National Income and Accounting Concepts

Study Notes

National Income (NI)

Aggregate value of all final goods and services produced in a country over a specific period, typically one financial year.

National Income Accounting

A system used by governments to measure economic activity levels within a given timeframe.

Circular Flow of Income

A model representing economic exchanges as flows of money and goods/services among agents.
Money flows one way, while goods and services flow in the opposite direction, creating a closed circuit.
Involves transactions among different sectors, leading to a cyclical pattern of income and expenditure.

Domestic/Economic Territory

Geographical area administered by the government where people, goods, and capital circulate freely.
Excludes foreign embassies in India; Indian embassies abroad are included.

Market Price (MP)

The selling price consumers pay for products, encompassing indirect taxes and excluding subsidies.

Factor Cost (FC)

Costs incurred by firms for the factors of production, excluding indirect taxes and including subsidies.
Formula: Factor Cost (FC) = Market Price - Indirect Taxes + Subsidy.

Nominal Price or Current Price

The current market price of goods or services, affected by inflation.

Base Price or Constant Price

Market price of goods/services in a reference year, known as the Base Year, used for comparing National Income over time.

Depreciation

Loss in fixed asset value due to wear, tear, damages, or obsolescence, also termed Consumption of Fixed Capital.

Net Factor Income from Abroad (NFIA)

Difference between factor income earned by Indian residents abroad and that earned by non-residents in India.
Formula: NFIA = Factor Income from Abroad to India - Factor Income from India to Abroad.

Transfer Payments

Unilateral payments made without reciprocal exchanges, such as scholarships and donations.
Not included in National Income.

Capital Output Ratio (COR)

The amount of capital required to produce one unit of output.
Higher COR indicates lower efficiency; conversely, a lower COR signifies greater efficiency.

Incremental Capital Output Ratio (ICOR)

Additional capital needed to produce one extra unit of output.
Formula: ICOR = Incremental Capital / Incremental Output.

Measures of National Income (NI)

Common metrics for measuring NI include Gross Domestic Product (GDP) and Gross National Product (GNP).

Gross Domestic Product (GDP)

Assess aggregation of final goods and services produced domestically within a year.
Focus on final goods and services, excluding intermediate production.

Description

This quiz explores the definitions and management of National Income (NI) and National Income Accounting. Delve into the fundamental concepts that help measure a country's economic activity over a specified period. Test your knowledge on the significance of these terms in the realm of economics.