National Income Accounting

Goods, Prices, GDP and Welfare

In your everyday routine, there are several things that you need to get through the day. As a student, you may require your subject books, your art equipment, or your mechanical drawing set. Needs are different for different people and what satisfies these needs are goods and services. And you pay a price for these goods. Consequently, you create a market for these goods and help in contributing towards the GDP of your country’s economy. And all these put together affect the economy in many ways. So, let’s try and understand these concepts in detail.

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Goods

Now, we already know that goods are products that satisfy human wants and needs. In the context of economics, we can define goods as materials that provide a utility. Now, you can classify goods into different categories such as tangible and intangible goods and intermediary and final goods.

Tangible and Intangible Goods

Tangible goods are the goods that you see and touch. You can transfer these goods from one place to another. Examples of tangible goods include automobiles, garments, and grocery items. Intangible goods, on the other hand, are goods that you can’t feel or touch. Medical, architectural, law or engineering services are all examples of intangible goods.

Goods, Prices, GDP and Welfare(Image Source: Wikipedia)

You can further divide tangible goods into categories such as economic and non-economic goods and consumer and producer goods. Goods that you buy are economic goods. They come with a price and are affected by demand and supply factors. Non-economic goods are free.

Consumer goods are goods that directly satisfy human needs. These include durable (fuel, bread, milk, rice) and non-durable goods (garments, cars, fans). Producer goods include goods that you can further use to produce other goods. These include goods such as machines and agricultural raw materials.

Intermediate and Final Goods

Intermediate goods are goods that one production unit sells to another for resale or further production. For instance, a farmer may sell wheat to a company. A company may then buy that wheat and further process it to create bread. Here wheat is an intermediary product.

Final goods are goods that are produced for final consumption or investment and not for resale. It is very important for you to understand the difference between an intermediary product and a final product. When a municipal corporation provides electricity to a production unit or a company, then it is an intermediary good. However, when the same electricity is supplied to households for direct consumption, it becomes a final good.

Prices

Now that you are familiar with the concept of goods in economics, let’s try and understand the concept of price. You can define price as the compensation you pay to another party in return for one unit of goods or services. The price of a product or a service usually depends on its supply and demand. And the demand and supply factors in an open economy usually balance on their own.

When a product’s supply is excessive, then the prices are usually low. This causes the production to decrease to a point where there is a balance between the demand and supply. When the demand for the same product increases and doesn’t match the supply, the price of the product increases. This entire system of price based on demand and supply factors is also referred to as the price theory.

Although in a free economy the demand and supply factors balance out themselves, sometimes these forces are affected by government subsidies or industrial manipulation. Consequently, the prices also change.

Goods, Prices, GDP and Welfare(Image Source: Wikipedia)

Gross Domestic Product (GDP) and Welfare

Now that you have understood the concepts of goods and prices, let’s see how they affect the GDP of an economy. Let’s first understand what’s GDP? You can define GDP as the total value of goods and services produced in a country within a specific period. The GDP is usually calculated on an annual basis.

You can calculate an economy’s GDP using the income and expenditure methods. After computing the GDP, you can measure it with the GDP of the previous year. Usually, GDP is used as a tool to the indicate economic performance of a country.

Although the GDP is an important indicator of economic growth, a country’s good GDP doesn’t necessarily translate to good welfare and well-being. Let’s see why. First, if a country’s GDP rises, it may not consequently increase the well-being of its people. The GDP rise may be distributed among a handful of companies. For others, the income may have fallen.

Second, there are several transactions and activities that are non-monetary. Money does not matter in such transactions. For instance, volunteer work is a non-monetary activity as there is no income generated.

Finally, there are black markets in several developing countries. In black markets, trading generally involves swapping of goods and services and money isn’t involved. Consequently, as money may or may not be exchanged, GDP cannot be calculated. So, although the GDP is an effective tool to measure economic growth, it doesn’t really measure the well-being or the welfare of the people.

Solved Question for You

Q: Identify whether the following statement is true or false.

“The sand on a beach shore comes under the category of an economic good.”

Correct answer: False. Beach sand is freely available. It does not have a monetary value associated with it and is hence a non-economic good.

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Saravanan Kathirvel
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Saravanan Kathirvel

Hello Sir/Mam,Please explain the product method of calculating national income.

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