CBSE Class 12 Economics - Basic concepts of Macroeconomics

Domestic Territory

Domestic Territory is geographical territory administered by a government within which persons, goods and capital circular freely.

In addition to the political frontier, a domestic territory also includes:-

1) Ship and aircraft owned and operated by normal residents between two countries, for example- planes operated by Air India between London and Paris part of the domestic territory of India.

2) Fishing Vessels, oil and natural gas rigs and floating platforms operated by the residents of a country in the international water they have exclusive rights of operation.

3) Embassies, consulates and military establishments of country located abroad for example-Indian Embassy in Japan is the domestic territory of India.

The domestic territory does not include:-

1) Embassies, consulates and military establishment of a foreign country, for example- the American embassy in India is the domestic territory of America and not India

2) An international organization like UNO, WHO located within the geographical boundaries of a country.

Normal Resident

Normal Residents of a country refers to an individual or institution who ordinarily resides in the country and whose centre of interest also lies in that country.

Following are not included in Normal residents:-

1) Foreign Tourists & Visitors

2) Foreign staff of Embassies, officials, diplomats and members of the armed forces.

3) International Organization like WHO, UNO etc.

4) Employers of International Organizations.

5) Border workers, who cross borders on a regular basis to work in other countries.


Citizenship is basically a legal concept based on place of birth of a person or some legal provisions allowing a person to become a citizen.

It means Indian Citizenship can arise in two ways:-

1) When a person is born in India, he acquired automatic citizenship of India.

2) A person born in India applies for citizenship and Indian laws allow him to become Indian Citizen.


It is an economics concept based on the basic economics activities performed by a person.

An individual is a normal resident of a country if he ordinarily resides in the country for a period of more than one year and his/her centre of economic interest lies in that country.

For example - An American is working in India for more than one year, then he is a resident of India but do not hold the citizenship of means, a person can be a citizen of one country, and at the same time, a resident of another country.

Factor Income and Transfer Income

Factor Income:

It refers to income received by factor of production (labour, Land, Capital and Enterprise) for rendering factor services.

Factor Incomes of normal resident is included in National Income for example-Rent, Wages, Interest and Profit.

Transfer Income:

Transfer Income refers to income received without rendering any productive service in return. It is unilateral (One-sided) concept. As there is no production of goods or services it is not included in National Income. For example-Pension, gifts, scholarship etc.


Consumption Goods: Consumption Goods are those goods which satisfy a want directly.


1. Durable Goods - It refers to goods which can be used again and again over a considerable period of time for example-Television, AC, etc.

2. Semi Durable Goods - It refers to goods which can be used for a limited period of time, for example-clothes, crockery, etc.

3. Non-Durable Goods - It refers to goods which are generally for one-time consumption, etc., for example, dairy products, etc.

4. Services-Services - Are intangible activities which can neither be seen nor touched but satisfies the wants directly, for example-banks, teachers, etc.

Capital Goods

Capital Goods are those final goods which help in the production of the goods, for example-machines, equipment, etc.


Investment refers to the addition to the capital stock of an economy. For example-Construction of roads,   flyovers, Building, etc.

This is of 2 Types:-

Gross Investment

It is an addition to the stock of capital before making allowance for depreciation

Net Investment

Net Investment is an actual addition made to the capital stock of the economy in a given period.

Net Investment = Gross Investment- Depreciation


It refers to a fall in the value of an asset due to normal wear  tear, the passage of time or expected obsolescence (change in technology)

Net Indirect Taxes

NIT refers to the difference between Indirect Tax and Subsidies.

Net Indirect Taxes (NIT) = Indirect Tax-Subsidies

Indirect Tax

Indirect Taxes refer to those taxes which are imposed by the government on production and sales of goods and services. For example-goods and services tax (GST)


Subsidies are the economic assistance given by the government to the firms and households, with a motive of the general welfare. For example-subsidy on LPG Gas Cylinders, etc.

Factor Cost

It refers to the amount paid to factors of production for their contribution to the production process.

Market Price

It refers to the Price at which product is actually sold in the market. For example-If Price of the LPG cylinder is Rs. 1000 and the tax rate is 10%, the price of the cylinder becomes Rs.1100 but a subsidy of Rs. 50 is provided by Govt., hence the final price is Rs. 1050

Here Rs.1000 is factor cost, Rs.1050 is Market Price and Rs.100 is indirect Taxes and Rs. 250 is a subsidy.

Net Factor Income From Abroad

It refers to the difference between factor income received from the rest of the world and factor income paid to the rest of the world.

NFIA =Factor Income earned from Abroad-Factor Income paid Abroad.

Components of NFIA

  • Net compensation of Employees- It is the difference between income from work received by resident workers living or employed abroad for less than one year & similar payments made to non-resident workers employed domestic territory of the country.
  • Net Income from Property and entrepreneurship -  It refers to the difference between income from property and entrepreneurship received by residents of the country and similar payments made to Non-residents
  • Net Retained earnings - It refers to the difference between retained earnings of residents companies located abroad and retained earnings of non-resident companies located within the domestic territory of that country.

NFIA = Net Compensation of Employees,+ Net Income from Property and Entrepreneurship + Net Retained earnings