Basic Concepts of Macroeconomics | Differences | Class XII | Chapter 2

 

Basic Concepts of Macroeconomics | Differences | Class XII | Chapter 2 |

Classification of Goods

In Economics, the goods are broadly classified into four ways which are as follow:

  1. Final Goods: Final goods refer to those goods which are available for the final user for consumption or those goods which have crossed the boundary line of production and no value addition is possible.
  2. Intermediate Goods: Intermediate goods are those goods which are within the boundary line of production and are purchased by one firm from the another one for the purpose of resale or to use them as raw material. In these goods, value is yet to be added and are not ready for the final consumption.

Additional Points to Remember

  • The same goods can be classified as final or intermediate goods due to the end use of the goods. It all depends on the final use of those goods.
  • For Example, Milk purchased by household is a final good whereas milk purchased by dairy for the purpose of resale is classified as intermediate good.
  1. Consumption or Consumer Goods: These are the goods which are directly used by the humans to satisfy there wants.



These goods are further classified into four types:

  • Durable Goods: These are those goods which are of high value and can be used for many years. The tenure of these goods is around 7-8 years. For Example- TV, Car, etc.
  • Semi-Durable Goods: It refers to those goods which can be used for a period of one or two years. For example – Furniture, Clothes, etc.
  • Non-Durable or Single use Goods: Such goods are used for a shorter period of time i.e. less than one year. For example- Milk, Petrol, Gas, etc.
  • Services: Services are non-tangible items which directly satisfy the wants of the humans. For Example Services rendered by Lawyer, Government Officials, etc.

4. Capital Goods: These Goods are the fixed assets for the producer which are used in the process of production for many years and are of very high value. Usage of these goods leads to depreciation which is managed by Depreciation Reserve Fund.

You May Also Read

  1. Macroeconomic; Scope and Significance, Micro Vs. Macroeconomics
  2. Basic Concepts of Macroeconomics
  3. National Income, GDP and Welfare
  4. Calculation of National Income| Methods and Steps |
  5. Barter System-Limitations | Money | Forms | Measurement |
  6. Commercial Banks | CRR Creation | Central Bank Functions|
  7. Aggregate Demand |Short Run | Equilibrium |
  8. Excess Demand | Deficient Demand |
  9. Government Budget | Objectives | Types |
  10. Foreign Exchange | Rate | Demand and Supply |
  11. Balance of Payment | Structure | Deficit | Types |

Concept and Components of Consumption Expenditure

Consumption Expenditure refers to the total expenditure done on the consumption by household, government and non-profit private institutions in an economy.

Household buys goods for satisfying their wants whereas government and non-profit institutes buy goods for distribution and charity respectively. If all the above expenditures are added, we get the total consumption expenditure.



Consumption Expenditure= Expenditure done by household + Expenditure done by government+ Expenditure done by non-profit institutes.

Concept and Types of Investment

Investment refers to the addition in the capital stock. Thus change in stock of capital is known as capital formation. Therefore investment is also called as capital formation. It can be classified into two types:

  • Fixed Investment: It refers to the increase in the fixed asset stock by the producer in an accounting year. It is also known as fixed capital formation. Example- In the beginning of year a producer have two machineries but at the end of the year the producer have five machineries.
  • Inventory Investment: It refers to the change in stock of inventory in an accounting year. Inventory includes finished goods, semi-finished goods and raw material. It is also known as inventory stock.

Inventory Investment = Stock of inventory at the end of the accounting year – Stock of inventory at the beginning of the accounting year.

Concept of Depreciation

Depreciation refers to the fall in the value of fixed assets because of normal wear and tear and accidental damages. The value of these goods goes down when they get outdated due to change in technology or change in demand. It represents how much value of asset has been used up and is also known as expected obsolescence or consumption of fixed capital.

It recovers through depreciation reserve fund made by the producer.

Four Sectors of Economy

On a macro point of view, the whole economy is divided into four sectors. Names of those sectors are as follow:

  • Household Sector: They are the owners of the factors of production and consumer of goods and services.
  • Producer Sector: This sector uses factor of production to produce goods and services for other sectors.
  • Government Sector: Government produces and sells goods for income and also works as an welfare agency for the welfare of the nation.
  • External Sector: It is also known as rest of the world sector. It includes all those activities which are related to the import and export of goods and services.

Inter-Sectoral Flows

It shows the dependency of one sector on another one either in the form of goods and services or in the form of money.

  • Real Flows: The flow of actual goods and services from one sector to another is called real flow.
  • Money Flows: The flow of money from one sector to another is called money flow. It is opposite of real flow.

Circular Flow of Income

Circular flow of income refers to the endless flow of the activities of production, generation of income and expenditure. Under this each activity is correspondence in value to each other. It has three phases namely;

Phase of production: Under this phase, the value is added to the goods to make is usable for the household sector.

Phase of Income Generation: Under this phase, the finished product is sold to the household sector which leads to generation of income and helps in gaining profit by which the producer can earn.

Phase of Expenditure: Under this phase, the generated income is disposed off or used for the payments by producer to households for consuming factors of productions.

Differences

Final Goods and Intermediate Goods

Basis of Difference

Final Goods Intermediate Goods
Meaning Final Goods are those goods which are ready-to-use by the final consumer.(producer/ household) Intermediate Goods are those goods which are not ready-to-use by the final consumer. (Producer/ household)
Nature The value of these goods is included in both i.e. national income and domestic income. The value of these goods is neither include in national income nor in domestic income.
Value Addition There is no value addition under this category of goods. Value can be added or yet to be added under these goods.
Production Boundary These goods have crossed the boundary line of production. These goods have not crossed the boundary lie of the producer.
Expenditure Expenditure on these goods is known as intermediate consumption or intermediate cost. Expenditure on these goods is known as final expenditure.
Example Milk purchased by household, car purchased by household Milk used for resale, car purchased for business purpose(Taxi, Transport).

Capital Goods and Consumer Goods

Basis of Difference

Capital Goods Consumer Goods
Meaning Capital Goods are those goods which are used for further production of goods and services. These are also known as durable goods or economic capital. Consumer Goods are those goods which are used by the final user. These goods are sometimes called as final goods due to their end user i.e. consumer.
Nature Increase in production of capital goods leads to higher production which directly helps in the growth of GDP. Increase in production of these goods leads to greater level of welfare among people which raises the quality of life.
Expenditure Expenditure on these goods is known as investment expenditure. Expenditure on these goods is called as consumption expenditure.
Satisfaction These goods do not satisfy human wants directly. These goods directly satisfy the wants of humans.
Examples Plant and machinery purchased by producer for further production. Ice-cream purchased by household.

Gross Investment and Net Investment

Basis of Difference

Gross Investment Net Investment
Meaning It includes expenditure on purchase of new assets and replacement of existing assets by producer in an accounting year. It includes expenditure only on purchase of new assets. It does not includes expenditure on the replacement of the existing asset by producer in an accounting year.
Calculation It is calculated by taking total expenditure done on purchasing the capital good. It is calculated by excluding the depreciation from gross investment.
Replacement Investment It includes replacement investment or depreciation on fixed assets. It do not includes replacement investment or depreciation on fixed assets.
Formula Gross Investment = Net investment + Depreciation. Net Investment= Gross investment- Depreciation

Expected Obsolescence and Unexpected Obsolescence

Basis of Difference Expected Obsolescence Unexpected Obsolescence
Meaning It refers to the fall in the value of assets(fixed) because of change in demand or change in technology or the loss which is expected before. It refers to the fall in the value of assets(fixed) because of the downfall of the economy or some natural calamities or the loss which takes place by chance.
Depreciation It is considered to be the part of depreciation. It is not considered to be the part of depreciation.
Management It is managed by depreciation reserve fund. It is managed by insurance of fixed assets.
Example Depreciation on fixed assets. Break down of fixed assets due to flood.

Consumption of Fixed Capital and Capital Loss

Basis of Difference

Consumption of Fixed Capital Capital Loss
Meaning It refers to the loss of the value of fixed assets even when they are continuously used in the process of production. It refers to the loss of the value of fixed assets while they are not used in the process of production.
Management It is managed by depreciation reserve fund. It is managed by insurance of fixed assets.
Reasons
  • ¬†Expected obsolescence.
  • Accidental damages.
  • Normal wear and tear.
  • Fall in market.
  • Natural calamities.

Stock and Flow

Basis of Difference

Stock Flow
Meaning Stock is defined as that value of variable which is calculated at a point of time. Flow refers to that value of variable which is measured over a period of time.
Nature It is static in nature. It is dynamic in nature.
Influence Stock influences the flow as greater the stock of capital leads to greater the flow of goods and services. Flow impacts on stock, as increase in flow of income results in greater the stock of wealth.
Time Dimension It is not time dimensional for it is measured at a point of time. It is time dimensional for it can be measured per hour, per day, per week, per month and per year.
Examples Population of a country, distance between a fixed place etc. Income, number of births and deaths, speed of moving vehicle.



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