Introduction to Macroeconomics and National Income Accounting
Introduction to Macroeconomics and National Income Accounting tests aggregate definitions, circular flow and GDP/GNP numericals.
Macro aggregates
Macroeconomics studies aggregate output, employment, the price level and external balance. Circular flow shows households supply factors and demand goods; firms produce and pay incomes. GDP is the market value of final goods and services produced within domestic territory in a year. GNP=GDP+net factor income from abroad. NNP=GNP−depreciation. National income at factor cost = NNP at market price − indirect taxes + subsidies.
Nominal GDP uses current prices; real GDP uses base-year prices; GDP deflator = nominal/real×100. Three methods: product/value added, income, expenditure. Avoid double counting by counting only value added or final expenditure. Transfer payments, second-hand sales and intermediate goods are excluded.
Worked example
Firm A sells wheat to Firm B for ₹500; B sells flour to consumers for ₹800. Value added by A=₹500; by B=₹800−₹500=₹300; GDP=₹800. Adding both firms’ sales (₹1,300) double counts the wheat. If nominal GDP is ₹1,200 crore and real GDP ₹1,000 crore, the deflator is 120, showing a 20% price rise relative to the base year.
Traps
GDP counts production inside the country, not citizens’ income abroad. Depreciation is subtracted to get NNP, not added. Subsidies are added when moving from market price to factor cost. Do not include financial transfers or sale of old assets. Real GDP changes only with quantities when base prices are fixed.