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ely CE
p let & N CBSE Revised Syllabus for 2021 Exam
m
Co CBSE CBSE Sample Question Paper 2020-21
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o n Latest NCERT Books 2020-21

bsa ed
Exam Handbook
Economics-XII
Edition
Effective for CBSE Examination 2021
2021
Economics-XII

< SYNOPSIS based on Revised CBSE Syllabus for 2021 Exam and NCERT Books 2020-21
< CASE STUDY - Case based Integrated Questions (as per CBSE Sample Question Paper 2020-21)
< ‘OBJECTIVE TYPE QUESTIONS’ - MCQs, True/False, Fill ups, Matching, Sequencing,Assertion-Reason
< ‘NUMERICAL QUESTIONS’ (with Solutions)
< ‘Definitions of KEY TERMS’ and ‘SEQUENCE OF EVENTS’ (INDIAN ECONOMIC DEVELOPMENT)
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< ‘PREPARING FOR EXAMINATION 2021’ (Important Tips for Economics XII Exam 2021)
< ‘CBSE SAMPLE QUESTION PAPER 2020-21’ (with Answers through Author’s Pen)
Subhash Dey

< ‘10 SAMPLE QUESTION PAPERS for PRACTICE’ (with Answer Key at the end)

Subhash Dey

Shree Radhey Publications

 1
UNIT-1 National Income and Related Aggregates EXAM HANDBOOK Economics XII (2021 Edition) 1

Unit 10 Marks

National Income and

Related Aggregates

Revised CBSE Syllabus 2020-21 For CBSE Economics Examination 2021

 What is Macroeconomics?
 Basic concepts in macroeconomics: consumption goods, capital goods, final goods, intermediate goods;
stocks and flows; gross investment and depreciation.
 Circular flow of income (two sector model); Methods of calculating National Income - Value Added or
Product method, Expenditure method, Income method.
 Aggregates related to National Income: Gross National Product (GNP), Net National Product (NNP), Gross
Domestic Product (GDP) and Net Domestic Product (NDP) - at market price, at factor cost; Real and
Nominal GDP.
 GDP and Welfare

1.1 Some Basic Concepts Stocks and Flows

Stocks are economic variables which are measured at a
Macroeconomics
given point of time, e.g. Capital, Wealth, Money supply,
In macroeconomics, we study the economic behaviour of the
Inventories, Buildings and machines in a factory, Balance in
economy as a whole, e.g. aggregate demand, aggregate supply,
a bank account, etc.
levels of income, employment and price in the economy.
Flows are economic variables which are measured over a
Final Goods and Intermediate Goods period of time, e.g, National income or GDP or Production
Final goods are the goods which are used for final consumption or Output, Sales, Savings, Expenditure, Profits, Losses, Exports,
(i.e., for satisfaction of wants) or for investment. Imports, Gross/Net capital formation or Gross/Net Investment,
Examples: (i) Machine purchased by a firm for installation Depreciation, Interest, Change in inventories, Change in money
in factory, (ii) Milk or bread purchased by households, (iii) supply or money creation, Value addition, etc.
Printer purchased by a lawyer for office use, etc.
Gross Investment and Depreciation
Intermediate goods (or single use producer goods) are the
Gross investment (or gross capital formation) refers to the
goods which are purchased during the year by a firm from
addition to the stock of physical capital and change in inventories
another for the purpose of further production or resale.
in an economy during an accounting year.
Examples: (i) Raw materials such as steel sheets used for
Depreciation is an annual allowance for normal wear and
making automobiles and copper used for making utensils,
tear and foreseen obsolescence of a fixed capital asset.
(ii) Mobile sets purchased by a mobile dealer, (iii) Chalks,
dusters, etc. purchased by a school, (iv) Paper purchased Depreciation is also called consumption of fixed capital or
by a publisher, (v) Purchase of rice by a grocery shop, (vi) annual replacement cost of fixed capital assets.
Fertilisers used by the farmers, etc. Annual Depreciation is calculated as follows:
Cost of fixed capital asset - Scrap value after its useful life
Consumption Goods and Capital Goods
Consumption goods (or consumer goods) are that part of the final Estimated useful life of the fixed capital asset (in years)
goods which are consumed (or used) for satisfaction of wants by Unexpected/unforeseen obsolescence or sudden destruction
the consumers, e.g., food, clothing, TV sets, refrigerators, etc. of capital assets is not depreciation, but capital loss.
Capital goods (or investment goods or durable use Concepts of Domestic Territory and Resident—their
producer goods) are those final goods which help in further
Implications
production of other goods and services, e.g. machinery.
Domestic territory (or Economic territory) is the geographical
 2 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

territory administered by a government within which Thus, consumption expenditure flow from household to
persons, goods and capital circulate freely. For example, (i) firms, completing the circular flow of income.
Branch of an American Bank in India, (ii) Embassies located
abroad, e.g. Indian embassy in America, etc. are included in
the domestic territory of India.
Resident is a person or an institution whose centre of
economic interest lies in the domestic territory of the country
in which he lives, for example, Indian officials working in the
US Embassy in India, etc. are normal residents of India.
Implications: Domestic product includes production
activity of the firms located in the domestic territory of
the country irrespective of whether they are residents or
non-residents, for example, (i) Profits earned by a foreign
company or a foreign bank in India (ii)  Compensation
of employees to the residents of Japan working in Indian
embassy in Japan are included in domestic product of India 1.2 Estimation of National Income
as it is a factor income earned in domestic territory of India. Production Method (or Value Added Method)
National product includes production activity of residents Step 1: Estimation of value of output produced by each
only irrespective of whether performed within the domestic firm in all the sectors of the economy during the year.
territory of the country or outside it, for example, (i) Salaries Value of output is the estimated money value of all the
received by Indian residents working in Russian Embassy goods and services, inclusive of change in stock and
in India (ii) Dividend received by an Indian from his production for self consumption.
investment in shares of a foreign company are included in
Value of output = Output produced (in units) × Market price
national product as it is a factor income earned by Indian
residents from abroad. (a) If a firm had no initial unsold stock in the beginning of
the year: Value of output = Sales + Value of unsold stock
Net factor Income from Abroad (NFIA)
Sales = Output sold (in units) × Market price.
Net Factor Income from Abroad is the excess of factor incomes
Or, Sales = Sale of goods and services to domestic buyers + Exports
(rent, wages, interest, profit) earned from abroad over factor
* Exports refers to the value of the goods and services sold by
incomes (rent, wages, interest, profit) paid to abroad. (NFIA = an economy to the rest of the world
Factor income from abroad – Factor income to abroad)
(b) If a firm had some unsold stock in the beginning of the year:
NFIA is negative when factor income from abroad is less
Value of output = Sales + Net change in inventories (stock)
than factor income paid to abroad.
Or, Value of output = Sales + Closing stock – Opening stock
National product = Domestic Product + NFIA (Factor • Inventory (Stock) is unsold goods, unused raw material or semi-
income from abroad – Factor income to abroad) finished goods which a firm carries from one year to the next.
• Factor income received from abroad is added to domestic • Unplanned inventories (Stock) refer to the unanticipated change
product to calculate national product because this in stock due to unexpected fall in sales.
factor income is earned by residents, though outside the Step 2: Calculation of Value Added (VA) and Gross
domestic territory. Domestic Product at market price (GDPmp)
• Factor income paid to abroad is subtracted because this Value added/Value addition is the excess of value of output
factor income is not earned by residents.\ over the value of intermediate consumption.
Circular flow of income in a two sector economy Value added = Value of output – Intermediate consumption
Two sector model consists of production units (firms)
Intermediate consumption refers to the value of goods and
and households. Households are the owners of factors
services used during the production process.
production and supply factor services (in the form of labour, Intermediate consumption = Purchase of raw materials etc.
capital, land and entrepreneurship) to the firms. Firms + Imports of raw materials etc.
produce goods and services and make factor payments (in Example: Suppose that there are only two producers in the
the form of wages and salaries, interest, rent and profit) to economy – farmer and baker. Farmer grows wheat worth
the households.Households spend the entire income on the `100 with no intermediate costs. He sells `50 worth of
purchase of goods and services produced by firms. wheat to the baker, who produces `200 worth of bread.
 UNIT-1 National Income and Related Aggregates EXAM HANDBOOK Economics XII (2021 Edition) 3

Value added by farmer (GVAmp) = Value of wheat produced but retained for self-consumption should be
produced – Intermediate costs = 100 – 0 = `100. included since output has been produced during the
Value added by baker (GVA) = Value of bread produced year, e.g. farmer consuming his own produce.
– Cost of wheat used = 200 – 50 = `150. Income Distribution Method
Note: Sum of Gross Value Added (GVA) of all firms in the Step 1: Estimate the factor payments by each firm in the
economy is Gross Domestic Product (GDP). economy. The sum of factor payments equals Net Value
GDP is the sum total of market value of all the final goods Added at Factor Cost (NVAfc) of a firm.
and services produced within the domestic territory of a Step 2: Take the sum total of NVAfc by all firms to arrive
country during a year. It is GDP at market price (GDPmp). at NDPfc.
Why GDPmp is called ‘Gross’ and ‘at market price’? GDPmp NDPfc = Compensation of employees
is what buyers pay, not what production units actually + Operating surplus + Mixed income
receive. Out of GDPmp production units have to make 1. Compensation of employees: It includes (a) Wages and
provision for depreciation and payment of indirect taxes salaries in cash and in kind, e.g. bonus, free medical
(e.g. GST) and receive subsidy from government.
facilities, free meals, house rent allowance, etc. (b) Social
• GDPmp is called ‘gross’, because no provision has been
security contributions by the employers, e.g., provident
made for depreciation yet.
• GDPmp is called ‘at market price’ because it includes net
fund or insurance premium paid by employers.
indirect taxes (indirect taxes – subsidies). 2. Operating surplus/ Income from property and entrepreneurship:
What production units actually receive is not the ‘market- It is the income which arises from ownership of
price’ but “market price – indirect taxes + subsidies = physical/financial/intellectual property and reward to
Factor costs”. the entrepreneur for his contribution to the production
Step 3: Calculation of Net Domestic Product at factor of goods and services in the form (i) Rent/Royalties (ii)
cost (NDPfc) Interest (iii) Profit.
NDPfc (domestic factor income) Profit = Corporation tax + Dividend + Retained earnings/
= GDPmp – Depreciation – Indirect taxes + Subsidies undistributed profits.
NDPfc is what production units actually receive and hence, OR, Profit = Corporation tax + After tax profit
distributed as wages and salaries, interest, rent, profits, etc. 3. Mixed income of self-employed: The income of self
Step 4: Calculation of National Income (NNPfc) employed people like doctors etc. has two or more
factor incomes; total income is estimable, but not its
National income (NNPfc) = NDPfc + NFIA
different components. So, mixed income is another
Precautions in calculating national income by production
factor payment.
method (or value added method)
Step 3: National income (NNPfc) = NDPfc + NFIA
1. Avoid double counting. Problem of double counting in
the estimation of National Income arises due to counting Components of National income by income method:
the value of commodities more than once. This leads 1. Compensation of employees
2. Operating surplus
to overestimation of the value of goods and services
3. Mixed income of self employed
produced in the economy.
4. Net Factor Income from Abroad (NFIA)
Two approaches to correct the problem of double
counting are: Precautions in making estimates of national income
(i) Final output Method : According to this method, value by income method
of only the final goods and services should be added 1. Avoid transfers. National income includes only factor
to determine the national income. payments, i.e. payment for the services rendered to the
(ii) Value Added Method: According to this method, sum production units by the owners of factors of production.
total of the value added by each producing unit should Any payment for which no service is rendered is called a
only be taken in consideration. It means the value of transfer, e.g. gifts, donations, charity, etc. Since transfers
intermediate consumption should not be considered. are not a production activity it must not be included in
2. Do not include sale of second hand goods. Value of second national income.
hand goods being sold should not be included in national 2. Avoid capital gain. Capital gain refers to the income
income as their value was accounted for at the time of first from the sale of second hand goods and financial assets.
production. However, any brokerage or commission paid So, income from sale of old cars, old house, etc. is not
to sell the second hand goods is a fresh production activity, included since these are not production transactions.
so brokerage or commission is included. Similarly, income from sale of financial assets, e.g.,
3. Self-consumed output must be included. Output shares, bonds, debentures, etc. are not included since
 4 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

financial assets are neither goods nor services, hence on consumption. (ii) Expenditure on purchase of a car/
not a production activity. furniture/machine/refrigerator for use by a firm is a final
3. Include income from self-consumed output, e.g. when investment expenditure.
a house owner lives in that house, he does not pay any Intermediate expenditure refers to the expenditure
rent. But in fact he pays rent to himself. So, imputed rent incurred by a firm on purchasing those goods and services
should be included in national income since the house during the year by a firm from another for the purpose of
provides housing services. Rent is a factor payment. further production or resale, for example, (i) Payment of
electricity bill by a school, (ii) Payment of fees to a Chartered
4. Include free services provided by the owners of the
Accountant/a Mechanic by a firm, (iii) Purchase of uniforms
production units. For example, owners work in their for nurses by a hospital, (iv) Expenditure on engine oil by a
own units but do not charge salary. Owners provide car service station, etc.
finance but do not charge any interest. Owners do
2. Do not include expenditure on second hand goods
production in their own buildings but do not charge
and financial assets. Buying second hand goods is not
rent. Although they do not charge, yet the services
a fresh production activity. Buying financial assets is
have been performed. The imputed value of these must
not a production activity because financial assets are
be included in national income.
neither goods nor services. Therefore they should not
Expenditure Method be included in estimates of national income.
Step 1: We take the sum of final expenditures on consumption 3. Avoid transfer expenditures. A transfer payment is a payment
and investment in the economy. This equals GDPmp. against which no services are rendered, e.g. Charities,
Components of GDPmp by expenditure method: donations, gifts, scholarships, etc. Since no production takes
1. Private final consumption expenditure, e.g. purchase place it is not included in national income.
of a car by a household, expenditure on education of 4. Include the self use of own produced final products.
children by a family, etc. For example, a house owner using the house for self.
2. Government final consumption expenditure, e.g. free Although explicitly he does not incur any expenditure,
services provided on education, heath, police service, implicitly he is making payment of rent to himself. Since
defense services, etc. the house is producing a service, the imputed value of
3. Gross domestic capital formation (= Gross domestic this service must be included in national income.
fixed capital formation + Net change in stock)
Giving reason state how the following are treated in
4. Net exports: It refers to the excess of the value of exports estimation of national income:
over the value of imports of a country in an accounting year 1. Payment of indirect taxes by a firm
(= Exports – Imports). Ans. No, it is not included in national income because an indirect
tax paid to the government is a transfer payment as no good or
• Exports, though purchased by non-residents, are
service is provided in return.
produced within domestic territory, hence included 2. Payment of corporate tax by a firm
in GDPmp. Ans. No, it is not included as it is a transfer payment. Corporate tax
• Imports are deducted because imports are not accrues to the government. It is not received by the owners of
factors of production. Hence, it is not a factor income.
produced within the domestic territory of the country.
3. Payment of interest on a loan taken by an employee from the
GDPmp = Private final consumption expenditure + employer/Payment of interest by an individual to a bank on a
Government final consumption expenditure + Gross loan to buy a car/Interest received on loans given to a friend for
domestic capital formation + Net exports (or – Net imports) purchasing a car.
Ans. No, it is not included in national income because the individual
Step 2: NDPfc = GDPmp – Depreciation – Net indirect taxes is a consumer, and the loan is taken to meet consumption
Step 3: National income (NNPfc) = NDPfc + NFIA expenditure. There is no contribution to production of goods
and services. Therefore, it is not a factor payment.
Precautions in making estimates of national income
4. Payment of interest by banks to its depositors/Payment of
by expenditure method interest by a firm to households.
1. Avoid intermediate expenditure. Only final expenditures, Ans. Yes, it is included in national income because it is a factor
i.e. expenditure on consumption and investment are income paid by a production unit (bank or firm). Banks borrow
for carrying out banking services/The firms borrow money for
included in national income. Intermediate expenditure carrying out production.
like that on raw materials, etc. is not included. 5. Payment of interest by a firm (government firm or a private
firm) to a bank
Final expenditure refers to the expenditure on goods and
Ans. Yes, it is included in national income because it is a factor
services meant for final consumption and investment, for
payment by the firm. The firm borrows money for carrying out
example, (i) Expenditure on purchase of car/furniture/sewing production of goods and services.
machine/refrigerator by a household is a final expenditure 6. Interest received on loan given to a foreign company in India.
 UNIT-1 National Income and Related Aggregates EXAM HANDBOOK Economics XII (2021 Edition) 5

Ans. Yes, it will be included in the national income as it is a part of

factor income from abroad. Real and Nominal GDP; GDP and
1.3
7. Interest received on debentures. Welfare
Ans. Yes, it will be included in the national income because interest
received on debentures is a factor income because debenture is a
Nominal and Real GDP
sort of loan taken by a production unit, which uses the money in Nominal GDP: It is the market value of all final goods
producing goods and services. and services, produced in a year, measured at the prices of
8. Money received by a family in India from relatives working current year. In other words, Nominal GDP is measured as
abroad, i.e., remittances from abroad/Scholarship given to
Indian students studying in India by a foreign company/Free
the product of current year’s output (Q1) of final goods and
meals to beggars/Financial help received by flood victims/ services and their current year’s price (P1).
Expenditure on old age pensions by government/Gift received Nominal GDP may increase even if there is no increase in
from employer, e.g. festival gift, gifts on independence day, the output of goods and services produced in the economy,
etc.
due to rise in general price level during the current year.
Ans. No, it will not be included in the national income as it is a
transfer income or transfer payment, which is received or paid Real GDP: It is defined as the market value of all final goods
without any contribution to production of goods and services. It and services produced in a year, measured at the prices of a given
is not a factor income. base year. In other words, Real GDP is measured as product of
9. Free medical facilities or free meals or house rent allowance or leave current year output (Q1) and their base year’s price (P0).
travel allowance paid by the employer/Rent-free house given to an
employee by an employer/Expenditure on medical treatment of Real GDP will increase only if the output of goods and
employee’s family/Payment of bonus by a firm to its employees/ services produced in the economy is increasing. Thus, Real
Contribution to provident fund by employer GDP is a better indicator of economic growth and welfare
Ans. Yes, it will be included in the national income as it is a part of the of people of the country than Nominal GDP as it is not
compensation of employees.
10. Contribution to provident fund or insurance premium paid
affected by changes in general price level.
by employees Given Nominal GDP, we can find Real GDP by eliminating
Ans. No, it is not included in national income because it is paid out of the effect of change in prices between the base year and the
compensation of employees, which is already included. current year in the following way:
11. Compensation given by insurance company to an injured
worker. No min al GDP
Ans. No, as compensation is given by insurance company to the Real GDP = ¥ 100
Price Index
employee and not by employer.
12. Prize won in a lottery. Suppose Nominal GDP = `288 and Price index = 120.
Ans. No, because it is a windfall gain, not a factor income.
Thus, Real GDP = Nominal GDP/ Price Index × 100 =
13. Receipts from sale of land.
Ans. No, it will not be included as land is a free gift of nature and
288/120 × 100 = `240
cannot be produced. GDP Deflator: The ratio of Nominal GDP to Real GDP
14. Dividend received by shareholders. of current year is a well known price index, called GDP
Ans. Yes, it will be included in the national income as it is a part of the Deflator. It gives the change in price level between the
profits of production units, which is distributed to the owners. base year and current year.
Hence, it is a factor income.
15. Rent received by Indian residents on their buildings rented Nominal GDP
out to foreigners in India. GDP Deflator/Price Index = ¥100
Ans. Yes, it will be included in the national income as it is a factor
Real GDP
income earned by the residents.
16. Royalty
Numerical Example:
Ans. Yes, it will be included in the national income as royalty is a Goods Price of Price of Quantity Nominal Real
productive income. Current Base Year of Current GDP GDP
17. Fees received from students Year (P1) (P0) Year (Q1) (P1Q1) (P0Q1)
Ans. Yes, it will be included in the national income as it is a part of the (in `) (in `) (in units)
private final consumption expenditure.
18. Purchase of goods by foreign tourists A 20 10 100 2,000 1,000
Ans. Yes, it is included in national income as these are exports produced B 10 5 200 2,000 1,000
in the domestic territory, an item of final expenditure.
19. Expenditure on maintenance of factory building by a firm
C 30 20 50 1,500 1,000
Ans. No, it will not be included in the national income as it is an ∑P1Q1 = ∑P0Q1 =
intermediate expenditure of the firm. 5,500 3,000
20. Transport expenses by a firm/ Expenditure on advertisement
and scientific research by a firm
In the above example, the Nominal GDP = SP1Q1 =
Ans. No, it will not be included in the national income as it is an `5,500 and Real GDP = SP0Q1 = `3,000
intermediate expenditure. The difference between Nominal GDP and Real GDP
 6 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

is 5,500 – 3,000 = `2,500. This is only the monetary etc.) by a millions of home-makers is not included in the GDP
difference (due to the change in the prices in the economy) of the economy. Similarly, barter exchanges are not included
as the quantity sold in the market remains unchanged. as these exchanges are not evaluated in terms of money due to
Nominal GDP 5, 500
non-availability of data.
GDP Deflator = ¥ 100 = ¥ 100 = 183.33% Since GDP does not include non-monetary exchanges/
Real GDP 3, 000
production, it is major cause of undervaluation of GDP
This implies that the prices have risen by 83.33% between in the economy. As result, welfare of the people is also
the base year and the current year. underestimated.
Nominal and Real Income 3. Externalities: Externalities refer to the benefits/harms
When national income (product) of the current year is caused by a firm/individual to the society in general, without
estimated on the basis of prices of current year, it is called being penalised/paid. There are two types of externalities:
nominal national income (or national income at current Negative externalities: Social harms, e.g. (i) Air pollution
prices) whereas when national income (product) of the caused by vehicles and smoke out of chimneys of factories
current year is estimated on the basis of prices prevailing in (ii) Traffic jams.
the base year, it is called real national income (or national
Negative externalities may cause harm to the people. Hence,
income at constant prices).
their welfare will fall. However, GDP does not account for
Nominal national income may increase due to increase
such negative externalities. Thus, GDP overestimates the
in prices of goods and services during the current year
without increase in the flow of goods and services in the actual welfare.
economy. Real national income reflects the real growth Positive externalities: Social benefits, e.g. (i) Introduction
of an economy because it increases only when there is an of metro rail has saved the time and money of general
increase in real national output over a period of time. public and has provided safe means of transport. (ii) Saving
Given Nominal Income, we can find Real Income by of time/fuel with construction of better roads in a country.
eliminating the effect of change in prices between the base Positive externalities increase welfare of people or general
year and the current year in the following way: public. However, GDP does not account for such positive
Real National Income =
Nominal National Income
¥ 100
externalities. Thus, GDP as an index underestimates welfare.
Price Index

Goods Price of Price of Quantity of Nominal Real NI

HOTS
Current Year Base Year Current Year NI (P0Q1) Analysing, Evaluating & Creating Questions
(P1) (P0) (Q1) (P1Q1)
(in `) (in `) (in units) Q.1 Answer the following: 1.5 × 4 = (6)
A 20 10 100 2,000 1,000 (a) Giving valid reasons, state how the services of a
B 10 5 200 2,000 1,000 ‘School Teacher’ will be undertaken in estimation
of National Income.
C 30 20 50 1,500 1,000
(b) Gross investment is always greater than net
∑P1Q1 = ∑P0Q1 =
5,500 3,000
investment.” Defend or refute the given statement
with valid argument.
In the above example, Nominal NI (∑P1Q1) = `5,500 and (c) Net factor income from abroad can never be
Real NI (∑P0Q1) = `3,000 negative.” Defend or refute the given statement
Is GDP a perfect index of economic welfare? with valid argument.
No, GDP cannot always be taken as a perfect index of (d) Discuss briefly how the money received from the
sale of a second-hand car will be undertaken in
economic welfare. Following are some of the limitations of
estimation of National Income.
using GDP as an index of welfare of a country: Ans. (a) The services of a school teacher will be included in
1. Distribution of GDP: If the GDP of the country is rising, the national income of the country as it contributes
the welfare of people may not increase if there is inequalities to the current flow of services in the economy.
in the distribution of GDP. Increase in inequalities means that (b) The given statement is refuted. Gross investment
rich become richer and poor become poorer. includes addition to capital stock which also
Since utility of money is higher among poor and lower among includes replacement for the normal wear and tear
the rich, therefore, if the distribution of GDP is not uniform, (depreciation). Whereas, addition to capital stock
in an economy is measured by net investment. So,
inequalities may not lead to increase in welfare of people.
in an accounting sense, if the value of depreciation
2. Non-monetary exchanges (or non-monetary production): becomes zero, only then gross investment will be
Non-monetary exchanges refer to the goods and services equal to net investment.
produced but not exchanged for any monetary value. For (c) The given statement is refuted. Net factor income
example, value of household chores (cooking, washing, cleaning from abroad is the difference between factor income
 UNIT-1 National Income and Related Aggregates EXAM HANDBOOK Economics XII (2021 Edition) 7

earned from rest of the world and factor income paid this case) ensures increase in welfare of the people of the
to rest of the world. If the value of factor income paid country. However, this may not always be correct. GDP
to rest of the world is greater than the factor income is not the best indicator of the economic welfare of a
earned from rest of the world, the resulting value (net country. Some of the prime reasons for the same are:
factor income from abroad) can be negative. (a) unequal distribution and composition of GDP,
(d) The money received from the sale of a second hand (b) non-monetary transactions in the economy which
car will not be included in the national income of the are not accounted for in GDP, and
country as it does not contribute to the current flow (c) occurrence of externalities in the economy (both
of goods in the economy. positive and negative).
Q.2 Final goods are those goods which are consumed only by Q.6 ‘Real Gross Domestic Product is a better indicator of
the households.” Defend or refute the given statement economic growth than Nominal Gross Domestic Product’.
with a valid argument. (3) Do you agree with the given statement? Support your
Ans. The given statement is not correct and is thus refuted. Final answer with a suitable numerical example. (4)
goods are those goods which are purchased/consumed Ans. The given statement is correct. Real Gross Domestic Product
either by households or by the producers for investment (GDP) is a better indicator of economic growth than
purpose, i.e., these are the goods which have crossed the Nominal Gross Domestic Product (GDP) as it is not affected
production boundary. by changes in general price level.
Q.3 State with valid reason, which of the following statement (Give numerical example on Page No. 5)
is true or false: (3) Q.7 ‘Circular flow of income in a two sector economy is
(a) Gross Value Added at market price and Gross based on the axiom that one’s expenditure is other’s
Domestic Product at market price are one and the income’. Do you agree with the given statement?
same thing. Support your answer with valid reasons. (3)
(b) Intermediate goods are always durable in nature. Ans. Yes, the given statement is correct. In a two sector
Ans. (a) The given statement is false as Gross Domestic economy, the firms produce goods and services and make
Product is the result of sum of Gross Value Added by factors payments to the households. The factor income
all the producing units/firms in an economy, during earned by the households will be used to buy the goods
an accounting year. and services which would be equal to income of firms. The
(b) The given statement is false as intermediate goods are aggregate consumption expenditure by the households in
generally non-durable in nature. They are the goods the economy is equal to the aggregate expenditure on
used as raw material and they lose their identity in goods and services produced by the firms in the economy
the production process for the creation of a new (Income of the producers).
commodity, during an accounting year. Q.8 “Management of a water polluting oil refinery says that
Q.4 (a) ‘Domestic/household services performed by a it (oil refinery) ensures welfare through its contribution
woman may not be considered as an economic to Gross Domestic product.” Defend or refute the
activity’. Defend or refute the given statement argument of management with respect to GDP as a
with valid reason. (2) welfare measure of the economy. (3)
(b) ‘Compensation to the victims of a cyclone is Ans. No, the given statement is not true. The value added by
an example of a welfare measure taken by the oil refinery to the Gross Domestic Product (GDP) may
government’. State with valid reason, should it also be polluting the nearby source of water. Such harmful
be included/not included in the estimation of effects that the refinery is causing to people and marine
national income of India. (2) life is not penalized for the same. Thus, these negative
Ans. (a) The given statement is defended; as it is difficult to externalities are not ensuring the welfare of the economy
measure the monetary value of the services performed through Gross Domestic Product (GDP).
by a woman (homemaker). Therefore, these activities Q.9 'Subsides to the producers, should be treated as transfer
may not be considered as an economic activity. payments.' Defend or refute the given statement with
(b) Compensation given to the victims of a cyclone valid reason. (3)
is an example of a social welfare measure taken Ans. The given statement is defended, as subsidy is a transfer
by the government. However, it is not included payment. Subsidy is the financial assistance provided by the
in estimation of national income as it is a transfer government to producers to fulfill its social welfare objectives.
payment which does not lead to corresponding flow Government does not get anything in consideration for the
of goods and services. same. It does not contribute to the current flow of goods
Q.5 “India’s GDP is expected to expand 7.5% in 2019-20: and services and hence do not contribute to any value
World Bank” — The Economic Times. Does the given addition.
statement mean that welfare of people of India increase Q.10 State giving reasons whether the following statements
at the same rate? Comment with reason. (3) are True or False: (3)
Ans. Generally it is considered that an increase in the Gross (a) Capital goods are used up to produce other goods.
Domestic Product (GDP) of any economy (India in (b) Machine purchased is always a final good.
 8 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

Ans. (a) False: Capital goods like machines make production externality if it is used by anti-social elements. This can
of other goods feasible, but they themselves don’t get increase crime and lead to insecurity.
transformed in the production process, i.e., they are Q.16 Which of the following items will be included/not
not used up to produce other goods. included while estimating Gross Domestic Product?
(b) False: Whether ‘machine’ is a final good or not Give valid reasons in support of your answer. (6)
depends on how it is being used. • If the machine is (a) Wages received by an Indian working in the
bought by a household, then it is a final good because British Embassy in India.
it is used for final consumption. • If the machine is (b) Financial aids received from abroad after 'Fani
bought by a firm for its own use, then also it is a cyclone'.
final good because it is used for investment. • If the (c) Purchase of second hand machinery from abroad.\
machine is bought by a firm for re-sale, then it is an Ans. (a) Wages received by an Indian working in British
intermediate good. embassy in India is not a part of economic territory
Q.11 Suppose a ban is imposed on consumption of tobacco. of India, as British Embassy is a part of Economic
Examine its likely effects on gross domestic product territory of Britain.
and welfare. (3) (b) Financial aid is a transfer income as no factor service
Ans. Ban on consumption of tobacco will bring down is provided in return. Hence, it is not included
production of tobacco. Since it is counted in GDP, GDP while estimating the value of GDP.
will fall. The ban will improve the health in general. It will (c) Purchase of second hand machinery from abroad is
thus increase welfare. not included as the value of imports are deducted
Q.12 Government incurs expenditure to popularise yoga while estimation GDP of a country.
among the masses. Analyse its impact on gross domestic
product and welfare of the people. (3)
Ans. Government expenditure on popularising yoga raises Numerical Questions
GDP because it is government’s final consumption
expenditure. It also raises welfare of the people because .1 Calculate ‘Depreciation on Capital Asset’ from the
Q
yogic exercises improve health and thus, raise efficiency of following data: (3 marks)
the people. Particulars Amount (in ` crores)
Q.13 Sale of petrol and diesel cars is rising particularly in big
(i) Capital value of the asset 1,000
cities. Analyse its impact on gross domestic product
and welfare. (3) (ii) Estimated life of the asset 20 years
Ans. Sale of cars raises GDP, because sales are of final products. (iii) Scrap Value Nil
Cars provide convenience in transportation but at the Solution: Depreciation on capital (annual)
same time, it causes traffic jams, air pollution and noise
Cost of the capital asset − Scrap value
pollution, which reduces the welfare of the people. =
Pollution has bad effects on the health of the people. Estimated life of the capital assets (in years)
Q.14 “Higher Gross Domestic Product (GDP) means greater 1000 − 0
per capita availability of goods in the economy.” Do = = `50 crores
20
you agree with the given statement? Give valid reasons
Q.2 Calculate compensation of employees from the following
in support of your answer. (3)
data: (3 marks)
Ans. “Higher Gross Domestic Product (GDP) means greater
per capita availability of goods in the economy.” This Particulars Amount (in ` crores)
statement is not true. (i) Profits after tax 20
(i) If the rate of population growth is more than the (ii) Interest 45
rate of growth of GDP, the per capita availability of
goods and services will fall. (iii) Gross Domestic Product at 200
(ii) GDP doesn’t account for changes in inequalities Market Price
in distribution of Income. If the rising GDP is (iv) Goods and Services Tax 10
concentrated in a few hands, per capita availability (v) Consumption of Fixed Capital 50
of goods in the economy might not increase. Rent
(vi) 25
Q.15 If in a locality, a new park is developed by the municipal
corporation, it will have externalities, both positive (vii) Corporate Tax 5
and negative. State on example each of both types of Solution:
externalities with reason. (3) GDPmp (iii) = Compensation of Employees (COE) + (vi) +
Ans. The park in neighbourhood can be a source of positive (ii) + (vii) + (i) + (v) + (iv)
externality as it helps in reducing pollution and thereby
improving health and efficiency. 200 = COE + 25 + 45 + 5 + 20 + 50 + 10
The park in neighbourhood can be a source of negative COE = 200 – 155 = `45 crore
UNIT-1 National Income and Related Aggregates EXAM HANDBOOK Economics XII (2021 Edition) 9

Q.3 Calculate the value of ‘Change in Stock’ from the following Solution: Given that Nominal GNP = `2500 crores and
data : (3 marks) Real GNP = `3000,
Particulars Amount (in ` crores) GNP deflator = Nominal GNP/ Real GNP × 100
(i) Sales 400 = 2500/3000 × 100 = 83. 33%
No, the price level has reduced from base year to current year
(ii) Net value Added at Factor 200
by 16.67%
Cost (NVAFC)
Q.7 Calculate Net Value Added at Factor Cost (NCAFC) from
(iii) Subsidies 10 the following data: (3 marks)
(iv) Change in Stock ? Particulars Amount (in ` crores)
(v) Depreciation 40 (i) Value of Output 800
(vi) Intermediate Consumption 100
(ii) Intermediate Consumption 200
Solution: NVAfc (ii) = (i) + Change in Stock – (vi) – (v) + (iii)
(iii) Indirect taxes 30
200 = 400 + Change in Stock – 100 – 40 + 10 (iv) Depreciation 20
Change in Stock = 200 + 100 + 40 – 10 – 400 = (–) `70 crore (v) Subsidies 50
Q.4 Using the following data of an imaginary economy,
(vi) Purchase of machinery 50
calculate and compare the Real Gross Domestic Product
(RGDP) for the given years: (4 marks) Solution: NVAFC = (i) – (ii) – (iv) – [(iii) – (v)]
Year 2015-16 2016-17 = 800 – 200 – 20 – [30 – 50]
= `600 crores
Nominal GDP 8.4% 9%
Q.8 If the Real Gross Domestic Product (GDP) in an economy
Growth Rate
is `520 crores and Nominal Gross Domestic Product (GDP)
GDP deflator 140 125 is `650 crores, calculate the price Index. (1 mark)
Solution: Real GDP = Nominal GDP/GDP deflator × 100 Solution: Price Index = Nominal GDP/Real GDP × 100
Suppose the Base year be 2014-15 and Nominal GDP and = 650/520 × 100 = 125
Real GDP of 2014-15= `10,000 crore Q.9 Calculate Net Value Added at factor cost from the following
data: (3 marks)
Year 2014-15 2015-16 2016-17
Nominal GDP `10,000 `10,840 `11,815 Particulars Amount (in ` crores)
crore crore crore (i) Durable producer goods 10
(Assume) (with a life span of 10 years)
Real GDP = `10,000 `7742 cr. `9452 cr. (ii) Single use producer goods 5
Nominal GDP/ cr (aprox.) (approx) (iii) Sales 20
GDP deflator × 100 (Assume) Unsold Goods (Stock)
(iv) 2
Q.5 Calculate Gross Value Added at Market Price (GVAMP) (v) Good & Services Tax (GST) 1
from the following data : (3 marks)
Solution: Net Value Added at factor cost = iii + iv – ii – v –
Particulars Amount (in ` lakhs) Depreciation
(i) Depreciation 20 = 20 + 2 – 5 – 1 – 1 = `15 Lakhs
(ii) Domestic Sales 200 Notes: Depreciation = Cost of asset/estimated life of asset = 10
lakhs/10 years = 1 lakh
(iii) Change in Stock (-)10 Q.10 Calculate Net Domestic Product at factor cost. ( 3 marks)
(iv) Exports 10
Particulars Amount (in ` crores)
(v) Single Use Producer Goods 120
(i) Interest 700
(vi) Net Indirect Taxes 20
(ii) Compensation of Employees 3,000
Solution: GVAMP = [(ii) + (iii) + (iv)] – (v)
(iii) Net Indirect Taxes 500
= [200 + (–)10 + 10] – 120 = 200-120 = `80 lakhs
Q.6 The value of the Nominal Gross National Product (GNP) (iv) Rent and Profit 700
of an economy was`2,500 crores in a particular year. (v) Transfer Payments by 10
The value of GNP of that country during the same year, Government
evaluated at the price of base year base `3,000 crores. olution: Net Domestic Product at factor cost = i + ii + iv
S
Calculate the value of GNP deflator of the year in = `700 + 3,000 + 700
percentage terms. Has the price level risen between the base = `1400 crores
year and the year under consideration? (3 marks)
 10 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

Q.11 Suppose in an imaginary economy GDP at market (iii) Net change in stocks (–)50
price in a particular fiscal year was `4000 crore, National (iv) Purchases of raw materials 10000
Income was `2500 crore, Net Factor Income paid by the (v) Import of raw materials 3000
economy to Rest of the World was `400 crore and the value (vi) Import of machines 20000
of Net Indirect Taxes is `450 crore. Estimate the value of Additional information: Output sold is 2000 units. (3 marks)
consumption of fixed capital for the economy from the Solution: GVA at factor cost = Sales (Output sold × Price per
given data. (4 marks) unit) + (iii) – (iv) – (i)
Solution: National Income (NNPfc) = GDPmp – Consumption = 2000 × 10 + (– 50) – 10000 – 900
of fixed capital – Net indirect taxes – Net factor income paid by = 20000 – 50 – 10000 – 900 = `9050
the economy to rest of the world Q.16 Calculate Gross National Product at market price.
2500 = 4000 – Consumption of fixed (4 marks)
capital – 450 + – 400 (`in crore)
Consumption of fixed capital = 4000 – 450 – 400 – 2500 (i) Compensation of employees 2500
= `650 crore (ii) Profit 700
Q.12 In an economy, following transactions took place. (iii) Mixed income of self-employed 7500
(i) Firm A sold to firm B goods of `80 crore; to firm (iv) Net addition to capital stock 400
C `50 crore; to households `30  crore and goods
(v) Rent and royalty 400
of value `10 crore remains unsold.
(vi) Interest 350
(ii) Firm B sold to firm C goods of `70 crore; to
(vii) Factor income from abroad 150
firm D `40 crore; goods of value `30 crore were
exported and goods of value `5 crore was sold to (viii) Indirect taxes 200
government. (ix) Gross investment 470
Calculate: (x) Net exports 40
(i) Value of output of Firm A and Firm B. (xi) Factor income paid to abroad 100
(ii) Value added by Firm B (4 marks) (xii) Subsidies 50
Solution: Solution: GNPmp = (i) + (ii) + (iii) + (v) + (vi) + (vii) – (xi) +
(i) Value of output of Firm A Depreciation (ix – iv) + (viii) – (xii)
= Total sales + Value of unsold stock = 2500 + 700 + 7500 + 400 + 350 + 150 – 100 +
= (Sales to Firm B + Sales to Firm C + Sales to (470 – 400) + 200 – 50 = `11720 crore
Households) + Value of unsold stock Q.17 Compute National Income. (4 marks)
= (80 + 50 + 30) + 10 = `170 crore (`in crore)
Value of output of Firm B (i) Private final consumption expenditure 900
= Sales to Firm C + Sales to Firm D + Exports + (ii) Government final consumption expenditure 400
Sales to Government (iii) Net imports 30
= 70 + 40 + 30 + 5 = `145 crore (iv) Gross domestic capital formation 250
(ii) Value added by Firm B = Value of output of Firm (v) Change in stock 50
B – Purchases by Firm B from Firm A = 145 – 80 = (vi) Net domestic fixed capital formation 180
`65 crore (vii) Net indirect taxes 100
Q.13 In a single day, Raju, a barber, collects `500 from (viii) Net factor income from abroad (–) 40
haircuts. Over this day, his equipment depreciates in value (ix) Profits 100
by `50. Of the remaining `450, Raju pays sales tax `30, Solution: National income = (i) + (ii) + (vi) + (v) – (iii) – (vii)
takes home `200 and retains `220 for improvement and + (viii) = 900 + 400 + 180 + 50 – 30 – 100 + (– 40)
buying of new equipment. He further pays `20 as income = `1360 crore
tax. Based on this information, calculate Raju’s contribution Q.18 Calculate Net National Product at market price.
to GDP, NDP and National Income. (3 marks) (3 marks)
Solution: Raju’s contribution to: (`in crore)
(i) GDP = Value of haircuts service produced by him (i) Gross domestic fixed capital formation 350
= `500 (ii) Private final consumption expenditure 8000
(ii) NDP = GDP – Depreciation of equipment = 500 – 50 (iii) Government final consumption expenditure 3000
= `450
(iv) Value of output produced in the economy 150
(iii) National Income (NNP at factor cost) = NDP –
(v) Current replacement cost of fixed capital 40
Sales Tax = 450 – 30 = `420
(vi) Net exports (–) 60
Q.14 Calculate GVA at factor cost of a firm: (`)
(vii) Net factor income from abroad 80
(i) Net indirect taxes 900
(viii) Sales by all firms in the economy 100
(ii) Price per unit of output 10
 UNIT-1 National Income and Related Aggregates EXAM HANDBOOK Economics XII (2021 Edition) 11

Solution: NNPmp = (ii) + (iii) + (i) + Change in stocks (iv – (ii) GDP by Income Method
viii) + (vi) – (v) + (vii) = 8000 + 3000 + 350 + (150 = Sum total of factor incomes paid by Firms A and B
– 100) + (– 60) – 40 + 80 = `11380 crore = Total wages received by workers of Firms A and
Q.19 Calculate “Depreciation” from the following data: B + Total operating surplus distributed by Firms A
(3 marks) and B
(` in crores) = (20 + 60) + (30 + 90) = 80 + 120 = `200 lakh
(i) Gross value of output 300 (iii) GDP by Expenditure Method = Sum of final
(ii) Net value added at factor cost (NVAfc) 100 expenditures, i.e. expenditures on goods and services for
(iii) Subsidies 15 end use. Here, the final expenditure is expenditure
(iv) Intermediate Consumption 185 by consumers on cloth, therefore, GDP = `200
Solution: NVAfc (ii) = (i) – (iv) – Depreciation + (iii) lakh
100 = 300 – 185 – Depreciation + 15 Thus, all the three methods give the same value of
Depreciation = 300 – 185 + 15 – 100 = `30 crore GDP.
Q.20 Given the following date, find the values of ‘Operating Q.22 Suppose only one Product X is produced in the
Surplus’ and ‘Net Exports’ (6 marks) country. Its output during the year 2017 and 2018 was
(in `crore) 100 units and 110 units respectively. The market price of X
during the years 2017 and 2018 were `50 and `55 per unit
(i) Wages and Salaries 2,400
respectively. Calculate the percentage change in real GDP
(ii) National Income 4,200
and nominal GDP in year 2018 using 2017 as the base
(iii) Net Exports ?
year. (4 marks)
(iv) Net Factor Income from Abroad 200
Solution:
(v) Gross Domestic Capital Formation 1,100
(vi) Mixed Income of Self-Employed 400 Year Output Price Real GDP Nominal GDP
(vii) Private Final Consumption Expenditure 2,000 2017 100 50 5000 5000
(viii) Net Indirect Taxes 150 2018 110 55 5500 6050
(ix) Operating Surplus ?
Percentage change in Real GDP
(x) Government Final Consumption Expenditure 1,000
= D in real GDP/Base year real GDP × 100
(xi) Consumption of Fixed Capital 100
= 500/5000 × 100 = 10%
(xii) Profits 500
Percentage change in Nominal GDP
Solution: National income (ii) = (i) + Operating Surplus +
= D in nominal GDP/Base year nominal GDP × 100
(vi) + (iv)
= 1050/5000 × 100 = 21%
Operating surplus = (ii) – (iv) – (vi) – (i)
Q.23 Use the following information of an imaginary country:
= 4200 – 200 – 400 – 2400 = `1200 crores
National Income (ii) = (vii) + (x) + (v) + Net Year 2017-18 2018-19 2019-20
Exports – (xi) – (viii) + (iv) Nominal GDP 6.5 8.4 9
Net Exports = (ii) – (vii) – (x) – (v) + (xi) + (viii) –
GDP deflator 100 140 125
(iv)
= 4200 – 2000 – 1000 – 1100 + 100 + 150 – 200 (i) For which year is real GDP and nominal GDP same
= `150 crores and why?
Q.21 Suppose there are only two firms, A and B in an imaginary (ii) Calculate real GDP for the given years. Is there any
economy. Firm A uses no raw material and produces cotton year for which real GDP falls? (4 marks)
worth `50 lakhs. Firm A gives `20 lakhs to the workers as Solution:
wages and keeps the remaining `30 lakhs to be distributed (i) For the year 2017-18, real GDP and nominal GDP are
as rent, interest and profits. Firm A sells its cotton to firm B, same as it is the base year and thus, GDP deflator is 100.
who uses it to produce cloth. Firm B sells the cloth produced (ii)
to consumers for `200 lakhs and gives `60 lakhs as wages and
Year 2017-18 2018-19 2019-20
keeps the remaining income generated as profits. Assuming
no depreciation and indirect taxes or subsidies, calculate Nominal GDP 6.5 8.4 9
GDP by three methods. (6 marks) GDP deflator 100 140 125
Ans. (i) GDP by Value Added Method Real GDP = (Nominal 6.5 6 7.2
Value added (VA) = Value of output – Intermediate GDP/GDP deflator)
consumption × 100
VA by Firm A = 50 – 0 = `50 lakh
VA by Firm B = 200 – 50 = `150 lakh The real GDP declined in the year 2018-19. It is due to high
rate of inflation. Price level has risen by 40% between 2017-18
GDP = VA by Firm A + VA by Firm B = 50 + 150
and 2018-19.
= `200 lakh
 12 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

Q.24 Suppose the Gross Domestic Product (GDP) of 9. `2,000 note lying in wallet of Rohini, a student is an
Nation X was `2,000 crores in 2018-19, whereas the example of ____________ (stock/flow) variable.
Gross Domestic Product of Nation Y in the same year was 10. The sum of factor payments is equal to ___________.
`120,000 crores. If the Gross Domestic Product of Nation (a) Domestic Income
X rises to `4,000 crores in 2019-20 and the Gross Domestic (b) National Income
Product of Nation Y rises to `200,000 crores in 2019-20. (c) Per Capital Real Income
Compare the rate of change of GDP of Nations X and Y,
(d) Per Capital Nominal Income
taking 2018-19 as base year. (4 marks)
11. Combined factor income, which can’t be separated
Solution:
into various factor income components is known as
Output 2018-19 2019-20 Growth Rate of GDP __________.
Change in GDP 12. When Nominal Gross Domestic Product (GDP) is
= × 100
Base year GDP `840 crores and price Index is 120, then the Real Gross
(Base year = 2018-19) Domestic product (GDP) will be _________.
100 `2,000 `4,000 = 2000/ 2000 × 100 (a) `700 crores (b) `900 crores
crores crores = 100% (c) `800 crores (d) `500 crores
13. State, whether the following statement is true or false:
110 `1,20,000 `2,00,000 = 80,000/ 1,20,000 × 100
‘Purchase of machinery by a producer is an intermediate
crores crores = 66.67%
good.’
Nation X has registered a GDP growth rate of 100% and has 14. Which of the following statement is incorrect?
performed better on the front of GDP rise as compared to (a) Gross Domestic Product (GDP) at Market price =
Nation Y that has registered a GDP growth rate of 66.67%. GDP at factor cost plus Net Indirect taxes.
(b) Net National Product (NNP) at Market price =
NNP at factor cost.
(c) Gross National Product (GNP) at Market price =
Objective Type Questions GDP at Market price plus Net factor income from
abroad.
1. Inventory is a ___________ concept whereas the change (d) Net National Product (NNP) at factor cost =
in inventory is a ___________ concept. National Income.
(a) stock, flow (b) flow, stock 15. Which of the following is not a factor payment?
(c) stock, stock (d) flow, flow (a) Free uniform to defence personnel
2. State whether the following statement is true or false (b) Rent paid to the owner of a building
“Industrial waste driven into rivers is an example of (c) Salaries to the Members of Parliament
positive externality.”
(d) Scholarship given to the students
3. If in an economy the value of Net Factor Income from
16. Net Domestic Fixed Capital Formation + Change in
Abroad is `200 crores and the value of Factor Income to
stock = _________.
Abroad is ` 40 crores. Identify the value of Factor Income
17. Rent + Interest + Profit = _________.
from Abroad.
18. If tea leaves are used in a restaurant for tea brewing , and
(a) `200 crore (b) `160 crore
the drinkable tea is sold to the customers, then the tea
(c) `240 crore (d) `180 crore
leaves will be________________.
4. GNP defiator is represented by which of the following formula?
(a) Final goods (b) Intermediate good
(a) Nominal GNP/Real GNP × 100
(c) Consumption goods (d) Capital goods
(b) Real GNP/Nominal GNP ×100
19. All the capital goods produced in a year do not constitute
(c) Real GNP/ Change in rate of inflation × 100 net addition to the capital stock already existing. True /
(d) Change in rate of inflation/ Real GNP × 100 False?
5. State, whether the following statement is true or false: 20. Which of the following does not explain the concept of
‘Inventory is a stock variable.’ depreciation?
6. State whether the following statement is true or false: (a) An annual allowance for wear and tear of a capital good.
“Expected obsolescence is included in depreciation”. (b) Cost of the capital good (minus scrap value) divided
7. A car purchased by a household is a __________. by number of years of its useful life.
(a) Single use capital good (c) Unexpected or sudden destruction or disuse of capital
(b) Single use consumer good as can happen with accidents, natural calamities etc.
(c) Durable consumer good (d) Maintenance and replacement cost of existing capital
(d) Semi-durable consumer good goods.
8. State, whether the given statement is true or false : 21. A firm produces `100 worth of goods per year, `20 is
‘Unexpected obsolescence is a component of depreciation.’ the value of intermediate goods used by it during the year
 UNIT-1 National Income and Related Aggregates EXAM HANDBOOK Economics XII (2021 Edition) 13

and `10 is the value of capital consumption. The net base year) was 120. How much amount the consumer had
value added will be: to spend on purchase of the same basket of commodities
(a) `100 (b) ` 80 in the year 2019-20?
(c) `70 (d) `130 (a) `1,167 (b) `1,680
22. Production of a firm during a year – Sale of the firm (c) `1,520 (d) `1,280
during the year = ___________ ? 38. Which of the following is a flow concept?
23. Wages earned by a citizen of India working is Saudi (a) Foreign exchange reserves
Arabia will be included in GDP of India. True/ False ? (b) Inventory
24. The profits earned by the Korean-owned Hyundai car (c) Capital
factory in India will be included in the National income (d) Exports
of India. True/False? 39. Which of the following will be included in gross national
25. Depreciation is deducted from GDP while calculating product of India?
national income because ______________. (a) Profits earned by a foreign company in India
26. Market prices include: (b) Salary paid to Americans working in Indian Embassy
(a) Subsidies in America
(b) Indirect taxes (c) Earnings from sale of bonds to the investors
(c) Intermediate consumption (d) None of the above
(d) Depreciation 40. Which of the following will be included in national income?
27. Indirect taxes are deducted from NNP at market prices to (a) Money receipt from sale of old car
calculate national income because _____________ . (b) Scholarships received by students
28. That part of NNP which actually accrues to the owners (c) Remittances from abroad
of factors of production is called ___________ . (d) Free services of owner occupied building
29. Prizes received by the household from government and 41. Losses are classified as:
firms are included in National Income. True/False? (a) Stock variable (b) Flow variable
30. GDPmp includes market value of all final goods and (c) Either (a) or (b) (d) Neither (a) nor (b)
services produced by the normal residents or the non-
42. Unforeseen obsolescence of fixed capital assets during
residents in a country. True/False?
production is:
31. _____________ is the income earned by the factors of
(a) Consumption of fixed capital
production in the form of wages, profits, rent, interest,
(b) Capital loss
etc, within the domestic territory of a country.
(c) Income loss
32. ______ is the value of all the final goods and services
that are produced by the normal residents of India and (d) None of the above
is measured at the market prices, in a year, regardless of 43. Foreign embassies in India are a part of India’s :
whatever they are located within the economic territory (a) Economic territory (b) Geographical territory
or abroad. (c) Both (a) and (b) (d) None of the above
33. If the nominal GDP of the current year is double the 44. Goods purchased for the following purpose are final
nominal GDP of the base year, the volume of production goods:
of the country must have doubled. True/False? (a) For satisfaction of wants
34. Suppose a country produces bread only. In the year 2018‑ (b) For investment in firm
19 it had produced 1,000 units of bread, price was `10 (c) Both (a) and (b)
per bread. In 2019-20, it produced 1100 units of bread (d) None of the above
at price of `12 per bread. In 2019-20, the nominal and 45. State giving reason whether the following statement is
real GDP are: True or False: " National income is always more than the
(a) `10,000 and `10,000 domestic income."
(b) `10,000 and `11,000 46. Market price and factor cost will be equal when ______.
(c) `13, 200 and `10,000 47. Which of the following transactions is not included in
(d) `13,200 and ` 11,000 national income?
35. The ratio of nominal to real GDP is a well-known index (a) Payment of interest by a private firm
of prices, called______________. (b) Payment of interest by banks on deposits
36. If the GDP deflator is 150% and real GDP is `1,100 the (c) Interest paid by an individual on a car loan taken
nominal GDP will be: from a bank
(a) `733 (b) `1,650 (d) None of the above
(c) `1,100 (d) `2,750 48. Which of the following transactions is not included in
37. A representative consumer had to spend `1,400 on purchase national income?
of a given basket of commodities in the year 2015-16. Due (a) Brokerage paid to broker for facilitating sale of second
to inflation, CPI of the year 2019-20 (taking 2015-16 as hand goods
 14 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

(b) Payment of corporation tax by firms to the government 61. Depreciation is also known as:
(c) Interest paid by productions units to households (a) Capital loss (b) Unforeseen obsolescence
(d) Interest paid by banks on deposits by individuals (c) Capital allowance (d) Both (a) and (b)
49. Which one of the following is not a part of a country’s 62. If Net factor income to abroad is (–) `120 crores, factor
Net Domestic Product at market price’? income from abroad is `150 crores and domestic income
(a) Depreciation is `4,500 crores, National Income will be:
(b) Indirect tax (a) `4,380 crores (b) `4,620 crores
(c) Net exports (c) `4,700 crores (d) `4,300 crores
(d) Net change in stocks 63. If GDPmp is `5,000 crores, intermediate consumption is
`2,500 and the ratio of sales to change in stock is 2 : 1,
50. Which one of the following is an intermediate expenditure?
then sales will be:
(a) Expenditure on purchase of furniture by a firm for its
(a) `4,000 (b) `5,000 (c) `3,000 (d) `2,000
own use
64. While calculating gross domestic capital formation,
(b) Expenditure on maintenance by a firm
exports are included because:
(c) Expenditure on purchase of tractor by a firm for its
(a) Exporters are paid for it.
own use
(b) It is an expenditure on domestic product.
(d) Machine bought by a household
(c) It is a final expenditure by the buyers.
51. National income is the sum of factor incomes accruing to:
(d) Exports result in expenditure.
(a) Nationals
65. NDPmp is the sum up of operating surplus, compensation of
(b) Economic territory employees, mixed income and Net Indirect Tax. (True/False)
(c) Residents 66. Salary of an Indian working in Russian embassy in India
(d) Both residents and non-residents is included in National Income of India. (True/False)
52. State giving reason whether the following statement is 67. If NDPfc = `80 crore, Net indirect tax = `10 crore, Net
True or False: factor income from abroad = (–)`10 crore, then NNPmp
Purchase of car by a household is a part of gross domestic = `70 crore. (True/False)
capital formation. 68. Match the following:
53. State giving reason whether the following statement is (a) Value addition (i) Value of all final goods and services
True or False: produced in an economy during
Free services provided by the government will not be an accounting year
included in national income. (b) Income from property (ii) Excess of value of output
54. Market price is less than factor cost if ___________. and entrepreneurship over the value of intermediate
55. Gross domestic capital formation is less than gross fixed consumption
capital formation when ________________ . (iii) Operating surplus
56. GDP can be greater than GNP when ___________. (iv) Wages , profits and rent
57. National income at current prices is higher than national 69. Match the following:
income at constant prices during a period of:
(a) Purchase of food (i) Intermediate goods
(a) Rising prices
products by
(b) Falling prices household
(c) Constant prices (b) Milk purchased by a (ii) Final goods
(d) Both (a) and (b) tea-seller
58. Nominal GDP can be less than Real GDP when ______. (iii) Capital goods
59. Net value added at factor cost = `100 crores, Depreciation
(iv) Consumer durables
= `30 crores, Subsidies = `15 crores and Intermediate
Consumption = `185 crores, then “Gross value of output” is: 70. Match the following:
(a) `300 crores (a) Market value of goods (i) Gross Domestic Product
(b) `330 crores and services produced
by a firm during an
(c) `130 crores
accounting year.
(d) `230 crores
(b) Money value of (ii) Value of output
60. Construction of a school building by the government will all final goods and
be part of: services produced in
(a) Domestic fixed capital formation an economy during
(b) Change in stock an accounting year.
(c) Government final consumption expenditure (iii) Value Addition
(d) Residential construction investment (iv) Domestic Income
UNIT-1 National Income and Related Aggregates EXAM HANDBOOK Economics XII (2021 Edition) 15

71. Match the following: 72. According to a report forwarded by the Reserve Bank of
(a) Excess of factor incomes (i) Operating surplus India, there was a fall in rate of inflation as measured by
(rent,wages, interest, Consumer Price Index (CPI) on year-on-year basis to 5%
profit) earned from abroad from 8% in the previous year.
over factor incomes paid to Which of the following statements represents the situation?
abroad. (a) CPI has fallen.
(b) Excess of the value of (ii) Net income from property (b) CPI has risen at a rate lower than the preceding year.
exports over the value of and entrepreneurship (c) CPI is constant.
imports of a country in an
(d) None of the above
accounting year
73. ___________ is the market value of the final goods
(iii) Net exports
and services produced within the domestic territory of
(iv) Net factor income from a country during an accounting year, as estimated at the
abroad current year prices.

Answer Key
Objective Type Questions 42. (b) Capital loss
1. (a) stock, flow. 2. False 43. (b) Geographical territory
44. (c) Both (a) and (b)
3. (c) `240 crores 4. (a) Nominal GNP/Real GNP × 100
45. False: National income can be less than domestic income when
5. True 6. True
net factor income from abroad (NFIA) is negative. National
7. (c) Durable consumer good 8. False income can also be equal to domestic income if NFIA is zero.
9. Stock 10. (a) and (b) 46. Net indirect tax (indirect tax – subsidy) is zero.
11. Mixed income of self employed. 47. (c) Interest paid by an individual on a car loan taken from a bank
12. (a) `700 crores 48. (b) Payment of corporation tax by firms to the government
13. False 49. (a) Depreciation
14. (b) Net National Product (NNP) at Market price = NNP at factor 50. (b) Expenditure on maintenance by a firm
cost.
51. (c) Residents
15. (d) Scholarship given to the students
52. False: It is a private final consumption expenditure.
16. Net Domestic Capital Formation
53. False: It will be included in national income as it is government
17. ‘Operating surplus final consumption expenditure.
18. Intermediate good 54. Net indirect tax is negative, i.e. subsidy is more than indirect taxes.
19. True 55. Net change in stock is negative, i.e., when opening stock exceeds closing stock.
20. (c) Unexpected or sudden destruction or disuse of capital as can 56. Factor income paid to abroad is greater than factor income received
happen with accidents, natural calamities etc. from abroad, i.e., when net factor income from abroad (NFIA) is
21. (c) `70 negative.
22. Change in inventories of the firm during a year. 57. (a) Rising prices
23. False 58. Prices in the current year are less than the prices in the base year.
24. False 59. (a) `300 crores
25. depreciation does not become part of anybody’s income Explanation: NVAFC = Gross Value of Output – Intermediate
26. (b) Indirect taxes consumption – Depreciation + Subsidies
27. Indirect taxes accrue to the government. It is a transfer payment, 100 = Gross Value of Output – 185 – 30 + 15
not a factor payment . Gross Value of Output = 100 + 185 + 30 – 15 = 300
28. Net National Product at factor cost or National Income. 60. (c) Government final consumption expenditure
29. False (It is a transfer payment.) 61. (c) Capital allowance
30. True 62. (b) `4,620 crores
31. Net Domestic Product at factor cost (NDPfc) 63. (b) `5,000
32. GNP at market prices 64. (b) It is an expenditure on domestic product.
33. False 65. True
34. (d) `13,200 and ` 11,000 66. True
35. GDP deflator 67. False
36. (b) `1,650 NNPmp = NDPfc + NFIA + Net Indirect Tax
37. (b) `1,680 = –80 + (–10) + 10 = `80 crore
38. (d) Exports 68. (a) – (ii); (b) – (iii) 69. (a) – (ii); (b) – (i)
39. (d) None of the above 70. (a) – (ii); (b) – (i) 71. (a) – (iv); (b) – (iii)
40. (d) Free services of owner occupied building 72. (b) CPI has risen at a rate lower than the preceding year.
41. (b) Flow variable 73. Nominal GDP
 2
16 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

Unit 6 Marks

Money and
Banking

Revised CBSE Syllabus 2020-21 For CBSE Economics Examination 2021

 Money - meaning and supply of money - Currency held by the public and net demand deposits held by
commercial banks.
 Money creation by the commercial banking system.
 Central bank and its functions (example of the Reserve Bank of India): Bank of issue, Govt. Bank, Banker's
Bank, Control of Credit

2.1 Money and Supply of Money that commercial banks must keep as cash reserves with
the Central Bank. SLR is the fraction of net total demand
Anything which is commonly accepted as a medium of and time deposits that commercial banks must keep with
exchange is called money. themselves in the form of liquid assets.
Money supply refers to the total quantity of money in
Total credit creation = Initial deposits ×1/LRR
circulation in the economy at a given point of time. Thus,
it is a stock variable. It has two components: Suppose the initial deposits are `10,000 and LRR is 20%. The
(i) Currency held by the public (CU): The currency issued banks will keep 20% of the deposits i.e. `2,000 as reserves
by the central bank (Reserve Bank of India) can be held and will lend the remaining amount of `8000. Those who
by the public or by the commercial banks, and is called borrow will spend the money for making payments.
the high‑powered money. It is assumed that the entire `8000 comes back as secondary
(ii) Net demand deposits held by commercial banks (DD): deposits to the banking system. Now the banks will again
Demand deposits are the deposits which can be easily keep 20% of `8000 i.e. `1600 as reserves and lend out
withdrawable on demand, by cheque or otherwise, by `6400.This process continues till total reserves become equal
the depositor from his/her bank account, e.g. current to initial reserves. Total money creation = Initial deposit × 1/
account and savings account deposits. LRR = `10,000 × 1/20% = `10,000 × 5 = `50,000.
Demand deposits are created by the commercial banks Hence, the initial deposit of `10,000 has led to the total
and are called bank money. money supply of `50,000.
Time deposits are those deposits in banks which have a fixed Rounds Deposits (`) Loans (`) Reserves (`)
period of maturity, e.g., Fixed Deposits (FD). I 10000 8000 2000
II 8000 6400 1600
2.2 Money Creation by Banks
III 6400 5120 1280
Money creation (or credit creation or deposit creation) by ... ... ... ...
commercial banks is determined by : Total 50000 40000 10000
1. The amount of the initial deposits/primary deposits. How does legal reserve ratio influence the process of
Primary deposits refer to initial deposits with the commercial banks. credit creation? Credit creation is inversely related to the
2. Legal Reserve Ratio (LRR)/Reserve Deposit Ratio legal reserve ratio.
Total credit creation = Initial Deposits × 1/LRR
LRR is the minimum reserves which a commercial bank For example, suppose LRR is 0.2 and initial deposits are
must maintain as per the instructions of the central bank. `10,000. = 10,000 × 1/0.2 = 10,000 × 5 = `50,000
There are two components of Legal Reserve Ratio (LRR):
Now suppose, if the LRR is increased by the Central Bank
Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
CRR is the fraction of net total demand and time deposits
to 0.5 and initial deposits remain the same, i.e. `10,000.
Now, total credit creation = Initial Deposits × 1/ LRR
 UNIT-2 Money and Banking EXAM HANDBOOK Economics XII (2021 Edition) 17

= 10,000 × 1/0.5 = 10,000 × 2 = `20,000. • Buys and sells government securities in the open
Thus, any increase in LRR will decrease the credit creation market.
power of the commercial banks (banking system). • Advises the government regarding the money market,
Define Money Multiplier. What role does it play in determining capital market and also on policy matters.
the credit creation power of the banking system? 3. Bankers’ Bank and Supervisor/Regulator: As the
Money Multiplier (or Credit Multiplier or Deposit Multiplier) banker to the banks, the Central Bank performs the
is the process by which the commercial banks create credit, following functions:
based upon the reserve ratio and initial deposits. • Holds surplus cash reserves of commercial banks.
The credit creation by commercial banks depends on • Gives loans to the commercial banks when they are
money multiplier as it is inversely related to LRR. in need of funds.
Money Multipler = 1/Legal Reserve Ratio • Provides a large number of routine banking functions
Higher the value of money multiplier, higher will be the to the commercial banks, like cheque clearing house
total credit created and vice-versa. facility, remittance facilities, etc.
Total credit creation = Initial deposits × Money Multipler (1/LRR) In its supervisory/regulatory role, the central bank
For example, suppose the LRR is 0.5 and initial deposit is performs the following functions:
`10,000. Money multiplier = 1/LRR = 1/0.5 = 2; andTotal • Ensures that the commercial banks follow all the rules
credit created = `10,000 × 2 = `20,000. regarding their licensing, branch expansion etc.
Whereas, suppose LRR is decreased by the Central Bank • Gives instructions for the smooth functioning of
to 0.2 and initial deposits remain the same, i.e. `10,000. the banking system.
Then, Money multiplier = 1/0.2 = 5; and
Central Bank acts as the ‘Lender of Last Resort’: It refers to the
Total credit created = `10,000 × 5 = `50,000.
role of the Central Bank (RBI), of being ready to lend to banks,
Thus, with the same initial deposit total credit creation especially when a bank is faced with unanticipated severe
increases with an increase in the value of money multiplier. financial crises, and due to this central bank is said to be the
‘lender of last resort’. If the central bank refuses to extend this
2.3 Central Bank and its Functions help, there is no option for the bank but to shut down.
The Central Bank is the apex institution of a country’s 4. Controller of Credit: The primary objective of credit
monetary system. India’s central bank is the ‘Reserve Bank of control is to remove causes responsible for instability
India’. It is the apex bank engaged in regulating commercial in price fluctuations which in turn are related to the
banks. Four main functions of Central Bank are: supply of money. By controlling credit, the Central
1. Bank of Currency Notes Issue: In most of the economies Bank can exercise an effective control over economic
across the world, there exists a centralised system of activity and mobilise it in the desired direction.
currency issues. Central Bank of a country has monopoly Central Bank regulates the volume and use of credit by
over the currency issue. It has the sole responsibility using quantitative and qualitative tools.
of printing and putting in circulation all types of Quantitative tools control the extent of money supply by
currency notes (with a few exceptions). changing the Cash Reserve Ratio (CRR) or Statutory
• This centralised and monopolised system of currency Liquidity Ratio (SLR) or Bank Rate or Repo Rate or
notes issue ensures uniformity of the currency system. Reverse Repo Rate, or through Open market operations
• It also helps in easier control over the monetary system. (OMO).
• This function of the central bank also builds faith Qualitative tools include persuasion by the Central Bank
in the currency system of the economy. in order to make commercial banks discourage or encourage
2. Government’s Bank, Agent and Advisor: Central Bank lending which is done through margin requirement,
acts as the Government’s banker (both central as well as moral suasion, etc.
state governments) and performs following functions:
• Provides credit/loans to the government. Objective Type Questions
• Accepts receipts and makes payments on behalf of the
government. 1. Value of Money Multiplier _______ (increases/decreases/
remains unchanged) with an increase in Cash Reserve Ratio.
• Keeps accounts of government and accepts deposits
2. State, whether the following statement is true or false:
from government. ‘All financial Institutions are banking institutions.’
As the agent and advisor to the government, the 3. Two components of money supply are _____ and _____.
Central Bank performs following functions: 4. Supply of money refers to _________.
• Manages the public debts for the government (a) currency held by the public
 18 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

(b) currency held by Reserve Bank of India (RBI) (b) Deposit ratio

(c) currency held by the public and demand deposits of (c) Cash reserve ratio
the public with commercial banks (d) Legal reserve ratio
(d) currency held in the government account 17. Which of the following is not a Quantitative Method of
5. The value of money multiplier is equal to ___________. credit control?
6. Loans offered by commercial banks _________ (increase/ (a) Open Market Operation
decrease) the money supply in the economy. (b) Margin Requirements
7. __________ is the main source of money in an economy. (c) Variable Reserve Ratio
(a) Central bank (b) Commercial banks (d) Bank Rate Policy
(c) Both (a) and (b) (d) Government 18. Who regulates money supply?
8. The interest rate paid by the banks to depositors is lower (a) Government of India (b) Reserve Bank of India
than the rate charged from the borrowers. This difference (c) Commercial Banks (d) Planning Commission
between these two types of interest rates is called ______. 19. State whether the following statement is true or false:
9. When the banks lend to any person, a new deposit is Currency created by the Central Bank is called bank money.
opened in that person’s name. Thus, money supply in the 20. Signature of _______ appears on a `2,000 currency note.
economy increases to old deposits plus new deposits plus 21. The formula used for calculating money multiplier :
_______. (a) 1/Cash Reserve Ratio
10. There is a limit to money or credit creation by banks, and (b) 1/Statutory Liquidity Ratio
this is determined by the central bank (RBI). The RBI (c) 1/Legal Reserve Ratio
decides a certain percentage of (i) _______ which every (d) All of the above
bank must keep as reserves, called (ii) _______. 22. Repo rate relates to ________.
11. If the Reserve Ratio is 20% and the primary deposits are `100, (a) Short-term borrowings by commercial banks
the total lending by the banking system will be ______.
(b) Long-term borrowing by commercial banks
12. M1 measure of money supply is defined as follows:
(c) Disinvestments
M1= CU +DD where, CU is Currency (notes plus coins)
(d) Dis-savings
held by the public and DD is ‘net’ demand deposits held
23. An increase in Legal Reserve Deposit Ratio increases the
by commercial banks. What does word ‘net’ imply here?
credit creation power of the commercial banks (banking
13. The currency issued by the central bank can be held by the
system). True/False? Give reason.
public or by the commercial bank, and is called the ______ .
24. Total deposits created by commercial banks is `12,000 crore
14. Demand deposits include _______.
(a) Saving account deposits and fixed deposits and LRR is 25%. Calculate the amount of initial deposits.
(b) Saving account deposits and current account deposits (a) `6000 crore (b) `4000 crore
(c) Current account deposits and fixed deposits (c) `5000 crore (d) `3000 crore
(d) All types of deposits 25. __________ measures the amount of money that the
15. Deposit creation by banks comes to an end when _____. banks are able to create in the form of deposits with every
(a) fresh deposits with banks become zero initial deposit.
(b) legal reserve ratio becomes zero 26. If Reserve Deposit Ratio is 12.5%, the value of money
(c) money multiplier becomes zero multiplier will be:
(d) total reserves equal initial deposits (a) 2 (b) 5 (c) 8 (d) 10
16. The ratio of net total deposits that a commercial bank 27. ______________ is the rate of interest at which central
has to keep with Reserve Bank of India is called: bank lends to the commercial banks for long-term.
(a) Statutory liquidity ratio 28. _____ is the agent and adviser to the Government of India.

Answer Key
Objective Type Questions 14. (b) 15. (d) 16. (c) 17. (b) 18. (b)
19. False: The currency cre­ated by the Central bank (Reserve Bank of India
1. Decreases 2. False
in India) is called High Powered Money.
3. (i) Currency held with public
20. Governor of Reserve Bank of India (RBI)
(ii) Demand deposits of the public with commercial banks.
21. (c) 1/Legal Reserve Ratio
4. (c)
22. (a) Short-term borrowings by commercial banks
5. the reciprocal of the reserve ratio or 1/Reserve Ratio
23. False: An increase in Legal Reserve Deposit Ratio will decrease the credit
6. Increase 7. (c) Both (a) and (b) creation power of the commercial banks (banking system) since credit
8. ‘spread’ 9. Currency held by the public creation is inversely related to the Legal Reserve Ratio.
10. (i) Net total demand and time deposits Credit creation = Primary deposits × 1/ Legal Reserve Ratio
(ii) Legal Reserve Ratio 11. `400 24. (d) `3000 crore
12. Only deposits of the public held by the banks are to be included in money 25. Credit multiplier/Money multiplier/Deposit multiplier
supply. The interbank deposits, which a commercial bank holds in other 26. (c) 8
commercial banks, are not to be regarded as part of money supply.
27. Bank Rate
13. high powered money
28. Reserve Bank of India. (RBI)
UNIT-6 Development Experience (1947-90) and
Economic Reforms since 1991 Unit 6
EXAM HANDBOOK Economics XII (2021 Edition) 12 Marks
47

Development
Experience (1947-90)
and Economic
Reforms since 1991

Revised CBSE Syllabus 2020-21 For CBSE Economics Examination 2021

 A brief introduction of the state of Indian economy on the eve of independence.
 Indian economic system and common goals of Five Year Plans.
 Main features, problems and policies of agriculture (institutional aspects and new agricultural strategy),
industry (IPR 1956; SSI – role & importance) and foreign trade.
 Economic Reforms since 1991: Features and appraisals of liberalisation, globalisation and privatisation (LPG policy);
 Concepts of Demonetization and GST

State of Indian economy on the eve Prolonged morbidity may lead to mortality. Morbidity
6.1 rate refers to the number of people who have a
of independence disease compared to the total population.
Sequence of Events 6. Mortality rate : The word ‘mortality’ refers to the annual
I Introduction of the railways in India by the British 1850 number of deaths (from a disease or in general) per
1,000 people.
II Opening of the Suez Canal 1869
7. Infant Mortality Rate : It is the number of deaths of
III Various details about the population of British 1881
infants before reaching the age of one, in a particular
India were first collected through a census
year, per 1,000 live births during that year.
IV The Tata Iron and Steel Company (TISCO) was 1907
incorporated 8. Maternal Mortality Rate : It is the relationship
between the number of maternal deaths due to
V Second stage of demographic transition in India 1921
childbearing by the number of live births or by the
sum of live births and foetal deaths in a given year.
Definitions of KEY TERMS 9. Land/Revenue Settlement: It refers to different systems
in which revenues were to be collected from each
1. Commercialisation of agriculture: Change in the cropping parcel of land – (i) system of permanent settlement,
pattern from food crops to commercial crops/cash which is also known as the zamindari system (ii)
crops is called commercialisation of agriculture. It ryotwari system (a system of revenue settlement entered
implies production of crops for the market rather into by the government with individual tenants) (iii)
than for self-consumption i.e. family consumption. mahalwari system (a system of revenue settlement
2. Capital goods industry: Capital goods industry entered into by the government with a mahal).
means the industry which can produce machine 10. Agricultural Productivity: Agricultural Productivity refers
tools which are, in turn, used for producing articles to output per hectare of land.
for current consumption.
3. Life Expectancy: Life Expectancy is defined as number
of years, on an average an individual is expected to live.
4. Occupational Structure: It refers to the distribution
of working persons across different industries and
Exercises
sectors – agriculture, manufacturing and services sectors. Q.1 What was the focus of the economic policies pursued
5. Morbidity : It is the propensity to fall ill. It affects a by the colonial government in India? What were the
person’s work by making him/her temporarily disabled. impacts of these policies? (NCERT) (3)
 48 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

Ans. The economic policies pursued by the colonial government (3) Absence of adequate infrastructure – lack of investment
in India were more concerned with the protection and promotion in terracing, flood-control, drainage and desalinisation of soil.
of the economic interests of their home country than with the (4) Even commercialisation of agriculture couldn’t help farmers
development of the Indian Economy. in improving their economic condition. Instead of producing
Such policies brought about a fundamental change in the food crops, now they were producing cash crops which
structure of the Indian economy – transforming the country were to be ultimately used by British industries back home.
into (i) supplier of raw materials, and (ii) and consumer of Q.5 “India could not develop a sound industrial base
finished products from Britain. under the British colonial rule. Even as the country’s world
Q.2 The traditional handicrafts industries were ruined famous handicraft industries declined, no corresponding
under the British rule. Do you agree with this view? Give modern industrial base was allowed to come up to take
reasons in support of your answer. (NCERT) (4) pride of place so long enjoyed by the former.”
Ans. India was well-known for its handcraft industries in the In the light of the above statement, critically appraise
fields of cotton and silk textiles, metal and precious stone works some of the shortfalls of the industrial policy pursued by
etc. These products enjoyed a world wide market because of the British colonial administration. (6)
(i) reputation of the fine quality of material used and; (ii) high
standards of craftsmanship seen in all imports from India. Ans. Some shortfalls of the industrial policy pursued by the
British colonial administration are as follows:
However, during the British rule, the country’s world famous
handicraft industries were ruined, which not only created (1) Industrial development remained very slow.
massive unemployment in India but also a new demand in • Initially, this development was confined to the setting
the Indian consumer market — increasing imports of cheap up of cotton and jute textile mills.
manufactured goods for Britain. • Subsequently, the iron and steel industries began
Q.3 State the two-fold motive for the systematic destabilisation coming up in the beginning of the 20th century,
of indigenous Indian industries in the British era. (3) e.g. TISCO was incorporated in 1907. A few other
Ans. Two-fold motive behind systematic destabilisation of industries in the fields of sugar, cement, paper, etc.
indigenous Indian industries in the British era was. came up after the second world war.
• To get raw material from India at cheaper rates to be (2) Lack of capital goods industries – There was hardly
used for upcoming modern industries in Britain. any capital goods industry to help promote further
• To sell finished products produced by the British industrialisation in India.
industries in Indian market at higher prices. (3) Low growth rate — The growth rate of the new industrial
Q.4 “During the British colonial rule, despite being sector and its contribution to GDP remained very small.
the occupation of about 85% of India’s population, the (4) Very limited area of operation of the public sector —
agriculture sector continued to experience stagnation and, railways, power generation, communications , ports and
not infrequently, unusual deterioration. Agricultural some other departmental undertakings.
productivity became low.” Do you agree? What were the main Q.6 Comment upon any two salient features of the foreign
causes of India's agricultural stagnation/low productivity trade policy of India, on the Eve of Independence. (4)
during the colonial period? (6)
OR
Ans. The given statement is correct. During the British colonial
rule, India’s agricultural sector experienced stagnation and Indicate the volume and direction of foreign trade of
low productivity. The main causes of India’s agricultural India at the time of Independence. (4)
stagnation and low productivity are: OR
(1) Various systems of land/revenue settlement introduced What do you understand by the drain of Indian wealth
by the colonial government, particularly the zamindari during the colonial period? (3)
system. • The profit went to the zamindars instead of Ans. Salient features of foreign trade policy of India, on the
the cultivators. However, government and zamindars eve of independence, were:
did nothing to improve the condition of agriculture. •
(1) Britain’s monopoly over trade – British maintained
The main interest of the zamindars was only to collect rent
monopoly control over India’s exports and imports.
regardless of the economic condition of the cultivators.
More than half of India’s foreign trade was restricted
(2) Low levels of technology, lack of irrigation facilities and to Britain while the rest was allowed with a few other
negligible use of fertilizers – all contributed to the low countries like China, Ceylon (Sri Lanka) and Persia
level of agricultural productivity. (Iran)
UNIT-6 Development Experience (1947-90) and
Economic Reforms since 1991 EXAM HANDBOOK Economics XII (2021 Edition) 49

(2) India as exporter of raw material and importer of Ans. Yes, the positive contributions made by the British in
finished goods – India became an exporter of primary India are stated below:
products such as raw silk, cotton, wool, sugar, indigo, (1) Introduction of the railways in India: It was considered
jute, etc and an importer of finished consumer goods as the most important contribution of the British. It
like cotton, silk, and woollen clothes and capital goods enabled people to undertake long distance travel and
like light machinery produced in the factories of Britain. thereby break geographical and cultural barriers.
(3) India had huge export surplus during the colonial rule.
(2) Construction of modern roads: Prior to the British
But this surplus came of a huge cost to the country’s
rule, there was an acute shortage of all weather roads to
economy – export surplus did not result in any flow of
reach out to the rural areas during the rainy season. The
gold or silver into India. Rather, this was used to make
British constructed modern roads in India.
payments for the office expenses in Britain, expenses
(3) Development of the inland trade and sea lanes
on war, and the import of invisible items. All of these
(4) Introduction of electric telegraph and postal services
led to the drain of Indian wealth.
Secondly, Several essential commodities – food grains, Q.10“Under the colonial regime, basic infrastructure such
clothes, kerosene, etc. were scarcely available in the as railways, ports, water transport, posts and telegraph
domestic market. develop. However, the real motive behind infrastructure
development was not to provide basic amenities to the
Q.7 Give a quantitative appraisal of India’s demographic
people but to subserve various colonial interests.“
profile during the colonial period. (NCERT) (4)
What objectives did the British intend to achieve through
Ans. Salient features of India‘s demographic conditions
their policies of infrastructure development in India? (4)
during the British colonial rule:
Ans. The objectives that the British intend to achieve through
(1) High Birth Rate and High Death Rate: Various details
their policies of infrastructure development in India:
about the population of British India were first collected
(1) The introduction of railways by the British fostered
through a census in 1881. Second stage of demographic
commercialisation of Indian agriculture, which adversely
transition began after 1921.
affected the self-sufficiency of the village economies in
Due to absence or lack of adequate public health
India. The benefits of exports surplus did not accrue
facilities, water and air-borne diseases were rampant.
to the Indian people. It was used to make payments
Life expectancy was also very low – 44 years (in contrast
for office expenses in Britain, war expenses, etc.; all of
to the present 69 years).
which led to the drain of Indian wealth.
(2) High Infant Mortality Rate: The infant mortality rate
(2) The roads that were built primarily served the purposes
was quite alarming – about 218 per thousand in contrast
of mobilising the army within India and drawing out
to the present infant mortality rate of 33 per thousand.
raw materials from the country side to the nearest
(3) Low level of Literacy: Overall literacy level was less than railway station or the port to send these to England or
16%. Out of this, female literacy level was only about 7%. other foreign destinations.
(4) Prevalence of Rampant Poverty and Unemployment – (3) The inland waterways, at times, proved uneconomical
which contributed to the worsening profile of India’s as in the case of the coast canal on the Orissa coast,
population of the time. which had to be ultimately abandoned.
Q.8 Highlight the salient features of India’s pre- (4) The introduction of the expensive system of electric
independence occupational structure. (NCERT) (4) telegraph in India served the purpose of maintaining
Ans. The occupational structure of India on the eve of law and order by the British colonial government. The
independence had the following two main features: postal services, despite serving a useful public purpose,
(1) Predominance of agriculture sector: The agricultural remained all through inadequate.
sector accounted for the largest share of workforce with Q.11 The economic challenges before India at the time of
approximately three-fourth of the workforce depending independence were enormous. Do you agree? Underscore
on agriculture, directly or indirectly. some of India's most crucial economic challenges at the
(2) Growing regional variation: Due to rise of manufacturing time of independence. (6)
and services sector in some parts of India (like the then Ans. The given statement is correct. Some of India's most
Madras, Bombay and Bengal Presidencies) the dependency crucial economic challenges at the time of independence were:
ratio of workforce on agricultural sector declined. (1) Low level of economic growth and development — The
Q.9 Were there any positive contributions made by the country’s growth of aggregate real output was less than
British in India? Discuss. (NCERT) (4) 2% p.a coupled with about 0.5% p.a. growth in per
capital output.
 50 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

(2) The agricultural sector had surplus labour with extremely (b) Both Assertion (A) and Reason (R) are true and Reason
low productivity. Agricultural productivity was extremely (R) is not the correct explanation of Assertion (A).
low due to low levels of technology, lack of irrigation (c) Assertion (A) is true but Reason (R) is false.
facilities, negligible use of fertilisers, etc. (d) Assertion (A) is false but Reason (R) is true.
(3) The industrial sector was crying for modernisation, 6. Read the following statements - Assertion (A) and Reason
diversification, capacity building and increased public (R). Choose one of the correct alternatives given below:
investment. There were only a few industries in the fields Assertion (A): During British rule, India saw huge drain of wealth.
of cotton and jute textile, iron and steel, sugar, cement, Reason (R): India generated large export surplus during the period.
paper, etc. There was hardly any capital goods industry Alternatives:
to help promote industrialisation in India. (a) Both Assertion (A) and Reason (R) are true and Reason
(4) Foreign trade was oriented to feed the industrial revolution (R) is the correct explanation of Assertion (A).
in Britain. British maintained a monopoly control over (b) Both Assertion (A) and Reason (R) are true and Reason
India’s exports and imports. Huge export surplus generated (R) is not the correct explanation of Assertion (A).
from India‘s foreign trade was used to make payments for (c) Assertion (A) is true but Reason (R) is false.
office expenses in Britain, war expenses, etc.; all of which (d) Assertion (A) is false but Reason (R) is true.
led to the drain of Indian wealth. 7. Read the following statements - Assertion (A) and Reason
(R). Choose one of the correct alternatives given below:
OBJECTIVE TYPE QUESTIONS Assertion (A): During the British colonial rule in India,
Britishers built roads extensively to cover the nation.
1. _________ is one of the main positive contribution made by Reason (R): Roads were built by Britishers primarily to
the British in India. mobilise army.
2. Opening of __________ Canal significantly reduced the cost Alternatives:
of transportation of goods between Britain and India. (a) Both Assertion (A) and Reason (R) are true and Reason
3. India entered the ____________ stage of Demographic (R) is the correct explanation of Assertion (A).
Transition after the year 1921. (b) Both Assertion (A) and Reason (R) are true and Reason
(a) fourth (b) second (R) is not the correct explanation of Assertion (A).
(c) third (d) first (c) Assertion (A) is true but Reason (R) is false.
4. Read the following statements - Assertion (A) and Reason (d) Assertion (A) is false but Reason (R) is true.
(R). Choose one of the correct alternatives given below: 8. Read the following statements relating to industrial sector
Assertion (A): India became an exporter of primary products during British rule and choose the correct sequence of these
and an importer of finished consumer and capital goods statements.
produced in Britain. (i) Cheap imports of British manufactured goods increased
Reason (R): Restrictive policies of commodity production, in the country.
trade and tariff pursued by the colonial government adversely (ii) The growth rate of Industrial sector was very small.
affected the structure, composition and volume of India’s (iii) India was reduced to be mere exporter of raw material.
foreign trade. (iv) India faced shortage of locally made goods.
Alternatives: Alternatives:
(a) Both Assertion (A) and Reason (R) are true and Reason (a) (i), (ii), (iii), (iv) (b) (iv), (iii), (ii), (i)
(R) is the correct explanation of Assertion (A).
(c) (iii), (iv), (ii), (i) (d) (iii), (iv), (i), (ii)
(b) Both Assertion (A) and Reason (R) are true and Reason
(R) is not the correct explanation of Assertion (A). 9. Read the following statements relating to foreign trade during
British rule and choose the correct sequence of these statements.
(c) Assertion (A) is true but Reason (R) is false.
(i) India was exporter of products like raw silk, cotton etc.
(d) Assertion (A) is false but Reason (R) is true.
(ii) Britain maintained monopoly control over India’s foreign trade.
5. Read the following statements - Assertion (A) and Reason
(R). Choose one of the correct alternatives given below: (iii) India generated large export surplus
Assertion (A): Britishers destroyed indigenous handicraft (iv) Exports did not result in any flow of wealth into the country.
market in India Alternatives:
Reason (R) : India was made market for British manufactured (a) (i), (ii), (iii), (iv) (b) (iv), (iii), (ii), (i)
products (c) (ii), (i), (iii), (iv) (d) (iv), (i), (ii), (iii)
Alternatives: 10. Read the following statements relating to demographic
(a) Both Assertion (A) and Reason (R) are true and Reason condition of India during British Rule and choose the correct
(R) is the correct explanation of Assertion (A). sequence of these statements.
 UNIT-6 Development Experience (1947-90) and
Economic Reforms since 1991 EXAM HANDBOOK Economics XII (2021 Edition) 51

(i) Overall mortality rate was very high 15. Under the British colonial rule, the agricultural production
(ii) Water and airborne diseases were rampant decreased. True/False? Give reason.
(iii) Public health services were either unavailable or were inadequate 16. One of the significant drawbacks of the industrial policy
(iv) Infant mortality was at alarming level pursued by the British colonial administration was the very
Alternatives: limited area of operation of the public sector. This sector
(a) (i), (ii), (iii), (iv) remained confined only to the ____________.
(b) (iii), (ii), (i), (iv) 17. India’s demographic condition on the eve of independence
(c) (ii), (i), (iii), (iv) was characterised by:
(d) (iv), (i), (ii), (iii) (a)  High level of literacy, high mortality rates, high life
11. Arrange the following events of India before the independence expectancy and high level of poverty.
in chronological order: (b)  Low level of literacy, low mortality rates, low life
(i) The opening of the Suez Canal expectancy and Low level of poverty.
(ii) Introduction of the railways (c)  Low level of literacy, low mortality rates, high life
(iii) Second stage of demographic transition expectancy and high level of poverty.
(iv) Incorporation of the Tata Iron and Steel Company (d)  Low level of literacy, high mortality rates, low life
12. Write the correct sequence of alternatives given in Column II expectancy and high level of poverty.
by matching them with respective terms in Column I:
18. Name some notable economists who estimated India’s per
Column I Column II capita income during the colonial period.
A. India’s first official census (i) less than 2% 19. Name some modern industries which were in operation in
our country at the time of independence.
B. Introduction of the railways in India (ii) about 7%
20. When was India’s first official census operation undertaken?
C. India’s annual growth rate of aggregate (iii) 1850
21. Which is regarded as the defining year to mark the demographic
real output during colonial period
transition from its first to the second decisive stage?
D. Female literacy level at the time of (iv) 1881
independence
13. Write the correct sequence of alternatives given in Column II
Answer Key
by matching them with respective terms in Column I: 1. Introduction of Railways
2. Suez
Column I Column II 3. (b) second
A. Focus of the (i) To use a large export surplus to 4. (a) Both Assertion (A) and Reason (R) are true and Reason (R)
economic policies make payments for the expenses is the correct explanation of Assertion (A)
pursued by the incurred by an office set-up in 5. (a) Both Assertion (A) and Reason (R) are true and Reason (R)
colonial government British, expenses on war, and is the correct explanation of Assertion (A).
in India import of invisible items. 6. (b) Both Assertion (A) and Reason (R) are true but Reason (R)
is not the correct explanation of Assertion (A).
B. Motive of the British (ii) To reduce India to the status
7. (d) Assertion (A) is false but Reason (R) is true.
behind the systematic of a mere exporter of important
deindustrialisation in raw materials for the upcoming 8. (d) (iii), (iv), (i), (ii)
India modern industries in Britain. 9. (c) (ii), (i), (iii), (iv)
10. (b) (iii), (ii), (i), (iv)
C. Motive of the (iii) Protection and promotion
11. (ii), (i), (iv), (iii)
British behind of the economic interests of their
12. (iv), (iii), (i), (ii)
infrastructural home country then withe the
13. (iii), (ii), (iv), (i)
development in India development of the Indian economy.
14. (d) Both (b) and (c)
D. Motive of the (iv) To subserve various colonial 15. False: in absolute terms, the agricultural sector experienced
British behind interests, e.g. mobilising the army some growth due to the expansion of the aggregate area under
monopoly control over within India and drawing out raw cultivation.
India’s exports and materials from the countryside to 16. railways, power generation, communications, ports and some
imports the nearest railway station or the other departmental undertakings.
port to send these to England. 17. (d) Low level of literacy, high mortality rates, low life expectancy
and high level of poverty.
14. The opening of the Suez Canal in 1869:
18. Dadabhai Naoroji, William Digby, V.K.R.V Rao and R.C Desai
(a) Raised the cost of transportation between Britain and India. (Rao’s estimates was considered very significant).
(b) Intensified British control over India’s foreign trade. 19. Cotton and Jute textile industries iron and steel industries;
(c) Reduced the cost of transportation and made access to sugar, cement, paper industries etc.
the Indian market easier. 20. 1881
(d) Both (b) and (c) 21. 1921
 52 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

6.2 Indian Economy 1950-1990 and pesticide in the correct quantities as well as regular
supply of water.
Sequence of Events 10. Land reforms: Land reforms primarily refer to change
in the ownership of land holdings, i.e. to make the
I First Industrial Policy of Independent India 1948 tillers the owners of land.
II Planning Commission was set up in India with 1950 11. Land ceiling: Land ceiling means fixing the maximum
Prime Minister as its Chairperson. size of land which could be owned by an individual.
III Village and Small-Scale Industries committee (also 1955 12. Structural/Sectoral Composition: The contribution
called Karve Committee) was constituted for the made by different sectors of the economy (agriculture,
development of small-scale industries. industry and services) in the GDP of the country makes
IV Industrial Policy Resolution (IPR) was adopted 1956 up the structural composition of the economy.
in accordance with the goal of the state controlling 13. Planning Commission : An organisation set up by the
the commanding heights of the economy. Government of India, responsible for formulating
plans for the most effective and balanced utilisation
of resources and determining priorities, etc.
Definitions of KEY TERMS
14. NITI Aayog: The National Institution for Transforming
1. Mixed economy is a type of economic system where India, also called NITI Aayog, was formed via a
the market system will provide whatever goods and resolution of the Union Cabinet on January 1, 2015.
services it can provide well, and the government will provide NITI Aayog designs strategic and long-term policies
essential goods and services which the market fails and programmes for the Government of India. It also
to do. provides relevant technical advice to the Centre and
2. Import Substitution Policy: The Policy aimed at replacing States.
or substituting imports with domestic production 15. Permit License Raj : A term used to denote the rules
by protecting the domestic industries from foreign and regulations framed by the government to start,
competition is known as import substitution policy run and operate an enterprise for production of
(commonly called as inward looking trade strategy). goods and services in India.
3. Quota/ Quantitative Restrictions: Quota refers
to non-tariff barriers imposed on the quantity of
imports and exports. Or, Quota refers to quantitative
restrictions on imports for the protection of the
domestic firms from foreign competition. Exercises
4. Tariff: A tax on imports, which can be levied either on Q.1 Discuss the common goals of five year plans in India
physical units, e.g. per tonne or on value. Tariffs make till 2017. (6)
imported goods more expensive and discourage their use.
OR
5. Small-scale industry: A ‘small-scale industry’ is defined
Discuss briefly, the rationale behind ‘growth with equity’
with reference to the maximum investment allowed
on the assets of a unit. This limit has changed over or 'equity with growth' as planning objectives for Indian
a period of time. In 1950 a small-scale industrial Economy. (NCERT) (3)
unit was one which invested a maximum of `5 lakh; at OR
present the maximum investment allowed is `1 crore. Discuss briefly the rationale behind choosing ‘ Modernisation’
6. Subsidy: Subsidy is the financial assistance provided as a planning objective for the Indian economy. (3)
by the government to producers to fulfill its social OR
welfare objectives.
Why was it necessary for a developing country like India to
7. Green Revolution: Green Revolution refers to large scale
increase in production of food grains (like wheat, rice follow self-reliance as a planning objective? (NCERT) (3)
etc.) resulting from the use of high yielding variety Ans. The common goals of five year plans in India are:
seeds, chemical fertilizers, modern sophisticated growth, equity, modernisation and self-reliance.
agricultural machines/tools/equipments etc. (1) Growth: It refers to increase in the country’s capacity
8. Marketed surplus: Marketed surplus is the portion of to produce the output of goods and services within the
agricultural produce which is sold in the market by country. It implies either a larger stock of productive
the farmers after meeting their own consumption
capital, or a larger size of supporting services (like
requirement.
transport, banking, etc.), or an increase in the efficiency
9. High Yielding Variety (HYV) seeds: Seeds that give
large proportion of output are called HYV seeds. of productive capital and services.
The use of these seeds require the use of fertiliser (2) Equity: Equity refers to reductions in inequality of income
UNIT-6 Development Experience (1947-90) and
Economic Reforms since 1991 EXAM HANDBOOK Economics XII (2021 Edition) 53

and wealth. • When the objective of economic growth and modern technology, higher output is obtained at a
equity are achieved, it may lead to development with social relatively lower cost. However, in a labour abundant
justice, which may increase the per capital availability of country like India modernisation may lead to an
goods and services. • It is important that the benefits of increase in unemployment as modern technology
economic growth should reach the poor sections as well requires lesser labour per unit of output.
instead of being enjoyed only by the rich. Every Indian (c) The given statement is correct; in the early post-
should be able to meet his/her basic need of food, house, independence period the aim of the government’s
education and health care. Inequality in the distribution of policy was to reduce the dependence on the
income and wealth should be reduced. foreign countries for goods, services, technology
(3) Modernisation: Modernisation aimed at increasing the and capital. It stressed on the use of domestic
production of goods and services by way of adopting resources to avoid foreign interference, as it was
newer technologies. In the post independence era, feared that the dependence on the imported food
modernisation was chosen as an objective of planing for supplies, foreign technology and foreign capital
the Indian economy with a view to raise the standard of may increase foreign interference in the policies
living of the people by adopting new technology, change of our country. Similarly, the main thrust of the
in social outlook, e.g. recognition that women should ‘Atmanirbhar Bharat’ is also to make India an
have the same rights as men. economy that is self-reliant and self-sufficient.
(4) Self-reliance: 'Self-reliance’ as a common goal of five Q.3 Discuss briefly how institutional reforms (land reforms)
year plans means avoiding imports of those goods which have played a significant role in transforming Indian
could be produced in India itself. Rationale behind agriculture.
choosing ‘Self-reliance’ as a planning objective for the OR
Indian economy were: Discuss briefly the rationale behind implementation of
• To reduce foreign dependence: ‘Self-reliance’ as land reforms in the post-independence era.
an objective for the planning process of the Indian OR
economy was promoted by the policy makers to avoid Explain the need and type of land reforms/institutional
dependence on the foreign countries on account of reforms implemented in the agriculture sector in India.
goods, capital and technology. Ans. After independence the government of India took
• To avoid foreign interference: It was feared that several institutional/land reforms to ensure transformation
dependence on imported food supplies, foreign of Indian agriculture, such as:
technology and foreign capital may increase foreign (1) Land ceiling : Land ceiling means fixing the maximum
interference in the policies of our country. size of land which could be owned by an individual. It
Q.2 Comment on the following statements: (6) ensured reduction of concentration of land ownership
(a) It is necessary that the service sector should in few hands.
contribute maximum to GDP of an economy. (2) Abolition of Zamindari system – It focused on elimination
(b) Modernisation as a planning objective shows a of farmers’ exploitation and promotion of agricultural
dichotomy with employment generation. growth.
(c) ‘Atamnirbhar Bharat’ had been at the roots of (3) Change in the ownership of the landholdings (‘land to
the Indian planning process in the form of ‘self the tiller’ policy) – The idea behind this move was that
reliance’ as an objective of the planning process. ownership of land would give incentives to the tillers to
invest in making improvements.
Ans. (a) The given statement is appropriate. Generally, at
higher levels of development the service sector These reforms have led to stability of farming as an occupation
contributes more to the GDP than the agriculture and promoted equity.
and industrial sectors. In India, the share of Q.4 How far the land reforms in the agriculture sector in
agriculture in the GDP was more than 50 per India were successful in their implementation? Explain? (6)
cent–as we would expect for a poor country. But Ans. The land reforms implemented in the agriculture sector in
by 1990s, the share of the service sector was 40.5 India were not quite successful because of the following reasons:
per cent, more than that of agriculture or industry, (1) Abolition of intermediaries meant that some 200 lakh
like what we find in developed nations. tenants came into direct contact with the government –
(b) The given statement is appropriate. Modernisation they were thus freed from being exploited by the zamindars.
implies use of advanced technology to enhance However, in some areas the former zamindars continued
productivity at a faster pace. With application of to own large areas of land by making use of some
 54 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

loopholes in the legislation. Thus, the goal of equity was to an impressive rise in food grains production. The
not fully served by abolition of intermediaries. agricultural productivity increased considerably. This enabled
(2) Ownership of landholdings gave the tenants incentive the government to procure sufficient food grains to build
to increase output; and this contributed to growth in the buffer stock to be used in times of shortages due to
agriculture. However, there were cases where tenants scanty rainfall, delayed monsoon, drought and other
were evicted and the landowners claimed to be the natural calamities.
actual tillers, claiming ownership of the land. And even Q.6 “While the nation had immensely benefited from
when the tillers got ownership of the land, the poorest the green revolution, the technology involved was not free
of the agricultural labourers (such as sharecroppers and from risks.” Do you agree with the given statement? Give
landless labourers) did not benefit from land reforms. valid reasons in support of your answer. (4)
(3) Land ceiling legislation also faced hurdles. The big OR
landlords challenged the legislation in the courts, delaying “The Green revolution would have favoured the rich
its implementation. They used this delay to register their farmers only if the state did not play an extensive role in
lands in the name of close relatives, thereby escaping ensuring that the small farmer also gains from the new
from the legislation. technology.” Do you agree with the above statement?
Moreover, land reforms were successful in Kerala and West Give valid reasons in support of your answer. (4)
Bangal because these states had governments committed Ans. The given statement is correct.
to the policy of ‘land to the tiller’. Unfortunately, other (1) One such risk was the possibility that it would increase
states did not have the same level of commitment and vast the disparities between small and big farmers – since
inequality in landholding continues to this day. only the big farmers could afford the required inputs
Q.5 Why was green revolution implemented in the (Irrigation facilities, Chemical fertilisers, Pesticides, HYV
agricultural sector and how did it benefit the farmers seeds), thereby reaping most of the benefits of the green
and the indian economy? Explain. (NCERT) (4) revolution.
OR However, the government provided loans at a low interest
Explain the statement that green revolution enabled the rate to small farmers and subsidised fertilisers so that
government to procure sufficient food grains to build its small farmer could also have access to the needed inputs.
stocks that could be used during times of shortage. (2) Secondly the HYV crops were also more prone to attack
(NCERT) (3) by pests. Thus, the small farmers who adopted this
Ans. At independence, about 75 per cent of the country’s technology could lose everything in a pest attack.
population was dependent on agriculture. However, productivity The risk was considerably reduced by the services rendered
in the agricultural sector was very low because of the use of by research institutes established by the government.
old technology and the absence of required infrastructure. Q.7 While subsidies encourage farmers to use new technology,
The green revolution was implemented to permanently break they are a huge burden on government finances. Discuss
the stagnation in agriculture. the usefulness of subsidies in the light of this fact.
(NCERT) (6)
Benefits of Green Revolution:
(1) Self-sufficiency in food grains: In the second phase of the Ans. Arguments against giving subsidies:
green revolution (mid-1970s to mid- 1980s), the green (1) Initially, it was necessary to use subsidies to provide an
revolution technology involving use of HYV seeds spread incentive for adoption of the new HYV technology by
to a large number of states and benefited a large variety farmers. Any new technology will be looked upon as
of crops, especially wheat and rice. It enabled India to being risky by farmers. Subsidies were, therefore, needed
achieve self-sufficiency in food grains. We no longer had to encourage farmers to test the new technology. But
to import food from America or any other nation. once the technology is fourd profitable and is widely
(2) Increase in marketed surplus resulting in decline in adopted, subsidies should be eliminated since their
the price of food grains: A good proportion of the wheat purpose has been served.
and rice produced during the green revolution period (2) Further subsidies are meant to benefit farmers but a
(available as marketed surplus) was sold by the farmers in substantial amount of fertiliser subsidy also benefits
the market. As a result, the price of food grains declined the fertiliser industry; and among farmers, the subsidy
relative to other items of consumption. The low-income largely benefits the farmers in the prosperous regions.
groups, who spend a large percentage of their income on
Therefore, it is argued that there is no case for continuing
food, benefited from this.
with fertiliser subsidy as it does not benefit the target
(3) Buffer Stock: The use of modern technology and HYV
group and it is a huge burden on the government’s finances.
seeds together formed the Green Revolution, which led
UNIT-6 Development Experience (1947-90) and
Economic Reforms since 1991 EXAM HANDBOOK Economics XII (2021 Edition) 55

Arguments in favour of giving subsidies: Ans. Role of small scale industries (SSIs):
(1) Some economists believe that the government should (1) Generate more employment: Small scale industries
continue with agricultural subsidies because farming in are more ‘labour intensive, i.e. they use more labour
India continues to be a risky business. Most farmers are than the large-scale industries and therefore, generate more
very poor and they will not be able to afford the required employment.
inputs without subsidies. Eliminating subsidies will (2) Help in promoting rural development: In 1955, the
increase the inequality between rich and poor farmers village and Small-Scale Industries Committee, also
and violate the goal of equity. called the Karve Committee, noted the possibility of
(2) These experts argue that if subsidies are largely benefiting using SSIs for promoting rural development.
the fertiliser industry and big farmers, the correct policy Steps taken by the government:
is not to abolish subsidies but to take steps to ensure Small-scale industries cannot compete the big industrial
that only the poor farmers enjoy the benefits. firms. Thus, development of small scale industry requires
Q.8 Why was public sector given a leading role in them to be protected from the large firms.
industrial development during the planning period? (1) The production of a number of products was reserved
(NCERT) (3) for the small scale industry.
Ans. During the planning period, public sector was given a leading (2) They were also given concessions such as lower excise
role in industrial development due to the following reasons: duty and bank loans at lower interest rates.
Q.11 Explain how import substitution can protect the
(1) Indian industrialists did not have the capital to
domestic industries. Why did the policy makers adopt
undertake investment in industrial ventures required
such policy of protection? (4)
for the development of our economy.
OR
(2) Secondly, the market was not big enough to encourage
"Import restrictions were imposed in India with the
industrialists to undertake major projects even if they
dual objective to save foreign exchange reserves and to
had the capital to do so.
be self-sufficient." Justify the given statement with valid
(3) In addition, the decision to develop the Indian economy arguments. (3)
on socialist lines led to the policy of the state controlling Ans. The domestic industries of India were not in a position
the commanding heights of the economy. to compete against the goods produced by developed
Q.9 Why and how was private sector regulated under economies. So, the policy of import substitution helped in
the IPR 1956? (NCERT) (4) protecting them in two ways:
Ans. Under the Industrial Policy Resolution (IPR), 1956 the (i) The tariff on imported goods,and
private sector was regulated through a system of licenses. (ii) Fixation of quotas helped in restricting the level of imports.
(1) No industry was allowed unless a license was obtained As a result, the domestic firms could expand without fear of
from the government. competition from the foreign market.
Reasons: This policy was used for promoting industry The policy makers adopted the policy of import restrictions
in backward regions. It was easier to obtain a license if due to the following reasons/purposes:
the industrial unit was established in an economically (1) To be self-sufficient: Protecting the domestic industries
backward area. Even such units were given tax from foreign competition by substituting imports with
consessions and electricity at a low tariff. Thus, the domestic production. It was assumed that if the domestic
purpose of licensing policy was to promote regional equality. industries were protected they would learn to compete in
(2) Even an existing industry had to obtain a license for the course of time. It helped India to move towards the
expanding output or for diversifying production. goal of self-reliance.
(2) To save foreign exchange reserves: Our planners also
Reasons: This was meant to ensure that the quantity of
feared the possibility of foreign exchange being spent on
goods produced was not more than what the economy
import of luxury goods if no restrictions were placed on
required. License to expand production was given only
imports.
if the government was convinced that the economy
Q.12 “The achievements of India’s industrial sector during
required a larger quantity of goods.
the first seven plans are impressive indeed.”
Q.10 Explain briefly the importance/role of small scale Do you agree with the above statement? Give valid
industries in industrial development of India? Why and reasons in support of your answer. (4)
how has the government shielded small scale industries
Ans. The given statement is correct.
from the large firms? (4)
(1) The proportion of GDP contributed by the industrial
 56 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

sector increased in the period from 13 per cent in 1950- are a drain on the economy’s resources. Discuss the
51 to 24.6 per cent in 1990-91. usefulness of public sector undertakings in the light of
(2) The 6% annual growth rate of the industrial sector this fact. (NCERT) (4)
during 1950-1990 is commendable. Ans. Usefulness of public sector undertakings:
(3) The industrial sector became well-deversified by 1990, At the time of independence, Indian industrialists did not
largely due to the public sector. No longer was Indian have the capital to undertake investment in industrial ventures
economy restricted largely to cotton textiles and jute. required for the development of our economy. The market
(4) The promotion of small-scale industries gave employment was not big enough to encourage industrialists to undertake
opportunities to those people who did not have capital major projects even if they had the capital to do so.
to start large firms to get into business. So, the government decided to develop the Indian economy
(5) Protection from foreign competition (due to import by establishing many public sector undertakings. They contribute
substitution policy) enabled the development of to the welfare of people.
indigenous industries in the areas of electronics and However, many public sector undertakings incur huge losses
automobile sectors, which otherwise could not have but continued to function because it is difficult to close a
developed. (any four) government undertaking even if it is a drain on the nation’s
Q.13 “The progress of the Indian economy during the limited resources. This has led some scholars to argue that
first seven plans was impressive indeed.” Do you agree the state should get out of areas which the private sector can
with the above statement? Give valid reasons in support manage and the government may concentrate its resources on
of your answer. (6) important services which the private sector cannot provide.
Ans. The given statement is not totally correct.
(1) No doubt, during 1950-1990, our industries became
far more diversified compared to the situation at OBJECTIVE TYPE QUESTIONS
independence. The 6% annual growth rate of the
industrial sector during the period is commendable. 1. In the Industrial Policy Resolution of 1956, industries were
classified in _________ (two/three) categories.
Also, India became self-sufficient in food production
2. Read the following statements - Assertion (A) and Reason
due to the green revolution. Land reforms resulted in (R). Choose one of the correct alternatives given below:
abolition of the hated zamindari system. Assertion (A): The major policy initiatives i.e. land reforms
(2) Many economists became dissatisfied with the performance and green revolution helped India to become self-sufficient
of many public sector enterprises (PSEs). They incurred in food grains production.
huge losses but continued to function because it was Reason (R): The proportion of people depending on
difficult to close a government undertaking even if it agriculture did not decline as expected
was a drain on the nation’s limited resources. Alternatives:
(3) Excessive government regulation through ‘permit license (a) Both Assertion (A) and Reason (R) are true and Reason
raj’ prevented growth of entrepreneurship. More time (R) is the correct explanation of Assertion (A).
was spent by industrialists in trying to obtain a license (b) Both Assertion (A) and Reason (R) are true and Reason
or lobby with the concerned ministries rather than on (R) is not the correct explanation of Assertion (A).
thinking about how to improve their products. Even, (c) Assertion (A) is true but Reason (R) is false.
(d) Assertion (A) is false but Reason (R) is true.
the need to obtain a license to start an industry was
3. During India’s first seven five-year plans, the Government of
misused by industrial houses. A big industrialist would
India adopted ______ policy to protect domestic industries.
get a license not for starting a new firm but to prevent
4. Identify the correct sequence of alternatives given in Column
competitors from starting new firms. II by matching them with respective terms in Column I:
(4) Our inward-looking trade strategy failed to develop a
strong export sector. In the name of self-reliance, our Column I Column II
producers were protected against foreign competition A. Land Ceiling (i) Increase in production of food grain
and this did not give them the incentive to improve using high yielding variety seeds
the quality of goods they produced. The producers B. Land reforms (ii) Portion of agricultural produce sold
in the market
were aware that they had a captive market. Due to
restrictions on imports the Indian consumers had to C. Green Revolution (iii) Fixing the maximum limit of land
holding for an individual.
purchase whatever the producers produced and sell at a
D. Marketed Surplus (iv) Change in the ownership of land
high price.
(land to tillers)
Q.14 Though public sector is very essential for industries,
many public sector undertakings incur huge losses and
 UNIT-6 Development Experience (1947-90) and
Economic Reforms since 1991 EXAM HANDBOOK Economics XII (2021 Edition) 57

5. Policy of ‘Import Substitution’ was targeted to protect ______ (a) to reduce the concentration of land ownership in a few hands.
industries. (b) that ownership of land would give incentives to the tillers
6. In 1955, Karve committee was constituted for aiming the ______. to invest in making improvements.
7. Write the correct sequence of alternatives given in Column II (c) fixing the maximum size of land which could be owned
by matching them with respective terms in Column I: by an individual.
(d) to reduce the vast inequality in land holding.
Column I Column II
12. Which of the following is not included in land reforms?
A. Growth (i) Adoption of new technology to (a) Use of high yielding variety (HYV)seeds
increase the production of goods (b) The abolition of intermediaries
and services. (c) The change in ownership of landholdings
B. Modernisation (ii) Avoiding imports of those goods (d) Land ceiling
which could be produced in 13. In the first phase of the green revolution (approximately mid
India itself. 1960s, up to mid 1970s), the use of HYV seeds primarily
C. Self-reliance (iii) Every Indian should be able to meet benefited the growing regions only. True/False? Give reason.
his/her basic needs such as food, a 14. In the second phase of the green revolution (mid 1970s to mid
decent house, education and health, 1980s), the HYV technology benefited only the more affluent
and inequality in the distribution of states and the wheat growing regions. True/False? Give reason.
wealth should be reduced. 15. Match the following and choose the correct alternative:
D. Equity (iv) Increase in the country’s capacity to 1. Quota (A) Quantity of goods that can be imported
produce the output of goods and
services within the country. 2. Land Reforms (B) Seeds that give large proportion of
output
8. Write the correct sequence of alternatives given in Column II 3. HYV Seeds (C) Improvements in the field of agriculture
by matching them with respective terms in Column I: to increase its productivity
Column I Column II 4. Subsidy (D) The monetary assistance given by
A. Karve (i) To encourage farmers for adopting government for production activities.
Committee, 1955 new HYV technology. (a) 1-D, 2-C, 3-B, 4-A (b) 1-A ,2-D, 3-B, 4-C
B. Industrial Policy (ii) Using small-scale industries to (c) 1-A, 2-C, 3-B, 4-D (d) 1-A, 2-B, 3-C, 4-D
Resolution, 1956 promote rural development. 16. The annual growth rate of the industrial sector during 1950-
1990 was:
C. Import (iii) To protect the domestic firm from
(a) 5 per cent (b) 6 per cent
Substitution Policy foreign competition.
(c) 8 per cent (d) 10 per cent
D. Subsidies (iv) To regulate private sector through 17. Land reforms primarily refer to:
a system of licensing to promote (a) fixing the maximum size of land which could be owned
regional equality. by individual.
9. Why, despite the implementation of green revolution, 65 (b) change in the ownership of landholdings.
per cent of our population continued to be engaged in the (c) use of new technology in agriculture sector.
agriculture sector till 1990? (d) abolition of intermediaries.
10. Match the following and choose the correct alternative:

1. Prime Minister (A) The money value of all the final

Answer Key
goods and services produced 1. three 2. (b) 
within the economy in one year 3. Import Substitution 4. iii , iv, i , ii
2. Gross Domestic (B) Adoption of new technology 5. Domestic 6. Development of small scale industries
Product 7. (iv), (i), (ii), (iii) 8. (ii), (iv), (iii), (i)
3. Modernisation (C) Chairperson of the planning 9. This is so because the industrial sector and the service sector did
not absorb the people working in the agricultural sector. (Many
commission
economists call this an important failure of our policies followed
4. Self-sufficiency (D) Avoiding imports of those goods during 1950-1990).
which could be produced in 10. (b) 11. (b)
India itself. 12. (a) 13. True
(a) 1-D, 2-A, 3-B, 4-C (b) 1-C, 2-A, 3-B, 4-D 14. False: In the second phase of the green revolution, the HYV
technology spread to a larger number of states and benefited
(c) 1-D, 2-A, 3-C, 4-B (d) 1-C, 2-B, 3-A, 4-D more variety of crops.
11. Just a year after independence, steps were taken to abolish 15. (c) 16. (b)
intermediaries and to make the tillers the owners of land. The 17. (b) change in the ownership of landholdings.
idea behind this move was:
 58 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

6.3 Economic Reforms since 1991 and/or by outright sale of public sector companies.
6. Disinvestment: Privatisation of the public sector
Sequence of Events enterprises (PSEs) by selling off a part/whole of the
I Establishment of General Agreement on Trade 1948 equity to the general public or any private sector player
and Tariff (GATT) with 23 countries as the is known as disinvestment.
global trade organisation 7. Globalisation: Globalisation is the outcome of the
policies of liberalisation and privatisation. It means
II New Economic Policy (NEP) 1991
integration of the economy of the country with the
– Liberalisation, Privatisation and Globlisation
world economy. It aims at transforming the world
was announced by the Government of India
towards greater interdependence and integration.
III World Trade Organisation (WTO) was founded 1995 8. Outsourcing: Outsourcing means hiring of regular
as the successor organisation to the General service from external sources, mostly from foreign
Agreement on Tariffs and Trade (GATT). countries, which was previously provided internally or
IV Government of India fully removed quantitative April from within the country (like legal advice, computer
restrictions on imports of manufactured 2001 service, advertisement, security services, etc.).
consumer goods and agricultural products. 9. Tarrif Barriers: The barriers which are imposed on
V Demonetisation of Currency by the 8 Nov. imports of goods and services to make them relatively
Government of India 2016 costlier and to protect the domestic producers from
VI The Parliament passed a law, Goods and Services 1 July the stiff international competition are known as tariff
Tax (GST) Act 2016, which came into effect in 2017 barriers e.g. Import Duties.
India 10. Non-tariff Barriers: Non-tariff barriers are those barriers
which are imposed on quantity of import and export of
goods and services e.g. quota and import licensing.
Definitions of KEY TERMS 11. Bilateral trade: The trade (export and import) between
two countries is known as bilateral trade.
1. Budgetary Deficit: A situation when the government’s
12. Multilateral trade: The trade (export and import)
income and tax receipts fail to cover its expenditures.
among more than two countries is known as multi-
2. Deficit financing: When government’s budgetary
lateral trade.
expenditure is more than budgetary receipts,
the government incurs a deficit in its budget. To 13. Strategic sale: It involves the sale of minimum 51%
finance the deficit, the government borrows from stake of a public sector undertaking (PSU) to the
the RBI, from people within the country and from private sector. The control and management of the
international financial institutions, such as, World PSU is transferred to the private sector.
Bank, IMF, etc. This is called ‘Deficit Financing’. 14. Minority sale: It involves the sale of less than 49%
3. New Economic Policy (NEP): India announced the stake of a PSU to the private sector. The control and
New Economic Policy (NEP) in 1991 due to financial management of the PSU remains with the government
crisis and pressure from the World Bank and IMF. The as it holds the majority stake.
NEP consisted of wide ranging economic reforms: 15. Dereservation : Allowing an individual or group of
(i) the stabilisation measures – short-term measures enterprises to produce goods and services which were
to correct the BoP position and to bring inflation hitherto produced by a particular individual or group
under control; and of enterprises. In India, it refers to allowing large-scale
(ii) structural reform policies – long-term measures industries to produce goods and services which were
aimed at improving the efficiency of the economy produced only by the smallscale industries.
and increasing its international competitiveness 16. Devaluation of currency : A deliberate reduction
by removing the barriers to entry and growth in the value of domestic currency (Rupee) vis-a-vis
of firms, viz. liberalisation, privatisation and any foreign currency (Dollar) by the government of a
globalisation. country is known as devaluation of the currency.
4. Liberalisation: Liberalisation is a part of the New 17. Fiscal Policy : All the planned actions of a government in
Economic Policy, 1991 to put an end to those mobilising financial resources for meeting its expenditure
restrictions which became major hindrances in and regulating the economic activities in a country.
growth and development; and open various sectors 18. Foreign Exchange Markets : A market in which
of the economy. currencies of different countries are bought and sold
5. Privatisation: It implies shedding of the ownership at market determined exchange rates.
or management of a government owned enterprise. 19. Foreign Direct Investment : Investment of foreign assets
Government companies are converted into private into domestic structures, equipment and organisations.
companies by withdrawal of the government from It does not include foreign investment into the stock
ownership and management of public sector companies markets.
UNIT-6 Development Experience (1947-90) and
Economic Reforms since 1991 EXAM HANDBOOK Economics XII (2021 Edition) 59

20. Foreign Institutional Investment : Foreign investments India approached the World Bank and IMF and received $7
which come in the form of stocks, bonds, or other billion as loan to manage the crisis. For availing the loan,
financial assets. This form of investment does not these international institutions expected India to liberalise
entail active management or control over the firms or and open up the economy by removing restrictions on the
investors. private sector, reducing the role of the government in many
21. Foreign Institutional Investors (FIIs) : Banking and areas and remove trade restrictions between India and other
non-banking financial institutions of foreign origin countries.
e.g. commercial banks, investment banks, mutual
India agreed to the conditionalities of World Bank and IMF
funds, etc. whose investment in stocks and bonds in
the country through stock markets have significant
and announced the New Economic Policy (NEP).
influence. Thus, India changed its economic policies in 1991 due to:
22. Import Licensing : Permission required from the (i) a financial crisis, and
government to import goods into a country. (ii) pressure from international organisations like the World
23. Export Duties: Taxes imposed on goods exported Bank and IMF.
from a country. Q.2 “Liberalisation was introduced to put an end to those
24. Export-Import Policy : The economic policies of the restrictions which became major hindrances in growth and
government relating to its exports and imports. development, and open various sectors of the economy.”
25. Stock Exchange : A market in which the securities In the light of the above statement, explain the various
of governments and public companies are traded.
liberalisation measures introduced in 1991. (6)
It provides the facilities for stock brokers to trade
company stocks and other securities. OR
26. Gross Value Added (GVA): The sum of a country’s GDP The policy of liberalisation changed the role of Reserve
by adding subsidies on production and subtracting Bank of India (RBI) from ‘a regulator’ to ‘a facilitator’ in
indirect taxes. (GVA = GDP + Subsidies – Indirect taxes) the financial sector. Defend or refute the given statement
with valid arguments. (3)
OR
Discuss briefly any two major steps taken by the
Exercises Government of India on ‘Financial Sector’ front under
the Economic Reforms of 1991. (3)
Q. 1 Why were economic reforms introduced in India in
Ans. Liberalisation measures introduced in 1991:
1991? (NCERT) (6)
(1) Deregulation of Industrial sector
Ans. In the late 1980s, the Indian economy was facing problems of:
• Industrial licensing was abolished for almost all products
(1) Declining foreign exchange reserves – The government
categories except alcohol, cigarettes, hazardous che-
was not able to generate sufficiently from taxation. The
micals, industrial explosives, electronics, aerospace
income from PSUs was also not very high to meet the
and drugs and pharmaceuticals.
growing expenditure (on development programmes and
• The only industries which are now reserved for the
to meet challanges like unemployment, poverty and
public sector are a part of defence equipment, atomic
population explosion). At times, out foreign exchange,
energy generation and railway transport.
borrowed from other countries and international financial
• Many goods produced by small-scale industries have
institutions, was spent on meeting consumption needs.
now been deserved.
Foreign exchange reserves declined to a level that was
• In many industries, the market has been allowed to
not sufficient to finance imports of petrol and other
determine the prices.
important items for more than two weeks.
(2) Financial Sector Reforms
(2) Economic crisis related to external debt – Government
• Change in the role of Reserve Bank of India (RBI):
expenditure began to exceed its revenue by such large
The role of RBI was reduced from regulator to
margins that meeting expenditure through borrowings
facilitator of financial sector. As a regulator (prior to
became unsustainable. The government was not able to make
liberalisation), RBI used to fix interest rate structure
repayments on its borrowings from abroad. No country
for the commercial banks, however, as a facilitator
or international funder was willing to lend to India.
(post-liberalisation) the RBI now facilitates the free
(3) Growing imports without matching rise in exports –
market forces to act independently. This means that
Imports grew at a very high rate. But sufficient attention
financial sector was given greater autonomy (to take
was not given to boost exports to pay for the growing imports.
decisions) on many matters independent of RBI, e.g.
(4) High inflation – The crisis was further compounded by
freedom to banks to setup new branches without the
the rising prices of essential goods.
approval of the RBI.
 60 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

• Origin of Private Banks: The reform process led to Ans.

establishment of private sector banks of Indian as (a) The statement is not correct. Only loss making PSUs
well as foreign origin. should be privatised. Profit making PSUs should not be
• Foreign investment limit in banks was raised to privatised only for drawing out funds to cover the deficit
around 74 per cent. in government budget. The government envisaged that
• Foreign Institutional Investors (FIIs) such as merchant proceeds from disinvestment could be effectively utilised
bankers, mutual funds and pension funds, are now to improve the performance of the PSEs. Every year, the
allowed to investment in Indian financial markets. government fixes a target for disinvestment of PSEs. For
(3) Tax Reforms instance, in 1991-92 it was targeted to mobilise `2,500
• Personal income tax rates have been reduced since crore through disinvestment. The government was able
1991 as it was felt that high rate of income tax to mobilise `3,040 crore more than the target. In 2017-
were an important reason for tax evasion. Moderate 18, the target was about `1,00,000 crore, whereas, the
rates of income tax encourage savings and more tax achievement was about `1,00,057 crore.
compliance. Critics point put that the assets of PSEs have been
• Corporate tax rate, which was very high earlier, has undervalued and sold to the private sector. This means
been gradually reduced. that there has been a substantial loss to the government.
• In 2016, the Indian Parliament passed a law, Goods Moreover, the proceeds from disinvestments were used
and Services Tax Act 2016, to simplify and introduce to offset the shortage of government revenues rather
a unified indirect tax system in India. This law came than using it for the development of PSEs and building
into effect from July 2017. This is expected to generate social infrastructure in the country.
additional revenue for the government, reduce tax evasion (b) The given statement is true to its character. The foreign
and create ‘one nation, one tax and one market’. investment, which includes foreign direct investment
(4) Foreign Exchange Reforms (FDI) and foreign institutional investment (FII), has
• In 1991, as an immediate measure to resolve the increased from about US $100 million in 1990-91
balance of payments crisis, the rupee was devalued to US $ 30 billion in 2017-18. This has changed the
against foreign currencies. This led to increase in status of India from a ‘begging bowl’ in 1990’s to a
exports and thus more inflow of foreign exchange. ‘selfdependent’ economy in the present ages. Due to
• Determination of foreign exchange rate through market the opening up of the Indian Economy, she has become
forces of demand and supply, without any government one of the largest foreign exchange reserve holders in
control. the world. India been able to register an increase in the
(5) Trade and Investment Policy Reforms: Liberalisation foreign exchange reserves from about US $ 6 billion in
of trade and investment was initiated to increase international 1990-91 to about US $ 413 billion in 2018-19.
competitiveness of domestic goods; and to increase the Q.4 Besides privatisation and disinvestment what attempts
inflow of foreign investment (FDI, FIIs etc.) and have been made by the government to improve the efficiency
technology into the economy. The trade policy reforms of PSUs? (3)
aimed at: (i) Dismantling quantitative restrictions on OR
imports and exports; (ii) Reduction in tariff rates; and Do you think the navaratna policy of the government
(iii) Removal of licensing procedures for imports. helps in improving the performance of public sector
• Import licensing was abolished except in case of undertakings in India? How? (NCERT) (3)
hazardous and environmentally sensitive industries. Ans. In order to improve efficiency of PSUs and enable them to
• Quantitative restrictions on imports of manufactured compete more effectively in the liberalised global environment,
consumer goods and agricultural products were fully the government has given them greater autonomy in taking
removed from April 2001. various decisions to run the company efficiently and thus increase
• Export duties have been removed to increase the competitive their profits. For instance, some PSUs have been granted a
position of Indian goods in the international market. special status such as maharatnas, navratnas and miniratnas.
Q.3 Comment on the following: (6) A few examples of PSUs with their status are as follows:
(a) Those public sector undertakings which are making (i) Maharatnas
profits should be privatised.    •  Indian Oil Corporation Limited
(b) The opening up of the Indian Economy has led to    •  Steel Authority of India Limited
a rapid increase in Foreign Direct Investments (ii) Navratnas
and Foreign Exchange Reserves of the country.    •  Hindustan Aeronautics Limited
   •  Mahanagar Telephone Nigam Limited
UNIT-6 Development Experience (1947-90) and
Economic Reforms since 1991 EXAM HANDBOOK Economics XII (2021 Edition) 61

(iii) Miniratnas services to facilitate international trade (bilateral and

   •  Airport Authority of India multilateral) through removal of tariff as well as non-
   •  Bharat Sanchar Nigam Limited tariff barriers.
The granting of special status resulted in better performance India is an important member of WTO. It has kept its
of these companies. commitments towards liberalisation of trade by removing
Q.5 Justify the following giving reasons: (4) quantitative restrictions on imports and reducing tariff
(a) Recently the Government of India has decided rates. However, some scholars question the usefulness of India
to merge MTNL and BSNL on account of rising being a member of the WTO due to the following reasons:
losses. (1) A major volume of international trade occurs among
(b) India is often called as outsourcing hub/favourite the developed nations.
outsourcing destination of the world. (2) Developing countries like India feel cheated as they are
Ans. forced to open their markets for developed countries
(a) The decision taken by the Government of India to merge but are not allowed access to the markets of developed
BSNL and MTNL is quite appropriate. The Government countries because of high non-tarriff barriers.
has merged the two loss incurring businesses, with a Q.8 “Fiscal policy reforms in India have had a negative
motive to : impact on developmental and welfare expenditures.”
(i) Achieve higher economic and functional efficiency Defend or refute the given statement. (4)
(ii) Minimise possible losses. Ans. The given statement is true.
(b) Reasons for India as favourite outsourcing destination Effect on expenditure policy: Economics reforms have placed
of the world: limits on the growth of public expenditure, especially in
(i) Availability of skilled manpower: India has vast social sectors. The government was not able to address
skilled manpower which enhances the faith of some of the basic problems facing our economy especially in
MNCs for investment in India. areas of employment, agriculture, industry, infrastructure
(ii) Favourable Government policies: MNCs get various development, etc. Though the GDP growth rate has increased
types of lucrative offers from the Indian government in the reform period from 5.6% p.a during 1980-91 to 8.2%
such as tax holidays, tax concessions etc. p.a. during 2007-12. But it has not generated sufficient
Q.6 Do you think outsourcing is good for India? Why are employment opportunities in India.
developed countries opposing it? (NCERT) (4) Effect on taxation policy:
• The tax reductions in the reform period aimed at yielding
Ans. Yes, outsourcing has proved to be good for India in
larger revenue and curb tax evasion, have not resulted in
the following manner:
increase in tax revenue for the government.
(i) Employment generation: Outsourcing from developed
• The reform policies, involving tariff reduction, have cur-
nations has created more employment opportunities in
tailed the scope for raising revenue through custom duties.
India.
• In order to attract foreign investment, tax incentives were
(ii) Increased foreign investment: Successful execution of processes
provided to foreign investors which further reduced the
outsourced to India has increased India’s international
scope for raising tax revenues.
credibility and hence the inflow of foreign capital to India.
Q.9 Study the following table and answer the questions
However, developed countries oppose outsourcing because that follow:
it results in outflow of capital from the developed countries Growth of GDP and Major Sectors (in %)
to the developing countries. Further, outsourcing leads to
Sector 1980- 1992- 2002- 2007- 2012- 2013- 2014-
a reduction in employment in the developed countries as 91 2001 07 12 13 14 15
the same jobs are outsourced to the developing countries.
Agriculture 3.6 3.3 2.3 3.2 1.5 4.2 – 0.2
Q.7 Why is it necessary to become a member of WTO? Industry 7.1 6.5 9.4 7.4 3.6 5 7.0
Services 6.7 8.2 7.8 10 8.1 7.8 9.8
Discuss the usefulness of India becoming a member of
Total 5.6 6.4 7.8 8.2 5.6 6.6 7.4
WTO. (NCERT) (6)
Ans. It is necessary to become a member of WTO because (a) Which sector has continued to witness a high level
of the following reasons: of growth during the reform period ? What are the
(i) It provides equal opportunities to all countries in the major factors responsible for the high growth of this
international market for trading purposes. sector? (NCERT) (4)
(ii) It ensures optimum utilisation of world resources. (b) “Some economists believe that the economic reforms
(iii) The WTO agreements cover trade in goods as well as have adversely affected the agriculture sector in
 62 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

India.” Do you agree with the given statement? (2) High technology and,
Justify your answer with valid reasons. (4) (3) Increased possibilities of large industries of developing
(c) State and discuss any two reasons for the poor countries to become important players in the international
performance of industrial sector in the reforms arena.
period. (3) On the contrary, the critics argue that: (Any three)
Ans. (1) Globalisation is a strategy of the developed countries to
(a) The service sector continued to witness a high level of expand their markets in other countries. According to
growth. In 2014– 15, this sector witnessed the high them, it has compromised the welfare and identity of
growth rate of 9.8 per cent. This indicates that GDP people belonging to poor countries.
growth is mainly due to the growth in the service sector. (2) Market-driven globalisation has widened the economic
The major factors responsible for the high growth of the disparities among nations.
service sector are as follows: (3) It has increased the income and quality of further
(i) Rise in income: With rise in income people demand consumption of only high income groups.
services which can make their lives more comfortable. (4) The growth has been concentrated only in some select
(ii) Outsourcing: India is looked upon as a great areas in the service sector such as telecommunication, IT,
destination to outsource various business processes finance, entertainment, travel and hospitality services,
such as call centres, accounting services etc. real estate and trade rather than vital sectors such as
agriculture and industry which provide livelihoods to
(iii) Globalisation: It has increased the demand for
millions of people in the country.
courier, shipping, travel and information services.
Q.11 Discuss economic reforms in India in the light of
(b) During the reform period, agriculture sector was
social justice and welfare. (NCERT) (4)
adversely affected because of the following reasons:
(i) Reduction in public investment in agriculture Ans. Economic reforms in India in the light of social justice
sector: Public investment in agriculture sector and welfare: Globalisation is a strategy of the developed
especially in infrastructure like irrigation power, countries to expand their markets in other countries. It has
etc. has been reduced in the reform period. compromised the welfare and identity of people belonging
(ii) Removal of fertilizers subsidy : Removal of fertilizer to poor countries.
subsidy has increased the cost of production (i) It has widened the economic disparities among nations
affecting thereby the small and marginal farmers. and people.
(iii) Increased international competitiveness due to (ii) It has increased the income and quality of consumption
liberalisation and reduction of import duties. of only high-income groups.
(iv) Shift from food crops to cash crops due to export- (iii) The growth has been concentrated only in some select
oriented policy in agriculture led to a rise in prices areas in the services sector such as telecommunication,
of food-grains. information technology, finance, entertainment, travel
(c) Industrial growth has recorded a slow down during the and hospitality services, real estate and trade, rather
reform period because of the following reasons: than vital sectors such as agriculture and industry which
(i) Cheaper imports: Cheaper imports have replaced provide livelihoods to millions of people in the country.
the demand for domestic goods. Demand for Q.12 “The demonetisation of currency undertaken by
industrial products have decreased because domestic the Government of India on November 8, 2016 had an
manufacturers are facing competition from imports. adverse impact on the economic activities.”
(ii) Inadequate investment in infrastructure: The infrastructure Do you agree with the statement? Give reason in support
facilities including power supply have remained of your answer. (4)
inadequate due to lower investment. Ans. The given statement is not totally correct.
Q.10 “The process of globalisation through liberalisation The shortage of currency in circulation had an adverse
and privatisation policies has produced positive, as well impact on the economic activities. There were long queues
as, negative results for India and other countries.” outside banks and ATM booths. However things improved
Defend or refute the above statement. (6) with time and normally returned.
Ans. The given statement is true to its character. Some This move had many positive impacts on the Indian economy
scholars argue that globalisation should be seen as an such as:
opportunity in terms of: (1) It improved tax compliance as a large number of people
(1) Greater access to global markets, were bought in the tax ambit. Tax evasion will result
in financial penalty. It put a curb on black money and
 UNIT-6 Development Experience (1947-90) and
Economic Reforms since 1991 EXAM HANDBOOK Economics XII (2021 Edition) 63

corruption. 4. Identify and match the correct sequence of alternatives of

(2) The savings of an individual were channelised into the organisations given in column I with their respective functions
formal financial system. As a result, banks have more in column II :
resources to provide more loans at lower interest rates. Column I Column II
(3) Shifting transactions out of the cash economy into the A. WTO (i) Provides short-term loans to solve
formal payment system. Households and firms have begun the Balance of Payments problem.
to shift from cash to electronic payment technologies. B. RBI (ii) is a multilateral trade negotiating
Q.13 What is Goods and Services Tax (GST)? State its body.
aim and features. (4) C. IMF (iii) facilitates lending for reconstruc-
Ans. The Parliament passed a law, Goods and Services Tax tion and development.
Act, 2016, to simplify and introduce a unified indirect tax D. IBRD (iv) is the Central Bank of India.
system in India. This law came into effect from 1 July 2017.
Choose the correct alternative from the following :
It aims to generate additional revenue for the government; (a) A-(ii), B-(i), C-(iii), D-(iv)
to reduce tax evasion; and to create ‘one nation, one tax (b) A-(ii), B-(iv), C-(iii), D-(i)
and one market’. (c) A-(ii), B-(iii), C-(iv), D-(i)
Features: (d) A-(ii), B-(iv), C-(i), D-(iii)
(1) Goods and Service Tax (GST) is the single comprehensive 5. State, whether the following statement is true or false:
indirect tax on supply of goods and services, right from “GATT was established in 1923 with 48 member countries.”
the manufacturer/service provider to the consumer. 6. State whether the following statement is true or false:
(2) It is a destination based consumption tax with facility of ‘World Bank is known as International Bank for Registration
Input Tax Credit (ITC) in the supply chain. and Delimitation (BRD)’.
7. _________ is one of the taxes eliminated after implementation
(3) GST is applicable throughout the country with one rate for
of Goods and Services Tax (GST.)
one type of goods/service. Under GST, there are 5 (five)
8. World Trade Organisation (WTO) established in 1995, as a
standard rates applied, i.e. 0%, 5%, 12%, 18% and 28% successor organisation to _______.
on supply of all goods and services across the country. 9. Name any one Maharatna Company.
(4) GST has amalgamated a large number of Central and 10. Name any one Navratana Company.
State taxes and cesses. It has replaced large number of 11. Name any two taxes which were subsumed in Goods and
taxes on goods and services levied on production/sale of Services Tax (GST).
goods or provision of service, e.g. Central Excise Duty, 12. IBRD stands for ___________ .
Service Tax, VAT/Sales Tax, Entertainment Tax, etc. 13. In 1991, an immediate measure to resolve the balance of
payments crisis was:
(a) to free the determination of rupee value in the foreign
OBJECTIVE TYPE QUESTIONS
exchange market from government control.
(b) devaluation of rupee against foreign currencies.
1. _______________ was the Indian Finance Minister in 1991,
acknowledged for his capabilities to steer away the economic (c) removing the trade barriers –quotas and tariffs.
crisis looming large on the erstwhile Indian Economy. (d) simplification of export and import procedures.
(a) Dr. Subramanian Swamy (b) Dr. Manmohan Singh 14. Rising prices have been kept under control in the reform
(c) Pranab Mukherjee (d) Dr. Urjit Patel period. (True/False)
2. Read the following statements - Assertion (A) and Reason
(R). Choose one of the correct alternatives given below:
Assertion (A): Every year government fixes a target for Answer Key
disinvestment of Public Sector Enterprises (PSEs). 1. (b) 2. (b)
Reason (R): Disinvestment is an excellent tool for discarding 3. Greater inflow of investment
the loss incurring Public Sector Enterprises (PSEs). 4. (d) 5. False 6. False
Alternatives: 7. Value Added Tax
(a) Both Assertion (A) and Reason (R) are true and Reason 8. General Agreement on Trade and Tariff (GATT)
(R) is the correct explanation of Assertion (A) 9. Indian Oil Corporation Limited (IOCL) or Steel Authority of India Ltd.
(b) Both Assertion (A) and Reason (R) are true and Reason 10. Mahanagar Telephone Nigam Limited (MTNL)
(R) is not the correct explanation of Assertion (A) 11. Value added tax, service tax, excise duty, sales tax. (any two)
(c) Assertion (A) is true but Reason (R) is false. 12. International Bank for Reconstruction and Development
(d) Assertion (A) is false but Reason (R) is true. (popularly known as World Bank)
3. State any one outcome of implementation of Economic 13. (b) 14. True
Reforms in India In 1991.
 New CBSE Sample Question Papers 2021 EXAM HANDBOOK Economics XII (2021 Edition) 87

New CBSE
Sample Question
Papers 2021

Important Tips for Attempting CBSE Economics XII Examination 2021

 During 15 minutes Reading Time, read all questions carefully. Select the Option to be answered in questions having internal
choice. When reading, underline the key lines with pencil which help you to write answers. Do calculations for all Numerical
Questions during the reading time.
 In Case-based Questions, before reading the whole case study first you must read what is required in the questions.
 Timing is an essential ingredient of success. Attempting the full paper on time with at least 20 minutes Revision Time in hand
to check calculations is necessary to score 100% marks in Economics Paper. Economics paper is worth 80 marks and must
be completed in 180 minutes. Allowing 20 minutes revision time, this leaves 160 minutes or 2 minutes per mark. So, do not
spend 10 minutes on a question worth just 3 marks! Do not exceed the time you have allocated for each question.
The following Time Schedule will help you managing your time when sitting the examination hall.
For each Section: Macroeconomics and Indian Economic Development
Types of Questions Marks Word limit No. of Questions Total Marks Estimated Time
OTQs (including 1 One word to a sentence 10 10 10 min.
Case-based Questions
SA-I 3 60-80 words 2 6 10 min.
SA-II 4 80-100 words 3 12 30 min.
LA 6 100-150 words 2 12 30 min.
20 Minutes – Revision
Total 17 40 90 min.
 The following table shows a list of key directive words which are most likely to occur in CBSE Economics examination
questions. You should read these carefully and understand what each means.
Directive Words The examine is supposed to:
Name/Identify/Which Write the name of the concept/term only
Define Give the exact meaning
State Make clear
Explain Give clear reasons
Describe Give a description of
Illustrate Give example/diagram
Discuss Give the important arguments, for and against
Comment Give your reasoned opinions on
Calculate/Compute Work out using the information provided
Defend/Refute Write whether given statement is correct/incorrect
 To score 100% marks, the presentation of answers is as much important as their content.
 Don’t forget to write Question Number you are answering.
 Answer each question from new page (except 1 mark questions)
 Give answer in points, as far as possible, rather than in paragraphs.
 Leave one line space between two headings
 88 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

 Leave at least 2-3 lines space between two answers of 1 mark questions.
 Step by Step Calculation is always appreciable by the examiner.
 Write the main heading in capital letters. (Use dark and bold pen like Pilot V10)
 Underline the headings with pencil.
 Explanation/description from next line of heading.
 Use bullets while giving explanation.
 Attempt all parts of a question together.
 Write impersonally. In other words, do not use ‘I’ or ‘We’ in your answers. For example, do not write — “I don’t agree
with the statement.” Rather you must write — “The given statement is not correct.”
 Take care with sentences and punctuation. In general, try to write short sentences.
 During last 20 minutes of revision, first of all make sure that you have attempted all the questions and written Question
Number for each answer. If any question(s) left, attempt it first. Don’t leave it even if you don’t know the proper answer.
Remember that writing something is always better than leaving it at all. Then check the calculations in Numerical Questions
one by one. Then, read your answers one by one underlining the key lines using pencil.
Economics XII Paper requires a relaxed mind to attempt the Numerical Questions/Applying or Creating or Analysing based Questions.
‘Study the whole night before the exam.’ is the major cause of under-performance in Economics Paper. Successful students always have
given proper rest to their mental faculty so as to do all calculations correctly and to attempt Numerical Questions/Applying or Creating
or Analysing based Questions when sitting the Examination Hall.
I n my teaching career, I’ve seen even good students making calculations as 2 × 3 = 5 or 1/0.2 = 2 who ultimately score 70 or 80 per
cent only, just because they had spent the whole night revising the whole syllabus and solving numerical questions.
I hope these tips will help you take CBSE Economics XII Examination 2020 successfully and you will score sky touching marks.
So, good luck in your examination. I hope that you obtain the results you deserve. My advice to you is:
 o work hard and give your 100%. Remember: Success will never lower its standard to accommodate you. You have to raise your
T
standard to achieve it. For every bird, God provides food but not in their nest.
Always believe in yourself. Don’t give up. One thing keep in mind: You are something! Because God does not create garbage.
Always remember God. Without Him, your all efforts are in vain! 0 0 0 0 0 0 0 = 0. But if you put 1 before these zeros, you get 1
crore (10000000). We human beings are zeros without Him! And 1 is God!
I’ll feel pleasure to solve any of your queries/doubts related to the subject through my social media handles.
Phone/Whatsapp Number    9810475716
Instagram: subhashdey_20: https://www.instagram.com/subhashdey_20/

Email: [email protected]

Mobile App: Shree Radhey Publications: https://play.google.com/store/apps/details?id=com.

shreeradheypublications&hl=en

Finally, I pray the Supreme Divine to bestow His best of blessings on you!
Serving the cause of education.
With warm regards
Your servant
SUBHASH DEY
B.Com. (Hons.), M.Com. (DSE), M.A. (Economics), PGDBA (Finance), B.Ed, PGD in Labour and Administrative Laws
• Author and Publisher of CBSE Books – Accountancy, Business Studies, Economics, Mathematics and English
• M.Com (Delhi School of Economics)– Gold Medalist, Topper of Delhi University
• Consecutive four years’ Economics topper of Delhi University
• Ex-Lecturer of Commerce in Hindu College, Delhi University
• Resource Person and Educationist conducting Workshops/Seminars of Teachers and Students
• Founder/Director of ‘Shree Radhey Academy, The Gurukul’ (C-3/6 Yamuna Vihar, Delhi-53)
 New CBSE Sample Question Papers 2021 EXAM HANDBOOK Economics XII (2021 Edition) 89

Sample Question Papers

CBSE Sample Question Paper 2020-21

Maximum Marks – 80 Time – 3 Hours

Part-A Macroeconomics
Q.1 Inventory is a ____________ concept whereas the change in inventory is a ____________ concept.
(Fill up the blank with correct alternative) (1)
(a) stock, flow (b) flow, stock (c) stock, stock (d) flow, flow
OR
If in an economy the value of Net Factor Income from Abroad is `200 crores and the value of Factor Income to Abroad is
`40 crores. Identify the value of Factor Income from Abroad. (Choose the correct alternative) (1)
Q.2 In the present COVID-19 times, many economists have raised their concerns that Indian economy may have to face a
deflationary situation, due to reduced economic activities in the country. Suppose you are a member of the high powered
committee constituted by the Reserve Bank of India (RBI). You have suggested that as the supervisor of commercial banks,
___________ (restriction/release) of the money supply be ensured, by the Reserve Bank of India (RBI).
(Choose the correct alternative) (1)
Q.3 Supply of money refers to ______________ . (Choose the correct alternative) (1)
(a) currency held by the public
(b) currency held by Reserve Bank of India (RBI)
(c) currency held by the public and demand deposits with commercial banks
(d) currency held in the government account
Q.4 Identify the correct pair of formula from the following column I and II: (Choose the correct alternative) (1)
Column I Column II
A. Current Account Surplus (i) Receipts < Payments
B. Current Account Surplus (ii) Receipts > Payments
C. Balance Current Account (iii) Receipts ≠ Payments
D. Current Account Deficit (iv) Receipts ≤ Payments
(a) A – (i) (b) B – (ii) (c) C – (iii) (d) D – (iv)
Q.5 Identify which of the following statements is true? (Choose the correct alternative) (1)
(a) The flexible exchange rate system gives the government more flexibility to maintain large stocks of foreign
exchange reserves.
(b) In the Managed floating exchange rate system, the government intervenes to buy and sell foreign currencies.
(c) In the Managed floating exchange rate system, the central bank intervenes to moderate exchange rate fluctuations.
(d) In the Fixed exchange rate system, market forces fix the exchange rate.
Q.6 An Indian real estate company receives rent from Google in New York. This transaction would be recorded on
_____________ side of _____________ account. (Fill up the blanks with correct alternative) (1)
 90 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

(a) credit, current (b) credit, capital
(c) debit, capital (d) debit, current
Read the following news report and answer Questions 7-10 on the basis of the same:
The Reserve Bank of India (RBI), cut Repo Rate to 4.4%, the lowest in at least 15 years. Also, it reduced the Cash Reserve Ratio
(CRR) maintained by the banks for the first time in over seven years. CRR for all banks was cut by 100 basis points to release `1.37
lakh crores across the banking system. RBI governor Dr. Shaktikanta Das predicted a big global recession and said India will not be
immune. It all depends how India responds to the situation. Aggregate demand may weaken and ease core inflation.
The Economic Times; March 27th, 2020
Q.7 Cut in Repo rate by RBI is likely to ___________ (increase/decrease) the demand for goods and services in the economy.
(Choose the correct alternative) (1)
Q.8 Decrease in Cash Reserve Ratio will lead to ___________ . (Choose the correct alternative) (1)
(a) fall in aggregate demand (b) no change in aggregate demand
(c) rise in aggregate demand (d) fall in general price level
Q.9 The difference by which actual Aggregate Demand exceeds the Aggregate Demand, required to establish full employment
equilibrium is known as ___________ (inflationary gap/deflationary gap). (Choose the correct alternative) (1)
Q.10 The impact of ‘Excess Demand’ under Keynesian theory of income and employment, in an economy are:
(Choose the correct alternative) (1)
(a) decrease in income, output, employment and general price level
(b) decrease in nominal income, but no change in real output
(c) increase in income, output, employment and general price level
(d) no change in output/employment but increase in general price level.
Q.11 State with valid reason, which of the following statement is true or false: (3)
(a) Gross Value Added at market price and Gross Domestic Product at market price are one and the same thing.
(b) Intermediate goods are always durable in nature.
Q.12 State, giving valid reasons, whether the following statements are true or false: (3)
(a) Current account in Balance of Payments records only the exports and imports of goods and services.
(b) Borrowings from abroad are recorded in the Capital Account of the Balance of Payments on the debit side.
OR
‘Trade Deficit must exist if a country is facing a situation of Current Account Deficit’. Defend or refute the statement, with
valid argument.
Q.13 (a) Define money multiplier. (1)
(b) ‘Credit creation is inversely related to the reserve deposit ratio’. Justify the given statement, using a hypothetical example. (3)
Q.14 In an economy C= 200 + 0.5 Y is the consumption function where C is the consumption expenditure and Y is the
national income. Investment expenditure is `400 crores. Is the economy in equilibrium at an income level `1500 crores?
Justify your answer. (4)
OR
Define: (i) Ex-Ante Savings (ii) Full Employment
Q.15 ‘India’s GDP contracted 23.9% in the April-June quarter of 2020-21 as compared to same period of 2019-20, suggesting
that the lockdown has hit the economy hard’. The Hindustan Times, 1st September 2020. State and discuss any two fiscal
measures that may be taken by the Government of India to correct the situation indicated in the above news report. (4)
Q.16 (a) ‘Domestic/household services performed by a woman may not be considered as an economic activity’. Defend or refute
the given statement with valid reason. (3)
(b) ‘Compensation to the victims of a cyclone is an example of a welfare measure taken by the government’. State with
valid reason, should it be included/not included in the estimation of national income of India. (3)
OR
Suppose the Gross Domestic Product (GDP) of Nation X was `2,000 crores in 2018-19, whereas the Gross Domestic
Product of Nation Y in the same year was `120,000 crores. If the Gross Domestic Product of Nation X rises to `4,000
crores in 2019-20 and the Gross Domestic Product of Nation Y rises to `200,000 crores in 2019-20. Domestic Product of
Nation Y rises to `200,000 crores in 2019-20. (6)
Q.17 (a) Elaborate the objective of ‘allocation of resources’ in the Government budget. (3)
(b) Discuss briefly how the Government budget can be used as an effective tool in the process of employment generation. (3)
 New CBSE Sample Question Papers 2021 EXAM HANDBOOK Economics XII (2021 Edition) 91

Part-B Indian Economic Development

Q.18 ___________ was the Indian Finance Minister in 1991, acknowledged for his capabilities to steer away the economic crisis
looming large on the erstwhile Indian Economy. (Choose the correct alternative) (1)
(a) Dr. Subramanian Swamy (b) Dr. Manmohan Singh
(c) Pranab Mukherjee (d) Dr. Urjit Patel
Q.19 India entered the ___________ stage of Demographic Transition after the year 1921. (Choose the correct alternative) (1)
(a) forth (b) second (c) third (d) first
Q.20 Read the following statements - Assertion (A) and Reason (R). Choose one of the correct alternatives given below: (1)
Assertion (A): India became an exporter of primary products and an importer of finished consumer and capital goods
produced in Britain.
Reason (R): Restrictive policies of commodity production, trade and tariff pursued by the colonial government adversely
affected the structure, composition and volume of India’s foreign trade.
Alternatives:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
(c) Assertion (A) is true but Reason (R) is false.
(d) Assertion (A) is false but Reason (R) is true.
OR
Read the following statements - Assertion (A) and Reason (R). Choose one of the correct alternatives given below: (1)
Assertion (A): The major policy initiatives i.e. land reforms and green revolution helped India to become self-sufficient in
food grains production.
Reason (R): The proportion of people depending on agriculture did not decline as expected
Alternatives:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A).
(c) Assertion (A) is true but Reason (R) is false.
(d) Assertion (A) is false but Reason (R) is true.
Q.21 Read the following statements - Assertion (A) and Reason (R). Choose one of the correct alternatives given below: (1)
Assertion (A): Every year government fixes a target for disinvestment of Public Sector Enterprises (PSEs).
Reason (R): Disinvestment is an excellent tool for discarding the loss incurring Public Sector Enterprises (PSEs).
Alternatives:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
(c) Assertion (A) is true but Reason (R) is false.
(d) Assertion (A) is false but Reason (R) is true.
Q.22 From the set of events/systems given in column I and corresponding relevant fact given in column II, about China, choose
the correct pair of statement: (1)
Column I Column II
A. Great Leap Forward (i) Cultivating land Collectively
B. Commune System (ii) Opening of the Industries in their homes
C. Proletarian Cultural revolution (iii) Students were sent to work and learn from the countryside
D. Economic Reforms in China (iv) 1988
(a) A - (i) (b) B - (ii) (c) C - (iii) (d) D – (iv)
Q.23 ___________adopted ‘One Child Policy’ as a measure to control population. (Choose the correct alternative) (1)
(a) India (b) China (c) Pakistan (d) Russia
Read, the following hypothetical Case Study, carefully and answer the question numbers 24-27 on the base of the same.
Since ages, farmers in India have taken recourse to debt. In the earlier times the same was from informal sources. Since independence
with the efforts of the government, formal sector has actively come into picture. Farmers borrow not only to meet their investment
needs but also to satisfy their personal needs. Uncertainty of income caused by factors likes crop failure caused by irregular rainfall,
reduction in ground water table, locust/other pest attack etc. These reasons push them into the clutches of the private money
lenders, who charge exorbitant rates of interest which add to their miseries.
 92 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

Various governments in India, at different times for different reasons, introduced debt relief/waiver schemes. These schemes are
used by governments as a quick means to extricate farmers from their indebtedness, helping to restore their capacity to invest and
produce, in short to lessen the miseries of the farmers across India. The costs and benefits of such debt relief schemes are, however,
a widely debated topic among economists. Some economists argue that such schemes are extremely beneficial to the poor and
marginalised farmers while others argue that these schemes add to the fiscal burden of the government, others believe that these
schemes may develop the expectation of repeated bailouts among farmers which may spoil the credit culture among farmers.
Q.24 Uncertainty of income for farmers in India is majorly caused by __________ (irregular rainfall/unavailability of loans). (1)
Q.25 Some economists argue that debt waiver schemes are extremely beneficial to the poor and marginalised farmers, as these
schemes reduce the burden of ____________ (indebtedness/personal expenditures) (1)
Q.26 The rural banking structure in India consists of a set of multi-agency institutions. _______________ (Regional Rural
Banks /Small Industries Development Bank of India) is expected to dispense credit at cheaper rates for agricultural purposes
to farmers. (1)
Q.27 _____________ (Regional Rural Banks/ Land Development Banks) is the most prominent body responsible for providing
loans for long term land development. (1)
Q.28 ‘India has emerged as a hotspot for medical tourism’. Defend the statement with valid arguments. (3)
OR
Discuss any two steps taken by the government in the direction of improving agricultural marketing system in India, since
independence. (3)
Q.29 Discuss briefly the concept of ‘informalisation of workforce’, in the context of Indian economy. (3)
Q.30 “Agriculture sector appears to be adversely affected by the economic reform process.” Explain the given statement. (4)
Q.31 ‘Atamnirbhar Bharat’ had been at the roots of the Indian planning process in the form of ‘self reliance’ as an objective of the
planning process. Do you agree with the given statement? Justify the rationale of the given statement. (4)
OR
Discuss briefly any two major steps taken by the Government of India on ‘Financial Sector’ front under the Economic
Reforms of 1991. (4)
Q.32 Compare and analyse the given data of India and China with valid arguments. (4)
Annual Growth of Gross Domestic Product (%), 1980-2017
Country 1980-90 2015-2017
India 5.7 7.3
China 10.3 6.8
Source: Key Indicators for Asia and Pacific 2016, Asian Development Bank, Philippines; World Development Indicators 2018.
Q.33 (a) “If the rate of resource extraction exceeds the rate of regeneration, it leads to reduction in carrying capacity of the
environment.” Discuss the rationale of the given statement with valid reasons. (3)
(b) “Calorie-based norm is not an adequate measure to identify the poor. Establish the rationale of the given statement
with valid reasons. (3)
OR
(a) Why are less women found in regular salaried employment? (2)
(b) Analyse the recent trends in sectoral distribution of workforce in India:
Trends in Employment Pattern (Sector wise), 1993-2012 (in %)
Sector 1993-94 1999-2000 2011-2012
Primary 64 60.4 24.3
Secondary 16 15.8 24.3
Services 20 23.8 26.8
Q.34 State, giving valid reasons whether the following statements are true or false.
(a) Since independence, the benefits of the increase in economic growth in India have trickled down to the people at the
bottom of population pyramid. (2)
(b) Human Capital Formation gives birth to innovation, invention and technological improvements. (2)
(c) There exists an inverse correlation between infrastructural growth and national income. (2)
 New CBSE Sample Question Papers 2021 EXAM HANDBOOK Economics XII (2021 Edition) 93

Answer Key
1. (a) stock, flow. OR (c) `240 crores the Aggregate Supply.
2. release 3. (c) 4. (b) (b) Increase in Government Expenditure: The government
5. (c) 6. (a) 7. increase may also increase its expenditure. This may increase the
8. (c) 9. inflationary gap 10. (d) purchasing power in the hands of the general public which in
11. (a) The given statement is false as Gross Domestic Product is the turn may increase the Aggregate Demand in the economy to
result of sum of Gross Value Added by all the producing units/ bring it equal to the Aggregate Supply.
firms in an economy, during an accounting year. 16. (a) The given statement is defended; as it is difficult to measure
(b) The given statement is false as intermediate goods are the monetary value of the services performed by a woman
generally non-durable in nature. They are the goods used as (homemaker). Therefore, these activities may not be
raw material and they lose their identity in the production considered as an economic activity.
process for the creation of a new commodity, during an (b) Compensation given to the victims of a cyclone is an example
accounting year. of a social welfare measure taken by the government. However,
12. (a) The given statement is false as the Current Account of it is not included in estimation of national income as it is a
Balance of Payments records unilateral transfers along with transfer payment which does not lead to corresponding flow of
exports and imports of goods and services. goods and services.
(b) The given statement is false as the borrowings from abroad OR
are recorded in the Capital Account of Balance of Payments Compare the rate of change of GDP of Nations X and Y, taking
on the credit side as it results in an inflow of foreign 2018-19 as base year.
currency in the economy. Nations/ 2018-19 2019-20 Growth Rate of GDP
OR Years = Change in GDP/Base
The given statement is refuted as the Current Account Deficit Year GDP × 100
(CAD) is a broader concept. CAD occurs when the foreign exchange (Base year = 2018-19)
payments on account of visible, invisibles and current transfers are in
excess over the receipts of visible, invisibles and current transfers. A X `2,000 `4,000 = 2000/ 2000
country may face a situation of CAD, even if the country has trade crores crores × 100 = 100%
surplus, with greater negative balances on account of services and Y `1,20,000 `2,00,000 = 80,000/ 1,20,000
unilateral transfers. crores crores × 100 = 66.67%
13. (a) Money multiplier is the process by which the commercial banks Nation X has registered a GDP growth rate of 100% and has
create credit, based upon the reserve ratio and initial deposits. performed better on the front of GDP rise as compared to Nation
(b) Reserve deposit ratio is the minimum reserves which a Y that has registered a GDP growth rate of 66.67%.
commercial bank must maintain as per the instructions of the 17. (a) Allocation of resources: Government seeks to allocate resources
Central Bank. Credit Creation = 1/reserve ratio with a view to balance the goals of all sections of the society.
Thus, credit creation is inversely related to the reserve deposit ratio. Production of goods and services which are injurious to
For Example: Suppose the Reserve Ratio is 0.2 and initial deposit health may be discouraged through taxation policy. Similarly,
is `1000 crores. Total Credit Created = 1/reserve ratio × initial production of goods of socially beneficial nature may be
deposits = 1/0.2 × 1000 = `5,000 crores. encouraged through subsidies. If the private sector does
Now, suppose reserve ratio is increased to 0.5. Total Credit not take initiative in certain activities (Public Goods), the
Created = 1/0.5 × 1000 = `2,000 crore. government may directly control them like water supply and
Thus, on the basis of the above illustration we can say that there exists sanitation etc.
an inverse relation between reserve and credit creation. (b) Employment Generation: Government budget can be used
14. Given, Consumption function(C)=200+0.5Y, Investment (I) = as an effective tool in the process of employment generation
400, Level of income (Y) = 1500 in various ways. Investment in infrastructural projects like
At Equilibrium level, AD = AS or Y = C + I construction of flyovers, bridges, expansion of roads etc.
Y = (200 + 0.5Y) + 400 Y – 0.5 Y = 600 Y = 600/0.5 = `1200 crores. creates jobs for different sections of the workforce. In rural/
The equilibrium level of income = `1200 crores. urban areas government can provide jobs through various
The given income (`1500 crores) is greater than equilibrium employment generation schemes like MGNREGA, SJSRY,
level of income (`1200 crores). Therefore, the economy is not in PMRY etc.
equilibrium. 18. (b) 19. (b) 20. (a) OR (b)
OR 21. (b) 22. (c) 23. (b)
(i) Ex-ante savings: Ex-ante savings refers to the planned
24. irregular rainfall 25. indebtedness
savings of an economy at different levels of income.
26. Regional Rural Banks 27. Land Development Banks
(ii) Full employment: It refers to a situation, where all the willing
and capable resources get a gainful job at prevailing wage rate. 28. The given statement is defended as in the recent past India has
It is a situation where there is no involuntary unemployment. witnessed many foreign nationals visiting for surgeries, organ
15. The situation suggests that Aggregate Demand is less than transplant, dental and even cosmetic care. The prime reason for
Aggregate Supply. Two fiscal measures to control it: this phenomenon can be quoted as:
(a) Decrease in Taxes: To curb the situation, the government (i) Health services in India offer latest medical technologies with
may decrease the taxes. This may increase the purchasing qualified professionals.
power in the hands of the general public. This may increase (ii) All these medical services are less costly in India as compared to
the Aggregate Demand in the economy to bring it equal to similar health care services in other countries.
 94 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

OR Nevertheless, Indian elephant has to travel a long distance before

Two major steps taken by the government in the direction it could present itself as a real threat to the growth story of the
of improving agricultural marketing system in India, since Chinese dragon.
independence are: 33. (a) The environment is able to perform its functions
(i) Regulation of markets: This step was necessary in the uninterruptedly so long as the demand for these functions is
post-independence period so as to create an orderly and within the carrying capacity of the environment. This means
transparent marketing condition across India. This policy that the resources are not extracted beyond the rate of their
benefited both farmers as well as consumers. regeneration.
(ii) Physical Infrastructure: This is another important aspect If there is a disequilibrium (demand being more than
tackled by the government. Improvement of physical supply), the environment fails to replenish itself and it will
infrastructure facilities like roads, railways, warehouses, lead to environmental crisis. Thus, to maintain a healthy
godowns, cold storages, processing units etc. has been the environment, the carrying capacity of the environment must
target of the government since decades. be valued and respected.
29. In the recent years, India has witnessed an unprecedented shift (b) The calorie based norms is not an adequate measure to
of the workforce from the formal sector to informal sector. This identify the poor as this method does not differentiate
process whereby, the proportion of informal worker in the total between the very poor and the other poor. This mechanism
workforce increases is known as informalisation of workforce. takes into account expenditure on food and a few other
30. The agricultural sector was adversely affected by the reform items as proxy for income. It ignores many other vital factors
process in the following manner- associated with poverty; for instance, the accessibility to
(i) Public investment in agriculture sector especially in basic education, health care, drinking water and sanitation.
infrastructure like irrigation, power etc. has been reduced in OR
the reform period (a) Lesser women are found in regular salaried employment in
(ii) Reduction of fertilizer subsidy has increased the cost of India, because:
production affecting thereby the small and marginal farmers (i) jobs generally require skills and high level of literacy.
(iii) Increased international competitiveness due to liberalisation
(ii) lack of mobility among women in India due to social
and reduction of import duties.
constraints.
(iv) Shift from food crops to cash crops due to export-oriented
(b) The given data indicates that over the given period, the
policy in agriculture led to a rise in prices of food-grains.
proportion of workforce in primary sector has gone down
31. The given statement is correct; in the early post-independence from 64% in 1993-94 to 24.3% in 2011-12, this account to
period the aim of the government’s policy was to reduce nearly a fall of 20% over the years. Whereas, the employment
the dependence on the foreign countries for goods, services, share of both secondary and the services sector has increased
technology and capital. It stressed on the use of domestic in India.
resources to avoid foreign interference, as it was feared that the
The share of secondary sector has gone up by approximately
dependence on the imported food supplies, foreign technology
9% (from 16% in 1993-94 to 24% approximately in 2011-
and foreign capital may increase foreign interference in the
12), the corresponding figure for services sector has gone
policies of our country.
up by 7% (from 20% in 1993-94 to 27% approximately in
Similarly, the main thrust of the ‘Atmanirbhar Bharat’ is also to make 2011-12).
India an economy that is self-reliant and self-sufficient.
These sectoral changes have been very significant in the
OR growth journey of India, showing the gradual shift of the
Two steps taken by the government of India on financial sector workforce from primary sector to the secondary and tertiary
under the Economic Reforms of 1991 were: sector.
(a) Change in the role of Reserve Bank of India (RBI): The role 34. (a) The given statement is false as there have been different
of RBI was reduced from regulator to facilitator of financial factors (like massive rate of growth of population, unequal
sector. This means that financial sector was given greater distribution of wealth, skewed benefits accruing from green
autonomy (to take decisions) on many matters independent revolution etc.) due to which benefits of increase in the
of RBI. Gross Domestic Product have not trickled down completely
(b) Origin of Private Banks: The reform process led to to the people at the bottom of population pyramid.
establishment of private sector banks of Indian as well as (b) The given statement is true. Human Capital Formation
foreign origin. (investment in education/health) not only increases the
32. The given data shown that China has gained economic strength productivity of the available human resources but also
over the years. When many developed countries were finding it stimulates innovations and creates ability to adopt and adapt
difficult to maintain a growth rate of even 5%, China was able to to the new technologies.
maintain near double-digit growth during the decade of 1980s. (c) The given statement is false, as generally, there exists a
The growth rate of China has decelerated to an average of 6.8%, positive correlation between infrastructural growth and
over the period 2015-17. In the recent past India has posted a national income. Infrastructure is the support system for
decent rise in the growth rate. While India had maintained an economy which facilitates greater productive activities,
a reasonable growth rate of 5.7% in the decade of 1980’s it higher levels of output/income and improvement of quality
has shown great calibre and character in the period 2015-17 of life in an economy.
by registering an average of 7.3%, over the period 2015-17.
 New CBSE Sample Question Papers 2021 EXAM HANDBOOK Economics XII (2021 Edition) 123

Sample Question Paper 10 (for Practice)

Part-A Macroeconomics
Q.1 To control recession, which of the following can be appropriate: (1)
(a) Reducing Repo Rate (b) Reducing CRR
(c) Both (a) and (b) (d) None of (a) and (b)
Q.2 The impact of ‘Excess Demand’ under the Keynesian theory of income and employment, in an economy are: (1)
(a) Decrease in output, income, employment and price level.
(b) Increase in output, income employment and price level.
(c) Rise in the price level and the nominal income but no change in the output and employment.
(d) Increase in output, income and employment; but no change in the price level.
Q.3 Which of the following is the equilibrium condition in a two sector economy? (1)
C C C+ I C+ I
(a) Y= (b)
Y= (c)
Y= (d)
Y=
MPS 1 - MPS 1 - MPC MPC
OR
Y
AS = Y

AD
AD2
1
Aggregate Demand

E1
AD2
AD1

E2

o
45
O Y2 Y1 X
Income/Output

Q.4 The value of MPC can exceed one. True/False? Give valid reason. (1)
Q.5 If inflation is higher in country A than in country B, and the exchange rate between the two countries is fixed what is likely
to happen to the trade balance between two countries? (1)
(a) Trade balance of country A will show a deficit whereas trade balance of country B will show a surplus.
(b) Trade balance of country A will show a surplus whereas trade balance of country B will show a deficit.
(c) Balance of trade of both the countries will be in balance
(d) None of the above.
Q.6 ‘Charity from Abroad’ will be recorded on __________ (credit/debt) side of the Balance of Payment accounts. (1)
Read the following News Report and answer Q. 7-10 on the basis of the same:
10 major highlights of Budget 2020
• Empowering people to create wealth and boost purchasing power.
• Fundamentals of the economy are strong.
• GST brings 60 lakh new taxpayers.
• Three pillars of Union Budget 2020 – (i) Aspirational India. (ii) Economic Development (iii) Caring society.
• Promoting Education In India – Finance minister has allocated a total of `99,300 crore to the education sector of India.
• National Infrastructure policy to spend `100 lakh crore over the next 5 years.
• Building Data centre parks and National Quantum Tech Plan.
• Developing the structure of tourism.
• Governance is key.
• Empowering the scheduled class and scheduled tribes – Government has allocated `85k crore for the scheduled class and
other backward classes for the year 2020-21 and `53,700 crore for the scheduled tribes.
Q.7 Goods and Services Tax (GST) is a __________ (direct/indirect) tax. (1)
Q.8 “GST brings 60 lakh new taxpayers.” What will be its likely effect on revenue deficit in government budget? (1)
(a) Increase (b) Decrease (c) Constant (d) None of these
Q.9 “National Infrastructure policy to spend `100 lakh crore over the next 5 years.” Building Infrastructure facilities is a _______
(revenue/capital) expenditure in a government budget.
124 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

Q.10 “Government has allocated `85k crore for the scheduled class and other backward classes for the year 2020-21 and `53,700
crore for the scheduled tribes.” What objective of government budget has been highlighted in the above lines?
(a) Reallocation of resources (b) Reduction in income inequalities
(c) Price stability (d) Economic growth
Q.11 Saving function of an economy is: S = – 250 + 0.25Y. If the planned investment is `2,000 crores, calculate the following:
(a) Equilibrium level of income in the economy. (b) Aggregate demand of income of `5,000 crores. (3)
OR
Consumption function of an economy is : C = 40 + 0.8Y (amount in `crores). Determine that level of income where
average propensity to consume will be one. (3)
Q.12 Use the following information of an imaginary country: (3)
Year 2016 2017 2018
Nominal GDP 6.5 8.4 9
GDP deflator 100 140 125
(i) For which year is real GDP and nominal GDP same and why?
(ii) Calculate real GDP for the given years. Is there any year for which real GDP falls?
Q.13 Assuming that initial deposits with bank `5,000 and Legal Reserve Deposit Ratio 10%, explain the process of credit creation
by the bank. (4)
Q.14 Explain, giving examples, the two components of capital receipts in a government budget. (4)
Q.15 (a) On which side and in which sub-account of Balance of Payments, will foreign investment in India’ be recorded ? State
valid reason for your answer. (2)
(b) “A country with trade deficit cannot have current account surplus in its Balance of Payments”. Do you agree with given
statement? Discuss with reason. (2)
OR
State on which side of capital account/current account will the following transactions be recorded and why:
(i) Interest on loan received from Nepal (ii) Import of mobile phones from China
Q.16 (a) Compute National Income. (`in crore) (3)
(i) Private final consumption expenditure 900
(ii) Government final consumption expenditure 400
(iii) Net imports 30
(iv) Gross domestic capital formation 250
(v) Change in stock 50
(vi) Net domestic fixed capital formation 180
(vii) Net indirect taxes 100
(viii) Net factor income from abroad (–)40
(ix) Profits 100
(b) Explain the circular flow of income in a two-sector economy. (3)
OR
(a) Calculate Net National Product at market price. (`in crore) (3)
(i) Gross domestic fixed capital formation 350
(ii) Private final consumption expenditure 8000
(iii) Government final consumption expenditure 3000
(iv) Value of output produced in the economy 150
(v) Current replacement cost of fixed capital 40
(vi) Net exports (–) 60
(vii) Net factor income from abroad 80
(viii) Sales by all firms in the economy 100
(b) Explain any two precautions while calculating National Income by Product Method. (3)
Q.17 What is ‘Effective Demand’ principle? Explain with the help of a numerical example. (6)
 New CBSE Sample Question Papers 2021 EXAM HANDBOOK Economics XII (2021 Edition) 125

Part-B Indian Economic Development

Q.18 Write the correct sequence of alternatives given in Column II by matching them with respective terms in Column I: (1)
Column I Column II
A. India’s first official census (i) less than 2%
B. Introduction of the railways in India (ii) about 7%
C. India’s annual growth rate of aggregate real output during colonial period (iii) 1850
D. Female literacy level at the time of independence (iv) 1881

Q.19 Match the following and choose the correct alternative: (1)
Column I Column II
1. Quota (A) Quantity of goods that can be imported
2. Land Reforms (B) Seeds that give large proportion of output
3. HYV Seeds (C) Improvements in the fieldof agriculture to increase its productivity
4. Subsidy (D) The monetary assistance given by government for production activities.
(a) 1-D, 2-C, 3-B, 4-A (b) 1-A ,2-D, 3-B, 4-C
(c) 1-A, 2-C, 3-B, 4-D (d) 1-A, 2-B, 3-C, 4-D
Q.20 ____________ have been removed to increase the competitive position of Indian goods in the international markets. (1)
(a) Import licensing (b) Quantitative restrictions
(c) Export duties (d) Tariffs
Q.21 Match the following: (1)
Column I Column II
(a) High degree of urbanisation (i) India
(b) Very high fertility rate (ii) China
(c) Lowest density of population (iii) Pakistan
(d) Growth due to service sector
Q.22 ____________ is a whole system of farming that restores, maintains and enhances the ecological balance. (1)
OR
Unemployment is a situation in which all those who, owing to lack of work, are not working but either seek work though
employment exchanges, intermediaries, friends or relatives or by making applications to prospective employers or express
their willingness or availability for work under the prevailing condition of work and remunerations. This definition is
given by:

(a) Economists
(b) National Sample Survey Organisation
(c) Census of India
(d) Directorate general of Employment and Training
Q.23 Identify the correct sequence of alternatives given in column II by matching them with respective terms in column I. (1)
Column I Column II
(a) A UN conference on climate change, held in Kyoto, (i) Emphasised the concept of sustainable development
Japan in 1997
(b) The CPCB (Central Pollution control Board) (ii) To fight global warming
(c) The United Nations Conference on Environment and (iii) Emphasised on protecting the future generation.
Development (UNCED)
(d) The Brundtland Commission (iv) Identified 17 categories of industries (large and
medium scale) as significantly polluting
126 EXAM HANDBOOK Economics XII (2021 Edition) For CBSE Exam 2021 – by Subhash Dey

Read the following carefully and answer question no. 24-27 on the basis of the same:
10
8.7
9

8
7.8
7
6.1 6.1
5.7 5.8
6
4.8
5
4.2
3.6 3.4
4 3.3
2.8
3
2
0.85 2.28 1.12
0.39 2.03 1.99 1.84 1.73 1.89
1 0.28
1.5
0.98
0
1951-56 1956-61 1961-66 1969-74 1974-79 1980-85 1985-90 1990-92 1997-2000 1999-2005 2005-10 2010-12

GDP Employment
Growth of Employment and Gross Domestic Product (GDP) during 1951-2012 (in %)

Q.24 During the period 1950–2010, Gross Domestic Product (GDP) of India grew positively and was higher than the
employment growth. However, there was always fluctuation in the growth of GDP. During this period, employment grew at
the rate of not more than ___________ per cent. (1)
(a) 1 (b) 2
(c) 3 (d) 4
Q.25 In the Indian economy, without generating employment, we have been able to produce more goods and services. Scholars
refer to this phenomenon as__________ . (1)
Q.26 The process of moving from selfemployment and regular salaried employment to casual wage work as_____________
(casualisation of workforce/informalisation of workforce). (1)
Q.27 All the public sector establishments and those private sector establishments which employ 10 hired workers or more are
called _____________ (formal/informal) sector establishments. (1)
Q.28 Examine the role of education in the economic development of a country. (3)
OR
Comment on the following:
(a) It is necessary to create employment in the formal sector rather than in the informal sector.
(b) Less women are found in regular salaried employment.
Q.29 Explain, how according to the Brundtland Commission the present generation can promote sustainable development. (3)
Q.30 The economic challenges before India at the time of independence were enormous. Do you agree with the statement? Give
reasons. (4)
OR
The economic justification of subsidies in agriculture is, at present, a hotly debated question. Some economists believe that
subsidies should be phased out. What arguments do these economists give against giving subsidies?
Q.31 Explain how Goods and Services Tax (GST) has simplified the multiplicity of taxes on goods and services. (4)
Q.32 “Till the late 1970s, India, China and Pakistan – all the three countries were maintaining the same level of low development.
The last three decades have taken these countries to different levels.”
Do you agree with the given statement? Give valid reasons in support of your answer. (4)
Q.33 Explain the various poverty alleviation programmes initiated by the government of India since the Third Five Year plan
(1961-66). (any four) (6)
OR
Bring out the importance of animal husbandry, fisheries and horticulture as a source of diversification. (6)
Q.34 “Infrastructure contributes to economic development of a country.” Do you agree with the given statement? Give reasons in
support of your answer. (6)

 New CBSE Sample Question Papers 2021 EXAM HANDBOOK Economics XII (2021 Edition) 127

ANSWERS

Sample Question Paper-1 14. (a) Central Bank performs similar banking functions for
1. False the government as commercial banks perform for its
customers. Its functions include providing loans to the
2. Current Account Surplus (CAS) refers to excess of the
government, working as an agent of the government,
receipts from value of export of visible items, invisible items
managing the public debts for the government etc. The
and unilateral transfers over the payments for value of import
Central Bank also advises the government regarding the
of visible items, invisible items and unilateral transfers.
money market, capital market and also on policy matters.
OR
(b) In most of the economies across the world there exists a
zero
centralised system of currency issues. Central Bank of a
3. 1/Legal Reserve Ratio country has monopoly over the currency issue. It has the
4. True sole responsibility of printing and putting in circulation
5. Tax is compulsory payment imposed by the government on all types of currency notes (with a few exceptions). This
individual and firms. centralised and monopolised system of currency notes
6. Fees 7. release issue ensures uniformity of the currency system. It also
8. (c) 9. (a) helps in easier control over the monetary system.
10. increase 15.
11. (a) The given statement is not correct and is thus refuted. Fiscal Deficit Revenue Deficit
Final goods are those goods which are purchased/
consumed either by households or by the producers for Fiscal deficit is the excess of the The revenue deficit
investment purpose, i.e., these are the goods which have government’s total estimated refers to the excess of
expenditure and its total government’s estimated
crossed the production boundary.
estimated receipts excluding revenue expenditure over its
(b) The given statement is refuted. Gross investment borrowing estimated revenue receipts
includes addition to capital stock which also includes Fiscal Deficit = Total Revenue Deficit = Revenue
replacement for the normal wear and tear (depreciation). Expenditure – (Revenue Expenditure – Revenue
Whereas, addition to capital stock in an economy is Receipts + Non-debt creating Receipts
measured by net investment. So, in an accounting sense, capital receipts)
if the value of depreciation becomes zero, only then 16. (a) The services of a school teacher will be included in the
gross investment will be equal to net investment. national income of the country as it contributes to the
(c) The given statement is refuted. Net factor income from current flow of services in the economy.
abroad is the difference between factor income earned (b)
from rest of the world and factor income paid to rest of
the world. If the value of factor income paid to rest of Real GDP Nominal GDP
the world is greater than the factor income earned from Real Gross Domestic Product Nominal Gross Domestic
rest of the world, the resulting value (net factor income (GDP) is defined as the market Product (GDP) is the market
from abroad) can be negative. value of all final goods and value of all final goods and
12. (a) We know that: services produced in a year, services, produced in a year,
Consumption expenditure C = C + bY = 500 + 0.6 (5,000) measured at the prices of a measured at the prices of
= `3,500 crores given base year. current year.
(b) Also, at equilibrium level, Y = C + I (c) The money received from the sale of a second hand
5,000 = 3,500 + I ⇒ I = `1,500 crores car will not be included in the national income of the
13. (i) False, trade deficit is a lesser cause of worry if it reflects country as it does not contributes to the current flow of
a rise in investment which will build the capital stock and goods in the economy.
increase the future output in an economy. 17. (a) The steps taken by the Central Bank to boost the falling
(ii) True, Indians investing in assets abroad will lead to an demand in the economy are justified as the reduction
outflow of foreign currency, it will be recorded under debit in the Repo rate and Reverse Repo Rate will increase
side of capital account in balance of payments. the availability of funds in the market through the
OR commercial banks.
(a) (i)  Recorded in the current account, because it is simply Rationale: A decrease in Repo/Reverse Repo Rate will
an import of a good. push the commercial banks to reduce the lending rate
and will eventually make the borrowings cheaper for the
(ii) Recorded on debit side because it leads to outflow of
general public. As a result the consumption demand in
foreign exchange.
the economy may increase.
(b) (i) Recorded in capital account because it is a transaction
(b) Involuntary Unemployment refers to a situation in
in assets.
which all those people who are willing and able to work
(ii) Recorded on credit side because it leads to inflow of at the existing wage rate do not get work.
foreign exchange.
OR
 New CBSE Sample Question Papers 2021 EXAM HANDBOOK Economics XII (2021 Edition) 151

agriculture. where this programme is implemented. In 2013-14, nearly

• Infrastructure is lacking in many parts of the country. 5 crore households got employment opportunities under
this law.
• It is yet to raise the level of living of more than one-fourth
of its population that lives below the poverty line. OR
Pakistan Importance of animal husbandry, fisheries and horticulture as
a source of diversification:
• The annual growth rate of GDP has fallen from 6.3%
during 1980-90 to 5.3% during 2015-2017. 1. Animal Husbandry: Livestock production provides
increased stability in income, food security, transport, fuel
• The official data of Pakistan indicate rising poverty there.
and nutrition for the rural households. Today, livestock
The proportion of poor which was 25 per cent in 1980s
sector alone provides alternative livelihood options to over
started rising again in 1990s.
70 million small and marginal farmers including landless
Political instability over a long period of time, over- labourers • Poultry accounts for the largest share with
dependence on remittances and foreign aid and volatile 58 percent • Milk production in India has increased by
performance of agricultural sector are the reasons for the more than 8 times between 1951-2014, mainly due to the
slowdown of the Pakistan economy. However, during the last successful implementation of ‘operation Flood’
three years, Pakistan has recovered its economic growth. In 2. Fisheries: In India, due to progressive increase in budgetary
2015-16, GDP growth rate was 4.7%, highest in last 8 years. allocations and introduction of new technologies in
Many macroeconomic indicators also began to show stable fisheries, today total fish production accounts for 0.9
and positive results. percent of the total GDP. Presently, fish production from
China: In China, the lack of political freedom and its inland sources contributes about 65 per cent to the total
implication for human rights are major concerns; yet, in the value of fish production and the balance 35 per cent
last three decades, it used the ‘market system without losing comes from the marine sector (sea and oceans).
political commitment’ and succeeded in raising the level of 3. Horticulture: India has adopted growing of diverse horticulture
growth along with alleviation of poverty. crops such as fruits, vegetables, flowers, medicinal plants, etc.
• China has used the market mechanism to create additional In rural India, horticultural plays a vital in providing food
social and economic opportunities. and nutrition to the rural population. It also addressed
• By retaining collective ownership of land and allowing the problem of unemployment (particularly disguised
individuals to cultivate lands, China has ensured social and seasonal unemployment) in the villages. Various
security in rural areas. horticultural activities in Indian villages have improved
• Public investment in social infrastructure brought about the economic condition of many farmers. Such activities
positive results in human development indicators in China. have become a lucrative source of livelihood for many
33. 1. Rural Employment Generation Programme (REGP): It women in the rural India. Horticulture sector contributes
aims at creating self employment opportunities in rural about 1/3rd of the value of agriculture output and 6
areas. The Khadi and Village Industries Commission percent of GDP of India. Enhancing its role requires
is implementing it. Under this programme, one can get investment in infrastructure like electricity, cold storage
financial assistance in the form of bank loans to set up systems, marketing linkages, etc.
small industries. 34. The given statement is correct. Infrastructure is the foundation
2. Prime Minister’s Rozgar Yojna (PMRY): The educated of economic development of a country.
unemployment from low-income families in rural and A. Infrastructure contributes to economic development of
urban areas can get financial help to set up any kind of a country by increasing the productivity of the factors of
enterprise that generates employment. production.
3. Swarnajayanti Gram Swarozgar Yojna (SGSY): Since Infrastructure in the support system on which depends
1990s, those who wish to benefit from self-employment the efficient working of the modern industrial economy.
programmes are encouraged to form Self-Help Groups 1. Modern agriculture depends, to a considerable extent, on
(SHGs). Initially, they are encouraged to save some the adequate expansion and development of irrigation
money and lend among themselves as small loans. Later, facilities. Agriculture also largely depends on infrastructure
through banks, the government provides, partial financial for speedy and large-scale transport of seeds, pesticides,
assistance to SHGs which then decide whom the loan is fertilizers, and the produce using modern roadways,
to be given to for self-employment activities. SGSY has railways and shipping facilities. In recent times, agriculture
now been restructured as ‘National Rural Livelihoods also depends on insurance and banking facilities
Mission (NRLM). A similar programme called ‘National
because of its need to operate on a very large scale.
Urban Livelihoods Mission’ has also been in place for
2. Industrial progress depends on the development of power and
urban poor.
electricity generation, transport and communications.
4. Mahatma Gandhi National Rural Employment Guarantee
B. Infrastructure also contributes to economic development
Act, 2005: This Act provides guaranteed wage employment
of a country by improving the quality of life. Infrastructure
to every rural household whose adult volunteer is to do
in water supply and sanitation have a large impact by
unskilled manual work for a minimum of 100 days in a
reducing morbidity from major waterborne diseases. Inadequate
year. The poor unskilled people in rural areas who are ready
to work at the minimum wage can report for work in areas infrastructure can have multiple adverse effects on health.