It means the total value of goods and
services produced annually in a country.
It includes payments made to all resources
in the form of wages, interest, rent and
It is the money value of the end result of all
economic activities of the nation.
CONCEPTS OF NATIONAL
Gross National Product: It is the total measure of the
flow of goods and services at market value resulting
from current production during a year in a
country, including net income from abroad.
GNP at Market Prices: When the total output produced
in one year is multiplied by their market prices
prevalent during that year in a country, plus net income
from abroad, it is called GNP at Market Prices.
GNP at Factor Cost: It is the sum of the money value of
the income accruing to the various factors of
production in one year in a country.
GNP at Factor Cost = GNP at market prices – Indirect
Taxes + Subsidies.
CONCEPTS OF NATIONAL
Net National Product (NNP): NNP is GNP net of
depreciation. NNP = GNP – Depreciation.
NNP at Market Prices: Net value of final goods and
services evaluated at market prices: NNP at Market
Prices = GNP at Market Price – Depreciation.
NNP at Factor Cost: Net output evaluated at factor
NNP at Factor Cost = NNP at
Market Prices – Indirect Taxes + Subsidies (or)
= GNP at
Market Prices – Depreciation – Indirect taxes +
CONCEPTS OF NATIONAL
Domestic Income or Product: Income generated or
earned by the factors of production within the
country from its own resources is called domestic
income or domestic product. Domestic Income =
National Income – Net Income earned from abroad.
Personal Income: Personal Income is the total
income received by the individuals of a country from
all sources before direct taxes. Personal Income =
National Income – Undistributed Corporate Profits –
Profit Taxes – Social Security Contributions +
Transfer Payments + Interest on Public Debt.
METHODS OF MEASURING
Product Method: Total value of final goods and services
produced in a country during a year is calculated at market
Income Method: The net income payments received by all
citizens of a country in a particular year are added up i.e. net
incomes that accrue to all factors of production.
Expenditure Method: The total expenditure incurred by the
society in a particular year is added together- includes
personal consumption expenditure, net domestic investment,
government expenditure on goods and services and net
Value Added Method: Difference between the value of
material outputs and inputs at each stage of production is the
DIFFICULTIES IN NATIONAL INCOME
Capital gains or loss to property owners excluded from GNP
because they do not result from current economic activities.
There are a number of goods and services which are
difficult to be assessed in terms of money.
The failure to distinguish properly between a final and an
Income earned through illegal activities are not included in
Transfer payments- these earnings are a part of individual
income and also government expenditure.
Public services cannot be estimated correctly
DIFFICULTIES IN DEVELOPING
Lack of occupational specialization.
Several productive activities do not enter market
Many people do not keep accounts.
Adequate and correct production and cost data are
Medium of Exchange
Unit of Account
Store of Value
Characteristics of Money:-
Categories of Money:-
Money is any object or record that is generally
accepted as payments for goods and services and
repayment of debts in
a given socio-economic context or country.
A number of items may qualify as media of exchange. The decision as to what items
are to be included in the money supply remains an issue in economic debates.
There is no universally applicable empirical definition of money supply and the
choice may vary dependent on what issue is being examined.
There are varying degrees of liquidity or “moneyness” depending on how easily an
asset can be converted into other assets.
In economics, the money supply or money stock is the total amount of monetary
assets available in an economy at a specific time.
There are several ways to define money but standard measures usually include
currency in circulation and demand deposits.
Money supply is the total stock of assets that are generally acceptable as media
of exchange within an economy at a particular time.
M0 and M1, also called narrow money, normally include coins and notes in
circulation and other money equivalents that are easily convertible into cash
M2 includes M1 plus short-term time deposits in banks and 24-hour money
M3 includes M2 plus longer-term time deposits and money market funds
with more than 24-hour maturity. The exact definitions of the three measures
depend on the country.
M4 includes M3 plus other deposits.
The different types of money are typically classified as "M"s.
The typical layout for each of the "M"s is as follows:
Reserve money (M0) :- Currency in circulation + Bankers deposit with the RBI +
Other deposit with the RBI.
M1 :- Currency with the public + Deposit money of the public (Demand deposits
with the banking system + Other deposits with the RBI).
M2 :- M1 + Saving deposits with Post office saving banks.
M3 :- M2 + Time deposits with the banking system.
M4 :- M3 + All deposits with post office saving banks (excluding National
The Reserve Bank of India defines the monetary
Why is the Money Supply Important ?
Money is used in virtually all economic transaction, it has a powerful effect on
An increase in the supply of money works both through lowering Interest Rates
which spurs investment and through putting more money in the hands of
consumers, making them feel wealthier and thus stimulating spending.
Business firms response to increased sales by ordering more raw materials and
The spread of business activity increases the demand for labour and rises the
demand for capital goods.
In a buoyant economy, Stock Market Price rise and firms issue equity and debt.
Opposite effects occur when the supply of money falls or when its rate of growth
The Meaning of Money
Money is any object or record that is generally accepted as payment for
goods and services and repayment of debts in a given socio-economic
context or country.
The main functions of money are distinguished as: a medium of
exchange; a unit of account; a store of value; and, occasionally in the
past, a standard of deferred payment
Money is the set of assets in an economy that people regularly use to buy
goods and services from other people
Functions of Money
Generally, economists have defined four types of functions of
money which are as follows:
(i) Medium of exchange
(ii) Measurement of value
(iii) Standard of deferred payments
(iv) Store of value.
Medium of exchange
- When money is used to intermediate the exchange of goods
and services, it is performing a function as a medium of
- Right from the beginning, money has been performing aim
important function as medium of exchange in the society.
- Money facilitates transactions of goods and service as a
medium of exchange.
- Producers sell their goods to the wholesalers in exchange of
money. Wholesalers sell the same goods to the consumers in
exchange of money.
Measurement of value
Money acts as a standard measure and common denomination of
trade. It is thus a basis for quoting and bargaining of prices.
It is necessary for developing efficient accounting systems.
But its most important usage is as a method for comparing the
values of dissimilar objects
Standard of deferred payment
While standard of deferred payment is distinguished by some
texts,particularly older ones, other texts subsume this under other
A "standard of deferred payment" is an accepted way to settle a
debt – a unit in which debts are denominated, and the status of
money as legal tender, in those jurisdictions which have this
concept, states that it may function for the discharge of debts.
When debts are denominated in money, the real value of debts
may change due to inflation and deflation, and for sovereign and
international debts via debasement and devaluation.
Store of value
To act as a store of value, a money must be able to be reliably
saved, stored, and retrieved – and be predictably usable as a
medium of exchange when it is retrieved.
The value of the money must also remain stable over time.
Some have argued that inflation, by reducing the value of money,
diminishes the ability of the money to function as a store of value.
Money Base, M1 and M2 in the US from 1981 to 2012
Functions Of Money
Primary Functions :
Economic function is to facilitate the interchange of goods
and services .
Common medium of exchange.
To achieve Unified Monetary system.
Establish Economic order
Secondary Functions :
Facilitating credit transactions .
Standard of deferred payments.
As a transmitter of value through time and space .
As a general medium of payment, Indirect exchange
divides a single transaction into two separate parts which
are connected merely by the ultimate intention of the
exchangers to acquire consumption goods.
Value Of Money
The Concept -:
The central element in the economic problem of
money is the objective exchange value of money,
popularly called its purchasing power.
Subjective value of money is conditioned by its
objective exchange value, that is, by a
characteristic that falls within the scope of
Objective Exchange Value Of Money
Objective exchange value (or value in business
transactions), is the most important kind of value, because
it governs the social and not merely the individual aspect of
“The objective exchange value of goods is their objective
significance in exchange, or, in other words, their capacity
in given circumstances to procure a specific quantity of
other goods as an equivalent in exchange.”
Derived from the human process of valuing individual goods
Theory of the Value of Money
In the case of money, subjective use-value and
subjective exchange value coincide both are
derived from objective exchange value, for
money has no utility other than that arising from
the possibility of obtaining other economic goods
in exchange for it.
By “the objective exchange value of money” the
possibility of obtaining a certain quantity of other
economic goods in exchange for a given quantity
of money; and by “the price of money” this
actual quantity of other goods. It is possible to
express the exchange value of a unit of money in
units of any other commodity and speak of the
commodity price of money. For nowadays money
is the sole indicator of prices.
Problems Involved in the Theory of the Value
Must take account of the fundamental difference between
the principles which govern the value of money and those
which govern the value of commodities.
Not necessary at first to pay any attention to objective
Must eliminate those determinants that arise from the
properties of the monetary material as a commodity, since
these present no peculiarity that could distinguish the value
of money from that of other commodities.
monetary theory must take the value of the monetary
material that arises from its industrial usefulness as given.
Central and Commercial
& their functions
In India, the definition of the business of banking has
been given in the Banking Regulation Act, (BR Act),
According to Section 5(c) of the BR Act, 'a banking
company is a company which transacts the business of
banking in India.
Definition of banks
A universal monetary institute in modern times.
Constitutes the apex of the money structure of an economy.
Acts as the leader of the money market .
Supervises, controls and regulates theactivities of commercial
India Reserve Bank of India. U.K. Bank of England.
U.S.A. Federal Reserve bank. Pakistan Bank of Pakistan.
“Institute charged with there sponsibility of
managing the expansion and contraction
of the volume of money in the interest of the
general public welfare.”
To control credit.
To issue Paper currency.
To iron out economic crisis.
To implement Monetary and financialPolicies.
ESTABLISHMENT OF RBI
Established in April 1935 with a share capital of Rs. 5
Nationalized in the year 1949.
Initially established in Calcutta but permanently moved to
Mumbai in 1937
Issue of Currency Notes Bank’s Supervision
Bankers to Government DevelopmentFunctions
Banker’s Bank Data Collection
Credit Controller Research
Custodian of Forex Reserves Clearness
FUNCTIONS OF CENTRAL BANK
CREDIT CONTROL MEASURES
GENERAL CREDIT CONTROLS SELECTIVE CREDIT CONTROLS
Bank Rate Ceiling on Credit
Open market operations Margin Requirements
Cash Reserve Ratio Directives
Statutory Liquidity Ratio Moral Suasion
Commercial Banks in India
The commercial banking industry in India started in 1786 with the
establishment of the Bank of Bengal in Calcutta.
The Indian Government at the time established three Presidency
banks,viz., the Bank of Bengal (established in 1809), the Bank of
Bombay (established in 1840) and the Bank of Madras (established
In 1921, the three Presidency banks were amalgamated to form
the Imperial Bank of India, which took up the role of a commercial
bank,a bankers' bank and a banker to the Government.
The Imperial Bank of India was establishedwith mainly European
It was only with the establishment of Reserve Bank of India (RBI)
as the central bank of the country in 1935, that the quasi-central
banking role of the Imperial Bank of India came to an end
Commercial Banks in India
In 1860, the concept of limited liability was introduced in Indian
banking, resulting in the establishment of joint-stock banks.
In 1865, the Allahabad Bank was established with purely
Punjab National Bank came into being in 1895. Between 1906 and
1913, other banks like Bank of India, Central Bank of India, Bank
of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set
After independence, the Government of India started taking steps to
encourage the spread of banking in India.
In order to serve the economy in general and the rural sector in
particular,the All India Rural Credit Survey Committee recommended
the creation of a state-partnered and state-sponsored bank taking
over the Imperial Bank of India and integrating with it, the former
state-owned and state-associate banks
Primary Functions of Commercial Banks
Accepting Deposits : Commercial bank accepts various types of
deposits from public especially from its clients. It includes saving account
deposits, recurring account deposits, fixed deposits, etc. These deposits
are payable after a certain time period.
Making Advances : The commercial banks provide loans and advances
of various forms. It includes an over draft facility, cash credit, bill
discounting, etc. They also give demand and demand and term loans to
all types of clients against proper security.
Credit creation : It is most significant function of the commercial banks.
While sanctioning a loan to a customer, a bank does not provide cash to
the borrower Instead it opens a deposit account from where the borrower
Secondary Functions of Commercial Banks
Various agency functions of commercial banks are:
To collect and clear cheque, dividends and interest warrant
To make payment of rent, insurance premium, etc.
To deal in foreign exchange transactions.
To purchase and sell securities.
To act as trusty, attorney, correspondent and executor.
To accept tax proceeds and tax returns.
General Utility Functions :
The general utility functions of the commercial banks includeTo provide
safety locker facility to customers.
To provide money transfer facility.
To issue traveller's cheque.
To act as referees.
To accept various bills for payment e.g phone bills, gas bills, water bills, etc.
To provide merchant banking facility.
To provide various cards such as credit cards, debit cards, Smart cards, etc