PART – A: INTRODUCTORY MACROECONOMICS

UNIT – I: NATIONAL INCOME AND

RELATED AGGREGATES
CHAPTER-1
NATIONAL INCOME AND RELATED AGGREGATES

TOPIC-1 Macroeconomics with Basic Concepts and Circular Flow of Income

Concepts Covered:
 Meaning of Macroeconomics;  Basic concepts in macroeconomics;  Circular Flow of Income in a 2-sector economy.

 Circular flow of income: Circular flow of income

Revision Notes refers to the flow of activities of production, income
 Macroeconomics refers to that branch of economics generation and expenditure involving different sectors
that deals with economic problems or economic issues of the economy.
at the level of an economy as a whole, e.g. it deals  2-Sector Model of Circular Flow: It is assumed that:
with aggregates like national income, general price (i) Domestic economy comprises only 2 sectors, the
level, etc. [Board, 2018] producers and the households.
 Consumption Goods: Goods which are used by the (ii) The households spend their entire income, so that
consumers to satisfy human wants directly are called there is no savings.
consumption goods. (iii) Domestic economy is a closed economy (no exports
 Capital Goods: All goods which are used in the and imports).
production of other goods either as fixed assets or as (iv) There is no government in the economy.
inventory/stock are called Capital Goods. [Board, 2016]
 Final Goods: Those goods which are purchased either  Production in the producing sector generates income
for final consumption by consumers (consumer goods) for the households who are owners of the factors of
or for investment by producers (capital goods) are final production. Expenditure by the households generates
goods. demand for further production. These movements keep
 Intermediate Goods: Those goods and services which chasing each other continuously moving in a circle.
are purchased as raw material for further production or
nd, Capital, Entrepr
for resale in the same year. r, La ene
a bou Rent, Interest, Pr ur
 Stock: Stock is a quantity measurable at a particular L a ges, ofits
W
Pa
“point of time”, e.g. wealth, assets, money, inventory, Factor yments
etc. A stock variable is nothing but an accumulated sum
of flows. Business
Households
 Flow: Flow is a quantity that can be measured over a Firms
specific “period of time”, e.g. national income, change
in stock, etc.
 Gross Investment: Total addition made to physical
stock of capital during a period of time. It includes
depreciation. It is also known as Gross Capital
Formation.
 Net Investment: Net addition made to the real stock of  Significance of Circular Flow of Income: (i) It reflects
capital during a period of time. structure of an economy, (ii) It shows interdependence
 Depreciation: It means fall in value of fixed capital goods among different sectors, (iii) It shows injections and
due to normal wear and tear, expected obsolescence and leakages from flow of money, (iv) It helps in estimation
efflux of time. of national income and related aggregates.
2 Oswaal CBSE Revision Notes Chapterwise & Topicwise, ECONOMICS, Class-XII

TOPIC-2 National Income Accounting

Concepts Covered:
 Methods of calculating National Income and their precautions.

(v) Transfer earning like old age pensions, unemployment

Revision Notes allowances, scholarships, pocket expenses, etc. should
 National Income: National Income is the sum total of not be included.
factor incomes earned by normal residents of a country.  Expenditure Method: By this method, the total sum
 Measurement of National Income: (a) In the form of of expenditures on the purchase of final goods and
flow of goods and services, (b) In the form of income services produced during an accounting year within
flow, (c) In the form of expenditure flow. an economy is estimated to obtain the value of GDP.
 Value Added Method or Production Method: The It is the expenditure on the purchase of final goods
national income is estimated by the contribution of and services, during an accounting year. It is broadly
each producing enterprise to produce in the domestic classified into four categories:
territory of the country in an accounting year. For (i) Private final consumption expenditure,
measuring national income by this method, we have to (ii) Government final consumption expenditure,
estimate the following components: (iii) Investment expenditure,
 Net Domestic Product at Market Price (NDPMP): Gross (iv) Net exports, i.e., difference between exports and
Valued Added by [Primary Sector + Secondary Sector + imports during an accounting year.
Tertiary Sector] - Depreciation  Computation of National Income (by expenditure
 Net National Product at Factor Cost (NNPFC) or NI: method) NNPFC = GDPMP - Depreciation + NFIA
NDPMP - Net Indirect Tax + Net factor Income from - Net Indirect Tax. Where, GDPMP = Private Final
Abroad. Consumption Expenditure + Government Final
 Value Added Method (Product Method): Gross Value Consumption Expenditure + Gross Domestic Capital
Added at Market Price (GVAMP) = Sales + Change in Formation + Net Exports (Exports - Imports). Where,
Stock - Intermediate Consumption. Gross Domestic Capital Formation = Gross Domestic
GDPMP =GVAMP of all sectors Fixed Capital Formation + Change in Stock (Closing
Stock - Opening Stock) [Board, 2020]
OR
 Precautions while using Expenditure Method:
Value of output - Intermediate consumption (i) Only final expenditure is to be taken into account to
NVAFC = GVAMP - Depreciation - Net Indirect Taxes avoid error of double counting.
(NIT) (ii) Expenditure on second hand goods is not to be
 Precautions while using Value Added Method: included.
(i)  The value of intermediate goods should not be (iii) Expenditure on transfer payments by the government
included. is not to be included.
(ii) Purchase and sale of second hand goods should not be (iv) Imputed value of expenditure on goods produced for
included. self-consumption should be taken into account.
(iii) Imputed or estimated value of self-consumed goods (v) Expenditure on shares and bonds is not to be included
should be included but self-consumed services should in total expenditure.
not be included.  Gross Domestic Product (GDP): It is the total value of
(iv) Own account production should be included. all the final goods and services by all the enterprises
(v) Commission earned on account of sale and purchase (both resident and non-resident) within the domestic
of second hand goods is included. territory of a country in a particular year.
 Income Method: It measures national income in term  Gross Domestic Product at Market Price (GDPMP):
of payments made in the form of wages, rent, interest Private Final Consumption Expenditure (C) +
and profit to the primary factors of production, i.e., Government Final Consumption Expenditure (G) +
labour, land, capital and enterprise respectively for their Investment Expenditure (I) or Gross Capital Formation
productive services in an accounting year. + Net Exports (X - M).
 Net Domestic Income or Net Domestic Product at
Net Domestic Product at Market Price (NDPMP) =
Factor Cost: Compensation to Employees + Operating GDPMP - Depreciation
Surplus + Mixed Income from Self Employment.
Net Domestic Product at Factor Cost (NDPFC) =
National Income = Net Domestic Income + Net factor
GDPMP - Indirect Taxes + Subsidies - Depreciation
Income from Abroad.
 Precautions while using Income Method: National Income = GDPMP - Depreciation - Net
Indirect Taxes + Net Income from Abroad
(i) Income from illegal activities like smuggling, theft,
 Nominal Gross Domestic Product: When the goods
gambling, etc., should not be included.
and services are produced by all producing units in the
(ii) Imputed rent of owner occupied structure and value of domestic territory of a country during an accounting
production for self-consumption is included but value year and valued at current year’s prices or current
of self-consumed services like those of housewife is prices, it is called Nominal GDP or GDP at current prices.
not included.  Real Gross Domestic Product: When the goods and
(iii) Brokerage on the sale/purchase of shares and bonds is services are produced by all producing units in the
to be included domestic territory of a country during an accounting
(iv) Income in terms of windfall gains should not be year and valued at base year’s prices or constant price,
included. it is called real GDP or GDP at constant prices.
 Oswaal CBSE Revision Notes Chapterwise & Topicwise, ECONOMICS, Class-XII 3
 Gross National Product: It is defined as the total value
of all final goods and services produced in a country in
KEY-TERMS
a particular year, plus the income which is earned by its Net Factor Income from Abroad (NFIA): This is the
citizens who are located abroad and minus the income difference between the factor income earned from abroad
of non-residents located within the country. for rendering factor services by the normal residents of
GNPMP = GDPMP + Net Factor Income from Abroad the country to the rest of the world and the income paid
 Net National Product at Factor Cost (NNPFC): It is the for the factor services rendered by non-residents in the
sum total of factor incomes (rent + interest + profits + domestic territory of a country.
wages) earned by normal residents of a country during Factor Income: These are incomes received by the owners
the period of an accounting year. It is also known as the of factors of production for rendering their factor services
National Income. to the producers.
NNPFC = GNPFC - Depreciation Transfer Payments: These are all those unilateral
OR payments corresponding to which there is no value
NNPFC = NDPFC + NFIA addition in the economy, e.g., gifts, donations, etc.
 Net National Product at Market Price (NNPMP): It refers Double Counting: Counting the value of the same product
to market value of final goods and services produced more than once in calculation of National Income.
during the year inclusive of Net Factor Income from
Abroad but exclusive of depreciation.
NNPMP = GDPMP - Depreciation + NFIA Example-1
Find Net Value Added at Factor Cost:
MNEMONICS
S. No Items (` in crore)
Concept 1: Value Added Method
Mnemonics: PST and Denit discussed about GDP at MP. (i) Intermediate Cost 15,000
Interpretations:
GDP of MP: GDPMP (ii) Output Sold (units) 9,000
P: Gross Value added by Primary Sector (iii) Price per unit of output 4
S: Gross Value added by Secondary Sector
T: Gross Value added by Tertiary Sector (iv) Consumption of Fixed 2,000
De: Depreciation Capital
nit: Net Indirect Taxes (v) Excise Duty 4,000
Concept 2: Net Domestic Income or Net Domestic Product
at Factor Cost (vi) Change in stock (-)1,000
Mnemonics CM of Orrisa dictated to NIA deptt.
Interpretations: Solution:
C: Compensation of Employees NVAFC = (ii × iii) + (vi) - (i) - (v) - (iv)
M: Mixed Income of Self-employed =[Output × Price] + [Change in Stock] -
Orrisa: Operating Surplus [Intermediate Cost] - [Excise Duty] -
NIA deptt.: Net Income from Abroad [Consumption of Fixed Capital]
Concept 3: Gross Domestic Product at Market Price = [` 9,000 × 4] + [- ` 1,000] - [` 15,000] -
Mnemonics: Students of GIC College decorated X-mas
[` 4,000] - [2,000]
tree.
Interpretations: = ` 36,000 - ` 1,000 - ` 15,000 - ` 4,000 -
G: Government Expenditure ` 2,000
I: Investment Expenditure = ` 36,000 - ` 22,000
C: Consumption Expenditure (Private) NVAFC = ` 14,000 crore
X-mas: Export - Imports

TOPIC-3 GDP and Welfare

Concepts Covered:
 Why GDP is not an appropriate indicator of Welfare
index because it isn’t based on a fixed basket of goods.
Revision Notes The GDP price deflator measures the changes in prices
 GDP Deflator: The GDP (gross domestic product) for all the goods and services produced in an economy.
price deflator, also known as the GDP deflator or the Using The GDP price deflator helps economists
implicit price deflator, measures the changes in prices compare the levels of real economic activity from one
for all the goods and services produced in an economy. year to another.
It shows the change in GNP with the change the price
levels. The GDP price deflator is a more comprehensive Normal GDP
GDP Deflator= ×100
inflation measure than the Consumer Price Index (CPI) Real GDP
4 Oswaal CBSE Revision Notes Chapterwise & Topicwise, ECONOMICS, Class-XII

 GDP and Welfare: In general, Real GDP and Welfare  GDP is not an appropriate indicator for Welfare: GDP
are directly related with each other. Even though higher may be a good indicator of economic growth but not of
economic welfare or economic development because of:
GDP implies more production of goods and services, it
(a) Externalities: Externalities refer to benefits or harms
does not necessarily mean that the people were better off. of an activity caused by a firm or an individual, for
Thus, higher GDP not necessarily mean higher welfare. which they are not paid or penalized. For example,
 Welfare means material well-being of the people. environmental pollution caused by industrial plants
It depends on many economic factors like national is a negative externality and building a flyover is a
positive externality.
income, consumption level, quantity of goods, etc., and
(b) Composition of GDP: GDP does not exhibit the
non-economic factors like environmental pollution, law structure of the product. If the increase in GDP is
and order, etc. The welfare which depends on economic mainly due to increased production of war equipment
factors is called economic welfare and the welfare which and ammunitions, then such an increase cannot
depends on non- economic factor is called non-economic improve welfare in economy.
(c) Distribution of GDP: When GDP is unevenly
welfare. The sum total of economic and non-economic
distributed, increase in GDP does not increase welfare.
welfare is called social welfare. [Board, 2021] (d) Non-monetary exchanges: Many activities in an
economy are not evaluated in monetary terms, they
AMAZING FACT are not included in GDP, due to non-availability of
Negative Externalities can be profitable for a company
for the short run growth. data. However, such activities influence the economic
welfare of people of the economy.


UNIT – II: MONEY AND BANKING

CHAPTER-2
MONEY AND BANKING

TOPIC- 1 Money
Concepts Covered:
 Definition of Money  Functions of Money  Supply of Money
 Other Deposits (OD): These deposits include:
Revision Notes (i)  Demand deposits of public financial institutions with
 Definition of Money: Money may be defined as RBI
anything which is generally accepted as a medium of (ii)  Demand deposits of international financial
exchange and also acts as common measures of value, institutions with RBI
store of value and standard of deferred payment. (iii) Demand deposits of foreign Government and Central
 Money Supply: Total of money (currency notes, coins Banks with RBI
 Time Deposits (TD): Those deposits of public with
and demand deposits of banks) in circulation held by
bank which can be withdrawn only after completion of
the public at a given point of time.
that period for which it has been deposited with banks.
 Measures of Money Supply: In India, RBI uses four  Stock of Money: If the supply of money is studied at a
measures of money supply. These are M1, M2, M3 point of time; it is called Stock of Money.
and M4.  Flow of Money: When the supply of money is
 Narrow Approach of Money Supply: In a narrow considered over a period of time; it is called Flow of
sense, we include only liquid assets which are easily Money.
acceptable for payments. It includes M1 and M2.  High Powered Money or Reserve
 Broad Approach of Money: It refers to currency Money: It is the sum of (i) Currency held by the public
held by public, demand deposits and time deposits. (ii) Cash reserve of the banks.
It includes M3 and M4. H=C+R [Board, 2020]
Functions of Money
 Currency with Public (C): Currency of a country is
(a) Medium of Exchange: Medium of exchange is the
issued either by the Government or by the Central
primary function of money. People exchange goods
Bank. It is called Legal Tender Money. and services through the medium of money. Money
 Demand Deposits (DD): Public deposits with bank has the quality of general acceptability. Therefore all
which public may withdraw at any time or on demand, the exchange in the economy takes place in terms of
bank has to pay it. money. Seller accepts money in exchange of their goods.
 Oswaal CBSE Revision Notes Chapterwise & Topicwise, ECONOMICS, Class-XII 5
By having medium of exchange, people do not have to (iv) Banking habits
waste the time and efforts. (v) Velocity of Circulation
(b) Measure of Value: Money as a “Unit of Account” or (vi) Volume of trade
“common measure of value.” It serves as a unit of
(vii) Amount of demand deposits
measurement in terms of which the value of all the
 Who Supplies Money: Central Bank of the country.
goods and services are measured and expressed. When
However, coins are issued by the Government of India
value of commodity is expressed in money it is known
under the Ministry of Finance. In India, Reserve Bank of
as price. A consumer compares the value of alternative
India is the Central Bank.
purchases in terms of money. Producers compare the
value of money should be stable. KEY-TERM
(c) Store of Value: Money also acts as a store of value. Central Bank: The apex financial institution that regulates
People can keep their wealth in terms of money. Money and controls other financial institutes.
helps us to store the purchasing power which can be
used at any time in the future to purchase. However, it MNEMONICS
suffers from the drawback that money’s value changes Concept: Factors affecting Money Supply
over time. People wish to keep a part of their wealth in Mnemonics: Charles and Carla
the form of money because savings in terms of goods is Bob Gave some Very good Variety of Antiques
very difficult. C: Central Bank
(d) Standard of Deferred Payment: Deferred payment C: Commercial Banks
refers to the payment that needs to be made on a future G: Government
date. B: Banking Habits of the People
 Factors affecting Money supply:
V: Velocity of Circulation
(i) Central Bank
V: Volume of Trade
(ii) Commercial Banks A: Amount of Demand Deposits
(iii) Government

TOPIC- 2 Banking
Concepts Covered:
 Money Creation by the Commercial Bank System  Functions of Central Bank  Money Control Measures
These are:
Revision Notes (i) Cash Reserve Ratio (CRR): This refers to the
 Money creation by Commercial Banks: Money creation proportion of total deposit of the commercial banks
is a process in which a Commercial Bank creates total which they must keep as Cash Reserves with
deposits many times the initial deposits.  [Board, 2020] Central Bank.
The capacity of commercial banks to create money
(ii) Statutory Liquidity Ratio (SLR): This refers to liquid
depends on two factors:
assets of the commercial banks which they must
(i) Amount of initial fresh deposit
maintain (on daily basis) as a minimum percentage of
(ii) Legal Reserve Ratio (LRR)
their total deposits.
1
Money Multiplier = (iii) Repo Rate: It is the rate at which the Central Bank
LRR Money Creation gives short-period loan to the commercial banks
Total Deposits = Initial Deposit × Money multiplier. against security pledged for the loan.
 Central Bank: A Central Bank is an apex institution (iv) Reverse Repo Rate: It is the rate of interest at which
in the banking structure of the country. It supervises, the Central Bank of a country borrows money from
controls and regulates the activities of Commercial commercial banks.
Banks and acts as a Banker to them. RBI (Reserve Bank (v) Bank Rate: It is the rate at which the Central Bank
of India) is the Central Bank of India. gives long-term/long period loan to the commercial
 Functions of RBI/Central Bank:
banks without any security to cope with immediate
(i) Monopoly of Note Issue/Bank of Issue cash crunch.
(ii) Banker to the Government
(vi) Open Market Operations: Open market operations
(iii) Bankers’ Bank [Board, 2020]
refer to the sale and purchase of securities in the
(iv)Controller of Credit
open market by the Central Bank. By selling the
 Monetary Management: It means to regulate money
securities (like, National Saving Certificates— NSCs),
and credit in such a way that it may satisfactorily meet
the Central Bank soaks liquidity (cash) from the
the demand for money needed for trade, business and
economy. And, by buying the securities, the Central
economic activities.
Bank releases liquidity.
 Methods of Credit Control / Instruments of Monetary
Policy: Methods of credit control can be classified (vii) Margin Requirements: Margin Requirement refers to
into two categories. These may be Quantitative tools the difference between market value of the securities
(controlling the extent of money supply) or Qualitative offered for loans and the amount of loan offered by
(persuasion, policy measure, etc.). the commercial banks.
6 Oswaal CBSE Revision Notes Chapterwise & Topicwise, ECONOMICS, Class-XII

KEY-TERM Example-1
Banker's Bank: A bankers’ bank is a specific type of bank If the total deposits created by commercial banks is
that a group of larger, more established banks create. `10,000 crores and legal reserve requirements is 10%,
what will be the amount of initial deposits?
Solution:
MNEMONICS Legal Reserve Requirement (LRR) = 10% = 0.1
Concept : Functions of the Central Bank
1 1
Mnemonics: Maria Blossom Baked Cake =
Money Multiplier = = 10
LRR 0.1
M: Monopoly of Note Issue/Bank of Issue
Total Deposits = `10,000 crores
B: Banker to the Government
B: Bankers’ Bank Initial Deposits
C: Controller of Credit Total deposits 10 , 000
=
Initial Deposits =
Money multiplier 10
= `1,000 crore



UNIT – III: DETERMINATION OF INCOME

AND EMPLOYMENT
CHAPTER-3
AGGREGATE DEMAND AND SHORT-RUN
EQUILIBRIUM OUTPUT
TOPIC- 1 AGGREGATE DEMAND AND SAVING
Concepts Covered
 Aggregate demand and its components;
 Consumption and Savings Functions;
 APC, MPC, APS & MPS.

Government Expenditure: It includes the total

Revision Notes 
Expenditure of the government on the purchase of
 Aggregate Demand: Aggregate demand refers to the consumer goods and investment Expenditure. There
total demand for all goods and services in the economic is a significant difference between government and
system as a whole. This is expressed in terms of total private investment. Private investments are done on
Expenditure made in the economy. consideration of profit.
 Components of Aggregate Demand (AD): In an open
 Autonomous Investment: Autonomous Investment refers
economy, constituents of AD are: to the portion of total investment that is not influenced by
(i) Consumption Expenditure changes in the level of income or output in an economy.
(ii) Investment Expenditure It is independent of current economic conditions and is
(iii) Government Expenditure driven by factors such as technological advancements,
(iv)Net Exports business expectations, and government policies.
AD = C + I + G + (X-M)  Aggregate Supply: The concept of aggregate supply is
 Private Consumption Expenditure: The total demand related to the total supply of goods and services made
for all goods and services by the household in an available by all the producers in the economy. It can be
economy during an accounting year is termed as Private expressed in three forms:
Consumption Expenditure. It is determined by the level (i) Money value of goods and services produced during a
of personal disposable income of the economy. year in an economy, i.e., National Income.
 Private Investment Expenditure: The Expenditure of
(ii) In the form of total income, i.e., consumption + saving.
households and private investor to purchase goods or
services that adds to their stock of capital is termed as (iii) In the form of minimum income which the firm will
Private Investment Expenditure. It mainly depends on receive as sale proceeds from the sale of goods and
market rate of interest. services. [Board, 2020]
 Oswaal CBSE Revision Notes Chapterwise & Topicwise, ECONOMICS, Class-XII 7
 Effective Demand: It signifies the point where aggregate  Relationship between Propensity to Save and
demand equals to aggregate supply. Thus, that level Propensity to Consume:
where aggregate demand equals aggregate supply is MPC + MPS = 1
called Effective Demand. or MPC = 1-MPS
 Consumption Function: The relationship between
MPS = 1-MPC
consumption and income is Consumption Function.
C = f (Y) APC + APS = 1
 Algebraic Expression of Consumption Function: APC = 1-APS
The algebraic expression of consumption function is or APS = 1-APC
given by:  Investment Expenditure: Investment Expenditure

C = C + b(Y) includes Expenditure for producer’s durable equipment,

new construction and the change in inventories.
where, C = Consumption
 Induced Investment : Investment made with expectation
C =Minimum Level of Consumption at of profit is called induced investment. It depends upon
Zero Income (i) Marginal efficiency of capital, and (ii) Rate of Interest.
b = Marginal Propensity to Consume  Induced investment is the portion of total investment
Y = Income that responds to changes in the level of income or
 Propensity to Consume: It expresses the consumption output in the economy. As income and output increase,
levels at different levels of income. induced investment increases, and vice versa.
 Average Propensity to Consume (APC): It is the ratio  Equilibrium Volume of Investment : Investment
of Consumption Expenditure to any particular level of decisions depend upon the relative superiority of MEC
income. over the rate of interest.
(C) Consumption MEC = r [Passive Effect on Investment or Neutral]
APC = MEC > r [Favourable effect on Investment]
(Y) Income
MEC < r [Adverse effect on Investment]
 Marginal Propensity to Consume (MPC): It is the ratio
of a change in Consumption to a change in Income. MNEMONICS
ΔC Concept: Constituents of Aggregate Demand
Change in Consumption ___ Aggregate Demand = Consumption Expenditure +
MPC = =
Change in Income ΔY Investment Expenditure + Government Expenditure +

 Propensity to Save: It is the ratio of saving to income at
Net Exports
different levels of income. Mnemonics: Andhra Pradesh Cannot Import Good Nuts
 Saving Function: It denotes the relation between saving A: Aggregate Demand
and income. It shows the desire of savings at various C: Consumption Expenditure
levels of income. [Board, 2020] I: Investment Expenditure
S = f(Y) G: Government Expenditure
 Algebraic Expression of Saving Function: The algebraic N: Net Exports
expression of saving function is given by:
S = (-) S + b(Y) KEY TERMS
where, S = Saving Marginal Efficiency of Capital (MEC): Marginal efficiency
S = Level of saving when Income is Zero of capital is expected rate of return on an additional unit
b = Marginal Propensity to Save of capital goods over its cost.
Y = Income Prospective Yield
MEC =
 Average Propensity to Save (APS): It is the ratio of Cost(Supply Price of Capital )
saving to income.
Saving S Rate of Interest: Interest is the reward for parting with
APS = = liquidity for a specified period.
Income Y
 Marginal Propensity to Save (MPS): It is the ratio of a
Ex-Ante Saving: It is the planned or desired or intended
change in saving to a change in income. saving during a particular period.
ΔS
___ Ex-Ante Investment: It is the planned or desired or
Change in Saving
MPS = = intended investment during a particular period.
Change in Income ΔY

TOPIC- 2 SHORT RUN EQUILIBRIUM OUTPUT

Concepts Covered
 Employment equilibrium in the short run;  Meaning of full employment and involuntary unemployment  Effect of change in equilibrium.

Full Employment: It refers to a situation, where all those

Revision Notes 
workers who are able to work and willing to work get
 Short Run: According to J. M. Keynes, “A period of time employment at prevailing wage rate.
during which level of output is determined exclusively
 Involuntary Unemployment: It is a situation in which
by the level of employment in the economy, is termed as
short run.” an individual is not working, but willing to work, able
8 Oswaal CBSE Revision Notes Chapterwise & Topicwise, ECONOMICS, Class-XII

to work at the available market wage rate and actively AS. But AS depends on technological factors therefore if
searching for job. AD increases, it will raise the level of employment.
 In an Economy: S=I
Income Equilibrium Level  According to Keynes income-employment equilibrium
(Y) is determined at a point where S = I.
= Output Equilibrium Level (i) If S > I then equilibrium income will have a tendency
(O) to reduce.
= Employment Equilibrium Level (ii) If S < I then equilibrium income will have a tendency
(N) to increase.
 Short Run Equilibrium, i.e., Keynesian Approach MNEMONICS
AD = AS
Concept: Equilibrium Level
AMAZING FACT Income Equilibrium Level (Y) = Output Equilibrium Level
An economy never reaches the level of full employment. (O) = Employment Equilibrium Level (N)
Mnemonics: India Out performing Economy.
(i) Employment is determined at a point where AD = AS.
I: Income Equilibrium Level
(ii) If AD > AS, firm will employ more factors of
production and it will again attain AD = AS. O: Output Equilibrium Level
(iii) If AD < AS, firm will cut employment and it will bring E: Employment Equilibrium Level
again AD = AS. [2021]
 Change in Equilibrium : Equilibrium position described
above may be of full employment or may not be of full KEY TERMS
employment. It only determines the level of income. Output: The product produced in the economy.
Therefore, for full employment we have to twist AD or Employment: The work-force being employed.

EXAMPLE 1
An economy is in equilibrium. Calculate the `1000 − ` 220
Marginal Propensity to Save from the following: or b=
National Income = `1,000 `1000
Autonomous Consumption = `100
Investment= `120 ` 780
Solution: b=
`1000
Step I: Given, Y = `1,000
C = ` 100 or b = 0.78
I = ` 120
  1-MPC = MPS
Step II: We know, Y = C + b(Y) + I
or 1-0.78 = MPS
or `1,000 = `100 + b(`1,000) + `120
or MPS = 0.22
or `1,000 = `220 + `1,000b

TOPIC- 3 INVESTMENT MULTIPLIER AND ITS MECHANISMS

Concepts Covered
 Multiplier and its relation with Marginal propensity to Consume.

Revision Notes K = 1-MPC

 Multiplier: It establishes the relation between income 1
and investment. It measures the change in income due and K=
MPC
to change in investment.
ΔY if MPC = Zero
___
Change in Income   K = 1
K = ΔI =
Change in Investment
MPC = 1

AMAZING FACT   K = ∞

The concept of Multiplier was developed by Kahn and Value of K lies between 1 and infinity.
then refined by Keynes.  Forward and Backward action of multiplier: Multiplier
 Relationship between Multiplier and Marginal is two-edge instrument and hence, it works in both
Propensity to Consume (MPC): The size of multiplier directions.
is determined by the Marginal Propensity to Consume. (i) Forward Action: Additional investment creates
There is a direct relation between MPC and K. Higher
additional income many more times.
the MPC, higher is the value of K and vice-versa.
 Oswaal CBSE Revision Notes Chapterwise & Topicwise, ECONOMICS, Class-XII 9
(ii) Backward Action: Withdrawal of investment
decreases income many more times.
MNEMONICS
Full employment: It refers to a situation, where Concept: Investment Multiplier
all those workers who can work and are willing Change in Income (DY)
to work get employment at prevailing wage rate. K=
Change in Investment (DI)
Involuntary unemployment: When people who Mnemonics: Korea Charges Culprit
are able and willing to work at the prevailing K: Investment Multiplier
wage rate, do not get employment, it is a situation
C: Change in Income
of involuntary unemployment [Board 2019]
C: Change in Investment

EXAMPLE 1
What is investment multiplier? Explain its working Step III: Numerical example
using a suitable numerical example.
Solution: Suppose Δl = `100 crore
Step I: Meaning MPC = 0.8
Investment multiplier is a measure of the effect of Step IV: Calculation
change in the initial investment on change in final 1
income. K = 1 − MPC
Step II: Schedule
Round ΔY C ΔS 1
I 100 80 20
K = 1 − 0.8

II 80 64 So ∆Y = K.ΔI
III 64 51.2 12.8 = 5 × 100 = `500
– – – Step IV: ∆C = MPC × ∆Y = 0.8 × 500
– – – = 400
Total 500 400 100 ∆S = MPS × ∆Y = (1-0.8) × 500
(or any other relevant example) = 100



CHAPTER-4
PROBLEMS AND MEASURES OF
EXCESS AND DEFICIENT DEMAND
corresponding to full employment. AD > AS (at full
Revision Notes employment level).
 Deficient Demand: When AD falls short of AS at full  Reasons for Excess Demand:
employment, it is called deficient demand.
(i) Increase in public expenditure
 Deficient Demand = AD < AS (at full employment
level). (ii) Reduction in taxes
 Reasons for Deficient Demand: (iii) Deficit financing
(i) Decrease in investment expenditure (iv) Increase in investment demand
(ii) Decrease in propensity to consume (v) Increase in propensity to consume
(iii) Increase in Taxes (vi) Increase in export demand
(iv) Reduction in Public Expenditure  Effects of Excess Demand:
(v) Increase in Propensity to Save (i) Decrease in unemployment
(ii) Increase in production level
(vi) Decline in Export Demand
(iii) Increase in price level.
 Effects of Deficient Demand:
 Cyclical Fluctuations: In real life, Aggregate demand
(i) Fall in production level does not match Aggregate Supply. Consequently,
(ii) Fall in price level economy faces economic fluctuations like:
(iii) Increase in unemployment Depression → Recovery → Full employment →
 Excess Demand: Excess demand refers to a situation Prosperity → Recession → Again depression and
when Aggregate Demand exceeds Aggregate Supply process goes on.
 10 Oswaal CBSE Revision Notes Chapterwise & Topicwise, ECONOMICS, Class-XII

 There are four important ways to correct Excess and

KEY TERMS
Deficient Demand: Taxes: The type of surcharge that the government
(i) Fiscal Policy imposes on the income and goods.
Unemployment: The situation where the able persons
(ii) Monetary Policy
who are willing to work are not employed.
(iii) Foreign Trade Policy Depression: Employment, income, and output begin to
(iv) Other Measures decline sharply in the economic fluctuation.
 Fiscal Policy: Government measures related to public
expenditure, taxation and public debt are referred as EXAMPLE 1
fiscal measures and the policy related to these measures In the given figure, what does the gap ‘KT’
is called Fiscal Policy.  [Board, 2022] represent? State any two fiscal measures to
correct the situation.
 Instruments of Fiscal Policy: Public expenditure,
taxation, public debt and deficit financing.
 Monetary Policy: A policy, which controls the money
supply, credit availability and its cost is termed as
monetary policy. Central Bank of the country frames
this policy and ensures its execution. [Board, 2023]
 Measures of Monetary Policy:
(i) 
Quantitative: Bank Rate, Open Market Operations,
Minimum Reserve Ratio and Liquidity Ratio.
(ii) Qualitative: Margin requirement of loans, Rationing
of credit, Direct action and Moral pressure.

Solution: the hands of the people which in turn may

The Gap ‘KT’ represents ‘Deficient demand’ increase the Aggregate Demand in the econo-
(Deflationary Gap). my to bring it equal to the Aggregate Supply.
Deflationary gap is that situation when Aggregate (b) 
Increase in Government Expenditure: To
Demand is lesser than Aggregate supply corre- curb the deflationary gap the government
sponding to a full employment level. may increase its expenditure. This may in-
Two fiscal measures to control it are: crease the purchasing power in the hands of
(a) Decrease in Taxes: To curb the deflationary the people which in turn may increase the
gap the government may decrease the taxes. Aggregate Demand in the economy to bring
This may increase the purchasing power in it equal to the Aggregate Supply.



UNIT – IV: GOVERNMENT BUDGET

AND THE ECONOMY
CHAPTER-5
GOVERNMENT BUDGET AND THE ECONOMY
(iii) Redistribution of income and property
Revision Notes (iv) Economic stability
 Budget : Budget is a financial statement showing the (v) Generation of employment
expected receipts and expenditures of Government for (vi) Management of public enterprises
the coming fiscal or financial year. It is a constitutional  Components of Government Budget:
requirement in India (Article 112).  Revenue Budget: It shows revenue receipts and
 Objectives of Government Budget:
revenue expenditures of the government related to the
current financial year only.
(i) Encouragement to economic development
 Revenue Receipts: (a) Which do not cause any
(ii) Balanced regional development reduction in assets; and (b) Which do not create any
 Oswaal CBSE Revision Notes Chapterwise & Topicwise, ECONOMICS, Class-XII 11
corresponding liability to the government. Example:  Capital Expenditure: It is the expenditure by the
Tax receipts of the government. government which:
 Tax: It is a compulsory contribution by an individual,
(i) Causes increase in government assets; and
household or a firm to the government without
receiving anything in return directly. Government uses (ii) Causes reduction in government liability.
these receipts for social and development work.  Budget Deficit: It is the excess of total estimated
 Direct Tax: When Government imposes a tax on a expenditure over total estimated receipt.
person and it is paid by the same person it is called
direct tax. Its burden cannot be shifted to others. For (i) Revenue Deficit: Revenue Expenditure – Revenue
example: Income Tax, Property Tax. Receipts.
 Indirect Tax: It is a tax on goods and services. It is to (ii) Fiscal Deficit: [Revenue Expenditure + Capital
be initially paid by the producers / traders but its final Expenditure] – [Revenue Receipts + Capital Receipts
burden can be passed on to the final buyers by way of
(other than government borrowings)].
inclusion or increase in price of the taxed commodity.
GST or VAT is an example of it.  Primary Deficit: By deducting interest payment from
 Non-Tax Receipts: Non-Tax Receipts are those receipts fiscal deficit, we get a primary deficit.
which are received from sources other than taxes, e.g., Primary Deficit = Fiscal Deficit – Interest Payment
Fees, Fines, Escheats, Grants / Donations, etc.
 Types of Budgets
 Revenue Expenditure: It is the expenditure by the
government that is related to the current financial year. (i) Balanced Budget: Total Expenditure = Total Revenue
These expenses: (ii) Deficit Budget: Total Expenditure > Total Revenue
(i) Do not cause increase in government assets, and;
(ii) Do not cause any reduction in government liability. AMAZING FACT
  Capital Budget: It shows capital receipts and capital The government can have a fiscal deficit but a
expenditure of the government. revenue surplus.
 Capital Receipts: (a) Which create corresponding
liability for the government. Example: Loans by the (iii) Surplus Budget: Total Anticipated Expenditure <
Government; and (b) Which cause reduction in assets of
Total Anticipated Revenue
the government. Example: Disinvestment. [Board 2020]
 Measures to Correct Different Deficit:
MNEMONICS (i) Raising government revenue
(i) C
 oncept: Objective of Government Budget: (ii) Monetary Expansion or Deficit Financing
Mnemonics: Encourage by Role Empower More Goal
(iii) Borrowing from general public
E: Encouragement to economic development
B: Balance Regional development (iv) Disinvestment
R: Redistribution of income and property (v) Lowering government expenditure
E: Economic stability.
M: Management of public enterprises KEY TERMS
G: Generation of employment Economic Development: Economic Development is a
(ii) C
 oncept: Measures to correct Different deficits comprehensive concept including increasing real per
Mnemonics: Radio Master Booked Dancing Luis capita income of a country over a long period of time along
R: Raising government revenue with reduction in poverty, inequality and unemployment.
M: Monetary Expansion or Deficit Financing
B: Borrowing from general public Disinvestment: Disinvestment is the process of the selling
D: Disinvestment of the shares of the public sector units by the government
L: Lowering government expenditure to the private enterprises or individual.

EXAMPLE 1
(a) What is the revenue deficit?
Items Amount is ` Crore
Solution:
Capital Expenditure 1,000
Revenue Deficit = Revenue Expenditure –
Revenue Expenditure 1,200 Revenue Receipts
Tax Receipts 700 = 1,200 – (7,00 + 4,00) = `100 crore
Non Tax Receipts 400 (b) What is the fiscal deficit?

Interest Payment 100 Solution:

Long Term Borrowings 150 Fiscal Deficit =

[Revenue Expenditure + Capital Expenditure] –
Capital Receipts including 1,000 [Revenue Receipts + Capital Receipts]
Long Term Borrowings
(other than government borrowings)
12 Oswaal CBSE Revision Notes Chapterwise & Topicwise, ECONOMICS, Class-XII

EXAMPLE 1
= [1,200 + 1,000] – [1,100 + 1,000 – 150] (c) What is the Primary deficit?
Solution:
= 2,200 – 1,950
Primary Deficit = Fiscal Deficit – Interest Pay-
= `250 crore ment = 250 – 100
= `150 crore



UNIT – V: BALANCE OF PAYMENTS

CHAPTER-6
BALANCE OF PAYMENTS
of such transactions then there is a deficit in Balance of
Revision Notes Payment.
 Balance of Payments: The Balance of Payments (BOP)  Causes of Disequilibrium of Balance of Payments:
records the transactions of goods, services and assets (i) Natural Causes: (a) Natural calamities; (b) Any
between residents of a country with rest of the world disease spreads
for a specified time period (a year).
(ii) Economic Factors: (a) Development activities; (b)
 Components of BOP (Balance of Payments) Account: High rate of inflation; (c) Trade cycle; (d) Change in
The transactions entering into the balance of payments cost structure of trading partners; (e) Development of
account can be grouped under three broad accounts: import substitutes.
(i) Current Account (iii) Political Factors: (a) Political stability; (b) Political
(ii) Capital Account [Board, 2023] influence on foreign trade
(iii) Official International Reserve Account (iv) Social Factors: (a) Demonstration effect; (b) Change in
 Current Account: Transactions related to trade in goods tastes and preferences; (c) Cross border prejudices
and services and transfer of payments constitute the
current account which do not cause a change in assets EXAMPLE 1
or liabilities status of a country or its government.
 Items of Current Account: The balance of trade shows a deficit of ` 5,000 crores
and the value of imports are ` 9,000 crores. What is the
(i) Merchandise Account
value of exports?
(ii) Invisible items
Solution: Balance of Trade= - ` 5,000 crores
(iii) Unilateral transfers
Value of Imports = ` 9,000 crores
 Capital Account: Capital account represents
Balance of Trade (Deficit) =Value of Exports – Imports
international capital transactions which include sale
and purchase of assets such as bonds, equities, lands, Value of Exports = Balance of Trade(Deficit) + Imports
loans, bank accounts, etc., which cause a change in = - ` 5,000 crores + ` 9,000 crores = ` 4,000 crores
assets and liabilities status of country or its government.
 Balance of Payments is always balanced: The equality MNEMONICS
of both sides of balance of payments is only accounting Concept: Components of Balance of Payments
equality, not the real equality. Mnemonics: Chief Coordinating Officer
 Balancing Items of Balance of Payments: (i) The official C: Current Account
settlements account, and (ii) Errors and Omissions. C: Capital Account
 Surplus Balance of Payment: When the total inflow of O: Official International Reserve Account
foreign exchange on account of autonomous transaction Concept: Items of Current Account
are more than the total outflows on account of such Mnemonics: Modern Indian Unit
transactions then there is a surplus Balance of Payment M: Merchandise account
 Deficit of Balance of Payment Account: When total I: Invisible items
inflows of foreign exchange on account of autonomous U: Unilateral transfers
transactions are less than the total outflows on account
 Oswaal CBSE Revision Notes Chapterwise & Topicwise, ECONOMICS, Class-XII 13

KEY TERMS KEY TERMS

Accommodating items refers to transactions that take
Autonomous transactions: Autonomous items are those
items of balance of payments which are related to such place because of other activities in Balance of Payments.
transactions as are determined by the motive of profit Unilateral transfers: Transfer of goods or services from
maximisation and not to maintain equilibrium in Balance one country to another without receiving anything in
of Payments. return, e.g., foreign aid.
Accommodating Items: Refers to all the items related
to the monetary transfers (or official reserve
transactions), correcting balance of payments disequilibrium. 

CHAPTER-7
FOREIGN EXCHANGE RATE
to the rate at which one unit of the currency of a
Revision Notes country can be exchanged for the number of units of
 Foreign Exchange Rate: Foreign exchange rate refers the currency of another country.
SYSTEM OF EXCHANGE
EXCHANGE RATE
RATE

Fixed Exchange Rate Managed Floating Flexible Exchange Rate

Exchange Rate

 Types of Foreign Exchange Rates:  Ensures stability in exchange rate

(i) Fixed Exchange Rate: When the Central Governmnet  Helpful to check inflation
of a country fixes (or pegs) the value of exchange rate, Demerits of Fixed Exchange Rates:
it is called Fixed Exchange Rate System or Pegged  Neglects National interest
Exchange Rate System.  Control over various sectors
(ii) Flexible Exchange Rate System: The system of  High fluctuation in exchange rates
exchange rate in which value of a currency is allowed  Intervention of Central Bank
to adjust freely or to float as determined by the demand Merits of Flexible Exchange Rate System:
for and supply of foreign exchange is called Flexible  Simple system
Exchange Rate System.  Continuous adjustment
(iii) Managed Floating System: It is a system in which  Lesser requirement of reserve funds
the Central Bank allows the exchange rate to be  Efficient utilization of resources
determined by market forces but intervenes at times Demerits of Flexible Exchange Rate System:
to influence the rate. When Central Bank finds the  Bad effects of less elasticity
rate is too high, it starts selling foreign exchange from  Creates uncertainty
its reserve to bring it down. When it finds that the rate  Instability in international trade [Board, 2023]
is too low, it starts buying to raise the rate. Merits of Managed Floating Exchange Rate:
AMAZING FACT  Improved Balance of Payment
Bretten Woods Conference that happened in 1944,  Reduced risk of inflation and deflation
 Balances the Economy
pegged the value of gold in terms of US dollars and
 Long-term Growth Potential
made all foreign transactions to be done in terms of
Demerits of Managed Floating Exchange Rate:
dollar instead of gold.
 Large forex reserves need to be maintained
Merits of Fixed Exchange Rate:  Speculation
 Promotion of international trade  Conflict with macroeconomic objectives.
 Incentives of foreign capital  Determination of Flexible Exchange Rate/Demand

 Acceleration in capital formation and Supply theory of exchange rate/ determination
 Economic planning of Equilibrium Rate of Exchange: Exchange rate is
 Source of economic benefit determined by the interaction of demand and supply
 Helpful in maintaining favourable Balance of Payments in foreign exchange market.
14 Oswaal CBSE Revision Notes Chapterwise & Topicwise, ECONOMICS, Class-XII

The demand for Foreign Exchange is created due to

the following purposes :
(i) To purchase goods and services from the rest of
world.
(ii) To purchase financial assets (i.e., to invest in bonds and
equity shares) in a foreign country.
(iii) To invest directly in shops, factories, buildings in
foreign countries.
(iv) To send gifts and grants abroad.
(v) To speculate on the value of foreign currency.
(vi) To undertake foreign tours.
 The supply of foreign exchange has positive relation
with foreign exchange rate. If foreign exchange rate
Inverse Relationship:
rises, the supply of foreign exchange rate also rises and
High rate of exchange – Low demand for Forex
Low exchange Rate – Increased demand for Forex vice versa.
Direct Relationship: Sources of Supply of Foreign Exchange:
High Exchange Rate – Increased supply of Forex (i) Direct purchase by foreigners in domestic market.
Low Exchange Rate – Decreasing Supply of Forex (ii) Direct investment by foreigners in domestic market.
 Reasons for the Demand of Foreign Exchange: The (iii) Remittance by non-residents living abroad.
demand of foreign exchange has inverse relation with (iv) Flow of foreign exchange due to speculative
flexible exchange rate. If flexible exchange rates rise, purchases by N.R.I.
the demand of foreign exchange falls and vice versa. (v) Export of goods and services.


PART – B: INDIAN ECONOMIC DEVELOPMENT

UNIT – VI: DEVELOPMENT EXPERIENCE (1947-90)
AND
ECONOMIC REFORMS SINCE 1991
CHAPTER-8
DEVELOPMENT EXPERIENCE (1947-90) AND
ECONOMIC REFORMS SINCE 1991

TOPIC-1 Indian Economy on the Eve of Independence

Concepts Covered
 Indian Economy at the time of independence,  Occupational Structure,  Sectoral contribution.

Change in Tenurial system and Commercialisation of

Revision Notes agriculture:
 The objective of policies adopted by the colonial Change in System and Tenure: (i) Permanent settlement
government was to export raw material from India and or Zamindari system, (ii) Ryotwari system, and (iii)
import manufactured goods from England.[Board, 2020] Mahalwari system.
First scientific estimate was made by V.K.R.V. Rao in Commercialisation of Agriculture: Main causes were:
(i) Industrial revolution (ii) Commercial policy of
1931-32 during colonial rule.
British Government, (iii) Increase in foreign trade, (iv)
 Agriculture sector on the Eve of Independence: Indian
Payment of Land Revenue in cash, (v) Use of money,
economy under the British colonial rule remained (vi) Development of the means of transportation and
fundamentally agrarian. The main causes of stagnation communication, (vii) Expansion of the agricultural
of agricultural sector were as follows: market, (viii) High price of cash crops. [Board 2018]