The non-tax revenue in the following is
State the different phases of changes in Total Product and Marginal Product in the Law of Variable Proportions. Also show the same in a single diagram.
The law of variable proportions state that as the quantity of one factor is increased, keeping the other factors fixed, the marginal product of that factor will eventually decline. This means that up to the use of a certain amount of variable factor, marginal product of the factor may increase and after a certain stage it starts diminishing.
Assumptions of Law of Variable Proportions:
1. Constant State of Technology: First, the state of technology is assumed to be given and unchanged. If there is an improvement in the technology, then the marginal product may rise instead of diminishing.
2. Fixed Amount of Other Factors: Secondly, there must be some inputs whose quantity is kept fixed. It is only in this way that we can alter the factor proportions and know its effects on output. The law does not apply if all factors are proportionately varied.
3. Possibility of Varying the Factor proportions: Thirdly, the law is based upon the possibility of varying the proportions in which the various factors can be combined to produce a product. The law does not apply if the factors must be used in fixed proportions to yield a product.
Behaviour of TP
|I||Stage of increasing return||
TP increases at an
|From 0 to point F|
|II||Stage of diminishing return||
Increases at a decreasing
|From F to point H|
|III||Stage of negative return.||TP starts to fall||From H onwards|
The whole production phase can be distinguished into three different production stages.
Ist Stage: Increasing Returns to a Factor
This stages starts from the origin point O and continues till the point of inflexion (F) on the TP curve. During this phase, TP increases at an increasing rate and is also accompanied by rising MP curve. The MP curve attains its maximum point corresponding to the point of inflexion. Throughout this stage, AP continues to rise.
IInd Stage: Diminishing Returns to a Factor
This stage starts from point F and continues till point H on the TP curve. During this stage, the TP increases but at a decreasing rate and attains its maximum point at H, where it remains constant. On the other hand, the MP curve continues to fall and cuts AP from its maximum point S, where MP equals AP. When TP attains its maximum point, corresponding to it, MP becomes zero. AP, in this stage initially rises, attains its maximum point at S and thereafter starts falling
IIIrd Stage: Negative Returns to a Factor
This stage begins from the point H on the TP curve. Throughout this point, TP curve is falling and MP curve is negative. Simultaneously, the AP curve continues to fall and approaches the x-axis (but does not touch it).
Borrowing in government budget is
Deficit in taxes
Fiscal deficit: The fiscal deficit is defined as the excess of government revenue over government expenditure. Hence borrowing in government budget is a fiscal deficit.
Why is the equality between marginal cost and marginal revenue necessary for a firm to be in equilibrium? Is it sufficient to ensure equilibrium? Explain.
Equilibrium refers to a state of rest when no change is required. A firm (producer) is said to be in equilibrium when it has no inclination to expand or to contract its output. This state either reflects maximum profits or minimum losses.
According to MC=MR approach, As long as MC is less than MR, it is profitable for the producer to go on producing more because it adds to its profits. He stops producing more only when MC becomes equal to MR.
When MC is greater than MR after equilibrium, it means producing more will lead to decline
Both the conditions are needed for Firm’s Equilibrium:
1. MC = MR:
MR is the addition to TR from sale of one more unit of output and MC is addition to TC for
increasing production by one unit. Every producer aims to maximize the total profits. For
this, a firm compares it’s MR with its MC. Profits will increase as long as MR exceeds MC
and profits will fall if MR is less than MC. So, equilibrium is not achieved when MC < MR
as it is possible to add to profits by producing more. Producer is also not in equilibrium
when MC > MR because benefit is less than the cost. It means, the firm will be at
equilibrium when MC = MR.
2. MC is greater than MR after MC = MR output level:
MC = MR is a necessary condition, but not sufficient enough to ensure equilibrium. Only
that output level is the equilibrium output when MC becomes greater than MR after the
It is because if MC is greater than MR, then producing beyond MC = MR output will reduce
profits. On the other hand, if MC is less than MR beyond MC = MR output, it is possible to
add to profits by producing more. So, first condition must be supplemented with the
second condition to attain the producer’s equilibrium.
What is 'aggregate supply' in macroeconomics?
Aggregate supply is the total supply of goods and services produced within an economy at a given overall price level in a given time period. In other words, supply refers to the total output produced in the country or the total national product of the country at a given level of employment.
If Real GDP is Rs. 200 and Price Index (with base = 100) is 110, calculate Nominal GDP.
Real GDP = (Nominal GDP/ Price Index of Current Year)*100 = Rs 200 (given)
Price index = 110
Hence, 200 = (Nominal GDP/110)* 100
Therefore, Nominal GDP = (200*110)/100 = 220
Market for a good is in equilibrium. The demand for the good 'increases'. Explain the chain of effects of this change.
Equilibrium is defined as a situation where the plans of all consumers and firms in the market match and the market clears. When the supply and demand curves intersect, the market is in equilibrium. This is where the quantity demanded and quantity supplied are equal. The corresponding price is the equilibrium price or market-clearing price, the quantity is the equilibrium quantity.
Suppose D1 and S1 are the initial market demand curve and the initial market supply curve, respectively. The initial equilibrium is established at point E1, where the market demand curve and the market supply curve intersects each other. Accordingly, the equilibrium price is OP1 and the equilibrium quantity demanded is Oq1.
Now, if there is an increase in the market demand, the market demand curve shifts parallely rightwards to D2 from D1, while the market supply curve remains unchanged at S1. This implies that at the initial price OP1, there exist excess demand equivalent to (Oq'1 - Oq1) units. This excess demand will increase competition among the buyers and they will now be ready to pay a higher price to acquire more units of the good. This will further raise the market price. The price will continue to rise till it reaches OP2. The new equilibrium is established at point E2, where the new demand curve D2 intersects the supply curve S1.
Hence, an increase in demand with supply remaining constant, results in rise in the equilibrium price as well as the equilibrium quantity.
Other things remaining unchanged, when in a country the price of foreign currency
rises, national income is (choose the correct alternative)
Likely to rise
Likely to fall
Likely to rise and fall both
Likely to rise
Likely to rise: As export is one of the main component of National Income, which
increases as a result of rise in foreign currency price, there is likely an increase in the
Name the broad categories of transactions recorded in the 'capital account' of the Balance of Payments Accounts.
Name the broad categories of transactions recorded in the 'current account' of the Balance of Payments Accounts.
The Balance of Payments (Bop) records the transactions in goods, services and assets between residents of a country with the rest of the world for a specified time period typically a year.
Capital account of BoP records public and private investment, and lending activities. It is the net change in foreign ownership of domestic assets.
The following are the three broad categories of transactions recorded under capital account
1. Foreign Investment – Foreign investment is bifurcated into Foreign Direct Investment
(FDI) and portfolio investment. FDI is the act of purchasing an asset and at the same time acquiring control on it. The FDI can be in the form of inflow of investment (credit) and outflow in the form of disinvestments (debit) or abroad in the reverse manner.
Portfolio investment is the acquisition of an asset, without control over it. Portfolio investment comes in the form of Foreign Institutional Investors (FIIs), offshore funds and Global Depository Receipts (GDRs) and American Depository Receipts (ADRs).
2. Loans and Borrowings - Loans are further classified into external assistance, medium and long-term commercial borrowings and short-term borrowings. Loans and borrowings by a country from the foreign countries or from the international money market are recorded in the Capital Account of the BOP. These borrowings can be in the form of commercial borrowings or in the form of assistance. When a country borrows with the consideration of assistance, the transaction would involve a lower rate of interest as compared to the prevailing market rate of interest. As against this, commercial borrowings involve open market rate of interest. Loans and borrowings result in inflow of foreign exchange into the country. Hence, they are recorded as positive items in the Capital Account of BOP. Unlike FDI and Portfolio Investments, loans and borrowings are debt creating capital transactions.
3. Banking Capital Transactions- Banking capital comprises external assets and liabilities of commercial and government banks authorized to deal in foreign exchange, and movement in balance of foreign central banks and international institutions like, World Bank, IDA, ADB and IFC maintained with RBI. Non-resident (NRI) deposits are an important component of banking capital.
Current account refers to an account which records all the transactions relating to export and import of goods and services and unilateral transfers during a given period of time. Current account contains the receipts and payments relating to all the transactions of visible items, invisible items and unilateral transfers.
Components of Current Account: The main components of Current Account are:
1. Export and Import of Goods (Merchandise Transactions or Visible Trade):
A major part of transactions in foreign trade is in the form of export and import of goods (visible items). Payment for import of goods is written on the negative side (debit items) and receipt from exports is shown on the positive side (credit items). Balance of these visible exports and imports is known as balance of trade (or trade balance).
2. Export and Import of Services (Invisible Trade):
It includes a large variety of non- factor services (known as invisible items) sold and purchased by the residents of a country, to and from the rest of the world. Payments are either received or made to the other countries for use of these services.
Services are generally of three kinds:
(b) Banking, and
Payments for these services are recorded on the negative side and receipts on the positive
3. Unilateral or Unrequited Transfers to and from abroad (One sided Transactions):
Unilateral transfers include gifts, donations, personal remittances and other ‘one-way’ transactions. These refer to those receipts and payments, which take place without any service in return. Receipt of unilateral transfers from rest of the world is shown on the credit side and unilateral transfers to rest of the world on the debit side.
4. Income receipts and payments to and from abroad:
It includes investment income in the form of interest, rent and profits.