NCERT Solutions Class 12 Macro Economics Chapter 2

NCERT Solutions Class 12 Macroeconomics Chapter 2 – National Income Accounting

One of the main questions raised in the study of Macroeconomics is; how wealth is generated by nations and what makes some countries richer and poorer. Governments considered the endowment of natural resources one of the ways to measure whether a country is richer or poorer, but it is not true. How the resources are employed in the production process and how income and wealth are generated from that process define a country’s national income. Thus we can state that the national income of a nation is nothing but the total value of the commodities and services generated by every government during its fiscal year. Classroom teaching will help the students have an initial grasp of the core concepts present in the chapter; they also would require regular brushing up of the ideas to comprehend the chapter as a whole thoroughly. The NCERT Solutions Class 12 Macroeconomics Chapter 2 will help the students go over the entire chapter in a fraction of time while also assisting in absorbing crucial information much better.

The NCERT Solutions for each chapter are frequently recommended to students to help them understand and use the chapter’s concepts. Due to various factors, many students struggle to obtain solutions to all of the NCERT exercises. Because of this, Extramarks has created NCERT Solutions Class 12 Macroeconomics Chapter 2 to assist students in learning and formulating their answers and supply them with professionally answered solutions. Since they are made by subject matter specialists and follow the most recent CBSE guidelines, these NCERT Solutions Class 12 Macroeconomics Chapter 2 assist students with thoroughly comprehending the material that will help them score well on examinations.

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Some Key Topics Covered in NCERT Solutions Class 12 Macroeconomics Chapter 2

National Income Accounting, Chapter 2 of Class 12 Economics, covers a wide range of topics that provide students with an overview of the fundamentals of a functioning economy. The NCERT Solution Class 12 Macroeconomics Chapter 2 will also provide in-depth knowledge to the students regarding calculating national income in three ways.

Some key topics covered in Ncert Solutions Class 12 Macroeconomics Chapter 2 are as follows:

  • Types of Goods
  • Factors of Production and their Remuneration
  • Investment
  • Depreciation
  • Capital Formation
  • Stock Variable and Flow Variable
  • Transfer Payments
  • Leakage and Injection
  • Consumer Price Index and Wholesale Price Index
  • Circular Flow of Income
  • Economic Territory and Its Scope
  • Normal Residents and Its Exceptions
  • Aggregates of National Income
  • Methods of Calculating National Income
  • The problem of Double Counting
  • Private Income, Personal Income, Personal Disposable Income
  • GDP and Welfare

Students must thoroughly understand the above-listed topics of national income accounting. While studying in class, students will get a basic idea of all the topics. Still, for better exam preparation, students can employ the NCERT Solutions Class 12 Macroeconomics Chapter 2 provided by Extramarks as a reliable study partner, which can help them achieve better scores in examinations and tests.

Let us now look at the detailed information on each of the above-listed subtopics in the NCERT Solutions Class 12 Macroeconomics Chapter 2:

Types of Goods

In economics, goods are resources and products that satisfy consumer wants and needs. A good can be a tangible item, a manufactured item, a service, or a combination of the three that can fetch a price on the market.

Goods can be further divided into the following types:

  1. Consumption Goods:
  • Consumption goods are items that are used right away to fulfil human needs. Consumption of products helps an economy achieve its primary objective: to support the population’s consumption as a whole.
  • These are not employed in the production of other products.
  • Consumption goods, also called final goods, are created to be consumed entirely.
  • A television, a pair of shoes or a pen are a few examples of consumption goods.

2. Capital Goods:

  • Capital goods help one business support another in producing consumer goods.
  • Capital products are not easily convertible into cash.
  • They are durable and do not break down quickly.
  • Capital goods include things like furniture, machinery, structures and computers.

3. Final Goods:

  • Final goods are commodities produced by a company for consumer use.
  • These products meet the needs or want of the consumer.

4. Intermediate Goods:

  • Producing finished goods or consumer goods requires the use of intermediate goods.
  • They can also be thought of as ingredients in finished goods and inputs into the  production of other commodities.

Factors of Production and their Remuneration

The factors of production include land, labour capital and entrepreneurship. The following are the means of remuneration for each of the elements of production:

  1. Land: The main factor in producing a natural resource is the land. The compensation received for using land is known as land rent.
  2. Labour: Labor is the physical or mental effort put forth by an employee that is necessary for the production process. Wages or salaries are used to pay the compensation for labour.
  3. Capital: The money or financial investment necessary for production is known as capital. Capital refers to supporting equipment, machinery and other manufacturing instruments. Interest is the name for the payment received for capital.
  4. Entrepreneurship: Entrepreneurship brings all the components of production together and manages them. The profit made once the product is sold the entrepreneur’s compensation or reward.

Investment

  • An asset or item is considered an investment if a business or household bought it with the hope of making money or appreciating it.
  • When a person purchases a good as an investment, they do not intend to use it for immediate consumption but rather to accumulate wealth.

Investments can be further divided into two parts; gross investment and net investment.

  1. Gross Investment:
  • Gross investment, often known as gross capital investment, refers to a company’s capital investment before depreciation.
  • Gross investment displays the company’s yearly absolute investment value in assets purchased.

2. Net Investment:

  • It is calculated as gross investment less existing capital’s depreciation. In a word, net investment is the rise in productive stock.
  • Gross investment less depreciation equals net investment.

Depreciation

In Economics, depreciation is a method of spreading out the expense of a physical asset throughout its useful life. Depreciation is a way to calculate how much an asset has lost in value.

Capital Formation

Gradually growing capital stock through time is known as capital formation.

Stock Variable and Flow Variable

Stock Variable: A variable that is measured at a certain moment in time is referred to as a stock variable.

There is no time dimension to stock variables. Examples include wealth, capital, etc.

Flow Variable: A flow variable is a quantity that is calculated over a predetermined period.

This means that flows are characterised by a certain time frame, such as hours, days, weeks, months or years. It has a time dimension.

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Transfer Payments

  • Transfer payments are sums of money that are given out without receiving anything in return, such as goods or services.
  • There is no expectation of a return on these one-time payments. For the recipients, these are unearned incomes.
  • You receive these without cost and are not required to make any payments in the present or the future in return.
  • In essence, transfer payments are welfare costs incurred by the government.

Leakage and Injection

Leakage:

  • Leakage is an economic term that explains capital or money that escapes an economy or system in a cyclical flow of income model.
  • Income levels and total demand both decline as a result.
  • Imports, savings and taxes are a few examples.

Injection:

  • Injection occurs when money enters an economy from sources other than individuals and businesses.
  • Both income levels and total demand are increased.
  • Various sources, such as government spending, investment and exports can act as injections.

Consumer Price Index and Wholesale Price Index

The consumer price index (CPI) measures changes over time in the average price of goods and services that a reference population purchase, uses or pays.

Circular Flow of Income

  • The circular flow of income explains how money circulates in an economy. We just have two elements in a simple economy: households and industries. But it’s not quite that easy.
  • The circular flow of income is impacted by many more elements in an open economy. An open economy also considers government spending, international trade, consumer spending and corporate production.
  • Money is added to the economy when the government invests in infrastructure and welfare programmes. Similarly, firms and industries profit when they export commodities. However, we decrease our disposable income when we import products and services and pay taxes to the government.
  • The inflow of funds into an economy is now made up of household income (wages), exports, investments and government spending. The overall outflow is made up of taxes, imports and business investments. When the inflow of money exceeds the total outflow of funds, the national income will rise. The circular flow of money will also be in equilibrium when the total amount coming in and going out is equal.

Economic Territory and Its Scope

The economic territory of a nation is the physical space under government control. The movement of capital, products and people is unrestricted inside this area. In addition to land, the economic territory also includes national airspace, territorial waters and offshore oil and gas reserves.

Scope of Economic Territory:

  • Political boundaries include territorial seas and airspace, for instance.
  • Ships and aircraft operated by locals that cross international borders.
  • Military installations, consulates, embassies and other foreign organisations.
  • Residents use fishing boats, oil platforms, and gas rigs in international waters.

Normal Residents and Its Exceptions

Normal residents of a country are individuals or entities that habitually reside there and have their primary place of business there:

  • The foreign embassy staff members and diplomats are exceptions to the normal residents.
  • Employees of international organisations like the WHO, IMF, UNESCO and others are treated like regular citizens of the nation they are originally from.
  • The travellers on business, tourists, students and so forth are not classified as normal residents.

Aggregates of National Income

The aggregates of national income mentioned under the NCERT Solutions Class 12 Macroeconomics Chapter 2 are as follows:

  1. Gross Domestic Product at Market Price (GDPMP):

It represents the market value of all finished goods and services produced during an accounting year by all manufacturing facilities situated on a nation’s domestic territory. Gross value contributed by all resident producers at market prices plus taxes and import subsidies less than zero equals the gross domestic product at market prices.

GDPMP = Net domestic product at Factor Cost (NDPFC) + Depreciation + Net Indirect Tax

GDP = C + I + G + (X-M)

2. Gross Domestic Product at Factor Cost (GDPFC):

It is the total net amount of all finished products produced on a nation’s domestic market, excluding net indirect taxes.

GDPFC = GDPMP − Indirect tax+Subsidy,or

GDPFC = GDPMP −NIT

GDPFC= Compensation of Employees + Rent + Interest + Profit + Depreciation

3. Net Domestic Product at Market Price (NDPMP):

It is the market value of finished goods and services generated throughout a year in the nation’s domestic market, depreciation-free.

Therefore, it is the total sales value of all goods and services produced on the territory of a nation within a fiscal year, excluding depreciation.

NDPMP =GDPMP − Depreciation

4. The Net Domestic Product at Factor Cost (NDPFC)/ Domestic Income:

It is the factor income owners of production factors receive for rendering factor services within the domestic territory over a fiscal year.

It is the entire cost of all rendered products and services, excluding depreciation and net indirect tax.

It is, therefore, equal to the total of all factor incomes (employee compensation, rent, interest, profit, and mixed-income from self-employment) produced in the domestic sector of the nation.

NDPFC = GDPMP – Depreciation – Indirect tax + Subsidy or

NDPFC= Compensation of Employees + Rent + Interest + Profit

5. The Net National Product at Factor Cost or National Income (NNPFC)/ National Income:

It is the total of all factor incomes that are received as wages by the general public of a nation. Rent, interest and profit are calculated for an accounting year.

It is the total of all factor incomes received by common people in a country during a fiscal year, including wages, rent, interest, and profit.

NNPFC =NDPFC + Factor income earned by normal residents from abroad – Factor payments made abroad.OR

NNPFC = NDPFC + NFIA = National Income

6. The Gross National Product at Market Price (GNPMP):

It represents the market value of all finished goods and services produced throughout an accounting year by regular residents of a nation (both domestically and abroad).

GNPMP(MNPFC) = GDPMP + NFIA Or

GNPMP = NNPFC + Dep + NIT

7. Net National Product at Market Price (NNPMP):

It is the total of factor incomes received by a nation’s regular people over a fiscal year, including net indirect taxes.

NNPMP=NNPFC + Indirect tax − Subsidy, Or

NNPMP=NDPMP + Net factor income from abroad

8. Gross National Product at Factor Cost (GNPFC):

It is the total of the factor earnings of the average citizen of a nation over an accounting year plus depreciation.

GNPFC = NNPFC + Depreciation,or

GNPFC = GDPFC + NFIA

9. National Income at Current Prices:

National income at current prices refers to the number of goods and services produced by common citizens inside and outside a nation during a given year when they are valued at current prices—additionally, it is also known as nominal national income.

Y = Q x P

Y represents the national income at current prices.

Q represents the number of goods and services that are produced in an accounting year.

P represents the prices of goods and services during the current accounting year.

10. National Income at Constant Prices:

The value of goods and services produced by the general public inside and outside of a nation in a given year at a constant price, or the base year’s price, is referred to as national income at regular prices, additionally known as actual national income.

Y’ = Q x P’

Here,

Y’ represents the national income at constant prices.

Q represents the number of goods and services produced during an accounting year.

P’ represents the price of goods and services prevailing during the base year.

11. The GVA at Market Prices:

The production and product taxes are included in GVA at market rates, but production and product subsidies are not.

GVA at market price = GDP at market prices

10. GVA at basic prices:

GVA at base prices includes production taxes but excludes product subsidies.

GVA at basic prices = GVAMP – Net Production Taxes

11. GVA at factor cost:

GVA at factor cost does not include subsidies or taxes.

GVA at factor cost = GVA at basic prices – Net Production Taxes

Methods of Calculating National Income

Calculating and measuring national income is crucial since doing so allows us to gauge an economy’s growth rate. There are many ways to determine national income. Let’s take a quick look at each approach for the calculation of the national income as mentioned in the NCERT Solutions Class 12 Macroeconomics Chapter 2:

  1. Income Method:

The income method of determining national income focuses on production. Currently, land, labour, capital and other resources are used to produce goods and services. Moreover, if we take these components of production into account, income is made by employing rent, salaries and wages, profits and interest.

The government can then determine the national income by adding these different revenue sources. Mixed-income is a significant additional source of income. Mixed-income is the term used to describe the earnings of sole proprietors and self-employed individuals.

According to the income method:

National Income = Rent + Wages + Interest + Profit + Mixed-Income

The income method does not take into consideration any transfer payments, prize money (lotteries), illegal money, profit tax and the sale of second-hand goods.

2. Expenditure Method:

The expenditure method of determining national income focuses on expenditures. All purchases made by citizens, governments, or commercial businesses are now referred to as expenditures. Following are the factors taken into consideration by the expense method:

  • The purchase of consumer goods and services by residents and households (C)
  • Government expenditure on goods and services (G)
  • Business enterprises spending on capital goods and stocks (I)
  • Net exports (exports-imports) (NX)

Hence, according to the expenditure method:

National Income = C + G + I + NX

However, the expenditure method excludes any expenditure on second-hand goods and the purchase of shares and bonds.

3. Value-Added Method:

The value added to a particular product at each manufacturing stage is the main emphasis of the value-added method of estimating national revenue. We must first determine the net value added at factor cost to calculate the national income using this method (NVAFC). We must subtract the net indirect taxes to select the (NVAFC).

The method typically segments the economy into several sectors, such as agriculture, fishing, transportation, communication etc. The government can then determine the national income by computing each level’s value added ((NVAFC). Considering that this approach focuses on the net worth added by each component, the following elements would need to be excluded or subtracted from the output of each enterprise:

  • Consumption of raw materials
  • Consumption of capital
  • Net indirect taxes

We can now calculate the industry’s net value added at factor cost by adding the NVAFC of all its businesses. We also obtain the net domestic product at factor cost, or NDPFC by aggregating the NVAFC of all industries. The national income is obtained by adding the net factor revenue from outside.

According to the value-added method of national income accounting:

National Income = (NDPFC) + Net factor income from abroad

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The Problem of Double Counting

The problem of double counting arises while calculating national income. When double counting happens in the calculation of national income, the estimates of national income become muddled.

Techniques for preventing the issue of double counting include the following:

  • The value of finished goods should only be considered.
  • The only value contributed that should be counted as equal to the value of output minus intermediary consumption (Value added method).

Private Income, Personal Income, Personal Disposable Income

Private Income:

  • Private income is the total expected income from all sources, including transfers to the private sector both domestically and internationally.
  • Private income = Factor income from net domestic product accruing to the private sector + National debt interest + Net factor income from abroad + Current transfers from government + Other net transfers from the rest of the world.

Personal Income:

  • The total amount of money received by all individuals or households in a particular nation is referred to as “personal income.” Personal income is the total compensation received from all sources, including salaries, wages, etc.
  • Personal income (PI) = National Income (NI) – Undistributed profits – Net interest payments made by households – Corporate tax + Transfer payments to the households from the government and firms

Personal Disposable Income:

  • The amount of money left over after subtracting income taxes is referred to as disposable income, often known as personal disposable income.
  • Personal Disposable Income (PDI) = PI– Personal tax payments – Non-tax payments

GDP and Welfare

It is a measurement of the economic worth of all finished products produced over a given period, usually annually or quarterly.

A higher GDP means that more goods and services are produced. Although it shows that more products and services are available, this does not necessarily mean that individuals have better lives overall.

The two classifications of GDP provided in the NCERT Solutions Class 12 Macroeconomics Chapter 2 includes the following –

  1. Real GDP: Real gross domestic product (real GDP) measures an economy’s total annual output of goods and services that has been adjusted for inflation. The terms “constant price”, “inflation-corrected”, or “GDP at constant prices” are also used to describe it.

It is impacted by changes in physical products rather than price level adjustments. It is regarded as a legitimate sign of economic development.

2. Nominal GDP: Nominal GDP or GDP at current prices refers to the goods and services generated by all production units inside a nation’s domestic territory during a fiscal year and valued at current prices. It is affected by changes in the physical output and the pricing level. It is not thought to be a trustworthy sign of economic development.

Welfare:

Welfare is the term used to describe people’s material well-being. Numerous economic factors, like national income, consumption levels, product quality, etc., and non-economic factors, including environmental pollution, law and order, and other considerations influence it.

While non-economic welfare is defined as welfare reliant on non-economic factors, economic welfare is defined as welfare dependent on economic variables. The total of one’s economic and non-economic well-being is referred to as social welfare.

As a result, GDP and welfare are directly related; nevertheless, the following restriction renders this link insufficient:

NCERT Solutions Class 12 Macroeconomics Chapter 2: Exercise and Solutions

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FAQs (Frequently Asked Questions)
1. Which way of calculating the national income of a country is considered the most accurate?

The National income is the total amount of money accruing for a county from their economic activities.  The country’s income is considered using the income method to compute national income. The government’s earnings are also included in this. The entire value of the goods and services produced in the economy is used to determine national income using the production method. Hence, a combination of these methods is considered accurate while computing the nation’s national income.

2. What is a GDP Deflator?

The GDP deflator, often known as the implicit price deflator, is a measure of inflation. It is the difference between the value of goods and services an economy produces in a given year at the current price and the prices that prevail in the base year. This ratio demonstrates how much of the rise in GDP may be attributed to higher pricing rather than increasing output.

If GDP denotes nominal GDP and

gdp denotes real GDP,

then;

GDP Deflator= GDP/gdp

The deflator is also expressed in percentage terms. In this scenario,

GDP Deflator= GDP/gdp × 100