National Income Accounting,INTRODUCTORY MACROECONOMICS Economics Notes | EduRev

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Economics : National Income Accounting,INTRODUCTORY MACROECONOMICS Economics Notes | EduRev

 Page 1


National Income Accounting 
1 
Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
 
 
Discipline Courses-I 
Semester-I 
Paper I: Principales of Economics(POE) 
Unit-III  
Lesson: National Income Accounting 
Lesson Developer: Rakhi Arora and Vaishali Kapoor 
College/Department: Rajdhani College, University of Delhi 
  
Page 2


National Income Accounting 
1 
Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
 
 
Discipline Courses-I 
Semester-I 
Paper I: Principales of Economics(POE) 
Unit-III  
Lesson: National Income Accounting 
Lesson Developer: Rakhi Arora and Vaishali Kapoor 
College/Department: Rajdhani College, University of Delhi 
  
National Income Accounting 
2 
Institute of Lifelong Learning, University of Delhi 
Table of Contents: 
1. Learning outcomes 
2. Introduction 
3. What is macroeconomics? 
4. Measurement of GDP 
a. Various concepts of National Income 
b. The Circular Flow 
c. Expenditure approach to calculate GDP 
d. Income approach to calculate GDP 
5. Real Vs Nominal GDP 
6. Price Indexes 
7. Summary 
8. Exercises 
9. Glossary 
10. References 
 
 
 
  
Page 3


National Income Accounting 
1 
Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
 
 
Discipline Courses-I 
Semester-I 
Paper I: Principales of Economics(POE) 
Unit-III  
Lesson: National Income Accounting 
Lesson Developer: Rakhi Arora and Vaishali Kapoor 
College/Department: Rajdhani College, University of Delhi 
  
National Income Accounting 
2 
Institute of Lifelong Learning, University of Delhi 
Table of Contents: 
1. Learning outcomes 
2. Introduction 
3. What is macroeconomics? 
4. Measurement of GDP 
a. Various concepts of National Income 
b. The Circular Flow 
c. Expenditure approach to calculate GDP 
d. Income approach to calculate GDP 
5. Real Vs Nominal GDP 
6. Price Indexes 
7. Summary 
8. Exercises 
9. Glossary 
10. References 
 
 
 
  
National Income Accounting 
3 
Institute of Lifelong Learning, University of Delhi 
Learning outcomes: 
After you have read this chapter, you should be able to:- 
a) Understand the various issues in an economy 
b) Define National Income 
c) List the various concepts of National Income 
d) Understand the flow of money in the economy 
e) Compute National Income through Expenditure and Income approach 
f) Differentiate between Real and Nominal GDP 
g) Acquaint with the GDP deflator and Consumer Price Index 
 
INTRODUCTION 
Newspapers, these days, are full of headlines symptomatic of the worsened conditions of 
the global economy; which suggest that policy makers and economists have been worried 
about what form the ongoing global financial crisis will take, how all economies would be 
affected and whether all economies would emerge as gainers and take the lead? One needs 
to know, how economists predict these crises & their repercussions;how economists study 
the symptoms of any disturbance in the economy and provide the cure. 
Economists & researchers keep studying every economy with the help of various economic 
variables & economic tools at hand & economic data that is widely released in various 
newspapers journals & articles –mostly produced by government.  These data /statistics are 
used to study the economy & policy makers use them to monitor the ongoing development 
processes in the economy &to formulate policies. 
 
This chapter broadly covers the macroeconomic issues and the macroeconomic 
variablesin Section one. It discusses in Section two the Gross Domestic Product, GDP, –
an indicator of the health of an economy and in Section three, it explains the meaning of 
Consumer Price Index,CPI, which represents the overall prices.  This chapter largely 
focuses on the accounting of National Income. 
Page 4


National Income Accounting 
1 
Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
 
 
Discipline Courses-I 
Semester-I 
Paper I: Principales of Economics(POE) 
Unit-III  
Lesson: National Income Accounting 
Lesson Developer: Rakhi Arora and Vaishali Kapoor 
College/Department: Rajdhani College, University of Delhi 
  
National Income Accounting 
2 
Institute of Lifelong Learning, University of Delhi 
Table of Contents: 
1. Learning outcomes 
2. Introduction 
3. What is macroeconomics? 
4. Measurement of GDP 
a. Various concepts of National Income 
b. The Circular Flow 
c. Expenditure approach to calculate GDP 
d. Income approach to calculate GDP 
5. Real Vs Nominal GDP 
6. Price Indexes 
7. Summary 
8. Exercises 
9. Glossary 
10. References 
 
 
 
  
National Income Accounting 
3 
Institute of Lifelong Learning, University of Delhi 
Learning outcomes: 
After you have read this chapter, you should be able to:- 
a) Understand the various issues in an economy 
b) Define National Income 
c) List the various concepts of National Income 
d) Understand the flow of money in the economy 
e) Compute National Income through Expenditure and Income approach 
f) Differentiate between Real and Nominal GDP 
g) Acquaint with the GDP deflator and Consumer Price Index 
 
INTRODUCTION 
Newspapers, these days, are full of headlines symptomatic of the worsened conditions of 
the global economy; which suggest that policy makers and economists have been worried 
about what form the ongoing global financial crisis will take, how all economies would be 
affected and whether all economies would emerge as gainers and take the lead? One needs 
to know, how economists predict these crises & their repercussions;how economists study 
the symptoms of any disturbance in the economy and provide the cure. 
Economists & researchers keep studying every economy with the help of various economic 
variables & economic tools at hand & economic data that is widely released in various 
newspapers journals & articles –mostly produced by government.  These data /statistics are 
used to study the economy & policy makers use them to monitor the ongoing development 
processes in the economy &to formulate policies. 
 
This chapter broadly covers the macroeconomic issues and the macroeconomic 
variablesin Section one. It discusses in Section two the Gross Domestic Product, GDP, –
an indicator of the health of an economy and in Section three, it explains the meaning of 
Consumer Price Index,CPI, which represents the overall prices.  This chapter largely 
focuses on the accounting of National Income. 
National Income Accounting 
4 
Institute of Lifelong Learning, University of Delhi 
 
WHAT IS MACROCONOMICS? 
 
Macro Economics is the study of the structure and performance of national economies and 
of the policies that government?s use to try to affect economic performance.  
The various macroeconomic issues are as follows: 
(i) Long Run Economic Growth 
This issue addresses why do some nations economies grow rapidly, providing their 
citizens with fast improving living standards, while other nation?s economies remain 
stagnant. For Instance, in 1870 per capita income was smaller in Norway then in 
Argentine, but today per capita income is three times as high in Norway as in 
Argentina. India?s GDP has been growing since 1950 as represented in figure1 and it 
has been impressive since 1990s because of the policy reforms adopted by Indian 
government. 
 
 
Figure 1: National income of India from 1950 to 2012 
Source: Statistical Outline of India 2012-13, TATA services ltd. 
*national income is calculated at factor cost with new base year of 2004-05 
 
 
(i) Business Cycle 
 
0
1000000
2000000
3000000
4000000
5000000
6000000
7000000
8000000
1950-51
1960-61
1970-71
1980-81
1990-91
2000-01
2000-02
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
National Income of India*( Rs. Cr)
National income of 
India Rs. Cr
Page 5


National Income Accounting 
1 
Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
 
 
Discipline Courses-I 
Semester-I 
Paper I: Principales of Economics(POE) 
Unit-III  
Lesson: National Income Accounting 
Lesson Developer: Rakhi Arora and Vaishali Kapoor 
College/Department: Rajdhani College, University of Delhi 
  
National Income Accounting 
2 
Institute of Lifelong Learning, University of Delhi 
Table of Contents: 
1. Learning outcomes 
2. Introduction 
3. What is macroeconomics? 
4. Measurement of GDP 
a. Various concepts of National Income 
b. The Circular Flow 
c. Expenditure approach to calculate GDP 
d. Income approach to calculate GDP 
5. Real Vs Nominal GDP 
6. Price Indexes 
7. Summary 
8. Exercises 
9. Glossary 
10. References 
 
 
 
  
National Income Accounting 
3 
Institute of Lifelong Learning, University of Delhi 
Learning outcomes: 
After you have read this chapter, you should be able to:- 
a) Understand the various issues in an economy 
b) Define National Income 
c) List the various concepts of National Income 
d) Understand the flow of money in the economy 
e) Compute National Income through Expenditure and Income approach 
f) Differentiate between Real and Nominal GDP 
g) Acquaint with the GDP deflator and Consumer Price Index 
 
INTRODUCTION 
Newspapers, these days, are full of headlines symptomatic of the worsened conditions of 
the global economy; which suggest that policy makers and economists have been worried 
about what form the ongoing global financial crisis will take, how all economies would be 
affected and whether all economies would emerge as gainers and take the lead? One needs 
to know, how economists predict these crises & their repercussions;how economists study 
the symptoms of any disturbance in the economy and provide the cure. 
Economists & researchers keep studying every economy with the help of various economic 
variables & economic tools at hand & economic data that is widely released in various 
newspapers journals & articles –mostly produced by government.  These data /statistics are 
used to study the economy & policy makers use them to monitor the ongoing development 
processes in the economy &to formulate policies. 
 
This chapter broadly covers the macroeconomic issues and the macroeconomic 
variablesin Section one. It discusses in Section two the Gross Domestic Product, GDP, –
an indicator of the health of an economy and in Section three, it explains the meaning of 
Consumer Price Index,CPI, which represents the overall prices.  This chapter largely 
focuses on the accounting of National Income. 
National Income Accounting 
4 
Institute of Lifelong Learning, University of Delhi 
 
WHAT IS MACROCONOMICS? 
 
Macro Economics is the study of the structure and performance of national economies and 
of the policies that government?s use to try to affect economic performance.  
The various macroeconomic issues are as follows: 
(i) Long Run Economic Growth 
This issue addresses why do some nations economies grow rapidly, providing their 
citizens with fast improving living standards, while other nation?s economies remain 
stagnant. For Instance, in 1870 per capita income was smaller in Norway then in 
Argentine, but today per capita income is three times as high in Norway as in 
Argentina. India?s GDP has been growing since 1950 as represented in figure1 and it 
has been impressive since 1990s because of the policy reforms adopted by Indian 
government. 
 
 
Figure 1: National income of India from 1950 to 2012 
Source: Statistical Outline of India 2012-13, TATA services ltd. 
*national income is calculated at factor cost with new base year of 2004-05 
 
 
(i) Business Cycle 
 
0
1000000
2000000
3000000
4000000
5000000
6000000
7000000
8000000
1950-51
1960-61
1970-71
1980-81
1990-91
2000-01
2000-02
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
National Income of India*( Rs. Cr)
National income of 
India Rs. Cr
National Income Accounting 
5 
Institute of Lifelong Learning, University of Delhi 
Instead of growing at an ever rate at all times, economies tend to experience 
short-term ups & downs in their performance technically described as Business 
cycle. Why do economies experience such business cycles –recession for 
instance (fall in output) in 1990 and then exhibited recovery (rise in output), the 
longest period of uninterrupted economic growth in US economic history but 
economic performance in 2000 was much weaker.  A mild recession in 2001 was 
followed by weak recovery that lasted only with December 2007. The recession 
that began at the end of 2007 was worsened by financial crisis in 2008, which 
contributed to a sharp decline in output at the end of 2008 and in early 2009. 
(ii) Unemployment  
 
The important aspect of recessions is that they are usually accompanied by an 
increase inunemployment, which is measured by the key indicator of the 
economy?s health- the unemployment rate. One needs to figure out the reason 
for high unemployment rates; sometimes even during relative prosperity times? 
 
 
(iii) Inflation   
Many efforts have been devoted by the economists to identify the costs & 
consequences of even the moderate inflation.  The key questions that need to be 
addressed are: who are Gainers & losers from inflation? What costs does inflation 
impose on society and their severity? What are the causes of inflation? What are the 
best ways to curb it? Figure 2 shows the behavior of consumer goods prices over 
time in India. They have been rising since 1950 and have doubled in the last decade 
owing to droughts, US crisis and recession. 
 
 
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