Basic Economics Concepts for class 12

Basic concepts of national income:

1. Definition of National Income:

National income is the sum of all the incomes earned by the factors of production within a country's borders in a given time period.

2. What are the methods of Calculating National Income ?

There are three main methods: 

1. the Income Method

2. the Expenditure Method

3. the Output Method

 They should all yield the same result, which is the total national income.

3. What are components of National Income ?

   National income is typically categorised into various components, including wages and salaries, profits,       rents, and interests.

4. Gross National Product (GNP) vs. Gross Domestic Product (GDP):

GNP includes the income earned by the country's residents both domestically and abroad, whereas GDP only includes income earned within the country's borders.

5. Real National Income vs. Nominal National Income:

Real national income is adjusted for inflation, while nominal national income is not. Real national income gives a more accurate picture of an economy's growth.

6. What is Per Capita Income ?

   This is the national income divided by the total population of a country. It is a useful indicator for comparing the standard of living between countries.

7. What are importance of National Income ?

 It helps in measuring economic growth, evaluating the standard of living, making international comparisons, and formulating economic policies.

8. What are Challenges in Measuring National Income ?

Challenges include the underground economy, non-monetary transactions, and the valuation of non-market activities.

9. What are Limitations of National Income ?

   National income does not capture following 

•  income distribution

• quality of life, or non-economic factors like health and education.

10. What is National Income of an Economy?

National income refers to the total value of all goods and services produced within the boundaries of a country in a given time period, usually a year. It represents the collective income earned by all factors of production, including labor, capital, and land, and serves as a critical economic indicator to measure the overall economic performance of a nation.

11. What are Aggregate in Economics?

In economics, "aggregate" is a term used to describe the sum or total of various economic variables or components within an economy. Commonly used aggregates include aggregate demand (the total demand for goods and services in an economy), aggregate supply (the total supply of goods and services), and aggregate expenditure (the total spending in an economy). Aggregates help economists analyse the overall behaviour and performance of an economy, often by considering the interactions between different sectors and components.

Basic concepts of Money 

What are characteristics of to be Money ?

1 Medium of Exchange: 

Money serves as a widely accepted medium for trading goods and services. It eliminates the need for barter, making transactions more efficient.

2. Unit of Account:

Money provides a common measure of value, allowing people to compare the prices of different goods and keep track of their wealth.

3. Store of Value:

Money can be saved and used in the future. It retains its value over time, allowing individuals to store wealth.

4. Standard of Deferred Payment:

 Money facilitates contracts where payments are made in the future, providing a reliable means of settling debts.

What are types of Money in an economy?

1 Commodity Money: 

Money that has intrinsic value, like gold or silver coins.

2. Fiat Money:

 Money that is declared by the government to be legal tender, with no intrinsic value.

3. Digital and Electronic Money:

 Modern forms of money represented electronically, such as bank deposits and cryptocurrencies.

Basics of Banking  System of India

1. Reserve Bank of India (RBI):

The Reserve Bank of India is the central bank of the country. Its primary functions include issuing and regulating the Indian currency, controlling monetary policy, and supervising and regulating banks and financial institutions.

2. Commercial Banks:

These are the backbone of India's banking system and serve various functions. They include both public sector banks (owned by the government) and private sector banks.

3. Scheduled Banks:

 Banks that are listed in the Second Schedule of the Reserve Bank of India Act, 1934 are known as scheduled banks. These banks are eligible for loans from the RBI.

4. Cooperative Banks:

These banks are organised as cooperatives and cater to the financial needs of various cooperative societies, farmers, and rural areas.

6. Electronic Funds Transfer:

 The National Electronic Funds Transfer (NEFT) and Real-Time Gross Settlement (RTGS) systems enable electronic transfer of funds between banks and are widely used for transactions.

7. Digital Banking:

The advent of technology has led to digital banking services, including internet banking and mobile banking, which allow customers to access their accounts and conduct transactions online.

8. Banking Services:

Commercial banks provide a range of services, including lending, accepting deposits, issuing credit cards, and providing trade finance and forex services.

9. Non-Performing Assets (NPAs):

NPAs are loans that are not being repaid as per the agreed terms. Banks must manage and recover NPAs to maintain their financial health.

10. Banking Regulations:

The banking sector in India is regulated by the RBI, which sets prudential norms, capital adequacy requirements, and conducts regular inspections to ensure the stability of the banking system.

Concepts of Investment Multiplier 

The investment multiplier is a fundamental concept in economics that explains how an initial change in investment can lead to a more significant change in overall economic output or income. It is based on the idea that when firms invest in new capital goods or projects, it creates a ripple effect throughout the economy.

Important concepts related to the investment multiplier:

1. Marginal Propensity to Consume (MPC): 

The MPC represents the fraction of an additional income that households and individuals spend on consumption. It's a crucial factor in the multiplier process because it determines how much of the initial injection of spending gets re-spent in the economy.

2. Initial Investment: 

This is the starting point of the multiplier process. An increase in investment spending by firms, such as building a new factory, can stimulate economic activity.

3. Induced Spending: 

When firms make an initial investment, it leads to increased income for workers, suppliers, and others involved in the project. As these individuals and businesses earn more, they, in turn, spend some of their additional income.

4. Multiplier Effect: 

The multiplier effect is the cumulative impact of each round of induced spending. The process continues as each successive round of spending generates additional income and, consequently, more spending.

5. Formula for investment multiplier :

 The formula for calculating the investment multiplier is: Multiplier = 1 / (1 - MPC). This formula quantifies the total change in income or output resulting from the initial change in investment.

6. Leakage:

 Leakage refers to any withdrawal from the circular flow of income and spending. In the context of the multiplier, savings and taxes are examples of leakages because they reduce the amount of income that individuals can spend.

7. Fiscal and Monetary Policy Implications: 

Understanding the investment multiplier is crucial for policymakers. By manipulating government spending, taxes, and interest rates, they can use the multiplier effect to stimulate or restrain economic activity. For example, increasing government spending can lead to a larger multiplier effect and boost economic growth.

Conclusion

the investment multiplier illustrates how changes in investment can have a magnified impact on the overall economy, making it an essential concept in macroeconomics.