Important Formulas in Macroeconomics | Class 12

Chapter 1: Introduction

1. Net Investment= Gross Investment – Depreciation

2. Net Indirect Tax = Indirect Taxes - Subsidies

3.  Market Price= Market Price = Factor Cost + Net Indirect Taxes

OR

Factor Cost + (Indirect Taxes - Subsidies)

4. Net factor Income from Abroad (NFIA)= Factor income earned from abroad – Factor income paid abroad

OR

Net Compensation of Employees + Net Income from Property and Entrepreneurship + Net Retained Earnings

5. National Income (using NFIA) = Domestic Income + NFIA

6. Depreciation = Gross Value - Net Value

7. Leakagesin Different Types of Economies

8. Injections in Different Types of Economies

Chapter 2 : National Income Accounting

1. National Income and Related Aggregates

• Gross Domestic Product at Factor Cost (GDP_FC) = GDP_MP – Net Indirect Taxes

• Net Domestic Product at Market Price (NDP_MP) = GDP_MP – Depreciation

• Net Domestic Product at Factor Cost (NDP_FC) or Domestic Income = GDP_MP – Net Indirect Taxes – Depreciation

• Gross National Product at Market Price (GNP_MP) = GDP_MP + Net Factor Income from Abroad

• Gross National Product at Factor Cost (GNP_FC) = GNP_MP – Net Indirect Taxes

• Net National Product at Market Price (NNP_MP) = GNP_MP – Depreciation

• Net National Product at Factor Cost (NNP_FC) or National Income = GNP_MP – Net Indirect Taxes – Depreciation

2. Domestic Income 

Income from Domestic Product accruing to Private Sector = NDP_FC - Income from Property and Entrepreneurship accruing to Government Administrative Departments - Savings of Non-Departmental Enterprises

3. Private Income = Factor Income earned (within domestic territory + from rest of the world) + Transfer Income received (within domestic territory + from rest of the world)

OR

= Income from Domestic Product Accruing to Private Sector + NFIA + Interest on National Debt + Current Transfers from Government + Net Current Transfer from Rest of the World

4.Personal Disposable Income = Personal Income - Personal Taxes Miscellaneous Receipts of Government

OR

= Personal Consumption Expenditure + Personal Savings

5. National Disposable Income = National Income + Net Indirect Taxes + Net Current Transfers from the rest of the world

OR

= National Consumption Expenditure + National Savings

6. Gross National Disposable Income = Net National Disposable Income + Depreciation

7. Product or Value Added Method of calculating National Income

• GDP_MP using Value Added Method (∑GVA_MP) = GDP_MP

• Value Added = Value of Output – Intermediate Consumption 

• Value of Output when the whole output is sold in a financial year = Sales

• Value of Output when the whole output is not sold in a financial year

Value of Output = Sales + Change in Stock
Change in Stock = Closing Stock – Opening Stock

• Value of Output  = (Quantity × Price) + Change in Stock

• National Income using Value Added Method( NNP_FC) = GDP_MP – Depreciation – Net Indirect Taxes + NFIA

OR

=Domestic Income or NDP_FC + NFIA

8. Expenditure Method of calculating National Income

• GDP_MP using Expenditure Method(GDP_MP) = ∑ Final Expenditure

∑ Final Expenditure = Private Final Consumption Expenditure (PFCE) + Government Final Consumption Expenditure (GFCE) + Gross Domestic Capital Formation (GDCF) + Net Exports (NX)

• Private Final Consumption Expenditure (PFCE) = Household Final Consumption Expenditure + Non-profit Private Institutions Final Consumption Expenditure

• Government Final Consumption Expenditure (GFCE) = Intermediate Consumption of Government + COE paid by Government +Direct purchases from abroad for embassies and consulates located abroad – Sale of goods and services produced by general government

• Gross Domestic Capital Formation (GDCF) = Gross Fixed Capital formation + Inventory Investment
  OR

= Gross Business Fixed Investment + Gross Residential Construction Investment + Gross Public Investment + Inventory Investment

• Net Exports (X – M) = Exports – Imports or (X-M)

• National Income using Expenditure Method (NNP_FC) = ∑Final Expenditure or GDP_MP – Depreciation – Indirect taxes + NFIA

OR

= Domestic Income or NDP_FC + NFIA

9. Income Method of calculating National Income

• Profit = Corporate Tax + Dividend + Retained Earnings

• Operating Surplus = Rent + Royalty + Interest + Profit

OR

= Value of Output – Intermediate Consumption – Compensation of Employees – Mixed Income – Consumption of Fixed Capital – Net Indirect Taxes

• National Income using Income Method(NNP_FC) = NDP_FC + NFIA

Where,

NDP_FC = Compensation of Employees + Profit + Rent & Royalty + Interest + Mixed income

10. National Income at Constant Price

National~Income~at~Constant~Price=\frac{National~Income~at~Current~Price}{Current~Price~Index}\times{100}

11. Nominal GDP or GDP at Current Price

Nominal~GDP=\frac{Real~GDP\times{Price~Index}}{100}

12. Real GDP or GDP at Constant Price

Real~GDP=\frac{Nominal~GDP}{Price~Index}\times100

13. GDP Deflator or Price Index =

GDP~Deflator~(or~Price~Index)=\frac{Nominal~GDP}{Real~GDP}\times100

Chapter 3 : Money and Banking

1. Measures of Money Supply

• M₁  = Currency and coins with public + Demand deposits of commercial banks + Other deposits with Reserve Bank of India

• M₂ = M₁ + Savings Deposits with Post Office Saving Bank 

• M₃ = M₁ + Net Time Deposits with Banks

• M₄ = M₃ + Total Deposits with Post Office Saving Bank

2. Money Multiplier

Money~Multiplier=\frac{1}{LRR}~or~\frac{1}{r}

Chapter 4 : Determination of Income and Employment

1. Aggregate Demand (AD) = C + I + G + (X - M)

= Private Consumption Expenditure + Investment Expenditure + Government Expenditure + Net Exports (Exports - Imports)

2. Aggregate Supply (AS) or National Income (Y) = Consumption (C) + Saving (S)

3. Consumption Function(C) = f(Y)

Where,

C = Consumption

f = Functional Relationship

Y = National Income

4. Average Propensity to Consume (APC)

Average~Propensity~to~Consume~(APC)=\frac{Consumption~(C)}{Income~(Y)}

5. Marginal Propensity to Consumer (MPC)

Marginal~Propensity~to~Consume~(MPC)=\frac{Change~in~Consumption~(\Delta{C})}{Change~in~Income~(\Delta{Y})}

6. Saving Function(S) = f(Y)

Where,

S = Saving

f = Functional Relationship

Y = National Income

7. Average Propensity to Save (APS)

Average~Propensity~to~Save~(APS)=\frac{Saving~(S)}{Income~(Y)}

8. Marginal Propensity to Save (MPS)

Marginal~Propensity~to~Save~(MPS)=\frac{Change~in~Saving~(\Delta{S})}{Change~in~Income~(\Delta{Y})}

9. Relationship between APC ad APS=APC + APS = 1

10. Relationship between MPC and MPS =MPC + MPS = 1

11. Values of APC, APS, MPC, and MPS

12. Equation of Consumption Function

C=\bar{c}+b(Y)

Where, 

C = Consumption

\bar{c}=Autonomous~Consumption   

b = MPC

Y = Income

13. Equation of Saving Function

S=-\bar{c}+(1-b)Y

Where,

S = Saving

-\bar{c}=Amount~of~negative~saving~at~zero~income~level

1-b = MPS

Y = Income

14. Marginal Efficiency of Investment (MEI)

Marginal~Efficiency~of~Investment~(MEI)=\frac{Prospective~Yield}{Supply~Price}\times{100}

15. Two Approaches for Determination of Equilibrium Level

• Aggregate Demand-Aggregate Supply Approach (AD-AS Approach): Equilibrium will be achieved when,

AD = AS

• Saving-Investment Approach (S-I Approach): Equilibrium will be achieved when,

S = I

16. Investment Multiplier

k=\frac{\Delta{Y}}{\Delta{I}}

OR

k=\frac{1}{1-MPC}

OR

k=\frac{1}{MPS}

The maximum value of the Multiplier is ∞ when MPC = 1

The minimum value of Multiplier is 1 when MPC = 0

Chapter 5 : Government Budget and the Economy

1. Measures of Government Deficit

• Revenue Deficit = Revenue Expenditure – Revenue Receipts

• Fiscal Deficit = Total Expenditure – Total Receipts (except borrowings)

OR

= (Revenue Expenditure + Capital Expenditure) – (Revenue Receipts + Capital Receipts excluding Borrowings)

OR

= (Revenue Expenditure – Revenue Receipts) + (Capital Expenditure – Capital Receipts excluding Borrowings)

OR

= Revenue Deficit + (Capital Expenditure – Capital Receipts excluding Borrowings)

• Primary Deficit = Fiscal Deficit – Interest Payment

Chapter 6 : Balance of Payments

1. Balance of Trade = Exports of Goods – Imports of Goods

2. Balance on Current Account

3. Balance on Capital Account