Class XII

Macro Economics
Chapter 1 to 4
Important Que/Ans

Short Answer Questions

3 or 4 Marks
Q1. Differentiate between microeconomics and macroeconomics.
Ans: The following table explains the differences between
microeconomics and macroeconomics:
Microeconomics Macroeconomics

The individual economic unit is The aggregate economic unit is

studied. studied.

It deals with the ascertainment of cost It deals with the ascertainment

price and output in the individual of general price and output in
markets. the whole economy.

Here, the main issues are the Here, the main issues are
ascertainment of price and allocation ascertainment of income level
of resources. and tackling unemployment in
the economy.

Q2. What are economic agents?

Ans: Individuals or institutions that make economic decisions are
referred to as “economic units” or “economic agents.”They could be
consumers who choose what and how much to consume.
1. They could be manufacturers of goods and services who decide
what and how much to produce.
2. They could be institutions such as the government, corporations,
or banks that make economic decisions such as how much to
 spend, what interest rate to charge on credit, how much to tax, and
so on.

Q3. What is entrepreneurship?

Ans: Entrepreneurship refers to the ability and willingness to conceive,
organise, and manage a business initiative, as well as any risks associated
with it, to generate profit. The most visible manifestation of
entrepreneurship is the establishment of new businesses.

Q4. Define the great depression.

Ans: The Great Depression, which lasted from 1929 to 1933, was the
worst economic downturn in the history of the industrialised world.
Economic historians commonly attribute the start of the Great
Depression to the sharp and disastrous drop in US stock market prices
on October 29, 1929, known as “Black Tuesday”. Some, however, argue
that the stock market crash was a symptom of the Great Depression
rather than a cause of it.
Long Answer Questions (6 Marks)

Q1. What are macroeconomics and microeconomics, and what is the

connection between the two?
Ans: Microeconomics is the study of individual and business decisions
about resource allocation and the pricing of goods and services. It
focuses on supply and demand, as well as other economic forces that
influence price levels.
Macroeconomics is the study of the economic activities in a country as a
whole, rather than just individual businesses.
While these two economic subjects appear to be separate, they are, in
fact, interconnected and complement one another due to many
overlapping concerns.
Higher inflation, for example, would increase the cost of raw materials
for businesses, influencing the price of the end product charged to the
public. “The link between macroeconomics and the theory of individual
behaviour is a two-way street,” says Professor Ackley.
Although microeconomic theories should serve as the foundation for
collective ideas, macroeconomics can also help with microeconomic
knowledge. For example, empirically stable macroeconomic
generalisations that appear to contradict microeconomic theories may
aid in understanding individual behaviour.

Q2. Explain the scope of macroeconomics.

Ans: The scope of Macroeconomics is as follows:
• To comprehend the operation of the economy: Understanding
how the economy works require an understanding of
macroeconomic variables. Macroeconomic challenges are related
to the behaviour of total income, output, employment, and the
overall price level of the economy.
• Economic Policies: Macroeconomics is especially useful for
economic policy. Modern governments, particularly those in
developing countries, are confronted with a plethora of domestic
issues. For example, overcrowding, inflation, the balance of
payments, general underproduction, and so on.
• Unemployment in General: Unemployment is thus, caused by a
lack of effective demand. Total investment, total output, total
income, and total consumption should all be increased to boost
effective demand. As a result, macroeconomics is particularly
important in studying the causes, consequences, and treatments of
general unemployment.
• National Income: Understanding macroeconomics is essential for
assessing the economy’s overall performance in terms of national
income. When the Great Depression of the 1930s began, it became
necessary to investigate the causes of general overproduction and
general unemployment.
• Economic Growth: A subfield of macroeconomics focuses on
growth, and is known as growth economics. Macroeconomic
 principles are used to assess an economy’s resources and
capacities. To boost the economy’s overall level of economic
development, plans for overall increases in national income,
output, and employment are developed and implemented.

Q3. What are the different ways in which resources can be allocated,
and what are their respective advantages and disadvantages?
Ans: The problem of resource allocation can be solved by either free
individual interaction or a government-controlled economic system.
There are three major market systems that determine resource
allocation.
• Planned Economy: A centrally planned economy is one in which
the government or a central authority plans all of the major
activities of the economy. The government makes all major
decisions concerning the production, exchange, and consumption
of goods and services. The central authority strives for a specific
resource allocation as well as the distribution of the final
combination of goods and services deemed desirable for society as
a whole. The primary goal of a centrally planned economy is to
promote social welfare.
Advantages:
1. Higher economic growth and development due to social welfare
objectives.
2. Reduced income and social inequalities.
3. Reduced duplication of resources
4. Improved and optimum resource utilisation.
Disadvantages:
• Lack of individual choice.
• Restricts individual rights
• As the government makes the decisions, there is no say for
individuals.
• Inefficiency exists, as the products are as per government
decisions, irrespective of consumer choice.
 • Market Economy: In a market economy, the market organises all
economic activities. A market is characterised by the free
interaction of individuals engaged in their respective economic
activities.
In other words, a market is a collection of arrangements in which
economic agents freely exchange their assets or products with one
another. Furthermore, no government interference occurs, and the
private sector exerts influence. The economy is determined by the forces
of demand and supply, as well as the behaviour of economic participants.
Profit maximisation is the primary goal of the market economy.
Advantages:
1. Higher efficiency due to competition between firms.
2. To enable differentiation, and gain a competitive advantage, firms
offer a wide variety of products.
3. Innovation in products takes place to boost consumer demand.
4. There is efficient resource production and utilisation.
Disadvantages:
• There is little or no concern for society or the environment because
of the profit motive.
• Exploitation of people takes place.
• Cutthroat competition leads to competitive disadvantages.
• The social, economic, and income inequalities take place.
• Mixed Economy: The economy in which both the government and
the private sector own and operate production factors is known as
a “mixed economy.” Profit maximisation is the primary goal of the
private sector, while social welfare is the primary goal of the public
sector. The central planning authority and the price mechanism
deal with major issues.
Advantages:
1. Efficient allocation of resources.
2. Social welfare
3. Private sector is encouraged.
4. Reduction in economic differences
Disadvantages:
• Delay in decision making.
• High possibility of resource wastage.
• More chances of corruption and black marketing.
• Lack of proper economic planning.

Q4. What are the different types of goods produced in an economy?

Ans: The following are some examples of different categories of goods:
• Consumer goods: The quantity demanded of such goods rises as
consumer income rises and falls as consumer income falls. Such
items are known as regular goods.
• Free goods: These are products that have an infinite supply and are
provided by nature as a free gift. These items are known as ‘Free
Goods.’ For example, air, sea, water, sunlight, desert sand, and so
on.
• Economic goods: These are vegetables, cereals, minerals, fruits,
and fish that are neither man-made nor limitless in supply from
nature. All of these items are only available for purchase and sale
in the market.
• Substitute goods: Substitute goods are items that can be consumed
or used in place of others. Furthermore, an increase in the price of
one type of good increases the demand for its substitutes, while a
decrease in the price decreases the demand for its substitutes. Tea
and coffee, for example, are acceptable substitutes.
• Private goods: All goods owned by private entities are considered
private goods. Private commodities include a car, a house, a
motorcycle, a mobile phone, books, a television set, and so on.
• Public goods: Many goods are jointly owned by society, the general
public, or the government. These are known as public or
government goods. Public goods, social goods, or government
goods include roads, bridges, hospitals, and government schools,
among other things.
 • Consumer goods: Consumer Goods are goods that are directly used
for consumption by the consumer. Consumer products include
bread, biscuits, butter, jam, rice, fish, eggs, shoes, clothing, fans,
books, pens, cooking gas, and so on.
• Capital goods: All items that are not immediately consumed but are
used in subsequent manufacturing are referred to as “Producer
Goods” or “Capital Goods.” For example, seeds, fertilisers, tools,
machinery, and raw materials.

Question 1.
Give one example of negative externality. (April re-exam 2018)
Answer:
“Environmental pollution caused by industrial plants” is an example of
negative externalities.
Question 2.
Give the meaning of depreciation. (All India (C) 2014)
Or
Define ‘depreciation’. (All India 2011)
Answer:
Depreciation can be defined as a fall in the value of fixed assets due to
normal wear and tear due to usage, passage of time or obsolescence.
Question 3.
Define national income. (Delhi 2014)
Answer:
National income can be defined as the sum total of factor incomes
accruing to normal residents of a country within the domestic territory
and from the rest of the world, in a period of one financial year.
Question 4.
Define national product. (Delhi 2014)
Answer:
National product can be defined as the money value of all goods and
services produced by the normal residents of a country during a period
of one financial year.
Question 5.
Define domestic product. (All India (C) 2014, 2011, 2010)
Answer:
The value of all factor incomes generated during an accounting year
within the domestic territory of a country is termed as domestic
product or domestic income of a country.
Question 6.
What is Nominal Gross Domestic Product? (Delhi 2011)
Answer:
Nominal Gross Domestic Product (GDP) refers to market value of the
final goods and services produced within the domestic territory of a
country during a financial year, as estimated using the current year
prices. It is also called GDP at current price.

Question 7.
What is meant by Real Gross Domestic Product? (Delhi (C) 2011)
Answer:
Real Gross Domestic Product (GDP) refers to market value of the final
goods and services produced within the domestic territory of a country
during a financial year, as estimated using the base year prices. It is also
called GDP at constant price.
Question 8.
What is transfer payment? (All India 2011)
Answer:
Transfer payments are all those unilateral payments corresponding to
which there is no value addition in the economy, e.g. gifts, donations
etc.
Question 9.
Define the problem of double counting in the computation of national
income. State any two approaches to correct the problem of double
counting. (Delhi 2019)
Answer:
Problem of double counting means including the value of some goods
and services more than once in estimation of national income. In other
words, the counting of the value of commodity more than once is called
double counting. This leads to over estimation of the value of goods
and services produced.

To avoid the problem of double counting, following two methods are

used

• Final output method According to this method, the value of

intermediate goods is not considered. Only the value of final
goods and services is considered.
• Value added method Another method to avoid the problem of
double counting is to estimafe the total value added at each stage
of production.

Question 10.
“Gross Domestic Product (GDP) does not give us a clear indication of
economic welfare of a country.” Defend or refute the given statement
with valid reason. (Delhi 2019)
Answer:
I defend the above statement. GDP does not give us a clear indication
of economic welfare of a country because it does not take into account
the following

• GDP does not throw light on equitable distribution of income.

• It does not take into account non-monetary exchanges.
• It does not consider the effect of positive and negative
externalities.
 • the final goods and services produced within the domestic
territory of a country during a financial year, as estimated using
the base year prices. It is also called GDP at constant price.
• Nominal gross domestic product:
Nominal Gross Domestic Product (GDP) refers to market value of
the final goods and services produced within the domestic
territory of a country during a financial year, as estimated using
the current year prices. It is also called GDP at current price.

goods per person, implying higher level of welfare.

Question 23.
What is real GDP? State three limitations of GDP as an index of
economic welfare. (Delhi (C) 2016)
Answer:
Real GDP:
Real Gross Domestic Product (GDP) refers to market value of the final
goods and services produced within the domestic territory of a country
during a financial year, as estimated using the base year prices. It is also
called GDP at constant price.

The three limitations of using GDP as an index of welfare are:

• It fails to indicate the distribution of income among the residents

of the country.
• Non-monetary transactions are ignored.
• Externalities are not considered.