LEARNING OBJECTIVES
2.1 Domestic Territory (Economic Territory) 2.6 Gross Investment, Net Investment and
2.2. Normal Residents Depreciation
2,3. Factor Income and Transfer Income 2.7 Net Indirect Taxes (NIT)
2.4 Final Goods and Intermediate Goods 2.8 Net Factor Income from Abroad (NFIA)
2.5. Consumption Goods and Capital Goods
2.1 DOMESTIC TERRITORY (ECONOMIC TERRITORY) _____—_—__
Domestic territory is a very important concept in national income accounting. In layman’s
language, domestic territory means the political frontiers of a country. However, for the purpose
of national income accounting, it is used in a wider sense.
Inaddition to political frontiers, domestic territory also includes:
1. Ships and aircrafts owned and operated by normal residents between two or more
countries. For example, planes operated by Air India between Russia and Japan are part of
the domestic territory of India. Similarly, planes operated by Singapore Airways between
India and Japan are a part of the domestic territory of Singapore.
2. Fishing vessels, oil and natural gas rigs and floating platforms operated by the residents
of a country in the international waters where they have exclusive rights of operation.
For example, fishing boats operated by Indian fishermen in international waters of Indian
Ocean will be considered a part of domestic territory of India.
3. Embassies, consulates and military establishments of a country located abroad.
For example, Indian Embassy in Russia is a part of the domestic territory of India.
‘Consulate'is an office or building used by consul (an officer commissioned by the government to
reside in a foreign country to promote the interest of the country to which he belongs).
Domestic Territory does not include:
1. Embassies, consulates and military establishments of a foreign country. For example,
Japanese Embassy in India is a part of domestic territory of Japan.
2. International organisations like UNO, WHO, ete. located within the geographical
boundaries of a country.
2.1
a Introductory Macroeconomic,
domesticterritory's the geographical territory,
| According to the United Nations, Economic Territory or sod apt crcl fe
administered by a government within which, persons,
Worm
Which ofthe following are covered under the domestic territory of India?
‘ \bassy in Japan.
1. Anindian Company in London, 6, Indian Em a
2. Merosonoftceln ina 7, Branch of State Bank of India in Chiro
: assy in India.
3. Company in India owned by a Japanese. 8, ‘Russian Em a
4 Office of Reliance IndustresinNew York. 9, Tatarentedits building to Google in America,
5. Branch of Foreign Bank in India. ss. stic Territory: 2, 3,5, 6]
2.2 NORMALRESIDENTS
Normal resident of a country refers to an individual or an institution who ordinarily resides in
the country and whose centre of economic interest also lies in that country. Normal residents
include both, individuals and institutions.
‘Centre of Economic Interest’ implies two things:
1. The resident lives or is located within the Domestic Territory; and
2. The resident carries out basic economic activities of earnings, spending and accumulation
from that location.
Following are not included under the category of Normal residents:
1. Foreign tourists and visitors who visit a country for recreation, holidays, medical treatment,
study, sports, conferences, etc.
2. Foreign staff of Embassies, officials, diplomats and members of the armed forces of a
foreign country, located in the given country.
3. International organisations like UNO, WHO, etc. are not considered as normal residents
of the country in which they operate. They are treated as the normal residents of
international area.
4, Employees of international organisations are considered as residents of the countries to
which they belong and not of the international area, For example, an American working
in UNO office located in India will be treated as normal resident of America.
However, if the employees are working for more than one year in such International Institutions, then
they become the normal resident of a country in which such institutions are located. It means, in the
given example, if the American is working in UNO office in India for more than one year, then he will
be treated as normal resident of India,
5. Crew members of foreign vessels, commercial travellers and seasonal workers, provided
their stay is less than one year.
6. Border workers who live near the international border and cross the border on a regular
basis to work in the other country. They are treated as normal residents of the country
where they live, and not where they work. Pe
chapter2™ Basic Concepts of Macroeconomics
identify the following as Normal Residents of India:
{a) Indian officials working in the Indian Embassy in USA.
(b) A Japanese tourist who stays in India for 2 months.
{q) Indians going to Pakistan for watching the cricket match.
(@) Indians working in the UNO office, located in America for less than 1 year.
(@) Indian employees working in WHO, located in India,
(() Foreign tourists visiting India for a month to see the Taj Mahal
{g) Indian Muslims going for the Haj pilgrimage.
{Ans. Normal Residents: (a), (c),(d), (e), (Q)}
Citizenship and Residentship are two different terms
Citizenship
It is basically a legal concept based on the place of birth of the person or some legal provisions
allowing a person to become a citizen. It means, Indian citizenship can arise in two ways:
(i) When a person is born in India, he acquires automatic citizenship of India.
(ii) Aperson born outside India applies for citizenship and Indian Law allows him to become
Indian Citizen.
Residentship
« It is an economic concept based on the basic economic activities performed by a person.
« An individual is a normal resident of a country if he ordinarily resides in the country for a
period more than one year and his centre of economic interest also lies in that country.
Example: A Chinese living in India for more than one year is a normal resident of India. However, he
isnota citizen (or national) of India as he does not hold citizenship of India. Similarly, a Non-Resident
Indian (NRI isa citizen of India, but a resident of the country in which he lives, Itmeans, a person can
bea citizen of one country and at the same time, a resident of another country.
dar ss Cu aC ag
‘Indian Nationals (like Patanjali,
Bespin comenic 9
Introductory Macroecongn,
s
2.3 FACTOR INCOME AND TRANSFER INCOME —————————______
Factor Income ee : .
Factor income refers to income received by factors of production” for rendering factor serycg,
in the production process. ;
* Itis received for providing factor serviees of land, labour, capital and a AS factor
income is eamad for contributing to production process, itis a Bilate tcf aa : Ie.
‘actor income of normal residents of a country is included in the National Income.
* Examples: Rent, wages, interest and profit.
* Itshould be noted that Factor Incomes and Factor Payments are the two sides of the same
coin. Itis factor income from the viewpoint of the owners of factors of production, while it
is factor payment from the viewpoint of the producers of goods and services.
“Factors of Production are the primary inputs, which are needed to produce goods and services. They
are broadly categorised under four heads: () Land: (i Labour; (ii) Capital; and (iv) Entrepreneur.
Transfer Income
Transfer income refers to income received without rendering any productive service in return,
* It isa unilateral (one-sided) concept.
* Itis not included in National Income as it does not reflect any production of goods and
services.
* It can be received either within the domestic territory of a country or from abroad.
* Examples: Old age pension, scholarship, unemployment allowance, pocket money, etc
| Taxes received by the government are the transfer incomes of the government as they are received
without providing any productive service in return. Similarly, subsidies paid by the government are
transfer payments of the government.
Bexx=== Een
Transfer receipts are of two types: (i) Current Transfer; (i) Capital Transfer,
1. Current transfers are made out of income, whereas, capital transfers are made out of the wealth of
the payer.
2. Current transfers are generally regular in nature, whereas, capital transfers are irregular.
3. Current transfers are meant for consumption purposes, whereas, capital transfers are meant for
capital formation.
4. Examples of Current transfers: Old age pension, gifts, unemployment allowance, etc. Examples of
Capital transfers: Investment grant, capital gains tax, war damages, etc.
Factor Income Vs Transfer Income
Acuna
It refers to income received without
zndering any productive service in
included in National Income
tic Income. prer2® BasicConcepts of Macroeconomics fal
chat
| Itis an earning concept.
Concept et ‘
ccipent It is received by factors of production | tis generally received by households and
Re (land, labour, capital and enterprise). _| government
Rent, Wages, Interest and Profit, Scholarship, Old age pension,
Bvample cS _____| Unemployment allowance, ete.
fe sh > a
4 FINAL GOODS AND INTERMEDIATE GOODS
+ pings that satisfy Iman reants are called goods. On the basis of end use of goods, they can be
th
A Iassfied into two heads: () Final Goods; and (ii) Intermediate Goods.
mainly
Final Goods
Final goods
Final Goods Include:
(i) Goods purchased by consumer households as they are meant for final consumption (like milk
purchased by households).
(ii) Goods purchased by firms for capital formation or investment (like machinery purchased by
a firm).
Expenditure on final goods purchased by householdsis called ‘Consumption Expenditure’ and
expenditure on final goods purchased by the producers is called ‘Investment Expenditure’. So,
Expenditure on Final Goods = Consumption Expenditure + Investment Expenditure.
refer to those goods which are used either for consumption or for investment.
itmust be noted that final goods are neither resold nor used for any further transformation in the
process of production.
Intermediate Goods
Intermediate goods refer to those goods which are used either for resale or for further production
in the same year.
Intermediate Goods include:
(i) Goods purchased for resale (like milk purchased by a Dairy Shop).
(ii) Goods used for further production (like milk used for making sweets).
Important Points about Intermediate Goods
* They are generally purchased by one production unit from another production unit, ie.
intermediate goods remain within the production boundary.
‘However, all purchases by one production unit from other production units are not intermediate
purchases. For example, purchases of building, machinery, etc. are not intermediate purchases
(they are not meant for resale) as their value is not included in the value of final good. In fact, such
‘purchases are termed as final products as they are purchased for investment.
* They have ‘Derived Demand’ as their demand depends on demand for final goods.
* They are not yet ready for use by their final users, ie.some value has to be added to the
intermediate goods. For example, Sugar purchased by a sweet shop is an intermediate good
as some value is to be added to sugar for making sweets. Introductory Macroconom,
ls
* Durable goods (like trucks, aircrafts, vehicles, etc.) purchased by pase ers Purpose
are included under the category of intermediate goods as they are used to produce Aefenc.
services and not for market sale. ‘
* Value of intermediate goods is merged with the value of final goods. For instance, suppose a Tiller
buys wheat worth % 700 and converts it into flour worth 1,000. Now, the value of flour
(final good) includes the value of wheat (intermediate good).
Production Boundary
The concept of production boundary
is very significant to understand the
difference between intermediate and
final goods. The production boundary
is the line around the productive
sector. As long as goods remain within the
Production boundary, they are intermediate
Soods and when a good comes out of this
boundary, it becomes a final good.
In the given diagram, there are 3
Production units (A, B and C). The
thick border drawn around these three
units is the Production Boundary. _ PRODUCTION BOUNDARY
Within this limit, cotton and thread are intermediate ‘goods. Cloth is a final good as it lies outside the
Purview of production boundary.
How to Classify Goods as: Intermediate Goods and Final Goods
The distinction between intermediate 00ds and final goods is made on the basis of the use of
Product and not on the basis of Product itself. A commodity can be an intermediate 800d as well as
4afinal good, depending upon its nature of use.
For Example:
() Sugar is an intermediate good when itis used by sweet shop for making sweets. However, if itis
used by the consumers, then it becomes afinal good.
AG Similaty, milks an intermediate good when itis used in dairy shops for resale. However, it becomes
final good when it is used by the households.
So,itmust be noted that distinction is made on the basis of enduse. fend use of agoodis consumption
Or investment, then itis afinal good. However, ifthe good s used for resale or further production (in
the same year), then itis an intermediate good.
National Income includes only Final Goods
Only final goods are included in national income. The intermediate goods are not included
in the national income as they are already included in the final goods. If their value is added
again, it will lead to double counting.
For example, Out of wheat and flour, only flour (final 00d) is included in National Income as
value of flour already includes the value of wheat (intermediate good).
Farmer A produces
Cotton worth ® 2,000
and Selisitto B
B produces Thread
‘worth 3,000 and sells
ittoc
C produces Cloth worth
24,500 and sels it to
Consumers
Final Good me?
chapter2.® Basic Concepts of Macroeconomics
2.7
pedistinction between final and intermediate goodsis required to estimate correct value of Gross Domestic
product (GDP). Inthe absence of this distinction, GDP may be over-estimated and may lead to problem of
double counting
Goods used up in the same year are Intermediate Goods
Itshould always be remembered that intermediate goods are used up in the same year. If they
rema
For example,
torines coal Was
remaining 3
Final Goods Vs Intermediate Goods
og
Meaning
ty
Final goods refer to those goods which
are used either for consumption or for
‘investment.
in for more than one year, then they are treated as final goods.
suppose X Ltd. purchases 10 tonnes coal in 2022 for making glasses. Only 7
ased up in 2022. Now, 7 tonnes coal will be taken as intermediate goods and
3 tonnes coal will be treated as final goods and will be included in National Income.
Intermediate goods refer to those goods
which are used either for resale or for
further production in the same year.
Nature
Value addition
They are included in both national and
domestic income.
They are ready for use by their final users
ite. no value has to be added to the final
goods.
They are neither included in national
income nor in domestic income.
They are not ready for use, i.e. some value
has to be added to the inter-mediate
goods.
Production Boundary
They have crossed the production
boundary.
They are still within the production
boundary.
Example
Milk purchased by households for
consumption, car purchased as an
investment,
Milk used in dairy shop for resale, coal
used in factory for further production.
Items categorised as Intermediate Products and Final Products
1, Paper purchased by a publisher.
itis an intermediate product as paper is used for further production during the same year.
2. Furniture purchased by a school.
Itisa final product because it is purchased for investment.
3. Milk purchased by households.
{tis final product as itis used by households for final consumption.
4, Purchase of rice by a grocery shop.
These are intermediate products because these are purchased for resale.
5. Coal used by manufacturing firms.
Itisan intermediate product as coal is used for further production during the same year.
‘6. Computers installed in an office.
Itisa final product because it is purchased for investment.
7. Coal used by consumer households.
Itisa final product as it is used by households for final consumption.
(CBSE, Delhi 2011 (1)}
{CBSE, Delhi 2011 (i)) introductory Maeve,
Mr,
WBA, Putty,
8. Mobile sets purchased by a mobile dealer. real )
sed for resales
These are intermediate products because these are purcha’
9. Purchase of pulses by a consumer.
ston
Itis a final product as it is used by a consumer for final consumptlo
(CWA, Leth py
10. Chalks, dusters, etc. purchased by a school.
These are intermediate products because these are taken to be us
+ Fertilizers used by the farmers. :
These are intermediate products because fertilize Is used for futher production during th
12. Printer purchased by a lawyer.
Itis a final product because itis purchased for investment,
13. Wheat used by the flour mill.
Itis an intermediate product as wheat is used for further production during the tame Yea" OF is reary g
resale,
sod upp Completely Bunty Nhe Serr Ye
1
NH Yeay,
14. Unsold coal with trader at year end.
'tis a final product as the unsold coal isan investment for the trader.
+ Cotton used by a cloth mill
Itis an intermediate product as cotton is used for further production during the same year,
16, Wheat used by households.
Itis a final product as it is used by households for final consumption.
17. Refrigerator installed by a firm.
{tis a final product because itis purchased for investment.
18. Sugar used by a sweet shop.
{tis an intermediate product as sugar is used for further production during the same year.
1
a
2.5 CONSUMPTION GOODS AND CAPITAL GOODS
a
Final goods can be classified into two groups: Consumption Goods and Capital Goods.
ree da Rcd
— me
Consumption Goods
Consumption goods refer to those goods which satisfy the wants of the consumers direct.
For example, Bread, butter, shirts, pens, television, furniture, etc.
Consumption goods can further be sub-divided into following categories:
1. Durable goods: It refers to those goods which can be used again and again over a considersbt
period of time. For example, television, refrigerators, etc. ra
Chapter2 © Basic Concepts of Macroeconomics
2, Semi-durable goods: Goods which can be used for a limited period of time are termed as semi-
durable goods. These goods have a life span of around one year, For example, clothes,
crockery, shoes, ete.
Non-durable goods: Goods which are used up in a single act of consumption are known as non-
durable goods. These goods cannot be used more than once, i.e. they lose their identity in
single act of consumption. For example, milk, bread, food grains, paper, etc.
4, Services: Services refer to non-material goods which directly satisfy the human wants, They are
intangible activities, i.e. they can neither be seen nor touched. For example, services of
teachers, doctors, banks, etc.
3
Capital Goods
Capital Goods are those final goods which help in production of other goods and services.
For example, plant and machinery, equipments, etc.
Some Points about Capital Goods
(i) They are used in future for productive purposes and have expected life time of several
years.
(ii) They do not lose their identity in the production process, i.e. they do not get merged in
the process of production.
(iii) They need repairs or replacement over time as they depreciate over a period of time.
(iv) They have derived demand as their demand is derived from the demand for other goods,
which they help to produce.
(0) Capital Goods are Durable Use Consumer Good for Households: When a good (say, refrigerator)
is used by a producer (say, Confectionery Shop), then it is a Capital Good. However,
the same good, i.e. refrigerator is a durable use consumer good for the households. So,
if the end-user of a durable good is a producer, then it is a capital good. However, if the
end-user is a household, then it is a durable use consumer good.
Co Pr ceo EM e ee CRC l Lory
Producer goods are those goods which are used in the production of other goods. All goods used by
producer, ie. all producer goods are not capital goods. Producer goods include two types of goods:
# Single-use Producer Goods: It includes raw material like coal, wood, etc. They are not capital goods
as they cannot be repeatedly used in the production process.
+ Capital Goods: It includes fixed assets like plant and machinery, which can be repeatedly used in
the production process.
So, tcanbe said that all capital goods are producer goods, but.all producer goods are not capital goods.
How to Classify Goods as: Consumption Goods and Capital Goods
There is no clear cut line of demarcation between consumption goods and capital goods. The
same good can be consumption good and also capital good. It depends on the ultimate use of the good.
For example, a machine purchased by a household is consumption good, whereas, if it is
purchased by a firm for use in the business, then it is a capital good.
However, if the machinery is bought by the firm for resale, then it will be treated as an intermediate good. Paty Introductory Macroeconom,
= Nes
Consumption Goods Vs Capital Goods
Cont
Satisfaction of Human
wants
Cu Cu cad RCTs
These goods satisfy human wants directly. | Such goods satisfy human wants i ty
So, such goods have direct demand. __| So, such goods have derived demang
4 So
Production Capacity _| They donot promote production capacity | They help in raising production Capacity
Expected Life
Most of the consumption goods (except | Capital goods generally have an expecta
durable goods) have limited expected if, | life of more than one year.
Comprehensive Example of Final Goods and Intermediate Goods
aor = Mileokl eee
bdaid ce iy Goods
| ae ra
Car !f purchased by If purchased by taxi- | If purchased by car dealer for resale.
household, driver as taxi,
oR
If purchased by firm
for use in business. =
Cloth 'fpurchased by | Cloth ying unsold _| purchased by tailor for making dresses,
households. with trader at the end oR
of accounting year _| ifpurchased by garment shop for resale.
(Capital formation).
Sugar fused by Iflying unsold with _| fused by sweet shop for making sweets.
households. trader at the end of or
year. if purchased by Grocery shop for resale.
Services of Fused by Ifused by enterprises.
doctor orlawyer —_| households.
2.6 GROSS INVESTMENT, NET INVESTMENT AND DEPRECIATION
Investment or capital formation refers to addition to the capital stock of an economy. For example,
construction of building, purchase of machinery,
Investment can be looked up in two forms:
(i) Gross Investment
addition to inventories of goods, etc.
(ii) Net Investment
Gross Investment.
Gross Investment is addition to the stock of capital before making allowance for depreciation
Capital stock consists of fixed assets and unsold stock. So, gross investment is the expenditure
on purchase of fixed assets and unsold stock during the accounting year.
However, gross investment does not indicate the actual change in economy's stock of productive
assets for a given year. During the production process, some amount of fixed capital is used up. This
'oss of fixed capital is known as depreciation. By subtracting depreciation from gross investment, we
get Net Investment. Chapter2 ® Basic Concepts of Macroeconomics
Net Investment
The actual addition made to the capital stock of economy ina given period is termed as Net
Investment.
Net Investment = Gross Investment - Depreciation
Let us now understand the meaning of depreciation,
Depreciation (Consumption of Fixed Capital) Gnas
Depreciation refers toa fall in the value of fixed assets due to normal
wear and tear, passage of time or expected obsolescence (change
in technology). The concept of depreciation is very important to
differentiate between Gross value and the Net value. ‘Gross’ is inclusive
of depreciation, whereas, ‘net’ excludes it. ae
(+) Depreciation
wonepaidsg (-)
Gross Value = Net Value + Depreciation
Depreciation is also known as: (i) Current Replacement Cost; (i) Replacement cost of Fixed Capital;
(i Capital Consumption Allowance.
‘Depreciation is also called consumption of fixed capital. It refers to that value of fixed capital (or fixed
assets) which is consumed (or used up) in the process of production. Because of depreciation, fixed
‘assets need to be replaced from time to time, Replacement of fixed assets requires funds, Provision for
‘the fundsis made on annual basis.To illustrate, ifa machineis purchased for® 10,00,000 andits expected
‘ifetime of use is 10 years, then the annual provision for funds (to replace the machine after 10 years) is
21,00,000(=%1 ‘The funds of 1,00,000 so accumulatedis called Depreciation Reserve Fund.
Depreciation of assets is mainly due to 3 reasons:
(i) Normal wear and tear: Continuous use of fixed assets in production process decreases
their productive capacity and value.
(ii) Passage of time: Value of fixed assets also decreases with the passage of time, even if
they are not being put to use in the business. Natural factors like rain, winds, weather,
etc. contribute to fall in their value.
(iti) Expected obsolescence: Value of fixed assets also decreases due to expected obsolescence
(‘e loss in value due to change in technology or change in demand for goods and services).
epreciation Reserve Fund or Provision for Depreciation
eres
calamities lke earthquake, floods, etc. ordue to thefts,
inexpected obsolescence is termed as ‘Capital Loss’. Itrefers to fallin the value of fixed assets
due to normal wear and tear, passage of
time or expected obsolescence.
Introductory Macroecong
Mic
$
Itrefers to loss in value ofthe fixeg 2
ts
due to unforeseen obsolescence, na
, tu
calamities, thefts, accidents, etc“!
No such provision is made in case gp
Provision forloss | Provision is made for replacement of | No 0
assets as it Is an expected loss. Provision | capital loss as it is an unexpected jo.
is maintained through Depreciation | However, insurance offixed assetsis don,
Reserve fund, to minimise the loss.
Production process _| Itdoesnothamperthe production process. | It hampers the production process, ~
2.7 NET INDIRECT TAXES (NIT) ee ———~
Net indirect taxes refer to the difference between indirect taxes and subsidies.
Net Indirect Taxes = Indirect Taxes - Subsidies
Let us discuss the two components of NIT;
(i) Indirect Taxes.
Indirect taxes refer to those taxes aa —
which are imposed by the govern- Base Price 57.16 57.94
ment on production and sale of Freight 020 022
goods and services. For example, BeeeDuy 7990 | 1580
Goods and Services Tax (GST), Dealer Commission] 3.75 255
Basic Customs Duty, Central Ex- VAT 15.71 13.01
cise and VAT on Petroleum Prod- Retail Price 96.72 89.62
ucts, Excise on Liquor, Electricity "een Deas on 27 verb 2003
Central Excise and State VAT (Indirect Taxes) account
for major share of the retail price of Auto Fuel
Duties, Stamp Duty, Securities
Transaction Tax, Entry Taxes and
Toll, etc.
Indirect tax increases the price of the product in the market. For example, if cost of producing
one set of speakers is ¥ 500 and Government levies GST of 10%, then price of speakers will
increase to % 550 due to indirect taxes.
(ii) Subsidies
Subsidies are the ‘financial assistance’ provided by the government to producers to fulfil its
social welfare objectives, In India, LPG cylinder is sold at subsidized rates.
* They are often granted to promote exports or to encourage firms for setting up the industries
in the backward areas.
* Subsidies are opposite to indirect taxes as they reduce the market price of the commodity:
In the example of speakers, if the Government grants a subsidy of € 10, then price of speakers
will fall to % 540 due to subsidies.
* Subsidies may also be referred as ‘Economic Assistance’ or ‘Financial Assistance’. ee
chapter? ® Basic Concepts of Macroeconomics
+ Subsidy is a ‘Transfer Payment’ as itis the financial assistance provided by the government
to producers to fulfil its social welfare objectives. Government does not get anything, in
return in consideration for the same, Subsidy does not contribute to any value addition as
it does not contribute to current flow of goods and services.
factor Cost Vs Market Price
(a) Factor Cost (FC): It refers to amount paid to factors of
production for their contribution in the production process.
In the given example, % 500 is the ‘Factor Cost’,
(b) Market Price (MP): It refers to the price at which product is
actually sold in the market: In the given example, & 540 is the
‘Market Price’. It includes the indirect taxes and excludes the
subsidies.
* Market Price = Factor Cost + (Indirect Taxes - Subsidies)
* Market Price = Factor Cost + Net Indirect Taxes
Calculate Net Indirect Taxes (NIT) in the following cases:
Case 1: (i) Indirect Taxes = 0; (ii) Subsidies = % 100
Ans. NIT=0-% 100 =-% 100
Case 2: (i) Indirect Taxes = % 250; (ii) Subsidies = 0
Ans, NIT=%250-0=%250
Case 3: (i) Indirect Taxes = % 200; (ii) Subsidies = 120
Ans. NIT=% 200 -%120=% 80
(4) Net indirect Taxes
‘S@X@] :>aNIPUL IAN (-)
The concept of NIT is very important to differentiate between Factor Cost and Market Price. Market
Price’includes net indirect taxes, whereas, Factor cost’ excludes it. The concepts of indirect taxes and
subsidies do not arise in a two-sector economy including households and firms. This concept is
relevant in a three-sector and four-sector economy.
2.8 NET FACTOR INCOME FROM ABROAD (NFIA)
It refers to the difference between factor income received from the rest of the world and factor
income paid to the rest of the world.
NFIA = Factor income earned from abroad - Factor income paid abroad
* ‘Factor income from abroad’ is the income earned by the normal residents of a country from
the rest of the world (ROW) in the form of wages and salaries, rent, interest, dividend and
retained earnings.
* ‘Factor income to abroad’ is the factor income paid to the normal residents of other countries
(ie. non-residents) for their factor services within the economic territory.
Significance of NFIA
NFIA is significant to differentiate between ‘Domestic Income’ and ‘National Income’. In
practical estimates, domestic income is estimated first and then, National Income is derived
from Domestic Income in the following manner: =
Introductory Macroecong,
Meg
National Income
= Domestic Income
+ Factor income from abroad (due to contribution of g
normal residents to production outside the economic Se
territory) 5 g
~Factor income to abroad (due to contribution of non-B &
residents to production inside the economic territory) z
The difference of Factor income from abroad and Factor
income to abroad is termed as “Net factor income from abroad”
or popularly abbreviated as NFIA.
So, National Income = Domestic Income + NFIA
NFIA can be Positive, Negative or Zero
* NFIA is Positive when income earned from abroad is more than income paid to abroad,
+ NFIA is Negative when income earned from abroad is less than income paid to abroad.
* NFIA is Zero when income earned from abroad is equal to income paid to abroad.
Components of NFIA
There are three main components of NFIA:
1. Net Compensation to Employees: It refers to difference between income from work
received by resident workers living or employed abroad for less than one year and similar
payments made to non-resident workers staying or employed within the domestic territory
of the country for less than one year.
2. Net Income from property and entrepreneurship: It refers to difference between income
from property and entrepreneurship (in the form of rent, interest and dividend) received
by residents of the country and similar payments made to the non-residents.
3. Net Retained Earnings: It refers to difference between retained earnings of resident
companies located abroad and retained earnings of non-resident companies located within
the domestic territory of the country.
Retained Earnings refer to that part of profits which is kept as reserve after paying the corporate tat
and dividends.
Thus, it may be concluded that:
Teacher a LOU ar) oe
chapter2 ® Basic Concepts of Macroeconomics
Itmust be noted that NFIA is zero in a closed economy as such economy does not deal with the rest
of the world sector.
pefore we proceed further
students must be very careful while dealing with NFIA. Quite often, NFIA is given in different
forms. Let us discuss treatment of NFIA in the following cases:
Calculate NFIA in the following case:
Case 1: (i) Factor income from abroad = % 500; (ii) Factor income to abroad = % 300
‘Ans. NFIA=% 500 -% 300 =% 200
Case 2: (i) Factor income from abroad = & 250; (ii) Factor income to abroad = & 620
Ans. NFIA=¥ 250 -% 620 = (-)% 370
Case 3: Factor income to abroad =% 150
Ans. NFIA=(-) 150
Case 4: Factor income to abroad = ~% 150
‘Ans. NFIA=% 150
l Peon ya aac es
‘* Domestic Territory refers to the geographical territory administered by a government within which persons,
goods and capital circulate freely.
‘+ Normal resident refers to an individual or an institution who ordinarily resides in the country for a period
more than one year and whose centre of interest also lies in that country.
* Factor Income is the income received by the factors of production for rendering factor services in the
process of production.
‘* Transfer Income refers to the income received without rendering any productive service in return.
* Final Goods refer to those goods which are used either for consumption or for investment.
* Intermediate Goods refer to those goods which are used either for resale or for further production in the
same year.
* Consumption goods refer to those goods which satisfy the wants of the consumers directly.
* Capital Goods are those final goods which help in production of other goods and services.
* Gross Investment refers to total investment made in a given period in an economy.
* Depreciation refers to a fall in the value of fixed assets due to normal wear and tear, passage of time and
expected obsolescence.
* Net indirect Taxes refer to the difference between indirect taxes and subsidies.
* Net Factor Income from Abroad refers to the difference between the factor income received from the rest
of the world and the factor income paid to the rest of the world.
* Three Components of NFIA: () Net compensation of employees; (i) Net income from property and
entrepreneurship; (iii) Net retained earnings. Introductory Macro
OOo,
Be en Sac)
Domestic Territory | Economic Territory
Earned Income
Uneamed Income
eee
+ Consumption of Fixed Capital
+ Current Replacement Cost
+ Replacement Cost of Fixed Capital
+ Gapital Consumption Allowance eT
+ Economic Assistance zn
+ Financial Assistance
Factor Income ar cae
HOTS: HIGHER ORDER THINKING SKILLS QUESTIONS
Q.1. Classify the following as factor income or transfer income:
@ Unemployment allowances.
(ii) Salary received by Rakesh from a company.
(ii) Financial help to earthquake victims.
(iv) Compensation received from the employer.
(¥) Claim received from Insurance company by an injured worker.
(vi) Birthday gift received from a friend.
(vii). Bonus received on Diwali,
‘Ans. Factor Income: (i), (iv), (vil); Transfer Income: (j,i), (v), (vi).
Q.2. Classify the following as final goods or intermediate goods.
() Machine purchased by a firm.
i) Soft drinks purchased by the school canteen.
(iil) Clothes purchased by an individual.
iv) Coal purchased by a factory.
(v) Electricity consumption in a business,
(Vi) Book purchased by a student.
(vii) Books purchased by a book seller,
(vill). Postage stamps purchased by a consumer.
(ix) Postage stamps purchased by a business unit,
(x) Exhaust fans used for making water coolers.
(xi) Seeds purchased by a farmer to produce wheat.
(sii) Seeds purchased for kitchen gardening,
(xiii) Machines purchased by a dealer of machines. (CBSE, All india 2010)
(xiv) Car purchased by a household. {CBSE, All india 2010)
(xv) Sewing machine purchased by a housewife,
‘Ans. Final Goods: (i), (ll), (vi), (vil), (xli) (xiv), (xv); Intermediate Goods: (il), (Iv), (v), (vii, (ix), (x), (xi), (xii)
- chapter2 © Basic Concepts of Macroeconomics rAd
Q,3. What is meant by factor income to abroad? State its components (CBSE, Delhi 2002)
Factor Income to abroad refers to factor income paid to the normal residents of other countries (Le. non
residents) for their factor services within the economic territory,
Components of factor income to abroad;
{0 Compensation of employees paid to the non-resident workers working within the economic territory
{i Income from property (rent, interest) and entrepreneurship (dividend) paid to the rest of the world.
{iil Retained earnings of enterprises owned by non-residents within the domestic territory.
{Note: It must be noted that components of Factor income to abroad! are asked and not of ‘Net factor
income from abroad’)
Q.4, Which among the following are capital goods and which are consumer goods (or consumption goods)
and why?
(@) Acarused as a taxi
(b) Refrigerator in a hotel
(© Airconditioner in a house
(CBSE, All india 2018}
Ans. (@) Acarused asataxi:Itisa capital good because itis used for producing services for generating income.
(b) Refrigerator in a hotel: It is a capital good because it is used for providing services over a period of
time to the production unit.
{@) Air-conditioner in a house: It is a consumer good because it is used for satisfaction of a want by a
household.
{.5. Which among the following are final goods and which are intermediate goods? Give reasons.
(a) Milk purchased by a tea stall.
(0) Bus purchased by a school.
(@) Juice purchased by a student from the school canteen
‘Ans. (a) Itis an intermediate good as milk is purchased by a tea stall for further production.
(b) Itisa final good as bus is treated as an investment for the school.
(0) Itisa final good as juice purchased by a student is meant for consumption purpose.
6. ‘Machine purchased is always a Capital Good: Defend or refute.
‘Ans. The given statement is refuted. The end-use of the machine determines whether its a capital good or not.
Forexample,a machine purchased by a household (say, computer, refrigerator, etc. isa consumption good
(Durable Good), wherea: purchased by a firm for use in the business, then it is a capital good.
Q7. “Final goods are those goods which are consumed only by the households. Defend or refute the given
‘statement with a valid argument. {CBSE, Delhi & Al Comptt. 2020}
‘Ans. The given statement is not correct and is thus refuted. Final goods are those goods which are purchased/
consumed either by households or by the producers for investment purpose, ie. these are the goods which
have crossed the production boundary.
Q8. “Gross investment is always greater than net investment” Defend or refute the given statement with valid
argument. {CBSE, Delhi & Al Comptt. 2020 ())
‘Ans. The given statement is refuted. Gross investment includes addition to capital stock which also includes
teplacement for the normal wear and tear (depreciation).
Whereas, addition to capital stock in an economy is measured by net investment. So, in an accounting sense,
if the value of depreciation becomes zero, only then gross investment will be equal to net investment.
Q9, ‘Subsidies to the producers should be treated as transfer payments: Defend or refute the given statement
with valid reason, (CASE, 2020 (58/5/1))
‘Ans. The given statementis defended, as subsidy is a transfer payment. Subsidy is the financial assistance provided
by the government to producers to fulfil its social welfare objectives. Government does not get anything
in consideration for the same. It does not contribute to the current flow of goods and services and hence
do not contribute to any value addition, =
Introductory Mactog, Con
ey
Q.10. Net factor income from abroad can never be negative’ Defend or refute the given sea ty
argument. (CBSE, Delhi AI Comp
Ans. The given statement is refuted, Net factor income from abroad isthe difference between faa
earned from rest of the world and factor income paid to rest of the world. Mong
ifthe value of factor income paid to rest ofthe worlds greater than the factor income earned fro
the world, the resulting value (net factor income from abroad) can be negative,
bo Sette
est
Fill in the Blanks
1. Normal resident of a country refers toan__oran_ who ordinarily residesin ty,
country and whose centre of economic interest also lies in that country.
2. Final goods refer to those goods which are used eitherfor___._____orfor_
3. __ Income is a receipt concept,
a 2 goods are used up in a single act of consumption.
5. Net indirect taxes refer to the difference between ___ epee
6. refer to those goods which are used either for _____oF for further production in
the same year,
7. Factor Income is included in both __ Income and___ Income,
8. Net Factor Income from abroad is Negative when income earned from abroad is _ income
paid to abroad.
9, When ___ is subtracted from gross investment, we get Net Investment.
10. Consumption goods have _ demand, while capital goods have _ demand,
11. Milk purchased by households is a good, while milk purchase by a sweet shop is an
good.
12, Intermediate Goods are still within the __ boundary.
13, Factor Income is received by
14, National Income includes only__ Goods.
15, Only (Expected / Unexpected) obsolescence is considered for estimation of consumption of
fixed capital.
True or False with Reasons
1, Intermediate goods have a derived demand, while final goods have direct demand.
2. Bread is always a consumer good. (CBSE, Sample Pope
3, Gross investment can be equal to net investment.
4. Market price is always more than factor cost.
5. Agood can be an intermediary good in one case anda final goodin another case.
6. The concept of normal resident applies to individuals only.
7. In inal goods, no value is to be added.
8. Butter is only a final product. {CBSE Delhi Compt. 2012)
9, End-use of the goods categorise the goods as intermediate goods and final goods.
10. Final goods include only those goods which are consumed by the households.
11. Obsolescence, be it expected or unexpected, is a component of depreciation.
— 4 Pee
chapter2.® Basic Concepts of Macroeconomics
12, National Income is always more than the Domestic Income.
13. All purchases by a production unit from other production units are intermediate products.
14, Salary of an Indian working in Russian Embassy in India is included in National Income.
45. ‘Purchase of machinery by a producer is an intermediate good’ ICBSE, 2020 (58/5/2)}
16, ‘Unexpected obsolescence is a component of depreciation’ (CBSE, 2020 (58/4/1)]
17. Intermediate goods are always durable in nature, {CBSE, Sample Paper 2021}
18. Consumption of Fixed Capital (or Depreciation) has nothing to do with the efflux of time.
Matching Type Questions
1. From the set of statements given in Column | and Column Il, choose the correct pair of statements:
{a) Final Goods (i)_ Goods used for resale
(b) CapitalGoods __| (il) Goods which help in production of other goods
(@ Intermediate Goods _| (ii) Goods used for consumption
(@ Consumption Goods | (iv) Goods which satisfy the wants of the consumers directly
Q.2. From the set of statements given in Column | and Column Il, choose the correct pair of statements:
{@) Net indirect Taxes (i) Subsidies - indirect Taxes
(b) Factor Income (ii), Scholarship
(0) Transfer Income (ii) Profit
(@) Depreciation (iv)_Consumption of Fixed Capital
Q.3. Match the statements given under A with the correct options given under B.
(0 Intermediate Product | a. Paper purchased by a publisher
._ Paper purchased by a consumer
Q.4, Match the statements given under A with the correct options given under B,
o oS
@ Consumption Goods | a. Durable goods
(il) Capital Goods b. Producer Goods
Q5. Match the statements given under A with the correct options given under B.
@ Factorincome ‘a. Consumption of Fixed Capital
li) Intermediate Goods _| b,_ Received by factors of production
ii) Depreciation c_ Scholarship oa
Introductory Macroscon,
iy
Q.6, Match the statements given under A with the correct options given under B,
(Consumption Goods | a. Help in raising production capacity =
ii) NetFactorincome |b. Net investment + Depreciation =
from abroad 1
(ii_Gross investment |< Semi-durable goods a
(iv) Capital Goods 4. Economic Assistance
() Subsidies e._Difference between National Income and Domestic Income
Multiple Choice Questions (MCQs)
1. Which of the following are covered under the domestic territory of India?
(a) State Bank of India in London (b) Google office in India
(c) Office of Tata Motors in Australia {d) Russian Embassy in India
2, Which one of the following is an intermediate product?
(a) Purchase of pulses by consumers (b) Machine purchased by a firm
() Wheat used by a flour mill (d) Wheat used by households
3. Which one of the following is not an ‘example of final goods?
(a) Chalk, dusters, etc. purchased bya school (b) Fertilizers used by the farmers
(6) Wheat used by the flour mill (d) Allof the above
‘4. Which of the following constitute the reason for: difference between Market Prices and Factor Cost?
(@) IndirectTaxes (b) Subsidies (€) Both(a)and(b) (a) Neither (a) nor b)
5. If factor cost is greater than market price, then it means that:
(a) Indirect Taxes > Subsides (b) Indirect Taxes = Subsidies
(©) Indirect Taxes < Subsides (d) Indirect Taxes 2 subsidies
6. Final goods refer to those goods which are used either for or for
(a) Consumption, investment (b) Consumption, resale
(0) Resale, investment (@) Resale further production
7. Net factor income from abroad is:
(a) Exports minus Imports
(b) Visible Exports minus Visible Imports
(c) Factor incomes received from abroad minus factor incomes paid abroad
(@) Factor incomes received from abroad
8. Depreciation means:
(a) Destruction ofa plant ina fre accident (b) Loss of ixed assets overtime due to wear tear
(€) Loss of fixed assets in an earthquake (d) Closure of the plant due to lockout
9. Market price and Factor cost will be equal when there is:
(2) Nodirect tax (b) Noindirect tax
(©) No subsidy (4) No indirect tax and no subsidy
10. Which ofthe following is an example of transfer income?
(2) Bonus (b) Unemployment Allowance
(€) Compensation from the employer (4) Allofthe above Pre
ter2 ® Basic Concepts of Macroeconomics
11, Which of the following isan example of intermediate goods?
(a) Carpurchased by a dealer of second hand cars (b) Steel and cement used to construct a fyaver
(@) Fertilizers purchased by a farmer (a) Allof these
12, Sugar purchased by a Sweet shop js an good, while it is a good when it is
purchased by a consumer,
(a) Capital, Final (b) Final Intermediate (c) Intermediate, Final (a) Final, Producer
13. Identity the missing item in the following flowchart:
(Maha Pre}
(on
{a) Depreciation (b) Net indirect Taxes
{c) Net Factor Income from Abroad (a) Indirect Taxes
14, Which of the following flowchart correctly establishes the treatment of ‘Depreciation’?
3 Gross eae Gross a National bigs Domestic }— _
5 24 es 25
é 23 ga a a
3 si Sac) sz g
Net Net Domestic}. National
fa) (b) ( (a)
15. Depreciation of fixed capital assets refers to: (CBSE, Delhi 2016}
(@) Normal wear and tear (b) Foreseen obsolescence
(c) Normal wear & tear & foreseen obsolescence _(d) Unforeseen obsolescence
16. Unforeseen obsolescence of fixed capital assets during production is: (CBSE, Foreign 2016}
{a) Consumption of Fixed Capital (b) Capital Loss
(6) Income Loss (d) None of the above
17. Refrigerator purchased by a confectionery shop is an example of:
{a) Final Good (b) Intermediate Good —_(c) Capital Good (d) Both (a) and (c)
18, Which of the following is an example of Non-durable good?
(2) Milk (b) Bread (c) Both(a)and(b) ——_(d) Clothes
19. Addition to the capital stock of an economy is termed as:
(a) Investment {b) Capital Loss
{€) Consumption of Fixed Capital (d) Allofthese
in India is a part of domestic territory of:
(b) Japan (c) Both(a)and(b) ——(d) International Area Introductory Maer
ec
ny,
2, Foreign embassies in nda area pat of india (Choose the correct alternative) (CBSE Deine,
: Gt itory («) Both (a) and (b) N wh
Economic territory Geographical = v , lone of
purchased for the following purpose are final goods: :
= ae tisfaction of wants For investment in firm
Re and (b) ) None of the above
é
23. Market Price will be equal to Factor Cost when:
Indirect Taxes are zero b) Indirect Taxes are equal to subsidies
No indirect tax and no subsidies
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