ECONOMICS

XII-(2023-24)

PART -1

VIDEO
NOTES
THERE ARE FOUR SECTORS
IN AN ECONOMY :-

(i)Household sector (Consumers)

(ii) Firms (Producers)

(iii) Govt. sector (Government)

(iv) External sector (Rest of the

world or abroad)

Circular flow of income: It refers to circular

flow of income in the production process.
Income is generated by household from firms
and also they spend their income in form of
consumption expenditure to firms.
 CIRCULAR FLOW OF INCOME IN
TWO SECTOR ECONOMY

GENERATION DISTRIBUTION
PHASE PHASE

PHASES OF CIRCULAR
FLOW OF INCOME

Disposition
Phase
(i)Real flow: Real flow refers
to flow of factor services
from household to firms and
flow of goods services from
firms to household.
• It measures the
production volume.
• It also determines the
growth process in economy.
• It is also called physical
flow.

(ii) Money flow : Money flow

refers to flow of money from
firms to households and
household to firms, like flow
of factor payments from
firms to household and flow
of consumption expenditure
from household to firms.
It measures the flow of
money supply in the
economy.
It is also called nominal flow
 DIFFERENCE BETWEEN
STOCK & FLOW

STOCK FLOW
It refers to that
variable which is It refers to that variable
1. MEANING measured at a which is measured at a
particular point of particular period of time.
time.

Stock is not time Flow is time dimensional

dimensional as it is as measured only for a
2. TIME
measured at a particular period of time.
DIMENSION
particular point of
time.

It is a static It is a dynamic
3. NATURE concept.
concept.

eg. wealth, distance e.g. pocket allowances,

speed of a car travelling
of Delhi to noida,
Delhi to Noida, flow of
stock of water in a
4.EXAMPLES water from tank, demand,
tank, bank deposits, supply, consumption exp.,
capital, population savings, profit or loss,
on a particular date national income,
etc. production, GDP,
Investment etc
ECONOMICS
XII-(2023-24)

PART -2

VIDEO
NOTES
FINAL INTERMEDIATE
GOODS GOODS

PHASES OF CIRCULAR
FLOW OF INCOME

Consumption
Capital
/Consumer
Goods
Goods
 FINAL GOODS
These are those goods. Which is finally produced and ready
for
use by their final users. Final users may be (i) consumer and
(ii) producers.
(i) Consumers are the final user of clothes, shoes, food, etc.
(ii) Producers are the final user of plant and machinery.
# Expenditure on final consumer goods by the household is
called

Final consumption expenditure

Expenditure on final goods by the producer is called

Investment
expenditure

Expenditure on final goods = Consumption Exp. +

Investment Expenditure
INTERMEDIATE GOODS
These are those goods which is not yet ready for use
by
their final user. These goods are purchased by one
firm from the other.
eg. Wood purchased by a carpenter for making chairs
is an intermediate good.
Because it is a raw material for carpenter.
Shirt purchased by firm A from firm B for resale.
Note: Value of intermediate goods ultimately
(Already) included in the value
of final goods.
Hence these goods are not included in National
income.
 CONSUMER GOODS
Consumption/Consumer Goods: These are those
goods which are directly
used for the satisfaction of human wants. These
are not used for the production
of other goods and services. Final user of
consumption goods are (i) Consumer
or household. (ii) Government (iii) NGO (Non-
Govt. Organisation).
These goods are also divided into
DURABLE GOODS
SEMI DURABLE GOODS
NON DURABLE GOODS
SERVICES
 CAPITAL GOODS
Capital goods are those goods which are
used in the process
of production for several years and which are
of high value. These goods are
fixed assets of the producers. E.g. Plant and
Machinery.
But all machines are not capital goods.
 DIFFERENCE BETWEEN
FINAL GOODS &
INTERMEDIATE GOODS

STOCK
FINAL INTERMEDIATE
FLOW
These are those These are those goods
goods which are which are not ready to
MEANING
ready to use by their use by their final user.
final user.

Purpose of these These are used in the

goods are for process of production as
PURPOSE
consumption and a raw material and for
investment. resale purpose

They are They are NOT

include in include in both
NATURE
both domestic domestic and
and national national income.
income.

Some value has

There is no value
to be added in
VALUE addition in final
intermediate
ADDITION goods as they are
goods as they are
ready for use.
not ready for use.
 STOCK
FINAL INTERMEDIATE
FLOW

They have crossed They have crossed

PRODUCTION the production the production
BOUNDARY
boundary. boundary.

Milk purchase by Milk purchased by a

household for biscuit company is a
EXAMPLE consumption, raw material, milk
machinery purchased purchased by a dairy
as an investment. shop is for resale.
 PRACTICE
QUESTION
Q.1) Giving reasons classify the following into
intermediate products and final products:

(i) Furniture purchased by a school.

(ii) Chalks, duster, etc. purchased by a
school.
(iii) Computers installed in an office.
(iv) Mobile sets purchased by a mobile
dealer.
(v) Paper purchased by a publisher.
(vi) Printer purchased by a lawyer.
(vii) Coal used by household.
(viii) Unsold coal at the Trader at year end

(ix) Seeds purchased by a farmer.

(x) Electricity consumption in a business.
(xi) Sewing machine purchased by a
housewife.
(xii) Soft drink purchased by School
Canteen.
(xiii) Coal used by manufacturing firms.
(xiv) Fertilizers used by a farmers.
(xv) Refrigerator installed by a firm
ECONOMICS
XII-(2023-24)

PART -3

VIDEO
NOTES
 PRACTICE
QUESTIONS
Q.1) CALCULATE (I) GDPMP AND (II) GNPMP
(i) NDPfc 300
(ii) Factor income from abroad 25
(iii) Factor income to abroad 15
(iv) Consumption of fixed capital 70
(v) Old age pension 30
(vi) Goods & Services Tax 20

Q.2) CALCULATE GNPFC AND NDPMP

(i) National income 250
(ii) Consumption of fixed capital 10
(iii) Net factor income from abroad 75
(iv) Factor income paid to abroad 25
(v) Goods & Services Tax 125
(vi) Import Duty 25
(vii) Subsidies 30
ECONOMICS
XII-(2023-24)

PART -4

VIDEO
NOTES
METHODS OF ESTIMATION
OF NATIONAL INCOME

REFER TO PART 4 OF
NATIONAL INCOME
FOR DETAILED
EXPLAINATION
ONLY ON

SUNIL PANDA - THE EDUCATOR

 PRACTICE
QUESTIONS
Q.1) CALCULATE NET VALUE ADDED AT
FACTOR COST FROM FOLLOWING DATA:

Q.2) CALCULATE VALUE OF OUTPUT FROM

THE FOLLOWING DATA:

Q.3) CALCULATE NET VALUE ADDED AT

FACTOR COST FROM THE FOLLOWING DATA:
 Q.4) FIND GROSS VALUE ADDED AT FACTOR COST:

Q.5)CALCULATE SALES FROM THE FOLLOWING DATA:

Q.6)FIRM A BUYS FROM X INPUTS WORTH ₹ 500 CRORES AND SELLS TO FIRM B GOODS
WORTH ₹ 1,000 CRORES AND TO FIRM C GOODS WORTH ₹ 700 CRORES. FIRM B
BUYS FROM Y INPUTS WORTH ₹ 200 CRORES AND SELLS TO FIRM C GOODS WORTH
₹ 1,500 CRORES AND FINISHED GOODS WORTH ₹ 2,000 CRORES TO HOUSEHOLDS.
FIRM C BUYS FROM Z INPUTS WORTH ₹ 150 CRORES AND SELLS FINISHED GOODS
WORTH ₹ 4,150 CRORES TO HOUSEHOLDS. CALCULATE VALUE ADDED BY FIRMS A,
B AND C AND GDPMP.
ECONOMICS
XII-(2023-24)

PART -5

VIDEO
NOTES
Q.1) CALCULATE FIND OUT NET NATIONAL
PRODUCT AT MARKET PRICE

Q.2) CALCULATE NATIONAL INCOME

Q.3) CALCULATE THE OPERATING SURPLUS

ECONOMICS
XII-(2023-24)

PART -6

VIDEO
NOTES
 Q.1) CALCULATE GROSS DOMESTIC
PRODUCT OF FACTOR COST FROM
THE FOLLOWING DATA

Q.2) CALCULATE GROSS FIXED CAPITAL

FORMATION FROM THE FOLLOWING DATA
ECONOMICS
XII-(2023-24)

PART -7

VIDEO
NOTES
 Q.1) FROM THE FOLLOWING DATA,
CALCULATE (A) VALUE OF OUTPUT;
(B) INTERMEDIATE CONSUMPTION;
(C) NET VALUE ADDED AT FACTOR COST

Q.2) CALCULATE GNP AT MP BY

INCOME AND EXPENDITURE METHOD
 Q.3) CALCULATE NNP AT FC BY
INCOME AND EXPENDITURE METHOD

Q.4) CALCULATE GROSS DOMESTIC

PRODUCT AT FACTOR COST AND
FACTOR INCOME TO ABROAD
 Q.5) FROM THE FOLLOWING DATA
CALCULATE GROSS DOMESTIC PRODUCT
AT MARKET PRICE AND SUBSIDIES

Q.6) CALCULATE OPERATING SURPLUS

AND COMPENSATION OF EMPLOYEES
ECONOMICS
XII-(2023-24)

PART -8

VIDEO
NOTES
 PRECAUTIONS
REGARDING
PRODUCTION
METHOD

(i)Value of the sale and purchase of second

(i)Value of the sale and purchase of second
hand goods is not included in value added
hand goods is not included in value added
because, value of these goods is already
because, value of these goods is already
accounted for during the year they were
accounted for during the year they were
first time produced.
first time produced.
(ii) Commission earned on account of the
(ii) Commission earned on account of the
sale and purchase of second hand goods is
sale and purchase of second hand goods is
included in the estimation of value added.
included in the estimation of value added.
Because, commission is a factor payment
Because, commission is a factor payment
for service rendered this is a new service.]
for service rendered this is a new service.]
(iii) Own account production of goods of
(iii) Own account production of goods of
the producing units is taken into account
the producing units is taken into account
while estimating value added. Becaue
while estimating value added. Becaue
these goods are like those produced for the
these goods are like those produced for the
market. They are simply not sold owing to
market. They are simply not sold owing to
their need by the producers themselves. If
their need by the producers themselves. If
we do not include, this cause under
we do not include, this cause under
estimation of national income.
estimation of national income.
(iv) Value of intermediate goods is not
(iv) Value of intermediate goods is not
included in the estimation of value added.
included in the estimation of value added.
Because, value of intermediate goods is
Because, value of intermediate goods is
reflected in the value of final goods. If we
reflected in the value of final goods. If we
include this cause overestimation of
include this cause overestimation of
national income.
national income.
(v) Change in stock (increase in stock) will
(v) Change in stock (increase in stock) will
be included because it is a part of capital
be included because it is a part of capital
formation.
formation.
(vi) Services for self-consumption is not
(vi) Services for self-consumption is not
considered while estimating value added.
considered while estimating value added.
Simply because, it is difficult to estimate
Simply because, it is difficult to estimate
their market value, like services of
their market value, like services of
housewives.
housewives.
So, to avoid the problem of double
counting
(i) Take value added instead of total output.
(ii) Take the value of final products only
 PRECAUTIONS
REGARDING
INCOME
METHOD

(i)Value of the sale and purchase of second

(i)Value of the sale and purchase of second
hand goods is not included in value added
hand goods is not included in value added
because, value of these goods is already
because, value of these goods is already
accounted for during the year they were
accounted for during the year they were
first time produced.
first time produced.
(ii) Commission earned on account of the
(ii) Commission earned on account of the
sale and purchase of second hand goods is
sale and purchase of second hand goods is
included in the estimation of value added.
included in the estimation of value added.
Because, commission is a factor payment
Because, commission is a factor payment
for service rendered this is a new service.]
for service rendered this is a new service.]
(iii) Own account production of goods of
(iii) Own account production of goods of
the producing units is taken into account
the producing units is taken into account
while estimating value added. Becaue
while estimating value added. Becaue
these goods are like those produced for the
these goods are like those produced for the
market. They are simply not sold owing to
market. They are simply not sold owing to
their need by the producers themselves. If
their need by the producers themselves. If
we do not include, this cause under
we do not include, this cause under
estimation of national income.
estimation of national income.
 PRECAUTIONS
REGARDING
PRODUCTION
INCOME
METHOD

(i)Value of the sale and purchase of second

1.Transfer earnings like old age pensions,
hand goods is not included in value added
unemployment allowances, scholarship,
because, value of these goods is already
pocket money etc. should not be included
accounted for during the year they were
in national income, because corresponding
first time produced.
to transfer payment there is no value
addition in the economy. Similarly, indirect
(ii) Commission earned on account of the
taxes are not included.
sale and purchase of second hand goods is
2.Income from illegal activities like
included in the estimation of value added.
smuggling, theft, gambling etc. should not
Because, commission is a factor payment
be included in national income. Black
for service rendered this is a new service.]
money is not to be counted in national
income. Lottery also not included because
(iii) Own account production of goods of
it is a windfall gain. There is no productive
the producing units is taken into account
activity connected with them.
while estimating value added. Becaue
3.Income from sale of second hand goods
these goods are like those produced for the
not included but commissions received on
market. They are simply not sold owing to
the sale of secondhand goods are to be
their need by the producers themselves. If
included in national income because these
we do not include, this cause under
are new factor income for rendering factor
estimation of national income.
services.
 (i)Value of the sale and purchase of second
4. Do not include income arising from the
hand goods is not included in value added
sale of financial assets. These are share,
because, value of these goods is already
bonds, debentures, govt. Securities, etc.
accounted for during the year they were
Buying and selling of these are not an
first time produced.
activity related to production of goods and
services.
(ii) Commission earned on account of the
(However any Commission or brokerage
sale and purchase of second hand goods is
charged by the intermediaries is a payment
included in the estimation of value added.
for the services rendered by them and is a
Because, commission is a factor payment
factor income).
for service rendered this is a new service.]
5. Imputed rent of owner occupied houses
is to be treated along with rent as a
(iii) Own account production of goods of
component of factor incomes.
the producing units is taken into account
Corresponding to production for self-
while estimating value added. Becaue
consumption must be included
these goods are like those produced for the
market. They are simply not sold owing to
their need by the producers themselves. If
we do not include, this cause under
estimation of national income.
 PRECAUTIONS
REGARDING
EXPENDITURE
METHOD

(i)Value of the sale and purchase of second

1.Do not include expenditure on
hand goods is not included in value added
intermediate goods and services:
because, value of these goods is already
Intermediate expenditure is already a part
accounted for during the year they were
of final expenditure. So, including
first time produced.
intermediate expenditure will mean double
counting of expenditure.
(ii) Commission earned on account of the
sale and purchase of second hand goods is
2.Include imputed expenditure on self-
included in the estimation of value added.
consumed or own account produced:
Because, commission is a factor payment
Output used for consumption and
for service rendered this is a new service.]
investment. eg. self consumed output by
farmers, self consumed services of owner
(iii) Own account production of goods of
occupied houses are included.
the producing units is taken into account
while estimating value added. Becaue
3.Do not include expenditure on transfer
these goods are like those produced for the
payments: A transfer payment is one
market. They are simply not sold owing to
against which no goods or services is
their need by the producers themselves. If
provided is return. eg. gift, donations,
we do not include, this cause under
charity, scholarship, old age pension,
estimation of national income.
unemployment allowances etc.
 (i)Value of the sale and purchase of second
4. Do not include expenditure on financial
hand goods is not included in value added
assets: It means expenditure on buying
because, value of these goods is already
shares, debentures, bonds, govt. securities
accounted for during the year they were
etc. But if any brokerage or services charge
first time produced.
is paid in buying financial assets it is
treated as expenditure on buying services.
(ii) Commission earned on account of the
Hence brokerage, commission are included
sale and purchase of second hand goods is
.
included in the estimation of value added.
5. Do not include expenditure on second
Because, commission is a factor payment
hand goods: Expenditure on these goods
for service rendered this is a new service.]
was accounted when they were purchased
new. Including expenditure on second hand
(iii) Own account production of goods of
goods would mean counting of the same
the producing units is taken into account
expenditure twice. No fresh production
while estimating value added. Becaue
takes place in such a case. However, if any
these goods are like those produced for the
commission or brokerage is paid to an
market. They are simply not sold owing to
intermediary in such transaction it should
their need by the producers themselves. If
be treated as final expenditure because it
we do not include, this cause under
is a fresh payment for the services
estimation of national income.
purchased.
ECONOMICS
XII-(2023-24)

PART -9

VIDEO
NOTES
 National income: It
is the sum total of
income of only the
normal residents
of a country

Domestic territory of a country refers

to that area of economic activity
which generates domestic income.
Domestic territory (Economic
territory) includes the following:
 DOMESTIC
DOMESTICTERRITORY
TERRITORY
DOES
DOESINCLUDE:
INCLUDE:

Ships and
aircrafts:-

Fishing vessels
and oil rigs

Embassies
Domestic Territory does not include:

1. Embassies and military establishments of a

foreign country in India. e.g. Chinese
embassy in India is a part of domestic
territory of China.

2. International Organizations like UNO,

WHO, WTO, etc. located within the
geographical boundaries of a country
 GDP AND WELFARE

EXCEPTION OF GDP WELFARE:

1.DISTRIBUTION OF GDP
2.COMPOSITION OF GDP
3.BARTER SYSTEM EXCHANGE
4.EXTERNALITIES
ECONOMICS
XII-(2023-24)

PART -10

VIDEO
NOTES
 DIFFERENCE BETWEEN
REAL GDP & NOMINAL GDP

Real Nominal
GDP GDP

When
When
GDP is measured at
GDP is measured at the
the base or constant
current year prices it is
year prices it is
called Nominal GDP.
called Real GDP.

Real GDP is the Nominal GDP is the Gross

inflation-adjusted Domestic
GDP Product without any effect
of a country. of inflation.

It is true indicator of It is not a true indicator of

economic growth economic growth and
and welfare. welfare
 GDP DEFLATOR/
PRICE INDEX

GDP deflator measures the change in the

average level of prices of all the
goods and services that make up GDP.

GDP deflator is used to eliminate the effect

of price changes and to
determine the real change in physical output.

REAL AND NOMINAL

GDP FORMULA

Price index or GDP Deflator =

( Nominal GDP/ Real GDP ) 100

Components of NFIA:
(i) Net compensation to employees.
(ii) Net income from property and
entrepreneurship: likes rental income,
interest income and profits.
(iii) Net retained earnings: Part of profit after
tax and dividend.
 DIFFERENCE BETWEEN
DEPRECIATION AND
CAPITAL LOSS

STOCK
DEPRECIATION FLOWLOSS
CAPITAL

It refers to loss in
It refers to fall in the
1. MEANING value of the fixed
value of fixed assets
assets due to
due to normal wear
unforeseen
and tear, passage of
obsolescence, natural
time or expected
calamities, thefts,
obsolescence
accidents, etc.

Provision is made for No such provisions is

2. replacement of made in case of
PROVISION assets as it is an capital loss as it is an
FOR LOSS expected loss. unexpected loss.

It does not hamper It hampers the

3. the production production process.
PRODUCTION process.
PROCESS
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ECONOMICS
XII-(2023-24)

ONE SHOT

VIDEO
NOTES
 OFFICIAL
SYLLABUS

BARTER
SYSTEM

Money act as a
Medium of
exchange.
i.e. money is
commonly
accepted as a
medium of
exchange
 PRIMARY
FUNCTIONS
OF MONEY

MEDIUM OF COMMON MEASURE

OF VALUE
EXCHANGE (COMMON UNIT OF
VALUE)

Primary functions:- Primary function include the

most important function of money which it must
perform in every country these are:

i) Medium of exchange:- Money as a medium

of exchange means that it can be used to
make payments for all transaction of goods
and services. It is the most essential function of
money. Money has the quality of general
acceptability. So all exchange take place in
term of money.

ii) Measure of value (Common unit of value) :-

Money as a measure of value means that
money works as a common denomination in
which values of all goods and service are
expressed.
 SECONDARY
FUNCTIONS
OF MONEY

STANDARD OF STORE OF VALUE

DEFERRED (ASSETS
FUNCTION OF
PAYMENTS MONEY)

Secondary functions:- These refer to functions of money

which are supplementary to the primary functions these
function are derived from primary functions and therefore
they are also known as Derivative functions

i) Standard of Deferred payments:- Money as a standard

of deferred payments means that money act as a standard
for payments which are to be made in future. Every day
millions of transaction take place in which payments are
not made immediately. Money encourage such
transactions and helps in capital formation and economic
development of the economy.

ii) Store of value (Assets function of money) :- Money as

a store value means that money can be used to transfer
purchasing power from present to future. It provides
security to individuals to meet contingencies, unpredictable
emergencies and to pay future debts. Under barter system
it was difficult to use goods as a store of wealth due to
perishable nature of some goods and high cost of storage.
 MONEY SUPPLY

MONEY SUPPLY
Supply of money is a stock concept.
Money supply does not include

(i)Stock of money held by the government

(ii) Stock of money held by the Banking
System of a country.
They are considered suppliers of money.
Money supply includes
(i)Individuals
(ii) Business firms

COMPONENTS

M1 = CC + DD + OD with RBI
It does not include
(a)deposits of the Indian government of
the country with RBI.
(b) deposits of the Commercial Bank of
India with RBI.
M1 is also known as Transaction money
It is Most Liquid
 COMPONENTS OR
MEASUREMENT
MONEY SUPPLY

M1 = CC + DD + OD with RBI
Note: (i) CC : Currency in cash i.e. Paper
notes & coins.
(ii) DD : Demand deposits i.e. deposits of
public with Commercial Banks which can
be withdrawn by issuing a cheque. It must
be noted that here we only include net
demand deposits. It means inter bank
deposits are excluded. Interbank deposits
are those deposits held by one bank of
behalf of other bank.

(iii) OD: Other deposits with RBI. It

includes:
(a)Deposits held by RBI on behalf of
Foreign Banks and Foreign government.
(b) Demand deposits of international
financial institutions like international
monetary fund (IMF) and World Bank.
(c) Demand deposit of financial
institutions like NABARD (National Bank for
Agriculture and Rural Development)
NABARD established on 12 July 1982
ECONOMICS
XII-(2023-24)

PART -1

VIDEO
NOTES
 OFFICIAL
SYLLABUS

BANK
A bank is an organization which keeps money
safely for its customers; You can take money out,
save, borrow or exchange money at a bank
 MEANING OF
COMMERCIAL BANK

A commercial bank is a kind of financial

institution that carries all the operations
related to deposit and withdrawal of money
for the general public, providing loans for
Consumption, investment, and other such
activities.
These banks are profit-making institutions
and do business only to make a profit.

LRR: LEGAL RESERVE RATIOS

 CREDIT
CREATION

Credit Creation by Commercial Bank

Commercial bank is an important source of money supply in the
economy, which contribute to money supply by creating credit in
terms of demand deposit. Suppose a new deposit of ₹1000 is made
by a depositor into bank and Bank Legal Reserve Ratio is 10%
Bank will keep legal Reserve Ratio of ₹100 (10% of ₹1000) and lend
the balance money of ₹900 to the borrower by crediting as
chequeable deposits (I round of credit creation).
The borrower will use the amount to pay its creditors which ultimately
will be deposited in another bank and bank keeps ₹90 (10% of ₹900)
as legal Reserve Ratio and lends the balance ₹810 to borrower. (II
Round of Credit Creation). This process will continue till amount
become zero and make the money 10 times the initial deposits i.e.
₹10,000.
Deposit multiplier (or) Money
multiplier = 1/LRR = 1/10 % = 10 times

As seen in the table, banks are able to create total

deposits of ₹10,000 with the initial deposits of just ₹1000.
It means total deposits become 10 times of the initial
deposit. This 10 times is value of Money Multiplier.
ECONOMICS
XII-(2023-24)

PART -2

VIDEO
NOTES
 CENTRAL
BANK
It is an apex bank that controls the entire
banking system of a country.
It is the sole agency of note issuing in a
country. In India it is Reserve Bank, in
England; Bank of England, in America;
Federal Reserve System.

RBI was established in April 1, 1935 under

RBI Act passed in 1934
 FUNCTIONS OF
CENTRAL BANK

(i) Issuing Authority of Currency Notes: Central Bank

of a country has the exclusive right of issuing notes. In
20th century, the Central Bank was known as Bank of
Issue. Central Bank is the sole agency of issuing
currency notes which is legal tender. However one
rupee coin and notes are issued by Ministry of Finance.

ii) Banker of the Government: Central Bank is a banker,

agent and financial advisor to the government As a
banker to the government it manages accounts of the
government As an agent to the government, it buys and
sells securities on the behalf of the government It helps
the government in framing policies to regulate the Money
Market. As a financial advisor, the Central Bank advises
the government from time to time on economic financial
and monetary matters. RBI also offers loans to the
government against some securities. In situation of deficit
government budget, the government often seeks loans
from the Central Bank. This is called Deficit financing
(iii) “Bankers Bank” & “Supervisory Bank”: The Central Bank the
banker’s bank and also plays a supervisory role. As a Banker’s Bank,
it has almost the same relation with other banks in the country as a
Commercial banks has with it’s customers. It accepts deposits from
the Commercial Banks and offered them loans. The rate at which
Central Bank offers loans to the Commercial Bank is called ‘Repo
rate’. The rate at which commercial banks are allowed to park their
surplus fund with RBI is called “Reverse Repo Rate”. As a Supervisor,
Central Bank Regulate and Controls the Commercial Banks. RBI
continuously exercised inspection on Commercial Banks. RBI gives
license to Commercial Banks. Central Bank ensure that Commercial
Banks maintains Cash Reserve Ratio & Statutory Liquidity Ratio in
proper way. Otherwise RBI charge interest and penalty

(iv) Lender of the Last Resort: As we know, commercial

bank create liabilities (demand deposits) many times more
than their cash reserves. However, there may be occasions
when a bank suffers crises of finance. In such a situation the
Central Bank acts as a lender of last resort. Central Bank
helps Commercial Banks in critical situation
(v) Custodian of Foreign Exchange Reserve: Central Bank
is the custodian of nation’s foreign exchange reserve. The
Central Bank not only maintain foreign exchange reserve but
also exercises managed floating to ensure stability of
exchange rate in the international money market. Managed
floating refers to the sales and purchase of foreign
exchange with a view to achieving stability of exchange
rate for the domestic currency.

(vi) Clearing house function: Central Bank acts as a

clearing house for transfer and settlement of mutual claims
of Commercial Banks. Since the Central Bank hold reserves
of Commercial Banks. It transfer funds from one Bank to
other banks to facilitate clearing of cheques.

vii) Control of Credit: The most important function of the

Central Bank is to control supply of money in the economy. It
implies increase or decrease in the supply of money by
regulating the ‘Creating of Credit’ by the Commercial Banks.
The Central Bank needs to control the supply of money to
cope with the situation of inflation and deflation. During
inflation, supply of money is restricted and during deflation,
supply of money is liberalised
ECONOMICS
XII-(2023-24)

PART -3

VIDEO
NOTES
 Credit Control By
Central Bank/ RBI
MONETARY POLICY

Monetary Policy by RBI

1. Quantitative
Measures.

2. Qualitative Measures
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ECONOMICS
XII-(2023-24)

PART -1

VIDEO
NOTES
 MEANING
AGGREGATE DEMAND (AD)

It refers to Total demand for all Final

goods and services in an economy during
a fiscal year
(1st April to 31st March)

COMPONENTS
OF AD
 COMPONENTS
OF AD

1.Private Final Consumption Expenditure (C)

It is also called household expenditure.

It depends on the level of disposable income
of household.
Higher the level of Disposable income, higher
will be private final consumption expenditure
and vice versa.

2. Private Investment Expenditure (I)

It refers to expenditure by private investors on

the purchase of such goods which add to their
stock of capital i.e. investment
Two Types of investment:-

(i) Induced investment: It

refers to the investment,
which is made with the
motive of earning profit. It is
generally done in private
sector. It depends upon level
of income Induced
investment curve moves
upwards from left to right

(ii) Autonomous investment: It

refers to the investment, which is
made irrespective of level of
income. It is generally done by
government with the motive of
social welfare. Autonomous
investment curve remains parallel
to X-axis. It is constant
irrespective the level of income
Marginal efficiency of
investment (MEI): It refers to the
expected rate of return on
additional investment.
G: GOVERNMENT
EXPENDITURE

3. Government final
consumption expenditure
(G):

It refers to the expenditure

incurred by government on
consumer goods to meet public
needs like law and order,
education, health, transport,
defense, etc.

4. Government investment
expenditure (G):

It refers to the expenditure

incurred by the government on
Capital goods. These
expenditure are need to
develop the economy. Like
construction of highways,
roads, hospital building, school,
power plant, etc.
5. Net Export (X – M) : Expenditure by the
foreigners on our goods is added to total
expenditure (AD) while expenditure on imports is
subtracted.

So difference between export and imports is

considered as a component of Aggregate
Demand.
So AD = C + I + G + (X – M)
But in two sector economy.
AD = C + I
C = Desired consumption, I = Desired Investment

SCHEDULE
 Important Points

(i)Consumption expenditure (c) can never

be zero. At level of income there should
be a minimum consumption. It is essential
even when income does not permit it. It is
also called autonomous consumption
expenditure past savings and borrowings
may be the source of such expenditure.

(ii)Investment is assumed to be constant

irrespective the level of income.
i.e. Autonomous investment.

(i)Consumption can never be zero. Hence

AD also can never be zero because AD is
the sum of consumption and investment.
ECONOMICS
XII-(2023-24)

PART -2

VIDEO
NOTES
 AGGREGATE
SUPPLY (AS)

It is the total production or supply of all goods and

services in the economy during fiscal year.

(i)Consumption: It is the part of income which is spent

on consumption (c).

(ii)Savings: It is the part of income which is not

consumed i.e. saved. (S).

(iii)Initially saving is negative but after a stage it is

positive.

AS= C + S (Y = C + S)
AS is 45 degree line
AS (Output) = Y (National income)
 SCHEDULE

WHY AS IS 45
DEGREE LINE ?

Significance of 45° degree line (why AS is 45° line)

Aggregate supply refers to money value of final goods
and services that all producers are willing to supply in an
economy during a fiscal year.
Before giving reason why AS is 45° line we must know
that Y = C + S
Y = National income
C = Consumption expenditure
S = Savings
AS = C + S
Aggregate Supply is obtained by Adding Consumption
and Savings so we can say AS=Y
Each point on AS line is equidistant from both axis AS
line Bisect the 90° angle.
X axis shows level of income &
Y axis shows consumption + Saving
Under Keynesian Economic Analysis
Y=C+S
Hence AS is 45° line

Break even
point

It is a point
where income
is equal to
consumption.
savings are
equal to Zero
ECONOMICS
XII-(2023-24)

PART -3

VIDEO
NOTES
 EQUILIBRIUM LEVEL
OF OUTPUT/ INCOME

I.AD-AS Approach: In this approach, equilibrium level

output (GDP) is achieved when aggregate demand is
equal to aggregate supply. i.e. [AD = AS]

SCHEDULE
What happens if AD > AS ?
What happens if AD > AS ?
• •When
WhenAD ADisisgreater
greaterthan
thanAS,AS,
flow of goods and services
flow of goods and services in in
the
the economy
economy tends
tends toto be
be less
less
than
thantheir
theirdemand.
demand.
• • Producers
Producers need
need toto produce
produce
more
moregoods
goodsand
andservices
servicesininthe
the
economy.
economy.
• •Whole
Wholeexisting
existingstock
stocksold
soldout
out
producers would suffer the loss
producers would suffer the loss
ofofunfulfilled demand.
unfulfilled demand.

What happens if AD < AS ?

What happens if AD < AS ?
• When AS is more than AD,
• When AS is more than AD,
flow of goods and services in
flow of goods and services in
the economy tends to exceed
the economy tends to exceed
their demand.
their demand.
• As a result, some of the
• As a result, some of the
goods would remain unsold.
goods would remain unsold.
• To clear unwanted stock, the
• To clear unwanted stock, the
producer would plan a cut in
producer would plan a cut in
production. Consequently, AS
production. Consequently, AS
would reduce to become equal
would reduce to become equal
to AD.
to AD.
II. S-I Approach:

In saving investment approach equilibrium level of

output (GDP) is achieved when planned saving is equal
to planned investment. i.e. [S = I]

SCHEDULE

Point “e” is equilibrium

point where

(S = I) at full employment
level of income ₹200.
What
Whathappens
happens ififSAD
> I ?> AS ?

• ItWhen
implies
AD isthat whenthan
greater planned
AS,
savings (S) is greater than the
flow of goods and services in
planned investments (I) is to the
the economy
circular flow
tendsofto beincome.
less
than their demand.
Accordingly, overall expenditure in
the economy would remain lower
• than
Producers
what isneed requireto toproduce
buy the
more goods
planned and services in the
output.
Some output would remain unsold
economy.
and producers will have undesired
stock. To clear their stocks, the
• Whole existing stock sold out
producer would now plan lesser
producers
output. wouldThe suffer the would
process loss
ofcontinue
unfulfilled
till Sdemand.
= I.

What happens if AD < AS ?

What happens if S < I ?
• When AS is more than AD,
It implies
flow of that
goodsplanned
andsavings (S) isin
services
less than planned investments (I) into
the economy
the circular flowtendsofto income.
exceed
their demand.
Accordingly, overall expenditure in
• As
the a result,
economy would some
turn outof the
to be
greater
goods thanwouldwhat is required
remain to buy
unsold.
the planned output. Here the
• To clear unwanted stock, the
producers would suffer the losses of
producerdemand.
unfulfilled would To plan a cutthein
manage
production.
situation, Consequently,
the producer would now AS
would
plan reduce
higher to become equal
production.
The process would continue till S = I
to AD.
ECONOMICS
XII-(2023-24)

PART -4

VIDEO
NOTES
A.Excess Demand

It refers to the situation when aggregate

demand (AD) is in excess of aggregate supply
(AS) corresponding to full employment level of
output in the economy.

AD > AS
Inflationary gap is
⇒ AD1 – AD
Causes of Excess Demand and Inflationary
Gap

(i)increase in private final consumption

expenditure.

(ii) increase in private investment expenditure.

(iii)increase in govt. final consumption

expenditure.

(iv)increase in govt. investment expenditure.

(v)Increase in exports, owing to lower domestic

prices in relation to international prices.

(vi)Decrease in imports, owing to higher

international prices as compared to domestic
prices.

(vii)A cut in tax rates leads to higher disposable

income of people.
B. Deficient Demand

It refers to the situation when aggregate

demand (AD) is less than aggregate supply
(AS) corresponding to full employment in the
economy.

AD < AS
Deflationary gap is
⇒ AD – AD1
 Causes of Deficient Demand and
Deflationary Gap

(i)Decrease in private final consumption

expenditure.

(ii)Decrease in private investment

expenditure.

(iii)Decrease in government
expenditure.

(iv)Decrease in exports and increase in

imports.

(v)Increase in tax rate leads to decrease

in disposable income of people.
 (i)Full employment:

It refers to a situation when all those who are

able to work and are willing to work (at the
existing wage rate) are getting work. It is a
situation when, corresponding to a given wage
rate, demand for Labour force is equal to supply
of Labour force and the Labour market is in
equilibrium. However, full employment does not
mean that there is no unemployment in the
economy. Some people may voluntarily choose to
remain unemployed they are not be willing to work
at all or not willing to work at the existing wage
rate. This is a situation of voluntary unemployment.
i.e. in full employment situation unemployment
can be occurs like
 TYPES OF UNEMPLOYMENT

(a)Structural unemployment: It refers to the situation of

unemployment where poor people remains unemployed due to
modernization or structural changes in the economy like due to
computerization many unskilled peoples are unemployed.

(b)Frictional unemployment: When a person leave one job and

find other job then the time period at which he is unemployed for
some days. That is called frictional unemployment.

(c)Voluntary unemployment occurs when some people are not

Willig to work at all or are not willing to work at an existing wage
rate.

(d)Involuntary unemployment occurs when some people are not

getting work, even when they are willing to work at an existing
wage rate. Here economy fails to create enough jobs because
planned output is lower than the potential output.
ECONOMICS
XII-(2023-24)

PART -5

VIDEO
NOTES
 Measures to correct Excess
demand & deficient demand

A. Fiscal measures (By the

government)
B. Monetary policy (By RBI)

A. Fiscal Policy (Fiscal Measures) It refers

to budgetary policy of the government to
correct the situation of excess demand and
deficient demand.

Common instruments are

a) government spendings
b) Taxation policy
 Components of Fiscal Policy (instruments)
(i)Government spending: It refers to the
expenditure of govt. on public welfare works
such as construction of roads, dams, bridges,
expenditure on education, defence, maintenance
of laws, etc.
To correct situation of excess demand govt.
reduces their all expenditures. So that less
income generation in the economy and
consequently AD will be less as require to correct
excess demand.
To correct situation of deficient demand govt.
increases their all expenditure. So that more
income generation in the economy. And
consequently AD will be more as required to
correct deficient demand

(ii) Taxation policy: Taxes are a compulsory payment made

to the government under any law. By increasing tax burden
on the households and the producers govt. reduces the
purchasing power in the economy on the other hand by
lowering the tax burden, the government increases the
purchasing power and excess demand and deficit demand
are corrected
B. Monetary measures:
1. Quantitative Measures.
2. Qualitative Measures

1. Quantitative Measures Quantitative

instruments are traditional tools related to the
Quantity or Volume of the money. These are also
called general tools. It comprises of the following
instruments
ECONOMICS
XII-(2023-24)

PART -6

VIDEO
NOTES
 PROPENSITY TO CONSUME &
PROPENSITY TO SAVE

APC (Average Propensity to Consume) It is the

part of income which is consumed. (or) It shows
the relationship between consumption and
income.
APS (Average Propensity to Save) It is
the part of income which is saved. It shows
the relationship between savings and
income.

MPC (Marginal propensity to consume) It

shows change in consumption due to change in
income. MPC is always more than zero less than
one.

MPS (Marginal propensity to save) It shows

change in savings due to change in income.

MUST REMEMBER
ECONOMICS
XII-(2023-24)

PART -7

VIDEO
NOTES
Consumption Function
The functional relationship between C
and Y is called consumption function.

Saving Function
It is the functional relationship
between S and Y (income)
S = – a + (1 – b)Y
Here S = Saving
 Note:
• MPC is slope of consumption function.
• MPC is constant at each level.
• MPS is slope of saving function
• MPS is constant for a straight line S-function

1.S-line must start from the point which indicate that the value of S
(the value of S when Y = 0) corresponds to the value of C (the value
of C when Y = 0).

Here S-line starts from –20 where C line starts from +20 because C
= 20, Y = 0 and S = –20.

2. S-line must cross the X-axis when (Y = C) so that S = 0. Thus S-

line crosses X-axis when Y = C = 100 and therefore S = 0.

3. The slope of S-line must be equal to (1 – slope of C-line) while

slope of C line is 0.8 = MPC and slope of S line is (1 – MPC) i.e. 0.2
i.e. MPS.
ECONOMICS
XII-(2023-24)

PART -8

VIDEO
NOTES
 INVESTMENT
MULTIPLIER

It measures change in income due

to change in investment in the
economy. We have noted that
increase in income is many times
more than the increase in
investment. The number of times by
which the increase in income
exceeds the increase in investment
is called investment multiplier or
output multiplier. It is denoted by
“K”

Conclusion
There is inverse relationship between MPC & MPS as value of MPC
increases then value of MPS decreases as shown in above
schedule.

* There is inverse relationship between multiplier and MPS. Higher

the value of MPS, lower the value of multiplier & vice versa
.
* There is a direct relationship between multiplier and MPC.
Higher the value of MPC, higher the value of multiplier and vice
versa as shown in above schedule.
 WORKING OF INVESTMENT MULTIPLIER
WITH A NUMERICAL EXAMPLE.

The above table clearly shows that initial increase in investment

of `100 crores has resulted in an increase of additional income
of `500 crores. i.e. the resultant increase in income is 5 times
the initial investment.

•Ex – ante saving: It refers to planned saving in an economy in a

year.

•Ex – ante investment: It refers to planned investment in an

economy in a year.

•Ex – post investment: It refers to the actual amount of

investment in an economy during a year. * Ex-post saving : It
refers to actual savings in an economy in a year
ECONOMICS
XII-(2023-24)

PART -9

VIDEO
NOTES
 PRACTICE
QUESTION
Q.1) From the following data, Calculate the (a) Consumption
expenditure and (b) Investment expenditure for the economy

Q.2) Find “Investment” from the following:

National income = ₹800
Autonomous consumption = ₹50
MPC = 0.8

Q.3) Find consumption expenditure from the following:

Autonomous consumption = ₹200
MPC = 0.75
National income = ₹1,500

Q.4) Calculate MPC from the following:

(i) Investment ₹350
(ii) Consumption expenditure at zero level income ₹20
(iii) National Income 1000.
ECONOMICS
XII-(2023-24)

PART -10

VIDEO
NOTES
Q.5) In an economy, C = 300 + 0.8Y and I = 500 (where C =
Consumption,
Y = Income, I = Investment). Calculate the following:
a)Equilibrium level of income
b)Consumption expenditure at equilibrium level of income

Q.6) If in economy, C = 500 + 0.9Y and I = 1,000 crores,

Where C = consumption expenditure, Y = National income, I =
Investment. Calculate the following:
i)Equilibrium level of income
ii)Value of investment multiplier.

Q.7) An economy is in equilibrium. The economy’s

consumption function is
C = 100 + 0.5Y
where C is consumption expenditure and Y is national
income. National income is 1000.
Find out investment expenditure,
MPS and
Investment Multiplier.

Q.8) The consumption function for an economy is

: C = 20 + 0.8Y

(assuming amount in ₹ crores). Determine the

level of income when average propensity to
consume will be one.
Q.9) Given consumption function C = 100 + 0.75Y
and investment expenditure ₹1000.

Calculate
(a) equilibrium level of national income
(b) consumption expenditure at that level.

Q.10) The saving function of an economy is given

as: S = -10 + 0.20 Y.

if the ex-ante investment are ₹240 crores,

calculate the following:
(i) Equilibrium level of income in the economy
(ii) Additional investments which will be needed
to double the present level of equilibrium
income

Q.11) The function of Saving (s) is given to be: S =

-40+0.25Y.

If planned investments are ₹100 crores,

determine:
a)Equilibrium level of income
b)Level of consumption at equilibrium
c)Savings at equilibrium
Q.12) In an economy, S = –100 + 0.6Y is the saving
function.

Where S is saving and Y is national income if

investment expenditure is ₹1100. Calculate:
(i) equilibrium level of national income.
(ii) Consumption expenditure at that level of
income

Q.13) Answer the following questions based on

the data given below:

i)Planned investment = ₹100 crore

ii)C = 50 + 0.5 Y
a)Determine the equilibrium level of income
b)Calculate the saving and consumption
expenditure at equilibrium level of National
Income.
ECONOMICS
XII-(2023-24)

PART -11

VIDEO
NOTES
 Q.14) Calculate MPC is
Investment Multiplier is 4

Q.15) In an economy, MPC = 0.75. What will be

he effect on total income if investment
increase by ₹300 crores.

Q.16) In an economy 75% of increased in income is

spend an consumption. Investment is increased
∆
by ₹1000 crore. Calculate Y (increase in
∆
income) and C (total increase in C).

Q.17) In an economy the equilibrium level of

income is ₹12000 crore. The ratio of marginal
propensity to consume and marginal propensity
to save is 3:1. Calculate additional investment
needed to reach a new equilibrium level of
income of ₹20,000 crore.
Q.18) In an economy, with every increase in
income 10% of the rise in income is saved.
Suppose a fresh investment of ₹120 crores takes
place in the economy.

Calculate (i) change in income

(ii) change in consumption.

Q.19) On the basis of consumption function C = 120

+ 0.40Y
Calculate: (i) Saving function
(ii) Determine saving at ₹500 level of income.
(iii) At what level of income saving becomes
zero?

Q.20) In an economy, an increase in investment

leads to increase in national income which is
three times more than the increase investment.
Calculate marginal propensity to consume.
Q.21) An increase of ₹250 crores in investment in
an economy resulted in total increase in income
of ₹1000 crores. Calculate the following:
(a) Marginal propensity to consume (MPC).
(b) Change in saving
(c) Change in consumption expenditure
(d) Value of multiplier.

Q.22) In an economy, investment is increased by

₹300 crore.
If marginal propensity to consume is 2/3,
calculate increase in National Income.
ECONOMICS
XII-(2023-24)

PART -12

VIDEO
NOTES
Q.23) Complete the following table:

Q.24) Complete the following table:

Q.25) The following table illustrate
the multiplier process after making
an additional investment of ₹1000
crores. Calculate missing values:

Q.26) Complete the following table:

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ECONOMICS
XII-(2023-24)

PART 1

VIDEO
NOTES
 MEANING

Government Budget is a statement of

expected receipts and expected expenditures
of the government for a fiscal year.
Every government prepares budget whether it
is local, state and central government.

First day of the month of February is well known

in India as a day the Finance Minister present
annual budget of the government called
Union Budget of India
 OBJECTIVES OF
GOVERNMENT
BUDGET
Managing Public Sector Enterprise:
There are large number of public sector
enterprises which are established and
managed for social welfare of the public.

Budget is prepared with the objective

of making various provisions
for managing such enterprise and
providing them financial help.

However in case public sector enterprises

are showing inefficiency and losses. The
govt may plan their privatization
 Economic stability:
Main objective of budget is to
bring stability in economy.
It control fluctuations in general
price level through taxes,
subsidies and government
expenditure.

for e.g. when there is inflation (continuous rise in prices)

Government can increase taxes and reduce its
expenditure.

When there is deflation (continuous fall in prices).

Government can reduce taxes and grant subsidies to
encourage spending by people.
REDISTRIBUTION OF INCOME AND WEALTH:

It means reduce the inequalities

between income and wealth. Through
the policy Government seeks to
promote “equity”. To increase the
disposable income of poor, Government
provide them subsidies.
To decrease the disposable income of rich section, tax
system is made progressive. Putting greater burden on
richer sections of the society. These are reflected in the
government budget by way of tax revenue and welfare
expenditure.
ALLOCATION OF RESOURCES:

Through the budgetary policy, government

aims to reallocate resources in
accordance with profit maximization
and social welfare. Government can
influence allocation of resources
through taxation and subsidies policy.

To encourage investment for welfare, Government can

give tax concessions and subsidies to the producers.
Government also discourage the production of harmful
consumption goods like, liquor, bidi, cigarettes,
tobacco etc. through heavy taxation and encourages
the use of “Khadi product” by way of subsidies.
ECONOMICS
XII-(2023-24)

PART 2

VIDEO
NOTES
 PRIMARY
FUNCTIONS
OF MONEY

BUDGETARY RECEIPTS BUDGETARY EXPENDITURE

(I) BUDGETARY RECEIPT

Budgetary receipts refer to total estimated money receipts of
the Government from all sources during a fiscal year.

TAX RECEIPT NON-TAX RECEIPT

1. Tax receipt: These are those
receipt of the Government which 2. Non-tax receipts: Non-tax
are received from the tax receipts are those receipts which are
received from sources other than
component (Tax source). ‘Tax’ is a
taxes. These are the following:
compulsory payment to the
government under any law. The TYPES
taxpayer cannot expect any
FINES
service or benefit from the
Government in Return. If a person FEES
fails to pay tax, he is liable to ESCHEAT
penal action. It is to be treated as
GRANTS/DONATIONS
revenue receipt because it neither
create any liability nor reduce any INCOME FROM
PUBLIC ENTERPRISES
asset of the government
INTRESTS

TYPES

DIRECT TAX

INDIRECT TAX
 TAX RECEIPT

DIRECT TAX
Direct tax are those tax, the person who bears the
burden of tax does himself deposit it with
government.

Burden of these taxes are not shiftable i.e. the

amount of tax can’t be recover from any other. These
taxes are progressive in nature.
e.g. Income tax, Corporation tax, gift tax, wealth tax,
etc.

INDIRECT TAX

Indirect tax are those tax,

the person who bears the
burden of tax does not
himself deposit it with
Government .
Burden of these taxes are
shiftable i.e. the amount of
tax can be recover from
customer. These taxes are
regressive in nature.
e.g. Goods and services tax,
custom duty, etc.
 NON-TAX RECEIPTS
(i)Fines: Fines are those payments which are made by the law
breakers to the Government by way of economic punishment. The
aim is not to earn revenue, but to make people respectful towards
the laws.

(ii)Fees: A fees is a payment to the Government for the services

that it renders to the people. e.g. Land registration fees, birth
registration fees, passport fees, court fees, license fees, etc. It is to
be noted that fee is not a payment for commercial service. It is a
payment for administrative and judicial services provided to the
people.

(iii) Escheat: It refers to income of the state which arises out of the
property left by the people without a legal heir.

(iv) Grants/ Donations: Grants received by the Government are

also a source in revenue. In the event of some natural calamities
like floods, famine, earthquake, or during wars. It also includes
donations received from citizens and non residents and rest of the
world.

(v) Income from public enterprises: Several enterprises are

owned by the Government e.g. Indian Railways, Indian Oil, Bhilai
Steel Plant, LIC, BHEL, etc.

(vi) Interest: Interest received by the government on loans are

considered as a revenue receipts.
 (B) CAPITAL RECEIPTS

These receipts are those receipts of the Government which

leads to creation of any liabilities the government or
reduction in any assets of the government.

BORROWING AND
RECOVERY OF LOAN OTHER LIABILITIES

DISINVESTMENT (PSU)

(i)Recovery of loan: Loan offered to others are assets of

the Government Accordingly recovery of loan cause
reduction in assets.

(ii)Disinvestment (PSU): Disinvestment occurs due to the

privatization.
It means sale of share of public sector undertaking to
private corporate sector. It reduces the assets of
Government

(iii) Borrowings & other liability: Government borrow

money from general public by issuing share / securities,
from RBI, from Rest of the world, it create liabilities of the
Government. Borrowings are debt creating capital
receipts.
ECONOMICS
XII-(2023-24)

PART 3

VIDEO
NOTES
 REVENUE
STOCK CAPITAL
FLOW
These are those
These are those receipts
receipts of the
1. MEANING
government which of the government which
don’t leads to leads to reduction in any
reduction in any assets or creation of any
assets nor creation of liabilities
any liabilities

2. NATURE These are recurring in These are non recurring

nature. in nature.

Revenue receipts Some capital

3.DEBT receipts like
are not debt
CREATION borrowing are debt
creating
creating

Tax receipts, fees, Recovery of loans,

4.EXAMPLES fines, interest, disinvestments (PSU) &
penalties, etc. borrowings.
 PRACTICE
QUESTION
Q.1) Classify the following into Revenue Receipts &
Capital Receipts, give reason.
(i) Loan from world bank
(ii) Corporation tax
(iii) Sale of shares held by Government of a PSU.
(iv) Dividend Received by Government from a company.
(v) Profit of LIC, a public enterprise.
(vi) Amount borrow from Japan for bullet train.
(vii) Goods & Service Tax collection
(viii) Recover amount of loan from Bhutan.

Q.2) Classify the following into debt creating and non-

debt creating capital receipt. Give reasons.
(i) Sale of public sector undertakings.
(ii) Borrowings from public
(iii) Recovery of loans

FORMULAE
FORMULAE:

TOTAL RECEIPTS = REVENUE RECEIPTS + CAPITAL RECEIPTS

REVENUE RECEIPTS = TAX REVENUE + NON TAX REVENUE

TAX REVENUE = DIRECT TAX + INDIRECT TAX

CAPITAL RECEIPTS = RECOVERY OF LOANS +

DISINVESTMENT + BORROWINGS
 (II) BUDGETARY EXPENDITURE

It refers to the total estimated expenditure

of the government over a fiscal year

REVENUE CAPITAL

(A)Revenue expenditure: These are those expenditure of

the government which do not create any asset nor
reduction in liability of the government.
Examples: Old age pension, subsidy, scholarship, salaries
to Government employees, interest payment, gifts, grants,
donation any type, expense on defense service, wage bill
of the government, expenditure on collection of taxes, etc.
These all are revenue expenditure because they do not
create any assets nor reduction in any liabilities of the
government.

(B) Capital expenditure: These are those expenditure of

the government which leads to reduction in liabilities of
the government or creation of any Assets of the
government
Examples: Repayment of loan, equity shares of the
domestic or multinational, corporations purchased by the
Government Expenditure on land and Building, Machinery,
equipment, construction of school, flyover, hospitals,
college, etc.
 REVENUE
STOCK CAPITAL
FLOW
These are those
These are those
expenditure of the
1. MEANING expenditures of the
government which
government which leads
don’t leads to
to creation of any assets
creation of any assets
or reduction of any
nor reduction of any
liabilities.
liabilities.

2. NATURE These are recurring in These are non recurring

nature. in nature.

These are incurred These are incurred

3.PURPOSE on normal on acquisition of
functioning of the assets and granting
government loans

Interest, subsidies, Acquisition of

expense on machinery,
4.EXAMPLES collection of taxes, construction of school,
donation, pensions, hospital, building,
etc repaid loans, etc.
 PRACTICE
QUESTION
Q.1) Giving reasons categories the following into revenue
and capital expenditure:
(i) Grants given to state government
(ii) Repayment of loans.
(iii) Expenditure on construction of roads.
(iv) Interest payment on past loans.
(v) Payment of salaries to Government employees.
(vi) Taking over a private firm by the Government
(vii) Expenditure on subsidies.
(viii) Purchase of shares by the Government
ECONOMICS
XII-(2023-24)

PART 4

VIDEO
NOTES
 Situation in Government Budget

(i) Balanced budget / Equilibrium Budget: It is a

situation when budgetary expenditure is equal to
budgetary receipts.

TR = TE

(ii) Surplus Budget: It is a situation when budgetary

receipts are greater than budgetary expenditure. In
situation of inflation, surplus budget is prepared by
the government.

TR > TE

(iii) Deficit Budget: It is a situation when budgetary

expenditures are greater than budgetary receipt. In
situation of deflation, deficit budget is prepared by
the government.

TE > TR
REVENUE DEFICIT FISCAL DEFICIT PRIMARY DEFICIT

BUDGETARY DEFICIT = TOTAL EXPENDITURE – TOTAL RECEIPTS

(i) Revenue deficit: It is the excess of revenue

expenditures over revenue receipts.
RD = RE – RR, Here (RE > RR)

IMPLICATIONS OF REVENUE DEFICIT

Since revenue receipts and revenue expenditures
are related largely to recurring expenses of the
Government (as on administration & maintenance)
High revenue deficit gives a warning signal to the
government either to cut its expenditure or increase
its tax/non tax receipts. In less developed countries
like India, it is difficult to force the poor people to
pay high tax. In such situation, the Government is
compelled to cope with high revenue deficit through
borrowings or disinvestment. Borrowings creates
liability of the Government whereas disinvestment
cause reduction in assets of the Government
(ii) Fiscal deficit: It is the excess of Total
expenditure over Total receipts other than
borrowings.
i.e. Fiscal deficit is equal to borrowings of the
Government Fiscal deficit =
TE – TR (excluding borrowings)
⇒ Fiscal deficit = Total expenditure – Revenue
Receipts – Capital receipts excluding Borrowings
⇒ Fiscal deficit = (RE + CE) – RR – Recovery of loan –
Disinvestment
⇒ Fiscal deficit = Budgetary deficit + Borrowing &
Other liabilities

IMPLICATIONS OF FISCAL DEFICIT

Greater fiscal deficit implies greater borrowings by

the Government.
(a)It causes Inflation: Government borrowings
includes borrowing from RBI.
It increases circulation of money in economy and
cause inflation.
(b) Increase foreign dependence: Government also
borrows from rest of the world. It increases our
dependence on other countries.
(c) It accumulates financial burden for future
generation to repay the loan with interest.
(d) Increase in fiscal deficit implies increase in
borrowings i.e. ultimately leads to increase in
interest expenditure i.e. increase in revenue deficit
also. It is also called Debt Trap.
(iii) Primary Deficit: It is the difference between
fiscal deficit and interest payment
Primary Deficit = Fiscal deficit – Interest payment
While fiscal deficit shows borrowings
requirement of the Government including of
interest payment on the accumulated national
debt. Primary deficit shows borrowing
requirement of the Government exclusive of
interest payment.
Tax Receipt = Direct Tax + Indirect Tax

PRACTICE
QUESTION
Q.1. How can the deficit in budget be financed?
(i) Deficit financing: This refers to borrowing by
Government from RBI against Treasury Bills. RBI
purchase the Bill in Return of Cash, which the
Government uses to fund the deficit.
(ii) Borrowing from public.
(iii) Disinvestment
(iv) Government should reduces its expenditure and
increase tax & non tax revenue
ECONOMICS
XII-(2023-24)

PART 5

VIDEO
NOTES
 PRACTICE
QUESTION
Q.1. FIND OUT (A) FISCAL DEFICIT AND (B) PRIMARY DEFICIT.

Q.2) FROM THE FOLLOWING DATA, CALCULATE (A)

REVENUE DEFICIT; (B) FISCAL DEFICIT
 Q.3) GIVEN THE FOLLOWING DATA ESTIMATE THE VALUE
OF: (I) REVENUE DEFICIT; (II) FISCAL DEFICIT:

Q.4) FROM THE FOLLOWING INFORMATION DETERMINE: (A)

CAPITAL EXPENDITURE, (B) TOTAL EXPENDITURE AND (C) INTEREST
PAYMENTS.

Q.5) CALCULATE (I) REVENUE DEFICIT (II) FISCAL DEFICIT (III)

PRIMARY DEFICIT.
Q.6) IF THE BUDGETARY DEFICIT OF THE
GOVERNMENT IS ₹50,000 CRORES AND THE
BORROWINGS AND OTHER LIABILITIES AND ₹14,000
CRORES, HOW MUCH WILL BE THE FISCAL DEFICIT?

Q.7) REVENUE DEFICIT IS ESTIMATED TO BE ₹20,000

CRORES, AND BORROWING IS ESTIMATED TO BE
₹15000 CRORE. IF EXPENDITURE ON INTEREST
PAYMENT IS ESTIMATED TO BE 50% OF THE REVENUE
DEFICIT FIND FISCAL DEFICIT AND PRIMARY DEFICIT

Q.8) FIND BORROWINGS BY THE GOVERNMENT IF

PAYMENT OF INTEREST IS ESTIMATED TO BE OF
₹15,000 CRORE WHICH IS 25% OF PRIMARY DEFICIT.

Q.9) CALCULATE (I) REVENUE DEFICIT (II) FISCAL DEFICIT (III)

PRIMARY DEFICIT
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ECONOMICS
XII-(2023-24)

PART 1

VIDEO
NOTES
 MEANING
Foreign exchange rate refers to the rate at
which one unit of foreign currency can be
exchanged for number of units in domestic
currency.

OR

It is the price paid in domestic currency in

order to get one unit of foreign currency.
 MANAGED FLOATING
FIXED EXCHANGE RATE SYSTEM
RATE SYSTEM
FLEXIBLE (OR)
FLOATING EXCHANGE
RATE SYSTEM

1. FIXED EXCHANGE RATE SYSTEM

Gold standard system of exchange:

According to this system before 1920’s gold was
taken as common unit of exchange between the
currencies of different countries. Each country
was to define value of its currency in terms of
gold. Accordingly value of one currency in terms
of the other currency was fixed considering gold
value of each currency. e.g. 1 UK £ = 4 gm gold, 1
US $ = 2 gm gold then 1 UK £ = 2 US $ (exchange
ratio between UK and US)

This system is also known as mint par value of

exchange or mint parity.
 Bretton woods system of exchange
According to this system US $ was taken as
common unit of exchange between the currency
of different countries. Different currencies are
related to one currency i.e. US $ (dollar). Each
country was to define value of its currency in
terms of US Dollar.
It is also called Adjustable peg system of
exchange.

MERITS DE-MERITS
a)Stability in the
exchange rate a)Huge Gold reserve
required
b)Promotes
international Trade b)Difficulty in fixing
and investment the exchange rate

c)Prevent speculative c)Problem of

activities undervaluation and
overvaluation
d)No free Market
 FLEXIBLE (OR)
FLOATING EXCHANGE
RATE SYSTEM

It is the rate which is determined by the demand

for and supply of different currencies in the
foreign exchange market. In other words, flexible
exchange rate is determined by the market
forces. The exchange rate at which demand for
foreign currency is equal to supply of foreign
currency is called equilibrium rate or normal rate
or par rate of exchange. It is a flexible rate
because it tends to change in accordance with
changes in the demand and supply for different
currencies in the foreign exchange market

MERITS DE-MERITS
a)Equilibrium level is
determined a)Instability in the
b)No need of huge exchange rate
Gold reserves b)Speculative
activities
c)Free Market, No c)Creates
Unwanted Control of inflationary situation
Government d)Risk of Foreign
Trade and Foreign
d)No problem of investment
undervaluation &
Overvaluation
 MANAGED FLOATING
RATE SYSTEM

It is a system in which exchange rate is

determined by the market forces of demand and
supply in international money market, but when
domestic currency is heavily depreciating then
Reserve Bank of India Intervenes to place some
influence on the exchange rate so that it remains
with in the desired limits. It is also known as ‘Dirty
floating’. Here RBI sells foreign exchange in
international money market. So that supply of
foreign exchange increases managed floating is
a hybrid of a fixed exchange rate and a flexible
exchange rate system.
 DEMAND FOR FOREIGN EXCHANGE
(OR)
Why foreign exchange is Demanded
(OR)
What are the sources of demand for
foreign exchange?

1. To purchase goods and services from other countries.

2. To purchase assets (like land, shares, bond, etc.) in
other countries.
3. Payment of international loans.
4. Gift and grants sent to rest of the world.
5. Foreign exchange is needed to undertake foreign
tours.

There is an inverse relationship

between Demand for foreign
exchange and foreign exchange rate.

Increase in foreign exchange rate

leads to decrease in demand for
foreign exchange and vice-versa
 SUPPLY FOR FOREIGN EXCHANGE
(OR)
Why foreign exchange is Supplied?
(OR)
What are the sources of supply of
foreign exchange?

1. Export of the country to rest of the world.

2. Foreign direct investment (FDI).
3. Gift / donation / Remittance received from foreign
countries.
4. Supply of foreign exchange also comes when foreign
tourists come in to Home Country

There is a Direct relationship between

supply of foreign exchange and foreign
exchange rate.

Increase in foreign exchange rate leads

to increase in supply of foreign
exchange and vice-versa
 EQUILIBRIUM RATE OF EXCHANGE

It is the rate at which demand for foreign

exchange and supply of foreign exchange are
equal. In the given diagram, X axis represents
demand and supply of foreign exchange and
Y axis represents foreign exchange rate. ‘DD’
shows Demand Curve of foreign exchange
and curve ‘SS’ shows Supply of foreign
exchange. Point ‘e’ stands for equilibrium
point where Demand ‘DD’ is equal to supply
SS. OR is the equilibrium rate of exchange
and OQ is the equilibrium quantity
ECONOMICS
XII-(2023-24)

PART 2

VIDEO
NOTES
 DEPRECIATION OF DOMESTIC CURRENCY
(OR) APPRECIATION OF FOREIGN CURRENCY

It refers to decrease in the value of domestic

currency in terms of foreign currency. Here
Domestic Currency is less valuable. e.g. $1 =
₹70 (Old stage) $1 = ₹80 (New stage) In the
above example Indian rupee is less valuable. In
old stage ₹70 is required to buy one US dollar
and in new stage to buy one US dollar we have
to pay ₹80. This shows that domestic currency is
less valuable.
 (i) Increase in demand for foreign currency.

An increase in demand for foreign exchange leads

to raise in foreign exchange rate. In the given
diagram as Demand increases from DD to D′D′ then
exchange rate increases from OR to OR′.

(ii) Decrease in supply of

foreign currency.

A decrease in supply of
foreign exchange leads to
raise in foreign exchange
rate. In the given diagram
as supply decreases from SS
to S′S′ then exchange rate
increases from OR to OR′.
 Effects of Depreciation of
Domestic Currency on Exports
Depreciation of domestic currency means a fall
in the price of domestic currency (say rupee) in
terms of a foreign currency (say US dollar). It
means one dollar can be exchanged for more
rupee. So with the same amount of dollar more
goods can be purchased from India. It means
export to USA becomes cheaper. This may result
an increase of Indian export to USA

Effects of Depreciation of
Domestic Currency on Imports

Depreciation of domestic currency means fall in

the price of domestic currency (say rupee) in
terms of a foreign currency (say US dollar). It
means one dollar can be exchange for more
rupee so with the same amount of rupee less
goods can be purchased from USA. It means
import from USA is expensive. This may results
decrease in imports from USA
 APPRECIATION OF DOMESTIC CURRENCY
(OR) DEPRECIATION OF FOREIGN CURRENCY

It refers to increase in the value of domestic

currency in terms of foreign currency. e.g. $ 1 =
₹80 (old stage) $ 1 = ₹70 (new stage) In the
above example, Indian rupee is more valuable
in old stage ₹80 is required to buy one US
dollar and in new stage to buy one US dollar we
have to pay only ₹70. This shows that domestic
currency is more valuable.
 (i) Increase in supply of foreign currency. An
increase in supply of foreign exchange leads to
fall in foreign exchange rate. In the given
diagram as supply increases from SS to S′S′ then
exchange rate decreases from OR to OR′

(ii) Decrease in Demand for

foreign currency

A decrease in demand of
foreign exchange leads to fall
in foreign exchange rate. In
the given diagram as Demand
decrease from DD to D′D′
then exchange rate
decreases from OR to OR′.
 Effects of Appreciation of
Domestic Currency on Exports
Appreciation of domestic currency means a fall
in price of foreign currency (Say US dollar) in
terms of domestic currency (say rupee). It means
foreigners have to spend more for purchase
goods from India. So with the same amount of
dollar less goods can be purchased from India. It
means export to USA becomes expensive. This
may result a decrease of Indian export to USA.

Effects of Appreciation of
Domestic Currency on Imports

Appreciation of domestic currency means a fall in

price of foreign currency (say US dollar) in terms
of domestic currency (say rupee). It means Indians
have to spend less for purchase goods from
abroad. So with the same amount of rupee more
goods can be purchased from abroad. It means
import from USA becomes cheaper. This may
result an increase in Indian imports from USA
 DEVALUATION
STOCK DEPRECIATION
CAPITAL
FLOW

It refers to fall in
It refers to fall in price of
1. MEANING price of domestic
domestic currency under
currency under fixed
flexible exchange rate
exchange rate
system.
system

2. CONTROL It is under the control of market

It is under the control
of Government. forces of demand and supply

It was in fixed It is in flexible

3.EXCHANGE
RANGE exchange rate exchange rate
SYSTEM system. system
 FOREIGN EXCHANGE MARKET

It is a market for foreign currencies i.e. here foreign

currencies are purchases and sold.

FUNCTIONS OF FOREIGN EXCHANGE MARKET.

(i) International transfer of foreign currency:

Foreign exchange market helps in transferring foreign
currency from one country to another where it is
needed.

(ii) Provide credit for foreign trade: Foreign

exchange market provides credit for foreign trade.

(iii) Hedging foreign exchange risk: Hedging

means covering exchange risk. It is done by foreign
exchange rate in forward transactions through banks.
Foreign exchange market makes a contract to buy or
sell foreign exchange in advance to pay in future
date at predetermined price
 FOREX MARKET

(ii) Forward
(i)Spot MarketMarket:
It(Current
is thatmarket):
market which
handles
It is that such market
transactions
which
of foreign only
handles exchange which
spot/current
are meant for
transactions. future
It operates
delivery. It does transactions.
daily nature not deal in
spot
The ratetransactions.
of exchange which It
determines
is determineda in rate of
the spot
exchange
market isforknown
futureascalled
spot
forward exchange rate.
rate of exchange

(ii)
(ii)Forward
ForwardMarket:
Market:
ItIt isis that
that market
market which
which
handles
handles such such transactions
transactions
ofof foreign
foreign exchange
exchange which
which
are
are meant
meant for for future
future
delivery.
delivery.ItItdoes
doesnot
notdeal
dealinin
spot
spot transactions.
transactions. ItIt
determines
determines aa rate rate of of
exchange
exchange for for future
future called
called
forward
forwardexchange
exchangerate.
rate.
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ECONOMICS
XII-(2023-24)

PART 1

VIDEO
NOTES
Balance of Trade:
It is the difference between the value of
goods exported and value of goods
imported.
BOT = Export value – Import value
[Only Tangible/ Visible goods]
It is a Narrow concept as Compared to
Balance of payments.
 It is a statement that records all
economic transactions of a country
with rest of the world.

Visible items: It includes all types of physical goods

exported & imported. These are seen crossing the
borders. e.g. Machines and many other tangible
goods.

Invisible items: Which include all types of services.

These are invisible like Banking Services, shipping
services, insurance services, etc.

Unilateral transfers: These are one way transfers

of money, goods or services from one country to
another. These are transfer for free e.g. gifts, grants,
donations, aid to flood victims, etc.

Capital transfers: Which are connected with

capital receipts and capital payments. These
involves transfer of capital Assets
 CURRENT CAPITAL
ACCOUNT IN BOP ACCOUNT IN BOP
CURRENT ACCOUNT IN BALANCE OF PAYMENT

It is that account in BOP which records export

and import of goods, services and unilateral
transfers.

Export and import of goods

It records export and import of tangible
goods like Machineries etc. (visible items).
All export of goods are recorded as credit
item or (+) items as these results inflow of
foreign exchange in to our country. While
all import of goods are recorded as debit
item or (–) items as these results outflow of
foreign exchange from our country
 Export & import of services
It records export and import of services i.e.
invisible items. Which is not seen as
crossing the borders. Services are split into
two components (i) factor services
(ii) non factor services.
Factor services involve payments in terms
of income like compensation of employees.
Non-factor services like shipping,
insurance, banking, involve payments in
terms of revenue. So all export of services
are recorded as credit item or (+) items as
these results inflow of foreign exchange
where as all import of services are
recorded as debit item or (–) item because
it results outflow of foreign exchange
 UNILATERAL TRANSFERS
It also records current transfers. It refers to
“transfer for free” these are unilateral
transfers by way of gift, grant, donations
etc. So receipt of unilateral transfers are
recorded as credit item or (+) items
because it results inflow of foreign
exchange in to our country. Whereas
payment of unilateral transfers are
recorded as debit item or (–) items
because it results outflow of foreign
exchange from our country.
 NET VALUE

Net value of these 3 items :-

(i) visible
(ii) invisible
(iii) unilateral transfers

are recorded current account in BOP

 CAPITAL ACCOUNT IN BALANCE OF PAYMENT

It is that account of BOP which records all

such transactions between resident of a
country and rest of the world which cause a
change in Assets or liabilities of the Resident
of a country or its government.

FOREIGN CHANGE IN FOREIGN

EXCHANGE RESERVES
INVESTMENTS
BORROWINGS / LOANS
 FOREIGN
INVESTMENTS

FOREIGN INVESTMENT HAS TWO SUB

COMPONENT:

(a)Foreign direct investment (FDI): It refers to

the purchase of assets in the rest of the world
which allows control over that assets. e.g.
Purchase of a firm by TATA in rest of the world.
After purchase TATA has full control over that firm.

(b)Portfolio investment (foreign institutional

investment): It refers to purchase of an asset in
rest of the world, without having any control over
that asset. e.g. Purchase of some shares of a
foreign company by TATA, FDI and Portfolio
investment are non-debt creating capital
transactions. FDI or portfolio investment by the
non-residents in our country is recorded as credit
item or (+) items because it results inflow of
foreign exchange in to our country whereas, FDI or
Portfolio investment by resident in rest of the
world is recorded as debit item or (–) items
because it results outflow of foreign exchange
from our country
 BORROWINGS /
LOANS

(ii) Borrowings / Loans has two sub

components.

(a)Commercial Borrowings: It refers to

borrowings by a country (including government
& private sector) from international money
market.

(b)Borrowing from international monetary

fund (IMF): It refers to borrowing by a country
with consideration. It involves lower rate of
interest as compared to market rate. All the
borrowings are debt creating capital
transactions loan from rest of the world are
recorded as credit side, (+) items because this
leads to inflow of foreign exchange in our
country. Whereas loan to rest of the world is
recorded as debit side, (–) items because
outflow of foreign exchange from our country.
 CHANGE IN FOREIGN
EXCHANGE RESERVES

(iii) Change in foreign exchange reserves/

Official reserves: Foreign exchange reserves
are the financial assets held as reserve by a
Central Bank in foreign currencies. A change in
foreign exchange reserve affects the balance
of payments. Any withdrawn from the reserve
are considered as a credit item or (+) item and
any addition to these reserves are considered
as a debit item or (–) item. Net value of these
items (foreign investment and borrowings) is
recorded as balance in capital account.
ECONOMICS
XII-(2023-24)

PART 2

VIDEO
NOTES
Equilibrium in BOP: Current account balance
+ Capital account balance = 0

There is no movement of official reserves of

the Central Bank.
i.e. inflow of foreign exchange = outflow of
foreign exchange.

Disequilibrium in BOP: When current account

Balance + Capital account Balance is not equal
to zero. (It may be Positive and Negative).

(i)Surplus BOP: Here autonomous receipts are

more than the autonomous payments.
(ii)Deficit BOP: Here autonomous receipts are
less than the autonomous payments.

BOP is always balances, in case there is

imbalance, it is corrected through
accommodating transactions.
 AUTONOMOUS
STOCK ACCOMMODATING
FLOW
TRANSACTION TRANSACTIONS
Autonomous items refers Accommodating items refer
to those international to those transaction which
Transactions which occur take place to cover deficit or
due to some economics surplus in autonomous
motive such as profit transactions. e.g. withdrawal
maximization eg. Import from foreign exchange
of machinery from Japan, reserve, loan from IMF, etc.
FDI, etc. to maintain BOP

These items are These items are

independent in nature dependent in nature

These item take place These item take place

on both current and only on capital account
capital account

These items are also These items are also

known as above the line known as below the line
items as they are items, as they are
recorded as first item recorded as secondary
before calculating item after calculating
deficit or surplus in BOP deficit or surplus in BOP
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