BUSINESS ECONOMICS pdf

Difference between explicit and implicit costs:

• Explicit cost: actual cash payment made by the firm (recorded in accounts).
  • Examples: wages paid, rent paid, electricity bill, raw material payment.
• Implicit cost: imputed cost of using owned resources (not a cash payment).
  • Examples: owner’s salary for his own work, rent that could be earned from own building used in business.

Thus, explicit costs are out-of-pocket costs, while implicit costs represent opportunity cost of owned resources.

Value Added (Output) Method

In this method, we compute national output by summing value added at each stage of production.

Key points (any three):

• Value added = Value of output − Value of intermediate goods.
• We add value added of all sectors (agriculture, industry, services) to get GDP.
• It avoids double counting because intermediate goods are excluded; only final contribution of each producer is counted.

Hence, value added method gives a correct measure of output without counting the same inputs repeatedly.

Difficulties in Measuring National Income (Developing Countries)

Measuring national income is difficult due to data limitations and structural features of the economy.

Key difficulties (any five):

• Large informal sector: many small businesses do not maintain accounts; output and income are under-reported.
• Non-monetized activities: household services and self-consumption (especially in agriculture) are not fully recorded.
• Illiteracy and lack of records: weak accounting practices make reliable estimation hard.
• Double counting: intermediate goods may be wrongly included if value added is not calculated correctly.
• Black economy/tax evasion: hidden incomes reduce reported national income.
• Valuation problems: price variation across regions and quality changes create estimation errors.

Mini summary table:

Conclusion: Because of these issues, national income figures in developing countries often require approximations and periodic revisions.