NATIONAL INCOME

ACCOUNTING
 Sum total of the money value of all final goods
National Income: and services produced in a country during a
financial year (April 1st - March 31st)

[It is the index of economic growth)

Final Goods: Used for final consumption. Eg.- clothes; shoes; bags

Final Goods
Consumer goods Capital goods

Directly used ' by the consumer good Goods used again for production

(Computer, Mobile phone, Pen) (Machinery, Tools, Trucks)

 ! " #

Consumer goods.

Durable Non-durable
Eg: , ,
 Final Goods

hoods.
Consumer Goods Capital

Durable Non-Durable
 Intermediate Goods

Intermediate goods are the goods which are used for further production

To build house:-Sand;Bricks
eg.
a
 Variables

Anything that goes under change.

Basis of measurement

STOCK FLOW
Stock (STATIC)
A variable that can be measured at a point of time.
Eg. Money supply, food grain stock, capital.

Flow (Dynaxxic)
A variable that is measured in a specific period of time.
Eg. Imports, exports, capital formation.
 Stock Flow

Population on March Population increased 18.1

31st 2011 is 121.02 percentage during the last
crores decade
Inventory

The quantity of output of a firm that could not be sold and

which is carried from one year to next year. It includes raw
materials, semi finished goods and finished goods.
Change in inventory = Production- Sale

A=Q-V
If the value of inventory at the end of year is more than the value
the inventory at the beginning of the year it is called
accumulation of inventory
If the value of inventory at the end of year is less than the value
the inventory at the beginning of the year it is called
decumulation of inventory
Net indirect taxes

Difference between indirect taxes and subsidies

Subsidies are financial help given to the producers and it reduces

the cost of production.

Indirect taxes are tax levied on goods and services.

Net Indirect Tax = Indirect Tax - Subsidies

NIT T S = -
Transfer payment

The unilateral payments for which no services are rendered

For example, scholarships, subsidies, pension

Net factor income from abroad

Difference between the income earned by the Indians in
foreign countries and income earned by Foreigners in India
&
 Circular flow of income

It shows the inter relationship and interdependence among

different sectors of the economy.

Circulation of money among different sectors of economy

This two sector model is based on some assumptions

1. There are only two sectors

2. House hold and firms
3. Household supply factor services. Firms buy the factors of production.
4. Household spend their entire income on consumption. Nothing is saved
5. Firms sell their entire output to the households
6. Closed economy without government.
⑮
Land: rent

Labour: wages

Capital: interest

Entrepreneurship: profit
 Real flow and Money flow.

Flow in real terms that is in goods and services

The flow of money is called money flow

 Consumption Expenditure

Goods and services

Firms
Household

Factor Services

Factor payments
 First flow: Household supply factor of production

Second flow: The firms reward the owner of factors of

production in the form land, rent

Third flow: The money that household give to the firm to buy
goods and services

Fourth flow: Firms give goods and services to the household

Flow of factors of production, flow of payments flow
of expenditure and flow of goods and services between
household and firms is called the circular flow of
income.
 Depreciation (മൂല$tകർc)

It refers to loss of value of capital due to the wear and tear.

ഉപേയാഗം, േതയ്മാനം അെl6ിൽ കാലഹരണെpടൽ എnിവ കാരണം ഒരു
അസDിൻFെറ പണ മൂല$ം കാലHകേമണ കുറയുnു. ഈ കുറവ്
മൂല$tകർcയായി കണkാkുnു.
 Gross investment: Final output of capital goods eg:
railways, roads.

Net investment: New capital formation is net investment

Net investment = Gross investment- Depreciation

National Income: Money value of all final goods and services
produced in a country during a financial year.

National Income at current price: Calculated on the basis of

current price

National income at constant price: calculated on the basis of

base year price. It is the real national income
Double counting:- act of counting the value of a commodity
more man once while calculating national income.

Value added : the real name generated and added production

process is called value rated.
Value added = value of output - value of intermediate
consumption.

Value of output = output Market price

Transfer Payments: Payments are the payments made without
receiving any service in return

Eg: pension, scholarship donation made to charitable

institutions.
NATIONAL INCOME

> PRODUCT METHOD

7 INCOME METHOD

> EXPENDITURE METHOD

 Product Method (Value added method)

Summing up all the value of goods and services ( final goods)

together

ചരkുകളുെടയും േസവന/ളുെടയും എlാ മൂല6വും (അവസാന

സാധന/ൾ) ഒരുമിc് േചർkുnു
 N
GDP= EGVA i
i 1
=

E = total
N = number
g = individual equals one
GVA = gross value added
 Expenditure Method

Adding up by the final expenditures on domestic product.

ആഭ#nര ഉൽപntിൻ-െറ അnിമ െചലവുകൾ കൂ9ിേcർkുnു

Identifying the components of expenditure

1.Household
2. Firms
3.Government
4.External Sector
1. Household

2. Firms

3. Government G

4. External
Revenue value of one firm

RVi 4 = + Ii 4i +
+ Xi
If there is ‘N’ number of firms

RV i+E+ Ri+Xi
=
C
EC
=

+ (m

I =
I,+Im
m E,4i
=

4m
+

X YX;
=

i 1
=
"Ci C
=
-

Cm
i1 =

*
Fi I Im
-
=

i =

&Gi G
= -
Rus
i1 =

/
 ERi =

i1
=
+ i +
hi+xi i 1
=

=C- (m + I -
In + k- kn X+

(m Im1Gm
X
-

C I G
+ -
- +
- +

M
(+I 4 X
-

+
= +
 INCOME METHOD

Calculating GDP by adding together all the factor income

received by all the factors of production

ഉൽpാദനtിൻFെറ എlാ ഘടകMൾkും ലഭിkുn എlാ ഘടകMളുെടയും

വരുമാനം കൂQിേcർt് ജിഡിപി കണkാkുnു
Land Rent

Labour Wages

Capital Interest

Organiser Profit
GDP R
= N Im P.
+
+ +
Nominal GDP : Money value of goods and services calculated on
the basis of current price (denoted by GDP)

Real GDP: Money value of goods and services calculated

on the basis of constant prices(denoted by gdp)
 GDP DEFLATOR
GDP
Ratio of nominal GDP to real gdp
gdp
OR
It can be also expressed in percentage that is GDP
gdp
Exercise

GDP of country at current price is Rs.2000 crore and GDP at

constant price is Rs. 3000 crores. Find the GDP deflator

-
-
 Budget Deficit

Here (G-T government expenditure is greater than its revenue

Budget deficit
o> T

4 T
=
Balanced budget

GCT Budget surplus

 Trade Deficit

Here (M-X) imports of the economy is greater than its

exports

M> X Trade deficit

M X
=
Balanced trade

4 <X Trade surplus

 Gross Domestic Product

I R I P D
+
NIT
MDPyp
+
+ + +

NIT
GDPFC RDPp-
=
 Gross National Product

GNP GDPip
= + NFI
MP

GNPF) GDPAc NFI

+
=
 Net national product

NRp= GNPyp-C
N

NNPc NNPyyp-N15
=
 Net domestic product

NDPrp GDPyp D
= -

NDPFc NDPyp
=
- NIT
 PERSONAL INCOME

Personal income = Private income - Corporate tax - Corporate savings

 GDP and Welfare

1. Inequality in distribution of income

2. Ignores non monetary changes

3. Ignores composition of GDP

4. Ignores externalities
 MARKET
EQUILIBRIUM
2 marks
What do you mean by market equilibrium ?
MARKET EQUILIBRIUM
Market equilibrium is a situation of the market in which
demand for a commodity is exactly equal to its supply,
corresponding to a particular price.
Pale1
D S

E
p*

!
-----

P
S
>
aty
EQUILIBRIUM PRICE: The price at which demand and
supply are equal is known as equilibrium price.

EQUILIBRIUM QUANTITY: The quantity of goods sold

and bought at equilibrium price is called equilibrium quantity.
The situation where, market demand equals market
supply :
(i) Excess supply
(ii) Excess demand
(iii) Equilibrium
V
(iv) Deficient demand
2 marks
What do you mean by Excess demand ?
The situation in which market demand is higher
than market supply at a given price is called
excess demand.

The situation in which market supply is higher

than market demand at a given price is called
excess supply.
Excess demand occurs when the market price is
less than equilibrium price.

Excess supply occurs when the market price is

greater than equilibrium price.
When the existing price is higher than the equilibrium price.
a) Market demand is higher than market supply
b) Market supply is higher than market demand.
c) Market demand is equal to market supply
d) None of these
Method of determination of equilibrium price
and quantity using equation
2 marks
The market demand curve and the market supply curve for
wheat are given below :
QD = 50 – 2P
QS = 10 + 2P
Find the equilibrium price and quantity.
4 marks
Suppose the market demand curve of Apple is ; QD :
500 - P. The market supply curve of Apple is ; qs : 100
+ P. Calculate the equilibrium price and quantity.
4 marks
QD = 500 – P
QS = 300 + P
a) Calculate the equilibrium price and quantity.
b) Draw a diagram based on equilibrium price and quantity.
SHIFTS IN DEMAND AND
SUPPLY
I
Shifts in demand while supply remains the same
v
Shifts in supply while demand remains the same
-
Simultaneous shifts in demand and supply.
a) Simultaneous increase in demand and supply
b) Simultaneous decrease in demand and supply
Demand curve shifts rightward and supply
remains the same Di
Poke D
S

pl El
-I

pt----,
0
S
D
Di

cats
The demand curve shifts leftward and supply
remains the same

Poke D
S
Di

pH- -
*
-El

"
D.
- - -

S e,
at
Equilibrium price and quantity will move in the
same direction when demand curve shifts and
supply remains the same.
The supply curve shifts rightward and
demand remains the same
Poke D
S
Si

-
=-
S
0 >9ty
The supply curve shifts leftward and demand
remains the same
Poke D
S

p. El
-
--
--

----he
pt
-

"

>
9ty
Equilibrium price and quantity will move in
opposite direction when supply curve shifts and
demand remains the same.
 Simultaneous shifts of demand and supply
Both demand and supply curves shift rightwards
-
-
Both demand and supply curves shift leftwards
Demand curve shifts rightward and supply curve shifts
leftward
-
Demand curve shifts leftward and supply curve shifts
rightward
Both demand and supply curves shift
rightwards De

Poke D
S

Si

ot----t*"at the
Both demand and supply curve shift
leftward.
Si
Poke D
S
Di

p*

E
= =

Si
S

O atthe
Demand curve shifts rightward and supply
curve shifts leftward
Di S,
Poke D
El
S
D. -----

----
↑
at

Si
xP
S
< qty
Demand curve shifts leftward and supply
curve shifts rightward
Poke Di D
Ss,
p- --- -
E

"
Pl
------
El

Ss, D,P
>
9ty
3 marks
Recently the government of India have decided to restrict the
export of onion towards foreign countries. Diagrammatically
illustrate the immediate effect of this decision on the
equilibrium price and quantity of onion in India.

⑰ &*
MARKET EQUILIBRIUM: FREE ENTRY AND EXIT

P = minimum AC
In a perfectly competitive market with free entry and exit, the
equilibrium price is
(a) equal to min AC
(b) greater than AC
(c) less than AC
(d) equal to min MC
APPLICATIONS
ceiling
Price
floor
Price
4 marks
Explain price ceiling with the help of a diagram.
PRICE CEILING
PRICE CEILING
The government-imposed upper limit on the price of a
good or service is called price ceiling.
5 marks
Explain price ceiling Write its two effects.
Adverse effects of price ceiling
a) Each consumer has to stand in long queues to buy the
good from ration shops.
(b) Since all consumers will not be satisfied by the
quantity of the goods that they get from the fair price
shop
PRICE FLOOR
PRICE FLOOR
Price floor or support price is the minimum price of
goods and services imposed by the government to
protect the interest of producers.
6 marks
Distinguish Price Ceiling and Price Floor with the help
of diagrams.
4 marks
Market determined price of paddy in kerala is Rs. 21 per
kilogram. But government intervenes in the market and sets
Rs. 26 per kilogram as its minimum price with a view to
protect the interests of paddy farmers.
a) By what name this policy of government is known?
b) Analyse the consequences of this policy with the help of a
diagram.
1. Money

2. Banking
 Barter system.

Commodity is exchanged for another

 L
Lack of double Lack of
coincidence of 7 divisibility
wants

L
Lack of common V V
measure of value Lack of store Lack of standard of
of value deferred payment
3 macks
 Medium of exchange

Primary Functions :

Measure of value

Medium of exchange: Any commodity can be purchased or sold through the

medium of money

Measure of value: Value of goods and services are expressed in terms of

money
 Standard of deferred payment

Secondary Functions: Store of value

Transfer of value
 Standard of deferred payment: Measure by which the value of future
payments are made

Store of value: People usually keep their wealth in the form of money

Transfer of value: Transfer of value from one place to another.

 Distribution of national income

Max satisfaction of customer

Contingent Function
Basis of credit

Liquidity
 Demand for money (Liquidity Preference)

Money is the most liquid of all assets. The preference of the

consumer to hold liquid money is called liquidity preference
People desire to hold money for two motives:

A) Transaction Motive
B) Speculative Motive
 TRANSACTION MOTIVE

*People hold cash for day to day transaction is called transaction

motive

*As volume of transactions increases transaction demand

for money also increases
 M1 kT
=

M4 = Transaction Demand for money

k =
A positive fraction

I -
Volume of transactions·
k is the ratio between transaction demand and volume of transactions

x
=
 Transaction Demand for money in an Economy

The MA in an economy is positively related to GDP

M4 kPY
=

P = Price level
Y= Real GDP
My
motive

* It is a demand for money by people for speculative purpose

*They hold a portion of their prices are low and sell them
when their prices rise in order to gain profit
Bonds: All forms of assets other than money, land, goods,
shares, securities, etc are put together into a single category
 Bond price and rate of interest

The bond price and the term of the bond are fixed.

There is a negative relationship between bond

price and rate of interest.

Market rate of interest Bond price

Capital Gain: Profit from bond

Capital Loss: Loss from bond

 Speculative Demand for Money

When the market rate of interest is maximum everyone expect into

fall in future and hence, expect a capital gain from bond holding.
Hence people will convert their money into bond. Thus, speculative
demand for money will be zero
When the market rate of interest is the minimum. People expect it
to rise in the future and expect capital loss from bond holding. They
convert bond into one by and expect the rate of interest to rise. Thus
speculative demand for money will be high or infinity
 Thus M4 is inversely related to the market rate of interest.

That is rate of interest maximum, M& will be zero

When the rate of interest is minimum, M4 will be infinity

 M4 -
rmax-r

r -r min

r max and r min = upper and lower limits of rate of interest

 LIQUIDITY TRAP

The situation in which speculative demand for money is perfectly

elastic where the rate of interest reaches the lowest level.

പലിശ നിരk് ഏ*വും താഴ്n നിലയിെലtുേmാൾ പണtിൻ:െറ

ഊഹkcവട ആവശAം തികcും ഇലാsിക് ആകുn സാഹചരAം
 Interest Rate

I
~max

W
~max

M5
-

r r min
=

Liquidity Trap
~min -P

Mds
Money supply is a stock variable.

The total stock of money in circulation among the

public at particular point of time is the money supply.
There are 4 measures of Money Supply

7 M1

- M2

> M3

7 M4
 M1 = Cu + DD

Where,
Cu = Currency held by the public
DD = Demand deposit held by the commercial bank
M1 = Cu+ DD

M2 = M1 + Saving deposits with post office

M3 = M1 + Net time deposits with commercial banks

M4 = M3 + Savings with Post Office

M1 and M2 Measures of narrow money
↳

M3 and M4 Measures of broad money

3 marks
 Ratios affecting Money Supply:

Various actions of RBI and commercial bank will affect the

money supply in the economy.

The key ratios that affect the money supply are:

i) Currency deposit ratio (cdr)

ii) Reserve deposit ratio (rdr)
 Currency deposit ratio (cdr)

cdr is the ratio of money held by the public in currency to

that they hold in Bank deposits.
cdr = Cu
DD
 Reserve deposit ratio (cdr)

*Banks hold a part of the money in their bank deposits as reserve

money and lend out the rest to the public.

*rdr is the ratio of total deposit that the commercial bank receives to
the total reserve of banks

rdr = total reserve

total deposits
RBI requires commercial banks to keep reserves inorder to ensure
that the banks have a safe cushion assets to draw on when the account
holders want to paid.

For this RBI uses various instruments to bring forth a healthy rdr in
commercial banks,

They are:
 CASH RESERVE RATIO

To keep certain percentage deposits as cash that is given to RBI

 STATUTORY LIQUIDITY RATIO
④

To keep as liquid cash, gold, government securities

 CRR SLR

The fraction of reserve money kept in Banks are required, by law, to invest
RBI by commercial banks as a ratio of a percentage of deposits in liquid
the demand deposits is called CRR. assets.

It is also known as Required Reserve This is known as SLR.

Ratio
Bank Rate

Rate of interest charged by central

bank, when lending loans to
commercial bank
Borrowing Rate

Rate of interest offered by the

banks to depositors.
Lending Rate

Rate of interest charged by the

banks for lending out their reserve.
 OPEN MARKET OPERATIONS

Out right transaction Repo transactions

(These transactions are permanent transactions.)
The policy of purchase and sale of securities by the RBI is
the open market is open market operations.
 Repo Rate (Repurchase Agreement)

When commercial bank borrow money from RBI, they have to

pay a certain amount as interest

Repo period: overnight/ 7days

 Reverse Repo Rate

When commercial bank have surplus deposit they deposit this

money in RBI, thus RBI pays a certain amount as interest
Instruments Inflation Deflation
Repo rate
CRR

SLR

Open market Sells securities Buys securities

operations
 Money Multiplier

Ratio of the stock of money supply in the economy to the stock of

high powered money

Money supply : High powered money

RATIO
Value of money multiplier will be more than 1

Money multiplier = M
H

OR

1+cdr
cdr+rdr
 High powered money: RBI’s liabilities

H = Cu + R

Cu = currency held by public

R = cash reserve of commercial banks
Exercise

cdr= 1
rdr= 0.2
cdr = .5
rdr = .25

It car 1+ 0 5
.
= 1 5
.

F -
-- --

Cartraa 0 5 + 025
. . 75
0

-
>
-
 LIQUIDITY TRAP

The situation in which speculative demand for money is perfectly

elastic where the rate of interest reaches the lowest level.

പലിശ നിരk് ഏ*വും താഴ്n നിലയിെലtുേmാൾ പണtിൻ:െറ

ഊഹkcവട ആവശAം തികcും ഇലാsിക് ആകുn സാഹചരAം
BANKING
 Types of banks in India

1.Central Bank
2.Co-operative banks
3.Commercial Banks
4. Regional Banks
List of Commercial Banks

18 B I
2. HDFC
3. PNB

4. YES Bank.
 Types of Bank accounts

1. Savings Bank account.

2. Current Account
3. Recurring deposit account tee
depositsmoney eveing
4. Fixed Deposit for a perio a)
fired time

↓ Ende -6-0)
rain- smalles - fixed -> grow
Savings and current account. Demand deposits

RD and FD Time Deposits

 Functioning of Commercial Banks

1.Accepting Demands
2.Providing loans
 Assets Deposits

Liability Loans

Left Right
 Deposit Loans

-
Depositor
BANK
O
Borrower

how. High
Interest Rate
 SPREAD:

Difference between borrowing rate and

lending rate of bank is called as spread.

It is the profit i.e; appropriated by the banks

Functions

1. Issue of currency

2. Banker to the government

3. Bankers' bank and supervisor

4. Controller of money supply

5. Custodian of foreign exchange

On 6th November 2016, PM announced demonetisation of
currency notes of 500 and 1000.

Objectives of demonetisation

• Tackling black money

• Removing counterfeit currency
• Confronting terrorism