National Income and Accounting Concepts

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.