INDEX

S. NO. Topic Page No

CBSE Syllabus 2022-23 Class XII

1. 3-4
(Introductory Macroeconomics)

Unit Wise Weightage of marks 5

2.
(Introductory Macroeconomics)

3. Unit 1: National income & Related Aggregates 6-63

4. Unit 2: Money and banking

64-78

5. Unit 3: Determination of income and employment 79-115

6. Unit 4: Government budget and the economy 116-151

7. Unit 5: Balance of payment and foreign exchange 152-195

2
 Part A: Introductory Macroeconomics
Unit 1: National Income and Related Aggregates
What is Macroeconomics?
Basic concepts in macroeconomics: consumption goods, capital goods,
final goods, intermediate goods; stocks and flows; gross investment and
depreciation.
Circular flow of income (two sector model); Methods of calculating National
Income
- Value Added or Product method, Expenditure method, Income
method. Aggregates related to National Income:
Gross National Product (GNP), Net National Product (NNP), Gross
Domestic Product (GDP) and Net Domestic Product (NDP) - at market
price, at factor cost; Real and Nominal GDP.GDP and Welfare

Unit 2: Money and Banking

Money – meaning and functions, supply of money - Currency held by
the public and net demand deposits held by commercial banks.
Money creation by the commercial banking system.
Central bank and its functions (example of the Reserve Bank of India):
Bank of issue, Govt. Bank, Banker's Bank, Control of Credit through
Bank Rate, CRR, SLR, Repo Rate and Reverse Repo Rate, Open Market 3
Operations, Margin requirement.
Unit 3: Determination of Income and Employment
Aggregate demand and its components.
Propensity to consume and propensity to save (average and marginal). Short-run
equilibrium output; investment multiplier and its mechanism. Meaning of full
employment and involuntary unemployment.
Problems of excess demand and deficient demand; measures to correct them -
changes in government spending, taxes and money supply

Unit 4: Government Budget and the Economy

Government budget - meaning, objectives and components.
Classification of receipts - revenue receipts and capital receipts;
Classification of expenditure – revenue expenditure and capital
expenditure. Balanced, Surplus and Deficit Budget – measures of
Government Budget deficit.

Unit 5: Balance of Payments

Balance of payments account - meaning and components; Balance of
payments – Surplus and Deficit
Foreign exchange rate - meaning of fixed and flexible rates and managed
floating. Determination of exchange rate in a free market, Merits and
demerits of flexible and fixed exchange rate.
Managed Floating exchange rate system 4
Unit Wise Weightage of Marks
(Introductory Macroeconomics)

5
UNIT 1: National Income and Related Aggregates

6
➢ What is Macroeconomics?

➢ Basic concepts in macroeconomics: consumption goods, capital

goods, final goods, intermediate goods; stocks and flows; gross
investment and depreciation.

➢ Circular flow of income (two sector model); Methods of calculating

National Income

➢ Value Added or Product method, Expenditure method, Income

method. Aggregates related to National Income

➢ Gross National Product (GNP), Net National Product (NNP), Gross

Domestic Product (GDP) and Net Domestic Product (NDP) - at
market price, at factor cost; Real and Nominal GDP. GDPand
Welfare.

7
Prior to the “GREAT DEPRESSION” of 1930’s, Macroeconomics was
treated as an extension of Microeconomics. The nosediving of
economies of the world caused by ‘Great Depression’ led to the
emergence of Macroeconomics as a separate branch of economics.
Thus, Macroeconomics is that branch of Economics which studies
economic problems/issues at the level of the economy as a whole.
For e.g. issues relating to level of unemployment, rate of inflation,
total output etc. Macroeconomics also studies the manner in which
governments can tackle such problems to improve the welfare of all
residents of a country.

8
▪ Broadly, goods are classified in two ways:

Classification of Goods

Consumption Goods
Final Goods
or Consumer Goods

Intermediate Goods Capital Goods

9
Consumption goods (or consumer goods) are those goods which are
directly used for the satisfaction of human wants.
They are broadly classified into four categories:

Durable Consumption Goods: Semi Durable Consumption Goods:

Those goods which can be used for Those goods which can be used for a
several years and are of relatively high period of one year or slightly more.
value.
Non Durable Consumption Goods or Services:
Single Use Consumption Goods:
Those non material goods which directly
Those goods which are used up in a satisfy human wants.
10
single act of consumption.
Capital goods are fixed assets of the producers. These goods are used in the
process of production for several years and are of high value. Use of these goods
leads to depreciation. (Loss of value of fixed assets when these are repeatedly
used. For example: Plant and Machinery.)

“All capital goods are producer goods, but all producer goods are not capital
goods.”
Producer goods include:
i. Goods used as raw material, like wood used to make furniture,
ii. Fixed assets lie plant and machinery
Capital goods include only fixed assets of the producers. These are durable use
producer goods.

On the other hand, goods used as raw material are single use producer goods.
These are not repeatedly used in the process of production. Accordingly, all
producer goods are not capital goods, while all capital goods are producer goods. 11
 Consumption Goods Capital Goods
Consumption goods lead to directly Capital goods do not lead to direct satisfaction
satisfaction of human wants. of human wants.
These goods are consumed by the households These goods are not consumed by the
when purchased. households. Instead, these are used by the
producers for further production.
Expenditure on consumption is called Expenditure on capital goods is called
consumption expenditure. investment expenditure.
Higher production of consumption goods leads Higher production of consumption goods leads
to higher level of welfare of the people. It to higher production capacity in the economy.
raises the their quality of life. It is the backbone of GDP growth.

12
 Intermediate Goods Final Goods
These goods remain within the boundary line These goods are outside the boundary line of
of production and are not ready for use by their production and are ready for use by their final
final users. users.
Can be used as raw material for production of Are not used as raw material for production of
other goods during an accounting year. other goods during an accounting year.
Can be resold by the form for profit during the Are not resold by the form for profit during the
accounting year. accounting year.
Value is yet to be added to these goods. Value is not to be added to these goods.

Expenditure on these goods is called Expenditure on these goods is called final

intermediate consumption or intermediate expenditure.
cost.

These goods are not included in the estimation These goods are included in the estimation of13
of the national income or national product. the national income or national product.
▪ The same good may be final or intermediate good. The distinction
depends on the end use of the goods.

When is it an intermediate good?

▪ If the good is used by producers as a raw material, it is to be treated as
an intermediate good.
▪ If is purchased and resold by the producer, it is an intermediate good.

When is it a final good?

▪ If it is used as a fixed asset by the producer (example: a tractor used by a
farmer), it is a final good.
▪ It is also a final good if goods as purchased by households for
consumption. 14
 STOCK FLOW
Stock refers to the value of a variable at a Flow refers to the value of a variable
point of time. during a period of time.
Stock is not time dimensional. It is Flow is time dimensional. It is measured
measured at a specific point of time per hour, per month or per year.
Stock impacts the flow. Greater the stock Flow impacts the stock. Greater the flow
of capital, greater is the flow of goods and of income, greater is the stock of wealth
services. with the people.
Example: Wealth, Labour Force, Example: Income, Expenditure of Money,
Population of a Country, Rice Stored in a Number of Births, Sales of Rice
Godown.
15
 Investment refers to capital formation, or a process that increases the stock of
capital.
Investment has two components:
i. Fixed Investment
Refers to increase in the stock of fixed assets (like plant and machinery) of the
producers during an accounting year. Fixed investment is also called fixed
capital formation.
Significance of Fixed Investment :
▪ Fixed investment raises production capacity of the producers
▪ Fixed investment leads to higher level of output in the economy
▪ Higher level of output leads to higher rate of economic growth/GDP growth

16
ii. Inventory Investment
At a point of time, producers hold the stock of:
- Finished goods (unsold goods)
- Semi Finished goods
- Raw material
This is called inventory stock. Change in inventory stock during the year is
called inventory stock inventory investment of producers.
Significance of Inventory Investment
▪ Ensures uninterrupted supply of inputs to the producers
▪ With enough stock of raw material, the producers can avoid uncertainties of the
market.
▪ Enables the producers to meet the potential (future) demand for their product.
17
 Gross Investment Net Investment
It includes expenditure by the producers It includes expenditure by the producers
on the purchase of new assets as well as on the purchase of new assets only. More
expenditure on the replacement of specifically, it does not include
existing assets during an accounting year. expenditure by the producers on the
replacement of existing assets.

It includes replacement investment: In does not include replacement

investment.
(=depreciation of fixed assets)

It does not show net addition to the It shows net addition to the existing
existing capital stock. capital stock.
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Depreciation is the loss of value of fixed assets in use on account of:
i. Normal wear and tear
ii. Accidental damages, and
iii. Expected obsolescence

Depreciation is also called consumption of fixed capital. Because of

depreciation, fixed assets need to be replaced from time to time.

19
Depreciation reserve fund refers to that fund which the producers
keep for replacement investment.

i. Lack of depreciation reserve fund implies the lack of

replacement investment. Accordingly, overall investment (gross
investment) in the economy tends to fall.

ii. This leads to a fall in the level of output. The level of income
and employment will also fall. The economy will slip into a state
of economic slowdown.

iii. It might be caught into a low level equilibrium trap: a situation

when low income causes low demand, and low demand causes
low output; and once again low income.
20
Consumption of Fixed Capital Capital Loss
It refers to a loss of value of fixed assets It refers to a loss of value of fixed assets while
(capital goods) while these are being these are not in use.
continuously used in the process of
production.
It is a loss due to: It is a loss due to:
a. Normal wear and tear a. Natural Calamities (earthquakes, floods etc)
b. Accidental Damages b. Fall in the market value of assets during
c. Expected Obsolescence periods of economic recession.
It is managed through depreciation reserve It is managed through insurance of fixed
fund. assets.

21
From the macro point of view, economy is often divided into four sectors, viz:
1. Household Sector: It includes consumers of goods and services. Households
are also the owners of the factors of production.

2. Producer Sector: It includes all producing units (firms) in the economy. For
the production of goods and services, the firms hire/purchase factors of
production (land, labour, capital, and entrepreneurial skill) from the
households.

3. Government Sector: It includes: government as a welfare agency, and

government as a producer. Government as a welfare agency performs such
welfare functions as of law and order and defence.

4. The External Sector, also called the REST OF THE WORLD Sector: It includes:
all such activities which are related to import and export of goods, and the
22
flow of capital between the domestic economy and rest of the world.
Each sector of the economy depends on the other in one way or the
other. It is called intersectoral dependence.

Intersectoral interdependence leads to intersectional

flows.

Intersectoral flow in the form of money is called Money Flow.

Intersectoral Flow in the form of goods is called Real Flow.

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 Goods produced and sold by the firms

PRODUCER
HOUSEHOLD
SECTOR
SECTOR
Or FIRMS

Factor Services (Land, Labour, Capital and Entrepreneurship)

rendered by the Households

Figure: Real Flows in a Two Sector Economy

24
 Expenditure on the Purchase of Goods

HOUSEHOLD PRODUCER
SECTOR SECTOR
Or FIRMS

Payment for Factor Services

Figure: Money Flows in a Two Sector Economy

25
 Circular Flow of income refers to the unending
flow of the activities of production, income
Production
of Goods generation and expenditure involving different
and Services sectors of the economy.

The three phases of circular flow:

1
a. Production of goods and services causes
generation (or distribution) of income.
3 2
b. Income causes expenditure (or disposition.)
Three phases c. By generating demand, expenditure once
of circular again causes production.
flow of income
The flows of production, income and
expenditure form a circularity with no beginning
or no end. Which is why it is called circular flow.
26
Considering the three phases together, we find that in a two sector economy:
Production (the value of goods and services) = Income Generated = Expenditure
This is called Triple Identity.

Sale of Goods and Services (Value

Addition)

Expenditure on Goods and Services

PRODUCER
SECTOR OR HOUSEHOLD
FIRMS SECTOR
Sale of Factor Services, Land, Labour, Capital,
Entrepreneurship

Factor Payments: Rent, Wages, Interest, Profit (Money Flow) 27

Assumptions:
i. There are only two sectors in the economy: Households and Producers.
ii. The households spend their entire income, so that there are no savings.
iii. The domestic economy is closed, i.e. there are no exports and imports.
iv. Govt does not play any role in the domestic economy.

Significance:
i. Facilitates the estimation of national income.
ii. Helps in understanding interdependence among different sectors of the
economy.

28
To measure NI in ‘Domestic & National’ terms the key term is
NET FACTOR INCOME FROM ABROAD(NFIA)
NFIA = Factor income earned by our residents in the rest of the world - Factor
income earned by non- residents in our domestic territory.
Domestic Income + NFIA = National Income.
National Income – NFIA = Domestic Income.

E.g. Find Domestic Income if NI = Rs.850 cr. & NFIA = Rs.30 cr.
Domestic Income = NI - NFIA = 850 – 30 = 820 cr.

E.g. Find National Income if Domestic Income = 700 cr.; Factor income earned by
our residents from ROW = 50 cr. & Factor income earned by non – residents in
our domestic territory = 20cr.
National Income = Domestic Income + NFIA
National Income = 700 + (50 – 20) = 700 + 30 = 730 cr. 29
To measure NI in ‘Gross & Net’ terms the key term is
DEPRECIATION
Gross = Net + Depreciation
Net = Gross – Depreciation

E.g. Find GDP, if NDP = Rs. 350cr. & Depreciation = Rs. 100cr.
GDP = NDP + Depreciation = 350 + 100 = Rs. 450 cr.

E.g. Find NDP, if GDP = Rs.500cr. & Depreciation = Rs. 50cr.

NDP = GDP – Depreciation = 500 – 50 = Rs.450 cr. 30
To measure NI at ‘Market Price & Factor Cost’ terms the key term is
NET INDIRECT TAXES
Net Indirect Tax = Indirect Tax – Subsidies
Market Price = Factor Cost + Net Indirect Tax ( I.T – Subsidies )
Factor Cost = Market Price – Net Indirect Tax ( I.T – Subsidies )

E.g. Calculate Market price if Factor cost=Rs. 35cr ; Indirect tax= Rs.10cr & Subsidy=Rs. 5cr.

MP= FC+NIT(I.T-Subsidy) = 35+(10-5) = Rs.40cr.

E.g. Calculate Factor Cost if Market price=70cr; Indirect tax= 15cr. & Subsidy=20cr.

FC=MP-NIT(I.T-Subsidy) = 70-(15-20) = 70-(-5) = Rs.75cr. 31

➢ Gross Domestic Product: Gross market value of all final goods & services
produced within the domestic territory of a country during an accounting year.

➢ Net Domestic Product: Gross market value of all final goods & services produced
within the domestic territory of a country during an accounting year excluding
Depreciation.

➢ Gross National Product: Gross market value of all final goods & services
produced by the normal residents of a country during an accounting year.

➢ Net National Product: Gross market value of all final goods & services produced
by the normal residents of a country during an accounting year excluding
Depreciation. 32
➢ Real and Nominal GDP
Real GDP Nominal GDP
Also known as GDP at constant prices. Also known as GDP at current prices.
Market value of final g/s produced within Market value of final g/s produced within
the domestic territory of a country during the domestic territory of a country during
an accounting year, as estimated at base an accounting year, as estimated at
year prices. current year prices.
Can increase only when flow of g/s in the Can increase if price level rises even when
economy increases. there is no increase in flow of g/s in the
economy.
A better measure of welfare of the people Not a reliable measure of welfare of the
in a country. people in a country.
Real GDP= Q x P* where, Nominal GDP=Q x P where,
Q= quantity of final g/s produced during GDP= Q x P where,
an accounting year. Q= quantity of final g/s produced during
P*= prices prevailing in the base year. an accounting year.
P= prices prevailing in the current year. 33
Estimation of Real and Nominal GDP(Hypothetical example)

Year Production Current year prices Base year prices Nominal GDP Real GDP
(Q) (P) (P*) (QxP) (QxP*)

2018-19 100 10 10 1000 1000

2019-20 100 15 10 1500 1000

2020-21 150 15 10 2250 1500

NOTE: While Nominal GDP increases from 1000 to 1500 even when Q is constant at 100 units
due to rise in prices, the Real GDP remained the same. Real GDP is showing a rise from 1000 to
1500 only when production increases from 100 to 150. 34
➢ Welfare of people is measured in terms of the per capita availability of goods &
services.
Greater availability of goods & services per person implies greater level of economic
welfare. Hence Real GDP is considered as an index of the welfare of people.
➢ However there are certain limitations related to GDP as an index of social welfare:
❑Composition of GDP: Higher GDP will promote welfare only if increased output
comprises of goods of mass consumption & essential goods.
❑Distribution of GDP: It may happen that with rise in GDP, the inequalities in the
distribution of income may also rise which will widen the gap between the rich & poor.
GDP does not take into account changes in inequalities in the distribution of income.
❑Non-monetary exchanges: Due to the non-availability of data, many activities which
influence the economic welfare such as services of housewives in the economy, are
not evaluated in monetary terms & hence not included in GDP.
❑Externalities: These refer to positive/negative impacts of an activity caused by an
individual/firm, for which they are not paid/penalised. The positive externalities
increase the welfare while the negative externalities reduce the welfare. GDP does not
take into account such externalities.
❑Rise in prices: If increase in GDP is due to increase in prices and not due to increase
35
in physical output, then it will not be a reliable index of economic welfare.
➢ Three aspects of National Income:
1) Production aspect
2) Income or distribution aspect
3) Expenditure aspect

➢ Production Aspect: It points to flow of goods and services in the economy

or process of value adding.
➢ Income or distribution aspect: It points out to generation of income in
terms of wages,rent, interest and profit.
➢ Expenditure aspect: It indicates disposal of income in terms of
consumption expenditure or investment expenditure.

36
 Product method or value-added method

➢ Product Method or Value-added method is that method which measures

national income by estimating the contribution of each producing enterprise

to production in the domestic territoryof country in an accounting year.

➢ Value of output=Sales + change in stock

➢ Change in stock = closing stock-opening stock

37
 Estimating Value Added
Item produced Value of Output Intermediate goods Value Added
Wheat 600 200 400
Flour Mill 800 600 200
Baker 1000 800 200
Shop- keeper 1200 1000 200
Total 3600 2600 1000

➢ Thus, the gross value added by all producing enterprises is :

Rs (400+ 200+200+200 = 1000)
➢ Gross value added by all producing enterprises within the domestic territory
of a country duringthe period of one year is called GDP at M.P.
➢ Thus, Gross Value added by all producing enterprises in (PRIMARY SECTOR +
SECONDARY SECTOR + TERTIARY SECTOR) = GDP at M.P
38
Measurement of N.I. by Value-added method

➢ GDP at M.P - Depreciation =N.D.P. at M.P.

➢ N.D.P. at M.P - Net Indirect Taxes = N.D.PFC

➢ N.D.P at F.C + NFIA = NNPFC(National Income)

39
 Precautions regarding Product- method or
Value –added method
➢ Sale and purchase of second-hand goods is notincluded in value- added. Because,
value of second-hand goods is already accounted for during the year of production.

➢ Commission earned on sale and purchase ofsecond-hand goods is included.

➢ Own account production of goods is taken into account. They are simply not sold
owing to theirneed by producers themselves.

➢ Value of intermediate goods is not included, because value of intermediate goods is

alreadyreflected in value of final goods.

➢ Imputed rent of owner-occupied houses is also taken into account, because all houses
have rental value.

➢ Services for self-consumption is not considered, because it is difficult to

estimate their market-value.
40
➢ Value added in Govt. sector is equal tocompensation of employees only.
 Problem of double-counting
➢ The problem of double-counting is the problem of estimating the value of
goodsand services more than once.
➢ This leads to over-estimation of value ofgoods and services produced.

How to avoid double-counting?

➢ Final output method- According to this method, valueof intermediate goods

is deducted from value of output. In other words, value of final goods and
services only is included in National Income.
Value of Final Output= {Value of output-value ofintermediate goods}
= 3600-2600=1000

➢ Value-added method- Value-added refers to the difference between value

of output and value of intermediate consumption of each producing unit.
SUM-TOTAL of value-added by all producing unitswithin the domestic
territory of a country is equal todomestic-product.
41
(400+200+200+200=1000)
 ADDED/PRODUCT/INDUSTRIAL ORIGIN/
NET OUTPUT METHOD
Q1. Find out:
a) Value Added by Firm A and B b) Gross Value Added(GDP at FC)
Items Rs (in lacs)
1. Sales by Firm A 100
2. Purchases from Firm B by 40
Firm A
3. Purchases from Firm A by 60
Firm B
4. Sales by Firm B 200
5. Closing stock of Firm A 20
6. Closing stock of Firm B 35
7. Opening stock Firm A 25
8. Opening stock of Firm B 45
9. Indirect taxes paid by 30
both Firms 42
 SOLUTION :

V.A by firm A= V.O of firm A - I.C of firm A

V.O of firm A = Sales+ change in stock
V.O of firm A= Sales by firm A + (closing stock – opening stock of firm A)
V.O of firm A = 100 + ( 20 – 25) = 100 - 5 = 95
I.C of firm A = Purchases from Firm B by Firm A
I.C of firm B = 40
Hence V.A by firm A = V.O of firm A – I.C of firm A = 95 – 40 = 55 lacs

V.A by firm B= V.O of firm B - I.C of firm B

V.O of firm B = Sales+ change in stock
V.O of firm B= Sales by firm B + (closing stock – opening stock of firm B)
V.O of firm B = 200 + ( 35 – 45) = 200 - 10 = 190
I.C of firm B = Purchases from firm A by firm B = 60
Hence V.A by firm B = V.O of firm B – I.C of firm B = 190 – 60 = 130 lacs

G.V.A at MP/G.D.P at MP = V.A by firm A + V.A by firm B

= 55 + 130 = 185
G.D.P at MP – I.Tax + Subsidy = G.D.P at FC
=185 – 30 + 0 = 155 lacs
43
 PRACTICE NUMERICALS VALUE ADDED/PRODUCT/INDUSTRIAL ORIGIN/
NET OUTPUTMETHOD
Q2. Calculate:
a) Gross Value Added/GDP at MP b) National Income (NNP at FC)
Items Rs (in lacs)
1. Value of Output:
a. Primary Sector 800
b. Secondary Sector 200
c. Tertiary Sector 300
2. Value of Intermediate Inputs purchased by:
a. Primary Sector 400
b. Secondary Sector 100
c. Tertiary Sector 50
3. Indirect taxed paid by all sectors 50
4. Consumption of Fixed Capital of all sectors 80

5. Factor income received from ROW 10

6. Factor income paid to non residents 20
44
7. Subsidies received by all sectors 20
SOLUTION :
(a)
G.V.A at MP/ G.D.P at MP = V.A by Pri. Sec + V.A by Sec. Sector + V.A by Ter. Sec.

V.A by Primary Sector = V.O of Pri. Sec - I.C by Pri. Sec. = 800 - 400 = 400

V.A by Secondary Sector = V.O of Sec. Sector - I.C by Sec. Sec. = 200 - 100 = 100

V.A by Tertiary Sector = V.O of Ter. Sector - I.C by Ter. Sector = 300 - 50 = 250

Hence G.V.A/G.D.P at MP = V.A by Pri. Sec + V.A by Sec. Sec. + V.A by Ter. Sec.
= 400 + 100 + 250 = 750
(b)
G.D.P at MP -- Depreciation = N.D.P at MP = 750 -- 80 = 670

N.D.P at MP + NFIA(Factor income received from R.O.W -- Factor income paid

to non residents) = N.N. P at MP
670 + ( 10 -- 20 ) = 670 - 10 = 660
N.N.P at MP – I. Tax + Subsidy = N.N.P at FC =660 -- 50 + 20 = 630 lacs
45
 Income-Method

➢ Income-method is that method which measures National income in terms of

payments made in the form of wages, rent, interest and profit to factors of
production for their services.
What are Factor-Incomes? How are they different from Transfer incomes?

➢ Factor-Incomes are earned-incomes, transfer payments are unearned.

➢ Factor-incomes are rewards for rendering factor-services. Transfer payments

are just one-sided payments. No service is rendered in return for transfer

payments.
46
 Classification of Factor-Incomes

➢ COMPENSATION OF EMPLOYEES
▪ It includes:-
• wages and salaries in cash
• payment in kind
• employers’ contribution to social-security scheme
• pension on retirement
➢ OPERATING SURPLUS:
▪It includes:-
• income from property and entrepreneurship. It is earned in both private
and Govt. sector. It includes:
• Rent
• Interest
• Profit (Dividend + corporation tax + savingof enterprise or undistributed profits) 47
 Classification of Factor-Incomes
➢ MIXED INCOME:

• Mixed- Income refers to the income of SELF- EMPLOYED persons using their
labour, land, capital and entrepreneurship to produce goods and services.

• These incomes are mixed in termsof wages, rent, interest and profit. That is
why, itis called mixed income.

NDP at F.C. = sum-total of factor-incomes generated within domestic

territory of countryduring an accounting year.
Measurement of National-Income (Income- Method)

NDP at F.C. = {compensation of employees +operating surplus +mixed income}

NDP at F.C. + NFIA = NNP at F.C.

48
Precautions while estimating Factor-Incomes
➢ Transfer-earnings like old-age pensions, unemployment allowances,
scholarships, pocketexpenses etc. should not be included in N.I. because
corresponding to transfer-payments, there is no value-addition in the
economy. However, it should be remembered that retirement pension is
included in N.I. as it is a part of compensation of employees.
➢ Income from illegal activities not to be included.

➢ Sale proceeds of second-hand goods not to beincluded.

➢ Sale-proceeds of shares and bonds are not included in N.I. Because such
transactions are not related to flow ofgoods and services.
➢ Windfall gains, like lotteries and capital-gains not to be included as there is
no value addition corresponding to windfall gains.
➢ Imputed rent of owner-occupied houses is included in N.I.
➢ Goods for self-consumption should be included.
49
Precautions while estimating Factor-Incomes

➢ Indirect taxes like sales-tax, excise-duty, tend to increase M.P of goods and
services. These are includedin estimation of N.I. at M.P but are NOT to be
included while estimating N.I. at F.C

➢ Corporate tax, dividends and undistributed profits are all components of

corporate profits.Once profit is included in N.I, any of these
components should not be separately added.

➢ Income-tax is paid out of compensation of employees. It should not be

separately added.

➢ Gift tax, wealth tax, taxes on windfall gains are paid not out of current
income but out of past savings of tax-payer. These are not to be included
in estimation of N.I
50
PRACTICE NUMERICALS…..INCOME METHOD/DISTRIBUTED SHARE METHOD/

FACTOR PAYMENT METHOD

Q1. GIVEN THE FOLLOWING DATA, CALCULATE :
a) Net Domestic Income
b) Gross Domestic Income
c) Net National Income
d) Net National Income at MP.
ITEMS (Rs.in crores)
i) Indirect Taxes 9,000
ii) Subsidies 1,800
iii)Consumption of fixed capital 1,700
iv)Mixed Income of self-employed 28,000
v) Operating Surplus 10,000
vi)NFIA (-) 300
vii)Compensation of employees 24,000

51
SOLUTION

a) Net Domestic Income / NDP at FC= C.O.E+ O.S + Mixed Income

NDP at FC = 24000 + 10000 + 28000 = Rs. 62,000

b) Gross Domestic Income/ GDP at FC = NDP at FC + Depreciation

GDP at FC = 62000 + 1700 = Rs. 63,700

c) Net National Income/ NNP at FC = NDP at FC + NFIA

NNP at FC = 62000 + (-300) = Rs. 61,700

d) Net National Income at MP/NNP at MP = NNP at FC + I.T - SUBSIDIES

NNP at MP = 617000 + 9000 - 1800 = Rs. 68,900

52
PRACTICE NUMERICALS…..INCOME METHOD/DISTRIBUTED SHARE METHOD/

FACTOR PAYMENT METHOD

Q 2. GIVEN THE FOLLOWING DATA, CALCULATE :

a) Domestic Income FACTOR PAYMENT METHOD
b) National Income
ITEMS (Rs.in crores)
i) Wages 10,000
ii) Rent 5,000
iii)Interest 400
iv)Dividend 3,000
v) Mixed Income 400
vi)Undistributed Profit 200
vii)Social Security Contribution by Employer 400
viii)Corporate Profit Tax 400
ix)Net Factor Income from Abroad 1,000
x) Social Security Contribution by Employee 600 53
Ans. a) Domestic Income/NDP at FC = C.O.E + O.S + M.I
C.O.E = Wages + Social security contribution by employer
C.O.E = 10000 + 400 = Rs. 10,400
O.S =Rent + Interest + Profit(dividend+undistributed profit+corporate profit tax)

O.S = 5000 + 400 + 3000 + 200 + 400 = Rs. 9,000

M.I = 400

Hence, NDP at FC = 10400 + 9000 + 400 = Rs. 19,800

b) National Income/NNP at FC = NDP at FC + NFIA

NNP at FC = 19800 + 1000 = Rs. 20,800

54
 EXPENDITURE METHOD

➢ Expenditure Method is the method which measures final expenditure on GDPMP

during an accounting year. Final Expenditure is equal to GDPMP.This is also called
Income-Disposal method.

What is Final-Expenditure?

➢ It refers to expenditure on final goods and services in a year.

➢ If an enterprise uses goods purchased from other enterprises for re-sale or as raw-
material, the expenditure on such goods will be inter-mediate expenditure.

➢ On the other-hand, if goods and servicesare produced for final consumption, the
expenditure on them is final expenditure. 55
 Classification of Final - expenditure

➢ PRIVATE FINAL CONSUMPTIONEXPENDITURE:

It refers to expenditure on final goods and services by individuals, households
and non-profit organizations.
➢ GOVT. FINAL CONSUMPTIONEXPENDITURE:
It refers to expenditure on final goods and services by Govt.
➢ INVESTMENT EXPENDITURE(Gross Domestic Capital Formation) : It refers to
expenditure on purchase of final goods by producers. These goods are to be
further used in process of production. Investment expenditure is classified as:
❖ Fixed Investment/Gross domestic fixed capital formation : Investment in fixed
assets by business, household, Govt.
❖Inventory Investment:It refers to change instock (closing stock-opening stock)

➢ NET EXPORTS (X-M): It refers to difference between exports and imports during

a year. 56
Measurement of N.I (Expenditure method)

Final consumption expenditure{PFCE+GFCE}

+
Gross Domestic Capital Formation {GDFCF + Changein stock}
+
Net Exports (Exports-Imports) = GDP at M.P

GDP at M.P – depreciation = NDP at M.P

NDP at M.P - Net Indirect Taxes = NDP at F.C

NDP at F.C + NFIA = NNP at F.C

57
 PRACTICE NUMERICALS ON EXPENDITURE/CONSUMPTION & INVESTMENT/
INCOME DISPOSAL METHOD

Q1. From the following data, calculate :

a) GDPMP b) GDPFC
ITEMS (Rs. in crores)
a) Gross Investment 90
b) Net Exports 10
c) Net Indirect Taxes 5
d) Depreciation 15
e) Net Factor Income from Abroad (-) 5
f) Private consumption Expenditure 350
g) Government purchases of goods and services 100

58
SOLUTION

a) GDPMP = C + G + I + (X-M)
GDP at MP = Private consumption expenditure + Government purchases of
goods & services + Gross investment + Net exports.

GDPMP = 350 + 100 + 90 + 10 = Rs. 550 cr.

b) GDP at FC = GDPMP – N.I.T

GDPFC = 550 – 5 = Rs. 545 cr.

59
 PRACTICE NUMERICALS ON EXPENDITURE/CONSUMPTION & INVESTMENT/
INCOME DISPOSAL METHOD

Q2. Find NNP at FC from the following data

ITEMS (Rs. in lacs)

a) Gross domestic fixed investment 10,000

b) Inventory investment 5,000
c) Depreciation 2,000
d) Indirect tax 1,000
e) Subsidies 2,000
f) Consumption expenditure 20,000
g) Residential construction investment 6,000
h) Net factor Income from Abroad 3,000

60
SOLUTION

GDP at MP = C + G + I + (X-M)

= Consumption expenditure + Government expenditure + (Gross domestic

fixed Investment + Inventory investment) + (X-M)

= 20,000 + 0 + ( 10,000 + 5,000) + 0 = GDP at MP = 35,000

GDP at MP – Depreciation = NDP at MP = 35,000 - 2,000 = 33,000

NDP at MP – I.T + Subsidies= NDP at FC =33,000-1,OOO + 2,000= 34,000

NDP at FC + NFIA = NNP at FC = 34,000 + 3,000 = 37,000

61
Relevant Videos:

➢ https://diksha.gov.in/play/collection/do_3131034754331115521988?referrer=utm
_source%3Dmobile%26utm_campaign%3Dshare_content&contentId=do_313080246
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➢ https://diksha.gov.in/play/collection/do_3131034754331115521988?referrer=utm
_source%3Dmobile%26utm_campaign%3Dshare_content&contentId=do_313124084
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62
SOURCE ACKNOWLEDGMENT:

1. Introductory Macroeconomics : NCERT

2. Diksha Portal; Ministry of Education Govt. of India.
2. Introductory Macroeconomics : Jain & Ohri
3. Introductory Macroeconomics : Sandeep Garg

Prepared By:
Mrs.Rumma Raina
T.A Economics
ZIET Mysuru

63
UNIT 2 : MONEY & BANKING

64
 MONEY
➢ DEFINITION
❖ Money is a matter of functions four, a Medium, a Measure, a Standard, a Store.
❖ Money is what Money does. It is generally defined as an instrument which is
commonly used as a MEDIUM OF EXCHANGE.
❖ The definition of Money conveys the basic functions of Money. These are:
✓ Money Acts as a Medium Of Exchange: Money acts as a medium for the sale &
purchase of goods & services. This has removed the major difficulty of double
coincidence of wants.
✓ Money serves as a Store of Value: Since Money is easy & economical to store and it’s
value remains relatively constant, people save i.t.o Money & hence it acts as a store
of value.
✓ Money as a Measure of Value : Money serves as a measure of value in terms of unit of
account. i.e market price of goods & services is measured i.t.o Money.
✓ Money serves as a Standard for Deffered Payments: Money acts as an instrument of
business contracts where future payments are involved.
65