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Circular Flow of Income Households own land, labor, and
Product method ·
capital. They provide these to firms in
return for income (wages, rent,
profits).
Expenditure method
Firms use these resources to produce
·
goods and services and sell them to
households.
Households spend money to buy goods
·
Income methods and services from firms
(expenditure).
Firms pay money to households for
the resources they use (income).
·
Factors of Production This cycle keeps the economy moving
1. Land Pay rent by maintaining a continuous flow of
Rent, Wages, Interest and
2. Labour Pay wages money, goods, and services between
Profit are Factor
3. Capital Pay interest households and businesses.
Payments
4. Entrepreneurs Pay profit
·
Methods to calculate GDP ·
Double Counting Error occurs when the value of the
1. Product method same product or service is counted more than once
2. Income method during the calculation of a country's national income
3. Expenditure method or GDP.
Product Method/Gross Value Added Method
Example
·
Cotton Yarn Cloth Shirt
Rs 100 Rs 200 Rs 400 Rs 800
Value added in Rs 100 Rs 100 Rs 200 Rs 400
every stage
Gross Value added (GVA): The value that producers add to goods and services they buy and sell
GVA = GAV 1 + GVA 2
Starting from 2015, the Indian government began using "Gross Value Added (GVA) at basic prices" to
calculate sector-wise economic contributions
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Final Goods Intermediate Goods
·
These goods will not undergo any ·
These are semi-finished products that will
economic process to form final undergo various economic process and
products transformation to be converted to final
products
- Goods used by the end consumer for Goods used as inputs for producing other
personal consumption or investment goods and services
Direct consumption or capital Further processing or resale
investment
Ex: When you buy tea from a shop for Ex: When a tea shop or hotel buys tea to
personal consumption, it is a final good prepare and sell tea to customers, it
becomes an intermediate good
Types:
-
Consumer goods: Finished products
used by individuals for personal
consumption rather than for producing
other goods.
·
Capital goods: They are physical goods
used by businesses to produce other
goods and services
Inventory goods: They refer to the items a business keeps in stock for sale or production purposes.
:
They can include raw materials, work-in-progress items, and finished goods, depending on the type
of business. Types
Accumulation Decumulation
Types: Types:
Planned Accumulation: intensional increase Planned Decumulation: intentional reduction of
in inventory or assets based on anticipated stock over time to match demand or avoid
sales or needs overstocking.
Unplanned Accumulation: an unexpected Unplanned Decumulation: unintended or
increase in stock of goods due to fall in unexpected reduction of stock, often due to
sales factors like sudden demand surges, inventory
mismanagement, theft, or damage.
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Stock Flow
It is a quantity measured at a point of time It is a quantity measured over a period of time
Ex: Wealth, loan, inventory, capital Ex: Income, expenditure, change in inventory,
depreciation
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National Income: the total of money earned within a country
IAusten
-
-
Intercountry: growth within various countries such as India, US, China, etc.
Intercountry:
Intracountry: within the country what is growth in comparison to previous year
Intercountry:
C
Measures and Aggregates of NI
SS
GDP · GNP NDP NNP
↑
GDP: Gross Domestic Product
R
Total value of all final goods and services produced within the territory of a country
within a financial year (1 Apr-31 March).
GNP: Gross National Product
A
↑
Total value of all final goods and services produced by the nationals of the country
GNP = GDP - Factor Income to
....-
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Abroad + FI from Abroad
GNP = GDP + Net factor income from
abroad
NDP: Net Domestic Product
goods and services
-
NDP = GDP - Depreciation
PA
factors of production:
Monetary value of an asset
-
L
Land
decreases over time due to various
Labour
factors -
Capital
Entrepreneurs
W Financial year: 1 April to 31st March
>
- In GDP second hand goods are never counted
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-
NNP: Net National Products
NNP = GNP - Depriciation
1 GDP was developed by American Economist “Simon Kuznetsk”
” in 1934 #
=>
I
C
Real GDP vs Nominal GDP
/
More than Real GDP due to inflation
->
↓ More than Real GDP due to inflation
SS
I
Calculated on current prices
I
Base year is taken known as
I
*
Not inflation
Inflation adjusted
not adjusted
Base effect
/
Calculated on constant prices
I
It is inflation adjusted
R ↓
↓ Irvin Fisher mentioned it as:
A
-
Concept of Money Illusion Contribution
in GDP
GDP P inflator
deflator is used to calculate
RM
this = Nominal GDP Parle-G Rs 100 (Rs 10 x 10)
GDP Deflator also X 100
Real GDP Nominal GDP x2
written as Price Index
Parle-G Rs 200 (Rs 20 x 10)
L Methods to calculate GDP If inflation is removed
Rs 20 Rs 10 Real GDP
PA
&
1. Value Added Method
-
Rs 10 x 10 = Rs 100
/
Also known as Production Method -
Who calculates GDP in India: Central
Value added method = Output - Input Statistical Office (CSO) under MoSPI
·
Base Year: 2011-12
2. Income Method
-
I
Compensation to employees *MoSPI: Ministry of Statistics and
I
Operating surplus Programme Implementation
I
Mixed income
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3. Expenditure Method
-
C + G + I + (X - M)
-
C: Consumption
I
G: Govt. expenditure
I
I: Investment
X: Export
C
W
-
M: Import
SS
-
Per Capita Income = National Income
-
Population
Purchasing Power Parity = A common basket of goods
↑
India -> GDP: 5th in the
R
A
↓ world Ranking (according to GDP)
USA
PPP: 3rd after USA and China China
↓
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Germany
Japan
Economy is inflated India
/
Personal Income: IfTtotal income of an individual earned from all the sources before taxes
PI = National Income + Income received not earned - Income earned but received
PA
PI = NI + Transfer payment - Undistributed corporate profit
↓
eg: subsidy by govt.
PI = NI + Govt. transfers + Net interest paid by Govt. - Corporate tax - payments
for social security
C Personal Disposable Income: PI - tax
Income finally left after deducting taxes for expenditure
=
GDP Calculation: by National Statistical Office under MOSPL
#(Ministry of Statistics
and Program )
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NNPFC: is also called National Income
I
GDPFC
t
FC
= GDPMP
MP
M
-- Net Indirect Taxes
GDPH
FC = GDPMC- (Indirect tax - Subsidy)
-
·
I
FC MP
⑳
GDP = GDPMC -
MP- Indirect tax + Subsidy
⑭
/
MFC
FC
GDP - Depreciation =Ple
Net GDP
Net DP
C
W
~
- GDP + NFIA = Gross NP
Market Price (MP) Factor Cost (FC)
SS
I Household income is not under GDP I ~
The market price is the final Factor cost is the cost of
value of the product being factors of production, or
sold, which includes indirect total value of inputs, where
taxes indirect tax is not included
R
Green GDP = GDP - Environmental Damage
FC = MP - Indirect tax + Subsidy
FC = MP - (Indirect tax - Subsidy)
FC = MP - Net Indirect Tax
A
: Potential GDP - Real GDP = Recessionary Gap
Basic Price = FC + Net production tax
*Net production = (Production tax - Subsidy)
RM
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