Class 12 Macroeconomics Chapter-1 Introduction to Macroeconomics and its Concepts

Chapter-1

 

Introduction to Macroeconomics and its Concepts

 

Introduction And Structure Of MacroEconomics:
1. Macroeconomics is the part of economic theory that studies the economy as a whole, such as national income, aggregate employment, general price level, aggregate consumption, aggregate investment, etc. Its main instruments are aggregate demand and aggregate supply. It is also called the ‘Income Theory’ or ‘Employment Theory’.
2. Structure of macro economy: As we know, Macroeconomics is concerned with economic problems at the level of an economy as a whole. Structure of Macroeconomics implies study of different sectors of the economy.
An economy may be divided into different sectors depending on the nature of study.
(a) Producer sector engaged in the production of goods and services.
(b) Household sector engaged in the consumption of goods and services.
Note: Households are taken as the owners of factors of production.
(c) The government sector engaged in activities like taxation and subsidies
(d) Rest of the world sector engaged in exports and imports.
(e) Financial sector (or financial system) engaged in the activity of borrowing and lending.
3. Circular flow of income.
It refers to flow of money, income or the flow of goods and services across different sectors of the economy in a circular form.
There are two types of Circular flow:
(a) Real/Product/Physical Flow
(b) Money/Monetary/Nominal Flow
(a) Real flow
(i) Real flow of income implies the flow of factor services from the household sector to the producing sector and corresponding flow of goods and services from the producing sector to the household sector.
(ii) Let us consider a simple economy consisting only of 2 sectors:
• Producer Sector.
• Household Sector.

(iii) These two sectors are dependent on each other in the following ways:
• Producers supply goods and services to the households.
• Household (as the owners of factors of production) supplies factors of production (or factor services) to the producers.
This interdependence can be explained with the help of the diagram given here.
(b) Money Flow
(i) Money flow refers to the flow of factor income, as rent, interest, profit and wages from the producing sector to the household sector as monetary rewards for their factor services as shown in the flowchart.

(ii) The households spend their incomes on the goods and services produced by the producing sector. Accordingly, money flows back to the producing sector as household expenditure as shown in the flowchart.
Circular Flow Of Income In Two Sector Model:
The following assumptions with regard to a simple economy with only two sector of economics activity are:
(i) There are only two sectors in the economy; that is, household and firms.
(ii) Household supply factor services to firms.
(iii) Firms hire factor services from Households.

(iv) Households spend their entire income on consumption.
(v) Firms sell all that is produced to the households.
(vi) There is no government or foreign trade.
Such an economy described above has two types of markets.
(i) Market for goods and services, that is product market.
(ii) Market for factors of production, factor market.
As a result we can derive the following, in the case of our simple economy:
(i) Total production of goods and services by firms = Total consumption of goods and services by Household Sector.
(ii) Factor Payments by Firms = Factor Incomes of Household Sector.
(iii) Consumption expenditure of Household sector = Income of Firm.
(iv) Hence, Real flows of production and consumption of Firms and households = Money flows of income and expenditure of Firms and Households.
Phases Of Circular Flow:
There are three types of phases of Circular flow.
(i) Production Phase:
• It deals with the production of goods and services by the producer sector.
• If we study it in term of the quantity of goods and services produced, it is a Real Flow. But, it is a Money flow, if we study it in terms of the market value of the goods produced.
(ii) Distribution Phase: It means the flow of income in the form of rent, interest, profit and wages, paid by producer sector to the household sector. It is a Money Flow.
(iii) Disposition Phase:
• Disposition means expenditure made. This phase deals with expenditure on the purchase of goods and services by households and other sectors.
• This is a Money Flow from other sectors to the producer sector. These phases are illustrated in the figure given here.

Some Basic Concepts Of MacroEconomics
1. Factor Income
(a) Income earned by factor of production by rendering their productive services in the production process is known as Factor Income.
(b) It is a bilateral [Two-Sided] Concept.
(c) It is included in National Income as it contribute something in the flow of goods and services.
Examples: Rent, interest, wages and profit.
2. Transfer Income
(a) Income received without rendering any productive services is known as transfer income.
(b) It is a unilateral [one-sided] concept.
(c) It is not included in National Income as it does not contribute anything in the flow of goods and services.
Examples: Old Age Pension, Scholarship, Unemployment allowance.
There are two types of transfers:
(i) Current transfers (ii) Capital transfers
(i) Current Transfers
• Transfers made from the income of the payer and added to the income of the recipient (who receive) for consumption expenditure are called current transfers.
• It is recurring or regular in nature.
For example, scholarships, gifts, old age pension, etc.
(ii) Capital Transfers
• Capital transfers are defined as transfers in cash and in kind for the purpose of investment to recipients, made out of the wealth or saving of the donor.
• It is non recurring or irregular in nature.
For example, investment grant, capital gains tax, war damages, etc.
3. Stock
(a) Any economic variable which is calculated at a particular point of time is known as stock.
(b) It is static in nature, i.e., it do not change.
(c) There is no time dimension in stock variables.
For example, Distance, Amount of Money, Money Supply, Water in Tank, etc.
4. Flow
(a) Any economic variable which is calculated during a period of time is known as flow.
(b) It is dynamic in nature, i.e., it can be changed.
(c) There is time dimension in flow variables.
For example, Speed, Spending of Money, Water in River, Exports, Imports, etc.
5. Economic territory or Domestic Territory:
(a) According to the United Nations, economic territory is the geographical territory administered by a government within which persons, goods and capital circulate freely.
(b) The above definition is based on the criterion “freedom of circulation of persons, goods and capital”. Clearly, those parts of the political frontiers (or boundaries) of a country where the government of that country does not enjoy the above “freedom” are not to be included in economic territory of that country.
(i) One example is embassies. Government of India does not enjoy the above freedom in the foreign embassies located within India. So, these are not treated as a part of economic territory of India. They are treated as part of the economic territories of their respective countries. For example the U.S. embassy in India is a part of economic territory of the U.S.A. Similarly, the Indian embassy in Washington is a part of economic territory of India.
(ii) International organizations like UNO, WHO, etc. located within the geographical boundaries of a country.
(iii) In layman terms, the domestic territory of a nation is understood to be the territory lying within the political frontiers (or boundaries) of a country. But in national income accounting, the term domestic territory is used in a wider sense. Based on ‘freedom’ criterion, the scope of economic territory is defined to cover:
• Ships and aircrafts owned and operated by normal residents between two or more countries. For example, Indian Ships moving between china and India
i regularly are part of domestic territory of India. Similarly, planes operated by Air India between Russia and Japan are part of the domestic territory of India. Similarly, planes operated by Malaysian Airlines between India and Japan are a part of the domestic territory of Malaysia.
• Fishing vessels, oil and natural gas rigs and floating platforms operated by the residents of a country in the international waters where they have exclusive
rights of operation. For example, Fishing boats operated by Indian fishermen in international waters of Indian Ocean will be considered a part of domestic territory of India.
• Embassies, consulates and military establishments of a country located abroad. For example, Indian Embassy in Russia is a part of the domestic territory of India. ‘Consulate’ is an office or building used by consul (an officer commissioned by the government to reside in a foreign country to promote the interest of the countiy to which he belongs).
6. Citizenship/Nationalship
(a) Citizenship is basically a legal concept based on the place of birth of the person or some legal provisions allowing a person to become a citizen.
(b) It means, Indian citizenship can arise in two ways:
(i) When a person is born in India, he acquires automatic citizenship of India.
(ii) A person born outside India applies for citizenship and Indian Law allows him to become Indian Citizen.
7. Normal Resident/Resident
(a) A Normal residenf, whether a person or an institution, is one whose centre of economic interest lies in the economic territory of the country in which he lives.
(b) The centre of economic interest implies in two things:
(i) The resident lives or is located within the economic territory for more than one year and
(ii) The resident carries out the basic economic activities of earnings, spending and accumulation from that location
(c) There is a difference between the terms normal resident (resident) and citizen (or national).
(i) A person becomes a national of a countiy because he was born in the country or on the basis of some other legal criterion.
(ii) A person is treated resident of a country on the basis of economic criterion.
(iii) It is not necessary that a resident must also be the national of that country. Even foreigners can be the residents if they pass the above stated economic criterion.
For example, a large number of Indian nationals have settled in U.S.A., England,
Australia, etc. as residents (and not as nationals) of these countries. For India, they
are Non-resident Indians (NRI) but continue to remain Indian nationals.
Following are not included under the category of Normal residents:
(i) Foreign visitors in the country for such purposes as recreation, holidays, medical treatment, study tours, conferences, sports events, business etc. (they are supposed to stay in the host country for less than one year. In case they continue to stay for one year or more in the host country, they will be treated as normal residents of the host countiy).
(ii) Crew members of foreign vessels, commercial travelers and seasonal workers in , the country (Foreign workers who work part of the year in the country in response to the varying seasonal demand for labour and return to their households and border workers who regularly cross the frontier each day or somewhat less regularly, (i.e. each week) to work in the neighbouring country are the normal residents of their own countries. Example: Nepal.
(iii) Officials, diplomats and members of the armed forces of a foreign country.
(iv) International bodies like World Bank, World Health Organisation or International Monetary Fund are not considered residents of the country in which these organisations operate but are treated as residents of international territory. However, the staffs of these bodies are treated as normal residents of the country in which the international body operates. For example, international body like World Health Organisation located in India is not normal resident of India but Americans working in its office for more than a year will be treated as normal residents of India.
(v) Foreigners who are the employees of non-resident enterprises and who have come to the country for purposes of installing machinery or equipment purchased from their employers. (They are supposed to stay for less than one year. In case they continue to stay for one year or more, they will be treated as normal residents of the host country).
8. Final Goods
(a) These are the goods that are used for:
(i) Personal Consumption (like bread purchased by consumer household), or (if) Investment Or Capital Formation (like building, machinery purchased by a firm)
(b) In other words, final goods are those, which require no further processing and are available in an economy for consumption purpose or investment. These give direct satisfaction to a consumer.
(c) According to production boundary, if a good crosses the imaginary line around the production unit and reaches to final consumer or investment made by a producer within the imaginary line of production unit is known as the final good.
9. Intermediate Goods
(a) These are the goods that are used for:
(i) Further processing (like sugar used for making sweets); or
(ii) Resale in the same year (If car purchased by car dealer for resale).
(b) In other words, intermediate goods are the ones, which require further processing and are not available in an economy for the purpose of consumption. These goods give indirect satisfaction to a consumer.
(c) According to the production boundary, if a good does not cross the imaginary line around the production unit and reaches to other firm within the production boundary, is known as intermediate good.
10. Point to Remember for Final Goods and Intermediate Goods
(a) Basis of Classification: If a good is used for:
(i) Personal consumption; or (ii) Investment
Then it is a final good, whereas, if a good is used for:
(i) Further processing; or
(ii) Resale in the same year, then it is known as intermediate good.
Thus, the basis of classification between these two goods is not the commodity itself, but the use made of it.
For example, bread used by a consumer household is a final goods, but the same used by a bakery for making a sandwich is a intermediate goods.
(b) Production Boundary
(i) Production boundary plays a vital role to differentiate between intermediate and final goods. The production boundary is the imaginary line around the production unit.
(ii) According to the production boundary, if a good crosses the imaginary line around the production unit and reaches to final consumer or investment made by a producer within the imaginary line of production unit, it is known as final good.
As against it, if a good does not cross the imaginary line around the production unit and reaches to other firm within the production boundary, it is known as intermediate good.

In the given diagram, there are 3 production units. The thick border drawn around these three units is the Production Boundary.
Within this limit, wheat and flour are intermediate goods.
Bread is final good as it lies outside the purview of production boundary.
11. Important Points about
Intermediate Goods: As far as intermediate consumption of general government is concerned, it’s purchased goods ranges from ordinary writing paper, pencils and pens to sophisticated fighter aircrafts. The goods and services purchased include both durable goods and non-durable goods and services. The intermediate consumption of the general government includes the following items:
(a) Value of all Non-durable Goods and Services such as petrol, electricity, lubricants, stationery, soaps, towels etc. including repair and maintenance of capital stock: Non-durable goods and services are those which have an expected life time of use of less than one year. Repair and maintenance of capital stock mean expenditure incurred for maintaining fixed assets and keep them in good working order. This includes the expenditure on new parts of the fixed assets. The life of the new parts may be around one year or slightly more and the value should be relatively small. For example, replacement of the tyres of a truck is an intermediate consumption, but not the replacement of its engine.
(b) Expenditure on Military Equipment missiles, rockets, bombs, warships, submarines, military aircrafts, tanks, missile carriers and rocket-launchers etc. whose function is to release weapons. Military vehicles and light weapons.
(c) Value of goods received from foreign governments in form of gifts or as transfers. Examples of these transfers in kind are food, clothing, medicines, vegetable oils, butter, toys sent by the government of one country to the other in times of natural calamities or as a token of goodwill and friendship between two countries.
However, the goods received for distribution to consumer households without renovation or alternation should not be included in intermediate consumption as these goods go into the final consumption of consumer households.
(d) As we know, intermediate goods are purchased by one production unit from another production unit within the production boundary.
However, it’s not necessary that all purchases by one production unit from other production units are intermediate purchases. For example, purchases of building, machinery, etc. are not intermediate purchases (if they are not meant for resale in the same year). Rather, these purchases are meant for investment and are termed as final product.
(e) Research and development
• Commodities consumed. In research and exploratory activities (like oil exploration in different parts of India by the Oil and Natural Gas Commission) or improving the technology of a particular production process.
• Commodities used in basic scientific research.
• Advertisements, market research and public relationship meant for improving the goodwill of the business enterprises.
• Business expenses of the employees on tours and entertainment.
12. Final goods can be classified into two groups: Consumption Goods and Capital Goods.
(a) Consumption Goods:
(i) Meaning: Consumption goods are those which satisfy the wants of the consumers directly. For example, cars, television sets, bread, furniture, air-conditioners, etc.
(u) Categories of Consumption Goods:
• Durable goods: These goods have an expected life time of several years and of relatively high value. They are motor cars, refrigerators, television sets, washing machines, air-conditioners, kitchen equipments, computers, communication equipments etc.
• Semi-durable goods: These goods have an expected life time of use of one year or slightly more. They are not of relatively great value. Examples are clothing, furniture, electrical appliances like fans, electric irons, hot plates and crockery.
• Non-durable goods: Goods which can not be used again and again, i.e., they lose their identity in a single act of consumption are known as non-durable goods. These are foodgrains, milk and milk products, edible oils, beverages, vegetables, tobacco and other food articles.
• Services: Services are non-material goods which satisfy the human wants directly. They cannot be seen or touched, i.e., they are intangible in nature. These are medical care, transport and communications, education, domestic services rendered by hired servants, etc.
(b) Capital Goods:
(i) Capital goods are defined as all goods produced for use in future productive processes.
For example, all the durable goods like cars, trucks, refrigerators, buildings, aircrafts,
air-fields and submarines used to produce goods and are ready for sale in the market
are a part of capital goods.
(ii) Stocks of raw materials, semi-finished and finished goods lying with the producers at the end of an accounting year are also a part of capital goods.
(iii) Some more examples of capital goods are machinery, equipment, roads and bridges.
(iv) These goods require repair or replacement over time as their value depreciate over a period of time.
13. Differentiate between final goods and intermediate goods on the basis of end used classification of goods and services with example.

Words that Matter
1. Circular flow of income: It refers to flow of money income or the flow of goods and services across different sectors of the economy in a circular form.
2. Money flow (nominal flow): Money flow refers to the flow of factor income, as rent, interest, profit and wages from the producing sector to the household sector as monetary rewards for their factor services.
3. Real flow or physical flow: Real flow of income implies the flow of factor services from the household sector to the producing sector and corresponding flow of goods and services from the producing sector to the household sector.
4. Factor income: Income earned by factor of production by rendering their productive services in the production process is known as Factor Income.
5. Transfer income: Income received without rendering any productive services is known as Transfer Income.
6. Current transfers: Transfers made from the current income of the payer and added to the current income of the recipient (who receive) for consumption expenditure are called current transfers.
7. Capital transfers: Capital transfers are defined as transfers in cash and in kind for the purpose of investment to recipient made out of the wealth or saving of a donor.
8. Final goods: These are those which are used for:
(a) Personal consumption (like bread purchased by consumer household), or
(b) Investment or capital formation (like building, machinery purchased by a firm)
9. Intermediate goods: These are those, which are used for:
(a) Further processing (like sugar used for making sweets), or
(b) Resale in the same year (If car purchased by a car dealer for resale).
10. Consumption goods: Consumption goods are those goods which satisfy the wants of consumers directly.
11. Capital goods: Capital goods are defined as all goods produced for use in future
productive processes.



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NCERT TEXTBOOK QUESTIONS SOLVED

1. Describe the five major sectors in an economy according to the macroeconomic point of view.[3-4 Marks]
Ans: An economy may be’ divided into different sectors depending on the nature of study.

1. Producer sector engaged in the production of goods and services.
2. Household sector engaged in the consumption of goods and services.
   Note: Households are taken as the owners of factors of production.
3. The government sector engaged in activities like taxation and subsidies.
4. Rest of the world sector engaged in exports and imports.
5. Financial sector (or financial system) engaged in the activity of borrowing and lending.

2. What are the four factors of production and remunerations to each of these called? [ 1 Mark]
Ans: 

3. What are the important features of a capitalist economy? [3-4 Marks]
Ans: Features of capitalist economy are:

1. Private ownership of land and capital.
2. Profit is the only motive.
3. Free play of the market forces of demand and supply.
4.  Government looks after growth, stability and social justice in the economy.

4. Describe the Great Depression of 1929. [3-4 Marks]
Ans: The Great Depression took place in 1929 which adversely affected the developed economies of Europe and North America. It continued for 10 years. There was extreme fall in aggregate demand due to fall in income, which led to a vicious circle of poverty.
5. 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. [3-4 Marks]
Ans: 

Net investment is a flow whereas capital is a stock. Amount of water in a tank at a particular point of time is a stock concept, whereas amount of water flowing into it is a flow concept.

MORE QUESTIONS SOLVED

I. VERY SHORT ANSWER TYPE QUESTIONS (1 Mark)
1. What is meant by circular flow of income?
Ans: It refers to flow of money income or the flow of goods and services across different sectors of the economy in a circular form.
2. What are the three phases of circular flow of income?
Ans: Production Phase, Distribution Phase and Disposition Phase.
Question 3. Give the meaning of factor income.
Ans: Income earned by factor of production by rendering their productive services in the production process is known as Factor Income.
4. What is meant by transfer income?
Ans: Income received without rendering any productive services is known as Transfer Income.
5. Out of factor income and transfer income which one is a unilateral concept?
Ans: Transfer income.
6. Define current transfers.[CBSE 2003]
Ans: Transfers made from the current income of the payer and added to the current income of the recipient (who receive) for consumption expenditure are called current transfers.
7. Define capital transfers.
Ans: Capital transfers are defined as transfers in cash and in kind for the purpose of investment to recipient made out of the wealth or saving of a donor.
8. What is the meaning of final goods?
Ans: These are those which are used for:

1. Personal consumption (like bread purchased by consumer household), or
2. Investment or capital formation (like building, machinery purchased by a firm)

9. What is meant by intermediate goods?
Ans: These are those, which are used for:

1.  Further processing (like sugar used for making sweets), or
2. Resale in the same year (If car purchased by a car dealer for resale).

10. What is meant by consumption goods?
Ans: Consumption goods are those goods which satisfy the wants of consumers directly.
11. Define capital goods.
Ans: Capital goods are defined as all goods produced for use in future productive processes.
12. Give an example of a person who is staying abroad for a period more than one year and still he is treated as normal resident of India.
Ans: An Indian working in Indian Embassy in the USA will be treated as normal resident of India.
II. MULTIPLE CHOICE QUESTIONS (1 Mark)
1. Transfer payments refer to payments which are made:
(a) Without any exchange of goods and services.
(b) To workers on transfer from one job to another.
(c) As compensation to employees.
(d) None of these
Ans: (a)
2. Which one of the following items comes under consumption goods?
(a) Durable goods
(b) Semi-durable goods
(c) Non-durable goods
(d) All of these.
Ans: (d)
3. Service of a teacher:
(a) Capital goods
(b) Consumption goods
(c) Intermediate goods
(d) Can be Consumption goods and intermediate goods
Ans: (d)
4. In a circular flow of income, we have:
(a) Production (b) Distribution
(c) Disposition (d) All of them
Ans: (d)
5. Who is considered as agents of factor
of production,
(a) Households
(b) Government
(c) Rest of the world
(d) All of these
Ans: (a)
6. Which among the following are the
features of capitalist economy,
(a) Private ownership of Land and Capital.
(b) Profit is the only motive.
(c) Free Play of market forces of demand and supply.
(d) All of these
Ans: (d)
7. Flow of Goods & services and factors of production across different sectors in a barter economy is known as: [CBSE Sample Paper 2016]
(a) Circular flow (b) Real flow
(c) Monetary Flow (d) Capital Flow
Ans: (b)
III. SHORT ANSWER-TYPE QUESTIONS
1. Explain the basis of classifying goods into intermediate and final goods. Give suitable examples. Or [CBSE 2010]
Distinguish between intermediate products and final products. Give examples. ‘ [CBSE 2009]
Ans: 


2. Define consumption goods and what are its categories.
Ans: Consumption goods are those which satisfy the wants of the consumers directly.
For example, cars, television sets, bread, furniture, air-conditioners, etc. Consumption goods can further be subdivided into the following categories:

1. Durable goods: These goods have an expected life time of several years and of relatively high value. They are motor cars, refrigerators, television sets, washing machines, air-conditioners, kitchen equipments, computers, communication equipments etc.
2.  Semi-durable goods: These goods have an expected life time of use of one year or slightly more. They are not of relatively great value. Examples are clothing, furniture, electrical appliances like fans, electric irons, hot plates and crockery.
3. Non-durable goods: Goods which cannot be used again and again, i.e., they lose their identity in a single act of consumption are known as non durable goods. These are food grains, milk and milk products, edible oils, beverages, vegetables, tobacco and other food articles.
   goods which satisfy the human wants directly. They cannot be seen or touched, i.e., they are intangible in nature. These are medical care, transport and communications, education, domestic services rendered by hired servants, etc.

3. Define capital goods and its categories.
Or
Define ‘capital goods’.[CBSE Foreign 2011]
Ans: 

1. Capital goods are defined as all goods produced for use in future productive processes.
2. For example, All the durable goods like cars, trucks, refrigerators, buildings, air crafts, air-fields and submarines used to produce goods and services for sale in the market are a part of capital goods.
3. Stocks of raw materials, semi finished and finished goods lying with the producers at the end of an accounting year are also a part of capital goods.
4. Some more examples of capital goods are machinery, equipment, roads and bridges.
5. These goods require repair or replacement over time as their value depreciate over a period of time.

4. Distinguish between consumption goods and capital goods. Which of these are final goods? [CBSE Delhi 2010]
Ans: 


5. Differentiate between Current transfers and Capital Transfers.
Ans: 

IV. GIVE REASONS
A. Giving reasons, classify the following into intermediate or final goods.
1. Machines purchased by a dealer of machines. [CBSE (AZ) 2010]
Ans: Intermediate good
Reason: Machines purchased by a dealer of machines is an intermediate good because machines are resold by the firms to make profits or value is yet to be added to these goods by way of further processing.
2. A car purchased by a household.[CBSE (AI) 2010]
Ans: Final good
Reason: A car purchased by a household is a final good because the household is the final user of the car and no value is to be added to the car.
3. Furniture purchased by a school. [CBSE Delhi 2011]
Ans: Final good
Reason: Furniture purchased by a school is a final product because school is the final user of the furniture and no value is to be added to the furniture. This will be deemed as investment expenditure because furniture is used by the school for several years and is of high value.
4. Chalks, dusters, etc. purchased by a school. [CBSE Delhi 2011]
Ans: Intermediate good
Reason: Chalks, dusters, etc. purchased by a school are intermediate goods as these are used up in the process of value – addition during the year.
5. Computers installed in an office.[CBSE Delhi 2011]
Ans: Final good
Reason: Computers installed in an office is a final product because computers are finally and repeatedly used by the office for several years and these are of high value.
6. Mobile sets purchased by a mobile dealer. [CBSE Delhi 2011]
Ans: Intermediate product
Reason: Mobile sets purchased by a mobile dealer is an intermediate product because these are purchased for resale.
7. Expenditure on maintenance of an office building. [CBSE Delhi 2011]
Ans: Intermediate product
Reason: Expenditure on maintenance of an office building is an intermediate expenditure as the things purchased for repair and maintenance are used up during the period of one year.
8. Expenditure on improvement of a machine in a factory.[CBSE Delhi 2011]
Ans: Final Product
Reason: Expenditure on improvement of a machine in a factory is a final expenditure as the machine is repeatedly used for several years as a fixed asset. Improvement of a machine implies improvement of asset value (through investment expenditure).
9. Purchase of furniture by a firm.[CBSE (Al) 2010]
Ans: Final Product
Reason: Purchase of furniture by a firm is a final expenditure because furniture is repeatedly used by the firm for several years and this is of high value.
10. Expenditure on maintenance by a firm. [CBSE (AI) 2010]
Ans: Intermediate product
Reason: Expenditure on maintenance by a firm is an intermediate expenditure as the things purchased for repair and maintenance are used up during the period of one year.
11. Paper purchased by a publisher.
Ans:  Intermediate product
Reason: It is an intermediate product as paper is used for further production during the same year.
12. Milk purchased by households.
Ans: Final product
Reason: It is a final product as it is used by households for final consumption.
13. Purchase of rice by a grocery shop.
Ans: Intermediate product
Reason: These are intermediate products because these are purchased for resale.
14. Coal used by manufacturing firms.
Ans: Intermediate product
Reason: It is an intermediate product as coal is used for further production during the same year.
15. Coal used by consumer households.
Ans: Final product
Reason: It is a final product as it is used by households for final consumption.
16. Purchase of pulses by a consumer.
Ans: Final Product
Reason: It is a final product as it is used by a consumer for final consumption.
17. Fertilizers used by the farmers.
Ans: Intermediate product
Reason: These are intermediate products because fertilizer is used for further production during the same year.
18. Printer purchased by a lawyer.
Ans: Final product
Reason: It is a final product because it is purchased for investment.
19. Wheat used by the flour mill.
Ans: Intermediate product
Reason: It is an intermediate product as wheat is used for further production during the same year or is meant for resale.
20. Unsold coal with trader at a year end.
Ans: Final product
Reason: It is a final product as the unsold coal is an investment for the trader.
21. Cotton used by a cloth mill.
Ans: Intermediate product
Reason: It is an intermediate product as cotton is used for further production during the same year.
22. Wheat used by households.
Ans: Final product
Reason: It is a final product as it is used by households for final consumption.
23. Refrigerator installed by a firm.
Ans: Final product
Reason: It is a final product because it is purchased for investment.
24. Sugar used by a sweet shop.
Ans: Intermediate product
Reason: It is an intermediate product as sugar is used for further production during the same year.
B. Giving reasons, classify the following into factor income or transfer income.
1. Unemployment allowances.
Ans: Transfer income
Reason: It is received without rendering any productive services.
2. Salary received by Pankaj from a company.
Ans: Factor income
Reason: It is earned by rendering productive services.
3. Financial help to earthquake victims.
Ans: Transfer income
Reason: It is received without rendering any productive services.
4. Compensation received from the employer.
Ans:  Factor income
Reason: It is earned by rendering productive services.
5. Claim received from Insurance company by an injured worker.
Ans: Transfer income
Reason: It is received without rendering any productive services.
6. Birthday gift received from a friend.
Ans: Transfer income
Reason: It is received without rendering any productive services.
7. Bonus received on Diwali.
Ans: Factor income
Reason: It is earned by rendering productive services.
C. Giving reasons, classify the following into stock or flow.
1. Capital [GBSE 2013]
Ans: Stock concept
Reason: Capital is stock because it is measured at a point of time.
2. Saving [CBSE 2013]
Ans: Flow concept
Reason: Saving is flow because it is .measured during a period of time.
3. Gross Domestic Product [CBSE 2013]
Ans: Flow concept
Reason: Gross domestic product is a flow because it is measured during a period of time.
4. Wealth [CBSE 2013]
Ans: Stock concept
Reason: Wealth is stock because it is measured at a point of time.
5. Exports
Ans: Flow concept
Reason: It relates to a period of time.
6. Imports
Ans: Flow concept
Reason: It relates to a period of time.
7. Business capital of business
Ans: Stock concept
Reason: It is related to a point of time.
8. Investment
Ans: Flow concept
Reason: It relates to a period of time.
9. Foreign Investment
Ans: Flow concept
Reason: It relates to a period of time.
10. Foreign Assets
Ans: Stock concept
Reason: It relates to a point of time.
11. Foreign Remittances (In flow of money)
Ans: Flow concept
Reason: It is related to a period of time.
12. Production of Wheat
Ans: Flow concept
Reason: It is related to a period of time.
13. Income of a servant
Ans: Flow concept
Reason: It is related to a period of one month or one year.
14. Budget Expenditure
Ans: Flow concept
Reason: It is related to a period of time. (1 year)
15. Money supply
Ans: Stock concept
Reason: It relates to a particular point of time.
16. Machinery of a firm
Ans: Stock concept
Reason: It relates to a point of time.
17. A five hundred rupee note
Ans: Stock concept
Reason: It is related to a point of time.
D. Giving reasons state whether the following are included or excluded in/from domestic territory.
1. An Indian Company in America
Ans: Excluded
Reason: As it is outside the domestic territory of our country.
2. Microsoft Office in India
Ans: Included
Reason: As it is within the domestic territory of our country.
3. Company in India owned by an American
Ans: Included
Reason: As it is within the domestic territory of our country.
4. Office of Tata in New York
Ans: Excluded
Reason: As it is outside the domestic territory of our country.
5. Branch of Foreign Bank in India
Ans: Included
Reason: As it is within the domestic territory of our country.
6. Indian Embassy in China
Ans: Included
Reason: As it is within the domestic territory of our country.
7. Branch of Punjab National Bank in America
Ans: Excluded
Reason: As it is outside the domestic territory of our country.
8. Russian Embassy in India
Ans: Excluded
Reason: As it is outside the domestic territory of our country.
9. Reliance Industries rented its building to Microsoft in America.
Ans: Excluded
Reason: As it is outside the domestic territory of our country.
E. Classify the following into durable, non-durable, semi-durable or services
1. Refrigerator
Ans: Durable
Reason: As it has expected life time of several years and of relatively high value.
2. Clothes
Ans: Semi-durable
Reason: As it have an expected life time of use of one year or slightly more.
3. Edible oil
Ans: Non-durable
Reason: As it loose their identity in a single act of consumption.
4. Tuition given by a teacher
Ans: Service
Reason: As it is non-material goods which satisfy the human wants directly.
5. Visit of a physician
Ans: Service
Reason: As it is non-material goods which satisfy the human wants directly.
6. Washing soaps
Ans: Non-durable
Reason: As it loose their identity in a single act of consumption.
F. Classify the following into consumer, intermediate or capital goods.
1. Milk used by a manufacturer of sweets.
Ans:  Intermediate goods
Reason: As it is used up while making sweets.
2. Cycle purchased by a consumer household
Ans: Consumer goods
Reason: End user is consumer.
3. Textile machinery
Ans: Capital goods
Reason: End user is producer.
4. Construction of a house
Ans: Consumer goods
Reason: End user is consumer.
5. Bread and butter used by a consumer household.
Ans: Consumer goods
Reason: End user is consumer.
6. Services of a private doctor purchased by a consumer household.
Ans: Consumer goods
Reason: End user is consumer.
7. Fertilizer used by a farmer.
Ans: Intermediate goods
Reason: As fertilizer is used for further production during the same year.
8. Passenger bus service used by a consumer household.
Ans: Consumer services
Reason: End user is consumer.
G. Giving reasons, classify the following into normal resident of India or not.
1. Indian officials working in the Indian Embassy in USA.
Ans: Normal Resident
Reason: As their centre of economic interest lies in the home country.
2. A Japanese tourist who stays in India for 2 months.
Ans: Not a Normal Resident
Reason: As their centre of economic interest lies in the foreign country.
3. Indians going to Pakistan for watching the cricket match.
Ans:  Normal Resident
Reason: As their centre of economic interest lies in the home country.
4. Indians working in the UNO office, located in America for less than 1 year.
Ans: Normal Resident
Reason: As their centre of economic interest lies in the home country.
5. Indian employees working in WHO, located in India.
Ans: Normal Resident
Reason: As their centre of economic interest lies in the home country.
6. Foreign tourists visiting India for a month to see the Taj Mahal.
Ans: Not a Normal Resident
Reason: As their centre of economic interest lies in the foreign country.
V. TRUE OR FALSE
Giving reasons, state whether the following statements are true or false.
1. Macroeconomics deals with the problems of a consumer.
Ans: False: It deals with problems of the economy.
2. Money flow is also known as physical flow.
Ans: False: Real flow is known as physical flow. Money flow is known by the name of nominal flow.
3. In a two-sector economy, total production is always equal to total consumption.
Ans: True: It happens because firms sell their entire output to the households.
4. Circular flow of income takes place in case of open economy and close economy.
Ans: True: Even in case of closed economy, circular flow of income takes place between households and firms.
5. Capital formation is a flow.[CBSE Sample Paper 2010]
Ans: True: Capital formation is measured over a period of time
6. Foreign remittances are a stock concept.
Ans: False: It is flow concept as these are assessed over a period of time and not at a point of time.
7. National Income of a country- is a stock concept.
Ans: False: It is a flow concept as it is measured over a period of time.
8. Bread is always a consumer good.[CBSE Sample Paper 2010]
Ans: False: It depends on the use of bread. When it is purchased by a household, it is a consumer good. If it is purchased by a restaurant, it is a producer intermediate goods.
9. Television is a capital good.
Ans: False: Television is a durable consumption good.
10. Services of a teacher is a consumption good.
Ans: True: It directly satisfies human wants.
11. Books in a library are intermediate goods.
Ans: False: Books used in a library are final goods as these are used by the end user.
12. Use of raw material is a consumption good.
Ans: False: Use of raw material helps in production process therefore it is a single use producer good. But it has no longer life.
13. Can purchase of a new car be categorized as an intermediate good.
Ans: True: Purchase of a new car can be categorized as an intermediate good, if purchased by a Government for military use or if it is purchased by a car dealer for resale.
14. A good can be an intermediate goods in one case and a final goods in another case.
Ans: True: A good can be an intermediate goods or final goods, depending upon its nature of use. For example, a car purchased by a household is a final good, whereas, it will be an intermediate good if it is purchased by a car dealer.
 15. The concept of normal resident applies to individuals only.
Ans: False: The concept applies to institutions also, in addition to individuals.
16. In final goods, no value is to be added.
Ans: True: Because final goods have crossed the production boundary.
17. Transfer income is a part of factor income.
Ans: False: It is not a factor income, It is paid for without receiving any goods and services.

VI. HIGHER ORDER THINKING SKILLS
1. Explain that Domestic territory is bigger than the political frontiers of a country.
Ans: In layman terms, the domestic territory of a nation is understood to be the territory lying within the political frontiers (or boundaries) of a country. But in national income accounting, the term domestic territory is used in a wider sense. Based on ‘freedom’ criterion, the scope of economic territory is defined to cover:

1. Ships and air crafts owned and operated by normal residents between two or more countries. For example, Indian Ships moving between China and India regularly are part of domestic territory of India. Similarly, planes operated by Air India between Russia and Japan are part of the domestic territory of India. Similarly, planes operated by Malaysian Airlines between India and Japan are a part of the domestic territory of Malaysia.
2. Fishing vessels, oil and natural gas rigs and floating platforms operated by the residents of a country in the international waters where they have exclusive rights of operation. For example, Fishing boats operated by Indian fishermen in international waters of Indian Ocean will be considered a part of domestic territory of India.
3. Embassies, consulates and military establishments of a country located abroad. For example, Indian Embassy in Russia is a part of the domestic territory of India.
   ‘Consulate’ is an office or building used by consul (an officer commissioned by the government to reside in a foreign country to promote the interest of the country to which he belongs).

2. “All Producer Goods are not Capital Goods”. Explain.
Ans: Producer goods are all those goods which are used in the process of production i.e., which are used in the production of other goods. Producer goods include two types of goods:

1.  Single-use Producer Goods: Goods used as raw material by the producers. It includes raw material like coal, wood, etc. They are not capital goods as they cannot be repeatedly used in the production process.
2. Capital Goods: Goods which are used as fixed assets by the producers, like plant and machinery, which can be repeatedly used in the production process.
   So, it can be said that all capital goods are producer goods, but all producer goods are not capital goods.

3. “Machine purchased is always a final good.” Do you agree? Give reasons for your answer.
Ans: No, it is not necessary that machine purchased is a final good. It will depend upon its use.

1. If a machine is purchased by a household, then it is a final good. For example, washing machine purchased by a consumer household is a final goods.
2.  If it is purchased by a firm for its own use, then it is also a final good. For example, refrigerator purchased by a firm.
3.  If it is bought by a firm for resale, then it is an intermediate good. For example, machine purchased by a machine dealer.

4. “ Machine purchased is always a capital good.” Do you agree? Give reasons for your answer.
Ans: No, it is not necessary that machine purchased is a capital good. It will depend upon its use.

1.  If a sewing machine is purchased by a tailor, then it is a fixed asset of the tailor and considered to be a capital good. But the same machine purchased by a consumer household is considered to be a durable use consumer goods.
2. If a car purchased by a taxi driver as a taxi or if purchased by a firm for use in its business is a capital good. But the same car purchased by a consumer household is a durable use consumer goods.
   Note: So, finally, the end user of a good determine, whether it is capital good or durable use consumer goods. If an end user of a durable goods is a producer, it is a capital good. If an end user of a durable goods is a consumer household, it is a durable use consumer goods. So, capital goods are only those durable goods which are used as producer goods, not as consumer goods.

VII. VALUE BASED QUESTION
1. Compensation to flood victims is a good social security measure by the government. But why is it not included in the estimation of national income?
Ans: Because this is a transfer payment. Value: Implement of Knowledge
VIII. APPLICATION BASED QUESTIONS
1. The concept of domestic territory helps to estimate ‘Domestic Product’. Defend or refute.
Ans: The concept of domestic territory helps to estimate ‘Domestic Product’. As we know Domestic Product includes goods and services produced by production units located in the domestic territory (irrespective of fact whether carried out by residents or non-residents). The money value of domestic product is termed as Domestic Income.
2. The concept of Normal Resident helps to estimate ‘National Product’. Defend or refute.
Ans: The concept of Normal Resident helps to estimate “National Product’. National Product includes production activities of normal residents irrespective of fact whether performed within the economic territoiy or outside it. The money value of national product is termed as National Income.