National Income Accounting class 12 Notes Pdf

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National Income Accounting class 12 Notes
National Income Accounting class 12 Notes

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National Income Accounting Class 12 Notes Pdf

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National Income Accounting

What is National Income Accounting?

A variety of measures of national income and output are used in economics to estimate total economic activity in a country or region. National Income Accounting is a branch of macroeconomics that captures the total flows of income as well as of goods and services within a certain period.

In the economy, we receive different types of incomes. We receive wages and salaries from our employers. We receive interest on capital for lending money. We also receive gifts and donations from others without giving anything in return. All these incomes can be grouped into two types of incomes.

Factor Incomes

A Factor Incomes is an income accruing to a factor of production in return for the services rendered to the production unit. We know that production is the result of the joint efforts of the four factors of production. These four factors of production are Factor incomes, Labour, Land, Capital, Entrepreneurship.

Non Factor Incomes

There are certain money receipts that do not involve any sacrifice on the part of their recipients, the examples are gifts, donation charities, taxes, fines etc. No production activity is involved in getting these incomes. These incomes are called transfer incomes because such income merely represents a transfer of money without any good or service being provided in return for the receipts. These incomes are not included in national income.

National Income: Components, Importance, Methods, Limitation


Basic Economic Activities

Production consumption and investment are three basic economic activities that take place in every economy:

  1. Production
  2. Consumption Goods
  3. Investment

Production

Production is the addition of value to an existing commodity. During the production process, already existing commodities are made more useful by combined efforts of factors of production which increase their value. This increase in value is known as production. Suppose, a carpenter purchase wood worth 1000/- and makes furniture from it sells it for 2000/- In this production process he has added value of 1000/- ( 2000-1000).

Consumption Goods

Those final goods satisfy human want directly. E.g.: ice cream and milk used by the households. Using up of produced goods and services for the direct satisfaction of individual and collective wants of the people is called consumption. It includes all goods and services purchased by households like food items, clothes shoes etc. and by the government for collective consumption like roads, bridges, parks, schools etc.

Investment

Investment is that part of production which is left after consumption and used for creating physical assets like machines, equipment, material etc. It is that part of production which is used for further production. It increases the future production capacity of the economy.


Stock and Flow

The distinction between stock and flows is very significant for national income estimates:

  1. Stock
  2. Flow

Stock

A stock is a quantity that is measured at a point of time i.e. at 4 p.m. on 31st March etc. wealth, population, money supply etc. are stock concepts. It has no time dimension.

Flow

A flow is a quantity that is measured over a period of time i.e. days, months, years etc. It has a time dimension. National income, population growth is flow concepts.


Circular Flow of Income

Production, consumption and investment are important economic activities of an economy. In carrying out these economic activities, people make transactions between different sectors of the economy. Because of these transactions, income and expenditure move in circular form. This is called the circular flow of income. It is based on two principles.

  • The expenditure of the buyer because the income of the sellers.
  • Good and services flow in one direction from sellers the buyers while money payment for these goods, and services flow in opposite direction i.e. from buyers to sellers

In this way, the flow of goods and services (real flow) and the flow of money payments (money flow) together make a circular flow.

Real flow

Households render factor services as owners of land, labour, capital and entrepreneurship to firms. The firms produce goods, and services to meet the demand of the households. Such flow of factor services from households to firms and flow of goods and services from firms to households is known as real flow.

Money Flow

In modern economies, goods and services and factor services are valued in terms of money. Households receive rent for land, wages for labour, interest for capital and profit for entrepreneurship- from firms and make payment for goods and services supplied by firms.

This flow of money between firms and households is called money flow: Circular flow can be shown with the help of a diagram given below: Circular flow of income in a two-sector economy without savings.

Money Flow
Money Flow

Concept of National Income

To understand the meaning of national income it is essential to understand some basic concepts related to national income and its related aggregates. These concepts are:

  1. Domestic Territory
  2. Normal Resident
  3. Intermediate Goods and Final Goods

Domestic Territory

In common language, the domestic territory of a country is understood to mean political territory of a nation. But, in economics, it refers to โ€˜economic territoryโ€™ which is a much wider concept than political territory. According to United Nations, โ€œEconomic territory is the geographical territory administered by a government within which persons, goods and capital circulate freely.โ€

Normal Resident

A normal resident is a person who ordinarily resides in a country and whose centre of economic interest also lies in that particular country. Normal residents include both nationals (such as Indians living in India) and foreigners (non-nationals living in India).

Intermediate Goods and Final Goods

To understand the concept of national income and its related aggregates it is necessary to understand the meaning and difference between intermediate goods and final goods:

Intermediate Goods

Intermediate goods are those goods that are meant either for reprocessing or for resale. Goods used in the production process during an accounting year are known as intermediate goods. These are non-durable goods and services used by the producers such as raw materials, oil, electricity, coal, fuel etc. and services of hired engineers and technicians etc.

Goods that are purchased for resale are also treated as intermediate goods. For example, Rice, Wheat, sugar etc. purchased by a retailer/wholesaler.

Final Goods

Goods that are used either for final consumption by the consumers or for investment by the producers are known as final goods. These goods do not pass through the production process and are not used for resale. For example, bread, butter, biscuits etc. used by the consumer.


Which is an example of national income accounting?

Gross Domestic Product (GDP), Net National Product (NNP), Gross National Product (GNP) It, personal income, and disposable income are the important metrics determined by national income accounting.

What are the four components of national income accounts?

The four components of national income account are Gross Domestic Product (GDP), Gross National Product (GNP), Net National Product (NNP), Net National Product at Factor Cost (NNPfc), Net Domestic Product At Market Prices (NDPMP), Income From Domestic Product Accruing To Private Sector, Private Income, Personal Income, Personal Disposable Income.

What are the 5 measures of national income?

Methods of Measuring National Income are Census of Product Method, Census of Income Method, Census of Expenditure Method, Value Added Method.

What is national income accounting definition?

A national income estimate measures the volume of commodities and services turned out during a given period counted without duplication. In other words, Is defined as the total market value of all the final goods and services produced in an economy in a given period of time.

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