SOLUTION TO SHORT QUESTION INDIAN ECONOMY

•    INDIAN ECONOMY
SHORT QUESTIONS
DR. SHASHI AGGARWAL

•    G+

•    SHORT QUESTIONS INDIAN ECONOMY

•    EXPLAIN THE FOLLOWING

a.       INFLATION

b.       BALANCE OF TRADE

c.        CAPITAL FORMATION

d.       BALANCE OF PAYMENT

e.       INDUSTRIAL LICENSING POLICY

f.        DEVALUATION

g.       FOCUS MARKET SCHEME

h.       MONETARY POLICY

i.         PARALLEL ECONOMY

j.         BIFR

•    LONG QUESTIONS SECTION A

I.            WHAT IS BUSINESS ENVIRONMENT? EXPLAIN THE ECONOMIC AND NON ECONOMIC ENVIRONMENT OF BUSINESS?

II.            WHAT ARE THE MAIN CAUSES OF LOW NATIONAL INCOME? SUGGEST MEASURES TO RAISE THE SAME?

III.            DISCUSS THE ACHIEVEMENT OF INDUSTRIAL GROWTH IN INDIA SINCE 1950?

IV.            WHAT ARE THE MAIN OBJECTIVES OF INDIA PLANNING? HOW FAR THESE OBJECTIVES HAVE BEEN ACHIEVED?

•    SECTION C

I.            THE MIXED ECONOMY IS A GOLDEN PATH BETWEEN CAPITALISM AND SOCIALISM. COMMENT

II.            WHAT DO YOU MEAN BY FISCAL POLICY? EXPLAIN THE TOOLS AND TECHNIQUES OF FISCAL POLICY IN INDIA?

III.            DISCUSS THE IMPORTANCE OF FOREIGN CAPITAL IN THE ECONOMIC DEVELOPMENT OF INDIA. WHAT ARE THE DISADVANTAGES?

IV.            EXPLAIN THE VARIOUS EFFORTS OF GOVERNMENT OF INDIA TO SOLVE THE PROBLEM OF UNEMPLOYMENT?

•    ANSWER

•    MIXED ECONOMY

•    IT IS A GOLDEN MIXTURE OF CAPITALISM AND SOCIALISM. UNDER THIS SYSTEM THERE IS FREEDOM OF ECONOMIC ACTIVITIES AND GOVT INTERFERENCE FOR THE SOCIAL WELFARE. IT IS A BLEND OF BOTH THE ECONOMIES.

•    INDIA HAS ADOPTED MIX ECONOMY TO ACCELERATE THE PATH OF ECONOMIC DEVELOPMENT. EVEN DEVELOPED NATIONS LIKE USA AND UK HAVE ALSO ADOPTED MIXED CAPITALISM SYSTEM.

•    SAMUELSON,MIXED ECONOMY IS THAT ECONOMY IN WHICH BOTH PUBLIC AND PRIVATE SECTORS COOPERATE.

•    FEATURES

I.            COEXISTENCE OF PRIVATE AND PUBLIC SECTOR

II.            PERSONAL FREEDOM

III.            PRIVATE PROPERTY IS ALLOWED

IV.            ECONOMIC PLANNING

V.            PRICE MECHANISM AND REGULATED PRICE OPERATE SIMULTANEOUSLY

VI.            PROFIT MOTIVE AND SOCIAL WELFARE

VII.            CHECK ON ECONOMIC INEQUALITIES

Ø  BANK RATE

•    A BANK RATE IS THE INTEREST RATE AT WHICH A NATION’S CENTRAL BANK LENDS MONEY TO DOMESTIC BANK IN THE FORM OF VERY SHORT TERM LOANS.MANAGING THE BANK RATE IS A METHOD BY WHICH THE CENTRAL BANK AFFECT ECONOMIC ACTIVITY.LOWER BANK RATES CAN HELP TO EXPAND THE ECONOMY BY LOWERING THE COST OF FUNDS FOR BORROWERS IN CASE OF DEPRESSION. IN CASE OF INFLATION IT RAISES THE BANK RATE TO CONTROL THE INFLATION.

Ø  OPEN MARKET OPERATIONS

•    REFERS TO THE BUYING AND SELLING OF GOVT SECURITIES IN THE OPEN MARKET IN ORDER TO EXPAND OR CONTRACT THE AMOUNT OF MONEY IN THE BANKING SYSTEM. WHEN CENTRAL BANK PURCHASE THE SECURITIES THE MONEY SUPPLY INCREASES IN THE ECONOMY AND STIMULATE GROWTH IN CASE OF DEPRESSION.

•    WHEN CENTRAL BANK SELL THE SECURITIES THEN THE MONEY SUPPLY DECREASES TO CONTROL THE INFLATION.

Ø  PRIVATIZATION

•    IS THE PROCESS OF TRANSFERRING AN ENTERPRISE OR INDUSTRY FROM THE PUBLIC SECTOR TO THE PRIVATE SECTOR. THE PUBLIC SECTOR IS THE PART OF THE ECONOMIC SYSTEM THAT IS RUN BY GOVT AGENCIES.

•    PRIVATIZATION MAY INVOLVE EITHER SALE OF GOVT HELD ASSETS OR REMOVAL OF RESTRICTIONS PREVENTING PRIVATE INDIVIDUALS AND BUSINESSES FROM PARTICIPATING IN A GIVEN INDUSTRY.

•    IT IS ARGUED THAT PRIVATE SECTOR TENDS TO RUN A BUSINESS MORE EFFICIENTLY BECAUSE OF THE PROFIT MOTIVE BUT CRITICS ARGUE PRIVATE FIRMS CAN EXPLOIT THEIR MONOPOLY POWER AND IGNORE WIDER SOCIAL COSTS.

Ø  FISCAL POLICY AND MONETARY POLICY

•    MONETARY POLICY IS PRIMARILY CONCERNED WITH THE MANAGEMENT OF INTEREST RATES AND TOTAL SUPPLY OF MONEY IN CIRCULATION AND IS GENERALLY CARRIED OUT BY THE CENTRAL GOVT.

•    FISCAL POLICY IS THE POLICY RELATED TO REVENUE ,EXPENDITURE AND DEBT OF THE GOVT FOR ACHIEVING A SET OF DEFINED OBJECTIVES. ACCORDING TO KEYNESIAN ECONOMIES ,WHEN THE GOVT CHANGES THE LEVEL OF TAXATION AND GOVT SPENDING,IT INFLUENCE AGGREGATE DEMAND AND THE LEVEL OF ECONOMIC ACTIVITY AND FISCAL POLICY ALONG WITH MONETARY POLICY IS USED TO BRING STABILITY IN THE ECONOMY.

Ø  MEANING OF PARALLEL ECONOMY

•    THE TERM PARALLEL ECONOMY IS WHAT ONE WOULD CALL BLACK MONEY.IT IS CALLED PARALLEL ECONOMY MAINLY BECAUSE THE ACTIVITIES WHICH CONSTITUTE  PARALLEL ECONOMY ARE NOT INCLUDED WITH IN SCOPE OF ECONOMIC ACTIVITIES. IT IS BASED ON UNACCOUNTED MONEY.

•    IT CAN BE DEFINED AS THE TAX EVADED MONEY WHICH IS GENERATED BY SECRET OR UNREPORTED ACTIVITIES. THE EXISTENCE OF PARALLEL ECONOMY CAUSES HUGE LOSS IN THE TAX REVENUE OF THE GOVT.

•    THE REASON:-

I.            BUYING AND SELLING ILLEGAL GOODS AND SERVICES

II.            TAX EVASION

III.            LACK OF KNOWLEDGE OF TAX FILING/ILLITERACY

IV.            CORRUPTION

Ø  CAPITAL FORMATION

•    REFERS TO THE INCREASE IN THE STOCK OF REAL CAPITAL IN AN ECONOMY DURING AN ACCOUNTING PERIOD.IT MEANS CREATION OF MORE CAPITAL GOODS FOR EXAMPLE BUILDING,EQUIPMENT,TOOLS,MACHINERY AND VEHICLES ETC

•    CAPITAL FORMATION IS THE PROCESS OF BUILDING THE CAPITAL STOCK OF A COUNTRY THROUGH INVESTING IN PRODUCTIVE PLANTS ,EQUIPMENT. IT INVOLVES THE INCREASING OF CAPITAL ASSETS BY EFFICIENT UTILIZATION OF THE AVAILABLE AND HUMAN RESOURCES OF THE COUNTRY. THE SOURCES OF CAPITAL GOODS CAN BE BUILT UP AND INCREASED THROUGH TWO MAIN SOURCES:-

I.            DOMESTIC RESOURCES

II.            EXTERNAL SOURCES

Ø  INFLATION

•    INFLATION IS THE RATE AT WHICH THE GENERAL LEVEL OF PRICES FOR GOODS AND SERVICES ARE RISING AND AS A RESULT THE PURCHASING POWER OF CURRENCY IS FALLING

•    SHAPIRO,” INFLATION IS SIMPLY A PERSISTENT AND APPRECIABLE RISE IN GENERAL PRICE LEVEL”

•    COULBOURN,” INFLATION IS THE STAGE OF TOO MUCH MONEY CHASING TOO FEW GOODS.

•    CAUSES OF INFLATION:-

I.            INCREASE IN MONEY SUPPLY

II.            DEFICIT FINANCING

III.            BLACK MONEY

IV.            LESS PRODUCTION

V.            WAR

Ø  DEVALUATION

•    IT REFERS TO DECREASE IN A CURRENCY’S VALUE WITH RESPECT TO OTHER CURRENCIES. A CURRENCY IS CONSIDERED DEVALUED WHEN IT LOSES VALUE RELATIVE TO OTHER CURRENCIES IN THE FOREIGN EXCHANGE MARKET. A CURRENCY’S DEVALUATION IS THE RESULT OF NATION’S MONETARY POLICY. CURRENCY DEVALUATION REDUCES THE PRICE OF THE COUNTRY’S DOMESTIC OUTPUT AND BENEFIT THE ECONOMY BY INCREASING THE EXPORT VOLUME. BUT IMPORT BECOMES DEARER.

Ø  BALANCE OF TRADE

•    REFERS TO BALANCE OF DIFFERENCE BETWEEN THE VALUE OF TOTAL IMPORTS AND EXPORTS OF VISIBLE MATERIAL GOODS.

•    FAVORABLE OR SURPLUS BALANCE OF TRADE

•    UNFAVOURABLE OR DEFICIT BALANCE OF TRADE

•    BALANCED BALANCE OF TRADE

Ø  BALANCE OF PAYMENTS

•    THE BALANCE OF PAYMENTS OF  A COUNTRY IS SYSTEMATIC RECORD OF ALL ECONOMIC TRANSACTIONS BETWEEN ITS RESIDENTS AND RESIDENTS OF FOREIGN COUNTRIES.

•    INCLUDE THREE TYPES OF ITEMS:

I.            VISIBLE ITEMS WHICH ARE PHYSICAL GOODS THAT ARE RECORED AT PORTS

II.            INVISIBLE ITEMS WHICH INCLUDE SERVICES AND THESE ARE NOT RECORDED AT PORT

III.            CAPITAL TRANSFERS WHICH ARE RELATED TO THE RECEIPT AND PAYMENTS OF CAPITAL

•    FAVORABLE WHEN RECEIPTS EXCEED THE PAYMENT

•    UNFAVORABLE WHEN PAYMENT EXCEED THE RECEIPTS

•    FEATURES OF BALANCE OF PAYMENTS

I.            SYSTEMATIC RECORD OF RECEIPTS AND PAYMENTS

II.            STATEMENT TO GIVEN PERIOD OF TIME

III.            RECORD ON DOUBLE ENTRY SYSTEM

IV.            THERE IS DIFFERENCE IN DEBIT AND CREDIT NEED IS FELT FOR NECESSARY ADJUSTMENTS

V.            BALANCE OF PAYMENT INCLUDE RECEIPTS AND PAYMENTS OF ALL ITEMS GOVT AND NON GOVERNMENT

•    COMPONENTS OF BOP

I.            CURRENT ACCOUNT: MONITORS THE FLOW OF FUNDS FROM GOODS AND SERVICES BETWEEN TWO COUNTRIES

II.            CAPITAL ACCOUNT MONITORS THE FLOW OF INTERNATIONAL CAPITAL TRANSACTIONS.

Ø  FOCUS MARKET SCHEME

•    IS AN EXPORT PROMOTION SCHEME OF THE GOVT. IS DESIGNED TO ENCOURAGEMENT TO EXPORT TO SELECTED MARKETS GIVEN CERTAIN DISADVANTAGES WHILE EXPORTING TO THESE MARKETS.THE SCHEME COMPENSATES OR OFFSET HIGH FREIGHT COST AND OTHER DISADVANTAGES TO SELECT INTERNATIONAL MARKETS WITH A VIEW TO ENHANCE THE COUNTRY’S EXPORT COMPETITIVENESS IN THESE COUNTRIES.