CA Inter Economics Summary Notes by CA Nitin Guru PDF

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Chapter-1, Unit-I: National Income Accounting

By: CA Nitin Guru

CHAPTER 1: UNIT-I: NATIONAL INCOME ACCOUNTING Question 1: Define National Income. Answer: 

National Income is defined as the net value of 

all economic goods and services produced



within the domestic territory of a country



in an Accounting Year



plus the Net Factor Income from Abroad (NFYA).

Question 2: Explain the usefulness and significance of National Income estimates. Answer: National income accounts are extremely useful, for following:

(i)

Evaluating the Short-Run Performance: 

Provide a comprehensive, conceptual and accounting framework for analyzing and evaluating the



The level of national income indicates the level of economic activity and economic development.

short-run performance of an economy.

(ii)

Determines Present and Future Demand: 

The distribution pattern of National Income determines the pattern of demand for goods and



Enables businesses to forecast the future demand for their products.

services, and

(iii)

Measure of Economic Welfare 

Economic welfare demand on the magnitude and distribution of national income, size of per capita income and the growth of these over time.

(iv)

International Comparisons: 

(v)

International comparisons in respect of incomes and living standards assist in determining eligibility for loans, and/or other funds or conditions on which such loans, and/or funds are made available.

Economic Forecasting: 

National income or a relevant component of it is an indispensable variable considered in economic forecasting and to make projections about the future development trends of the economy.

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Chapter-1, Unit-I: National Income Accounting

By: CA Nitin Guru

Question 3: What is UN System of National Accounts (SNA)? Answer: UN System of National Accounts (SNA) developed by United Nations to provide a comprehensive conceptual and accounting framework for compiling and reporting macroeconomic statistics for analyzing and evaluating the performance of an economy. Question 4: Explain three sides of NIA. Answer: National income accounts have three sides: a product side, an expenditure side and an income side:

(i)

Product Side:

(ii)

Expenditure Side:

(iii)

Income Side:

National income is the sum total of all the incomes accruing over a specified period to the residents of a country and consists of wages, salaries, profits, rent and interest. Question 5: Explain the Gross Domestic Product (GDPMP). Answer: 

Gross domestic product (GDP) is a measure of the market value of all final economic goods and services, gross of depreciation, produced within the domestic territory of a country during a given time period.



It is the sum total of ‘value added’ by all producing units in the domestic territory and includes



The term ‘gross’ implies that GDP is measured ‘gross’ of depreciation.

value added by current production by foreign residents or foreign-owned firms. 

‘Domestic’ means domestic territory or resident production units.



GDP excludes transfer payments, financial transactions and non- reported output generated through illegal transactions such as narcotics and gambling (these are also known as ‘bads’ as opposed to goods which GDP accounts for). GDPMP = Value of Output in the Domestic Territory – Value of International Consumption GDPMP = Σ Value Added

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Chapter-1, Unit-I: National Income Accounting



Important Points:

(i)

Only Final Goods and Services:

(ii)

Intermediate Consumption: 

(iii)

By: CA Nitin Guru

Intermediate goods used to produce other goods rather than being sold to final purchasers are not counted as it would involve double counting.

Economic Activities: 

(iv)

Economic Activities and Non-Economic Activities include all human activities which create goods and services that are exchanged in a market and valued at market price.

‘Flow’ Concept: 

(v)

National income is a ‘flow’ measure of output per time period—for example, per year—and includes only those goods and services produced in the current period.

Inventory Investment:  

The net change in inventories of final goods awaiting sale or of materials used in the production which may be positive or negative. Additions to inventory stocks of final goods and materials belong to GDP because they are currently produced output.

Question 6: Explain Nominal GDP v/s Real GDP, i.e. GDP at current and constant prices.

Question 7: Explain Gross National Product (GNP). Answer: 

Gross National Product (GNP) is a measure of the market value of all final economic goods and services, gross of depreciation, produced within the domestic territory of a country by normal residents during an accounting year including net factor incomes from abroad.



Gross National Product (GNP) is evaluated at market prices.

GNPMP = GDPMP + Net Factor Income from Abroad

GDPMP = GNPMP – Net Factor Income from Abroad

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Chapter-1, Unit-I: National Income Accounting



By: CA Nitin Guru

Note: NFIA is the difference between the aggregate amount that a country's citizens and companies earn abroad, and the aggregate amount that foreign citizens and overseas companies earn in that country.



If Net Factor Income from Abroad is positive, then GNPMP would be greater than GDPMP.

National = Domestic + Net Factor Income from Abroad

Question 8: Explain Net Domestic Product at market prices (NDPMP). Answer: Net domestic product at market prices (NDP MP) is a measure of the market value of all final economic goods and services, produced within the domestic territory of a country by its normal residents and non residents during an accounting year less depreciation.

NDPMP = GDPMP –Depreciation NDPMP = NNPMP – Net Factor Income from Abroad

Gross = Net + Depreciation OR Net = Gross – Depreciation

Question 9: Explain Net National Product at Market Prices (NNPMP). Answer: Net National Product at Market Prices (NNP MP) is a measure of the market value of all final economic goods and services, produced by normal residents within the domestic territory of a country including Net Factor Income from Abroad during an accounting year excluding depreciation.

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Chapter-1, Unit-I: National Income Accounting

By: CA Nitin Guru

NNPMP = GNPMP – Depreciation NNPMP = NDPMP + Net Factor Income from Abroad NNPMP = GDPMP + Net Factor Income from Abroad – Depreciation

Question 10: Explain Gross Domestic Product at Factor Cost (GDPFC). Question 11: Explain Net Indirect Tax. Answer: 

Indirect Taxes - Subsidy

Market Price = Factor Cost + Net Indirect Taxes = Factor Cost + Indirect Taxes – Subsidies

Factor Cost = Market Price – Net Indirect Taxes = Market Price – Indirect Taxes + Subsidies

Question 12: Explain Net Domestic Product at Factor Cost (NDPFC).

Question 13: Explain Net National Product at Factor Cost (NNPFC) or National Income. Question 14: Explain Per Capita Income.

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Chapter-1, Unit-I: National Income Accounting

By: CA Nitin Guru

Answer: 

The GDP per capita is a measure of a country's economic output per person.



It is obtained by dividing the country’s gross domestic product, adjusted by inflation, by the total population. It serves as an indicator of the standard of living of a country.

Question 15: Explain Measurement of National Income in India. Answer: 

National Accounts Statistics (NAS) in India are compiled by National Accounts Division in the Central



Annual as well as quarterly estimates are published.



As per the mandate of the Fiscal Responsibility and Budget Management Act 2003, the Ministry of



Now, the base year has revised from 2004-05 to 2011-12.

Statistics Office, Ministry of Statistics and Programme Implementation.

Finance uses the GDP numbers (at current prices) to determine the fiscal targets.

Question 16: Explain the Value Added Method, Income Method , Expenditure Method. Question 17: Explain the system of regional accounts in India. Answer: The system is as explained below: 

Regional accounts provide an integrated database on the innumerable transactions taking place in the



All the states and union territories of India compute state income estimates and district level

regional economy and help decision making at the regional level. estimates. State income or Net State Domestic Product (NSDP) is a measure n monetary terms of the volume of all goods and services produced in the state within a given period of time. 

Per Capital State Income is obtained by dividing the NSDP (State Income) by the midyear projected



The state level estimates are prepared by the State Income Units of the respective State

population of the state. Directorates of Economics and Statistics (DESs). Question 18: What are Supra-regional sectors?

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Chapter-1, Unit-I: National Income Accounting

By: CA Nitin Guru

Answer: The Supra-regional sectors are explained as below: 

Certain activities such as railways, communications, banking and insurance and central government administration, that cut across state boundaries, and thus their economic contribution cannot be assigned to any one state directly and are known as the 'Supra-regional sectors' of the economy.



The estimates for these supra regional activities are compiled for the economy as a whole and allocated to the states on the basis of relevant indicators.

Question 19: Explain the limitations and challenges of National Income computation. Answer: The limitations are explained as below: GDP measures ignores the following a) Inadequate measure of welfare - Countries may have significantly different income distributions and, consequently, different levels of overall well-being for the same level of per capital income. b) Ignores Qualitative data - Quality improvements in systems and processes due to technological as well as managerial innovations which reflect true growth in output from year to year. c) Doesn't count hidden transactions - Productions hidden from government authorities, either because those engaged in it are evading taxes or because it is illegal (drugs, gambling etc). d) Doesn't count non - market production - Nonmarket production and Non-economic contributors to well-being for example: health of a country’s citizens, education levels, political participation, or other social and political factors that may significantly affect well-being levels are ignored. e) Economic bads are not accounted for - Economic ’bads’ for example: crime, pollution, traffic congestion etc which make us worse off are not considered in GDP. f) Volunteer work excluded - The volunteer work and services rendered without remuneration undertaken in the economy, even though such work can contribute to social well-being as much as paid work. g) Things that contribute to economic welfare - Many things that contribute to our economic welfare such as, leisure time, fairness, gender equality, security of community feeling etc., h) Better off or preventing worse off 

The distinction between production that makes us better off and production that only prevents us



Increased expenditure on police due to increase in crimes may increase GDP but these expenses only



No reflection is made in national income of the negative impacts of higher crime rates.

from becoming worse off, for e.g. defense expenditures such as on police protection. prevent us from becoming worse off.

Question 20: What is meant by Domestic Territory?

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Chapter-1, Unit-I: National Income Accounting

By: CA Nitin Guru

Answer: In layman's language, domestic territory means the political frontiers of a country. In addition to political frontiers, domestic territory also includes: 1. Ships and aircrafts owned and operated by normal residents between two or more countries. 2. Fishing vessels, oil and natural gas rigs and floating platforms operated by the residents of a country in the international waters where they have exclusive rights of operation. 3. Embassies, consulates and military establishments of a country located abroad. Domestic territory doesn't include 1. Embassies, consulates and military establishments of a foreign country. 2. International organizations like UNO, WHO, etc. located within geographical boundaries of a country.

Question 21: Differentiate between : 1. Factor Income and Transfer Income. 2. Final Goods and Intermediate Goods 3. Consumption Goods and Capital Goods 4. Domestic Income (NDPFC) and National Income (NNPFC) 5. Depreciation and capital loss 6. Personal Income and Private Income 7. Personal Income and National Income Answer: Factor Income and Transfer Income Basis

Factor

Transfer Income

Meaning

It refers to income received by factors of production for rendering factor services in the production process. It is included in both National Income and Domestic Income.

It refers to income received without rendering any productive service in return.

It is an earning concept.

It is a receipt concept.

Nature Concept

It is neither included in National Income nor in Domestic Income.

Final Goods and Intermediate Goods Basis

Final Goods

Intermediate Goods

Meaning

Final goods refer to those goods which are used either for consumption or for investment.

Intermediate goods refer to those goods which are used either for resale or for further production in the same year.

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Chapter-1, Unit-I: National Income Accounting

By: CA Nitin Guru

Nature

They are included in both national and domestic income.

Value addition

They are ready for use by their final users i.e. no value has to be added to the final goods They have crossed the production boundary.

They are neither included in national income nor in domestic income. They are not ready for use, i.e. some value has to be added to the intermediate goods. They are still within the production boundary.

Milk purchased by households for consumption, car purchased as an investment.

Milk used in dairy shop for resale, coal used in factory for further production.

Production boundary Example

Consumption Goods and Capital Goods Basis Satisfaction human wants

of

Production capacity Expected life

Consumption Goods These goods satisfy human wants directly. So, such goods have direct demand. They do not promote production capacity.

Capital Goods Such goods satisfy human wanted indirectly. So, such goods have derived demand. They help in raising production capacity.

Most of the consumption goods (except durable goods) have limited expected life.

Capital goods generally have an expected life of more than one year.

Domestic Income and National Income Basis Nature of concept

Category Producers

of

NFIA

Domestic Income It is a territorial concept as it includes the value of final goods and services produced within domestic territory of a country. It considers all producers within the domestic territory of the country.

National Income It is a national concept as it includes the value of final goods and services produced in the entire world. It considers all producers who are normal residents of the country.

It does not include NFIA

It includes NFIA

Depreciation and Capital Loss Basis Meaning

Provision for loss

Production process

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Depreciation It refers to fall in the value of fixed assets due to normal wear and tear, passage of time or expected obsolescence. Provision is made for replacement of assets as it is an expected loss.

Capital Loss It refers to loss in value of the fixed assets due to unforeseen obsolescence, natural calamities, thefts, accidents, etc. No such provision is made in case of capital loss as it is an unexpected loss.

It does not hamper the production process.

It hampers the production process.

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Chapter-1, Unit-I: National Income Accounting

By: CA Nitin Guru

Personal Income and Private Income Basis Meaning

Concept Formula

Personal Income It refers to income actually received by households from all sources. It is a narrower concept as it is a part of private income.

Private Income It refers to the income which accrues to private sector from all sources. It is a broader concept as it includes personal income.

Personal Income = Private income Corporate tax - Retained earnings

Private income = Personal income + Corporate tax + Retained earnings

Personal Income and National Income Basis Meaning

Personal Income It is the sum total of all incomes that are actually received by households from all the sources.

Private Income

Nature of Income

It includes both factor incomes as well as transfer incomes.

It includes only the factor incomes.

Public sector income

It does not include income earned by public sector.

It includes income earned by public sector.

Domestic Income (NDPFC)

Income from Domestic Product accruing to Private Sector

Question 22:

Income from Domestic Product accruing to Public Sector

Income from Property and Entrepreneurship accruing to Government Administrative Departments

Savings of Non-Departmental Enterprises

What does private income refer to? Answer: Private income refers to the income which accrues to private sector from all the sources within and outside the country.

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Chapter-1, Unit-I: National Income Accounting

By: CA Nitin Guru

Private Income includes:

Factor Income earned:

within Domestic territory

Income from Domestic product accruing to private sector (a)

T...