2. National Income Accounting
The chapter introduces fundamental concepts related to national income accounting and the functioning of a simple economy. It explores the circular flow of income, methods for calculating national income—including the product, expenditure, and income methods—and examines the significance of capital goods and the relationships between different types of income. The chapter also discusses limitations of GDP as an indicator of welfare.
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What we have learnt
- Economic wealth is generated through the efficient use of resources and production processes.
- National income can be calculated using three primary methods: product method, expenditure method, and income method.
- GDP does not fully capture the welfare of a country's population due to issues like income distribution and externalities.
Key Concepts
- -- National Income
- The total monetary value of all final goods and services produced within a country in a given period, typically measured annually.
- -- GDP (Gross Domestic Product)
- The market value of all final goods and services produced within a country during a specific period.
- -- GNP (Gross National Product)
- The total market value of all final goods and services produced by the residents of a country, regardless of whether the production occurs within the country's borders.
- -- Net Investment
- The addition to capital stock in an economy, calculated as gross investment minus depreciation.
- -- Inflation
- The rate at which the general level of prices for goods and services rises, eroding purchasing power.
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