MINIMUM LEVEL OF LEARNING -
MACROECONOMICS
1. Distinguish
between Stock & Flow.
2. Differentiate
between Personal Income and Private Income and National Income.
3. Differentiate
between consumption goods and capital goods.
4. What
precautions should be taken while calculating National Income by Value Added
Method? OR
What
precautions should be taken while calculating National Income by Value Added
Method? OR
What
precautions should be taken while calculating National Income by Value Added
Method?
5. Write
the steps while calculating National Income by Value Added Method? OR
Write the steps
while calculating National Income by Value Added Method? OR
Write the steps
while calculating National Income by Value Added Method?
6.
Explain the four functions of money.
1.
Medium of exchange 2. Measure of value
3.
Store of value 4.
Standard of differed payment
7.
Explain the credit creation by commercial bank
with a numerical example.
8.
Explain the functions of Central Bank.
9.
What do you mean by double coincidence of wants?
OR
What
are the drawbacks of barter system? How money overcome to this problem?
10. Explain
the Income determination by AD = AS approach. How to reach at Equilibrium when
AD>AS & AS>AD?
11. Explain
the Income determination by I=S approach. How to reach at equilibrium when I
> & I<S?
12. How
will you derive the consumption curve from saving curve? OR
How will you
derive the saving curve from consumption curve?
13. Distinguish
between Excess demand & Deficient demand. How will you correct the Excess
demand (ADrequired < ADacual) (Inflationary Gap)
situation with fiscal policy and monetary policy? OR
Distinguish
between Excess demand & Deficient demand. How will you correct the
Deficient demand (ADrequired > ADacual) (Difationary
Gap) situation with fiscal policy and monetary policy?
14.
Explain the objectives of budget.
15.
Explain the implications of:
1.
Revenue Deficit. 2. Primary
Deficit. 3.
Fiscal Deficit,
16.
Differentiate between Revenue Budget &
Capital Budget.
17. What
are the components of current account of Balance of Payment?
18. What
are the components of capital account of Balance of Payment?
19. Differences
between Balance of Trade and Balance of Payment.
10.
Differences between Autonomous items & Accommodating items.
11.
Why foreign exchange demanded?
12.
What are the supply sources of foreign exchange?
13.
Impact of Appreciation / Revaluation and Depreciation / Devaluation on its
export & Import of a country.
14.
Differentiate between Appreciation & Depreciation.
15.
Differentiate between revaluation & devaluation.
16.
Explain foreign exchange rate determination.
17.
Write short notes on fixed exchange rate, Flexible exchange rate & Managed
floating exchange rate.
18.
Merits & demerits of fixed exchange rate, Flexible exchange rate &
managed floating exchange rate.
MINIMUM LEVEL OF LEARNING - MICROECONOMICS
1.
Explain
central problems of an economy with the help of PPC.
2.
What
are the possible situations when PPC shifts rightward or leftward.
3.
Differentiate
between Positive economics & Normative economic.
4.
What
do you mean by Marginal opportunity cost.
5.
Explain
relation between MU & TU.
6.
Explain
Law of diminishing Marginal utility.
7.
What
is Indifferences curve? Explain its properties.
8.
What
is Budget line.
9.
Cases
related to equilibrium of consumers:
i). MUx > Px OR MUx < Px
ii). MUx / Px >MUy / Py OR MUx
/ Px < MUy / Py
iii). MRSxy > Px/Py OR MRSxy
< Px/Py
10. Explain factors affecting individual
demand and market demand.
11. Differentiate between change in
demand & change in quantity demanded.
12. Explain the chain effect of change in
prices of related goods & its impact on demand of given commodity.
13. Explain Factors affecting elasticity
of demand.
14. Differences between change in supply
& change in quantity supplied.
15. Explain Factors affecting supply.
16. Differences between Returns to factor
& returns to scale.
17. Reasons behind the phases of
Increasing Returns to a Factor, Diminishing Returns to a Factor and Negative
Returns to a Factor.
18. Explain the relationship between
different cost concepts.
19. Explain relationship between
different revenue concepts in different markets.
20. Explain producer’s equilibrium with
MR = MC approach.
21. Differentiate between market forms on
the basis of no. of buyers & sellers, control over price, selling cost,
product, knowledge about market, entry & exit & shape of demand curve.
22. What are the regions for emergence of
monopoly?
23. Differentiate between Collusive &
non collusive oligopoly & Perfect & differentiated oligopoly.
24. Chain reaction of excess demand &
excess supply situations.
25. Explain Price ceiling & price
floor concept.
Contact if you have any doubt
Dr.
Asad Ahmad
PGT
Economics
K V
mungaoli
Bhopal
Region
09451927636,
09300927636
Facebook
page - @madeeconomicseasy
Blog –
drahmadasad.blogspot.com
You tube channel – Dr. Asad Ahmad
MINIMUM LEVEL OF LEARNING - MACROECONOMICS
1. Distinguish
between Stock & Flow.
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STOCK
|
FLOW
|
|
* It refers to that variable which is measured at
a point of time.
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* It refers to that variable which is measured
over a period of time.
|
|
It does not have time dimension.
|
* It has a time dimension as its magnitude can be
measured over a period of time
|
|
* It is a static concept.
|
* It is a dynamic concept.
|
|
* Examples – Population of India as on 31.3.2014,
Money Supply, National Wealth
|
* Examples – No of birth during 2014, national
income, Expenditure in money.
|
2. Differentiate
between Personal Income and Private Income and National Income.
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Personal Income
*Income actually received by household from all
sources.
*Narrower concept; part of private income.
*Personal Income = Private income – Corporation
Tax – retained earnings
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Private Income
*Income which accrues to private sector from all
sources.
*Broader concept; includes personal income.
*Private income = Personal Income + Corporation
Tax + retained earnings
|
Personal Income
*Sum total of all incomes that are actually
received by households from all sources.
*Includes both factor and transfer income.
*Does not includes income earned by Public
Sector.
|
National Income
*The sum total of all the factor incomes, earned
by the normal residents of a country.
*Includes only factor Incomes.
*It includes income earned by Public Sector.
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3. Differentiate
between consumption goods and capital goods.
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CONSUMPTION GOODS
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CAPITAL GOODS
|
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* These goods satisfy human wants directly.
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* Such goods satisfy human wants indirectly.
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* These goods have direct demand.
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* Such goods have derived demand.
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They do not promote production capacity.
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* They help in rising production capacity.
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* Most of the consumption goods (except durable
goods) have limited expected life.
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* Capital goods generally have an expected life
more than one year.
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4. What
precautions should be taken while calculating National Income by Value Added
Method?
STEPS-
(1) Identify
and classify the production units. (2) Estimate Gross Domestic product at
Market Price ƩGVAMP = GDPMP. (3) Calculate
Domestic Income (NDPFC) = NDPFC = GDPMP –
Depreciation – Net Indirect Tax. (4)
Estimate net factor income from abroad (NFIY) to arrive at National
Income. NNPFC = NDPFC + NFIA.
OR
What precautions
should be taken while calculating National Income by Value Added Method?
STEPS-
(1) Identify and
classify the production units. (2) Estimate the factor income paid by each
sector. (3) Calculate Domestic Income (NDPFC) = NDPFC =
C.O.E. + Rent and Royalty + Interest + Profit + Mixed Income (4) Estimate net
factor income from abroad (NFIY) to arrive at National Income. NNPFC
= NDPFC + NFIA. OR
What precautions
should be taken while calculating National Income by Value Added Method?
STEPS-
(1) Identify the
Economic units incurring Final Expenditure (2) Classification of Final
Expenditure (PFCE + GFCE + GDCF + Net Export = GDPMP) (3) Calculate
Domestic Income ( NDPFC) = NDPFC = GDPMP –
Depreciation – Net Indirect Tax. (4) Estimate net factor income from abroad
(NFIY) to arrive at National Income. NNPFC = NDPFC +
NFIA.
5. Write
the steps while calculating National Income by Value Added Method?
PRECAUTIONS-
(1)
Intermediate Goods are not to be included in N.I. (2) Sale and Purchase of
second hand goods is not included. (3) Production of services for self
consumption (Domestic Services) is not included. (4) Production of Goods for
self consumption is not included. (5) Imputed value of owner occupied houses
should be included. (6) Change in stock of Goods (inventory) will be
included. OR
Write the steps
while calculating National Income by Value Added Method?
PRECAUTIONS-
(1) Transfer Incomes
are not included in the N.I. (2) Income from sale of second hand goods will not
be included. (3) Income from sale of shares, bonds and debentures will not be
included. (4) Windfall gains. (5) Imputed value of services provided by owners
of production units will be included. (6) Payments out of past savings are not
included in the N.I. (7) Indirect Taxes are not included in N.I. at factor
cost. OR
Write the steps
while calculating National Income by Value Added Method?
PRECAUTIONS-
(1) Expenditure on
Intermediate Goods will not be included in the National Income. (2)Transfer
payments are not included. (3) Purchase of second hand goods will not be
included. (4) Purchase of financial assets (shares, debentures, Bonds) will not
be included. (5) Expenditure on own account production will be included in the
National Income.
6. Explain
the four functions of money.
2.
Medium of exchange 2. Measure of value
3.
Store of value 4. Standard of differed payment
FUNCTIONS OF MONEY (money has overcome the drawbacks of barter system)
1- Medium of Exchange – it means that money acts as a
medium for the sale and purchase of goods and services. A buyer can buy goods
through money and a seller can sell goods for money. In the absence of money,
goods were exchanged for goods. This required double coincidence of wants. It has removed the major difficulty of the double coincidence of
wants.
2- Measure of Value -Money
serves as a measure of value in terms of unit of account. Unit of account means
that the value of each good or service is measured in the monetary unit.
Measurement of value was very difficult in the barter system one good was
valued in terms of the other. Introduction of
money has removed this difficulty. It acts as a yardstick of standard measure
of value to which all other things can be compared.” Money measures the value
of everything or the prices of all goods and services can be expressed in terms
of money. This function of money also enables the trading firms to ascertain
their costs, revenues, profits and losses.
3- Standard of Deferred Payments – Deferred Payments referred to those payments which are to be made in
near future. Money act as a standard of deferred payments due to the following
reasons –
* Value of money remains more or less
constant compared to other commodities.
* Money has the merit of general
acceptability.
* Money is
more durable compared to other commodities.
4- Store
of Value – Money can be stores and does not lose value. Money acts as a
store of value due to the following reasons.
* It is
easy and economical to store.
* Value of
money remains relatively constant.
* Money
has the merit of general acceptability.
7.
Explain the credit creation by commercial
bank with a numerical example.
MONEY
CREATION OR CREDIT CREATION - Money creation (or deposit creation
or credit creation) by the commercial banks is determined by (1) The amount of
the initial fresh deposit and (2) The Legal Reserve Ratio
(LRR) – It is the minimum ratio of deposit legally required to be kept
as cash by the banks. LRR includes Cash Reserve Ratio – It is the
minimum proportion of cash reserves which is kept by commercial banks with the
central bank against its total deposits; and Statutory Liquidity Ratio –
It is that proportion of the total deposits which a commercial bank has to keep
with itself in the form of liquid assets (i.e. cash, gold and unencumbered
approved securities). It is assumed that all the money that goes out of banks
is redeposit into the banks.
PROCESS - Let the
LRR be 20% and there is a fresh deposit of Rs.10000. As required the banks keep
20% i.e. Rs 2000 as cash. Suppose the banks lend the remaining Rs8000 those who
borrow use this case money for making payments as assumed those who receive
payments put the money back into the banks in this way banks receive fresh
deposits of Rs 8000. The banks again keeps 20% i.e. Rs1600 as cash and lend
Rs.6400 which is also 80% of the last deposit the money again comes back to the
banks’ lending to a fresh deposit of Rs 6400. The money goes on multiplying in
this way and ultimately total money creation is Rs =50000. Credit creation by
banks is done by the formula.
As seen in
the table, banks are able to create total deposits of Rs. 50000 with the
initial deposits of just Rs. 10000. It means, total deposits become ‘five
times’ of the initial deposit. Five times means Value of ‘Money Multiplier’
Money
Multiplier or Deposit Multiplier – It measures the amount of money that
the banks are able to create in the form of deposits with every unit if money
it keeps as reserves.
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Initials Deposits
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Deposits
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Loans
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LRR=20%
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Money
Creation = Initial Deposit x 1/LRR,
Money
Multiplier = 1/LRR
Money
Creation = Initial Deposit x Money Multiplier
Money
Multiplier = 1/ (20/100), 1/0.20
= 5
Money
Creation = Initial Deposit x Money Multiplier
Money
Creation = 10000 x 5 = 50000
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Round - 1
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10000
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8000
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2000
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Round - 2
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8000
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6400
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1600
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Round -3
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6400
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5120
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1280
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---
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---
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---
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---
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---
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Total
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50000
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40000
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10000
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8.
Explain the functions of Central Bank.
1. Currency Authority or Bank of Note
Issue - Central bank is a sole authority to issue
currency in the country. The main advantages of sole authority of note issue.
(a)Uniformity in note circulation, (b) Better supervision and control, (c) It
is easy to control credit, (d) Ensure public faith, (e) Stabilization in
internal and external value of currency.
2. Banker’s Bank-
RBI
acts as Bankers bank in 3 capacities-
Banker’s
Bank and Supervisor – There
are no of commercial bank in country. There should be some agency top regulate
and supervise their proper functioning. Being the apex bank, The RBI regulates
and controls the commercial banks. The regulation of banks may be related to
their licensing, branch expansion, liquidity of assets, management. Merging,
winding up etc. The control is exercised by periodic inspections of banks and
the returns filed by them.
Custodian
of Cash Reserve –
Commercial Banks must keep a certain proportion of cash reserves with the
central banks from their total Deposit (known as Cash Reserve Ratio or CRR).
Lender
of Last Resort - The
central bank also acts as lender of last resort for the other banks of the
country. It means that if a commercial bank fails to get financial
accommodation from anywhere, it approaches the central bank as a last resort.
Central bank advances loan to such a bank against approved securities. As a
lender of the last resort, central bank exercises control over the entire
banking system of the country.
3. Banker to the Government – The central bank act as a banker, an
agent and a financial advisor to the central government and all the state
governments except J&K).
Banker
to the Government – As a
Banker - to the govt., it acts like commercial bank to the public. Accepts receipts & makes payment for the
govt. It provides short term credit to the govt. It provides foreign exchange
resources to the govt. to repay external debt. It manages public debt. It
advises the govt. on banking & financial matters.
As
an Agent – The
central bank also has the responsibility of managing the public debt and collect
taxes.
As
a financial Advisor – The
central bank advises the government from time to time on economic, financial
and monetary matters.
4. Clearing House - Every bank keeps cash reserves with the
central bank. The claims of banks against one another can be easily and
conveniently settled by simple transfers from in to their account. Supposing,
Bank A receives a cheque of Rs 10,000 drawn on Bank B and Bank B receives a
cheque of Rs. 15000 drawn on Bank A. The most convenient method of settling or
clearing their mutual claims is that Bank A should issue a cheque amounting to
Rs 5000 in favour of Bank B, drawn on central Bank. As a result of this
transference, a sum of Rs 5000 will be debited to the account of Bank A and
credited to the account of B. There is no need of cash transactions between the
banks concerned. It facilitates cash transaction across the entire banking
system, it also reduces requirement of cash reserves of the commercial banks.
5.
Custodian of Foreign Exchange Reserves - Another important function of Central
Bank is the custodian of foreign exchange reserves. Central Bank acts as
custodian of country’s stock of gold and foreign exchange reserves. It helps in
stabilizing the external value of money and maintaining favorable balance of
payments in the economy.
6. Controller of Money Supply and Credit – Central bank or RBI plays an important
role during the times of economic fluctuations. It influences the money supply
Through Quantitative instruments ( like – Bank Rate, Open Market Operations,
legal Reserve ratios, Cash reserve Ratios, Statutory Liquidity ratios) and
Qualitative instruments ( like – Moral Suasion, Credit Rationing, Direct
Action, Margin Requirements).
9.
What do you mean by double coincidence of
wants? OR
What
are the drawbacks of barter system? How money overcome to this problem?
Draw
Backs of Barter System –
1.
Problem of Double Co incidence of Wants – A can exchange goods with B only when
A has what B wants and B has what A wants.
2.
Lack of Common Measure of Value
3.
Lack of Standard of Deferred Payment
4.
Difficulty in Storing Wealth.
5. Lack of
Divisibility.
10. Explain
the Income determination by AD = AS approach. How to reach at Equilibrium when
AD>AS & AS>AD?
AD = AS
Approach – Equilibrium level is determined when AD is equal to AS.
AD>AS =
It means that consumers and firms together would be buying more goods
than the firms are willing to produce. As a result planned inventory would fall
below the desired level. To bring the inventory back to the desired level,
firms would resort to increase in employment and output till the economy is
back at output level at OY, where AD is become to AS and there is no further
tendency to change.
AS>AD
= It means that consumers and firms together would be buying less goods
than the firms are willing to produce. As a result planned inventory would
rise. To clear the unwanted increase in inventory, firms Plan to decrease the
employment and output till the economy is back at output level at OY, where AD
is become to AS and there is no further tendency to change.
11. Explain
the Income determination by I=S approach. How to reach at equilibrium when I
> & I<S?
I = S
Approach –Equilibrium level is determined when I = S.
I > S
= If planned saving is less than planned investment, i.e. before point
E. It means that households are consuming more and saving less than what the
firms expected them to. As a result planned inventory would fall below the
desired level. To bring the inventory back to the desired level, firms would
plan to increase in employment and output till saving and investment equal to
each other and there is no further tendency to change.
S > I
= If planned investment is less than planned saving, i.e. after point
E. It means that households are not consuming as much as the firms expected
them to. As a result inventory rises above the desired level. To clear the unwanted increase in inventory,
firms would plan to reduce the production till saving and investment equal to
each other and there is no further tendency to change.
12. How
will you derive the consumption curve from saving curve? OR
How will you
derive the saving curve from consumption curve?
13. Distinguish
between Excess demand & Deficient demand. How will you correct the Excess
demand (ADrequired < ADacual) (Inflationary Gap)
situation with fiscal policy and monetary policy? OR
Distinguish
between Excess demand & Deficient demand. How will you correct the
Deficient demand (ADrequired > ADacual) (Difationary
Gap) situation with fiscal policy and monetary policy?
EXCESS
DEMAND - It is a situation when actual aggregate demand is more than
aggregate demand required at the full employment equilibrium. It is also known
as Inflationary Gap.
DEFICIENT
DEMAND - It is a situation when actual aggregate demand is less than
aggregate demand required at the full employment equilibrium. It is also known
as Deflationary Gap.
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EXCESS DEMAND
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CORRECTION
MEASURES
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DEFICIENT DEMAND
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FISCAL MEASURE ( ADOPTED BY GOVERNMENT )
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It refers to the situation when
AD >AS at full employment equilibrium.
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Decrease
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Expenditure Policy
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Increase
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It refers to the situation when
AD<AS at full employment equilibrium.
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|||||||
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Increase
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Taxation Policy
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Decrease
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|||||||||
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It leads to Inflationary gap.
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Increase
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Public Borrowings
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NO
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It leads to Deflationary Gap.
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|||||||
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Its indicate Over Full
Employment equilibrium.
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NO
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Deficit Financing
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Yes
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Its show Under Employment
Equilibrium.
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MONETARY POLICY – QUANTITATIVE ( ADOPTED BY RBI )
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|||||||||||
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It occurs due to excess of anticipated
expenditure, i.e. due to rise in consumption expenditure, investment
expenditure, etc.
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Increase
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BANK RATE
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Decrease
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It occurs due to shortage of
anticipated expenditure, i.e. due to fall in consumption expenditure,
investment expenditure, etc.
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Increase
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REPO RATE
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Decrease
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|||||||||
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Increase
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RESERVE RAPO RATE
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Decrease
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|||||||||
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Increase
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CASH RESERVE RATIO
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Decrease
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|||||||||
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Increase
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S. L. R.
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Decrease
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|||||||||
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It does not affect the Output,
Employment and Income level as economy is already operating at full
employment level.
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Sell of Securities
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OPEN MARKET
OPERATION
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Purchase of Securities
|
It leads to fall in output and
employment due to shortage of aggregate demand.
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|||||||
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MONETARY POLICY –
QUALITATIVE ( ADOPTED BY RBI )
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|||||||||||
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Increase
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MARGIN REQUIRMENTS
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Decrease
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|||||||||
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It leads to inflation, i.e. it results in rise in
general price level.
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Follow by Commercial
banks
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MORAL SUASSION
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Follow by Commercial
banks
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Its leads to deflation, i.e. it results in fall in
general price level.
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EX ANTE SAVING –
What households plan to save at different levels of Income in an economy. It
is shown by saving function.
EX-ANTE INVESTMENT –
What firms plan to invest at different levels of income in an economy. It is
shown by investment demand function.
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Selected Credits
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CREDIT RATIONING
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Encourage Credits
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EX-POST SAVING –
It is the actual or realized savings in an economy during a year.
EX-POST INVESTMENT –
It refers to the actual or realized investment in an economy during a year.
Ex-post saving and Ex-post
Investment are equal at all levels of income.
|
|||||||
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Stop functioning as
banker’s bank
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DIRECT ACTION
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Stop functioning as
banker’s bank
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IMPACT ON VARIOUS
SECTOR
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|||||||||||
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EXCESS DEMAND
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DEFICIENT DEMAND
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||||||||||
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No Change
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Employment
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Fall
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|||||||||
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No Change
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Output
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Fall
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|||||||||
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No Change
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National Income
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Fall
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|||||||||
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Rise
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General Price Level
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Fall
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POSSIBILITIES OF
EQUILIBRIUM AT EMPLOYMENT LEVEL
|
|||||||||||
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FULL EMPLOYMENT EQUILIBRIUM
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UNDER EMPLOYMENT
EQUILIBRIUM
|
OVER FULL
EMPLOYMENT EQUILIBRIUM
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|||||||||
14.
What is Government budget? Explain the objectives
of budget.
Meaning of Government Budget:-A government budget is an annual
statement of the estimated receipts and estimated expenditure during a fiscal
year.
Objective of the Government Budget
The
objective that are pursued by the government through the budget are-
1. To
Achieve Economic Growth. 2.
To Reduce Inequalities in Income and Wealth.
3. To
Achieve Economic Stability. 4. To Management of Public
Enterprises.
5. To
Reallocation of Resources. 6.
To Reduce regional Disparities.
15.
Explain the implications of:
1.
Revenue Deficit. 2. Primary Deficit. 3. Fiscal Deficit.
@ Revenue
Deficit:-Revenue deficit refers to the excess of revenue expenditure of the
government over its revenue receipts.
Revenue deficit = Total revenue
expenditure – Total revenue receipts.
Importance:- Since it
is largely related with the recurring expenditure. Therefore, high revenue
deficit gives a warning to the government either to cut expenditure or to
increase revenue receipts. It also implies requirement burden in future.
@ Fiscal
Deficit:-Fiscal deficit is defined as excess of total expenditure over
total receipts excluding borrowings.
Fiscal
Deficit = Total budget expenditure - Total budget receipts (excluding
borrowings)
Importance:
- Fiscal deficit is a measure of total borrowings required by the
government. Greater fiscal deficit implies greater borrowings by the
government. This creates a large burden of interest payments in the future that
leads to increase in revenue expenditure, causing an increase in revenue
deficit. Thus a vicious circle sets in. In the present, a large fiscal deficit
may also lead to inflationary pressures.
@ Primary
Deficit: -Primary deficit is defined as fiscal deficit minus interest
payment. It is equal to fiscal deficit reduced by interest payment.
Primary
deficit = Fiscal deficit – interest payment.
Importance:
- Primary deficit signifies borrowing requirements of the
government. A low or zero primary deficit means that while government’s
interest requirement on earlier loans have compelled the government to borrow but
it is aware of the need to tighten its belt.
16.
Differentiate between Revenue Budget
& Capital Budget.
  BUDGET COMPONENT |
|||||||
     BUDGET RECEIPT |
   BUDGET EXPENDITURE |
||||||
 CAPITAL RECIEPT |
 REVENUE RECEIPT |
  CAPITAL EXPENDITURE |
REVENUE EXPENDITURE
|
||||
|
Either Creates Liability
|
Or Reduce Assets
|
Neither Create Liability
|
Nor Reduce Assets
|
Either Creates Assets
|
Or Reduce Liability
|
Neither Create Assets
|
Nor Reduce Liability
|
|
* It’s always creating a liability.
* Capital Receipts causes for reduction in
the assets of the government.
* Eg. Borrowings, Disinvestment, Recovery of
loans etc.
|
* Revenue Receipts do not create any
liability.
* It’s does not reduce assets of the
government.
* Eg. Dividend, Tax and non tax revenue.
|
* It results in
creation of assets.
* It result in
reduce in liability.
* It for long
period and non-recurring in nature.
* Eg. Expenditure
on acquisition of assets like land, building etc.
|
* It does not
result in creation of assets.
* It does not
reduce any liability.
* It is for day to
day activity and recurring in nature.
* Eg. Expenditure
on salaries of employees.
|
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|
1. Borrowing
2. Disinvestment
3. Recovery of Loans
4. Small Savings- NSC, KVP
|
1. Tax and Non Tax Revenue
2. Interest Received on loans
3. Gift and Grants
4. Profit of PSUs
|
1. Construction Activities
2. Lending loans
3. Defence Capital Equipments
4. Repayment of Loan
|
1. Payment of Interest
2. Expenditure on General Services
3. Subsidies
4. Grants Given to State Govt.
|
||||
17. Differentiate
between Direct and Indirect tax.
|
Direct
Tax
|
Indirect Tax
|
|
*
Liability to pay and burden of direct tax falls on same person.
|
* Liability to pay and burden of direct tax
falls on some other person.
|
|
* Direct
taxes are levied on individuals and companies.
|
*
Indirect taxes are levied on goods and services.
|
|
* Levied
on income and property of person.
|
* Levied
on goods and services on their sale, Production, import and export.
|
|
* Direct
taxes are generally progressive in nature.
|
*
Indirect taxes are generally proportional in nature.
|
|
* Eg.
Income tax, Corporate tax, Wealth Tax, Capital Gains etc.
|
* Eg.
Sales tax, Service Tax, Excise duty, Custom duty etc.
|
18. What
are the components of current account of Balance of Payment?
CURRENT
ACCOUNT - The current account records all transactions related to imports
and exports of goods and services and unilateral transfers during a given
period of time. The main components of this account are -
(1) EXPORT
AND IMPORT OF GOODS – (Visible Items) – The balance of export and import of
goods is called the balance of visible trade. Payment for import of good is
written on the negative side and receipt from export is shown on positive side.
(2) EXPORT
AND IMPORT OF SERVICES (Invisible Trade) -The
balance of exports and imports of services is called the balance invisible
trade. Example - Shipping, Banking,Insurance etc. Payments for these services
are written on the negative side and receipt on positive side.
(3)
UNILATERAL TRANSER TO AND FRO ABROAD -Unilateral transfers is receipts which
residents of a country make without getting anything in return eg. Gifts,
donation, personal remittances etc.
(4) INCOME
RECIEPT AND PAYMENT TO AND FRO ABROAD – It includes income in the form of
interest, rent and profits.
The net
balance of visible trade, invisible trade and of unilateral transfers is the
balance on current account. Current Account shows the Net Income.
19. What
are the components of capital account of Balance of Payment?
It records
are international transactions that involve a resident of the domestic country changing
his assets or liabilitywith a foreign resident.It is concerned with
financial transfers. So it does not have direct effect on income, output and
employment of the country.
Various
forms of capital account transactions :-
(1)
PRIVATE TRANSACTIONS - There are transactions that affect the
liabilities and assets of individuals.
(2)
OFFICIAL TRANSACTIONS - Transactions affecting assets and liabilities
by the govt. and its agencies.
(3)
PORTFOLIO INVESTMENT (FII) - It is the acquisition of an asset
that does not give the purchaser control over the asset.
(4) DIRECT
INVESTMENT (FDI)- It is the act of purchasing an asset and at
the same time acquiring control of it.
(5)
BANKING INFLOW – Inflow of hot money seeking the highest rate
of return as NRI deposits.
(6) OFFICIAL RESERVE TRANSACTION – It
includes change in a countries gold reserves, foreign exchange reserves,
foreign securities and SDRs with IMF.
The net
value of the balance of direct and portfolio investment is called the balanced
on Capital Account.
20. Differences
between Balance of Trade and Balance of Payment. OR
Differences between Autonomous
items & Accommodating items.
|
AUTONOMOUS ITEMS
|
ACCOMODATING ITEMS
|
BALANCE
OF TRADE
|
BALANCE
OF PAYMENTS
|
|
Autonomous items refer to
international economic transactions that take place due to some economic
motive such as profit maximization.
|
This refers to transactions that
occur because of other activity in the BOP, such as government financing.
|
Balance of trade is a record of only
visible items i.e. exports and imports of goods.
|
Balance of payments is a record of
both visible items (goods) and invisible items (services)
|
|
These transactions are independent
of the state of the country’s BOP.
|
These transactions are responsible
for country’s BOP.
|
Balance of trade can be in a
deficit, surplus or balanced
|
Balance of payments must always
balance.
|
|
These items are often called above
the line items in the BOP.
|
These items are called below the line
items.
|
Unfavorable BoT can be met out with
of favorable BoP.
|
Unfavorable BoP cannot be met out
with of favorable BoT.
|
|
CURRENT
ACCOUNT
* It records all transaction between
the resident of a country and the rest of the world which does not change
asset and liability
* It is a flow concept
* It consist of export and import of
goods, services and unilateral transfer
|
CAPITAL
ACCOUNT
* It records all transaction between
the resident of a country and the rest of the world which change asset and
liability
* It is a stock concept
* It consist of borrowing and
lending, change in foreign exchange reserve and FDI
|
BOT does not record ant transaction
of capital nature.
|
BOP records all the transactions of
capital nature.
|
|
Balance of trade is a narrower
concept as it is only a part of the balance of payments account.
|
Balance of payments is a wider and
more useful concept as it is a record of all transactions in foreign exchange
including balance of trade.
|
21. Why
foreign exchange demanded?
22. What
are the supply sources of foreign exchange
|
DEMAND OF FOREIGN CURRENCY
1.Import
of goods and services from other countries;
2.
Tourism;
3.
Unilateral Transfers sent to abroad;
4. To
purchase assets in foreign countries;
5. To
speculate on the value of foreign currencies.
|
 |
 |
SUPPLY SOURCES OF FOREIGN
1. Export
of Goods and Services to other countries;
2.
Tourism;
3. Foreign
investment like FDI and FII;
4. Unilateral Transfers received from abroad;
5.
Speculation
|
23. Explain
foreign exchange rate determination.
|
DETERMINATION
OF EXCHANGE RATE Equilibrium in the foreign exchange market
is determined in the same way as the price of a commodity through the forces
of supply and demand. The foreign exchange market, like any other normal
market, contains a downward sloping demand curve and an upward sloping supply
curve. The price on the vertical axis is stated in terms of domestic currency
(i.e. how many rupees for one US dollar).The horizontal axis measures the
quantity demanded or supplied. The intersection of the supply and demand curve
determines the equilibrium foreign exchange rate.
|
 |
24. Impact
of Appreciation / Revaluation and Depreciation / Devaluation on its export
& Import of a country.
25. Differentiate
between Appreciation & Depreciation.
26. Differentiate
between revaluation & devaluation.
|
DEPRICIATION
|
DEVALUATION
|
FIXED EXCHANGE RATE
|
FLEXIBLE EXCHANGE RATE
|
|
Depreciation refers to fall in the price of
domestic currency in terms of foreign currency.
|
It refers to reduction in the price of
domestic currency by the government in terms of foreign currency.
|
It is officially fixed by the government in
terms of gold or any other currency.
|
It is determined by the forces of demand and
supply of foreign exchange.
|
|
It takes place due to market demand and
market supply of foreign exchange.
|
It is done deliberately by the government or
central bank
|
Traditional exchange rate system (adopted by
all countries from 1946 to 1973)
|
New exchange rate system ( adopted by almost
all countries after 1973)
|
|
It takes place under Flexible Exchange Rate
System
|
It takes place under Fixed Exchange Rate
System.
|
The exchange rate is generally stable or a
very small variation possible
|
The exchange rate keeps on changing.
|
|
It is very common.
|
It is very uncommon.
|
In this system only government has the power
to change exchange rate.
|
Market forces changes the exchange rate. (
In Managed Floating RBI can intervene under certain limits)
|
|
DEPRICIATION
|
APPRICIATION
|
||
|
Depreciation refers to fall in the price of
domestic currency in terms of foreign currency.
|
Appreciation refers to rise in the price of
domestic currency in terms of foreign currency.
|
||
|
IMPACT
ON EXPORT AND IMPORT -It makes domestic
goods cheaper in foreign country as more of such goods can now be purchased
with same amount of foreign currency. So, it leads to increase in export
and decrease in Import. (Same result will be in case of Devaluation)
|
IMPACT
ON EXPORT AND IMPORT -It makes foreign
goods cheaper in domestic country as more of such goods can now be purchased
with same amount of domestic currency. So, it leads to increase in import
and decrease in Export.(Same result will be in case of Revaluation)
|
||
|
A change from 1 $ = 50 Rs. to 1 $ = 55 Rs.
is Depreciation of Indian Currency.
|
A change from 1 $ = 50 Rs. to 1 $ = 45 Rs.
is Appreciation of Indian Currency.
|
||
27.
Write short notes on fixed exchange rate, Flexible exchange rate & Managed
floating exchange rate.
28.
Merits & demerits of fixed exchange rate, Flexible exchange rate &
managed floating exchange rate.
|
FIXED
EXCHANGE RATE - Under the fixed exchange rate system the
exchange rate is officially declared and it is fixed. Only a very small
deviation from this fixed value is possible. It is not determined by supply
of and demand for foreign exchange.
MERIT
–1. Stability in the exchange Rate; 2. Promote
International Investment; 3. Promotes International Trade; 4.
Prevent Speculative Activity; 5. Coordination of Macroeconomics
Policies.
DEMERITS
–1. Huge foreign Exchange Reserves Required; 2.
Difficulty in fixing the Exchange rate; 3. Exchange Rates are
not Fixed.
|
|
FLEXIBLE
EXCHANGE RATE - In the flexible exchange rate system
exchange rate is determined by the supply and demand for foreign exchange.
There is no intervention by the central bank.
MERIT
–1. Maintains Equilibrium Level; 2. No need or Huge
Foreign Exchange Reserves; 3. Optimum Utilization of resources.
DEMERITS
–1. Instability in the Exchange Rate; 2. Speculative
Activities; 3. Creates Inflationary Situation.
|
|
MANAGED
FFLOATING EXCHANGE RATE - In this system foreign exchange rate
is determined by the market demand and supply and central bank can intervene
in foreign exchange rate determination whenever it feels desirable. It is
also known as dirty floating.
|
