Flash Card

LAKSHYA-75 [Day-14] Static Flash Cards for IAS Prelims 2020

Government Budget; GDP calculation Methods; Basic National Income Aggregates; Money Multiplier effect; Narrow and Broad Money; Measures of Government Deficit; Current Account & Capital Account; Indifference Curve; Bretton Woods System
By IASToppers
March 20, 2020

 

 

Which agreement created the International Monetary Fund (IMF) and the World Bank?

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Answer:

The Bretton Woods Agreement created two important organizations—the International Monetary Fund (IMF) and the World Bank.

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Bretton Woods System:

  • The Bretton Woods Agreement was negotiated in July 1944 to establish a new international monetary system, the Bretton Woods System.
  • The Agreement was developed by delegates from 44 countries at the United Nations Monetary and Financial Conference held in Bretton Woods.
  • Under the Bretton Woods System, gold was the basis for the U.S. dollar and other currencies were pegged to the U.S. dollar’s value.
  • The Bretton Woods System effectively came to an end in the early 1970s when President Richard M. Nixon announced that the U.S. would no longer exchange gold for U.S. currency.
  • The Bretton Woods Agreement and System were central to principal goals of creating an efficient foreign exchange system, preventing competitive devaluations of currencies, and promoting international economic growth.

 

 

Indifference curve always slopes downward from left to right. True OR False.

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Answer: True

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Indifference Curve:

  • Such a curve joining all points representing bundles among which the consumer is indifferent is called an indifference curve.
  • Any combination of two products indicated by the curve will provide the consumer with equal levels of utility, and the consumer has no preference for one combination or bundle of goods over a different combination on the same curve.
  • Indifference curve is the locus of all points among which the consumer is indifferent.

Features of Indifference Curve:

  1. Indifference curve always slopes downward from left to right: When the consumer has limited income, the increase in consumption of one commodity is possible only by reducing the consumption of another commodity.
  2. The law of Diminishing Rate of Substitution: The amount of good B, the consumer is willing to give up for an extra unit of good A declines as the consumer has more and more of good A. In other words, when the satisfaction derived is less the sacrifice will also be less.
  3. They cannot intersect each other.
  4. They are convex to the origin.

 

 

When does the Surplus in capital account arise?

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Answer:

Surplus in capital account arises when capital inflows are greater than capital outflows, whereas deficit in capital account arises when capital inflows are lesser than capital outflows.

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Capital Account:

  • Capital Account records all international transactions of assets. An asset is any one of the forms in which wealth can be held.
  • For example: money, stocks, bonds, Government debt, etc. Purchase of assets is a debit item on the capital account.

Components of Capital Account:

Balance on Capital Account:

  • Capital account is in balance when capital inflows (like receipt of loans from abroad, sale of assets or shares in foreign companies) are equal to capital outflows (like repayment of loans, purchase of assets or shares in foreign countries).

 

 

What are the components of the Balance on Current Account?

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Answer:

Balance on Current Account has two components:

  • Balance of Trade (BOT) is the difference between the value of exports and value of imports of goods of a country in a given period of time.
  • Net Invisibles is the difference between the value of exports and value of imports of invisibles of a country in a given period of time. Invisibles include services, transfers and flows of income that take place between different countries.

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Current Account:

  • Current Account is the record of trade in goods and services and transfer payments.
  • Trade in goods includes exports and imports of goods. Trade in services includes factor income and non-factor income transactions.
  • Transfer payments are the receipts which the residents of a country get for ‘free’, without having to provide any goods or services in return.
  • They consist of gifts, remittances and grants. They could be given by the government or by private citizens living abroad.

Components of Current Account:

Balance on Current Account:

 

 

 

Fiscal deficit is the difference between the government’s total expenditure and its total receipts including borrowing. True OR False.

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Answer:

False

Correct Statement

  • Fiscal deficit is the difference between the government’s total expenditure and its total receipts excluding borrowing.

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Measures of Government Deficit:

  • When a government spends more than it collects by way of revenue, it incurs a budget deficit.

Revenue Deficit:

  • The revenue deficit refers to the excess of government’s revenue expenditure over revenue receipts. Revenue deficit = Revenue expenditure – Revenue receipts
  • The revenue deficit includes only such transactions that affect the current income and expenditure of the government.
  • When the government incurs a revenue deficit, it implies that the government is dissaving and is using up the savings of the other sectors of the economy to finance a part of its consumption expenditure.

Fiscal Deficit:

  • Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts)
  • Non-debt creating capital receipts are those receipts which are not borrowings and, therefore, do not give rise to debt. Examples are recovery of loans and the proceeds from the sale of PSUs.
  • The fiscal deficit will have to be financed through borrowing. Thus, it indicates the total borrowing requirements of the government from all sources. From the financing side,
  • Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad

Primary Deficit:

  • The borrowing requirement of the government includes interest obligations on accumulated debt.
  • The goal of measuring primary deficit is to focus on present fiscal imbalances. To obtain an estimate of borrowing on account of current expenditures exceeding revenues, need to calculate what has been called the primary deficit.
  • It is simply the fiscal deficit minus the interest payments,

Gross primary deficit = Gross fiscal deficit – Net interest liabilities

  • Net interest liabilities consist of interest payments minus interest receipts by the government on net domestic lending.

 

 

Which article of the Constitution says that there is a constitutional requirement in India to present before the Parliament a statement of estimated receipts and expenditures of the government?

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Answer:

There is a constitutional requirement in India (Article 112) to present before the Parliament a statement of estimated receipts and expenditures of the government.

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Government Budget:

  • The budget document relates to the receipts and expenditure of the government for a particular financial year, the impact of it will be there in subsequent years.
  • There is a need therefore to have two accounts- those that relate to the current financial year only are included in the revenue account (also called revenue budget) and those that concern the assets and liabilities of the government into the capital account (also called capital budget).

Objectives of Government Budget:

Allocation Function of Government:

  • Budget Government provides certain goods and services which cannot be provided by the market mechanism i.e. by exchange between individual consumers and producers.
  • Examples of such goods are national defence, roads, government administration etc. which are referred to as public goods.
  • The benefits of public goods are available to all and are not only restricted to one particular consumer. In case of private goods anyone who does not pay for the goods can be excluded from enjoying its benefits.

Redistribution Function of Government Budget:

  • The total national income of the country goes to either the private sector, that is, firms and households (known as private income) or the government (known as public income).
  • Out of private income, what finally reaches the households is known as personal income and the amount that can be spent is the personal disposable income.
  • The government sector affects the personal disposable income of households by making transfers and collecting taxes.
  • It is through this that the government can change the distribution of income and bring about a distribution that is considered ‘fair’ by society. This is the redistribution function.

Stabilisation Function of Government Budget:

  • The government may need to correct fluctuations in income and employment.
  • The government needs to intervene to raise the aggregate demand. There may be times when demand exceeds available output under conditions of high employment and thus may give rise to inflation.
  • In such situations, restrictive conditions may be needed to reduce demand. The intervention of the government whether to expand demand or reduce it constitutes the stabilisation function.

Components of the Government Budget:

 

 

Category of money which includes all physical money such as coins, currency, demand deposits and liquid assets are called a) Narrow Money OR b) Broad Money?

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Answer:

Category of money which includes all physical money such as coins, currency, demand deposits and liquid assets called Narrow Money.

Category of money which includes deposit-based accounts that take more than 24 hours to reach maturity are known as Broad Money.

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Narrow and Broad Money:

Narrow Money:

  • It is considered to be most liquid of all forms of money.
  • Denoted by M1 and M2 where,
  • M1 = Currency notes and net demand deposits and
  • M2 = M1 + saving deposits with Post Office savings bank.

Broad Money:

  • This form of money is least liquid of all forms.
  • Denoted by M3 and M4.
  • M3 = M1 + net time deposits of commercial banks
  • M4 = M3 + Total deposits with Post Office savings organisations.
  • M4 is the least liquid, while M3 is the most commonly used measure of money supply. Also known as aggregate monetary resource.

 

 

In context of Economy, Money Multiplier effect refers to?

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Answer:

The multiplier effect refers to the proportional amount of increase in final income that results from an injection of spending. Alternatively, a multiplier effect can also work in reverse, showing a proportional decrease in income when spending falls.

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Money Multiplier effect:

  • The multiplier effect involves a multiplier that provides a numerical value or estimate of an expected increase in income per dollar of investment.
  • In general, the most basic multiplier used in gauging the multiplier effect is calculated as change in income / change in spending.
  • The multiplier effect can be used by companies or calculated on a larger scale with the use of GDP.
  • The monetary multiplier effect occurs when banks lend more than they hold in deposits and the increase in the money supply exceeds the amount of the initial deposit due to the fractional reserve banking system.

Paradox of Thrift:

  • If all the people of the economy increase the proportion of income they save the total value of savings in the economy will not increase – it will either decline or remain unchanged. This result is known as the Paradox of Thrift – which states that as people become more thrifty, they end up saving less or same as before.

 

 

 

Net National Product at Market Prices (NNPMP) is the difference between GNPMP (Gross National Product at Market Price) and Export and Import OR b) Depreciation?

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Answer: Net National Product at Market Prices (NNPMP) = GNPMP – Depreciation

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Basic National Income Aggregates:

1

Gross Domestic Product at Market Prices (GDPMP)

·         GDP is the market value of all final goods and services produced within a domestic territory of a country measured in a year.

·         All production done by the national residents or the non-residents in a country gets included, regardless of whether that production is owned by a local company or a foreign entity.

·         Everything is valued at market prices.

GDPMP = C + I + G + X – M

C (household consumption), G (government expenditure), I (investment expense) X= Exports M= Imports

2

GDP at Factor Cost (GDPFC)

·         GDP at factor cost is gross domestic product at market prices, less net product taxes.

·         Market prices are the prices as paid by the consumers Market prices also include product taxes and subsides. The term factor cost refers to the prices of products as received by the producers. Thus, factor cost is equal to market prices, minus net indirect taxes.

·         GDP at factor cost measures money value of output produced by the firms within the domestic boundaries of a country in a year.

GDPFC =  GDPMP – NIT

3

Net Domestic Product at Market Prices (NDPMP)

·         This measure allows policy-makers to estimate how much the country has to spend just to maintain their current GDP.

·         If the country is not able to replace the capital stock lost through depreciation, then GDP will fall.

NDPMP = GDPMP – Dep.

4

NDP at Factor Cost (NDPFC)

·         NDP at factor cost is the income earned by the factors in the form of wages, profits, rent, interest, etc., within the domestic territory of a country.

NDPFC = NDPMP – Net ProductTaxes – Net ProductionTaxes

5

Gross National Product at Market Prices (GNPMP)

·         GNPMP is the value of all the final goods and services that are produced by the normal residents of India and is measured at the market prices, in a year.

·         GNP refers to all the economic output produced by a nation’s normal residents, whether they are located within the national boundary or abroad.

·         Everything is valued at the market prices.

GNPMP = GDPMP + NFIA

6

GNP at Factor Cost (GNPFC)

·         GNP at factor cost measures value of output received by the factors of production belonging to a country in a year.

GNPFC = GNPMP – Net Product Taxes – Net ProductionTaxes

7

Net National Product at Market Prices (NNPMP)

·         This is a measure of how much a country can consume in a given period of time.

·         NNP measures output regardless of where that production has taken place (in domestic territory or abroad).

NNPMP = GNPMP – Depreciation

NNPMP =NDPMP + NFIA

8

NNP at Factor Cost (NNPFC) Or National Income (NI)

·         NNP at factor cost is the sum of income earned by all factors in the production in the form of wages, profits, rent and interest, etc., belonging to a country during a year.

·         It is the National Product and is not bound by production in the national boundaries. It is the net domestic factor income added with the net factor income from abroad.

NI = NNPMP – Net ProductTaxes – Net ProductionTaxes = NDPFC +  NFIA = NNPFC

9

GVA at Market Prices

GDP at market prices

10

GVA at basic prices

GVAMP – Net Product Taxes

11

GVA at factor cost

GVA at basic prices – Net Production Taxes

 

 

Only those incomes that are come from the production of goods and services are included in the calculation of GDP by the income approach. True OR False.

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Answer: True

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GDP calculation Methods:

Expenditure Method:

  • The expenditure approach focuses on the expenditure involved in the production of goods and services. It classifies based on consumption and investment.
  • Consumption expenditure includes household consumption of goods and services (C). It also includes government’s expenditure on goods and services to fulfill social welfare needs (G).
  • Investment expenditure refers to the expenditure made by companies and production units for raising capital (I). Investment expenditure also includes an acquisition of valuables such as precious metals or jewelry.
  • Expenditure also includes imports and exports made by companies and the government. 
  • GDP= C (household consumption) + G (government expenditure) + I (investment expense) + NX (net exports= Total exports minus total imports).

Income Method:

  • The income method of calculating national income takes into account the income generated from the basic factors of production.
  • These include the land, labor, capital, and organization. And in addition to income accrued from these factors of production, another important component of income is mixed income. 

The Income Method – adding together factor incomes:

  • GDP is the sum of the incomes earned through the production of goods and services.
  • Incomefrom people in jobs and in self-employment (e.g. wages and salaries) + Profits of private sector businesses + Rent income from the ownership of land = Gross Domestic product (by sum of factor incomes)
  • While computing national income using the income approach, economists exclude transfer payments such as gifts and donations and profits from the sale of pre-owned goods. They also exclude income from the sale of shares and debentures.
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Daily Current Flash Cards 2020 Prelims 2020
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