Adidev Economics Classes

11th & 12th Commerce & Arts

Mr. Parmod Goyal {98727-97007}

Chapter-3 {Basis of National Income}

Classification of Goods

Goods

Intermediate
Final goods
goods

Single use producer

consumer goods Capital goods
goods (raw material)

Final goods:
Meaning: Those goods which are meant for final use and will not pass through
any more stages of production or transformation are called final goods.

Features:
• Meant for final consumption or investment
• It will not undergo any further transformation at the hand of any producer
• Once it has been sold it passes out of the active economic flow
• These are not meant for resale
• If any good meant for intermediate but does not used in the same year and
remain for another year , it qualifies for final good
• It does not make any Value Addition
• Example: Milk purchased by house hold, Tea Brewing Machine purchased
by the restaurant.
Value of the final goods is included in the Domestic as well as National
Income
Types of final goods:
Final goods are divided in to two types.
(a) Consumer Goods
(b) Capital Goods
1. Consumer goods:-These are also known as consumption goods. It refers
to those goods which are directly used for the satisfaction of human
wants.

Consumer goods are classified into three categories.

Consumer goods

Durable goods Non durable

long time Semi –durable goods/
useable e.g. t.v, goods (for 1 year
eg. Clothes etc.
perishable goods
radio etc. e.g.milk curd etc

2. Capital goods: - These are those goods which are used in process of
production for several years. These are known as fixed assets of the
producer. For ex. Plant and machinery

All machines are not capital goods:-

Capital goods are only those durable goods which are used by producer for
production not for consumption.

All capital goods are producer goods but all producer goods are not
capital goods.
Producer goods are all those goods which are used in the process of
production.

For e.g. Raw material, furniture etc. Capital goods are those goods which are
used in the production as fixed assets.
Intermediate goods:
Meaning:
Those goods which are meant for resale or further production and will pass
through more stages of production or transformation are called intermediate
goods.
Features:

• Meant for resale or further production

• It will undergo further transformation at the hand of any producer
• It remain within the active economic flow
• Mostly used as raw materials or inputs (Non-factor inputs) for production
of other commodities
• If any good meant for intermediate it should be used up in the same year to
qualify for intermediate good
• It makes Value Addition
• Example: Milk purchased by a restaurant for preparing tea , Tea Brewing
Machine purchased by the machine dealer for resale

Implications:
Value of the intermediate goods is not included in the Domestic as well as
National Income
Note: The same good may be final good or intermediate good, it depends on
the nature of its economic use. Hence it is not the nature of the good rather
its nature of economic use which makes it final good or intermediate good.
Examples:-

Final Goods Intermediate goods

A machine purchased for Fees paid to the lawyer by a

installation in a factory producer
Car purchased by a house Milk purchased by hotel
hold
Office furniture, school bus Electricity bill paid by factory
 INVESTMENT/CAPITAL FORMATION
Addition made to the stock of capital during a period of time is called
investment. It is also called capital formation.

Investment

Gross Investment Net Investment

Gross Investment
It is the total addition to the capital stock of the economy including depreciation.
Gross Investment = Gross Fixed investment + Inventory investment
Gross Fixed investment:-
Gross Fixed investment refers to an increase in the stock of fixed assets
of the producers during a year. Expenditure on the purchase of capital
goods like plant, machines, building etc. is called fixed investment. It
includes:-

a) Gross business fixed investment: - Expenditure on fixed assets like

factory buildings etc.
b) Gross residential construction investment:-Amount spent on
construction of houses
c) Gross public investment: - expenditure by government on schools,
roads etc.

Calculation
Stock of fixed assets at the end Stock of assets at the
of year beginning of year

Inventory investment:-
Inventory investment refers to the change in the stock of (i) finished goods
(ii) semi-finished goods (ii) raw material during an accounting year.
Inventory investment also known as change in stock.

Calculation
Stock of Goods at the end of Stock of assets at the
year beginning of year

Note:
• A significant part of the current output of capital goods goes in maintaining
or replacing part of the existing stock of capital goods
• This is because the existing capital stock suffers wear and tear and needs
maintenance and replacement
• A part of the capital goods produced in the current year goes for
replacement of existing capital goods and is not an addition to the stock of
capital goods already existing and its value needs to be subtracted from
gross investment for arriving at the measure for net investment.
• This replacement investment is called DEPRECIATION.

Depreciation:
It refers to the fall in the value of fixed capital goods due to normal wear and
tear and foreseen obsolescence. (By normal wear and tear, we mean the fall in
value due to normal use in production, foreseen obsolesce means fall in value
due to expected changes in technology, market demand, government policy etc.

Note:- If the value of an assets falls due to unforeseen obsolescence or

due to natural calamities like floods, earthquakes etc. or due to the etc. It
is called capital loss and not depreciation.
• The other names are Consumption of Fixed Capital, Replacement
Investment, and Capital Consumption Allowances etc.
• It is calculated annually
• It is pre-determined. Hence it is always positive
• It is calculated by:
 Net Investment:
It is the addition to capital stock in an economy during a year excluding
depreciation.
Net Investment = Gross Investment – Depreciation
Example:
Suppose a company has 5 machines and 20% of each machine is depreciated
annually. This year the company has purchased another 3 machines. So the
Gross Investment is 3 machines. But actually 1 machine is meant for replacing
the existing machines. Hence net investment is 2 machines.
Difference between consumption of fixed capital and Capital loss:-
1. Depreciation refers to the fall in the value of fixed assets due to normal wear
and tear, and expected obsolescence whereas capital loss refers to loss in
value of fixed assets due to unforeseen obsolescence.
2. Provision is made for depreciation whereas no provision is made for capital
loss.
3. Depreciation does not obstruct the production process whereas
production process stops in the event of capital loss
Domestic Territory of a country
Economic or Domestic territory is that geographic territory administered by a
government within which persons, goods and capital circulate freely.
It includes the following:

1. Political frontiers including territorial waters (12 Nautical miles) and

airspace.
2. Ships, aircrafts etc., operated by the residents between two or more
countries
3. Fishing vessels, oil and natural gas rigs etc., operated by residents in
the international water or other areas over which country enjoys
exclusive rights or jurisdiction.
4. Embassies, consulates and military establishments of country located
abroad. But excluding the foreign ones located within its political frontiers.

For examples:- The Indian embassy in the USA is part of the domestic
territory of India but the embassy of USA in India is a part of the domestic
territory of USA.
Implication
National income and related aggregates are basically measures of production
activity. There are two categories of National income aggregates: - Domestic
and National. Production activity of the [productions units located within the
economics territory is domestic product.

Normal Resident
A Normal Resident is defined as follows:-

“A resident, whether a person or an institution, is one whose centre of

economic interest lies in the economic territory of the country in which he
lives.’

The center of economic interest implies two things: -

a) The resident lives or located within the economic territory for more than
one year and
b) The resident carries out the basic economic activities of earnings, spending
and accumulation from that location
Implication
Production activity of the residents of an economic territory is National
product. National product includes production activities of residents
irrespective of whether performed within the economic territory or outside it.

Domestic Income / Product National Income / Product

Domestic Income / Product Domestic Income / Product

Income earned in domestic Income earned by Normal

territory residents

Does not matter who earned Does not matter where earned
that means by normal resident that means in domestic or in
or non resident abroad

Citizenship and Residentship

Citizenship 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.

On the other hand Residentship is basically an economic concept based on

the basic economic activities performed by a person
Note: - It is not necessary that normal resident of a country is also a
citizen of that country.
A person may be a normal resident of one country even when he is a
citizen of the other.
For example – If an Indian is living in USA for more than one year and
his centre of interest lies in that country he would be consider as a normal
resident of USA. Even when he continues to be a citizen of India.

Difference between Normal resident and Non resident

NORMAL RESIDENT OF INDIA NON RESIDENT OF INDIA

1. India working in foreign embassies in 1. Foreigner working in Indian

India.
2. Indian employed in WHO located in
India
3. Local people working in the office of
IMF in India
4. Ambassador for India in USA
5. The foreign citizen living in
India for a period of more than one year
embassies in Canada and Japan
2. Foreigners working in WHO located
in India.
3. The German Director of the office
IMF in India.
4. USA ambassador in India
5. The foreign technical experts
working in India for a period of less
than one year.

Thankyou
Mr. Parmod Goyal