Maharashtra Board Class 12 Economics Chapter 7 National Income PDF Download

National Income

Introduction

National Income is one of the important subject matter of macroeconomics. The national economy comprises of all the firms and factories, shops and markets, banks and financial institutions, various departments and their offices etc. National income is a composite measure of all economic activities such as production, distribution, exchange and consumption, but is also an objective indicator of economic welfare of the people in a country.

In India, establishment of the National Income Committee (NIC) in 1949 marked the beginning of Government efforts for regular compilation of National Income estimates. At present, Central Statistical Organisation (CSO) compiles and publishes data on national income and allied aggregates every year.

Teacher's Note

National income tells us about the total money value of goods and services a country makes in one year. It is like checking how much money your family earned this year.

Exam Trick

Remember: National Income = Money value of all goods and services made in one year. Just like your school counts all the marks of all students, India counts all the money of all work done.

Points to Remember

National income measures all economic activities in a country.
It is calculated for one financial year (1st April to 31st March in India).
Only final goods and services are counted, not raw materials.
National income shows the economic welfare of people in a country.
CSO is the organization that calculates India's national income.

Meaning

Modern economy is a money economy. Hence, national income of a country is expressed in terms of money.

The total income of the nation is called national income.

In real terms, national income is the flow of goods and services produced in an economy during a year.

Definitions of National Income

Following are some of the important definitions of national income:

1) National Income Committee (NIC): The National Income Committee was appointed by the Government of India in August 1949 with Prof. P. C. Mahalanobis as Chairman and Prof. D. R. Gadgil and Dr. V. K. R. V. Rao as the members.

According to NIC "A national estimate measures the volume of commodities and services turned out during a given period counted without duplication."

2) Prof. A.C. Pigou: "National dividend is that part of objective income of the community including of course income derived from abroad which can be measured in money."

5) Prof. Irving Fisher: "National dividend or income consists solely of services as received by ultimate consumers, whether from their material or from their human environments."

Features of National Income

1) Macro Economic Concept: National income represents income of the economy as a whole rather than that of an individual. Hence it is a macro economic concept.

2) Value of Only Final Goods and Services: In order to avoid double counting in national income, the value of only final goods and services produced in the economy are considered. The value of intermediate goods or raw materials is not considered. For example, while estimating the production of shirts, there is no need to take the value of cotton, as it is already included in the price of the shirts.

Teacher's Note

When we buy a shirt, the price includes the cost of cotton. We should not count cotton cost and shirt cost separately. This is like counting your lunch money once, not twice.

Exam Trick

Remember: Final goods = bread (ready to eat). Intermediate goods = wheat and flour (used to make bread). Count only bread, not wheat and flour.

Points to Remember

Double counting means counting the same thing two times, which is wrong.
Final goods are ready to use by consumers.
Intermediate goods are used to make final goods.
Avoid double counting by counting only final products.
Cotton is intermediate, but shirt is final product.

3) Net Aggregate Value: National income includes net value of goods and services produced and does not include depreciation cost. (i.e. wear and tear of capital assets)

4) Net Income from Abroad: National income includes net income from abroad i.e. difference between export value and import value (X-M) and net difference between receipts from abroad and payments made abroad (R-P).

5) Financial Year: National income is always expressed with reference to a time period. In India, it is from 1st April to 31st March.

6) Flow Concept: National income is a flow concept as it shows flow of goods and services produced in the economy during a year.

7) Money Value: National income is always expressed in monetary terms. It represents only those goods and services which are exchanged for money.

Teacher's Note

National income only counts things sold for money. If your mother cooks food at home for the family, it is not counted in national income because no money is exchanged.

Exam Trick

Remember: National income = Money exchange only. Aadhaar card has a number just like national income has a money value.

Points to Remember

National income is measured only in money, not in goods.
It includes both exports and imports of the country.
It is calculated for a specific time period (one financial year).
Net income means income after taking away costs.
Depreciation is the wear and tear of tools and machines.

Circular Flow of National Income

Circular flow of income is the basic concept in macro economics. The circular flow of income refers to the process whereby an economy's money receipts and payments flow in a circular manner continuously through time.

Circular flow of income can be determined for the following:

1) Two sector Economy (Households and Business Firms.) \(Y = C + I\)

2) Three sector Economy (Households, Business Firms and Government sector) \(Y = C + I + G\)

3) Four Sector Economy (Households, Business Firms, Government and Foreign sector) \(Y = C + I + G + (X-M)\)

The circular flow of goods and money in a two sector model is explained below:

Two Sector Model of Circular Flow of National Income

There are two sectors, households and firms. It divides the diagram into two parts. The upper half represents the factor market and the lower half represents the commodity market.

In the above figure, the factors of production flow from the households to the firms. The firms use these factors to produce goods and services required by the households. Thus, goods flow from the households to the firms and from the firms back to the households. It is called product flows.

In the same way, money flows from the firms to the households in the form of factor payments such as rent, wages, interest and profit. Households use this income to purchase goods and services. Thus, money flows from the firms to the households and from the households back to the firms. It is called money flows.

In the circular flow of income, production generates factor income, which is converted into expenditure. This flow of income continues as production is a continuous activity due to never ending human wants. It makes the flow of income circular.

Teacher's Note

In a family, one person earns money and buys things. Then that money goes to the shop owner. This is circular flow. Money keeps moving in circles in the economy.

Exam Trick

Remember: Circular flow = money goes round and round. Like a merry-go-round, money keeps moving from households to firms and back again.

Points to Remember

Households give their work (labour) to firms and get money (wages).
Firms give goods and services to households and get money (consumption expenditure).
This creates a circular flow of money and goods.
The flow never stops because people always want to buy things.
Two sectors means households and business firms only.

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