EXAM GAP REVISION

NATIONAL INCOME
MONEY &
BANKING

BOARD EXAM 2024

There are four sectors in an economy:
(i) Household sector (Consumers)
(ii) Firms (Producers)
(iii) Govt. sector (Government)
(iv) External sector (Rest of the world or
abroad)

Circular flow of income: It refers to circular

flow of income in the production process.
Income is generated by household from firms
and also they spend their income in form of
consumption expenditure to firms.
Circular flow of income in Two sector Economy
 PhasesNature of controlling
of circular flow of income

Generation
Phase
Distribution
Phase Disposition
Phase
 Difference between Stock & Flow
Basis Stock
1. Meaning It refers to that variable which
is measured at a particular
point of time.
2. Time Stock is not time dimensional
Dimension as it is measured at a particular
point of time.
3. Nature It is a static concept.
4.Examples eg. wealth, distance of Delhi to
noida, stock of water in a tank,
bank deposits, capital,
population on a particular date
etc.
Flow
It refers to that variable which is measured
at a particular period of time.
Flow is time dimensional as measured only
for a particular period of time.
It is a dynamic concept.
e.g. pocket allowances, speed of a car
travelling Delhi to Noida, flow of water
from tank, demand, supply, consumption
exp., savings, profit or loss, national
income, production, GDP, Investment etc
 Types of Goods in the Economy

Intermediate Consumer
Final Goods Capital Goods
Goods Goods
 Difference between final goods & Intermediate goods

Basis Final Goods Intermediate Goods

1.Meaning These are those goods which These are those goods which are
are ready to use by their not ready to use by their final
final user. user.
2. Purpose Purpose of these goods are These are used in the process of
for consumption and production as a raw material and
investment. for resale purpose
3. Nature They are include in both They are NOT include in both
domestic and national domestic and national income.
income.
 Basis Final Goods Intermediate Goods
4. Value There is no value addition Some value has to be added in
addition in final goods as they are intermediate goods as they are
ready for use. not ready for use.
5. They have crossed the These are with in the production
Production production boundary. boundary.
boundary
6. Example Milk purchase by Milk purchased by a biscuit
household for company is a raw material, milk
consumption, machinery purchased by a dairy shop is for
purchased as an resale.
investment.
Basic Formulae of Conversion
Methods of Estimation of National Income
PRODUCTION/ PRODUCT METHOD
Q.1) Calculate Sales from the following data:

Particulars Amount
Subsidies 600
Opening stock 100
Closing stock 600
Intermediate cost 3,600
Consumption of fixed capital 700
Profits 750
Net value added at factor cost 8,000
INCOME METHOD
Q.2) Calculate National income

Particulars Amount
Compensation of employees 13,300
Wages in kind 200
Indirect taxes 3,800
Gross domestic fixed capital formation 6,200
Operating surplus 5,000
Mixed income of self-employed 16,100
Net factor income from abroad 300
Net exports -100
EXPENDITURE METHOD
Q.3) Calculate Gross Domestic Product of Factor Cost from the following data
Particulars Amount
Private final consumption expenditure 800
Net domestic capital formation 150
Change in stock 30
Net factor income from abroad -20
Net indirect tax 120
Government final consumption expenditure 450
Net exports -30
Consumption of fixed capital 50
 Precautions regarding production method
(i) Value of the sale and purchase of second hand goods is not included in
value added because, value of these goods is already accounted for during
the year they were first time produced.
(ii) Commission earned on account of the sale and purchase of second hand
goods is included in the estimation of value added. Because, commission is
a factor payment for service rendered this is a new service.
(iii) Own account production of goods of the producing units is taken into
account while estimating value added. Becaue these goods are like those
produced for the market. They are simply not sold owing to their need by
the producers themselves. If we do not include, this cause under
estimation of national income.
(iv) Value of intermediate goods is not included in the estimation of value
added. Because, value of intermediate goods is reflected in the value of final
goods. If we include this cause overestimation of national income.
(v) Change in stock (increase in stock) will be included because it is a part of
capital formation.
(vi) Services for self-consumption is not considered while estimating value
added. Simply because, it is difficult to estimate their market value, like
services of housewives.
 Problem of Double Counting
Problem of double counting is the problem
of estimating the value of goods and services more than once. In production
method we take the value of final goods and services only if we mistakenly
taken
the value of intermediate goods this leads to double counting or
overestimation
of national income because value of intermediate goods is already included in
value of final goods.
So, to avoid the problem of double counting
(i) Take value added instead of total output.
(ii) Take the value of final products only
 Precautions Regarding Income Method
1. Transfer earnings like old age pensions, unemployment allowances,
scholarship, pocket money etc. should not be included in national income,
because corresponding to transfer payment there is no value addition in
the economy. Similarly, indirect taxes are not included.
2. Income from illegal activities like smuggling, theft, gambling etc. should not
be included in national income. Black money is not to be counted in
national income. Lottery also not included because it is a windfall gain.
There is no productive activity connected with them.
3. Income from sale of second hand goods not included but commissions
received on the sale of secondhand goods are to be included in national
income because these are new factor income for rendering factor services.
4. Do not include income arising from the sale of financial assets. These are
share, bonds, debentures, govt. Securities, etc. Buying and selling of these
are not an activity related to production of goods and services.
(However any Commission or brokerage charged by the intermediaries is a
payment for the services rendered by them and is a factor income).
5. Imputed rent of owner occupied houses is to be treated along with rent as
a component of factor incomes. Corresponding to production for self-
consumption must be included
 Precautions Regarding Expenditure Method
1. Do not include expenditure on intermediate goods and services:
Intermediate expenditure is already a part of final expenditure. So,
including intermediate expenditure will mean double counting of
expenditure.
2. Include imputed expenditure on self-consumed or own account produced:
Output used for consumption and investment. eg. self consumed output by
farmers, self consumed services of owner occupied houses are included.
3. Do not include expenditure on transfer payments: A transfer payment is
one against which no goods or services is provided is return. eg. gift,
donations, charity, scholarship, old age pension, unemployment allowances
etc.
4. Do not include expenditure on financial assets: It means expenditure on
buying shares, debentures, bonds, govt. securities etc. But if any brokerage or
services charge is paid in buying financial assets it is treated as expenditure on
buying services. Hence brokerage, commission are included.
5. Do not include expenditure on second hand goods: Expenditure on these
goods was accounted when they were purchased new. Including expenditure
on second hand goods would mean counting of the same expenditure twice.
No fresh production takes place in such a case. However, if any commission or
brokerage is paid to an intermediary in such transaction it should be treated as
final expenditure because it is a fresh payment for the services purchased.
National income: It is the sum total of income of only the normal
residents of a country
Domestic territory of a country refers to that area of economic activity
which generates domestic income.
Domestic territory (Economic territory) includes the following:
 Domestic Territory does include:
Ships and aircrafts:-

Fishing vessels and oil rigs

Embassies
 Domestic Territory does not include:
1. Embassies and military establishments of a foreign country in India. e.g.
Chinese embassy in India is a part of domestic territory of China.
2. International Organizations like UNO, WHO, WTO, etc. located within the
geographical boundaries of a country
GDP and Welfare
 But there are some exception of GDP welfare:
1. Distribution of GDP
2. Composition of GDP
3. Barter system exchange
4. Externalities
 Difference between Real GDP & Nominal GDP
Real GDP Nominal GDP
When GDP is measured at the base or When GDP is measured at the current
constant year prices it is called Real year prices it is called Nominal GDP.
GDP.
The Value of Total Product is low The Value of Total Product is High
Because Because
Real GDP is the inflation-adjusted Nominal GDP is the Gross Domestic
GDP of a country. Product without any effect of
inflation.
It is true indicator of economic growth It is not a true indicator of economic
and welfare. growth and welfare
Real GDP is better & More Reliable than Nominal GDP
 GDP DEFLATOR/ PRICE INDEX

GDP deflator measures the change in the average level of prices of all the
goods and services that make up GDP.
GDP deflator is used to eliminate the effect of price changes and to
determine the real change in physical output.

Real and Nominal GDP Formula

Price index or GDP Deflator = ( Nominal GDP/ Real GDP ) X 100

Components of NFIA:
(i) Net compensation to employees.
(ii) Net income from property and entrepreneurship: likes rental income,
interest income and profits.
(iii) Net retained earnings: Part of profit after tax and dividend.
 Difference between Depreciation and Capital Loss
Basis Depreciation
1. Meaning It refers to fall in the value
of fixed assets due to
normal wear and tear,
passage of time or
expected obsolescence
2. Provision Provision is made for
for loss replacement of assets as it
is an expected loss.
3. Production It does not hamper the
process production process.
Capital Loss
It refers to loss in value of
the fixed assets due to
unforeseen obsolescence,
natural calamities, thefts,
accidents, etc.
No such provisions is made
in case of capital loss as it is
an unexpected loss.
It hampers the production
process.
MONEY
 Money act as a Medium of exchange.
i.e. money is commonly accepted as a medium of exchange
 Functions of money

Primary Secondary

Medium of Standard of
Exchange Deferred
Payment

Common
measure of Store of Value
value
 MONEY SUPPLY
It refers to stock of money held by public at a particular point of Time.
Supply of money is a stock concept.
Money supply does not include
(i) Stock of money held by the government
(ii) Stock of money held by the Banking System of a country.
They are considered suppliers of money. Money supply includes
(i) Individuals
(ii) Business firms
 Components or measurement money supply
M1 = CC + DD + OD with RBI
It does not include
(a) deposits of the Indian government of the country with RBI.
(b) deposits of the Commercial Bank of India with RBI.
M1 is also known as Transaction money
It is Most Liquid.
 BANKING
A bank is an organization which keeps money safely for its customers;
You can take money out, save, borrow or exchange money at a bank

COMMERCIAL BANK
CENTRAL BANK (RBI)
 Meaning of Commercial Bank
A commercial bank is a kind of financial institution that carries all the operations
related to deposit and withdrawal of money for the general public, providing loans
for Consumption, investment, and other such activities.
These banks are profit-making institutions and do business only to make a profit.
 Credit Creation by Commercial Bank
Deposit multiplier (or) Money multiplier = 1/LRR = 1/10 % = 10 times

Credit Creation Deposits Loans LRR

Initial Deposit 1000 900 100
Round I 900 810 90
Round II 810 729 81
All Other Round -- -- --
Total 10000 9000 1000
As seen in the table, banks are able to create total deposits of ₹10,000
with the initial deposits of just ₹1000. It means total deposits become 10
times of the initial deposit. This 10 times is value of Money Multiplier.
 Central bank
It is an apex bank that controls the entire banking system of a country.
It is the sole agency of note issuing in a country. In India it is Reserve Bank, in
England; Bank of England, in America; Federal Reserve System.
RBI was established in April 1, 1935 under RBI Act passed in 1934
Functions of central Bank
Issuing Authority of Currency Notes
Banker of the Government
“Bankers Bank” & “Supervisory Bank”
Lender of the Last Resort
Custodian of Foreign Exchange Reserve
Clearing house function
Control of Credit
 Monetary Policy by RBI
1. Quantitative Measures.
2. Qualitative Measures

INSTRUMEMTS OF QUANTITATIVE & QUALITATIVE MEASURES

Quantitative Measures Instruments Qualitative Measures Instruments
Banks Rate and Repo Rate Marginal Requirement
CRR + SLR = LRR
Open market operations.
Reverse Repo Rate
 THANK YOU
MUST LEARN THIS BEFORE NEXT CLASS
WRITE ALL IMP POINTS IN YOUR NOTE BOOK
SO THAT YOU CAN REVISE ALL THESE IN SHORT SPAN OF TIME ONE DAY
BEFORE EXAM

SHARE IF YOU ENJOYED