MODULE 4 (Macroeconomic concepts)

Circular flow of economic activities – Stock and flow – Final goods and intermediate goods -
Gross Domestic Product - National Income – Three sectors of an economy- Methods of
measuring national income – Inflation- causes and effects – Measures to control inflation-
Monetary and fiscal policies – Business financing- Bonds and shares -Money market and
Capital market – Stock market – Demat account and Trading account - SENSEX and NIFTY.

4.1 CIRCULAR FLOW OF ECONOMIC ACTIVITIES

In an economy production of goods and services is a continuous process, production
give rise to income, income give rise to expenditure and expenditure again leads to production.
Thus, there is circular flow of production, income and expenditure.
a) Two Sector economy
To understand the circular flow let us take the example of a two-sector economy.
 In this model there are two sectors- house hold sector and production
sector(firms).
 The household sector supply factor of production (land, (labour, capital
and organization). The economic activities begin with the flow of factors of
production from household sector to production sector.

 Production takes place in firms, for services of factors of production the

production sector pays factor income to the household sector. Here we can see a
flow and a counter flow,
 When household sector receives income, they spend it on the purchase of
goods and services. Thus, income flow from the household to firms in the form of
expenditure.

114
  This flow leads the counter flow of goods and services from production
sector to household sector. Thus, circular flow is completed.
b) Three Sector economy
 In this model consist- household sector, production sector and government sector.
 In three sector the flow and counter flow are same as two sector economy and along
with that the operations of government also included,
 The household sector pays taxes and provide labours for Government sector and
this flow leads to the counter flow of services, wages and salaries from government
sector to the household sector.
 The production sector pays taxes and provide goods and services for Government
sector and this flow leads to the counter flow of services, wages and salaries from
government sector to the production sector.


c) Three Sector economy

 In this model consist- household sector, production sector government sector and
foreign sector.
 In three sector the flow and counter flow are same as three sector economy and along
with that the operations of foreign sector also included,
 The house hold sector export manpower to foreign nations and this flow leads to
the counter flow of foreign remittance from foreign sector to household sector.

115
  The production sector will export goods and services to foreign nations and it helps
the production sector to earn export receipt and this flow leads to the counter flow
of import payments from production sector to foreign sector as a result of import
of goods and services from foreign countries.

4.2. STOCK AND FLOW

Stock is a quantity measurable at appoint of time (like say 22nd December 2020).it has no time
dimension (no time limit). It is static in nature. Examples: census, wealth, capital, water in a
tank etc.
Flow is a quantity measurable over a period of time, it would be measured per unit of time. It
has a time dimension and it is dynamic. Examples: Income, expenditure, savings, flow of water
from one tank to another tank.
4.3 FINAL GOODS AND INTERMEDIATE GOODS
Final Goods:
Goods which are meant for final use and will not pass through any more stages of production
/ transformation. Final goods are in two forms.
a) Consumer goods: goods which are used for final use or consumption are known as
consumer goods. it includes durable and non-durable goods.
examples for durable consumer goods: home appliances, private vehicles, furniture etc.
examples for non-durable consumer goods: food items, soap, paste, brush, etc.

116
b) Capital goods: goods which are used for further production process are known as capital
goods. they are durable in character. These goods are very crucial in any kind of production
process. Capital goods gradually undergo wear and tear. Examples: machineries, equipment’s,
public vehicles, etc.
Intermediate goods: goods which are used for further production and get transformed in the
production process are known as intermediate goods. They are non-durable in character.
Examples: rawmaterials, fuel, electricity, fire and wood, seeds, fertilizer, pesticides, etc.
4.4. INFLATION- CAUSES AND EFFECTS
✦ Inflation is referred to as the situation when the price level of goods and services
rise, which leads to decline in the purchasing power in the economy or in other words
decreases the buying power of the money.
✦ Inflation is typically a broad measure, such as the overall increase in prices or the
increase in the cost of living in a country.
✦ Inflation is measured by the Consumer Price Index(CPI).
✦ according to C. Crowther, “Inflation is state in which value of money is falling and
the prices are rising.”
✦ Most Central banks try to limit inflation in order to keep their respective economies
functioning efficiently.
✦ inflation rate of India: 5.3%
✦ Deflation is a decrease in the general price level of goods and services.
4.4.1. Types of inflation: Demand pull and Cost Push Inflation
✦ There are two types of inflation which arise either based on the demand side or price
of inputs in the economy.
✦ The demand side factors result in formation of demand-pull inflation.
✦ The supply side factors result in cost push inflation.
✦ Demand pull inflation arises when the aggregate demand becomes more than the
aggregate supply in the economy.
✦ Cost pull inflation : occurs when aggregate demand remains the same but there is a
decline in aggregate supply due to external factors that cause rise in price levels.
✦ There are three kinds of cost-push inflation:

117
 1. Wage-push inflation: When the monopolistic groups of the society like labour union
exercise their monopoly power, to enhance their money wages above the competitive level,
which cause an increase in the cost of production.
2. Profit-push inflation: When the monopoly power is used by the firms operating in the
monopolistic and oligopolistic market to increase their profit margin, leading to rise in the
price of goods and services.
3. Supply shock inflation: A type of inflation arising due to unexpected fall in the supply
of necessary consumer goods or major industrial inputs.
4.4.2. Difference between Demand pull and Cost Push Inflation

Demand Pull Inflation Cost Push Inflation

Definition Inflation that occurs due to Inflation that results from decline in
increase in aggregate demand is aggregate supply due to external
referred to as demand pull factors is referred to as cost push
inflation inflation.

Impact of Increased aggregate demand In cost push inflation the aggregate

aggregate results in demand pull inflation demand remains the same.
demand

Caused by Rise in aggregate demand

Rise in price of inputs like raw
materials, labour, etc

Policy Monetary and fiscal measures Administrative control on price rise

recommendations and income policy.

4.4.3. Causes of Inflation

1. Money Supply: Excess currency (money) supply in an economy is one of the primary cause
of inflation. This happens when the money supply/circulation in a nation grows above the
economic growth, therefore reducing the value of the currency.
2. National Debt: There are a number of factors that influence national debt, which include
the nations borrowing and spending. In a situation where a country’s debt increases, the
respective country is left with two options:
a. Taxes can be raised internally.
b. Additional money can be printed to pay off the debt.
3. Demand-Pull Effect

118
4. Cost-Push Effect
5. Increase in Public Spending: In any modern economy, Government spending is an
important element of the total spending. It is also an important determinant of
aggregate demand.
Usually, in lesser developed economies, the Govt. spending increases which invariably creates
inflationary pressure on the economy.
6. Population Growth: As the population grows, it increases the total demand in the market.
Further, excessive demand creates inflation.
7. Hoarding: Hoarders are people or entities who stockpile commodities and do not release
them to the market. Therefore, there is an artificially created demand excess in the economy.
This also leads to inflation.
8. Genuine Shortage: It is possible that at certain times, the factors of production are short in
supply. This affects production. Therefore, supply is less than the demand, leading to an
increase in prices and inflation.
9. Trade Unions: Trade union work in favor of the employees. As the prices increase, these
unions demand an increase in wages for workers. This invariably increases the cost of
production and leads to a further increase in prices.
4.4.4. Effects of Inflation
Positive Effects
1)Increase in production: when prices are rising slowly, the profits of the industrialist and
businessmen rise. They try to produce more good for more profit.
2) Increase in Employment: Because of high prices of products, firms try to increase
production and employ more workers
3) Higher income for share holders.
4) Higher investment : The entrepreneurs and investors get added incentives to invest in
productive Activities during inflation, since they can earn higher prices.
5) Gain for the borrowers : lnflation means a decrease in the value or purchasing power of
money. If the rate of interest to be paid by the borrower is less than the inflation rate, the
borrower will gain
Negative Effects
1. Erodes Purchasing Power: This first effect of inflation is really just a different way of
stating what it is. Inflation is a decrease in the purchasing power of currency due to a rise in
prices across the economy.
2. Less export and more import:due to inflation local goods become costly for the
foreigners means for other country people. They start buying from other countries. It effect our
export and the graph of import increase.
3. Lowers National Savings

119
4. Inflation reduces living standard.
5. Shortage of goods due to hoarding.
[Link] production cost.
7. Income inequalities increase: when prices are rising and businessmen and big landlords
make huge money. The distribution of income among various classes of society becomes more
unequal. Due to which the position of wage earners become weaker. They get a smaller share
of national income and the rich-poor gape increase.

4.5. MEASURES TO CONTROL INFLATION–MONETARY AND FISCAL POLICIES

Monetary policy
✦ Monetary policy is an economic policy that manages the size and growth rate of the
money supply in an economy.
✦ It is a powerful tool to regulate macroeconomic variables such as inflation and
unemployment.
✦ Aim – “macro economic stability” – low unemployment, low inflation, economic
growth.
✦ The central bank or a similar regulatory organization is responsible for formulating
these policies.
Objectives of Monetary Policy
1. Inflation :Monetary policies can target inflation levels. A low level of inflation is
considered to be healthy for the economy.
2. Unemployment: Monetary policies can influence the level of unemployment in the
economy.
3. Currency exchange rates: Using its fiscal authority, a central bank can regulate the
exchange rates between domestic and foreign currencies.
4. to avoid Deflation:
5. to attain sustainable economic growth:
6. to attain balanced growth
✦ Contractionary Monetary Policy: Also known as tight monetary policy,
contractionary policy decreases a nation’s money supply to curb rampant inflation and
keep the economy in balance. A central bank will likely hike interest rates and try to
slow the growth of money and prices.

120
✦ Expansionary Monetary Policy: Also known as loose monetary policy, expansionary
policy increases the supply of money and credit to generate economic growth. A central
bank may deploy an expansionist monetary policy to reduce unemployment and boost
growth during hard economic times.
Instruments / Tools of Monetary Policy
✦ Open Market Operations: Buying and selling of government securities in the open
market. Central bank controls the nation’s money supply by buying and selling
government securities, or other financial instruments. Central Bank will buy the
Government securities during Deflation and Central Bank will sell the Government
securities during inflation.
✦ Bank rate : rate at which central bank lends money to commercial banks. An increase
in in bank rate results in an increase in interest rate charged by commercial banks. As a
result, people in the country will borrow less because of higher rate of interest and hence
inflation is bought under control. Present Bank rate of India is 4.25%.
✦ Cash Reserve Ratio (CRR): is the share of a bank’s total deposit that is mandated by
the Reserve Bank of India (RBI) to be maintained with the latter as reserves in the form
of liquid cash. An increase in CRR reduces the cash with commercial banks which
results in low supply of currency in the market, higher interest rate and low inflation.
Present CRR of India is 4%.
✦ Statutory Liquidity Ratio (SLR) : is a minimum percentage of deposits that a
commercial bank has to maintain in the form of liquid cash, gold or other securities. It
is basically the reserve requirement that banks are expected to keep before offering
credit to customers. These are not reserved with the Reserve Bank of India (RBI), but
with banks themselves. The SLR is fixed by the RBI. An increase in SLR reduces the
cash with commercial banks which results in low supply of currency in the market,
higher interest rate and low inflation. Present SLR of India is 18%.
✦ Repo Rate and Reverse Repo Rate:
a. Repo rate is the rate at which the central bank gives loans to commercial banks
against government securities. Present Repo Rate of India is 4%.

An increase in in Repo rate results in an increase in interest rate charged by

commercial banks. As a result, people in the country will borrow less because of
higher rate of interest and hence inflation is bought under control.

121
 b. Reverse Repo rate is the rate at which the Reserve Bank of India borrows funds
from the commercial banks in the country. Present Repo Rate of India is 3.35%.

✦ In other words, it is the rate at which commercial banks in India park their excess
money with Reserve Bank of India usually for a short-term.

Fiscal Policy

✦ Fiscal policy refers to the use of government spending and tax policies to influence
economic condition, especially macroeconomic conditions, including aggregate
demand for goods and services, employment, inflation, and economic growth.

✦ it helps the Government to decide how much money it should spend to support the
economic activity.

✦ Objectives:

a. Boosting employment level

b. maintains economic growth.

c. rising the standard of living.

d. Price stability.

e. equitable distribution of wealth and income

✦ Types:

a. Expansionary: to stimulate economic growth by increasing spending/ lowering tax/

both.

b. Contractionary: to slow the economic growth.

Instruments / Tools of Fiscal policy

[Link]:

 A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer
by a governmental organization in order to fund government spending and various
public expenditures.

 During inflation, Government increases the tax rate. It helps to reduce the aggregate
demand.

 It helps to decrease the price of commodities.

122
  During deflation, Government decreases the tax rate. It helps to increase the aggregate
demand.

 It helps to increase the price of commodities.

2. Public Expenditure:

 Public expenditure is spending made by the government of a country on collective

needs and wants, such as pension, provisions, security, infrastructure, etc.

 During inflation, Government reduces the government expenditure. It helps to reduce

the aggregate demand.

 It helps to decrease the price of commodities.

 During deflation, Government increases the. It helps to increase the aggregate demand.

 It helps to increase the price of commodities.

3. Public Debt:

 Public debt is the total amount, including total liabilities, borrowed by the government
to meet its development budget.

 Government debt can be owed to lenders within the country or owed to foreign lenders.

 During Inflation, Government borrows from public.

 During Deflation, Government borrows from banks.

4. Savings: During inflation government adopts compulsory saving scheme.

4.6. BUSINESS FINANCING

Finance means money or fund. That is making money available when it’s needed.

Business Financing: is the funding we needed for commercial purpose. It is the money,
business people require to start, run, or expand a business. In another words it is the fund for
meet their needs (for operations, purchase capital asset, to meet with sudden cash crunch).

Need of Business Financing

1. Fixed capital requirement: example-land, buildings, equipment’s etc

2. Working capital requirement: funds for day-to-day operations. Example- tax, raw
materials, to pay salaries, rent, wages etc.

123
3. Diversification: to become multi product firm.

4. Technology upgradation

5. Growth and expansion

Methods of rising Business Financing

1) Through debt: borrowing loans from commercial banks and financial institutions

2) Through shares:

a) Equity shares

b) Preference shares

c) Debentures:

d) Retained earnings:

e) Lease financing

4.7. BONDS AND SHARES

4.7.1. Bonds

 It is a debt instrument.
 Issue when Government have no money.
 Issued by Government, Semi-Government and public corporations.
 By purchasing bond an investor lend money for a fixed period of time at a pre-
determined rate.
 The pre-determined interest rate is called as coupon rate.

Types of Bonds

a) Government Bonds: issued by Government- finance their capital requirement.

b) Corporate Bond: issued by public or private corporations to raise money for their
working capital or capital requirements.

c) Zero coupon Bond: No interest rate paid to holder. Here Government issue bond at a
discount.

d) Convertible Bonds: bond holders can convert their bonds into share of stock of issuing
authority.

e) Step up Bond: lower coupon rate at initial period. Then increase to higher coupon rate.

124
4.7.2. Shares

 a share is a unit used as mutual funds, limited partnerships, and real estate investment
trusts.[1] Share capital refers to all of the shares of an enterprise. The owner of shares in
the company is a shareholder (or stockholder) of the corporation.[
 The income received from the ownership of shares is a dividend.
 There are different types of shares such as equity shares, preference shares, deferred
shares, redeemable shares, bonus shares, right shares, and employee stock option
plan shares.

a) Equity shares:

 An equity share, normally known as ordinary share is a part ownership where each
member is a fractional owner and initiates the maximum entrepreneurial liability related
with a trading concern. These types of shareholders in any organization possess the
right to vote.
 Real owners.
 No fixed rate of dividend on the equity capital.

b) Preference shares:

 Is consider as safer investment.

 Preference shares are a long-term source of finance for a company.

 They receive dividend at affixed rate.
 They have no voting rate.

125
4.8. MONEY MARKET AND CAPITAL MARKET STOCK MARKET

4.8.0. Financial Market

 Is a market in which people trade financial securities and derivatives.

 It is a market that facilitates transfer of funds between investors /lenders and borrowers
/ users.
 It consists Individual investors, financial institutions and other intermediaries who are
linked by a common trading rules and communication network for trading the various
financial assets.

Main functions of Financial Market

 It provides facilities for interaction between the investor and borrowers

 It provides security to dealings in financial assets.
 Risk sharing
 Capital formation
 It ensures low cost of transactions and information.

126
Classifications of Financial Market

The financial market is classified into Money market and Capital Market.

4.8.1. Money market

 Market for short term funds.

 Which deals in financial assets whose period of maturity is up to one year.
 Money market does not deal in cash or money but with financial instruments.
 These financial instruments are close substitute of money.
 These instruments help the business unit, other organization and Government to borrow
the funds to meet their short-term requirements.
 Indian money market consists RBI, commercial bank, corporate banks and other
specialised institution.
 RBI is the leader in Indian money market.

Money market- Instruments.

1. Treasury Bills
 T-bills are one of the most popular money market instruments. They have varying
short-term maturities. The Government of India issues it at a discount for 14 days to
364 days.
 These instruments are issued at a discount and repaid at par at the time of
maturity. Also, a company, firm, or person can purchase TB’s.
 There is no interest rate.
 And are issued in lots of Rs. 25,000 for 14 days & 91 days and Rs. 1,00,000 for 364
days.

2. Commercial Bills
 Short term negotiable instruments used for credit sale or purchase.
 Seller (drawer): one who draw bill
 Buyer (Drawee): one who accept the bill.
 If the buyer accepts the bill given by drawer or seller then the bill is called as Trade
bill.
 Maturity period: 30 days to 90 days
 Minimum amount- 5 lakhs and its multiplications.

3. Certificate of Deposit
 Certificate of deposit or CD’s is a negotiable term deposit accepted by commercial
banks. It is usually issued through a promissory note.
 CD’s can be issued to individuals, corporations, trusts, etc. Also, the CD’s can be issued
by scheduled commercial banks at a discount.

127
  Duration of these varies between 3 months to 1 year. The same, when issued by a
financial institution, is issued for a minimum of 1 year and a maximum of 3 years.
4. Commercial Paper
 Corporates issue CP’s to meet their short-term working capital requirements. Hence
serves as an alternative to borrowing from a bank.
 The period of commercial paper ranges from 15 days to 1 year.
 Higher return compared to treasury bill.
 Minimum amount: 5lakhs and its multiplications.
5. Call Money / Notice Money
 It is a segment of the market where scheduled commercial banks lend or borrow
on short notice (say a period of 14 days). In order to manage day-to-day cash flows.
 If money is lend for a day, then it is called call money.
 If money is lend for 2 to 14 day, then it is called notice money.

4.8.2. Capital Market.

 Market for long term credit.

 A capital market is a market for medium- and long-term funds.
 It includes all organisations, institutions and instruments that provide long term and
medium-term funds.
 It does not include the instruments or institutions which provides finance for short
period (up to one year).
 The common instrument used in capital market are shares, debentures ,bonds,
funds, public deposits etc.

Features of capital market

1. Link between savers and investment opportunities.

2. Deals in long term investment.

3. Utilises intermediaries.

4. Determinant of capital formation.

5. Government rules and regulations

128
Types of Capital Market.

Capital
Market

Primary Secondary
Market Market

a) Primary Market

 Primary market is also known as new issue market.

 As in this market securities are sold for the first time i.e. new securities are issued from
the company.
 Primary market companies goes directly to investor and utilises these funds for
investment in building, plants and machinery etc.

Methods of floatation of securities in primary market

1. Public issue through prospectus: Under this method company issue a prospectus to inform
and attract general public

2. Offer for sale: Under this method new securities are offered to general public but not directly
by the company but by an intermediary who buys whole lot of securities from the company.

3. Private placement: Under this method the securities are sold by the company to an
intermediary at fixed price and in second step intermediaries sell these securities not to general
public but selected clients at higher price. 4. Right issue (for existing companies): This is the
issue of new shares to existing shareholders. It is called right issue because it is the pre- emptive
right of shareholder that company must offer them the new issue before subscribing to
outsiders.

5. e- IPO (electronic initial public offer): it is the new method of issuing securities through
online system of stock exchange. in this company has to appoint registered brokers for the
purpose of accepting application and placing orders.

129
b) Secondary market (stock market/stock exchange):

 The secondary market is the market for the sale and purchase of previously issued
or second hand securities.
 In secondary market securities are not directly issued by the company to investors.
The securities are sold by existing investors to other investors.
 In secondary market companies get on additional capital as securities are bought and
sold between investors only so directly there is no capital formation but secondary
market indirectly contributes in capital formation by providing liquidity to securities of
the company

Type of operation in secondary market (stock market/stock exchange):

1. Brokers: A broker is a member of stock exchange. He buys and sells securities on behalf of
outsiders who are not the members. He charges brokerage or commission for his services.

2. Jobbers: A jobber is a member of stock exchange. He buys and sells securities on his own
behalf. He is specialised in one type of security and he makes profits by selling the securities
at a higher price.

3. Bulls: A bull is a speculator who expect rise in price. He buys securities with a view to
selling them in future at a higher price and making profit out of it.

4. Bears: A bear is a speculator who expects fall in price. He sells securities which he does not
possess.

5. Stag: A stag is also a speculator who applies for new securities in expectation that price will
rise by the time of allotment and he can sell them at premium.

Capital Market Instrument

The corporate securities that are dealt in primary market can classified under two categories:

a. Ownership securities or capital stock.

b. Creditorship securities or debt capital

130
 Capital Market
Instrument

a. Ownership b. Creditorship
securities or securities or
capital stock. debt capital

i) Equity shares
ii) Preference shares Debenture:
iii) Deferred shares

a. Ownership securities or capital stock : Ownership securities, also known as capital stock
or shares, are the most common methods used by corporates, government, and other big
companies to raise funds to help finance their operations.

i) Equity shares:
 An equity share, normally known as ordinary share is a part ownership where each
member is a fractional owner and initiates the maximum entrepreneurial liability related
with a trading concern. These types of shareholders in any organization possess the
right to vote.
 Real owners.
 No fixed rate of dividend on the equity capital.
ii) Preference shares:
 Is consider as safer investment.
 Preference shares are a long-term source of finance for a company.
 They receive dividend at affixed rate.
 They have no voting rate.
iii) Deferred shares Deferred shares are also called as founder shares because these shares
were normally issued to founders. The shareholders have a preferential right to get dividend
before the preference shares and equity shares. No Public limited company or which is a
subsidiary of a public company can issue deferred shares. This shares are issued to the founder
shares to control over the management by the virtue of their voting rights
B. Creditorship securities
Debenture: is used to issue the loan by government and companies. The loan is issued at the
fixed interest depending upon the reputation of the companies. When companies need to
borrow some money to expand themselves, they take the help of debentures.

131
 Financial
Market

Money Capital
Market Market

Primary Capital
market Market
Money
market
Instruments
1. Treasury Capital market
Bill Instruments
2. Call
money
3.
Commercial
Papers Ownership
4. securities or
Commercial capital stock.
Papers i) Equity shares Creditorship
[Link] securities or
ii) Preference
of deposts debt capital
shares
iii) Deferred
shares Debenture

132
4.9. DEMAT ACCOUNT AND TRADING ACCOUNT

Demat Account

 Demat account is also known as a Dematerialized account. The primary use of

demat account is to hold shares and securities in an electronic format.
 It helps you in online trading like buying or selling shares, or converting physical shares
into electronic form. All the shares, mutual funds, bonds, government securities, and
other investments are saved in a dematerialized account.
 Dematerialization is the term used to define the process of transferring physical
certificates into electronic ones. Overall, it makes the documents available round the
clock and accessible at your fingertip. The main motto of dematerialization is to
avoid holding physical shares and help you with seamless tracking and
monitoring. It helps convert physical shares to electronic form.

Account Opening Process:

Step 1: Contact any Depository Participant (DP), who is an agent of the depository. Their list
is found on the websites of Central Depository Services (India) Ltd and National Securities
Depository Ltd.

Step 2: Fill the account opening form. Provide the requisite documents pertaining to proof of
address and identity.

Step 3: Now you will have to sign an agreement. This agreement will provide the details
regarding your rights and duties as an investor/DP. Do not forget to get a copy of the agreement
along with the schedule of related charges.

Step 4: Congratulations! Your account has been opened. You will now receive a Beneficial
Owner Identification Number also known as Demat Account Number.

Benefits of Demat Account

1. Easy to use, convenient, and secured.
2. Automatic credit of share in the event of a company merger, bonus, consolidation, and so
on.
3. All the Demat account information is accessible online just using a secure login.
4. You do not need to keep visiting the stock market for transactions.
5. Low transaction costs
6. No stamp duty
7. Unlike physical shares, here you can make transactions with odd numbers too.
8. If you have a common Demat account, you do not need to update details from time to time.
9. It offers a common banking solution.

133
10. Less paper work
Trading Account

 A trading account is used to purchase and sell shares in stock markets. Once you have
a Demat Account, and want to sell your shares, or purchase new securities, you need a
Trading Account.
 Your Trading Account will have a unique trading number, which will be used to trade
in shares.

Importance of trading account:

 Once you want to start trading in share markets, you require having three accounts: A
bank account, a Demat Account and a Trading Account. Let us understand this with an
example. Ashok wants to purchase shares of a particular company. He will place an
order through his Trading Account, following which the transaction will be processed
in the given stock exchange. The shares will then be deposited in his Demat Account,
while the requisite money will be deducted from his bank account.
 a Trading Account acts as a link between your bank account and Demat Account,
allowing you to trade in stock markets.
 Having an online Trading Account helps you to secure access to multiple stock markets
like National Stock Exchange (NSE), Bombay Stock Exchange (BSE), National
Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange
(MCX).

Opening a Trading Account

Opening a trading account can be explained with the help of these simple steps:

Step 1: Select a broker/firm of your choice by comparing the different service charges and
brokerage rates.

Step 2: Inform the broker that you wish to open a trading account.

Step 3: Fill the account opening form. Here, you are required to provide the requisite
documents, including KYC details, address and ID proof.

Step 4: Now the authorities will verify your application. The application verification process
may take some time.

Step 5: You will now receive the details regarding your trading account.

Step 6: Congratulations! You are all set to begin your journey of trading in stock markets.

4.10. SENSEX AND NIFTY.

What are BSE and NSE?

 BSE is short for the ‘Bombay Stock Exchange’. Founded in 1875, BSE is the first and
one of the largest securities markets based out of Bombay in India.

134
  NSE is short for the ‘National Stock Exchange’. Founded much later than BSE in 1972,
and offers a country-wide stock market similar to BSE.
 While BSE is older, NSE is larger with a greater number of daily trades occurring on it
and a higher turnover rate.

Sensex is derived from Sensitive and Index and is coined by Mr Deepak Mohoni, a stock
market analyst.
 It is an index on the Bombay Stock Exchange or BSE. Sensex comprises 30 companies,
and these are chosen based on the liquidity, market capitalisation, revenue, and
diversification of the company. Also, for a company to be on Sensex, has to be listed
on BSE.
 It is one of India’s oldest indices, and people consider it a measure of market
performance and reflection of the Indian economy. It is used as a benchmark to gauge
growth and development in the Indian economy and industry and understand the stock
market trend.
 Sensex comprises the top 30 stocks. The value of the index depends on the price
movement of the underlying securities. An increase in the value of Sensex is due to an
increase in the price of most of the securities. While a decrease in the value of the index
is due to the fall in the price of most of the underlying securities.

Nifty: Similar to the Sensex, Nifty is also an index.

 The National Stock Exchange is represented by Nifty. Nifty is a variation of the terms
National and Fifty. The Nifty 50 is also a benchmark index, consisting of the top 50
stocks listed on the National Stock Exchange.
 The top 50 stocks that comprise the Nifty 50 are from 12 different sectors. Some of
these include information technology, consumer goods, financial services, automobiles,
telecommunications, etc.
 The companies to meet the following parameters and criteria to be part of the Nifty 50:

1. Liquidity: The stock should have been traded at an average cost of 0.50% or less in the
last six months.
2. Float Adjustment: The float-adjusted market capitalisation of the company must be at
least twice that of the current smallest index composition.
3. Domicile: The company must be listed on the National Stock Exchange NSE and be an
Indian company.

135
Difference between SENSEX AND NIFTY.

4.11. THREE SECTORS OF AN ECONOMY

 Sectors are groups of people who engage in diverse activities including the production
of commodities or services.
 Economic activities are those that result in revenue and profit. A farmer, for example,
harvests crops in order to sell and profit; an industry, on the other hand, produces things
or services for people in order to profit.

Different Sectors of the Indian Economy

1. Primary Sector: The primary sector is when we make a product by extracting and collecting
natural resources. Farming, forestry, hunting, fishing, and mining are just a few examples.
2. Secondary Sector: It includes operations that include the transformation of natural goods
into new forms through various manufacturing processes. The industrial sector is another name
for it.
For example, we spin yarn and make cloth from the plant's cotton fiber. Sugar or Gur is
produced using sugarcane as a basic ingredient.
3. Tertiary Sector: Activities that aid in the growth of the elementary and secondary sectors
are included in the tertiary sector. These actions do not generate a good in and of itself, but

136
they help or support the production process. It's also known as the service sector. Teachers,
doctors, washermen, barbers, cobblers, lawyers, call centres, software businesses, and so on
are some examples.

4.12. NATIONAL INCOME

National Income
• National income is the sum total of the value of all the goods and services manufactured
by the residents of the country, in a year., within its domestic boundaries or outside. It
is the net amount of income of the citizens by production in a year.
• The aggregate economic performance of a nation is calculated with the help of National
income data.
• The basic purpose of national income is to throw light on aggregate output and income
and provide a basis for the government to formulate its policy, programs, to maximize
the national welfare of the people.
• Central Statistical Organization calculates the national income in India.
Importance of measuring National Income
1. Setting Economic Policy
National Income indicates the status of the economy and can give a clear picture of the
country’s economic growth. National Income statistics can help economists in formulating
economic policies for economic development.
2. Inflation and Deflationary Gaps
For timely anti-inflationary and deflationary policies, we need aggregate data of national
income. If expenditure increases from the total output, it shows inflammatory gaps and vice
versa.
[Link] Preparation

137
 The budget of the country is highly dependent on the net national income and its concepts.
The Government formulates the yearly budget with the help of national income statistics in
order to avoid any cynical policies.
4. Standard of Living
National income data assists the government in comparing the standard of living amongst
countries and people living in the same country at different times.
5. Defense and Development
National income estimates help us to bifurcate the national product between defense
and development purposes of the country. From such figures, we can easily know, how much
can be set aside for the defense budget.

concepts related to the National income are given below

1. Gross domestic product (GDP) is the total monetary or market value of all the finished
goods and services produced within a country’s borders in a specific time period. Gross
domestic product (GDP) is the most commonly used measure for the size of an economy.

• Nominal GDP accounts for current market prices without factoring in deflation or
inflation, meaning it tracks general changes in an economy’s value over time.

• Real GDP: The measure of GDP was modified according to the changes in the general
price level.

• GDP Deflator = Nominal GDP / Real GDP

GDP EQUATION

• GDP can be expressed as an equation that sums up all of its components: a nation’s
level of consumption, investment, government spending on goods and services, and the
difference in profit between exports and imports.

• GDPmp = Consumption + Investment + Government Spending on Goods and Services

+ net export (Exports (x) – Imports(m)), which looks like this:

• GDPmp = C + I + G + (X-M)

• GDP at market price (GDPmp)= GDPfc + Net Indirect Tax (NIT)

• NIT = Indirect Tax - Subsidy

• GDP at factor cost (GDPfc) = GDPmp - Net Indirect Tax (NIT)

2. Net Domestic Product (NDP)

138
 • in the production of GDP of a year, we consume or use up some capital,i.e., equipment,
machinery, etc.

• The capital goods like machinery, wear out or depreciate in value as a result of its
consumption or use in the production process.

• this consumption of fixed capital or fall in value of capital due to wear and tear is called
depreciation.

• when charges for depreciation are deducted from the GDP, we get NDP.

• it means the market value of all final goods and services after providing for
depreciation is called NDP. Thus,

• Net Domestic Product (NDP)= Gross Domestic Product – Depreciation

• NDP at market price (NDPmp) = NDP at factor cost (NDPfc) + Net Indirect Tax (NIT)

• NIT = Indirect Tax - Subsidy

• NDP at factor cost (NDPfc) = GDPmp - Net Indirect Tax (NIT)

• In order to convert GDPmp to NDPfc

• NDPfc = GDPmp – Depreciation – NIT

• In order to convert NDPfc to GDPmp

• GDPmp = NDPfc + Depreciation + NIT

3. GNP (Gross National Product)

• Gross National Product (GNP) is defined as the total market value of all final goods
and services produced in a year.

• GNP does not include the services used to produce manufactured goods because its
value is included in the price of the finished product.

• It also includes net income arising in a country from abroad.

• GNP = GDP + Net factor Income from Abroad (NFIA)

• NFIA = factor income from abroad- factor income to abroad.

• GNP at market price (GNPmp) = GNP at factor cost(GNPfc) + Net Indirect Tax (NIT)

• NIT = Indirect Tax – Subsidy

139
 • GNP at factor cost(GNPfc) = GNP at market price (GNPmp) - Net Indirect Tax (NIT)

4. Net National Product (NNP) / (National Income at market price)

• in the production of GNP of a year, we consume or use up some capital,i.e., equipment,

machinery, etc.

• The capital goods like machinery, wear out or depreciate in value as a result of its
consumption or use in the production process.

• this consumption of fixed capital or fall in value of capital due to wear and tear is called
depreciation.

• when charges for depreciation are deducted from the GNP, we get NNP.

• it means the market value of all final goods and services after providing for
depreciation is called NNP. Thus,

• Net National Product / National Income at Market Prices = Gross National Product –
Depreciation

• Net National Product at Market Prices (NNPmp) = Net National Product at factor cost
(NNPfc) + Net Indirect Tax (NIT)

• NIT = Indirect Tax – Subsidy

• Net National Product (NNP) / (National Income at factor cost)

• Net National Product at factor cost (NNPfc) = Net National Product at Market Prices
(NNPmp) - Net Indirect Tax (NIT)

• In order to convert GNPmp to NNPfc

NNPfc = GNPmp – Depreciation – NIT

• In order to convert NNPfc to GNPmp
GNPmp = NNPfc + Depreciation + NIT

• In order to convert GDPmp to NNPfc

NNPFC = GDPMP – Depreciation + Net factor income from abroad – NIT
• for change NNPfc to GDPmp
GDPMP = NNPFC + Depreciation - Net factor income from abroad + NIT
• for change GNPmp to NDPfc
NDPfc = GNPmp – Depreciation - Net factor income from abroad - NIT

140
 • for change NDPfc to GNPmp
GNPmp = NDPfc + Depreciation + Net factor income from abroad + NIT
• for change GDPmp to GNPmp
GNPmp = GDPmp + NFIA
• for change GDPfc to GNPfc
GNPfc = GDPfc + NFIA
for change GNPmp to GDPmp
GDPfc = GNPfc - NFIA
for change GNPmp to GDPmp
GDPmp = GNPmp – NFIA
• for change GDPmp to GNPfc
GNPfc = GDPmp + NFIA - Net Indirect Tax (NIT)
• for change GNPfc to GDPmp
GDPmp = GNPfc – NFIA + Net Indirect Tax (NIT)
• for change GDPfc to GNPmp
GNPmp = GDPfc + NFIA + Net Indirect Tax (NIT)
• for change GNPmp to GDPfc
GDPfc = GNPmp – NFIA - Net Indirect Tax (NIT)

6. Personal Income
• Personal Income is the sum of all incomes actually received by all individuals or
households during a given year.
• Personal Income = National Income - Social Security Contributions - Corporate Income
Taxes - Undistributed Corporate Profits + Transfer Payment

141
7. Disposable Income (D.I.)
• After a good part of personal income is paid to government in the form of personal
taxes like income tax, personal property taxes, etc., what remains of personal income is
called Disposable income.

• Disposable income = Personal Income – Direct Taxes – Non tax payments

• Disposable income can either be consumed or saved. Therefore,

• Disposable income = Consumption + Saving

? Suppose GDPmp of a country in a particular year was Rs 1100 crores. Net Factor Income
from abroad was 100 crores. The value of indirect tax and subsidy are Rs 200 crores and Rs 50
crores respectively. In this economy the depreciation as calculated as Rs 200 crores. Calculate
GNPmp,GNPfc, NNPmp, NNPfc, NDP mp and NDPfc.?

GDPmp = Rs 1100 crores

Net Factor Income from abroad (NFIA) = 100 crores
indirect tax = 200 crores
subsidy = 50 crores
Depreciation = 200 crores
Solution:
1) GNPmp = GDPmp + NFIA
= 1100 crores + 100 crores
= 1200 crores
2) GNPfc = GNPmp – NIT
NIT = Indirect tax - Subsidy.
= 200 crores - 50 crores
NIT = 150 crores
GNPfc = 1200 cr - 150 cr,
= 1050 crores
3) NNPmp = GNPmp – Depreciation
= 1200 crores – 200 crores
= 1000 crores
4) NNPfc = NNPmp – NIT
NIT = Indirect tax - Subsidy.

142
 = 200 crores - 50 crores
NIT = 150 cr
NNPfc = 1000 crores– 150 crores
= 850 crores
5) NDPmp = NNPmp – NFIA
= 1000 crores - 100 crores
= 900 crores
6) NDPfc = NDPmp – NIT
NIT = Indirect tax – Subsidy
= 200 crores - 50 crores
NIT = 150 cr

NDPfc = 900 crores – 150 crores

= 750 crores.

1. Calculate national income and GNP from the given data.

Solution:
We know that NNPfc = National Income

It can be calculated as:

NDPfc = NDPmp – Net Indirect Taxes

NDPfc = 114-12 = 102

NDPfc + NFIA = NNPfc

NNPfc =102+ (-1) = 101

GNPmp = NDPmp +Consumption of Fixed Capital+ NFIA

GNPmp = 114+13+ (-1) = 126

143
2. Calculate NDPfc and NNPfc from the given data.

Solution:
NDPfc = GNPmp – Depreciation – NFIA – Indirect Taxes + Subsidies

= 200 – 10 – (-4) -20 + 4

NDPfc = 178

NNPfc = NDPfc +NFIA = 178 + (-4) = 174

(NNPfc can also be calculated as = GNPmp Depreciation-Indirect Faxes +Subsides)

3. Calculate GNPfc and NDPmp from the given data.

solution:
GNPfc = NDPfc + Depreciation+ Factor income received from abroad – Factor income paid to
abroad

= 250 + 30 + 20 – 30

= 270

NDPmp = NDPfc + Indirect taxes – Subsidies

= 250 + 40 – 10

= 280.

144
4.13. Methods For Measuring National Income
1. Product Method
2. Income Method
3. Expenditure Method
1. Product Method / Value added Method
• According to this method national income is measured by adding money value of all
goods and services produced in a country during an accounting year.
• In order to find the value of final goods and services, the value of intermediate
consumption is deducted from value of all types of goods and services. This is done to
avoid double counting.
• Value added of a firm = Value of Output– Value of intermediate goods used by the
firm.
• Value of output: An enterprise's output is the commodities and services it produces
during an accounting year. The market worth of all goods and services generated by a
firm throughout an accounting year is referred to as the value of output.
Value of Output = Quantity of output x Price
• Intermediate goods: refers to the value of non-factor inputs or raw material which is
used in the process of production.
2. Income Method
• In this method national income is estimated by adding the factor income (rent,
wage, interest and profit) received by all factors of production (land, labour, capital
and organization) with in the domestic territory of a country during an accounting year.
• Under this method, national income is measured as a flow of factor incomes. There are
generally four factors of production labour, capital, land and entrepreneurship. Labour
gets wages and salaries, capital gets interest, land gets rent and entrepreneurship gets
profit as their remuneration.
• Besides, there are some self-employed persons who employ their own labour and
capital such as doctors, advocates, CAs, etc. Their income is called mixed income. The
sum-total of all these factor incomes is called NDP at factor costs.

3. Expenditure Method
• according to this method national income is measured by adding final expenditure
on GDP.

145
• It is believed that the value of domestic income is equal to the total sum of
expenditures on the purchase of final products and services produced throughout
an accounting year within an economy.
• NI= Private consumption expenditure + Government consumption Expenditure +
investment Expenditure + Net export
• Consumption Expenditure: The expenditure by households, individuals, etc on final
goods and services.

• Government Expenditure: The expenditure by the government on final goods and

services.

• Investment Expenditure: The expenditure on the purchase of the goods that would be
used for further production. It includes fixed investment (on plant, machinery etc) and
inventory investment (includes change in stock).

• Net exports: The difference between exports(X) and imports(M).

146