Tag: UGC NET Economics Notes

NET Economics UNIT 2 – Consumption Function and Investment Function
Introduction

The concepts of Consumption Function and Investment Function are among the most important topics in Macroeconomics, especially in the Keynesian Theory of Income and Employment. These concepts explain how individuals spend their income and how businesses decide to invest in the economy.

According to the British economist John Maynard Keynes, the level of national income, output, and employment in an economy depends largely on Aggregate Demand (AD). Consumption and Investment are the two most important components of Aggregate Demand.

PART I: CONSUMPTION FUNCTION

Meaning of Consumption

Definition

Consumption refers to the expenditure made by households on goods and services for the satisfaction of wants.

In simple words:

Consumption means spending money to buy goods and services for personal use.

Examples
- Buying food
- Paying rent
- Purchasing clothes
- Paying electricity bills
- Spending on education and healthcare
What is Consumption Function?

Definition

The Consumption Function shows the relationship between consumption expenditure and income.

It explains:

How much people spend and how much they save at different levels of income.

Keynes observed that when income increases, consumption also increases, but not by the same proportion.

Consumption Function Equation

The consumption function is represented as:

$C = a + b Y$

Where:
- C = Consumption expenditure
- a = Autonomous Consumption
- b = Marginal Propensity to Consume (MPC)
- Y = Income
Important Terms in Consumption Function

1. Income (Y)

Definition

Income refers to the earnings received by households from various sources.

Examples:
- Salary
- Wages
- Interest
- Rent
- Profit
Income is the main determinant of consumption.

2. Consumption Expenditure (C)

Definition

Consumption expenditure refers to the amount spent by households on goods and services.

Example:

If a person earns ₹50,000 and spends ₹40,000, then:

Consumption = ₹40,000

3. Saving (S)

Definition

Saving is the part of income that is not consumed.

Formula:

$S = Y - C$

Where:
- S = Saving
- Y = Income
- C = Consumption
Example

Income = ₹50,000

Consumption = ₹40,000

Saving = ₹10,000

4. Autonomous Consumption (a)

Definition

Autonomous consumption is the minimum consumption expenditure that occurs even when income is zero.

People still need food, shelter, and basic necessities.

They may borrow money or use past savings.

Example

Even if a person’s income is ₹0, they may spend ₹5,000 on basic needs.

This ₹5,000 is autonomous consumption.

5. Induced Consumption

Definition

Consumption that changes with income is called induced consumption.

As income rises, spending also rises.

Example

Income increases from ₹20,000 to ₹30,000.

Consumption increases from ₹18,000 to ₹24,000.

The additional ₹6,000 is induced consumption.

Keynes’ Psychological Law of Consumption

One of Keynes’ most important ideas is the Psychological Law of Consumption.

Statement

“Men are disposed, as a rule, and on average, to increase their consumption as their income increases, but not by as much as the increase in income.”

Meaning

When income rises:
- Consumption rises.
- Savings also rise.
- Consumption rises less than income.
Example

Income (₹) Consumption (₹)

10,000 9,500

20,000 18,000

30,000 25,000

As income increases by ₹10,000, consumption increases but by less than ₹10,000.

Average Propensity to Consume (APC)

Definition

APC measures the proportion of income spent on consumption.

Formula:

$A P C = \frac{C}{Y}$

Where:
- C = Consumption
- Y = Income
Example

Income = ₹40,000

Consumption = ₹32,000

$A P C = \frac{32000}{40000}$ $A P C = 0.8$

Thus, 80% of income is spent on consumption.

Marginal Propensity to Consume (MPC)

Definition

MPC measures the change in consumption resulting from a change in income.

Formula:

$M P C = \frac{Δ C}{Δ Y}$

Where:
- ΔC = Change in Consumption
- ΔY = Change in Income
Example

Income rises from ₹50,000 to ₹60,000.

Consumption rises from ₹40,000 to ₹48,000.

$M P C = \frac{8000}{10000}$ $M P C = 0.8$

Meaning:

For every additional ₹1 earned, ₹0.80 is spent.

Factors Affecting Consumption Function

Objective Factors

These are external factors.

1. Income Level

Higher income increases consumption.

2. Wealth

More wealth leads to higher spending.

3. Interest Rate

Higher interest rates encourage saving.

4. Taxation

Higher taxes reduce disposable income.

5. Price Level

Higher prices reduce purchasing power.

Subjective Factors

These are psychological motives.

Examples:
- Desire to save
- Future security
- Family responsibilities
- Business motives
PART II: INVESTMENT FUNCTION

Meaning of Investment

Definition

Investment refers to expenditure on the creation of capital assets.

In simple words:

Investment means spending money to increase future production capacity.

Examples
- Building factories
- Purchasing machinery
- Constructing roads
- Building warehouses
- Installing new technology
Investment Function

Definition

The Investment Function shows the relationship between investment and factors influencing investment decisions.

According to Keynes:

Investment depends mainly on the expected profitability of investment and the rate of interest.

Types of Investment

1. Autonomous Investment

Definition

Investment that does not depend on income.

Examples:
- Government infrastructure projects
- Defence expenditure
- Public sector investment
Even if national income changes, such investments continue.

2. Induced Investment

Definition

Investment that depends on income and demand.

When income rises:
- Demand rises.
- Production rises.
- Investment rises.
Determinants of Investment

1. Rate of Interest

Definition

Interest is the cost of borrowing money.

Relationship:
- Higher interest rate → Lower investment.
- Lower interest rate → Higher investment.
Reason

Borrowing becomes cheaper when interest rates are low.

2. Expected Profitability

Definition

Expected profitability refers to the anticipated earnings from an investment project.

Firms invest only if they expect future profits.

Marginal Efficiency of Capital (MEC)

This is one of the most important UGC NET concepts.

Definition

Marginal Efficiency of Capital refers to the expected rate of return from an additional unit of capital.

Keynes defined MEC as:

The rate of discount that equates the present value of expected returns with the supply price of capital.

Simple Meaning

MEC tells us:

How profitable a new investment is expected to be.

Example

A machine costs ₹1,00,000.

Expected annual returns = ₹15,000.

If profitability is high, firms will invest.

Relationship Between MEC and Interest Rate

Investment occurs when:

$M E C > R a t e o f I n t e r e s t$

Example

MEC = 12%

Interest Rate = 8%

Since:

12% > 8%

Investment will take place.

Example 2

MEC = 5%

Interest Rate = 8%

Since:

5% < 8%

Investment will not occur.

Average Propensity to Save (APS)

Definition

APS measures the proportion of income saved.

Formula:

$A P S = \frac{S}{Y}$

Where:
- S = Saving
- Y = Income
Marginal Propensity to Save (MPS)

Definition

MPS measures the proportion of additional income saved.

Formula:

$M P S = \frac{Δ S}{Δ Y}$

Relationship Between MPC and MPS

Since income is either consumed or saved:

$M P C + M P S = 1$

This is an important UGC NET formula.

Importance of Consumption and Investment Functions

1. Determination of National Income

Both consumption and investment determine aggregate demand.

2. Employment Generation

Higher investment creates jobs.

3. Economic Growth

Investment increases productive capacity.

4. Business Cycle Analysis

Fluctuations in investment are a major cause of economic booms and recessions.

UGC NET Important One-Liners

Consumption Function

Relationship between consumption and income.

Autonomous Consumption

Consumption even at zero income.

APC

Consumption divided by income.

MPC

Change in consumption divided by change in income.

Saving

Income minus consumption.

Investment

Addition to capital stock.

Autonomous Investment

Investment independent of income.

Induced Investment

Investment dependent on income.

MEC

Expected profitability of capital.

Keynes’ Psychological Law

Consumption increases with income, but less than proportionately.

Key Formulae

$C = a + b Y$ $S = Y - C$ $A P C = \frac{C}{Y}$ $M P C = \frac{Δ C}{Δ Y}$ $A P S = \frac{S}{Y}$ $M P S = \frac{Δ S}{Δ Y}$ $M P C + M P S = 1$
May 29, 2026

Income (₹)	Consumption (₹)
10,000	9,500
20,000	18,000
30,000	25,000

NET Economics Unit 2 Determination of Output and Employment (Keynesian Approach)

Introduction

The determination of output and employment is one of the most important topics in Macroeconomics for the UGC NET Economics examination. It explains how the level of national income, output, and employment are determined in an economy.

Two major approaches explain the determination of output and employment:

Classical Theory
Keynesian Theory

The Classical economists believed that the economy automatically moves towards full employment through market forces. On the other hand, the Keynesian economists argued that economies can remain in underemployment equilibrium for a long period and government intervention becomes necessary.

This topic is extremely important for:

UGC NET Economics
MA Economics
University examinations
Competitive examinations

1. Classical Theory of Output and Employment

Introduction to Classical Theory

The Classical Theory was developed by economists such as:

“Adam Smith“,”Scottish Economist”
“David Ricardo“,”British Economist”
“J. B. Say“,”French Economist”
“Alfred Marshall“,”British Economist”
“A. C. Pigou“,”British Economist”

The classical economists believed that a free market economy automatically achieves full employment equilibrium through flexibility in wages, prices, and interest rates.

2. Main Features of Classical Theory

1. Full Employment Assumption

Classical economists assumed that the economy normally operates at full employment.

According to them:

Unemployment is temporary.
Any unemployment is voluntary.
Market forces automatically restore full employment.

2. Perfect Competition

The classical model assumes perfect competition in:

Goods market
Labour market
Capital market

Therefore:

Prices are flexible.
Wages are flexible.
Interest rates are flexible.

3. Say’s Law of Markets

One of the most important principles of Classical economics is Say’s Law.

It was given by:

“J. B. Say”,

Statement

“Supply creates its own demand.”

Meaning:

Whenever goods are produced, income is generated equal to the value of output. This income creates demand for goods.

Thus:

General overproduction is impossible.
Deficiency of aggregate demand cannot occur.
Full employment is automatically maintained.

3. Classical Labour Market

According to classical economists, employment is determined in the labour market through:

Demand for labour
Supply of labour

Demand for Labour

Labour demand depends on Marginal Productivity of Labour (MPL).

Firms hire labour until:

W = MPL

Where:

W = Wage rate
MPL = Marginal Product of Labour

The labour demand curve slopes downward because marginal productivity declines as more labour is employed.

Supply of Labour

Supply of labour depends on real wages.

Higher wages encourage more workers to supply labour.

Thus, labour supply curve slopes upward.

Equilibrium in Labour Market

Equilibrium occurs where:

Labour Demand = Labour Supply

At equilibrium:

Full employment is achieved.
Wage rate becomes stable.

4. Classical Theory of Interest Rate

According to classical economists, interest rate is determined by:

Saving
Investment

Saving Function

Saving is positively related to interest rate.

Higher interest rates encourage more saving.

Investment Function

Investment is negatively related to interest rate.

Higher interest rates discourage investment.

Equilibrium Interest Rate

Equilibrium occurs where:

S = I

Where:

S = Saving
I = Investment

Thus, interest rate adjusts automatically to maintain equality between saving and investment.

5. Quantity Theory of Money

Classical economists believed that money only affects price level and not real output.

Money is neutral.

The Quantity Theory of Money is expressed as:

MV = PT

Where:

M = Money Supply
V = Velocity of Money
P = Price Level
T = Volume of Transactions

According to classical economists:

Increase in money supply increases prices proportionately.
Output and employment remain unaffected.

6. Assumptions of Classical Theory

Full employment exists.
Prices and wages are flexible.
Perfect competition exists.
No government intervention.
Savings automatically become investment.
Money is neutral.
Markets clear automatically.

7. Criticisms of Classical Theory

1. Unrealistic Full Employment Assumption

In reality, unemployment exists for long periods.

2. Wages Are Not Perfectly Flexible

Trade unions and labour laws prevent wage flexibility.

3. Say’s Law Fails During Depression

During the Great Depression, demand deficiency caused massive unemployment.

4. Saving and Investment Are Not Always Equal

Savings and investment decisions are made by different groups.

5. Ignored Aggregate Demand

Classical economists neglected the role of aggregate demand.

8. Keynesian Theory of Output and Employment

Introduction

The Keynesian Theory was developed by:

“people”,”John Maynard Keynes”,”British Economist”

in his famous book:

“The General Theory of Employment, Interest and Money”,”1936″

Keynes developed his theory during the Great Depression of the 1930s.

He criticized classical economics and argued that economies may remain in underemployment equilibrium due to deficiency of aggregate demand.

9. Main Features of Keynesian Theory

1. Underemployment Equilibrium

Keynes argued that full employment is not automatic.

Economy can remain in equilibrium even with unemployment.

2. Importance of Aggregate Demand

Output and employment depend on Aggregate Demand (AD).

Higher AD leads to:

Higher output
Higher income
Higher employment

3. Wage Rigidity

Wages are sticky downward.

Workers resist wage cuts.

4. Government Intervention

Government intervention becomes necessary during recession.

10. Aggregate Demand (AD)

Meaning

Aggregate Demand refers to total demand for goods and services in an economy during a given period.

Components of AD

AD = C + I

Where:

C = Consumption Expenditure
I = Investment Expenditure

In a three-sector economy:

AD = C + I + G

In a four-sector economy:

AD = C + I + G + (X – M)

11. Aggregate Supply (AS)

Meaning

Aggregate Supply refers to total output produced in an economy.

In the Keynesian short-run model:

AS is perfectly elastic before full employment.
AS becomes perfectly inelastic at full employment.

12. Keynesian Equilibrium

Equilibrium Condition

Equilibrium occurs where:

AD = AS

Y = AD

Where:

Y = National Income
AD = Aggregate Demand

At equilibrium:

Planned expenditure equals output.
Firms have no incentive to change production.

13. Consumption Function

Meaning

Consumption function shows relationship between consumption and income.

Formula

C = a + bY

Where:

C = Consumption
a = Autonomous Consumption
b = Marginal Propensity to Consume (MPC)
Y = Income

Autonomous Consumption

Consumption that occurs even at zero income.

Marginal Propensity to Consume (MPC)

MPC measures the proportion of additional income spent on consumption.

Formula:

MPC = Change in Consumption / Change in Income

0 < MPC < 1

14. Saving Function

Meaning

Saving function shows relationship between saving and income.

Formula

S = -a + (1-b)Y

Where:

S = Saving
a = Autonomous Consumption
b = MPC

Marginal Propensity to Save (MPS)

MPS measures proportion of additional income saved.

Formula:

MPS = Change in Saving / Change in Income

Relationship:

MPC + MPS = 1

15. Investment Function

Meaning

Investment refers to expenditure on capital goods.

According to Keynes:

Investment depends on:

Marginal Efficiency of Capital (MEC)
Interest Rate

Marginal Efficiency of Capital (MEC)

MEC refers to expected profitability of investment.

Investment occurs until:

MEC = Rate of Interest

16. Multiplier

Meaning

Multiplier refers to the ratio of change in income to change in investment.

It explains how small increase in investment leads to larger increase in national income.

Formula

K = Change in Income / Change in Investment

K = 1 / (1 – MPC)

Since:

MPS = 1 – MPC

Therefore:

K = 1 / MPS

Importance of Multiplier

Explains income generation process.
Helps in employment creation.
Useful in fiscal policy.
Important during depression.

17. Principle of Effective Demand

This is the central concept of Keynesian economics.

According to Keynes:

Employment depends on Effective Demand.

Effective Demand

Effective demand is the level of aggregate demand at which entrepreneurs maximize profits.

When AD increases:

Output rises.
Employment rises.

18. Comparison Between Classical and Keynesian Theory

Basis	Classical Theory	Keynesian Theory
Employment	Full employment	Underemployment possible
Wage Flexibility	Flexible wages	Sticky wages
Say’s Law	Accepted	Rejected
Government Role	Minimal	Important
Money	Neutral	Non-neutral
Cause of Unemployment	Voluntary	Deficiency of demand
Equilibrium	Automatic	Requires intervention
Focus	Supply side	Demand side

19. Importance of Keynesian Theory

Explained Great Depression.
Highlighted role of aggregate demand.
Supported government intervention.
Developed modern macroeconomics.
Provided basis for fiscal policy.

20. Criticisms of Keynesian Theory

Short-run analysis only.
Ignored inflation in long run.
Excessive government intervention may create deficits.
Assumes excess capacity.
Consumption function unstable in long run.

21. Important Formulas

Classical Theory

S = I

W = MPL

MV = PT

Keynesian Theory

AD = C + I

Y = AD

C = a + bY

S = -a + (1-b)Y

MPC = Change in Consumption / Change in Income

MPS = Change in Saving / Change in Income

K = 1 / (1-MPC)

K = 1 / MPS

22. Important UGC NET Exam Points

Say’s Law states “Supply creates its own demand.”
Classical economists believed in full employment.
Keynes rejected Say’s Law.
Aggregate demand determines employment in Keynesian theory.
Keynesian equilibrium may occur below full employment.
Multiplier depends on MPC.
MPC + MPS = 1.
Effective demand is central to Keynesian economics.
Wages are flexible in classical theory.
Wages are sticky in Keynesian theory.

Conclusion

The Classical and Keynesian approaches provide two different explanations of output and employment determination.

The Classical theory emphasizes:

Market self-adjustment
Full employment
Flexible wages and prices

The Keynesian theory emphasizes:

Aggregate demand
Government intervention
Underemployment equilibrium

For UGC NET Economics, students should focus on:

Assumptions of both theories
Say’s Law
Effective demand
Consumption and saving functions
Multiplier
Comparative analysis
Important formulas and diagrams

A clear understanding of both approaches is essential for conceptual and numerical questions in the examination.

May 26, 2026

NET Economics Unit-2
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National Income: Concepts and Measurement
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National Income: Concepts and Measurement – UGC NET Economics Notes

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Introduction

National Income is one of the most important topics in Macroeconomics for the UGC NET Economics examination. It refers to the total value of final goods and services produced in a country during a specific period, generally one year.

The study of national income helps us understand:
- Economic growth of a country
- Standard of living of people
- Production and income generation
- Economic welfare
- Planning and policy-making
National income accounting is also used by governments for:
- Budget preparation
- Economic planning
- Inflation control
- Employment policies
- International comparison of economies
1. Meaning of National Income

National Income refers to the total income earned by the normal residents of a country through the production of goods and services during one year.

It includes:
- Wages
- Rent
- Interest
- Profit
Important Features:
1. Measured in monetary terms
2. Includes only final goods and services
3. Calculated for a specific period
4. Avoids double counting
5. Includes factor incomes only
2. Circular Flow of Income

The circular flow of income explains the continuous movement of production, income, and expenditure between different sectors of the economy.

Two-Sector Economy

The economy consists of:
1. Households
2. Firms
Flow Process
- Households provide factors of production to firms.
- Firms produce goods and services.
- Firms pay wages, rent, interest, and profit.
- Households spend income on goods and services.
Types of Flows

Real Flow

Flow of goods and services.

Money Flow

Flow of money income and expenditure.

Leakages and Injections

Leakages
- Savings (S)
- Taxes (T)
- Imports (M)
Injections
- Investment (I)
- Government Expenditure (G)
- Exports (X)
Equilibrium Condition:

S + T + M = I + G + X

3. Gross Domestic Product (GDP)

Meaning

Gross Domestic Product (GDP) refers to the total market value of all final goods and services produced within the domestic territory of a country during one year.

Important Terms
- Gross = Includes depreciation
- Domestic = Within geographical boundaries
- Product = Goods and services produced
GDP Formula

GDP = C + I + G + (X – M)

Where:
- C = Consumption Expenditure
- I = Investment Expenditure
- G = Government Expenditure
- X = Exports
- M = Imports
Types of GDP

GDP at Market Price (GDPMP)

Includes indirect taxes and excludes subsidies.

GDP at Factor Cost (GDPFC)

Includes only factor payments.

Relationship:

GDPFC = GDPMP – Indirect Taxes + Subsidies

4. Gross National Product (GNP)

Meaning

Gross National Product (GNP) refers to the total market value of all final goods and services produced by the normal residents of a country during one year.

GNP includes:
- Income earned by residents abroad
- Excludes income earned by foreigners domestically
Formula

GNP = GDP + NFIA

Where:

NFIA = Net Factor Income from Abroad

NFIA Formula:

NFIA = Factor Income Received from Abroad – Factor Income Paid Abroad

5. Net Domestic Product (NDP)

Meaning

Net Domestic Product is GDP after deducting depreciation.

Formula

NDP = GDP – Depreciation

6. Net National Product (NNP)

Meaning

Net National Product is GNP after deducting depreciation.

NNP at Market Price is also known as National Income at Market Price.

Formula

NNP = GNP – Depreciation

7. National Income at Factor Cost

Meaning

National Income at Factor Cost refers to the sum of all factor incomes earned by normal residents of a country.

It includes:
- Wages
- Rent
- Interest
- Profit
Formula

NNPFC = NNPMP – Indirect Taxes + Subsidies

8. Personal Income

Meaning

Personal Income refers to the income actually received by individuals and households.

Formula

PI = NI – Undistributed Profits – Corporate Taxes – Social Security Contributions + Transfer Payments

9. Personal Disposable Income

Meaning

Personal Disposable Income is the income available with individuals for consumption and saving.

Formula

PDI = PI – Personal Taxes

10. Per Capita Income

Meaning

Per Capita Income refers to the average income per person.

Formula

Per Capita Income = National Income / Population

11. Nominal GDP and Real GDP

Nominal GDP

Nominal GDP is measured at current prices.

It is affected by inflation.

Real GDP

Real GDP is measured at constant prices.

It removes the effect of inflation.

Formula

Real GDP = (Nominal GDP × 100) / Price Index

12. GDP Deflator

Meaning

GDP Deflator measures the overall price level in an economy.

Formula

GDP Deflator = (Nominal GDP / Real GDP) × 100

13. Methods of Measuring National Income

There are three methods of measuring national income:
1. Product Method
2. Income Method
3. Expenditure Method
14. Product Method (Value Added Method)

Meaning

Under this method, national income is measured by calculating value added at each stage of production.

Formula

Value Added = Value of Output – Intermediate Consumption

Steps
1. Calculate value of output
2. Deduct intermediate consumption
3. Obtain value added
4. Add all value added
Precautions
- Avoid double counting
- Include final goods only
- Exclude transfer payments
15. Income Method

Meaning

Under this method, national income is measured as the sum of factor incomes.

Components
- Wages
- Rent
- Interest
- Profit
- Mixed Income
Formula

National Income = Wages + Rent + Interest + Profit + Mixed Income

Precautions
- Exclude transfer income
- Exclude capital gains
- Include only factor incomes
16. Expenditure Method

Meaning

Under this method, national income is measured by calculating total expenditure on final goods and services.

Formula

GDP = C + I + G + (X – M)

Components
- Consumption Expenditure
- Investment Expenditure
- Government Expenditure
- Net Exports
17. Double Counting

Meaning

Double counting refers to counting the value of the same good multiple times.

Solution
- Use final goods method
- Use value added method
18. Transfer Payments

Meaning

Transfer payments are payments made without any productive service.

Examples:
- Pension
- Scholarship
- Unemployment Allowance
- Old Age Pension
Transfer payments are excluded from national income.

19. Intermediate Goods and Final Goods

Intermediate Goods

Goods used for resale or further production.

Example:
Flour used in bakery.

Final Goods

Goods used for final consumption.

Example:
Bread purchased by consumers.

20. Green GDP

Meaning

Green GDP adjusts GDP by considering environmental damage and depletion of natural resources.

Formula

Green GDP = GDP – Environmental Damage – Resource Depletion

Importance
- Measures sustainable development
- Includes environmental welfare
- Better indicator of economic welfare
21. National Income and Economic Welfare

National income is often considered an indicator of economic welfare.

However, higher national income does not always mean greater welfare.

Limitations
1. Unequal distribution of income
2. Environmental pollution ignored
3. Non-market activities excluded
4. Leisure ignored
5. Harmful goods included in GDP
22. Market Price and Factor Cost

Market Price

Includes indirect taxes and excludes subsidies.

Factor Cost

Excludes indirect taxes and includes subsidies.

Relationship

Market Price = Factor Cost + Indirect Taxes – Subsidies

23. Gross and Net Concepts

Gross

Includes depreciation.

Net

Excludes depreciation.

Formula

Net = Gross – Depreciation

24. Domestic and National Concepts

Domestic Concept

Based on geographical territory.

National Concept

Based on normal residents.

Relationship

National = Domestic + NFIA

25. Important Economists

Simon Kuznets

Known for national income accounting.

John Maynard Keynes

Developed theory of national income determination.

Wassily Leontief

Developed input-output analysis.

Richard Stone

Known for social accounting.

26. Important Formula Summary

GDP = C + I + G + (X – M)

GNP = GDP + NFIA

NDP = GDP – Depreciation

NNP = GNP – Depreciation

NNPFC = NNPMP – Indirect Taxes + Subsidies

Real GDP = (Nominal GDP × 100) / Price Index

GDP Deflator = (Nominal GDP / Real GDP) × 100

Per Capita Income = National Income / Population

Value Added = Value of Output – Intermediate Consumption

27. Important UGC NET Exam Points
1. GDP is a domestic concept.
2. GNP is a national concept.
3. Net concepts exclude depreciation.
4. Transfer payments are excluded from national income.
5. Real GDP removes inflation effect.
6. Green GDP includes environmental concerns.
7. Value added method avoids double counting.
8. Factor cost excludes indirect taxes.
9. Market price includes indirect taxes.
10. NFIA is added to GDP to obtain GNP.
Conclusion

National Income is one of the most important and frequently asked topics in UGC NET Economics. Students should focus on:
- Definitions and concepts
- Relationships among aggregates
- Numerical formulas
- Methods of measurement
- Welfare implications
- Differences between concepts
A strong understanding of formulas and conceptual clarity is essential for solving both theoretical and numerical questions in the examination.
May 26, 2026

Tag: UGC NET Economics Notes

NET Economics UNIT 2 – Consumption Function and Investment Function

Introduction

PART I: CONSUMPTION FUNCTION

Meaning of Consumption

Definition

Examples

What is Consumption Function?

Definition

Consumption Function Equation

Important Terms in Consumption Function

1. Income (Y)

Definition

2. Consumption Expenditure (C)

Definition

3. Saving (S)

Definition

Example

4. Autonomous Consumption (a)

Definition

Example

5. Induced Consumption

Definition

Example

Keynes’ Psychological Law of Consumption

Statement

Meaning

Example

Average Propensity to Consume (APC)

Definition

Example

Marginal Propensity to Consume (MPC)

Definition

Example

Factors Affecting Consumption Function

Objective Factors

1. Income Level

2. Wealth

3. Interest Rate

4. Taxation

5. Price Level

Subjective Factors

PART II: INVESTMENT FUNCTION

Meaning of Investment

Definition

Examples

Investment Function

Definition

Types of Investment

1. Autonomous Investment

Definition

2. Induced Investment

Definition

Determinants of Investment

1. Rate of Interest

Definition

Reason

2. Expected Profitability

Definition

Marginal Efficiency of Capital (MEC)

Definition

Simple Meaning

Example

Relationship Between MEC and Interest Rate

Example

Example 2

Average Propensity to Save (APS)

Definition

Marginal Propensity to Save (MPS)

Definition

Relationship Between MPC and MPS

Importance of Consumption and Investment Functions

1. Determination of National Income

2. Employment Generation

3. Economic Growth

4. Business Cycle Analysis

UGC NET Important One-Liners

Consumption Function

Autonomous Consumption

APC