UNIT – VII: MONEY AND BANKING

MEANING OF MONEY: Money is anything which is generally accepted as medium of exchange, measure of value, store of value and as means of standard of deferred payment. FUNCTIONS OF MONEY: Functions of money can be classified into Primary and Secondary

Primary/Basic functions:-

1. Medium of Exchange: – It can be used in making payments for all transactions of

goods and services.

1. Measure /Unit of value: – It helps in measuring the value of goods and services. The

value is usually called as price. After knowing the value of goods in single unit (price) exchanges become easy.

Secondary functions:-

1. Standard of deferred payments: Deferred payments referred to those payments which

are to be made in near future.

Money acts as a standard deferred payment due to the following reasons:

1. Value of money remains more or less constant compared to other commodities.
2. Money has the merit of general acceptability.
3. Money is more durable compare to other commodity.
4. Store of value: Money can be stored and does not lose value

Money acts as a store of value due to the following reasons:

1. It is easy and economical to store.
2. Money has the merit of general acceptability.
3. Value of money remains relatively constant

MONEY HAS OVERCOME THE DRAW BACKS OF BARTER SYSTEM:

1. Medium of Exchange: Money has removed the major difficulty of the double coincidence of wants.
2. Measure of value: Money has become measuring rod to measure the value of goods and services and is expressed in terms of price.
3. Store of value: It is very convenient, easy and economical to store the value and has got general acceptability which was lacking in the barter system.
4. Standard of deferred payments: Money has simplified the borrowing and lending of operations which were difficult under barter system. It also encourages capital formation.

MONEY SUPPLY: refers to total volume of money held by public at a particular point of time in an economy.

M1=currency held by public + Demand deposits + other deposits with Reserve Bank of India. M2=M1+saving deposits with post office saving bank M3=M1+net time deposit with the bank

M4=M3 + total deposits with post office saving bank excluding national saving certificate HIGH POWERED MONEY:

Refers to, currency with the public (notes +coins) and cash reserve of banks.

MONEY CREATION/DEPOSIT CREATION/CREDIT CREATION BY COMMERCIAL BANK

Let us understand the process of credit creation with the following example.

Suppose there is an initial deposit of Rs. 1000 and L.R.R. is 20% i.e., the banks have to keep Rs. 200 and lend Rs. 800/-. All the transactions are routed through banks. The borrower withdraws his Rs. 800/- for making payments which are routed through banks in the form of deposits account.

The Bank receives Rs. 800/- as deposit and keeps 20% of Rs.800/- i.e., Rs.160/- and lends Rs.640/- . Again the borrower uses this for payment which flows back into the banks thereby increasing the flow of deposits.

MONEY MULTIPLIER:

Money Multiplier = 1/LRR. In the above example LRR is 20% i.e., 0.2, so money multiplier is equal to 1/0.2=5.

Why only a fraction of deposits is kept as Cash Reserve?

1. All depositors do not withdraw the money at the same time.
2. There is constant flow of new deposits into the banks.

CENTRAL BANK

MEANING: An apex body that controls, operates, regulates and directs the entire banking and monetary structure of the country.

FUNCTIONS OF CENTRAL BANK:

1. Currency authority or bank of issue: Central bank is a sole authority to issue currency in the country. Central Bank is obliged to back the currency with assets of equal value (usually gold coins, gold bullions, foreign securities etc.,)

Advantages of sole authority of note issue:

1. Uniformity in note circulation
2. Better supervision and control
3. It is easy to control credit
4. Ensures public faith
5. Stabilization of internal and external value of currency
6. Banker to the Government: As a banker it carries out all banking business of the Government and maintains current account for keeping cash balances of the government. Accepts receipts and makes payments for the government. It also gives loans and Advances to the government.
7. Banker’s bank and supervisor: Acts as a banker to other banks in the country—
8. Custodian of cash reserves:- Commercial banks must keep a certain proportion of cash reserves with the central bank (CRR)
9. Lender of last resort: – When commercial banks fail to need their financial requirements from other sources, they approach Central Bank which gives loans and advances.
10. Clearing house: – Since the Central Bank holds the cash reserves of commercial banks it is easier and more convenient to act as clearing house of commercial banks.
11. Controller of money supply and credit: – Central Bank or RBI plays an important role during the times of economic fluctuations. It influences the money supply through quantitative and qualitative instruments. Former refers to the volume of credit and the latter refers to regulate the direction of credit.
12. Custodian of foreign exchange reserves.

Another important function of Central Bank is the custodian of foreign exchange reserves. Central Bank acts as custodian of country’s stock of gold and foreign exchange reserves. It helps in stabilizing the external value of money and maintaining favorable balance of payments in the economy.

QUANTITATIVE INSTRUMENTS:

1. Bank Rate policy: – It refers to the rate at which the central bank lends money to

commercial banks as a lender of the last resort.

Central Bank increases the bank rate during inflation (excess demand) and reduces the same in times of deflation (deficient demand)

1. Open Market Operations: It refers to the buying and selling of securities by the

Central Bank from/ to the public and commercial banks.

It sells government securities during inflation/excess demand and buys the securities during deflation/deficient demand.

1. Legal Reserve Ratio: R.B.I. can influence the credit creation power of commercial

banks by making changes in CRR and SLR

Cash Reserve Ratio (CRR): It refers to the minimum percentage of net demand and time liabilities to be kept by commercial banks with central bank.

Reserve Bank increases CRR during inflation and decreases the same during deflation

Statutory Liquidity Ratio (SLR): It refers to minimum percentage of net demand and time liabilities which commercial banks required to maintain with themselves. SLR is increased during inflation or excess demand and decreased during deflation or deficient demand.

QUALITATIVE INSTRUMENTS:

1. Margin Requirements: It is the difference between the amount of loan and market value of the security offered by the borrower against the loan.

Margin requirements are increased during inflation and decreased during deflation.

1. Moral suasion: It is a combination of persuasion and pressure that Central Bank applies on other banks in order to get them act in a manner in line with its policy.
2. Selective credit controls: Central Bank gives direction to other banks to give or not to give credit for certain purposes to particular sectors.

SHORT AND LONG ANSWER QUESTIONS

1. Define Central Bank.
2. Give the meaning of money.
3. Discuss the functions of money.
4. Describe how money over comes the problems of barter system?
5. What are the measures of money supply?
6. What do you mean by High powered money?
7. Describe the process of money creation or credit creation by commercial banks.
8. Why only a fraction of deposits is kept as Cash Reserves?
9. Discuss the functions of Central Bank.
10. Bring out the role of Central Bank as the controller of money supply or credit
11. Explain the various qualitative and quantitative instruments used by the central bank in controlling the money supply during the times of a) excess demand/inflation b) deficient demand/deflation.

HOTS

1. Calculate the value money multiplier and the total deposit created if initial deposit is of Rs. 500 crores and LRR is 10%.

Ans: Money multiplier = 1/LRR which is equal to 1/0.1=10 Initial deposit Rs. 500 crores Total deposit = Initial deposit x money multiplier = 500 x 10 = 5000 crores.

1. If total deposits created by commercial banks are Rs.12000, LRR is 25% calculate initial deposit.

Ans: Money multiplier = 1/LRR = 1/.25 = 4

Initial deposit = Total deposit / money multiplier = 12000/4 = 3000

1. Calculate LRR, if initial deposit of Rs. 200 cores lead to creation of total deposits of Rs. 1600 cores.

Ans: Money multiplier = Total deposits/Initial deposits = 1600/200=8 Money multiplier = 1/LRR = 8=1/LRR.

LRR = 1.25 or 12.5

FREQUENTLY ASKED CBSE BOARD QUESTIONS

One Mark Questions (1M)

1. Define money.
2. Ml =
3. What is meant by barter system?
4. Write two drawbacks of barter exchange.
5. List out two main functions of money.
6. Define commercial bank.
7. Give the meaning of central bank.
8. What do you mean by credit creation by commercial banks.
9. Define bank rate.
10. Define cash reserve ratio.
11. Give the meaning of statutory liquidity ratio.
12. What is meant by open market operations (OMO)?
13. Define money supply.
14. Write one difference between commercial bank and central bank.
15. Mention two important functions of central bank.

Three Marks Questions (3M)

1. Explain briefly any two main functions of money.
2. How does the central bank apply bank rate as a measure of credit control?
3. What are the components of M1?
4. State any THREE functions of central bank. Explain any one.
5. Explain the “lender of last resort” function of central bank.
6. What is money multiplier?
7. Explain briefly any three drawbacks of barter system
8. Explain the open market operations method of credit control used by a central bank. Four Marks Questions (4 M)
9. Distinguish between commercial banks and central bank.
10. Explain how money solves the drawbacks of barter exchange.
11. What is money multiplier? How will you determine its value?
12. Briefly explain any TWO quantitative measures of credit control by the central bank.
13. Explain briefly the credit creation by commercial banks with the help of an example.

PART B-INTRODUCTORY MACRO ECONOMICS

Unit VI: NATIONAL INCOME AND RELATED AGGREGATES: KEY CONCEPTS

• Macro Economics: Its meaning
• Consumption goods, capital goods, final goods, intermediate goods, stock and flow, gross investment and depreciation.
• Circular flow of income
• Methods of calculation of national income
• Value added method (product method)
• Expenditure method
• Income method
• Concepts and aggregates related to national income
• Gross national product
• Net National product
• Gross and Net domestic product at market price and at factor cost.
• National disposable income (Gross and net)
• Private income
• Personal income
• Personal disposable income
• Real and Nominal GDP
• GDP and welfare

Macro Economics: – Macroeconomics is the study of aggregate economic variables of an economy.

Consumption goods:- Are those which are bought by consumers as final or ultimate goods to satisfy their wants.

Eg: Durable goods car, television, radio etc.

Non-durable goods and services like fruit, oil, milk, vegetable etc.

Semi durable goods such as crockery etc.

Capital goods – capital goods are those final goods, which are used and help in the process of production of other goods and services. E.g.: plant, machinery etc.

Final goods: Are those goods, which are used either for final consumption or for investment. It includes final consumer goods and final production goods. They are not meant for resale. So, no value is added to these goods. Their value is included in the national income. Intermediate goods intermediate goods are those goods, which are used either for resale or for further production. Example for intermediate good is- milk used by a tea shop for selling tea.

Stock: – Quantity of an economic variable which is measured at a particular point of time. Stock has no time dimension. Stock is static concept.

Eg: wealth, water in a tank.

Flow: Flow is that quantity of an economic variable, which is measured during the period of time.

Flow has time dimension- like per hr, per day etc.

Flow is a dynamic concept.

Eg: Investment, water in a stream.

Investment: Investment is the net addition made to the existing stock of capital.

Net Investment = Gross investment – depreciation.

Depreciation: – depreciation refers to fall in the value of fixed assets due to normal wear and tear, passage of time and expected obsolescence.

Circular flow in a two sector economy.

Payment for goods and services (Money Flow)

Firms

Supply of goods and services (Real Flow)

House hold

Supply of Factors of Production (Real Flow)

Payment for Factor services (Money Flow)

Producers (firms) and households are the constituents in a two sectors economy.

Households give factors of production to firm and firms in turn supply goods and services to households.

Related aggregates

Gross Domestic product at market price

It is the money value of all final goods and services produced during an accounting year with in the domestic territory of a country.

Gross National product at market price:

It is a money value of all final goods and services produced by a country during an accounting year including net factor income from abroad.

Net factor income from abroad:

Difference between the factor incomes earned by our residents from abroad and factor income earned by non-residents with in our country.

Components of Net factor income from abroad

• Net compensation of employees
• Net income from property and entrepreneurship (other than retained earnings of resident companies of abroad)
• Net retained earnings of resident companies abroad

Formulas

• NNP _Mp = GNP mp – depreciation
• NDP Mp GDP_mp – depreciation
• NDP _Fc = NDP _mp – Net indirect taxes (indirect tax – subsidies)
• GDP _Fc = NDP _fc + depreciation
• NNP _Fc = GDP _mp – depreciation + Net factor income from abroad – Net indirect taxes
• (NNP _FC is the sum total of factor income earned by normal residents of a country during the accounting year)
• NNP _fc = NDP _fc + Net factor income from abroad.

Concept of domestic (economic) territory

Domestic territory is a geographical territory administered by a government within which persons, goods and capital circulate freely. (Areas of operation generating domestic income, freedom of circulation of persons, goods and capital)

Scope identified as

*Political frontiers including territorial waters and air space.

*Embassies, consulates, military bases etc. located abroad but including those locates within the political frontiers.

*Ships, aircrafts etc., operated by the residents between two or more countries.

*Fishing vessels, oil and natural gas rigs etc. operated by the residents in the international waters or other areas over which the country enjoys the exclusive rights or jurisdiction.

Resident (normal resident) :-

Normal resident is a person or an institution who ordinarily resides in that country and whose center of economic interest lies in that country.

(The Centre of economic interest implies 🙁 1) the resident lives or is located within the economic territory. (2) The resident carries out the basic economic activities of earnings, spending and accumulation from that location 3. His center of interest lies in that country. Relation between national product and Domestic product.

Domestic product concept is based on the production units located within domestic (economic) territory, operated both by residents and non-residents.

National product concept based on resident and includes their contribution to production both within and outside the economic territory.

National product = Domestic product + Residents contribution to production outside the economic territory (Factor income from abroad) – Non- resident contribution to production inside the economic territory (Factor income to abroad)

Methods of calculation of national income

I – PRODUCT METHOD (Value added method):

• Sales + change in stock = value of output
• Change in stock = closing stock – opening stock
• Value of output – Intermediate consumption = Gross value added (GDP_Mp)
• NNP Fc (N.I) = GDPMp (-) consumption of fixed capital (depreciation)

(+) Net factor income from abroad ( -) Net indirect tax.

Income method:

1. Compensation of employees.
2. Operating surplus.

Dm

Income from property

m t

Rent & Royalty Interest

Income from^Entrepreneurship
1

Profit

Corporate

Tax

Corporate dividend Savings (Net retained earnings)

3. Mixed income of self-employed.

• NDP fc = (1) + (2) + (3)
• NNP fc = NDP fc (+) Net factor income from abroad
• GNP mp = NDP fc + consumption of fixed capital + Net indirect tax

(Indirect tax – subsidy)

Expenditure method:

1. Government final consumption expenditure.
2. Private final consumption expenditure.
3. Net Export.
4. Gross domestic capital formation.

Gross Domestic fixed + Change in stock

Capital formation

GDPmp = (1) + (2) + (3) + (4)

NNP fc = GDPmp – consumption of fixed capital + NFIA- Net indirect taxes Note: If capital formation is given as Net domestic capital formation we arrive at NDPmp. Capital formation = Investment

CALCULATION OF NATIONAL DISPOSABLE INCOME, PRIVATE INCOME, PERSONAL INCOME AND PERSONAL DISPOSABLE INCOME

Private Income includes factor Personal Income National Disposable income as well as Transfer

income income (Earned income +

Unearned income)

Factor income from net domestic product accruing to private sector includes income from enterprises owned and controlled by the private individual.

Excludes:-

It is the income from all the sources (Earned Income as well as transfer payment from abroad) available to resident of a country for consumption expenditure or saving during a year.

NNP_FC + Net Indirect tax + Net current transfer from abroad =Net National

disposable income. (Gross National

Disposable Income includes depreciation)

PI is the income Actually received by the individuals and households from all sources in the form of factor income and current transfers.

Personal income = Private Income (-) corporation tax. (-) Corporate Savings OR Undistributed profits

Personal disposable

income

Pe rs o n al i n come (-) Direct Personal tax (-) Miscellaneous Receipts of the govt. Administrative department (fees and fines paid by house hold.)

1. Property and entrepreneurial income of the Gov. departmental enterprise
2. Savings of the Non-departmental Enterprise.

Factor Income from NDP Accruing to private

sector = NDP_fc (-) income from properly entrepreneurship accruing to the govt departmental Enterprises (-) savings of Non departmental enterprises.

Private Income Includes

* Factor income from net domestic product accruing to private sector.

+ Net factor income from abroad + Interest on National Debt + Current transfer from Govt.

+ Current transfer from rest of the world.

One Mark questions.

1. When will the domestic income be greater than the national income?

Ans: When the net factor income from abroad is negative.

1. What is national disposable income?

Ans.It is the income, which is available to the whole economy for spending or disposal NNP _Mp + net current transfers from abroad = NDI

1. What must be added to domestic factor income to obtain national income?

Ans. Net factor income from abroad.

1. Explain the meaning of non-market activities

Ans. Non marketing activities refer to acquiring of many final goods and services not through regular market transactions. E.g. vegetable grown in the backyard of the house.

1. Define nominal GNP

Ans. GNP measured in terms of current market prices is called nominal GNP.

1. Define Real GNP.

Ans. GNP computed at constant prices (base year price) is called real GNP.

1. Meaning of real flow.

Ans. It refers to the flow of goods and services between different sectors of the economy. Eg. Flow of factor services from household to firm and flow of goods and services from firm to household.

1. Define money flow.

It refers to the flow of money between different sectors of the economy such as firm, household etc. Eg. Flow of factor income from firm to house hold and consumption expenditure from house hold to firm.

3- 4 Mark Questions

1. Distinguish between GDP_Mp and GNP fc

Ans. The difference between both arise due to (1) Net factor income from abroad. and 2) Net indirect taxes. In GDP_Mp Net factor income from abroad is not included but it includes net indirect taxes.

GNP fc – GDPMp + net factor income from abroad – net indirect taxes

1. Distinguish between personal income and private income

Ans. Personal income: -It is the sum total of earned income and transfer incomes received by persons from all sources within and outside the country.

Personal income – private income – corporate tax -corporate savings (undistributed profit) Private income consists of factor income and transfer income received from all sources by private sectors within and outside the country.

1. Distinguish between nominal GNP and real GNP

Ans. Nominal GNP is measured at current prices. Since this aggregate measures the value of goods and services at current year prices, GNP will change when volume of product changes or price changes or when both changes.

Real GNP is computed at the constant prices. Under real GNP, value is expressed in terms of prices prevailing in the base year. This measure takes only quantity changes. Real GNP is the indicator of real income level in the economy.

1. Explain the main steps involved in measuring national income through product method

Ans.

1. classify the producing units into industrial sectors like primary, secondary and tertiary sectors.
2. Estimate the net value added at the factor cost.
3. Estimate value of output by sales + change in stock
4. Estimate gross value added by value of output – intermediate consumption
5. Deduct depreciation and net indirect tax from gross value added at market price to arrive at net value added at factor cost – NDP Fc
6. Add net factor income received from abroad to NDP _Fc to obtain NNP _FC which is national income
7. Explain the steps involved in calculation of national income through income method
8. Classify the producing enterprises into industrial sectors like primary, secondary and tertiary.
9. Estimate the following factor income paid out by the producing units in each sector i.e.

Compensation of employees

*Operating surplus

*Mixed income of self employed

1. Take the sum of the factor income by all the industrial sectors to arrive at the NDP _Fc (Which is called domestic income)
2. Add net factor income from abroad to the net domestic product at factor cost to arrive at the net national product at factor cost.
3. Explain the main steps involved in measuring national income through expenditure method.
4. Classify the economic units incurring final expenditure into distant groups like households, government, firms etc.
5. .Estimate the following expenditure on final products by all economic units

• Private final consumption expenditure
• Government final consumption expenditure
• Gross domestic capital formation
• Net export

(Sum total of above gives GDP_Mp)

1. Deduct depreciation, net indirect taxes to get NDP _Fc
2. Add net factor income from abroad to NDP _Fc to arrive at NNP _FC.
3. What are the precautions to be taken while calculating national income through product method (value added method)
4. Avoid double counting of production, take only value added by each production unit.
5. The output produced for self-consumption to be included
6. The sale & purchase of second hand goods should not be included.
7. Value of intermediate consumption should not be included
8. The value of services rendered in sales must be included.
9. Precautions to be taken while calculating national income through income method.
10. Income from owner occupied house to be included.
11. Wages & salaries in cash and kind both to be included.
12. Transfer income should not be included
13. Interest on loans taken for production only to be included. Interest on loan taken for consumption expenditure is non-factor income and so not included.
14. Precautions to be taken while calculations N.I under expenditure method.
15. Avoid double counting of expenditure by not including expenditure on intermediate product
16. Transfer expenditure not to be included
17. Expenditure on purchase of second hand goods not to be included.
18. Write down the limitations of using GDP as an index of welfare of a country
19. The national income figures give no indications of the population, skill and resources of the country. A country may be having high national income but it may be consumed by the increasing population, so that the level of people’s wellbeing or welfare standard of living remains low.
20. High N. I may be due to greater area of the country or due to the concentration of some resources in out particular country.
21. National income does not consider the level of prices of the country. People may be having income but may not be able to enjoy high standard of living due to high prices.
22. High N. I may be due to the large contribution made by a few industrialists
23. Level of unemployment is not taken into account.
24. National income does not care to reduce ecological degradation. Due to excess of economic activity which leads to ecological degradation reduces the welfare of the people. Hence GNP and economic welfare are not positively related. Income in GNP does not bring about increase in economic welfare.
25. ‘Machine purchased is always a final good’ do you agree? Give reason for your answer

Whether machine is a final good or it depends on how it is being used (end use). If machine is bought by a household, then it is a final good. If machine is bought by a firm for its own use, then also it is a final good. If the machine is bought by a firm for resale then it is an intermediate good.

1. What is double counting? How can it be avoided?

Counting the value of commodities at every stage of production more than one time is called double counting.

It can be avoided by

1. taking value added method in the calculation of the national income.
2. By taking the value of final commodity only while calculating N.I

6 Mark questions

1. State whether following is true or false. Give reason for your answer.
2. Capital formation is a flow

True, because it is measured over a period of time.

1. Bread is always a consumer good.

False, it depends upon the end use of bread. When it is purchased by a household it is a consumer good. When purchased by restaurant for making sandwich, it is an intermediate (producer) good.

1. Nominal GDP can never be less that real GDP

False. Nominal GDP can be less than the real GDP when the prices in the base year is more than the current year.

1. Gross domestic capital formation is always greater than gross fixed capital formation.

False, gross domestic capital formation can be less than gross fixed capital formation if change in stock is negative.

1. Why are exports included in the estimation of domestic product by the expenditure method? Can the gross domestic product be greater than the gross national product? Explain

Expenditure method estimates expenditure on domestic product i.e., expenditure on final goods and services produced within the economic territory of the country. It includes expenditure by residents and non-residents both. Exports though purchased by non residents are produced within the economic territory and therefore a part of domestic product. Domestic product can be greater than national product, if the factor income paid to the rest of the world is greater than the factor income received from the rest of the world i.e, when net factor income received from abroad is negative.

1. How will you treat the following while estimating domestic product of India?
2. Rent received by resident Indian from his property in Singapore.

No, it will not be included in domestic product as this income is earned outside the economic territory of India.

1. Salaries of Indians working in Japanese Embassy in India

It will not be included in domestic product of India as embassy of Japan is not a part of economic territory of India.

1. Profits earned by branch of American bank in India.

Yes, it is included as part of domestic product since the branch of American bank is located within the economic territory of India.

1. Salaries paid to Koreans working in the Indian embassy in Korea

Yes, it will be part of domestic product of India because the income is earned within the economic territory of India. Indian embassy in Korea is a part of economic territory of India.

1. How are the following treated in estimating national income from expenditure method? Give reason.
2. Purchase of new car by a household: purchase of car is included in the national income because it is final consumption expenditure, which is part of national income.
3. Purchase of raw material by purchase unit: purchase of raw material by purchase unit is not included in the national income because raw material is intermediate goods and intermediate goods and service are excluded from the national income. Purchase of raw material, if included in national income will result in double counting.
4. Expenditure by the government on scholarship to student is not included in the national income because it is a transfer payment and no productive service is rendered by the student in exchange.
5. Are the following item included in the estimating a country‘s national income? Give reason.
6. Free cloth given to workers: free cloth given to worker is a part of wages in kind i.e. compensation to employee such compensation to employee is paid for the productive services in the economy, it is included in the national income.
7. Commission paid to dealer in old car: commission paid to dealer in old car is included in the estimation of national income because it is the income of the dealer for his productive services to various parties.
8. Growing vegetable in a kitchen garden of the house: growing vegetable in a kitchen garden of the house amount to production, though not for sale for self-consumption. It is included in the national income because it adds to the production of goods.

NATIONAL INCOME – NUMERICALS

1. Calculate Value Added at factor cost from the following.

= 200 -5=195

Value of output – intermediate consumption

= value added at MP 195-48 = 147

V.A at FC = V.A at MP – Net indirect tax 147 – 20

127 crores

1. Calculate (a) Net National Product at MP, and (b) Gross National Disposable Income

ITEMS

Rs. crores

200

20

(–)15 (–)10

50

15

30

5

10

Private final Consumption expenditure

a.

b.

c.

d.

e.

f.

g.

h.

i.

Ans:

Net indirect taxes

Change in stocks

Net current transfers from abroad

Govt. final consumption expenditure

Consumption of fixed capital

Net domestic capital formation

Net factor income from abroad

Net imports

(a) + (e) + (g) + (-i) = NDP mp

200 + 50+ 30 -10 280 -10 = 270 crores NNP mp = NDP mp + NFIFA 270 + 5 = 275 NNP MP + 275 crores

GNDI = NNP _PC + NFIFA + Net indirect taxes + Net current transfers from abroad + Depreciation (comp of fixed capital)

NNP _MP – net in tax = 275 – 20 =255 crores GNDI = 255 + 20 + 5 + (-10) + 15 = 295 – 10 = 285 crores GNDI = 285 crores

3. Calculate Gross Domestic Product at Market Price by

Ans: GDP _Mp by production method

(b) (i) + (ii) + (iii) – a (i) + (ii) + ( iii) = value added

(1000+ 900 + 700) – (500 -400-400)

2600 – 1300 = 1300 crores Value added at MP (GDP _MP)

Income method

Compensation of employees + operating surplus + mixed income = NDP _FC = 400 + 300 + 550 = 1250 crores GDP mp = NDP fc + conspn of fixed capital + net In. tax = 1250+ 40 + 10 GDP mp =1300

4. Calculate Net National Disposable Income from the following data.

Ans: NNDI = GDP MP – consumption of fixed capital + Net FIFA + Net current transfer from abroad

= 1000- 100 + 50 + (-20)

= 880 + 50 = 930 crores

5. Calculate Gross National Disposable Income from the following.

1. ESTIMATE NATIONAL INCOME BY

(a) EXPENDITURE METHOD (b) INCOME METHOD FROM THE FOLLOWING DATA Rs. in crores

1. Factor income from abroad 03
2. Consumption of fixed capital 25
3. Royalty 15

Ans: National Income (NNP FC)

Expenditure Method

1. + (2) + (3) + (4) = NDP mp

210 + 50 + 40 + (-5) = 295

NNP FC = NDP MP + factor Income from abroad – net Indirect tax ( Indirect tax – subsidy) 295 + 3 – (30 -5)

295 + 3 – 25 = 298 – 25 = 273 NNP FC= 273 crores Income method:

(5) + (6) + (7) + (8) + (11) + (15)

170 + 10 + 45 + 20 + 10 + 15 = 270 (NDP FC)

NDP fc = NDP fc + FIFA = 270 + 3= 273 crores

1. FROM THE FOLLOWING DATA CALCULATE

Ans: NNP FC (N. I) = (5) + (9) + (4) + (1) + (2) 1000 + 250+ 800 + 500 + 200 NDP FC = 2750 crores NNP FC = NDP FC + (7)

= 2750 + (-50)

NNP Fc = 2700 crores PDI = (3) – (8) – (11) – (13)

2000 – 150 – 100 -120

PDI = 2000 – 370 = 1630 crores

1. CALCULATE NATIONAL INCOME AND GROSS NATIONAL DISPOSABLE INCOME FROM THE FOLLOWING DATA.

Net indirect tax 05

Ans: National Income (NNP _FC)

= (4) + (6) + (2) + (7) + (3) = NDP mp = 200 + 600 + 100 + 10 + (-20)

= 910 -20 = 890

NDP _MP = 890 crores

NNP fc = NDP mp + (8) — (1)

= 890 + 5 -5 NNP fc = 890 Depreciation = (9) – (2)

125 – 100 = 25 crores

GNDI = NNP _FC + Net Indirect Tax + Net Current transfers from abroad + depreciation = 890 = 05+ 15 + 25 GNDI = 935 crores

9. CALCULATE NNP AT MARKET PRICE BY PRODUCTION METHOD AND

NNP mp = GDP mp – (9) + (7)

= 1400 – 40 + (-20)

NNP mp = 1340 Income Method:

NNP mp = (4) + (5) + (6) + (10) + (7)

= 400 + 650 + 300 + 10 + (-20)

NNP mp = 1350 + 10 – 20

1. CALCULATE GNP at FACTOR COST BY INCOME METHOD AND

EXPENDITURE METHOD. Rupees in crores

1. Private final consumption expenditure 1000
2. Net domestic capital formation 200
3. Profit 400
4. Compensation of employers 800
5. Rent 250
6. Gov.: final consumption expenditure 500
7. Consumption of fixed capital 60
8. Interest 150
9. Net current transfer from row (-)80
10. Net factor income from abroad (-) 10
11. Net exports (-)20
12. Net indirect taxes 80

Ans: GNP FC by Income method

GNP FC = 4 + 3 + 5 + 8 + 10 + 7

800 + 400 +250 + 150 + (-10) + 60 GNP FC = 1650 crores GNP FC by Expenditure Method GNP FC = 1 + 2 + 6 + 10 + 11 -12 + 7

= 1000 + 200 + 500 + (-10) + (-20) -80 + 60 = 1700-110+ 60 GNP FC = 1650 crores

1. CALCULATE PRIVATE INCOME AND PERSONAL DISPOSABLE INCOME

FROM THE FOLLOWING DATA

Rupees in crores

1. National income
2. Income from property and entrepreneurship to gov. administrative department
3. Saving of non-department public enterprises
4. Corporation tax
5. Current transfer from govt: administrative depart
6. Net factor income from abroad
7. Direct personal tax
8. Indirect taxes
9. Current transfer from Raw
10. Saving of private corporate sector

5050

500

100

80

200

-50

150

220

80

500

Ans: Private Income = 1 – 2- 3 + 5 + 9

5050 – 500 – 100 + 200 + 80 5430 – 500

Private Income = 4930 crores PDI = Private Income – 4 -10 -7 4930 -80 -500 -150 PDI = 4200 crores

1. Calculate private income
2. Income from domestic product accruing to private sector 250
3. Net current transfer from raw 40

3Net current transfer from govt: administrative dept 10

1. National debt interest 20
2. Net factor income from abroad 05

Ans: Private Income = 1 + 2+ 3 + 4 + 5

250 + 40 + 10 + 20 + 5 = 325 crores

13. CALCULATE NET NATIONAL DISPOSABLE INCOME AND PERSONAL INCOME FROM THE FOLLOWING DATA

1. Income from property and entrepreneurship to govt administrative

Department 30

1. Net current transfer from RAW 20
2. Net factor income from abroad -50
3. saving of private corporate sector 20

Ans: NDPfc = (2) + (4) + (6)

400 + 200 + 500 = 1100 crores NNDI = NDP fc + (12) + (1) + (11)

=1100 + (-50) + 90 + 20 NNDI = 1210 – 50 = 1160 crores

Personal Income Ans:

Private Income = NDP _FC -(8) – (10)

1160 -40 – 30=1090 crores 1090 + 7 + 9 +11 +12 1090 + 70 + 60 + 20 + (-50) = 1190 crores

Personal income = Private Income – Corporation Profit Tax – Savings of private corporate sectors

1190 – 80 – 20= 1090 crores

1. CALCULATE FROM THE FOLLOWING DATA (A) PRIVATE INCOME (B) PERSONAL INCOME (C) PERSONAL DISPOSABLE INCOME.

RS IN CRORES

1. Factor income from NDP accruing to private sector 300
2. Income from entrepreneurship and property
3. Accruing to govt administrative departmental 70
4. Savings of non-departmental enterprises 60
5. Factor income from abroad 20
6. Consumption of fixed capital 35
7. Current transfer from rest of the world 15
8. Corporation taxes 25
9. Factor income to abroad 30
10. Current transfer from govt governmental admi depart 40
11. Direct taxes paid by house hold 20
12. National dept interest 05
13. saving of private corporate sector 80
14. Net national product at factor cost 700

Ans Private Income = 1 + 5 + 7 -9 + 10 + 12 300 + 20 + 15 -30 + 40 + 05 Private Income = 350 crores Personal Income = Private income – 8 – 13 = 350 – 25 – 80 Personal Income = 245 crores PDI = Personal Income – 11 245 – 20 PDI = 225 crores

15. From the following data, calculate:

1. Gross national Disposable Income
2. Private Income
3. Personal Disposable Income

(Rs. In Crores)

1. Indirect taxes 60
2. Subsidies 10
3. Consumption of fixed capital 40
4. Income from property and entrepreneurship

Accruing to government administrative departments 50

1. Current transfers from rest of the world 45
2. Profits 100
3. Direct tax paid by households 50
4. Savings of private corporate sector 60
5. Saving of non-departmental enterprises 25
6. Current transfer from govt: administrative departments 70
7. A factor income abroad 20
8. Factor income to abroad 30
9. Corporation tax 35

Ans GNDI = 1 + 2 -3 + 6 + 4

700 + 60 – 10 + 45 + 40= 805 -10 + 40 GNDI = 835 crores b) Private Income = 1 – 5 -10 + 6 +11

(Rs. In Crores)

1. National income 2000

700 – 50 -25 + 45 +70 Private Income = 740 crores c) PDI = Private Income – 14 – 9 – 8 740 – 35 – 60 – 50 PDI = 594 crores

16. Calculate Gross National Disposable Income from the following data:

1. Net current transfer from rest of the world 200
2. Consumption of fixed capital 100
3. Net factor income from abroad (-)50
4. Net indirect taxes 250

Ans: GNDI = 1 + 5 + 2 + 3

2000 + 250 + 200 + 100 GNDI = 2550 crores

1. Gross national product at factor cost 800

17. Calculate Net National Disposable Income from the Following Data:

(Rs. In Crores)

1. Net current transfer from rest of the world 50
2. Net indirect taxes 70
3. Consumption of fixed capital 60
4. Net factor income from abroad (-)10

Ans: NNDI = 1 + 2 + 3 -4

800 + 50 + 70 -60 = 860 crores

NUMERICALS TO BE CALCULATED BY STUDENTS

(Rs. In Crores)

1. Calculate Net National Disposable Income From The Following Data:

1. Gross domestic product at market price 1,000
2. Net factor income from abroad (-)20
3. Net indirect taxes 120
4. Consumption of fixed capital 100
5. Net current transfer from rest of the world 70

2. Calculate Gross National Disposable Income The Following Data:

(Rs. In Crores)

1. National income (or NNPfc) 800
2. Net indirect taxes 100
3. Net factor income from abroad 30
4. Net current transfer from rest of the world 50
5. Consumption of fixed capital 70
6. Calculate Gross National Disposable Income And net National Disposable Income from the Following Data:

(Rs. In Crores)

1. Consumption of fixed capital 30
2. Net national product at market price 240
3. Net Indirect taxes 40
4. Net current transfers from rest of the world (-)20
5. Net factor income from abroad (-) 10
6. Find Out GNP_mP, NDPfc And Gross National Disposable Income.

(Rs. In Crores)

1. National income 520
2. Net factor income from abroad 10
3. Indirect taxes 40
4. Subsidies 10
5. Consumption of fixed capital 50
6. Net current transfer received from abroad 20
7. Calculate NNP_fc, net National Disposable Income and Gross National Disposable Income from following data:

(Rs. In Crores)

1. GNPmp 1000
2. Net Indirect taxes 100
3. Net current transfer received from rest of the world (-)20
4. Subsidies 25
5. Consumption of fixed capital 50
6. Net factor income paid to the rest of the world (-)10
7. Find Out (a) Personal Income and (b) Personal Disposable Income from following data:

(Rs. In Crores)

1.Private income 48,800

1. Interest on national debit 1,000
2. Net factor income from abroad 300
3. Corporate Savings 800
4. ) Corporation tax 210
5. Personal income tax 540
6. From The Following Data Calculate:

Private Income and (b) Personal disposable income.

(Rs. In Crores)

1. Income from Domestic product accruing to the private sector 4,000
2. Savings of non-departmental public enterprises 200
3. Current transfer from government administrative departments 150
4. Savings of private corporate sector 400
5. Current transfers from rest of the world 50
6. Net factor income from abroad (-) 4
7. Corporation tax 60
8. Direct Personal tax 140
9. Calculate (a) Personal Income (b) Personal Disposable Income from following data:

(Rs. In Crores)

1. Income from property and entrepreneurship accruing to

Government administrative department 500

1. Savings of non-departmental public enterprises 100
2. Corporation tax 80
3. Income from Domestic product accruing to the private sector 4,500
4. Current transfer from government administrative departments 200
5. Net factor income from abroad (-)50
6. Direct Personal tax 150
7. Indirect taxes 220
8. Current transfers from rest of the world 80
9. Savings of private corporate sector 500

(Rs. In Crores)

9.From the following data calculate National Income by (i) Income method and (ii) Expenditure method.

1. Compensation of employees 1,200
2. Net factor income from abroad (-)20
3. Net indirect taxes 120
4. Profit 800
5. Private final consumption expenditure 2,000
6. Net domestic capital formation 770
7. Consumption of fixed capital 130
8. Rent 400
9. Interest 620
10. Mixed income of self- employed 700
11. Net exports (-)30
12. Government final consumption expenditure 1,100
13. Mixed income of self-employed 400

10.From the following data, calculate Gross national product at Market Price by (i) Income method. (ii) Expenditure method:

(Rs. In Crores)

1. Compensation of employees 500
2. Private final consumption expenditure 900
3. Net factor income from abroad (-)20
4. Net indirect taxes 100
5. Consumption of fixed capital 120
6. Net domestic capital formation 280
7. Net exports (-)30
8. Profits 350
9. Rent 100
10. Interest 150
11. Government final consumption expenditure 450

11.Calculate (a) National Income and (b) Gross National Disposable Income from the following data

(Rs. In Crores)

1. Net factor income from abroad (-)20
2. Government final consumption expenditure 200
3. Subsidies 10
4. Private final consumption expenditure 800
5. Net current transfers from the rest of the world 30
6. Net domestic fixed capital formation 100
7. Indirect taxes 80
8. Consumption of fixed capital 40
9. Change in stock (-)10
10. Net exports (-)50

12.From the following data, calculate ‘gross value added at factor cost’

(Rs. In Crores)

1. Sales 500
2. Change in stock 30
3. Subsidies 40
4. Consumption of fixed capital 60
5. Purchases of intermediate products 350
6. Profit 70

13.From the following data, calculate:

(a) National income, and (b) Personal disposable income

(Rs. In Crores)

(xii) Government final consumption expenditure (xvi) Consumption of fixed capital

600

100

FREQUENTLY ASKED CBSE BOARD QUESTIONS