2nd PUC Economics Previous Year Question Paper June 2019

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Karnataka 2nd PUC Economics Previous Year Question Paper June 2019

Time: 3.15 Hours
Max Marks: 100

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

Question 1.
The scares resources of an economy have
(a) Competing usages
(b) Single usage
(c) Unlimited usages
(d) None of the above
Answer:
(a) Competing usages

Question 2.
The equation of Budget line is
(a) Px + p₁x₁ = M
(b) M = P₀X₀ + Px
(c) P₁X₁ + p₂x₂ = M
(d) Y = Mx + C
Answer:
(c) P₁X₁ + p₂x₂ = M

Question 3.
Cobb-Douglas production function is
(a) q = (x, x)
(b) q = (x₁, x₂)
(c) q = (x₁^α, x₂^β)
(d) q = (0)
Answer:
(c) q = (x₁^α, x₂^β)

Question 4.
The individuals or institutions which take economic decisions are:
(a) Economic variables
(b) Economic Agents
(c) Economists
(d) none of the above.
Answer:
(b) Economic Agents

Question 5.
Which of the following is an example for ‘paper tax’?
(a) Income tax
(b) Excise taxes
(c) Wealth tax
(d) Customs taxes
Answer:
(c) Wealth tax

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

Question 6.
In reality all economies are ______.
Answer:
Mixed Economies.

Question 7.
The point of minimum AVC where the SMC curve cuts the AVC curves is called as _______.
Answer:
Shut down point.

Question 8.
TR = _______.
Answer:
Price × quantity.

Question 9.
The revenue received by the firm per unit of commodity sold is called _______.
Answer:
Average Revenue.

Question 10.
Revenue deficit = Revenue expenditure minus ________.
Answer:
Revenue Receipts.

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

Question 11.

A	B
1. Market Equilibrium	(a) TR-TC
2. Raw materials	(b) Operation of Invisible hand
3. π	(c) Paper gold
4. Adam Smith	(d) Intermediate good
5. SDR	(e) QD = QS

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

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

Question 12.
What is price ceiling?
Answer:
The government imposed upper limit on the price of a good or services is called price ceiling. Example, price ceiling on necessary items like selected medicines, kerosene, wheat, etc. Imposition of price ceiling below the equilibrium leads to an after excess demand.

Question 13.
What is monopoly?
Answer:
It is a market with one seller or firm with many buyers.

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.
Write the meaning of autonomous consumption.
Answer:
The consumption which is independent of income is called as autonomous consumption.

Question 16.
Who are free riders?
Answer:
If some users do not pay. and it is difficult and impossible to collect fees for the public good, such non-paying users are known as free riders.

Part – B

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

Question 17.
What do you mean by inferior goods? Give example.
Answer:
The inferior goods are those goods for which the demand increases with the fall in income of consumer and vice-versa. That is, there will be negative relationship between income of consumer and demand for inferior goods. Here the income of consumer and demand move in opposite directions. Example: Low quality goods.

Question 18.
State the law of demand?
Answer:
Law of demand states that other things being equal, there is a negative relation between demand for a commodity and its price. In other words, when price of the commodity increases, demand for it falls and when price of the commodity decreases, demand for it rises, other factors remaining the constant.

The law can be explained in the following manner: “Other things being equal, a fall in price leads to expansion in demand and a rise in price leads to contraction in demand”.

Question 19.
Give the meaning of the concepts of short run and long run.
Answer:
The concepts of short run and long run are defined as a period simply by looking at whether all the inputs can be varied or not. It is not advisable to define short run and long run in terms of days, months or years.

In the short run, at least one of the factor – labour or capital cannot be varied and therefore, remains fixed. In order to vary the output level, the firm can vary only the other factor. The factor that remains fixed is called the fixed factor and the other factor which the firm can vary is called the variable factor.

In the long run, all factors of production can be varied. A firm in order to produce different levels of output in the long run may vary both the inputs simultaneously. So. in the long there is no fixed factor.

Question 20.
Give the meaning of price elasticity of supply and write its formula.
Answer:
The price elasticity of supply refers to the proportionate change in quantity’ supplied to a proportionate change in price of a commodity.

Question 21.
Define equilibrium price and quantity.
Answer:
Equilibrium price is the price at which equilibrium is reached in the market.
The equilibrium quantity is defined as the quantity which is bought and sold at equilibrium price. Therefore, price and quantity will be at equilibrium when
Qd (p*) = qs(p*)
p* denotes the equilibrium price and Qd(p*) and qs(p*) denote the market demand and market supply, respectively.

Question 22.
Write the meaning of monopolistic competition and give an example.
Answer:
When the market structure has large number of firms, free entry and exit of firms and differentiated goods, then it is called monopolistic competition.

For example, there is large number of soaps producing firms. But many of the soaps being produced are associated with some brand name and are distinguishable from the other companies. The consumer develops a preference for a particular brand of soap over time or becomes loyal to a particular brand like some people always prefer Mysore Sandal Soap.

Question 23.
What is the difference between consumer goods and capital goods.
Answer:

Consumer Goods	Capital Goods
1. These are the goods which are purchased for consumption by ultimate consumers.	1. These are the durable goods which are used in the production process.
2. Examples are food, clothes and services like recreation.	2. Examples are machinery, tools, implements, etc.

Question 24.
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 25.
Mention the two motives of demand for money.
Answer:
The two motives of demand for money are as follows:

The transaction Motive
The Speculative Motive.

Question 26.
Write the meaning of excess demand and deficient demand?
Answer:

If the equilibrium level of output is more than the full employment level, it is due to the fact that the demand is more than the level of output produced at full employment level. This situation is called excess demand.
If the equilibrium level of output is less than the full employment of output, it is due to fact that demand is not enough to employ all factors of production. This situation is called deficient demand.

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.
Mention the non-tax revenues of the central government.
Answer:
The non-tax revenues of the central government mainly consists of the following:

Interest receipts on account of loans by the central government.
Dividends and profits on investments made by the government. .
Fees and other receipts for services rendered by the government.
Grants-in-aid from foreign countries and international organisations.

Question 29.
Mention the three linkages of open economy.
Answer:
The three linkages of open economy are as follows:

Output market linkage
Financial Market linkage
Labour market linkage.

Question 30.
What is foreign exchange rate?
Answer:
Foreign exchange rate is the price of one currency in terms of another currency. It links the currencies of different countries and enables comparison of international costs and prices. For example, if we need to pay Rs.68 for 1 dollar, then the exchange rate is Rs.68 per dollar.

Part – C

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

Question 31.
Distinguish between positive and normative economics.
Answer:

Positive Economics	Normative Economics
1. The positive economics is the study of ‘what was’ and ‘what is’ under the given set of circumstances.	1. The Normative economics studies ‘what ought to be’.
2. It deals with the scientific explanation of the working of the economy.	2. It explains about ‘what should be and should not be done’.
3. Here we study how the different mechanisms function.	3. Here we try to understand that whether the mechanisms are desirable or not.

Question 32.
Write the differences between Total Utility and Marginal Utility.
Answer:

Total Utility	Marginal Utility
1. It is the aggregate utility derived by the consumer by consuming all the units.	1. It is the additional utility derived by the consumer by consuming additional unit.
2. It represents utility of all the units consumed.	2. It represents the utility of single unit.
3. It may be symbolically written as TU_n = U₁+ U₂+ U₃ +U₄ ……………U_n	3. It may be written as MU_n = TU_n -TU_n-1 .
4. It increases in the beginning and later decreases as the consumer consumes more and more units.	4. It decreases from the beginning and becomes negative later.

Question 33.
Explain Isoquant with the help of diagram.
Answer:
An isoquant is the set of all possible combinations of the two inputs that yield the same maximum possible level of output. Each isoquant represents a particular level of output and is labeled with that amount of output. It is just an alternative way of representing the production function.

The concept of isoquant can be explained with the help of following diagram:

The above diagram generalizes the concept of isoquant. In the above diagram, labour is measured in OX axis and capital is measured in OY axis. There are 3 isoquants for the three output levels, viz. q=q₁, q=q₂ and q=q₃ Two input combinations (L₁, K₂) and (L₂, K₁) give us the same level of output q₁.

If we fix capital at K₁ and increase labour to L₃, output increases and we reach a higher isoquant q=q₂. When marginal products are positive, with greater amount of one input, the same level of output can be produced only using lesser amount of the other. Therefore, isoquants curves slope downwards from left to right (negatively sloped).

Question 34.
Write a brief note on returns to scale.
Answer:
The returns to scale can happen only in the long run as both the factors (Labour and Capital) can be changed. One special case in the long run occurs when both factors are increased by the same proportion or factors are scaled up.

Constant returns to scale: When a proportional increase in all inputs results in an increase in output by the same proportion, the production function is said display constant returns to scale.
Increasing returns to scale: When proportional increase in all inputs results in an increase in output by a larger proportion, the production function is said to display increasing returns to scale.
Decreasing returns to scale: When a proportional increase in all inputs results in an increase in output by a smaller proportion, the production function is said to display decreasing returns to scale.

For example, if in a production process, all inputs get doubled. As a result, if the output gets doubled, the production function exhibits constant returns to scale, if output is less than doubled, exhibits decreasing returns to scale and if is more than doubled, exhibits increasing returns to scale.

Question 35.
Explain the determinants of a firm’s supply curve.
Answer:
A firm’s marginal cost curve is a part of its marginal cost curve. Any factor that affects a firm’s marginal cost curve is a determinant of its supply curve. Following are the two factors determining a firm’s supply curve:

(1) Technological progress: The organizational innovation by the firm leads to more production of output. That means, to produce a given level of output, the organizational innovation allows the firm to use fewer units of inputs. It is expected that this will lower the firm’s marginal cost at any level of output, i.e., there is a rightward shift of the MC curve. As the firm’s supply curve is essentially a segment of the MC curve, technological progress shifts the supply curve of the firm to the right. At any given market price, the firm now supplies more quantity of output.

(2) Input prices: A change in the prices of factors of production (inputs) also influences a firm’s supply curve. If the price of input (e.g. wage) increases, the cost of production also increases. The consequent increase in the firm’s average cost at any level of output is usually accompanied by an increase in the firm’s marginal cost at any level of output which leads to upward shift of the MC curve. That means, the firm’s supply curve shifts to the left and the firm produces less quantity of output.

Question 36.
Explain the features of perfect competition.
Answer:
Perfect competition is a market where there will be existence of large number of buyers and sellers dealing with homogenous products. It is a market with highest level of competition.

(1) Large number of sellers and sellers: The first condition which a perfectly competitive market must satisfy is concerned with the sellers’ side of the market. The market must have such a large number of sellers that no one seller is able to dominate in the market. No single firm can influence the price of the commodity. The sellers will be the firms producing the product for sale in the market. These firms must be all relatively small as compared to the market as a whole. Their individual outputs should be just a fraction of the total output in the market.

There must be such a large number of buyers that no one buyer is able to influence the market price in any way. Each buyer should purchase just a fraction of the market supplies. Further the buyers should have any kind of union or association so that they compete for the market demand on an individual basis.

(2) Homogeneous products: Another prerequisite of perfect competition is that all the firms or sellers must sell completely identical or homogeneous goods. Their products must be considered to be identical by all the buyers in the market. There should not be any differentiation of products by sellers by way of quality, colour, design, packing or other selling conditions of the product.

(3) Free Entry and Free exit for firms: Under perfect competition, there is absolutely no restriction on entry of new firms in the industry or the exit of the firms from the industry which want to leave. This condition must be satisfied especially for long period equilibrium of the industry.

If these four conditions are satisfied, the market is said to be purely competitive. In other words, a market characterized by the presence of these four features is called purely competitive. For a market to be perfect, some conditions of perfection of the market must also be fulfilled.

(4) Price Taker: The single distinguishing character of perfect competition is the price taking behaviour of the firms. A price taking firm believes that if it sets a price above the market price, it will be unable to sell any quantity of the good that it produces. On the other hand, if the firm set the price less than or equal to the market price, the firm can sell as many units of the good as it wants sell.

The firms in the perfect competitive market are price takers. That means, the producers will continue to sell their goods and services in the price existing in the market. Firms have no control over the price of the product.

(5) Information is perfect: Price taking is often thought to be a reasonable assumption when the market has many firms and buyers have perfect information about the price prevailing in the market. Since all firms produce the same good and all buyers are aware of the market price, the firm in question loses all its buyers if it rises price.

Question 37.
Explain the role of the government (state) and household sectors in both developed and developing countries.
Answer:
Role of government: In both 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 ow n consumption or a group of individuals for whom the decisions relating to consumption are jointly determined. Households consist of people, these people work in firms as workers and earn wages. They are the one 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.

Question 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.
Negative externalities.

For example, let us imagine that there is chemical fertilizer industry. It produces the chemical fertilizers required for agriculture. The output o~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.
Briefly explain the functions of RBI.
Answer:
The main functions of RBI are as follows:
(1)Printing and issuing currency notes: It has complete authority of printing and issuing currency notes in the country. RBI issue all denominations of currency notes (Rs.2, Rs.10, Rs.20, Rs.50, Rs. 100, Rs.500 and Rs.2000) except one rupee note, which is issued by Finance Ministry, Government of India. The minimum reserve system of note issue was followed by RBI after 1956.

(2) Banker to Government: RBI works as banker to the Government. It does all activities of banking on behalf of Government activities like opening account, receiving money, making payments, transfer government funds, manages public debt and also maintains accounts of expenditure of government it also gives credit to government relating to Financial matters RBI gives advice to government.

RBI also acts as agent to the Government through performing the transfer of funds from government to beneficiaries. RBI also advises the government during some circumstances like not to go for over expenditure during inflation.

(3) Act as Bankers’ bank: All banks and financial institutions in India are under the control of RBI. It advices and gives direction on all transactions of commercial banks. All commercial banks in India have to keep certain portion of its deposits as cash reserves with RBI. All Commercial banks have to submit a detailed document and report about its transactions to RBI.

As a banker’s bank RBI functions as follows:

Lender of last resort: RBI provides financial assistance to commercial banks like giving credit, discounting bills, giving advances, etc. during their financial crisis and helps the banks as a lender of last resort.
Clearing house: Commercial Banks in crisis can approach RBI for loans and advances. RBI re-discounts bills and lends money to commercial banks. It also advances money on other securities.

(4) Controls credit creation activities of commercial banks: The credit provided by all commercial banks is controlled by RBI. RBI implements both quantitative and qualitative techniques to control the credit generated by commercial banks. The quantitative measures to control credit are Bank Rate Policy.

Open Market Operation, Cash Reserve Ratio and Statutory Liquidity Ratio. The qualitative techniques of credit control include fixation of margin requirements for loans, introduction of a system of credit rationing, moral suasion and direct action.

(5) Controls money market: RBI is the leader of money market. All the activities and components of money market like commercial banks and financial institutions are controlled and directed by RBI.

(6) Custodian of foreign exchange reserves: RBI has regular and continuous contacts with international monetary institutions relating to foreign exchange reserves. Precious foreign exchanges is preserved and protected by it.

Question 40.
Explain the consumption and investment function with the help of graphs.
Answer:
In a two sector model, there are two sources of final demand. The first is consumption and the second is investment. The investment function was shown as I = I. Graphically, this is show n as a horizontal line at a height equal to I above the horizontal axis.

In this model. I is autonomous which means, it is the same no matter whatever is the level of income. The consumers demand can he expressed by the equation C = \(\hat{C}\) + cY. where \(\hat{C}\) is autonomous expenditure and c is the marginal propensity to consume.
The consumption function can be shown as follows:

The consumption function can he graphically expressed as follows:

In the above diagram \(\hat{C}\) is the intercept of the consumption. ‘c’ is slope of consumption function equals α.

Question 41.
Write the chart of components of current account.
Answer:

part – D

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

Question 42.
Explain the features of indifference curves with the help of diagrams.
Answer:
The main features of Indifference curves are as follows:
(1) Indifference curve slopes downwards from left to right: An indifference curve slopes downwards from left to right because, the consumer in order to have more of one product, he has to forego some units of other product. This can be explained with the help of diagram.

Thus, according to above diagram, as long as the consumer is on the same indifference curve, an increase in bananas must be compensated by a fall in quantity of mangoes. That means, an increase in the amount of bananas along the indifference curve is associated with a decrease in the amount of mangoes.

(2) Higher indifference curve gives greater level of utility: As long as marginal utility of a commodity is positive, a consumer always prefers more of that commodity to increase his level of satisfaction. This can be explained with the help of table and a diagram:

Combination	Bananas	Mangoes
A	1	10
B	2	10
C	3	10

Let us consider the different combinations of two goods bananas and mangoes A, B and C in the above table and diagram. All the three Mangoes combinations consist of same quantity of mangoes but different quantities of bananas. As combination B has more bananas than A, B will provide the consumer higher level of satisfaction than A. Therefore. B will lie on higher indifference curve.

Similarly. C has more bananas than B and therefore C will provide higher level of satisfaction than B and also lie on higher indifference curve than B. Thus higher indifference curves give greater level of utility.

(3) Two indifference curves never intersect each other: If the two indifference curves intersect each other, they will give conflicting results. This can be explained with the help of diagram.

In the above diagram the two indifference curves have intersected with each other. As points A and Mango B lie on IC₂ utilities derived from A and B are same. Similarly, as points A and C lie on the same indifference curve IC₁ the utilities are same. From this, it follows that utility from point B and C are same.

But this is clearly an absurd result as on B, the consumer gets a greater number of mangoes with the same quantity of bananas. So the consumer is better off at point B than at Point C. Thus, it is clear that intersecting indifference curves will lead to conflicting results. Thus, two indifference curves cannot intersect each other.

Question 43.
Suppose the demand and supply curves of wheat are given by q^D = 200 – P and q^s = 120 + P
(a) Find the equilibrium price.
(b) Find the equilibrium quantity of demand and supply.
(c) Find the quantity of demand and supply when P is greater than equilibrium price.
(d) Find the quantity’ of demand and supply when P is lesser than equilibrium price.
Answer:
(a) By definition
q^D = q^s200 – P = 120 + P ⇒ 200 – P – 120 – P
2P – 80 ⇒ 2P = 80
P = \(\frac{80}{2}\) ⇒ P = 40

(b) q^D = 200 – P = 200-40 ⇒ q^D = 160
q^D = 120 + P = 120 + 40 ⇒ q^s = 160
∴Equilibrium quantity is supplied and demand is 160.

(d) When P is less than equilibrium price
If P = 35
q^D = 200 – 35 ⇒ q^D = 165 ⇒ q^s = 120 + 35 = 155 ∴ q^D > q^s

Question 44.
Explain how the firms behave in Oligopoly.
Answer:
If the market of a particular commodity consists of a few number of sellers, the market structure is termed oligopoly. Given there are a few firms, each firm is relatively large when compared to the size of the market. As a result each firm is in a position to affect the total supply in the market and thus influence the market price.

For example, if a firm decides to double its output, the total supply in the market will increase, causing the price to fall. This fall in price affects the profits of all firms in the industry. Other firms will respond to such a move in order to protect their own profits, by taking fresh decisions regarding how much to produce. Therefore the level of output in the industry, the level of prices, and the profits are outcomes of how firms are interacting with each other.

Case-1: Firms could decide to collude with each other to maximize profits. Here the firms form a cartel (an association) that acts as a monopoly. The quantity supplied collectively by the industry and the price charged are the same as a single monopoly firm.

Case-2: The firms could decide to compete with each other. For example, a firm may lower its price a little below the other firms, in order to attract away their customers. Certainly, the other firms would retaliate by doing the same. So the market price keep falling.

In reality, cooperation of the kind that is needed to ensure a monopoly outcome is often difficult to achieve in the real world. The firms may realize that competing fiercely by continuous price cuts is harmful to their own profits.

Question 45.
Explain the numerical example to show that all the three methods of estimating GDP gives us the same answer.
Answer:
The three methods of calculating GDP viz., Product or Value Added Method, Expenditure method and Income Method, give us the same answer. This can be explained with the help of numerical example as follows:

Let us imagine, there are two firms X and Y. Suppose X use no raw material and produces cotton worth Rs.50. X sell its cotton to firm Y, who uses it to produce cloth. Y sells the cloth produced to consumers for Rs.200.

(a) GDP in the phase of product or the value added method: Here the value added = Sales – Intermediate goods.
Thus VA_X = 50 – 0
VA_y = 200 – 50 = 150.
Thus GDP = VA_X + VA_Y = 50 + 150 = 200.
GDP distribution for firms X and Y

Particulars	Firm X	Firm Y
Sales	50	200
Intermediate consumption	0	50
Value added	50	150

(b) GDP in the phase of Expenditure Method: Under this method, GDP is the sum of final expenditure/s on goods and services for end use. In the above case, final expenditure is expenditure by consumers on cloth. Therefore, GDP = 200.

(c) GDP in the phase of Income Method: Under this method, GDP is obtained by adding factor payments. Let us imagine firm X, from Rs.50 received gives Rs.30 as wages and keeps the remaining Rs.20 as its profits. Similarly, firm Y gives Rs. 100 as wages and keeps Rs.50 as profits. It can be stated in the following table:

Particulars	Firm X	Firm Y	Total
Wages	30	100	130
Profits	20	50	70

Now the GDP by income method = total of factor payments (incomes) which is equal to total wages received (workers of Firms X and Y) and total profits earned (by Firms X and Y).
Thus GDP = Wages + Profits i.e., GDP =130 + 70 = 200.
Thus all the three methods of estimating GDP give us the same answer.

Question 46.
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:

1. 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.

2. 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.

3. 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.

4. 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.

5. 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 47.
Explain the functions of Money. How does money overcome the short comings of barter system?
Answer:
The function of Money are broadly classified as fo0llows:

Primary Functions
Secondary Functions
Contingent Functions

1. Primary Functions:
The primary functions of money are as follows:
(a) Medium of Exchange: Money plays an important role as a medium of exchange. It facilitates exchange of goods for money. It has solved the problems of barter system. Barter exchanges become extremely difficult in a large economy because of the high costs people would have to incur looking for suitable persons to exchange their surpluses. It helps the people to sell in one place and buy in another place. Money has widened the scope of market transactions. Money has become a circulating material between buyers and sellers.

(b) Measure of Value/Unit of account: The money acts as a common measure of value. The values of all goods and services can be expressed in terms of money. As a measure of value, money performs following functions:

The value of all goods and services measured and expressed in terms of the money.
Rate of exchange of goods and services expressed in money.
Facilitates the maintenance of accounts.
It facilitates price mechanism.
It makes goods and services comparable in terms of price.

For instance, w hen we say that the value of a book is Rs.500 we mean that the book can be exchanged for 500 units of money where a unit of money is rupee in this case. If the price of a pencil is Rs.5 and that of a pen is Rs.10 we can calculate the relative price of a pen with respect to a pencil i.e., a pen is worth 10/5 = 2 pencils.

2. Secondary Functions: The secondary functions of money are as follows:
(a) Store of value: People can save part of their present income and hold the same for future. Money can be stored for precautionary motives needed to overcome financial stringencies. Money solves one of the deficiencies of barter system i.e., difficulty to carry forward one’s wealth under the barter system.

For instance, we have an endowment of wheat which we do not wish to consume today entirely. We may regard this stock of surplus w heat as an asset which we may wish to consume or even sell off, for acquiring other commodities at some future date. But wheat is a perishable item and cannot be stored beyond a certain period. Also, holding the stock of rice required a lot of space.

We may have to spend considerable time and resources looking for people with a demand for wheat when we wish to exchange our stock for buying other commodities. This problem can be solved if we sell our wheat for money. Money is not perishable land its storage costs are also less.

(b) Standard of deferred payments: All the credit transactions are expressed in terms of money. The payment can be delayed or postponed. So, money can be used for delayed settlement of dues or financial commitments.

(c) Transfer of value: Money acts as a transfer of value from person to person and from place to place. As a transfer of value, money helps us to buy goods, properties or anything from any part of the country or the world. Further, money earned in different places can be brought or transferred to anywhere in the world.

3. Contingent Functions of Money: Other than Primary and Secondary functions, money also performs other functions which are as follows:
(a) Basis of Credit: Money serves as a basis of the credit. The modern credit system exists only because of existence of money.

(b) Distribution of National Income: Money helps in distribution of national income. The reward paid to factors of production in the form of rent, wages, interest and profit are nothing but the distribution of National Income at factor prices.

(c) Provides Liquidity and Uniformity: Money provides liquidity to all kinds of assets both movable and immovable. Money can be converted into any type of asset and all assets can be converted into money.

(d) Helps in consumers and producers equilibrium: All goods and services are expressed in terms of money. The consumer attains equilibrium when the price of a product is equal to his marginal utility. Similarly, the producers reach equilibrium if they get maximum satisfaction. Both consumers and producers try to achieve equilibrium with the help of money.

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.,

Current Account
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 of bananas is Rs.4 and price of mangoes is Rs.5. The consumer income is Rs.20.
(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 consumer’s income or not.
(e) If you want to have more of banana you have to give up mangoes. Is it true?
Answer:
(a) 5 Bananas (20/4).
(b) 4 Mangoes (20/5).
(c) Slope of budget line is downward.
(d) Yes, the bundles on the budget line are equal to the consumer’s income.
(e) If we want to have more of banana we have to give up mangoes.

Question 50.
Compute the total revenue, marginal revenue and average revenue schedules from the following table when market price of each unit of goods is Rs.10.

Answer:
Hint: For TR Multiply Price and Quantity (P × Q);
MR = TR_n – TR_n-1 and AR = TR/Q

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