Topics
National Income and Related Aggregates
- Macroeconomics Vs Microeconomics
- Representative Goods and Sectors
- Macroeconomic Agents and Government Role
- Emergence of Macroeconomics
- Context of the Present Book of Macroeconomics
- Meaning of Economic Wealth and Final Goods
- Stocks, Flows, and Depreciation
- Capital Formation, Trade-off & Circular Flow of Income
- Circular Flow of Income and Methods of Calculating National Income
- Output Method/Product Method
- Expenditure Method
- Income Method
- Factor Cost, Basic Prices and Market Prices
- Some Macroeconomic Identities
- National Disposable Income
- Private Income
- National Income Aggregates
- Real GDP and Nominal GDP
- GDP and Welfare
Introductory Macroeconomics
Introduction
- A Simple Economy
- Central Problems of an Economy
- Concepts of Production Possibility Frontier
- Organisation of Economic Activities
- Positive and Normative Economics
- Macroeconomics Vs Microeconomics
Development Experience (1947-90) and Economic Reforms since 1991
- India's Economy Before Independence
- Low Level of Economic Development Under the Colonial Rule
- Agricultural Sector in India
- Industrial Sector
- Foreign Trade of India
- Demographic Condition
- Occupational Structure
- Infrastructure
- Post-Independence Economic Systems and Planning
- Five Year Plans (FYP)
- Agriculture
- Industry and Trade
- Trade Policy: Import Substitution
- The 1991 Economic Crisis and Reforms
- Background of the New Economic Policy
- Liberalisation
- Privatisation
- Globalisation
- World Trade Organisation (WTO)
- Impact of the Economic Reforms
Current Challenges Facing Indian Economy
- Concept of Human Capital
- Sources of Human Capital
- Human Capital and Economic Growth
- Human Capital and Human Development
- State of Human Capital Formation in India
- Growth of Education Sector in India
- Challenges and Future Prospects in Education
- Rural Development in India
- Credit and Marketing in Rural Areas
- Agricultural Market System
- Diversification into Productive Activities
- Sustainable Development and Organic Farming
- The Nature and Importance of Work in Society
- Workers and Employment
- Participation of People in Employment
- Self-employed and Hired Workers
- Employment in Firms, Factories and Offices
- Growth and Changing Structure of Employment
- Informalisation of Indian Workforce
- Concept of Unemployment
- Government and Employment Generation
- Environment and Sustainable Development in India
- State of India’s Environment
- Concept of Sustainable Development
- Strategies for Sustainable Development
Money and Banking
- Concept of Money
- Functions of Money
- Demand for Money and Supply of Money
- Money Creation by Banking System
- Limits to Credit Creation and Money Multiplier
- Policy Tools To Control Money Supply
- Demand and Supply for Money : A Detailed Discussion
- The Transaction Motive
- The Speculative Motive
- Various Measures of Supply of Money
- Narrow and Broad Money
- Demonetisation
Theory of Consumer Behaviour
- Consumer Behaviour: The Problem of Choice
- Basic Concepts of Microeconomics > Utility
- Cardinal Approach (Utility Analysis)
- Derivation of Demand Curve in the Case of a Single Commodity
- Ordinal Utility Analysis/Indifference Curve Analysis
Indian Economic Development
Determination of Income and Employment
- Aggregate Demand and Its Components
- Consumption
- Investment
- Determination of Income in Two-sector Model
- Determination of Equilibrium Income in the Short Run
- Macroeconomic Equilibrium with Price Level Fixed
- Effect of an Autonomous Change in Aggregate Demand on Income and Output
- The Multiplier Mechanism
- Paradox of Thrift
- Equilibrium Output and Employment
Development Experience of India – a Comparison with Neighbours
Introductory Microeconomics
Production and Costs
- Production Function
- Basics of Production Theory
- Variation of Output in the Short-Run Returns to a Factor
- Relation Between Total, Average and Marginal Product
- Law of Variable Proportions
- Average and Marginal Physical Products
- Changes in Production
- Cost - Fixed Cost
- Cost -variable Cost
- Behaviour of Cost in the Short - Run
- Relationship Between Average Variable Cost and Average Total Cost and Marginal Cost
- Concept of Opportunity Cost
- Marginal Revenue
- Producer's Equilibrium
- Law of Supply
- Market Supply Schedule
- Distinguish between Stock and Supply
- Determinants of Supply
- Movements Along and Shifts in Supply Curve
- Measurement of Elasticity of Supply
- Methods of Measurement of National Income
- Cost Concepts > Marginal Cost
- The Law of Diminishing Marginal Product
- Shapes of Product Curves
- Costs in Long Run Period
- Returns to Scale
The Theory of the Firm Under Perfect Competition
- Concept of Market
- Market Equilibrium
- Determination of Market Equilibrium
- Effect of Simultaneous change in Demand and Supply on Equilibrium Price
- Perfect Competition
- Imperfect Competition
- Classification of Market Structure
- Oligopoly
- Market Forms - Perfect Oligopoly
- Market Forms - Imperfect Oligopoly
- Equilibrium Price
- Applications of Tools of Demand and Supply Price Control
- Price Ceiling
- Price Floor
- Revenue Concepts
- Profit Maximisation Objective
- Determinants of a Firm’s Supply Curve
- Market Supply Schedule
- Price Elasticity of Supply
Government Budget and the Economy
Market Equilibrium
- Simple Monopoly in the Commodity Market
- Other Non - Perfectly Competitive Markets
Balance of Payments
- Open Economy and Its Linkages
- Concept of Balance of Payments
- Current Account
- Capital Account
- Balance of Payments Surplus and Deficit
- Foreign Exchange Market
- Foreign Exchange Rate
- Determination of the Exchange Rate
- Merits and Demerits of Flexible and Fixed Exchange Rate Systems
- Managed Floating Exchange Rate System
Estimated time: 20 minutes
CBSE: Class 12
National Testing Agency: Class 12
National Testing Agency: Class 12
Meaning
Exchange Rate is the rate at which one currency is exchanged for another in the foreign exchange market. It expresses the price of one unit of foreign currency in terms of the domestic currency.
CBSE: Class 12
National Testing Agency: Class 12
National Testing Agency: Class 12
Exchange Rate Systems
There are two main systems of exchange rate determination:
- Flexible (Floating) Exchange Rate System
- Fixed Exchange Rate System
| Feature | Flexible Exchange Rate | Fixed Exchange Rate |
|---|---|---|
| Determined by | Demand and supply in the foreign exchange market | Government / Central Bank (RBI) |
| Government Intervention | No regular intervention | RBI buys/sells foreign exchange to maintain the fixed rate |
| Fall in domestic currency value | Depreciation | Devaluation |
| Rise in domestic currency value | Appreciation | Revaluation |
| Historical Examples | — | Gold Standard, Bretton Woods System |
CBSE: Class 12
National Testing Agency: Class 12
National Testing Agency: Class 12
Flexible (Floating) Exchange Rate
The exchange rate is determined by the demand and supply of foreign exchange in the market.
Equilibrium under Flexible Exchange Rates
Equilibrium is reached where Demand (DD) = Supply (SS).
If demand for foreign currency increases,
- Exchange rate rises.
- Domestic currency depreciates.
- Foreign currency appreciates.
Effect of an Increase in Demand for Imports in the Foreign Exchange Market
Example:
₹50/\[$\]→₹70/\[$\]
If demand for foreign currency decreases,
- Exchange rate falls.
- Domestic currency appreciates.
CBSE: Class 12
Factors Affecting Flexible Exchange Rate
1. Speculation
- Expectation of appreciation of a foreign currency increases its demand, causing the exchange rate to rise.
2. Interest Rate Differential
- Higher domestic interest rates attract foreign investment, increasing demand for domestic currency and causing it to appreciate.
3. Income Changes
- Higher national income increases imports, raising demand for foreign exchange and causing domestic currency to depreciate.
4. Purchasing Power Parity (PPP)
- In the long run, exchange rates reflect differences in price levels between countries.
CBSE: Class 12
Formula: Interest Rate Differential
\[\text{Interest Rate Differential}=i_A-i_B\]
CBSE: Class 12
Formula: Exchange Rate
\[\text{Exchange Rate (PPP)}=\frac{\text{Domestic Price}}{\text{Foreign Price}}\]
CBSE: Class 12
National Testing Agency: Class 12
National Testing Agency: Class 12
Fixed Exchange Rate
The exchange rate is fixed by the Government or RBI and maintained through intervention in the foreign exchange market.
Foreign Exchange Market with Fixed Exchange Rates
- Devaluation: Official increase in exchange rate (domestic currency becomes cheaper).
- Revaluation: Official decrease in exchange rate (domestic currency becomes costlier).
If the fixed rate is above equilibrium, RBI buys foreign exchange.
If the fixed rate is below equilibrium, RBI sells foreign exchange.
CBSE: Class 12
National Testing Agency: Class 12
National Testing Agency: Class 12
Historical Fixed Exchange Rate Systems
Gold Standard System
Each country fixed the value of its currency in terms of gold.
Bretton Woods System
- Established in 1944.
- Countries fixed their currencies against the US Dollar.
- Supervised by the International Monetary Fund (IMF).
CBSE: Class 12
National Testing Agency: Class 12
National Testing Agency: Class 12
Key Points: Determination of the Exchange Rate
- Exchange rate = Price of one unit of foreign currency in terms of domestic currency.
- Flexible exchange rate is determined by Demand = Supply.
- Increase in demand for foreign currency → Depreciation of domestic currency.
- Decrease in demand for foreign currency → Appreciation of domestic currency.
- Main determinants: Speculation, Interest Rate Differential, Income Changes, PPP.
- Fixed exchange rate is maintained by Government/RBI through buying or selling foreign exchange.
- Depreciation/Appreciation occur under a Flexible system.
- Devaluation/Revaluation occur under a Fixed system.
