12th HSC Board Economics:
ANSWER IN BRIEF
[Q.3 : 4 Marks each; Total: 12 Marks]
| Economics |
1. | Choose the Correct Option | 5 Marks | |
2 | Complete the Correction | 5 Marks | |
3 | Give Economic Term | 5 Marks | |
4 | Find the Odd Word | 5 Marks | |
5 | Complete the following Statements | 5 Marks | |
6 | Assertion and Reasoning Questions | 5 Marks | |
7 | Identify and Explain the Concepts | 6 Marks | |
8 | Distinguish Between | 6 Marks | |
9 | Answer in Brief | 12 Marks | |
10 | State with Reasons, Do you Agree/ Disagree | 12 Marks | |
11 | Table, Diagram, Passage Based Questions | 8 Marks | |
12 | Answer in Detail | 16 Marks |
Notes: (1) Five questions will be given in the question paper. Students are expected to write answers to any three questions,
(2) Write precise and to the point answers.
(3) Write at least four points in the answer.
(4) Draw diagrams, schedule wherever necessary.
Q. Answer the following questions in brief: (4 marks each)
Chapter 1: Introduction to Microeconomics and Macroeconomics
(1) Explain the scope of macroeconomics. (March '22)
Ans.
The scope of macroeconomics is as follows:
(1) Theory of Income and Employment:
Macroeconomics explains how the level of national income and employment is determined. It also examines the causes for fluctuations in national Income and employment. To understand the determination of the level of national income and employment, it also studies the consumption function, investment function and trade cycles. Macroeconomics studies the interrelationship between the level of output, national income and the employment level and suggests policies to solve the problems related to these macro variables.
(2) Theory of General Price Level and Inflation:
Macro- economics shows how the general price level is determined and further explains what causes fluctuations in it. The theory of general price level studies the causes and effects of inflation and depression and suggests economic policies to tackle these problems.
(3) Theory of Growth and Development:
Macroeconomics studies the causes of underdevelopment and poverty in poor countries as well as developing countries and suggest theories and strategies for accelerating growth and development in them. It also explains how the higher rate of growth with stability can be achieved.
(4) Macro Theory of Distribution:
Macroeconomics deals with determination of relative shares of various social classes in the total national income. Macro theory shares of distribution deals with the of rent, wages, interest and profit in the total national Income
(2) Explain any four features of microeconomics. (July 22-23)
Ans.
The following are the features of microeconomics
(a) Study of individual units:
Microeconomics is concerned with the study of economic behavior of small individual economic units of an economy. For example, microeconomics studies the economic behavior of particular household, particular firm, price of a particular product, etc.
(b) Price theory:
Microeconomics is primarily concerned with price determination of goods and services as well as factors of production, viz., land, labour, capital and entrepreneur. Therefore, microeconomics is also known as Price Theory.
(c) Partial equilibrium:
Microeconomics isolates individual economic units from the other forces of economy. It analyses the equilibrium positions of individual economic units such as individual consumer. individual firm separately. Therefore, microeconomie analysis is a partial equilibrium analysis. Partial equilibrium analysis is based on the assumption of 'Ceteris Paribus'. 1.e. Other things remaining the same. Thus, partial equilibrium neglects the Interdependence between economic variables of an economy.
(d) Based on certain assumptions:
Microeconomics is based on certain assumptions such as full employment, pure capitalism Laissez-faire policy, perfect competition, etc. prevailing in an economy. tat in reality, an economy with such conditions does not exist. Most of the theories of microeconomics are based on the Ceteris Paribus assumption, Le. Other things remaining the same.
(e) Slicing method:
Microeconomics splits the economy into small individual units. Then it studies the economic behaviour of ach individual unit separately in detail. Thus, microeconomics uses slicing method for its analysis.
(F) Use of marginalism principle:
Consumers as well as producers take all important microeconomic decisions at the margin. Therefore, microeconomics uses marginalism principle as a tool of analysis.
(g) Analysis of market structures:
Microeconomics studies market structures such as perfect competition, monopoly, oligopoly. monopolistic competition, etc. It also describes how the prices of goods and services are determined in these markets.
(h) Limited scope:
Microeconomics does not deal with national economic problems such as poverty, unemployment. inflation, depression, deficit in balance of payments, etc. Therefore. microeconomics has limited scope.
(3) Explain any four points of importance of microeconomics (March 23)
Ans.
The importance of microeconomics can be explained with the help of the following points:
(a) Helpful in explaining price determination:
Microeconomics helps in explaining the price determination of goods and services as well as factors of production.
(b) Helpful to understand the working of free market economy:
Microeconomics helps to understand how free market economy works and gets regulated by demand and supply principles. Microeconomics helps producers to take business decisions about what to produce, how to produce, how much to produce, etc. at Individual levels. There is no intervention by government or any other agency in this decision-making process.
(c) Helpful in foreign trade:
Microeconomics is useful in studying the aspects related to foreign trade such as effects of tariff. determination of exchange rate, gains from international trade, etc.
(d) Helpful in economic model building:
Microeconomics helps in understanding complex economic situations with its variety of models. Many terms, concepts, terminologies, tools of economic analysis of microeconomics have valuably contributed to the science of economics.
(e) Helpful to businessmen in taking business decisions:
Microeconomics help businessmen in formulating prices of products or services, minimizing the cost of production, analysing profitability of investment, attainment of maximum productivity, etc. It also helps businessmen in demand forecasting.
(f) Useful to government:
Microeconomics is useful to government In framing economic policies such as tax policy, public expenditure policy, price policy, etc. Microeconomics also guides government in attaining the goal of efficient allocation of resources and economic welfare of society.
(g) Basis of welfare economics:
Microeconomics provides explanation for the conditions of economic welfare. It explains how the maximum welfare of people in society can be achieved by avoiding wastage of resources.
Thus, microeconomies has many theoretical and practical importance as well as uses.
Chapter 2: Utility Analysis
(4) Elaborate any four features of utility. (March 22)
Ans.
The following are the important features or characteristics of utility:
(a) Relative concept:
Utility changes from time to time and from place to place. For example, woollen clothes possess more utility during winter and less utility during summer. Similarly, they possess more utility in Kashmir and less utility in Mumbai.
(b) Subjective concept:
Utility gets influenced by person's likes. dislikes, habits, preferences, etc. Therefore, utility changes from person to person. For example, a non-vegetarian finds utility in mutton, but the vegetarian does not find utility from it.
(c) Ethically neutral concept:
The concept of utility is morally and ethically colourless. Utility never takes into account the concepts such as good or bad, moral or immoral, etc. For example, in economics, milk as well as wine possesses utility.
(d) Utility differs from usefulness:
Commodity possessing Utility may not always possess usefulness. Utility and usefulness are totally different concepts. For example, a harmful product like poison possesses utility but it does not possess usefulness.
(e) Utility differs from pleasure:
A commodity possessing utility may not always provide pleasure to the consumer. Thus, utility and pleasure are totally different concepts. For example, injection possesses utility, but its consumption does not give pleasure to the patient.
(f) Utility differs from satisfaction:
Utility and satisfaction are totally different concepts. Utility is the starting point of consumption. whereas satisfaction is derived after consumption. For example, for a thirsty person a glass of water has utility. When he drinks that glass of water he derives satisfaction from it.
(g) Measurement of utility is hypothetical:
Utility is a psychological concept. It has no physical existence. Therefore it cannot be measured in numbers. Therefore, only hypothetical measurement of utility is possible.
(h) Utility is multipurpose:
A particular commodity can satisfy many wants of a particular individual or more than one individual at a time. For example, one individual can make use of electricity for operating washing machine, another individual can make use of electricity to operate air-conditioning unit.
(i) Depends upon the intensity of want:
Utility has direct relation to intensity of want. Individual finds more utility in a commodity if his want is more intense and vice versa. For example, hungry individual finds more utility in food than a person who is not so hungry.
(j) It is the basis of demand:
Utility forms the basis for demand. Generally, an individual demands a commodity when it has utility for him. Unless a commodity provides utility, it is not demanded.
(Write any eight points in the answer.)
(5) Explain any four exceptions of the law of Diminishing marginal utility. (March '23)
Ans.
There are no real exceptions to the law of DMU. In the following some cases it is considered that the law of DMU is not valid:
(a) Hobbies:
It is said that in case of certain hobbies such as collection of stamps, rare coins, etc. an individual derives more and more utility from every additional stamp or coin.
It is also said that people who are fond of music derive more and more utility from every additional listening of music. It is also said that people who are fond of reading books derive more and more utility from every additional reading of book.
But in fact as per the assumptions of homogeneity and continuity of the law of DMU, if an individual is asked to collect same type of stamp continuously or to listen same song continuously or to read the same book continuously, the marginal utility will fall and the law will become applicable.
(b) Misers:
It is said that for a miser, the marginal utility of money increases with every increase in the stock of money. But the miser's behaviour is irrational. Thus, he violates the rationality assumption of the law. Therefore, misers are not real exception to the law.
(c) Addictions:
It is said that, a drunkard derives more and more marginal utility from consumption of every additional unit of liquor. But the drunkard's behaviour is irrational. Thus, he violates the rationality assumption of the law. Therefore, the drunkards are not real exception to the law.
(d) Power:
It is said that a person derives more and more utility from every additional acquisition of power. But a person's lust for power is irrational. Thus, he violates the rationality assumption of the law. So power is not a real exception to the law.
(e) Money:
It is said that a person derives more and more marginal utility with every additional unit of a money. But in fact the marginal utility of money also diminishes as its stock increases.
For example, a poor person will get more marginal utility from a 5-rupee note, but a rich person will get less marginal utility from the same 5-rupee note. Thus, in fact, there are no real exceptions to the law of DMU. It has universal applicability.
(Write any four points in the answer.)
(6) Explain any four types of utility. (July '23)
Ans.
The types of utility are as follows:
(1) Form Utility:
Utility increased by changing the shape, size, colour, etc. of a commodity is called form utility. It refers to changing the structure of an existing material to another structure, which is more useful. For example, transforming a log of wood into table and chair.
(2) Place Utility:
Utility increased by changing the place of utilization of a commodity is called place utility. It refers to transporting commodity from one place where it is available in plenty to another place where it is in scarcity. For example, grapes of Nashik are brought to Mumbai,
(3) Service Utility:
Utility obtained from the services of professional is called service utility. For example, a utility obtained from the services of teachers, doctors, chartered accountants, etc.
(4) Knowledge Utility:
Utility obtained from acquiring knowledge is called knowledge utility. For example, after completion of training. a person finds more utility in computers.
(5) Possession Utility:
Utility obtained from transfer of ownership rights of goods from one person to another, is called possession utility. For example, consumers find more utility in food grains, when they actually purchase those food grains from a retailer.
(6) Time Utility:
Utility increased by changing the time of utilization of a commodity is called time utility. It refers mainly to storage of a product and to use it during the time of need or scarcity. For example, selling preserved crops at high prices during their scarcity.
(Write any four points in the answer.)
Chapter 3 (A): Demand Analysis
(7) Explain the types of demand.
Ans.
The types of demand are as follows:
(1) Direct Demand:
Commodities and services satisfying the human wants directly are said to have direct demand. Direct demand also called conventional demand. For example, demand for clothes.
(2) Indirect Demand:
Commodities and services satisfying human wants indirectly are said to have indirect demand. Indirect Demand is also called derived demand. For example, demand for the actors of production.
(3) Joint demand:
Two or more commodities that are demanded together to satisfy a single want are said to have joint demand. Complementary commodities have joint demand. For example, Demand for needle and thread.
(4) Composite Demand:
Commodities that are used to satisfy several wants are said to have composite demand. For example, Demand for electricity.
(5) Competitive Demand:
Commodities that are substitutes or each other are said to have competitive demand. For example, Demand for tea and coffee.
(Write any four points in the answer.)
Chapter 3 (B): Elasticity of Demand
8) Explain the Ratio Method of measuring price elasticity of demand. (March 22-23)
Ans.
(1) Ratio Method of measuring elasticity of demand developed by Dr. Alfred Marshall. This method is also known arithmetic method or percentage method or proportional method of measuring elasticity of demand.
(2) In this method, the elasticity of demand is measured by dividing the percentage change in the quantity demanded of a the percentage change in its price. commodity by
(3) The formula used for the measurement of the elasticity of demand is as follows:
Ed = (Delta*Q)/Q * P_{y}/(Delta*P_{y}) where
(1) Delta*Q = Change in the quantity demanded, i.e. Q1, - Q
(New demand - Original demand)
(ii) Q = Original demand
(iii) Delta*P = Change in the price, i.e. P_{1} - Q (New price-Original price) and
(iv) P = Original price.
(4) Ratio Method can be explained with the help of the following example:
Price and Demand of a Commodity
Demand
(per day in units)
Price (₹)
Ed = (Delta*Q)/Q * P_{y}/(Delta*P_{y})
.. Ed = 1/10 * 20/5
... Ed = 0.4
.. Ed < 1
As the numerical value of the elasticity of demand is less than one. the demand is relatively less elastic in this example.
Chapter 4: Supply Analysis
(9) Explain the concept of Total Cost and Total Revenue.
Ans . [A] Total Cost:
(1) Meaning:
Total cost is the total expenditure incurred by a firm the factors of production required for the production of goods and vices. Total cost is the sum of total fixed cost and total variable cost various levels of output.
(2) Formula: Total cost is calculated as follows:
TC = TFC + TVC where TC-Total Cost,
TFC Total Fixed Cost TVC-Total Variable Cost.
(a) Total Fixed Cost (TFC):
Total fixed costs are those expenses - production which are incurred on fixed factors such as land. machinery, etc.
(b) Total Variable Cost (TVC):
Total variable costs are those expenses of production which are incurred on variable factors such labor, raw material, power, fuel, etc.
(3) Example:
If a particular manufacturer has incurred a total fixed cost of 50,000 and a total variable cost of₹ 40,000 for manufacturing fans, the total cost can be calculated as follows:
TC = TFC + TVC
TC = 50000 + 40
TC = 90000
Total Cost = 90,000.
[B] Total Revenue :
(1) Meaning:
Total revenue is the total sales proceeds of a firm by selling a commodity at a given price. It is the total income of a firm.
(2) Formula: Total revenue is calculated as follows:
Total Revenue = Price x Quantity
(3) Example:
If a particular manufacturer sells fans by charging 6000 per unit, the total revenue can be calculated as follows:
TR = P x Q
TR = 6000 x 20
TR = 1,20,000
Total Revenue = ₹ 1,20,000.
(10) Explain the concept of Marginal Cost and Marginal Revenue.
Ans. [A] Marginal Cost:
(1) Meaning:
Marginal cost is the net addition made to total cost by producing one more unit of output.
(2) Formula:
Marginal cost is calculated as follows:
MCnTCn-TCn-1
Where,
TCn = Total cost of producing n units,
TCn-1 = Total cost of producing previous unit of n unit.
(3) Example: If a particular manufacturer's total cost of producing 20 units of fan is₹90.000 and total cost of producing 19 units of fan is 87,000, then marginal cost of producing 20th fan can be calculated as follows:
MCn=TCn-TCn-1
MCn =TC(20 units) - TC(19 units) .
MCn=90,000-87.000 ..MCn=3,000
Marginal cost of producing nth (20th unit) of fan is ₹3,000.
[B] Marginal Revenue:
(1) Meaning:
Marginal revenue is the net addition made to total revenue by selling an extra unit of the commodity.
(2) Formula:
Marginal revenue is calculated as follows: MRnTRn-TRn-1
Where, TRn = Total Revenue of n units, TRn - 1 = Total revenue of previous unit of n unit.
(3) Example:
If a particular manufacturer receives ₹1,20,000 after selling 20 units of fan and receives 1,16,000 after selling 19 units of fan, then marginal revenue received by selling 20th fan can be calculated as follows:
MRn = TRn - TRn - 1
MRn = TR (20 unit) TR(19 units)
MRn = 1,20,000-1,16,000
MRn = 4.000
Marginal revenue received after selling nth (20th unit) of fan is Rs. 4.000.
Chapter 5: Forms of Market
(11) Explain any four features of perfect competition. (Sept. '21)
Ans.
(A) Meaning:
According to Mrs. Joan Robinson. "Perfect competition prevails when the demand for the output of each producer is perfectly elastic."
(B) Features: The features of perfect competition are as follows:
(a) Large number of buyers and sellers :
Large number of buyers:
In perfect competition, there is a large number of potential buyers buying commodity in market. Their number is so large that a single buyer cannot influence the market price. Thus, in perfect competition, a buyer is a price taker.
Large number of sellers:
In perfect competition, there is a large number of potential sellers selling their commodity in the market. Their number is so large that the single seller cannot influence the market price. The price of the product is determined by the interaction of market demand and market supply of a commodity. Thus, in perfect competition, a seller is a price taker.
(b) Homogeneous product:
In perfect competition, every firm produces and sells identical products, i.e. units of a commodity produced by each firm are uniform in respect of their size, shape, colour, quality, etc. Therefore, the commodities sold in perfect market are perfect substitutes to one another.
(c) Free entry and exit:
In perfect competition, any firm can freely enter or can exit the market without any restrictions. If there is a hope of profit, a new firm can easily enter the market. Similarly, if there is possibility of losses, the existing firm can freely exit the market.
(d) Single price:
In perfect competition, all units of a commodity have uniform price and it is determined by the equilibrium of the market demand and market supply.
(e) Perfect knowledge of market:
In perfect competition, the buyers as well as sellers have perfect knowledge of market conditions such as price of product, quality of product, source of supply of product, etc.
(f) Perfect mobility of factors of production:
In perfect competition, land has occupational mobility and other factors of production viz. labour, capital and entrepreneur have occupational mobility as well as geographical mobility.
(g) Absence of transport cost:
It is assumed that there is no transport cost in perfect competition. Therefore, uniform price prevails in perfect competition.
(h) No government intervention:
Laissez-faire policy prevails under perfect competition. It means that there is no government intervention in economic activities.
(Write any four points in the answer.)
(12) Explain any four features of monopoly. (March '22; July '22)
Ans.
(A) Meaning:
'Mono' means single and 'poly' means seller. Thus monopoly means single seller who has complete control over the supply of the commodity. According to Prof. E.H. Chamberlin, "A monopoly refers to a single firm which has control over the supply of a product which has no close substitute."
(B) Features: The following are the important features of monopoly:
(a) Single seller:
In a monopoly market, there is a single seller (monopolist). The monopolist has no rivals and therefore he faces no competition.
(b) No close substitute:
There are no close substitutes for the commodity sold in the monopoly market. Therefore buyers in a monopoly market have no choice. They have to buy a product from a monopolist or go without it. The cross elasticity of demand for a commodity sold by monopolist is zero.
(c) Barriers to entry:
Under monopoly, the entry of rival firms is restricted due to natural, legal or technical barriers. Thus, rival firms are not allowed to enter in a monopoly market.
(d) Complete control over the market supply:
The monopolist has the complete hold over the market supply as he is a sole producer of the commodity.
(e) Price maker:
The firm/monopolist in a monopoly market is a price maker and not a price taker. Monopolist can set any price of a commodity as he has complete control over the market supply of the product.
(f) Price discrimination:
Being a single seller, monopolist can charge consumerwise, placewise, timewise and use wise different prices for the same product. Price discrimination is an important feature of monopoly market. For example, Indian Railways provides railway tickets at concessional rates to the students and senior citizens.
(g) No discrimination between firm and industry:
As monopolist is the only seller in the monopoly market, a monopolist's firm itself is an industry in a monopoly market.
(Write any four points in the answer.)
(13) Explain any four points related to the significance of index number. (July '22) OR
Explain the significance of index numbers in economics.
Ans.
The significance of index numbers in economics can be explained as follows:
(1) Helpful in framing suitable policies:
Index numbers provide guidelines to policy makers in framing suitable economic policies. Index numbers are helpful in framing the economic policies such as agricultural policy and industrial policy. Index numbers also help in the fixation of wages and dearness allowances in accordance with the cost of living, etc.
(2) Helpful in studying trends and tendencies:
Index numbers are widely used to measure changes in various economic variables such as production, prices, exports, imports, etc. over a period of time. For example, by examining the index of industrial production for the last five years, important conclusions about the trend of industrial production, i.e. whether the industrial production shows an upward tendency or a downward tendency can be drawn.
(3) Helpful in forecasting future economic activity:
Index numbers helps in making predictions on the basis of analysis of the past and present trends in the economic activities. For example, increasing, by examining the data pertaining to exports of alphonso mangoes from the year 2009 to 2014 and from the year 2014 to 2019, if it is noticed that the export of alphonso mangoes has been it can be predicted that an increase in export will continue in future.
(4) Helpful in measurement of inflation:
Index numbers are also used to measure changes in the price level from time to time. The measurement of inflation enables the government to undertake appropriate anti-inflationary measures. For example, there is a legal provision to pay the D.A. (dearness allowance) to the employees in organized sector on the basis of changes in Dearness Index. Thus, with the help of the Dearness Index, the government can increase the D.A. from time to time.
(5) Useful to present financial data in real terms:
Rise in money supply over a period of time leads to inflation in an economy. Inflation has its effects on various economic variables such as total production, national income, price level, wage level, etc. Index numbers can exclude the effects of inflation by deflating the values of these various economic variables on the basis of their constant prices. Thus, index numbers can measure the changes in the values of various economic variables in real terms.
(Write any four points in the answer.)
Chapter 6: Index Numbers
(14) Explain the features of index numbers.
Ans.
The features of index numbers are as follows:
(1) Statistical device: Index numbers are statistical devices.
(2) Specialized averages: Index numbers are specialized averages. Index numbers are capable of being expressed in percentages.
(3) Helpful to measure changes in the variables: Index numbers are helpful in measuring the net changes in one or more related variables over a period of time of between two different time periods or two different localities.
(4) Computed for a single variable or a group of variables:
Index numbers are computed for measuring a net change in a single variable or a group of variables over a period of time. Index number which is computed from a single variable is called a 'univariate index An index number which is constructed from a group of variables is called a 'composite index.
(5) Prepared for a current year:
Index numbers are prepared for a current year. Index numbers measure a net change in a particular variable from the base year to the current year.
(6) Based on the base year:
Index numbers are prepared with reference to the base year. Index numbers measure a net change in a particular variable by taking into account the values of a particular variable in the selected base year.
(7) Assumption of base year's index as 100:
While calculating the net change in the values of a particular variable, the base year's Index of a selected variable is assumed as 100 and accordingly the value of the selected variable for the current year is calculated.
(8) Barometers of economic activity:
Index numbers are also referred to as 'barometers of economic activity', since they are used to measure the trends and changes in the economy.
(Write any four points in the answer.)
(15) Calculate value index number from the given data:
Ans.
Chapter 7: National Income
(18) Explain any four features of national income. (Sept. '21; March 23)
Ans.
The features of national income are as follows:
(1) Macroeconomic concept:
National income represents income of the economy as a whole rather than that of an individual. Therefore, national income is a macroeconomic concept.
(2) Inclusion of value of only final goods and services:
In order to avoid double counting, the value of only final goods and services produced in the economy are considered while calculating national Income. While calculating national income, the value of intermediate goods or raw materials is not considered. For example, while estimating the value of sugar, the value of sugar cane is not taken into account, as it is already included in the price of the sugar.
(3) Inclusion of net aggregate value:
National income includes net value of goods and services produced and does not include depreciation cost (i.e. wear and tear of capital assets).
(4) Inclusion of net income from abroad:
National income includes net income from abroad. i.e. difference between export value and import value (X-M) and net difference between receipts from abroad and payments made abroad (R-P).
(5) Expressed with reference to financial year:
National income is always expressed with reference to a specific time period. In India, it is calculated for every financial year, i.e. from 1st April to 31st March.
(6) Flow concept:
National income is a flow concept. It shows flow of goods and services produced in the economy during a financial year.
(7) Expressed in monetary terms:
National income is always expressed in monetary terms. It represents only those goods and services which are exchanged for money.
(Write any four points in the answer.)
(19) Explain the importance of national income.
Ans.
The importance of national income can be explained with the help of the following points:
(1) Useful for the economy:
The information/data of national home is very important for the economy of a country. In present times, the national income data is regarded as accounts of the economy. Which is known as "Social Accounts'. It provides information about how the aggregates of a nation's income, output and product result from the income of different individuals, products of industries and transactions of international trade.
(2) Helpful in framing national policies:
The statistical data of national income forms the basis of national policies such as employment policy, industrial policy, agricultural policy, etc. The Information about national income enables to know the direction in which the industrial output, Investment and saving, etc. change. National income also helps to generate economic models like growth model, investment models, etc. Thus, proper measures can be adopted to bring the economy to the right path.
(3) Helps in economic planning:
For economic planning, data pertaining to national income is very essential. This includes data related to a country's gross income, output, savings, investment and consumption which can be obtained from different sources.
(4) Useful in economic research:
National income data is also used by the research scholars of economics. For example, the data of the country's input, output, income, savings, consumption. investment, employment, etc. which are obtained from social accounts helps in economic research.
(5) Helpful in comparing standard of living:
National income data helps to compare the standards of living of people in different countries and of people living in the same country at different times. For example, the data about national income of developed countries and undeveloped countries help in comparing the standard of living of people of these countries.
(6) Helpful in knowing the distribution of income:
National income statistics enables to know about the distribution of income in the country from the data related to wages, rent, interest and profits.
This data helps in understanding the economic disparities in the Incomes of different sections of the society.
(Write any four points in the answer.)
(20) Explain the precautions to be taken while using product method of measuring national income.
Ans.
The precautions to be taken while using product method of measuring national income are as follows:
(1) To avoid double counting, only the value of final goods and services must be taken into account while calculating national income.
(2) Goods used for self-consumption by farmers or manufacturer should be estimated by a guess work. Imputed value of goods produced for self-consumption is included in national income.
(3) Indirect taxes included in the market prices are to be deducted and subsidies given by the government to certain products should be added for accurate estimation of national income.
(4) While evaluating output, changes in the price level between different years must be taken into account.
(5) Value of exports should be added and value of imports should be deducted.
(6) Depreciation of capital assets should be deducted.
(7) Sale and purchase of second hand goods should be ignored as it is not a part of current production.
(21) Explain the precautions to be taken while using income method of measuring national income.
Ans.
The precautions to be taken while using income method of measuring national income are as follows:
(1) Transfer incomes or transfer payments like scholarships, gifts, donations, charity, old age pensions, unemployment allowance, etc. should be excluded from the measurement of national income.
(2) All unpaid services like services of a housewife, teacher teaching her/his child, should be ignored while calculating national income.
(3) Any Income from sale of second hand goods like car, house, etc. should be ignored,
(4) Income from sale of shares and bonds should be ignored, as not add anything to the real national hey do income.
(5) Revenue received by the government through direct taxes, should be ignored, as it is only a transfer of income.
(6) Undistributed profits of companies, income from government property and profits from public enterprises such as water supply, should be included.
(7) Imputed value of production kept for self-consumption and Imputed rent of owner occupied houses should be included.
(22) Explain the precautions to be taken while using expenditure method of measuring national income.
Ans.
The precautions to be taken while using expenditure method of measuring national income are as follows:
(1) To avoid double counting, expenditure on all intermediate goods and services should be ignored while calculating national income.
(2) Expenditure on the repurchase of second-hand goods, should be ignored, as it is not incurred on currently produced goods.
(3) Expenditure on transfer payments like scholarships, old age pensions, unemployment allowance, etc. should be ignored.
(4) Expenditure on repurchase of financial assets such as shares, bonds, debentures, etc., should not be included, as such transactions do not add to the flow of goods and services.
(5) Indirect taxes should be deducted from the calculation of national income.
(6) Expenditure on only final goods and services should be included.
(7) Subsidies should be included while measuring national income.
(23) Explain the income method of measuring national income.
Ans.
Income method of measuring national income is also known as factor cost method. This method approaches national income from the distribution side. This method can be explained with the help of The following points:
(1) According to this method, the income payments received by all citizens of a country, in a given year are added up . The data pertaining to income are obtained from Income tax returns, reports, books of accounts as well as estimates from small income.
(2) In this method, the incomes accrued to land, labour, capital and entrepreneur in the forms of rents, wages, interest and profits are all added together. The sum of factor income is treated as Grow this method, the income received in the form of transfer payments is ignored.
(3) In India, the national income committee of the Central Statistical Organization uses the income method for adding up the Income arising from trade, transport, professional and liberal arts, public administration and domestic services.
(4) GNP according to income method is calculated as follows: NI = Rent + Wages + Interest + Profit + Mixed Income + Net income from abroad.
(24) Explain the expenditure method of measuring national income.
Ans.
Expenditure method of measuring national income is also known as Outlay Method. According to this method, national income is calculated by summing up all consumption expenditure and investment expenditure made by all individuals, firms as well as the government of a country during a year. Thus, gross national product is found by using the following formula: NIC+I+G+ (X-M) + (R-P). The expenditure method can be explained with the help of the following points:
(1) Private Final Consumption Expenditure (C):
Private final consumption expenditure by households may be on non-durable goods such as food which are used immediately, or on durable goods such as car, computer, television set, washing machine, which are generally used for a longer period of time or on services such as transport services, medical services, etc. National income takes into account the private final consumption expenditure.
(2) Gross Domestic Private Investment Expenditure (I):
It refers to expenditure made by private businesses on replacement. renewals and new investments. National Income takes into account the gross domestic private investment expenditure.
(3) Government's Final Consumption and Investment Expenditure (G):
Government's final consumption expenditure refers to the expenditure incurred by government on various administrative services like law and order, defense, education, etc. Government's investment expenditure refers to the expenditure Incurred by government on creating infrastructural facilities such as construction of roads, railways, bridges, dams, canals, which are used by the business sector for production of goods and services in any economy. National income takes into account the government's final consumption expenditure and investment expenditure.
(4) Net Foreign Investment/Net Exports (X-M):
It refers to the difference between exports and imports of a country during a period of one year. National income takes into account the value of net exports.
(5) Net receipts (R-P):
It refers to the difference between expenditure incurred by foreigners in the country (R) and expenditures Incurred abroad by residents (P). National income takes into account the value of net receipts.
Chapter 8: Public Finance In India
(25) Explain any four sources of non-tax revenue of the government. (Sept. '21)
Ans.
Non-tax sources of revenue of the government are as follows:
(1) Fees:
Fee is paid by citizens in return for certain specific services rendered by the government. For example, education fee, registration fee, etc.
(2) Prices of public goods and services:
Modern governments sell various types of commodities and services to the citizens. A price is a payment made by the citizens to the government for the goods and services sold to them. For example, railway fares, postal charges, etc.
(3) Special assessment:
The payment made by the citizens of a particular locality in exchange for certain special facilities given to them by the authorities is known as 'special assessment. For example, local bodies can levy a special tax on the residents of a particular area where extra/special facilities of roads, energy, water supply, etc. are provided.
(4) Fines and penalties:
The government imposes fines and penalties on those who violate the laws of the country. The objective of the imposition of fines and penalties is not to earn income, but to discourage the citizens from violating the laws framed by the government. For example, fines for violating traffic rules. However, the revenue from this source is comparatively limited.
(5) Gifts, grants and donations:
The government may also earn some income in the form of gifts by the citizens and others. The government may also receive grants from the foreign governments and institutions for general and specific purposes. Foreign aid has become an important source of development finance for a developing country like India. However, this source of revenue is uncertain in nature.
(6) Special levies:
The government levies duties on those commodities, the consumption of which is harmful to the health and well-being of the citizens. Like fines and penalties, the objective of special levies is not to earn income, but to discourage citizens from the consumption of harmful commodities. For example, duties levied on wine, opium and other intoxicants.
(7) Borrowings:
The government borrows from the citizens in the form of deposits, bonds, etc. Government also gets loans from foreign governments and international organizations such as IMF, World Bank, etc. In modern times, loans are becoming more and more popular source of revenue for the governments.
(Write any four points in the answer.)
(26) Explain the principles of taxation.
Ans.
The principles (canons) of taxation propounded by Adam Smith are as follows:
(1) Canon of equity or equality:
Adam Smith suggested that every person will pay the taxes to the government in proportion to his/her ability to pay'. It means rich people should pay more tax compared to the poon.
(2) Canon of certainty:
According to Adam Smith, the tax payer should know in advance how much tax he/she has to pay at what time he/she has to pay the tax and in what form the tax is to be paid to the government.
(3) Canon of convenience:
According to this canon, every tax should be levied in such a manner and at such a time that its payment becomes convenient to the tax payer.
(4) Canon of economy:
According to this canon, the cost of tax collection should be the minimum. If a major portion of the tax proceeds is spent on the tax collection itself, then such a tax cannot be considered as a good tax.
(27) Explain the types of public expenditure.
Ans.
The types of public expenditure are as follows:
(1) Revenue expenditure:
The expenditure which is incurred by the government for carrying out day-to-day functions of the government departments and various administrative services is called revenue expenditure. It is incurred regularly by the government. For example, administration costs of the government, payment of salaries. allowances and pensions of government employees, costs paid for providing medical and public health services, etc.
(2) Capital expenditure:
The expenditure which is incurred by the government for boosting the economic growth and development of a country is called capital expenditure. For example, huge investments in different development projects, loans granted to the state governments and government companies, repayment of government loans, etc.
(3) Developmental expenditure:
The expenditure of government which yields direct productive impact on the country is called developmental expenditure. Developmental expenditure results in generation of employment, increase in production, price stability, etc. For example, expenditure on health, education, industrial development, social welfare, Research and Development (R & D), etc.
4) Non-developmental expenditure:
The expenditure government which does not yield any direct productive impact the country is called non-developmental expenditure. For example administration costs, war expenditure, etc.
(28) Define the term Public Finance. Explain the meaning an nature of public finance.
Ans.
(A) Definitions:
(1) According to Hugh Dalton: "Public finance is one of those subjects which are on the borderline between economics and politics. It is concerned with the income and expenditure of public authorities and with the adjustment one with the other."
(2) According to Prof. Findlay Shirras: "Public finance is th study of the principles underlying the spending and raising of fund by public authorities."
(B) Meaning and Nature:
(1) The concept of public finance is a combination of two words viz 'public' and 'finance'. 'Public' is a collective for the individuals living within an administrative territory. In economics, the term public is used to signify the government which represents the public. 'Finance simply means income and expenditure.
(2) Thus public finance' is a branch of economics studying the principles of income and expenditure of the central government, state government and governments at local levels.
(29) Give definitions of Tax and explain the essential characteristics of tax.
Ans.
Ans. (A) Definitions:
(1) According to Prof. Taussig: "The essence of a tax as distinguished from other charges by government is the absence of a direct quid pro quo between the tax payer and the public authority."
(2) According to Prof. Seligman: "A tax is a compulsory contribution from the person to the government without reference to special benefits conferred."
(B) Essential characteristics: Some essential characteristics of ax are as follows:
(1) Compulsory contribution:
A tax is a compulsory contribution o of the country is legally contribution W the tax imposed upon him/her. It is a major source of revenue o the government. If any person does not pay a tax, he/she can be punished by the government.
(2) Payment for the common interest:
Tax is imposed on the tax payer by the government to enable the government to incur expenses in the common interests of the society.
(3) No direct and proportionate benefit to the tax payer from the payment of the tax:
The payment of a tax by a person does not entitle him/her to receive any direct and proportionate benefits or services from the government in return for the payment of the tax.
(4) Direct or indirect imposition:
Tax is directly imposed on income or property. It is indirectly imposed on various commodities and services.
Chapter 9: Money Market and Capital Market in India
(30) Explain the function of acceptance of deposits of commercial banks. (Sept. '21)
Ans.
The functions of commercial banks are as follows:
(1) Accepting deposits:
Deposits are the main source of funds for commercial banks. Commercial banks accept the following types of deposits:
(A) Demand deposits:
Demand deposits are deposits that are withdrawn on demand. The following are the two types of demand deposits:
(a) Current deposits:
Current deposits are generally kept in current account by businessmen, corporations and trusts. The account holder can deposit money in the current deposit account any number of times and withdraw as many times as demanded. Current deposit accountholders are also given the facility of overdraft, i.e. facility to withdraw in excess of the balance in the account.
(b) Savings deposits:
Savings deposits are held mainly by salaried class and small traders. The accountholder can deposit money in the savings deposit account at any number of times and withdraw money as and when required.
(B) Term deposits:
Deposits held for a fixed period are called term deposits. The following are the two types of term deposits:
(a) Recurring deposits:
Recurring deposits are regularly kept in the recurring deposit account, especially by small savers. Recurring deposits encourage regular savings.
(b) Fixed Deposits:
Fixed deposits are kept by the saver for a fixed period. The amount deposited by the saver can be withdrawn after the stipulated period. Interest is paid at the highest rate on fixed deposits.
(2) Providing loans and advances:
Commercial banks deposits accepted from depositors to lend to needy persons. Commercial banks provide short, medium and longs terms to individuals and institutions for various purposes. The longer the loan period, the higher is the loan rate. Apart from this, Commercial banks also offer cash credit, overdraft facility and also discount bills of exchange.
(3) Ancillary functions:
Commercial banks provide various facilities like transfer of funds, collection of money, making periodical payments on behalf of the customers, safe deposit lockers, D-mat facility, internet banking facility, mobile banking facility, etc.
(4) Credit creation:
Credit creation is an important function of commercial banks. Commercial banks create credit on the basis of primary deposits. Commercial banks use demand and term deposits to lend after meeting the cash reserve requirement. Commercial banks deposit the loan amount in the borrower's account when lending a loan. Thus, loans are made from primary deposits and secondary deposits are made while lending loans. Thus, commercial banks create credit.
(31) Explain any four points related to the role of money market in India. (July '22)
Ans.
The role of money market in India can be explained with the help of the following points:
(a) Meeting the short-term requirements of the borrower:
Due to the money market, the short-term financial needs of the borrower are met at realistic interest rates.
(b) Liquidity management:
Money market facilitates better management of liquidity and money in the economy by the monetary authorities. As a result, the country enjoys economic stability and economic development.
(c) Portfolio management:
Money market deals with different types of financial instruments that are designed to suit the risk and return preferences of investors. This enables the investors to manage portfolios to minimize the risks and to maximize the returns.
(d) Equilibrating mechanism:
Money market leads to rational allocation of financial resources. The money market accelerates savings in the investment stream. The money market helps to strike a balance between the demand for and the supply of short-term funds.
(e) Meeting the financial requirements of the government :
Money market helps the government to fulfil its short-term financial needs on the basis of the Treasury Bills.
(f) Implementation of monetary policy:
The main objective of monetary policy is to manage the quantity of money in the economy. In India, monetary policy is implemented by the Reserve Bank of India. Monetary policy makes it possible to meet the economic needs of different sectors of the economy and accelerate economic growth. The money market guides the Reserve Bank of India in developing appropriate interest rates. Thus, a fully developed money market in the economy helps in the successful implementation of monetary policy.
(g) Economising the use of cash:
The money market is not about the actual money but about various financial instruments that are the close substitutes to money. As a result, the money market helps to use cash sparingly.
(h) Promoting the growth of commerce, industry and trade :
Local traders as well as international traders who are in the need of short-term funds have the facility to discount bills of exchange in the money market. Money market provides working capital for agro- industries and small scale industries. As a result, the money market drives the growth of commerce, industry and trade in the country.
(Write any four points in the answer.)
(32) Explain any four problems faced by the money market in India. (March '23)
Ans.
The problems faced by the money market in India are as follows:
(1) Dual structure:
The money market in India has a dual structure, i.e. organized sector of money market and unorganized sector of money market. The organized sector of money market Includes the Reserve Bank of India, commercial banks, co-operative banks, development financial institutions, Discount and Finance House of India, etc. The unorganized sector of money market in India Includes money lenders, indigenous bankers, unregulated financing intermediates, etc. Due to this dual structure of the money market, there is a lack of transparency and stability in the Indian money market. There is a lack of coordination in the sector of the Indian money market. Also, the unorganized sector of the Indian money market does not come under the direct control and supervision of the Reserve Bank of India. unorganized non-bang
(2) Lack of uniformity in the rates of interest:
The interest rate charged on the debt in the unorganized money market in India is relatively high. In the organized money market of India, there exists a difference in the rate of interest of commercial banks, Co operative banks, non-bank finance companies, development finance institutions, investment companies, etc. This lack of similarity in interest rate adversely affects the efficiency of the money market of India.
(3) Shortage of funds:
Due to limited per capita income, lack of banking habits among the general public, over/emphasis on useless consumption expenditure, inadequate banking facilities in rural areas. etc., the savings rate among the people of India is low. Inadequate savings have led to a shortage of funds in the money market of India.
(4) Seasonal fluctuations:
In India, during the peak season, i.e. from October to June, there is a huge demand for finance due to various reasons such as trading in agricultural products, investing in agro-based businesses, etc. During the peak season, the demand for finance in the money market is high and the supply is low, leading to an increase in lending rates. Demand for finance is relatively low in the post-harvest period, leading to lower borrowing rates. As a result, the money market of India, especially the unorganized sector, experiences significant fluctuations in seasonal interest rates and lending rates, adversely affecting the efficiency of the money market of India.
(5) Lack of financial inclusion:
Banking facilities are not adequately accessible to the economically weaker lower income groups in India. As a result, people in this group do not have adequate savings and loan opportunities. As a result, there is a lack of financial inclusion in the money market of India.
(6) Delays in technological upgradation :
It is essential to use the latest technology for the development and smooth functioning of the money market. Due to some delays in the improvement of technology in India, the functioning of the money market in India is hampered
(Write any four points in the answer.)
(33) Explain the functions of commercial banks.
Ans.
The functions of commercial banks are as follows:
(1) Accepting deposits:
Deposits are the main source of funds for commercial banks. Commercial banks accept the following types of deposits:
(A) Demand deposits:
Demand deposits are deposits that are withdrawn on demand. The following are the two types of demand deposits:
(a) Current deposits:
Current deposits are generally kept in current account by businessmen, corporations and trusts. The account holder can deposit money in the current deposit account any number of times and withdraw as many times as demanded. Current deposit accountholders are also given the facility of overdraft, i.e. facility to withdraw in excess of the balance in the account.
(b) Savings deposits:
Savings deposits are held mainly by salaried class and small traders. The accountholder can deposit money in the savings deposit account at any number of times and withdraw money as and when required.
(B) Term deposits:
Deposits held for a fixed period are called term deposits. The following are the two types of term deposits:
(a) Recurring deposits:
Recurring deposits are regularly kept in the recurring deposit account, especially by small savers. Recurring deposits encourage regular savings.
(b) Fixed Deposits:
Fixed deposits are kept by the saver for a fixed period. The amount deposited by the saver can be withdrawn after the stipulated period. Interest is paid at the highest rate on fixed deposits.
(2) Providing loans and advances:
Commercial banks deposits accepted from depositors to lend to needy persons. Commercial banks provide short, medium and longs terms to individuals and institutions for various purposes. The longer the loan period, the higher is the loan rate. Apart from this, Commercial banks also offer cash credit, overdraft facility and also discount bills of exchange.
(3) Ancillary functions:
Commercial banks provide various facilities like transfer of funds, collection of money, making periodical payments on behalf of the customers, safe deposit lockers, D-mat facility, internet banking facility, mobile banking facility, etc.
(4) Credit creation:
Credit creation is an important function of commercial banks. Commercial banks create credit on the basis of primary deposits. Commercial banks use demand and term deposits to lend after meeting the cash reserve requirement. Commercial banks deposit the loan amount in the borrower's account when lending a loan. Thus, loans are made from primary deposits and secondary deposits are made while lending loans. Thus, commercial banks create credit.
(34) Write the details of the co-operative banks in the organized sector of money market of India.
Ans.
Co-operative banks in the organized sector of money market of India can be explained with the help of the following points:
(1) Co-operative banks came into existence in India under the Co-operative Credit Societies Act, 1904. Co-operative banks cater to the credit needs of the local people and thereby complement the efforts of commercial banks.
(2) Co-operative banks mainly cater to the banking needs of low and middle income groups.
(3) The co-operative banking sector in India has a three-tier co-operative credit structure like (i) Primary Co-operative Society (in rural areas), (ii) District Central Co-operative Bank (in rural and urban areas) and (iii) State Co-operative Bank (Apex Bank).
4) The three-tier-co-operative credit structure of the co-operative banking sector in India is explained with the help of the following diagram:
(35) Write information about various components of the unorganized money market of India.
Ans.
The following are the various components of the unorganized money market of India:
(1) Indigenous bankers:
Indigenous bankers are financial Intermediaries, they act like banks. Indigenous bankers deal mainly in Indigenous and short-term credit instruments like hundi. Indigenous Bankers generally belong to specific social groups. Indigenous bankers are an important source of finance in areas where banking facilities are scarce. Indigenous bankers provide loans for agriculture, trade and industry. For example, goldsmiths, traders, brokers, etc.
(2) Money lenders:
In India, mainly in rural areas, money lenders seem to be financing agricultural labourers, marginal farmers, smallholder farmers, artisans and small traders. Generally, loans are often taken from money lenders for unproductive purposes. Money lenders usually charge high interest rates on loans they make. Due to the tendency of money lenders to exploit the borrowers, the Reserve Bank of India has imposed legal restrictions on the activities of money lenders.
(3) Unregulated financing non-bank intermediaries :
Unregulated non-bank financing intermediaries include the following components:
(a) Chit funds: In Chit funds, members regularly pay a fixed amount in the form of member funds, One of the members is selected by the accepted bidding or draw method and the funds collected accordingly are given to that member. In India, the states of Kerala and Tamil Nadu use chit funds extensively for financing.
(b) Nidhi: Nidhi is a traditional lucrative form of finance in India The Nidhi is run on the financial contribution of the members. In the form of nidhis, loans are provided to the members at reasonable rates.
(c) Loan companies: Loan companies provide loans to traders. small entrepreneurs and self-employed persons. Loan companies charge high interest rates on loans as they do not come under the direct control of the Reserve Bank of India.
(36) Write about the reforms introduced in the money market of India.
Ans.
The major reforms introduced in the money market of India are as follows:
(1) Introduction of new instruments:
New instruments like treasury bills, Commercial Papers (CPs), Certificates of Deposits (CDs) and Money Market Mutual Funds (MMMFs) have been introduced in the money market of India.
(2) Liquidity Adjustment Facility:
The Liquidity Adjustment Facility (LAF) in the money market of India includes the Repos and Reverse Repos of the Reserve Bank of India.
(3) Mechanism of market forces:
In the money market of India, the emphasis is mainly on determining interest rates by market forces.
(4) Facilities for faster transfer of funds:
National Electronic Fund Transfer (NEFT) and Real Time Gross Settlement (RTGS) funds have been introduced to facilitate faster transfer of funds in the money market of India.
(5) Technological upgradation:
An electronic dealing system has been introduced to bring technological upgradation in the money market of India.
(37) Explain the role of capital market in India.
Ans.
The role of the capital market in India is explained in the Mowing points:
(1) Mobilization of long-term savings:
Industrial organizations d the government need a large amount of funds for investment and financial resources. Availability of financial resources are insufficient meet the demand for these funds. In such a case, the sale of securities by the capital market helps to bring together the long-term Savings of different sections of the population.
(2) Provision of equity capital:
The capital market provides equity capital to entrepreneurs. Entrepreneurs use the share capital buy assets for the industry and to fund business operations.
(3) Operational efficiency:
Capital market reduces the cost of transactions and simplifies the transaction process. Capital market helps financial transactions to achieve operational efficiency by educing the time taken to buy and sell stocks.
(4) Quick valuation:
Capital market helps to determine the fair and quick value of equities (shares) and debt (bonds and debentures).
(5) Integration
The capital market coordinates by consolidating the real and financial sector, equities and debt instruments, public Sector and private sector, domestic and external funds, etc.
(38) Explain the problems of the capital market in India.
Ans.
The following are the problems of capital market in India:
(1) Financial Scams:
Financial scams are on the rise in the Indian capital market. Rising financial scandals have increased the distrust of the general public and as a result, investors' confidence in investing in the capital market has waned. As a result, capital markets face irreparable losses in the form of declining public confidence.
(2) Insider trading and price manipulation:
Since some individuals have access to confidential information of companies, such individuals, for personal gains, buy and sell securities on the basis of the unpublished confidential information of companies. Some Individuals deliberately raise or lower the price of shares by buying and selling shares of certain companies for personal gain. Such illegal transactions are adversely affecting the smooth functioning of the capital market of India.
(3) Inadequate debt instruments:
In the capital market of India, debt instruments include bonds, debentures, etc. Due to narrow investor base, high cost of issuance, restrictions on entry of small and medium enterprises into the capital market, etc., there is relatively few trading in debt securities.
(4) Decline in the volume of trade:
Capital market investors can trade online. As a result, capital market investors in various parts of the country prefer to invest in securities listed in premier stock exchanges like in the Bombay Stock Exchange and in the National Stock Exchange. As a result, there has been a sharp decline in trade in regional stock exchanges in India.
(5) Lack of information efficiency:
If the company's current stock price incorporates all the information about the company, then a market is said to be informationally efficient. However, the efficiency of information in the Indian stock market is relatively low compared to other developed countries. As a result, investors do not get the expected return on investment and thus lose faith in the capital market.
(39) Explain the reforms introduced in the capital market of India.
Ans.
Capital market reforms in India are as follows:
(1) Establishment of SEBI:
The Securities and Exchange Board of India (SEBI) was established in 1988 to improve capital market transactions in India and was given statutory recognition in 1992.
(2) Establishment of Stock Exchange:
India's leading stock exchange, i.e. National Stock Exchange (NSE) was established in 1992 to improve capital market transactions in India.
(3) Adoption of computerized system:
As part of modernization, Computerized Screen Based Trading System (SBTS) was introduced in the capital market of India.
(4) D-MAT account facility:
D-MAT account facility has been made available to the investors in the capital market since 1996 so that investors can easily buy and sell shares.
(5) Increased access to global funds:
Increased access to global Funds by Indian companies is allowed through American Deposit Receipts (ADR) and Global Deposit Receipts (GDR).
(6) Establishment of Investor Education and Protection Fund:
The Investor Education and Protection Fund (IEPF) was stablished in 2001 to raise the awareness of investors in the capital market and to safeguard the interests of investors.
Chapter 10: Foreign Trade of India
(40) Explain any four points related to the role of foreign trade. (July '22)
Ans.
(B) Role of foreign trade:
The role of foreign trade can be explained with the help of the following points:
(a) To earn foreign exchange:
Foreign exchange is earned through foreign trade. The foreign exchange received can be used for various productive activities. Foreign trade promotes the production and market expansion of domestic goods and services.
(b) Encourages investment:
Foreign trade provides an opportunity for producers to sell goods and services in the domestic market as well as export to the world market. As a result, the production of various goods and services in the country is boosted and investment is encouraged.
(c) Division of labour and specialization:
Foreign trade leads to division and specialization of labour at the global level. For example, if workers in country A are skilled in agricultural production and workers in country 'B' are skilled in making electronic products, then country 'A' can export agricultural products to country 'B' by acquiring specialization in agricultural products. 'B' country can export electronic products to 'A' country by acquiring specialization in electronic products.
(d) Optimum allocation and utilization of resources:
Due to foreign trade, each country channelized the available resources to the production of the same goods from which maximum benefit can be obtained at minimum production cost. For example, if it would be possible to produce wheat at the lowest cost based on the resources available in country 'A' and if it would be possible to produce medicines at the lowest cost based on the production resources in country 'B', then country 'A' manufactures wheat and export wheat to country B. Similarly, country 'B' manufactures drugs and exports drugs to country 'A'. Thus foreign trade leads to adequate allocation and utilization of resources internationally.
(e) Stability in price level:
Foreign trade helps in balancing the demand and supply of goods and hence brings stability in price level in the economy.
(f) Availability of multiple choices:
Foreign trade provides multiple choices of imported commodities. It thus creates competition in the market and hence high quality goods can be made available to the consumers at reasonable prices. Thus, foreign trade helps in raising the standard of living.
(g) Brings reputation and helps earn goodwill:
Exporting countries get reputation and goodwill in the international market. For example, Japan and Switzerland have gained a great deal of goodwill in the international market by exporting electronic goods worldwide.
(Write any four points in the answer.)
(41) Explain the concept of foreign trade and its types.
Ans.
(A) Concept of foreign trade: The concept of foreign trade is as follows:
(1) Foreign trade is trade between different countries of the world. Foreign trade is also called international trade or external trade.
(2) According to Wasserman and Hultman. "International trade consists of transactions between residents of different countries."
(B) Types of foreign trade: The types of foreign trade are as Follows:
(1) Import trade:
Purchase of goods and services by one country from another country is called import trade. The influx of goods and services from abroad to home country is called import trade. For example, India buys petroleum from Iraq. Kuwait, Saudi Arabia.
(2) Export trade:
The sale of goods and services by one country to another is called export trade. The outflow of goods and services from home country to abroad is called export trade. For example, India sells tea, rice, jute to China, Hong Kong and Singapore.
(3) Entrepot trade:
The process of processing goods imported from one country and exporting them to another country is called entrepot trade. For example, Japan imports raw materials for the manufacture of electronics from England, Germany, France, etc. processes the raw materials to make electronic goods such as radios, washing machines, televisions and exports these goods to various countries of the world.
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