2. There are four sectors in an economy:
(i) Household sector (Consumers)
(ii) Firms (Producers)
(iii) Govt. sector (Government)
(iv) External sector (Rest of the world or
abroad)
3. Circular flow of income: It refers to circular flow of income in the production
process. Income is generated by household from firms and also they spend their
income in form of consumption expenditure to firms.
7. (i) Real flow: Real flow refers to flow of factor services from household to
firms and flow of goods services from firms to household.
• It measures the production volume.
• It also determines the growth process in economy.
• It is also called physical flow.
(ii) Money flow : Money flow refers to flow of money from firms to households
and household to firms, like flow of factor payments from firms to household
and flow of consumption expenditure from household to firms.
• It measures the flow of money supply in the economy.
• It is also called nominal flow
8. Difference between Stock & Flow
Basis Stock Flow
1. Meaning It refers to that variable which
is measured at a particular
point of time.
It refers to that variable which is measured
at a particular period of time.
2. Time
Dimension
Stock is not time dimensional
as it is measured at a particular
point of time.
Flow is time dimensional as measured only
for a particular period of time.
3. Nature It is a static concept. It is a dynamic concept.
4.Examples eg. wealth, distance of Delhi to
noida, stock of water in a tank,
bank deposits, capital,
population on a particular date
etc.
e.g. pocket allowances, speed of a car
travelling Delhi to Noida, flow of water
from tank, demand, supply, consumption
exp., savings, profit or loss, national
income, production, GDP, Investment etc
11. Types of Goods in the Economy
Final goods
Intermediate
Goods
Consumption/
Consumer
Goods
Capital
Goods
12. These are those goods. Which is finally produced and ready for
use by their final users. Final users may be (i) consumer and (ii) producers.
(i) Consumers are the final user of clothes, shoes, food, etc.
(ii) Producers are the final user of plant and machinery.
# Expenditure on final consumer goods by the household is called
Final consumption expenditure
# Expenditure on final goods by the producer is called Investment
expenditure
Expenditure on final goods = Consumption Exp. + Investment Expenditure
FINAL GOODS
13.
14. These are those goods which is not yet ready for use by
their final user. These goods are purchased by one firm from the other.
eg. Wood purchased by a carpenter for making chairs is an intermediate good.
Because it is a raw material for carpenter.
Shirt purchased by firm A from firm B for resale.
Note: Value of intermediate goods ultimately (Already) included in the value
of final goods.
Hence these goods are not included in National income.
INTERMEDIATE GOODS
17. Consumption/Consumer Goods: These are those goods which are directly
used for the satisfaction of human wants. These are not used for the
production
of other goods and services. Final user of consumption goods are (i) Consumer
or household. (ii) Government (iii) NGO (Non-Govt. Organisation).
These goods are also divided into
DURABLE GOODS
SEMI DURABLE GOODS
NON DURABLE GOODS
SERVICES
CONSUMER GOODS
18. Capital goods are those goods which are used in the process
of production for several years and which are of high value. These goods are
fixed assets of the producers. E.g. Plant and Machinery.
But all machines are not capital goods.
CAPITAL GOODS
19. Note: All capital goods are producer goods. But all producer goods
are not capital goods
20. Difference between final goods & Intermediate goods
Basis Final Goods Intermediate Goods
1.Meaning These are those goods which
are ready to use by their
final user.
These are those goods which are
not ready to use by their final
user.
2. Purpose Purpose of these goods are
for consumption and
investment.
These are used in the process of
production as a raw material and
for resale purpose
3. Nature They are include in both
domestic and national
income.
They are NOT include in both
domestic and national income.
21. Basis Final Goods Intermediate Goods
4. Value
addition
There is no value addition
in final goods as they are
ready for use.
Some value has to be added in
intermediate goods as they are
not ready for use.
5.
Production
boundary
They have crossed the
production boundary.
They have crossed the production
boundary.
6. Example Milk purchase by
household for
consumption, machinery
purchased as an
investment.
Milk purchased by a biscuit
company is a raw material, milk
purchased by a dairy shop is for
resale.
22. Q.1) Giving reasons classify the following into intermediate products and
final products:
(i) Furniture purchased by a school.
(ii) Chalks, duster, etc. purchased by a school.
(iii) Computers installed in an office.
(iv) Mobile sets purchased by a mobile dealer.
(v) Paper purchased by a publisher.
(vi) Printer purchased by a lawyer.
(vii) Coal used by household.
(viii) Unsold coal at the Trader at year end
23. (ix) Seeds purchased by a farmer.
(x) Electricity consumption in a business.
(xi) Sewing machine purchased by a housewife.
(xii) Soft drink purchased by School Canteen.
(xiii) Coal used by manufacturing firms.
(xiv) Fertilizers used by a farmers.
(xv) Refrigerator installed by a firm
27. Q.1) Calculate (i) GDPmp and (ii) GNPmp
(i) NDPfc 300
(ii) Factor income from abroad 25
(iii) Factor income to abroad 15
(iv) Consumption of fixed capital 70
(v) Old age pension 30
(vi) Goods & Services Tax 20
28. Q.2) Calculate GNPfc and NDPmp
(i) National income 250
(ii) Consumption of fixed capital 10
(iii) Net factor income from abroad 75
(iv) Factor income paid to abroad 25
(v) Goods & Services Tax 125
(vi) Import Duty 25
(vii) Subsidies 30
33. Q.1) Calculate Net value added at factor cost from following data:
Particulars Amount in crores
Purchase of machinery to be used in the production unit 100
Sales 200
Intermediate costs 90
Indirect taxes 12
Change in stock/ Inventory Investment 10
Goods and service tax 6
Stock of raw material 5
34. Q.2) Calculate value of output from the following data:
Particulars Amount in lakhs
Subsidy 10
Intermediate consumption 150
Net addition to stock (-) 13
Depreciation 30
Goods and service tax 20
Net value added at factor cost 250
35. Q.3) Calculate Net value added at factor cost from the following data:
Particulars Amount
Durable producer goods (with a life span of 10 years) 10
Single use producer goods 5
Sales 20
Unsold good (stock) 2
Goods and service tax (GST) 1
36. Q.4) Find Gross value added at factor cost:
Particulars Amount
Units of output sold 4,000
Price per unit of output 20
Depreciation 3,000
Change in stock -400
Intermediate cost 17,000
Subsidy 4,000
37. Q.5)Calculate Sales from the following data:
Particulars Amount
Subsidies 400
Opening stock 100
Closing stock 600
Intermediate cost 3,200
Consumption of fixed capital 700
Profit 750
Net value added at factor cost 4,000
38. Q.6)Firm A buys from X inputs worth ₹ 500 crores and sells to firm B goods
worth ₹ 1,000 crores and to firm C goods worth ₹ 700 crores. Firm B
buys from Y inputs worth ₹ 200 crores and sells to firm C goods worth
₹ 1,500 crores and finished goods worth ₹ 2,000 crores to households.
Firm C buys from Z inputs worth ₹ 150 crores and sells finished goods
worth ₹ 4,150 crores to households. Calculate value added by firms A,
B and C and GDPMP.
42. Q.1) Calculate find out net national product at market price
Particulars Amount in crores
Interest 400
Wages and salaries 1000
Net factor income to abroad (-) 20
Social security contribution by employers 100
Net indirect tax 80
Rent 300
Consumption of fixed capital 120
Corporation tax 50
Dividend 200
Undistributed profits 60
43. Q.2) Calculate National income
Particulars Amount
Compensation of employees 13,300
Wages in kind 200
Indirect taxes 3,800
Gross domestic fixed capital formation 6,200
Operating surplus 5,000
Mixed income of self-employed 16,100
Net factor income from abroad 300
Net exports -100
44. Q.3) Calculate the Operating Surplus
Particulars Amount
Sales 4,000
Compensation of employees 800
Intermediate consumption 600
Rent 400
Interest 300
Net indirect taxes 500
Consumption of fixed capital 200
Mixed income 400
48. Q.1) Calculate Gross Domestic Product of Factor Cost from the following data
Particulars Amount
Private final consumption expenditure 800
Net domestic capital formation 150
Change in stock 30
Net factor income from abroad -20
Net indirect tax 120
Government final consumption expenditure 450
Net exports -30
Consumption of fixed capital 50
49. Q.2) Calculate Gross fixed Capital Formation from the following data
Particulars Amount
Private final consumption expenditure 1,000
Government final consumption expenditure 500
Net exports -50
Net factor income from abroad 20
Gross domestic product at market price 2,500
Opening stock 300
Closing stock 200
52. Q.1) From the following data, calculate (a) Value of output; (b) Intermediate consumption;
(c) Net value added at factor cost
Particulars Amount
Purchase of raw materials from domestic market 400
Increase in the unsold stock 60
Import of raw material 120
Domestic sales 1,200
Replacement of fixed capital 50
Power charges 20
Exports 200
Import of machinery 40
Goods and Services tax (GST) 10
Subsidy 30
Goods used for self consumption 10
53. Q.2) Calculate GNP at MP by income and expenditure method
Particulars Amount in crores
Net exports 15
Private final consumption expenditure 600
Consumption of fixed capital 30
Operating surplus 190
Net indirect taxes 105
Net factor income from abroad -5
Wages and salaries 520
Rent 60
Employers’ contribution to social security schemes 100
Government final consumption expenditure 200
Net capital formation 100
54. Q.3) Calculate NNP at FC by Income and Expenditure Method
Particulars Amount in crores
Mixed income of self employed 100
Gross fixed capital formation 300
Private final consumption expenditure 900
Net exports (-) 50
Subsidies 50
Government final consumption expenditure 150
Rent 60
Indirect taxes 250
Interest 200
Change in stock 50
55. Compensation of employees 400
Profit 340
Consumption of fixed capital 50
Net factor income from abroad 50
56. Q.4) Calculate Gross domestic product at factor cost and factor income to abroad
Particulars Amount in crores
Compensation of employees 800
Profits 200
Dividend 50
Gross national product at market price 1400
Rent 150
Interest 100
Gross domestic capital formation 300
Net fixed capital formation 200
Change in stock 50
Factor income from abroad 60
Net indirect tax 120
57. Q.5) From the following data calculate Gross domestic product at market price and Subsidies
Particulars Amount in crores
Government final consumption expenditure 7000
Indirect taxes 9000
NNPfc 61700
Mixed income of self employed 28000
Gross fixed capital formation 13000
Net addition to stocks 10000
Compensation of employees 24000
Depreciation 4000
Private final consumption expenditure 44000
Exports of goods and services 4800
Imports of goods and services 5600
NFIA -300
58. Q.6) Calculate operating surplus and compensation of employees
Particulars Amount in crores
Indirect taxes 250
Depreciation 200
Royalty 20
Profit 200
Subsidies 50
Gross domestic product at MP 1800
Interest 50
Rent 100
Net factor income from abroad -40
61. Precautions regarding production method
(i) Value of the sale and purchase of second hand goods is not included in
value added because, value of these goods is already accounted for during
the year they were first time produced.
(ii) Commission earned on account of the sale and purchase of second hand
goods is included in the estimation of value added. Because, commission is
a factor payment for service rendered this is a new service.
(iii) Own account production of goods of the producing units is taken into
account while estimating value added. Becaue these goods are like those
produced for the market. They are simply not sold owing to their need by
the producers themselves. If we do not include, this cause under
estimation of national income.
62. (iv) Value of intermediate goods is not included in the estimation of value
added. Because, value of intermediate goods is reflected in the value of final
goods. If we include this cause overestimation of national income.
(v) Change in stock (increase in stock) will be included because it is a part of
capital formation.
(vi) Services for self-consumption is not considered while estimating value
added. Simply because, it is difficult to estimate their market value, like
services of housewives.
63. Problem of Double Counting
Problem of double counting is the problem
of estimating the value of goods and services more than once. In production
method we take the value of final goods and services only if we mistakenly
taken
the value of intermediate goods this leads to double counting or
overestimation
of national income because value of intermediate goods is already included in
value of final goods.
64. e.g. A farmer produces one ton of wheat and sells if for ₹400 in the market
to a flour mill. As the farmer is concerned the sale is final sale. The flour mill
have wheat as an intermediate goods he converts it into flour and sells it for
₹600 to a Baker. The flour mill treats the sale is final sale but the Baker uses
it as an intermediate good and manufacture bread. The Baker sells the bread
to shopkeeper for ₹800. For the Baker it is a final sale. But for the shopkeeper
it is an intermediate good. The shopkeeper sells the entire stock of bread to
consumer ₹900.
So, you may take the value of output = 400 + 600 + 800 + 900 = ₹2700
(but this is wrong estimation because all intermediates are included)
i.e. double counting occurs.
65. So, to avoid the problem of double counting
(i) Take value added instead of total output.
(ii) Take the value of final products only
66. Precautions Regarding Income Method
1. Transfer earnings like old age pensions, unemployment allowances,
scholarship, pocket money etc. should not be included in national income,
because corresponding to transfer payment there is no value addition in
the economy. Similarly, indirect taxes are not included.
2. Income from illegal activities like smuggling, theft, gambling etc. should not
be included in national income. Black money is not to be counted in
national income. Lottery also not included because it is a windfall gain.
There is no productive activity connected with them.
3. Income from sale of second hand goods not included but commissions
received on the sale of secondhand goods are to be included in national
income because these are new factor income for rendering factor services.
67. 4. Do not include income arising from the sale of financial assets. These are
share, bonds, debentures, govt. Securities, etc. Buying and selling of these
are not an activity related to production of goods and services.
(However any Commission or brokerage charged by the intermediaries is a
payment for the services rendered by them and is a factor income).
5. Imputed rent of owner occupied houses is to be treated along with rent as
a component of factor incomes. Corresponding to production for self-
consumption must be included
68. Precautions Regarding Expenditure Method
1. Do not include expenditure on intermediate goods and services:
Intermediate expenditure is already a part of final expenditure. So,
including intermediate expenditure will mean double counting of
expenditure.
2. Include imputed expenditure on self-consumed or own account produced:
Output used for consumption and investment. eg. self consumed output by
farmers, self consumed services of owner occupied houses are included.
3. Do not include expenditure on transfer payments: A transfer payment is
one against which no goods or services is provided is return. eg. gift,
donations, charity, scholarship, old age pension, unemployment allowances
etc.
69. 4. Do not include expenditure on financial assets: It means expenditure on
buying shares, debentures, bonds, govt. securities etc. But if any brokerage or
services charge is paid in buying financial assets it is treated as expenditure on
buying services. Hence brokerage, commission are included.
5. Do not include expenditure on second hand goods: Expenditure on these
goods was accounted when they were purchased new. Including expenditure
on second hand goods would mean counting of the same expenditure twice.
No fresh production takes place in such a case. However, if any commission or
brokerage is paid to an intermediary in such transaction it should be treated as
final expenditure because it is a fresh payment for the services purchased.
72. National income: It is the sum total of income of only the normal
residents of a country
Domestic territory of a country refers to that area of economic activity
which generates domestic income.
Domestic territory (Economic territory) includes the following:
73. Domestic Territory does include:
Ships and aircrafts:-
Embassies
Fishing vessels and oil rigs
74. Domestic Territory does not include:
1. Embassies and military establishments of a foreign country in India. e.g.
Chinese embassy in India is a part of domestic territory of China.
2. International Organizations like UNO, WHO, WTO, etc. located within the
geographical boundaries of a country
79. Difference between Real GDP & Nominal GDP
Real GDP Nominal GDP
When GDP is measured at the base
or constant year prices it is called
Real GDP.
When GDP is measured at the
current year prices it is called
Nominal GDP.
It is without effect of inflation. It is inflation adjusted GDP.
It is true indicator of economic
growth and welfare.
It is not a true indicator of
economic growth and welfare
80. Real and Nominal GDP Formula
GDP DEFLATOR/ PRICE INDEX
Price index or GDP Deflator = ( Nominal GDP/ Real GDP ) 100
GDP deflator measures the change in the average level of prices of all the
goods and services that make up GDP.
GDP deflator is used to eliminate the effect of price changes and to
determine the real change in physical output.
81. Components of NFIA:
(i) Net compensation to employees.
(ii) Net income from property and entrepreneurship: likes rental income,
interest income and profits.
(iii) Net retained earnings: Part of profit after tax and dividend.
82. Difference between Depreciation and Capital Loss
Basis Depreciation Capital Loss
1. Meaning It refers to fall in the value
of fixed assets due to
normal wear and tear,
passage of time or
expected obsolescence
It refers to loss in value of
the fixed assets due to
unforeseen obsolescence,
natural calamities, thefts,
accidents, etc.
2. Provision
for loss
Provision is made for
replacement of assets as it
is an expected loss.
No such provisions is made
in case of capital loss as it is
an unexpected loss.
3. Production
process
It does not hamper the
production process.
It hampers the production
process.
