Class 12 Commerce (HSC Board) · Economics · Chapter 1
Introduction to Micro and Macro Economics
Quick summary
Economics has two main branches: micro economics, which studies individual units like a consumer, a firm or one market, and macro economics, which studies the economy as a whole — national income, total employment, general price level. This chapter explains their meaning, scope, features and importance.
Key points
'Micro' comes from the Greek word Mikros (small); 'Macro' from Makros (large). The terms were coined by Norwegian economist Ragnar Frisch of Oslo University in 1933.
Micro economics developed first (classical economists like Marshall). Macro economics became popular after the Great Depression of the 1930s through J. M. Keynes.
Micro economics is also called Price Theory; macro economics is called Income and Employment Theory.
Scope of micro: theory of product pricing, theory of factor pricing (rent, wages, interest, profit), theory of economic welfare.
Features of micro: study of individual units, price theory, partial equilibrium, based on assumptions ("other things remaining constant"), slicing method, marginalism, limited scope.
Importance of micro: explains price determination, working of a free market economy, foreign trade, business decisions, useful to government, basis of welfare economics.
Scope of macro: theory of income and employment, general price level and inflation, growth and development, macro theory of distribution.
Features of macro: study of aggregates, income theory, general equilibrium, interdependence, lumping method, growth models, general price level, policy-oriented.
Importance of macro: understanding the working of an economy, economic fluctuations, national income, economic development, performance of the economy, employment level.
Important terms
Slicing method – splitting the economy into small units for study (micro).
Lumping method – studying the economy in totals or aggregates (macro).
Partial equilibrium – equilibrium of one unit, assuming others constant.
General equilibrium – equilibrium of the economy as a whole, with all units interdependent.
Aggregates – totals like national income, total consumption, total investment.
Important dates and people
1933 – Ragnar Frisch coins the terms micro and macro economics.
1930s – Great Depression; Keynes popularises macro economics.
1969 – Ragnar Frisch shares the first Nobel Prize in Economics with Jan Tinbergen.
5 important questions
Q1. Distinguish between micro and macro economics (any four points).
Micro
Macro
Studies individual units
Studies the whole economy
Price theory
Income and employment theory
Slicing method
Lumping method
Partial equilibrium
General equilibrium
Q2. Explain any three features of micro economics.
It studies individual units like a household or firm; it uses the slicing method; it is based on assumptions such as 'ceteris paribus' (other things remaining constant).
Q3. State the scope of macro economics.
Theory of income and employment; theory of general price level and inflation; theory of growth and development; macro theory of distribution.
Q4. Who coined the terms micro and macro economics and when?
Ragnar Frisch of Oslo University, in 1933.
Q5. Give two examples of micro and two of macro concepts.
Micro: price of rice, demand of a consumer. Macro: national income, general price level.
Exam tip
In 'distinguish' questions, use a table with at least four clear points — basis, method, equilibrium and scope.
Class 12 Commerce (HSC Board) · Economics · Chapter 2
Utility Analysis
Quick summary
Utility is the want-satisfying power of a commodity. This chapter explains features and types of utility, the concepts of total utility (TU) and marginal utility (MU), their relationship, and the Law of Diminishing Marginal Utility given by Alfred Marshall with its assumptions and exceptions.
Key points
Utility (उपयोगिता) = capacity of a commodity or service to satisfy a human want.
Features: relative concept, subjective (psychological), ethically neutral, differs from usefulness, pleasure and satisfaction, measurement is hypothetical, multi-purpose, depends on intensity of want, basis of demand.
Types of utility: form, place, service, knowledge, possession, time utility.
Total Utility (TU) = sum of utility from all units consumed. Marginal Utility (MU) = addition to TU from one more unit.
Relationship: when MU falls, TU rises at a diminishing rate; when MU = 0, TU is maximum (point of satiety); when MU is negative, TU falls.
Law of Diminishing Marginal Utility (Prof. Alfred Marshall): other things remaining constant, the additional benefit a person gets from a given increase in his stock of a thing diminishes with every increase in the stock that he already has.
Assumptions: rationality, cardinal measurement, homogeneity, continuity, reasonable size of units, constancy of other factors, divisibility, single want.
Exceptions (where the law seems not to apply): hobbies and collection (stamps, coins), drunkards, misers (money), reading, music/poetry.
Criticisms: utility cannot be measured cardinally; unrealistic assumptions; applies to a single want only.
Important terms
Point of satiety – point where MU becomes zero and TU is maximum.
Disutility – negative utility from consuming beyond satiety.
Cardinal measurement – measuring utility in numbers (utils).
Form utility – utility created by changing the shape of a thing, e.g., wood into a chair.
Formulas
MUn = TUn − TU(n−1)
TU = ΣMU (sum of marginal utilities)
Consumer equilibrium (one good): MU = Price
5 important questions
Q1. Define utility. State any four features.
Utility is the want-satisfying capacity of a commodity. Features: relative, subjective, ethically neutral, basis of demand.
Q2. Explain the relationship between TU and MU with a table.
Units
TU
MU
1
10
10
2
18
8
3
24
6
4
24
0
5
20
−4
As MU falls, TU rises slowly; at MU = 0, TU is maximum; when MU is negative, TU falls.
Q3. State Marshall's Law of Diminishing Marginal Utility.
Other things being constant, the additional benefit from each extra unit of a commodity goes on diminishing as the stock with the consumer increases.
Q4. State any four assumptions of the law.
Rationality, cardinal measurement, homogeneity of units, continuity in consumption.
Q5. Give two exceptions to the law.
Hobbies like collecting stamps or coins; money for a miser (and drunkards with liquor).
Exam tip
Draw the TU and MU diagram neatly, mark the point of satiety, and label the axes (Units on X-axis, Utility on Y-axis).
Class 12 Commerce (HSC Board) · Economics · Chapter 3
Demand Analysis (3A)
Quick summary
Demand is not just a wish — it is a desire backed by willingness and ability to pay. This chapter explains the meaning and features of demand, demand schedule and curve, types of demand, determinants of demand, the Law of Demand with assumptions and exceptions, and variations and changes in demand.
Key points
Demand = desire + willingness to pay + ability to pay, at a given price and time.
Demand is relative: it is always stated with price, time and place.
Demand schedule: a table showing quantities demanded at different prices (individual or market). Demand curve: its graph; normally slopes downward from left to right.
Market demand = sum of demands of all individual buyers (A + B + C).
Types of demand: direct, indirect (derived), complementary/joint, composite, competitive.
Determinants: price, income, prices of substitutes, prices of complementary goods, nature of product, size of population, expectations of future prices, advertisement, tastes/habits/fashions, level of taxation, others (climate, technology, government policy, customs).
Law of Demand (Marshall): other things remaining constant, the higher the price, the lower the quantity demanded, and vice versa. Dx = f(Px).
Why the curve slopes down: law of diminishing marginal utility, income effect, substitution effect, multi-purpose uses, new consumers.
Exceptions: Giffen's paradox (Sir Robert Giffen, bread in England), prestige goods (diamonds, gold), speculation, habitual goods, ignorance; here the demand curve slopes upward.
Variations in demand (price alone changes): expansion (fall in price → more demand) and contraction (rise in price → less demand) — movement along the same curve.
Changes in demand (other factors change, price same): increase and decrease — the whole curve shifts right or left.
Important terms
Derived demand – demand for a thing because of demand for another product, e.g., demand for labour.
Composite demand – one good demanded for several uses, e.g., electricity.
Joint demand – two goods demanded together, e.g., pen and ink.
Demand function: Dx = f(Px, Y, Ps, Pc, T, E…) where Px = own price, Y = income, Ps/Pc = prices of substitute/complementary goods, T = tastes, E = expectations
Law of demand: Dx = f(Px), inverse relation
5 important questions
Q1. Define demand and state its features.
Demand is the desire for a commodity backed by willingness and ability to pay. It is relative to price, time and place.
Q2. State the Law of Demand with its assumptions.
Other things being equal, quantity demanded falls when price rises and rises when price falls. Assumptions: constant income, population, prices of substitutes and complements, tastes, no expectation of future price change, no change in taxation.
Q3. Explain any three exceptions to the Law of Demand.
Giffen goods — people buy less bread when its price falls and switch to better food; prestige goods — rich buy more diamonds at high prices; speculation — people buy more when they expect prices to rise further.
Q4. Distinguish between expansion of demand and increase in demand.
Expansion: due to fall in price only; movement downward along the same curve. Increase: due to other factors at the same price; the demand curve shifts to the right.
Q5. Explain any four determinants of demand.
Price of the good, income of the consumer, prices of substitutes, and tastes and fashions.
Exam tip
Draw separate diagrams for expansion/contraction (movement) and increase/decrease (shift) — they are frequently asked.
Class 12 Commerce (HSC Board) · Economics · Chapter 4
Elasticity of Demand (3B)
Quick summary
The law of demand tells us the direction of change in demand when price changes, but not how much. Elasticity of demand measures this degree of response. This chapter covers types of elasticity, the five types of price elasticity, methods of measuring it and factors affecting it.
Key points
Elasticity of demand = degree of responsiveness of quantity demanded to a change in price, income or prices of related goods.
Types: income elasticity, cross elasticity, price elasticity. Price elasticity is the most important (Prof. Alfred Marshall).
Unitary elastic (Ed = 1) – % change in demand = % change in price (rectangular hyperbola).
Relatively elastic (Ed > 1) – demand changes more than price (flatter curve), e.g., luxuries.
Relatively inelastic (Ed < 1) – demand changes less than price (steeper curve), e.g., necessities.
Methods of measurement: ratio/percentage method, total expenditure (outlay) method, point (geometric) method.
Total expenditure method: if price falls and total expenditure rises → Ed > 1; stays same → Ed = 1; falls → Ed < 1.
Point method: on a straight-line demand curve, Ed = lower segment ÷ upper segment. At the mid-point Ed = 1; at the Y-axis Ed = ∞; at the X-axis Ed = 0.
Elasticity has a negative sign (inverse relation) but is read as a pure number without units.
Factors: nature of commodity (necessity/luxury), availability of substitutes, number of uses, habits, durability, complementary goods, income of consumer, urgency of need, time period, proportion of expenditure.
Important terms
Income elasticity – response of demand to change in income.
Cross elasticity – response of demand for X to a change in price of Y.
Unitary elasticity – equal proportionate change in price and quantity.
Formulas
Ed = (% change in quantity demanded) ÷ (% change in price) = (ΔQ/Q) ÷ (ΔP/P)
Ey (income) = % change in quantity demanded ÷ % change in income
Point elasticity = Lower segment ÷ Upper segment
5 important questions
Q1. Define price elasticity of demand.
The ratio of the percentage change in quantity demanded to the percentage change in price.
Q2. Price falls from ₹10 to ₹8 and demand rises from 100 to 150 units. Find Ed.
% change in Q = 50/100 × 100 = 50%. % change in P = 2/10 × 100 = 20%. Ed = 50 ÷ 20 = 2.5 (> 1, relatively elastic).
Q3. Explain the total expenditure method.
Compare total spending before and after a price change. Price ↓ and spending ↑ → Ed > 1; spending same → Ed = 1; spending ↓ → Ed < 1.
Q4. Explain any four factors influencing elasticity of demand.
Necessities are inelastic and luxuries elastic; goods with many substitutes are elastic; habitual goods are inelastic; goods with many uses are elastic.
Q5. Explain the point method of measuring elasticity.
On a straight-line demand curve, Ed at a point = lower segment ÷ upper segment; it is 1 at the mid-point, ∞ on the Y-axis and 0 on the X-axis.
Exam tip
Learn all five elasticity diagrams with correct curve shapes — flatter for elastic, steeper for inelastic.
Class 12 Commerce (HSC Board) · Economics · Chapter 5
Supply Analysis
Quick summary
Supply is the quantity of a commodity that sellers are willing to offer for sale at a given price and time. This chapter explains total output, stock and supply, supply schedule and curve, determinants of supply, the Law of Supply with assumptions and exceptions, and variations and changes in supply.
Key points
Total output = total production in a period. Stock = quantity available with the seller that can be offered for sale. Supply = part of stock actually offered at a given price.
Supply is always related to price and time.
Supply schedule: individual (one seller) or market (all sellers). The supply curve slopes upward from left to right (positive slope).
Determinants of supply: price of the commodity, state of technology, cost of production, infrastructure, government policy (taxes, subsidies), natural conditions, future price expectations, other factors (prices of other goods, number of firms, goals of the firm).
Law of Supply: other things remaining constant, the higher the price, the greater the quantity supplied, and the lower the price, the smaller the supply — a direct relationship. Sx = f(Px).
Assumptions: constant cost of production, constant technique, no change in weather, no change in government policy, no change in transport cost, prices of other goods constant, no future price expectations.
Exceptions: supply of labour (backward-bending curve — after a point, higher wages mean more leisure), agricultural goods (depends on weather), urgent need for cash, perishable goods, rare goods (paintings, antiques).
Variations in supply (price alone changes): expansion and contraction — movement along the curve.
Changes in supply (other factors change): increase (curve shifts right) and decrease (curve shifts left).
Important terms
Supply schedule – table of quantities supplied at different prices.
Backward-bending supply curve – labour supply curve that bends back at high wage rates.
Expansion of supply – rise in supply due to rise in price only.
Increase in supply – more supply at the same price due to other favourable factors.
Formulas
Supply function: Sx = f(Px, T, C, G, N, E…) where Px = price, T = technology, C = cost, G = government policy, N = natural conditions, E = expectations
Law of supply: Sx = f(Px), direct relation
5 important questions
Q1. Distinguish between stock and supply.
Stock is the total quantity available with the seller; supply is the part of the stock offered for sale at a particular price. Stock can be more than supply.
Q2. State the Law of Supply with its assumptions.
Other things remaining constant, quantity supplied rises with rise in price and falls with fall in price. Assumptions: constant cost and technique, no change in weather, government policy, transport cost, prices of other goods, no future price expectations.
Q3. Explain any three exceptions to the Law of Supply.
Labour supply bends backward at high wages; perishable goods are sold more even at low prices; rare goods' supply cannot change with price.
Q4. Explain any four determinants of supply.
Price of the commodity, technology, cost of production, government policy of taxes and subsidies.
Q5. Distinguish between expansion of supply and increase in supply.
Expansion: due to rise in price only; upward movement along the same curve. Increase: due to other factors; curve shifts to the right.
Exam tip
Remember: the demand curve slopes down, the supply curve slopes up. Label diagrams with Quantity on the X-axis and Price on the Y-axis.
Class 12 Commerce (HSC Board) · Economics · Chapter 6
Forms of Market
Quick summary
A market is any arrangement through which buyers and sellers come in contact to buy and sell a commodity — it need not be a physical place. This chapter classifies markets by place, time and competition, and explains perfect competition, monopoly, oligopoly and monopolistic competition.
Key points
Elements of a market: buyers and sellers, a product, a price, contact between buyers and sellers, knowledge of the market.
By place: local, national, international market.
By time: very short period (supply fixed), short period, long period, very long period (secular period).
By competition: perfect competition and imperfect competition (monopoly, oligopoly, monopolistic competition).
Perfect competition features: large number of buyers and sellers, homogeneous product, free entry and exit, single uniform price, perfect knowledge, perfect mobility of factors, no transport cost, no government intervention. A firm is a price taker; price is set by industry demand and supply.
Monopoly (mono = single, poly = seller): single seller, no close substitutes, barriers to entry, price maker, possible price discrimination.
Oligopoly: few sellers, interdependence in decisions, advertisement, homogeneous or differentiated product, price rigidity, e.g., telecom, automobile.
Monopolistic competition (Prof. E. H. Chamberlin): many sellers, product differentiation (brands), selling costs, free entry, e.g., soaps, toothpaste.
Equilibrium price under perfect competition is where market demand = market supply.
Important terms
Price taker – a firm that accepts the market price (perfect competition).
Price maker – a firm that fixes its own price (monopoly).
Product differentiation – making a product look different by brand, packing, colour.
Selling costs – expenses on advertisement and sales promotion.
Equilibrium price – price at which demand equals supply.
Key facts
Feature
Perfect competition
Monopoly
Monopolistic competition
Oligopoly
Sellers
Very many
One
Many
Few
Product
Homogeneous
No close substitute
Differentiated
Homo./Differentiated
Entry
Free
Restricted
Free
Difficult
Price
Taker
Maker
Some control
Interdependent
5 important questions
Q1. Define market and state its features.
A market is an arrangement where buyers and sellers come in contact to exchange a product at a price. Features: buyers and sellers, a product, a price, contact, market knowledge.
Q2. Explain any four features of perfect competition.
Large number of buyers and sellers; homogeneous product; free entry and exit; single uniform price.
Q3. Explain the features of monopoly.
Single seller; no close substitutes; strong barriers to entry; seller is a price maker; may charge different prices to different buyers.
Q4. What is monopolistic competition? Give two examples.
A market with many sellers selling differentiated products, e.g., toothpaste and soap brands.
Q5. Classify markets on the basis of time.
Very short period, short period, long period and very long period.
Exam tip
For 'explain features' questions, write the feature as a heading and one line of explanation for each — at least four points.
Class 12 Commerce (HSC Board) · Economics · Chapter 7
Index Numbers
Quick summary
Index numbers measure the relative change in prices, quantities or values over time or between places. This chapter covers the meaning, features, types and significance of index numbers, the steps in their construction, and simple and weighted (Laspeyres) methods with examples.
Key points
An index number is a statistical device to measure changes in a group of related variables over time, place etc. It is a specialised average expressed in percentage.
The base year index is taken as 100. The year being compared is the current year.
Index numbers are also called "economic barometers".
Types: price index, quantity index, value index, special purpose index (e.g., cost of living, Sensex).
Significance: framing policies, studying trends, forecasting, measuring inflation, presenting financial data simply, cost of living and wage fixing.
Steps of construction: purpose, base year (normal, not too distant), selection of items, price quotations, choice of average (usually arithmetic mean), weights, formula.
In 2015 the base year for GDP, IIP and WPI was changed from 2004-05 to 2011-12.
Methods: simple (unweighted) index — every item equally important; weighted index — items given weights, commonly base-year quantities (Laspeyres) or current-year quantities (Paasche).
Limitations: based on samples, base year may become outdated, quality changes ignored, different formulas give different results.
Important terms
Base year – reference year with index 100.
Weight – relative importance of an item.
Price relative – current price as a percentage of base price.
(p0, q0 = base-year price and quantity; p1, q1 = current-year price and quantity)
5 important questions
Q1. Define index number and state its features.
A statistical device that measures relative change in a group of variables over time. Features: expressed in percentage, specialised average, base year = 100, measures net change.
Q2. Base-year prices of four goods total ₹120 and current-year prices total ₹150. Find the simple price index.
Class 12 Commerce (HSC Board) · Economics · Chapter 8
National Income
Quick summary
National income is the total money value of all final goods and services produced in a country during a year, plus net income from abroad. This chapter explains definitions and features of national income, the circular flow of income, concepts like GDP, NDP, GNP, NNP and Green GNP, the three methods of measurement, difficulties in measurement and its importance.
Key points
National Income Committee (NIC) was appointed by the Government of India in August 1949 with Prof. P. C. Mahalanobis as Chairman and Prof. D. R. Gadgil and Dr. V. K. R. V. Rao as members.
Other definitions given by Prof. A. C. Pigou, Alfred Marshall and Irving Fisher.
Features: macro concept; only final goods and services counted; net aggregate value (after depreciation); includes net income from abroad; measured for a financial year (1 April – 31 March in India); a flow concept; expressed in money value.
Circular flow: income flows from firms to households (factor payments) and back as spending. Two-sector (households, firms), three-sector (+ government), four-sector (+ foreign sector) models.
Concepts: GDP, NDP, GNP, NNP; Green GNP accounts for environmental damage and supports sustainable development.
Methods of measurement: Output (Product) method — final goods approach or value added approach; Income method — rent + wages + interest + profits + mixed income; Expenditure method — consumption + investment + government expenditure + net exports.
Difficulties: (a) theoretical — transfer payments, illegal income, black money, unpaid services (housewife), capital gains, double counting, valuation of government services, changing price level; (b) practical — non-monetised sector, lack of reliable data, illiteracy, inadequate occupational specialisation.
Importance: shows economic growth, helps planning and policy, compares standards of living, shows contribution of sectors, guides distribution of income.
Important terms
Final goods – goods meant for final use, not for further production.
Depreciation – wear and tear of capital during production.
Transfer payments – payments without any service in return, e.g., pension; not included.
Mixed income – income of self-employed persons using their own factors.
Double counting – counting the value of a good more than once.
Formulas
GNP = GDP + Net factor income from abroad (X − M)
NNP = GNP − Depreciation
NDP = GDP − Depreciation
Expenditure method: GDP = C + I + G + (X − M)
Income method: NI = Rent + Wages + Interest + Profit + Mixed income
5 important questions
Q1. Explain any four features of national income.
It is a macro concept; only final goods are counted; it is a flow measured over a year; it is expressed in money value.
Q2. GDP is ₹500 crore, net factor income from abroad ₹20 crore and depreciation ₹50 crore. Find GNP and NNP.
Class 12 Commerce (HSC Board) · Economics · Chapter 9
Public Finance in India
Quick summary
Public finance studies the income and expenditure of public authorities (central, state and local governments) and how they adjust them. This chapter explains its meaning, the difference from private finance, the structure of public finance — public expenditure, public revenue and public debt — and India's budget and GST.
Key points
Hugh Dalton: public finance deals with the income and expenditure of public authorities and the adjustment of one to the other. Findlay Shirras also defined it.
Government functions: obligatory (defence, law and order, justice) and optional (education, health, welfare).
Public vs private finance: objective (welfare vs self-interest), government decides expenditure first and then raises income, better credit status, right to print money, more elastic finance, wider effect on economy.
Structure: public expenditure, public revenue, public debt (plus financial administration — budget).
Reasons for growth of public expenditure: more government activities (welfare state), population growth, urbanisation, defence, spread of democracy, inflation, industrial development, disaster management.
Public revenue: (A) Taxes and (B) non-tax revenue — fees, prices of public goods, special assessment, fines and penalties, gifts/grants/donations, special levy, borrowings.
Tax (Prof. Taussig): compulsory payment to government with no direct quid pro quo (no direct return).
Tax systems: proportional (same rate), progressive (rate rises with income), regressive (rate falls as income rises).
Taxes may be direct (income tax, corporate tax — burden cannot be shifted) or indirect (GST, customs — burden can be shifted).
GST came into effect on 1 July 2017 (101st Constitutional Amendment Act, 2016; GST Council).
Public debt: loans raised by government — internal/external, productive/unproductive, short/long term.
Important terms
Budget – annual statement of estimated income and expenditure of government.
Quid pro quo – something in return; absent in a tax.
Fee – payment for a specific service, e.g., registration fee.
Special assessment – charge on property owners whose property value rises due to public work.
Important dates and people
Hugh Dalton, Findlay Shirras – definitions of public finance.
Prof. Taussig – definition of tax.
1 July 2017 – GST introduced in India.
5 important questions
Q1. Define public finance.
According to Hugh Dalton, public finance deals with the income and expenditure of public authorities and the adjustment of one with the other.
Q2. Distinguish between public finance and private finance (any four points).
Objective: welfare vs personal gain; government fixes expenditure first, individual fixes income first; government can print money, individual cannot; government finance is more elastic.
Q3. Explain reasons for growth of public expenditure (any four).
Welfare activities, population growth, urbanisation, defence spending.
Q4. Explain the non-tax sources of public revenue.
Fees, prices of public goods, special assessment, fines and penalties, gifts and grants, special levy, borrowings.
Q5. What are progressive and regressive taxes?
Progressive: rate increases as income rises (income tax). Regressive: rate falls as income rises, burdening the poor more.
Exam tip
Distinguish questions need a table with at least four points; add the definition of the related term at the start.
Class 12 Commerce (HSC Board) · Economics · Chapter 10
Money Market and Capital Market in India
Quick summary
Finance is the backbone of an economy. The financial market has two parts: the money market, which deals in short-term funds (up to one year), and the capital market, which deals in long-term funds. This chapter explains the structure of both markets in India, the role of RBI and commercial banks, money market instruments, and reforms in both markets.
Key points
Money market = market for short-term funds (generally up to one year) for working capital.
Structure of Indian money market: organised sector (RBI, commercial banks, co-operative banks, development financial institutions, DFHI) and unorganised sector (indigenous bankers, money lenders, unregulated non-bank financial intermediaries — chit funds, nidhis, loan companies).
RBI (central bank): issue of currency notes, banker to the government, bankers' bank, custodian of foreign exchange reserves, controller of credit, collection and publication of data, promotional functions, clearing house.
Commercial banks: accept deposits (demand and time deposits), give loans and advances, ancillary functions (agency and general utility services), credit creation.
DFHI set up in 1988 on the Vaghul Committee's recommendation to give liquidity to money market instruments.
Issues currency notes; acts as banker to the government; acts as bankers' bank; controls credit.
Q3. Explain the functions of commercial banks.
Accepting deposits; giving loans and advances; agency and utility services; creating credit.
Q4. Distinguish between money market and capital market.
Money market: short-term funds, instruments like T-bills, regulated mainly by RBI. Capital market: long-term funds, instruments like shares and debentures, regulated mainly by SEBI.
Q5. What is SEBI? State its role.
Securities and Exchange Board of India (1988, statutory 1992); it protects investors and regulates and develops the securities market.
Exam tip
Draw the structure charts of both markets as flow diagrams — they make long answers clear and score well.
Class 12 Commerce (HSC Board) · Economics · Chapter 11
Foreign Trade of India
Quick summary
Foreign trade means exchange of goods and services between countries. This chapter explains internal and foreign trade, types of foreign trade, its role in economic development, the composition and direction of India's foreign trade, recent trends in exports and imports, and the balance of trade and balance of payments.
Key points
Internal trade: trade within the boundaries of a country. Foreign trade: trade between two or more countries.
Wasserman and Hultman: international trade consists of transactions between residents of different countries.
Types: import trade, export trade, entrepot trade (importing goods to re-export them, e.g., processing and re-export).
Role of foreign trade: earns foreign exchange, encourages investment, division of labour and specialisation, optimum use of resources, price stability, wider choice for consumers, brings reputation.
Features of India's foreign trade: rising share in national income (17.55% in 1990-91 to 48.8% in 2016-17), increase in volume and value, change in composition of exports and imports, mostly by sea (oceanic trade), new ports developed.
Direction: before independence Britain was India's main partner; now USA is the leading partner, followed by countries like Germany, Japan and UK (as per the textbook).
Major exports: engineering goods (about 25% in 2017-18), petroleum products, chemicals, gems and jewellery, textiles and readymade garments.
Major imports: petroleum (largest, around 31%), gold, fertilizers, electronic goods, pearls and precious stones, edible oils.
Balance of trade = value of exports − value of imports of goods. Surplus if exports > imports; deficit if imports > exports.
Balance of payments is wider: it includes trade in goods, services, transfers and capital flows.
Important terms
Entrepot trade – re-export trade.
Composition of trade – what goods are exported and imported.
Direction of trade – countries with which trade is done.
Trade deficit – imports greater than exports.
Key facts
Share of foreign trade in Gross National Income: 17.55% (1990-91) → 25% (2006-07) → 48.8% (2016-17).
Petroleum's share in imports: about 27% (1990-92) → around 31% now (textbook figure).
5 important questions
Q1. Distinguish between internal trade and foreign trade (any three).
Area: within country vs between countries. Currency: same vs different currencies. Restrictions: few vs many (customs, quotas).
Q2. Explain the types of foreign trade.
Import trade (buying from abroad), export trade (selling abroad), entrepot trade (importing to re-export).
Q3. Explain the role of foreign trade in economic development (any four).
Earns foreign exchange; encourages investment; leads to specialisation; ensures optimum use of resources.
Q4. State recent trends in India's exports.
Rise in engineering goods, petroleum products, chemicals, gems and jewellery, and textiles and garments.
Q5. What is balance of trade?
The difference between the values of a country's exports and imports of goods in a given period; it can be a surplus or a deficit.
Exam tip
Learn the difference between balance of trade (only goods) and balance of payments (goods, services and capital) — a common short-answer question.