National Income Accounting NCERT Textbook PDF

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National Income Accounting

Chapter 2: National Income Accounting

One of the pioneers of the subject we call economics today, Adam Smith, named his most influential work – An Enquiry into the Nature and Cause of the Wealth of Nations.

What generates the economic wealth of a nation? What makes countries rich or poor?
These are some of the central questions of economics.

It is not that countries that are endowed with a bounty of natural wealth – minerals or forests or the most fertile lands – are naturally the richest countries.

In fact, the resource-rich Africa and Latin America have some of the poorest countries in the world, whereas many prosperous countries have scarcely any natural wealth.

There was a time when possession of natural resources was the most important consideration but even then the resource had to be transformed through a production process.

The economic wealth, or well-being, of a country, this does not necessarily depend on the mere possession of resources; the point is how these resources are used in generating a flow of production and how, as a consequence, income and wealth are generated from that process.

Let us now dwell upon this flow of production. How does this flow of production arise? People combine their energies with the natural and manmade environments within a certain social and
technological structure to generate a flow of production.

In our modern economic setting, this flow of production arises out of the production of commodities – goods and services by millions of enterprises large and small.

These enterprises range from giant corporations employing a large number of people to single entrepreneur enterprises. But what happens to these commodities after being produced?

Each producer of commodities intends to sell its output. So from the smallest items like pins or buttons to the largest ones like airplanes, automobiles, giant machinery, or any saleable service like that of the doctor, the lawyer or the financial consultant–the goods and services produced are to be sold to the consumers.

The consumer may, in turn, be an individual or an enterprise and the good or service purchased by that entity might be for final use or for use in further production.

When it is used in further production it often loses its characteristic as that specific good and is transformed through a productive process into another good.

Thus a farmer producing cotton sells it to a spinning mill where the raw cotton undergoes transformation to yarn; the yarn is, in turn, sold to a textile mill where, through the production process, it is transformed into cloth; the cloth is, in turn, transformed through another productive process into an article of clothing which is then ready to be sold finally to the consumers
for final use.

Such an item that is meant for final use and will not pass through any more stages of production or transformations is called a final good.

Why do we call this a final good? Because once it has been sold it passes out of the active economic flow.

It will not undergo any further transformation at the hands of any producer. It may, however, undergo transformation by the action of the ultimate purchaser.

In fact, many such final goods are transformed during their consumption. Thus the tea leaves purchased by the consumer are not consumed in that form – they are used to make drinkable tea, which is consumed.

Similarly, most of the items that enter our kitchen are transformed through the process of cooking.

But cooking at home is not an economic activity, even though the product involved undergoes a transformation.

Home-cooked food is not sold on the market. However, if the same cooking or tea brewing was done in a restaurant where the cooked product would be sold to customers, then the same items, such as tea leaves, would cease to be final goods and would be counted as inputs to which economic value addition can take place.

Thus it is not in the nature of the good but in the economic nature of its use that a good becomes a final good.

Language English
No. of Pages25
PDF Size4.1 MB

NCERT Solutions Class 12 Economics Chapter 2 National Income Accounting

1. What are the four factors of production and what are the remunerations for each of these called?

Land, Labour, Capital, and Entrepreneurship are the four factors of production.

i) land is a natural resource and the primary factor of production. Land rent is the remuneration paid for the use of land.

ii) Labour is the physical or mental work done by an employee that is required for production. The remuneration for labor is paid through wages or salary.

iii) Capital is the wealth or monetary investment that is essential for production. Capital can also mean assisting tools, machinery and other means of production. The remuneration for capital is called interest.

iv) Entrepreneurship refers to the task of the individual who brings all the factors of production together and manages them. The remuneration or reward of the entrepreneur is the profit that is gained after the product is sold.

 2. Why should the aggregate final expenditure of an economy be equal to the aggregate factor payments? Explain. 

The final aggregate expenditure of an economy is the sum of all the spending in the economy. In economics, factor payment denotes the wage, interest, rent, and other payments done as a remuneration for the factors of production.

The income earned is either spent on goods on services or saved. But, all savings can be counted as investments for future expenditure. Therefore, the aggregate final expenditure of an economy should be equal to aggregate factor payments.

3. Distinguish between stock and flow. Between net investment and capital which is a stock and which is a flow? Compare net investment and capital with the flow of water into a tank. 

The difference between stock and flow are as follows

Stocks are defined at a point in timeFlows are defined over a period of time
Stocks are a static conceptFlows are a dynamic concept
It does not have a time dimensionIt has a time dimension
Examples: Wealth, Money supply, etc.Examples: National Income, Investments, etc.

The difference between net investment and capital is explained below

Capital Net Investment
Capital is tied to liquidityInvestment is tied to equity
Capital is a stock variableNet Investment is a flow variable
Capital is on the liabilities side of the balance sheetInvestment is on the assets side of the balance sheet

Since it is measured over a period of time, the flow of water in a tank can be compared to net investment. The stock of water in a tank is measured at a point in time and can be compared to capital.

NCERT Class 12 Economics Textbook Chapter 2 National Income Accounting With Answer PDF Free Download

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