CBSE Class 12 Macroeconomics Revision Notes

CBSE Class 12 Macroeconomics Revision Notes cover all six chapters of the Introductory Macroeconomics textbook. They help students revise definitions, formulas, economic relationships and diagrams required for the board examination.

Macroeconomics studies the economy as a whole. It examines aggregate variables such as national income, total output, employment, money supply, government expenditure and international transactions.

The NCERT Introductory Macroeconomics book contains six chapters. However, the assessed content is grouped into five CBSE units because the introductory chapter provides the foundation for the remaining topics.

Key Takeaways

• Six chapters: Introductory Macroeconomics begins with Introduction and ends with Open Economy Macroeconomics.
• Five units: The assessed syllabus groups the main topics into five units.
• 40 marks: Macroeconomics contributes 40 marks to the Economics theory examination.
• 12 marks: Determination of Income and Employment carries the highest unit weightage.

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Chapter-Wise Class 12 Macroeconomics Notes

Chapter 1: Introduction

Macroeconomics studies economic variables for the economy as a whole. It focuses on total production, employment, general price levels and national income.

The subject developed because the behaviour of the whole economy cannot always be understood by studying one consumer or one firm.

The main sectors of an economy are:

• Household sector
• Production or firm sector
• Government sector
• External sector

Households own factors of production and receive income in the form of wages, rent, interest and profit. They use this income to consume goods and services.

Firms employ factors of production and produce goods and services.

The government collects taxes, provides public services and influences economic activity.

The external sector connects the domestic economy with other countries through trade and financial transactions.

Chapter 2: National Income Accounting

National income accounting measures the value of economic activity during an accounting period.

Basic Concepts

Important concepts include:

• Final goods: Goods purchased for final use
• Intermediate goods: Goods used to produce other goods
• Consumer goods: Goods used directly by consumers
• Capital goods: Goods used for future production
• Stock: Quantity measured at a point in time
• Flow: Quantity measured over a period
• Depreciation: Loss in the value of fixed capital due to use or normal wear

Only the value of final goods is included in national income to avoid double counting.

Methods of Calculating National Income

The three methods are:

1. Product or value-added method
2. Income method
3. Expenditure method

Under the value-added method, the contribution made by each producing unit is added.

Value Added = Value of Output − Intermediate Consumption

Under the income method, factor incomes earned during production are added.

Under the expenditure method:

GDP at Market Price = C + I + G + (X − M)

Here:

• C = Private final consumption expenditure
• I = Investment expenditure
• G = Government expenditure
• X = Exports
• M = Imports

Important National Income Aggregates

Net Domestic Product:

NDP = GDP − Depreciation

Gross National Product:

GNP = GDP + Net Factor Income from Abroad

Net National Product:

NNP = GNP − Depreciation

Net Factor Income from Abroad is the difference between factor income received from abroad and factor income paid abroad.

Nominal and Real GDP

Nominal GDP measures production at current-year prices.

Real GDP measures production at base-year or constant prices.

GDP Deflator = Nominal GDP/Real GDP × 100

Real GDP is better for comparing production across years because it removes the effect of price changes.

GDP and Welfare

A rise in GDP does not always mean an equal rise in welfare.

GDP may not fully reflect:

• Income distribution
• Environmental damage
• Unpaid household services
• Composition of production
• Externalities

Chapter 3: Money and Banking

Money is anything generally accepted as a means of payment.

Functions of Money

The main functions are:

• Medium of exchange
• Unit or measure of value
• Store of value
• Standard of deferred payment

Money removes the difficulty of double coincidence of wants found in the barter system.

Demand and Supply of Money

People demand money mainly for transactions and precautionary purposes.

Money supply includes currency held by the public and demand deposits held with commercial banks.

Demand deposits can be withdrawn through cheques and other banking methods.

Commercial Banks

Commercial banks perform two main functions:

• Accepting deposits
• Advancing loans

They also create credit.

Banks keep a fraction of deposits as reserves and lend the remaining amount. The loan may return to the banking system as a new deposit, allowing further lending.

Money Multiplier = 1/Legal Reserve Ratio

A lower reserve ratio allows a greater expansion of deposits, while a higher ratio reduces the credit-creation capacity of banks.

Central Bank and Monetary Policy

The Reserve Bank of India acts as the country’s central bank.

Its functions include:

• Issuing currency
• Acting as banker to the government
• Acting as banker’s bank
• Controlling money supply and credit
• Managing foreign-exchange reserves

Important monetary-policy tools include:

• Repo rate
• Reverse repo rate
• Bank rate
• Cash Reserve Ratio
• Statutory Liquidity Ratio
• Open market operations
• Margin requirements

An increase in the repo rate generally makes borrowing more expensive and may reduce credit.

Chapter 4: Determination of Income and Employment

This chapter explains how aggregate demand determines equilibrium income and employment in the short run.

Aggregate Demand

Aggregate demand is the total planned expenditure on final goods and services.

In a two-sector economy:

AD = C + I

Consumption depends on income:

C = C̄ + cY

Here:

• C̄ = Autonomous consumption
• c = Marginal propensity to consume
• Y = Income

Consumption and Saving Propensities

Average propensity to consume:

APC = C/Y

Average propensity to save:

APS = S/Y

Marginal propensity to consume:

MPC = ΔC/ΔY

Marginal propensity to save:

MPS = ΔS/ΔY

Important relationships are:

APC + APS = 1

MPC + MPS = 1

Equilibrium Income

The economy is in equilibrium when planned aggregate demand equals output.

AD = AS

Equilibrium can also be expressed as:

S = I

If planned expenditure is greater than output, inventories fall and firms increase production.

If planned expenditure is lower than output, inventories rise and firms reduce production.

Investment Multiplier

The investment multiplier shows the change in income caused by a change in investment.

k = 1/(1 − MPC)

It may also be written as:

k = 1/MPS

A higher MPC creates a larger multiplier because a greater part of additional income is spent.

Excess and Deficient Demand

Excess demand exists when aggregate demand exceeds the output available at full employment.

It may create inflationary pressure.

Measures to correct excess demand include:

• Reducing government expenditure
• Increasing taxes
• Raising interest rates
• Increasing reserve requirements

Deficient demand exists when aggregate demand is below the full-employment level.

Measures to correct it include:

• Increasing government expenditure
• Reducing taxes
• Lowering interest rates
• Reducing reserve requirements

Chapter 5: Government Budget and the Economy

A government budget is an annual statement of estimated government receipts and expenditure.

Objectives of a Government Budget

The main objectives are:

• Reallocation of resources
• Reduction of income inequality
• Economic stability
• Management of public enterprises
• Economic growth

Government Receipts

Government receipts are divided into revenue and capital receipts.

Revenue receipts neither create liabilities nor reduce assets.

They include:

• Tax revenue
• Non-tax revenue

Capital receipts either create liabilities or reduce government assets.

They include:

• Borrowings
• Recovery of loans
• Disinvestment

Government Expenditure

Revenue expenditure is incurred on regular government activities and generally does not create assets.

Capital expenditure creates assets or reduces liabilities.

Examples include expenditure on infrastructure and repayment of loans.

Budget Deficits

Revenue Deficit:

Revenue Deficit = Revenue Expenditure − Revenue Receipts

Fiscal Deficit:

Fiscal Deficit = Total Expenditure − Total Receipts excluding Borrowings

Primary Deficit:

Primary Deficit = Fiscal Deficit − Interest Payments

Fiscal deficit shows the total borrowing requirement of the government.

Primary deficit shows the current borrowing requirement after excluding interest payments on earlier debt.

Types of Budgets

• Balanced budget: Receipts equal expenditure
• Surplus budget: Receipts exceed expenditure
• Deficit budget: Expenditure exceeds receipts

Chapter 6: Open Economy Macroeconomics

An open economy exchanges goods, services and financial assets with the rest of the world.

Balance of Payments

The balance of payments records all economic transactions between residents of a country and the rest of the world during an accounting period.

It has two main accounts:

• Current account
• Capital account

Current Account

The current account records:

• Export and import of goods
• Export and import of services
• Income receipts and payments
• Transfers

The balance of trade is the difference between exports and imports of goods.

Capital Account

The capital account records transactions that change foreign assets and liabilities.

It includes:

• Foreign investment
• Loans
• Banking capital
• Other capital transfers

A balance of payments surplus occurs when autonomous receipts exceed autonomous payments.

A deficit occurs when autonomous payments exceed receipts.

Foreign Exchange Rate

The foreign exchange rate is the price of one currency in terms of another.

Demand for foreign exchange arises from:

• Importing goods and services
• Foreign travel
• Investment abroad
• Making payments to other countries

Supply of foreign exchange comes from:

• Exports
• Foreign tourism
• Foreign investment
• Remittances from abroad

Exchange-Rate Systems

Under a flexible exchange-rate system, market demand and supply determine the exchange rate.

Under a fixed exchange-rate system, the monetary authority maintains the rate at an official level.

Managed floating combines market determination with central-bank intervention.

Important terms include:

• Appreciation: Market-led increase in currency value
• Depreciation: Market-led fall in currency value
• Revaluation: Official increase in currency value
• Devaluation: Official reduction in currency value

Important Class 12 Macroeconomics Formulas

Important Macroeconomics Differences

CBSE Class 12 Macroeconomics Unit-Wise Marks Distribution

The NCERT textbook contains six chapters, but the assessed content is organised into five units.