CBSE Grade 12 Macroeconomics - Complete Notes
1. National Income and Related Aggregates
National income is the total value of all goods and services produced in a country. It helps measure
economic growth.
Key Terms:
- GDP (Gross Domestic Product): Total value of goods & services produced within a country.
- GNP (Gross National Product): GDP + Net Factor Income from Abroad (NFIA).
- NDP (Net Domestic Product): GDP - Depreciation (wear & tear of assets).
- NNP (Net National Product): GNP - Depreciation.
- Market Price vs. Factor Cost:
- Market Price = Factor Cost + Indirect Taxes - Subsidies
- Factor cost considers wages, rent, profit, and interest, while market price includes taxes &
subsidies.
Methods of Calculating National Income:
1. Income Method: NI = Wages + Rent + Interest + Profit
2. Expenditure Method: GDP = C + I + G + (X - M)
3. Value-Added Method: Measures GDP by adding the value added at each stage of production.
Practice Questions - National Income
Q1: Calculate GDPmp using the Income Method.
Given: Wages = Rs.1000 crore, Rent = Rs.200 crore, Interest = Rs.150 crore, Profit = Rs.250 crore,
Indirect Taxes = Rs.100 crore, Subsidies = Rs.50 crore.
Solution: GDPmp = (1000 + 200 + 150 + 250) + (100 - 50) = Rs.1650 crore.
Q6: Calculate National Income using Income Method.
Given: Compensation = Rs.5000 crore, Rent = Rs.800 crore, Interest = Rs.1200 crore, Profit =
Rs.2500 crore, Mixed income = Rs.2000 crore, NFIA = Rs.100 crore.
Solution: NNPfc = 5000 + 800 + 1200 + 2500 + 2000 + 100 = Rs.11,600 crore.
2. Money and Banking
Functions of Money:
- Medium of exchange: Replaces barter system.
- Store of value: Holds purchasing power for future use.
- Unit of account: Measures the value of goods & services.
- Standard of deferred payment: Enables credit transactions.
Money Supply (M1, M2, M3, M4):
- M1: Currency + Demand Deposits (most liquid).
- M2, M3, M4: Includes savings & term deposits.
Role of Commercial Banks in Credit Creation:
- Banks lend a portion of their deposits while keeping some as reserves.
- Credit Creation Formula: Total Credit = Initial Deposit × (1 / CRR)
Monetary Policy Tools of the RBI:
- CRR (Cash Reserve Ratio): % of deposits banks must keep with RBI.
- SLR (Statutory Liquidity Ratio): % banks must keep in liquid assets.
- Repo Rate: Interest rate at which RBI lends to banks.
- Reverse Repo Rate: Interest rate at which RBI borrows from banks.
Practice Questions - Money and Banking
Q2: Total Credit Created by a Bank.
Given: Initial Deposit = Rs.1000 crore, CRR = 10%.
Solution: Total Credit = Initial Deposit x (1 / CRR) = 1000 x (1 / 0.10) = Rs.10,000 crore.
3. Determination of Income and Employment
Aggregate Demand (AD) and Aggregate Supply (AS):
- Aggregate Demand (AD) = C + I + G + (X - M)
- Aggregate Supply (AS) = Total output (Y)
- Equilibrium occurs when AD = AS.
Investment Multiplier:
Multiplier = 1 / (1 - MPC)
If MPC = 0.8, Multiplier = 5 (Rs.1 increase in investment increases income by Rs.5).
Practice Questions - Determination of Income and Employment
Q3: Find Investment Multiplier.
Given: MPC = 0.9.
Solution: Multiplier = 1 / (1 - MPC) = 1 / (1 - 0.9) = 10.
Q7: Find the New Equilibrium Level of Income.
Given: Autonomous Consumption (C0) = Rs.200, MPC = 0.8, Investment (I) = Rs.400.
Solution: Y = (200 + 0.8Y) + 400, solving Y = Rs.3000.
4. Government Budget and the Economy
Components of Budget:
- Revenue Budget: Includes tax & non-tax revenue.
- Capital Budget: Long-term investments, loans.
Types of Deficits:
- Fiscal Deficit = Total Expenditure - Total Revenue (excluding borrowings).
- Revenue Deficit = Revenue Expenditure - Revenue Receipts.
- Primary Deficit = Fiscal Deficit - Interest Payments.
Practice Questions - Government Budget
Q4: Find Primary Deficit.
Given: Fiscal Deficit = Rs.500 crore, Interest Payments = Rs.100 crore.
Solution: Primary Deficit = Fiscal Deficit - Interest Payments = 500 - 100 = Rs.400 crore.
Q8: Find Fiscal Deficit.
Given: Total Expenditure = Rs.1000 crore, Revenue Receipts = Rs.500 crore, Borrowings = Rs.300
crore.
Solution: Fiscal Deficit = 1000 - 500 = Rs.500 crore.
5. Balance of Payments (BOP) & Foreign Exchange
Balance of Payments (BOP):
- Current Account: Exports, imports, remittances, services.
- Capital Account: FDI, FII, loans.
Exchange Rate Systems:
- Fixed: Govt sets currency value.
- Flexible: Market decides exchange rate.
- Managed Float: RBI intervenes when necessary.
Practice Questions - Balance of Payments & Foreign Exchange
Q5: Identify whether the Rupee has Appreciated or Depreciated.
Given: Exchange Rate changes from Rs.80 = $1 to Rs.85 = $1.
Solution: Since more rupees are needed to buy $1, the Rupee has depreciated.
Q9: Balance of Payments - Current vs. Capital Account.
Statement: Classify transactions as Current or Capital Account.
1. Indian software exports Rs.10 crore. (Current Account)
2. Indian investor buys US company for Rs.50 crore. (Capital Account)
3. India imports crude oil worth Rs.200 crore. (Current Account)
4. Foreign company invests Rs.100 crore in Indian startup. (Capital Account).
Q10: Impact of Increase in Repo Rate on Economy.
RBI increases the repo rate from 6% to 7%. Effects:
1. Loan availability decreases as borrowing costs rise.
2. Inflation decreases as spending slows.
3. Investment decreases due to higher borrowing costs.
