Economics Class 12th Chapter 2nd national income Notes

Economics Class 12th Chapter 2nd national income Notes
Economics Class 12th Chapter 2nd national income Notes

Introduction to Adam Smith

Adam Smith is known as the father of modern economics. He was a resident of
Scotland and was a professor at the University of Glasgow. His published book
‘An Inquiry into the Nature and Causes of the Wealth of Nations’ Before Smith,
the physiocrats of France were great thinkers of political economics. Now let’s
talk about national income.

Final goods

goods are those goods which have crossed the boundary line of production
and is ready for use by its end users, final goods are divided into two
categories: consumption goods and capital goods.

Consumption goods are known as consumer goods

Consumer goods are those goods that directly satisfy human needs, they are
not use for the production of other goods.

Capital Goods

Capital goods are those goods which are use for many years in the process of
production, they are fixed assets of the producer eg plant and machinery.

consumer durables

Durable consumer goods – these are goods that are use for many years


1) T.v

2) Car

3) Washing Machine

Intermediate goods

Intermediate goods are those goods which have not yet crossed the threshold
of production.

Prices of these items are not yet fully determined, they are yet to be
increase in value. They are not yet ready for use by end-users.

For some it is the final commodity; for some it is the intermediate object.

Example- Milk is the intermediate commodity for the tea maker and for a
common man who wants to drink a glass of milk at night, milk is the last commodity.

stock and flow

Stock is a quantity measured at a certain point in time [as]

You can have ₹50,000 in your bank account as on 1st January 2020

meaning of flow


The quantity measured over a specific period of time is you probably spend
₹200 per day in the canteen

Gross investment

It includes both the expenditure incurred by the producers on the purchase
of new assets and the replacement of existing assets during an accounting year.

About the accounting year

Accounting year of Reserve Bank of India

The accounting year of the Reserve Bank of India is between July 1 and June

Whereas the financial year of the country is between 1 April to 30 March.

Aspects of national income

Gross National Product (GNP) – The goods manufactured by
the people of the nation which are manufactured in a given time period (time).
The net value derived from them is called Gross National Product (GNP).

Net National Product (NNP) – Net National Product is
generally viewed from the point of view of profit, that is, the value of
production is removed from the Gross National Product (GNP). After which the
net national product of the nation becomes known.

Formula- GNP-NNP

National Income of India

The national income of India is very necessary for the smooth operation of
power towards each nation. The calculation of the national income of India was
first started by Dadabhai Noroji in the year 1867-1868. At that time Noroji
told according to his assessment that the per capita income of India is 20
rupees, that is, if the population at that time is divided by 20, then we will
know the national income at that time.

Product method and income method are adopted to find the national income of
any nation, so let us know what is this method?

1. Income Method – Under this, the sum of the payments made
for the resources of production is taken and it is used to estimate the GDP of
the service provider like transport, governance and industry business.

2. Product Method – Under this, the net value addition of
goods and all services is calculated. It is used in the fields of agriculture,
animal husbandry and industry.

 (Currently the national income of India is assessed by the Central
Statistical Organization.)


National income serves to show the structure and status of each nation
(country). It is the endeavor of all countries that they find a way to increase
their national income and they get success in them. Increase in national income
is essential for the development of the nation.

Real Flows and Money Flows or Intersectoral Flows:


It (Real Flow and Money
Flow) refers to the flow driven by inter-regional interdependence where goods
and services or money are transferred from one region to another.
Inter-sectoral dependency defines how different sectors of an economy are
dependent on each other. The following observations explain the interregional


The domestic sector is dependent on the productive sector for consumption,
for goods and services.

This makes the productive sector dependent on the domestic sector for the
supply of the means of production. These are essential for the production of
goods and services in the economy. Hence, these are also known as factor

Tax and non-tax revenue is the main source of income for the government.
Thus, the government is dependent on the domestic and productive sector for

Besides law, order and defence, the productive and domestic sectors depend
on the government for administrative services.

Interregional flows can be classified as:

  • Actual
  • Money

Real Flows:

It refers to the flow of goods and services between different sectors of the
economy. For example, the flow of factor services from households to the
productive sector and the flow of goods and services from the productive sector
to the domestic sector.

Money Flows:

It refers to the flow of money between different sectors of the economy. For
example, the flow of factor payments from the productive sector to households
and the flow of money into the productive sector due to the purchase of goods
and services by the domestic sector.

Money Flows as Reciprocal of Real Flows:

In barter system of exchange, where goods are exchanged for goods, only real
flows take place in the economy. Workers provide their labor services on farms
and farms. Thus, it is known as real flow. In return they got grain, which is
also the real flow. However, the barter system of exchange worked successfully
only when human desires were limited. Thus, with the multiplicity of human
needs, interdependence also increased manifold. As a result, the barter system
proved to be an inefficient system of exchange. As a result, a monetary system
of exchange is introduced in which currency is used as a medium of exchange.
Thus, money flow is the reciprocal of the actual flow in that economy.


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