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Basic Concepts of Macroeconomics

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Depreciation- Wear and tear of the capital goods due to their usage in production or consumption of  fixed capital.It includes

(i) normal wear and tear ;

(ii) normal rate of accidental damages ;

(iii) expected obsolescence .  

Gross invst. – depreciation = net invst.

Significance of Net Invst.-
Net invst. implies net addition to the stock of capital and it increases the scale of prod. It is a sign of growth and dev.It helps generate employment opportunities.

Intermediate Goods-
 Goods which are purchased by one firm from the other either for resale or are used up  as raw material. Its value merges with the value of final goods.

Used up- transformed into other products or added to stocks.

Exceptions:- In defence services durable capital goods { weapons ( missiles, rocket bombs, etc.) , equipments (vehicles, tanks, etc. ) } are treated as raw materials needed for producing defence services.

Final goods- Goods and services purchased or own produced for the purpose of consumption and invst.

Same good may be intermediate or final –
Distinction depends upon the end-use of the machine; if it purchased by household or a firm( it is used for prod. Of goods in the firm), it is final good but if it is purchased for reselling by the firm  it is intermediate.

Stocks-   It is the qty. measured at a particular period of time.
Flow -  It is the qty. measured over a specified period of time.

Relation and difference between stock and flow-



  1. It relates to a point of time eg. Your cash balance at the end of a/cing year.
  2. It is not time dimensional.
  3. It influences the flow. Greater the st. of capital greater the flow of goods and services.
  1. It relates to a period of time. Eg. Your pocket expenses of Rs. 100 per day.
  2. It is time dimensional eg, as per hr., per month or per year.
  3. It influences the stock. Eg. Monthly increase in supply of money leads to increase in Qty. of money.


Economic territory is the geographical territory administered by a government within which persons, goods and capital circulate freely.

The scope of economic territory is defined to cover:

(i) Political frontiers including territorial waters and air space.
(ii) Embassies, consulates, military bases, etc located abroad, but excluding the foreign ones located
within the political frontiers.(geographical territory)
(iii) Ships, aircrafts etc, operated by the residents between two or more countries
(iv) Fishing vessels, oil and natural gas rigs, etc operated by the residents in the international
waters or other areas over which the country enjoys the exclusive rights or jurisdiction.

National income is the sum total of income of only the residents of the country.

Resident - A resident, whether a person or an institution, is one whose centre of economic interest 
lies in the economic territory of the country in which he lives. A person must reside in a country for one year or more than one year to become a normal resident of that country.

 Normal residents include-

  1. Citizens of our country who normally reside in our country and have their centre of economic activity.
  2. Citizens of other countries who continue to live in our country beyond a period of one year and whose centre of economic interest lies in our country.
  3. Citizens of our country working in international organizations ( world bank or Indian Monetary Fund)) or foreign embassies located in our country.
  4. Border workers ( people who cross borders daily or on regular basis to work in one country are residents of the country where they live) 

Persons who are not treated as normal residents-

  1. Foreign visitors visiting for recreation , medical purpose, studies , sports, etc.
  2. Crew members of foreign vessels or seasonal workers.
  3. Foreigners who are employees of non-resident enterprises ( they have come to install machinery purchased from their employers)

National income, or for that matter any aggregate related to it, is a measure of the value of production activity of a country

National income and related aggregates are basically measures of production activity.
There are two categories of national income aggregates  : domestic and national, or domestic product and national product. Production activity of the production units located within the economic territory is domestic product.

National income = Domestic income  + net factor income from abroad

Domestic aggregates-  It refers to a group of statistical measures of the value of prod. Activity,  being carried out by prod. Units located within the economic territory of country.

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