S.NO.XYXYX²Y² 1 23 18 414 529 324 2 27 22 594 729 484 3 28 23 644 784 529 4 29 24 696 841 576 5 30 25 750 900 625 6 31 26 806 961 676 7 33 28 924 1089 784 8 35 29 1015 1225 841 9 36 30 1080 1296 900 10 39 32 1248 1521 1024 N=10 311 257 8171 9875 6763 \(r =\frac{N \sum X Y-\left(\sum X\right)\left(\sum Y\right)}{\sqrt{N \sum X^{2}-\left(\sum X\right)^{2}} \sqrt{N \sum Y^{2}-\left(\sum Y\right)^{2}}} \)
\(=\frac{(10 \times 8171)-311 \times 257}{\sqrt{(10 \times 9875)-(311)^{2}} \sqrt{10 \times 6763-(257)^{2}}} \)
\(=\frac{81710-79927}{\sqrt{98750-96721} \sqrt{67630-66049}} \)
\(=\frac{1783}{\sqrt{2029} \sqrt{1581}}=0.9955\)
Ans: + 0.9955 high correleated 

Introduction:
(i) Planning may retard private initiatives, hamper freedom of choice, involve huge cost of administration and stop automatic adjustment of price mechanism.
(i) Loss of freedom
1. Regulations and restrictions are the backbone of a planned economy.
2. Economic freedom consists of freedom of consumption, freedom of choice of occupation, freedom to produce and the freedom to fix prices for the products.
3. Under planning, crucial decisions are made by the Central Planning Authority.
4. The consumers, producers and the workers enjoy no freedom of choice.
5. Hayek in his book 'Road to Serfdom' explains that centralized planning leads to loss of personal freedom and ends in economic stagnation.
(ii) Elimination of Initiative
1. Planning follows routine proocedure and may cause stagnation in growth.
2. Absence of private ownership and profit discourages entrepreneurs from risk taking.
3. Attractive profit is the incentive for searching new ideas, new methods.
4. All enjoy equal reward under planned economy irrespective of their effort, efficiency.
5. So, nobody is interested in undertaking new and risky ventures.
6. The bureaucracy and red tapism cause procedural delay and time loss.
7. So, even socialist countries like Russia and China offer incentives to private firms.
(iii) High cost of Management
1. Plan formulation and implementation involve an army of staff for data collection and administration.
2. Lewis remarks, "The better we try to plan, the more planners we need".
3. Inadequate data, faulty estimations and improper implementation of plans result in wastage of resources and cause either surplus or shortages.
(iv) Difficulty in advance
calculations
1. Advance calculations in a precise manner is impossible with regard to consumption and production.
2. It is also difficult to put the calculations into practice under planning.
Conclusion
1. The arguments against planning are mostly concerned with centralized and totalitarian planning.

Natural Resource:
(i) The existence of natural resources in abundance is essential for development.
(ii) But Japan, though it lacks natural resources imports them and achieves faster rate of economic development with the help of technology.
Capital Formation:
(i) Capital formation refers to the net addition to the existing stock of capital goods which are either tangible (plants, machinery) or intangible (health, education).
(ii) Capital formation helps increase productivity of labour, production and income.
(iii) Advanced techniques of production can be used and leads to better utilization of natural resources, industrialization and expansion of markets which are essential for economic progress.
Size of the Market:
(i) Large size of the market would stimulate production, increase employment and raise the National per capita income.
Structural Change:
(ii) Structural change refers to change in the occupational structure of the economy.
(iii) Any economy is divided into primary secondary and tertiary sector.
(iv) Any economy which is predominantly agricultural remains backward.
Financial System:
(i) Financial system implies the existence of an efficient and organized banking system in the country.
(ii) There should be an organized money market to facilitate easy availability of capital.
Marketable Surplus:
(i) It refers to the total amount of farm output cultivated by farmers over and above their family consumption needs.
(ii) This surplus brings income, raises purchasing power, employment and output in other sectors.
Foreign Trade:
(i) A country with favorable balance of trade is always developed.
Economic System:
(i) A country with free market system enjoys better growth rate compared to controlled economies.

Introduction:
(i) Sustainable development is concerned with the welfare of the present and future generation.
(ii) It aims at satisfying the luxury wants of the rich and the basic necessities of the poor.
Definition:
(i) Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
Goals:
(i) It is crucial to harmonize three core elements such as economic growth, social inclusion and environmental protection.
(ii) A set of 17 goals for the world's future can be achieved before 2030 with three unanimous principles fixed by United Nations such as Universality, Integration and Transformation.
1) End poverty in all its forms everywhere.
2) End hunger, achieve food security and improved nutrition and promote sustainable agriculture.
3) Ensure healthy lives and promote wellbeing for all at all ages.
4) Ensure inclusive and quality education for all and promote lifelong learning.
5) Achieve gender equality and empower women and girls.
6) Ensure access to water and sanitation for all.
7) Ensure access to affordable, reliable, sustainable and modern energy for all.
8) Promote inclusive and sustainable economic growth, employment and decent work for all.
9) Build resilient infrastructure, promote, sustainable industrialization and foster innovation.
10) Reduce inequality within and among countries.
11) Make cities inclusive, safe, resilient and sustainable.
12) Ensure sustainable consumption and production pattern.
13) Take urgent action to combat climate change and its impacts
14) Conserve and sustainably use the oceans, seas and marine resources.
15) Sustainably manage forests, combat desertification, stop and reverse land degradation, stop biodiversity loss.
16) Promote just, peaceful and inclusive societies.
17) Revitalize the global partnership for sustainable development.

(i) Strong economic growth or high GDP growth leads to excessive use of resources.
(ii) Natural resources are essential inputs for production in many sectors;
(iii) Production and consumption lead to pollution and other pressures on the environments.
(iv) Poor environmental quality affects economic growth and well being by lowering the quantity and quality of resources or due to health impact.
(v) There is the need to balance growth and the sustainability of eco system.
(vi) So we have to ensure our sustainable existence, consume less and curb economic growth.

Introduction:
(i) The modern state is a welfare state. In a welfare state government has to perform several functions i.e. social, economic and political.
(ii) These activities lead to increasing public expenditure.
Population Growth
(i) The growth in population needs huge investment in health and education, law and order. Young population need increasing expenditure on education & youch services.
(ii) Aging population needs transfer payments - old age pension, social security.
Defence Expenditure
(i) Defence expenditure increases due to modernisation of defence equipment.
Government Subsidies
(i) Government provides subsidies on food, fertilizers, interest on priority sector lending, exports, education.
(ii) Because of the huge subsidies public expenditure increased manifold.
(iii) Corporate sectors also receive subsidies.
Debt Servicing
(i) Government has borrowed heavily from internal and external sources.
(ii) So government has to make huge amounts of repayment towards debt servicing.
Development Projects
(i) Various development projects like irrigation, iron and steel, heavy machinery, power, telecommunications involve huge investment.
Urbanisation
(i) The urban population is 43 %.
(ii) There are more than 54 cities above one million population.
(iii) The increase in urbanization needs heavy expenditure on law and order, civic amenities.
Industrialisation
(i) In a planned economy, the government starts basic and heavy industries which need huge capital and have long gestation period.
(ii) UDCs also need strong infrastructures like transport, communication, power, fuel.
Increase in grants in aid to state and union territories
(i) There is increase in grants-in-aid to state and union territories to meet natural disasters.

(i) Fiscal Policy is implemented through fiscal instruments also called 'fiscal tools' or fiscal levers - Government expenditure, taxation and borrowing are the instruments of fiscal policy.
Taxation:
(i) Taxes transfer income from the people to the Government.
(ii) Taxes are direct or indirect.
(iii) An increase in tax reduces disposable income.
(iv) So tax should be raised to control inflation.
(v) During depression, taxes are to be reduced.
Public Expenditure:
(i) Public expenditure raises wages and salaries of the employees and so aggregate demand for goods rises.
(ii) So, public expenditure is raised during recession and reduced during inflation.
Public debt:
(i) When Government borrows by floating a loan, there is transfer of funds from the public to the Government.
(ii) At the time of interest payment and repayment of public debt, funds are transferred from Government to public.

Introduction:
1. India is the founding member of the WTO.
2. India favours multilateral trade approach and enjoys MFN status.
3. India benefited from WTO on following grounds:
4. By reducing tariff rates on raw materials, components and capital goods, it was able to import more for meeting her developmental needs.
5. India's imports go on increasing.
6. India gets market access in several countries without any bilateral trade agreements.
7. Advanced technology has been obtained at cheaper cost.
8. India is in a better position to get quick redressal from the trade disputes.
9. Indian exporters benefited from wider market information.

(i) To promote international monetary cooperation among the member nations.
(ii) To facilitate faster and balanced growth of international trade.
(iii) To ensure exchange rate stability by curbing competitive exchange depreciations.
(iv) To reduce exchange controls imposed by member nations.
(v) To establish multilateral trade and payment system in respect of current transactions.
(vi) To promote the flow of capital from developed to developing nations.
(vii) To solve the problem of international liquidity.

1. FDI is an important factor in global 
2. Foreign trade and FDI are closely related.
3. In developing countries like India FDI in tie natural resource sector like plantations, increases rade.
4. Foreign production by FDI is useful to substitute foreign trade.
5. FDI is also influenced by the income generated from the trade and regional integration schemes.
6. FDI accelerates the economic growth by facilitating essential imports needed for development programs like capital goods, technical know-how, raw materials, other inputs and even scarce consumer goods.
7. When the export earnings of a country are not sufficient to finance for imports, FDI may be required to fill the trade gap.
8. FDI is encouraged by foreign exchange shortage, desire to create employment and acceleration of the pace of economic development.
9. Many developing countries strongly prefer foreign investment to imports.

Cyclical Disequilibrium
Cyclical Disequilibrium occurs because of:
(i) Two countries may be passing through different phases of business cycle.
(ii) The elasticities of demand may differ between countries.
Secular Disequilibrium
(i) It occurs because of long-run and deep rooted changes in an economy as it advances from one stage of growth to another.
(ii) In the initial stages of development, domestic investment exceeded domestic savings and imports exceeded exports, as it happened in India since $1951.
Structural disequilibrium
(i) Structural changes in line economy may also cause BoP disequibrium
(ii) Structural changes include development of alternative sources of supply, development of better substitutes, exhaustion of protective resources or changes in transport routes and costs.

Introduction
1. Modern theory of international trade was developed by Heckscher and Bertil Ohlin.
2. This theory says that basis for international trade is the differences in factor endowments.
3. So this theory is also called Factor Endowment Theory.
Theory
1. International differences in comparative costs is due to:
(i) Difference in the endowments of factors of production between countries.
(ii) Differences in the factor proportions required in production.
Assumptions
1. There are two countries, two commodities, two factors (2 x 2 x 2 model).
2. Countries differ in factor endowments.
3. Commodities are categorized in terms of factor intensity.
4. Countries use same production technology.
5. Countries have identical demand conditions.
6. There is perfect competition in product and factor markets in both the countries.
Explanation
1. According to Heckscher-Ohlin, "a capital abundant country will export the capital intensive goods, while labour abundant country will export the labour intensive goods".
2. A factor is regarded abundant or scarce in relation to the quantum of other factors.
3. A country is richly endowed with capital only if the ratio of capital to other factors is higher than other countries.
Particulars India America Supply of Labour 50 24 Supply of Capital 40 30 Capital-Labour Ratio 40/50 = 0.8 30/24 = 1.25 4. Even though India has more capital (40) compared to America (30) in absolute terms, yet America is more richly endowed with capital because the ratio of capital in India is $0.8$ which is less than that in America (1.25).
Criticism
1. Factor endowment of a country may change over time.
2. The efficiency of the same factor (labour) may differ in the two countries.

S.No	Internal Trade	International Trade
1	Trade takes place between different individual and firms within the same nation.	Trade takes place between different individual and firms in different countries.
2	Labour and capital move freely from one region to another.	Labour and capital do not move easily from one nation to another.
3	Free flow of goods and services since there are no restrictions.	Goods and services do not easily move from one country to another because of tariff and quota.
4	There is only one common currency.	There are different currencies.
5	Physical and geographical conditions of a country are similar.	There are differences in physical and geographical conditions of the two countries.
6	Trade and financial regulations are same.	Trade and financial regulations, interest rate, trade laws differ between countries.
7	No difference in political affiliations, customs and habits of the people and government policies.	There are lot of differences in political affiliation, habits, customs of the people and government policies.

Introduction
(i) Monetary Policy is the macroeconomic policy laid down by the Central Bank towards the management of money, supply and interest rate. It is associated with Milton Friedman
1) Neutrality of Money
(i) Wicksteed, Hayek and Robertson are the chief exponents of neutral money.
(ii) They say that the monetary authority should aim at neutrality of money in the economy.
(iii) Monetary changes cause distortion and disturbances in the proper functioning of the economic system of the leading to all economic fluctuations.
2) Exchange Rate Stability
(i) It is a traditional objective from the Gold Standard period
(ii) When there was disequilibrium in the balance of payment, it was automatically corrected by movements.
(iii) It was popularly known as "Expand Currency and Credit when gold is coming in; Contract currency and credit when gold is going out."
(iv) If there is instability in the exchange rates, it would result in outflow or inflow of gold resulting in unfavorable balance of payments.
3) Price Stability
(i) Crustave Cassel and Keynes suggested price stabilization as a main objective of monetary policy.
(ii) Stable Price creates public confidence, promotes business activity and ensures equitable distribution of income and wealth leading to prosperity and welfare
(iii) Price stability does not mean price rigidity or price stagnation.
(iv) A mild increase in the price level provides a tonic for economic growth.
4) Full Employment
(i) Unemployment was socially dangerous, economically wasteful and morally deplorable.
(ii) Both Keynes' General Theory of Employment, Interest and Money in 1936, the objective of full employment became very important
5) Economic Growth
(i) Economic growth is the process whereby the real per capita income of a country increases
(ii) There is increase in the total physical or real output
(iii) Monetary policy should promote sustained and continuous economic growth by maintaining equilibrium between the total demand for money and total production capacity for creating increase in saving and investment.
(iv) Flexible monetary policy is the best solution.
6) Equilibrium in the Balance of Payments (BoP)
(i) World trade was faster than world liquidity.
(ii) Increasing deficit in BoP reduces the ability of an economy to achieve other objectives.
(iii) Many less developed countries reduce their imports which adversely affects development activities, so monetary authority should make efforts to bring equilibrium in the BoP.

Boom or Prosperity:
1. The employment and the movement of the economy beyond full employment is the characterized features of boom.
2. There is hectic activity, money wages rise, profits increase, interest rates go up, demand for bank credit increases.
3. There is all round optimism.
Recession:
1. The turning point from boom condition is recession.
2. Failure of a company or bank brings a phase of recession.
3. Investments are drastically reduced, production falls, income and profits decline.
4. There is panic in the stock market and business is dull.
5. Liquidity preference of the people rises and money market becomes tight.
Depression:
1. The level of economic activity becomes extremely low.
2. Firms incur loss and close down resulting in unemployment.
3. Interest rate, profits, wages are low.
4. Agricultural class and wage carners are badly affected.
5. Banks do not lend to businessmen.
6. The extreme point of depression is called as "trough".
7. Keynes said that autonomous investment of the government can help the economy to come out of depression.
Recovery:
1. After depression, recovery sets in the upswing.
2. It begins with the revival of demand for capital goods.
3. The demand slowly picks up and in due course there is more production, profit, income, wages and employment.
4. Recovery may be initiated by innovation or investment or by government.

Introduction:
(i) It was first propounded in 1588 by an Italian economist Davanzatti. It was popularised by an Americill economist, Irving Fisher is his book, "The Purchasing Power of Money" in 1911. He gave it a quantitative form in terms of "Equation of Exchange".
Equations:
MV = PT
(i) The Supply of Money = Demand for Money
M = Money Supply
V = Velocity of Money
P = Price level
T = Volume of Transaction.
(ii) The total quantity of money will be equal to the total value of all goods and services bought and sold.
\(P=\frac{M V}{T}\)
(iii) The quantity of money determines the price level and the price level varies directly with the quantity of money provided 'V' and 'T' remain constant.
(iv) Later Fisher extended his exchange to include bank deposits M₁ and its velocity V₁.
\(P T =M V+M^{\prime} V^{\prime} \)
\(P =\frac{M V+M^{\prime} V^{\prime}}{T}\)
- The price level is determined by
(a) quantity of money in circulation M
(b) velocity of circulation of money V
(c) volume of bank credit money M₁
(d) velocity of circulation of credit money V₁
(c) Volume of trade ('T')

(i) It show's the effect of changes in the quantity of money on the price level.
(ii) When quantity of money is OM₁, the price level is OP₁.
(iii) When the quantity of money is doubled to OM₂, the price level is also doubled to OP₂.
(iv) When quantity of money is increased four-fold to OM₄, the price level also increases by 4 times to OP₄ his relationship is shown by the curve OP = f(M) from the origin at 45^o.
Quantity of money
(i) Fig B shows the inverse relation between the quantity of money and the value of money.
(ii) Value of money is taken on the vertical axis.
(iii) When the quantity of money is OM₁, the value of money is OI / P₁.
(iv) When quantity of money is doubled to OM₂, the value of money becomes one half of what it was before (OI / P₂)
(v) When quantity of money increases by the four fold to OM₄, the value of among is reduced by OI / P₄
(vi) This inverse relationship between the quantity of money and the value of money is shown by downward sloping curve 1 / OP= f(M).

S. No	Marginal Efficiency of Captial (MEC)	Marginal Efficiency of Investment (MEI)
1.	It is based on given supply price for capital.	It is based on the induced change in the price due to change in the demand for capital.
2.	It represents the rate of return on all successive unit of capital without regard to existing capital.	It shows the rate of return on just those units of capital over and above the existing capital stock
3.	The capital stock is taken on the X axis of diagram.	The amount of investment is taken on the X axis of diagram.
4.	It is a 'Stock' concept.	It is a 'Flow' concept.
5.	It determines the optimum capital stock in an economy at each level of interest rate.	It determines the net investment of the economy at each interest rate given the capital stock.

Introduction
J.M Keynes has divided factors influencing the consumption function into two namely Subjective factors and Objective factors
Subjective Factors
These factors are internal and related to psychological feelings. Keynes lists 8 motives which lead individuals to refrain from spending
Motive of precaution
To build a reserve against unforeseen contingencies. (eg.) Accidents
Motive of foresight
The desire to provide for anticipated future needs. (eg.) Old age
Motive of calculation
The desire to enjoy interest and appreciation.
Motive of improvernent
(i) The desire to enjoy for improving standard of living.
(ii) Motive of financial independence
(iii) Motive of enterprise - desire to do forward trading
(iv) Motive of pride - desire to leave a fortune
(v) Motive of avarice - miserly instinct
(vi) The government institutions, business corporations and firms may also consume mainly because of:
Motive of enterprise
The desire to get resources to carry out further capital investment without debt.
Motive of liquidity
The desire to secure liquid resources to meet emergency
Motive of improvement
The desire to secure a rising income and to demonstrate successful management
Motive of financial prudence
The desire to ensure adequate financial provision against depreciation, obsolescence and to discharge debt.
Objective Factors
They are the external factors which are real and measurable. They can be easily changed in the long run;
Income Distribution
According to VKRV Rao if incone is equally distributed propensity to consume increases
Price level
When price falls, real income rises; people consume more and save more.
Wage level
Consumption expenditure increases with a rise in wages.
Interest rate
Higher interest rate will encourage people to save more money and reduces consumption.
Fiscal Policy
When government reduces tax, disposable income rises and propensity to consume increases.
Consumer credit
The availability of consumer credit at easy installments will encourage people to buy consumer durables like car, fridge, computer
Demographic factors
(i) Size of family, stage in family life cycle, place of residence and occupation affect the consumption pattern
Duesenberry hypothesis
(i) Consumption expenditure depends on current income, past income and standard of living
(ii) As individuals are accustomed to a particular standard of living, they continue to spend the same amount on consumption
(iii) Consumption of the poor people is influenced by the rich. This is called Demonstration effect.
Windfall gain and loss
Unexpected changes in the stock market leads to gain or loss, so consumption function shifts upward or downward.
Conclusion
According to Keynes only the subjective factors do not change in the short-run, so consumption function remains stable in the short period.

Law
According to Keynes, "men are disposed as a rule and on the average to increase their consumption as their income increases but not by as much as the increáse in their income".
Propositions
1. When income increases, consumption expenditure also increases, but by a smaller amount
(a) When income increases from 120 to 180; consumption also increases from 120 to 170 but the increase in consumption is less than the increase in income, 10 is saved.
2. The increased income will be divided in some proportion between consumption expenditure and saving
(a) When income increases to 180 and 240, it is divided between consumption (170 and 220) and saving (10 and 20)
3. Incrcascs in income always lead to in incrcase in both consumption and saving
(a) Increases in income to 180) and 240; lead to increased consumption 170 and 220; increased saving 10 and 20.
(b) It is clear from the widening area below the C curve and the saving gap between 45^o line and C curve.
 

 

Y	C	S
120	120	0
180	170	10
240	220	20

S.No Keynesian Classicism 1. Short-run equilibrium Long-run equilibrium 2. Savings is a vice Saving is a social virtue 3. Money functions as medium of exchange and store of value. Money acts as a medium of exchange. 4. Macro approch to national problems. Micro foundation to macro problems. 5. State intervention is advocated. Favoured laissez-fair policy. 6. Applicable to all situations-full employment and less than full employment. Applicable only to the full employment 7. Captialism has inherent contradictions Captialism is good. 8. Budgeting should be adjusted to the requirements of economy. Balanced budget is favored. 9. Equality between saving and investment is achieved through changes in income Equality between saving and investment is achieved through changes of rate of interest 10. Rate of interest is determined by the demand for and supply of money Rate of interest is determined by saving and investment. 11. Rate of interest is a flow. Rate of interest is a stock. 12. Demand vreates its own supply. Supply creates its own demand. 13. Rate of interest is a reward for parting with liquidity Rate of interest is a reward for savings.

Introduction
According to J. B. Say "Supply creates its own demand"
Explanation
A person receives his income from production which is spent on the purchase of goods and services produced by others. For the economy as a whole, therefore, total production equals total income.
Criticisms
(i) According to Keynes, supply does not. create its demand. It is not applicable where demand does not increase as much as production increases.
(ii) Automatic adjustment process will not remove unemployment. Unemployment can be removed by increase in the rate of investment.
(iii) Money is not neutral. Individuals hold money for unforeseen contingencies, businessmen keep cash reserve for future activities.
(iv) Say's law is supply creates its own demand and there is no over production. Keynes said that over production is possible
(v) Keynes regards full employment as a special case because there is underemployment in capitalist economies.
(vi) State intervention is needed when there is over production and mass unemployment.

Introduction:
National income can be measured by the social accounting method. Under this method, the transactions among various sectors such as firms, households, government are recorded and their interrelationships traced.
Firms:
undertake productive activities. They employ factors of production to produce goods and services.
Households:
Households are consuming entities. They represent the factors of production, who receive payment for services rendered by them to firms. (i) Households consume the goods produced by the firms. There is a circular flow of money between these two groups.
Government:
The Government sector refers to the economic transactions of public bodies at all levels-centre, state and local. Their purchases may be financed through taxation, public borrowings. The government provides public health, education. They satisfy the collective wants of society. But Post Offices and railways are separated from the Government sector and included as "Firms".
Rest of the world:
It relates to international economic transactions - income, export, import external loan transaction, and allied overseas investment income and payments.
Capital sector:
(i) Capital sector refers to saving and investment activities. It includes the transactions of banks, insurance corporations, financial houses. These are not included under "Firms".
(ii) The economy is also divided into primary, secondary tertiary and quaternary sectors.
Conclusion:
The social accounting framework is useful for economists as well as policy makers, because it represents the major economic flows and statistical relationships among various sectors of the economic system. It is possible to forecast the trends of economy more accurately.

Introduction:
(i) Whatever is produced is either used for consumption or for saving. So, national output can be computed at any of three levels, ie., production, income and expenditure.
(ii) Therefore there are three methods to measure national income.
Product Method (inventory method):
(i) This method measures the output of the country. Gross value of output from different sectors like agriculture, industry, trade, commerce is obtained by the summation of all the values added in the productive process.
(ii) In India, the gross value of the farm output is obtained as follows:
(iii) Total production of 64 agriculture commodities is estimated. The output of each crop is measured by multiplying the area sown by the average yield per hectare.
(iv) Total output of each commodity is valued at market prices.
(v) The aggregate value of total output of these 64 commodities is taken to measure the gross value of agricultural output.
(vi) The net value of the agricultural output is measured by making deductions for the cost of seed, manures and fertilizers, market charges.
(vii) Net value of each sector is measured in this way.
(viii) Double counting should be avoided.
(ix) Value of output used for self consumption should be counted but sale and purchase of second hand durable goods should be excluded.
Income Method (Factor Earning Method):
(i) National income is calculated by adding up all the incomes generated while producing national product.
(ii) Enterprises are classified into industrial groups.
(iii) Factor incomes are grouped under labour income (wages, salaries, fringe benefits), capital income (profit, interest, dividend) and mixed income (farming, sole proprietorship).
\(\mathrm{Y}=\mathrm{w}+\mathrm{r}+\mathrm{i}+\pi+(\mathrm{R}-\mathrm{P})\)
(iv) Transfer payment, receipt from sale of second hand goods, windfall gains and corporate profit tax must not be included.
(v) Imputed value of rent for self occupied houses or offices and Imputed value of services provided by owners of production units are to be included.
Expenditure method (outlay method):
(i) The total expenditure incurred by the society in a particular year is added together.
(ii) It includes personal consumption expenditure (C), net domestic investment (I), Government expenditure on consumption (G) and net exports (X-M).
\(\mathrm{GNP}=\mathrm{C}+\mathrm{I}+\mathrm{G}+(\mathrm{X}-\mathrm{M})\)
(iii) Expenditure on second hand goods, purchase of shares and bonds, transfer payments and expenditure on intermediate goods should not be included.
Conclusion:
Output = Income = Expenditure
(i) This is because the three methods are circular in nature. So, if the 3 methods are done correctly this equation must hold.

1. Capitalism and socialism are two extreme and opposite approaches.
2. In capitalism, there is total freedom but in socialism, there is no freedom at all.
3. In capitalism, there is private ownership of means of production but there is public ownership of means of production in socialism.
4. Profit is the driving force behind all economic activities in capitalism but it is social welfare under socialism.
5. Capitalism enjoys free market but in socialism there is central planning.
6. There is unequal income distribution in capitalism but there is equal income distribution in socialism.
7. The major problem in capitalism is inequality but it is inefficiency in socialism.

1. In an economy, the fundamental economic activities are production and consumption.
2. These are several other activities.
3. The ultimate aim is to achieve growth.
4. The exchange activity supports production and consumption.
5. These activities are influenced by economic and non economic activities.
6. The economic activities include transportation, banking, advertising, planning.
7. The non-economic activities are environment, education, health, entertainment.
8. The external activities are import, export, international relations, emigration, immigration, foreign investment, foreign exchange earnings.
9. All these activities influence the entire functioning of the economy.