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What are the three ways to calculate national income?
What are the three ways to calculate national income?
Product method, expenditure method, income method
What makes a country rich or poor according to the text?
What makes a country rich or poor according to the text?
Consumer goods are goods consumed when purchased by their ultimate consumers.
Consumer goods are goods consumed when purchased by their ultimate consumers.
True
Intermediate goods are mostly used as raw material or inputs for the production of ___ .
Intermediate goods are mostly used as raw material or inputs for the production of ___ .
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What are stocks defined as in economics?
What are stocks defined as in economics?
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What is the formula to calculate Net Investment in an economy?
What is the formula to calculate Net Investment in an economy?
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Depreciation is an annual allowance for wear and tear of a capital good.
Depreciation is an annual allowance for wear and tear of a capital good.
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Depreciation is the cost of the good divided by number of years of its useful ______.
Depreciation is the cost of the good divided by number of years of its useful ______.
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Match the following terms with their definitions:
Match the following terms with their definitions:
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What are the four kinds of contributions that can be made during the production of goods and services?
What are the four kinds of contributions that can be made during the production of goods and services?
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In the simplified economy described, how do households dispose of their earnings?
In the simplified economy described, how do households dispose of their earnings?
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In the circular flow of income in the simple economy, there is no leakage from the system.
In the circular flow of income in the simple economy, there is no leakage from the system.
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The uppermost arrow in Fig. 2.1 represents the spending the households undertake to buy goods and services produced by the ____.
The uppermost arrow in Fig. 2.1 represents the spending the households undertake to buy goods and services produced by the ____.
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What is the term used to denote the net contribution made by a firm?
What is the term used to denote the net contribution made by a firm?
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What are the four factors of production that the value added of a firm is distributed among?
What are the four factors of production that the value added of a firm is distributed among?
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Net Value Added includes wear and tear that capital has undergone.
Net Value Added includes wear and tear that capital has undergone.
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Inventory is a ______ variable.
Inventory is a ______ variable.
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What is the equation to calculate Gross Domestic Product (GDP) using the sum total of gross value added of all firms in the economy?
What is the equation to calculate Gross Domestic Product (GDP) using the sum total of gross value added of all firms in the economy?
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What does the symbol ∑ denote in the context of calculations related to the economy?
What does the symbol ∑ denote in the context of calculations related to the economy?
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Final expenditure includes spending on intermediate goods.
Final expenditure includes spending on intermediate goods.
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Aggregate consumption for the economy is calculated as ∑ ___.
Aggregate consumption for the economy is calculated as ∑ ___.
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What does the Income Method of calculating GDP focus on?
What does the Income Method of calculating GDP focus on?
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What does GDP stand for?
What does GDP stand for?
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In the context of GDP, what does VA stand for?
In the context of GDP, what does VA stand for?
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Define GNP.
Define GNP.
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What is the formula for calculating Net National Product (NNP)?
What is the formula for calculating Net National Product (NNP)?
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What is the formula to calculate Personal Income (PI)?
What is the formula to calculate Personal Income (PI)?
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How is Personal Disposable Income (PDI) calculated?
How is Personal Disposable Income (PDI) calculated?
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What is the difference between nominal GDP and real GDP?
What is the difference between nominal GDP and real GDP?
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Which of the following is deducted from National Income to calculate Personal Income (PI)?
Which of the following is deducted from National Income to calculate Personal Income (PI)?
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What is the GDP deflator used to calculate?
What is the GDP deflator used to calculate?
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National Disposable Income includes current transfers from the rest of the world.
National Disposable Income includes current transfers from the rest of the world.
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Consumer Price Index (CPI) is generally expressed in percentage terms.
Consumer Price Index (CPI) is generally expressed in percentage terms.
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CPI is the index of prices of a given basket of __________ bought by the representative consumer.
CPI is the index of prices of a given basket of __________ bought by the representative consumer.
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Match the following definitions:
Match the following definitions:
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Study Notes
Understanding National Income Accounting
- National income accounting is the process of calculating the aggregate income of an economy by analyzing the flow of income through different sectors.
Basic Concepts of Macroeconomics
- Adam Smith's book "An Enquiry into the Nature and Cause of the Wealth of Nations" is a pioneering work in economics that explores what generates the economic wealth of a nation.
- A country's economic wealth does not necessarily depend on the possession of natural resources, but on how these resources are used to generate production and income.
Flow of Production
- The flow of production arises from people combining their energies with natural and man-made resources within a social and technological structure.
- Production involves the transformation of commodities (goods and services) by millions of enterprises, which are then sold to consumers.
- Commodities can be either final goods (intended for final use) or intermediate goods (used as inputs for further production).
Final Goods
- Final goods are goods and services produced for final use, and they do not undergo further transformation in the economic process.
- Examples of final goods include consumption goods (e.g., food, clothing, recreation) and capital goods (e.g., tools, machines).
- Consumer durables are goods that are durable and have a long life, such as television sets, automobiles, and home computers.
Stocks and Flows
- Stocks are quantities of goods or assets that exist at a particular point in time (e.g., capital stock, buildings, machines).
- Flows are quantities of goods or services that occur over a period of time (e.g., income, output, profits).
- Stocks can change over time due to additions or deductions, which are considered flows.
Measures of Final Output
- The total final output produced in an economy can be measured using a common measuring rod, which is money.
- The value of final goods already includes the value of intermediate goods used in their production.
- Counting intermediate goods separately would lead to double counting and exaggerate the value of economic activity.
Investment and Depreciation
- Gross investment refers to the total capital goods produced in a year, while net investment refers to the new addition to capital stock.
- Depreciation is the annual allowance for wear and tear of capital goods, which is subtracted from gross investment to arrive at net investment.
- Depreciation is an accounting concept and does not necessarily involve actual expenditure.
Trade-off between Consumption and Investment
- The total production of final goods in an economy can be either in the form of consumption or investment.
- There is a trade-off between consumption and investment, as producing more of one implies producing less of the other.
- However, producing more capital goods can lead to increased production of consumer goods in the future.### Circular Flow of Income
- The economy's income is generated through the production process, which leads to factor payments to households.
- Households use these payments to buy goods and services, which enables firms to sell their products and receive revenue.
- The revenue received by firms is used to pay factors of production, creating a circular flow of income.
Factors of Production
- There are four kinds of contributions that can be made during the production of goods and services:
- Human labour, remunerated by wages
- Capital, remunerated by interest
- Entrepreneurship, remunerated by profit
- Fixed natural resources (land), remunerated by rent
Circular Flow of Income in a Simple Economy
- Households receive payments from firms for productive activities.
- Households spend their entire income on goods and services produced by domestic firms.
- Firms produce goods and services, pay remunerations to factors of production, and receive sales revenue.
- The entire income of the economy comes back to producers in the form of sales revenue.
Methods of Calculating National Income
- Three methods can be used to calculate national income:
- Expenditure method: measures the aggregate value of spending by households on final goods and services
- Product method: measures the aggregate value of goods and services produced by all firms
- Income method: measures the sum total of all factor payments made to households
The Product or Value Added Method
- Value added is the net contribution made by a firm to the production process.
- It is calculated by subtracting the value of intermediate goods used by the firm from the value of its production.
- Value added is distributed among the four factors of production: labour, capital, entrepreneurship, and land.
- Value added is a flow variable and can be represented in terms of money.
Gross Value Added and Net Value Added
- Gross Value Added includes the value of depreciation (consumption of fixed capital).
- Net Value Added excludes depreciation and represents the true value added by a firm.
- Net Value Added is calculated by deducting depreciation from Gross Value Added.### Inventory and Change in Inventory
- Inventory refers to the stock of unsold finished goods, semi-finished goods, or raw materials that a firm carries from one year to the next.
- Inventory is a stock variable, which means it has a value at the beginning of the year and may have a higher or lower value at the end of the year.
- Change in inventories is the difference between the production of a firm during a year and the sale of the firm during the same year.
Types of Investment
- There are three major categories of investment:
- Rise in the value of inventories of a firm over a year, which is treated as investment expenditure.
- Fixed business investment, which is the addition to the machinery, factory buildings, and equipment employed by firms.
- Residential investment, which refers to the addition of housing facilities.
Planned and Unplanned Change in Inventory
- Planned change in inventory occurs when a firm intentionally increases or decreases its inventory level.
- Unplanned change in inventory occurs when a firm experiences unexpected changes in sales, leading to an unplanned accumulation or decumulation of inventories.
Gross Value Added (GVA) and Net Value Added (NVA)
- GVA is the value of the output produced by a firm minus the value of intermediate goods used by the firm.
- NVA is the GVA minus depreciation.
Gross Domestic Product (GDP)
- GDP is the sum of the gross value added of all firms in the economy.
- GDP can be calculated using the following equation: GDP = GVA1 + GVA2 + ... + GVAN
Expenditure Method
- The expenditure method calculates GDP by looking at the demand side of the products.
- GDP is the sum of final consumption expenditure, investment expenditure, government expenditure, and exports.
Income Method
- The income method calculates GDP by looking at the income received by all the factors of production.
- GDP is the sum of wages, salaries, profits, interest payments, and rents received by all households in the economy.
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Description
Learn about the fundamental concepts of national income accounting, including the circular flow of income and the three methods to calculate national income.
