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Karnataka Class 12 Commerce Economics Measurement Of National Income Notes

Karnataka Class 12 Commerce Economics Measurement Of National Income Notes

Karnataka Class 12 Commerce Economics Measurement Of National Income :  Karnataka State Open University is located in Manasagangotri, Mysore. It is recognized as one of the best Open Universities in India imparting Distance Education. The University was established during 1996 and the library started functioning in the same year. It has a glorious record of worthy service with a multi disciplinary resource collection of more than one lakh volumes. At the inception of Library, the collection of books was around 50,000, which was housed in the main building of KSOU but later the Library was shifted to its own new building in the KSOU campus in 2006.

Here we provides Karnataka Class 12 Commerce Economics Measurement Of National Income in PDF Format. In this Article you will know about  Karnataka Class 12 Commerce Economics Measurement Of National Income Complete details in Pdf Format File. Download here Karnataka Class 12 Commerce Economics Measurement Of National Income notes and read well.

Karnataka Class 12 Commerce Economics Measurement Of National Income Notes

Karnataka Class 12 Commerce Economics Measurement Of National Income : National income is the total market value of all final goods and services produced in an economy including net factor income from abroad during an accounting year. In order to avoid double counting of the goods and services in the national income, only final goods are taken into consideration and for calculating Net National Income, the Wear N’ Tear and depreciation charges are deducted from Gross National Income. National income also refers to the aggregate of factor income earned by the normal residents of a nation during a given period (say a year) as a result of their productive services.

According to Prof. Pigou, “National income or dividend is that part of the objective income of the community including, of course, income derived from abroad which can be measured in money.

” According to Prof. Pigou “only those goods and services should be included (double counting being avoided) that are transacted is a specific year in exchange of money.” Pigou’s definition is precise, convenient, elastic and workable because it does away with the difficulty of measuring the national income inherent in Marshall’s definition.

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Karnataka Class 12 Commerce Economics Measurement Of National Income Notes

Karnataka Class 12 Commerce Economics Measurement Of National Income :National income measures the monetary value of the flow of output of goods and services produced in an economy over a period of time.There are four methods of measuring national income. Which method is to be used depends on the availability of data in a country and the purpose in hand.

Measuring the level and rate of growth of national income (Y) is important for seeing:

  • The rate of economic growth
  • Changes to average living standards
  • Changes to the distribution of income

Gross Domestic Product

Gross domestic product (GDP) is the total value of output in an economy and is used to measure change in economic activity. GDP includes the output of foreign owned businesses that are located in a country following foreign direct investment. For example, the output produced at the Nissan car plant on Tyne and Wear and by foreign owned restaurants and banks all contribute to the UK’s GDP.

There are 3 ways of calculating GDP all of which should sum to the same amount:

National Output = National Expenditure (Aggregate Demand) = National Income

The full equation for GDP using this approach is GDP = C + I + G + (X-M) where

  • C: Household spending
  • I: Capital Investment spending
  • G: Government spending
  • X: Exports of Goods and Services
  • M: Imports of Goods and Services

Karnataka Class 12 Commerce Economics Measurement Of National Income-The Income Method: adding factor incomes

Here GDP is the sum of the incomes earned through the production of goods and services. This is:

  • Income from people in jobs and in self-employment +
  • Profits of private sector businesses +
  • Rent income from the ownership of land =
  • Gross Domestic product (by factor incomes)

Only those incomes that come from the production of goods and services are included in the calculation of GDP by the income approach. We exclude:

  • Transfer payments e.g. the state pension; income support for families on low incomes; the Jobseekers’ Allowance for the unemployed and welfare assistance, such housing benefit.
  • Private transfers of money from one individual to another.
  • Income not registered with the Inland Revenue or Customs and Excise. Every year, billions of pounds worth of activity is not declared to the tax authorities.

This is known as the shadow economy or black economy.

According to a World Bank report published in 2010, the average size of the shadow economy (as a percentage of official gross domestic product) in Sub-Saharan Africa was 38%; in Europe and Central Asia (mostly transition countries), it was 36%, and in high-income OECD countries it was13%

Published figures for GDP by factor incomes will be inaccurate because much activity is not officially recorded, including subsistence farming, barter transactions and the shadow economy.

Many African countries in particular have trouble measuring the size of their relatively large subsistence economies and unrecorded economic activity.

In 2013 the United States made changes to the way that the value of their GDP is calculated. They now include the amount spent on intellectual property outlays such as pop song production and drug patents for the first time.

Share of GDP by Sector for Selected Nations (2014)

The Value Added and Contributions to a Nation’s GDP method

  • There are four main wealth-generating sectors of the economy: manufacturing, oil and gas, farming, forestry and fishing and a wide range of service-sector industries.
  • This measure of GDP adds together the value of output produced by each of the productive sectors in the economy using the concept of value added. .

Value added is the increase in the value of goods or services as a result of the production process

Value added = value of production – value of intermediate goods

Let us say that you buy a ham and mushroom pizza from Dominos at a price of £14.99 – this is the final retail price and will count as consumption.

The pizza has many ingredients at different stages of the supply chain, for example tomato growers, dough, mushroom farmers plus the value created by Dominos themselves as they put the pizza together and get it to the consumer.

Some products have a low value-added, for example those really cheap tee-shirts that you might find in a supermarket for little more than £5. These are low cost, high volume, low priced products.

Other goods and services are such that lots of value can be added as we move from sourcing the raw

Karnataka Class 12 Commerce Economics Measurement Of National Income-Methods of Measuring National Income:

(1) Product Method:

According to this method, the total value of final goods and services produced in a country during a year is calculated at market prices. To find out the GNP, the data of all productive activities, such as agricultural products, wood received from forests, minerals received from mines, commodities produced by industries, the contributions to production made by transport, communications, insurance companies, lawyers, doctors, teachers, etc. are collected and assessed at market prices. Only the final goods and services are included and the intermediary goods and services are left out.

(2) Income Method:

According to this method, the net income payments received by all citizens of a country in a particular year are added up, i.e., net incomes that accrue to all factors of production by way of net rents, net wages, net interest and net profits are all added together but incomes received in the form of transfer payments are not included in it. The data pertaining to income are obtained from different sources, for instance, from income tax department in respect of high income groups and in case of workers from their wage bills.

(3) Expenditure Method:

According to this method, the total expenditure incurred by the society in a particular year is added together and includes personal consumption expenditure, net domestic investment, government expenditure on goods and services, and net foreign investment. This concept is based on the assumption that national income equals national expenditure.

(4) Value Added Method:

Another method of measuring national income is the value added by industries. The difference between the value of material outputs and inputs at each stage of production is the value added. If all such differences are added up for all industries in the economy, we arrive at the gross domestic product.

Karnataka Class 12 Commerce Economics Measurement Of National Income-Importance of National Income Analysis:


The national income data have the following importance:

1. For the Economy:

National income data are of great importance for the economy of a country. These days the national income data are regarded as accounts of the economy, which are known as social accounts. These refer to net national income and net national expenditure, which ultimately equal each other.

Social accounts tell us how the aggregates of a nation’s income, output and product result from the income of different individuals, products of industries and transactions of international trade. Their main constituents are inter-related and each particular account can be used to verify the correctness of any other account.

2. National Policies:

National income data form the basis of national policies such as employment policy, because these figures enable us to know the direction in which the industrial output, investment and savings, etc. change, and proper measures can be adopted to bring the economy to the right path.

3. Economic Planning:

In the present age of planning, the national data are of great importance. For economic planning, it is essential that the data pertaining to a country’s gross income, output, saving and consumption from different sources should be available. Without these, planning is not possible.

4. Economic Models:

The economists propound short-run as well as long-run economic models or long-run investment models in which the national income data are very widely used.

5. Research:

The national income data are also made use of by the research scholars of economics. They make use of the various data of the country’s input, output, income, saving, consumption, investment, employment, etc., which are obtained from social accounts.

6. Per Capita Income:

National income data are significant for a country’s per capita income which reflects the economic welfare of the country. The higher the per capita income, the higher the economic welfare of the country.

7. Distribution of Income:

National income statistics enable us to know about the distribution of income in the country. From the data pertaining to wages, rent, interest and profits, we learn of the disparities in the incomes of different sections of the society. Similarly, the regional distribution of income is revealed.

It is only on the basis of these that the government can adopt measures to remove the inequalities in income distribution and to restore regional equilibrium. With a view to removing these personal and regional disequibria, the decisions to levy more taxes and increase public expenditure also rest on national income statistics.

6. Inter-Relationship among different concept of National Income

The inter-relationship among the various concept of national income can be shown in the form of equations as under

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Karnataka Class 12 Commerce Economics Measurement Of National Income Notes

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