Chapter 2(T-4, National Income Accounting) Flashcards
(37 cards)
What is National Income Accounting in the context of economics?
National Income Accounting is the systematic method of measuring and presenting the aggregate income of an economy.
(Memory hook: Think of it as the “report card” of the economy — showing where income is generated and how it flows.)
In National Income Accounting, what are the two interpretations of the term National?
1️⃣ Within a nation → Production within the country’s geographical boundaries
2️⃣ By nationals → Production by a nation’s citizens, regardless of where they are in the world
(Memory hook: National = Nation’s land + Nation’s hands (citizens))
In National Income Accounting, income refers to payments made to which four factors of production?
Entrepreneur → Profit
Capital → Interest
Land → Rent
Labour → Wages
(Memory hook: E-C-L-L = Every Child Loves Laddoos! → Entrepreneur, Capital, Land, Labour)
👉 True or False: National Income Accounting measures both the production and distribution of income within an economy.
✅ True
(Memory hook: Accounting tracks how much and where it goes — production + distribution.)
Fill in the blank: In National Income Accounting, ________ is the aggregate monetary value of all final goods and services produced in an economy in a given period.
👉 National Income
Q: What is the “Flow of Income” Model in National Income Accounting?
It is a representation of how income moves through the economy among production units, households, government, and external sectors, showing the generation, distribution, and expenditure of income.
Its a deep and good definition, try to foucus and learn.
Q: What is the “Circular Flow of Income Model” (two-sector model)?
A simplified model showing the continuous flow of income and expenditure between households (providers of factors of production) and firms (producers of goods/services), assuming no government or foreign sector.
What are the key assumptions of the basic Circular Flow of Income Model?
- Only two sectors: households & firms
- Households spend all income (no saving)
- Firms pay all income earned by factors
- No government, taxes, or foreign trade
How is the Multi-Sectoral Flow of Income Model different from the Circular Flow of Income Model?
It adds government sector (taxes, subsidies, expenditure)
Includes financial sector (savings, investments, borrowings)
Includes external sector (exports, imports)
Shows leakages (savings, taxes, imports) and injections (investment, govt. spending, exports)
True or False: The Multi-Sectoral Model explains leakages and injections in the flow of income.
T
In the multi-sector model, _______ represent leakages, and _______ represent injections into the income flow.
Leakages: Savings, taxes, imports
Injections: Investment, government spending, exports
What are the three methods of measuring national income?
1️⃣ Production (or Output or Value Added) Method
2️⃣ Income Method
3️⃣ Expenditure Method
What is the Income Method of national income measurement?
It adds up all incomes earned by factors of production: wages, rent, interest, and profits, within a year.
Why is avoiding double counting important in national income measurement?
To ensure only the value of final goods and services is included, preventing inflation of national income estimates.
How does Net National Income (NNI) differ from Gross National Income (GNI)?
NNI = GNI - Depreciation (consumption of fixed capital)
Explain how national income accounting helps in measuring the economic development of a country.(2016)
- Shows growth trends over time
- Helps assess sectoral contributions
- Informs policy decisions
- Indicates per capita income trends
Expenditure Approach (Expenditure Method)?
This method measures national income by summing up all the final expenditures made on goods and services produced within the economy in a given year.
👉 What gets added?
✅ C + I + G + (X − M),
C = Final consumption expenditure by households
I = Gross domestic capital formation (investment)
G = Government final consumption expenditure
X − M = Net exports (exports minus imports)
👉 Caution point (UPSC relevance)
Intermediate goods or transfer payments like pensions are NOT included, because they don’t represent spending on current production.
💡 Production Approach (Output / Value Added Method)?
This method measures national income by adding the value added by each producer / sector in the economy.
👉 Formula:
✅ Value added = Value of output − Value of intermediate consumption
👉 Sum of value added across sectors = GDP at factor cost.
Why are transfer payments (e.g. pensions, subsidies) excluded from Expenditure Approach national income?
Because they are not payments for current production of goods/services — they do not represent production activity in the accounting year.
(REMBEMBER: Expenditure Approch-Consumption expenditure. So, TP are not consumption expenditure)
GDP is about production, so why is it also measured using income and expenditure approaches?
(Confusing, hence focus)
Because production generates income and leads to expenditure. All three reflect the same economic activity, so GDP can be measured by any of these approaches.
Is GDP calculated using the Income or Expenditure approach?
GDP can be calculated using both the Income and Expenditure approaches, along with the Production approach — all three give the same GDP in theory.
What is GDP?
It is the total value of all final goods and services produced in an economy in a given time period, usually a year.
- Invaluable things are not calculated.
- A Goods value is accounted for the year of its production .
Why are second-hand goods not included in GDP calculation?
Because their value was already counted when they were first produced. Including them again would lead to double counting. GDP only includes current production of final goods and services.
