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ISC Class XII Notes 2024 : Economics (Jamnabai Narsee School (JNS), Mumbai) : Notes

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Prathham Ahuja
Jamnabai Narsee School (JNS), Mumbai

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ECONOMICS CHAPTER 18: NATIONAL INCOME AND CIRCULAR FLOW OF INCOME Class: 12(ISC) 2023-2024 National Income: National Income is defined as the money value of all final goods and services produced by normal residents of a country, whether operating within the domestic territory of the country or outside in a year. Its important aspects are: I. It is a monetary expression. The output of different goods and services is valued at market prices and the values are added together to get national income. Thus, it is the sum of monetary value of all goods and services produced. II. It is the sum of all final goods and services which are sold to final consumers during the year. Intermediate products are to be excluded. III. National income accounts for the current year s output. Any goods and services produced in any previous year and transacted this year as resale should be excluded. IV. Transfer payments or any type of unilateral transfer of money should also be excluded as such payments lead to no contribution. V. National Income is a flow concept which is measured over a period of time. Final products: Final products are those goods and services which are sold to the final users during the year. These goods and services are purchased for final consumers and for investment by producers, and not for resale. All consumer goods and services eg. Food items, refrigerators etc. are final goods. Producer goods which help in the production of other goods in future like machines, buildings etc. Intermediate products Intermediate products are those goods and services which are used by the producers as inputs into a further stage of production also known as non-factor inputs, e.g. seeds, fertilisers purchased by farmers are intermediate products. Double Counting Error Double counting is the error which arises in national income estimation if we add up the total output of all the sectors in the economy, instead of adding up the output of final goods and services only. The problem can be solved by taking the value of final goods and services only. Transfer payments are unilateral payments for which no productive services are rendered in return in the current period. The recipients of these transfer payments do not make any contribution to current production in return for these payments for e.g. old-age pension from government to its employees without any output being produced in the current year. Normal Resident: Normal residents are those persons who ordinarily reside in a country in which they live and whose economic interest lies in that country. It includes nationals as well as foreign nationals. 1

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