National Income And Related Aggregates Class 12 Notes Macro Economics Chapter 2 - CBSE

Chapter: 2

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MacroEconomics

Macroeconomics is that branch of economics which deals with economic aggregates such as national income, unemployment, business cycles and inflation etc.

Basic Concepts In Macroeconomics

Consumption goods are the goods and services which are consumed by the individuals and the households for the satisfaction of individual needs and wants. Examples are car, food, education and clothes etc.
Capital goods are the goods or fixed assets which are used by the firms for the further production of goods and services. Such goods are durable in nature such as machines, equipment and tools etc.
Final goods are the goods which have crossed the production line, that means they are ready to be used by the end users whether households or firms and does not require any further processes on them.
Intermediate goods include raw materials and semi finished goods on which further production processes are still left to be done. This means these goods have not crossed the production line.
Stock refers to a quantity of a variable which is measured at a particular point of time. For example, the stock of money in the economy at a particular date.
Flow refers to a quantity of a variable which is measured over a particular period of time, such as the disposable income in the economy.
Gross investment refers to the expenditure on the new capital goods and inventory stocks of raw material, semi finished goods and finished goods in a specific period.
Depreciation, also known as consumption of fixed capital, refers to the loss in the value of the assets due to normal wear and tear, expected obsolescence and normal rate of accidental losses in a particular period.

Circular Flow Of Income In Two Sector Model

Circular flow of income in two sector model refers to the continuous flow of goods and services, the factors of production like land, labour, capital and entrepreneurship and money between the firms and the household in a specific period.

National Income

National income refers to the money value of all the goods and services produced in an economy in a year.
It also represents the aggregate of factor incomes which accrue to the normal residents of a country in a year.

Methods Of Measuring National Income

Total Product or Value Added Method

It measures the contributions in the form of value addition made by all the the producing entities in the domestic territory of the country. The result that is obtained in the form of national income from this method is gross domestic product at market price.

Expenditure Method

Under this method, the expenditures incurred by all the constituents of economy such as consumers, business houses and firms, the government and the net exports are taken into consideration. The measure of income obtained by the expenditure method is gross domestic product at market price.

Income Method

It measures the national income by taking into consideration the payments made to the factors of production in the forms of wages, rent, interest and profit during a year. The result that is obtained in the form of national income by this method is net domestic product at factor cost.

Gross domestic product at market price (GDP_MP) refers to the market value of all the goods and services produced in the domestic boundaries of a country in a year.
Gross domestic product at factor cost (GDP_FC) is arrived at by deducting indirect taxes from and adding subsidies in the gross domestic product at market price.
Net domestic product at market price (NDP_MP) is arrived at by deducting depreciation from the gross domestic product at market price.
Net domestic product at factor cost (NDP_FC) is arrived at by adding subsidies to and deducting indirect taxes from the net domestic product at market price.
Gross national product at market price (GNP_MP) is the market value of all the goods and services produced by the nationals or the normal residents of a country in a year. It is arrived at by adding net factor income from abroad to the gross domestic product at market price.
Gross national product at factor cost (GNP_FC) is arrived at by deducting indirect taxes from and adding subsidies to the gross national product at market price.
Net national product at market price (NNP_MP) is arrived at by deducting depreciation from the gross national product at market price.
Net national product at factor cost (NNP_FC) is arrived at by adding subsidies to and deducting indirect taxes from the net national product at market price.

Nominal GDP

When the gross domestic product is calculated at the current market prices then it is called the Nominal Gross Domestic Product. This measure is also known as gross domestic product at current prices.

Real GDP

The Real Gross Domestic Product is calculated by multiplying the quantity of goods and services produced in an economy in a year by the prices of the base year. This measure is also known as gross domestic product at constant prices.

GDP Deflator

GDP deflator refers to the ratio of nominal to real GDP. It measures average price changes of all goods and services that add up to GDP.

GDP And Welfare

The GDP is considered to be the indicator of welfare because the welfare of the people is assumed and measured in terms of availability of goods and services per person. But this measure suffers from certain limitations such as existence of externalities, non monetary exchanges, composition of GDP and the unequal distribution of income etc.

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