Category: Commerce Notes PPT

The long-run cost curve is also referred to as the marginal cost of the plant. It compares the total cost of a plant with its output size. It is the slope of the long-run cost curve. If the long-run cost curve is plotted on the x-axis and the size of the plant on the y-axis, the slope will show the long-run cost of the plant. In the long-run cost curve, we see that for every increase in the output size, the long-run cost of the plant increases. It follows that the long-run cost curve for a plant is in fact the average cost of the plant and the rate of return.

Cobb-Douglas Production Function

The Cobb-Douglas Production Function is a production function that can be used to explain the production, consumption and income of an economy. The Cobb-Douglas production function is described below:

Where: Cobb-Douglas Production Function is given by

Y = A * Lᵝ * Kᵅ

where K is a constant, L is the level of output (the amount of goods that the economy produces per hour of labour) and P is the output price (the rate of output that the economy receives per hour of labour). K is the constant of the production function and L and P are the variables to the production function. P is the variable in the production function. It is a price that is paid for output.

The long-run cost curve can also be considered as the average cost curve. This is since the long-run cost is the price of output. This is the average price that the firms will pay to the firm and the rate of return. It is the long-run cost curve that is also referred to as the average cost curve.

Marginal Cost Curves

Marginal cost curves are part of the microeconomics sub-discipline and deal with costs related to production. This cost curve measures the price the firm will charge for a certain product or service. The following image shows an example of a marginal cost curve.

The following graph shows an example of a marginal cost curve for a firm in manufacturing. This graph shows the cost of producing each unit of output. This graph is also called the cost-volume or production-volume curve. The horizontal axis shows the volume of output produced, and the vertical axis shows the unit cost of producing this quantity. The solid line indicates the marginal cost of producing an additional quantity of output. The marginal cost curve is useful for determining how much profit the firm will earn at each point along the production curve.

Price-Volume Relationship

Price-volume graphs are important for understanding how the firm’s profit is related to how much they make. A firm’s production and price are related by the following equation,

In the equation above, the price is given by the vertical axis and the volume is given by the horizontal axis. In this equation, P is the price per unit and K is the quantity produced. This equation can be restated as

P = K/V

Where,

P = the price per unit

K = the quantity produced per unit

V = the volume produced per unit

Marginal Cost Curve

The marginal cost curve can be thought of as a cost-volume graph. It is possible to plot all of the different costs associated with a product and add them together. To do this, we can rewrite our above equation as

A producer’s marginal cost is determined by the intersection of its cost curve with its supply curve. The intersection between a supply and a demand curve is called a Nash equilibrium.

Marginal Cost and Price Margin

A producer’s cost curve shifts from left to right as the quantity produced increases. We can illustrate this on the cost-volume curve. If the quantity produced doubles and the price doubles, the producer’s cost will double. Therefore, the change in price per unit is equal to the change in quantity produced. This is the definition of the price margin. The price margin is calculated by dividing the change in price by the change in quantity produced.

Therefore, the price margin is defined as follows:

Price Margin = (P₂ – P₁) / (K₂ – K₁)

Example

The marginal cost and price margin curves are illustrated in the following graphs.

A firm can produce three different quantities of steel. The graphs on the left demonstrate what happens when quantity is increased. As the quantity increases, the cost increases but the price decreases. In the graph on the right, the opposite is true. As price decreases, the cost is decreased but quantity is increased. The curves cross at the equilibrium price-quantity point.

When a firm starts to produce at some price and volume, it experiences a shock in production quantity and price. The firm must wait until its equilibrium price-quantity point is reached. For the graph to the left, at first, only a small amount of steel is produced. As volume increases, the price decreases and the amount of steel produced increases. The price-quantity point is reached and further changes in production will not change the equilibrium price-quantity point. The graph to the right shows what happens when volume and price are both increased. At first, only a small amount of steel was produced. As volume increases, the price decreases. Then the price-quantity point is reached and quantity is increased.

The first step in calculating price margin is to find the point at which the marginal cost and marginal revenue curves cross. To find that point, we take the derivative of each curve and find where they are equal to one another. The points are as follows:

We can substitute for P₁ and P₂ to get the following results:

Price Margin = (5.0 – 3.2) / (2.8 – 1.5)

Price Margin = 4.5 / 3.0

The price margin of 3 is the same as the profit margin. Because the price-quantity point is at 4.5, quantity is 4.5 units per year.

In order to find the point where the price margin and marginal cost curves cross, you must find the point at which MC = MR. 

The long-run cost curve is a part of macroeconomics which deals with the production and size of a plant in an organisation. This section speaks of the variables and factors which affect the curve of the production and cost in the long run. It is important to note that there is no difference between the Long-run total costs, and the long-run cost is variable. It depends on the ability of a firm and its changing inputs at a lower price.

 

Apart from understanding the terms, a student needs to gain knowledge about short-run and long-run costs. A long-run is different from a short-run in various factors and inputs. Ideally, a long-run cost curve and short-run curve are distinguished with Long-run Marginal, Total and Average costs.

 

The Factors Needed to Determine Short Run and Long-Run Cost Curves

To determine the long-run total cost curve, an individual must know factors that affect changes in production. 

 

Mentioned below are some factors of the long-run cost curve for drawing its graph.

 

1. Long-run Total Cost

 

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The Long-run Total Cost (LTC) is the minimum cost by which a given level of output can be determined. This long-run total cost, according to Leibhafasky, is the least cost possible in producing various output with variable inputs. It represents the smallest amount of multiple measures of production. It is seen that LTC is either less or similar to short-run total cost but can never be more than it.

 

2. Long-run Average Cost

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Long-run Average Cost (LAC) is the total cost divided by any level of output. It is ideally derived by long-run average price from short-run average cost curve. In the short-run turn, a firm or plant remains fixed, and the curve corresponds to a respective plant. Here the long average cost curve is termed as planning or envelope curve due to its function in preparing plans for enlarging production at a minimum cost.

 

A good example will be taking three sizes of plants where nothing else can be built. In the short-run curve, this plant size remains fixed, which can increase or decrease the variables. However, in the long term, a firm has the flexibility to choose the options of plants which can aid in the highest output at minimum cost.

 

3. Long-run Marginal Cost Curve

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In Long run Marginal Cost (LMC), the added cost of production and the unit of a product becomes a variable. This cost can be derived from short-run marginal cost.

 

The long-run cost curve is a vast chapter with diagrams and explanations on determining variables. These graphs and curves make a significant part of a firm’s production and sale. 

 

A student needs to understand these theories and concepts better to secure a good ranking in exams. is one such educational site that offers an in-depth explanation of the short-run cost and long-run cost and its function.

 

They also offer pocket-friendly study material and solutions on a long-run cost function with exercises. To enjoy these features, download the app or log in to the website now.

In a varied and expanding Economic setting, with various products and services, and ever-increasing manufacturers, service providers, and marketers, market demand serves as the fulcrum of all Economic activity. Simply put, market demand is the demand for a product in the market. In even simpler terms, it is a product or service measured by its consumption, need, and usage rate by the consumer market.

The more the market demand for a product, the more is its supply, and thereby, the more revenue the product may generate, and more is its demand in marketing. Market demand is not directly tied to the pricing of a product. Likewise, there is no direct correlation between market demand and the value of a product. A product’s price is determined largely by the elasticity of demand, the cost of production, shortage or excess of the product in the market, import/export duty, etc.

An even granular definition of market demand is that it is the total of individual demand. In a market, if more buyers enter owing to an increase in demand, the market demand for a product increases – this is a way to derive market demand definition. Importantly, suppose the potential buyers can pay for the product. In that case, the market demand for the product is a realistic one and not an estimated one or an optimistic one.

Did you know? The substitution effect and income effect can influence market demand. The former is when another or similar products substitute a product. The latter is a consequence of purchasing power in a demographic.

What is Market Demand in Traditional Marketing?

Marketers have defined the market in various ways, depending on their product strategies, product positioning, portfolio, product vision, and several other factors. To define market demand is not easy because one marketer’s version of market demand may not be similar to another’s. However, here are some of the elements of market demand that all marketers take into consideration.

Product

Market demand meaning in the context of a product is estimating the demand for a product in its specific industry, in its demography, in a region, or specific use-cases. Therefore, a marketing team first defines the scope of a product, its vision, its intended churn, its proposed customer base, and the final output of the marketing efforts concerning the product.

Total Volume

Sales volume may indicate market demand. It could be in the form of the total value or the form of the total number of units sold. Adjudicating the value proposition of a product is a new-age marketing theory and practice. Marketers use this as a benchmark to estimate or sell the market demand for a product in terms of the value it has created. For example, a drug company can quantify market demand for a product based on the number of people who have been cured in the region, the number of active cases of that illness in that region, customer reviews, customer satisfaction, etc. The drug company may not necessarily factor in the number of units sold of the product.

Customer Groups

The demand for a product is sometimes expressed in terms of the different customer groups that have purchased it. Customer groups could be categorized as institutional, individual, or industrial, to name a few. If the demand for a product is far-reaching and cuts across customer categories, it means that the product’s demand has breadth. If the demand for a product is used with great detail, interest, assimilation, and is part of the daily culture, the market demand for the product is said to have depth. These are some of the yardsticks that marketers employ to derive the market demand for a product or service.

Time Duration

Market demand is seasonal or cyclical. The demand for a bike model may not be the same several years after. There are some products where the demand is seasonal, such as woollen wear, which are very much in demand during winters. There are some products where the demand is cyclical. Therefore, the time factor is considered when estimating demand for a product. There are, however, a large number of products and services that have constant, perennial, and uninterrupted demand. All of these considerations are taken by marketers to arrive at a market demand estimate.

Solved Examples

The following is an example of a market demand curve diagram.

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As depicted in the figure, the market demand curve is the curve formed from individual demand curves based on a market schedule and summing the individual demands at different price points.

An individual demand curve displays the demand of an individual. But in a market, the total demand of all individuals in the market is required. As per the following table, it displays a schedule:

The demand curves of individuals in the market are summed. The figure below represents the composite curve.

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Types of Market Demand

The following are the types of demands in marketing.

Is applicable for complementary products and services. For example, cereal and milk can be purchased together. Jelly and peanut butter are complementary products.

A product may have multiple uses; thereby, it can draw demand in multiple customer categories. 

Short-run demand is applicable for products dependent on the manufacturer’s production cost. Long-run demand is not immediately dependent on Economic factors because the demand can sustain itself.

This relates to the price a customer is willing to pay for a product. For example, a real estate property’s last recorded demand is its last selling price or the last sold price of a property in that vicinity.

Fun Facts about Market Demand

• More marketers are spending time in generating ‘interest’ more than focusing on conversions. 64% of Internet marketers are engaged in search engine optimization.

• Marketers are approaching mobile users more because more than 60% of market demand is generated by way of mobile phone users who search for products, purchase, and transact all via their smartphones.

• Trade wars create more demand for a product. Two trade-warring countries can generate more demand for particular products that they have dependencies upon.

• Another driver for demand is the fear of shortage. The scarcity of a product or service increases its demand, especially if the product or service is highly useful or rare.

Demand from Customers

The quantity of a commodity or service that consumers are willing and able to acquire at a given price is referred to as ‘demand’ in Economics. Demand describes what people are actually able to buy, as opposed to what they want to buy. Because commodities are guided by market prices, not all demands can be fulfilled. Consumers would desire to buy less of a good at higher costs, and vice versa at cheaper prices. The famous law of demand is based on this relationship.

Another reason wishes differ from real consumer decisions is that customers are limited by their financial resources. A consumer’s ability to acquire a commodity is limited by his cash income. As a result, demand reflects both the willingness and the ability to consume. Consumer preferences represent willingness, whereas constraints such as money income and prices (budget) represent capacity.

The Curve of Market Demand

The knowledge of all individual demand curves is required before creating a market demand curve. The market demand curve can thus be easily drawn from the market demand schedule. We can acquire alternative price-quantity combinations for the market demand curve by summing individual desires at different prices.

The rule of demand also applies to the market demand curve, which slopes downward. If the market is large enough, a small sample of representative consumers can be used to calculate market demand by multiplying their average quantities by the total number of consumers in the market.

Conclusion

Market demand is the demand for a product in the market measured by its consumption, needs, and usage rate. Market demand is not directly tied to the pricing of a product. A product’s price is determined largely by the elasticity of demand, the cost of production, shortage or excess of the product.

Most students who are preparing for their exams might need to know about the meaning and scope of accounting since it is one of their chapters. To clear out their doubts, we have some notes. 

 

Accounting is a language that is used to understand finance. It can be used to convey the financial position of any particular company or business. Accounting can also help in translating the functions of the company in the mode of some tangible reports. So, people need to know more about accounting. That is exactly what we are here for. These notes are going to define accounting to explain the objectives and scope of accounting.

What is Accounting?

It is just the process that helps in recording, summarizing, analyzing and reporting the data related to the different financial transactions that happen in a company on a daily or monthly basis. 

Accounting is the language of finance, and it conveys the financial position of any particular company or business. To provide more information about accounting and its objectives and scopes, has provided detailed notes on it. When it comes to the meaning, scope and role of accounting, there are some things that students need to be familiar with. Accounting is just the process that helps in recording, summarizing, analyzing, and then reporting the data which is concerned with the different financial transactions that happen in a company. So, here we are going to talk a bit more about the meaning of the scope of accounting to those who need to know. 

 

The first function that students are going to learn in the definition and scope of accounting notes is the recording of the data. This is also known as book-keeping. This process helps in tracking financial data and preparing reports of it. 

 

The next function would be to summarize the raw data that is collected after recording different transactions. Since raw data is not much of a use for the organizations, these are mainly summarized. This further helps in the decision-making processes. 

 

After the summarizing of data, the information is then provided to the management. This is known as reporting. This helps the owners get a better idea about the company. The next step is the analysis of the data to create better functions and decisions for the company.

 

These are some of the important things that students need to know about when they are studying the meaning and scope of accounting. 

Learning Objectives with

subject matter experts have explained the scope and various subsections of accounting. Also, there are some of the objectives of accounting that students have to know. 

• Accounting will help you analyze financial management and decision-making.

• With counting, you can keep an eye on financial frauds in the organization.

• Accounting contributes to manifesting profits and losses.

helps you with the basics of accounting. Students of commerce find it more helpful in their preparations. It is necessary to follow the objectives of accounting topics and work on learning. It is a broader and flexible topic and needs more information than only learning from bookish knowledge. These notes are well-written and have presented the meaning of terms in standard forms, covering some extra information about the various terms.

Subsections of Accounting with

There are sub-sections of accounting that students will learn in this particular topic. Experts have explained each section thoroughly to make a good and trusting platform to study. For more commerce-related topics, students can select a particular subject to explore and read, as per their convenience, on the website or the learning app.

Different Subsections of Accounting:

• Management Accounting: Students need to know about the meaning of nature and scope of management accounting if they aim to stay on top of the class. Management accounting is the type of accounting that deals with all the management and manager-related information. This type of accounting can help managers take a good look at their employees and make better decisions. Students can find more information from the meaning and scope of management accounting notes. 

• Cost Accounting: Some students also need to know about the meaning and scope of cost accounting if they want to score good marks in examinations. Well, cost accounting is the process that deals with recording and ultimately analyzing the costs which are made by the company. Students can find more details in the cost accounting meaning nature and scope. 

• Financial Accounting: Students need to know financial accounting definition and scope if they want to get a piece of in-depth knowledge about the field. To put it in simple words, financial accounting is the type of accounting that deals with the interpretation and the preparation of different financial statements as well as the accounts that are a part of the company as a whole.

has crafted these resources keeping every student in mind; easy to understand and do not sound like foisting unnecessary and useless information on students. These resources are genuine and follow up with the updated resources. 

Students and professionals need to take notes during a lecture or a seminar. Taking down notes is essential to their learning process, and one may use either Linear or non-linear notes whichever feels appropriate for the occasion. Notes are short written facts that help in remembering things. Notes are usually written to record either a speech or a dictation while one is listening to it. They are helpful when you need to refer back and rephrase them as desired.

The Necessity for Note-Making

Since knowledge is vast, but our memory is limited, we can’t remember all the information that we gather. By making notes, we can recall information even after months. Note making and summary are very useful for students to prepare for their exams in many subjects. Rather than going through voluminous books, students can refer to their notes to quickly revise the main points of a chapter or book. Note making has mainly 3 useful functions and they are as follows.

• By Note-making and summary writing in English, we can have a lot of information at our disposal.

• We can reconstruct what was said or written by referring to the material we create with our note making or a summary.

• Our Note-making and summarizing process comes handy in many ways like taking part in a debate, delivering a speech, writing an essay, and revising lessons before an exam.

Difference Between Note-Making and Note-Taking

Note-taking and Note-making are two different processes used for study purposes. 

• Note-taking refers to jotting down notes while hearing some speech (lectures, audio, videos, tapes, dictation, etc.); You write them down as the speaker speaks and the note-taker does not have much control in this process. This is because your note-taking is dependent on your ability to decipher, interpret, and write down what is being spoken. This process is done at the speaker’s pace and not that of the note-takers’.

• Note-making is the process of reorganizing your thoughts and ideas and putting them in words. It usually refers to making notes from another source like a textbook or a website. This process allows more control to the note-maker as it can be done at their own pace.

What is Linear Note Making

Linear note making is the simplest and the most common form of note-making. The notes appear in a structured manner, one line after another. Notes are written as heading, subheading, and various points. The other parts of a linear note-making are abbreviations, notations, indentations, and keywords.

The Parts of Linear Note-Making

• Heading – Read the passage carefully to get a bird’s eye view of it and provide a heading.

• Subheading – Provide the important points of the passage as different subheadings. Subheadings reflect how the text is developed.

• Abbreviations – We use abbreviations for using fewer words and maintaining precision. It is mandatory to use at least 4 easily recognizable abbreviations. Abbreviations can be acronyms (capital initial letters), contractions (the first few letters of the word), or short forms (the first and last few letters of a word). For example, PM for the Prime Minister, GPO for the general post office, Capt. for a captain, Dr for the doctor,  etc.

• Numbers and Indentation – Indentation is the space that one leaves at the beginning of a line. The format must have an indentation. From heading to subheading to the points, the numbering should be spaced to the right. You can see how it looks in the below image. 

• Symbols – Symbols could also be part of your note-making and summary. Symbols save a lot of time and are easy to understand. Some of the common symbols are:

• ‘>’  for greater than

• ‘<’  for less than

• ‘&’  for and

The process of accounting which is used for financial transactions is classified into two different types. There is the modern approach of classification and there is the traditional approach of classification. We all know that the traditional approach is the British one and the modern approach is the American one. In the notes we have for this chapter, students are going to learn about the modern approach and the methods that are currently in use for the modern approach. With the help of these notes, they will surely be able to get good marks in the exams. Let us start by understanding the basic accounting equation in the coming section.

 

Understanding the Basic Accounting Equation

When it comes to the classification of accounts under the modern approach, there are some accounts that are not credit and debit. So, in that case, there is a use of the Accounting Equation to credit the account or debit it. So, the modern approach can also be considered as the Accounting Equation Approach. 

 

The Basic Accounting Equation is: Assets = Liabilities + Capital (Owner’s Equity)

 

Also, the following formula when expanded looks like this, Assets = Liabilities + Capital + Revenues – Expenses

 

Also, Profit = Revenues – Expenses

 

The Accounting Equation needs to remain in a balanced form all the time. This is because every single transaction comes with a certain dual aspect. So, each one of the transactions will affect the credit side or the debit side. Also, transactions might be able to have an impact on two different accounts either on the credit side or the debit side. This is exactly what students need to know about the classification of accounts under the modern approach method.

 

Classifying Accounts Using the Modern Approach

Under the modern approach of classification, the accounts are classified into different groups which are mentioned below.

1. Assets Accounts

The assets are the possessions, economic resources, or properties of any particular business. These assets tend to play a very important role in helping out some of the essential business operations in earning some revenue for the company. The assets are sometimes measured in the terms of monetary values. Assets are classified as intangible and tangible. Also, there are current assets and fixed assets. Those assets that are held for a long time are fixed assets. Some examples might include furniture, machinery, land, and buildings. Some assets are held for a shorter period and are called current assets. Some examples might include bank balance, debtors, and bills. 

2. Liabilities Accounts

Another important group in the classification of accounts under the modern approach would have to be the liabilities accounts. These are the accounts that tend to owe some amenities to the outsiders. These might be some sort of debts or obligations that the business might have. Liabilities are also Current and Long-Term. 

Long-term liabilities are those that are payable after one year. For example, debentures, bank loans, etc. The term “current liabilities” refers to liabilities that must be paid within a year. For example, creditors, rent outstanding, bank overdraft, etc.

3. Capital Accounts

Another important part of the classification of accounts under the modern approach method would be capital accounts. This is the money that is brought to the business or the company by the owner. That is why it is also known as the Owner’s Equity. 

As a result, the Capital is shown on the Balance Sheet’s liabilities side. After the owner deducts the Drawings, the capital account is shown. Drawings are the amount of cash, goods, or assets taken from the business by the owner for personal use. 

4. Revenue Accounts

The amount that is earned by any business when they sell their goods or render their services is known as revenue. Also, some other incomes are included in the revenue accounts such as rents, commissions, interests, dividends and so much more. The items of revenue can be grouped under the classification using the modern approach. 

5. Expenses Accounts

There are certain costs and monetary spending that the company has to incur so that the revenue for the company can be earned. These costs are known as expenses. One of the important things to keep in mind is that when all the benefits that come from spending the money are completely exhausted within the given period of a single year, then it would be known as an expense. 

As a result, the cost of goods sold is an expense, while the cost of goods purchased is an expenditure. Rent, salary, electricity, interest, and other expenses are examples of expenses. Purchases of assets, short-term investments, and other similar purchases fall under the category of expenditure.

 

Example

Consider the list of accounts shown below. Our task is to classify these accounts using the modern approach of accounting.

1. Plant and machinery

2. Purchases

3. Sales

4. Rent

5. Land and building

6. Cash

7. Sam’s capital

8. A loan from city bank

 

Here are the accounts classified using the modern approach of accounting:

1. Plant and machinery > Asset account

2. Purchases > Expense account

3. Sales > Revenue account

4. Rent expense > Expense account

5. Land and building > Asset account

6. Cash > Asset account

7. Sam’s capital > Capital/owner’s equity account

8. Loan from city bank > Liability account

National Income Accounting is a technique to measure the income and production of an economy. National Income Accounting is the study of a larger picture and managing the whole nation. While calculating National Income accounting, we consider two significant terms – Microeconomics, deals with individuals and organizations, and macroeconomics deals with the nation’s economy as a whole. 

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Important Terminology Related to Macroeconomics and National Income Accounting in India

Fun Fact: The systematic keeping of national accounts only began in the 1930s in the United States and some European countries.

1. Goods:

Goods are products that satisfy human wants, needs, and desires. Goods can be classified into various categories like:

• Tangible and Intangible Goods: Goods like grocery, transport, garments that can be touched and felt are tangible goods and goods that cannot be felt or touched like medical, law, engineering, etc.

• Economic goods are the ones that come at a price and are affected by demand and supply.

• Non-economic goods are free of cost.

• People directly consume consumer goods, further classified into non-durable goods like fuel, furniture, garments, etc., and durable like milk, rice, bread, etc.

• Producer goods are those that help in producing other goods like cotton, jute, machines, etc.

• Intermediate goods are bought by production units and are resold in different forms: bread, curd, etc.

• Final goods are produced for final consumption and not for reselling, for example, furniture in the house, food for consumption, etc.

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2. Income and Output

This is one of the most significant concepts of macroeconomics.

National output is the cumulative amount of goods and services generated during a specific period in a country.

National Income is the cumulative income that is earned by selling these goods and services.

National Output is generally termed as GDP – Gross Domestic Product, which means the income earned from the output produced by a country.

GDP can be affected by upgrades in technology, increase in capital, increase in output and income, acquisition of updated equipment, organizations and units, and much more. This can also be negatively impacted by inflation, market factors, and recession.

3. Unemployment

Unemployment is the percentage of people without jobs. Unemployment can be further categorized as:

• Classic – wages are too high to be paid to the employee

• Structural – mismatch between the required skills and actual skills of an employee

• Frictional – when it takes a long time to search for an appropriate employee for a job.

• Cyclical – when the growth of the national economy is stagnant.

4. Inflation and Deflation

Inflation is when the economy grows too quickly. Deflation is when the economy takes a dive and declines over a period. Both these situations can be harmful to an economy, wherein Inflation leads to negative results and deflation leads to low economic output.

5. Gross National Product

GNP is the total value of goods and services produced by a country in a specified period. Income earned by residents by foreign individuals is subtracted from the total value. Similarly, income earned by citizens working abroad is added to the total value.

This addition and subtraction of International income differentiate between GNP and GDP.

Fun Fact: Gross National Product is the most common technique to calculate a nation’s output, which includes goods and services.

6. Net National Product

NNP considers the depreciation factor. Depreciation is the wear and tear of fixed assets. It is also the capital used to maintain existing stocks. In simple words:

NNP = GNP – Depreciation.

Also, while calculating NNP, economics subtract the taxes and add the government subsidies granted to encourage the production of goods and services.

Thus, National Income Accounting = NNP – Taxes + Subsidies.

7. National Disposable Income and Private Income

The national disposable income refers to the total income a country possesses to cater to its consumption and expenditure without having to dispose of any of its assets.

Private income is the net income earned by Residents and individuals. Private income includes income earned privately from abroad, national debt interest, current transfers from government, and net transfers from the rest of the world.

Fun Fact: National Income accounting is an invaluable tool for budget makers and economic planners.

Important Policies Regarding Macroeconomics

Fiscal Policy 

This policy has the power to control the income and expenditure of an economy. This is under the government’s direct control and is generally not preferred by economists as Political intentions could influence it. 

Monetary Policy

This policy is controlled by the monetary authority that is the Central Bank. This policy aims to enhance the strength of the country’s currency and to stabilize prices. It also balances the GDP and reduces unemployment. The central bank can buy and sell bonds to circulate wealth and create an equilibrium. This is a much-preferred policy by economists as the controlling power is in the hands of the Central Bank – an independent organization.

How to Calculate National Income Accounting in India?

The National’s Economic growth rate is measured by calculating the National Income accounting, and there are several methods to do it:

Income Method

This method focuses on the production of goods and services involving capital, land, labour, etc. Income is generated through interest, profit, rent, wages, etc. Another parameter is mixed-income, which is earned by businessmen and self-employed professionals.

Thus: National Income = Interest + Profit+Rent+Wages+Mixed Income

Solved Example:

Q. Calculate the National Income of country X and identify which of the following is not considered while calculating National Income using the Income Method?

1. Rent accrued – Rs. 20000

2. Salaries – Rs. 10000

3. Sale from secondhand goods – Rs. 5000

4. Interest earned on Loan – Rs. 10000

Correct Answer: National Income = Interest + Profit+Rent+Wages+Mixed Income

So National Income = 20000+10000+10000 = Rs. 40000.

Option C will not be considered as income generated from land and labour and not from goods. So, option C would not be considered.

Expenditure Method

This method considers the purchases made by Governments, Residents, organizations, etc. The components are:

C = Expense on consumer goods and services by residents and households

G = Expense of the Government on goods and services

I = Expense of the business organizations on capital goods and stocks

NX = Net exports, which mean exports – imports

Thus National Income = C+G+I+NX.

Value Added Method

Under this method, the economy is divided into various industries like transport, communication, agriculture, etc. National Income is calculated by calculating the NVAFC, which is the value-added at each stage. While calculating the same for each industry, we must subtract:

Now NVAFC = when it is added for all enterprises.

NDPFC= when NVAFC of industries is added, it is called the net domestic product at factor cost

Finally, the net income from international states should be added.

Thus National Income accounting in India = National Income = (NDPFC) + Net factor income from abroad 

Fun Fact: The National Product and Income are calculated considering value-added tax figures, incomes and expenditure, income and corporation tax returns, and different methods of valuation and definitions. 

Solved Examples

Question 1. Does the GNP consider Depreciation on the production of goods and services?

Correct Answer – No, NNP = GNP – Depreciation. 

Question 2. The market value of all finished goods – Rs. 50000

The market value of all finished services – Rs. 20000

The depreciation of those goods and services – Rs. 10000

Calculate the Net National Product?

Answer: The market value of all finished goods + the market value of all finished services – the depreciation of those goods and services = net national product.

The gross national product – depreciation = net national product.

So, the answer is 50000+20000-10000

NNP = Rs. 60000