CHAPTER -7

INTRODUCTIONS OF MACRO ECONOMICS

I.CHOOSE THE CORRECT ANSWER. ( 1 MARKS).

1. The individuals or institutions which take decisions are.

a) Economic agents b) Economic variables c) Economists d) None of the
above.
2. In 1936 British economists JM Keynes published his celebrated book
a) Wealth of nation b) General theory of employment ,interest and money
c) Theory of interest d) Theory of employment.
3. All the labourers who are ready to work will find employment and all the
factories will working at their full capacity, this school of thought is known as
a) Modern thought b) Classical thought c) Contemporary thought d) None of
the above
4. The year of great depression
a) 1920 b) 1889 c) 1929 d) 2018
5. In a capitalistic economy, production activities are mainly carried out by
ANSWERS:
1. (c) Economic agents
2. (b)General theory of employment, interest and money.
3. (c)Classical thought.
4. ( c ) 1929
5. (a) Private enterprises

II. Fill in the blanks ( 1 marks ).

1. _________________ tries to address situation facing the economy as a whole.

2. Sale of goods by the domestic country to the rest of the world is
called______________
3. _________________ will be called as firms.
4. ______________________ policies are pursued by the state itself or statutory bodies
like the RBI,SEBI, etc.

ANSWERS:

1. Macro economics
2. Exports
3. The production units
4. Macro economics
III. Answer following questions ( 1 marks ).

1. Who are economic agents?

The individuals and institutions which take economic decisions are called as
economic agents.

2. What does classical school of thought say?.

The classical school of thought says that all the labourers who are ready to work,
will find employment and all the factories will work at their full capacity.

3. Give the meaning import.

The purchase of goods from other countries is called as imports.

4. Name the well known work of Adam smith.

“An enquiry in to the nature and causes of wealth of nation” (The wealth of nation)
Published in 1776 by Adam Smith.

5. What do you mean by Wage rate?

A rate at which, the sale and purchase of labour is determined.

II. Answer the following questions: ( 2 marks ).

1. What are the features of capitalistic economy?

1. The means of production is under the control of private ownership.
2. The profit maximization is the main.
3. Whatever good are produced by the private sector, they are due to tastes and
preferences of the consumer.
4. The basic economic problems like what to produce, how to produce, for whom to
produce etc are resolved by the private sector.

2. Name and write the meaning of two kinds of trade.

1. Export trade means “ The sale of goods to other countries.
2. Import means “ The purchase of goods from other countries.

3 Who are the macro economic agents?

Consumers, producers, The govt, RBI, banks etc are the macro economic agents.
 IV. Answer the following questions in 12 sentences each. ( 4 MARKS ).

1. Briefly explain in what way, Macro economics is different from micro

economics.

SL NO MICRO ECONOMICS MACRO ECONOMICS

1 DEFINITION The micro economics is a
science which separately
or individually studies
economic agents.
2 DEALS WITH It deals with consumers
and producers decision
3 METHOD Macro economics follows
partial equilibrium.
4 THEORIES It studies theory of
consumer behavior,
producers behavior.
5 POPULARISED BY Macro economics is
popularized by prof Alfred
Marshal.
Macro economics is a
science which aggregately
studies the economic
agents.
It deals with RBI,SEBI,
NATIONAL INCOME,MONEY.
Macro economics follows
general equilibrium.
It studies theory of
money,employment etc
It is popularized by JM
Keynes.

2.Briefly explain the emergence of macro economics.

In 1929-32 in USA great economic depression resulted in the Briefly explain the
emergence of macro economics.
decline in output and employment level in the country.
2. Due to depression, in USA, from 1929 -1932 unemployment rate rose from 3% to
25%.
3. Output level fell by 33%.
4. These events made economists to think about the functioning of the economy in a
new way.
5. The eminent economist JM Keynes realized the president of America Rosewelt to
solve the economic depression by implementing the policy “Dig the well and fill the
well” with the help of the govt support.
6. For the first time he realized the importance of govt to the world economy to
achieve economic development through the publication of General theory of
employment, interest and money in 1936.
7. As a result, then the macro economics popularized all over the world.
3. Explain the role of the government (state) and household sector in both developed
and developing countries.

Role of the government in the developed and developing countries:

1. The government interference is minimum.
2. Maintenance of law and order in the economy.
3. Framing laws and implementing them.
4. Delivering justice for the people in the economy.

Role of household sector in both developed and developing countries.

The household sector includes individuals or families who are engaged in
different occupation for their livelihood in the economy.
1. The household sector supplies factors required for the production.
2. In turn it receives income, from the firms, in the form of rent, wages , interest,
and profit.
3. This income is spent on the goods and services produced by the firms for the
consumption purpose.
4. The decision on consumption is depended on the budget of household sector.

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 CHAPTER -8
NATIONAL INCOME ACCOUNTING

Choose the correct answer: (1mark)

1. The study of national income is related to

A) Micro economics C) Macro economics
B) Both Micro and Macro D) None of the above

2. NNP=GNP-
A) Deduction B) Depreciation C) Investment D) None of the above

3.The valve of GDP at the current prevailing price is called

A) Nominal GDP B) GDP at factor cost C) Real GDP D) NDP

4. By deducting undistributed profit from national income, we get

A) Personal disposable income C) Personal income
B) Private income D) Subsidies

5.Measuring the sun total of all factor payments will be called

A) Product method C) Expenditure method
B) Income method D) none of the above

ANSWER:
1. Macro economics
2. Depreciation
3. Nominal income
4. Personal income
5. Income method

II. Fill in the blanks (1mark)

1. ___________________ are defined at a particular point time.
2. ____________________ Goods will not pass through anymore stages of production.
3. ______________________ is an annual allowance for wear and tear of a capital good.
4. ________________________ is a stock variable.
5. Pollution is an example for _________________________ negative externalities.
6. The net contribution made by a firm called its_______________________.
ANSWER:
1. Stocks
2. Final
3. Depreciation
4. Inventory
5. Negative
6. Valve added
III. Match the following (1mark).

SLNO A B
1 Labour a)Non-monetary exchange
2 GDP b)Personal Disposable
income
3 Inventory c)Gross domestic product

4 PDI d) Stock variable

5 Domestic service e) Wages

ANSWERS:
1=e) Wages,
2=c) Gross domestic product,
3=d) Stock variable,
4=b) Personal Disposable income,
5= a) Non-monetary exchange

IV. Answer the following questions (1mark)

1. What do you mean by final goods?
The goods that will not pass through anymore stages of production are called as
final goods.
2. Expand CPI
Consumer price index
3. Expand GNP mp”
Gross national product, at market price
4. How do you get net valve added?
If we deduct the valve of depreciation from gross valve added,we obtain Net valve
added.
5. Give the meaning of GDP.
The total money valve of all final goods and services produced in a year within the
nation is called as GDP.
III.ANSWER THE FOLLOWING QUESTIONS
1.Explain the circular flow of national income in a simple economy.

Circular flow of national income means” The movement of national income from one
sector to another sector through the goods market and capital market.”

ASSUMPTIONS
1. There are only two sectors like household sector and firm sector.
2. There are only two markets like factor market and goods market.
3. No savings in the household sector and firm sector or in the entire economy.
4. The household sector act as a supplier of factors of production for the firms and
5. The firm sector act as a supplier of goods and services required for the household
sector.
It can be explained with the help of the following diagram.

1.In above the circle, there are two sectors in the economy like household sector and firm
sector or production sector.

2. There are two markets like factor market and goods market.

3. The house sector supply factors of production like land, labour, capital and organization
required for the production of goods and services.

4. The firm sector supplies goods required for the household sector.

5. The household sector earns income in the form of the factors like rent from land, wages
from labour, interest from capital and profit from organization.

6. What household sector earns income (rent, wages, interest and profit respectively
earned by land, labour, capital and organization) is used to spend without making savings
on goods and services in the goods market.
7. What income is earned by firms by selling goods to the household sector, the same
income is spent on the factors of production like land, labour , capital and organization
without making savings.

2.Illustrate unplanned accumulation and decumulation of inventories with an

example.

Meaning of unplanned accumulation of inventories means” In case of unexpected fall in

sales, a firm will have unsold stock of goods unexpectedly”.

For example : suppose a firm starts the year with an inventory of 100 shirts and it expects
to sell 1000 shirts for the forthcoming year and it produces 1000 shirts and expecting to
keep 100 a inventories.

However, during the year, the sales of shirts unexpectedly decreased by 400 shirts where
the firm is able to sell 600 shirts only, then the firm is left with 400 unsold shirts. The firm
ends the year with 400+100=500. The unexpected rise of inventories by400 will be an
example of unplanned accumulation of inventories.

Meaning of Unplanned decumulation of inventories : In case of unexpected rise in sales,

there will be unplanned decumulation it.

For example: If the sales unexpectedly increases from 1000 to 1050 during the year, then
inventories unexpectedly decreases from 100 to 50. Then the firm will have to sell 50 extra
shirts out of 100 shirts of inventories It is called as unplanned decumulation.

3.Explain the planned accumulation and decumulation of inventories.

Planned accumulation means” If a firm wants to increase, the inventories purposefully

,then it is called as planed accumulation.

For example: Suppose the firm wants to increase the inventories from 100 to 200 shirts
during the year and expecting the sales of 1000 shirts, the firm produces 1000+100 =1100
shirts should be produced.

4 . Explain the macro economic identities. ( 6 marks).

1. Gross domestic product ( GDP): The GDP means “ The total money value of all final
goods and services produced in a year within the nation.”

While estimating GDP, We should not add the contribution of Non Residential Indians
( NRI) working in abroad to the GDP. And the contribution of foreigners working in
India should be added to the GDP of India.
2. Net domestic product ( NDP ): When the depreciation cost is deducted from the GNP
is called as NDP.
NDP=GDP – Depreciation cost.

3. Gross national product ( GNP ) : It means “ The total money value of all final goods
and services produced in a year within the nation, plus income from abroad is called as
GNP.
GNP=GDP + Net factor income from abroad.

4. Net national product ( NNP ) : When we deduct depreciation cost from the Gross
National Product (GNP) is called as Net National Product ( NNP ).
NNP = GNP – Depreciation.

5. Personal income ( PI): A part of national income received by the individual or

household is called as personal income.
PI = NI – Undistributed profits – net interest payments made by household – corporate
tax +Transfer payments to the households from the GOVT and firms.

6. Nominal and real national income: If the national income is expressed at current
year price is called as Nominal income.

If the national income is expressed at the base year price is called as Real national
income.

7. Personal disposable income ( PDI ): The income which can be spent only after the
payment of tax is called as personal disposable income.

8. Per capita income ( PCI ) : The income per head of population is called as Per capita
income.

PCI = National income

Total population

5.Write a note on Externalities.

The benefits or losses and advantages or disadvantages experienced by one person to

another person or one firm to another firm ,for which they are not paid is called as
Externalities.

The externalities don’t have any market in which they can be bought and sold.
There are two types of externalities. They are:

1.Positive externalities

2. Negative externalities

1. Positive externalities: if the benefits or advantages are experienced by one

firm to another firm or one industry to another industry is called as positive
externalities.

For example: If the refinery company, planting the plants around the company,
it may give fresh air which is required for the health of the neighbors it is called
positive externalities. Since the company is responsible for fresh air, the
neighbors are not required to pay for the refinary company. The benefits of fresh
air to the health of the people is not shown in the GDP.

2. Negative externalities : at the same time since the refinery company

discharges wastages of the oil, in to the river, it harms the health of the
fishermen who are depended on the river for their livelihood. But it is shown
in the GDP.
Totally the benefits either benefits or losses are not entered in the estimation
of GDP.

6. Explain the limitations of estimating GDP in the welfare of the people :

Even the GDP increases, we cannot conclude that the welfare of the people
increases. There are some reasons for that.
They are:
1. Distribution of income: If the income is not equally distributed among
the people of the country, it leads to the two classes of people like rich
and poor. Here if the rich people enjoy their day to day life comfortably,
but poor people are not able meet minimum basic needs, they cannot
enjoy the life comfortably. Here since all the people of the country are not
equally enjoy the life comfortably, it is not welfare of the people. The real
welfare indicates a state of equal economic satisfaction of all the people
of the country.
 No of people 2020 Total income
100 people RS 10 RS 1000 =100x10
In 2021,If 10 people RS 7 RS 70=10x7
earns wages
But 90people earns RS 3 RS 270=90x3

In above the table, in 2020, all 100 were equally enjoying life comfortably with RS
10 wages, but in 2021,out of 100 people only 10 people are enjoying economic life
comfortably but 90 people are not able to enjoy the economic life comfortably. So all
100 people not equally enjoying life. So It is not real welfare of the people of the
country.

2 Non monetary exchanges: In the non monetary exchanges or barter system

there no means of money. Since all the goods are exchanged for one commodity to another
commodity. Here GDO or National income cannot be calculated to understand economic
development of a country.

And domestic services which are provided b from your father , mother etc their value
cannot be considered in the estimation of GDP to understand economic development.

3.Externalities: It means “ The benefits or advantages caused by one person to another ,or
one firm to another firm is called as externalities. For which they are not paid.

Since no one pays for it, so we cannot understand economic development of an economy.