Class 12 Economics National Income Notes | Economics Chapter 1 Notes
This article will help you with Class 12 Economics National Income Notes. Economics Chapter 1 Notes are very helpful if you want to score good marks, as I got 98 in CBSE 2025 Boards using these notes. study properly, and you will do good in economics, definitely. you can also check our YouTube channel for an explanation.
National Income and Related Aggregates – Complete Notes for CBSE Class 12
What is National Income?
National Income is the total money value of all final goods and services produced by the normal residents of a country during an accounting year. It represents the sum of all factor incomes (wages, rent, interest, profit) earned by residents within and outside the country.
Simple Definition: National Income = Total earnings of all citizens of a country in one year
Key Concepts to Understand
1. Basic Terms
| Term | Meaning | Example |
|---|---|---|
| Final Goods | Goods ready for consumption or investment | Bread from bakery, Car from showroom |
| Intermediate Goods | Goods used in production of other goods | Flour for bread, Steel for car |
| Factor Income | Payment to factors of production | Wages, Rent, Interest, Profit |
| Transfer Payments | Payments without any service in return | Pension, Scholarships, Gifts |
2. Important Distinctions
| Concept | Gross vs Net | Domestic vs National | Market Price vs Factor Cost |
|---|---|---|---|
| Meaning | Gross = Including depreciation Net = Excluding depreciation | Domestic = Within country borders National = By country’s residents | Market Price = Including taxes Factor Cost = Excluding taxes |
| Example | Gross includes wear & tear of machines Net excludes it | GDP counts production in India GNP counts production by Indians | Market price has GST included Factor cost without GST |
National Income Aggregates (The Big 8)
Domestic Aggregates
| Aggregate | Formula | What it Measures |
|---|---|---|
| GDP MP (Gross Domestic Product at Market Price) | Sum of value added by all sectors | Total production within country borders |
| GDP FC (Gross Domestic Product at Factor Cost) | GDP MP – Net Indirect Taxes | Production cost without taxes |
| NDP MP (Net Domestic Product at Market Price) | GDP MP – Depreciation | Net production within borders |
| NDP FC (Net Domestic Product at Factor Cost) | GDP MP – Depreciation – Net Indirect Taxes | Net production cost without taxes |
National Aggregates
| Aggregate | Formula | What it Measures |
|---|---|---|
| GNP MP (Gross National Product at Market Price) | GDP MP + NFIA | Total production by country’s residents |
| GNP FC (Gross National Product at Factor Cost) | GNP MP – Net Indirect Taxes | Production by residents without taxes |
| NNP MP (Net National Product at Market Price) | GNP MP – Depreciation | Net production by residents |
| NNP FC (Net National Product at Factor Cost) | NNP MP – Net Indirect Taxes = NATIONAL INCOME | The actual National Income measure |
Key Relationships and Formulas
Converting Between Aggregates
GDP MP → GDP FC: Subtract Net Indirect Taxes
GDP MP → NDP MP: Subtract Depreciation
GDP MP → GNP MP: Add NFIA
GDP MP → NNP FC: Subtract (Depreciation + Net Indirect Taxes) + Add NFIAImportant Formulas Table
| From | To | Formula |
|---|---|---|
| GDP MP | GDP FC | GDP MP – Net Indirect Taxes |
| GDP MP | NDP MP | GDP MP – Depreciation |
| GDP MP | GNP MP | GDP MP + NFIA |
| GNP MP | NNP MP | GNP MP – Depreciation |
| NNP MP | NNP FC | NNP MP – Net Indirect Taxes |
| NDP FC | NNP FC | NDP FC + NFIA |
Key Terms:
- NFIA = Net Factor Income from Abroad
- Net Indirect Taxes = Indirect Taxes – Subsidies
- Depreciation = Consumption of Fixed Capital
Methods of Calculating National Income
There are three methods to calculate National Income, all giving the same result:
1. Product Method (Value Added Method)
What it does: Adds up value added by all sectors
Steps:
- Divide economy into sectors (Primary, Secondary, Tertiary)
- Calculate Gross Value of Output for each sector
- Subtract Intermediate Consumption
- Get Value Added for each sector
- Add all sectors’ value added
Formula:
GDP MP = Sum of Value Added by all sectors
Value Added = Gross Output - Intermediate ConsumptionExample:
| Sector | Gross Output (₹) | Intermediate Consumption (₹) | Value Added (₹) |
|---|---|---|---|
| Agriculture | 1000 | 200 | 800 |
| Industry | 1500 | 600 | 900 |
| Services | 2000 | 300 | 1700 |
| Total GDP | 3400 |
2. Income Method
What it does: Adds up all factor incomes
Components:
- Compensation of Employees (wages, salaries)
- Operating Surplus (profit of companies)
- Mixed Income (income of self-employed)
- Rent
- Interest
Formula:
NDP FC = Compensation of Employees + Operating Surplus + Mixed Income
National Income = NDP FC + NFIAWhat to Include/Exclude:
| Include ✓ | Exclude ✗ |
|---|---|
| Wages and salaries | Transfer payments (pension, scholarship) |
| Rent from property | Sale of old goods |
| Interest on loans | Windfall gains (lottery) |
| Business profits | Income from illegal activities |
3. Expenditure Method
What it does: Adds up all final expenditures
Components:
- C = Private Final Consumption Expenditure
- I = Gross Domestic Capital Formation (Investment)
- G = Government Final Consumption Expenditure
- (X-M) = Net Exports
Formula:
GDP MP = C + I + G + (X - M)Example Calculation:
| Component | Amount (₹ crores) |
|---|---|
| Private Consumption | 5000 |
| Investment | 1500 |
| Government Expenditure | 1200 |
| Exports | 800 |
| Imports | 600 |
| GDP MP | 5000 + 1500 + 1200 + (800-600) = 7900 |
Real vs Nominal GDP
Understanding the Difference
| Aspect | Nominal GDP | Real GDP |
|---|---|---|
| Price Level | Current year prices | Base year prices (constant) |
| Inflation Effect | Includes inflation | Removes inflation effect |
| Better for | Current market value | Actual growth comparison |
| Also Called | GDP at Current Prices | GDP at Constant Prices |
GDP Deflator
Formula:
GDP Deflator = (Nominal GDP / Real GDP) × 100Use: Measures overall price level changes in the economy
Circular Flow of Income
Simple Two-Sector Economy
Real Flow: Households provide factors → Firms provide goods/services
Money Flow: Firms pay factor payments → Households pay for goods
Households ←→ Firms
(Factor services) → (Factor payments)
(Goods & services) ← (Consumption expenditure)Injections and Leakages
| Injections (Add to flow) | Leakages (Remove from flow) |
|---|---|
| Investment (I) | Savings (S) |
| Government Expenditure (G) | Taxes (T) |
| Exports (X) | Imports (M) |
Equilibrium: Total Injections = Total Leakages
Important Points for Exams
Key Relationships to Remember
- National Income = NNP FC
- Domestic Income = NDP FC
- Difference between National and Domestic Income = NFIA
- Difference between Gross and Net = Depreciation
- Difference between Market Price and Factor Cost = Net Indirect Taxes
Common Mistakes to Avoid
❌ Don’t Include:
- Transfer payments in National Income
- Intermediate goods (leads to double counting)
- Sale of second-hand goods
- Purchase of shares/bonds (financial transactions)
✅ Do Include:
- Only final goods and services
- Factor incomes only
- Production activities only
- Imputed rent of owner-occupied houses
Numerical Problem Tips
- Read carefully what is asked (GDP, GNP, National Income?)
- Identify given information clearly
- Use correct formula step by step
- Show all workings for partial marks
- Double-check units (crores, lakhs, etc.)
Sample Numerical Problem
Question: Calculate National Income from the following data:
- GDP MP = ₹5000 crores
- Depreciation = ₹500 crores
- Net Indirect Taxes = ₹300 crores
- NFIA = ₹200 crores
Solution:
Step 1: GDP MP = ₹5000 crores (given)
Step 2: Calculate NDP MP
NDP MP = GDP MP - Depreciation
NDP MP = 5000 - 500 = ₹4500 crores
Step 3: Calculate NDP FC
NDP FC = NDP MP - Net Indirect Taxes
NDP FC = 4500 - 300 = ₹4200 crores
Step 4: Calculate National Income (NNP FC)
National Income = NDP FC + NFIA
National Income = 4200 + 200 = ₹4400 croresAnswer: National Income = ₹4400 crores
Quick Revision Points
Formula Sheet
| Need to Find | Use This Formula |
|---|---|
| GDP FC | GDP MP – Net Indirect Taxes |
| NDP MP | GDP MP – Depreciation |
| GNP MP | GDP MP + NFIA |
| National Income | NDP FC + NFIA OR NNP FC |
| Personal Income | National Income – Corporate Tax – Undistributed Profits + Transfer Payments |
| Disposable Income | Personal Income – Direct Taxes |
Memory Tips
- “GING” = Gross Is including, Net is excluding, Gross has more
- “DINI” = Domestic Is territory based, National Is resident based
- “MIFI” = Market price Includes taxes, Factor cost Is pure cost
Money And Banking Important MCQ | Class 12 economics Chapter 2 MCQ
2 Comments