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First Edi t ionMarch 2007 Phalguna 1928

Re pr in t e d

February 2008 Magha 1929February 2009 Magha 1930

PD 185T RNB

© Nat ional Counci l of Educat ional

Re se arc h and T ra in ing , 2007

R s . 0 0 . 0 0

Printed on 8 0 GSM pa per w ith NCER T

w atermark

Published at the Publication Department by

the S ecretary, National Coun cil of Edu cationalResearch and Training, Sri Aurobindo Marg,

New Del h i 110 016 an d p r i n t edat . . . . . .

ISB N 81-7450-715-9

ALL RIGHTS RESERVED

No part of this publication may be reproduced, stored in a retrieval system

or transmitted, in any form or by any means, electronic, mechanical,photocopying, recording or otherwise without the prior permission of the

publisher.

This book is sold subject to the condition that it shall not, by way of trade,

be lent, re-sold, hired out or otherwise disposed of without the publisher’sconsent, in any form of binding or cover other than that in which it ispublished.

The correct price of this publication is the price printed on this page, Any

revised price indicated by a rubber stamp or by a sticker or by any othermeans is incorrect and should be unacceptable.

OFFICES OF THE PUBLICATION

DEPARTMENT, NCERT

NCERT CampusSri Aurobindo Marg

New Delhi 110 016 Phone : 011-26562708

108, 100 Feet RoadHosdakere Halli ExtensionBanashankari III StageBangalore 560 085 Phone : 080-26725740

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PanihatiKolkata 700 114 Phone : 033-25530454

CWC ComplexMaligaon

Guwahati 781 021 Phone : 0361-2674869

Publication Team

Head, Publication

Depa r t m en t : Peyye t i Ra jakumar

Chief Production

Offic er : Shiv Kumar

Ch ief Ed itor : Shveta Uppal

Chief Business

Ma n a ger : Gautam Ganguly

As sis ta n t E ditor : R.N. B hardw aj

Assistant Production

Offic er :

Cover, Layout and Illustrations

Blue Fish

Cartoonist

Irfan

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Foreword?The Nat iona l Curr iculum Framework (NFC) 2005 , recommen ds tha t

children ’s life at s chool mu st b e linked to th eir life out side th e sch ool.

This pr inciple mark s a depa rtu re from th e legacy of bookish learn ing

which cont inues to shape our sys tem and causes a gap be tween

t he s choo l , hom e an d com m u n i t y . The s y ll ab i an d t ex t books

developed on the bas is of NCF signify an at tem pt to imp lemen t th is

basic idea. They also at tempt to discourage rote learning and themaintena nce of sharp boun dar ies be tween d i ffe rent su bjec t a reas .

We hope these measures wil l take us s ignif icant ly fur ther in the

direct ion of a chi ld-centred system of educat ion out l ined in the

National Policy on E du cation (1986 ).

The success of this effor t depends on the s teps that school

pr incipals a nd teachers will take to en coura ge chi ldren to reflect on

t h e ir own l ea r n i ng a nd t o p u r s u e i m a g ina t i ve a c t iv it i e s a n d

ques t ions . We mu st recognise tha t , given s pace, t ime an d freedom,

chi ldren generate n ew kn owledge by engaging with th e informa tion

passed on to them by adul ts . Treat ing the prescr ibed textbook as

the s ole bas is of examina t ion is one of th e key reasons why other

resou rces a nd s i tes of learn ing are ignored. Inculcat ing creat ivi ty

and in i t i a t ive i s poss ib le i f we perce ive and t rea t ch i ldren as

pa rticipa tes in lear n ing, not a s r eceivers of a fixed bod y of kn owledge.

These aims imply considerable change in school rout ines and

m ode of fu n ct ionin g. Flexibi l ity in t h e da i ly t ime-ta bles is a s

necessary as r igour in implement ing the an nu al ca lendar so tha t

the requi red number of t eaching days a re ac tua l ly devot ing to

teach ing. The meth ods u sed for teach ing and evalua t ion wil l a lso

determ ine h ow effective th is textbook pr oves for ma king ch ildren ’s

li fe at sch ool a h app y experience, rath er tha n a sou rce of s t ress or

problem. Syl labus designers have t r ied to address the problem of

curr icular burden by rest ructur ing and reorient ing knowledge at

differen t sta ges with grea ter cons ideration for ch ild ps ychology and

the t ime avai lable for teaching. The textbook at tem pts to en ha ncethis en deavour by giving higher pr ior ity an d s pace to opp ortun it ies

for contem plat ion an d wondering, discu ss ion in sm al l groups , an d

act ivit ies requir ing ha nd s-on experience.

The Nat ional Counci l of Educat ional Research and Training

(NCER T) app reciates th e ha rd work don e by the textbook developmen t

comm it tee resp ons ible for this textbook. We wish to tha n k th e

Cha irperson of th e advisory grou p in Social Sciences , Professor Ha ri

Vas u devan an d th e Chief Advisor for this textbook, Pr ofess or Tap as

Maju md ar for guiding th e work of this com mit tee. Several teach ers

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iv

contr ibu ted to th e developmen t of this textbook; we are gratefu l to their pr incipals

for ma king this poss ible. We a re ind ebted to th e ins t i tut ions a nd organisat ions

which h ave generous ly permi t t ed u s to dra w up on th e ir resources , ma ter ia l and

personnel. We are especially grateful to the members of the National Monitoring

Commit tee, appointed by the Department of Secondary and Higher Educat ion,

Ministry of Hu ma n Resou rces Developmen t un der th e Chairperson sh ip of Professor

Mrina l Miri an d Professor G.P. Desh pa nd e, for their valu able t ime a nd contribu tion.

As an organ isat ion comm it ted to systemic reform an d cont inu ous imp rovemen t in

th e qua lity of i ts produ cts, NCERT welcomes comm ents an d su ggestions wh ich will

enable us to un der take fur th er revis ion an d re finem ent .

Director

New Delh i Na t ion a l Cou n cil of Edu ca t ion a l

16 February 20 07 Research an d Tra in ing

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Textbook Development Commitee?CHAIRPERSON, ADVISORY COMMITTEE FOR SOCIAL SCIENCE TEXTBOOKS AT THE HIGHER

SECONDARY LEVEL

Hari Vasu devan , Profes s or, Depar tm ent of History, University of Calcut ta,

Kolkata

CHIEF ADVISOR

Tapas Majumda r , Profes sor Eme ritus of Econom ics,

J awa h ar lal Nehr u University, New Delh i.

ADVISOR

Sat ish J ain, Profes s or, Centre for Economics Studies and Planning,

Sch ool of Social Scien ces, J awa h ar lal Nehr u University, New Delhi

MEMBERS

Debarshi Das , Lecturer, Departm ent of Economics, Pu njab Universi ty,

Chand i ga r h

S a u m y a j it B h a t t a c h a r y a , Sr Lecturer, Depar t m en t o f Econom i cs ,

Kirorim a l College, New DelhiS a n m it r a G h o s h , Lecturer , Depa r t m en t o f Econom i cs , J ad avpu r

University, Kolkatta

Malbika Pal, Sr Lectu rer , Department of Economics, Miranda House,

New Delh i

MEMBER-COORDINATOR

J aya Singh, Lecturer, Economics, Department of Educat ion in Social

Sciences a nd Hu ma nit ies , NCERT, New Delhi

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Contents?FOREWORD ii i

1 . INTRODUCTION 1

1.1 Em ergen ce of Ma croecon om ics 4

1.2 Con text of t he Pr es en t Book of Ma cr oecon om ics 5

2 . NATIONAL INCOME ACCOUNTING 8

2.1 Som e Ba s ic Con cep ts of Ma croecon om ics 8

2.2 Circu lar Flow of Incom e an d Methods of

Ca lcu la t in g Na t ion a l In com e 14

2.2.1 Th e Pr odu ct or Va lu e Added Meth od 17

2.2.2 Expen d itu re Meth od 20

2.2.3 In com e Meth od 22

2.3 Som e Ma croecon om ic Iden t it ies 23

2.4 Goods a n d Prices 25

2.5 GDP a n d Welfa re 27

3 . MONEY AND BANKING 33

3.1 Fu n ct ion s of Mon ey 33

3.2 Dem a n d for Mon ey 34

3.2.1 Th e Tra n s a ct ion Mot ive 34

3.2.2 Th e Specu la t ive Mot ive 36

3.3 Th e Su pp ly of Mon ey 38

3 .3 .1 Le ga l D efin it ion s : Na r row a n d B roa d Mon e y 3 8

3.3.2 Mon ey Crea tion b y th e Ba nk in g Sys tem 39

3.3.3 Ins tru men ts of Moneta ry Policy an d the

Res erve Ba n k of In d ia 43

4 . INCOME DETERMINATION 49

4.1 Ex An te a n d Ex Pos t 49

4 .2 Move m en t Alon g a C u rve Ve rs u s S h ift of a C u rve 5 2

4.3 The Short Run Fixed Price Ana lysis of the Produ ct Market 53

4.3.1 A Poin t on th e Aggr ega te Dem a n d Cu r ve 54

4.3.2 Effects of an Au tonom ous Ch an ge on Equ i libr iu m

Dem a n d in th e Prod u ct Ma rket 54

4.3.3 Th e Mu lt ip lier Mech a n is m 56

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5 . THE GOVERNMENT: BUDGET AND THE ECONOMY 60

5.1 Com pon en ts of th e Govern m en t Bu dget 61

5.1.1 Th e Reven u e Accou n t 61

5.1.2 Th e Ca p ita l Accou n t 63

5.1.3 Mea s u res of Govern m en t Deficit 64

5.2 Fis ca l Policy 65

5.2.1 Ch an ges in Govern men t Expen ditu re 66

5.2.2 Ch a n ges in Ta xes 67

5.2.3 Deb t 71

6 . OPEN ECONOMY MACROECONOMICS 76

6.1 Th e Ba la n ce of Pa ym en ts 77

6.1.1 BoP Su rp lu s a n d Deficit 77

6.2 Th e Foreign Exch a n ge Ma rket 78

6.2.1 Determ in at ion of th e Exch an ge Ra te 79

6.2.2 Flexib le Exch a n ge Ra tes 80

6.2.3 Fixed Exch a n ge Ra tes 836.2.4 Ma n a ged Floa t in g 84

6.2.5 Exchan ge Rate Man agement :

Th e In tern a t ion a l Exp er ien ce 84

6 .3 Th e D et er m in a t ion of In c om e in a n O pen E con om y 8 7

6 .3 .1 Na t io n a l In c om e Id e n tit y fo r a n O p en E c on o m y 8 8

6 .3 .2 E qu ilib riu m Ou t p u t a n d t h e Tr a de Ba la n ce 90

6.4 Tra de Deficit s , Sa vin gs a n d In ves tm en t 93

GLOSSARY 98

viii

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