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IAS Prelims tit-bits- Economy part 1 and 5 Questions

 Dr V
  • 1. GDP and GNP

    1. Gross Domestic product (GDP) is money value of final goods and services inside the Domestic economy whether produced by nationals or foreigners
    2. Gross National product (GNP) is money value of Final goods and services produced by Nationals whether they produce it within the nation or abroad
    3. GDP = GNP – Net Factor Income from abroad
    4. Nominal GDP (GDP at market price) is at current market prices while Real GDP (GDP at constant price) is adjusted for inflation w.r.t base year
    5. Measure of that inflation is not CPI or WPI but GDP Deflator
    6. GDP Deflator = Nominal GDP/Real GDP
    7. Net Domestic Product = GDP – Depreciation
    8. GDP at market price = GDP at factor cost + Indirect taxes – subsidies
    • Discuss – Recent changes to the method of calculating GDP
    • Discuss – what are these factors in factor cots

    2. Fiscal Deficit, Revenue Deficit, Primary Deficit

    1. Fiscal Deficit = Total expenditure – Total non debt creating  receipts ( total revenue receipt plus non debt creating capital receipt)
    2. In the above formula only debt creating capital receipt is excluded which is borrowing and that is exactly the fiscal deficit
    3. Revenue deficit = revenue receipt -revenue expenditure
    4. Effective revenue deficit = revenue deficit-grants for creation of capital assets
    5. Primary deficit = fiscal deficit -deficit due to interest paid

    Note – As grants are donation, creates no liability, are not to be repaid, they come under revenue budget not capital part similarly under international transaction grants come under current account not capital account

    • Discuss – FRBM act targets
    • Discuss – Deficit financing and monetizing deficits

    3. Current account and Capital account

    1. Current account deals with current, ongoing, short term transactions like trade in goods, services (invisible)
    2. It includes 1.trade in goods (BoT), 2.trade in services (invisible trade), 3.investment income,4.Unilateral transfers – GIFTS, GRANTS ,REMITTANCES
    3. Capital account deals with investments (FDI, FII, FPI), loans (ECB, External Commercial Borrowings), reserves (dollar, Special Drawing Right , gold etc). <bulk transactions which create liabilities>
    4. Balance of Payment is systematic record of all the transaction of a country with the world

    Note – Grants, remittances etc. are in current account not capital account

    Note 2- Investment income is under current account while Investments under capital account

    • Discuss – Balance of Trade v/s Balance of Payment
    • Discuss – Current account deficit

    4. Plan v/s non plan expenditure

    1. Plan expenditure simply means expenditure according to erstwhile 5 year plans (mostly for creation of capital assets)
    2. all other things included in non plan -interest payment , subsidies, pensions, military expenditure etc

    Discuss – Why is plan- non plan division being done away with

    5. Monetary Policy and Fiscal Policy

    1. Monetary Policy – what RBI does i.e interest rates (Repo, reverse repo, MSF, bank rate), Open Market Operations, CRR, SLR
    2. It affects money supply in the economy
    3. Fiscal Policy – what govt., finance ministry does, mainly taxes and expenditure (subsidies, wages etc)
    4. It mainly affects aggregated demand in the economy

    Discuss – Countercyclical monetary and Fiscal Policies


     

    5 Questions 


     

    #1. Net National product at factor cost is equal to
    (a) Gross Domestic product + Net factor income from abroad – depreciation
    (b) Gross National product at market prices -indirect taxes + subsidies – Depreciation
    (c) Gross domestic product – depreciation + Indirect taxes -subsidies
    (d) National product at market prices + Indirect taxes + subsidies + Depreciation

    2. The balance of payments of a country is a systematic record of (2012)

    • (a) all import and export transactions of a country during a given period normally a year
    • (b) goods exported from a country during a year
    • (c) economic transaction between the government of one country to another
    • (d) capital movements from one country to another

    £3. Which of the following constitute Capital Account? (2013)

    • 1. Foreign Loans
    • 2. Foreign Direct Investment
    • 3. Private Remittances
    • 4. Portfolio Investment

    Select the correct answer using the codes given below.

    • (a) 1, 2 and 3
    • (b) 1, 2 and 4
    • (c) 2, 3 and 4
    • (d) 1, 3 and 4

    £4. The national income of a country for a given period is equal to the: (2013)

    • (a) total value of goods and services produced by the nationals
    • (b) sum of total consumption and investment expenditure
    • (c) sum of personal income of all individuals
    • (d) money value of final goods and services produced

    5. With reference to Union Budget, which of the following is/are covered under Non-Plan Expenditure?

    • 1. Defense -expenditure
    • 2. Interest payments
    • 3. Salaries and pensions
    • 4. Subsidies

    Select the correct answer using the code given below.

    • a. 1 only
    • b. 2 and 3 only
    • c. 1, 2, 3 and 4
    • d. None

     

     


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  •  Kato @ghukato

    bacdc

  •  Sankalp Singh @sankalp-singh

    Base year for computing gdp has been changed from 2004-05 to 2011-12.
    factors are effect of indirect taxes and subsidies on the cost of manufactured item or services.
    FRMB Act, 2003 targets – Fiscal deficit of not more than 3%, Total debt of not more than 9% of GDP

  •  Shrishty Agarwal @hansamahta

    1 b
    2 c
    3 b
    4 a
    5 c

    •  Gopi Kumar @gopi-kumar

      The answer to the second question is option A , read C again, it says “one govt to another” i.e transaction between govts and hence it seems correct but it is not

  •  maverick @maverick-s

    Attached

    Attachments:
  •  Pushpendra Rana @pushpendra11rana

    3. Current account and Capital account
    Capital Account – reserves (dollar, Special Drawing Right , gold etc)

    Are you referring to Forex Reserves ?

    I guess Forex reserves not accounted as Capital/Current Account, while calculating BOP.

    Please clarify ?

  •  Pranav Pathak @pranavce15

    Balance of Trade Vs Balance of Payments.

    *Balance of payments is the overall record of all economic transactions of a country with the rest of the world.

    *Balance of trade is the difference in the value of exports and imports of only visible items.

    *Balance of trade includes imports and exports of goods alone i.e., visible items.
    *On the other hand, balance of payments includes
    – Imports and exports of goods.
    – Imports and exports of services.
    – Capital transfers.

    *Balance of trade of a country can be favorable or unfavorable but BoP always balances.

    *BoP is important than balance of trade because BoP offers a comprehensive picture of the country’s economic status

  •  Pranav Pathak @pranavce15

    Deficit Financing:

    – financing Deficits by borrowing.

    – Deficit financing is resorted mainly to enable the government to obtain the necessary resources for its plans mostly because the levels of outlay are of an order which cannot be met only by taxation and borrowing from the public

    – Borrowing can be from anywhere.

    ***********************************************************************************************
    Monetizing debt:

    – a two-step process where the government issues debt to finance its spending and the central bank purchases the debt, holding it until it comes due, and leaving the system with an increased supply of money.

    – Both are Inflationary in nature and too much inflation can make it a counterproductive step.(because the inflation adjusted growth might not be enough to payback the debts).

    As I understand monetizing Debt is kinda the first step taken under deficit financing.
    Please correct me if I am mistaken Dr V.

    •  Dr V @dr-v

      Monetizing debt is essentially central bank buying govt debt and printing money in lieu of that. Essentially govt get its borrowing for free as central bank can print as much money as it wants but obviously it would be very inflationary hence rbi has stopped it and Now there is no concept of monetizing deficit in india. There is concept of ways and means allowamce

      Deficit financing is to generate resources for the welfare activities of the govt. It’s your typical borrowing to finance govt debt or budget or fiscal deficit

    •  krager kring @kragermumbai

      So, QE is monetizing the debt?

  •  Srishty Arun @hereissrishty

    The answers are- B C B A C

    •  Dr V @dr-v

      They are correct answers except for q 2. 2nd ka answer a hoga. It’s not just transaction of govt but everyone, private traders etc which determine balance of payment

    •  Srishty Arun @hereissrishty

      Sir, isn’t balance of payment beyond imports and exports? Doesn’t it include other economic transactions between countries as well?
      So how can one choose between option A and C? Isme elimination kaise use kar sakte hain?

    •  Dr V @dr-v

      Yess balance of payments include all transactions but option c is clearly wrong as it talks about govt only. Option a looks more like balance of trade and two are confused very often and may be examiner was confused.
      A remains the single best answer.

  •  Janam Thakore @drjanamthakore

    Should be
    B C B A C

  •  Kato @ghukato

    1.b
    2.a
    3.b
    4.a
    5.c

  •  RAMNARAYAN CHOUDHARY @choudharyramnarayan9

    1 b
    2 c
    3 b
    4 a
    5 c

  •  Pranav Pathak @pranavce15

    Counter-cyclical Policies:

    – Counter-cyclical policies are ones that cool down the economy when it is in an upswing, and stimulate the economy when it is in a downturn

    – One example of an automatically counter-cyclical fiscal policy is progressive taxation. By taxing a larger proportion of income when the economy expands, a progressive tax tends to decrease demand when the economy is booming, thus reining in the boom

    – When the government adopts a counter-cyclical fiscal policy in response to a threat of recession the government might increase infrastructure spending (This is what we’re doing)

    ***********************************************************************************************

    Pro-cyclical Policies

    – Refers to any aspect of economic policy that could magnify economic or financial fluctuations

    – financial regulations of the Basel II Accord have been criticized for their possible pro-cyclicality

  •  Pranav Pathak @pranavce15

    1 – b
    2 – a
    3 – b
    4 – a
    5 – c

    ***********************************************************************************************
    Recent changes to the GDP calculation method
    – Base year now 2011-12 from 2004-05

    – Now GDP calculation @ market prices instead of Factor Cost

    – Aligned accounting methodology to IMF standards

    – Comprehensive coverage of corporate sector by use of MCA21 software and also coverage of financial sector comprehensively ***********************************************************************************************
    Factors – factors of Production – inputs required to produce anything
    1. Land

    2. Labour

    3. Capital

    $. Risk (Entrepreneurship)
    ***********************************************************************************************
    Why is plan-non plan distinction being done away with?

    successive committees have questioned the merit in having Plan and Non-Plan classification of Government expenditure. A broad understanding over the years has been that Plan expenditures are good and Non-Plan expenditures are bad resulting in skewed allocations in the Budget. This needs to be corrected to give greater focus to Revenue and Capital classification of Government expenditure (which is mandated by the Constitution which states that the govt will separately show the revenue account from the rest)

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This topic contains 19 replies, has 12 voices, and was last updated by  Kato 2 weeks, 1 day ago.



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