Macroeconomics

National income: 1) to identify the outcomes from each sector. 2) review of policies. 3) the
distribution of income among different sectors. 4) it helps to find out structural change. 5) comparison
among nations 6) assessment of strengths and weaknesses. Output approach, income approach and
expenditure approach. GDP: output approach: final goods and services by factor of production during
one year in a country. GDP: expenditure approach: private consumption expenditure: by households
and not for profit organizations. Private consumption is demand for consumer goods and services.
Goods can be consumed divorced from place of production which is not true for services. Goods are
tangible while services are intangible goods. Non-durable goods are used up in short time. Durable
goods are for longer period. Investment: private capital invested. Depreciation is to be accounted
which eliminates double counting. Residential construction investment. Public investment. Inventory
investment. Government purchases: government spending is proxy measure for government output.
Government transfers are not counted in GDP. Net exports: E I. Income approach: it is measured by
adding all factor income generated by production of goods and services.
GNP: GDP + income from Indian national from abroad income paid to foreign national in india.
Export Import represents only G&S other than factor income.
Real and nominal GNP: GNP at current prices is nominal GNP. It will change when overall price or
volume changes. GNP at constant prices is called as real GNP. It changes with quantity and not with
prices.
GNP deflator: it measures average level of the prices of all the goods and services that make up GNP.
It is the ratio of nominal to real GNP.
At factor prices = At market prices net indirect taxes.
Net disposable income: net income available for consumption and savings.
Items excluded from GNP: purely financial transactions such as buying and selling of securities,
government transfers and private payment transfers like pocket money etc. transfer or buying of used
goods. Non-market goods and barter system and illegal activities.
Greater price lowers the demand. At full employment there is some temporary unemployment called
as frictional unemployment. Consumption demand increases with income which in turn increases
investment and revenues of firms. Investment and interest rates are inversely related.
Deficit demand: when demand is less than the equilibrium employment level. This leads to
deflationary gap which causes decline in income, output and employment. Inventory will increase
which leads to cutting down jobs and production. This can be taken care by fiscal and monetary
policies. Reducing the taxes or increasing government spending. Increase in investment by increasing
credit. This needs to be done by low interest rates, CRR.
Excess demand: It gives rise to an inflationary gap leading to rise in prices. This can be taken care of
by reducing government expenditure, increasing taxes, increasing interest rates and CRR.
Barter system: absence of common unit hinder measurement of G&S. Lack of double coincidence i.e.,
to find a person who want the same good the most and in return giving person also wants the same
good the most from other person. Future contracts were not possible. It does not provide for any
method of storing generalised purchasing power.

Money: purchasing power is inversely proportional to price level. It is a legal tender. It is also called
as flat money because it serves as money on the fiat of the government which is not true for demand
deposit. DD is called as fiduciary money as they are taken on the confidence basis of trust. Cheque is
not a legal tender. Narrow money is based upon its medium of payments function. Broad money also
include others with high degree of moneyness. Broad money includes saving and time deposits. These
have high degree of moneyness but not accepted as payments. Paper money is a full legal tender while
coins are limited legal tender. RBI issues all notes above one rupee while government issues all coins
and one rupee notes but circulation is with RBI. Paper currency is not convertible into gold.
Banks: chequable deposits is necessary but not sufficient conditions to be banks. Lending is also
important. Current account deposit: payable on demand also by cheque. No interest in paid.
Fixed/term deposit: deposited for fixed time. These are not payable on demand and cheque facility.
Rate of interest rises with time. Its variant is recurring deposit. Saving deposit: combine both features
of current and time deposits. Payable on demand and withdrawn on cheque but with certain condition
on cheques. Interest paid is less than time deposit. Only demand deposits may serve as a medium of
exchange.
Cash credit: loan amount sanctioned by bank. The withdrawal is done after showing the ongoing
business requirements. Only amount withdrawn is chargeable. These are given based on
creditworthiness of loanee. Demand loans: lump sum amount is given into loan amount. Whole
amount is chargeable. These are given against securities. Short-term loans: these are secured loans
given against some security. Whole amount is given and chargeable. This is given for short-term.
Repayment within scheduled time in one or more than one instalment. Overdraft: to overdraw from
current account upto an agreed limit. The security for overdraft is financial assets. Lower interest rate
than cash credit. Discounting bill of exchange: an amount of money owed in exchange for goods
received. The amount will be paid on later date and if cashed before than bank will deduct the
commission and take money from the issuer upon maturity of the bill.
Government securities: securities of central and state government such as T-Bills, NSC etc.
SLR: Part of bank investment in GSec and other securities as mandated by RBI. Banks hold excess
securities to borrow money from RBI and market. The return on them are lower than loans as these
are more liquid.
Banks: paid up capital is capital contributed by owners. Reserves are retained earnings. Banks borrow
from each other, call market and other sources.
Call money: money lent to other banks, FI and stock brokers for 1 to 14 days. These are done to get
surplus earning. Bill of exchange: during pendency it is the asset of the bank. By providing loans
banks do credit creation. RBI determines quantity of reserves: 1) lend reserves to the banks. These
reserves are borrowed reserves or borrowings. 2) open market operations. The amount is added or
deducted to and from bank reserves.