Economics

MEASUREMENT OF NATIONAL INCOME There are three methods of measuring national income because national income can be looked at from three points as Total output , Total product ,Total expenditure. All these three are flows on the economy per period of time. The three methods of measuring National income measures the same flow from different angles.When production takes place,factors of production are paid.There is an income flow and an output flow.Output is purchased by people through expenditure which give rise to income. Thus income,output and expenditure are thre facets of same coin. The PRODUCT  METHOD It is also known as inventory method or commodity service method. It consists of finding out the market value of all the final goods and services produced in a country during the period of an accounting year. In this method, the net production of all the industries in the economy are added up. The total of this would give us net domestic product at factor cost . By adding net incom...

CONCEPT OF MACROECONOMICS The term Macroeconomics applies to the study of relations between economic aggregates .It is the theory of income,employment,prices and money. Macroeconomics is concerned with the basic problem of determination of flow of income. Macroeconomics :  1)Macroeconomics deals with the study of economic issues related to larger units or economy as a whole. 2)These issues are studied with a view to maximising social welfare. 3)It is concerned with the determination of aggregate output and general price level of the whole economy. 4)Level of output and employment is the main principle of macroeconomics .      5) The subject matter is full employment,national income,general price level,trade cycle,economic growth etc. 6) It studies about the interdependence of economic factors which are categorised into aggregate units like aggregate demand ,aggregate supply ,total consumption,total supply. This method of study is called as "general equilibrium analy...

Role Of Central Banks a) Traditional Functions : The central banks in the developing countries perform Both traditional and non -traditional functions. The functions of central bank are having monopoly of note issue,acting as banker to government,serving as bankers bank and maintaining the external stability. b) Economic growth : The central banks in developing countries should aim at promoting the process of economic growth.Economic growth requires sufficient financial resources. The central bank can ensure adequate monetary expand in country. c) Internal stability : The central bank should also attempt to maintain internal price stability. The developing countries are susceptible to inflationary pressures mainly due to supply inelasticities in short period. The central bank should adopt such policies that can control inflationary tendencies and price stability.  d) Development of banking system : The central bank should not only take measures to develop an integrated commercia...

DIFFERENCE between the central bank and commercial banks a)The central bank is the apex monetary institution which has been empowered to exercise control over the banking system of the country. The commercial bank on the other hand is a constituent unit of banking system. b)The objective of central bank is to achieve economic policy of the government and maximise public welfare through monetary measures. The objective of commercial banks is to have profit earning. c)The central bank is state owned institution The commercial banks are privately owned institution. d)The central bank does not deal directly with the public. The commercial banks directly deals with the public. e)The central bank does not compete with the commercial banks. It helps them by acting as lender of last resort. The commercial banks thrives to have strong competition with the central bank. f)The central banks have the monopoly of note issue . The commercial policy does not have such power. g)The central bank is the...

METHODS OF CREDIT CONTROL The methods of credit control can be classified into two categories : a)Quantitative or general methods b)Qualitative or selective methods Quantitative or general methods a) Bank rate policy : The bank rate or discount rate is rate at which a central bank is prepared to discount the first class bills of exchange.The rate of interest which the central bank charges from the commercial banks for rediscounting the bills is called bank rate. Bank rate policy aims at influencing  -the cost and availability of credit to commercial banks. -interest rates and money supply in economy -level of economic activity f the economy. A rise in bank rate makes credit costlier,reduces the volume of credit ,discourages economic activity and brings doen price level in the Economy.A fall in bank rate makes credit cheaper ,increases volume of credit,encourages business man to borrow and invest and increases the levels of economic activity and price level. b) Open market operatio...

Credit control Meaning of credit control Credit control is the regulation of credit by Central Bank for achieving some definite objectives. Changes in the volume of credit influence the level of business activity and price level in the Economy. It becomes necessary for the central bank to keep the creation of credit under control in order to maintain stability in the economic system. Objectives of credit control a) Price stability :Price stability is the important objective of credit control policy. The central bank by regulating supply of credit in accordance with the commercial needs of the people ,can bring about the price stability in the country. b) Economic stability :Operation of business cycle brings instability in capitalist economy. The objective of credit control policy of central bank should be to eliminate cyclical fluctuations and ensure economic stability in the Economy. c) Employment maximisation : Economic stability with full employment and high performance capital ...

CENTRAL BANKS Meaning of central banks : CENTRAL bank is supreme monetary institution which is at the apex of monetary and banking structure of a country. It is leader of money market and controls,supervises,regulates the activities of commercial banks.  It is central monetary authority which manages the currency and credit policy of the economy and functions as a banker to government as well as to commercial banks. Functions of central bank a) Note issue : The central bank has the sole monopoly of note issue in almost every country. The currency notes are issued and printed by the central bank.In  India, one rupee notes are issued by Ministry of Finance and all other notes are issued by Central Bank I.e Reserve Bank of India.It brings uniformity in monetary system of note issue and note circulation. b) Banker,Agent and adviser : The central bank functions as banker ,agent and adviser to the government. As a banker to government , it performs same function for government as a...

CREDIT MULTIPLIER Meaning of credit multiplier In the process of multiple credit creation,the total amount of derivative deposits created by the banks will be a multiple of initial excess reserves.The ratio between the total amount of derivative deposits and the initial amount of excess reserves is known as credit multiplier.It is reciprocal of cash reserve ratio(r) and denoted by k. Credit multiplier k =                                                  Total derivative deposits/Initial excess reserves Credit multiplier k =                         1/ cash reserves ratio (r) Assumptions 1)The cash reserve ratio remains constant through all the stages of credit creation process. 2)The banks adjust their assets in such a manner as to maintain a fixed relationship between their deposit liabilities and ca...

ROLE OF COMMERCIAL BANKS Banks are considered not mere as dealers in money but also the leaders in the development. Banks ,in the modern economy plays an important role in the progress of country.The economic progress in the present day in the developing economies largely depends upon the growth of sound banks system in these economies. The following are contribution of commercial banks in the economic development of the economy :- a) Capital formation - Capital formation is the most important factor of economic development and banks promote capital formation.It consists of 3 stages. -generation of saving -mobilisation of saving -canalisation of saving Bank plays an important role by -stimulating savings by providing number of incentives to savers . -by expanding their branches in different areas and giving various incentives,they succeed in mobilising the savings . b) Economic activity : Banks influence economic activity,and hence pace of economic development through its influence o...

MEANING Of CREDIT CREATION A bank differs from other financial institutions because it can create credit.Banks have the ability to expand their demand deposits as a multiple of their cash reserves. Multiple expansion of deposits is called credit creation . Bank credit means bank loans and advances ,a bank keeps a certain .The bank loan is not paid directly to borrower but is only credited in his account. Every bank loan creates an equivalent deposit in the Bank. Thus,credit creation means multiple expansion of Bank deposits. Creation refers to the ability of the Bank to expand deposits as a multiple of its reserves. To conclude , Credit creation refers to the unique power of banks to multiply loans and advances, and hence deposits through the process of making loans or investment in securities. The banks create additional purchasing power with just a little cash in hand.  Basic concepts a) Bank deposits : This forms the basis of credit creation. It is of two types : - Primary depo...

MEANING OF COMMERCIAL BANKS Commercial banks are those banks which perform all kinds of banking business and generally finance trade and commerce are called commercial banks . These banks normally advance short term loans to the businessmen and traders .Lately , the commercial banks have extended their areas of operation to medium term and long term finance . Majority of commercial banks are in the public sector. FUNCTIONS of commercial banks a) Accepting deposits : Banks accept deposits from those who can save but cannot profitably utilise these savings themselves. People consider it more deposit their Savings in a bank because of doing so they,on the one hand earns interest and on the other hand avoid the danger of theft . Different types of accounts   -Fixed deposit account -Current deposit account -Saving deposit account -Recurring deposit account -Home safe account b) Advancing of loans :Banks advances loans to the public. After keeping certain cash reserves,the banks lend t...

MEANING AND TYPES OF BANK Meaning of Bank : A Bank is an institution which deals with the money and credit. It accepts deposits from the public,makes the funds available to the needy and helps in transfer of money from one place to another.  Features of the Bank   a)It deals with money, it accepts deposits and advances loans. b)It has the ability of creating credit system. c)It is commercial institution which aims at earning profit. d)It is financial institution that creates demand deposits which serve as a medium of exchange and as a result,the banks manages payment system of the country. Types of Banks a) Commercial Banks : The Banks which perform all kinds of banking business and finance trade and commerce are called as commercial banks. These Banks offer short term loans to businessman and traders but lately also offers medium term and long term loans. b) Industrial Banks : Industrial Banks meet the medium term and long  term needs of the industries .These are also...

DISADVANTAGES OF MONEY a) Misuse of capital - Money leads to creation of more and more credit .Credit creation if not matched by the increase in production results in inflation. b) Over capitalisation - Easy borrowing and lending facilities, made possible through money may lead certain industries to use more and more capital than require which results in over capitalisation , overproduction and unemployment. c) Monopolies - Money leads to concentration of wealth in a few hands and thus give rise to Monopolies which results in exploitation of workers . d) Inequality of income - Money through its excessive use and inflationary effect creates and widens inequalities in the distribution of income and wealth. e) Political instability - Wide fluctuations in prices and buisness activities caused by money leads to political instability . f)Economic instability - The value of money does not remain constant which creates economic instability  in the economy . Too much money reduces it'...

ADVANTAGES OF MONEY a) Removal of Barter system difficulties - Money has helped in overcoming the difficulties of Barter system such as need for double coincidence of wants ,lack of common measure of value , lack of divisibility and many others. b) Importance in socialist economy - Socialism is an economic system which is controlled and regulated by government so as to ensure welfare to the society . Money has helped the socialist economy in number of following given ways :  1)Money acts as measure of value . The value of goods and services is expressed in terms of money . 2)Money performs the function of circulation as all buying and selling is done through money. 3)Money provides the Medium of payment when wages are paid to workers , entrepreneur receives loans  etc. 4)Money that is saved are used by state to expand production reserves and provide credit. 5)Working people receive a share of national product in terms of money according to their quality and quantity they ...

FUNCTIONS OF MONEY Various functions of Money can be classified into three broad groups: a) Primary functions b) Secondary functions c) Contingent functions d) other functions Primary functions   a) Medium of exchange : Money must be commonly accepted by the people in exchange of goods and services to be successful medium of exchange.Money benefits the society in number of ways as a medium of exchange. -It offers sales and purchases through money. -It promotes transactional efficiency. -It allows freedom of choice . b) Measure of value : Money serves as common measure of value in terms of which value of all goods and services is measured and expressed. It has made transactions easy and simplifies the problem of measuring and comparing prices of goods and services. c) Unit of account : As a unit of account, it helps in developing an efficient accounting system . It provides basis for keeping account ,estimating national income,cost of a project etc. Secondary functions a) Standar...

NEAR MONEY   Meaning : Those assets which cannot be technically regarded as money,but are claims to money and perform some functions of money. Such assets are called as Near money. Characteristics of near money a) It possess characteristics of money. b) It have high degree of liquidity c) It can be converted into money. d) It cannot be directly used for making transactions. e) It is close substitute of money. Types of near money a) Bill of exchange - It is a promise to pay a specified amount of money in specified date ,generally after 3 months. It may be of different types : 1) Commercial bills are drawn in connection with commercial transactions. 2) Finance bills are drawn when a person lends money to other person . 3) Treasury bills are finance bills through which government raises short period funds. b) Bond - It is a promise to pay a fixed sum of money by way of interest annually for specified number of years and to repay capital sum borrowed at the end of period. This me...

CLASSIFICATION OF MONEY a) Money proper and Money of account Money proper is the money which is in circulation in a country. It is medium of exchange and means of payment . Rupee note and coin is Money proper in India. Money of account is that in which accounts are maintained.Process of goods ,purchasing power debts etc are Money of account. While the Indian rupee as money of account has remained same,the actual , Indian rupee has been experiencing change in its weight ,size and content from time to time. Types of money proper 1) Commodity money and representative money Commodity money is made up of metal and its face value is equal to its intrinsic value. With being medium of exchange ,it also serves as store of purchasing power. It is also called as full bodied money. Representative money is the money which is not full bodied and is still in circulation. Its materially value is greater than the value of stuff of which it is composed.Paper money is its example. b ) Legal tender ...

EVOLUTION OF MONEY History of money Increasing difficulties and inconvenience led to the invention of money.Money was first used as a unit of account or a numeraire in terms of which all other things were to be measured and compared. It allowed the process of goods to be expressed in terms of common unit of account,made non - comparable goods comparable but still ,trading was simple exchange of goods as process were priced in terms of one standard commodity . This difficulty was removed , When unit of account become medium of exchange also which saves time and lot of effort. Development of money There are different stages of development of money in accordance with the growth of human civilization. a) Animal money - In primitive agricultural communities,domestic animals were used as money . Cattle were considered the common instrument of exchange.Cow and sheep were accepted as common wealth in ancient times. b) Commodity Money -A number of commodities like bows,arrows,shells,rice etc ...

BARTER SYSTEM  Meaning of Barter system of exchange Before money came into existence, exchange took place with the system of BARTER.  Barter system refers to the exchange with the help of goods . It means direct exchange of goods without using money. Advantages   a)It is simple system without complexity of monetary system. b)There is no worries regarding over or under productions of goods. c)There is no problems of international trade. d)Personal and natural resources are utilised to meet needs of society. Disadvantages a) Double coincidence - Under Barter system, a double coincidence of wants is required for exchange. For instance , if person A wants clothes in exchange of horse , then he must have to find the person who has need for horse and can exchange it for clothes. b) Absence of common measure of value - Since there is no common measure in terms of which the value of commodity can be expressed, the problem arises how much wheat should be exchanged for how many p...

Multinational co-operations (MNCs) Meaning : MNCs are huge industrial organisation which extends their industrial and marketing operations through a network of their branches.Instead of aiming for maximization of their profit from one or two products ,these operate in number of fields and from this point of view,their buisness stategy extends over number of countries. Features a)These are giant in size. Their sales run into billions of dollars and thus makes super normal profits. b)They operate all over the world  where these have effective control and supervision. c)They have been comprised of Oligopoly structure. d)These usually grow in a spontaneous and unconscious manner. e)An MNCs facilitates multilateral transfer of resources includes equipment, machinery, raw material, finished products etc. f)The various countries have their share in total capital of corporation. g)They have multi national management. h)Large part of capital assets of parent company is owned by the citizen ...

Major issue facing Indian economy Introduction - After independence, India made progess in political, economic, social fields but many problems like poverty, unemployment and inflation are yet to be solved. Meaning - Economy means a money framework in which all economic activities of a country are explained. Indian economy is a mix economy whereby both private and public sector plays its role. The root cause of the 3 problems namely poverty , unemployment and inflation is population explosion that is increasing at very fast speed. These three problems are major challenges for Indian economy. Poverty Poverty has attracted attention of economists, sociologists and educationists . It exists when one is not able to get the basic necessities of life - food ,clothes and shelter. It is condition of lower standard of living, inability of an individual to get minimum requirement of food , education and health. It further indicates 3 direction  a) Economic inequality b) Economic dependence ...

SOUTH ASIAN ASSOCIATION FOR REGIONAL COOPERATION (SAARC) Introduction    The South Asian association for regional cooperation comprises of Afghanistan, Bangladesh, Bhutan, Indian, Maldives, Nepal, Pakistan and Sri Lanka. The foreign ministers of these countries, at their first meeting in New Delhi in August 1983,adopted the declaration on SAARC and formally launched its Integrated Programme of Action IPA. SAARC has also nine observers - Australia, China, EU , Iran, Japan, Republic of Korea, Mauritius, Myanmar and USA. Meaning  The aim of the organisation is to accelerate the process of economic and social development in Member states joint action in agreed areas of cooperation. Observers are not allowed to be part of deliberations and their participation is limited to the inangural and closing sessions of the summit. Objectives   a)To promote the welfare of the people of South Asia and to improve their quality of life. b)To accelerate economic growth, social progess ...

THE WORLD TRADE ORGANISATIONS Introduction : The Uruguay Round of GATT negotiations concluded on 5th April, 1994 at Marrakesh, Morocco. The WTO agreement is the Uruguay Round agreement infact whereby the original GATT is now part of WTO Agreement which came into force from January 1,1995. Meaning : The WTO is the successor to the GATT. The WTO is properly established permanent world trade organisations. It has a legal status and enjoys privileges amd immunities on same footing as IMF and WORLD BANK. It includes the GATT as modified by Uruguay round and all agreement concluded under GATT and complete results of Uruguay Round. There were 77member countries of WTO on January 1,1995.Now, there are 160 members India is one of the founder members. Objectives a)It's relation in field of trade and economic endeavour shall be conducted with view of raising standard of living, enduring full employment and large and steadily growing volume of real income and trade in goods and services. b)T...

General aggreement on tariffs and trade GATT Introduction The GATT emerged in Havana in the year 1947-48 as the allied owners thought of having a liberal world trading system after World War 2nd.Fifty three nations drew up and signed a charter for Establishing International Trade Organisation ITO . But due to the negligence of Havana centre by Congress , it never came into existence. Simultaneously, 23 nations agreed to continue extensive tariffs and trade. This was signed on October 30, 1947 and came into force from January 1,1948 when other nations had also signed it. In the year 1995 ,GATT disappeared and passed into history when it was merged in the World Trade Organization . Meaning:  GATT was a multilateral treaty which had been signed by 96 government known as contracting parties. It was multinational treaty which covered 80% of world trade. It was decision making body with a code of rules for conduct of International Trade, and mechanisms for trade liberalisation. The contr...

THE EUROPEAN UNION Origin of EU The European Economic Community (EEC) or European Community (EC )was founded in 1957 under the treaty of Rome,France, Germany, Italy, Belgium,Luxemberg and Netherlands. The community of these orginal members was enlarged with the addition of Ireland , Denmark and United Kingdom in 1973.In 1981 Greece joined the community afterwards  Portugal and Spain joined in 1984.The community has now 28 members. Since 1955,it is also called as European Union (EU). AIM of the union The forerunner of EU was European Coal and Steal Community (ECSC) treaty which was ratified by original members in 1952.It removed all import duties and quota restrictions on coal , iron ore, steel on intra community trade. The aim was to have economies of scale in these industries. The integration. Of six members was enlarged by Treaty of Rome in 1957 for the establishment of common mark for all commodities . Objectives of EU a)To eliminate custom duties, restrictions in regard to impo...

THE WORLD BANK Origin of the bank The International Bank for Reconstruction and Development (IBRD) or The World Bank was established in 1945 under the Bretton Woods Agreement of 1944 to assist in bringing about a smooth transition from a war time to peace time economy . Membership of the Fund The members of the International Monetary Fund are the members of IBRD. It had 180 members in 2015.If a country resigns its membership, it is required to pay back all the loans with interest on due dates. If the Bank incurs financial loss in the years in which member resigns, it is required to pay its share of loss on demand. Functions of the Bank a)To assist in the development of territories of its members by facilitating tthe investment of capital. b)To encourage the development of productive facilities and resources ib less development countries. c)To promote foreign investment by means of guarantees on participation in loans. d)To supplement private investment by providing finance for product...

INTERNATIONAL MONETARY FUND (IMF) Origin of IMF The International Monetary Fund is an institution established by 44 nations under the Bretton Woods Agreement of July 1944 . The world depression of 30's forced every country to abandon the gold standard. This led to the adoption of purely nationalistic policies whereby almost every country imposed trade restrictions, exchange controls in order to encourage it's exports .This further brought a marked decline in world trade and extention of depression . It was against this background that 44 nations assembled at United Nations Monetary and Financial conference at Bretton Woods, New Hampshire from July 1st to 22 nd , 1944. Thus, IMF was established to promote economic and financial cooperation among its members in order to facilitate the expansion the expansion and balanced growth of world trade. Membership of the fund It started functioning from March 1st ,1947.In January 2016 ,the Fund had 188 members .The Amendment of the article...