Thursday, 9 May 2013


 State the main functions of the commercial banks in india.
        - Commercial banks can contribute to the development of a country in the following ways:-
a) Capital formation
        - It is the most important role of the commercial banks and capital formation has three main stages:-
         1. Generalisation of savings.
         2. Mobilisation of savings.
         3. Canalisation of savings.

b) Encouragement to entrepreneurs.
        - They facilitate entrepreneurs with bank loans, thus helping them help the economy with their investment processes.

c) Monetisation of money.
        - Commercial bank are the distributors of money. They monetise debts and spread their branches in rural and backward areas.

d) Influence economic activity
        - Banks can directly influence economic activity and hence the pace of development through its influence on the rate of interest and availability of credit.

e) Implementation of monetary policy
        - Control and regulation of credit by the monetary authority is not possible without the active participation of the banking authority in india.

f) Promotion of trade and industry.
        -The use of bill of exchanges by banks have revolutionised both internal and external trade, which in turn has encouraged specialisation and accelerated the pace of industrialization.

g) Encouragement to trade and industry.
        - Banks provIde financial resources to the right type of industries to secure necessary material, machines and other inputs.

h) Regional development.
        - Banks transfer surplus capital from the developed regions  to the regional sectors where it is scarce.

i) Development of agriculture
        -Banks have diversified role in extending credit to trade and also to provide medium-term and long-term loans to industry and agriculture.

Explain the absolute cost advantage theory. Discuss the economic effect of imposition of tariff.
        - In Adam Smith's model of international trade or absolute advantage theory of Adam smith every one will be better off. According to him,the basis of international trade is a territorial division of labour and specialisation . Each country should produce and export a commodity in whose production she has a cost adbvantage. Adam Smith's theory can be explained as follows:-
        Let us suppose that there are two countries : country X and country Y, producing two commodities A and B .Let us suppose that in the production of both the commodities, labour is the only factor of production . The value of any commodity is assumed to be determined by the amount of labour required to produce one unit of that commodity. this is known as the labour theory of value.
Let us suppose that to produce one unit of A, country X requires 5 units of labour and to produce one unit of B, she requires 10 units of labour. On the other hand, in country Y, the production of one unit of A requires 10 units of labour and production of 1 unit of B requires 5 units of labour. The unit labour costs are shown in the following table:-

 Here it is seen that the commodity A can be produced at a lower cost in country x than in country Y. On the other hand, commodity B can be produced at a lower cost in country Y than in country x. country X is then said to enjoy an absolute advantage in the production of A and country Y is said to enjoy an absolute advantage in the production of B. According to Adam smith, in this case, country X should specialise in the production of A and country Y should specialise in the production of B. country X should export A and country Y should export B. Both the countries will benefit as a result of trade.
Here it is assumed that each country has an absolute advantage in the production of one commodity only.

 Public Expenditure
        -In simple words, public expenditure refers to the expenses incurred by the government for the maintenance of the government and to preserve the society as a whole. In other words, it refers to the expenses made by the public authorities to satisfy the wants of the people which they cannot satisfy individually. It is for protecting the citizens and/or for promoting their economic and social welfare.
        Public expenditure has to play an active role in reducing regional disparities,developing social overheads, creation of infrastructure, education and training, growth of capital goods industries, researcch and development etc in developing economies. On the  other hand, in a well advanced economy, public expenditure maintains a smooth rate of economic growth in order to get the stabilisation and stimulation of economic activities. Thus, public expenditure has a greaat role to play in the form of stimulated saving and capital accumulation.t can accelerate the pace of economic growth by narrowing down the diffrence between social and marginal productivity of certain investment. Therefore, economists like  Prof.Dalton and A.C.Pigou have suggested the principle of public expenditure, popularly known as "Principle of Maximum Social Advantage or Benefit."
Areas on which public expenditure is implemented are as follows:-
1. Welfare states
2. To meet defence needs.
3. Development of agriculture.
4. Urbanisation.
5. Democratic and social structure of the government.
6. Rural development schemes.
7. Industrial development.
8. Rising population.
9. Growth of transport and communication.
10. To check business.
11. Adoption of planning.
12. Increase in national income.
13. Expansion of traditional functions.
14. Social progress.
15. Defective administration.

Personal income
            - In the national income analysis, the term ‘personal income’ denotes the total monetary funds received by all the individuals during the course of a financial year. It is not equal to the NNP. It includes the transfer payments also but it doesn’t include the corporate undistributed profits, which are included in the NNP, as the latter do not actually come at the hands of the people in the year under consideration

PI= NDP at factor cost – Savings of the non-governmental enterprises of the government- Property and entrepreneurial income of the government + net current affairs from government + net current transfers from the rest of the world + interest on national debt – Undistributed profits – corporate tax – social contribution.



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