Compiled by – Prerak Trivedi (BE, MBA, Founder Director PACE)

PACE 20, Park Road, Vallabh Nagar, Near Rajkumar Bridge, Indore (M.P.)
Mobile:- 9977404446, 9977604446
Compiled by – Roopa Trivedi (BE, MBA Gold Medalist Founder Director PACE)
PACE 20, Park Road, Vallabh Nagar, Near Rajkumar Bridge, Indore (M.P.)
Mobile:- 9977404446, 9977604446
 NATURE AND SCOPE OF BUSINESS ECONOMICS,

Originated from a "Greek Word" Fundamental facts

OIKONOMIA which means "Household" ➢ ‘Human beings have unlimited wants’;
ECONOMICS ➢ ‘The means to satisfy these unlimited
wants are relatively scarce’
The first modern work of Economics was the book
named ‘An Inquiry into the Nature and Causes of
the Wealth of Nations’ (1776) abbreviated as ‘The MICRO ECONOMICS MACRO ECONOMICS Earlier known as
Wealth of Nations’, by Adam Smith "POLITICAL ECONOMY"
✓ It studies individual ✓ It studies aggregate
economic units economic units
✓ Derived from the ✓ Derived from the Greek Microeconomics applied to operational or
BUSINESS ECONOMICS Greek word ‘mikros’ word ‘makros’ meaning internal issues.
meaning small. large. ✓ Demand analysis and forecasting
Example :- Allocation of Example :- General price ✓ Production and Cost Analysis
The use of economic analysis in the formulation of resources. , Price of a level, National income ✓ Inventory Management
business policies. - Joel Dean product ✓ Market Structure and Pricing Policies
✓ Resource Allocation
= Economics Theory + Business Practice ✓ Theory of Capital and Investment Decisions
✓ Profit Analysis
✓ Risk and Uncertainty Analysis
Other name - Managerial Economics
Positive Science Normative Science
Given by L. Robbins Given by Marshal & Pigou
Scope of Business Economics
Nature of Business Economics States "what is" States "what ought to be"
➢ Business Economics is a Science Descriptive in nature Prescriptive in nature Macroeconomics applied to
➢ Based on Micro Economics environmental or external issues.
➢ Incorporates elements of Macro Analysis Analyses cause & effect Involves value judgements,
➢ Business Economics is an art relationship between suggests what should be ✓ The type of economic system
➢ Uses theory of Markets and Private Enterprises variables ✓ Stage of business cycle
➢ Pragmatic in Approach Based on facts Based on welfare ✓ The general trends in economic parameters
➢ Interdisciplinary in nature considerations ✓ Government’s economic policies
➢ Normative in Nature Objective Subjective ✓ Socio-economic organisations
✓ Social and political environment.

Professional Academy of Competitive Excellence Designed by - Roopa Trivedi, PACE, 9826798311

 BASIC PROBLEMS OF AN ECONOMY AND ROLE OF PRICE MECHANISM

Since the resources are limited, every society

Whether to use labour intensive What to has to decide which goods and services should
techniques or capital intensive produce? be produced and how many units of each good
techniques or service should be produced

ECONOMIC SYSTEM:
Central What provisions
How to Refers to the sum total of arrangements for the
produce? Economic are to made for
economic growth? production and distribution of goods and services
Problems
in a society

A society cannot satisfy each and CLASSIFICATION

A society has to decide how much (Based on their Mode of production,
every want of all the people. For whom
to saving and investment (i.e. how much exchange, distribution and the role which
Therefore, has to decide on who
produce? sacrifice of current consumption) should their governments play in economic activity)
should get how much of the total
be made for future progress
output of goods and services

CAPITALIST ECONOMY
SOCIALIST ECONOMY MIXED ECONOMY
✓ Right to Private property
✓ Collective ownership of means of production ✓ Coexistence of both private and public
✓ Freedom of Enterprise
✓ Centrally planned economy sectors-
✓ Freedom of choice by consumers
✓ Economic equalities ✓ Planned Economy
✓ Profit Motive
✓ Social welfare ✓ Balanced regional development
✓ Consumer Sovereignty
✓ Lack of competition ✓ Dual system of pricing
✓ Competition
✓ Elimination of exploitation ✓ Depends on both markets and
✓ Price mechanism
✓ Propounded by Karl Marx and Frederic Engels in their work ‘The government for allocation of resource
✓ Inequalities of Income
Communist Manifesto’ published in 1848 ✓ Mixed economy is called
✓ Absence of Government Interference
✓ Also called “Command Economy” or a “Centrally Planned Economy” "CAPITALISM INSIDE AN
✓ Also called a free market economy or
✓ Resources are allocated according to the commands of a central planning OXYGEN TENT" - SCHUMPETER
laissez-faire economy
authority

Professional Academy of Competitive Excellence Designed by - Roopa Trivedi, PACE, 9826798311

 DETERMINANTS OF DEMAND
THE THEORY OF DEMAND
✓ Price of commodity
✓ Price of related goods DEMAND = Desire + Ability to pay + Willingness to pay
✓ Level of income & wealth LAW OF DEMAND
✓ Taste and preference
✓ Economic fluctuations
Assumption Exceptions Reasons for downward
✓ Government policy sloping demand curve
✓ Size of population
All ➢Conspicuous goods
✓ Composition of population
determinants ➢Giffen goods Traditional
✓ Distribution of income & wealth of demand ➢Conspicuous Necessities ➢Law of diminishing MU
✓ Consumers’ Expectations are constant ➢Future expectation ➢New Consumers
✓ Consumer credit facility and except price ➢Irrational Consumer ➢Several uses of commodity
interest rates ➢Necessaries
➢Speculative Goods
CHANGES IN DEMAND Modern
Price effect = Income Effect
MOVEMENT SHIFTING Income Substitution Price +
Effect Effect Effect Substitution Effect
Normal Positive Positive Positive
Caused by change Caused by change in Inferior Negative Positive Positive
in price factors other than price For Inferior Goods Substitution Effect > Income Effect Bandwagon effect:- Demand
is increased due to the fact that
others are also consuming the
same commodity
Movement along the Shift in the demand Snob effect:-
same demand curve Demand is
curve Demonstration Effect:- People
decreased owing
buy or have things because
to the fact that
Increase in Demand they see that other people are
others are also
Change in quantity able to have them.
Change in demand consuming the
demanded same commodity
Decrease in Demand Veblen effect:- Highly priced
goods are consumed by status
seeking rich people to satisfy
Expansion Because of decrease in price Contraction Because of increase in price their need for conspicuous
consumption

Professional Academy of Competitive Excellence Designed by - Roopa Trivedi, PACE, 9826798311

 ELASTICITY OF DEMAND

PRICE CROSS INCOME

Ec= % change in demand of X
Ei= % change in demand
% change in price of Y
% change in income
METHODS DEGREES DETERMINANTS
Degrees
➢PERCENTAGE METHOD Degrees
Ep= % change in quantity demanded ➢Perfectly inelastic
➢Position of a commodity Ec =0 Unrelated goods
% change in price Y Ei<0 Inferior goods
➢PROPORTIONATE METHOD Price Ep=0 in a consumer’s budget Ec <0 Complementary
Ei=0 Ultimate necessities
Ep= Q x P ➢Price Range Ec >0 Substitutes 0<Ei<1 Necessities
P Q Ei>0
➢Nature of commodity Ec =∞ Perfect Substitutes Ei=1 Comfortable goods Normal
➢ARC ELASTICITY METHOD Ei>1 Luxury Goods
Ep= q2-q1 p1 +p2 Quantity X ➢Number of uses
p2-p1 x q1 +q2 ➢Relatively Inelastic ➢Availability of substitutes
➢POINT METHOD Price ➢Tied demand
Ep= -dq p P2 ➢Time period
Ep<1
dp x q
P1
Ep= Lower Segment
Upper Segment q2q1 Quantity ADVERTISEMENT
➢Unitary Elastic
Y ep=∞ % Changein Demand
Price Price Ea
ep> 1 % Changein Advertisement Expenditure
ep=1 P2 Ep=1
ep< 1 P1
Ea is typically positive
ep=0
Quantity X q2 q1 Quantity
TOTAL OUTLAY METHOD
Relation between ➢Relatively Elastic
Price
Price & Expenditure Type of Product
P2 Ep>1
(Revenue)
P1
1) Direct Inelastic
2) Inverse Elastic q2 q1Quantity
3) No Relation Unitary Elastic ➢Perfectly Elastic
(Expenditure Constant) Price

Ep=∞
Quantity
 THEORY OF CONSUMER BEHAVIOUR
UTILITY Assumptions
CARDINAL (MARSHAL)
•Utility is measurable
•Utility is additive
Want satisfying •Marginal utility of money is constant
power of commodity Law of diminishing •Consumer is rational
marginal utility
(LDMU) Consumer surplus
FEATURES = (What a consumer is willing to pay) - (What he actually pays)
= TU - P x Q
•Subjective Limitations of LDMU = Area above the price line and below the marginal utility curve
•Relative and variable
➢ Units consumed should be identical in all respects.
•Not measurable
➢ Habit, taste, treatment & income of the consumer remain unchanged.
•Utility, Usefulness, Pleasure ➢The different units consumed should consist of standard units.
are not always same ➢There should be no time gap or interval between the consumption of one unit and another unit i.e., there
•Abstract should be continuous consumption
➢The law may not apply to articles like gold, cash etc. where a greater quantity may increase the lust for it.
➢The shape of the utility curve may be affected by the presence or absence of articles which are substitutes
TYPES or complements.

Marginal ORDINAL (HICKS & ALLEN)

Total
TUn= MU1+MU2+MU3+…MUn Consumer Equilibrium
MUn=TUn-TUn-1 or Budget line depends on
Properties of indifference curve
MU= TU (to be used when quantity
•Slopes downward to right
Q changes by more than one unit) •Price of X
•Indifference curve is convex
towards origin •Price of Y
Assumption •Indifference curve can never •Income of person
•Consumer is rational intersect each other
•Utility is ordinal Equilibrium condition
•A higher indifference curve
•Diminishing MRS Budget line is tangent to IC
gives higher level of satisfaction
•Preferences consistent Slope of budget line= Slope of IC
•Indifference curve does not
and transitive Px = MUx = MRSxy
touch any axis
Py MUy

Professional Academy of Competitive Excellence

 THE THEORY OF SUPPLY

DETERMINANTS Supply = Ability + Willingness to sell at a particular price in a given period of time

1. Price of the commodity CHANGES IN SUPPLY ELASTICITY OF DUPPLY

2. Price of related goods. Supply
3. Price of factor of production.
Caused by change in Caused by change in
4. Technology Methods Degrees
price factors other than price
5. Government policy
1) Percentage method ➢ Perfectly inelastic (Es=0)
6. Nature of competition and
Movement along the Shift in the supply curve
size of industry 2) Es =% Change in quantity supplied
➢ Relatively inelastic(Es<I)
same supply curve
7. Expectations % change in price
8. Number of sellers ➢ Unitary elastic (Es=I)
3) Proportionate Method
9. Other factors Change in quantity Change in supply
Es = q p ➢ Relatively elastic (Es> I)
➢ Natural factors supplied p
x q
➢ Industrial policy of govt. 3) Arc method ➢ Perfectly elastic (Es=∞)
Decrease
➢ Foreign policy of govt. In Supply Es = q2-q1 p1+p2
p2-p1 x q1+q2
➢ Time period Expansion Contraction
Increase 4) Point method
➢ Market structure Es=o Es< I
In Supply
Es =dq Es=I
➢ Infrastructure Because of Because of X p
dp q Price
Es> I
➢ Goals of firm increase in decrease in
Es=∞
price price
Quantity

C Es< I
Price B
Es> I A
Es= I

Quantity

Professional Academy of Competitive Excellence Designed by - Roopa Trivedi, PACE, 9826798311

Supply
 THEORY OF PRODUCTION
Production = Creation or
FACTORS OF PRODUCTION addition of utility

LAND LABOUR CAPITAL ENTREPRENEUR

➢ Free gift from nature ➢ Human Element Steps in capital formation FUNCTIONS
➢ Indestructible ➢ Perishable ➢Planning
➢ Limited in supply ➢ Inseparable from labourer ➢Organizing
➢ Immobile ➢ Labour power differs ➢Savings ➢Risk bearing
➢ Heterogeneous ➢ Weak bargaining power ➢Mobilization of savings ➢Innovation
➢ Passive factor of production ➢ Productivity varies ➢Investment
➢ Land has multiple uses ➢ Has to choose between
hours of labour and leisure
➢ Mobile TYPES OF CAPITAL
➢ There is no rapid adjustment ➢Fixed capital Formulae
of supply of labour to the ➢AP = TP
PRODUCTION FUNCTION demand for it
➢Circulating capital
➢Real capital Q
➢Human capital ➢MPn = TPn – TPn–1
Short Run Long Run ➢Tangible capital ➢MP= TP
➢Individual capital Q
At least one All factors ➢Social capital
factor fixed variable

Law of variable Law of returns

proportions to scale

Professional Academy of Competitive Excellence Designed by - Roopa Trivedi, PACE, 9826798311

 Law of variable proportions
Law to returns to scale

Y STAGE STAGE TP

Marginal product
II III

STAGE Constant Return

OUT`PUT
I Stage II

Scale of input
AP
ECONOMIES & DISECONOMIES OF SCALE
O MP X
Amt. of Variable Factor

STAGE 1 = Law of increasing returns Internal External

STAGE 2 =Law of diminishing returns
STAGE 3 =Law of negative returns
STAGE of operation-a rational producer works in stage 2 ➢Technical Economies
➢Managerial ➢Cheaper raw material
COBB-DOUGLAS PRODUCTION FUNCTION ➢Commercial ➢Technological
b ➢Financial ➢Development of skilled labour
Q=K L a C ➢Growth of ancilliary Industries
➢Risk bearing
Q= Output ➢Better transportation & marketing facilities.
L= Quantity of labour ➢Economies of Information
C= Quantity of capital Diseconomies
K,a,b= Positive constants ➢Rise in factor prices
CONCLUSION
3 ➢Government may restrict expansion of industry
Labour contributed th and capital 1 th of the increase
4 4
in manufacturing production.
➢Applied in American Manufacturing industries Iso-cost or Equal-cost Lines Isoquants: All those combinations of
➢If a+b > 1, Increasing Returns to Scale It shows various inputs which are capable of producing
If a+b < 1, Diminishing Returns to Scale combinations of two factors the same level of output.
If a+b = 1, Constant Returns to Scale which the firm can buy with ▪ Equal-product curve
given outlay. ▪ Iso-product curves
▪ Production-indifference curve

Professional Academy of Competitive Excellence Designed by - Roopa Trivedi, PACE, 9826798311

 TYPES THEORY OF COST

Implicit cost (Opportunity costs) Explicit cost (Accounting cost) Outlay cost Opportunity costs
= Cost of factors owned by = Payments and charges made by = Actual expenditure of = Cost of forgone
entrepreneur and employed in the entrepreneur to the suppliers funds incurred in production alternatives
his own business of various productive factors

ECONOMIC COST = IMPLICIT COSTS

+
EXPLICIT COST

Direct Cost = Costs Indirect Cost = Costs Average Cost = Marginal Cost = Addition Variable Cost = Fixed Cost = Costs
which are traceable which are not Cost per unit of in the total cost on the Costs which vary which are not
to a particular traceable to specific output production of an with production dependent on
product, operation goods, services or additional unit of production
or plant operation commodity

FORMULAE
AC / ATC = TC POINTS TO REMEMBER TOTAL COST = FIXED COST
+
Q ➢AFC curve does not touch any axis.
VARIABLE COST
TC = ATC X Q ➢AFC is a rectangular hyperbola, is convex towards origin.
MCn =TCn – TCn-I ➢AFC is not U shaped.
= ▲TC (to be used when quantity ➢Till MC is below ATC, ATC falls.
▲Q changes by more than one unit)
➢When MC comes above ATC, ATC rises.
TC = TFC + TVC
➢Till MC is below AVC, AVC falls.
AFC = TFC AVC = TVC ➢When MC comes above AVC, AVC rises.
Q Q ➢MC cuts AVC and ATC at their respective minimas.
TFC = AFC x Q TVC = AVC x Q ➢SAC is called plant curve.
ATC = AFC+AVC ➢ LAC is called planning curve or envelop curve.
Short Run Cost Curves
Professional Academy of Competitive Excellence Designed by - Roopa Trivedi, PACE, 9826798311
 MARKETS TYPES OF MARKET

On the On the basis On the basis of On the basis of On the basis of On the basis of
basis of of time nature regulation volume of business competition
area of transactions ➢Perfect
➢Imperfect

➢Local ➢Very short period ➢Spot ➢Regulated ➢Wholesale

➢Regional (Market period) ➢Future ➢Unregulated ➢Retail
➢National ➢Short period
➢International ➢Long period
➢Very long period
(Secular period)

Average Revenue Marginal Revenue

Total Revenue
TYPES OF = Revenue per unit of output = Change in total revenue because of sale of one
= Amount of money a firm
AR= TR additional unit of commodity
REVENUE realizes by selling goods
MRn = TRn – TRn-1
TR = PXQ Q
= P XQ MR = TR (to be used when quantity
Q Q changes by more than one unit)
EQUILIBRIUM PRICE & QTY AR = P

Relation Between Demand & Equilibrium Quantity – DIRECT ➢If demand is more, prevailing price MR,AR and Elasticity of Demand
Relation Between Demand & Equilibrium Price – DIRECT is less than equilibrium price MR = AR e-1
Relation Between Supply & Equilibrium Quantity – DIRECT ➢If supply is more, prevailing price is e
Relation Between Supply & Equilibrium Price – INVERSE more than equilibrium price If e> I, MR = Positive
If e< I, MR = Negative
SHUTDOWN POINTS DECISION REGARDING PRODUCTION
If e=I, MR = Zero
1) TR = TVC ➢MR>MC – Increase Production
2) AR = AVC ➢MR<MC – Decrease Production
3) MC = AVC(only for PCM) ➢MR=MC – Profit maximization or loss minimization point
 MARKETS ON THE BASIS OF COMPETITION
MONOPOLISTIC
S. No. FEATURE PCM MONOPOLY OLIGOPOLY
COMPETITIVE

1 No. of sellers Large Single Large Few

2 Type of Product Homogeneous Unique Differentiated Homogeneous or Differentiated

3 Price Elasticity Infinite Small Large Small

4 Degree of control over price None Considerable Some Some

5 Entry Free Entry & Exit Restriction on Entry Free Entry & Exit Restriction on Entry

6 Long-Run Profit Normal Supernormal Normal Supernormal

7 Size of Firm Very Small Large Small Large

8 Market Share Negligilble Full Small Large

Always Some Excess

9 Capacity Utilization Full
Capacity is Left

10 Works at what point of LAC Minima Falling portion of LAC Falling portion of LAC

Professional Academy of Competitive Excellence Designed by - Roopa Trivedi, PACE, 9826798311

 The steady growth line
or the growth of the
BUSINESS CYCLES economy when there
are no business cycle

Rhythmic fluctuations in aggregate economic activity that an economy experiences over a period of time are called business cycles or trade cycles.

EXPANSION RECESSION
• Full employment of resources
• Input prices reduce
• Production is at its maximum possible level
• Aggregate demand of goods and services falls
• Involuntary unemployment is almost zero and • Incomes of wage earners decline
whatever unemployment is there is either • Stock prices fall and unemployment increases.
frictional or structural.
• Prices and costs tend to rise faster.
• Good amounts of net investment
• Increasing prosperity DEPRESSION
• Depression is severe form of recession
• Growth rate becomes negative
PEAK 4 PHASES OF BUSINESS CYCLE
• Level of national income and expenditure declines
• This is the top or the highest point of the
business cycle. • Consumers are left with very less disposable income
• This is the end of expansion and it occurs when • Capital and consumer goods industry suffer from TROUGH
excess capacity
economic growth has reached a point where it
• There is mounting unemployment. • At the depth of depression when all economic
will stabilize for a short time and then move in
• Fall in interest rates activities touch the bottom, trough is reached.
the reverse direction.
• Actual demand stagnates • It is a very agonizing period causing lots of
• Consumers begin to review their consumption distress for all.
expenditure on housing, & durable goods
RECOVERY
CONTRACTION
• Increase in demand is halted • The process of reversal is initially felt in the
• It starts decreasing in certain sectors. labour market.
• There is a fall in the levels of investment and • Pervasive unemployment forces the workers to
employment. accept wages lower than the prevailing rates.
• Supply exceeds demand • The producers anticipate lower costs and better
• There is cancellation and stoppage of orders for business environment.
equipments and all types of inputs. • Employment increases,
• When contraction worsens stage of recession is • Aggregate demand picks up and prices
reached. gradually rise

Professional Academy of Competitive Excellence Designed by - Roopa Trivedi, PACE, 9826798311

 FEATURES OF BUSINESS CYCLES CAUSES OF BUSINESS CYCLES

Business cycles occur periodically although they do not INTERNAL CAUSES: EXTERNAL CAUSES: KEYNES:-
exhibit the same regularity. The intensity of fluctuations Fluctuations in effective demand
also varies. • Fluctuations in Effective • Wars
Business cycles have distinct phases of expansion, peak, Demand • Post War Reconstruction PIGOU:-
• Psychological factors
contraction and trough. Fluctuations in • Technology shocks
Business cycles generally originate in free market Investment • Natural Factors SCHUMPETER's:-
economies. • Innovation theory
Some sectors such as capital goods industries, durable
Variations in government • Population growth
consumer goods industry etc, are disproportionately
spending • Other Causes NICHOLAS KALDOR:-
affected by business cycles. As compared to agricultural • Macroeconomic policies Cobweb theory
sector, the industrial sector is more prone to the adverse • Money Supply HAWTREY:-
effects of trade cycles. • Psychological factors Purely monetary phenomenon
Business cycles are exceedingly complex phenomena; they
do not have uniform characteristics and causes.
Repercussions of business cycles get simultaneously felt on CYCLICAL BUSINESSES GLOBAL ECONOMIC CRISIS (2008-09)
nearly all economic variables.
Business cycles are contagious and are international in • Businesses whose fortunes are closely • To take the US Economy out of
character. recession post Technology Bubble Burst
linked to the rate of economic growth
Business cycles have serious consequences on the well 2000, the rate of interest was reduced.
being of the society. • These include fashion retailers, electrical • Credit became cheaper and the
goods, house-builders, restaurants, households, even with low
INDICATORS advertising, overseas tour operators, creditworthiness, began to buy houses in
construction and other infrastructure increasing numbers.
Leading Indicator - Those variables that change before the firms • House prices began to decline in 2006,
real output changes Housing bubble got burst in the second
Lagging Indicators - Changes in these indicators are LAGGING INDICATORS half of 2007
observable only after an economic Unemployment
trend or pattern has already occurred. Corporate profits
Coincident Indicator - Coincide or occur simultaneously with Labour cost per unit of output LEADING INDICATORS
the business-cycle movements Interest rates Changes in stock prices
Consumer price index Profit margins and profits
Commercial lending activity Indices such as housing, interest rates and
GREAT DEPRESSION, 1930 COINCIDENT INDICATORS prices
• GDP fell by around 15% between 1929 and 1932 Gross Domestic Product Value of new orders for consumer goods
• The economies of the world began recovering in 1933 Industrial production New orders for plant and equipment
Inflation Building permits for private houses
Personal income Fraction of companies reporting slower
INFORMATION TECHNOLOGY BUBBLE BURST OF 2000 deliveries
• Covered the period 1997-2000 Retail sales
Financial market trends Index of consumer confidence
• The collapse of the bubble took place during 1999–2001 Money growth rate

Professional Academy of Competitive Excellence Designed by - Roopa Trivedi, PACE, 9826798311

 NATIONAL INCOME AND RELATED AGGREGATES

Gross Domestic Product at Market Prices or GDP at National and Real prices when GDP is measured
GDP at current Prices, It is known as Nominal GDP, but when
Refers to Market value of final Goods and it is converted at some base year prices, it is known as
Services produced during a year Real GDP or GDP at some constant prices.
Conversion of Nominal GDP into Real GDP.

Triple identity
GNP=GNI=GNE

Net National Product (NNP)

Externalities Gross National Product (GNP)
National Product which does not include
Extra benefits/harms received Total production including Net
depreciation yet includes net factor income
in production process factor income from abord
from abroad

Positive Negative
GNP at Factor
Externalities Externalities GNP at Market NNP at Market
Cost
External benefits External Prices Prices
Total national NNP at factor cost
received from Harms in Total National Net national
product at factor Net National Product
production process Production Product including Product that
cost but including that income which
without incurring Process net indirect taxes incudes net
depreciation does not include net
any extra Expenses indirect taxes and indirect taxes
net factor income
from abroad

Professional Academy of Competitive Excellence Designed by – CS Sheetal Verma, PACE, 8120655410

 MEASUREMENT OF NATIONAL INCOME

National Income refers to monetary value of all the final goods and services produced in an economy counted without duplication

Calculation of National Income

Value Added or Total Output Method Income Method Total Expenditure

Market value of total goods and services Sum of different types of

Income of all the factors
produced in the country expenditures

Output of Primary Sector or Agricultural output Output of Secondary Sector Output of Tertiary Sector or Net factor income from Rest of
or farming output or Industrial Output Service Sector world

National income = Net Value added from Primary sector + Net value added from secondary sector + Net value added from Tertiary Sector + Net factor
income from abroad – Net indirect taxes

Income from Wages and Income from rent, interest

Income Method Income from Profits Net factor Income from Abroad
Salaries and royalties

National Income (Income Method) = Wages and Salaries + Rent and Royalties + Interest + Profits + Social Security contribution made by employers + Net
factor income from abroad

Private Final Government Final Gross Domestic Net Exports Net factor
Expenditure Method
Consumption Expenditure consumption expenditure Capital Formation (Exports Import) income from
Abroad
National income (Expenditure Method) = Private Final consumption expenditure + Govt. Final
consumption expenditure + Gross Domestic Capital formation – net indirect taxes - Capital consumption
allowance + Net factor income from aboard
Professional Academy of Competitive Excellence Designed by – CS Sheetal Verma, PACE, 8120655410
 NATIONAL INCOME CALCULATION

1. NDPFC = COE + OS + MI

2. NDPFC Accruing to Private Sector NDPFC - NDPFC Accuring to Govt.

Here, NDPFC Accruing to Govt. includes: -

a) Income from property & entrepreneurship to govt.
b) Savings of non-departmental enterprises

3. NNPFC Accruing to Private Sector = NDPFC Accruing to Private Sector + NFIA

4. Private Income = NNPFC to private sector + net current transfer from govt.
+ net current transfer from rest of the world
+ National debt interest

5. Personal Income = Private Income - Corporate profit tax

- Retained earnings

6. Personal Disposable Income = Personal Income (-) Direct tax by households GDP deflator = Nominal GDP × 100
(-) Misc. receipts of govt. Real GDP

7. National Disposable Income (NDI)

Gross NDI = NNPFC + Net Indirect Taxes + Net current transfer from ROW +
Depreciation
Net NDI = NNPFC + Net Indirect Taxes + Net current transfer from ROW
Professional Academy of Competitive Excellence Designed by – CS Sheetal Verma, PACE, 8120655410
Macro-Economic Goals PUBLIC FINANCE (UNIT-1) GST: Introduced on 1
• Economic Growth July 2017
• Employment Fiscal Function: An Overview 1. State level & collects
• Stable Price Levels state GST (SGST)
2. union levies & collects
Richard Musgrave Article 246: 3 lists central GST (CGST)
Roal of Govt. in an • The Theory of Public • Union List 3. IGST (Integrated
Economic System Finance (1959) • State List GST) Combination of
• Allocation of
resources
Function of govt. • Concurrent List SGST and CGST
• Resource allocation
• Distribution of goods • Income redistribution
• Macroeconomic Article 280: 3 lists
Adam Smith stabilization • Finance commission
• Role of Govt. considers issues
• Protection from The Allocation Function
relating to
external violence • Vertical equity
- Determined by both
• Provision of internal • Horizontal equity
market and govt.
law and order (Transfer of resources
The Redistribution
• Highly beneficial function - Govt. Can
from the Centre to the
public institutions State)
redistribute income and
wealth through
a) The expenditure
side or
b) The revenue side of
the budget

Professional Academy of Competitive Excellence Designed by – CS Sheetal Verma, PACE, 8120655410

 DETERMINATION OF EQUILIBRIUM LEVEL OF INCOME AND EMPLOYMENT AND INVESTMENT MULTIPLIER

Equilibrium Level of income and employment

An economy is in equilibrium when AD equals AS
or I=S it is not necessary that such an equilibrium is
necessarily at full employment level.

Aggregate Demand – Aggregate Supply Approach Saving Investment Approach

Such an equilibrium is established where AD equals AS. Such an Economy is also in equilibrium when S=1, Such an equilibrium can
equilibrium can settle at full employment or under employment employment establish at full employment or under employment

When AD>AS AS>AD I>S S>1

When AD>AS, This is the When AS>AD, It is the When household sector is When household sector is buying
Situation of excess demand Situation of excess supply. At buying more goods than less goods, then they will save
Buyers Want to buy more this level producer would producers are producing. It more and buy inventory. It would
goods than producers are ready produce less in order to reduce would reduce planned rise planned inventory. They
to sell. Planned inventory falls planned inventory. It would inventory and I>S. Producers would start producing less
and producers are forced to reduce production, employment would start more production amount of goods. It will reduce
raise inventory. It would raise and level of income by which then income and saving income and saving. Hence saving
production level and income aggregate supply (AS) falls would rise by which S=1 would falls and becomes equal to
level by which AD=AS Hence AS=AD investment.

Full Employment Under Employment

When all those who want to seek employment at prevailing When all those labourers who want to work at prevailing
wage rate get employment in this situation, AD equals required wage rate, do not get employment, there exists involuntary
AD’ to maintain full employment. There is no Involuntary unemployment. Actual AD is less than AD required to
unemployment in the economy. According to Keynes however maintain full employment level. Such a level exists in
full employment never exist in a capitalist economy. actual economies of the world.

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 EXCESS DEMAND AND DEFICIENT DEMAND Disequilibrium of the Economy When AD is not equal to AS, it results into
disequilibrium in the economy. When AD > AS, Excess Demand or inflationary
Gap exists when AD < AS Deficient demand or Deflationary GAP exists

Excess Demand/Inflationary Gap Deficient Demand/Deflationary Gap

When AD is in excess of the available flow of goods and services i.e. When AD is less than the required flow of goods and services at full
AD>AS it is the situation of Excess Demand. It causes price rise or employment level i.e. AD < AS it is the situation of Deficient
inflation in the economy, and is known as Inflationary Gap. Such a Demand. It causes prices to fall in the economy therefore it is known
situation arises after full employment, it results into a rise in Price and as Deflationary gap. It arises only during under employment situation.
expansion in income and output of the economy It causes prices to fall which results into a fall in output and
employment and finally a contraction of the economy

Causes of Inflationary Gap Measures of inflationary Gap

1 Increase in propensity to There are fiscal and monetary Causes of Deflationary Gap Measures of
consume measures to control inflationary 1 Decrease in Public expenditure deflationary Gap
2 Increase in deficient Financing gap. Monetary measures are 2 Decrease in autonomous Investment Monetary and fiscal
3 Increase in autonomous introduced by central bank and 3 Decrease in consumption measures are adopted to
investment fiscal measures by the 4 Decrease in money supply and rise aggregate demand
government supply of credit in the economy

Fiscal Measures for excess demand

Govt. Introduce following Fiscal Monetary Measures for Excess demand: Fiscal Measures for Deflationary Monetary Measures for
measured for Excess Demand Quantitative and Qualitative measures Gap deflationary Gap
i. Surplus Budgeting i. Higher bank Rate i. Deficit Budgeting i. Decrease in Bank rate
ii. Control over public expenditure ii. Sales of securities in the open market ii. Increase in Public expenditure ii. Purchases of securities in
iii. Additional Taxes iii. Increase in cash reserve ratio and statutory iii. Reduction in taxes the open market
iv. An increase in public borrowing liquidity ratio iv. Decrease in Public borrowing. iii. Decrease in Cash reserve
through public loans and issue of iv. Increase in repo rate and Reverse repo rate v. Incentives for investment pians ratio and reverse repo rate
bonds v. Increase in marginal requirement ratio vi. Encouragement to foreign iv. Decrease in repo rate and
vi. Morak Persuasion investment reverse repo rate
v. Decrease in margin
requirement
vi. Moral Persuasion
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 EFFECTIVE DEMAND

That level of Employment Where

Aggregate demand equals aggregate
supply Aggregate Supply
Aggregate Demand Total volume of output
Total volume of goods and services demanded in an AD = C + 1 + G + (X-M) Four Sector Economy available for purchases by
economy during a year. it depends upon disposable AD = C + 1 Two Sector Economy the economy it refers to
income of the economy AS = C + S Income Aspect of the
AD = C + I + G + (X-M) Four sector Economy 1 = S Equilibrium of the Economy economy.
AD = C + I Simple Economy C = c + by c = Autonomous Consumption
C
MPC =
b= Y
Consumption Saving
S= - c + (I-b)Y – C = Autonomous Saving Expenditure That part of
Consumption Expenditure Investment I-b = MPS
Expenditure That part of income income which is
Total expenditure made by C not spent upon
An addition to MPC = which is spent upon
household sector and Y
nation’s Physical purchases of goods and consumption. It is
government sector. It incudes APS + APC = I services. It is a function also a function of
stock of capital assets
autonomous consumption (C)  APS = I-APC of level of income level of income
and induced consumption which raises
productive capacity of MPC + MPS = I C = f (Y) S = f (Y)
expenditure Breakeven Point of Economy
the country.
C
APC = Y =I or C= Y
S
Average Marginal
Average propensity Marginal Propensity to Y Propensity to Propensity to
APS = = O or Saving is Zero
Consumer (MPC) save ratio of save
Ratio of consumption to
Ratio of change in saving and Ratio of change in
income APC is never
consumption to change in S saving to change
zero. APC falls with Y 
Autonomous investment Induced investment income  .  S 
every increase in income. It varies between  Y 
That investment which is That investment which is It is never in income  
it
income. It is always <1 0 to 1 in no case it can be
greater than <1 independent of level of income made with the motive of greater than varies between 0
change. Such an investment is earning income. Such an one. to 1
made by public sector for the investment is made by
promotion of welfare. If Private sector. It is known as
remains almost constant. It is income elastic investment
known as income in-elastic
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 Y=C+I+G
AD = AS or C + I + G = C + S + T (iii) Income determination with tax as
a function of income
Y = a + b (Y – T - tY) + I + G
Govt. Sector and income determination
Where, C = a + b Yd
Yd = Y – T or Y – T - tY
(i) Income determination with lump sum T = T+ tY (T = Autonomous
tax constant tax, t = income tax rate)
Y = a + b (Y – T) + I + G
Where, C = a + b Yd
Yd = Y – T (disposable income) (iv) Income determination with tax
T = lump sum tax (as a function of income)
government expenditure &
Transfer payment
(ii) Income determination with lump Y = a + b (Y – T – tY + TR) + I + G
sum tax and Transfer Payment Where, C = a + b (Y-T-tY+TR)
Y = a + b (Y – T + TR) + I + G
Where, C = a + b Yd
Yd = Y – T + TR Departmentation of equilibrium income
T = lump sum tax Four sector model
TR = Transfer Receipts Y = C + I + G (X - M)
Here m = m + my

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 Type MARKET FALIURE (UNIT-2)
• Complete
• Partial

Reasons for market failure Market power Externalities Public goods Incomplete
Information
• Monopoly • Production
• Price maker ✓ +ve
• Non – excludable • Asymmetric
✓ -ve
• Non - rivalrous information
• Consumption
✓ +ve • Free rider problem • Adverse selection
✓ -ve • Moral hazard
Govt. Intervention to correct market failure

Market power Externalities Merit Goods Demerit Goods Public Goods

• Rules & regulation • Pollution Tax • Provided by

• Competition Act (Pigouvian Tax) • Heavy duties Govt.,
• Subsidies
2002 • Tradable • Strict regulation Corporate
• Price maker • Provided free
emission Permit • Complete ban entities &
• Carbon Credit NGOs

Correcting Information failure Equitable distribution

• Complete disclosure by producers • High income high tax

• Public dissemination of information • Low-income law tax
• Regulation of advertisement
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Process of Budget making; Sources of MARKET FALIURE (UNIT-3)
Revenue, expenditure management and Presentation of Budget
management of public debt
✓ In parliament
✓ Includes Budget estimates of receipts and
Budget Need of Budget expenditure
Receipts Efficient allocation of resource ✓ Includes current year revised estimates
Expenditures Reallocation of resource ✓ Actuals of preceding year
Estimated amounts Redistribution of income & wealth ✓ Budget speech by Finance Minister before
Next fiscal year Increase in real GDP Lok Sabha

Process of Budget marking

Prepared by Ministry of Finance in consultation with NITI Aayog and other
Budget speech
relevant ministers

Part-A Part-B
Budget Procedure Execution of Budget
Outline of prevailing macro- Progress of Govt.
economic situation (+) on various
Preparation of Budget Presentation & enactment of budget Budget estimates for next developmental
financial year measures

Budget Process Other Document List

Administrative & Legislative:
✓ Starts in August- September of
previous year Annual Financial Statement (AFS) Statements under FRBM Act
✓ Schedule prepared by budget Demands for
✓ Consolidated Fund of India Grants (DG) ✓ Macro Economic
division of the Ministry of Finance ✓ Contingency Fund of India Farmwork Statement
✓ Public Account ✓ Medium Term fiscal
Finance Bill policy
✓ Contingency Fund of
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India
✓ Public Account
 THE CONCEPT OF MONEY DEMAND: IMPORTANT THEORIES THEORIES OF DEMAND FOR MONEY

FUNCTIONS OF MONEY THE DEMAND

➢ Store of value The Quantity Theory of The Cambridge approach (Cash
FOR MONEY Money (Classical Approach)
➢ Unit of account The demand for Balance Approach)
➢ Medium of exchange ➢ The quantity of money is ➢ Propounded by Cambridge
money is a demand the main determinant of Economists Alfred Marshall, A.C.
for real balances. the price level or the Pigou, D.H. Robertson and John
This is a derived value of money.
GENERAL CHARACTERISTICS Maynard Keynes
demand ➢ Propounded by Irving
OF MONEY ➢ Money increases utility in the
➢ Generally acceptable Fisher following two ways:
➢ Durable or long-lasting ➢ The Purchasing Power of ✓ Enabling the possibility of split-
➢ Effortlessly recognizable. Demand for Money published in 1911 up of sale and purchase to two
➢ Difficult to counterfeit i.e. not money depends on. different points of time rather
Extended equation of exchange
easily Reproducible by people ➢ Income than being simultaneous
(Transaction Approach)
➢ Relatively scarce, but has ➢ General level (Transaction Motive)
MV + M'V' = PT
elasticity of supply of prices ✓ Being a hedge against
V, V' & T Constant
➢ Portable or easily transported ➢ Rate of interest uncertainty (Precautionary
➢ Possessing uniformity; and ➢ Real GDP Motive) money demand function
Cambridge
➢ Divisible into smaller parts in ➢ Degree of Md = k PY
usable Quantities or fractions financial
without losing value innovation
The amount of
money in an
economy is
measured through LIQUIDITY TRAP INVENTORY APPROACH TO TRANSACTION BALANCES
broad money A situation in which the general public is prepared to hold on Two media for storing value:
to whatever amount of money is supplied, at a given rate of ✓ money
interest because of the fear of adverse events like deflation, war ✓ an interest-bearing alternative financial asset.
The speculative demand becomes perfectly elastic with respect The average amount of cash withdrawal which minimises cost is
to interest rate and the speculative money demand curve
becomes parallel to the X axis. given by C=√2bY/r (Square Root Rule)

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 THE KEYNESIAN THEORY OF DEMAND FOR MONEY
Friedman's Restatement of the Quantity Theory
(Liquidity Preference Theory) Demand for money is affected by-
Coined by John Maynard Keynes in his masterpiece ‘The ✓ Permanent income
General Theory of Employment, Interest and Money’ (1936) ✓ Relative returns on assets

Determinants of the demand for money

Transactions Precautionary Speculative ✓ Function of total wealth, average return on the five
Motive Motive Motive asset classes namely money, bonds, equity, physical
capital and human capital
The transactions Individuals as well as People demand to
✓ Positively related to the price level
demand for money businesses keep a portion of hold money balances
✓ Rises if the opportunity costs of money holdings
is a direct their income to finance such to take advantage of
✓ A positive inflation rate reduces the real value of
proportional and unanticipated expenditures the future changes in
money balances,
positive function Depends on – the rate of interest
of the level of ✓ The size of income The expected returns
income ✓ Prevailing economic as on bonds are of two
Tobin’s Liquidity Preference Function
Lr = kY well as political conditions types
Demand function for money as an asset slope
✓ Personal characteristics of ✓ the interest
downwards, where horizontal axis shows the
the individual payment
demand for money and vertical axis shows the rate
✓ the expected rate
of interest
of capital gain.

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 CONCEPT OF MONEY SUPPLY
THE MONEY MULTIPLIER
MEASURES OF MONEY SUPPLY APPROACH TO SUPPLY OF MONEY
M1 = Currency notes and coins with the people + Propounded by Milton Friedman and Anna
Schwartz, (1963) three factors as immediate Money multiplier and the money supply are
demand deposits with the banking system
determinants of money supply – negatively related to the currency ratio c
(Current and Saving deposit accounts) + 𝟏 𝟏
✓ the stock of high-powered money (H) m 𝒄 , M 𝒄
other deposits with the RBI.
✓ the ratio of reserves to deposits or reserve-
M2 = M1 + savings deposits with post office
ratio r = {Reserves/Deposits R/D} and Money multiplier and the money supply are
savings banks.
✓ the ratio of currency to deposits, or currency- negatively related to the excess reserve’s ratio e
M3 = M1 + time deposits with the banking 𝟏
deposit ratio c={C/D} m 𝟏e ,,M
m Me
system.
M4 = M3 + total deposits with the Post Office When there are excess reserves, the money
Savings Organization (excluding National Money supply multiplier m is expressed as
Savings Certificates). Money Multiplier (m)= Monetary base m= 1+c
r+e+c
MONETARY POLICY Primary objective of monetary When
policy Maintenance of a judicious ✓ Banks do not hold excess reserves and
TRANSMISSION OF MONETARY balance between price stability and ✓ Individuals and non-bank corporations do
POLICY economic growth not hold currency then,
The transmission of the monetary
Money multiplier = Credit multiplier = 𝟏
policy describes how changes made by TOOLS IMPACTING MONEY SUPPLY r
the Reserve Bank to its monetary
policy settings flow through to
MONETARY POLICY COMMITTEE
economic activity and inflation. Quantitative tools Qualitative tools ➢ The Reserve Bank of India (RBI) Act, 1934 amended on June
Stage 1 : Changes to monetary policy ➢ Reserve Ratio ➢ Margin 27, 2016
affect interest rates in the economy ➢ Cash Reserve Ratio requirements ➢ Statutory backing to the Monetary Policy Framework
Stage 2 : Changes to interest rates (CRR) ➢ Moral suasion Agreement (MPFA) for setting up a Monetary Policy
affect economic activity and inflation ➢ Statutory Liquidity Ratio ➢ Selective Committee (MPC)
CHANNELS OF MONETARY
(SLR) credit control ➢ Agreement reached between the Government of India and the
POLICY TRANSMISSION ➢ Open Market Operations Reserve Bank of India (RBI) on the maximum tolerable
(OMO) inflation rate
➢ Saving and Investment Channel
➢ Cash-flow Channel ➢ The Central Government has notified 4 per cent Consumer
➢ Asset Prices and Wealth Channel Market Stabilisation Scheme (MSS) Price Index (CPI) inflation as the target for the period from
➢ Exchange Rate Channel ➢ Bank rate August 5, 2016 to March 31, 2021 with the upper tolerance
Liquidity Adjustment Facility (LAF) limit of 6 per cent and the lower tolerance limit of 2 per cent
➢ Repo rate
➢ Reverse Repo rate
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 THEORIES OF INTERNATIONAL TRADE

The Theory of Comparative The Mercantilists’ View of

The Theory of Absolute Advantage
Advantage International Trade Adam Smith, the father of economics
trade was driven by comparative rather Economic policy trending in Europe (16th -
than absolute costs. 18th centuries)

the basis of international trade was

absolute cost advantage.
If one country is more productive than government used power to control
others in all goods, it would still benefit industry and trade
from trading according to its refers to the ability of a party (an
comparative advantage—exporting Belief - National power is achieved and individual, or firm, or country) to produce
products in which its absolute advantage sustained by having constant large a greater quantity of a good, product, or
was greatest quantities of exports over imports service than competitors, using the same
amount of resources.

The Heckscher-Ohlin Theory of Trade New International Trade Theory

Eli Heckscher and Bertil Ohlin American economist and journalist Paul Krugman

countries tend to export goods whose production uses In Praise of Cheap Labor, published in Slate in 1997.
intensively the factor of production that is relatively
abundant in the country. Two key concepts giving advantages to countries that import goods
➢ Economies of Scale
➢ Network effects (Bandwagon Effect)

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 THE Protectionism - A state policy aimed to protect domestic producers against foreign
INSTRUMENTS OF competition through the use of tariffs, quotas and non-tariff trade policy instruments. NON-TARIFFS
TRADE POLICY MEASURES

IMPORT TARIFFS TECHNICAL MEASURES NON-TECHNICAL

MEASURES EXPORT RELATED
➢ Specific Tariff ➢ MEASURES
➢
Sanitary and ➢ Import Quotas
Ad valorem tariff Phytosanitary ➢ Ban on exports
➢ ➢ Price Control Measures
Mixed Tariffs (SPS) Measures ➢ Export Taxes
➢ ➢ ➢ Non-automatic Licensing and
Compound Tariff (Compound Duty) Technical Barriers toTrade
Prohibitions ➢ Export Subsidies and Incentives
➢ Technical/Other Tariff (TBT) ➢
➢ Financial Measures Voluntary Export Restraints
➢ Tariff Rate Quotas
➢ Most-Favored Nation Tariffs
➢ Measures Affecting Competition

➢ Variable Tariff
➢ Government Procurement
Policies
➢ Preferential Tariff
➢ Trade-Related Investment
➢ Bound Tariff Measures
➢ Applied Tariffs ➢ Distribution Restrictions
➢ Escalated Tariff
➢ Restriction on post-sales Services
➢ Prohibitive tariff
➢ Administrative Procedures
➢ Import subsidies
➢ Rules of origin
➢ Tariffs as Response to Trade
Distortions ➢ Safeguard Measures
✓ Anti-dumping Duties ➢ Embargos
✓ Countervailing Duties

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 INTERNATIONAL TRADE

TRADE NEGOTIATIONS

RTA’s GATT WTO

Regional Trade Agreements The General Agreement on Tariffs and Trade World Trade Organization

Unilateral trade agreements

Covers international trade in goods The Ministerial Conference Founded in Uruguay Round
Director General - Ngozi Okonjo-Iweala (Eighth Round)
Bilateral Agreements
Working done by Goods Council
Regional Preferential Trade
The General Council 1st July 1995, 164 Members
agreement

Trading Bloc
Good Council Service Council Intellectual Property (TRIPS) Council
Customs union

Common Markets The Guiding Principles of World Trade

Organization (WTO) DOHA ROUND
Economic and Monetary
Union
Most-favoured-nation National treatment Most controversial topic - Agriculture trade WTO’s Fourth Ministerial Conference
(MFN) Treatment

Qatar, in November 2001

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 EXCHANGE RATE AND ITS ECONOMIC EFFECTS

THE EXCHANGE RATE REGIMES

Free-floating exchange rate system Managed Float Systems Fixed Exchange Rates

Exchange rates are set purely by private market Currency values are allowed to change, but Exchange rate between two currencies is
forces with no government involvement governments participate in currency markets in set by government policy.
an effort to influence those values
Appreciation Depreciation
Exchange Rates REVALUATION DEVALUATION
An increase in a A decrease in a
currency's value due to currency's value due to A discrete official A deliberate
Nominal Real
market forces of demand market forces of demand increase of the downward
and supply and supply otherwise fixed par adjustment in the
Rate at which a Rate at which a value of a nation’s value of a country's
person can trade the person can trade the currency. currency
currency of one goods and services of
country for the one country for the
Vehicle
Forex market participants currency of another goods and services
Currency -
country of another
Dollar

Market makers Passive market

RER between two currencies
players
Nominal exchange Rate x Domestic price
➢ Commercial Real exchange Rate =
banks Foreign price
➢ Brokerage
RER of economy as a whole
houses
➢ Domestic Price Index
Real exchange rate = Nominal exchange rate X
Foreign price Index

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 INTERNATIONAL CAPITAL MOVEMENTS

FDI FPI

The acquisition of at least ten percent of the ordinary Types of Foreign direct investors – Flow of financial capital
shares or voting power in a public or private enterprise ➢ Individuals
by non-resident investors ➢ Incorporated or unincorporated private or public
Moves to investment in financial
enterprises
stocks, bonds and other financial
➢ Associated groups of individuals or enterprises,
Direct investments are real investments in factories, assets, instruments
governments or government agencies
land, inventories etc. and involve foreign ownership of
➢ Estates
production facilities. By individuals and institutions through
➢ Trusts, or other organizations or any combination
of the above-mentioned entities. the mechanism of capital market
The investor retains control over the use of the invested
capital and also seeks the power to exercise control over Types of FDI Components of FDI Immediate effects on balance of
decision making to the extent of its equity participation. ➢ Horizontal ➢ Equity capital payments or exchange rates
➢ Vertical ➢ Reinvested earnings
➢ Conglomerate. ➢ Other direct
Modes of direct investments – stake in a firm at below 10 percent
➢ Opening of a subsidiary or associate company in a ➢
foreign country Foreign Direct Investment (FDI) Foreign Portfolio Investment (FPI)
➢ Equity injection into an overseas company,
➢ Acquiring a controlling interest in an existing foreign Investment involves creation of physical assets Investment is only in financial assets
company, Has a long term interest and therefore remain Only short-term interest and generally remain invested
➢ Mergers and acquisitions(M&A) invested for long for short periods
➢ Joint venture with a foreign company. Relatively difficult to withdraw Relatively easy to withdraw
➢ Green field investment Not inclined to be speculative Speculative in nature
➢ Brownfield investments Often accompanied by technology transfer Not accompanied by technology transfer
Direct impact on employment of labour and wages No direct impact on employment of labour and wages
Enduring interest in management and control No abiding interest in management and control
Securities are held with significant degree of influence Securities are held purely as a financial investment and
by the investor on the management of the enterprise no significant degree of influence on the management of
the enterprise

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 INDIAN ECONOMY

INDIAN ECONOMY: PRE INDEPENDENCE THE STAGNATED NATURE OF DOWNFALL OF INDIAN INDUSTRIES
➢ Between the first and the seventeenth century AD, INDUSTRIALISATION UNDER BRITISH RULE
India was the largest economy of the ancient and ➢ Factory-based production did not exist in India ➢ The destruction of Indian handicrafts and
the medieval world. before 1850 manufactures was mainly due to –
➢ It controlled between one third and one fourth of ➢ The cotton mill industry in India had 9 million ✓ Hostile imperial policies to serve the
the world's wealth spindles in the 1930s, which placed India in the British interests
ARTHASHASTRA fifth position globally ✓ Competition from machine- made goods
➢ It was a handbook for King Chandragupta Maurya. ➢ At the end of the 19th century, the Indian jute mill ✓ Shift in patterns of demand by domestic
➢ Arthashastra is the science of ‘artha’ which is, industry was the largest in the world in terms of the consumers favouring foreign goods
primarily, ‘wealth’ and, secondarily, ‘the land’ amount of raw jute consumed in production. ➢ Adverse effects on the traditional village
➢ There are seven vital elements, namely the King, ➢ India’s iron industry was ranked eighth in the world economy
Ministers, Farmlands, Fortresses, Treasury, ➢ Just before the Great Depression, India was ranked ✓ The zamindari system
Military and the Allies. as the twelfth largest industrialized country ✓ The demand for land under tenancy
measured by the value of manufactured products ✓ Absentee landlordism

INDIAN ECONOMY: POST- THE INDUSTRIAL POLICY

INDEPENDENCE RESOLUTION (1948) OTHER HIGHLIGHTS
The Nehruvian model which supported social and This envisaged an expanded role for the ➢ India’s average annual rate of growth of GDP, the ‘Hindu growth
economic redistribution and industrialization public sector and licensing to the private rate’- was a modest 3.5 percent.
directed by the state came to dominate the post- sector. It granted state monopoly for ➢ Agricultural development relied on institutional model i.e. land
Independence Indian economic policy. strategic areas reforms, farm cooperatives etc
✓ Centralized economic planning and direction ➢ Two severe and consecutive droughts struck India in 1966 and
was at the core of India’s development 1967 resulting in negative growth of agriculture
strategy. POLICIES IN 1950’S ➢ The green revolution was materialized by innovative farm
✓ The economic policies were crafted to The policies in 1950’s were guided by technologies, including high yielding seed varieties and intensive
accomplish rapid economic growth two economic philosophies: use of water, fertilizer and pesticides
accompanied by equity and distributive justice. ➢ The then prime minister Nehru’s ➢ Nationalization of 14 banks in 1969 and 6 in 1980 was done
✓ Planning Commission of India was established visualization to build a socialistic ➢ The economic performance during the period of 1965-81 is the
which worked in line with the socialistic society with emphasis on heavy worst in independent India’s history
strategy and developed, implemented and industry. ➢ MRTP (1969) aimed at regulation of large firms
monitored the five-year plans ➢ The Gandhian philosophy of small ➢ In 1967, the policy of reservation of many products for exclusive
scale and cottage industry and manufacture by the small-scale sector was initiated
village republics.

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 EARLY LIBERALIZATION THE FISCAL REFORMS THE INDUSTRIAL SECTOR REFORMS
➢ The seeds of early liberalization and reforms Measures to this effect included - New Industrial Policy
were sown during the 1980s, especially after ➢ Introduction of a stable and transparent tax structure, ➢ The ‘New Industrial Policy’ was announced
1985. ➢ Ensuring better tax compliance, by the government on 24 July 1991
➢ This liberalization is often referred to as ➢ Thrust on curbing government expenditure ➢ The New Economic Policy put an end to the
‘reforms by stealth’ ➢ Reduction in subsidies and abolition of unnecessary ‘License Raj’ except 5 arms and
➢ Broadly covered three areas, namely subsidies ammunition, atomic substances, narcotic
industry, trade and taxation. ➢ Disinvestment of part of government’s equity holdings in drugs and hazardous chemicals,
select public sector undertakings and distillation and brewing of alcoholic drinks
THE ECONOMIC REFORMS OF 1991 ➢ Encouraging private sector participation and cigarettes and cigars
India embarked on a bold set of economic reforms ➢ Public sector was limited to two sectors
in 1991 under the Narsimha Rao government railway transport and atomic energy
The causes- MONETARY AND FINANCIAL SECTOR ➢ The Monopolies and Restrictive Trade
➢ Extremely large fiscal deficits and adverse REFORMS Practices (MRTP) Act was restructured
balance of payments. ➢ Interest rate liberalization and reduction in controls on ➢ Many goods produced by small-scale
➢ Persistent huge deficits led to swelling public banks by the RBI industries have been dereserved
debt ➢ Opening of new private sector banks and facilitating ➢ in four sectors viz. retail trade, atomic energy,
➢ The surge in oil prices triggered by the gulf greater competition lottery business and betting and gambling
war in 1990 ➢ Reduction in reserve requirements ➢ In external trade ‘the positive list approach’
➢ foreign exchange reserves touched the lowest ➢ Liberalisation of bank branch licensing policy and was substituted with the negative list
point with a reserve of only $1.2 billion which granting of freedom to banks in respect of opening, approach
was barely sufficient for two weeks of relocating or closure of branches ➢ Tariff was reduced to 10% with some
imports ➢ Prudential norms of accounting in respect of exceptions
➢ Tightening of import restrictions resulted in classification of assets, disclosure of income and ➢ Rupee was devalued by 18% against the
reduction in industrial output. provisions for bad debt (Narasimham Committee dollar.
➢ Dependence on external borrowing from the recommendations)
IMF
➢ The fragile political situation REFORMS IN CAPITAL MARKETS
TRADE POLICY REFORMS ➢ The Securities and Exchange Board of India
The reforms, popularly known as liberalization, ➢ In 1991, India had a fixed exchange rate system (SEBI) which was set up in 1988 was given
privatization and globalisation, had two major ➢ In July 1991 the Indian government devalued the rupee statutory recognition in 1992
objectives: by between 18 and 19 percent. In March 1992 the
➢ Reorientation of the economy from a centrally government decided to establish a dual exchange rate
directed and highly controlled one to a regime.
‘market friendly’ or market-oriented ➢ In March 1993 the government unified the exchange rate GDP growth rate is regarded as the most
economy. and allowed, for the first time, the rupee to float.
➢ Macroeconomic stabilization by substantial reliable indicator of economic growth.
reduction in fiscal deficit
Professional Academy of Competitive Excellence Designed by - Roopa Trivedi, PACE, 9826798311
 NITI AAYOG THE PRIMARY SECTOR THE SECONDARY SECTOR
➢ The largest source of livelihood in India, ➢ The Indian industry contributes 30 percent of total
National Institution for Transforming India
(NITI) Aayog replaced Planning Commission 1st employes 47 per cent of India’s population GVA in the country and employes over 12.1 crores
January 2015 ➢ Gross Value Added by the agriculture and of people.
allied sector was 18.8% in 2021-22 ➢ Manufacturing is the most important sector and
The major objective ➢ India is among the top ten exporters of accounts for 78 percent of total production
To ‘spur innovative thinking by objective ‘experts’ agricultural products in the world ➢ India’s rank in the Global Innovation Index (GII)
and Promote ‘co-operative federalism’ by enhancing ➢ The Government of India has allowed improved to 40th
the voice and influence of the states’. 100% FDI in marketing of food products ➢ The eight core industries are Coal, Crude Oil,
and in food product E-commerce under Natural Gas, Refinery Products, Fertilizers, Steel,
The key initiatives of NITI Aayog are:
the automatic route Cement and Electricity.
➢ ‘LIFE’ -'use-and-dispose' economy
Interventions undertaken by government in ➢ The Department for Promotion of Industry and
➢ The National Data and Analytics Platform
primary sector Internal Trade (DPIIT) - formulation and
(NDAP)
➢ Shoonya campaign aims to improve air quality in ✓ PM KISAN implementation of industrial policy and strategies
India by accelerating the deployment of electric ✓ Minimum Support Price (MSP) Major Industrial Policies
vehicle ✓ Institutional credit for agriculture sector ✓ (GST) on 1 July 2017
➢ E-Amrit is a one-stop destination for all ✓ National Mission for Edible Oils ✓ Reduction of corporate tax to 22%
information on electric vehicles ✓ Pradhan Mantri Fasal BimaYojana ✓ Make in India’ launched in 2014
➢ India Policy Insights (IPI) (PMFBY) ✓ ‘Ease of Doing Business’
➢ 'Methanol Economy' -reducing India's oil import ✓ Mission for Integrated Development of ✓ The National Single Window System
bill, greenhouse gas (GHG) emissions Horticulture (MIDH) ✓ PM Gati Shakti National Master Plan
➢ 'Transforming India’s Gold Market' ✓ Soil Health Cards ✓ National Logistics Policy (NLP)
✓ Paramparagat Krishi Vikas Yojana ✓ Atmanirbhar Bharat
(PKVY) ✓ Industrial Corridor Development Programme
✓ Agri Infrastructure Fund ✓ FAME-India Scheme (Faster Adoption and
THE TERTIARY SECTOR ✓ Promotion of Farmer Producer Manufacturing of Hybrid and Electric Vehicles)
India has the unique experience of bypassing the Organisations (FPOs) ✓ ‘Udyami Bharat’ – MSMEs
secondary sector in the growth trajectory by a shift ✓ Per Drop More Crop (PDMC) ✓ PM Mega Integrated Textile Region and Apparel
from agriculture to the services sector ✓ Micro Irrigation Fund (PM MITRA):
➢ The services sector is the largest sector of India ✓ Agricultural mechanization ✓ 100 per cent FDI under automatic route is permitted
and accounts for 53.89% of total India's GVA ✓ Setting up of E-NAM for the sale of coal, and coal mining activities.
➢ The service sector is the fastest growing sector in ✓ Kisan Rail ✓ Foreign Investment Promotion Board (FIPB)
India and has the highest labour productivity ✓ Start-up Eco system replaced in May 2017 by Foreign Investment
➢ The Indian services sector is the largest recipient Facilitation Portal (FIF)
of FDI inflows ✓ Remission of Duties and Taxes on Export Products
➢ The government has permitted 100 per cent ✓ The National Manufacturing Policy aims –
Share of manufacturing in GDP to 25 (RoDTEP) 2021 replaced MEIS (Merchandise
foreign participation in telecommunication Exports from India Scheme)
services through theProfessional
AutomaticAcademy
Route including percent by 2025.
of Competitive Excellence
✓ India Ranks 63rd in Ease of doing business Designed by - Roopa Trivedi, PACE, 9826798311
all services and infrastructure providers.