CBSE Class 12 Macro Economics Revision Notes Chapter 2

Class 12 Macroeconomics Chapter 2 Notes

National income accounting is the 2nd chapter of class 12 Economics. This chapter presents the fundamental functioning of a simple economy, clarity about cash flow, types of goods and investments. NCERT Solutions is regarded as an exceptionally beneficial book while preparing for the CBSE class 12 economics board examinations. This study resource has acute knowledge and the solutions by the subject matter experts. 

Class 12 Macroeconomics Chapter 2 Notes introduces one of the crucial topics of macroeconomics, and you will learn about diverse elements of national income accounting such as intermediate goods, capital goods and final goods. By clicking on the links accessible on the Extramarks website, you can achieve the goal of doing well in the examination. 

Students may register on Extramarks to access the class 12 Macroeconomics chapter 2 notes in addition to various other study materials.

Key Topics Covered in Class 12 Macroeconomics Chapter 2 Notes 

The key topics covered under class 12 Macroeconomics chapter 2 notes are mentioned below.

Introduction to National Income Accounting

National income accounting provides awareness of how a country’s economy is performing and also the tools used to measure the level of an economy. The performance of an economy is gauged by its revenues from sources like sales, income tax data, profit earned by corporations etc. 

National income accounting indicates the set of techniques and procedures adopted by the government for measuring production and income, or in other words, the economic activity of a country during a financial year. The various standards of deciding national income are gross domestic product, gross national product and net national product, personal income and disposable income. The government policies are constructed on the basis of the data gathered from national income accounting.

In accepted terms, the income earned by the nation from its total value of goods and services manufactured annually determines the standard of the economy. In class 12 Macroeconomics chapter 2 notes, you will learn how the net production and movement of goods and services flow during a specific period depending on the purchasing power of the ultimate consumers. 

IMPORTANT TERMINOLOGIES

Goods

The goods are products and resources that meet people’s wants and demands in economic terms. A good can be a service, a physical object, a man-made object, or a mix of the three that can determine a market price. 

Types of goods include

Consumption Goods: 

• The goods are items that are utilised directly to satisfy human demands and are referred to as consumption goods. Consumption of goods fulfils the objective of an economy, which is to sustain the consumption demand of the country’s overall population. 
• These are not utilised in the manufacturing of other goods. 
• They are intended for final consumption and are also known as final goods. 
• For instance, a fan, a book, or a pair of sunglasses.

Capital Goods: 

Under this section of the class 12 Macroeconomics chapter 2 notes, students will learn about capital goods. 

• The goods employed by one business to guide another in the production of consumer goods are called capital goods. 
• Capital goods can not be conveniently transformed into cash. 
• They are durable and do not degrade simply. 
• Machinery, equipment, computers, and buildings, are some common examples of capital goods.

Final Goods: 

• Goods that are bought by the family for the final consumption also include those goods that are purchased by the firms for investment or capital formation.
• These commodities please a consumer’s wants or desires.

Intermediate Goods: 

• Intermediate goods are used in the manufacturing of finished goods or consumer goods. 
• They are also used to act as inputs in other products and to incorporate into the final goods as ingredients.

Investment

• An asset or commodity purchased with the desire of an investment purpose to earn profits or increase in value. 
• When an individual makes a purchase as an investment, the aim is to build wealth in the future and not to consume the good. 

Gross Investment: 

• A company’s capital investment before depreciation is indicated as gross investment or gross capital investment. 
• The absolute investment value made by the business in buying assets each year is shown by gross investment. 

Net investment: 

The gross investment minus depreciation on existing capital is net investment. Net investment is the increase in productive merchandise. As mentioned in class 12 Macroeconomics chapter 2 notes, 

Net investment = Gross Investment – Depreciation

Depreciation

In economic terms, depreciation is a way of dividing the cost of a tangible or physical asset over its active and usable life or life expectancy. The measurement of how much of the value of an asset has been diminished is called depreciation.

Capital Formation: 

Capital formation is the procedure of gradually escalating the stock of capital over time.

Factor Cost: 

These are the earnings collected by the owners of factors of production in exchange for providing factor services to the producer.

Basic Prices: 

The amount a producer receives from a buyer for a unit of a thing or service given as output is the basic price. This doesn’t include any tax due and any subsidy due on that unit as a consequence of its production or demand. 

Basic price = Production taxes + Factor cost – Production subsidy

Market Prices: 

• The market price of a product is the price at which it is sold on the open market. It covers the costs of production such as rent, wages, input prices, interest and profit.
• It also comprises government-imposed duties and government-provided manufacturer subsidies.

Market price = product taxes + Basic price – Product subsidy.

In addition to class 12 Macroeconomics chapter 2 notes, students may refer to various other study materials to understand more about price. 

Transfer Payments: 

• The payment received without the provision of any service or goods in exchange is a Transfer payment.
• These are unearned incomes for recipients and are one-time settlements with no expectation of a return. 
• These are given for free, with no demand to make any current or future payments in exchange. 
• Transfer payments are fundamentally government welfare consumption.

Stock Variable: 

• A stock variable is standardised at the appointed time. 
• It directs the flow. 
• Stock does not have a temporal dimension. 
• Examples are wealth and capital.

Flow Variable: 

• A flow is a quantity that is standardised over a specific timeframe. 
• It has a time element to it.
• Flows are explained in terms of a given period, such as days, weeks, months and years. 

Leakage:

• In the perspective of a circular flow of income model, leakage is an economic term that defines capital or money that escapes an economy or system. 
• It diminishes aggregate demand and income levels. 
• Taxes, savings, and imports are some of the examples.

Injection: 

• The injection takes place when funds are added to an economy from sources other than people and business.  
• It boosts aggregate demand as well as income levels. 
• Injections can come from different sources, consisting of government spending, investment, and exports.

Consumer Price Index: 

Under this section of class 12 Macroeconomics chapter 2 notes, students learn about CPI.  The consumer price index  is the index used to gauge inflation. It is applied to estimate the average variation between two given periods at the prices of commodities consumed by families. It is a composite measurement of trends in the prices of products of stable quality.

Wholesale Price Index: 

A wholesale price index or WPI is a yardstick that monitors and tracks changes in the price of products ahead of they reach the retail level.

Circular Flow of Income

• The circular flow occurs due to the continual flow of commodities and services, revenue, and expenditure in an economy.
• It represents the circular redistribution of revenue between the production unit and households.

Economic Territory

• The geographical territory administered by a government constitutes a country’s economic territory. 
• There would be free circulation of people, goods, and capital inside this zone. 
• The economic region encloses not just land but also territorial waters, national air space, and natural oil and gas resources in international waters. 

Scope of Economic Territory:

• Examples of political boundaries are territorial seas and airspace.
• Citizen vessels and aircraft that travel between two or more countries. 
• The consulates, embassies, military bases, and other international institutions.
• The residents operate fishing boats and oil and gas rigs in international waters.

To know more about economic territory, students may refer to various other books in addition to class 12 Macroeconomics chapter 2 notes.

Normal Residents of a Country

A normal resident of that country is referred to as a person or entity that regularly resides in a country and has its centre of economic interest in the country he or she lives in.

• Exceptions for Normal Residents of a country: 
• The embassy officials and diplomats from other countries.
• People who work for global organisations such as WHO, IMF, UNESCO, and others are treated as normal citizens of the nation to which they belong.
• Tourists, Commercial travellers and students.

Aggregates of National Income

1. GDPMP or Gross Domestic Product at Market Price:

• GDPMP is the market value of all ultimate products and services produced by all manufacturing units located on a country’s domestic territory within a financial year.
• GDPMP equals the total of all resident producers’ gross values added at market rates plus taxes and fewer import subsidies. 

1. GDPFC or Gross Domestic Product at Factor Cost:

GDPFC is the sum of all final goods and services produced within a country’s domestic area, excluding net indirect taxation.

1. NDPMP or Net Domestic Product at Market Price:

NDPMP is the depreciation-free market value of ultimate goods and services produced in the country’s domestic territory within a year, excluding depreciation.

1. NDPFC or Net Domestic Product at Factor Cost:

• INDPFC is the factor income received by the proprietor of factors of production for providing factor services in domestic land throughout a fiscal year, excluding depreciation and net indirect tax. 
• This is equivalent to the sum of all factor incomes (compensation of employees, interest, profit,  rent, and mixed-income of the self-employed) generated in the country’s domestic colony.

1. NNPFC or Net National Product at Factor Cost of National Income:

NNPFC is the aggregate of all factor earnings received by the ordinary population of a country in the form of wages during a financial year. Rent, interest, and profit are calculated.

1. GNPMP or Gross National Product at Market Price:

Under this section of class 12 Macroeconomics chapter 2 notes, students learn about GNPMP. GNPMP is the market value of all finished goods and services generated by a country’s ordinary citizens (both domestically and overseas) throughout an accounting year.

1. NNPMP or Net National Product at Market Price:

NNPMP is the total of factor incomes earned by average citizens of a country throughout an annual accounting period, and net indirect taxes are covered.

1. Gross National Product at Factor Cost or GNPFC:

GNPFC is the aggregate of a country’s working-class people’s factor earnings over an accounting year plus depreciation.

1. National Income at Current Prices: 

When products and services created by ordinary inhabitants within and outside of a nation in a financial year are evaluated at the current year’s values or current prices

1. National Income at Constant Prices: 

National Income at Constant Prices indicates the worth of products and services generated by average inhabitants within and outside a country in a given accounting year at a stable price or the base year’s price. 

1. GVA at Market Prices:  

Production and product taxes are incorporated in gross value added at market prices, whereas production and product subsidies are omitted.

1. GVA at basic prices: 

As mentioned in class 12 Macroeconomics chapter 2 notes, Gross value added at basic prices does not contain product subsidies but incorporates production taxes.

1. GVA at factor cost: 

Gross value added at factor cost does not enclose any subsidies or taxes.

GDP and Welfare: 

GDP: It is the standard economic value of all final goods and services produced within a specific time period, which is usually quarterly or annually. A greater GDP recommends that more products and services are manufactured. It refers to the increased availability of goods and services, but this does not always imply that people were well off around the year. 

GDP is classified into two categories-

1. Real GDP: Real GDP or Real gross domestic product is an inflation-adjusted evaluation of the worth of all goods and services produced by an economy each year. It is also known as “inflation-corrected” or “constant-price” or “GDP at constant prices”. 

It is entirely affected by a turnaround in physical output, not by changes in the price level. It’s known as a definite indication of economic advancement.

• Nominal GDP: The products and services produced by all manufacturing units in a country’s domestic area during a financial year and valued at the current year’s prices or current prices are known as GDP at current prices or nominal GDP. 

Conversion in both physical output and the price level has an effect on it. It is not consecrated as a reliable indicator of economic advancement.

GDP Deflator: GDP Deflator is the nominal-to-real GDP ratio.

Welfare: As per class 12 Macroeconomics chapter 2 notes, people’s material prosperity is known as welfare. It is determined by a mixture of economic segments such as consumption level, national income and product quality. And also non-economic factors such as law and order, environmental pollution,  and so on. 

Economic well being refers to welfare that is reliant on economic variables, whereas non-economic welfare indicates welfare that is dependent on non-economic elements. Social welfare is defined as the total economic and non-economic well-being. 

Some limitations of per capita real GDP as an indicator of economic welfare:

GDP and welfare are directly associated, and this relationship is deficient because of the below-mentioned limitation:

• Externalities are not covered in GDP but have an impact on well-being.
• The exclusion of non-market transactions
• Not all commodities make contributions to economic welfare.
• GDP does not precisely reflect the quality of economic development.
• Inflation may generate the impression of a decline.
• Some products may have a detrimental impact.

Methods of Calculating National Income:

Under this section of class 12 Macroeconomics chapter 2 notes, students will learn the different methods of calculating national income.

Product Method/ Value Added Method: These are production activities that add value to raw materials or intermediate goods. Instead, value-added is defined as an enterprise’s · donation to the present flow of products and services. To express it differently, the term “value-added” is used to describe a company’s net contribution.

As a result, 

Value-added of a firm = Value of Output – Value of intermediate goods used by the firm.

Value of output:  A firm’s output is the goods and services it creates during an annual accounting period. The market price of all goods and services produced by a firm around an accounting year is referred to as the value of output.

Change in Stock: It is calculated as follows

Stock = ClosingStock − OpeningStock

Intermediate Consumption: It indicates the value of non-factor inputs or raw materials utilised in the production process.

Expenditure Method: It is one of the methods mentioned in class 12 Macroeconomics chapter 2 notes. It is accepted that the value of domestic income is equal to the total sum of expenditures on the purchase of ultimate products and services generated in an accounting year completely within an economy.

• Consumption Expenditure: The expenditure by families and individuals on final goods and services.
• Government Expenditure: The total expenses by the government on final goods and services.
• Investment Expenditure: The expenditure on the acquisition of the goods that would be used for further creation. It contains fixed investment on plant and machinery and inventory investment that includes a change in inventory.
• Net exports: The difference between exports(X) and imports(M).

Formula as mentioned in class 12 Macroeconomics chapter 2 notes.

GDPMp = C + I + G + (X – M)

Here, 

C = consumer expenses on varied goods and services, 

I = investments made by firms on capital goods, 

G = government’s expenditure on goods and services provided to the public, 

X = exports, and 

M = imports.

Income Method: The income method is a real estate assessment strategy that divides the capitalisation tariff or price by the net operating income of the rental payments. This calculation is used by investors to calculate assets depending on their profitability. It is also termed a factor payment method, as in this, the calculation of national income is through factor incomes.

Classification of Factor Incomes

Compensation of Employees: It constitutes salary and wages earned in return for the services and talents used to produce goods and services. Lodging allowances, travel allowances, bonuses, and medical expenses are also included.

• Wages and salaries
• Pension 
• Employers contribution
• Payment in kind

Operating Surplus: It contains. 

• Rent: Rent is the amount of money paid for land usage. When determining income, rent only applies to the money earned from utilising any land. The rent paid for the operation of machinery, and other equipment is not covered in the rent calculation.
• Interest: It is the price one pays for borrowing money. This now includes the interest paid when a business collects a loan for an investment.
• Profit: Profit includes profit tax, dividends and undistributed profits. 

Students may refer to various study materials apart from class 12 Macroeconomics chapter 2 notes to know more about the operating surplus.

Mixed-Income: The mixed-income of self-employed professionals, farming units, and sole proprietorships.

Formula

National Income (NNPFC) = Net Factor + Net Domestic Product at Factor Cost (NDPFC) 

Note: NDPFC = Rent +  Interest + Compensation + Profit + Mixed income.

The issue of Double Counting: The problem of double counting occurs when computing national income. The national income projection becomes complicated when double accounting occurs in calculating national income.

Methods to avoid the difficulty of double counting as mentioned in class 12 Macroeconomics chapter 2 notes:

• The final output method should be used for counting the value of finished goods.
• Only the value-added that equals the value of output less intermediary consumption should be counted. Also called the value-added method.

Private Income: Private income is the approximate income of all factors and transfers to the private sector, both within and outside the country.

Private Income = National debt interest + Factor income from net domestic product accruing to the private sector + Current transfers from government+ Net factor income from abroad + + Other net transfers from the rest of the world.

Personal Income: Personal income” refers to the total sum of money received by all individuals or families in a particular country. Personal income includes remuneration from various sources, such as salaries and wages.

Personal Disposable Income: Disposable income, or personal disposable income, is the amount of money available after deducting income taxes for household consumption, savings, and spending. 

To access the class 12 Macroeconomics chapter 2 notes, students may register at Extramarks.

Class 12 Macroeconomics Chapter 2 Notes: The Key Components

Final Goods: The first critical component under Class 12 Macroeconomics Chapter 2 Notes is the final goods. The merchandise that has passed through all the manufacturing phases and is ready for use by the final users is termed final goods. Sometimes, final goods are segregated into final consumer goods and final producer goods.

Intermediate Commodities: The intermediate commodities are in the midway of production.

Consumption Goods: The commodities that are directly used to satisfy human wants are termed consumer goods. These types of goods are not utilised with the objective of producing other goods. 

Consumer goods are grouped into four categories, namely 

• Durable Goods like TV, radio, car etc.
• Semi-Durable Consumer Goods like clothes and furniture
• Non-Durable Consumer Goods like Bread and milk.  
• Services like doctor, teacher and lawyer.

Capital Goods: Under the Class 12 Macroeconomics Chapter 2 Notes, the following vital topic is Capital Goods. Capital Goods are of high value and are used for a long time in the production procedure.

Investment: Investment is one of the prime components of national income accounting. Investment is the procedure of capital formation or a course of the increment in capital stock. There are two classifications of investments, namely Fixed Investment and Inventory Investment. 

Gross Investment: It is one of the most salient terms regarding the national income accounting. 

Spending on the inventory stock during the accounting year + spending on the consumption of fixed assets during the accounting year.

Net Investment: If you follow the Class 12 Macroeconomics Chapter 2 Notes meticulously, you will get to know how Net Investment = Gross Investment – Depreciation.

Stock: The quantity of any economic variable measured at a specific point in time is termed a stock.

Flow: The quantity of any economic variable is standardised during a period.

Circular Flow of Income: It is the engagement of production, income generation and expenditure in the different sectors of the economy. The circular flow is categorised into three phases, namely:

• Production
• Income Generation
• Expenditure.

Condition for Equilibrium in a Four Sector Economy: If you in detail go through the Class 12 Macroeconomics Chapter 2 Notes, you will find that the state for equilibrium in the four sector economy is: 

C= Consumption, I= Investment S= Saving, T= Tax Revenue, G= Govt Expenditure

Techniques of Measurement of National Income: There are three methods of measurement of National Income which are as follows:

• Product or Value Added Method
• Expenditure Method
• Income Method

Fundamental of Domestic Factor Income: There Are Three Elements of Domestic Factor Income.

• Compensation to Employees (compensation in kind, wages and salaries in cash,  and employees’ contributions to the various social security schemes.
• Operating surplus like property income and entrepreneurship income
• Mixed-Income of the self-employed persons

National Income: National income indicates the aggregate of factor incomes for the residents residing within the boundary of a particular nation.

GDP: Class 12 Macroeconomics Chapter 2 Notes introduce the essential aspect of the present economic scenario called GDP. It is the aggregate compensation of employees, mixed-income, consumption of fixed capital, and operating surplus within a particular country’s boundary during one year. 

There are two types of GDP, namely 

• Nominal GDP or GDP at the current price
• Real GDP or GDP at a constant price

When it comes to Class 12 Macroeconomics Chapter 2 Notes, students may register at Extramarks as the notes are prepared by experts with several years of experience teaching. 

Class 12 Macroeconomics Chapter 2 Notes the experienced teachers of Extramarks prepare macroeconomics as per the guidelines of the CBSE Board. You can check the link provided for the Class 12 MacroEconomics Chapter 2 Notes from the official website of Extramarks.

Class 12 Macroeconomics Chapter 2 Notes: Exercises and Solutions.

By going through Class 12 Macroeconomics Chapter 2 Notes, students can learn the implications of a deficit on the economy. There are several measures to legitimate a budgetary deficit, including steps like borrowing from the public, disinvestment, and many more. Students can clarify all doubts by clicking on the Macroeconomics Chapter 2 Class 12 Notes on the Extramarks website.

Class 12 Macroeconomics Chapter 2 Notes help students understand the budget concept and its basics. They will learn about the consequence of receipts and exceeding expenditures. Students often find it hard to gauge the significance of every concept given in the chapter and the weightage it might carry in the exam. Class 12 Macroeconomics Chapter 2 Notes by Extramarks emphasise all the fundamental concepts students must revise before the exam. This way, students can utilise their time carefully.

A list of detailed solutions for all the questions is below:

• Very Short Answer Type Questions and Solutions- 5 Questions
• Short Answer Type Questions and Solutions- 7 Questions
• Long Answer Type Questions and Solutions- 6 Questions

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