Unit I
Indian Economic Environment
Question bank
Q1) What is economic environment? What are its components? 5
A1) It is macroeconomic indicators that strategists study to influence their decisions. These indicators shape the health and well-being of the economy. These are determinants of a company's ability to make a profit and generate wealth. More important is the maximization of wealth, as it means maximizing profits and returning them to investments that generate more income.
Components:
The components of the economic environment are:
I. General economic situation:
The general economic situation that prevails in the economy is a determinant of economic prosperity and community well-being. These economic conditions are variables in which the amount of national income, per capita income, economic resources, income and wealth distribution, and economic development determine people's economic prosperity.
Revenue and its distribution determine the business outlook and therefore the business strategy. In an economy where it is low and per capita is relatively low, demand will decline. This pessimistic situation does not attract business people who invest in and execute manufacturing and marketing activities.
On the other hand, in an economy where the income of the economy is increasing, it leads to more and more investment and entry into industrial and marketing activities. In India, the backbone of the Indian economy, the Middle, is ready to increase income and invest in business.
Even NRI considers it beneficial to invest surplus income in this way, helping the Indian economy to become stronger and thus benefit from profits.
II. Economic system:
The economy is an arrangement that encourages the use of free resources to generate and distribute income, based on some accepted economic philosophies. Economy around the world is widely linked to Kabbalism, socialism, and communism as a hybrid economy called a pure variety or mixed economy.
India is the best example of a mixed economy, with the benefits of capitalism and socialism in one focus, eliminating the disadvantages of pure socialism or capitalism.
Capitalism gives maximum economic freedom in the management of economic activity, socialism talks about maximum domination by the state, mixed economy is freedom and the role of the state in which both the public and private sectors support each other. I have.
The collapse of the mighty nation formed in the early 20th century had to kick a bucket for a period of 100 years. Today, the Soviet Union is divided into small nations that were one of the greatest forces in the world linked to socialist ideology.
III. Economic policy:
It is the appropriate and timely economic policies adopted and implemented by the government that determine the fate of the state and its citizens. Think about India before 1991 and now. The Indian economy is on the verge of collapse and foreign exchange reserves were enough to pull another eight days.
It was a change in personality as a political leader and the brain behind them, together they freed India from control and opened the Indian economy to the whole world.
Private and public sector businesses that worked under the umbrella of protection were set up and faced the challenge of changing competition. Which foreign companies couldn't replace them as Indian players became global players?
IV. Economic growth:
Economic growth or development is the rise and maintenance of per capita income for all individuals who are members of the economy. It is economic growth, which represents increased consumer spending and lower pressure in the industrial sector, that provides more opportunities and enables businesses to withstand the severity of the threat. Other methods also apply. Declining economic growth and lower consumer spending will increase pressure and reduce profitability.
V. Interest rate:
Interest rates affect the demand for goods and services in the economy when they are purchased through borrowing. If interest rates are low, the demand for the product may be durable or non-durable. This gives Philip to a growing industry.
The opposite is true if the rate is high. Today, R.B.I is emerging at lowest interest rates to increase demand for durable and non-durable consumer goods, which will bring the Indian economy out of pessimism and tomorrow's rut.
The cost of capital also depends on interest rates. When they are getting capital at the lowest rates, the companies will encourage all companies to have ambitious plans and strategies in the case of borrowed funds.
VI. Exchange rate:
Exchange rates represent currency conversions to other currencies. It may be hard or soft. In 1991, the Indian Rupee was devalued to make Indian products cheaper in the global market to boost Indian exports. This was a great opportunity for all Indian exporters to export more commodities and reserves and earn forex.
Today, foreign exchange reserves are at a record high of Rs 200 billion, at least costly to boost quality production. Indian exporters do so only if they regularly understand and implement three strategies for export cost, export quality, and export volume. Therefore, it is the exchange rate that determines the fate of a country.
Q2) Define income. State the concepts associated with income. 8
A2) Income is the income earned by a company selling goods or services, or the money an individual receives in return for labour, services, or investment. Companies report this number on their income statement, while individuals report it on Form 1040.
The accounting profession is similar to other professions where the language has many different meanings depending on the context. Income is used by accounting professionals to mean several different things.
One meaning of income is income or sales. Revenue is the money a company receives from selling goods or services in the course of its business. Revenue is an equity account with a credit balance. Throughout the year, sales are recorded in the revenue account and posted in the trial balance. Revenue is then reported in the first line of the income statement. This is often referred to as total revenue, total sales, or top-line sales because it includes revenues and sales of all companies before deducting expenses.
Another meaning of income is net income. Net income is completely different from total income. Net income is displayed at the bottom of the income statement after deducting all costs of goods sold and operating expenses. Net income is equal to the company's total revenue minus the company's total costs. As you can see, the definition of net income is very different from the definition of income of income.
The general term income is most commonly used to refer to net income rather than income. Be careful when reading examples or finding problems that refer to your company's income. You need to analyze the question and understand the meaning of the income the question is using. Often the definition of net income is used.
1. National earnings/ gross home product at marketplace charge: It is the sum overall of cash price of all of the very last items and offerings produces inside home territory of a rustic all through a monetary 12 months. Gross Domestic Product measures the mixture manufacturing of very last items and offerings taking vicinity in the home financial system all through a 12 months.
GDP=C+I+G+(X-M)
Where, C=consumption
I=earnings
G=Govt. Expenditure
X= export
M=import
2. Gross countrywide product (GNP): It is marketplace charge of all items and offerings produced in a 12 months via way of means of citizens of a rustic in the home territory in addition to abroad.
GNP=GDP+NFIA
3. Net countrywide product at marketplace charge (NNP): its miles the marketplace price of internet output of very last items and offerings produces via way of means of a financial system all through a 12 months and internet component earnings from abroad.
NNP=GNP-Depreciation
4. Personal earnings (PI): It refers to the whole cash earnings obtained via way of means of people and families of a rustic from all feasible reasserts earlier than direct taxes.
PI= NI-Corporate earnings taxes-undistributed company profits-social protection contribution+ Transfer payments.
5. Disposable earnings (DI): It is the earnings left with people after fee of direct taxes from non-public earnings.
DI= PI- direct taxes.
6. Per capital earnings: It is calculated via way of means of dividing the countrywide earnings of the united states via way of means of the whole populace of a rustic.
Per capital earnings= Total countrywide earnings/overall countrywide populace.
Q3) What do you mean by saving and investment? 8
A3) Savings, the process of securing a portion of current income for future use, or the flow of resources thus accumulated over a specific period of time. Savings can take the form of increased bank deposits, purchases of securities, or increased cash holdings. The degree to which an individual saves is influenced by his preference for the future over current consumption, his expectations for future income, and to some extent interest rates.
There are two ways an individual can measure savings for a particular accounting period. One is to estimate his income and deduct his current spending. The difference is his savings. Another way is to look at his balance sheet (his assets and his liabilities) at the beginning and end of the period and measure the increase in net worth that reflects his savings.
The total national savings is measured as an excess of national income for consumption and taxes and is the same as an excess of net national products for the portion of the product made up of items purchased through national investment, or consumer goods and services, and government spending. Is. Therefore, in the national income account, savings are always the same as investments. An alternative to saving is an estimated change in total net worth over a period of time.
Savings are important for a country's economic development in relation to investment. When productive wealth increases, some individuals are willing to refrain from consuming their entire income. Progress does not depend solely on savings. There must also be individuals who are willing to invest and increase their production capacity.
An investment is essentially an asset created for the purpose of growing money. The wealth generated can be used for a variety of purposes, including addressing income shortages, saving for retirement, repayment of loans, paying tuition fees, and fulfilling certain obligations such as purchasing other assets.
Understanding the definition of investment is very important. It can be difficult to choose the right means to achieve your financial goals. Knowing the implications of investing in your particular financial situation will allow you to make the right choices.
Investing may generate income for you in two ways. One is that if you invest in an asset that you can sell, you can make a profit. Second, if the investment is made in a profit-making plan, you will earn income through the accumulation of profits. In this sense, "investment" means investing in an asset or object that has a higher value than its original value, or an asset or object that helps generate income over time. ..
Financially speaking, an investment is an asset that is acquired with the purpose of allowing it to be valued over time. In general, investments fall into one of three basic categories, as described below.
Q4) Define industry . Discuss its classification. 5
A4) Industry refers to all monetary hobbies this is worried with primary, secondary and tertiary sports manufacturing of goods, extraction of minerals or the availability of services. Industries may be labelled on the idea of uncooked substances, length and ownership. For instance, fabric enterprise, car enterprise, meals processing enterprise etc.
Classification of industry
a) On the idea of uncooked substances
1. Agro primarily based totally enterprise: It makes use of use plant and animal primarily based totally merchandise as their uncooked substances. For instance, meals processing, vegetable oil, cotton fabric, dairy merchandise and leather-based industries etc.
2. Mineral primarily based totally enterprise: Such industries make use of use mineral ores as their uncooked substances for the manufacture of some of different merchandise, including heavy machinery, constructing substances and railway coaches etc.
3. Marine primarily based totally enterprise: Such industries use merchandise from the ocean and oceans as uncooked substances. Industries processing sea meals or production fish oil are a few examples
4. Forest primarily based totally enterprise: Such industries make use of utilise wooded area produce as uncooked substances. The industries related to forests are pulp and paper, pharmaceuticals, furnishings and homes are a number of the examples.
b) On the idea of length
1. Small and medium industries: Such industries make much less investment. For instance village and cottage industries like handloom and handicraft, brass metallic enterprise.
2. Large scale industries: Such industries make large investment. For instance, car enterprise, telecommunication enterprise etc.
c) On the idea of ownership
1. Private enterprise: Such industries are owned and operated via way of means of people or a set of people. For instance, Reliance industries ltd.
2. Public/ kingdom owned enterprise: The public quarter industries are owned and operated via way of means of the government. For instance, Hindustan Aeronautics Limited, SAIl etc.
3. Joint quarter: Such industries are owned and operated via way of means of the kingdom and people or a set of people. For instance, Maruti Udyog Limited.
4. Co-operative: Such industries are owned and operated via way of means of the manufacturers or providers of uncooked substances, employees or both. For instance, Anand Milk Union Limited, AMUL milk etc.
Q5) What are the factors that affect on the location of industry? 5
A5) Factors affecting location of industry are:
1. Availability of uncooked substances:
Availability and get admission to uncooked substances impacts on area of an enterprise. Labour industries are positioned wherein reasonably-priced labour is to be had, Iron and Steel industries are positioned Jamshedpur due to wealthy in iron ore.
2. Availability of labour
It impacts on area of labour extensive enterprise due to the fact the enterprise can get massive range of labour at low cost. For instance, Bangladesh, India etc. has many labour extensive industries.
3. Accessibility to capital
Easy and handy accessibility to credit score for start-ups and current industries ends in advertising of extra industries. Govt. Of India commenced to release many schemes for advertising of industries. For instance, MUDRA loan, start-up India, make in India etc.
4. Market gets admission to
Industry will localise in the ones regions it could without difficulty get admission to the marketplace. It will assist them to continue to exist and develop withinside the marketplace.
5. Transport
There must be desirable conversation and transportation hyperlink for transporting the goods to the marketplace vicinity from the vicinity of manufacturing.
6. Availability of energy
Energy like electricity, gas, net etc. must be to be had withinside the vicinity wherein the enterprise is positioned.
7. Availability of land
An enterprise wishes massive property to installation its manufacturing unit. Thus an enterprise will discover in the ones regions wherein massive location of land is to be had.
Q6) Write a short note on : 8
- BOP
- BOT
A6) a. BOP
The stability of bills (BOP) facts the transactions in items, offerings and belongings among citizens of a rustic with the relaxation of the sector for a certain term generally a year. There are essential debts withinside the BOP — the modern account and the capital account.
The classification of BOP is shown in figure
Figure 3: Classification of BOP
a) Current account transactions:
It refers to the ones forex transactions which does now no longer purpose modifications withinside the asset and legal responsibility role of the country. Current Account is the document of change in items and offerings and switch bills. A surplus modern account manner that the kingdom is a lender to different international locations and a deficit modern account manner that the kingdom is a borrower from different international locations.
i. Trade in items consists of exports and imports of items.
Ii. Trade in offerings consists of aspect profits and non-aspect profits transactions.
Iii. Transfer bills are the receipts which the citizens of a rustic get for ‘free’, while not having to offer any items or offerings in go back. They encompass gifts, remittances and grants.
b) Capital account transactions:
It refers to the ones forex transactions which purpose modifications withinside the asset and legal responsibility role of the country. For example, buy of asset in overseas country, go back of mortgage, External business borrowings etc. It encompass the components-
a. Foreign direct funding and overseas portfolio funding.
b. External borrowings via debt, mortgage from different international locations, global economic companies.
c. External aids like Govt. Aid, intergovernmental mortgage, bilateral mortgage etc.
BOT
The trade balance is also known as the net export, trade balance, or international trade balance. It is also considered part of the current account balance. This is usually the difference between the export and import of a country's goods over a period of time.
This does not include service imports and exports. Services include invisible items such as insurance, banks, interest, asset dividends, profits and software services. These items are called invisible because they are not visible in cross-border transactions.
Based on the definition of BOT, the total value of exports – the total value of imports = trade balance. It is considered the largest component of the country's balance of payments. It also helps determine the relative strength of a country's economy.
If the value of imports exceeds the value of exports, the trade balance is considered to be more disadvantageous than the country. This can also be called a trade deficit. Also, if the export value is higher than the import value, it is called a positive or favourable BOT for the country. This is called the trade surplus.
Q7) What is BOT? State the difference between Balance of payments and Balance of trade. 8
A7) The trade balance is also known as the net export, trade balance, or international trade balance. It is also considered part of the current account balance. This is usually the difference between the export and import of a country's goods over a period of time.
This does not include service imports and exports. Services include invisible items such as insurance, banks, interest, asset dividends, profits and software services. These items are called invisible because they are not visible in cross-border transactions.
Based on the definition of BOT, the total value of exports – the total value of imports = trade balance. It is considered the largest component of the country's balance of payments. It also helps determine the relative strength of a country's economy.
If the value of imports exceeds the value of exports, the trade balance is considered to be more disadvantageous than the country. This can also be called a trade deficit. Also, if the export value is higher than the import value, it is called a positive or favourable BOT for the country. This is called the trade surplus.
Difference between BOP and BOT
- Meaning
The balance of payments is the difference between payments and total revenues of a particular economy over a particular period of time, while the trade balance is the difference between imports and exports of a particular economy over a particular period of time.
b. Range
The trade balance captures all visible and invisible economic transactions in the world. The trade balance, on the other hand, captures the value of all import and export goods.
c. Economic view
The trade balance gives a big picture of the strength of a particular economy, while the trade balance gives a partial view based on imports and exports.
d. Capital transfer
The balance of payments includes capital transfers, but the trade balance does not include capital transfers.
e. Transaction
The balance of payments records transactions that occur in connection with both goods and services transactions, while the trade balance records transactions that occur in connection with goods only.
f. Calculation mode
The balance of payments is calculated by adding up the reserve balance, current account balance, and capital account balance. On the other hand, the trade balance is the value of exports minus the value of imports.
g. Net effect
On the balance of payments, the net impact is always zero. However, in the trade balance, the net effect is either positive, negative, or zero.
Q8) Write a brief note on concept of money. 5
A8. Money is a medium of alternate. In advance time barter device became prevailed for wherein items are exchanged with gods. But in a while cash is taken into consideration as a medium of alternate for its convenience. The function/functions of cash are-
1) It acts as a medium of alternate.
2) It acts as a handy unit of account.
3) It can act as a shop of value for individuals.
Demand for cash
People preference to keep cash stability extensively from motives-
1. The Transaction Motive:
The important cause for containing cash is to perform transactions. Suppose you earn Rs a hundred on the primary day of each month and run down this stability lightly over the relaxation of the month. Thus your coins stability at the start and stop of the month are Rs a hundred and 0, respectively. Your common coins preserving can then be calculated as (Rs a hundred + Rs 0) ÷ 2 = Rs 50, with that you are making transactions really well worth Rs a hundred in line with month. Hence your common transaction calls for cash is identical to 1/2 of your month-to-month profits, or, in different words, 1/2 of the cost of your month-to-month transactions. Consider, next, a -character financial system which includes entities – a corporation (owned through one character) and a employee. The corporation will pay the employee a income of Rs a hundred at the start of each month. The employee, in turn, spends this profits over the month at the output produced through the corporation – the best right to be had on this financial system. Thus, at the start of every month the employee has a cash stability of Rs a hundred and the corporation a stability of Rs 0. On the ultimate day of the month the photo is reversed – the corporation has accumulated a stability of Rs a hundred via its income to the employee. The common cash preserving of the corporation in addition to the employee is identical to Rs 50 each. Thus the overall transaction call for cash on this financial system is identical to Rs a hundred. The overall extent of month-to-month transactions on this financial system is Rs 200 – the corporation has offered its output really well worth Rs a hundred to the employee and the latter has offered her offerings really well worth Rs a hundred to the corporation. The transaction call for cash of the financial system is once more a fragment of the overall extent of transactions withinside the financial system over the unit length of time. In general, therefore, the transaction call for cash in an financial system, MdT,
Can be written in the following form
MdT= k.T
Where, T is the overall cost of (nominal) transactions withinside the financial system over unit length and okay is a nice fraction.
2. The Speculative Motive:
A person may also keep her wealth withinside the shape of landed property, bullion, bonds, cash etc. For simplicity, allow us to membership all sorts of property aside from cash collectively right into an unmarried class called ‘bonds’. Typically, bonds are papers bearing the promise of a destiny movement of financial returns over a sure length of time. These papers are issued through governments or companies for borrowing cash from the general public and they may be tradable withinside the marketplace. The fee of a bond is inversely associated with the marketplace charge of hobby. Different human beings have specific expectancies concerning the destiny actions withinside the marketplace charge of hobby primarily based totally on their personal facts concerning the financial system.
Speculations concerning destiny actions in hobby charge and bond expenses deliver upward push to the speculative call for cash. When the hobby charge could be very excessive anyone expects it to fall in destiny and as a result anticipates capital profits from bond-preserving. Hence human beings convert their cash into bonds. Thus, speculative call for cash is low. When hobby charge comes down, an increasing number of human beings count on it to upward push withinside the destiny and assume capital loss. Thus they convert their bonds into cash giving upward push to an excessive speculative call for cash. Hence speculative call for cash is inversely associated with the charge of hobby.
Assuming a simple form, the speculative demand for money can be written as
MdS= 
Where r is the market rate of interest and rmax and rmin are the upper and lower limits of r, both positive constants. It is evident from equation that asr decreases from rmax to rmin, the value of MdSincreases from 0 to α.
Q9) What is finance? State its types. 5
A9) Finance may be defined as the art and science of managing money. It includes financial service and financial instruments. Finance also is referred as the provision of money at the time when it is needed.
According to Khan and Jain, “Finance is the art and science of managing money”.
Types of finance
a) Private finance:
Private finance includes the individual, firms, business or corporate financial activities to meet the requirements.
1) Individual/personal finance is concerned managing one’s savings and investment. It covers budgeting, banking, insurance, mortgages, investment, tax, retirement planning etc. of an individual.
2) Partnership firm finance refers to the managing of savings and investment of partnership firm.
3) Business finance is concerned with planning, acquisition and control of funds/capital of business concern. Different sources of business finance are shares, debentures, bonds, borrowings from financial institutions etc.
b) Public finance:
Public Finance which concerns with revenue and disbursement of Government such as Central Government, State Government and Semi-Government Financial matters.
1) Government revenues are income of government earned from income tax, corporate tax, GST, non-tax items like fees, fines, royalty etc.
2) Public expenditure is the money spent by government entities on infrastructure, defence, education, health, housing, administration etc.
Q10) What is finance? Why it is important in business? 5
A10) Finance may be defined as the art and science of managing money. It includes financial service and financial instruments. Finance also is referred as the provision of money at the time when it is needed.
According to Khan and Jain, “Finance is the art and science of managing money”.
Below are some of the top and most important reasons why you need finance in your business life.
- Narrow focus
One and the essential reason for needing money is to focus. If you work or run a business without investment, you outsource issues that may come along your way. Therefore, the main advantage of finance is to narrow down and limit your business needs. That's because fields and data can be easily and excitingly integrated. Banking, stakeholders, management, marketing and all other activities cannot succeed without funding. So if you use a bank for your business, you will definitely succeed.
b. Growth business outlook
Another essential reason your business needs money is to grow your business outlook. If you have a degree in finance, you may win the competition in your way. Another aspect is to increase the potential of your business outlook. Studies show that businesses have almost 23% more opportunities to hire people with financial knowledge. Focusing on your business and your point is essential.
c. Satisfaction of expenses in business management
Business management is another important and major cause of business. All the smallest and most important aspects of materials, payments, investments, data records, etc. depend on finances. This helps you plan your business properly, manage your company properly, and manage it centrally. This is an essential and beautiful way to succeed in the industry. It raises you and saves you from imperfect daily management of your business.
d. Set long-term goals
Another important and versatile advantage of finance is setting long-term goals. Today, one is not happy with short-term success, but he / she is more consistent with long-term goals. Treasury is one of the reasons for increasing long-term goals and chances of long-term success. This helps maintain the organization and the progress it has made.
e. Business management roots
One of the great and fascinating ways to manage your business needs money is that you can't run your business without it. Without personal banking expertise, your business may not be able to reach its long-term goals. It helps you manage your company, make money, but also be effective and beautiful. Simply put, that is the basis of management.
