Page 22 - DECO402_Macro Economics

Unit-2: National Income : Concept of National Income

income level is high also. Just its contrary, in under developed countries production level is low also. Notes
In the form of economic transition, development process means rising from “under developedness
to developedness.” In national income’s level being sustained rise or finding in the long period of
time in the production level of economy sustained rise. A nation’s national income at different time
related data is the indicator of their growth. Different countries such a group of data is helpful in
international comparison of economic growth.

 Why it is important to compute depreciation?
Due to use of, the value of permanent capital will occurred loss is called depreciation. It is called the
consumption of fixed capital. At whole economy level it is called current replacement cost also.
In depreciation following three type of expenses are included---
(i) Normal Wear and Tear: Its means from those expensed that is to do for the continuing
use of fixed capital (as a machinery).
(ii) Obsolescence: Its means from those expenditures that producer is to do become old of
capital intensive machine (due to changing in technique or demand). Changing in technique
or demand obsolescence is called expected obsolescence. This expected obsolescence is
different from natural calamities as a flood, fire etc. Keep in mind that only expected
obsolescence is included in depreciation computation.
(iii) Sudden Damage: It means sudden out of order of machinery and plant.
(iv) To fake these three types of depreciation a producer is to establish Depreciation Reserve
Fund. It is necessary for replacement of depreciated capital otherwise in his production
capacity (in the form of his fixed capital) will found decreasing tendency. At national
level if not pay attention on current replacement then country’s production capacity will
be decreased and its means fall of flow of goods and services. Calculating of replacement
cost we keep in mind only present production capacity (or capital stock). Depreciated
capital stock’s again replacement related expenses is called investment expenditure of
replacement investment.
Replacement investment is doing for only depreciation related damages, by that means there is no
increment in capital stock of a country. Whom besides replacement investment, more investment
does then rises in capital stock (or production potentialities) of nation and then it is called net
investment (net investment = gross investment - depreciation).
By calculation of depreciation we explain following:
(i) Importance of replacement cost
(ii) Difference between gross and net investment
(iii) Net investment’s (extra investment besides replacement cost) capital stock (or nation’s
production capacity) rise related importance.

Key Points

y Gross Domestic Product: An economy’s under domestic border, produced final goods and
services flows measurement is called gross domestic product. In this deprecation is included
also.

y Value Addition: Changing of input into production is called value addition.
y Final Goods: Final goods are called those goods which is crossed production’s line and ready
for final consumer.

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