NCERT Solutions Class 12th Economics (Individuals) Chapter – 1 National Income and Allied Economics Notes

NCERT Solutions Class 12th Economics (Micro) Chapter – 1 National Income and Allied Economics

NCERT Solutions Class 12th Economics (Micro) Chapter 1 National Income and Allied Economics

?Chapter – 1?

✍National Income and Allied Economics✍

?Notes?

Economics – How an individual or society can use the scarce resources with their alternative uses for the satisfaction of their needs and how to distribute them for consumption among different individuals and groups in the society, it is studied under economics.

Types of Economics – Economics is mainly divided into two parts –

• Microeconomics
• macroeconomics

Macroeconomics – Macroeconomics is called Macroeconomics in English. The word macro is derived from the Greek word macros. The Marathi meaning of this word is a large or whole part.

Definition – The branch of economic analysis in which the units related to the whole economy are studied is called macroeconomics.

For example , national income, total output, total investment, aggregate savings, aggregate demand, aggregate supply, total employment, general price level etc.

Classification of Goods – The goods produced in an economy are mainly divided into four parts.

• consumer goods
• capital goods
• final goods
• intermediate objects

consumer goods

Those final goods and services that directly satisfy the human needs of the consumer. The goods and services purchased by the consumer are consumer goods.

Consumer goods are mainly divided into four parts

(i) Durable Goods – These are consumer goods which have high cost and which can be used for many years are called durable goods.

Such as – TV, car, washing machine etc.

(ii) Semi – durable goods: – These are consumer goods which can be used for a year or a little more and these goods are of low cost.

For example – clothes, crockery etc.

(iii) Non- durable goods:- These are consumer goods which can be used only once. These are also called single use items.

For example – milk, petrol, double roti etc.

(iv) Services – Services – These are non-material goods that directly satisfy human needs but are intangible. That is, they cannot be touched and seen, they can only be felt.

Capital Goods – These are the final goods which are helpful in production and are used for income generation. They increase the capital asset of the producer.

final goods

Goods that are available for consumption and investment are not for resale or value addition. All goods and services used by the consumer are final goods.

Final goods are mainly divided into two parts

(i) End consumer goods – which are ready for use by the end user and their end users are the consumers are called end consumer goods.

(ii) End producer goods – which are ready for use by the end users and their end users are producers, they are called final producer goods.

Intermediate Goods – These are goods and services that can be resold in the same year or are used as raw materials in the production of final goods or whose conversion is possible. It does not directly meet human needs. Services used by the producer such as the services of a lawyer; raw material use.

Depreciation – The decline in the value of fixed assets due to normal wear and tear or obsolescence is called depreciation or consumption of fixed capital. Depreciation is calculated by dividing the value of fixed capital by its estimated age (in years).

Investment – ​​Growth in the stock of capital goods over a given period of time is called investment. It is also called capital formation or appropriation.

Investment Types

• gross investment
• net investment

Gross Investment – ​​The total increase in the stock of capital goods over a given period of time is called gross investment. This includes depreciation.

Net investment – ​​Net increase in the stock of capital goods in an economy over a given period of time is called net investment. It does not include depreciation.

Note – Net Investment = Gross Investment – ​​Depreciation (Depreciation)

Stock – Stock is a quantity (variable) that is measured at a given point in time; Such as national wealth and property, money supply etc.

Flow – Flow is a quantity (variable) that is measured over a period of time; such as national income; investment etc.

circular flow of income

Circular flow of income refers to the continuous flow of goods and services and resource services and monetary income between different sectors of the economy.

It is cyclic in nature as it has neither a starting point nor an end point.

Actual Flow – Actual flow shows the flow of goods and resource services produced and services produced.

Monetary Flow – Monetary flow refers to the flow of consumption expenditure and factor payments.

Economic boundary – It is the geographical boundary administered by the government in which there is free flow of persons, goods and capital.

economic frontier

• Political, maritime and air borders.
• Embassies, consulates, military establishments, diplomatic buildings, etc. located abroad.
• ship and aircraft operated by mutual agreement between two countries
• Fishing boats, oil and gas extraction vehicles and floating platforms operated by the countrymen.

Ordinary Resident – ​​A person or entity whose economic interests are concentrated within the economic boundaries of the country in which he or she has ordinarily resided for one year.

Value of Production – The market value of all the goods and services produced by a production unit in an accounting year is called the value of production.

Note – Value of output = Unit sold x Market price + Change in stock.

Factor Income – Income derived from the services rendered in the production process by the means of production (labour, land, capital and enterprise) is called factor income. For example, salary and wages, rent, interest etc.

Transfer Payments – These are one-party payments that do not receive anything in return. Income received without any production service. Like old age pension, tax, scholarship etc.

Capital Gains – The increase in the value of capital assets and financial assets, which occurs with the passage of time, it is worth more than the purchase price. It is received at the time of sale of property.

Remuneration of employees – The payment made by the labor resource for the resource services rendered in the production process (city and commodity) is called the remuneration of the employees. It includes salary, wages, bonus, contribution to social security by employers.

Operating Surplus – The amount left over in the production process after workers have paid their wages. It is the sum of rent, interest and profit.

home catering

Gross Domestic Product at Market Price (GDPMP) – Gross Domestic Product at market price is the sum of the market prices of all final goods and services produced within the domestic range of an economy during a period of one year.

Net Domestic Product at Market Price (NDPMP) – NDPMP = GDPMP – Depreciation

Net Domestic Income at Factor Cost (NDPFC) – The sum of the income of factors of production in an accounting year in the domestic range of an economy, which is received in return for the services rendered by the factors, is called domestic income.

Note – NDPFC = GDPMP – Depreciation – Net Indirect Taxes.

national collection

Gross National Product at Market Price (GNPMP) – The sum of the market prices of final goods and services produced by the normal residents of a country in a year within the country’s domestic border and abroad is called GNPM.

Net National Product at Market Price (NNPMP) –  NNPMP = GNPMP – Depreciation

National Income (NNPFC) – The sum of the factor income earned by the ordinary residents of a country from the domestic limit of the country and the rest of the world in an accounting year is called national income.

Note – NNPFC = NDPFC + NFIA = National Income

Erosion – The erosion of the amount (in the form of money) removed from the circular flow of income is called; For example, taxes, savings and imports are called erosion.

fill

The amount (amount of money) put into the circular flow of income is called filling.

For example , investment, government expenditure, exports.

Value Added (Value Added) –The difference between the value of production done by a production unit in a given time and the value of intermediate consumption used is called value added.

Double Counting Problem – When the value of a commodity is calculated more than once in the estimation of national income, it is called double counting. This shows the overvaluation of national income. That’s why it is called double counting problem.

some important equations 

Gross – Net (net) + Depreciation (consumption of fixed capital)

National – Domestic + Net factor income received from abroad.

Market Price – Factor Cost + Net Indirect Taxes (NIT)

Net Indirect Tax (NIT) – Indirect Tax – Subsidy

Net factor income from abroad (factor) – factor income from abroad – factor income to foreign countries

Methods of Estimating National Income

income method

Phase I – Net Domestic Product at Factor Cost / Net Domestic Factor Income (NDPFC) = Employees’ Remuneration + Operating Surplus + Mixed Income of Self Employed.

Phase II

Net National Product at Factor Cost / National Income = Net Domestic Product at Factor Cost + Net Factor Income from abroad.

NNPFC = NDPFC + NFIA

Product Method or Value Added Method

first round

Gross Domestic Product at Market Price = Value Added by Primary Sector + Value Added by Secondary Sector + Value Added by Tertiary Sector.

or Gross Domestic Product at Market Price (GDPMP) = Sales + Change in Stock – Intermediate Consumption.

Phase II – Net Domestic Product at Market Price NDPMP = GDP at Market Price GDPMP – Depreciation.

Step 3 – Net Domestic Product at Factor Cost (NDPFC) = Net Domestic Product at Market Price (NDPFC) – Net Indirect Taxes (NIT)

Stage IV – Net National Product at Factor Cost / National Income (NNPFC) = Net Domestic Product at Factor Cost (NDPFC) + Net Factor Income from abroad (NFIA)

expenditure method

first round 

Gross Domestic Product at Market Price = Private End Use Expenditure + Government End Use Expenditure + Gross Domestic Capital Formation + Net / Net Exports

GDPMP = C + G + I + ( X – M )

Phase II – Net Domestic Product at Market Price (NDPMP) = Gross Domestic Product at Market Price (GDPMP) – Depreciation.

Phase III – Net Domestic Product at Factor Cost (NDPFC) = Net Domestic Product at Market Price (NDPMP) – Net Indirect Taxes (NIT)

Stage IV – Net National Product at Factor Cost / National Income (NNPFC) = Net Domestic Product at Factor Cost (NDPFC) + Net Factor Income from abroad (NFIA)

Net Factor Income from Abroad (NFIA)

Net factor income received from abroad is the difference between the income received by the ordinary residents of the country from the resource services rendered to foreign countries and the resource income given to the foreign countries.

It has the following components

1. Net remuneration of employees
2. Net income from property and entrepreneurship and
3. Net retained earnings of resident companies from abroad.

Current Transfer – That non-earning income which comes out from the current income of the donor and is added to the current income of the recipient, is called current transfer income.

Capital Transfer – The non-earning income that comes out of the money and capital of the payer and joins the money and capital of the recipient is called capital transfer.

Precautions

1. value added method

• Abandonment of double counting.
• Do not include resale of goods.
• Goods produced for self-use are included.

2 . income method

• Do not include transfer income
• Does not include capital gains.
• Self-use includes the income generated from the goods produced.
• The product includes free services offered by the manufacturer.

3. expenditure method 

• does not include intermediate expenses
• Do not include the form on resale items.
• Does not include expenditure on financial assets.
• transfer payment relinquishment

There are two types of GDP.

1. Real GDP
2. monetary GDP

1. Real GDP –  All final goods and services produced within the domestic range of an economy in a period of one year, if evaluated at base year prices (constant prices), is called real GDP. It is also called GDP at constant prices. It changes only due to change in the quantity of production, it is considered as an indicator of economic development.

2 . monetary GDP

Monetary GDP is the sum of all final goods and services produced within the domestic range of an economy in a period of one year, if evaluated at current year prices (current prices). It is also called GDP at current prices. It is affected by changes in both the production quantity and the price level. It is not considered an indicator of economic development.

Since the price index plays the role of a dilator to bring down the current price estimates to a fixed price estimate. That’s why it is called gross domestic product defoliant.

Gross Domestic Product and Welfare – Generally there is a direct relationship between GDP and welfare. Higher GDP means more production of goods and services. It means more availability of goods and services. But it is not necessary to take this to mean that the welfare of the people is better than before. In other words, higher GDP does not necessarily mean an increase in the welfare of the people.

Welfare – It refers to the material comforts and facilities of the people. It depends on many economic and non-economic factors. Economic factors like national income, level of consumption etc. and non-economic factors like environmental pollution, law and order, social unrest etc. The welfare which depends on economic factors is called economic welfare and that which depends on non-economic factors is called non-economic welfare. The sum of both is called social welfare.

Conclusion – There is a direct relation between both i.e. GDP and welfare, but this relationship is incomplete and incomplete due to the following reasons. Following are the limitations of GDP as an indicator of economic welfare

1. Externalities – It refers to those actions by an individual or firm which have a bad (or good) effect on others but are not punished (beneficial) for it. Example – Smoke from factories (negative externalities) and construction of flyovers (positive externalities).

2 . Structure of GDP – If the increase in GDP is due to increase in production of war material, then increase in GDP will not increase welfare.

3. Distribution of GDP – An increase in GDP will not lead to an increase in welfare if there is an unequal distribution of income. The rich will become richer and the poor will become poorer.

4. Non-monetary transactions – GDP does not include non-monetary transactions that increase welfare.