Here, you will find summaries, questions, answers, textbook solutions, pdf, extras etc. of (Nagaland Board) NBSE Class 12 (Arts/Commerce) Economics Chapter 1: Introduction. These solutions, however, should be only treated as references and can be modified/changed.
Introduction
Economics is a fascinating field of study that is divided into two major branches: Microeconomics and Macroeconomics. Microeconomics focuses on the behavior of individual economic units, such as households, firms, or industries. It delves into how these units make decisions, considering factors like scarcity and resource allocation. On the other hand, Macroeconomics takes a broader view, studying the economy as a whole. It examines aggregates and averages of the entire economy, such as national income, total employment, aggregate savings and investment, aggregate demand, aggregate supply, and the general price level.
The field of macroeconomics was revolutionized by the British economist J.M. Keynes, who authored the book “General Theory of Employment, Interest and Money” in 1936. This work, which came in response to the Great Depression, challenged the classical assumption of full employment and led to the development of Macroeconomic Theory. Keynes’ ideas have had a profound impact on economic thought and policy-making, underscoring the importance of macroeconomics in understanding and managing economies.
Macroeconomics is crucial for several reasons. It helps us understand the functioning of a complex modern economy, the interdependence of various sectors, the causes of short-run fluctuations in output and employment, and the causes of long-run economic growth. It also aids in formulating economic policies to promote economic growth, reduce unemployment and inflation, and promote a stable and well-functioning economy.
One of the key concepts in macroeconomics is the business cycle, which refers to the short-run fluctuations in economic activity. The business cycle consists of four phases: expansion (or recovery), peak, contraction (or recession), and trough. Understanding the business cycle is crucial for policy-making and for businesses and investors.
Another important concept in economics is the distinction between final goods and intermediate goods. Final goods are those that are meant for final use by consumers or for investment by firms. They are not used for further transformation or resold. Intermediate goods, on the other hand, are used as raw material for further production of other goods or for resale in the same year. This distinction is important because the national income includes the value of only final goods, not intermediate goods.
Economics also differentiates between flow variables and stock variables. Flow variables are measured per unit of time, such as income or output per year. Stock variables, on the other hand, are measured at a particular point in time, like wealth or debt.
Textual questions and answers
A. Very short-answer questions (answer in one word/one sentence)
1. Name the two branches of economics.
Answer: The two branches of economics are Microeconomics and Macroeconomics.
2 Name the book authored by J.M. Keynes to explain macroeconomic theory.
Answer: The book authored by J.M. Keynes to explain macroeconomic theory is “General Theory of Employment, Interest and Money”.
3. State the meaning of microeconomics
Answer: Microeconomics is that part of economic theory which studies the behaviour of individual economic units of an economy such as a household, a firm, an industry, etc.
4. State the meaning of macroeconomics.
Answer: Macroeconomics is the study of national aggregates or economy-wide aggregates. It revolves around determination of the level of income and employment, therefore, it is also known as ‘Theory of Income and Employment’.
8. “Purchase of a refrigerator by a firm”. Here, refrigerator is a capital good or a consumption good?
Answer: The refrigerator is a capital good.
9. “Bread is a consumer goods”. True or false.
Answer: True.
B. Short-answer questions-I (answer in 30-50 words)
1. Define Economics.
Answer: Economics is the study of how societies use scarce resources to produce valuable goods and services and distribute them among different people. It primarily focuses on the interaction between economic agents and how economies work.
2. What do you mean by Microeconomics?
Answer: Microeconomics is that part of economic theory that studies the behaviour of individual economic units of an economy such as a household, a firm, an industry, etc. It is the analysis of the economy’s constituent elements-households, firms, and industries.
5. What is meant by business cycle?
Answer: The business cycle is also known as the economic cycle or trade cycle, it is the downward or upward movement of gross domestic product around its long-term growth trend.
6. How are producer goods different from capital goods?
Answer: All goods which are used in the production of other goods are termed producer goods. On the other hand, capital goods include only fixed assets of producers which are usually of high value. Thus, all capital goods are producer goods but all producer goods are not capital goods.
C. Short-answer questions-II (answer in 60-80 words)
1. What is the importance of macroeconomics?
Answer: Macroeconomics enriches our knowledge of the functioning of an economy by studying the behavior of national income, output, investment, savings, and consumption. It helps in solving the problems of inflation, unemployment, economic instability, and economic growth.
4. Explain the concept of final goods and intermediate goods by giving examples.
Answer: All goods which are meant either (a) for consumption by consumers or (b) for investment by firms are called final goods. Eg., A car purchased for personal use.
All goods which are used (a) as raw material for further production of other goods or (b) for resale in the same year are known as intermediate goods. Eg., A machine bought for resale.
5. Discuss the four sectors of an economy.
Answer: The four sectors of an economy are:
(a) Household Sector: It consists of consumer goods and services and households are also owners of the factors of production.
(b) Producer Sector: It consists of firms, i.e. all producing units in the economy. Firms hire factors of production, i.e. Land, Labour, Capital and Entrepreneurial skills from the households for the production of goods and services.
(c) Government Sector: The government performs various welfare functions as maintaining law and order and defence.
(d) Rest of the world: It is also called the external sector. It includes all such activities which are related to the export and import of goods and capital between the domestic economy and the rest of the world.
6. Write a short note on the basic problems of an economy.
Answer: The basic problems of an economy are economic growth, inflation, and unemployment. Economic growth refers to the increase in the economy’s production over a period of time. Inflation refers to a situation of constantly rising prices of commodities and factors of production in the economy. Unemployment refers to the situation where the labour is able as well as willing to work but is sitting idle due to the unavailability of any work opportunity.
D. Long-answer questions-I (answer in 90-120 words)
1. Differentiate between microeconomics and macroeconomics.
Answer: Microeconomics is that part of economic theory that studies the behaviour of individual economic units of an economy such as a household, a firm, an industry, etc. It is the analysis of the economy’s constituent elements-households, firms, and industries. On the other hand, macronomics is that part of economic theory that studies the economy in its totality or as a whole. It studies not individual economic units like a household, a firm or an industry but the whole economic system. Macroeconomics is the study of aggregates and averages of the entire economy.
3. Differentiate between flow variables and stock variables.
Answer: Flow variables are quantities that are measured with reference to a period of time. They have a time dimension. For instance, national income is a flow as it describes and measures the flow of goods and services which become available to a country during a year. Other examples of flows include expenditure, savings, depreciation, interest, exports, imports, change in inventories, change in money supply, rent, profit, etc.
On the other hand, stock variables are quantities that are measurable at a particular point of time. For instance, capital is a stock variable. On a particular date, a country owns and commands a stock of machines, buildings, accessories, raw materials, etc. It is the stock of capital. A stock has a reference to a particular date on which it shows the stock position. A stock has no time dimension. Examples of stocks are wealth, foreign debts, loan, inventories, opening stock, money supply, population, etc.
E. Long-answer questions-II (answer in 130-200 words)
1. Define macroeconomics. What is the importance of macroeconomics?
Answer: Macroeconomics is that part of economic theory that studies the economy in its totality or as a whole. It studies not individual economic units like a household, a firm or an industry but the whole economic system.
The importance of macroeconomics are:
i. It helps to understand the functioning of a complicated modern economic system.
ii. It helps to achieve the goal of economic growth, a higher level of GDP and a higher level of employment.
iii. It helps to bring stability to the price level and analyses fluctuations in business activities. It suggests policy measures to control inflation and deflation.
iv. It explains factors which determine the balance of payment. At the same time, it identifies causes of deficit in the balance of payment and suggests remedial measures.
v. It helps to solve economic problems like poverty, unemployment, business cycles, etc., whose solution is possible at the macro level only, i.e. at the level of the whole economy.
vi. With detailed knowledge of the functioning of an economy at the macro level, it has been possible to formulate correct economic policies and also coordinate international economic policies.
vii. Last but not least, macroeconomic theory has saved us from the dangers of the application of microeconomic theory to the problems of the economy as a whole.
2. Write a note on Business Cycle.
Answer: The business cycle, also known as the economic cycle or trade cycle, is the downward or upward movement of gross domestic product around its long-term growth trend. In other words, it describes the rise and fall in the production of goods and services in an economy. The period of high income, output, and employment is called the period of expansion or prosperity, and the period of low income, output, and employment is described as a period of contraction or depression.
These alternating periods of expansion and contraction in economic activity have caused the business cycle. The duration of a business cycle has not been of the same length; it has varied from a minimum of two years to a maximum of twelve years.
There are four phases of the business cycle:
(i) Expansion (Boom or prosperity)
(ii) Peak (upper turning point)
(iii) Contraction (Downsizing, Recession)
(iv) Trough (or Depression) (lower turning point).
After remaining at the trough for some time, the economy revives and again the new cycle begins.
5. What is the importance of macroeconomics?
Answer: The importance of macroeconomics is manifold:
i. It helps to understand the functioning of a complicated modern economic system. It describes how the economy as a whole functions and how the level of national income and employment is determined on the basis of aggregate demand and aggregate supply.
ii. It helps to achieve the goal of economic growth, higher level of GDP and higher level of employment. It analyses the forces which determine economic growth of a country and explains how to reach the highest state of economic growth and sustain it.
iii. It helps to bring stability in price level and analyses fluctuations in business activities. It suggests policy measures to control inflation and deflation.
iv. It explains factors which determine balance of payment. At the same time, it identifies causes of deficit in balance of payment and suggests remedial measures.
v. It helps to solve economic problems like poverty, unemployment, business cycles, etc., whose solution is possible at macro level only, i.e. at the level of the whole economy.
vi. With detailed knowledge of functioning of an economy at macro level, it has been possible to formulate correct economic policies and also coordinate international economic policies.
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