Chapter 2 National Income and Related Aggregates Class 12 Economics 2022-2023 CBSE Notes & PDF

Consumption Goods : Those final goods which satisfy human wants directly. ex- ice-cream and milk used by the households.

Capital Goods :Those final goods which help in production. These goods are used for generating income. These goods are fixed assets of the producers.ex- plant and machinery.

Final Goods are those goods which are used either for final consumption or for investment.

Intermediate Goods refers to those goods and services which are used as a raw material for further production or for resale in the same year.

These goods do not fulfill needs of mankind directly.

Investment :Addition made to the physical stock of capital during a period of time is called investment. It is also called capital formation.

capital formation:- Change in the stock of capital is also called capital formation.

Depreciation :means fall in value of fixed capital goods due to normal wear and tear and expected obsolescence. It is also called consumption of fixed capital.

Gross Investment :Total addition made to physical stock of capital during a period of time. It includes depreciation. OR Net Investment + Depreciation

Net Investment :Net addition made to the real stock of capital during a period of time. It excludes depreciation.

Net Investment = Gross investment – Depreciation.

Stocks :Variables whose magnitude is measured at a particular point of time are called stock variables. Eg. National Wealth, Inventory etc.

Flows :Variables whose magnitude is measured over a period of time are called flow variable. Eg. National income, change in stock etc.

Circular flow of income :It refers to continuous flow of goods and services and money income among different sectors in the economy. It is circular in nature. It has neither any end and nor any beginning point. It helps to know the functioning of the economy.

Leakage :It is the amount of money which is withdrawn from circular flow of income. For eg. Taxes, Savings and Import. It reduces aggregate demand and the level of income.

Injection :It is the amount of money which is added to the circular flow of income. For e.g. Govt. Exp., investment and exports. It increases the aggregate demand and the level of income.

Economic Territory :Economic (or domestic) Territory is the geographical territory administrated 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: is a person or an institution who normally resides in a country and whose Centre of economic interest lies in that country.

Exceptions:- (a) Diplomats and officials of foreign embassy.

(b) Commercial travellers, tourists students etc.

(c) People working in international organizations like WHO, IMF, UNESCO etc. are treated as normal residents of the country to which they belong.

The related aggregates of national income are:-
(i) Gross Domestic Product at Market price (GDP_MP)
(ii) Gross Domestic Product at Factor Cost (GDP_FC)
(iii) Net Domestic Product at Market Price (NDP_MP)
(iv) Net Domestic Product at FC or (NDP_FC)
(v) Net National Product at FC or National Income (NNP_FC)
(vi) Gross National Product at FC (GNP_FC)
(vii) Net National. Product at MP (NNP_MP)
(viii) Gross National Product at MP (GNP_MP)

(i) Gross Domestic Product at Market Price : It is the money value of all the
final goods and services produced within the domestic territory of a country
during an accounting year.
GDP_MP = Net domestic product at FC (NDP_FC) + Depreciation + Net
Indirect tax.

(ii) Gross Domestic Product at FC : It is the value of all final goods and services
produced within domestic territory of a country which does not include net
indirect tax.
GDP_FC = GDP_MP – Indirect tax + Subsidy
or GDP_FC = GDP_MP – NIT

(iii) Net Domestic Product at Market Price : It is the money value of all final
goods and services produced within domestic territory of a country during an
accounting year and does not include depreciation.
NDP_MP = GDP_MP – Depreciation

(iv) Net Domestic Product at FC : It is the value of all final goods and services 
which does not include depreciation charges and net indirect tax. Thus it is
equal to the sum of all factor incomes (compensation of employees, rent,
interest, profit and mixed income of self employed) generated in the domestic
territory of the country.
NDP_FC = GDP_MP – Depreciation – Indirect tax + Subsidy

(v) Net National Product at FC (National Income) : It is the sum total of factor
incomes (compensation of employees + rent + interest + profit) earned by
normal residents of a country in an accounting year
or
NNP_FC = NDP_FC + Factor income earned by normal residents from abroad –
factor payments made to abroad.

(vi) Gross National Product at FC: It is the sum total of factor incomes earned
by normal residents of a country along with depreciation, during an accounting
year.
GNP_FC = NNP_FC + Depreciation OR

GNP_FC = GDP_FC + NFIA

(vii) Net National Product at MP : It is the sum total of factor incomes earned by
the normal residents of a country during an accounting year including net
indirect taxes.
NNP_MP = NNP_FC + Indirect tax – Subsidy

(viii) Gross National Product at MP : It is the sum total of factor incomes earned
by normal residents of a country during an accounting year including
depreciation and net indirect taxes.
GNP_MP = NNP_FC + Dep + NIT

Domestic Aggregates

Gross domestic Product at Market Price is the market 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. It includes the value of depreciation or consumption of fixed capital.

Net Domestic Product at Market PriceDepreciation (consumption of Fixed capital). It is the market value of final goods and services produced within the domestic territory of the country during a year exclusive of depreciation.

It is the factor income accruing to owners of factors of production for suppling factor services with in domestic territory during an accounting year.

NATIONAL AGGREGATES

Gross National Product at Market Price ) is 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 the sum total of all factors incomes which are earned by normal residents of a country in the form of wages. rent, interest and profit during an accounting year.

Methods of Estimation of National Income:

National Income at Current Prices : It is also called nominal National income. When goods and services produced by normal residents within and outside of a country in a year valued at current years prices i.e. current prices is called national income at current prices.

Y = Q x P

Y = 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 called as real national income. When goods and services produced by normal residents within and outside of a country in a year valued at constant price i.e. 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

Value of Output :Market value of all goods and services produced by an enterprise during an accounting year.

Value added :It is the difference between value of output of a firm and value of inputs bought from the other firms during a particular period of time.

Problem of Double Counting :Counting the value of a commodity more than once while estimating national income is called double counting. It leads to overestimation of national income. So, it is called problem of double counting.

Ways to solve the problem of double counting.

(a) By taking the value of only final goods.

(b) By value added method.

Components of Added by all 3 sectors

1. Value Added by Primary Sector(=VO-IC)

2. Value Added by Secondary Sector(=VO-IC)

3. Value Added by Tertiary Sectors(=VO-IC)

Hints

VO=Value of output

IC=Intermediate Consumption

VO=Price X quantity OR

Sales + Change in stock

(Change in stock = Closing Stock – Opening Stock)

Components of Final Expenditure:

1. Final Consumption Expenditure

a. Private Final Consumption Expenditure(C)

b. Government Final Consumption Expenditure(G)

2. Gross Domestic Capital Formation

a. Gross Domestic Fixed Capital Formation

i. Gross business Fixed Investment

ii. Gross Residential Construction Investment

iii. Gross public Investment

b. Change in Stock or Inventory Investment

3. Net Export(X-M)

a. Export(X)

b. Import(M)

Components of Domestic Income :

1. Compensation of Employees

a. Wages and salaries(Cash/or kinds)

b. Employers Contribution of Social security Schemes

2. Operating surplus

a. Rent

b. Interest

c. Profit

i. Corporate Tax

ii. Dividend

iii. Undistributed corporate profit

3. Mixed Income for self-Employed person

Net Factor Income from Abroad NFIA = It is 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 :

1. Net Compensation of Employees

2. Net Income from Property and entrepreneurship

3. Net Retained earning of resident companies abroad

Hints :NFIA : Net Factor Income Earned from Abroad.

NFIA = Factor Income Received from Abroad.

–Factor Income Paid to Abroad.

OR

NFIA = Net compensation of Employees

+ Net income from property and entrepreneurship.

+ Net retained earning of resident companies abroad.

Net National Disposable Income (NNDI): It is defined as net national product at Market price  plus net current transfer from rest of the world.

NNDI = NNP_MP

+ Net current transfers from rest of the world.

=National income + net indirect tax + net current transfers from the rest of the world.

Gross National Disposable Income (Gross NDI  + Net current Transfers from rest of the world.

Net National Disposable Income (Net NDI)  + Net current Transfers from rest of the world.

OR

= Gross NDI – Depreciation.

Concept of Value Added of One Sector or One Firm

1. Value output = Sales + Change in Stock. or value of output = price × qty. sold + ΔS.
2. Gross value added at market price  = Value of output – Intermediate consumption.
3. Net value added at market price  = – Depreciation.
4. Net value added at factor cost  = – Net indirect tax.
Note: By adding up of all the sectors, we get or Domestic Income.
Personal Disposable Income from National Income 

Private Income :Private income is estimated income of factor and transfer incomes from all sources to private sector within and outside the country.
Personal Income :It refers to income received by house hold from all sources. It includes factor income and transfer income.
Personal Disposable Income :It is that part of Personal income which is available to the households for disposal as they like.
GDP and Welfare :
In general GDP and Welfare are directly related with each other. A higher GDP implies that more production of goods and services. It means more availability of goods and services. But more goods and services may not necessarily indicate that the people were better off during the year. In other words, a higher GDP may not necessarily mean higher welfare of the people. There are two types of GDP:

Real GDP : When the goods and services are produced by all producing units in the domestic territory of a country during an a/c. year and valued these at base year’s prices or constant price, it is called real GDP or GDP at constant prices. It changes only by change in physical output not by change price level. It is called a true indicator of economic development.

Important Question

• Define budget deficit and trade deficit. The excess of private investment over saving of a country in a particular year was Rs 2,000 crores. The amount of budget deficit was (-) Rs 1,500 crores. What was the volume of trade deficit of that country? [3-4 Marks]
  Ans: Budget deficit. It measures the amount by which the government expenditure exceeds the tax revenue earned by it. Budget Deficit = G – T.
  Trade deficit: It measures the amount of excess expenditure over the export revenue earned by the country.
  Trade Deficit = M – X
  Given G – T = (-) Rs 1500 crore
  Investment – Saving = Rs 2000 crore Trade deficit = [I – S] + [G – T]
  = [2000]+ [-1500] = Rs 500 crore.
• Suppose the GDP at market price of a country in a particular year was Rs 1,100 crores. Net Factor Income from Abroad was Rs 100 crores. The value of Indirect taxes – Subsidies was Rs 150 crores and National Income was Rs 850 crores. Calculate the aggregate value of depreciation. [3 Marks]
  Ans: National Income (or NNPFC) = GDPmp- Depreciation + Net factor income from abroad – [Indirect Taxes-Subsides] 850 = 1100 – Depreciation +100- 150
  Depreciation = 1100+ 100- 150-850 Depreciation = Rs 200 Crore
• Net National Product at Factor Cost of a particular country in a year is Rs 1,900 crores. There are no interest payments made by the households to the firms / government, or by the firms / government to the households. The Personal Disposable Income of the households is Rs 1,200 crores. The personal income taxes paid by them is Rs 600 crores and the value of retained earnings of the firms and government is valued at Rs 200 crores. What is the value of transfer payments made by the government and firms to the households? [3-4 Marks]
  Ans: Personal disposable income = Personal income – Personal tax – miscellaneous receipts of government 1200 = Personal Income – 600 – 0 Personal Income = 1800 Crore Private Income = Personal income + retained earnings + corporate tax = 1800 + 200 + 0 = 2000 Crore Private income = NNPFC (National income) – NDPFC of government sector + Value of transfer payment 2000 = 1900 – 0 + Value of transfer payment
  Value of transfer payment =100 Crore
• Explain any four limitations of using GDP as a measure/index of welfare of a country. [CBSE Sample Paper 2016]
  Ans: Per Capita Real GDP can be taken as indicator for economy. But by itself is not an adequate indicator. There are many reasons behind this. These are:

1. Many goods and services contributing economic welfare are not included in GDP Or Non-Monetary exchanges.
   (a)There are many goods and services which are left out of estimation of national income on account of practical estimation difficulties e.g., services of housewives and other members, own account production, etc.
   (b)These are left on account of non availability of data and problem in valuation.
   (c)It is generally agreed that these items contribute to economic welfare.
   (d)So, if we depend only on GDP, we would be underestimating economic welfare.
2. Though externalities are not taken into account in GDP, they affect welfare.
   (a)When the activities of somebody result in benefits or harms to others with no payment received for the benefit and no payment made for the harm done, such benefits and harms are called externalities.
   (b)Activities resulting in benefits to others are positive externalities and increase welfare; and those resulting in harm to others are called negative externalities, and thus decrease welfare.
   (c)GDP does not take into account these externalities.
   (d)For example, construction of a flyover or a highway reduces transport cost and journey time of its users who have not contributed anything towards its cost. Expenditure on construction is included in GDP but not the positive externalities flowing from it. GDP and positive externalities both increase welfare. Therefore, taking only GDP as an index of welfare understates welfare. It means that welfare is much more than it is indicated by GDP.
   (e)Similarly, GDP also does not take into account negative externalities. For examples, factories produce goods but at the same time create pollution of water and air. River Yamuna, now a drain, is a living example. The pollution harms people. The factories are not required to pay anything for harming people. Producing goods increases welfare but creating pollution reduces welfare. Therefore, taking only GDP as an index of welfare overstates welfare In this case, welfare is much less than indicated by GDP.
3. Change in the distribution of income (GDP) may affect welfare.
   (a)All people do not earn the same amount of income. Some earn more and some earn less. In other words, there is unequal distribution of income.
   (b)At the same time, it is also true that in the event of rise in ‘per capita real income’ all are not better off equally. ‘Per capita’ is only an average. Income of some may rise by less and of some by more than the national average. In case of some it may even fall.
   (c)It means that the inequality in the distribution of income may increase or decrease.
   (d)If it increase it implies that rich become more rich and the poor become more poor.
   (e)Utility of a rupee of income to the poor is more than to the rich. Suppose, the income of the poor declines by one rupee and that of the rich increases by one rupee. In such a case, the decline in welfare of the poor will be more than the increase in welfare of the rich.
   (f) Therefore, if the rise in per capita real income inequality increases, it may lead to a decline in welfare (in the macro sense).
4. All products may not contribute equally to economic welfare.
   (a)GDP includes different types of products, like food articles, houses, clothes, police services, military services, etc.
   (b)Some of these products contribute more to the welfare of the people, like food, clothes, houses, etc. Other products like police services, military services etc. may comparatively contribute less and may not directly affect the standard of living of the people.
   (c)Therefore, how much is the economic welfare would depend more on. the types of goods and services produced, and not simply how much is produced.
   (d) It means that if GDP rises, the increase in welfare may not be in the same proportion.
5. Contribution of some products may be negative
   (a)GDP includes all final products whether it is milk or liquor.
   (b)Milk may provide both immediate and ultimate satisfaction to consumers On the other hand, liquor may provide some immediate satisfaction, but because of its harmful effects on health it may lead to decline in welfare.
   (c)GDP include only the monetary values of the products and not their contribution to welfare.
   (d)Therefore, economic welfare depends not only on the volume of consumption but also on the type or goods and services consumed.