National Income – Macroeconomics Lecture

Vocabulary flashcards covering definitions and core terms related to National Income, its measurement methods, key aggregates, distinctions, challenges, and significance.

National Income

Total monetary value of all final goods and services produced by a country’s residents in one year; equals aggregate factor income.

Final Goods and Services

Products ready for consumption or investment that avoid double-counting in national income accounting.

Flow Concept

Economic variable measured over a period of time (e.g., national income per year), unlike a stock concept such as wealth.

Gross Domestic Product (GDP)

Market value of all final goods and services produced within a country’s geographic borders during a given year.

GDP – Expenditure Formula

GDP = C (Consumption) + I (Investment) + G (Government Expenditure) + (X − M) (Net Exports).

Consumption (C)

Household final consumption expenditure on durable, non-durable goods and services.

Investment (I)

Gross private domestic investment in machinery, buildings, inventories, etc.

Government Expenditure (G)

Government final consumption expenditure and investment on public goods and services.

Net Exports (X − M)

Exports of goods and services minus imports; can be positive or negative.

Gross National Product (GNP)

Market value of all final goods and services produced by a country’s residents, no matter where they are located.

Net Factor Income from Abroad (NFIA)

Income residents earn from abroad minus income paid to foreign residents domestically.

Net National Product (NNP)

GNP minus depreciation; measures net addition to a nation’s wealth.

Depreciation (Consumption of Fixed Capital)

Allowance for wear and tear or obsolescence of capital goods during production.

National Income (NI) / NNP at Factor Cost

Sum of all factor incomes earned by residents; equal to NNP at market price minus indirect taxes plus subsidies.

Personal Income (PI)

Total money income received by individuals/households before direct taxes; includes transfer payments.

Disposable Income (DI)

Personal income remaining after payment of direct taxes; available for consumption and saving.

Per Capita Income (PCI)

National income divided by total population; proxy for average living standard.

Product (Value Added) Method

National income calculation by summing gross value added of all sectors to obtain GDP at market price.

Gross Value Added (GVA)

Value of output minus intermediate consumption at each production stage.

Income Method

Calculates national income by summing factor incomes: compensation of employees, operating surplus, mixed income of self-employed.

Compensation of Employees (CoE)

Wages, salaries (cash & in-kind) plus employers’ social security contributions.

Operating Surplus (OS)

Income from property and entrepreneurship: rent, interest, profit.

Mixed Income of Self-Employed (MIE)

Income of self-employed where labor and capital earnings are inseparable.

Expenditure Method

Computes GDP by summing final expenditures: C + G + I + (X − M).

Gross Domestic Capital Formation (GDCF)

Total investment expenditure, including fixed capital formation and change in inventories.

Gross Fixed Capital Formation

Purchases of new machinery, buildings, and other fixed assets.

Change in Stocks (Inventories)

Variation in firms’ inventories of finished goods, work-in-progress, and raw materials.

Market Price (MP)

Price at which goods/services are sold; includes indirect taxes and excludes subsidies.

Factor Cost (FC)

Cost of factors of production; equals market price minus net indirect taxes.

Net Indirect Taxes

Indirect taxes less subsidies; difference between MP and FC.

Gross vs. Net

Gross measures include depreciation; net measures exclude it (Net = Gross − Depreciation).

Domestic vs. National

Domestic relates to production within borders; national relates to production by residents regardless of location.

Imputed Rent

Estimated rental value of owner-occupied housing, included in national income.

Double-Counting

Erroneously adding intermediate goods’ value; avoided by counting only final goods or value added.

Non-Monetized Transactions

Goods/services produced and consumed without market exchange (e.g., subsistence farming), typically excluded from NI.

Black Money / Underground Economy

Illegal or unreported income not captured in official national income statistics.

Transfer Payments

Income receipts not arising from current production (e.g., pensions); excluded from NI calculation.

Externalities

Uncompensated positive or negative side-effects of production/consumption not reflected in NI data.

Importance of National Income Data

Guides economic growth analysis, policy formulation, resource allocation, income distribution studies, and international comparisons.