Economics Ch.3 Class 12th (National Income and Related Aggregates)

Ch.3 (National Income and Related Aggregates)

National Income:-

It is the sum total of Factor Income accruing to Normal Resident of a Country. It does not account for transfer Incomes.

1.) Factor Income - Factor Income are the Payments made by the Producing Units to the Households for the use of their factor Services.It includes Compensation of Employees,Rent,Interest etc.

2.) Transfer Incomes - Transfer Incomes are Unearned Income. because it is Received by a Person as help , Donation , Charity etc. So due to this reason it is not included in the estimation of National Income.

✱ Normal Residents of a Country : These are the Persons who Normally reside in the Country and whose Center Interest Lies in the Country concerned.

✱Domestic Income - It is the Sum total of Factor Incomes generated within the Domestic territory of a Country*. And no matter it is the income Generated by a Resident or non Resident of the Country.

*Domestic Territory of a Country - It is economic territory of the country in which economic activities of the country generate its domestic income. 

Nominal and Real GDP:

Nominal GDP - 

✴️ It is the Market value of the Final Goods and Services produced with in the Domestic territory of a Country during an accounting year,But it is estimated using the Current year Price.

✴️ It is also known as GDP at Current Price.

✴️ It can increase when Price level rises even when there is no increase in the Flow of Goods and Services in the Economy.

✴️ It is not a good measure of welfare of people.

Real GDP -

✴️  It is the Market value of the Final Goods and Services produced with in the Domestic territory of a Country during an accounting year,But it is estimated using the Base year Price. 

✴️  It is also known as GDP at Constant Price.

✴️ It can increase when the Flow of Goods and Services increase in the Economy.

✴️ It is a good measure of welfare of people.

Limitations of GDP and Welfare :-

1.Distribution of Income :-

It is possible that with a rise in GDP , distribution of income may also increased i.e , the gap b/w the rich and poor increases . It means that the rise in GDP may be concentrated in the hands of very few individuals or firms . For the rest , the income may in fact have fallen . In such a case the welfare of the entire country cannot be said to have increased.

Who are better off , then surely GDP is not a good index.

2.Non - Monetary Exchanges :-

 Many activities an economy are not evaluated is monetary terms . The exchanges which take place in the informal sector without the help of money are called barter exchanges. 

a) In better exchanges , goods or services are directly exchanged against each other . But since money is not being used here , these exchanges are not registered as a part of economic activity.

b)In developing countries , where many remote regions are underdeveloped , these kinds of exchange do take place but they are not counted in the GDP's of these countries . This is case of underestimation of GDP.

c)Hence , GDP calculated in the standard , manner may not give us a clear indication of the productive activity and well-being of a country . Therefore it remains an inappropriate index of welfare.

3.Externalities :-

Externalities refer to good and bad impact of an economic activity without paying the price or penalty for that.

There are both positive or negative externalities.

a) Positive Externalities - These externalities which have positive impact on social welfare.

b) Negative Externalities - Those externalities which have negative impact on social welfare.

For Ex.Smoke emitted by factories causes air , pollution or industrial waste is driven into rivers causing water pollution . This may cause harm to the people who use the water of the river . Hence their well being may fall . Pollution may also kill fish of the river.

As a result , the fishermen of the river may be losing their livelihood.

GDP fails to account for the impact of positive and negative externaliities on social welfare . Hence it is an inappropriate index of welfare.

4.Composition of GDP :-

 Composition of GDP may not be welfare oriented .

For Ex.Increase in the production of defence goods does not lead to any direct increase in the welfare of the public . Strong defense offers a peaceful environment in the country , But it contribute to social welfare only.

Whereas if there is increase in the production of agriculture products or if there is an increases in industrial production it leads to social welfare.