ENROLMENT

NO ...........................................................

NAME ...................................................................
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ADDRESS ..............................................................
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DATE.....................................................................
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INDIRA GANDHI NATIONAL OPEN

UNIVERSITY

PROGRAMME TITLE .............................................................

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COURSE CODE ...................................................................

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REGIONAL CENTRE ASSIGNED ...........................................

1. Describe the Circular flow of Income and Expenditure. How is Three-

Sector Model different from Four-Sector Model? Discuss.

Circular Flow of Income and Expenditure

The Circular Flow of Income and Expenditure is a model that

describes how money moves through an economy. It illustrates the
relationship between different economic agents and how their
interactions facilitate the flow of goods, services, and money.

Two-Sector Model

In its simplest form, the model includes two sectors: households and
firms.

 Households: They own the factors of production (land, labor,

capital, and entrepreneurship) and supply these factors to firms.

 Firms: They produce goods and services by using the factors of

production supplied by households.

Flow of Goods and Services:

 Households provide factors of production to firms.

 Firms produce goods and services using these factors.

Flow of Income and Expenditure:

 Firms pay households for the factors of production (wages for labor,
rent for land, interest for capital, and profits for entrepreneurship).

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 Households use this income to purchase goods and services
produced by firms.

Three-Sector Model

The three-sector model includes the government sector along with

households and firms.

 Government: It collects taxes from households and firms and

spends money on public goods and services.

Flow of Goods and Services:

 Same as in the two-sector model.

 Government provides public goods and services.

Flow of Income and Expenditure:

 Government collects taxes from households and firms.

 Government spends on public goods and services, providing income

to households and firms.

Four-Sector Model

The four-sector model includes the foreign sector along with

households, firms, and the government.

 Foreign Sector: It involves trade with other countries (exports and

imports).

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 Flow of Goods and Services:

 Includes exports (goods and services sold to other countries) and

imports (goods and services bought from other countries).

Flow of Income and Expenditure:

 Firms receive income from exports and spend money on imports.

 Net exports (exports minus imports) affect the total income in the
economy.

Differences between Three-Sector and Four-Sector Models

 Government Sector:

o Three-Sector Model: Includes government, which collects

taxes and spends on public goods and services.

o Four-Sector Model: Includes government plus foreign trade,

adding another layer of complexity.

 Foreign Sector:

o Three-Sector Model: Does not consider foreign trade.

o Four-Sector Model: Accounts for international trade (exports

and imports), affecting the overall economic flow.

 Complexity and Realism:

o Three-Sector Model: More realistic than the two-sector

model but does not account for global economic interactions.

o Four-Sector Model: Most comprehensive, reflecting the

interconnectedness of modern economies.

2. Examine the working of the Capital Market along with its various
Instruments and Intermediaries.

Capital Market Overview

The capital market is a crucial part of the financial system, enabling

the mobilization of long-term funds from investors to entities such
as corporations and governments. It comprises two main segments:
the primary market and the secondary market.

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 Primary Market

The primary market, or new issue market, facilitates the issuance of

new securities. Key instruments include:

1. Equity Shares (Stocks): Companies issue shares to raise equity

capital. Investors become part-owners of the company.

2. Debt Instruments: Includes bonds, debentures, and other forms of

long-term debt. Investors lend money to the issuer in exchange for
regular interest payments and the return of principal at maturity.

3. Preference Shares: These shares provide a fixed dividend before

any dividend is paid to equity shareholders and have a higher claim
on assets in the event of liquidation.

4. Convertible Securities: Instruments that can be converted into

equity shares at a later date, such as convertible debentures.

5. Initial Public Offerings (IPOs): The process through which a

private company offers shares to the public for the first time.

6. Follow-on Public Offerings (FPOs): Additional shares are issued

by companies that are already publicly listed.

Secondary Market

The secondary market is where existing securities are traded among

investors. Key components include:

1. Stock Exchanges: Organized and regulated markets where

securities are bought and sold. Examples include the New York Stock
Exchange (NYSE), NASDAQ, and the Bombay Stock Exchange (BSE).

2. Over-the-Counter (OTC) Market: Decentralized market where

trading occurs directly between parties, often facilitated by dealers.

3. Derivatives Market: Trading of financial instruments like futures,

options, and swaps, which derive their value from underlying assets
like stocks, bonds, or commodities.

Capital Market Instruments

1. Equity Instruments: Common and preferred stocks, representing

ownership in a company.

2. Debt Instruments: Bonds, debentures, and other long-term loans.

3. Derivatives: Futures, options, and swaps used for hedging and

speculative purposes.

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4. Hybrid Instruments: Convertible debentures, preference shares,
and other instruments combining features of both debt and equity.

Intermediaries in the Capital Market

1. Stockbrokers: Facilitate buying and selling of securities on behalf

of clients.

2. Investment Bankers: Assist companies in raising capital, including

underwriting new issues and advisory services.

3. Depositories: Provide dematerialization and rematerialization of

securities, ensuring safe custody and transfer. Examples include the
National Securities Depository Limited (NSDL) and Central
Depository Services Limited (CDSL) in India.

4. Clearing Houses: Ensure the smooth settlement of transactions by

acting as intermediaries between buyers and sellers.

5. Credit Rating Agencies: Assess the creditworthiness of issuers of

debt instruments. Examples include Moody's, S&P, and CRISIL.

6. Mutual Funds: Pool money from investors to purchase a diversified

portfolio of securities, managed by professional fund managers.

7. Regulatory Bodies: Ensure the proper functioning and regulation

of the capital market. Examples include the Securities and Exchange
Commission (SEC) in the US and the Securities and Exchange Board
of India (SEBI).

Working of the Capital Market

1. Issuance of Securities: Companies issue new securities in the

primary market to raise funds.

2. Trading of Securities: These securities are then traded in the

secondary market, providing liquidity to investors.

3. Price Discovery: The capital market facilitates price discovery

through the interaction of demand and supply forces.

4. Regulation and Compliance: Regulatory bodies oversee market

activities to ensure transparency, protect investors, and maintain
market integrity.

5. Intermediation: Various intermediaries facilitate transactions,

provide advisory services, and help in the efficient allocation of
resources.

Conclusion

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 The capital market is a vital component of the financial system,
enabling long-term funding for entities and investment opportunities
for individuals and institutions. Understanding its instruments and
intermediaries is crucial for effective participation and regulation.

3. How have the reforms in the Insurance Sector provided Universal

Social Security System especially to the underprivileged? Discuss.

Reforms in the insurance sector have significantly contributed to

providing a universal social security system, particularly benefiting
the underprivileged. Here’s an overview of how these reforms have
achieved this, as per the IGNOU MBAOL syllabus:

Insurance Sector Reforms

1. Liberalization and Privatization: The liberalization and

privatization of the insurance sector opened the market to private
players and foreign investments, increasing competition and
improving service quality.

2. Regulatory Framework: Establishment of the Insurance

Regulatory and Development Authority of India (IRDAI) in 1999
ensured better regulation and development of the insurance
industry, focusing on consumer protection and market growth.

3. Product Innovation: The introduction of various insurance

products tailored to meet the needs of different segments of society,
including low-cost and micro-insurance products for the
underprivileged.

4. Technological Advancements: The adoption of technology in the

insurance sector has streamlined processes, increased reach, and
improved efficiency in policy issuance and claims management.

Universal Social Security System

The reforms in the insurance sector have facilitated the creation of a

more inclusive social security system in the following ways:

1. Government-Sponsored Insurance Schemes:

o Pradhan Mantri Jan Dhan Yojana (PMJDY): Launched in

2014, this financial inclusion program includes a life insurance
cover of ₹30,000 for account holders.

o Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY):

Provides life insurance cover of ₹2 lakh at a nominal premium,
aimed at the poor and underprivileged.

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 o Pradhan Mantri Suraksha Bima Yojana (PMSBY): Offers
accidental death and disability cover of ₹2 lakh for a minimal
annual premium.

o Ayushman Bharat - Pradhan Mantri Jan Arogya Yojana

(AB-PMJAY): A health insurance scheme providing coverage
up to ₹5 lakh per family per year for secondary and tertiary
care hospitalization, targeting economically vulnerable
families.

2. Micro-Insurance Products:

o Affordable Premiums: Designed to cater to low-income

groups with low premiums and simplified procedures.

o Coverage for Specific Risks: Includes health, life, crop, and

livestock insurance, addressing specific risks faced by the
underprivileged.

3. Public Distribution Systems:

o Rashtriya Swasthya Bima Yojana (RSBY): A health

insurance scheme for BPL families, offering hospitalization
coverage for the family up to ₹30,000 per annum.

4. Financial Literacy and Inclusion:

o Awareness Campaigns: Government and private sector

initiatives to educate the masses about the benefits and
availability of insurance products.

o Banking Correspondents and Agents: Use of banking

correspondents and insurance agents to reach remote and
rural areas, ensuring greater penetration of insurance
services.

5. Subsidies and Incentives:

o Premium Subsidies: Government subsidies on premiums to

make insurance more affordable for the economically weaker
sections.

o Tax Benefits: Tax incentives on premiums paid for health and

life insurance to encourage insurance uptake among the
masses.

Impact on the Underprivileged

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1. Financial Protection: Insurance provides a safety net, helping
families to cope with financial shocks due to illness, accidents, or
death of a breadwinner.

2. Improved Healthcare Access: Health insurance schemes have

improved access to quality healthcare services for the poor,
reducing out-of-pocket expenses.

3. Risk Mitigation for Farmers: Crop and livestock insurance

schemes protect farmers from the financial impact of crop failure
and livestock loss, promoting agricultural stability.

4. Economic Stability: By mitigating risks, insurance helps maintain

economic stability and supports poverty alleviation efforts.

Conclusion

The reforms in the insurance sector have played a crucial role in

extending social security benefits to the underprivileged,
contributing to financial inclusion and poverty reduction. The
government's proactive approach, combined with private sector
participation, has made significant strides towards achieving a
universal social security system.

4. How is the Theory of Absolute Advantage different from the Theory

of Comparative Advantage? Discuss.

The theories of Absolute Advantage and Comparative Advantage are

foundational concepts in international trade that explain how and
why countries engage in trade and how they can benefit from it.
Here’s a detailed discussion of each theory and their differences, as
per the IGNOU MBAOL syllabus:

Theory of Absolute Advantage

Proposed by: Adam Smith in his book "The Wealth of Nations"

(1776).

Concept: The theory of absolute advantage posits that a country

should produce and export goods in which it has an absolute
production advantage. This means that a country can produce a
good using fewer resources than another country.

Key Points:

1. Efficiency and Productivity: Countries should specialize in

producing goods where they are most efficient, i.e., where they can
produce more output with the same amount of input compared to
other countries.

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2. Trade Benefits: Trade between countries allows each to benefit
from the other’s efficiencies. If each country specializes in goods
where they have an absolute advantage, overall production and
consumption increase.

3. Labor Division: Promotes the division of labor at an international

level, leading to increased productivity and economic growth.

Example:

 Country A can produce 10 units of cloth with the same resources

that Country B uses to produce 5 units of cloth. Country A has an
absolute advantage in cloth production.

 Country B can produce 8 units of wine with the same resources

that Country A uses to produce 4 units of wine. Country B has an
absolute advantage in wine production.

 Therefore, Country A should specialize in cloth production, and

Country B should specialize in wine production. They can then trade
cloth for wine.

Theory of Comparative Advantage

Proposed by: David Ricardo in his book "Principles of Political

Economy and Taxation" (1817).

Concept: The theory of comparative advantage suggests that even

if a country does not have an absolute advantage in any good, it can
still benefit from trade by specializing in producing and exporting
goods where it has a comparative advantage. A comparative
advantage exists when a country can produce a good at a lower
opportunity cost compared to other countries.

Key Points:

1. Opportunity Cost: The focus is on the relative efficiency in

producing goods. A country should produce goods for which it has
the lowest opportunity cost, even if it means not having an absolute
advantage in any good.

2. Mutual Benefits: Trade is beneficial for all countries involved if

they specialize based on comparative advantage. This leads to more
efficient allocation of resources globally.

3. Broader Applicability: The theory of comparative advantage

applies even when one country has an absolute advantage in
producing all goods.

Example:
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 Country A takes 10 hours to produce 1 unit of cloth and 5 hours to
produce 1 unit of wine.

 Country B takes 8 hours to produce 1 unit of cloth and 4 hours to

produce 1 unit of wine.

 Although Country B has an absolute advantage in producing both

goods, it has a comparative advantage in producing wine because
the opportunity cost of producing 1 unit of wine is 0.5 units of cloth
(4 hours/8 hours), compared to 2 units of cloth (10 hours/5 hours)
for Country A.

 Country A has a comparative advantage in producing cloth

because the opportunity cost of producing 1 unit of cloth is 0.5 units
of wine (5 hours/10 hours), compared to 2 units of wine (8 hours/4
hours) for Country B.

 Therefore, Country A should specialize in cloth production, and

Country B should specialize in wine production, and then they can
trade to benefit mutually.

Differences Between Absolute Advantage and Comparative

Advantage

1. Basis of Advantage:

o Absolute Advantage: Based on the ability to produce goods

using fewer resources.

o Comparative Advantage: Based on producing goods at a

lower opportunity cost.

2. Specialization Criteria:

o Absolute Advantage: Specialization is based on having a

clear productivity edge in producing certain goods.

o Comparative Advantage: Specialization is determined by

the relative efficiency and opportunity costs, even if a country
does not have an absolute advantage.

3. Trade Implications:

o Absolute Advantage: Trade occurs when countries

specialize in goods where they are absolutely more efficient.

o Comparative Advantage: Trade is beneficial even if one

country is more efficient in producing all goods, as long as
they specialize based on comparative costs.

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4. Scope of Application:

o Absolute Advantage: Limited in cases where one country is

less efficient in producing all goods.

o Comparative Advantage: More universally applicable as it

considers opportunity costs and relative efficiency.

Conclusion

Both theories underscore the importance of specialization and trade

in promoting economic efficiency and growth. While the theory of
absolute advantage highlights the benefits of productivity and
efficiency, the theory of comparative advantage provides a more
comprehensive framework that demonstrates how all countries can
gain from trade, even when one is more productive in all goods.
Understanding these differences helps in formulating better trade
policies and fostering international economic cooperation.

5. Write short notes :-

(a) Corporate Social Responsibility
(b)Banking Structure in India
(c) Atmanirbhar Bharat Abhiyan

(a) Corporate Social Responsibility (CSR)

Definition: Corporate Social Responsibility (CSR) refers to the

ethical obligation of companies to contribute to the economic,
social, and environmental well-being of communities in which they
operate. It involves going beyond profit-making to consider the
impact of their activities on various stakeholders, including
employees, customers, suppliers, communities, and the
environment.

Key Aspects:

1. Philanthropy: Direct contributions to charitable causes, such as

donations, sponsoring community projects, and supporting
educational institutions.

2. Environmental Sustainability: Initiatives aimed at reducing

carbon footprints, managing waste, conserving resources, and
promoting sustainable practices.

3. Ethical Business Practices: Ensuring fairness, transparency, and

integrity in business operations, including fair labor practices and
adherence to legal standards.

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4. Community Engagement: Involving and investing in local
communities to improve living standards, such as building
infrastructure, providing healthcare, and supporting local
businesses.

5. Employee Welfare: Promoting a positive work environment,

ensuring employee well-being, providing training and development,
and encouraging work-life balance.

Regulatory Framework in India: Under the Companies Act 2013,

certain classes of companies are required to spend at least 2% of
their average net profits over the past three years on CSR
activities. These activities must be related to areas such as
education, poverty, gender equality, and environmental
sustainability.

(b) Banking Structure in India

Overview: India's banking structure is diverse and comprises

various types of institutions regulated by the Reserve Bank of India
(RBI). The structure aims to cater to the financial needs of different
sectors of the economy, including rural and urban populations.

Components:

1. Scheduled Banks:

o Commercial Banks: These include public sector banks, private

sector banks, foreign banks, and regional rural banks (RRBs).

 Public Sector Banks: Major banks owned by the government, such

as State Bank of India (SBI) and Bank of Baroda.

 Private Sector Banks: Banks owned by private entities, including

HDFC Bank and ICICI Bank.s

 Foreign Banks: Banks with headquarters outside India but

operating in India, such as Citibank and HSBC.

 Regional Rural Banks (RRBs): Banks aimed at providing credit

and financial services to rural areas.

2. Cooperative Banks:

o These are small-sized banks operating in rural and urban areas,

focusing on agriculture, rural development, and small industries.
They include State Cooperative Banks, District Central Cooperative
Banks, and Primary Agricultural Credit Societies.

3. Non-Scheduled Banks:

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o These banks are not included in the second schedule of the RBI Act
and have a relatively smaller scale of operations.

4. Development Banks:

o Financial institutions providing long-term capital for industrial and

agricultural development, such as NABARD (National Bank for
Agriculture and Rural Development) and SIDBI (Small Industries
Development Bank of India).

5. Payments Banks and Small Finance Banks:

o These are new categories of banks aimed at promoting financial

inclusion by providing basic banking services in underserved areas.
Examples include Paytm Payments Bank and Ujjivan Small Finance
Bank.

(c) Atmanirbhar Bharat Abhiyan

Definition: Atmanirbhar Bharat Abhiyan, or Self-Reliant India

Campaign, is an initiative launched by the Government of India to
make the country self-reliant and resilient, especially in the wake of
the COVID-19 pandemic. The campaign aims to reduce dependence
on imports and promote indigenous manufacturing and services.

Objectives:

1. Economic Stimulus: Providing financial packages to revive and

support various sectors of the economy, including MSMEs,
agriculture, and healthcare.

2. Infrastructure Development: Building world-class infrastructure

to support economic growth and development.

3. Technology-Driven Systems: Leveraging technology to enhance

efficiency, governance, and service delivery.

4. Vocal for Local: Promoting local products and businesses to reduce

reliance on imports and boost domestic industries.

5. Ease of Doing Business: Implementing reforms to simplify

business processes, reduce bureaucratic hurdles, and attract
investments.

Key Measures:

1. Financial Packages: Announcing economic stimulus packages

aimed at different sectors, amounting to approximately ₹20 lakh
crore.

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2. Policy Reforms: Introducing reforms in agriculture, labor laws, and
industrial policies to promote growth and investment.

3. Support for MSMEs: Providing collateral-free loans, equity

infusion, and market access to micro, small, and medium
enterprises.

4. Promoting Startups: Encouraging innovation and

entrepreneurship through funding, incubation centers, and
favorable policies.

Impact: The Atmanirbhar Bharat Abhiyan seeks to position India as

a global manufacturing hub, boost employment, and ensure
sustainable economic growth by focusing on self-reliance and
reducing vulnerabilities to global disruptions.

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