Scribd
Upload
25 views3 pages

Chapter 2 - Basic concepts of Macroeconomics (1)

Uploaded by

RISHIKA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
25 views3 pages

Chapter 2 - Basic concepts of Macroeconomics (1)

Uploaded by

RISHIKA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

CHAPTER – 2

BASIC CONCEPTS OF MACROECONOMICS

Domestic Territory:
Domestic territory refers to the geographical territory administered by a
government within which persons, goods and capital circulate freely.
Normal resident
Normal resident refers to an individual or an institution who ordinarily resides in
the country for a period more than one year and whose centre of interest also
lies in that country.
Factor Income
It refers to income received by factors of production for rendering factor services
in the production process.
Transfer Income
It refers to income received without rendering any productive services in return.
Final Goods
Final goods refer to those goods which are used either for consumption or for
investment.
Intermediate Goods
Intermediate goods refer to those goods which are used either for resale or for
further production in the same year.
Consumption goods
Consumption goods refer to those goods which satisfy the wants of consumers
directly.
Capital goods
Capital goods are those final goods which help in production of other goods and
services.
Depreciation
Depreciation refers to a fall in the value of fixed assets due to normal wear and
tear, passage of time or expected obsolescence (change in technology).

1
Investment
Investment or Capital formation refers to addition to the capital stock of the
economy.
Investment can be looked up in two forms:
(i) Gross Investment: Gross investment is addition to the stock of capital before
making allowance for depreciation.
(ii) Net Investment: The actual addition made to the capital stock of an economy
during a year is called Net Investment.
Net Investment = Gross Investment – Depreciation

Net Factor Income from Abroad (NFIA).


NFIA refers to difference between factor income received from the rest of the
world and factor income paid to the rest of world.
There are 3 main components of NFIA:
(i) Net Compensation to Employees
(ii) Net Income from property and entrepreneurship
(iii) Net Retained Earnings
NFIA = Factor income earned from abroad – Factor income paid to abroad
Domestic Income Vs. National Income
National Income = Domestic Income + NFIA

2
Net Indirect tax (NIT)
Net indirect tax refers to the difference between indirect taxes and subsidies.
Net Indirect Tax = Indirect tax – Subsidies
There are 2 Components of NIT:
 Indirect Taxes: Indirect taxes refers to those taxes which are imposed by the
government on production and sale of goods and services. For example, GST
(Goods and Services Tax).
 Subsidies: Subsidies are the ‘Economic Assistance’ given by the government to
the firms and households, to fulfil its social welfare objectives.
Factor Cost Vs Market Price
Factor Cost (FC): It refers to amount paid to factors of production for the
contribution in the production process.
Market Price (MP): It refers to the price at which product is actually sold in the
market. It includes indirect taxes and excludes the subsidies.
Market Price = Factor Cost + Net Indirect Tax
Market Price = Factor Cost + (Indirect Taxes – Subsidies)
Market Price = Factor Cost + Indirect Tax – Subsidies

You might also like