12Th Class ECONOMICS
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CHANAKYA GROUP OF ECONOMICS SESSION 2020-21 12th class ECONOMICS Macro Economics: Part-5 Market price & Factor cost Aggregates related to national Income. Domestic product at Market price and factor cost 1.Gross domestic product at Market Price GDP at Market price is the market value of final goods and services produced within the domestic territory of a country during an accounting year inclusive of depreciation. (GDPmp include Indirect taxes and deduct subsidies) 2.Gross domestic product at factor cost. GDP at factor cost is the sum total of factor cost incurred on the production of final goods and services within the domestic territory of a country during an accounting year inclusive of depreciation. (GDPfc=Compensation of employee+ Rent+ Interest+profit.) (GDPfc include subsidies and deduct Indirect taxes ) Formulas of GDPmp and GDPfc 1. GDP at Market price = GDPfc + indirect taxes- subsidy. 1. GDP at Factor cost = GDPmp - indirect taxes+ subsidy. Net indirect taxes= indirect taxes - subsidies 1.Gross National Product: Gross National Product (GNP) is defined as the total market value of all final goods and services produced in a country during a specific period of time, usually one year. It measures the output generated by a country’s organizations located domestically or abroad. 2.Gross Domestic Product: Gross Domestic Product (GDP) refers to the market value of final goods and services produced in a country in a given time period. It includes income earned by foreign players locally minus income earned by national players in abroad. The GNP can be calculated with the help of the following formula: GNP = GDP +Net Factor Income from Abroad (NFIA) From the above mentioned formula, we can calculate GDP as follows: GDP = GNP- NFIA 3.NDPmp refers to the market value of final goods and services produced by all the production units in the domestic territory of a country during a given time period. It excludes depreciation and includes indirect taxes. It is equal to the net value added at market price. NDPmp can be calculated as follows: NDPmp = GDPmp – depreciation 4.NDPfc refers to the market value of final goods and services produced by all the production units in the domestic territory of a country during a given time period excluding depreciation and net indirect taxes. NDPfc is also known as Net Domestic Income (NDI). It can be calculated as follows: NDPfc = GDPmp – depreciation – Net Indirect taxes Or NDPfc = NDPmp – Net Indirect Taxes = NDPmp – Indirect Taxes + Subsidies 5.Net National Product: Net National Product (NNP) is equal to GNP minus depreciation. It indicates the net output available for the consumption by society where society includes consumers, producers and government. NNP is the actual measure of the national income. It can be calculated as follows: NNPmp = NDPmp + NFIA NNPfc is defined as the measure of the factor earnings of the residents of a country, both from economic territory and abroad. Therefore, NNPfc is equal to national income of country. It can be calculated as follows: NNPfc = NDPfc + NFIA Aggregates related to national income 1.Domestic product GDPmp NDPmp GDPfc NDPfc GDPMP- GDPFC- Dep NDPMP+Dep+indi GDPMP- Dep. indirect taxes + OR rect taxes – Subsidy.(- net OR GDPMP- Subsidy. OR (+ net indirect taxes) indirect taxes + indirect taxes) GDPMP- Subsidy.(- net Dep+indirect taxes indirect taxes)- – Subsidy. dep DOMESTIC PRODUCT NATIONAL 2.National Product PRODUCT GNPmp NNPmp GNPfc NNPfc GDPmp + NDPmp+ GDPfc+ NDPfc+ NFIFA NFIFA NFIFA NFIFA NFIFA = Income earned by normal residents – income earn by non- residents. or NFIFA = factor income from abroad – factor income to abroad. All the types of transfer incomes are kept out of the national income estimates. For recipients of transfer payment, it is called transfer income, while for payers; it is termed as transfer expenditures. There are two types of transfers namely current and capital transfers. The following are some of the examples of current transfers: a. Tax payments to the government b. Donations to non-profit institutions c. Scholarship to students d. Old age pensions e. Unemployment allowances f. Gifts and lottery prizes g. Aid provided by one country to another country in case of emergencies h. Transfer of money by resident of one country to relatives residing in other country On the other hand, capital transfers are the transfers made out of the wealth or capital of the payer and added to the wealth or capital of the recipient. The example of capital transfers are as follows: a. Capital grants from government to organizations b. Lump-sum payments to households in case of natural disasters c. Payment of taxes on capital and wealth CHANAKYA GROUP OF ECONOMICS SESSION 2020-21 12th class ECONOMICS Macro Economics: Part-6 Real GDP & Nominal GDP Methods of calculating National income. Concept of GDP 1.Nominal 3.GDP 2.Real GDP GDP deflator 1. Nominal GDP The Nominal GDP is the total value of all of the final goods and services that an economy produces during a given year, measured on the basis of current prices. Nominal GDP is measured on the basis of current price . Nominal values of GDP from different time periods can differ due to changes in quantities of goods and services and/or changes in general price levels nominal GDP would also change even though output remained constant. Price index Nominal GDP = Real GDP × 100 Nominal GDP = Q × P Q- quantity of final goods and services produced during an accounting year. P- prices prevailing during the accounting s year. Price index- it is difference between the price of two different periods. If there is no inflation or deflation, nominal GDP will be the same as real GDP. 2.Real GDP The real GDP is the total value of all of the final goods and services that an economy produces during a given year, measured on the base year prices. It is calculated using the prices of a selected base year. GDP is calculated on the basis of fixed prices in some year. To find out the real GDP a base year is chosen when the general prices level is normal, ie it is neither to high nor too low. If prices change from one period to the next but actual output does not, real GDP would be remain the same. Real GDP reflects changes in real production. GDP at current prices Real GDP = × 100 Price index Real GDP = Q*P Price index- it is difference between the price of two different periods. Q- quantity of final goods and services produced during an accounting year. P- prices prevailing during the base year. Real GDP = Q*P Real GDP increases only when Q increases . Because prices remain constant. So when real GDP increases there is an increases in the flow of goods and services, Other things remaining constant. Real GDP increases- output or goods and services increases- quality of life improve. Real GDP example In an economy total production of notebooks is 100 and current price of each notebook is 12 rupees in 2019-20, and base year price is 10rs Real GDP = Q*P Real GDP = 100 × 10 = 1000 Nominal GDP example In an economy total production of notebooks is 100 and current price of each notebook is 12 rupees in 2019-20 and base year price is 10rs Nominal GDP = Q*P Nominal GDP = 100 × 12 = 1200 3.GDP deflator GDP deflator is an index of price changes of goods and services included in GDP. It is a price index which is calculated by diving the nominal GDP in a given year by the real GDP for the same year and multiplying by 100. Nominal (current price) GDP GDP Deflator = × 100 Real( constant price) GDP 1.If real GDP is 50 , and Price index is 400 , then Nominal GDP? 2.If Nominal GDP is and Price index is 400 , then Real GDP? 3.If Nominal GDP is and Real GDP is then Price index ? GDP and Welfare There is positive relation between GDP of a country and Welfare of people. Real GDP is considered as an index of welfare of the people. Because it increase in real GDP means increase in level of output in the economy. Welfare of the people measured in terms of the availability of goods and services per person. GDP and Welfare 1.Higher GDP Growth 6.Increase in investment. 2.Rise in level of Employment. 5.Rise in inducement 3.Rise in income of to invest. people 4.Rise in aggregare demand. Limitation of GDP and Welfare Increase in GDP always not lead to welfare of people, some time high GDP lead to reduction in welfare of the people. these are- 1. Unequal distribution of income – benefit of growth goes to richer section of the society. 2. Composition of GDP -more production of capital goods.(luxury goods) 3. Non-monetary transactions- (barter system) these goods are not recorded in GDP. 4. Externalities- good and bad impact of economic activities. If GDP increases by pollution related production activities then welfare will be reduced. home-work Q1. if real GDP is 520 and Price index.(base = 100) is 125 , calculat Nominal GDP. Q2. If the real GDP is 300 and nominal GDP is 330 , calculate price index.(base = 100) Q3. if nominal GDP is 1200 and price index.(base = 100) is 120, calculate real GDP. CHANAKYA GROUP OF ECONOMICS 12th class ECONOMICS Macro Economics: Part-7 Methods of calculating National income 1.product method- I calculating GDP OR GVA at Market prices and factor cost. Methods of calculating national income 1.Product1.Product 2.Income 3.Expenditure method/valuemethod/value method method. addedadded methodmethod Value Added Method This method is used to measure national income in different phases of production in the circular flow.