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Economics > National Income Accounting > Flashcards

National Income Accounting Flashcards

1
Q

What is considered as national income and why?

A

Net National product at factor cost is considered as national income because,
a). It represents the total income earned by factors of production
b). Net is chosen because gross income includes the wear and tear of fixed assets which does not represent actual income available for distribution
c). National is chosen because it includes the income earned by nationals abroad but excludes the income earned by foreigners within the country
d). Factor cost was chosen because taxes and subsidies are not the payments for factors of production

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2
Q

What is the significance of NIA?

A

A. International Comparison
B. Business Decisions (shows relative contribution and potential of different sectors)
C. Policy Formulation (proper allocation of resources)
D. Policy Evaluation
E. Annual Budget
F. National Statistics

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3
Q

What is GDP?

A

It is the total market value of all the final goods and services produced in an economy in a given period of time.

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4
Q

What is Nominal GDP?
What is Real GDP?

A

Nominal GDP refers to the current year production of final goods and services valued at current year prices.
Real GDP refers to the current year production of g&s valued at base year prices.

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5
Q

What is GNP?

A

It is the measure of the value of output produced by the residents of the country irrespective of the geographical boundaries.

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6
Q

Relation and Difference between GDP and GNP

A

Relation
a). GNP = GDP + NFIA
b). (GDP - GNP) is directly proportional to Integration with and dependency on global economy i.e., The difference between GDP and GNP of a nation reflects how much the outside world is dependent on its products and how much it depends on the world for the same.

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7
Q

What it means if GDP > GNP?

A

It means that dependency on foreign investments, businesses or resources within the country.

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8
Q

What it means if, GDP < GNP?

A

It means that economic reliance on international markets or investments by nationals in foreign economies.

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9
Q

What is Net Factor Income from abroad (NFIA)?

A

NFIA = Citizen’s income in abroad - Foreigner’s income in country
= GNP - GDP

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10
Q

Why GDP is the most acceptable indicator worldwide?

A
  1. GDP growth is the major contributor to welfare
  2. GDP corelates with several other measures of development like literacy and healthcare
  3. It has a clear methodology and is easy to calculate.
  4. It is objective because it is a monetary/mathematical/accounting calculation.
  5. Facilitated cross-country and over-time comparisons.
  6. Given its long history and standard methodology, it is reasonably well understood by policy makers
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11
Q

Different parts of NFIA are……..

A
  1. Net Compensation of Employees
  2. Net Income from Property and Entrepreneurship (Earning from foreign direct investments like, dividends, interests or portfolio investments)
  3. Net Retained Earning of Resident Companies Abroad (Eg : Retained earnings of a MNC’s foreign branches)
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12
Q

Why the concept of NDP and NNP are not used to compare different economies?

A

They are not used to compare different economies because the method of calculating the DEPRICIATION varies from nation to nation.

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13
Q

What are Transfer Payments?

A

These are the payments made by government to individuals for which there is no economic activity produced in return by these individuals.
They act as injections, potentially increasing national incomes. It is merely a transfer of right to spend, and not income, thus is not accounted in calculation of national income.
Eg : Old Age Pensions, Scholarships, Subsidies, Donations, Unemployment Benefits, Disaster Relief, Remittances, Bonuses, Direct Benefit Transfers (DBTs) etc.

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14
Q

What is Gross Investment and its parts?

A

It is the investment expenditure by firms.
It is divided into two parts: -
A. Net Investment
Expanding the production capacity (new
capital goods and machinery)
B. Depreciation
Maintaining the production capacity
(Replacing and maintenance of used up
capital goods)
Gross Investment
= Net Investment + Depreciation
= (Net Fixed Capital Formation + Change in Inventory + Residential Investment) + Depreciation
= (Gross Fixed Capital Formation + Change in Inventory) + Residential Investment (New units)
= Gross Capital Formation + Residential Investment (New Units)

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15
Q

What is Depreciation?

A

Depreciation is the deduction in the price of a tangible asset which reduces the asset’s monetary value due to a variety of reasons like wear and tear that is caused by a prolonged use of the asset.

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16
Q

What is Capital Consumption Allowance?

A

It represents the minimum investment amount required to maintain current productivity levels of fixed assets i.e., capital goods.

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17
Q

What is Personal Income?

A

It includes all income received by an individual in a year.
PI = National Income + Transfer Payments - Corporate retained earnings, Social Security Taxes

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18
Q

What is Disposable Personal Income?

A

Disposable Personal Income refers to the amount, which in actual is at the disposal of individuals to spend as they like.
DPI = PI - Direct Taxes
= Consumption + Savings

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19
Q

Give some factors affecting National Income

A

Factors of Production
Land
Capital
Labour and Entrepreneur
Technology
Government (provide a favorable business environment)
Political Stability

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20
Q

What is Purchasing Power Parity?

A

It is an economic concept the relative value of currencies by measuring the price of purchasing the fixed basket of goods and services in different countries.

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21
Q

What are the limitations of doing GDP conversion using market determined exchange rates?

A
  1. They do not reflect the prices of non-tradeable goods and services that are produced and consumed domestically.
  2. The cost of domestically traded goods and services can be much lower than developed countries, but market exchange do not capture this price difference, leading to distorted calculations of GDP.
  3. It understates GDP of developing countries.
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22
Q

How PPP is better than GDP for comparing economies?

A
  1. It compares purchasing power of currencies.
  2. It measures how much of a common basket of goods and services can be purchased.
  3. It reflects the real cost of living.
  4. It accounts for both traded and non-traded goods.
  5. It provides a more accurate picture of economic output.
  6. It allows for a more realistic comparison of living standards and economic sizes between countries.
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23
Q

Which components are included and excluded when calculating GDP using Value Added or, Product Method?

A

Components to be included,
1. Goods and Services sold in the market
2. Goods and Services not sold, but supplied free of charge
3. Net Indirect Taxes
Components to be excludable,
1. Value of Intermediate Goods
2. Non-market Activities
3. Illegal Activities
4. Transfer Payments
5. Secondhand items
6. Non-economic goods such as air and water

24
Q

Which components are included and excluded when calculating GDP using Income Method?

A

Components to be included,
1. Wages
2. Interest
3. Rent
4. Profit
5. Dividend
6. Net Indirect Taxes
7. Depreciation
Components to be excluded
1. Illegal Activities
2. Non-Market Activities
3. Windfall gains such as lottery prizes
4. Capital Gains such as, income from stocks, bonds or real estate

25
Q

Which components are included and excluded when calculating GDP using Expenditure Method?

A

Components to be included
1. Consumption Expenditure by Households
2. Investment expenditure by firms and govt.
3. Expenditure on capital goods by govt.
4. Net Exports
GDP at MP = C + I + G + X - M

26
Q

What is the utility of Value-Added Method for calculating GDP?

A

1.Sectoral Contribution Analysis:
a. Helps identify the contribution of different sectors (agriculture, industry, and services) to GDP.
b. Useful for tracking structural changes in the economy (e.g., the shift from agriculture to services).

  1. Policy Formulation:
    a. Guides policies aimed at boosting underperforming sectors or enhancing productivity in specific industries.
  2. Estimating Gross Value Added (GVA):
    a. Provides data on the value added at each stage of production, helping measure efficiency and productivity.
  3. Monitoring Regional or State-Level GDP:
    a. Useful for calculating GDP at sub-national levels, where data on sectoral output is more accessible.
27
Q

What is the utility of Income Method for calculating GDP?

A
  1. Understanding Income Distribution:
    Provides insights into how income is distributed among different factors of production (wages, rent, interest, and profit).
  2. Policy for Income Inequality:
    Useful for addressing income disparities by analyzing the distribution of GDP among labor and capital.
  3. Identifying Tax Revenue Potential:
    Helps estimate the government’s potential tax base by providing a breakdown of income earned.
  4. Assessing Factor Productivity:
    Useful in understanding the efficiency of labor and capital in generating economic output.
28
Q

What is the utility of Expenditure Method for calculating GDP?

A
  1. Analyzing Demand Patterns:
    a. Provides insights into how GDP is spent (on consumption, investment, government spending, and net exports).
    b. Helps understand consumer behavior, investment trends, and export-import dynamics.
  2. Formulating Fiscal and Monetary Policies:
    Guides policies to stimulate demand (e.g., increasing government spending or incentivizing private investment).
  3. Tracking Economic Cycles:
    Useful for identifying trends in consumption and investment during economic booms or recessions.
  4. External Trade Impact:
    Measures the contribution of net exports (exports minus imports), highlighting trade’s role in the economy.
29
Q

Why do we use three methods of GDP calculation, even if they measure same thing?

A
  1. Cross-Verification and Accuracy:
    Comparing results from the three methods helps ensure consistency and accuracy in GDP estimation.
  2. Data Availability and Limitations:
    In some cases, data may not be fully available for one method, requiring the use of alternative approaches.
  3. Diverse Analytical Insights:
    Each method emphasizes a different aspect of the economy, providing a more comprehensive understanding.
  4. International Comparisons:
    Different countries may prefer one method over another due to data collection practices, making it important to have multiple approaches for comparability.

A. The Production Method to identify underperforming sectors needing support.
B. The Income Method to analyze wage growth and income inequality.
C. The Expenditure Method to adjust fiscal policies targeting consumer spending or investment.

30
Q

What is GDP Deflator? How to calculate it?

A

It represents the ratio of GDP at current prices to GDP at constant prices. It is a tool to measure inflation comprehensively.
GDP Deflator = (Nominal GDP/Real GDP) x 100

31
Q

What are the advantages of using GDP Deflator as a measure of inflation over WPI or, CPI?

A
  1. Unlike WPI or, CPI, GDP Deflator is not based on a fixed basket of goods and services.
  2. Changes in consumption pattern or, introduction of new goods and services are automatically reflected in the deflator, a feature missing in WPI/CPI.
32
Q

What are some difficulties faced by economists in measuring GDP?

A
  1. Non-monetization of transactions
  2. Unreported illegal income
  3. Non-availability of data about households, small producers etc.
  4. Absence of data on growing service sector
33
Q

What is MCA21 database?

A

The MCA21 database is an online platform created by the Ministry of Corporate Affairs (MCA) of India to manage and monitor corporate entities and their financial statements.
This system provides access to various corporate filings, financial data, and regulatory information, supporting stakeholders in making informed decisions.
It provides the value-added information from the registered firms with the government, finally resulting in GVA@BP, to which New Product Taxes are added to calculate GDP@MP.
It is one of the 27 Mision Mode Projects of the National e-Governance Plan.

34
Q

What is Consumption of Fixed Capital (CFC)?

A

CFC refers to the wearing out or reduction in the value of fixed assets, such as buildings, machinery, and equipment, due to usage, obsolescence, or depreciation.

35
Q

How is CFC different from Depreciation?

A

The concept of CFC differs from depreciation because it values the decline in fixed assets at their current market price rather than their original purchase price (historic cost). CFC shows how much is required to replace an asset in today’s terms, making it a better measure for long-term economic planning.

36
Q

What are the arguments against GDP as a parameter to judge progress?

A
  1. Gender Disparities are not indicated.
  2. It does not measure sustainability of growth.
  3. Condition of poor is not indicated.
  4. Measurement is complex for economies with large proportion of informal sector and black money
  5. It does not value intangibles like, leisure, quality of life etc.
  6. It is an aggregate measure thus is insensitive to its constituents.
    (a). Nature of Good: Merit vs Demerit
    (b). Inequality
  7. Being the value of output, valuation differences can lead to change in figures without any grass root change
37
Q

Why despite of many other alternatives available, GDP is still used?

A
  1. The alternates would have bias in choice of indicators and data sources along with institutional and individual bias whereas, GDP is based on universally accepted standards. Thus, fair comparison is possible.
  2. The data required for calculating the alternatives is not frequently available or even may not be available in some countries, unlike GDP which is regularly calculated and even revised.
    Thus, GDP continued to be used not just as the measure of income but also as the decent measure of well-being.
38
Q

Who publishes Human Development Index (HDI)?

A

United Nations Development Programme (UNDP) since 1990

39
Q

What indicators are included in measuring HDI?

A
  1. Standard of Living
    - Gross National Income per capita
  2. Education
    - Mean years of schooling
    - Expected years of schooling
  3. Health
    - Life Expectancy at birth
40
Q

Who publishes Multidimensional Poverty Index (MPI)?

A

Jointly published by
United Nations Development Programme (UNDP) and
Oxford Poverty and Human Development Initiative (OPHI)

41
Q

What indicators are included in MPI?

A
  1. Health
    - Nutrition
    - Child Mortality
  2. Education
    - Years of Schooling
    - School Attendance
  3. Living Standard
    - Cooking Fuel
    - Drinking Water
    - Housing
    - Sanitation
    - Electricity
    - Assets
42
Q

What is meant by Green GDP?

A

Green GDP is an index of economic growth with the environmental consequences of that growth factored in.
From the value of goods and services produced, the cost of ecological degradation is deducted to arrive at Green GDP.

43
Q

What is the primary role of government?

A
  1. To ensure stability and order in the society
  2. To provide public goods
    (Non-rival and Non-excludable)
44
Q

What is “Crowding Out”?

A

Crowding out refers to the phenomenon where increased government spending or borrowing leads to a decrease in private investment and economic activity.

45
Q

Which places are included in the domestic territory of a country?

A
  1. Political Boundary
  2. Embassies in abroad
  3. Oil wells and Natural Gas rigs operated by nationals of that country
  4. Aircrafts and Ships operated by residents of that country outside of the political boundary
46
Q

Who are the residents of a country?

A

A normal resident is said to be a person or institution who stays in that country for more than 1 year and whose center of economic interest lies within the country.

47
Q

What is Gross Capital Formation?

A

GCF refers to the total investment made in acquiring, creating, or improving fixed assets (such as buildings, machinery, and equipment) within a specific period.

48
Q

How Gross Capital Formation is different from Gross Investment?

A

GCF focuses on the creation and improvement of productive assets while, Gross Investment focuses on the total spending, including maintaining and expanding assets.

49
Q

What are the components of Gross Capital Formation?

A
  1. Gross Fixed Capital Formation
    - Expenditure on new machines and equipment
    - Construction of new infrastructure
    - Construction of new homes by household
  2. Changes in Inventory
    - Consumer goods that are produced but not sold.
    - Raw and Intermediate materials which are not being converted into final goods.
  3. Valuables
    - includes precious items such as gold, gems and other antique and art materials
    - can be included in consumption expenditure, but is included in capital formation due to its long durability
50
Q

What is the relationship between Factor Cost (FC), Basic Prices (BP), and Market Price (MP)?

A

Factor Cost + Production Cost - Production Subsidies = Basic Prices
Basic Prices + Product Tax - Product Subsidy = Market Prices (MP)

51
Q

What are stock variables? Give some examples.

A

Stock is defined as a variable that is measured at a particular point in time. It does not have a time dimension attached with it and is static in nature.
Eg: Bank deposits, Capital, Wealth, Population, Money Supply, National Debt, Inventory Level etc.

52
Q

What are flow variables? Give some examples.

A

Flow is defined as a variable which is measurable over a period of time. It has a time dimension attached to it and is dynamic in nature.
Eg: Capital formation, income, interest on capital, depreciation, GDP, Investment, Exports and Imports, Tax Revenue etc.

53
Q

What if prices of certain goods are not available in base year while calculating Real GDP?

A

Goods whose prices are not available in the base year are valued using the standards of System of National Accounts (SNA-2008).

54
Q

What is the headline measure of GDP?

A

GDP at MP at Current Prices i.e., Nominal GDP

55
Q

What is the headline measure of GDP growth?

A

% change in Real GDP at Constant Prices

Economics (5 decks)

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