Rajasthan Board RBSE Class 12 Economics Notes Chapter 14 Basic Concepts of National Income
Today animal husbandry, agriculture, industry, trade and other commercial activities such as transport, communication, banking, storage, etc. are done in all countries.
National income is the income of a country.
With the help of national income, information about the country’s economic achievements is known.
National income of a country can be defined as the total market value of all the final goods and services produced in the economy in a year.
In order to avoid counting several times the parts of goods that are sold and resold, national income only includes the market value of all the final goods and services and ignores the transactions involving intermediate goods.
There are three measures of national income of a country:
- The sum of values of all final goods and services produced.
- The sum of all incomes, in cash and kind, accruing to factors of production in a year; and
- The sum of consumption expenditure, net investment expenditure and government expenditure on goods and services.
Gross National Product is defined as the total market value of all the final goods and
services produced in a year.
Final goods are those goods which are purchased for final use and not for resale or further processing.
Intermediate goods are those goods which are purchased for further processing or for resale. The sale of intermediate goods is excluded from gross national product.
Gross domestic product is the money value of all the final goods and resources produced by normal residents as well as non-residents in the domestic territory of a country.
The difference between Gross Domestic Product (GDP) and Gross National Product (GNP) at market prices arises due to the existence of ‘net factor income from abroad’.
The net factor income from abroad is the difference between factor income received from abroad by normal residents of India for rendering factor services in other countries and the factor income paid to the foreign residents for factor services rendered by them in the domestic territory of India.
After a part of personal taxes, like income tax, personal property taxes, etc., what remains of personal income is called disposable income.
Since factor incomes arise from the production of goods and services, and since income is spent on goods and services produced, there are three alternative methods of measuring national income. These are :
- Value Added Method or Product Method.
- Income Method.
- Expenditure Method.
In the value added method, the contribution of each enterprise to the generation of flow of goods and services is measured. The economy is divided into different industrial sectors such as agriculture,, fishing, mining, construction, manufacturing, trade and commerce, transport, communication and other services.
In income method, national income is obtained by summing up the incomes of all individuals of a country.
Expenditure method arrives at national income by adding up all expenditures made on goods and services during a year.
The idea of the circular flow of income was given by French naturalist agricultural economist Francois Quesney, which was given in 1758.
Sources of production in a country go from family to business firms.
Expenditure on family, expenditure of business firms and income of business firms create family income.
The amount of money received by all the producers of a country is as much as is spent by all the consumers of the country.
In the direction in which the flow of goods and services occurs, there is flow of money in opposite direction.
By using consumption items, people satisfy their needs in the society.
Due to being the last item of consumption, their values are included for calculating national income.
Examples of consumption goods and services are as follows- food stuff, clothing, vehicles, radio, television, textbooks, etc.
Using capital goods, goods and services can be produced for many years.
All the goods, services that can be used in consumption or production are called final
goods.
When a producer does expenditure in cash, then that is called monetary investment.
Investments are of two types; Example – Total Investment Net Investment.
The expenditure on productive capital goods in a fixed period (normally 1 year) is called gross investment.
In the calculation of national income, the concept of household income is considered to be important.
Under the Domestic Boundary Concept, the economic activities outside the geographical boundaries of a country are not included.
In the calculation of national income, income earned from the actions of ordinary people of a country are included.
The quantity and direction of national income is revealed by import and export.
The net source income derived from foreign countries is calculated by the difference obtained by substracting import from export.
Production in a country is evaluated at market prices.
Important Glossary
- Stock – Goods or commodities that are kept in the business or warehouse premises and available for sale or distribution.
- Flow – Those payments that can be assessed in a given time period are called flows.
- Circular Flow – The productive economic activities of a country’s family and business firms revolve around, which is the circular flow of income.
- Actual Flow – The means of production flow from the family to business firms and the consumption flows from business firms to the family.
- Monetary Flow – Flow to business firms in the form of consumption expenditure horn family firms and household expenses from commercial firms.
- Consumer Goods – Goods or services used by consumers are called consumer goods or consumption goods.
- Capital Goods – Goods that are not used to meet the immediate requirement of the consumers, but they are used to produce other goods are called capital goods.
- Final Goods – All the goods that are used in consumption or production are called final goods.
- Intermediate Goods – The goods that are in the form of semi-finished items and raw materials.
- Gross Investment – That increase in capital stock, which includes the substitution of depreciation in capital stock, is called gross investment.
- Net Investment- The monetary value of the increase in capital goods in the entire economy is called gross investment. It is calculated by subtracting depreciation value from the gross investment.
- Depriciation – A decrease in the value due to regular breakdown or decline in capital goods is known as depreciation.