Professional Documents
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MACRO ECONOMICS
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Unit 5
Basic characteristic of Indian Economy & National Income
Chapter 1
Basic characteristic of Indian Economy
Q.1)
Ans.
1)
Explain Indias features in context of Land, forest, water, minerals & Irrigation.
2)
Water:
India is well endowed with water resources including rainfall, snowfall, lakes, rivers etc.
But, there is large scale wastage of water, we are utilizing only 18% of rainfall.
3)
Minerals:
India is rich in some minerals & very poor in some others.
It is rich in: (a) Coal reserves exceeding 1,30,000 million, tones but it is of poor Quality & contain
lots of Ash, available only in some status like WB, MP, Orissa & Bihar.
(b) A high Quality Iron ore is also abundantly available in India & used for exports,
The total reserve being 21,000 millions tones.
It is poor in minerals like: Copper, tin, zinc, nickel, cobalt, oil & Gas etc.
4)
Irrigation:
Irrigation helps to reduce dependence of agriculture on the vagaries of rainfall
India has the Worlds largest irrigated area in the world. This is possible due to the development
of tanks, wells, canals etc.
But, still irrigation facilities have several drawbacks i.e.
a)
These is large unexploited potential of irrigation facilities
b)
Maintenance of irrigation facilities is poor. etc.
Q.2)
Ans:
1)
2)
Important changes in sectoral distribution of domestic product: An important indicator which shows that India is growing, i.e. decline in the share of agricultural
sector in the overall GDP.
Composition of GDP
1950-51
2004-05
Primary
59.1
21.9
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24.1
54
The above table states that, the share of agriculture and allied activities has fallen and share of
secondary and tertiary sectors have improved in the GDP
3)
Strong Fundamentals: The another important features of Indian economy is its strong fundamentals such as sound
financial system including financial institutions like SEBI, NSE, price stability etc.
It provides the pace to the programme of economic development.
4)
Expansion of Science and Technology: In a recent survey, American journal of science established that India number eight among top
fifteen countries ranked by the contribution of their scientists to the worlds total number of
publications in science, engineering and medicines.
5)
Dualistic economy: Indian economy is dualistic economy. The total traditional and the completely modern co-exist in
India.
6)
Underdeveloped Natural Resources: India is rich in natural resources and major parts of these resources are unutilized.
7)
Law rate of capital formation: In Indian economy there is an existence of capital deficiency which is reflected in two ways i.e.
1)
The amount of capital per head is low and
2)
The current rate of capital formation is also low.
8)
Mixed economy
Q.3)
Ans:
1)
2)
Provides employment
It is most important activity in India in terms of source of employment
Agricultural employed 69.7% of labour force of the country in 1951 which has decline to 60% of
labour force in India.
3)
Contribution to Exports :
At the time of independence agriculture contributed around 50% of total exports in India, at
present it has declined but even today it contributes 10.5% of total exports of the country.
4)
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5)
Development of Services :
Agriculture encourages various types of services such as Transportation, Banking (in rural
areas), insurance services etc.
6)
Q.4
Ans
1)
2)
Provides employment
Industry provides employment to large number of persons.
At present industry engage 18% of the labour force of India.
3)
Contribution to Exports :
Indian industries contributes tremendously to the export earnings of India.
It contributes 77% of total export earnings of India.
4)
5)
Development of services :
An industries encourages various types of services such as transportation, banking services,
insurance services, warehousing, maintenance services etc.
6)
Strengthing economy:
Industries strengthen the economy as the large quantities of goods are produced at a lower cost
due to technology developments.
Q.5
Provides employment :
Service sector provides employment to large number of people.
The employment level in service sector has been increased form 17.3% of working population in
1951 to 25.2% in 2001.
3)
Contribution to exports :
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The service sector has played a very important role in increasing exports of service earning of
country.
The exports of service increased upto 36% of total exports in 2004-05.
4)
5)
Q.6
Employment potential:
Small industries are important in India because they have large employment potential.
Generally they use semi-automatic machines for production.
Hence they can create large number of employment opportunities.
At present nearly 295 lakhs workers are employed in small scale industries in India.
2.
3.
5.
6.
Decentralization:
In India there is concentration of industries in and around a few big cities, This has created the
problem of regional disparities.
If India wants a balanced regional development industries should be set up in every part of the
country. This is possible only through the development of small industries.
7.
Reduction in Inequality:
Inequality can be reduced through the development of small industries.
This is because ownership of small industries can be spread across the society.
Hence profits will be distributed over large number of people.
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Q.7
Explain various problems faced by small scale industries in India. {1999June-7 Marks}{2000
June -7 Marks}
Or
Factors responsible for Industrial Sickness. {2000 June 4 Marks}
Or
State the problems of SSI in India in view of growing global competitive environment.
{2001June-8 Marks}
Ans. Small scale industries in India face various problems. There are nearly 3 lakh sick industrial units in
India and 99% of them are small scale industries. It implies that small industries in India face
various problems. They are explained as follows:
1.
Outdated Technology:
It is a common problem of small scale industries in India. They are not able to replace their old
and outdated technology by a new and latest technology.
Due to old technology cost of production is higher and profit margins are lower.
2.
3.
4.
5.
Inefficient Management:
Qualified and experienced managers work for large industries. Hence small industries
generally work with inefficient management.
When the leader is inefficient, inefficiency percolates at other levels also.
6.
7.
Marketing Problems:
Small scale industries face stiff competition against large industries in the market.
When a similar product is produced by small & large industries, the latter will follow aggressive
marketing strategy and eliminate the former form the market.
8.
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Small scale industries cannot invest in research and development. Hence they do not improve
the quality of the product, the packing, the marketing strategy, etc.
They face the threat of being thrown out of market in absence of Research and Development.
Q.8
1.
2.
3.
4.
5.
6.
7.
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They get automatic approval for new investment except for those industries where license is
compulsory.
8.
Q.9.
Ans.
Mixed economy is that economy, which includes the features of both private enterprises and public
enterprises.
In India, the structure of our mixed economy may be viewed by dividing into the following parts.
i) Some segments of the economy are guided by market mechanism which include:
a) Agriculture.
b) Fine, cottage & village industries.
c) Some small scale industries etc.
ii) Second segment of Indian economy include:
a) Medium and large scale industry.
b) Financial institution etc.
iii) Third segment of Indian economy comprises of public sector.
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Q.10. Write Short Note on Industrial Sickness. {2002 Dec 4 Marks}{2003 Dec 4 Marks}{2006
June 4 Marks}
Ans.
Industrial sickness is the phenomenal of industry and business units running into a loss and erosion
of net worth.
The Industrial sickness is caused by two basic factors i.e.
a) Sick personal benefits by entrepreneurs.
b) Faulty policies and planning persuade by authorities
The following data shows a significance increase in no. of sick units.
1980
2001
Non-SSI Units 1401
3317
SSI Units
23,149 2,49,630
Bureau of Industrial & Financial Reconstruction (BIFR) was set up in 1987 with a view to study the
ways & means of rehabilitating the sick units. The functions of BIFR were assigned to Company
Law Tribunal by means of Companies Act, 2002.
Q.11. What do you mean by Dualism? How far it is applicable to Indian Economy? {2006 June
7 Marks}
Or
Dualistic Nature of India Economy {2006 Dec 4 Marks}
Or
Dualistic Economy. {2008 June 1 Marks}
Ans.
Dualistic economy means some segments of economic activity are unevenly developed and other
are well developed.
Generally dualism exists mostly in under developed or developing economy.
Dualism is not confined to any region or country it may be found in several segments of economic
activity.
For e.g.: In India:
a) Some areas of the country like Mumbai, Delhi, and Kolkata etc. are highly developed and rest areas
are less developed.
b) Some economic activities are highly capital intensive and some others economics activities are
based on old techniques.
c) Urban dualism is in the form posh offices, hotels, restaurants, shopping complexes etc. whereas
some part of urban areas are Slums populated by very poor.
Q.12. what do you mean by Disinvestment & account for Declining role of public sectors. {2005
June 7 Marks}
Or
Need & Justification of Disinvestment process in India. {2004 Dec. 4 Marks}
Or
Do you think that NIP 1991 has reduced the importance of Public sector in India? {2007 Dec
5 Marks}
Ans.
Under new policy the role of public sector is declined through Disinvestment which means
transfer of shares of public sector enterprises to the private sector.
Declining role of public sector & encouraging privatization is one of the leading components of
new industrial policy in the liberalized era.
The need for Disinvestment arise because:
a)
Government is no longer interested in controlling economy, thus a greater role is assign
to market mechanism & private sector.
b)
The number of sick units increased under Government control can be efficiently
managed by private sector.
Thus, Under new policy the role of government is limited to :
a) Providing defense & social services.
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Q.2.
India suffers from several problems like those regional disparities Discuss? {2005 Dec 7
Marks}
Refer Q.11. (First two points & a) & b) points of Dualistic economy & Replace the term Dualistic
economy with Regional disparities).
Hint
Logical Questions
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Chapter 2
National Income
Q.1. National Product/National Income
Ans.
1)
The Sum total of good & service Produced during a give period of time normally a year is
termed National product
2)
This definition conforms the following condition:
The national product comprises a variety of goods & services it is not possible to add them
in terms of physical quantities thus this is done by estimating their money values
The good & services which are produced for self consumption are recorded at imputed
values some important example are: Agriculture produce, Dairy product which farmers
produce for their Own use. Imputed rent of owner occupied houses etc.
There are various other goods & services which are not possible to record under national
product Like: Services provided by house wife for their families, illegal activates like
smuggling, black marketing etc.
In estimating nation product the multiple counting is avoided by reducing the value of
Intermediate goods from the final goods & services.
Q.2. Gross domestic product (GDP): {2005 June - 2 Marks}
Ans.
GDP refers to the money value of all final goods & services produced within the domestic
territory of a country during an accounting year.
The term Gross implies inclusion of Depreciation.
Gross Domestic product excludes net factor income from abroad (NFTA).
Symbolically = GDP = C + I + G
Where as: C = Consumer good & services
I = Gross goods private Investment
G = Government purchases & production
GDP can be at market price & GDP can be at factor cast.
Q.3. Gross national product (GNP)
Ans.
GNP refers to the money value of all final goods services produced in the country during a year
Plus net foreign income from abroad.
The term gross implies inclusion of depreciation
GNP includes Net factor incomes from abroad
Symbolically: GNP = (C + I + G) + NFIA or GDP + NFIA
Where as: C = Consumer good & services
I = Gross goods private Investment
G = Government purchases
NFIA= net factor income from abroad.
Q.4. Net National product (NNP)
Ans.
NNP refers to the money value of all final goods services produced in the country during a
year(after deducting depreciation ) Plus net foreign income from abroad.
The term Net implies exclusion of depreciation
NNP includes net factor income from abroad
Symbolically: NNP = (C + I + G) + NFIA depreciation or GNP Depreciation
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2nd Method:- Expenditure Method:Under Expenditure method, the NI is computed by summing all the expenditure incurred by
Households, firms, & the Government during a period of one year & then the income from abroad is
added.
The Gross National Expenditure is valued at market price & includes following items:1)
Total Expenditure on Consumer Goods & service(C): It includes the total expenditure made by consumer on goods & service like purchase of
refrigerators, furniture, hospitals services, education institute services, rent paid to landlords
etc., during a year.
2)
3)
4)
Total Expenditure on Gross Domestic Private Investment(I):It includes total expenditure made by business, business firms on capital goods, inventories &
new building constructed during a year.
Government Consumption & Investment Expenditure(G):It includes the total expenditure made by Government for purchase of goods & service like
payments made for purchase of service like police, defense, administration etc. & expenditure
made for building, dams, bridges, roads, etc.
Net Foreign Investment/ Earnings(E):It includes both the a) Net Exports & b) NFIA
a) Net Exports(X-M): It refers to the difference between the value of goods & services
exported & imported. If the difference is positive, it is added & if negative, it is deducted.
b) NFIA(R-P): It refers to the difference between factors income (rent, wages, interest, & profit)
received by India from abroad & paid by India to abroad. If the difference is positive, it is
added & if the difference is negative then it is deducted.
All these four items constitute GNE at market price ie. GNEmp= C+I+G+E
From GNEmp, we arrive at NNEmp by deducting depreciation ieNNPmp= GNPmp Depreciation.
From NNEmp, we arrive at NNEfc or National Income by deducting Indirect taxes & by adding
Subsidies i.e. NNEfc/NI= NNEmp- Indirect tax+ Subsidies
This is the final value of National Expenditure.
3rd Method: Income Method: {2000 June - 4 Marks}
Under Income method, the National Income is computed by summing total of money income received by
all the factors of production in a country during a period of one year & then the net factor income from
abroad is added:
The Gross National Income valued at factor cost & includes following items :1) Labour Income: Income received by the Labourer is called Labour Income
It includes:
(a) salaries & wages
(b) Contribution to laborers welfare fund etc.
2) Rental Income: Income received from real property (Land) rented is called rental income.
It includes: (a) Rental value of self occupied houses
(b) Royalties etc.
3) Organisational profit: Income received by Entrepreneurs for taking the risk in the business Is called Profits.
It includes: (a) Dividend incomes (Distributed profit)
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5) Lack of accounts:
In many underdeveloped countries, people who are illiterate do not keep accounts of income &
output & people who are literate hide incomes by manipulating accounts for avoiding tax
payments
Hence, no proper estimation of NI
6) Difficult differentiation between Economic & Non-Economic activites:
It is difficult to differentiate between economic activities which are included in NI & NonEconomic activites which are excluded from NI
Hence, no proper estimation of NI
7) No data of Backward Areas:
Today also in many of the Backward areas barter system prevails, there is no record of these
transactions.
Also data on self consumption is not available.
This results in the difficulty of estimation of NI
8) Scattered & Unorganised production:
Statisticians make guesses on the income from those units whose production is scattered,
Unorganised & Unrecorded.
9) Lack of data on subsidiary Jobs:
People are engaged in more than one occupation or Job.
Lack of information on subsidiary jobs makes the estimation of NI incorrect.
10) Difficult of valuation at Market Price:
When the goods & services are valued at a market price for calculating NI the following factors
distort calculations of NI:
a) The Market structures.
b) The sale & marketing campaigns of the suppliers.
c) The role of speculative forces.
d) Shift in price of Exports & Imports.
Q.8. Explain the significance of NI data. {2001 Dec - 7 Marks}{2005 June - 7 Marks}{2009 June - 5
Marks}
Or
what are the Uses of NI estimates
Ans.
National income estimates are highly useful in providing various economic magnitudes & related
issues of country & it is also used to prepared various policies
1) NI Provide basic information for several analytical other purposes.
The NI estimates reveal the rate at which the economy is growing.
The NI estimates helps people to know the potential rate of growth of different sectors.
2) Help to protect economic against economic fluctuations:
NI data provide the basis to frame economic policies to protect the economy against fluctuations
& to exploit its economic potential to the full.
3) NI helps to the authorities in quantifying the problem of income & wealth inequalities and take
corrective steps
4) NI help the country to know their economic position & performance with the rest of world, it also
helps to know the trade & balance of payments position of country
5) NI estimates provides a framework for NI accounting social accounting.
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Q.9. National income accounting is known as social accounting do you agree? Explain?
Ans.
yes I agree that NI accounting is known as social accounting because these accounts provide
statistical relationship between different sectors of the economy & help in studying the economic Structure
& condition of the country & it is also useful for :
1)
The analysts in projecting the past behavioral trends of the economy & making forecasts of its
future Performance.
2)
Understanding the macro aggregates of the economy & their inter linkages
3)
Analysing the relative contribution of each sector to the national Income
4)
Establishing relationship between NNP at factor cost & market price
5)
Planner & policy makers in estimating the likely effects of alternative policies.
Q.10.
Outline the limitation of the National Income as an indicator of economic welfare. {1998 Dec 8 Marks}
Or
Is National Income is a reliable index of economy welfare? {2003 Dec - 8 Marks}
Or
What is meant by NI? Can it be taken as measure of welfare? {2006 Dec - 7 Marks}
Ans.
We always think that, increase in National Income leads to increase in economic welfare of the society.
But sometime it may or may not be so. Because economic welfare depends on a many number of
factors and National Income is only one of them.
This can be explained with the help of following points:
1) Overworking of the labour:
The increase in National Income may be the result of overworking of the labour force, but it does
not add to the economic welfare of the society.
2) Resource and environmental degradation: If the increase in National Income is accompanied by a resource and environmental degradation
of the economy will leads to reduction in productive potential instead of adding economic welfare.
3) No improvement in quality of life of people: If National Income is increased only by using additional resources without improving the
consumption standard quality of life of people, it is not result in economic welfare.
Because the increase in National Income may be simply because of :
a) Sales and marketing efforts of sellers
(or)
b) Increased output of harmful goods and services etc.
4) Increase in government expenditure: An increase in government expenditure on its own maintenance or producing certain public services
inefficiently results in an increasing in national Income estimates, but not in economic welfare of
the society.
Q.11.
Explain the methods of measurements of National Income in a country and suggest the most
appropriate method for estimates, of Nation Income. {2004 Dec - 8 Marks}
Or
How is NI estimated in India? {2007 Dec - 5 Marks}
Ans.
There are three methods of measuring National Income. They are:1) Production method (value added method).
2) Income method.
3) Expenditure methods.
All the above three methods, ideally leads to the same figure of National Income.
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However, it is easier said then done; Because of Lack of proper and reliable data it is very difficult
to estimate National Income by each method separately. This is especially in case of
Underdeveloped or Developing countries.
These countries like India are unable to estimate their National Income wholly by one method,
hence to calculate estimated National Income different methods are used in different factors like :1) In Agricultural, Forestry, Fishing, Mining Quarrying etc they used production method.
2) In service sector like Electricity, Railways, Air transport, Banks and Insurance, Communication
etc they use income method to calculate National Income.
3) In small scale sectors and unregistered manufacturing etc. They use income method to
calculate National Income.
4) In construction sector they use Expenditure method to calculate National Income.
Most appropriate method from Indian point of view:
An Indian is an Agrarian economy & it is also known as a service sector at a global level. The
production method & income method is most appropriate method for calculation of NI
Q.12. Discuss to components of domestic sector income? {2003 June - 7 Marks}
Or
Desire in brief the different components of domestic factor Income {2004 June - 5 Marks} Or
Composition of Indias National Income {2005 June - 3 Marks}
Or
Ans:
Domestic sector income refers to income within the domestic territory (excluding foreign income) i.e.
Gross domestic product.
This gross domestic product comprises of the following 3 components ie.
1)
Primary Sector:
This sector compress of Agricultural, Fishing, Mining, Pig easing, Poultry farming etc.
But their share in NI is declined from 56% in 1950 -51 to 23% in 2004 05 Thus, the
dependence on Agricultural has been declined.
2)
Secondary Sector:
The secondary sector includes manufacturing construction, Electric, gas & water supply etc.
Their share in NI has been increased from 11.7% in 1950 51 to 23% in 2004 05
3)
Tertiary Sector:
The tertiary sector includes Insurance, Banking, Transportation communication service etc.
Their share in NI has been remarkably increases from 32.7% in 195051 to 53.2% in 2004-
Q.13.
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Q.14. Difference between NI at Current price & Constant price. {2003 June - 5 Marks}
N.I. at current price
N.I. at constant price
(1) Def: N.I. at current price is (1) Def: N.I. at constant price is calculated
obtained by expressing the value
on the basis of a base years prices, it is
of goods and services produced in
called N.I. at constant price.
a country at market prices actually
prevailing in that year.
(2) When the goods and services (2) When the value of goods and services
during a year is measured according to
produced during a year are valued
the prices of base year, the estimates
at the market price of the same
are said to be at constant price.
year, the estimates are said to be
a current prices i.e. we use the
same years output and same
years market prices.
(3) E.g. products of 2006-07, if (3) E.g. the products of 2006-07 valued at
prices of 2000-01 (base year) , it is
measured at market prices of the
called N.I. at constant price.
sale year, it is called N.I. at current
price.
(4) There is no need of a year (4) A year which has been normal and which
because values are calculated at
is not too far in the past is selected as
current years prices.
the base year.
(5) If the value of the output increases (5) If the value of output at the base years
prices increases it is a true indicator of
in the next year as compared to
economic development of a country.
the previous year, it may not be
the true indicator of economic
development as N.I. may simply
increase due to the rise in price.
Important Points /Tips:
Closed Economy means
Open Economy means
The Answers given in Q.2, Q.3, Q.4, & Q.5 can be used for distinguish between in any combination
as well as for Short notes.
General Questions
Q.1.
Saving is important for Capital formation/Investment & for faster growth of Indian economy
Discuss?
Hint: Yes saving is important because: a)Saving & investment have Direct relationship, b) It will help to
increase the production capacity of the economy, c) Help to improve the standard of leaving of the people,
d) help to maintain the sustainable growth etc. (Elaborate it)
Logical Questions
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Practical question
Q.1.
Calculate GNP fc NNP fc and NDP fc with the help of following information. {2005 Dec - 4
Marks}
GNP at MP
35,000 Crores
Net Indirect tax
4,000 Crores
Consumption of fixed Capital
1,800 Crores
NFIA
200 Crores
Unit 6
Select Areas of Indian Economy
Chapter 1
Population & Unemployment
Q.1.
Q.2.
Age Composition:
Age composition is a major factor in determining the overall productivity of a population.
Age composition indicates whether the population of a country is young or old (For e.g. Indian
population is a young population)
It is estimated that 1/3 rd of the population is in the age of 1-14 years, while another 7.8%is
above 60 years.
It indicates that dependency rate is high which is not good for economic development.
Q.3.
Density of Population
Density of population refers to the number of persons per square kilometer.
Density of the population before independence was less than 100 & it was increased to 363 in
2004.
It states that the population in country ins increasing continuously & which hamper the
development of economy.
Q.4.
Urabnisation
In India, growing population has led to Urbanization during 1951 to 2000-01, it has increased
from 17.3% to 25.7%
Important reason for migration from Rural areas to Urban areas are:
a)
Lack of employment opportunities in rural areas.
b)
Agriculture growth has been at a slow pace & uneven agricultural reforms, etc.
Disadvantage of Urbanisation are:
a)
Government has to invest on growing social wants (Food, Clothing, Shelter, Education,
Medical etc) and reduced the funds on productive investment.
b)
Urban areas suffer from Atmospheric & Noise pollution.
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How does population growth creates hurdles in the economic development {2006 June - 7
Marks}{2009 June - 5 Marks}
Or
A rapid increase of population creates hurdles in the economic development of India Do
you agree with this statement? Give reason in support of your ans {2007June - 8 Marks} Or
Drawbacks of population explosion:
Ans:
1) Pressure on Agricultural Land :
Since the supply of land is inelastic, the rising population pressure on land is resulting in division &
sub-division of agricultural land
Thus, most of the farming land have become uneconomic in size.
2) Inadequate social overheads :
Due to ever increasing ever increasing population most of our cities have become over crowded &
are suffering from inadequate transportation, drinking water, housing & sanitary problems.
3) Low saving & Investment :
Due to rising population, more funds have to be spent on growing social wants ( foods, clothing,
shelter, education, medicines etc.) which reduces the savings & thus investment
4)
Food shortage :
Due to increasing population, the per capita availability of food items declines.
Which results, A millions of people in the country dies due to malnutrition , undernourished &
malnourished.
5)
Energy crises :
The increasing population leads to energy crises in
More energy is needed in future to meet increasing demand of the rising population
6)
Environmental degradation :
The increasing population growth is also responsible for environmental degradation & pollution.
The problem like soil erosion, floods, air & water pollution etc increases
7)
Q.6.
Ans:
1)
2)
Quality of Population of a country is the combination of the quality of life led by it & the level of
its productivity. It is represented by number of factors i.e.
Level of health enjoyed by it & Proneness to suffer from ill-health :
The mass killer diseases like small pox, Plague etc has been significantly controlled, which
results in the proneness to suffer from ill-health has been reduced & level of health enjoyed has
been improved.
Life expectancy at birth:
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The Life expectancy has been improved from 32.1 years in 1950-51 to 63.87 for males & 66.91
years for female in 2000-01.
3)
Education:
The literacy rate has been increased from 18.33% in 1950-51 to 65% in 2000-01.
4)
5)
6)
Employment level
But due to the size of population is rapidly increasing, the above improvements are nullified
thus it is said that, the quality of population has been improved significantly in India but
comparatively it is still poor then advanced countries.
Q.7. What do you mean by Unemployment & what are the types of unemployment?
Ans:
Meaning : Any person who is able & wiling to work but gainfully employed in any productive activity
is called unemployed.
Types of Unemployment
1) Seasonal unemployment :
Disguised unemployment :
It is a situation in which worker seems to be working but its marginal productivity is zero.
Disguised unemployment arises due to surplus man power & lack of other employment
Opportunities.
3)
Technological unemployment :
4)
Frictional Unemployment :
5)
Structural Unemployment :
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Cyclical unemployment :
Cyclical unemployment caused because of cyclical fluctuations in the trade cycles of the
Country.
6)
2)
3)
4)
5)
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for the entire day even if he is employed only for an hour during the day.
General Questions
Q.1. Write detailed not on population growth in India {2003 Dec - 7 Marks}
India is experiencing an explosive growth in its Population Do you agree?
Hint: Refer Q.1, Q.3 & Q.4. (Merge it & modify according to the given question)
Or
Q.2. What do you understand by Income inequalities? What are its causes? {2008 June - 5
Marks}
Hint:
Q.3. Frictional Unemployment is an inevitable result of technological progress. {2009 June - 3
Marks}
Hint: No, Frictional Unemployment is not an inevitable result of technological progress. (For detail
reasons refer Q.7 point 3 & 4).
Chapter2
Foreign Trade & Balance of Payment
Q.1. Explain the concept of BOP? {2005 June - 6 Marks}
Or
What is balance of payment & what are the components of balance of payment
Ans : Balance of payment is a systematic records of all economic transactions between the residents of
one country & the residents of the rest of the world. The balance of payment always balance in an
accounting sense.
Components of BOP:
The balance of payment is classified as follows:
1)
Current A/c
2)
Capital A/c
1)
Current A/c :
Balance of current A/c includes
a)
Balance of trade
b)
Balance of services
c)
Balance of unilateral transfer
a)
b)
c)
Balance of trade: It includes all the goods imported & exported by a country in a year.
Balance of services: It includes all the services imported & exported by a country in a year.
Balance of unilateral trade: It includes both official & private transfer line gifts, donation etc.
2)
a)
b)
c)
Capital A/c :
It deals with borrowing & lending of the country. Balance of capital A/c includes
Balance of private direct investment
Balance of private portfolio investment
Govt. loans to foreign Govt.
Conclusion:
Balance of payment must always balances
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Q.2.
Ans:
If there is a surplus it adds to external reserves & if there is deficit, it reduces down to
external reserves of the country.
Foreign exchange reserve means a reserve of currency other than domestic currency.
Foreign exchange reserve are increased by exporting of goods & services & are used
for making payments against imports.
Indias foreign currency reserves has more substantially to about 180 billion US dollars
in 2007. but it is not optimum because the foreign currency earned through exports finance only 65%
of imports
Thus, foreign exchange reserves should be made optimally to avoid foreign exchange crunches in
the country.
Chapter 3
Taxation & Subsidy
Q.1. Subsidy: {2003 Dec - 5 Marks}
Ans:
A Subsidy is a negative tax
A Subsidy is of two types i.e.
1. Open Subsidy which is provided in the form of cash grant
2. Hidden Subsidy which is provided in the form of tax concession.
BENEFITS: A Subsidy is meant to help one section of the economy, or society , by procuring resources
from the removing section. This can be explained with the following point:
1. Subsidies alter allocation of resources between alternative uses it helps to move resources from
non-subsidies to subsidized uses.
2. It helps to redistribute real income and wealth between urban and rural people and between richer
and poorer people etc.
3. Subsidies aim at altering the prices of selected inputs and product patterns.
DRAWBACKS:
1. Subsidies are not administered well thus they fail to achieve the set goals.
2. The beneficiaries are able to hide their economic inefficiency.
3. These subsides become burden upon public debt.
4. Subsidies are a fiscal policy too help for correcting market failures by protecting producers interest
through remunerative prices and also keeping prices stable for consumer
Q.2. Explain main features of Indian Taxation:
Ans:
1. Complicated tax system:
The taxation system in India is highly complicated because: a) There is a multiplicity of taxes both in
case of direct & indirect tax. (b) There is rapidly changing in provision and tax rates.
2. Narrow tax base:
The direct tax structure has a very narrow tax base because: (a) Exclusion of tax on agricultural
income. (b) Difficulty in taxing unorganized sector.
3. Highly unbalanced tax structure:
The Indian tax structure is highly unbalanced because: (a) The Indian tax revenue is highly
dependent on indirect tax as compare to direct tax because indirect tax is less pinching. Thus the
ratio of direct & indirect taxes in total tax revenue is 29.3% & 70.7% respectively.
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Chapter 4
Five year Plans & Economic Development
Q.1. Discuss the main objectives of Tenth Five Year Plane:Ans:
Introduction
The Tenth Five Year Plan (2002 07) is very comprehensive and diversified.
The objectives of Tenth F.Y.P is not only accelerating the rate of economic growth but also strengthening
the fundamentals of the system, improving the quality of life, increasing employment opportunities,
acquiring competitive strength in international market and freedom from the need to borrow externally.
Targets:In addition to 8% overall rate of growth p.a. the tenth plan lays down some specific targets which are as
follows:1) Access of all to primary education by the end of Tenth plan, and increasing in literacy rate to 7.5%.
2) To provide gainful employment to the labour force expected to be added during the tenth plan.
3) Cleaning of all major rivers by 2007.
4) A reduction in poverty ratio by 5% by the end of plant and by 15% by the end of tenth plan.
5) Reduction in material mortality rate to 2 per 1000 live births by 2007 and to 1 per 1000 live birth by
2012.
6) Reduction in infant mortality rate to 45 per 1000 live births by 2007 and further to 28 by 2012.
7) Access to safe drinking water by every village by 2012.
8) Forest cover to be increased to 25% by 2007 and to 33% by 2012.
Plan size and allocation:The tenth plan is only indicative for the private sector, therefore, the plan puts allocation for the entire
public sector during 2002 07 (at 2001-02 prices) at Rs.15,25,639 crores with the following sectoral
breakup:
1. Energy: Rs.4,03,927 crores
2. Social services: Rs.3,47,391 crores
3. Total of rural related: Rs.3,05,055 crores
4. Transport: Rs.2,25,977 crores
5. Rural development: Rs.1,21,928 crores
6. Irrigation and flood control: Rs.1.03,315 crores
7. Communication: Rs.98,968 cores
8. Industry and minerals: Rs.98,939 crores
9. Agricultural and allied activities: Rs.58,933 crores
10. General economic services: Rs.38,630 crores
11. Science, Technology and environment: Rs30,424 crores
12. Special area programmes: Rs.20,879 crores
13. General services: Rs.16,332 crores
26.5%
22.8%
20.0%
14.8%
8.0%
6.8%
6.5%
3.9%
3.9%
2.5%
2.0%
1.3%
1.0%
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CHAPTER 5
FISCAL POLICY & BUDGET
Q.1. What do you mean by fiscal policy & its objectives?
Ans:
Fiscal policy refers to policy relating to public revenue & public expenditure.
3)
Exchange Stability:
Fiscal policy helps to achieve this objective by regulating custom duties, movement of capital,
speculations in foreign currencies etc & if necessary by banning exports & Imports if items which
leads to exchange instability.
4)
5)
Full employment:
The goal of full employment is achieved by accelerating the process of growth with employment.
Taxation:
Both Direct tax & Indirect tax are an important element of the fiscal policy because:
Through Direct tax, the equitable distribution of income & wealth is ensured due to its
progressive nature.
Though Indirect Tax, Balance regional development is ensured by encourage savings &
Investment in backward areas.
2)
Public Expenditure:
Both development & Non-developmental expenditure are an important element of fiscal policy
because.
Development expenditure means developing infrastructure for increasing present production
capacity for high economic growth
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And Non-development expenditure like expenditure on health, education etc is equally important
from long term point of view
3)
Public Debt:
Public debt is also an important element for mobilizing the resources to meet the capital
expenditure.
Capital Budget
Capital Budget consist of capital receipts & capital payments
Capital receipts consist of loan raised by government from public, foreign governments, & own
bodies, fund raised through sale of treasury bills, recovers of loan granted by central government
to states & union territory.
Capital expenditure consist of acquisition of assets & infrastructure, Laws & advance given to
state government etc.
Conclusion
Budget can be :
a) Surplus
b) Deficit
c) Balanced
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Unit 7
Money & Banking
Chapter 1
Money
Q.1. Discuss the meaning of Money? {1999 June - 3 Marks}
Money is anything that is generally acceptable as a means of exchange and at the same time, acts
as a measure and store of value.
Q.2. Discuss the Nature / Function of Money. {1999 June - 6 Marks}
Ans:
I) Functional Approach:1. Medium of exchange: Money acts as an effective medium of exchange.
By performing as the medium of exchange, money removes the difficulties of barter system.
Due to medium of exchange money splits single barter transaction into three economic activities
comprising (1) Two Sale / Purchase transactions and (2) One that of storing wealth.
Hence we can buy without selling anything and sell without buying anything.
2. Store of value: Money serves as a store of value.
Under barter system, seller accepts one good in exchange of other even when it has no intrinsic
value for him, he do so because seller knows that goods which is stores as an asset have some
purchasing power (stored value) and in future can be exchanged for some other goods.
Thus, the second function of money should be a store of value.
3. Measure of value: Money serves as common measures of value.
Under barter system, all goods and services which are exchange for each other their value are
measured in terms of some standard unit or some other unit of account.
Hence, money is one of the two items exchanged. Being common to all transactions, it has the best
claim to be used for expressing measures of value. For e.g. In India the standard monetary unit is
called a rupee.
4. Standard for deferred payments: Money acts as an effective and efficient standard for deferred payment.
Deferred payments refer to payment to be made at future date.
The debtor will pay to the creditor a certain value as expressed and measures in terms of standard
monetary units of the country.
Hence, money acts as a better standard of deferred payments due to the attributes of stability,
durability and general acceptability.
II) LIQUIDITY APPROACH: {2001 June - 5 Marks}
The term liquidity means the economic capacity of an item to be readily acceptable in the market.
In other words, An item cannot have liquidity unless It is marketable, that is unless it can be sold or
exchanged in the market.
Cash or official currency, by its very nature, is the most liquid asset.
Liquidity of an asset is deeply influenced by several factors which are as follows:(i)
Liquidity content of an asset is inversely related with the average time taken to convert in to
cash in market.
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(ii)
A higher marketing cost reduces the liquidity of assets.
(iii)
The liquidity of an asset is inversely related to the probability & extent of its price fluctuation.
Hence, money being the most liquid asset, it can be converted into any other asset quickly.
Q.3. Briefly explain the fishers Quantity theory of money {2007 June - 2 Marks}{2008 Dec- 5 Marks}
Ans:
Quantity theory of money states that, the value of money changes inversely related to changes in
quality of money & The Price level is directly related to changes in Qty of money.
The fishers version of Quantity theory of money was presented in the form of an exchange as
follows:M1V1 + M2 V2 = PT
Where:- P =
Average price of goods and services
T=
Total transaction of goods and services
M1=
Total quantity of legal tender money
V1 = Velocity of circulation of legal tender money
M2 = The total quantity of Bank money
V2 = Velocity of circulation of Bank money
Explanation: The equation indicates that demand for money (PT) is equal to the supply of money (M1V1 + M2V2)
Thus, the total value of purchases (PT) in a year is measured by M1V1 + M2V2
The above equation also explains that there is a direct proportional relationship between the quantity
of money and the general price level. If the quality of money is doubled, the price level also
doubles, but the value of money (1/P) is reduced to half and vice versa.
Assumptions of Theory:Fishers equations is based on the following assumptions.
1. There is no credit sales in the market it means all sales are made only for cash.
2. Money is only of medium of exchange for payment of purchases.
3. It assumes that of the six variables (M1, V1, M2, V2, P & T) in the equation, only M1 & M2 can change on
its own initiative and No other variable can do so.
4. Full employment prevails in the economy.
5. When M1 or M2 changes V1 & V2 and T do not change in response but changes takes place in P in
same direction.
Evaluation / Criticism:1. The theory makes a totally unrealistic assumption that there are no credit sales in the market.
Practically, the reality is some sales are affects on cash as well as on credit also.
2. It is also an unrealistic assumption that money can be used only for making payments but practically
money also kept as an asset for holding wealth.
3. The definition of money supply used in the quality theory of money is a narrow one. It includes only the
bank currency and bank deposits.
4. During depression, although the money supply does not change, price shows a tendency to fall.
5. The theory is based on unrealistic assumption that T, V1, V2 remain constant. In real life, all these
elements do change and thus, affect the price level.
6. There may be direct relationship between the quality of money and the price level but the relationship
cannot be always proportional.
Q.4. Give the statement of quantity theory of money, explain it with the help of Cambrige Version.
{2003 Dec - 7 Marks}
CAMBRIDGE VERSION of quantity theory of money concentrates upon the store of value function of
money.
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The CAMBRIDGE VERSION of quantity theory of money was presented the equation as follows:P=kR/M
Where: P=purchasing power of one unit of commodity.
R=Real resources of the society
k=Hold in the form of readily available purchasing power
M=Cash balance+ Bank Money
According to pigous the equation as follows:P=kR [C+h(1-C)]/M
Where: All same as above
C= Actual cash.
Explanation: The above equation explains that change in quantity of money is inversely related to change in per
unit of purchasing power of money.
The above equation measures purchasing power of money with reference to point of time & over a
period of time.
Assumptions: The symbol R stands for Real resources of society.
CAMBRIDGE VERSION assumes that proportions k, C & h remains constant over time.
Other assumptions are similar to Fishers Version.
Criticism: It makes wrong assumptions that proportion k, C & h remains constant from one point of time to
other.
The concept of R is Vague.
There is no explanation of the factors determining to value of k, C & h
Q.5. Alternative measures of money
Ans:
I. Components of Money Supply:1 Currency with public (C):
Currency with public is total currency issued by both RBI & government to public.
i.e. Government issued coins & notes not exceeding denomination of one rupee.
Other denominations exceeding 1 rupee issued by RBI.
2 Other deposits with RBI (OD): It includes deposits maintained by government of India & state government & also deposits
maintained by other commercial bank.
3 Demand Deposits (DD): Demand Deposits are deposits can be encashed at the demand of the deposit holders.
For e.g. saving deposit A/C , Current A/C etc.
4 Time deposits(TD): Time Deposits are deposit can be encashed only after maturity period of time.
For e.g. Fixed Deposit, Recurring Deposit etc.
5 Deposit with post offices: It includes all the deposits made with post offices in the form of saving & other deposits.
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II. Alternative measures of money:1)In 1979 the RBI classified four alternative measures of money supply which are as follows:a)
M1=C+DD+OD [Narrow Money]
b)
M2=M1+ Post office saving deposits.
c)
M3= M1+TD [Broad Money]
d)
M4=M3+ Total post office deposit [widest money]
Note:- The difference between Narrow money (M1) & Broad Money(M3) is treatment of time deposit with
banks. {2005 June - 3 Marks}
2)Currently RBI redefined the alternative measures of money supply which are as follows:a)
M1=C+DD+OD.
b)
M2=M1+ Time liabilities portion of saving deposits with bank + Term deposits maturing within a
year excluding FCNR(B) deposit.
c)
M3=M2+ Term deposits with banks with maturity over one year + call/term borrowings of the
banking system.
Q.6. Distinguish between {2005 Dec - 5 Marks}
Credit Card
Debit Card
General Question
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Chapter 2
Banking
Q.1. What are the functions of commercial Bank?
Ans:
1) Accepting Deposits
Bank accepts deposit from the public. People having surplus fund would like to deposit these with
commercial banks for various reasons. Bank accepts mainly 3 types of deposits.
(i)
Current Account
(ii)
Saving Bank Account
(iii)
Fixed deposit
2) Transfer of funds from one Bank to another
Bank transfer the money from the deposit of the writer of the cheque to the deposit of person in
whose favour the cheque is written.
3) Agency functions Bank perform
The following agency function.
(i)
They collect interest on bonds and dividend on shares.
(ii)
They make payment on behalf of customer
(iii)
It accepts income tax payment.
(iv)
Act as trusteeship and execution of will.
4) Credit Creation
Credit creation means the creation of bank deposit or increases in bank deposit bank expand their
deposit by giving loan and advantages. With little cash in hand, bank can multiply loan and
advances.
5) Advancing of loan
It acts as intermediaries between depositors and browsers. They make profit out of these
transactions. They lend money in following ways.
(i)
Cash credit
(ii)
Short term loan
(iii)
Overdraft
Q.2.
Q.3.
1)
2)
Governments Bank: Central Bank acts as the banker, adviser & agent to the govt.
Central Bank performs most of the monetary functions on behalf of the government like a)
Managing their funds, b) managing public debts, c) raising loans & advances for government by
issuing Treasury Bills, etc.
It also advises government in formulation & execution of monetary policy.
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3)
Bankers Bank: A central Bank has been vested with power to supervise & control the functions of all the banks.
All the commercial banks keep certain cash reserve with the Central Bank & it acts as a custodian
of the cash reserves of the banks.
4)
Custodian of Foreign Exchange Reserve: The Central Bank has a responsibility to stabilize the exchange value of the nations Foreign
exchange reserve.
When Foreign exchange reserves are inadequate for meeting balance of payment problems, it
borrows from IMF.(International Monetary Funds)
5)
Controller of Credit: Credit plays an important role in the settlement of business transaction & purchasing power of
people.
Controlling Credit operations is a principle function of central bank & for this purpose it can use
almost the Qualitative & Quantitative methods of credit controls.
6)
Lender of the last resort: Whenever a bank is in difficulty or does not have enough cash to pay to customer, it approaches to
Central Bank for help.
The central bank helps commercial bank by providing loans 7 advances or discounting bills of
exchange, hence it is called as Lender Of last resort.
7)
Clearing house: Central Bank provides clearing facility for the smooth function of commercial bank.
There are large no. of commercial banks & it is not possible for all commercial bank to meet
personally & settle their claims.
Hence Commercial Bank solves these problems smoothly by debiting & crediting against each bank
concerned.
8)
Promotes of Development: Central Bank helps Government to promote economic development by developing financial sector
in the economy.
Central Bank setup NABARD Bank to provide loans to develop Rural & Agricultural sector.
It also provides loans & advance to develop Industrial sector & also provide Export Import finance
to encourage Globalization.
Q.4.
Ans:
What is meant by credit control and what are its main categories. {2006 June - 3 Marks}
Credit control refers to the regulation of credit (money supply) by the central bank for
achieving some objectives like:a) Price stability.
b) Economic growth.
c) Exchange rate.
d) Etc
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LIMITATIONS OF CREDIT CREATIONS:1) Liquidity Preference of the people: Liquidity preference means the desire of the people to hold cash,.
Liquidity preference of the people is inversely related with multiple credit creation.
If people decide to keep more cash, it lead to less credit creation. Or vice versa.
2) Cash Reserve Ratio: Every commercial bank has to keep certain proportion of their deposit with RBI, that proportion is called
Cash Reserve.
Cash reserve is also inversely related with credit creation.
i.e. higher the ratio of reserves, less cash will be available with bank to create credit or vice versa.
3) Amount of Cash Available: It means excess cash available after deducting CRR.
Excess cash available has direct relationship with credit creation.
i.e. larger the excess cash available, higher will be credit creation or vice versa.
4) Volume of currency: It refer to the cash received through primary deposits.
Credit creation depends upon primary deposit & it is directly related to volume of currency in
circulation.
i.e. higher the volume of currency circulation, higher primary deposit & credit creation or vice versa.
5) Banking habits among people: If people have banking habits, bank will receive more deposits & create more credit.
If people lack banking habits, they will prefer to keep their income at home, hence less scope for credit
creation.
6) Business Conditions: Credit creation is also related to the existing business condition in the economy.
During the period of prosperity , business people demand for loans & advances, hence large credit
creation.
During depression period, demand for loans & advances fulls, hence low credit creation.
7) Credit Control by Central Banks: Central Bank has full authority to control credit in the economy.
Central Bank takes various measures like increase or decrease in CRR, bank rate policy,, open market
operation etc. to affect the power to create credit.
8) Leakages in credit Creation: There are various reasons which restricts banks to create credit which are as follows: The borrower withdraw a cash & keep a part amount with himself.
The Banks may not use the entire excess reserves for credit creation.
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The people use the loan money for making payment for imported goods.
From the above reasons the power of creating credit gets reduced.
Q.6. Methods of Credit Control by Banks:Ans:
I) Quantitative Steps: Quantitative instruments used for influencing the total volume of credit in the economy.
The Quantitative measures are as follows:1) Bank Rate Policy: {2003 June - 8 Marks} {2006 June - 5 Marks}{2006 Dec - 5 Marks}
The Bank rate is the rate at which Central Bank lends to the Commercial Banks.
During inflation Central Bank increases the bank rates, which increases the cost of borrowings of
Commercial bank.
Hence the price of credit increases& the demand for credit falls.
During deflation Central Bank reduces the bank rates which reduces the cost of borrowings of
commercial bank & for borrows, hence the demand for credit increases.
Limitations:
1. Bank Pate Policy is successful when commercial banks depend upon Central bank for rediscounting bill, but commercial banks are less dependent on central bank.
2. There is no organized bill market in India which makes this method ineffective foe controlling
credit.
3. In unorganized money market the large amount of credit is supplied by non-banking
institution thus this method does not work in unorganized sector.
4. This method has no effect on priority sector like Agriculture because in these sector they
rarely increase interest rates
2) Open Market Operations {2007 Dec - 3 Marks} {2005 June - 3 Marks}
It refers to buying & selling of securities & other eligible paper by central bank in open market.
During inflation central bank sells the securities & other liquidity with banks & people (market) &
contracts credit.
During deflation central bank purchase the securities, money flows in the market & liquidity
increases with banks & people & expand credit.
Limitations:
1. These government securities market is well developed which makes this method ineffective.
2. The buying & selling securities in the market is highly risky for central bank.
3. Enough securities should be available with central bank for effective implementation of open
market operation.
3) Change in Reserve Ratio: There are two types of reserves i.e.:a) Cash Reserve Ratio:- It refers to that proportion of total deposits which a commercial bank has to
keep with the central bank.
b) Statutory Reserve:- It refers to that proportion of total deposits which a bank has to keep with itself.
Central Bank can use either or both reserve ratio to control credit.
During inflation central bank increases the Reserve Ratio, which leads to reduce the liquidity in the
market hence it contracts credit.
During deflation central bank reduces Reserves, which leads to increase the liquidity in the market,
hence credit expands.
Limitations:
1. In case of excess reserve with commercial bank they will continue to lend more even is CRR
is high.
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2. This method is ineffective on those commercial banks who lend money from foreign funds.
3. Frequent Changes in CRR will create uncertainty in banking sector.
4. Small banks may severely affected as compare to lawyer banks.
II) Qualitative Steps/ Selective steps: Qualitative instruments are used for regulating particulars use of credit & not its total volume.
The Qualitative measures are as follows:
1) Margin requirements: A Banks provide loans & advances against securities like Gold, Shares, Property, etc.
The difference between the value of security & the actual amount of the loans is known as margin.
Central Bank can reduce flow of credit money in to undesirable sectors by increasing margin
requirements.
It can also increase the flow of credit money in the desirable sector (Agriculture) by reducing margin
requirements.
2) Consumer Credit Regulation: Commercial Banks often provide advance to consumer for purchasing luxury goods like T.V,
Refrigerators etc.
Central Banks can regulate consumer loans by directing commercial banks to increase the minimum
down payment or by reducing the no. Of installments for payment of loans & can do vice versa
during deflation.
3) Rationing of Credit: Central Bank uses this method for controlling & regulating the purpose for which credit is granted.
This method help to check the flow of money in to undesirable uses.
4) Moral Suasion: Moral Suasion is a Psychological means of controlling credit.
It refers to persuasion & request made by central bank to the commercial bank to cooperate credit.
For E.g. Central Bank request to commercial bank for not to finance the speculative activities etc.
5) Direct action: The Central bank may take direct action against the earning of commercial bank.
Direct actions can be like: -a) Suspending the activities of the commercial bank, b) Refusal of
renewal of license, refuse to rediscount their papers etc.
6) Issue of Directors: Central Bank also uses directives to various Commercial banks.
Directives are in the form of oral or written, appeals or warning particulars to curb individual credit
structure.
Q.7. Distinguish between :
(i)
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(iii)
(iv)
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Unit 8
Economic Reforms & Liberaliation
Chapter 1
World Trade Organisation (WTO)
Q.1. What is WTO & what are its function? {2009 June - 5 Marks}
Ans:
GATT(General Agreement Tariff and Trade) was setup in 1947.
The last round of negotiations of GATT was held in Uruguay, it prepared the ground for setting up of
WTO on 1st January 1995.
The WTO is a powerful which gave a real push to the process of globalization.
The present members of WTO is around 149 countries.
The main aim of WTO is to make the entire world a big village where there is free flow of goods and
services and where there are no barriers to trade.
Objectives/ Functions of WTO:
1) The main objective of WTO is to help trade flow as freely as possible.
2) WTO shall handle trade disputes.
3) It shall provide technical assistance and training to developing countries.
4) To ensure the individuals, companies and governments, that there will be no sudden change in policy.
5) To settle the disputes among the member countries.
Q.2. Principal of WTO:
Ans:
1) National Treatment:
The principal of National Treatment means treating foreigners and local equally.
It means foreign goods, services, trademarks, copyrights and patents should be treated equally as
local goods, services, trademarks, copyrights and patents.
2) Most favored Nation:
The principal of Most favoured Nation means any member countries cannot discriminate between
their trading partners.
It means a member of WTO granting some-one a special favor (for e.g. low custom duty etc) then
such member has to do the same for all other WTO members.
3) Binding an enforceable commitments:
The tariff commitments made by WO members in a multilateral trade negotiation are Ceiling
bindings.
If any members country changes its bindings, he has to pay compensation for any loss of trade to
his trading partners.
4) Free Trade :
The principal of Free trade means lowering down the trade barriers and encourage free flow of
goods and services.
Trade barriers include custom duties, import bans, quotas System etc.
5) Predictability and stability:
The principal of Predictability and stability means to make the business environment predictable
and stable.
It means, with Stability and predictability, investment is encouraged, jobs are created and consumers
can fully enjoy the benefits of competition (choice and lower prices).
6) Promoting fair competition:
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WTO aims to support fair open and undistorted competition through out the world.
The rule of non-discrimination and national treatment are designed to secure fair conditions of trade.
7) transparency:
WTO aims to maintain maximum transparency in trade policies and regulations of member countries.
For this purpose WTO institution review member countries trade regulations, policies and
administrative decisions and request them to make necessary changes in policies if required.
Q.3. Structure of governance of WTO
Ans:
WTOs headquarters are in Geneva (Switzerland) & there is no branch around the world.
Top Level: Ministerial Conference
The constituents of ministerial conference are commerce minister of all member countries.
It is the highest decision making Body.
Their meeting held once in two years, which can be held anywhere.
Second Level: There is three groups which perform daily works of Ministerial conference they are:
i)
General Council :
The members of general council represents ambassadors equivalent of different members
countries.
They are WTOs highest level decision making body.
They meet regularly at Geneva only to carry out functions of WTO
ii)
The dispute settlement body :
The body is made up of all member governments, usually represented by ambassador or
equivalent.
iii)
Trade policy review body (TPRB):
The WTO general council meets as the TPRB to undertake policy review members under
the TRPM.
Other Level or Committees:
There are other level and committees also such as
a) Council of trade in Good.
b) Council of trade.
c) Council of trade in services.
d) Trade and development.
e) Trade and environment etc.
Q.4. DISPUTE SETTLEMENT MECHANISM of WTO.
Ans:
1) The dispute settlement body is responsible for administering the entire dispute settlement process.
2) The operation of the WTO dispute settlement process involves the DSB panels, Appellate body,
WTO Secretariat, Arbitrators, Independent experts and other institutions.
3) If dispute fails to resolves within 60 days from the date of the request for the consultation, the
complaint state may request the establishment of panel.
4) Then finally, consisting panel of three members appointed to resolve the dispute among members.
5) Thus, it can be conclude that the dispute settlement mechanism made is stronger, automatic and
credible and it uses the process of negative consensus for dispute settlement.
Q.5. Explain the impact of WTO/ Globalisation on Indian economy ? {2005 Dec - 5 Marks}
Ans.
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1)
2)
3)
4)
5)
1)
2)
3)
Signing of WTO will have far reaching effect not only on Indias foreign trade but also on the internal
economy. There could be various positive and negative effects of WTO on Indian economy.
FAVOURABLE EFFECTS:
According to supporters of WTO, India is likely to make following gains from WTO:
Expansion in trade:
World Bank, organization for Economic Corporation and development & the GATT Secretariat have
estimated that as a result of Uruguay round package, the merchandise trade in goods will increase
by US $ 745 Billion in 2005. India will also gain from it. Indias share in world exports will increase
from existing 0.5% to 1%. As a result, additional export earnings will be nearly $ 2.7 Billion p.a.
Benefits from agreement on textiles & clothing:
Pacing out of Multi-Fiber Arrangement (MFA) by 2005 will benefit India. The export of textile &
clothing will increase from India.
Better prospectus of agricultural exports:
Under Agreement on agriculture, development countries will have to reduce subsidies & trade
barriers in agriculture. However, India as a developing country will continue with agricultural
subsidies and higher rate of tariff on imports of agricultural products. India expects to gain from this
in the form of higher export earnings from agriculture.
Benefits from Multilateral rules and disciplines:
The Uruguay Round Agreement provides for rules and disciplines related to anti-during, subsidies,
dispute-settlement, etc. This will create conditions for fair trade. It will create a more favorable
environment for India in new world eco0nomic order.
Increase in service export:
Due to GATs. Indias service export has increased. Service export from India is growing at the rate
of 13% p.a. as against 6% annual increase in world export.
UNFAVOURABLE EFFECTS OF WTO:
As a member of WTO India is likely to face a number of challenges and disadvantages. They are
explained as follows:
Trade Related Intellectual Property Rights (TRIPs):
Protection of Intellectual Property Rights such as patents, copyrights, trademarks etc. will serve the
interest of developed countries. This is because Agreement on TRIPs is highly weighted in favor of
patent holders. Since MNCs and developed countries hold large number of patents, they will be
benefited most. Indian pharmaceutical industry will be worst effected by TRIPs. The extension of
TRIPs to agriculture has serious consequence for India.
Trade Related Investment Measures (TRIMs):
This agreement protects the interests of foreign investors in developing countries. The provisions of
TRIMs will adversely affect any plan of self-reliant growth in developing countries. It could also
prove a drain on foreign exchange reserves (in the forms of profit transfer) of developing countries
causing BOP crisis.
Competition in Services:
There is a big difference in level of service like banking, insurance, and telecommunications
between developed countries and developing countries. Therefore, GATS will benefit more to
developed countries and go against India.
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