Economics Book Macro Economics by Dheeraj Jagiya

MACRO
ECONOMICS
BY
CS DHEERAJ JAGIYA
THIS BOOK IS A PERFECT AND COMPLETE MATERIAL FOR

CBSE 12TH BOARD EXAMS.
“FOLLOW YOUR PASSION”

CHAPTER 1ST CIRCULAR FLOW OF INCOME
HOUSEHOLDS TWO SECTOR
PRODUCERS/FIRMS
GOVERNMENT THREE SECTOR
ABOROAD FOUR SECTOR
CIRCULAR FLOW OF INCOME;

It refers to cycle of generation of income in the production process, its
distribution among factors of production and finally its circulation from
households to firms in the form of consumption expenditure on goods and
services produced by firms.
FACTORS (LAND , LABOUR , CAPITAL AND ENTREPRENEUR)
EXPENDITURE ON GOODS AND SERVICES
HOUSEHOLDS FIRMS
FACTOR PAYMENTS(RENT, WAGES, SALARY, INTEREST
AND PROFITS)
GOODS AND SERVICES
PHASES OF CIRCULAR FLOW OF INCOME

1.) GENERATION PHASE
In this phase firms produce goods and services with the help of factors of
production.
2.) DISTRIBUTION PHASE

this phase involves flow of factor income from firms to households for hiring
factor services. It includes rent, wages, salary , interest and profits.
3.) DISPOSITION PHASE

In this phase the income received by the households is spent on goods and
services produced by firms.
STOCK AND FLOW

STOCK
STOCK refers to that variable which is measured at a particular point of time. It
must be noted that stock variable do not have any time dimension.
Examples of stock variable are;
1. goods in the godown on 31st jan. 2015
2. national wealth
3. national capital
4. money supply
5. bank deposits on a particular date
6. population on a particular date
7. capital
FLOW- FLOW refers to that variable which is measured over a period of time. It
must be noted that flow variable always has a time dimension.
Examples of flow variable are;
1. production during month of January
2. birth rate of an year
3. profits and losses
4. savings
5. national income
6. GDP
7. investment or capital formation.
FOR EXAMPLE:
The amount of water in a tank is the quantity of water in a tank at a

particular point of time, so it’s a stock whereas, water flowing into the tank
from a tap is a flow of water bcoz it is measured over a period of time.
IT MUST BE NOTED THAT, CAPITAL IS A STOCK CONCEPT WHEREAS

INVESTMENT IS A FLOW CONCEPT BECAUSE INVESTMENT INCLUDES
REGULAR INCOME ALSO.
CIRCULAR FLOW OF INCOME
REAL FLOW MONEY FLOW
REAL FLOW/PHYSICAL FLOW;

It refers to the flow of factor services from households to firms and
corresponding flow of goods and services from firms to households.
REAL FLOW determines the magnitude or amount of growth process in an

economy. When more factor services are offered to firm then volume of
production will be more and thus economic growth will increase.
FACTORS(LAND, LABOUR , CAPITAL AND ENTREPRENEUR)
HOUSEHOLDS FIRMS
GOODS AND SERVICES
MONEY FLOW/NOMINAL FLOW

It refers to the flow of factor payments from firms to households and
corresponding flow of money from households to firms in the form of
consumption expenditure.
It involves exchange of money between households and firms.

HOUSEHOLDS FIRMS
FACTOR PAYMENTS
DIFFERENCE BETWEEN REAL FLOW AND MONEY
FLOW;
BASIS REAL FLOW MONEY FLOW
Meaning it is the flow of goods and services it is the flow of money
Between firms and households between firms and

households
Kind of it involves exchange of goods it involves exchange of
Exchange and services only money only
Alternate name it is also known as physical flow it is also known as nominal
flow
FOUR SECTORS OF THE ECONOMY –

1.) HOUSEHOLD SECTOR – it includes consumers of goods and services and also
the owners of factors of production. they supply factors like land, labour, capital
and enterprise and receive income in return called as rent, wages, salary,
interest and profits respectively.
2.) PRODUCING SECTOR (FIRMS) – it includes all producing firms in the

Economy. To produce goods and services, the firm hires factors of production
from the households. Household consumes goods and services to satisfy their
wants and firms produce goods and services to make profits.
3.) GOVERNMENT SECTOR – it acts in two capacities, (a) as a welfare agency, it

is involved in maintaining law and order, defence and other services of public
welfare. (b) as a producer, it produces goods and services in public sector
enterprises.
4.) FOREIGN SECTOR/EXTERNAL SECTOR – it is also called as rest of the world.
This sector includes transactions with the rest of the world. It is involved in
export and import of goods and flow of capital between domestic economy and
other countries of the world.
On the basis of above content, we can say that there are two type of Economies
A.) OPEN ECONOMY – it is an economy which has economic relations with the
abroad. It includes four sector economy.
B.) closed Economy – it is an economy which has no economic relations with the
abroad. It involves two sector and three sector Economy. It doesnot includes
foreign sector.
CIRCULAR FLOW OF INCOME IN TWO SECTOR ECONOMY

A simple economy assumes the existence of only two sectors i.e
household sector and firm sector.
Households are the owners of factors and consumers of goods and

services whereas, producers produce goods and services and sell them
to households.
It is also known as closed economy and there is no involvement of

government and abroad.
ASSUMPTIONS OF CIRCULAR FLOW OF INCOME IN TWO SECTOR

ECONOMY;
1.) there are only two sectors in the economy i.e household and firm sector. There
is no government and abroad.
2.) household sector supplies factor services only to firms and firms hire factors
only from households.
3.) firms produce goods and services and sell the entire output to households.
4.) household receive factor income for their factor services and spend the entire
amount on consumption of goods and services.
5.) there are no savings in the economy which means neither the households
save from their income nor the firms save from their profits.
FACTORS (LAND , LABOUR , CAPITAL AND ENTREPRENEUR)
HOUSEHOLDS FIRMS
FACTOR PAYMENTS(RENT, WAGES, SALARY, INTEREST
AND PROFITS)
GOODS AND SERVICES
The outer loop is known as real flow and the inner loop is known as money flow.
Production phase
Distribution phase
disposition phase
LEAKAGES
It refers to withdrawal of money from the circular flow of income. When
households and firms save a part of their incomes , it leads to leakages in the
circular flow. It refers to that part of the income which do not pass through the
circular flow of income.
INJECTIONS
It refers to introduction of income into the circular flow of income. When
households and firms borrow money from financial institutions then it adds to
their income.
CONCLUSION OF CIRCULAR FLOW……
1.) Total production by firms = Total production by households.
2.) factor payments = factor incomes.
3.) consumption expenditure = factor incomes
4.) Real flow = Money flow.
NATIONAL PRODUCT is always equal to NATIONAL

INCOME? HOW
(very important)
ANS. National product means all final goods and services produced in an
economy during an accounting year. Money value of these goods and services
are distributed among the factors of production in the form of rent, wages,
salaries , interest and profits. Sum total of all these factor incomes are called
national income. So national product is always equal to national income.
SOME QUESTIONS OF CHAPTER 1ST;

Q.1) why flow of income is always circular in two sector economy?
ANS. In the circular flow of income, production generates factor income, which
is converted into expenditure. This flow of income always continue because
production is a continuous activity as human wants are unlimited. It makes
the flow of income circular.
Q.2) NATIONAL PRODUCT is always equal to NATIONAL INCOME? HOW
(very important)
ANS. National product means all final goods and services produced in an
economy during an accounting year. Money value of these goods and services
are distributed among the factors of production in the form of rent, wages,
salaries , interest and profits. Sum total of all these factor incomes are called
national income. So national product is always equal to national income.
Q.3) what are the contents of real flow?
ANS. factor flow and product flow
Q.4) capital and wealth is a stock while capital formation is flow?
ANS. True, capital and wealth is always measured at a particular point of time
while capital formation is measured over a period of time.
Q.5) what is the significance of circular flow of income? (read only)
ANS. 1.) it help us to understand the mutual interdependence among

different sectors. 2.) it shows equilibrium position of the economy. 3.) it
helps in identifying various types of leakages and injections. 4.) it helps in
estimation of national income
CHAPTER 2ND BASIC CONCEPTS OF MACRO
DOMESTIC TERRITORY –
DOMESTIC TERRITORY refers to political boundaries/political frontiers of a
country.
DOMESTIC TERRITORY includes the following;
A.) ships and aircrafts owned and operated by normal residents between two or
more countries will be considered under the Indian territory. For example planes
operated by AIR INDIA between Russia and JAPAN are part of domestic
territory of india.
B.) fishing vessels , oil and natural gas rigs and floating platforms operated
by Indian residents in the international waters are the part of domestic territory
of INDIA.
C.) embassies , consulates and military establishments of a country located

abroad will be considered under the domestic territory. For example Indian
embassy in Russia is a part of domestic territory of INDIA.
DOMESTIC TERRITORY DOES NOT INCLUDE THE FOLLOWING;
A.) embassy , consulates and military establishments of a foreign country in

our country will not be considered as the part of Indian territory. For example
Russian embassy in INDIA is a part of territory of RUSSIA.
B.) International organizations like UNO, WHO, WTO, WTC located in INDIA
but they are not considered as a part of domestic territory of INDIA as these
organizations belong to international boundary.
POINTS TO REMEMBER;
A.) embassy , consulates and military establishments of our country located
abroad but will be considered under the Indian territory. For example. Indian
embassy set up in Russia but will be considered under the Indian territory .
similarly American embassy set up in japan will be considered under
American territory.
B.) company , MNCs and banks of our country located abroad will be
considered under the territory of that foreign country in which it is established.
For example ;branch of Indian company set up in china is a part of territory of
CHINA.
In simple words….(HINDI)
Embassy, consulates and military jis country ke hote hai usi country ke mane
jate hai but, companies, banks and buildings jha setup hoti hai usi country ki
mani jati hai.)
IDENTIFY WHETHER THE FOLLOWING WILL BE CONSIDERED UNDER

INDIAN TERRITORY OR NOT;
1.) an Indian company in London
2.) Microsoft office in india.
3.) company in india owned by a japaneese
4.) office of reliance in newyork
5.) branch of foreign bank in india
6.) Indian embassy in japan.
7.) branch of SBI in china
8.) Russian embassy in india.
9.) tata rented its building to google in America
ANS. 2,3,5 and 6 are part of domestic territory of india.

NORMAL RESIDENTS
NORMAL RESIDENT refers to an individual or an institution who ordinarily
resides in the country for a period of one year or more and whose economic
interest also lies in that country.
FOLLOWING ARE NOT INCLUDED UNDER THE CATEGORY OF NORMAL

RESIDENTS;
1.) foreign tourists and visitors who visit a country for recreation, holidays,
medical treatment , study , sports and conferences etc. are not considered as the
normal residents of our country
2.) foreign staff of embassies , officials , diplomats and members of armed

forces of a foreign country will not be considered as the normal residents of our
country.
3.) International organizations will not be considered as the normal residents

of that country in which they operate because they are part of international
area.
4.) Employees of international organizations are considered as residents of

that country to which they belong but if their stay in India is for one year or
more then they will be considered as normal resident of INDIA.
For example; American working in WHO( set up in INDIA) will be considered as

normal resident of AMERICA but if that American is working in that WHO
for a period of 1 year or more then he will be considered as normal resident of
INDIA.
5.) crew members of foreign vessels , commercial travelers and seasonal workers
are not considered as normal residents provided that their stay in INDIA is for
less than one year.
6.) BORDER WORKERS who live near the international border and cross the
border on a regular basis for work, then they will be considered as normal
resident of that country in which they live not where they work.
IDENTIFY WHETHER THE FOLLOWING ARE NORMAL RESIDENTS OF INDIA OR NOT;

1.) Indian officials working in INDIAN embassy in USA
2.) a Japanese tourist who stays in INDIA for 2 months.
3.) Indians going to Pakistan for watching cricket match
4.) Indians working in UNO located in America for less than 1 year.
5.) Indian employees working in WHO located in INDIA.
6.) foreign tourists visiting INDIA for a month to see TAJ MAHAL.
7.) INDIAN muslims going for haj pilgrimage.
ANS. 1 , 3 , 4 , 5 AND 7 are normal residents of INDIA.
CITIZENSHIP AND RESIDENTSHIP

CITIZENSHIP
It is a legal concept based on the place of birth of a person or some legal
provisions which allow a person to become a citizen.
INDIAN citizenship arises in two ways;
1.) when a person born in India then he automatically acquires the Indian
citizenship
2.) when a person born outside INDIA but applies for Indian citizenship.
RESIDENTSHIP
It is an economic concept based on the economic activities performed by a person.
An individual is a normal resident of our country if he ordinarily resides in
our country for a period of one year or more and his economic interest also lies
in our country.
It is possible that a person is citizen of one country and at the same time, he can
be the resident of other country. For example A chineese living in India for more
than 1 year, then, he will be taken as Indian resident but citizen will be of
CHINA.
FACTOR INCOME AND TRANSFER INCOME

FACTOR INCOME –
Factor income refers to the income received by factors of production for
rendering factor services in the production process.
It is received for providing factor services like land , labour , capital and
entrepreneurship. It will be included in the national income and domestic
income as it is related to productive activities.
Examples rent , wages , salary , interest , dividend and profits.
Bonus always considered as factor income whether it is received on any

occasion or due to part of job.
TRANSFER INCOME –
Transfer income refers to income received without rendering any productive
services in return. It is a unilateral i.e one – sided concept. It is not included in
national income and domestic income as it is just transfer of money from one
person to another , not related to any productive activities.
Examples ; old age pension, scholarships, unemployment allowance , pocket

money, widow pension, gifts, donations , charity, etc.
Taxes received by the government are transfer income for the government as
they are received without providing any productive services in return.
Similarly, subsidies paid by the government are transfer payments by the
government.
DIFFERENCE BETWEEN FACTOR INCOME AND TRANSFER INCOME
BASIS FACTOR INCOME TRANSFER INCOME

MEANING it refers to income received by it refers to income
Factors for providing factor received without
Services in production process. Rendering any factor
Services.
INCLUSION it is included in national income it will not be included

As well as domestic income. In national and
Domestic income
CONCEPT it is an earning concept it is a receipt concept
NATURE it is bilateral ( two sided) it is unilateral

In nature
IT MUST BE NOTED THAT BONUS IS ALWAYS TAKEN AS FACTOR

INCOME
FINAL GOODS AND INTERMEDIATE GOODS

FINAL GOODS
Goods purchased for consumption All assets are final goods

Like milk whether purchased for home
Or office or school as it is an
investment.( except assets
purchased by dealer for sale and assets
purchased by military)
INTERMEDIATE GOODS
Goods purchased for further sale
Goods purchased for further production.
Goods purchased for further services
Above goods must be used with in the same year.
Assets purchased by dealer/showroom for further sale
Assets purchased by military for defence services
FINAL GOODS
FINAL goods refer to those goods which are used either for consumption or for
investment. It includes the following;
1.) goods purchased by households for final consumption like milk
2.) goods purchased by firm for capital formation or investment like

machinery , equipments etc.
Final goods have direct demand.
INTERMEDIATE GOODS
It refer to those goods which are used either for resale , further production or
further services within the same year.
It includes the following;
1.) Goods purchased for resale like milk purchased by a diary shop
2.)Goods purchased for further production like milk purchased by a sweets shop
3.)Goods purchased for further services like chalk and dusters used by a school.
IMPORTANT POINTS ABOUT INTERMEDIATE GOODS;
A.) they are generally purchased by one firm from another firm.
B.) they have derived demand as their demand depends on demand of final
goods.
C.) trucks, aircrafts , vehicles purchased by government for military purposes

are included under the category of intermediate goods as they are used for
defence services.
D.) value of intermediate goods is already included in the value of final goods
and thus it is not separately included in national income.
“It must be noted that assets even after providing services,

still be taken as final goods as they investments and do not
changes its form after providing services.”
PRODUCTION BOUNDARY
To understand the concept of final goods and intermediate goods , the concept of
production boundary is very significant.
As long as goods remain within the production boundary, they are intermediate
goods because further production is still possible.
But when goods crossed the production boundary , it means further production
is not possible so it will be considered as final goods.
CATEGORISE THE FOLLOWING ITEMS INTO FINAL AND INTERMEDIATE GOODS
WITH REASONS;
1.) paper purchased by a publisher 2.) furniture purchased by a school 3.) milk purchase by households 4.)
purchase of rice by a grocery shop 5.) coal used by a manufacturing firm 6.) computer installed in a office 7.) coal
used by consumer households 8.) mobile set purchased by a mobile dealer 9.) purchase of pulses by a consumer
10.) chalk, dusters purchased by a school 11.) fertilizers used by the farmers. 12.) printer purchased by a lawyer
13.) wheat used by the flour mill. 14.) unsold coal with the trader at the year end 15.) cotton used by a cloth mill.
16.) wheat used by households 17.) refrigerator installed in a firm. 18.) sugar used by a sweet shop
ANS. FINAL GOODS 2 , 3 , 6 , 7 , 9 , 12 , 14 , 16 , 17
FINAL GOODS
CONSUMPTION GOODS CAPITAL GOODS

CONSUMPTION GOODS –
Consumption goods refer to those goods which satisfy the wants of the
consumer directly. It is further divided into following categories;
1.) durable goods –

It refers to those goods which can be used again and again over a considerable
period of time. For example television, referigrator,etc
2.) semi durable goods –

Goods which can be used for a limited period of time are known as semi durable
goods. These goods generally have a life span of one year or less. For example
clothes, crockery, etc
3.) non durable goods –

Goods which are used up in a single act of consumption are known as non
durable goods. These goods cannot be used more than once. for example milk,
bread , apple , etc
4.) services –
Services refer to non material goods which directly satisfy the human wants.
They cannot be seen or touched. For example services of a doctor , teacher , etc
CAPITAL – GOODS
Capital goods are those final goods which help in production of other goods and
services. For example plant and machinery , equipments etc.
Some points about capital goods;
✓ They are used for productive services and have an expected life of several
years.
✓ They donot loose their identity in the production process
✓ They need repairment or replacement as they depreciate over a period of
time.
✓ They have derived demand.
NOTE;
It must be noted that all machines are not capital goods . it entirely depends on
its use that whether a machinery will be a capital good, consumption good or
intermediate good.
If a sewing machine is used by a household for personal use then that sewing
machine will be considered as final consumption good.
If that particular sewing machine is used by a tailor for further income

generation motive then it will be considered under final capital goods.
If that sewing machine is purchased by a dealer for further sale then it will be
considered as intermediate goods.
DIFFERENCE BETWEEN CONSUMPTION GOODS and CAPITAL GOODS
BASIS CONSUMPTION GOODS CAPITAL GOODS

MEANING it refers to those goods which it refers to those goods
Satisfy the wants of the which is used for further
Consumers directly income generation.
Nature of they have direct demand they have derived

demand Demand
Inclusion it includes goods , services it includes assets only

As well as assets
Production they do not promote any it helps in raising

Production capacity production capacity
QUESTION: ALL PRODUCER GOODS ARE NOT CAPITAL GOODS, WHY?
ANS: producer goods are those goods which are used for production of other
goods. It includes.. raw-material and machinery.
Machinery is a capital goods as it is an asset but raw-material is not an assets

and thus raw-material cannot be taken as capital goods.
So, we can say that, all producer goods are not capital goods.
CONCEPT OF INVESTMENT , DEPRECIATION

AND CAPITAL LOSS
INVESTMEMT or capital formation refers to addition to the capital stock of
economy.
GROSS INVESTMENT refers to addition to the stock of capital in an economy

before adjusting for depreciation.
NET INVESTMENT refers to actual addition made to the capital stock of

economy.
GROSS INVESTMENT – DEPRECIATION = NET INVESTMENT
DEPRECIATION refers to fall in the value of fixed assets due to normal wear and
tear , passage of time and change in technology.
IT occurs due to following 3 reasons;
1.) normal wear and tear means continuous use of assets
2.) passage of time.
3.) change in technology.(expected obsolescence)

It must be noted as expected obsolescence is depreciation while unexpected
obsolescence is capital loss.
DIFFERENCE BETWEEN DEPRECIATION AND CAPITAL LOSS
BASIS DEPRECIATION CAPITAL LOSS
Meaning it refers to fall in the it refers to loss in the value of

Value of fixed assets fixed assets due to unforeseen
Due to normal wear and activities like theft , accident,
Tear, passage of time natural calamity etc.
And change in technology.
NATURE OF it is an expected loss it is an unexpected loss

LOSS
PROVISION provision is made for no such provision is made

FOR LOSS repairmen or replacement
Of assets.
HAMPER THE it does not hamper the it hampers the process of

PROCESS production process production.
QUESTION: what is depreciation reserve fund?

ANS: depreciation means fall in the value of fixed assets due to various reasons
like normal wear and tear. Because of depreciation, fixed assets need to be
replaced from time to time. Replacement of fixed assets need funds. For the
funds, company make a provision for depreciation.
For example: if value of machine is 1,00,000 and depreciation is 10% and life of
machine is 10 years. So, every year 10,000 Rs. will be transferred to
depreciation reserve fund to replace the machinery after 10 years. Depreciation
reserve funds is also called as provision for depreciation.
NET INDIRECT TAXES (N.I.T)
Must read the following;
A.) MP means market price i.e the selling price of commodity
B.) FC means factor cost i.e expenses to manufacture a commodity
C.) indirect taxes means taxes levied on goods
D.) subsidies refers to financial help given by government
E.) NIT means net indirect taxes i.e difference of indirect taxes and subsidies.
NET INDIRECT TAXES refers to difference between indirect taxes and

subsidies.
INDIRECT TAXES refers to those taxes which are imposed by the government on
production and sale of goods and services like GST
SUBSIDIES refers to financial assistance provided by the government for

production of a certain commodity.
MARKET PRICE(MP) means the price at which product is actually sold in the
market.
FACTOR COST(FC) refers to amount paid to the factors for their contribution
in the production process.
NOTE;
IF indirect taxes and subsidies are equal then N.I.T will be zero. So, market
price and factor cost will be equal
If indirect taxes are more than subsidies, N.I.T is positive, then Market price
will be more than factor cost
If indirect taxes are less than subsidies, then N.I.T is negative, then Market
price will be less than factor cost
IT MUST BE NOTED THAT:
MP – IT + SUBSIDIES = FC
NFIA ( NET FACTOR INCOME FROM ABROAD)

Must read the following;
+ Factor income received from abroad
Domestic income = national income
- Factor income paid to abroad
Factor income rec. from abroad - factor income paid to abroad = NFIA
NFIA refers to the difference between factor income received from abroad and
factor income paid to abroad.
FACTOR INCOME RECEIVED FROM ABROAD refers to income earned by

normal residents of a country from abroad in the form of wages , salaries,
interest , profits, dividends, etc
FACTOR INCOME PAID TO ABROAD refers to the income paid to the normal
residents of other countries for their services in our country.
COMPONENTS OF NFIA (VERY IMPORTANT)
1.) net compensation to employees – it refers to difference between income

received by resident workers from working abroad and income paid to non-
resident workers working in our country.
2.) net income from entrepreneurship and property – it refers to difference
between income from rent, interest and dividends received by residents of our
country and payment of rent, interest and dividends paid to non-residents
abroad.
3.) net retained earnings – it refers to difference between retained earnings of

our company located abroad and retained earnings of foreign companies located
in India. Retained earnings means part of profits kept as reserves.
NOTE;
If factor income received from abroad is equal to factor income paid to abroad,
then NFIA is zero and thus national income equals to domestic income.
If factor income received from abroad is more than factor income paid to
abroad, then NFIA is positive and thus national income is more than domestic
income.
If factor income received from abroad is less than factor income paid to
abroad, then NFIA is negative and thus national income is less than domestic
income.
IMPORTANT QUESTIONS OF THIS CHAPTER;

Q.1) CLASSIFY THE FOLLOWING AS FACTOR INCOME AND TRANSFER INCOME;
1. unemployment allowance 2. Salary received by rakesh from a company 3. Compensation received

by employer 4. Claim received from an insurance company by an injured worker 5. Birthday gift
received from a friend 6. Bonus received on diwali. 7.) financial help to earthquake victims.
ANS. 1. 4. 5. 7. Are transfer incomes and rest are factor incomes
Q.2) concept of normal resident applies to individual only?
ANS. False, the concept of normal resident applies to institutions also.
Q.3) in final goods, no value is to be added?
ANS. True final goods have crossed the production boundary and now cannot be used for further
production.
Q.4) purchases by one firm from another firm is always an intermediate goods.
ANS. FALSE, if one firm purchases input from another firm for further production of goods then it is
called intermediate goods. While if one firm purchases assets from another firm like machinery then
even it is used for further production but it will be considered as final goods.
NATIONAL INCOME AND RELATED AGGREGATES
CHAPTER 3RD
G D P mp
GROSS DOMESTIC PRODUCT at market price
N N P fc
NET NATIONAL PRODUCT at factor cost
FORMULA NO.1…
GROSS
- DEPRECITION
NET
Another names of depreciation are;
Consumption of fixed capital , consumption of fixed
assets , normal wear and tear and current replacement
cost.
FORMULA NO. 2……
DOMESTIC
+ factor income received from abroad
- Factor income paid to abroad
NATIONAL
(OR)
DOMESTIC
+ NFIA
NATIONAL
FORMULA NO. 3…….
MP MP
- Indirect taxes (OR) - N.I.T
+ subsidies FC
FC
Another names of indirect taxes; NNPfc = national income
GST , sales tax , VAT , custom duty , excise duty
ANOTHER names of subsidies; NDPfc = domestic income
Assistance and economic assistance

Q.1) domestic income (NDPfc) = 50,000 Rs.
Consumption of fixed capital = 4000 Rs.
Factor income received from abroad = 3000 Rs.
Indirect taxes = 1500 Rs.
Subsidies = 1200 Rs.
Factor income paid to abroad = 9000Rs.
Calculate GNPmp
Solution……….
NDPfc = 50,000
+ depreciation 4000
GDPfc = 54000
+ factor income rec. from abroad 3000
- Factor income paid to abroad 9000
GNPfc = 48,000
+ indirect taxes 1500
- Subsidies 1200
GNPmp = 48,300 ANSWER
QUESTIONS FOR PRACTICE
Q.1) NDPmp 80,000 , net factor income from abroad -200 , depreciation
4950 , subsidies 1770 , indirect taxes 10,600 .
Calculate GNPfc
Q.2) gross national product at market price 58350 , indirect taxes 2590 ,
subsidies 1540 , depreciation 1625 , NFIA -240
Calculate domestic income
Q.3) GDPmp 4800, indirect taxes 300 , NFIA 80 , consumption of fixed capital
200 , subsidies 60.
Calculate national income (NNPfc)
Q.4) national income 6700 , consumption of fixed capital 180 , factor income
from abroad 100 , indirect taxes 130 , subsidies 70 , factor income to abroad
150.
Calculate GDPmp
Q.5) GDPfc 55000 , indirect taxes 4400 , factor income paid to abroad 600 ,
NNP mp 55,500 , factor income received from abroad 1300 , depreciation
2500.
Calculate subsidies.
Q.6) GNPfc 4280, subsidies 80, factor income from abroad 400 , depreciation
480 , indirect taxes 100 , NDP mp 3700.
Calculate factor income paid to abroad
Q.7) NDp fc(domestic income) 55915 , subsidies 1540 , factor income from
abroad 625 , consumption of fixed capital 1625 , factor income paid to abroad
865 , GNPmp 58,350.
Calculate indirect taxes.
IMPORTANT MEANINGS AND KEYWORDS –
G = GROSS
N = NET
MP = market value of final goods and services
FC = money value of final goods and services
DP = produced with in the domestic territory
NP = produced by normal residents.
GDPmp – gross market value of final goods and services produced with in the
domestic territory during an accounting year.
GNPmp Gross market value of final goods and services produced by normal
residents during an accounting year
NDPmp Net market value of final goods and services produced with in the
NNPmp Net market value of final goods and services produced by normal
residents during an accounting year.
GDPfc – gross money value of final goods and services produced with in the
GNPfc Gross money value of final goods and services produced by normal
residents during an accounting year
NDPfc Net money value of final goods and services produced with in the
NNPfc Net money value of final goods and services produced by normal
residents during an accounting year.
IMPORTANT QUESTIONS OF THIS CHAPTER
Q.1) mention the situations when following equations will hold true
1.) GDPfc> GDPmp 2.) NNPfc<NDPfc 3.) GDPfc = GDPmp

4.) domestic income is greater than national income.
Q.2) CALCULATE THE missing values
1.) GNPfc = GNPmp - ______?
2.) _________ = national income – domestic income
3.) GDPfc = _______ + depreciation
4.) NDPfc = ____________ - depreciation - N.I.T
Q.3) in a closed economy, NDP equal to NNP
ANS. True , in a closed economy there is no involvement of abroad, so national

income and domestic income will be equal always as there is zero NFIA.
CHAPTER 4 - - - MEASURMENT OF NATIONAL INCOME
METHOD NO. 1ST
VALUE ADDED METHOD / product method / output

method/INVENTORY METHOD/ INDUSTRIAL ORIGIN
METHOD….
FORMULA –
Value of output - intermediate consumption = GDPmp / GVAmp
OR
Sales + self consumption + change in stock – intermediate consumption =

GDPmp / GVAmp
OR
Domestic sales +self consumption + exports – domestic purchases – imports

+ change in stock = GDPmp / GVAmp
NOTE;
Change in stock = closing stock – opening stock
Addition to stock means change in stock will be added
Fall in stock means change in stock will be deducted
Another names of intermediate consumption are;
Purchases
Purchase of raw material
Purchase of fuel , power and labour
But , purchase of assets and machinery will not be considered as intermediate

consumption.
THEORY OF VALUE ADDED METHOD –
RAW-MATERIAL VALUE ADDITION FINAL GOODS
200 Rs. intermediate 600 Rs.

400 Rs.
conumption
Value of output
VALUE ADDED refers to addition of value to the raw material by a firm during
the production process.
Value added = value of output – intermediate consumption
Suppose a bakery needs flour to produce bread. He purchases flour as input

worth Rs. 200 and converts the flour into bread and sell the bread for Rs.600.
So flour is considered as input means intermediate consumption and bread is

considered as final goods means value of output. So value addition will be
400Rs.
INTERMEDIATE CONSUMPTION refers to use of intermediate goods in the

production process . in the above example flour is the intermediate consumption.
VALUE OF OUTPUT
Value of output refers to market value of all goods and services produced during
a period of one year.
Value of output = sales + change in stock + self consumption
STEPS OF VALUE ADDED METHOD;
STEP 1 – IDENTIFY AND CLASSIFY THE PRODUCTION UNITS
The first step is to identify and classify all the producing units into primary ,
secondary and tertiary sectors.
STEP 2 – ESTIMATE GDPmp
In the second step gross value added at market price means GVAmp of each
sector will be calculated and sum total of GVAmp of all sectors give GDPmp of
economy.
STEP 3 – CALCULATE DOMESTIC INCOME (NDP fc)
By subtracting the amount of depreciation and net indirect taxes from GDPmp
we will get domestic income i.e NDPfc
STEP 4 – ESTIMATE NFIA TO ARRIVE AT NATIONAL INCOME (NNPfc)
In the final step NFIA will be added in domestic income to arrive at national
income (NNPfc)
GVAmp of primary sector
+ GVAmp of secondary sector
+ GVAmp of tertiary sector
GDPmp
- DEPRECIATION
- NET INDIRECT TAXES
NDPfc ( domestic income)
+ NFIA
NNPfc ( national income)

PRECAUTIONS OF VALUE ADDED METHOD –
1.) INTERMEDIATE GOODS are not to be included in national income because
its value is already included in the value of final goods and if they will be
included again then It will lead to double counting.
2.) sale and purchase of second hand goods in not to be included in

national income as there value has already been included during their original
purchase
However , brokerage and commission paid on such transactions will be included

in national income as it is related to productive service of current year.
3.) services for self consumption means domestic services will not be included in
national income as it is difficult to calculate its market value. For example
services of housewife and mother, kitchen gardening etc.
HOWEVER, paid services of maids, drivers, etc will be included as they are
charging something for their services.
4.) production of goods for self consumption will be included in national

income as they contribute to current output and its market value can be easily
measured.
5.) change in stock of goods(inventory) will be included in national income as

it is a part of capital formation i.e investment
6.) imputed rent of owner occupied house , imputed interest on own capital will
be included in national income as it is related to productive activities.
CONCEPT OF DOUBLE COUNTING

While calculating the national income , only the value of final goods and
services is to be included because the value of intermediate goods is already
included in the value of final goods.
The problem of double counting arises when value of intermediate goods is
again included in the national income.
Double counting refers to counting of an output more than once during the
production process.
COTTON THREADS SHIRTS consumers
Rs. 1000 Rs. 5000 Rs. 12000
IN the above flow chart , a person produces cotton worth Rs. 1000 and sell them
to a company for making threads worth Rs. 5000.
( here cotton is an intermediate for making threads)
Now, threads are further sold to a firm for making shirts worth Rs. 12000 and
shirts are consumed by final users i.e consumers. ( here thread is an
intermediate good for making shirts)
While calculating the national income , only the value of shirts is to be

included as value of cotton and threads is already included in the value of
shirt.
HOW TO AVOID DOUBLE COUNTING;
1.) FINAL OUTPUT METHOD –
According to this method , value of only final goods is to be included to

determine the national income. In the above case value of shirts i.e 12000 will be
included in national income.
2.) VALUE ADDED METHOD –

According to this method , value addition by each producing unit should be
taken taken to determine the national income. In the above case, value of input
is 1000 , first value addition is of 4000 Rs from cotton to threads and next
value addition is 7000 Rs. from threads to shirts.
Sum total of all these will be included in national income i.e 12000 Rs.
METHOD NO. 2ND

INCOME – METHOD/ distributive share method/
factor payment method
FORMULA –
COMPENSATION + OPERATING SURPLUS +MIXED INCOME = NDPfc
OF EMPLOYEES OF SELF EMPLOYED
CPMPENSATION OF EMPLOYEES WILL BE CALCULATED AS;
Wages and salaries in cash + wages and salaries in kind( vouchers, coupons ,
rent free house etc) + employer’s contribution in social security schemes +
retirement pension
OPERATING SURPLUS WILL BE CALCULATED AS;
Rent + royalty + interest + profits
In which profits = corporate savings + corporate dividend + corporate taxes.
Another name of corporate savings;
Undistributed profits or retained earnings.
THEORY OF INCOME METHOD;

1.) compensation of employees –
It refers to amount paid to employees by employer for rendering services. In

includes the following;
a.) wages and salaries in cash which includes all monetary benefits like wages
salaries bonus , commission, etc
b.) wages and salaries in kind which includes all non monetary benefits like
rent free house , free medical facilities etc.
c.) employers contribution to social security schemes like LIC , retirement

pension , provident funds , etc
2.) operating surplus
A) RENT and ROYALTY –
Rent is that part of national income which arises from ownership of land and
building where as , royalty refers to income received for granting patent rights .
B) INTEREST –
Interest refers to amount received for lending funds to a production unit.
It must be noted that;
a.) interest paid by one firm to another firm will not be included in national
income as it is the intermediate payment.
b.) if loan is taken for production purpose then its interest will be included in
national income as it related to productive activities.
c.) if loan is taken for consumption purpose then its interest will not be
included in national income as it is not related to any productive activities.
d) payment made by a firm to a CA or LAWYER will not be included in
national income as it is the intermediate payment.
e) interest received on deposits made by individuals or firms into banks will be

included in national income as such deposits are used for productive uses.
C) PROFITS –
Profit is a reward for the entrepreneur for his contribution in the production
process. It includes the following;
a.) corporate taxes b.) corporate dividend c.) corporate savings( undistributed
profits/ retained earnings)
3.) mixed income of self employed –
It is the income generated by own account workers. For example ; income of a

doctor running his clinic at his residence. It is the term used for any income
that has elements of more than one type of factor income. Mixed income arises
from productive services of self employed people whose income includes ages,
rent, interest, profits, etc and these elements cannot be separated from each
other.
STEPS OF INCOME METHOD

Step 1 identify and classify the production units
All the producing units are identified and classified into primary , secondary
and tertiary sectors.
Step 2 estimate the factor income paid by each sector
The factor income paid by each sector are classified under
a.) compensation of employees b.) rent and royalty c.) interest d.) profits e.)
mixed income of self employed.
Step 3 calculate domestic income NDPfc
When factor income of all the sectors are summed up we get , domestic income
i.e NDPfc
Step 4 estimate NFIA for national income i.e NNPfc
in the final step , NFIA will be added in domestic income to calculate the
national income.
Compensation to employees
+ rent and royalty
+ interest
+ profits
+ mixed income of self employed
NDPfc
+NFIA
NNPfc
PRECAUTIONS OF INCOME METHOD

1.) transfer incomes like gifts , donations , charity , scholarships , old age
pension , remittances from abroad , unemployment allowances , expenditure on
birthday and marriages , pocket money , financial help to victims , meal to
beggars , compensation to accident victims , insurance claim, etc. will not be
included in national income as it is not connected with any productive
activity.
2.) income from sale of second hand goods will not be included in national
income as the original sale has already been counted. However , commission
and brokerage received on such transactions will be included in national
income as it is related to current flow of goods and services.
3.) income from sale of shares , debentures and bonds(financial assets) will not
be included in national income as such transactions do not contribute to
current flow of goods and services.
However , dividend and interest received on such assets and commission and
brokerage received on such transactions will be included in national income as
it is related to current productive services.
Capital gain means profit from increase in value of shares will not be included
in national income as it not related to any productive activities.
4.) windfall gains means income from lottery , casino, KBC , horse race will not
be included in national income as there is no productive activity connected with
them.
5.) imputed rent on owner occupied house , imputed interest on self supplied
capital will be included in national income as it is related to current productive
services.
6.) taxes and duties will not be included in national income as these are
compulsory transfer payments and govt. do not make any promises to provide
benefit in return.
7.) payment out of past savings will not be included in national income as it is
not related to current flow of goods and services.
EXPENDITURE METHOD / Income disposal Method/
consumption and investment method.
FORMULA –
Private final consumption expenditure + government final consumption

expenditure + private non profit institution’s expenditures + gross domestic
capital formation + net exports = GDPmp
Note ;
1.) Private final consumption expenditure is also known as personal final

consumption expenditure or household final consumption expenditure.
2.) Government final consumption expenditure is also known as government

purchase of goods and services.
3.)Net exports will be calculated as EXPORTS - IMPORTS
If net imports are given then it will be deducted.
4.) GROSS DOMESTIC CAPITAL FORMATION WILL BE CALCULATED

AS;
NET DOMESTIC FIXED GROSS PUBLIC INVESTMENT

CAPITAL FORMATION + GROSS RESIDENTIAL CONSTRUCTION
+ DEPRECIATION ( OR) INVESTMENT
+ CHANGE IN STOCK + GROSS BUSINESS FIXED
INVESTMENT
+ CHANGE IN STOCK
THEORY OF EXPENDITURE METHOD ;
1.) PRIVATE FINAL CONSUMPTION EXPENDITURE –

It refers to the expenditure incurred by households and private non profit
institutions on all consumer goods.
2.) GOVERNMENT FINAL CONSUMPTION EXPENDITURE –
It refers to the expenditure incurred by general government on various
administrative services like defence , law and order , education , etc.
3.) GROSS DOMESTIC CAPITAL FORMATION –
It refers to the addition to the capital stock of economy. It includes the following
;a.) gross business fixed investment b.) gross residential construction
investment c.) gross public investment d.) inventory investment
4.) NET EXPORTS –
it refers to the difference between exports and imports of a country.
STEPS OF EXPENDITURE METHOD –
STEP 1 IDENTIFY THE ECONOMIC UNITS
All the economic units are identified and classified into 4 groups (i) household
sector (ii) firm sector (iii) government sector (iv) abroad
STEP 2 CLASSIFICATION OF FINAL EXPENDITURES
Final expenditures by above mentioned economic units are identified and

classified into following heads;
a) private final consumption expenditure b) government final consumption

expenditure c) gross domestic capital formation d) net exports
sum total of all these will be equal to GDPmp
STEP 3 CALCULATE DOMESTIC INCOME (NDPfc) –
By subtracting the amount of depreciation and net indirect taxes from GDPmp
, we will get domestic income NDPfc
STEP 4 ESTIMATE NFIA TO ARRIVE AT NATIONAL INCOME (NNPfc) –
With the addition of NFIA under the domestic income , we will arrive at
national income (NNPfc)
Private final consumption expenditure

+ government final consumption expenditure
+ gross domestic capital formation
+ net exports
GDPmp
- depreciation
- net indirect taxes
NDPfc
+ NFIA
NNPfc
PRECAUTIONS OF EXPENDITURE METHOD –
1.) expenditure on intermediate goods will not be included in national

income
As its value has already been included in value of final expenditures.
2.) transfer payments are not to be included in national income as it is not

connected with any productive activity.
3.) purchase of second hand goods are not to be included in national

income as it has already been included when they were originally purchased.
However, brokerage and commission paid on such transactions will be
included in national income as it is related with current productive services.
4.) purchase of financial assets like shares , debentures and bonds will
not be included in national income as these transactions do not contribute to
current flow of goods and services. However, dividend and interest paid on
such assets and commission and brokerage paid on such transactions will be
included in national income as it is related with current productive services.
5.) production of goods for self consumption and imputed rent of self
occupied house will be included in national income as it is connected with
current flow of goods and services.
ITEMS NOT TO BE INCLUDED IN NATIONAL INCOME
1.) transfer incomes and transfer payments like gifts , donations, charity ,
pocket money , scholarships , unemployment allowances , old age pension,
expenditure on birthday and marriages , remittances from abroad , financial
help to victims , meal to beggars , will not be included in national income
REASON – these incomes and payments are not connected with any productive
activity.
2.) compulsory transfer payments like taxes , duties etc will not be included in
national income.
REASON – it is compulsory transfer payment made to the government and
govt. do not make any promise to provide benefit in return.
3.) sale and purchase of financial assets like shares , debentures and bonds will
not be included in national income.
REASON – such transactions are not connected with current flow of goods and
services , they are just paper claims and involves change of title only.
4.) windfall gains like income from lottery , casino, KBC , horse race will not
be included in national income.
REASON – it is not connected with any productive activity.
5.) Non market transactions like kitchen gardening , services of housewife , a

parent teaching his own child will not be included in national income .
REASON – it is difficult to calculate its monetary value.
6.) intermediate consumption like purchase of raw-material by a firm ,

vegetables purchased by a restaurant , milk purchased by a diary shop ,
electricity charges paid for further services , advertisement expenses paid by a
firm , expenses on scientific research , purchase of cold drink by a school
canteen , expenditure on repair and maintenance will not be included in
national income.
REASON – they are intermediate expenditure and its value has already been
included in final expenditures.
7.) sale and purchase of second hand goods will not be included in national
income
Reason – its value has already been included when they were originally
purchased.
8.) capital loss like destruction of building in an earthquake will not be

REASON – they do not affect the national product.
9.) capital gain like profits due to increase in the value of shares and building
will not be included in national income
Reason – it is not connected with any productive activity.
10.) if loan is taken for consumption purpose, then its interest will not be
REASON – it is not connected with any productive activity.
11.) payment of interest by one firm to another firm will not be included in
national income.
Reason – it is an intermediate payment.
12.) payment of fees by a firm to a CA or lawyer will not be included in

national income .
REASON – it is an intermediate payment.
13.) petrol used in police vehicles , ambulance , taxi will not be included in
national income.
REASON – it is an intermediate expenditure because here fuel(petrol) is used

for further services.
14.) a person working in abroad and sending money to his family in INDIA
will not be included in national income.
REASON – it is the transfer income for the receiver.
15.) Insurance claim received from an insurance company will not be included
in national income.
REASON – it is the transfer income for the receiver.
16.) expenditure on repairmen and maintenance of assets will not be included

in national income.
REASON – it is the intermediate expenditure.
17.) factor income paid to abroad will not be included in national income.
REASON – it is the payment made to abroad and will be deducted while
calculating the national income.
18.) payment of interest by an individual to bank will not be included in

national income
REASON – loan is for consumption purpose and no productive activity

connected with them.
19.) interest on national debt and interest on loan taken by general

government will not be included in national income.
REASON – loan is for consumption purpose and no productive activity

connected with them.
ITEMS INCLUDED IN NATIONAL INCOME
1.) the brokerage and commission on sale and purchase of second hand goods
and on shares will be included in national income
REASON – it is connected with current productive services.
2.) imputed rent of self occupied house , imputed interest on self supplied capital
will be included in national income.
REASON – they are connected with current flow of goods and services.
3.) any type of investment like purchase of machinery , purchase of new house ,
construction of bridge, highway , addition to stock will be included in national
income
REASON – it is a part of gross domestic capital formation.
4.) Any payment or benefit given by employer to employee except transfer

income will be included in national income. for example payment of bonus ,
contribution to provident fund by employer , lunch to workers , medical
facilities and rent free house to workers.
REASON – it is a part of compensation to employees for productive services.
5.) Any expenditure made by households and consumers like payment of bus
fare , examination fees , insurance premium , purchase of durable goods ,
payment of telephone bill , electricity bill will be included in national income.
REASON – they are part of private final consumption expenditure.
6.) factor income received from abroad will be included in national income
REASON – it will be added in domestic income to arrive at national income.
7.) any expenditure made by government except transfer income will be

REASON – they are part of government final consumption expenditure.
8.) if loan is taken for production purpose then its interest will be included in
national income like loan taken by firm for productive services then its interest
will be a part of national income.
REASON – it is connected with productive activities.
9.) purchase of new house , adding a new floor(improvement of house) will be

REASON – it is an investment means capital formation.
10.) payment of interest by bank to households or to firms both will be included

in national income.
REASON – interest is connected with deposits made by households or firms

used for productive services.
RULES OF DOEMSTIC INCOME –

RULE 1ST
All the 29 points discussed above of inclusion and non- inclusion will be
applicable here also in the same manner. But,
RULE 2ND
While calculating the domestic income , factor income received from abroad and
factor income paid to abroad both will not be included in domestic income.
We should not consider the factor income received from or paid to abroad while
calculating the domestic income.
RULE 3RD
Anything which is a part of domestic territory, its income will be included in
domestic income. Anything which is not a part of domestic territory, then its
income will not be included in domestic income.
Example – profits earned by foreign banks in india.. its income will be

included in domestic income as that bank is a part of domestic territory.
Salary paid to a resident working in Russian embassy in INDIA, its income

will not be included in domestic income as that embassy is not a part of
domestic territory.
(FOR DOMESTIC TERRITORY REFER CHAPTER 2)
ASSIGNMENT OF INCLUSION AND NON INCLUSION;

(VERY IMPORTANT ASSIGNMENT)
( 6 MARKS MANDATORY QUESTION IN CBSE)
ASSIGNMENT OF NATIONAL INCOME (81 QUES.)
1.) construction of new house. 2.) winning of lottery prize 3.) increase in the price of
stocks lying with in the trader 4.) national debt interest 5.) rent free house given to
employer by an employee 6.) profits earned by branches of foreign banks in INDIA. 7.)
purchases by foreign tourists 8.) rent received by Indian resident from the buildings
rented to foreigners in INDIA . 9.) payment of fees to a lawyer 10.) free medical facilities
by the employer. 11.) gifts received from abroad or from employer 12.) profits of reliance
companies from its setup in Australia 13.) salary received by Indian resident working in
Russian embassy in INDIA 14.) subsidized lunch given to workers 15.) old age pension
16.) durable goods or car purchased by households 17.) profit earned by Indian bank from
its branches abroad 18.) earning of shareholders from the sale of shares 19.) expenditure
on advertisement or scientific research by a firm 20.) receipts from sale of land 21.)
financial help received by flood victims 22.) purchase of machine by a factory or purchase
of car by a taxi driver 23.) royalty 24.) commission or brokerage on sale of second hand
goods or on sale of shares 25.) dividend received by an Indian from his investment in
shares of foreign company 26.) purchase of raw material by a production unit 27.)
earning of a self employed doctor having his clinic at his residence 28.) money received
from sale of second hand goods 29.) imputed rent of self occupied house 30.) contribution
to provident fund by an employer OR foregone of interest by the employer on loan given
to employee 31.) wheat grown by farmer and self consumed by his family 32.)
expenditure on the construction of flyover by the government. 33.) commission received
by a dealer 34.) growing vegetables in kitchen garden 35.) services rendered by family
members to each other 36.) expenditure by govt. in providing free education/free
services/street lightning 37.) insurance premium paid by an household /fees received
from student 38.)mineral / national wealth of nation 39.) value of wood purchased for
manufacturing of a table/transport expenses by a firm 40.) purchase of equipments for
installation in a factory. 41.) payment of interest tax or death duty 42.) GST received by
government 43.) salary paid to Russians working in Indian embassy in Russia. 44.) capital
gain from sale of shares. 45.) harish works in USA and send money to his family in INDIA
46.) destruction of building in an earthquake 47.) HP uses its own new laptop in its office
for self consumption 48.) purchase of truck to carry goods by a production unit 49.) direct
purchases made by govt. from abroad 50.) earning from a part time job in mcDonalds 51.)
receipts from sale of property inherited from relative 52.) entertainment allowance given
by an employer to employee for entertaining business guests 53.) expenditure on purchase
of shares debentures and bonds 54.) goods lying with in the production boundary 55.)
money received by a family from relatives working abroad 56.) dividend received by
foreigner from his investment in Indian companies 57.) sale of an old house 58.) purchase
of house by a tenant 59.) insurance money received from insurance company against fire
in factory 60.) payment of interest by bank to depositors/payment of interest by a firm to
bank 61.) interest received on loan for purchase of personal car/payment of interest by an
individual 62.) interest received on loan given to a foreign company 63.) interest received
on debentures 64.) expenditure on improvement of assets/addition of new floor 65.)
scholarships given to student to study abroad 66.) value of bonus shares received bya
shareholders 67.) purchase of uniforms for nurses by a hospital 68.) expenditure on
repairmen and maintenance of building or assets 69.) payment of interest on borrowings
by a general government 70.) family members working free on farm 71.) payment of
bonus to employees 72.) purchase of tractor by a farmer 73.) expenditure on fertilizers by
a farmer 74.) purchase of furniture by a firm 75.) expenditure on education of a children
by a family . 76.) payment of electricity bill by a school or firm 77.) dividend received by
shareholders 78.) festival gifts from an employer 79.) contribution to provident fund by an
employee 80.) addition to stocks during an year 81.) payment of corporate tax by a firm
ASSIGNMENT OF DOMESTIC INCOME (27 QUES.)

1.) profit earned by branches of foreign banks in india 2.) profit earned by resident of india
from his company in Singapore 3.) profit earned by company in india which is owned by
non resident 4.) profits earned by branch of SBI(state bank of india) in japan 5.) rent
received by an Indian from his building in London 6.) compensation of employees to the
resident of japan working in Indian embassy in japan 7.) rent paid by embassy of japan in
india to a resident Indian 8.) salaries to Indian resident working in Russian embassy in
india 9.) profits earned by Indian employees working in Pakistan embassy in india 10.)
factor income from abroad 11.) scholarships given by govt. of india 12.) expenditure by
govt on providing old age pensions 13.) payment of bonus by a firm 14.) consultancy fees
paid to foreign expert. 15.) sale and purchase of shares , debentures and bonds 16.)
compensation of employees paid by a foreign company located in INDIA 17.) compensation
of employees paid by a foreign company located in India. 18.) earning of American express
bank branch located in Chennai . 19.) broker’s commission on sale of an old car 20.) profit
earned by a company located in INDIA partly owned by USA 21.) services rendered by
housewives 22.) capital gains 23.) windfall gains 24.) remittances from non residents to
their families in INDIA . 25.) and Indian owned airplane operating between singapor and
dubai 26.) gifts given by an employer to employees on independence day 27.) purchase of
goods by a foreign tourists
THE ASSIGNMENT MENTIONED ABOVE IS VERY IMPORTANT AS PER THE WEIGHTAGE OF

6 MARKS IN CBSE BOARD EXAMS. IT MUST BE NOTED THAT NO MARKS WILL BE GIVEN
IF REASON IS NOT MENTIONED
(for answers refer sandeep garg macro book)

NOMINAL AND REAL NATIONAL INCOME
NOMINAL NATIONAL INCOME (NNPfc at current prices)
It refers to the money value of final goods and services produced by normal
residents of a country during an accounting year , measured at current year
prices. Suppose current year is 2018 -19. It does not show the true picture of
economic growth of a country because any increase in nominal national
income is due to change in prices.
REAL NATIONAL INCOME (NNPfc at constant prices)

it is the money value of final goods and services produced by normal residents
of a country in a year measured at base year prices. Base year is a normal year
which is free from price fluctuations. Presently 2011-12 is taken as base year
in india. It shows the true picture of economic growth as increase in real
national income is only due to rise in output not due to rise in prices.
BASIS NOMINAL NNPfc REAL NNPfc

Meaning it refers to money value of it refers to money value of
Final goods and services final goods and services
Produced by normal produced by normal
Residents of a country residents of a country
During an accounting year, during an accounting
Measured at current prices year, measured at base
Year prices.
INDEX OF it is not a good tool it is a good tool for
GROWTH for measurement of measurement of
Economic growth economic growth
Calculation P1 X Q1 P0 X Q1
Another name it is also known as it is also known as

National income national income at
At current prices constant prices.
REAL NATIONAL INCOME = NOMINAL NATIONAL INCOME X 100
CURRENT PRICE INDEX
NOMINAL GDP AND REAL GDP

NOMINAL GDP OR GDP at current prices
when GDP of a given year is estimated on the basis of the price of same year, it
is called nominal GDP.
REAL GDP OR GDP at constant prices

when GDP of a given year is estimated on the basis of price of base year , it is
called real GDP.
 Price of base year is equal to price of current year, then , real GDP is equal
to nominal GDP.
 Price of base year is less than price of current year , real GDP is less than
nominal GDP.
 Price of base year is more than price of current year , real GDP is more
than nominal GDP.
REAL GDP IS BETTER THAN NOMINAL GDP
Real GDP is better than nominal GDP because of following reasons;

1.) real GDP helps in determining the effect of increased production of goods
and services as it is affected by change in output only,where as nominal GDP
can even increase without increase in output because it is affected by change in
prices.
2.) real GDP is a better tool to make periodic comparisons of output over
different years.
3.) real GDP is a better tool to facilitate international comparison of economic

performance of output across the countries.
REAL GDP = NOMINAL GDP X100
CURRENT PRICE INDEX
GDP DEFLATOR
GDP deflator measures the average level of prices of all goods and services that
make up GDP.
GDP deflator or PRICE INDEX = nominal GDP x 100
Real GDP
QUES.1) If real GDP is 12000 and nominal GDP is 15000 , then calculate GDP
deflator and what does this indicate?
GDP deflator is 15000 x 100 = 125.
12000
Base is 100 and GDP deflator is 125 , so price rises by 25%.
QUES 2.) if real GDP is 3000 and nominal GDP is 2500 . calculate GDP
deflator and what does this indicate?
GDP deflator is 2500 x 100 = 83.3
3000
Base is 100 and GDP deflator is 83.3. so prices fall by 16.67%

GDP AND WELFARE VERY IMPORTANT
GDP is often considered as an index of welfare. Welfare means sense of material
well- being among the people. However, there are some limitations of the above
mentioned line.
1.) DISTRIBUTION OF GDP

It is possible that with rise in GDP, inequalities also rises means the gap between
rich and poor increases. GDP does not take into account changes in inequalities
in the distribution of income. It means welfare may not arise with rise in GDP
if there is increase in inequalities along with it.
2.) CHANGE IN PRICES

If increase in GDP is due to rise in prices and not due to rise in physical output
then it will not be a reliable index of welfare.
3.) NON MONETARY TRANSACTIONS/ BARTER TRANSACTIONS.

Many activities in an economy are not calculated in monetary terms like
services of mother , a parent teaching his own child , etc . these transactions are
not included in GDP however it affect the economic welfare.
4.) RATE OF POPULATION GROWTH

GDP does not consider the changes in population growth of a country. If rate of
population growth is higher than the rate of growth of GDP , then it will reduce
the per capita availability of goods and services which will adversely affect the
economic welfare.
5.) EXTERNALITIES
Externalities refer to benefits or harms of an activity caused by a firm or an
individual for which he is not paid. Activities which results in benefit to others
are called positive externalities and activities which result in harm to others are
called negative externalities.
Environment pollution caused by industries are considered as negative
externalities which reduces the economic welfare but GDP does not take into
account all these externalities
Use of public parks by the people will improve their health is the positive
externalities and it will increase the economic welfare but GDP does not take
into account all these externalities.
6.) COMPOSITION OF GDP – Composition of GDP always affect the welfare of

country. If GDP of our country is increasing due to goods like wheat, Rice, etc
then along with GDP welfare will also increase. However, if GDP of our country
is increasing due to goods like liquor, cigarette, tobacco, war goods, etc then
GDP will increase but welfare will not increase.
WHAT IS GREEN GNP/GDP?
ANS. It measures GDP and national income of our country adjusted for the
depletion of natural resources and degradation of the environment. It will help
to attain a sustainable use of natural environment. Higher the Green GNP
signifies higher sustainable development.
NUMERICAL and theory QUESTIONS FOR

PRACTICE
Q.1) SALES 20,000 , purchase of machinery 5000 , purchase of raw-material 3000 , closing stock 500
, national debt interest on loan taken by general govt. 1300, private final consumption exp.2000 ,
opening stock 200 , consumption of fixed capital 100 , custom duty 200 , assistance 300 , factor
income received from abroad 1000 , capital transfers paid to abroad 700 , factor income paid to
abroad 800 , wages and salaries in cash 50 , retirement pension 90 , employers contribution to social
security schemes 60 , employee contribution in social security 300 , mixed income of self employed
5100 , interest 1000 , gross business fixed investment 3000 , corporate savings 500 , corporate taxes
800 , dividend 700, royalty 2500 , direct taxes paid by households 200. Calculate RENT. Ans. 6500
Q.2) A FARMER sold wheat to households 3000 , to government 1500 , to whole sellers 4500. Wheat
left unsold worth Rs.6000 and wheat of Rs. 2000 is used for self consumption. Farmer purchased a
tractor of Rs 50,000 and seeds for Rs. 3500. Current replacement cost 500 , factor income Paid to
abroad 4000 , factor income received from abroad 6500 , excise duty 2500 , subsidies 2000 , mixed
income of self employed 1000 , rent 200 , royalty 300 , corporate savings and taxes 400 , dividend 300
, interest 300 . calculate the value of compensation paid to employees and national income. Ans.
10000 , 15000
Q.3) ) salaries and wages in cash Rs. 1997 , transfer payments by government Rs. 25 , rent
Rs. 132 , indirect taxes Rs. 200, subsidies Rs.89, compensation of workers in kind Rs. 95,
depreciation Rs. 81, NFIA Rs.52 , interest Rs.92, govt. expenditure on goods and services
Rs.574, personal consumption expenditure on goods and services Rs.1805 , corporate tax Rs.
10 , mixed income of self employed Rs. 264, undistributed profits Rs. 26, corporate dividends
Rs. 201, exports Rs. 900, addition to stock Rs. 7 , social security contribution by employer Rs.
54 , social security contribution by employees Rs. 64 , imports Rs. 323 , gross domestic fixed
capital investment Rs. Rs.100. Calculate NATIONAL INCOME by INCOME method and
EXPENDITURE method ANS. 2923
Q.4) Calculate ' Net domestic product at factor cost' by the expenditure method and Product
method: -
ITEMS (Rs. in Crores)
i. Value of output in the economic territory 4100
ii. Net export. -50
iii. Intermediate purchase by the primary 600
sector.
iv. Private final consumption expenditure 1450
v. Intermediate purchase by the secondary 700
sector
Vi. Government final consumption 400
expenditure
vii. Net domestic fixed capital formation 200
viii. Intermediate purchase by the territory 700
sector.
ix. Net change in stock 50
X. Indirect taxes 100
xi. Consumption of fixed capital. 50
ANS. 1950
Q.5) calculate the value of CORPORATE SAVINGS; ANS. 17250
Sales 48000 , closing stock 300 , wages and salaries in cash 2500, opening stock 400 , purchase of raw material 6000,
purchase of machinery 5000, depreciation 800 , indirect taxes 650 , factor income paid to abroad 1100 , subsidies 350 , factor
income received from abroad 300 , retirement pension 800 , employers contribution in provident fund schemes 1250 , rent
and royalty 2000 , interest 1000 , mixed income of self employed 500 , corporate taxes 12500 , corporate dividend 3000 ,
gross domestic fixed capital formation 13450 , exports 450 , national debt interest 300 , private income 25800 .
Q.6) Calculate (a) Net domestic product at factor cost ANS. 1600
i. Domestic product accruing to govt. sector 300
ii. Wages and Salaries 1000
Iii Net current transfer to abroad. - 20
iv. Rent 100
v. Interest paid by the production unit 130
Vi. National debt interest 30
vii. Corporation tax 50
viii. Current transfer by government. 40
ix. Contribution to social security scheme by 200
employers
x. Dividends 100
xi. Undistributed profit 20
xii. Net factor income to abroad. 0
Q.7) out of total production, ram sold 70% to normal public and rest 20% saved for his
family. 5% taxes are now levied on total production and electricity charges of Rs. 500 are now
subsidized. Closing stock at year end was 10,000 Rs. Ram decided to import some fabric from
ITALY for 17,000Rs.. Show the income of country if 18% of value of machinery is transferred
to provisions of depreciation. Value of machinery was Rs. 1,00,000. Total output produced is
of Rs. 2,00,000 inclusive of stock. Calculate domestic income. ANS. 155500
Q.8) answer the following questions…..WITH REASONS
(a) car purchased by taxi driver will be final good or intermediate?
(b) salary received by rakesh from airtel company from a branch setup in Chennai will be
included in national income or not?
(c) IN ________________ goods , value is to be added.
(d) NNPmp will always be greater than national income?
(e) wealth is a stock or flow?
(f) all assets are capital goods?
(g) interest on loan for textile industry will be included in national income or not?
Q.9) with a numerical example , show how domestic income and national income can be
equal as well as unequal. With such numerical example also show when can NDPmp and
domestic income be equal or unequal. State when can net indirect taxes be zero.
Q.10) calculate the value of hidden depreciation and national income from following data
Private final consumption expenditure Rs.2250, government final consumption expenditureRs. 1250, imports Rs.250,
factor income paid to abroad Rs.200, transfer income received from abroad Rs.875, indirect taxes Rs.1050,
subsidies Rs.2000, gross domestic capital formation Rs.5000, net domestic fixed capital formation Rs.3400,
closing stock Rs.800, opening stock Rs.200, exports Rs.300
Ans 1000 8300
Q.11) calculate the value of national income from following data:
Domestic sales 20,000 , purchase of tractor 65000 , closing stock 2500 , purchases 12000 ,
sales to abroad 13500 , rent and royalty 14500 , income of self employed 21500 , factor
income received from abroad 5000 , current replacement cost 550 , custom duty 1200 ,
subsidies 3500.
ANS. 30750
Q.12) wages and salaries in cash 2500, rent 1300, corporate taxes 300, retained earnings 600
, employer’s contribution in provident funds 5000, vouchers 1000 , royalty 3000 , retirement
pension 2500, corporate dividends 1400 , closing stock 700 , opening stock 500 , purchase of
fuel 1400 , consumption of fixed capital 100 , NFIA 1500 , subsidies 1100
Calculate SALES
Q.13) purchase of goods and services by households 13000 , transfers paid to abroad 13000 , government
purchase of goods and services 12000 , net imports 1000 , gross business fixed investment 2500 , closing
stock 1000 , gross residential construction investment 2000 , opening stock 500 , gross public investment 3000 ,
norrmal wear and tear 2000 , factor income paid to abroad 1500 , assistance 1800 , sales tax 3000 , purchase of
fuel 2000 , current transfers from abroad 3500 , capital transfers to abroad 2000. Calculate sales.
Q.14)
ii. Net export. -50
iii. Intermediate purchase by the primary sector. 600
v. Intermediate purchase by the secondary sector 700

Vi. Government final consumption expenditure 400
viii. Intermediate purchase by the territory sector. 700
Q.15) sales 5500 , compensation of employees 1500 , change in stock 200 , rent and royalty
1000 , interest 450 ,national debt interest 380 , purchase of raw material 400 , direct taxes
450 , income of self employed 600 , corporate taxes 300 , corporate savings 250 , profit 550 ,
net exports (-150) , personal final consumption expenditure 3500 , government final
consumption expenditure 650 , net domestic fixed capital formation 600 , net indirect taxes
700 , depreciation 500 , NFIA 100 , wages and salaries in cash 800 , retirement pension 200 ,
savings of NPO 320 , provident funds 800 , miscellaneous receipts of govt. 200.
Calculate NATIONAL INCOME (NNPfc) by all three methods

16.) Calculate ' net value added at factor cost' from the following data: -
ITEMS (Rs. IN LAKHS)
i. Sale 800
ii. import of material. 50
iii. Subsidies 50
iv. Change in stock. 40
v. Purchase of raw material from domestic market. 450
vi. Wages and salaries 200
vii. Consumption of fixed capital 60
17.) Calculate NATIONAL income by income method:
Sales 1000 , closing stock 250 , rent and royalty 3000 , corporate taxes 240 , retained earnings 360 ,
wages and salaries in cash 3500 , intermediate consumption 4500 , retirement pension 6700 , mixed
income of self employed 4750 , opening stock 80 , interest 690 , corporate dividends 300 , employer’s
contribution in provident funds 2000 , indirect taxes 150 , current replacement cost 400 , subsidies 450
, factor income paid to abroad 350.
Q.18) value of output by primary sector 1000 , value of output by secondary sector 800 , value of
output by tertiary sector 600 , intermediate consumption of primary 400 ,of secondary 300 and of
tertiary sector 100 , compensation of employees 500 , rent 40 , consumption of fixed capital 80 ,
indirect taxes 30 , NFIA 10 , subsidies 10 , interest 50 , royalty 110 , mixed income 800. Calculate
national income by income method and value added method
Q.19) calculate GDPmp by value added and income method.

Purchase of fuel and power 1200 , sales 1900 , closing stock 1000 , rent 10 , opening stock 300 ,
compensation of employees 950 , profits 285 , NFIA (-20) , corporate savings 35 , corporate taxes 200 ,
interest 5 , depreciation 40 , net indirect taxes 10 , mixed income 100
Q.20) sales 5500 , compensation of employees 1500 , change in stock 200 , rent and royalty
1000 , interest 450 ,national debt interest 380 , purchase of raw material 400 , direct taxes
450 , income of self employed 600 , corporate taxes 300 , corporate savings 250 , profit 550 ,
net exports (-150) , personal final consumption expenditure 3500 , government final
consumption expenditure 650 , net domestic fixed capital formation 600 , net indirect taxes
700 , depreciation 500 , NFIA 100 , wages and salaries in cash 800 , retirement pension 200 ,
savings of NPO 320 , provident funds 800 , miscellaneous receipts of govt. 200.
Calculate NATIONAL INCOME (NNPfc) by all three methods and corporate dividends
Q.21) consumption of fixed capital 600 Rs. , import duty 400Rs. , output sold 2000 units , price
per unit of output 10 Rs. , change in stock (-50) Rs. , intermediate cost 10,000 Rs. , subsidies
500 .
Calculate domestic income ( NDPfc )
Q.22) calculate the value of national income from following data:
Domestic sales 20,000 , purchase of tractor 65000 , closing stock 2500 , purchases 12000 ,
sales to abroad 13500 , rent and royalty 14500 , income of self employed 21500 , factor
income received from abroad 5000 , current replacement cost 550 , custom duty 1200 ,
subsidies 3500.
Q.23) wages and salaries in cash 2500, rent 1300, corporate taxes 300, retained earnings 600
, employer’s contribution in provident funds 5000, vouchers 1000 , royalty 3000 , retirement
Calculate SALES
Q.24) Calculate' Gross National product at Market Price' by the production method and
Income method.: -
i. Value of output of the primary sector 1000
ii. Indirect taxes 200
Iii Compensation of employee 780

iv. Net factor income to abroad. 100
v. Intermediate purchase by all the sector 2900
Vi. Rent 300
vii. Value of output by tertiary sector 2000
viii. Subsidies 50
ix. Interest 600
x. Consumption of fixed capital. 120
xi. Value of output of the secondary sector 3000
xii. Profit 320
xiii. Mixed income of self employed 830
Q.25) answer the following questions with REASONS;
(a) value of shares will be included in national income ( true or false )
(b) share of Rs. 120 is now in market for sale for Rs. 170. Profit of Rs. 50 will not be included
in national income ( true or false )
(c) taxes of rs 12000 will be included in national income ( true or false )
(d) ram produced goods for Rs. 5000 out of which half is self consumed and half is in stock.
How much will be part of national income
(e) dividend received on shares will not be included in national income ( true or false )
(f) income received from casino cards are part of national income ( true or false )
CHAPTER 5TH MONEY

BARTER exchange refers to exchange of goods for goods. It is also known as
C – C economy , where C stands for commodity.
MONEY is anything which is generally accepted as a medium of exchange,

measure of value , store of value and standard of deferred payments.
LIMITATIONS OF BARTER SYSTEM
1.) LACK OF DOUBLE COINCIDENCE OF WANTS –

Barter system can work only when both buyer and seller are ready to exchange
goods of each other. For example if A can exchange goods with B only when A
has what B wants and B has what A wants.
2.) LACK OF MEASURE OF VALUE/ LACK OF UNIT OF ACCOUNT –

In the barter system all the commodities are not of equal value and there is no
common measure for valuation of goods and services. For example if A has
wheat and B has rice then it is difficult to decide that how much wheat is needed
to exchange with 1 kg of rice.
3.) LACK OF STORE OF VALUE / LACK OF ASSET FUNCTION –

Under barter system , it is difficult for people to store wealth for future use
because most of the goods are perishable in nature and their quality decreases
with the passage of time. As a result , goods cannot be used to store the earnings
for a long period.
4.) LACK OF STANDARD OF DEFERRED PAYMENTS –

Under barter system , contracts involving future transactions or credit
transactions cannot take place easily because the borrower may not be able to
arrange goods exactly of same quality at the time of repayment. So it is very
difficult to make deferred payments in the form of goods.
5.) LACK OF DIVISIBILITY –

Another drawback of barter system is lack of divisibility power in goods.
Unlike money goods do not possess divisibility power. Suppose if a person is
ready to sell a horse for 100 kg of wheat, so, a person carry 50kg of wheat
cannot buy the half horse with same value as earlier.
DEFINITION OF MONEY
MONEY is anything which is generally accepted as a medium of exchange,

measure of value, store of value and standard of deferred payments.
The term money is used to cover all such things like notes, coins, etc which are
used to conduct all transactions and settlement of business claims.
FUNCTIONS OF MONEY –
1.) MEDIUM OF EXCHANGE – money as a medium of exchange means that it

can be used to make payments for all transactions of goods and services.
2.) MEASURE OF VALUE – Money as a measure of value means that money

works as a common denomination in which value of goods and services can be
expressed.
3.) STORE OF VALUE – money as a store of value means that money can be
used to transfer purchasing power from present to future.
4.) STANDARD OF DEFERRED PAYMENTS – it means that money acts as a

standard of payments which are to be made in future.
It must be noted that first two are primary functions and rest are
secondary functions.
LEGAL DEFINITION OF MONEY
1.) LEGAL TENDER MONEY – Money which can be legally used to make
payment of debts is called legal tender money.
a) Limited legal tender – It refers to that form of legal tender money which
can be paid in discharge of a debt up to a certain limit. In India coins are
limited legal tender money as coins can be used up to a limit and beyond that
it can be refused by a person to accept it.
b) Unlimited legal tender – It refers to that form of legal tender money which
can be paid in discharge of a debt of any amount without any limit. In India
Notes are unlimited legal tender Money. As per coinage act 2011, coins shall be
legal tender for sum not exceeding Rs. 1000.
2.) NON- LEGAL TENDER MONEY – it is also called optional money. It refers to
that form of money which is generally accepted but legally no one is bound to
accept it. For example cheques, demand drafts, etc.
BANK MONEY refers to demand deposits created by the commercial banks.

These deposits are repayable by the banks on demand. The depositors are given
cheques facility to withdraw money from their account. Bank money is a part
of non-legal tender money or optional money.
MONEY SUPPLY
Money supply refers to total volume of money held by the public at a particular
point of time in an economy.
It includes money held by public only and does not include the money of
money creating sector like government. Here public means individuals and
firms and does not include the money of banking sector and government.
Money supply is a stock concept as it is concerned with particular point of time.
MEASUREMENT OF MONEY SUPPLY
M1 = C + DD + OD
Here , C means currency , DD means demand deposits with banks and OD
means other deposits with RBI.
CURRENCY – it consist of paper notes and coins held by the public. Any
currency held with the government and banks will not be included here.
Currency money is also known as fiat money or legal tender money. Fiat
money or legal tender money means money is accepted for the payments of all
debts and everyone is bound to accept it.
DEMAND DEPOSITS –
It refers to demand deposits of the public with the commercial banks. It refers to
those deposits which can be encashed at anytime by issuing cheque.
IT must be noted that only net demand deposits are included i.e money
deposited by public in banks which can be withdrawn at anytime are included
in it but inter-bank deposits are not included in it. Inter-bank deposits means
deposits held by banks on behalf of other banks.
While calculating money supply, only net demand deposits are taken into
account.
It should also be noted that term or fixed deposits are also not included in the
definition of demand deposits.
OTHER DEPOSITS –
It includes deposits held by the RBI on behalf of foreign banks and foreign
government , world bank and international monetary fund.
It must be noted that M1 is also known as transaction money

EFFECT OF DEMONETISATION ON MONEY SUPPLY –
Money supply is calculated as C + DD + OD
So old currency deposited by the public will reduce the currency held by the
public but the same money will be deposited with the bank so, DD will be
increased by same amount. So there will be no effect on money supply.
However , if some amount is not re enter into the system i.e black money so
money supply will be reduced by same amount.
OTHER MEASUREMENTS OF MONEY SUPPLY ARE:
M1 = Currency + Demand deposits + other deposits
M2 = M1 + savings deposits with post office saving bank
M3 = M1 + Net time deposits with banks
M4 = M3 + total deposits with post office saving bank excluding National savings
certificates.
IMPORTANT FACTS;
1.) all these measurements of money supply shows different level of liquidity.
Here M1 is the most liquid and M4 is the least liquid.
2.) M3 is widely used for measurement of money supply and called as aggregate
monetary resources of the society.
3.) M1 and M2 are called narrow money supply concepts and M3 and M4 are
called broad money supply concepts.
Q.1) M1 includes which demand deposits?

Ans. M1 includes only net demand deposits and not the gross demand
deposits. It means inter-bank deposits are not included while calculating the
money supply.
Q.2) money supply does not include money held by govt and banks, WHY?
Ans. Because there money do not come into actual circulation in the country.
Q.3) WHY M1 is also known as transaction money?
ANS. Because it can be directly used for making transactions
Q.4) what is legal tender money or fiat money?
ANS. Money which can be legally used to make payments of debts or other
obligations. Fiat money means which is under the order of govt. to act as
money.
Q.5) what is high powered money?
(VERY VERY IMPORTANT)
ANS. High powered money is money produced by the

RBI and the govt. it consist of two things
Currency held by the public and cash reserves of

banks.
CHAPTER 6TH BANKING
COMMERCIAL BANK is an institution which performs the function of
accepting deposits, granting loans and making investments with the aim of
earning profits.
Central bank is an apex body that controls , operates , regulates and directs the
entire banking and monetary system of the country. Central bank of INDIA is
RBI ( RESERVE BANK OF INDIA). RBI was established on 1 st April1935
under the RBI act 1934.
DEPOSITS ACCEPTED BY COMMERCIAL BANKS
Or PRIMARY FUNCTION OF COMMERCIAL BANKS –
1.) SAVINGS ACCOUNT-
It refers to those deposits which are maintained by households. The depositors are
given cheque facility to withdraw money from their account but some
restrictions are imposed on number and amount of withdrawals. They carry a
rate of interest which is less than rate on FD.
2.) CURRENT ACCOUNT/ DEMAND DEPOSITS –
It refers to those deposits which are repayable by banks on demand. Such

deposits are generally maintained by businessmen with the intention of
making regular transactions. They can be drawn upon a cheque without any
restriction.
Banks do not pay any interest on this account , rather banks impose a service
charge for running these accounts.
3.) FIXED DEPOSITS/TIME DEPOSITS –

It refer to those deposits in which the amount is deposited with the bank for a
fixed period of time. Such deposits do not enjoy cheque facility but carries a
high rate of interest.
IMPORTANT CONCEPTS –
1.) CRR (cash reserve ratio) – it refers to that percentage of total deposits which is
required to be maintained by the commercial banks with the RBI . it is
mandatory to be maintained in cash only.
2.) SLR (statutory liquidity ratio) - it refers to that percentage of total deposits
which is required to be maintained by the commercial banks with themselves . it
can be maintained in cash as well as in other liquid assets.
3.) REPO RATE (REPURCHASE - RATE) – repo rate is that rate of interest at which
RBI lends money to commercial banks to meet their short term requirements.
4.) BANK RATE ( DISCOUNT – RATE) -– bank rate is that rate of interest at
which RBI lends money to commercial banks to meet their long term
requirements
5.) REVERSE REPO RATE – it refers to that rate of interest at which commercial
banks park their surplus money with RBI. It is also called as reverse repurchase
rate.
FUNCTIONS OF CENTRAL BANK (RBI)-

1.) CURRENCY AUTHORITY FUNCTION (BANK OF ISSUE)-
Central bank has the sole authority for issue of currency in the country. In
INDIA , RBI has the sole monopoly power to issue currency notes of Rs.2 and
above. All the currency issued by central bank is its monetary liability i.e RBI
is under obligation to back the currency with the assets of equal value.
Advantage of sole monopoly power to issue currency is that
(a)it leads to uniformity in note circulation ,
(b)RBI can control the money supply in economy and
(c)it ensures public faith in the currency system.
(d) it helps in stabilization of value of currency.
2.) BANKER TO THE GOVERNMENT –
RBI acts as banker , agent and a financial advisor to the central government
and state governments.
• As a banker , RBI carries out all the banking business of the government
and RBI maintains a current account for keeping their cash balances.
• As an agent , RBI also has the responsibility of managing the public
debt.
• As a financial advisor , RBI advises the government from time to time on
various economic and monetary matters.
3.) CONTROLLER OF MONEY SUPPLY –
RBI controls the money supply and credit in best interest of the economy.
During inflation( which occurs due to high level of demand) , RBI restricts the
flow of credit in the economy by using various instruments.
Where as during deflation ( which occurs due to low level of demand) , RBI
encourages the flow of credit in the economy by using some instruments.
4.) CUSTODIAN OF FOREIGN EXCHANGE –

RBI acts as the custodian of country’s stock of gold and foreign exchange .
with this function , RBI can easily take a reasonable control on foreign
exchange rate and can maintain stability in economy. It must be noted that all
the foreign exchange transactions must be routed through RBI.
5.) BANKER’S BANK AND SUPERVISOR –
There are number of commercial banks in a country. So there must be some

agency to regulate and supervise their proper functioning. Being the apex bank,
RBI acts as banker to the commercial banks.
As a supervisor , RBI regulates and controls the commercial banks related to

licensing , branch expansion , liquidity of assets , management , merging ,
winding up , etc.
5(A) CUSTODIAN OF CASH RESERVES –
Commercial banks are required to maintain a certain proportion of their

deposits with RBI with the name of CRR ( cash reserve ratio ). In this way , RBI
acts as custodian of cash reserves.
5 (B) LENDER OF LAST RESORT –
when commercial banks fail to meet their financial requirements from any
source then they can approach the central bank to give loans and advances as
lender of last resort . RBI provide these loans and advances against some
securities.
5 (C) CLEARING HOUSE –
RBI holds cash reserves of all commercial banks , it becomes easier and
convenient for RBI to act as clearing house . All commercial banks have their
account with RBI, so, RBI can easily settle their claims against each other by
making debit and credit entries in their CRR account.
MONEY CREATION / CREDIT CREATION
OR HOW COMMERCIAL BANKS CREATE CREDIT IN
THE ECONOMY , EXPLAIN WITH THE HELP OF
MONEY MULTIPLIER
Through the process of money creation , commercial banks are able to create
credit which is in far excess of initial deposits.
This process can be better understood with the help of following assumptions;
1.) the entire commercial banking system is one unit and known as banks
2.) all the transactions are routed through banks means all the payments are
made through cheque.
3.) banks cannot use the whole money of deposit for lending. It is legally
compulsory for the banks to keep a certain amount of their deposits as reserves
known as LRR (legal reserve ratio) / reserve deposit ratio / reserve ratio.
LET US NOW UNDERSTAND THE PROCESS OF CREDIT CREATION

WITH A NUMERICAL EXAMPLE –
• Suppose initial deposits in bank are RS. 1000 and LRR is 20% . it
means banks are required to keep Rs. 200 as reserves and free to lend
remaining 800 Rs. banks never lend money in cash, rather bank opens
the account in the name of borrower and borrower is free to withdraw the
amount anytime .
• Suppose borrower withdraw the entire amount of Rs. 800 for making
payments. As all the transactions are routed through banks , so, the
money spent by the borrower comes back into the bank in the form of
deposits by the person who received such amount.
• With new deposits of Rs. 800 , banks keep 20% as cash reserves and lend
the remaining balance of 640Rs. borrower uses this amount for making
payments which again comes back into the bank in the form of deposits
by the person who received such amount.
• The deposits keeps on increasing in every round by 80% and at the same
time cash reserves of bank are also increasing. Deposit creation comes to
end when total of reserves become equal to initial deposits.
Deposits LRR LOANS
Initial deposits 1000 200 800
Round I 800 160 640
Round II 640 128 512
- - - -
- - - -
- - - -
Total 5000 1000 4000
MONEY MULTIPLIER –
Money multiplier or deposit multiplier measures the amount of money that the
banks are able to create in the form of deposits with every unit of money kept as
reserves.
MONEY MULTIPLIER = 1
%LRR
So it will be 1/20% = 5 times.
It means with every unit of money kept as reserves, banks are able to create 5 units of
money.
Commercial banks lend money mainly to investors. The rise in investment leads to rise in
national income with the multiplier effect.
HOW CENTRAL BANK CONTROL CREDIT IN
THE ECONOMY BY USING QUANTITATIVE AND
QUALITATIVE INSTRUMENTS ----(V. IMP.)
QUANTITATIVE INSTRUMENTS QUALITATIVE INSTRUMENTS
1.)BANK RATE/REPO RATE 1.)MARGIN REQUIREMNT
2.)OPEN MARKET OPERATIONS 2.)MORAL SUASION
3.)CRR AND SLR 3.)SELECTIVE CREDIT CONTROL

4.)REVERSE REPO RATE (CREDIT -RATIONING)
QUANTITATIVE INSTRUMENTS OF CREDIT CONTROL BY RBI
1.) BANK RATE/REPO RATE –

Bank rate refers to that rate of interest at which RBI lends money to
commercial banks for meeting their long term requirements whereas , repo rate
refers to that rate of interest at which RBI lends money to commercial banks for
meeting their short term requirements.
Due to increase in repo rate and bank rate , the cost of borrowings of the
commercial banks will increase. It forces the commercial banks to increase the
market rate of interest and thus it will reduce the lending capacity of
commercial banks. This policy is favorable during inflation.
Due to fall in repo rate and bank rate , the cost of borrowings of the commercial
banks will decrease. commercial banks thus reduces the market rate of interest
and thus it will rise the lending capacity of commercial banks. This policy is
favorable during deflation.
2.) OPEN MARKET OPERATIONS –

Open market operations refers to buying and selling of government securities
by the RBI in the open market.
Sale of securities by the RBI to the commercial banks will reduce the cash
reserves of commercial banks and thus banks will provide less credit in the
economy and this policy is adopted during inflation.
Purchase of securities by RBI from commercial banks will increase the cash
balance of commercial banks and thus banks can provide more credit in the
economy and this policy is basically adopted during deflation .
3.) CRR and SLR –

CRR refers to that percentage of total deposits that the commercial banks are
required to maintain with RBI where as SLR refers to that percentage of total
deposits which the commercial banks are required to maintain with themselves.
During inflation , RBI will increase the percentage of CRR and SLR. With this
increase in CRR and SLR , banks will be able to provide less credit in the
economy and thus flow of money will reduce in the economy.
During deflation , RBI will reduce the percentage of CRR and SLR , with this
effect commercial banks will be able to provide more credit in the economy and
thus flow of money supply will increase.
4.) REVERSE REPO RATE –

It refers to that rate of interest at which commercial banks can park their
surplus money with RBI. RBI uses this tool during excess money supply in the
economy or during inflation.
In this , RBI will increase the percentage of reverse repo rate , so that commercial
banks will park more money to RBI for such attractive rate of interest and with
this, commercial banks will be able to provide less credit in the economy.
QUALITATIVE INSTRUMENTS OF CREDIT CONTROL BY RBI
1.) MARGIN REQUIREMNT –
Margin refers to the difference between amount of loan and value of security
offered against loan. Suppose if RBI fixed the % of margin as 40 % then
commercial banks can provide only 60% of loan of the value of security.
During inflation , RBI will increase the percentage of margin so that

commercial banks can provide less credit in the economy and thus flow of
money supply will reduce
Whereas during deflation, RBI will reduce the percentage of margin so that
banks can provide more credit in the economy and flow of money supply will
increase.
Margin is necessary because if banks will provide loan up to full value of

security then bank will suffer loss if value of security will fall.
2.) MORAL SUASION-
It is a combination of persuasion and pressure that RBI applies on commercial

banks in order to get them act in a manner in line with the policy of RBI. Moral
suasion is exercised through discussions , letters , speeches and hints to banks.
RBI frequently announces its policy position and request the banks to
implement these policies.
During inflation, RBI advises the commercial banks to discourage the flow of
credit in the economy whereas during deflation, RBI advises the commercial
banks to advance more credit in the economy.
3.) SELECTIVE CREDIT CONTROL (CREDIT RATIONING) –
Under selective credit control , RBI gives direction to commercial banks to give
or not to give credit to particular sectors. This method can be applied in positive
as well as negative manner.
During inflation, RBI introduces the policy of credit rationing in order to
prevent the flow of credit in the economy whereas, during deflation, RBI
withdraws the policy of credit rationing in order to encourage the flow of credit
in the economy.
QUANTITATIVE VS QUALITATIVE
 Quantitative instruments are general in nature and affect all the sectors where as qualitative
instruments are specific in nature and affect only particular sectors.
 Quantitative instruments are designed to regulate the volume of credit and qualitative instruments
are designed to regulate the direction of credit.
 Quantitative instruments are also known as traditional methods where as qualitative instruments
are known as selective methods.
IMPORTANT QUESTIONS OF THIS CHAPTER.
Q.1) calculate the value of money multiplier and total deposits, if initial deposits are 500
and LRR is 10%
Ans. Money multiplier 10 times and total deposits 5000
Q.2) total deposits created by commercial banks is 12000 and LRR is 25%. Calculate initial
deposits
Ans. 3000
Q.3) calculate LRR is initial deposit is 200 and total deposit is 1600.
Ans. 12.5%
Q.4) whether the following changes by RBI will increase the money supply or reduce the
money supply -(a) rise in repo rate (b) purchase of securities in the open market by RBI
(c) RBI increases the margin from 20% to 30% (d) RBI reduces the CRR
Ans. (a) decrease in money supply (b) rise in money supply (c) decrease the money supply
(d) rise in money supply.
Q.5) GOVT. of INDIA has recently launched jan dhan yojna aimed at every household in the
country to have atleast one bank account. Explain how it going to affect the national income
of economy.
Ans. credit creation (explain) and national income will increase because more bank
accounts lead to more deposits which leads to rise in lending capacity of banks. Bank
mainly lend money to investors so there will be rise in investment and thus national
income will increase.
Q.6) commercial banks do not contribute in the quantum of money supply in economy
because they do not have power of issuing currency? True or false?
Ans. False because commercial banks can influence the money supply through credit
creation.
Q.7) CRR and SLR are fixed by commercial banks themselves?
Ans. No they are fixed by RBI only.
Q.8) commercial banks can offer loan equal to the amount of deposits received? True or
false?
Ans. False , Commercial banks can offer loan which is in far excess of initial deposits with
the help of credit creation.
CH – 7TH AGGREGATE DEMAND AND RELATED CONCEPTS
AGGREGATE DEMAND refers to total value of final goods and services which all
the sectors of an economy are planning to buy at a given level of income during
an accounting year. It must be noted that AD is the planned expenditure and
not the actual expenditure. AD is a flow concept as it is measured for the period
of an accounting year.
COMPONENTS OF AD –
1.) Households consumption expenditure (C) –

It refers to total expenditure incurred by households on purchase of goods and
services during an year. Consumption is directly related with disposable income
i.e higher the disposable income, higher will be the consumption. Disposable
income means income available to households for spending after payment of all
taxes to government.
2.) Investment expenditure (I) –

It refers to the total expenditure incurred by all private firms on capital goods. It
is assumed that investment is autonomous (constant) and not influenced by
change in Income.
3.) Government expenditure (G) –

It refers to the total expenditure incurred by government on consumer goods and
capital goods to satisfy the common needs of the Economy. It means govt.
incur consumption exp. as well as investment exp.
4.) Net exports (NX) –
It refers to the difference between exports and imports of a country. Exports refer
to demand of domestically produced goods by abroad and Imports refer to
demand of foreign produced goods by domestic residents.
AD = C + I in two sector economy.
AD = C + I + G in three sector economy.
AD = C + I + G + NX in four sector economy.
AD IN TWO SECTOR MODEL –

Y C I AD (C+I)
0 40(c) 40 80
100 120 40 160
200 200 40 240
300 280 40 320
400 360 40 400
500 440 40 480
600 520 40 560

In the above schedule, consumption at zero level of income is autonomous
consumption means minimum consumption denoted by c.
Y axis Y
AD(C+I)
C, I C
And
AD M I
0 INCOME/OUTPUT x axis
IMPORTANT POINTS OF AD in two sector model –

1.) AD is the sum total of consumption and investment in two sector economy.
2.) there is always some minimum level of consumption even at zero level of
income and this is called autonomous consumption. It exists because survival
needs consumption and this consumption can be fulfilled from previous
savings means dis-savings.
3.) Consumption curve is always upward sloping as with increase in income ,

consumption also increases .
4.) Investment is autonomous and its curve will be horizontal straight line
parallel to x axis because investment is constant in the short run.
5.) AD curve will be upward sloping as with increase in income, aggregate

demand will also increase.
6.) AD curve will always start from Y axis as it includes consumption which
can never be zero.
AGGREGATE SUPPLY –
AGGREGATE SUPPLY refers to money value of final goods and services that
all the producers are willing to supply in the economy during an accounting
year.
AS = C + S
Y=C+S
Y C S AS( C + S) Y(AS)
0 40 - 40 0
100 120 - 20 100
200 200 0 200
300 280 20 300 AS
400 360 40 400
500 440 60 500 45®
600 520 80 600 O INCOME/OUTPUT
QUES . WHY AGGREGATE SUPPLY IS EQUAL TO INCOME? OR WHY AS = Y?

OR WHY OUTPUT IS ALWAYS EQUAL TO INCOME?
ANS . AS refers to total Value of goods and services in an economy in a given
period of time. The money value of total output is distributed to factors of
production in the form of rent , wages , salaries , interest and profits. The sum
total of all these factor incomes will be known as domestic income or national
income. So we can say that aggregate supply is always equal to income
generated in economy.
QUES . WHY AS AND Y CURVE IS ALWAYS 45 DEGREE STRAIGHT LINE?

ANS. In the given diagram, income is represented on X axis and consumption
and savings are represented on Y axis. AS curve is always 45 degree straight
line from the point of origin because the scale on both the axes are equal.
As we know that AS = C+ S , so , it is clear that vertical distance on curve is
exactly equals to horizontal distance . and thus AS curve is always 45 degree
straight line means line of reference.
AS (Y)
AS
45®
Income/OUTPUT
CONSUMPTION - FUNCTION;
CONSUMPTION FUNCTION refers to functional relationship between
consumption and national income.
C = f (Y)
It is always a psychological concept as it is always based on human preferences,

taste and habits.
Y C
0 40(c) savings
100 120 Dissavings
200 200 break even point
300 280
400 360 savings Dis-savings
500 440
600 520
IMPORTANT POINTS OF CONSUMPTION FUNCTION;

1.) Consumption curve will always start from Y axis. It implies there is
autonomous consumption even at zero level of income.
2.) Consumption curve is always upward sloping as with increase in income ,

consumption also increases but proportionate increase in consumption is
always less than proportionate increase in income.
3.) when income is less than consumption then gap is covered by dis-
savings(utilization of previous savings)(AREA OCB)
4.) when income and consumption both are equal then savings will be zero and
this is called break even point i.e point B
5.) when income is more than consumption then excess income leads to savings.
J.M KEYNES PSYCHOLOGICAL LAW OF CONSUMPTION –

Consumption function is based on Keynes psychological law of consumption
which states that –
1.) there is always some minimum level of consumption even at zero level of
income and this is called autonomous consumption.
2.) as income increases, consumption also increases.
3.) income rises at a greater proportion as compared to increase in consumption
APC (AVERAGE PROPENSITY TO CONSUME)

APC refers to ratio of consumption to the corresponding level of income.
APC = Consumption (C)
Income (Y)
Y C APC Y xis C
0 40 -
100 120 1.2 APC =C/Y
200 200 1 C
300 280 0.93
400 360 0.90 O

x axis
Income/output
IMPORTANT POINTS OF APC

1.) APC will be more than 1 when consumption is more than income. This is
called Dis-savings which occurs before the break-even point.
2.) APC will be 1 when income and consumption are equal. This is called break-
even point.
3.) APC will be less than 1 when consumption is less than income. This is called
savings which occurs after the break-even point.
4.) APC can never be zero or negative as consumption can never be zero or
negative. Because even at zero level of Income , there will be some autonomous
consumption.
5.) APC continuously falls because with increase in Income, the proportion
spent on consumption keeps on decreasing. This is called paradox of thrift.
Y axis
C APC<1 C
M APC>1 APC=1
O X axis
Income/output
NOTE; both the diagrams of APC are mandatory to draw in board exam
MARGINAL PROPENSITY TO CONSUME (MPC)
MPC refers to ratio of change in consumption to the corresponding change in
level of income.
MPC = ∆C
∆Y
Y C MPC
0 40 - C
100 120 0.8 ∆C MPC =∆C/∆Y
200 200 0.8 C
300 280 0.8 ∆Y
400 360 0.8 0 INCOME/output
MPC is called as the slope of consumption curve and as MPC is taken as

constant , thats why, consumption curve is linear and straight line.
IMPORTANT POINTS OF MPC –
1.) MPC varies between zero and one –

a) If entire additional income is saved and there is no change in consumption ,
then , MPC will be zero.
b) If entire additional income is consumed and there is no change in savings,

then , MPC will be one.
∆Y = 100 , ∆C = 0 then MPC will be zero
∆Y = 100 , ∆C = 100 then MPC will be one

2.) MPC of poor is always more than MPC of RICH. It happens because poor
people spend a larger proportion of their increased income on consumption as
most of their needs remain unsatisfied. Rich people spend a smaller proportion
of their increased income on consumption as they are already enjoy a high
standard of living. It can be concluded that MPC of developing countries is
always more than MPC of developed countries.
BASIS APC MPC
Meaning it is the ratio of consumption it is the ratio of change

To the corresponding level of in consumption to the
Income. Corresponding change
In income.
VALUE APC can be more than one MPC cannot be more

When consumption is than one as change in
More than income. Consumption cannot
Be more than change
In Income.
FORMULA C/Y ∆C/∆Y
SAVINGS FUNCTION –
Savings function refers to functional relationship between savings and
national income.
S = f(Y)
Y C S y axis
0 40 -40
100 120 -20 savings
200 200 0 Savings s
300 280 20 break even
400 360 40 0 R Income xaxis
500 440 60 -C Dis-savings
600 520 80 y’ axis
IMPORTANT POINTS OF SAVINGS FUNCTION –

1.) Savings curve will always upward sloping as with increase in income ,
savings also increases.
2.) Savings curve will always start from negative Y axis(OA) because there
will always be some autonomous consumption.
3.) Savings will be negative as when income is less than consumption. This is
called Dis-savings . it occurs before the break-even point. area OAR
4.) Savings will be zero when income exactly equals to consumption . this is
called break-even point. POINT R
5.) Savings will be positive when income is more than consumption. This occurs
after the break-even point. It is called savings.
APS ( AVERAGE PROPENSITY TO SAVE)

APS refers to ratio of savings to the corresponding level of income.
APS = S
Y
Y C S APS Y
0 40 -40 -
100 120 -20 -0.2 S S
200 200 0 0 APS =S/Y
300 280 20 0.067 INCOME/output
400 360 40 0.10 Y’
Y axis
S S
APS = +ve
O R x axis
-c APS = -ve APS = 0
A INCOME/OUTPUT
NOTE; both the diagrams of APS are mandatory to draw in board exam
IMPORTANT POINTS OF APS –

1.) APS can never be one or more than one as income and savings can never be
equal as consumption can never be zero or negative.
2.) APS can be zero when savings are zero. It occurs during break-even point
when income and consumption are equal.
3.) APS can be negative when savings are negative. It occurs when savings are
negative i.e dis-savings when consumption is more than income.
4.) APS can be less than one when income is more than consumption when
some part of their income is saved. APS is positive
5.)APS rises with rise in income. It happens because with rise in income the
proportion of income which is saved rises continuously. This is also called
paradox of thrift.
MPS (MARGINAL PROPENSITY TO SAVE)

MPS refers to ratio of change in savings to the corresponding change in
income.
MPS = ∆S
∆Y
Y C S MPS S
0 40 -40 -
100 120 -20 0.2 S ∆S MPS =∆S/∆Y
200 200 0 0.2 ∆Y
300 280 20 0.2 INCOME/output
IMPORTANT POINTS OF MPS –
MPS VARIES BETWEEN ZERO AND ONE –

a) If entire additional income is consumed then it means change in savings
will be zero and thus MPS will be zero
∆Y=100 , ∆C =100 , ∆S =0, so MPS will be zero
b) If entire additional income is saved then it means MPS will be one
∆Y = 100 , ∆S = 100 , MPS will be one.
It must be noted that MPS is the slope of savings curve. As MPS is taken as
constant, that’s why, savings curve is linear and straight line.
BASIS APS MPS
MEANING it refers to ratio of it refers to ratio of

Savings to the corresponding change in savings
Level of income to the corresponding
Change in income.
VALUE APS cannot be one as income MPS can be one when

And savings can never be entire additional
equal income is saved.
FORMULA S/Y ∆S/∆Y
DERIVATION-
1.) Y = C + S
Divide both the sides by Y
Y/Y = C/Y + S/Y
1 = APC + APS
2.) Y = C + S
We can also write,
∆Y = ∆C + ∆S
Divide both the sides by ∆Y
∆Y÷∆Y = ∆C÷∆Y + ∆S÷∆Y
1 = MPC + MPS
HOW SAVINGS CURVE IS DERIVED FROM CONSUMPTION CURVE?
HOW CONSUMPTION CURVE IS DERIVED FROM SAVINGS CURVE?
HOW SAVINGS AND CONSUMPTION CURVES ARE COMPLEMENTARY?
ANS.
IN THE GIVEN SCHEDULE AND DIAGRAM , consumption curve is upward
sloping and 45 degree line represents the income curve.
By these income and consumption curves , we can derive the savings curve and
vice versa is also possible –
 At zero level of income , there will be some autonomous consumption and

due to this savings curve will start from negative Y axis . Here negative
savings will be equal to the amount of autonomous consumption.
 Before the break-even point , consumption is more than income and thus
savings will be negative i.e dis savings i.e area OSK
 At the break-even point , income and consumption are equal and thus
savings will be zero i.e POINT K
 After the break-even point , income is more than consumption , so, there
will be positive savings.
By joining these points S and K and extending it further we can derive a

savings curve from consumption curve.
Y C S
0 40 -40(-c) DIS-SAVINGS
100 120 -20
200 200 0 Break-even point
300 280 20
400 360 40 Savings
500 440 60
600 520 80
(Figure on next page)
INVESTMENT FUNCTION –
Investment refers to expenditure incurred on creation of new capital assets.

Investment is of two types –
A) INDUCED INVESTMENT
B) AUTONOMOUS INVESTMENT
INDUCED INVESTMENT –
It refers to the investment which depends on the profit expectations and is

directly influenced with income level. It is income elastic means it increases
with rise in income or vice-versa.
Its curve is upward sloping because with increase in income, induced
investment also increases.
INDUCED INVESTMENT
INVEST
-MENT
O X axis
INCOME
AUTONOMOUS INVESTMENT –
It refers to the investment which is not affected by change in level of income
and it is not influenced by profit motive. It is income inelastic as it is not
influenced by change in level of income.
Its curve will be horizontal straight line parallel to X axis as it remain same at
every level of income. These investments are generally made by govt. on
infrastructural activities.
Y axis
Autonomous investment
Investment
x axis
Income
TYPES OF CONSUMPTION –
AUTONOMOUS CONSUMPTION and INDUCED CONSUMPTION
BASIS INDUCED CONSUMPTION AUTONOMOUS CONSUMPTION

MEANING it refers to that consumption it refers to the minimum
which is directly influenced consumption which exists
By income level i.e it rises even at zero level of income.
With rise in income.
SYMBOL MPC(Y) c
Nature it is affected by change in It exists even when income

Income. is zero as survival needs
Consumption.
IMPORTANT MEANINGS –
1.) EX-ANTE SAVINGS –

It refers to the amount of savings which the households plan to save at different
levels of income. It is also known as planned savings, desired savings, intended
savings and voluntary savings.
2.) EX-POST SAVINGS –
it refers to actual savings in an economy during a year. It is sum total of
planned and unplanned savings
3.) EX-ANTE INVESTMENT –
It refers to the amount of investment which firms plan to invest at different
levels of income in the economy. It is also known as intended investment ,
planned investment , desired investment and voluntary investment.
4.) EX-POST INVESTMENT –
It refers to the actual investment in an economy during a year. It is the sum
total of planned and unplanned investments.
5.) FULL EMPLOYMENT –
It refers to a situation when all those people who are able to work and willing to
work are getting work at the existing wage rate.
6.) FRICTIONAL UNEMPLOYMENT –
it refers to temporary unemployment which exists during the time period when
workers leave one job and join some other.
7.) STRUCTURAL UNEMPLOYMENT –
It refers to the unemployment in which people remain unemployed due to a
mismatch between unemployed workers and demand for specific type of
workers.
8.) VOLUNTARY UNEMPLOYMENT –
It refers to the unemployment when a person is unemployed because he is not
willing to work at the existing wage rate.
9.) INVOLUNTARY UNEMPLOYMENT –
it refers to the unemployment when all those people who are willing to work and
able to work but do not get work.
IMPORTANT NOTE:
Equilibrium occurs only when ex-ante(planned) savings = ex-ante(planned
investment).
NOTE ABOUT FULLEMPLOYMENT:

It must be noted that in macro- economics, full employment never means zero
unemployment because frictional and structural unemployment always exists.
FORMULAE –
AD = C + I
AS = C + S
Y=C+S
APC = C÷Y
MPC = ∆C÷∆Y
APS = S÷Y
MPS =∆S÷∆Y
APC + APS = 1
MPC + MPS = 1
C = c + MPC(Y)
S = -c + MPS(Y)
AT BREAK EVEN LEVEL, Y = C or SAVINGS = 0(ZERO)
Assume a percentage, say 60%
60% of income is consumed = APC 0.6

60% of income is saved = APS 0.6
60% of additional income is consumed = MPC 0.6
60% of additional income is saved = MPS 0.6
NUMERICAL QUESTIONS –
Q.1)
Y 0 50 100 150
C 15 50 85 120
MPS - - - -
APC - - - -
Q.2)
Y 0 100 200 300
MPC - 0.75 0.75 0.75
SAVINGS -30 - - -
APC - - - -
Q.3)
Y 0 50 100 150 200
SAVINGS -20 -10 0 30 60
MPC - - - - -
APC - - - - -
Q.4)
Y 0 100 200 - -
C 80 140 - 240 260
MPS - 0.4 - - 0.8
APS - - 0 0.20 0.35
Q.5)
Y 0 50 100 150 200
SAVINGS -40 -20 0 30 50
APC - - - 0.8 -
MPC - - 0.6 - -
Q.6)
Calculate savings at income level of 2000 , if autonomous consumption is 150 and
40% of additional income is consumed.
Q.7) the savings function is given as -120 + 0.4(y). determine (i) consumption
function (ii) consumption at income level of 600 . (iii) break even level of income.
Q.8) consumption function in an economy is given as C = 200+0.8(y). determine the

value of MPC and MPS . calculate autonomous consumption . derive the savings
function. Calculate consumption at income level of 3000 and 5000. Determine break
even level of income.
Q.9) MPC is four times of MPS. Consumption at zero level of income is 70. Derive the
consumption function.
Q.10) the consumption curve makes an intercept of 60 Rs. on y axis. If MPC and MPS
is expressed as 1:3 then derive consumption and savings function. Also determine
the level of income when savings become zero.
Q.11) the break-even point for an economy occurs at income level of 500. If MPC is
0.6. determine autonomous consumption. Savings function and calculate level of
income when savings are 600.
Q.12) consumption function in an economy is 40 + 0.7 Y. calculate the savings at
income level of 2200.
Q.13) savings curve makes an intercept of 40 on negative Y axis. If consumer spends

60% of additional income then determine savings function , consumption function
and break even level of income.
Q.14) consumption function is given as C = 30 + 0.4(Y). determine savings at zero

level of income , MPC , MPS , break-even level of income and savings function.
THEORY QUESTIONS
Q.1) which of the following have the value of more than 1 and less than zero means
negative (a) APC (b) APS (c) MPC (d) MPS
Ans. (a) APC can be more than 1 at dis-savings but can never be negative as consumption
can never be negative
(b) APS can be negative at dis-savings but can never be more than 1 because consumption
can never be zero or negative, so savings cannot be equal to or cannot be more than income
(c) value of MPC varies from zero to one (d) value of MPS varies from zero to one.
Q.2) explain ex-ante consumption, autonomous consumption and induced consumption.

Ans. Ex-ante consumption means the consumption expenditure which is planned by the
households during a year.
Autonomous consumption is the consumption which exists even at zero level of income. It
is denoted by c
Induced consumption is the consumption which rises with rise in income. It is denoted by
MPC(Y)
Q.3)with increase in national income, both APS and APC falls?

Ans. False, with rise in income proportion of income spent declines and proportion of
income saved rises.
Q.4) slope of consumption curve is ________ Ans. MPC
CH – 8TH INCOME DETERMINATION AND MULTIPLIER

ACCORDING TO J.M KEYNES
AD = AS (EQU.)
C+I = C+S
SO, I = S or S = I (EQU.)
Assumptions of these two approaches are:
1.) The determination of equilibrium is to be studied in the context of two
sector model (households and firms) and there is no involvement of
government and foreign sector.
2.) Investment is taken as autonomous i.e constant,
3.) Price level is assumed to be constant.
4.) Determination of equilibrium is taken in short run.
AD AND AS APPROACH (OR) PLANNED SPENDINGS

AND PLANNED OUTPUT APPROACH (OR) EFFECTIVE
DEMAND APPROACH (OR) C+I APPROACH
ACCORDING to J.M KEYNES the equilibrium level of income or output is
determined when aggregate demand exactly equals to aggregate supply.
AGGREGATE DEMAND refers to total value of final goods and services which
all the sectors of an economy are planning to buy in an economy during an
accounting year.
AGGREGATE SUPPLY refers to money value of final goods and services which
all the producers in the economy are planning to supply during an accounting
year.
LET US now understand the concept of income determination at equilibrium

level , with the help of following schedule and diagram.
Y C I S AD AS REMARKS
0 40 40 -40 80 0
100 120 40 -20 160 100 AD > AS
200 200 40 0 240 200
300 280 40 20 320 300
400 360 40 40 400 400 AD = AS
500 440 40 60 480 500
600 520 40 80 560 600 AD< AS
Y axis AS
AD<AS AD
AD and AS
AD>AS
0 Y X axis
Income/output/employment
AD curve shows the desired level of expenditure by consumers and firms

whereas, 45 degree AS curve represents the desired level of output in the
economy.
• E is the equilibrium point because here desired spending exactly equals to
desired output.
• OY is the equilibrium level of income or output.(400 Rs.)
• It is a situation of effective demand.
WHEN AD IS MORE THAN AS –

When planned spending is more than planned output , it means that
consumers would be buying more goods than the firms are willing to produce.
As a result, price level in the economy will increase and inventory would fall
below the desired level.
To bring the inventory back to the desired level, firm will increase the level of
output and thus employment will generate in the economy. This will continue
till we reach the point of equilibrium
WHEN AD IS LESS THAN AS –

When planned spending is less than planned output, it means that consumers
would be buying fewer goods than the firms are willing to produce. As a result,
price level will fall in the economy and inventory would rise above the desired
level.
To clear the unwanted inventory, firm will reduce the further level of output and
thus unemployment will create. This will continue till we reach the point of
equilibrium.
SAVINGS and INVESTMENT APPROACH (OR) EX-ANTE

SAVINGS and EX-ANTE INVESTMENT APPROACH (OR)
PLANNED SAVINGS and PLANNED INVESTMENT
APPROACH.
According to this approach, the equilibrium level of income is determined at a
level , when planned savings exactly equals to planned investment.
Let us understand the concept with the help of following schedule and diagram.
Y C I S AD AS
0 40 40 -40 80 0
100 120 40 -20 S<I 160 100
200 200 40 0 240 200
300 280 40 20 320 300
400 360 40 40 S =I 400 400
500 440 40 60 480 500
600 520 40 80 S>I 560 600

INVESTMENT curve is parallel to X axis because of its autonomous nature and
savings curve is upward sloping because when income rises then savings also
rises.
• ECONOMY is in equilibrium at point E where savings curve and

investment curve intersect each other.
• At point E , ex-ante savings exactly equals to ex-ante investments.
• OY is the equilibrium level of output (INCOME)
WHEN SAVINGS IS MORE THAN INVESTMENT –

If planned savings is more than planned investment then it means that
households are not consuming as much the firms are expected them to do so. As
a result , inventory rises above the desired level. To clear the unwanted
inventory firm will reduce the further output till we reach the point of
equilibrium.
WHEN SAVINGS IS LESS THAN INVESTMENT –

If planned savings are less than planned investments then it means that
households are consuming more as much the firms are expected them to do so.
As a result, inventory would fall below the desired level. To bring the inventory
back to the desired level, firm will increase the level of output till we reach the
point of equilibrium.
EQUILIBRIUM UNDER DIFFERENT EMPLOYMENT LEVEL
1.) FULL EMPLOYMENT EQUILIBRIUM –
It refers to a situation when aggregate demand exactly equals to aggregate

supply at full employment level. Full employment refers to a situation when all
those people who are able to work and willing to work are getting work.
2.) UNDER EMPLOYMENT EQUILIBRIUM –
It refers to a situation when aggregate demand is equal to aggregate supply

when the resources are not fully employed. It occurs before the full employment
level.
3.) OVER FULL EMPLOYMENT EQUILIBRIUM –
It refers to a situation when aggregate demand is equal to aggregate supply

beyond the full employment level. It occurs after the full employment level.
It must be noted that after the full employment level , aggregate supply or
output cannot be increased , so AD must be reduced by increasing the prices. So
it will create inflation.
INVESTMENT MULTIPLIER
INVESTMENT MULTIPLIER refers to the ratio of increase in national income
due to an increase in investment.
IT IS DENOTED BY “K”
K= ∆Y suppose investment rises by 4000 Rs. and income rises by
∆I 20,000 Rs. so investment multiplier will be 5 times.
DERIVATION –
AS = AD (EQUILIBRIUM LEVEL)
Y = C + I
We can also write….
∆Y = ∆C + ∆I
Divide both sides by ∆Y
∆Y = ∆C + ∆I
∆Y = ∆Y + ∆Y
1 = MPC + ∆I
∆Y
1 – MPC = ∆I
∆Y
RECIPROCAL….
1 = K
1 – MPC
(OR)
MPC + MPS = 1
SO, MPS = 1 – MPC
SO, K = 1
MPS
RELATION BETWEEN MPC AND MULTIPLIER

There always exists a direct or positive relation between MPC and investment
multiplier. It means higher will be the MPC, higher will be the multiplier or vice
versa.
When investment increases then it also increases the income of people. People
spend a part of increased income on consumption which depends on MPC.
In case of higher MPC , people will spend a large proportion of their increased
income on consumption , so multiplier will be more.
In case of low MPC , people will spend a less proportion of their increased income
on consumption , so multiplier will be less.
1.) Assume MPC is 0.2,
So multiplier will be
K = 1 = 1 = 1.25 TIMES
1 - MPC 1-0.2
2.) Assume , MPC = 0.8
So multiplier will be
K = 1 = 1 = 5 TIMES
1 - MPC 1-0.8
RELATION BETWEEN MPS AD MULTIPLIER
K = 1 = 1 = 10 TIMES
MPS 0.1
K = 1 = 1 = 1.25 TIMES
MPS 0.8
There exists an inverse relation between MPS and multiplier. As, higher savings
lead to lower investments and lower will be the value of multiplier.
Whereas , lower savings lead to higher investments and thus higher multiplier.
MINIMUM VALUE OF MULTIPLIER

Minimum value of MPC is zero. By which we can calculate the minimum value
of investment multiplier.
K = 1 = 1 = 1 TIME
1 - MPC 1-0
MINIMUM value of multiplier is one which indicates that total of increased

income is saved and there is no change in consumption. It means there will be
no further increase in income.
MAXIMUM VALUE OF MULTIPLIER

Maximum value of MPC is one. By which we can calculate the maximum value
of investment multiplier.
K = 1 = 1 = infinity
1 - MPC 1–1
Maximum value of multiplier is infinite which indicates that total of increased
income is consumed and there is no change in savings. Thus there will be
continuous increase in consumption and income.
WORKING OF MULTIPLIER (OR) EXPLAIN THE WORKING OF

INVESTMENT MULTIPLIER WITH TABLE AND DIAGRAM AND ALSO
EXPLAIN THE REVERSE OPERATION OF MUTIPLIER.
The working of multiplier is based on the fact that expenditure of one person is
the income of another person. When an additional investment is made then
income increases many times more than increase in investment.
LET US NOW UNDERSTAND the working of investment multiplier with the

help of numerical example.
• Suppose an additional investment of Rs. 100 is made to construct a

flyover which will generate an extra income of Rs. 100 in the first round.
• If MPC is assumed to be 0.9 then it means that 90% of additional income
will be consumed and remaining amount will be saved. It will ultimately
increase the income of other person by 90 Rs. in the second round.
• In the next round, again 90% of additional income will be consumed
(81 Rs.) and remaining amount will be saved.
• This multiplier process will go on and consumption expenditure in every
round keeps on increasing.
K= 1
1 – MPC
K = 1 = 10 times
1- 0.9
ROUNDS ∆I ∆Y ∆C ∆S
1ST 100 100 90 10
2ND 90 81 9
3RD 81 72.9 8.1
- - - -
- - - -
TOTAL 1000 900 100
Y axis AS
AD(C + I + ∆I)
∆I AD(C+I)
AD &
AS
INCOME X axis
REVERSE OPERATION OF MULTIPLIER –
MULTIPLIER works in forward direction as well as in backward direction. If
the investment decreases the multiplier operates in the backward direction. A
reduction in investment leads to reduction in income as well as reduction in
consumption.
Thus investment multiplier is a double edged weapon.
FORMULAE –
AD = C + I
AS = C + S
Y=C+S
APC = C÷Y
MPC = ∆C÷∆Y
APS = S÷Y
MPS =∆S÷∆Y
APC + APS = 1
MPC + MPS = 1
C = c + MPC(Y)
S = -c + MPS(Y)
AT BREAK EVEN LEVEL, Y = C or SAVINGS = 0(ZERO)
Assume a percentage, say 60%
60% of income is consumed = APC 0.6

60% of income is saved = APS 0.6
60% of additional income is consumed = MPC 0.6
60% of additional income is saved = MPS 0.6
EQUILIBRIUM LEVEL OF INCOME –
Y = c + MPC(Y) + I
(OR)
-c + MPS(Y) = I
(OR)
Y=C+I
K = 1
1 – MPC
K = 1
MPS
K = ∆Y
∆I
WHEN total of autonomous consumption and investment is given, then,
AD = A + MPC(Y)
HERE, A = c + I
NUMERICAL QUESTIONS ..
Q.1) in an economy, income generated is four times of increase in investment. Calculate MPC and MPS.
Hint k = 4 times.
Q.2) in an economy increase in investment leads to increase in national income which is four times
more than increase in investment. Calculate MPC and MPS.
Hint k = 5 times.
Q.3) HOW much additional income will be generated in the economy with an additional investment of
100 Rs. when half of additional income is spent on consumption.
Q.4) consumption function in an economy is given as C = 40 + 0.8Y . calculate the total increase in
income and increase in consumption if investment expenditure increases by 500 Rs.
Q.5) in an economy investment expenditure increases by 2000. Calculate the increase in income and
increase in consumption if ratio of MPC and MPS is 4:1
Q.6) in an economy with every increase in income 70% of increased income is spent on consumption.
Suppose a fresh investment of 300Rs. is made calculate the change in income and change in savings.
Q.7) in an economy, C = 50 + 0.8Y , if investments is Rs. 50 then calculate equilibrium level of income,
level of consumption at this level and savings at this level.
Q.8) savings function is given as S = -40 + 0.25Y , if planned investment is 100 Rs. then calculate
equilibrium level of income , level of consumption at this level and savings at this level.
Q.9) savings function is given as S = -50 + 0.4Y , the economy is in equilibrium at income level of 1500
Rs. calculate investment at equilibrium level , autonomous consumption and value of multiplier.
Q.10) C = 100 + 0.25Y , calculate savings if consumption expenditure is given as 500 Rs. at equilibrium
level of national income.
Q.11) C = 200 + 0.75Y. if planned investments is 500 then calculate equilibrium level of income.
Q.12) C = 600 + 0.9Y. calculate equilibrium level of income and consumption where investment is 500.
Q.13) S = -50 + 0.5Y and investment expenditure is 7000. Calculate equilibrium level of national
income and consumption at equilibrium level.
Q.14) C= 300 + 0.8Y. INVESTMENT IS 500. Calculate equilibrium level ofincome and consumption at
that level.
Q.15) CALCULATE the value of MPC if in an economy with increase in investment, income rises 4 times
more than increase in investment.
Q.16) government introduced a scheme of digital india and decided to invest 1000 crores in Mumbai
and 4000 crores in Chennai for this purpose. As per a survey, it is clear that most of population
consumed 50% of their increased income and survey also states about minimum consumption of Rs.
100 crores in both Mumbai and Chennai.
Calculate increase in income of economy and equilibrium income of Mumbai city.
Q.17) The income level in the economy rising by some crores every year. Whereas consumption rises
by 50% for first three respective years and then 75% for next four years. During the 2 nd and 3rd year
government decided to invest 300 crores and 400 crores respectively. Calculate the rise in income
level of economy for respective two years. After examining all the facts, government found that
atleast 200 crores is the minimum consumption. Calculate the equilibrium level of income for 2 nd
year and 3rd year.
Q.18) in an economy, government found that income level in an economy is rising continuosly and
consumption also rising with a proportion of 60%. Economy is opting atleast 50 crores on
consumption even in heavy depressed situations. Calculate the total consumption if income and
consumption curve are tangent at point R.
Q.19) Measure the value of ex - ante average demand when autonomous consumption expenditure is
Rs. 50 crores and MPS is 0.2 and level of income is Rs. 4000 crores.level of investment in economy is
650 crores.
State, whether the economy is in equilibrium or not? Why?

Q.20) IN an economy, an increase in investment leads to increase in national income which is 3 times
more than increase in investment. Calculate the value of consumption if autonomous consumption is
400 and income level is 8000.
Q.21) in an economy, the investment expenditure is 100 crores and consumption function is C = 250 +
0.8Y. (i) determine the equilibrium level of income. (ii) Find the equilibrium level of income if
planned investment expenditure rises by 100 crores. (iii) value of multiplier due to increase in
investment.
Q.22) calculate investment if equilibrium level of income is 500 , autonomous consumption is 50 and
MPC is 0.7.
Q.23) calculate MPC from the equilibrium income of 350 , autonomous consumption 20 and
investment is 50.
Q.24) calculate equilibrium national income if autonomous consumption is 60 , MPC is 0.9 and
investment is 100 Rs.
Q.25) I an economy autonomous investment is 100 Rs. and C = 80 + 0.4Y , justify whether the economy
is at equilibrium at level 400 or not.
Q.26) in an economy , investment increased by 1100 and income increased by 5500. If MPS will be
25% then what will be the increase in income.
THEORY QUESTIONS
Q1.) when MPC is equal to MPS , then increase in income will be two times of increase in investment?
Ans. Yes if MPC and MPS are equal then it means both are 0.5 , so K means multiplier will be 2 times . it
means increase in income will be two times of increase in investment.
Q.2) Economists are generally concerned about rising MPS, WHY?
Ans. As we know, the sum of MPC and MPS is equal to one. So if MPS will rise then it leads to fall in MPC
which means there will be a significant decline in proportion of consumption. Consumption is vital
factor of aggregate demand. So fall in consumption leads to fall in AD. Fall in AD leads to fall in
equilibrium level of economy.
Q.3) when MPC is greater than MPS , then multiplier will be more than 5?
Ans. False if MPC is more than MPS then investment multiplier can even be less than 5 times also.
Q.4) measure the level of exante AD if autonomous investment and consumption is 50. MPS 0.2,
income level is 4000.
Ans.
AD = c + MPC(y) + I, here
autonomous consumption + autonomous investment is totally given as 50

AD = 50 + 0.8(4000)
AD = 50 + 3200
AD = 3250
And AS is given as 4000. So economy is not an equilibrium.
Q.5) estimate the valueof ex-ante AD if autonomous investment and consumption is 50. MPS 0.2 and
income is 300.
Ans. AD = c + MPC(y) + I, here
autonomous consumption + autonomous investment is totally given as 50
AD = 50 + 0.8(300)
AD = 50 + 240
AD = 290
But AS is 300 so, economy is not at equilibrium level.
CH – 9TH EXCESS DEMAND and DEFICIENT DEMAND

EXCESS DEMAND –
EXCESS DEMAND refers to the situation when aggregate demand is more
than the aggregate supply corresponding to full employment level of output in
the economy.
INFLATIONARY GAP refers to the gap by which actual AD exceeds the AD

required at full employment level.
REASONS BEHIND EXCESS DEMAND –

1.) excess demand may arise due to increase in consumption expenditure i.e rise
in propensity to consume and fall in propensity to save.
2.) excess demand may also occur due to increase in disposable income of people
because of reduction in taxes by the government.
3.) excess demand may also arise due to increase in investment expenditure
because of lower interest rates on loan and due to higher profits on investment.
4.) excess demand can arise due to increase in government expenditure on

goods, services and infrastructure.
5.) excess demand occurs due to fall in imports because fall in imports lead to
rise in demand of domestic goods.
6.) excess demand arises due to rise in exports which means increase in demand
of domestic goods by the foreign market.
7.) excess demand occurs because of deficit financing which means printing of
new currency by the RBI in case of deficit budget.
IMPACT OF EXCESS DEMAND –

EXCESS DEMAND is not a desired situation as it does not lead to rise in
aggregate supply as economy is already operating at full employment level.
Excess demand has the following impacts on economy.
1.) Effect on general price level – excess demand leads to rise in general price
level in the economy (inflation)
2.) Effect on employment – there will be no change in the level of employment

as the economy is already operating at full employment level.
3.) Effect on output – there will be no change in the level of output as economy
is operating at full employment equilibrium and there is no idle capacity in the
economy.
If there is question regarding AD is more than AS then answer it from previous chapter , AD and
AS approach.
But if it is mentioned that AD is more than AS at full employment level then answer it from this
chapter.
DEFICIENT DEMAND –
DEFICIENT DEMAND refers to a situation when aggregate demand is less than
aggregate supply corresponding to full employment level of output in the
economy.
Deflationary gap refers to the gap by which actual AD fall short of AD required
at full employment level.
REASONS BEHIND DEFICIENT DEMAND –

1.) deficient demand arises due to fall in consumption expenditure i.e fall in
propensity to consume and high propensity to save.
2.) deficient demand arises due to fall in disposable income of people because of
higher taxes imposed by the government.
3.) deficient demand occurs due to fall in government expenditure on goods ,
services and infrastructure.
4.) deficient demand mainly occurs due to fall in investment because of higher
interest rates on loans or due to lower profits on investment.
5.) deficient demand arises due to rise in imports because rise in imports lead to
fall in demand of domestic goods.
6.) deficient demand arises due to fall in exports which means fall in demand
of domestic goods by the foreign market.
IMPACT OF DEFICIENT DEMAND –

Deficient demand has following impact on the economy
1.) Effect on general price level – deficient demand causes fall in general price
level (deflation)
2.) Effect on output – due to shortage of demand there will be increase in the
level of inventory thus planned output will fall.
3.) Effect on employment – deficient demand causes involuntary

unemployment in the economy due to fall in planned output.
EXCESS DEMAND VS. DEFICIENT DEMAND
BASIS EXCESS DEMAND DEFICIENT DEMAND
MEANING it refers to a situation it refers to a situation

When AD is more than when AD is less than
AS corresponding to AS corresponding to
Full employment full employment
Equilibrium equilibrium
GAP it leads to it leads to deflationary

Inflationary gap gap
Reason it occurs due to rise in it occurs due to fall in
Estimated expenditures estimated expenditures
Equilibrium it shows over full employ- it shows under employ-

ment equilibrium. ment equilibrium.
IMPACT it leads to rise in price it leads to fall in price,

Level but no change in output and employment
Output or employment.
MEASURES TO TACKLE OR CONTROL EXCESS

DEMAND BY FISCAL AND MONETARY POLICY –
FISCAL POLICY –
1.) DECREASE IN GOVERNMENT SPENDINGS
Government spends huge amount on infrastructure and administration like
defence. To control the situation of excess demand, government should reduce
its expenditures to the maximum possible level. Government should reduce its
expenditures on defence and other unproductive activities which helps in
reduction of aggregate demand.
2.) INCREASE IN TAXES

During excess demand, government increases rate of taxes and even impose
some new taxes which leads to fall in disposable income of the economy and
helps to reduce the level of aggregate demand.
MONETARY POLICY –
1.) BANK RATE/REPO RATE (QUANTITATIVE INSTRUMENT)
commercial banks for meeting their long term requirements whereas repo rate
meeting their short term requirements. During the situation of excess demand,
RBI increases the percentage of bank rate and repo rate which will ultimately
increase the cost of borrowings by the commercial banks. Thus commercial
banks will increase the market rate of interest which discourages the borrower to
take loans and thus level of AD will reduce.
2.) OPEN MARKET OPERATIONS (QUANTITATIVE INSTRUMENT)

It refers to purchase and sale of securities in the open market by the RBI. During
the situation of excess demand , RBI offers securities for sale which will reduce
the cash balance of commercial banks and it will reduce their lending capacity
and thus level of AD will also reduce.
3.) CRR AND SLR (QUANTITATIVE INSTRUMENT)

CRR refers to that percentage of total deposits which the commercial banks are
required to maintain with RBI whereas SLR refers to that percentage of total
During the situation of excess demand, RBI increases the percentage of these
reserves which will ultimately reduce the lending capacity of commercial banks
and thus commercial banks will provide less credit in the economy and thus
level of AD will surely reduce.
4.) REVERSE REPO RATE (QUANTITATIVE INSTRUMENT)

Reverse repo rate refers to that rate of interest at which commercial banks can
park their surplus funds with RBI. During the situation of excess demand, RBI
increases the reverse repo rate which induce the commercial banks to park more
money with RBI so that lending capacity of commercial banks will reduce and
thus banks will provide less credit in the economy and money supply will
reduce. Thus aggregate demand can be reduced and excess demand can be
tackled.
5.) MARGIN REQUIREMENT (QUALITATIVE INSTRUMENT)

offered against loan. When the economy is suffering from excess demand, RBI
increases the percentage of margin which restricts the flow of credit in the
economy and thus commercial banks will be able to provide less credit in the
economy and thus AD will reduce.
6.) MORAL SUASION(QUALITATIVE INSTRUMENT)

This is the combination of persuasion and pressure that RBI applies on
commercial banks in order to get them act in a manner with the policy of RBI.
Moral suasion is exercised through discussions, speeches, letters and hints to
commercial banks. During the situation of excess demand , RBI advises not to
advance credit to economy which will surely reduce the level of aggregate
demand.
7.) SELECTIVE CREDIT CONTROL(QUALITATIVE INSTRUMENT)

It refers to a method in which RBI gives direction to commercial banks to give or
not to give credit to a particular sector. During excess demand, RBI introduces
rationing of credit which will prevent the flow of credit in economy and thus
aggregate demand will reduce.
MEASURES TO TACKLE DEFICIENT DEMAND BY
FISCAL AND MONETARY POLICY –
FISCAL POLICY –
1.) INCREASE IN GOVERNMENT SPENDINGS
Government spends huge amount on infrastructure and administration like
defence. To tackle the situation of deficient demand, government should
increase its expenditures to the maximum possible level. Government should
increase its expenditures on defence and other infrastructural activities which
helps in increase in the level of aggregate demand.
2.) DECREASE IN TAXES

During deficient demand, government reduces rate of taxes and even abolish
some taxes which leads to rise in disposable income of the economy and helps to
increase the level of aggregate demand.
MONETARY POLICY –
1.) BANK RATE/REPO RATE (QUANTITATIVE INSTRUMENT)
commercial banks for meeting their long term requirements whereas repo rate
meeting their short term requirements. During the situation of deficient
demand, RBI reduces the percentage of bank rate and repo rate which will
ultimately reduce the cost of borrowings by the commercial banks. Thus
commercial banks will reduce the market rate of interest which encourages the
borrower to take loans and thus level of AD will increase.
2.) OPEN MARKET OPERATIONS (QUANTITATIVE INSTRUMENT)
It refers to purchase and sale of securities in the open market by the RBI. During
the situation of deficient demand, RBI purchases securities from commercial
banks which will increase the cash balance of commercial banks and it will
increase their lending capacity and thus level of AD will also increase.
3.) CRR AND SLR (QUANTITATIVE INSTRUMENT)

CRR refers to that percentage of total deposits which the commercial banks are
required to maintain with RBI whereas SLR refers to that percentage of total
During the situation of deficient demand, RBI reduces the percentage of these
reserves which will ultimately increase the lending capacity of commercial
banks and thus commercial banks will provide more credit in the economy and
thus level of AD will surely increase.
4.) REVERSE REPO RATE (QUANTITATIVE INSTRUMENT)

Reverse repo rate refers to that rate of interest at which commercial banks can
park their surplus funds with RBI. During the situation of deficient demand,
RBI reduces the reverse repo rate which indicates the commercial banks to park
less money with RBI so that lending capacity of commercial banks will
increase and thus banks will provide more credit in the economy and money
supply will increase. Thus aggregate demand can be increased and deficient
demand can be corrected.
5.) MARGIN REQUIREMENT (QUALITATIVE INSTRUMENT)

offered against loan. When the economy is suffering from deficient demand,
RBI reduces the percentage of margin which encourages the flow of credit in the
economy and thus commercial banks will be able to provide more credit in the
economy and thus AD will increase.
6.) MORAL SUASION(QUALITATIVE INSTRUMENT)

This is the combination of persuasion and pressure that RBI applies on
commercial banks in order to get them act in a manner with the policy of RBI.
Moral suasion is exercised through discussions, speeches, letters and hints to
commercial banks. During the situation of deficient demand , RBI advises to
advance credit to economy which will surely increase the level of aggregate
demand.
7.) SELECTIVE CREDIT CONTROL(QUALITATIVE INSTRUMENT)

It refers to a method in which RBI gives direction to commercial banks to give or
not to give credit to a particular sector. During deficient demand, RBI removes
rationing of credit which will encourage the flow of credit in economy and thus
aggregate demand will increase.
THREE SECTOR ECONOMY –
(LESS IMP. TOPIC) (SIMILAR TO FISCAL POLICY DISCUSSED ABOVE)
REMEDY FOR EXCESS DEMAND IN THREE SECTOR ECONOMY

To correct the problem of excess demand in three sector economy, government
needs to reduce its expenditure which will ultimately helps in reduction of
aggregate demand. Because of reduction in government expenditure AD curve
will shift downward and we reach at the point of equilibrium at full
employment.
REMEDY FOR DEFICIENT DEMAND IN THREE SECTOR ECONOMY

To correct the problem of deficient demand in three sector economy, government
needs to increase its expenditure which will ultimately helps in increasing of
aggregate demand. Because of increase in government expenditure AD curve
will shift upward and we reach at the point of equilibrium at full employment.
Q.1) state the treatment of following instruments during excess demand
(a) bank rate (b) margin (c) open market operations
Ans. (a)Rise n bank rate (b) rise in % of margin (c) RBI will sell securities in the open
market
Q.2) find out whether the following measures will be taken during excess demand or
deficient demand?
(a) RBI starts selling securities to public (b) instead of 80%, now 90% of security amount
will be given as loan. (c) increase in interest rate charged by commercial banks (d) RBI
advised banks to stop advertising for home loans (e) RBI reduces the amount to be kept as
reserves (f) RBI advised not to advance loans to people with income above 5 lakhs
Ans. RBI used these measures to tackle
(a) excess demand (b) deficient demand (c) excess demand (d) excess demand (e)
deficient demand (f) excess demand
CHAPTER 10TH GOVERNMENT BUDGET
GOVERNMENT BUDGET is an annual statement showing item wise estimates
of receipts and expenditures during a fiscal year. Fiscal year is taken from 1 st
April to 31st March.
✓ Budget is prepared by government at all levels i.e central govt. , state

govt. and local government. The budget of central government is known
as union budget.
✓ Receipts and expenditures are planned as per the objectives of the
government.
✓ Budget is presented in the parliament as it is required to be approved by
parliament before it is implemented.
✓ Finance minister presents the budget before the parliament on first dayof
February each year.
✓ Budget reveals the financial performance of last year and financial
policies of coming year.
OBJECTIVES OF GOVT. BUDGET

1.) RE-ALLOCATION OF RESOURCES –
Through the budget government aims to reallocate resources in accordance with
the economic priorities(profit) and social priorities(social welfare) of the
country. Government can influence the allocation of resources through;
(a) TAX CONCESSION OR SUBSIDIES – to encourage investment ,

government can give tax concessions or subsidies to the producers. For example;
government can discourage the production of harmful goods like liquor by
imposing heavy taxes and encourage the use of Khadi products by providing
subsidies.
(b) DIRECTLY PRODUCING GOODS and SERVICES – if private sector does

not take interest then government can undertake the production. there are
many non-profitable economic activities which are not undertaken by private
sector like defence, etc. there activities are called public goods and such activities
are necessarily undertaken by government in public interest and to raise social
welfare.
2.) REDUCING INEQUALITIES IN INCOME AND WEALTH –

Economic inequality is an inherent part of every economic system. Govt. aims
to reduce such inequalities of income and wealth through the budget. Govt.
aims to influence this by imposing heavy taxes on rich and spending more on
the welfare of poor. It will reduce income of the rich and raise the standard of
living of poor.
Free LPG gas connection under ujjwala yojana and food grains to BPL sections
can also raise the standard of living of poor people.
3.) ECONOMIC STABILITY –

Government budget is used to prevent business fluctuations of inflation and
deflation to achieve the objectives of economic stability.
(a) inflation arises when aggregate demand is higher than the aggregate
supply . government can bring down the aggregate demand by reducing the
govt. expenditures or by increasing taxes. This is surplus budget.
(b) deflation arises when aggregate demand is less than aggregate supply.
Government can raise the level of AD by increasing the govt. expenditures or by
lowering taxes. This is deficit budget.
4.) MANAGEMENT OF PUBLIC ENTERPRISES –

There are large no. of public sector industries which are established and
managed for social welfare of the public. Budget is prepared with the objective of
making various provisions for managing such enterprises and providing them
financial help.
5.) ECONOMIC GROWTH –

The growth rate of a country depends on the rate of savings and investments.
For this purpose , government budget aims to mobilize sufficient resources for
investment in public sector. Government makes various provisions in the
budget to raise overall rate of savings and investments in the economy.
Economic growth implies sustainable increase in the real GDP of an economy i.e
increase in the volume of goods and services. Budget can be an effective tool to
ensure economic growth as
(a) if govt. provides subsidies for productive projects then it can stimulate
savings and investment in the economy.
(b) spending on infrastructure enhances the production activity in different

sectors of economy.
6.) REDUCING REGIONAL DISPARITIES –

The government budget aims to reduce regional disparities through its taxation
and expenditure policy for encouraging setting up of production units in
economically backward regions. Establishments of special economic zones in
backward areas can also promote their economic and financial development.
7.) EMPLOYMENT GENERATION –

budget is used as an effective tool in the process of employment generation in
various ways. Investment in infrastructure like construction of highways
creates jobs for different sections of workers. Similarly, government aims to
provide jobs through various employment generation schemes like MGNREGA,
NFFWP, SJSRY, PMRY, etc.
BUDGET
RECEIPTS EXPENDITURES
CAPITAL RECEIPTS REVENUE RECEIPTS REVENUE EXPENDITURES CAPITAL EXPENDITURES
TAX REVENUE NON TAX REVENUE
DIRECT TAX INDIRECT TAX 1. INTEREST

2. PROFITS AND DIVIDENDS
3. FEES
4. LICENSE FEES
5. FINES AND PENALTIES
6. ESCHEATS
7. GIFTS AND GRANTS
8. FORFEITURES
9. SPECIAL ASSESSMENT
BUDGET RECEIPTS –
It refers to the estimated money receipts of the government from all the sources
during a given fiscal year.
Budget receipts are categorized into;
(a) REVENUE RECEIPTS
(b) CAPITAL RECEIPTS
REVENUE RECEIPTS –
Revenue receipts refer to those receipts which neither create any liability nor
reduce the assets of the government. They are regular in nature and it has to
satisfy following two conditions ;
(a) it must not create any liability for the government. For example taxes
imposed by the government does not create any liability for the government.
(b) it must not reduces any assets of the government.

REVENUE RECEIPTS ARE CATEGORISED INTO;
1.) TAX REVENUE
2.) NON TAX REVENUE
TAX REVENUE –
It refers to the sum total of receipts from taxes and duties imposed by the
government. Tax is a compulsory payment made by people and companies to
the government without getting any direct benefit in return.
TAX REVENUE IS CATEGORISED INTO;
(A) DIRECT TAXES
(B) INDIRECT TAXES

DIRECT – TAXES
It refers to the taxes that are imposed on property and income of individuals and
companies. It is paid directly by them to the government.
The liability to pay the tax lies on same person. It means the actual burden of
direct tax cannot be shifted and the incidence of the tax lies on same person.
In INDIA , direct taxes are progressive in nature i.e with rise in income, tax
percentage also rises.
For example – income tax , corporate tax , wealth tax , interest tax , death duty ,
capital gain tax , etc.
INDIRECT – TAXES
It refers to those taxes which are imposed on goods and services. The liability to
pay the tax means actual burden lie on different persons. It means the actual
burden of this tax can be shifted to others.
In INDIA, indirect taxes are generally proportional in nature which means tax
rate will remain same irrespective of quantity.
The incidence of indirect taxes lie on different persons.
Example ; GST, excise duty and custom duty.
DIFFERENCE BETWEEN DIRECT AND INDIRECT TAXES
Basis Direct taxes Indirect taxes

MEANING it is levied on individuals and it is levied on goods and
Companies services.
Shift of burden the burden of direct tax cannot the burden of indirect tax
be shifted can be shifted.
Nature they are generally progressive they are generally proportional

In nature in nature.
Coverage they have limited reach they have a wide reach.

NON – TAX REVENUE –
Non tax revenue refers to receipts of the government from all the sources other
than taxes and duties.
It is of following types ;
1.) Interest
Government receives interest on loans given by it to the state government,
private enterprises and general public. Interest received on these loans is a non
tax revenue.
2.) Profits and dividend

Government earns profit through public sector undertakings like Indian
railways, LIC, BSNL, etc. It earns profit from sale proceeds of such
undertakings. Government also get dividend from its investment in other
companies.
3.) Fees
fees refer to charges imposed by the government for providing services in public
interest. It is a compulsory contribution like tax. Court fees , registration fees,
import fees etc are some of the examples.
4.) License fee

It is a payment charged by the government to grant permission for something.
For example license fee paid for permission of keeping a gun, national permit
for commercial vehicles.
5.) Fines and penalties

It refers to those payments which are imposed on law breakers. For example fine
for jumping red light. It is basically imposed to maintain law and order.
6.) Escheats
It refers to claim of the government on the property of a person who dies without
leaving behind and legal nominee or a will.
7.) Gifts and grants

Government receives gifts and grants from foreign government and
international organizations, such gifts are not a fixed source of revenue and are
generally received during national crisis.
8.) Forfeitures
These are in the form of penalties which are imposed by the court for non
fulfillment of orders or contracts.
9.) Special assessment

It refers to the payment made by owners of those properties whose value has
appreciated due to development activities of the government. If value of a
property has increased near a metro station then a part of development
expenditure is received from owners of such property.
CAPITAL RECEIPTS
Capital receipts refer to those receipts which either create a liability or reduces the
assets of the government. They are non routine in nature.
It must satisfies any of the following two conditions;
(a) it must create a liability for the government. For example borrowings by the
government.
(b)it must cause a reduction in assets of the government. For example sale of
shares or assets of the public undertakings.
SOURCES OF CAPITAL RECEIPTS
1.) BORRWINGS;
Borrowings are the funds raised by the government to meet excess expenditure.
Government borrow funds from RBI , foreign government and international
organizations like world bank and IMF. It is considered as a capital receipt
because it creates a liability for the government.
2.) SMALL SAVINGS

It refers to the funds raised by the government from the public in the form of
post office deposits, national saving certificates and kisan vikas patras. It is
considered as capital receipt because it creates a liability for the government.
3.) DISINVESTMENT
It refers to the act of selling a part or whole of the shares of the public sector
undertakings to the private sector . sale of such shares of public sector
undertakings is a capital receipt because it reduces the assets of the government.
4.) RECOVERY OF LOANS

Government grant various loans to the state government or union territories .
recovery of such loans is a capital receipt because it reduces the assets of the
government.
BUDGET EXPENDITURE
Budget expenditure refers to the estimated expenditure of the government
during a given fiscal year.
It is categorized into;
1.) Revenue expenditure
it refers to the expenditure which neither creates an asset nor reduces the
liabilities of the government . they are of routine in nature and are incurred for
normal functioning of the government.
For example payment of salary , pension and interest , expenditure on

administration , defence and health and grants given to state.
Revenue expenditure must satisfy following two conditions;
(a) it must not create any asset of the government. For example payment of
salary or pension to government staff.
(b) it must not reduce any liability for the government.
2.) Capital expenditure

It refers to the expenditure which either create an asset or causes a reduction in
the liabilities of the government. It is of routine in nature but it adds to the
capital stock of economy.
Example ; loan given to state govt. , expenditure on infrastructure, purchase of

assets and repayment of loans.
It must satisfies any of the following two conditions;
(a) it must create an asset for the government . for example construction of
metro.
(b)it must reduces the liabilities of the government. For example repayment of
loans.
IDENTIFY WHETHER THE FOLLOWING IS A DIRECT TAX OR INDIRECT TAX

WITH REASON:
1.) corporation tax – it is a direct tax as it is levied on property and income of companies
2.) GST - it is an indirect tax as it is imposed on goods and services.
3.) income tax - it is a direct tax as it is levied on income of an individual or companies
4.) capital gain tax - it is a direct tax as it is levied on property of an individual or companies
IDENTIFY WHETHER THE FOLLOWING IS A CAPITAL RECEIPT OR REVENUE

RECEIPT:
1.) loan from world bank – it is a capital receipt because it creates a liability for the govt.
2.) corporation tax - it is a revenue receipt as it neither creates any liability nor reduces the assets of the
government.
3.) grants received from world bank - it is a revenue receipt as it neither creates any liability nor reduces the
assets of the government.
4.) profits of public sector undertakings - it is a revenue receipt as it neither creates any liability nor reduces
the assets of the government.
5.) sale of public sector undertakings – it is a capital receipt as it reduces the assets of the govt.
6.) foreign aid received against earthquake victims - it is a revenue receipt as it neither creates any liability
nor reduces the assets of the government.
7.) dividend on investment made by govt. - it is a revenue receipt as it neither creates any liability nor
reduces the assets of the government.
8.) borrowings from public – it is a capital receipt as it creates liability for the govt.
IDENTIFY WHETHER THE FOLLOWING IS A CAPITAL EXPENDITURE OR

REVENUE EXPENDITURE
1.) subsidies - it is a revenue expenditure as it neither creates any asset nor reduces the liabilities of the
government.
2.) defence capital equipments purchased from USA – it is a capital exp. As it increases assets of the govt.
3.) grants given to state govt. - it is a revenue expenditure as it neither creates any asset nor reduces the
liabilities of the government.
4.) construction of school building – it is a capital exp. Because it creates an assets of the govt.
5.) expenditure on administration - it is a revenue expenditure as it neither creates any asset nor reduces the
liabilities of the government.
6.) repayment of loans – it is a capital expenditure as it reduces liabilities of the govt.
7.) expenditure on collection of taxes - it is a revenue expenditure as it neither creates any asset nor reduces
the liabilities of the government.
8.) expenditure on scholarships given by govt.- it is a revenue expenditure as it neither creates any asset nor
reduces the liabilities of the government.
Types of budget ;
1.) Balanced budget

A budget is said to be a balanced budget when estimated receipts of the
government are exactly equals to estimated expenditures.
2.) Surplus budget

A budget is said to be a surplus budget when estimated receipts of the
government are more than estimated expenditures.
3.) Deficit budget

A budget is said to be a deficit budget when estimated receipts of the
government are less than estimated expenditures.
TYPES OF DEFICIT –
1.) REVENUE DEFICIT

It refers to excess of revenue expenditure over revenue receipts during the given
fiscal year.
REVENUE DEFICIT = revenue expenditure – revenue receipts
IMPLICATIONS OF REVENUE DEFICIT –

1.) it indicates the inability of the government to meet its regular expenditure
in the proposed budget.
2.) it implies that government is dissaving i.e utilization of previous savings or

savings of other sectors.
3.) government has to make up the deficit through disinvestment which means
sale of assets or shares of public sector undertakings.
4.) government has to make the deficit by borrowings which will increase the
future burden of loan and interest as well as leads to inflationary situation in
the economy.
5.) high revenue deficit gives a warning signal to the government either to
reduce its expenditure or increase receipts.
MEASURES TO REDUCE REVENUE DEFICIT –

1.) government should take some serious steps to reduce its expenditure and
avoid unproductive expenditures.
2.) government should increase its receipts from various sources of tax and non
tax revenue.
2.) FISCAL DEFICIT

Fiscal deficit refers to the excess of total expenditures over total
receipts(excluding borrowings)during the given fiscal year.
Fiscal deficit = total exp. - total receipts(excluding borrowings)
Or fiscal deficit = borrowings

Fiscal deficit = (revenue exp. + capital exp.) - (revenue receipts + capital receipts excluding borrowings)
Fiscal deficit = revenue deficit + capital exp. - capital receipts excluding borrowings
Fiscal deficit = budgetary deficit + borrowings
NON – DEBT creating capital receipts refers to all those capital receipts except
borrowings. Borrowings are considered as debt creating capital receipts because
it creates a liability on the government to make payment in future.
IMPLICATIONS OF FISCAL DEFICIT –
1.) DEBT TRAP –

Fiscal deficit indicates the total borrowing requirements of the government.
Borrowings not only involve repayment of principal amount but also require
payment of interest. It creates a vicious circle of fiscal and revenue deficit, where
government takes more loans to repay the earlier one. As such , country caught
in debt trap.
2.) INFLATION –
Government mainly borrows money from RBI to meet its fiscal deficit. RBI
prints new currency to meet the deficit requirement. It increases the money
supply in the economy and thus creates inflation.
3.) FOREIGN DEPENDENCE –

Government also borrows from rest of the world which raises its dependence of
other countries.
4.) HAMPERS FUTURE GROWTH –

Borrowings increase the financial burden for future generations. It adversely
affects the future growth and development of the country.
SOURCES OF FINANCING FISCAL DEFICIT (OR) HOW TO TACKLE FISCAL
DEFICIT –
1.) BORROWINGS –
Fiscal deficit can be met by borrowings from the internal sources as well as
from the external sources. Internal sources include public, commercial banks etc
whereas external sources include foreign government, international
organizations like world bank.
2.) DEFICIT FINANCING –(printing of new currency)

Government may borrow from RBI against its securities to meet the fiscal
deficit. RBI issues new currency for this purpose. This process is known as
deficit financing.
NOTE :
Borrowings are considered as better source to cover the fiscal deficit because it
will not increase the money supply and does not lead to inflation. Deficit
financing means printing of new currency always create inflation in the
economy as it leads to rise in money supply.
IS FISCAL DEFICIT NECESSARY INFLATIONARY?
ANS. Fiscal deficit is mainly financed by deficit financing i.e printing of new
currency by the RBI. Printing of new currency leads to rise in money supply of
economy and thus creates excess demand and thus inflation in the economy.
However if borrowings are made for infrastructural development then it does not
lead to inflation.
IT MUST BE NOTED THAT, IN INDIA SAFE LIMIT OF FISCAL DEFICIT IS

3% OF GDP.
3.) PRIMARY DEFICIT
Primary deficit refers to the difference between fiscal deficit of the current year
and interest payments of the previous borrowings.
Fiscal deficit – interest payments = primary deficit.
It must be noted that primary deficit indicates borrowings requirements of the

government to cover up the current year deficit.
ZERO PRIMARY DEFICIT OR LOW PRIMARY DEFICIT

Zero primary deficit indicates that government resorts to borrow money only to
clear the backlog of interest payments. There is no borrowing requirement for
current year because zero primary deficit clearly indicates zero deficit of the
current year, it means government is required to borrow money just to clear the
previous interest payments.
Zero primary deficit is a sign of fiscal discipline in the economy.
NUMERICAL QUESTIONS;
Q.1) revenue receipts 1515771, capital receipts 630964, total receipts 2146735, revenue exp.
1836934, capital exp. 309801borrowings 546532.
Calculate revenue deficit , fiscal deficit and primary deficit.
Q.2) revenue deficit is 35 crores, revenue receipts 70 crores and capital expenditure 120 crores. How
much is the revenue expenditure.
Q.3) interest payment 140000 and borrowing requirements in total 270000. Calculate the deficit of
current year or primary deficit.
Q.4) interest payment is 10000, which is 40% of primary deficit. Calculate fiscal deficit.
Q.5) capital receipts net of borrowings 95, revenue expenditure 100, interest payments 10, revenue
receipts 80 and capital expenditures 110. Calculate revenue, fiscal and primary deficits.
Q.6) revenue expenditure 70000, borrowings 15000, revenue receipts 50000 and interest payments
25% of revenue deficit. Calculate primary deficit.
Q.7) non debt creating capital receipts 25000, revenue deficit 12000, interest payments 7000,
revenue expenditure 20000, capital expenditure 35000.
Calculate revenue receipts, fiscal and primary deficit.
Q.8) budgetary deficit is 25000 and borrowings and other liabilities is 7000. Calculate total fiscal
deficit. Ans. 32000.
IMPORTANT QUESTIONS OF GOVT. BUDGET
Q.1) how can surplus budget be used during inflation?
Ans. Surplus budget refers to a situation when receipts of govt. are more than expenditures
of the govt. during a fiscal year. In surplus budget govt. is actually receiving more taxes
from the public which results in decline in purchasing power of economy and thus AD will
reduce . so inflation can be corrected.
Q.2) can there be a fiscal deficit without any revenue deficit?
Ans. Yes this is possible in two cases
(a) when revenue receipts are equal to revenue expenditure, that is no revenue deficit but
capital expenditures are more than capital receipts, so there will be fiscal deficit
(b) when revenue receipts are more than revenue expenditure, that is no revenue deficit
but capital expenditures are more than capital receipts, so there will be fiscal deficit.
Q.3) finance minister proposed to raise the tax on cigratte. He also proposed to raise the
income tax on people earning more than 1 crore per annum. What are the possible welfare
objectives of govt.
Ans. Reallocation of resources and reducing inequalities
Q.4) govt. raising its exp. On public goods, explain the concerned objective
Ans. Public goods are like defence, education, health, law and order. Expenditure on these
goods provide nation security. The concerned objective if economic growth
Q.5) govt has started spending more on providing free education and health to poor.
Explain the objective
Ans. Reducing inequalities by increasing standard of living of poor.
Q.6) as a finance minister, which tax would u prefer?
Ans. As a finance minister, I would prefer both direct and indirect taxes.
Direct taxes can be a better source for growth of economy because it helps in reducing
inequalities. Where as indirect taxes is also a better source of revenue of govt. as indirect
taxes are always included in the price of a product i.e no one can evade these taxes and govt
can spend the amount of such taxes on infrastructure.
So both the taxes are favorable for economy.
Q.7) government under ujjawala yojna trying to provide LPG gas cylinders to people who
are below poverty line. Explain the concern
Ans. Reducing inequalities as govt. is trying to increase the standard of living of poor.
CHAPTER 11TH FOREIGN EXCHANGE

FOREIGN EXCHANGE refers to all currencies other than the domestic currency
of a given country. For example rupee is our domestic currency but all other
currencies are foreign exchange.
FOREIGN EXCHANGE RATE refers to the rate at which one currency is

exchanged for the other. It represents the price of one currency in terms of
another currency.
If 1 US$ = 60 Rs.
Then value of 1 US$ is 60 Rs. and value of 1 rupee is
1/60 = 0.0167$
CURRENCY DEPRECIATION –
Currency depreciation refers to decrease in the value of domestic currency in
terms of foreign currency. It means domestic currency is less valuable and
more of domestic currency is required to buy the foreign currency.
Example ;
1US $ = 30 Rs.
NOW, 1 US $ = 60 Rs.
It means Indian rupee is depreciating as more rupees are required to buy 1 US$
EFFECT OF CURRENCY DEPRECIATION –
1.) With same amount of dollars, foreign residents can buy more goods from
INDIA , so, our exports will rise because exports are relatively cheaper.
2.) With same amount of Indian rupees we can now exchange less dollars , so
our imports will fall.
Due to rise in exports, national income is likely to rise.
CURRENCY APPRECIATION –
It refers to increase in the value of domestic currency in terms of foreign
currency. The domestic currency becomes more valuable and less domestic
currency is required to buy foreign currency.
Example ;
1US $ = 50 Rs.
NOW, 1 US $ = 25 Rs.
It means Indian rupee is appreciating as less rupees are required to buy 1 US$
EFFECT OF CURRENCY APPRECIATION –
1.) with same amount of dollars, foreign residents can buy less goods from
INDIA i.e our exports will fall as exports are now more expensive.
2.)with same amount of Indian rupees we can now exchange more dollars and
thus our imports will increase . it means imports from USA are relatively
cheaper for us.
Due to rise in imports and fall in exports, national income is likely to fall.
NOTE;
CURRENCY DEPRECIATION MEANS our domestic goods are cheaper for foreigners
Whereas,
CURRENCY APPRECIATION MEANS foreign goods are cheaper for domestic country.
Currency Depreciation Vs. Currency Appreciation
Basis Currency Currency Appreciation

Depreciation
Meaning: It refers to It refers to increase in the value of domestic

decrease in the currency in terms of foreign
value of
domestic currency.
currency in
terms of foreign
currency.
Effect on It makes It makes foreign goods cheaper in domestic

Imports/Exports: domestic goods country as more of such goods can now be
cheaper in purchased with same amount of domestic
foreign country currency. So, it leads to increase in imports.
as more of such
goods can now
be purchased
with same
amount of
foreign
currency. So, it
leads to increase
in exports.
Example: A change from A change from $1 = Rs 42 to $1 = Rs 38

$1 = Rs 40 to $1 represents that Indian Rupees is appreciating.
= Rs 45
represents that
Indian Rupees is
depreciating.
TYPES OF FOREIGN EXCHANGE RATE SYSTEM

1.) FIXED EXCHANGE RATE SYSTEM/ ADJUSTABLE PEG
SYSTEM
It refers to a system in which exchange rate for a currency is fixed by the
government. The basic purpose of adopting this system is to ensure stability in
foreign trade.
To achieve stability, government undertakes to buy foreign currency when the

exchange rate becomes weaker and sell foreign currency when the rate of
exchange becomes stronger. Government has to maintain large reserves of
foreign currencies so that government can maintain a fixed exchange rate.
When the value of domestic currency is tied in terms of foreign currency, it is

known as PEGGING. When the value of a currency is fixed in terms of gold,
then it is known as PARITY VALUE of currency.
For example… Government decided to maintain the rate of dollar at Rs. 40. If
exchange rate falls or become weaker like 1 $ = 34Rs. then in such a case govt
will buy more dollars to make the rate stable at Rs. 40.
Similarly, when exchange rate becomes stronger then govt will sell more dollars
to make the exchange rate stable at Rs. 40.
2.) FLEXIBLE EXCHANGE RATE SYSTEM

FLEXIBLE EXCHANGE RATE system refers to a system in which exchange
rate is determined by the market forces of demand and supply. Demand and
supply of different currencies are measured to decide the exchange rate.
The value of currency is allowed to fluctuate freely according to changes in

demand and supply of foreign currency. It is also known as floating exchange
rate system.
There is no official (govt.) intervention in the foreign exchange market. It is

also known as free exchange rate system and clean floating system.
DIFFERENCE BETWEEN FIXED and FLEXIBLE EXCHANGE

RATE SYSTEM
DIFFERENCE BETWEEN CURRENCY DEPRECIATION AND
CURRENCY DEVALUATION
BASIS CURRENCY DEVALUATION CURRENCY DEPRECIATION
MEANING it refers to reduction in value it refers to reduction in value

of domestic currency in terms of domestic currency in
of foreign currency under terms of foreign currency
fixed exchange rate system. under flexible exchange rate
system.
OCURENCE it take place due to government it take place due to market

forces of demand and supply.
SYSTEM it take place under fixed it take place under flexible

exchange rate system exchange rate system.
Policy it is a discretionary policy it is non discretionary policy

Adopted by govt to maintain and runs through demand and
Stable economy supply.
3.)MANAGED FLOATING RATE SYSTEM

It refers to the system in which foreign exchange rate is determined by market
forces of demand and supply but central bank also influences the exchange rate
through intervention in the foreign exchange market.
It is a hybrid of fixed as well as flexible exchange rate system.
Central bank interfere in the foreign exchange market to restrict the

fluctuations in the exchange rate within certain limits. The aim is to keep
exchange rate close to desired target values.
It is also known as dirty floating.

Suppose India has a managed floating rate system and central bank(RBI)
wants to keep value of rupee close to 60 Rs per dollar. RBI is ready to tolerate
small fluctuations in the exchange rate say 59.75 to 60.25.
If value of rupee fall below 59.75 per dollar then RBI start buying or acquiring
dollars to increase the rate close to 60Rs. similarly, if value of rupee rises above
the level of 60.25 Rs per dollar then RBI will start selling more dollars to
maintain the rate close to 60Rs. per dollar.
It must be noted that dirty float means a system in which exchange rate can be
fluctuated with the help of demand and supply but exchange rate is controlled
and manipulated by RBI. However, if RBI will not interfere, then, it is called as
clean floating.
DEMAND FOR FOREIGN EXCHANGE

Foreign currency is demanded by domestic residents because of following
reasons;
1.)import of goods and services – foreign exchange is demanded to make

payment for import of goods and services.
2.)tourism – foreign exchange is needed to meet expenditure incurred in foreign

tours.
3.)unilateral transfers sent abroad – foreign exchange is required for making

unilateral transfers like sending gifts to other countries.
4.) purchase of assets in abroad – it is demanded to make payment for purchase

of assets like land, shares, bonds in abroad.
5.)speculation – demand for foreign exchange rises when people want to make
gains from appreciation of currency. i.e purchase of dollars when cheaper and
sell it when price of dollar rises.
6.) repayment of international loans – loans from foreign countries is raised in
foreign currencies and thus foreign currency will be required to repay such
loans.
Why demand for foreign currency rises when its rate falls?
1.) When price of foreign currency falls, imports from that country become
cheaper. So our imports will increase and to make payments, demand for
foreign currency increases.
2.) when price of foreign currency falls, it promotes tourism in that country
and thus demand for such foreign currency rises.
3.) when price of foreign currency falls then in order to earn profit or gain more
people will purchase foreign currency for speculation and thus demand for
foreign currency rises.
DEMAND CURVE OF FOREIGN EXCHNAGE
foreign exchnage
rate D
Demand
Demand curve of foreign exchange is downward sloping due to inverse
relationship between foreign exchange rate and demand for foreign exchange.
Demand for foreign exchange is shown on x axis and foreign exchange rate is
shown on Y axis. Downward sloping demand curve shows that more foreign
exchange is demanded at low exchange rate or vice versa.
SUPPLY OF FOREIGN EXCHNAGE

SUPPLY OF FOREIGN EXCHANGE comes from following sources;
1.) EXPORT OF GOODS AND SERVICES – supply of foreign exchange comes
from export of goods and services.
2.) FOREIGN INVESTMENT – the amount that foreigners invest in our
country brings foreign exchange in our country.
3.) REMITTANCES FROM ABROAD (UNILATERALS FROM ABROAD) –
supply of foreign exchange comes from gifts, donations and other remittances
from abroad.
4.) SPECULATION – supply of foreign exchange comes from those who want to
speculate on the value of foreign exchange.
5.) loans from abroad – borrowings from abroad can also generates foreign
currency for our country.
6.) Grants and donations from abroad – grants and donations from abroad
also leads to rise in supply of foreign currency in our country.
WHY THERE IS RISE IN SUPPLY OF FOREIGN EXCHANGE WHEN ITS RATE

RISES?
1.) When price of foreign currency rises, domestic goods become relatively
cheaper for foreigners. Foreign countries will purchase more goods from our
country, our exports will increase and thus supply of foreign exchange
increases.
2.) when price of foreign currency rises, investment in our country will increase
and thus supply of foreign currency increases.
SUPPLY CURVE OF FOREIGN EXCHANGE

S
RATE
S
SUPPLY
Supply curve of foreign exchange is upward sloping due to positive or direct
relationship between foreign exchange rate and supply of foreign exchange.
In the above diagram, supply of foreign exchange shown on X axis and foreign
exchange rate is on Y axis. The upward sloping supply curve shows that supply
of foreign exchange rises when the exchange rate rises or VICE VERSA.
DETERMINATION OF EXCHANGE RATE

FLEXIBLE exchange rate system is determined by the interaction of demand
and supply. The equilibrium exchange rate is determined at a level where
demand for foreign exchange is equal to the supply of foreign exchange.
In the given diagram, demand and supply of foreign exchange are measured on
X axis and foreign exchange rate is measured on Y axis.
DD is the downward sloping demand curve of foreign exchange and SS is the

supply curve of foreign exchange. Both the curves intersect each other at point E.
where equilibrium exchange rate is determined at OR and equilibrium
quantity is determined at OQ .
In the above diagram, OR is the equilibrium exchange rate. If exchange rate
rises then it leads to excess supply whereas, if exchange rate falls then it leads to
excess demand.
CHNAGES IN EXCHNAGE RATE –
1.) INCREASE IN DEMAND
An increase in demand of foreign exchange will shift the demand curve

towards right from D1D1 curve to D2D2 curve. As a result, exchange rate rises
from OP1 to OP2 . it means the price of dollar has increased, which means
domestic currency has depreciated.
2.) DECREASE IN DEMAND – S
Rate P
P1
• D1
Quantity
A decrease in demand will shift the demand curve towards left from DD curve to
D1D1 curve. As a result , exchange rate will fall from OP to OP1 , which means
price of dollar has decreased i.e domestic currency is appreciating.
3.) INCREASE IN SUPPLY

if supply of foreign exchange increases, it will lead to rightward shift in supply
curve from SS curve to S1S1 curve. As a result, new exchange rate moves down
from OR to OR1. It means price of dollar has decreased and domestic currency
is appreciating.
4.) DECREASE IN SUPPLY S1
RATE
QUANTITY
A decrease in supply of foreign exchange will shift the supply curve towards left
from SS to S1S1 curve. As a result, exchange rate will increase. It means that
price of dollar has increased and thus domestic currency is depreciated.
Q.1) identify which currency is appreciating or which currency is depreciating
(a) 3$ = 2 euro to 4$ = 2 euro (b) 95 Rs. = 2$ to 150 Rs. = 3$
(c) 140Rs. = 2 euro to 60Rs = 1 euro (d) 52Rs. = 1$ to 50Rs = 1$
Ans. (a) euro appreciate and $ depreciate (b) $ appreciate and Rs. depreciate
(c) Rs. appreciate and euro depreciate (d) Rs. appreciate and $ depreciate.
Q.2) state whether the following will constitute demand or supply of foreign exchange
(a) indian going to USA for medical treatment (b) donation of 500 million$ received from
microsoft (c) import of goods from china (d) indian students going to USA for MBA (e)
foreign tourist to India to visit Taj Mahal (f) purchase of land in England (g) bought 500
pounds to sell for speculation.
Ans. DEMAND OF FOREIGN EXCHANGE (a), (c) , (d) , (f) and (g)
SUPPLY OF FOREIGN EXCHANGE (b) and (e)
Q.3) if Inflation is higher in country A than in country B , the exchange rate between these
two countries is fixed. What is likely to happen between trade balance of these two
countries?
Ans. In this situation, A country will import more goods from B country. Exports of country
B rises. So there will be surplus trade balance in country B and deficit trade balance in
country A.
CH – 12 BALANCE OF PAYMENTS (BOP)

Balance of payment is an accounting statement that provides a systematic
record of all economic transactions between residents of a country and rest of
the world in a given period of time.
BOP is a flow concept as it is concerned with period of time.
In the above meaning residents means individuals, firms and government

agencies.
ECONOMIC – TRANSACTIONS
ECONOMIC TRANSACTIONS refer to those transactions which involve

transfer of the ownership of goods, services, money and assets. Economic
transactions are as follows;
1.) VISIBLE ITEMS –
These include all types of physical goods which are exported and imported. These
are called visible items because they are made of some matter or material and
can be seen and touched.
2.) INVISIBLE ITEMS –
Invisible items of trade refer to all types of services like shipping, banking,
insurance etc. which are given and received. These are called invisible items
because they cannot be seen , felt, touched or measured.
3.) UNILATERAL TRANSFERS –
Unilateral transfers include gifts, remittances and other one way transactions.
Since these transactions do not involve any claim of repayment , they are also
known as unrequited transfers.
4.) CAPITAL TRANSFERS –
Capital transfers relate to capital receipts and payments. Capital receipts like
sale of assets and borrowings where as capital payments means purchase of
assets and repayment of borrowings. it basically involves assets , loans and
investment.
STRUCTURE OF BOP
BOP uses the double entry system for recording the transactions with rest of the
world. BOP has two sides
(i) CREDIT SIDE – all inflows of foreign exchange are recorded on the credit
side.
(ii) DEBIT SIDE – all the outflows of foreign exchange are recorded on the debit
side.
BOP IS OF THREE TYPES;

1.) BALANCED BOP – BOP is balanced when receipts of foreign exchange are
equal to payments of foreign exchange.
2.) SURPLUS BOP – BOP is in surplus when receipts of foreign exchange are
more than payments of foreign exchange.
3.) DEFICIT BOP – BOP is in deficit when receipts of foreign exchange are less
than payments of foreign exchange.
QUES . IS BOP ALWAYS BALANCED?
ANS. It must be noted that in the accounting sense BOP is always balanced by
showing net balances on debit and credit side, as per double entry system. But
in operational sense or economic sense, BOP need not be equal always. It can be
balanced , surplus or deficit in economic sense.
BALANCE OF TRADE (BOT)

Balance of trade refers to difference between amount of exports and imports of
visible items(goods)
BOT = exports of goods - imports of goods
Exports are entered as credit side or positive items in BOT while imports are
entered as debit side or negative side of BOT . BOT is just a part of BOP.
BOT is also known as balance of visible trade or trade balance.
BALANCE OF TRADE IS ALSO OF THREE TYPES;
When export of goods are exactly equal to import of goods , then it is known as
balanced BOT.
When export of goods are more than import of goods , then it is known as
surplus BOT or favourable BOT
When exports of goods are less than import of goods , then it is known as deficit
BOT or unfavourable BOT
DIFFERENCE BETWEEN BOP AND BOT

BASIS BOP BOT
MEANING it is an accounting statement BOT is the difference
That provides a systematic between amount of
Record of all economic exports and amount of
Transactions between residents imports of visible items.
Of a country and rest of the
world.
COMPONENTS it includes visible items, it includes only

Invisible items, unilateral visible items.
And capital transfers
Capital it records all transactions it does not record

Transactions of capital nature any transaction of
capital nature
scope it is a wider concept it is a narrow concept
settlement unfavorable BOP cannot unfavorable BOT can

be met out with favorable BOT be met out with
favorable BOP
COMPONENTS OF BOP
CURRENT ACCOUNT CAPITAL ACCOUNT

1.) Visible items (goods) capital transactions;
2.) Invisible items (services) 1.) Immovable assets
3.) Unilaterals (gifts, donations etc) 2.) Loans
4.) Rent, interest and profits 3.) Investments
5.) Movable assets like machinery
Spare parts etc
CURRENT ACCOUNT
Current account refers to an account which records all the transactions relating
to export and import of goods, services and unilateral transfers during a given
period of time. It includes receipts and payments of visible items, invisible
items and unilateral.
It is a flow concept
It must be noted that transactions of current account do not affect assets or

liabilities of our country and do not increase any future claims. It just affects
income of current year.
COMPONENTS OF CURRENT ACCOUNT –
1.) EXPORT AND IMPORT OF GOODS/VISIBLE TRADE/MERCHANDISE TRADE
A major part of transactions in foreign trade is in the form of export and import
of goods or movable assets. Payment for import of goods is written on negative
side or debit side whereas, receipts from export of goods are written on credit side
or positive side. Balance of these receipts and payments is called balance of
trade or visible trade.
2.) EXPORT AND IMPORT OF SERVICE/ INVISIBLE TRADE
It includes a large variety of non-factor services sold and purchased by

residents of the country. Payments are either received or made to the other
countries for use of services . services includes mainly insurance , shipping
and banking. Payment of these services are recorded on debit(negative side)
and receipts of these services are recorded on credit(positive side)
3.) UNILATERALS / UNREQUITED TRANSFERS / ONE SIDED TRANSACTIONS
It include gifts, donations, remittances and other one way transactions which
do not involve any claim of repayment. Receipt of these transfers from abroad
is recorded on credit side where as payments of these transfers to abroad is
recorded on debit side. It is basically those receipts and payments which take
place without any service in return.
4.) INCOME RECEIPTS AND PAYMENTS
It includes income in the form of rent , interest and profits generated on capital
transactions.
NOTE – current account is different from balance of trade. BOT records only
visible items(goods) whereas current account records visible items, invisible
items as well as unilateral transfers.
CURRENT ACCOUNT IS OF three types;
1.) Balanced current account arises when credit items are exactly equal to debit
items.
2.) Surplus current account arises when credit items are more than debit items.
3.) Deficit current account arises when credit items are less than debit items.
CAPITAL ACCOUNT;
Capital account of BOP records all those transactions between residents of a

country and rest of the world which cause a change in assets or liabilities of the
residents of the country or its government.
Capital account is used to finance deficit of current account or absorb surplus

of current account.
It is a stock concept.
Transactions of capital account do not affect income of our country, rather it

affects assets and liabilities position of our country.
COMPONENTS OF CAPITAL ACCOUNT
1.) BORROWINGS AND LENDINGS
All transactions relating to borrowings from abroad by private sector and

government will be recorded on credit side of capital account , whereas lending
of funds to the abroad by private sector and government will be recorded on
debit side.
It must be noted that recovery of loans given to abroad will be recorded on credit
side and payment of loans taken from abroad is recorded on debit side.
2.) INVESTMENTS
Investment by foreigners in shares of Indian companies or real estate. Such

investments will be recorded on credit(positive side) of capital account as they
leads to inflow of foreign exchange in our country.
Whereas, investment by Indian residents in shares of foreign companies or real

estate. Such investments will be recorded on debit(negative side) of capital
account as it leads to outflow of foreign exchange from our country.
INVESTMENTS ARE OF TWO TYPES;
1.) FOREIGN DIRECT INVESTMENT (FDI) – it refers to purchase of an asset

which gives direct control to the purchaser on the asset. Like purchase of land
and building.
2.) PORTFOLIO INVESTMENT (FII) – it refers to purchase of an investment

which does not give direct control to the purchaser on the asset. Like purchase of
shares.
3.) CHANGE IN FOREIGN EXCHNAGE RESERVES
Foreign exchange reserves are financial assets of the government held by RBI.
Any withdrawal from these reserves is recorded on credit side whereas any
deposit in these reserves is recorded on debit side.
It must be noted that BOP never records the total foreign exchange reserves, it
only records the change in these reserves during the year.
CAPITAL ACCOUNT IS OF THREE TYPES;
1.) Balanced capital account arises when credit items of capital account are
exactly equals to debit item of capital account
2.) Surplus capital account arises when credit items of capital account are more
than debit items of capital account.
3.) Deficit capital account arises when credit items of capital account are less
than debit items of capital account.
DIFFERENCE BETWEEN CURRENT ACCOUNT AND CAPITAL ACCOUNT (VERY VERY IMP.)
AUTONOMOUS AND ACCOMODATING ITEMS

AUTONOMOUS ITEMS –
Autonomous items refer to those international economic transactions which
take place due to some economic motive such as profit maximization. These
transactions are also known as above the line items.
These transactions are independent with the state of BOP because it occurred
only for profit motive. These transactions can take place in current account as
well as capital account.
ACCOMODATING ITEMS –
It refer to the transactions that are undertaken to cover deficit or surplus of

autonomous transactions. These transactions are occurred due to net
consequences of autonomous transactions.
These transactions are also known as below the line items.
Accommodating transactions are compensating transactions which are meant

to correct the disequilibrium of autonomous transactions.
DIFFERENCE B/W AUTONOMOUS AND ACCOMODATING ITEMS
BASIS AUTONOMOUS ITEMS ACCOMODATING ITEMS
MEANING it refers to those economic it refers to those transactions which

Transactions which take place are undertaken to cover deficit or surplus
Due to some economic motive of autonomous transactions.
Such as profit maximization.
EFFECT ON BOP these transactions are these transactions are undertaken to

Independent with the state maintain the balanced BOP.
Of BOP.
ACCOUNT it can take place in both it can take place only in

Current account as well as capital account.
Capital account
ALTERNATE NAME it is also known as above the it is also known as below the line
Line items. Items.
ORT ( Official Reserve Transactions)

It refers to transactions by the RBI that cause changes in the reserves of foreign
exchange. Such transactions take place when a country withdraws from its
stock of foreign exchange reserves to finance the deficit in BOP account.
Similarly when there is surplus in BOP then it leads to rise in stock of foreign
exchange reserves.
OFFICIAL RESERVE TRANSACTIONS are very important as they help to

bring a balance in state of BOP.
COMBINED QUESTIONS BOP AND FOREIGN EXCHANGE (very very imp.)
Q.1) how does giving incentives for exports affect the foreign exchange rate?
ANS. Due to increase in exports of our country the supply of foreign exchange will increase in our country.
Due to rise in supply of foreign exchange, foreign exchange rate will fall and domestic currency (Rs.) will
appreciate.
Q.2) how does rise in imports will affect the foreign exchange rate?
ANS. Due to rise in imports of our country, the demand of foreign exchange will increase to make payment for
imports.
Due to rise in demand, foreign exchange rate will also rise and thus domestic currency will depreciate.
Q.3) how does NRI deposits affect the foreign exchange rate?
ANS. With increase in NRI deposits the supply of foreign exchange will increase in our country. Due to rise in
supply of foreign exchange, foreign exchange rate will fall and domestic currency will appreciate.
Q.4) recently government of INDIA has doubled the import duty of gold. How it will impact foreign exchange
rate?
ANS. Due to increase in import duty, our imports will reduce and thus demand of foreign exchange will also
reduce. Due to fall in demand of foreign exchange, foreign exchange rate will fall and domestic currency will
appreciate.
Q.5) visit of foreign countries by INDIANS is rising day by day. Show the impact on foreign exchange rate.
ANS. Due to rise in tourism to abroad by INDIANS, the demand for foreign exchange will also increase. It leads to
rise in foreign exchange rate and domestic currency will depreciate.
Q.6) how increase in interest on investment in our economy will affect the foreign exchange rate?
ANS. With increase in interest rate on investment in our economy, foreign direct investment will also increase.
Thus, supply of foreign currency in our country will also increase. Due to rise in supply of foreign exchange,
foreign exchange rate will decline and domestic currency will appreciate.
Q.7) foreign exchange rate is rising. Show the impact on exports and imports?
ANS. 1 US$ = 20Rs to 1US$ = 40Rs. it means with same amount of dollars, foreign residents can now buy
more goods from INDIA and our exports will increase. But at the same time, with same amount of rupees, we
can now exchange less dollars, thus our imports will reduce.
Q.8) foreign exchange rate is falling. Show the impact on exports and imports?
ANS. 1US$ = 50Rs. to IUS$ = 25Rs. it means with same amount of dollars , foreign residents can now
buy less goods from INDIA and our exports will reduce. But at the same time, with same amount of rupees, we
can now exchange more dollars and thus our imports will increase.
Q.9) foreign exchange rate is rising. What will be the likely impact on national income?
Ans. National income is likely to rise. (explain currency depreciation for 4 to 6 marks)
Q.10) foreign exchange rate is falling. What will be the likely impact on national income?
Ans. National income is likely to fall. (explain currency depreciation for 4 to 6 marks)
NOTE –Above Questions from 1 to 6 must be explained with diagrams in board.
OTHER IMPORTANT QUESTIONS OF BOP
Q.1) classify whether the following will be recorded in current account or capital account
(a) purchase of shares of reliance by Microsoft. (b) import of computer spare parts from
germany. (c) borrowings from world bank (d) repayment of loan by indian govt. taken from
japan (e) gifts received from relative in America (f) purchase of land in England (g) shipping
service by indian company to foreign company.
Ans. Current account (b) (e) and (g) capital account (a), (c) , (d), (f)
Q.2) state whether the following will be recorded on credit side or debit side
(a) loan from IMF to cover deficit BOP (b) indian govt repays loan taken from IMF (c) purchase
of shares of Infosys by japaneese resident (d) export of jute to srilanka (e) acquisition of
foreign company by TATA (f) purchase of toys from china
Ans. Dr. side (b), (e) and (f) and cr. Side (a), (c) and (d)
Q.3) mention the side and account of these transactions
(a) investments from abroad (b) transfer of funds to relative abroad (c) imports of machinery
Ans. (a) it will be recorded on the credit side of capital account. (b) it will be recorded on the
dr. side of current account. (c) it will be recorded on dr. side of current account.
Q.4) where sale of machinery to abroad be recorded in BOP account. Give reasons
Ans. Sale of machinery will be recorded in cr. Side of current account. Sale of machinery will
lead to inflow of foreign exchange and thus recorded on cr. Side. Machinery , a movable assets
will be part of goods i.e current account
Q.5) INDIAN investors lend abroad. In which account and which side will be recorded?
Explain this impact on foreign exchange rate.
Ans. Indians lending abroad, it will be recorded on dr. side of capital account. It will be
recorded in capital account as investment affects assets and liabilities position of country. It will
be recorded on dr. side as it leads to outflow of foreign exchange.
When investors lend more money to abroad, then it will create demand of foreign exchange.
Rise in demand of foreign exchange leads to rise in foreign exchange rate and Indian rupees
will depreciate.
Q.6) MAKE IN INDIA and imports of pulses, show its effect on BOP.
Ans. Make in India will lead to increase in foreign investment in India and thus it leads inflow
of foreign exchange and BOP will be in surplus.
Import of pulses from abroad will lead to payment of foreign exchange, so there will be
outflow of foreign exchange and BOP will be in deficit
Q.7) explain current account deficit and current account surplus? State its significance
Ans. Current account deficit means receipts of current account are less than payments of
current account. Current account surplus means receipts of current account are more than
payments of current account. Current account deficit signifies that our country is a borrower
from abroad while current account surplus signifies that our country is a lender to abroad.
MACRO 1 MARK QUESTIONS
Q.1) capital formation is stock or flow? Q.2) Indians
working in the UNO office , located in aamerica for more
than one year will be Indian resident or not? Q.3) factor
income is a earning concept or receipt concept? Q.4)
trucks used in military will be included in national income
or not? Q.5) final goods have derived demand? Q.6)
sugar used for further income generation , so sugar is a
capital good? Q.7) duster purchased by a school will be
final or intermediate good? Q.8) what are the
components of NFIA ? Q.9) Bonus received on diwali will
be included in national income or not? Q.10) bread is
always a consumer good? Q.11) final goods are those
which are used either for ____ or for ____ Q.12)
refrigerator purchased by a confectionary will be _____
good? Q.13) GDPfc > GDPmp , this situation hold true
when? Q.14) payment of interest by bank to individual
will be included in N.Y or not? Q.15) payment of interest
by bank to firm will be included in N.Y or not? Q.16)
payment of interest by an individual to bank will be
included in N.Y or not? Q.17) payment of interest by a
firm to bank will be included in N.Y or not? Q.18) profits
earned by a company owned 70% by reliance and 30% by
google , set up in india will be included in domestic
income or not? Q.19) how real GDP is better than
NOMINAL GDP? Q.20) real GDP can be calculated by
using ____ year prices? Q.21) following will be included
in national income or not (a) bus fare paid by passenger
(b) free meal to employees (c) prize won in lottery (d)
expenses of foreign visitors in india.Q.22) WHEN can
nominal GDP be less than real GDP? Q.23) when can
nominal GDP be equal to real GDP.Q.24) current prices
are reliable base for comparison?? Q.25) 3200 Rs
contributed by harish( employee of nandlal co.) for his
own provident fund will be included in national income
or not? Q.26) what will be the impact of demonetization
on money supply? Q.27) what are the components of
money supply? Q.28) what will be the % of L.R.R if money
multiplier is 8 times. Q.29) calculate the L.R.R if initial
deposits of 500Rs lead to money creation of 2000Rs.
Q.30) BOT account is a ___________ concept. (a) stock
(b) flow Q.31) BOP always balanced in ________ sense.
Q.32) 1 US $ = 25 dinar, now it turns to 1 US $ = 20 dinar.
Which currency is appreciating?
Q.33) RECORD the following entries in the Dr. or Cr. Side
of respective account OF BOP with REASONS
(a) transferring money to USA account from india
account (b) purchase 700 shares( 49.9%) of google
company (c) sale of machinery to france (d) indians
earning 12% profit from investment in japan in
petroleum. (e) repayment of loans to Kuwait.
Q.34) . Measure the value of ex - ante average
demand when autonomous consumption
expenditure is Rs. 50 crores and MPS is 0.2 and level
of income is Rs. 4000 crores.
State, whether the economy is in equilibrium or not
ASSIGNMENTS OF CH 7TH AD
ASSIGNMENT 1ST (UP TO AS TOPIC)
Q.1) consumption of households is directly and entirely dependent on _________
Q.2) in the short run, investment is ________
Q.3) under three sector economy, aggregate demand shall be calculated as

summation of ________
Q.4) if income is zero and still household need to spend 500 Rs. then this amount
of 500 is called ____________
Q.5) can consumption curve be horizontal? Give reason and if No then what’s its
actual shape called?
Q.6) Is AD a negative slope with rise in Income? Give reason
Q.7) sum total of factor incomes i.e total of rent, wages , salary, interest and
profits will always be equal to ____________
Q.8) how can we calculate savings?
Q.9) income and AS curve will be 45 degree when changes take place on
horizontal and vertical axes are _______
Q.10) Economy is at break-even point, calculate savings.
ANSWERS :
1.) disposable income , 2.) autonomous (constant) , 3.) C + I + G , 4.) autonomous

consumption , 5.) No consumption curve cannot be horizontal because with rise
in income, consumption will also rise , thus it will be upward sloping , 6.) No, AD
will be positive slope with rise in Income. 7.) total Income will always be equal to
AS 8.) Income minus consumption 9.) Equal 10.) zero savings at break even
ASSIGNMENTS OF CH 7th AD
ASSIGNMENT 2ND (consumption function to savings
function)
Q.1) APC refers to the ratio of ________ expenditure to the corresponding level of
Income.
Q.2) APC is more than 1 before the _________ point
Q.3) value of MPC varies between ______ and ______

Q.4) at the break-even point, consumption is _______ to national income and
thus APC will be _______
Q.5) value of consumption will be _______ if national income is 1000 and APC and
APS is 6:4
Q.6) according to J.M Keynes psychological law of consumption, Income rises at

______ rate as compare to increase in consumption.
Q.7) why MPC of poor people is more than MPC of rich people?
Q.8) If entire additional income is saved, then MPC will be ______
Q.9) can MPC be more than 1? Give reason
Q.10) what will be the slope of savings curve and why?
Q.11) negative intercept of savings curve on y axis will always be equal to positive
intercept of consumption curve on y axis. True or false? Give reason for your
answer.
ANSWERS:
1.) consumption expenditure 2.) break-even point 3.) zero and one
4.) equal to national income and APC will be one 5.) APC is 6/10 and APS is 4/10
and income is 1000. Put the formula of APC = C/Y so, C will be 600
6.) greater proportion 7.) because poor people spends more on their
consumption when their income rises as most of their needs are unsatisfied
8.) MPC will be zero 9.) no, MPC can never be more than 1 because change in
consumption can never be more than change in income. 10.) savings curve will be
upward sloping because savings rises with rise in Income. 11.) True because at
zero income whatever we will consume will be extracted from past savings and
thus c and (-)c will be equal.
ASSIGNMENT 3rd ( APS to Meanings at last)

Q.1) which of the following can have the value of more than 1 and less than zero
(negative)? (a) APC (b) APS (c) MPC (d) MPS. Write about all.
Q.2) If MPC and MPS both are equal, then what will be the change in savings and
change in consumption if change in income is 1000
Q.3) Can APS be one? Give reason for your answer
Q.4) if entire additional income is saved, then what will be MPC and MPS?
Q.5) if there is break-even point at pt. M and that point extended to savings curve
and touches x axis, then savings will be _________
Q.6) _________ Investment curve is upward sloping and it is income ______
Q.7) what is the formula of consumption and savings function to calculate

consumption and savings?
Q.8) APC can never be ______ but APS possess the same value.
Q.9) C = 120 + 0.4(Y). What is the value of autonomous consumption, MPC and
MPS in this?
Q.10) If MPC is 3 times of MPS, calculate MPC and MPS.
Answers:
1.) APC can be more than 1 when C > Y but can never be negative as consumption
can never be negative , APS can never be more than 1 because savings never be
more than income but APS can be negative at the time of Dis-savings , MPC and
MPS both can never be negative and can never be more than 1
2.) If MPC and MPS both are equal, so both will be 0.5 as MPC + MPS = 1. So,
change in consumption and change in savings will be 500 and 500 respectively if
change in Income is 1000.
3.) NO, APS can never be one because savings can never be equal to Income as
consumption can never be zero.
4.) MPS will be one and MPC will be zero
5.) Savings will be zero 6.) Induced investment curve will be upward sloping and
It is Income elastic
7.) C = c + MPC(y) S = -c + MPS(y)
8.) ZERO and negative 9.) autonomous consumption is 120, MPC is 0.4 and MPS
is 0.6
10.) MPC = 3 MPS
As, MPC + MPS = 1
3MPS + MPS = 1
4MPS = 1
MPS = ¼ = 0.25
So, MPC will be 0.75
ASSIGNMENT 4TH OF NUMERICALS IS IN LAST PAGE OF NOTES OF CHAPTER 7TH
ASSIGNMENT OF CH 8TH
ASSIGNMENT 1ST ( starting to over full employment
equilibrium)
Q.1) if 45 degree straight line is tangent with AD curve then we can achieve the
break even level. True or false. Give reason
Q.2) point where neither any shortage nor any surplus is called ________
demand.
Q.3) Income/output corresponding to equilibrium level is called _______
Q.4) what will be the effect on planned inventory if aggregate demand is more
than aggregate supply.
Q.5) In order to bring the inventory back to desired level, firm will take any action.
write it
Q.6) Unemployment will generate when Ad is more than AS. True or false. Give
reasons.
Q.7) what is the difference between break even level and equilibrium level.
Q.8) ________ refers to a situation when AD is equal to AS at full employment.
Q.9) ________ refers to a situation when AD is equal to AS beyond the full

employment level.
Q.10) ________ will create during over full employment equilibrium
Answers:
1.) false, we will achieve the equilibrium level. 2.) effective demand 3.)
equilibrium income/output 4.) planned inventory would fall 5.) to increase the
inventory, firm will increase the output 6.) false, employment will create when
AD is more than AS 7.) at break even, Y=C and at equ. AD = AS 8.) full
employment equ. 9.) over full employment equ. 10.) Inflation
ASSIGNMENT 2ND ( INVESTMENT MULTIPLIER TO END OF

THEORY OF CH 8th )
Q.1) _______ is the slope of consumption curve and ______ is the slope of savings
curve.
Q.2) Investment multiplier is increase in investment due to increase in Income.
True or false. Give reasons
Q.3) Higher the value of MPS, ________ will be investment multiplier.
Q.4) which value of investment multiplier indicates continuous increase in income

and consumption?
Q.5) which value of investment multiplier indicates that there will be no further
increase in Income?
Q.6) calculate the value of investment multiplier if MPC and MPS both are equal.
Q.7) Inventories accumulate when planned savings is ______ than planned

investment.
Q.8) MPC 2 to 5, Investment multiplier is falling rapidly. True or false. Give

reasons.
Q.9) Investment Multiplier is 10 times, what will be MPC and MPS.
Q.10) Investment Multiplier works in both directions that is forward direction as

well as backward direction and thus it is called ______________
Answers: 1.) MPC is the slope of consumption curve and MPS is the slope of
savings curve. 2.) FALSE, investment multiplier is increase in income due to
increase in investment. 3.) lower will be multiplier 4.) Maximum value infinity
5.) Minimum value one 6.) as we know MPC + MPS = 1, as both are equal so,
MPC will be 0.5 and MPS will also be 0.5, SO, K = 1/ MPS. So K will be 2 times
7.) when planned savings will be more than planned investment, then due to
more savings, consumption will be less and thus AD will be less and thus
inventory will accumulate/increase.
8.) False, because with rise in MPC, K will also Rise
9.) K = 1/ MPS means 10 = 1/MPS so, MPS = 1/10, so MPS will be 0.1 and MPC
will be 0.9
10.) Double edged weapon.
ASSIGNMENT 3RD OF CH 8th (NUMERICALS)

Q.1) consumption function in an economy is given as C = 40 + 0.8Y . calculate the total increase in
income and increase in consumption if investment expenditure increases by 500 Rs.
Q.2) in an economy investment expenditure increases by 2000. Calculate the increase in income and
increase in consumption if ratio of MPC and MPS is 4:1
Q.3) savings function is given as S = -40 + 0.25Y , if planned investment is 100 Rs. then calculate
equilibrium level of income , level of consumption at this level and savings at this level.
Q.4) CALCULATE the value of MPC if in an economy with increase in investment, income rises 4 times
more than increase in investment.
Q.5) in an economy, the investment expenditure is 100 crores and consumption function is C = 250 +
0.8Y. (i) determine the equilibrium level of income. (ii) Find the equilibrium level of income again
if planned investment expenditure rises by 100 crores. (iii) value of multiplier due to increase in
investment.
Q.6) In an economy, autonomous Investment is 100 and the consumption is C = 80+0.4(Y). find out
whether the equilibrium level of Income exists at Rs. 400 or not.
Q.7) Calculate the value of Multiplier if Entire additional Income is saved.
SOLUTION 1st :
1.) C = 40+0.8Y and delta I is given as 500.
Here, 0.8 is the value of MPC, so, MPS will be 0.2

K = 1 / MPS , K = 1 / 0.2 , K = 5 times.
K = DELTA Y / DELTA I
5 times = DELTA Y / 500
DELTA Y = 2500.
NOW PUT THE FORMULA OF MPC,

MPC = DELTA C / DELTA Y
0.8 = DELTA C / 2500
DELTA C = 2000
SO, DELTA Y 2500 AND DELTA C = 2000
SOLUTION 2nd:
DELTA I = 2000 and ratio of MPC and MPS is 4 : 1
So, MPC is 4/5 means 0.8 and MPS is 1/5 means 0.2
As we know, K = 1 / MPS
K = 1/0.2 , K = 5 times.
5 times = DELTA Y / 2000
DELTA Y = 10,000
MPC = DELTA C / DELTA Y

0.8 = DELTA C / 10,000
DELTA C = 8000.
Solution 3rd:
S = -40+ 0.25Y and I is given as 100.
As we know, at equ. Level, S = I
SO,
-40 + 0.25 Y = 100
0.25 Y = 140
Y = 140 / 0.25
Y = 560
THEN, S = -40 +0.25Y

S = -40 + 0.25(560)
S = -40 + 140
S = 100
And also, at equ. S is always equal to I
NOW,
Y=C+S
560 = C + 100
C = 460
Solution 4th:
Income rises 4 times more than of increase in Investment
So, K will be 5 times.
K = 1/MPS
5 times = 1 / MPS
MPS = 1/5
MPS = 0.2
AS, MPC + MPS = 1

MPC + 0.2 = 1
MPC will be 0.8
Solution 5th:
C = 250+ 0.8Y and I is given as 100.
So, at equ.
Y = c + MPC(Y) + I
Y = 250+ 0.8Y + 100
Y = 350+ 0.8 Y
Y – 0.8Y = 350
0.2 Y = 350
Y = 350/ 0.2
Y = 1750
NOW, investment rises by 100, so I is now 200.

Put same formula again with I = 200
Y = c + MPC(Y) + I
Y = 250+ 0.8Y + 200
Y = 450+ 0.8 Y
Y – 0.8Y = 450
0.2 Y = 450
Y = 450/ 0.2
Y = 2250
NOW,
First Y is 1750 and second Y is 2250
Delta Y is 500
Similarly
First I is 100 and second I is 200
Delta I is 100
K = 500/ 100
K = 5 times.
You cannot calculate K with MPC and MPS here, because question already said calculate K with change
in Income and Investment
SOLUTION 6th:
C = 80+ 0.4Y and I is 100
At equ.
Y = c + MPC(Y) + I
Y = 80+ 0.4Y + 100
Y = 180+ 0.4Y
Y - 0.4Y = 180
0.6 Y = 180
Y = 180/ 0.6
Y = 300
So, Equilibrium level exists at 300 and not at 400.
Solution 7th :
If entire additional Income is saved,
So, MPS will be 1 and MPC will be 0
So, K = 1 / MPS
K=1/1
K will be 1 time
ASSIGNMENTS OF CH 9TH
ASSIGNMENT 1ST (EXCESS AND DEFICIENT DEMAND)
Q.1) When actual aggregate demand exceeds aggregate demand of full
employment equilibrium, then, gap is called ________
Q.2) if economy is at equilibrium above the full employment level, then output
will not rise. True or false with reason.
Q.3) reduction in government expenditures will increase the purchasing power of
people. true or false. Give reason
Q.4) deficiency in demand puts no effect on country’s output and prices. True or
false with reason.
Q.5) increase in bank rate on bank loans makes borrowings costlier for general
public. True or false.
Q.6) one of our friend said, employment will rise because of excess demand.
Justify this.
Q.7) rise in exports lead to _____ where as rise in imports lead to ______
Q.8) deficit financing can cause the problem of _______ in the economy.
Q.9) deficient demand causes voluntary unemployment in the economy. True or

false. Give reason
Q.10) Govt is proposed to increase income tax rate by 0.89% and GST by 1.26%,
what outcome we can expect on this?
Q.11) ________ indicates over full employment equilibrium and _______

indicates underemployment equilibrium.
Answers: 1.) inflationary gap or excess demand, 2.) true, here output will not rise
because economy is already at full employment and AS is maximum. 3.) false, it
will reduce the purchasing power of people as there will be fewer jobs for labour
and workers. 4.) false, deficient demand leads to fall in output and employment
in economy. 5.) true, borrowings will be costlier by increasing in bank rate. 6.)
your friend is wrong because at excess demand, there is full employment, so
further employment cannot rise. 7.) excess demand due to rise in exports and
deficient demand due to rise in imports 8.) excess demand 9.) false, deficient
demand will cause involuntary unemployment in the economy as due to less
production, producer will retrench(remove) some workers. 10.) deficient
demand will be the outcome. 11.) excess demand, deficient demand.
ASSIGNMENT 2ND (MEASURES TO TACKLE EXCESS AND

DEFICIENT DEMAND)
Q.1) during excess demand, RBI ______ the margin
Q.2) Change in govt expenditures and taxes are part of ________policy
Q.3) In case of deficient demand, RBI _______ the % of CRR and SLR.
Q.4) RBI decided to sell govt securities and bonds in the market in order to tackle
deficient demand in the economy. To what extent it is a valid step?
Q5) excess demand can be tackled by increasing the level of AS or by reducing the
level of AD or both? Choose wisely.
Q.6) to correct the inflationary gap, money supply(loan facility) should be

________
Q.7) during excess and deficient demand, RBI advise to discourage and encourage
lending, this is called _________
Q.8) RBI lends money to commercial banks to meet short term needs and that
rate at which RBI lends money is called ________
Q.9) when RBI will withdraw credit rationing?
Q.10) when AD is more than AS, then output will _______

Q.11) when AD is more than AS at full employment, then output will _____
Answers: 1.) increases the % of margin, 2.) fiscal policy 3.) reduces CRR and SLR.
4.) this is not at all a valid step as RBI will sell securities to tackle excess demand
and not for deficient demand. 5.) by reducing the level of AD 6.) reduced 7.)
moral suasion 8.) repo rate 9.) to encourage loans for tackling deficient 10.)
increase 11.) cannot increase at all because economy is at full employment.
ASSIGNMENT OF GOVT. BUDGET

ASSIGNMENT 1ST (INTRO TO NON-TAX REVENUE)
Q.1) corporate tax and capital gain tax is an indirect tax. True or false give reason
Q.2) financial help received from MNC for victims in a flood affected area. Identify
the type of receipt and its subpart with reason.
Q.3) Budget formed by central govt. is called _______
Q.4) Borrowing is a capital receipt as we all know that. Identify whether it will
reduce the assets of govt or increase the liabilities or both or none.
Q.5) A tax is a _________ tax, if its burden cannot be shifted.

Q.6) RAJU started a shop for general commodities and cosmetics and sold goods
for Rs 30 lakhs this year and liable for 10% GST. He calculated his income after
expenses and liable for income tax of 25000 Rs. identify the amount of direct and
indirect taxes.
Q.7) Govt decided to sell 20% shares and some part of its BSNL Company to pvt.
Investors. Identify the component of budget.
Q.8) Actual burden of ______ lie on the same person.

Q.9) The ultimate burden of indirect tax or GST lie on ______
Q.10) ________ refer to charges imposed by govt. to cover the cost of services
and _______ refers to charges imposed by govt for granting permission for
something.
Q.11) payments imposed on law breakers are called forfeitures. True or false.
Give reason.
Answers:
1.) false bcoz both of them levied on income and property and thus they are
direct taxes. 2.) it’s a revenue receipt and subpart is gifts and grants of non-tax
revenue and reason is it neither reduce any assets nor increase the liabilities.
3.) union budget 4.) increase the liabilities 5.) direct tax 6.) rupees three lakhs
GST is indirect tax and 25000 income tax is direct tax. 7.) it’s a capital receipt as it
reduces the assets of the govt. 8.) direct tax 9.) final user/consumer 10.) fees ,
license fees 11.) false, its fines and penalties.
ASSIGNMENT 2ND (CAPITAL RECEIPTS TO TYPES OF BUDGET)

Q.1) identify whether the following is a revenue receipt or capital receipt…(WITH
REASONS)
(a) loans recovered from private sectors enterprises (b) profit of LIC
(c) loans taken from foreign institutions (d) interest received on loans given to
banks.
Q.2) identify the nature of expenditures in following:(WITH REASONS)

(a) salary paid to BSNL and LIC employees (b) subsidies paid to farmers
(c) 28% shares purchased by government of google (d) construction of Yamuna
expressway
Q.3) surplus budget is harmful as govt. needs to face shortage, true or false.
Q.4) a person dies without leaving behind any will and govt transferred his entire
wealth to govt. accounts. Finance minister called it a capital receipt. To what
extent he is valid and why?
Q.5) Govt. is issuing kisaan vikas patras and receiving money as a loan from
public. What kind of receipt it is and mention the type/subpart.
Q.6) revenue receipts and revenue expenditures are together called as _______
Q.7) capital receipts and capital expenditures are together called as ________
ANSWERS/HINTS
1.) (a) capital receipts bcoz it reduces assets/debtors of govt. (b) revenue receipts
bcoz neither increase any liab nor reduces assets of govt. (c) capital receipts bcoz
it increases liab of govt. (d) revenue receipts bcoz neither reduces assets nor
increases liab of govt.
2.) (a) revenue expenditure bcoz neither creates assets nor reduces liabilities of
govt. (b) revenue expenditure bcoz neither creates assets nor reduces liabilities
of govt. (c) capital expenditure bcoz increases assets of the govt. (d) capital
expenditure bcoz increases assets of the govt.
3.) false, surplus budget creates surplus of money not the shortage
4.) his words are invalid, as its not a capital receipt bcoz it’s a revenue receipt
called ESCHEATS.
5.) it’s a capital receipt and increase liab of govt and subpart/type is small savings.
6.) revenue budget 7.) capital budget
ASSIGNMENT 3RD (REVENUE DEFICIT AND FISCAL DEFICIT)

Q.1) ___________ measures total borrowing requirements of the country.
Q.2) fiscal deficit is always inflationary? True or false. Give reasons.
Q.3) it creates a liability or reduces assets of govt. write its name.
Q.4) ________ deficit indicates that government is using up savings of other

sectors of the economy to finance its consumption expenditure.
Q.5) borrowing from public increase the _______ of the government.
Q.6) when RBI prints new currency, it creates ______________ pressure in

economy.
Q.7) out of borrowings or deficit financing, which source is better? Answer in

single statement.
Q.8) what is non-debt creating capital receipts?
Q.9) printing of new currency by RBI is called ________
Q.10) if total borrowings are only given, then, fiscal deficit will be ___________
Answers: 1.) fiscal deficit 2.) false, when govt. invests some of new currency on
infrastructure and industries then inflation will not create 3.) capital receipts
4.) revenue deficit 5.) liabilities 6.) inflationary 7.) borrowing is better as it
does not create inflation on economy. 8.) all capital receipts are non-debt capital
receipts except borrowings because borrowings creates debt or liabilities 9.)
deficit financing 10.) equal to total borrowings.
ASSIGNMENT 4TH (PRIMARY DEFICIT AND OBJECTIVES OF GOVT. BUDGET)
Q.1) Total borrowing requirements are 3, 50,000 and interest payments of

previous year are 1, 40,000. Calculate the primary deficit.
Q.2) interest payments are 10,000 which is 40% of primary deficit. Calculate fiscal
deficit.
Q.3) ________ budget is used during inflation and ________ budget is used
during deflation.
Q.4) finance minister proposed to raise taxes on cigarettes and also increased
taxes on income of rich people earning more than 1 crores. Motive is clear that is
welfare. What two objectives are govt trying to fulfill?
Q.5) Govt raises its expenditure on public goods. What objectives is government
trying to achieve?
Q.6) under ujjwala yojna, government is providing free LPG GAS connections to
people who are below poverty line. What objective is government trying to fulfill?
Q.7) primary deficit = _____________ -- interest payments.
Q.8) Govt decided to raise the level of taxes and reducing govt. expenditures to
tackle inflationary situation in the economy. Objective fulfilled is ___________
Q.9) revenue deficit 30,000 and borrowings are 2, 15,000. Calculate the primary
deficit if interest payments are half of revenue deficit.
Q.10) Encouraging setting up of production units in backward regions is one of the

objectives of govt. budget. Identify.
Answers: 1.) 2,10,000 bcoz total borrowings means fiscal deficit.

2.) let primary deficit be X, int. payments are 40% of primary deficit. So, int.
payments are 40% of X.
INT PAYMENTS = 40% OF X
10,000 = 40/100 x X
10,000 = 0.4 X
X = 10,000 / 0.4
X = 25,000.
NOW, P.D = F.D – INT.

25,000 = F.D – 10,000
F.D = 35,000
3.) surplus budget, deficit budget. 4.) reallocation of resources and reducing
inequalities. 5.) reallocation of resources. 6.) reducing inequalities.
7.) fiscal deficit 8.) Economic stability 9.) total borrowings are fiscal deficit i.e
2,15.000 and interest payments will be 15,000, so, PD will be 2,00,000
10.) Reducing regional disparities.
CHAPTER 11TH FOREIGN EXCHANGE

ASSIGNMENT 1ST (INTRODUCTION TO MANAGED FLOATING EXCHANGE RATE
SYSTEM)
Q.1) there is a change in rate of dollars in respect to pounds. 1 US$ = 2 pounds
and now it is 2 US$ = 6 pounds. Identify which currency is depreciating?
Q.2) when rate of foreign currency is rising, then, NY of our country is likely to
______
Q.3) Who maintains all records and reserves of foreign exchange under managed
floating exchange rate system?
Q.4) ___________ of rupees will occur when 65 Rs have to be paid for 1 dollar
instead of present 70 Rs for a single dollar.
Q.5) under _________ exchange rate system, each country sets the value of its
currency in terms of some external standards like gold.
Q.6) _____ refers to increase in price of foreign currency in terms of domestic

currency under fixed exchange rate system.
Q.7) demand of dollars is rising day by day and thus its rate is also rising and we
need to pay more rupees to buy one dollar, this is called ___________ (a)
depreciation of rupees. (b) devaluation of rupees (c) appreciation of dollar (d)
both a and c.
Q.8) Managed floating rate system is a hybrid of ______________
Q.9) increase in value of domestic currency by the government is called

__________
Q.10) floating and managed floating exchange rate system are same. True or
false. Give reason
Answers: 1.) 1 US$ = 2 POUNDS , NOW, I US $ = 3 POUNDS

So here more pounds need to pay for one dollar, so, pound is depreciating.
2.) NY is likely to rise due to rise in exports.

3.) Central Bank i.e RBI
4.) Appreciation of rupees
5.) Fixed Exchange rate system
6.) devaluation
7.) both a and c
8.) fixed and flexible exchange rate system
9.) revaluation
10.) floating relates with flexible exchange rate system and managed floating
relates with hybrid of fixed and flexible system. Thus, both are different and the
statement is false.
ASSIGNMENT 2ND (FOREX LAST TOPICS AND BOP AND BOT)

Q.1) Indians going to USA for medical treatment. This will result in demand of
foreign exchange or supply of foreign exchange?
Q2.) due to increase in rate of foreign exchange, imports from foreign country will
increase and thus demand of foreign currency will also increase. True or false with
reason.
Q.3) if exports will increase of our country then there will be more demand of
foreign exchange in our country. True or false with reason.
Q.4) rate of pounds with respect to rupees is rising. What will be the impact on
exports, imports and national income of India.
Q.5) there is no official intervention in _________ system.
Q.6) Unrequited transfers are also known as __________
Q.7) BOP is always balanced in __________sense

Q.8) BOP is based on single entry system. True or false
Q.9) Unfavorable BOT (DEFICIT BOT) can be met out with ___________
Q.10) BOT includes only goods and services. True or false with reasons.
Answers: 1.) this will result in demand of foreign exchange as Indians will need
dollars to make payment in USA for medical treatment.
2.) FALSE, bcoz due to increase in rate, imports will fall and thus demand will also
fall.
3.) FALSE, if exports will increase then there will be more supply of foreign
exchange.
4.) it means Indian currency is depreciating, so, exports and NY of India will
increase and imports will fall.
5.) flexible system. 6.) one sided transfers/ unilateral transfers
7.) Accounting sense 8.) FALSE, BOP is based on double entry system as every
transactions has two effects.
9.) FAVOURABLE BOP/ SURPLUS BOP
10.) FALSE, BOT includes only goods and not services means only visible items.
ASSIGNMENT 3RD (CURRENT ACCOUNT TO LAST BOP)

Q.1) RECORD THE FOLLOWING TRANSACTIONS, IDENTIFY in which account of BOP
and in which side will it be recorded?
(a) imports of spare-parts (b) Japanese purchasing 7% shares of reliance co. (c)
Banking services to NRI
Q.2) _______ transactions are independent with the state of BOP.
Q.3) Government increased import duties on Import of fertilizers from China.

Write down its effect on foreign exchange rate. Show effect with diagram.
Q.4) Is current account deficit is an alarming situation? Give reason for your
answer.
Q.5) India received amount on account of export of seeds to Nepal and recorded
it in capital account. Justify
Q.6) APPLE co. recently shifted its production base in India for manufacturing of
various apple accessories. Identify
(a) whether it will affect demand or supply of foreign exchange.
(b) effect on foreign exchange rate. Show diagram.
Q.7) borrowings lead to inflow of foreign exchange in current account of Bop and
thus will be recorded in credit side.
Answers:
1.) (a) current account and DR side (b) capital account and CR side (c) current
account and CR side
2.) autonomous items/transactions.
3.) IMPORT duties rises, so, imports will fall and thus demand of forex will fall and
thus demand curve shifts leftward leads to fall in exchange rate and thus forex
rate will decline and Indian rupees will appreciate.
4.) NO, current account deficit can easily be tackled by capital account surplus and
thus it’s not an alarming situation.
5.) This entry is not correct as export of seeds will be recorded in current account
as seeds are movable and visible items.
6.) (a) apple co. shifted its unit in India and thus it leads to rise in inflow or supply
of foreign Exchange in India.
(b) rise in supply leads to rightward shift of supply curve and thus forex rate will
fall and thus Indian currency will appreciate.
7.) PARTLY TRUE, as borrowings leads to inflow of forex. This statement is true but
it will be recorded in capital account and not current account.
ASSIGNMENT OF CH 1ST (COMPLETE CHAPTER)

Q.1) classify the following as stock and flow: (with reason)
(a) profit and losses (b) national Income of a country (c) wealth (d) balance in a
bank account (e) production.
Q.2) In the ______ phase, ______ provide factors to producers and producers
generate _______
Q.3) _________ variable is a dynamic concept
Q.4) the amount of production in economy with two sector approach is 12000
units of value Rs. 50,000.calculate consumption. Justify your answer.
Q.5) Ramesh deposited 10 Lakhs in bank for fixed deposits and earning 7.12% pa
interest. Identify stock and flow.
Q.6) In a closed economy, _______ is not included.
Q.7) Give an example, which can be stock as well as flow on different times.
Q.8) in two sector model, households supplied factors to producers in domestic

territory and outside the domestic territory. Justify
Answers:
Ans 1. (a) flow (b) flow (c) stock (d) stock (e) flow
Reason for pts a, b and e – as it is measured over a period of time.
Reason for pts c and d - as it is measured at a particular point of time.
Ans 2. Generation phase, households , goods and services.
Ans 3. Stock variable
Ans 4. Consumption will be same as production i.e Rs 50,000 bcoz there is no

savings in the economy.
Ans 5. The amount of deposit is stock as it is measured at a particular point of
time and interest will be flow as its regular earning and measured over a period of
time.
Ans 6. Abroad
Ans 7. Suppose production of march is flow but production on 31 st march is stock.

You can take any example of that except those which are specific like GDP can
only be flow. And wealth can only be stock.
Ans 8. Not justified, bcoz in two sector model abroad is not included so factors
cannot be supplied to outside producers.
ASSIGNMENT OF CH 5TH (MONEY COMPLETE CHAPTER)
Q.1) Barter system is also called as _________ economy.
Q.2) it is very difficult to make deferred payments in case of _________
Q.3) Money can be accepted as medium of exchange or asset or both? Give

reason.
Q.4) Money supply includes money held by ________ and not by ________
Q.5) Money supply can be calculated over a period of time. True or false with
reason.
Q.6) M1 is also known as ___________
Q.7) ______ can be accepted for all payments and it is legally acceptable and
everyone is bound to accept it.
Q.8) during demonetization, if entire money which is now not legal tender
deposited in bank , then money supply will ____________
Q.9) during demonetization, if some part of money which is now not legal tender
is not deposited in bank, then , money supply will _________
Q.10) It was difficult to decide that how much wheat is needed to exchange with
one kg of rice. This is an example of one of the drawback of barter system. Write
that.
Answers:
1.) C – C economy. 2.) goods and services under barter system
3.) money can be accepted as a medium of exchange as well as assets because it
can be used for daily transactions and can be stored for future use also.
4.) public and not by banks and govt.
5.) false, money supply can be calculated at a particular point of time.
6.) transaction money
7.) fiat money/ legal tender money / currency
8.) will remain same 9.) will reduce
10.) lack of measure of value / lack of unit of account.
ASSIGNEMNT OF CH 6TH BANKING (IMP. TERMS AND CREDIT CREATION)
Q.1) The rate at which commercial banks accept deposits is called _______
Q.2) The rate at which commercial banks lend money is called _________
Q.3) Difference between Q.1 and Q.2 is called ____________
Q.4) _________ account holders do not receive any interest.
Q.5) It is legally mandatory for the banks to keep a certain minimum fraction of
their deposits and this is called as ___________
Q.6) money multiplier is inversely related to LRR. True or false with reason,
Q.7) money multiplier is also known as __________ and ___________
Q.8) Calculate the total deposits if Initial deposit is 10,000 and LRR is 25%.
Q.9) Money creation leads to ________ in National income and _______ in

domestic income.
Q.10) Total deposits are 15000 and LRR is 10%. Calculate Initial deposits.
Answers:
1.) borrowing rate 2.) lending rate 3.) spread
4.) current account holders 5.) LRR
6.) True, MM is inversely related with LRR bcoz lowest will be LRR, so, Highest will
be money multiplier
7.) credit multiplier and deposit multiplier.
8.) MM = 1 / LRR so, MM = 1/ 25% ,
MM = 4 times.
TD = MM x ID
TD = 4 x 10,000
TD = 40,000
9.) rise in NY and also rise in DY
10.) MM = 1/ LRR
MM = 1 / 10%
MM = 10 times.
TD = MM x ID
15,000 = 10 x ID
ID = 1500 Rs.
ASSIGNMENT 2ND (FUNCTIONS OF RBI)
Q.1) The central bank acts as ___________ to both central and state
government.
Q.2) _______ refers to minimum percentage of net demand deposits which the
commercial banks are required to maintain with themselves.
Q.3) Components of Legal reserve ratio are _____ and _____
Q.4) Value of money multiplier _______ with increase in LRR. (a) increases (b)
decreases (c) unchanged (d) none.
Q.5) All the currency issued by RBI is its ___________ liability.
Q.6) RBI increases the money supply during Inflation and acts as controller of
money supply. True or false with reason.
Q.7) RBI can easily settle claims of commercial banks against each other and
thus RBI acts as Custodian of cash reserves. True or false with reason.
Q.8) RBI can be owned by private sector also. Is the statement justified?
Q.9) Centralization of foreign exchange transactions indicate one of the function

of RBI. Write the name.
Q.10) Name the bank which do not work for Economic motive.
Answers:
1.) Banker 2.) Statutory liquidity ratio (SLR)
3.) CRR and SLR 4.) Decreases, as there is inverse relation between LRR and
money multiplier.
5.) Monetary liability 6.) False, bcoz during Inflation RBI will reduce the money
supply, not Increase
7.) False, when RBI settle claims of commercial banks then it acts as clearing
house not custodian.
8.) This statement is not justified bcoz RBI can be owned by Govt only and not
by private sector as it’s a Government authority.
9.) Custodian of foreign exchange reserves.
10.) Central bank i.e RBI
ASSIGNMENTS OF CH- 2ND (DOMESTIC TERRITORY to FACTOR AND TRANSFER

INCOME)
Q.1) IDENTIFY whether the following are part of domestic territory or not.
a.) An Indian company in London b.) Microsoft office in India c.) Indian
embassy in Japan d.) Russian embassy in India e.) Mahindra provides one of
its building on rent to foreigners in USA.
Q.2) Identify the following whether they are normal residents or not:
a.) Indians working in Indian embassy in USA
b.) Indians working in UNO for 8 months and UNO is located in America.
c.) Foreign tourists visiting India for a month to see the TajMahal
d.) Indians going to Pakistan for watching cricket match.
e.) Russian working in WHO setup in India and he is working for 15 months.
Q.3) IDENTIFY whether the following are factor income or transfer Income.
a.) salary received by rakesh from a company
b.) Claim received from Insurance company by an injured worker.
c.) Gift received from employer by an employee
d.) Bonus received on Diwali.
Answers:
Ans 1. a) not a part of indian territory
b) part of indian territory
c) Part of Indian territory
d) Not a part of Indian Territory
e) Not a part of indian territory
Ans 2.)
a) Indian resident
b) Indian Resident
c) Not an Indian Resident
d) Indian Resident
e) Indian Resident
Ans 3.)
a) factor Income b) transfer Income c) transfer Income d) factor Income
ASSIGNMENT 2ND OF CH 2ND (FINAL GOODS TO CAPITAL GOODS)
Q.1) IDENTIFY WITH REASONS WHETHER THE FOLLOWING WILL BE A FINAL

GOOD OR INTERMEDIATE GOOD
a) Machine purchased by a firm b) Book purchased by a student
c) Soft drinks purchased by a school canteen
d) Exhaust fans used for making coolers.
e) Seeds purchased by a farmer for producing wheat
f) Unsold goods at the end of the year
g) Chalk duster purchased by a school
h) printer purchased by a lawyer.
Q.2) A car used as a taxi, a refrigerator used in a hotel and AC in the house.
Identify which is final capital good and which is final consumption good with
REASONS.
Q.3) Final goods are those goods which are used either for ______ or for
________
Q.4) _______ income is a receipt concept.
Q.5) __________ goods are used up in a single act of consumption.
Q.6) _________ goods are still within the production boundary.
Q.7) factor income is received by __________
Answers:
Ans 1.
a) Final good as it is an investment for the firm.
b) final good as it is purchased for self use
c) intermediate goods as it is purchased for further sale
d) intermediate goods as it is purchased for further production
e) intermediate goods as it is purchased for further production
f) final goods as it is a closing stock means assets.
g) intermediate goods as it is purchased for further services
h) final goods as it is an investment.
Ans 2.) A car used as a taxi and refrigerator used in the hotel both are final
capital goods as they are assets for income generation
Whereas, AC in the house is final consumption good as it is for personal use.
Ans3.) either consumption or for investment
Ans 4.) Transfer Income Ans 5.) Non durable goods

Ans 6.) Intermediate goods
Ans 7.) owner of factors of production.
ASSIGNMENT 3RD (gross investment to NFIA and ch 3rd numerical)
Q.1) GDPmp 4800, indirect taxes 300 , NFIA 80 , consumption of fixed capital 200
, subsidies 60.
Calculate national income (NNPfc)
Q.2) national income 6700 , consumption of fixed capital 180 , factor income from
abroad 100 , indirect taxes 130 , subsidies 70 , factor income to abroad 150.
Calculate GDPmp
Q.3) GDPfc 55000 , indirect taxes 4400 , factor income paid to abroad 600 , NNP
mp 55,500 , factor income received from abroad 1300 , depreciation 2500.
Calculate subsidies.
Q.4) Mention the situations when following equations will hold true
1.) GDPfc> GDPmp 2.) NNPfc<NDPfc 3.) GDPfc = GDPmp
Q.5) In a closed economy, NDP equal to NNP. WHY?
ANSWERS:
Ans 1.)
GDPMP 4800 – depreciation(200) = NDPmp 4600
Now,
NDPmp 4600 – IT + subsidies = NDPfc (4360)
Now,
NDPfc 4360 + NFIA = NNPfc 4440
Ans is 4440
ANS 2.
NNPfc(6700) + depreciation(180) = GNPfc 6880
Now,
GNPfc(6880) + paid to abroad – received from abroad = GDPfc 6930
Now,
GDPfc 6930 + IT – subsidies = GDPmp 6990
Ans is 6990
ANS 3.
GDPfc 55000 – depreciation = NDPfc 52500
Now,
NDPfc 52500 + rec. from abroad – paid to abroad = NNPfC 53,200
Now,
NNPfc we have 53200 and NNPmp is already given 55,500
Difference between these two is indirect tax and subsidies.
So,
NNPMP – indirect tax + subsidies = NNPfc
55,500 – 4400 + subsidies = 53,200
By solving, subsidies will be 2100
Ans is 2100.
Ans 4.)
a) FC > MP…it is possible when IT is less than subsidies or when NIT is negative
b) NATIONAL < DOMESTIC…it is possible when NFIA is negative
c) MP = FC….it is possible when NIT is zero.
Ans 5. YES in closed economy, NDP is equal to NNP because closed economy
does not contain abroad and thus NFIA will be zero.
ASSIGNMENT 1ST CH 4TH (THEORY OF VALUE ADDED METHOD)
Q.1) Value added method is also known as _______ and ______ method.
Q.2) Addition of value to the raw-material by a producer during the productive

activity is called ___________
Q.3) If value addition is 200 and value of output is 850. Calculate intermediate
consumption. Show working.
Q.4) Units sold x Price = _____________
Q.5) units produced x PRICE = _____________
Q.6) For calculating the national Income from Value Added Method, we need to
sum up all the value additions of all sectors. True or false.
Q.7) Your mom paid 3500/- salary to maid for her sanitation services during this
month at your home. Thereafter, your mom started cooking in kitchen and
made some delicious dishes for entire family. Treat the above in calculating
National income.
Q.8) Inventory (change in stock) will be included in National Income as it is a

part of _________.
Q.9) double counting can be avoided by ___________.
Q.10) Goods produced and self consumed by producer will be included in

national Income. Why?
Q.11) services for self consumption i.e domestic services will not be Included in
National Income. Why?
Answer:
1.) Product method and output method.
2.) Value addition / value added
3.) Value of output – IC = value addition
850 - IC = 200
IC = 650
4.) SALES
5.) Value of output
6.) FALSE, because with addition of value added by all sectors we will get
GDPmp not National Income.
7.) salary paid to maid 3500/- will be included in national Income as maid
provided factor services in return but services of MOM will not be included in
national income as its monetary value cannot be calculated.
8.) Assets or Capital Formation
9.) final output method and by value addition method (write any one)
10.) if goods are self consumed, then it will be included in NY as its monetary
value can be calculated and moreover it’s a part of current year output.
11.) because its monetary value cannot be calculated.
ASSIGNMENT 2ND OF CH 4TH (VALUE ADDED METHOD NUMERICALS)
Q.1) Gross value of output 300, net value added at factor cost 100, subsidies 15
and depreciation 30. Calculate the value of Intermediate Consumption.
Q.2) Fixed capital worth 15 with life span of 5 years, raw-materials 6, Sales 25,
net change in stock (-)2, taxes on production 1. Calculate Net value added at
market price.
Q.3) Subsidies 200, opening stock 100, closing stock 600, intermediate
consumption 3000 , consumption of fixed capital 700, profits, 750, Net value
added at factor cost 2000. Calculate Sales.
Q.4) You are given the following Information about four producers A, B , C and
Din an Economy. A sells output to B for Rs. 300, for Rs. 200 to C and for Rs. 500
to households. The sales of B to A, C and D are 400, 200 and 300 respectively. C
sells output to A, B and D for 100 each. Sales by C to households are worth Rs.
900. D sells to households Output worth Rs 700. Exports by D is Rs 300 and 200
remain unsold (stock).
Calculate value added by A,B,C and D.
Q.5) Consumption of fixed capital 600, GST 400, output sold in units 2000, price
per unit 10, Net change in stock (-) 50, Intermediate cost 10,000 and subsidy
500. Calculate net value added at factor cost.
Answers:
Solution 1st –
NDPfc 100 + depreciation 30 = GDPfc 130.
So,
GDPfc 130 + IT NIL – subsidies 15 = GDPmp 115
Then,
Value of output – I.C = GDPmp
300 – IC = 115
So, IC = 185
Solution 2nd:
Asset value / life = depreiation
Depreciation = 15 / 5 = 3.
Sales + change in stock + self consumption – IC = GDPmp

25 + (-) 2 + 0 – 6 = GDPmp
GDPmp = 17.
GDPmp – depreciation = NDPmp

17 – 3 = 14.
SO, NDPmp = 14.
Solution 3rd:
NDPfc + depreciation = GDPfc
2000 + 700 = 2700
Then, GDPfc + IT – subsidies = GDPmp
2700 + 0 – 200 = GDPmp
So, GDPmp = 2500.
SALES + change in stock – IC = GDPmp

Sales + 500 – 3000 = 2500
SALES = 5000.
Solution 4th :
FIRM A Sales 300 + 200 + 500

Change in stock zero
Self consumption zero
- IC 400 + 100
= GDPmp = 500
FIRM B Sales 400 + 200 + 300
- IC 300 + 100
= GDPmp 500
FIRM C Sales 100 + 100 + 100 + 900

- IC 200 + 200
= GDPmp = 800
FIRM D
Sales 700 + Exports 300
Change in stock 200
- IC 300 + 100
= GDPmp = 800
Solution 5th:
Units sold x price = SALES
2000 Units x 10 = SALES
SALES = 20,000
Sales + change in stocks + self consumption – IC = GDPmp

20,000 + (-)50 + 0 – 10,000 = GDPmp
GDPmp = 9950.
Now,
GDPmp 9950 – depre 600 = NDPmp
NDPmp = 9350
Now,
NDPmp 9350 – IT + Susidies = NDPfc
9350 – 400 + 500 = NDPfc
So, NDPfc = 9450
ASSIGNMENT 3RD CH 4TH ( INCOME METHOD’S NUMERICALS)
Q.1) prove that net value added at factor cost is equal to income generated.
Addition to stock 1000 , sales 10,000 , net indirect taxes 800 , purchase of raw-material 1650 ,
expenses on power 850 , consumption of fixed capital 500 , rent 700 , compensation of
employees 3500 , interest 1000 , dividend 1500 , corporate tax 300 , Undistributed profits 200.
Hint: raw-material + power = IC
Q.2) Employee compensation 600, Rent and Interest 350 , profit 200 , indirect tax 160 ,
consumption of fixed capital 200 , mixed Income of self employed 850 , subsidies 40 , NFIA (-)
100.
Calculate GNPmp with the help of Income method.
Q.3) wages and salaries in cash 2500, rent 1300, corporate taxes 300, retained earnings 600 ,
employer’s contribution in provident funds 5000, vouchers 1000 , royalty 3000 , retirement
Calculate SALES.
Q.4) Calculate GDPmp by value added and income method.
Purchase of fuel and power 1200 , sales 1900 , closing stock 1000 , rent 10 , opening stock 300 ,
compensation of employees 950 , profits 285 , NFIA (-20) , corporate savings 35 , corporate
taxes 200 , interest 5 , depreciation 40 , net indirect taxes 10 , mixed income 100
SOLUTIONS:
1st answer
By Income Method –
Compensation of employees = 3500.
Operating surplus = Rent + Royalty + INTEREST + Profits
= 700 + 0 + 1000 + (1500+300+200)
= 3700
Mixed Income = 0
COE + OS + MI = NDPfc
3500 + 3700 + 0 = NDPfc
So, NDPfc = 7200
NOW, BY VALUE ADDED METHOD:

Sales + change in stock – IC = GDPmp
10,000 + 1000 – 2500 = GDPmp
So, GDPmp = 8500
Now,
GDPmp – depre – NIT = NDPfc
8500 – 500 – 800 = NDPfc
NDPfc = 7200
SOLUTION 2ND:
Compensation of Employees = 600
Operating Surplus = Rent + Interest + Profits + Royalty
= 350 + 200 + 0
= 550
Mixed Income = 850
So, COE + OS + MI = NDPfc

600 + 550 + 850 = NDPfc
NDPfc = 2000
Now,
NDPfc 2000 + depre 200 = GDPfc 2200
Then, GDPfc 2200 + IT 160 – subsidies 40 = GDPmp 2320
Now, GDPmp 2320 + NFIA (-) 100 = GNPmp

GNPmp = 2220
Solution 3rd:
COE = 2500 + 1000 + 2500 + 5000 = 11,000
OS = 1300 + 3000 + (300 + 600 + 1400)
OS = 6600
MI = 0
So, NDPfc = 11,000 + 6600 + 0

NDPfc = 17,600
Now, NDPfc + depre + IT – SUBSIDIES = GDPmp

So, GDPmp = 16,600.
As per value added method….

SALES + CHANGE IN STOCK – IC = GDPmp
SALES + 200 – 1400 = 16,600
SALES = 17,800
SOLUTION 4th
Value added method:
Sales + change in stock – IC = GDPmp
1900 + 700 – 1200 = GDPmp
GDPmp = 1400
INCOME METHOD:
COE = 950
OS = 10 + 5 + 285 = 300
MI = 100
Then, NDPfc = 950 + 300 + 100

NDPfc = 1350
NDPfc + depre + NIT = GDPmp

1350 + 40 + 10 = GDPmp
So, GDPmp = 1400
ASSIGNMENT 4TH (INCOME METHOD THEORY)
Q.1) Interest paid to bank on loan taken by Individual or for consumption purpose. Identify
with reason whether it will be included in NY or not?
Q.2) Interest paid to bank on loan taken by Firm or for production purpose. Identify with
reason whether it will be included in NY or not?
Q.3) Interest paid by banks to public for depositing money in bank. Identify with reason
whether it will be included in NY or not?
Q.4) Payment made by one firm to another firm for services. Identify with reason whether it
will be included in NY or not?
Q.5) profit is given as 2500, corporate taxes 500 and dividend is 1200. Calculate retained
earnings. Show working.
Q.6) Shares purchased worth Rs 1.25 lakhs will be included in NY or not? Identify with reason.
Q.7) Corporate taxes or any tax are not a part of national Income. Why?
Q.8) Shares purchased above of 1.25 lakhs, now sold at 1.30 lakhs. Treat the profit of 5000
while calculating National Income.
Q.9) Scholarships received by a student will be included in national income or not and why?
Q.10) Bonus is a part of operating surplus? Justify
Answers:
1.) NOT INCLUDED as the amount spent is not connected with any productive activity.
2.) INCLUDED as the amount spent on productive purpose
3.) INCLUDED as bank is using the deposits for further investments and productive purpose.
4.) NOT INCLUDED as it is an intermediate payment.
5.) Retained earnings will be 800.
6.) NOT INCLUDED as it is a paper claim
7.) NOT INCLUDED because it is a compulsory transfer payment.
8.) NOT INCLUDED as its is a capital gain and does not related with any productive activity.
9.) NOT INCLUDED as it is a transfer Income.
10.) NOT JUSTIFIED, as bonus is a part of wages and salaries in cash under compensation of
employees.
ASSIGNMENT 5TH (EXPENDITURE METHOD NUMERICALS)
Q.1) calculate the value of hidden depreciation and national income from following data
Private final consumption expenditure Rs.2250, government final consumption
expenditureRs. 1250, imports Rs.250, factor income paid to abroad Rs.200,
transfer income received from abroad Rs.875, indirect taxes Rs.1050, subsidies
Rs.2000, gross domestic capital formation Rs.5000, net domestic fixed capital
formation Rs.3400, closing stock Rs.800, opening stock Rs.200, exports Rs.300
Q.2) Calculate ' Net domestic product at factor cost' by the expenditure method and Product method: -
ii. Net export. -50
iii. Intermediate purchase by the primary sector. 600
v. Intermediate purchase by the secondary sector 700
Vi. Government final consumption expenditure 400
viii. Intermediate purchase by the territory sector. 700
Q.3) Calculate NNPfc by Income and expenditure method:

Mixed income of self employed 100 , Gross fixed capital formation 300 , private final
consumption expenditure 900 , net exports (-) 50 , subsidies 50 , Govt. final consumption exp.
150 , Rent 60 , indirect taxes 250 , interest 200 , change in stock 50 , compensation of
employees 400 , profit 340 , consumption of fixed capital 50 , NFIA 50 ,
Q.4) value of output of primary sector 300 , value of output of secondary sector 200 , value of
output of tertiary sector 100 , IC of primary sector 100 , IC of secondary sector 50 , IC of
tertiary sector 50 , Emoluments(compensation) of employees 150 , NFIA (-)10 , operating
surplus 140 , consumption of fixed capital 40 , NIT 20 , Interest 20 , MIXED income 50 , RENT
10.
SOLUTIONS:
ANS 1.)
Net domestic fixed capital formation 3400
+ change in stock 600
= net domestic capital formation 4000
Gross domestic capital formation 5000 is already given

Difference between above two is depreciation which is 1000.
Now,
PFCE + GFCE + EXP. OF NPO + GROSS DOMESTIC CAPITAL FORMATION + NET EXPORTS
2250 + 1250 + 0 + 5000 + 50
= GDPmp = 8550
GDPmp – depre – IT + subsidies + NFIA = NNPfc

8550 – 1000 – 1050 + 2000 – 200 = 8300
So, NNPfc = 8300
ANS 2nd :
EXP. Method
PFCE + GFCE + EXP. OF NPO + GROSS DOMESTIC CAPITAL FORMATION + NET EX. = GDPmp
1450 + 400 + 0 + (200+50+50) – 50 = 2100
So, GDPmp = 2100
Now,
GDPmp – Depre – IT + subsidies = NDPfc
2100 – 50 – 100 + 0 = 1950
NDPfc = 1950
Value added method:

Value of output – IC = GDPmp
4100 – (600+700+700) = GDPmp
GDPmp = 2100
Now,
GDPmp – Depre – IT + subsidies = NDPfc
2100 – 50 – 100 + 0 = 1950
NDPfc = 1950
Ans 3.
EXP. Method
PFCE + GFCE + EXP. OF NPO + GROSS DOMESTIC CAPITAL FORMATION + NET EX. = GDPmp
900 + 150 + 0 + (300+50) – 50 = GDPmp
GDPmp = 1350
GDPmp – depre – IT + subsidies + NFIA = NNPfc

1350 – 50 – 250 + 50 + 50 = NNPfc
NNPfc = 1150
INCOME METHOD:
COE = 400
Operating surplus = 60+ 200+ 340 = 600
MI = 100
NDPfc = 1100
NDPfc + NFIA = NNPfc

1100 + 50 = 1150
Ans 4.
VALUE ADDED METHOD:
VALUE OF OUTPUT – IC = GDPmp
(300+200+100) – (100+50+50) = GDPmp
GDPmp = 400
GDPmp – depre – NIT + NFIA = NNPfc

400 – 40 – 20 – 10 = NNPfc
So, NNPfc = 330
Income Method:
COE = 150
Operating Surplus = 140
MI = 50
NDPfc = 340
NDPfc + NFIA = NNPfc

340 – 10 = 330
ASSIGNMET 6TH (EXPENDITURE METHOD THEORY)
Q.1) Gross domestic capital formation is also called as ____________
Q.2) Gross Domestic Capital formation is the sum of ______ , _______ , _________ and
________
Q.3) Change in stock is also known as _________
Q.4) Expenditure Method is also known as __________
Q.5) Households, Producers, Govt. and abroad is also called as _______________units.
Q.6) Primary sector, secondary sector and tertiary sector is also called as ____________ units.
Q.7) why transfer payments are not included in National Income? Give one example of it.
Q.8) Shares, debentures and bonds are also called as ____________.
Q.9) BIKANER sweets incurring expenditures on Milk and other ingredients worth Rs.15000
for making sweets and other dishes. Treat the amount in National Income.
Q.10) Expenditure on Second hand goods is not included in NY Why?
Answers:
1.) GROSS Investment
2.) Gross residential construction investment, Gross public investment, gross business fixed
Investment and Inventory Investment.
3.) Inventory Investment
4.) Income disposal Method
5.) Economic units
6.) Production units
7.) Transfer payments are not included in NY as it is not connected with any productive
activity. Example is payment of donation/charity to someone does not make any production
activity.
8.) Financial assets
9.) Amount of 15,000 will not be included in National Income as it’s an intermediate
expenditure and It’s value is already included in the value of final goods.
10.) Expenditure on second and goods will not be included in NY because its value is already
included when they were originally purchased.
ASSIGNMENT 7TH (INCLUSION / NON INCLUSION IN NATIONAL INCOME)

ASSIGNMENT OF NATIONAL INCOME
Identify whether the following will be included in national income or not WITH REASONS
1.) construction of new house.

2.) winning of lottery prize
3.) national debt interest
4.) rent free house given to employee by an employer
5.) profits earned by branches of foreign banks in INDIA.
6.) rent received by Indian resident from the buildings rented to foreigners in INDIA .
7.) payment of fees to a lawyer by a firm.
8.) gifts received from abroad or from employer
9.) salary received by Indian resident working in Russian embassy in INDIA
10.) durable goods or car purchased by households
11.) profit earned by Indian bank from its branches abroad
12.) earning of shareholders from the sale of shares
13.) financial help received by flood victims
14.) purchase of machine by a factory or purchase of car by a taxi driver
15.) dividend received by an Indian from his investment in shares of foreign company
16.) purchase of raw material by a production unit
17.) expenditure on the construction of flyover by the govt.
18.) growing vegetables in kitchen garden
19.) services rendered by family members to each other
20.) expenditure by govt. in providing free education/free services/street lightning
ANSWERS:
1.) construction of new house.
It will be included in NY bcoz it is an investment or capital formation
2.) winning of lottery prize

Not included in NY bcoz it is windfall gains
3.) national debt interest

Not included in NY bcoz its loan is for personal purpose
4.) rent free house given to employee by an employer

Included in NY bcoz it is a part of compensation to employees under wages and salaries in
kind
5.) profits earned by branches of foreign banks in INDIA.

Not included in NY bcoz its factor income paid to abroad
6.) rent received by Indian resident from the buildings rented to foreigners in INDIA .
Included in NY bcoz its factor income rec from abroad
7.) payment of fees to a lawyer by a firm.
Not included in NY bcoz its intermediate payment
8.) gifts received from abroad or from employer

Not included bcoz its transfer income
9.) salary received by Indian resident working in Russian embassy in INDIA

10.) durable goods or car purchased by households

Included in NY bcoz it is an investment or capital formation
11.) profit earned by Indian bank from its branches abroad

12.) earning of shareholders from the sale of shares

Not included in NY bcoz its capital gain and paper claims
13.) financial help received by flood victims

Not included in NY bcoz its transfer income
14.) purchase of machine by a factory or purchase of car by a taxi driver

Included in NY bcoz it is an investment or capital formation
15.) dividend received by an Indian from his investment in shares of foreign company
16.) purchase of raw material by a production unit

Not included in NY bcoz its intermediate goods
17.) expenditure on the construction of flyover by the govt.

Included in NY bcoz its capital formation or investment
18.) growing vegetables in kitchen garden

Not included in NY bcoz its monetary value cannot be estimated
19.) services rendered by family members to each other

Not included in NY bcoz its monetary value cannot be estimated
20.) expenditure by govt. in providing free education/free services/street lightning

Included in NY bcoz its govt final consumption expenditure
ASSIGNMENT 8TH (INCLUSION / NON-INCLUSION IN DOMESTIC INCOME)

SOLVE WITH REASONS
1.) profit earned by branches of foreign banks in india

2.) profit earned by resident of india from his company in Singapore
3.) profit earned by company in india which is owned by non resident
4.) profits earned by branch of SBI(state bank of india) in japan
5.) rent received by an Indian from his building in London
6.) compensation of employees to the resident of japan working in Indian embassy in japan
7.) rent paid by embassy of japan in india to a resident Indian
8.) salaries to Indian resident working in Russian embassy in india
9.) profits earned by Indian employees working in Pakistan embassy in india
10.) scholarships given by govt. of india
11.) expenditure by govt on providing old age pensions
12) compensation of employees paid by a foreign company located in INDIA
13.) compensation of employees paid by a Indian company located in USA.
14.) earning of American express bank branch located in Chennai
15.) profit earned by a company located in INDIA partly owned by USA
16.) capital gains
17.) windfall gains
18.) remittances from non residents to their families in INDIA
19.) gifts given by an employer to employees on independence day
20.) purchase of goods by a foreign tourists
Answers of Assignment -
1.) profit earned by branches of foreign banks in india

Ans. It will be included in domestic income bcoz this bank is a part of indian domestic
territory.
2.) profit earned by resident of india from his company in Singapore

Ans. It will not be included in domestic income bcoz this company is not a part of indian
domestic territory.
3.) profit earned by company in india which is owned by non resident

Ans. It will be included in domestic income bcoz the company is a part of indian domestic
territory.
4.) profits earned by branch of SBI(state bank of india) in japan

Ans. It will not be included in domestic income bcoz this bank is not a part of indian domestic
territory.
5.) rent received by an Indian from his building in London

Ans. It will not be included in domestic income bcoz the building is not a part of indian
domestic territory.
6.) compensation of employees to the resident of japan working in Indian embassy in japan.
Ans. It will be included in domestic income bcoz the embassy is part of indian domestic
territory
7.) rent paid by embassy of japan in india to a resident Indian

Ans. It will not be included in domestic income bcoz this embassy is not a part of indian
domestic territory
8.) salaries to Indian resident working in Russian embassy in india

Ans. It will not be included in domestic income bcoz this embassy is not a part of indian
domestic territory
9.) profits earned by Indian employees working in Pakistan embassy in india

Ans. It will not be included in domestic income bcoz the embassy is not a part of indian
domestic territory
10.) scholarships given by govt. of india

Ans. It will not be included in domestic income as its transfer income
11.) expenditure by govt on providing old age pensions

Ans. It will not be included in domestic income as its transfer income
12) compensation of employees paid by a foreign company located in INDIA

Ans. It will be included in domestic income bcoz this company is part of indian domestic
territory.
13.) compensation of employees paid by an Indian company located in USA

Ans. It will not be included in domestic income bcoz this company is not a part of indian
domestic territory
14.) earning of American express bank branch located in Chennai

Ans. It will be included in domestic income bcoz this bank is a part of indian domestic
territory
15.) profit earned by a company located in INDIA partly owned by USA

Ans. It will be included in domestic income bcoz this company is part of indian domestic
territory
16.) capital gains

Ans. It will not be included in domestic income bcoz capital gain is not connected with any
productive activity
17.) windfall gains
It will not be included in domestic income bcoz wind fall gains is not connected with any
productive activity
18.) remittances from non residents to their families in INDIA

It will not be included in domestic income bcoz its transfer income
19.) gifts given by an employer to employees on independence day

Ans. It will not be included in domestic income bcoz its transfer income
20.) purchase of goods by a foreign tourists

Ans. It will be included in domestic income as it is related with exports
ASSIGNMENT 9TH (NOMINAL AND REAL NNPfc and GDP, GDP and welfare)
Q.1) ___________ is taken as base year in India.
Q.2) Nominal national Income shows a change in ________
Q.3) Real national Income shows a change in ________
Q.4) nominal GDP is 20,000 and real GDP is 12500.calculte GDP deflator with working and
what does it indicate?
Q.5) GDP includes harmful products like liquor then welfare will _________ .
Q.6) Above mentioned point in Q.5 indicates one of the exception of GDP and welfare. Write
it.
Q.7) Real National Income can be calculated as _____ x _______
Q.8) Environmental pollution caused by industrial plants caused __________
Q.9) 1000 kg pulses at current price of 20 is selling into market and its earlier price in base
year was 15. The increase in income of 5000 shows real growth of economy. True or false
with reason.
Q.10) _________ measures the average level of prices of all goods and services produced in
our country.
Answers:
1.) 2011-2012
2.) change in prices
3.) change in output
4.) GDP deflator will be 160 and it shows a rise in price by 60%.
5.) Reduce
6.) Composition of GDP
7.) P0 x Q1
8.) Negative Externalities
9.) False, this rise in income is only due to rise in prices. So it does not show the real growth
because output is still same just price is inflating.
10.) GDP deflator

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MACRO

THIS BOOK IS A PERFECT AND COMPLETE MATERIAL FOR

“FOLLOW YOUR PASSION”

GOVERNMENT THREE SECTOR

ABOROAD FOUR SECTOR

CIRCULAR FLOW OF INCOME;

EXPENDITURE ON GOODS AND SERVICES

FACTOR PAYMENTS(RENT, WAGES, SALARY, INTEREST

GOODS AND SERVICES

PHASES OF CIRCULAR FLOW OF INCOME

2.) DISTRIBUTION PHASE

3.) DISPOSITION PHASE

STOCK AND FLOW

Examples of stock variable are;

1. goods in the godown on 31st jan. 2015

5. bank deposits on a particular date

6. population on a particular date

1. production during month of January

2. birth rate of an year

3. profits and losses

7. investment or capital formation.

The amount of water in a tank is the quantity of water in a tank at a

IT MUST BE NOTED THAT, CAPITAL IS A STOCK CONCEPT WHEREAS

REAL FLOW MONEY FLOW

REAL FLOW/PHYSICAL FLOW;

REAL FLOW determines the magnitude or amount of growth process in an

GOODS AND SERVICES

MONEY FLOW/NOMINAL FLOW

It involves exchange of money between households and firms.

Meaning it is the flow of goods and services it is the flow of money

Between firms and households between firms and

Kind of it involves exchange of goods it involves exchange of

Exchange and services only money only

Alternate name it is also known as physical flow it is also known as nominal

FOUR SECTORS OF THE ECONOMY –

2.) PRODUCING SECTOR (FIRMS) – it includes all producing firms in the

3.) GOVERNMENT SECTOR – it acts in two capacities, (a) as a welfare agency, it

CIRCULAR FLOW OF INCOME IN TWO SECTOR ECONOMY

Households are the owners of factors and consumers of goods and

It is also known as closed economy and there is no involvement of

ASSUMPTIONS OF CIRCULAR FLOW OF INCOME IN TWO SECTOR

FACTORS (LAND , LABOUR , CAPITAL AND ENTREPRENEUR)

EXPENDITURE ON GOODS AND SERVICES

FACTOR PAYMENTS(RENT, WAGES, SALARY, INTEREST

GOODS AND SERVICES

CONCLUSION OF CIRCULAR FLOW……

1.) Total production by firms = Total production by households.

2.) factor payments = factor incomes.

3.) consumption expenditure = factor incomes

4.) Real flow = Money flow.

NATIONAL PRODUCT is always equal to NATIONAL

SOME QUESTIONS OF CHAPTER 1ST;

Q.2) NATIONAL PRODUCT is always equal to NATIONAL INCOME? HOW

Q.3) what are the contents of real flow?

ANS. factor flow and product flow

Q.4) capital and wealth is a stock while capital formation is flow?

Q.5) what is the significance of circular flow of income? (read only)

ANS. 1.) it help us to understand the mutual interdependence among

DOMESTIC TERRITORY includes the following;

C.) embassies , consulates and military establishments of a country located