Class 12 Macroeconomics Chapter 2: National Income Accounting Notes
These National Income Accounting Class 12 Notes explain the concepts of national income, GDP, GNP, value added, circular flow of income and methods of calculating national income. The chapter also discusses nominal and real GDP, GDP deflator, welfare and important macroeconomic aggregates.
These NCERT notes are prepared for quick revision and competitive exam preparation, covering formulas, definitions, examples and important exam-oriented concepts useful for UPSC, SSC, CUET, State PSC, Railways and board examinations.
Table of Contents
- Chapter Overview
- Basic Concepts of Macroeconomics
- Stocks and Flows
- Investment and Depreciation
- Circular Flow of Income
- Methods of Calculating National Income
- Product Method
- Expenditure Method
- Income Method
- Factor Cost, Basic Price and Market Price
- Macroeconomic Identities
- Nominal and Real GDP
- GDP and Welfare
- Important Formulas
- Important Topics
- Important Questions
- FAQs
- Quick Revision Summary
Chapter Overview
National Income Accounting explains how the aggregate production, income and expenditure of an economy are measured. The chapter introduces concepts such as final goods, intermediate goods, stocks and flows, investment and depreciation.
The chapter also explains the circular flow of income, methods of calculating GDP, macroeconomic aggregates like GDP, GNP, NNP and National Income along with concepts of real GDP, price indices and GDP as a measure of welfare.
Some Basic Concepts of Macroeconomics (Pages 9–14)
These NCERT notes explain the meaning of production, final goods and macroeconomic concepts.
Economic Wealth
Economic wealth depends on:
- Production process
- Use of resources
- Flow of production
Final Goods
Meaning
Goods meant for final use and not for further production.
Examples
- Clothes
- Food items
- Consumer services
Intermediate Goods
Meaning
Goods used as raw materials for producing other goods.
Examples
- Steel sheets
- Cotton yarn
- Copper
Consumer Goods
Meaning
Goods used for direct consumption.
Examples
- Food
- Clothing
- Recreation services
Capital Goods
Meaning
Durable goods used in production process.
Examples
- Machines
- Tools
- Factory buildings
Consumer Durables
Meaning
Consumer goods having long life.
Examples
- Television
- Cars
- Computers
Stocks and Flows (Pages 11–12)
These notes explain stock variables and flow variables.
Flow Variable
Meaning
Variables measured over a period of time.
Examples
- Income
- Output
- Profits
Stock Variable
Meaning
Variables measured at a particular point of time.
Examples
- Capital stock
- Inventory
- Wealth
Difference Between Stock and Flow
| Basis | Stock | Flow |
|---|---|---|
| Measurement | At a point of time | Over a period of time |
| Example | Wealth | Income |
Investment and Depreciation (Pages 12–13)
These notes explain gross investment, net investment and depreciation.
Gross Investment
Meaning
Total expenditure on capital goods.
Depreciation
Meaning
Loss in value of capital goods due to wear and tear.
Net Investment Formula
Net Investment = Gross Investment − Depreciation
Meaning
Net addition to capital stock.
Circular Flow of Income (Pages 14–16)
These NCERT notes explain how income moves between households and firms.
Circular Flow
Meaning
Continuous movement of income and expenditure between firms and households.
Two-Sector Economy
Sectors
- Households
- Firms
Flow in Economy
| From | To | Flow |
|---|---|---|
| Firms | Households | Factor payments |
| Households | Firms | Consumption expenditure |
Methods of Calculating National Income (Pages 15–24)
These notes explain the three methods of measuring national income.
Three Methods
- Product Method
- Expenditure Method
- Income Method
Product Method / Value Added Method (Pages 17–20)
These NCERT notes explain value added approach to measuring GDP.
Value Added
Meaning
Contribution made by a firm to production.
Value Added Formula
Value Added = Value of Output − Intermediate Consumption
Gross Value Added (GVA)
Meaning
Value added including depreciation.
Net Value Added (NVA)
Formula
NVA = GVA − Depreciation
Inventory
Meaning
Stock of unsold goods and raw materials.
Formula
Change in Inventory = Closing Stock − Opening Stock
GDP by Product Method
Formula
GDP = Sum of Gross Value Added + Taxes − Subsidies
Expenditure Method (Pages 21–22)
These notes explain calculation of GDP using expenditure approach.
Components of Expenditure
- Consumption expenditure (C)
- Investment expenditure (I)
- Government expenditure (G)
- Net exports (X − M)
GDP by Expenditure Method
Formula
GDP = C + I + G + (X − M)
Where:
- C = Consumption expenditure
- I = Investment expenditure
- G = Government expenditure
- X = Exports
- M = Imports
Income Method (Pages 22–24)
These NCERT notes explain calculation of GDP through factor incomes.
Components of Income
- Wages
- Rent
- Interest
- Profit
GDP by Income Method
Formula
GDP = W + R + In + P
Where:
- W = Wages
- R = Rent
- In = Interest
- P = Profit
Identity of GDP Methods
Product Method = Income Method = Expenditure Method
Factor Cost, Basic Prices and Market Prices (Page 24)
These notes explain the relationship between different price concepts.
Factor Cost
Meaning
Income received by factors of production excluding taxes.
Basic Prices
Meaning
Prices including production taxes but excluding product taxes.
Market Prices
Meaning
Prices paid by consumers including indirect taxes.
Relationship Formula
Market Price = Factor Cost + Indirect Taxes − Subsidies
GDP at Market Prices
Formula
GDPMP = GDPFC + Net Indirect Taxes
Some Macroeconomic Identities (Pages 25–28)
These notes explain GDP, GNP, NNP and National Income.
Gross Domestic Product (GDP)
Meaning
Market value of all final goods and services produced within domestic territory during a year.
Gross National Product (GNP)
Formula
GNP = GDP + NFIA
Net National Product (NNP)
Formula
NNP = GNP − Depreciation
National Income (NI)
Formula
National Income = NNP at Market Price − Net Indirect Taxes
Personal Income (PI)
Formula
PI = NI − Undistributed Profits − Corporate Tax + Transfer Payments
Personal Disposable Income (PDI)
Formula
PDI = PI − Personal Taxes
National Disposable Income
Formula
National Disposable Income = NNP at Market Prices + Other Current Transfers from Rest of World
Nominal and Real GDP (Pages 29–30)
These NCERT notes explain nominal GDP, real GDP and GDP deflator.
Nominal GDP
Meaning
GDP measured at current market prices.
Real GDP
Meaning
GDP measured at constant prices.
GDP Deflator
Formula
GDP Deflator = (Nominal GDP / Real GDP) × 100
Consumer Price Index (CPI)
Meaning
Index measuring prices of basket of goods purchased by consumers.
Wholesale Price Index (WPI)
Meaning
Index measuring wholesale prices of goods traded in bulk.
GDP and Welfare (Pages 30–31)
These notes explain limitations of GDP as an indicator of welfare.
Limitations of GDP as Welfare Measure
1. Unequal Distribution of Income
Rise in GDP may benefit only a few people.
2. Non-Monetary Exchanges
Barter transactions are not included in GDP.
3. Externalities
Meaning
Benefits or harms caused to others without payment.
Example
- Pollution by industries
Positive Externality
Example
Education improving social welfare.
Negative Externality
Example
Industrial pollution harming environment.
Important Formulas
Net Investment
Net Investment = Gross Investment − Depreciation
Value Added
Value Added = Value of Output − Intermediate Consumption
GDP by Expenditure Method
GDP = C + I + G + (X − M)
GDP by Income Method
GDP = W + R + In + P
GNP Formula
GNP = GDP + NFIA
NNP Formula
NNP = GNP − Depreciation
National Income Formula
National Income = NNP at Market Price − Net Indirect Taxes
GDP Deflator
GDP Deflator = (Nominal GDP / Real GDP) × 100
Important Topics
| Important Topic | Page Reference |
|---|---|
| Final and Intermediate Goods | Pages 9–11 |
| Stocks and Flows | Pages 11–12 |
| Gross and Net Investment | Pages 12–13 |
| Circular Flow of Income | Pages 14–16 |
| Product Method | Pages 17–20 |
| Expenditure Method | Pages 21–22 |
| Income Method | Pages 22–24 |
| GDP, GNP and NNP | Pages 25–28 |
| National Income | Pages 25–28 |
| Personal Income and PDI | Pages 26–27 |
| Nominal and Real GDP | Pages 29–30 |
| GDP Deflator | Page 29 |
| CPI and WPI | Page 30 |
| GDP and Welfare | Pages 30–31 |
Looking for other chapters notes?
Introduction to Macroeconomics Class 12 Notes
Money and Banking Class 12 Notes
Determination of Income and Employment Class 12 Notes
Government Budget and the Economy Class 12 Notes
Class 12 Economics Chapter 6: Open Economy Macroeconomics Notes
Important Questions
Very Short Answer Questions
- What is a final good?
- Define depreciation.
- What is value added?
- Define GDP.
- What is GDP deflator?
Short Answer Questions
- Differentiate between stock and flow.
- Explain circular flow of income.
- Explain value added method.
- Differentiate between nominal GDP and real GDP.
- Explain GDP deflator.
Long Answer Questions
- Explain the three methods of calculating national income.
- Explain the concepts of GDP, GNP and NNP.
- Discuss the limitations of GDP as measure of welfare.
- Explain nominal GDP and real GDP with examples.
- Explain circular flow of income in a two-sector economy.
FAQs
1. What is GDP?
GDP is the market value of all final goods and services produced within domestic territory in a year.
2. What is depreciation?
Depreciation is reduction in value of capital goods due to wear and tear.
3. What is the difference between GDP and GNP?
- GDP measures production within domestic territory.
- GNP includes net factor income from abroad.
4. What is GDP deflator?
GDP Deflator measures price level changes in economy.
GDP Deflator = (Nominal GDP / Real GDP) × 100
5. Why is GDP not a perfect measure of welfare?
Because:
- Income distribution may be unequal
- Non-monetary transactions are excluded
- Externalities are ignored
Quick Revision Summary
- Final goods are meant for final use.
- Intermediate goods are used for further production.
- Stock is measured at a point of time.
- Flow is measured over a period of time.
- Depreciation means wear and tear of capital goods.
- Circular flow explains movement of income and expenditure.
- GDP can be measured by:
- Product method
- Expenditure method
- Income method
- GDP formula:
GDP = C + I + G + (X − M)
- GNP includes NFIA.
- NNP = GNP − Depreciation.
- National Income = NNP at market price − Net indirect taxes.
- Nominal GDP uses current prices.
- Real GDP uses constant prices.
- GDP Deflator measures price changes.
- GDP is not a perfect indicator of welfare.