5 real PYQs·25 concepts ↓·21 concept drills·Asked 2015 · 2021
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National Income Accounting
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National Income Identity for an Open Economy
›In a closed economy, the national income identity is Y = C + I + G (NCERT Class 12 — Introductory Microeconomics, ch06-open-economy.md, p. 97).
›In an open economy, exports (X) are an additional source of demand for domestic goods and services from abroad (NCERT Class 12 — Introductory Microeconomics, ch06-open-economy.md, p. 97).
›Imports (M) supplement domestic supplies and represent the part of domestic demand that falls on foreign goods and services (NCERT Class 12 — Introductory Microeconomics, ch06-open-economy.md, p. 97).
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In an open economy, the national income identity expands upon the closed-economy model by incorporating international trade in goods and services. While a closed economy's aggregate demand is composed of consumption (C), investment (I), and government spending (G), an open economy includes exports (X) as an additional source of demand for domestic goods and services from abroad. Conversely, imports (M) represent the portion of domestic demand that falls on foreign goods and services, thus supplementing domestic supplies.
The fundamental national income identity for an open economy can be expressed as:
Y + M = C + I + G + X
This equation states that the total supply of goods and services in the domestic market (domestic output Y plus imports M) must equal the total demand for goods and services (consumption C, investment I, government spending G, and exports X).
Rearranging this identity, it becomes:
Y = C + I + G + X – M
Alternatively, this can be written as:
Y = C + I + G + NX
where NX denotes net exports, which is the difference between exports and imports (NX = X – M). A positive NX indicates a trade surplus, meaning exports exceed imports, while a negative NX signifies a trade deficit, with imports surpassing exports.
The equilibrium income in an open economy is influenced by autonomous components of expenditure (like autonomous investment and government spending) and the determinants of imports and exports. Imports generally depend positively on domestic income (Y) and negatively on the real exchange rate (R). Exports depend positively on foreign income (Yf) and the real exchange rate (R). Assuming price levels and the nominal exchange rate are constant (fixing R), and considering foreign income and thus exports as exogenous, the demand for imports includes an autonomous component and a component dependent on income (M = M + mY), where 'm' is the marginal propensity to import. The open economy multiplier, given by `1 / (1 – c + m)`, is smaller than its closed-economy counterpart because 'm' (marginal propensity to import) represents an additional leakage from the circular flow of domestic income, reducing the induced effect on demand for domestic goods.
All key facts
›In a closed economy, the national income identity is Y = C + I + G (NCERT Class 12 — Introductory Microeconomics, ch06-open-economy.md, p. 97).
›In an open economy, exports (X) are an additional source of demand for domestic goods and services from abroad (NCERT Class 12 — Introductory Microeconomics, ch06-open-economy.md, p. 97).
›Imports (M) supplement domestic supplies and represent the part of domestic demand that falls on foreign goods and services (NCERT Class 12 — Introductory Microeconomics, ch06-open-economy.md, p. 97).
›The national income identity for an open economy is Y + M = C + I + G + X (NCERT Class 12 — Introductory Microeconomics, ch06-open-economy.md, p. 97).
›This identity can be rearranged to Y = C + I + G + X – M or Y = C + I + G + NX (NCERT Class 12 — Introductory Microeconomics, ch06-open-economy.md, p. 97).
›NX stands for net exports, calculated as exports minus imports (NX = X – M) (NCERT Class 12 — Introductory Microeconomics, ch06-open-economy.md, p. 97).
›A positive NX indicates a trade surplus, while a negative NX implies a trade deficit (NCERT Class 12 — Introductory Microeconomics, ch06-open-economy.md, p. 97).
›The demand for imports depends positively on domestic income (Y) and negatively on the real exchange rate (R) (NCERT Class 12 — Introductory Microeconomics, ch06-open-economy.md, p. 97).
›Exports depend positively on foreign income (Yf) and the real exchange rate (R) (NCERT Class 12 — Introductory Microeconomics, ch06-open-economy.md, p. 97).
›For simplified analysis, price levels and the nominal exchange rate are assumed constant, fixing R, and foreign income and exports (X) are considered exogenous (X = X) (NCERT Class 12 — Introductory Microeconomics, ch06-open-economy.md, p. 98).
›The demand for imports is modeled as M = M + mY, where M > 0 is the autonomous component, and 'm' is the marginal propensity to import (NCERT Class 12 — Introductory Microeconomics, ch06-open-economy.md, p. 98).
›The marginal propensity to import ('m') is the fraction of an extra rupee of income spent on imports (NCERT Class 12 — Introductory Microeconomics, ch06-open-economy.md, p. 98).
›The equilibrium income (Y*) in an open economy is given by Y* = A / (1 – c + m), where A represents all autonomous components (NCERT Class 12 — Introductory Microeconomics, ch06-open-economy.md, p. 98).
›The open economy multiplier is 1 / (1 – c + m) (NCERT Class 12 — Introductory Microeconomics, ch06-open-economy.md, p. 98).
›Since the marginal propensity to import (m) is greater than zero, the open economy multiplier is smaller than the closed economy multiplier (NCERT Class 12 — Introductory Microeconomics, ch06-open-economy.md, p. 98).
›An increase in demand for exports increases aggregate demand for domestically produced output (NCERT Class 12 — Introductory Microeconomics, ch06-open-economy.md, p. 99).
›An autonomous rise in import demand causes a fall in demand for domestic output and a decline in equilibrium income (NCERT Class 12 — Introductory Microeconomics, ch06-open-economy.md, p. 99).
Net National Product (NNP)
›Net National Product (NNP) is obtained by subtracting depreciation from Gross National Product (GNP). — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›The formula for NNP is: NNP = GNP - Depreciation. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
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Net National Product (NNP) is a macroeconomic variable that is derived from the Gross National Product (GNP). It is calculated by subtracting depreciation from the Gross National Product. Depreciation, in this context, refers to the wear and tear or consumption of physical capital during the production process. Therefore, NNP represents the net value of output and income accruing to the residents of a country after accounting for the capital consumed.
All key facts
›Net National Product (NNP) is obtained by subtracting depreciation from Gross National Product (GNP). — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›The formula for NNP is: NNP = GNP - Depreciation. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
Structural Composition of the Economy
›The structural composition of the economy is determined by the contribution of the agricultural, industrial, and service sectors to the country's Gross Domestic Product (GDP). (NCERT Class 11 — Indian Economic Development, ch02-after-studying-this-chapter-the-learners-will.md, p. 21)
›Usually, as a country develops, the share of agriculture in GDP declines, and the share of industry becomes dominant. (NCERT Class 11 — Indian Economic Development, ch02-after-studying-this-chapter-the-learners-will.md, p. 21, Box 2.4)
›At higher levels of development, the service sector contributes more to the GDP than the other two sectors. (NCERT Class 11 — Indian Economic Development, ch02-after-studying-this-chapter-the-learners-will.md, p. 21, Box 2.4)
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The structural composition of an economy refers to the contribution made by its different sectors to the Gross Domestic Product (GDP). The primary sectors considered are the agricultural sector, the industrial sector, and the service sector. Economic development is often accompanied by a structural change where the share of agriculture in GDP typically declines, and the share of industry becomes dominant. At higher levels of development, the service sector tends to contribute the most to GDP.
In India, during the period 1950-1990, a significant structural change was observed. While the share of agriculture in GDP declined, the share of the industrial sector increased, and notably, the service sector's contribution grew to become dominant, exceeding both agriculture and industry by 1990. This pattern, where the service sector's growth outpaced industry to become the largest contributor early in development, was considered peculiar compared to typical development trajectories. Despite the decline in agriculture's share of GDP, the proportion of the population dependent on agriculture did not decrease significantly between 1950 and 1990, indicating a failure of the industrial and service sectors to absorb the agricultural workforce.
All key facts
›The structural composition of the economy is determined by the contribution of the agricultural, industrial, and service sectors to the country's Gross Domestic Product (GDP). (NCERT Class 11 — Indian Economic Development, ch02-after-studying-this-chapter-the-learners-will.md, p. 21)
›Usually, as a country develops, the share of agriculture in GDP declines, and the share of industry becomes dominant. (NCERT Class 11 — Indian Economic Development, ch02-after-studying-this-chapter-the-learners-will.md, p. 21, Box 2.4)
›At higher levels of development, the service sector contributes more to the GDP than the other two sectors. (NCERT Class 11 — Indian Economic Development, ch02-after-studying-this-chapter-the-learners-will.md, p. 21, Box 2.4)
›In India, the structural change observed was peculiar: by 1990, the share of the service sector (40.59%) in GDP was more than that of agriculture or industry, similar to developed nations, even though India started with agriculture contributing over 50%. (NCERT Class 11 — Indian Economic Development, ch02-after-studying-this-chapter-the-learners-will.md, p. 21, Box 2.4)
›Between 1950-51 and 1990-91, the sectoral contribution to GDP in India changed as follows:
›Agriculture: 59.0% (1950-51) to 34.9% (1990-91). (NCERT Class 11 — Indian Economic Development, ch02-after-studying-this-chapter-the-learners-will.md, p. 31)
›Industry: 13.0% (1950-51) to 24.6% (1990-91). (NCERT Class 11 — Indian Economic Development, ch02-after-studying-this-chapter-the-learners-will.md, p. 31)
›Services: 28.0% (1950-51) to 40.5% (1990-91). (NCERT Class 11 — Indian Economic Development, ch02-after-studying-this-chapter-the-learners-will.md, p. 31)
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Sectoral Contribution to GVA/GDP (India, China, Pakistan)
›In 2022, the service sector contributed the highest share of GVA in India (54%), China (54%), and Pakistan (55%). (NCERT Class 11 — Indian Economic Development, ch08-development-experiences-of-india-a-comparison.md, Table 8.3)
›As of 2022, China's agriculture sector contributed 8% to GVA, India's 18%, and Pakistan's 24%. (NCERT Class 11 — Indian Economic Development, ch08-development-experiences-of-india-a-comparison.md, Table 8.3)
›The proportion of workforce engaged in agriculture in 2022 was 43% in India, 36% in Pakistan, and 23% in China. (NCERT Class 11 — Indian Economic Development, ch08-development-experiences-of-india-a-comparison.md, Table 8.3)
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The sectoral contribution to Gross Value Added (GVA), formerly Gross Domestic Product (GDP), and the distribution of the workforce across agriculture, industry, and services are key indicators of a country's economic structure and development path. In a comparison of India, China, and Pakistan, significant differences and similarities emerge.
As of 2022, the service sector contributes the highest share to GVA in all three countries. India's service sector contributes 54% to GVA, China's 54%, and Pakistan's 55%. In terms of employment, 45% of China's workforce is in services, 38% in Pakistan, and 31% in India.
The industrial sector contributes 38% to China's GVA, employing 32% of its workforce. For India, industry contributes 28% to GDP, employing 26% of the workforce. Pakistan's industrial sector accounts for 21% of GVA and employs 26% of its workforce.
Agriculture's contribution to GVA is 8% in China, 18% in India, and 24% in Pakistan (as of 2021/2022 data cited). The workforce dependency on agriculture remains high, with 43% in India, 36% in Pakistan, and 23% in China. While traditionally countries shift employment and output from agriculture to industry and then services, China has followed this pattern. In contrast, India and Pakistan have seen a direct shift of their workforce and output towards the service sector, bypassing substantial industrial growth.
Historically, China maintained near double-digit industrial growth in the 1980s, contributing to its overall growth. India's growth is primarily driven by the service sector, whereas Pakistan has experienced deceleration across all three sectors in certain periods.
All key facts
›In 2022, the service sector contributed the highest share of GVA in India (54%), China (54%), and Pakistan (55%). (NCERT Class 11 — Indian Economic Development, ch08-development-experiences-of-india-a-comparison.md, Table 8.3)
›As of 2022, China's agriculture sector contributed 8% to GVA, India's 18%, and Pakistan's 24%. (NCERT Class 11 — Indian Economic Development, ch08-development-experiences-of-india-a-comparison.md, Table 8.3)
›The proportion of workforce engaged in agriculture in 2022 was 43% in India, 36% in Pakistan, and 23% in China. (NCERT Class 11 — Indian Economic Development, ch08-development-experiences-of-india-a-comparison.md, Table 8.3)
›In 2022, industry contributed 28% to India's GVA (with 26% workforce), 38% to China's GVA (with 32% workforce), and 21% to Pakistan's GVA (with 26% workforce). (NCERT Class 11 — Indian Economic Development, ch08-development-experiences-of-india-a-comparison.md, Table 8.3)
›China has generally followed the normal development pattern of shifting employment and output from agriculture to industry and then to services. (NCERT Class 11 — Indian Economic Development, ch08-development-experiences-of-india-a-comparison.md, page 141)
›In India and Pakistan, the shift in employment and output has been directly from the agriculture sector to the service sector. (NCERT Class 11 — Indian Economic Development, ch08-development-experiences-of-india-a-comparison.md, page 141)
›China's growth is largely contributed by the manufacturing and service sectors, while India's growth is mainly by the service sector. (NCERT Class 11 — Indian Economic Development, ch08-development-experiences-of-india-a-comparison.md, page 142)
›In the 1980s, China maintained a near double-digit growth rate in the industrial sector. (NCERT Class 11 — Indian Economic Development, ch08-development-experiences-of-india-a-comparison.md, page 141)
Circular Flow of Income
›The circular flow of income describes how the aggregate income of an economy goes through its sectors in a circular way (p. 15).
›In a simple economy model, there is no government, external trade, or savings (p. 15).
›Households receive payments from firms for productive activities (p. 15).
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The Circular Flow of Income illustrates the aggregate income of an economy moving in a continuous cycle through its various sectors. In a simplified economy, without government, external trade, or savings, this flow primarily involves two sectors: households and firms. Households provide factors of production (labour, capital, entrepreneurship, land) to firms, for which they receive factor payments in the form of wages, interest, profits, and rent.
Households then spend their entire earned income on the goods and services produced by domestic firms. This spending constitutes the firms' sales revenue. Firms, in turn, use this revenue to pay for the factors of production in the next period, thus completing the circular movement of income and expenditure. This model shows that the aggregate consumption by households is equal to the aggregate expenditure on goods and services produced by firms, implying no leakage from the system. The value of expenditure must equal the value of goods and services.
The circular flow demonstrates that the aggregate value of goods and services produced in an economy can be estimated by measuring the annual value of these flows at different points: through the aggregate value of spending received by firms (expenditure method), the aggregate value of final goods and services produced (product method), or the sum total of all factor payments (income method). This fundamental principle remains true even in more complex economic systems.
All key facts
›The circular flow of income describes how the aggregate income of an economy goes through its sectors in a circular way (p. 15).
›In a simple economy model, there is no government, external trade, or savings (p. 15).
›Households receive payments from firms for productive activities (p. 15).
›The four fundamental contributions to production and their remunerations are: human labour (wage), capital (interest), entrepreneurship (profit), and fixed natural resources/land (rent) (p. 15).
›In this simplified economy, households dispose of their earnings by spending their entire income on goods and services produced by domestic firms (p. 15).
›The aggregate consumption by households is equal to the aggregate expenditure on goods and services produced by firms (p. 15).
›The entire income of the economy comes back to the producers as sales revenue, with no leakage from the system (p. 16).
›The value of expenditure must be equal to the value of goods and services (p. 16).
›The circular flow involves two main markets: the goods and services market (flow of payments and goods/services) and the factors of production market (flow of services and payments) (p. 16).
›The aggregate value of goods and services produced annually can be estimated by measuring the annual value of flows at any point in the diagram (p. 16).
›National income can be calculated using three methods derived from the circular flow: the expenditure method, the product (or value added) method, and the income method (p. 16-17).
GDP, GNP, NNP — Definitions and Relationships
›GDP measures production within domestic territory regardless of ownership
›GDP is a good indicator of economic growth, representing an increase in the country's capacity to produce goods and services.
›Economic growth, when visualised as a 'cake', means an increase in the size of the cake, allowing more people to enjoy it.
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Gross Domestic Product (GDP) measures the aggregate production of final goods and services taking place within the domestic economy during a year. The whole of it may not accrue to the citizens of the country. For example, a citizen of India working in Saudi Arabia may be earning wages that will be included in the Saudi Arabian GDP, but legally speaking, she is an Indian.
To account for this, macroeconomics uses the concept of Gross National Product (GNP). GNP = GDP + Net factor income from abroad. Net factor income from abroad is the difference between factor income earned by domestic factors of production employed in the rest of the world and the factor income earned by factors of production of the rest of the world employed in the domestic economy.
The macroeconomic variable which takes into account such additions and subtractions is known as National Product. It is, therefore, defined as: GNP = GDP + Net factor income earned abroad.
From GNP, if we deduct depreciation (the wearing and tearing of capital during production), we get Net National Product (NNP): NNP = GNP − Depreciation.
All these variables are evaluated at market prices. But market prices include indirect taxes. When indirect taxes are imposed on goods and services, their prices go up. We need to deduct these from NNP evaluated at market prices in order to calculate that part of NNP which actually accrues to the factors of production. Similarly, there may be subsidies granted by the government on the prices of some commodities. So we need to add subsidies to the NNP evaluated at market prices.
The measure we obtain by doing so is called NNP at factor cost or National Income (NI):
NNP at factor cost = NNP at market prices − (Indirect taxes − Subsidies)
= NNP at market prices − Net indirect taxes.
GDP at factor cost = NNP at factor cost + Depreciation = National Income + Depreciation.
GDP at factor cost = GDP at market prices − Net indirect taxes.
All key facts
›GDP measures production within domestic territory regardless of ownership
›GDP is a good indicator of economic growth, representing an increase in the country's capacity to produce goods and services.
›Economic growth, when visualised as a 'cake', means an increase in the size of the cake, allowing more people to enjoy it.
›The GDP of a country is derived from the agricultural, industrial, and service sectors.
›The contribution made by each of these sectors forms the structural composition of the economy.
›Typically, as a country develops, the share of agriculture in GDP declines, the share of industry becomes dominant, and at higher development levels, the service sector contributes most to GDP.
›GNP = GDP + Net factor income from abroad (can be positive or negative)
›NNP = GNP − Depreciation (also called Net National Product)
›National Income = NNP at factor cost = NNP at market prices − Net indirect taxes
›Net indirect taxes = Indirect taxes − Subsidies
›Three methods of calculating GDP: Product/Value Added method, Expenditure method, Income method — all yield the same result
›GDP by expenditure method: C + I + G + (X − M) where C = consumption, I = investment, G = government expenditure, X = exports, M = imports
union and territory articles 1 4
Factors of Production and Factor Payments
›Production arises from people combining their energies with natural and manmade environments within a social and technological structure (page 10).
›Capital goods (tools, implements, machines) are durable items used in the production process; they are a crucial factor of production that productive enterprises invest in (page 10).
›The ability to buy commodities comes from the income earned as an owner of factors of production (page 14).
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Economic production involves combining human energy with the natural and manmade environment within a specific social and technological structure to generate a flow of commodities, which include both goods and services. The fundamental components contributing to this production process are known as factors of production.
The source chapter identifies four primary factors of production:
1. **Human Labour**: The contribution made by human effort.
2. **Capital**: The contribution made by capital, which includes durable goods like tools, implements, and machines that enable production but are not transformed in the process.
3. **Entrepreneurship**: The organizational and risk-taking contribution.
4. **Fixed Natural Resources ('Land')**: The contribution made by natural resources.
For their roles in producing goods and services, the owners of these factors receive specific remunerations, collectively termed factor payments. The remuneration for human labour is called wage, for capital it is interest, for entrepreneurship it is profit, and for fixed natural resources ('land') it is rent.
These factor payments constitute the income of households, which own the factors of production. Households then use this income to demand goods and services from firms, thereby enabling a continuous circular flow within the economy. Firms demand factors of production from households, generating payments to the public. In turn, the public's demand for goods and services creates payments back to the firms, facilitating the sale of products. This circular interaction between firms and households, operating through factor markets and goods and services markets, ensures the ongoing economic cycle. The aggregate income distributed by firms is the sum total of these remunerations earned by the four factors of production. The value added by a firm is distributed among these four factors, meaning wages, interest, profits, and rents paid out by a firm must collectively sum up to its value added.
All key facts
›Production arises from people combining their energies with natural and manmade environments within a social and technological structure (page 10).
›Capital goods (tools, implements, machines) are durable items used in the production process; they are a crucial factor of production that productive enterprises invest in (page 10).
›The ability to buy commodities comes from the income earned as an owner of factors of production (page 14).
›The incomes people earn as owners of factors of production are used to meet their demand for goods and services (page 14).
›Firms' demand for factors of production to run their processes creates payments to the public (households) (page 14).
›The process of production generates factor payments for those involved and produces goods and services (page 14).
›There are fundamentally four kinds of contributions (factors) made during the production of goods and services (page 15):
›**Human labour**: Remuneration is called wage (page 15).
›**Capital**: Remuneration is called interest (page 15).
›**Entrepreneurship**: Remuneration is called profit (page 15).
›**Fixed natural resources ('land')**: Remuneration is called rent (page 15).
›In a simple economy, households dispose of their earnings by spending their entire income on goods and services produced by domestic firms (page 15).
National Disposable Income
›National Disposable Income is calculated as: National Income + Transfer payments. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›Transfer payments are not included in factor income, which comprises profit, rent, interest, and wages. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
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National Disposable Income represents the total income available to the residents of a country for consumption or saving. It is calculated by adding transfer payments to the National Income. Transfer payments are a type of income, like remittances, that are not considered factor income. This macroeconomic variable helps understand the actual income at the disposal of a nation's economic agents.
All key facts
›National Disposable Income is calculated as: National Income + Transfer payments. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›Transfer payments are not included in factor income, which comprises profit, rent, interest, and wages. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
Gross Investment
›Gross Investment constitutes that part of an economy's final output that comprises capital goods. (p. 13)
›Capital goods included in Gross Investment are items like machines, tools, implements, buildings, office spaces, storehouses, and infrastructure such as roads, bridges, airports, or jetties. (p. 13)
›A significant portion of capital goods produced in a year goes towards maintaining or replacing existing capital stock due to wear and tear. (p. 13)
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Gross Investment in an economy refers to that portion of the total final output that comprises capital goods. These capital goods are durable in character and are utilized in the production process without being transformed. Examples include machines, tools, implements, buildings, office spaces, storehouses, and infrastructure such as roads, bridges, airports, or jetties. Investment, in economic terms, is defined as capital formation, representing a gross or net addition to the capital stock.
It is crucial to distinguish Gross Investment from the net addition to the economy's capital stock. Not all capital goods produced in a year constitute new capital formation because a significant part of the current output of capital goods is directed towards maintaining or replacing existing capital stock that has undergone wear and tear. This wear and tear is termed depreciation. When the value of depreciation is subtracted from Gross Investment, the resulting figure is Net Investment, which measures the actual new addition to the capital stock of an economy.
The concept of investment in economics should not be confused with the commonplace notion of using money to buy financial assets like shares, property, or insurance policies. Economists strictly define investment as the process of capital formation. Investment is a flow variable, meaning it is measured over a period of time, such as a year, rather than at a specific point in time. Major categories of investment include changes in inventories, fixed business investment (addition to machinery, factory buildings, and equipment), and residential investment (addition of housing facilities).
All key facts
›Gross Investment constitutes that part of an economy's final output that comprises capital goods. (p. 13)
›Capital goods included in Gross Investment are items like machines, tools, implements, buildings, office spaces, storehouses, and infrastructure such as roads, bridges, airports, or jetties. (p. 13)
›A significant portion of capital goods produced in a year goes towards maintaining or replacing existing capital stock due to wear and tear. (p. 13)
›Depreciation is the deletion made from the value of Gross Investment to accommodate regular wear and tear of capital. (p. 13)
›Net Investment, or new capital formation, is calculated as Gross Investment minus Depreciation. (p. 13)
›Economists define "investment" strictly as capital formation, which is a gross or net addition to capital stock, distinct from the purchase of financial assets. (p. 13, footnote 1)
›Investment is considered a flow variable, measured over a specific period of time. (Implied from the general discussion of flows on p. 12-13 and "capital goods produced in a year" on p. 13).
›Major categories of investment include: rise in the value of inventories, fixed business investment (addition to machinery, factory buildings, and equipment), and residential investment (addition of housing facilities). (p. 19)
GDP Calculation - Income Method
›The Income Method calculates GDP by summing the income received by all four factors of production (p. 14).
›These four factors are entrepreneurship, labour, capital, and natural resources (p. 14).
›The income components included are profits, interest, rent, and wages (p. 14).
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The Income Method is one of the ways to calculate the Gross Domestic Product (GDP) of a country. This method is based on the principle that the total value of final goods and services produced in an economy must be equal to the total income received by the various factors of production involved in creating that output.
Essentially, the revenues earned by all firms in the economy are distributed among the contributors to the production process. These contributors are categorized into four fundamental factors of production: entrepreneurship, labour, capital, and natural resources. Each of these factors receives a specific type of income in return for its contribution:
* **Profit** for entrepreneurship (the risk-taker who organizes production).
* **Wages** for labour (human effort, both physical and mental).
* **Interest** for capital (physical capital goods like machinery and buildings).
* **Rent** for natural resources (like land and raw materials).
Therefore, by summing up these factor payments—profits, interest, rent, and wages—across the entire economy, the aggregate value of goods and services produced (GDP) can be estimated. In the context of the circular flow of income, measuring the total factor payments made by enterprises to households represents the income method of GDP calculation.
All key facts
›The Income Method calculates GDP by summing the income received by all four factors of production (p. 14).
›These four factors are entrepreneurship, labour, capital, and natural resources (p. 14).
›The income components included are profits, interest, rent, and wages (p. 14).
›The method is based on the idea that total revenues earned by firms are distributed to those who contributed to the production process (p. 14).
›The formula for GDP using this method is: GDP = Profit + Interest + Rent + Wages (p. 14).
›In the circular flow diagram, measuring the total factor payments (represented by arrow B in the diagram) is referred to as the income method (p. 10).
Real GDP
›The term "Real GDP" is not explicitly used or defined in the source chapter; the discussion focuses solely on "Gross Domestic Product (GDP)".
›Gross Domestic Product (GDP) is defined as the total final value of goods and services produced within the domestic territory of a country in a specified time period (generally a financial year). (p. 12)
›GDP measures the aggregate (total) production of final goods and services taking place within the domestic territory of the country during a year. (p. 16)
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The provided source text discusses the concept of Gross Domestic Product (GDP) as a measure of the aggregate output of an economy. However, it does not explicitly use or define the term "Real GDP," nor does it distinguish between nominal and real measures of GDP. The source refers to GDP as the total final value of goods and services produced within the domestic territory of a country during a specified time period, typically a financial year.
GDP, as described, represents the aggregate value of goods and services and can be measured in three ways: the Product or Value-Added Method, the Expenditure Method, and the Income Method. The National Statistical Office (NSO) in India calculates GDP using both the Value Added Method and the Expenditure Method. The concept of domestic territory for GDP calculation includes the political frontiers, territorial waters, ships and aircrafts operated by residents, fishing vessels/oil rigs in international waters, and embassies abroad. GDP is also a foundational macroeconomic variable from which Net Domestic Product (NDP) and Gross National Product (GNP) are derived.
All key facts
›The term "Real GDP" is not explicitly used or defined in the source chapter; the discussion focuses solely on "Gross Domestic Product (GDP)".
›Gross Domestic Product (GDP) is defined as the total final value of goods and services produced within the domestic territory of a country in a specified time period (generally a financial year). (p. 12)
›GDP measures the aggregate (total) production of final goods and services taking place within the domestic territory of the country during a year. (p. 16)
›The aggregate output (GDP) can be measured in three ways: the Product or Value-Added Method, the Expenditure Method, and the Income Method. (p. 10, 12, 13, 14)
›The National Statistical Office (NSO) calculates GDP in India using both the Value Added Method and the Expenditure Method. (p. 15)
›Under the Value Added Method, NSO adds the value addition from various economic activities such as Agriculture, Mining, Manufacturing, Construction, Services, and Public administration. (p. 15)
›Under the Expenditure Method, NSO adds Private (Final) Consumption Expenditure, Government (Final) Consumption Expenditure, Gross Fixed Capital Formation (Investment expenditure), and Net of Exports and Imports. (p. 15)
›Components of GDP by expenditure method are approximately: Private consumption (60%), Government consumption (11%), total investment (29%), and exports minus imports (-2%). (p. 14)
›Domestic territory for GDP calculation includes political frontiers, territorial waters, ships and aircrafts operated by residents, fishing vessels and oil rigs operated by residents in international waters, and embassies/consulates/military establishments of the country located in other countries. (p. 15)
›
GDP Calculation - Expenditure Method
›The Expenditure Method is an alternative approach to calculate GDP by aggregating the expenditure side of all sectors. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›It sums the expenditures made by four sectors: household, government, private, and external. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›These expenditures are on the purchase of final goods and services produced within the domestic territory. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
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The Expenditure Method is one of the alternative ways to calculate a country's Gross Domestic Product (GDP). This method focuses on the aggregate spending by all economic sectors on final goods and services produced within the domestic territory during a specified time period. The fundamental principle is that all goods and services produced in an economy are ultimately purchased by the four main sectors: household, government, private, and external. Therefore, summing the expenditures made by these sectors on domestically produced final goods and services yields the GDP.
The formula for GDP using the expenditure method is expressed as:
**GDP = C + I + G + X - M**
Here, 'C' represents total private consumption expenditure (by the household sector) on both domestic and imported consumption goods. 'I' stands for total private investment expenditure (by the private sector), primarily on capital goods, encompassing both domestic and imported items. 'G' denotes total government expenditure, which includes purchases of both consumption and capital goods, domestic and imported. 'X' signifies exports, representing the external sector's purchases of domestically produced goods and services. Finally, 'M' stands for total imports, which accounts for consumption goods (Cm), investment goods (Im), and government purchases (Gm) that originate from outside the domestic territory, and must be subtracted to only include domestic production. This comprehensive summation of final expenditures reflects the overall economic activity.
The National Statistical Office (NSO) also employs the Expenditure Method and considers components such as Private (Final) Consumption Expenditure, Government (Final) Consumption Expenditure, Gross Fixed Capital Formation (Investment expenditure of private and government), and Net of Exports and Imports. Although theoretically, GDP measured by various methods should be equal, the expenditure approach often shows "discrepancies" primarily due to challenges in obtaining reliable data for private consumption expenditure.
All key facts
›The Expenditure Method is an alternative approach to calculate GDP by aggregating the expenditure side of all sectors. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›It sums the expenditures made by four sectors: household, government, private, and external. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›These expenditures are on the purchase of final goods and services produced within the domestic territory. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›The household sector's expenditure (C') is on consumption goods. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›The private sector's expenditure (I') is primarily on capital goods (investment). — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›The government sector's expenditure (G') includes both capital and consumption goods. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›The external sector's purchases (X) are exports from the economy. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›The formula for GDP using this method is: GDP = C + I + G + X - M. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›In the formula, C, I, and G represent expenditure by respective sectors on both domestic and imported final goods. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›M represents the total imports by the country, combining household, private, and government sector imports (Cm + Im + Gm). — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
Net Investment (New Capital Formation)
›Net Investment measures the new addition to the capital stock in an economy (NCERT Class 12 — Introductory Microeconomics, ch02-national-income-accounting.md, p. 13).
›It is also referred to as new capital formation (NCERT Class 12 — Introductory Microeconomics, ch02-national-income-accounting.md, p. 13).
›The calculation for Net Investment is: Gross Investment – Depreciation (NCERT Class 12 — Introductory Microeconomics, ch02-national-income-accounting.md, p. 13).
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Net Investment, also known as new capital formation, is a measure of the actual addition to an economy's capital stock over a specific period. It is derived by adjusting Gross Investment for depreciation. Gross Investment represents the total output of capital goods produced in an economy within a given timeframe, which can include items like machines, tools, buildings, and infrastructure.
A crucial aspect of capital goods is that they undergo wear and tear over time. A portion of the new capital goods produced is therefore dedicated to maintaining or replacing the existing capital stock rather than expanding it. This reduction in the value of capital due to regular use is termed **depreciation**. Depreciation is considered an annual allowance for the wear and tear of capital goods, often calculated by dividing the cost of the good by its estimated useful life; it is an accounting concept. Depreciation is also defined as the consumption of physical capital.
By subtracting depreciation from gross investment, net investment provides a true measure of the *new* capital accumulated. This effectively reflects the expansion of an economy's productive capacity, indicating how much the capital stock has genuinely grown beyond merely replacing worn-out assets. Economists define investment specifically as capital formation—the gross or net addition to capital stock—distinguishing it from the common understanding of using money to purchase financial assets like shares or property.
All key facts
›Net Investment measures the new addition to the capital stock in an economy (NCERT Class 12 — Introductory Microeconomics, ch02-national-income-accounting.md, p. 13).
›It is also referred to as new capital formation (NCERT Class 12 — Introductory Microeconomics, ch02-national-income-accounting.md, p. 13).
›The calculation for Net Investment is: Gross Investment – Depreciation (NCERT Class 12 — Introductory Microeconomics, ch02-national-income-accounting.md, p. 13).
›Gross investment includes capital goods such as machines, tools, implements, buildings, office spaces, storehouses, roads, bridges, airports, or jetties (NCERT Class 12 — Introductory Microeconomics, ch02-national-income-accounting.md, p. 13).
›Depreciation is the deletion made from the value of gross investment to accommodate regular wear and tear of capital (NCERT Class 12 — Introductory Microeconomics, ch02-national-income-accounting.md, p. 13).
›Depreciation is an annual allowance for wear and tear of a capital good (NCERT Class 12 — Introductory Microeconomics, ch02-national-income-accounting.md, p. 13).
›Depreciation is an accounting concept, meaning no real expenditure may have actually been incurred each year, yet it is annually accounted for (NCERT Class 12 — Introductory Microeconomics, ch02-national-income-accounting.md, p. 14).
›Economists define investment as capital formation, which is a gross or net addition to capital stock, not the commonplace notion of buying physical or financial assets (NCERT Class 12 — Introductory Microeconomics, ch02-national-income-accounting.md, p. 13, footnote 1).
›Gross investment is the part of the final output that comprises physical capital goods (Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md, p. 7).
Inventory (Economics)
›Inventory is defined as the stock of unsold finished goods, semi-finished goods, or raw materials that a firm carries from one year to the next (Page 19).
›Inventory is a stock variable, representing a quantity at a particular point in time (Page 19).
›The change in inventories takes place over a period of time, making it a flow variable (Page 19).
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In economics, **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. It is classified as a stock variable, meaning its value is defined at a specific point in time. However, the *change* in inventories during a year is considered a flow variable because it occurs over a period of time. This change in inventories for a firm is precisely the difference between its production and its sales during that year.
From an accounting and economic perspective, inventories are treated as capital. Consequently, any change in a firm's inventory is classified as an investment. This investment can manifest as an increase (accumulation) or a decrease (decumulation) in the value of inventories. Changes in inventories can be either planned, reflecting a firm's deliberate strategy to adjust its stock levels, or unplanned, resulting from unexpected deviations in sales from forecasts. Unplanned accumulation occurs when sales are lower than anticipated, leading to a build-up of unsold goods, while unplanned decumulation happens when sales exceed expectations, forcing it to draw down its existing stock.
All key facts
›Inventory is defined as the stock of unsold finished goods, semi-finished goods, or raw materials that a firm carries from one year to the next (Page 19).
›Inventory is a stock variable, representing a quantity at a particular point in time (Page 19).
›The change in inventories takes place over a period of time, making it a flow variable (Page 19).
›The change of inventories of a firm during a year is identical to the firm’s production during the year minus its sale during the year (Page 19).
›Inventories are treated as a form of capital (Page 20).
›Any change in the inventory of a firm is considered an investment (Page 20).
›The rise in the value of inventories of a firm over a year is treated as investment expenditure (Page 20).
›Changes in inventories can be either planned or unplanned (Page 20).
›Unplanned accumulation of inventories occurs due to an unexpected fall in sales, resulting in unanticipated unsold stock (Page 20).
›Unplanned decumulation of inventories occurs due to an unexpected rise in sales, leading to a reduction in inventory beyond what was anticipated (Page 20).
›Planned accumulation happens when a firm aims to increase inventories, producing more than expected sales (Page 20).
›Planned decumulation happens when a firm aims to reduce inventories, producing less than expected sales and intending to sell from existing stock (Page 20).
›Change in stock/inventory is a component of Gross Capital Formation (Page 8).
Consumption Goods
›Consumption goods are also referred to as consumer goods (p. 11).
›They are consumed when purchased by their ultimate consumers (p. 11).
›Examples include goods like food and clothing, and services like recreation (p. 11).
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Consumption goods, also known as consumer goods, are a category of final goods and services that are purchased by their ultimate consumers for direct consumption. Unlike capital goods, which are used in further production and are not ultimately consumed by households, consumption goods are meant for final use and do not undergo any more stages of economic production or transformation once sold to the consumer. This category encompasses both tangible goods, such as food and clothing, and intangible services like recreation.
The source further distinguishes between consumption goods based on their durability. Some consumption goods, referred to as consumer durables, possess a durable character, similar to capital goods. Examples include television sets, automobiles, and home computers. These items are not extinguished by immediate or short-period consumption and have a relatively long lifespan compared to non-durable articles like food or even clothing. Consumer durables also experience wear and tear with gradual use, requiring repairs and replacements over time, much like machines. In an economy, the total production of final goods and services in a given period is comprised of either consumption goods (both durable and non-durable) or capital goods. The availability and purchase of consumer goods are directly linked to the population's capacity to spend, which in turn depends on their income.
Critically, the classification of a good as a consumption good or a capital good often depends on its *purpose of use*. For instance, a washing machine used by an individual for personal laundry is a consumption good, but the same washing machine purchased by a business to provide laundry services becomes a capital good because it is used to produce a service for the market.
Consumption goods are broadly categorized into three types: durable consumption goods, non-durable consumption goods, and services. Durable goods, such as home appliances, typically last for more than three years, while non-durable goods like food or fuel are consumed immediately or have a life of less than three years. Services, being intangible and consumed immediately, are also considered a type of consumption good, examples being education or healthcare.
All key facts
›Consumption goods are also referred to as consumer goods (p. 11).
›They are consumed when purchased by their ultimate consumers (p. 11).
›Examples include goods like food and clothing, and services like recreation (p. 11).
›Services are included under consumption goods (p. 11).
›Consumption goods are a type of final good, meaning they will not pass through any more stages of production or transformations once sold for final use (p. 11, 12).
›Some consumption goods are durable, such as television sets, automobiles, or home computers (p. 12).
›Durable consumption goods are not extinguished by immediate or short-period consumption and have a relatively long life (p. 12).
›Consumer durables undergo wear and tear and often need repairs and replacements, similar to capital goods (p. 12).
›The total final goods and services produced in an economy are either consumption goods (durable and non-durable) or capital goods (p. 12).
›Consumer goods sustain the consumption of the entire population (p. 14).
›Purchase of consumer goods depends on people's capacity to spend, which is linked to their income (p. 14).
›Consumption goods are categorized into durable consumption goods, non-durable consumption goods, and services (p. 6).
GDP Calculation - Product or Value-Added Method
›The Product or Value-Added Method is used to calculate the aggregate annual value of goods and services produced in an economy. (Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md, Fundamentals of Macro Economy 12)
›To arrive at GDP using this method, the value added by all firms in an economy is summed up. (Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md, Fundamentals of Macro Economy 12)
›Value added by a firm is calculated as the value of its total production minus the value of intermediate goods used by that firm. (Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md, Fundamentals of Macro Economy 12)
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The Product or Value-Added Method is one of the ways to calculate the Gross Domestic Product (GDP) of a country. This method involves summing up the aggregate annual value of all goods and services produced by every firm within an economy. The core principle of this method is to avoid double-counting intermediate goods by focusing on the "value addition" at each stage of production.
Value addition by a firm is determined by subtracting the value of intermediate goods it purchases and uses from the total value of its production. For instance, if a baker buys wheat from a farmer (an intermediate good) and converts it into bread, the baker's value addition is the value of the bread produced minus the cost of the wheat. The farmer's value addition is the total value of the wheat produced, assuming no other inputs. When calculating GDP using this method, the value added by all producers, including those who consume their own produce, is aggregated. The total GDP calculated this way should be equivalent to the final value of all final goods and services produced in the economy, ensuring that only the final transactions are counted towards the national income. The National Statistical Office (NSO) utilizes this method for GDP calculation, considering value addition across various economic activities such as agriculture, manufacturing, and services.
All key facts
›The Product or Value-Added Method is used to calculate the aggregate annual value of goods and services produced in an economy. (Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md, Fundamentals of Macro Economy 12)
›To arrive at GDP using this method, the value added by all firms in an economy is summed up. (Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md, Fundamentals of Macro Economy 12)
›Value added by a firm is calculated as the value of its total production minus the value of intermediate goods used by that firm. (Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md, Fundamentals of Macro Economy 12)
›The value addition reflects "the value/price that somebody's work will fetch in the market" and includes profit. (Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md, Fundamentals of Macro Economy 13)
›The method explicitly accounts for which goods are final and which are intermediate, ensuring that intermediate goods are not counted towards GDP. (Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md, Fundamentals of Macro Economy 13)
›The National Statistical Office (NSO) calculates GDP using the Value Added Method. (Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md, Fundamentals of Macro Economy 15)
›Under the Value Added Method, NSO calculates value addition from various economic activities including Agriculture, Forestry and Fishing; Mining and Quarrying; Manufacturing; Electricity, Gas, water supply and other utility services; Construction; Trade, Hotels and transport, and communication and services related to broadcasting; Financial, Insurance, real estate and professional services; and Public administration and defence and other services. (Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md, Fundamentals of Macro Economy 15)
Gross National Product (GNP)
›GNP measures the output/earnings made by the economic agents who are residents of the country. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›It includes income earned by domestic residents whether they are in India or abroad. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›It subtracts the contribution of foreigners in the country's GDP. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
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Gross National Product (GNP) is a macroeconomic variable that measures the aggregate output or earnings made by the residents of a country. Unlike Gross Domestic Product (GDP), which focuses on production within the domestic territory, GNP specifically accrues to the economic agents who are residents of the country, regardless of their geographical location of earning.
To calculate GNP, the factor income earned by the domestic factors of production (residents) employed in the rest of the world is added to the GDP. Conversely, the factor income earned by foreign factors of production employed within the domestic economy is subtracted. This difference between factor income from abroad and factor income paid to abroad is known as Net Factor Income from Abroad (NFIA). Therefore, the formula for GNP is GDP plus Net Factor Income from Abroad (NFIA). Factor income comprises profit, rent, interest, and wages, but it explicitly excludes transfer payments such as remittances.
All key facts
›GNP measures the output/earnings made by the economic agents who are residents of the country. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›It includes income earned by domestic residents whether they are in India or abroad. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›It subtracts the contribution of foreigners in the country's GDP. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›The formula for GNP is: GNP = GDP + Net factor income from abroad (NFIA). — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›NFIA is calculated as: Factor income earned by domestic factors of production employed abroad - Factor income earned by foreign factors of production employed domestically. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›Factor income includes profit, rent, interest, and wages. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›Factor income does not include transfer payments (e.g., remittances). — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
Net Domestic Product (NDP)
›Net Domestic Product (NDP) is obtained by subtracting depreciation from Gross Domestic Product (GDP). (p. 16)
›The formula for NDP is: Gross Domestic Product (GDP) - Depreciation = Net Domestic Product (NDP). (p. 16)
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Net Domestic Product (NDP) is a macroeconomic variable that is derived from the Gross Domestic Product (GDP). It represents the net production of final goods and services within a country's domestic territory after accounting for the wear and tear on physical capital. The Net Domestic Product is calculated by subtracting depreciation from the Gross Domestic Product.
All key facts
›Net Domestic Product (NDP) is obtained by subtracting depreciation from Gross Domestic Product (GDP). (p. 16)
›The formula for NDP is: Gross Domestic Product (GDP) - Depreciation = Net Domestic Product (NDP). (p. 16)
Depreciation
›Depreciation is a deletion made from the value of gross investment to accommodate regular wear and tear of capital. (p. 13)
›It is also known as "consumption of fixed capital." (p. 18)
›Depreciation is an annual allowance for the wear and tear of a capital good. (p. 13)
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Depreciation, also known as **consumption of fixed capital**, is an economic accounting concept that represents the deletion made from the value of gross investment to accommodate the regular wear and tear of capital goods. Capital goods, such as machines, tools, implements, buildings, or infrastructure, gradually undergo wear and tear during their use in the production process over time.
Instead of considering a large, bulk investment for replacement after a long period, depreciation conceptualizes an annual allowance for this wear and tear. It is typically calculated as the cost of the capital good divided by its expected useful life, assuming a constant rate based on the original value. While depreciation is an annually accounted cost, it does not necessarily mean a real expenditure is incurred each year by a firm. However, at an economy-wide level, it is assumed that a steady flow of actual replacement spending will generally align with the amount of annual depreciation accounted for.
Depreciation is a crucial factor in distinguishing between gross and net measures of economic activity. For instance, **Net Investment** is derived by subtracting depreciation from **Gross Investment**. Similarly, **Net Value Added** is calculated by deducting depreciation from **Gross Value Added**, signifying that the net measure excludes the wear and tear suffered by capital. It is important to note that depreciation specifically covers regular wear and tear and does not account for unexpected destruction or disuse of capital due as can occur from accidents or natural calamities.
All key facts
›Depreciation is a deletion made from the value of gross investment to accommodate regular wear and tear of capital. (p. 13)
›It is also known as "consumption of fixed capital." (p. 18)
›Depreciation is an annual allowance for the wear and tear of a capital good. (p. 13)
›It is inherent in its conception is the expected life of a particular capital good. (p. 13)
›Depreciation can be calculated as the cost of the good divided by the number of years of its useful life. (p. 14)
›Depreciation is an accounting concept, meaning no real expenditure may be incurred each year, yet it is annually accounted for. (p. 14)
›In an economy, a steady flow of actual replacement spending is assumed to more or less match the amount of annual depreciation accounted for. (p. 14)
›**Net Investment** is defined as Gross Investment minus Depreciation. (p. 13)
›**Gross Value Added** includes depreciation. (p. 18)
›**Net Value Added** is obtained by deducting depreciation (or capital consumption) from Gross Value Added. (p. 18)
›Net Value Added does not include the wear and tear that capital has undergone. (p. 18)
›Depreciation does not account for unexpected or sudden destruction or disuse of capital due to accidents, natural calamities, or other extraneous circumstances. (p. 14, footnote 2)
Domestic Territory (Economic Territory)
›The concept of domestic territory (economic territory) is distinct from the geographical or political territory of a country. (p. 15)
›It includes the political frontiers of the country, along with its territorial waters. (p. 15)
›It includes ships and aircrafts operated by the residents of the country between two or more countries (e.g., Air India’s services). (p. 15)
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The Domestic Territory, also referred to as Economic Territory, is a concept distinct from the geographical or political boundaries of a country. It encompasses the area within which a country's economic activities primarily operate and whose residents are considered to have a center of economic interest.
This definition extends beyond mere landmass and territorial waters to include specific economic operations and diplomatic presences abroad. It includes the political frontiers of a country, its territorial waters, and the airspace above. Additionally, ships and aircraft operated by the country's residents for transport between two or more countries are part of its domestic territory. Fishing vessels, oil and natural gas rigs, and floating platforms operated by residents in international waters or in areas where the country holds exclusive operational rights are also included. Furthermore, a country's embassies, consulates, and military establishments located in other nations are considered part of its domestic territory. Conversely, foreign embassies, consulates, military establishments, and offices of international organizations situated within the country's geographical borders are explicitly excluded from its domestic territory. Gross Domestic Product (GDP) measures the aggregate production of final goods and services taking place within this defined domestic territory.
All key facts
›The concept of domestic territory (economic territory) is distinct from the geographical or political territory of a country. (p. 15)
›It includes the political frontiers of the country, along with its territorial waters. (p. 15)
›It includes ships and aircrafts operated by the residents of the country between two or more countries (e.g., Air India’s services). (p. 15)
›It encompasses fishing vessels, oil and natural gas rigs, and floating platforms operated by the residents of the country in international waters or in areas where the country has exclusive rights of operation. (p. 15)
›Embassies, consulates, and military establishments of the country located in other countries (e.g., Indian embassy in U.S.A., Japan) are part of the domestic territory. (p. 15)
›It explicitly excludes all embassies, consulates, and military establishments of other countries and offices of international organisations located within the country's geographical borders. (p. 15)
›Gross Domestic Product (GDP) measures the aggregate production of final goods and services taking place within the domestic territory of the country during a year. (p. 12, 16)
›India's GDP calculation includes output from Centre specific activities (like Railways, Defence, Central Highways), Embassies located in other countries, and Fishing vessels, oil and natural gas rigs, floating platforms operated by residents in international waters. (p. 15)
Net Factor Income from Abroad (NFIA)
›NFIA is used to calculate Gross National Product (GNP) from Gross Domestic Product (GDP). (ch01-fundamentals-of-macro-economy.md)
›The formula for GNP is: GNP = GDP + Net Factor Income from Abroad (NFIA). (ch01-fundamentals-of-macro-economy.md)
›NFIA is derived by adding the factor income earned by domestic factors of production employed in the rest of the world and subtracting the factor income earned by factors of production of the rest of the world employed in the domestic economy. (ch01-fundamentals-of-macro-economy.md)
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Net Factor Income from Abroad (NFIA) is a macroeconomic variable used to bridge the gap between Gross Domestic Product (GDP) and Gross National Product (GNP). It represents the difference between the factor income earned by a country's domestic residents from their employment or investments abroad, and the factor income earned by foreign residents within the domestic economy. Factor income includes profits, rent, interest, and wages. Notably, NFIA specifically excludes transfer payments, such as remittances, which are considered "free money" and not income generated by factors of production. By adding NFIA to GDP, one can arrive at GNP, which measures the total income or product accruing to the economic agents who are residents of the country, regardless of where that income was generated.
All key facts
›NFIA is used to calculate Gross National Product (GNP) from Gross Domestic Product (GDP). (ch01-fundamentals-of-macro-economy.md)
›The formula for GNP is: GNP = GDP + Net Factor Income from Abroad (NFIA). (ch01-fundamentals-of-macro-economy.md)
›NFIA is derived by adding the factor income earned by domestic factors of production employed in the rest of the world and subtracting the factor income earned by factors of production of the rest of the world employed in the domestic economy. (ch01-fundamentals-of-macro-economy.md)
›Factor income, for the purpose of NFIA, includes income earned by the four factors of production: profit, rent, interest, and wages. (ch01-fundamentals-of-macro-economy.md)
›NFIA does not include transfer payments, such as remittances, received from the rest of the world. (ch01-fundamentals-of-macro-economy.md)
Gross Value Added (GVA) Basic Prices vs. Factor Cost
›Gross Value Added (GVA) is discussed in the source as "Value Addition" within the context of the Product or Value-Added Method for GDP calculation. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›The Product or Value-Added Method for GDP calculation sums the aggregate annual value of goods and services produced by all firms. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›Value addition by a firm is calculated by subtracting the value of intermediate goods used by the firm from the value of its production. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
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Gross Value Added (GVA), referred to as "Value Addition" in the source, is a key component in the "Product or Value-Added Method" for calculating Gross Domestic Product (GDP). This method involves summing the aggregate annual value of goods and services produced by all firms within an economy. Value addition for a firm is determined by subtracting the value of intermediate goods used from the value of its total production. For example, if a baker produces bread worth Rs. 200 using wheat purchased for Rs. 50, the baker's value addition is Rs. 150 (Rs. 200 - Rs. 50). The concept of value addition is defined as "the value/price that somebody's work will fetch in the market" and it incorporates profit. The National Statistical Office (NSO) utilizes the Value Added Method, among others, to calculate GDP, considering value addition across various economic activities such as Agriculture, Manufacturing, and Services. The source text does not detail the distinction between GVA at Basic Prices and GVA at Factor Cost.
All key facts
›Gross Value Added (GVA) is discussed in the source as "Value Addition" within the context of the Product or Value-Added Method for GDP calculation. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›The Product or Value-Added Method for GDP calculation sums the aggregate annual value of goods and services produced by all firms. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›Value addition by a firm is calculated by subtracting the value of intermediate goods used by the firm from the value of its production. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›Value addition is defined as "the value/price that somebody's work will fetch in the market" and includes profit. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›The National Statistical Office (NSO) calculates GDP using the Value Added Method, assessing value addition from various economic activities like agriculture, manufacturing, and services. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›The source text does not provide information regarding the distinction between Gross Value Added (GVA) at Basic Prices and GVA at Factor Cost.
GDP Identity (Savings, Investment, Government, External Sector)
›GDP can be calculated by summing expenditures from four sectors: household, private, government, and external (page 13).
›The expenditure method for GDP is expressed as: **GDP = C + I + G + X - M** (page 13-14).
›**C** represents private consumption expenditure on both domestic and imported consumption goods (page 13).
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The Gross Domestic Product (GDP) identity represents the equality between the total value of final goods and services produced in an economy and the total expenditure on these goods and services by all economic sectors. This identity can be expressed from two perspectives: the expenditure side and the income side, leading to an equilibrium condition involving savings, investment, government spending, and the external sector.
From the expenditure method, GDP is calculated as the sum of consumption by households, investment by the private sector, government expenditure, and net exports (exports minus imports). This is represented by the formula: **GDP = C + I + G + (X - M)**, where C is private consumption, I is private investment, G is government investment and consumption, X is exports, and M is imports. Each component represents the expenditure of a particular sector on domestically produced final goods and services.
Alternatively, from the income perspective, the total income households receive is either spent on consumption (C), saved (S), or paid as taxes (T). Thus, **GDP = C + S + T**.
By equating these two expressions for GDP, a fundamental macroeconomic identity is derived: **C + I + G + X - M = C + S + T**. Simplifying this, we get **I + G + X - M = S + T**, which can be rearranged to **(I - S) + (G - T) = M - X**. This identity shows the relationship between private sector balances (Investment minus Savings), government sector balances (Government expenditure minus Taxes), and the external sector balance (Imports minus Exports). In a simplified economy without a government or external sector (G=T=M=X=0), this identity reduces to **I = S**, indicating that savings must equal investment. This highlights that for an economy to produce more capital goods (investment), it must increase its savings.
All key facts
›GDP can be calculated by summing expenditures from four sectors: household, private, government, and external (page 13).
›The expenditure method for GDP is expressed as: **GDP = C + I + G + X - M** (page 13-14).
›**C** represents private consumption expenditure on both domestic and imported consumption goods (page 13).
›**I** represents private sector expenditure on domestically produced capital goods (investment) (page 14).
›**G** represents government sector expenditure on both domestically produced consumption and capital goods (page 14).
›**X** represents exports from India (purchases by the external sector) (page 13).
›**M** represents total imports by the country, combining household, private, and government sector imports (page 14).
›From an income perspective, household income is either consumed (C), saved (S), or paid as taxes (T), leading to the identity: **GDP = C + S + T** (page 14).
›Equating the expenditure and income identities for GDP yields: **C + I + G + X - M = C + S + T** (page 14).
›This simplifies to: **I + G + X - M = S + T** (page 14).
›In an economy without government and external sectors (i.e., G=T=M=X=0), the identity simplifies to **I = S** (Investment equals Savings) (page 11, 14).
National Income Accounting Methods (Product, Expenditure, Income)
›There are three methods to calculate national income: product method, expenditure method, and income method (p. 10, 16).
›The annual production of goods and services estimated through each of the three methods is the same, regardless of the complexity of the economic system (p. 17).
›**Product or Value Added Method:**
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National income accounting provides three principal methods for calculating the aggregate income of an economy: the Product (or Value Added) Method, the Expenditure Method, and the Income Method. Each of these methods measures the same aggregate value of goods and services produced in an economy over a specific period, typically a year.
The **Product Method**, also known as the Value Added Method, calculates the aggregate annual value of final goods and services produced by all firms in an economy. A key principle of this method is to avoid 'double counting' by subtracting the value of intermediate goods used in production. The net contribution made by a firm is termed 'value added', which is the value of its production minus the value of intermediate goods used. This value added is then distributed among the factors of production as wages, interest, profits, and rents. The method distinguishes between Gross Value Added (GVA), which includes depreciation, and Net Value Added (NVA), which deducts depreciation (consumption of fixed capital). Changes in inventory are treated as investment in this method.
The **Expenditure Method** measures national income by aggregating the total spending on final goods and services produced in the economy. This involves summing the aggregate value of spending that firms receive for their final goods and services.
The **Income Method** calculates national income by summing the total factor payments made to the owners of the factors of production. These payments include remuneration for human labour (wages), capital (interest), entrepreneurship (profit), and fixed natural resources (rent). This method essentially measures the aggregate income earned by households for their contributions to production.
All key facts
›There are three methods to calculate national income: product method, expenditure method, and income method (p. 10, 16).
›The annual production of goods and services estimated through each of the three methods is the same, regardless of the complexity of the economic system (p. 17).
›**Product or Value Added Method:**
›Calculates the aggregate annual value of final goods and services produced by all firms (p. 16, 17).
›The error of 'double counting' occurs if intermediate goods are counted separately along with final goods (p. 11, 17).
›Value added of a firm = value of production of the firm – value of intermediate goods used by the firm (p. 17).
›Value added is distributed among four factors of production: labour (wages), capital (interest), entrepreneurship (profits), and land (rents) (p. 17).
›Gross Value Added (GVA) includes depreciation; Net Value Added (NVA) is obtained by deducting depreciation from GVA (p. 18).
›Depreciation is an annual allowance for wear and tear of a capital good, or its cost divided by its useful life (p. 13-14).
›Inventory is the stock of unsold finished goods, semi-finished goods, or raw materials carried by a firm from one year to the next (p. 18).
›Change in inventories is treated as investment and is a flow variable (p. 19).
Final Goods
›A final good is an item meant for final use that will not pass through any more stages of production or transformations (p. 10, 6).
›Once a final good has been sold, it passes out of the active economic flow and will not undergo any further transformation at the hands of any producer (p. 10).
›The determination of whether a good is final depends on the economic nature of its use, not on its inherent physical nature (p. 10).
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Final goods are commodities, encompassing both goods and services, that are intended for ultimate use and will not undergo any further stages of production or transformations. Once a final good is sold, it exits the active economic flow, meaning it will not be subject to any more processing or alteration by a producer. The categorization of a good as 'final' is determined by the economic nature of its use, rather than its inherent physical form or characteristics. For instance, tea leaves purchased for home consumption are considered final goods, but the same tea leaves would be an intermediate good if bought by a restaurant to prepare tea for sale to customers. The distinguishing characteristic between a final and intermediate good is identified by "the last transaction in the market".
Final goods are broadly categorized into two types: consumption goods and capital goods. Consumption goods, also referred to as consumer goods, are those directly consumed by their ultimate purchasers, such as food, clothing, and services like recreation, or to meet their immediate needs. This category includes durable consumption goods, which do not get exhausted immediately and typically last over a period of more than 3 years (e.g., home appliances, furniture); non-durable consumption goods, which are consumed immediately and generally last less than 3 years (e.g., food, fuel, cosmetics); and services, which are intangible and consumed instantly (e.g., education, banking). Capital goods, on the other hand, are durable items such as tools, implements, and machines. They are utilized in the production process to facilitate the creation of other commodities and do not themselves get transformed during this process. Capital goods are defined by three key characteristics: they are a produced durable output of a man-made process, they act as an input for further production processes (to be sold in the market), and they do not get transformed or consumed while acting as an input. Capital goods are a crucial component of an economy's capital stock, enabling continuous cycles of production. The classification of a good as consumption or capital also depends entirely on the purpose for which it is being used.
In the context of national income accounting, only final goods and services are measured to determine the aggregate level of production in an economy. This approach is adopted to prevent the error of 'double counting,' as the monetary value of final goods already inherently includes the value of any intermediate goods that were used in their production. Therefore, the total output of final goods in an economy within a specified period is exclusively composed of either consumption goods (both durable and non-durable) or capital goods. Capital goods are crucial for an economy's growth, as their production is synonymous with investment, which is financed through savings. Higher savings lead to greater production of capital goods, thus propelling the economy on a higher growth path. The total share of physical capital goods in the final output constitutes gross investment, also known as gross capital formation.
All key facts
›A final good is an item meant for final use that will not pass through any more stages of production or transformations (p. 10, 6).
›Once a final good has been sold, it passes out of the active economic flow and will not undergo any further transformation at the hands of any producer (p. 10).
›The determination of whether a good is final depends on the economic nature of its use, not on its inherent physical nature (p. 10).
›Intermediate goods are semi-finished goods that cannot be used as is and require further production processes to be converted into a final good (p. 6).
›For example, steel sheets are intermediate goods because they need to be transformed into final products like automobiles or appliances (p. 6).
›In the context of GDP calculation, wheat consumed by a farmer for home use is a final good, while wheat sold by the farmer to a baker is an intermediate good used to produce bread (p. 13).
›Final goods can be distinguished into consumption goods and capital goods (p. 10, 6).
›Consumption goods (or consumer goods) are those consumed when purchased by their ultimate consumers, such as food, clothing, and services like recreation (p. 10), or meet the immediate need of the consumer (p. 6).
›Consumer durables (e.g., television sets, automobiles, home computers) are a type of consumption good that are durable and have a relatively long life, undergoing wear and tear (p. 11).
›Durable consumption goods do not get exhausted immediately but last over a period of time, generally more than 3 years (p. 6).
Intermediate Goods
The proportion of GDP contributed by agriculture declined significantly between 1950 and 1990. (NCERT Class 11 — Indian Economic Development, ch02-after-studying-this-chapter-the-learners-will.md, p. 27)
›The proportion of population working in agriculture did not decline considerably between 1950 and 1990 (from 67.5% in 1950 to 64.9% by 1990), despite agriculture's declining GDP share. (NCERT Class 11 — Indian Economic Development, ch02-after-studying-this-chapter-the-learners-will.md, p. 27)
›The occupational structure of the Indian economy showed these changes between 1950-51 and 1990-91:
›Agriculture: 72.1% (1950-51) to 66.8% (1990-91). (NCERT Class 11 — Indian Economic Development, ch02-after-studying-this-chapter-the-learners-will.md, p. 28)
›Industry: 10.7% (1950-51) to 12.7% (1990-91). (NCERT Class 11 — Indian Economic Development, ch02-after-studying-this-chapter-the-learners-will.md, p. 28)
›Services: 17.2% (1950-51) to 20.5% (1990-91). (NCERT Class 11 — Indian Economic Development, ch02-after-studying-this-chapter-the-learners-will.md, p. 28)
›Pakistan showed deceleration in all three sectors during certain periods mentioned. (NCERT Class 11 — Indian Economic Development, ch08-development-experiences-of-india-a-comparison.md, page 142)
›The aggregate spending of the economy must be equal to the aggregate income earned by the factors of production (p. 17).
›A rise in the flow at one point in the economy (e.g., increased spending) must eventually lead to a rise in the flow at all levels, resulting in increased income (p. 17).
›The conclusion that the aggregate estimate of the economy's income remains the same whether calculated by the expenditure, product, or income method does not change fundamentally even when savings are introduced into the model (p. 17).
›The value of the product produced by an enterprise (e.g., a burger for Rs. 100) is considered the Gross Domestic Product (GDP) of the country for that year. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›The total amount generated from the sale of a product is distributed among the providers of the four factor services (entrepreneurship, labour, capital, natural resources) as profit, wages, rent, and interest, and these factor payments must sum up to the value of the product. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›In a simplified economy where households do not save and spend all their income on consumption, the production in the economy will remain stagnant year after year. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›For an economy to increase its future production and consumption, the private sector must first produce capital goods. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›If the household sector saves a portion of its income, that saved value corresponds to the production of capital goods in the economy, assuming no government or external sector. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›In a simplified economy without government and external sectors, savings (S) are equal to investment (I), meaning higher savings lead to higher investment. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›Higher savings enable greater production of capital goods, which in turn propels the economy on a higher growth path by increasing future output of goods and services. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›At India's independence, savings were approximately 5% of GDP (95% consumption goods, 5% capital goods), while in 2019-20, savings were around 28% of GDP (72% consumption goods, 28% capital goods). — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›China's consistent production of over 40% capital goods out of its total output has been a factor in its rapid economic growth. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›Value Added by a firm = Value of output − Value of intermediate goods used
›GDP = Sum of Net Value Added of all firms + Depreciation of all firms = Sum of GVA + Depreciation
›A final good is an item meant for final use that will not pass through any more stages of production or transformations.
›Consumption goods (or consumer goods) are goods and services like food, clothing, and recreation, consumed when purchased by their ultimate consumers.
›Capital goods are durable items such as tools, implements, and machines, used in the production process to make other commodities feasible without themselves being transformed.
›Consumer durables, like television sets or automobiles, are final consumption goods that are durable, have a relatively long life, and undergo wear and tear similar to capital goods.
›Intermediate goods are products (e.g., steel sheets, copper) used by other producers as material inputs or raw materials for production and are not meant for final use.
›To avoid 'double counting' in aggregate output, only final goods are measured, as the value of intermediate goods is already included in the value of final goods.
›Economic variables are classified as 'flows' if they are defined over a period of time (e.g., income, output, profits) and 'stocks' if defined at a particular point in time (e.g., capital goods, consumer durables, amount of water in a tank).
›Gross investment is defined by economists as the part of final output that consists of capital goods.
›Depreciation, also known as consumption of fixed capital, is the annual allowance for the regular wear and tear of a capital good, and is an accounting concept.
›Net Investment measures the new addition to capital stock and is calculated as Gross Investment minus Depreciation.
›Value Added of a firm (its net contribution) is calculated as the value of its production minus the value of intermediate goods used.
›The value added by a firm is distributed among its four factors of production: labour (wages), capital (interest), entrepreneurship (profits), and land (rents).
›Gross Value Added (GVA) includes depreciation, whereas Net Value Added (NVA) is obtained by deducting depreciation from GVA.
›Inventory refers to the stock of unsold finished goods, semi-finished goods, or raw materials a firm carries from one year to the next, and is a stock variable.
›Change in inventories, a flow variable, is the difference between a firm's production and its sales during a year.
›Investment categories include inventory investment (rise in value of inventories), fixed business investment (addition to machinery, factory buildings, equipment), and residential investment (addition of housing facilities).
›Changes in inventories can be planned (when a firm intentionally adjusts production to meet desired stock levels) or unplanned (due to unexpected sales figures, leading to unplanned accumulation or decumulation).
›In India, the industrial sector's contribution to GDP increased from 13% in 1950-51 to 24.6% in 1990-91.
›In India, between 1950 and 1990, the proportion of GDP contributed by agriculture declined significantly, while the proportion of population depending on it did not decline at the same rate.
›Factors of production use their remunerations to buy the goods and services they assisted in producing (page 15).
›The aggregate consumption by households equals the aggregate expenditure on goods and services produced by firms (page 15).
›In a simple economy without leakages, the amount firms distribute as factor payments equals the aggregate consumption expenditure they receive as sales revenue (page 16).
›The circular flow diagram shows services flowing from households to firms in the factors of production market, and payments for these services flowing from firms to households (page 16).
›Measuring the sum total of all factor payments is called the income method of calculating national income (page 16-17).
›The value added of a firm is distributed among its four factors of production: labour, capital, entrepreneurship, and land (page 17).
›Wages, interest, profits, and rents paid out by a firm must add up to the value added of the firm (page 17).
Gross Domestic Product minus Depreciation equals Net Domestic Product (NDP). (p. 16)
›Gross Domestic Product plus Net Factor Income from Abroad (NFIA) equals Gross National Product (GNP). (p. 16)
›GDP can also be expressed as [Private consumption + Government consumption] + [Private investment + Government investment] + Exports – Imports, or Total consumption + Total Investment + Exports - Imports. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›Private consumption constitutes approximately 60% of GDP. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›Government consumption is around 11% of GDP. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›Total investment is approximately 29% of GDP. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›Net exports (exports minus imports) are approximately -2% of GDP. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›The National Statistical Office (NSO) calculates GDP using the Expenditure Method. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›NSO adds up Private (Final) Consumption Expenditure, Government (Final) Consumption Expenditure, Gross Fixed Capital Formation, and Net of Exports and Imports. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›Discrepancies often arise in the expenditure approach due to unreliable data for private consumption expenditure. — Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md
›Investment in a country is essentially the portion of the final output (GDP) that consists of capital goods, rather than money put into a business or economic activity (Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md, p. 7).
›Depreciation is also defined as the consumption of physical capital (Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md, p. 8).
›Investment in the economy is also referred to as Gross Capital Formation (Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md, p. 8).
›Gross Capital Formation includes Gross Fixed Capital Formation (machinery, equipment, new construction, intellectual property), Net acquisition of valuable metals (like gold, silver, platinum, gems and stones), and Change in stock/inventory (Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md, p. 8).
›In an economy without government and external sectors, savings are equal to the production of capital goods, and thus savings equal investment (Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md, p. 11).
›Higher savings lead to a greater production of capital goods and increased investment, which can propel an economy to a higher growth path (Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md, p. 11).
›In 2019-20, India's investment was approximately 28% of GDP, indicating that 28% of total output was capital goods and 72% was consumption goods (Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md, p. 12).
›China has consistently produced over 40% capital goods out of its total output (GDP), contributing to its rapid economic growth (Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md, p. 12).
›The private sector's expenditure on capital goods (investment) is a component (I') in the expenditure method of calculating GDP (Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md, p. 13).
›Total investment in India is around 29% of GDP, according to the expenditure method components (Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md, p. 14).
›The National Statistical Office (NSO) includes Gross Fixed Capital Formation (investment expenditure of private and government) as a component when calculating GDP using the Expenditure Method (Vivek Singh — Indian Economy, ch01-fundamentals-of-macro-economy.md, p. 15).
›Durable consumption goods do not get exhausted immediately but last over a period of time, generally more than 3 years (p. 6).
›Examples of durable consumption goods include home appliances, consumer electronics, and furniture (p. 6).
›Non-durable consumption goods are consumed immediately and generally have a life of less than 3 years (p. 6).
›Examples of non-durable consumption goods include cosmetics, food, fuel, paper, and clothing (p. 6).
›Services are intangibles that are consumed immediately and are a kind of consumption good (p. 6).
›Examples of services as consumption goods include education, banking, telecom, and healthcare (p. 6).
›Whether a good is classified as a consumption good or a capital good depends on the purpose for which it is being used (p. 7).
›If a good is used to produce some other goods/services to be sold in the market, it is a capital good; otherwise, if used for own consumption, it is a consumption good (p. 7).
›At India's independence, the economy was producing approximately 95% consumption goods and 5% capital goods (p. 12).
›In 2019-20, India's economy was producing around 72% consumption goods and 28% capital goods (p. 12).
›Depreciation is also defined as consumption of physical capital. (p. 8)
›Net Domestic Product (NDP) is calculated by subtracting depreciation from Gross Domestic Product (GDP). (p. 16)
›Net National Product (NNP) is calculated by subtracting depreciation from Gross National Product (GNP). (p. 16)
›For India's GDP, private consumption is around 60%, government consumption is around 11%, total investment is around 29%, and exports minus imports is around -2% (page 14).
›
**Expenditure Method:** Measures the aggregate value of spending that firms receive for the final goods and services they produce (p. 16).
›**Income Method:** Measures the sum total of all factor payments (p. 17).
›Factor payments include wage (for human labour), interest (for capital), profit (for entrepreneurship), and rent (for fixed natural resources or 'land') (p. 15).
›Examples of durable consumption goods include home appliances, consumer electronics, and furniture (p. 6).
›Non-durable consumption goods get consumed immediately, and their life is generally less than 3 years (p. 6).
›Examples of non-durable consumption goods include cosmetics, food, fuel, paper, and clothing (p. 6).
›Services are intangible consumption goods that are consumed immediately, such as education, banking, telecom, and healthcare (p. 6).
›Capital goods are durable items like tools, implements, and machines, which are used in the production process and make the production of other commodities feasible, without getting transformed themselves (p. 10).
›A capital good will be capital in nature only if it possesses three characteristics: it is a produced durable output of a man-made process, it acts as an input for further production processes (to be sold in the market), and it does not get transformed or consumed while acting as an input (p. 6).
›For example, a tractor is a capital good because it is a produced durable output, acts as an input in agricultural production (like wheat and rice), and does not get transformed while acting as an input (p. 6).
›Economists, in a strict sense, consider only physical capital as capital, categorizing capital into physical capital (capital goods), financial capital (money), and intellectual capital (patents, copyrights, etc.) (p. 6).
›The explanation for a tractor as a capital good details that while wear and tear happens over a long period of time, it does not imply the tractor is being transformed or consumed in the production process (p. 6).
›Capital goods form a part of capital, enabling continuous cycles of production (p. 10).
›The classification of a particular good as consumption or capital depends on the purpose for which it is being used (p. 7).
›For instance, a washing machine used at home for personal clothes is a consumption good, but if purchased by a businessman for providing laundry services, it acts as a capital good (p. 7).
›Similarly, a car purchased for home use is a consumption good, but a car purchased by a company like "Ola Cabs" to provide transportation services for the market becomes a capital good (p. 7).
›That part of the final output comprising physical capital goods is termed gross investment (p. 8).
›Investment in an economy is measured as the percentage of total output that consists of capital goods (p. 8).
›If a country imports capital goods, gross investment increases by their value, and if it exports capital goods, gross investment decreases by their value (p. 8).
›Depreciation is defined as the wear and tear on a factory or the consumption of physical capital (p. 8).
›Net Investment is calculated as Gross Investment minus Depreciation (p. 8).
›Investment in the economy is also known as Gross Capital Formation (p. 8).
›Gross Capital Formation includes Gross Fixed Capital Formation (machinery, equipment, new construction, intellectual property), Net acquisition of valuable metals, and Change in stock/inventory (p. 8).
›An increase in the production of goods and services in the future requires the current production of more capital goods (investment) (p. 10, 11).
›In an economy without government and external sectors, savings are equal to the production of capital goods (investment); thus, higher savings lead to greater production of capital goods (p. 11).
›Greater savings and subsequent production of capital goods propel an economy onto a higher growth path (p. 11).
›In 2019-20, India's savings were around 28% of GDP, indicating that approximately 28% of the total output was capital goods (investment) (p. 12).
›China has consistently produced over 40% capital goods out of its total GDP, which has contributed to its high economic growth (p. 12).
›The private sector primarily spends on capital goods, which constitutes investment (p. 13).
›In the expenditure method of GDP calculation, the household sector's spending (C') is primarily on consumption goods (p. 13).
›In the expenditure method, the private sector's spending (I') is primarily on capital goods (investment), with exceptions for firms buying consumables to treat guests or employees (p. 13).
›In the expenditure method, the government sector (G') purchases both capital and consumption goods (p. 13).