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ECONOMICS
By Abhimanu Sir
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Economics: Inferior Goods: Goods which are having whatever be the price the quantity
The science which studies human negative relation with income. It demanded remains the same.
behaviour as a relationship between means less demand at higher income Inelastic (less elasti(c) demand (e < 1)
ends and scarce means which have and vice versa. Veblen good: In this case the proportionate change
alternative uses”. Veblen goods are goods for which in demand is smaller than in price.
Macroeconomics: It is the study of increased prices will increase quantity Unitary elasticity demand (e = 1)
economic system as a whole. It studies demanded. Veblen goods are high- When the percentage change in price
broad aggregates like national income, status goods such as expensive wines, produces equivalent percentage
employment and trade. automobiles, watches, or perfumes. change in demand, we have a case of
Micro Economics: It is a study of The utility of such goods is associated unit elasticity. The rectangular
behaviour of individual units of an with their ability to denote status. hyperbola as shown in the figure
economy such as individual consumer, TYPES OF DEMAND demonstrates this type of elasticity.
producer etc. Cross demand: Demand primarily Elastic (more elasti(c) demand (e > 1) In
Economy: An economy is a system by dependent upon prices of related case of certain commodities, the
which people get their living. goods is called cross demand. The demand is relatively more responsive
Production Possibility Curve (PP(C): PP cplementary goods and substitutes are to the change in price. It means a small
curve shows all the possible called related goods. In case of change in price induces a significant
combination of two goods that can be complementary goods like pen and ink change in, demand.
produced with the help of available demand for good is inversely related to Perfectly elastic demand (e = ∞) This is
resources and technology. the prices of other goods but the case experienced when the demand is
Marginal Opportunity Cost: MOC of a in substituting goods are just opposite. extremely sensitive to the changes in
particular good along PPC is the Demand for substituting goods is price. In this case an insignificant
amount of other good which is directly related to prices. change in price produces tremendous
sacrificed for production of additional Income demand: Demand primarily change in demand. The demand curve
unit of another good. dependent upon income is called showing perfectly elastic demand is a
DEMAND – SUPPLY CONCEPT Law of income demand. horizontal straight line. Engel’s Law: %
Demand- The law of demand states Direct demand: Demand for goods and of income spent on food decreases as
that quantity purchased varies services made by final consumers to income increases.
inversely with price. In other words, satisfy their wants or needs is called LAW OF SUPPLY:
the higher the price, the lower the direct demand. For example guest of Supply means the goods offered for
quantity demanded. Law of Supply- hotels make the demand for food. sale at a price during a specific period
Supply of product is directly Derived demand: Demand for goods of time. It is the capacity and intention
proportional to the price of the and services made according to direct of the producers to produce goods and
product. In other words, the higher the demand is called derived demand. services for sale at a specific price. The
price, higher the supply of goods. Joint demand: Demand made for two supply of a commodity at a given price
Equillibrium point - It is a point where or more goods and services to satisfy may be defined as the amount of it
demand of product is equal to the single need or want is called joint which is actually offered for sale per
supply of the product. demand. unit of time at that price. The law of
Type of Goods Price Elasticity of Demand (E(d) supply establishes a direct relationship
Substitute Goods: Increase in the price It refers to the degree of between price and supply. Firms will
of one good causes increase in demand responsiveness of quantity demanded supply less at lower prices and more at
for other good. E.g., tea and Coffee to change in its price. higher prices.“Other things remaining
Complementary Goods: Increase in the Ed. = Percentage change in quantity the same, as the price of commodity
price of one good causes decrease in demanded/Percentage change in price rises, its supply expands and as the
demand for other good. E.g:- Petrol Ed. = P/q X Δq/Δp P = Original price Q = price falls, its supply contracts”.
and Car Original quantity Δ = Change Elasticity of Supply The law of supply
Normal Good: Goods which are having Perfectly inelastic demand (Ed = 0) tells us that quantity supplied will
positive relation with income. It means This describes a situation in which respond to a change in price. The
when income rises, demand for normal demand shows no response to a concept of elasticity of supply explains
goods also rises. change in price. In other words, the rate of change in supply as a result
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of change in price. It is measured by 1. Single seller of a commodity. PRODUCTION FUNCTION AND TIME
the formula mentioned below 2. Absence of close substitute of the PERIOD
Elasticity of supply = Proportionate product. 1. Production function is a long period
change in quantity 3. Difficulty of entry of a new firm. production function if all the inputs are
supplied/Proportionate change in price 4. Negatively sloped demand varied.
FORMS OF MARKET AND PRICE curve(AR>MR) 2. Production function is a short period
DETERMINATION Market: 5. Full control over price. production function if few variable
Market is a place in which buyers and 6. Price discrimination exists factors are combined with few fixed
sellers come into contact for the 7. Existence of abnormal profit. factors.
purchase and sale of goods and Features of monopolistic competition Concepts of product: Total Product-
services. 1. Large number of buyers and sellers Total quantity of goods produced by a
Market structure: refers to number of but less than perfect competition. firm / industry during a given period of
firms operating in an industry, nature 2. Product differentiation. time with given number of inputs.
of competition between them and the 3. Freedom of entry and exit. Average product = output per unit of
nature of product. 4. Selling cost. variable input.
Types of market 5. Lack of perfect knowledge. APP = TPP / units of variable factor
(a) Perfect competition. (b) Monopoly 6. High transportation cost. Average product is also known as
(c) Monopolistic Competition (d) 7. Partial control over price. average physical product.
Oligopoly. 8. Main features of Oligopoly. Marginal product (MP): refers to
(a) Perfect competition:It refers to a 9. Mutual interdependence. addition to the total product, when
market situation in which there are 10. Barrier to entry. one more unit of variable factor is
large number of buyers and sellers. 11. Homogeneous or differentiated employed.
Firms sell homogeneous products at a product. MPn = TPn – TPn-1
uniform price. 12. Price rigidity. MPn = Marginal product of nth unit of
(b) Monopoly market: Monopoly is a 13. Few dominant firms who are large variable factor
market situation dominated by a single in size TPn = Total product of n units of
seller who has full control over the Features of pure competition variable factor
price. 1. Large number of buyers and sellers. TPn-1= Total product of (n-1) unit of
(c) Monopolistic competition: It refers 2. Homogeneous products. variable factor.
to a market situation in which there 3. Free entry and exit of firm. n=no. of units of variable factor MP =
are many firms who sell closely related Selling cost (Advertisement cost)-Cost ΔTP / Δn We derive TP by summing up
but differentiated products. incurred by a firm for the promotion of MP TP = ΣMP
(d) Oligopoly:It is a market structure in sale is known as selling cost. COST
which there are few large sellers of a Product differentiation- It means close Cost of production: Expenditure
commodity and large number of substitutes offered by different incurred on various inputs to produce
buyers. producers to show their output differs goods and services. Types of Cost
1. Features of perfect competition: 1. from other output available in the Money cost: Money expenses incurred
Very large number of buyers and market. Differentiation can be in by a firm for producing a commodity or
sellers. colour, size packing, brand name etc to service. .
2. Homogeneous product. attract buyers. • Explicit cost: Actual payment made
3. Free entry and exit of firms. Patent rights-Patent rights is an on hired factors of production. For
4. Perfect knowledge. exclusive right or license granted to a example wages paid to the hired
5. Firm is a price taker and industry is company to produce a particular labourers, rent paid for hired
price maker. output under a specific technology. accommodation, cost of raw material
6. Perfectly elastic demand curve Price discrimination- It refers to etc.
(AR=MR) charging of different prices from • Implicit cost: Cost incurred on the self
7. Perfect mobility of factors of different consumers for different units – It owned factors of production. For
production. of the same product. example, interest on owners capital,
8. Absence of transportation cost. Production: Combining inputs in order rent of own building, salary for the
9. Absence of selling cost. to get the output is production. services of entrepreneur etc.
Features of monopoly:
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• Opportunity cost: is the cost of next • Both AC & MC are “U” shaped (Law Relationships between AR and MR
best alternative foregone / sacrificed. of variable proportion) under monopoly and monopolistic
• Fixed cost: are the cost which are • When AC is falling MC also falls & lies competition (Price changes or under
incurred on the fixed factors of below AC curve. imperfect competition)
production. These costs remain fixed • When AC is rising MC also rises & lies • AR and MR curves will be downward
whatever may be the scale of output. above AC sloping in both the market forms.
These costs are present even when the • MC cuts AC at its minimum where • AR lies above MR.
output is zero. These costs are present MC = AC • AR can never be negative.
in short run but disappear in the long Revenue • AR curve is less elastic in monopoly
run. Revenue: Money received by a firm market form because of no substitutes.
• Total Variable Cost: TVC or variable from the sale of a given output in the • AR curve is more elastic in
cost are those costs which vary directly market. Total Revenue: monopolistic market because of the
with the variation in the output. These Total sale receipts or receipts from the presence of substitutes. Relationship
costs are incurred on the variable sale of given output. between TR and MR. (When price falls
factors of production. These costs are TR = Quantity sold × Price (or) output with the increase in sale of output)
also called “prime costs”,“Direct cost” sold × price • Under imperfect market AR will be
or “avoidable cost”. These costs are Average Revenue: Revenue or Receipt downward sloping – which shows that
zero when output is zero. received per unit of output sold. more units can be sold only at a less
• Total Cost: is the total expenditure • AR = TR / Output sold price.
incurred on the factors and non-factor • AR and price are the same. • MR falls with every fall in AR / price
inputs in the production of goods and • TR = Quantity sold × price or output and lies below AR curve.
services. It is obtained by summing TFC sold × price • TR increases as long as MR is positive.
and TVC at various levels of output. 1. • AR = (output / quantity × pric(e) / • TR falls when MR is negative.
Relation between TC, TFC and TVC 1. Output/ quantity • TR will be maximum when MR is zero
TFC is horizontal to x axis. 2. TC and • AR= price Break-even point: It is that point where
TVC are S shaped (they rise initially at a • AR and demand curve are the same. TR = TC or AR=AC.
decreasing rate, then at a constant rate Shows the various quantities Firm will be earning normal profit. Shut
& finally at an increasing rat(e) due to demanded at various prices. down point: A situation when a firm is
law of variable proportions. 3. At zero Marginal Revenue: Additional revenue able to cover only variable costs or TR
level of output TC is equal to TFC. 4. TC earned by the seller by selling an = TVC
and TVC curves parallel to each other. additional unit of output. MRn = TR n - • Formulae at a glance:
• Average variable cost TR n-1 TR = Σ MR • TR = price or AR × Output sold or TR =
• It is the cost per unit of the variable Relationship between AR and MR Σ MR
cost of production. (when price remains constant or • AR (pric(e) = TR ÷ units sold
• AVC = TVC / output. perfect competition) Under perfect • MR n = MR n – MR n-1
• AVC falls with every increase in competition, the sellers are price Main characteristics and various
output initially. takers. Single price prevails in the aspects of Indian Economy are being
• Once the optimum level of output is market. Since all the goods are given below:
reached AVC starts rising homogeneous and are sold at the same Agrarian Economy — Even after 60
Average total cost (AT(C) or Average price AR = MR. As a result AR and MR years of independence, 49% of the
cost (A(C): refers to the per unit total curve will be horizontal straight line work force of India is still agriculturist
cost of production. parallel to OX axis. (When price is and its contribution to Gross Domestic
Marginal cost: Refers to the addition constant or perfect competition) Product is approximately 18%.
made to total cost Relation between TR and MR (When Mixed Economy — Indian Economy is a
when an additional unit of output is price remains constant or in perfect unique combination of public and
produced. competition) When there exists single private sector, i.e. a mixed economy.
MCn = TCn-TCn-1 or MC = ΔTC / ΔQ price, the seller can sell any quantity at After liberalization, Indian Economy is
Note : MC is not affected by TFC. that price, the total revenue increases going ahead as a capitalist economy or
Relationship between AC and MC at a constant rate (MR is horizontal to market economy.
• Both AC & MC are derived from TC X axis) SECTORS OF AN INDIAN ECONOMY –
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a. Primary Sector-It includes all those product measures the net money value Nominal-GNP- GNP measured in terms
activites which involve direct use of of final goods and services at current of current market prices is called
Natural resources such as prices produced in a year in a country. nominal GNP.
agriculture,forestry,fishing,minerals It is the gross national product at Real GNP- GNP computed at constant
etc. market price less depreciation. prices (base year pric(e) is called real
b. Secondary sector-It involve all (4) Net Domestic Product (NDP):-NDP GNP.
economic activities which use the is calculated by deducting depreciation Factor Payment: Factor payment is a
produce of primary sector as its raw expense from Gross domestic product. payment made in lieu of providing
materials.It is also called the (5) Gross Domestic Product at Factor goods and services. A worker gets the
Manufacturing sector example Cost (GDP at F(C):- Gross national wages is the factor payment because
production of bread from wheat.Its product at factor cost is obtained by he worked for it.
contribution to GDP is approximately deducting the indirect tax and adding Transfer payment: If there is no
30% in Indian economy. subsidies to GNP at market price . obligation involved to deliver service or
c. Tertiary sector-It includes all (6) Private Income:- Private income goods in return of the payments is
economic activities which provide means the income earned by private called transfer payment. Examples are:
“services” example are individuals from any source whether donation, old age pension,
banking,tourism etc. Tertiary sector productive or unproductive. It can be unemployment benefit, scholarship
contribution in GDP is highest it is arrived at from NNP at factor cost by etc.
approximately 53%. making certain additions and METHODS OF CALCULATING NATIONAL
MACRO ECONOMICS deduction. INCOME
Important concepts of National (7) Personal Income:- Personal Income Production generate incomes which
Income: is the total income received by the are again spent on goods and services
(1) Gross Domestic Product (GDP):- individuals of country from all sources produced. Therefore, national income
Gross Domestic Product (GDP) is the before direct taxes. Personal income is can be measured by three methods:
total market value of all final goods not the same as National Income, 1. Output or Production method
and services currently produced within because personal income includes the 2. Income method, and
the domestic territory of a country in a transfer payments where as they are 3. Expenditure method.
year. It is measured at two different not included in national income. Let us discuss these methods in detail.
prices which are GDP at factor cost and Personal income includes the wages, 1. Output or Production Method: This
GDP at constant prices.When GDP is salaries, interest and rent received by method is also called the value-added
measured at current price it is called the individuals. method. This method approaches
Nominal GDP and when it is measured (8) Disposable Income:- Disposable national income from the output side.
at constant price or base year it is income means the actual income which Under this method, it estimate the net
called real GDP. can be spent on consumption by contribution made by all the firms in a
(2) Gross National Product of Market individuals and families. It refers to the year. Value added by a firm is the
Price (GNP at MP):- Gross national purchasing power of the house hold. difference between value of total
product at market price is broad and The whole of disposable income is not production by the firm and value of
comprehensive concept. GNP at MP spent on consumptions; a part of it is intermediate goods used by the firm.
measures the money value of all the paid in the form of direct tax. Thus Value added=Value of output -Value of
final products produced annually in a disposable income is that part of input
counter plus net factor income from income, which is left after the In order to arrive at the net value of
abroad. In short GNP is GDP plus net exclusion of direct tax. production of a given industry,
factor incomes earned from abroad. Concepts intermediate goods purchases by the
Net factor incomes is derived by • NNP Mp = GNP mp - depreciation producers of this industry are deducted
reducing the factor incomes earned by • NDP Mp = GDPmp – depreciation from the gross value of production of
foreigners from the country, in • NDP Fc = NDP mp – Net indirect taxes that industry. The advantage of this
question from the factor incomes (indirect tax – subsidies) method is that it reveals the
earned by the residents of that country • GDP Fc = NDP fc + depreciation contributions and relative importance
from abroad. • NNP Fc = GDP mp - depreciation + and of the different sectors of the
(3) Net National Product at Market Net factor income from abroad – Net economy.
Price (NNP at MP):- Net National indirect taxes
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2. Income Method: This method individuals purchasing the same good it The tax on incomes, customs duties,
approaches national income from the will increase the price of goods so it is central excise and service tax are levied
distribution side. According to this called demand pull inflation. by the Central Government. The state
method, national income is obtained (b) Cost push inflation- It is an inflation Government levies agricultural income
by summing up of the incomes earned caused by an increase in the price of tax (income from plantations only),
from four factors of production which inputs like labour,raw material etc.The Value Added Tax (VAT)/ Sales Tax,
arerentland, wage (labour), profit increased price of the factors of Stamp Duty, State Excise, Land
(entreprenur) and interest (capital). production leads to a decreased supply Revenue, Luxury Tax and Tax On
This method of estimating national of goods. Other types of Inflation- Professions. The local bodies have the
income has the great advantage of (a)Deflation- When the overall price authority to levy tax on properties,
indicating the distribution of national level decreases so that inflation rate octroi/entry tax and tax for utilities like
income among different income groups becomes negative, it is called deflation. water supply, drainage etc.
such as landlords, capitalists, workers, It is the opposite of the often- DIRECT TAXESThese taxes are levied
etc. encountered inflation.It is decrease in directly on the persons. These
3. Expenditure Method: This method general level price for shorter period. contributes major chunk of the total
arrives at national income by adding up (b)Disinflation- Disinflation is a taxes collected in India.
all the expenditure made on goods and situation of decrease in the rate of INCOME TAX- This is a type of tax
services during a year. Thus, the inflation over successive time period. It levied on the individuals whose income
national income is found by adding up is simply slowing of inflation for longer falls under the taxable category (more
the following types of expenditure by period of time than 3 lakhs per annum).
households, private business (c)Stagflation-It is a condition of slow The Indian Income Tax Department is
enterprises and the government: - economic growth and relatively high governed by CBDT and is part of the
(a)Expenditure on consumer goods and unemployment and there is decline in Department of Revenue under the
services by individuals and households GDP. Ministry of Finance, Govt. of India.
denoted by C. This is called personal (d)Hyperinflation- Hyperinflation is an Corporate Income Tax - This is the tax
consumption expenditure denoted by extremely rapid period of inflation, levied on the profits a corporate house
C. usually caused by a rapid increase in earned in a year. In India, the
(b)Expenditure by private business the money supply. Corporate Income tax rate is a tax
enterprises on capital goods and on Some Important curvesLorenz curve- collected from companies.
making additions to inventories or The Lorenz curve is a graphical Securities Transaction Tax Introduced
stocks in a year. This is called gross representation of income inequality or in 2004, STT is levied on the sale and
domestic private investment denoted wealth inequality developed by purchase of equities (ie Shares,
by I. American economist Max Lorenz in Debentures or any other security).
(c)Government’s expenditure on goods 1905. The graph plots percentiles of more clearly, The income a individual
and services i.e. government purchases the population according to income or generate through the securities market
denoted by G. wealth on the horizontal axis. Philip be it through reselling of shares or
(d)Expenditure made by foreigners on curve- The Phillips curve is an through debentures is taxed by the
goods and services of the national economic concept developed by A. W. government of India and the same tax
economy over and above what this Phillips showing that inflation and is called as Securities Transaction Tax.
economy spends on the output of the unemployment have a stable and
foreign countries i.e. exports – imports inverse relationship. Gini coefficient - Banking Cash Transaction Tax A bank
denoted by The Gini coefficient is a measure of transaction tax is a tax levied on debit
(X – M). Thus, GDP = C + I + G + (X – M) inequality of a distribution. It is defined (and/or credit) entries on bank
INFLATION TYPES- as a ratio with values between 0 and 1. accounts. It can be automatically
•Inflation is the rate at which the TAX STRUCTURE IN INDIA collected by a central counterparty in
general level of prices for goods and Taxes are the amount of money the clearing or settlement process.
service is on rise. Inflation is measures government imposes on an individual Capital Gains Tax: Capital Gain tax as
by consumer price index. or corporates directly or indirectly so name suggests it is tax on gain in
•Types of Inflation- as to generate revenue or to keep in capital. If you sale property, shares,
(a)Demand Pull Inflation-when there is check any black money activities in bonds & precious material etc. and
strong consumer demand and many India.
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earn profit on it then you are supposed are imported from a foreign country (b) The Union Minister of State, in-
to pay capital gain tax. into India Octroi is tax applicable on charge of Revenue of finance -
• PROPERTY TAX goods entering from one state to Member
• GIFT TAX another for consumption or sale. In (c) The Minister In-charge of finance or
• HOUSE TAX simple terms one can call it as Entry taxation or any other Minister
• PROFESSIONAL TAX Tax. nominated by each State Government
• DTC Excise Duty:- An excise duty is a type of – Members
INDIRECT TAXES tax charged on goods produced within Economic Reforms
You go to a super market to buy goods the country. Another name of this tax Economic Reforms were introduced in
or to a restaurant to have a mouthful is CENVAT (Central Value Added Tax). 1991 in India. First Generation Reforms
there at the time of billing you often Service Tax-Service Tax is a tax were aimed at stabilisation of Indian
see yourself robbed by some more imposed by Government of India on economy and were macro level in
amount than what you enjoyed of, services provided in India. The service nature. It includes liberalisation &
these extra amounts are indirect taxes, provider collects the tax and pays the deregulation of industry, financial
which are collected by the same to the government. It is charged sector reforms, taxation reforms etc.
intermediaries and when govt tax the on all services except the services in Second Generation Reforms aimed at
income of the intermediaries this extra the negative list of services. structural changes and are micro level
amount goes in to government’s kitty, GST(Goods and services tax)- Goods in nature. It will include labour
hence as the name suggests these are and Service Tax is an value added reforms, land reforms, capital market
levied indirectly on common people. indirect tax levied on the supply of reforms, expenditure reforms and
• Indirect Taxes:- goods and services. It has replaced power sector reforms etc.
• SALES TAX many indirect tax laws that previously Disinvestment means to decrease the
• VAT(VALUE ADDED TAX) existed in India. It is one indirect tax for share of government in the industries.
• CUSTOM DUTY the entire country. It remove the In 1996,
• OCTROI Cascading effect on the sale of goods Disinvestment Commission was
• EXCISE DUTY and services. There are 3 taxes constituted to review, give suggestions
• ANTI DUMPING DUTY applicable under GST: CGST, SGST and make regulations on the issue of
• ENTERTAINMENT TAX &IGST. disinvestment. Shri G.V. Ramkrishna
• TOLL TAX CGST: Collected by the Central was the first Chairman of
• SERVICE TAX Government on an intrastate sale (Eg: Disinvestment Commission.
• GST-GOODS & SERVICE TAX Within Maharashtr(a) In the year 1992, National Renewal
Sales Tax : Sales tax charged on the SGST: Collected by the State Fund was constituted for rehabilitation
sales of movable goods. Value Added Government on an intra-state sale (Eg: of displaced labourers of sick industrial
Tax: When we pay an extra amount of Within Mahaashtr(a) units affected due to industrial
price for the goods and services we IGST: Collected by the Central modernization, technological
consume or buy, that extra amount of Government for inter-state sale (Eg: development etc.
money is called as VAT. This taxes is Maharashtra to Tamil Nadu) “Navratna” is a company which is rising
about to be replaced by Goods and It is divided into five tax slabs for at world level. To encourage these
Services Tax. collection of tax - 0%, 5%, 12%, 18% companies, the government has given
Customs Duty : Customs Duty is a type and 28%. As per Article 279A (1) of the them complete autonomy. 11 such
of indirect tax levied on goods amended Constitution, the GST Council companies have been identified. In the
imported into India as well as on goods has to be constituted by the President second phase of economic reforms
exported from India. In India, the basic within 60 days of the commencement programme, the main aim is to
law for levy and collection of customs of Article 279A. eradicate poverty from the country and
duty is Customs Act, 1962. It provides GST Council which will be a joint forum development at the rate of 7 to 8%.
for levy and collection of duty on of the Centre and the States, shall Some Important Terminology Relating
imports and exports. consist of the following members: - to the New Economic Reforms Policy:
Custom duty & Octroi (On Goods):- (a)Union Finance Minister - Privatisation —To increase
Custom Duty is a type of indirect tax Chairperson participation of private sector in the
charged on goods imported into India. public sector companies by capital
One has to pay this duty, on goods that investment or by management or both
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or to hand over a public sector unit to a number of PSEs having Navratna status load is comparatively less, and hence
private company is called Privatisation. has been raised to 16, the most recent people are rendered jobless. For
Liberalisation —Liberalisation is the addition being Oil India Limited. PSU example, in the period between past
process by which government control companies are divided into three harvest and next sowing, agricultural
is relaxed or abolished. In this process categories: laborers are unemployed. It means the
privatisation is also included. •Maharatna • Navratna •Miniratna unemployment of the farmers and
Globalisation —The process of CPSEs: Category I & Category I farm labourers during non-crop
amalgamation of an economy with Types of Poverty seasons.
world-economy is called Globalisation. (a)Absolute poverty Educated unemployment: This is
It is signified by lower duties on import It is based on assessments of minimum mainly found in urban areas. Those
& export. By doing so, that sector will subsistence requirement or basic educated persons who are unable to
also get private capital and foreign needs such as food,cloth,shelter,health get work come under this category.
technology. etc Underemployment: It results when a
Disinvestment —To reduce the govt. (b)Relative poverty person contributes to production less
share in the public sector is called It is based on the different parameters than what he or she is capable of, for
disinvestment. set for living of standard set up by example, an engineer working as a
Public Sector In terms of ownership different society. clerk is underemployed. In India, the
public sector enterprise (PS(E) Unemployment data relating to unemployment are
comprises all undertakings that are Unemployment is a situation when a collected by National Sample Survey
owned by the government, or the capable and willing to do job workforce Organisation (NASO). This Organisation
public, whereas private sector does not get work. However, it can be has the following concepts with regard
comprises enterprises that are owned of two kinds (i) voluntary unemployed to unemployment:. Terms related with
by private persons. In case of private and (ii) involuntary unemployed. Here Unemployment-
sector the main objective is we are concerned with the second (a)Labour force participation rate-It is
maximization of profits whereas PSE’s category of unemployed persons. defined as the number of person in the
mainly aim for fulfillment of public, or In India unemployment is structural in labour force per 1000.
social interest. nature due to lack of productive (b)Working population-In India those
• The main Objectives of Public Sector capacity and resource. who are above 15 years and below 60
are: The main reasons for unemployment in years are considered as the working
• To promote rapid economic India are slow economic development, population.
development through creation and population explosion, outdated RESERVE BANK OF INDIA
expansion of infrastructure; technique, improper education system Functions of RBI as a central bank of
• To generate financial resources for and limited effect of government India are explained briefly as follows:
development; planning. Bank of Issue: The RBI formulates,
• To promote redistribution of income Types of Unemployment implements, and monitors the
and wealth; Cyclical unemployment: Cyclical monitory policy. Its main objective is
• To create employment opportunities; unemployment is a factor of overall maintaining price stability and ensuring
• To encourage the development of unemployment that relates to the adequate flow of credit to productive
small scale and ancillary industries; cyclical trends in growth and sector. Regulator-Supervisor of the
• To promote exports on the new side production that occur within the financial system: RBI prescribes broad
and import substitution on the other; business cycle. parameters of banking operations
and Frictional unemployment: This kind of within which the country’s banking and
• To promote balanced regional unemployment is temporary. It is the financial system functions. Their main
development. result of a situation when new objective is to maintain public
• Navratna Maharatna & Mini Ratna industries drive out old ones and confidence in the system, protect
Navratna was the title given originally workers change over to better jobs. depositor’s interest and provide cost
to nine Public Sector Enterprises Open unemployment: It refers to those effective banking services to the public.
(PSEs), identified by the Government of who have nowork to do even though Manager of exchange control: The
India in 1997 as its most prestigious, they are able and willing to do work. manager of exchange control
which allowed them greater autonomy Seasonal unemployment: This occurs at department manages the foreign
to compete in the global market. The certain period of the work when work exchange, according to the foreign
GROW ACADEMY
Name……… (Economics) Batch……
exchange management act, 1999. The regulation act 1949 have given the RBI their money are in safe hands with a
manager’s main objective is to wide powers of supervision and control good interest. An increase in reverse
facilitate external trade and payment over commercial and co-operative repo rate can prompt banks to park
and promote orderly development and banks, relating to licensing and more funds with the RBI to earn higher
maintenance of foreign exchange establishments, branch expansion, returns on idle cash. It is also a tool
market in India. liquidity of their assets, management which can be used by the RBI to drain
Issuer of currency: It’s main objective is and methods of working, excess money out of the banking
to give the public adequate quantity of amalgamation, reconstruction and system.
supplies of currency notes and coins liquidation. Bank Rate - Bank rate is also called as
and in good quality. The Finance Promotional Functions: With economic the discount rate. It is the rate of
Ministry issues Currency Notes and growth assuming a new urgency since interest which a central bank charges
Coins of rupee one, all other Currency independence, the range of the on the loans and advances provided to
Notes are issued by the Reserve Bank Reserve Bank’s functions has steadily commercial banks.It is used for long
of India. widened. The bank now performs a term term.
Developmental role: The RBI performs variety of developmental and Statutory Liquidity Ratio (SLR) - Every
the wide range of promotional promotional functions, which, at one bank is required to maintain at the
functions to support national time, were regarded as outside the close of business every day, a minimum
objectives such as contests, coupons normal scope of central banking. The proportion of their Net Demand and
maintaining good public relations and Reserve bank was asked to promote Time Liabilities as liquid assets in the
many more. banking habit, extend banking facilities form of cash, gold and un-encumbered
Related functions: There are also some to rural and semi-urban areas, and approved securities. The ratio of liquid
of the related functions to the above establish and promote new specialized assets to demand and time liabilities is
mentioned main functions. They are financing agencies. known as Statutory Liquidity Ratio
such as; banker to the government, Monetary Policy - Monetary policy is (SLR). RBI is empowered to increase
banker to banks etc. govern by RBI to control the amount of this ratio up to 40%. An increase in SLR
Banker to government performs liquidity and avability of credit in also restricts the bank’s leverage
merchant banking function for the economy through following instrument position to pump more money into the
central and the state governments; Cash reserve Ratio - CRR is the amount economy.
also acts as their banker. of funds that the banks have to keep Marginal Standing Facility Rate - RBI
Banker to banks maintains banking with the RBI. If the central bank announced that MSF scheme has
accounts to all scheduled banks. decides to increase the CRR, the become effective from 09th May,
Controller of Credit: RBI performs the available amount with the banks 2011. Under this scheme, Banks will be
following tasks: comes down. The RBI uses the CRR to able to borrow up to 1% of their
• It holds the cash reserves of all the drain out excessive money from the respective Net Demand and Time
scheduled banks. system. Presently the Cash reserve Liabilities. The rate of interest on the
• It controls the credit operations of Ratio is 4%. amount accessed from this facility will
banks through quantitative and Repo rate - The rate at which the RBI be 100(i.e. 1%) basis point above the
qualitative controls. lends money to commercial banks is repo rate. This scheme is likely to
• It controls the banking system called repo rate. It is an instrument of reduce volatility in the over night rates
through the system of licensing, monetary policy. Whenever banks have and improve monetary transmission
inspection and calling for information. any shortage of funds they can borrow Overnight.
• It acts as the lender of the last resort from the RBI. A reduction in the repo Money supply The Reserve Bank of
by providing rediscount facilities to rate helps banks get money at a India (RBI) is the central bank of our
scheduled banks. cheaper rate and vice versa. The repo country. It manages the monetary
Supervisory Functions: In addition to its rate currently is 6%.It is used by system of our country. It has classified
traditional central banking functions, commercial banks for short term by to the money supply of our country into
the Reserve Bank performs certain meet their day-to-day obligations. four components.
nonmonetary functions of the nature Reverse Repo Rate - It is the rate at They are :
of supervision of banks and promotion which the RBI borrows money from M1 = Currency with the public. It
of sound banking in India. The Reserve commercial banks. Banks are always includes coins and currency notes +
Bank Act 1934 and the banking happy to lend money to the RBI since demand deposits of the public.
GROW ACADEMY
Name……… (Economics) Batch……
M1 is also known as narrow money ; Exchange for Automatic Trading’ running of government departments
M2 = M1 + post office savings deposits (NEAT). and provision of various services like
; M3 = M1 + Time deposits of the Types of Shares interest charges on debt, subsidies etc.,
public with the banks. M3 is also A company may have many different ii. Capital Expenditure:- It consists
known as broad money ; and types of shares that come with mainly of expenditure on acquisition of
M4 = M3 + total post office deposits. different conditions and rights. assets like land, building, machinery,
Note: Besides savings deposits, people Equity shares: An equity share, equipment etc., and loans and
maintain fixed deposits of different commonly referred to as ordinary advances granted by the Central
maturity periods with the post office. share also represents the form of Government to States & Union
Fiat Money: Currency notes in fractional or part ownership in which a Territories.
circulation are normally referred to as shareholder, as a fractional owner, Explain the four different concepts of
fiat money. For example, one Rupee undertakes the maximum Budget deficit. These are the four
notes issued by the Government of entrepreneurial risk associated with a different concepts of Budget Deficit.
India is Fiat money.The notes issued by business venture. The holders of such (a) Budget Deficit:- It is the difference
the RBI are usually referred to as bank shares are members of the company between the total expenditure, current
notes.They are in the nature of and have voting rights. revenue and net internal and external
promissory notes. Preference shares: Preference shares capital receipts of the government.
Stock Exchange The stock exchange is are shares which are preferred over Formulae: B.D = B.E > B.R (B.D= Budget
the market for buying and selling of common or equity shares in payment Deficit, B.E. Budget Expenditure B.R=
stocks, shares, securities, bonds & of surplus or dividend i.e preference Budget Revenue
debentures etc. It increases the market shareholders are the first to get (b) Fiscal Deficit:- It is the difference
ability of existing securities by dividends in case the company decides between the total expenditure of the
providing simple method for public & to pay out dividends. Owners of government, the revenue receipts
others to buy andsell securities. Some preference shares gets fixed dividend. PLUS those capital receipts which
Important Share Price Index of India Deferred shares: These shares are finally accrue to the government.
BSE SENSEX — This is the most those shares which are held by the Formulae: F.D = B.E - B.R (B.E > B.R.
sensitive share index of the Mumbai founders or pioneer or beginners of other than borrowings) F.D=Fiscal
Stock Exchange. This is the the company. They are also called as Deficit, B.E= Budget Expenditure, B.R. =
representative index of 30 main shares. Founder shares or Management shares Budget Receipts.
BSE is the oldest stock exchange of Bonus shares: The word bonus means a (c) Revenue Deficit: - It is the excess of
India, founded in 1875. BSE 200 — This gift given free of charge. Bonus shares governments revenue expenditures
represents 200 shares of Mumbai Stock are those shares which are issued by over revenue receipts.
Exchange. Its base year is 1989-90. the company free of charge as bonus Formulae: R.D= R.E – R.R., When R.E >
DOLLEX — Index of 200 BSE Dollar to the shareholders. They are issued to R.R., R.D= Revenue Deficit, R.E=
Value Index is called DOLLEX. Its base the existing shareholders in proportion Revenue Expenditure, R.R. = Revenue
year is 1989-90. to their existing share holdings. Some Receipts.
NSE-50 — From 28th July, 1998, its Other Important terms Devaluation :A (d) Primary Deficit: - It is the fiscal
name is S & P CNX Nifty. National Stock devaluation is an official lowering of deficit MINUS Interest payments.
Exchange has launched a new share the value of a country's currency within Formulae: P.D= F.D – I.P, [P.D= Primary
Price Index, NSE-50 in place of NSE-100 a fixed exchange rate system. A Deficit,
in April 1996.NSE50 includes 50 currency's devaluation is the result of a F.D= Fiscal Deficit, I.P= Interest
companies shares. This stock exchange nation's monetary policy. Payment.]
was founded on Ferwani Committee’s Appreciation: Appreciation of the BALANCE OF PAYMENTS:MEANINGAND
recommendation in 1994. currency refers to the increase in the COMPONENTS
CRISIL 500 — is the new share Price external value of the domestic The balance of payments of a country
Index introduced by Credit Rating currency occurred due to the operation is a systematic record of all economic
Agency CRISIL on January 18, 1996. It of market forces. transactions between residents of a
has 1994 as the base year. The What do you mean by Revenue country and residents of foreign
National Stock Exchange (NS(E) has Expenditure and Capital Expenditure? countries during a given period of time.
launched a new version of its online i. Revenue Expenditure :- Itis the BALANCE OF TRADE AND BALANCE OF
trading software called ‘National expenditure incurred for the normal PAYMENTS
GROW ACADEMY
Name……… (Economics) Batch……
Balance of trade: Balance of trade is exchanged for currency of another
the difference between the money country.
value of exports and imports of Fixed Exchange Rate- Fixed Rate of
material goods (visible item) Balance of exchange is a rate that is fixed and
payments: Balance of payments is a determined by the government of a
systematic record of all economic country and only the government can
transactions between residents of a change it.
country and the residents of foreign Equilibrium rate of exchange-
countries during a given period of time. Equilibrium exchange rate occurs when
It includes both visible and invisible supply of and demand for foreign
items. Hence the balance of payments exchange are equal to each other.
represents a better picture of a Flexible exchange rate.-
country’s economic transactions with Flexible rate of exchange is that rate
the rest of the world than the balance which is determined by the demand
of trade. and supply of different currencies in
STRUCTURE OF BALANCE OF PAYMENT the foreign exchange market.
ACCOUNTING Appreciation of currencies-
A balance of payments statement is a Appreciation of a currency occurs
summary of a Nation’s total economic when its exchange value in relation to
transaction undertaken on currencies of other country increases.
international account. There are two Spot exchange rate-The spot exchange
types of account. rate refers to the rate at which foreign
1. Current Account: It records the currencies are available on the sport.
following three items. Forward market- Market for foreign
(a) Visible items of trade: The balance exchange for future delivery is known
of exports and imports of goods is as the forward market.
called the balance of visible trade. Balance of payments-Balance of
(b) Invisible trade: The balance of payments refers to the statement of
exports and imports of services is accounts recording all economic
called the balance ofinvisible trade E.g. transactions of a given country with
Shipping insurance etc. the rest of the world
(c) Unilateral transfers: Unilateral
transfers are receipts which resident of
a country receive (or) payments that
the residents of a country make
without getting anything in return e.g.
gifts.
The net value of balances of visible
trade and of invisible trade and of
unilateral transfers isthe balance on
current account.
2.CAPITAL ACCOUNT: It records all
international transactions that involve
a resident of the domestic country
changing his assets with a foreign
resident or his liabilities to a foreign
resident.
EXCHANGE Foreign exchange rate-
Foreign exchange rate is the rate at
which currency of one country can be