Q. P. Code: 12188 Model Answer Paper F.Y.B.AJB.Se. ECONOMICS SEM IT Code no. 1 Date of the Examination @ 4 (yo \\ First Half 2017 1, Attempt any two of the following. a) Explainthe circular flow of income in an open economy. Sol: Diagram. Explanation b) Country A produces two goods Rice and Wheat. The following table gives data regarding quantities of goods produced and their prices in the years 2010 and 2011. Calculate i) Nominal GDP at current prices for years 2010 and 2011. ii) Real GDP for 2011 at 2010 prices. [ Goods 1 20102011 ana | Price [Quantity | Price(Rs) | Quantity 12 [600Kg 10 [10002 [Wheat 16 ~(|800Kg | 12 I Calculate nominal GDP at current prices for 2010 and 2011. Sol: Nominal GDP at current prices for 2010 = Q Wheat x P Wheat + Q Rice x P Rice = 16 x 800 + 12 x 600 = 9600 +7200 = 16,800 Nominal GDP at current prices for 201 1= Q Wheat x P Wheat +Q Rice x P Rice+ Q Edible Oil x P Edible Oil =12 x 1200+10 x 1000= 14400+ 10000 = 24400 Calculate the real GDP (GDP of 201! at 2010 prices) Q Wheat in 2011 x P Wheat in 2010 + Q Rice in 2011 x P Rice in 2010 200 x 16+ 1000 x 30 = 19200+ 30000 = 49200 c) Discuss the trend in sectoral composition of GDP in India. Sol: Explain how the share of income output and employment has fallen for primary sector, and has increased for tertiary sector, highlighting some components in tertiary sectors, eg. 1 sector, banking and insurance. etc.Q. P. Code: 12188 2.Attempt any two of the following: a) Explain the Keynesian consumption function. If consumption function is C =100+0.55Y and investment expenditure is Rs 1000 , calculate: i) Equilibrium level of national income. ii) Consumption expenditure at equilibrium level of national income. Sol: State the Psychological law of consumption. Calculate the equilibrium Income level. Y = C +1, Given: C=100+0.55Y and I= 1000, Y = 100+0.58Y + 10000 Y-0.55Y= 10100. So, 0.45 Y= 10100. So, Y= 10100/ A. Y= 22844. b) ‘Investment is determined by MEC and the rate of interest” — Discuss, Sol: Investment depends on (i) cost of borrowing and (ii) return on investment. i interest rate, and MEC. Give definition of MEC, explain Investment function, using diagram. Show how Shift in investment function will take place if there is a change in interest rate c) Explain the working and limitations of the accelerator principle. Sol: i. assumption of constant capital output ratio, i. No excess capacity in consumer goods industry. ii, Excess capacity in capital goods industry, iv. No role for change in expectations 3.Attempt any two of the following: a) Explain the following concepts. i) Impact of tax ii)Shifting of tax Sol: _ i) Impact of tax : the immediate result of or original imposition of the tax ii)Shifting of tax : Process of shifting... forward and backward iii)Incidence of tax: final money burden of a tax or final resting place of @ tax b) What is public expenditure? Explain the revenue and capital expenditure with suitable examples. Sol: public expenditure is the expenditure incurred on providing public! merit goods. Capital expenses are for the acquisition of long-term assets, Revenue expenses are shorter-term expenses required to meet the ongoing operational costs of running, or the administrative cost of the government. ) Given the following budget statement, find i) Revenue Deficit ii) Fiscal Deficit iii) Primary Deficit Items Amount in Rs, Crore 1. Revenue receipts 110 2. Revenue Expenditure (net of interest 130 payment) | 3. Interest Payment 35 4. Capital Expenditure | 105 5. Capital receipts (net of borrowing) [90 Sol:i. Revenue deficit-Revenue expenditure-Revenue receipt Revenue deficit =165-110 Revenue deficit =55 Rs.Crore ii, Fiscal Deficit = (Revenue deficit + Capital expenditure) - Non debt creating capital receipts Fiscal Deficit = (55 +105) - 90 Fiscal Deficit = 160 -90 Fiscal Deficit = 70 Rs. Crore iii, Primary deficit= Fiscal deficit-Interest payments Primary deficit= 70- 35 Primary deficit=45 Rs. Crore 130+ 35(interest)}-(110) 4.Attempt any two of the following: a) Explain the structure of balance of payment in India. Sol: The Balance of Payment is an organized account of all economic transactions between a country (say India) and the rest of the world, carried out in a particular time period. In other words, a country archives all the inflows and outflows of funds in a statement referred to as BOP. Its components are: 1, Trade Balance: It is the difference between exports and imports of items, typically referenced as visible or tangible items. The trade balance is a part of current account. 2. Current Account: In the current account, merchandise trade is entered first. There are actually a large number of distinct items which belong to the goods category. Export receipts are shown on the credit side and the imports are shown on the debit side. The second item that is recorded in the current account is invisibles. The current account consists of trade in services, dividends, unilateral receipts, investment income, ete Capital Account: The Capital account includes all the short-term and long-term transactions between a country and the world. Usually, these types of flows of money are related to saving and investment, but speculation has turned into a ‘major component of the account in recent times. In the capital account, both direct and portfolio foreign investment is recorded. External assistance and commercial borrowing are presented net repayment b) Explain the various types of disequilibrium in balance of payment. Sol: i, short run, ii, Long run, iii, Cyclical, iv. Structural ) What is rate of exchange? How it is determined? Sol: definition of exchange rate, Factors determining demand for and supply of foreign exchange, diagram of demand and supply, explanation.5. Attempt any two of the followin; a) Explain the GDP at purchasing power parity. Sol: Developed by Gustav Cassel-Value of GDP is based on PPP.Exchange rate between two currencies is determined by their PPP. i.e. equalisation of purchasing Power of two currencies by considering the cost of living and inflation. Difficulties in measuring GDP at PPP: i, Different quality ofeommodity ii different variety of commodities, iii different proportion and pattern of expenditure , iv many goods & services are not traded in market, v difficulty in finding prices b) Discuss the trend and composition of capital formation in India. Sol © The household sector contributed 6.2 per cent to GDS in 1950-51 and its share markedly improved to 19.3 per cent of GDP in 1990-91 and it further reached a level of 22 per cent by the end of 2004-05. Thus, the contribution of household sector to total GDS of the Indian economy was significant. '* Gross domestic capital formation (GDCF) of India as a percentage of GDP was 8.7 per cent of GDP in 1950-51, which increased to 20.3 per cent by 1980-81. Further, it increased to 26.3 per cent in 1990-91, and improved to 26.9 per cent in 1995-96 and thereafter, it increased further to 33.8 per cent in 2005-06. + In 1950-51, due to underdeveloped capital and money market in India the share of financial savings in the total household savings was only 0.6 per cent of GDP and bulk of, savings were undertaken in the form of physical assets. However, the situation changed by 1980-81, where the financial savings as a proportion of total savings accounted fc 43.5 per cent of total household savings. This was mainly due to the rapid expansion of banking sector in rural as well as urban areas, nationalization of banks, and a large increased of employment in the organized sector which started contributing towards provident funds and pension. The mobilization of rural savings towards Life Insurance Corporation also added to the growth of financial savings. * With the development of capital markets, especially, after financial liberalization, the households began investment in shares and debentures and this further strengthened the share of financial savings in total household savings. In 2004-05, out of the total household savings as a per cent of GDP, the share of financial savings was around 10.3 and that of physical savings was | 1.7 per cent. + The percentage share of manufacturing sector in total GDCF has increased to about 34.8 per cent by the end of 2004-05 from 19.2 per cent in 1950-51 where as the percentage share of agriculture, forestry and fishing in total GDCF has declined to 7.8 per cent in 2004-05 from 19.3 per cent in 1950-51. over the years, industries in services sector such as trade, hotels and restaurants, transport, storage and communication, finance, insurance, real estate and business services and community, social and personal services have also contributed a major proportion of total GDCF in India. ) Explain the various types of deficit. Sol: Revenue Deficit: is the excess of government revenue expenditure over revenue receipts. Therefore, it indicates that government cannot meet its current expenditure from its current revenue.Revenue Deficit = Revenue expenses- Revenue receiptsQ. P. Code: 12188 Budget Deficit:Budget deficit is the overall type of deficit. It means the excess of total expenditure over total revenues. Budget deficit includes both capital and the revenue items mentioned in the receipts and expenditure. Fiscal Deficit:The difference between governments’ total expenditure and total receipts. excluding the borrowings is known as the fiscal deficit. Gross fiscal deficit = Total expenditure ~ (revenue receipts + Non debt creating capital receipts) Fiscal Deficit = revenue deficit + Capital expenditure ~ Non debt creating capital receipts) While Fiscal deficit indicates total borrowings by Government from all sources, Budget Deficit only indicates government's borrowings from RBI. Primary Deficit:It is defined as fiscal deficit minus the interest payments. This is basically gross primary deficit. Primary deficit excludes the burden of previous debt and only shows the net increase in the governments Debt that is due in the current fiscal year. Therefore, a reduction in the primary deficit means the government is following Policies to bridge the fiscal gap during the financial year d) Write a note on benefits of GST. Sol: Definition, Advantages: i. Lean tax structure, ii, Unified market in the country. ili Encourage exports, iv. Lowering the cost v. widen the tax base, will cover unorganised sector.vi. more transparency and better compliance