Unit-2 National income accounting (Theory)

 

 very short questions ;

1.    Prepare a list of gross domestic investment.

a.     Business fixed investment

b.    Net foreign investment

c.     Residential investment

2.    Transfer payment are excluded from GDP. Why ?

Ans : Transfer payment are excluded from GDP because transfer payment do not include the production of goods and services. GDP always calculated the value of all final goods and services produced in the territory of a country within a specific period of time.

Descriptive question answers :

3.    Explain the circular flow of income & expenditure of the two sector economy.

Ans : Two sector economy consists of only two sectors i.e, Household and Business. It is the most simplified model in which the product and money flow from the government and business are ignored. Obviously it is unrealistic model. In other words, this kind of economy cannot be found in the real world. This is also known as the two sector closed economy.

 

Assumption :

a.     It consists of two sectors : Household & Business

b.    All the income are spent on consumption : there is no saving

c.     There is no government & foreign trade

d.    Household are the owner of the factor of production or factor of production are supplied by only household.

e.    Producer purchases factor of production from household.

 

On the basis of the assumptions circular flow of income and expenditure can be shown in the given figure :

 

 

 

In the above figure shows the circular flow of income and expenditure in the two sector economy. In the upper half of the figure represents the factor market and lower half of the figure shows the commodity market. Both the market generates the two kind of flow : real or product flow & money flow.

In the upper half of the figure shows the factor of production from household to the business sector. This is the real flow or factor flow which flows reverse flow that is factor income in the form of wage, rent, profit and interest from business sector to household sector. Since factor income are paid in the form of money, the flow of factor income represents money flow. From the figure it is clear that the factor service and money flows in opposite direction.

In the lower half of figure shows the commodity market in which the goods and services produced by business sector flows from business sector to households sector and the payment made by households sector flows from households sector to businesses sector. It is clear that the real (goods ) & money flows in the commodity market also flows in the opposite direction.

When we combine the goods and money flow in the goods market and money market, we get the regular circulation flow of income and expenditure. It is also clear that income and expenditure flow are equal.

Solution of BBS Second year