Goods and stocks
The economic wealth, or well-being, of a country does not necessarily depend on the mere possession of resources; the point is how these resources are used in generating a flow of production and how, as a consequence, income and wealth are generated from that process.
Flow of production
- People combine their energies with natural and manmade environment within a certain social and technological structure to generate a flow of production.
- Each producer of commodities intends to sell her output. The consumer may, in turn, be an individual or an enterprise and the good or service purchased by that entity might be for final use or for use in further production.
- It is not in the nature of the good but in the economic nature of its use that a good becomes a final good. Ex: use of tea in house and shops.
FINAL GOODS AND INTERMEDIATE GOODS
They are either in the form of consumption goods (both durable and non-durable) or capital goods. As final goods they do not undergo any further transformation in the economic process.
- Goods like food and clothing, and services like recreation that are consumed when purchased by their ultimate consumers are called consumption goods or consumer goods(includes services).
- Then there are other goods that are of durable character which are used in the production process.
- These are tools, implements and machines.
- While they make production of other commodities feasible, they themselves don’t get transformed in the production process.
- These goods form a part of capital, one of the crucial factors of production in which a productive enterprise has invested, and they continue to enable the production process to go on for continuous cycles of production. These are capital goods and they gradually undergo wear and tear, and thus are repaired or gradually replaced over time.
- The stock of capital that an economy possesses is thus preserved, maintained and renewed partially or wholly over time.
Of the total production taking place in the economy a large number of products don’t end up in final consumption and are not capital goods either. Such goods may be used by other producers as material inputs. Examples are steel sheets used for making automobiles and copper used for making utensils. These are intermediate goods, mostly used as raw material or inputs for production of other commodities. These are not final goods.
A quantitative measure
Since each of these commodities is produced for sale, the sum total of the monetary value of these diverse commodities gives us a measure of final output.
The problem of error
Since we are dealing with value of output, we should realise that the value of the final goods already includes the value of the intermediate goods that have entered into their production as inputs. Counting them separately will lead to the error of double counting.
- Whereas considering intermediate goods may give a fuller description of total economic activity, counting them will highly exaggerate the final value of our economic activity.
- Capital goods or consumer durables once produced do not wear out or get consumed in a delineated time period. In fact capital goods continue to serve us through different cycles of production.
- There can be addition to, or deduction from, these if a new machine is added or a machine falls in disuse and is not replaced. These are called stocks.
- Stocks are defined at a particular point of time.
- However we can measure a change in stock over a specific period of time like how many machines were added this year. Such changes in stocks are thus flows, which can be measured over specific time periods.
- A particular machine can be part of the capital stock for many years (unless it wears out); but that machine can be part of the flow of new machines added to the capital stock only for a single year when it was initially installed.
Investment and depreciation
- That part of our final output that comprises of capital goods constitutes gross investment of an economy. These may be machines, tools and implements; buildings, office spaces, storehouses or infrastructure like roads, bridges, airports or jetties.
- But all the capital goods produced in a year do not constitute an addition to the capital stock already existing. A significant part of current output of capital goods goes in maintaining or replacing part of the existing stock of capital goods. This is because the already existing capital stock suffers wear and tear and needs maintenance and replacement and its value needs to be subtracted from gross investment for arriving at the measure for net investment.
- This deletion, which is made from the value of gross investment in order to accommodate regular wear and tear of capital, is called depreciation.
Net Investment = Gross investment – Depreciation
Depreciation is the annual allowance for wear and tear of a capital good. In other words it is the cost of the good divided by number of years of its useful life. Depreciation is an accounting concept. No real expenditure may have actually been incurred each year yet depreciation is annually accounted for
Importance of consumer goods
- The consumer goods sustain the consumption of the entire population of the economy.
- Purchase of consumer goods depends on the capacity of the people to spend on these goods which, in turn, depends on their income.
In a specific time period, say in a year, the total production of final goods can thus be either in the form of consumption or investment. This implies that there is a trade-off.
- But production of more capital goods would mean that in future the labourers would have more capital equipments to work with. This leads to a higher capacity of the economy to produce with the same number of labourers.
- Thus total input itself would be higher compared to the case when less capital goods were produced. If total output is higher, the amount of consumer goods that can be produced would surely be higher.
- Thus the economic cycle not only rolls on, higher production of capital goods enables the economy to expand.
Without demand and the backing of purchasing power, one’s need for commodities does not get recognised by the market. So we can see a circular flow here which is facilitated through the market.
Simply put, the firms’ demand for factors of production to run the production process creates payments to the public. In turn, the public’s demand for goods and services creates payments to the firms and enables the sale of the products they produce.