Page 32 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 2: National Income

Self Assessment Notes

State whether the following statements are true or false:
9. The final product method of national income calculation includes values of only final
goods and services.
10. The value added method gives us the Net Domestic Product at market prices.
11. NDP = NNP – Net Factor Income from Abroad.
FC FC
12. The proceeds from sale of a second hand car will be included in the national income.
13. Expenditures incurred by the firms are termed as investment expenditures.

2.4 Problems in Measuring National Income

The problems in measurement of national income are:
National income measures domestic economic performance and not social welfare. For
real economic growth, there should be strong positive correlation between the two.
National Income understates social welfare-non-market transactions like home-makers
service and do-it-yourself projects are not counted.
National Income does not measure an increase in leisure or work satisfaction or changes
in product quality.
National Income does not accurately reflect changes in environment like oil spills cleanup
is measured as positive output but increased in pollution is not measured as negative.

Per capital income is a more meaningful measure of living standards than total national
income.

There is a problem of double counting. However, problem of double counting could be
avoided by utilizing the value added approach.

Example: The wheat that is used to make bread is an "intermediate good". The value of
the bread only is counted as part of GNP and we do not count the value of wheat sold to the
miller and the value of flour sold to the baker.
Problems of depreciation estimation as there are different methods of calculating or
estimating depreciation.
Inclusion or exclusion of certain items in national income accounting can cause confusion:
Imputed rent of owner occupied houses is also included in calculation of national
income.
Imputed value of goods and services produced for self consumption are included.
Sale and purchase of second hand goods are excluded.

Imputed rent of owner occupied houses and production for self-consumption are
included.
Incomes from illegal activities are not included.

Direct taxes such as Income tax are paid by employees from their salaries are included.

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