12th Economics Textbook - Tamil Nadu

www.tntextbooks.in GOVERNMENT OF TAMIL NADU HIGHER SECONDARY SECOND YEAR ECONOMICS A publication under Free Textbook Prog...

www.tntextbooks.in GOVERNMENT OF TAMIL NADU HIGHER SECONDARY SECOND YEAR ECONOMICS A publication under Free Textbook Programme of Government of Tamil Nadu Department of School Education Untouchability is Inhuman and a Crime 12th_Economics_First 6 pages_Folder.indd 1 23-12-2022 14:49:04  www.tntextbooks.in Government of Tamil Nadu First Edition – 2019 Revised Edition – 2020, 2022, 2023 Reprint – 2021, 2024 (Published under New Syllabus) NOT FOR SALE The wise possess all SCERT 2019 II 12th_Economics_First 6 pages_Folder.indd 2 23/12/2023 16:41:48  www.tntextbooks.in HOW TO USE THE BOOK Chapter content It presents a complete overview of the chapter Introduction Summary of the presentation in every chapter Objectives Goals to transform the class room processes into learner centric with a list of bench marks Think and Amazing facts and rhetorical questions to lead students Do to economic inquiries Boxes Additional inputs to the content is provided Directions are provided to students to conduct Activity activities in order to explore and enrich the concept. To motivate the students to further explore and enrich the concept ICT The use of ICT for improving the teaching – learning skills is given Give the values derived from functions which are graphed Schedules in the diagrams Concept Conceptual diagrams that depict relationships between concepts Diagrams to enable students to learn the content schematically. Figures To illustrate the situations. Glossary Explanation of scientific terms Model Question Papers Evaluation References List of related books for further details of the topic Web links List of digital resources III 12th_Economics_First 6 pages_Folder.indd 3 23-12-2022 14:49:04  CAREER GUIDANCE CAREER PROSPECTS IN ECONOMICS The career prospects for economics graduates are many. Numerous fields are waiting for economic graduates both in public as well as private sectors. In the government 12th_Economics_First 6 pages_Folder.indd 4 sector, one may try for Indian Economic Services, jobs in Reserve Bank of India, PSUs and other public sector banks. All these jobs have wonderful career options. These jobs give social prestige along with financial stability. Private sector also offers jobs for economic graduates in the fields like private banks, MNCs, BPOs, KPOs, Business journals and newspapers. A good opportunity is also waiting for economic students in higher education. One can pursue Ph.D. in economics to enter into the field of teaching in schools, colleges and universities and research in hundreds of Research Institutes and funding agencies – national & international. One makes a successful career as a Corporate Lawyer after BA in economics followed by LLB. BA in economics and MBA placed one at a better position in the private sector. Economic Journalism is another shining area for job perspective. FAMOUS UNIVERSITIES AND COLLEGES OFFERING ECONOMICS There are many institutes, colleges and universities that have economics in its BA, MA and Ph.D. level courses. Here are the lists of institutions offering economics. One can easily see other information related with the respective universities/colleges/institutes with their given website. Delhi School Sri Ram College University of Delhi, University of of Economics of Commerce South Campus Agriculture Science www.econdse.org www.srcc.edu www.south.du.ac.in www.uasbangalore.edu.in IV Jawaharlal Nehru St. Stephen University Ravenshaw University, Delhi College, Delhi of Bombay University, Cuttack www.jnu.ac.in www.ststephens.edu www.mu.ac.in www. ravenshawuniversity.ac.in www.tntextbooks.in Gokhale Institute of Madras School IIT Kanpur BITS –Pilani Economics & Politics, of Economics Pune www.jnu.ac.in www.mse.ac.in www.bits-pilani.ac.in www.gipe.ac.in Indian Statistical Presidency Symbiosis School of IIT Madras Institute, Kolkata College, Kolkata Economics Bangalore https://www.iitm.ac.in www.presiuniv.ac.in www. isical.ac.in www.sse.ac.in Banaras University Centre for IGIDR-Mumbai Hindu University of Hyderabad Development Studies Thiruvananthapuram www.bhu.ac.in www.uohyd.ernet.in www.igidr.ac.in www.cds.edu For world recognised institution in the field of economics, everybody wishes to join London School of Economics 23-12-2022 14:49:05  Jobs in Economics Field An array of employment opportunities is available in economics field. Meritorious candidates can get excellent job opportunities after successfully completing their BA or MA in economics. Government Sectors Economics graduates can get prestigious jobs in the government sectors like 12th_Economics_First 6 pages_Folder.indd 5 Indian Civil Services Indian Economic Services Reserve Bank of India National Sample Survey Ministry of Economic Affairs Planning Board Planning Commission (State & Central) National Council for Applied Economic Research and National Institute of Public Finance and Policy. Other than Government Sectors Job opportunities are also waiting in the private sectors, NGOs and International Aid Agencies. The firms like World Bank, Asian Development Bank, IMF, and other Development Banks, Aid agencies, Financial Consultancy firms are hiring the economic graduates for their various positions. One can assume in these organisations as economist, economic advisor, executive, analyst, consultant, researcher, financial analyst, business analyst, economic research analyst and stock market analyst. As far as salary is concerned, lots of candidates are hired through campus placement. The average salary is Rs. 4 to 8 lakh per annum. But for the deserving candidates, the field opens plethora of options and remuneration is also beyond expectation. The filed like accountancy, actuarial, banking, insurance also open many jobs opportunities. Economics Employment Opportunities The various fields are offering better job opportunity after passing BA or MA in economics. Some of the high demand sectors are given below where job prospects are huge. CAREERS FOR AN ECONOMIST V Government Banking and Finance Education and Communications Business and Public Sector www.tntextbooks.in Commodities Broker Claims Examiner Professor Market Research Analyst Bank Management Trainee Foreign Trade analyst Technical Writer Retail Buyer Financial Analyst Tax Auditor Journalist/Columnist Staff Training and Development Specialist Economic Forecaster Public Administrator Teacher Insurance Underwriting Trainee Investment Banker Legislative Assistant Higher Education, Administration Management Consultant Loan Counsellor Regional/Urban Planner Educational Television Advisor Strategic Planner Securities Analyst Financial Planner Information Analyst Business Administrator 23-12-2022 14:49:05  www.tntextbooks.in Table of Contents ECONOMICS Page Chapters Content Month No Chapter 1 Introduction to Macro Economics 1 June Chapter 2 National Income 19 June Chapter 3 Theories of Employment and Income 37 June Chapter 4 Consumption and Investment Functions 52 July Chapter 5 Monetary Economics 76 July First Mid-Term 1 to 5 Chapters Chapter 6 Banking 95 August Chapter 7 International Economics 125 August Chapter 8 International Economic Organisations 154 September Quarterly 1 to 8 Chapters Chapter 9 Fiscal Economics 176 October Chapter 10 Environmental Economics 212 October Chapter 11 Economics of Development and Planning 237 November Second Mid-Term 9 to 11 Chapters Introduction to Statistical Methods and Chapter 12 257 November Econometrics E - book Assessment VI 12th_Economics_First 6 pages_Folder.indd 6 23-12-2022 14:49:05  www.tntextbooks.in CHAPTER 1 Introduction to Macro Economics “Macro economics is very much about tying together facts and theories”. - Dorn Busch, Fischer and Startz Learning Objectives 1 To enlighten the evolution, importance and basic concepts of macroeconomics, and 2 To understand the functioning of an economy. 1.1 the words ‘micro’ meaning small and Introduction ‘macro’ meaning large in the year 1933. However, macroeconomics in its modern The subject Economics is classified form, began with John Maynard Keynes into two branches, namely, Micro and his book “The General Theory Economics and Macro Economics. of Employment, Interest and Money” Ragnar Frisch, a Norwegian economist published in 1936. Keynes offered an and the co-recipient of the first Nobel explanation for fallout from the Great Prize in Economic Sciences coined Depression, when goods remained unsold and workers unemployed. Hence, Keynes is regarded as the ‘Father of Modern Macro Economics’. 1.2 Meaning of Macro Economics The word ‘Macro’ is derived from J.M.Keynes the Greek word ‘Makros’ meaning ‘large’. Father of Modern Macro Economics Hence, Macro Economics is the study of 1 Introduction to Macro Economics 12-Economics-Chapter_1.indd 1 23-12-2022 14:41:37  www.tntextbooks.in the economy as a whole. In other words, There is a need to understand the macro economics deals with aggregates functioning of the economy at the such as national income, employment, aggregate level to evolve suitable output etc. Macro Economics is also strategies and to solve the basic known as ‘Income Theory’. problems prevailing in an economy. Understanding the future problems,  Study of the Economy needs and challenges of an economy as a Whole as a whole is important to evolve Na ct i g O tion precautionary measures. Pi e B e ut ur pu al Th t Includes National, Macro economics provides ample  Regional & Global opportunities to use scientific MACROECONOMICS Inflation investigation to understand the reality. Economics Study of Macro economics helps to make  economy-wide Un phenomena meaningful comparison and analysis of em economic indicators. pl l oy m i o na en t e Macro economics helps for better t Na com  In prediction about future and to formulate suitable policies to avoid economic Contrasts with Microeconomics crises. 1.4 The subject matters covered in Scope of Macro Economics Macro Economics are the areas such as employment, national income, inflation, The study of macro economics has business cycle, poverty, inequality, wide scope and it covers the major areas disparity, investment and saving, capital as follows formation, infrastructure development, international trade, balance of trade and National Income: Measurement of balance of payments, exchange rate and national income and its composition economic growth. by sectors are the basic aspects of 1.3 macroeconomic analysis. The trends in National Income and its composition Importance of Macro Economics provide a long term understanding of the growth process of an economy. The importance and the need for introducing a macro outlook of an Inflation: Inflation refers to steady economy are given below: increase in general price level. Estimating the general price level Introduction to Macro Economics 2 12-Economics-Chapter_1.indd 2 23-12-2022 14:41:37  www.tntextbooks.in by constructing various price index 1.  There is a danger of excessive numbers such as Wholesale Price generalisation of the economy as a Index, Consumer Price Index, etc, are whole. needed. 2.  It assumes homogeneity among the Business Cycle: Almost all economies individual units. face the problem of business 3. There is a fallacy of composition. What fluctuations and business cycle. The is good for an individual need not be cyclical movements (boom, recession, good for nation and viceversa. And, depression and recovery) in the what is good for a country is not good economy need to be carefully studied for another country and at another based on aggregate economic variables. time. Poverty and Unemployment: The major 4.  Many non - economic factors determine problems of most resource - rich nations economic activities; but they do not are poverty and unemployment. This is find place in the usual macroeconomic one of the economic paradoxes. A clear books. understanding about the magnitude of poverty and unemployment facilitates 1.6 allocation of resources and initiating corrective measures. Economy and its Types E conomic Growth: The growth and The term economy has been defined development of an economy and by A. J. Brown as, “A system by which the factors determining them could people earn their living.” J. R. Hicks be understood only through macro defined it as, “An economy is a cooperation analysis. of producers and workers to make goods and services that satisfy the wants of the E conomic Policies: Macro Economics consumers.” is significant for evolving suitable economic policies. Economic policies In short, an economy is referred are necessary to solve the basic to any system or area where economic problems, to overcome the obstacles activities are carried out. Each economy and to achieve growth. has its own character. Accordingly, the functions or activities also vary. The 1.5 functioning of an economy by its activities Limitations is explained in flow chart 1. Macro economics suffers from certain limitations. They are: 3 Introduction to Macro Economics 12-Economics-Chapter_1.indd 3 23-12-2022 14:41:37  www.tntextbooks.in Flow Chart: 1 Economies can be classified into different Functioning of an Economy Based on types based on the Activities 1.  Status of Development: Developed, Growth underdeveloped, undeveloped and developing economies. Production Activity Consumption Activity 2.  System of Activities: Capitalist, Socialist and Mixed Economies. 3. S cale of Activities: Small and Large Exchange Activity Economies. 4.  Nature of Functioning: Static and Supporting Economic and Non- Dynamic Economies. Economic Activities of an Economy 5. Nature of Operation: Closed and Open Economies. External Activities (Activities of other Economies) 6.  Nature of Advancement: Traditional and Modern Economies. 7. L evel of National Income: Low Income, In an economy, the fundamental Middle Income and High Income economic activities are production and Economies. consumption. These two activities are 1.7 supported by several other activities. Economic Systems The ultimate aim of these activities is to achieve growth. The ‘exchange activity’ supports the production and consumption Economic System refers to the manner activities. These activities are influenced in which individuals and institutions are by several economic and non-economic connected together to carry out economic activities. The major economic activities activities in a particular area. It is the include transportation, banking, methodology of doing economic activities advertising, planning, government policy to meet the needs of the society. There are and others. The major non-economic three major types of economic systems. activities are environment, health, They are: education, entertainment, governance, regulations etc. In addition to these 1. Capitalist Economy (Capitalism), supporting activities, external activities from other economies such as import, 2. Socialist Economy (Socialism)and export, international relations, emigration, 3. Mixed Economy (Mixedism) immigration, foreign investment, foreign exchange earnings, etc. also influence the entire functioning of the economy. Introduction to Macro Economics 4 12-Economics-Chapter_1.indd 4 23-12-2022 14:41:37  www.tntextbooks.in The means Globalism of production The term coined by Manfred D in a Capitalist Steger (2002) to denote the new market economy are ideology of globalisation that connects privately owned. nations together through international Manufacturers Adam Smith trade and aiming at global development. produce goods This ideology is also termed as ‘Extended and services with profit motive. The private Capitalism’. individual has the freedom to undertake any occupation and develop any skill. The USA, West Germany, Australia and Capitalism and socialism are two Japan are the best examples for Capitalist extreme and opposite approaches. In economies. However, they do undertake capitalism, there is total freedom and large social welfare measures to safeguard private ownership of means of production. the downtrodden people from the market In socialism, there is no freedom for forces. private and there is public ownership of means of production. Mixedism denotes Features of Capitalist Economy the Co-existence of capitalism and 1.  Private Ownership of Property and socialism. The features, merits and Law of Inheritance: The basic feature of demerits of various economic systems are capitalism is that all resources namely, discussed below. land, capital, machines, mines etc. are owned by private individuals. The Socialism Capitalism owner has the right to own, keep, sell Mi or use these resources according to his xe dism will. The property can be transferred to heirs after death. 2.  Freedom of Choice and Enterprise: Each individual is free to carry out any occupation or trade at any place and produce any commodity. Similarly, consumers are free to buy any commodity as per their choice. 3. Profit Motive: Profit is the driving 1.7.1 Capitalist Economy (Capitalism) force behind all economic activities in a Adam Smith is the ‘Father of Capitalist economy. Each individual and Capitalism’. Capitalist economy is also organization produce only those goods termed as a free economy (Laissez faire, in which ensure high profit. Advance Latin) or market economy where the role technology, division of labour, and of the government is minimum and market specialisation are followed. The golden determines the economic activities. rule for a producer under capitalism is ‘to maximize profit.’ 5 Introduction to Macro Economics 12-Economics-Chapter_1.indd 5 23-12-2022 14:41:37  www.tntextbooks.in 4. Free Competition: There is free 5. C onsumers Sovereignty: All competition in both product market production activities are aimed at and factor market. The government satisfying the consumers. Consumers’ or any authority cannot prevent firms desire determines what to produce. so from buying or selling in the market. they are like sovereigns. There is competition between buyers 6. Higher Rates of Capital Formation: and sellers. Increase in saving and investment leads 5. Price Mechanism: Price mechanism to higher rates of capital formation. is the heart of any Capitalist economy. 7. Development of New Technology: As All economic activities are regulated profit is aimed at, producers invest on through price mechanism i.e, market new technology and produce quality forces of demand and supply. goods. 6.  Role of Government: As the price Demerits of Capitalism mechanism regulates economic activity, 1. C oncentration of Wealth and Income: the government has a limited role in a Capitalism causes concentration of Capitalist economy. The government wealth and income in a few hands provides basic services such as, defence, and thereby increases inequalities of public health, education, etc. income. 7.  Inequalities of Income: A capitalist 2. Wastage of Resources: Large amount society is divided into two classes of of resources are wasted on competitive people viz ‘haves’ and have - nots are advertising and duplication of products. those who own property and ‘have- 3. C lass Struggle: Capitalism leads to nots’ who do not own property but class struggle as it divides the society work for their living. The outcome of into capitalists and workers. this situation is that the rich become 4. Business Cycle: Free market system richer and poor become poorer. Here, leads to frequent violent economic economic inequality goes on increasing. fluctuations and crises. Merits of Capitalism 5.  Production of non essential goods: 1. Automatic Working: Without any Even the harmful goods are produced if government intervention, the economy there is possibility to make profit from works automatically. them. 2.  Efficient Use of Resources: All 1.7.2 Socialist Economy (Socialism) resources are put into optimum use. The Father of Socialism is Karl 3. Incentives for Hard work: Hard work Marx. Socialism refers to a system of total is encouraged and entrepreneurs get planning, public ownership and state more profit for more efficiency. control on economic activities. Socialism is 4. E conomic Progress: Production and defined as a way of organizing a society productivity levels are very high in in which major industries are owned and Capitalist economies. controlled by the government, A Socialist Introduction to Macro Economics 6 12-Economics-Chapter_1.indd 6 23-12-2022 14:41:37  www.tntextbooks.in economy is also known as ‘Planned 2. C entral Planning: Planning is an Economy’ or ‘Command Economy’. integral part of a Socialist economy. In this system, all decisions are undertaken by the central planning authority. 3.  Maximum Social Benefit: Social welfare is the guiding principle behind all economic activities. Investments are planned in such a way that the benefits are distributed to the society at large. Karl Marx 4.  Non-existence of Competition: - Father of Socialism Under the socialist economic system there is absence of competition in the In a Socialist economy, all the resources market. The state has full control over are owned and operated by the government. production and distribution of goods Public welfare is the main motive behind and services. The consumers will have all economic activities. It aims at equality a limited choice. in the distribution of income and wealth and equal opportunity for all. Russia, 5.  Absence of Price Mechanism: The China, Vietnam, Poland and Cuba are the pricing system works under the control examples of socialist economies. But, now and regulation of the central planning there are no absolutely socialist economies. authority. Command Economy 6. E quality of Income: Another essential feature of socialism is the removal and What to How to For Whom reduction of economic inequalities. Produce Produce to Produce Under socialism private property and the law of inheritance do not exist. 7.  E quality of Opportunity: Socialism provides equal opportunity for all through free health, education and professional training. 8. C lassless Society: Under socialism, there is a classless society and so no Completely determined and controlled by a class conflicts. In a true socialist society, central authority everyone is equal as far as economic Features of Socialism: status is concerned. 1.  Public Ownership of Means of Merits of Socialism Production: All resources are owned by the government. It means that all the 1. Reduction in Inequalities: No one is factors of production are nationalized allowed to own and use private property and managed by the public authority. to exploit others. 7 Introduction to Macro Economics 12-Economics-Chapter_1.indd 7 23-12-2022 14:41:38  www.tntextbooks.in 2.  R ational Allocation of Resources: Demerits of Socialism The central planning authority 1.  Red Tapism and Bureaucracy: As allocates the resources in a planned decisions are taken by government manner. Wastages are minimised and agencies, approval of many officials investments are made in a pre planned and movement of files from one table manner. to the other takes time and leads to red 3.  Absence of Class Conflicts: As tapism. inequalities are minimum, there is no 2.  Absence of Incentive: The major conflict between rich and poor class. limitation of socialism is that this Society functions in a harmonious system does not provide any incentive manner. for efficiency. Therefore, productivity 4.  End of Trade Cycles: Planning also suffers. authority takes control over production 3.  L imited Freedom of Choice: and distribution of goods and services. Consumers do not enjoy freedom of Therefore, economic fluctuations can choice over the consumption of goods be avoided. and services. 5. Promotes Social Welfare: Absence of 4.  C oncentration of Power: The State exploitation, reduction in economic takes all major decisions. The private inequalities, avoidance of trade cycles sector takes no initiative in making and increase in productive efficiency economic decisions. Hence, the State help to promote social welfare. is more powerful and misuse of power can also take place. 1.7.3 Mixed Economy (Mixedism): Pure Planned Pure Free Market Economy Economy Economic Systems Mixed Economies Pure Communism Socialist Capitalist Competition Example North China France United States Countries: Korea Venezuela Sweden Japan In a mixed economy system both private It is a combination of both capitalism and public sectors co-exist and work and socialism. It tends to eliminate the together towards economic development. evils of both capitalism and socialism. Introduction to Macro Economics 8 12-Economics-Chapter_1.indd 8 23-12-2022 14:41:38  www.tntextbooks.in In these economies, resources are owned Merits of Mixed Economy by individuals and the government. 1.  R apid Economic Growth: The best India, England, France and Brazil are the advantage of mixed economy is that examples of mixed economy. it promotes rapid economic growth. Features of Mixed Economy Thus, both public requirements and private needs are taken care of. 1. O wnership of Property and Means of Production: The means of production 2. Balanced Economic Growth: Mixedism and properties are owned by both promotes balanced growth of the private sector and public sector. Public economy. It promotes balanced growth and Private sectors have the right to between agriculture and industry, purchase, use or transfer their resources. consumer goods and capital goods, 2.  C oexistence of Public and Private rural and urban areas etc. Sectors: In mixed economies, both 3. Proper Utilization of Resources: In a private and public sectors coexist. mixed economy, the government can Private industries undertake activities ensure proper utilization of resources. primarily for profit. Public sector firms The government controls most of the are owned by the government with a important activities directly and the view to maximize social welfare. private sector indirectly. 3. E conomic Planning: The central planning authority prepares the 4. Economic Equality: The government economic plans. National plans are uses progressive rates of taxation for drawn up by the Government and levying income tax to bring about both private and public sectors abide. economic equality. In general, all sectors of the economy function according to the objectives, 5.  Special Advantages to the Society: priorities and targets laid down in the The government safeguards the interest plan. of the workers and weaker sections by legislating on minimum wages, 4. S olution to Economic Problems: The and rationing, establishing fair price basic problems of what to produce, how shops and formulating social welfare to produce, for whom to produce and measures. how to distribute are solved through the price mechanism as well as state Demerits of Mixed Economy intervention. 1.  L ack of Coordination: The greatest 5. Freedom and Control: Though private drawback of mixedism is lack of sector has freedom to own resources, coordination between public sector produce goods and services and and private sector. As both work with distribute the same, the overall control divergent motives, it creates many on the economic activities rests with coordination related problems. the government. 9 Introduction to Macro Economics 12-Economics-Chapter_1.indd 9 23-12-2022 14:41:38  www.tntextbooks.in 2. C ompetitive Attitude: It is expected absolute and unbiased. that both government and private 4. Fear of Nationalization: In a mixed should work with a complementary economy, the fear of nationalization spirit towards the welfare of the society, discourages the private entrepreneurs but in reality they are competitive in in their business operations and their activities. innovative initiatives. 3. Inefficiency: Some people criticise that most of the public sector enterprises 5. Widening Inequality: Ownership remain inefficient due to lethargic of resources, laws of inheritance and bureaucracy, red tapism and lack of profit motive of people widens the gap motivation. But this observation is not between the rich and the poor. Comparison of Different Economic Systems S.No. Features Capitalism Socialism Mixedism Ownership of Means Private Public Private Ownership 1 of Production Ownership Ownership and Public Ownership Social Welfare and 2 Economic Motive Profit Social Welfare Profit Motive Central Central Planning Solution of Central Free Market 3 Planning System and Free Problems System System Market System Interanal Complete 4 Government Role Limited Role Regulation only Involvement 5 Income Distribution Unequal Equal Less unequal Private Government Both Private and State 6 Nature of Enterprise Enterprise Enterprise Enterprises Complete Lack of 7 Economic Freedom Limited Freedom Freedom Freedom Inequality and 8 Major Problem Inequality Inefficiency Ineffiency 1.8 1.8.1. Stock and Flow Variables Concepts of Macro Economics Variables used in economic analysis are classified as stock and flow. Both The important concepts used in macro stock and flow variables may increase or economics are presented below: decrease with time. Introduction to Macro Economics 10 12-Economics-Chapter_1.indd 10 23-12-2022 14:41:38  www.tntextbooks.in Stock refers to a quantity of a There are three models of circular commodity measured at a point of time. flow of income, representing the major In macro economics, money supply, economic systems. unemployment level, foreign exchange 1. Two Sector Model: It is for a simple reserves, capital etc are examples of economy with households and firms. stock variables. 2. Three Sector Model: It is for a mixed Flow variables are measured over and closed economy with households, a period of time. National Income, firms and government. imports, exports, consumption, production, investment etc are examples 3. Four Sector Model: It is for an open of flow variables. economy with households, firms, government and rest of the world E conomic Models A model is a (External sector). simplified representation of real situation. Economists use models to describe economic activities, their 1.9.1  C  ircular Flow of Income in a relationships and their behaviour. A Two-Sector Economy: model is an explanation of how the economy, or part of the economy, works. There are only two sectors namely, Most economic models are built with household sector and firm sector. mathematics, graphs and equations, (i) Household Sector: The household and attempt to explain relationships sector is the sole buyer of goods and between economic variables. The services, and the sole supplier of commonly used economic models are factors of production, i.e., land, labour, the supply-demand models and circular capital and organisation. It spends its flow models and Smith models. entire income on the purchase of goods 1.9 and services produced by the business Circular Flow sector. The household sector receives of Income income from firm sector by providing the factors of production owned by it. The circular flow of income is a (ii) Firms: The firm sector generates its model of an economy showing connections revenue by selling goods and services between different sectors of an economy. to the household sector. It hires the It shows flows of income, goods and factors of production, i.e., land, labour, services and factors of production capital and organisation, owned by the between economic agents such as firms, household sector. The firm sector sells households, government and nations. the entire output to households. The circular flow analysis is the basis of national accounts and macroeconomics. 11 Introduction to Macro Economics 12-Economics-Chapter_1.indd 11 23-12-2022 14:41:38  www.tntextbooks.in In a two-sector economy, production and sales are equal and there will be a circular flow of income and goods. The Goods and services outer circle represents real flow (factors and goods) and the inner circle represents Consumer expenditure the monetary flow (factor prices and commodity prices). Real flow indicates the factor services flow from household sector to the business sector, and in turn goods and services flow from business sector to the household. The basic identities of the Households Firms two-sector economy are as under: Wages, rent, dividends Y=C+I Factors for production Where Y is Income; C is Consumption; I is investment 1.9.2. Circular Flow of Income in a Three-Sector Economy: The Domestic Circular flow of Income & Spending Purchases of goods and Service Govt Taxes Purchases ₹ Demand Households Government Firms Social Incomes Transfers Taxes ₹ Wages, dividends, interest, profits and rent In addition to household and firms, inclusion of the government sector makes this model a three-sector model. The government levies taxes on households and firms, Introduction to Macro Economics 12 12-Economics-Chapter_1.indd 12 23-12-2022 14:41:38  www.tntextbooks.in purchases goods and services from firms, Under three sector model, national and firms receive factors of production income (Y) is obtained by adding from household sector. On the other Consumption expenditure (C), Investment hand, the government also makes social expenditure (I) and Government transfers such as pension, relief, subsidies expenditure (G). to the households. Similarly, Government pays the firms for the purchases of goods Therefore: and services. The Flow Chart illustrates Y=C+I+G three-sector economy model: 1.9.3 Circular Flow of Income in a Four-Sector Economy: Trade Sector of the Imports Export The External Rest of the Economy World Purchases of goods and Service Income Made up of Households, The Domestic Circular Flow of ₹ Demand Government, Firms Taxes Govt Purchases Households Government Firms Social Taxes Transfers Incomes ₹ Wages, dividends, interest, profits and rent In a Four-sector economy, in addition The external sector comprises to household, firms and government, a exports and imports. It is illustrated in the fourth sector namely, external sector is Flow Chart. included. In real life, only four-sector economy exists. This model is composed In four-sector economy, expenditure for of four sectors namely, the entire economy include domestic expenditure (C+I+G) and net exports (i) Households, (ii) Firms, (X– M). Therefore, (iii) Government, (iv) External sector Y = C + I + G + (X – M) 13 Introduction to Macro Economics 12-Economics-Chapter_1.indd 13 23-12-2022 14:41:38  www.tntextbooks.in Summary S  ocialism : A way of organizing a Macroeconomics studies the society in which major economic behavior and performance of an economy activities are owned and controlled as a whole. It covers the functioning, by the government rather than by performance and growth of an economy. individual people and companies It examines the macro aspects such as M  ixedism : An ideology that mixes or employment, national income, inflation, combines the principles of Capitalism business cycle, poverty, inequality, (Private Role) and Socialism disparity, investment and saving, capital (Government Role) in an economy. formation, infrastructure development, G  lobalism : An economic system banking, public finance, international where the economic activities of a trade, balance of trade and balance of nation are inter connected and inter payments, exchange rate and economic dependent on each other nation. growth. Economic models based on economic variables are useful in S  tock : A quantity of a commodity that understanding an economy. Circular is constant at a point of time (Static) Flow Models provide a base to understand F  low : Variables measured over a the functioning of a macro economy. period of time. (Dynamic) E  conomic Model : It is an explanation An economy could be classified on of how the economy, or part of the the basis of economic systems such as economy, works. Capitalist economy, Socialist economy and mixed economy. However, nowadays C  ircular Flow : It shows flows of it is difficult to find 100 percent capitalist income, goods and services and factors system, Socialist system or perfectly of production between economic mixed economy. agents such as firms, households, government and nations. Glossary M  acroeconomics : The branch of economics that studies the behaviour and performance of an economy as a whole E  conomic System : The manner in which individuals and institutions are connected together to carry out economic activities in a particular area C  apitalism : The system where the means of production are privately owned and market determines the economic activities. Introduction to Macro Economics 14 12-Economics-Chapter_1.indd 14 23-12-2022 14:41:38  www.tntextbooks.in MODEL QUESTIONS Part-A Multiple Choice Questions 1. The branches of the subject Economics 6. Indicate the contribution of are _____________. J M Keynes to economics. a) Wealth and welfare a) Wealth of Nations b) production and consumption b) General Theory c) Demand and supply d) micro and macro c) Capital d) Public Finance 2. Who coined the word ‘Macro’? 7. A steady increase in general price level a) Adam Smith is termed as_____________. b) J M Keynes c) Ragnar Frisch a) wholesale price index d) Karl Marx b) Business Cycle c) Inflation 3.  Who is regarded as the Father of d) National Income Modern Macro Economics? a) Adam Smith Identify the necessity of Economic 8.  policies. b) J M Keynes c) Ragnar Frisch a) to solve the basic problems d) Karl Marx b) to overcome the obstacles c) to achieve growth Identify the other name for Macro 4.  d) all the above Economics. 9.  Indicate the fundamental economic a) Price Theory activities of an economy. b) Income Theory c) Market Theory a) Production and Distribution b) Production and Exchange d) Micro Theory c) Production and Consumption 5. Macro economics is a study of d) Production and Marketing ___________________. 10. An economy consists of ___________. a) individuals a) consumption sector b) firms b) Production sector c) a nation c) Government sector d) aggregates d) All the above 15 Introduction to Macro Economics 12-Economics-Chapter_1.indd 15 23-12-2022 14:41:38  www.tntextbooks.in 11. Identify the economic system where 16.  An economic system where the only private ownership of production economic activities of a nation are exists. done both by the private and the a) Capitalist Economy public sectors together is termed b) Socialist Economy as_____________. c) Globalist Economy a) Capitalist Economy d) Mixed Economy b) Socialist Economy c) Globalist Economy 12. Economic system representing equality d) Mixed Economy in distribution is _________. 17.  Quantity of a commodity measured a) Capitalism at a point of time is termed as b) Globalism ____________. c) Mixedism a)production d) Socialism b) stock c) variable 13.  Who is referred as ‘Father of d) flow Capitalism’? 18. Identify the flow variable. a) Adam Smith a) money supply b) Karl Marx b) assets c) Thackeray c) income d) J M Keynes d) foreign exchange reserves 14. The country following Capitalism is 19. Identify the sectors of a Two Sector ________________. Model. a) Russia a) Households and Firms b) America b) Private and Public c) India c) Internal and External d) China d) Firms and Government 20.  The Circular Flow Model that 15. Identify The Father of Socialism. represents an open Economy. a) J M Keynes a) Two Sector Model b) Karl Marx b) Three Sector Model c) Adam Smith c) Four Sector Model d) Samuelson d) All the above Answers 1 2 3 4 5 6 7 8 9 10 d c b b d b c d c d 11 12 13 14 15 16 17 18 19 20 a d a b b d b c a c Introduction to Macro Economics 16 12-Economics-Chapter_1.indd 16 23-12-2022 14:41:38  www.tntextbooks.in Part - B Answer the following questions in one or two sentences 21. Define Macro Economics. 22. Define the term ‘Inflation’. 23. What is meant by an ‘Economy’? 24. Classify the economies based on the status of development. 25. What do you mean by Capitalism? 26. Define ‘Economic Model’. 27. ‘Circular Flow of Income’ - Define. Part - C Answer the following questions in about a paragraph 28. State the importance of Macro Economics. 29. Describe the different types of economic systems. 30. Outline the major merits of capitalism. 31. Indicate the demerits of socialism. 32. Enumerate the features of mixed economy. 33. Distinguish between Capitalism and Globalism. 34. Briefly explain the two sector circular flow model. Part - D Answer the following questions in one page 35. Discuss the scope of Macro Economics. 36. Illustrate the functioning of an economy based on its activities. 37. Compare the features of Capitalism, Secularism and Mixedism. 17 Introduction to Macro Economics 12-Economics-Chapter_1.indd 17 23-12-2022 14:41:38  www.tntextbooks.in ACTIVITY 1. Internet Based Activity: Each student may be asked allotted FOUR countries. The students may be given the responsibility of collecting basic information about each country and present them in chart papers. The list of geo, politic, socio-economic and other information to be compiled may be listed by the course teacher. Students may be asked to point out the economic system adopted in those countries. Internet sources may be used for doing this activity. 2. Role Play Activity: Students may be grouped in to Four groups, each one representing a sector of the FOUR Sector Model. In specific, Household sector, Business Sector, Government Sector and External sector. Each sector may decide on their activities and understand how the flow of income and goods and services takes place between sectors. The class teacher may initiate the activities and do the moderator role. References Dhas A.C (2016): Economics, an Economy, and the Role of Information in Economic Decisions, International Journal of Exclusive Global Research, Vol. 1, Issue 9 September. Dornbusch, Fischer and Startz (2004): Macro Economics, Tata Mc Graw Hill Education Private Limited, New Delhi. Edward Shapiro (1998): Macro Economic Analysis, Galgotia Publications (P) Ltd. New Delhi. Gupta G.S. (2016): Macro Economics: Theory and Applications, Tata McGraw-Hill Publishing Company, New Delhi. Karl Marx (1920): Capital: A Critical Analysis of Capitalist Production, William Glaisher Limited, London. Lord Rollof Ipsden(1982): The Mixed Economy, Macmillan Press, London. Manfred B.Steger (2002) : Globalism: The New Market Ideology, Rowan and Littlefield Publishers, USA. Maria John Kennedy M(2013): Macro Economic Theory, PHI Learning Private Ltd, New Delhi. Paul A Samuelson and William D.Nordhuaus (2012): Macro Economics, Tata Mc Graw Hill Education Private Limited, New Delhi. Introduction to Macro Economics 18 12-Economics-Chapter_1.indd 18 23-12-2022 14:41:38  www.tntextbooks.in CHAPTER 2 National Income “The concept of national income is an indispensable preparation for tackling the great issues of unemployment, inflation and growth”.