Chapters :

NATIONAL INCOME - 01

The Economic Wealth, or wellbeing of a country does not depend merely on the possession of resources but also hoe these are used in generating a flow of production and distribution and the consequent income and wealth generated in that process. Hence people combine energies with natural and man-made environment within certain social and technological structure to generate a flow of production. In modern economies this flow of production are translated into goods and services produced by individuals and enterprises in that economy.

Therefore the measurement and accounting of this wealth generated in terms of aggregate Goods And Services produced in an economy is National Income and its accounting process. This this chapter we will look at the basic concepts and terms in national income and the methods of its assessment.

MARKET

 

A market is a place where buying and selling of goods and service takes place. Markets are dependent on two major participants, (i.e.) Buyers  & Sellers

  1. MARKET WITH PHYSICAL SPACE:

Here Buyers and sellers meet together in order to carry on transaction of goods and services

  1. MARKET WITHOUT PHYSICAL SPACE:  (eg) stock market

Here Buyers and sellers don’t come in direct contact with each other.

LAW OF SUPPLY AND DEMAND

The number of buyers and sellers involved will have a direct bearing on the price of the good or service to be sold, and it is said to be called law of supply and demand.

SUPPLY AND DEMAND RELATIONSHIP

If there are More Seller  than buyers for a particular commodity, price of the commodity will decrease due to low demand.

If there are More Buyers than sellers for a particular commodity, price of the commodity will increase due to high demand.

DEMAND

“…Demand refers to the quantity of a goods or a service, which is desired by the buyers at a particular price, all other things unchanged…”

For e.g. 100 buckets of Tomatoes are sold each month in a particular city at a price of Rs.50 per bucket, that quantity of 100 buckets of tomatoes demanded per month at a rate of Rs.50. If the price were Rs.60, we would expect the quantity

demanded to be less. If the price were Rs.40, we would expect the quantity demanded to be more.

SUPPLY

Supply is a fundamental economic concept that describes the total amount of a specific good or service that is available to consumers. It also refers to the amount of a certain goods that producers are willing to supply when receiving a certain price. It depends on production of goods.

COST

Cost is defined as the expenditure incurred by a firm or producer to purchase or hire factors of production in order to produce a product.

OPPORTUNITY COST

Opportunity Cost can be defined as the value of next best alternative foregone. It is a common practice that a person makes a list of several activities before adopting a particular one to pursue his/her goal. Similarly, in production a producer leaves some alternatives before finally choosing to produce the particular output. So, while finally choosing one, the producer did forego the alternative production.

Let us take example of a farmer. He can produce either rice or wheat on a piece of land. If he has decided to produce wheat on this piece of land, he has to forego the production of rice for producing wheat. So, value of rice foregone (next best alternative) is the opportunity cost of producing wheat.

FACTORS OF PRODUCTION

Resources or inputs that are used in the production process to produce output (i.e.), finished goods and services are known as factors of production. These are:

  1. LAND
  2. LABOUR
  3. CAPITAL
  4. ENTREPRENEUR

The income that resource owners earn in return for land resources is called RENT

Labour is ability to work or human factor of production.The income earned by labour resources is called Wages and is the largest source of income for most people.

Capital is part of wealth which is used for production.    The process of production of new Capital Goods, Plants & Equipment  is called as INVESTMENT & this investment with a view to obtain the target returns over a specific period of time. The income earned by owners of Capital is called Interest.

Capital does not solely in physical form and it also includes the intellectual discoveries like computer software, formula for Medicine, etc.

Note: Money becomes Capital only when it is used to purchase real Capital goods like, Plant, Machinery, etc.

An Entrepreneur is a person who combines the other factors of productions like Land, Labour And Capital to earn a profit.

Good and services are the final output of the process of production.

The input and output of factors of production and given below:

INPUTOUTPUT
LandRent
LabourWages
CapitalInterest
EntrepreneurshipProfit

CONCEPT OF NATIONAL INCOME

The output of an economy is the monetary value of final goods and services in a given time period. The output of an economy also consists of production of machines which are consumed every year, and hence is called depreciation. The output is also classified as those produced within the geographic boundary of the country known as domestic output.

In an economy, Households Buy Goods And Services from firms, and firms use their revenue from sales to pay wages to workers, rent to landowners, and profit to firm owners.

 

SIGNIFICANCE OF NATIONAL INCOME ACCOUNTING

      Income level is the most commonly used tool to determine the well-being and happiness of nations and their citizens. National Income data are significant for a country’s per capita income which reflects the economic welfare of the country. It also paves way

  1. To find the total value of economic activities and output in the country.
  2. To find out the level of economic development of a country.
  • It helps the business to plan for production.

For policy formulation by State.

Hence keeping these concepts in account the National income accounting consist of broadly four concepts:

  1. GDP
  2. NDP
  3. GNP
  4. NNP
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