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Study material for Less Achievers 1. Define national income? A. National income is the sum of income earned by normal residents of a country in the economy in an accounting year. 2. What do you mean by circular flow of income? A. Income or money first flows from the firms to the households in the form of factor payments and then from the household to the firms in the form of consumption expenditure. The income constitutes to flow in a circular way. So it is called circular flow of income. 3. What do you mean by money flow? A. Money flow means the flow of factor payments from firm to households and consumption expenditure from households to firm. 4. What do you understand by real flow? A. Real flow means the flow of factor services from households to firms and of goods and services from firms to households. 5. Name the different methods of measuring national income. A: 1) Product method, 2) Income method, 3) Expenditure-method 11. Define intermediate goods. A. Intermediate goods are those goods which are meant for either for resale or further production. 12. Define final goods. A. Final goods are those goods which have crossed the boundry line of production 13. Define stock. A. Stock is a variable which is measured at a particular point of time. Eg: water in a tank; no. of computer in a lab etc. 14. Define flow. A. Flow is a variable which is measured at a specified period of time. Eg. Leakage of water from a tank, production of computers 15. Who is a normal resident? A. Normal resident is a person who generally lives in a country and whose centre of interest lies in that country. Short Answer Questions (3/4 Marks) 1. What is circular flow of income and product? State its basic principles. A. A pictorial illustration of the interdependence between the major sectors (Households and Firms) of economic activity is called circular flow of income and product. Basic principles of flow of income and product In any exchange process the seller or the producer or the firm receives the same amount that the buyer or the consumer or households spends Factor payments by firms = Consumption expenditure By households Goods and services flow in one direction, which the money flows in the other direction, thus it makes a circular flow. The output flows from the firms to households and the payment from households to firms. The following circular reveals the flow of income and product. 3. Distinguish between stock and flow. A. STOCK Stock is a variable which is measured at a particular point of time. 4. FLOW flow is a variable which is measured at a specified period of time. It has no time dimension It has time dimension Eg. Water in a tank Eg: Leakage of water out of tank Distinguish between consumer goods and capital goods A. CONSUMER GOODS CAPITAL GOODS 1. Consumer goods are those goods Capital goods are those goods which which satisfy human wants directly satisfy human wants indirectly. 2. Eg: car. Petrol, pen etc., Eg: machine; wood used in furniture 3. Consumer goods cannot be used for Capital goods can be used for further further production production 5. Distinguish between intermediate goods and final goods. A. INTERMEDIATE GOODS FINAL GOODS Intermediate goods and those goods which Final goods are those goods which are are meant for either for resale or further meant for either for final consumption or production investment. Eg; coal used in a thermal station Eg; car used by a household These are meant for further production or These are meant for final use and not for resale resale The value of these will not included while Value of these goods only included in calculating national income because it leads national income to the problem of double counting 4. A. Explain the following: a) Real flow b) Money flow a) Real flow: Let us assume that money is not being used in an economy. In this situation, households provide factor services to the firms. Business firms produce goods and services by utilizing these factor services. Afterwards business firms provide goods and services to the households as a reward of their factor services. Such flow of goods and services from firms to households is known as real flow or commodity flow. Money flow: In modern economics, households supply factor services to business firms and get money income from these firms in the form of rent, interest, wages and profit. Households utilize this money in purchasing goods and services produced by firms. Thus money flows from firms to households and again from households to firms. This is called money flow or income flow. 6. Distinguish between national income at constant and current prices. A: National income at constant prices: It is the sum total of money value of final goods and services produced by the normal residence of a country during an accounting year. Hear value is estimated at base year prices. It is also called real national income. National income at Current prices: It refers to total current money value of final goods and services produced by the normal residents of a country during a year. Here value is estimated at market prices/current prices. So it is called national income at current prices/monetary income. 7. Explain the concept of National Disposable Income (NDI). A: National Disposable Income: National Disposable Income is different from the concept of personal disposable income. National disposable income can be calculated by adding the following two items in the national income. a) Net indirect taxes b) Net current transfers from abroad. 8. What are the limitations of GDP as a measure of welfare? A: The following are the limitsations. Size of population: If a country,s population increasing more than that of GDP though GDP is larger but welfare remains low Distribution of income: Unequal distribution of income in an economy means lack of welfare of lower income of society. Production of defence goods: GDP may be more due to production of defence goods but the welfare remains low. Non-marketed Production : In some economies, goods are produced not for exchange. Its GDP may be low but welfare is not less. EXTERNALITIES: it is good or bad effect of a work for which no reward or punishment is imposed. Long Answer Questions (06 marks) 2. Explain briefly the production, income and expenditure flows that arise in the process of production indicating their inter-relation ship. OR Explain the circular flow of National Income in a two sector economy. A: Production of goods and services is the result of combined efforts of the four primary factors of production. And in the process of production, income is generated or the production emerging from the production process distributed among factors of production in the form of money income. (Eg. Rent, wages, interest and profit) 1) Production generated Income 2) This generated income gives rise to demand for produced goods and services. In other words the households (i.e. suppliers of factors of production) spend their income on goods and services to satisfy their wants. 3) Hence, income creates expenditure which ultimately leads to further production. As above mentioned production, Income and expenditure become circular. Money and Banking Q1. What is money ? ans. Any thing which is generally acceptable as a medium of exchange of value measure of value and store of value is known as money. Q2. What do you mean by barter system? ans,. Direct exchange of goods for goods is known as barter system. Q3. Explain the concept of M1 of money supply. ans. in m1 we include the following itemsi) c= currency held by the public ii) dd= demand deposits in commercial banks iii) od= other deposits of RBI Q4. What are the main functions of money? ans . There are mainly two functions of moneyi) Primary functions ii) Secondary functions in primary functions we includes-a) medium of exchange--- it is the main important function of money. We can sell and purchase goods and services by money. b) Measure of value--- by money we can measure the value of goods and services. for Example this book value is rs.160/- only ii) Secondary function- a) standard of deferred payments—deferred payments refers to the payments which are made sometimes in the future. b) Store of value--- money acts as a store of value , as a store of value money is held without plans for immediate exchange of goods and services. c) transfer of value- we can also transfer the value by using money for example we sold house in Mumbai and get the money and buy house in Chennai by that money or we can buy other things. Q5. Explain the main functions of RBI or central bank of the country. ans. the main functions of RBI are as follows— a) Issue of currency- -- the RBI or central bank of the country has the monopoly to issue currency notes. While issuing currency notes the RBI use minimum reserve system . in this system RBI has to keep minimum gold stock and foreign currency and issue currency according the needs. b) Banker to the govt--- central bank act as a banker to the govt . , agent and advisor to the govt. central bank advances loan to the govt for approved securities. c) Bankers bank.--- central bank or RBI provide loans to the commercial banks for approved securities. d) Lender of the last resort--banks. the central bank is the lender of the last resort for commercial when commercial banks fail to meet the obligation of their depositors central bank comes to their rescue and give loans to them . this save the commercial bank from a breakdown. e) Custodian of the nations reserves of foreign exchange---it is the responsibility of the of central bank to keep the sufficient reserve of foreign currency to keep the external value of currency stable. f) Clearing house function----bills central bank perform the function of clearing house by clear the of exchange. g) Control of credit---- central bank acts as a controller of the credit by monetary policies instruments such as Bank rate, Open market operations, CRR, SLR etc. DETERMINATION OF INCOME AND EMPLOYMENT Q1- What is aggregate demand? Ans- It is the total demand for all the goods and services in an economy during an accounting year. Q2- What are the components of aggregate demand? Ans- They are: consumption expenditure b- investment expenditure c- Government expenditure d- net export Q3- Define aggregate supply. Ans – It is the value of goods and services produced by all the sectors in ecnomy during a Financial year. Q4- Define APS. Ans- It is ratio between saving and national income. MPS=saving/income. Q5- Define MPC. Ans- It is ratio of change in consumption and change in income. Q6- Define involuntary unemployment. Ans- It is a situation in which an able and willing bodied do not get job at the existing wage rate. Q7- If MPC is 0.4, find MPS. Ans- MPS=1-MPC=1-0.4=0.6 Q8- What is the relationship between MPC and MPS? Ans- MPC+MPS=1 Q9- If the value of MPC is 0.75, calculate the value of multiplier? Ans- 1/1-MPC=1/1-0.75=1/0.25=4 Q11- Define excess demand or inflationary gap. Ans- It is a situation in which aggregate demand exceeds aggregate supply. Q12- Define multiplier. Ans- It is ratio of change in income and change in investment. Q13 What do you mean by deficient demand? Ans. When aggregate demand is less than aggregate supply at full employment it is known as deficient demand. Government Budget and the Economy Very Short Answer Question ( 1 Mark) Q1. Give the meaning of budget. Ans. A budget is an annual statement of the estimated receipts and expenditure of the government over the fiscal year. Q2. Name the two components of budget. Ans. 1) Budget Receipts 2) Budget Expenditure. Q3. Why is borrowings considered as Capital receipt? Ans. It increases the liability of the government, so it is considered as Capital receipt. Q4. Define tax Ans. Tax is legal compulsory payment imposed by the government on the people. Q5. Give two example of direct tax. Ans. 1) Income tax 2) Gift tax Q6. Give two example of indirect tax. Ans. 1) Sales tax 2) Custom duty Q7. Give two example of non-tax revenue. Ans. 1) dividend 2) Fees and fines Q8. Why is tax not a Capital receipt? Ans. Tax neither creates liability nor reduces assets, so it is not considered as capital receipt. Q9. Give two example of revenue expenditure. Ans. 1) Payment of Salaries 2) Interest payment Q10. Give two example of Capital expenditure. Ans. 1) Loan to public 2) Acquiring land, building, machine and investment in shares etc. Q11. Give the formula to calculate ‘ revenue deficit’. Ans. Revenue deficit = Total revenue expenditure – Total revenue receipts. Q12. Give the formula to calculate ‘ fiscal deficit’. Ans. Fiscal Deficit = Total budget expenditure = Total budget receipts net of borrowings. Q13. Give the formula to calculate ‘ primary deficit’. Ans. Primary deficit = Fiscal deficit – interest payment. Q14. Define Capital receipts. Ans. Capital Receipts refer to those receipts of the government which i) tend to create a liability or ii) Causes reduction in its assets. Q15. Define revenue receipts. Ans. A revenue receipts are those receipts which neither create a liability nor reduce assets of the government. eg. Tax and non-tax receipts. Q16. Define revenue expenditure. Ans. It does not result in creation of assets or reduction in liabilities eg. Payment of salaries. Q17. Define Capital expenditure. Ans. It refers to the expenditure which leads to creation of assets and reduction in liabilities eg. Expenditure incurred on construction of building, roads, bridges etc. Q18. Give two sources of Capital receipts. Ans. 1) Recovery of loans 2) Borrowings. Q19. Give one objective of budget. Ans. To reduce inequalities of income and wealth. Q20. Define direct tax. Ans. These taxes are those tax in which liability to pay and burden of tax falls on same person. Q21. Define indirect tax. Ans. Liability to pay and burden of indirect tax falls on different persons. Short Answer Question (3/4 Mark) Q1. Write any three objective of government Budget. Ans. The objective that are pursued by the government through the budget arei) To achieve economic growth. ii) To reduce in equalities in income and wealth. iii) To achieve economic stability. Q2. Explain the basis of classifying government receipts into revenue receipts and capital receipts. Ans. Revenue Receipts :-A government revenue receipts are those receipts i) which neither create liability ii) nor reduce assets of the government eg. Dividend. Capital Receipts :- Capital Receipts refer to those receipts of the government which i) tend to create a liability or ii) Causes reduction in its assets of the government. eg. Borrowings Q3. Distinguish between direct tax and indirect tax Ans. Direct Tax 1. Liability to pay and burden of direct tax falls on same person. 2. Levied on income and property of person. 3. eg. Income tax Indirect Tax 1. Liability to pay and burden of direct tax falls on some other person. 2. Levied on goods and services on their sale, production, import and export. 3. eg. Sales tax Q4. Define revenue receipts. Write the groups in which they are classified. Ans. Any receipts which does not either create a liability or lead to reduction in assets is called revenue receipts. Revenue receipts consist of 1) Tax Revenue and 2) Non-Tax Revenue. Q5. Distinguish between Revenue and Capital expenditure. Ans. Revenue Expenditure 1. It does not result in creation of assets Capital Expenditure 1. It result in creation of assets 2. It is for short period and recurring in nature 2. It for long period and nonrecurring in nature 3. eg. Expenditure on salaries of employees 3. eg. Expenditure on acquisition of assets like land, building etc. BALANCE OF PAYMENTSQ.1 what do you mean by foreign exchange? Currencies other than domestic currencies are called foreign exchange. Q.2 what is foreign exchange rate? The rate at which currency of one country is exchanged with currency of other country is known as foreign exchange rate. Q.3 what are two systems of determining foreign exchange rate? 1.Fixed exchange rate system-rate which is determined by govt 2.flexible exchange rate-rate which is determined by market forces of demand and supply. Q.4 what is foreign exchange market? It is the market where sale and purchase of currencies of different countries is done. Q.5How is foreign exchange rate determined? It is determined by market forces of demand and supply. Q.5 What is managed floating? Managed floating is a combination of fixed and flexible exchange rate. Q.6 what do you mean by balance of payments accounts of a country. Balance of payments account of a country is a systematic record of all economic transactions ofbetween a country and rest of the world. Q.7what is current account of balance of payments account? Current account keeps record of visible items invisible items and unilateral transfers Q.8what is balance of trade ? Balance of trade shows transaction of visible items that is balance of export and imports. Q.9 What is difference between autonomous items and accommodating items of balance of payments account? Autonomous items Accommodating items 1.these are undertaken for the purpose of profits These are undertaken for the purpose of adjustment 2.these may cause imbalance in bop These may be used for correction 3.these involve movement of goods across borders These do not involve movement of goods in fact they involve movement of official reserves Q.10 why is foreign exchange demanded? it is demanded by residents of a country to perform various economic activities abroad. A)for imports b)for investment c)for purchase of property abroad d)for remittances abroad e) speculative trading in foreign currency Q.11 why more of foreign exchange demanded when its price falls? When price of foreign exchange falls ,purchasing power of domestic currency increases so it can purchase more from abroad . People increase their economic activities abroad for example they start purchasing more from that country or they start more investment in that country. Q.12 what brings supply of foreign exchange to a country? Any economic activity done by foreigners in a country brings supply of foreign exchange to that country for example a)for exports b)for investment in that country c)for purchase of property in that country d)remittances by non residents living abroad. Q.13 why supply of foreign exchange increases when its price increases? When price of foreign exchange increases its supply increases because purchasing power of foreign exchange increases. It can purchase more from domestic area of that country. So foreign people increase their economic activities in that country. for example direct purchases in that country or exports from that country increase.