National Income and Related aggregates is largely a numerical based chapter that helps us calculate the national income through different methods such as Income, expenditure and value-added methods, their steps and precautions. Here in this blog, we have summarized the national income and related aggregates class 12 notes.
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Basic Concepts of Macroeconomics
In our national income and related aggregate class 12 notes, we will first look at the basic concepts of Macroeconomics. You can have a look here:
Goods: Goods is defined as any physical object, manmade, that could command a price in the market. they are the materials that satisfy human wants and provide utility.
Consumption goods: Those goods which satisfy human wants directly are called consumption goods. Eg milk, foodgrains etc
Capital goods: Those goods used for investment and help increase production are called capital goods: Eg plant, machinery.
Final goods: The goods that are used for final consumption or investment are called final goods. These goods won’t pass through any further stages of processing or transformation.
Intermediate goods: Those goods used as raw material for further production or resale are called intermediate goods. They do not fulfill the needs of mankind directly. Eg Lawyers, chartered accountants.
Investment: Investment refers to addition made to the physical stock of capital during a period of time.
Capital formation: Capital formation is the change in the change in the stock of capital.
Depreciation: A fall in the value of fixed capital goods due to normal wear and tear. It is also called the consumption of fixed capital.
Gross Investment: Gross investment refers to the total addition made to the physical stock of capital during a period of time. It includes depreciation.
Net Investment + Depreciation
Net Investment : net investment is the net addition made to the real stock of capital during a period of time. It excludes depreciation.
Net Investment = Gross investment – Depreciation
Stocks: Stock variables are those variables whose magnitude is measured at a particular point in time. Eg National Wealth, Inventory etc
Flows: Flow variables are those variables whose magnitude is measured over a period of time are called flow variables. Eg. National income, change in stock etc.
Circular flow of Income: Circular flow of Income refers to the continuous flow of goods and services and money income among different sectors in the economy. It doesn’t have an end or a beginning point. It helps us know the functioning of the economy.
Leakage: Leakage is the amount of money that is withdrawn from the circular flow of income. Eg Taxes, Savings etc. (reduces aggregate demand and level of income )
Injection: Injection refers to the amount of money that is added to the circular flow of income. Eg : govt, imports etc (increases aggregate demands and levels of income)
Economic Territory: Economic refers to the geographical territory administered by a Government within which persons, goods, and capital circulate freely.
Scope of economic territory:
(a) Political frontiers, including territorial waters and airspace.
(b) Embassies, consulates, military bases etc., located abroad.
(c) Ships and aircraft operated by the residents between two or more countries.
(d) Fishing vessels, oil and natural gas rigs operated by residents in the international waters.
Normal Resident of a country: A person or an institution who normally resides in a country and whose Centre of economic interest lies in that country is called a normal resident. However, the exceptions to normal residents of a country are Diplomacy/officials of a foreign embassy.
Travellers, tourists, students.
Those working in international organizations like WHO, IMF, UNESCO
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Moving further in national income and related aggregates class 12 notes, we will look at the various related aggregates of national incomes. They are listed below.
1.Gross domestic product market price (GDPMP)
Referred to as the money value of all the final goods and services produced in the country during an accounting year.
GDPMP = Net domestic product at FC (NDPFC) + Depreciation + Net Indirect tax.
- Gross Domestic Product at FC
Referred to as the value of the final goods and services produced within the country’s domestic territory. It doesn’t include the net indirect tax.
GDPFC = GDPMP – Indirect tax + Subsidy
or GDPFC = GDPMP – NIT
- Net Domestic Product at Market Price
It is referred to as the value of all final goods and services produced with the territory during an accounting year. It doesn’t include depreciation.
NDPMP = GDPMP – Depreciation
- Net domestic product at FC
It is referred to as the value of all final goods and services, including depreciation charges and net indirect tax.
NDPFC = GDPMP – Depreciation – Indirect tax + Subsidy
- Net National Product at FC (National Income)
Referred to as the total of factor incomes (compensation of employees + rent + interest + profit) earned by normal residents of a country in an accounting year.
NNPFC = NDPFC + Factor income earned by normal residents from abroad – factor payments made abroad.
- Gross National Product at FC
Referred to as the total of factor incomes earned by normal residents of a country and depreciation during an accounting year.
GNPFC = NNPFC + Depreciation OR GNPFC = GDPFC + NFIA
- Gross National Product at MP
It is referred to as the total of factor incomes earned by normal residents of a country during an accounting year, including depreciation and net indirect taxes.
GNPMP = NNPFC + Dep + NIT
- Net National Product at MP
It is referred to as the total of factor incomes earned by the normal residents during an accounting year, including net indirect taxes.
NNPMP = NNPFC + Indirect tax – Subsidy
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According to national income and related aggregates class 12 notes, there are two kinds of domestic aggregates. They are mentioned below.
- Gross Domestic Product at Market Price – Value of all the final goods and services produced by all producing units located in the domestic territory of a country during an accounting year. Includes value of depreciation or consumption of fixed capital.
2. Net domestic product at market price – The market value of final goods and services produced within the country’s domestic territory during a year exclusive of depreciation.
We now move further in national income and related aggregates class 12 notes and look at the kinds of national aggregates. They are mentioned below.
- Gross National Product at Market Price: Referred to as the market value of all the final goods and services produced by normal residents (in the domestic territory and abroad) of a country during an accounting year.
- National income: It is referred to as the total of all factors incomes earned by normal residents of a country in the form of wages—rent, interest and profit during an accounting year.
- National Income at Current Prices: It is also referred to as nominal National income. When goods and services produced by normal residents within and outside of a country in a year are valued at current years prices, i.e., current prices are called national income at current prices.
Y = Q x PY = National income at current prices
Q = Quantity of goods and services produced during an accounting year
P = Prices of goods and services prevailing during the current accounting year.
- National Income at Constant Prices: It is also referred to as real national income. When goods and services produced by normal residents within and outside of a country in a year are valued at a constant price, i.e. the base year’s price is called National Income at Constant Prices.
Y’ = Q x P
Y’ = National income at constant prices
Q = Quantity of goods and services produced during an accounting year
P’ = Prices of goods and services prevailing during the base year.
Problem of Double Counting
According to national income and related aggregates class 12 notes, counting the value of a commodity more than once while estimating national income is double counting. It leads to overestimation of national income. So, it is called the problem of double counting. Ways to solve the problem of double counting are mentioned below.
(a) By taking the value of only final goods.
(b) By value added method.
Components of Final Expenditure
Moving further in national income and related aggregates class 12 notes, we examine the components of final expenditure. They are:
- Final Consumption Expenditure
- Private Final Consumption Expenditure(C)
- Government Final Consumption Expenditure(G)
- Gross Domestic Capital Formation
- Gross Domestic Fixed Capital Formation
- Gross Business Fixed Investment
- Gross Residential Construction Investment
- Gross Public Investment
- Change in Stock or Inventory Investment.
- Net Export
Components of Domestic Income
There are various components of domestic income according to national income and related aggregates class 12 notes. You can have a look here:
- Compensation of Employees
- Wages and salaries(Cash/or kinds)
- Employers Contribution to Social security Schemes
- Operating surplus
It is further divided into:
- Corporate Tax
- Undistributed corporate profit
- Mixed income for a self-employed person
- Net Factor Income from Abroad NFIA = It is the difference between factor income received/earned by normal residents of a country and factor income paid to non-residents of the country.
Components of NFIA :
- Net Compensation of Employees
- Net Income from Property and entrepreneurship
- Net Retained earning of resident companies abroad
NFIA: Net Factor Income Earned from Abroad.
NFIA = Factor Income Received from Abroad –Factor Income Paid to Abroad.
NFIA = Net compensation of Employees
Net income from property and entrepreneurship + Net retained earnings of resident companies abroad.
- Net National Disposable Income (NNDI): It is defined as the net national product at the Market price plus net current transfer from the rest of the world.
NNDI = NNPMP + Net current transfers from the rest of the world
=National income + net indirect tax + net current transfers from the rest of the world.
- Private income – It is the estimation of income of factors and transfer incomes from all sources to the private sector within and outside the country.
- Personal income – It is income received by a household from all sources. It includes factor income and transfer income.
- Personal Disposable Income – It is referred to as Personal income which is available to the households for disposal as they like.
- GDP and welfare: There is a direct relationship between GDP and welfare. There are 2 main types of GDP, namely
Welfare: This refers to the material well being of the people and is dependent on factors like national income, consumption level, quality of goods etc. and non-economic factors like environmental pollution, law and order etc. Additionally, welfare depends on a non-economic factor called non-economic welfare. Social welfare is the total of economic and non-economic welfare.
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This was all about National Income and Related aggregate class 12 notes. We hope that the above-provided revision and study notes will prove to be helpful. For more such notes, read our blogs at Leverage Edu.