2. PREFACE
IT’S A MATTER OF A GREAT PLEASURE TO PRESENT MY HAND
BOOK “IKJOT-SURVIVOR” OF COMMERCE WHICH IS SPECIALLY
DESIGNED FOR “SPECIAL-NEED CHILDREN” GRADE 12TH CBSE &
NWAC BOARD COMMERCE STREAM.
I AM CONFIDENT THAT THIS HAND BOOK WILL INSPIRE BOTH
THE STUDENTS AND THE TEACHERS TO ACHIEVE THE BEST
RESULT.
THIS IS MY FIRST BOOK ,SUGGESTIONS AND COMMENTS FOR
IMPROVEMENT OF SUBSEQUENT EDITION ARE MOST
WELCOME.
THE NAME OF MY BOOK IS “IKJOT” WHICH MEANS A SINGLE
LIGHT ,IT WILL SHOW THE SUCCESS PATH TO STUDENTS IN
THEIR EXAM.
BEST WISHES-
GURMEET KAUR
3. IAM dedicating this book to the most
charming ,faithful , forgiving and caring
person on this planet, my loving mother in
heaven
4. IKJOT BY-
GURMEET KAUR
M.COM (ACCOUNTANCY),M. A (ENG.LIT),B.ED,CET,
CERTIFIED LIFE COACH,NLP” PRACTITIONER.
“I’m not sure how much a successful exam has to
do with luck. Rather, it’s about believing in
yourself, trusting that you studied enough, being
confident that you can recall the material and being
present in the moment.”
6. Macroeconomics
Macroeconomics is derived from Greek Prefix “macr(o)” meaning “large” + economics. It
is a branch of economics dealing with the performance, structure, behavior, and decision
making of the entire economy. This includes a national, regional, or global economy.
Microeconomics and Macroeconomics are two most general fields in Economics.
What is the difference between Microeconomics and Macroeconomics?
Microeconomics is primarily focused on the Individual Agents i.e. Firms and Consumers
and how their behaviors determine Price and Quantities in specific markets.
Macroeconomics is a broad field of study. It studies Aggregated Indicators such as GDP,
Unemployment Rates, and Price Indices to understand how the whole economy functions.
Macroeconomists develop models that explain relationship between factors such as
National Income, Output, Consumption, Unemployment, Inflation, Saving, Investment,
International Trade and International Finance.
Macroeconomics models and their forecasts are used by both Governments and large
corporations to assist in the development and evaluation of economic policy and business
strategies.Fiscal Policy and Monetary Policies are good examples of how economic
management is achieved through these government strategies. It is also vital to point out
here that to avoid major Economic Shocks, such as Great Depression, Recession, Melt
down etc., Government makes adjustments through policy changes, they hope, will
stabilize the economy.
7. Some Basic Concepts
Computation of National Income is important as it reflects the leveled
growth & development of any country. But before you introduce children
with the concept, meaning and definition of National Income/GDP and
other related terms, introduce and explain the basic concepts/terms which
will invariably be used in the computation of National Income. These
concepts are explained briefly as under:
Final Goods and Intermediate Goods
Final Goods
Final goods are those goods which are ready for use by their final
users. Or Final goods are those goods which have crossed the boundary
line of production. No value is to be added to these goods by way of
further processing or resale. For example, consumption of milk or
vegetables by the consumer households.
8. Final goods are further classified as:
(i) Final consumer goods: goods which are finally used by the consumer
households. Like, milk, bread, car, washing machine, as used by the
consumer households.
(ii) Final producer goods: goods which are finally used by the
producers/firms. Like, plant and machinery, building, as used by the
firms/producers.
Final consumer goods are purchased or used by the consumers for the
satisfaction of their wants. Whereas, final producer goods are purchased
or used by the producers for further production.
Intermediate Goods
Intermediate goods are those goods which are not ready for use by their
final users. Or Intermediate goods are those goods which are within the
boundary line of production. Value is yet to be added to these goods by
way of further processing or resale.
Example: Raw material purchased by one firm from the other firm for
further production is an intermediate good.
9. Distinction between Final Goods and Intermediate Goods
The main difference between final goods and intermediate goods lies in the
end-use of the good. The same good may be a final good or an intermediate
good, depending on its end-use. For example, use of petrol by the consumer
household is regarded as a final good. But the petrol used by some travel
agency is regarded as an intermediate good.
10. Consumer Goods and Capital Goods
Consumer or Consumption Goods
Goods used by the consumer household for the satisfaction of their wants
are known as consumer goods. These goods directly satisfy the needs of
the consumers. These goods are used as final goods by their final users,
viz. consumers. Expenditure on these goods by the consumers is called
final consumption expenditure.
Consumers goods can be classified as:
(i) Durable consumers goods, which can be repeatedly used for several
years and which are of relatively high value. Example:TV, washing
machine, car, etc.
(ii) Semi-durable consumers goods, which can be used for a period of
nearly one year. Example: clothes, shoes, crockery, etc.
(iii) Non-durable goods , which can be used only once. Example: milk,
vegetables, etc.
(iv) Services, which are non-material goods and directly satisfy human
wants.
Example: services of a doctor, teacher, lawyer etc.
11. Capital Goods
Final goods as used by the producers are called capital goods. In other
words, final goods are those fixed assets which are repeatedly used by
the producers in the production process for several years and which are
of relatively high value.
Example: plant and machinery and building.
Depreciation
The value of fixed assets tends to (decrease) due to normal wear
and tear, accidental damages and expected obsolescence. This
decrease in value of fixed assets (while in use) is
called Depreciation.
Consumption of fixed capital or depreciation is the loss in the value
of fixed capital due to normal wear and tear, foreseen obsolescence
and normal rate of accidental damage.
.
12. Circular Flow of Income
The circular flow of income refers to exchange of goods & services and
money across different sectors of the economy, i.e., firms, households and
the government.
Significance: The study of circular flow of income highlights the relation
and interdependence among different sectors of the economy and the
way in which each sector contributes to the national output.
This flow of income is circular as well as continuous because the payment
of one sector becomes the receipt of the other sector and the production
activity (involving payments and receipts) has been continuous since time
immemorial.
13. Circular Flow in a Two Sector Model
Assumptions:
(i) There are only 2 sectors in the economy:
households and producers.
(ii) There are no savings by households.
(iii) Firms sell all their goods to the
households.
(iv) There are no purchases by the
government.
(v) There is no foreign trade.
15. Economic Territory :Economic (or domestic) Territory is the
geographical territory administrated by a Government within which
persons, goods, and capital circulate freely.
Scope of Economic Territory :
(a) Political frontiers including territorial waters and airspace.
(b) Embassies, consulates, military bases etc. located abroad.
(c) Ships and aircraft operated by the residents between two or more
countries.
(d) Fishing vessels, oil and natural gas rigs operated by residents in the
international waters.
16. The related aggregates of national income are:-
(i) Gross Domestic Product at Market price (GDPMP)
(ii) Gross Domestic Product at Factor Cost (GDPFC)
(iii) Net Domestic Product at Market Price (NDPMP)
(iv) Net Domestic Product at FC or (NDPFC)
(v) Net National Product at FC or National Income (NNPFC)
(vi) Gross National Product at FC (GNPFC)
(vii) Net National. Product at MP (NNPMP)
(viii) Gross National Product at MP (GNPMP)
(i) Gross Domestic Product at Market Price : It is the money value of all
the
final goods and services produced within the domestic territory of a
country
during an accounting year.
17. Private Income :Private income is estimated income of factor and
transfer incomes from all sources to private sector within and outside the
country.
Personal Income :It refers to income received by house hold from all
sources. It includes factor income and transfer income.
Personal Disposable Income :It is that part of Personal income which is
available to the households for disposal as they like.
GDP and Welfare :
In general GDP and Welfare are directly related with each other. A
higher GDP implies that more production of goods and services. It
means more availability of goods and services. But more goods and
services may not necessarily indicate that the people were better off
during the year. In other words, a higher GDP may not necessarily mean
higher welfare of the people. There are two types of GDP:
18. Welfare mean material well being of the people. It depends on many
economic factors like national income, consumption level quality of goods
etc and non-economic factor like environmental pollution, law and order
etc. the welfare which depends on economic factors is called economic
welfare and the welfare which depends on non-economic factor is called
non-economic welfare. The sum total of economic and non-economic
welfare is called social welfare. Conclusion thus GDP and welfare directly
related with each other but this relation is incomplete because of the
following reasons.
Limitation of percapita real GDP/GDP as a indicator of Economic
welfare :
Non-monetary exchange
Externalities not taken into GDP but it affects welfare.
Distribution of GDP.
All product may not contribute equally to economic welfare.
Contribution of some products may be negative.
Inflation may give falls impression of growth of GDP.
20. MEANING OF MONEY: Money is anything which is generally
accepted as medium of exchange, measure of value, store of
value and as means of standard of deferred payment.
FUNCTIONS OF MONEY: Functions of money can be classified
into Primary and Secondary
Primary/Basic functions:-
Medium of Exchange: - It can be used in making payments for all
transactions of goods and services.
Measure /Unit of value: - It helps in measuring the value of goods
and services. The value is usually called as price. After knowing
the value of goods in single unit (price) exchanges become easy.
21. Secondary functions:-
Standard of deferred payments: Deferred payments referred to those
payments which are to be made in near future.
Money acts as a standard deferred payment due to the following
reasons:
a. Value of money remains more or less constant compared to other
commodities.
b. Money has the merit of general acceptability.
c. Money is more durable compare to other commodity.
Store of value: Money can be stored and does not lose value
Money acts as a store of value due to the following reasons:
a. It is easy and economical to store.
b. Money has the merit of general acceptability.
c. Value of money remains relatively constant.
22. MONEY HAS OVERCOME THE DRAW BACKS OF BARTER SYSTEM:
Medium of Exchange: Money has removed the major difficulty of the
double coincidence of wants.
Measure of value: Money has become measuring rod to measure the
value of goods and services and is expressed in terms of price.
Store of value: It is very convenient, easy and economical to store the
value and has got general acceptability which was lacking in the barter
system.
Standard of deferred payments: Money has simplified the borrowing
and lending of operations which were difficult under barter system. It
also encourages capital formation.
23. CENTRAL BANK
MEANING: An apex body that controls, operates, regulates and directs
the entire banking and monetary structure of the country.
FUNCTIONS OF CENTRAL BANK:
Currency authority or bank of issue: Central bank is a sole authority to
issue currency in the country. Central Bank is obliged to back the
currency with assets of equal value (usually gold coins, gold bullions,
foreign securities etc.,)
Advantages of sole authority of note issue:
a. Uniformity in note circulation
b. Better supervision and control
c. It is easy to control credit
d. Ensures public faith
e. Stabilization of internal and external value of currency
24. Banker to the Government: As a banker it carries out all banking business of the
Government and maintains current account for keeping cash balances of the
government. Accepts receipts and makes payments for the government. It also gives
loans and Advances to the government.
Banker’s bank and supervisor: Acts as a banker to other banks in the country—
a. Custodian of cash reserves:- Commercial banks must keep a certain proportion of
cash reserves with the central bank (CRR)
b. Lender of last resort: - When commercial banks fail to need their financial
requirements from other sources, they approach Central Bank which gives loans and
advances.
c. Clearing house: - Since the Central Bank holds the cash reserves of commercial banks
it is easier and more convenient to act as clearing house of commercial banks.
Controller of money supply and credit: - Central Bank or RBI plays an important role
during the times of economic fluctuations. It influences the money supply through
quantitative and qualitative instruments. Former refers to the volume of credit and the
latter refers to regulate the direction of credit.
Custodian of foreign exchange reserves.
Another important function of Central Bank is the custodian of foreign exchange
reserves. Central Bank acts as custodian of country’s stock of gold and foreign exchange
reserves. It helps in stabilizing the external value of money and maintaining favourable
balance of payments in the economy.
26. Aggregate Demand refers to total value of all final goods and services
that are planned to buy by all the sectors of the economy at a given leve
of income during a period of time. AD represents the total expenditure
on goods and services in an economy during a period of time.
Components of Aggregate demand are:
(i) Household consumption expenditure (C).
(ii) Investment expenditure (I).
(iii) Govt. consumption expenditure (G).
(iv) Net export (X – M).
Thus, AD = C + I + G + (X – M)
In two sector economy AD = C + I
27. Aggregate Supply is the money value of all final goods and
services available for purchase by an economy during a given
period. It is the flow of goods and services in the economy. Since,
money value of final goods and services is equal to net value
added, AS is nothing but the national income.
AS = C + S
Aggregate supply represents the national income of the country.
AS = Y (National Income)
Consumption function shows functional relationship between
consumption and Income.
C = f(Y)
where C = Consumption
Y = Income
f= Functional relationship.
Equation of Consumption Function
C = + MPC * Y
C = Consumption
= Autonomous consumption
28. (1) Average Propensity to Consume (APC):
Average propensity to consume refers to the ratio of consumption
expenditure to the corresponding level of income.
2. Marginal Propensity to Consume (MPC):
Marginal propensity to consume refers to the ratio of change in
consumption expenditure to change in total income. MPC explains
what proportion of change in income is spent on consumption.
29. Average Propensity to Save (APS): Average propensity to save refers to
the ratio of savings to the corresponding level of income
Important Point about APS
(1) APS can never be 1 or more than 1 :As saving can never be equal to
or more than income.
(2) APS can be zero: At break even point C = Y, hence S = 0
(3) APS can be negative: At income levels which are lower than the
break-even point, APS can be negative when consumption exceeds
income.
(4) APS rises with increase in income.
Marginal Propensity to Save (MPS): Marginal propensity to save refers
to the ratio of change in savings to change in total income.
MPS varies between 0 and 1
(i) MPS = 1 if the entire additional income is saved. In such a case, ΔS =
ΔY, then MPS = 1
(ii) MPS = 0 If the entire additional income is consumed. In such a case, ΔS
= 0, then MPS = 0
(iii) Mps is the slope of saving curve.
(iv) MPS remains constant throughout in short run.
30. Autonomous Investment: Autonomous investment refers to the
investment which is not affected by changes in the Level of income and is
not induced solely by profit motive. It is income inelastic.
Ex-Ante Savings: Ex-ante saving refers to amount of savings which all
the household intended to save at different levels of income in the
economy at the beginning of period. It is also known as planned savings.
Ex-Ante Investment: Ex-ante investments refers to amount of investment
which all the firms plan to invest at different level of income in the
economy at the beginning of the period. It is also known as planned
investment.
Ex-Post Saving: Ex-post savings refer to the actual or realised savings in
an economy during a financial year at end of the period.
Ex-Post Investment: Ex-post investment refers to the actual or realised
investment in an economy during a financial year at the end of the
period.
32. Budget is a financial statement showing the expected receipt and
expenditure of Govt. for the coming fiscal or financial year.
Main objectives of budget are:
(i) Reallocation of resources.
(ii) Redistribution of income and wealth
(iii) Economic Stability
(iv) Management of public enterprises.
(v) Economic Growth
(vi) Generation of employment
There are two components of budget:
(a) Revenue budget
(b) Capital budget
33. Revenue Budget consists of revenue receipts of govt. and expenditure met from such revenue.
Capital budget consists of capital receipts and capital expenditure.
BUDGET RECEIPTS:
1. Revenue Receipts
A. Tax
a. Direct Tax
i. Income tax
ii. Corporate Tax
iii. Wealth and Property Tax
b. Indirect Tax
i. Value added Tax
ii. Service Tax
iii. Excise Duty
iv. Custom Duty
v. Entertainment Tax
B. Non-Tax
a. Commercial Revenue
b. Interest
c. Dividend, Profits
d. External Grants
e. Administrative Revenues
f. Fees
g. License Fee
h. Fines, Penalties
i. Cash grants-in-aid from foreign countries and international org.
34. 2. Capital Receipts
A. Borrowing and Other liabilities
B. Recovery of Loans
C. Other receipts(Disinvestments)
Direct Tax: A direct tax is one whose burden cannot be shifted to others
I.e. the impact and incidence of the tax is on the same person.ex- income
tax, wealth tax, gift tax.
Indirect Tax: An indirect tax is one whose burden can be shifted to others
or the impact and incidence of an indirect tax falls on different people.
ex- excise duty, VAT, service tax.
Revenue Receipts:
(i) Neither creates liabilities for Govt.
(ii) Nor causes any reduction in assets.
Capital Receipts:
(i) It creates liabilities or
(ii) It reduces financial assets.
35. BUDGET EXPENDITURE:
1. Revenue Expenditure
(i) Neither creates assets
(ii) Nor reduces liabilities.
e.g., Interest Payment, subsidies etc.
Capital Expenditure:
(i) It creates assets
(ii) It reduces liabilities.
e.g., Construction of school building Repayment of loans etc.
36. Budget Deficit:- It refers to a situation when budget expenditure
of a govt. are greater than the govt. receipts.
Budgetary Deficit: Total Expenditure > Total Receipts.
Revenue deficit: It is the excess of govt. revenue expenditure
over revenue receipts
Fiscal Deficit: When total expenditure exceeds total receipts
excluding borrowing.
Fiscal Deficit: Total expenditures > Total Receipts excluding
borrowing.
. Primary Deficit: By deducting Interest payment from fiscal deficit
we get primary deficit.
Primary Deficit: Fiscal deficit – Interest payments.
38. The balance of payment is a comprehensive and systematic records of all
economic transaction between normal residents of a country and rest of
the world during an accounting year.
Accounts of Balance of Payments:
1. Current Account: The current account records export and import of
goods and services and unilateral transfers.
2. Capital Account: It records of all such transactions between normal
residents of a country and rest of the world which relates to sale and
purchase of foreign assets and liabilities during an accounting year.
39. Components of Current Account Components of Capital Account
1. Visible items (import and export
of goods).
1. Foreign Direct investment.
2. Invisible items (import and
export of services).
2. Loans.
3. Unilateral transfers. 3. Portfolio investment.
4.Income receipts and payments
from and to abroad.
4. Banking capital transactions.
5. These are the transactions which
do not affect the assets or
liabilities position of the country.
5. These are the transactions which
affect assets or
liabilities position of the country.
6. It is a flow concept. 6.It is a stock concept.
40. Balance of trade is the net difference of Import and export of all visible items
between the normal residents of a country and rest of the world.
Autonomous items are those items of balance of payment which is related to
such transaction as are determined by the motive of profit maximisation and not
to maintain equilibrium in balance of payments. These items are recorded as a
first items before calculating deficit or surplus in balance of payment a/c.
These items are generally called ‘Above the Line items’ in balance of payment.
Accommodating item refers to transactions that take place because of other
activity in Balance of Payment. These transactions are meant to restore the
Balance of Payment identity. These items are generally called ‘Below the Line
items’.
Deficit of Bop Account: When total inflows of foreign exchange on account of
autonomous transactions are less than total outflows on account such transaction
then there is a deficit in Bop.
Foreign exchange rate refers to the rate at which one unit of currency of a
country can be exchanged for the number of units of currency of another country.
In simple words, we can say that the price of one currency in terms of other
currency is known as foreign exchange rate or exchange rate.
41. SYSTEM OF EXCHANGE RATE:
1. Fixed exchange rate2. Flexible exchange rate
Fixed exchange rate . Flexible exchange rate.
In fixed exchange rate system, the rate of
exchange is officially fixed or determined by
Government or Monetary Authority of the
country.
Merits of Fixed Exchange Rate
(i) Stability in exchange rate
(ii) Promotes capital movement and
international trade.
(iii) No scope for speculation
(iv) It forces the govt. to keep inflation in check.
(v) Attracts foreign capital.
Demerits of Fixed Exchange Rate
(i) Need to hold foreign exchange reserves.
(ii) No automatic adjustment in the ‘Balance of
payments.’
(iii) It may result in undervaluation or
overvaluation of currency.
(iv) It discourages the objective of having free
markets.
The supply of foreign exchange have the
positive relation with foreign exchange rate. If
foreign exchange rate rises the supply of
foreign exchange also rises and vice versa.
Merits of Flexible Exchange Rate
(i) No need to hold foreign exchange reserves
(ii) Leads to automatic adjustment in the
‘balance of payments’.
(iii) To enhances efficiency in resources
allocation.
(iv) To remove obstacles in the transfer of
capital and trade.
(v) It eliminates the problem of undervaluation
or overvaluation of currency.
cles in the transfer of capital and trade.
(v) It eliminates the problem of undervaluation
or overvaluation of currency.
Demerits of Flexible Exchange Rate
(i) Fluctuations in future exchange rate.
(ii) Encourages speculation.
(iii) Discourages international trade and
investment.
42. Devaluation of a currency: When government or monetary authority of a
country officially lowers the external value of its domestic currency (in respect of
all other foreign currency) is called devaluation of a currency. It takes place by
government order under fixed exchange rate system.
Revaluation of a currency: When government or monetary authority of a
country officially raises the external value of its domestic currency is called
revaluation. It takes place by government order under fixed exchange rates
system.
.
Managed floating system is a system in which the central bank allows the
exchange rate to be determined by market forces b intervenes at times to
influence the rate. When central bank finds the rate is too high, it starts selling
foreign exchange from its reserve to bring down it. When it finds the rate is too
low. It starts buying to raise the rate.
