BANKING

 Commercial Banks: 

Commercial Banks are financial institution who accepts deposits from the public and

provide loans facilities for investment with the aim of earning profit.

Functions of Commercial Banks:-

1. Primary functions:-

(a) Accepting deposits 

(b) Advancing loans 

(c) Discounting bill of exchange.

2Secondary functions:-

1. Agency function

(a) Transfer of fund

 (b) Collection of funds

 (c) Purchase and sale of shares and securities on behalf of the customers.

(d) Collection of dividend and interest 

(e) Payment of bills and insurance premium on behalf of customers

(f) Acting as executor and trustee of will

 (g) Acting as correspondent and representative of customer and provide letter of credit to the customer.

2. General utility function

(a) Purchase and sell of foreign exchange. 

(b) Issuance of travelerscheque.

(c) Safe custody of valuable goods in lockers. 

(d) Underwriting of securities.

Central Banks: 

1.The central Bank is the apex institution of monetary and financial system of a country.

 2.It makes monetary policy of the country in public interest. 

3.It manages, supervises and facilitates the banking system of the country.

Functions of Central Banks

1. Bank of Issue 

2. Banker to the Government

 3. Banker’s Bank and Supervisor.

 4. Controller of credit.

5. Lender of last resort 

6. Custodian of foreign exchange reserves

MONEY CREATION OR CREDIT CREATION BY COMMERCIAL BANKS

CREDIT is defined as finance made available by one party to another party on a certain rate of exchange.

The capacity of banks to create money or credit depends on:-

 (i) Amount of primary deposits

(ii) Legal reserve ratio(LRR).

Legal Reserve Ratio(LRR):- is fixed by the central bank of a country and it is the minimum ratio of deposit legally required to be kept as cash by banks.

Cash Reserve Ratio(CRR):- It is a part of LRR which is to be kept with the central bank.

Statutory Liquidity Ratio(SLR):- It is a part of LRR which is to be kept with the bank themselves.

Commercial bank’s demand deposits are a part of money supply. Commercial banks lend money to the borrowers by opening demand deposit account in their names. The borrowers are free to use this money by writing cheques. According to definition demand deposits are a part of money supply. Therefore, by creating additional demand deposits bank create money.

Money creation depends upon two factor:

1. Primary deposits 

2. Legal Reserve Ratio (LRR). 

Multiplier = 1/LRR Total Deposit creation = Initial deposit X 1/LRR.

Repo rate : Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.

Reverse repo rate : Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) borrows money from commercial banks within the country. It is a monetary policy instrument which can be used to control the money supply in the country.

AGGREGATE DEMAND & RELATED CONCEPTS

AGGREGATE DEMAND & RELATED CONCEPTS

AGGREGATE DEMAND:-

The sum, total of the demand for all the goods and services in an economy during an accounting year is termed as an Aggregate Demand of an economY.

AGGREGATE SUPPLY:-

It is the money value of the final goods and services or national product produced in an economy during one year.

COMPONENTS OF AGGREGATE DEMAND :-

 (a)Intermediate consumption of government sector.

(b) Compensation of employees of government sector.

(c) Imports by government sector.

(d) Net export (X – M)

*NOTE:-

It should be remembered that AD is not zero at zero level of income.
AD = C +1+ G + X- M

COMPONENTS OF AGGREGATE SUPPLY:-

(i) Consumption expenditure (C)              (ii) Saving (S)

*NOTE:-

Thus, Aggregate Supply can also be written as AD = C + S

Propensity to Consume 

It refers to the ratio between consumption (C) and income (Y). It shows level of consumption (C) with respect to a given level of income (Y).

 Average Propensity to Consume 

The ratio between the consumption expenditure and income is called Average Propensity to Consume.

Average Propensity to Consume (APC) = C/Y
Where,       C = Consumption, Y = Income

Marginal Propensity to Consume

 The ratio between the change in consumption expenditure with the change in income is called Marginal Propensity to Consume.

Consumption Function 

• The functional relationship between the consumption expenditure and the income is known as consumption function.
• C = f(Y)

Where, C = Consumption expenditure
Y = Income

Algebraic Expression of Consumption Function 

The algebraic expression of consumption function is given by

Propensity to Save

 It refers to the ratio between savings (S) and income (Y) with respect to given level of income.

 Average Propensity to Save 

• The ratio between total savings and the total income in an economy at a given level of income is termed as Average propensity to Save.
• Average Propensity to Save (APS) = S/Y

Where,                                      S = Saving
Y= Income

 Marginal Propensity to Save 

The ratio between the change in savings with the change in income is known as Marginal Propensity to Save.

*Saving Function

•  The functional relationship between saving and income is known as saving function.

• S = f(Y)

         Where, S = Saving
          Y = Income or we can also say that saving is a function of income.

• Saving is the excess income which is left with the consumer after paying for all the consumption expenditure.

           S=Y-C

Algebraic Expression of Saving Function 

The algebraic expression of saving function is given by

Relationship between APC and APS

APC + APS =1
or         APC = 1 – APS
and      APS = 1 – APC

 Relationship between MPC and MPS

MPC + MPS = 1
or                                                  MPC = 1 – MPS
and                                                MPS = 1 – MPC

INVESTMENT:-

• There are additions made to the present stock of capital. 
• It leads to an increase in capital assets.

Autonomous Investment

 An investment which is not influenced by expected profitability or level of income is called autonomous investment.

 Induced Investment

•  It is positively related to the level of income in an economy. 
• At higher levels of income, consumption expenditure tends to increase, thereby motivating the producers to increase their investment to be able to meet Higher Demand levels.

MONEY

MONEY

Money is anything that is generally acceptable as a means of exchange and at the same time, act as a measure and as a store of value.

Barter System :- Barter system means the direct exchange of one commodity to another.

Barter Economy can be termed as C-C economy i.e., Commodity for Commodity economy.

double coincidence of wants –This occurs when two people have goods they are both happy to swap in exchange. i.e. a perfect barter exchange.

Liquidity Trap - It is a situation of very low rate of Interest in the economy where every economic agent expects the interest rate to rise in future and consequently bond price falls, causing capital loss. 

TYPES OF MONEY

• Fiat money refers to money backed by order or authority of the government.

 Example: Notes and coins.

• Fiduciary money refers to money backed up by trust between the payer and payee.

 Example: Cheques are fiduciary money as these are accepted as a means of payment on the basis of trust but not on the basis of any order of the government

• Commodity money is the simplest and, most likely, the oldest type of money. 

 Examples of commodity money include gold coins, beads, shells, spices, etc.

• Commercial bank money can be described as claims against financial institutions that can be used to purchase goods or services.

• commercial bank money is debt generated by commercial banks that can be exchanged for “real” money or to buy goods and services.

Transaction demand for money is positively associated with the level of income, as higher the level of Income, larger would be the size of money holdings for transactions.

NATIONAL INCOME AND RELATED AGGREGATES

NATIONAL INCOME AND RELATED AGGREGATES

• National income is the value of the aggregate output of the different sectors during a certain time period. 
• In other words, it is the flow of goods and services produced in an economy in a particular year.

• Gross Domestic Product at Market Price (GDPMP):

It refers to gross market value of all final goods and services produced within the domestic territory of a country during a period of one yea

• Gross Domestic Product at Factor Cost (GDPFC):

It refers to gross money value of all the final goods and services produced within the domestic territory of a country during a period of one year.

• Net Domestic Product at Market Price (NDPMP):

It refers to net market value of all the final goods and services produced within the domestic territory of a country during a period of one year.

• Net Domestic Product at Factor Cost (NDPFC):

It refers to net money value of all the final goods and services produced within the domestic territory of a country during a period of one year.

• Gross National Product at Market Price (GNPMP):

It refers to gross market value of all the final goods and services produced by the normal residents of a country during a period of one year.

• Gross National Product at Factor Cost (GNPFC):

It refers to gross money value of all the final goods and services produced by the normal residents of a country during a period of one year.

• Net National Product at Market Price (NNPMP):

It refers to net market value of all the final goods and services produced by the normal residents of a country during a period of one year.

• Net National Product at Factor Cost (NNPFC):

It refers to net money value of all the final goods and services produced by the normal residents of a country during a period of one year.

• Relationship between Four Domestic Concepts:

GDPMP, GDPFC, NDPMP and NDPFC are four Domestic concepts. The term ‘Domestic’ signifies that contribution of only those producers (whether resident or non-resident) is to be included who are within the domestic territory of the country.

Relationship between Four National Concepts:

GNPMP, GNPFC, NNPMP and NNPFC are four National concepts. The term National’ signifies that production of only normal residents of the country is to be included even if they are outside the domestic territory of the country.

IMPORTANT FORMULAE

 Estimation of National Income 

1) Estimation of GDPMP (Income method/ Expenditure method/Value added method) 

2) GNPMP = GDPMP + NFIA

3) NNPMP = GNPMP - Depreciation

4) NNPFC = NNPMP - Net indirect taxes

5) NFIA = Factor income from abroad - Factor income to abroad

6) Net Indirect Taxes = Indirect taxes - Subsidies

Estimation of GDPMP 

1. Income Method NDPFC = Compensation of employees + Operating surplus + Mixed income of self employed

2. Expenditure Method GDPMP = Private final consumption expenditure + Government final consumption expenditure +Gross domestic capital formation + Net exports.

 3. Value Added Method i) Value of output = Sales + Change in stock.

ii) GVAMP of GDPMP = Value of output - Intermediate consumption.

CLASS:XII

SUBJECT:MACROECONOMICS

NATIONAL INCOME AND RELATED AGGREGATES

National income is a money measure of the value of all goods and services produced in a year by a nation.

• It is Net National Product (NNP) at Factor Cost (FC)
• It does not include taxes, depreciation and non-factor inputs (raw materials)

Domestic Income – Total value of final goods and services produced within a domestic territory during an accounting year, after adjusting depreciation.

• It is NDP at FC
• Both NNP and NDP can be measured at constant prices (real income) or market prices (nominal income)
• Domestic Income + NFIA = National Income

Q1. Define real GNP.

Answer: Gross national product is calculated at constant prices i.e., via base year price is known as real GNP in economics.

Q2. What is national disposable income?

Answer: National disposable income is that type of an income which is obtainable to the whole economy .

1.  NNP:If we deduct depreciation from gross product we obtain net product. GDP minus depreciation is called NNP. NNP is sometimes called national income.

NNP = GNP – depreciation

2. GDP:GDP measures the aggregate money value of output produced by the economy over a year.

GDP at factor cost = GDP at market prices – indirect taxes (T) + subsidies (SU )

3. GNP includes GDP plus net property income from abroad. Thus, GNP includes incomes that nationals earn abroad, but it does not include the incomes earned by foreign nationals.

GNP = GDP + net property income from abroad.

Measurement of National Income

There are three methods to measure national income:

Methods to Measure National Income
S.No	Measurement Method
1.	Income Method
2.	Production (Value-Added) Method
3.	Expenditure Method

• Measurement of National Income – Expenditure Method

The expenditure method to measure national income can be understood by the equation given below:

Y = C + I + G + (X-M),

where Y = GDP at MP, C = Private Sector’s Expenditure on final consumer goods, G = Govt’s expenditure on final consumer goods, I = Investment or Capital Formation, X = Exports, I = Imports, X-M = Net Exports

Capital	Net Investment
Capital is tied to liquidity	Investment is tied to equity
Capital is a stock variable	Net Investment is a flow variable
Capital is on the liabilities side of the balance sheet	Investment is on the assets side of the balance sheet

• Expenditure

The expenditure approach is basically an output accounting method. It focuses on finding the total output of a nation by finding the total amount of money spent. This is acceptable to economists, because, like income, the total value of all goods is equal to the total amount of money spent on goods. The basic formula for domestic output takes all the different areas in which money is spent within the region, and then combines them to find the total output.

${\displaystyle \mathrm {GDP} =C+G+I+\left(\mathrm {X} -M\right)}$

where:

C = household consumption expenditures / personal consumption expenditures
I = gross private domestic investment
G = government consumption and gross investment expenditures
X = gross exports of goods and services
M = gross imports of goods and services

• Equilibrium level of national income

CLASS 12TH
SUBJECT:MACROECONOMICS

BASIC CONCEPTS OF MACROECONOMICS

 Types of Investment:

1. Induced Investment:

Real investment may be induced. Induced investment is profit or income motivated. Factors like prices, wages and interest changes which affect profits influence induced investment. Similarly demand also influences it. When income increases, consumption de­mand also increases and to meet this, investment increases. In the ultimate analysis, induced investment is a function of in­come i.e., I = f(Y). It is income elastic. It increases or de­creases with the rise or fall in income, as shown in Figure 1.

• Microeconomics is the study of particular markets, and segments of the economy. It looks at issues such as consumer behaviour, individual labour markets, and the theory of firms.
• Macro economics is the study of the whole economy. It looks at ‘aggregate’ variables, such as aggregate demand, national output and inflation.
• 

• FINAL GOODS AND INTERMEDIATE GOODS

Final Goods Vs Intermediate Goods:

BASIS	FINAL GOODS	Intermediate Goods
Meaning:	Final goods refer to those goods which are used either for consumption or for investment.	Intermediate goods refer to those goods which are used either for resale or for further production in the same year.
Nature:	They are included in both national and domestic income.	They are neither included in national income nor in domestic income.
Demand:	They have a direct demand as they satisfy the wants directly.	They have a derived demand as their demand depends on the demand for final goods.
Value addition:	They are ready for use by their final users i.e. no value has to be added to the final goods.	They are not ready for use, i.e. some value has to be added to the intermediate goods.
Production Boundary:	They have crossed the production boundary.	They are still within the production boundary.
Example:	Milk purchased by households for consumption, car purchased as an investment.	Milk used in dairy shop for resale, coal used in factory for further.

How to Classify Goods as: Intermediate Goods and Final Goods:

The distinction between intermediate goods and final goods is made on the basis of the use of product and not on the basis of product itself. A commodity can be an intermediate good as well as a final good, depending upon its nature of use.

For Example:

(i) Sugar is an intermediate good when it is used for making sweets. However, if it is used by the consumers, then it becomes a final good.

(ii) Similarly, milk is an intermediate good when it used in dairy shops for resale. However, it becomes a final good when it is used by the households.

• DIFFERENCE BETWEEN CONSUMPTION GOODS AND FINAL GOODS

Basis	Consumption Goods	Capital Goods
Satisfaction of Human wants	These goods satisfy human wants directly. So, such goods have direct demand	Such goods satisfy human wants indirectly. So, such goods have derived demand
Production Capacity	They do not promote the production	They help in raising production capacity
Expected Life	Most of the consumption goods (except durable goods) have limited expected life	Capital goods generally have an expected life of more than one year

• DIFFERENCE BETWEEN DEPRECIATION AND CAPITAL LOSS

Basis	Depreciation	Capital Loss
Meaning	It refers to the fall in the value of fixed assets due to normal wear and tear, the passage of time or outdated technology	It refers to the loss in value of the fixed assets because it is outdated
Provision for loss	Provision is made for replacement of assets as it is an expected loss	No such provision is made in case of capital loss as it is an unexpected loss
Production Process	It does not hamper the production process	It hampers the production process

•  INVESTMENT

In simple terms, Investment refers to purchase of financial assets. While Investment Goods are those goods, which are used for further production.

1. Induced Investment:

Real investment may be induced. Induced investment is profit or income motivated. Factors like prices, wages and interest changes which affect profits influence induced investment.  In the ultimate analysis, induced investment is a function of in­come i.e., I = f(Y). It is income elastic. It increases or de­creases with the rise or fall in income.

2. Autonomous Investment:

Autonomous investment is independent of the level of income and is thus income inelastic. It is influenced by exogenous factors like innovations, inventions, growth of population and labour force, researches, social and legal institutions, weather changes, war, revolution, etc

Gross Investment:-Gross investment includes the total of all investments made in a country during one year.

Net Investment:-Net investment equals gross investment, minus annual wear and tear.

Indirect taxes

Indirect taxes are those imposed by a government on goods and services, in contrast to direct taxes, such as income and corporation tax, which are levied on incomes of households and firms. Indirect taxes are also called expenditure taxes.

Factor Payment (Income):

1. It comprises rent, wages, interest and profit.

2. It is received in return for rendering productive service.

3. It is an earned income (earning concept).

4. It is bilateral payment.

5. It is included in national income.

Transfer Payment (Income):

1. It comprises gifts, subsidies, donations, scholarships, etc.

2. It is received without providing any good or service in return.

3. It is an unearned income (receipt concept).

4. It is unilateral payment.

5. It is not included in national income.