National Income and Financial Concepts

Overview

This lecture covers the main questions, concepts, differences, and important points related to National Income that appear in exams.

Stock and Flow Variables

• Stock variables are measured at a specific point in time, such as money supply.
• Flow variables are measured over a specific period, such as national income.
• Bank deposit (at one date) — stock; domestic income (yearly) — flow.

Money Flow and Real Flow

• Real flow involves goods and services flowing physically.
• Money flow involves the exchange of money.
• Both flows occur between households and firms.

Externalities

• An externality can have a positive or negative effect on an activity, which is not directly correlated with GDP.
• Positive (e.g., planting trees), negative (e.g., factory waste) examples.
• Good infrastructure provides collective benefits to the economy.

Operating Surplus

• Operating surplus includes income from property and entrepreneurship, such as rent, profit, interest, royalty.

Two-Sector Circular Flow Model

• Households provide factors of production, firms pay factor payments.
• Households spend on consumption and receive goods and services.
• Money and goods/services continuously flow in the cycle.

Depreciation vs Capital Loss

• Depreciation means asset value decreases gradually, but production continues.
• Capital loss means the asset is completely destroyed/lost, which can stop production.

Precautions (National Income Calculation)

• Do not include expenses on intermediate goods, second-hand goods, and financial assets.
• Include goods for self-consumption, but not services.

GDP, GVA and Other Concepts

• GDP and GVA at MP are always equal (value addition of all three sectors).
• GDP deflator = nominal GDP / real GDP.
• Understand clearly the definitions of distribution and disposition phases.
• Increase in electric vehicle sales improves both GDP and welfare.

Value Addition, Final and Intermediate Goods

• Value addition = output value - intermediate consumption.
• Final goods are for consumer or investment; intermediate goods are for further production/resale.
• If machinery is bought by a firm, it is a capital good; if bought for resale, it is intermediate.

Domestic Income, National Income, Welfare

• Domestic income: total income earned by factors within the country.
• National income is not always higher; it can be lower if NFIA is negative.
• Welfare does not occur if income does not reach all sections.

Key Terms & Definitions

• Stock variables — measured at a point in time.
• Flow variables — measured over a time period.
• Operating surplus — income earned from rent, profit, interest, royalty.
• Depreciation — regular decrease in asset value.
• Final goods — finally consumed or invested.
• Intermediate goods — used for further production or resale.

Action Items / Next Steps

• Revise all precautions and steps.
• Review theory questions on national income and money banking.
• Revise national income and money banking for tomorrow's class.