syllabus 2021-2022 ch: 1 national income and related …

INDIAN CENTRAL SCHOOL, KUWAIT

1. CLASS : XII D & E

2. SUBJECT : ECONOMICS

3. TOPIC : SOME BASIC CONCEPTS OF MACRO ECONOMICS

4. CHAPTER : 01

5. SLOT : 01

6. CATEGORY : CLASSWORK

SYLLABUS 2021-2022

PART:A INTRODUCTORY MACRO ECONOMICS MARKS(40)

CH: 1 NATIONAL INCOME AND RELATEDAGGREGATES

12 MARKS

CH: 2 MONEY AND BANKING 06 MARKS

CH: 3 DETERMINATION OF INCOME AND EMPLOYMENT

10 MARKS

CH: 4 GOVERNMENT BUDGET AND THE ECONOMY

06 MARKS

CH: 5 BALANCE OF PAYMENT 06 MARKS

TOTAL 40 MARKS

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UNIT1: NATIONAL INCOME AND RELATED AGGREGATE

CHAPTER 01: SOME BASIC CONCEPTS OF MACRO ECONOMICS

ÿ Aggregates of the Economic Systemÿ Types of Goods Produced in the Economyÿ Final Goods & Intermediate Goodsÿ Consumer Goods & Capital Goodsÿ Concept & components of Consumption Expenditureÿ Concept & Components o Investmentÿ Stock & Flowÿ Circular Flow of Income/ Money/ ORÿ Intersectoral Flows—Real & Money Flow

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Q1. Define Macro Economics. Mention the well known economic

problems.

Ans. Macro Economics is the study of an economy as a whole.

OR

Macro Economics is the study of economic problems at the

macro level

The well known economic problems includes:

a) The problem of GDP growth.

b) The problem of unemployment.

c) The problem of inflation and deflation.

d) The problem finding funds for investment.

e) The problem related to exchange rate and Balance of payment.

Q2. Distinguish between Micro Economics and Macro Economics



MICRO ECONOMICS MACRO ECONOMICS

a) It is the study of an individualunit

a) It is the study of an Economy asa whole.

b) Demand and Supply are themain tools.

b) Aggregate Demand,Aggregate Supply areits main tools.

c) It is also called the PriceTheory

c) It is called Income Theory or Income and Employment.

d) Its central problem is determination of price andallocation of resources.

d) Its central problem isdetermination of thelevel of NationalIncome and Employment.

e) Micro economics assumesMacro variables as constant.

e) Macro economics assumesMicro variables as constant.

Q3. Give some examples of Micro Economics.

a) Individual Demandb) Individual Supplyc) Price Determination of a commodityd) Consumer’s Equilibriume) Producer’s Equilibriumf) Study of Individual Firm or Consumerg) Behaviour of a Firmh) Partial Equilibriumi) Theory of Demandj) Theory of Supplyk) Savings of an individuall) Output of the firmm) Consumption of a house holdsn) Price level of a firm

Q4. Give some examples for Macro Economics



a National Incomeb Level of Employmentc Aggregate Demandd Aggregate Supplye Aggregate consumptionf Aggregate Investmentg General Price Levelh General Equilibrium/ Economy’s Equilibriumi Problem of inflation and deflationj Money and Bankingk Government budget and The Economyl Full Employment / Unemploymentm Determination of Aggregate Outputn Scarcity and choice at the level of an economy

Q5. Define the following terms.

Q6. Who all are economic agents?

Ans. Consumers, Producers, Government etc.

Q7. Define Aggregates of economic system. Explain macro economic

variables.

Ans. Aggregates of economic system refers to Macro Economic Variables.

Macro Economic Variables are:

a) Aggregate Demand [AD]: AD is the sum total of expenditure that

the people plan to incur on the purchase of goods and services

a) Partial Equilibrium: Equilibrium in one market or oneCommodity.

b) General Equilibrium: Simultaneous equilibrium orEquilibrium in an economy

c) Economic Agent: They are the individuals or institutions who take economicdecisions.



produced in an economy during an accounting year corresponding

to different levels of income.

b) Aggregate Supply [AS]: AS refers to aggregate production or the

flow of goods and services as planned by the producers during an

accounting year.

c) Aggregate Consumption: It is the sum total of expenditure on the

consumer goods by the house holds during an accounting year.

d) Aggregate Investment: It is the sum total of expenditure on the

capital goods by the producers during an accounting year.

e) Domestic Income: It is the sum total of factor incomes generated

within the domestic territory of a country no matter who generates

it normal residents or non residents.

f) General Price Level: It refers to the index of prices of all goods and

services at the end of a specified period of time. It reflects cost of

living of a common people.

* TYPES OF GOODS

TYPES OF GOODS

FINAL GOODS

&

INTERMEDIATE GOODS

CONSUMER GOODS

&

CAPITAL GOODS



Q8. Distinguish between final goods and intermediate goods.

FINAL GOODS INTERMEDIATE GOODSi) Final goods are those goods which are finally crossed the boundary line of production and are ready to use by the final users.

i) Intermediate goods are those goods which are not yet crossed the boundary line of production and are not yet ready to use by the final users.

ii) These goods are not used as raw material for the production of other goods.

ii) These goods are used as raw material for the production of other goods.

iii) These goods are not resold by the firm.

iii) These goods are resold by the firm.

iv) Value is not to be added to these goods.

iv) Value is yet to be added to these goods.

v) These goods are included in the estimation of national income.

v) These goods are not included in the estimation of national income.

vi) Expenditure on these goods is called Final Expenditure.= ( C+ I)

vi) Expenditure on these goods is called Intermediate Consumption or intermediate cost.

Q9. Define the following

i) Final Consumer Goods: are those goods which are finally purchased by the consumer for their satisfaction. Eg: Bread & Butter.

ii) Final Producer Goods: are those goods which are finally purchased by the producer for further production. Eg: Tractors used by farmers.

iii) Consumption Expenditure: It is the expenditure on final consumer goods by the households.

iv) Intermediate consumption/ Intermediate cost: Expenditure on intermediate goods by the producers during an accounting year.

Expenditure on Final Goods = Consumption Expenditure

+ Investment Expenditure



Q10. Explain the basis of classification of goods into intermediate goods and final goods. Give suitable examples.

Ans: END USE is the basis of classification of goods as Final Goods or Intermediate Goods.

For Example: Goods which are used by the producer for the process of production as raw materials or goods which are purchased and resold by producer is treated as intermediate goods. But if goods which are used by the producer as fixed assets like tractor used by a farmer is treated as final goods. (OR)

Sugar used as raw material for production of biscuits for resold by firm to other is intermediate goods. But sugar used by households is final goods.

Q11. Explain the process of double counting using an example. State any two ways to avoid this problem. (OR)

Explain the significance of the distinction between intermediate and final goods.

Ans: For the estimation of national income the difference between final goods and intermediate goods is very significant. We know that intermediate goods are those goods which are purchased by one firm from the other for resale or for use as raw materials. When these goods are used as raw materials in the production of final goods, the value of intermediate goods is reflected in the value of final goods. For Example, suppose a farmer sells wheat to a miller for Rs. 1000 and miller sold flour to a baker for Rs. 1200 and baker sells bread to a shopkeeper for Rs. 2000 and shopkeeper sells bread to a consumer for Rs. 2500. If , all the production units treat the commodity they sell as final product , the national income be.

(1000 + 1200 + 2000 + 2500) = 6700



This includes the value of wheat four times, which cause double counting. (Counting the value of a commodity more than one time is called double counting) But national income increased only by 2500.

This problem can be avoided by two ways:

i) By taking the value of final product (ie. 2500)

ii) By taking the sum total of value added by production units ie.

1000 + 200 + 800 + 500 = 2500

Q12. How would you find out whether a particular expenditure is expenditure on intermediate goods or on final goods?

Ans: Expenditure on final goods must lead to:

i) Final consumption Expenditure (C) or

ii) Investment Expenditure (I)

The expenditure which does not lead to C & I (like expenditure on raw material) is to be treated as an expenditure on intermediate goods. Expenditure on intermediate goods leads to intermediate consumption or intermediate cost.

Q13. Define consumer goods / consumption goods. Explain its classification.Ans: Consumer goods are those goods which are directly used for the satisfaction of human wants. Eg. Milk used by households.

Classification of Consumer Goods:

i) DURABLE CONSUMER GOODS: are those goods which can be used for several years and are of high value. Eg: TV, Radio etc

ii) SEMI-DURABLE CONSUMER GOODS: are those goods which can be used for a period of one year or slightly more. Eg: Cloths, Furniture etc



iii) NON –DURABLE OR SINGLE USE CONSUMER GOODS: are those goods which are used-up in a single act of consumption. Eg: Milk, ice cream etc

iv) SERVICES/ NON- MATERIAL GOODS: are those goods which directly satisfy human wants. Eg: Service of a doctor, teacher etc.

Q14. Define Capital Goods.

Ans. CAPITAL GOODS: are fixed assets of producers which are used in the process of production for several years and are of high value.Eg: Plant & Machinery.

(Nuts and bolts or nails and screws are also used for several years but these are not capital goods because they are of low value.)

Q15. “All fixed assets (machines) are not capital goods’’. Justify the statement with example.

Ans: Only fixed assets with producer are considered as capital goods and fixed assets with consumer are considered as durable consumer goods.

Example: Refrigerator in medical store is capital goods whereas refrigerator with household is durable consumer goods.

Q16. “All producer goods are not capital goods ‘’ .Explain.

Ans: Because producer goods include capital goods as well as intermediate goods. All capital goods can be considered as producer goods. Eg: Tractors used by farmers considered as capital goods. Whereas seeds, pesticides, fertilizers etc. as intermediate goods.

Q17. Machine purchased is always final goods. Do you agree? Give reason.

Ans: No, machines purchased can be final or intermediate goods depending on the purpose of purchase. If it is purchased by households



then it is treated as final goods. If it is purchased by a firm for resale it is treated as intermediate goods.

*CONCEPT & COMPONENTS OF CONSUMPTION EXPENDITUREQ18) What is consumption Expenditure?Expenditure on final consumer goods by the households is calledconsumption expenditure.Q19) Who are the consumers in an economy?

Consumers are broadly classified as:

i) HOUSEHOLDS: buys goods and services for the satisfaction of their needs.

ii) GOVERNMENT: Buys consumer goods for distribution among defence forces, for mid- day meals in the govt. Schools and for such otherpurposes.iii) Non – profit Private institution buys consumer goods for charity.

If we add up expenditure on the purchase of consumer goods by the above three, we get an estimate of Total consumption Expenditure.Aggregate consumption Expenditure = Consumption Exp by HH

+ GOVT+ NGO

* CONCEPT & COMPONENTS OF INVESTMENT

Q20. Define the following terms:

i) Capital: It is the stock of produced means of production.

ii) Investment: Increase in the stock of capital.

Investment (I) = Change in capital stock ( K)

OR

Investment is a process of capital formation (OR)

Investment is the process that increases the stock of capital.



iii) Capital Formation: Change in stock of capital.

Q21. Mention two components of Investment.

Ans: i) Fixed Investment (Fixed Capital Formation)

ii) Inventory Investment

Q22. What is Fixed Investment?

Ans: It refers to increase in the stock of fixed assets of the producers during an accounting year. Fixed investment also known as Fixed Capital Formation.Eg: If at the beginning of the 2019, a producer has stock of 08 machines and at the end of 2019, he has a stock of 10 machines , then stock of his fixed assets increased by 02 machines .

Q23. Mention the significance of Fixed Investment

Significance of Fixed InvestmentFixed investment implies:1. Increase in the stock of fixed assets.2. It raising production capacity of the producer.3. It leads to increase in output of the economy



4. Higher level of output leads to higher rate of economic growth (GDP). Gross Domestic Product (GDP): It refers to the market value of all final goods & services produced in an economy within the domestic territory of a country during an accounting year.

Q24. Define Inventory Stock.

Ans: At a particular point of time, producer holds stock of (i) finished goods (unsold goods) (ii) Semi finished goods (Which are in the process of production) (iii) Raw materials. This is called Inventory stock.

Q25. Define Inventory Investment.

Ans: Change in inventory stock is inventory investment.

Inventory Investment = Inventory stock at the end of the accounting

year

(- ) Inventory stock at the beginning of the

accounting year

= Change in Inventory stock during an accounting

year

Q26. Mention the significance of inventory investment.

Ans: Significance of Inventory Investment

Inventory Investment consists of investment in terms of the stock of:

(i) Raw Material & (ii) Finished Goods

The Stock of Raw material is significant because:



i) It ensures uninterrupted supply of inputs in the process of production.

ii) With enough stock of raw materials the producer can avoid their day

- to – day purchases from the market.

The stock of Finished goods is significant because:

i) It enables the producers to meet the potential (future) demand fortheir product.

ii) In the absence of abundant stocks, domestic producers may lose potential demand for their product to rival producers in the international market.

Q27. Define the following

Ans: Desired Inventory Stock: It refers to planned inventory stock. This is maintained by the producers to meet the future.

Undesired Inventory Stock: It refers to unplanned inventory stock. It arises because demand for the product turns out to be lower than expected. (For Eg. If a producer expected to sell 1,000 units of washing machines . But he could sell 500 units owing to the lack of demand. Remaining 500 units of washing machines (unsold stock) are an undesired stock .Unplanned inventory stock leads to losses.

Q28. What is the difference between planned and unplanned inventory accumulation? Write down the relation between change in inventories and value added.

Ans: Planned Inventory Accumulation: It refers to desired inventory stock. This is maintained by the producer with a view to meet potential or future demand for his product. Otherwise the producer might suffer the loss of unfulfilled demand.



Unplanned Inventory Accumulation: It refers to undesired inventory stock. It arises because demand for the product turns out to be lower than expected. It leads to losses.

Value Added = Sales + Change in stock

* GROSS INVESTMENT, NET INVESTMENT AND CONCEPT OF

DEPRECIATION

Q29. Distinguish between Gross Investment and Net Investment

Gross Investment Net Investment(i)It includes expenditure by the producer on the purchase of new fixed assets as well as expenditure on inventory stock. It also includes expenditure on the replacement of fixed assets.

i)It includes expenditure by the producer for the purchase of new fixed assets only. It does not include expenditure by the producer on the replacement of existing assets.

ii)It includes replacement investment or = to depreciation of fixed assets.

ii) It does not include replacement investment or Depreciation.

iii)It does not show net addition to the existing capital stock.

iii) It shows net addition to the existing capital stock.

iv)Gross Investment = Net Investment( purchase of new assets) +

Depreciation (Replacement cost)

iv)Net Investment = Gross Investment

- Depreciation

G = N + D N = G – DThen D = G - N



Q30. Mention the significance of Net Investment

Q31. Distinguish between Depreciation and Capital loss.

DEPRECIATION/ CONSUMPTION OF FIXED CAPITAL

CAPITAL LOSS

i)It refers to loss of value of fixed assets while these are in use.

i) It refers to loss of value of fixed assets while these are not in use.

ii) It is the loss of value due to: i) Normal wear and tearii) Accidental damagesiii) Expected Obsolescence.

ii)It is the loss of value due to i) Natural Calamitiesii) Fall in the market value of the

assets

iii) It is managed through Depreciation Reserve Fund

ii) It is managed through Insurance.

Q32. Define Depreciation Reserve Funds. Explain it with the help of an example. Mention its significance.

DEPRECIATION RESERVE FUND: The funds which producer keeps for the replacement of fixed assets.

For Example: If a machine is purchased for Rs.10,00,000 and its expected life time of use is 10 years, then the annual provision for to replace the machine after 10 year= 10,00,000 ÷ 10 = 1,00,000



Significance of Depreciation Reserve Funds

1. Low investment leads to low level of output.

2. It leads to vicious circle of low investment.

3. It leads to low level of income and employment.

4. It leads to low level of aggregate demand.

5. It leads to low inducement to investment.

It again leads to low investment.

Q33. What is Current Replacement Cost?

Ans: It refers to estimated value o depreciation for all the producing units in the economy during the period of an accounting year.

Q34. Distinguish between Expected obsolescence and unexpected obsolescence.

Expected Obsolescence Un Expected Obsolescence

i) It refers to a fall in the value of fixed assets due the change in technology or ( A plant producing black and white TVs becomes obsolete when technology is discovered to produce colour TVs)change in Demand

i) It refers to a fall in the value of fixed assets due to natural calamities or economic recession.

ii) It is a part of depreciation. ii) It is not a part of depreciation. Instead it points to capital loss.

iii) It is managed throughDepreciation Reserve Fund(Only expected Obsolescence is considered for the estimation of NI)

iii) It is managed through Insurance.



* STOCK AND FLOW

In Economics certain terms like capital, money, income, etc are widely used terms. Some of these are stock while others are flow.

Meaning of stock: A stock is a quantity measured at a particular point of time. For eg. Deposits of 20,000 in your bank account on January 01 st 2019 . This is a stock values, as these are measured at a specific point of time. Some egs. of Stock water in a tank, Distance b/w Jaleeb and Farwaniya, wealth, capital etc .

Meaning of Flow: A flow is a quantity measured over a specified period of time. ( per day, an hour, a day a month, an year) Eg: withdrawals 500 Rs. Per month from bank A/C is Flow. Deposits Rs.1000 per month is flow. Expenditure, income, Expenditure of money, Speed of a car, Interest etc.

Q35. Distinguish between stock and flow.

STOCK FLOWi) It is the quantity of an economic variable at a point of time

i) It is the quantity of an economic variable during the period of time.

ii) It has no time dimension. On January 01,2019 there may be 20,000 in your bank account

ii) It has time dimension. It can be daily, weekly, monthly , hourly , per day

iii) Stock is a static conceptiv) Eg. Distance between Delhi and Mumbai

iii) Flow is a dynamic conceptiv) Eg. Consumption, investment It is the quantity of an economic variable at a point of time

* Certain concepts studied only as flow eg: Export & Import



Q36. Give some examples of stocks

∑ Wealth∑ Labour force∑ Capital∑ Quantity of money∑ Supply of money∑ Bank deposits on 31.03 2019∑ Water in the overhead tank∑ Distance between Delhi & Mumbai∑ Rice stored in a go down∑ Population of a country



∑ Water in a reservoir∑ Total number of houses in cities∑ Balance in Bank Account∑ A hundred Rupee Note∑ Machinery of a sugar mill

Q37. Give some examples of Flow variable

∑ Income∑ Expenditure of money∑ Capital formation∑ Change in supply of money in a country∑ Interest on capital∑ Leakage of water from the overhead tank∑ Speed of a car going from Delhi to Mumbai∑ Sales of rice∑ Number of births∑ Investment∑ Export and Import∑ Profit∑ Savings∑ Production of rice∑ Change in capital stock∑ GDP∑ Service of a Tutor∑ Monetary Expenditure

CIRCULAR FLOW OF INCOME IN DIFFERENT SECTORS OF AN ECONOMY

INCLUDES:



1. Circular Flow of Income in Two Sector Economy.2. Circular Flow of Income in Three Sector Economy3. Circular Flow of Income in Four Sector Economy

Economy: Economy is an area in which people earn for their livelihood DIFFERENT SECTORS OF AN ECONOMY

CLOSED ECONOMY OPEN ECONOMY

CIRCULAR FLOW OF INCOME IN TWO SECTORS ECONOMY

Q38. Explain Circular Flow of an Income using a suitable diagram.

Economic Activities like production, consumption, distribution and exchange generate income. This income flows continuously among various sectors of an economy is called Circular Flow of Income. This is also called as Intersectoral Flow of Income.



Circular Flow can be of two types.1. Real Circular Flow> which show the flow of goods & services from sector to another.2. Money / Monetary Circular Flow> which shows the flow of money from one sector to another.

Circular Flow of Income in Two Sector EconomyTwo Sector Economy consists of Households & Firm .Households > they owns Factors of Production i.e.

Land, Labour, Capital, Organisation (Factor services)(Real flow) and supply it to Firm. Firms in return give

Factor payments to Households (i. e) Money flowFirms> use factors to produce goods and services and give to households (Real Flow). In return to this Households pay money for consumption expenditure (Money Flow) .Each money flow is a reciprocal of real flow.This can be explain with the help of a diagram

Q39. Mention the significance of circular flow of income/ money.



Ans: i) Knowledge of intersectoral interdependence: Circular flow model helps to understand interdependence among different sectors of the economy. It explains how consumers are dependent on producers and vice versa.

ii) Estimation of National Income: It facilitates the estimation o national income.



syllabus 2021-2022 ch: 1 national income and related …

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