CLASS XII Economics Chapterwise Topicwise Notes Chapter 4 Determination of Income and Employment
CLASS XII Economics Chapterwise Topicwise Notes Chapter 4 Determination of Income and Employment
ECONOMICS
INCOME DETERMINATION
REVISION NOTES
CHAPTERWISE &
TOPICWISE
Page 1
Class 12th Economics (Macro)
)
04 DETERMINATION OF INCOME AND EMPLOYMENT
INDEX
9. Types of Employment
➢ Full employment
➢ Voluntary unemployment
➢ Involuntary unemployment
➢ Under employment
10. Excess Demand
➢ Meaning
➢ Reasons
11. Deficient Demand
➢ Meaning
➢ Reasons
12. Measures to correct Excess or deficient demand
➢ Fiscal policy
• Change in taxation
• Change in govt. spendings
➢ Monetary policy
• Quantitative measures
• Qualitative measures
13. Mind Map
➢ (Colourful & Interactive/ Complete All Concept Covered)
14. Assertion Reason Questions
➢ (An assertion is a simple statement, whereas a reason gives a detailed explanation about
that given statement.)
15. Case Study Questions
➢ (A scenario in a particular professional context which students are expected to analyse and
respond to, guided by specific questions posed concerning the situation.)
Page 3
Class 12th Economics (Macro)
AGGREGATE DEMAND
Meaning
Aggregate demand is a measurement of the total amount of demand for all
finished goods and services produced in an economy. Aggregate demand is
commonly expressed as the total amount of money exchanged for those goods and
services at a specific price level and point in time.
Diagram
Aggregate Demand Schedule and Graph
c) Government Expenditure(G)
d) Net Exports (X-M)
Aggregate Demand = C + I + G + (X-M)
AGGREGATE SUPPLY
Meaning
Aggregate Supply is the value of all final goods and services that all the producers
are planning to supply over a period of time.
Aggregate Supply = Y
Components Of Aggregate Supply
National Income (Y) = Consumption (C) + Savings (S)
Y=C+S
Consumption and savings are the two components of Aggregate Supply.
Aggregate Supply Schedule and Graph
Aggregate Supply = C + S
• Consumption(C)
• Saving(S)
AS = C + S
National Income (Y) Consumption(C) Saving (S) AS = C + S
0 20 -20 0
10 25 -15 10
20 30 -10 20
30 35 -5 30
40 40 0 40
50 45 5 50
60 50 10 60
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Class 12th Economics (Macro)
2. The starting point of the consumption curve is above zero as the is always some minimum
level of consumption which is termed as “Autonomous consumption”.
3. The point where C = Y is termed as break-even point as at this point Consumption is equal to
income.
4. Before the break-even point in the economy because consumption is more than income after
the break-even point savings will start as now the increase in consumption is less than the
increase in income.
Page 8
Class 12th Economics (Macro)
𝐂
National Consumption APC =
𝐘
Income (Y) (c)
0 80 -
100 160 1.6
200 240 1.2
300 320 1.06
400 400 1
500 480 0.96
APC = 1: When APC is equal to 1, consumption is equal to national income, which is known as to be
break-even point.
When APC is less than 1: When consumption is less than national income, i.e. beyond the break-
even point.
The ratio of change in consumption (C) to change in income (Y) is known as marginal propensity to
consume.
0 80 50 - -
100 160 130 80 0.8
200 240 210 80 0.8
300 320 290 80 0.8
400 400 370 80 0.8
500 480 450 80 0.8
600 100 530 80 0.8
Page 10
Class 12th Economics (Macro)
As we know that increase in income is either spent on consumption or saved for future use.
MPC falls with the successive increase in income: It happens because as an economy becomes richer,
it has the tendency to consume smaller percentage of each increment to its income.
Page 11
Class 12th Economics (Macro)
In the above diagram, ‘SS’ curve is the saving curve, which is the counterpoint of consumption
curve ‘CC’.
At ‘ON’ level of income, consumption equals income at point ‘B’ and the savings is zero. When
income is lower than ‘ON’, consumption is greater than income and there is dis-saving because
consumption is done through borrowing. So, saving curve ‘SS’ is below ‘OX’ –axis. When income
is greater than ‘ON’, the consumption is lower than income and there is savings. So, saving curve
‘SS’ is above OX-axis. The propensity to save depends on the level of income. The relationship
between savings and income is direct and positive.
Normally, higher the income, higher would be the saving. Therefore, saving is the function of
income. It can be expressed as follows: -
S = f (Y)
Saving Schedule: -
Page 12
Class 12th Economics (Macro)
The relationship between income and saving can be shown in the following schedule.
Saving Schedule (Rs. Crore)
Income (Y) Consumption (C) Savings (S)
10000 13000 -3000
15000 15000 Zero
20000 17000 3000
25000 19000 6000
30000 21000 9000
From the above schedule, it is clear that there is direct and positive relationship between
income and saving. As the income increases, savings also increase depending upon the
consumption expenditure.
Page 13
Class 12th Economics (Macro)
0
200 0 0 (= )
200
20
300 20 0.067 (= )
300
40
400 40 0.10 (= )
400
Page 14
Class 12th Economics (Macro)
Since MPS measures the slope of saving curve, constant value of MPS means that the saving curve
is a straight line.
MPS varies between 0 and 1.If the entire additional income is saved then MPS = 1.
Y=C+S
Y C S
= +
Y Y Y
: 1 = APC + APS
: 1 = MPC + MPS
Page 16
Class 12th Economics (Macro)
Y = AD
Y = AD in relation with Income
Savings-Investment approach
Under this, the point of equilibrium is the point where investment in an economy is equal to the
level of saving in an economy. In other words, the sum of investment done by the producer in an
economy is equal to the total saving by the household sector of an economy.
The equation of this approach is derived from the equation of equilibrium output.
AS = AD
The saving and investment can further be classified as, ex-ante and ex-post. The further clarification
is as follows:
Page 18
Class 12th Economics (Macro)
• Ex-ante Saving: This type of saving can also be called as desired saving or planned saving for
a period of one year. It refers to the level which is planned by the people to save in an
economy for a period of one year.
• Ex-post Saving: It can also be called as actual saving. It refers to the amount which is actually
saved by the people of a country in an economy for a period of one year. It is helpful in
calculation of national income.
• Ex-ante Investment: It refers to the level of investment which is desired or planned by the
producer in an economy for a period of one year, therefore it can also be called as desired
investment or planned investment but it does not include unplanned investment.
• Ex-post Investment: It refers to the level of investment which is actually done by the
producer in an economy during a period of one year. It is also known as actual investment. It
includes both planned and unplanned investment.
This approach is also studied with two situations which are;
1. When S is more than I: It refers to a situation where people tend to save more than to invest.
In other words, it is a situation in which the more expenditure falls due to the rise in saving
than the investment. Therefore, the producer is left with unwanted stock. To handle this
situation, the producer now produces lesser output so that the saving can be equal to the
investment.
2. When S is less than I: It refers to a situation where people tend to save less than to invest. In
other words, it is a situation in which the more expenditure falls due to the fall in saving than
the investment. Therefore, the producer has a surplus stock left and he suffers a loss due to
not meeting the demand. To handle this situation, the producer produces more output so
that the saving can be equal to the investment.
Page 19
Class 12th Economics (Macro)
INVESTMENT MULTIPLIER
Meaning
“Multiplier is the ratio of increase in national income due to an increase in
investment.”
∆𝐘
𝐊 =
∆𝐈
Where K = Multiplier
∆Y= Change in National Income
∆I = Change in Investment
Algebraic Relation with Mpc
∆Y
K=
∆I
Since Y = C + I
∆Y = ∆C + ∆I
Or
∆I = ∆Y - ∆C
∆Y
K= − ∆C
∆Y
Dividing both sides by ∆Y, we get
𝟏
𝐊 = − 𝐌𝐏𝐂
𝟏
There is a direct relationship between K and MPC.
1. Higher MPC means people are consuming a large proportion of their increased income. The
value of MPC will be more.
2. Lower MPC means people are consuming a small proportion of their increased income. The
value of MPC will be less.
In terms of MPS the Multiplier will be:
𝟏
𝐊=
𝐌𝐏𝐒
Mechanism
• The working of an Investment Multiplier is based on the assumption that the expenditure of
one person is the income of another.
Page 20
Class 12th Economics (Macro)
• When an additional investment is done in the economy that will increase the National Income
Determination and Multiplier many times.
• The process starts with an addition in investment.
• Suppose the government invested rupees 1000 crore for construction of Highway and MPC
is 0.8.
Round ∆I ∆Y ∆C ∆S
1 1000 1000 800 200
2 800 640 160
3 640 512 128
…
Total 1000 5000 4000 1000
Round 1: Fresh investment of rupees 1000 crore made by the government increases the income of
the person engaged in the construction of the Highway.
Since MPC is 0.8, they will spend 800 crores on consumption, and the remaining is saved. At the end
of the round increase in income is equal to rupees 1000 crore.
Round 2: Rupees 800 crore spent on consumption becomes the income of producers engaged in the
production of goods and services. They will spend rupees 640 crores on consumption and the
remaining is saved. The increase in income in this round is equal to rupees 800 crore and the total
increase in income in this round is rupees 1800 crore.
This process will continue until ∆C = 0 or ∆Y = ∆S.
In this process total increase in National Income Determination and Multiplier is ₹ 5000 cr. As
additional investment was made of ₹ 1000 cr.
∆Y
K=
∆I
5000
K=
1000
K=5
Page 21
Class 12th Economics (Macro)
TYPES OF EMPLOYMENT
Full employment
Full employment refers to a situation in which all those people who are willing and
able to work at the existing wage rate get work without any due difficulty. Ordinarily,
the term full employment refers to the situation in which no one is employed.
• Frictional unemployment: Sometimes people leave one job in search for some
other job and remain vacant between these periods; this is termed as frictional
unemployment.
Voluntary unemployment
Voluntary unemployment refers to a situation in which individuals willingly
choose not to work, even though they are capable of and willing to work. It
occurs when individuals make a conscious decision to remain unemployed, either
temporarily or for an extended period, for various personal or economic reasons.
Involuntary unemployment
Involuntary unemployment refers to the situation where people who are able to work and are willing
to work at the existing wage rate are not getting the job. This kind of situation is eradicated in the
case of full employment as in full employment willing and capable people get work without any
undue difficulty and there is no involuntary unemployment.
Under employment
Underemployment equilibrium refers to a situation when equilibrium is attained i.e., aggregate
demand is equal to aggregate supply below full employment level or when resources are not fully
employed. An economy can be in equilibrium when there is unemployment in the economy when
the aggregate demand = aggregate supply in the economy. It refers to a situation when aggregate
demand is equal to the aggregate supply at a level where the resources are not fully employed.
Page 23
Class 12th Economics (Macro)
EXCESS DEMAND
Meaning
Definition:
Excess Demand refers to a situation when aggregate demand is more than the aggregate supply
corresponding to full employment level of output in the economy.
Inflationary gap is the gap showing excess of current aggregate demand over ‘aggregate supply at
the level of full employment’. It is called inflationary because it leads to inflation (continuous rise in
prices).
• Effect on General Price Level: Excess demand gives a rise to general price level because it
arises when aggregate demand is more than aggregate supply at a full employment level.
There is inflation in economy showing inflationary gap.
• Effect on Output: Excess demand has no effect on the level of output. Economy is at full
employment level and there is no idle capacity in the economy. Hence, output cannot
increase.
Page 25
Class 12th Economics (Macro)
DEFICIENT DEMAND
Meaning
Definition:
When in an economy, aggregate demand falls short of aggregate supply at full
employment level, the demand is said to be a deficient demand.
Deflationary gap is the gap showing Demand deficient of current aggregate demand over aggregate
supply at the level of full employment’. It is called deflationary because it leads to deflation
(continuous fall in prices).
Fiscal policy refers to the use of government spending and taxation to influence the
economy. When it comes to providing a change in taxation as part of fiscal policy, there are
several options that governments can consider:
Tax cuts: Governments can reduce tax rates or provide tax credits to individuals or
businesses. Lower taxes can stimulate economic growth by increasing disposable income
for consumers or providing incentives for businesses to invest, expand, or hire more
workers.
Tax incentives: Governments can offer tax incentives to promote specific activities or industries.
For example, they may provide tax breaks for research and development expenditures, green energy
investments, or job creation in certain regions.
Tax reforms: Governments can implement structural changes to the tax system to improve efficiency
or fairness. This could involve simplifying the tax code, eliminating loopholes, or adjusting tax
brackets to ensure that the burden is distributed more equitably.
Monetary policy
Quantitative measures
Quantitative measures refer to those measures that affect the variables, which in turn affect the
overall money supply in the economy.
Page 28
Class 12th Economics (Macro)
Bank rate − The rate at which central bank provides loan to commercial banks is called bank rate.
This instrument is a key at the hands of RBI to control the money supply.
Increase in the bank rate will make the loans more expensive for the commercial banks; thereby,
pressurising the banks to increase the rate of lending. The public capacity to take credit will
gradually fall leading to the fall in the volume of credit demanded. The reverse happens in case
of a decrease in the bank rate. The increased lending capacity of banks as well as increased public
demand for credit will automatically lead to a rise in the volume of credit.
The reserve ratio determines the reserve requirements, wherein banks are liable to maintain
reserves with the central bank.
• Cash Reserve Ratio (CRR): It refers to the minimum amount of funds that a commercial
bank has to maintain with the Reserve Bank of India, in the form of deposits. For example,
suppose the total assets of a bank are worth Rs. 200 crores and the minimum cash reserve
ratio is 10%.
• Statuary Liquidity Ratio (SLR): SLR is concerned with maintaining the minimum reserve of
assets with RBI, whereas the cash reserve ratio is concerned with maintaining cash balance
(reserve) with RBI. So, SLR is defined as the minimum percentage of assets to be
maintained in the form of either fixed or liquid assets with RBI.
• Open Market Operations (OMO): Open Market operations refer to the buying and selling
of securities in an open market, in order to affect the money supply in the economy.
Qualitative measures
Page 29
Class 12th Economics (Macro)
1. Marginal Requirements: The commercial banks’ function to grant loan rests upon the
value of security being mortgaged. So, the banks keep a margin, which is the difference
between the market value of security and the loan value. For example, a commercial bank
grants loan of Rs. 80,000 against security of Rs. 1,00,000. So, the margin is calculated as
1,00,000 - 80,000 = 20,000. When the central bank decides to restrict the flow of money,
then the margin requirement of loan is raised and vice-versa in the case of expansionary
credit policy.
2. Selective Credit Control (SCC’s): An instrument of the monetary policy that affects the
flow of credit to particular sectors positively and negatively is known as selective credit
control. The positive aspect is concerned with the increased flow of credit to the priority
sectors. However, the negative aspect is concerned with the measures to restrict credit to
a particular sector.
3. Moral Suasions: A persuasion technique followed by the central bank to pressurise the
commercial banks to abide by the monetary policy is termed as moral suasion. This
involves meetings, seminars, speeches and discussions, which explains the present
economic scenario and thereby persuading the commercial banks to adapt the changes
needed.
Page 30
Class 12th Economics (Macro)
)
04 DETERMINATION OF INCOME AND EMPLOYMENT
MIND MAP
MIND MAP
Page 31
Class 12th Economics
04 INCOME DETERMINATION
CASE STUDY
CASE STUDY
Chapter 4 Income Determination
Question 1:
ABC Manufacturing Company produces and sells electronic goods. The company's total
revenue is Rs. 10,00,000. The production cost amounts to Rs. 6,00,000, and the company paid
Rs. 1,00,000 in taxes. Calculate the company's operating surplus and its net factor income from
abroad.
a. Rs. 4,00,000
b. Rs. 6,00,000
c. Rs. 10,00,000
d. Rs. 3,00,000
a. Rs. 4,00,000
b. Rs. 6,00,000
c. Rs. 10,00,000
d. Rs. 1,00,000
a. Rs. 4,00,000
b. Rs. 6,00,000
c. Rs. 10,00,000
d. Rs. 1,00,000
iv. What is the net factor income from abroad for ABC Manufacturing Company?
a. Rs. 4,00,000
b. Rs. 6,00,000
c. Rs. 10,00,000
d. Rs. 3,00,000
a. Rs. 4,00,000
Page 32
Class 12th Economics
04 INCOME DETERMINATION
CASE STUDY
b. Rs. 6,00,000
c. Rs. 10,00,000
d. Rs. 3,00,000
Answer:
XYZ Construction Company is involved in building infrastructure projects. The company's gross
value of output is Rs. 20,00,000. The company used Rs. 10,00,000 worth of intermediate
goods and services and paid Rs. 2,00,000 as indirect taxes. Calculate the net value added by
the company.
a. Rs. 10,00,000
b. Rs. 2,00,000
c. Rs. 8,00,000
d. Rs. 20,00,000
ii. The gross value of output for XYZ Construction Company is:
a. Rs. 10,00,000
b. Rs. 2,00,000
c. Rs. 8,00,000
d. Rs. 20,00,000
iii. How much worth of intermediate goods and services did XYZ Construction Company
use?
a. Rs. 10,00,000
b. Rs. 2,00,000
c. Rs. 8,00,000
d. Rs. 20,00,000
Page 33
Class 12th Economics
04 INCOME DETERMINATION
CASE STUDY
iv. What were the indirect taxes paid by XYZ Construction Company?
a. Rs. 10,00,000
b. Rs. 2,00,000
c. Rs. 8,00,000
d. Rs. 20,00,000
a. Rs. 10,00,000
b. Rs. 2,00,000
c. Rs. 8,00,000
d. Rs. 20,00,000
Answer:
04 INCOME DETERMINATION
ASSERTION REASON
ASSERTION REASON
Chapter 4 Income Determination
Question 1:
Directions: For two statements are given-one labelled Assertion (A) and the other labelled
Reason (R). Select the correct answer to these questions from the codes (a), (b), (c) and (d)
as given below:
Assertion: Consumption curve makes an intercept on the Y-axis, some point above the
origin.
Reason: People need certain basic goods and services to sustain themselves, even if
income is zero.
a. Both Assertion and Reason are true, and Reason (R) is the correct explanation of
Assertion (A).
b. Both Assertion and Reason are true, and Reason (R) is not the correct explanation
of Assertion (A).
c. Assertion (A) is True, but Reason (R) is False.
d. Assertion (A) is False, but Reason (R) is True.
Answer: (a) Both Assertion and Reason are true, and Reason (R) is the correct
explanation of Assertion (A).
Question 2:
Directions: For two statements are given-one labelled Assertion (A) and the other labelled
Reason (R). Select the correct answer to these questions from the codes (a), (b), (c) and (d)
as given below:
a. Both Assertion and Reason are true, and Reason (R) is the correct explanation of
Assertion (A).
b. Both Assertion and Reason are true, and Reason (R) is not the correct explanation
of Assertion (A).
c. Assertion (A) is True, but Reason (R) is False.
Page 35
Class 12th Economics (Introductory Macroeconomics)
04 INCOME DETERMINATION
ASSERTION REASON
Question 3:
Directions: For two statements are given-one labelled Assertion (A) and the other labelled
Reason (R). Select the correct answer to these questions from the codes (a), (b), (c) and (d)
as given below:
a. Both Assertion and Reason are true, and Reason (R) is the correct explanation of
Assertion (A).
b. Both Assertion and Reason are true, and Reason (R) is not the correct explanation
of Assertion (A).
c. Assertion (A) is True, but Reason (R) is False.
d. Assertion (A) is False, but Reason (R) is True.
Answer: (a) Both Assertion and Reason are true, and Reason (R) is the correct
explanation of Assertion (A).
Question 4:
Directions: For two statements are given-one labelled Assertion (A) and the other labelled
Reason (R). Select the correct answer to these questions from the codes (a), (b), (c) and (d)
as given below:
Reason: Incremental income is either spent on consumption or saved for future use.
a. Both Assertion and Reason are true, and Reason (R) is the correct explanation of
Assertion (A).
b. Both Assertion and Reason are true, and Reason (R) is not the correct explanation
of Assertion (A).
c. Assertion (A) is True, but Reason (R) is False.
d. Assertion (A) is False, but Reason (R) is True.
Question 5:
Page 36
Class 12th Economics (Introductory Macroeconomics)
04 INCOME DETERMINATION
ASSERTION REASON
Directions: For two statements are given-one labelled Assertion (A) and the other labelled
Reason (R). Select the correct answer to these questions from the codes (a), (b), (c) and (d)
as given below:
a. Both Assertion and Reason are true, and Reason (R) is the correct explanation of
Assertion (A).
b. Both Assertion and Reason are true, and Reason (R) is not the correct explanation
of Assertion (A).
c. Assertion (A) is True, but Reason (R) is False.
d. Assertion (A) is False, but Reason (R) is True.
Answer: (b) Both Assertion and Reason are true, and Reason (R) is not the correct
explanation of Assertion (A).
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