I have divided Syllabus of Economics (for both exams)
1. Economy: Introduction
2. Economy types
3. Economy sectors
4. Salient features of Indian Economy
5. Fiscal Policy (LPG also) and Taxation
6. National Income - Economy Indicators- GDP, NNP etc.
7. Planning in India- Five year Plan
8. International Organizations
9. Banking in India and Monetary policy
10. Agriculture
11. Unemployment and poverty
12. Inflation
13. Budget
14. Population
15. Transport and Communication(NH-1, 2 etc.)
16. Important terms
Read our previous two series if you have missed:-
1. [Revision Series] UPSC SSC (Part 1 of 8) Economics
2. [Revision Series] UPSC SSC (Part 2 of 8) Economics
Today we will cover two important topics in our third series of Economics.
1. National Income - Economy Indicators- GDP, NNP etc
2. Banking in India and Monetary policy
First topic of the day:-
National Income - Economy Indicators- GDP, NNP etc
What is Macroeconomics?
Let's start with the definition of Macroeconomics. Macroeconomics is the study of the economy as a whole. Its goal is to explain the economic changes that affect many households, firms, and markets at once.
In interview also, a favorite question of interview board is--"Can you differentiate between macro and micro economics?"
Micro-economics is just a branch of economics that analyzes the market behavior of individual consumers and firms..like demand-supply...etc.
Macro-economics is something big..it deals with whole economy like employment, GDP etc....hope you are getting me...
Macroeconomics answers questions like the following:-
1. Why is average income high in some countries and low in others?
2. Why do prices rise rapidly in some time periods while they are more stable in others?
3. Why do production and employment expand in some years and contract in others?
The Economy’s Income and Expenditure
When judging whether the economy is doing well or poorly, it is natural to look at the total income that everyone in the economy is earning.
For an economy as a whole, income must equal expenditure because:
i) Every transaction has a buyer and a seller.
ii) Every dollar of spending by some buyer is a dollar of income for some seller.
Gross Domestic Product
i) Gross domestic product (GDP) is a measure of the income and expenditures of an economy.
ii) It is the total market value of all final goods and services produced within a country in a given period of time.
The Circular-Flow Diagram
The equality of income and expenditure can be illustrated with the circular-flow diagram.
DIAGRAM
The Measurement of GDP
i) Output is valued at market prices.
ii) It records only the value of final goods, not intermediate goods (the value is counted only once).
iii) It includes both tangible goods (food, clothing, cars) and intangible services (haircuts, housecleaning, doctor visits).
iv) The term final goods and services refers to goods and services produced for final use.
v) Intermediate goods are goods produced by one firm for use in further processing by another firm.
vi) It includes goods and services currently produced, not transactions involving goods produced in the past.
vii) It measures the value of production within the geographic confines of a country.
viii) It measures the value of production that takes place within a specific interval of time, usually a year or a quarter (three months).
What Is Counted in GDP?
GDP includes all items produced in the economy and sold legally in markets.
What Is Not Counted in GDP?
i) GDP excludes most items that are produced and consumed at home and that never enter the marketplace.
ii) It excludes items produced and sold illicitly, such as illegal drugs.
Other Measures of Income
A. Gross National Product (GNP)
B. Net National Product (NNP)
C. National Income
D. Personal Income
E. Disposable Personal Income
Gross National Product
i) Gross national product (GNP) is the total income earned by a nation’s permanent residents (called nationals).
ii) It differs from GDP by including income that our citizens earn abroad and excluding income that foreigners earn here.
Net National Product (NNP)
i) Net National Product (NNP) is the total income of the nation’s residents (GNP) minus losses from depreciation.
ii) Depreciation is the wear and tear on the economy’s stock of equipment and structures.
National Income
i) National Income is the total income earned by a nation’s residents in the production of goods and services.
ii) It differs from NNP by excluding indirect business taxes (such as sales taxes) and including business subsidies.
Personal Income
i) Personal income is the income that households and noncorporate businesses receive.
ii) Unlike national income, it excludes retained earnings, which is income that corporations have earned but have not paid out to their owners.
iii) In addition, it includes household’s interest income and government transfers.
Disposable Personal Income
i) Disposable personal income is the income that household and noncorporate businesses have left after satisfying all their obligations to the government.
ii) It equals personal income minus personal taxes and certain non-tax payments
The Components of GDP
GDP (Y ) is the sum of the following:
1. Consumption (C)
2. Investment (I)
3. Government Purchases (G)
4. Net Exports (NX)
Y = C + I + G + NX
where
Consumption (C):
The spending by households on goods and services, with the exception of purchases of new housing.
Investment (I):
The spending on capital equipment, inventories, and structures, including new housing.
Government Purchases (G):
i) The spending on goods and services by local, state, and federal governments.
ii) Does not include transfer payments because they are not made in exchange for currently produced goods or services.
Net Exports (NX)= Exports minus imports.
Real versus Nominal GDP
i) Nominal GDP values the production of goods and services at current prices.
ii) Real GDP values the production of goods and services at constant prices.
iii) An accurate view of the economy requires adjusting nominal to real GDP by using the GDP deflator.
GDP Deflator
1. The GDP deflator measures the current level of prices relative to the level of prices in the base year.
2. It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced.
3. The GDP deflator is calculated as follows.
Converting Nominal GDP to Real GDP
Nominal GDP is converted to real GDP as follows:
GDP and Economic Well-Being
1. GDP is the best single measure of the economic well-being of a society.
2. GDP per person tells us the income and expenditure of the average person in the economy.
3. Higher GDP per person indicates a higher standard of living.
4. GDP is not a perfect measure of the happiness or quality of life, however.
5. Some things that contribute to well-being are not included in GDP.
a) The value of leisure.
b) The value of a clean environment.
c) The value of almost all activity that takes place outside of markets, such as the value of the time parents spend with their children and the value of volunteer work.
Summary
i. Because every transaction has a buyer and a seller, the total expenditure in the economy must equal the total income in the economy.
ii. Gross Domestic Product (GDP) measures an economy’s total expenditure on newly produced goods and services and the total income earned from the production of these goods and services.
iii. GDP is the market value of all final goods and services produced within a country in a given period of time.
iv. GDP is divided among four components of expenditure: consumption, investment, government purchases, and net exports.
v. Nominal GDP uses current prices to value the economy’s production. Real GDP uses constant base-year prices to value the economy’s production of goods and services.
vi. The GDP deflator--calculated from the ratio of nominal to real GDP--measures the level of prices in the economy.
vii. GDP is a good measure of economic well-being because people prefer higher to lower incomes.
viii. It is not a perfect measure of well-being because some things, such as leisure time and a clean environment, aren’t measured by GDP.
Can you solve this?
1. Consider the following statements and identify the right ones.
i. Personal income refers to the income of individuals of a country.
ii. The income at their disposal after paying direct taxes is called disposable income
a. I only
b. ii only
c. both
d. none
2. Which of the following is added to national income while calculating personal income?
a. Transfer payments to individuals
b. Social security contributions
c. Corporate taxes
d. Undistributed profits
3.Which of the following method/s is/are used to calculate national income in India?
a. Production method
b. Expenditure method
c. Income method
d. All the above
4. The national income estimation is the responsibility of
a. NSSO
b. CSO
c. Finance Ministry
d. National Income Committee
5. Consider the following statements and identify the right ones.
i. CSO is a premier statistical institution for collecting data in India
ii. It presents the national income estimates twice a year.
a. I only
b. ii only
c. both
d. none
6. As per the CSO classification, which of the following does not fall under the industrial sector?
a. Construction
b. Manufacturing
c. Fisheries
d. Mining
7. As per the CSO classification, which of the following does not fall under finance and real estate category?
a. Banking
b. Construction
c. Insurance
d. Real estate
8. As per the CSO classification, which of the following does not fall under industrial sector?
a. Electricity
b. gas and water supply
c. transport and communication
d. manufacturing
9. Consider the following statements and identify the right ones.
i. The data for NI and PCI are collected at current prices.
ii. They are deflated using the deflator index to get value at constant prices.
a. I only
b. ii only
c. both
d. none
10. The most appropriate measure of a country's economic growth is
a. GDP
b. NDP
c. Per capita real income
d. GNP
Answers I am giving in the comment box...at the bottom.
Now moving to the next topic:-
Banking in India and Monetary policy
The composition of the Indian Banking System:
The organized banking system in India can be broadly divided into three categories viz., the central bank of the country known as the Reserve Bank of India, the commercial banks and the co-operative banks.
Another and more common classification of banks in India is between scheduled and non-scheduled banks. The Reserve Bank of India is the supreme monetary and banking authority in the country and has the responsibility to control the banking system in the country. It keeps the cash reserves of all scheduled banks and hence is known as the “Reserve Bank”.
Scheduled and Non-scheduled Bank
Under the reserve Bank of India Act, 1934, banks were classified as scheduled banks and non-scheduled banks.
The scheduled banks are those which are entered in the Seconds Schedule of RBI Act, 1934. Such banks are those which have a paid-up capital and reserves of an aggregate value of not less than Rs. 5 lakhs and which satisfy RBI that their affairs are carried out in the interests of their depositors. All commercial banks- Indian and foreign, regional rural banks and state co-operative banks-are scheduled banks. Non-scheduled banks are those which have not been included in the second schedule of RBI Act, 1934. At present, there are only three non-scheduled banks in the country.
Scheduled banks are divided into commercial banks and co-operative banks. Commercial banks are based on profit, while co-operative banks are based on co-operative principle.
Commercial banks have been in existence for many decades. They mobilise savings in urban areas and make them available to large and small industrial and trading units mainly for working capital requirements. After 1969 commercial banks are broadly classified into nationalized or public sector banks and private sector banks. The State Bank of India and its associate banks along with another 20 banks are the public sector banks. The private sector banks include a small number of Indian scheduled banks which have not been nationalized and branched of foreign banks operating in India- commonly known as foreign exchange banks.
The Regional Rural Banks (RRBs) came into existence since the middle of 1970s with the specific objective of providing credit and deposit facilities particularly to the small and marginal farmers, agricultural labourers and artisans and small entrepreneurs. The Regional Rural Banks have the responsibility to develop agriculture, trade, commerce and industry in the rural areas. The RRBs are essentially commercial banks but their area of operation is generally limited to a district.
THE RESERVE BANK OF INDIA AND MONETARY MANAGEMENT:
The Reserve Bank of India was inaugurated in April 1935 with a share capital of Rs. 5crores, divided into shares of Rs.100 each fully paid up. The entire share capital was in the beginning, owned by private shareholders. But in view of the public nature of the Bank‟s functions, the Reserve Bank of India, Act, 1934 provided for the appointment by the Central Government of the Governor and two 3 Deputy Governor (who were also directors of the central Board). The Reserve Bank was nationalized in 1949. Besides the central Board, there are four local Boards with headquarters at Bombay, Calcutta, Madras and New Delhi.
FUNCTIONS OF THE RESERVE BANK OF INDIA:
By the reserve Bank of India Act of 1934, all the important functions of a central bank have been entrusted to the Reserve Bank of India.
Bank of Issue: Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and conies and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Rs.200 crores, of which at least Rs.115 crores should be in gold. The system as it exists today is known as the minimum reserve system.
Bankers to Government: The second important function of the Reserve Bank of India is to act as Government banker, agent and adviser. The Reserve Bank is agent of central Government and of all state Government in India excepting that of Jammu and Kashmir. The Reserve Bank has the obligation to transact Government business, viz., to keep the cash balances as deposits free of interest, to receive and to make payments on behalf of the Government and to carry out their exchange remittances and other banking operations. The Reserve Bank of India helps the Government-both the Union and the States to float new loans and to manage public debt. The Banks makes ways and means advances to the Governments for 90 days. It makes loans and advances to the states and local authorities. It acts as adviser to the Government on all monetary and banking matters.
Bankers’ Bank and Lender of the last resort: The Reserve Bank of India acts as the bankers‟ bank. According to the provisions of the Banking Companies Act of 1949, every scheduled bank was required to maintain with Reserve Bank a cash balance equivalent to 5 percent of its demand liabilities and 2 per cent of its time liabilities in India. By an amendment of 1962, the distinction between demand 4 and time liabilities was abolished and banks have been asked to keep cash reserves equal to3 percent of their aggregate deposit liabilities. The minimum cash requirements can be changed by the Reserve Bank of India. The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible securities or get financial accommodation in times of need or stringency by re-discounting bills of exchange. Since commercial banks can always expect the Reserve Banks of India to come to their help in times of banking crisis, the Reserve Bank becomes not only the bankers‟ bank but also the lender of the last resort.
Controller of credit: The Reserve Bank of India is the controller of credit, i.e., it has the power to influence the volume of credit created by banks in India. It can do so through changing the Bank rate or through open market operations. According to the Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular bank or the whole banking system not to lend to particular groups or persons on the basis of certain types of securities. Since 1956, selective controls of credit are increasingly being used by the Reserve Bank. The Reserve Bank of India is armed with many more powers to control the India money market. Every bank has to get a licence from the Reserve Bank of India to do banking business within India; the licence can be cancelled by the Reserve Bank if certain stipulated conditions are not fulfilled. Every bank will have to get the permission of the Reserve Bank it can open a new branch. Each scheduled bank must send a weekly return to the Reserve Bank showing, in detail, its assets and liabilities. This power of the Bank to call for information is also intended to give it effective control of the credit system. The Reserve Bank has also the power to inspect the accounts of any commercial bank.
As supreme banking authority in the country, the Reserve Bank of India, therefore, has the following powers:
○ It holds the cash reserves of all the scheduled banks.
○ It controls the credit operations of banks through quantitative and qualitative controls.
○ It controls the banking system through the system of licensing, inspection and calling for information.
○ It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.
Custodian of Foreign Exchange Reserves: The Reserve Bank of India has the responsibility to maintain the official rate of exchange. According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at fixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of exchange fixed was the exchange rate fixed at 1sh.6d. Though there were periods of extreme pressure in favour of or against the rupee. After India became a member of the International Monetary Fund in 1946, the Reserve Bank has the responsibility of maintaining fixed exchange rates with all other member countries of the I.M.F.
Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the custodian of India‟s reserve of international currencies. The vast sterling balances were acquired and managed by the Bank. Further the RBI has the responsibility of administering the exchange controls of the country.
Supervisory Functions: In addition to its traditional central banking functions, the Reserve bank has certain n