Introduction to Macroeconomics and National Income
Macroeconomics studies the economy as a whole. The exam tests the circular flow, the national income aggregates and the three methods of measurement.
Core rules
- Circular flow of income between households and firms; injections (investment, government spending, exports) and leakages (saving, taxes, imports).
- GDP = value of final goods and services produced within the domestic territory in a year. GNP = GDP + net factor income from abroad (NFIA).
- NNP = GNP − depreciation. From market price to factor cost: subtract indirect taxes, add subsidies.
- Nominal vs real GDP: real GDP is measured at constant prices, removing price effects.
- Methods: output/product method (count value added, avoid double counting), income method, expenditure method (C + I + G + X − M).
Worked example
GDP at market price = ₹1,000 crore; NFIA = −₹50 crore; depreciation = ₹100 crore; indirect taxes = ₹80 crore; subsidies = ₹30 crore. GNPmp = 1,000 + (−50) = ₹950 crore. NNPmp = 950 − 100 = ₹850 crore. NNPfc (national income) = 850 − 80 + 30 = ₹800 crore.
Traps that cost marks
- Counting intermediate goods or second-hand sales, which create double counting.
- Treating transfer payments such as pensions and scholarships as national income; they add no current output.
- Mixing up GDP and GNP when factor income crosses borders.
- Forgetting to subtract depreciation when moving from gross to net, or to adjust for indirect taxes and subsidies when moving to factor cost.