(a) Should purchase of wheat in the wholesale market be treated as the purchase of intermediate goods ? (b) Increase in national income always implies increase in domestic income. Elucidate.

Question

Accepted Answer

(a) Purchase of wheat in wholesale market: If purchased by a flour mill for further processing, it is an intermediate good as its value will be merged in the value of flour. If purchased by a household for consumption, it is a final good. The treatment depends on the purpose of purchase. As per the chapter, intermediate goods are those whose value is merged with the value of final goods.

(b) This statement is not always true. National Income (NNP_FC) = Domestic Income (NDP_FC) + NFIA. If NFIA is negative (factor income paid abroad exceeds factor income received from abroad), National Income will be less than Domestic Income. So increase in National Income does not necessarily imply increase in Domestic Income.