4 Most Important Questions For Economy Exam they carry 5-13marks for each questions Read Now!

Q1:- What is National Income? And its measures with Formulas?

Ans:- National Income is the total money value of all goods and services produced in a country during a year. It represents the earnings from production activities, showing how much wealth a country generates and how well its people are living. National income helps us measure a country’s economic health and standard of living.

National Income & it's measures through Diagram

Methods of Measuring National Income

National income can be calculated using three main methods: the Production Method, the Income Method, and the Expenditure Method. Each method focuses on a different aspect of economic activity.

1. Production Method (Value Added Method)

This method calculates national income by adding the value of all goods and services produced in a country’s economy during a year.

Explanation:

The economy is divided into three sectors:

Primary Sector: Agriculture, fishing, and mining.

Secondary Sector: Factories and manufacturing industries.

Tertiary Sector: Services like banking, transport, and healthcare.

The value added by each sector is calculated using this formula:

Value Added = Total Output (Sales) − Intermediate Costs + Change in Stock.

By summing up the value added from all sectors, we get the Gross Domestic Product (GDP).

To calculate National Income, we add Net Factor Income from Abroad (NFIA):

National Income = GDP + NFIA.

Why Use This Method?

This method shows how much each sector contributes to the economy. It is helpful for understanding the strengths of various industries.

Precautions:

Avoid counting intermediate goods (to prevent double counting).

Include goods produced for self-use (e.g., crops a farmer consumes).

Exclude sales of second-hand goods or previously used products.

2. Income Method

This method calculates national income by adding all the earnings of people and businesses in the economy.

Explanation:

Income is earned in four main forms:

Wages: Salaries paid to workers.

Rent: Income from land.

Interest: Earnings from investments.

Profits: Income earned by businesses.

Self-employed earnings are also included.

The formula is:

National Income = Wages + Rent + Interest + Profits.

Or 

National Income:- NDP + NFIA

Why Use This Method?

This method provides a clear picture of how income is distributed among people in the economy. It also highlights the sources of income for individuals and businesses.

Precautions:

Exclude transfer payments like pensions, scholarships, and unemployment benefits (these are not earned through production).

Only include legal income from production activities.

Avoid counting gifts or donations, as they don’t contribute to production.

3. Expenditure Method

This method calculates national income by adding up all the spending on goods and services in the economy.

Explanation:

Spending is divided into the following categories:

Consumption: Spending by households on goods and services.

Investment: Spending by businesses on machinery, buildings, and tools.

Government Spending: Money spent by the government on public services like education and healthcare.

Net Exports: Exports (goods sold to other countries) minus imports (goods bought from other countries).

The formula is:

National Income = Consumption + Investment + Government Spending + (Exports − Imports).

Why Use This Method?

This method helps economists understand how money is spent in the economy. It shows the demand for goods and services and highlights areas of economic growth.

Precautions:

Exclude spending on second-hand goods to avoid double counting.

Only include spending within the country’s borders.

Count only final goods and services, not intermediate goods.

Why Are These Methods Used?

Each method provides a unique perspective:

Production Method shows how different sectors contribute to the economy.

Income Method highlights how income is distributed among people.

Expenditure Method reveals how money is spent in the economy.These methods are chosen based on data availability and the purpose of the study.

Practical Difficulties in Measuring National Income
Informal Sector: Small businesses and informal jobs are hard to track.
Non-Market Activities: Work like housework or volunteer services is not included.
Illegal Economy: Income from illegal activities like black-market sales is excluded.
Double Counting: Including intermediate goods inflates the national income.
Data Collection: Getting accurate data from remote areas is difficult.

By using these methods carefully and considering their limitations, economists can estimate a country’s economic progress and identify areas for improvement.

Q2:- Define Indian Money Market and Capital Market? 

Ans:- A market word refers to a  platform where buyers and sellers come together to trade goods, services, or financial instruments. It can be a physical location (e.g., a vegetable market) or a virtual one (e.g., stock exchanges). In essence, a market facilitates the exchange of value between participants.

A financial market is a type of market where financial instruments like shares, bonds, loans, or treasury bills are traded. It plays a crucial role in the economy by enabling individuals, businesses, and governments to meet their financial needs efficiently. Financial markets ensure that funds flow smoothly through the economy.

Purpose of Financial Markets:

• Mobilize savings for productive use.
• Facilitate the flow of capital for economic development.
• Create investment opportunities for individuals and institutions.

Main Parts of the Financial Market:

1. Money Market
2. Capital Market

Money Market

The money market is a segment of the financial market where short-term borrowing and lending of funds take place. Instruments traded in the money market have a maturity of one year or less. It is used primarily by governments, banks, and corporations to manage short-term funding needs.

Features of the Money Market:

1. Short-Term Nature: Instruments like treasury bills and commercial papers are traded.
2. High Liquidity: Funds can be quickly converted into cash.
3. Participants: Includes the Reserve Bank of India (RBI), commercial banks, financial institutions, and large corporations.
4. Regulator: The RBI regulates the money market in India.
5. Instruments in the Money Market:
6. Treasury Bills (T-Bills): Issued by the government to raise money for short-term needs.
7. Commercial Papers (CPs): Issued by companies to meet their short-term financial requirements.
8. Call Money: Short-term loans borrowed and repaid within one day.
9. Certificates of Deposit (CDs): Fixed-term deposits issued by banks.

Example of Money Market:

If the government needs funds for a few months, it issues treasury bills in the money market, which investors (e.g., banks) buy. After the maturity period, the government repays the amount with interest.

Importance of the Money Market:

• Ensures liquidity in the economy.
• Helps the RBI control inflation and stabilize the economy.
• Provides businesses and governments with quick funds for short-term needs.

Organized and Unorganized Money Market

The Indian money market is divided into two sectors:

Organized Money Market

This sector is regulated by the RBI and includes institutions and instruments that follow a structured framework.

Examples:

• Banks (commercial and cooperative banks).
• Instruments like treasury bills, certificates of deposit, and call money.

Features:

• Regulated and transparent.
• Operates under a formal framework ensuring efficiency.
• Focuses on stability and liquidity management.

Unorganized Money Market

This sector operates without formal regulations and often caters to rural or small-scale borrowers.

Examples:

Moneylenders, indigenous bankers, chit funds.

Features:

1. No regulation by the RBI.
2. High interest rates and informal terms.
3. Often less secure for borrowers.
4. Problems Faced by the Money Market
5. Lack of Integration: Organized and unorganized sectors operate separately, leading to inefficiencies.
6. Limited Instruments: The market lacks diversity in its financial instruments.
7. Dominance of Informal Sector: A significant portion of borrowing still happens through unregulated moneylenders.
8. Insufficient Reach: Many rural areas lack access to the organized money market.
9. Interest Rate Variations: Different sectors offer varying interest rates, creating inconsistencies.

Capital Market

The capital market is where long-term financial instruments like shares, bonds, and debentures are traded. It helps businesses and governments raise funds for large-scale projects and development.

Features of the Capital Market:

• Long-Term Nature: Instruments traded have a maturity of more than one year.
• Participants: Includes individual investors, mutual funds, companies, and governments.
• Regulator: The Securities and Exchange Board of India (SEBI) regulates the capital market.

Two Divisions:

• Primary Market: Where new securities are issued (e.g., Initial Public Offerings or IPOs).
• Secondary Market: Where already-issued securities are bought and sold (e.g., stock exchanges like NSE and BSE).

Instruments in the Capital Market:

• Equity Shares: Represent ownership in a company.
• Debentures: Debt instruments issued by companies to raise funds.
• Bonds: Long-term debt instruments issued by governments or corporations.

Example of Capital Market:

A company planning to expand might raise funds by issuing shares in the primary market. These shares can then be traded by investors in the secondary market.

Importance of the Capital Market:

• Provides long-term funding for businesses and governments.
• Encourages investment, boosting economic growth.
• Helps individuals grow their wealth by offering investment opportunities.

Problems Faced by the Capital Market

• Lack of Awareness: Many people, especially in rural areas, are unaware of investment opportunities.
• Volatility: Frequent price fluctuations can deter small investors.
• Insider Trading: Malpractices like insider trading undermine investor confidence.
• Limited Reach: The penetration of the capital market in India is lower compared to developed nations.
• High Transaction Costs: Brokerage fees and taxes discourage small investors.

Diagram Of Indian Money Market & Capital Market

Why Are These Markets Important?

1. For Economic Development: They channel savings into productive investments.
2. For Business Growth: Provide funds for expansion and innovation.
3. For Government Projects: Enable governments to fund infrastructure and development.
4. For Individuals: Offer opportunities to grow wealth through investments.

Who Regulates These Markets?

1:- Money Market:
Regulated by the RBI (established in 1935).
The RBI ensures liquidity, controls inflation, and stabilizes the economy through tools like repo rate and reverse repo rate.

2:- Capital Market

Regulated by SEBI (established in 1988, given statutory powers in 1992).
SEBI protects investors, ensures transparency, and curbs malpractices in the market.

Conclusion

By understanding the money market and capital market, their structure, and their challenges, it becomes evident how vital they are to India’s economic health. Continuous improvements in both markets can ensure inclusivity, efficiency, and a stronger financial system for the future.

Q3:- Define NITI Aayog?

Ans:- NITI Aayog stands for the National Institution for Transforming India Aayog. It is a policy think-tank of the Government of India, established to replace the Planning Commission in 2015. Unlike the Planning Commission, which focused on centralized planning, NITI Aayog emphasizes cooperative federalism and decentralized decision-making.

Key Features:

• It acts as an advisory body, providing strategic and technical advice to the central and state governments.
• It focuses on fostering innovation, sustainable development, and economic growth in India.
• NITI Aayog works as a platform to promote cooperative federalism, encouraging states to participate actively in nation-building.

Why Was NITI Aayog Established?

The Planning Commission, which existed from 1950 to 2014, was often criticized for being overly centralized, rigid, and unable to meet the changing needs of India’s economy. The government recognized the need for a more dynamic and inclusive institution that could:

• Adapt to the rapidly changing economic environment.
• Promote innovation and technological advancements.
• Encourage states to play a more significant role in policymaking.
• Shift focus from resource allocation to strategic policymaking.

Prime Minister Narendra Modi officially announced the formation of NITI Aayog on January 1, 2015, replacing the Planning Commission.

What Does NITI Aayog Do?

NITI Aayog plays a critical role in shaping India’s economic and social policies. Its primary functions include:

1. Policy Formulation:

Develops long-term strategies and action plans for India’s development.

Prepares medium-term and short-term plans to achieve sustainable development goals (SDGs).

2. Promoting Cooperative Federalism:

Encourages states to work together and align their policies with national goals.

Acts as a bridge between the central and state governments.

3. Monitoring and Evaluation:

Tracks the implementation of government policies and programs.

Provides feedback and suggests improvements for better outcomes.

4. Innovation and Technology:

Promotes innovation and the adoption of new technologies in governance and development.

Supports startups and entrepreneurship through initiatives like the Atal Innovation Mission (AIM).

5. Sector-Specific Focus:

Works on specific sectors such as agriculture, health, education, infrastructure, and energy.

Provides recommendations to improve the performance of these sectors.

6. International Collaboration:

Partners with international organizations to bring global best practices to India.

Facilitates investments and partnerships in critical areas of development.

NITI AAYOG WORK EXPLAIN THROUGH DIAGRAM

Structure of NITI Aayog

NITI Aayog operates through a well-defined organizational structure:

1. Chairperson:

The Prime Minister of India is the chairperson of NITI Aayog.

2. Vice-Chairperson:

Appointed by the Prime Minister, the vice-chairperson serves as the functional head of NITI Aayog.

3. Governing Council:

Comprises Chief Ministers of all states and Union Territories and Lieutenant Governors of Union Territories.

Discusses and decides on national development priorities.

4. Regional Councils:

Formed to address specific regional issues.

Composed of Chief Ministers and relevant ministers from the states and Union Territories in a region.

5. Full-Time Members:

Experts in various fields such as economics, social sciences, and technology.

6. Ex-Officio Members:

Union ministers nominated by the Prime Minister

7. Special Invitees:

Experts and specialists invited to contribute to specific projects or initiatives.

8. CEO (Chief Executive Officer):

Responsible for the day-to-day administration and implementation of policies.

Key Initiatives by NITI Aayog

1. Atal Innovation Mission (AIM): Promotes innovation and entrepreneurship through setting up Atal Tinkering Labs and supporting startups.
2. Digital India Program: Aims to transform India into a digitally empowered society.
3. Aspirational Districts Programme: Focuses on the development of backward districts across India.
4. National Nutrition Mission: Addresses malnutrition and aims to improve nutrition levels among children and women.
5. India Energy Dashboards: Provides data on energy usage and promotes renewable energy.
6. SDG India Index: Tracks India’s progress toward achieving Sustainable Development Goals.

Importance of NITI Aayog

NITI Aayog’s significance lies in its ability to adapt to the changing needs of the nation. Here’s why it’s important:

1. Strategic Vision: Provides a long-term vision for India’s development.
2. Dynamic Planning: Focuses on real-time data and evidence-based policymaking.
3. Inclusive Growth: Ensures that development reaches all sections of society.
4. State-Centric Approach: Encourages states to actively participate in national goals.
5. Innovation and Technology: Promotes technological advancements to improve governance and development.

Challenges Faced by NITI Aayog

1. Limited Financial Powers: Unlike the Planning Commission, NITI Aayog does not have the authority to allocate funds.
2. Coordination Issues: Aligning central and state interests can be challenging.
3. Dependence on States: Success depends heavily on the cooperation of state governments.
4. Implementation Gaps: There is sometimes a delay in implementing the policies recommended by NITI Aayog.

Conclusion

NITI Aayog is a modern institution designed to address India’s contemporary challenges. By focusing on innovation, cooperative federalism, and sustainable development, it plays a crucial role in transforming India into a globally competitive and inclusive economy. With initiatives like the Atal Innovation Mission and the Aspirational Districts Programme, NITI Aayog is laying the foundation for a stronger and more equitable India. However, continuous efforts to overcome challenges and strengthen coordination between the center and states will be essential for its success.

Q4:- Define what Is MSMEs?

Ans:- MSMEs stand for Micro, Small, and Medium Enterprises. These are businesses categorized based on their investment in equipment and machinery and their annual turnover. MSMEs play a crucial role in the Indian economy by providing employment, fostering innovation, and contributing significantly to the country's GDP.

The Government of India defines MSMEs under the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006, and these definitions were revised in 2020 to align with global standards.

Classification of MSMEs:

Micro Enterprises:

Investment: Up to ₹1 crore.

Turnover: Up to ₹5 crore.

Small Enterprises:

Investment: Up to ₹10 crore.

Turnover: Up to ₹50 crore.

Medium Enterprises:

Investment: Up to ₹50 crore.

Turnover: Up to ₹250 crore.

What Do MSMEs Do?

MSMEs are the backbone of the economy and perform several essential functions:

• Employment Generation: MSMEs are labor-intensive and create employment opportunities for millions, especially in rural and semi-urban areas.
• Boost to Innovation: They foster creativity and innovation by developing new products, processes, and technologies.
• Support to Large Industries: MSMEs act as ancillary units, providing raw materials, components, and services to larger industries.
• Promote Regional Development: By setting up businesses in underdeveloped areas, MSMEs help reduce regional imbalances and promote equitable growth.
• Exports: MSMEs contribute significantly to India’s export earnings by producing a wide range of products such as textiles, handicrafts, gems, and jewelry.
• Self-Reliance (Aatmanirbhar Bharat): They align with the government’s vision of making India self-reliant by promoting local manufacturing and reducing dependency on imports.

 

MSMEs Sector Through Diagram

Why Are MSMEs Important?

1. Contribution to GDP: MSMEs contribute about 30% of India’s GDP.
2. Employment: MSMEs employ over 11 crore people across India, making them the second-largest employer after agriculture.
3. Exports: MSMEs account for nearly 48% of India’s total exports.
4. Fostering Inclusivity: They help in uplifting economically weaker sections and empowering women entrepreneurs.
5. Boost to Rural Economy: By providing opportunities in rural areas, MSMEs reduce migration to cities.

Who Established MSMEs?

The Ministry of Micro, Small, and Medium Enterprises oversees the development and regulation of MSMEs in India. The MSMED Act, 2006, was introduced to promote the growth of MSMEs.

1. Ensure timely credit and infrastructure support.
2. Encourage entrepreneurship.

Key Statements:

The revised definition of MSMEs in 2020 was announced by Prime Minister Narendra Modi as part of the Aatmanirbhar Bharat Abhiyan.

The government introduced various schemes and policies to support MSMEs, such as Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and Pradhan Mantri Employment Generation Programme (PMEGP).

Key Contributions of MSMEs

1. Sectoral Contributions: Manufacturing, trade, and services form the major sectors where MSMEs operate.
2. Product Diversity: From handloom products to IT services, MSMEs cater to diverse industries.
3. Financial Inclusion: By offering opportunities to small entrepreneurs, MSMEs contribute to greater financial inclusion.
4. Resilience: MSMEs proved resilient during crises like the COVID-19 pandemic by adapting quickly to changing circumstances, including digital transformations.
5. Data and Statistics:- India has over 63 million MSMEs, which constitute approximately 99% of all businesses in the country.
6. Sector-Wise Breakdown: About 31% in manufacturing,, 36% in trade,,33% in services.
7. State-Wise Distribution: Uttar Pradesh, West Bengal, and Tamil Nadu have the highest number of MSMEs.
8. Financial Support: Emergency Credit Line Guarantee Scheme (ECLGS): Provides collateral-free loans to MSMEs.
9. MUDRA Yojana: Offers financial support to micro-enterprises.
10. Skill Development: Skill India Mission: Trains workers in various trades to enhance productivity.
11. Technology Upgradation: Credit Linked Capital Subsidy Scheme (CLCSS): Helps MSMEs upgrade their technology.
12. Market Support: MSMEs SAMBANDH: Encourages public procurement from MSMEs.
13. Digitalization: Udyam Registration Portal: Simplifies the registration process for MSMEs and integrates them into formal credit systems.

Challenges Faced by MSMEs

1. Access to Credit: Many MSMEs struggle to secure loans due to a lack of collateral or credit history.
2. Infrastructure Deficiency: Poor infrastructure in rural areas limits the growth of MSMEs.
3. Technological Gaps: MSMEs often lack access to modern tools and technologies.
4. Market Competition: MSMEs face stiff competition from larger enterprises and cheaper imports.
5. Policy Implementation Issues: Delays in policy implementation and lack of awareness hinder growth.

Conclusion

MSMEs are the lifeline of India’s economy, driving employment, innovation, and regional development. With their significant contribution to GDP and exports, they are essential for India’s growth story. However, addressing challenges like access to credit, infrastructure, and technological upgradation is crucial to unlocking their full potential. Through consistent government support and strategic reforms, MSMEs can lead India toward becoming a global economic powerhouse.

Author:- Aniket Kumar

First Year BA.LLB Student