Chapter-1: INTRODUCTION TO MACRO ECONOMICS
(1 to 3 Marks)
1. What is macroeconomics? Distinguish between micro economics and macroeconomics. 2018
Ans: Macro economics is the study of aggregates or groups of entire economy like national income, full employment, total investment, aggregate demand, aggregate supply etc. It is concerned with the aggregates and averages of the entire economy, such as national income, national output, total employment, total consumption, general per capital income, price level etc. 2015
Difference between Micro and Macro economics:
a) Micro economics studies individual economic units whereas macroeconomics is concerned with economy as a whole.
b) The word micro has been derived from the Greek word micros which means small. On the other hand, macro economics is also derived from the Greek word macros which means large.
c) Micro economics was developed by classical and neo-classical economist Adam Smith and Alfred Marshall. Macro economics was developed by modern economist J.M. Keynes.
d) Micro economics is known as Price theory because it helps in determination of price on the basis of individual demand and supply. Macro economics is known as aggregate theory because it helps in determination of income and employment with help of aggregate demand and supply.
e) Microeconomics is concerned with allocation of resources whereas macro economics is concerned with the full utilization of resources.
f) Micro economics is based on partial equilibrium analysis which helps to explain the equilibrium conditions of a individual, a firm, a industry and a factor. On the other hand, macro economics is based on general equilibrium analysis which is an extensive study of a number of variables working of the economic system as a whole.
g) The objectives of micro economics on demand side is the maximize utility whereas on the supply side is to minimize profits at minimum cost. On the other hand, the main objectives of macro economics are full employment, price stability, economic growth etc.
2. Explain the objectives scope and of Macro economics.
Ans: Objectives of Macroeconomics
- To determine income level of the economy.
- To determine employment level of the economy.
- To maintain high and sustainable economic growth.
- To maintain satisfactory balance of payment.
- To stabilize foreign exchange.
Macro economics mainly deals with:
- Theory of income and employment: Macroeconomics explains the causes behind fluctuations in the level of income and employment.
- General Price level: Macroeconomics studied the inflation and deflation.
- Theory of economic growth: Problems relating to economic growth are studies in macroeconomics.
- Theory of international trade: Macroeconomics also studies trade among different nations.
- Theory of foreign exchange rates: It also studies the determination of foreign exchange rates.
3. Describe briefly the Great Depression of 1929 and emergence of Macro economics.
Ans: Before 1929, it was believed by economists that there always exists a state of full employment in capitalist economy due to free play of market forces in a free economy. Unemployment, if at all occurs, will disappear only. But the Great depression of 1929 exploded this belief. In 1929, the output and employment level in Europe and North America fell by huge amount. It affected the other countries of the world as well. The aggregate demand was low, many factories were lying idle, and workers were thrown out of jobs. Income levels were falling, there was widespread unemployment. In USA from 1929 to 1933, unemployment rate rose from 3% to 25% and output fell by about 33%.
After this J.M. Keynes written a book named ‘The General Theory of Employment, Interest and Money in 1936 in which he criticized the classical assumption of full employment. After studying the working of the economy in its totality and examined the interdependence of the different sectors, he stated a new concept called macroeconomics. According to this concept, unemployment would not disappear automatically. Government must undertake investment and production activities to generate employment opportunities.
4. Why do we need a separate study of macro economics?
Ans: A separate study of macroeconomic is required because of the following reasons:
a) What is true (good) to an individual may not be desirable for the society as a whole. For instance, saving is a virtue for an individual, as it brings future prosperity to him.
b) There are certain ‘big issues’ like problems of growth and development, inflation, unemployment etc. which need to be handled only at the level of economy.
5. Define partial equilibrium and general equilibrium.
Ans. Partial equilibrium refers to the equilibrium in one particular market say product market. It is here assumed that there is no changes in other markets say labour market or capital market. General equilibrium, on the other hand, refers to the equilibrium in all markets of the economy simultaneously. Partial equilibrium is studied in microeconomics whereas general equilibrium is studied in macroeconomics.
6. Explain the four main sectors of an economy from macroeconomic point of view. Or who are the macro-economic decision makers? Explain them.
Ans: From macro point of view, a modern economy has four major sectors which are called basic economic agents of the economy. These major sectors include the following:
- Firms: Firms are the producing units. They purchase or hire different factors of production and produce a variety of goods and services.
- Households Sector: Households supply factor services to the firms and earn factor incomes for supplying these productive services.
- Government: It maintains law and order situation in the country and provides other services for public welfare. It also produces goods and services.
- External sector: In a modern economy, external sector plays an important role. External sector is that part of economy which interacts with economies of other countries. External sector receives payments for exports and makes payments for imports.
7. What are the economic functions of a state?
Ans: The main economic functions of a state are as follows:
- Extension of Education.
- Extension and development of health services.
- Development of infrastructural facilities.
8. What is Capitalist Economy? Mention the characteristics of a capitalist economy.
Ans: Capitalism is an economic system where private entities own the factors of production i.e., land, labour, capital and organization owned by private entities. The main characteristics of a capitalist economy are as follows:
- Under capitalism, the private entities own the factors of production.
- The main aim of producer in capitalism is to attain maximum profit.
- Market forces determine the price of a commodity. That means all economic decisions are taken by market mechanism.
- The individuals and firms are free to choose occupation and use the available natural resources of the country.
AHSEC CLASS 12 CHAPTER-WISE NOTES
Part A: Introductory Macro Economics
- INTRODUCTION TO MICRO ECONOMICS
- NATIONAL INCOME AND RELATED AGGREGATES
- MONEY AND BANKING
- GOVERNMENT BUDGET AND THE ECONOMY
- BALANCE OF PAYMENTS