national income class 12

National Income

👉national income class 12

National Income is the money value of final goods and services produced by normal residents of a country in a year.

👉Methods of Calculating National Income :

1. Value Added Method = In national income value added refers to the addition of value to the raw material (intermediate goods) by a firms, by virtue of its productive activities.

2. Income Method = In national income, income method involves all the incomes that accrue to the factors of production by way of wages, profits, rent, interest, etc. are summed up to obtain the national income.

3. Expenditure Method = In national income expenditure method measures national income as sum total of final expenditures incurred by households, business firms, government and foreigners.

👉Topics Discussed in this National Income Class 12th, Macro Economics ?

1. Circular flow of Income
2. Stock and Flow Concept
3. Real and Money Flow Concept
4. Domestic Territory / Economic Territory 
5. Normal Residents
6. Citizenship and Normal Residentship Concept
7. Factor and Transfer Income
8. Final and Intermediate Goods
9. Consumption and Capital Goods
10. Methods of Calculating National Income
11. Real and Nominal : National Income and GDP   
12. GDP Deflator / Price Index 
13. GDP and Welfare (or GDP limitations) [Important for cbse students]

Topic 1. Circular Flow of Income 

Circular Flow of Income refers to the cycle of generation of income in the production process, its distribution among the factors of production and finally, its circulation from households to the production units in the form of consumption expenditure on goods and services produced by these units.

Three Phases of Circular flow of Income :

1. Generation Phase    2. Distribution Phase    3. Disposition Phase

Topic 2. Stock and Flow Concept (Important for 1 mark in CBSE)

(i) Stock : Stock refers to that variable, which is measured at a particular point of time.

(ii) Flow : Flow refers to that variable, which is measured over a period of time.

Topic 3. Real and Money Flow Concept (Important for 1 mark in CBSE)

(i) Real Flow = Real Flow refers to flow of factor services from households to firms and the corresponding flow of goods and services from firms to households.

(ii) Money Flow = Money Flow refers to flow of factor payments from firms to households for their factor services and corresponding flow of consumption expenditure from households to firms for purchase of goods and services produced by the firms.

Topic 4. Domestic Territory / Economic Territory

Domestic Territory/Economic Territory refers to the geographical territory administrated by a government within which persons, goods and capital circulate freely.

Topic 5. Normal Residents

Normal Residents refers to an individual or an institution who ordinarily resides in the country for a period more than one year and whose center of interest also lies in that country.

Topic 6. Citizenship and Normal Residentship 

(i) Citizenship = Citizenship is a basically a legal concept based on the place of birth of the person or some legal provisions allowing a person to become a citizen.

(ii) Residentship = Residentship is an economic concept based on the basic economic activities performed by a person.

Topic 7. Factor and Transfer Income (Important for 1/3 marks in CBSE)

(i) Factor Income = Factor Income is the income received by the factors of production for rendering factor services in the process of production.

(ii) Transfer Income = Transfer Income refers to the income received without rendering any productive service in return.

Topic 8. Final and Intermediate Goods (Important for 1 mark in CBSE)

(i) Final Goods = Final Goods refer to those goods which are used either for consumption or for investment.

(ii) Intermediate Goods = Intermediate Goods refer to those goods which are used either for resale or for further production in the same year.

Topic 9. Consumption and Capital Goods

(i) Consumption Goods = Consumption Goods refer to those goods which satisfy the wants of the consumers directly.

(ii) Capital Goods = Capital Goods refer to those final goods which help in production of other goods and services.

Topic 10. Methods of Calculating National Income (Important for 6 marks in CBSE)

(i) Value Added Method = Measures the market value of all final goods and services, produced by each producing enterprise, within the domestic territory of the country. It includes :
    (a) Value of Output = It refers to the market value of goods and services produced during a period of one year.

    (b) Intermediate Consumption = It refers to the value of non-factor inputs, which are used in the  production process.

    (c) Double Counting = It refers to the repeated inclusion of the same products at different stages of production.

    (d) Two ways to Avoid Double Counting = 1. Take the value of final output.    2. Take value add ed     of each firm.

(ii) Income Method = It measures national income in terms of payment made to the primary factors of production. The main components of factor incomes are :

    (a) Compensation of Employees = It refers to the amount paid to the employees for rendering      productive services.

    (b) Rent = It refers to the rental or hiring charges for the use of capital assets like land, buildings,      machinery and other properties.

          Royalty = It refers to the income received for leasing the rights of mining to others and for        granting the rights of using patents, copyrights and trademarks.

    (c) Interest = It refers to the amount received for lending funds to a production unit.

    (d) Profit =  It is the reward to the entrepreneur for his contribution to the production of goods and    services. 

    (e) Mixed Income = It refers to the income generates by own account workers and unincorporated    enterprises.

(iii) Expenditure method = It measures national income as the aggregate of all the final expenditure incurred in an economy,during a year. The main components of final expenditures are :
    (a) Private final consumption expenditure  = It refers to expenditure on the purchase of  goods and      services. by households and private non-profit institutions serving households.

    (b) Government final consumption expenditure = It is the expenditure incurred by general                government on various administrative services.

    (c) Gross domestic capital formation = It refers to the addition to the capital stock of the economy.

    (d) Net exports = It is the difference between exports and imports of a country, during the period of    one year.

Topic 11. Real and National : National Income and GDP

(i) National Income at Current Price (or Nominal National Income) = It is the money value of final goods and services produced by normal residents of a country in a year, measured at the prices of the current year.

(ii) National Income at Constant Price (or Real National Income) = It is the money value of final goods and services produced by normal residents of a country in a year, measure at base year price. It shows the true picture of economic growth of a country as any increase in real national income is due to to increase in output only.

(iii) Nominal GDP = It refers to production pf goods and services valued at constant prices.

(iv) Real GDP = It refers to production of goods and services valued at constant prices. It is better than Nominal GDP as it truly reflects the growth of an economy.

Topic 12. GDP Deflator / Price Index

It measures the average level of prices of all the goods and services that make up GDP.

Topic 13. GDP and Welfare

GDP cannot be taken as a satisfactory measure of welfare of people due to following limitations :

1. Distribution of GDP

2. Change in Prices

3. Non-Monetary Exchanges

4. Externalizes

5. Rate of Population Growth

👉Multiple Choice Questions (MCQs) 

Que 1. Which of the following is not a flow ?

(a) Capital    (b) Income    (c) Investment    (d) Depreciation

Ans. (a) Capital

Que 2. Which of the following is a stock ?

(a) Wealth    (b) Saving    (c) Exports    (d) Profits

Ans. (a) Wealth

Que 3. Depreciation of fixed capital assets to :
(a) Normal wear and tear    (b) Foreseen obsolescence    

(c) Normal wear & tear & foreseen obsolescence    (d) Unforeseen obsolescence  

Ans. (c) Normal wear & tear & foreseen obsolescence 

Que 4. Unforeseen obsolescence of fixed capital assets during production is :

(a) Consumption of Fixed Capital    (b) Capital Loss 
(c) Income Loss    (d) None of the above

Ans. (b) Capital Loss

Que 5. Foreign embassies in India is a part of India's :
(a) Economic territory    (b) Geographical territory

(c) Both (a) and (b)          (d) None of the above

Ans. (b) Geographical territory

Que 6. Goods purchased for the following purpose are final goods :
(a) For satisfaction of wants    (b) For investment in firm

(c) Both (a) and (b)                   (d) None of the above

Ans. (c) Both (a) and (b)