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# Chapter 6: Measuring National Output and National Income

Outline
I. The concept of Gross Domestic Product (GDP) II. Calculating GDP 1. The expenditure approach 2. The Income approach III. Nominal GDP V.S. Real GDP IV. Limitations of the GDP

## National Income and Product Accounts

National income and product accounts

are data collected and published by the government describing the various components of national income and output in the economy. The U.S. Department of Commerce is responsible for producing and maintaining the National Income and Product Accounts that keep track of GDP.

## I. The Concept of Gross Domestic Product

Gross domestic product (GDP) is

the total market value of all final goods and services produced within a given period by factors of production located within a country.

## Final Goods and Services

The term final goods and services in

GDP refers to goods and services produced for final use. Intermediate goods are goods produced by one firm for use in further processing by another firm.

Value added is the difference between the

value of goods as they leave a stage of production and the cost of the goods as they entered that stage.

Value Added in the Production of a Gallon of Gasoline (Hypothetical Numbers)
STAGE OF PRODUCTION (1) Oil drilling (2) Refining (3) Shipping (4) Retail sale Total value added VALUE OF SALES \$ .50 .65 .80 1.00 VALUE ADDED \$ .50 .15 .15 .20 \$ 1.00

## Exclusions of Used Goods and Paper Transactions

GDP ignores all transactions in which

money or goods change hands but in which no new goods and services are produced.

## Exclusion of Output Produced Abroad by Domestically Owned Factors of Production

GDP is the value of output produced by

factors of production located within a country. Output produced by a countrys citizens, regardless of where the output is produced, is measured by gross national product (GNP).

## II. Calculating GDP

GDP can be computed in two ways:
The expenditure approach: A method of

computing GDP that measures the total amount spent on all final goods during a given period.
The income approach: A method of

computing GDP that measures the incomewages, rents, interest, and profitsreceived by all factors of production in producing final goods.

## II. Calculating GDP 1. The Expenditure Approach

Expenditure categories:
Personal consumption expenditures (C)

## household spending on consumer goods.

Gross private domestic investment (I)spending by firms and households on new capital: plant, equipment, inventory, and new residential structures.

## II. Calculating GDP 1. The Expenditure Approach

Expenditure categories: Government consumption and gross investment (G) Net exports (EX IM)net spending by the rest of the world, or exports (EX) minus imports (IM)

## II. Calculating GDP 1. The Expenditure Approach

The expenditure approach calculates GDP by

## adding together the four components of spending. In equation form:

GDP C I G ( EX IM )

## Personal Consumption Expenditures

Personal consumption expenditures

## (C) are expenditures by consumers on the following:

Durable goods
Nondurable goods Services

## Gross Private Domestic Investment

Investment refers to the purchase of new

capital. Total investment by the private sector is called gross private domestic investment. It includes the purchase of new housing, plants, equipment, and inventory by the private sector:

## Gross Private Domestic Investment

Nonresidential investment Residential investment

Change in inventories

## Gross Private Domestic Investment

Remember that GDP is not the market value

of total sales during a periodit is the market value of total production. The relationship between total production and total sales is:

## Gross Investment versus Net Investment

Gross investment is the total value of all newly

produced capital goods (plant, equipment, housing, and inventory) produced in a given period.
Depreciation is the amount by which an assets

## value falls in a given period.

Net investment equals gross investment minus

depreciation.

## Government Consumption and Gross Investment

Government consumption

and gross investment (G) counts expenditures by federal, state, and local governments for final goods and services.

Net Exports
Net exports (EX IM) is the difference

## Components of GDP, 1999: The Expenditure Approach

Components of GDP, 2002: The Expenditure Approach BILLIONS OF DOLLARS 7303.7 871.9 2115.0 4316.8 1543.2 1117.4 471.9 3.9 1972.9 PERCENTAGE OF GDP 69.9 8.3 20.2 41.3 14.8 10.7 4.5 0 18.9 Personal consumption expenditures (C) Durable goods Nondurable goods Services Gross private domestic investment (l) Nonresidential Residential Change in business inventories Government consumption and gross investment (G)

Federal
State and local Net exports (EX IM) Exports (EX) Imports (IM) Total gross domestic product (GDP)
Note: Numbers may not add exactly because of rounding. Source: U.S. Department of Commerce, Bureau of Economic Analysis.

693.7
1279.2 423.6 1014.9 1438.5 10446.2

6.6
12.2 4.1 9.8 13.8 100.0

## II. Calculating GDP The Income Approach

National income is the total income earned

by the factors of production owned by a countrys citizens. The income approach to GDP breaks down GDP into four components:

GDP = national income + depreciation + (indirect taxes subsidies) + net factor payments to the rest of the world + other

## II. Calculating GDP The Income Approach

Components of GDP, 2002: The Income Approach
BILLIONS OF DOLLARS PERCENTAG E OF GDP

National income
Compensation of employees Proprietors income Corporate profits Net interest Rental income

8,199.9
6,010.0 943.5 748.9 554.8 142.7

80.3
58.9 7.3 7.3 5.4 1.4

Depreciation Indirect taxes minus subsidies Net factor payments to the rest of the world Other Gross domestic product

96.1 10,205.6

0.9 100.0

## From GDP to Disposable Personal Income

GDP, GNP, NNP, National Income, Personal Income, and Disposable Personal Income, 2002 DOLLARS (BILLIONS) 10,205.6 + 342.1 353.2 10,194.5 1,351.3 8,843.2 643.3 8,199.9 332.6 731.2 + 439.1 +1,148.7 8,723.9

GDP
Plus: receipts of factor income from the rest of the world Less: payments of factor income to the rest of the world

Equals: GNP
Less: depreciation

## Equals: net national product (NNP)

Less: indirect taxes minus subsidies plus other

## Equals: national income

Less: corporate profits minus dividends Less: social insurance payments Plus: personal interest income received from the government and consumers Plus: transfer payments to persons

## From GDP to Disposable Personal Income

Net national product equals gross national

product minus depreciation; a nations total product minus what is required to maintain the value of its capital stock. Personal income is the income received by households after paying social insurance taxes but before paying personal income taxes.

## Disposable Personal Income and Personal Saving

Disposable Personal Income and Personal Saving, 2002 DOLLARS (BILLION S)
Disposable personal income Less: Personal consumption expenditures Interest paid by consumers to business Personal transfer payments to foreigners Equals: personal saving Personal savings as a percentage of disposable personal income:
Source: See Table 18.2.

## Disposable Personal Income and Personal Saving

The personal saving rate is the percentage

of disposable personal income that is saved. If the personal saving rate is low, households are spending a large amount relative to their incomes; if it is high, households are spending cautiously.

## III. Nominal Versus Real GDP

Nominal GDP is GDP measured in current

dollars, or the current prices we pay for things. Nominal GDP includes all the components of GDP valued at their current prices. When a variable is measured in current dollars, it is described in nominal terms.

## Calculating Real GDP

A weight is the importance attached to an

item within a group of items. A base year is the year chosen for the weights in a fixed-weight procedure. A fixed-weight procedure uses weights from a given base year.

## Calculating Real GDP

A Three-Good Economy
(1) (2) (3) (4) (5) GDP IN YEAR 1 IN YEAR 1 PRICES P1 x Q1 (6) GDP IN YEAR 2 IN YEAR 1 PRICES P1 x Q2 (7) GDP IN YEAR 1 IN YEAR 2 PRICES P2 x Q1 (8) GDP IN YEAR 2 IN YEAR 2 PRICES P2 X Q2

## PRICE PER UNIT YEAR YEAR 1 2 P1 P2

Good A
Good B Good C Total

6
7 10

11
4 12

\$.50
.30 .70

\$ .40
1.00 .90

\$3.00
2.10 7.00 \$12.10 Nominal GDP in year 1

\$5.50
1.20 8.40 \$15.10

\$2.40
7.00 9.00 \$18.40

\$4.40
4.00 10.80 \$19.20 Nominal GDP in year 2

## Calculating the GDP Deflator

The GDP deflator is one measure of the

overall price level. The GDP deflator is computed by the Bureau of Economic Analysis (BEA). Overall price increases can be sensitive to the choice of the base year. For this reason, using fixed-price weights to compute real GDP has some problems.

## The Problems of Fixed Weights

The use of fixed price weights to estimate real GDP leads to problems because it ignores: 1. Structural changes in the economy. 2. Supply shifts, which cause large decreases in price and large increases in quantity supplied. 3. The substitution effect of price increases.

## IV. Limitations of the GDP GDP and Social Welfare

Society is better off when crime decreases,

however, a decrease in crime is not reflected in GDP. An increase in leisure is an increase in social welfare, but not counted in GDP. Nonmarket and household activities are not counted in GDP even though they amount to real production.

## GDP and Social Welfare

GDP accounting rules do not adjust for

production that pollutes the environment. GDP has nothing to say about the distribution of output. Redistributive income policies have no direct impact on GDP. GDP is neutral to the kinds of goods an economy produces.

## The Underground Economy

The underground economy is the

part of an economy in which transactions take place and in which income is generated that is unreported and therefore not counted in GDP.

## Gross National Income per Capita

To make comparisons of GNP between countries,

currency exchange rates must be taken into account. Gross National Income (GNI) is a measure used to make international comparisons of output. GNI is GNP converted into dollars using an average of currency exchange rates over several years adjusted for rates of inflation. GNI divided by population equals gross national income per capita.

## Gross National Income per Capita

Per Capita Gross National Income for Selected Countries, 2002
COUNTRY Switzerland Japan Norway United States Denmark Ireland Sweden United Kingdom Netherlands Austria Finland Germany Belgium France Canada U.S. DOLLARS 36,970 35,990 35,530 34,870 31,090 28,880 25,400 24,230 24,040 23,940 23,840 23,700 23,340 22,640 21,340 COUNTRY Portugal South Korea Argentina Mexico Czech Republic Brazil South Africa Turkey Colombia Jordan Romania Philippines China Indonesia India U.S. DOLLARS 10,670 9,400 6,860 5,540 5,270 3,060 2,900 2,540 1,910 1,750 1,710 1,050 890 680 460

## Review Terms and Concepts

base year change in business inventories compensation of employees corporate profits current dollars depreciation disposable personal income, or after-tax income durable goods government consumption and gross investment (G) gross domestic product (GDP) gross investment gross national income (GNI)

## gross national product (GNP)

gross private domestic investment (I) income approach indirect taxes

expenditure approach
final goods and services fixed-weight procedure

intermediate goods
national income national income and product accounts

## Review Terms and Concepts

net exports (EX IM) net factor payments to the rest of the world net interest net investment personal saving personal saving rate proprietors income rental income residential investment services subsidies underground economy value added weight

## net national product (NNP)

nominal GDP nondurable goods nonresidential investment

personal income

## Difficulties of Measurement of National income

1. Lack of statistical data :In the less developing countries, the accurate figures about the various sectors of economy are not available due to this we are unable to estimate the real national income of the country.
2. Lack of staff :There is a shortage of trained staff which may collect the statistics about the national product. 3. Public co-operation :Public is also not ready to provide the correct figures about the income due to the fear of income tax. 4. No account :Some people do not keep any proper account about their business income, so their income is not included in the national income.

5. Difficulty in assessment :Some goods and services value can not be assessed easily. For example the value of different Cows and Sheep's is very difficult. 6. Problem of double counting :While computing the national income there is always a danger of double counting. If the care is not taken the national income is over estimated.

7. Unpaid services :In national income only those services are included for which the payment is made. The unpaid services are excluded.
8. Assessment of depreciation :The assessment of depreciation allowance, repair and replacement charges is a very difficult job.

A landlord receives Rs. 1000 monthly a rent of his house. This rent will be included in the national income. If this house is purchased by the tenant. Now Rs.1000 will not be paid by the tenant. So now Rs. 1000 income of the tenant has increased. Now the controversial issue is that it should be included in the national income or not. 10. Transfer earnings :The transfer earnings like pensions are excluded from the national income and it feels problem. 11. Foreign payments :We include only net foreign balance, if we include all the sources from which foreign payment is received, it will be more difficult. 12. Direct exchange :In the less developing areas people exchange the commodities with the commodities and do not use the money. So the value of these goods can not be

Chapter- 2

## Classical theory of Income and Employment

The basic contention of classical economists was that if wages and prices were

flexible, a competitive market economy would always operate at full employment. That is, economic forces would always be generated so as to ensure that the demand for labour was always equal to its supply. In the classical model the equilibrium levels of income and employment were supposed to be determined largely in the labour market. At lower wage rate more workers will be employed. That is why the demand curve for labour is downward sloping. The supply curve of labour is upward sloping because the higher the wage rate, the greater the supply of labour.

## The classical economists believed that aggregate demand would

always be sufficient to absorb the full capacity output Qo. In other words, they denied the possibility of under spending or overproduction. This belief has its root in Says Law. (a) Says Law: According to Says Law supply creates its own demand, i.e., the very act of producing goods and services generates an amount of income equal to the value of the goods produced. Says Law can be easily understood under barter system where people produced (supply) goods to demand other equivalent goods. So, demand must be the same as supply. Says Law is equally applicable in a modern economy. The circular flow of income model suggests this sort of relationship. For instance, the income created from producing goods would be just sufficient to demand the goods produced. (b) Saving-Investment Equality: There is a serious omission in Says Law. If the recipients of income in this simple model save a portion of their income, consumption expenditure will fall short of total output and supply would no longer create its own demand. Consequently there would be unsold goods, falling prices, reduction of production,

c) Saving-Investment Equality in the Money Market: The classical economists also argued that capitalism contained a very special market the money market which would ensure saving investment equality and thus would guarantee full employment. According to them the rate of interest was determined by the demand for and supply of capital. The demand for capital is investment and its supply is saving. The equilibrium rate of interest is determined by the saving-investment equality. Any imbalance between saving and investment would be corrected by the rate of interest. If saving exceeds investment, the rate of interest will fall. This will stimulate investment and the process will continue until the equality is restored. The converse is also true. (d) Price Flexibility: The classical economists further believed that even if the rate of interest fails to equate saving and investment, any resulting decline in total spending would be neutralized by proportionate decline in the price level. That is, Rs 100 will buy two shirts at Rs 50, but Rs 50 will also buy two shirts if the price falls to Rs 25. Therefore, if households saves more than firms would invest, the resulting fall in spending would not lead to decline in real output, real income and the level of employment provided product prices also fall in the same proportion.

(e) Wage Flexibility: The classical economists also believed that a decline in product demand would lead to a fall in the demand for labour resulting in unemployment. However, the wage rate would also fall and competition among unemployed workers would force them to accept lower wages rather than remain unemployed. The process will continue until the wage rate falls enough to clear the labour market. So a new lower equilibrium wage rate will be established. Thus, involuntary unemployment was logical impossibility in the classical model.

## Keynesian theory of output & Employment

Keynes theory of output and employment is

often called a monetary theory of employment. Outline the relations of monetary factors in the relationship between savings and investment. What role does a price mechanism play in determining the eq. between savings & investment?

Keynes said, the consumption of the nation will also affect their income. He formulated his analysis for the closed economy with no government, but the theory could be extended. So all income is either spent or saved. Y=C+S, whereas the income of the nation will be the investment expenditure + consumption. Y=C+I, it follows that the country is in equilibrium if S=I, but this is just stating an identity. In practice the time lags are involved and C+S comes from the previous time period, whereas C+I forms the income for the next period. It is the nature of people not to spend all their extra income, the proportion spent is the Marginal Propensity to Consume. At very low levels of income people actually dis save (live from previous stocks or borrow).

So Keynes suggested in the case when full employment level was above Y1 government intervention to increase I and ultimately C+I, so the level of national income would rise. Friedeman called early Keynesians fiscalists. But the general theory does not mention fiscal policy, Keynes only mentions monetary policy. Keynes took over the quantity theorists assumption about Ms=exogenous. The demand for money is Md=kPY according to the Cambridge approach. Keynes accepted that but told this is not the complete picture. The Md should also include interest rate. So Md could be split to 3: 1. transactionary - like monetarists defined it, it is interest inelastic and depends on how often one is paid the wage. 2. precautionary - for rainy days, much the same as 1.

3. asset demand for money - liquidity preference L(r). This is interest elastic. So Keynes reformulated the Cambridge formulae: Md=kPY + L(r). Liquidity preference showed the difference between how many bonds or money you like to hold. If you have higher liquidity preference you hold more money. Amount of money does not matter, aggregate demand can be anything with given amount of money, the velocity of circulation can be whatever, if people do not want to spend, then extra money will be held in accounts.

## Central Bank & its functions

The central bank generally performs the following functions:

1. Bank of Note Issue: The central bank has the sole monopoly of note issue in almost every country. The currency notes printed and issued by the central bank become unlimited legal tender throughout the country. In the words of De Kock, "The privilege of note-issue was almost everywhere associated with the origin and development of central banks." However, the monopoly of central bank to issue the currency notes may be partial in certain countries. For example, in India, one rupee notes are issued by the Ministry of Finance and all other notes are issued by the Reserve Bank of India. The main advantages of giving the monopoly right of note issue to the central bank are given below: (i) It brings uniformity in the monetary system of note issue and note circulation. (ii) The central bank can exercise better control over the money supply in the country. It increases public confidence in the monetary system of the country.

(iii) Monetary management of the paper currency becomes easier. Being the supreme bank of the country, the central bank has full information about the monetary requirements of the economy and, therefore, can change the quantity of currency accordingly. (iv) It enables the central bank to exercise control over the creation of credit by the commercial banks. (v) The central bank also earns profit from the issue of paper currency. (vi) Granting of monopoly right of note issue to the central bank avoids the political interference in the matter of note issue.

2. Banker, Agent and Adviser to the Government: The central bank functions as a banker, agent and financial adviser to the

government, (a) As a banker to government, the central bank performs the same functions for the government as a commercial bank performs for its customers. It maintains the accounts of the central as well as state government; it receives deposits from government; it makes short-term advances to the government; it collects cheques and drafts deposited in the government account; it provides foreign exchange resources to the government for repaying external debt or purchasing foreign goods or making other payments, (b) As an Agent to the government, the central bank collects taxes and other payments on behalf of the government. It raises loans from the public and thus manages public debt. It also represents the government in the international financial institutions and conferences, (c) As a financial adviser to the lent, the central bank gives advise to the government on economic, monetary, financial and fiscal ^natters such as deficit financing, devaluation, trade policy, foreign exchange policy, etc.

3. Bankers' Bank: The central bank acts as the bankers' bank in three capacities: (a) custodian of the cash preserves of the commercial banks; (b) as the lender of the last resort; and (c) as clearing agent. In this

way, the central bank acts as a friend, philosopher and guide to the commercial banks As a custodian of the cash reserves of the commercial banks the central bank maintains the cash reserves of the commercial banks. Every commercial bank has to keep a certain percentage of its cash balances as deposits with the central banks. These cash reserves can be utilised by the commercial banks in times of emergency.

## 4. Lender of Last Resort:

As the supreme bank of the country and the bankers' bank, the central

bank acts as the lender of the last resort. In other words, in case the commercial banks are not able to meet their financial requirements from other sources, they can, as a last resort, approach the central bank for financial accommodation. The central bank provides financial accommodation to the commercial banks by rediscounting their eligible securities and exchange bills. The main advantages of the central bank's functioning as the lender of the last resort are : (i) It increases the elasticity and liquidity of the whole credit structure of the economy. (ii) It enables the commercial banks to carry on their activities even with their limited cash reserves. (iii) It provides financial help to the commercial banks in times of emergency. (iv) It enables the central bank to exercise its control over banking system of the country.

5. Clearing Agent: As the custodian of the cash reserves of the commercial banks, the

central bank acts as the clearing house for these banks. Since all banks have their accounts with the central bank, the central bank can easily settle the claims of various banks against each other with least use of cash. The clearing house function of the central bank has the following advantages: (i) It economies the use of cash by banks while settling their claims and counter-claims. (i) It reduces the withdrawals of cash and these enable the commercial banks to create credit on a large scale. (ii) It keeps the central bank fully informed about the liquidity position of the commercial banks.

## Commercial Bank & its functions

The main functions of commercial banks are accepting deposits from

the public and advancing them loans. However, besides these functions there are many other functions which these banks perform. All these functions can be divided under the following heads: 1. Accepting deposits 2. Giving loans 3. Overdraft 4. Discounting of Bills of Exchange 5. Investment of Funds 6. Agency Functions 7. Miscellaneous Functions

## 1. Accepting Deposits: The most important function of commercial banks is to accept

deposits from the public. Various sections of society, according to their needs and economic condition, deposit their savings with the banks. For example, fixed and low income group people deposit their savings in small amounts from the points of view of security, income and saving promotion. On the other hand, traders and businessmen deposit their savings in the banks for the convenience of payment. Therefore, keeping the needs and interests of various sections of society, banks formulate various deposit schemes. Generally, there ire three types of deposits which are as follows:

(i) Current Deposits: The depositors of such deposits can withdraw and deposit money whenever

they desire. Since banks have to keep the deposited amount of such accounts in cash always, they carry either no interest or very low rate of interest. These deposits are called as Demand Deposits because these can be demanded or withdrawn by the depositors at any time they want. Such deposit accounts are highly useful for traders and big business firms because they have to make payments and accept payments many times in a day. (ii) Fixed Deposits: These are the deposits which are deposited for a definite period of time. This period is generally not less than one year and, therefore, these are called as long term deposits. These deposits cannot be withdrawn before the expiry of the stipulated time and, therefore, these are also called as time deposits. These deposits generally carry a higher rate of interest because banks can use these deposits for a definite time without having the fear of being withdrawn.

iii) Saving Deposits: In such deposits, money upto a certain limit can be deposited and with-

drawn once or twice in a week. On such deposits, the rate of interest is very less. As is evident from the name of such deposits their main objective is to mobilise small savings in the form of deposits. These deposits are generally done by salaried people and the people who have fixed and less income.

2. Giving Loans: The second important function of commercial banks is to advance loans to its

customers. Banks charge interest from the borrowers and this is the main source of their income. Banks advance loans not only on the basis of the deposits of the public rather they also advance loans on the basis of depositing the money in the accounts of borrowers. In other words, they create loans out of deposits and deposits out of loans. This is called as credit creation by commercial banks. Modern banks give mostly secured loans for productive purposes. In other words, at the time of advancing loans, they demand proper security or collateral. Generally, the value of security or collateral is equal to the amount of loan. This is done mainly with a view to recover the loan money by selling the security in the event of non-refund of the loan. At limes, banks give loan on the basis of personal security also. Therefore, such loans are called as unsecured loan. Banks generally give following types of loans and advances:

(i) Cash Credit: In this type of credit scheme, banks advance loans to its customers on the basis

of bonds, inventories and other approved securities. Under this scheme, banks enter into an agreement with its customers to which money can be withdrawn many times during a year. Under this set up banks open accounts of their customers and deposit the loan money. With this type of loan, credit is created. (iii) Demand loans: These are such loans that can be recalled on demand by the banks. The entire loan amount is paid in lump sum by crediting it to the loan account of the borrower, and thus entire loan becomes chargeable to interest with immediate effect. (iv) Short-term loan: These loans may be given as personal loans, loans to finance working capital or as priority sector advances. These are made against some security and entire loan amount is transferred to the loan account of the borrower.

3. Over-Draft: Banks advance loans to its customers upto a certain amount through over-

drafts, if there are no deposits in the current account. For this banks demand a security from the customers and charge very high rate of interest. 4. Discounting of Bills of Exchange: This is the most prevalent and important method of advancing loans to the traders for short-term purposes. Under this system, banks advance loans to the traders and business firms by discounting their bills. In this way, businessmen get loans on the basis of their bills of exchange before the time of their maturity. 5. Investment of Funds: The banks invest their surplus funds in three types of securitiesGovernment securities, other approved securities and other securities. Government securities include both, central and state governments, such as treasury bills, national savings certificate etc. Other securities include securities of state associated bodies like electricity boards, housing boards, debentures of Land Development Banks units of UTI,

6. Agency Functions: Banks function in the form of agents and representatives of their customers.

Customers give their consent for performing such functions. The important functions of these types are as follows: (i) Banks collect cheques, drafts, bills of exchange and dividends of the shares for their customers. (ii) Banks make payment for their clients and at times accept the bills of exchange: of their customers for which payment is made at the fixed time. (iii) Banks pay insurance premium of their customers. Besides this, they also deposit loan installments, income-tax, interest etc. as per directions. (iv) Banks purchase and sell securities, shares and debentures on behalf of their customers. (v) Banks arrange to send money from one place to another for the convenience of their customers.

7. Miscellaneous Functions: Besides the functions mentioned above, banks perform many other functions

of general utility which are as follows: (i) Banks make arrangement of lockers for the safe custody of valuable assets of their customers such as gold, silver, legal documents etc. (ii) Banks give reference for their customers. (iii) Banks collect necessary and useful statistics relating to trade and industry. (iv) For facilitating foreign trade, banks undertake to sell and purchase foreign exchange. (v) Banks advise their clients relating to investment decisions as specialist (vi) Bank does the under-writing of shares and debentures also. (vii) Banks issue letters of credit. (viii) During natural calamities, banks are highly useful in mobilizing funds and donations. (ix) Banks provide loans for consumer durables like Car, Air-conditioner, and Fridge etc.