Class XII Economics Macro & Indian Economics Workbook PDF

ECONOMICS WORK BOOK CLASS-XII State Council of Educational Research and Training Govt. of Tripura © All rights reserved by SCERT, Tripura ECONOMICS WORK BOOK Class - XII First Edition September, 2021 Cover Design Asoke Deb, Teacher Type & Setting : SCERT, Tripura in Collaboration with DEO, West District, Tripura Printed by : Satyajug Employees Co-operative Industrial Society Ltd. 13, Prafulla Sarkar Street, Kolkata-72 Publisher : State Council of Educational Research and Training Government of Tripura Ó˚ï˛l °y° lyÌ Ùsf# !¢«˛y òÆÓ˚ !e˛õ%Ó˚y §Ó˚Ü˛yÓ˚ Óyï≈˛y !¢«˛yÓ˚ ≤ÃÜ,˛ï˛ !ÓÜ˛yˆÏ¢Ó˚ çlƒñ !¢«˛yˆÏÜ˛ Î%ˆÏày˛õˆÏÎyà# Ü˛ˆÏÓ˚ ˆï˛y°yÓ˚ çlƒ ≤ÃˆÏÎ˚yçl !¢«˛y§ÇÜ˛yhs˝ !lÓ˚hs˝Ó˚ àˆÏÓ£Ïîy– ≤ÃˆÏÎ˚yçl !¢«˛y §Ç!Ÿ’T˛ §Ü˛°ˆÏÜ˛ §ÙˆÏÎ˚Ó˚ §ˆÏAà §ˆÏAà ≤Ã!¢!«˛ï˛ Ü˛Ó˚y ~ÓÇ ≤ÃˆÏÎ˚yçl#Î˚ !¢ál §yÙ@˝Ã#ñ ˛õyë˛ƒÜ˛Ù G ˛õyë˛ƒ˛õ%hﬂÏˆÏÜ˛Ó˚ !ÓÜ˛y¢ §yôl Ü˛Ó˚y– ~§ !§ z xyÓ˚ !ê˛ !e˛õ%Ó˚y Ó˚yˆÏçƒÓ˚ !¢«˛yÓ˚ !ÓÜ˛yˆÏ¢ ~§Ó Ü˛yç §%lyˆÏÙÓ˚ §ˆÏAà Ü˛ˆÏÓ˚ xy§ˆÏSÈ– !¢«˛yÌ#≈Ó˚ Ùyl!§Ü˛ñ ˆÓÔ!ÂôÜ˛ G §yÙy!çÜ˛ !ÓÜ˛yˆÏ¢Ó˚ çlƒ ~§ !§ z xyÓ˚ !ê˛ ˛õyë˛ƒÜ˛ÙˆÏÜ˛ xyˆÏÓ˚y !ÓK˛yl§¡øï˛ñ ly®!lÜ˛ ~ÓÇ Ü˛yÎ≈Ü˛Ó˚ Ü˛Ó˚ÓyÓ˚ Ü˛yç Ü˛ˆÏÓ˚ ã˛ˆÏ°ˆÏSÈ– Ü˛Ó˚y ˆÏFSÈ §%!l!ò≈T˛ ˛õ!Ó˚Ü˛“lyÓ˚ xô#ˆÏl– ~ z ˛õ!Ó˚Ü˛“lyÓ˚ xyGï˛yÎ˚ ˛õyë˛ƒÜ˛Ù G ˛õyë˛ƒ˛õ%hﬂÏˆÏÜ˛Ó˚ ˛õy¢y˛õy!¢ !¢¢%ˆÏòÓ˚ !¢ál §«˛Ùï˛y Ó,!ÂôÓ˚ çlƒ ˜ï˛!Ó˚ Ü˛Ó˚y ˆÏÎ˚ˆÏSÈ GÎ˚yÜ≈˛ Ó%Ü˛ Óy xl%¢#°l ˛õ%hﬂÏÜ˛– ≤Ã§Aàï˛ í˛zˆÏÕ‘áƒñ SÈyeÈüÈSÈye#ˆÏòÓ˚ §Ù§ƒyÓ˚ §ÙyôylˆÏÜ˛ § çï˛Ó˚ Ü˛Ó˚yÓ˚ °ˆÏ«˛ƒ ~ÓÇ ï˛yˆÏòÓ˚ !¢álˆÏÜ˛ xyˆÏÓ˚y § ç G §yÓ°#° Ü˛Ó˚yÓ˚ çlƒ Ó˚yçƒ §Ó˚Ü˛yÓ˚ ~Ü˛!ê˛ í˛zˆÏòƒyà @˝Ã î Ü˛ˆÏÓ˚ˆÏSÈñ ÎyÓ˚ lyÙ Ú≤ÃÎ˚y§Û– ~ z ≤ÃÜ˛ˆÏ“Ó˚ xô#ˆÏl ~§ !§ z xyÓ˚ !ê˛ ~ÓÇ ˆç°y !¢«˛y xy!ôÜ˛y!Ó˚Ü˛Ó˚y !Ó!¢T˛ !¢«˛Ü˛ˆÏòÓ˚ § yÎ˚ï˛y @˝Ã ˆÏîÓ˚ ÙyôƒˆÏÙ ≤ÃÌÙ ˆÌˆÏÜ˛ myò¢ ˆ◊!îÓ˚ SÈyeÈüÈSÈye#ˆÏòÓ˚ çlƒ GÎ˚yÜ≈˛ Ó%Ü˛à%ˆÏ°y §%ã˛yÓ˚%Ë˛yˆÏÓ ˜ï˛!Ó˚ Ü˛ˆÏÓ˚ˆÏSÈl– £Ï¤˛ ˆÌˆÏÜ˛ xT˛Ù ˆ◊!î ˛õÎ≈hs˝ !ÓK˛ylñ à!îï˛ñ zÇˆÏÓ˚!çñ ÓyÇ°y G §Ùyç!ÓòƒyÓ˚ GÎ˚yÜ≈˛ Ó%Ü˛ ˜ï˛!Ó˚ ˆÏÎ˚ˆÏSÈ– lÓÙ ò¢Ù ˆ◊!îÓ˚ çlƒ ˆÏÎ˚ˆÏSÈ à!îï˛ñ !ÓK˛ylñ §Ùyç!Óòƒyñ zÇˆÏÓ˚!ç G ÓyÇ°y– ~Ü˛yò¢ myò¢ ˆ◊!îÓ˚ SÈyeÈüÈSÈye#ˆÏòÓ˚ çlƒ zÇˆÏÓ˚!çñ ÓyÇ°yñ ! §yÓ¢yﬂfñ ˛õòyÌ≈!Óòƒyñ Ó˚§yÎ˚l!Óòƒyñ xÌ≈l#!ï˛ ~ÓÇ à!îï˛ zï˛ƒy!ò !Ó£ÏˆÏÎ˚Ó˚ çlƒ ˜ï˛!Ó˚ ˆÏÎ˚ˆÏSÈ GÎ˚yÜ≈˛ Ó%Ü˛– ~ z§Ó GÎ˚yÜ≈˛ Ó%ˆÏÜ˛Ó˚ §y yˆÏÎƒ SÈyeÈüÈSÈye#Ó˚y K˛ylÙ)°Ü˛ !Ó!Ë˛ß¨ Ü˛yÎ≈ §¡õyòl Ü˛Ó˚ˆÏï˛ ˛õyÓ˚ˆÏÓ ~ÓÇ ï˛yˆÏòÓ˚ !ã˛hs˝y ≤Ã!Ü˛Î˚yÓ˚ ˆÎ ﬂ∫yË˛y!ÓÜ˛ SÈ® Ó˚ˆÏÎ˚ˆÏSÈñ ï˛yˆÏÜ˛ ÓƒÓ yÓ˚ Ü˛ˆÏÓ˚ !Ó!Ë˛ß¨ §Ù§ƒyÓ˚ §Ùyôyl Ü˛Ó˚ˆÏï˛ ˛õyÓ˚ˆÏÓ– ÓyÇ°y G zÇˆÏÓ˚!ç í˛zË˛Î˚ Ë˛y£ÏyÎ˚ !°!áï˛ ~ z§Ó xl%¢#°l ˛õ%hﬂÏÜ˛ SÈyeÈüÈSÈye#ˆÏòÓ˚ ÙˆÏôƒ !ÓlyÙ)ˆÏ°ƒ !Óï˛Ó˚î Ü˛Ó˚y ˆÏÓ– ~ z í˛zˆÏòƒyˆÏà §Ü˛° !¢«˛yÌ#≈ x!ï˛¢Î˚ í˛z˛õÜ,˛ï˛ ˆÏÓ– xyÙyÓ˚ !ÓŸªy§ñ xyÙyˆÏòÓ˚ §Ü˛ˆÏ°Ó˚ §!Ü˛Î˚ ~ÓÇ !lÓ˚°§ xÇ¢@˝Ã ˆÏîÓ˚ ÙyôƒˆÏÙ !e˛õ%Ó˚yÓ˚ !¢«˛yçàˆÏï˛ ~Ü˛!ê˛ lï%˛l !òàˆÏhs˝Ó˚ í˛zˆÏß√£Ï âê˛ˆÏÓ– Óƒ!=˛àï˛ Ë˛yˆÏÓ xy!Ù ã˛y z ÎÌyÎÌ K˛yˆÏlÓ˚ §ˆÏAà §ˆÏAà !¢«˛yÌ#≈Ó˚ §yÙ!@˝ÃÜ˛ !ÓÜ˛y¢ âê%˛Ü˛ ~ÓÇ ï˛yÓ˚ xyˆÏ°y Ó˚yˆÏçƒÓ˚ ˛≤Ã!ï˛!ê˛ ˆÜ˛yˆÏî SÈ!í˛¸ˆÏÎ˚ ˛õí˛YÜ˛– åÓ˚ï˛l °y° lyÌä ECONOMICS WORK BOOK Class-XII CONTRIBUTORS 01. Chandan Debnath, Teacher 02. Rakesh Ghosh, Teacher 03. Sukanta Saha, Teacher 04. Rajesh Dutta, Teacher 05. Abhijit Saha, Teacher PROOF CHECKING & EDITING : 1. Goutam Ray Barman, Teacher Class : XII Content Part-A : Macro Economics Page No Chapter-1 : Introduction 3–6 Chapter-2 : National Income Accounting 7 – 36 Chapter-3 : Money & Banking 37 – 50 Chapter-4 : Income & Employment Determination 51 – 65 Chapter -5 : Government Budget and the Economy 66 – 83 Chapter -6 : Open economy 84 – 96 Part-B : Indian Economic Development Chapter - 1 : Indian Economy on the Eve of Independence 98-104 Chapter - 2 : Indian Economy (1950-1990) 105-112 Chapter - 3: Economic Reforms Since 1991 113-126 Chapter - 4 : Poverty 127-136 Chapter - 5 : Human Capital Formation in India 137-143 Chapter - 6 : Rural Development 144-151 Chapter - 7 : Employment 152-165 Chapter - 8 : Infrastructure 166-175 Chapter - 9 : Environment & Sustainable Development 176-185 Chapter -10: Comparative Development Experiences of India 186-194 and its Neighbours Macro Economics : Page 1 Macro Economics : Page 2 CHAPTER 1 “INTRODUCTION” During1930s the world observed the most dramatic & catastrophic periods in the economic history.The revese recession of 1929-1930 turned into the great depression of 1931-33. It was felt by most of the economists that drastic fall in income & output levels was due to series of errors in fiscal and monetary policies of various economies, especially of USA,where the full of economic activity was greater than the other parts of the world.The economic environment was much that survival of capitalism & democracy seemed impossible. The economists belived that classical concept of free market economy without government interven- tion led to this crisis & economic backwardness. It was during this time the keynesian school of thought come into existance,keynes challenges the classical concept stating that full employment should be the norm rather than the exception which always holds good. Classical concept of self correction market forces without government intervention failed to correct the world wide depression in 1929 & this was the time when keynsian belief come into existance that government should attend to, “those functions which fall outside the private sphere & those decissions which are made by no one if the state does not make them” * [Lord J.M.Keynes-famous British economist] Keynes is called the “Father of Modern Macroeconomics”. He wrote a book on Macro economics named “ General Theory of Employment, Interest & Money” in 1936. In Macro economics, we try to understand how the level of income & employment is determined & how unemployment can be removed- in real terms, Macro economics deals with the economy in its totality. It helps to solve the central problem of full employment of resources in an economy which forms the subject matter for study of Macroeconomic theory. Macroeconomics has enabled to properly organise, collect& analyse tha data about national income & cordinate with international economic policies. The study of Macro economics deals with- the theory of Employment, National Income, General price level, Money, International Trade & economic growth. The study of Macr o economics helps to (a) Understand the measurement of National Income of a country. (b) Formulate govt. budget & politics to control the situation of inflation & deflation. (c) Facilitate international comparisons on the basis of aggregate demand & Aggregate supply and sur- plus & deficit in balance of payment. Macro Economics : Page 3 (d) Cordinate various policies to solve economic problem like poverty, unemployment, inflationary & deflationary gap etc. The two branches of economics- Micro & Macro economics are different in their approaches, but changes in micro economic variables have an impact or macroeconomic variables & vice-versa.i.e Micro & Macro economics are interdependent. For example- price of good is influced by the general price level of the economy, National Income of a country is sum total of income of individual units of the country etc. So both micro & marco economics are supplymentary & not substitute of each other. EXERCISE 1.1 True/ False 1. Study of the problem of unemployment in india is considerd a microeconomic study. 2. Aggregation is involved only in macroeconomics. 3. Monetary & fiscal policy of Government are a part of macro economic analysis. 4. Aggregate demand in macroeconomics is identical with market demand in microeconomics. 5. ‘Save more’ is always a virtue. 6. Problem of scarcity & choice causes to exists at the macro level when resources of the entire nation are polled together. 1.2 Multiple choice questions:- 1. The study of macro economics includes– (a) Theory of employment (b) Theory of money (c) both (a) & (b) (d) None of these. 2. Example of micro economic variables– (a) Aggregate demand (b) Total saving (c) Aggregate supply (d) Supply of a firm. 3. According to classical theory there is always– (a) Full employment equilibrium (b) over full employment equilibrium (c) under-full employment equilibrium (d) None of these. 4. Micro economics is also called- (a) Theory of income & employment (b) classical theory (c) keynesian theory (d) price theory. 5. In micro economics, there exists : (a) Limited aggregation (b) No aggregation (c) Vast aggregation (d) none of these. 6. Keynesian School of thought advocates possibility of - (a) AD=AS (b) AD>AS (c) AD (c) Durable capital goods purchased by govt< for defence purpose>. Macro Economics : Page 8 Final good : It refers to those goods which are ready for the final users. it includes– (a) Consumer goods- purchased for direct satisfaction< like- sugar, milk purchased by household> (b) Capital goods- purchased by the producers for the purpose of production< like- Bus purchased by a transport company> 2.3 Investment & its types: Investment or capital formation refers to the sum total of production of capital goods during an accounting year. It increases the production capacity of the producers. It is of the following types :- (a) fixed investment- It refers to increase in the stock of fixed asset during an accounting year. Example: machine, plant,land,etc. (b) Inventory investment: It refers to change in inventory stock during an accounting year. (c) gross investment: It refers to the total production of capital goods during an accounting year. Gross investment / Capital formation = Net investment+ consumption of fixed capital i.e. depreciation. Depreciation is the fall in value of fixed assets due to normal wear & tear and expected obsolence. 2.4 Normal Residents & Non residents of a country: A normal resident is said to be a person or an institution who ordinarity resides or is located in a country ( for more than one year) and whose centre of economic interest lies in that country. A non resident is raid to be a person or an institution who do not fulfill the criterion of centre of economic interest. For example- International organigation (WTO, WB, IMF etc) Foreign travellers, foreign staff of embassies, The crew of foreign ship etc. 2.5 Domestic/Economic territory: Domestic territory is the geographycal territory administered by a government within which persons, frontiers, embassies, residents between two or more countries etc. 2.6 Domestic & National income: Domestic income ( Net domestic product at factor cost-NDPFC ) is the sum total of factor incomes generated by all the producing units located within domestic territory of a country along with net factor income from abroad during an accouning year. Macro Economics : Page 9 2.7 Terms used in National Income Accounting (a) Gross Domestic product (b) Gross National Product (c) Net Domestic Product (d) Net National Product (e) Factor Cost (f) Market Price Relation between the Terms:- # gross & net gross-depreciation=Net. # Domestic & National Domestic + net factor inome from abroad(NFIA) = National # Factor cost & market price FC + Net indirect Tax(NIT) = NP (NIT= Indirect tax-subsidy) 2.8 Methods of Measuring National Income: From the earlier discussion of circular flow we learnt that production gives rise to income, income gives rise to expenditure & expenditure causes production of goods & services. Accordingly national income of a country can be measured in three different methods, which are- l Value added/ production/ output method. l Income/ Distribution method l Expenditure method. All the above three methods provide the same measurement of national income. Each method is important in its own way as it refers to different approaches to study National Income of an country. 2.8.1 Production method : National income is meausered on the basis of contribution made by all the producing enterprises in the domestic territory of a country with in the accounting year. Macro Economics : Page 10 GDPMP= Value of output- Intermediate purchase = (Sales+ change in stock)- Intermediate purchase. National Income( NNPFC) = GDPMP – Depreciation + Net factor Income From Abroad( NFIA) – Net Indirect Tax (NIT) Precautions of production method: (a) Only the value of final goods & services are to be include, value of intermedicate goods should be excluded otherwise the problem of double counting will arise. (b) Value of sales & purchase of second hand good, shares & bonds are to be excluded as these are only related with change in ownership. But brokerage/ commision of sales representative should be included for his productive services rendered. (c) Services produced for self consumption should be excluded as its market value can not be assessed < like services of house wife etc >. (d) Own account production for self consumption should be included. (e) Value of production of illegal activities< like black marketing, gambling> should be excluded. An important issue related with production method is “ problem of double counting”. It arise when the value of same product is added more than once in the calculation of GDP and then it provides over estimation of National Income. It can be avoided though the following two methodes: (a) Final output method : Where only the value of final product is included and thus the value of intermediate product is excluded. (b) Value added method : Where the value added in the every stage of production in the production process of a good is added and by this the value of intermediate products are excluded. 2.8.2 Income Method: National Income is measured in terms of factor payments ( wages, rent, interest & profit) to the owner of factors of production ( Labour, land, capital & enterprise) during an accounting year & then Net factor income from abroad is added with NDPFC to obtain National Income (NNPFC) National Income ( NNPFC) = Compensation of employees (wages in cash & kind + Empolyer’s contribution to social security schemes) Macro Economics : Page 11 + operating surplus( Rent + Interest + Royalty +Profit) + Mixed income of self employed. + Net Factor Inome From Abroad. Precautions of income method: (a) Income from illegal activities( like robbery, gambling etc) are not included in calculation of National income as these are not related with any production activities. (b) Transfer income(like old age pension etc) are excluded as no goods & services are produced against it. (c) Penson on retirement is to be included as it is the part of compensation of employees. (d) Income from windfull gain(like lottaries) is to be excluded as these are unearned income. (e) Income from sale of shares, old or second-hand good are to be excluded as these are related with only change of ownership not with any productive activities. But brokerage should be included for the factor services of broker. 2.8.3 Expenditure method: National income is measured in terms of expenditure on the purchase of final goods & services produced in the economy during on accunting year. To obtain National Income( NNPFC) Net factor income from abroad is added & depreciation and Net indirect taxes are substructed. GDPMP = Private final consumption expenditure + Government final consumption expenditure + Gross domestic capital formation (Gross domestic fixed capital formation + change in stocke) + Net export (export-import) National Income (NNPFC) = GDPMP – Depreciation +Net factor income from abroad – Net indirect ax (NIT) Precautions of Expenditure Method: (a) Expenditure on transfer payment(like pension, money given to begger etc) are to be excluded as no goods or services are received against them. Macro Economics : Page 12 (b) Expenditure on second hand good (expenditure on purchase of old house, car etc) are to be excluded as no new goods are produced on that. But expenditure on brokerage given to sales representative is to be included for his factor services rendered. (c) Expenditure on intermediate goods are to be excluded and only expenditure on final good should be included otherwise the problem of double counting will arise. Nominal & Real National Income: National Income can be measured in monetary terms in two ways- at current prices & at constant prices. When National Income is measured at current prices. i.e. prices of that particular year, then we obtain Nominal National Income. When National Income is measured on the basis of certain base year price then we obtain Real National Income. Out of Real National Incomed & Nominal National Income, Real National Income is a better indicator because it estimates the effect of change in prices where as Nominal Income does not. 2.9.1 Price Index & GDP deflator: It measures the average level of prices of all goods and services taken to find GDP. National GDP GDP deflator/ price index = ×100 Real GDP GDP at current prices i.e. ×100 GDP at constant prices 2.10 GDP & Welfare “ Neither GDP nor GNP nor National Income of a country indicate the welfare of the country” Higher level of GDP/ GNP/ NI does not indicate the higher level of welfare. Because– (a) If the distribution of GDP is inequal, i.e if there arises huge gap between rich & poor due to concentration of income in few hands only, then it will reduce the level of welfare of mass of the people of the country. (b) The value of Externalities is ignorged in GDP. The positive externalities increases the welfare level. But it is not included in GDP & so GDP is under estimated. On the other hand, negative externalities reduces the welfare level. But it is not included in GDP & so GDP is over estimated. (c) If the rate of population growth is more than the rate of economic(GDP) growth then, per capital income will fall, i.e. per capital availability of goods & services will fall. It implies lesser economic welfare. 2.11. Externalities: It refer to good or bad impact of an economic activity by an individual or organisation for which nothing to be paid or no penalty is imposed. It is of the following 2 types:- Macro Economics : Page 13 (a) Positive externalities:- It refers to the good impact of an economic activity by an individual or a firm for which nothing to be paid for gaining that good impact. Example :- The pleasure obtains by the public from a park, flower garden etc. saving of time, energy & money from the use of a flyover made by govt. (b) Negative externalituies:- It refers to the bad impacts of an economic activity by an individual or a firm for which they are not penalised. Example:- Pollution caused by an industry for which its neighbours suffer from various diseases. STUDY AIDS Differences between different topics:- 1. LEAKAGES in circular flow INJECTION in circular flow of income of income a) Leakes are those flow variables which a) Injections are those flow variables which which reduces the flow of income / increases the flow of income/money in the money in circular flow model. circular flow model. Example- Borrowing, Example- saving, taxes,payments for govt expenditure, receives from export. import. b) It has negative impact on the economy b) It has positive impact on the economy as it reduces the level of employment, as it increases the level of income, output income output in the economy & employment in the economy. c) It reduces the growth & development c) It increse the growth & development rate rate of the economy. of the economy. 2. Real GDP (GDP at constant price) Nomina GDP(GDP at current price) (a) It is the market value of goods & services (a) It is the market value of goods & services produced in the domestic territory of a produced in the domestic territory of a country during an accounting year & it is country during an accounting year & it is estimated on the basis of certain base estimated on the basis of curremt year year price. price. (b) It is a good measure of welfare. (b) It is not a good measure of welfare. (c) It can increase only when the flow of (c) It can increase only when price level goods & services increases in the economy. increases even there is no increase in goods & services. Macro Economics : Page 14 3. Stock Flow (a) Stok refers to those variables which are a) Flow refers to those variables which are measured at a particular point of time. measured during a period of time. Ex:- Wealth, money supply, labour force, Ex:- Income, capital formation, interset on bank deposite, capital, distance between capital, change in stock, speed of a two place. car etc. (b) It is a static concept as it has no time (b) It is a dynamic concept as it has time dimention. dimention, like- per day, per year etc. (c) More the stock of capital more is the (c) More the flow of income, more is the stock flow of goods & services. i.e. Stock of wealth. i.e.Flow impacts the stock. impacts the flow. 4. Intermediate Goods Final Goods (a) It refers to those goods which are (a) Final goods are those, which are purchased by a firm as raw materials ready to use by the final users. Ex:- Milk, from another firm. Ex:- sugar, milk etc. cloths, fruits etc. Purchased by a house Purchased by a broker, cotton pruchased wife. by a cotton mill. (b) These goods remain within the production (b) These goods are out of production boundary and value is yet to be added to boundary as no value is to be added with this goods these goods. (c) Expenditure on intermediate good is called (c) Expenditure on final good is called final intermediate cost/expenditure. expenditure. (d) Its value is not included in the calculation (d) Its value is included in the calculation of National Income as it creats the of National Income. problem of “Double-counting”. 5. Consumption Goods Capital Goods (a) Goods which are purchased by the final (a) Goods which are purchased by the consumers are called consumotion goods. producers for the production purpose is Ex:- Cloths, food items etc. Purchased called capital goods. Ex:- Machine,raw by household. materials etc. Purchased by a producer. (b) Expenditure on such goods are called (b) Expenditure on such goods are called consumption expenditure. investment. (c) More of production of such goods indicate (c) More of production of such goods indicate higher level of welfare of the society. higher level of growth of the economy. Macro Economics : Page 15 6. Depreciation Capital loss (a) It refers to normal wear & tear or (a) It refers to the loss of fixed asset while accidental damages or expected these are not in use. obsolescence of fixed asset. (b) It is a loss due to normal wear & tear (b) It is a loss due to natural calamities or change in economic structure, fall in market value etc. (c) It is managed through depreciation (c) It is managed by insurance of the fixed refund fund. assets. 7. Factor Income(Payment) Transfer Income(Payments) (a) It is income received in return of (a) It is income received without any rendering factor services by the factors goods & services provided in return. of production. (b) It is a earning concept. Ex:- rent, wages, (b) It is a receipt concept. Ex:- gifts interest & profits. grants, donation,scholarship etc from household or Govt. or corpotare. (c) These are included in national income as (c) These are not included in National there is corresponding flow of goods & Income as there is no corresponding services. flow of goods & services. 8. Normal Residents of a country Non-Residents of a country (a) A normal resident is said to a person (a) Non residents of india are those who who ordinarily resides in a country for a who are citizen of india but at the same period of 1 year or more and his centre of time a resident of another country to economic interest< i.e production, perform basic economic activities. consumption, investment etc> lies in that country. Example:- Examples:- * Indians working in foreign Embassy in india * Foreigners working in indian Embassy in * Indian working in the branch of WHO/IMF abroad. located in india. * Foreigners working in the branch of WTO/ * Indian Embassador in abroad. IMF in india. * Foreigner living in india for more than one * Foreign doctors/ technician etc. working in year for the purpose of treatment, studies india for less than one year. etc. * Embassadors in india from abroad. Macro Economics : Page 16 9. Gross Domestic Product (GDP) Gross National Product (GNP) (a) It is a territorial concept. (a) It is a National concept. (b) It includes production of final goods (b) It includes the production of final goods & services within domestic territory & services from the entire world. of a country. (c) It includes Net Factor Income from abroad. (c) It doesnot include Net Factor Income GDP + NFIA=GNP from abroad. GNP- NFIA=GDP (d) It includes all the producers who are (d) It includes all the producers with in the normal residents of a country. domestic territory of a country. 10. Gross Domestic Product (GDPMP) Net Domestic Product (NDPFC) (a) It is a territorial concept. (a) It is a National concept. (b) It includes production of final goods (b) It includes the production of final goods services & services within domestic & services by normal residents of a territory of a country. country. (c) It includes Net Indirect Tax(NIT) & (c) It excludes Net Indirect Tax(NIT) & Depreciation. Depreciation. GDPMP=NDPFC + dep+ NIT NDPFC=GDPMP -NIT – dep 2. The problem of DOUBLE COUNTING:- When the value of a product is estimated more than once in the calculation of GDP, it creats the situation of over estimation of GDP-this problem is called the “problem of double counting” For example:- Suppose a farmer produces sugarcane & sells it to a sugar mill at 1000. The miller produces sugar & sells it to a confectioner at 1300. The confectioner produces sweets & sells it to the final cunsumer at 1400. Now the problem of double counting will arise if we take all the value of output as (1000++ 1300+ 1400)= 3700. In this way the value of sugarcane has been included 3 times, sugar for 2 times, where as the value of final products i.e. sweets is only 1400. or the total value added in (1000+ 300+100)= 1400. This problem can be avoided in the following 2ways- a) Final Output Method:- According to this method, only the value of final good is included and by this the value of intermediate products are excluded. In the above example, the value of final good is sweets is 1400 should be included only. Macro Economics : Page 17 b) Value added method:- According to this method the value added in every stage of a production of good is to be included and by this the value of intermediate products are excluded. Thus the problem of over valuation can be avoided. In the above example, total value added in 3 stages are (1000 + 300+ 100) = 1400. ie the value of final product. EXERCISE 1.1 Are the following statements true or false : 1. Domestic income of a country may be more than National Income. 2. National income is affected by both factor & transfer income. 3. Purchase of a house by an household is a part of gross domestic capital formation. 4. Washing of own cloths will be included in National Income. 5. “An ammount of 5000 contributed by an employee to his provident fund”- It is a part of compen- sation of employees. 6. Production for self services consumption are not included in National Income. 7. Real GDP may be equal to Nominal GDP. 8. Rent of own house should be included in National Income. 9. Gross domestic capital formation is the sum of gross domestic fixed capital formation & change in stock. 10. Corporate tax is a part of profit. 11. Sum of export & import is net export. 12. Rent is a part of operating surplus. 13. Change is stock is the difference between closing stock & opening stock. 14. Pollution made by an industrial plant is negative externalities. 15. Leisure is included in GNP. 1.2 Multiple choice question: 1. Out of the following which aggregate represents “National Income”? (a) NNPMP (b) NNPFC (c) NDPMP (d) GDPMP. 2. Which one of the following is not a component of “ operating surplus”? (a) Interest (b) Rent (c) Royalty (d) Compensation of employees 3. In which type of economy domestic income & national income are equal? (a) open economy (b) closed economy (c) both (a) & (b) (d) None Macro Economics : Page 18 4. Which one is included in National Income? (a) Winning from lottery (b) Milk purchased by a dairy firm (c) National Debt interest (d) None 5. Which of the following is a part of Expenditure Method? (a) Rent & Royalty (b) Mixed income (c) Net export (d) Sales 6. “ Operating surplus” refers - (a) Income from property (b) Income from entrepreneurship (c) both (a) & (b) (d) None of these 7. When the entire output is not sold in an accounting year, then value of output is equal to: (a) Sales + change in stock (b) sales-change in stock (c) Sales (d) change in stock 8. National Income includes: (a) Transfer Income (b) factor income (c) both (a) & (b) (d) none 9. Measure of National Income at constant price constitute its- (a) Nominal value (b) Real value (c) both (a)& (b) (d) none 10. Value added by a firm is equal to - (a) sales (b) profit (c) sales-intermediate consumption (d) sales + intermediate consumption. 11. Which of the following statement is correct? Pr ice Index Nominal GDP (a) Real GDP = ×100 (b) Real GDP = ×100 Nominal GDP Pr ice Index Real GDP Price Index (c) Nominal GDP = 100 (d) Nominal GDP = ×100 Price Indes Real GDP 12. Which of the following is a non-economic activity & not included in national income? (a) Medical services by a doctor (b) A lawyer doing his practice (c) a house wife cooking for her family members (d) services renderd by house maid. 13. With the rise in Real National Income , welfare of the people: (a) Rises (b) falls (c) Remain same (d) none 14. If NDPFC= 1500 & Net factor income from abroad = 500, then NNPFC will be (a) 1500 (b) 2000 (c) 1000 (d) 2500 15. If purchase of raw material is 1200, import 300 & export 500, then value of intermediate consumption is: (a) 1200 (b) 1500 (c) 1700 (d) 700. Macro Economics : Page 19 1.3 Fill in the blanks : 1) The difference between value of output & value added is ________. 2) If net national product is given at market prices, we _______ indirect taxes and ________ sybsidies to get National Income of a country. 3) Final goods are those which are used eaither for ________ or for _______. 4) GDPMP = 1000 & subsidies= 50, then GDPFC=__________. 5) Net export is the________ between export & import. 6. Operating surplus is the sum of income from __________ and income from entrepreneurship. 7. Measures of national income at __________ prices constitute its Real value. 8. Change in stock becomes _________ when closing stock & opening stock are equal to each other. 9. _________ sector comes under tertiary sector. 10. Nature of GST is __________ Taxes. 1.4 Short question :- (1 mark each) 1. Define domestic income/product(NDPFC) 2. Define national income/product(NNPFC) 3. Write 2 methods to avoid the problem of double counting. 4. What is operating surplus? 5. What is mixed income? 6. Why Leisure is excluded in GNP? 7. What is Nominal GDP? 8. What is Real GDP? 9. What is GDP deflator? 10. Give example of positive externalities. 11. Give example of negative externalities. 12. Define intermediate consumption. 13. What is externalities? 14. What is factor income? 15. What is transfer payment? 16. What is non market activitiies. 17. What is Leakages in circular flow of income? Macro Economics : Page 20 18. What is Injections in circular flow of income? 19. What is the problem of Double Counting? 20. What is value added? 1.5 SHORT ANSWER TYPE QUESTION (3/4 Marks) : 1. Briefly explain the real flow & money flow of income. 2. Describe the circular flow of income in a two sector economy. (with financial sector) 3. Write the difference between real flow & money flow. 4. Write four precautions required while estimating National Income by income method. 5. Write four precautions required while estimating National Income by expenditure method. 6. Write four precautions required while estimating National Income by output method. 7. What is the problem of “double counting”? Expalin with a suitable example. 8. Explain the measures to remove the problem of “Double Counting” arises in calculation of National Income by output method. 9. Explain how “distribution of GDP” is a limitation in taking GDP as an index of welfare. 10. What is externalities? Explain its types with suitable examples. 11. Write the difference between: (a) Leakages & Injections in circular flow of income. (b) Intermediate & final good. (c) Consumtion good & capital good (d) Stock & flow (e) Depreciation & capital loss (f) Gross investment & net investment (g) GDP & GNP (h) Factor income & Transfer income (i) Real & Nominal GDP 12. What is investment? write its types with examples. 13. Calculate Gross value added at market price (GVAMP) Items (in Lakhs) (a) Sales 50,000 (b) Change in stock 15,000 (c) Intermediate consumption 10,000 Macro Economics : Page 21 (d) Depreciation 9,000 (e) subsidy 12,000 (f) Indirect tax 14,000 14. Find Net value added at factor cost (NVAFC) Items (in lakhs) (a) Indermediate cost 10,000 (b) Sales 750 units (c) price/unit 40 (d) depreciation 3000 (e) change in stock 10,000 (f) Indirect tax 2000 15. Find gross value added at factor cost ( GVAFC) Items (in Lakhs) (a) sales 2000 unit (b) price/unit 20 (c) depreciation 2000 (d) change in stock (–) 500 (e) Intermediate cost 5000 f) Subsidy 3000 16. Calculate Net value added at market price (NVAMP) by production method. Items (in Lakhs) a) sales 8,000 b) change in stock 100 c) subsidy 1,200 d) depreciation 300 e) Intermediate cost 5,500 f) Rent 500 17. Find NVAFC in production method. Items (in Lakhs) a) Sales 1000 b)Indirect tax 100 Macro Economics : Page 22 c) subsidy 40 d) change in stock 00 e) depreciation 50 f) Intermediate cost 600 g) operating surplus 60 18. Find NDPFC by production method. Items (in Lakhs) a) Subsidy 1 b) Sales 100 c) change in stock (–) 10 d) indirect tax 5 e) Intermediate cost 20 f) depreciation 15 19. Find NVAMP by production method. a) Depreceations 700 b) sales 36,000 c) change in stock 200 d) sales tax 3,000 e) Intermediate purchase 2,000 1.6 LONG ANSWER TYPE QUESTIONS ( 6 marks) : 1. Explain the limitation of GDP as an indicator of welfare. 2. Are the following included in the calculation of National Income of a country/ Give reasons. (a) sale of an old house (b) purchase of a car by a household (c) purchase of raw materials by a producer (d) expenditure of government on scholarship to students. 3. Are the following included in the calculation of National Income of a country? Give reasons. (a) Contribution to profident fund by employer (b) Income from robbery (c) Commision received by a lottery ticket seller (d) Expenditure on purchase of shares. Macro Economics : Page 23 4. Are the following included in the estimation of National Income? give reasons. (a) Profit earned by a foreign bank in india. (b) Rent received by an indian on building rented to a foreign bank in india. (c) Profit earned by a branch of SBI in abroad. (d) Salary received by a foreigner working in indian ambassy in London. (e) Salary received by an indian working in USA ambassy located in Delhi. (f) Salary received by a foreigner working in SBI in india. NUMERICAL QUESTIONS 1. Calculate NNPFC by income & Expenditure method. Items (in crores) Interest 250 Net Factor Income from abroad (–) 50 Govt. final consumption expenditure 1400 Compensation of employees 3000 Mixed Income 1500 Private final consumption expenditure 4,500 Profit 1000 Depreciation 60 Rent 300 Net Investment 600 Net export (–) 30 Net Indirect tax 420 2. Calculate NNPFC by Income & Expenditure method. Items (in crores) Compensation of employees 1000 operating surplus 500 Social security benifits by employers 120 Net export (–) 30 Net Indirect tax 40 Mixed Income 600 Macro Economics : Page 24 Net Factor Income from abroad (–) 20 Depreciation 40 Private consumption expenditure 1400 Govt. final consumption expenditure 490 Net fixed capital formation 250 change in stock 30 3. Calculate GNPFC by Income & Expenditure method. Items (in crores) Net export 20 operating surplus 320 Net investment 250 Contribution on social securities by employers 100 Private final consumption expenditure 1200 wages & salaries 300 Net indirect tax 150 Net factor income from abroad (–) 20 Rent 100 depreciation 50 Govt. final expenditure 400 4. Calculate GNPMP by income & expenditure method. Items (in crores) Net investment 200 Private final consumption expenditure 1000 Rent, interest & profit 360 Wages & salaries 900 Govt. final consumption expenditure 300 Depreciation 50 Net indirect tax 200 Net factor income from abroad (–) 10 Employer’s contribution to social security 50 Net export 10 Macro Economics : Page 25 5. Calculate National Income (NNPFC) by income & expenditure. Items (in crores) Govt. expenditure 1000 wages & salaries 3800 divident 500 Rent 200 Interest 150 Net domestic capital formation 500 Profit 800 Employers contribution of social security 200 Net export (–) 50 Net factor income from abroad (–) 30 Depreciation 40 Private final expenditure 4000 Net indirect tax 300 6. Calculate National Income by income & expenditure method. Items (in crores) Interest 50 Rent 250 Government expenditure(final) 600 Private expenditure (final) 1200 Profit 640 Compensation of employees 1000 Net factor income from abroad (–) 30 Net indirect tax 60 Net export (–) 40 Depreciation 60 Net fixed capital formation 340 7. Calculate NNPMP Items (in crores) Macro Economics : Page 26 Compensation of employees 2000 Interset 500 Rent 700 Profit 800 Employer’s contribution to social security benefits 200 Divident 300 Depreciation 100 Net indirect tax 250 Net export 70 Net factor income from abroad 150 Mixed income 1500 8. Calculate GDPMP by income method & NNPFC by expenditure method. Items (in crores) Rent, interest & profit 290 Mixed income 260 Govt. final consumption expenditure 220 Import 170 Export 140 Private final consumption expenditure 1530 Change in stock 100 Compensation of employees 730 Net factor income from abroad 120 Subsidy 30 Depreciation 120 gross fixed investment 400 Indirect tax 850 9. Find GDPMP by income & expenditure method. Items (in crores) Compensation of employees 1300 Indirect tax 3700 Macro Economics : Page 27 gross fixed capital formation/investment 8100 Rent, interest & profit 5000 govt. final consumption expenditure 3600 Private final consumption expenditure 27000 change in stock 1000 Import of goods & services 1800 export of goods & services 1700 subsidy 300 Net factor income from abroad (–) 250 depreciation 2200 Mixed income 16000 10. Find GNPMP by income method & NNPFC by expenditure method. Items (in crores) Compensation of employees 400 Private final consumption expenditure 1120 Govt final consumption expenditure 150 Net factor income from abroad (–) 10 Depreciation/ consumption of fixed capital 80 Indirect tax 180 Change in stock 60 Mixed income of self employed 560 Net fixed investment 180 Net export (–) 10 Rent, interest, profit 190 Subsidy 20 11. Calculate GDPMP by income & expenditure method. Items (in crores) Private final consumption expenditure 620 wages & salaries 700 Employer’s contribution to social security scheme 100 Macro Economics : Page 28 Gross capital formation 180 Profit 100 Govt final expenditure 200 Rent 50 Interest 50 Net export 30 Net factor income from abroad (–) 10 Depreciation 20 Subsidy 10 Indirect tax 20 12. Calculate NNPFC by income & production method. Items in crores Gross value added by primary 300 Gross value added by secondary sector 200 Gross value added by tertiary sector 100 Intermediate consumption by primary sector 100 Intermediate consumption by secondary sector 50 Intermediate consumption by tertiary sector 50 Compensation of employees 150 Net factor income from abroad (–) 10 operating surplus 140 depreciation 40 Net indirect tax 20 Interest 20 Mixed income 50 Rent 10 13. Calculate GDPMP by income & production method. Items in crores Intermediate expenditure by primary & secondary sector 900 Intermediate expenditure by Tertiary sector 300 Macro Economics : Page 29 Gross value added by primary & secondary sector 1900 Gross value added by by Tertiary sector 700 Rent, interest & profit 290 Depreciation 40 Mixed income 100 Net factor income from abrood (–) 20 Compensation of employees 950 Net Indirect Tax 20 14. Calculate GNPMP Items (in crores) Change in stock (–) 10 Private final consumption expenditure 1000 Net fixed capital formation 150 Net factor income from abroad 10 govt. final consumption expenditure 300 Depreciation 30 Net export 20 ANSWER KEY 1.1 True fales type 1. True, when factor income from abroad is more than factor income to abroad. 2. False, affected only by factor income. 3. False, it is a part of private final consumption expenditure. 4. False, as it is not mareket activities. 5. False, as it is not contributed by the employer. 6. True, as it is difficult to measure the proper market value. 7. True, when the price level of both the year is same. 8. True, as it imputed value is to be included. 9. True. 10. True, as profit is the sum of corporate tax, divident & nundistributed profit. 11. False, Nret export = export- import Macro Economics : Page 30 12. True, operating surplus = Rent + interest + Royalty + profit. 13. True. 14. True. 15. False, as proper valuation of Leisure is not possible. 1.2 Multiple choice question : 1. b-NNPFC 2. d-compensation of employees. 3. b-closed economy 4. d-none 5. c- Net export 6. c- both (a) & (b) 7. a- sales+change in stock 8. b-Factor income 9. b- real value 10. c- sales- intermediate consumption Nominal GDP 11. b- Real GDP = ×100 Price Index 12. c- a house wife cooking for her family members. 13. a- rises. 14. b- 2000 15. a-1200. 1.3 Fill in the blanks :- 1. Intermediate consumption 2. Substract, add. 3. Consumption, investment. 4. 1050 5. Difference. 6. Property. 7. Constant. 8. Zero. 9. Service. 10. Indirect. 1.4 Short question :- 1. It is the money value of all the final goods & services produced with in the domestic territory of a country during a period of one year. 2. It is the money value of all the final goods & services produced by the normal residents of a country during a period of one year. 3. The 2 methods to avoid the double counting problem are final output method & value added method. 4. OS is the sum total of income from property (Rent, interest & Royalty) and income from entrepreneuship (profit) 5. It is the income generated from self-owned & self employed factors of production. Like farmer, barber etc. Macro Economics : Page 31 6. Its value is very difficult to calculate. 7. When GDP is estimated on the basis of certain base year price. 8. When GDP is estimated on the basis of current year price. 9. The ratio between Nominal GDP & Real GDP multipled by 100. 10 Use of public park, roads. 11. Polution made by industrial unit. 12. Intermediate consumption is the use of intermediate goods in production process. 13. The benefits or harms which are caused by one unit to another without any penalty for harm or payment for benefit. 14. Income received by the factors of production for their contribution to production process (rent, wages, interest, profit). 15. Payment made without receiving any goods or services in return. Ex: Gift, donation, etc. 16. Activities of acquiring goods & services without entering the market. Example: services of housewife. 17. Leakages are those flow variables which reduces the flow of income/money in the circular flow. Example: Taxes, import etc. 18. Injections are those flow variables which increases the flow of income/ money in the circular flow. Example : export, borrowing etc. 19. It arises when the value of some product is estimated more than once in the calculation of GDP. 20. It is the difference between total value of output & value of intermediate purchase of a firm. GVAMP = VO-IC Macro Economics : Page 32 ANSWER KEY Numerical question- (3/4 marks) 13. GVAMP = sales + change in stock (∆s) - intermediate consumptic (IC) = 50000 +15000-10000 = 55000 Lakh. 14. GVAMP = SALES + ∆ stock-IC = 750 x 40 + 10000 - 10000 = 30000 NVAFC = GVAMP - depreciation- Net indirect tax (NIT) = 30000-3000- (2000-0) [NIT = Indirect tax-subsidy] = 25000 15. GVAMP = sales + ∆S-IC = (2000 x 20) + (-500) - 5000 = 34500 GVAFC = GVAMP- NIT = 34500 - ( 0-3000) = 37500 16. GVAMP = sales + ∆ S-IC = 8000+100-5500 = 2600 Lakh. NVAMP = GVAMP- Ddepreciation = 2600-300 = 2300 Lakh. 17. Value of output = sales + ∆S = 1000+00 = 1000 Lakh. GVAMP = sales + ∆ S-IC = 1000+00-600 = 400 Lakh. NVAFC = GVAMP-depreciation - NIT = 400-50- (100-40) = 290 Lakh. 18. GVAMP/GDPMP = sales + ∆S-IC = 100+5-20 = 85 crores NDPFC/NVAFC = GDPMP -depreciation-NIT = 85-15- (5-1) = 76 crores. 19. GVAMP = sales + ∆ S-IC = 36000+200-2000 = 34200 NVAMP = GVAMP-depreciation = 34200-700 = 33500 Macro Economics : Page 33 Numerical questions : ( 6 marks) 1. Income method National Income (NNPFC) = Compensation of employees + mixed income + operating surplus + Net factor Income from abroad = 3000+1500+( 250+1000+300) + (-50) = 6000 crores. Expenditure method GDPMP = Govt. final consumption expenditure + Private final consumption expenditur + gross domestic capital formation + Net export = 1400+4500+(600+60) +(-30) = 6530 crores. National Income (NNPFC) = GDPMP- depreciation + Net factor income from abroad- Net indirect tax = 6530-60+(-50) -420 = 6000 crore 2. Income method; National Income (NNPFC) = 1000+600+500+ (-20) = 2080 crores. Expenditure method GDPMP = 490+1400+(250+40+30) +(-30) = 2180 crores. * (gross domestic capital formation = Net domestic fixed capital + depreciation + change in stock) National Income (NNPFC) = 2180-40+(-20)-40= 2080 crores. 3. Income method: National Income(NNPFC) = (1300+100) + 320 + (-20) = 1700 crores. GNPMP = NNPFC+ depreciation+Net indirect tax = 1700+50+150= 1900crores. Expenditure mehod : GDPMP = 400+1200 + (250+150)+20 = 1920 crores. GNPMP= GDPMP + Net factor income from abroad Macro Economics : Page 34 = 1920+(-20) = 1900 crores. 4. Income method : National Income(NNPFC) =(900+50) + 360+ (-10) = 1300 crores. GNPMP= GDPMP +depreciation +Net indirect tax = 1300+50+200 = 1550 crores. Expenditure mehod : GNPMP = 300+1000+(200+50) +10 = 1560 crores. GNPMP = 1560 + (-10) = 1550 crores. 5. Income method : National Income(NNPFC)=(3800+200) + ( 200150+800) +(-30) = 5120 crores. Expenditure method : GDPMP = 1000+4000+(500+40)+(-50) = 5490 crores. NNPFC = 5490-40+(-30) -300 = 5120 crores. 6. Income method : NNPFC = 1000+(250+150+640)+ (-30) = 2010 crores. Expenditure mehod: GDPMP = 600+1200+(340+60)+(-40) = 2160 crores. NNPFC = 2160-60+(-30) -60 = 2010 crores. 7. Income method : NNPFC = 2000+1500+(700+500+800+300)+150 = 5950 crores NNPMP= 5950+250 = 6200 crores. 8. Income method : NNPFC= 730+260+290+120 = 1400 crores GDPMP= 1400+120-(-120) +(850-30) = 22009 crores *(Net indirect tax = indirect tax-subsidy) 9. Income method : NNPFC=13000+16000+5000+(-250)= 34750 crores. GDPMP= 34750+2200-(-250) + (3700-300) = 39600 crores. Expenditure method : GDPMP= 34750+2200-(-250) + (3700-300) = 39600 crores. Macro Economics : Page 35 10. Income method :- NNPFC = 490+500+290+(-10)= 1330 crores GDPMP= 1330+80-(-10) + (180-20)= 1580 crores Expenditure method :- GDPMP= 150 +1120+(180+180+60) +(-10) = 1580 crores NNPFC= 1580-80+(-10) – (180–20) = 1330 crores 11. Income method : NNPFC= (700+100)+(50+50+100)+(-10)= 990 crores. GDPFC = 990+20-(-10) = 1020 crores. Expenditure method : GDPMP= 200+620+180+30= 1030 crores GDPFC= 1030-(20-10)= 1020 crores. 12. Income method : NNPFC=150+50+140+(-10)= 330 crores. Production method : GDPMP=Value of output of (primary+secondary+tertiary)-intermediate consumption of(primary+secondary+tertiary) = (300+200+100)-(100+50+50) = 400 crores. NNPFC= 400-40+(-10)- 20= 330 crores. 13. Income method : NNPFC= 950+100+290+(-20)= 1320 crores. GDPMP=1320+40-(-20)+20= 1400 crores Production method : GDPMP= (1900+700)-(900+300)= 1400 crores. 14. Expenditure method : GDPMP= 300+1000+{150+30+(-10)}+(-20)= 1450 crores. GNPMP= 1450+10 = 1460 crores. Macro Economics : Page 36 CHAPTER - 3 Money & Banking In modern times, it is very difficult to imagine the modern economy without money. It is the basic requirement of all economies as it is the commonly accepted medium of exchange. If economic agents engage themselves in market transaction, money becomes an important for facitilitating these exchanges. 3.1 Evolution of money : Before money was invented, the primitive world’s trade was carried out according to the barter system of exchange. It refers to the exchange of goods for goods. In barter system there requires simultaneous fulfillment of mutual wants of buyers & sellers and it leads to huge trading cost. Some other disadvantages are lack of common measure of value, lack of standard of deffered payments, lack of storing wealth etc. After barter system, there arises metalic money with growth of human civilisation. The medium of exchange were metals, specially Gold, silver. But after 1930, use of metalic money was discarded because, their supply was limited, difficulty in handling large transaction & lack of safety during transportation. Metalic money was replaced by paper money which facilitated huge transactions requiring the use of money. In India paper money is regulated & controlled by RBI. Than after we have bank or credit money which was invented to make the transactions convenient based on the trust and consent between buyers & sellers. People started using credit money like cheques, drafts etc. Plastic money in the form of credit cards, debit cards, ATM cards is also used now as medium of exchange. It reduces risk and easy to handle & commonly accepted in payment. 3.2 Money :- Money refers to the medium of exchange. i.e anything that can be used an a medium of exchange and at the same time acts as a store of value & standard of defered payments is called money. –This one is the functional defination of money. # Legal tender money/ Fiat money:- It refers to the money by order or authority of the govt. Which includes currency notes & coins. It has the legal power to discharge debt. # Non legal tender money/Fiduciary Money:- It refers to the money which is backed by the trust between the payer & the payee, which includes cheques, drafts, bills of exchange etc. It is also called optional money. – This is the legal defination od money. Macro Economics : Page 37 # Narrow defination of money :- It is based upon medium of payments function. It includes currency held by public (c) & demand deposits (DD) M=C+DD. i.e anything that is commonly accepted as medium of exchange is included in Narrow defination of money. # Broad defination of money :- It is based upon the store of value function of money. It includes curency (C), demand deposits (DD) & time deposit (TD) of Banks & post office. M=C+DD+TD. i.e. anything which widely used as a store of value is included in this category of money. 3.3 Function of money :- Money removes the problems faced in Barter system. The various functions performed by money are- (a) Medium of exchange :- As a medium of exchange, money is used to purchage & sale of goods & services and thus money offers the freedom of choice. (b) Measure of value :- Money is a unit of account. By reducing the value of all goods & services in a single unit of account, money has facilitated & simplified the system of exchange and makes it possible to keep the proper business account. (c) Store of value :- Money is the best form to hold asset as it is the most liquid from of asset. It is the commonly accepted measure of value and its value remains constant compared to other goods & easy to store. (d) Tranfer of value :- Value available with a person in the form of assets can be transfered to another person with the help of money easily, quickly & efficiently. (e) Standerd of diferred payment:- Since money has general acceptability, its value is stable, durable & homogeneous, money is also helpful in payment after a gap of time in the form of instalment. 3.4 Classification of money :- (a) Full bodies Money: It is the type of money whose face value is same as its material value. Example: gold, silver coin, when economy was in metalic standard. (b) Representative full bodies money: It is generally made of paper money whose face value is more than its metalic value & it is backed by 100% gold or silver reserves. Macro Economics : Page 38 (c) Credit money:- It is the money where face value in more than metarial or intrinsic value. Its types are- Token coins, circulating promissory Notes & deposite at Bank. 3.5 Money supply & its types :- Money supply is a stock variable & it refers to the sum total of stock of money which is in circulation in the economy at a particular point of time. Following are the 4 money supply measures published by RBI (a) M1 Measurement :- It is called narrow money & most liquid form of money. M1= C+DD+OD where, C = currency held by public DD= Net demand deposit with commercial & coperative Banks. OD= other deposit with RBI of quasi-government institution like ICICI, IDBI etc. (b) M2 Measurement :- It is a broader concept of money supply compared to M1. It includes deposits with post office savings bank by the public along with M1 Measurement. M2= M1+ deposits with post office savings bank. (c) M3 Measurement :- It is still broader concept of money supply compared to M1 meausurement and it includes net time/ term/fixed deposit of people with commercial Banks along M1. M3 = M1 +Net time deposite with commercial Banks. d) M4 Measurement :- It is called least liquid form of money and it is broader concept compared to M3. It includes deposits with post office (excluding National service certificates) along with M3 M4 = M3 + total deposite with PO(excluding NSCS) 3.6 Components of money supply :- a) Currency held by public- All the paper currency notes & currency coins which are in circulation are included in currency held by public. Here face value of such currency is more than its material value. b) Demand deposite;- These are the deposits made by the banks which are withdrawable through cheques, drafts etc. This are included in money supply because these are claims of the creditor againsts bank which can be transferred from one person to another through using cheques, drafts etc. Macro Economics : Page 39 3.7 Factors/ Determinents of money supply :- a) Central Bank:- It is responsible to issue currency notes & coins in the country. So money supply is determined by the central bank first. For this the supply of money can be increased or decreased in the country by the central Bank. b) Commercial Bank:- Ammount of money deposited by the public may or may not be tended by the commercial bank. If the banks increase the rate of interest then money supply will fall in the country & vice-versa. c) Government:- The activities of govt. also affects the money supply. To increase the collection of revenue if govt. increases the existing tax rate or introduces new taxes than money supply will fall and vice-versa. But if govt. increases its various development & welfare activities the money supply will rise. d) Volume of Trade:- Money supply is directly related with trade & commercial activities. If the trade & commercial activities rises in the country then sale & puechase activities will rise and with that money supply also will rise. 3.8 Commercial Bank Commercial bank is a safe custody of money which it pays out on customer’s demand, order of otherways. Example: SBI, PNB, UBI, TGB etc. Primary Function of Commercial Bank : a) Accepting deposit :- It is the basic function of commercial bank is to accept deposite from each & every class & source of the country. To attract deposit banks accept the following types of deposit– i) Current account deposit ii) Savings account deposit. iii) Recurring deposit. iv) Fixed deposit. Different rate of interest is paid by the banks on different mode of deposit on the basis of period of time for which the amount has deposited. b) Providing loans :- The second basic function of commercial bank is to provide loans and advances to the public to fulfil their need of fund. Loans may be granted in the form of– i) Cash credit ii) Demand credit iii) Short term loan iv) Overdraft Macro Economics : Page 40 v) Discounting of Bills. Bank charge different rate of intterest from the borrower for different types of loans on the basis of the time for which the loan in sanctioned. c) Credit Creation : In the process of accepting deposite & advancing loans, the commercial banks are also able to create credit. Those who receive loans from the bank, a new account is created for that person and loan amount is deposited in that account. Thus, new accounts are created and money multiplies in this process. By this banks are able to create credit. Agency Function of Commercial Bank a) Banks provide facilities for easy and cheap transfer of fund from one place to another or one person to another through instruments like cheque, draft, mail transfer, telegraphic transfer etc. b) Banks also collect fund on behalf of its coustomers through instruments like cheques, draft, bills of exchange etc. c) Purchase & sale of share & collection of divident on behalf of its costomer. d) Acting as executors & trustees of wills. e) Purchase & sale of bonds & securities of govt. f) Provision of income tax consultancy and acceptance of income tax on behalf of its costomer. g) Payment of bills and insurance premium of its customer. General Utility Function of Commercial Bank a) Purchase & sale of foreign exchange. b) Issue of traveller’s cheque. c) Safe custody of valuable goods in lockers. d) Underwriting activities & private placements of securities (Privately to selected entities). e) Consultancy to customer on finncial matters by collecting & publishing statistics related to trade, commerce & industry. 3.9 Central Bank & its function A central bank is an apex institution of a country which controls & regulates the banking & financial activities of the country. RBI is the central Bank of India. Following are the function of central bank- (a) Issuing Authority:- One of the basic function of centarl bank is to issue currency for the public of the country. The sole right has been given to the central bank of India to issue of currency (except one rupee notes & coins) in the country. For this– i) It leads to uniformity in note circulation. Macro Economics : Page 41 ii) It enables the govt. to control money system through RBI. iii) It builds up public faith in currency system It is monitary liability of RBI to issue new currency. In case of deificit, central govt. borrow from RBI. This is done by selling security bills of RBI & then RBI issues new currency (i.e. deficit financing) (b) Banker to the govt.:- As a banker to the govt., the central bank perfomrs the following functions- 1. It accepts receipts, deposites, makes payments, carries out exchange, remittance & other banking operation on behalf of govt. 2. It provides short term credit against securities to the government, 3. It manages public debt i.e. manages all new issues of govt. loans, services the public debt outstanding & nurtures the public debt outstanding. 4. As a agent, it collects taxes & other payments on behalf of government. 5. As an advisor, it advices the govt. on various economic, banking, financial mattters and international finance. (c) Banker of the commercial Banks:- As a banker & supervisor of commercial Banks, central bank performs the following functions- 1. Custodian of cash reserves:- Every Commercial bank has to maintain a certain amount of his cash reserve with Central bank, which is called Cash Reserve Ratio (CCR). Central Bank holds that CRR. 2. Lender of last resort:- As a lender of last resort it makes short term loans & advances available to them, i.e. It provides financial accomodation to commercial banks against approved securities. 3. Clearing house function:- when the central bank works in the form of cleaning agency, it is convenient & save time for commercial banks to settle their claims at one place.It also economics the utilisation of money. It also transfer fund from one bank to another to facilitate clearing of cheques. 4. Supervisor:- The central book supervises, regulate & controls the activities of commercial banks.The regulation may be related to their licensing, brance expansion, Liquidity of assets, management, periodic inspection of banks, amalgamation etc. (d) Controller of credit & money supply:- Through various quantitative & qualitative instruments central bank can control the credit creation capacity of commercial banks & also the money supply of the economy. Macro Economics : Page 42 The quantitative measures are- 1. Bank Rate/ Repo rate & reverse repo rate. 2. Cash reserve ratio. 3. Statutory Liquidity ratio. 4. open market operation. The qualitative measures are- 1. Marginal requirement 2. Moral suasion & direct action. 3. Selective credit control & credit rationing. (e) Custodian of foreign exchange reserves & gold:- The Central bank is the custodian of a countries stock of gold & foreign currencies. It maintains the stability of exchange rate fixed by the Govt. By the sale & purchase of foreign currencies in the market, it maintains the internal & external value of currency. STUDY AIDS 1. Types of credit issued by commercial Banks a) Cash credit:- A credit limit is sanctioned up to which the user may borrow from the bank on a given security. Interest is charged on amount actually used. b) Demand Credit:- The loan can be recalled on demand by the bank at any time. But interest is charged on the whole amount of loan. c) Short term loan:- This loan is given as personal loans or, are advanced as priority sector. Whole amount of loan is chargeable to interest. d) Over draft:- Under this arrangement a customer having a current account is allowed to withdwraw more than what he was deposited. The security of over drafts is usually financial assets of the account holder, such as shares, debentures, LIC policies etc. Rate of interest is lower than of cash credit as it is easier to liquidity financial assets than physical assets. e) Discounting bills of exchange:- Under this arrangement a customer can get the amount of bill receivable from the bank before the date of Macro Economics : Page 43 maturity. Bank deducts the discount charges from the gross amount. On the date of maturity, the bank gets the amount from the acceptor of the bill. 2. Credit Creation by Commercial Bank:- Credit Creation/ Money Multiplier Process- In the process of accepting deposits & advancing loan, commercial banks are also able to creat credit. Those who receive loans from bank, the loan amount created by Commercial Bank. Thus, new accounts are created & money multiplies in this process and banks are able to creat credit. Example:- Suppose a person deposits 1000 in a bank, that 1000 is called primary deposite (PD) of the bank. Again, let bank knows from its experience that 20% of cash reserve is required to fulfil the cash demand of the public. This 20% is the cash reserve ratio (CRR) of the bank. 1 Total credit creation = PD × CRR The process is like following- Out of PD of 1000, bank will keep 20% of 1000 i.e.200 as CRR to meet the demands out of liabilities to its depositors & land the remaining 800. Borrower of 800 will use this money & the money will come back to the banking system (as drawn on bank). Now 800 is the derivative deposite, bank will keep 20% of 800 i.e 160 as CRR & the remaining 640 to the borrow as loans. This process continues and bank can creat a credit of 5000 starting from PD of 1000. 1 1 Total credit creation = PD × = 1000 × = 5000 CRR 20% Transaction Deposits Legal Reserve Loans Round 1st Round 1000(PD) 200 800 2nd Round 800 160 640 3rd Round 640 128 512 § § § § Total 5000 1000 4000 Macro Economics : Page 44 3. Write the difference:- Central Bank Commercial Bank a) It is an apex institute in the money market. a) It operates under the control of central Bank. b) A country has only one central bank b) A country has a large number of Comercial which is generally owned & controlled banks which may be owned by Govt. or by the Govt. private sector. c) It doesn’t deal with general public. c) It deals with general public. d) It is the sole authority to issue currency. d) It has no such power. e) It doesn’t aim at profit e) It aims at profit. f) It controls credit. f) It creates credit. g) It works as an agent, advisor & banker g) It has no such status. to the govt. and also advices the govt. in various fiscal & monetary matters of govt. 4) Vaious types of deposites which are accepted in the Commercial Bnak. a) Current account deposite:- These are payable on demand and can be withdrawn upon by cheque without any restriction. No interest is paid against such deposits & in some cases service charges also may be imposed by the bank. b) Savings account deposite:- These are also payable on demand but having restriction on number of withdrawl or number of cheque issued. Rate of interest is nominal in such deposite. c) Recurring account deposite:- It is payable on demand but after a certain period of time a fixed amount of deposite is required in every month for that certain period. Interest rate is more than the savings deposite & less than fixed deposite. d) Fixed deposite:- It is one time investment for a certain fixed period of time where withdrawl is possible only after the maturity period. Rate of interest is more than reccuring deposite. Macro Economics : Page 45 EXERCISE A) True or False:- 1. In barten system, deffered payments are made in the form of goods. 2. In case of credit money, money value is less than commodity value. 3. Supply of money includes stock of money hold by the government. 4. Commercial banks add to the supply of money through demand deposits. 5. Only net demand deposits are taken as a part of money supply 6. In india CRR is determined by the commercial banks themselves. 7. Banks lend money many times more than their cash reserve with the RBI. 8. The central bank focuses on growth and stability of the economy. 9. Credit creation is the principal function of the central bank. 10. The notes issued by the central bank are an unlimited legal tender. B) Choose the correct option:- 1. Money that is issued by the authority of the government is called- a) full bodied money b) Credit money c) fiat money d) fiduciary money 2. Which of the following is the component of M1 measure of money supply- a) Term deposit b) Demand deposits c) Cash reserve of the commercial banks d) None of these 3. Bank money is that money which is- a) Printed by RBI b) Printed by the government c) Generated in the form of credit creation, d) None of these 4. Who supplies money in India? a) The RBI b) The commercial banks c) The government d) all of these 5. In India coins are issued by:- a) State Bank of India b) RBI c) Ministry of finance d) Ministrey of urban development. 6. The main aim of the commercial banks is- a) Social welfare b) to earn profits Macro Economics : Page 46 c) to provide services to the people d) none of these 7. Central bank is an apex bank of the country that- a) Controls the entire banking system of the country b) issues currency c) acts as a banker to the government d) All of these 8 Which of the following is not the instrument of credit control? a) CRR b) SLR c) Bank rate d) Managed floating 9. The credit multiplier(K) = _________ 1 1 a) b) CRR SLR 1 c) d) None of these Bank Rate 10. Reverse repo rate- a) generates interest income b) is used to curb inflation c) is not a policy rate d) both (a) and (b) C) Fill in the blank:- 1. A thing which is commonly accepted as a medium of exchange is called __________. 2. A system where goods are exchanged for goods is known as _________. 3. Main characteristic of money is ___________. 4. __________ value of a paper note is what is written on it. 5. commercial banks contribute to the supply of money by way of _________. 6. Demand Deposits = Primary deposits + ___________. 7. By selling the securities in the open market, the RBI _________ Liquidity from the economy. 8. Rationing of credit is the __________ method to control money supply in the economy. 9. The _________ bank is a apex bank of the entire banking system. 10. The __________banks are not the note issuing authority. D) Objective type questions:- 1. What is money? 2. What is Barten system of exchange? 3. What is fiat money? 4. What is fiduciary money? Macro Economics : Page 47 5. What is full bodied money? 6. What is credit money? 7. Define money supply? 8, What is bank money? 9. What is Bank? 10. Define credit multiplier? 11. What is primary deposits? 12. What is a central bank? 13. Define CRR? 14. What is SLR? 15. Define bank rate? 16. What is repo rate? 17. Define reverse repo rate? 18. Define margin requirement? E) Answer the following questions:- (3/4 marks) 1. What are the Drawbacks of the Barten system of exchange? 2. Explain “ Double coincidence of wants”. 3. What are the important forms of money? 4. State M1 measure of money supply. 5. Explain the process of money creation by the commercial banks. 6. Explain the principal functions of the central bank. 7. Write the differences between “ The central Bank” and “ A commercial Bank”. 8. What are the instruments of monetary policy of RBI? 9. Write short note- open market operation. 10. Write the Agency function of Commercial Bank. Macro Economics : Page 48 ANSWER A) True/ False- 1. True. 2. False. 3. False. 4. True. 5. True. 6. False. 7. True. 8. True. 9. False. 10. True. B) M.C.Qs. 1. fiat money. 2. demand deposits 3. generated in the form of credit creation. 4. All of these 5. Minstry of finance. 6. to earn profit 7. All of the above. 8. Managed floating 1 9. 10. both (a) and (b) CRR C) Fill in the blanks:- 1. money 2. barter system of exchange 3. liquidity 4. money 5. loans and demand deposits 6. secondery deposits. 7. soaks 8. qualitative 9. central 10. commercial. D) Objective type question answer:- 1. Money is anything which is commonly accepted as a medium of exchange. 2. Barter system of exchange is the system in which commodities are exchanged for commodities. 3. Fiat money refers to that money which is issued by order of the government. 4. Fiduciary money is the money backed with mutual trust between the payer and the payee. 5. Full bodied money refers to money in terms of coins whose commodity value is equal to the money value as and when these are issued. 6. Credit money is the money of which money value is more than commodity value. 7. Money supply refers to the total quantity or stock of money available in the economy at a point of time. 8. Bank money is the money created by the commercial banks in the form of demand deposits, over and above cash deposits of the people with the banks. 9. A bank is a financial institution where customers can save or borrow money. 1 10. Credit multiplier is the reciprocal of CRR. credit multiplier = CRR Macro Economics : Page 49 11. Primary deposits are cash deposits with the commercial banks by the people. These are a part of demand deposits of the banks. 12. A central bank is an apex institution of a country that control and regulates the monetary and financial system of the country. 13. CRR refers to the legally required cash reserves of the commercial banks with the central bank as a percentage of their total deposits. 14. SLR refers to liquid assets of the commercial banks which they are required to maintain as a minimum percentage of their total deposits. 15. The bank rate is the rate at which the central bank offers loans to the commercial banks (long term). 16. Repo rate is the rateof interest at which commercial banks raise short term loans from the central bank. 17. Reserve repo rate is the rate of interest of which commercial banks can

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