Economy Basic Concepts – Economy, Final Goods, Intermediary Goods, National Income

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In this post, you will learn what economy means, what is the concept of output and you will learn the difference between final goods and intermediary goods. This is the first post in the series of Indian Economy explainers.

What is the Economy?

Any region with a well-defined Set of Rules and Established institutions to implement those rules is called an Economy. The aim of any economy is the efficient use of resources.

What is Economic Activity?

All activities which utilize resources and create value are Economic Activities. Production, consumption, exchange, or distribution can be a form of an Economic Activity.

economic-activity

All economic activities have an opportunity cost.

What is Opportunity Cost?

Cost of sacrificing next best alternative. You are preparing for UPSC but you are sacrificing an opportunity to have a successful career as a software engineer or data scientist. So the cost of sacrificing that is an opportunity cost.

What is an Output?

In every economy goods are produced, that is raw materials are converted into finished goods.

For example- Iron is used to make cars. Tomatoes are used to make Ketchup, Cement is used to build homes.

Similarly, services are rendered. For example, banking services, insurance, hospitality, tourism, and entertainment.

So the output of an economy implies, the monetary value of all the goods and services produced in an economy in a given time period.

If you produced wheat on your farm. You eat some and sell the rest. Then all the wheat produced is considered under the concept of output.

What is National Income?

  • Nation = country
  • Income = monetary value

The national income of the country is the total value of all final goods and services produced in the country in a particular period of time usually one year. The growth of national income helps to know the progress of the country.

There is a catch. There are two types of goods – final goods and intermediate goods.

What Are Final Goods?

When goods are meant for final consumption they are called final goods. Final goods cannot be used to further use. Final goods are not used in the production or manufacturing of other goods. For example- A car is the final good.

Final goods are also called consumer goods. All goods and services which are used for ultimate satisfaction and not used in further production are called consumer goods.

What Are Intermediate Goods?

Steel and plastic are used in the production of cars. These are intermediate goods. These goods are used in the production of a final good.

Under the concept of output, only final goods are included in order to avoid double counting. If we include intermediate goods, it means counting the same thing twice.

So only final goods are taken into consideration.

Are Second Hand Goods Considered in Output?

No, they were already included when they were manufactured.

What Are Capital Goods?

All goods which are used for further production of goods and services over a long period of time are called Capital Goods.

  • Computers used by companies are a type of capital good
  • Xerox machine used by shop vendor is capital good

With all that being said let us go back to the defition of the national income

The national income of the country is the total value of all final goods and services produced in the country in a particular period of time usually one year.

We learned that only final goods are included in the calculation of national income. 

There are various measures of national income. Each of these measures of the national income form a different perspective. They are similar to one another and are shown in the following figure.

Economy Basic Concepts - Economy, Final Goods, Intermediary Goods, National Income 1

 

The growth of national income helps to know the progress of the country. We will learn about all these measures of national income in the next post.

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