3 MARK QUESTIONS

MODULE 4

1. What are the different sectors of an economy?

From the macro point of view, economy is often divided into four sectors:-
 Household sector: - It includes consumers of goods and services. Households are also owners of the
factors of production.
 Producer sector: - It includes all producing units (firms) in the economy. For the production of goods and
services, the firms hire or purchase factors of production (land, labour, capital and entrepreneurship) from
the households.
 Government sector: - It includes (i) Government as a welfare agency, and (ii) Government as a producer.
Government as a welfare agency performs such welfare functions as law and order and defense.
 Foreign sector: - It includes all such activities which are related to export and import of goods, and the
flow of capital between domestic economy and the rest of the world.
2. Differentiate Stock and Flow concepts: -
Stock refers to any quantity that is measured at a particular point of time, while flow is referred to as the
quantity that can be measured over a period of time.
Difference between stock and flow:-

Criteria Stock Flow

stock is defined as a variable that is measured Flow is defined of a variable which is

Definition at a particular point of time measurable over a period of time.

Time Dimension Stock does not have a Flow has a time dimension attached
time dimension attached with it. with it.
Nature Stock is static in nature Flow is dynamic
in nature
Stock influence the flow, as such greater Flow Influences the stock, as in
Influence amount of capital will lead to greater flow of increased
services. flow of money supply to an economy
results to increase in the quantity of
money
Examples Bank deposits, capital, wealth, population Capital formation, income rate of
interest on capital, depreciation

3. Differentiate Final Goods and Intermediate goods:-

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a) Final Goods: - Final goods are referred to as those good which do not require further processing. These
goods are also known of consumer goods and are produced for the purpose of direct consumption by the end
consumer E.g:- bread, shoes, tractors etc.

b) Intermediate goods:- Intermediate goods referred to as those goods that are used by businesses in producing
goods or services. These goods are also known as producer goods. E.g.:- wood used for production of chairs
Difference between final goods and intermediate goods:-

Criteria Final Goods Intermediate goods

Final goods are those goods that are Intermediate goods are referred to as
Definition manufactured to be consumed directly by those goods that are used for producing
the consumer final goods
Intermediate goods are goods that are
Nature Final goods are finished goods partly prepared and can be referred to
as unfinished goods or partly finished
goods
Final goods are available for consumption Intermediate goods are available for
Uses or can be used for capital formation. reselling by the firms for generating
profit.
Final goods are ready to be consumed and Intermediate goods require further
Processing needed therefore do not require any further processing in order to be consumed.
processing.

Impact on National Final goods are considered to be a part of Intermediate goods are not included in
income National Income and have an impact on the National income and therefore no
National Income impact
Final goods have inherent demand or Intermediate goods do not have natural
Demand for goods direct demand demand and the demand is derived
based on user preference

4. What are the features of National Income?

 National income is the money value of goods and services produced in an economy during a specified
year.
 National income is always expressed with respect to time period.
 NI is a flow and not a stock.
 There is a triple identity. This is shown as: National output= National income= National expenditure.

5. Differentiate GDP and GNP: -

 Gross Domestic Product(GDP): -

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 GDP is defined as the total market value of all goods and services produced within the country in a
particular year. It is the most comprehensive account of a nation’s total output of goods and services.
GDP= C+I + G+ (X-M)
Where; C= consumer goods and services
I= Gross domestic investment
G= Goods and services produced by the govt.
X-M= net exports
GDP is used for many purposes, but the most important one is t measure the overall performance
of the economy. When economists want to determine the level of economic development of a country, they
look at its GDP.
 Gross Domestic Product (GNP): -

GNP is defined as the total market value of all final goods( final goods means those goods which
are being purchased for final use and not for resale or further processing) and services produced in a year plus net
income from abroad.
GNP= C+ I+ G+ Net factor income from abroad (NFIA)
Or GNP=GDP+ Net factor income from abroad (NFIA)
Net factor income from abroad (NFIA) = Income from abroad – Income payable to abroad
For example; the income of Indians working abroad is a part of India’s GNP but not a part of her
GDP.
6. How black money affects NI calculation?
A major part of economy operates through black money. Economic activities of this sector are not reported
or under reported. To evade excise duties, production of manufacturing units is under reported. To evade income
tax, income of different sources is under covered. So, the estimates of national income becomes difficult.
7. Define National Income:-
National Income (NI) is defined as the money value of the goods produces and services made by the
people of a country during a specified period. By national income, we mean the annual flow of goods and services.
So it is a flow and not a stock.
8. Why NI accounting is important to India?
There are several important uses of NI statistics and so there is great need for their regular preparation.
 Overall production performances: - NI estimates furnishes the overall production performance of an
economy as it seeks to measure the level of production in a year.
 Growth rate of the economy: - By comparing NI estimates for different periods, the growth rate of
economy can be analyzed. That is whether the economy is growing, stagnant or declining.

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  Contribution made by different sectors: - The contribution made by each sector of the economy such as
agriculture, industries, service sector etc towards the NI can be clearly estimated.
 Estimate the degree of inflation and deflation: - NI statistics enable us to estimate the degree of inflation
or deflation in the economy.
 Formulation of economic and fiscal policies: - NI estimates are very much useful in the formulation of
economic and fiscal policy for the govt.
 Indicator of economic structure: - NI estimates clearly indicate the economic structure of the country and
show how incomes are earned and spent.
 Standard of living: - The standard of living and level of economic welfare of the people living in different
countries can be compared with the help of NI statistics.
 Importance in economic analysis: - NI estimates help us in analyzing the functioning, growth and anatomy
of the economy. It is very important in analyzing: -
a) The growth of the economy
b) The trends of various sectors
c) The trends of factors of production and
d) The trends of various variables such as aggregate (total) consumption, investment and saving etc.

9. Explain the methods to measure inflation:-

 Producer Price Index:-
Producer Price index (PPI) measures average changes in prices received by domestic producers for their product.
In a way, it measures the pressure being put on producers by the costs of their raw materials. This could be passed
on to consumers as inflation, or it could be offset by increasing productivity.
 Wholesale Price Index (WPI):-
When inflation is calculated on the basis of a wide variety of goods (including consumer and capital goods), it is
called Wholesale Price Index (WPI). In India, WPI is available on a weekly basis, and continues to be the most
popular and most comprehensive measure of the economy wide inflation available with high frequency. USA has
replaced WPI with PPI. In India, the Office of Economic Adviser, Ministry of Commerce and Industry, has
already started the process of switching from WPI to PPI.
 Consumer Price Index (CPI):-
Consumer Price Index (CPI) measures the price of a selection of goods purchased by a 'typical consumer'. The
commodity basket of these indices is derived on the basis of group specific consumer expenditure surveys, and
weights to each commodity are proportionate to its expenditure. CPI differs from PPI in that price subsidization,
profits, and taxes may cause the amount received by the producer to differ from what the consumer paid. In India,
4 types of CPIs are issued that are specific to different groups of consumers.
o CPI- WI for industrial workers.
o CPI -UNME for urban non- manual employees
o CPI- AL for agricultural labourers.
o CPI – RL for rural labourers.

 Cost of Living Indices (COLI)

The costs of Indices are similar to the CPI. These are often used to adjust fixed incomes and contractual incomes
to maintain the real value of such incomes. In fact wage indexation is based on such indices.

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  Service price Index (SPI)
With the growing importance of service sector around the world, many countries have started developing services
price Indices (SPI). While some agencies have focused exclusively on the prices of the services provided to the
enterprise, other has approached the subject more broadly through the development of service producer price
indices. Attempts are on to enhance the coverage, aiming at an improved deflator for the sector. The need for
service sector price index is very strongly felt in case of India, and the office of Economic Adviser, Ministry of
Commerce and Industry has started work on construction of index numbers for selected services, including road
transport, railways, air transport, port, banking, insurance, post, telecommunication, business services and trade
services.

10. What adjustments can be made in CRR and SLR to bring down the level of inflation?
The CRR refers to the minimum amount of funds that a commercial bank has to maintain with the RBI,
in the form of deposits and SLR refers to percent of reserves to be maintained in the form of gold or securities. In
India, the CRR by law, remains in between 3- 15% while, the SLR remains in between 20-40% of bank reserves.
Any change in VRR (CRR+ SLR) brings out a change in the commercial bank’s reserves. For example, if CRR
and SLR rates are 4% and 23% respectively, then the bank can only use 100-4-23= 73% of its total deposits for
the purpose of lending. Thus by varying VRR, commercial banks’ lending capacity can be affected. CRR limits
the ability of the banks to pump more money into the economy. SLR is used to limit the expansion of bank credit,
for ensuring the solvency of banks (even if all the loans by the bank go bad, the bank can still retrieve a part of it
by selling the gold/ government securities). RBI increases VRR during the inflation to reduce credit creation. But
during depression, RBI lowers VRR making more cash reserves available for credit expansion.
CRR =4% and SLR= 21.5%
11. Differentiate Repo and reverse repo rates: -
a) Repo rate:-

. The rate at which banks borrow money from the RBI by selling their surplus government securities to RBI
is known as "Repo Rate." Repo rate is short form of Repurchase Rate. Generally, these loans are for short
durations up to 2 weeks.

It simply means Repo Rate is the rate at which RBI lends money to commercial banks against the pledge of
government securities whenever the banks are in need of funds to meet their day-to-day obligations. Banks enter
into an agreement with the RBI to repurchase the same pledged government securities at a future date at a pre-
determined price. RBI manages this repo rate which is the cost of credit for the bank.

Higher the repo rates higher the cost of short-term money and vice versa. Higher repo rate may slowdown the
growth of the economy. If the repo rate is low then banks can charge lower interest rates on the loans taken by
us.

Current repo rate is 6.5%.

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 b) Reverse repo rate:-

Reverse repo rate is the rate of interest offered by RBI, when banks deposit their surplus funds with the RBI
for short periods. In other words, it is the rate at which RBI borrows money from commercial banks. Commercial
banks are very comfortable to lend money to RBI because their money is in safe hands with a good interest. If
reverse repo is increased, then it encourage to transfer more funds to RBI due to its attractive interest rates. It can
cause money to be drawn out of the banking system.

Current reverse repo rate is 6%

12. Explain the differences between debentures and shares: -

Sl. No: Debentures Shares

1 A debenture holder is a creditor only and has A shareholder (Equity) is an owner of
no control over the affairs of the company. the company.

2 A fixed rate interest is paid on debentures. Dividend is paid on shares.

3 Interest is p[aid whether the company runs Interest is paid depending upon the
in profit or loss. profit/ loss incurred by the company.
4 A debenture holder gets his money back Money of the shareholder is not
after the stated number of years. refunded to him.
5 In the event of liquidation of the company, a debenture holder will get his money before
the shareholder gets something

13. “Financial market is essential for the growth of an economy.”. Why?

The financial market provides a platform to the buyers and sellers, to meet, for trading assets at a price
determined by the demand and supply forces.

Functions of Financial market: -

(1) Mobilization of Savings and their Channelization into more Productive Uses: Financial market gives impetus
to the savings of the people. Many financial instruments are made available for transferring finance from one side
to the other side. The investors can invest in any of these instruments according to their wish.

(2) Facilitates Price Discovery: Like goods and services, the investors also try to discover the price of their
securities. The financial market is helpful to the investors in giving them proper price.

(3) Provides Liquidity to Financial Assets: This is a market where the buyers and the sellers of all the securities
are available all the times. This is the reason that it provides liquidity to securities. It means that the investors can
invest their money, whenever they desire, in securities through the medium of financial market. They can also
convert their investment into money whenever they so desire.

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(4) Reduces the Cost of Transactions: Various types of information are needed while buying and selling securities.
Much time and money are spent in obtaining the same. The financial market makes available every type of
information without spending any money. In this way, the financial market reduces the cost of transactions.

14. Differentiate money market and capital market:-

Money market: -

The market where monetary assets such as commercial paper, certificate of deposits, treasury bills, etc.
which mature within a year, are traded is called money market. It is the market for short-term funds.

Capital market: -

Capital market is the market for long term funds required by the business enterprises. It offers an ideal
source of external finance. Stocks, shares, long term loans etc are the main instruments in capital market.

Difference between money market and capital market

Criteria Money market Capital market

Meaning A segment of the financial market where A section of financial market where
lending and borrowing of short-term long term securities are issued and
securities are done. traded.

Risk factor Low Comparatively high

Time horizon Within a year More than a year
Merit Increases liquidity of funds in the Mobilization of savings in the
economy economy.

15. What are the Investment methods in stock exchange?

Investors can invest in a stock exchange of India through two ways. They are: -

a) Primary market: -
It is in the primary market that companies register themselves to issue their shares and raise money. This
process is also known as listing on the stock exchange. The purpose of entering into the primary market is to raise
money and if the company is selling their shares for the very first time it is referred to as the Initial Public Offering
(IPO).

b) Secondary market: -
The shares of a company are traded in the secondary market once the new securities are sold in the primary
market. The transactions that take place in the secondary market are called trades. It involves the activity of

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investors buying from each other and selling amongst themselves at an agreed-upon price. A broker is an
intermediary that facilitates these transactions.

16. Explain SEBI: -

The regulation and supervision of the stock markets in India rest with the Securities and Exchange Board
of India. SEBI was formed as an independent identity under the SEBI Act of 1992 and has the power to conduct
inspections of the stock exchanges. The inspections review the operations of the market and the organizational
structure along with aspects of administrative control.

The main role of SEBI includes the following: -

 Ensuring a fair and equitable market for investors to grow

 Compliance of the exchange organization, the system its practices in accordance with the rules framed
under the Securities Contracts (Regulation) Act (SC(R) Act),1956

 A Ensure implementation of the guidelines and directions issued by the SEBI

 Check if the exchange has complied with all the conditions and has renewed the grants, if needed, under
Section 4 of the SC(R) Act of 1956.
17. List the Major weakness or issues faced by Indian stock exchanges: -

The stock market in India suffers from number of weaknesses. The principal ones are mentioned below.

o Lack of professionalism: - While there are brokers who are highly professional in their dealings, the
majority of brokers seem to lack high professional standards. Many of them lack the professional expertise
to guide and counsel their clients. Further, they resort to actions, which may hurt the interests of their
clients.

o Dominance of financial institutions: - Stock Exchange is influenced by the dealings of LIC, UTI and
foreign financial institutions. When they buy the share, prices go up and when they sell, the market become
dull

o Poor liquidity: - Indian stock exchange suffers from poor liquidity

o Poor regulations - The regulations are very weak. The regulation of SE is entrusted to SEBI (Securities
Exchange Board of India) though large powers, the functioning is inefficient

o Speculative trading: - Most of the transactions are speculative in nature, where the motive is to make
profit from the short-term price fluctuations.

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18. Explain Demat account: -
Demat account or dematerialized account used to hold shares and securities in dematerialized/electronic
format. Investors name on it. Today, there is no paperwork involved, and physical certificates are no longer issued.
Under dematerialization, share certificates converted from physical form electronic form so to increase their
accessibility. India introduced demat account system in 1996 for trades on NSE. Depository is the organisation
which holds securities (like shares, debentures, bonds, government securities, mutual fund units etc) of investors
in electronic form at the request of the investors through registered Depository Participant. The demat account
number is quoted for all transactions to enable electronic settlements of trades to take place. So demat account is
a must for trading and investing. The investor (a buyer or seller of shares) to do his business, should start an
account with depository. This account is known as demat account. Any investor who wish to open demat account,
needs to approach Depository Participant his/her choice to open the demat account.
19. What are the advantages of demat account?

o It is a safe and convenient way to hold securities

o It ensures immediate transfer of securities

o There is no stamp duty on transfer of securities.

o Risks associated with physical certificates such as bad delivery, fake securities, delays, thefts, etc.,
are eliminated.

o There is a major reduction in paperwork involved in transfer of securities, and reduction in transaction
cost, etc.

o The depository system helps the company in reducing the cost of new issues due lower printing
and distribution costs.
20. Compare Demat account and Trading account: -

SL Demat account Trading account

NO
1 A Demat account is used to hold The trading account works as a link between
shares in the electronic format that the the investors bank account and demat account.
investor buys from share market.
2 Demat account will have a unique Trading account it will have a unique trading
demat number, which will be used to number, which can be used to trade in the
uniquely identify the investors share market.
account.
3 Demat account can hold financial Trading account only helps in the act of
instruments like equity shares, mutual buying and selling the securities, not used to
funds etc. hold any financial securities.

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 4 The key role of a demat account is to The key role of trading account is to allow to
ensure the safety of investors shares. carry out trading transactions in the stock
market.

21. Compare SENSEX and NIFTY:-

Basics of difference BSE Sensex NIFTY 50

Owned by BSE SENSEX is an index NIFTY 50 is owned and

owned and managed by BSE. managed by NSE.
Number of companies in the 30 50
index
Base year and value The base year is 1978-79 and 1995 is the base year,
the value base is 100 and1000 it is the base value.
Number of constituents Sensex comprises the top 30 Nifty 50 constitutes of the
companies actively traded in top 50 companies that are
in BSE. actively traded in NSE.

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