What traumatic event does Zitkala-Sa describe at the school?

The forcible cutting of her long hair

Why was the cutting of her hair so humiliating to Zitkala-Sa?

Among her people, shingled hair was worn by cowards and mourners

What are the three methods of calculating national income?

The product (value-added) method, the income method and the expenditure method, which all give the same aggregate.

Why must intermediate goods be excluded in the product method?

To avoid double counting — only the value added at each stage, or the value of final goods, should be counted.

Write the expenditure-method identity for GDP.

\(GDP=C+I+G+(X-M)\), where C is consumption, I investment, G government spending and (X−M) net exports.

Distinguish between GDP and GNP.

GDP measures output produced within the domestic territory; GNP adds net factor income from abroad, \(GNP=GDP+NFIA\).

What is the difference between nominal GDP and real GDP?

Nominal GDP is valued at current prices; real GDP is valued at constant base-year prices, so only real GDP reflects genuine changes in output.

How is the GDP deflator calculated?

As the ratio of nominal GDP to real GDP multiplied by 100, \(\dfrac{\text{Nominal GDP}}{\text{Real GDP}}\times 100\).

The value of a firm’s output minus the value of its intermediate consumption — the contribution of that firm to total output.

How do we move from market price to factor cost?

By subtracting net indirect taxes (indirect taxes minus subsidies) from a market-price aggregate.

Why is GDP not a perfect measure of welfare?

Because it ignores the distribution of income, non-market and household activities, and negative externalities such as pollution.

What is the circular flow of income?

The continuous flow showing that production generates factor incomes, which are spent on final goods, returning as revenue to firms.

National Income Accounting

Class 12 Economics · Introductory Macroeconomics · Chapter 2

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Summary

National income accounting measures the aggregate production, income and expenditure of an economy. The circular flow of income shows that the value of output produced by firms equals the factor incomes paid to households, which in turn equals the expenditure on final goods — so income can be measured in three equivalent ways. The product (value-added) method sums the value added by all producing units, avoiding double counting of intermediate goods. The income method adds factor incomes — wages, rent, interest and profit. The expenditure method sums spending on final goods: \(GDP=C+I+G+(X-M)\). Several aggregates follow. Gross Domestic Product (GDP) measures output within the domestic territory, while Gross National Product adds net factor income from abroad, \(GNP=GDP+NFIA\). Subtracting depreciation gives net product, and subtracting net indirect taxes converts market-price measures to factor-cost measures, leading to National Income (NNP at factor cost). The chapter distinguishes nominal GDP (at current prices) from real GDP (at constant prices), and defines the GDP deflator \(=\dfrac{\text{Nominal GDP}}{\text{Real GDP}}\times 100\) along with the Consumer Price Index and Wholesale Price Index as measures of the price level. Finally it notes the limitations of GDP as an index of welfare — it ignores the distribution of income, non-market activities and externalities.

Key terms

Circular flow of income

The flow showing that output equals factor income equals expenditure on final goods.

Value added

The difference between the value of a firm’s output and the value of its intermediate inputs.

Gross Domestic Product

The market value of all final goods and services produced within a country in a year.

Net factor income from abroad

Factor income earned by residents abroad minus factor income paid to non-residents, linking GDP and GNP.

GDP deflator

A price index, \(\dfrac{\text{Nominal GDP}}{\text{Real GDP}}\times 100\), measuring the general price level.

Real GDP

GDP valued at constant (base-year) prices, removing the effect of price changes.

Extra questions & answers

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The circular flow of income shows that:

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