In order to understand national income accounting, one should have knowledge of some basic concepts related with national income. These basic concepts are as follows:
1. Economic and non-economic production:
Economic production refers to the production of those goods and services which are meant for sale and have market value. On the other hand, non-economic production includes the production of goods and services which are not meant to be sold or have no market value. For example: goods and services produced by firms is the economic production and goods and services produced for self-consumption is the non-economic production. Economic production is also known as the economic activities and non-economic production is also known as the non-economic activities. Although, non-economic production contribute to human welfare, this is not included in the measurement of national income as these have no market value or price. Non-economic goods are not included in the national income accounting.
2.Intermediate and final products:
Intermediate goods or products are those goods or products which are sold by one firm to another for resale or for further processing or value addition. On the other hand, the products which are sold finally to the consumer or investor are the final products. For example, flour is intermediate product and bread is final product. Intermediate product is used as input to produce other goods where as final good or product is used for consumption but not to produce other goods. Intermediate goods are not included in the national income accounting. Only final goods or products are included in the national income accounting.
3.Transfer payments:
Transfer payment is defined as the flow of money without reverse flow of goods and services. For example, old-age pension paid by the government is transfer payment. Transfer payments are not included in the national income accounting because such payments do not result any addition to the total production nor do they add any additional value to the society.
4.Consumer and producer goods:
The goods and services which are consumed by the people to directly satisfy their wants are called consumer goods. For example: food, clothes, mobile phone, etc. are consumer goods. On the other hand, producer goods are those goods which are used to produce other goods. These goods are also known as the capital goods. For example: machines, tools, equipments, airplanes, etc. are produce goods.
5.Capital gains:
Capital gains are defined as the income received from the transaction of financial instruments like shares, bonds, etc. They are not included in the national income accounting because they do not add the productive capacity of the economy.
6.Stock and flow variables:
The economic aggregates used in macroeconomics are called macroeconomic variables. These variables are used to evaluate the performance and to analyse the behaviour of an economy. And the macroeconomic variables are generally grouped under stock variables and flow variables. Brief description of stock and flow variables is given below:
a. Stock variables:
The macroeconomic variables which are measured at a point of time are called stock variables. In other words, stock variables are the macroeconomic quantities measurable at specified point in time. For example, the water stored in a tank at a point of time, number of books in a library on a particular date, etc. are stock variables. In macroeconomics, stock of capital in a country, the number of employed persons, money supply, total saving, labour force, business inventories, etc. are measured at a point of time which are some examples of stock variables.
b. Flow variables:
The macroeconomic variables which are measured or expressed per unit of time are called flow variables. In other words, flow variables are measurable only in terms of a specified period of time, i.e., per hour, per week, per month, or per year. For example, national income, total consumption, total saving, total investment, total export, total import, etc. are flow variables.
7. Factor cost and market price:
Factor cost is the total sum of all earnings received by factors of production in terms of compensation of employees, i.e. rent, profit, interest, etc. On the other hand, market price of the total monetary value of final goods and services. When net indirect taxes are added to factor cost, market price is obtained.
Market price = Factor cost + Net indirect taxes
Or
Factor cost = Market price – Net indirect taxes
Net Indirect taxes = Indirect taxes – Subsidies
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