Model question paper for IBBI valuation exam: Macroeconomics

Model question paper for IBBI valuation exam: Macroeconomics

The Insolvency and Bankruptcy Board of India’s (IBBI) Valuation Exam Model Question Paper: Macroeconomics Questions Solved and Explained
The registered valuer exam conducted by the Insolvency and Bankruptcy Board of India’s (IBBI) dedicates 3% of overall weightage to macroeconomics. The IBBI website has one model question paper for valuation examination for the asset class securities or financial assets. (refer Paper FA 28 Mar.pdf).

In this post we will solve and explain four questions from the model question paper for students keen to learn the ‘why’ behind those solutions.

  1. The national output is measured at _____________.
    a. production prices
    b. market prices
    c. cost prices
    d. wholesale prices

The answer provided by IBBI is b (market prices).

This question is from national income accounting (NIA) topic within
macroeconomics. NIA is one of the 4 subtopics in macroeconomics in addition to 1) basics of fiscal policy 2) basics of monetary policy and 3) understanding business cycles. In NIA, a student is expected to know the meaning of national income, the various measure of output (such as GDP, GNP) and different measurement bases such as market price and factor cost. The total output of an economy is generally measure by GDP which is at market prices. Market prices refer to the final price paid by consumers to the producer. This is inclusive of taxes (net taxes after considering subsidy).

Since taxes are collected by the government and don’t represent actual production, a more refined measure of output is National Income which is technically called NNP (Net National Product) at factor cost.

However, in the given question what is asked is National Output, which refers to conventional measure such as GDP. The answer choice c (cost price) is not the same as Factor Cost. Hence there is no confusion whether the question intends National Income (NNPFC ) or National Output (GDPMP).

2. Which of the following is a revenue receipt?
a. Loan from the International Monetary Fund
b. Grant from the World Bank
c. Borrowing from the Public
d. Public Issue of shares

The answer provided by IBBI is b (Grant from the World Bank).

Revenue receipts are basically divided into tax and non-tax revenue. Tax revenues constitute taxes like income tax, corporate tax, excise, customs, service and other duties that the Government levies. The non-tax revenue sources include interest on loans, dividend on investments, fees for certain services by departments etc.

For governments, tax revenue forms the most important source of overall revenue. If the money received is grant instead of a loan, it becomes revenue receipts. This is because grants are not paid back. Government receipts which either

  1. create liabilities (borrowing from internal or external sources) or
  2. reduce assets (disinvestment by sale of shares to public)
    are called capital receipts.
    Thus, when the government raises funds either by incurring a liability or by disposing off its assets, it is a capital receipt. The other three choices viz, loan from the International Monetary Fund, borrowing from the public and public issue of shares are instances of capital receipts.
  3. What is the relation between fiscal deficit (FD) and primary deficit (PD)
    a. PD = FD - Depreciation
    b. PD = FD - Interest payments
    c. FD = PD - Interest payments
    d. FD = PD - Depreciation
    The answer provided by IBBI is b (PD = FD - Interest payments).
    Primary deficit is fiscal deficit of the current year minus interest payments on previous borrowings. While fiscal deficit represents the government's total borrowing including interest payments, primary deficit shows the amount of borrowing excluding interest payments. The primary deficit would be zero when government borrows to pay interest on borrowings.
    Primary deficit is an indication of the current government’s borrowing out of current activities whereas fiscal deficit has carryover impact of previous governments borrowing decisions.
  4. Private ownership of property and resources is a characteristic of _____________ economy.
    a. socialist
    b. command
    c. market
    d. traditional

The answer provided by IBBI is c (market). This is a general macroeconomic question. The type of economic system is something that doesn’t neat fit in any of the four topics within macroeconomics – viz, national income accounting, basics of fiscal policy, basics of monetary policy and understanding of business cycles. It talks about the system of economy.

Whether production, resources etc. are centrally planned and owned like in certain communist countries such as Russia or whether they are privately owned by citizens, such as the US. India is largely privately owned system called
the market economy, though vestiges of central planning still exit.

Where resources/production is privately owned it is called the market economy. Socialist or command (choices a and b) are similar systems. In a socialist system, production and resources are owned by the government. The government decides as to what to produce and at what prices to be sold. A command economy may have private ownership characteristics but runs on the command of the government – that is, though resources may be owned privately, what to produce and what prices to be charged are decided centrally. But this is rare. China has a sort of command economy – where the Chinese Communist Party governs the capitalistic economy.

The clearer choice is choice c - market. The last choice is not very meaningful - there is no system called traditional economy.

Macroeconomics is comparatively lower weightage topic in the IBBI valuation exam. Though the weightage is only 3%, the topics are itself relatively extensive. A careful study of the relevant topics is required to score well in this area. For students who haven’t dealt with macroeconomics as a discipline, a thorough reading is suggested.