TS Inter 1st Year

Telangana TSBIE TS Inter 1st Year Environmental Education Study Material 6th Lesson Development in Telangana Textbook Questions and Answers.

TS Inter 1st Year Environmental Education Study Material 5th Lesson Development in Telangana

Essay Questions

Question 1.
Write about Telangana and its development.
Answer:
TELANGANA :
Telangana became the 29^th state of India on June 2, 2014. It was earlier part of the unified state of Andhra Pradesh. The state, which, at the time of formation, comprised 10 districts, is now divided into 31 districts for more efficient administration. Hyderabad, the largest city in the state, is the capital. Other important cities are Warangal, Khammam, Nizamabad and Karimnagar. Telangana is the 12^th largest state in the country in terms of area as well as population, according to the 2011 census. The population is more than 3.5 crores. The literacy rate in Telangana is 66.46% as against the national average of 74.04%.

The state has large tracts of land available as well as smaller parcels of land which are suitable for setting up factories and workshops for the production of auto components and spare parts as well as textiles. Telangana has large reserves of forest area. Apart from natural resources, Telangana also boasts of a significant amount of Software exports.

Sectoral Composition :

1. Agricultural Sector
2. Industrial Sector
3. Services Sector

I. Agriculture Sector :
Agriculture plays a pivotal role in the economy of a state and is vital for inclusive growth. The Telangana Department of Agriculture was created mainly to provide Agricultural Extension services to farmers and to transfer the latest technical knowledge to the farming community. The state is endowed with bountiful resources, has good soils, diversified cropping patterns and major irrigation systems fed by rivers like the Godavari and the Krishna. Farmers in Telangana mainly depend on rainfed water sources for irrigation. Rice is the major food crop. Other important local crops are cotton, sugar cane, mango and tobacco.

Recently, crops used for vegetable oil production, such as sunflower and peanuts, have gained favour. There are varieties of soils ranging from fertile alluvial to very poor sandy soils. The various soil types include chalkas, red sandy soils, dubbas, deep red loamy soils, and very deep black cotton soils that facilitate the planting of mangoes, oranges and flowers. Red soils are predominant, accounting for 48 percent of the total area. Black cotton soils, alluvial soil, rocks and boulders account for 25 percent, 20 percent and 7 percent of the area, respectively.

Agriculture Vision :
Despite the constraints, it is important to improve the agricultural situation in the state by duly harnessing the available agricultural potential and integrating it with technology and resources. To begin with, an attempt should be made to empower farmers in seed management and enable them to acquire good quality seeds at the right time and at affordable cost. Keeping in view the future requirements of agricultural production, a vision for Telangana has been framed as put forth hereunder :

Agriculture Development Vision

• Making farming a commercially viable endeavor.
• Providing easy access to inputs, finance, technology, and IT.
• Increasing irrigated area by utilizing the available surface and groundwater potential.
• Providing means for land development for efficient soil and water management.
• Providing trained extension staff for technology transfer at the door step of farmers.
• Identifying the yield gaps and bridging them through suitable technologies.
• Motivating the farmers to adopt Integrated Nutrient Management (INM) and balanced fertilization with necessary demonstration and training support.
• Providing short term weather forecasting for instant action.
• Promoting farm mechanization through access to farm machinery and equipment at affordable cost.
• Improving water use efficiency through drip and sprinkler irrigation.

Agriculture Schemes of Telangana

✓ Agricultural Technology Management Agency. (ATMA).
✓ Rainfed Area development (RAD) Component Under National Mission For Sustainable Agriculture. (NMSA).
✓ Rashtriya Krishi Vikash Yojana. (RKVY).
✓ Soil Health Management.
✓ Sub-Mission On Agricultural Mechanization. (SMAM).
✓ Soil Health Card.

II. Industrial Sector :
Telangana is home to large industries in pharma, engineering goods and defence. Several major manufacturing and services industries are in operation including textiles and apparels, mines and minerals, automobiles, auto components, spices, horticulture, and poultry farming.

The industrial sector in Telangana provides employment opportunities to 17.8% of the total workforce in the state. This sector registered a growth of 83.6% in 2017-18. Such remarkable growth has been possible largely due to the incentives being offered under the new government’s Industrial Policy

Framework, 2014. Several measures have been taken to speed up industrial growth. The government has allotted 1.5 lakh acres of land for the setting up of new industrial units. Rs.30,000 crore is being spent on the Telangana Water Grid to ensure drinking water supply to every house. 10% of the water under this grid will be allocated for industry. The state has become completely self-sufficient with regard to electricity. Six industrial corridors are envisioned along important national and state highways.

In the first phase the Hyderabad-Warangal, Hyderabad-Nagpur and Hyderabad-Bangalore industrial corridors are being developed. Life Sciences Information Technology and Aeronautics are among 14 core sectors identified under the new policy. Food processing, automobiles, textiles, plastic and polymers, FMCG (Fast Moving Consumer Goods), engineering and capital goods are some of the others. The Kakatiya Mega Textile Park is coming up at Warangal, making it the textile hub of Telangana.

TS-iPASS :
The government has framed many proactive policies to encourage the growth of industry in the state, the most important of which is the TS-iPASS ACT which was framed shortly after the formation of the state in 2014. TS-iPASS or Telangana State Project Approval and Self-Certification System is the new fast-track industry policy of the government of Telangana. It is a single window clearance system for new investors in the state. It provides applicants the right to timely clearances.

This is the first time in the world that such cleamaces have been provided. A time limit of 15 days has been set for megaprojects. Applicants need not go to different departments for approval of projects as there is a common application form. There is Nodal Officer and provision of penalty if there are departmental clearance delays. There is zero tolerance for corruption. The essence of the policy is Minimum inspection and maximum facilitation’.

Telangana was ranked No. 1 in ‘Ease of Doing Business’ among all the states and union territories of India in 2016 and was ranked 2^nd for the year 2017.

III. Services Sector :
Telangana’s services sector covers a wide variety of activities such as trade, hotel and restaurants, transport, communication, financing, insurance, real estate and business services. The services sector delivers “intangible” goods in all social and economic sectors in the state economy excluding broad agriculture and industry sector categories. The sector recorded strong annual average growth rate of more than 9% in the last decade. Real Estate and Business services is the leading subsector with a share of 15.6%, followed by the Hotels and Restaurants services with a share of 13.1%. Banking and Insurance stands at 6.6%. Some of the sub-sectors make huge indirect contributions. For instance, ‘transport and communications’ add immensely to infrastructure.

Tourism is growing in importance and contributing to the state’s economy. Telangana State Tourism Development Corporation (TSTDC) is a state government agency which promotes tourism in Telangana. Telangana has a variety of tourist attractions including historical places, monuments, forts, waterfalls, forests and temples. The Charminar Golconda Fort and Chowmohalla Palace in Hyderabad, the forts of Warangal and Bhongir, the temples at Warangal, Basra, and Bhadrachalam, the Kuntala waterfalls near Adilabad, and the Papikonda National Park close to Khammam are some of the places of interest.

Question 2.
Write about Telangana Industries.
Answer:
The Ministry of Environment and Forests, Govt, of India has classified industries into four categories based on the levels of pollution generated. They are : red 1 and 2, orange, green and white. Red category industries cause the most pollution and include fertilizers, pharma, tanneries, and refineries. In order to facilitate environmental clearance, the Telangana government decreed that only Red 2 category of industries would go to the government of India for clearance. 90% of applications could be cleared by the state government. The Telangana government has identified more than 1000 polluting industries in and around Hyderabad and is in the process of getting them shifted far away. Hotels, however, have been exempted.

I.T. Industry in Telangana :
Over the last few decades, Telangana has also become the hub of Information Technology. In the 1990s an exclusive software park for the I.T sector, the first of its kind in the country, was established near Hyderabad and is called the HITEC City (Hyderabad Information Technology and Engineering Consultancy City). The township is called Cyberabad. Leading IT companies like Facebook, Google, IBM, and Microsoft hold significant presence in Hyderabad. Even after the bifurcation of Andhra Pradesh, the I.T industry in Telangana has continued to flourish and today Telangana contributes 10% of the country’s exports in I.T.

Mining in Telangana :
Telangana is a state which is rich in minerals. It contains 20 percent of the country’s coal deposits and is rich in limestone deposits that cater to cement factories. It has other mineral resources like granite, bauxite, and mica. The extensive coal reserves around Yellandu are excavated by the Singareni Collieries Company Ltd for power generation and industrial purposes. There are limestone deposits in the area, which are used by cement factories. Telangana also has deposits of bauxite and mica. Kothagudem, Jammikunta, and Palwancha are prominent industrial towns in the state. NTPC in Ramagundam is the largest thermal power plant in South India.

Pharma Industry In Telangana :
Telangana has diversified its industrial base, with the thrust on high-tech sectors including pharmaceuticals, biotechnology, and nanotechnology. A pharma city, one of the biggest in the world, is coming up in Mucherla, R.R district. The Telangana government has envisaged establishing a Life Sciences Infrastructure Fund which will be the first of its kind in the country. The Rs 1.000 crore fund will be used to create sophisticated infrastructure for the pharmaceuticals, biotechnology, and medical devices industries. Telangana already accounts for one-third of the pharma industry in the country.

Telangana TSBIE TS Inter 1st Year Environmental Education Study Material 5th Lesson Effects of Industrial Development Textbook Questions and Answers.

TS Inter 1st Year Environmental Education Study Material 5th Lesson Effects of Industrial Development

Esssay Questions

Question 1.
Write an essay on pollution in terms of Industrial Development. List out the reasons why pollution control measures are difficult to implement.
Answer:
The Dark side of Industrial Development :
The Industrial Revolution in the eighteenth century marked the beginning of the mass production of goods. As technology developed, factories multiplied exponentially. Prior to industrialization, there were only small factories or cottage industries, often run by small families. Factories were few in number and working hours were limited. By and the environment was clean.

In order to provide for the daily needs of the growing population, different types of industries have now been established. These industries use raw materials, process them and produce finished products. Besides the finished products, a good number of by products are produced. If the processing of waste is a cost prohibitive one, then the industrialist is often tempted to throw the waste matter into the environment instead of disposing it in a responsible manner. The waste may be in the form of gas, liquid or solid. The gases are usually released into the atmosphere, the liquids are discharged into aquatic bodies like canals, rivers or seas and solid wastes are either dumped on the land or in aquatic bodies.

In all the cases, the air, water or land is fouled due to the dumping of wastes. The fouling of the environment because of industrialization is referred to as ‘industrial pollution’. It is the undesirable outcome when factories or other industrial plants emit harmful by-products and waste into the environment. Emission of toxic chemicals into the atmosphere causes air pollution. Effluents released into water bodies cause water pollution. When soil is degraded by harmful substances, it is called soil pollution.

The Central Pollution Control Board, India has identified 17 industries which cause the most pollution. They include industries pertaining to fertilizers, pesticides, and pharmaceuticals, apart from petroleum refineries and steel plants.

Air Pollution :
Due to industrial activities, a variety of poisonous gases and substances like carbon dioxide, sulphur dioxide and dusts are spewed into the atmosphere, causing acute pollution. The quality of the air is vitiated also by the large number of autgmobiles which emit toxic fumes and particulate matter. The .burning of crop stubble, common in states like Punjab and Haryana, is another major cause of air pollution, especially in winter. Delhi is covered with thick smog and a “toxic cloud” at such times. The presence of pollutants in the air disturbs the natural eco-system. It affects the well-being and health of all living organisms, including human beings, animals and plants.

Water Pollution :
Effluents released by industries into water bodies contain harmful pollutants like lead, mercury and petro-chemicals. These pollutants contaminate the water of lakes, ponds, rivers and seas. Aquatic plants and animals are adversely affected. The improper disposal of sewerage and the seepage of industrial effluents into the soil results in the contamination of groundwater. The water becomes unfit for human consumption as it contains harmful compounds and also disease causing pathogens.

Hussain Sagar Lake, once the pride of Hyderabad is now choked with agricultural waste, pharma residues, municipal sewage, and industrial effluents. The Ganga has now become the 6^th most polluted river in the world. Numerous tanneries, textile mills, and chemical plants discharge untreated waste into it everyday. Besides, about 3 billion litres of untreated sewage are dumped into the river daily. The National Mission to Clean Ganga aims to clean the Ganga and its tributaries in a comprehensive manner.

Soil / Land Pollution :
Soil Pollution is defined as the presence of toxic chemicals in soil, in high enough concentrations to pose a risk to human health and/ or the ecosystem. Pesticides and chemical fertilizers used by farmers contain harmful compounds that contaminate the soil and are harmful when ingested by human beings or animals. Effluents and sludge discharged by industries pollute not only water bodies but land too.

Why Pollution Control Measures are Difficult to Implement :
In developing and under developed countries Pollution Control measures are difficult to implement because of the following reasons :

Lack of Policies to Control Pollution :
Lack of effective policies and poor enforcement of laws framed by the Pollution Control Board has resulted in unchecked pollution.

Use of Outdated Technologies :
Many industries still rely on old technologies so that they can avoid the high cost of incorporating new technology. These industries continue to generate large amounts of toxic waste.

Unplanned Industrial Growth :
Many industries have expanded in a haphazard and unplanned manner Owners of these industries may flout rules and norms pertaining to pollution control as it may not be economically feasible or profitable to do so.

Presence of Large Number of Small Scale Industries :
Many small-scale industries and factories that do not have enough capital rely on government grants to run their day-to-day businesses. They may not fall under the ambit of stringent environment regulations.

Inefficient Waste Disposal :
Water pollution and soil pollution are often the consequence of inefficient disposal of waste.

Question 2.
List out the impact of Industrial Development and other human activities on the environment and the need for sustainable development.
Answer:
Since 1950 urban populations have increased seven-fold, energy use has soared five times, while the amount of fertiliser used is now eight times higher. Human activities are responsible for causing environmental degradation. The deterioration of the environment is manifested in many ways such as the depletion of resources like air, water and soil: the destruction of ecosystems; habitat destruction; the extinction of wildlife; and pollution.

The table below highlights the impact of development on the environment.

Adverse Impact of Development on The Environment

Developments/Human Activities in the Modem Age	Impact on the Environment
Urbanization and Population Explosion	• Deforestation/ Loss of billions of forest trees. • Forest areas are converted to farm lands/ residential townships. • Depletion of available natural resources. • Decrease in rainfall. • Increase in global temperature/ global warming affecting humans and also animals like the polar bear. • Changes in climatic conditions. • Increase in natural calamities like floods, earthquakes and droughts. • Loss of wild life – tigers, elephants, snakes etc. • Extinction of several plant species.
Developments/Human Activities in the Modem Age	Impact on the Environment
Industrialization and Mining	• Loss of raw materials like wood, ores and minerals. • Discharge of effluents/by products into the air. water and soil, thereby causing severe pollution. Water pollution – causes diseases like cholera and cancer, affects marine life. Air pollution – causes respiratory diseases, including cancer, vitiates the quality of air. • Fertility of soil is affected. • Loss of massive tracts of land, affecting crop production.
Commercial fishing	• Disturbance to the ecosystem, ecological imbalance, disruption of the food chain. • Threat of extinction of aquatic animals such as tunas and sharks. • Destruction of coral reefs.
Commercial Agriculture and Livestock Farming	• Deforestation due to plantation crops, burn and slash agriculture, grazing of livestock. • Chemical pesticides and fertilizers used in commercial agriculture are toxic. • Livestock (farm animals like cows and sheep) accounts for 40% of global emissions of gases like methane which contribute to global warming.
Tourism	• Loss of forest land. • Pollution of the natural resources due to construction of hotels, tourist influx, usage of plastic. • Disturbance to the ecosystem. • Threat to wild life.
Developments/Human Activities in the Modem Age	Impact on the Environment
Production & disposal of waste	• Waste material, such as sewage, either in solid or liquid or gaseous form, is toxic and poses a health hazard. • Improper disposal and dumping of garbage in cities leads to unhygienic conditions and spread of diseases. In Hyderabad alone, about 4500 tons of garbage is collected every day, of which only 30% is recycled.
Killing of Wild Life for trade	• Unchecked poaching has led to several species of animals becoming extinct. For eg. elephants are killed for their ivory tusks, rhinos for their horns, antelopes for fur, sharks and gorillas for meat, tigers for their skin and for other organs which are believed to have medicinal properties.
Transportation	• Particulate matter (PM) emitted by vehicles causes smog, respiratory diseases, cancer. • Noise pollution caused by vehicles and jets affects the nervous system; hearing is impaired.

The Cost of Development :
Developed countries are generally highly industrialized and are technologically far more advanced than developing or under developed countries. The per capita income of the citizens in developed countries is very high and the people living there enjoy high standards of living. Thus, a country is deemed to be ‘advanced’ if it is dotted with skyscrapers, industries and express highways, and its citizens drive fancy SUVs and use all the latest technological gadgets.

But at what cost does such development take place? In his quest for Development, man is ruthlessly destroying the environment. It is estimated that for paper alone, about 4 billion trees are cut worldwide every year. Every”day, more than 2 million tons of sewage and industrial and agricultural waste are discharged into the world’s water, the equivalent of the weight of the entire human population. Deforestation, industrialization and population explosion have wreaked havoc on Nature. Glaciers are melting and groundwater aquifers are running dry. Weather patterns are changing worldwide and thousands of species of animals and plants are becoming extinct.

Man cannot escape the consequences of his actions. Global warming has not only made many places inhospitable for a living but has also affected crop production and led to an increase in natural calamities. Hoods, droughts, and earthquakes have become common throughout the world. Natural resources like water are rapidly becoming scarce. Recently Cape Town, the 2^nd most populous city in South Africa, faced a major water crisis and narrowly escaped Day Zero, the day it was expected to completely run out of water. Cities like Bangalore, Moscow, and London are predicted to meet a similar fate.

The Need for Sustainable Development:
If Man wishes to survive on this planet, it is clear that he must live in harmony with the environment and stop the indiscriminate destruction of natural resources. He must strike a balance between his desire to improve the quality of his life and the preservation of the environment. Over-exploitation of the environment for economic profits will inevitably lead to a tipping point where natural resources can no longer be replenished at the place where they are being depleted.

The United Nations Conference on Environment and Development (UNCED) defines the concept of Sustainable Development. Sustainable Development is a development that meets the needs of the present generation without compromising the ability of future generations to fulfill their own needs. Sustainable development rests on three pillars – Environment, Economy, and Social Equity. If one of the pillars is weak, the system will collapse. Economic Sustainability ensures that the greed to make profits is curbed and that the environment is not damaged. Social Equity envisages the just and equitable sharing of resources among the rich and the poor, whether on an individual or global level. These pillars are also referred to as the 3 Ps- People, Profit, and Planet.

Telangana TSBIE TS Inter 1st Year Environmental Education Study Material 4th Lesson Factors Affecting Development Textbook Questions and Answers.

TS Inter 1st Year Environmental Education Study Material 4th Lesson Factors Affecting Development

Essay Questions

Question 1.
Define “Environment and Development”. Describe factors affecting development.
Answer:
‘Environment’ is a broad term and conveys different .meanings in different disciplines. In Natural Sciences, Environment is defined as a system which provides natural surroundings for the existence of organisms (including humans) and which is a prerequisite for their evolution. Abiotic components (e.g. : air, water, sunlight, minerals) and biotic components (e.g. : humans, animals, birds, insects) are the main elements of the environment. They are interlinked individually and collectively in myriad ways.

What is Development?
Development is the process of improving the quality of all human lives in three equally important aspects. These are

• Raising the standards of living i.e. income and consumption, levels of food, medical services and education through relevant growth processes.
• Creating conditions conducive to the growth of selfesteem through the establishment of social, political and economic systems and institutions which promote human dignify and respect.
• Increasing the freedom to choose by enlarging the range of choice variables, e.g. : varieties of goods and services.

Thus, development is not purely an economic phenomenon but rather a multidimensional process involving reorganization and reorientation of the entire economic and social system.

Factors Affecting Development :
1. Physical Factors :
The physical environment and natural geographic features of a region have a direct impact on the kind of development that takes place there. For instance, the type of soil and the fertility of the soil at a place, proximity to rivers, as well as the climate and weather patterns determine whether agriculture is feasible there and, if so, what kind of crops can be grown. Factories are setup in areas which have an abundance of natural resources like wood and water or where there are rich deposits of minerals and ores. Hilly areas which enjoy a salubrious climate are developed as places of tourist interest. Kodaicanal, Ooty and Nainital are popular summer resorts bemuse of their picturesque surroundings and cool climate.

2. Economic Factors :
The economic health of a region and the development that takes place there are inter dependent. If the economy thrives, there is a greater scope for developmental activities. More industries can be set up, infrastructure like roads, schools, hospitals and railway stations can be improved and better facilities are provided to the residents. These developmental activities, in turn, stoke the economy and attract more investment.

In order to attract foreign investments, the Government of India has facilitated the setting up of several Special Economic Zones (SEZ) in various states. Business units that setup establishments in a SEZ are entitled to several incentives and a simplified operating environment. Besides, no license is required for imports.

The figure below shows the Poverty Trap, which is often thought of as a cycle. Low investment in key areas such as infrastructure (roads, rail, telecommunications etc.), education and healthcare can have dire consequences for a population. Populations in countries hovering at low levels of development can become more vulnerable to ill health, as seen with regard to HIV and AIDs in sub-Saharan Africa. This, in turn, reduces the productivity of the workforce. In addition, lack of education leads to a lower quality work force, while poor road networks discourage investors.

3. Social Factors :
There are many social factors that affect the level of development of a place. It is easier to execute developmental projects in a society that extols hard work and gives recognition to merit. Conversely, lack of social motivation for betterment, unproductive social activities such as war and having to provide for very large families are factors which hinder development. Negative socio-cultural practices such as gambling and drinking, and lack of skills due to poor training and education are other factors which impede development.

India is making rapid strides in many fields but it is still bogged down by various social evils such as the prevalence of the caste system, child labour, illiteracy, gender inequality, superstitions, and religious conflicts. These social ills are stumbling blocks in the path of national development.

The causes and effects of these social ills are given below, along with solutions for their eradication. It is only when these social ills are eradicated that the country can truly develop in all spheres of life.

Question 2.
Write about Social Evils.
Answer:

Telangana TSBIE TS Inter 1st Year Environmental Education Study Material 3rd Lesson Population Explosion and its Consequences Textbook Questions and Answers.

TS Inter 1st Year Environmental Education Study Material 3rd Lesson Population Explosion and its Consequences

Easy Questions

Question 1.
What is population? Write briefly about population explosion and causes of population explosion.
Answer:
Introduction :
Population is a group of individuals of a particular species, sharing a common gene pool and occupying a particular area at a specific time.

Population Explosion refers to the sudden and rapid rise in the size of population, especially human population. A drastic growth in population beyond normal limits is called population explosion. Population explosion is a global phenomenon but is more prominent in under developed and developing countries. The population of the world currently (May 2018) is about 7.6 billion. While China is the most populous country with over 1.38 billion inhabitants, it is predicted that India will overtake China by 2025. India and China together account for about 37% of the world’s population, Given below is a list of the world’s most populous countries along with projected figures for 2030.

The causes of population explosion are as follows :
a) Accelerating Birth rate / High Fertility rate :
The Fertility rate of a country refers to the number of children a woman gives birth to during her child bearing age. High fertility rates lead to a rapid increase in the population of a country. High fertility rates are prevalent in countries which are underdeveloped and where literacy rates, especially among women, are low. It is not a coincidence that 9 out of the 10 top countries with the highest fertility rates are in Africa, a continent in which the inhabitants of several regions routinely face abject poverty, starvation, famine, drought and disease, besides internal strife. Nigeria, a country in Africa, has the world’s highest fertility rate. On an average, women in Niger give birth to 7 children each. In India, the fertility rate is 2.2. Bihar, one of the most backward states, has the highest fertility rate of 3.34. Telangana has a fertility rate of 1.78.

b) Decrease in Infant Mortality Rate :
Infant Mortality Rate refers to the number of deaths of infants under 1 year old per 1000 live births. An improvement in medical science and technology, better maternal care facilities and wide usage of preventive drugs (vaccines) has reduced infant mortality rates in many countries, including India. 1MR is an index of the health of a country. Monaco, Japan, Iceland and Singapore are countries with an IMR of less than 2.5. The IMR in India (as>in 2016) is 34.

c) Increase in life expectancy :
Due to improved living conditions, better hygiene and sanitation habits, better nutrition, health and education, the average life expectancy of human population has improved significantly. Steady supply of good quality food, makes sure that the population is well nourished. Population grows when they are adequately nourished. Japan, Switzerland and Singapore have the highest life expectancies in the world, with an average life expectancy of about 83 years. The life expect^npy in India is about 68 years (as in 2015).

d) Increased immigration :
An increase in immigration Often contributes towards population explosion, particularly in developed countries. It happens when a large number arrive at an already populated place with the intention to reside permanently.

e) Less space than required :
In urban cities, it is often found that there is very less scope for making available extra space to absorb the additional population. In such cases, a large population is seen packed into a smaller space.

The details of the Indian population density and age distribution are given in the map :

Question 2.
Explain the consequences of population explosion.
Answer:
Consequences of Population Explosion :
i) Over Exploitation of Natural Resources :
Due to high growth in population, the requirements of the people have increased at a tremendous rate. Consequently, the available natural resources are getting depleted. The Earth has limited natural resources like water, land, flora and fauna, minerals and fossil fuels. Over-exploitation has created a severe depletion of resources. Humans today extract and use around 50% more natural resources than they did just 30 years ago. It is estimated that within 40 years, the reserves of petroleum will vanish completely. Water scarcity is rampant and it is common for states to be engaged in bitter disputes about their rightful share of water.

ii) Industrialization and Urbanization :
Urbanization is the result of growth of population in urban areas. As a country develops from primarily an agricultural to an industrial economy, large – scale emigration of rural residents to towns and cities takes place. During the process, the growth rate of urban areas is typically double the pace of overall population increase. Urbanization is taking place at a fast rate in India. The population residing in urban areas in India, according to the 1901 census, was 11.4%. This count increased to 28.53% according to the 2001 census, and in 2018 it stands at 33.2%.

Urbanization eventually leads to a severe decline in the number of people living in the countryside, with negative population growth rates in rural areas. Urban areas face acute shortage of land and water and other environmental problems. Vast areas are converted into slums.

iii) Shrinking Agricultural Land :
Agricultural lands are being converted into residential settlements and industrial zones. The per capita availability of land for cultivation declined by nearly 50% from 1.1 acres in 1911 to 0.6 acres in 1971 in India. Since then it has shrunk much further. The small size of holding hinders adoption of modem technology in farming.

iv) Global Wanning :
Population explosion is linked with global warming. The increase in population leads to greater consumption of resources. The amount of carbon dioxide and other greenhouse gases that is produced increases. This causes a rise in global temperatures. The global average surface temperature has increased during the 20^th century by about 0.6°C. If it rises further, the consequences will be disastrous.

v) Environmental Pollution :
The tremendous growth in population has led to the degradation of the environment. Air, water and soil have got contaminated with various pollutants.

vi) Poverty, Malnutrition and Famine :
Millions of people live in hunger and suffer from malnourishment because they cannot afford to buy enough food, cannot afford nutritions food or cannot afford the arming supplies they need to grow enough good food of their own.

Poverty and malnutrition are a common phenomenon in underdeveloped countries. Africa, which has the highest population growth rate, is also the world’s poorest continent. Countries in Sub-Saharan Africa suffer from frequent droughts and famines and have high rates of starvation deaths.

vii) Population reduces the Rate of Capital Formation :
In underdeveloped countries, due to high birth rates and low life expectancy, the number of dependents in families is high. Nearly 40 to 50 per cent of the population is in the non-productive age group, which simply consumes and does not produce anything. The per capita income is low because the dependents have to be fed and taken care of. Job opportunities too are less in poor countries. Thus, there is very little scope for savings or capital formation.

viii) Population growth weakens Social Infrastructure :
In welfare states like India, the government pledges to meet the social needs of the people by providing basic facilities like free or subsidised education, housing and medical aid. But the vast increase in population casts a heavy burden on the government and details many plans.

Question 3.
Explain population control measures or initiatives in India.
Answer:
Population Control Measures / Initiatives in India :
There are no easy solutions to the problem of population explosion. Population growth is inextricably linked with factors like poverty and illiteracy. It is only when people are educated and enjoy reasonably good standards of living that the population of a country will stabilize. It is not a coincidence that countries like Norway, Switzerland, Singapore and the U.S.A which have a high Human Development Index have a low growth rate of population. In India, economically backward states like Bihar, U.P and Rajasthan have the highest birth rates. A multipronged effort is needed, therefore, to tackle the problem of population explosion.

In countries like India, societal norms and prejudices influence the size of families. The preference for a male child, prevalence of child marriages and the low status accorded to women in many communities are some factors which contribute to high birth rates.

India was the first country in the world to launch a nation wide Family Planning programme in 1952. Government agencies and institutions were mobilized to spread the message of the importance of having small families. The media was extensively used for propaganda. People were reminded of the advantages of small families. It was pointed out that children in such families would be healthy and happy as parents could devote more time and resources to them. Cheap contraceptives were distributed in even the most remote villages, sex education was popularized, sterilizations were conducted and aborption was legalized. Couples were persuaded to go in for sterilization after the birth of two children.

Every country must devise its own ways to tackle the menace of over population. In 1979, China started the ‘one child per family’ policy. Draconian measures were used to implement the law. Those who defied the law and had a second child were subjected to brutal punishment. The child too bore the brunt as the government denied him/her education and health care. The infamous population control measure was successful in bringing down the birthrate but at the cost of gross human rights violations. Such coercive tactics to enforce birth control are abhorrent and are ill-suited for a democratic country like India.

Measures to Control Population :

1. The government should regularly conduct programmes to educate the public about the ills of over population.
2. Social organizations and NGOs should actively inform people about the available methods of family planning.
3. People should be persuaded, but not coerced, to undergo sterilization after having two children.
4. Female literacy should be encouraged so that women can take informed decisions about the size of their families.
5. The ban on child marriages should be enforced strictly.
6. Maternal and childcare facilities should be improved.

Are there any advantages of High Population Growth?
An increase in the rate of population growth is not devoid of advantages. The teeming population of youth in developing countries like India can play a vital role in building the economy. Their strength and talents can be harnessed in various ways. In contrast, advanced countries like Japan and many European countries face peculiar problems associated with a sharp decline in population. Japan has become a society of aging people because of a rapid fall in fertility rates and an increase in longevity. Nearly a quarter of the population is above 65 years. Because of a shrinking labour force, dependence on robots is increasing, both at home and in factories. There is no one to take care of the elderly population.

Telangana TSBIE TS Inter 1st Year Environmental Education Study Material 2nd Lesson Environmental Stakeholders Textbook Questions and Answers.

TS Inter 1st Year Environmental Education Study Material 2nd Lesson Environmental Stakeholders

Essay Questions

Question 1.
Write about Environmental stakeholders.
Answer:
Stakeholders are defined as the people and organizations who are likely to be affected, either directly or indirectly, by an action or policy of the government or by the action of an industry or organization. Stakeholders have a vested interest in something and are likely to gain or loss on account of any changes initiated by others or by their own intervention.

In the environmental context all citizens are stakeholders as they are directly or indirectly affected by developmental activities which alter the water, air and soil around them. When industries are setup in a town, the economy picks up, jobs are created and infrastructure improves. Many residents reap the benefits. These people derive some advantages and are affected favourably by the environmental decision. At the same time, however, the residents may suffer from ill effects of industrialization. The factories may discharge pollutants into the air and water, thereby harming the health of the people. The pollutants released may cause water bodies to become a breeding place for vectors like mosquitoes which spread diseases. The water bodies may also emit a foul odour due to the release of gases like hydrogen sulphide and ammonia. The residents, therefore, may also suffer adversely as a consequence of the environmental decision.

Similarly, when a dam is constructed, hydro – electricity is generated, providing clean energy to thousands of homes. Vast areas get irrigated, bringing cheer to farmers. But the same dam may submerge scores of villages, forcing the displacement of thousands of villagers. Thus, while some are benefitted by the project, others are adversely affected.

The stakeholders in projects affecting the environment include government representatives, businesses, scientists, land owners, and local communities who are traditionally dependent on the nearby natural resources. The objectives of each of the groups vary and it is difficult to evolve a common agenda and uniformity while implementation of developmental projects. The United Nations Environment Programme identifies nine specific major stakeholder groups for sustainable development: Farmers, women, scientific and technological community, children and youth, indigenous peoples and their communities, workers and trade unions, business and industry, non-govern-mental organizations, and local authorities (UNEP 2015).

Question 2.
Describe the categories of stakeholders.
Answer:
Environment stakeholders can be broadly categorised into the following categories based on the cause-effect relationship and the management systems :

I. Affected parties :
The proposed projects, such as the setting up of an industry or a multipurpose project like a dam, may induce changes in the surrounding environment thereby affecting the health and socio-economic conditions of the residents in those areas. There may also be a cultural invasion (especially, impacting tribes who have a distinct culture of their own). The parties may be affected directly or indirectly.

a) Directly Affected Parties :
It involves a direct cause and effect due to the proposed changes in the surrounding. The effect may be a positive or negative one, leading to gain or loss on account of the proposed change.

i) Positive Affect :
This may be due to appreciation of the property or sub constracting and employment opportunities as a result of the proposed changes. The people who stand to gain are called Risk Gainers.

ii) Negative Affect :
The proposed project may lead to damage of the property, displacement leading to migration. The people who stand to lose are called Risk Losers.

b) Indirectly Affected Parties :
It involves an indirect effect due to the modifications induced into the surrounding environment. For instance, even people who reside in distant places may be indirectly affected by the discharge of pollutants and depletion of natural resources.

II. Project Proponents / Risk Perpetrators :
The proponents of a project or Risk Perpetrators are one of the major stakeholders. The proponent may be the government or an entrepreneur (firm / organization / private / public limited company / Individual) who is in the process of setting up an industry.

III. Regulatory Authorities or Committees / Risk Managers :
These are the statutory authorities who are connected with regulating and monitoring the implementation of the guidelines / rules. These authorities include regulatory bodies from central, state, and local govemments. The committees constituted by the government and the non – governmental organizations (NGO) and other civic bodies also play a vital role in representing the advocacy of the community to highlight issues and their redressal.

Of course, these categories are not mutually exclusive For example, a risk gainer might also be a risk loser. An affected person may benefit in some ways and lose in other ways. (e.g. : a person gets employment in a factory but is exposed to dust and smoke); a risk perpetrator is likely to be a gainer as well and may also be expected to be a risk manager, (an industrialist is interested in economic profits but also convinces the local community about the benefits of the project and tries to allay their apprehensions).

The involving of multiple stakeholders brings together individuals with different perspectives, interests and positions. The success of any project depends on the mutual co-operation among different stakeholders with clear information flow while imparting mutual trust and fulfilling the assurances. Sometimes this may have the potential to slow the implementation of a project and create conflict. Though, potential overlaps and ambiguities exist, the co-operation and interaction between different stakeholders will bring radically different perspectives and may lead to a better decision making process.

Question 3.
Explain “3 Rs” Approach.
Answer:
It is key for the success of any project / policy to identify and engage all the stakeholders right from the beginning of the project. The most basic stakeholder analysis involves identification of people, groups, and institutions that have some interest in a project or affected by it. The government or project proponents will undertake a stakeholder analysis prior to the planning and development of an environmental project. The objective of stakeholder analysis is to identify and assess the relevant view points of key people, groups or institutions on the proposed activity.

“3 Rs” Approach :
Rights, Risks, Responsibilities before assembling stakeholders, the project planners or meeting facilitators should consider acknowledging each stakeholder’s individual rights, risks, and responsibilities. The ”3 Rs” approach has been championed by the United Nations. In this approach, project planners acknowledge and characterize stakeholder :

• Rights (e.g. : rights to extractable resources, rights of land tenure, human rights).
• Risks associated with a project (e.g. : loss of reputation, economic loss, loss of cultural integrity).
• Responsibilities in planning and executing the project (may be included in a formal agreement or contract).

Facilitating inclusive stakeholder engagement
Following a pre-planning stakeholder analysis, a project proposal is typically announced and stakeholders are invited to participate in the process.

Bringing stakeholders face to face is an important step of the engagement process. Discussion among stakeholders has been shown to help foster collaboration and the willingness to participate. Capacity development is another approach, which involves building the capacity of stakeholders to understand and solve the issue at hand and has been associated with successfully project outcomes. It can include training work-, shops, courses, or professional development for key stakeholder groups to provide them with the necessary knowledge, skills, and tools for more productive engagement.

Question 4.
Explain the benefits of stakeholder consultation process.
Answer:
Project Proponents :

• The project proponent will benefit with the inputs obtained, during consultation process leading to better planning by incorporating the feedback.
• The perspectives of local stakeholders can allow for solutions better suited for the social and cultural context of a region.
• It takes into account a diversity of values and facilitating empowerment, trust and equity by including local communities in the decision making process and consensus can be arrived before a new rule, plan or decision takes effect.
• This can lead to a more harmonious process and avoidance of unnecessary conflict ensuring smooth execution of the projects.

Affected Parties :

• It reduces the marginalization of under-represented groups and provides an opportunity to the most impacted for expressing their concerns.
• The stakeholder will feel the ownership and as a part of the system and can lead to increased support for smooth implementation of the project.
• Another potential benefit of engagement from this perspective is social learning, where stakeholders can learn from each other and develop new relationships along the way.

Corporate Social Responsibility in India :
CSR is a concept, wherein an enterprise is accountable for its impact on all relevant stakeholders and includes the social and environmental considerations into a company’s operations. India is the first country in the world to make Corporate Social Responsibility (CSR) mandatory, following an amendment to the Company Act, 2013 in April 2014. It mandates the Businesses to invest 2% of its profits in areas such as education, poverty, gender equality and hunger.

Question 5.
Describe some case studies on the issue of stakeholder participation.
Answer:
1) The Singur-Tata Motors controversy is an apt illustration of the turmoil that ensures when the interests of stakeholders are not adequately taken into consideration. In 2006, the Tata group was granted permission by the government of West Bengal to setup their Tata Nano factory on 1000 acres of fertile, agricultural land in Singur. However, the project faced stiff resistance from displaced farmers who felt that they were losing their only source of livelihood and were not being given sufficient compensation in terms of money or jobs at the proposed factory.

The displaced farmers received massive support from the opposition party led by Mamata Banerjee as well as from environmentalists like Medha Patkar and Arundhati Roy. The project was called off in 2008 and was shifted to Gujarat where farmers received four times the market price for the land they gave up.

2) The Sterlite Copper Agitation in Thoothukudi, Tamilnadu, is another instance of the violent clashes that erupt when commercial interests of industrialists override environmental concerns and safety. Sterlite Copper started operations in Thoothukudi in 1997 after being driven out of Ratnagiri, Maharashtra due to environmental concerns. It was dogged by controversy and court cases right from the beginning. Residents complained of noxious gas leaks and poor effluent management for over two decades.

They suffered from chronic respiratory diseases and eye irritation. Environmentalists pointed out that the plant was too close to the ecologically sensitive region of the Gulf of Munnar, it had not created a sufficient green belt around the factory; that public hearings were not held before giving the plant a go-ahead; and pollutants like cadmium, copper, aluminium, lead and arsenic were seeping into the groundwater.

Things took a turn in March 2018 when Sterlite sought approval to build a second copper smelter. There were large scale protests by villagers, politicians and environmentalists. Film actor turned politician, Kamal Hassan, too joined the fray. Several people, including policemen, lost their lives in the agitation. The plant was finally shut down indefinitely in May 2018.

3) Land acquisition for Mumbai-Ahmedabad Bullet Train :
India’s ambitious Mumbai-Ahmedabad bullet train project costing $ 17 billion, expected to be constructed by August 2022, faced delays due to problems in land acquisition. It faced stiff resistance from farmers and tribal villages, especially in the Palghar district of Maharashtra. The National High Speed Rail Corporation Limited (NHSRCL) then took the initiative of involving women of 73 villages in Palghar district in the project. These women were entrusted with the task of facilitating communication between the village heads and NHSRCL engineers. Ateam of 15 women from various blocks was setup to explain the compensation packages being offered and the exact land requirement.

This method of stakeholder participation paid rich divi-dends. There is a participation change in the villagets. Till a few months ago, the survey teams could not even enter some of these areas! In Dahanu, for instance, where the project team even faced violence, officials have now been able to establish contact with all the 16 villages where land is required and were able to clear misgivings and lack of understanding about the project.

4) ‘Restore or Demolish’ : The Fading Glory of the Taj Mahal :
The Taj Trapezium case :
It is not merely displaced villagers, or farmers and fishermen who lose their source of livelihood, who are affected parties or risk losers. A concerned citizen too is a risk loser in the environmental context if he perceives a threat to his aesthetic enjoyment of a beautiful monument or a scenic place because of “developmental” activities. As a socially responsible citizen, he may be concerned about environmental issues that affect the general population.

In what is popularly referred to as the Taj Trapezium case’, Mr. M.C. Mehta, a casual visitor to the famed monument, was appalled by the damage caused to the structure by surrounding polluting industries. Being a Supreme Court lawyer, he filed a Public Interest Litigation in 1984. The case had far reaching consequences which are being felt to this day.

Located on the banks of the Yamuna in Agra, the Taj Mahal is considered one of the wonders of the modern world. The 17^th century mausoleum, made entirely of ivory-white marble, was built, by the Mughal emperor, Shah Jahan. Thousands of visitors come daily from all parts of the globe to admire the beauty of this monument.

Over the last few decades, however, the Taj Mahal has been getting discoloured and pitted and is losing its pristine beauty. The cause of the yellow discolouration is by the high levels of air pollution in the surrounding areas. The un-checked growth of iron foundries, chemical industries and brick factories, as well as heavy vehicular traffic, have all contributed to the problem. The Mathura oil refinery and the glass factories at Ferozabad too are a major source of pollution. Most of these industries lie within a 10,400 sq km trapezium shaped area around the Taj.

Mr.Mehta’s PIL led to the formation of committees to study the problem in depth. Finally in 1996 the Supreme Court suggested that 292 polluting industries located within the Taj trapezium area be relocated in a phased manner, unless they stopped using coal and started using natural gas, instead. The Court applied the principle of Sustainable Development in this case, observing that there should be a balance between economic development and environmental protection.

The court reaffirmed the “Polluter Pays Principle”, whereby the polluter would be liable to compensate the individual sufferers as well as bear the costs of reversing the damage to the environment.

Unfortunately, however, the implementation of the measures has been tardy. Today Agra is the 5^th most polluted city in India and the 27^th most polluted city in the world. In anguish and exasperation the Supreme Court reprimanded the U.P. Government in July 2018 and served an ultimatum – restore the Taj Mahal or demolish it. Spurred to action, the government promised to prepare a 100 year vision document for the conservation of the Taj, including closing down of polluting industries and promoting green transport.

Telangana TSBIE TS Inter 1st Year Environmental Education Study Material 1st Lesson Dimensions of the Environment Textbook Questions and Answers.

TS Inter 1st Year Environmental Education Study Material 1st Lesson Dimensions of the Environment

Essay Questions

Question 1.
Explain the term “Environment”.
Answer:
Environment refers to the sum total of conditions which surround a living being’s habitation. It includes both biotic (living) and abiotic (non-living) aspects. The word ‘environment’ has been derived from the French word ‘environir’ which means ‘to surround.’ Environmental Studies is a multidisciplinary subject which systematically studies human interaction with the environment and seeks to find answers to problems such as how the growing population on earth can be sustained with the finite resources of Nature.

Man has had a close relationship with his environment since time immemorial. Primitive man lived in the lap of Nature and derived nourishment and sustenance from the bountiful resources of Nature in the form of the air he breathed, the water he drank, the food he ate and the trees and caves in which he sought shelter. Man’s needs were few and Nature seemed a perennial source and supplier of pristine resources.

However, rapid technological advancements and unchecked urbanization in the last few centuries have altered the relationship between Man and Nature in unimaginable ways. The everincreasing growth in population led to the depletion and degradation of the environment. Over – exploitation of natural resources in the last century has led to an unprecedented crisis and has raised concerns not only about the resource availability for future generations but the very existence of the human race.

Question 2.
Write the relationship between Man and Environment. What are the impacts of Man on Environment?
Answer:
Man – Environment relationship :
The relationship between Man and his Environment can be categorised into four broad stages if we examine the history of the socio-cultural evolution of man. The four stages are :

1. Hunting and Food gathering.
2. Animal domestication and Pastoralism.
3. Agriculture.
4. Industrialization.

i) Hunting and Food gathering :
The life of primitive man was nomadic and unstructured. Man was dependent on his surroundings for food and other needs.

• Primitive man :
a) Man was part of the natural environment.
b) He lived in harmony with the environment and completely depended on the natural resources and food available in his habitation.
c) Later he began to hunt animals for food.

• Discovery of fire, invention of tools :
a) The necessity of tools for hunting and the invention of fire radically changed the life of primitive man and paved the way for the exploitation of natural resources.

ii) Animal domestication and Pastoralism :
The next stage of evolution was the domestication of animals for meat and milk. This led to greater control on the environment and reduced dependence on natural resources alone.

iii) Agriculture :
During this stage man started cultivating crops. There was no further need to lead a nomadic life. He now had a permanent habitation and this, in turn, paved the way for community living and a gradual increase in human population. In subsequent years he started clearing the forests, not only for the purpose of gathering firewood, but for agricultural use as well as for the construction of dwellings.

iv) Industrialization :
The subsequent development of Science and Technology led to the Industrial revolution which began during the late eighteenth century in Great Britain. Goods started being produced on a mass scale in factories. This led, inevitably, in indiscriminate exploitation of natural resources and the fouling of the environment.

Impact of Man on Environment :
Various activities of man have left a profound impact on the environment. Some of the effects are direct while others are indirect.
Activities of Man that affect the Environment :

a) Land use changes :
• Clearing of forests, burning of land, felling of trees, changes in cropping patterns.

b) Agricultural practices ;
• Mechanization of agriculture, use of chemical fertilizers and pesticides.

c) Construction and Excavation :
• Construction of dams, roads and bridges; Mineral extraction by way of excavation; Urbanization.

d) Exploitation of Natural Resources :
• Excessive use of natural resources like wood and water
• Excessive use of conventional sources of energy like coal and fossil fuels.

Question 3.
Describe the Dimensions of the Environment.
Answer:
The Environment has three major dimensions. These dimensions have a mutual influence on each other and have a significant impact on the sustenance of life on this earth. The three dimensions are :
1) Physical 2) Biological 3) Social

The various sub-components in each of the three dimensions of the environment are given in the table below :

I. The Physical Environment :
It comprises the abiotic components or non-living components of the environment such as land, air and water. These components are referred to as the lithosphere (land), atmosphere (air) and hydrosphere (water). Each of these physical components can be sub divided into different components based on their physical properties.

a) Lithosphere :
The word ‘lithosphere’ is derived from the Greek words ‘lithos’ (rock) and ‘spharia’ (globe or ball). The lithosphere includes the crust and the upper most mantle of the earth and constitutes the Biotic Environment. It is the solid part of the earth, made up of rocks and solids. The lithosphere occupies about 29% of the earth’s surface area and provides the habitat for flora (plants) and fauna (animals).

b) Atmosphere :
It is a layer of gases which surrounds the earth on all sides. The word ‘atmosphere’ is derived from the Greek words ‘atoms’ (vapour) and ‘sphaira’ (sphere).

The atmosphere of the earth is composed mainly of nitrogen (about 78%), oxygen (21%) and argon (0.9%). Carbon dioxide and other gases are found in traces.

The atmosphere plays a crucial role for the sustenance of life on the earth. Life, as we know it, would not be possible without the atmosphere. Oxygen is used by most organisms for respiration. Plants and animals need nitrogen to make proteins. Carbon dioxide is used by plants and algae for photosynthesis.

The atmosphere keeps us warm. It holds the surface heat on the earth and prevents it from radiating out into space. It reduces the extreme temperatures between day and night. The atmosphere also gives us weather. Wind, rain and snow depend on the atmosphere. Without winds and rain we would not have water to drink. Plants and animals too would perish. Apart from these functions, the atmosphere also helps to pro­tect living organisms from damage caused by harmful ultra violet radiation from the sun.

The atmosphere of the earth consists of a number of layers which differ in properties such as composition, temperature and pressure.

The lowest layer is the troposphere with extends from the surface of the earth to the bottom of the stratosphere. The stratosphere extends from the top of the troposphere to the bottom of the mesosphere and contains the ozone layer. The ozone layer ranges in altitude between 15-35 km where most of the U.V radiation from the sun is absorbed.

The top of the mesosphere ranges from 50-85 km. The thermosphere extends from 85 km to the base of the exosphere at 690 km and contains the ionosphere, a region where the atmosphere is ionised by incoming solar radiation.

c) Hydrosphere :
The hydrosphere (from Greek ‘hydr’ which means ‘water’) is the combined mass of water found on, under and above the surface of the earth. It includes the oceans, lakes and rivers, water vapour in the atmosphere, water in the soil, aquifers and glaciers. About 71% of the Earth’s surface is covered with water. The oceans hold about 96.5% of all the water on the Earth.

Saltwater accounts for 97.5% of water. Fresh water accounts for only 2.5%. Of this fresh water, about 30% is in the form of fresh gro jnd water and the rest exists as snow and ice on glaciers.

II. The Biological Environment or Biosphere :
The biosphere (from Greek ‘bios’ which means ‘life’) is also known as the ecosphere (from Greek ‘oikos’ which means ‘environment’). It is the worldwide sum of all ecosystems. It contains all forms of life including human, animal and plant life. Flora includes all plants in various forms such as forests, grasslands and other types of vegetation. Fauna refers to all animals and other organisms which live in the air, soil or water. The average thick-ness of the biosphere, consisting of those parts of the air, water, soil and rock where life exists in some form, is about 25 km.

It is difficult to pinpoint the exact time the biosphere came into existence as records of primitive living forms that have been preserved are indistinct and rare to find in the earth’s crust. However, from the evidence available, it is believed that life began about 4 billion years ago when the oceans were formed.

III. Social Environment :
It is also known as cultural or man-made environment. It is concerned with the social behaviour of organisms. All the organisms of the floral and faunal environment organise themselves into social groups and form what is known as the social environment. Social environment involves population interaction and behaviour patterns of animals in response to their environment.

Question 4.
Explain the impact of Man’s Activities on the Environment.
Answer:
Impact of Man’s Activities on the Environment :
Several human activities like industrialization, urbanization and population growth have adversely affected bio-geo-chemical cycles. The impact of man’s activities on the environment is referred to as the anthropogenic impact on the environment. It includes the impact on biophysical environments, biodiversity and other resources.

Man’s activities have caused a rapid depletion of natural resources. Green House Gas (GHG) emissions (carbon dioxide, methane, etc.) have increased, leading to global warming, climate change and natural disasters. Pollution is fouling the air, water and land. Altered bio-geo-chemical cycles combined with climate change have a negative impact on biodiversity, food security, human health and water quality. The National Wildlife Federation, USA, states that every day 100 plant and animal species are becoming extinct as a result of deforestation. It is estimated that global temperature may increase by more than 2 degrees Celsius by the end of the century, making the earth in hospitable to most species.

The impact of man’s activities on the environment may be long lasting and even irreversible. We can stem the damage to some extent by taking appropriate steps like afforestation, change of farming practices, optimal use of resources and changing our patterns of consumption.

If we compare Earth with other planets in the solar system, we find that while sunlight is available on the other seven planets too, with varying intensities, air and water are available only on Earth. Without air and water, Life, as we know it, cannot exist.

The Environment does not require man. It can exist without human interaction or interference and can sustain billions of species that inhabit the earth. Man, on the other hand, requires the environment for sustenance of life. It is our bounden duty to protect it and ensure that future generations too can live in harmony with Nature.

Question 5.
What is the legacy thet we should leave for future generations?
Answer:
It is just multi-storeyed buildings, massive infrastructure and complex electronic gadgets that we should bequeath our children or a clean environment which supports life and provides sustenance? Man is the most intelligent animal on earth. He is well aware of the havoc he is wreaking on the environment and knows too that the damage he is inflicting on Nature may be irreversible. Even now it is not too late for all of us to save the earth. The majestic mountains, the vast oceans, the rich flora and fauna need to be preserved. Small individual actions will collectively make a huge difference.

Let us all take a pledge, ‘I shall go Green’.
Let us all take a decision to

• Conserve Water.
• Conserve Energy.
• Implement the concept ‘Reduce, Reuse and Recycle’ in our day to day life.
• Conserve Natural Resources.
• Minimize activities that cause Pollution Let us not forget.

“We have not inherited the Earth from our ancestors, we have borrowed it from our children.”

Question 6.
Explain water cycle briefly.
Answer:
It refers to the cycle of processes by which water evaporates from the surface of the earth, rises into the atmosphere, cools and condenses into rain or snow in clouds, falls to the surface as precipitation and is collected once again in lakes, rivers and oceans. Solar energy, in the form of heat and light, besides gravity, causes the transfer of water from one state to another over periods ranging from hours to thousands of years. The water cycle is crucial for the sustenance of life and ecosystems on earth.

There are four important stages in the water cycle. In the first stage the sun heats the water on the surface of the earth. The water from lakes, rivers and oceans gets hot and changes into vapour. This process is called evaporation. The water vapour then cools and collects in the sky as clouds. This is called condensation. In the next stage water in the form of rain, snow or hail falls from the clouds. It is called precipitation. The water that falls gets collected in oceans, streams, rivers and lakes. This stage is called collection. The process continues in this manner.

It should be noted that evaporation takes place not only from water but also from snow and plants. Evaporation from snow and ice is called sublimation. Transpiration refers to the expiration of water through the minute pores or stomata of trees. Evapo transpiration is the term used by hydrologists with reference to the three processes together — transpiration, sublimation and evaporation.

Question 7.
Explain Bio-geo-chemical cycle briefly.
Answer:
Bio-geo-chemical cycles are defined as large scale cycles, involving inorganic substances which pass through a biotic phase and then return to an abiotic or inorganic state. The term is used as the process includes a variety of biological, geological and chemical processes. Many chemicals cycle through biotic (biosphere) and abiotic (lithosphere, atmosphere and hydro-sphere) compartments of the earth. Nutrient elements like car-bon, nitrogen, hydrogen, oxygen and sulphur move through the earth’s atmosphere, ocean and sediments. These cycles are important because important elements are transported and stored suclj that they can be used by living organisms. Given below is an example :

• Plants take nutrients (inorganic elements) through their roots from the soil while animals do so through the intake of food and water. These nutrients get recycled back to the earth after the death and decay of the plants and animals.

Bio-geo-chemical cycles are of two types :

1. Those that involve cycling of all elements together e.g. Water cycle
2. Those that involve cycling of individual elements e.g. carbon cycle, nitrogen cycle, oxygen cycle.

Question 8.
Write about Oxygen Cycle.
Answer:

1. Large amounts of oxygen is present in air (21%).
2. Some of this O₂ is dissolved in water. O₂ content in air and water are in equilibrium i.e., whenever O₂ content in water decreases, more amount of O₂ from air gets dissolved in water. So that the ratio of O₂ in air and water always remain constant.
3. O₂ dissolved in water is used for respiration by aquatic plants and animals.
4. Similarly terrestrial plants and animals use oxygen present in air for their respiration.
5. The by – products of respiration – carbondioxide and water are released into air.
6. These two are taken up by plants and are used by photosynthesis.
7. The by – product of photosynthesis is O₂ which is released into air.
8. Carbondioxide is also formed when fuels like wood, coal and petroleum products are burnt.
9. There is a fine balance between these processes, so that the total amount of O₂ present in air remains constants. All these processes together represent O₂ cycle.
   
10. O₂ also has another important role in environment. In the upper layers of atmosphere, O₂ is converted to ozone. This is another form of oxygen in which each molecule has three oxygen atoms instead of two.
11. 
12. Ozone gas is present at a height of 16 – 23 km from the surface of earth. At this height it covers the entire planet like a blanket.
13. Light rays reaching earth from such has three components i.e. Ultraviolet rays (uv), visible rays and Infrared rays. Ozone has the property of absorbing ultraviolet light and does not allow it to fall on Earth.

Telangana TSBIE TS Inter 1st Year Economics Study Material 10th Lesson Basic Statistics for Economics Textbook Questions and Answers.

TS Inter 1st Year Economics Study Material 10th Lesson Basic Statistics for Economics

Long Answer Questions

Question 1.
Explain one dimensional diagram with suitable examples.
Answer:
The following are the common types of diagrams, which are used in statistical analysis.

One Dimensional Diagrams :
In such diagrams only one dimensional measurement, i.e, height is used, the width is not considered.
a) Simple Bar Diagrams :
Simple bar diagrams are used to present individual observations, time series and spatial series.

b) Sub – divided Bar Diagrams :
In a sub-divided bar diagram, the bar is subdivided into various parts in proportion to the values given in the data and the whole bar represents the total. Such diagram is also called “components bar diagram”. Such a diagram shows total as well as various components.

c) Multiple Bar Diagrams :
Such diagrams are used to compare two or more variables. The method of drawing multiple bar diagrams is shown in figure with the help of an example.

d) Percentage Bar Diagram :
Relative changes are studied with the help of percentage bar diagrams. The length of the bar is treated as 100 units. Each bar is divided on the basis of percentage.

Quetion 2.
Calculate arithmetic mean from the following data.

Answer:
The above data relates to inclusive method changed into exclusive method. Deduc¬tive 0.5 from lower limit, add 0.5 to upper limit changed as above data.

Here, A = Assumed mean = 54.5
∑ fd’ Sum of the product of deviations (d) taken from the assumed mean multiplied with its respective frequencies = – 374
N = Total no. of frequencies = 200
i = Class interval = 10
Substitute these values in above equation
\(\overline{\mathrm{x}}\) = 54.5 + (\(\frac{-374}{200}\)) × 10
= 54.5 + (-1.87) × 10 = 54.5 + (-18.7)
\(\overline{\mathrm{x}}\) = 35.8

Question 3.
Compute median for the data given below.

Solution:

Median = L₁(\(\frac{\frac{N}{2}-C F}{f}\)) × i
Location of median class = \(\frac{N^{th}}{2}\) item
= \(\frac{100^{th}}{2}\)
= 50^th item
L₁ = Lower limit of the median class = 30 N
\(\frac{N}{2}\) = Median value = 50

CF = Cumulative frequency of the class preceeding to the median class = 40
f = Frequency of the median class = 30
i = class interval = 10
Substitute these values in the above formula
= 30 + (\(\frac{50-40}{30}\)) × 10
= 30 + (\(\frac{10}{30}\)) × 10
= 30 + (0.33) × 10
= 30 + 3.33 = 33.3
∴ Median = 33.3

Question 4.
Locate modal value for the below given data.

Answer:
Grouping Classification Table


(2)* = figure arrived at by adding ‘f’ of two rows each.
(3)* = figure arrived at by adding ‘f’ of two rows each leaving first row.
(4)* = figure arrived at by adding ‘f’ of three rows each.
(5)* = figure arrived at by adding ‘f’ of three rows each leaving first row.
(6)* = figure arrived at by adding ‘f’ of three rows each leaving second row.

The analysis table, presented below, is prepared with the help of classification table,
Analysis Table

From the analysis table, it is found that 6000 has occurred many times, i.e., 6 times. Therefore, Z = 6000

Question 5.
Draw the pie diagram for following data.

Solution:
Area changed into Degree =

Short Answer Questions

Question 1.
What is Statistics? Explain its relationship with Economics. [Mar.’17]
Answer:
There is a close relationship between statistics and economics. In the words of Tugwell, “The science of economics is becoming statistical in its method”. All the economic laws are pronounced on the basis of statistical facts and figures. The theory of population of Malthus, the law of family expenditure of Engels etc., were propounded after statistical tests. Statistics helps the economics to become an exact science.

In the study of theoretical economics, the application and use of statistical methods are of great importance. Most of the doctrines of economics are based on the study of a large number of units and their analysis. This is done through statistical methods. Law of demand was formulated because of statistical methods.

The importance of statistics is felt in all branches of knowledge in accountancy and auditing in banking, in insurance, in research and in many fields. Without statistics no branch of knowledge is complete.

Question 2.
Explain simple and sub – divided bar diagrams with examples.
Answer:
The following are the common types of diagrams, which are used in statistical analysis.

1. One Dimensional Diagrams :
In such diagrams only one dimensional measurement, i.e, height is used, the width is not considered.

1) Simple Bar Diagrams :
Simple bar diagrams are used to present individual observations, time series and spatial series. The method of drawing simple bar diagram is explained with the help of the example.

Example :
Draw the simple diagram from the following data relating to Censs of India from 1901 to 2011.

Population from 1901 to 2011

2. Subdivided Bar Diagram :
Component bar diagram charts are also called as sub-divided bar diagrams, which are very useful in comparing the sizes of different component parts.

The following data relates to the number of companies registered in a country.

Registered Companies

Question 3.
Calculate arithmetic mean for the data given below.

Solution:

\(\overline{\mathrm{X}}\) = A + \(\frac{\Sigma \mathrm{fd}}{\mathrm{N}}\)
Here, \(\overline{\mathrm{X}}\) = Mean
A = Assumed mean = 1200
∑fd = Sum of product of the step deviation (d¹) taken from the assumed mean multiplied with its respective frequencies -600
N = Total no. of frequencies = 100
Substitute these values in above formula
= 1200 + \(\frac{-600}{100}\)
= 1200 + (-6) = 1194
∴ \(\overline{\mathrm{X}}\) = 1194

Question 4.
Calculate median for the following data.

Solution:

Location of median class = \(\frac{N+1^{th}}{2}\) item
Here, N = total frequencies =116
\(\frac{116+1^{th}}{2}\) item = \(\frac{117}{2}\) = 58.5
The 58.5^th item is included in the cumulative frequencey of 75. The corresponding class of the median is 50.

Question 5.
Calculate mode for the following series.

Answer:

Analysis Table

∴ Z = 16

Question 6.
What is Arithmetic mean? What are its merits and drawbacks?
Answer:
Arithmetic Mean (\(\overline{\mathrm{X}}\)) :
Among all types of averages, the arithmetic mean or simple mean is most commonly and widely used measure of central tendency. It is normally expressed as “the sum total of the observations divided by the number of items observed”. It is defined as the quotient of the sum of all items or entries divided by the number of items.

1. Computation of Arithmetic Mean – Individual Series – Direct Method:

Where, \(\overline{\mathrm{X}}\) = Arithmetic mean, ∑X = Sum total of ‘X’, and
N = Number of items of ‘X’.

Merits and Drawbacks of Arithmetic Mean :
i) Merits of A.M.:

1. It can be easily calculated; and can be easily understood.
2. As every item is taken into calculation, it is affected by every item.
3. As the mathematical formula is rigid one, therefore, the result remains the same.
4. It is useful for further algebraic treatment.
5. It is mostly used for comparing the various issues.

ii) Drawbacks of A.M :

1. It cannot be located graphically.
2. A single item can bring a big change in the result. For example, if there are three terms 3, 6, 9; the A.M. value is 6. If we add a new term 82, the new AM. value is 3 + 6 + 9 + 82 / 4 = 25. This a big change as compared to the size of first three terms of X.
3. The A.M. gives greater importance to higher items of a series and lesser importance to smaller items.
4. It cannot be located by inspection as in the case of mode and median.
5. Sometimes it gives absurd results. For instance, if we have to find out.the number of children per family and if we get the average value as 4.3 children, obviously the result is absurd adn it can’t be in fractional value. A

Question 7.
What is median? What are it’s merits and drawbacks?
Answer:
Median (M):
Median is the middle element when the data set is arranged in order of the magnitude. Median is that positional value of the variable which divides the distribution into two equal parts. In the ungrouped data, the median is computed as follows :

1. The values of the variate are arranged either in ascending or in descending order.
2. The middle – most value is taken as the median.

If the number of values ‘n’ in the raw data is odd, then the Median will be the (\(\frac{n+1}{2}\))^th value arranged in order of magnitude. In this case, there will be one and only one value of Median. On the other hand, if n is even, and when the data arranged in order of magnitude, there will be two middle – most values, (\(\frac{n}{2}\))^th and (\(\frac{n}{2}\)+1)^th values. Median is the average of the \(\frac{n^{th}}{2}\) (\(\frac{n}{2}\)+1)^th values.

Merits and Drawbacks of Median :
i) Merits of Median:

1. It is rigidly defined.
2. Even if the value of extreme item is much different from other values, it is not much affected by these values.
3. It can be located graphically.
4. It can be easily calculated and is also easy to understand.

ii) Drawbacks of Median:

1. Even if the value of extreme items is too large, it does not affect too much, due to this reason, sometimes median does not remain the representative of the series.
2. Median cannot be used for further algebraic treatment.
3. In a continuous series it has to be interpolated.
4. If the number of series is even, we can only make its estimate; as the A.M. of two middle terms is taken as Median.

Question 8.
What is mode? What are its merits and demerits?
Answer:
Mode (Z) :
Mode is the most frequently observed value in the data or an observation with the highest frequency is called the mode of the data. Mode is defined as that value in series which occurs most frequently. Mode is a point of maximum concentration on a scale of values, i.e., it is the most typical or most fashionable value of series.

Merits and Drawbacks of Mode:
i) Merits or uses of Mode :

1. Mode is the term that occur most in the series hence, it is neither an isolated value like Median nor it is a value like mean that may not be there in the series.
2. It is not affected by extreme values hence, is a good representative of the series.
3. It can be found graphically also.
4. For open end intervals it is not necessary to know the length of open intervals.
5. It can also he used in case of quantitative phenomenon.
6. With only just a single glance on data we can find its value. It is simplest.
7. It is the most used average in day-to-day life, such as average marks of a class, average number of students in a section, average size of shoes, etc.

ii) Drawbacks of mode :

1. Mode cannot be determined if the series is. bimodal or multimodal.
2. Mode is based only on concentrated values; other values are not taken into account inspite of their big difference with the mode. In continuous series only the lengths of class intervals are considered.
3. Mode is most affected by fluctuations of sampling.
4. Mode is not so rigidly defined. Solving the problem by different methods we won’t get the same results as in case of mean.
5. It is not capable of further algebraic treatment. It is impossible to find the combined mode of some series as in case of Mean.
6. If the number of terms is too large, only then we can call it as the representative value.

Question 9.
What are the characteristics of a good average?
Answer:
Characteristics of goods average :

1. It should be based on all the observations.
2. It should be rigidly defined. It should be clearly defined. There should be no confusion about the meaning or description of an average.
3. It should be capable of future algebaic treatment.
4. It should not be unduly affected by extreme values. No item of the series should affect the average too much. If very large items unduly affect the average, then the average cannot represent the entire group.
5. It should be easy to calculate and simple to understand.
6. It should not be affected by variations of sampling.

Very Short Answer Questions

Question 1.
Discuss the importance of statistics for the study of economics. [Mar. ’16]
Answer:
Statistical analysis render valuable assistance in the understanding of the economic problems and the formulation of economic policy. Economic problems are capable of being expressed numerically. The nature of many economic problems like poverty, unemployment, rise in prices, volume of trade, output of manufacturing, mining, agriculture etc., cannot be analysed without the help of statistics.

Question 2.
What are the advantages of diagrams?
Answer:
Diagrams are used with great effectiveness in the presentation of all types of data.

The advantages of diagrams are as follows :

1. A properly constructed diagram appeals to eye and mind.
2. There is no need to have special mathematical knowledge.
3. Data presentation becomes easier.
4. It facilitates comparison.
5. It improves memory power.

Question 3.
What is a Pie diagram? [Mar.’17, ’16]
Answer:
Pie – Diagram :
This diagram enables us to show the partitioning of total into component parts. It is also called a pie chart.

Question 4.
Explain the uses of sub divided bar diagrams.
Answer:
In a sub-divided bar diagram, the bar is sub-divided into various parts in proportion to the values given in the data and the whole bar represents the total. Such diagram is also called “component bar diagram”. Such a diagram shows total as well as various components.

Question 5.
Compute median for the following data. [Mar. ’17, ’16]
5, 7, 7,8,9,10,12,15 and 21
Solution:

Here N = 9
Median = \(\frac{N+1}{2}\)
= \(\frac{9+1}{2}\) = \(\frac{10}{2}\)
5^th value is 9.
Hence, Median (Q₂) = 9

Question 6.
Explain the concept of Mode. [Mar. ’17]
Answer:
Mode is most frequently occuring value in data.

Question 7.
What are the uses of Arithmetic mean
Answer:
Uses of A.M.

1. It can be easily calculated; and can be easily understood.
2. As every item is taken into calculation, it is affected by every item.
3. As the mathematical formula is rigid one, therefore, the result remains the same.
4. It is useful for further algebraic treatment.
5. It is mostly used for comparing the various issues.

Question 8.
Explain the concept of Geometric mean.
Answer:
Geometric mean (G.M.) :
The Geometric mean is a special type of average where we multiply the numbers together and then take a square root (for two numbers), cube root (for three numbers), fourth root (for four numbers) etc., and for ‘n’ numbers n^th root (ty-). It is technically defined as ‘the n^th root (\(\sqrt[n]{}\))product of ‘n’ numbers’. For instance, the geometric mean of two numbers, say 2 and 8, is the square root of their product, i.e., \(\sqrt{2.8}\) = 4. As another example, the geometric mean of three numbers, say 2, 3 and 6 is the cubic root of their product, i.e., \(\sqrt[3]{2.3.6}\) or (2.3.6)^1/3 = 3.3.
Symbolically G.M. = \(\sqrt[n]{X_1,X_2,X_3……….X_n}\)

Where, G.M. = geometric mean; n = number of items and X = values of the variable.

Question 9.
What are the merits of Median?
Answer:
Merits of Median :

1. It is rigidly defined.
2. Even if the value of extreme item is much different from other values, it is not much affected by these values.
3. It can be located graphically.
4. It can be easily calculated and is also easy to understand.

Question 10.
What are the drawbacks of Median?
Answer:
Drawbacks of median :

1. Even if the value of extreme items is too large, it does not affect too much, due to this reason, sometimes median does not remain the representative of the series.
2. Median cannot be used for further algebraic treatment.
3. In a continuous series it has to be interpolated.
4. If the number of series is even, we can only make its estimate; as the A.M. of two middle terms is taken as Median.

Question 11.
Explain the merits of Mode.
Answer:
Merits:

1. Mode is the term that occur most in the series hence, it is neither an isolated value like Median nor it is a value like mean that may not be there in the series.
2. It is not affecteed by extreme values hence is a good representative of the series.
3. It can be found graphically also.
4. For open end intervals it is not necessary to know the length of open intervals.
5. It can also be used in case of quantitative phenomenon.
6. With only just a single glance on data we can find its value. It is simplest.
7. It is the most used average in day-to-day life, such as average marks of a class, average number of students in a section, average size of shoes, etc.

Question 12.
Explain the drawback of Mode?
Answer:
Drawbacks of mode :

1. Mode cannot be determined if the series is bimodal or multimodal.
2. Mode is based only on concentrated values; other values are not taken into account inspite of their big difference with the mode. In continuous series only the lengths of class intervals are considered.
3. Mode is most affected by fluctuation of sampling.
4. Mode is not so rigidly defined. Solving the problem by different methods we wont get the same results as in case of mean.
5. It is not capable of further algebraic treatment. It is impossible to find the combined mode of some series as in case of Mean.
6. If the number of terms is too large, only then we can call it as the representative value.

Question 13.
Find the mode from the following data.

Answer:
From the given data, it can be seen that Rs. 480 occurred many times in the series.
∴ Mode = 480

Question 14.
Explain the concept of Harmonic mean?
Answer:
Harmonic Mean (H.M.) :
The Harmonic mean of a series is the reciprocal or the arithmetic average of the reciprocal of the values of its various items. It can be calculated by using the following formula :

Question 15.
Compute Harmonic means for 4, 6 and 12.
Answer:
Harmonic mean for 4, 6, 12

∴ Reci procals (\(\frac{1}{x}\))

Question 16.
What is the Geometric mean of two numbers 4 and 16?
Answer:
Geometric mean of two numbers : 4, 16

N = 2
G.M. = \(\sqrt[n]{X_1.X_2.X_3}\) = (x₁, x₂ ………… x₄)ⁿ
= \(\sqrt{4 \times 16}\) = \(\sqrt{64}\) = 8

Textual Examples

Qustion 1.
The following data relates to students studying foreign languages in a college.
Table-10.3 : Students Studying French & German in a College

Answer:

Question 2
Draw the pie diagram for the following data.
Area of Crops Cultivated in a Year (in hectares)

Answer:
Total area = 16 + 24 + 10 + 8 + 5 = 63
Area changed into Degrees =

Question 3.
Following data relates to percentage of students going to school and out of school.
Table-10.4:Students Going to School and Out of School

Answer:

Question 4.
The following are the marks obtained by 6 students in a test. Calculate arithmetic mean.
Marks (X) : 70, 80, 40, 50, 65, 45
Answer:

\(\overline{\mathrm{X}}=\frac{\Sigma \mathrm{X}}{\mathrm{N}}=\frac{350}{6}\) = 58.3
∴ \(\overline{\mathrm{X}}\) = 58.3

Question 5.
Calculate arithmetic mean from the following data :

Answer:

Note : In the above example assumed mean is taken as 40,
Substituting the values the in the above formula,
= 40 + \(\frac{60}{60}\) = 40+1
∴ \(\overline{\mathrm{X}}\) = 41

Question 6.
Find the arithmetic mean for the following data:

Answer:

Where, \(\overline{\mathrm{X}}\) = Arithmatic mean
A = Assumed mean =155

Question 7.
Calculate median for the below given data relating to income of seven persons.
Incomes (X): 100 150 80 90 160 200 140
Answer:
After arranging the given data in ascending order:

Med = (\(\frac{N+1}{2}\))^th item
Where, Med = Median, N = Total no. of Items = 7
M = (\(\frac{7+1}{2}\))^th item = \(\frac{8}{2}\) = 4^th item
The corresponding ’X’ value of the 4^th item in the series is 140 and
∴ Med = 140

Question 8.
Calculate median for the following data.

Answer:

Med (\(\frac{7+1}{2}\))^th = item
Where, N = Total no. of frequencies = 116
Median = (\(\frac{116+1}{2}\))^th item (\(\frac{117}{2}\)) = 58.5^th item

58.5^th item is included in the cumulative frequency of 75. Therefore, the corresponding X’ value is 50.
∴ Median = 50

Question 9.
Calculate median for the following data.

Note : When the data is given in ‘inclusive form’ (as the above), we have to change it into ‘exclusive from’. For that, we have to ‘subtract’ 0.5 from the lower limit of the class and ‘add’ 0.5 to the upper limit.
Answer:

Med = (\(\frac{N+1}{2}\))^th item
Location of median class = (\(\frac{N}{2}\))^th item = \(\frac{700}{2}\) = 350^thitem
The 350^th item is included in the cumulative frequency of 502. The corresponding class is the median class, i.e., 39.5 – 49.5.

Med = L₁ \(\frac{\frac{N}{2}-C F}{f}\) × i
Where, Med = Median
L₁ = Lower limit of the median class = 39.5, \(\frac{N}{2}\) = Median value = 350
CF = Cumulative frequency of the class preceeding to the median class = 252
F = Frequency of the median class = 250

Question 10.
Locate modal value for the below given data.

Solution:

(2)* = figure arrived at by adding ‘f’ of two rows each.
(3)* = figure arrived at by adding ‘f’ of two rows each leaving first row.
(4)* = figure arrived at by adding ‘f’ of three rows each.
(5)* = figure arrived at by adding ‘f’ of three rows each leaving first row.
(6)* = figure arrived at by adding ‘f’ of three rows each leaving two row.

From the analysis table, it is found that 10 – 15 has modal class. So, the modal value lies in 10 – 15 class.

After grouping and analysis, the following formula is applied to determine modal value:
Z = L₁ + \(\frac{\Delta_1}{\Delta_1+\Delta_2}\) × i
Where, Z = Mode = ?
L₁ = Lower limit of the median class = 0
f₀ = Frequency for the class proceeding to the modal class = 195
f₁ = Frequency of the modal class = 241
f₂ = Frequency of the class after the modal class =117
i = Size of the class interval = 5
∆₁ = f₁ – f₀ = 241 – 195 = 46
∆₂ = f₁ – f₂ = 241 – 117 = 124
After substituting the values in the above formula, we get
= 10 + \(\frac{46}{46+124}\) × 5
= 10 + \(\frac{230}{170}\) = 10 + 1.35 = 11.35
∴ Z = 11.35

Telangana TSBIE TS Inter 1st Year Economics Study Material 9th Lesson Money, Banking and Inflation Textbook Questions and Answers.

TS Inter 1st Year Economics Study Material 9th Lesson Money, Banking and Inflation

Long Answer Questions

Question 1.
Discuss the evolution of money. Explain its types.
Answer:
Money occupies a unique place in any economic system. Society needs money for a variety of transactions undertaken by the people and the government in the day to day life. Now-a-days, we cannot imagine a society without a role for money.

Evolution of money:
The term ‘money’ was derived from the name of goddess Juno Moneta of Rome. Prior to the introduction of money, the barter system was in vogue. In that system one commodity was exchanged for another commodity. Money was coined in order to overcome the difficulties of the barter system. In the initial stages, animal was used in place of money. Gradually metallic money in the form of gold, silver, bronze and nickel replaced it. In the third stage coins came into use. That was followed by paper money. The latest stage is the credit money in the form of drafts, cheques, debit cards, credit cards etc. Thus, money has undergone different stages in the process of evolution.

Types of money:
1) Commodity Money and Representative Money :
Commodity money includes metallic coins whose face value and intrinsic value are same. It is also called as full-bodied money. Representative money includes coins and paper money whose intrinsic value is less than their face value.

2) Legal Tender Money and Optional Money :
On the basis of legality, money is divided into legal tender money and optional money. Legal tender money is the money which is accepted as per the law by everyone in payment for commodities and services. Credit creation by the commercial banks in the form of drafts, cheques etc., are called as optional money.

3) Metallic Money and Paper Money :
Metallic money is made up of metals such as silver, nickel, steel etc. All coins are metallic money. Paper money is money printed on paper. Currency notes in the form of ₹ 1,000, ₹500, ₹ 100, ₹ 50 and ₹ 10 are paper money

4) Standard Money and Token Money :
Standard money is the money whose face value and intrinsic value are same. Token money is money or unit of currency whose face value is higher than the intrinsic value, e.g. 50 paisa, 1 rupee coins etc.

5) Credit Money :
This is also called as bank money. This is created by commercial banks. This refers to the bank deposits that are repayable on demand and which can be transferred from one individual to the other through cheques.

Question 2.
Define money and explain the functions of money.
Answer:
Money plays a vital role in modern economy. A modem economy is rightly known as monetary economy because of the crucial position that money occupies.

1. According to ‘Robertson’ – “Anything which is widely accepted in payment for goods or it discharges of other kinds of business obligations”.
2. According to ‘Seligman’ – “One that possesses general acceptability”.
3. According to Waker’ – “Money is what money does”.

Functions of money:

1. Primary functions :
a) Medium of exchange :
Money serves as a medium of exchange. It removes the inconveniences of the barter system in which exchange of goods was possible if only there was double coincidence of wants. But money facilitates exchange of commodities without double coincidence wants. Any commodity can be exchanged for money. People can exchange goods and services through the medium of money.

b) Measure of value :
Money serves as a measure of value of goods and services. As common measure of value it has removed the difficulty of the barter system and has made transactions simple and easy. The value of each commodity is expressed in the units of money We call it as price.

2. Secondary functions :
a) Store of value :
The value of commodities and services can be stored in the form of more. Certain commodities are perishable. If they are exchanged for money before they perish, their value be preserved in the form of money.

b) Standard of deferred payments :
Money serves as a standard of deferred payments. In the modern economies most of the business transactions take place on the basis of credit. An individual consumer or a business man may now purchase a commodity and pay for it in future. As this function makes it possible to express future payments in terms of money.

c) Transfer of money :
Money can be transferred from one person to another at any time at any place.

3. Contingent functions :
a) Measurement and distribution of National income : National income of a country be measured in money by aggregating the value of all commodities. This is not possible in a barter system similarly national income can be distributed to different factors of production by making them payment in money.

b) Money equalizes marginal utilits / productivities :
The consumers can equalize marginal utilities of different commodities purchased by them with the help of money. We know how consumers equalize the marginal utility of the taste rupee they speed on each commodity. Similarly firms can also equalize the marginal productivities of different factors of production and maximize profits.

c) Basis of credit :
Credit is created by banks from out of the primary deposits of money supply of credit, in an economy it is dependent on the supply of nominal money.

d) Liquidity :
Money is the most important liquid asset. Interms of liquidity, it is superior than other assets. Money is centpercent liquid.

Question 3.
Describe the functions of the commercial banks.
Answer:
Functions of commercial banks :
Primary functions :
a) Accepting deposits :
The commercial bank is just like any other money lender doing money lending business, bank receives public money in the form of deposits. The deposits mainly are of the following steps.

1) Current deposits :
These deposits have two characteristics. One, there are no restrictions with regard to the amount of withdrawal and number of withdrawals. Banks normally do not pay any interest on current account deposits.

2) Savings deposits :
The sole aim of banks in receiving these deposits is to promote the habit of thrift among low income groups. They have the following characteristics : 1) two or three withdrawals per week are permitted 2) banks pay 4 to 5% interest (nominal) per annum or savings deposits.

3) Recurring deposits :
People will deposit their money in these deposits as monthly installments for a fixed period of time. The bank after expiry of the said period will return the total amount with interest thereon. The rate of interest will be higher than the savings deposits.

4) Fixed deposits :
Deposits received on fixed accounts are called fixed or time deposits. They are left with the bank for a fixed period. The following are the characteristics.

1. The amount cannot be withdrawn before the expiry of the fixed period.
2. Banks pay high rate of interest than any other deposits.

b) Advancing loans :
Commercial banks release funds so collected for productive purposes by way of loans and advances. Commercial bank usually lend money by way of loans, cash credits, overdrafts, and by discounting bills of exchange.
1) Cash credit :
In this case, the borrower is given a loan. The amount of the loan is deposited in his account in the bank. The loan is not normally paid in cash. The borrower can draw money out of his account as per his needs.

2) Overdraft :
It means allowing the depositor to overdraw his account upto a previous agreed limit. Banks allow overdrafts only to those persons who have their accounts in the bank. The overdraft is granted only for short period for customers.

3) Loans :
Usually a loan is granted against the securities of assets or the personal security of the borrower bank loans and advances carry a high rate of interest. In addition, banks grant call loans for every short period, term loans for longer period and also grant consumer credit for buying durable goods.

4) Discounting bills of exchange :
The banks facilitate trade and commerce by discounting the bills of exchange. This is the most popular form of bank lending.

Secondary functions :
a) Agency services :
Banks act as agents, correspondents and representatives of their customer. As an agent a commercial bank collects and pay cheques, drafts, bills and pay insurance premium subscriptions, rent, income tax etc., as per the instruction of their customers. Banks also act as trusties executors and attorneys.

b) General utility services :
Banks provide some general utility services like :

1. Locker facility for safe custody and valuables.
2. Issue traveller’s cheques and drafts.
3. Transfer of funds.
4. Acting a referee to the financial standing of customers.
5. Issue letters of credit.
6. Finance foreign trade by discounts foreign bills of exchange.

Question 4.
What are the functions of Reserve Bank of India?
Answer:
The Central Bank of our country is Reserve Bank of India. It was established in April 1935, with a share capital of ₹ 5 crores. It was originally owned by private shareholders but was nationalised by the government of India in 1949. It performs all its activities under the Reserve Bank of India Act 1934.

The main aim of RBI is to achieve the monetary stability and to control the credit system of an economy. It performs the following functions.
1) Note issue :
Reserve Bank of India enjoys the monopoly of note issue in the country. It maintains a minimum ₹ 200 crores of gold and foreign exchange reserves of which gold should be ₹ 115 crores. It issue notes in the denominations of ₹ 1,000, ₹ 500, ₹ 100, ₹ 50, ₹ 20, ₹ 10, ₹ 5 and ₹ 2. One rupee note and coins are issued by the finance department of the Government of India. Reserve Bank of India prints all the currency notes in the security press of the Government of India.

2) Banker to Government :
Reserve Bank of India acts as the banker, agent and adviser to the Government of India. It receives money and make payments on behalf of the government and gives temporary advances to the government. It advises the government in all financial matters.

3) Banker’s Bank :
Reserve Bank serves as a banker not only to the government but also to the banks. It provides financial assistance to the commercial banks by giving loans and rediscounting the bills of exchange. It helps the banks by acting as a clearing house for settlement of inter bank transactions and controls the supply of money in the economy through cash reserve ratio.

4) Lender of last resort :
It acts as lender of last resort by granting loans and advances to the commercial banks against some securities viz., treasury bonds, treasury bills and other approved securities. It also provides financial help to banks by rediscounting the eligible bills of exchange.

5) Custodian of foreign exchange reserves :
Reserve Bank of India as a member of the International Monetary fund. It regulates all foreign exchange transactions in the country. It controls and regulates the purchase and sale of foreign exchange through restrictions on exports and imports to maintain the official rate of exchange.

6) Credit controller :
Reserve Bank of India controls the volume of credit in the country. It controls the credit through different methods by appropriate monetary or fiscal policies. It announces credit policy for every six months based on the credit needs of the country. Through this it controls the inflation and deflation.

7) Promotional and development functions :
Reserve Bank of India in order to achieve economic development performs certain promotional and developmental functions.

They are :

1. Promoting various financial institutions to provide industrial finance.
2. It takes steps for establishment of banks throughout the country and expansion of their branches.
3. Encourage the financial institution to provide financial help to agriculture and rural credit.

Question 5.
Define Inflation. Explain the types and effect of Inflation.
Answer:
In a broader sense, the term inflation refers to persistent rise in the general price level over a long period of time. Some of the important definitions are given below :

According to Pigou, “Inflation exists when money income is expanding more than in proportion to increase in earning activity”.

Crowther defined inflation as, “a state in which the value of money is falling, that is the prices are rising.

Types of Inflation:
Inflation is divided into different types based on its pace or rate of inflation and the causes of inflation. They are detailed below :
A) Based on the Rate of Inflation :
On the basis of the rate of inflation, it may be classified into four types.

1) Creeping Inflation :
When rise prices is very slow and small (from 0 to 2 percent), it is called creeping inflation. It helps the economy to grow. It is depicted through O to A in the graph.

2) Walking Inflation :
This is the second stage of inflation. The inflation rate will be between 2% and 4%. It also helps the economy to progress (A to B in the graph).

3) Running Inflation :
When the rate of inflation is in the range of 4-10 percent per annum, it is called running inflation (B to C in the graph). It needs to be controlled.

4) Galloping Inflation or Hyper Inflation :
If the inflation rate exceeds 10 percent, galloping inflation occurs. It may also be called hyper inflation (C to D). It damages the economy.

B) Based on the Cause of Inflation :
On the basis of the cause of inflation, it can be classified into two types :
1) Demand-Pull Inflation :
If inflation is caused by an increase in the aggregate demand for commodities over aggregate supply, it is called demand-pull inflation.

2) Cost-Push Inflation :
Prices of the commodities may increase due to increase in the cost of production. Inflation caused by the rise in cost of production is called cost-push inflation. It can again be viewed from two angles : i) wage push and ii) profit push.

Effect of Inflation:
Inflation refers to a persistent upward movement in the general price level rather than once for all rise in it.

The effects of inflation can be divided into two sub-heads.

1. Effects of production
2. Effects of distribution
   It will affect all economic activities in the economy.

A) On production:
a) Mild inflation stimulates production and it increases the profit margin of entrepreneurs.
b) High inflation rate hinders production.
c) Inflation discourages savings. This affects the capital formation which in turn affects production.

B) On distribution:
Inflation produces a deep impact on the distribution of income and wealth of society. A prolonged period of inflation results in the distribution of wealth in favour of rich and affluent classes of society. The concrete effects of inflation on various groups of society are as follows.

Effects on distribution :
Inflation produces a deep impact on the distribution of income and wealth of society. A prolonged period of inflation results in the distribution of wealth in favour of inflation on various groups of society are as follows.

1) Debtors and creditors :
During inflation, debtors are generally the gainers while the creditors are the losses. The reason is that the debtors had borrowed when the purchasing power of money was high and now return the loans when the purchasing power of money is low due to rising prices.

2) On fixed income groups :
Those who get fixed income lose from inflation. Salaried persons people living on past savings, pensioners, interest earners are the worst suffers during inflation because their income remain fixed.

3) On working class :
During inflation working class also suffers worst because wages do not rise as much as the prices of commodities. In addition there is a time lag between the rise in prices and rise in wages. If the trade unions are strong they may get equal increase in money incomes compared to rise in prices.

4) Entrepreneurs :
They experience windfall gains as the prices at their stocks suddenly go up. Inflation thus re-distributes income and wealth in such a way as to harm the interest of creditors, labours, fixed income groups and favours the businessmen, traders and debtors. By meaning the rich richer and poor poorer, inflation is socially undesirable.

C) Social impact :
Economic inequality leads to unequal opportunities in matters of health, education and employment. This results in social injustice.

D) Political effect :
Inflation widens social and economic disparities. It leads to political movements and if government is not responsive. This movement may threaten the stability of governments.

Question 6.
What are the causes of Inflation? Suggest remedial measures to control inflation.
Answer:
Inflation means a rise in the general price level over a long period of time. It occur due to the following reasons.

1. Increase in the aggregate demand of commodities.
2. Inadequate supply of commodities.
3. Increase in the cost of production.

I. The factors that effect the increase in demand :

1. Heavy pressure of population.
2. Increase in economy’s money supply.
3. More public expenditure towards various welfare schemes.
4. Reduce in rates of direct taxes.
5. Increase in the income levels of individuals.
6. Deficit financing by government.
7. Conspicuous spending by the people having black money.
8. Production in direct tax rates.

II. Factors that increase the cost of production :

1. Increase in costs of various factors of production.
2. Increase in tax rates.
3. Increase in the prices of technology.
4. Devaluation of domestic currency.
5. Inefficient management and no control on expenditure.
6. Lack of optimum allocation of resources.
7. Devaluation of domestic currency.

III. Factors that cause inadequate supply :

1. Irregular monsoons, floods, interior seeds in agriculture.
2. Non-availability of scarcity of inputs and raw materials.
3. Under-utilisation of productive capacity.
4. Shortage of investment due to non-availability of institutional credit.
5. Artificial scarcity due to black-marketing.
6. Exports at the cost of domestic supply.
7. Long gestation period of certain industries.

Remedial Measures :
Government has to take several steps to control inflation. Some of them are enlisted hereunder:

1. Importing the goods which are in short supply in the country.
2. Introducing rationing and quota system in case of mass consumption goods whose supply in inadequate to improve their distribution among all the needy sections of the people.
3. Controlling prices and eliminating black markets.
4. Taking steps to increase production of consumer goods.
5. Reducing the supply of money and credit by way of implementing appropriate monetary and fiscal policies.

Short Answer Questions

Question 1.
What is Barter system? What are its difficulties?
Answer:
Barter system means exchange of goods. This system was followed in olden days. But the population and its requirements are increasing, the system became very complicated. The difficulties of barter system are :

1) Lack of coincidence of wants :
Under the barter system, the buyer must be willing to accept the commodity which the seller is willing to offer in exchange. The wants of both the buyer and the seller just coincide. This is called double coincidence of wants. Suppose the seller has a good and he is willing to exchange it for rice. Then the buyer must have rice and he must be willing to exchange rice for goat. If there is no such coincidence direct exchange between the buyer and the seller is not possible.

2) Lack of store value :
Some commodities are perishables. They perish within a short time. It is not possible to store the value of such commodities in their original form under the barter system. They should be exchanged before they actually perish.

3) Lack of divisibility of commodities :
Depending upon its quantity and value, it may become necessary to divide a commodity into small units and exchange one or more units for other commodity. But all commodities are not divisible.

4) Lack of common measure of value :
Under the barter system, there was no common measure value. To make exchange possible, it is necessary to determine the value of every commodity interms of every other commodity.

5) Difficulty is making deferred payments :
Under barter system future payments for present transaction was not possible, because future exchange involved some difficulties. For example suppose it is agreed to sell specific quantity of rice in exchange for a goat on a future date keeping in view the recent value of the goat. But the value of goat may decrease or increase by that date.

Question 2.
Explain the definitions of money.
Answer:
Money plays a vital role in modem economy. A modem economy is rightly known as monetary economy because at the crucial position that money occupies. In the olden days goods were exchanged for goods. Such system is called barter system. However when economics grew there was a tremendous increase in the wants of the people as well as in the number of transactions then barter system became more difficult, in order to eliminate the difficulties in the barter system money came into existence.

Definition of money :
Several economists have defined money in several ways. Some of the prominent definitions are given below.

According to ‘Waker’ – “Money is what money does”.

According to ‘Robertson’ – Money as” anything which is widely accepted in payment for goods or in discharge of other kinds of business obligations”.

According to ‘Seligman’ – Money as “one that possesses general acceptability”.

According to “Crowther” – Money as “anything that is generally acceptable as a medium of exchange and which at the same time acts as a’ measure and store of value”.

It may be found from the above definitions that the main focus is on general acceptability. Anything that used as money should have the general acceptance of the public as medium of exchange because it is for direct exchange of commodities money is fundamentally required. It acts as a common measure of value. However its suitability as a store of value is equally important. Therefore we can consider Crowther’s definition as relatively more comprehensive. It is elaborate and covers the most important functions of money.

Question 3.
Discuss money related concepts.
Answer:
Money was invented to overcome the difficulties of the barter system. Several economists have given definitions for money. Some of them are listed hereunder :

1. Robertson defined money as ‘anything which is widely accepted in payment for goods or in discharge of other kinds of business obligations”.
2. According to Seligman’s definition, ‘money is one that possesses general acceptability”.

Related Concepts of Money :
When we discuss about money, we come across certain terms like currency, liquidity and near-money. They have different meanings. These concepts are related to money. It is necessary to know them clearly without any conceptual ambiguity.

i) Currency :
Currency is the form in which money is circulated in the economy by the monetary authority i.e., the government and the central bank. Currency includes coins and paper notes. It is only one component of money. Money comprises of not only currency but demand deposit and time deposits also.

ii) Liquidity :
The ability of an asset to be converted into money is termed as liquidity. In other words, conversion takes place with ease. Hence, liquidity may be defined as the ability of any asset to act as a direct medium of exchange.

Money acts as a direct medium of exchange. Hence money is considered as the perfect liquid asset. Other assets are not as liquid as money because they are not accepted by the public as medium of exchange. They have to be converted into money to facilitate exchange to take place. They have liquidity but the degree of liquidity varies from asset to asset.

iii) Near Money :
The term near-money refers to those highly liquid assets which are not accepted as money, but can be easily converted into money within a short period.

Here are some examples of near money :

1. savings deposits and time deposits in the commercial banks,
2. savings deposits in the post offices, and post office bonds,
3. stock and shares of joint stock companies.
4. units of UTI.
5. savings bonds and certificates.
6. treasury bills, and
7. bills of exchange and government securities and securities guaranteed by the government.

These assets are close substitutes of money. Hence, they are called near money or quasi-money.

Question 4.
Distinguish between different types of money.
Answer:
Money can be grouped into various items based on the value, material used and the legal status. They are :
1) Commodity money and representative money :
Money is classified into commodity money and representative money on the basis of the intrinsic value it possess.

If the intrinsic value is equal to the face value of coin is called commodity money and if the value is less than the face value, it is called representative money.

2) Legal tender money and optional money :
On the basis of legality money is divided into legal tender money and optional money. If money is accepted as per law by every one is called legal tender money If the acceptance is optional and not according to law is called optional money.
Ex: Cheques.

3) Metallic money and paper money :
Based on the material used money can be divided into metallic and paper money. If money is made up of metals such as silver, nickel, steel etc., all coins are metallic money and if money is printed on papers is called paper money.

4) Standard money and token money :
If the face value and intrinsic value are same, then the money is called standard money and if the face value is higher than the intrinsic value is called token money.

5) Credit money :
It is also called as bank money. This is created by commercial banks. This refers to the bank deposits that are repayable on demand and can be transferred from one person to other through cheques.

Question 5.
Explain the primary and secondary functions of money. [Mar. ’17, ’16]
Answer:
Money has many important functions to perform. These functions may be classified as :
i) Primary functions, ii) Secondary functions, iii) Contingent functions, and iv) Static and dynamic functions.

1. Primary Functions of Money :
The primary functions of money are really as the technical and important functions of money. They are two types :
i) Medium of Exchange :
Money serves as a medium of exchange. It removes the inconveniences of the barter system in which exchange of goods was possible if only there was double coincidence of wants. But money facilitates exchange of commodities without double coincidence wants. Any commodity can be exchanged for money. People can exchange goods and services through the medium of money.

ii) Measure of value :
Money serves as a measure of the value of goods and services. As common measure of value it has removed the difficulty of the barter system and has made transactions simple and easy. The value of each commodity is expressed in the units of money. We call it as price. In view of this function of money, the values of different commodities can be compared and the ratios between the prices of different commodities can be determined easily.

2. Secondary Functions of Money :
Money has two secondary functions which are stated hereunder :
i) Store of value :
The value of commodities and services can be stored in the form of money. Certain commodities are perishable. If they are exchanged for money before they perish, their value be preserved in the form of money. Otherwise they perish and their value is lost forever. Even in the case of durable commodities, their value may diminish over a period of time. But their value can be stored, without any decline, in the form of money by exchanging them for money.

ii) Standard of Deferred Payments :
Money serves as a standard of deferred payments. In modem economies, most of the business transactions take place on the basis of credit. An individual consumer or a business man may now purchase a commodity and pay for it, in future as this function makes it possible to express future payments in terms of money. Similarly one can borrow certain amount of money now and repay it in future.

iii) Transfer of money :
Money can be transferred from one person to another at any time at any place.

Question 6.
State the contingent, static and dynamic functions of money.
Answer:
Money plays a vital role in modem economy.

According to Waker’ – “Money is what money does”.

According to ‘Robertson’ – “Anything which is widely accepted in payment for goods discharge of other kinds of business obligations”.

Contingent functions :
a) Measurement and distribution of National income :
National income of a country be measured in money by aggregating the value of all commodities. This is not possible in a barter system similarly national income can be distributed to different factors of production by making payment then in money.

b) Money equalizes marginal utilises / productivities :
The consumers can equalize marginal utilities of different commodities purchased by them with the help of money. We know how consumers equalize the marginal utility of the taste rupee they speed on each commodity. Similarly firms can also equalize the marginal productivities of different factors of production and maximize profits.

c) Basis of credit :
Credit is created by banks from out of the primary deposits of money supply of credit, in an economy is dependent on the supply of nominal money.

d) Liquidity :
Money is the most important liquid asset. Interms of liquidity it is superior than other assets. Money is cent percent liquid.

Static and Dynamic Functions of money :
Paul Engig classified functions of money as static and dynamic functions.

i) Static Functions :
We have learnt the medium of exchange, measure of value, store of value and standard of deferred payment are the traditional or technical functions of money. Engig called them static functions. These functions facilitate emergence of price mechanism. They do not show any effect on the economic development.

ii) Dynamic Functions :
The functions of money which influence output, consumption, distribution and general price level are called dynamic functions. They make the entire economy dynamic. The functions shown as contingent functions come under dynamic functions.

Question 7.
Explain different kinds of deposits accepted by the commercial banks.
Answer:
Commercial banks pay a very important role in the economic growth of a country. Commercial banks are the most important source of institutional credit in the money market. Banks attract savings from the people and encourage investment in industry, trade and commerce. Bank is a profit seeking business firm dealing in money and credit.

The word bank is derived from the “German” word “bankco” which means joint stock or joint fund. Banking in Britain originated with the lending of money by wealthy individuals to merchants who wished to borrow.

According to ‘Richard Sydney’ sayers – “Banks are institutions whose debts usually referred to as “Bank deposits” are commonly accepted in final settlement of other people’s debts”.

Accepting deposits :
The commercial bank just like any other money lender is doing money lending business. Bank receives public money in the form of deposits. The deposits mainly are of the following types.

a) Current deposits :
These deposits have two characteristics.
1) There are no restrictions with regard to the amount of withdrawal and number of withdrawals.
2) Banks normally do not pay any interest on current account deposits.

b) Savings deposits :
The sole aim of banks in receiving these deposits is to promote the habit of thrift among low income groups. They have the following characteristics :

1. Two or three withdrawals per week are permitted.
2. Banks pay 4% to 5% interest per annum on savings deposits.

c) Recurring deposits :
People will deposit their money in these deposits as monthly installments for a fixed period of time. The bank after expiry of the said period will return the total amount with interest thereon. The rate of interest will be higher than the saving deposits.

d) Fixed deposits :
Deposits of fixed accounts are called fixed or time deposits they are left with the bank for a fixed period. The following are the characteristics.

1. The amount cannot be withdrawn before expiry of fixed period.
2. Bank pay high rate of interest than any deposits.

Question 8.
Explain different types of loans and advances paid by the commercial banks.
Answer:
According to “Crowther”- “A bank is a dealer in debts his own and other people”.

Banking means the accepting for the purpose of lending or investment of deposits of money from the public repayable or demand or otherwise and withdrawable by cheque, draft or otherwise.

Advancing loans :
Commercial banks release funds so collected for productive purposes by way of loans and advances. Commercial bank usually lend money by way of loans, cash credit, overdrafts and by discounting bills of exchange.

a) Cash credit :
In this case, the borrower is given a loan is deposited in his account in the bank. The loan is not normally paid in cash. The borrower can draw money out of his account as per his needs.

b) Overdraft :
It means allowing the depositor to overdraft his account upto a previously agreed limit. Banks allow overdraft only to those persons who have their accounts in the bank. The overdraft is granted only for a short period for customers.

c) Loans :
Usually a loan is granted against the securities of assets or personal security of the borrowed bank loans and advances carry a high rate of interest. In addition, banks grant call loans for every short period. Term loans for longer period and also grant consumer credit for buying durable goods.

d) Discounting bills of exchange :
The bank facilitates ‘trade and commerce’ by discounting the bills of exchange. This is the most popular form of bank lending.

Question 9.
Point out the agency and general utility functions of commercial banks.
Answer:
The following are agency functions and general utility functions.

Agency Function :
Commercial banks perform certain agency functions also. On certain occasions they act as agents of the customers. Some of the important agency functions are :

1. Collection of cheques, drafts, bills of exchange etc., of their customers from other banks.
2. Collection of dividends and interest from business and industrial firms.
3. Purchase and sale of securities, shares, debentures, government securities on behalf of the customers.
4. Acting as trustees and keeping their funds in safe custody.
5. Making payments such as insurance premium, income tax, subscriptions etc., on behalf of their customers as per their request.

General Utility Functions :
Besides the agency functions, commercial banks provide certain utility services to their customers. They are :

1. Provision of locker facility for the safe custody of the silver, gold ornaments and important and valuable documents for which service rent is collected.
2. Transfer of money of the customers from one bank to the other by way of demand drafts, mail transfer by collecting commission from them.
3. Provision of online transfer facility of money from one bank to the other.
4. Issue of letters of credit to enable the customers to purchase commodities on the basic of credit.
5. Endorsing and providing guarantee to the shares issued by the joint stock companies.
6. Issue of traveler’s cheques to customers to avoid the risk of carrying of cash.
7. Providing foreign exchange to the customers for exports and imports in connection with their business.
8. Conveying information on behalf of their customers to the businessmen operating in other places and also collecting information of such businessmen and provide it to the customers. Thus they act as ‘referees’.

Question 10.
State any three major (general) functions of a central bank.
Answer:
Central bank is the apex institution of the banking system of a country. It controls, regulates, and activities of the country’s banking system. Reserve Bank of India (RBI) is our central bank. It was established on 1st, April 1935 with a share capital of ₹ 5 crore. It was originally owned by private shareholders but was nationalized by the Government of India in 1949. It performs all important functions of the central bank under the Reserve Bank of India Act, 1934.

Reserve Bank of India performs the following functions:

General Functions :

a) Note issue :
Reserve Bank of India has the monopoly of note issue in the country. It maintains gold and foreign exchange reserves of a minimum ₹ 200 crores of which gold should be worth ₹ 115 crores. There is a separate issue department to issue currency notes. At present Reserve Bank of India issues currency notes of the denomination ₹ 1,000, ₹ 500, ₹ 100, ₹ 50, ₹ 20, ₹ 10, ₹ 5. One rupee note and coins are issued by the Finance Ministry of the Government of India but circulated by the Reserve Bank of India.

2) Banker to Government :
Reserve Bank of India acts as the banker, agent and adviser to the Government of India. It acts as an agent of the Government of India and all the state governments except the Government of Jammu and Kashmir. It receives money and makes payments on behalf of the government and keep the cash balances as deposits without any interest. It assists the government in floating new loans and the management of public debt. It gives temporary advances to the Government in all financial matters.

3) Banker’s Bank :
Reserve Bank serves as a banker not only to the government but also to the banks. According to Banking Regulation Act, 1934 all the scheduled banks are bound by the law to maintain with the Reserve Bank of India a part of their total deposit amount as cash balances. This ratio is called the Cash Reserve Ratio (CRR).

Question 11.
Define inflation and explain its types. [Mar. 17]
Answer:
Inflation, we mean a general rise in the prices in the ordinary language it is rapid upward movement of prices in a broader sense. The term inflation refers to persistent rise in the general price level over a long period of time.

According to Prof.Hawtrey : “Issue of too much currency”

According to ‘Dalton’:
Defined inflation as Too much Money is chasing too few goods”.

According to ‘Pigou’:
“Inflation exists when money income is expanding more than in proportion to increase in earning activity”.

According to Irving Fisher :
“Inflation occurs when the volume of money increases faster than the available supply of goods”.

According to Samuelson :
“Inflation denotes a rise in the general level of prices”. Types of Inflation:

1) Creeping inflation :
When rise in the prices is very slow and small, it is called creeping inflation.

2) Walking inflation :
This is the second stage of inflation. The inflation rate will be between 2% and 4%.

3) Running inflation :
When the rate of inflation is in the range of 4-10% per annum, it is called running inflation.

4) Galloping inflation or hyper inflation :
If the inflation rate exceeds 10%, galloping inflation occurs. It may also called hyper inflation.

Question 12.
Identify the causes of Inflation.
Answer:
In a broader sense, the term inflation refers to persistent rise in the general price level! over a long period of time. Some of the important definitions are given below :

According to Pigou, “inflation exists when money income is expanding more than in j proportion to increase in earning activity”.

Crowther defined inflation as, “a state in which the value of money is falling, that is the prices are rising.

Causes of Inflation :
Broadly speaking, inflation may occur due to the following reasons. Inflation is caused either by excess demand or supply shortage or increased cost of production.

I. Factors Causing Increase in the Aggregate Demand of Commodities :

1. High rate of population growth.
2. Increase in non-plan and plan expenditure of the government.
3. Rise in the per capita income of the people due to economic development.
4. Increased spending by the government on employment programmes and welfare schemes.
5. Heavy investment on development projects with long gestation period.
6. Increase in the money supply in the economy.
7. Liberal availability of credit for unproductive economic activities.
8. Deficit financing by the government.
9. Conspicuous spending by the people having black money.
10. Reduction in direct tax rates.

II. Factors that Increase the Cost of Production :

1. Increase in costs of lands, rents, wage rates and interest rates.
2. Rise in the price of capital equipment and raw materials due to their shortage.
3. Increase in indirect tax rates.
4. Excessive wear and tear of machinery and lack of modernization.
5. Import of machinery and equipment at higher prices.
6. Lack of optimum allocation of resources.
7. Devaluation of domestic currency.
8. Inefficiency in management and lack of control over wasteful expenditure.

III. Factors Causing Inadequate Supply:

1. Failure of monsoons, floods, pests, use of spurious seeds etc., in agriculture.
2. Shortage of investment due to inadequate availability of institutional credit.
3. Non-availability or inadequate availability of inputs and raw materials.
4. Underutilization of productive capacity due to power shortage, labour unrest etc.
5. Long gestation period of certain industries.
6. Exports at the cost of domestic supply.
7. Artificial scarcity due to black-marketing.

Question 13.
Explain the effects of inflation. [Mar. 16]
Answr:
In a broader sense, the term inflation refers to persistent rise in the general price level over a long period of time. Some of the important definitions are given below :

According to Pigou, “inflation exists when money income is expanding more than in proportion to increase in earning activity”.

Crowther defined inflation as, “a state in which the value of money is falling, that is the prices are rising.

Effects of Inflation:
Inflation affects economic activities such as production, distribution, social and political relations in an economy adversely.
A) On Production:

1. Mild inflation stimulates production as it increases the profit margin entrepreneurs.
2. High inflation rate of hyper inflation hinders production.
3. Inflation discourages savings. This affects the capital formation which intum affects products.

B) On Distribution:
The impact of inflation is not uniform on all sections of people. It affects certain sections of the people adversely while certain other sections gain because of inflation. This can be elaborated as follows :

1) Fixed Income Groups :
People belonging to fixed income groups suffer due to inflation because their incomes do not increase as prices of commodities rise.

2) Working Class :
Workers and wage earners in the informal sector normally work for subsistence living. Even otherwise their wages do not rise as and when prices rise. Such people suffer because of inflation.

3) Debtors and Creditors :
Inflation results a decline in the value of money. Therefore, creditors lose as the value of money is higher when they have lent and less when they are repaid. But debtors gain because the value of money is high when they borrowed but low when they repay.

4) Consumers and Entrepreneurs :
Consumers lose but entrepreneurs gain because of inflation.

C) On Social Justice Front :
Economic inequality leads to unequal opportunities in matters of health, education and employment. This results in social injustice.

D) On Political Front:
Inflation widens social and economic disparities which cause frustration among the sufferers. This provides opportunity for political movements and if the government is not responsive, the movements may threaten the stability of governments.

Question 14.
What are the Components of Money Supply.
Answer:
Money supply includes all money in circulation in the economy. The components of money supply may vary from country to country. Broadly speaking, money supply consists of the following:

1. Currency Issued by the Central Bank :
In any country the central bank issues currency. Currency consists of paper notes and coins. In India Reserve Bank of India, which is the central bank of the country, issues notes in the denominations of 2,000, 500, 100, 50, 20 and 10 rupees. The one rupee note (which is not in circulation in practice) and coins are issued by the Finance Ministry of the Government of India.

2. Demand Deposits Created by Commercial Banks :
Bank deposits are a prominent component of money supply. Commercial banks create credit from the primary deposits of money received from the public. Credit is created in the form deposits called derived or secondary deposits. In developed countries they constitute nearly 80 per cent of money supply.

Very Short Answer Questions

Question 1.
What is Barter System? [Mar. ’16]
Answer:
Prior to the introduction of money, the barter system was in vogue. In the system on commodity was exchanged for another commodity. Under this system, no one was able to produce all goods at their disposal. As a consequence, they used to exchange commodities among themselves. For instance, a producer for paddy used to exchange paddy for clothes from the producers of cloths. Thus, this system was beset with several difficulties.

Question 2.
What are the functions of money?
Answer:
Money has many important function to perform. These functions may be classified as
i) Primary functions, ii) Secondary functions, iii) Contingent functions and iv) Static and dynamic functions. .

Question 3.
What is paper money?
Answer:
Paper money is made of paper. Currency notes in the form of ₹ 2,000, ₹ 500, ₹ 100, ₹ 50, ₹ 20, ₹ 10 are printed on paper in India.

Question 4.
What do you understand by stone of value of money?
Answer:
By this functions money preserve the value of perishable commodities in the form of money if they are exchanged before they prism. It stores the value of durable commodities also.

Question 5.
What is token money?
Answer:
Token money is money or unit of currency whose face value is higher then the intrinsic value. Ex. 1, 2 and 5 rupees coins, etc.

Question 6.
What are the Monetary Aggregates of RBI?
Answer:
Monetary Aggregates :
In India money supply is measured in terms fo the following monetary aggregates by RBI at present.

M₀ = Currency in circulation + Banker’s deposits with the RBI + Other deposits with the R.B.I.
M₁ = Currency with the public + demand deposits with the banking system + Other deposits with the R.B.I.
M₂ = M₁ + time liability portion of saving deposits with banking system + Certificates of deposits issued by banks + term depostis maturing within one year. [Excludes CD’s] .
M₃ = M₂ + term deposits over one year maturity + call/term borrowings of banks.

Question 7.
Distinguish between Saving deposits and Time deposits.
Answer:
Savings deposits :
These are the deposits made into the savings account of a bank. The public with small savings fund it safe to keep their money in the savings account of the banks. They encourage savings habit among the public. They are most convenient savings habit among the public. They are most convenient to the small businessmen, salaried employees, artisans and people belonging to the low and middle income groups. The interest paid on these deposits is comparatively low and is around 4% per annum.

Time deposits :
These are also called fixed deposits because the money is deposited with the bank for a fixed period of time. The deposit can be withdrawn only after the expirty of maturity period. However, the depositor has an option to borrow against the security of these deposits. These deposits carry more interest than the savings deposits. The rate of interest varies from 6% per annum to 12% per annum, depending on the period of deposit.

Question 8.
Explain creation of Credit.
Answer:
This is also called bank money. This is created by commercial banks. This refers to the bank deposits that are repayable on demand and which can be transferred from one individual to the other through cheques.

Question 9.
What are the uses of credit cards in the modern economy?
Answer:
Credit Cards :
Now-a-days banks have devised new methods of giving loans to the customers. One such popular method is issuance of the credit card. A credit card holder can use his/her card to purchase goods on credit from specified firms and shops subject to certain regulations. The firms collect the amount of the bills from the banks which issued the credit card. The card holder pays the amount to the bank on a later date with or without interest. Each credit card has a credit limit. The card holder can draw cash also subject to the limit specified by the bank. The credit cards have become very much popular. Certain sections of the population are given specific cards like Kisan cards.

Question 10.
What is Net Banking? Explain the merits of it. [Mar. ’17, ’16]
Answer:
Net banking also called internet or online banking. It is the process of conducting banking transactions over the internet. Viewing bank statements and the status of a bank account online comes under the definitions of net banking.

Question 11.
Write about the main objectives of Central Bank.
Answer:
Central Bank is the apex institution of the banking system in a country. It controls, regulates and supervises the activities of the country’s banking system. The Reserve Bank of India works to achieve the following objectives :

1. Regulating the issue of currency notes.
2. Achieving the monetary stability in the economy.
3. Controlling the credit system.
4. Providing guidance to commercial banks.
5. Evolving and implementing uniform credit policy throughout countiy.

Question 12.
What is Clearance House.
Answer:
Businessmen and other customers issue cheques towards payment for their transactions. A businessman or customer may get a cheque issued on a bank in which he has no account. He has to deposit it in his bank and which collects the amount from the bank on which the cheque is issued. This happens on a large scale everyday and calls for inter-bank settlement of accounts. Since all the commercial banks maintain deposit accounts with the Reserve Bank of India, it all cheques to settle the inter-bank transactions by making appropriate entries in the accounts of the commercial banks. For this purpose the Reserve Bank established clearing houses at different places.

Question 13.
Explain the Types of Inflation.
Answer:
Inflation is divided into different bases on its pace or rate of inflation and the causes of inflation. They are detailed below :
1) Based on the Rate of Inflation :
On the basis of the rate of inflation, it may be classified into four types. :

1. Creeping inflation
2. Walking inflation
3. Running inflation
4. Galloping inflation

2) Based on cause of inflation :

1. Demand pull inflation
2. Cost push inflation

Question 14.
Who are affected by the inflation?
Answer:
Inflation affects economic activities such as production, distribution, social and political relation in an economy adversely.

Question 15.
What are the uses of overdrafts?
Answer:
Overdraft: This is a facility allowed by the bank to the current account holders. They are allowed to withdraw money, with or without security, in excess of the balance available in their account, up to a limit. This facility is available as a temporary measure to the borrowers to meet their short needs in case of shortage of regular funds. Interest is charged on the amount of actual withdrawal.

Question 16.
Which Bank is called as bankers bank and why?
Answer:
Banker’s Bank :
Reserve Bank serves as a banker not only to the government but also to the banks. According to Banking Regulation Act, 1934 all the scheduled banks are bound by the law to maintain with the Reserve Bank of India a part of their total deposit amount as cash balances. This ratio is called the Cash Reserve Ratio (CRR). Reserve Bank provides financial assistance to the commercial banks in times of their financial stringency by giving loans or rediscounting the bills of exchange. It acts as clearing house for Settlement of inter bank accounts.

Question 17.
What are the dynamic functions of money?
Answer:
The function of money which influence output consumption, distribution and the given price level are known as dynamic functions. They make the entire economy into dynamic. The contingent function explained about under the perview of dynamic functions.

Question 18.
What is currency?
Answer:
Currency is the form in which money is circulated in the economy by the monetary authority. Currency includes coins and paper notes. It is only one component of money.

Question 19.
What is cash credits?
Answer:
Cash credit is a type of loan given by the commercial bank which facilitaties with drawal of loan amount in instalments as and when necessary.

Question 20.
What is meant by discounting of bills of exchange?
Answer:
Bills of exchange are undertakings written by the buyers and given to sellers when the transaction is made on credit basis. The buyer undertakes to make payment after a specified period or on a specified future date. The traders who posses such bills of exchange with them may approach the banks for discounting of the bills of exchange when they need money. The commercial banks pay advances by discounting the bills of exchange with or without security.

Telangana TSBIE TS Inter 1st Year Economics Study Material 8th Lesson Theories of Employment and Public Finance Textbook Questions and Answers.

TS Inter 1st Year Economics Study Material 8th Lesson Theories of Employment and Public Finance

Long Answer Questions

Question 1.
Critically examine the classical theory of employment.
Answer:
The theory of output and employment developed by economists such as Adam Smith, David Ricardo, Malthus is known as classical theory. It is based on the famous “Law of markets” advocated by J.B. Say. According to this law “supply creates its own demand”. The classical theory of employment assumes that there is always full employment of labour and other resources. The classical economists ruled out any general unemployment in the long run. These views are known as the classical theory of output and employment.

The classical theory of employment can be three dimensions.

C. Equilibrium of the labour market (Pigou wage cut policy)

A) Goods market equilibrium :
The 1^st part of Say’s law of markets explains the goods market equilibrium. According to Say “supply creates its own demand”. Say’s law states that supply always equals demand. Whenever additional output is produced in the economy, the factors of production which participate in the process of production. The total income generated is equivalent to the total value of the output produced. Such income creates additional demand for the sale of the additional output. Thus there could be no deficiency in the aggregate demand in the economy for the total output. Here every thing is automatically adjusting without need of government intervention.

The classical economists believe that economy attains equilibrium in the long run at the level of full employment. Any disequilibrium between aggregate demand and aggregate supply equilibrium adjusted automatically. This changes in the general price level is known as price flexibility.

B) Money market equilibrium :
The goods market equilibrium leads to bring equilibrium of both money and labour markets. In goods market, it is assumed that total income spent the classical economists agree that part of the income may be saved. But the savings is gradually spent on capital goods. The expenditure on capital goods is called investment. It is assumed that equality between savings and investment is brought by the flexible rate of interest. This can be explained by the following diagram.

In the diagram savings and investment are measured on the ‘X’ axis and rate of interest on Y axis. Savings and investments are equal at ‘Oi’ rate of interest. So money market equilibrium can be automatically brought through the rate of interest flexibility.

C) Labour market equilibrium :
According to the classical economists, unemployment may occur in the short run. This is not because the demand is not sufficient but due to increase in the wages forced by the trade unions. A.C. Pigou suggests that reduction in the wages will remove unemployment. This is called wage – cut policy. A reduction in the wage rate results in the increase in employment.

According to the classical theory supply of and demand for labour are determined by real wage rate. Demand for labour is the inverse function of the real wage rate. The supply of labour is the direct function of real wage rate. At a particular point real wage rate the supply of and the demand for labour in the economy become equal and thus equilibrium attained in the labour market. Thus there is full employment of labour. This can be explained with the help of diagram.

In the above diagram supply of and demand for labour is measured on the X – axis.

The real wage rate is measured on the Y axis.

If the wage rate is OWp the supply of labour more than the demand for labour. Hence the wage rate falls. If the real wage rate is 0W2, the demand for labour is more than supply of labour. Hence the wage rate rises. At OW, real wage rate the supply and demand are equal. This is equilibrium.

Assumptions :

1. There is no interference of government of the economy.
2. Perfect competition in commodity and labour market.
3. Full employment.

Question 2.
Explain the Keynesian theory of employment. [Man’17, ’16]
Answer:
Keynes theory of employment is the principle of effective demand. He called his theory, general theory because it deals with all levels of employment. Keynes explains that lack of aggregate demand is the cause of unemployment. He used the terms aggregate demand, aggregate supply. It means total. The term effective demand is used to denote that level of aggregate demand which is equal to aggregate supply.

According to Keynes where aggregate demand and aggregate supply are intersected at that point effective demand is determined. This effective demand will determine the level of employment.

Aggregate supply schedule :
The aggregate supply schedule shows the various amounts of the commodity that will be offered for sale at a series of price. As the level of output increases with the level of employment. The aggregate supply price also increases with every increase in the level of employment. The aggregate supply curve slopes upwards from left to right. But when the economy reaches the level of the full employment, the aggregate supply curve becomes vertical.

Aggregate demand schedule :
The various aggregate demand prices at different level of employment is called aggregate demand price schedule. As the level of employment rises, the total income of the community also rises and therefore the aggregate demand price also increases. The aggregate demand curve slopes upward from left to right.

Equilibrium level of income :
The two determinants of effective demand aggregate supply and aggregate demand prices combined schedule is shown in the following table.

The table shows that so long as the demand price is higher than the aggregate supply price. The level of employment 40 lakh workers aggregate demand price is equal to aggregate supply price i.e., 300 crores. So effective demand in the above table is ₹ 300 crores. This can be shown in the following diagrams.

In the diagram ‘X’ axis represents the employment and Y axis represents price. A.S is aggregate supply curve A.D is aggregate demand curve. The point of intersection between the two ‘E₁‘ point. This is effective demand where all workers are employed at this point the entrepreneurs expectation of profits are maximised. At any other points the entrepreneurs will either incur losses or Employment earn sub-normal profits.

Question 3.
Discuss the concept of public finance. Describe the sources of public revenue.
Answer:
Public finance deals with the income and expenditure of public authorities (government). The word public is used to denote state or government: central, state and local bodies. According to Prof. Hugh Dalton “it is concerned with the income and expenditure of public authorities and with the adjustment of one to another”.

Modem governments play a major role in creating economic and social infrastructure. They spend lots of money on construction of roads, railways, on creating communication systems, education and health, on providing irrigation facilities and electricity etc. Of late modem governments have been spending huge amounts on various welfare measures to ameliorate the difficulties of poor and downtrodden sections of their population.

Public Revenue:
As explained in the previous paragraphs, a modem government has many functions to perform. It needs huge revenue for the performance of all its functions efficiently. Therefore it collects revenue by imposing taxes and also receives money from the people in many other forms. Revenue received by the government from different sources is called public revenue. Public revenue is broadly classified into two kinds :

1. Tax revenue and
2. Non-Tax revenue.

1) Tax Revenue :
Revenue received through collection of taxes from the public is called tax revenue. Both the central and state governments collect taxes as per their allocation in the Constitution.

Broadly taxes are divided into two categories : a) direct taxes, b) indirect taxes.
a) Direct Taxes :
i) Taxes imposed on individuals and companies based on income and expenditure.
Ex : Personal income tax, corporate tax, interest tax and expenditure tax.

ii) Taxes imposed on property and capital assets of individuals and companies.
Ex : Wealth tax, gift tax, estate duty.

b) Indirect Taxes :
Taxes levied On goods and services. Ex : Excise duty, customs duty, service tax.

2) Non – Tax Revenue :
Government receives revenue from sources other than taxes and such revenue is called the non-tax revenue. The sources of non-tax revenues are as follows:
a) Administrative Revenue :
Government receives money for certain administrative services. Ex : License fee, Tuition fee, Penalty etc.

b) Commercial Revenue :
Modern governments establish public sector units to manufacture certain goods and offer certain services. The goods and services are exchanged for the price. So such units earn revenue by way of selling their products.

Some of the examples of the public sector units are Indian Oil Corporation, Bharath Sanchar Nigam Ltd, Bharath Heavy Electricals, Indian Railways, State Road Transport Corporations, Air India etc.

c) Loans and Advances :
When the revenue received by the government from taxes and from non-tax sources is not sufficient to meet the needs of government expenditure, it may receive loans from the financial institutions operating within the country and also from the public. Modem government can also obtain loans from foreign government and international financial institutions.

d) Grants-in-Aid :
Grants are amounts received without any condition of repayment. They are not repaid. State governments receive such grants from the central government. The central government may receive such grants from foreign governments or any international funding agency.

Grants are of two types.
1. General Grants :
When a grant is given to meet shortage of funds in general without specifying a purpose, it is called general grant.

2. Specific Grants :
When a grant is given for a specific purpose it is called a specific grant. It cannot be spent on any other purpose. Ex : education grant and family planning grant etc.

Question 4.
Explain the concept of public debt Describe the various methods of redemption of public debt
Answer:
When the government’s expenditure exceeds its revenue one option it has is to go for public debt. A government can borrow funds from sources within the country or from abroad. This creates public debt.

Types of Public Debt:
On the basis of the sources, public debt is classified into two categories :

i) Internal debt :
Internal debt is the debt raised from the sources such as banks, financial institutions and private individuals within the country.

ii) External debt :
The borrowings of the government from the sources outside the country are called external debt. A government can raise external debt from the governments of other countries, international financial institutions like World Bank and International Monetary Fund (IMF) and other funding agencies.

Redemption of public debt means repayment of public debt. All government debts should be rapid promptly. There are various methods of repayment which may be discussed under the following heads.

1) Surplus budget :
Surplus budget means having public revenue in excess of public expenditure. If the government plans for a surplus budget, the excess revenue may be utilized to repay public debt.

2) Refunding :
Refunding implies the issue of fresh bands and securities by government so that the matured loans can be used for repayment of public debt.

3) Annuities :
By this method, the government repays past of the public debt every year. Such annual payments are made regularly till the debt is completely cleared.

4) Sinking fund :
By this method, the government creates a separate fund called Sinking fund’ for the purpose of repaying public debt. This is considered as the best method of redemption.

5) Conversion :
Conversion means that the existing loans are changed into new loans before the date of their maturity.

6) Additional taxation :
Government may resort to additional taxation so as to raise necessary funds to repay public debt under this method new taxes are imposed.

7) Capital levy :
Capital levy is a heavy one time tax on the capital assets and estates.

8) Surplus Balance of payments :
This is useful to repay external debt for which foreign exchange is required surplus balance of payment implies exports in excess of imports by which reserves of foreign exchange can be created.

Question 5.
Analyse the central, state financial relations in India.
Answer:
The financial relationship between the centre (union) and the states is provided in the constitution. The constitution gives a detailed scheme of distribution of financial resources between union and the states. The constitution makes a broad distinction between the power to levy a tax and the power to appropriate the proceeds of a tax. Thus the legislature which levies a tax is not necessarily the authority which retains the proceeds of a tax levied.

The constitution grants the union parliament exclusive power to levy taxes on several items. The state legislatures enjoy similar power with regard to several other specified items. In general, the union parliament levies taxes on items mentioned in the union list while the state legislatures levy taxes on items mentioned in the state list.

1) Exclusive Powers of Union Government:
The subjects on whom the union government has the exclusive powers to levy taxes are :
a) Customs duty, b) Corporation tax, c) Capital gains, c) Surcharge on income tax and c) Railway fares etc.

2) Exclusive Powers of State Governments :
State’s exclusive powers to tax include : a) Land revenue, b) Stamp duty, c) Estate duty, d) Entry tax, e) Sales tax and f) Taxes on vehicles and Luxuries etc.

The residuary power of taxation belongs to the centre. It means that the subjects which have not been included either in the union or in the state list may be taxed only by the union government. In the matter of taxation, the constitution recognizes no concurrent jurisdiction. Hence there is no subject who may be taxed both by the union and the state governments.

Besides the exclusive power of taxation of the union and the state governments, there are 3 other categories of taxes. They are :
a) Taxes levied by the union government but collected and appropriated by the states. Stamp duties on bills of exchange, excise duties on medicinal and toilet preparations fall in this category.

b) Certain duties are levied and collected by the union but the net proceeds of such taxes are distributed among the states. Each state gets that amount of the tax as is collected with in its territory. Succession duty, estate duty on property other than agricultural land, taxes on railway fares and freights, taxes on news paper sales and advertisements etc., fall in this category.

c) Certain taxes are levied and collected by the union but the proceeds are distributed between the centre and the states. Taxes on non-agricultural income (Art. 270) and excise duties on items in the union list except medicinal and toilet preparations fall in this category.

3) Miscellaneous Powers:
i) After 73^rd and 74^th Amendment of the Constitution, a provision is made for the constitution of the consolidated fund of state from which resources are to be provided to the village panchayats and municipalities.

ii) According to Article 360, during the proclamation of financial emergency, the President can give financial directives to the states. The union government supplements the financial resources of the states by two other means besides distribution of tax revenues. There are : a) Advancement of central loans and b) Grants-in-aid given to the states.

Question 6.
Write an essay on Federal Finance.
Answer:
Federal finance means the finance of the central government as well as the state governments and the relationship between the two. In a federal system of finance, all items of revenue and expenditure are divided among the central, state and local governments. All the three forms of government are free to make expenditure on their respective heads and to get revenue from their respective sources.

Characteristics of a Federal Finance :
The following are some of the important characteristic features of federal finance :

1. In the federal finance, the sources of income and heads of expenditure are distributed between the central and state governments according to the constitution. Their jurisdiction and rights are clearly defined in the constitution.
2. In the federal system the central government provides financial aid to states.
3. Although the state government have administered autonomy, yet they remain subordinate to the centre. No state is free to fall apart from central government on its own.
4. In case of any financial dispute arising between the central and the state governments, the solution there of is sought according to the constitutional provisions. India with a federal form of government has a federal finance system.

The essence of the federal form of government is that the central and state governments should be independent of each other in their respective spheres of action. The constitution should spell distinctly and separately the functions to be performed by respective governments. Once the functions of the governments have been spelt out, it becomes equally important that each of the governments should be provided with competent sources of raising adequate revenue to discharge the functions entrusted to it. Thus, for the successful operation of the federal form of government, two important conditions are essential, viz.

1. Each government should have independent sources of revenue, and
2. Each government should have total command over its resources to meet its needs.

In short, financial independence and adequacy constitute the backbone of the federal
finance system.

Question 7.
Describe the concept, components and types of budget.
Answer:
Budget is an annual statement showing the estimated receipts (revenue) and expenditure of a government for a financial year (April – March). The governments present to the legislature an annual budget every year for its approval. The budget is presented by the finance minister. The government cannot incur any expenditure unless it has the prior approval of the legislature.

Sometimes a vote on account budget is presented by the government when it is not possible to present the full budget. It is an interim budget for a few months. This will facilitate the government to incur expenditure pending approval of the regular budget.

Objectives :
The main purpose of the budget is to obtain approval of the legislature for the tax proposals and allocation of resources to various government activities. The government utilizes the occasion to state its policies and programmes.

Budget Estimates :
In the budget, budget estimates for the ensuing financial year are shown along with the actual expenditure of the preceding financial year, and budget estimates and revised estimates for the current financial year. For a clear understanding of these estimates, budget at a glance for the year 2013-14.

Components of the Budget :
The budget consists of both receipts (income) and expenditure of the government. The budget of the Government of India consists of two main components :
1) Budget Receipts:
a) Revenue Receipts :
This consists of tax revenue and non-tax revenue and

b) Capital Receipts :
This consists of recoveries of loans, other receipts and borrowings and other liabilities.

2) Budget Expenditure :
In the Union budget of India, the budget expenditure is classified into plan expenditure and non-plan expenditure. Each category is further divided into revenue account and capital account. Let us enlist them as hereunder :
i) Plan Expenditure:
a) Plan expenditure on revenue account.
b) Plan expenditure on capital account.

ii) Non-plan Expenditure :
a) Non-Plan expenditure on revenue account.
b) Non-Plan expenditure on capital account.

Again the plan expenditure and the non-plan expenditure is summed up and shown as revenue expenditure and capital expenditure.

Types of Budget:
There are three types of budgets based on the difference between the receipts and expenditure:
1) Surplus Budget :
This refers to the budget in which the total revenue is more than the total expenditure (R>E).

2) Deficit Budget :
This refers to the budget in which the total expenditure exceeds the total revenue (R<E).

3) Balanced Budget :
This refers to the budget in which the total expenditure and the total revenue are equal (R = E).

Short Answer Questions

Question 1.
“Supply creates its own demand”. Explain the statement ofJ.B. Say.
Answer:
Classical theory of employment or the theory of output and employment developed by economists such as Adam Smith, David Ricardo, Robert Malthus etc., it is based on the J.B Say’s law of market’. According to this law “supply creates its own demand”. The classical theory of employment assumes that there is always full employment of labour and other resources.

According to this law the supply always equals to demand it can be expressed as S=D. Whenever additional output is produced in the economy. The factors of production which participate in the process of production. Earn income in the form of rent, wages, interest and profits.

The total income so generated is equivalent to the total value of the additional output produced. Such income creates additionl demand necessary for the sale of the additional output. Therefore the question of addition output not being sold does not arise.

Question 2.
Enumerate the assumptions and major aspects of classical theory of employment
Answer:
The classical theory of employment is based on the Say’s law of markets. The famous law of markets, propounded by the J.B Say states that “Supply creates its own demand”.

Assumptions :
The Say’s law is based on the following assumptions.

1. There is a free enterprise economy.
2. There is perfect competition in the economy.
3. There is no government interference in the functioning of the economy.
4. The equilibrium process is considered from the long term point of view.
5. All savings are automatically invested.
6. The interest rate is flexible.
7. The wage rate is flexible.
8. There are no limits to the expansion of the market.
9. Money acts as medium of exchange.

Aspects of Classical Theory :
The classical theory of employment can be discussed with three dimensions.

A) Goods Market Equilibrium :
The classical theory of employmet is based on the Say’s Law of Markets. The first part of Say’s market law explains the goods market equilibrium. The famous law of markets, propounded by the J.B. Say states that, “Supply creates its own demand”.

B) Money Market Equilibrium (Saving Investment Equilibrium) :
The goods market equilibrium leads to bring equilibrium of both money and labour markets. In goods market, it is assumed that the total income is spent. The classical economists agree that part of the income may be saved, but the savings is gradually spent on capital goods. The expenditure on capital goods is called investment. It is assumed that equality between savings and investment (S=I) is brought by the flexible rate of interest.

C) Labour Market Equilibrium :
Pigou’s Wage Cut Policy: According to the classical economists, unemployment may occur in the short run. This is not because the demand is not sufficient but due to increase in the wages forced by the trade unions or the interference of government. A.C. Pigou suggested that reduction in the wages will remove unemployment. This is called wage – cut policy. A reduction in the wage rate results in the increase in employment.

Question 3.
Distinguish between aggregate supply price and aggregate demand price.
Answer:
Aggregate supply price: When an entrepreneur gives employment to certain amount of labour. It requires the use of other factors of production or inputs. All these inputs have to be paid remunerations. When all these are added what we get is the value of the output produced or the expenditure incurred to supply employment for a specific number of labourers. By selling the output the entrepreneurs must expect to receive atleast what they have spent. This is known as the “Aggregate supply price” of the output or level of employment. As the level of output increases with the level of employment, aggregate supply price also increases with every increase in the level of employment.

Aggregate demand price :
In Keynes theory the aggregate demand determines the level of employment. The aggregate demand price for a given output is the amount of money which the firms expect to receive from the sale of that output. Then aggregate demand will be equal to the sum of consumption (C) investment (I) and Government expenditure (G) for goods and services.
Therefore, Aggregate demand (AD) = C+ I + G.

As the level of employment rises, the total income of the community also rises and therefore the aggregate demand, price also increases.

Question 4.
Explain the criticism against the classical theory of employment
Answer:
The classical theory of employment came in for severe criticism from J.M. Keynes. The main points of criticism are as follows :

1. The assumption of full employment is unrealistic. It is rare phenomenon and not a normal features.
2. The wage cut policy is not a practical policy in modem times. The supply of labour is a function of money wage and not real wage. Trade unions would never accept any reduction in the money wage rate.
3. Equilibrium between savings and investment is not brought about by a flexible rate of interest. Infact, saving is a function of income and not interest.
4. The process of equilibrium between supply and demand is not realistic. Keynes commented the self adjusting mechanism doesn’t always operate.
5. Long run approach to the problem of unemployment is also not realistic. Keynes commented, “we are all dead in the long ran”. He considered unemployment as a short-run problem and offered immediate solution through his employment theory.
6. It is not correct to say that money is neutral. Money acts not only as a medium of exchange but also as a store of value. Money influences variables like consumption, investment and output.

Question 5.
Explain the concept of effective demand.
Answer:
Effective demand means where aggregate demand equals the aggregate supply. When aggregate demand is equal to aggregate supply the economy is in equilibrium. This can be shown in the table.

In the table when the level of employment is 14 lakh workers, aggregate demand price is equal to aggregate supply price i.e., 1700 crores. This can be shown in the following diagram.

In the above diagram aggregate demand price curve (AD) and the aggregate supply price curve (AS) interest each other at point Er It shows the equilibrium point. The equilibrium has been attained at ON₁ level of employment. It is assumed that ON₁ in the above diagram does not indicate full employment as the economy is having idle factors of production. So it is considered as under-employment equilibrium.

According to Keynes, to achieve full employment an upward shift of aggregate demand curve is required. This can be possible through government expenditure on goods and services supplied in the economy, whenever private entrepreneurs may not show interest to invest. With this the AD₁ curve (C + I) shift as AD₂ (C + I + G) at new point of effective demand E₂, where the economy reaches full employment level i.e., ONF.

Question 6.
What are the sources of public revenue? [Mar. ’16]
Answer:
Revenue received by the government from different sources is called public revenue. Public revenue is classified into two kinds.

1. Tax revenue
2. Non-Tax revenue.

1) Tax Revenue :
Revenue received through collection of taxes from the public is called tax revenue. Both the state and central government collect taxes as per their allocation in the constitution.

Taxes are two types.
a) Direct taxes:

1. Taxes on income and expenditure. Ex : Income tax, Corporate tax etc.
2. Taxes on property and capital assests. Ex: Wealth tax, Gift tax etc.

b) Indirect taxes :
Taxes levied on goods and services. Ex: Excise duty, Service tax.

2) Non – tax revenue :
Government receives revenue from sources other than taxes and such revenue is called non-tax revenue. They are :
a) Administrative revenue :
Government receives money for certain administrative services. Ex : License fee, Tuition fee etc.

b) Commercial revenue :
Modern governments establish public sector units to manufacture certain goods and offer certain services. The goods and services are exchanged for the price. So such units earn revenue by way of selling their products. Ex: Indian Oil Corporation, Bharath Sanchar Nigam Ltd, Bharath Heavy Electricals, Indian Railways, State Road Transport Corporations, Indian Air lines etc.

c) Loans and advances :
When the revenue received by the government from taxes and from the above non-tax sources is not sufficient to meet the needs of government expenditure, it may receive loans from the financial institutions operating within the country and also from the public. Modem government also taken loans from international financial institutions.

d) Grants-in-aid :
Grants are amount received without any condition of repayment. They are not repaid.
These are two types. 1. General grant, 2. Specific grant.

Question 7.
List out various items of public expenditure.
Answer:
Public expenditure is an important constituent of public finance. Modem governments spend money from various welfare activities. The expenditure incurred by the government on various economic activities is called public expenditure.

Governments incur expenditure on the following heads of accounts.

1. Defence
2. Internal security
3. Economic services
4. Social services
5. Other general services
6. Pensions
7. Subsidies
8. Grants to state governments
9. Grants to foreign governments
10. Loans to state governments
11. Loans to public enterprises
12. Loans to foreign governments
13. Repayment of loans
14. Assistance to states on natural calamities etc.

Question 8.
Point out the redemption methods of public debt. [Mar,’17]
Answer:
Repayment of debt by government is called redemption of public debt. Internal debt can be repaid in the domestic currency but foreign exchange is necessary to repay external debt.

Redemption of Public Debt:

The following are the methods of redemption of public debt.
1) Surplus Budgets :
Surplus budget means having public revenue in excess of public expenditure. If the government plans for a surplus budget, the excess revenue may be utilized to repay public debt.

2) Refunding :
Refunding implies the issue of fresh bonds and securities by the government so that the matured loans can be used for repayment of public debt.

3) Annuities :
By this method the government repays part of the public debt every year. Such annual payments are made regularly till the debt is completely cleared.

4) Sinking Fund :
By this method, the government creates a separate fund called ‘Sinking fund’ for the purpose of repaying public debt. A part of the public revenue is deposited into this fund every year so that public debt is repaid from the sinking fund. This is considered as the best method of redemption.

5) Conversion :
Conversion means that the existing loans are changed into new loans before the date of their maturity. This method is advantageous when the rate of interest charged on the new loans is less than the rate of interest to be paid on the existing loans.

Question 9.
What are the characteristics of federal finance? [Mar. ’17]
Answer:
Federal finance means the finance of the central government as well as the state governments and the relationship between the two. In a federal system of finance, all items of revenue and expenditure are divided among the central, state and local governments. All the three forms of government are free make expenditure on their respective heads and to get revenue from their respective sources.

Characteristics of a Federal Finance :
The following are some of the important characteristic features of federal finance :

1. In the federal finance, the sources of income and heads of expenditure are distributed between the central and state government according to the constitution. Their jurisdiction and rights are clearly defined in the constitution.
2. In the federal system the central government provides financial aid to states.
3. Although the state government have administered autonomy, yet they remain subordinate to the centre. No state is free to fall apart from central government on its own.
4. In case of any financial dispute arising between the central and the state governments, the solution thereof is sought according to the constitutional provisions. India with a federal form of government has a federal finance system.

Question 10.
Write a note on Finance Commission and its functions. [Mar. ’16]
Answer:
The Finance Commission of India came into existence in 1951. It was established under Article 280 of the Indian Constitution by the President of India. It was formed to define the financial relations between the centre and the state. As per the Constitution, the commission is appointed for every five years and consists of a chairman, secretary and four other members. The first finance commission submitted its report in 1952.

The finance commission advises the President, what percentage of the income tax should be retained by the centre, and what principles should be adopted to distribute the divisible pool of the income tax among the states. Since the institution of the first finance commission, stark changes have occurred in the Indian economy causing changes in the macro economic scenario. This has led to major changes in the finance commission’s recommendations over the years. Till date, fourteen finance commissions have submitted their reports.

Functions of Finance Commission :
The functions of the finance commission can be explicitly stated as :

1. Distribution of net proceeds of taxes between centre and the states, to be divided as per their respective contributions to the taxes.
2. Determine factors governing grants-in aid to the states and the magnitude of the same.
3. To make recommendations to President as to the measures needed to augment the consolidated fund of a state to supplement the resources of the panchayats and municipalities in the state on the basis of the recommendations made by the finance commission.

Question 11.
Explain the budget deficits.
Answer:
Generally speaking, budget deficit arises when the total expenditure in the budget exceeds the total receipts (income). Technically there are four types of deficits with reference to a budget:
1) Revenue Deficit :
Revenue deficit arises when revenue expenditure exceeds revenue receipts.
Revenue deficit = revenue receipts – revenue expenditure.

2) Budget Deficit :
Budget deficit is the difference between the total receipts and the total expenditure.
Budget deficit = Total receipts – Total expenditure.

3) Fiscal Deficit :
Fiscal deficit is the difference between the total expenditure and the total revenue plus the market borrowings.
Fiscal deficit = (Total revenue – Total expenditure) + Market borrowings & Other liabilities.
(or)
Fiscal deficit = Budget deficit + Market borrowings and Other liabilities.

4) Primary Deficit :
Primary deficit is the fiscal deficit minus interest payments.
Primary deficit = Fiscal deficit – Interest payments.

Modem governments have been resorting to deficit budgets in order to meet the growing expenditure needs to finance for economic development. But it is not desirable to have large deficits, particularly fiscal deficit as it would have adverse effects on the economy.

Very Short Answer Questions

Question 1.
How do you explain the term classical economics?
Answer:
The term classical economics refers to the body of economic group which held their influence from the letter half of the 18th century to the early part of the 20th century. The most important principle of classicism are personal liberty. Private property and freedom of private enterprise.

Question 2.
What is Money Market Equilibrium?
Answer:
Money Market Equilibrium (Savings Investment Equilibrium) :
The goods market equilibrium leads to bring equilibrium in both money and labour markets. In the goods market, it is assumed that the total income is spent. The classical economists agree that part of the income may be saved, but the savings are gradually spent on capital goods. The expenditure on capital goods is called investment. It is assumed equality between savings and investment (S=I) is brought by the flexible rate of interest. This is explained in the Fig.

In diagram, savings and investment are measured on the OX axis and rate of interest is shown on the OY axis. Savings and investments are equal at Oi rate of interest where the curves intersect each other. Hence, Oi is the equilibrium rate of interest which will come to stay in the market. If any change in the demand for investment and supply of savings comes about, the curves will shift accordingly, and the equilibrium rate of interest will also change and further it brings savings and investment into equality. Thus, money market equilibrium can be automatically brought through the rate of interest flexibility.

Question 3.
What is Say’s law of markets?
Answer:
J.B Say a French economist advocated the famous ‘Law of markets’ on which the classical theory of employment is based. According to this law “supply creates its own demand”. According to this law whenever additional output is created. The factors of production which participate in that production receive incomes equal to that value of that output. This income would be spent either on consumption goods or on capital goods. Thus additional demand is created matching the additional supply.

Question 4.
Explain the functioning of market mechanism in the economy.
Answer:
Market mechanism is often interpreted as a ‘free’ market system. Productive efficiency, while allocate efficiency is only a feature of perfect competition. A mechanism is a mathematical structure that models institutions through which economic activity is guided and coordinated. They seek to do so in ways that economize on the resources needed to operate the institutions, and that provide incentives that induce the required behaviors.

1. No governmental intervention.
2. Consumer’s sovereignty : In market economy, consumers are sovereign.
3. Personal freedom and motives.
4. Personal property.
5. Perfect competition.

Question 5.
What do you mean by full employment?
Answer:
Full employment is a situation in which all those who are willing to work at the existing wage rate are engaged in work.

Question 6.
What is an Aggregate Demand Function?
Answer:
The schedule showing aggregate demand prices at different levels of employment in the economy is called as aggregate demand function.

Question 7.
What is the relationship between level of employment and Aggregate supply price?
Answer:
The schedule showing the aggregate supply price at different levels of employment is called the aggregate supply price.

Question 8.
What is Effective Demand?
Answer:
Effective demand is that aggregate demand which becomes equal to the aggregate supply. This refers to the aggregate demand at equilibrium.

Question 9.
What do you mean by Wage – cut policy? [Mar. ’17]
Answer:
Wage cut policy is one of the assumption of classical theory of employment which was started by “AC Pigou” who defended the classical theory and its full employment assumption. To Pigou and others the wage fund is given. The wage rate determined by dividing the wage fund with the number of workers. Pigou advocated a general cut in money wages in times of depression to restore full employment.

If there is a problem of unemployment in the economy. It is possible to solve this problem by reducing the money wages of the workers. This is known as “wage cut policy”.

Question 10.
Define public finance.
Answer:
It deals with the income and expenditure of the public authorities. (Central state and local government.

Question 11.
Differentiate tax revenue and non – tax revenue.
Answer:
Tax Revenues: Revenue received through collection of taxes from the public is called tax revenue. Both the central and state governments collect taxes as per their allocation in the constitution.
Broadly taxes are divided into two categories : (a) direct taxes, (b) indirect taxes.

2. Non – Tax revenue :
Government also receives revenue from sources other than taxes and such revenue is called the non – tax revenue. The sources of non – tax revenues are as follows :
a) Administrative Revenue
b) Commercial Revenue
c) Loan and advances
d) Grants – in – AID.

Question 12.
What is meant by Public expenditure?
Answer:
Public expenditure is an important constituent of public finance. Modem governments spend money perform various financiers. The expenditure incurred by the government on various economic activities is called public expenditure. For example, defence, internal security and economic services.

Question 13.
What is Public Debt?
Answer:
Public Debt :
When the government’s expanding expenditure on various activities exceeds its revenue it has one option i.e., is to go for public debt. A government can borrow funds rom various sources within the country or from abroad. This creates public debt. The instruments of public debt are in the form of various types of government bonds and securities.

Question 14.
What are the Debt Redemption methods.
Answer:
Redemption of Public Debt:
The following are the methods implemented for the redemption of public debt:

1. Surplus Budgets
2. Refunding
3. Annuities
4. Sinking Fund
5. Conversion
6. Additional taxation,
7. Capital Levey
8. Surplus in Balance of Trade.

Question 15.
What is capital levy?
Answer:
Capital Levy is a heavy one time tax on the capital assets and estates over and above a minimum limit of value. This means acquiring funds for debt redemption all at a time.

Question 16.
What is Federal Finance?
Answer:
Federal finance means the finance of all central government as well as the state governments and the relationship between the two. In a federal system of finance, all items of revenue and expenditure are divided among the central, state and local governments. All the three forms of government are free to make expenditure on their respective heads and to get revenue from their respective sources.

Question 17.
Mention the functions of Finance commission.
Answer:
The functions of the finance commission can be explicitly stated as :

1. Distribution of net proceeds of taxes between centre and the states, to be divided as per their respective contributions to the taxes.
2. Determine factors governing grants in aid to the states and the magnitude of the same.
3. To make recommendations to President as to the measures needed to augment the consolidated fund of a state to supplement the resources of the panchayats and municipalities in the state on the basis of the recommendations made by the finance commission.

Question 18.
What is budget?
Answer:
Budget is the annual statement showing the estimated receipts and expenditure of the government for a financial year in the budget. The budget estimates and revised estimates of the current financial year and actual expenditure of the preceding financial year are shown. .

Question 19.
What are the components of a budget?
Answer:
Components of the Budget :
The budget consists of both receipts (income) and expenditure of the government. The budget of the Government of India consists of two main components :
1. Budget Receipts :
a) Revenue Receipts :
This consists of tax revenue and non – tax revenue and

b) Capital Receipts :
This consists of recoveries of loans, other receipts and borrowings and other liabilities.

2. Budget Expenditure :
In the Union budget of India, the budget expenditure is classified into plan expenditure and non – plan expenditure. But, Central Government through its Union Budget 2017 – 18 abondoned plan and non – plan expenditure and replaced these items with Revenue Expenditure and Capital Expenditure.

Persual of the budget at a glance gives a vivid pitcture of the structure of the budget and its components as followed by the government of India in actual practice.

Question 20.
Distinguish between revenue account and capital account.
Answer:
Revenue account consists of the current transactions and includes value of transactions relating to export import travel expenses, insurance, investment, income etc. The capital account refers to the transactions of capital nature such as borrowing and lending of capital repayment of capital sale and purchase of shares and securities etc.

Question 21.
What is meant by Primary deficit?
Answer:
Primary deficit is the fiscal deficit minus the interest payments.

Question 22.
In deficit Budget desirable?
Answer:
Budget deficit is the difference between the total receipts and total expenditure.

Question 23.
What are the exclusive powers of union Government?
Answer:
Exclusive Powers of Union Government:
The subjects on whom the union government has the exclusive powers to levy taxes are : (a) customs duty, (b) corporation tax, (c) capital gains, (d) surcharge on income tax and (e) railway fares etc.

Question 24.
What is Fiscal deficit?
Answer:
Fiscal deficit is the difference between total revenue and total expenditure plus the market borrowings.

Fiscal deficit = (Total revenue – total expenditure) + Other borrowing and other liabilities.

Question 25.
What is the significance of vote on account budget?
Answer:
Vote on account is an interim budget presented for a few months pending presentation at the regular budget.

Question 26.
Write about Fourteenth Finance Commission.
Answer:
Fourteenth Finance Commission :
The First Finance Commission submitted its report in 1952. The Finance Commission advises the President about what percentage of the income tax should be retained by the centre, and what principles should be adopted to distribute the divisible pool of the income tax among the states. Since the institution of the First Finance Commission, stark changes have occurred in the Indian economy causing changes in the macroeconomic scenario. This has led to major changes in the Finance Commission’s recommendations over the years.

Hence, it has become necessary to have a glance at the Fourteenth Finance Commission’s (2015-2020) recommendations. The Committee specifically suggested the suitable measures so as to maintain a stable and sustainable fiscal environment in the country. The 14th Finance Commission was appointed on 2nd January 2013 under the Chairmanship of Y.VReddy, it has submitted its report 15th December 2014.

Question 27.
Write about Fifteenth Finance Commission.
Answer:
Fifteenth Finance Commission :
The Government of India appointed the Fifteenth Finance Commission on November 27, 2017 with N.K. Singh as Chairman. The recommendations of the Commission will cover the five year period 2020 – 25. The Commission has been asked to submit its report by October 30, 2019.

The Commission has been instructed to use the population data of 2011 census as the base for calculating the expenditure needs of various states. This is the first Commission which is required to present its recommandations in the post GST era.

Question 28.
Write in brief, about GST.
Answer:
GST :
Goods and Services Tax (GST) is an Indirect Tax which has replaced many Indirect Taxes in India. The Goods and Service Tax Act was passed in the Parliament on 29th March 2017. the Act came into effect on 1st July 2017; GST is a comprehensive, multistage, destination-based tax that is levied on every value addition. In simple words, GST is an indirect tax levied on the supply of goods and services. Under this system four slabs are fixed for GST rates i.e., 5%, 12%, 18% and 28%.

Telangana TSBIE TS Inter 1st Year Economics Study Material 7th Lesson National Income Analysis Textbook Questions and Answers.

TS Inter 1st Year Economics Study Material 7th Lesson National Income Analysis

Long Answer Questions

Question 1.
What are the various definitions of National Income? Describe the determining factors of National Income.
Answer:
National Income has been defined in a number of ways. National income is the total market value of all goods and services produced annually in a country. In other way, the total income accruing to a country from economic activities in a year’s time is called national income. It includes payments made to all factors of production in the form of rent, wages, interest and profits.

The definitions of national income can be divided into two classes. They are :
i) traditional definitions advocated by Marshall, Pigou and Fisher, and ii) modern definitions.

1) Marshall’s Definition :
According to Alfred Marshall, “the labour and capital of a country acting on its natural resources, produce annually a certain net aggregate of commodities, material and non-material including services of all kinds. This is the true net annual income or revenue of the country”. In this definition, the word ‘net’ refers to deduction of depreciation from the gross national income and to this income from abroad must be added.

2) Pigou’s Definition :
According to A. C.Pigou, “National Income is that part of the objective income of the community including of income derived from abroad which can be measured in money”. He has included that income which can be measured in terms of money. This definition is better than the Marshallian definition.

3) Fisher’s Definition :
Fisher adopted consumption as the criterion of national income. Marshall and Pigou regarded it as the production. According to Fisher, “the national income consists solely of services as received by ultimate consumers, whether from their material or from their human environment. Only the services rendered during this year are income”.

4) Kuznets’ Definition :
From the modem point of view, according to Kuznets, “national income is the net output of commodities and services flowing during the year from the country’s productive system into the hands of the ultimate consumers”.

Determining Factors of National income :
There are many factors that influence and determine the size of national income in a country. These factors are responsible for the differences in national income of various countries.

a) Natural Resources :
The availability of natural resources in a country, its climatic conditions, geographical features, fertility of soil, mines and fuel resources etc., influence the size of national income.

b) Quality and Quantity of Factors of Production :
The national income of a country is largely influenced by the quality and quantity of a country’s stock of factors of production.

c) State of Technology :
Output and national income are influenced by the level of technical progress achieved by the country. Advanced techniques of production help in optimum utilization of a country’s natural resources.

d) Political Will and Stability :
Political will and stability in a country helps in planned economic development and for a faster growth of national income.

Question 2.
Define national income and explain the various concepts of National Income.
Answer:
National Income means the aggregate value of all the final goods and services produced in the economy in one year.

Concepts of National Income :
1) Gross National Product (GNP) :
It is the total value of all final goods and services produced in the economy in one year.

The main components of GNP are :

1. The goods and services purchased by consumers – C.
2. Investments made by public and private sectors -1.
3. Government expenditure on public utility services – G.
4. Income earned through International Trade (x – m).
5. Net factor income from abroad.

GNP at market prices = C + I- G + (x-m)+ Net factor income from abroad.

2) Gross Domestic Product (GDP) :
The market value of the total goods and services produced in a country in one particular period usually in a year is the GDP
GDP = C + I + G

3) Net National Product (NNP) :
Firms use continuously machines and tools for the production of goods and services. This result in a loss of value due to wear and tear of fixed capital. The loss suffered by fixed capital is called depreciation. When we substract depreciation from GNP we get NNP.
NNP = GNP – depreciation.

4) National Income at Factor Cost :
The cost of production of a good is equal to the rewards paid to the factors which participated in the production process. So the cost of production of a firm is the rent paid on land, wages paid to labour, interest paid on capital and profits of the entrepreneur.

National Income at factor cost = NNP + Subsidies – Indirect Taxes – Profits of Govt, owned firms.

5) Personal Income :
It is the total of incomes received by all persons from all sources in a specific time period. Personal income is not equal to National Income. Because social security payments. Corporate taxes, undistributed profits are deducted from national income and only the remaining is received by persons.

Personal Income = National Income at factor cost – Undistributed profits – Corporate taxes – Social security contributions + Transfer payments.

6) Disposable Income :
Personal income totally is not available for spending. Income tax is a payment which must be deducted to obtain disposable income.
Disposable Income = Personal income – Personal taxes D.I = Consumption + Savings

7) Per Capita Income :
National Income when divided by country’s population, we get per capita income.

The average standard of living of a country is indicated by per capita income.

Question 3.
What are the various methods of calculating national income? Explain them. [Mar.’17,’16]
Answer:
There are three methods of measuring National Income.

1. Output method or Product method.
2. Expenditure method.
3. Income method.

‘Carin cross’ says, National Income can be looked in any one of the three ways. As the national income measured by adding up everybody’s income by adding up everybody’s output and by adding up the value of all things that people buy and adding in their savings.

1) Output Method (Product Method) :
The market value of total goods and services produced in an economy in a year is considered for estimating National Income. In order to arrive at the value of the product services, the total goods and services produced are multiplied with their market prices.
Then, National Income = (P₁Q₁ + P₂Q₂ + …. P_nQ_n) – Depreciation – Indirect taxes + Net income from abroad.
Where P = Price
Q = Quantity
1, 2, 3 n = Commodities & Services

There is a possibility of double counting. Care must be taken to avoid this. Only final goods and services are taken to compute National Income but not the raw materials or intermediary goods. Estimation of the National Income through this method will indicate the contribution of different sectors, the growth trends in each sector and the sectors which are lagging behind.

2) Expenditure Method :
In this method, we add the personal consumption expenditure of households, expenditure of the firms, government purchase of goods and services net exports plus net income from abroad.
NI = EH + EF + EG + Net exports + Net income from abroad.
Here, National Income = Private final consumption expenditure + Government final consumption expenditure + Net domestic capital formation + Net exports + Net income from abroad
EH = Expenditure of households
EF = Expenditure of firms
EG = Expenditure of Government
Care should be taken to include spending or expenditure made on final goods and services only.

3) Income Method :
In this method, the income earned by all factors of production is aggregated to arrive at the National Income of a country. The four factors of production receives income in the form of wages, rent, interest and profits. This is also national income at factor cost.
NI = W + I + R + P + Net income from abroad
Where, NI = National income
W = Wages
I = Interest
R = Rent
P = Profits

This method gives us National Income according to distribution of shares.

Short Answer Questions

Question 1.
What are the factors that determine National Income? [Mar. ’17, ’16]
Answer:
National Income is the total market value of all goods and services produced in a country during a given period of time. There are many factors that influence and determine the size of national income of a country.

a) Natural Resources :
The availability of natural resources in a country, its climatic conditions, geographical features, fertility of soil, mines and fuel resources etc., influence the size of National Income.

b) Quality and Quantity of Factors of Production :
The national income of a country is largely influenced by the quality and quantity of a country’s stock of factors of production.

c) State of Technology :
Output and national income are influenced by the level of technical progress achieved by the country. Advanced techniques of production help in optimum utilization of a country’s natural resources.

d) Political Will and Stability :
Political will and stability in a country helps in planned economic development and for a faster growth of National Income.

Question 2.
Explain the differences between gross national product at market prices and gross national product at factor prices.
Answer:
National income is the value of all final goods and services produced in a company in a year.

Gross National Product (GNP) :
Gross National Product is also known as the gross national product at market prices. Gross national product is the current market value of all final goods and services produced in a country during a year including net income from abroad.

The main components of GNP are :
a) The goods and services purchased by consumers (consumption – C).
b) Gross private domestic investment in capital goods (Investment -I)
c) Goods and services consumed by the government (Govt expenditure – G)
d) Net incomes earned through International trade (value of exports – value of imports, i.e., X-M).
GNP = C + I-G + (X-M).

GNP at Factor Cost :
Gross national product at factor cost is the sum of the money value produced by and accruing to the various factors of production in a year in a country. GNP at market prices includes wages, rent, interest, dividends, undistributed corporate profits, mixed incomes (profits of unincorporated business), direct taxes, indirect taxes, depreciation and net income from abroad. GNP at factor cost includes all items mentioned above in GNP at market prices less indirect taxes. GNP at market prices is always higher than GNP at factor cost. If there are any subsidies to the producers, then to get GNP at factor cost, subsidies are added to GNP at market prices.

GNP at factor cost = GNP at market prices = indirect taxes + subsidies.

Question 3.
What are National Income at market prices and National income at factor cost?
Answer:
National Income is the value of all the final goods and services produced in a year of a country.

National Product at Market Prices (NNP) :
The country’s stock of fixed capital undergoes certain amount of wear and tear in producing goods and services over a period of time. This ‘user cost’ or depreciation or charges for renewals and repairs must be substracted from the GNP at market prices to obtain net national product at market prices.

NNP at market prices = GNP at market prices – Depreciation.

National Product at Factor Cost :
It is aslo called as national income. It is the total income received by the four factors of production in the form of rent, wages, interest and profits in an economy during a year. NNP at market prices is not available for distribution among the factors of production. The amount of indirect taxes (which are included in the prices) are paid by the firms to the government and not to the factors of production. Similarly, the government gives subsidies to firms for production of certain types of goods and services and that part of the production cost is borne by the government. Hence, the goods are sold in the market at a lover price than the actual cost of production. Therefore, this volume of subsidies has to broded to the net national income at market prices. Thus,

NNP at factor cost = NNP at market prices – Indirect taxes + Subsidies. In another way,

NNP at factor cost = GNP at market prices – Depreciation – Indirect taxes + Subsidies.

Question 4.
Discuss the three definitions of National Income.
Answer:
National Income has been defined in a number of ways. National income is the toted market value of all goods and services produced annually in a country. In other way, the total income accruing to a country from economic activities in a year’s time is called national income. It includes payments made to all factors of production in the form of rent, wages, interest and profits.

The definitions of national income can be divided into two classes. They are : i) traditional definitions advocated by Marshall Pigou and Fisher, and ii) modem definitions.

1) Marshall’s Definition :
According to Alfred Marshall, “the labour and capital of a country acting on its natural resources, produce annually a certain net aggregate of commodities, material and non-material including services of all kinds. This is the true net annual income or revenue of the country”. In this definition, the word ‘net’ refers to deduction of depreciation from the gross national income and to this income from abroad must be added.

2) Pigou’s Definition :
According to A.C.Pigou, “National Income is that part of the objective income of the community including of income derived from abroad which can be measured in money”. He has included that income which can be measured in terms of money. This definition is better than the Marshallian definition.

3) Fisher’s Definition :
Fisher adopted consumption as the criterion of national income. Marshall and Pigou regared it as the production. According to Fisher, “the national income consists solely of services as received by ultimate consumers, whether from their material or from their human environment. Only the services rendered during this year are income”.

Fisher definition is better than that of Marshall and Pigou. Because, Fisher’s definition has considered economic welfare which is depending on consumption and consumption represents standard of living.

But the definitions advocated by Marshall, pigou, and Fisher are not flawless. The Marshallian and Pigou’s definitions deal with the reasons for economic welfare. But Fisher’s definition is useful to compare economic welfare in different years.

Question 5.
How the per capita income is calculated? What is the relationship between population and per capita income.
Answer:
The per capita income is the average income of the people in a country in a particular year. It is calculated by dividing national income at current prices by population of the country in that year.

This refers to the measurement of per capita income at current prices. This concept is a good indicator of the average income and the standard of living in a country. But it is not reliable because actual income may be more or may be less when compared to the average income.

This per capita income will also be measured at constant prices and so we get real per capita income. By dividing real national income in a particular year by population of that year we will get real per capita income for that year.

Relationship Between Per Capita Income and Population :
There is a close relationship between national income and population. These two together determine the per capita income. If rate of growth of national income is 6% and rate of growth of population is 3% the rate of growth of per capita income will be 3% and it can be expressed as follows :
g_pc = g_ni – g_p
where,
g_pc = Growth rate of per capita income
g_ni = Growth rate of national income
g_p = Growth rate of population

A rise in the per capita income indicates a rise in standard of living. The rise in per capita income is possible only when the rate of growth of population is less than the rate of growth of that national income.

Relationship among National Income Concepts
NIA = Net Income from Abroad
D = Depreciation
ID = Indirect Taxes
Sub = Subsidies
UP = Undistributed Profits
CT = Corporate Taxes
TrH = Transfers received by Households
PTP = Personal Tax Payments
PTP = Gross Domestic Product
GDP = Gross National Product
In fig. we have presented the relation between the various concepts of national income.

Question 6.
Analyse any two methods of measuring National income.
Answer:
There are three methods of measuring National Income. These are :

1. Output method or Product method
2. Income method, and
3. Expenditure method

CaimCross says, “National Income can be looked in any one of the three ways, as the national income measured by adding up everybody’s output by adding up everybody’s income and by adding up the value of all things that people buy and adding in their savings.

1) Output Method or Product Method :
It is also known as inventory method or commodity service method. In this method we find the the market value of all final goods and services produced in a country in a year. The entire output of fined goods and services are multiplied by their respective market prices to find out the gross national product.

GNP = (P₁Q₁ + P₂Q₂ + …. P_nQ_n) + Net income from abroad.
Where, GNP == gross national product,
P = Price of the goods or services
Q = Quantity of goods or services produced
1,2, 3 n are the various goods and services produced.

The values of the intermediary goods and services should not be included. Only final goods and services should be taken into account. Here, we find out the value of output by the different sectors like agriculture, government, professionals, industry.

2) Income method :
In this method, the incomes earned by all factors of production are aggregated to arrive at the National Income of a country. The four factors of production receives income in the form of wages, rent, interest and profits. Incomes in the form of transfer payment is not included in it. This is also known as national income at factor cost.
NI = R + W + I + P
NI = National income
W = Wages R Rent
I = Interest
P = Profits

Very Short Answer Questions

Question 1.
What is National Income?
Answer:
National income is the market value of goods and services produced annually in a country.

Question 2.
Mention the factors that determine National Income.
Answer:
There are many factors that influence and determine the size of national income in a country. These factors are responsible for the differences in national income of various countries.

a) Natural Resources :
The availability of natural resources in a country, its climatic conditions, geographical features, fertility of soil, mines and fuel resources etc., influence the size of national income.

b) Quality and Quantity of Factors of Production :
The national income of a country is largely influenced by the quality and quantity of a country’s stock of factors of production. For example, the quantity of agricultural production and hence, the size of National income.

c) State of Technology :
Output and national income are influenced by the level of technical progress achieved by the country. Advanced techniques of production help in optimum utilization of a country’s natural resources.

d) Political Will and Stability :
Political will and stability in a country helps for planned economic development for a faster growth of national income.

Question 3.
Explain the concept of GNP (Gross National Product).
Answer:
It is the total value of all final goods and services produced in the economy in one year.
GNP = C + I + G + (x-m) where,
C = Consumption
I = Gross National Investment
G = Government Expenditure
X = Exports
M = Imports
x – m = Net foreign trade.

Question 4.
What is Net National Product at factor cost?
Answer:
It is aslo called as national income. It is the total income received by the four factors of production in the form of rent, wages, interest and profits in an economy during a year. NNP at market prices is not available for distribution among the factors of production. The amount of indirect taxes (which are included in the prices) are paid by the firms to the government and not to the factors of production. Similarly, the government gives subsidies to firms for production of certain types of goods and services and that part of the production cost is borne by the government. Hence, the goods are sold in the market at a lower price than the actual cost of production. Therefore, this volume of subsidies has to be added to the net national income at market prices. Thus,

NNP at factor cost = NNP at market prices – Indirect taxes + Subsidies. In another way,

NNP at factor cost = GNP at market prices – Depreciation-Indirect taxes + Subsidies.

Question 5.
What is Personal Income?
Answer:
It is the total of income received by all persons in a year before payment of all direct taxes. The whole of National Income is not availabe to them. Corporate taxes have to be paid by firms. Firms may keep a part of its profits for expansion. Salaried employees may make contributions for social security. Hence,

PI = NI(NNP at factor cost) – (Undistributed corporate profits + Corporate taxes + Social security payments) + Transfer earnings

Question 6.
What are subsidies?
Answer:
A subsidy or government incentive is a form of financial aid or support extended to an economic sector generally with the aim of promoting economic and social policy ………….. consumer/ consumption subsidies. Commonly reduce the price of goods and services to the consumer.

Question 7.
What is Real Per Capita Income ? [Mar. ’17, ’16]
Answer:
Real National Income when divided by country’s population, percapita income is obtained.

The average standard of living of country is indicated by per capita income.

Question 8.
What are the components of National Income?
Answer:
These are the four components of National Income.
a) Consumption (C) :
It is the total expenditure made by households on goods and services. It depends on the level of income.

b) Investment (I) :
It include expenditure on capital goods and machinery, roadways, bridges etc.

c) Government Expenditure (G) :
It is the expenditure made by the government on infrastructural facilities for the use of society.

d) Net Foreign Income :
It is the income earned by a country through international trade.

Question 9.
What is income method of measuring National Income?
Answer:
The value of all final goods and services produced in a country in a year is known as National Income.

Difficulties in Measurement National Income :
Following are the some of the difficulties we face while measuring national income.

1. Many of the products pass through a number of stages before these are purchased. If these are counted at every stage double counting will be there.
2. Goods and services rendered free of charge are not included in the gross national product (GNP). But all these will enhance the welfare of the consumers.
3. Income earned through illegal activities is not included in the gross national product (GNP). But this is also the cause for economic welfare.
4. Goods meant for self consumption are not included in the national income and its result is under estimation of national income.
5. Services of house wives – unpaid services – are not taken into consideration. Therefore, the national income is underestmated.
6. In order to get net national product, depreciation is deducted from gross national product. Thus, depreciation lowers the national income.

Question 10.
How National Income is estimated in India?
Answer:
After independence the Government of India appointed a National Income Estimates Committee in the year 1949, Under the chairmanship of Sri PC. Mahalanobis to claculate the national income of India. At present the Central Statistical Organization (CSO) has been entrusted with the responsibility of preparing national income estimates.

The CSO has divided the Indian economy into 13 sectors and grouped them under five heads. They are :

1. Primary Sector.
2. Secondry Sector.
3. Transport, Communication and Trade.
4. Finance and Real Estate.
5. Community and Personal Services.

Question 11.
Distinguish between Per Capita Income and National Income.
Answer:
Per Capital Income National Income
Per capita income is the average income of people in a country in a particular year. National income is the market value of goods and services produced annually in a country.

Question 12.
What are transfer payments? Give examples.
Answer:
The government may provide social security allowances like pensions, unemployment allowances, scholarships etc. These are incomes for some sections of the society even though no productive services are made by them. These are called transfer payments.

Question 13.
What is the importance of National income estimations?
Answer:
Importance of national income estimations :

1. The national income estimates or statistics are very important for preparing economic plans and for framing national economic policies.
2. The national income data are useful in research and distribution of income in the country.
3. It enables us to assess the performance of each sector in the economy and inter-relationship among the sectors.
4. It is more useful in making budgetory allocations.
5. It gives us an idea of the standard of living in the country.

Question 14.
Expand C.S.O. What is its responsibility?
Answer:
C.S.O. is the Central Statistical Organisation and Responsibility for preparing national income estimates.

Question 15.
What is Depreciation?
Answer:
Firms use continuously machines and tools for the production of goods and services. This results in a loss of value due to the wear and tear of fixed capital. This loss suffered by fixed capital is called depreciation.

Telangana TSBIE TS Inter 1st Year Economics Study Material 6th Lesson Theories of Distribution Textbook Questions and Answers.

TS Inter 1st Year Economics Study Material 6th Lesson Theories of Distribution

Long Answer Questions

Question 1.
Explain critically the marginal productivity theory of distribution.
Answer:
This theory was developed by J.B. Clark. According to this theory, the remuneration of a factor of production will be equal to its marginal productivity. The theory assumes perfect competition in the market for factors of production. In such a market, average cost and marginal cost of each unit of factor of production are the same as they are equal to the price or cost of a factor of production.

For example, if four tailors can stitch ten shirts in a day and five tailors can stitch thirteen shirts in a day, then the marginal physical product of the 5^th tailor is 3 shirts. If stitching charge for a shirt is ₹ 100/-, then the marginal value product of three shirts is ₹ 300/-. According to this theory, the 5^th person will be remunerated ₹ 300/-. Marginal physical product is the additional output obtained by using an additional unit of the factor of production. If we multiply the additional output by market price we will get marginal value product or marginal revenue product.

At first stage when additional units of labour are employed the marginal productivity of labourer increases up to certain extent due to economies of scale. If additional units’ of labour are employed beyond that point the marginal productivity of labour decreases. This can be shown in the given figure.

In the figure, OX axis represent units of labour and OY represent price/revenue/cost. At a given price, OP the firm will employ OL units of labour where price OP = L. If it employs less than ‘OL’ i.e., OL₁ units, MRP will be E₁L₁, which is higher than the price OR If firm employs more than OL units upto OL₂, price is OP is more than E₂L₂. So the firm decreases employment until price = MRP till OL. At that point ‘E’ the additional unit of labour is remunerated equal to his marginal productivity.

Question 2.
Define rent and explain the Ricardian Theory of Rent.
Answer:
David Ricardo was a 19^th century economist of England, who propounded a systematic theory of rent. Ricardo defined rent as “that portion of the procedure of earth which is paid to the landlords for the use of the original and indestructible powers of soil”. According to Ricardo, rent arises due to differential in surplus occurring to agriculturists resulting from the differences in fertility of soil of different grades of land.

Ricardian theory of rent is based on the principle of demand and supply. It arises in both extensive and intensive cultivation of land. When land is cultivated extensively, rent on superior land equals the excess of its produce over that of the inferior land. This can be explained with the following illustration.

We can imagine that a new island is discovered. Assume a batch of settlers go to that Island. Land in this Island is differ in fertility and situation. We assume that there are three grades of land A, B, and G. With a given application of labour and capital superior lands will yield more output than others. The difference in fertility will bring about differences in the cost of production, on the different grades of land. They first settle on A’ grade land for cultivation of com. A’ grade land yields say, 20 quintals of com with the investment of ₹ 300. The cost of production per quintal is ₹ 15 (300/20). The price of com in the market has to cover the cost of cultivation. Otherwise the farmer will not produce corn. Thus, the price in the present case should be atleast ₹ 15 per quintal.

As time passes, population increases and demand for land also increases. In such a case, people have to cultivate next best land, i.e., ‘B’ grade land. The same amount of ₹ 300 is spent on B’ grade land gives only 15 quintals of com as ‘B’ grade land is less fertile. The cost of cultivation on B’ grade land risen to ₹ 20 (300/15) per quintal of com. If the price of corn per quintal in the market is then ₹ 20, the cultivator of ’B‘ grade land will be not cultivate. Therefore, the price has to be high enough to cover the cost of cultivation on ’B’ grade land. Hence, the price also rises to ₹ 20. There is no surplus on ‘B’ grade land. But on A’ grade land, the surplus is 5 quintals or ₹ 100 (5 × 20).

Further, due to growth of population demand for land and corn increased. This necessitates, the cultivation of ‘C’ grade land with ? 300 investment cost. It yields only 10 quintals of com. Therefore, the per quintal production cost rises to 30 (300/10). Then the price per quintal must be atleast ? 30 to cover the cost of production. Otherwise C’ grade land will be withdrawn from cultivation. At price ? 30 C’ grade land yield no surplus or rent. But A grade land yields still layer surplus of 10 quintals or ? 300 (10 x 30). But surplus or rent on ‘B’ grade land has 5 quintals or ? 150 (5 x 30). But there is no surplus or rent on ‘C’ grade land. It covers just the cost of cultivation. Hence, ‘C’ grade land is a marginal land which earns no rent or surplus.

This can also be explained with the following table.

The essence of Ricardian theory of rent.

1. Rent is a pure surplus.
2. Rent is differential surplus.
3. Rent does not determine or enter into price.
4. Diminishing returns applies to agricultural production.
5. Land is put to only one use, i.e., for cultivation.

Ricardian theory’ of rent can be explained with the help of the above diagram.

In the above diagram, the shaded area represents the rent or differential surplus. The least fertile land, i.e., C does not carry any rent. So it is called marginal land or no rent land.

Question 3.
What is meant by real wages? What are the factors that determine real wages?
Answer:
The amount of goods and services that can be purchased with the money wages at any particular time is called real wage. Thus, real wage is the amount of purchasing power received by worker through his money wage.

Factors Determining the Real Wage :
1. Methods of Form of Payment :
Besides money wages, normally the labourers get some additional facilities provided by their management. Ex : Free housing, free medical facilities etc. As a result, this real wage of the worker will be high.

2. Purchasing Power of Money :
An important factor which determines the real wage is the purchasing power of money which depends upon the general price level. A rise in general price level will mean a full in the purchasing power of money, causes decline in real wages.

3. Nature of Work :
The working conditions also determine the real wages of labourer. Less duration of work, ventilation, fresh air etc., result in high real wages, lack of these facilities then the real wages are low even though if money wages are high.

4. Future Prospects :
Real wage is said to be higher in those jobs where there is possibility of promotions, hike in wages and vice-versa.

5. Nature of Work :
Real wages are also determined by the risk and danger involved in the work. If work is risky wages of labourer will be low though money wages are high. Ex : Captain in a submarine.

6. Timely Payment :
If a labourer receives payment regularly and timely the real wages of the labourer is high although his money wage is pretty less and vice-versa.

7. Social Prestige :
Real wage depends on social prestige. The money wages of Bank officer and judge are equal, but the real wage of a judge is higher than bank officer.

8. Period and Expenses of Education :
Period and expenses of training also affect real wages.

Question 4.
Explain about the gross interest and net interest.
Answer:
The concept of interest are two types namely, gross interest and net interest.
Gross Interest :
The payment which the lender receives from the borrower excluding the principal is gross interest. It comprises the following payments :

Net Interest :
It is the payment for the service of capital or money only. This is the interest in economic sense.

Keynes’ Liquidity Preference Theory :
Keynes proposed a monetary explanation of the rate of interest. He said that interest is determined by both the demand for and supply of money. According to J.M. Keynes, “Interest is the reward paid for parting with liquidity for the specified period”.

A. Supply of Money :
Supply of money refers to the total quantity of money in circulation. Though the supply of money is a function of the rate of interest to a degree, supply of money is fixed or perfectly inelastic at a given point of time. It is determined by the central bank of a country.

B. Demand for Money :
Keynes coined a new term liquidity preference. People demand money for its liquidity. The desire to hold ready cash is liquidity preference. The higher the liquidity preference, the higher will be the rate of interest to be paid to induce them to part with their liquid assets. The lower the liquidity preference, the lower will be the rate of interest that will be paid to the cash holders. People demand money basically for three reasons : 1) Transactions motive 2) Precautionary motive 3) Speculative motive.

1) Transaction Motive :
People desire to keep cash for the current transactions of personal and business exchanges. The amount kept for this purpose depends upon the income and business motives.

2) Precautionary Motive :
People keep cash in reserve to meet unforeseen expenses like illness, accidents, unemployment etc. Businessmen keep cash in reserve to gain from unexpected deals in future. Therefore, both individuals and businessmen keep cash in reserve to meet unexpected needs.

3) Speculative Motive :
Speculative motive for money relates to the desire to hold cash to take advantage of future changes in the rate of interest and bond prices. The price of bonds and the rate of interest are inversely related. If the prices of bonds are expected to rise then the rate of interest is expected to fall, as businessmen will buy bonds to sell them when their prices rise and vice versa. Low bond prices are indicative of high interest rates, and high bond prices reflect low interest rates.

The demand for money is inversely related to the rate of interest.

The transaction and precautionary motives are relatively interest inelastic, but are highly income elastic. In the determination of rate of interest, these two motives do not have any role. Only the speculative motive is interest elastic and this plays very important role in determining the rate of interest with the given supply of money. When the demand for money and supply of money are equal, along with the equilibrium, rate of interest also be determined.

Question 5.
What is meant by profit? Explain briefly various theories of profit.
Answer:
Profit is the reward paid to the entrepreneur for his services as an organizer in the process of production.

Theories of Profit:
1. Dynamic theory of profit :
This theory was propounded by J.B.Clark. According to Clark, “Profit is the difference between the price and cost of production of commodity”. He viewed that profit as a reward for entrepreneurial dynamism. Dynamic changes like increase in population, new method of production etc., result in increase in profit. In a static economy due to lack of these changes entrepreneurs receive only wages but not profit. Hence, profits are the result of the dynamic changes only.

2. Innovation theory of profit :
This theory was developed by Joseph Schumpeter. According to Schumpeter, “profit is the reward paid to the entrepreneur for his inventive skills”. Because of these inventions profits arise as a difference between prices and costs of production.

According to Schumpeter, entrepreneur must break the circular flow by introducing innovations. They are :

1. Introduction of new good.
2. Introduction of new method of production.
3. Reorganisation of industry.
4. Opening up of a new market.
5. Discovery of new source of raw materials.

So these innovations, the cost of production remains below its selling price and thus, profit arises.

Thus profit is paid to entrepreneur for innovating but not for risk taking.

3. The risk theory of profit :
This theory was proposed by Prof. Hawley. Profits are the reward for an entrepreneur for risk-taking. So the residual part of income after paying all factors of production goes to the entrepreneur for risk taking. Fluctuations in future prices, demand etc., are involved in risk taking.

According to Prof. Hawley, “those who face risks in business will be able to earn an excess of payment above the actual value of risk in the form of profit”.

4. Uncertainty theory of profit :
This theory was formulated by Prof. Knight. It is a modified version of risk bearing theory of profits. According to him, profit as the reward for bearing uninsurable risks and uncertainties. He classified risks into two types.

1. Unforeseen insurable risks like fire, theft.
2. Unforeseen non insurable risks like changes in prices, demand and supply. These uninsurable risks cannot be calculated.

According to Prof. Knight, “Profit cannot be treated as the reward for risk taking only for reward for uncertainty bearing”.

5. Walker’s theory of profit :
This theory was developed by Walker. According to Walker, “Profits are a rent paid for the abilities of entrepreneur”. Walker theory states that profits arise due to the differences in efficiency and ability of entrepreneurs. Hence, efficient and able entrepreneurs are paid profits.

Short Answer Questions

Question 1.
Explain the types of distribution in income.
Answer:
Distribution refers to that branch of economies which analyses how the national income of a community is divided among the various factors of production, distribution then refer to the sharing of the wealth that is produced among factors of production. It is the pricing of factors of production. The distribution of income may be personal or functional. Economies is concerned with functional distribution. The distinction between them is briefly explained here.

1. Functional Distribution :
Functional distribution deals with the study of factor incomes. It means the theory of factor pricing. The prices of land, labour, capital and organisation are called rent, wages, interest and profit respectively. Therefore, it is the study and determination of rent, wages, interest and profit. It concerns the pattern of distribution of national income as rent, wage, interest and profits. Thus, it is not concerned with individuals and their individual income, but with the agents of production. The study of functional shares has been carried on both at the macro and micro levels.

Micro-distribution :
The theory of micro-distribution explains how the prices of factors of production are determined.
Ex : Micro-distribution studies how the wage rate of labour is determined.

Macro-distribution :
Macro distribution explains the share of a factor of production in the national income.
Ex : The share of labour in the national income.

2. Personal distribution :
It refers to the distribution of income or wealth of a country among its people. It studies how income or wealth is distributed among individuals or persons. It studies how much income is earned by an individual, but not how it is earned or in how many forms it is earned. The causes of income inequalities can be known by studying personal distribution.

Question 2.
What are the factors that determine the factor prices?
Answer:
The demand and supply of a factor of production determine its price. The demand for a factor of production depends on the following.

1. It depends on the demand for the goods produced by it.
2. Price of the factor determines its demand.
3. Prices of other factors or co-operative factors determine the demand for a factor.
4. Technological changes determine the demand for a factor.
5. The demand for a factor increases due to increase in its production.

Factors that determine the supply of a factor of production.

1. The size of the population and it’s age composition.
2. Mobility of the factor of production.
3. Efficiency of the factor of production.
4. Geographical conditions.
5. Wage also determines the supply of this factor.
6. Income.

Question 3.
Point out the assumptions and limitations of marginal productivity theory.
Answer:
Marginal Physical Product (MPP) is the additional output obtained by using an additional unit of the factor of production. If we multiply the additional output by market price we will get Marginal Value Product (MVP) or Marginal Revenue Product (MRP). MRP is the addition made to total revenue by employing one more unit of factor. The marginal revenue productivity of a factor increases initially with the increase in the units of the factor of production, then reaches to maximum and after that it diminishes and will tend to equal the price of the factor service (average factor cost = AFC). This tendency of diminishing marginal revenue productivity follows from the assumption law of variable proportion. Assumptions of the Theory :

The theory is based on the following assumptions :

1. There is perfect competition in the factor market and commodity market.
2. All the units of a factor are homogeneous.
3. The theory assumes full employment of the factors.
4. There is perfect mobility of the factors of production.
5. Substitution is possible between the factors.
6. The entrepreneurs are motivated by the profits.
7. Various units of the factors are divisible.
8. The theory is applicable in the long run.
9. It is based on the law of variable proportions.
10. Marginal production of a factor can be measured.

Criticism :
The marginal productivity theory of distribution is based on unrealistic assump¬tions. Hence, it has been criticized.

1. There is no perfect competition in the factor market and commodity market.
2. All the factor units are not homogeneous.
3. Factors are not fully employed.
4. Factors are not perfectly mobile.
5. Substitution is not always possible between the factors.
6. Profit motive is not the main motive.
7. All factors are not divisible.
8. This theory is not applicable in the short run.
9. Production is not the result of one factor alone.
10. The sum of factor payments is not equal to the value of product.

The marginal productivity theory is not an adequate explanation of the determination of the pricing of factors of production. Inspite of limitations of the theory, it explains the role of productivity in the determination of factor price.

Question 4.
What are the determining factors of real wages? [Mar. 17, 16]
Answer:
Real wages refer to the purchasing power of money wages received by the labourer. Real wages are expressed in terms of goods and services that a worker can buy with his money wages. The real wage is said to be high when a labourer obtains larger quantity of goods and services with his money income.

Factors Determining Real Wages :
Real wages depend on the following factors :
1) Price Level :
Purchasing power of money determines the real wage. Purchasing power of money depends on the price level. If price level is high, purchasing power of money will be low. On the contrary, if price level is low, purchasing power of money will be high. Similarly, given the price level, if money wage is high real wage will also increase and when money wage decreases real wage also decreases.

2) Method of Payment :
Besides money wages, labourers get certain additional facilities provided by their management. Like free housing, free medical facilities, free education facilities to children, free transport etc. If such facilities are high, the real wages of labourers will also be high.

3) Regularity of Employment :
Real wages depend on the regularity of employment. If the job is permanent, his real wage will be high even though his money wage is low. In case of temporary employment, his real wage will be low though his money wage is high. Thus, certainty of job influences real wages.

4) Nature of Work :
Real wages are also determined by the risk and danger involved in the work. If the work is risky real wages of labourer will be low though money wages are high. For instance, a captain in a submarine, miners etc., always face danger and risk.

5) Conditions of Work :
The working conditions also determine the real wage of a labourer. Less duration of work, ventilation, light, fresh air, recreation facilities etc., certainly result in the high real wages. If these facilities are lacking, real wages are low even though money wages are high.

6) Subsidiary Earnings :
If a labourer earns extra income in addition to his wage, his real wage will be higher. For instance, a government doctor may supplement his earnings by undertaking private practice.

7) Future Prospects :
Real wage is said to be higher in those jobs where there is a possibility of promotions, hike in wage and vice-versa.

8) Timely Payment :
If a labourer receives payment regularly and timely, the real wage of the labourer is high although his money wage is pretty less and vice versa.

9) Social Prestige :
Although money wages of a bank officer and Judge are equal, the real wage of a Judge is higher than the bank officer due to social status.

10) Period and Expenses of Education :
Period and expenses of education also affect real wage. For example, if one person is a graduate and the other is an undergraduate who are working as clerks, the real wage of the undergraduate is high because his period of learning and expenses on education are lower than the graduate labourer.

Question 5.
Explain the concepts of gross profits.
Answer:
Gross profit is considered as a difference between total revenue and cost of production. The following are the components of gross profit:

1. The rent payable to his own land or buildings includes gross profit.
2. The interest payable to his own business capital.
3. The wage payable to the entrepreneur for his management includes gross profit.
4. Depreciation charges or user cost of production and insurance charges are included in gross profit.

Net profits :
Net profits are reward paid for the organiser’s entrepreneurial skills.

Components :
1. Reward for Risk Bearing :
Net profit is the reward for bearing uninsurable risks and uncertainties.

2. Reward for Co-ordination :
It is the reward paid for co-ordinating the factors of production in right proportion in the process of production.

3. Reward for Marketing Services :
It is the profit paid to the entrepreneur for his ability to purchase the services of factors of production.

4. Reward for Innovations :
It is the reward paid for innovations of new products and alternative uses to natural resources.

5. Wind Fall Gains :
These gains arise as a result of natural calamities, wars and artificial scarcity are also included in net profits.

Very Short Answer Questions

Question 1.
What are the determining factors of the demand for a factor?
Answer:

1. The demand for the factors of production is derived demand. It depends on the demand for the goods produced by it.
2. Price of the factor determines its demand.
3. Prices of other factors which will help in the production also determine the demand for a factor.
4. Technology determines the demand for the factors. For instance, increase in technology reduces the demand for labourers.
5. Returns to scale will determine the demand for the factors of production. The demand for the factors increases due to increasing returns in the production.

Question 2.
What are the determining factors of the surplus of labour ?
Answer:
Supply of labour depends on :

1. Size of the population and its age composition.
2. Mobility of the factors of production.
3. Efficiency of the factors of production.
4. Geographical conditions will determine the supply of factors of production.
5. Price of the factor determines its supply.
6. The supply of a factor depends on its opportunity cost – the minimum earning which it can earn in the next best alternative use.

Question 3.
What is Contract rent?
Answer:
It is the hire charges for any durable good. Ex : Cycle rent, room rent etc. It is a periodic payment made for the use of any material good. The amount paid by the tenant cultivator to the landlord annually may be also called contract rent. Ex. : The rent that a tenant pays to the house owner monthly as per an agreement made earlier or the hiring charges of a cycle ^ 10 per hour is also contract rent.

Question 4.
What is Economic rent?
Answer:
The ordinary use of the term ‘rent’ means any periodic payment for the hire of anything such as garriages, buildings etc. Economic rent is the pure rent payable as a reward for utilising the productivity of land. It is derived by subtracting the elements like interest, wages, profits and depreciation from the gross rent or contract rent. To David Ricardo, it is surplus over costs or expenses of cultivation.

Question 5.
What are Money wages?
Answer:
Money wages are the remuneration received by the labourer in the form of money for the physical and mental service rendered by him or her in the production process.
Ex : If a labourer is paid ₹ 30/- per day. ₹ 30/- is the money wage.

Question 6.
What are Real wages?
Answer:
Real wage is the purchasing power of money wages in terms of goods and services.

Question 7.
What are Time wages?
Answer:
Time wage is the amount paid for labourers for a fixed period of work i.e., weakly, daily, monthly etc.

Question 8.
What are Piece wages?
Answer:
Piece wage is the amount paid for labourers according to volume of work, done by them.

Question 9.
What is Gross interest?
Answer:
The payment which the lender receives from the borrower excluding the principal is gross interest.
Gross interest = Net interest + [Reward for risk taking + Reward for Inconvenience + Reward for management]

Question 10.
What is Net interest?
Answer:
Net interest is the reward for the service of the capital loan.
Ex : Net interest paid on government bonds and government loans.

Question 11.
What is Gross profit?
Answer:
Gross profit is considered as a difference between total revenue and cost of production.
Gross profit = Net profit + [Implicit rent + Implicit wage + Implicit interest + Depreciation charges + Insurance premium]

Question 12.
What is Net profit ? [Mar. ’16]
Answer:
Net profit is the reward paid for the organizer’s entrepreneurial skills.
Net profit = Gross profit – [Implicit rent + Implicit wage + Implicit interest + Depreciation charges + Insurance premium]

Telangana TSBIE TS Inter 1st Year Economics Study Material 5th Lesson Market Analysis Textbook Questions and Answers.

TS Inter 1st Year Economics Study Material 5th Lesson Market Analysis

Long Answer Questions

Question 1.
Describe the classification of markets.
Answer:
Edwards defined “Market as a mechanism by which buyers and sellers are brought together”. Hence, market means where selling and buying transactions take place. The classification of markets is based on three factors.

1. On the basis of area
2. On the basis of time
3. On the basis of competition.

I. On the Basis of Area :
According to the area, markets can be of three types.

1) Local Market :
When a commodity is sold at particular locality. It is called a local market. Ex : Vegetables, flowers, fruits etc.

2) National Market :
When a commodity is demanded and supplied throughout the country is called national market. Ex : Wheat, rice etc.

3) International Market :
When a commodity is demanded and supplied all over the world is called international market. Ex : Gold, silver etc.

II. On the Basis of Time :
It can be further classified into three types.
1) Market Period or Very Short Period :
In this period where producer cannot make any changes in supply of a commodity. Here, supply remains constant. Ex: Perishable goods.

2) Short Period :
In this period supply can be changed to some extent by changing the variable factors of production.

3) Long Period :
In this period supply can be adjusted in accordance with change in demand. In long run all factors will become variable.

III. On the Basis of Competition :
This can be classified into two types.
1) Perfect Market :
A perfect market is one in which the number of buyers and sellers is very large, all engaged in buying and selling a homogeneous products without any restrictions.

2) Imperfect Market :
In this market, competition is imperfect among the buyers and sellers. These markets are divided into 1. Monopoly 2. Duopoly 3. Oligopoly 4. Monopolistic competition.

Question 2.
What are the characteristic features of perfect competition?
Answer:
Perfect competitive market is one in which the number of buyers and sellers is very large, all engaged in buying and selling a homogeneous products without any restrictions.

The following are the features of perfect competition :
1) Large Number of Buyers and Sellers :
Under perfect competition, the number of buyers and sellers is large. The share of each seller and buyer in total supply or total demand is small. So, no buyer and seller cannot influence the price. The price is determined only by demand and supply. Thus, the firm is price taker.

2) Homogeneous Product :
The commodities produced by all the firms of an industry are homogeneous or identical. The cross elasticity of products of sellers is infinite. As a result, single price will rule in the industry.

3) Free Entry and Exit :
In this competition there is a freedom of free entry and exit. If existing firms are getting profits new firms enter into the market. But when a firm gets losses, it would leave the market.

4) Perfect Mobility of Factors of Production :
Under perfect competition the factors of production are freely mobile between the firms. This is useful for free entry and exit of firms.

5) Absence of Transport Cost :
There are no transport cost. Due to this, price of the commodity will be the same throughout the market.

6) Perfect Knowledge of the Economy :
All the buyers and sellers have full information regarding the prevailing and future prices and availability of the commodity. Information regarding market conditions is also available.

Question 3.
Explain the meaning of perfect competition. Illustrate the mechanism of price determination under perfect competition. [Mar. ’17, ’16]
Answer:
Perfect Competition :
Perfect competition is a market sructure characterized by a complete absence of rivalry among the individual firms. Thus, perfect competition in economic theory has a meaning diametrically opposite to the everyday use of this term. In practice, businessmen use the word competition as synonymous to rivalry. In the theory, perfect competition implies no rivalry among firms. Perfect competition may be defined as that market situation, in which there are large number of firms producing homogeneous product, there is free entry and free exit, perfect knowledge on the part of buyer, perfect mobility of factors of production and no transportation cost at all.

Price Determination under Perfect Competition : Under perfect competition, sellers and buyers cannot decide the price, Industry decides the price of the good.

Market brings about a balance between the commodities that come for sale and those demanded by consumers. It means, the forces of supply and demand determine the price of the good. The following schedule and diagram help us to understand changes in supply, demand and equilibrium price.

Demand and Supply Schedule

The above table shows the demand and supply schedules of a good. Changes in price always lead to change in supply and demand. As price increases, there is a fall in the quantity demanded. It means, price and quantity demanded have a negative relationship. At the sametime, if price of a commodity increases there is an increase in the quantity supplied. Therefore, the relation between price and supply of goods is positive. It can be observed from the table that when the price is ₹ 10/-, market demand is 60 kgs and supply is 20 kgs.

When the price increases to ₹ 20/-, the supply increases to 30 kgs and demand falls to 50kgs. If the price increases to ₹ 50/-, the supply increases to 60 kgs and demand is only 20 kgs. When the demand is less, price tends to decrease towards equilibrium price. When the price is ₹ 30/-, the demand and supply are equal to 40 kgs. This price is called equilibrium price which is ₹ 30, and equilibrium output and demand is 40 kgs. This process is explained with, the help of figure.

In the figure, the demand and supply of a commodity are shown on OX axis and the price of the commodity on OY axis. As per the diagram, the equilibrium price is found at a point where both demand and supply curves intersect each other at point E, i.e., OP price is the equilibrium price and OQ quantity is the equilibrium supply and demand.

Question 4.
Explain equilibrium of the firm in the shortrun and longrun under perfect competition.
Answer:
Perfect competition is a market structure characterized by a complete absence of rivalry among the individual firms. Thus, perfect competition in economic theory has a meaning diametrically opposite to the everyday use of this term. In practice, businessmen use the word competiton as synonymous to rivalry. In theory, perfect competition implies no rivalry among firms. Perfect competition may be defined as that market situation, in which there are large number of firms producing homogeneous product, there is free entry and free exit, perfect knowledge on the part of buyer, perfect mobility of factors of production and no transportation cost at all.

Equilibrium of a Firm :
We have learnt that the price of a commodity is determined by the market demand and market supply under perfect competition. An increase in price of a product acts as an incentive in increasing production. As a firm aims at maximizing profit, it chooses that output which maximizes its profits. When the firm is in equilibrium, it has no desire to change its output.

Equilibrium output is explained with the help of cost and revenue curves of a firm. In perfect competition, average and marginal cost curves are ‘U’ shaped one and average revenue and marginal revenue curves are parallel to OX axis. Since AR = MR, both these curves will merge into a single line.

1) Short Period Equilibrium :
Firms are in business to maximize profits. During short period, a firm cannot change fixed factors like machinery, buildings etc. However, it produces more output by increasing variable factors. Equilibrium output is produced in the short period where short period marginal cost (SMC) is equal to short period marginal revenue (SMR). The firm will be in equilibrium, when marginal cost curve cuts marginal revenue curve from below. During short period, a firm may get super normal, normal profits or losses. Two conditions are necessary for firm’s equilibrium. They are : i) MC = MR and ii) MC curve should cut MR curve from below. The figure shows the firm’s short period equilibrium.

In the figure quantity demanded and supplied are shown on OX axis and price of the commodity on OY axis. The diagram shows that the equilibrium price OP is determined by the industry at point E where the industry demand is equal to industry supply. The price, so, determined by the industry is passed on to the firm. This is shown by the horizontal demand curve of the firm. This line is also known as the price line. Since, competition is perfect, the AR curve (demand curve) of the firm is also the MR curve of the firm. The firm’s SAC curve and SMC curve are also shown respectively.

The profits of the firm are maximum at the output where MC = MR, that is, at output OQ, SMC = MR. At any output than OQ, MR exceeds MC, which would mean that if the production is more its profits will increase. At any output more than OQ, MR becomes less than MC, which would mean a loss to the firm. Thus, OQ is output of maximum profits. At the equilibrium point ‘E’, the price is equal to OP or AQ, while AC per unit equals QB, profit per unit is equal to B. Total supernormal profits will be equal to PABC, i.e., BA x OQ.

2) Long Period Equilibrium :
We have seen that under short period, a firm can adjust its output, within limits, by varying the factors of production. But in the long period the firm can adjust its output to any extent because it can vary all the factors of production. Thus, it is certain that the firm will not incur losses in the long period. In the long period, the free entry of the new firms into the industry will wipe out the supernormal profits of the firm. Hence, in the long period, the frim wil be at optimum size where there is no profit – no loss. Firm gets only normal profits which are included in the long period average cost. In other words, under perfect competition, the individual firm at equilibrium earns normal profits only.
Therefore, AR = MR = LAC = LMC

The figure illustrates the long period equilibrium of the firm. The quantity of a good is depicted on OX axis and price, costs and revenues are on OY axis in the diagram.

The point of equilibrium will be established at which the firm’s MR curve touches its LAC curve at its minimum point. At this point LMC = LAC. Thus, when a firm is in long period equilibrium the following conditions exist:
At point E; P = AR = MR = LMC = LAC.

Question 5.
What is monopoly? Explain how price is determined under monopoly.
Answer:
Monopoly is one of the market in the imperfect competition. The word ‘Mono’ means I ‘single’ and ‘Poly’ means ‘seller’. Thus, monopoly means single seller market.

In the words of Bilas, “Monopoly is represented by a market situation in which there is a single seller of a product for which there are no close substitutes, this single seller is unaffected by and does not affect, the prices and outputs of other products sold in the economy”. Monopoly exists under the following conditions : 1) There is a single seller of product. 2) There are no close substitutes. 3) Strong barriers to entry into the industry exist.

Features of Monopoly:

1. There is no single seller in the market.
2. No close substitutes.
3. There is no difference between firm and industry.
4. The monopolist either fix the price or output.

Price Determination :
Under monopoly, the monopolist has complete control over the supply of the product. He is price maker who can set the price to attain maximum profit. But he cannot do both things simultaneously. Either he can fix the price and leave the output to be determined by consumer demand at a particular price. Or he can fix the output to be produced and leave the price to be determined by the consumer demand for his product. This can be shown in the diagram.

In the above diagram, on ‘OX’ axis measures output and ‘OY axis measures cost. AR is Average Revenue curve, AC is Average Cost curve. In the above diagram, at point E where MC = MR at that point the monopolist determines the output. Price is determined where this output line touches the AR line. In the above diagram for producing OQ quantity cost of production is OCBQ and revenue is OPAQ.
Profit = Revenue – Cost
= PACB shaded area is profit under monopoly.

Short Answer Questions

Question 1.
Write a note on classification of markets based on time and area.
Answer:
Edwards defined, “Market as a mechanism by which buyers and sellers are brought together”. Hence, market means where selling and buying transactions take place. The classification of markets is based on three factors.

1. On the basis of area
2. On the basis of time
3. On the basis of competition.

I. On the Basis of Area :
According to the area, markets can be of three types.

1) Local Market :
When a commodity is sold at particular locality, it is called a local market. Ex : Vegetables, flowers, fruits etc.

2) National Market :
When a commodity is demanded and supplied throughout the country is called national market. Ex : Wheat, rice etc.

3) International Market :
When a commodity is demanded and supplied all over the world is cdlled international market. Ex : Gold, silver etc.

II. On the Basis of Time :
It can be further classified into three types.
1) Market Period or Very Short Period :
In this period where producer cannot make any changes in supply of a commodity. Here supply remains constant. Ex: Perishable goods.

2) Short Period :
In this period supply can be changed to some extent by changing the variable factors of production.

3) Long Period :
In this period supply can be adjusted in according to change in demand. In long run all factors will become variable.

III. On the Basis of Competition :
This can be classified into two types.
1) Perfect market :
A perfect market is one in which the number of buyers and sellers is very large, all engaged in buying and selling a homogeneous products without any restrictions.

2) Imperfect Market :
In this market, competition is imperfect among the buyers and sellers. These markets are divided into 1. Monopoly 2. Duopoly 3. Oligopoly 4. Monopolistic competition.

Question 2.
Explain the equilibrium of the firm in the Short-run under perfect competition.
Answer:
Short Period Equilibrium :
Firms are in business to maximize profits. During short period, a firm cannot change fixed factors like machinery, buildings etc. However, it produces more output by increasing variable factors. Equilibrium output is produced in the short period where short period marginal cost (SMC) is equal to short period marginal revenue (SMR). The firm will be in equilibrium, when marginal cost curve cuts marginal revenue curve from below. During short period, a firm may get super normal, normal profits or losses. Two conditions are necessary for firm’s equilibrium. They are : i) MC = MR and ii) MC curve should cut MR curve from below. The figure shows the firm’s short period equilibrium.

In the figure quantity demanded and supplied are shown on OX axis and price of the commodity on OY axis. The diagram shows that the equilibrium price OP is determined by the industry at point E where the industry demand is equal to industry supply. The price, so, determined by the industry is passed on to the firm. This is shown by the horizontal demand curve of the firm. This line is also known as the price line. Since, competition is perfect, the AR curve (demand curve) of the firm is also the MR curve of the firm.

The firm’s SAC curve and SMC curve are also shown respectively. The profits of the firm are maximum at the output where MC = MR, that is, at output OQ, SMC = MR. At any output than OQ, MR exceeds MC, which would mean that if the production is more its profits will increase. At any output more than OQ, MR becomes less than MC, which would mean a loss to the firm. Thus, OQ is output of maximum profits. At the equilibrium point ‘E’, the price is equal to OP or AQ, while AC per unit equals QB, profit per unit is equal to B. Total supernormal profits will be equal to PABC, i.e., BA x OQ.

Question 3.
Explain the equilibrium of the firm in the Longrun under perfect competition.
Answer:
Long Period Equilibrium :
We have seen that under short period, a firm can adjust its output, within limits, by varying the factors of production. But in the long period the firm can adjust its output to any extent because it can vary all the factors of production. Thus, it is certain that the firm will not incur losses in the long period. In the long period, the free entry of the new firms into the industry will wipe out the supernormal profits of the firm.

Hence, in the long period, the frim wil be at optimum size where there is no profit – no loss. Firm gets only normal profits which are included in the long period average cost. In other words, under perfect competition, the individual firm at equilibrium earns normal profits only.
Therefore, AR = MR = LAC = LMC

The figure illustrates the long period equilibrium of the firm. The quantity of a good is depicted on OX axis and price, costs and revenues are on OY axis in the diagram.

The point of equilibrium will be established at which the firm’s MR curve touches its LAC curve at its minimum point. At this point LMC = LAC. Thus, when a firm is in long period equilibrium the following conditions exist:
At point E; P = AR = MR = LMC = LAC.

Quedtion 4.
What is monopoly? What are its characteristics?
Answer:
Monopoly is totally a different market situtation compared with perfect competition. The word ‘mono‘ means single, and ‘poly’ means seller. Monopoly is said to exist when one firm is the sole producer of a product which has no close substitutes. In the words of Bilas, “Monopoly is represented by a market situation in which there is a single seller of a product for which there are no close substitutes, this single seller is unaffected by and does not affect the prices and outputs of other products sold in the economy”.

Characteritics of Monopoly:
a) A single firm produces the good in the market.
b) No close substitutes to this good.
c) Strong barriers exist for the entry of new firms into the market.
d) Industry and firm is one and same.
e) Producer can control either price or quantity of the good. But he / she cannot determine both price and quantity of the good simultaneously.

Equilibrium and Price Determination under Monopoly :
Price, output and profits under monopoly are determined by the forces of demand and supply. The monopolist will have complete control over the supply of the product. He also possesses the power to set the price to attain maximum profit. However, he cannot do both the things simultaneously, Either he can fix the price and leave the output to be determined by the consumer demand at this price or he can fix the output to be produced and leave the price to be determined by the consumer demand for his product.

Question 5.
What are the characteristics of monopolistic competition?
Answer:
It is a market with many sellers for a product but the products are different in certain respects. It is mid way of monopoly and perfect competition. Prof. E.H. Chamberlin and Mrs. Joan Robinson pioneered this market analysis.

Characteristics of Monopolistic Competition :
1) Relatively Small Number of Firms :
The number of firms in this market are less than that of perfect competition. No one can control the output in the market as a result of high competition.

2) Product Differentiation :
One of the features of monopolistic competition is product differentiation. It takes the form of brand names, trade marks etc. Its cross elasticity of demand is very high.

3) Entry and Exit :
Entry into the industry is unrestricted. New firms are able to commence production of very close substitutes for the existing brands of the product.

4) Selling Cost :
Advertisement or sales promotion technique is the important feature of Monopolistic competition. Such costs are called selling costs.

5) More Elastic Demand :
Under this competition the demand curve slopes downwards from left to the right. It is highly elastic.

Question 6.
What is oligopoly? Explain its characteristics.
Answer:
The term ‘Oligopoly’ is derived from two Greek word “Oligoi” meaning a few and “Pollein” means to sell. Oligopoly refers to a market situation in which the number of sellers dealing in a homogeneous or differentiated product is small. It is called competition among the few. The main features of oligopoly are the following.

1. Few sellers of the product.
2. There is interdependence in the determination of price.
3. Presence of monopoly power.
4. There is existence of price rigidity.
5. There is excessive selling cost or advertisement cost.

Question 7.
Explain the concept of duopoly and its characteristics.
Answer:
Duopoly (from greek duoayi (two) + polein(to sell)) is a specific type of oligopoly where only two producers exist in one market. In reality, this definition is generally used where only two firms have dominance over a market.

It is also called as a limited form of oligopoly. The goods produced by the producers may be homogeneous or differentiated. As there are only two producers, both are aware that the decisions of one will affect the other. Rivalry and collusion of the producers are both possible in this market situation. In the market both firms have noteworthy control. In the field of industrial organization, it is the most commonly studied form of oligopoly due to its simplicity.

The earliest duopoly model was developed in 1838 by the French economist Augustin Cournot. Cournot illustrated his model with the example of two firms. According to this model, the two sellers will have a naive behaviours and they never learn from past patterns of reaction of rivalry. As a result each firm produces one third of the output. Together they cover two-thirds of the total market. Each firm maximizes its profits but industry profit will not be maximized. This happens due to non recognition of their interdependence. Characteristics of Duopoly:
a) There will be two sellers.
b) Homogeneous product.
c) Zero production cost.
d) Sellers do not understand their interdependence.

Question 8.
Compare perfect Competition and Monopoly.
Answer:

Very Short Answer Questions

Question 1.
Define Market. [Mar. ’16]
Answer:
Market is place where commodities are brought and sold and where buyers and sellers meet. Communication facilities help us today to purchase and sell without going to the market. All the activities take place is now called as market.

Question 2.
Give a note on the Time Based Markets.
Answer:
Supply of a good can be adjusted depending on time factor. On the basis of time, markets are divided into three types, i.e., very short period, short period and long period.

a) Market Period or Very Short Period :
This is a period where producer cannot make any changes in the supply of a good. Hence, the supply is fixed. As we know supply can be changed by making changes in inputs. Inputs cannot be changed in the very short period. Supply remains constant in this period. Perishable goods will have this kind of markets.

b) Short Period :
It is a period in which supply can be changed to a little extent. It is possible by changing certain variable inputs like labour.

c) Long Period :
The market in which the supply can be changed to meet the increased demand, producer can make changes in all inputs depending upon the demand in the long period. It is possible to make adjustments in supply in long period.

Question 3.
Give a note on the Area Based Markets.
Answer:
On the basis of area, markets are classified into local, national and international. These markets tell us the size or extent of the market for a commodity. The size of the market for a good depends upon demand for the good, transportation facilities and durability of the good etc.

a) Local Market :
When a commodity is sold at its produced area it is called local market. Perishable goods like vegetables, flowers, fruits etc., maybe produced and marketed in the same area.

b) National Market :
When a commodity is demanded and supplied by people throughout the country it is called national market. Examples are wheat, rice, cotton etc.

c) International Market :
When buying and selling of commodities take place all over the world, then it is called international market. Ex. gold, silver, petrol etc.

Question 4.
Give a note on the Competition based markets.
Answer:
Based on the nature of the competition, markets are classified into two perfect competition and imperfect competition.
a) Perfect Competition :
A perfectly competitive market is one in which the number of buyers and sellers is very large, all engaged in buying and selling a homogeneous product without any artificial restrictions. Hence, there is absence of rivalry among the individual firms in perfect competition.

b) Imperfect Competition :
It is a market situation where competition is not perfect either amongst the buyers or amongst the sellers. Hence, there will be a different price for the same product. These markets are divided into monopoly, monopolistic competition, oligopoly and duopoly.

Question 5.
What is Perfect competition?
Answer:
In this market there are large number of buyers and sellers who promote competition. In this market goods are homogeneous. There is no transport fares and publicity costs. So price is uniform of any market.

Question 6.
Define Monopoly.
Answer:
Mono means single, Poly means seller. In this market single seller and there is no close substitutes. The monopolist is a price maker.

Question 7.
What is Monopolistic competition? [Mar. ’16]
Answer:
It is a market where several firms produce same commodity with small differences is • called monopolistic competition. In this market producers to produce close substitute goods.
Ex : Soaps, cosmetics etc.

Question 8.
Define Oligopoly.
Answer:
A market with a small number of producers is called oligopoly. The product may be homogeneous or may be differences. This market exists in automobiles, electricals etc.

Question 9.
What is Duopoly?
Answer:
When there are only two sellers of a product, there exist duopoly. Each seller under duopoly must consider the other firms reactions to any changes that he makes in price or output. They make decisions either independently or together.

Question 10.
Explain Equilibrium price.
Answer:
Equilibrium price is that price where demand and supply are equal in the market.

Question 11.
What is Product differentiation? [Mar. ’17]
Answer:
One of the main features of monopolistic competition is product differentiation. This is a market situation in which there are many firms of a particular product, but the product of each firm is in some way or the other way differentiated from the product of the other firms in the market. They are heterogeneous rather than homogeneous. Product differentiation may take the form of brand names, trademarks, etc. This means that the products of the firms will have close substitutes and their cross-elasticity of demand will be very high.

Question 12.
What are the Selling costs? [Mar. ’17]
Answer:
An important feature of a monopolistic market is every firm makes expenditures to sell more output. Advertisements through newspapers, journals, electronic media etc., these methods are used to attract more consumers by each firm.