Goods :In economics a goods is defined as any physical object or service that

could command a price in the market and these are the materials that satisfy
human wants and provide utility.

Consumption Goods : Those final goods which satisfy human wants directly. ex-
ice-cream and milk used by the households.

Capital Goods :Those final goods which help in production of other goods and
services . These goods are used for generating income. These goods are fixed
assets of the [Link]- plant and machinery.

Final Goods are those goods which are used either for final consumption or for
investment.

Intermediate Goods refers to those goods and services which are used as a raw
material for further production or for resale in the same year.

Investment :Addition made to the physical stock of capital during a period of

time is called investment. It is also called capital formation.

Capital formation:- Change in the stock of capital is also called capital formation.

Depreciation :means fall in value of fixed capital goods due to normal wear and
tear and expected obsolescence. It is also called consumption of fixed capital.

Gross Investment :Total addition made to physical stock of capital during a

period of time. It includes depreciation.

Net Investment :Net addition made to the real stock of capital during a period of
time. It excludes depreciation.
Net Investment = Gross investment – Depreciation.

Stocks : Variables whose magnitude is measured at a particular point of time are

called stock variables. Eg. National Wealth, Inventory etc.

Flows :Variables whose magnitude is measured over a period of time are called
flow variable. Eg. National income, change in stock etc.

Circular flow of income :It refers to continuous flow of goods and services and
money income among different sectors in the economy. It is circular in nature. It
has neither any end and nor any beginning point. It helps to know the
functioning of the economy.

Leakage :It is the amount of money which is withdrawn from circular flow of
income. For eg. Taxes, Savings and Import. It reduces aggregate demand and the
level of income.

Injection :It is the amount of money which is added to the circular flow of
income. For e.g. Govt. Exp., investment and exports. It increases the aggregate
demand and the level of income.

Economic Territory :Economic (or domestic) Territory is the geographical

territory administrated by a Government within which persons, goods, and
capital circulate freely.
Scope of Economic Territory :
(a) Political frontiers including territorial waters and airspace.
(b) Embassies, consulates, military bases etc. located abroad.
(c) Ships and aircraft operated by the residents between two or more countries.
(d) Fishing vessels, oil and natural gas rigs operated by residents in the
international waters.
Normal Resident of a country: is a person or an institution who normally resides
in a country and whose Centre of economic interest lies in that country.
Exceptions:- (a) Diplomats and officials of foreign embassy.
(b) Commercial travellers, tourists students etc.
(c) People working in international organizations like WHO, IMF, UNESCO etc.
are treated as normal residents of the country to which they belong.

Gross Domestic Product at Market Price : It is Gross National Product at Market

the gross market value of all the
Price ) is the gross market
final goods and services produced
value of all the final goods and services
within the domestic territory of a
produced by normal residents (in the
country
domestic territory and abroad) of a
during an accounting year.
country during an accounting year.
GDPMP = Net domestic product at FC (NDPFC) +
Depreciation + Net
Indirect tax.

Gross Domestic Product at FC : It

is the gross Gross National Product at FC : It is the
money value of all final goods and gross money value of all final goods
services and services produced by normal
produced within domestic territory of residents (in the domestic territory and
a country which does not include net abroad) of a country during an
indirect tax. accounting year.
GDPFC = GDPMP – Indirect tax + Subsidy
or GDPFC = GDPMP – NIT

It is
Net Domestic Product at Market Price : Net National Product at Market Price : It is
the net market value of all final the net market value of all final
goods and services produced within goods and services produced by
domestic territory of a country during normal residents (in the domestic
an territory and abroad) of a country
accounting year and does not include during an accounting year.
depreciation.
NDPMP = GDPMP – Depreciation

It is the net
Net Domestic Product at FC: Net National Product at factor cost
money value of all final goods and (Factor Income ) : It is the net market
services produced within domestic value of all final
territory of a country during an
accounting year . goods and services produced by
normal residents (in the domestic
territory and abroad) of a country
during an accounting year.

[Link] is the problem of double counting and how can it be avoided ?

[Link] the value of a commodity more than once while estimating
national income is called double counting. It leads to overestimation of national
income. So, it is called problem of double counting.
Ways to solve the problem of double counting.

(a) By taking the value of only final goods.

(b) By value added method.

[Link] out components of final expenditure .

Ans.
1. Final Consumption Expenditure
a. Private Final Consumption Expenditure(C)
b. Government Final Consumption Expenditure(G)
2. Gross Domestic Capital Formation
a. Gross Domestic Fixed Capital Formation
i. Gross business Fixed Investment
ii. Gross Residential Construction Investment
iii. Gross public Investment
b. Change in Stock or Inventory Investment
3. Net Export(X-M)
a. Export(X)
b. Import(M)
Q. List out components of Domestic Income .
Ans.
1. Compensation of Employees
a. Wages and salaries(Cash/or kinds)
b. Employers Contribution of Social security Schemes
2. Operating surplus
a. Rent
b. Interest
c. Profit
i. Corporate Tax
ii. Dividend
iii. Undistributed corporate profit
3. Mixed Income for self-Employed person

Q. Define NFIA and list out its components .

Ans. It is difference between factor income received/earned by normal
residents of a country and factor income paid to non-residents of the country.
Components of NFIA :
1. Net Compensation of Employees
2. Net Income from Property and entrepreneurship
3. Net Retained earning of resident companies abroad

Q. Distinguish between real and nominal GDP .

Real GDP or GDP at constant Nominal GDP or GDP at

prices current prices

Meaning When the goods and services are When the goods and
produced by all producing units in services are produced by all
the domestic territory of a country producing units in the
during an a/c. year and valued domestic territory of a
these at base year’s prices or country during an a/c. year
constant price, it is called real GDP and valued these at current
or GDP at constant prices. year’s prices or current
prices, it is called Nominal
 GDP or GDP at current
prices.

changes It changes only by change in It is influenced by change in

physical output not by change both physical output and
price level. price level.

Q. List out precautions of all three methods of calculating national income .

[Link] of Value Added Method:-

Included i.)Production for self-consumption is included ii.)Imputed value of owner

occupied houses should be included. iii.)Change in stock of goods will be included

Items excluded i).Intermediate goods are not to be included ii).Sale and purchase of
second hand goods is not included iii).Domestic services are not included .

Precautions of Income Method

Included :Imputed value of services of the owner occupied house;

interest own capital and production of self consumption

Excluded [Link] income [Link] from sale of second hand goods [Link] from
share and bonds [Link] from wind fall gain [Link] out of past savings
[Link] tax

Precautions of expenditure Method

Included :1. Include on account production of fixed assets by all the producing
sectors. (2)Include purchase of new house by consumer households. Work in
progress at the site of construction. 3. Include capital repairs like alteration of new
building.

Excluded :1. Exclude second hand goods expenditure. 2. Exclude Expenditure on old
and new shares and bonds as they are only paper claims 3. Exclude all government
expenditures on transfer payments such as unemployment benefits, old age pensions
and scholarships as no productive service rendered in return. 4. Exclude expenditure
on all intermediate goods and services to avoid double counting.

[Link] will the domestic income be greater than the national income?

Ans: When the net factor income from abroad is negative.

[Link] must be added to domestic factor income to obtain national income?

Ans. Net factor income from abroad.

[Link] the meaning of non-market activities .

Ans. Non marketing activities refer to acquiring of many final goods and services not
through regular market transactions. E.g. vegetable grown in the backyard of the
house.

Q.‘Machine purchased is always a final good’ do you agree? Give reason for your
answer.

[Link] machine is a final good or it depends on how it is being used (end use).

If machine is bought by a household, then it is a final good.

If machine is bought by a firm for its own use, then also it is a final good.

If the machine is bought by a firm for resale then it is an intermediate good.

[Link] are exports included in the estimation of domestic product by the
expenditure method? Can the gross domestic product be greater than the gross
national product? Explain.

Ans. Expenditure method estimates expenditure on domestic product i.e.,

expenditure on final goods and services produced within the economic territory of
the country. It includes expenditure by residents and non-residents both. Exports
though purchased by non residents are produced within the economic territory and
therefore a part of domestic product. Domestic product can be greater than national
product, if the factor income paid to the rest of the world is greater than the factor
income received from the rest of the world i.e, when net factor income received from
abroad is negative.

GDP is one of the indicators of economic well-being. Higher is the GDP higher will
be the welfare. This may not be true always due to the following reasons.

1. Distribution of GDP: Higher the GDP in the economy and it is not equally
distributed means concentration of wealth in the hands of a few individuals and
firms. If GDP increases with the increase in the production of war goods it may not
going to improve the welfare of the people.

2. Non-monetary exchanges: The GDP measures only marketed goods and services.
In developing countries barter exchanges also take place and this is not counted in
GDP. The services of the house wife, value of the items from the kitchen gardening
etc are not included in the national income. Thus the GDP calculations may not
indicate the well-being of a country.

3. Change in Prices: If the GDP increases due to increase in the price level then there
is no real increase in the GDP .

4. Externalities: Externalities refer to the benefits or harms caused by an individual or

firm to another for which they are not paid or penalized. An oil refinery may pollute
the nearby areas. The production of the oil refinery will be calculated in GDP where
as the negative impact is not taking into account. In such cases GDP will not estimate
the actual welfare of the economy.
5. Rate of Population Growth: GDP does not consider the changes in the population
of the country .If population growth is high , then Growth in GDP also will be of no
use.

[Link] is better Real GDP or Nominal GDP?

[Link] GDP is better compared to Nominal GDP Nominal GDP is the GDP at
current year prices Real GDP is the calculation f o GDP at constant prices (base year).
Real GDP helps in determining the effect of the increased production of goods and
services. Nominal GDP can increase due to price rise without any change in the real
output. Real GDP is better to make periodic comparison in the physical output of
goods and services. Real GDP facilitates international comparison.

.
The Basic Circular Flow of Income Model analyzes the relationship
between two economic sectors; households and firms

The households provide factors of production (i.e. labor, land, and capital) for
the firms to use in their production process.

In return, they are compensated with factor income.

Meanwhile, the firms use the resources to produce a variety of goods and
services.

Finally, the households use their income to buy goods and services, thereby
transferring all their income back to the firms.