NCERT Solutions for Class 12 Economics Chapter 1 Introduction to Macroeconomics and its Concepts

NCERT TEXTBOOK QUESTIONS SOLVED

1. Describe the five major sectors in an economy according to the macroeconomic point of view. [3-4 Marks]

Ans: An economy may be divided into different sectors depending on the nature of study.

• Producer sector engaged in the production of goods and services.
• Household sector engaged in the consumption of goods and services.
  Note: Households are taken as the owners of factors of production.
• The government sector engaged in activities like taxation and subsidies.
• Rest of the world sector engaged in exports and imports.
• Financial sector (or financial system) engaged in the activity of borrowing and lending.

2. What are the four factors of production and remunerations to each of these called? [1 Mark]

Ans: The four factors of production and their corresponding remunerations are:

• Land – Rent
• Labour – Wages
• Capital – Interest
• Entrepreneurship – Profit

3. What are the important features of a capitalist economy? [3-4 Marks]

Ans: Features of a capitalist economy are:

• Private ownership of land and capital.
• Profit is the only motive.
• Free play of the market forces of demand and supply.
• Government looks after growth, stability, and social justice in the economy.

4. Describe the Great Depression of 1929. [3-4 Marks]

Ans: The Great Depression took place in 1929 which adversely affected the developed economies of Europe and North America. It continued for 10 years. There was extreme fall in aggregate demand due to fall in income, which led to a vicious circle of poverty.

5. Distinguish between stock and flow. Between net investment and capital which is a stock and which is a flow? Compare net investment and capital with flow of water into a tank. [3-4 Marks]

Ans: Net investment is a flow whereas capital is a stock. Amount of water in a tank at a particular point of time is a stock concept, whereas amount of water flowing into it is a flow concept.

MORE QUESTIONS SOLVED

I. VERY SHORT ANSWER TYPE QUESTIONS (1 Mark)

1. What is meant by circular flow of income?

Ans: It refers to the flow of money income or the flow of goods and services across different sectors of the economy in a circular form.

2. What are the three phases of circular flow of income?

Ans: Production Phase, Distribution Phase, and Disposition Phase.

3. Give the meaning of factor income.

Ans: Income earned by the factors of production by rendering their productive services in the production process is known as Factor Income.

4. What is meant by transfer income?

Ans: Income received without rendering any productive services is known as Transfer Income.

5. Out of factor income and transfer income which one is a unilateral concept?

Ans: Transfer income.

6. Define current transfers. [CBSE 2003]

Ans: Transfers made from the current income of the payer and added to the current income of the recipient (who receive) for consumption expenditure are called current transfers.

7. Define capital transfers.

Ans: Capital transfers are defined as transfers in cash and in kind for the purpose of investment to the recipient made out of the wealth or saving of a donor.

8. What is the meaning of final goods?

Ans: These are those goods which are used for:

• Personal consumption (like bread purchased by consumer household), or
• Investment or capital formation (like building, machinery purchased by a firm)

9. What is meant by intermediate goods?

Ans: These are those goods which are used for:

• Further processing (like sugar used for making sweets), or
• Resale in the same year (If car purchased by a car dealer for resale).

10. What is meant by consumption goods?

Ans: Consumption goods are those goods which satisfy the wants of consumers directly.

11. Define capital goods.

Ans: Capital goods are defined as all goods produced for use in future productive processes.

12. Give an example of a person who is staying abroad for a period more than one year and still he is treated as a normal resident of India.

Ans: An Indian working in the Indian Embassy in the USA will be treated as a normal resident of India.

II. MULTIPLE CHOICE QUESTIONS (1 Mark)

1. Transfer payments refer to payments which are made:

• (a) Without any exchange of goods and services.
• (b) To workers on transfer from one job to another.
• (c) As compensation to employees.
• (d) None of these

Ans: (a)

2. Which one of the following items comes under consumption goods?

• (a) Durable goods
• (b) Semi-durable goods
• (c) Non-durable goods
• (d) All of these.

Ans: (d)

3. Service of a teacher:

• (a) Capital goods
• (b) Consumption goods
• (c) Intermediate goods
• (d) Can be Consumption goods and intermediate goods

Ans: (d)

4. In a circular flow of income, we have:

• (a) Production
• (b) Distribution
• (c) Disposition
• (d) All of them

Ans: (d)

5. Who is considered as agents of factor of production?

• (a) Households
• (b) Government
• (c) Rest of the world
• (d) All of these

Ans: (a)

6. Which among the following are the features of capitalist economy?

• (a) Private ownership of Land and Capital.
• (b) Profit is the only motive.
• (c) Free Play of market forces of demand and supply.
• (d) All of these

Ans: (d)

7. Flow of Goods & services and factors of production across different sectors in a barter economy is known as: [CBSE Sample Paper 2016]

• (a) Circular flow
• (b) Real flow
• (c) Monetary Flow
• (d) Capital Flow

Ans: (b)

III. SHORT ANSWER-TYPE QUESTIONS

1. Explain the basis of classifying goods into intermediate and final goods. Give suitable examples.

Ans: Goods are classified into intermediate and final goods based on their use. Intermediate goods are used in the production process, whereas final goods are those that are ready for consumption or investment.

2. Define consumption goods and what are its categories.

Ans: Consumption goods are those goods which satisfy the wants of consumers directly. Consumption goods can further be subdivided into the following categories:

• Durable goods: These goods have an expected lifetime of several years. Examples include motor cars, refrigerators, and air-conditioners.
• Semi-durable goods: These goods have a shorter lifetime. Examples include clothing, furniture, and electrical appliances.
• Non-durable goods: Goods which are consumed quickly. Examples include food grains, milk, and vegetables.

3. Define capital goods and its categories.

Ans: Capital goods are defined as all goods produced for use in future productive processes. Examples include machinery, equipment, and buildings.

4. Distinguish between consumption goods and capital goods. Which of these are final goods?

Ans: Consumption goods are used for direct consumption, while capital goods are used to produce other goods. Both are final goods as they are not used for further production within the same accounting year.

5. Differentiate between Current transfers and Capital Transfers.

Ans: Current transfers refer to transfers for consumption purposes, whereas capital transfers are made for investment purposes.

IV. GIVE REASONS

1. Machines purchased by a dealer of machines. [CBSE (AZ) 2010]

Ans: Intermediate good

Reason: Machines purchased by a dealer of machines are intermediate goods because they are resold or used in the production process for value addition.

2. A car purchased by a household. [CBSE (AI) 2010]

Ans: Final good

Reason: A car purchased by a household is a final good because the household is the final user and no further value is added to the car.

3. Furniture purchased by a school. [CBSE Delhi 2011]

Ans: Final good

Reason: Furniture purchased by a school is a final product because it is used directly by the school for several years without further processing.

4. Chalks, dusters, etc. purchased by a school. [CBSE Delhi 2011]

Ans: Intermediate good

Reason: Chalks, dusters, etc. are intermediate goods as they are used up in the teaching process within the same year.

5. Computers installed in an office. [CBSE Delhi 2011]

Ans: Final good

Reason: Computers are final goods as they are used directly by the office for several years.

6. Mobile sets purchased by a mobile dealer. [CBSE Delhi 2011]

Ans: Intermediate product

Reason: Mobile sets purchased by a dealer are intermediate products because they are intended for resale.

B. Giving reasons, classify the following into factor income or transfer income.

1. Unemployment allowances.
Ans: Transfer income
Reason: It is received without rendering any productive services.

2. Salary received by Pankaj from a company.
Ans: Factor income
Reason: It is earned by rendering productive services.

3. Financial help to earthquake victims.
Ans: Transfer income
Reason: It is received without rendering any productive services.

4. Compensation received from the employer.
Ans: Factor income
Reason: It is earned by rendering productive services.

5. Claim received from Insurance company by an injured worker.
Ans: Transfer income
Reason: It is received without rendering any productive services.

6. Birthday gift received from a friend.
Ans: Transfer income
Reason: It is received without rendering any productive services.

7. Bonus received on Diwali.
Ans: Factor income
Reason: It is earned by rendering productive services.

C. Giving reasons, classify the following into stock or flow.

1. Capital.
Ans: Stock concept
Reason: Capital is stock because it is measured at a point of time.

2. Saving.
Ans: Flow concept
Reason: Saving is flow because it is measured during a period of time.

3. Gross Domestic Product.
Ans: Flow concept
Reason: Gross Domestic Product is a flow because it is measured during a period of time.

4. Wealth.
Ans: Stock concept
Reason: Wealth is stock because it is measured at a point of time.

5. Exports.
Ans: Flow concept
Reason: It relates to a period of time.

6. Imports.
Ans: Flow concept
Reason: It relates to a period of time.

7. Business capital of business.
Ans: Stock concept
Reason: It is related to a point of time.

E. Classify the following into durable, non-durable, semi-durable or services

1. Refrigerator
Ans: Durable
Reason: As it has expected life time of several years and of relatively high value.

2. Clothes
Ans: Semi-durable
Reason: As it have an expected life time of use of one year or slightly more.

3. Edible oil
Ans: Non-durable
Reason: As it loose their identity in a single act of consumption.

4. Tuition given by a teacher
Ans: Service
Reason: As it is non-material goods which satisfy the human wants directly.

5. Visit of a physician
Ans: Service
Reason: As it is non-material goods which satisfy the human wants directly.

6. Washing soaps
Ans: Non-durable
Reason: As it loose their identity in a single act of consumption.

F. Classify the following into consumer, intermediate or capital goods.

1. Milk used by a manufacturer of sweets.
Ans: Intermediate goods
Reason: As it is used up while making sweets.

2. Cycle purchased by a consumer household
Ans: Consumer goods
Reason: End user is consumer.

3. Textile machinery
Ans: Capital goods
Reason: End user is producer.

4. Construction of a house
Ans: Consumer goods
Reason: End user is consumer.

5. Bread and butter used by a consumer household.
Ans: Consumer goods
Reason: End user is consumer.

6. Services of a private doctor purchased by a consumer household.
Ans: Consumer goods
Reason: End user is consumer.

7. Fertilizer used by a farmer.
Ans: Intermediate goods
Reason: As fertilizer is used for further production during the same year.

8. Passenger bus service used by a consumer household.
Ans: Consumer services
Reason: End user is consumer.

G. Giving reasons, classify the following into normal resident of India or not.

1. Indian officials working in the Indian Embassy in USA.
Ans: Normal Resident
Reason: As their centre of economic interest lies in the home country.

2. A Japanese tourist who stays in India for 2 months.
Ans: Not a Normal Resident
Reason: As their centre of economic interest lies in the foreign country.

3. Indians going to Pakistan for watching the cricket match.
Ans: Normal Resident
Reason: As their centre of economic interest lies in the home country.

4. Indians working in the UNO office, located in America for less than 1 year.
Ans: Normal Resident
Reason: As their centre of economic interest lies in the home country.

5. Indian employees working in WHO, located in India.
Ans: Normal Resident
Reason: As their centre of economic interest lies in the home country.

6. Foreign tourists visiting India for a month to see the Taj Mahal.
Ans: Not a Normal Resident
Reason: As their centre of economic interest lies in the foreign country.

V. TRUE OR FALSE

Giving reasons, state whether the following statements are true or false.

1. Macroeconomics deals with the problems of a consumer.
Ans: False: It deals with problems of the economy.

2. Money flow is also known as physical flow.
Ans: False: Real flow is known as physical flow. Money flow is known by the name of nominal flow.

3. In a two-sector economy, total production is always equal to total consumption.
Ans: True: It happens because firms sell their entire output to the households.

4. Circular flow of income takes place in case of open economy and close economy.
Ans: True: Even in case of closed economy, circular flow of income takes place between households and firms.

5. Capital formation is a flow.
Ans: True: Capital formation is measured over a period of time.

6. Foreign remittances are a stock concept.
Ans: False: It is flow concept as these are assessed over a period of time and not at a point of time.

7. National Income of a country- is a stock concept.
Ans: False: It is a flow concept as it is measured over a period of time.

8. Bread is always a consumer good.
Ans: False: It depends on the use of bread. When it is purchased by a household, it is a consumer good. If it is purchased by a restaurant, it is a producer intermediate good.

9. Television is a capital good.
Ans: False: Television is a durable consumption good.

10. Services of a teacher is a consumption good.
Ans: True: It directly satisfies human wants.

11. Books in a library are intermediate goods.
Ans: False: Books used in a library are final goods as these are used by the end user.

12. Use of raw material is a consumption good.
Ans: False: Use of raw material helps in production process therefore it is a single use producer good. But it has no longer life.

13. Can purchase of a new car be categorized as an intermediate good.
Ans: True: Purchase of a new car can be categorized as an intermediate good, if purchased by a Government for military use or if it is purchased by a car dealer for resale.

14. A good can be an intermediate goods in one case and a final goods in another case.
Ans: True: A good can be an intermediate goods or final goods, depending upon its nature of use. For example, a car purchased by a household is a final good, whereas, it will be an intermediate good if it is purchased by a car dealer.

15. The concept of normal resident applies to individuals only.
Ans: False: The concept applies to institutions also, in addition to individuals.

16. In final goods, no value is to be added.
Ans: True: Because final goods have crossed the production boundary.

17. Transfer income is a part of factor income.
Ans: False: It is not a factor income, It is paid for without receiving any goods and services.

VI. HIGHER ORDER THINKING SKILLS

1. Explain that Domestic territory is bigger than the political frontiers of a country.
Ans: In layman terms, the domestic territory of a nation is understood to be the territory lying within the political frontiers (or boundaries) of a country. But in national income accounting, the term domestic territory is used in a wider sense. Based on ‘freedom’ criterion, the scope of economic territory is defined to cover:

• Ships and air crafts owned and operated by normal residents between two or more countries. For example, Indian Ships moving between China and India regularly are part of domestic territory of India.
• Fishing vessels, oil and natural gas rigs and floating platforms operated by the residents of a country in the international waters where they have exclusive rights of operation. For example, Fishing boats operated by Indian fishermen in international waters of Indian Ocean will be considered a part of domestic territory of India.
• Embassies, consulates and military establishments of a country located abroad. For example, Indian Embassy in Russia is a part of the domestic territory of India.

2. “All Producer Goods are not Capital Goods”. Explain.
Ans: Producer goods are all those goods which are used in the process of production i.e., which are used in the production of other goods. Producer goods include two types of goods:

• Single-use Producer Goods: Goods used as raw material by the producers. It includes raw material like coal, wood, etc. They are not capital goods as they cannot be repeatedly used in the production process.
• Capital Goods: Goods which are used as fixed assets by the producers, like plant and machinery, which can be repeatedly used in the production process.

So, it can be said that all capital goods are producer goods, but all producer goods are not capital goods.

3. “Machine purchased is always a final good.” Do you agree? Give reasons for your answer.
Ans: No, it is not necessary that machine purchased is a final good. It will depend upon its use.

• If a machine is purchased by a household, then it is a final good. For example, washing machine purchased by a consumer household is a final goods.
• If it is purchased by a firm for its own use, then it is also a final good. For example, refrigerator purchased by a firm.
• If it is bought by a firm for resale, then it is an intermediate good. For example, machine purchased by a machine dealer.

4. “Machine purchased is always a capital good.” Do you agree? Give reasons for your answer.
Ans: No, it is not necessary that machine purchased is a capital good. It will depend upon its use.

• If a sewing machine is purchased by a tailor, then it is a fixed asset of the tailor and considered to be a capital good. But the same machine purchased by a consumer household is considered to be a durable use consumer goods.
• If a car purchased by a taxi driver as a taxi or if purchased by a firm for use in its business is a capital good. But the same car purchased by a consumer household is a durable use consumer goods.

Note: So, finally, the end user of a good determines whether it is capital good or durable use consumer goods. If an end user of durable goods is a producer, it is a capital good. If an end user of durable goods is a consumer household, it is a durable use consumer good. So, capital goods are only those durable goods which are used as producer goods, not as consumer goods.

VII. VALUE BASED QUESTION

1. Compensation to flood victims is a good social security measure by the government. But why is it not included in the estimation of national income?
Ans: Because this is a transfer payment. Value: Implement of Knowledge

VIII. APPLICATION BASED QUESTIONS

1. The concept of domestic territory helps to estimate ‘Domestic Product’. Defend or refute.
Ans: The concept of domestic territory helps to estimate ‘Domestic Product’. As we know Domestic Product includes goods and services produced by production units located in the domestic territory (irrespective of fact whether carried out by residents or non-residents). The money value of domestic product is termed as Domestic Income.

2. The concept of Normal Resident helps to estimate ‘National Product’. Defend or refute.
Ans: The concept of Normal Resident helps to estimate “National Product’. National Product includes production activities of normal residents irrespective of fact whether performed within the economic territory or outside it. The money value of national product is termed as National Income.