ECONOMICS END TERM 2009

Economics End Term 2009

SECTION-A

1.       A stock variable is measured at one specific time, and represents a quantity existing at that point in time (say, December 31, 2004), which may have accumulated in the past.

     A flow variable is measured over an interval of time. Therefore a flow would be measured per unit of time (say a year). Flow is roughly analogous to rate or speed in this sense.

2.       A transfer payment (or government transfer or simply transfer) is a redistribution of income in the market system.

These payments are considered to be non exhaustive because they do not directly absorb resources or create output.

3.       When the equilibrium level of output is less than the natural rate,  a Deflationary GAP exist.

When the equilibrium level of output is greater than the natural rate, an Inflationary GAP exists.

4. Inflation is a rise in the general level of prices of goods and services in an economy over a period of time.

5.       As per the Keynesian formulation of Say's Law "supply creates its own demand"

6.       autonomous investment - Capital investment effected by the profit and interest rate levels in an economy, and which is not related to the economy's growth reflected in its output levels.

induced investment - Investment effected by a growing national economy that stimulates demand. As output levels rise, capacity utilization increases resulting in additional capital investment

7. Public Revenue:

The revenue collected by central, state and local government from the public from various sources are known as public revenue.

It includes revenue from taxes, non-tax sources, borrowing from the public and banks, profits of public undertakings, deficit financing and foreign aid.

Public Expenditure:

The expenditure incurred by central, state and local government on various types of goods and services to satisfy the collective wants of the public is known as public expenditure.

It includes the expenditure incurred on developmental, non-developmental, transfer payments, non-transfer payments, revenue expenditure and capital expenditure etc.

8.  A central bank's changing of the money supply to influence interest rates and assist the economy in achieving a full-employment, non-inflationary level of total output.

9.   When a government's total expenditures exceed the revenue that it generates (excluding money from borrowings).

                    Deficit differs from debt, which is an accumulation of yearly deficits.

10. A price index  is a normalized average (typically a weighted average) of prices for a given class of goods or services in a given region, during a given interval of time.

12.     A record of all transactions made between one particular country and all other countries during a specified period of time.

                 

BOP compares the dollar difference of the amount of exports and imports, including all financial exports and imports

Balance of payments may be used as an indicator of economic and political stability. For example, if a country has a consistently positive BOP, this could mean that there is significant foreign investment within that country. It may also mean that the country does not export much of its currency

SECTION-B

13. Circular Flow of Income in a Four-Sector Economy:

           Two-sector economy and three-sector economy are hypothetical economies. In real life, only four-sector economy exists. The four-sector economy is composed of following sectors, i.e.:

(i) Household sector,

(ii) Business sector,

(iii) The government, and

(iv) Transaction with ‘rest of the world’ or foreign sector or external sector.

The foreign sector includes everyone and everything (households, businesses, and governments) beyond the boundaries of the domestic economy. It buys exports produced by the domestic economy and produces imports purchased by the domestic economy, which are commonly combined into net exports (exports minus imports).

The inclusion of fourth sector, i.e., foreign sector or transaction

with ‘rest of the world’ makes the national income accounting more purposeful and realistic. With the inclusion of this sector, the economy becomes an open economy

15. Frictional unemployment  : It arises when the labour force is temporarily out of work because of perfect mobility on the part of the labour.

In a growing and dynamic economy, in which some industries are declining and others are rising and in which people are free to work wherever they wish, some volume of frictional unemployment is bound to exist. This is so because it takes some time for the unemployed labour to learn new trades or to shift to new places, where there is a demand for labour.

Thus, frictional unemployment exists when there is unsatisfied demand for labour, but the unemployed workers are either not fit for the jobs in question or not in the right place to meet this demand.

 16. Types of Inflation

A.   On the basis of speed

          Creeping  : very mild and not dangerous to economy.

          Walking : Rise in prices becomes more marked.

          Running : Rise in prices will be very sharp and vigorous

          Hyper : Disastrous to economy.

B.   On the basis of inducement

Deficit induced: Caused by unbalanced budgetary policies
Wage induced : Caused due to an increase in money wages
Profit induced : On account of increase in profits of manufacturers.

C. On the basis of time

          Emergencies like war period
          Post war period

D. On the basis of coverage

          Economy wide : Very comprehensive nature covering the entire economy
          Sporadic :Partial & sectional in nature.

USEFUL FACTS ON ECONOMICS

RBI GOVERNOR - Dr. D. Subbarao

EXTRAS

 Limitations of Macro-Economics:

1. Individual is ignored altogether. For example, in macro-economics

national saving is increased through increasing tax on consumption, which

directly affects the consumer welfare.

2. The macro-economic analysis overlooks individual differences. For

instance, the general price level may be stable, but the prices of food

grains may have gone spelling ruin to the poor. A steep rise in

manufactured articles may conceal a calamitous fall in agricultural prices,

while the average prices were steady. The agriculturists may be ruined.

While speaking of the aggregates, it is also essential to remember the

nature, composition and structure of the components.