Important Formulas in Macroeconomics | Class 12

Last Updated : 06 Apr, 2023

Chapter: Introduction

1. Net Investment

Net Investment = Gross Investment – Depreciation

2. Net Indirect Tax

Net Indirect Tax = Indirect Taxes – Subsidies

3. Market Price

Market Price = Factor Cost + Net Indirect Taxes

= Factor Cost + (Indirect Taxes – Subsidies)

4. Net factor Income from Abroad (NFIA)

Net Factor Income from Abroad = Factor income earned from abroad – Factor income paid abroad

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

5. National Income (using NFIA)

National Income = Domestic Income + NFIA

7. Leakages in Different Types of Economies

Leakages in Different Types of Economies
Two-Sector Economy (with Financial Market)	Savings
Two-Sector Economy (without Financial Market)	No Leakages
Three-Sector Economy	Savings + Taxes
Four-Sector Economy	Savings + Taxes + Imports

8. Injections in Different Types of Economies

Injections in Different Types of Economies
Two-Sector Economy (with Financial Market)	Investment
Two-Sector Economy (without Financial Market)	No Injection
Three-Sector Economy	Investment + Government Expenditure
Four-Sector Economy	Investment + Government Expenditure + Exports

Chapter: National Income Accounting

1. National Income and Related Aggregates

Gross Domestic Product at Factor Cost (GDP_FC)

GDP_FC = GDP_MP – Net Indirect Taxes

Net Domestic Product at Market Price (NDP_MP)

NDP_MP = GDP_MP – Depreciation

Net Domestic Product at Factor Cost (NDP_FC) or Domestic Income

NDP_FC = GDP_MP – Net Indirect Taxes – Depreciation

Gross National Product at Market Price (GNP_MP)

GNP_MP = GDP_MP + Net Factor Income from Abroad

Gross National Product at Factor Cost (GNP_FC)

GNP_FC = GNP_MP – Net Indirect Taxes

Net National Product at Market Price (NNP_MP)

NNP_MP = GNP_MP – Depreciation

Net National Product at Factor Cost (NNP_FC) or National Income

NNP_FC = 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

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

= 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 Disposable Income = Personal Income – Personal Taxes Miscellaneous Receipts of Government

= Personal Consumption Expenditure + Personal Savings

5. National Disposable Income

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

= National Consumption Expenditure + National Savings

6. Gross National Disposable Income

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 Added = Value of Output – Intermediate Consumption

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

Value of Output = 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

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

National Income using Value Added Method

National Income or NNP_FC = GDP_MP – Depreciation – Net Indirect Taxes + NFIA

= 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)

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

Government Final Consumption Expenditure (GFCE)

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)

GDFC = Gross Fixed Capital formation + Inventory Investment
or

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

Net Exports (X – M)

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

National Income using Expenditure Method

National Income or NNP_FC = ∑Final Expenditure or GDP_MP – Depreciation – Indirect taxes + NFIA

= Domestic Income or NDP_FC + NFIA

9. Income Method of calculating National Income

Profit

Profit = Corporate Tax + Dividend + Retained Earnings

Operating Surplus

Operating Surplus = Rent + Royalty + Interest + Profit

= 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

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

Chapter: Money and Banking

1. Measures of Money Supply

M₁

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

M₂

M₂ = M₁ + Savings Deposits with Post Office Saving Bank

M₃

M₃ = M₁ + Net Time Deposits with Banks

M₄

M₄ = M₃ + Total Deposits with Post Office Saving Bank

2. Money Multiplier

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

Chapter: Determination of Income and Employment

1. Aggregate Demand

Aggregate Demand (AD) = C + I + G + (X – M)

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

2. Aggregate Supply

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

Value	APC	APS	MPC	MPS
Negative (less than zero)	APC can never be less than zero, because of the presence of $\bar{c}$	APS can be less than zero when C>Y; i.e., before Break-even Point.	MPC can never be less than zero, as $\Delta{S}$ can never be more than $\Delta{Y}$	MPS can never be less than zero, as $\Delta{C}$ can never be more than $\Delta{Y}$
Zero	APC can never be zero, because of the presence of $\bar{c}$	APS can be zero when C=Y; i.e., at Break-even Point.	MPC can never be zero, when $\Delta{S}=\Delta{Y}$	MPS can never be zero, when $\Delta{C}=\Delta{Y}$
One	APC can be one when C=Y; i.e., at BEP	APS can never by one as savings can never be equal to income	MPC can never be zero, when $\Delta{C}=\Delta{Y}$	MPS can never be zero, when $\Delta{S}=\Delta{Y}$
More than One	APC can be more than one when C>Y; i.e., before Break-even Point.	APS can never be more than one as savings can never be more than income	MPC can never be less than zero, as $\Delta{C}$ can never be more than $\Delta{Y}$	MPS can never be less than zero, as $\Delta{S}$ can never be more than $\Delta{Y}$