Class 12 Macroeconomics — Formula Sheet

I = Investment; S = Saving. In a closed economy with only households and firms, planned investment must equal planned saving at equilibrium.

Adds government to the two-sector model. G = Government Expenditure (an injection); T = Taxes (a leakage). Closed economy with no foreign trade.

Total injections equal total leakages. X = Exports (an injection); M = Imports (a leakage). Open economy.

Injections add new income flow not from household consumption. Leakages remove income from the consumption flow. At equilibrium they are equal.

A good is not inherently intermediate or final — flour is intermediate if used by a baker, final if bought by a household. Only final goods appear in the Expenditure Method; the Value Added Method avoids double counting automatically.

GDP, GNP, NI = Flows (annual totals). Capital stock, money supply, forex reserves = Stocks. A flow is the rate of change of a related stock. Knowing this distinction is essential for CBSE 1-mark questions.

Domestic Territory is an economic concept (wider than geographic). GDP counts all production within domestic territory regardless of who produces it. Normal Resident: person whose centre of economic interest is in India; stay ≥ 1 year.

NFIA = Net Factor Income from Abroad = Factor income earned by residents abroad − Factor income earned by non-residents in India. MP = Market Price.

NFIA splits into three components. Each is computed as (income earned by residents abroad − income earned by non-residents in India) for that category.

Depreciation = Consumption of Fixed Capital (CFC), the wear and tear of fixed capital assets during the year.

Gross Investment includes replacement of worn-out capital; Net Investment is the genuine addition to the capital stock.

NIT = Net Indirect Taxes. FC = Factor Cost. Same NIT adjustment converts any MP aggregate to its FC counterpart.

Income earned within the domestic territory (regardless of who earns it).

NI = National Income = Net National Product at Factor Cost. The cleanest identity is Domestic Income (NDP at FC) plus NFIA.

Total income accruing to the private sector from all sources. Distinct from National Income (which includes public-sector income too).

PI = Personal Income — income actually received by households before personal taxes. Equivalently: PI = NI − Corporate retained earnings − Corporate tax + Transfer payments to households.

DPI = income households can actually spend or save. Miscellaneous receipts = fees, fines etc. paid by households to government.

NDI represents the total disposable income of the country. It includes net unilateral transfers from abroad on top of national product.

Average income per person. Real Per Capita Income strips out price changes for genuine standard-of-living comparisons.

Nominal GDP = GDP at current year prices; Real GDP = GDP at base year prices; Price Index = current price index with base = 100.

A price index covering all goods and services in GDP. Measures average price change in the economy.

C = Private Final Consumption Expenditure (PFCE); I = Gross Domestic Capital Formation; G = Government Final Consumption Expenditure (GFCE); X − M = Net Exports.

Each adds a sector. Two-sector = households + firms only; three-sector adds government; four-sector adds foreign trade.

Exports of goods AND services minus imports of goods AND services. Distinct from Balance of Trade (which covers only goods).

GDCF = total gross investment in the economy. Net Domestic Capital Formation is the genuine addition to capital stock after replacing worn-out capital.

Sum of factor incomes earned within domestic territory. Adding NFIA gives National Income.

Total payment to labour from production. Includes both cash compensation and in-kind benefits (food, housing, etc.).

Sum of property and entrepreneurship incomes. Excludes mixed income (which is treated separately).

Profit before corporate tax = Dividends paid to shareholders + Profits retained by company + Corporate tax paid to government.

After computing NDP(FC) by summing factor incomes domestically, add Net Factor Income from Abroad to get National Income.

GVA = Gross Value Added; NVA = Net Value Added. The chain converts gross-at-MP value-added into net-at-FC. Sum across all units gives GDP(MP) — avoids double counting.

Output is what is produced in the year, whether sold or stockpiled. Change in Stock can be positive (stock added) or negative (stock drawn down).

Standard CBSE precautions list. None of these represent new production within the accounting period.

M = Money supply; V = Velocity of circulation (number of times each unit changes hands); P = General price level; T = Total volume of transactions. Fisher assumes V and T are constant in the short run.

If M doubles (with V, T constant), P doubles — the basis of the Quantity Theory of Money.

Most liquid measure of money supply in India. Currency with public excludes cash held by banks themselves.

M1 plus savings deposits held with post-office savings banks. M1 and M2 together are classified as narrow money.

Most commonly cited measure of money supply in India. Time deposits are fixed deposits with a maturity period.

Broadest measure of money supply. NSC = National Savings Certificate. M3 and M4 together are classified as broad money.

M1 is the most liquid but smallest in size; M4 is the least liquid but largest in size. Each successive aggregate adds less-liquid components.

H = High-Powered Money (also called Monetary Base or Reserve Money). It is the total currency issued by the RBI plus bank reserves held with the RBI. It forms the base on which the money supply is built.

M = Money Supply (typically M1 or M3); m = Money Multiplier; H = High-Powered Money. Since m > 1, money supply is a multiple of high-powered money.

k = Money (Credit) Multiplier; LRR = Legal Reserve Ratio (the fraction of deposits banks must keep as reserves). Lower LRR → higher multiplier.

cdr = Currency-Deposit Ratio (Currency held by public ÷ Deposits); rdr = Reserve-Deposit Ratio (Bank reserves ÷ Deposits). Used when public also holds part of money as currency, not just deposits.

If LRR = 20%, an initial deposit of ₹1,000 generates total deposits of ₹5,000 in the banking system through successive lending.

The new loans (credit) created by the banking system equals total deposits minus the original primary deposit. With LRR = 20%, a ₹1,000 initial deposit creates ₹4,000 of new loans (and ₹5,000 of total deposits).

CRR = Cash Reserve Ratio (cash with RBI); SLR = Statutory Liquidity Ratio (liquid assets within the bank — cash, gold, approved govt securities). Both are RBI policy tools.

A qualitative monetary policy tool. Higher margin → smaller loan against the same collateral → tighter credit. Lower margin → larger loan → easier credit.

Repo Rate = rate at which RBI lends short-term to banks against collateral; Reverse Repo = rate at which RBI borrows from banks; Bank Rate = long-term lending without collateral; OMO = Open Market Operations (RBI buys/sells government securities); MSF = Marginal Standing Facility (overnight emergency lending to banks).

Total planned expenditure at a given income level. Each form adds a sector. CBSE asks which form fits a given economy.

Aggregate Supply equals total income generated in production. In the Keynesian 45° diagram, AS is the 45° line — every point shows where output equals income.

Total income equals consumption plus saving (two-sector with no taxes). With taxes: Y = C + S + T.

a = Autonomous consumption (consumption when Y = 0, financed by dissaving); b = MPC (Marginal Propensity to Consume); Y = National Income.

Derived from Y = C + S. (1 − b) = MPS (Marginal Propensity to Save). At Y = 0, S = −a (dissaving equal to autonomous consumption).

The income level at which households consume exactly all their income — no saving, no dissaving. Below break-even: Y < C, S < 0, APC > 1. Above break-even: Y > C, S > 0, APC < 1.

APC > 1 below break-even (dissaving). APC = 1 at break-even. APC < 1 above break-even. APS mirror image — can be negative at low income.

Both lie between 0 and 1 (inclusive at limits). Δ denotes change in. Keynesian theory typically assumes 0 < MPC < 1.

Since income is either consumed or saved, the propensities (both average and marginal) must sum to 1.

Marginal propensities are bounded by [0, 1]. Average propensities are not — APC can exceed 1 and APS can be negative when consumption exceeds income.

K = Investment Multiplier — the ratio of total change in income to the initial change in autonomous investment. Higher MPC → larger multiplier.

ΔY = Change in equilibrium income; ΔI = Change in autonomous investment.

The multiplier is at least 1 (the original investment itself counts). It approaches infinity if MPC = 1 (all extra income is re-spent). In practice, 0 < MPC < 1 so K is finite and greater than 1.

Solved by substituting the consumption function into Y = C + I and rearranging. I here is autonomous investment (independent of income).

Equilibrium occurs where planned aggregate demand equals planned aggregate supply, equivalently where planned saving equals planned investment.

Keynes' insight: individually rational saving is collectively self-defeating in an underemployment economy. Higher saving propensity reduces consumption → lowers AD → lowers income → lower actual saving. Applies only when there are idle resources.

Y_FE = Full-employment level of income. Keynes argued the economy can stay at underemployment equilibrium without self-correcting — hence the case for government intervention.

Excess of actual aggregate demand over the AD needed for full employment. Output cannot rise beyond full employment, so excess demand causes demand-pull inflation.

Shortfall of actual aggregate demand below the AD needed for full employment. Causes recession and unemployment.

The two gaps are linked by the multiplier. To close an income gap of ΔY at full employment, AD must change by ΔY × MPS (which the multiplier 1/MPS will then scale back up to ΔY).

Contractionary policy. Withdraws money from the economy, reduces credit, lowers AD towards full-employment level.

Expansionary policy. Injects money, expands credit, raises AD towards full-employment level.

Receipts that do not create a liability or reduce an asset. Tax Revenue = Direct Tax + Indirect Tax. Non-Tax Revenue = interest receipts, profits/dividends from PSUs, fees, fines, grants.

Direct tax: incidence and impact fall on the same person (cannot be shifted). Indirect tax: incidence and impact fall on different persons (can be shifted).

Receipts that either create a liability (borrowings) or reduce an asset (disinvestment of PSU shares; recovery of loans given by government). All three are capital-account items.

Examples of revenue expenditure: salaries, interest payments, subsidies, pensions. Examples of capital expenditure: roads, dams, buildings (asset creation); repayment of debt principal (liability reduction).

Most modern governments run a deficit budget for stimulus and development. A surplus budget is contractionary; a balanced budget is neutral.

Arises when revenue expenditure exceeds revenue receipts. Indicates the government is borrowing to meet day-to-day operational expenses — a sign of fiscal stress.

The budget is the government's primary instrument of fiscal policy. CBSE board-tested objectives — not formulas, but standard reference.

The simplest deficit measure (officially retired in 1997-98 but still defined in syllabus). Captures the gap between all government spending and all receipts.

Introduced in 2011-12. Excludes grants given to states for asset creation, since these effectively become capital expenditure at the state level. A truer measure of revenue stress.

The total borrowing requirement of the government for the year. Non-debt Capital Receipts = Recovery of Loans + Disinvestment proceeds (capital receipts that don't create new debt).

An accounting identity. The fiscal deficit equals the additional borrowing the government must do to fund the gap. This includes borrowings from RBI, the public, banks, and abroad.

Strips out the interest burden of past debt. PD = 0 means borrowing only to service past debt; PD > 0 means new fiscal expansion; PD < 0 (primary surplus) means revenues cover spending and partially service debt.

Fiscal Deficit covers the entire budget; Revenue Deficit covers only the revenue account. The gap = Capital Expenditure − Non-debt Capital Receipts.

Borrowing from RBI directly increases money supply (inflationary). External borrowing creates currency-risk. Public borrowing is the most common method but causes crowding out of private investment.

Convention used here: e rises ⇒ rupee weakens (depreciation/devaluation); e falls ⇒ rupee strengthens (appreciation/revaluation).

India operates a managed float. A fixed-rate system requires large forex reserves; a flexible system has no reserve requirement but creates volatility.

Both raise e. Both make exports cheaper for foreign buyers and imports costlier for domestic buyers. Difference is mechanism: market force vs government decision.

Both lower e. Both make exports costlier for foreign buyers and imports cheaper for domestic buyers.

Under a floating rate, the equilibrium exchange rate e* is where the demand curve for foreign exchange intersects the supply curve. Demand slopes downward; supply slopes upward.

All transactions where Indian residents need foreign currency to pay non-residents. Demand curve slopes downward — cheaper forex (stronger rupee) means more imports.

All transactions where non-residents need Indian rupees and supply foreign currency. Supply curve slopes upward — more expensive forex (weaker rupee) means more exports.

Absolute PPP: long-run equilibrium exchange rate equals the ratio of price levels. If domestic inflation exceeds foreign inflation, the rupee should depreciate. PPP holds in the long run for tradable goods only.

Adjusts the nominal exchange rate (e) for differences in price levels. Used to compare actual purchasing power across countries.

Forward markets help hedge against exchange-rate risk. Premium = Forward > Spot; Discount = Forward < Spot.

Visible items appear in the customs records (you can "see" them at the border). Invisible items are services and intangible flows.

Covers only merchandise (visible) trade. Trade Surplus / Favourable BoT: BoT > 0. Trade Deficit / Unfavourable BoT: BoT < 0.

Sum of the trade balance, net invisibles, and net unilateral transfers (remittances, gifts, foreign aid).

Records all transactions that change asset/liability position with the rest of the world. FDI = Foreign Direct Investment (long-term, with control). FII = Foreign Institutional Investment (portfolio, short-term).

A surplus on capital account typically finances a deficit on current account.

BoP surplus or deficit is measured only on autonomous transactions. Accommodating transactions then balance the books.

A surplus adds to official foreign exchange reserves; a deficit draws them down.

Through double-entry bookkeeping, the overall BoP always balances. Errors & Omissions captures statistical discrepancies. The autonomous-vs-accommodating distinction is what reveals whether the country is in BoP surplus or deficit.

BoP is far broader and more comprehensive than BoT. Most countries with a trade deficit can still finance it through capital inflows on the BoP.