Revision: Introductory Macroeconomics >> National Income and Related Aggregates Economics Commerce (English Medium) Class 12 CBSE

Value Addition: Value addition on a good refers to the increase in the value of good at each successive stage of production. Algebraically, Value Addition is the difference between the total value of the output and the total value of the intermediate consumption.

Value Addition = Total Value of Output – Total Value of Intermediate Consumption.

"Private income is the total of factor incomes from all sources and current transfers from the Government and rest of the world accruing to private sector." – C.S.O.

\[\mathrm{GDP}\equiv\sum_{i=1}^N\mathrm{GVA}_i\]

National Income (NI) or Gross National Product at market prices can be written as:
NI = C + I + G + (X − M) + (R − P)

Where:

• C: Private Final Consumption Expenditure
• I: Private Domestic Investment Expenditure
• G: Government Final Consumption and Investment Expenditure
• $(X-M)$: Net Exports (Exports minus Imports)
• $(R-P)$: Net Receipts from abroad on account of goods and services

National Income (NI) using this income method is expressed as:

NI = R + W + I + P + MI + (X − M) + (R − P)

Where:

• R: Rent (including imputed rent of owner-occupied houses and income from government property)
• W: Wages and salaries (compensation of employees)
• I: Interest
• P: Profits (including distributed, undistributed, and corporate tax)
• MI: Mixed income of self-employed (where labour and capital income cannot be separated)
• X−M: Net exports (exports minus imports of goods and services)
• R−P: Net receipts from abroad (net income from abroad, such as factor income received from the rest of the world minus factor income paid abroad)

In words, national income is the sum of all domestic factor incomes plus net exports and net factor receipts from abroad.

PI = NI − Undistributed profits − Net interest payments made by households − Corporate tax + Transfer payments to households

NI ≡ NNP at factor cost = NNP at market prices − (Indirect taxes − Subsidies)

or

NNP at factor cost = NNP at market prices − Net indirect taxes

NNP = GNP − Depreciation

GNP = GDP + Net factor income from abroad

where

Net factor income from abroad = Factor income earned by domestic factors abroad

PDI = PI − Personal tax payments − Non-tax payments

National Disposable Income = Net National Product at market prices + Other current transfers from the rest of the world

Private Income can be expressed as under:

Or

Using nominal GDP = GDP and real GDP = gdp:

\[\text{GDP Deflator}=\frac{\text{Nominal GDP}}{\mathrm{Real~GDP}}\]

In percentage form:

\[\text{GDP Deflator }(\%)=\frac{\text{Nominal GDP}}{\mathrm{Real~GDP}}\times100\]

\[\mathrm{WPI}=\frac{\text{Cost of wholesale basket in current year}}{\text{Cost of same wholesale basket in base year}}\times100\]

Value of current year output at base year prices.

Real GDP = ∑ (Current year quantity × Base year price)

Value of current year output at current year prices.

Nominal GDP = ∑ (Current year quantity × Current year price)

\[\mathrm{CPI}=\frac{\text{Cost of fixed basket in current year}}{\text{Cost of same basket in base year}}\times100\]

• Output, prices, and employment tend to move in the same direction — this justifies using one representative good.
• One representative good is a simplification and can overlook real differences.
• Macroeconomics uses three representative goods: agricultural goods, industrial goods, and services.
• Each differs in production technology and price behaviour.
• For each type, macroeconomics determines output, price, and employment.

• Economic Agents: Consumers, producers, government, banks, and firms that make economic decisions.
• Microeconomics: Studies individual consumers, firms, and markets.
• Macroeconomics: Studies the economy as a whole (income, employment, inflation, etc.).
• Micro & Macro Link: Macroeconomic outcomes are the combined result of individual decisions.
• Need for Macroeconomics: Markets alone cannot solve all problems; government intervention is often needed.
• Adam Smith: Supported free markets and self-interest, but later economists recognised the need for state intervention.
• Role of Government & RBI/SEBI: Use policies on taxes, spending, money supply, and interest rates to achieve public welfare and economic stability.

• Macroeconomics emerged as a separate branch of economics after John Maynard Keynes published The General Theory of Employment, Interest and Money in 1936.
• Before Keynes, classical economists believed that all willing workers would find jobs and that factories would operate at full capacity.
• The Great Depression (1929–1933) caused a sharp fall in output and employment, especially in Europe and North America.
• During the Depression, demand for goods was very low, many factories remained idle, and large numbers of workers became unemployed.
• Keynes showed that economies can experience prolonged unemployment and unused productive capacity, leading to the development of macroeconomics to study the economy as a whole.

• A capitalist economy is based on private ownership, and most goods and services are produced for sale in the market rather than for self-consumption.
• Entrepreneurs control firms, make important decisions, bear risks, and organise production using land, labour, and capital.
• Land, labour, and capital are the main factors of production used to produce goods and services.
• Revenue earned from selling output is distributed as rent to landowners, wages to workers, interest to capital providers, and profit to entrepreneurs.
• A part of the profit is often reinvested in new machinery, factories, and technology, increasing the productive capacity of the economy.
• Households consume goods and services, save income, pay taxes, and earn income in the form of wages, rent, interest, and profits.
• The economy is connected to the rest of the world through exports, imports, and the movement of capital between countries.

• Depreciation is the annual allowance for wear and tear of a capital good, equal to its cost divided by its useful life in years.
• In any year, total final output is split between consumption goods and capital goods; more capital goods now usually mean more capacity to produce consumer goods in the future.
• There is a circular flow: firms pay incomes (wages, rent, interest, profit) to households for factor services; households use these incomes to buy goods and services from firms, enabling firms to sell their output.

• In a simple economy (no government, no trade, no saving), households earn wages, rent, interest and profit, and spend all their income on firms’ goods and services.
• The same income circulates: firms’ factor payments = households’ spending = firms’ sales, so aggregate income = aggregate expenditure = total value of final output.
• Hence national income can be calculated in three equal ways: by total spending, by total output, or by total factor incomes.