AP Inter 1st Year

Referring to the AP Inter 1st Year Maths Study Material Chapter 1 Sets Exercise 1a Solutions makes it easier to understand complex problems.

AP Inter 1st Year Maths Sets Solutions Exercise 1a

Question 1.
Which of the following are sets? Justify your answer.
i) The collection of all the months of a year beginning with the letter J.
Solution:
The collection of all the months of a year beginning with the letter J is a set because it is well defined.

ii) The collection of ten most talented writers of India.
Solution:
The collection of ten most talented writers of India is not a set because it is not well defined.

iii) A team of eleven best cricket batsmen of the world.
Solution:
A team of eleven best cricket batsmen of the world is not a set because it is not well defined.

iv) The collection of all boys in your class.
Solution:
The collection of all boys in my class is a set because it is well-defined.

v) The collection of all natural numbers less than 100.
Solution:
The collection of all natural numbers less than 100 is a set because it is well-defined.

vi) A collection of novels written by the writer Munshi Prem Chand.
Solution:
A collection of novels written by the writer Munshi Prem Chand is a set because it is well defined.

vii) The collection of all even integers.
Solution:
The collection of all even integers is a set because it is well defined.

viii) The collection of questions in this chapter.
Solution:
The collection of questions in this chapter is a set because it is well defined,

ix) A collection of most dangerous animals of the world.
Solution:
A collection of most dangerous animals of the world is not a set because it is not well defined.

Question 2.
Let A = {1, 2, 3, 4, 5, 6}. Insert the appropriate symbol ∈ or ∉ in the blank spaces,
i) 5 … A
ii) 8 … A
iii) 0 … A
iv) 4 … A
v) 2 … A
vi) 10 … A
Solution:
i) ∈
ii) ∉
iii) ∉
iv) ∈
v) ∈
vi) ∉

Question 3.
Write the following sets in roster form.
i) A = (x : x is an integer and – 3 < x < 7}.
ii) B = {x: x is a natural number less than 6}.
iii) C = {x: x is a two-digit natural number such that the sum of its digits is 8}.
iv) D = {x: x is a prime number which is divisor of 60).
v) E = {The set of all letters in the word TRIGONOMETRY}
vi) F = {The set of all letters in the word BETTER}.
Solution:
i) A = {-3, -2,-1, 0, 1, 2, 3, 4, 5, 6}.
ii) B = {1, 2, 3, 4, 5}.
iii) C = {17, 26, 35, 44, 53, 62, 71, 80}.
iv) D = {2, 3, 5}.
v) E = {T, R, I, G, O, N, M, E, Y}.
vi) F = {B, E, T, R}.

Question 4.
Write the following sets in the set-builder form.
i) {3, 6, 9, 12}
ii) {2, 4, 8, 16, 32}
iii) {5, 25, 125, 625}
iv) {2, 4, 6 , ………..}
v) {1, 4, 9, …………. 100}
Solution:
i) {x : x is a natural number multiple of 3 and x ≤ 15}.
ii) {x : x = 2n where n ∈ N & 1 ≤ n ≤ 5}.
iii) {x : x = 5n where ne N & 1 ≤ n ≤ 4}.
iv) { x : x is an even natural number}.
v) { x : x = n², 1 ≤ n ≤ 10}.

Question 5.
List all the elements of the following sets.
i) A = {x : x is an odd natural number).
ii) B = {x : x is an integer, –\(\frac{1}{2}\) < x < \(\frac{9}{2}\)}.
iii) C = {x : x is an integer, x² ≤ 4).
iv) D = {x : x is a letter in the word “LOYAL”}.
v) E = {x : x is a month of a year not having 31 days},
vi) F = {x : x is a consonant in the English alphabet which precedes k}.
Solution:
i) A = {1,3, 5, 7, ……….}.
ii) B = {0, 1,2, 3, 4}.
iii) C = {-2, -1, 0, 1, 2}.
iv) D = {L, O, Y, A},
v) E = {February, April, June, September, November},
vi) F = { b, c, d, f, g, h, j}

Question 6.
Match each of the set on the left in the roster form with the same set on the right described in set-builder form.

Answer:

Regular practice with AP Inter 1st Year Commerce Study Material Chapter 6 Fundamental Aspects of Joint Stock Company Questions and Answers helps students stay prepared for examinations.

AP Inter 1st Year Commerce 6th Lesson Fundamental Aspects of Joint Stock Company Questions and Answers

Fill in the Blanks

Question 1.
The capital of a company is divided into small units is called __________
Answer:
Shares

Question 2.
The members who invest their money by purchasing the shares of a company are known as __________
Answer:
Shareholders

Question 3.
A company comes into existence when it is registered under Indian Companies Act or any previous company acts.
Answer:
2013

Question 4.
The elected representatives of the company who manage the day-to-day affairs of the company are called __________
Answer:
Board of Directors

Question 5.
East India Company is an example of a __________ company.
Answer:
Chartered company

Question 6.
A company created by special act of the parliament or legislature of any state is called a __________ company.
Answer:
Statutory company

Question 7.
The minimum paid up capital of a private company is __________
Answer:
Rs. 1,00,000/-

Question 8.
The minimum paid-up capital of public company is __________
Answer:
Rs. 5,00,000/-

Question 9.
A company which controls the management of another company is called a __________ company.
Answer:
Holding company

Question 10.
A private company must suffix its name __________
Answer:
private limited

Very Short Answer Questions

Question 1.
Joint Stock Company.
Answer:
A joint stock company or simply a company is a voluntary association of individuals formed to undertake a large-scale business activity. It is established by law and can be dissolved by law. The company has a separate legal existence so that even if its members die, the company remains in existence. Its members contribute money for a common purpose. The money so contributed constitutes the capital of the company. The capital of the company is divided into small units called shares. Since members invest their money by purchasing the shares from the company, they are known as share holders and the capital of the company is known as share capital.

Question 2.
Government Company.
Answer:
Government Company : Any company in which not less than 51 percent of the paid-up share capital is held by the central Government and or by any State Government or State Governments is called a “Government Company”.
Ex : BEL, ONGC, NTPC are the examples of Government Company.

Question 3.
Statutory Company.
Answer:
Statutory companies are those, which are started under the special act of parliament. Public utility concerns like railways, electricity etc are in corporated by special acts of parliament.
Ex : SBI, RBI established under Banking companies act -1949, New India assurance company is established under insurance companies act – 1956.

Question 4.
Chartered Company.
Answer:
Chartered companies are those which are started under a special charter of a king. Several companies were started in England under Royal charter in 17th century. The charter defined their powers.
Ex : East India Company.

In India such type of company does not exist because there is no monarchy.

Question 5.
One person company.
Answer:
As per the companies act 2013 one person company (OPC) means “a company which has only one person as member”. This is a company in which only one man hold the whole share capital of the company.

Question 6.
Holding Company.
Answer:
Where one company contrails the management for another company, the controlling company is called “Holding Company”.
Ex : If company A holds more than 51% of paid up share capital of company B, the company A is called Holding Company.

Question 7.
Subsidiary Company.
Answer:
When one company controls the management of another company, the company so controlled is called as subsidiary company. For example if company ‘A’ holds more than 51% of paid up share capital of company ‘B’. ‘B’ is called a subsidiary company.

Question 8.
Private Company.
Answer:
A private company is a very suitable form for carrying on the business of family and small concerns. It is registered under the companies act, 2013 or any previous company law. According to section 2(68) of the companies act, 2013 a private company has the following feature :

1. The minimum paid up capital is Rs. 1,00,000.
2. The minimum number of members is 2.
3. The maximum number of members is 200.
4. It is prohibited from issuing of shares to the public.
5. It is prohibited from transfer of shares.

Question 9.
Public Company.
Answer:
It is a suitable form of company for carrying on the business on a large scale, involving a huge amount of capital. According to section 2(71) of companies act of 2013, a public company has the following features.

1. The minimum paid up capital is Rs. 5,00,000.
2. The minimum number of members is 7.
3. The maximum number of members is unlimited. Such a company must us the word “Ltd” as part of its name.

A public company must write public limited or simply limited after its name. Steel Authority of India limited, Bajaj Auto Limited, Reliance Industries Limited and Hindustan Lever Limited are the examples of public companies.

Question 10.
Company Limited by Guarantee.
Answer:
This type of company can be defined as a company having the liability of its members limited by its memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up. The amount guaranteed by each member cannot be demanded until the company is wound up. Companies limited by guarantee are very few, as they are non-trading companies.

Question 11.
Foreign Company.
Answer:
It is company incorporated outside India and has place of business. The term ‘place of business’ does not mean agency business in India. It may be noted that even if, all the shareholders of a company are Indian citizens, it will still be called “foreign company” if it is registered outside India.

Question 12.
Multi National Company.
Answer:
Such companies extend the areas of their operations beyond the country in which they are registered.

Question 13.
Define Company.
Answer:
Company : “According to Section 3 of the companies act, 1956 “A company is an artificial person created by law, having a separate legal entity with a perpetual succession and a common seal”.

“A joint stock company is a voluntary association of individuals for profit, having a capita’ dividend into transferable shares, the ownership of which is the condition of membership” – L.H. Honey

Question 14.
Company as per Companies Act, 2013.
Answer:
As per the companies Act, 2013. “A company refers to an organisation incorporated under the companies act, 2013 or under any previous company law”.

Question 15.
Dormant Company.
Answer:
It is a company does not carry any accounting transactions for a period of two years. Such company can apply to registrar of companies calling it as a “Dormant company”.

Short Answer Questions

Question 1.
List out the features of Joint Stock Company.
Answer:
The distinctive features of a company are as follows :

1) An Artificial Person Created by Law : A company is an artificial person created by law and existing only in contemplation of law. It is an intengible and invisible legal person having no body and soul.

2) Separate Legal Entity : A company has an entity quite distinct and independent of the existence of the members who constitute it. In other words, a company has a separate legal entity entirely different from that of its members. It can make contracts, purchase and sell goods, employ people and conduct any lawful business in its own name. It can sue and can be sued in the court of law in its own name, of course, through some representatives.

3) Formation : The formation of a joint stock company involves the preparation of several documents and compliance with various legal requirements before it starts its operation, A company comes into existence only when it is registered under the Indian companies act, 2013 or any previous company law.

4) Common seal as a substitute for signature : As the company is not a natural person, it cannot sign its documents. The common seal with the name of the company engraved on it is therefore, used in place of signature. Generally, the secretary of the company is authorised to keep the seal under his safe custody.

5) Perpetual Existence : A company has perpetual existance unlike a sole trading or partnership concern. Once a company is formed, it continues for an unlimited period until it is legally dissolved. In other words, a company has a perpetual life and the death, lunacy, retirement or insolvency of its members does not affect its existence.

6) Limited Liability of Members : The liability of a member of a company is limited to the extent of the amount unpaid on the shares he holds.
Ex :If “Jeswanth” holds one share of Rs. 10 and has paid Rs.7 on that share, his liability would be limited to the unpaid amount of Rs. 3. Beyond this, he is not liable to pay anything towards the debts or losses of the company.

7) Transfer ability of Shares :The members of a company (Public) are free to transfer or dispose of the shares held by them to any person as and when they like. They do not need the consent of other shareholders to transfer their shares. However, in the case of private companies, certain restrictions are imposed on the transfer of shares.

8) Membership : The form of a joint stock company, a minimum of two (2) members are required in case of a private limited company and seven (7) members in case of public limited company. The maximum limit is fifty (50) in case of private limited company. There is no maximum limit on the members in case of a public limited company. In case of one person company, only one shareholder will act as a member.

9) Democratic Management: Different catagories of people from various areas contribute to the capital of a company. Since it is not possible for them to look after the day-to-day management of the company, they may take part in deciding the general policies of the company but the day-to-day affairs of the company are managed by their elected representatives “Board of Directors”.

10) Statutory Regulations : A company has to comply with and abide by several statutory requirements. It is governed by the companies act and must invariably follow the various provisions of the act. Under the act, companies should submit several returns to the government and their accounts have to be audited by a chartered accountant.

Question 2.
Briefly explain different types of companies.
Answer:
1) Chartered Companies : Charatered companies are those which are started under a special charter of a king. Several companies were started in England under Royal charter in 17th century. The charter defined their powers.
Ex : East India company.
In India such type of company does not exist because there is no monarchy.

2) Statutory Company Statutory companies are those which are started under the special act of parliament. Public utility concerns like railways, electricity etc. are incorporated by special act of parliament.
Ex: SBI, RBI established under Banking companies act. 1949.
New India assurance company is established under insurance companies act – 1956

3) Government Companies : These companies are regisered under companies act 1956. According to companies act, Government company means any company in which not less than 51% of paid up share the central government or any state government holds capital.
Ex : Such companies is HMT.

4) Registered Companies : All those companies registered under the companies act are called “registered companies”. Companies formed under the India companies act may be divided into three classes.

5) Private company : A private company is one which by its Articles of Association.

• Limits the number of members to 50.
• Restricts the right of transfer of shares and
• Prohibits any invitation to public to subscribe for its shares and debentures.

6) Public Company : According companies act, all those companies other than private companies are considered as public limited companies.

Question 3.
What are the features of Public Company ?
Answer:
The public companies carry business in large-scale involving huge amount of capital, resources and huge infrastructure. Public companies procure capital from public. There is no restriction on transfer of ownership on shares. Such a company must use the word “LIMITED” or “Ltd” as a part of its name. According to section 2(71) of the companies act, 2013 a public company is one which has

1. The minimum paid-up capital of Rs. 5,00,000/-
2. The minimum number of members is 7.
3. The maximum number of members is unlimited.

Question 4.
What are the features of a Private Company ?
Answer:
Private Company : A private company is a very suitable form for carrying on the business of family and small concerns. It is registered under the companies act, 2013 or any previous company law. According to section 2(68) of the companies act, 2013 a private company has the following features.

1. The minimum paid up capital is Rs. 1,00,000.
2. The minimum number of members is two (2).
3. The maximum number of members is 200
4. It is prohibited from issuing of shares to the public.
5. It is prohibited from transfer of shares.

Private companies have to follow all these conditions mentioned above. These companies must include “Private Limited” after their names. The ownership of these companies is confined only to well-known selected persons. It requires a minimum of two persons to start a “Private Limited company”. Usually, whenever partnership firms need more capital to expand their business, they convert themselves into private companies. It may be noted that private companies are exempted from various regulations of the companies act. They combine the advantages of both the company and the partnership form of business organisation.

Question 5.
Write any five advantages of joint stock company.
Answer:
Joint stock company organisation is an artificial person created by law and a voluntary association of persons who contributes to its capital. It will have a common seal.

Advantages or Merits of Joint Stock Company :

1. Large Capital:One of the main advantages of the joint stock company is that it facilitates mobilisation of large amount of capital. It would not be possible under the other forms. Joint stock companies are suitable for those business where large resources are required.
2. Limited Liability :The liability of the shareholders of a company is limited to the value of shares they held. The limited liability encourages many persons to invest in shares of joint stock companies.
3. Continuity of Existence : When a company is incorporated it becomes a separate legal entity. It is an entity with perpetual succession. The death or insolvency of members does not in any way affect the existence of the company.
4. Efficient – Management : In company form of organisation ownership is separate from management. It enables the company to appoint expert and qualified persons for managing various business functions. The efficient management will help the company to expand and diversity its activities.
5. Economics of large – scale Production : With the availability of large-scale resources, the company can organise on a big scale. The increase in scale and size of the business will result in economic in production purchase and marketing etc. Hence, cost of production is reduced, goods are provided to customers at cheaper rates.

Question 6.
Write any Five disadvantages of Joint Stock Company.
Answer:

1. Difficulty in formation : Promotion of a company is not an easy task. A number of stages are involved in company promotion. A lot of legal formalities are required to be performed at the time of registration. Therefore it is proved that the formation of company is difficult.
2. Lack of personal interest : The company is not managed by the proprietors. It is
   managed by the directors and paid officials. They do not have a share in the profits. They have very little personal interest. .
3. Fraudulent Management : All the shareholders of the company cannot take part in its management. They elect directors periodically. They will manage the business. If the directors are dishonest, they may misuse their powers and position.
4. Temptation of speculate :The liability of shareholders is limited. So the management is tempted to get into speculative activities. They may lead to the ultimate ruin of the company.
5. Limited borrowing capacity : The liability of the shareholders is limited. Therefore, the credit that can be obtained by the company will also be limited.

Long Answer Questions

Question 1.
Explain the advantages and disadvantages of a Joint Stock Company.
Answer:
Joint stock company organisation is an artificial person created by law and a voluntary association of persons who contributes to its capital. It will have a common seal. Definitions : “Joint stock company is voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership”. – L.H. Hanery

Advantages or Merits :

1. Large Capital: One of the main advantages of the joint stock company is that it facilitates mobilisation of large amount of capital. Joint stock companies are suitable for those business where large resources are required.
2. Limited Liability : The liability of the shareholders of a company is limited to the value of shares they held. The limited liability encourages many persons to invest in shares of joint stock companies.
3. Continuity of Existence : When a company is incorporated it becomes a separate legal entity. It is an entity with perpetual succession. The death or insolvency of members does not in anyway affect the existence of the company.
4. Efficient Management ; In company form of organisation ownership is separate from management. It enables the company to appoint expert and qualified persons for managing various business functions. The efficient management will help the company to expand and diversity its activities.
5. Economics of large – scale Production : With the availability of large-scale resources, the company can organise on a big scale. The increase in scale and size of the business will result in economic in production purchase and marketing etc. Hence, cost of production is reduced, goods are provided to customers at cheaper rates.
6. Transfer of Shares : Every member can transfer his share freely without informing the other shareholders. He can sell his shares easily in the stock market. This facility attracts many investors.
7. Public Confidence : Companies are subject to government controls and regulation. Their accounts are audited by chartered accountant. The affairs of a company are made public through its published accounts and annual reports. This creates confidence in the public about the functioning of the company.
8. Mobilisation of small savings : As the value of a share is small and as the liability is limited more capital can be raised from all classes of people. Small savings of the public can be mobilized and directed to productive channels.
9. Facilitates Industrial Development: We cannot expect Industrialization of a country without the help of Joint Stock system. Joint stock companies have encouraged the growth of national income. They have brought about an increase in the standard of living of the people.
10. Public Confidence :The accounts of the company are audited by chartered accountants. The affairs of the company are made published through leading newspapers. This creates confidence in the public about the functioning of the company.
11. Tax Benefits : Company income tax at flat rate and the companies which are established in backward areas get some concession in tax.

Demerits / Disadvantages :

1. Difficulty in formation : Promotion of a company is not an easy task. A number of stages are involved in company promotion. A lot of legal formalities are required to be performed at the time of registration. Therefore it is proved that the information of company is difficult.
2. Lack of personal interest: The company is not managed by the proprietors. It is managed by the directors and paid officials. They do not have a share in the profits. They have very little personal interest in the business.
3. Fraudulent Management : All the shareholders of a company cannot take part in its management. They elect directors periodically. If the directors are dishonest, they may misuse their powers and position.
4. Temptation of speculate : The liability of shareholders is limited. So the management is tempted to get into speculative activities. They may lead to the ultimate ruin of the company.
5. Limited borrowing capacity : The liability of the shareholders is limited. Therefore, the credit that can be obtained by the company will also be limited.
6. Lack of personal touch : There is no personal touch between the shareholders and consumers and the worker. This may result consumer’s dissatisfaction and labour troubles.
7. Delay in decision making : In company form of organisation no single individual can make a policy decision. All important decisions are taken either by the Board of Directors or by the General House. Decision making process is time consuming. So. many opportunities may be lost because of delay in decision – making.
8. Inflexible and Inelastic : A company lacks elasticity and adaptability. The memorandum of association of the company restricts the scope of business. It is very difficult to adopt business to changing circumstances due to very rigid legal formalities.
9. Lack of Secrecy : The management of company’s remaining in the hands of many persons. Everything is discussed in the meetings of Board of Directors. The trade secrets cannot be maintained.
10. Lack of continuity policies : In company, the some directors may not be elected every time. Therefore, company may not have unity of management and continuity of policies.
11. Evils of Large-scale Operation : A company suffers from the Evils of large – scale operation such as lack of co-ordination, lack of close supervision.

Question 2.
Distinguish a Private company and a Public company.
Answer:
Private Company : A private company is a very suitable form for carrying on the business of family and small concerns. It is registered under the companies act, 2013 or any previous company law. According to section 2(68) of the companies act. 2013 a private company has the following features.

1. The minimum paid up capital is Rs. 1,00,000.
2. The minimum number of members is two (2).
3. The maximum number of members is 200.
4. It is prohibited from issuing of shares to the public.
5. It is prohibited from transfer of shares. Such a company must use the word “Pvt. Ltd” as the part of its name.

Public Company : ft rs a sccftahte form of company for carrying on the business on a targe – scale, involving a huge amount of capital. According to section 2(71) of the companies act of 2013, a public company has the following features :

1. The minimum paid-up capital of Rs. 5,00,000/-
2. The minimum number of members is 7.
3. The maximum number of members is unlimited. Such a company must use the word “Ltd” as part of its name.
   Ex : Steel Authority of India Ltd., Reliance Industries Ltd., Hindustan Lever Ltd., & Bajaj Auto Limited etc.

Distinguish between Private Company & Public Company :

Question 3.
What is Joint Stock Company ? What are the features of it ?
Answer:
Meaning : Joint stock company organisation is an artificial person created by law and voluntary association of persons who contributes to its capital.

Definitions : “Joint stock company is voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership”. – L.H. Hanery

A Joint Stock Company limited by shares is “a company having permanent paid or nominal share capital of fixed amount divided into shares also of fixed amount held and transferable as stock and formed on the principles of having in its members only the holders of those shares of stocks and no other persons”. – Indian Companies Act, 1956

Distinctive features of a Joint Stock Company :

1. Artificial Person Created by Law : A company is an artificial person created by law and existing only in contemplation of law. It is an intengible and invisible legal person having no body and soul.
2. Separate Legal Entity : The company is created under law. It has separate legal entity apart from its members. It can file a suit against others and can be sued against. It can purchase assets and can make contracts on its name.
3. Formation : The formation of a joint stock company consists of preparation of several documents and compliance of so many legal requirements prior to starting its operations. Registration under Indian Companies Act. 1956 is mandatory.
4. Common Seal : A company being an artificial person cannot put its signatures. The law requires every company to have a seal and get its name engraved on it. The seal of the company is affixed on all important documents.
5. Perpetual Existence : A company has perpetual existance that is to say its existence is not affected by the death or insolvency of its members. The company can be wound up by the operation of law.
6. Limited Liability : The liability of a share-holder is limited to the extent of face value of shares held by him. Shareholders are not liable to bring their personal assets to pay the debts of the company.
7. Transferability of Shares : Shareholder of a company can sell his shares at his will at anytime. He need not take permission from other shareholders.
8. Membership : In the case of public limited companies, the minimum number of shareholders is seven and the maximum is unlimited. In the case of private limited companies, the minimum is two and maximum is fifty.
9. Democratic Management : Members are the owners of the company. Management of business is vested in the board of directors elected by the members. Thus, owners of the company have no direct control over the business of the company on democratic lines.
10. Wide diffusion of ownership : The shareholders are the owners of the company. They are scattered throughout the country.
11. Statutory Regulations : A company is governed by the companies act. It has to submit a number of returns to the government. Its account must be audited by a chartered accountant.
12. Regid Objective : The type of business in which the company would participate is mentioned in the object clauses of memorandum of association.
13. Shareholders are not the agents : The shareholders of the company cannot act as agents of the company. They cannot bind the company by their acts.

Question 4.
Listout and briefly explain different types of companies.
Answer:

Companies are of different types, and are classified based on various points of view. A brief description of each type is as follows :

I) Based on Formation:

1. Chartered Companies : The companies that are established by a Royal charter or special sanctions from the Royal Head of state are called chartered companies. Such companies are granted special privileges and powers to achieve their defined objectives. Ex : East India company, Bank of England etc.
   Such companies do not exist now-a-days.
2. Statutory Company : A company that is created by a special act of the parliament or the legislature of a state is called a “Statutory company”.
   Ex : SBI, RBI, LIC & UTI etc.
3. Registered Companies : A company which is established through registration with the registrar or companies, under the companies act, 2013 or any previous law is called a “Registered Company”. These companies are governed by the above act, but subject to the rules of Memorandum of association and articles of association of their own.
   Ex : Infosys, ITC, WIPRO etc.
4. Government Companies : A company in which not less than 51% of the paid up share capital is held by the Central Government and or by any state government or state governments is called a “Government Company”.
   Ex : ONGC, NTPC etc.
5. One Person Company (OPC) : Section 2(62) of the companies act, 2013 states that a company can be firmed with just one director and one member. The director and the member can be the same person.

II) Based on Public Interest: On the basis of the number of members or public interest, companies may be further categorized into

1. Private company,
2. Public company.

1) Private Company : A private company is a very suitable form for carrying on the business of family and small concerns. It is registered under the companies act, 2013 or any previous company law. According to section 2(68) of the companies act, 2013 a private company has the following features.

• The minimum paid up capital is Rs. 1,00,000.
• The minimum number of members is two (2).
• The maximum number of members is 200.
• It is prohibited from issuing of shares to the public.
• It is prohibited from transfer of shares. These companies must include private limited after their names.

2) Public Company : It is a suitable form of company for carrying on the business on a large – scale, involving a huge amount of capital. According to section 2(71) of the companies act of 2013, a public company has the following features :

• The minimum paid-up capital of Rs. 5,00.000/-
• The minimum number of members is 7.
• The maximum number of members is unlimited. Such a company must use the word “Ltd” as part of its name.
  Ex : Steel Authority of India Ltd., Bajaj Auto Ltd., Reliance Industries Ltd. & Hindustan Lever Ltd., & etc.

III) Based on Liability :

1. Companies Limited Shares : A company having the liability of its members limited by the memorandum to the value of shares held by them is called a “company Limited” by shares.
2. Companies Limited by Guarantee : This type of company can be defined as a company having the liability of its members limited by its memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up. The amount guaranteed by each member cannot be demanded until the company is wound up. Companies limited by guarantee are very few, as they are non-trading companies.
3. Unlimited Companies : The liability of members of such companies is limited. All the members will be liable to meet the liabilities of the company to an unlimited extent. Such companies are not popular and they are not found in large number.

IV) Based on Control :

1. Holding Company : Where are company controls the management of another company, the controlling company is called “Holding Company”.
   Ex : If company ‘A’ holds more than 51% of paidup share capital of company ‘B’, then company ‘A’ is called a holding company.
2. Subsidiary Company : When one company controls the management of another company the company so controlled is called as “Subsidiary Company”.
   Ex : If company ‘A’ holds more than 51% of paidup share capital of company ‘B’. ‘B’ is called a subsidiary company.

V) Based on of Nationality

1. Indian Company : A company registered in India and having a place of business in India is called an “Indian company”. It may be a private company or a public company.
2. Foreign Company : It is a company incorporated outside India and has a place of business. The term ‘place of business’ does not mean agency business in India. It may be noted that even if, all the sharholders of a company are Indian citizens, it will still be called “foreign company”, if it is registered outside India.

VI) Based on area :

1. National Company : Such companies confine their operations within the boundaries of the country in which they are registered.
2. Multi-National Company : Such companies extend the areas of their operations beyond the country in which they are registered.

Check Your Knowledge

1. Fill in the blanks for the following questions :

Question 1.
The official signature of a company is called __________
Answer:
common seal

Question 2.
The company is managed by the group of persons known as __________
Answer:
Board of directors

Question 3.
The word limited should appear after the name of __________
Answer:
Registered company

Question 4.
A company is formed by __________
Answer:
Promoters

Question 5.
A joint stock company or simply a company is a __________ of individuals formed to undertake a large scale business activity.
Answer:
Voluntary Association

Question 6.
A company is an __________ person.
Answer:
Artificial

Question 7.
The secretary of the company is authorised to keep the __________ under his safe custody.
Answer:
seal

Question 8.
The liability of a member of a company is __________
Answer:
limited

Question 9.
OPC stands for __________
Answer:
One Person Company

Question 10.
Statutory company one example is __________
Answer:
Life Insurance Corporation, SBI etc.

Question 11.
A company in which not less than 51% of the paid-up share capital is held by the __________
Answer:
Central Government / State Govt. / State Govt.

Question 12.
A public company must write __________ after its name.
Answer:
Public Limited

Question 13.
A company registered in India and having a place of business in India is called an __________
Answer:
Indian Company

Question 14.
The accounts of a public company are open for inspection by __________
Answer:
Public

II. State whether the statement are True or False

Question 1.
The company’s form of organisation contributes to the growth of business. (True/False)
Answer:
True

Question 2.
The joint stock company is the only form of business organisation which can provide capital for small-scale operations. (True/False)
Answer:
False

Question 3.
The companies are required to pay tax at a low rate. (True/False)
Answer:
False

Question 4.
Redtapism and bureaucratic hurdles do not permit quick decisions and prompt action in company form of organisation. (True/False)
Answer:
True

Question 5.
At every stage in the management of a company, there are legal rules and regulations to follow. (True/False)
Answer:
True

Question 6.
The shares of a public company are dealt in on an employment exchange. (True/False)
Answer:
False

Question 7.
Company is the only form of business. (True/False)
Answer:
True

Question 8.
According to Sec 2(71) of the companies act 2013. (True/False)
Answer:
True

Question 9.
A company which not less than 51% of the paid-up share capital is held by the private company. (True/False)
Answer:
False

Question 10.
Chartered companies for example Bank of England. (True/False)
Answer:
True

Student Activity

State whether the statements are True or False.

Question 1.
The capital of a company is divided into small units called shares. (True/False)
Answer:
True

Question 2.
A company is a natural person created by law. (True/False)
Answer:
False

Question 3.
A company has a separate legal entity. (True/False)
Answer:
True

Question 4.
The secretary of the company is authorized to keep the seal of the company under his safe custody. (True/False)
Answer:
True

Question 5.
The liability of a member of a company is limited to the extent of the amount of shares held by him. (True/False)
Answer:
True

Question 6.
East India company is an example of a statutory company. (True/False)
Answer:
False

Question 7.
A single resolution is enough to appoint or retire the directors of a private company. (True/False)
Answer:
True

Question 8.
Both public & private companies can secure capital from the public. (True/False)
Answer:
False

Question 9.
A public company can start its business immediately upon its registration. (True/False)
Answer:
False

Question 10.
The maximum number of members in case of Pvt. Ltd. company is 200. (True/False)
Answer:
True

Question 11.
There are no restrictions on managerial remuneration in case of a public limited company. (True/False)
Answer:
False

Question 12.
The shares of a private company can be transferred freely. (True/False)
Answer:
False

Regular practice with AP Inter 1st Year Commerce Study Material Chapter 5 Partnership Questions and Answers helps students stay prepared for examinations.

AP Inter 1st Year Commerce 5th Lesson Partnership Questions and Answers

Fill in the Blanks

Question 1.
The persons who form a partnership are individually known as ____________.
Answer:
Partners

Question 2.
The partnership form of business organisation is governed by the Indian Partnership Act of ____________
Answer:
1932

Question 3.
Every partner acts as a principal as well as an ____________ of the firm.
Answer:
Agent

Question 4.
The ____________ of a partnership firm is not compulsory.
Answer:
Registration

Question 5.
Section ____________ of the partnership act, 1932 defines a partnership.
Answer:
4

Question 6.
____________ liability partnership firms are found in some European countries and USA.
Answer:
Limited

Question 7.
A partnership ____________ is a document containing the terms and conditions of a partnership.
Answer:
Deed

Question 8.
Active partners are also called ____________ partners.
Answer:
working

Question 9.
A sleeping partner is also called a ____________ partner.
Answer:
Dormant

Question 10.
Nominal partners are ____________ to third parties for all the acts of the firm.
Answer:
liable

Question 11.
The liability partners is ____________
Answer:
unlimited

Question 12.
Partners in profits apply only to ____________ partners.
Answer:
minor

Very Short Answer Questions

Question 1.
Partnership Firm.
Answer:
Partnership is an association of two or more persons who pool their financial and managerial resources and agree to carry on a business, and share its profit or losses. The persons who form a partnership firm individually are known as ‘Partners’. The firm is known as ‘Partnership firm’.

Question 2.
Registration of Partnership.
Answer:
The Indian partnership Act of 1932 doesnot make it compulsory for a firm to be registered. But there are some certain disadvantages associated with an unregistered firm, making its registration virtually essential. Registration can take place at any time.

The procedure for registration of a firm is as follows :

1. The firm will have to apply to the Registrar of Firms of the state concerned in the prescribed form number I.
2. It should be accompained a fee of Rs. 1500/- and to be sent to registrar of Firms :
   1. Name of the firm,
   2. Location,
   3. Names of other places where the firm carries on business,
   4. Name in full addresses of the partners,
   5. The date on which various partners joined the firm,
   6. The duration of the firm.
3. The duly filled in form must be signed by all the partners.
4. The Registrar will scrutinize the application and if he satisfied, isue the certificate of registration.

Question 3.
Partnership Deed.
Answer:
Partnership arises out of a contract or an agreement. It can be formed with the consent of all the partners. It may be oral or written. The written agreement among the partners is called partnership deed. It contains terms and conditions relating to partnership.

Question 4.
Active Partner.
Answer:
An active partner is one who takes active part in the day-to-day working of the business. He enjoys full voice in the organisation of the firm. He may also be called a “Working Partner”.

Question 5.
Sleeping Partner.
Answer:
Only provides funds to the firm. He does not take part in the management of the firm. Sleeping partner is liable for the liabilities of the firm like other partners. He is not known to the public as a partner. So he may be called as a “secret partner”.

Question 6.
Nominal Partner.
Answer:
The partner who allow the firms to use their names as partners in the firm, are called as nominal partners.

Question 7.
Partners by Estoppel.
Answer:
A person who behaves in the public in such a way of give an impression that he/she is a partner of the firm is called “partner by estoppel”. Such partners are not entitled to share the profits of the firm, but are fully liable if somebody suffers because of his/her false representation.

Question 8.
Partner by Holding out.
Answer:
If a person is considered by outsider as a partner in a firm and he does not deny his being so considered he is called a “partner by holding out”. He does not contribute capital to the firm and does not participate in profits. He is liable to third parties.

Question 9.
Partner in Profits.
Answer:
This type of partner will share only profits. But his liability to creditors is unlimited. He won’t share the losses of the firm. Only he enjoys the profits.

Question 10.
General Partners.
Answer:
If the liability of the partners is unlimited, they are treated as general partners. If the amount of liability is not specified in the document such partner is deemed to be general partner.

Question 11.
Limited Partners.
Answer:
Liability of the partners is limited to the extent of their investment of capitals.

Question 12.
Define partnership. Write any one.
Answer:
Definitions :

• “Partnership as the relation between persons who have agreed to share the profits of a business carried on by all or any one acting for all”. – Section 4 of the Partnership Act, 1932
• “Partnership is the relation existing between persons competent to make contract, who agree to carry on a lawful business in common with a view to private gain”. – L.H. Haney
• “Two or more individuals may form a partnership by making a written or oral agreement that they will jointly assume full responsibility for the conduct of business”. – John Shubin

Short Answer Questions

Question 1.
What are the features of a partnership ?
Answer:
Definition : “The relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all”. – Partnership Act, 1932

Characteristics / Features of Partnership :

1. Formation : The partnership business is governed by the provisions of Indian partnership act, 1932. It comes into force by a deed. It should be formed with an object of profit earning but not for rendering charitable services.
2. Unlimited liability : Each partner of the firm as liable to the unlimited extent to satisfy the obligations of the firm to outsiders. It means that if the assets of the firm are insufficient to satisfy the claims of creditors of the firm even the personal property of the partners can be attached to satisfy such claims.
3. Lawful Business : The business must be lawful. Any agreement containing the provisions which are opposing the public policies, the partnership will be cancelled.
4. Principal and Agent Relationship : Every partner has a right to take part in business. Every partner is a principal as well as an agent to the firm.
5. Voluntary Registration : Registration of a firm is not compulsory. But an unregistered firm suffers from some limitations which make it virtually compulsory to be registered.

Question 2.
Who are the different types of partners in a partnership firm ?
Answer:
Types of Patners : A partnership can have different types of partners, each with their own roles and responsibilities. Understanding these types is crucial for gaining a clear understanding of their rights and responsibilities involved. These are described as follows :

I) Based on the extent of Participation : In the day-to-day management of the firm, partners can be classified as :

1. Active Partners (or) Working Partners : The partners who actively participate in the day-to-day operations of the business are known as active partners or working partners.
2. Sleeping partners : Those partners who do not participate in the day-to-day activities of the business are known as “sleeping” or “dormant” partners. Such partners simply contribute capital and share the profits and losses.

II) Based on sharing of profits : The partners may be classified as :

1. Nominal Partners : Nominal partners allow the firm to use their name as partner. They neither invest any capital nor participate in the day-to-day operations. They are not entitled to share in the profits of the firm. However, they are liable to third parties for all the acts of the firm.
2. Partners in Profits : A person who shares in the profits of a business without being liable for the losses is known as partner in profits. This applies only to the minors are admitted to the benefits of the firm and their liability is limited to their capital contribution.

III) Based on liability : The partners can be classified as :

1. Limited Partners : The liability of limited partners is limited to the extent of their capital contribution. This type of partner is found in limited partnership firms in some European Countries and the U.S.A. However, such partnerships are not allowed in India. The concept of limited liability partnership is recognised under the limited liability partnership act, 2008, which is under the consideration of parliament.
2. General Partners : The partners having unlimited liability are called as general partners or partners with unimited liability. It may be noted that every partner who is not a limited partner is treated as a general partner.

IV) Based on the behaviour and conduct exhibited : There are two more types of partners. They are :

1. Partner by Estopper : A person who behaves in public in such a way as to give the impression that he/she is a partner to the firm, is called “partner by estoppel”. Such partners are not entitled to share the profits of the firm, but they are fully liable if someone suffers due to their false representation.
2. Partners by Holdingout: A partner or partnership firm declares that a particular person is a partner of their firm, and such person does not disclaim it. Then he/she is known as “Partners by Holdingout”. Such partners are not entitled to profits but are fully liable for the firm’s debts.

Question 3.
What is the registration procedure of partnership ?
Answer:
Procedure to get a firm registered :

1. The firm will have to apply to the registrar of firms of the state concerned in the prescribed form.
2. A form containing the following particulars accompanied by a fee of Rs. 3/- has to be sent to the registrar of firms.
   1. The name of the firm.
   2. Location of the firm.
   3. Names of other places where the firm carries on business.
   4. The name in full and addresses of the partners.
   5. The date on which various partners joined the firm.
   6. The duration of the firm.
3. Duly filled in form must be signed by all the partners. The filled-in form along with prescribed registration fee must be deposited in the office of the registrar of firms.
4. The registrar will scrutinise the application, and if he is satisfied that all formalities relating to registration have been duly complied with he will put the name of the firm in his registrar and issue the certificate of registration.

Question 4.
What are the contents of the partnership deed ?
Answer:
The document containing the terms and conditions of contract are called as “articles of partnership” or “Partnership Deed”.

According to Indian Partnership Act of 1932, the agreement may be oral or written. It has to be stamped according to Indian Stamps Act – 1899.

Contents of Partnership Deed :

1. Name of the firm.
2. Nature of the firm.
3. Names and addresses of the partners.
4. Location of the partnership.
5. Duration of the partnership.
6. Amount of capital contribution by each partner.
7. Profit & Loss Ratio.
8. Duties, Powers and Obligations of the partners.
9. Salaries and withdrawals of the partners.
10. Methods of preparation of accounts and their auditing.
11. Procedure for dissolution of the firm.
12. Procedure for settlement of disputes.

Question 5.
Briefly explain the Rights of the Partners.
Answer:
The rights and duties of the partners are specified in the partnership deed. If there is absence of deed, the provisions specified under the Indian partnership act are applicable.

Rights of the partners :

1. Right to take part in the conduct and management of the firm.
2. Right to be consulted and expressed his opinion on any matter related to the firm.
3. Right to access and inspect any copy, books of accounts and records of the firm.
4. Right to share profits equally, unless the deed specify.
5. Right to receive interest on loans and advances made by the partners to the firm.
6. Right to be indemnified for the expenses losses sustained by the partner to the firm.
7. Right to the partnership property unless and otherwise the deed specified.
8. Right to impose the authority, to do any act for the purpose of protecting the firm from loss.
9. Right to act as an agent of the partnership, in the ordinary course of the business.

Question 6.
Briefly explain the duties of the Partners.
Answer:
The rights and duties of the partners are specified in the partnership deed. If there is absence of deed the provisions specified under the Indian partnership act are applicable.

Duties of the Partners :

1. Duty to behave honestly towards the firm and other partners as well.
2. Duty to behave just and faithful towards other partners.
3. Duty to share losses, unless the deed specify.
4. Duty to share the losses sustained due to his wilful negligence in the business.
5. Duty to maintain the books of accounts with true and fair value of transactions.
6. Duty to not to make secret profits or commissions otherwise from the firm’s business.
7. Duty to not transfer the share in profits of him to the outsiders.
8. Duty to not carry any business, in the same line of product of business, in which he is a partner.

Question 7.
Define Partnership. Explain its merits.
Answer:
Definition : “The relationship between persons who agree to carry on a business in common with a view to private gain”. – L.H. Haney

Advantages / Merits of a Partnership Firm :

1. Easy Formation : A partnership can be formed easily without many legal formalities. Since it is not compulsory to get the firm registered, a simple agreement, either in oral or writing implied is sufficient to create a partnership firm.
2. Availability of Larger Resources : Since two or more partners joint hands to start partnership firm, it may be possible to pool more resources as compared to sole proprietorship form of business organisation.
3. Better Decisions : In partnership firm each partner has a right to take part in the management of the business. All major decisions are taken in consultation with and with the consent of all partners. Thus, collective wisdom prevails and there is less scope for reckless and hasty decisions.
4. Flexibility : The partnership firm is a flexible organisation. At anytime the partners can decide to change the size on nature of business or area of its operation after taking the necessary consent of all the partners.
5. Sharing of Risks : The losses of the firm are shared by all the partners equally or as per the agreed ratio.
6. Keen interest: Since partners share the profit and bear the losses, they take keen interest in the affairs of the business.
7. Protection of Interest: ln partnership form of business organisation, the rights of each partner and his/her interests are fully protected. If a partner is dissatisfied with any decision, he can ask for dissolution of the firm withdraw from the partnership.

Question 8.
Explain the Limitations of Partnership firm.
Answer:
Definition : “The relation between persons who have agreed to share the profits of a business carried on by all or anyone of them acting for all”. – Partnership Act of 1932, Sec.4

Demerits / Limitations :

1. Unlimited Liability : The partners are personally liable for the debts and obligations of the firm. In other words, their personal property can also be utilized for payment of firm’s liabilities.
2. Instability : Every partnership firm uncertain life. The death, insolvency, incapacity on the retirement of any partner brings the firm to an end.
3. Limited Capital : Since the total number of partner cannot exceed 20, the capacity to raise funds remain limited as compared to Joint Stock Company.
4. Non-transferability of share : The share of interest of any partner cannot be transferred to other partners or to the outsiders. So, it creates inconvenience for the partner who wants to transfer his share to others fully and partly. The only alternative is dissolution of the firm.
5. Possibility of Conflicts : Every partner in the firm has an equal right to participate in the management. There is friction and quarrel among the partners. Difference of opinion may give rise to quarrels and lead to dissolution of the firm.

Long Answer Questions

Question 1.
Define Partnership. Discuss its merits and limitations.
Answer:
A partnership is an association of two or more persons to carryon a business and to share its profits and losses.

Definition : “The relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all”. – Partnership Act of 1932 (Section 4)
“The relationship between persons who agree to carry on a business in common with a view to private gain”. – L.H. Haney

Merits :

1. Easy Formation : An oral or written agreement is enough to start any lawful business on partnership basis. There are no complicated legal formalities regarding the establishment of such enterprise. Even registration of such firms is not compulsory.
2. Huge Capital : The resources of more than one person are available for the business. New partners can be admitted to secure more capital that may be needed for the expansion of business.
3. Wise Decision : A partnership consists of people possessing different abilities. Hence, they discuss every problem in detail and take wise and quick decision.
4. Introduction of division of labour : A partnership enjoys all advantages of division of labour. As there are more than one partner, the duties can be assigned to different partners according to their qualification and specialisation.
5. Greater borrowing capacity : The creditors of the firm can recover their loans from the private properties of all the partners. So the ability of a firm to raise loans depends upon the private properties of the partners. Thus a firm employs greater credit in the market.
6. Secrecy : The partners can keep the business secrets to themselves.
7. Protection of Minority interests : All important decisions are taken by the consent of all partners. If anything goes wrong unsatisfied partner can file a suit in the court of law the minority interest will be protected by law.
8. Flexibility The partners can change the nature, the method of business, or situation of the business very early by the agreement. No legal formalities for the above changes.
9. Division of Labour : In partnership there are more than one partner hence the work can be divided among them according the qualifications and specialisation.
10. Risk/Losses can be shared by all: The losses incurred by the firm will be shared by all the partners. So the share of loss of each partner will be less than the sole trader.

Limitations :

1. Unlimited Liability ; The partners are personally liable for the debts and obligations of the firm. In other words, their personal property can also be utilized for payment of firm’s liabilities.
2. Instability : Every partnership firm uncertain life. The death, insolvency, incapacity on the retirement of any partner brings the firm to an end.
3. Limited Capital : Since the total number of partner cannot exceed 20, the capacity to raise funds remain limited as compared to Joint Stock Company.
4. Non-transferability of share : The share of interest of any partner cannot be transferred to other partners or to the outsiders. So, it creates inconvenience for the partner who wants to transfer his share to others fully and partly. The only alternative is dissolution of the firm.
5. Possibility of Conflicts : Every partner in the firm has an equal right to participate in the management. There is friction and quarrel among the partners. Difference of opinion may give rise to quarrels and lead to dissolution of the firm.

Question 2.
What is Partnership Deed ? And also explain its contents.
Answer:
The document containing the terms and conditions of contact are called as “articles of partnership” or “partnership deed”.

According to Indian Partnership Act of 1932, the agreement may be oral or written. It has to be stamped according to Indian Stamps Act – 1899.

Contents of Partnership Deed :

1. Name of the firm.
2. Nature of the firm.
3. Names and addresses of the partners.
4. Location of the partnership.
5. Duration of the partnership.
6. Amount of capital contribution by each partner.
7. Profit & Loss Ratio.
8. Duties. Powers and Obligations of the partners.
9. Salaries and withdrawals of the partners.
10. Methods of preparation of accounts and their auditing.
11. Procedure for dissolution of the firm.
12. Procedure for settlement of disputes.

Question 3.
Define partnership and discuss the different types of partners.
Answer:
Basing on the roles and responsibilities partners of a firm can be divided as under :

I) Basing on the participation :

1. Active Partner : The partner who participates in the day-to-day business transactions he is known as “Active Partner”.
2. Sleeping Partner : The partner who do not participates in the day-to-day transactions of the firm, is known as “sleeping partner” or “dormant partner”.

II) Basing on the sharing in profits :

1. Nominal Partner : The partner who allow the firms to use their names as partners in the firm, are called as “Nominal Partners”.
2. Partner in Profits : This type of partner will share only profits. But his liability to creditors is unlimited. He won’t share the losses of the firm. Only he enjoys the profits.

III) Basing on Liability :

1. Limited Partners : Liability of the partners is limited to the extent of their investment of capitals.
2. General Partners : If the liability of the partners is unlimited, they are treated as general partners. If the amount of liability is not specified in the document, such partner is deemed to be general partner.

IV) Basing on the behaviour and conduct exhibited :

1. Partner by estoppel : A partner even by his false representation, public or third parties got believed that he is a partner of one firm, he is called as “partner by estoppel”.
2. Partner by holdingout: A partner or partnership firm declares that a particular person is a partner of their firm and such a person does not disclaim it, then such a partner is said to be “partner by holdingout”.

Question 4.
Is Registration of partnership compulsory under the partnership Act 1932 ? Explain the procedure required for registration ?
Answer:
Registration of partnership firm is not compulsory. It is optional or the partnership firms according to the Indian Partnership Act – 1932. Registration can be made at anytime. By keeping unregistered, partnership firms, the firms cannot sue on others and cannot be sued by others.

The procedure for registration of a firm is as under.

1. The firm will have to apply to the registrar of the firm of the concerned state, by paying stipulated fee for application.
2. Following are the contents of the application :
   1. Name of the firm.
   2. Address of the firm.
   3. Address/locations of the firm, where the firm carries its business operations.
   4. Complete details of the partners along with adresses.
   5. The dates of admission of various partners.
   6. Duration of the firm.
3. Duly filled application form must be signed by all the partners, prescribed registration fee is to be paid in the office of the registrar of the firm.
4. If the registrar will scrutinize the application, attached by the other documents, and if satisfied with all the formalities pertaining to registration, on the name of the firm, the registrar will issue the certificate of registration.

Question 5.
Define Partnership. Explain its Merits and Demerits.
Answer:
A partnership is an association of two or more persons to carry on a business and to share its profits and losses.

Definition : “The relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all”. – Partnership Act of 1932 (Section 4) “The relationship between persons who agree to carry on a business in common with a view to private gain”. – L.H. Haney

Advantages / Merits of a Partnership Firm :

1. Easy Formation : An oral or written agreement is enough to start any lawful business on partnership basis. There are no complicated legal formalities regardings the establishment of such enterprise. Even registration of such firms is not compulsory.
2. Huge Capital : The resources of more than one person are available for the business.
   New partners can be admitted to secure more capital that may be needed for the expansion of business.
3. Wise Decision : A partnership consists of people possessing different abilities. Hence, they discuss every problem in detail and take wise and quick decision.
4. Introduction of division of labour : A partnership enjoys all advantages of division of labour. As there are more than one partner, the duties can be assigned to different partners according to their qualification and specialisation.
5. Greater borrowing capacity :The creditors of the firm can recover their loans from the private properties of all the partners. So the ability of a firm to raise loans depends upon the private properties of the partners. Thus a firm employs greater credit in the market.
6. Secrecy :The partners can keep the business secrets to themselves.
7. Protection of Minority interests : All important decisions are taken by the consent of all partners. If anything goes wrong unsatisfied partner can file a suit in the court of law the minority interest will be protected by law.
8. Flexibility : The partners can change the nature, the method of business, or situation of the business very early by the agreement. No legal formalities for the above changes.
9. Division of Labour : In partnership there are more than one partner hence the work can be divided among them according the qualifications and specialisation.
10. Risk/Losses can be shared by all: The losses incurred by the firm will be shared by all the partners. So the share of loss of each partner will be less than the sole trader.

Demerits / Disadvantages of Partnership :

1. Unlimited Liability : The liability of partners is unlimited. They are not only liable for their business investment but their private properties can also be taken for business liabilities.
2. Limited Resources : A partnership firm may not be able to raise adequate capital for expansion beyond a certain limit. Legally the number of partners in a firm cannot be more than 20, which puts a limit to the capacity of a firm to raise capital for large – scale operation.
3. Continuity is uncertain : Death, insolvency in capacity of one of the partners may lead to dissolution of the firm. Dissolution by notice at anytime brings about the closure of the firm.
4. Mutual Distrust: The mutual distrust among partners is the main cause for the dissolution of partnership concerns.
5. Limitations on transfer of share : No partner can transfer his interest in the firm to outsiders without the consent of all other partners.
6. Lack of public faith : The accounts of partnership concerns are not published. So, the public is unaware of the exact position of the business. Therefore a partnership may not enjoy public confidence.
7. Delay in decision : Before any decision is taken all the partners must be consulted. Hence, quick decisions may not be taken.
8. Differences in opinions : Sometimes the opinions of the partners may differ. They may not be able to come to a common understanding. Such difference of opinions may lead to disputes and costly litigations.

Question 6.
Define partnership and state its important features.
Answer:
Definition : Section 4 of the partnership act, 1932 defines partnership as “the relation between persons who have agreed to share the profits of a business carried on by all or anyone of them acting for all”.

Characteristics / Features of Partnership :

1. Formation : The partnership form of business organisation is governed by the provisions of Indian Partnership Act, 1932. It comes into existence through a legal agreement where in the terms and conditions governing the relationship among the partners, sharing of profits and losses and the manner of conducting the business are specified must be lawful and run with the profit motive.
2. Unlimited Liability :The partners of a firm have unlimited liability. Personal assets may be used for repaying debts incases the business assets are insufficient. Further, the partners are jointly and individually liable for payment of debts.
3. Existence of lawful business :The business of which the persons have agreed to share the profit, must be lawful. Any agreement to indulge in smuggling, black marketing etc., cannot be called partnership business in the eyes of law.
4. Principal agent relationship : Three must be an agency relationship between the partners. Every partner is the principal as well as the agent of the firm. When a partner deals with other parties he/she acts as an agent of other partners and at the same time the other partners become the principal.
5. Voluntary Registration : The registration of a partnership firm is not compulsory. But an unregistered firm suffers from some limitations which make it virtually compulsory to be registered.

Check Your Knowledge

I. Fill in the blanks for the following questions :

Question 1.
The partner who does not participate in the day-to-day activities of the business is known as ____________
Answer:
Sleeping partner

Question 2.
____________ allows the firm use their name as partner.
Answer
Nominal partner

Question 3.
A person who shares the profits of the business without being liable for the losses is known as ____________
Answer:
Profits in partner

Question 4.
The partner having unlimited liability is called a ____________
Answer:
General partner

Question 5.
Maximum partners are ____________ of the partnership firm.
Answer:
Banking 10, others 20

Question 6.
Minimum partners are ____________ of the partnership firm.
Answer:
2

Question 7.
The partners who actively participate in the day-to-day operations of the business are known as ____________
Answer:
Active partner

Question 8.
Partnership is an agreement between ____________ or ____________ persons.
Answer:
Two or more

Question 9.
Business secrete of the firm are known to the ____________
Answer:
Partners

Question 10.
Difference of opinion may give rise to quarrels and lead to ____________ of the firm.
Answer:
Dissolution

Question 11.
The partnership firm is a ____________ organisation.
Answer:
Flexibility

Question 12.
The persons who are enter into partnership individually called ____________ and collectively known as ____________
Answer:
Partners, firm

II. State whether the statement are True or False.

Question 1.
The persons who form a partnership are individually known as partners. (True/False)
Answer:
True

Question 2.
The partnership form of business organisation is governed by the provisions of Indian Partnership Act of 1932. (True/False)
Answer:
True

Question 3.
Every partner is the principal as well as the agent of the firm. (True/False)
Answer:
True

Question 4.
Any agreement to indulge in smuggling, black marketing etc. cannot be called partnership business in the eyes of law. (True/False)
Answer:
True

Question 5.
Limited partner is found in limited partnership firms in some European countries and the USA. (True/False)
Answer:
True

Question 6.
A partnership can be formed easily without many legal formalities. (True/False)
Answer:
True

Question 7.
The partnership firm is a flexible organisation. (True/False)
Answer:
True

Question 8.
The losses of the firm are shared by all partners equally or as per the agreed ratio. (True/False)
Answer:
True

Question 9.
Registrar will not scrutinise the application. (True/False)
Answer:
False

Question 10.
The Registration form contains the following particulars and it should be accompanied by a fee of Rs. 500/- and sent to the registrar of firms. (True/False)
Answer:
False

Student Activity

State whether the statements are True or False.

Question 1.
Partnership is an ideal form of organisation only for large size of organisation. (True/False)
Answer:
False

Question 2.
The partners of the partnership firm have unlimited liability. (True/False)
Answer:
True

Question 3.
The registration of a partnership firm is compulsory. (True/False)
Answer:
False

Question 4.
Sleeping partners simply contribute capital and share the profits and losses. (True/False)
Answer:
True

Question 5.
Partners by holdingout are not entitled to profits but are liable for the firm’s debts. (True/False)
Answer:
True

Question 6.
The partnership firm is not flexible organisation. (True/False)
Answer:
False

Question 7.
It is mandatory to publish the annual accounts of the partnership firm. (True/False)
Answer:
False

Question 8.
The share of interest of any partner can be transferred to other partners or outsiders. (True/False)
Answer:
True

Question 9.
A partnership deed is not a public document. (True/False)
Answer:
False

Question 10.
The death, insolvency, incapacity or retirement of any partner does not bring the firm to an (True/False)
Answer:
False

Regular practice with AP Inter 1st Year Commerce Study Material Chapter 4 Joint Hindu Family Business and Co-operative Society Questions and Answers helps students stay prepared for examinations.

AP Inter 1st Year Commerce 4th Lesson Joint Hindu Family Business and Co-operative Society Questions and Answers

Fill in the Blanks

Question 1.
The family members of three successive generations own the business jointly in the ____________ business.
Answer:
Joint Hindu Family

Question 2.
The membership of the JHF is acquired by ____________ in the same family.
Answer:
Birth

Question 3.
The joint Hindu Family business is governed by two laws viz, the ____________
Answer:
Dayabhaga and Mitakshara

Question 4.
____________ Hindu Law prevails in Assam and West Bengal.
Answer:
Dayabhaga

Question 5.
____________ law directs shares in the property gets fluctuate by the number of co-parceners.
Answer:
Mitakshara

Question 6.
The JHF business is governed by the Hindu succession Act of ____________
Answer:
1956

Question 7.
In JHF business ____________ liability is unlimited.
Answer:
Karta

Question 8.
In JHF business, membership is ____________
Answer:
Unlimited

Question 9.
The term ‘co-operation’ is derived from the Latin word’ ____________
Answer:
Co-operari

Question 10.
The term co-operation means working ____________
Answer:
Together

Question 11.
The motto of co-operative society is each for all and all for ____________
Answer:
Each

Question 12.
The minimum number of members required to form a co-operative society is ____________
Answer:
10

Question 13.
In the case of multi-state co-operative societies, the minimum number of members should be ____________ from each state.
Answer:
50

Question 14.
One-man one-vote exists in a ____________ business.
Answer:
Co-operative

Question 15.
In India, co-operative societies are governed by the co-operative societies Act ____________
Answer:
1912

Very Short Answer Questions

Question 1.
Joint Hindu Family.
Answer:
Joint Hindu family : The Joint Hindu Family (JHF) business is a form of business organisation run by the Hindu Undivided Family (HUF), where the family members of three successive generations own the business jointly. The head of the family of the family known as ‘Karta’ manages the business. The other members are called ‘coparceners’. All of them have equal ownership right over the properties of the business.

The members of the JHF is aquired by birth in the same family. There is no restriction for minors to become members of the business. The liability of the karta is unlimited but the liability of co-parceners is limited to the extent of their shares in the business.

Question 2.
Karta.
Answer:
The head of the Joint Hindu Family is known as ‘Karta’. He is the senior most male member of the family. The karta has the authority to manage the business as per his own will. His ways of managing cannot be questioned. The liability of Karta is unlimited.

Question 3.
Co-parcener.
Answer:
The members of the Joint Hindu Family are called co-parcener. Co-parcener is a person who has a share in the common property. The liability of the co-parcener is limited.

Question 4.
Mitakshara.
Answer:
It is one of the schools in Hindu undivided family business. It is applicable to all over India except Assam and West Bengal. According to this rule, only male members of the family get the right of inheritance on property by birth. The right on property come by brith and lost by death. Illegitimate children will have no right of inheritance till the death of the father.

Question 5.
Dayabhaga.
Answer:
This school of Hindu law prevails only in West Bengal, Assam states. According to this law, if the deceased male co-parcener has not left behind a male issue his window (or in her absence, daughter) will become a co-parcener.

Question 6.
Co-operative society.
Answer:
The term co-operation means Working together’. It is a voluntary association of persons who work together to promote their economic interests. The motto of a co-operative society is “Each for all and all for each”.

Question 7.
Registration of the society.
Answer:
Registration of the society : In India, co-operative societies are registered under the co-operative societies Act 1912 or state co-operative societies Act. The multi-state co-operative societies are registered under the multi-state co-operative societies Act 2002. Once registered, the society becomes a separate legal entity and enjoys the following privileges :

1. The society enjoys perpetual sucession.
2. It has its own common seal.
3. It can enter into agreements with others.
4. It can sue others in a court of Law.
5. It can own properties in its name.

Question 8.
Housing co-operative society.
Answer:
It is formed to provide residential accommodation to their members either on ownership basis or at fair rents. Housing co-operative buys and land constructs flats which are allotted to members.

Question 9.
Producers co-operative society.
Answer:
Producers co-operative society : These societies are formed to protect the interest of small producers and artisans by making available items they need for production, like raw- materials, tools, equipments etc.

Question 10.
Credit co-operative society.
These societies are formed to give financial help to the small farmers and other poor sections of society. These societies grant loans at cheaper rates of interest to its needs.

Question 11.
Consumer co-operative society.
Answer:
These societies are formed to protect the interest of small producers and artisans by making available items of their need for production, like raw-material, tools and equipments etc.

Question 12.
Farming co-operative societies.
Answer:
These societies are formed by the small farmers to get the benefit of large scale farming.

Question 13.
Marketing co-operative society.
Answer:
Small producers form together as marketing co-operative societies to solve the marketing problems of their products.

Short Answer Questions

Question 1.
Trace out the features of JHF business.
Answer:
The Joint Hindu Family business runs by Hindu Undivided Family in which the members are the owners jointly. The members are called as “CO-PARCENERS”. The business is managed by the head of the family, known as “KARTHA”.

Definition : A Joint Hindu Family is a family which has the same place of worship, share the same food and shares the same property of the family.

Features / Characteristics :

1. Formation : In JHF business, the minimum number of numbers is 2, having property inheritance. It is not created by an agreement but by operation of law.
2. Legal status : It is jointly owned by the members and governed by Hindu Succession Act, 1956.
3. Membership : Only the members of HUF will get membership rights by brith. Outsiders are not allowed as co-parceners.
4. Profit sharing : All co-parceners will have equal rights in profits of the business.
5. Management : The business is managed by the senior, most member of the family known as ‘Karta’ or ‘Manger’ other members do not have the right to participate in the management.
6. Liability : The personal properties of Karta are utilized to meet the liabilities of the business. The karta will have only unlimited liability, whereas coparceners will have limited liability.

Question 2.
Briefly explain different types of co-operative societies.
Answer:
The primary objective of this movement is “how to protect economically the weaker sections of society”. The co-operative form of organisation is a democratic setup. The philosophy behind co-operative movement is “All for each and each for all”.

Definition : “Co-operation is self-help made effective by organisation”.- Sir. H. Plunkeet

Types of co-operative society :

1. Consumer’s co-operative society : These are started to help lower and middle class people. These societies protect weaker sections of the society.
2. Producer’s co-operative societies : These societies are established for the benefit of small producers.
3. Marketing co-operatives : These societies are association of producers for selling their products at remunerative prices. These societies provide services like grading, warehousing, insurance etc.
4. Housing co-operative societies : These societies provides loan facilities to the weaker sections of the society to construct own houses.
5. Farming co-operative societies : These are the societies formed to reap the benefits of large scale farming on scientific lines. These are called “agricultural credit societies”.
6. Credit co-operative societies : These societies are formed to give financial help to the small farmers and other poor sections of society.

Question 3.
What privileges are enjoyed by registered co-operative society ?
Answer:
A registered co-operative society enjoys several privileges, including the ability to hold property, enter contracts, and democratic management. They also have the right to access government resources, preferential treatment in certain areas, and may be eligible for tax exemptions.

Legal and operational privileges :

1. Seperate legal entity : Registered co-operative societies are treated as a distinct legal entity from their members, allowing them to own property, enter contracts, sue and be sued, and perform other legal actions in their own name.
2. Limited liability : Member’s liability is typically limited to the amount of their shareholdings meaning their personal assets are not at risk if the society increase debts.
3. Perpetual succession : The society continues to exist even if members leave or die, ensuring uninterupted operation.
4. Property ownership and contracts : Registered societies can own property, enter into contracts, and conduct business activities for their purposes.
5. Preferential treatment : They may receive preferential treatment in accessing government resources, programs and services.
6. Tax exemption/deductions : Some co-operative societies may be eligible for tax exemptions or deductions, depending on the specific regulations and their activities.

Question 4.
What are the features of co-operative society ?
Answer:
The term “co-operation” is derived from ‘co-operi’ which means with and together.

Definition : “A society which has its objectives the promotion of the interest of its members in association with co-operative society is “Each for all and all for each”.

Characteristics / Features :

1. Voluntary Association : Members join the co-operative society voluntarily i.e., by their own choice.
2. Open membership : The membership is open to all those having a common economic interest.
3. Number of members : A minimum of 10 members are required to form a co-operative society.
4. State control : The registration is compulsory. Every co-operative society comes under the control of supervision of Government.
5. Capital: The capital of the co-operative society is contributed by its members. It depends on the loan from government.
6. Democratic set up : The management is selected through one-man, one-vote system. Co-operative business stands or falls with democracy.
7. Service motive : Primary objective of co-operative society is to provide service to its members.
8. Return on capital investment : Every member get returns on their investment in the form of dividend.

Question 5.
What are the advantages of Joint Hindu Family business organisation ?
Answer:
Meaning : The Joint Hindu Family business runs by Hindu Undivided Family, in which the members are the owners jointly. The members are call as “Co-parceners”.

Definition : “A Joint Hindu Family is a family which has the same place of worship, shares the same food and share the same property of the family”.

Merits / Advantages :

1. Perpetuity or continuity : It is not dissolved by death or insanity of a co-parcener. The stability of the business increases the reputation in the market.
2. Centralized and efficient management: The business affairs are managed by Kartha only. Hence, unity of command, disciplined management, maintenance of secrecy etc. are possible.
3. No limit to membership : The membership of the co-parcener can be obtained birth in the family. So there is no limit on maximum number.
4. Better credit: When compared to a sole trader, the credit worthiness is better. As kartha is having unlimited liability, the credit facilities are also available.
5. Quick decisions : Kartha can only take decisions. No need to consult any other coparcener. Hence, there will be no delay in taking and implementation of decisions pertaining to decisions.

Question 6.
Explain the advantages of a co-operative form of business organisation.
Answer:
Advantages / Merits :

1. Easy Formation : A co-operative society is formed voluntarily. There are no many legal formalities. It can be formed by 10 persons as minimum. Its registration is easy.
2. Democratic management : Every member can vote irrespective of shares held by them. Every member ha an equal voice in the management. In this way the management is done in a democratic way.
3. Limited Liability : The liability of the members is limited.
4. Perpetual Existence : It is not affected by the death or insolvency of any member. It continues its business.
5. Service Motto : It is started not for profits but for service. The members are provided with goods at cheap rates. A feeling of co-operation is created among members.
6. State Patronage : They get financial and non-financial help from the government because they work for the uplift of weaker sections of society.

Question 7.
State the disadvantage of Joint Hindu Family business organisations.
Answer:
Disadvantages / Demerits / Limitations :

1. No direct relation between efforts and rewards : Kartha manages the entire business and the others will share the fruits of the business. There will be no scope for developing leadership qualities, problem solving ability, business handling skills etc. Moreover, idleness may results in laziness.
2. Limited managerial ability : As there is scarcity in man power, no scope for managerial ability.
3. Limited capital and financial resources : The investment is limited to the extent of the property held by the family. In sometimes it may not be adequate for the necessary steps to be taken in business. Financial resources are very limited for Joint Hindu Families.
4. May lead to selfishness of Kartha : Kartha having unlimited powers. And he is not answerable to anybody. He may behave selfishly and manipulate the accounts.
5. Lack of stability : The stability of this form of business is linked with joint family. But the joint family system is breaking very fast now-a-days. So this form of organisation lacks stability.

Question 8.
What are the disadvantages of co-operative business organisation ?
Answer:
Demerits / Disadvantages / Limitations :

1. Limited Resources : The co-operative societies are not able to raise huge amount of capital because the members usually come from a limited area.
2. Inefficiency Management; A co-operative is managed by the members. The members usually lack of experience and managerial capacity. In efficient management may lead to heavy loss.
3. Absence of motivation : The co-operative are non-profit making concerns. Though the society makes huge profits, the members get a very low rate of dividend. So they do not take any active part and interest in the management. Employees also do not have any interest to work hard as they get low salaries.
4. Lack of Co-operation : The success of a society depends upon two factors. Co-operation from members and members familiarity with the principles. But in practice both these conditions are very rarely observed.
5. Lack of secrecy : It is very difficult to maintain business secrets which are very important for the success of a business unit.
6. Political Interference : Generally, members of co-operative society are affiliated to political parties. Political interference is a great problem.

Long Answer Questions

Question 1.
Define the co-operative society and explain its features.
Answer:
Meaning : The term “co-operation” is derived from ‘co-operi’ which means with and together.

Definition : “A society which has its objectives the promotion of the interest of its members in accordance with co-operative principles”. – Indian Co-operative Societies Act, 1912

Features / Characteristics (Principles) :

1. Voluntary Association : Everyone is act liberty to enter or leave the co-operative society as and when he likes. Nobody is compelled to join a co-operative society. Voluntary membership has also been responsible for the success of co-operative movement.
2. Membership is open for all : The management of a co-operative society is opened to all irrespective of religion, caste, creed, colour or political affiliation. The primary aim of co-operatives is to serve its members.
3. State control : The registration is compulsory. Every co-operative society comes under the control and supervision of Government.
4. Capital : As the capital contributed by the members is very limited the society often depends on the loan from government along with assistance from state/central government and apex institutions.
5.  Democratic Management : The management of a co-operative society is always on democratic lines. All the members of a society select of a body of persons to conduct and control the day-to-day working of the society.
6. Number of members : Ten members are sufficient to form a society. There is no limitation on maximum number. But after formation of society, the maximum number is to be disclosed.
7. Service Motive : The Primary objective of co-operative societies is to provide services to their members.
8. Return on capital investment : Members purchase shares in the society to invest capital. The members get returns on their capital investment in the form of dividend.
9. Distribution of surplus : The co-operative act has a provision to distribute certain percentage of profits as dividends to its members.
10. Registration of the society : jn India, co-operative societies is registered under the co-operative societies Act-1912 under the state co-operative societies act.
11. Equal voting rights : One man, one vote is the co-operative principle.
12. Liability of members : Generally, the members of the society will have limited liability.
13. Separate legal entity : A registered cooperative society will enjoy the perpetual succession.
14. Privileges and exemptions : A registered co-operative society enjoys certain privileges, exceptions and concessions.
15. Perpetual Succession : The society enjoys perpetual succession by having common seal.

Question 2.
What is Joint Hindu Family business? Discuss its main features.
Answer:
The Joint Hindu Family business runs by Hindu Undivided Family in which the members are the owners jointly The members are called as “CO-PARCENERS”. The business is managed by the head of the family, known as “KARTHA”.

Definition : A Joint Hindu Family is a family which has the same place of worship, share the same food and shares the same property of the family.

Features / Characteristics :

1. Formation : In JHF business, the minimum number of numbers is 2, having property inheritance. The contractual relation with respect to the business can be constituted to Hindu Law, but not by agreement.
2. Legal status : It is jointly owned by the members and governed by Hindu Succession Act, 1956.
3. Membership : Only the members of HUF will get membership rights by birth. Outsiders are not allowed as coparceners.
4. Profit sharing : All coparceners will have equal rights in profits of the business.
5. Management : The business is managed by the senior, member of the family called “Kartha”. Accounts are also maintained and managed by Kartha.
6. Liability The personal properties of Kartha are utilized to meet the liabilities of the business. That is kartha will only have unlimited liability, whereas coparceners will have limited liability.
7. Continuity : Death of the coparceners will not affect the existence of the business. Death of Kartha leads to occupy the place of kartha by next eldest person.
8. Dissolution : If the coparceners are dissatisfied, the business can be dissolved by mutual agreement or by partition suit in the court of law.

Question 3.
Define co-operative society and explain the different types of co-operative
societies.
Answer:
Definition : The Indian Co-operative societies Act, 1912, section (4) defines a co-operative society as “a society, which has its objectives for the promotion of economic interests of its members in accordance with co-operative principles”.

Types of Co-operative Societies : According to the needs of the people, we find different types of co-operative societies in India.
Some of the important types are given below :

1. Consumer’s Co-operative Societies : These societies are formed to protect the enterest of consumers by making available consumer goods of high quality at reasonable prices.
2. Producer’s Co-operative Societies : These societies are formed to protect the interest of small producers and artisans by making available items they need for production, like raw-materials, tools, equipments etc.
3. Marketing co-operative Societies : Small producers form together as marketing co-operative societies to solve the marketing problem of their products.
4. Housing Co-operative Societies : Housing co-operative societies are formed generally in urban areas to provide residential housing facilities to their members.
5. Farming Co-operative Societies : These societies are formed by the small farmers to get the benefit of large-scale farming.
6. Credit Co-operative Societies : These societies are started by persons who need credit. They accept deposits from the members and grant them loans at a reasonable rate of Interest.

Question 4.
A co-operative form of organisation is a method of “self-help”. Discuss.
Answer:
The co-operative movement started in England by Robert – Owen in the year 1844.

The “co-operation” is derived from ‘co-operi’ which means with and together.

Definition : “A society which has its objectives the promotion of the interest of its members in accordance with co-operative principles. – Indian Co-operative Society Act, 1912

Features :

1. Voluntary Association : Members of the society can be joined at their will, i.e., their own choice.
2. Open membership : Any one can become its member irrespective of caste, creed, religion, sex, etc.
3. Number of members : Atleast 10 members are required to form a co-operative society.
4. Democratic set up : Every member will have equal voting right, irrespective of shares and the management works on the democratic lines of management.
5. Service motive : The main objective of co-operative society is to render service to its
   members.
6. Distribution of surplus : Profits of the society are distributed in the form of dividend to its members. Some statutory reserve will also be kept a side for the welfare of the society.

Hence, from the above definitions, co-operative society is a voluntary association of persons who work together to promote their economic interests. It works on the principle of self-help and mutual help. It is reflected in profit distribution, decision making, entering as a member and the service motto of “each for all and all for each”.

Question 5.
State the advantages and disadvantages of Joint Hindu Family business organisation.
Answer:
The Joint Hindu Family business runs by Hindu Undivided Family, in which the members are the owners jointly. The members are call as “Coparceners”. The business is managed by the head of the family, known as “Kartha”.

Definition : “A Joint Hindu Family is a family which has the same place of worship, shares the same food and share the same property of the family”.

Merits / Advantages :

1. Perpetuity or continuity : It is not dissolved by death or insanity of a coparcener. The stability of the business increases the reputation in the market.
2.  Centralized and efficient management: The business affairs are managed by Kartha only.
3. No limit to membership : The membership of the coparcener can be obtained by birth in the family. So there is no limit on maximum number.
4. Better credit: When compared to a sale trader, the credit worthiness is better. As kartha is having unlimited liability, the credit facilities are also available.
5. Quick decisions : Kartha can only take decisions. No need to consult any other coparcener.

Disadvantages / Demerits / Limitations :

1. No direct relation between efforts and rewards : Kartha manages the entire business and the others will share the fruits of the business. There will be no scope for developing leadership qualities, dynamism, problem solving ability, business handling skills etc. Moreover, idleness may results in laziness.
2. Limited managerial ability : As there is scarcity in man power, no scope for managerial ability.
3. Limited capital and financial resources : The investment is limited to the extent of the property held by the family. Financial resources are very limited for Joint Hindu Families.
4. May lead to selfishness of Kartha : Kartha having unlimited powers. And he is not answerable to anybody. He may behave selfish and manipulate the accounts.
5. Lack of stability : The stability of this form of business is linked with joint family. So this form organisation lacks stability.

Question 6.
Explain the advantages and disadvantages of a co-operative form of business organization.
Answer:
The term “co-operation” is derived from ‘co-operi’ which means with and together.

The motto of co-operative society is “Each for all and all for each”.

Definition : “A society which has its objectives the promotion of the interest of its members in accordance with co-operative principles”. – Indian Co-operative Societies Act, 1912

Merits / Advantages :

1. Easy Formation : It is formed voluntarily. There are no legal formalities. It can be formed by 10 persons as minimum. Its Registration is easy.
2. Democratic management : It is elected by the members from among themselves. All members are given equal voting rights. So these asociations are run on democratic principles.
3. Limited Liability : The liability of the members is limited.
4. Perpetual Existence : It is not affected by the death or insolvency of any member. It continues its business.
5. Economical operations : The operations carries on by a co-operative society turnout to be quite economical due to elimination of the middlemen.
6. Tax concessions : The law gives preferential treatment to co-operative societies in the form of tax concessions and exceptions.
7. State Patronage : To get financial and non-financial help from the government because they work for the uplift of weaker sections of society.
8. Service Motto : The co-operative societies are started not for profit but for service. The members are provided with goods at cheap rates. A feeling of co-operation is created among members.
9. Cordial relations among members : Co-operatives work on the concept of “All for each and each for all”. As a result, they foster friendship and faternity among members.
10. No speculation in shares : In co-operative society membership is always open to new members. Any person can buy new shares at any time. There is no scope for speculation.
11. Social Utility : This kind of business organisation provides education and training in democracy, self-Government, self-help, mutual help and spirit of service etc. among members.
12. Elimination of middle men : The co-operative societies purchase goods from manufactures / producers directly and supply goods to consumers directly middlemen will be eliminated, which leads to reduction in sales price.
13. Check on the other business organisations : Co-operative societies supply goods at reasonable price even when the other organisations are supplying at more costs. It reduces the exploitation of consumer by other organizations.
14. Provision of employment : Trade and industry have flourished in the co-operative sector with the aids of the state. They create employment avenues in the market. The co¬operative sector and provided jobs to the people.

Demerits / Disadvantages / Limitations :

1. Limited Resources : The co-operative societies are not able to raise huge amount of capital because the members usually come from a limited area.
2. Inefficiency Management : A co-operative society is managed by the members. The members usually lack of experience and managerial capacity. Inefficient management may lead to heavy loss.
3. Absence of motivation : The co-operatives are non-profit making concerns. Employees also do not have any interest to work hard as they get low salaries.
4. Lack of Co-operation : Co-operation from members and members familiarity with the principles. But in practice both these conditions are very rarely observed.
5. Lack of secrecy : It is very difficult to maintain business secrets which are very important for the success of a business unit.
6. Political Interference : Generally, members of co-operative society are affiliated to political parties. Political interference is a great problem.
7. No credit : Credit is not allowed in co-operative society. Generally people buy their requirements from other shops on credit. It is loss to the society.
8. Lack of public confidence : The co-operative societies have achieved only limited success in many countries. That has ended, the confidence of the public.
9. Excessive Government Interference : Excessive state participation and regulation kills the voluntary, character of the co-operative organisation.
10. Limited scope : They have limited capital-raising power. They cannot undertake large- scale operations.

Check Your Knowledge

I. Fill in the blanks for the following questions :

Question 1.
In a Joint Hindu Family, who is the head of the family and manages the property ____________
Answer:
The karta

Question 2.
Besides bank, the other formal major source of cheap credit in rural areas are ____________
Answer:
More than one of the above

Question 3.
A co-operative society is an example for ____________
Answer:
Formal group

Question 4.
Co-operative movement first started in ____________
Answer:
England

Question 5.
Co-operatives in India follow this type of organisation structure ____________
Answer:
Federal structure

Question 6.
At least 10 adults, no maximum limit incase of ____________
Answer:
Co-operative society

Question 7.
Apex society represents ____________
Answer:
state level

Question 8.
The urban credit co-operatives are also known as ____________
Answer:
Urban co-operative banks

Question 9.
Co-operative Banks that fall under the banking regulation Act of 1949 are controlled by ____________
Answer:
RBI

Question 10.
The principle followed in a co-operative society is ____________
Answer:
One-man one-vote

Question 11.
JHF stands for ____________
Answer:
Joint Hindu Family

Question 12.
“CO” means ____________
Answer:
With

Question 13.
Operari means ____________
Answer:
To work

Question 14.
Co-operative society maximum number ____________
Answer:
Unlimited

Question 15.
Karta ____________
Answer:
Head of the family

State whether the statement are True or False.

Question 1.
Housing co-operative societies are formed in Rural areas. (True/False)
Answer:
False

Question 2.
In, India co-operative societies are registered under the co-operative societies Act 1922. (True/False)
Answer:
False

Question 3.
The primary objective of all co-operative societies is to provide services to its members. (True/False)
Answer:
True

Question 4.
Members join the co-operative society voluntarily. (True/False)
Answer:
True

Question 5.
The liability of co-parceners is unlimited. (True/False)
Answer:
False

Question 6.
In JHF business there must be at least two members in the family. (True/False)
Answer:
True

Question 7.
Kartha has all rights on property. (True/False)
Answer:
True

Question 8.
The school of HUF prevails in entire India except in Assam and West Bengal. (True/False)
Answer:
True

Question 9.
HUF stands for Hindu Unity Family. (True/False)
Answer:
False

Question 10.
JHF stands for Joint Hindu Family. (True/False)
Answer:
True

Question 11.
As per the ‘Dayabhaga’ system of British law. (True/False)
Answer:
False

Question 12.
Death of any co-parceners does not affect the continuity of business. (True/False)
Answer:
True

Question 13.
Latin Word “co-operari”. (True/False)
Answer:
True

Question 14.
The motto of co-operative society is “Each for all and all for each. (True/False)
Answer:
False

Question 15.
The capital of the co-operative society is contributed by its members. (True/False)
Answer:
True

Student Activity

State whether the statements are True or False.

Question 1.
The HUF business is managed by Karta. (True/False)
Answer:
True

Question 2.
In Mitakshara the membership is acquired by birth. (True/False)
Answer:
True

Question 3.
The co-parceners have equal ownership rights over the profits of the business. (True/False)
Answer:
True

Question 4.
The minor cannot be a member of the HUF business. (True/False)
Answer:
False

Question 5.
The HUF business is governed by the Hindu succession Act of 1956. (True/False)
Answer:
False

Question 6.
The Karta has a limited liability. (True/False)
Answer:
False

Question 7.
The term co-operation is derived from the French word co-operari. (True/False)
Answer:
False

Question 8.
The co-operative society’s basic principles are self-help and mutual help. (True/False)
Answer:
True

Question 9.
The minimum number of members required to form a co-operative society is 5. (True/False)
Answer:
False

Question 10.
The Registration of a co-operative society is not compulsory. (True/False)
Answer:
True

AP Intermediate 1st Year Maths Textbook Solutions 2026 2027

AP Inter 1st Year Maths Study Material

AP Board Solutions Class 11 Maths

Chapter 1 Sets

• Chapter 1 Sets Exercise 1a
• Chapter 1 Sets Exercise 1b
• Chapter 1 Sets Exercise 1c
• Chapter 1 Sets Exercise 1d
• Chapter 1 Sets Exercise 1e
• Chapter 1 Sets Exercise 1f
• Chapter 1 Sets Exercise 1g
• Chapter 1 Sets MCQ

Chapter 2 Relations and Functions

• Chapter 2 Relations and Functions Exercise 2a
• Chapter 2 Relations and Functions Exercise 2b
• Chapter 2 Relations and Functions Exercise 2c
• Chapter 2 Relations and Functions Exercise 2d
• Chapter 2 Relations and Functions Exercise 2e
• Chapter 2 Relations and Functions Exercise 2f
• Chapter 2 Relations and Functions MCQ

Chapter 3 Trigonometric Functions

• Chapter 3 Trigonometric Functions Exercise 3a
• Chapter 3 Trigonometric Functions Exercise 3b
• Chapter 3 Trigonometric Functions Exercise 3c
• Chapter 3 Trigonometric Functions Exercise 3d
• Chapter 3 Trigonometric Functions MCQ

Chapter 4 Complex Numbers and Quadratic Equations

• Chapter 4 Complex Numbers and Quadratic Equations Exercise 4a
• Chapter 4 Complex Numbers and Quadratic Equations Exercise 4b
• Chapter 4 Complex Numbers and Quadratic Equations MCQ

Chapter 5 Linear Inequalities

• Chapter 5 Linear Inequalities Exercise 5a
• Chapter 5 Linear Inequalities Exercise 5b
• Chapter 5 Linear Inequalities MCQ

Chapter 6 Permutations and Combinations

• Chapter 6 Permutations and Combinations Exercise 6a
• Chapter 6 Permutations and Combinations Exercise 6b
• Chapter 6 Permutations and Combinations Exercise 6c
• Chapter 6 Permutations and Combinations Exercise 6d
• Chapter 6 Permutations and Combinations Exercise 6e
• Chapter 6 Permutations and Combinations MCQ

Chapter 7 Binomial Theorem

• Chapter 7 Binomial Theorem Exercise 7a
• Chapter 7 Binomial Theorem Exercise 7b
• Chapter 7 Binomial Theorem MCQ

Chapter 8 Sequences and Series

• Chapter 8 Sequences and Series Exercise 8a
• Chapter 8 Sequences and Series Exercise 8b
• Chapter 8 Sequences and Series Exercise 8c
• Chapter 8 Sequences and Series Exercise 8d
• Chapter 8 Sequences and Series MCQ

Chapter 9 Straight Lines

• Chapter 9 Straight Lines Exercise 9a
• Chapter 9 Straight Lines Exercise 9b
• Chapter 9 Straight Lines Exercise 9c
• Chapter 9 Straight Lines Exercise 9d
• Chapter 9 Straight Lines MCQ

Chapter 10 Conic Sections

• Chapter 10 Conic Sections Exercise 10a
• Chapter 10 Conic Sections Exercise 10b
• Chapter 10 Conic Sections Exercise 10c
• Chapter 10 Conic Sections Exercise 10d
• Chapter 10 Conic Sections Exercise 10e
• Chapter 10 Conic Sections MCQ

Chapter 11 Introduction to 3D Geometry

• Chapter 11 Introduction to 3D Geometry Exercise 11a
• Chapter 11 Introduction to 3D Geometry Exercise 11b
• Chapter 11 Introduction to 3D Geometry Exercise 11c
• Chapter 11 Introduction to 3D Geometry MCQ

Chapter 12 Limits and Derivatives

• Chapter 12 Limits and Derivatives Exercise 12a
• Chapter 12 Limits and Derivatives Exercise 12b
• Chapter 12 Limits and Derivatives Exercise 12c
• Chapter 12 Limits and Derivatives MCQ

Chapter 13 Statistics

• Chapter 13 Statistics Exercise 13a
• Chapter 13 Statistics Exercise 13b
• Chapter 13 Statistics Exercise 13c
• Chapter 13 Statistics MCQ

Chapter 14 Probability

• Chapter 14 Probability Exercise 14a
• Chapter 14 Probability Exercise 14b
• Chapter 14 Probability Exercise 14c
• Chapter 14 Probability Exercise 14d
• Chapter 14 Probability MCQ

AP Inter 1st Year Maths Weightage BluePrint 2026-2027

AP Inter 1st Year Study Material

Regular practice with AP Inter 1st Year Commerce Study Material Chapter 3 Sole Proprietorship Questions and Answers helps students stay prepared for examinations.

AP Inter 1st Year Commerce 3rd Lesson Sole Proprietorship Questions and Answers

Fill in the Blanks

Question 1.
The arrangement of ownership and management of business organisations is termed as ___________ organisation.
Answer:
Business

Question 2.
A sole proprietorship is also known as ___________ entrepreneurship.
Answer:
Individual

Question 3.
___________ is the oldest form of business organisation.
Answer:
A sole proprietorship

Question 4.
The ___________ form of business organisation has a single owner.
Answer:
Sole proprietorship

Question 5.
The liability of the sole proprietor is ___________.
Answer:
Unlimited

Very Short Answer Questions

Question 1.
Business Organisation ?
Answer:
In order to carryout any business and to achieve of objective of earning profit, it is required to bring together all the resources and put them into action in a systematic way and to co-ordinate and controll all these activities properly. This arrangement is knownas “Business Organisation”.

Question 2.
Sole proprietorship.
Answer:

• “A type of business unit where one person is solely responsible for providing the capital and bearing the risk of the enterprise, and for the management of the business”. – J.L. Hanson
• “Sole proprietorship is a form of business where the individual proprietor is the supreme judge of all matters pertaining to his business”. – Kimball and Kimball

Question 3.
Unlimited liability.
Answer:
The liability of the sole proprietor is unlimited. Incase of loss, if his business assets are not enough to make the payment of business liabilities, his personal property can also be utilised to pay off the liabilities of the business.

Question 4.
Explain any two characteristics of Sole trade business.
Answer:
Characteristics/Features of sole trade business :

1. Single ownership : The sole proprietorship form of business organisation has a single owner who himself/herself starts the business by bringing together all the resources.
2. Less Legal Formalities : The formation and operation of a sole proprietorship form of business organisation involves less legal formalities. Thus, its formation is quite easy and simple.

Question 5.
Explain any two limitations of Sole trade business.
Answer:
Limitations of sole trade business :

1. Limited Resources : The resources of a sole proprietor are always limited. Being a single owner, it is not always possible to arrange sufficient funds from his own sources. Again borrowing funds from friends and relatives or banks has its own implications. So, the proprietor has a limited capacity to raise funds for his business.
2. Unlimited Liability : In the eyes of the law, the proprietor and the business are one and the same. So, personal properties of the owner can also be used to meet the business obligation and debts.

Question 6.
One man control.
Answer:
One man control : The controlling power of the sole proprietorship business always remain with the owner. He/she runs the business as per his/her own will.

Question 7.
No separate Entity.
Answer:
The sole proprietorship unit does not have an entity separate from the owner. The businessman and its enterprise are one and the same, and the businessman is responsible for everything that happens in his business firm.

Question 8.
What is the meaning of sole proprietorship ?
Answer:
It is a business organisation in which a single individual introduces his own capital, skill and intelligence in the management of the affairs. He is solely responsible for the results of its operations.

Question 9.
Write about lack of continuity.
Answer:
The sole trader has to run his business on his ability and capacity. When he suffers from a long illness or when he dies the business may be closed down. There is no continuity in the sole trading concern.

Question 10.
Explain Direct Motivation.
Answer:
The sole proprietor takes keen interest in the working of the business. He tries put his heart and soul in the business so as to earn as much profits as he can. There is direct relationship between effort and reward.

Question 11.
Explain Limited Resources.
Answer:
The resources of a sole proprietor are limited. He has only two sources of securing capital – personal savings and borrowings on personal securities. There is a limit to which a single person can invest. Therefore, the sole trading concern has limited capital.

Question 12.
Write about quick decisions.
Answer:
He is the supreme master of his business. He has to take all the business decisions himself. He need not consult any other person. If more than one person is involved in decision-making, then delay is bound or occurs.

Short Answer Questions

Question 1.
Explain the features of sole proprietorship (or) characteristics.
Answer:
Features / Characteristics :

1. Single ownership : The business organisation has a single ownership. The proprietor brings all the resources. One man contributes capital.
2. No separation of ownership and management : The owner manages the business using his/her own intelligence and skill. There is no scope for distinguish ownership and management as in the case of other organisations like joint stock companies.
3. Less number of legal formalities : Formation of sole proprietorship is very simple and easy. A lesser number of legal formalities is required. Registration is not also compulsory.
4. No separate Entity : The businessman and business enterprise are one and the same. There is no separate legal entity. Hence, the proprietor is responsible for every act of the business.
5. No share in profits or losses : The sole proprietor enjoys all the benefits and he has to borne all the losses solely. The proprietor has to face the risk alone.
6. Unlimited Liability : The liability of the sole proprietor is unlimited. That is, the liabilities of the business are to be re-paid even by utilizing personal assets.
7. One-man control: The controlling power of the sole proprietorship rests with the owner. On the will of the owner business will be managed and controlled.
8. Limited area of operations : This kind of business is not so easy to scatter everywhere, due to limited capability of managerial abilities and resources.

Question 2.
What is meant by Business Organisation ?
Answer:
Arrangement of ownership and management of business organisations is termed as ‘Forms of Business Organisation’. Business organisations may be owned and managed by a single individual (sole proprietorship) or a group of individuals (Partnership) or in the form of a company (Joint stock company). In India, business organisations usually take the following forms.

Question 3.
What is sole proprietorship ?
Answer:
The sole proprietor is an individual who owns and manages a business. The individual brings his own or borrowed capital, manages the business himself, bears all the risks alone, enjoys all profits, suffers all losses.

Definition:

1. According to Wheeler : The sole proprietorship is that form of business ownership which is owned and controlled by a single individual. He receives all the profits and bears the risks of his property in the success or failure of the enterprise”.
2. According to Kimball & Kimball: “The individual proprietor is the supreme judge of all matters pertaining to his business subject only to the general laws of land and to such special legislation as may effect his particular business”.

Question 4.
Explain the limitations of a sole trader.
Answer:
Demerits/Disadvantages/Limitations of sole proprietorship :

1. Limited Resources : The resources of a sole proprietor are limited. He has only two sources of securing capital. Personal savings and borrowings on personal securities. There is a limit to which a single person can invest. Therefore, the sole trading concern has limited capital.
2. Limited managerial ability : A single person may not be an expert in all fields. This business organisation always suffers from lack of managerial expertise.
3. Unlimited Liability : The liability of a sole proprietor is unlimited. His private properties can also be used for meeting business losses. So, he never shows interest of expansion.
4. Less scope for economies of scale : Sole trader usually operates on small scale only. So, he cannot enjoy the benefits of large-scale production. This may raise the cost of business operations.
5. Limited area of operations : Generally the sole trader’s activities cannot go beyond a certain area due to his limited skill and resources.
6. No Division of Labour : The sole trader has limited capital. So he cannot hire the service of experts. Therefore, there is no specialization or division of labour in the sole trading concern.
7. Lack of continuity : The continuity of the business is linked with the life of the proprietor illness, death of insolvency of the proprietor can lead to closure of the business. Thus, the continuity of business is uncertain.
8. Restricted growth : The limitations of capital and managerial ability act as a barrier to the development and expansion of business. Economies of large-scale manufacturing buying and selling cannot be obtained.

Question 5.
Explain the advantages of sole proprietorship.
Answer:
Merits / Advantages :

1. Easy Formation : It can be very easily started no legal formalities are necessary business.
2. Direct motivation : The entire profit of the business goes to the owner. This motivates the proprietor to work hard and run the business effectively and efficiently.
3. Business secrets : In this form of organisation the secretes can be retained easily.
4. Direct contact with customers : He can establish and maintain personal touch with his customers.
5. Economy in management: The sole trader knows that he is the only person to bear all the losses of his business.
6. Personal relations with employees : He establishes personal and direct contact with his employees.
7. Quick decisions : He is the supreme master of his business. He has to take all the business decisions himself.
8. Social Advantages : This form of organisation provides employment opportunities. It prevents concentration of economic wealth and power in the hands of a few individuals and encourages decentralization.
9. Flexibility in operation : Changes in the buusiness are necessary. The sole trading concern is dynamic in its nature. The nature of the business can be easily changed according to the changing market conditions. So, it is an ideal form of business organisation.
10. Easy Dissolution : There is no scope of difference of opinion in case of dissolution of business.

Long Answer Questions

Question 1.
Define Sole Proprietorship and discuss its merits and demerits.
Answer:
Any business unit which is owned and run by a single person is known as sole trade. This organisation is also known as sole proprietorship.

Definitions :
“The individual entrepreneurship is the form of business on the head of which stands an individual as the one who is responsible who directs its operations, who alone runs the risk of failure”. – L.H. Haney

“A type of business unit where one person is solely responsible for providing the capital and bearing the risk of the enterprise, and for management of the business”. – J.L. Hanson

Merits / Advantages :

1. Easy Formation : It can be very easily started no legal formalities are necessary for its formation.
2. Direct motivation : The sole proprietor takes keen interest in the working of the business.
3. Business secrets : In this form of organisation the secrets can be retained easily.
4. Direct contact with customers : He can establish and maintain personal touch with his customers.
5. Quick Decisions : He is the supreme master of his business. He has to take all the business decisions himself.
6. Economy in management: The sole trader knows that he is the only person to bear all the losses of his business.
7. Personal relations with employees : He establishes personal and direct contact with his employees.
8. Social Advantages : This form of organisation provides employment opportunities.
9. Flexibility in operation : It >s very easy to initiate and implement changes as per the requirements of the business.
10. Easy Dissolution : There is no scope of difference of opinion in case of dissolution of business.

Demerits / Disadvantages / Limitations :

1. Limited Resources : The resources of a sole proprietor are limited. There is a limit to which a single person can invest. Therefore, the sole trading concern has limited capital.
2. Limited managerial ability : He will not be able to devote sufficient time for all types of activities. Hence, limited managerial capacity will hinder the growth of concern.
3. Unlimited liability : The liability of a sole trader is unlimited. So personal properties of the owner can also he used to meet the business obligations and debts.
4. Less scope of economies of scale : Sole trader usually operates on small scale only. So, he cannot enjoy the benefits of large-scale production.
5. No division of labour : Sole trader has limited capital. So he cannot hire the service of experts. Therefore, there is no specialization or division of labour in the sole trading concern.
6. Limited area of operation : Generally, the sole trader’s activities cannot go beyond a certain area due to his limited skill and resources.
7. Lack of continuity : The continuity of the business is linked with the life of the proprietor. Illness, death or insolvency of the proprietor can lead to closure of the business. Thus, the continuity of business is uncertain.
8. Restricted growth : The limitations of capital and managerial ability act as breaker to the development and expansion of business.

Question 2.
Define Sole proprietorship and explain the features of sole proprietorship.
Answer:
It is a business organisation in which a single individual introduces his own capital, skill and intelligence in the management of its affairs. He is solely responsible for the results of its operations.

Definition : “A type of business unit where one person is solely responsible for providing the capital and bearing the risk of the enterprize, and for the management of the business”. – J.L. Hanson

Features / Characteristics :

1. One man ownership : The ownership lies with one person only. He invests his own money or borrow from his friends or relatives.
2. No seperation of ownership and management : The owner himself manages the business. The separation of ownership from management is not present in this form of organisation.
3. No legal formalities : No legal formalities are required to start sole trading business. However, in some cases, a licence may be required.
4. No separate entity : The business does not have any entity separate from the owner. The owner and the business are one and the same.
5. Sharing of profits : One person is the sole owner of the business. He takes all profits and bears all losses. There is direct relationship between efforts and rewards.
6. Unlimited liability : The liability of the sole proprietor is unlimited and the creditors has the right to come a cross the personal properties of him.
7. Secrecy : All important decisions are taken by the owner himself. He keeps all business secrets only to himself.

Question 3.
“One man show is the best in the world provided that one man is big enough to take care of everything”. Discuss.
Answer:
Any business unit which is owned and run by a single person is known as sole trade.

Definition : “A type of business unit where one person is solely responsible for providing the capital and bearing the risk of the enterprise, and for the management of the business”. – J.L. Hanson

We can say that a sole trade is one man show basing on the following points :

1. The business is started by the initiative of a single person and he contributes complete efforts.
2. As the sole trade unit is a small business concern it is possible to keep all business secrets.
3. The sole proprietor invests the necessary capital in the business from his own sources.
4. Legally, the sole trader does not have separate legal entity from his business.
5. A sole trader is having unlimited liability.
6. A sole trade business has generally a limited area of operations, the reason being the limited resources and managerial abilities of the sole trader.
7. The proprietor managers the whole business himself.
8. He enjoys all profits and bears losses if any.
9. There is direct relationship between efforts and reward.
10. The sole proprietor takes keen interest in the working of the business.
11. The proprietor can establish and maintain personal touch with his customers.
12. The sole trader is the supreme master of his business.
13. Changes in the business are necessary.
14. The sole trader tries to avoid all kinds of waste and unnecessary expenses.
15. The sole trader introduces his children into the business.
16. The proprietor establishes personal and direct contact with his employees.

In sole trade large number of traders was entered in different types of business. There is no scope of difference of opinion in case of dissolution of business. Therefore, “one man show is the best in the world provided that one man is big enough to take care of everything”.

Check Your Knowledge

I. Fill in the blanks for the following questions :

Question 1.
A business ___________ can be owned and against in several forms.
Answer:
Enterprize

Question 2.
Registration is not compulsory in the form of business ___________
Answer:
Sole proprietorship

Question 3.
The proprietor is ___________ of the business.
Answer:
Sole owner

Question 4.
All is he and he is ___________
Answer:
All

Question 5.
The simplest form of the business ownership is a ___________
Answer:
Proprietorship

Question 6.
“Supreme Judge of all matters pertaining to his business” who said ___________
Answer:
Kimbal & Kimbal

Question 7.
As per law ___________ and ___________ are same.
Answer:
Proprietor and business

II. State whether the statement are True or False.

Question 1.
A sole proprietorship is a form of business organisation in which an individual invests his own capital. (True/False)
Answer:
True

Question 2.
The business unit does not have an entity separate from the owner. (True/False)
Answer:
True

Question 3.
The proprietor works hard and run business efficiently. (True/False)
Answer:
True

Question 4.
The business secrets are known only to the proprietor. (True/False)
Answer:
True

Student Activity

State whether the statements are True or False.

Question 1.
A sole proprietorship form of business is suitable for large – scale business operations. (True/False)
Answer:
False

Question 2.
A sole proprietorship business is managed by a single individual. (True/False)
Answer:
True

Question 3.
The liability of the sole proprietor is limited. (True/False)
Answer:
False

Question 4.
To form a sole proprietorship business, more legal formalities are involved. (True/False)
Answer:
False

Question 5.
The decision – making is quick and easy in a sole proprietorship. (True/False)
Answer:
True

Question 6.
The resources of a sole proprietor are unlimited. (True/False)
Answer:
False

Regular practice with AP Inter 1st Year Commerce Study Material Chapter 2 Business Activities Questions and Answers helps students stay prepared for examinations.

AP Inter 1st Year Commerce 2nd Lesson Business Activities Questions and Answers

Fill in the Blanks

Question 1.
The production side of business activity is referred to as _________
Answer:
Industry

Question 2.
The equation form of _________ is industry + commerce.
Answer:
Business

Question 3.
The equation form of _________ is trade + aids to trade.
Answer:
Commerce

Question 4.
_________ refers to the quality of life enjoyed by the members of a society.
Answer:
Standard of living

Question 5.
_________ is also known as ‘external trade’ or ‘International trade’.
Answer:
Foreign Trade

Question 6.
_________ is also known as ‘domestic trade’ or ‘internal trade’.
Answer:
Home Trade

Question 7.
Entrepot trade is also known as _________ trade.
Answer:
Re-export

Question 8.
Personal hindrances can be removed by _________.
Answer:
Trade

Question 9.
_________ removes the hindrance of place.
Answer:
ransportation

Question 10.
_________ services remove the hindrance of financial problems.
Answer:
Banking

Question 11.
_________ removes the hindrance of time.
Answer:
Warehouse

Question 12.
_________ removes the hindrance of risk.
Answer:
Insurance

Question 13.
_________ removes the hindrance of knowledge.
Answer:
Advertisement

Question 14.
_________ removes the hindrance of information.
Answer:
Communication

Question 15.
The _________ connects links between the producers and the retailers.
Answer:
Wholesalers

Question 16.
The _________ connects links between wholesalers and consumers.
Answer:
Retailers

Very Short Answer Questions

Question 1.
Industry.
Answer:
Industry is concerned with making or manufacturing of goods. Simply means the production of wealth or value. Industry is the backbone to the commerce and trade. Both industry and commerce are the part & parcel of business.

Question 2.
Commerce.
Answer:
The word “commerce” means and includes all the efforts originating for transfer of goods and services from their place of origin to the place of consumption.
Commerce = Trade + Aids to Trade where Trade = Purchase and sale of goods & services
Aids to Trade = Transport, Communication, Warehousing, insurance, banking, advertisement.

Question 3.
Trade.
Answer:
Trade is a branch of commerce. It connects buying & selling activities. An individual who does trade is called a trader. Trader transfers the goods from the producer to the consumer. He earns profit form this activity.

Question 4.
Home Trade.
Answer:
Trade takes place between the individuals of the same country (or) with in the geographical boundaries of a country is called “Home Trade”. It is also called as Domestic Trade or Internal Trade.

Question 5.
Foreign Trade.
Answer:
The trade takes place between individuals of different countries is called “Foreign Trade”or “International Trade”.

Question 6.
Entrepot Trade or Re-export Trade.
Answer:
It means importing (buying) goods from one country for the purpose of exporting (selling) them to another country. This type of trade is also known as re-export trade.

Question 7.
Genetic Industries.
Answer:
Genetic Industry is related to the re-producing and multiplying of certain species of animals and plants with the object of earning profits from their sale. Nature, climate and Environment play an important role in these industries.
Ex : Plant nurseries, Poultry forms. Cattle breeding etc.

Question 8.
Extractive Industry.
Answer:
The extractive industry is engaged in raising some form of wealth from the soil, climate, air and water. Here nature does not everything and man does very little to add it. All that the man has to do is simply to take out what the nature has already given.
Ex : Extractive industries are mining, fishing, agriculture, extraction of timber, rubber from forest etc.

Question 9.
Warehousing.
Answer:
The goods are produced in anticipation of demand. They may also be produced at a time when they are not needed. So there is time gap between the production and consumption. This gap is filed up by warehouses. Warehouses store the goods and protect the goods until the goods are consumed.

Question 10.
Transportation.
Answer:
The goods are taken from a place where there is a less demand, to the places where they are in more demand. These goods are to be taken to the source of consumption with the help transport facilities we can create ‘Place utility’ in goods.

Question 11.
Banking.
Answer:
The traders purchase goods from the producers and sell them to the consumers. It takes time to collect money after sale. There is a need of finance to trade activities. The commercial banks help trade in the form of overdrafts, loan etc.

Question 12.
Wholesale Trade.
Answer:
Buying and selling of goods in large quantities is called “wholesale trade”. A wholesaler buys goods in large quantities from the producers and sells in small quantities to retailers.

Question 13.
Retail Trade.
Answer:
Retail Traders sell goods in small quantities directly to the consumers. A person who is involved in the retail trade is called “retailer”. He maintains all varieties of goods to attract the consumers for sales either in cash or credit.

Question 14.
Consumer goods.
Answer:
The goods which are acquired for the purpose of consumption are called consumer goods. Consumer goods are the goods those can be used directly by the consumers food grains, textiles etc.

Question 15.
Producer goods.
Answer:
The goods which are acquired for the purpose of production are called producer goods. The producer goods are the goods used by producers to produce some other goods like machinery, equipment etc.

Question 16.
Communication.
Answer:
Transmitting information from one person to other is known as communication. Communication plays an important role between producer, businessman and consumers.

Question 17.
Advertising.
Answer:
Advertising helps in providing information about the availability and usefulness of various products in the market. Therefore advertising, publicity and selling campaigns will remove the hindrances of knowledge about products.

Question 18.
Import Trade.
Answer:
When the goods are purchased from outside countries for use in the domestic market, it is called “Import Trade”.
Ex : India buys petrol from Iran.

Question 19.
Export Trade.
Answer:
When domestic goods are sold to the other country it is called “Export Trade”.
Ex : India sells readymade dressess to America.

Question 20.
Home Trade.
Answer:
Trade takes place between the inviduals of the same country or within the geographical boundaries of a country is called “Home Trade”. It is also called a “Domestic Trade” or “Internal Trade”.

Short Answer Questions

Question 1.
List out types of Industries.
Answer:
Industry is concerned with the making or manufacturing of goods. Simply it means the production of wealth or value.

Types of Industry :

1. Primary Industry : It is concerned with production of goods with the help of nature. It is a nature oriented, which requires lesser human efforts.
   Ex : Agriculture, Farming, Forestry, Fishing. Horticulture etc.
2. Genetic Industry : Genetic industry is related to the re-producing and multiplying of certain species of plants and animals with the object of sale. The main aim is to earn profit from such sale.
   Ex : Plant nurseries, Poultry forms, Cattle breeding etc.
3. Extractive Industry : The extractive industry is engaged in raising some form of wealth from the soil, climate, air and water. All that the man has to do is simply to take out what the nature has already given.
   Ex : Mining Industry, coal, mineral, oil industry, fishing, agriculture, extraction of tumber & Rubber from forest etc.
4. Manufacturing Industry : Manufacturing industries are engaged in transforming raw- material into finished product with the help of machines and manpower. The finished goods can be either consumer goods or producer goods.
   Ex : Textiles, chemicals, sugar industry, paper industry etc.,
5. Construction Industry : The industry is engaged in the creation of infrastructure. These industries are engaged in the construction of buildings, roads, dams, bridges and canals.
6. Service Industry : In modern times, service sector plays an important role in the development of the nation and therefore it is named as service industry. These are engaged in the provision of essential services to the community.
   Ex : Banking, Hotels, Tourism, Insurance etc.

Question 2.
How Trade is classified ?
Answer:
Trade : Trade is the part of commerce and it creates connection between buyers and sellers.

Trade is nothing but the summation of purchasing and selling of goods.

1) Home Trade : The purchase and sale of goods inside the country is called as “Home Trade”. It is divided into Wholesale Trade and Retail Trade.

•  Wholesale Trade : In wholesale Trade, goods are purchased in large quantities by whole saler and sold them in small quantities to retailer.
• Retail Trade : In retail trade, the retailer purchases goods from wholesaler and sells them to ultimate consumers. Unlike a wholesaler, the retailers will have direct contact with customers.

2) Foreign Trade : When trade takes place between two countries, it is called foreign trade (or) international trade. It can be divided into 3.

• Import Trade : When goods are purchased from outside countries, it is called Import Trade”.
• Export Trade : When the goods are sold and sent to other countries is called “Export Trade”.
• Entrepot Trade : When one .country imports the goods from another country and the same goods are exported to another foreign country, it is called “Re-export Trade” or Entrepot Trade”.

Question 3.
What are the hindrances involved in Commerce ?
Answer:
’Commerce’ plays an important role in the distribution of goods and services. For the smooth running of trade and business some services are needed, like transport, banking, insurance etc.

Definition : “Commerce is an organized system for the exchange of goods between the members of the industrial world”. – James Stephenson

The main hindrances are as follows :

1. Hindrances of Place : The place of production may be away from the place of consumption. The various means of transport will helps for the smooth distribution of goods and services.
2. Hindrances of time : Goods are produced by expecting the demand. So it is necessary to make suitable arrangement for their storage. The gap between production and consumption is the main hindrance with the help of warehousing we can overcome this hindrance.
3. Hindrances of exchange : Exchange of goods and services automatically deals with exchange of value. For that time, value, place may vary. Those hindrances and working capital problems will be solved with help of banks.
4. Hindrances of knowledge : Creation of demand is very important junction of commerce. If we fails to create demand then no question of production or distribution arises with the help of advertisements we can overcome this hindrance.
5. Hindrances of work : Objective of business is to earn profit. But profit is the reward of risk bearing. A choice of loss occurence is there. This hindrance can be removed with the help of Insurance. Finally commerce is a group of services it includes trade and aids to trade.

Question 4.
Trace out the various types of Aids to Trade.
Answer:
Aids to Trade : Auxiliaries which help in smooth exchange of goods directly or indirectly are known as “Aids to trade”. Various aids to trade are :

1. Transport : Transferring of goods from the centre of production to the center of communication is done by transport. Several types of transports are like air, water and land etc.
2. Communication : Transmitting of information from one person to other is known as “Communication”. Communication plays an important role between producer, businessman and consumer. Telex, Telephone, Telegraph, e-mail, teleconference etc.
3. Warehousing : Production takes place only in few seasons on large scale and their utility is spread throughout the year. There is gap between production & consumption. Hence, warehousing eliminates the time gap between production and consumption. For this reason, warehousing provides “time utility”.
4. Insurance : The businessmen covers all the risks through insurance companies. Insurance covers all risks due to fire, theft, floods, storm other calamities. Insurance helps the development of trade by removing the fear of loss.
5. Banking : Banking helps in buying and selling of goods by providing convenient and safe mode of payment. They play an important role in overcoming the financial problem.
6. Advertisement : Advertising helps in providing information about the availability and usefulness of various products in the market. Therefore advertising publicity and selling campaigns will remove the hindrances of knowledge about products.

Question 5.
What do you understand by commerce ?
Answer:
Commerce : Commerce is that part of business which is connected with the exchange of goods and services. Commerce involves the process of bringing goods from the place of production and sending them to the place of consumption. In other words, it supplies goods to ultimate consumer.

Definition : “Commerce is an organized system for the exchange of goods between the members of the Industrial World”. – James Stephenson

Importance of Commerce :

1. Commerce tries to satisfy increasing human wants.
2. Commerce helps to increase our standard of living.
3. Commerce links producers and consumers.
4. Commerce generates employment opportunities.
5. Commerce increases national income and wealth.
6. Commerce encourages International Trade.
7. Commerce benefits underdeveloped countries.
8. Commerce helps during emergencies like floods, earthquakes and wars.

Question 6.
How foreign Trade is classified ?
Answer:
Trade is the part of commerce. It is the summation of purchasing and selling of goods. Trade can be divided into home trade and foreign trade.

Foreign Trade : When trade takes place between two countries, it is called foreign trade (or) international trade.

1. Import trade : When goods are purchased from outside countries, it is called “Import Trade”.
   Ex : India purchases wheat goods from Russia. This is called import trade.
2. Export Trade : When the goods are sold and sent to other countries is called “Export Trade”.
   Ex : India sells leather goods to Russia. This is an export trade to India.
3. Entrepot or Re-export Trade : If one country imports the goods from another country and the same goods are exported to another foreign country, it is called “Re-export Trade” or Entrepot Trade”.

Long Answer Questions

Question 1.
What is meant by Industry ? Explain various types of industries with suitable examples.
Answer:
Industry is concerned with the production of goods and services. Extracting, producing, processing and manufacturing of goods.

Industries can be classified into 6 types :

1) Primary Industry: Primary industry is concerned with production of goods with the help of naure. It is a nature – oriented industry, which requires very little human effort.
Ex : Agriculture, Farming Forestry, Fishing, Horticulture etc.

2) Genetic Industry : Genetic industries are engaged, in re-production and multiplication of certain species of plants and animals with the object of sale. The main aim is to earn profit from such sale.
Ex : Poultry forms, cattle breeding farms, plants nurseries.

3) Extractive Industry : The extractive industry is engaged in raising some form of wealth from the soil, climate, air or water. Generally products of extractive industries come in raw-material, they are used for manufacturing and construction industries for producing finished products.
Ex : Mining, Fishing, Coal, Mineral, Iron ore. Oil industry, Timber, Rubber from forests etc.

4) Manufacturing Industry : Manufacturing industries are engaged in transforming raw-materials into finished product with the help of machines and man power. The finished goods can be either consumer goods or producer goods.
Ex : Textiles, chemicals, sugar industry, paper industry etc.

These kind of industries can be divided under :

• Analytical : In an analytical industry the basic raw-material is broken into several useful materials.
  Ex : In oil refinery, crude oil is refined and several petroleum products are procured.
• Synthetic : In this type of manufacturing industry two or more materials are mixed to form a new product.
  Ex : Cosmetics, detergents, fertilizers etc.
• Processing : In the processing industry, material is processed through various stages.
  Ex : Spinning, weaving, dying, bleaching and printing process.
• Assembling : This kind of industry assembles various parts to manufacture a finished product.
  Ex : Manufacturing of automobiles, by assembling various spare-parts.

5) Construction Industry : This industry is engaged in the creation of infrastructure for the smooth development of the economy. These industries are engaged in the provision of essential service to the community.
Ex : Construction of buildings, roads, dams etc.,

6) Service Industries : In modern times service plays vital role in the development of nation and therefore it is named as service industry.
Ex : Banking, transport, hotels, tourism industry, film and other entertainment industries etc.

Question 2.
What is commerce ? Describe the various branches of commerce.
Answer:
Commerce is that part of business which is concerned with the exchange of goods and services and include all the activities which directly or indirectly facilitate that exchange.

Definition : “Commerce is an organized system for the exchange of goods between the members of the industrial world”. – James Stephenson

Commerce = Trade + Aids to Trade
Where, Trade = Purchase and sale of goods and services.
Aids to Trade = Transport, communication, warehousing, insurance, banking, advertisement.

A) Trade: Trade is nothing but the summation of purchasing and selling of goods. An individual who does trade is called a “Trader”.

Trade classified into Home Trade & Foreign Trade.

1) Home Trade : The purchase and sale of goods inside the country is called as “Home Trade”. It is also known as “Internal trade” or “Domestic trade”. It is divided into “wholesale trade” & “Retail trade”.

• Wholesale Trade : Buying and selling of goods in large quantities is called “Wholesale trade”. A wholesaler buys goods in large quantities from the producers and sell in small quantities to retailers.
• Retail Trade : Retail traders sell goods in small quantities directly to the consumers. A person who is involved in the retail trade is called ‘retailer’.

2) Foreign Trade : When trade takes place between two countries, it is called “Foreign trade” or “International trade”. Buyer and seller belong to different countries. It can be divided into three :

• Export Trade : When the goods are sold and sent to other countries is called “Export Trade”.
  Ex : India sells leather goods to Russia.
• Import trade : When goods are purchased from other countries, it is called “Import Trade”.
  Ex : India purchases wheat goods from Russia.
• Entrepot Trade : If one country imports the goods from another country and the same goods are exported to another foreign country, it is called “Entrepot trade” or “Re-entrepot trade”.
  Ex : India importing wheat from U.S. and exporting the same to Sri Lanka.

B) Aids to Trade : Auxiliaries which help in smooth exchange of goods directly or indirectly are known as “Aids to trade”. Various aids to trade are :

1. Transport : Transferring of goods from the centre of production to the center of communication is done by transport. Several types of transports are like air, water and land etc.
   
2. Communication : Transmitting of information from one person to other is known as “Communication”. Communication plays an important role between producer, businessman and consumer. Telex, Telephone, Telegraph, e-mail, teleconference etc.
3. Warehousing : Production takes place only in few seasons on large scale and their utility is spread throughout the year. There is gap between production & consumption. Hence, warehousing eliminates the time gap between production and consumption. For this reason, warehousing provides “time utility”.
4. Insurance : The businessmen covers all the risks through insurance companies. Insurance covers all risks due to fire, theft, floods, storm other calamities. Insurance helps the development of trade by removing the fear of loss.
5.  Banking : Banking helps in buying and selling of goods by providing convenient and safe mode of payment. They play an important role in overcoming the financial problem.
6. Advertisement : Advertising helps in providing information about the availability and usefulness of various products in the market. Therefore advertising publicity and selling campaigns will remove the hindrances of knowledge about products.

Question 3.
Define Trade and explain various types of Aids to Trade.
Answer:
Trade means buying and selling of goods in order to earn or make profit. It creates a link between producers and customers.

Types of Trade : Trade classified into two :

1) Home Trade : Trade takes place between the individuals of the same country within the geographical boundaries of a country is called “Home Trade”. It is also called as “Domestic Trade” or “Internal Trade”. It is classified into two :

• Wholesale Trade : Buying and selling of goods in large quantities is called “wholesale trade”. A wholesaler buys goods in large quantities from the producers and sells in small quantities to retailers.
• Retail Trade : It involves selling goods to the final consumers. He purchases goods from wholesaler and sells them to ultimate consumers.

2) Foreign Trade : When trade takes place between two countries, it is called “foreign trade” or “internal trade”. Buyer and seller belong to different countries. It can be divided into three :

• Import trade : When goods are purchased from other countries it is called “import trade”.
  Ex: India purchases wheat goods from Russia.
• Export trade : When the goods are sold and sent to other countries is called “export trade”.
  Ex : India sells leather goods to Russia.
• Entrepot trade or Re-export trade : If one country imports the goods from another country and the same goods are exported to another foreign country, it is called “Re-export trade”.
  Ex : India purchases wheat from Russia and exporting the same to Sri Lanka.

Aids to Trade of Auxiliaries to trade :

For smooth running of trade and commerce these services are required without the help of such functions, it is not possible to take goods from one place to another. These are also known as auxiliaries to trade and also called as “aids to trade”.

1. Transport : Transporting of goods from the centre of production to the center of communication is done by transport.
2. Communication : Transmitting of information from one person to other is known as “Communication”.
3. Warehousing : The goods are produced in anticipation of demand. They may also be produced at a time when they are not needed. So there is time gap between the production and consumption. Warehousing provides ‘time utility’.
4. Insurance : The businessmen covers all the risks through insurance. Insurance covers all risks due to fire, theft, floods and-accidents. Insurance acts as risk bearers.
5. Banking : Banking helps in buying and selling of goods by providing convenient and safe mode of payment. They play an important role in overcoming the financial problem.
6. Advertisement : Advertising helps in providing information about the availability and usefulness of various products in the market. Therefore advertising, publicity and selling campaigns will remove the hindrances of knowledge about products.

Question 4.
Narrate the importance of commerce ?
Answer:
The importance of commerce is explained with the help of the following points :

1. Commerce tries to satisfy increasing human wants : Human wants are never ending. Commerce has made distribution and movement of goods possible from one part of the world to the other. Today we can buy anything produced anywhere in the world.
2. Commerce helps to increase our standard of living : Standard of living refers to the quality of life enjoyed by the members of a society. When a man consumes more products his standard of living improves. Commerce helps us to get what we want at the right time, right place, and at the right price and thus helps us in improving our standard of living.
3. Commerce links producers and consumers ; Production is meant for ultimate consumption. Commerce makes possible to link producers and consumers through wholesalers and retailers and also through the aids to trade. Thus, commerce creates and facilitates the contact between the centres of production and consumption and links them.
4. Commerce generates employment opportunities : The growth of commerce, industry and trade caused the growth of agencies of trade such as banking, transport, warehousing, insurance, advertising, etc. These agencies need people to look after their functioning. Thus, development of commerce generates more and more employment opportunities.
5. Commerce increases national income and wealth : When production increases, national income also increases. It also helps to earn foreign exchange by way of exports and duties levied on imports.
6. Commerce helps in expansion of aids-to-trade : With the growth in trade and commerce there is a growing need for expansion and modernisation of aids to trade. Aids to trade such as Banking, Communication, advertising and publicity, transport, insurance etc. are expanded and modernised for the smooth conduct of commerce.
7. Commerce encourages international trade : With the help of transport and communication development, countries can exchange their surplus commodities and earn foreign exchange. Thus, commerce ensures faster economic growth of the country.
8. Commerce benefits underdeveloped countries : Underdeveloped countries can import skilled labour and technical know-how from developed countries, while the advanced countries can import raw-material’s from underdeveloped countries. This helps in laying down the seeds of industrialization in the underdeveloped countries.
9. Commerce helps during emergencies : During emergencies like floods, earthquakes, and wars, commerce helps in reaching the essential requirements like foodstuff, medicines and relief measures to the affected areas.

Question 5.
Explain the hindrances involved in commerce.
Answer:
Commerce is an organized system which facilitates the free flow of goods and services. In business, products and services are produced through industry. The produced goods and services face various types of hindrances to reach the customers. Commerce removes these hindrances and helps to distribute products and achieving the business’s desired goals. The following table presents the hindrances involved in the commerce and aids to remove them :

Thus, commerce involves trade and aids to trade. Following are some of the hindrances in commerce.

1. Hindrance of Person : Trade is done by buyers and sellers, in exchange for money. The sellers sell the goods and services to the buyers. Therefore, by handing over products or services, personal hindrance can be removed.
2. Hindrance of Finance : Banking services remove the hindrance of financial problems. It facilitates trade by providing credit in various forms.
3. Hindrance of Time and Duration : There is a time gap between production and consumption. The goods produced are not immediately required for consumption. Warehousing removes the hindrance of time and duration. It preserves the goods from the time of production to the time of consumption. It creates time utility.
4. Hindrance of Place : Goods are produced in a limited number of production centres, whereas consumers are located everywhere. Transportation removes the hindrance of place. It implies conveyance of goods and passengers from one place to another. It creates place utility.
5. Hindrance of Risk : Business involves risk. Risk and uncertainty are inherent in any business. Insurance stands for protection significant against risk. So, it removes the hindrance of risk. The risk of businessman is reduced by several types of insurance such as fire insurance, transit insurance, marine insurance, factory insurance on stocks and assets etc.
6. Hindrance of Knowledge and Information : Advertisement helps to eliminate the hindrance of knowledge. It informs the customers about the availability of various products. Communication helps in the efficient operation of commercial activities. Thus, it removes the hindrance of information.

Question 6.
Explain the inter relationship between trade, commerce and industry. (Additional)
Answer:
Industry, commerce and trade are a part of business and closely related to each other.

• • Industry : Industry is concerned with the making or manufacturing of goods.
  • Trade : Trade is a channel for transport of goods from producer to consumer.
  • Commerce : Commerce helps industry before and after the production.

Check Your Knowledge

I. Fill in the blanks for the following questions :

Question 1.
_________ industry is conserved with production of goods with the help of nature.
Answer:
Primary

Question 2.
The goods may be _________ goods.
Answer:
Consumer

Question 3.
_________ industries are engaged, in reproduction and multiplication of certain species of plants and animals with the object of sale.
Answer:
Genetic

Question 4.
_________ industry is concerned with extraction or drawing out goods from the soil, air or water.
Answer:
Extractive

Question 5.
_________ industries are engaged in transforming raw – materials into finished product with the help of machines and manpower.
Answer:
Manufacturing

Question 6.
The _________ industry, material is processed through various stages.
Answer:
Processing

Question 7.
_________ industries take up the work of construction of buildings, bridges, roads, dams, canals etc.
Answer:
Construction

Question 8.
_________ deals with the distribution aspect of the business.
Answer:
Commerce

Question 9.
_________ is done by buyers and sellers, in exchange for money.
Answer:
Trade

Question 10.
Home Trade is also known as _________ trade.
Answer:
Domestic trade

Question 11.
Traders who engage themselves in wholesale trade are called _________
Answer:
Wholesalers

Question 12.
Traders engaged in retail trade called _________
Answer:
Retailers

Question 13.
The geographical distance between producers and consumers is removed with the help of _________
Answer:
Transport

Question 14.
_________ means transmitting of exchanging information from one person to another.
Answer:
Communication

Question 15.
_________ and _________ are important medias of mass communication.
Answer:
Advertising and Publicity

II. State whether the statement are True or False.

Question 1.
Human wants are never ending. (True/False)
Answer:
True

Question 2.
Production is meant for ultimate consumption. (True/False)
Answer:
True

Question 3.
When production decreases, national income also decreases. (True/False)
Answer:
False

Question 4.
Business involves not risk. (True/False)
Answer:
False

Question 5.
Trade is a branch of business. (True/False)
Answer:
False

Question 6.
Trade is the nucleus of commerce. (True/False)
Answer:
True

Question 7.
Home trade is also known as wholesale trade. (True/False)
Answer:
False

Question 8.
Wholesale Trade involves buying and selling of goods in large quantities. (True/False)
Answer:
True

Question 9.
Traders engaged in retail trade are called wholesale traders. (True/False)
Answer:
False

Question 10.
Buying and selling of goods and services between two or more countries are called Foreign Trade. (True/False)
Answer:
True

Question 11.
Trade or exchange of goods involves several difficulties which can be removed by auxiliaries to business. (True/False)
Answer:
False

Question 12.
Modern means of communication like telephone, telex, telegraph, email, teleconference etc. (True/False)
Answer:
True

Question 13.
Export trade means the sale of goods to our country. (True/False)
Answer:
False

Question 14.
Import Trade refers to the purchase of goods from foreign countries. (True/False)
Answer:
True

Question 15.
Aids to Trade include Transport, communication. Warehousing, Banking, Insurance, Advertising. (True/False)
Answer:
True

Question 16.
Industry refers to production of consumer goods and capital goods and creates form utility. (True/False)
Answer:
True

Question 17.
The hindrances of commerce are person, place, finance, time and duration etc. (True/False)
Answer:
True

Student Activity

State whether the statements are True or False.

Question 1.
The production side of business activity is referred to as industry. (True/False)
Answer:
True

Question 2.
Business = Trade + Commerce. (True/False) (True/False)
Answer:
False

Question 3.
Buying and selling of goods and services is called commerce.
Answer:
False

Question 4.
Agriculture is related to Primary Industry.
Answer:
True

Question 5.
Fishing related to genetic industry. (True/False)(True/False)
Answer:
True

Question 6.
Tourism belongs to the service industry.
Answer:
True

Question 7.
Commerce = Trade + Aids to Trade. (True/False)
Answer:
True

Question 8.
Commerce facilitates the free flow of goods & services. (True/False)
Answer:
True

Regular practice with AP Inter 1st Year Commerce Study Material Chapter 1 Concept of Business Questions and Answers helps students stay prepared for examinations.

AP Inter 1st Year Commerce 1st Lesson Concept of Business Questions and Answers

Fill in the Blanks

Question 1.
The term Business refers to the state of being _____________
Answer:
Busy

Question 2.
All the activities of human beings can be broadly classified into economic and _____________ activities.
Answer:
Non-Economic Activities

Question 3.
Economic Activities refer to the activities involved with _____________
Answer:
Money

Question 4.
‘Chartered Accountants’ (CA) is an example for _____________
Answer:
Profession

Question 5.
The relationship between the employer and the employee is master and _____________
Answer:
Servant

Question 6.
_____________ are known as intangible and invisible goods.
Answer:
Services

Question 7.
_____________ goods are meant for direct use by the ultimate consumers.
Answer:
Consumer

Question 8.
_____________ goods are used for the production of consumer or capital goods.
Answer:
Producer

Question 9.
The primary objective of business is to earn _____________
Answer:
Profit

Question 10.
_____________ implies an uncertainty of profit or the possibility of loss.
Answer:
Risk

Question 11.
“The primary aim of the business should be service and the subsidiary aim should be eearning profit” pronounced by _____________
Answer:
Henry Ford

Very Short Answer Questions

Question 1.
Define Business.
Answer:

1. “A human activity directed towards producing or acquiring wealth through buying and selling of goods”. – L.H. Haney
2. “Business is a sum of all activities involved in the production and distribution of goods and services for private profits”. – Keith and Carlo

Question 2.
Profession.
Answer:
Profession is an occupation requiring specialized education. In other sense, profession refers “to a body of people in a learned occupation”. It requires an association with a professional body for a person to practice.
For example : A chartered accountant, lawyers, doctors.

Question 3.
Employment.
Answer:
Employment involves working under a contract of employment for or under someone known as employer in return for a salary. The person engaged under employment works as per the direction of the employer.

Question 4.
Economic Activities.
Answer:
Economic Activities are broadly classified into three. They are –

1. Profession : Profession is an occupation requiring specialized education. In another sense, profession refers “to a body of people in a learned occupation”.
2. Employment: A person who works under the contract for a salary is called an employee and the person who has given the job to the employee is called an employer.
3. Business : Business is an economic activity involving the production, exchange, distribution, and sale of goods and services to make profits.

Question 5.
Non-Economic Activities.
Answer:
Those human activities do not involve money or money’s worth, such activities are termed as non-economic activities. Human beings engage themselves in non-economic activities due to love, affection, patriotism, charity, sympathy and other such sentiments.
Ex : A mother looks after her children, youngman helps a blind man to cross the road etc.

Question 6.
Human Activities.
Answer:
The activities performed by the human being in their daily life are called human activities. These are undertaken by them to fulfill their needs, desires, wants and luxuries.

Question 7.
Risk & Uncertainty.
Answer:
Risk is the fear of loss and profit is reward for assuming risk. Uncertainty is a potential, unpredictable and uncontrollable outcome. When the future events or circumstances is indefinite it is termed as uncertanity.

Question 8.
Art as well as Science.
Answer:
Business is an art because it requires personal skills and experience. It is also a science because it is based on certain principles and laws.

Question 9.
Labour Welfare.
Answer:
A business must recognize the dignity of labour. Adequate health, safety and social security provisions are to be made.

Short Answer Questions

Question 1.
What are the characteristics of business ?
Answer:
Characteristics/Features :

1. Creation of utility : Business creates time, place, form and possession utilities to various types of goods and services. It enables people satisfy their wants and needs.
2. Goods & Services : A business concern produces or purchases goods and services, with an intention of sale to others to earn profits. Goods are tangible and the services are intangible. The goods may be consumer goods or producer goods.
3. Continuity in dealings : A single isolated transaction of purchase and sale does not constitute business. Recurring or repeated transactions of purchase and sale constitutes business. Regularity of dealings is an essential feature of business.
4. Profit motive : The primary objective of business is to earn profits. Profits are essential for the survival as well as growth of business.
5. Risk and Uncertainty : Risk implies uncertainty of profit or the possibility of loss. Risk is a part and parcel of business. Changes, in customers tastes and fashions, demand, competition, Government policies etc., create risk. Flood, fire, earthquake, strike by employees, theft etc., also cause loss. A business man can reduce risks through correct forecasting and insurance.
6. Economic Activity : Business is primarily an economic activity as it involves production and distribution of goods and services for earning money.
7. Sale, transfer or exchange : All business activities involve transfer or exchange of goods and services for some consideration. The consideration, called price, is usually expressed in terms of money. Business delivers goods and services to those who need them and are able and willing to pay for them.
8. Art as well as science : Business is an art because it requires personal skills and experience. It is also a science because it is based on certain principles and laws.

Question 2.
What are the economic objectives of Business ?
Answer:
Every Business enterprize has certain objectives. Objectives of business are classified into four objectives.

Economic Objectives : Business is basically an economic activity. Therefore, its primary objectives are economic in nature. The main economic objectives of business are as follows:

1. Earning Profits : A business enterprise is established to earn some income. It is the hope of earning profits that inspires people to start business. Profit is essential for the survival of every business unit. Profit also serves as the barometer of stability, efficiency and progress of a business enterprise.
2. Creating customers : Profits arise from the business – man’s efforts to satisfy the needs and wants of customers. A businessman can earn profits only when there are enough customers to buy and pay for his goods and services. The customer is the foundation of business and keeps it in existence. Business exists to satisfy the wants, tastes and preferences of customers.
3. Innovation : Innovation refers to “creation of new things resulting from the study and experimentation, research and development”. In these days of competition, a business can be successful only when it creates new designs, better machines, improved techniques, new varieties etc. Modern science and technology have created a great scope for innovation in the business world.

Question 3.
What are the social objectives of business ?
Answer:
Social Objectives : Business is a part of society. Business cannot survive and grow without the support of society. It must therefore discharge social responsibilities in addition to earning profits.

According to Henry Ford “The primary aim of business should be service and subsidary aim should be earning profits”.

Social Objectives of Business :

1. Supplying desired goods at reasonable prices : Goods and services should be good quality and these should be supplied at reasonable prices.
2. Fair Remuneration to employees : Employees must be given fair compensation for their work. In addition to wages and salary a reasonable part of profits should be distributed among employees by way of bonus. Such sharing of profits will help to increase the motivation and efficiency of employees.
3. Employment Generation : Provision of adequate and fully employment opportunities is a significant service to society.
4. Social Welfare : Business should provide support to social, cultural and religious organisations.
5. Payment of Government dues : Every business entereprize should pay tax dues (Income tax, sales tax, excise duty, customs duty etc.) to the Government honestly and at the right time. It provides revenue to the Government honestly and at the right time. It provides revenue to Government for spending on public welfare.

Question 4.
What are the human objectives of business ?
Answer:
Business is run by people and for people. Labour is a valuable human element in business. Human objectives of business are concerned with the well being of labour which are given below :

1. Labour Welfare : Business must recognise the dignity of labour and human factor should be given due recognition. Adequate provisions should be made for their health, safety and social security.
2. Developing Human Resources : Employees must be provided with the opportunities to develop new skills and attitudes. This can be done by training the employees and conducting workshops on skill development and attitude. Human resources are the most valuable asset of business and their development will help in the growth of business.
3. Participative Management : Employees should be allowed to take part in decision making process of business. This will help the development of employees. Worker’s participation in management will learn to industrial democracy.
4. Labour Management Co-operation : Business should strive to create and maintain cordial employer – employee relations so as to ensure peace and progress in industry.

Question 5.
What are the National Objectives of business ?
Answer:
National objectives of business are optinum utilization of resources, National Self Reliance by reducing imports and development of backward areas by set up factories in notified areas.

National Objectives :

1. Optimum utilization of resources : Adequate usage of natural resources will develop nation. Wastage of scarce resources is not only a loss to the business but also to the nation.
2. National Self-Reliance : By increasing exports and reducing imports lead to self:reliance over dependency is reduced by having sufficient supply of goods and services.
3. Development of small-scale industries : Small-scale industries will provide inputs the big business organizations. Hence, development of large-scale units leads to the development of small-scale industries.
4. Development of backward areas : Business is expected to give preference to the industrialisation of backward regions of the country. Balanced Regional Development is necessary for peace and progress in the country. Government offers special incentives to the businessmen who set up factories in notified backward areas.

Question 6.
What are the Business Objectives ?
Answer:
Business objectives are divided into four types. They are
i) Economic Objectives :
a) Earning profit.
b) Creation of customer.
c) Technological Improvements.

ii) Social Objectives :
a) Availability and Supply of Quality goods
b) Fair Remuneration to employees
c) Creation of employment opportunities
d) Co-operation with the government

iii) Human Objectives :
a) Labour management Co-operation
b) Welfare of workers
c) Development of human resources
d) Labour participation in management

iv) National Objectives :
a) Producing goods according to national priorities
b) Optimum utilisation of natural resources
c) Development of backward regions
d) Development of small scale industries
e) Self-reliance

Question 7.
What are the Economic activities ?
Answer:
Activities undertaken with the aim of earning money are called economic activities. These are the activities related to production, exchange and consumption of goods and services.
Ex : Doctor, Lawyer, Teacher, Chartered Accountant.

Economic activities are divided into three. They are

1. Business : Business is an economic activity involving production, exchange, distribution and sale of goods and services with profits motive.
2. Profession : Which involves the rendering of personalized services of a specialized nature based on professional knowledge, education and training is called a ‘Profession’.
3. Employment: An employment is a contract of service between employee and employer. The employee works under an agreement as per the rules of services and performs tasks assigned to him by the employer.

Question 8.
What is the role of Profit in business ?
Answer:
The primary objective of business is to earn profits.

The following are the points to measure the importance or role of profit in every business.

1. Profits earn adequate funds for future expansion of the business.
2. Profits are also helpful to attract more funds from outsider. Like Banks, investors, financial institutions etc.
3. Profits provide the most accurate test of business efficiency.
4. Accumulation of wealth through business profits provides economic power and social status.
5. Profits are necessary to meet the business risk.

Long Answer Questions

Question 1.
Define business. What are its characteristics ?
Answer:
Definition : “A human activity directed towards producing or acquiring wealth through buying and selling of goods and services”. – L.H. Haney

Characteristics/Features :

1. Creation of utility : Business creates time, place, form and possession utilities to various types of goods and services. It enables people satisfy their wants and needs.
2. Goods & Services ; A business concern produces or purchases goods and services, with an intention of sale to others to earn profits. Goods are tangible and the services are intangible. The goods may be consumer goods or producer goods.
3. Continuity in dealings : A single isolated transaction of purchase and sale does not constitute business. Recurring or repeated transactions of purchase and sale constitutes business. Regularity of dealings is an essential feature of business.
4. Profit motive : The primary objective of business is to earn profits. Profits are essential for the survival as well as growth of business.
5. Risk and Uncertainty : Risk implies uncertainty of profit or the possibility of loss. Risk is a part and parcel of business. Changes, in customers tastes and fashions, demand, competition. Government policies etc., create risk. Flood, fire, earthquake, strike by employees, theft etc., also cause loss. A business man can reduce risks through correct forecasting and insurance.
6. Economic Activity : Business is primarily an economic activity as it involves production and distribution of goods and services for earning money.
7. Sale, transfer or exchange : All business activities involve transfer or exchange of goods and services for some consideration. The consideration, called price, is usually expressed in terms of money. Business delivers goods and services to those who need them and are able and willing to pay for them,
8.  Art as well as science : Business is an art because it requires personal skills and experience. It is also a science because it is based on certain principles and laws.

Question 2.
Explain the objectives of a business.
Answer:
The term business refers to “the state of being busy”.

The objectives of a business are classified as under :

1) Economic Objectives : The Economic objectives are :

a) Earning Profits : Earning profits is an essential for the existence of business. It gives sustainability for a business in any fluctuations. It is a barometer for a business enterprise to measure stability, capability, efficiency etc.

b) Creating customers : A business can earn profits only when there are sufficient number of customers to buy the goods and services. The customer is the foundation for business and keeps it in existence. Hence, creation of customer is an important economic object of a business.

c) innovation : It refers to creation of new things. Modern science and technology is giving great scope for innovation. Therefore, business firms invest money, time and efforts in Research & development.

2) Social objectives : Business does not exist in a vaccum. It is a part of society. It cannot survive and grow without the support of society. So, business must have some social objectives. They are given below :

a) Supply of goods at reasonable price : A business should produce its goods and services with fair quality and reasonable price. It also has a social obligation of avoiding malpractices, smuggling, black marketing, misleading the customers with false advertisements, exploiting the customers with fixation of high or inappropriate pricing etc.

b) Fair Remuneration to employees : Apart from payment of salaries to the employees and wages to workers, if profits of business are distributed, it helps in motivating them. It is primary role of the employers to provide healthy and safe working environment to the workers.

c) Employment generation : Business should provide opportunities for gainful employment to members of the society. Government cannot provide employment to all. Therefore, provision of adequate and full employment opportunities is a significant service to society.

d) Social welfare : Business enterprizes can build schools, colleges, libraries, dharmashalas, hospitals, sports bodies and research institutions. They can help non¬government organisations (NGO’s) like CRY (Child Relief and You), Help Age, and other which render services to weaker sections of society’.

e) Payment of government dues : The duties, direct and indirect taxes (such as income tax. sales tax, excise duty, customs duty etc.) to be paid by a business enterprise to Government honestly and promptly. Business should also comply with the laws of the country.

3) Human objectives : Business is run by the people and for the people. Human objectives are :

a) Labour Welfare : A business must recognize the dignity of labour. Adequate health, safety and social security provisions are to be made.

b) Developing human resources : Human resources are the most valuable asset of business and their development will help in the growth of business. Development of skilled manpower is necessary for the economic development of a country.

c) Participative management : Employees should be allowed to take part in decision making process of business. This will help in the development of employees. Workers participation in management will lead to industrial democracy.

d) Labour – Management Co-operation : To keep the organizational climate peaceful, it is very important to maintain a cordial employee – employee relation.

4) National objectives : National objectives are :

a) Optimum utilization of resources : Adequate usage of natural resources will develop nation. Wastage of scarce resources is not only a loss to the business but also to the nation.

b) National self-reliance : By increasing exports and reducing imports lead to self-reliance. Over-dependency is reduced by having sufficient supply of goods & services.

c) Development of small-scale industries : Small-scale industries will provide inputs to the big business organizations. Hence, development of large scale units leads to the development of small-scale industries.

d) Development of backward areas : Business is expected to give preference to the industrialization of backward regions of the country. Balanced Regional Development is necessary for progress in the country. It will also help to raise standard of living in backward areas.

Question 3.
Classify and describe each type of Economic Activities.
Answer:
Economic activities are those which are engages in, to earn livelihood by producing and distributing goods and rendering services.

1. Profession : Profession is an occupation based on specialized education. Profession refers “to a body of people in a learned occupation”. It requires an association with a professional body for a person to practise.
   Ex : Chartered Accountants, Doctors, Lawyers, Teachers etc.
2. Employment : An employment is a contract of service. A person who works under the contract for a salary is called an employee and the person who has given the job to the employee is called an employer. An employee works under an agreement as per the rules of service and performs tasks assigned to him by the employer. The relationship between the employer and the employee is that of a ‘Master’ and ‘Servant’.
3. Business : Business is an economic activity involving production, exchange, distribution and sale of goods and services with an objective of making profits.

Question 4.
Discuss the Social Responsibility of business.
Answer:
The social responsibility of business are :

1) Responsibility towards owners : These are

a) Regular and fair returns on capital invested by way of dividends.
b) Safety of their capital and growth.
c) Proper utilisation of capital.
d) Running the business efficiently.

2) Responsibility towards employees :

a) Regular payment of their wages and allowances.
b) Better working conditions and welfare amenities.
c) To improve the skill and efficiency by providing proper training.
d) Job security and social security like group insurance, pension, retirement benefits etc.

3) Responsibility towards suppliers :

a) Timely payment of dues.
b) Dealing on fair terms and conditions.
c) Availing reasonable credit period.

4) Responsibility towards customers :

a) Providing qualitative goods & services.
b) Charging reasonable prices.
c) Giving delivery of goods with stipulated time.
d) After sale survive.
e) Avoiding unfair means like under weighing the product, adulteration etc.

5) Responsibility towards government:

a) Payment of fees, duties and taxes honesty & regularly.
b) Setting up units as per guidelines of the government.
c) Following the pollution control norms.
d) Not to indulge in unlawful activities.

6) Responsibility towards society :

a) To help weaker and backward sections of the society.
b) To generate employment.
c) To protect environment.
d) To conserve natural resources and wild life.
e) To promote sports, social and cultural values.

Check Your Knowledge

I. Fill in the blanks :

Question 1.
Business is an _____________
Answer:
Economic Activity

Question 2.
Business is one of the _____________
Answer:
Human Activity

Question 3.
Goods are _____________
Answer:
Tangible

Question 4.
Services are _____________
Answer:
Intangible

Question 5.
Goods may be _____________
Answer:
Consumer goods (or) Producer goods

Question 6.
The primary objective of business is to earn _____________
Answer:
Profit

Question 7.
Capital goods also known as _____________
Answer:
Producer goods

Question 8.
How many types of Economic Activities ?
Answer:
3

Question 9.
Which one is the Non-Economic Activities ?
Answer:
Love & affection

Question 10.
Which one is National objective ?
Answer:
MSME

Question 11.
Which one is Human activities ?
Answer:
Labour Welfare

Question 12.
Innovation means _____________
Answer:
Creation of New things

Question 13.
Business risk is not likely to arise to _____________
Answer:
Good Management

Question 14.
Economic activities may be classified into business _____________ and employment.
Answer:
Profession

Question 15.
Transfer of interest exist in the case of _____________
Answer:
Business

II. State whether the statements are True or False.

Question 1.
The primary aim of business should be service and subsidiary aim should be earning of profit. (True/False)
Answer:
True

Question 2.
Regularity of dealings is an unnecessary feature of business. (True/False)
Answer:
False

Question 3.
If a person cooks and serves food to his family, it is business. (True/False)
Answer:
False

Question 4.
Services are known as intangible and invisible goods. (True/False)
Answer:
True

Question 5.
Profit is also necessary for the expansion and growth of business. (True/False)
Answer:
True

Question 6.
R & D stands for Research and Development. (True/False)
Answer:
True

Question 7.
Business must to provide healthy and safework environment for employees. (True/False)
Answer:
True

Question 8.
N.G.O’s stands for Non-Government Organization. (True/False)
Answer:
True

Question 9.
CRY stands for Child Relief and You. (True/False)
Answer:
True

Question 10.
Employees should not be allowed to take part in decision making process of business. (True/False)
Answer:
False

Question 11.
The primary objective of business is to earn loss. (True/False)
Answer:
False

Question 12.
BRD stands for Balanced Recruitment Development. (True/False)
Answer:
False

Question 13.
BRD is necessary for peace and progress in the country. (True/False)
Answer:
True

Question 14.
C.A stands for Certificate Accountant. (True/False)
Answer:
False

Student Activity

State whether the statements are True or False.

Question 1.
Economic activities are the activities a man is engaged in to earn his livelihood by producing and distributing goods ands and rendering services. (True/False)
Answer:
True

Question 2.
Non-economic activities result in a payment. (True/False)
Answer:
False

Question 3.
The primary intention of busines is to serve the society. (True/False)
Answer:
False

Question 4.
Businesses make goods available for futur use through storage. (True/False)
Answer:
True

Question 5.
Risk implies certainty of profits. (True/False)
Answer:
True

Question 6.
Non-economic activities are also part of business. (True/False)
Answer:
False

Question 7.
Business is an art but not a science. (True/False)
Answer:
False

Question 8.
Profit is essential for the survival of every business. (True/False)
Answer:
True

Question 9.
Business must discharge social responsibility in addition to earning profits. (True/False)
Answer:
True

Question 10.
Businesses must help the government to increase exports and reduce dependence on imports. (True/False)
Answer:
True

Regular practice with AP Inter 1st Year Economics Study Material Chapter 10 Money, Banking and Inflation Questions and Answers helps students stay prepared for examinations.

AP Inter 1st Year Economics 10th Lesson Money, Banking and Inflation Questions and Answers

Essay Questions

Write an essay on the following questions.

Question 1.
Write the functions of commercial banks.
Answer:
Commercial banks play a very important role in economic growth of a country. It is a financial institution. It is a profit making business firm dealing with money. Modern banks in India are joint stock companies registered under the Indian Companies Act.

Definitions of Bank:

1. According to Sayers “we can define bank as an institution whose debts are widely accepted in settlement of other people’s debts. ”
2. According to Crowther “a bank collects money from those who have it to spare or who are saving it out of their incomes, and lends this money to those who require it.”

Functions of Commercial Banks :

Functions of Commercial Banks have been classified into various types as mentioned below.

1. Primary functions
2. Secondary functions
3. Creation of credit
4. Agency functions
5. General utility services

1. Acceptance of Deposits : One of the primary functions of a commercial bank is to accept deposits from the public. The deposits accepted by the banks are of the following types.

a) Savings deposits : These deposits are made into a savings account of a bank. These deposits encourage savings habit among the public. These are most convenient to small businessmen, salaried employees, artisans, etc. The rate of interest paid on these deposits is comparatively low and it is around 4% per annum.

b) Current deposits: These are the deposits made into the current account of a bank. These are most convenient to the business people, public authorities, and joint stock companies, because there are no restrictions on the number and the amount of withdrawals. Bank do not pay any interest on these deposits.

c) Term deposits : These are also called fixed deposits because the money is deposited with the bank for a fixed period of time. These deposits can be withdrawn after the expiry of maturity period. These deposits carry more interest than the saving deposits. The rate of interest varies from 6% to 12% per annum depending on the period of deposits.

d) Recurring or Cumulative deposits : These are the variants of fixed deposits. These deposits are very convenient to those who can’t save huge amount at a time. These are the monthly installments for a fixed period of time. A fixed amount in the multiples of Rs. 10 may be deposited every month for a period one or more years. These deposits carry rate of interest at a rate more than that of savings bank and less than that of a term deposit.

2. Payment of Loans and Advances: Another primary function of the commercial bank is to give loans and advances to different sections of the public like traders, industrialists, farmers, artisans, etc.

a) Demand loans / Call loans : A demand loan is a loan that should be repaid on demand by the bank. The entire loan amount is credited to the account of the borrower in a lump sum. The entire amount carries rate of interest from the date of credit. This loan is a kind of advance made with or without security. These are also called call loans.

b) Short term loans : These loans are given for a specified short period. They are sanctioned to businessmen and farmers, etc. to finance working capital. Individuals may also receive such loans as personal loans. They are given against security.

c) Cash credits : Banks give cash credit to business firms and industries against current assets such as shares, stocks, bonds, etc. up to a specified limit. The customer need not withdraw the entire amount in one installment. He may withdraw as and when he needs and interest is charged on the amount of actual withdrawal.

d) Overdraft. This is a facility allowed by the bank to current account holders. Sometimes they are allowed to withdraw amount above the balances in their account up to a limit. Interest is charged on the amount of actual withdrawal.

e) Discounting of bills of exchange: The most useful and popular form of bonding is by discounting “bills of exchange”. These are undertakings
written by the buyers and given to sellers when the transaction is made on credit basis. The buyer undertakes to make payment after a specified period or on a specified future date.

f) Credit cards : Now-a-days banks devised new methods of giving loans to the customers. One such popular method is issuance of the credit card. A credit cardholder can use his card to purchase goods on credit from specified firms and shops subject to certain regulations. The card holder pays the amount to the bank on a later date with interest.

3. Creation of Credit: The unique function of commercial banks is creation of credit. This type of credit is created from out of the primary deposits of money received from the public. Part of the total amount of these deposits is given as loans and advances to its customers.

4. Agency Functions: Along with above functions commercial banks perform certain agency functions also. Some of the important agency functions are;

1. Collection of cheques, drafts, bills of exchange, etc. of their customers from other banks.
2. Collection of dividends and interest from business and industrial firms.
3. Purchase and sale of securities, shares, debentures, government securities on behalf of the customers.
4. Acting as trustees and keeping their funds in safe custody.
5. Making payments such as insurance premium, income tax, etc. on behalf of their customers as per their advice.

5. General Utility Functions: Besides the above agency functions, commercial banks provide certain utility services to their customers.

1. They provide locker facility for the safe custody of the silver, gold ornaments, etc.
2. They transfer money of the customers from one bank to the other by way of demand drafts, mail transfer, etc. by collecting commission from them.
3. With the use of computers and internet facility, now-a-days the banks are facilitating online transfer of money from one bank to the other.
4. They issue letters of credit to help the traders and businessmen.
5. Traveller’s cheques are issued by the commercial banks to avoid the risk of carrying of cash.
6. They provide foreign exchange to the customers for exports and imports in connection with their business.
7. They convey information on behalf of their customers to the businessmen operating in other places.
8. Recently the commercial banks have been establishing ATMs at different locations to enable their customers to withdraw cash from their accounts.

Question 2.
State the functions of the RBI.
Answer:
Reserve Bank of India is the Central bank of India. It was established in April 1935 with a share capital of Rs. 5 crores. It was originally owned by private shareholders but it was nationalized in 1949. It performs all the Central bank functions under RBI Act, 1934.

Functions of RBI : RBI performs the following functions.

1. Note Issue : RBI has the monopoly of note issue in the country. It maintains gold and foreign exchange reserves of a minimum Rs. 200 crores of which gold should be worth of 115 cores. RBI issues currency notes of the denomination of Rs. 2000,1000, Rs. 500, Rs. 100, Rs. 50, Rs. 20, and Rs. 5, Rs. 2, one rupee note and other coins are issued by the Finance Ministry of the Government of India but circulated by the RBI.

2. Banker of Government: RBI acts as the banker, agent and advisor to the Government of India. It is the agent of the Government of India and all the State governments except the Government of Jammu and Kashmir. It receives money and makes payments on behalf of the Government and keeps the cash balances as deposits without any interest.

3. Bankers’ Bank : RBI serves as a Banker not only to the Government but also to the banks.

• All the scheduled banks are bound by the state to maintain with RBI a part of their total deposit amount as cash balances. This ratio is called the Cash Reserve Ratio (CRR).
• RBI provides financial assistance to the commercial banks in times of their financial stringency or crisis / problems by giving loans or rediscounting the bills of exchange.
• It acts as a clearing house for settlement of inter-bank accounts.

4. Lender of last resort: In times of financial crisis the schedule banks can approach the RBI as a last resort. The RBI grants them loans against the securities such as treasury bonds, treasury bills and other approved securities. The RBI may also provide financial assistance by rediscounting the eligible bills of exchange.

5. Clearing House : Businessmen and other customers issue cheques towards payment for their transactions. A businessman or customer may get a cheque issued on a bank in which he has no account. He has to deposit it in his bank and which collects the amount from the bank on which the cheque is issued.

6. Custodian of foreign exchange reserves : The RBI acts as a custodian of foreign exchange reserves for the country. It has also the responsibility of maintaining the stability of foreign exchange rate. As a member of the International Monetary Fund, it maintains the stability of the exchange rate between the Indian currency and currencies of the member countries.

7. Credit controller: It is the responsibility of RBI to control the volume of credit in the country. It controls credit through different quantitative and qualitative control methods. RBI announces a credit policy for every six months suitable to the credit needs of the country.

8. Supervisory functions : The RBI, being the apex institution of the banking system, exercises wide powers of supervision and control over all the commercial banks and the cooperative banks through the system of licensing, inspection and amalgamation of banks.

9. Promotional and developmental functions : It performs certain promotional and developmental functions also in order to achieve economic development.

1. Takes steps for establishment of banks throughout the country and expansion of their branches.
2. Refinances the state cooperative banks and the financial institutions which give agriculture credit.
3. Promotes different financial institutions to provide industrial finance.

Question 3.
Explain how inflation affects production, income and distribution.
Answer:
Effects of inflation : The effects of Inflation on production and distribution can be explained below.

1. On production:

• Mild inflation stimulates production, as it increases the profit margin of entrepreneurs.
• High inflation rate or hyperinflation hinders production.
• Inflation discourages savings. This affects the capital formation, which in turn affects production.

2. Income and Distribution : The impact of inflation is not uniform on all sections of people. It affects certain sections of the people adversely, while certain other sections may benefit from inflation. This can be elaborated as follows:

• Fixed income groups : People belonging to fixed income groups suffer due to inflation because, their incomes remain constant even prices of commodities rise.
• Working class : Workers and wage earners in the informal sector normally work for incomes. Even otherwise their wages do not rise when prices rise. Such people suffer because of inflation.
• Debtors and creditors : Inflation results in a decline in the value of money. Therefore, creditors lose as‘the value of money is higher when they have lent and less when they are repaid. But debtor gains because the value of money is high when they borrowed but low when they repay.
• Consumers and entrepreneurs : Inflation can negatively impact the consumers. During inflation, the purchasing power of money will be less, hence, consumer will suffer during inflation. On the other hand, entrepreneurs gain from inflation by selling more output at higher prices.

Question 4.
Examine the difficulties of the barter system.
Answer:
Prior to the introduction of money, people can exchange one commodity for another commodity. This method of exchanging good is called “barter system”. This system consists of several difficulties. These are as follows :

1. Lack of coincidence of wants : Under the barter system, the buyer must be willing to accept the commodity which the seller is willing to offer in exchange. The wants of both buyer and seller must coincide. This is called coincidence of wants.
   E.g: Suppose the seller has a goat and he is willing to exchange it for rice. Then the buyer must have rice and he must be willing to exchange rice for goat.
2. Lack of store value: Some commodities are perishable. They perish within a short time. It was not possible to store the value of such goods in their original form under barter system.
3. Lack of divisibility of commodities : Exchange of goods or commodities was possible when we divide the goods into small units. But in reality all commodities are not divisible. This is particularly true in the case of animals.
4. Lack of common measure of value : Under the barter system, there was no common measure of value. To make exchange is possible, it was necessary to determine the value of every commodity in terms of every other commodity.
5. Difficulty in making deferred payments: Deferred payments means, payments to be paid in future for present transaction. But it is not possible in barter system. Because future exchange involved some difficulties.
   E.g: Suppose it was agreed to sell specific quantity of rice in exchange for a goat on a future date keeping in view that present value of the goat. But the value of goat may decrease or increase by that date.

Question 5.
Explain the functions of Money.
Answer:
The term “Money” was derived from the name of Goddess Juno Moneta of Rome. Prior to the introduction of money, the barter system was introduced. To eliminate difficulties in barter system, money was introduced. Money plays a key role in < Modern Economics. A modern economy is rightly known as Monetary Economy.

Definitions of Money : Several economists have defined money in several ways. Some are given below:

1. According to Seligman, “Money is one that possesses general acceptability”.
2. According to Walker “Money is what money does”.

Functions of Money : The functions of money may be classified into 4 types.

1. Primary functions,
2. Secondary functions,
3. Contingent functions,
4. Static and dynamic functions

1) Primary functions The primary functions of money are really the technical and important functions of money. They are of two types,

a) Medium of exchange : The most important function of money is to serve as a medium of exchange. It removes the inconveniences of the barter system in which exchange of goods was possible If only there was double coincidence of wants.

Money serves as a medium of exchange and facilitates the buying and selling of goods. People can exchange goods and services through the medium of exchange.

b) Measure of value: Money serves as a measure of the value of goods and services. The value of goods and services is expressed in terms of money. It has removed the difficulty of the barter system and has made transactions simple and easy. The value of each commodity is expressed in the units of money. We call it the price.

2) Secondary functions : The secondary functions of money has been classified into “3 types”.

a) Store of value : The value of goods and services can be stored in the form of money. Certain commodities are perishable. If they are exchanged for money before they perish, their value can be preserved in the form of money.

b) Standard of deferred payments : Money serves as a standard of deferred payments. In modem economics, most of the business transactions take place on in the form of credit. An individual consumer may now purchase a commodity and pay for it in future because it is possible to express future payments in terms of money.

c) Transfer of money: Money can be easily transferred from one person to another at any time and at any place.

3) Contingent functions Besides the primary and secondary functions, money has certain contingent functions also. These are classified into 4 types.

a) Measurement and distribution of national income: National income of a country can be measured in terms of money by aggregating the value of all commodities. It is not possible in a barter system. In the same manner, national income can be distributed to different factors of production like (N, L, K, O) by making payments to them (rent, wage, interest, profit) in money terms.

b) Money equalizes marginal utilities: The consumer can measure utilities of goods in money terms and he can equalize the marginal utilities of different commodities which are purchased by them with the help of money.

c) Basic for credit: Credit is created by banks from out of primary deposits of money. It is the basis of modern economic progress. The supply of credit in an economy depends on the supply of nominal money.

d) Liquidity: Money is the most important liquid asset. All types of properties can be converted into money easily. Money is 100% liquid.

4) Static and dynamic functions of money “Paul Engig” classified the functions of money as static and dynamic functions.

a) Static functions: The functions like medium of exchange, measure of value, store of value and deferred payment are the traditional functions or technical functions of money. In the point of Engig, all these are called static functions of money. These functions do not show any effect on the economic development.

b) Dynamic functions: The functions of money which influence output, consumption, distribution, and general price level are called dynamic functions of money. The contingent functions come under dynamic functions.

Question 6.
Write note on supply of money.
Answer:
Money supply includes all money in the economy. It is a stock concept. There may be increase or decrease in the money stock over a period of time. The components of money supply may vary from country to country. Money supply consists of the following:

1. Currency issued by the Central Bank In any country the Central Bank issues currency. It consists of paper notes, and coins. In India RBI, which is the Central Bank of the country, issues notes in the denominations of 500,100, 50, 20,10, 5 and 2 rupees. The one rupee note and coins are issued by the Finance Ministry of the Government of India.
2. Demand deposits created by Commercial Banks : Bank deposits are a prominent component of money supply. Commercial banks create credit from the primary deposits of money received from the public. Credit is created in the form of deposits called derived or secondary deposits. In developed countries, they constitute nearly 80% of money supply.

Monetary aggregates : In India money supply is measured in terms of the following monetary aggregates.
M₁ = Currency + demand deposits + other deposits
M₂ = M₁ + time liability portion of savings deposits with banks + certificates of deposits issued by banks + term deposits maturing within one year.
M₃ = M₂ + term deposits over one year maturity + call / term borrowing of banks.

Question 7.
Define Inflation. Explain the causes of inflation.
Answer:
Introduction: Inflation is one of the serious macro-economic problems confronting all the economies in the world today. It affects the economic lives and the welfare of the people in many ways.

Inflation: Inflation means a general rise in prices. It is a continuous rise in the general price level rather than once for all rise in it.

Definitions :

1. According to Samuelson, “Inflation denotes a rise in the general level of prices”.
2. According to Ackley, “Inflation is a persistent and appreciable rise in the general level or average of prices”.

Causes of Inflation : Inflation may occur due to the following reasons.

1. Excess demand
2. Supply shortage or increased cost of production

1. Factors causing increase in the aggregate demand for commodities :

a) High rate of population growth
b) Increase in non-plan and plan expenditure of government
c) Rise in government expenditure on employment and welfare schemes
d) Rise in the per capita income of the people due to economic development
e) Heavy investment on development projects with long gestation period
f) Increase in the money supply in the economy
g) Liberal availability of credit for unproductive economic activities
h) Deficit financing by the government
i) Reduction in direct tax rates.

2. Factors that raise the cost of production :

a) Increase in cost of factors of production
b) Rise in the prices of capital equipment
c) Increase in the tax rates
d) Excessive wear and tear of machinery
e) Import of machinery and equipment at higher prices
fj Devaluation of domestic currency
g) Inefficiency in management
h) Lack of optimum allocation of resources

3. Factors causing inadequate supply :

a) Failure of monsoons, floods, etc. in agriculture.
b) Shortage of investment
c) Non-availability of inputs and raw materials
d) Under-utilization of productive capacity
e) Long gestation period of certain industries
f) Exports at the cost of domestic supply
g) Artificial scarcity due to black-marketing.

Question 8.
Explain the payment system of Electronic (or) Online banking.
Answer:
Mobile Banking All banking transactions can be performed using a smartphone through a mobile ‘app’ of the respective banks. This is very popular now.

Payment Systems

a) Real Time Gross Settlement (RTGS) : The RTGS system is a fund transfer mechanism where the transfer of money takes place from one bank to another on a ‘real time’ and on ‘gross basis’. This is the fastest possible money transfer system through the banking channel. Settlement in real time means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. In India, the Reserve Bank of India maintains this payment network. There is no limit on the amount to be transferred.

b) National Electronic Fund Transfer (NEFT) ;The NEFT system is a nationwide system that facilitates individuals, firms and corporates to electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country. There is a limit of Rs. 2 lakhs. Transfer is done in batches and hence there is waiting time. NEFT requires an IFSC to perform transactions.

Only domestic transactions are possible through RTGS and NEFT. For international transactions, there is another system called SWIFT (Society for Worldwide Interbank Financial Telecommunication).

c) Immediate payment Services (IMPS) :The IMPS is a 24/7 interbank electronic fund transfer system in India that enables instant money transfers via mobile, internet and ATM channels.

d) Unified Payments Interface (UPI): UPI is a payment system that enables transactions through mobile apps. Eg.: Phonepe, G-Pay, Paytm etc. National Payments Corporation of India (NPCI) established in 2008, promoting and manages UPI.

e) Indian Financial System Code (IFSC) : Core Banking enabled banks and branches are assigned an Indian Financial System Code (IFSC) for RTGS and NEFT transactions. IFSC is an 11 digit alphanumeric code and unique to each branch of a bank.

The first ‘4’ alphabetic characters representing the bank name, and the last ‘6’ characters (usually numeric) representing the branch. The 5th character is 0 (zero) and reserved for future use.

Question 9.
Explain the policy tools of Control Money Supply or Monetary Policy.
Answer:
Policy tools to control Money Supply (Monetary Policy) : Monetary policy is the policy adopted by the monetary authority of the nation (i.e., RBI). The main objectives of monetary policy in India are:

1. Price stability,
2. Exchange Rate stability,
3. Employment generation, and
4. Control of money supply, etc.

The RBI controls the money supply in the economy in various ways. The tools used by the central bank to control money supply can be quantitative or qualitative.

Quantitative (or) General Measures:

a) Bank Rate : The Bank Rate is the rate at which the Central Bank discounts the bills of commercial banks. It is also known as discount rate. If the Central Bank wishes to control credit and inflation in the economy, it raises the Bank Rate. If the Central Bank wishes to boost production and investment activities in the economy, it will decrease the Bank Rate.

b) Open Market Operations : It implies the deliberate direct sales and purchases of securities and bills in the market by the Central Bank on its own initiative to control the volume of credit. If RBI wants to discourage credit in the economy, it sell its securities. This step leads to contraction of credit and money in circulation.

If RBI wants to encourage credit in the economy, it purchases its securities. This measure leads to expansion of credit and money in circulation.

c) Cash Reserve Ratio (CRR): CRR refers to that portion of total deposits which a commercial bank has to keep with the Central Bank in the form of cash reserves. Cash reserves determine the capacity of the commercial banks to create credit. During inflation the CRR is raised consequently, credit contracts. During deflation or recession, CRR is reduced. This will facilitate credit expansion.

d) Statutory Liquidity Ratio (SLR) : SLR refers to that portion of total deposits which a commercial bank has to keep with itself in the form of liquid assets like cash, gold or approved government securities. Liquidity impacts the credit creating ability of commercial banks.

If RBI wants to discourage credit in the economy, it increases SLR and if it wants to encourage credit in the economy, it decreases SLR.

e) Repo Rate : Repurchase options or in short ‘Repo’is defined as ‘an instrument for borrowing funds by selling securities with an agreement to repurchase the securities on a mutually agreed future date at agreed price, which includes interest for the funds borrowed’. The interest rate charged by RBI for this transaction is called the ‘repo rate’. Changes in repo rate influence the quantity of credit in the economy.

f) Reverse Repo Rate : ‘Reverse Repo’ is defined as “an instrument for lending funds by purchasing securities with an agreement to resell the securities on a mutually agreed future date at an agreed price which includes interest for the funds lent”. The interest rate paid by RBI for such transactions is called the reverse repo rate. Changes in reverse repo rate lead to expansion or contraction of credit.

Qualitative measures :

These are also known as selective credit controls. They include changing margin requirements, changing credit regulatory conditions, issuing directives, rationing of credit and moral suasion. RBI can also take direct action. These measures help in directing the credit to the desired sectors and purposes.

Question 10.
Write the methods of measuring inflation in India.
Answer:
Methods of Measuring Inflation in India : Whole sale Price Index (WPI) and Consumer Price Index (CPI) are two commonly used measures that later effective in determining the inflation in the country. WPI only consider changes in the price of goods. Whereas CPI considers changes in the prices of both goods and services.

a) Wholesale Price Index (WPI): It measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses. WPI indices are published by the Office of “Economic Adviser, Ministry of Commerce and Industry”. It is the most widely used inflation indicator in India. The base year for the all India WPI has been revised from 2004-05 to 2011-12 in 2017. The WPI was calculated using about 435 elements in the base year 1993-94, but 697 items in the advanced foundation base year 2011-12.

b) Consumer Price Index (CPI): It measures price changes from the perspective of retail buyers (consumers). It is released by the “National Statistical Office (NSO)” of the Ministry of Statistics and Program Implementation (MoSPI). The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc, which Indian consumers buy for final consumption.

There are 4 types of CPI indices. They are CPI for Industrial Workers (IW), CPI for Agricultural Labourer (AL), CPI for Rural Labourer (RL) and CPI (Rural/Urban/ Combined). The base year for CPI is 2012. The “Ministry of Labour and Employment” released the new series of Consumer Price Index for Industrial Worker (CPI-IW) with the base year as 2016. The Monetary Policy Committee (MPC) uses CPI data to control inflation. In April 2014, the Reserve Bank of India (RBI) adopted the CPI as its key measure of inflation.

Short Answer Questions

Write the answers briefly for the following questions.

Question 1.
Briefly explain the primary and secondary functions of Money.
Answer:
I. Primary Functions : The primary functions of money are both technical and essential to the functions of the economy. They are of two types :

a) Medium of exchange : Money serves as a medium of exchange. It removes the inconveniences of the barter system. Money facilitates the exchange of commodities without the need for a double coincidence of wants. Any commodity can be exchanged for money, enabling people to trade goods and services efficiently.

b) Measure of value (Unit of Account) : Money serves as a measure of the value of goods and services. As a common measure of value, it removes the difficulty of the barter system and simplifies transactions. The value of each commodity is expressed in units of money.
Eg.: Indian Rupees, US Dollar.

II. Secondary Functions

Money has the following secondary functions:

a) Store of value : The value of commodities and services can be stored in the form of money. Certain commodities are perishable. If they are exchanged for money before they perish, their value can be preserved in the form of money. Otherwise, they perish and their value is lost forever. Even in the case of durable commodities, their value may diminish over a period of time. But their value can be stored, without any decline, in the form of money by exchanging them for money.

b) Standard of deferred payments : Money serves as a standard of deferred payments. In modern economies, most of the business transactions take place in the form of credit. An individual consumer or a business person may now purchase a commodity and pay for it in future, as this makes it possible to express future payments in terms of money. Similarly, one can borrow a certain amount of money now and repay it in future.

Question 2.
What are the monetary aggregates in India?
Answer:
Monetary aggregates (Measurement of Money Supply) : Following the recommendations of the Second Working Group on Money Supply (SWG), from April, 1997 the RBI has been publishing data on four alternative measures of money supply.

The respective empirical definitions of these measures are as follows;

M₁ = Currency notes and coins with the public + demand deposits of the banks (current and savings deposits accounts) + other deposits of the RBI
M₂ = M₁ + Savings deposits with post office savings banks.
M₃ = M₁ + Net time deposits with the banking system.
M₄ = M₃ + Total deposits with the post office savings organisation (excluding National “Savings Certificate)

Note: Mi is known as “narrow money-and MS is known as “broad money”.

These measures are in decreasing order of liquidity. M₁ is most liquid and easiest for transactions, whereas, M₄ is least the liquid of all. Ms is the most commonly used measure of money supply. It is also known as the “aggregate monetary resource”.

Question 3.
Differentiate between Repo Rate and Reverse Repo Rate and their uses.
Answer:
Differentiate between Repo Rate and Reverse Repo Rate :

Uses : Repo Rate is used by the central bank to lend money to commercial bank to meet short term fund shortages and manage liquidity. By adjusting the repo rate, the central bank controls inflation and influences economic growth. A higher repo rate makes borrowing costly, reducing spending and inflation, a lower repo rate encourages borrowing and economic activity.

Reserve Repo Rate is used by the central bank to borrow money from commercial banks to absorb excess liquidity in the system, thus controlling inflation and maintaining Financial stability. Where the reserve repo rate is high, banks proper to keep surplus funds with one central bank, reducing money supply. A lower reserve repo rate encourages banks to lend more.

Question 4.
What are the quantitative credit controlling tools used by the RBI?
Answer:
Quantitative (or) General Measures :

a) Bank Rate The Bank Rate is the rate at which the Central Bank discounts the bills of commercial banks. It is also known as discount rate. If the Central Bank wishes to control credit and inflation in the economy, it raises the Bank Rate. If the Central Bank wishes to boost production and investment activities in the economy, it will decrease the Bank Rate.

b) Open Market Operations : It implies the deliberate direct sales and purchases of securities and bills in the market by the Central Bank on its own initiative to control the volume of credit. If RBI wants to discourage credit in the economy, it sell its securities. This step leads to contraction of credit and money in circulation.

c) Cash Reserve Ratio (CRR): CRR refers to that portion of total deposits which a commercial bank has to keep with the Central Bank in the form of cash reserves. Cash reserves determine the capacity of the commercial banks to create credit. During inflation the CRR is raised consequently, credit contracts. During deflation or recession, CRR is reduced. This will facilitate credit expansion.

d) Statutory Liquidity Ratio (SLR) : SLR refers to that portion of total deposits which a commercial bank has to keep with itself in the form of liquid assets like cash, gold or approved government securities. Liquidity impacts the credit creating ability of commercial banks.

If RBI wants to discourage credit in the economy, it increases SLR and if it wants to encourage credit in the economy, it decreases SLR.

e) Repo Rate : Repurchase options or in short ‘Repo’is defined as ‘an instrument for borrowing funds by selling securities with an agreement to repurchase the securities on a mutually agreed future date at agreed price, which includes interest for the funds borrowed. The interest rate charged by RBI for this transaction is called the “repo rate’. Changes in repo rate influence the quantity of credit in the economy.

f) Reverse Repo Rate : ‘Reverse Repo’ is defined as “an instrument for lending funds by purchasing securities with an agreement to resell the securities on a mutually agreed future date at an agreed price which includes interest for the funds lent”. The interest rate paid by RBI for such transactions is called the reverse repo rate. Changes in reverse repo rate lead to expansion or contraction of credit.

Question 5.
Define Inflation, state the types of Inflation.
Answer:
Definition : In a broader sense, the term inflation refers to a persistent rise in the general price level over a long period of time. Many modern economists agree that Inflation is a situation in which there is a persistent and appreciable increase in the general level of prices. Some of the important definitions are given below:

• According to Pigou, ‘inflation exists when money income is expanding more than in proportion to increase in earning activity’.
• Crowther defined inflation as ‘a state in which the value of money is falling, i.e, the prices are rising’.
• According to Ackley, ‘Inflation is a persistent and appreciable rise in the level or average of prices’.
• According to Samuelson, ‘Inflation denotes a rise in the general level of prices’

All definitions/agree that inflation refers to a rise in the general price level and that the rise is persistent.

Types : Inflation refers to a persistent rise in the general price level of goods and services over time. Inflation is divided into different types based on its pace or rate of inflation and the causes of inflation. They are explained below:

I. Based on the rate of inflation

1. Creeping inflation : When the rise in the prices is very slow and small, it is called creeping inflation. Creeping inflation is also known as ‘mild inflation’. Under this, a gradual rise in prices is usually less than 3 per cent per annum. Creeping inflation is generally good for economic growth.
2. Walking inflation : This is also referred to as ‘trotting inflation’. In this case, the inflation rate ranges between 3% and 5% annually.
3. Running inflation : When the rate of inflation is in the range of 5% to 10% per annum, it is known as running inflation.
4. Galloping (or) Hyper inflation : When the inflation rate exceeds 10 per cent annually, it is known as galloping inflation or hyper inflation.

II. On the basis of the cause

1. Demand-Pull inflation : Inflation caused by an increase in the aggregate demand for commodities over aggregate supply is referred to as ‘demand- pull inflation’.
2. Cost-push inflation : Prices of the commodities may rise due to a rise in the cost of production. Inflation caused by the rise in cost of production is called ‘cost-push inflation’,

Question 6.
Enumerate any eight factors of Demand and Supply that cause inflation.
Answer:
Inflation is generally caused by either excess demand or supply shortages, or increased production costs.

1. Factors causing increase in demand for commodities.

a) High rate of population growth.
b) Increase in non-plan and plan expenditure of the government.
c) Rise in the per capita income of the people due to economic development.
d) Increased spending by the government on employment programmes and welfare schemes.
e) Liberal availability of credit for unproductive economic activities.
f) Deficit financing by the Government.

2. Factors causing inadequate supply.

a) Failure of monsoons, floods, pests, use of spurious seeds etc. in agriculture.
b) Shortage of investment due to inadequate availability of institutional credit.
c) Non-availability (or) inadequate availability of inputs and raw materials.
d) Under-utilisation of productive capacity due to power shortage, labour unrest, etc.
e) Artificial scarcity due to black marketing.

Question 7.
Explain the components of demand for and supply of money.
Answer:
a) Demand for Money : The demand for money reflects why people desire a certain amount of money. Since money is needed for transactions, the value of transactions will determine the amount of money required. The greater the volume of transactions, the greater the demand for money. As volume of transactions depends on income, an increase in income will lead to a rise in demand for money.

When people keep their savings in the form of money rather than putting it in a bank, demand for money is high. How much money people keep also depends on rate of interest offered by banks. Specifically, when interest rates go up, people become less interested in holding money. Since holding money amounts to holding less of interest-earning deposits, and thus less interest received. Therefore, at higher interest rates, money demanded comes down.

b) Supply of Money : Money supply refers to the total amount of money circulating in an economy. The components of money supply may vary from country to country. Broadly speaking, money supply consists of the following:

1. Currency issued by the central bank : In any country, the central bank issues currency, which includes paper notes and coins. In India, Reserve Bank of India, which is the central bank of the country, issues notes in the denominations of Rs. 500, 200, 100, 50, 20, 10, 5 and 2.
2. Demand deposits created by commercial banks : Bank deposits are a prominent component of money supply. Commercial banks create credit from Third primary deposits of money receive from the public. The credit is created in the form of deposits known as derived or secondary deposits.

Question 8.
Define demonetisation and explain its advantages and disadvantages.
Answer:
Meaning : Demonetisation is an economic process where the existing currency unit (such as bank notes and coins) is withdrawn from circulation and replaced with new currency.

Demonetisation was an initiative taken by the Government of India in November, 2016 to tackle the problem of corruption, black money, terrorism and circulation of fake currency in the economy. Old currency notes of Rs.’500 and Rs. 1000 were declared no longer legal tender. New currency notes in the denomination of Rs. 500 and Rs. 2000 were launched. The public was advised to deposit old currency notes in their bank account till 31st December, 2016 without any declaration and upto 31st March, 2017 with the RBI declaration.

Advantages of Demonetisation

• Helps to minimise tax evasion and eliminate black money.
• Encourages a cashless society (digital payments network).
• Decreases a variety of criminal activities.
• Leads to an improvement in cash deposits.

Disadvantages of Demonetisation

• Damage to economic sentiment.
• Fall in employment in the unorganised sector.
• Slow growth rate of GDP.
• Public panic during the demonetisation process.

Question 9.
WPI and CPI. (Or)
Explain Methods of measuring inflation in India.
Answer:
Whole Sale Price Index (WPI) and Consumer Price Index (CPI) are two commonly used measures that later effective in determining the inflation in the country. WPI only consider changes in the price of goods. Whereas CPI considers changes in the prices of both goods and services.

a) Wholesale Price Index (WPI) : It measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses. WPI indices are published by the Office of “Economic Adviser, Ministry of Commerce and Industry”. It is the most widely used inflation indicator in India. The base year for the all India WPI has been revised from 2004-05 to 2011-12 in 2017. The WPI was calculated using about 435 elements in the base year 1993-94, but 697 items in the advanced foundation base year 2011-12.

b) Consumer Price Index (CPI): It measures price changes from the perspective of retail buyers (consumers). It is released by the “National Statistical Office (NSO)” of the Ministry of Statistics and Program Implementation (MoSPI). The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc, which Indian consumers buy for final consumption.

There are 4 types of CPI indices. They are CPI for Industrial Workers (IW), CPI for Agricultural Labourer (AL), CPI for Rural Labourer (RL) and CPI (Rural/ Urban/Combined). The base year for CPI is 2012. The “Ministry of Labour and Employment” released the new series of Consumer Price Index for Industrial Worker (CPI-IW) with the base year as 2016. The Monetary Policy Committee (MPC) uses CPI data to control inflation. In April 2014, the Reserve Bank of India (RBI) adopted the CPI as its key measure of inflation.

Very Short Answer Questions

Question 1.
Barter System.
Answer:
The Barter System is the oldest form of commerce where goods or services are exchanged directly without using money or any medium of exchange. In this system, two or more parties trade items or services. They have for those they need, based on mutually agreed values. For example, a carpenter might build a fence for a farmer who pays with crops instead of cash.

Question 2.
Liquidity.
Answer:
Liquidity can be defined as the ability of any asset to act as a direct medium of exchange. Money is the most liquid asset. The degree of liquidity differs from one asset to other asset.

Question 3.
Legal Tender Money.
Answer:
Legal Tender Money is the official currency recognised by law that must be accepted as payment for debts and financial obligations within a country. It typically includes coins and bank notes issued by the Government or Central Bank. In India, coins and currency notes issued by the RBI are legal tender.

Question 4.
Near Money.
Answer:
The term near money refers to those highly liquid asset which are not accepted as money i.e., they are not accepted but be easily converted into money within a short period.

Question 5.
Money Multiplier.
Answer:
The money multiplier (m) is defined as “the ratio of the change in the money supply to a given change in the monetary base (MJ”. It indicates how much the money supply will increase of a in high-powered money.
Money Multiplier (m) = \(\frac{\text { Money Supply }}{\text { Monetary Base }\left(\mathrm{M}_0\right)}\)
Thus, money multiplier indicates what multiple of the monetary base is transformed into money supply.

Question 6.
RBI.
Answer:
RBI is the Central Bank of India. It is established in April 1935 with a share capital of Rs.5 crores, as a shareholders bank. It was nationalized in 1949. It performs all the important functions of Central Bank under the Reserve Bank of India Act, 1934.

Question 7.
Bank Rate.
Answer:
The Bank Rate is the rate at which the Central Bank discounts the bills of commercial banks. It is also known as discount rate. If the Central Bank wishes to control credit and inflation in the economy, it raises the Bank Rate. If the Central Bank wishes to boost production and investment activities in the economy, it will decrease the Bank Rate.

Question 8.
RTGS.
Answer:
The RTGS system is a funds transfer mechanism where the transfer of money takes place from one bank to another on a ‘real time’ and on ‘gross basis’. This is the fastest possible money transfer system through the banking channel. Settlement in real time means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. In India, the Reserve Bank of India maintains this payment network. There is no limit on the amount to be transferred.

Question 9.
Cash Reserve Ratio.
Answer:
CRR refers to that portion of total deposits which a commercial bank has to keep with the Central Bank in the form of cash reserves. Cash reserves determine the capacity of the commercial banks to create credit. During inflation the CRR is raised consequently, credit contracts. During deflation or recession, CRR is reduced. This will facilitate credit expansion.

Question 10.
Open Market Operation.
Answer:
It implies the deliberate direct sales and purchases of securities and bills in the market by the Central Bank on its own initiative to control the volume of credit. If RBI wants to discourage credit in the economy, it sell its securities. This step leads to contraction of credit and money in circulation.

Question 11.
Lender of Lost Resort.
Answer:
In times of financial stringency, the scheduled banks can approach the RBI as a last resort. The RBI grants loans against the securities such as the treasury bonds, treasury bills, etc. This, acts as the lender of last resort.

Question 12.
High Powered Money.
Answer:
It is also called the monetary base, is the total amount of currency in circulation plus the reserves the commercial banks hold at the central bank. It includes physical currency and bank reserves deposited with the central bank.

This money is termed high-powered because a small change in it can lead to a much larger change in the overall money supply through the money multiplier effect in the fractional reserve banking system. Central Banks control high-powered money directly and use it as a key tool to implement monetary policy influencing interest rates, inflation, and economic stability.

Question 13.
Consumer Price Index.
Answer:
CPI is one of the price indices to know about inflation. This is the index of prices of a given basket of commodities which are brought by the representative consumer. It is generally expressed in percentage terms. Here we calculate the cost of purchase of a given basket of commodities for both base year and current year.

Question 14.
Stagflation.
Answer:
The term “Stagflation” is a combination of the words ‘stagnation’ and ‘inflation’. Stagflation refers to an economic condition characterised by high inflation, low economic growth and high unemployment.

One Word Answer Questions

Answer the following questions in ONE WORD.

Question 1.
What is the full form of the IFSC?
Answer:
Indian Financial System Code

Question 2.
The latest ‘Demonetisation measure’ was taken by Govt, of India on.
Answer:
November 2016

Question 3.
MI + Net time deposits with the banking system is equal to :
Answer:
M₃

Question 4.
The ratio of change in the money supply to a given change in the monetary base is known as :
Answer:
Money Multiplier

Question 5.
“An instrument for borrowing funds by selling securities with an agreement to repurchase on a mutually agreed future date” is called: ___________
Answer:
Repo Rate

Fill in the blanks

Question 1.
___________ measure of money supply is known as broad money.
Answer:
M₃

Question 2.
“Money is what money does”. This definition of money is given by ___________.
Answer:
Walker

Question 3.
Currency in circulation + Banker’s deposits with the RBI + Other deposits with the RBI is equal to ___________.
Answer:
Reserve Money (M₀)

Question 4.
During inflation, the purchasing power of money ___________.
Answer:
Decreases

Question 5.
___________ is responsible for overall credit and monetary policy in India.
Answer:
RBI

Multiple Choice Questions

Question 1.
Which of the following is not a quantitative credit controlling measure by
the RBI?
1) Repo Rate
2) Bank Rate
3) CRR
4) Margin Requirements
Answer:
4) Margin Requirements

Question 2.
Which of the following currency notes were demonetised in 2016?
1) Rs. 100 & 200
2) Rs.200 & 500
3) Rs. 500 & 1000
4) Rs.500 & 200
Answer:
3) Rs. 500 & 1000

Question 3.
The rate at which Rupee was borrowed by commercial banks from the RBI is known as:
1) SLR
2) Repo Rate
3) Reverse Repo Rate
4) CRR
Answer:
2) Repo Rate

Question 4.
When the aggregate demand exceeds aggregate supply, it results in:
1) Demand-pull Inflation
2) Cost-push Inflation
3) Hyper Inflation
4) Creeping Inflation
Answer:
1) Demand-pull Inflation

Question 5.
Which of the following statement is true?
1) M₃ is the most liquid money supply measure
2) M₂ is the most liquid money supply measure
3) M₁ is the most liquid money supply measure
4) M₄ is the most liquid money supply measure
Answer:
3) M₁ is the most liquid money supply measure

Regular practice with AP Inter 1st Year Economics Study Material Chapter 9 Theory of Employment and Public Finance Questions and Answers helps students stay prepared for examinations.

AP Inter 1st Year Economics 9th Lesson Theory of Employment and Public Finance Questions and Answers

Essay Questions

Write an essay on the following questions.

Question 1.
Elucidate the classical theory of employment.
Answer:
The classical theory of employment was developed by Economist such as Adam Smith, David Ricardo, Robert Mathus, etc. It is based on the famous “Law of Markets” advocated by J.B. Say. According to this law, “Supply creates its own Demand”.

The implications of the classical theory of employment may be summarized as follows.

1. There is no general over production and general unemployment.
2. There is an automatic adjustment of demand and supply levels through the price mechanism.
3. There is no need for the interference by the government.
4. The whole income is spent. Even if there is saving, all savings will be gradually spent on capital goods. Thus the whole income is spent either on consumption good or on capital goods. It means savings and investments are equal.
5. Flexible interest rate keeps saving and investment in equilibrium.
6. Flexible wage rate brings about equilibrium in the labour market.
7. It is possible to increase output and employment as long as there are unemployed or idle resources.
8. Goods are exchanged for goods. Money facilitates such exchange of goods. Hence, money has no other role except acting as medium of exchange.

Salient features of Classical Theory of Employment: The classical economists held the view that in a capitalistic economy, there is always a stable equilibrium at full employment level in the long run under conditions of perfect competition.

They consider full employment as a general feature and unemployment a rare phenomenon. If there is unemployment at anytime, the economy has a tendency to move towards full employment. There would be automatic adjustment through free play of market forces, provided there is no interference by the government. Thus, the classical economists ruled out any general unemployment in the long run. These views are broadly known as the classical theory of output, income and employment.

Assumptions of classical theory of employment : The classical theory of employment including J.B. Say’s market law is based on the following assumptions :

1. There is a free enterprise economy.
2. There is perfect competition in the economy.
3. There is no government interference in the functioning of the economy. Price mechanism is allowed to work freely.
4. The equilibrium process is considered from the long term point of view.
5. All savings are automatically invested.
6. The interest rate is flexible.
7. The wage rate is flexible.
8. There are no limits to the expansion of the market.
9. Money acts as the medium of exchange and it has no role to play in the determination of output and employment. It is neutral.

The classical theory of employment can be discussed with three dimensions:

A) Goods market equilibrium.
B) Money market equilibrium and
C) Equilibrium of the labour market (Pigou wage – cut policy).

The equilibrium of the first two markets was propounded by J.B. Say, whereas the third one was advocated by A.C. Pigou.

Question 2.
Describe the Keynesian theory of employment with the help of diagram.
Answer:
The classical employment theory assumed that there is always full employment in the economy. The classical economists consider full employment as a general situation in the long run. But J.M. Keynes criticized it and he considered full employment as a rare phenomenon. He considered full employment as special case in short run.

J.M. Keynes stated his employment theory in his famous book entitled “The General Theory of Employment, Interest and Money”, published in 1936. His theory is known as Keynesian theory of employment.

He says that the level of employment is determined by two factors.

1. Aggregate supply
2. Aggregate demand.

The term effective demand is used to denote that level of aggregate demand which is equal to aggregate supply.

Aggregate Supply: Aggregate supply refers to the total supply of goods and services in the economy. The level of aggregate supply depends on the level of employment. The minimum amount of money which the producers in the economy must receive by selling the goods and services at different levels of employment is called aggregate supply price. As the level of output increases with the level of employment the aggregate supply price also increases with every increase in the level of employment.

Aggregate Supply Schedule: It shows the various amounts of supply at different levels of employment. It is shown in the table given below.

From the above table, we know that as employment increases aggregate supply is increasing. So there is a direct relationship between level of employment and aggregate supply.

Aggregate Supply Curve: If the above schedule is shown in graph, then we get a curve. This curve is called aggregate supply curve.

Aggregate supply curve can be seen sloping upwards from left to right. It started from the origin which means the aggregated supply is zero, when the employment is nil.

In the adjacent diagram as employment levels increase the AS curve rises to the right. ON is assumed to be full employment level. At this level, aggregate supply the function AS is parallel to Y – axis which means that the aggregated supply is perfectly inelastic.

Aggregate Demand : Aggregate demand means the total demand for all commodities in the economy at a particular level of employment. The amount they spend on consumption goods is called consumption expenditure (C) and their expenditure on capital goods is called investment (I). The entrepreneurs expect that the community as a whole is willing to spend certain amount towards purchase of the total output. That expected expenditure is termed as aggregate demand price.

Aggregate Demand Schedule : It shows the aggregate demand at different levels of employment. As the level of employment rises, the total income of the community also rises and therefore the aggregate demand price also increases. This can be seen in the following table.

Aggregate Demand Function

In the above table, as employment increases AD also increases. So there is direct relationship between levels of employment and aggregate demand.

Aggregate Demand Curve : If the AD schedule is shown on a graph, then we get a curve. This curve is called aggregate demand curve. This is shown in the diagram given adjacent:

In the adjacent diagram, AD curve is the aggregate demand curve. It slopes upwards from left to right.

Effective Demand : The level of employment will be in equilibrium at a point where aggregate demand and aggregate supply are equal. The aggregate demand at which it is equal to aggregate supply is called effective demand. This is shown in the table given below.

Effective Demand

In the above table, at the employment of 14 lakhs, the aggregate supply and aggregate demand are equal. At the level of employment of below 14 lakhs, aggregate supply is less than aggregate demand. Similarly, at the level of employment of above 14 lakhs aggregate supply is more than aggregate demand.

Only at the level of 14 lakhs the A.D and AS are equal. Hence, it is called effective demand.

In this diagram, Aggregate demand price curve (AD) and aggregate supply price curve (AS) intersect each other at point E₁“. It shows the equilibrium point. The equilibrium has been attained at “ON₁”, level of employment. It is assumed that ON in the above diagram does not indicate full employment as the economy is having idle factors of production. So it is considered as under-employment equilibrium.

According to Keynes, to achieve full employment an upward shift of aggregate demand curve is required. This can be possible through government expenditure on goods and services supplied in the economy, whenever private entrepreneurs may not show interest to invest. With this the AD₁ curve (C + I) shifts as AD₂ (C + I + G) at new point of effective demand E₂, where the economy reaches full employment level i.e., ON_F.

Question 3.
Explain various methods of redemption of public debt.
Answer:
When the government’s expenditure exceeds its revenue, the government can borrow funds from various sources within the country or from abroad. Such debts are known as public debt.

On the basis of the sources, public debt is classified into two categories

Internal debt: It is the fund which is borrowed by a government from the people and institutions within the country. In other words, debts floated within the country is called internal debt.

External debt: It is the fund or amount which is borrowed by a government from the individuals, institutions, and governments of other countries, (or) In other words, debt floated from abroad is called “external debt”.

Redemption of public debt: Repayment of debt by government is called redemption of public debt. Internal debt can be repaid in the domestic currency, but to repay external debt foreign exchange is necessary (dollars,…………………).

The following are the methods of redemption of public debt.

1. Surplus budget: Surplus budget means having public revenue is excess of public expenditure. If the government plans for a surplus budget, the excess revenue may be utilized to repay public debt.
2. Refunding : In this method, the government sells new bonds and securities in the market and the money thus raised is utilized for the repayment of old or maturing debts.
3. Annuities : By using this method, the government repays part of the public debt every year. These are called annuities. Such annual payments are made regularly till the debts are completely cleared.
4. Sinking fund : By using this method, the government creates a separate fund called ‘sinking fund’ for the purpose of repaying public debt. A part of the public revenue is deposited into fund every year. Public debt is repaid from the sinking fund. This method is considered as the better method of redemption.
5. Conversion : Conversion means that existing loans are changed into new loans before the date of their maturity. This method is advantageous when the rate of interest charged on the new loans is less than the rate of interest to be paid on the existing loans.
6. Additional taxation : The government can levy new taxes and raise funds for the repayment of old debts. Under this method new taxes are imposed.
7. Capital levy : It is a heavy one – time tax on the capital assets and estates.
8. Surplus balance of payment: This is useful to repay external debt for which foreign exchange is required. Surplus balance of payment implies exports in excess of imports by which reserves of foreign exchange can be created.

Question 4.
Describe various components of a budget.
Answer:
The government budget consists of two main components: Revenue Budget and Capital Budget. They are presented as revenue account and capital account in the budget documents. Each consists of receipts and expenditure as shown below.

I. Revenue Budget :

a) Revenue Receipts: Revenue receipts are those receipts that do not lead to a claim on the government. They are therefore termed non-redeemable. They are divided into tax and non-tax revenues, tax revenues are divided into direct taxes and indirect taxes. Non-tax revenue consists of interest receipts, dividends and profits on government investments.

b) Revenue Expenditure: Revenue expenditure is expenditure incurred for purposes other than the creation of physical or financial assets of the central government. It relates to those expenses incurred for the normal functioning of the government departments and various services, such as interest payments, subsidies, and pensions,

II. Capital Budget :

a) Capital Receipts: These include market loans and borrowings. Market loans are raised from the public by floating bonds and securities. Borrowings include loans raised from the Reserve Bank of India and financial institutions by selling Treasury Bills. The government may also receive loans from World Bank and IMF. Another source is small savings such as National Savings Certificates, Provident Fund etc. The government also receives money by way of loans or from the sale of its assets. Loans will have to be returned to the agencies from which they have been borrowed. Thus, capital receipts liabilities for the government.

b) Capital Expenditure: Capital expenditure refers to the government spending that results in the creation of physical or financial assets or the reduction in financial liabilities. This includes expenditure on the acquisition of land, buildings, machinery, equipment, investment in shares, and loans and advances by the central government to state and union territory governments.

Question 5.
How does Keynes advocate government expenditure to reduce un¬employment? Explain. ‘
Answer:
J.M. Keynes was one of the famous British economist of the 20th century. According to Keynes theory, lack of effective demand is the basic cause for unemployment in India.

Keynes suggests that unemployment can be removed and full employment level reached by increasing the aggregate demand. Aggregate demand consists of consumption expenditure (C) and investment (AD = C + I).

Keynes opines or believes that in short run it is not possible to raise consumption expenditure and therefore suggested that aggregate demand can be raised by increasing investment. In order to encourage private investment the government should reduce rate of interest. However he argued that the organisers in private sector may not be willing to come forward to increase private investment, when they are not optimistic. In this situation, the government should spend on public works. The government expenditure raises aggregate demand and removes unemployment.

In the view of Keynes, the level of employment in the short run will depend on effective demand for goods in the country. Greater the effective demand leads higher volume of employment and vice – versa. Total employment depends on total demand and unemployment is result of a deficiency of total demand. Effective demand represents the total money spent on consumption and investment. The total national expenditure is equal to total national income which is equal to national output.

So Effective Demand = National Income (Y) = National Output (O)

Effective demand determines the volume of employment in the economy at a particular time, the deficiency of effective demand in employment. The deficiency of effective demand is due to the gap between income and consumption. As income increases, consumption also increases but it is in a smaller proportion than the increase in national income. Since consumption is less, the demand is less. The gap must be filled by increasing investment and hence effective demand. In order to maintain employment at high level. Thus it is increase in effective demand which results in increase in employment or total output or national income.

In terms of expenditure, effective demand means, the total expenditure of the community at a particular level of employment. This expenditure is just equal to economy’s aggregate supply. So effective is the aggregate or total demand of community both for consumption and investment.

Question 6.
Discuss how the Keynesian Theory is an improvement over the classical theory of employment.
Answer:
Keynesian theory has a greater particular value in the world of reality. Keynesian theory is entirely new and marks a revolutionary thinking. So it has been aptly called a Keynesian Revolution. Based on cary some point Keynesian theory is better than classical theory of employment.

Keynesian theory relates to Macro Economics, which studies the economy as a whole but the classical economic theory deals with the individual aspect of the economy that is Micro Economics. Keynes, dealt with Aggregates. Whereas classical economics system, in terms of it innumerable decision – marking units. The classical economists believed that a state of full employment could be brought about through cuts in money wages. But Keynes held that this theory was not only unrealistic but theoretically unsound.

According to Keynes, lowering of wages in any particular industry might increase employment there. But in reality reducing wages caused for reduction in income level of the public. It leads reduce in effective demand and the volume of employment.

In the point view of classical group of economists, interest is the reward for “waiting”. But in the point view of Keynes, rate of interest is the reward for parting with liquidity. The classical economists opined that Rate of Interest is determined by the intersection of the saving and investment schedule. The Keynes theory gives us a set of liquidity preference schedules various levels of income.

The classical theory is based on the conception of static economy. Whereas Keyne’s theory is dynamic. Keynes theory is a general theory and as such as a very wide application to all situations – unemployment, partial employment and near full employment.

The classical theory analysis relates only to full employment. The classical economists consider full employment a general feature and unemployment a rare phenomenon. Keynes integrated the theory of money with the theory of value and output.

According to the classical economists, increase in money supply brings about inflation and must, therefore, be avoided, this arose from their convention that allows existed full employment. But Keynes pointed out that full employment was a rare phenomenon, actually there was generally less than full employment so that some productive resources of the community lay idle and unemployed, totally or partially. That being, an increase in money supply would increase employment and output and may not thus necessarily be in inflation.

Thus Keynes’ theory has great relevance to the world reality and has great particular value. Whereas the view of the classical economists are more or less theoretical and devoid of any particular importance.

Short Answer Questions

Write the answers briefly for the following questions.

Question 1.
State the assumptions of the classical theory of Employment.
Answer:
Assumptions of the classical theory of Employment: The classical theory of employment is based on the following assumptions:

1. There is a free enterprise economy.
2. The economy operates under conditions of perfect competition.
3. There is no government interference in the economy, and price mechanism is allowed to work freely.
4. The equilibriums viewed from the long-term perspective.
5. It is assumed that all savings are automatically converted into investment.
6. Both interest rates and wage rates are flexible, adjusting to restore equilibrium.
7. There are no constraints on market expansion.
8. Money acts as a medium of exchange and does not influence out and employment.

Question 2.
“Supply creates its own demand. Explain this statement.
Answer:
Jean Baptist Say (1767 – 1832) was a French economist and a business man. He founded the French classical school of Economics. He wrote a book titled “Treatise on Political Economy” in 1803 which became so much famous that it was used as a textbook in American colleges in those days. His writings influenced many countries.

The classical theory of employment is based on the Say’s law of market. The famous law of markets propounded by J.B. Say states that “Supply creates its own demand. ’’This law is generally interpreted as supply always equals demand or it can be expressed as S = D. Whenever additional output is produced in the economy, the factors of production which participate in the process of production, earns income in the form of rent, wages, interest and profit.

The total income so generated is equivalent to the total value of the additional output produced. Such income creates additional demand necessary for the sale of the additional output. Therefore, the question of the additional output not being sold does not arise. It is assumed that the whole income is spent on purchase of commodities, partly on consumption goods and partly on capital goods.

Question 3.
What are the sources of public revenue?
Answer:
Revenue received by the government from different sources is called public revenue. Public revenue is broadly classified into two kinds.

1. Tax revenue
2. Non-tax revenue.

1) Tax Revenue: Revenue received through collection of taxes from the public is called tax revenue. Both the Central and State governments collect taxes as per their allocation in the Constitution. Broadly, taxes are divided into two categories.

a) Direct taxes:

• Taxes on income and expenditure.
  E.g : Personal income tax, corporate tax, interest and expenditure tax.
• Taxes on property and capital assets.
  E.g : Wealth tax, gift tax, estate duty.

b) Indirect taxes : Taxes levied on goods and services.
Eg : Excise duty, customs duty, service tax.

2) Non-tax Revenue: Government receives revenues from sources other than taxes and such revenue is called the non – tax revenue. The sources of non-tax revenue are as follows.

1. Administrative revenue: Government receives money for certain administrative services. Ex : License fee, tuition fee, penalty, etc.
2. Commercial revenue : It is the second important source of public revenue. Modern governments establish public sector units to manufacture certain goods and offer certain services. These goods and services are exchanged for the prices. Government gets revenue from public sector units like IOC, BSNL, Indian Railways, Indian Airways, etc.
3. Loans and advances When the revenue received by the government from taxes and from the above non – tax sources is not sufficient to meet the needs of government expenditure, it may receive loans from the financial institutions operating within the country and also from the public. The modern governments can also obtain loans from foreign governments and international financial institutions.
4. Grants-in-aid: Grants are amounts received without any condition of repayment. They are not repaid. State governments receive such grants from the central government. The Central government may receive such grants from foreign governments or any international funding agency. Grants are of two types.

1. General grants: When a grant is given to meet shortage of funds in general without specifying a purpose, it is called general grant.
2. Specific grants : When a grant is given for a specific purpose, it is called a specific grant. It cannot be spent on any other purpose.
   E.g : Education grant, Family planning grant, etc.

Question 4.
List out the various items of public expenditure.
Answer:
Public expenditure is an important part of public finance. Modern governments spend money to perform various functions. The expenditure incurred by the government on various economic activities is called the public expenditure. Usually public expenditure will be made on following aspects.

1. Defence
2. Internal security (Police)
3. Economic services (agriculture, industry, power, transport, communication, science and technology, etc.)
4. Social services (education, health, broadcasting, etc.)
5. Other general services (organs of state, tax collection, external affairs, etc.)
6. Pensions
7. Subsidies
8. Grants to state governments
9. Grants to foreign governments
10. Loans to state governments
11. Loans to public enterprises
12. Loans to foreign governments
13. Repayment of loans (principal amount, interest and debt management)
14. Assistance to states on natural calamities, etc.
15. Expenditure made for day to day administration

Public expenditure transfers money to the community. The income of the society increases on account of the increase in public expenditure. Development may take place.

Question 5.
Write a note on Goods and Services Tax (GST).
Answer:
Goods and Services Tax (GST) is a comprehensive, multistage, destination-based value-added tax levied on the supply of goods and services for domestic consumption in India. It was introduced on July 1, 2017. GST replaced multiple indirect taxes like excise duty, VAT, and service tax, aiming to create a unified tax system under the slogan One Nation, One Tax.

GST operates under a dual structure – Central GST (CGST) and State GST (SGST) – for intrastate transactions, and integrated GST (IGST) for interstate transactions. The tax is collected at every stage of the supply chain, but businesses can claim input tax credit for taxes paid on inputs, ensuring only the value added at each stage is taxed and eliminating the cascading effect of taxes.

This reform has simplified tax administration, improved compliance and fostered a seamless national market, making Indian industry more competitive and transparent.

Question 6.
Distinguish between Revenue account and Capital account in the Budget.
Answer:
Here is a comparison between the revenue accounts and the capital account in the budget.

Question 7.
Explain the Investment multiplier.
Answer:
The concept of the Investment multiplier was introduced by JM. Keynes. The Investment multiplier is an important in Keynesian theory, which explains how an economy’s income and employment are determined.

The multiplier refers to the phenomenon where a change in investment or expenditure lead to a proportionately larger change (or multiple change) in the national income.

Multiplier explains how many times the aggregate income increases as a result of an increase in investment. When the level of investment increases by an amount say ∆I , the equilibrium level of income will increase by some multiple amounts ∆Y.

Thus, the multiplier expresses the relationship between an initial increment in investment and the resulting increase in aggregate income. In other words, the ratio of change in income (∆Y) to change in investment (∆I) is called the investment multiplier.
Thus, k = \(\frac{\Delta \mathrm{Y}}{\Delta \mathrm{I}}\)
Where, k = Multiplier,
∆Y = Change in Income,
∆I = Change in Investment.

Question 8.
Define Foreign Exchange Rate. Explain the types of foreign exchange rate.
Answer:
Foreign Exchange Rate : Foreign Exchange (FX) rate is the price of one currency expressed in terms of units of another currency and represents the number of units of one currency that exchanges for a unit of another.

Previously the exchange rate was determined in terms of one major foreign currency such as the US dollar or British pound sterling. As this was causing frequent fluctuations, the concept of basket of currencies was introduced in 1969. Now, the basket includes ‘five currencies’ assigned different weightages.

Types of Exchange rates : There are two major types of exchange rate regimes at the extreme ends, namely

• Floating (Flexible) exchange rate regime,
• Fixed (Non-Floating) exchange rate regime.

a) Floating exchange rate regime : Under floating exchange rate regime, the equilibrium value of the exchange rate of a country’s currency is market- determined (i.e. the demajid for and supply of currency relative to other currencies determine the exchange rate).

Under this system, there is no interference on the part of the government or central bank of the country in the determination of exchange rate.

b) Fixed exchange rate regime : Under fixed exchange rate regime, a country’s central bank or government declares the value of its currency relative to another country’s currency or a basket of currencies.
Eg.: Fixing the value of Rs. 85 per US dollar.

In order to maintain the exchange rate at the predetermined level, the central bank intervenes in the foreign exchange market.

Question 9.
Explain the difference between current account and capital account in Balance of Payments.
Answer:

Question 10.
Explain the criticism against the classical theory of employment.
Answer:
J.M. Keynes criticized, the basic assumptions of classical theory. According to him, the assumptions of classical theory are far from reality. The main points of criticism are as follows.

1. The assumption of full employment is unrealistic. It is a rare phenomenon and not a normal feature.
2. The wage cut policy is not a practical policy in the modern times. The supply of labour is a function of money wage and not real wage. Trade unions would never accept and reduction in the money wage rate.
3. Equilibrium between savings and investment is not brought about by a flexible rate of interest. In fact, saving is a function of income and not of interest.
4. Classical economists believe that the economic forces automatically adjust by themselves without interference of government. But automatic adjustment mechanism failed to restore full employment during the period of economic depression in 1930.
5. The long-run approach to the problem of unemployment is also not realistic. Keynes commented, “We are all dead in the long run”. He considered unemployment is a short-run problem.
6. J.M. Keynes dissolved the classical assumption that “Money is neutral”. He integrated monetary variables with real variables through rate of interest and successfully demonstrated effect of change in money supply in the real variables.

Question 11.
Distinguish between aggregate supply price and aggregate demand price.
Answer:
Aggregate Supply: Aggregate supply refers to the total supply of goods and services in the economy. The level of aggregate supply depends on the level of employment. The minimum amount of money which the producers in the economy must receive by selling the goods and services at different levels of employment is called aggregate supply price. As the level of output increases with the level of employment the aggregate supply price also increases with every increase in the level of employment.

Aggregate Supply Schedule: It shows the various amounts of supply at different levels of employment. It is shown in the table given below.

From the above table, we know that as employment increases aggregate supply is increasing. So there is a direct relationship between level of employment and aggregate supply.

Aggregate Supply Curve: If the above schedule is shown in graph, then we get a curve. This curve is called aggregate supply curve.

Aggregate supply curve can be seen sloping upwards from left to right. It started from the origin which means the aggregated supply is zero, when the employment is nil.

In the above diagram as employment levels Aggregate Supply Function increase the AS curve rises to the right. ON is assumed to be full employment level. At this level, aggregate supply the function AS is parallel to Y – axis which means that the aggregated supply is perfectly inelastic.

Aggregate Demand : Aggregate demand means the total demand for all commodities in the economy at a particular level of employment. The amount they spend on consumption goods is called consumption expenditure (C) and their expenditure on capital goods is called investment (I). The entrepreneurs expect that the community as a whole is willing to spend certain amount towards purchase of the total output. That expected expenditure is termed as aggregate demand price.

Aggregate Demand Schedule: It shows the aggregate demand at different levels of employment. As the level of employment rises, the total income of the community also rises and therefore the aggregate demand price also increases. This can be seen in the following table.

Aggregate Demand Function

In the above table, as employment increases AD also increases. So there is direct relationship between levels of employment and aggregate demand.

Aggregate Demand Curve : If the AD schedule is shown on a graph, then we get a curve. This curve is called aggregate demand curve. This is shown in the diagram given adjacent:

In the adjacent diagram, AD curve is the aggregate demand curve. It slopes upwards from left to right.

Question 12.
Explain the concept of Effective Demand.
Answer:
Effective Demand : The level of employment will be in equilibrium at a point where aggregate demand and aggregate supply are equal. The aggregate demand at which it is equal to aggregate supply is called effective demand. This is shown in the table given below.

Effective Demand

In the above table, at the employment of 14 lakhs, the aggregate supply and aggregate demand are equal. At the level of employment of below 14 lakhs, aggregate supply is less than aggregate demand. Similarly, at the level of employment of above 14 lakhs aggregate supply is more than aggregate demand. Only at the level of 14 lakhs the A.D and AS are equal. Hence, it is called effective demand.

In this diagram, Aggregate demand price curve (AD) and aggregate supply price curve (AS) intersect each’other at point E₁”. It shows the equilibrium point. The equilibrium has been attained at “ON,”, level of employment. It is assumed that “ON₁” in the above diagram does not indicate full employment as the economy is having idle factors of production. So it is considered as under- employment equilibrium.

According to Keynes, to achieve full employment an upward shift of aggregate demand curve is required. This can be possible through government expenditure on goods and services supplied in the economy, whenever private entrepreneurs may not show interest to invest. With this the AD₁ curve (C + I) shifts as AD₂ (C + I + G) at new point of effective demand E₂, where the economy reaches full employment level i.e., ON_F.

Question 13.
Explain the objectives of Government Budget.
Answer:
Objectives of Government Budget : The government plays a crucial role in promoting public welfare. To achieve this, it intervenes in the economy through the following three essential functions. They are:

1. Reallocation Function:
Under the budgetary policy, the government aims to reallocate resources in line with the economic (profit maximization) and social benefit (public welfare) priorities of the country. For example, Government discourages the production of harmful consumption goods (like liquor, cigarettes, etc.) through heavy taxes and encourages the use of “khadi products” by providing subsidies.

2. Redistribution Function :
Economic inequality is an inherent part of every economic system. The government aims to reduce such inequalities of income and wealth through its budgetary policy. Fiscal instruments like taxation, subsidies, expenditure on social security and public works are used by the government to achieve this objective.

3. Stabilization Function:
The government budget is used to prevent business fluctuations of inflation (or) deflation and to maintain economic stability. The Government aims to control the different phases of business fluctuations, with the help of budgetary policy. Policies of surplus budget during inflation and deficit budget during deflation are adopted to achieve stability in the economy.

Question 14.
Write the types of budget.
Answer:
There are three types of budget based on the difference between the receipts and expenditure:

1. Surplus Budget : This refers to a budget in which the total revenue is more than the total expenditure.
2. Balanced Budget: This refers to a budget in which the total expenditure and the total revenue are equal.
3. Deficit Budget: This refers to a budget in which the total expenditure exceeds the total revenue.

Question 15.
Explain different types of deficit.
Answer:
Generally speaking, budget deficit arises when the total expenditure in the budget exceeds the total-receipts.

a) Revenue Deficit Revenue Deficit arises when revenue expenditure exceeds revenue receipts.
Revenue Deficit = Revenue receipts – Revenue expenditure

b) Capital Deficit Capital deficit occurs when capital expenditure exceeds capital receipts.
Capital Deficit = Capital receipts – Capital expenditure

c) Budget deficit Budget deficit is the difference between the total receipts and the total expenditure. In other words, it is the sum of Revenue Deficit and Capital Deficit.
Budget Deficit = Total Receipts – Total Expenditure (OR)
Budget Deficit = Revenue Deficit + Capital Deficit

d) Fiscal deficit: Fiscal Deficit is the difference between Government’s total expenditure and its total receipts (revenue and capital), excluding borrowings and other liabilities. In other words, Fiscal Deficit is the sum of budget deficit and market borrowings and other liabilities.
Fiscal deficit = Revenue Receipts + Capital Receipts (excluding borrowings and other liabilities) – Total expenditure. (OR)
Fiscal Deficit = Budget Deficit + Market borrowings and other liabilities

e) Primary deficit: The primary deficit is derived by subtracting interest payments from the fiscal deficit.
Primary Deficit = Fiscal deficit – Interest payments

Question 16.
Write the objectives of FRBMA.
Answer:
The enactment of the FRBMA, in August 2003, marked a turning point in fiscal reforms, binding the government through an institutional framework to pursue a prudent fiscal policy.

Main objectives :

1. The Act mandates the central government to take appropriate measures to reduce fiscal deficit to not more than 3 percent of GDP and to eliminate the revenue deficit by March 31, 2009. This deadline was later extended to 2021. However, the target is yet to be achieved.
2. It requires a reduction in the fiscal deficit by 0.3 per cent of GDP each year and the revenue deficit by 0.5 per cent.
3. The Act also requires the debt of central government to be limited to 40% of GDP by 2024-25.

Very Short Answer Questions

Question 1.
Laissez Faire.
Answer:
According to classical the role of government in economic activities should be nominal or very less. The free play of economic forces itself brings about the fuller utilization of economic resources including labour. Any interference with the free play of market force, Say’s theory shall fail to bring about full employment.

Question 2.
Say’s Law of Markets.
Answer:
J.B. Say, French economist advocated the famous “Law of markets” on which the classical theory of employment is based. According to this law “Supply creates its own demand’’. According to this law, whenever additional output is created, the factors of production which participate in that production receive incomes equal to that value of that output.

Question 3.
Consumption function.
Answer:
Consumption is a function of income, denoted as C = f(Y) (where C is consumption and Y is income). It means consumption depends on the level of income. As income rises, consumption also increases but not in the same proportion. The increase in consumption is usually less than the increase in income. It is because of the propensity to consume. It means the tendency on the part of the consumers to spend their income. It depends upon several factors.

Question 4.
Marginal Propensity to Save.
Answer:
In Keynesian economic theory, Marginal Propensity to Save (MPS) refers to the proportion of an aggregate raise in income that a consumer saves rather than spends on the consumption of goods and services. Put differently MPS is the proportion of each added dollar of income that is saved rather than spent, MPS is a component of Keynesian macroeconomics theory and is calculated as the change in savings divided by the change in income.

MPS = Change in Saving = Change in Income

Question 5.
Paradox Thrift.
Answer:
The paradox of thrift was developed by British economist J.M. Keynes and popularized in his book The General Theory of Employment, Interest and Money.

If all the people of the economy increase the proportion of income they save (ie., if the MPS of the economy increases) the total value of savings in the economy will not increase – it will either decline or remain unchanged. This result is known as the Paradox of Thrift. This theory states that as people become more thrifty, overall savings may actually decline or remain unchanged.

Question 6.
Goods and Services Tax.
Answer:
Goods and Services Tax is the biggest tax reform in the country since Independence. GST was introduced in India on 1st July 2017. The motto of the GST is One Nation, One Tax, One Market, it is applicable throughout the country with one rate for one type of goods or services. GST replaced large number of taxes on goods and services levied by central and state/UT Governments, Some of the major taxes like excise duty, service tax, central sales tax, VAT etc. are replaced by GST.

Question 7.
Marginal propensity to consume.
Answer:
It refers to the ratio of change in consumption expenditure to the change in the income.
MPC = \(\frac{\Delta C}{\Delta Y}\)
∆C = Change in consumption
∆Y = Change in income
If the MPC increase, consumption increases more and aggregate demand can be increased.

Question 8.
Effective Demand.
Answer:
Effective demand is that aggregate demand which becomes equal to the aggregate supply. This refers to the aggregate demand at equilibrium.

Question 9.
Deficit Budget.
Answer:
Deficit budget refers to the budget in which the total expenditure exceeds the total revenue.

Question 10.
Fiscal Deficit.
Answer:
Fiscal deficit is the difference between the total expenditure and the total revenue minus the market borrowings. In other words, fiscal deficit is the budget deficit plus the market borrowings and other liabilities.

Fiscal deficit = (Total revenue – Total expenditure) + market borrowings & other liabilities, (or)
Fiscal deficit = Budget deficit + market borrowings and other liabilities.

Question 11.
FRBM Act.
Answer:
The FRBM Bill was introduced in the parliament of India in the year 2000 by Atal Bihari Vajpayee Government to provide legal backing to the fiscal discipline to be institutionalized in the country. Subsequently, the FRBM Act was passed in the year 2003. It is an act of the parliament that sets targets for the government of India to establish financial discipline, improve the management of public funds, strengthen fiscal prudence, and reduce its fiscal deficits.

Question 12.
Fiscal Deficit Balance of Trade and Balance of Payments.
Answer:
Balance of Trade (BoT) is a statement showing the total value of exports and imports of goods over a specific period of time. Invisible items i.e., services are not included in BoT.

The BoP (Balance of Payment) is a systematic record of all economic transactions between the residents of one country and the residents of the rest of the world in a year. The BoT always balance in an accounting sense.

One Word Answer Questions

Answer the following questions in ONE WORD.

Question 1.
In which year, Goods and Services Taxes (GST) was introduced in India ?
Answer:
1.7.2017

Question 2.
The ratio of change in consumption to the change in Income is known as
Answer:
Marginal Propensity to Consume (MPC)

Question 3.
“Supply creates its own demand”, stand by ?
Answer:
J.B.Say

Question 4.
The slope of consumption function is equal to :
Answer:
MPC – Marginal Propensity to Consume)

Fill in the blanks

Question 1.
The minimal interference of the government in economic activities is known as ____________.
Answer:
Laissez Faire

Question 2.
In ____________ budget, the total receipt and total expenditure are equal.
Answer:
Balance Budget

Question 3.
The ratio of change in Income to change in investment is called ____________.
Answer:
Investment Multiplier

Question 4.
Fiscal deficit minus interest payments is equal to ____________.
Answer:
Primary Deficit

Question 5.
If borrowings and other liabilities are added to the budget deficit, we get ____________.
Answer:
Fiscal Deficit

Multiple Choice Questions

Question 1.
Which of the following is not an assumption of classical theory of employment?
1) Full employment
2) Laisswez faire employment
3) Perfect competition
4) Short period
Answer:
4) Short period

Question 2.
A point where aggregate demand equals to aggregate supply is called :
1) Direct Demand
2) Indirect demand
3) Effective Demand
4) Derived Demand
Answer:
3) Effective Demand

Question 3.
Which of the following is not considered as public revenue?
1) Direct Taxes
2) Indirect Taxes
3) Goods and Services Tax
4) Transfer Payments
Answer:
3) Goods and Services Tax

Question 4.
If revenue receipts are Rs. 800 cr. capital receipts Rs. 500 cr. borrowings and other liabilities are Rs.400 and total expenditure is Rs.1200 cr. the fiscal deficit is
1) Rs. 1200 cr.
2) Rs. 500 cr.
3) Rs. 300 cr.
4) Rs. 400 cr.
Answer:
3) Rs. 300 cr.

Question 5.
GST comes under which type of tax in the government budget ?
1) Indirect tax
2) Corporate Tax
3) Direct Tax
4) Income Tax
Answer:
1) Indirect tax

Regular practice with AP Inter 1st Year Economics Study Material Chapter 8 National Income Accounting Questions and Answers helps students stay prepared for examinations.

AP Inter 1st Year Economics 8th Lesson National Income Accounting Questions and Answers

Essay Questions

Write an essay on the following questions.

Question 1.
Describe the components of National Income.
Answer:
In Macro Economics, national income plays an important role. For the economic development of a country, the national income estimates are very important.

The total market value of all goods and services produced in a country during a given period of time is called national income.

Definition : According to Marshall, “Labour and capital of a country, acting on its natural resources produce annually a certain net aggregate of commodities material and immaterial, including services of all kinds” is called National Income.

Components of national income : There are five main components of national income.
They are ;
a) Consumption – C
b) Gross domestic investment – I
c) Government expenditure – G
d) Net foreign investment – (x – m)
e) Net income from abroad

a) Consumption – C : It is the total expenditure made by households on goods and services. It includes both durable and non-durable goods like food grains, clothing, medical services, etc. The level of consumption depends on the level of incomes.

b) Investment – I : It is the expenditure by firms on goods and services which are not for current consumption. It includes expenditure on capital like machinery, roadways, bridges, etc. which will help in production of consumer goods in future.

c) Government expenditure (G) : It is the expenditure made by the government on infrastructural facilities for the use of the society. It also includes government expenditure on services like Police, Military and Judicial services.

d) Net foreign investment (x – m) : It is the income earned by a country through international trade. Every country exports certain volume of goods produced by it and imports goods which are relatively cheaper in the international market or other countries.

The difference between the value of exports and imports (either positive or negative) has to be taken into account to estimate the national income of a country.

The net foreign investment depends on the export – import policy of the government and the comparative price level of the goods in domestic and international markets.
Y = C + I + G + (x – m)

e) Net income from abroad : Some of the nationals of a country working in other countries may be sending remittances to their country. Likewise foreigners in one country may be sending their income abroad. Hence net income from abroad represents the difference between receipts and payments of the above type of factor incomes.

Question 2.
Explain various methods of calculations National Income. [March-2026]
Answer:
National Income is the total market value of all goods and services produced in a country during a given period of time.

Measurement of National Income :

There are three methods of measuring National Income.

1. Output method or Product method
2. Expenditure method and
3. Income method.

Cairn Cross says “National Income can be looked in any one of the three ways, as the National Income measured by adding up everybody’s income, by adding up everybody’s output, and by adding up the value of all things that people buy and adding in their savings.”

1) Output method or Product method : It is also known as inventory method or commodity service method. In this method we find the market value of all final goods and services produced in a country during a given period of time. The entire output of final goods and services are multiplied by their respective market prices to find out the gross national product.

NI = (P₁Q₁, P₂Q₂ + ………………. P_nQ_n)
= Depreciation – Indirect taxes + Net Income from abroad.
where NI = National Income,
P = Price of the good or service;
Q = Quantity of good or service produced; 1, 2 ………………………. n are the various goods and services produced.

The values of raw material, intermediary goods, etc. should not be included. Only final goods should be taken into account.

Here we find out the value added in the different sectors like agriculture, government professionals, industry and services sectors. Hence it is also called “Value added method”.

National income based on output data is calculated by adding the sum of Values added’ by each firm in each industry. Industrial activity is conventionally classified according to the standard industrial classification.

Value added is the difference between the final value of the product and the cost of the inputs of raw materials and components, i.e., it is the rise in value of the product caused by the activities of the firm itself.

2) Income method: In this method, the incomes earned by all factors of production are aggregated to arrive at the national income of a country. The four factors of production receive incomes in the form of wages, rent, interest and profits. This is also National Income at factor cost.
NI = W + I + R + P + Net income from abroad
NI = National Income.
W = Wages,
I = Interest,
R = Rent,
P = Profits
This method gives us National Income according to distributive shares, (the most important share is that of labour)

Income from employment
+ Income from self employment
+ Gross trading profits of companies
+ Gross trading surpluses of nationalized industries
+ Gross trading surpluses of general government enterprises
+ Rent
+ Imputed charge for the consumption of non-traded capital
= Total domestic income
– Stock appreciation
+ Residual error
= Gross Domestic Product at factor cost

Undistributed profits of companies are included in the accounts as they have been earned in the accounting period. It makes no difference what the firm does with the profits subsequently.

Residual error refers to a sum that is added to balance the accounts. Each approach to calculating national income involves thousands of figures ‘ collected from a variety of sources. It is not surprising that the totals are not, in practice, equal. The residual error appears in the income accounts purely for convenience of presentation.

3) Expenditure method: In this method we add the personal consumption expenditure of households, expenditure of the firms, government purchase of goods and services, net exports plus net income from abroad.

MI = EH + EF + EG + Net exports + Net income from abroad.

Here national income = Private final consumption expenditure + government final consumption expenditure + net domestic capital formation + net exports + net income from abroad
EH = Expenditure of Households
EF = Expenditure of Firms
EG = Expenditure of Government

Care should be taken to include spending or expenditure made on final goods and services only.

There are two different ways in which national income of a country is estimated. They are national income at market prices and national income at constant prices.

Question 3.
Find the GDP_MP, GNP_MP and GNP_FC from the following data on the economy.

Answer:
To find the GDP_MP and GNP_FC from the given data, we will follow these steps.

Step I :
Given Data :
I.

1. Value of output = 600 cr. Rs.
2. Secondary Sector = 700 cr. Rs.
3. Tertiary sector = 900 cr. Rs.

II. Intermediate Consumption

1. Primary sector = 350 cr. Rs.
2. Secondary sector = 200 cr. Rs.
3. Tertiary sector = 300 cr. Rs.

III. Net Factor Income from Abroad

NFIA = 30 cr. Rs.

IV. Net Indirect taxes (NIT) = 10 cr. Rs.

GVA_FC for each sector
GVA_FC = Value of output – Intermediate consumption

1. Primary sector = 600 – 350 = 250 cr. Rs.
2. Secondary sector = 700 – 200 = 500 cr. Rs.
3. Tertiary sector = 900 – 300 = 600 cr. Rs.

Total GVA_FC = 250 + 500 + 600 = 1350 cr. Rs.

Step II :

Calculate GDP at market price (MP)
GDP_MP = GVA_FC + Net Indirect Taxes
GDP_MP = 1350 + 10 = 1360 cr. Rs.

Step III :

Calculate GNP at Factor Cost (FC).
GNP_FC = GDP_MP – NIT + NFIA.
GNP_FC = 1360 – 10 + 30 = 1380 cr.Rs.
Alternatively we can also compute it as :
GNP_FC = GVA_FC + NFIA = 1350 + 30 – 1380 Crs.
So, GDP_MP = Rs. 1360 cr. rs.
GNP_FC = Rs.1380 cr.rs.

Question 4.
Calculate GDP_MP, GNP_MP and GNP_FC and NNP_FC from the following data on the economy.

Answer:

1. Calculate Government Final Consumption (GFCE)
Government expenditure inclusive of transfer payments is given.
To find GFCE, we need to subtract the transfer payments as they are not part of final consumption of goods and services.
GFCE = Government Expenditure inclusive of Transfer Payments – Transfer Payments.
GFCE = 90 – 30 = 60 crore rupees.

2. Calculate GDP at MP (Gross Domestic Product at Market Price)
GDP at MP is calculated using the expenditure method.
GDP at MP = Private Final Consumption Expenditure at MP + Gross Domestic Capital Formation (Investment) + Government Final Consumption Expenditure + (Exports – Imports).
GDP_MP = 160 + 40 + 60 +(30 – 50) = 260 – 20 = 240 cr. rs.

3. Calculate GNP_MP
GDP_MP + NFIA = 240 + 20 = 260 cr. rs.

4. NNP_FC = GNP_FC – Depreciation
= 220 – 10 = 210 cr. rs.
So, GDP_MP = 240 cr. rs.
GNP_MP = 260 cr. rs.
GNP_FC = 220 cr. rs.
NNP_FC = 210 cr. rs.

Question 5.
Define National Income and explain the various concepts of National Income.
Answer:
In Macro Economics, National Income plays an important role. For the economic development of a country, the National Income estimates are very important.

Meaning : National Income is the total market value of all goods and services produced in a country during a given period of time.

Definition : “The labour and capital of a country acting on its natural resources, produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds. This is the net annual income (or) revenue of a country. ”

Concepts of National Income : There are five main concepts of National Income. The various concepts are :

A) Gross National Product (GNP) at Market Prices
B) Gross Domestic Product (GDP) at Market Prices
C) Net National Product (NNP) at Market Prices
D) National Income (or) Net National Product at factor cost
E) Personal Income (PI)
F) Disposable Personal Income (DPI)
G) Per capita Income
H) Relationship between per capita income and population

A) Gross National Product (GNP) at Market Prices: Gross National Product at market prices is the current market value of all final goods and services produced in a country during a given period. The main components of GNP are :

1. The goods and services purchased by consumers; C
2. Investments made by public and private sectors; I
3. Government expenditure on public utility services; G
4. Incomes earned through International trade; (x – m)
5. Net factor incomes from abroad.

GNP at market prices = C + I + G + (x – m) + net factor income from abroad. In this concept production of goods and services must be made by the citizens of that country irrespective of where it is produced.

B) Gross Domestic Product (GDP) at Market Prices : This is that part of the GNP that is produced within the country in a given period of time usually a year. In this concept it is essential that production of goods and services must take place within the country, who produces it is not the criterion for computing National Income.

C) Net National Product (NNP) at Market Prices: The country’s stock of fixed capital undergoes certain amount of wear and tear in producing goods and services over a period of time. This \iser cost’ or depreciation or charges for renewals and repairs must be subtracted from the GNP to obtain Net National Product at Market Prices.

NNP at market prices = GNP at market prices – Depreciation.

D) National Income or Net National product at factor cost : It is the total income received by the four factors of production in the form of rent, wages, interest and profits in an economy during a given period of time.

It is also the incomes received by persons supplying the services or resources used in production. It includes all wages earned by employees, interest paid to private individuals, net rent received by landlords and net profit of all kind of business.

The NNP is not available for distribution among the factors of production. The amount of indirect taxes are paid by the firms to the government and not to the factors of production. Similarly the government gives subsidies to firms for production of certain types of goods and services and that part of the production cost is borne by the government.

Hence the goods are sold in the market at a lower price than the actual cost of production. Therefore this volume of subsidies has to be added to the Net National Income.

In modern days the government sector is vastly enlarging and runs several industries and enterprises. The profits of the government do not go to the factors of production.

NI or NNP at factor cost = NNP at market prices – Indirect taxes + Subsidies – Profits of government owned firms.

E) Personal Income (PI) : It is the total incomes received by all persons of households in a country during a given period of time. The whole of NI earned by factors of production is not available to them. Corporate taxes have to be paid by firms before distributing them to share-holders.

Similarly, firms may prefer to keep a part of its profits for expansion or for other exigencies. This part of profits are also not distributed to its shareholders. Salaried employees make contributions for social security.

The government may provide social security allowances like pensions, unemployment allowances, scholarships, etc. These are incomes for some sections of the society even though no productive services are made by them.

Personal Income PI = NI at factor cost – Undistributed profits – Corporate taxes – Social security contributions + Transfer payments.

F) Disposable Personal Income (DPI) Disposable personal income is that part of personal income which is left with the individual after payment of all direct taxes like income tax, property tax, etc. generally disposable income is either spent for consumption or for savings.

DPI = PI – Personal taxes DPI = Consumption + Savings ;

G) Per capita Income : Per capita income is the average income of an individual in a country. It is calculated by dividing national income by population of the country.

Per Capita Income = \(\frac{National Income}{Population}\)

This concept is a good indicator of the average standard of living in a country.

H) Relationship between per capita income and population : There is a close relationship between national income and population. These two together determine the per capita income. If rate of growth of national income is 6% and rate of growth of population is 3%, the rate of growth of per capita income will be 3% and it can be expressed as follows.
QPC = Q – QP
QPC = rate of growth of per capita income
Q = rate of growth of national income
QP = rate of growth of population

Question 6.
Write the importance of National Income Estimation.
Answer:
The importance of national income studies is growing for several reasons :

1. The national income estimates or statistics are very important for preparing economic plans.
2. It is a very important tool for framing economic policies.
3. It enables us to assess the performance of each sector in the economy.
4. It is very useful in making budgetary allocations.
5. It gives us an idea of the standard of living in the country.
6. It helps us to compare economic growth with other countries.
7. It gives a clear picture of the level of utilization of natural resources in a country.
8. It is essential to calculate per capita incomes in a country and income inequalities.
9. It helps the Government in macroeconomic policy making.
10. It will enable us to know the role of public and private sectors in the economy.

Short Answer Questions

Write the answers briefly for the following questions.

Question 1.
Explain any four factors that determine National Income.
Answer:
The total market value of all goods and services produced in a country during a given period of time is called National Income.

There are many factors that influence and determine the size of national income in a country. These factors are responsible for the differences in national incomes of various countries.

a) Natural Resources : The availability of natural resources in a country, its climatic conditions, geographical features, fertility of soil, mines and fuel resources, etc. influence the size of National Income.

b) Quality and Quantity of Factors of Production : The National Income of a country is largely influenced by the Quality and Quantity of country’s stock of factors of production.

c) State of Technology : Output and National Income are influenced by the level of technical progress achieved by the country. Advanced techniques of production help in optimum utilization of a country’s national resources.

d) Political Will and Stability: Political will and stability in a country helps in planned economic development and for a faster growth of national income.

Question 2.
Distinguish between GNP and GDP.
Answer:
Differences between GNP and GDP:

Question 3.
Suppose the GDP_Mp of a country in 2023-24 was Rs. 1100 crores, Net Factor Income from Abroad (NFIA) was Rs. 100 Crores, the value of indirect taxes – subsidies were Rs. 150 crores and the value of depreciation was Rs. 200 crores then calculate the NNP_FC ?
Answer:
NNP_FC = GDP at Market Price – Depreciation + Net Factor Income From Abroad – (Indirect Taxes – Subsidies)
GDP_Mp = Rs.100 crores
NFIA = Rs. 100 crores
Value of Indirect Taxes – Subsidies = Rs. – 150 crores
Depreciation = Rs – 200 crores
NNP_FC = 1100 – 200 + 100 – 150
= 900 + 100 – 150
= 1000 – 150 = 850
∴ NNP_FC = Rs.850 crores

Question 4.
Calculate the National income by using the total expenditure approach.

Answer:
National Income (NDP at MP) = Consumption Expenditure + Investment Expenditure + Government Expenditure + Net Exports.

1. GDP_Mp = 500 + 80 + 100 + (-100)
= 680 – 100 = 580 cr. rupees

2. NDP_Mp = GDP_Mp – Depreciation
= Rs. 580 – 70 = 510 cr. rupees

3. NNP_Mp = NDP_Mp + NFIA
= 510 + 50 = 560 cr. rupees

4. NNP_FC = NNP_Mp – Net Indirect Taxes
= 560 – 30 = 530 cr. rupees

Therefore, the national income using the total expenditure approach is Rs.530 crores.

Question 5.
From the following data, compute the Gross National Product at Market Prices (GNP_Mp) by using value added method.

Answer:
GVA (Gross Value Added) of Primary Sector = 2000 – 400 = 1,600 crore rupees
GVA of Secondary Sector = 3500 – 500 = 3000 crore rupees
GVA of Tertiary Sector = 460 – 500 = Rs.410 crore Rupees
GDP at Market Price = 160 + 300 + 4,100 = 8,700 crore rupees.
GNP_Mp = 8700 – 200 = 8,500 crore rupees.

Question 6.
What is National Income at Factor Cost ?
Answer:
National Income at factor cost is the total income received by the four factors of production in the form of rent, wages, interest and profits in an economy during a given period of time. It is also the incomes received by persons supplying the services or resources used in production. It includes all wages earned by employees, interest paid to private individuals, net rent received by landlords and net profits of all kinds of business.

NNP is not available for distribution among the factors of production. The amount of indirect taxes are paid by the firms to the government and not to the factors of production. Similarly, the government gives subsidies to firms for production of certain types of goods and services and that part of the production cost is borne by the government.

Hence, the goods are sold in the market at a lower price than the actual cost of production. Therefore, this volume of subsidies has to be added to the Net National Income.

In modern days, the government sector is vastly enlarging and runs several industries and enterprises. The profits of the government do not go to the factors of production.

NI or NNP at factor cost = NNP at market prices – Indirect taxes + subsidies – profits of government-owned firms.

Question 7.
Write the definitions of National Income.
Answer:
Meaning: National Income is the total market value of all goods and services produced in a country during a given period of time. Several economists have defined National Income as follows :

1. Fisher’s Definition : “The National Dividend, or Income consists solely of services as received by ultimate consumers, whether from their material or from their human environment.”
2. Marshall’s Definition : “The labour and capital of country acting on its natural resources, produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds. This is the net annual income or revenue of a country. ”
3. Kuznet Definition : According to Kuznet, “National Income is the net output of commodities and services flowing during the year from the country’s productive system into the hands of the ultimate consumers or into the net addition to country’s capital goods”.

Question 8.
What is the relationship between per capita income and population?
Answer:
There is a close relationship between national income and population. These two together determine the per capita income. If rate of growth of material income is 6% and the rate of growth of population is 3%, the rate of growth of per capita income will be 3% and it can be expressed as follows.
QPC = Q – QP
QPC = Rate of growth of per capita income
Q = Rate of growth of national income
QP = Rate of growth of population

A rise in the per capita income indicates a rise in standard of living. The rise in per capita income is possible only when the rate of growth of population is less than the rate of growth of the National Income.

Question 9.
Distinguish between Real GDP and Nominal GDP.
Answer:
Differences between Real GDP and Nominal GDP :

Question 10.
Write the difficulties related to the measurement of National Income.
Answer:
Difficulties related to the measurement of National Income :

1. Lack of an agreed definition of national income.
2. Accurate distinction between final goods and intermediate goods.
3. Issues of transfer payments.
4. Inadequacy of data and lack of reliability of available data.
5. Presence of non-monetized sector.
6. Production for self-consumption, which does not reach markets and therefore not counted.
7. Absence of recording of incomes due to illiteracy and ignorance.
8. Lack of proper occupational classification.

Very Short Answer Questions

Question 1.
GNP.
Answer:
Gross National Product at market prices is the current market value of all final goods produced in a country during a given period. The main components of GNP are ;

GNP at market prices = C + I – G + (x – m) + net factor income from abroad.

In this concept production of goods and services must be made by the citizens of that country irrespective of where it is produced.

Question 2.
Per Capita Income.
Answer:
Per capita income is the average income of an individual in a country. It is calculated by dividing national income by population of the country.

Per Capita Income = \(\frac{National Income}{Population}\)

This concept is a good indicator of the average standard of living in a country.

Question 3.
Depreciation.
Answer:
Depreciation is a user cost or replacement cost. The consumption of fixed capital or fall in value of the capital due to wear and tear is called depreciation.

Question 4.
Disposable Income.
Answer:
Disposable income is that part of personal income which is left with the individual after payment of all direct taxes like income tax, property tax, etc. generally disposable income is either spent for consumption or for savings.

Disposable Income (DPI) :
Personal Income – Personal taxes (or) DPI = Consumption + Savings.

Question 5.
Transfer Payments.
Answer:
In National Income Accounting, Transfer payments refer to payments made for which no goods or, services are received in return. They are essentially a redistribution of income and wealth, rather than a payment for current productive activity. These are not included in the calculation of core national income aggregate. The primary reason is to avoid double counting and to accurately reflect the value of current economic production.

Eg: Old age pensions (Social Security),
Unemployment benefits.
Students Scholarships and Grants.

Question 6.
Circular Flow of Income.
Answer:

Question 7.
Net Value Added.
Answer:
Net Value Added (NVA) in National Income accounting defined as the value of output produced by a sector or industry minus the value of intermediate consumption and consumption of fixed capital. Essentially, it measures the net contribution of a production unit to the economy after accounting for the inputs consumed and capital depreciation. It captures the real economic value generated by production activities, including intermediate inputs and capital wear and tear, providing a clearer picture of economic contributing within national income accounting.

Question 8.
CSO definition of National Income.
Answer:
According to the Central Statistical Organization (CSO), ‘National Income’ is the sum total of factor incomes generated by the normal residents of a country in the form of wages, rent, interest and profit in an accounting year.

Question 9.
GDP Deflator.
Answer:
The GDP Deflator is an economic measure that reflects the changes in the price levels of all goods and services produced domestically in an economy over a period, capturing inflation or deflation. It is used to convert nominal GDP, thereby showing how much of the GDP growth is due to price changes rather than the actual output increase.

GDP Deflation = \(\frac{Nominal GDP}{Real GDP}\)

Question 10.
Intermediary consumption.
Answer:
Intermediary consumption consists of the value of the goods and services consumed as inputs by a process of production, excluding fixed assets whose consumption is recorded as consumption of fixed capital, the goods or services may be either transformed or used up by the production processes.

Question 11.
Real GDP.
Answer:
Real GDP is the total value of the goods and services measured at constant prices. Since these prices remain fixed, if the Real GDP changes, we can be sure that it is the volume of production which is undergoing changes.

Question 12.
Production Taxes and Product Taxes.
Answer:
Taxes on Production: Taxes on production are to be paid by a firm by virtue of production of a good or service.
Eg.: registration fee, factory license fee, stamp duties, pollution tax etc. They are unrelated to the quantum of production. It means they do not depend on the actual volume of production.

Product Taxes: Product taxes are related to the quantum of production or actual volume of production and are levied by the government on goods and services like excise duties, customs, sales tax, service tax, etc.

Question 13.
Compute National income from the given table.

Answer:
X = C + I + G + (X – M)
C = 600 Crore rupees
I = 200 Crore rupees
G = 100 Crore rupees
X = 100 Crore rupees
M = 200 Crore rupees
Y = 600 + 200 + 100 + (100 – 200)
= 900 – 100
= 800 Crore rupees
So the National Income is 800 crore rupees.

One Word Answer Questions

Answer the following questions in ONE WORD.

Question 1.
The sum of Gross Domestic Product and net Factor Income from abroad is equal to:
Answer:
GNP_MP

Question 2.
GDP_FC minus Depreciation is equal to:
Answer:
NDP_FC

Question 3.
The difference between GNP_MP and NNP_MP is equal to:
Answer:
Depreciation

Question 4.
GDP Deflator is equal to:
Answer:
\(\frac{Nominal GDP}{Real GDP}\) × 100

Question 5.
GVA_MP minus Net Product Taxes is equal to:
Answer:
GVA at basic prices

Fill in the blanks

Question 1.
Prabhas working in Australia and sends money to his parents in India. Which concept of national income covers this item _____________.
Answer:
GNP_MP

Question 2.
The goods and services produced within the boundaries of the country are known as _____________.
Answer:
Gross domestic Product

Question 3.
The market value of a rice is Rs. 40/- kg. But in PDS system, the government is charged Re. 1/ – i.e., the government is bearing Rs.39/- kg. This type of government expenditure is own as _____________.
Answer:
Subsidies

Question 4.
The main difference between NNP_MP and NNP_FC is equal to _____________.
Answer:
Net Indirect Taxes (NIT)

Question 5.
In India, National Income is calculated in _____________ and _____________ methods.
Answer:
Output, Income

Multiple Choice Questions

Question 1.
NNPMp is equal to :
1) GDPmp-D
2) GNPMp – D
3) GDPMp – D + NFIA
4) Both 2 & 3
Answer:
4) Both 2 & 3

Question 2.
The difference between GNPMp and GDPM is equals to:
1) Net domestic investment
2) Gross foreign investment
3) Gross factor income from abroad
4) Net factor income from abroad
Answer:
4) Net factor income from abroad

Question 3.
The difference between indirect taxes and subsidies:
1) Gross subsidies
2) Gross indirect taxes
3) Net indirect taxes
4) Net exports
Answer:
3) Net indirect taxes

Question 4.
Which of the following is not correct?
1) GDP Mp= C + I + G + (X-M)
2) GNPMp = C + I + G + (X-M) + NFIA
3) NNPMp = C + I + G + (X-M) + NFIA – D
4) NNP = C + I + G + (X-M) + NFIA – D + I.T – S
Answer:
4) NNP = C + I + G + (X-M) + NFIA – D + I.T – S

Question 5.
If Nominal GDP = Rs. 1000, Real GDP = Rs. 500, then GDP Deflator is equal to (in cr.):
1) 1000
2) 500
3) 1500
4) 200
Answer:
4) 200