HARYANA – ECONOMY

LECTURE: 2 NATIONAL INCOME ACCOUNTING

What will we cover

• Gross Domestic Product (GDP) Final,

• Intermediate, Consumer & Capital goods.
• Stock Vs Flow
• GDP Estimation Methodology
• GDP at FC, BP & MP + some other macroeconomic aggregates.
• Drivers of economic growth
• GDP & Welfare
GDP
• Adam Smith’s enquiry reveals what generates wealth of nations. According to him,
it is not the bounty of natural resources, but how they are used in generating the
flow of production that makes nations rich or poor.
• GDP - it is the monetary value of final goods and services produced in the domestic
territory of a country in a specific period of time.
• GDP measures the creation of wealth in a country in a year.
• It is the final output of an economy in a year.
• GDP in India is measured by NSO (National Statistical Organisation) which is under Ministry of statistics
and Programme Implementation
Goods
Intermediate Goods
• These are goods used as inputs in production of other goods including final goods. These are still in
active economic flow.
▪ Intermediate goods are not used In GDP estimation so as to prevent Double Counting
Final Goods
• These are goods which would undergo no more stages of production or transformation. These are
outside active economic flow.
▪ Consumer Goods
▪ Capital Goods
Consumer Goods
• A consumer good is a commodity that is used by a consumer to satisfy current wants or needs, rather
than to produce another good.
• Examples : Microwave, Clothes, food etc. - Certain consumer goods are durable in nature, thus they
are called “Consumer Durables”. Eg - TV, Fridge, A.C, Microwave etc.
Capital Goods
• It is a durable good that is used in the production process of other goodsand services, rather than being
bought by consumers.
• They form the crucial backbone of any production process - That part of our final output that comprises
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of “capital goods” constitute“Gross Investment” of an economy.

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• Examples : Machines, tools, buildings, office spaces, Infrastructure etc.

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 Gross investment - Depreciation = Net Investment
• Depreciation - the deletion which is made from the value of gross investment in order to accommodate
regular wear and tear of capital.
For example
• Capital Stock before 2020 = Rs 500
• Gross Investment in 2020 = Rs 100
• Capital depreciated in 2020 = Rs 50
• Capital Stock after 2020 = Rs 550
▪ Therefore, net addition to capital stock = Rs 50 Hence, Net Investment = Rs 50
GDP = Final Output
• Consumption
• Investment
▪ Higher the investment in an economy, higher the capacity of that economy to produce more
goods and services
Stock Vs Flow
• Stock - it is an economic variable that can be measured at a point of time. Eg - Wealth, Debt, Capital
stock, Foreign exchange reserves etc.
• Flow - it is an economic variable that can be measured in a period of time. Eg - Income, Profit, GDP,
Gross Investment, Rent etc.
• Change in stock becomes a flow variable.

GDP Estimation Methodology

• Product or Value Added Method
• Expenditure Method
• Income Method
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 Product or Value Added Method
• Value added by Firm(i) = (Value of goods produced - Value of intermediate goods used).
• Value added by Firm(i) = Value of Sales + (Change in inventories) - Value of intermediate goods used.
• Value added by all the firms in the economy = Gross Value Added.
• Positive change in inventory is treated as “Capital” or “Investment”.
• Inventory is a stock variable, but change in inventory becomes a flow variable.
• Gross investment = Gross Capital Formation(GFC).
• Gross Capital Formation
▪ GFCF
▪ Change in Inventories
• GFCF = Gross Fixed Capital formation.
Expenditure Method
• Let Expenditure on Firm(i) be
• F(i) = C(i) + I(i) + G(i) + X(i)
▪ C(i) = Consumption Expenditure
▪ I(i) = Investment Expenditure
▪ G(i) = Government Expenditure
▪ X(i) = Export Expenditure
• GDP = Total Expenditure on Domestic Firms.
• GDP = ∑ F(i)
• GDP = C-Cm + I-Im + G-Gm + X
• Cm + Im + Gm = total import expenditure = M
• GDP = C+I+G+(X-M)
▪ C = Total Consumption Expenditure
▪ I = Total Investment Expenditure
▪ G = Total Government Expenditure
▪ X-M = Net Exports
Income Method
Final Output
• Rent
• Wages
• Interest
• Profit
• GDP = Total (Rent + Wages + Interest + Profit) in the economy.
Factor Cost, Basic Price & Market Price
• Factor Cost + Net Indirect Taxes = Market Price.
• (Taxes - Subsides) = Net Indirect Taxes.
• Indirect taxes/subsidies can be divided into two parts:
▪ Production Taxes - those taxes which are paid or received in relation to production and are
independent of the volume of production. Eg - Land Revenue, Stamp Duty etc.
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▪ Product Taxes - those taxes which are paid per unit of product. Eg - GST, Excise duty, Custom duty
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etc.

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 • Factor Cost + Net Production Taxes = Basic Price
• Basic Price + Net Product Taxes = Market Price GVA
• GDP(FC) + Net Production Tax = GDP(BP)
• GDP(BP) + Net Product tax = GDP(MP)
Other Macroeconomic Aggregates
• Gross National Product (GNP) = GDP + Net Factor income from abroad
• Net Factor Income from Abroad = (Factor income earned by domestic factors of production employed
in the rest of the world) - Factor income earned by foreign factors of production employed in domestic
economy).
• Net National Product (NNP) = GNP - Depreciation
• Net Domestic Product (NDP) = GDP - Depreciation
• National Income = NNP (at factor cost)
Other Macroeconomic Aggregates
• Gross National Product(GNP) = GDP + Net Factor income from abroad
• Net Factor Income from Abroad = (Factor income earned by domestic factors of production employed
in the rest of the world) - Factor income earned by foreign factors of production employed in domestic
economy).
• Net National Product(NNP) = GNP - Depreciation
• Net Domestic Product(NDP) = GDP - Depreciation
• National Income = NNP(at factor cost)
India: Lower Middle Income Nation
Group July 1, 2020 (new) July 1, 2019 (old)

Low Income < 1,036 < 1,026

Lower-Middle Income 1,036 - 4,045 1,026 - 3,995

Upper-Middle Income 4,046 - 12,535 3,996 - 12,375

High Income > 12,535 > 12,375

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