Macroeconomics and Circular Flow of Income
1. Which among the following are final goods and which are intermediate goods? Give reasons.
View Answer(i) Milk purchased by a tea stall
Ans. ‘Milk purchased by a tea stall’ is an intermediate good.
Reason: It will be used as a raw material for making tea and involves value addition.
(ii) Bus purchased by a school
Ans. ‘Bus purchased by a school’ is final good.
Reason: School purchases bus as long-term durable product and it is an investment for school. It is not for re-sale.
(iii) Juice purchased by a student from the school canteen
Ans. ‘Juice purchased by a student from school canteen’ is final good.
Reason: Here juice is purchased for direct satisfaction of student’s need, i.e., juice is being consumed by its end user.
2. What is the difference between microeconomics and macroeconomics?
View AnswerAns. Difference between microeconomics and macroeconomics
| Basis | Microeconomics | Macroeconomics |
| Meaning | It studies economic problems at an individual level. | It studies economic problems at an individual level. |
| Determines | It studies economic problems at an individual level. | It studies economic problems at an individual level. |
| Tools | It studies economic problems at an individual level. | Aggregate demand and aggregate supply are its main tools. |
| Dependence | It assumes all the macro variables to be constant as national income, consumption, saving, etc. | It assumes all the micro variables to be constant as demand of households, supply of firms, prices of individual products, etc. |
3. ‘‘Final goods include only those goods which are consumed by the households.’’ Defend or refute the given statement with valid reason.
View AnswerAns. Final goods include only those goods which are consumed by the households. The given statement is refused as final goods are the goods which have crossed the boundary line of production and are ready to use by consumers and producers (includes capital goods). These goods can be further classified as final consumer goods and final producer goods.
4. Distinguish intermediate goods from final goods with the help of suitable examples.
View AnswerAns. Distinguish intermediate goods from final goods with the help of suitable examples.
| Basis | Intermediate Goods | Final Goods |
| Boundary Line | These goods remain within the boundary line of production and are not ready for use by their final users. | These goods are outside the boundary line of production and are ready for use by their final users. |
| Resale | These goods may be reproduced or resold by firms for making profit. | These goods are not resold by firms for making profit. |
| Value Addition | Value is yet to be added to these goods. | Value is not to be added to these goods |
5. Explain with the help of an example, the basis of classifying goods into final goods and intermediate goods.
View AnswerAns. The basis of classification is the end-use of the product. Goods which are used by the producers in the process of production such as raw material or goods purchased for resale, are known as intermediate goods, e.g. shirt purchased by a firm for resale. These goods are still within the production boundary.
Goods which are outside the boundary line of production and are ready for use by their final users are called final goods, e.g. shirt purchased by a consumer.
6. 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.
View AnswerAns. Stock is that quantity of an economic variable which is measured at a particular point of time. Stock has no time dimension. Flow is the quantity of an economic variable which is measured during the period of time. Flow has a time dimension as per hour, per day or per month.
Net investment is a flow variable and capital is a stock variable. Flow of water in a tank is flow because it is measured as per unit of time period. Whereas, stock of water in a tank is stock because it is measured at a point of time. Capital is like a stock of water in the tank at a point of time.
7. Give reasons and categorise the following into stock and flow.
View Answer(i) Capital: It is a man-made means of production. It is a stock because it is measured at a given point of time.
(ii) Saving: It is the surplus of production over consumption. It is a flow as it is measured during a period of time.
(iii) Gross domestic product: It is a flow as it is the market value of final goods and services produced within the domestic territory measured during a period of time.
(iv) Wealth: It is a stock as it is measured at a particular point of time.
8. Describe the four major sectors in an economy according to the macroeconomics point of view.
View AnswerAns. An economy is generally classified into the following four sectors
(i) Household Sector: It is engaged in the consumption of goods and services.
(ii) Producing Sector: It is engaged in the production of goods and services.
(iii) Government Sector: It is engaged in such activities which are related to taxation and subsidies as well as consumption and production.
(iv) Rest of the World: It is engaged in exports and imports.