(SET-I)

Time allowed : 3 Hours

M.M. : 100

Instructions :

(i) All questions are compulsory.

(ii) Marks allotted to each question are indicated against it.

(iii) Question numbers 1-4 and 19-22 are very short-answer questions. They should be answered in one sentence each.

(iv) Questions 5-6 and 23-24 are short-answer questions. answers to these should not normally exceed 30 words each.

(v) Questions 7-15 and 25-33 are short-answer questions. Answers to these should not normally exceed 60 words each.

(vi) Questions 16-18 and 34-36 are long-answer questions. answers to these should not normally exceed 100 words each.

(vii) The word-limit is not applicable to numerical questions.

SECTION-'A'

When will the rate of increase in real national income of a country not lead to the same rate of increase in the real per-capita income ? (1)

Ans.

When the population of the country grows at a faster rate than the rate of increase in national income, real per capital income will not grow at the rate at which national income is increasing.

(ii) General government.

Value added means increase in the value of commodity. This is done by changing or transforming intermediate goods into finished goods.

Value of output - Intermediate consumption.

Exports form a part of national income because they are a part of domestic product.

Why are the following not included in national income ? (2)

(ii) Interest paid by consumer households

(i) Wealth tax is paid by the individuals from their wealth or past savings and is therefore not included in national income.

Q.6.

Ans.

National Income is defined as factor income accruing to the normal resident of a country. It is the sum of domestic factor income and net factor income earned from abroad.

Q.7.

The political frontiers of a country include only the geographical boundaries of a country whereas domestic territory of a country denotes something more than the geographical boundaries of country. It includes the following items :

(ii) Ships and aircrafts owned and operated by the residents between two or more countries. Indian ships or planes moving between Japan and China are part of domestic territory of Indian.

(iii) Fishing vessels, oil and natural gas rigs and floating platforms operated by the residents of the country in the international waters or engaged in extraction is areas in which has exclusive rights of operation.

(iv) Embassies, consulates and military establishment of a country located abroad.

Q.8.

The producing units have become highly interdependent from the economic point of view these days. Their economic dependence is explained by the fact that prosperity or depression in one sector of an economy affects the other sector also. Demand for output or goods and services produced in one sector depends upon the income generated in the other sectors.

Q.9.

Change in stocks in a flow and this flow includes the value of the physical change in the following at the domestic level :

2. Stock of strategic materials, food grains and other commodities of special importance to the nation in the possession of the government.

3. Livestock raised for slaughter by enterprises.

Change in Stocks = Change in inventories + Change in the stock of government + Change in livestock.

Do sale and purchase of second - hand physical assets affect domestic fixed capital formation ? Explain.(3)

Sale and purchase of second hand physical assets within the domestic territory do not affect the domestic capital formation. If government sells second hand physical assets to the corporate and quasi-corporate enterprises, gross fixed capital formation in the govt. sector goes down and it increases in the purchasing sector to the extent of sale purchase. At the economy's level, domestic fixed capital formation remains the same.

Explain the components of net factor income from abroad. (3)

(a) Net compensation employees.

(b) Net income from property and entrepreneurship and

(c) Net retained earning of resident companies abroad. In short Net factor income earned from abroad

= Net compensation of employees + Net Income from property and enterpreneurship + Net retained earning of resident companies abroad.

= 300 - 80 = Rs. 220 lakhs.

Explain the basis of classifying the producing enterprises of an economy into primary, secondary and tertiary sectors. (3)

Classification of producing enterprises of an economy into primary, secondary and tertiary sectors is on the basis of source of input. For this, primary sector exploits natural resources, secondary sector transfers one type of commodity into other and tertiary sector render services.

Calculate gross national product at market price from the following data :

(a) primary sector

(b) secondary sector

(c) tertiary sector

40

50

60

= Rs [(100 -40) + (150 - 50) + 150 + (-)5]

= [60+100+150-5] lakhs

= Rs. 305 lakhs.

Expenditure method directly give us GDP _MP.

GDP _MP = Private final consumption expenditure + govt. final consumption expenditure + Gross Domestic capital formation + Net exports.

Govt. final consumption expenditure = Compensation of employees paid by Govt. + direct purchases of non-durable goods from abroad by general govt. + Net Purchase of goods and services by general Govt.

= 100 + 10 + 100 = 210

Gross Domestic Capital formation = Net domestic capital formation + Consumption of fixed capital

= 60+10 = 70

GDP _MP = 500 + 210 + 70 + (-5) = Rs. 775 crores.

Now we calculate National Income (or NNP fe) from GDP _MP

NNP fe or National Income = GDP _MP - Consumption of fixed capital + Net factor income from abroad - net indirect taxes

= 775 - 10 + (-10) - 50

+ Rs. 705 crores.

How is the private final consumption expenditure measured ? (5)

Private final consumption expenditure : It includes the expenditure made by both households and private enterprises on final demand. Household sector makes expenditure on single use consumer goods such as bread, butter, vegetable etc., durable use goods such as furniture, T.V. etc., and services like those of teachers, medical and transportation. The expenditure on these items is met by household sector by receiving income from factor services. Private final expenditure also includes expenditure made by private producing sector. This sector broadly incurs expenditure on (i) Inventories / change in stocks ( closing stock - opening stock) and (ii) replacement investment. Inventory investment includes stock of raw material, work-in-progress, semi-finished goods. It is a very essential expenditure of business sector for increasing the level of production and meeting the demand of household sector.

Explain the income method of calculating national income.

Measurement of national income using income method involves the following steps :

1. Firstly, all the enterprises are classified industry - wise. From this point of view, enterprises can be classified into three sectors namely, agriculture, industries and services.

2. Secondly, all the factor payments are classified into following categories :

(i) Compensation of employees which include :

(a) Wages and salaries (b) Employers contribution to social security schemes (c) Pension on retirement.

(ii) Operating Surplus which included rent, interest and profit.

(iii) Mixed Income : It is the income of self - employed persons using their labour, land, capital and entrepreneurship.

(3) Thirdly, by adding up all the factor payments of enterprises of all the sectors, domestic factor income is ascertained.

(4) Net factor Income earned from abroad : Domestic factors earn income from foreign countries and foreigners earn income within country. The difference of the two is known as net income earned from abroad. It is included in the national income. However, income earned from abroad is included in the national income when factor incomes have been counted on the basis of income paid by the firms. If factor incomes are calculated on the basis of income received by the factors, then net income earned from abroad will not be separately included in the national income; this is already included in it.

Which organisation estimate the national income in India ? Name the sectors of the Indian economy for which income method is used for estimating their contribution to the domestic product.

The Central Statistical Organisation (CSO). estimates the national income in India.

The following sectorso of the Indian economy use Income method for estimating their contribution to the domestic product :

1. Manufacturing ( Unregistered)

2. Electricity, gas and water supply

3. Transport and Communication

4. Trade

5. Banking and Insurance

6. Real estate

7. Public administration and defence

8. Other services

SECTION - 'B'

A minimum amount of profit, which is necessary to retain the entrepreneur in a particular line of production is called normal profit.

When will the transfer earnings of a factor of production be zero ?

When the supply of a factor of production is perfectly inelastic the transfer earning will be zero.

What is the value of marginal propensity to consume when marginal propensity to save is zero ? (1)

= 1 - 0

= 1

Involuntary unemployment : A situation in which people are willing to work at current or slightly lower level of wages, but do not find jobs due to deficiency of aggregate effective demand.

Explain the problem of full utilisation of resources in an economy. (2)

The problem of full utilisation of resources : The problem is how can an economy give fuller employment to its unutilised and under - utilised existing resources ? On one hand a country has limited resources and on the other, if they are not fully utilised, it will have an adverse affect on the economy. due to this reason every country is confronted with the problem of fuller utilisation of its existing resources. The problem has two aspects; First, to give employment to all the resources - land, labour and capital of the economy; and second, fuller or optimum utilisation of these resources.

How is the supply of a commodity affected by the prices of other commodities ? (2)

The supply of a commodity depends upon the prices of all other commodities, for if other prices rises, they will become relatively more attractive to produce, and the supply of the commodity, the price of which has not changed, will become less attractive. Its supply may, therefore, fall.

State the economic problems relating to the allocation of resources. (3)

The Problem of Resources Allocation : This means allocation of resources to the production of different goods. Production of goods requires resources for their production. If it is decided to produce a good, then resources need to be allocated for that. Further, the greater the quantity of a good to be produced, the greater the amount of resources will be allocated to it. This, the problem of resource allocation implies which goods and in what quantities are to be produced. The best allocation of resources for the production of different goods should be such that maximises satisfaction of the people.

How do change in the income of the buyer of a commodity affect his demand for that commodity ?

Both income and demand for commodities move in the same direction. In some cases, however, an increase in income may have no effect on the demand for a particular commodity. This will be so in case of very inexpensive items of food. In case of salt, even with a rise in income, the demand for salt is likely to remain unaffected. In some other cases, a rise in income may actually lead to decrease in demand for a particular commodity. For example, the household may be consuming Dalda Ghee. A rise in income may induce it to consume Pure Ghee and its demand for Dalda Ghee may go down. We call such goods 'inferior' goods.
In case of normal goods, a rise in income leads to an increase and a fall in income leads to decrease in their demand.

Explain two fiscal measures by which excess demand in an economy can be reduced. (3)

1. Surplus budget : The surplus budget is one in which public revenue is more than the public expenditure. Through this method government takes away the purchasing power of the public and it will not use a part of this purchasing power by keeping its reserve in its funds. This will reduce the aggregate demand which in turn, will correct the excess demand.

2. Cutting the government expenditure : on (a) Public works programmes such as road, building, rural electrification, (b) on government investment in public health and education, and (c) on defence, internal administration and maintenance of the state.

'Change in both demand and supply of a commodity may or may not affect its equilibrium price'. Explain. (3)

If both demand and supply change, say both increase the new equilibrium quantity rises. The new equilibrium price may rise fall, or remain at the same level, depending upon the relative changes in demand and supply and again would be established at the point where the new demand curve intersects the new supply curve.

(i) If the increase in demand is greater than the increase in supply, the equilibrium price will rise.

(ii) If the increase in demand is less than the increase in supply, the equilibrium - price will fall.

(iii) If the increase in demand and increase in supply are equal, the equilibrium price will remain unchanged.

Explain the relationship between marginal cost and average variable cost.

The relationship between Average Variable Cost (AVC) and Marginal Cost (MC) is as follows :

2. When MV is equal to AVC, AVC is constant and at its minimum.

3. When MC is above AVC, it pulls AVC up and AVC rises. Thus a rising MC cuts AVC curve from below at a point when AVC is at its minimum.

How do changes in marginal revenue affect total revenue ?

(i) When marginal revenue is positive (i.e., greater than zero), total revenue rises.

(ii) When marginal revenue becomes zero, total revenue is the maximum.

(iii) When marginal revenue becomes negative total revenues starts to fall.

Define monopolistic competition. Can a seller in such a market influence the price ? Explain.

Monopolistic competition is a form of market in which a large number of firms product and sell differentiated products which are close substitutes of each other.

Some influence over the price : Since the seller under monopolistic competition sells a differentiated product, he can influence the price of the commodity to some extent.

What affects the demand for a factor of production by a firm under conditions of perfect competition.

The demand for a factor of production by a firm under the conditions of perfect competition depends on the following factors :

1. Demand for the Final Product : The demand for the factors being a derived demand, the higher the demand for the final product, the higher shall be the demand for factors that help produce it.

2. Productivity of the Factor : The demand for a factor service also depend on its productivity. an improvement in productivity of a factor means an increase in the quantity of the commodity that it helps to produce. Consequently, the demand for the factor service may increase.

3. Price of other factors : The price of related factors of production too have an effect on the demand for a given factor. The factors of production may be substitutes or complements. A fall in the price of its substitute may decrease the demand for a factor, whereas a fall in the price of its compliments is likely to cause an increase in the demand for the factor.

What is inflationary gap ? What are its effects on the economy in the short run. (3)

Law of Variable Proportions : According to this law when the amount of aa factor is increased, given the quantity of other factors, average and marginal product first increase, then after reaching the maximum eventually diminish. In accordance with this, total product first rise at an increasing rate and then rises at a drcreasing rate and after a point starts declining.

According to the law of variable proportions, the production function with one variable factor has been divided into three stages. In stage I, we have increasing returns to a factor, in stage II we have diminishing returns to the factor and then in stage III we have negative returns to the factor.

State - I : In this stage the Total Production (TP) goes on increasing, first at increasing rate and then at a decreasing rate. The Average Product (AP) of the variable factor in stage I goes on increasing throughout. But Marginal Product (MP) of the variable factor rises for a large part in this stage in the begining but at a later part marginal product starts diminishing in this stage, but it still remains above the average product.

Stage II : In this stage both average and marginal products of the variable factor diminish. This stage ends where the marginal product of variable factor is zero and Total Product is maximum. This is best stage for a producer.

Stage III : In stage III Marginal Product (MP) of the variable factor becomes negative as Total Product (TP) starts declining in this stage.

Briefly explain the main features of Ricardian theory of rent. How is the modern approach to rent different from it? (5)

(i) The supply of land cannot be increased in the short period as well as in the long run.

(ii) Rent arises because of indestructible powers of land.

(iii) There is no rent on marginal land.

Difference :

(i) According to Ricarda, rent does not enter into prices. But the modern theory of rent deviates from the Ricardian theory in this respect.

(ii) According to ricarda, rent is applicable merely to Land But according to modern theory rent can arises in respect of any factor of production.

(iii) Economic rent, according to Ricarda, is the true surplus left after the expenses of cultivation as represented by payments to labour, capital and enterprise have been met. According to modern theory rent is a surplus payment in excess of transfer earnings of any factor of production.

Monetary Measures to correct excess demand :

1. Increase in bank rate : The rate at which central banks advances loans to the member commercial bank or rediscounts first class bills of exchange and government securities held by them is known as bank rate. On the other hand, the rate at which commercial banks advance loans to their customer is known as interest rate. Bank rate and interest rate are closely related interest rate generally rise with the rise in bank rate and falls with the fall in bank rate. When there is a situation of excess demand, central banks should increase its bank rate.

2. Selling of securities in the open market : Open market operations refer to sale and purchase of government bonds and securities. Such sales and purchases influence liquidity (cash) position of banks. In the situation of excess demand, the central bank should start selling the securities in the market. This reduce the cash reserves of the commercial banks which, in turn, would reduce the credit creation capacity of these banks.

3. Change in reserve ratio : Changes in reserve ratio affects the volume of credit in the opposite direction. In the situation of excess demand central bank should raise the reserve ratio.

4. Raising the margin requirement : In the period of excess demand central bank reduces the credit creation capacity of the commercial banks by raising the margin requirements.