National income part 1
Final goods.....
The good is called final goods if satisfied following conditions:
1. The goods have crossed the boundary line of the production.
2. These are ready for consumption.
3. These are not used as intermediate goods.
4. These are bought by producer or consumer for their own use not for sale
notes: These goods are taken while calculating national income of the economy.
Examples:
T.V., radio, bread, machinery, car, etc.
Types of final goods......
Final goods are two types.
1) Final Consumer goods: These are those final goods which are bought by consumer for
satisfaction of human wants. Fruits, bread, TV, services of doctor and tutors are its
examples. Expenditure on final goods by the household is called consumption expenditure.
2) Final Producer goods: These are those final goods which are used by producer for further
production such as machinery, building, etc. Expenditure on final goods by the producers is
called Investment expenditure.Accordingly, expenditure on final goods = Consumption
expenditure + investment expenditure.
Intermediate goods.....
The good is called intermediate goods if satisfied following conditions:
1.
2.
3.
4.
5.
The goods which are remain within the boundary line of production.
Value is yet to be added to these goods
These are not yet ready for consumption.
These are used in the process of production as a raw material.
These are bought by producer for sale not for own use.
Note: These goods are not a part of nation income. Expenditure on the intermediate goods
by the producers during an accounting year is called Intermediate expenditure.
National income part 1
Difference between Final and Intermediate goods
1. Final goods are added while estismated national income whereas intermediates goods are
not.
2. Final goods have crossed the boundary line of production whereas intermediate goods are
within the boundary line of production.
3. Milk used by household is an example of final good whereas milk used by sweet maker is an
example of intermediate good.
Some example of final and intermediate goods:
1. Services of a teacher: Final goods because it is final used by students.
2. Television: Final good if it is bought by consumer. But, it is intermediate goods if it is bought
by T.V. dealer.
3. Raw material: intermediate goods because it helps to produce more goods.
4. Petrol: Final goods for car and scooter owner.
5. Machine purchase by dealer: Intermediate good because it is bought for sale purpose.
6. Machine purchased by manufacture: Final goods because it is used by producer.
Same good may be final or intermediate.
The same good may be final or intermediate good. The distinction depends on the end use of the
goods. End use of goods is the principle basis of classifying the goods into intermediate goods and
final goods. For example:
1. If sugar used as a raw material in the production of biscuit is an intermediate good. But the
same sugar used by the households in milk or tea is final goods.
2. Paper purchased by a student is a final good. But when paper purchased by a publisher for
making books is an intermediate good.
Consumer goods
These are those goods which are directly used for the satisfaction of human wants. For examples,
Fruits, bread, TV, services of doctor and tutors.
Types of Consumer goods: These can be divided into 4 parts:
1) Durable goods:
a) These types of goods have long life and these can be used for many years.
b) These are of higher value.
c) Repeated used can be possible such as TV, Fan, Car, Furniture, etc.
2) Semi- durable goods:
a) These goods have short life than durable goods.
National income part 1
3)
4)
a)
b)
b) Repeated use can be possible such as clothes, shoes, cell phones etc.
Non- durable goods:
a) These are those goods which are used in a single act of consumption. For example, the
bread you eat to satisfy your hunger is used in a single act of consumption.
b) Repeated used cannot be possible.
Services:
These are non-material goods which satisfied human needs.
Services of tutor, bank, doctor, etc. are its examples.
Capital goods:
These are those final goods which satisfy the following conditions:
1) These are fixed assets of the producer.
2) These are repeatedly used in the process of production for several years.
3) These are of high value.
Note: Nuts and bolts are used for several years, but these are of low value are not
considered as capital goods.
All machines are not capital goods:
It must be noted that all machines are not capital goods. Examples:
1. A sewing machine in a tailor shop is a fixed asset of the tailor; it is a capital good. But the
same machine with a consumer household is not a capital good. It is a simply durable
consumer good.
2. A car with Tourist Company is capital good. But the same car with a consumer household is a
durable consumer good.
Thus, while identifying goods as capital goods, we must make sure about its end user. If the end user
of a durable good is household –consumer than it is called consumer goods only. On the other hand,
if the end user of a durable good is a producer, it is capital goods. Capital goods are only those goods
which are used by producer in the process of production not as consumer goods.
All capital goods are produces goods, but all producer
goods are not capital goods:
Producer goods are those goods which are used by producer in the process of production. These
goods include:
1) Goods which are used as raw material like wood used to make furniture. These are not
durable goods. These are single use producer goods; these cannot be repeated used in the
process of production. Thus, goods which are used as raw material is only producer goods
not capital goods.
National income part 1
2) Goods which are used fixed assets of the producers like plant and machinery. These are
durable goods. These are repeated used in the process of production. Thus, goods which are
used fixed assets of the producer considered as capital goods.
Investment and its types..,,
Investment is a process of capital formation, or a process of increase in the capital stock.
Types of Investment:
1. Fixed investment: It refers to increase in the stock of fixed assets of the producers during an
accounting year. Example,
If at the beginning of the year 2010, a producer has stock of 5 machines and at the end of
2010, he has a stock of 7 machine, then the stock of his fixed assets increased by 2 machines
during the year 2010.
Significance of fixed investment:
2. Inventory investment: At a point of time, producers have the stock of
a) Finished goods
b) Semi-finished goods
c) Raw material
Sum total of finished goods, semi-finished goods and raw material is known as inventory
stock. Change in inventory stock during the year is called inventory investment of the
producers.
Gross investment, net investment, and the concept of
depreciation.
National income part 1
1. Expenditure on the purchase of fixed assets and on inventory stock during the year is called
gross investment.
2. Gross investment also includes expenditure on the purchase of new assets in place of the
worn- out assets. Of course, fixed assets are repeatedly used for several years. But they have
their lifetime of use. After these assets worn- out (or when they become outdated/ obsolete
or are accidentally damaged), they need to replaced.
3. Replacement of fixed assets, owing to their depreciation, is a part of gross investment. But
the amount of depreciation is not the part of net investment. Thus gross investment less
depreciation = net investment.
Concept of depreciation: (also known as consumption of fixed assets):
While fixed assets are in use, they go down in value due to:
1. Normal wear and tear
2. Accidental damages
3. When they become obsolete or outdated due to change in technology.
This loss of value of fixed assets is known as ‘depreciation’. Depreciation is called
consumption of fixed assets as consume in the process of production. Owing to their
depreciation, fixed assets need to be replaced after some time. Replacement of fixed
assets requires a provision for fund. Generally, this provision is estimated on annual
basis. For example, if a machine is purchased for Rs.10,000,00 and its expected lifetime
of use is 10 years, then the annual provision for funds (to replace the machine after 10
years) is 10,000. This is called Depreciation Reserve Fund.
National income part 1
Expected obsolescence:
It has two components:
1) Loss of value of fixed assets when these become outdated owing to change in
technology. For example, a plant producing black and white TVs become obsolete
when technology is discovered to produce colour TVs.
2) Loss of value of fixed assets when these become outdated owing to change in
demand. For example, a plant producing rubber shoes becomes obsolete when
demand shift from rubber to leather shoes.
The producers make a provision for expected obsolescence on the basis of their
knowledge and experience of the market conditions.
Unexpected obsolescence:
It occurs owing to:
1) Natural calamities like earthquake, floods or fire.
2) Fall in market value of the assets when there is economic recession.
Loss of value of fixed assets owing to unexpected obsolescence is called ‘Capital loss’
.these losses are not the part of depreciation or depreciation reserve fund.
Stock variable.......
A stock is a quantity, measured at a particular point of time. Examples,
1.
2.
3.
4.
5.
6.
7.
8.
Income and investment
Population of a country
100 Rs. Note
Machinery of sugar industry
Foreign reserves with RBI.
Money supply
Water in a tank
Deposit in saving account
Flow variable.....
A flow is a quantity measured at a particular period of time. Examples,
1.
2.
3.
4.
5.
Income of the household
Consumption expenditure
Number of birth
Production
Export.
National income part 1
Different between stock and flow variable....