1. A.

Explain how firms and individuals participate and

interact in the product market and in factor market

A product market refers to a place where goods and services are bought and
sold. A factor market refers to the employment of factors of production, such
as labour, capital and land.

Product market
 Demand for product markets comes primarily from households
 The main sellers of goods are different kinds of firms.
 Demand for goods is a direct demand. The good is bought for
its intrinsic use.
 The market facilitates the exchange of goods and services in
the economy. It is based on a voluntary transaction across a
wide range of places.
Product markets rely on the operation of supply and demand to
determine prices

In this case, an increase in demand can lead to an increase in the price of the
product.

Examples of Product markets

 Farmer’s market selling vegetables direct to the public

 Fish market
  Supermarkets selling a range of goods in a convenient
place.
 Amazon.com – Offering the direct sale of goods, and
marketplaces for intermediaries
 Ebay.com – Offering individuals the opportunity to sell
goods.

FACTOR MARKETS
The factor market is a place where factors of production (land, labour, capital)
are bought and sold.

In this case, an increase in supply of labour and demand for labour leads to an
increase in Q of workers and wages staying at W1.

 Demand for labour and capital is a derived demand. Firms

need to employ more workers when there is greater demand
for the product that they make.
 If demand for takeaway coffee rises, then Starbucks will need
to employ more coffee workers (baristas)
 If there is an increase in demand for private dental treatment,
there will be an increase in demand for dentists and this will
push up the price of dental treatment and also the wage of
dentists.
Examples of Factor Markets
 A labour exchange where firms post available jobs.
 Modern equivalents include websites/apps for job
seekers.
 Commercial real estate agents, making available
office space to rent

B. WHAT ROLE DOES PROFIT PLAY IN MARKET

SYSTEM?
In a capitalist economy, profit plays an important
role in creating incentives for business and
entrepreneurs. For an incumbent firm, the reward of
higher profit will encourage them to try and cut
costs and develop new products. If an industry is
profitable, it will encourage new firms to enter. If a
firm becomes unprofitable, it will either have to
adapt and change or close down. This profit motive
can help increase efficiency, provide greater choice
for consumers and allocate resources according to
consumer preferences. However, profit can have a
downside. To increase profits, firms may take action
which cause market failure. For example, an asset
stripper could buy a failing firm – selling off its
assets and then make workers redundant.
Alternatively, a firm may increase profits by finding
ways around environmental regulation and cause
more pollution. Also, a firm may seek short-run
profit maximisation and under-invest in the long-
term. Behavioural economists argue that economics
can often over-emphasise the role of profit. For
example, individuals are motivated by many factors
other than profit, such as pride in work, desire to
work in bigger company, be successful and
attachment to ideas – even if unprofitable.

IMPORTANCE-OF-PROFIT
1. Investment in Research & Development. Higher
profit enables a firm to spend more on research and
development. This can lead to better technology,
lower costs and dynamic efficiency. This profit is
particularly important for some industries such as
oil exploration, drug research and car manufacturing
– which require significant risky investment to
develop. Without this profit and investment, the
economy will stagnate and lose international
competitiveness, leading to job losses in some
sectors.
2. Reward for Shareholders
Shareholders are given dividends. Higher profit
leads to higher dividends and encourages people to
buy shares. Shareholders are an important source of
finance for firms. Profit is important to be able to
remunerate shareholders. It is the hope of future
profit that enables firms to raise finance from
shareholders to finance expansion. Low profit may
make a firm the target of a takeover bid. If a firm
appears to be under-performing, shareholders may
feel they are better off selling to a firm wishing to
take them over.
3. High Profit should attract new firms into the
industry
If the price of oil is high then it will become more
profitable. These profits should encourage firms to
develop new oil fields. With mobile Apps becoming
more profitable, it will encourage more firms to
enter.
4. Risk Bearing Economies
Profit can be saved and provide insurance for an
unexpected downturn, such as recession or rapid
appreciation in the exchange rate. This is important
for volatile industries, like luxury products. Luxury
goods may be very profitable in boom years, but
make a loss in recession.
5. Tax Revenues
Governments charge corporation tax on company
profits and this provides several billion pounds of
tax revenue per year. In the UK the corporation tax
rate is 19% Company profit levels in the US. This
shows the dip in profit during the recession, but
sharp rise after.
6. The incentive effect
Higher profit acts as an incentive for entrepreneurs
to set up a business. Without the reward of profit,
there would be less investment and fewer people
willing to take risks. In a command economy, there
is no profit incentive but this can easily lead to a lack
of incentives.

2.A. EXPLAIN THE CONCEPT AND VARIOUS

DETERMINANTS OF DEMAND

Demand refers to the willingness or ability of a

buyer to pay for a particular product. In other
words, demand can be defined as the quantity of
a product that a buyer desires to purchase at a
specific price and time period the’ demand for a
product is influenced by a number of factors,
such as price of the product, change in
customers’ preferences, and standard of living.

The five determinants of demand are:

• The price of the good or service.
• The income of buyers.
• The prices of related goods or services—either
complementary and purchased along with a
particular item, or substitutes and bought
instead of a product.
• The tastes or preferences of consumers will
drive demand.
• Consumer expectations. Most often, this refers
to whether a consumer believes prices for the
product will rise or fall in the future.

B) PRICE OUTPUT DECISIONS IN MULTI

PLANT FIRMS

In the long run, a monopoly organization with a

number of plants may increase (or decrease) the
number of its plants with a view to obtain the
profit-maximizing solution. Now, each plant of
the monopolist may be of a different size, and in
the long run the size of each plant is a variable.
However, in the long run since all sorts of input
adjustments are possible, the LAC curve and the
associated SAC curves of each plant of the
monopolist would be identical, for what is good
for a particular plant is good for every other
plant. The size of each plant should be such as
would enable the firm to produce the same
 quantity of output at the same minimum
possible (average) cost.
That is, in the long run the monopolist will select
the minimum point on the identical LAC curve of
each plant, which is also the minimum point of
the associated SAC curve. In the long run, as the
number of plants of the multi-plant monopolist
increases so that a larger quantity of output may
be produced, the SAC curves along with their
envelope LAC curve in each plant will shift
upwards, as it has done from the lower LAC to
the higher LAC curve.

3. A.Elaborate the meaning and various types

of cost in detail?
Cost is the sacrifice made, usually measured by the
resources given up, to achieve a particular purpose.
A sacrifice made in order to obtain some goods or
services
• Costs are not always Expenses.
• Some costs are Assets, other costs are Expenses
• Expenses are Expired (Used up) Costs
The following points highlight the five main types of
classification of costs. The types are: 1. Cost
Classification by Nature 2. Cost Classification in
Relation to Cost Centre 3. Cost Classification by Time
4. Cost Classification for Decision Making 5. Cost
Classification by Nature of Production Process.
Type 1. Cost Classification by Nature:
The total cost of a product or service is basically
classified into material cost, labour cost and
expenses as follows:
i. Material Cost:
It is the cost of material of any nature used for the
purpose of production of a product or a service.
Material cost includes cost of procurement, freight
inwards, taxes and duties, insurance etc. directly
attributable to the acquisition. Trade discounts,
rebates, duty drawbacks, refunds on account of
modvat, cenvat, sales tax and other similar items are
deducted in determining the costs of material.
ii. Labour Cost:
Labour cost includes salaries and wages paid to
permanent employees, temporary employees and
also to employees of the contractor.
The labour cost can be analyzed into the following:
a. Monetary benefits payable immediately:
Salaries and wages, dearness and other allowances,
production incentive or bonus.
b. Monetary benefits after sometime in future:
Employer’s contribution to P.F., E.S.I., Pension etc.
Gratuity, Profit linked bonus.
c. Non-monetary benefits (fringe benefits):
Free or subsidized food, free medical or hospital
facilities, free or subsidized education to the
employees children, free or subsidized housing etc.
Type 2. Cost Classification in Relation to Cost Centre:
The elements of cost can be studied under the
classification direct and indirect costs. If the object
of interest for identifying and measuring cost is to
determine how much sacrifice is involved in
manufacturing a particular product, then initially
one can define the three elements of total cost i.e.,
materials, labour, and expenses.
i. Direct Costs:
The direct costs are those which can be identified
easily and indisputably with a unit of operation or
costing unit or cost centre. Costs of direct material,
direct labour and direct expenses can be directly
allocated or identified with a particular cost centres
or a cost unit and can be directly charged to such
cost centre or cost unit. These costs are also called
‘traceable costs’.
ii. Direct Material:
The direct material costs are those which can be
identified easily and indisputably with a unit of
operation or costing unit or cost centre. The direct
material cost can be directly allocated or identified
with particular cost centres or cost units and can be
directly charged to such cost centres or cost units.
Raw materials are directly identifiable as part of the
final product and are classified as direct materials.
For example, wood used in production of tables and
chairs, steel bars used in steel factory etc. are the
direct materials that becomes part of the finished
product.
iii. Direct Labour:
The labour cost incurred on the employees who are
engaged directly in making the product, their work
can be identified clearly in the process of converting
the raw materials into finished product is called
‘direct labour cost’.
For example, wages paid to the workers engaged in
machining department, fabrication department,
assembling department etc.
iv. Direct Expenses:
The direct expenses refers to expenses that are
specifically incurred and charged for specific or
particular job, process, service, cost unit or cost
centre. These expenses are also called ‘chargeable
expenses’.
v. Indirect Costs:
Indirect costs cannot be allocated but which can be
apportioned to cost centres or cost units. These
costs are also called as ‘common costs’. The indirect
costs are not traceable to any plant, department,
operation or to any individual final product. All
overhead costs are indirect costs.
Costs of indirect material, indirect labour and
indirect expenses in aggregate constitute the
overhead costs and are the indirect component of
the total cost. Indirect costs cannot be directly
allocated to cost units or cost centres and have to be
absorbed or recovered into cost units.
vi. Indirect Material:
The costs incurred on materials used to further the
manufacturing process, which cannot be traced into
the end product and the material required in the
production process but not necessarily built into the
product are called ‘indirect material’.
For example cutting oil used in cutting surface,
threads and buttons used in stitching clothes,
lubricants used in maintenance of plant and
machinery, cotton waste used in cleaning the
machinery etc. are considered as indirect materials.
vii. Indirect Labour:
The cost of indirect labour consist of all salaries and
wages paid to the staff for the purpose of carrying
and tasks incidental to goods or services provided
which will not form part of salaries and wages paid
in working directly upon the product.
For example, salaries and wages paid to store
keepers, watch and ward, supervisors, timekeepers,
quality control, managers, clerical staff, salesmen
etc. These indirect labour costs cannot be identified
with any particular job, process, cost unit or cost
centre.
Type # 3. Cost Classification by Time:
i. Historical Cost:
The historical cost is the actual cost, determined
after the event. Historical cost valuation states costs
of plant and materials, for example, at the price
originally paid for them.
Costs reported by conventional financial accounts
are based on historical valuations. But during
periods of changing price levels, historical costs may
not be correct basis for projecting future costs.
Naturally historical costs must be adjusted to reflect
current or future price levels.
ii. Predetermined Cost:
These costs relating to the product are computed in
advance of production, on the basis of a specification
of all the factors affecting cost and cost data.
Predetermined costs may be either standard or
estimated.
iii. Standard Cost:
It is a predetermined calculation of how much costs
should be under specified working conditions. It is
built up from an assessment of the value of cost
elements and correlates technical specifications and
the quantification of materials, labour and other
costs to the prices and/or usage rates expected to
apply during the period in which the standard cost is
intended to be used.
Its main purpose is to provide basis for control
through variance accounting for the valuation of
stock and work-in-progress and in some cases, for
fixing selling prices. A standard cost is a planned
cost for a unit of product or service rendered.
iv. Estimated Cost:
It is a predetermined cost based on past
performance adjusted to the anticipated changes. No
minute appraisal of each individual component cost.
It can be used in any business situation or decision
making which does not require accurate cost.
It is used in budgetary control system and historical
costing system. Its emphasis is on the level of costs
not to be exceeded. It is used in decision making and
selection of alternative with maximum profitability.
It is also used in price fixation and tendering. It is
determined generally for the period.
Type 4. Cost Classification for Decision Making:
For the managerial decision making the cost data
can be analyzed keeping in view the following cost
concepts:
i. Marginal Cost:
The term ‘marginal cost’ is defined as the amount at
any given volume of output by which aggregate costs
are changed if the volume of output is increased or
decreased by one unit. It is a variable cost of one unit
of a product or a service i.e., a cost which would be
avoided if that unit was not produced or provided.
ii. Differential Cost:
It is also known as ‘incremental cost’. It is the
difference in total cost that will arise from the
selection of one alternative to the other. It is an
added cost of a change in the level of activity.
This concept is similar to the economists’ concept of
marginal cost which is defined as the additional cost
incurred by producing one more unit of product. It
refers to any kind of change like add or drop a new
product/existing product, changing distribution
channels, add or drop business segments, adding
new machinery, sell or process further, accept or
reject special orders etc.
iii. Opportunity Cost:
It is the value of a benefit sacrificed in favour of an
alternative course of action. It is the maximum
amount that could be obtained at any given point of
time if a resource was sold or put to the most
valuable alternative use that would be practicable.
Opportunity cost of good or service is measured in
terms of revenue which could have been earned by
employing that good or service in some other
alternative uses.
Type 5. Cost Classification by Nature of Production
Process:
Depending on the nature of production process, the
cost can be classified into the following:
1. Batch Cost:
It is the aggregate cost related to a cost unit which
consists of a group of similar articles which maintain
its identity throughout one or more stages of
production.
2. Process Cost:
When the production process is such that goods are
produced from a sequence of continuous or
repetitive operations or processes, the cost incurred
during a period is considered as process cost. The
process cost per unit is derived by dividing the
process cost by number of units produced in the
process during the period. Accounts are maintained
for cost of a process for a period. The average cost
per unit produced during the period is process cost
per unit.
3. Operation Cost:
It is the cost of a specific operation involved in a
production process or business activity. When there
are distinctly separate operations involved in a
process, cost for each operation is found out for
effective control mechanism.
4. Operating Cost:
It is the cost incurred in conducting a business
activity. Operating costs refer to the cost of
undertakings which do not manufacture any product
but which provide services.
5. Contract Cost:
It is the cost of a contract with some terms and
conditions of adjustment agreed upon between the
contractee and the contractor. Contract cost usually
implied to major long- term contracts as distinct
from short-term job costs. Escalation clause is
sometimes provided in the contract in order to take
care of anticipated change in material price, labour
cost etc.
6. Joint Cost:
These are the common costs of facilities or services
employed in the output of two or more
simultaneously produced or otherwise closely
related operations, commodities or services.
When a production process is such that from a set of
same input, two or more distinguishably different
products are produced together, products of greater
importance are termed as joint products and
products of minor importance are termed as by-
products and the costs incurred prior to the point of
separation of the products are termed as joint costs.
B. Discuss meaning of risk. Explain the
decision making under risk in detail?
Risk is the possibility of something bad happening.
Risk involves uncertainty about the
effects/implications of an activity with respect to
something that humans value (such as health, well-
being, wealth, property or the environment), often
focusing on negative, undesirable consequences.
Decision making under risk
Decision making is one of the most important tasks
in the management process and it is often a very
difficult one. When having knowledge regarding the
states of nature, subjective probability estimates for
the occurrence of each state can be assigned. In such
cases, the problem is classified as decision making
under risk. In the decision making process, all
relevant information is evaluated through decision
analysis (DA).
The decision analysis process consist of the use of a
decison tool and a decsion theory. The decision tree
is the most commonly applied decision tool in the
decision analysis. The decision theory of interest in
the decision analysis, regarding the decision making
under risk, is the expected value of criterion also
reffered to as the Bayesian principle. This is the only
one of the four decision methods that incorporates
the probabilities of the states of nature.
When a manager lacks perfect information or
whenever an information asymmetry exists, risk
arises. Under a state of risk, the decision maker has
incomplete information about available alternatives
but has a good idea of the probability of outcomes
for each alternative.
While making decisions under a state of risk,
managers must determine the probability associated
with each alternative on the basis of the available
information and his experience.
4. A.Explain composition and
functions of money market in India
There are two kinds of markets where borrowing
and lending of money takes place between fund
scarce and fund surplus individuals and groups. The
markets catering the need of short term funds are
called Money Markets while the markets that cater
to the need of long term funds are called Capital
Markets.
Structure of Organized Money Market in India
The organized money market in India is not a single
market but is a conglomeration of markets of
various instruments.
1. Call Money / Notice Money / Term Money Market
Call Money, Notice Money and Term Money markets
are sub-markets of the Indian Money Market. These
refer to the markets for very short term funds. Call
Money refers to the borrowing or lending of funds
for 1 day. Notice Money refers to the borrowing and
lending of funds for 2-14 days. Term money refers to
borrowing and lending of funds for a period of more
than 14 days. More information is available here.
2. Treasury Bill (T – Bills)
The bill market is a sub-market of the money market
in India. There are two types of bills viz. Treasury
Bills and commercial bills. While Treasury Bills or T-
Bills are issued by the Central Government;
Commercial Bills are issued by financial institutions.
Click here for more information on Treasury Bills.
3. Commercial Bills
Commercial bills market is basically a market of
instruments similar to Bill of Exchange. The
participants of commercial bill market in India are
banks and financial institutions but this market is
not yet developed.
4. Certificate Of Deposits (CDs)
Certificate of Deposit (CD) refers to a money market
instrument, which is negotiable and equivalent to a
promissory note. All scheduled commercial banks
excluding Regional Rural Banks (RRBs) and Local
Area Banks (LABs) and Select All India Financial
Institutions permitted by RBI are eligible to issue
certificates of deposits. More information is here.
5. Commercial Papers (CP)
Commercial Paper (CP) is yet another money market
instrument in India, which was first introduced in
1990 to enable the highly rated corporates to
diversify their resources for short term fund
requirements. More Information about Commercial
Papers is here.
6. Money Market Mutual Funds (MMMFs)
Money Market Mutual Funds (MMMFs) were
introduced by RBI in 1992 but since 2000, they are
brought under the purview of the SEBI. They
provide additional short-term avenue to individual
investors.
7. The Repo / Reverse Repo Market
Repo (repurchase agreement ) was introduced in
December 1992. Repo means selling a security
under an agreement to repurchase it at a
predetermined date and rate. Repo transactions are
affected between banks and financial institutions
and among bank themselves, RBI also undertake
Repo. IN 1996, Reverse Repo was introduced.
Reverse Repo means buying a security on a spot
basis with a commitment to resell on a forward
basis. Reverse Repo transactions are affected with
scheduled commercial banks and primary dealers.
8. Discount And Finance House Of India (DFHI)
It was established in 1988 by RBI and is jointly
owned by RBI, public sector banks and all India
financial institutions which have contributed to its
paid up capital. DFHI plays important role in
developing an active secondary market in Money
Market Instruments. From 1996, it has been
assigned status of a Primary Dealer (PD). It deals in
treasury bills, commercial bills, CDs, CPs, short term
deposits, call money market and government
securities.
Functions of Money Markets
Due to short maturity term, the instruments of
money market are liquid and can be converted to
cash easily and thus are able to address the need of
the short term surplus fund of the lenders and short
term borrowing requirements of the borrowers.
Thus, the major function of the money markets is to
cater to the short term financial needs of the
economy. The other functions are as follows:
• Money Markets help in effective implementation of
the RBI’s monetary policy
• Money markets help to maintain demand and
supply equilibrium with regard to short term funds
• They cater to the short term fund requirement of
the governments
• They help in maintaining liquidity in the economy
B.Discuss role of Securities and Exchange
Board of India (SEBI) in monitoring and
regulating capital market in India
The Indian capital market is one of the biggest
capital markets in the world. The main stock
exchange of India, the SENSEX has a major role in
the global markets. To control and monitor this
capital market the government formed the Securities
and Exchange Board of India (SEBI).
The formation of the Securities and Exchange Board
of India (SEBI) was done on 12th April 1988. This
was followed by the establishment of the SEBI Act
on 30th January 1992, which gave SEBI their powers
and functions. The main aim of the SEBI was to
control and regulate the capital markets. This was
done with the view of protecting the interests of the
investors. The government wanted to ensure that
the money which the public was investing was safe.
Functions of the SEBI
The SEBI Act lists out the powers of the Securities
and Exchange Board of India. It has to be responsive
to the needs of three particular parties in the capital
market. Firstly there are the investors who invest
their savings in the market in the hope for a return.
Then there is the issuers, i.e. the companies and
institutions that issue securities in exchange for
investment. And the SEBI must also govern the
market intermediaries, such as brokers, banks,
consultants etc. Since SEBI is the only authority
when it comes to the capital markets it has a variety
of functions. These functions are of three types or
categories as follows,
• Quasi-Legislative Functions: These include drafting
legislature with respect to the capital markets.
• Quasi-Executive Functions: The implementation of
the legislation also falls to SEBI. And when necessary
they can conduct investigations as well about any
wrongdoings.
• Quasi-Legal Functions: The SEBI also has the
authority to conduct hearings and pass rulings and
judgments.
Powers of the SEBI
To be able to function efficiently and keep a
definitive control over the market the Securities and
Exchange Board of India has been granted some
widespread powers.
Has control of the bylaws of every stock exchange in
the country. The approval of the SEBI is to be taken
for such laws. And the SEBI can also ask the
authorities to amend the laws if necessary. The SEBI
can also inspect the books of accounts of any stock
exchange to check for irregularities. If the SEBI
demands, such stock exchanges must provide any
accounts/books/documents as requested. SEBI can
also inspect books of accounts for financial
intermediaries. And SEBI can ask any company to
list their shares on more than one stock exchange if
they feel it would be more beneficial to the market.
SEBI as a Business Facilitator
The main function of the Securities and Exchange
Board of India is to regulate the capital market of
India. By doing so it is also responsible for the
development and advancement of the capital
market. It builds trust among the investors that their
investment is safe within its guidelines. So
ultimately the companies wanting to do business
now have access to the capital they require. SEBI
also facilitates the public offering of such companies.
Another aspect is that SEBI also oversees
international investment in the domestic market. It
is responsible for the trading of Indian companies in
various stock markets across the world. It
coordinates with governing
bodies and regulators abroad to make the process
simpler and safer. So foreign companies can invest
in India and Indian companies can invest in other
global companies as well.

5. Write a note on the following.

1) Difference between WTO and GATT.
 GATT was ad-hoc and provisional. The WTO and
its agreement are permanent with WTO having a
sound legal basis because members have
ratified the WTO agreements.
 GATT refers to an international multilateral
treaty to promote international trade and
remove cross-country trade barriers. On the
contrary, WTO is a global body, which
superseded GATT and deals with the rules of
international trade between member nations.
 While GATT is a simple agreement, there is no
institutional existence, but have a small
secretariat. Conversely, WTO is a permanent
institution along with a secretariat.
 The participating nations are called as
contracting parties in GATT, whereas for WTO,
they are called as member nations
 The grandfather clause in the Protocol of
Provisional Application in GATT 1947 has not
been carried forward to WTO. WTO contains an
 improved version of original GATT rules-GATT
Rules 1994.
 GATT commitments are provisional in nature,
which after 47 years the government can make a
choice to treat it as a permanent commitment or
not. On the other hand, WTO commitments are
permanent, since the very beginning.
 The scope of WTO is wider than that of GATT in
the sense that the rules of GATT are applied only
when the trade is made in goods. As opposed to,
WTO whose rules are applicable to services and
aspects of intellectual property along with the
goods.
 GATT agreement is primarily multilateral, but
the plurilateral agreement is added to it later. In
contrast, WTO agreements are purely
multilateral.
 The domestic legislation is allowed to continue
in GATT, while the same is not possible in the
case of WTO.
 The dispute settlement system of GATT was
slower, less automatic and susceptible to
blockages. Unlike WTO, whose dispute
settlement system is very effective.

2) GDP and PPP

 PPP (Purchasing power parity):
The theory aims to determine the adjustments
needed to be made in the exchange rates of two
currencies to make them at par with the purchasing
power of each other. In other words, the expenditure
on a similar commodity must be same in both
currencies when accounted for exchange rate. The
purchasing power of each currency is determined in
the process.
Description: Purchasing power parity is used
worldwide to compare the income levels in different
countries. PPP thus makes it easy to understand and
interpret the data of each country.
 GDP (Gross domestic product):
GDP is the final value of the goods and services
produced within the geographic boundaries of a
country during a specified period of time, normally a
year. GDP growth rate is an important indicator of
the economic performance of a country.
Description: It can be measured by three methods,
namely,
1. Output Method: This measures the monetary or
market value of all the goods and services produced
within the borders of the country. In order to avoid a
distorted measure of GDP due to price level changes,
GDP at constant prices of real GDP is computed. GDP
(as per output method) = Real GDP (GDP at constant
prices) – Taxes + Subsidies.
2. Expenditure Method: This measures the total
expenditure incurred by all entities on goods and
services within the domestic boundaries of a
country. GDP (as per expenditure method) = C + I +
G + (X-IM) C: Consumption expenditure, I:
Investment expenditure, G: Government spending
and (X-IM): Exports minus imports, that is, net
exports.
3. Income Method: It measures the total income
earned by the factors of production, that is, labor
and capital within the domestic boundaries of a
country. GDP (as per income method) = GDP at
factor cost + Taxes – Subsidies.

B. DEFINE FOLLOWING TERMS IN RELATION

WITH UNION BUDGET
1- REVENUE ACCOUNT
The account showing the inflow of money from
sale of goods or services and the costs and
expenses chargeable against it, over an
accounting period. The equivalent UK term is
profit and loss account.
2- CAPITAL ACCOUNT
An account of the total capital invested in fixed
assets by the owners of a business, including
real estate, machinery, etc., but excluding
current or operating expenses
3- REVENUE DEFICIT
A revenue deficit occurs when realized net
income is less than the projected net income.
This happens when the actual amount of
revenue and/or the actual amount of
expenditures do not correspond with budgeted
revenue and expenditures.
4- CAPITAL DEFICIT
A deficit in the capital account means money is
flowing out of the country, and it suggests the
nation is increasing its ownership of foreign
assets. The term "capital account" is used with a
narrower meaning by the International
Monetary Fund (IMF) and affiliated sources.
5- PLAN AND NON PLAN EXPENDITURE
Plan expenditures are estimated after
discussions between each of the ministries
concerned and the Planning Commission.
Non-plan revenue expenditure is accounted for
by interest payments, subsidies (mainly on food
and fertilisers), wage and salary payments to
government employees, grants to States and
Union Territories governments, pensions,
police, economic services in various sectors,
other general services such as tax collection,
social services, and grants to foreign
governments..