2nd PUC Economics Model Question Paper 4 with Answers

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Karnataka 2nd PUC Economics Model Question Paper 4 with Answers

Time: 3.15 Hours
Max Marks: 100

I. Choose the correct answer (each question carries one mark): ( 1 × 5 = 5 )

Question 1.
Central problems of an economy includes
(a) What to produce
(b) How to produce
(c) For whom to produce
(d) All of the above
Answer:
(d) All of the above

Question 2.
The consumption bundle that are available to the consumer depend on
(a) Colour and shape
(b) Price and income
(c) Income and quality
(d) None of the above
Answer:
(b) Price and income

Question 3.
In the short run, a firm
(a) Can change all the inputs
(b) Cannot vary all the inputs
(c) Can keep inputs fixed
(d) None of the above
Answer:
(b) Cannot vary all the inputs

Question 4.
The value of GDP at the current prevailing prices is
(a) Real GDP
(b) GDP at factor cost
(c) Nominal GDP
(d) NDP
Answer:
(c) Nominal GDP

Question 5.
The rate at which the price of one currency in terms of foreign currency is called
(a) Exchange control
(b) Interest rate
(c) Foreign exchange rate
(d) None of the above
Answer:
(c) Foreign exchange rate

II. Fill in the blanks (each carries one mark): ( 1 × 5 = 5 )

Question 6.
The demand for a good moves in the
Answer:
Opposite

Question 7.
_______ is a tax that the Government imposes per unit sale of output.
Answer:
Unit Tax

Question 8.
is a stock variable.
Answer:
Inventory

Question 9.
Economic exchanges without the use of money are referred to as
Answer:
Barter system

Question 10.
The price of foreign currency in terms of domestic currency has increased and this is called . of domestic currency.
Answer:
Depreciation.

III. Match the following: ( 1 × 5 = 5 )

Question 11.

A	B
1. Complementary goods	(a) Attraction of new firms
2. TR	(b) Pen and Ink
3. SDR	(c) Intermediate goods
4. Raw material	(d) Paper gold
5. Supernormal profit	(e) P x Q

Answer:
1 – (b)
2 – (e)
3 – (d)
4 – (c)
5 – (a).

IV. Answer the following questions in a sentence/word. ( 1 × 5 = 5 )

Question 12.
What is utility?
Answer:
Utility refers to the want-satisfying power of a commodity or a service.

Question 13.
Define marginal revenue.
Answer:
Marginal revenue of a firm is defined as the increase in total revenue for a unit increase in the firm’s output. It is obtained by dividing the change in total revenue by change in quantity.

Question 14.
Name the well known work of Adam Smith.
Answer:
An Enquiry into the Nature and Cause of the Wealth of Nations.

Question 15.
Give the meaning of GDP.
Answer:
GDP (Gross Domestic Product) is the market value of all final goods and services produced within a domestic territory of a country measured in a year.

Question 16.
What is balance of payment?
Answer:
The balance of payments is the record of the transactions in goods, services and assets between residents of a country with the rest of the world for a specified period of time i.e.. a year.

V. Answer any NINE of the following questions in FOUR sentences each. ( 9 × 2 = 18 )

Question 17.
Distinguish between micro and macro economics.
Answer:
The micro and macro economics are distinguished on the following grounds:
Scope:

• Micro economics studies in individual units so its scope is narrow.
• Macro economics studies in aggregates, so its scope is wider.

Method of study:

• The Micro economics follows slicing method as it studies individual unit.
• The Macro economics follows lumping method as it studies in aggregates.

Question 18.
Mention two different approaches which explain consumer behaviour.
Answer:
The two approaches which explain consumer behaviour are:

1. Cardinal Utility Analysis-Law of Diminishing Marginal Utility.
2. Ordinal Utility Analysis-Indifference Curve Analysis.

Question 19.
What are long costs?
Answer:
There are two long run costs namely,

1. Long Run Average Cost
2. Long Run Marginal Cost.

Question 20.
Mention the two determinants of a firm’s supply curve.
Answer:
The two determinants of a firm’s supply curve are as follows:

1. Technological progress
2. Input prices.

Question 21.
Define market equilibrium.
Answer:
A market equilibrium is a situation where the plans of all consumers and firms in the market match and the market clears. Here Quantity demanded is equal to Quantity supplied. It is a zero excess demand and zero excess supply situation.

Question 22.
Write the features of monopoly.
Answer:

• Existence of single seller or firm.
• No close substitutes.
• Barriers on entry of new firms.
• Firm is a Price maker and buyers are price takers.
• Uniform price or price discrimination.

Question 23.
Write the meaning of Oligopoly and Duopoly.
Answer:

• If the market consists of more than one seller but the number of sellers is few, then it is called oligopoly market. Oligopoly in a commodity market occurs when there are a small number of firms producing a homogenous commodity.
• Duopoly is a special case of oligopoly where there are exactly two sellers or firms.

Question 24.
Write any two features of Indifference curve.
Answer:

1. Indifference curves always slope downwards.
2. Higher Indifference curve gives greater level of satisfaction.

Question 25.
Write the difference between Nominal GDP and Real GDP.
Answer:

Nominal GDP	Real GDP
1. It is the value of GDP at current prevailing prices.	1. It is evaluated at constant set of prices i.e., by keeping base year’s price index.
2. It is not reliable.	2. It is reliable.
3. It does not give real picture of economic development of a country.	3. It gives real picture of economic development of a country.

Question 26.
Answer:
The total liability of the monetary authority of the country – RBI, is called high powered money. It consists of currency (coins and notes in circulation with the public and vault cash of commercial banks) and deposits held by the Government of India and commercial banks with RBI.

Question 27.
What are the factors which cause change in aggregate demand?
Answer:
The factors which cause change in aggregate demand are as follows:

• Change in consumption
• Change in investment.

Question 28.
Why public goods must be provided by the Government?
Answer:
In order to understand why public goods need to be provided by the government, we must understand the difference between private goods and public goods. Viz.,

(1) The benefits of public goods are available to all and are not restricted to one consumer. Example public goods like, park or measures of air pollution, the benefits will accrue to all whereas private goods, say, chocolates, will not be available to others.

(2) In case of private goods anyone who does not pay for the goods can be excluded from enjoying its benefits. But, in pubic goods, there is no feasibility way of excluding anyone from enjoying the benefits of the good. Hence, public goods must be provided by the Government.

Question 29.
Differentiate between depreciation and devaluation.
Answer:
The difference between Depreciation and Devaluation is as follows:

Depreciation	Devaluation
1. Here the price of foreign currency in terms of domestic currency increases.	1. Here, the government deliberately makes the domestic currency cheaper by increasing exchange rate.
2. It happens because of market forces i.e., demand for foreign exchange and supply of foreign exchange.	2. It is a deliberate action of government.

Question 30.
How does bank rate influence money supply?
Answer:
The RBI can influence money supply by changing the rate at which it gives loans to the commercial banks. This rate is called as bank rate. By increasing the bank rate, loans taken by commercial banks become more expensive which reduces the reserves held by the commercial bank and hence decreases money supply. A fall in the bank rate can increase the money supply.

Part – C

VI. Answer any SEVEN of the following questions in TWELVE sentences each. ( 4 × 7 = 28 )

Question 31.
Write a short on market economy.
Answer:
A market economy also known as capitalistic economy, it is that economy in which the economic decisions are undertaken on the basis of market mechanism by the private entrepreneurs. It functions on demand and supply conditions. In USA, Japan, Australia, UK and other countries we can see market economic systems.

In market economy, private individuals own the factors of production. Here, the profit is the main goal of business. There is least intervention of Government.

Price mechanism plays a major role in market economy. It is a balancing wheel of the market mechanism. Prices coordinate decisions of the producers and consumers. The price is determined by demand and supply in the market. No individual organization or Government is responsible for the production and distribution or pricing of goods. All depend on market mechanism.

Regarding basic problems of an economy, the problem of what to produce is solved on the basis of demand and profit. The producers produce those products which bring more income.

The problem – how the goods are to be produced is determined by the competition among different entrepreneurs. The select least cost combination of technology so that they can get more returns with less cost.

In market economy, the problem of whom to produce is decided on the basis of purchasing power of consumers. The producers produce commodities to the rich as they can afford to pay more but poorer sections of the society are neglected.

In market economy, profits and losses play a predominant role in growth and development of every producer.

Question 32.
Explain the derivation of slope of the budget line.
Answer:
The slope of the budget line measures the quantity of change in one product required per unit of change in another product along budget line.

For example, the amount of change in mangoes required per unit of change in bananas along the budget line is the derivation of slope of the budget line. It can be represented in diagram as follows:

The absolute value of the slope of the budget line measures the rate at which the consumer is able to substitute bananas for mangoes when she spends her entire budget.

Let us consider two points (x₁, x₂) and (x₁ + Δx₁, x₂ + Δx₂) on the budget line. It will be as follows
change in another product along the budget line.
For example, the amount of change in mangoes required per unit of change in bananas along the budget line is the derivation of slope of the budget line. It can be represented in diagram as follows:
P₁x₁ + P₂X₂ = M ………(1)
P₁ (x₁ + Δx₁) + P₂ (X₂ + Δx₂) = M ……….(2)
Now subtracting (1) from (2), we get
P₁ Δx₁ + P₂ Δx₂ = 0 ………(3)
By rearranging terms in (3) we get
Δx₂/Δx₁ = -P₁/P₂ ……..(4)
Therefore, the slope of the budget line is-P₁/P₂. The means, the indifference curve is negatively sloped i.e., it slope downwards. An increase in the amount of bananas along the indifference curve is associated with a decrease in the amount of mangoes.

Question 33.
The following table gives the TP schedule of labour. Find the corresponding Average product and Marginal product schedules.

Answer:
Calculation of Average Product (AP) and Marginal Product (MP). AP is obtained by dividing TPL by Labour (L) and MP is obtained from TPL with the help of formulaTCn – TCn_1

Question 34.
Explain the Average Revenue or price line of a firm under perfect competition with the help of a diagram.
Answer:
Average Revenue: It refers to the revenue per unit of output sold. It is obtained by dividing the total revenue by the number of units of output sold. The average revenue is defined as total revenue per unit of output.
So. AR = TR/Q = p × q = p
q where. AR is Average Revenue, TR is Total Revenue and Q is quantities sold. That means, for a price taking firm, average revenue equals the market price.

Under perfect competition, the AR will be equal to the market price. This is because, in perfect competitive market, the seller sells his product at the same price which is prevailing in the market. If the seller sells at low price, he incurs losses or if he increases the price, he loses customers. This can be represented in diagram:

In the above diagram, the average revenue for different values of firm’s output i s shown in Y and X axis respectively. Since the market price is fixed at P, we obtain a horizontal straight line that cuts the Y axis at a height equal to P. This horizontal straight line is called the price line. It is also firm’s AR curve under Perfect competition. The AR curve of a firm is also the demand curve of the customers, because the price paid by the consumer for each unit is the average revenue from the seller’s point of view.

Question 35.
Write a note on price floor.
Answer:
The Government imposed lower limit on the price that may be charged for a particular good or service is called price floor. For certain goods and services, fall in price below a particular level is not desirable and hence the Government sets minimum prices for these goods and services.

Example, agricultural price support programmes and the minimum wage legislation. The Government may impose a lower limit on the purchase price for some of the agricultural goods and the floor is normally set at a level higher than the market determined price for these goods. Similarly, through the minimum wage legislation, the Government ensures that the wage rate of the labourers does not fall below a particular level and here again the minimum wage rate is set above the equilibrium wage rate.

The Price floor can be explained with the help of following diagram:

In the above diagram DD is market demand curve and SS is market supply curve. P* is the equilibrium price and q* is the equilibrium quantity. When government imposes price floor at P_f which is higher than equilibrium price, there will be excess supply of q_f¹ q_f .In order to support producers the government needs to buy this excess supply and should take steps to find alternative markets.

Question 36.
Show the relationship between average revenue and marginal revenue of a monopoly market with the help of diagrams.
Answer:
Marginal Revenue of a firm is defined as the increase in total revenue for a unit increase in the firm’s output. It is obtained by dividing the change in total revenue (ΔTR) by change in quantity (Δq). Thus, MR = ΔTR/Δq.

Average Revenue: We calculate average revenue, by dividing total revenue by the quantity sold. The following formula used:
AR = TR/q
The relationship between AR and MR of a monopoly market can be shown with the help of following diagrams:

The above diagram shows that the MR curve lies below the AR curve. That means, if the AR curve is falling steeply, the MR curve is far below the AR curve. If the AR curve is less steep, the vertical distance between the AR and MR curves is smaller. The diagram (a) shows a flatter AR curve while diagram (b) shows a steeper AR curve. Therefore, for the same units of the commodity, the difference between AR and MR in diagram (a) is less than the difference in diagram (b).

Question 37.
Explain the role of the Government (State) and household sector in both developed and developing countries.
Answer:
Role of Government: In both the developed and developing countries, apart from capitalist sector, there is the institution of State. The role of the state includes framing laws, enforcing them and delivering justice. The State here refers to the Government which performs various developmental functions for the society as whole.

It undertakes production, apart from imposing taxes and spending money on building public infrastructure, running schools, providing health services etc. These economic functions of the state have to be taken into account when we want to describe the economy of the country.

Role of Household sector: By household we mean a single individual who takes decisions relating to her own consumption or a group of individuals for whom the decisions relating to consumption are jointly determined. Household consist of people. These people work in firms as workers and earn wages. They are the ones who work in government departments and earn salaries or they are the owners of firms and earn profits.

Therefore, the market in which the firms sell their products could not have been functioning without the demand coming from the households. Further, they also earn rent by leasing land or earn interest by lending capital.

Qiestion 38.
Write a note on externalities.
Answer:
An externality is a cost or benefit conferred upon second or third parties as a result of acts of individual production and consumption. But the cost or benefit of an externality cannot be measured in money terms because it is not included in market activities.

In other words, externalities refer to the benefits or harms, a firm or an individual causes to another for which they are not paid or penalized. They do not have any market in which they can be bought and sold:-
There are two types of externalities viz.,

• Positive Externalities and
• Negative Externalities.

For example, let us imagine that there is chemical fertilizer industry. It produces the chemical fertilizers required for agriculture. The output of the industry is taken for counting GDP of an economy. This is positive externality.

While carrying out the production the chemical fertilizer industry may also be polluting the nearby river. This may cause harm to the people who use the water of the river. Hence their health will be affected. Pollution also may kill fish and other organisms of the river. As a result, the fishermen of the river may lose their livelihood. Such harmful effects that the industry is inflicting on others, for which it will not bear any cost are called negative externalities.

Question 39.
Write the meaning of transaction motive and speculative motive of demand for money and liquidity trap.
Answer:
(a) Transaction Motive: Transaction motive demand for money refers to holding money to carry out transactions. If we receive our income weekly and make payments on the first day of every week, we need not hold any cash balance throughout the rest of the week. But our expenditure patterns do not normally match our receipts. People earn incomes at discrete points in time and spend it continuously throughout the interval.

The Transaction demand for money is represented as follows:
M^dT = k.T
Where, T is the total value of transactions in the economy ovr unit period and k is a position fraction.

(b) Speculative Motive: Some people hold cash to invest on shares, debentures, gold, immovable properties etc. The speculative demand for money refers to the demand for money that people hold as idle cash to speculate with the aim of earning capital gains and profits. The speculative demand for money can be written as follows:
\(\mathrm{M}_{\mathrm{s}}^{\mathrm{d}}=\frac{\mathrm{r}_{\mathrm{max}}-\mathrm{r}}{\mathrm{r}-\mathrm{r}_{\mathrm{min}}}\)
Where, r is the market rate of interest and r ax and r m are the upper and lower limits of r, both positive constants. It clearly states that as r decreases from rmax to rmin, the value of speculative demand for money decreases from zero to infinity.

Question 40.
Distinguish between Revenue expenditure and Capital expenditure.
Answer:
The differences between Revenue Expenditure and Capital Expenditure are as follows:
Revenue Expenditure :

• Revenue Expenditure is expenditure incurred for purposes other than the creation of physical or financial assets of the central government.
• This expenditure is related to maintain government departments and various services, interest payments, grants given to state governments etc.
• It includes Plan Revenue expenditure and non-plan revenue expenditure.
• Interest payments, external loans and from various reserve funds constitute largest component under non-plan revenue expenditure.

Capital Expenditure:

• The capital expenditures are the expenses of government which result in creation of physical or financial assets or reduction in financial liabilities.
• It includes expenditure on the acquisition of land, building, machinery, equipment, investment in shares, etc.
• It includes plan capital expenditure and non-plan capital expenditure.
• Central plan and central assistance for state and union territory plans constitute largest component under non-plan capital expenditure.

Question 41.
Write the chart of components of capital account.
Answer:
The chart which consists of different components of capital account can be drawn as follows:

Part – D

VI. Answer any FOUR of the following questions TWENTY sentences each. ( 4 × 6 = 24 )

Question 42.
Explain the optimal choice of consumer with the help of diagram.
Answer:
It is assumed that the consumer chooses her consumption bundle on the basis of her taste and preferences over the bundles in the budget set. It is generally assumed that the consumer has well defined preferences over the set of all possible bundles. She can compare any two bundles. In other words, between any two bundles, she either prefers one to the other or she is indifferent between the two goods.

It is further assumed that the consumer is a rational individual. A rational individual clearly knows what is good or what is bad for her and in any given situation, she always tries to achieve the best for herself. From the bundles which are available to her, a rational consumer always chooses the one which gives her maximum satisfaction. The consumer always tries to move to a point on the highest possible indifference curve given her budget set.

Thus, the optimum point would be located on the budget line. A point below the budget line cannot be the optimum. Compared to a point below the budget line, there is always some point on the budget line which contains more of at least one of the goods and no less of the other. Thus, the consumer’s preferences are monotonic.
The point at which the budget line is tangent to one of the indifference curves would be the optimum choice of consumer. This is because, the budget line other than the point at which it touches the indifference curves lies on a lower indifference curve is considered as inferior. So such a point cannot be the consumer’s optimum. The optimum bundle is located on the budget line at the point where the budget line is tangent to an indifference curve.

This can be explained with the help of the following diagram.

In the above diagram, PQ is budget line, IC₁, IC₂ and IC₃ are indifference curves showing different levels of satisfaction. Banana is measured in OX axis and mango is measured in OY axis.

The above diagram illustrates the consumer’s optimal choice also known as consumer’s equilibrium. At (x₁, x₂), the budget line PQ is tangent to the indifference curve IC2. The indifference curve just touching the budget line is the highest possible indifference curve given the consumer’s budget set. Bundles on the indifference curve above IC₂ are not affordable. Points on the indifference curve IC₂ are certainly inferior to the points on the IC₂ as they lie on IC₁ Therefore, (x₁, x₂) is the consumer’s optimum bundle.

Question 43.
Explain the shapes of TP, MP and AP curves.
Answer:
Total Product(TP): Total product is the relationship between a variable input and output when all other inputs are held constant. Suppose we vary a single input and keep all other inputs constant. Then for different levels of that input, we get different levels of output. This relationship between the variable input and output, keeping all other inputs constant, is often referred to as Total Product of the variable input.

The total product curve in the input-output plane is a positively sloped curve as follows:

The above diagram shows the total product curve for labour. When all other inputs are held constant, it shows the different output levels obtainable from different units of labour. Labour is measured in OX axis and output is measured in OY axis. With L units of labour, the firm can at most produce q 1 units of output.

Average product (AP) and Marginal Product (MP): Average Product is defined as the output per unit of variable input. We calculate it asAPL = TP_L/L, where APL is the Average Product of Labour, TP_L is the total product of labour and L is the amount of labour input used. Marginal Product of an input is defined as the change in output per unit of change in the input when all other inputs are held constant. It is the additional unit of output per additional unit of variable input. It is calculated by dividing the change in output by change in input labour.
MP_L = ΔTP_L/ΔL

According to the law of variable proportions, the marginal product of an input initially rises and then after a certain level of employment, it starts falling. The MP curve therefore, looks like an inverse ‘U’ shaped curve.

For the first unit of the variable input, one can easily check that the MP and the AP are same. As the amount of input is increased, the MP rises. AP being the average of marginal output products also rises, but rises less than MP. Then after a point, the MP starts falling. However, as long as the value of MP remains higher than the value of the AP, the AP continues to rise. Once MP has fallen sufficiently, its value becomes less than the AP and the AP also starts falling. So AP curve is also inverse ‘U’ shaped.

This can be diagrammatically represented as follows:
In the above diagram. MPL is marginal product of labour, APL is the average product labour. As long as the AP increases, it must be the case that MP is greater than AP. Otherwise, AP cannot rise. Similarly, when AP falls, MP has to be less than AP. It follows that MP curve cuts AP curve from above at its maximum. In the diagram, AP is maximum at L. To the left of L, AP is rising and MP is greater than AP. To the right of L, AP is falling and MP is less than AP.

Question 44.
Explain the long run supply curve of a firm with the help of a diagram.
Answer:
To derive the long supply curve of a firm we split the derivation into two parts. First we determine the firm’s profit-maximising output level when the market price is greater than or equal to the minimum long run average cost.

Case 1: Price greater than or equal to minimum of LRAC: In the above diagram, if the market price is p₁, which exceeds the minimum LRAC, with LRMC rising, q₁ output is produced. LRAC at q₁ does not exceed the market price p₁. Hence, when the market price is p₁, the firm’s supply, in the long run become an output equal to q₁.

Case 2: Price less than the minimum LRAC: If the market price is P₂, which is less than the minimum LRAC the firm will not produce. Here the firm will not produce positive output. The market price P₂ must be greater than or equal to the LRAC at the level of output. So, in the above diagram, LRAC exceeds P₂.

By combining both the cases, we conclude that a firm’s long run supply curve is the rising part of the LRMC curve from and above the minimum LRAC together with zero output for all the prices less than the minimum of LRAC. The following diagram shows the long run supply curve of the firm.

Question 45.
Explain the simultaneous shifts of demand and supply curve in perfect competition with the help of diagrams.
Answer:
The simultaneous shifts can happen in four possible ways:
(a) Both supply and demand curves shift rightwards.
(b) Both supply and demand curves shift leftwards.
(c) Supply curve shifts leftward and demand curve shifts rightward.
(d) Supply curve shifts rightward and demand curve shifts leftward.

The simultaneous shifts of demand and supply curve in perfect competition can be represented in the following table:

In the above table, each row of the table describes the direction in which the equilibrium price and quantity will change for each possible combination of the simultaneous shifts in demand and supply curves. For instance, from the second row of the table, we can notice that due to a rightward shift in both demand and supply curves, the equilibrium quantity increases invariably but the equilibrium price may increase or decrease or remain constant.
The following diagrams depict the second and third cases of the above table:

In the above diagram (a) initially, the equilibrium is at E where the demand curve DD₀ and supply curve SS₀ intersect. Here, both supply and demand curves shift rightward where the price remains constant at P but the equilibrium quantity moves from q to q₁.

Similarly, in diagram (b), the supply curve shifts rightward and demand curve shifts leftward where the equilibrium quantity remains same but the equilibrium price decreases from P to P₁.

Therefore, the rightward shifts in both demand and supply curves leads to increase in the equilibrium quantity and equilibrium price remaining constant. The equilibrium quantity remains same and the price decreases if there is leftward shift in demand curve and a rightward shift in supply curve.

Question 46.
Explain the short run equilibrium of a monopoly firm with the help of the simple case of zero cost.
Answer:
Every monopolist aims at maximizing profit. Here, we try to analyze the profit maximizing behaviour to determine the quantity produced by a monopoly firm and price at which it is sold. Let us imagine that there exists a village situated far way from other villages. In this village, there is exactly one well from which water is available. All residents are completely dependent for their water requirements on this well.

The well is owned by one person who is able to prevent others from drawing water from it except through purchase of water. The person who purchases the water has to draw the water out of the well. The well owner is thus a monopolist firm which bears zero cost in producing the good. We shall analyse this simple case of a monopolist bearing zero costs to determine the amount of water sold and the price at which it is sold.

The short run equilibrium of the monopolist with zero cost can be explained with the help of the following diagram:

In the given diagram, TR, AR and MR curves are revenue curves. The profit received by the firm equal the revenue received by the firm minus the cost incurred. Since TC is zero, profit is maximum when TR is maximum. This occurs when output is of 10 units. This is the level when MR equals zero. The amount of profit is given the length of the vertical line segment from ‘a’ to the horizontal axis.

Question 47.
Write down some of the limitations of using GDP as an index of welfare of a country.
Answer:
Gross Domestic Product (GDP) is the sum total of value of goods and services created within the geographical boundary of a country in a particular year. It gets distributed among the people as incomes except retained earnings. So we consider that higher level of GDP of a country is an index of greater well being of the people of that country. Welfare of a country means well being of entire population of the country. But there are certain limitations of stating GDP as an index of welfare of a country. They are as follows:

(a) Distribution of Gross Domestic Product (GDP): Generally, the rise in GDP will not represent increase in the welfare of the country. If the GDP of the country is rising, the welfare may not rise as a consequence. This is because the rise in gross domestic product may be concentrated in the hands of very few individuals or firms. For the remaining, the income may in fact might have decreased. In such a situation the welfare of the entire country cannot be said to have improved.

(b) Non-monetary exchanges: Some of the activities in a country are not evaluated in terms of money. For instance, the domestic services of housewife are not paid for. The exchanges which take place in the informal sector without the help of money are called barter exchanges. In barter exchanges goods are directly exchanged against each other. As money is not used here, these exchanges are not registered as a part of economic activity.

In India, because of many remote areas, these kinds of exchanges still take place and they are generally not counted in the GDP. Therefore, gross domestic product calculated in the standard manner may not give us a clear indication of welfare of a country.

(c) Externalities: An externality is a cost or benefit conferred upon second or third parties as a result of acts of individual production and consumption. In other words, externalities refer to the benefits or harms, a firm or an individual causes to another for which they are not paid or penalized. These do not have any market in which they can be bought and sold.

But the cost or benefit of an externality cannot be measured in terms of money because it is not included in market activities. For example, the pleasure one gets from his neighbour’s garden is an external benefit and external cost is environmental pollution caused by industries. Both are excluded from national income estimates.

(d) Leisure and work: One of the important things that affect the welfare of a society is leisure. But is not included in GDP. For example:- longer working hours may make the people unhappy because their leisure is reduced. On the contrary, shorter working hours per week may increase leisure and make people happy.

(e) Manner of production: The economic welfare also depends on the manner of production of goods and services. If goods are produced by child labour or by exploitation of workers, then the economic welfare cannot increase.

Question 48.
Write a note on balance of payment.
Answer:
The balance of payments is the record of the transactions in goods, services and assets between residents of a country with the rest of the world for a specified time period i.e., a year. The balance of payments consists of two accounts viz.,

1. Current Account
2. Capital Account

(1) Current Account: It is the record of trade in goods and services and transfer payments. The main components of current account are trade in goods i.e., exports and imports of goods. The trade in services includes the factor income and non-factor income transactions. Transfer payments are the receipts which the residents of a country get for free without having to provide any goods or services in return. They consists of gifts, remittances and grants. They could be given by the government or by private citizens living abroad.

Current account is in balance when receipts on current account are equal to the payments on the current account. A surplus current account means that the nation is a lender to other countries and a deficit current account means that the nation is a borrower from other countries.

(2) Capital Account: It is the record of all international transactions of assets. An asset is any one of the forms in which wealth can be held.

For example, stocks, bonds, government debt, etc. Purchase of assets is a debit item on the capital account. If an Indian buys a UK car company it infers capital account transactions as a debit item. On the other hand, sale of assets like sale of share of an Indian company to a USA customer is a credit item on the capital account.

The capital account mainly consists of foreign direct investment, foreign institutional investments, external borrowings and assistance. The capital account will in balance when capital inflows are equal to capital outflows. Surplus in capital account arises when capital flows are greater than capital outflows and deficit in capital account arises when capital inflows are lesser than capital outflows.

(Capital inflows: Loans from abroad, sale of assets or shares in foreign companies)
(Capital outflows: Repayment of loans, pure has.; of assets or shares in foreign countries).

The balance of payments can be classified as follows:
Balance of payments is said to be in balance when exports of both visible and invisible items are equal to the imports.

Surplus balance of trade arises if country’s exports of visible and invisible items are more than its imports. Deficit balance of trade arises if a country’s imports of visible and invisible items are more than its exports.

VIII. Answer any TWO of the following project-oriented questions. ( 2 × 5 = 10 )

Question 49.
A consumer wants to consume two goods. The Price ,?r bananas is Rs.5 and price of mangoes is Rs.10. The consumer income is Rs.40.
(a) How much bananas can she consume if she spend her entire income on that good?
(b) How much mangoes can she consume if she spend her entire income on that good?
(c) Is the slope of budget line is downward or upward? ,
(d) Are the bundles on the budget line equal to the consumers’ income or not.
(e) If you want to have more of banana you have to give up mangoes. Is it true?
Answer:
(a) 8 Bananas (40/5).
(b) 4 Mangoes (40/10).
(c) Slope of budget line is downward.
(d) Yes, the bundles on the budget line are equal to the consumer’s income.
(e) True. If we want to have more of banana we have to give up mangoes.

Question 50.
Prepare a budget on monthly income and expenditure of your family.
Answer:
The budget is a financial statement which includes anticipated income and anticipated expenditure. An imaginary monthly income and expenditure of a family is given below:

This family has surplus budget as its income is more than expenditure.

Question 51.
Name the currencies of any five countries of the following:
USA, UK, Germany, Japan, China, Argentina, UAE, Bangladesh, Russia
Answer:

Countries	Currency
USA	US Dollars
UK	British Pound
UAE	UAE Dirham
Germany	Euro
Japan	Japanese Yen
China	Chinese Yuan
Argentina	Argentine Peso
Bangladesh	Bangladeshi Taka
Russia	Russian Ruble