CBSE Term II

2022
Economics
Class XII
Complete Theory Covering NCERT

Case Based Questions

Short/Long Answer Type Questions

3 Practice Papers with Explanations

Author
Shubham Anand

ARIHANT PRAKASHAN (School Division Series)

ARIHANT PRAKASHAN (School Division Series)

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CBSE Term II
2022
Contents
PART A
CHAPTER
Macroeconomics and Circular Flow of Income -

CHAPTER
National Income and Its Measurement -

CHAPTER
Aggregate Demand, Aggregate Supply and Related Concepts -
CHAPTER
Equilibrium and Disequilibrium in the Economy -

PART B
CHAPTER
Employment and Unemployment in India -

CHAPTER
Infrastructure in India -

CHAPTER
Environment and Sustainable Development -
CHAPTER
Comparative Development Experience of India and Its Neighbours -

Practice Papers - -

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Syllabus
CBSE Term II Class XII

Theory - Marks Duration - hrs

PART A : INTRODUCTORY MACROECONOMICS Marks Periods

National Income and Related Aggregates
Determination of Income and Employment

Sub Total

PART B : INDIAN ECONOMIC DEVELOPMENT

Current challenges facing Indian Economy
Ÿ Employment
Ÿ Infrastructure
Ÿ Sustainable Economic Development

Development Experience of India A Comparison with Neighbours

Ÿ Comparative Development Experience of India and
its Neighbours

Sub Total

Total
Project Work

PART A Introductory Macroeconomics

Unit- National Income and Related Aggregates Periods
Ÿ What is Macroeconomics
Ÿ Basic concepts in macroeconomics: consumption goods, capital goods, final goods,
intermediate goods; stocks and flows; gross investment and depreciation.
Ÿ Circular flow of income two sector model ; Methods of calculating National
Income - Value Added or Product method, Expenditure method, Income method.
Ÿ Aggregates related to National Income:
Ÿ Gross National Product GNP , Net National Product NNP , Gross Domestic Product
GDP and Net Domestic Product NDP - at market price, at factor cost; Real and
Nominal GDP. GDP and Welfare

CBSE Term II
2022
Unit- Determination of Income and Employment Periods
Ÿ Aggregate demand and its components.
Ÿ Propensity to consume and propensity to save average and marginal .
Ÿ Short-run equilibrium output; investment multiplier and its mechanism.
Ÿ Meaning of full employment and involuntary unemployment.
Ÿ Problems of excess demand and deficient demand; measures to correct them -
changes in government spending, taxes and money supply through Bank Rate,
CRR, SLR, Repo Rate and Reverse Repo Rate, Open Market Operations, Margin
requirement.

PART B Indian Economic Development

Unit- Current challenges facing Indian Economy Periods
Ÿ Employment : Growth and changes in work force participation rate in formal and
informal sectors; problems and policies
Ÿ Infrastructure : Meaning and Types: Case Studies: Health: Problems and Policies-
A critical assessment;
Ÿ Sustainable Economic Development : Meaning, Effects of Economic Development
on Resources and Environment, including global warming

Unit- Development Experience of India Periods

Ÿ A comparison with neighbours
Ÿ India and Pakistan
Ÿ India and China
Ÿ Issues: economic growth, population, sectoral development and other Human
Development Indicators

CBSE Term II
2022
 CBSE Circular
Acad - 51/2021, 05 July 2021

Exam Scheme Term I & II

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Hkkjr CENTRAL BOARD OF SECONDARY EDUCATION

(An Autonomous Organisation under the Ministryof Education, Govt. of India)
 dsUnh;
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Hkkjr
CENTRAL BOARD OF SECONDARY EDUCATION
(An Autonomous Organisation under the Ministryof Education, Govt. of India)
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Hkkjr CENTRAL BOARD OF SECONDARY EDUCATION

(An Autonomous Organisation under the Ministryof Education, Govt. of India)

To cover this
situation, we
have given
both MCQs and
Subjective
Questions in
each Chapter.
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(An Autonomous Organisation under the Ministryof Education, Govt. of India)
CBSE Term-II Economics XII 3

CHAPTER 01

Macroeconomics
and Circular Flow
of Income
In this Chapter...
Macroeconomics
Basic Concepts of Macroeconomics
Intersectoral Flows
Circular Flow of Income

Macroeconomics
Macroeconomics is that branch of economics which deals 2. Intermediate Goods Those goods which will be used
with aggregates or issues related to the economy as a whole. for the production of other goods or which will be
resold are known as intermediate goods.
Scope of Macroeconomics e.g. cloth, electronic parts, etc.
l
It helps in policy formulation of government. 3. Consumer/Consumption Goods These are the goods
l
It provides basis for microeconomic study. which are used by end-users to satisfy their needs and
l
It helps to understand the distribution of income among desires. Such goods are not used in the production of
different groups of people. other goods.
l
It facilitates international comparison. e.g., ice-cream and milk used by the households. These
goods can be classified as durable goods, semi-durable
Basic Concepts of goods, non-durable goods and services.
Macroeconomics 4. Capital Goods These are the goods which are used to
produce other goods and services for a number of years.
Some of the basic concepts of macroeconomics such as goods
produced in the economy, investment, depreciation, etc. are These goods are fixed assets of the producers.
as follows e.g., building, plant and machinery, etc.

Classification of Goods Investment

1. Final Goods Those goods, which have crossed the It is the process of capital formation for a firm or increase in
boundary line of production and are ready for use by the stock of capital.
their final users are known as final goods. e.g. shirt, pen, I = ∆K
TV, washing machine, etc. These goods can be further Here, I = Investment,
classified as final consumer goods and final producer
goods. ∆K = Change in capital stock during the year
 4 CBSE Term-II Economics XII

Components of Investment Intersectoral Flows

There are mainly two components of investment Intersectional flows refer to the flow of goods and services as
1. Fixed Investment It refers to increase or addition in well as the flow of money among different sectors of the
the stock of fixed assets of the producers during a economy. The flow of goods and services are called ‘real flows’
financial year. while the flow of money is called ‘money flows’ across different
2. Inventory Investment It refers to the stock of finished sectors.
goods, semi-finished goods and raw material. This These flows (both real as well as money flows) point to
stock keeps varying overtime. intersectoral interdependence or the dependence of one
sector on the other. These intersectional interdependences
Types of Investment are satisfied through a system of mutual exchanges, and
mutual exchanges lead to intersectoral flows of money as well
There are mainly two types of investment
as of goods and services.
1. Gross Investment Increase in value of capital stock
These flows are the essence of modern economic activity as
during a specific period is called gross investment, i.e., the entire economic activity revolves around these
expenditure on fixed assets or on inventory stock. intersectoral flows.
It has two components, To illustrate, factor services flow from households to the
(i) Gross fixed investment producers without which production activity is not possible.
(ii) Inventory investment Likewise, factor incomes flow from producers to the
Gross Investment = Expenditure on the Purchase of households without which consumption activity is not
Fixed Assets in an Accounting Year possible.
+ Expenditure on the Inventory
Stock in an Year Circular Flow of Income
2. Net Investment It is the actual increase in stock of The circular flow means the unending flows of production of
capital during an accounting year. It is also termed as goods & services and income & expenditure in an economy
net capital formation. from one sector of an economy to another. It shows the
Net Investment = Gross Investment − Depreciation redistribution of income in a circular manner between
production units and households.
Depreciation There are three phases in any circular flow of income, which
includes
It refers to loss in the value of fixed assets in use on account of
1. Production Phase In this phase, firms produce goods
l
Normal wear and tear
and services with the help of factor services.
l
Normal rate of accidental changes
2. Income Phase This phase involves the flow of factor
l
Expected or foreseen obsolescence
income (rent, wages, interest and profits) from firms to
Depreciation Reserve Fund the households.
It is a fund created by the producers to meet the upcoming 3. Expenditure Phase In this phase, the income received
depreciation losses in the process of production. Due to by factors of production, is spent on the goods and
depreciation, fixed assets need to be replaced from time to services produced by firms.
time which requires funds. So, every year, an amount from
Production phase
the profit is appropriated to depreciation reserve fund. (Generation of income)
Income phase
Stock (Distribution of income)
A stock is a quantity of any economic variable which is
Expenditure phase
measured at a particular point of time. e.g. amount in the (Disposition of income)
bank account at a specific date.

Flow In this way, income is first generated in production units,

Flow variables are defined as any quantity which is then distributed to households and finally spent on goods and
measured over a period of time. e.g. income or expenditure services produced by these units to make the circular flow
over a time period of one month or one year. complete its course.
CBSE Term-II Economics XII 5

Sectors Involved in Circular Flow

Different sectors, which are involved in circular flow within an economy are
1. Household Sector It is engaged in the consumption of goods and services and is also the provider of factor services.
2. Producing Sector It is engaged in the production of goods and services. It is also referred to as ‘firms’.
3. Government Sector It is engaged in such activities which are related to taxation and subsidies as well as consumption
and production.
4. Rest of the World It is engaged in exports and imports.

Circular Flow in Two-sector Economy

In a two-sector economy, there are only two sectors of economic activity, namely households and firms. Households supply
factor services to firms and firms hire factor services from households. Households spend their entire income on consumption
of goods and services. Firms sell what is produced by the households. This leads to intersectoral flow.
In this type of economy, circular flow can be explained with the help of the following diagram

Leakages
These refer to the withdrawal from the circular flow. Leakages cause contraction in the circular flow. e.g. savings, import, taxes
by the government, etc.
Injections
These refer to the addition to the circular flow. Injections cause expansion in the circular flow, e.g. investment, exports,
government spending, etc.
 6 CBSE Term-II Economics XII

Chapter
Practice
PART 1
4. Which of the given pair is incorrectly matched?
Objective Questions Column I Column II
A. Non-durable (i) Goods that are used-up in a single
l
Multiple Choice Questions consumer goods act of consumption
B. Capital goods (ii) Goods used as fixed assets by the
1. Which of the following is the main problem producers in the production of
addressed in macroeconomics? other goods and services
(a) Determination of output of a firm C. Consumption (iii) Goods which are not used in the
(b) Determination of price of a product goods production of other goods
(c) Determination of income and employment level in an D. Final goods (iv) Goods which have not yet crossed
economy the boundary line of production
(d) All of the above
Ans. (c) Determination of income and employment level Codes
in an economy (a) A-(i) (b) B-(ii) (c) C-(iii) (d) D-(iv)
Ans. (d) Final goods are those which have crossed the
2. The study of macroeconomics deals with which of boundary line of production and are ready for use by
the following questions of an economy? their final users. e.g., car used by the households,
(i) Will prices as a whole rise or come down? machine used by the producer, etc.
(ii) Is the employment condition of the country getting 5. Which of the following is the cause of unexpected
better or is it worsening? obsolescence?
(iii) What all factors act as a stimulant towards achieving (a) Natural calamities
higher growth rate?
(b) Change in demand
Alternatives (c) Change in technology
(a) (i) and (ii)
(d) Both (a) and (c)
(b) (ii) and (iii)
Ans. (a) Natural calamities
(c) (i) and (iii)
(d) (i), (ii) and (iii) 6. Money flow refers to the
(a) flow of goods across different sectors of the economy
Ans. (d) Study of economic problems at the level of country as
a whole is called macroeconomics. Understanding (b) flow of services across different sectors of the economy
macroeconomic indicators such as inflation, (c) flow of money across different sectors of the economy
unemployment, GDP, trade flows etc. comes under the (d) flow of income across different sectors of the economy
purview of macroeconomics. Ans. (c) flow of money across different sectors of the economy
3. Intermediate goods are those goods 7. Depreciation is the
(a) which have not yet crossed the boundary line of (a) loss in the value of fixed assets in use due to normal
production wear and tear
(b) which are purchased by one firm from the other firm (b) loss of value of fixed assets in use due to normal rate of
for resale accidental damages
(c) which are not included in the estimation of (c) loss of value of fixed assets in use due to foreseen
national product obsolescence
(d) All of the above
(d) All of the above
Ans. (d) All of the above
Ans. (d) All of the above
CBSE Term-II Economics XII 7

8. Which of the following is not an example of Ans. (d) Capital output ratio establishes a relationship between
depreciation? capital employed and units produced. It is a flow variable
as it relates to a period of time and it is a unit free
(a) A plant producing rubber shoes becomes obsolete
measure, therefore it is represented as a pure number. It
when demand shift from rubber shoes to leather shoes Capital Stock
(b) A plant producing black and white televisions is calculated as .
GDP
becomes obsolete when technology is discovered to
produce coloured televisions 14. Which of the following is not a leak from the
(c) Fall in the market value of assets during the period of circular flow of income/expenditure?
economic downturn (a) Taxes (b) Transfers
(d) Fall in the value of your residential apartment (c) Net imports (d) Savings
Ans. (c) Fall in the market value of assets during the period of Ans. (b) Transfers are not a leak from the circular flow of
economic downturn income/ expenditure, as they merely represent movement
9. “Expected obsolescence is included in from one head to another.
depreciation”. The given statement is (CBSE 2020) 15. The fiscal deficit is a
(a) True (b) False (a) flow variable
(c) Partially true (d) Partially false (b) stock variable
Ans. (a) Expected obsolescence is the normal wear and tear in (c) the ratio of a flow variable to a stock variable.
fixed assets. (d) the ratio of a stock variable to a flow variable.
10. ` 200 note lying in the pocket of Rohini, a student, Ans. (a) Fiscal deficit is a flow variable as it is defined with
is an example of ……… . reference to a period of time.
(a) stock variable 16. The phases of circular flow of income includes
(b) flow variable (i) phase of production
(c) Both stock and flow (ii) phase of income generation
(d) None of the above (iii) phase of disposal
Ans. (a) stock variable Alternatives
11. The rate of interest is (a) (i) and (ii) (b) (ii) and (iii)
(a) a flow variable (c) (i) and (iii) (d) (i), (ii) and (iii)
(b) a stock variable Ans. (d) Every type of circular flow of income has three phases
(c) the ratio of a flow variable to a stock variable which are connected in a circular form. The process
(d) the ratio of a stock variable to a flow variable starts with production, which generates income and
distribution of income leads to expenditure. Expenditure
Ans. (a) Rate of interest is a flow variable as it relates to a
further generates demand for production.
period of time, e.g. 6% per annum or 2% per month.
12. Economic activities cover 17. A car purchased by a household is a ……… .
(CBSE 2020)
(a) only activities that result in products that are
(a) single use capital good (b) single use consumer good
exchanged in markets
(c) durable consumer good (d) semi-durable consumer good
(b) only activities that people engage in for profit
Ans. (c) A car purchased by a household is a final good and a
(c) only activities that are or can potentially be delegated
durable consumer good because the household is the
to someone else
final user of the car and no value is to be added to the car.
(d) only activities that are entered into the national
accounts 18. Which of the following is a stock variable?
Ans. (a) An activity which is related to the use of scarce (a) Interest on capital
resources is called an economic activity. These activities (b) Distance between Delhi and Goa
are classified as production, consumption, investment, (c) Expenditure on money
exchange and distribution. (d) All of the above
13. If an economy produces GDP of ` 30 billion per Ans. (b) Distance between Delhi and Goa
year with a capital stock of ` 135 billion, then
19. Which of the following statements is/are correct?
capital output ratio is a
(i) Flow of factor services rendered by the households
(a) stock variable with a value of ` 4.5 billion.
to the producers is real flow.
(b) stock variable with a value of 4.5 years.
(ii) Depreciation reserve fund refers to the fund which
(c) flow variable with a value of ` 4.5 billion. the producers keep to cope with depreciation losses
(d) flow variable with a value of 4.5 as pure number. in the process of production.
 8 CBSE Term-II Economics XII

Alternatives 3. Assertion (A) All producer goods are capital goods.

(a) Both are true (b) Both are false Reason (R) Producer goods are those which are
(c) (i) is true, but (ii) is false (d) (i) is false, but (ii) is true used in the production of other goods whereas
Ans. (a) Flow of factor services rendered by the households to capital goods are the fixed assets of the producers.
the producers are real flows because these flow involve the Ans. (c) Producer goods are those which are used for further
movement of goods and services from one sector to the production. These may be used either as raw material or
other. as fixed assets. Capital goods are fixed assets of the
20. Match the correct combination between the producers which are repeatedly used in the production of
following columns. other goods and services and are of high value.
Therefore, all producer goods are not capital goods.
Column I Column II 4. Assertion (A) High fixed investment is a sign of
A. Electric goods like (i) Capital goods growth and development.
tubelights and bulbs
Reason (R) Fixed investment indicates production
B. Milk and ice-cream used (ii) Semi-durable capacity of a nation. Greater the addition to
by households consumer goods
production capacity (fixed investment), higher the
C. Tractors used by the (iii) Intermediate goods growth and development.
farmers Ans. (a) Both Assertion (A) and Reason (R) are true and Reason
D. Wood purchased by a (iv) Consumption goods (R) is the correct explanation of Assertion (A)
timber merchant for resale
5. Assertion (A) Expenditure on maintenance of
Codes machinery is an intermediate expenditure.
A B C D A B C D
(a) (ii) (iv) (i) (iii) (b) (iv) (ii) (iii) (i)
Reason (R) All expenditures on repair and
(c) (ii) (i) (iv) (iii) (d) (i) (iii) (ii) (i) maintenance incurred by the firm are treated as
Ans.(a) (ii) (iv) (i) (iii)
part of intermediate consumption.
Ans. (a) Both Assertion (A) and Reason (R) are true and Reason
l
Assertion–Reasoning MCQs (R) is the correct explanation of Assertion (A)

Directions (Q. Nos. 1 to 7) There are two statements 6. Assertion (A) Unexpected obsolescence is an
marked as Assertion (A) and Reason (R). Read the element of depreciation.
statements and choose the appropriate option from the Reason (R) Loss of value of fixed assets owing to
options given below. un expected obsolescence is called capital loss.
Ans. (c) Only expected obsolescence is considered as an element
(a) Both Assertion (A) and Reason (R) are true and Reason of depreciation, not the unexpected obsolescence.
(R) is the correct explanation of Assertion (A)
(b) Both Assertion (A) and Reason (R) are true, but 7. Assertion (A) Real flow and money flow are one or
Reason (R) is not the correct explanation of Assertion the same thing, presented in a different form.
(A) Reason (R) In money flow, there is no involvement
(c) Assertion (A) is false, but Reason (R) is true of goods in its physical form.
(d) Both of the statements are false Ans. (d) Real flow and money flow are different in the way that
the formal is based upon the use of goods in the system
1. Assertion (A) Microeconomics and while the later uses money. Money flow also involves
Macroeconomics are interdependent upon each goods but in exchange of money only.
other. One cannot study the two in isolation.
Reason (R) Microeconomics has a smaller degree of
l
Case Based MCQs
aggregation while Macroeconomics has greater 1. Direction Observe the following picture and
degree of aggregation. answer question no. (i) to (vi) given below.
Ans. (a) Both Assertion (A) and Reason (R) are true and Reason Imports Savings
(R) is the correct explanation of Assertion (A) Taxes
Households
2. Assertion (A) LED TV is an example of durable
consumer goods. Income
Consumer
expenditure
Reason (R) LED TV can be repeatedly used for
several years and is of relatively high value.
Ans. (a) Both Assertion (A) and Reason (R) are true and Reason Exports Firms Investment
(R) is the correct explanation of Assertion (A) Government
expenditure
CBSE Term-II Economics XII 9

(i) The above diagram shows which type of circular Reason (R) Intersectoral interdependences are
flow of income? satisfied through a system of mutual exchanges, and
(a) Real flow (b) Physical flow mutual exchanges lead to intersectoral flows of
(c) Money flow (d) None of these money as well as goods and services.
Ans. (c) The above is a case of money flow, as there is payment Alternatives
of money involved in this case. (a) Both Assertion (A) and Reason (R) are true and Reason
(ii) Which of the following case is true as per the figure (R) is the correct explanation of Assertion (A).
given above? (b) Both Assertion (A) and Reason (R) are true, but Reason
(a) The above model is an example of two-sector open (R) is not the correct explanation of Assertion (A).
economic model (c) Assertion (A) is false, but Reason (R) is true
(b) The above model is an example of two-sector closed (d) Both the statements are false
economic model Ans. (a) Both Assertion (A) and Reason (R) are true and Reason
(c) The above model is an example of three-sector open (R) is the correct explanation of Assertion (A).
economic model 2. Direction Analyse the following circular flow chart
(d) The above model is an example of three-sector closed carefully and answer the question no. (i) to (vi) on
economic model the basis of the same.
Ans. (b) The above model is an example of two-sector closed
economic model as it only involves household and firms. Goods and Services
Exclusion of tertiary sector makes it a closed economic
model.
(iii) Government expenditure in the above case is an Consumer Expenditure
example of ………… . Wages, Rent, Dividends
(a) injections
(b) leakages Households Firms

(c) withdrawals Factors for Production

(d) Both (b) and (c)
Ans. (a) Government expenditure leads to increase in the (i) The figure shows ……… flow.
flow of income into the economy, thus it is considered as
(a) real (b) money
an injection.
(c) Both (a) and (b) (d) None of these
(iv) Imports in the above model is an example of
Ans. (b) money
(a) injections (b) leakages
(c) withdrawals (d) Both (b) and (c) (ii) When money moves out of circular flow of income,
it is known as ……… .
Ans. (d) Imports leads to the outflow of income as we have to
pay to the outsiders to buy their goods. It is thus, (a) Leakages (b) Injections
considered as a leakage. (c) Both (a) and (b) (d) None of these
(v) Which of the following is a leakage from the Ans. (a) Leakages
circular flow of income as per the above diagram? (iii) In an two economic model described above, how
(i) Taxes (ii) Savings many sectors are there?
(iii) Imports (iv) Exports (a) Three (b) Two
(v) Government expenditure (vi) Investment (c) Five (d) None of these
Alternatives Ans. (b) Two
(a) (i), (iii) and (iv) (iv) Who are considered as the owner of factors of
(b) (i), (ii) and (iii) production in the circular flow of income?
(c) (iii), (v) and (vi) (a) Firms (b) Household
(d) (iv), (v) and (vi) (c) Government (d) Rest of the world
Ans. (b) Taxes, savings and imports are the leakages from the Ans. (b) Household
circular flow of income as they lead to decrease in (v) The value of Marginal Propensity to Save (MPS)
income and slower down the process of growth. is zero. In this case, the value of Marginal
(vi) Assertion (A) Intersectoral flows refer to the flow of Propensity to Consume (MPC) will be ……… .
goods and services as well as flow of money among (a) 1 (b) 0 (c) − 1 (d) None of these
different sectors of the economy. Ans. (a) 1
10 CBSE Term-II Economics XII

(vi) Assertion (A) Real and money flows are the (a) Household
essence of modern economic activity. (b) Firms
Reason (R) Factor services flow from household to (c) Government
the producers without which production activity is (d) Rest of the world
not possible. Likewise, factor incomes flow from Ans. (d) Trade with the external sector i.e., countries different
producers to the households without which from the domestic countries are known as rest of the world
consumption activity is not possible. and demand for domestic goods are known as exports.
Alternatives (iii) Choose the correct statement from given below
(a) Both Assertion (A) and Reason (R) are true and options.
Reason (R) is the correct explanation of Assertion (A). (a) Manish is involved in production activity
(b) Both Assertion (A) and Reason (R) are true, but Reason (b) Manish is involved in distribution of goods
(R) is not the correct explanation of Assertion (A). (c) Manish is involved in disposal of income
(c) Assertion (A) is false, but Reason (R) is true (d) All of the above
(d) Both the statements are false Ans. (a) Production is the process of converting raw materials
Ans. (a) Both Assertion (A) and Reason (R) are true and into finished goods.
Reason (R) is the correct explanation of Assertion (A). (iv) Manish is selling in foreign countries as well. If it is
3. Direction Read the following text and answer to be a model of circular flow of income, which of
question no. (i) to (vi) on the basis of the same. the following it should be?
(a) Closed economic model
Manish is an entrepreneur who manufactures
decorative items. He is at the helm of affairs. He (b) Open economic model
hires wage labour from the market and employs (c) Traditional economic model
the services of capital and land as well. After (d) Modern economic model
hiring the inputs, he undertakes the task of Ans. (b) When a producer or firm trades with the rest of the
production which involves conversion of raw world, it is considered as an open economy as the
material into finished products. country is involved with export and import with rest of the
His motive is to ensure the optimal utilisation of world.
the available inputs and to produce output for sale (v) Export of good to the rest of the world will lead to
in the market and maximise profit. ………… in circular flow of income.
(a) increase
His products are also available on e-commerce
(b) decrease
websites and are not limited only to domestic
consumers but to consumers of other countries as (c) no change
well thus, ensuring inter-regionalism. (d) ambiguous
However in this process, he undertakes risks and Ans. (a) Export of goods leads to inflow of income into the
uncertainties, for example he may not get a right circular flow, this leads to increase in income and hence
price for his product which in turn would growth of the nation.
minimise his profit level. There is also a possibility (vi) Assertion (A) One of the way to mitigate the risk of
that the goods might damage during shipping damage or loss is to get the goods insured.
process. Reason (R) Insurance act is an assurance to
(i) As per the case given above, profit earned by safeguard and provide some sense of security to the
Manish will be referred as ……… . concerned parties involved.
(a) factor income (b) transfer income Alternatives
(c) unproductive service (d) non-market service (a) Both Assertion (A) and Reason (R) are true and Reason
Ans. (a) Profit is earned by the fourth factor of production (R) is the correct explanation of Assertion (A).
known as entrepreneur. This income is earned by (b) Both Assertion (A) and Reason (R) are true, but Reason
rendering factor services. (R) is not the correct explanation of Assertion (A).
(c) Assertion (A) is false, but Reason (R) is true
(ii) Manish sells his goods in countries like America,
(d) Both the statements are false
Belgium and Germany. Trade with these countries
Ans. (a) Both Assertion (A) and Reason (R) are true and Reason (R)
includes which of the following sector of an
is the correct explanation of Assertion (A).
economy?
CBSE Term-II Economics XII 11

PART 2 4. What is the difference between microeconomics

and macroeconomics? (NCERT)
Subjective Questions Ans. Difference between microeconomics and
macroeconomics
Basis Microeconomics Macroeconomics
l
Short Answer (SA) Type Questions
Meaning It studies It studies economic
1. Giving reasons, classify the following into economic problems at the level of
intermediate goods and final goods. problems at an an economy as a whole.
(i) Curtain cloth purchased by a household. individual level.
(ii) Machinery installed in an office. Determines It determines the It determines an
Ans. (i) Curtain purchased by a household is a final output and price aggregate output and
for an individual general price level in the
consumer good because the household is the final
firm. whole economy.
user of the curtain cloth and there is no value
addition. Tools Demand and Aggregate demand and
(ii) Machinery installed in an office is a final producer supply are its aggregate supply are its
good because machinery is finally and repeatedly main tools. main tools.
used by the office for several years and these are of Dependence It assumes all the It assumes all the
high value. macrovariables to microvariables to be
be constant as constant as demand of
2. Giving reasons, classify the following into national income, households, supply of
intermediate goods and final goods. consumption, firms, prices of
(i) Ceiling fan purchased by a tailor for his shop. saving, etc. individual products, etc.
(ii) Chalks, dusters, etc. purchased by a school.
Ans. (i) Ceiling fan purchased by a tailor for his shop is a final 5. ‘‘Final goods include only those goods which are
good because tailor is the final user of the ceiling fan consumed by the households.’’ Defend or refute
and no value is to be added to the ceiling fan. This the given statement with valid reason. (CBSE 2020)
will be deemed as investment expenditure because Ans. Final goods include only those goods which are
ceiling fan is used by the tailor for several years and is consumed by the households. The given statement is
of high value. refused as final goods are the goods which have crossed
(ii) Chalks, dusters, etc. purchased by a school are the boundary line of production and are ready to use by
intermediate goods as these are used up in the consumers and producers (includes capital goods). These
process of value addition during the year. goods can be further classified as final consumer goods
and final producer goods.
3. Which among the following are final goods and
which are intermediate goods? Give reasons. 6. Distinguish intermediate goods from final goods
(i) Milk purchased by a tea stall with the help of suitable examples. (CBSE 2019)
(ii) Bus purchased by a school Ans. Differences between intermediate goods and final goods
(iii) Juice purchased by a student from the school canteen Basis Intermediate Final Goods
(CBSE 2018) Goods
Ans. (i) ‘Milk purchased by a tea stall’ is an intermediate Boundary These goods remain These goods are outside
goods. Line within the boundary the boundary line of
Reason It will be used as a raw material for making line of production production and are ready
tea and involves value addition. and are not ready for for use by their final users.
(ii) ‘Bus purchased by a school’ is final good. use by their final
Reason School purchases bus as long-term durable users.
product and it is an investment for school. It is not Resale These goods may be These goods are not
for re-sale. reproduced or resold by firms for making
(iii) ‘Juice purchased by a student from school canteen’ is resold by firms for profit.
final good. making profit.
Reason Here juice is purchased for direct Value Value is yet to be Value is not to be added to
satisfaction of student’s need, i.e., juice is being Addition added to these these goods.
consumed by its end user. goods.
12 CBSE Term-II Economics XII

7. Explain with the help of an example, the basis of 11. Distinguish between stock and flow. Between net
classifying goods into final goods and intermediate investment and capital which is a stock and which
goods. (All India 2017; Delhi 2010) is a flow? Compare net investment and capital with
Ans. The basis of classification is the end-use of the product. flow of water into a tank. (NCERT)
Goods which are used by the producers in the process of Ans. Stock is that quantity of an economic variable which is
production such as raw material or goods purchased for measured at a particular point of time. Stock has no time
resale, are known as intermediate goods, e.g. shirt dimension. Flow is the quantity of an economic variable
purchased by a firm for resale. These goods are still which is measured during the period of time. Flow has a
within the production boundary.
time dimension as per hour, per day or per month.
Goods which are outside the boundary line of production
and are ready for use by their final users are called final Net investment is a flow variable and capital is a stock
goods, e.g. shirt purchased by a consumer. variable. Flow of water in a tank is flow because it is
measured as per unit of time period. Whereas, stock of
8. ‘All producer goods are not capital goods’. Do water in a tank is stock because it is measured at a point
you agree? of time. Capital is like a stock of water in the tank at a
Ans. Yes, I agree that all producer goods are not capital goods, point of time.
because producer goods includes 12. Give reasons and categorise the following into
(i) Goods which are used as raw material like wood, stock and flow. (Delhi 2013)
used to make furniture. (i) Capital (ii) Saving
(ii) Goods which are used as fixed assets like plant and (iii) Gross domestic product (iv) Wealth
machinery.
Ans. (i) Capital It is a man-made means of production. It is a
Capital goods include only fixed assets of the producers. stock because it is measured at a given point of time.
These are durable goods. On the other hand, goods used
(ii) Saving It is the surplus of production over
as raw material are not capital goods as these are not
consumption. It is a flow as it is measured during a
repeatedly used in the process of production. Thus, all
period of time.
producers goods are not capital goods.
(iii) Gross Domestic Product It is a flow as it is the
9. Distinguish between consumption of fixed capital market value of final goods and services produced
and capital loss. within the domestic territory measured during a
Ans. Consumption of fixed capital refers to depreciation of period of time.
fixed assets. It refers to loss of value of fixed assets while (iv) Wealth It is a stock as it is measured at a particular
these are being used in the process of production. It point of time.
occurs on account of normal wear and tear, accidental
damages and expected obsolescence. 13. Distinguish between money flows and real flows.
On the other hand, capital loss is the loss of value of fixed Ans. Flow of income refers to flow of goods and services (or
assets when these are not being used. It occurs on their money value) across different sectors of the
economy. It is called real flow in case it occurs in the
account of natural calamities (like earthquake, floods, or
form of goods and services, e.g., households rendering
fire) and fall in the market value of the assets during their factor services to the producers and in return
periods of economic recession. producers offering final goods and services to the
10. How is depreciation different from depreciation households. It is called money flows because there is a
flow of money value from one sector to the other, e.g.,
reserve fund? producers make factor payments to the households and
Ans. Difference between depreciation and depreciation households make payments to the producers for the
reserve fund purchase of goods and services.
Basis Depreciation Depreciation 14. How money flows are opposite to real flows?
Reserve Fund Explain with the help of an example.
Concept It is the loss of value of It is a provision of funds Ans. Money flows are opposite to real flows because money
fixed assets in use, on created by producers to flows in response to the real flows. For example, There is
account of normal wear cope up with a real flow of goods and services from the producers to
and tear. depreciation losses. the households. It is in response to it, that the households
Effect It leads to correct These funds are used make payments to the producers. So, money flows from
computation of profit. for the replacement of the households to the producers in terms of consumption
fixed assets when these expenditure.
are worn out.
Likewise, there is a real flow of factor services from the
Reason Expected or foreseen Obsolete/outdated households to the producers. It is in response to it, that
obsolescence, normal assets need to be the producers make payments to the households. So,
wear and tear. repalced. money flows from producers to the households in terms
of factor payments.
CBSE Term-II Economics XII 13

15. Why is the flow of income and product called a circular flow?
Ans. It is because of the following reasons that the flow of income and product is called a circular flow
(i) Corresponding to each real flow to one direction, there is money/income flow from the opposite direction. For example
Corresponding to the flow of factor services (which is a real flow) from household to the producer sector, there is a flow
of factor payments (which is a money flow) from producer to the household sector.
(ii) In a two sector economy, receipts of one sector are equal to payments to other sector. In case receipts are less than the
payments (or payments are less than the receipts), circularity is bound to stop at one point or the other.
(iii) Activities of production, income generation and expenditure never stop in the economy. They keep chasing one another
in a circular manner.
16. Describe the four major sectors in an economy according to the macroeconomics point of view. (NCERT)
Ans. An economy is generally classified into the following four sectors
(i) Household Sector It is engaged in the consumption of goods and services.
(ii) Producing Sector It is engaged in the production of goods and services.
(iii) Government Sector It is engaged in such activities which are related to taxation and subsidies as well as consumption
and production.
(iv) Rest of the World It is engaged in exports and imports.
17. Explain the difference between the concept of injections and leakages in context of circular flow of income.
Ans.

Basis Injections Leakages

Meaning These are those flow variables which creates a value These are those flow variables which causes reduction in
addition in the process of circular flow in an economy. the process of production (or the process of income
generation in an economy).
Components Injections include Leakages include
Consumption expenditure by the government
l l
Savings
Investment expenditure by the government
l l
Taxation
Exports
l l
Imports
Cause This causes positive multiplier effect on the level of This causes negative multiplier effect on the level of
income and employment in the economy. income and employment in the economy.

l
Long Answer (LA) Type Question
1. Explain the circular flow of income in a two sector economy with the help of a diagram.
Ans. In a two sector economy, there are only two sectors of economic activity
namely households and firms. Households supply factor services to firms
and firms hire factor services from households. Households spend their
entire income on consumption. Firms sell what is produced to the
households.
There are two types of markets in this economy
(i) Product Market Market for goods and services.
(ii) Factor Market Market for factors of production.
The above figure shows that
(i) Total Production of Goods and Services by firms
= Total Consumption of Goods and Services by Households
(ii) Factor Payments by Firms = Factor Incomes of Households
(iii) Consumption Expenditure of Households = Income of Firms
Thus, Real Flow of Production and Consumption of Firms and
Households = Money Flows of Income and Expenditure of Firms and Circular Flow of Income in a Two-sector Economy
Households
Chapter Test
Multiple Choice Questions
1. Depreciation of fixed capital assets refer to
(a) normal wear and tear (b) foreseen obsolescence (c) Both (a) and (b) (d) unforeseen obsolescence
2. Which of the following statements is/are correct?
(i) Capital formation is a stock variable.
(ii) A car covering a distance of 400 km in 5 hours includes both stock as well as flow variable.
Alternatives
(a) Both are true (b) Both are false
(c) (i) is true, but (ii) is false (d) (i) is false, but (ii) is true
3. A thousand rupee note is an example of
(a) stock variable (b) flow variable
(c) Either stock or flow (d) Neither stock nor flow
4. Money flows are reciprocal of
(a) monetary flows (b) real flows (c) circular flows (d) inventory flows
5. Circular flow of income is based upon which of the following assumptions?
(a) All sectors are self-sufficient and independent
(b) Income generated in one sector is consumed within the same sector
(c) One person’s expenditure is another person’s income
(d) All economies are closed economies

Short Answer (SA) Type Questions

1. What are the four factors of production and what are the remunerations to each of these called?
2. Giving reason, classify the following into capital goods and consumer goods.
(i) Ice-cream purchased by a consumer.
(ii) Plant and machinery of XYZ company.
3. Give reason and identify whether the following are final expenditures or intermediate expenditures.
(i) Expenditure on maintenance of an office building.
(ii) Expenditure on improvement of machine in a factory.
4. Distinguish between consumer goods and capital goods.
5. Distinguish between stocks and flows. Give two examples of each.
Long Answer (LA) Type Question
1. Explain the circular flow of income.

Answers
Multiple Choice Questions
For Detailed Solutions
1. (c) 2. (d) 3. (a) 4. (b) 5. (c)
Scan the code
CBSE Term-II Economics XII 15

CHAPTER 02

National Income and

Its Measurement

In this Chapter...
l Concept of National Income
l Aggregates Related to National Income
l Methods of Estimating National Income

National Income at Constant Prices

Concept of National Income It is the money value of all final goods and services
It is defined as the sum total of factor incomes accruing to measured at constant prices.
normal residents of a country, within the domestic territory
of a country and from rest of the world, during a period of an Y ′ = Q × P′
accounting year. Where, Y ′ = National Income at constant prices
Residents Q = Quantity of goods and services
A resident or normal resident is said to be a person or an produced during an accounting year
institution, who ordinarily resides in a country for a period of P′ = Price of goods and services prevailing during
one year or more and whose centre of economic interest lies in the base year
that country.
Non-residents Aggregates Related to
Those citizens, who visit home country for travelling, National Income
recreation, holidays, medical treatment, studies or sports are
known as non-residents of a country. There are eight aggregates of national income, which are as
follows
National Income at Current Prices 1. Gross Domestic Product at Market Price (GDP MP ) It
It is the money value of all final goods and services measured at is the market value of the final goods and services
current prices. produced during a year within the domestic territory
Y=Q×P of a country. It includes the value of depreciation.

Where, Y = National income at current prices 2. Net Domestic Product at Market Price (NDP MP ) It is
Q = Quantity of goods and services produced during the market value of final goods and services produced
an accounting year within the domestic territory of a country during a
P = Price of goods and services prevailing year, exclusive of depreciation.
during the accounting year NDP MP = GDP MP − Depreciation
 16 CBSE Term-II Economics XII

3. Gross National Product at Market Price (GNP MP ) 3. Net Factor Income from Abroad (NFIA) It is defined
It is the market value of final goods and services produced as the difference between factor income received from
in the economy, during a year inclusive of Net Factor abroad and the factor income paid to abroad.
Income from Abroad (NFIA). Components of Net Factor Income from Abroad are
GNP MP = GDP MP + NFIA l
Net compensation to employees.
l
Net income from property and entrepreneurship
4. Net National Product at Market Price (NNP MP ) It is the received by residents of the country.
market value of the final goods and services produced in
the economy, during an accounting year, exclusive of
l
Net retained earnings.
depreciation and adjusted for Net Factor Income from Nominal GDP
Abroad.
It refers to market value of the final goods and services
NNP MP = GDP MP − Depreciation + NFIA produced within the domestic territory of a country during
a financial year, as estimated using the current year prices.
5. Gross Domestic Product at Factor Cost (GDP FC ) It is It is also called GDP at current price or monetary GDP.
the sum total of factor incomes generated within the
Real GDP
domestic territory of a country along with consumption of
fixed capital during a year. It refers to market value of the final goods and services
produced within the domestic territory of a country during
GDP FC = GDP MP − NIT a financial year, as estimated using the base year prices. It
is also called GDP at constant price.
6. Net Domestic Product at Factor Cost (NDP FC ) It is the
Nominal GDP
sum total of factor incomes generated within the domestic Real GDP = × 100
territory of a country during a year, exclusive of Current Price Index
depreciation.
GDP and Welfare
NDP FC = GDP MP − NIT − Depreciation GDP may be a good indicator of economic growth but is not
considered a good measure of economic welfare because of
7. Gross National Product at Factor Cost (GNP FC ) It is the the following three reasons
sum total of factor incomes earned by normal residents of l
Distribution of GDP
a country, inclusive of depreciation during an accounting l
Non-monetary exchanges
year and Net Factor Income from Abroad (NFIA).
l
Externalities
GNP FC = GDP FC +NFIA

8. Net National Product at Factor Cost (NNP FC ) It is the

Methods of Estimating
sum total of factor incomes earned by normal residents of National Income
a country during the period of an accounting year, There are three methods of estimating national income.
exclusive of depreciation. They are
NNP FC = GNP FC – Depreciation
l
Value Added Method
l
Income Method
Some Terms related to National Income l
Expenditure Method
To understand above aggregates of national income, the
following three terms should be understood Value Added Method /
1. Depreciation It refers to the loss in the value of fixed Production Method
assets due to their normal wear and tear. In value added method, national income is estimated by
2. Net Indirect Tax (NIT) It is equal to the difference adding contribution of each producing enterprise in
between Indirect Tax (IT) and Subsidies (S). production of final goods and services produced in an
accounting year.
Where, indirect taxes add to the factor cost of the product
and subsidies reduce the factor cost of the product to GDP MP / GVA MP = Value of Output − Intermediate
reach the market price. Consumption
CBSE Term-II Economics XII 17

Where, Where, NDP FC = Compensation of Employees

Value of Output = Sales + Change in Stocks Intermediate + Operating Surplus + Mixed
Consumption = Purchases + Opening Stock of Raw Income of Self Employed
Material − Closing Stock of Raw Material
Operating Surplus = Rent + Interest + Profit
National Income (NNP FC ) Precautions of Income Method
= Gross Value Added by all the
Production units within the While using income method, items included or excluded in
Domestic Territory of the Country calculation of National Income are
− Depreciation − Net Indirect Taxes l
Income from illegal activities like smuggling, theft,
+Net Factor Income from Abroad gambling, etc should not be included.
Net Indirect Taxes = Indirect Tax − Subsidies l
Commission paid on the sale and purchase of second hand
goods are to be included.
Precautions of Value Added Method l
Transfer earnings like old age pensions, unemployment
allowances, scholarships, pocket expenses, etc should not be
While using value added method, items to be included or
included.
excluded in calculation of national income are
l
Income in terms of windfall gains should not be included.
l
The value of intermediate goods should not be included.
l
Purchase and sale of second hand goods should be excluded.
l
Imputed rent of owner occupied houses is to be treated
l
Imputed value of self-consumed goods should be included. along with rent as a component of factor incomes.
l
Own account production should be included. l
Income tax is paid out of compensation of employees. It
l
Value of self-consumed services should not be included in the should not be separately added in the estimation of national
estimation of national income. income.
l
Commission earned on account of sale and purchase of second l
Brokerage on the sale/purchase of shares and bonds is to be
hand goods is included. included.
l
Imputed rent on the owner occupied house is also taken into the
account. Expenditure Method
l
The value added in the government sector is equal to In this method, national income is measured in terms of
compensation of employees only. Also, in case of general expenditure on the purchase of final goods and services
government sector, no data of capital consumption is available. produced in the economy during an accounting year.
That is why, value added is supposed to be equal to net value
added. National Income (NNP FC )
l
Double counting should be avoided. For this, we can adopt = GDP MP − Net Indirect Taxes − Depreciation
either of the following methods + Net Factor Income from Abroad
1. Final Output Method This method takes into account
the value of only final goods and services in the estimation Where,
of GDP. Intermediate goods are not to be considered. GDP MP = Private Final Consumption
Expenditure + Government Final
2. Value Added Method This method takes into account Consumption Expenditure +
the sum total of value added by all the producing units Investment Expenditure + Net Exports
within the domestic territory, while computing national
income. Precautions of Expenditure Method
While using expenditure method, items included or
Income Method excluded in calculation of national income are
In this method, we take sum total of factor incomes earned by l
Only final expenditure is to be taken into account to avoid
the normal residents of a country during a year. It is also called error of double counting.
factor payment method. l
Expenditure on second hand goods is not to be included,
National Income (NNP FC ) because value of second hand goods has already been
accounted for during the year of their production.
= NDP FC + Net Factor Income from Abroad
 18 CBSE Term-II Economics XII

l
Expenditure on shares and bonds is not to be included in total 3. Tertiary Sector It is that sector in which entrepreneurs
expenditure, as these are mere paper claims and are not related provide services. It includes units like educational,
to the production of final goods and services. medical, transport, etc.
l
Expenditure on transfer payments by the government is not to 4. Factor Payments These are the payments made to
be included. scarce resources or the factors of production in return
l
Imputed value/estimated value of expenditure on goods for productive services.
produced for self-consumption should be taken into account, as 5. Factor Incomes These are the incomes received by the
these goods are reflected in the estimation of GDP. owners of factors of production for rendering their
Terms related to National Income Methods factor services to the producers.
1. Primary Sector It includes production of goods by 6. Transfer Incomes Incomes received by households,
exploiting natural resources, i.e., agriculture, forestry, production units and non-profit making institutions
logging, etc. from government and other sources without rendering
any services are known as transfer incomes.
2. Secondary Sector It includes all those units which
produce commodities by transforming one type of 7. Transfer Payments It is a redistribution of income in
commodity into other type of commodity, i.e., the market system. Transfer payments do not add to the
manufacturing, electricity, etc. current flow of goods and services.

Solved Examples
Example 1. (iv) GDPMP = GNPMP – Net Factor Income from Abroad
= 15, 000 − 650 = ` 14, 350 crore
S.No. Contents ` (in crore)
(i) GNPMP 15,000 Example 2. Calculate national income from the
following data.
(ii) Depreciation or Consumption of Fixed 1,000
Capital S.No. Contents ` (in lakh)
(iii) Indirect Taxes 500 (i) Sales 800
(iv) Subsidies 150 (ii) Purchase of Raw Materials from Domestic
(v) Net Factor Income from Abroad 650 Market 400
(iii) Import of Raw Material 100
On the basis of the above information, calculate
(i) NNPMP (ii) NNPFC (iv) Subsidies 30
(iii) NDPFC (iv) GDPMP (v) Consumption of Fixed Capital 40
Ans. (i) NNPMP = GNPMP – Depreciation (vi) Change in Stock 50
= 15, 000 − 1, 000
(vii) Rent 70
= ` 14, 000 crore
(ii) NNPFC = GNPMP – Depreciation – Net Indirect Taxes (viii) Net Factor Income from Abroad 10

= 15, 000 − 1, 000 − ( 500 − 150) Ans. National Income = Sales + Change in Stock − (Purchase of
= 14, 000 − 350 Raw Material from Domestic Market +
= ` 13, 650 crore Import of Raw Material) −
[Q NIT = Indirect Taxes – Subsidies]
Consumption of Fixed Capital
(iii) NDPFC = GNPMP – Depreciation – Net Factor + Subsidies + NFIA
Income from Abroad – Net Indirect Taxes
= 800 + 50 − ( 400 + 100 ) − 40 + 30 +10
= 15, 000 − 1, 000 − 650 − ( 500 − 150)
= ` 13, 000 crore
= ( 880 − 540 + 10 ) = ` 350 lakh
CBSE Term-II Economics XII 19

Example 3. Calculate net domestic product at factor cost Example 4. Calculate national income by the
by income method. expenditure method.
S.No. Contents ` (in crore) S.No. Contents ` (in crore)
(i) Dividend 60 (i) Government Final Consumption 150
Expenditure
(ii) Wages and Salaries 2,000
(ii) Private Final Consumption Expenditure 750
(iii) Social Security Contribution by Employers 100
(iii) Consumption of Fixed Capital 150
(iv) Rent 300 (iv) Net Indirect Taxes 120
(v) Corporation Tax 30 (v) Net Factor Income from Abroad 20
(vi) Retained Earnings of Private Corporations 10 (vi) Net Domestic Fixed Capital Formation 220
(vii) Interest 300 (vii) Change in Stocks (–) 20
(viii) Net Imports 50
Ans. By income method
Ans. By expenditure method
Net Domestic Product at Factor Cost (NDPFC )
National Income (NNPFC)
= Wages and Salaries + Social Security
= Private Final Consumption Expenditure + Government
Contribution by Employers + Corporation Tax
Final Consumption Expenditure + Net Domestic
+ Retained Earnings of Private Corporations Fixed Capital Formation + Change in Stocks − Net
+ Dividend + Rent + Interest Imports − Net Indirect Taxes + Net Factor Income
= 2, 000 + 100 + 30 + 10 + 60 + 300 + 300 from Abroad
= ` 2,800 crore = 750 + 150 + 220 + ( − 20 ) − 50 − 120 + 20
= 1,140 − 190 = ` 950 crore
 Chapter
Practice
PART 1 5. Which of the following is included in the estimation
of national income?
Objective Questions (a) Expenses on electricity by a factory
(b) Gifts from abroad
(c) Free services by the government
l
Multiple Choice Questions (d) Financial help to earthquake victims
Ans. (c) Free services by the government
1. Which of the following is an example of normal
residents of India? 6. Which of the following statements is/are correct?
(a) Foreign worker working in WHO located in India (i) Value added and value of output are identical
(b) The German working as director in IMD office concepts.
located in India (ii) Sum total of value added by all the producing units
(c) Ambassador in India from the rest of the world within the domestic territory of the country is equal
(d) Ambassador of India in rest of the world to national product.
Ans. (d) Ambassador of India in rest of the world
Alternatives
2. Which of the given pair is incorrectly matched? (a) Both are true
(b) Both are false
Column I Column II
(c) (i) is true, but (ii) is false
A. Land (i) Rent (d) (i) is false, but (ii) is true
B. Labour (ii) Wages and salaries Ans. (b) Value of output refers to the market value of the goods
C. Capital (iii) Interest produced while value added refers to the market value of
the goods produced minus the market value of the goods
D. Entrepreneur (iv) Dividend
used as inputs/raw material in the process of production.
Codes Sum total of value added by all the producing units within
(a) A – (i) (b) B – (ii) (c) C – (iii) (d) D – (iv) the domestic territory of the country is equal to domestic
Ans. (d) Entrepreneur get profit as a compensation for its factor product.
services. Dividend is paid to the shareholders for their 7. Which of the following is not included in the
contribution in the company’s capital as an incentive. estimation of national income?
3. Factor payment received by the households for (a) Brokerage on sale of bonds
rendering their services as employees of the (b) Imputed value of production for self-consumption
producing unit is called (c) Leisure-time activities
(a) Compensation of employees (d) Employer’s contribution to provident fund
(b) Rent Ans. (c) No value is generated by enjoying leisure and hence not
(c) Interest included in the estimation of national income.
(d) Profit
Ans. (a) Compensation of employees 8. Inventory investment is used as a component to
calculate national income in which of the following
4. Operating Surplus = methods?
(a) Compensation of Employees + Rent + Interest +
(a) Product method and income method
Profit
(b) Income method and expenditure method
(b) Rent + Interest + Profit
(c) Product method and expenditure method
(c) Compensation of Employees + Mixed Income of
(d) Product method, income method and expenditure method
Self-employed
(d) Compensation of Employees + Rent + Interest + Ans. (c) Inventory investment or change in stock is used in
Profit +Mixed Income of Self-employed both value added (Product) method and expenditure
method while calculating national income.
Ans. (b) Rent + Interest + Profit
CBSE Term-II Economics XII 21

9. National income is the sum of factor incomes Re al GDP × Pr ice Index

Nominal GDP =
accruing to (CBSE 2016) 100
200 × 110
(a) nationals = = ` 220
(b) economic territory 100
(c) residents 15. Let us assume that the GDP of some country was
(d) Both residents and non-residents ` 100 at current prices in 2012-13 and that was
Ans. (c) residents ` 90 in 2011-12; and that the GDP at constant
10. Combined factor income, which can’t be separated 2004-05 prices was ` 59 in 2012-13 and that was
into various income components is known as ……… . ` 56.1 in 2011-12, then in GDP of 2011-12 at
(a) Mixed income of self-employed 2012-13 (constant) prices would be
(b) Compensation of employees (a) ` 59.1 (b) ` 90 (c) ` 95.08 (d) ` 100
(c) Deferred income Ans. (c) GDP of 2011-12 at 2012 `13 (constant) prices would
(d) Any of the above be
Ans.(a) Mixed income of self-employed GDP at Constant Prices of 2011 − 21
= × 100
11. Other things remaining the same, when foreign GDP at Costant Prices of 2021 − 13
currency becomes cheaper, the effect on national 56.1 × 100
= = 95 .08
income is likely to be (CBSE 2015) 59
(a) positive 16. Which of the given statement is incorrect?
(b) negative
(CBSE 2020)
(c) Both positive and negative
(d) No effect (a) GDPMP = GDPFC + NIT
Ans. (d) Rise of fall in the prices of foreign currency has no (b) NNPMP = NNPFC
direct impact on national income of a country. Exchange (c) GNPMP = GDPMP + NFIA
rate changes on a daily basis and several times in a day. It (d) NNPFC = National Income
does not mean that national income would change Ans. (b) Market price includes the impact of indirect taxes
accordingly. and subsidies, i.e. indirect taxes raise the market price,
12. If gross domestic capital formation is ` 3,000, net but subsidies tend to lower it while factor cost refers to
domestic fixed capital formation is ` 2,000 and the cost of factors of production, independent of net
inventory investment is ` 150, what will be the value indirect taxes (Indirect Taxes – Subsidies).
of consumption of fixed capital? 17. If in an economy, all production is undertaken by
(a) ` 1,000 (b) ` 850 firms and the recorded sales of all firms in a year are
(c) ` 150 (d) Can’t be determined less than their respective recorded costs, then
Ans. (b) Consumption of Fixed Capital = Gross Domestic Capital which of the following statements is necessarily true?
Formation – (Net (a) At least some firms must have made accounting errors
Domestic Fixed Capital (b) The economy’s GDP of that year was negative
Formation + Inventory (c) The total purchases of intermediates by firms were
investment) more than their total sales
= 3,000 – (2,000+150) (d) None of the above
= ` 850 Ans. (c) If an economy’s production, costs exceed its sales
then it implies that the intermediate cost exceed the
13. Which of the following is not a ‘factor payment’? firm’s total sales.
(CBSE 2020)
(a) Free uniform to defence personnel
18. Given the following data for an economy
(b) Salaries to members of Parliament Gross domestic product at market prices ` 20,000
(c) Rent paid to the owner of the building Gross domestic capital formation ` 5,000
(d) Scholarship given to the students Depreciation ` 4,000
Ans. (d) Scholarship given to the students Net exports (–) ` 2,000
Net factor incomes from abroad ` 5,000
14. If Real GDP is ` 200 and Price Index (with base =
100) is 110, calculate Nominal GDP. (CBSE 2015)
The economy’s net domestic capital formation is
(a) ` 1,000 (b) ` 5,000
(a) ` 33 (b) ` 220 (c) ` 3,000 (d) (–) ` 1,000
(c) ` 200 (d) ` 100
Ans. (a) Net Domestic Capital Formation
Nominal GDP
Ans. (b) Real GDP = × 100 = Gross Domestic Capital Formation –Depreciation
Price Index = 5,000 – 4,000 = ` 1,000
22 CBSE Term-II Economics XII

19. In which of the following cases would the purchase of Reason (R) Uniforms are provided by the hospital
rice be included while calculating the GDP of India at the time of work. It is to be treated as an
from the expenditure side? intermediate consumption.
(a) A resident Indian purchases rice to make a dosa which Ans. (a) Both Assertion (A) and Reason (R) are true and
he sells to his neighbour. He then pockets the money Reason (R) is the correct explanation of Assertion (A)
received. 3. Assertion (A) Financial help received by the flood
(b) A resident Indian purchases rice to make dosa which he
victims should not be included while estimating
sells to his neighbour. He donates the money received to
national income.
a charity.
(c) A foreign citizen visiting Indian purchases rice to make a Reason (R) Financial help is a transfer payment
dosa which he sells to another foreign citizen visiting and should not be included.
India. Ans. (a) Both Assertion (A) and Reason (R) are true and
(d) A non-resident Indian visiting India purchases rice, goes Reason (R) is the correct explanation of Assertion (A).
back to his country of residence, makes a dosa and then
sells it to his neighbour. 4. Assertion (A) Real GDP shows change in the level
Ans. (d) The expenditure of a non-resident Indian on purchase of
of economic activity and facilitates inter-regional
rice would be included in the calculation of GDP as a and international comparison.
component of net exports. Reason (R) It is an inflation adjusted index and
20. With a positive externality account for an increase in the level of production
in response to the price changes.
(a) there is under consumption in the free market.
(b) there is over consumption in the free market. Ans. (a) Both Assertion (A) and Reason (R) are true and
(c) the government may tax to decrease production. Reason (R) is the correct explanation of Assertion (A)
(d) society could be made better-off if less was produced. 5. Assertion (A) Public goods possess the charac-
Ans. (b) Positive externality refers to the benefits enjoyed by a teristics of non-rivalry and non-excludability.
firm from external factors. Due to positive externality, there
is over consumption in free market as it might lower the Reason (R) Non-rival means consumption by one
market price. person does not reduces consumption for
another person whereas non-excludability implies
l
Assertion-Reasoning MCQs that no one can be excluded in terms of
benefitting from the consumption of public
Direction (Q. Nos. 1 to 7) There are two statements goods.
marked as Assertion (A) and Reason (R). Read the
Ans. (a) Both Assertion (A) and Reason (R) are true and
statements choose the appropriate option from the Reason (R) is the correct explanation of Assertion (A)
options given below.
(a) Both Assertion (A) and Reason (R) are true and Reason 6. Assertion (A) Imputed value of owner-occupied
(R) is the correct explanation of Assertion (A) lands are a part of both domestic income and
(b) Both Assertion (A) and Reason (R) are true, but Reason national income.
(R) is not the correct explanation of Assertion (A) Reason (R) Factors of production are bound to
(c) Assertion (A) is true, but Reason (R) is false
give its services regardless of the fact that it
(d) Assertion (A) is false, but Reason (R) is true
is giving its services to the owner or an
1. Assertion (A) Money received from the sale of second outsider.
hand car will be considered while estimating national Ans. (a) Factor of production always gives its services
income. regardless of its owner. So, while calculating national
Reason (R) Their value is already included and it income we should include its market value to get actual
does not contribute to the current flow of goods and estimation of production in the economy.
services. 7. Assertion (A) GDP as an index of welfare may
Ans. (d) Money received from the sale of second hand car will underestimate or overestimate the welfare.
not be considered while estimating national income as the Reason (R) It does not consider the non-monetary
value of second hand goods has already been accounted
exchanges and does not take into consideration
during the year of their production (when these were
initially produced and purchased by the final users). the positive or negative aspects associated with an
economic activity.
2. Assertion (A) Payment of uniforms for nurses by a Ans. (a) Both Assertion (A) and Reason (R) are true and
hospital is not included in the estimation of national Reason (R) is the correct explanation of Assertion (A)
income.
CBSE Term-II Economics XII 23

l
Case Based MCQs Fourth and last, manufactured goods generally
yield much higher earnings than agricultural
1. Direction Read the following text and answer produce… For all these reasons the accident of a
question no. (i) to (vi) on the basis of the same. multiplicity of manufacturing activities is more
“A multiplicity of manufacturing activities will make a important than that of domestic agricultural
kingdom or city abound in money when they are surplus.”
diverse and produce things necessary or useful or Source (From Antonio Serra –A Short Treatise on the
pleasing to people in quantities that exceed the needs Wealth and Poverty of Nations, 1613)
of the country. There are four reasons why this is so. (i) There is greater certainty in manufacturing
First, there is greater certainty in manufacturing activities than in agricultural because
activity, for a manufacturer is more certain to earn (a) it is subject to increasing returns
from his work than a farmer or other person who tills (b) it relies only on human labour
the soil or deals in his agricultural ‘produce’, for the (c) the manufacturing worker must always keep working
(d) manufacturing products are diverse
earnings of these people depend not just on human
labour but on the weather-since the land sometimes Ans. (b) it relies only on human labour
needs rain and sometimes sun–as well as other (ii) Manufacturing offers the possibility of more likely
conditions. profit than agriculture because
And if these conditions are not forthcoming or the (a) the variety of manufacturing products is greater than
weather is bad, their work is wasted and instead of the variety of agricultural produce
making money they lose it. But a manufacturer’s (b) it used to be risky to export from one country to
another country that is far away
earnings are always certain, provided that he keeps
(c) both storage and transport are easier for
working. manufactured goods
Second, in manufacturing activities it is possible to (d) manufacturing products are diverse
achieve a multiplication of products and therefore of Ans. (a) the variety of manufacturing products is greater than
earnings. The same cannot be done with agricultural the variety of agricultural produce
produce, which is not subject to multiplication. If a (iii) Serra believed that
given piece of land is only large enough to sow a (a) agriculture and manufacturing are both subject to
hundred (bushels) of wheat, it is impossible to sow a increasing returns
hundred and fifty there. In manufacturing, by (b) only manufacturing is subject to increasing returns
contrast production can be multiplied not merely (c) neither activity is subject to increasing returns no
twofold but a hundredfold and at a proportionately activity
lower cost. (d) increasing returns are not relevant in a discussion of
Third, the sale of manufactured products is more economic activity
certain than that of agricultural produce and this Ans. (b) only manufacturing is subject to increasing returns
certainty of sale means a greater certainty of profit. (iv) The significance of advances in navigation for
For it is difficult to preserve agricultural produce, for Serra is that
a long time without its deteriorating, so it is risky to (a) it enables improved transport of agricultural produce
export from country to another one far away and so it to make up for losses when the weather is bad
is also risky to preserve it for the future, should it not (b) it proves that the moderns have surpassed the ancients
be sold immediately, manufactured products, on the (c) it gets rid of the difficulty of preserving goods for the
other hand, can easily be preserved even for long future
periods, so they can easily be exported to far off (d) it makes profits from manufacturing more certain by
expanding potential markets
lands.
Ans. (d) it makes profits from manufacturing more certain by
And since navigation–the only art in which the expanding potential markets
moderns surpass the ancients–has been so greatly
facilitated that trade is carried on not merely between (v) According to Serra, manufacturing
East and West, North and South, but even between (a) generates higher value added than agriculture
(b) is desirable only when the quantities produced
one hemisphere and the other and goods can be
exceed the needs of the country
easily transported from one to the other who will (c) is always in a multiplicity that exceeds the
deny that the sale of manufactured products is more agricultural surplus
certain and more profitable than that of agricultural (d) always makes a kingdom or a city abound in money
produce? Ans. (a) generates higher value added than agriculture
24 CBSE Term-II Economics XII

(vi) Assertion (A) There exists a unidirectional (a) positive externalities (b) negative externalities
relationship between certainty of sales and certainty (c) Either of the two (d) Neither of the two
of profits. Ans. (b) negative externalities
Reason (R) Higher revenues are often guaranteed (iii) Welfare of the people in an economy is measured
from sale of manufactured goods than agricultural in terms of ……… .
produce. (a) availability of national income
Alternatives (b) availability of goods and services per person
(c) overall price level and degree of profit maximisation
(a) Both Assertion (A) and Reason (R) are true and Reason (d) overall price level in an economy
(R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason Ans. (b) availability of goods and services per person
(R) is not the correct explanation of Assertion (A). (iv) With every increase in the level of GDP, social
(c) Assertion (A) is false, but Reason (R) is true welfare definitely increases in an economy.
(d) Both the statements are false The given statement is
Ans. (b) Both Assertion (A) and Reason (R) are true, but Reason (a) True, if increase in GDP is associated with
(R) is not the correct explanation of Assertion (A). disparities in the distribution of income
(b) True, if increase in GDP is associated with skewed
2. Direction Read the following text and answer distribution of income
question no. (i) to (vi) on the basis of the same. (c) False, if increase in GDP is associated with
Consumption, production and investment decisions disparities in the distribution of income
of individuals, households and firms often affect (d) False, if increase in GDP is associated with
people not directly involved in the transactions. normality in distribution of income
Sometimes these indirect effects are tiny. But when Ans. (c) False, if increase in GDP is associated with
they are large they can become problematic—what disparities in the distribution of income
economists call externalities. Externalities are among (v) Assertion (A) GDP cannot be considered as an
the main reasons governments intervene in the appropriate index of welfare.
economic sphere. Most externalities fall into the Reason (R) Non-monetary transactions,
category of so-called technical externalities; i.e., the externalities, composition and distribution of
indirect effects have an impact on the consumption GDP are some of the reasons which makes it an
and production opportunities of others, but the price inappropriate index of welfare.
of the product does not take those externalities into Alternatives
account. As a result, there are differences between (a) Both Assertion (A) and Reason (R) are true and
private returns or costs and the returns or costs to Reason (R) is the correct explanation of Assertion (A)
society as a whole. (b) Both Assertion (A) and Reason (R) are true, but Reason
(R) is not the correct explanation of Assertion (A)
Externalities could be either positive or negative. (c) Assertion (A) is true, but Reason (R) is false
There is no valuation of it in the estimation of GDP. (d) Assertion (A) is false, but Reason (R) is true
Its impact (positive or negative) is not accounted in
Ans. (a) Both Assertion (A) and Reason (R) are true and
the index of social welfare in terms of GDP. To that Reason (R) is the correct explanation of Assertion (A)
extent, GDP as an index of welfare is not an
appropriate index. It is either underestimated or (vi) Assertion (A) Mass vaccination, awareness about
sanitisation and promoting cleanliness entails
overestimated the level of welfare.
positive externalities.
(i) An externality can be defined as Reason (R) These often accounts as part of
(a) good or bad impact of an activity for which the other economic development but does not count for
person is fully compensated economic growth.
(b) production or consumption choices of one entity enters Alternatives
the production or utility function of other entity without
that entity’s approval (a) Both Assertion (A) and Reason (R) are true and Reason
(R) is the correct explanation of Assertion (A).
(c) positive or negative impact of an activity, solely on the
concerned individual (b) Both Assertion (A) and Reason (R) are true, but Reason
(d) All of the above (R) is not the correct explanation of Assertion (A).
(c) Assertion (A) is false, but Reason (R) is true
Ans. (b) production or consumption choices of one entity enters
(d) Both the statements are false
the production or utility function of other entity without
that entity’s approval Ans. (b) Economic growth considers only an increase in the
level of production but development means a sustained
(ii) Smoke emitted by a chemical factory and causing air increase in GDP along with an improvement in social,
pollution is an example of economic and institutional sphere.
CBSE Term-II Economics XII 25

3. Direction Read the following text and answer (iv) Countries of ............. are rich in natural resources.
question no. (i) to (vi) on the basis of the same. (a) Africa
(b) Latin America
It is not that countries which are endowed with a (c) Both (a) and (b)
bounty of natural wealth-minerals or forests or the (d) Asia
most fertile lands are naturally the countries with Ans. (c) Due the geographical location, these two countries
high national income. In fact, the resource rich Africa possess resources naturally. However, growth of a
and Latin America have some of the countries with nation does not depend upon the possession of
lowest national income in the world, whereas many resources but the usage of the same.
countries with high national income have scarcely (v) Growth and development of a country are ………
any natural wealth. related.
There was a time when possession of natural (a) positively (b) negatively
resources was the most important consideration but (c) Not related at all (d) None of these
even then the resources have to be transformed Ans. (a) In general, growth is the first step towards achieving
through a production process. development. Development is not possible without
The economic well-being of a country thus does not growth but the vice-versa is possible
necessarily depend on the mere possession of (vi) Which of the following statements is/are correct?
resources; the point is how these resources are used (i) Inequitable distribution of resources is the
in generating a flow of production and how, as a inequality in the social conditions of daily living
consequence, income and wealth are generated from shaped by deeper social structures and processes.
that process. (ii) The inequality is systematic, produced by social
(i) GDP cannot be considered as a good indicator of norms, policies and practises that tolerate or
promote unfair distribution of power, wealth and
development due to which of the following reasons?
other necessary social resources.
(a) It ignores non-tradable goods
(b)It gives no information regarding the distribution of Alternatives
income (a) Both are true
(c) It ignores the side-effects of undertaking production (b) Both are false
activities (c) Only (i) is true, but (ii) is false
(d)All of the above (d) Only (ii) is true, but (i) is false
Ans. (d) All of the above Ans. (a) Both are true

(ii) Assertion (A) The economic well-being of a country

doesn’t directly depend upon the possession of
natural resources. PART 2
Reason (R) Distribution of income generated in the
growth process is an important indicator of countries
level of development.
Subjective Questions
Alternatives l
Short Answer (SA) Type Questions
(a) Both Assertion (A) and Reason (R) are true and Reason
(R) is the correct explanation of Assertion (A) 1. ‘Domestic services (household services)
(b) Both Assertion (A) and Reason (R) are true, but Reason performed by a woman are not considered as an
(R) is not the correct explanation of Assertion (A) economic activity. Defend or refute the given
(c) Assertion (A) is true, but Reason (R) is false statement with valid reason. (CBSE 2020)
(d) Assertion (A) is false, but Reason (R) is true
Ans. The given statement is refuted on the basis of the
Ans. (a) Availability of resources in any country doesn’t ensure
following reasons
that the benefit of growth achieved will trickle down to the
masses. Ensuring equitable distribution of the available (i) Domestic services are performed by woman out of
resources is the responsibility of the government. love and affection.
(ii) Such services do not add to the flow of goods and
(iii) Possession of natural resources and growth of
services in the economy.
national income are ……… related.
(iii) These services are for self-consumption, not for
(a) directly (b) inversely economy.
(c) constantly (d) Can’t comment
Ans. (d) In general, we cannot fix a relationship between natural 2. ‘Subsidies to the producers, should be treated as
resources and national income. It majorly depends upon transfer payments’. Defend or refute the given
how the resources are being utilised in an economy. statement with valid reason. (CBSE 2020)
26 CBSE Term-II Economics XII

Ans. This statement is refuted because subsidies given to the Ans. Computing the value of xa
producers should not be treated as transfer payments. Gross Fixed Capital Formation
Subsidies are given to reduce the market price of socially =GDPMP – (Final Consumption Expenditure +
desirable goods such as fertilisers, LPG gas, etc. So, that
they can be afforded by the poor section of society. Change in Stocks + Net Exports)
= 50,50,345 − 33,53,748 – 2,55,126 − (10,18,907
Transfer payments, on the other hand, are given to fulfill − 12,19,109)
social objectives. Examples of transfer payments are old age
= 16,41,673
pension, unemployment allowance, etc.
Computing the value of xb
Also, transfer payments are not taken into account while
computing the GDP of the country, but subsidies are Gross Domestic Product at Market Price
considered in the computation of GDP. = Final Consumption Expenditure + Gross Fixed
Capital Formation + Change in Stock + Net Exports
3. Suppose the GDP at market price of a country in a
particular year was ` 1,100 crore. Net factor income (Exports – Imports)
from abroad was ` 100 crore. The value of Indirect = 38,46,417 + 18,21,099 + 1,79,004 + (13,28,765 –
taxes – Subsidies was ` 150 crore and national 16,14,040)
income was ` 850 crore. Calculate the aggregate = 55,61,245
value of depreciation. (NCERT) 6. Calculate net domestic product at factor cost.
Ans. NNPMP = NNPFC + NIT
S.No. Contents ` (in lakh)
= 850 + 150 = ` 1,000 crore
(i) Interest 700
GNPMP = NFIA + GDPMP
= 100 + 1,100 (ii) Compensation of Employees 3,000
= ` 1,200 crore (iii) Net Indirect Taxes 500
Depreciation = GNPMP − NNPMP (iv) Rent and Profit 700
= 1,200 – 1,000 = 200 crore
(v) Transfer Payments by Government 10
Therefore, depreciation = ` 200 crore
(CBSE 2020)
4. GNP is the estimated value of the total worth of
Ans. Net Domestic Product at Factor Cost
production and services earned by the normal
(NDPFC ) = Compensation of Employees + Interest
residents of a country. But to find out NNP, GNP
+ Rent and Profit
deducts depreciation, why should we deduct
depreciation from GNP? = 3, 000 + 700 + 700
Ans. The productive power of physical capital stock of a country
= ` 4, 400 crore
diminishes gradually because of the wear and tear in the 7. In a single day Raju, the barber collects ` 500
process of production. When the machine becomes totally from haircuts; over this day, his equipment
unproductive, it has to be replaced by new machine. So, a depreciates in value by ` 50. Of the remaining
sum of money is set aside every year into depreciation ` 450, Raju pays sales tax worth ` 30, takes home
account and new machine can be purchased by utilising
` 200 and retains ` 220 for improvement and
this accumulated sum.
buying of new equipment. He further pays ` 20 as
So, depreciation is deducted from GNP in order to get
income tax from his income. Based on this
more accurate measure of the sustainable production of
goods and services in a country in a given year.
information, complete Raju’s contribution to the
following measures of income
5. Compute the values of x a and x b on the basis of given (i) Gross domestic product, (ii) NNP at market
data pertaining to an economy. price and (iii) NNP at factor cost.
Ans. Assuming intermediate consumption= 0 and
Year/Item Year 1 ( ` ) Year 2 ( ` )
Change in stock = 0
Final consumption expenditure 33,53,748 38,64,617
(i) GVA MP = ` 500 (Raju’s contribution to GDP)
Gross fixed capital formation x a 18,21,099
(ii) NVA MP = GVA MP – Depreciation
Change in stocks 2,55,126 1,79,004 = 500 – 50
Exports of goods and services 10,18,907 13,28,765 = ` 450 (Raju’s contribution to NNPMP )
Imports of goods and services 12,19,109 16,14,040 (iii) NVA FC = NVA MP – Net Indirect Taxes
Gross domestic product at 50,50,345 xb = 450 – 30
market prices = ` 420 (Raju’s contribution to NNPFC)
CBSE Term-II Economics XII 27

8. Calculate Net Value Added at Factor Cost ( NVA FC ) (ii) Rent received by an Indian resident from Russian
from the following data. embassy in India is not a part of domestic factor
income of India because Russian embassy in India is
S.No. Contents ` (in crores) not a part of domestic territory of India.
(i) Value of Output 800 (iii) Profits earned by a branch of State Bank of India in
England is not a part of domestic factor income of
(ii) Intermediate Consumption 200 India because the branch of SBI in England is not a
(iii) Indirect Taxes 30 part of domestic territory of India.
(iv) Depreciation 20 11. Calculate Gross Value Added at Market Price
(v) Subsidies 50 (GVAMP) from the following data.
(vi) Purchase of Machinery 50 S.No. Contents (in ` lakhs)
(CBSE 2020) (i) Depreciation 20
(ii) Domestic Sales 200
Ans. GVA MP = Value of Output − Intermediate Consumption
(iii) Change in Stock (–) 10
= 800 − 200 = ` 600 crores
NVA FC = GVA MP − Depreciation − Indirect Tax + Subsidies (iv) Exports 10
NVA FC = 600 − 20 − 30 + 50 = ` 600 crores (v) Single use Producer Goods 120
(vi) Net Indirect Taxes 20
9. How will the following be treated while estimating
national income of India? Give reasons. (CBSE 2020)
(i) Value of bonus shares received by shareholders of a Ans. Gross Value Added at Market Price (GVAMP )
company. = Value of Output − Intermediate Consumption
(ii) Capital gains to Indian residents from sale of shares of Value of Output = Sales + Change in Stock
a foreign company. Value of Output = ( 200 + 10 ) + ( − ) 10
(iii) Fees received from students. = 210 − 10 = ` 200
Ans. (i) Value of bonus shares received by shareholders of a GVAMP = 200 − 120
company is not included in the estimation of national GVAMP = ` 80 lakhs
income of India because these are just financial
transactions (leading to change of ownership of financial 12. Calculate intermediate consumption from the
assets), not contributing to the flow of goods and following data. (CBSE 2019)
services in the economy. (` in crores)
S.No. Contents
(ii) Capital gains to Indian residents from sale of shares of a
foreign company is not included in the national income (i) Gross Value of Output 300
of India because it is a part of financial transactions (ii) Net Value Added at Factor Cost (NVA FC) 100
corresponding to which there is no flow of goods and
(iii) Subsidies 15
services in the economy.
(iii) From the students’ point of view, expenditure on fees is (iv) Depreciation 30
to be treated as part of private final consumption
Ans. NVA FC = ` 100 crores (given)
expenditure. Accordingly, it is to be included in the
estimation of national income of India when expenditure GVA MP = NVA FC + Depreciation – Subsidy
method is used to estimate it. However, from the GVA MP = ( 100 + 30 − 15 ) = ` 115 crores
schools’ point of view, fee received is just a revenue GVA MP = Value of Output − Intermediate Consumption
from the sale of services.
115 = 300 − Intermediate Consumption
10. Which of the following factor incomes be included Intermediate Consumption = 300 − 115 crores
in domestic factor income of India? Give reasons for = ` 185 crores
your answer.
13. Giving reason state how the following are treated
(i) Compensation of employees to the residents of Japan
working in Indian embassy in Japan.
in estimation of national income.
(ii) Rent received by an Indian resident from Russian (i) Payment of interest by banks to its depositors.
embassy in India. (ii) Expenditure on old age pensions by government.
(iii) Profits earned by a branch of State Bank of India in (iii) Expenditure on engine oil by car service station.
England. (CBSE (C) 2017)
Ans. (i) Compensation of employees to the residents of Japan Ans. (i) Payment of interests by bank to its depositors should
working in Indian embassy in Japan is a part of factor be included in estimation of national income as it will
income of India because Indian embassy in Japan is a be treated as factor income.
part of domestic territory of India.
28 CBSE Term-II Economics XII

(ii) Expenditure on old age pensions by government is not a 16. Social welfare may not increase even when real
part of national income as it is a transfer payment.
GDP increases. Explain.
(iii) Expenditure on engine oil by car service station is not a
Ans. Increase in GDP may not cause increase in welfare in a
part of national income as it is an intermediate cost.
situation when distribution of income becomes skewed
14. Find net value added at factor cost. (unequal). If, along with an increase in GDP, the
percentage of population below poverty line happens to
S.No. Contents ` (in lakhs) increase, it implies a situation of deprivation on one
(i) Durable use Producer Goods with a 10 hand and concentration of economic power on the
Life Span of 10 Years other. It is a situation when a rising percentage of GDP
(ii) Single use Producer Goods 5 is being pocketed by a smaller percentage of
population. The bulk of population suffers poverty,
(iii) Sales 20 while only a small segment of the society enjoys
(iv) Unsold Output Produced During the 2 prosperity owing to a rise in GDP. The rise in GDP is
Year achieved at the cost of social welfare.
(v) Taxes on Production 1 17. “Management of a water polluting oil refinery says
(CBSE 2016) that it (oil refinery) ensures welfare through its
Ans. Net Value Added at Factor Cost ( NVA FC ) contribution to gross domestic product.” Defend or
= Sales + Unsold Output Produced during the
refute the argument of management with respect to
Year − Single use Producer Goods −
GDP as a welfare measure of the economy.
(CBSE 2020)
Depreciation on Durable use Producer
Goods − Taxes on Production Ans. The above argument is refuted with respect to GDP as
= 20 + 2 − 5 − 1 − 1 a welfare measure of the economy. It is because GDP is
not a good measure of welfare as it fails to take in to the
= ` 15 lakhs
Value of Durable Goods 10 effect of externalities. Externality means good or bad
Note Depreciation = = impact of an activity without paying the price or penalty
Life Span 10
for that impact of externalities is not accounted in the
= ` 1 lakh index of social welfare in terms of GDP.
15. (i) Calculate the value of ‘Change in Stock’ from the For example, oil refinery may pollute the nearby source
following data. of water. Such harmful effects to people and marine life
is not be penalised. Thus it is not ensuring the welfare
S.No. Contents ` (in crores) of the economy through GDP.
(a) Sales 400
18. Sale of petrol and diesel cars is rising particularly
(b) Net Value Added at Factor 200 in big cities. Analyse its impact on gross domestic
Cost (NVA FC)
product and welfare. (CBSE 2016)
(c) Subsidies 100 Ans. As the sale of petrol and diesel cars rises, it implies that
(d) Change in Stock ? the private consumption expenditure is also rising.
(e) Depreciation 40 A rise in private consumption expenditure leads to a
(f) Intermediate Consumption 100 rise in the gross domestic product.
So, an increase in the sale of petrol and diesel cars will
(ii) Define real gross domestic product. (CBSE 2020) lead to an increase in the gross domestic product of the
Ans. (i) Net Value Added at Factor Cost (NVA FC) country.
= Sales + Change in Stock – Intermediate However, it will not lead to an increase in the welfare of
Consumption − Depreciation − Net Indirect the people because of the below mentioned reasons
Taxes (i) As the sale of petrol and diesel cars rises, then the
200 = 400 + (Change in Stock) − 100 − 40 − ( 0 − 100) level of pollution will also rise in the big cities.
200 = 360 + Change in Stock − Change in Stock (ii) With a rise in the number of cars, the traffic
= 360 − 200 congestion on the roads will worsen.
Change in Stock = − 160 crores (iii) A rise in the number of cars will increase the demand
for petrol and diesel. This will lead to a rise in the
∴ Decrease in Stock = ` 160 crores
prices of petrol and diesel.
(ii) Real gross domestic product is the sum total of the money
(iv) The already depleted reserves of petrol and diesel
value of all final goods and services produced in an
will be subjected to further depletion.
economy during the year estimated at same given base
year prices.
CBSE Term-II Economics XII 29

19. Explain how ‘non-monetary exchanges’ act as a 22. Find net value added at market price. (Delhi 2016)
limitation in taking GDP as an index of welfare.
S.No. Contents `n (in lakhs)
(CBSE 2017)
Ans. It can be understood with the help of following points (i) Fixed Capital Good with a
Life Span of 5 Years 15
(i) GDP measures only economic value of the current
productive activity of a country. (ii) Raw Materials 6
(ii) There are many activities which are not evaluated in (iii) Sales 25
monetary terms. In India, non-monetary transactions are
present in rural areas where payments for farm labourers (iv) Net Change in Stock ( −) 2
are made in kind rather than cash. But such transactions (v) Taxes on Production 1
are not recorded.
(iii) Even while producing goods and services, lot of human Ans Net Value Added at Market Price (NVA MP)
cost is also involved. For example, sacrificing leisure = Sales + Net Change in Stock − Raw Materials
hours by working but this is never included in total cost. − Depreciation on Fixed Capital Good
Therefore, GDP remains underestimated and hence loses = 25 + ( −2) − 6 − 3 = ` 14 lakh
its appropriateness as an index of welfare.
Note Depreciation on Fixed Capital Good
20. ‘‘Gross Domestic Product (GDP) is not the best Value of Fixed Capital Good
=
indicator of the economic welfare of a country.’’ Life Span
Defend or refute the given statement with valid 15
= = ` 3 lakh
reasons. (CBSE 2020) 3
Ans. ‘‘Gross Domestic Product (GDP) is not the best indicator of 23. Calculate net national product at market price
the economic welfare of a country.’’ This statement is from the following data
defended because of the following reasons
(i) Distribution of GDP If the GDP of the country is rising, S.No. Contents ` (in crore)
it is not necessary that the welfare will also rise. This is
because with every increase in the level of GDP, it is not (i) Net Factor Income from Abroad ( −) 5
necessary that distribution of income is also equalable.
(ii) Non-Monetary Exchanges In rural economy, barter
(ii) Private Final Consumption 100
Expenditure
system of exchange still prevails to some extent. Payments
for farm labour are often made in kind rather than in (iii) Personal Tax 20
cash. All such transactions remain unrecorded which
causes underestimation of GDP. (iv) Gross National Disposable Income 170
(iii) Externalities It refers to good and bad impact of an (v) Government Final Consumption 20
activity without paying the price or penalty for that Expenditure
activity. Impact of external entities are not accounted in
the index of social welfare in terms of GDP. (vi) Corporation Tax 15
21. Government incurs expenditure to popularise yoga (vii) Gross Domestic Capital Formation 30
among the masses. Analyse its impact on Gross
(viii) Personal Disposable Income 70
Domestic Product and welfare of the people.
(Delhi 2016) (ix) Net Exports ( − ) 10
Ans. The expenditure incurred by the government to popularise
yoga among the masses will increase the government final (x) Savings of Private Corporate Sector 5
consumption expenditure. With a rise in this component, (xi) Net National Disposable Income 145
the domestic income of the country will also rise. So, the
expenditure incurred by the government to popularise yoga Ans. Here,
will lead to an increase in the Gross Domestic Product of NNPMP = Private Final Consumption Expenditure
the country. +Government Final Consumption
This expenditure will also increase the welfare of the Expenditure + Gross Domestic Capital
people, as is enumerated below Formation + Net Export − Depreciation
(i) As more and more people practise yoga, their health and + NFIA
immunity will improve. This will help in increasing their = 100 + 20 + 30 + ( − 10) − 25 + (–5)
working capacity. = ` 110 crore
(ii) As people’s health improve, so government’s expenditure Depreciation = Gross National Disposable Income
on the curative aspect of health issues will decrease. – Net National Disposable Income
(iii) People will develop a positive outlook and their
= 170 − 145 = ` 25 crore
well-being will increase in general.
30 CBSE Term-II Economics XII

24. Find net value added at market price. (Delhi 2012) Ans. (i) Family members working free on the farm owned by
the family are engaged in the value addition process.
Imputed value of their farm output is included in the
S.No. Contents ` (in crore) estimation of national income. Accordingly, income
(i) Output Sold (units) 800 generated by the farming family would be treated as
mixed income of self-employed, which includes
(ii) Price Per Unit of Output 20 compensation of labour.
(iii) Excise 1,600 (ii) Rent free house from an employer is included in the
(iv) Import Duty 400 estimation of national income because it is a kind of
wages in kind and therefore, a part of compensation
(v) Net Change in Stock (–) 500 of employees.
(vi) Depreciation 1,000 (iii) Expenditure on free services provided by the
(vii) Intermediate Cost 8,000 government should be included in the estimation of
national income because expenditure on these
Ans. Sales = Output Sold × Price Per Unit services is a part of government final consumption
= 800 × 20 = ` 16,000 crore expenditure.
Now, Value of Output = Sales + Change in Stock 2. Define the problem of double counting in the
= [16, 000 + ( −500 )] = ` 15,500 crore estimation of national income. Discuss two
Now, GVA MP = Value of Output − Intermediate Cost approaches to correct the problem of double
= (15 ,500 − 8, 000) = ` 7,500 crore counting. (CBSE 2020)
Hence, NVA MP = GVA MP − Depreciation Ans. The counting of the value of commodity more than
= (7,500 − 1,000) once is called double counting. This leads to
overestimation of the value of goods and services
= 6,500 crore
produced. Thus, the importance of avoiding double
25. From the following data, calculate net value added at counting lies in avoiding overestimating the value of
factor cost (All India 2011) domestic product.
For example, a farmer produces one ton of wheat and
S.No. Contents ` (in crore) sells it for ` 400 in the market to a flour mill. The flour
mill sells it for ` 600 to the baker. The baker sells the
(i) Sales 500 bread to a shopkeeper for ` 800. The shopkeeper sells
(ii) Purchase of Intermediate Goods 350 the entire bread to the final consumers for ` 900. Thus,
(iii) Opening Stock 60 Value of Output = 400 + 600 + 800 + 900 = ` 2,700
Infact, the value of the wheat is counted four times, the
(iv) Indirect Taxes 50 value of services of the miller thrice and the value of
(v) Consumption of Fixed Capital 90 services by the baker twice. In other words, the value of
wheat and value of services of the miller and of the
(vi) Import of Raw Materials 85
baker have been counted more than once. The counting
(vii) Closing Stock 80 of the value of the commodity more than once is called
double counting.
Ans. Here,
To avoid the problem of double counting, two methods
Net Value Added at Factor Cost ( NVA FC )
are used
= Sales + Change in Stock (Closing Stock −
Opening Stock) − Purchase of Intermediate Goods (i) Final Output Method According to this method, the
value of intermediate goods is not considered. Only
− Consumption of Fixed Capital − Indirect Taxes
the value of final goods and services are considered.
= 500 + ( 80 − 60 ) − 350 − 90 − 50 In the above example, the value of final goods i.e.,
= 520 − 490 = ` 30 crore bread is `900.
(ii) Value Added Method Another method to avoid the
l
Long Answer (LA) Type Questions problem of double counting is to estimate the total
value added at each stage of production. In the above
1. Explain the treatment assigned to the following while example, the value added at each stage of production
estimating national income. Give reasons. is 400 + 200 + 200 + 100 = ` 900
(i) Family members working free on the farm owned by
the family. 3. How will the following be treated while
(ii) Rent free house from an employer.
estimating national income of India? Give
reasons.
(iii) Expenditure on free services provided by the
government. (i) Dividend received by a foreigner from investment
in shares of an Indian company.
CBSE Term-II Economics XII 31

(ii) Expenditure on education of children by a family in Also,

Uttar Pradesh. Let mixed income = y
(iii) Remittances from non-resident Indians to their families NDP FC = Wages and Salaries + Operating Surplus
in India. (CBSE 2018) + Mixed Income
Ans. (i) Dividend received by a foreigner from investment in 70, 000 = ( 15 , 000 + 30, 000 + y )
shares of an Indian company is included in national So, y = 25 , 000
income of India as a negative component because it is a Note NDPFC = NNPMP − NFIA = 71,000 − 1,000
part of net factor income to the rest of the world.
= ` 70,000 crores
(ii) Expenditure on education of children by a family in Uttar
Pradesh is included in the estimation of national income So, Government final consumption expenditure
of India since it is a part of private final consumption = ` 20,000 crores
expenditure. Mixed income = ` 25,000 crores
(iii) Remittances from non-resident Indians to their families 5. Given the following data, find the missing values
in India are to be treated as transfer payments.
Accordingly, these are not to be included in the
of ‘private final consumption expenditure’ and
estimation of national income of India. ‘operating surplus’.
4. Given the following data, find the missing value of S. No. Contents ` (in crores)
‘government final consumption expenditure’ and (i) National Income 50,000
‘mixed income of self-employed’. (ii) Net Indirect Taxes (NIT) 1,000
(iii) Private Final Consumption Expenditure ?
S. No. Contents ` (in crores)
(iv) Gross Domestic Capital Formation 17,000
(i) National Income 71,000
(v) Profits 1,000
(ii) Gross Domestic Capital Formation 10,000 (vi) Government Final Consumption 12,500
(iii) Government Final Consumption ? Expenditure
Expenditure (vii) Wages and Salaries 20,000
(iv) Mixed Income of Self-employed ? (viii) Consumption of Fixed Capital 700
(ix) Mixed Income of Self-employed 13,000
(v) Net Factor Income from Abroad 1,000
(x) Operating Surplus ?
(vi) Net Indirect Taxes 2,000
(xi) Net Factor Income from Abroad 500
(vii) Profits 1,200 (xii) Net Exports 2,000
(viii) Wages and Salaries 15,000 (CBSE 2019)
(ix) Net Exports 5,000 Ans. Private final consumption expenditure = y,
(x) Private Final Consumption 40,000
Operating surplus = x
Expenditure We know,
NDPFC = CoE + Operating Surplus + Mixed Income
(xi) Consumption of Fixed Capital 3,000
Also, NDPFC = NNPFC − NFIA
(xii) Operating Surplus 30,000 = 50, 000 − 500 = ` 49,500 crores
(CBSE 2019) ∴ 49,500 = Wages and Salaries + x + 13, 000
Ans. NNP FC = ` 71,000 (given) crores 49,500 = 20, 000 + 13, 000 + x
49,500 = 33, 000 + x
GDPFC = NNPFC − Net Factor Income from Abroad +
x = 49,500 − 33, 000 = ` 16,500 crores
Depreciation + Net Indirect Taxes
Also, GDPMP = PFCE + GFCE + Gross Domestic Capital
= 71, 000 − 1, 000 + 3, 000 + 2, 000 Formation + Net Exports
= ` 75 , 000 crores GDPMP = NPPFC + Depreciation + NIT
Now, = 49,500 + 700 + 1, 000
Let government final consumption expenditure = x = ` 51,200 crores
GDP MP = Private Final Consumption Expenditure + ∴ 51,200 = y + 12,500 + 17, 000 + 2, 000
Government Final Consumption Expenditure + ∴ y = ` 19,700 crores
Gross Domestic Capital Formation + Net Exports So, private final consumption expenditure
75 , 000 = ( 40, 000 + x + 10, 000 + 5 , 000 ) = ` 16,500 crores
∴ x = ` 20, 000 crores Operating surplus = ` 19,700 crores
32 CBSE Term-II Economics XII

6. Given the following data, find the values of ‘operating S.No. Contents ` (in crores)
surplus’ and ‘gross domestic capital formation’. (h) Dividends 80
S. No. Contents ` (in crores) (i) Consumption of Fixed Capital 50
(i) Government Final Consumption 2,000 (j) Social Security Contribution by 200
Expenditure Employers
(ii) Mixed Income of Self-employed 1,500 (k) Mixed Income 1,000
(iii) National Income 12,000
(CBSE 2018)
(iv) Net Factor Income from Abroad 200
Ans. (i) NDP FC = Compensation of Employees + Operating
(v) Operating Surplus ? Surplus + Mixed Income
(vi) Profits 500 NDP FC = Wages and Salaries + Social Security
(vii) Private Final Consumption Expenditure 6,000 Contribution by Employers + Rent and
Interest + Undistributed Profit +
(viii) Net Indirect Taxes 700
Corporation Tax + Dividends + Mixed
(ix) Net Exports 1,800 Income
(x) Consumption of Fixed Capital 600 NDP FC = 1, 800 + 200 + 6, 000 + 400 + 120
(xi) Gross Domestic Capital Formation ? + 80 + 1, 000
(xii) Wages and Salaries 6,000 NDP FC = 2, 000 + 6, 600 + 1, 000 = ` 9, 600 crores
NNP MP = NDP FC + Net Factor Income from Abroad
(CBSE 2019)
+ Net Indirect Taxes
Ans. NNP FC = ` 12,000 (Given) NNP MP = 9, 600 + ( − ) 70 + 100
Let Gross domestic capital formation = x NNP MP = 9, 600 − 70 + 100 = ` 9,630 crores
And Operating surplus = y (ii) GDP FC = NDP FC + Depreciation
GDP MP = NNP FC + Depreciation − NFIA + NIT GDP FC = 9, 600 + 50 = ` 9,650 crores
GDP MP = 12, 000 + 600 − 200 + 700 = ` 13,100 crores
8. (i) Define ‘net factor income from abroad’. How is it
GDP MP = Private Final Consumption Expenditure + different from ‘net exports’?
Government Final Consumption Expenditure +
(ii) Calculate the value of “Rent” from the following
Gross Domestic Capital Formation + Net
data. (CBSE 2019)
Exports
13,100 = 6, 000 + 2, 000 + x + 1, 800 S.No. Contents (` in crores)
x = 13,100 − 9, 800 = ` 3, 300 crores (a) Gross Domestic Product at Market 18,000
Gross domestic capital formation = ` 3,300 crores Price
NDP FC = NNP FC − NFIA (b) Mixed Income of Self-employed 7,000
NDP FC = 12, 000 − 200 = ` 11, 800 crores (c) Subsidies 250
NDP FC = Compensation of Employees + Operating (d) Interest 800
Surplus + Mixed Income (e) Rent ?
11, 800 = 6, 000 + y + 1,500 (f) Profit 975
y = 11, 800 − 7,500 = ` 4, 300 crores
(g) Compensation of Employees 6,000
Operating surplus = ` 4,300 crores
(h) Consumption of Fixed Capital 1,000
7. Calculate (i) Indirect Tax 2,000
(i) Net National Product at Market Price
Ans. (i) Difference between Net Export and Net Factor
(ii) Gross Domestic Product at Factor Cost Income from Abroad (NFIA).
S.No. Contents ` (in crores) Net Factor Income From Abroad (NFIA) refers to the
difference between factor income received from and
(a) Rent and Interest 6,000
paid to abroad.
(b) Wages and Salaries 1,800
Basis Net Exports NFIA
(c) Undistributed Profit 400
Concept It is the income from It is the income from
(d) Net Indirect Taxes 100 buying and selling factor sources.
(e) Subsidies 20 goods abroad.
(f) Corporation Tax 120 Formula Export of Goods – Factor Income Received
Import of Goods from Abroad– Factor
(g) Net Factor Income to Abroad 70 Income paid to Abroad.
CBSE Term-II Economics XII 33

(ii) By Income method Basis Real GDP Nominal GDP

NDPFC = COE + Operating Surplus* + Mixed Income Rise It can increase only It can rise either when
…(i) when output of goods output of goods and
*Operating Surplus = Rent + Interest + Profits and services rise in services rise or when
the current year. current prices rise.
and NDPFC = GDPMP − Depreciation − NIT
= 18, 000 − 1, 000 − ( 2, 000 − 250) Reliability It is a reliable index of It is not a reliable
= ` 15,250 crores economic growth. index of economic
growth.
Now, putting values in eq. (i)
15 , 250 = 6, 000 + Rent + 800 + 975 + 7, 000 11. Calculate (i) Gross Domestic Product at Market
15 , 250 = 14, 775 + Rent Price and (ii) Factor income from abroad from the
∴ Rent = ` 475 crores following data.
9. Explain the precautions that are taken while estimating S.No. Contents ` (in crore)
national income by value added method. (CBSE 2017) (a) Gross National Product at Factor Cost 6,150
Ans. While using value added method for computing national (b) Net Exports ( − ) 50
income, the following precautions should be taken
(i) The value of intermediate goods should not be included. (c) Compensation of Employees 3,000
(ii) Purchase and sale of second hand goods should be (d) Rent 800
excluded. (e) Interest 900
(iii) Imputed value of self-consumed goods should be
included. (f) Profit 1,300
(iv) Own account production of goods should be included. (g) Net Indirect Taxes 300
(v) Value of self-consumed services should not be included in (h) Net Domestic Capital Formation 800
the estimation of national income.
(vi) Imputed rent on the owner occupied house is also taken (i) Gross Fixed Capital Formation 850
into the account. (j) Change in Stock 50
10. (i) Giving valid reasons, state how the services of a ‘school (k) Dividend 300
teacher’ will be undertaken in estimation of national (l) Factor Income to Abroad 80
income. Ans (i) GDPMP = Compensation of Employees + Rent
(ii) Distinguish between ‘Real Gross Domestic Product’ + Interest + Profit + Net Indirect Taxes
and ‘Nominal Gross Domestic Product’. (CBSE 2020)
+ Consumption of Fixed Capital
Ans. (i) The services of a school teacher will be taken in the = 3,000 + (800 + 900 + 1,300) + 300
estimation of national income of the country as they + ( 850 + 50 − 800 )
provide services in consideration of some payment and
adds to the current flow of services.
= ` 6, 400 crore
Note Depreciation = Gross Domestic Fixed Capital
(ii) Difference between Real GDP and Nominal GDP
Formation + Change in Stock − Net
Basis Real GDP Nominal GDP Domestic Capital Formation
(ii) GNPFC = GDPMP − Net Indirect Taxes + Factor Income
Price It is the value of It is the value of
current output at base current output at from Abroad − Factor Income to Abroad
year prices. current year prices. 6,150 = 6, 400 − 300 + Factor
Other Name It is also known as It is also known as Income from Abroad − 80
GDP at constant GDP. 6,150 = 6, 020 + Factor Income from Abroad
price. Factor Income from Abroad
= 6,150 − 6, 020 = ` 130 crore
34 CBSE Term-II Economics XII

Chapter Test
(ii) Payment of interest by a bank to an individual
(iii) Payment of interest by an individual to a bank
Multiple Choice Questions
1. GDP does not include
3. Explain the precautions that should be taken while
estimating national income by expenditure
(a) government spending to clean up pollution caused by
method.
factories
(b) payments to technical consultants abroad 4. If Real GDP is ` 300 and Nominal GDP is ` 330,
(c) additions to inventory stocks of intermediate goods calculate Price Index (base = 100).
(d) None of the above 5. The value of the Nominal Gross National Product
2. GDP equals GNP, when (GNP) of an economy was ` 2,500 crores in a
(a) the value of exports of goods equals the value of imports particular year. The value of GNP of that country
of goods during the same year, evaluated at the price of
(b) the value of exports of goods and services equals the value base year was ` 3,000 crores.
of imports of goods and services Calculate the value of GNP deflator of the year in
(c) there are no net factor income from abroad percentage terms. Has the price level risen
(d) None of the above between the base year and the year under
3. Income from buying and selling of financial assets is consideration?
not included in the estimation of domestic income by Long Answer (LA) Type Questions
income method. Choose the correct reason for the
same. 1. (i) Discuss briefly the three components of
(a) These are paper claims and no actual production has
‘Income from property and entrepreneurship’.
happened (ii) What are ‘externalities’ ? State its types with
(b) It’s a transfer of ownership from one person to other suitable examples.
(c) These are not related to the current year’s production. 2. Given the following data, find the missing values
(d) Both (a) and (b) of ‘gross domestic capital formation’ and ‘Wages
4. Net factor income abroad is zero when and salaries’.
(a) factor income from abroad is equal to factor income to S. No. Contents ` (in crores)
abroad
(b) factor income from abroad is more than factor income to (i) Mixed Income of Self-employed 3,500
abroad (ii) Net Indirect Taxes 300
(c) it can never be zero
(d) None of the above (iii) Wages and Salaries ?
5. If a country’s nominal GDP is constant, then which of (iv) Government Final Consumption 14,000
the following statements about it would be correct? Expenditure
(a) It is impossible for the real per capita GDP to rise in such (v) Net Exports 3,000
circumstances
(b) The real per capita GDP can rise if and only if the (vi) Consumption of Fixed Capital 300
country’s population is shrinking and prices are falling (vii) Net Factor Income from Abroad 700
(c) It is possible for the real per capita GDP to rise even if
the country’s population is increasing (viii) Operating Surplus 12,000
(d) None of the above (ix) National Income 30,000
Short Answer (SA) Type Questions (x) Profits 500
1. ‘‘Gross investment is always greater than net (xi) Gross Domestic Capital ?
investment.’’ Defend or refute the given statement with Formation
valid argument.
(xii) Private Final Consumption 11,000
2. Giving reason explain how the following should be Expenditure
treated in the estimation of national income?
(i) Payment of interest by a firm to a bank

Answers
Multiple Choice Questions
For Detailed Solutions
1. (b) 2. (c) 3. (d) 4. (a) 5. (c)
Scan the code
CBSE Term-II Economics XII 35

CHAPTER 03

Aggregate Demand,
Aggregate Supply
and Related Concepts

In this Chapter...
l Concept of Aggregate Demand (AD) l Saving Function
l Concept of Aggregate Supply (AS) l Concept of Short-run
l Consumption Function l Investment Multiplier

Concept of Aggregate Demand (AD) 2. Investment Expenditure by Firms (I) It refers to

planned expenditure by private entrepreneurs on
Aggregate Demand is the value of total expenditure on all
goods and services in an economy during a fiscal year. creation of new capital assets like machines, buildings
Aggregate Demand of the economy depends upon the level of and raw materials. Increase in capital assets through
employment. There is direct or positive relationship between investment is called capital formation. It is also called
the level of employment or output in the economy and the private investment expenditure. It comprises of
Aggregate Demand. Aggregate Demand is the summation of investment in fixed assets and inventory stock. It is
consumption and investment. determined by the market rate of interest. Higher the
Aggregate Demand (AD) = C + I market rate of interest, lower the investment
expenditure as rate of interest is considered as cost of
Where, C = Consumption expenditure borrowings.
I = Investment 3. Government Expenditure or Demand for Goods and
Components of Aggregate Demand Services (G) It refers to government planned
expenditure on purchase of consumer and capital
Following are the components of Aggregate Demand (AD) in a goods to fulfil common needs of the society. These
four sector economy include provision for schools, transport, hospitals,
1. Household Consumption Demand or Expenditure (C ) It roads, parks, etc.
refers to total expenditure to be incurred by all 4. Net Export ( X − M ) It is defined as the aggregate of all
households on purchase of goods and services, e.g.,
demand for our goods and services by foreign countries
households demand for food, clothing, housing, etc. It is
over our country’s demand for foreign countries’ goods
also called private consumption expenditure.
and services. It depends upon foreign exchange rate,
It is determined by the level of personal disposable terms of trade, trade policy, etc. thus, aggregate
income in the economy. Higher the level of personal demand can also be written as
disposable income, higher the private consumption
expenditure. AD = C + I + G + ( X − M )
 36 CBSE Term-II Economics XII

Concept of Aggregate Supply (AS) CC is the consumption function, showing the behaviour
of C with respect to Y.
Aggregate Supply is the money value of the final goods and
services or national product produced in an economy during CC is a straight line moving upward showing that
one year. It is equal to income generated. l
CC is a linear function.
So, AS = Y = C + S
l
There is a positive relation between Y and C.
C = Y when Y = 400 . It refers to a break-even point.
Components of Aggregate Supply 300 is the minimum level of C, even when Y = 0.
The two main components of AS are So, C = 300 and b = MPC = 0 . 25
l
Consumption expenditure ( C )
Propensity to Consume
l
Saving ( S)
A major portion of income is spent on consumption of goods It refers to the ratio between consumption (C) and income
and services and the balance is saved. (Y). It has two aspects
Aggregate Supply/National Income = Consumption+ Saving 1. Average Propensity to Consume (APC) Average
or Y = AS = C + S Propensity to Consume is the ratio of aggregate
consumption expenditure (C) to aggregate income (Y).
Consumption Function C
APC =
The relationship between the consumption expenditure and Y
income is known as consumption function.
2. Marginal Propensity to Consume (MPC) The ratio
C = F ( Y) between the change in consumption expenditure
Where, C = Consumption expenditure, Y = Income (∆C) and the change in income (∆Y) is called Marginal
The algebraic expression of consumption function is Propensity to Consume.
C = C + bY ∆C
MPC =
Where, C = Consumption ∆Y
C = Autonomous consumption, i.e. consumption at
zero level of income Saving Function
b = Marginal Propensity to Consume The relationship between savings and income is known as
Y = Disposable income, i.e. income after tax saving function.
Explanation of consumption function with the help of an S = F ( Y)
imaginary schedule and graph Where, S = Saving, Y = Income
Income Consumption APC Saving is the excess income which is left with the
∆C ∆Y MPC (∆C/∆Y)
(Y) (C) (C/Y) consumer after doing all the consumption expenditure.
0 300 — — — — S= Y −C
200 350 1.75 50 200 0.25 The algebraic expression of saving function is
400 400 1 50 200 0.25
S = − S + sY
600 450 0.75 50 200 0.25
Where, S = Saving
800 500 0.625 50 200 0.25
S = Autonomous saving, i.e, level of saving when
1000 550 0.55 50 200 0.25
income is zero
Y s = Marginal Propensity to Save
Y Y = Disposable income
Consumption (C)

Explanation of saving function with the help of an

600 C
imaginary schedule and graph
500
Q Income Consumption Saving APS ∆S ∆Y MPS
400
(Y) (C) (S) (S/Y) (∆S/∆Y)
300 C
200 0 300 −300 — — — —
100 45° 200 350 −150 − 0.75 150 200 0.75
X
0 200 400 600 800 1000 400 400 0 0 150 200 0.75
Income (Y)
600 450 150 0.25 150 200 0.75
Consumption function: Behaviour of C with respect toY 800 500 300 0.375 150 200 0.75
CBSE Term-II Economics XII 37

Income Consumption Saving APS ∆S ∆Y MPS APC can never be zero or negative, as consumption is
(Y) (C) (S) (S/Y) (∆S/∆Y) always positive even at zero level of income.
1000 550 450 0.45 150 200 0.75 Relationship between MPC and MPS
1200 600 600 0.50 150 200 0.75 ∆C ∆S
MPC = , MPS =
Y ∆Y ∆Y
800 As we know that, ∆Y = ∆C + ∆S
700 S
 ∆ C ∆ S ∆ C + ∆ S ∆ Y
So, MPC + MPS =  + = = =1
 ∆Y ∆Y
D
600
Increase in
∆Y ∆Y
500 saving C or MPC + MPS = 1 , MPC = 1 − MPS ,
400 MPS = 1 − MPC
Saving (` in crore)

B
300 Marginal Propensity to Consume is generally less than
in income
Increase
200 A unity and greater than zero. It means that a part of increase
100 in income is consumed and the other part is saved. So, that
1 1
0 X when MPC = , then MPS = ,
2 2
100
200
300
400
500
600
700
800
900
1000
1100
1200
1300

100 also implying that, MPC + MPS = 1 always. Also, with the
200 Income (` in crore)
rise in income level, APC generally falls hence, APS rises.
300 S Paradox of Thrift
SS is the saving function
S 400
when Y = ` 1000 crore, It implies that if all the people of an economy increase the
500 S = ` 450 crore. So that, proportion of income they save, then the total volume of
450
600 APS = S/Y = = 0.45. savings in that economy will not increase. Total savings will
1000
When income is 0, savings are –300, either decrease or remain the same.
Y
∴ S = –300 and S = MPS = 0.75 Induced Investment
It suggests 45% of income is saved and (100–45) = 55 % is spent. The investment made with a view to earn more profit is known
Saving function: Behaviour of S with respect to Y as induced investment. It has a positive slope showing direct
relationship between income and investment. Induced
Propensity to Save investment is income elastic.
It refers to the ratio between saving (S) and income ( Y) with Autonomous Investment
respect to given level of income. It has two aspects The investment which is not influenced by expected
1. Average Propensity to Save (APS) The ratio between profitability or level of income is called autonomous
aggregate saving (S) and aggregate income (Y) is called investment. It is income-inelastic. Autonomous investment
Average Propensity to Save (APS). curve is horizontal straight line parallel to X-axis.
S
APS = Concept of Short-run
Y
Short-run may be defined as a period of time when
2. Marginal Propensity to Save (MPS) The ratio between ‘technology’ as a factor (affecting the level of output)
change in saving (∆S) and change in income ( ∆Y) is called remains constant. Accordingly, level of output is
Marginal Propensity to Save (MPS). determined exclusively by the level of employment in the
∆S economy (briefly employment of labour). Higher level of
MPS = employment causes proportionately higher level of output
∆Y
and vice-versa. So long as there is unemployment in the
Relationship between APC and APS economy (implying the existence of excess capacity),
C S general price level is assumed to remain constant.
APC =
, APS =
Y Y Equilibrium Output (AD-AS Approach)
As we know that, Y = C + S
The following are the two approaches
C S  C + S Y
So, APC + APS =  +  = = =1 1. AD = AS Approach Equilibrium GDP refers to a
 Y Y Y Y
situation when in an economy
or APC + APS = 1, APC = 1 − APS
AD = AS
APS = 1 − APC
So that, all that the producers wish to produce (or
Value of APS is negative when APC > 1. It happens when
C > Y, where C = Consumption, Y = Income. However, value of plan to produce) during the year is exactly equal to
38 CBSE Term-II Economics XII

what the buyers wish to spend on the purchase of goods

and services during the year.
Investment Multiplier
It refers to the number by which change in investment (∆ I)
Since, AD = C + I and AS = C + S
multiplies to become change in income (∆ Y).
Equilibrium GDP = C + S = C + I In other words, it can be expressed as the ratio between
∴ C=I change in income ( ∆Y) to change in investment ( ∆ I ).
Thus equilibrium output/equilibrium GDP is achieved ∆Y
K=
when AD = AS or C = I ∆I
2. S = I Approach Equilibrium level of output is Where, K = Multiplier
determined at a point where planned saving is equal to
∆Y = Change in income
planned investment.
∆ I = Change in investment
In national income accounting,
(C + S) = (C + I) always Relationship between Multiplier and MPC
S = I always There is a direct relationship between multiplier and MPC.
Higher the value of MPC, higher the multiplier and
This equality refers to the equality between ex-post AS vice-versa.
and AD or between ex-post S and I which is an
1
accounting identity. Ex-post means ‘actual’ or ‘realised’ K=
and actual S is always equal to actual I. In the context of 1 − MPC
equilibrium level of income/output, what matters is the
equality between ex-ante AS and AD or between ex-ante
Relationship between Multiplier and MPS
S and I. Ex-ante means ‘planned’ or ‘desired’ or intend. There is an inverse relationship between multiplier and
MPS. Higher the value of MPS, lower the multiplier and
Equilibrium is struck only when planned AS = planned
vice-versa.
AD (or planned S = planned I). It refers to AS as planned
by the producers for the year ahead and AD as planned 1
K=
by the consumers and investors for the year ahead. MPS

Solved Examples
Example 1. Complete the following table. Example 2. Complete the following table.
Income Average Income Consumption Marginal
Saving ( `) Marginal Propensity to Average Propensity
( `) Propensity to ( `) Expenditure Propensity to
Consume (MPC) to Save (APS)
Consume (APC) ( `) Save (MPS)
0 –40 … … 0 80 … …
50 –20 ... ... 100 140 0.4 ...
100 0 ... 0.6 200 ... ... 0
150 30 0.8 ... ... 240 ... 0.20
200 50 ... ... ... 260 0.8 0.35

∆C Ans. Y = C + S,
Ans. C = Y − S , APC = C/Y, MPC = ∆S S
∆Y S = Y – C, MPS = , APS =
∆Y Y
Income ( Y ) Saving Con-
sumption APC ∆C ∆Y MPC Income Consumption Saving
( `) ( S) (`) Expenditure ∆S ∆Y MPS APS
(C ) (`) ( Y ) ( `) ( S) (`)
(C )( `)
0 –40 40 — — — —
0 80 –80 — — — —
50 –20 70 1.4 30 50 0.6
100 140 –40 40 100 0.4 –0.4
100 0 100 1 30 50 0.6 200 200 0 –40 100 – 0.4 0
150 30 120 0.8 20 50 0.4 300 240 60 60 100 0.6 0.20
200 50 150 0.75 30 50 0.6 400 260 140 80 100 0.8 0.35
CBSE Term-II Economics XII 39

Example 3. Complete the following table Example 6. Calculate autonomous consumption

Marginal
expenditure from the following data about an
Consumption Income to economy which is in equilibrium
Savings (`) Propensity to
Expenditure (`) Consume
Consume (MPC) National Income = ` 500
100 50 150 — Marginal Propensity to Save = 0.30
Investment Expenditure = 100
175 75 L L
Ans. Given, Y = ` 500,
250 100 L L MPS = 0.30, I = 100, C = ?
325 125 L L b or MPC = 1 − MPS = 1 − 0.30 = 0.70
Ans. Income to Consume Y = C + I or Y = C + bY + I
= Consumption Expenditure + Savings 500 = C + 0.70 × 500 + 100
Income to MPC 500 = C + 350 + 100
Consumption Savings
Consume ∆C ∆Y  ∆C  C = 500 − 450 = 50
Expenditure (C ) (`) ( S) (`)  
( Y)  ∆Y 
∴ Autonomous consumption ( C ) = 50
100 50 150 — — —
Example 7. In an economy, everytime income rises,
175 75 250 75 100 0.75 75% of the rise in income is spent on consumption.
250 100 350 75 100 0.75 Now, suppose in the same economy, investment
325 125 450 75 100 0.75 rises by ` 750 crore. Calculate the following
(i) Change in income. (ii) MPS.
Example 4. Calculate investment expenditure from the Ans. (i) Here, MPC = 0.75, ∆ I = ` 750 crore
following data about an economy which is in 1
equilibrium. Now, K=
1 − MPC
National Income = ` 1,000 1 1
Marginal Propensity to Save = 0.20 ∴ K= = =4
1 − 0.75 0 . 25
Autonomous Consumption Expenditure = ` 100 ∆Y
Again, K=
Ans. Given, Y = ` 1, 000, ∆I
MPS = 0. 20, C = ` 100, I = ? ∆Y
b or MPC = 1 − MPS = 1 – 0. 20 = 0.80 or 4=
750
Y=C+I ∴ ∆ Y = 750 × 4, ∆ Y = ` 3,000 crore
or Y = C + bY + I (ii) MPS = 1 − MPC = 1 − 0.75 = 0.25
1, 000 = 100 + 0.80 × 1, 000 + I Example 8. State whether the following statements are
I=1,000 – 900, I = 100 true or false. Give reasons for your answer.
Example 5. Calculate Marginal Propensity to Consume (i) When marginal propensity to consume is greater
from the following data about an economy which is than marginal propensity to save, the value of
in equilibrium. investment multiplier will be greater than 5.
National Income = ` 2,000 (ii) The value of marginal propensity to save can
Autonomous Consumption Expenditure = ` 200 never be negative.
Investment Expenditure = 100 Ans. (i) No, the statement is false. This can be understood by
Ans Given, Y = ` 2, 000, C = ` 200, I = 100 an example. Suppose, the value of MPC = 0.6, hence,
We know, Y = C + I, C = C + bY MPS = 0.4 (as MPS = 1 − MPC ).
Y = C + bY + I Here, MPC > MPS
1 1 1
For calculating MPC, we use following equation Now, K= = or = 2.5
Y = C + bY + I 1 − MPC 1 − 0.6 0.4
b = MPC So, K < 5 even if MPC > MPS.
2, 000 = 200 + 2, 000 b + 100 (ii) Yes, the statement is true. As MPS tells about the
2, 000 − 300 1, 700 change in savings due to change in income and even
b= = = 0.85 if the entire income is consumed, savings can be at
2, 000 2, 000
most zero, so MPS can never be negative.
Thus, MPC = 0.85
40 CBSE Term-II Economics XII

Chapter
Practice
PART 1 5. Suppose in a hypothetical economy, the income
Objective Questions rises from ` 500 crores to ` 600 crores. As a result,
the consumption expenditure rises from ` 400
crores to ` 500 crores. Marginal propensity to
l
Multiple Choice Questions consume in such a case would be...... . (Choose the
correct alternative) (CBSE 2020)
1. According to the theory of Keynesian Economics, (a) 0.8 (b) 0.4 (c) 1.0 (d) 0.6
the value of the average propensity to consume can DC 500 − 400 100
never be ……… . (CBSE 2020) Ans. (c) MPC = = = =1
DY 600 − 500 100
(a) zero (b) unity
(c) more than one (d) less than one 6. In an open economy, aggregate demand is
Ans. (a) zero estimated as
(a) Private Consumption Expenditure + Net Exports
2. If Marginal Propensity to Save (MPS) is equal to (b) Private Consumption Expenditure + Government
zero, the value of investment multiplier will be Expenditure
.................... . (CBSE 2020) (c) Private Consumption Expenditure + Government
(a) 1 (b) 0 Expenditure + Net Exports
(c) ∞ (d) None of these (d) Private Consumption Expenditure + Private Investment
Ans. (c) Multiplier ( K ) = 1/MPS = 1 / 0 = ∞ Expenditure + Government Expenditure + Net Exports
Ans. (d) Private Consumption Expenditure + Private
3. If the marginal propensity to consume is greater Investment Expenditure + Government Expenditure +
than marginal propensity to save, the value of the Net Exports
multiplier will be (CBSE 2017)
(a) greater than 2
7. Which of the following statements is/are correct?
(b) less than 2 (i) Autonomous investment increases with increase
(c) equal to 2 in the level of income in an economy.
(d) equal to 5 (ii) Induced investment changes with change in the
Ans. (a) greater than 2 rate of interest and income level in an economy.
4. If the value of Average Propensity to Consume Alternatives
(APC) is 0.8 and national income is ` 4,000 crores, (a) Both are true
the value of savings will be ............ . (Choose the (b) Both are false
correct alternative) (CBSE 2020) (c) (i) is true, but (ii) is false
(a) ` 100 crores (d)(i) is false, but (ii) is true
(b) ` 200 crores Ans. (d) Autonomous investment does not change with any
(c) ` 800 crores change in the level of income. It remains constant, no
(d) ` 500 crores
matter what the level of income is in the economy.

Ans. (c) APS = 1 − APC = 1 − 0.8 = 0. 2 8. Expenditure on Goods and Services =

(a) Government Expenditure + Investment Expenditure
Savings
Also, APS = (b) Consumption Expenditure + Government Consumption
National Income
Expenditure
Savings
⇒ 0. 2 = (c) Consumption Expenditure + Investment Expenditure
4,000 (d) None of the above
⇒ ` 800 crores Ans. (c) Consumption Expenditure + Investment Expenditure
CBSE Term-II Economics XII 41

9. When C function shoots from Y-axis, it indicates that Ans. (d) APC + APS = 1, aggregate of average propensity to
consume and average propensity to save is equal to one
(i) consumption is zero when income is zero and propensity to save is the ratio of saving to income.
(ii) saving is negative when income is zero
(iii) consumption is positive when income is zero 15. Perfectly elastic AS implies that
(iv) saving is positive when income is zero (i) there is fuller utilisation of resources in the
Alternatives economy
(a) (i) and (ii) (b) (ii) and (iii) (ii) there is unemployment of resources in the
(c) (i), (ii) and (iii) (d) (ii), (iii) and (iv) economy
Ans. (b) (ii) and (iii) (iii) there is excess capacity in the economy
10. Constant slope of S-line indicates that Alternatives
(a) S-line will be a straight line (a) Both (i) and (ii) (b) Both (ii) and (iii)
(b) saving function will be non-linear (c) (i), (ii) and (iii) (d) None of these
(c) saving function will be linear Ans. (b) Both (ii) and (iii)
(d) Both (a) and (c) 16. 45 degree line in the context of equilibrium GDP is a
Ans. (d) Both (a) and (c)
(i) line of reference
11. When household consumption expenditure (ii) line of identity
= ` 9,000, private investment expenditure (iii) line of equality between AS and AD
= ` 7,000, government expenditure = ` 12,000,
exports = ` 1,000 and imports = ` 3,000, the level Alternatives
of AD in an open economy will be (a) (i) and (ii)
(a) ` 16,000 (b) ` 26,000 (b) (ii) and (iii)
(c) ` 28,000 (d) ` 29,000 (c) (i) and (iii)
(d) None of the above
Ans. (b) AD (Y) = C + I + G + NX
Ans. (c) (i) and (iii)
= 9,000 + 7,000 + 12,000 + 1,000 – 3,000
= ` 26,000 17. In Keynesian Economics, equilibrium level of
income implies
12. Which of the following is correct?
C (a) equilibrium level of output
(a) APC = (b) MPC = 1 – MPS (b) equilibrium level of employment
Y
(c) APC + APS = 1 (d) All of these (c) Both (a) and (b)
Ans. (d) All of the above (d) None of the above
Ans. (c) Both (a) and (b)
13. Propensity to save is the
(a) additional income that is not to be saved 18. If MPC = 0.5, the value of multiplier equals
(b) ratio of saving to income (a) 2 (b) 1
(c) level of saving at which saving and consumption are equal (c) 5 (d) ∞
1 1
(d) tendency of the consumer towards higher saving Ans. (a) K = = =2
Ans. (b) ratio of saving to income MPC 0.5

14. Which of the given pair is correctly matched? 19. The value of multiplier is
1 1
(a) (b)
Column I Column II MPC MPS
A. (i) 1 1
Income is zero Consumption is zero (c) (d)
1 – MPC MPC – 1
B. MPC + MPS (ii) Zero 1
Ans. (b)
C. APC + APS (iii) Two MPS
D. Propensity to save (iv) The ratio of saving to income 20. With the increase in investment, MEC
(a) rises (b) falls
Codes (c) remains constant (d) None of these
(a) A-(i) (b) B-(ii) (c) C-(iii) (d) D-(iv)
Ans. (b) falls
 42 CBSE Term-II Economics XII

l
Assertion-Reasoning MCQs Reason (R) Saving is a leakage in the circular flow
of income. Greater the savings, greater the leakage
Directions (Q. Nos. 1 to 7) There are two statements marked and lower the value of investment multiplier.
as Assertion (A) and Reason (R). Read the statements and Ans. (a) Both Assertion (A) and Reason (R) are true and Reason
choose the appropriate option from the options given below. (R) is the correct explanation of Assertion (A).
(a) Both Assertion (A) and Reason (R) are true and Reason
(R) is the correct explanation of Assertion (A). 6. Assertion (A) Full employment does not imply zero
(b) Both Assertion (A) and Reason (R) are true, but Reason unemployment in an economy.
(R) is the not the correct explanation of Assertion (A). Reason (R) There are certain people in the economy
(c) Assertion (A) is true, but Reason (R) is false.
who are both voluntary as well involuntary
(d) Both Assertion (A) and Reason (R) are false
unemployed and there also exist certain level of
1. Assertion (A) AD is measured not as the sum total natural unemployment in an economy.
of goods but as the sum total of planned Ans. (a) Both Assertion (A) and Reason (R) are true and Reason
expenditure on the goods during an accounting (R) is the correct explanation of Assertion (A).
year.
7. Assertion (A) The value of marginal propensity to
Reason (R) It is not possible to add up physical save can never be negative.
quantities of the goods and services planned to be
Reason (R) MPS is the ratio between additional
purchased by the people.
saving and additional income which is always
Ans. (a) Both Assertion (A) and Reason (R) are true and Reason
positive because of positive relationship between
(R) is the correct explanation of Assertion (A).
savings and income.
2. Assertion (A) The value of marginal propensity to Ans. (a) Both Assertion (A) and Reason (R) are true and Reason
consume can be greater than one. (R) is the correct explanation of Assertion (A).
Reason (R) The value of marginal propensity to save
can be negative as well.
l
Case Based MCQs
Ans. (d) The value of MPC cannot be greater than one because 1. Direction Read the following text and answer
change in consumption can never be greater than change in question no. (i) to (vi) on the basis of the same.
income. MPS is the ratio between additional savings and
additional income which is always positive because of “The denial of the crucial role of the interest rate as
positive correlation between savings and income. equilibrator of savings and investment led directly
to the Keynesian theory of employment
3. Assertion (A) Saving function depicts linear determinants. Given the ‘propensity to consume’
relationship when MPS is found to be constant. and hence the proportion of any given income that
Reason (R) A linear saving function is a straight line will be spent by individual consumers (on which
savings function. The slope of a straight line is the size of R F Kahn’s ‘multiplier’ depends), the
constant as indicated by constant MPS. level of output and employment will be a function
Ans. (a) Both Assertion (A) and Reason (R) are true and Reason of investment. According to the level at which
(R) is the correct explanation of Assertion (A). investment (also consumption) stands, the level of
4. Assertion (A) The value of investment multiplier output and employment may be almost anything
varies between one and infinity. between zero and full capacity output. There is at
any rate, no longer any unique level to which the
Reason (R) The minimum value of investment
system is necessarily tending. So far as investment
multiplier is one when MPC equals zero and
consists of private investment, it will remain
maximum value equals infinity when MPC equals
governed by the ‘marginal efficiency of capital’
one.
(anticipated profitability), modified, on one hand,
1 1
Ans. (d) In case MPC = 0, K = = =1 by ‘expectations’ (powerfully swayed by business
1 − MPC 1 − 0 mood and the like) and on other hand, by the cost of
1 1
In case MPC = 1, K = = =∞ borrowing, namely prevailing rate of interest.
1 − MPC 1 − 1
Thus, was the casual emphasis of theory reversed:
5. Assertion (A) There is an inverse relationship instead of any change in saving being translated
between the value of investment multiplier and into an equivalent shift of investment and (via
marginal propensity to consume. income changes) the volume of savings the
dependent variable.
CBSE Term-II Economics XII 43

Interest was converted virtually into a money (c) affects the supply of money
rate-something influenced on the one hand by (d) is unrelated to any of the above
monetary policy (affecting the supply of money Ans. (a) Liquidity preference means holding money in liquid
available) and on the other hand by the current form, as compared to other assets.
attitude towards is as something worth holding (e.g, (vi) Assertion (A) The level of private investment in an
qua bank deposit) in preference to other assets (e.g, economy arbitrarily depends on the marginal
bonds). This later constituted the famous liquidity efficiency of capital.
preference –a preference powerfully influenced by Reason (R) Animal spirits results in boom and bust
expectations (or uncertainty) about future and the cost of borrowing largely influences the
movements of interest rates (and hence of bond level of private investment.
prices).”
Alternatives
Source [From Maurice Dobb, Theories of Value and
(a) Both Assertion (A) and Reason (R) are true and Reason (R)
Distribution since Adam Smith, page 218–219]
is the correct explanation of Assertion (A).
(i) There is no unique level of output and employment (b) Both Assertion (A) and Reason (R) are true, but Reason
to which the economic system tends, because (R) is not the correct explanation of Assertion (A).
(a) investment consists only of private investment (c) Assertion (A) is false, but Reason (R) is true
(d) Both the statements are false
(b) investment determines the level of output and can vary
(c) changes in saving are translated into an equivalent Ans. (a) Both Assertion (A) and Reason (R) are true and Reason
level of investment (R) is the correct explanation of Assertion (A).
(d) investment depends upon the propensity to consume 2. Direction Read the following text and answer
Ans. (b) As per the passage, there is no unique level of output question no. (i) to (vi) on the basis of the same.
and employment in an economic system because these Suppose in equilibrium, aggregate income (in units
two factors are dependent on investment which is not
of money per year) in an economy Y = C + I, where
constant.
investment expenditure (in units of money per year)
(ii) The ‘multiplier’ referred to here relates to I = 1, 000 and aggregate consumption expenditure (in
(a) the propensity to consume which determines how units of money per year) C satisfies the following
much consumers spend conditions
(b) the change in employment consequent upon a change l
C is a function of current disposable income in the
in output economy.
(c) the change in output consequent upon a change in l
f Yd = 0, then C = 500
investment
(d) the number that equilibrates saving and investment
l
Marginal propensity to save out of Yd is constant in the
Ans. (c) Multiplier in the passage refers to change in output economy and equal to 30%.
due to change in investment. Suppose the government collects direct tax
(iii) Expectations ……… . revenues equal to 15% of Y and makes direct
transfer payments equal to 750 units of money per
(a) determine the prevailing rate of interest
year.
(b) contribute to liquidity preference
(c) govern the cost of borrowing (i) The level of MPC in an economy is
(d) determine the money supply (a) 0.595 (b) 0.678
Ans. (b) As per the passage, liquidity preference of people is (c) 0.495 (d) 0.324
determined by their expectations. Ans. (a) MPC = 1 − 0.30 − (0.70 × 0.15)
(iv) Keynes treated the interest rate as = 0.7 – 0.105 = 0.595
(a) entirely determined by expectations about the future (ii) What is the value of the investment multiplier in the
(b) the rate at which current savings and investment are economy?
equilibrated (a) Between 1.7 and 1.9 (b) Between 1.9 and 2.1
(c) reflecting both monetary policy and liquidity preference (c) Between 2.1 and 2.3 (d) Between 2.3 and 2.5
(d) an indicator of expected profitability 1
Ans. (d) Investment Multiplier = ; where
Ans. (c) According to Keynes, interest rate is affected by both, 1 − MPC
the monetary policy and the liquidity preference.
MPC = 0.595
(v) Liquidity preference 1
So, Investment Multiplier. = = 2. 4726
(a) is about holding money related to other assets 1 − 0 .595
(b) is the difference between bond prices and interest rates
44 CBSE Term-II Economics XII

(iii) What is the equilibrium value of Y in the economy?

(a) Between 3,250 and 3,750 (b) Between 3,750 and 4,250
PART 2
(c) Between 4,250 and 4,750 (d) Between 4,750 and 5,250
Ans. (d) At the equilibrium level Y = C + I
Subjective Questions
Y = 500 + 0.7 ( Y − 15 Y + 750 ) + 1, 000 l
Short Answer (SA) Type Questions
Y = 500 + 0.7 Y − 0.105 Y + 525 + 1, 000
0.405 Y = 2, 025 1. Define aggregate demand. State its components.
∴ Y = 5 , 000 (CBSE 2018)
Ans. Aggregate demand refers to the total expenditure on the
(iv) If instead of 750 units of money, the government goods and services in an economy during the period of
makes annual transfer payments equal to 10% of Y, one year.
then the value of the investment multiplier will The main components of aggregate demand are
(a) decrease by less than unity (i) Consumption expenditure
(b) decrease by more than unity
(ii) Private investment (Fixed Capital Formation +
(c) increase by less than unity Change in Stock)
(d) increase by more than unity (iii) Government expenditure
Ans. (c) Y = C + I (iv) Net exports or difference between exports and
= 500 + 0 . 7 ( Y − 0 .15 Y + 0 .10 Y ) + 1, 000 imports AD = C + I + G + (X – M)
= 1,500 + 0.665 Y 2. Which are the important elements in the
A simple glance tells us that autonomous consumption determination of investment? (NCERT)
equals 1,500 and MPC equals 0.665. Ans. Following are the three elements important in the
1 1
∴K = = = 2.98 determination of investment
1 − MPC 1 − 0.665 (i) Expected Returns or Revenue An investment is
Change in multiplier = 2.98 – 2.46 = 0.52 undertaken on the basis of expected demand or
(v) If instead of 750 units of money, the government expected returns to the producers.
makes an annual transfer payments equal to 10% of (ii) Costs It has three components viz. cost of purchase
Y, then the equilibrium value of Y will of equipment, cost of maintenance of equipment
(a) decrease by less than 1,000 (depreciation) and Cost of funds borrowed for
(b) decrease by more than 1,000
investment.
(c) increase by less than 1,000 (iii) Business Expectation Bullish expectations attract
(d) increase by more than 1,000
more investment. Bearish expectations cause low
investment.
Ans. (a) As computed above,
Y = 1,500 + 0.665 Y 3. Distinguish between marginal propensity to
Y − 0.665 Y = 1,500 consume and average propensity to consume. Give
a numerical example. (CBSE 2016)
∴ Y = 4477.6
Ans. Differences between marginal propensity to consume and
Change in income = 5000 – 4477.6 = 522.4 average propensity to consume
(vi) Assertion (A) Higher the MPC, higher would be
Marginal Propensity to Average Propensity to
the multiplier effect. Basis
Consume (MPC) Consume (APC)
Reason (R) The multiplier effect is the magnified Meaning The ratio between the The ratio between the
increase in equilibrium GDP that occurs when any change in consumption total consumption
component of aggregate expenditures changes. expenditure and the expenditure and total
Therefore when MPC increases, the value of change in income is income, at a given level
multiplier increases as well. called the marginal of income is called the
propensity to consume. average propensity to
Alternatives consume.
(a) Both Assertion (A) and Reason (R) are true and Reason It It represents the part of It represents the part of
(R) is the correct explanation of Assertion (A). Represents increased income total income which is
(b) Both Assertion (A) and Reason (R) are true, but Reason which is spent on spent on consumption.
(R) is not the correct explanation of Assertion (A). consumption.
(c) Assertion (A) is false, but Reason (R) is true
(d) Both the statements are false Symbolically MPC = Change in APC
Consumption ( ∆C )/ =
Total Consumption (C )
Ans. (a) Both Assertion (A) and Reason (R) are true and Reason Change in Income ( ∆Y ) Total Income(Y )
(R) is the correct explanation of Assertion (A).
CBSE Term-II Economics XII 45

The numerical example given below will help to 6. If national income is ` 100 crore and consumption
understand the computation of MPC and APC. ` 90 crore, find the average propensity to save.
Income Consumption APC MPC When income rises to ` 120 crore and consumption
∆C ∆Y expenditure to ` 108 crore, what will be the
(Y) (C) (C / Y) (∆C/∆Y)
marginal propensity to consume and marginal
0 300 — — — —
propensity to save?
200 350 1.75 50 200 0.25 Ans. Given, National Income (Y) = ` 100 crore
400 400 1 50 200 0.25 Consumption Expenditure (C) = ` 90 crore
600 450 0.75 50 200 0.25 Saving (S) = Y – C
800 500 0.625 50 200 0.25 = 100 – 90
= ` 10 crore
1000 500 0.55 50 200 0.25
S 10
Average Propensity to Save (APS) = = = 0.1
4. What is the difference between planned investment Y 100
and actual investment? (NCERT) Increased Income (Y1) = ` 120 crore
Ans. Increased Consumption Expenditure (C1)
= `108 crore
Basis Planned Investment Actual Investment
Increased Saving (S1) = 120 – 108
Meaning Planned (or ex-ante) Actual (or ex-post)
investment refers to investment refers to the = `12 crore
the desired level of realised level of Change in Income (∆Y) = 120 – 100
investment. investment.
= ` 20 crore
Reaction In an accounting year, In an accounting year,
Change in Consumption Expenditure (∆C) = 108 – 90
with Savings planned investment actual investment is
may or may not be always equal actual = `18 crore
equal to planned savings. (This is Change in Saving (∆S) = 12 – 10
savings. according to the
principle of national = ` 2 crore
income accounting.) ∆C 18
Marginal Propensity to Consume (MPC) = = = 0.9
Determina- Equilibrium level of Actual investment has ∆Y 20
tion of income is determined no relevance in the ∆AS 2
where planned determination of Marginal Propensity to Save (MPS) = = = 0.1
Income
investment is equal to equilibrium level of ∆AY 20
planned savings. income. Therefore,
Average Propensity to Save (APS) = 0.1.
5. State whether the following statement are true or Marginal Propensity to Consume (MPC) = 0.9.
false. Give reasons for your answer. Marginal Propensity to Save (MPS) = 0.1
(i) The value of average propensity to save can
never be greater than 1. 7. An economy is in equilibrium. From the following
data, calculate the marginal propensity to save.
(ii) When investment multiplier is 1 the value of
Income = ` 10, 000
marginal propensity to consume is 0.
Autonomous consumption = ` 500
Ans. (i) True. The value of average propensity to save can
never be greater than 1 because even when all the Consumption expenditure = ` 8, 000
income is saved and nothing is spent on (CBSE 2017)
consumption, saving will be equal to income. In this Ans. We know that,
case, Average Propensity to Save (APS) will be equal Consumption expenditure = C + bY,
to 1 and not greater than 1. where C = Autonomous Consumption,
(ii) The given statement is true. When investment b = Marginal Propensity to Consume and
multiplier is 1, marginal propensity to consume is 0.
Y = Income
We know that,
1 So, on substituting the given variables, we get
Multiplier ( K ) = 8, 000 = 500 + b. ( 10, 000 )
1 − MPC
1 8, 000 − 500 = b. 10, 000
1= 7,500
1 − MPC b= = 0.75 , i.e.
10, 000
1 – MPC = 1 MPC = 0
Marginal Propensity to Consume = 0.75 .
46 CBSE Term-II Economics XII

We also know that, MPC + MPS = 1, where, (ii) Marginal propensity to consume represents the
MPC = Marginal Propensity to Consume, and slope of the consumption function. (CBSE 2019)
MPS = Marginal Propensity to Save Ans. (i) The given statement is false, as ex-post investment
On substituting MPC = 0.75 , we get includes both fixed as well as inventory investment
0.75 + MPS = 1, with the production unit during a period of time.
MPS = 1 − 0.75 = 0.25, i.e, (ii) The given statement is true, as it represents change
Marginal Propensity to Save = 0.25 in consumption due to a given change in income.
MPC = ∆C / ∆Y
8. An economy is in equilibrium. Calculate the
investment expenditure from the following. 11. From the following data, calculate the
National income = ` 800 (i) consumption expenditure and
Marginal propensity to save = 0. 3 (ii) investment expenditure for the economy.
Autonomous consumption = 100 (CBSE 2015) (CBSE 2020)
Ans. As the economy is in equilibrium
S. No. Particulars (in `)
∴ Y = AD
(a) Equilibrium Level of Income 5,000
i.e. Y=C + I
C = C + bY (b) Autonomous Consumption 500
or, Y = C + bY + I ...(i) (c) Marginal Propensity to Save 0.4
National Income ( Y ) = 800
Ans. (i) Consumption expenditure ⇒ c = c + by
Marginal Propensity to Save ( MPS) = 0. 3
Here, c means autonomous consumption
Marginal Propensity to Consume
b means MPC
( MPC ) = 1 − MPS = 1 − 0. 3 = 0.7
Y means income
Autonomous Consumption, ( C ) = 100
MPC = 1 − MPS
From (i) 800 = 100 + 0.7 ( 800 ) + I
MPC = 1 − 0.4 = 0.6
700 = 560 + I
Consumption expenditure = 500 + 0.6 × 5 , 000
I = 140
Consumption expenditure = 500 + 3, 000
9. An economy is in equilibrium. Find ‘autonomous = ` 3,500 crores
consumption’ from the following (ii) At equilibrium level, Y = C + I
National income = 1,000 5 , 000 = 3,500 + I
Marginal propensity to consume = 0.8 Investment expenditure = 5 , 000 − 3,500 = ` 1,500 crores
Investment expenditure = 100
(CBSE 2015) 12. In an economy, the autonomous investment is 360
and the marginal propensity to save is 0.3. If the
Ans. At equilibrium
equilibrium level of income is 1,400, then the
AD = AS( Y )
autonomous consumption is 40. True or false?
Y=C+I Justify your answer.
Where C = Consumption expenditure Ans. False. Given, Autonomous Investment= 360
I = Investment expenditure Marginal Propensity to Save (MPS) = 0.3
Further C = C + bY Equilibrium Level of Income (Y) = 1,400
Where, C = Autonomous consumption Marginal Propensity to Consume (MPC) = 1 – MPS
b = MPC = 1 – 0.3 = 0.7
Hence, Y = C + bY + I At the equilibrium Level, Y = C+I
1, 000 = C + 0.8 ( 1, 000 ) + 100 or, Y = C+MPC (Y) +I
1, 000 = C + 800 + 100 1,400 = C + MPC (Y) + I
C = ` 100 1,400 = C + 0.7 (1,400) + 360
1,400 = C+ 980+360
10. Giving valid reasons, state whether the following 1,400 = C+1,340
statements are true or false.
C = 1,400 – 1,340 = 60
(i) Ex-post investment means fixed capital with
Thus, it is proved that the given statement is false. The
production units during a particular period of autonomous consumption = 60.
time.
CBSE Term-II Economics XII 47

13. If in an economy 15. The value of marginal propensity to consume is 0.6

Marginal Propensity to Consume (MPC) = 08 . and initial income in the economy is ` 100 crores.
Prepare a schedule showing income, consumption
Change in Initial Investment ( ∆I ) = ` 4,000 crores
and saving. Also show the equilibrium level of
Find the value of the following. (CBSE 2020) income by assuming investment of ` 80 crores.
(i) Investment Multiplier (K) (CBSE 2018)
(ii) Change in Final Income (∆Y) Ans. MPC = 0.6, Let autonomous consumption = 40
Ans. (i) Investment Multiplier (K) = 1/1 − MPC
Y C = C′+MPC(y) S = Y– C
Here, MPC is given = 0.8
0 40 −40
Now,
Investment Multiplier (K) = 1/1 − 0.8 100 100 0
Investment Multiplier (K) = 1/0.2 200 160 40
Investment Multiplier (K) = 5
300 220 80
(ii) Investment Multiplier (K)
Change in Income ( ∆Y ) 400 280 120
=
Change in Investment ( ∆I ) 500 340 160
Putting the value of K, which is determined in above When economy is in equilibrium, S = I
case
∆Y Y=C + I
we get 5 = Y = 40 + 0.6 Y + 80
4, 000
Y − 0.6 Y = 120
∆Y = 4, 000 × 5
0.4 Y = 120
∴ Change in final income ∆Y = ` 20,000 crores
Y = ` 300 crores
14. Give reason, state whether the following are true or Equilibrium level of income is ` 300 crores.
false.
16. The saving function of an economy is given as
(i) Sum of average propensity to consume and
marginal propensity is always equal to 1. S = −250 + 0.25 Y
(ii) If the ratio of marginal propensity to consume If the planned investment is ` 2,000 crores,
and marginal propensity to save 3 : 1, the value of calculate the following.
investment multiplier will be 5. (i) Equilibrium level of income in the economy.
Ans. (i) False. Sum of average propensity to consume and (ii) Aggregate demand at income of ` 5,000 crores.
average propensity to save as well as sum of marginal (CBSE 2019)
propensity to consume and marginal propensity to Ans. (i) At the point of equilibrium,
save is always equal to one. There is no fixed
Saving = Investment
relationship between APC and MPC.
( S = I ) − 250 + 0.25 Y = 2, 000
(ii) False, because, if the ratio of marginal propensity to
consume and marginal propensity to save is 3:1, MPC 0.25 Y = 2, 000 + 250
will be 0.75 and investment multiplier (K) will be 0.25 Y = 2.250
1 1 1 2, 250
K= = = =4 Y= = 9, 000
1 − MPC 1 − 0.75 0.25 0.25
Assume that MPS = x, So that MPC = 3x Equilibrium level of income = ` 9, 000 crores
We know MPC+MPS=1 (ii) AD at income level ` 5 , 000 crores will be
⇒ 3x + x = 1 AD = 250 + ( 1 − 0.25 )( 5 , 000 ) + 2, 000
⇒ 4x = 1 = 250 + 0.75 × 5 , 000 + 2, 000
1 = 250 + 5 , 750
⇒ x = = 0 . 25
4 = ` 6,000 crores
⇒ MPS = 0 . 25 17. In an economy autonomous consumption is 500,
So that MPC = 3 × 0.25 = 0.75 marginal propensity to save is 0.2 and investment
or MPC = 1 – MPS expenditure is 2,000. Calculate its equilibrium level
1 − 0.25 = 0.75 of income. (CBSE 2015)
48 CBSE Term-II Economics XII

Ans. When economy is in equilibrium, then Y = C + I The point B in the diagram below represents the
Given C ′ = 500, MPS = 0.2, I = 2, 000 break-even point where the consumption expenditure
MPC = 1 − MPS equals to the income.
Y
MPC = 1 − 0.2 = 0.8 Y

Consumption (C)
Y = C ′ + MPC ( Y ) + I [Q C = C ′ + MPC( Y )] bY
C+ C
Y = 500 + 0.8Y + 2, 000 C=
Y − 0.8Y = 2,500
B(C = Y)
0.2Y = 2,500 C
Y = 12,500 X
O
Equilibrium level of income = ` 12,500 Income (Y)
Diagrammatic presentation of
18. Which of the following cannot have a negative value? consumption function
Give reasons.
(i) Average propensity to save 2. In an economy, if initial investments are increased
(ii) Marginal propensity to save (CBSE 2015) by ` 100 crores, discuss the working of investment
Ans. (i) APS can have a negative value because at zero level of multiplier presuming marginal propensity to
income there is some amount of consumption which is consume is 0⋅8. (CBSE 2020)
known autonomous consumption which shows Ans. Investment multiplier is the ratio between change in
dissaving. income and the corresponding change in investment.
(ii) MPS cannot have a negative value as there is a positive There is a direct or positive relationship between
relationship between saving and income, an increase in Marginal Propensity to Consume (MPC) and Multiplier
income must cause an increase in saving. Implying that (K). Higher the MPC, higher will be the value of
MPS must always be positive. multiplier and vice-versa.
Working of Investment Multiplier
l
Long Answer (LA) Type Questions
Initial Consumption
1. Explain consumption function, with the help of a Rounds Savings
Investment Expenditure
schedule and diagram. (All India 2011)
I 100 80 20
Ans. The relationship between the consumption expenditure and
the income is known as consumption function. II 80 64 16
C = F (Y) III 64 12.8 5.2
When we write consumption function in terms of an 500 400 100
algebraic expression, we write, C = C + bY
Where, C = Consumption expenditure, As shown in the table, there is additional investment of
C = Autonomous consumption i.e. consumption at zero ` 100 crores and 80% of which is spent on consumption
i.e, ` 80 crores and ` 20 crores is saved. ` 80 crores is
level of income,
reinvested of which 80% is consumed and if goes on like
b = Marginal Propensity to Consume, this.
Y = Income Marginal propensity to consume is 0.8
Let us understand consumption function with the help of Change in investment = ` 100 crores
an imaginary schedule and diagram 1 1
K= =
MPC 1 − MPC 1 − 0.8
Income Consumption APC  C 
 Y  ∆C ∆Y  ∆C  K=
1
=5
(Y) (C)  
 ∆Y  0.2
0 100 … … … … Change in investment = ∆I = ` 100 crores
100 170 1.7 70 100 0.7 Investment multiplier = K = 5
200 240 1.2 70 100 0.7 Change in income ∆Y = K × ∆I
= 5 × 100
300 310 1.33 70 100 0.7
= ` 500 crores
400 380 0.95 70 100 0.7
500 450 0.9 70 100 0.7
CBSE Term-II Economics XII 49

3. (i) On the basis of following information, identify Ans. (i) At equilibrium level of income,
whether the economy is in equilibrium or not. Y=C + I
Here, Y = Equilibrium level of income
S.No. Particulars ` (in crores)
C = Consumption expenditure at equilibrium level
(a) Autonomous Consumption and 500
of income
Investment Expenditure (A)
I = Investment expenditure at equilibrium level
(b) Marginal Propensity to Save 0.2
(MPS)
of income
Y = ( 50 + 0 .5 Y ) + 100
(c) National Income 4,000
Y − 0.5 Y = 150
(ii) Answer the following questions on the basis of 0 .5 Y = 150
given figure. Equilibrium level of income = ` 300 crores
Y (ii) C = 50 + 0 .5 Y
S=–50+0.2 Y Substituting the value of Y in the above equation
C = 50 + 0 .5 × 300
Savings

C = 50 + 150
C = 200
Consumption expenditure at equilibrium level of income
O
B
X = ` 200 crores
Income Y=C +S
A
Y' 300 = 200 + S
(a) What does the shaded area AOB indicate? S = 300 − 200 ; S = 100
(b) What is the significance of point B ? Saving at equilibrium level of income = ` 100 crores.
(CBSE 2020)
5. When is an economy in equilibrium ? Explain with
Ans. (i) The economy is in equilibrium when
the help of saving and investment functions. Also
AD = AS explain the changes that take place in an economy
∴ AS = Y = 4, 000 when the economy is not in equilibrium. Use
∴ MPC = 1 − MPS diagram.
∴ AD = A + MPC ( Y )  = 1 − 0.2  Ans. Equilibrium level of income is determined at a point
 
 = 0.8  where ex-ante or planned saving is equal to planned
investment.
= 500 + 0.8 × 4, 000
Y
= 500 + 3, 200 = ` 3, 700 S
So, in the above question
AD= 4, 000 and AS = 3, 700 Investment Saving
S=I
AD ≠ AS, so the economy is not in equilibrium. I E I
(ii) (a) The shaded area AOB indicates negative savings
or dissavings.
(b) Point B is the point of equilibrium. At point B, O X
Y
savings are zero and level of aggregate demand is S Income/Output
equal to the level of aggregate supply in the
economy. At this point the value of APS = Zero
Y′
 S This is because, in equilibrium
APS = Y 
AS = AD or C + S= C + I or S= I
4. Answer the following questions based on the data E is the point where S = I, hence, the point at which the
given below. economy is in equilibrium. OY is the equilibrium level of
Planned investment = ` 100 crore national income.
What happens when S > I?
C = 50 + 05
. Y
When savings are greater than investment in an economy,
(i) Determine the equilibrium level of income. it refers to AD < AS. There will be a rise in inventory
(ii) Calculate the saving and consumption stock and prices will start to fall. To clear their stocks, the
expenditure at equilibrium level of national producers will now plan lesser output.
income. (CBSE 2020)
50 CBSE Term-II Economics XII

This will mean lesser income in the economy. Lesser Y S

+
income implies lesser saving. The process will continue =
C
I
till S = I. AS C+

Aggregate Demand/
D=

Aggregate Supply
What Happens if S < I? In case S < I, it implies a E
A

situation when withdrawal of expenditure (S) is lesser AD = AS

than injection of expenditure (I) into the circular flow of Point of
income. Accordingly, overall expenditure in the economy equilibrium
would exceed than what is required to buy the planned Y
output. It is a situation of higher AD than AS. 45°
To cope with the situation, the producers would now plan O Y1 Y Y2
X
higher output. Higher output would mean higher income Income/Output
and higher saving. The process will continue till S = I.
6. Explain the theory of determination of income and In the above figure, AD represents aggregate demand
curve and 45° line is the line of reference, where AS =Y.
employment with the help of aggregate demand
Equilibrium level of income Y is determined at point E,
and aggregate supply curves. where AD = AS. Prior to point E, aggregate demand
Or exceeds aggregate supply, leading to an increase in level of
Why must aggregate demand be equal to Aggregate income upto point E. Beyond point E, Aggregate Supply
exceeds Aggregate Demand leading to a fall in income
supply at the equilibrium level of income and
back towards point E.
output? Explain with the help of a diagram.
It is only when AS = AD, that the equilibrium is struck,
Ans. In an economy, equilibrium level of income and
because the equality between AS and AD implies that the
employment is determined when AD (Aggregate
desired level of output in the economy (as indicated by AS) is
Demand) is equal to AS (Aggregate Supply). According to
exactly equal to the desired level of expenditure (indicated
Keynes, AS may be assumed to be elastic in an economy
by AD) in the economy. So, the entire output as planned by
where full employment (of resources) is yet to be
the producers (during an accounting year) is purchased by
achieved. Accordingly, AD becomes the principal
the buyers. There are no undesired or unwanted inventories
determinant of equilibrium level of income.
(stock of goods) with the producers.
Chapter Test
Multiple Choice Questions
1. If Autonomous Consumption (C) is greater than zero, it indicates that the level of national income in an economy will be
……… .
(a) rising (b) falling
(c) constant (d) Any of these
2. According to classical economists, real wage rate is ……… to the marginal productivity of labour.
(a) equal (b) more (c) less (d) None of these
3. Value of marginal propensity to consume varies from ……… to ……… .
(a) negative infinity, positive infinity (b) one, positive infinity
(c) negative infinity, one (d) zero, one
4. Saving is a ............. function of disposable income.
(a) positive (b) negative
(c) constant (d) None of these
5. Which of the following statements is/are correct?
(i) Autonomous investment is the expenditure incurred on creation of capital assets.
(ii) If the level of investment in an economy is greater than savings, the level of income will also rise so long as full
employment is not achieved.
Alternatives
(a) Both are true (b) Both are false
(c) (i) is true, but (ii) is false (d) (i) is false, but (ii) is true

Short Answer (SA) Type Questions

1. Define multiplier. What is the relation between marginal propensity to consume and multiplier? Calculate the marginal
propensity to consume if the value of multiplier is 4.
2. If in an economy
Change in Initial Investment ( ∆I ) = ` 700 crores Marginal Propensity to Save (MPS) = 0.2
Find the values of the following
(i) Investment Multiplier ( K ) (ii) Change in Final Income ( ∆Y )
3. Giving reason, sate whether the following statement are true or false
(i) Value of average propensity to save can never be less than zero.
(ii) When marginal propensity to consume is zero, the value of investment multiplier will also be zero.
4. In an economy investment is increased by ` 300 crore. If marginal propensity to consume is 2/3, calculate increase in
national income.
5. An economy is in equilibrium. Calculate the marginal propensity to save from the following.
National Income = ` 1, 000
Autonomous Consumption = 100
Investment = 120

Long Answer (LA) Type Questions

1. Draw a straight line saving curve for an economy and derive the consumption curve. Explain the method of derivation.
Show a point on the consumption curve at which average propensity to consume is equal to 1.
2. Assuming that increase in investment is ` 1,000 crore and marginal propensity to consume is 0.9, explain the working of
multiplier.

Answers
Multiple Choice Questions
For Detailed Solutions
1. (d) 2. (a) 3. (d) 4. (a) 5. (a)
Scan the code
 52 CBSE Term-II Economics XII

CHAPTER 04

Equilibrium and
Disequilibrium
in the Economy
In this Chapter...
Basic Concepts
Excess Demand
Deficient Demand
Measures to Correct Deficient
and Excess Demand

Basic Concepts
Following basic concepts are essential before studying the output in the economy, which is expected in the
problem of deficient demand and excess demand long-term potential output.
1. Full Employment It refers to a situation where all
those who are able to work and are willing to work, are Excess Demand
getting work.
It refers to the situation when Aggregate Demand (AD) is in
2. Voluntary Employment It refers to the situation when excess of Aggregate Supply (AS) corresponding to full
some people are not willing to work at the existing employment in the economy, i.e., AD > AS.
wage rate.
3. Involuntary Unemployment It refers to the situation Inflationary Gap
where some people are not getting work, even when This gap is the excess of actual AD over and above its level
they are willing to work at the existing wage rate. required to maintain full employment equilibrium in the
4. Full Employment Equilibrium It refers to that economy or it is difference between AD beyond full
situation in the economy where Aggregate Supply (AS) employment and AD at full employment.
is equal to Aggregate Demand (AD) or Saving (S) is Y AS = Y = C + S
equal to Investment (I), along with fuller utilisation of Inflationary
Aggregate Demand/

labour force. gap AD1 (above full employment)

Aggregate Supply

= C1 + I1
E′
5. Under Employment Equilibrium It refers to that F AD (at full employment)
situation in the economy where Aggregate Supply (AS) =C+I
is equal to Aggregate Demand (AD) or Saving (S) is {E Excess demand
equal to Investment (I), but without fuller utilisation of
labour force.
45°
6. Over Employment Equilibrium It refers to a situation, O S R
X
when Aggregate Demand (AD) is equal to Aggregate Income and Employment
Supply (AS), beyond the full employment level of Inflationary Gap
CBSE Term-II Economics XII 53

Causes of Excess Demand and Inflationary Gap Consequences of Deficient

l
Increase in investment demand. Demand and Deflationary Gap
l
Increase in consumption demand. l
Actual stock increases, i.e., there is a situation of unwanted
l
Increase in export demand. stock pile up with producers.
l
Increase in disposable income. l
This forces the producers to reduce their current output
l
Increase in money supply. levels.
l
Increase in government’s demand for goods and services. l
This causes a situation of reduction in employment, further
l
Increase in private demand. worsening the situation.
Consequences of Excess
Demand and Inflationary Gap Measures to Correct Deficient
l
When Aggregate Demand (AD) increases beyond full Demand and Excess Demand
employment level, output remains constant.
There are two policy measures to solve the problem of excess
l
This creates excess pressure on demand at existing level demand and deficient demand which are as follows
of output.
l
This excess pressure causes a rise in prices implying a Monetary Measures
situation of inflation.
In a situation of excess and deficient demand, the RBI uses
l
Inflation further increases the cost of production, various instruments of monetary policy. It refers to the
worsening the situation. economic policy of the government relating to currency and
credit money.
Deficient Demand The instruments of monetary policy are as follows
It refers to the situation when Aggregate Demand (AD) is 1. Quantitative Instruments
short of Aggregate Supply (AS) corresponding to full
employment in the economy, i.e., AD < AS. It includes the following
(i) Bank Rate Policy It is the rate at which commercial
Deflationary Gap banks borrow from Central Bank for a period of more
The extent to which current aggregate demand falls short of than 90 days. In a situation of deficient demand, the RBI
the actual aggregate demand required for full employment reduces the bank rate or market interest rate.
level, is termed as deflationary gap. It measures the size of In case of excess demand, the RBI increases the bank
deficient demand. rate or interest rate which makes the credit dear.
Y AS = Y =C+S (ii) Open Market Operations It refers to buying and selling
of government approved securities in the open market
Aggregate Demand/

by the RBI to general public and commercial banks. In

Aggregate Supply

AD (at full employment)

=C+I the situation of deficient demand, RBI buys securities
E
AD1 (at under employment) from the open market and releases funds for the banks
} = C1 + I1 and the individuals. In a situation of excess demand, RBI
E′ F sells the eligible securities in its possession to
Deflationary commercial banks.
gap (iii) Cash Reserve Ratio (CRR) It is the fraction of total
45° deposits that each commercial bank must keep with RBI,
X
O S R as a part of fractional reserve system. During deficient
Income and Employment Deflationary Gap demand, RBI reduces the CRR. In a situation of excess
demand, RBI raises the CRR.
Causes of Deficient (iv) Statutory Liquidity Ratio (SLR) It refers to the fraction
Demand and Deflationary Gap of total deposits which each commercial bank must keep
with itself in liquid assets like gold, government securities,
l
Decrease in investment demand.
etc. RBI reduces SLR in situations of deficient demand.
l
Decrease in public expenditure. In a situation of excess demand, RBI raises the SLR.
l
Decrease in export demand.
2. Qualitative Instruments
l
Decrease in consumption demand.
It includes the following
l
Decrease in disposable income.
l
Decrease in supply of money. (i) Marginal Requirement It is the difference between the
market value of securities provided by the borrower and
l
Decrease in credit creation.
the amount of loan granted to him.
 54 CBSE Term-II Economics XII

There will be reduction in marginal requirement increase the purchasing power of the people and they will
in a situation of deficient demand while it is raised spend more on consumption of goods and services. Thus,
to correct the situations of excess demand. aggregate demand will rise.
(ii) Moral Suasion In this, RBI issues directives to In a situation of excess demand, government raises the rates
bank to follow rules and regulations. During of all taxes which reduces the purchasing power of the
deficient demand, the RBI issues instructions to people and reduces both consumption and investment
member banks to increase the availability of credit expenditures.
to borrowers for non-essential purposes also. But,
in case of excess demand, RBI imposes restrictions 2. Expenditure Policy In a situation of deficient demand, the
on commercial banks on granting loans. government should raise its expenditure which will raise
(iii) Selective Credit Controls It refers to a method in the level of employment. It will in turn, increase the wages
which the Central Bank gives directions to other and the purchasing power. Thus, aggregate demand will
banks to give or not to give credit for certain rise.
purposes to particular sectors. It imposes rationing In a situation of excess demand, government reduces its
of credit to prevent excessive flow of credit. public expenditure which will result in fall in demand for
goods and services. The fall in government expenditures
Fiscal Measures should be equal to the inflationary gap.
Fiscal policy is the government’s revenue and 3. Deficit Financing To correct deficient demand,
expenditure policy. In a situation of excess demand, government should take resort to deficit financing or
government uses various instruments of fiscal policy to printing of notes to increase purchasing power of the
reduce budgetary deficit. The instruments of fiscal economy.
policy used to control deficient and excess demand are In order to correct excess demand, government should
1. Revenue Policy In a situation of deficient demand, reduce the deficit financing or printing of notes to bring the
the government should reduce taxes which will excess demand down.
CBSE Term-II Economics XII 55

Chapter
Practice
Ans. (d) Deficit demand occurs due to fall in government
PART 1 expenditure, fall in level of autonomous investment, fall in
supply of money and credit and decrease in marginal
Objective Questions propensity to consume.
5. …… refers to selling of government approved
l
Multiple Choice Questions securities by RBI to general public and commercial
banks in case of excess demand.
1. In the AD-AS model, the level of aggregate (a) Bank rate
demand can influence the level of output. (b) CRR
(a) If and only if aggregate supply has a positive (c) SLR
relationship with the price level
(d) Open market operation
(b) If and only if the price level is constant
(c) If and only if aggregate supply is not invariant with Ans. (d) Open market operation
changes in the price level 6. In order to correct the situation of excess demand
(d) If and only if aggregate supply is invariant with
changes in the price level
(i) cost of credit is raised
(ii) availability of credit is raised
Ans. (a) In the model, aggregate demand = aggregate supply.
The level of aggregate demand can influence the level of (iii) availability of credit is reduced
output only if aggregate supply has a positive Alternatives
relationship with the price level (a) Only (iii)
(b) Only (i)
2. When does a situatioin of deficient demand arise
(c) Both (i) and (iii)
in an economy?
(d) (i), (ii) and (iii)
(a) AD > AS (b) S > I
Ans. (c) Both (i) and (iii)
(c) AD < AS (d) S < I
Ans. (c) Deficient demand arises when AD is short of AS 7. By increasing the tax burden on the producers, the
corresponding to full employment in the economy. government intends to
3. If an individual deposits a sum of money in a bank, (i) correct the situation of inflationary gap
then the amount of traditional credit that the (ii) correct the situation of excess demand
banking system can create is Which statement is true?
(a) fraction of that sum defined by the cash reserve ratio (a) Both (i) and (ii)
(b) a fraction of that sum defined by the statutory liquidity (b) Only (i)
ratio
(c) Only (ii)
(c) a multiple of the sum defined by the cash reserve ratio
(d) None of the above (d) None of the above
Ans. (d) The process of credit creation is a multiple of that Ans. (a) Both (i) and (ii)
sum defined by the sum of cash reserve ratio and 8. In case of an underemployment equilibrium, which
statutory liquidity ratio. of the following alternative is not true? (CBSE 2020)
4. The main cause(s) of deficit demand is/are (a) Aggregate demand is equal to aggregate supply.
(a) decrease in money supply (b) There exist excess production capacity in the economy.
(b) increase in public expenditure (c) Resources are not fully and efficiently utilised.
(d) Resources are fully and efficiently utilised.
(c) decrease in investment demand
Ans. (d) Resources are fully and efficiently utilised.
(d) Both (a) and (c)
56 CBSE Term-II Economics XII

9. Match the following. 14. The central bank can increase availability of credit
by (CBSE 2018)
Column I Column II
(a) raising repo rate
A. Inflationary gap (i) Boom, recession, depression, (b) raising reverse repo rate
recovery (c) buying government securities
B. Deflationary gap (ii) Excess demand (d) selling government securities
Ans. (c) buying government securities
C. Taxation (iii) Deficit demand
D. Business cycle (iv) Revenue policy 15. Which fiscal measure should be adopted for
correcting deficient demand?
Codes (a) Government should spend more on public works.
A B C D A B C D (b) Taxation should be reduced.
(a) (i) (ii) (iii) (iv) (b) (ii) (iii) (iv) (i) (c) Public debt should be reduced.
(c) (iii) (ii) (iv) (i) (d) (ii) (iii) (i) (iv) (d) All of the above
Ans. (b) (ii) (iii) (iv) (i) Ans. (d) All of the above
10. To reduce credit availability in the economy, the 16. Match the following.
central bank may ............. . (CBSE 2020)
(a) buy securities in the open market Column I Column II
(b) sell securities in the open market A. Corrective measure for (i) Deficit demand
(c) reduce reserve ratio deficient demand
(d) reduce repo rate B. Qualitative method of (ii) Credit rationing
Ans. (b) sell securities in the open market controlling credit
C. Inflationary gap shows (iii) Monetary measures
11. The Cash Reserve Ratio (CRR) refers to the measurement of
(a) the liquid cash that banks have to maintain with the
Reserve Bank of India as a certain percentage of their Codes
demand and time deposits. A B C A B C
(b) the cash that banks have to keep in their vaults in order (a) (i) (ii) (iii) (b) (iii) (ii) (i)
to meet sudden demand from depositors in times of (c) (iii) (i) (ii) (d) (ii) (iii) (i)
crisis. Ans. (b) (iii) (ii) (i)
(c) the cash that households have to keep in reserve to meet
sudden increases in the price of essential goods and 17. With which component of monetary policy, central
services. bank tries to attain economic stability in the country?
(d) the cash that the government keeps in reserve so as to be (a) Supply of money (b) Interest rate
ready to meet unexpected contingencies. (c) Availability of money (d) All of these
Ans. (a) Cash Reserve Ratio (CRR) refers to the liquid cash Ans. (d) Supply of money, interest rate and availability of money.
that banks have to maintain with Reserve Bank of India
as a percentage of their demand and time deposits. 18. Inflationary gap shows the measurement of
(a) deficit demand
12. The money multiplier in an economy increases with
(b) surplus demand
(a) increase in cash reserve ratio
(b) increase in statutory liquidity ratio (c) full employment
(c) increase in banking habits of the population (d) None of the above
(d) increase in the population of the country Ans. (a) deficit demand
Ans. (c) Money multiplier in an economy increases with the
increase in the banking habits of the population. It l
Assertion-Reasoning MCQs
measures the amount of money that commercial banks
would create out of their deposits after keeping certain
Directions (Q.Nos. 1 to 7) There are two statements
fractions as reserve. So, as the banking habits of the marked as Assertion (A) and Reason (R). Read the
people increase, the deposits will also increase leading to statements and choose the appropriate option from the
an increase in the value of money multiplier. options given below
(a) Both Assertion (A) and Reason (R) are true and Reason
13. Which of the following is not a tool of monetary (R) is the correct explanation of Assertion (A).
policy? (b) Both Assertion (A) and Reason (R) are true, but
(a) Tax rate (b) Interest rate Reason (R) is the not the correct explanation of
(c) Cash reserve ratio (d) Open market operations Assertion (A).
Ans. (a) It is not a tool of monetary policy as it does not affect (c) Assertion (A) is true, but Reason (R) is false.
the demand and supply of money. (d) Both the statement are false.
CBSE Term-II Economics XII 57

1. Assertion (A) AS increases proportionate to the Ans. (d) SLR is decreased to correct the situation of deflationary
increase in AD as long as there is excess capacity gap. Lower SLR increases credit creation capacity of
in the economy. commercial banks which in turn would increase AD and
correct the deflationary gap.
Reason (R) Excess capacity arises because of the
deficiency of demand, so that as demand 7. Assertion (A) During periods of economic depression,
increases, supply increases proportionately. economy is caught in a low level equilibrium trap as
Ans. (a) Both Assertion (A) and Reason (R) are true and investment in the private sector tends to slide to its
Reason (R) is the correct explanation of Assertion (A). bottom.
2. Assertion (A) In a situation of deficient demand, Reason (R) The government can break the deadlock of
there is underemployment equilibrium in an low demand side factors by pumping investment into
economy. an economy and there by raising AD till such time the
private investment is revived to achieve higher level
Reason (R) Owing to deficient AD, equilibrium
of output and employment.
between desired AD and desired AS is struck at
Ans. (a) Both Assertion (A) and Reason (R) are true and Reason
a lower level of GDP, lower than the full
(R) is the correct explanation of Assertion (A).
employment in an economy.
Ans. (a) Both Assertion (A) and Reason (R) are true and l
Case Based MCQs
Reason (R) is the correct explanation of Assertion (A).
3. Assertion (A) During periods of economic 1. Direction Read the following text and answer the
question no. (i) to (vi) on the basis of the same.
downturn, Central Bank raises cash reserve ratio
as a monetary policy tool to stabilise the When an economy undergoes a deflationary shock, the
economy. implications can be both positive and negative for
consumers and businesses.
Reason (R) This in turn will increase the credit
There is a big difference between the
creation power of the commercial banks and
terms disinflation and deflation, which we will first go
thus reduces the level of AD in an economy.
over before getting into the causes and effects of
Ans. (d) Central Bank decreases CRR during periods of deflationary shocks, and how these shocks can affect
recession which in turn will increase the credit the economy, consumers and businesses.
creation power of commercial banks and thus expand Disinflation usually occurs during a period of
the level of AD in the economy.
recession and manifests itself by slowing down the
4. Assertion (A) Fiscal policy focuses on both the rate at which prices increase; this occurs as a result of
principles of economic growth and stability. a decrease in consumer sales.
Reason (R) Stability is achieved by correcting If the inflation rate drops to a lower level than before,
the situation of inflationary and deflationary gap, technically that difference is disinflation. Deflation,
while growth is achieved by way of lower on the other hand, can be thought as the opposite of
taxation and higher subsidies to the producers. inflation or as negative inflation and it occurs when
Ans. (a) Both Assertion (A) and Reason (R) are true and the supply of goods or services rises faster than
Reason (R) is the correct explanation of Assertion (A). the supply of money.
5. Assertion (A) During the pandemic, income of (i) ……… helps to correct the situation of deflationary
the people have fallen and as a result there has shock in a country through its credit control policy.
been a reduction in aggregate demand. (a) Central bank
Reason (R) According the Keynesian economics, (b) Commercial bank
government should follow expansionary fiscal (c) Either (a) or (b)
policy implying a higher level of government (d) None of the above
expenditure and lower level of taxes. Ans. (a) Central bank
Ans. (a) Both Assertion (A) and Reason (R) are true and (ii) Which of the following statements stands true during
Reason (R) is the correct explanation of Assertion (A). deflationary gap?
6. Assertion (A) SLR is increased to correct the (a) Actual output falls short of potential output
situation of deflationary gap. (b) Potential output falls short of actual output
Reason (R) Higher SLR increases credit creation (c) Actual demand is less than expected demand
capacity of commercial banks which in turn (d) Expected demand is less than actual demand
increases liquidity in the capital market. Ans. (c) Actual demand is less than expected demand
58 CBSE Term-II Economics XII

(iii) Which of the following steps should be taken by expenditure side of the budget are also of three
central bank to boost demand in the economy types i.e., purchase of goods and services, transfer
during deflationary gap? payment and repayment of debts. Taxation is a
(a) Decrease tax rate compulsory contribution made by the people to the
(b) Deficit financing government against which no direct payments are
(c) Decrease legal reserve requirements made by the government.
(d) Increase foreign exchange reserve A taxpayer becomes poorer by the amount of taxes.
Ans. (c) Decrease legal reserve requirements Hence, the income available in the hands of the
(iv) What will be the impact on money supply during people is reduced by the amount of taxes paid.
deflationary gap? Public borrowing is made through the sale of new
(a) Increase (b) Decrease government bonds, which people voluntarily
(c) Remain constant (d) Can’t be predicted purchase. Neither their income nor their wealth is
Ans. (b) Decrease deduted thereby. They simply alter the form and
(v) All types of physical goods imported and exported composition of wealth in the private sector.
are known as ........... items. An increase in the net indebtedness of the
(a) visible (b) invisible government to the central bank takes place through
(c) Both (a) and (b) (d) None of these the creation of new money by the central bank.
Ans. (a) visible (i) If government increase its expenditure on
(vi) Assertion (A) Excess demand raises the market infrastructural development project, how will this
value of the output. impact the aggregate demand?
Reason (R) In situation of excess demand, output (a) Increase
level remaining constant, higher demand leads to a (b) Decrease
rise in the general price level, implying a situation (c) Remains constant
where market value of the output increases in the (d) Increase in a three-sector closed economy
economy. Ans. (d) Increase in a three-sector closed economy
Alternatives (ii) What will be the impact on aggregate demand, if
(a) Both Assertion (A) and Reason (R) are true and Reason the government increase tax rates as it is a main
(R) is the correct explanation of Assertion (A). source of government’s revenue?
(b) Both Assertion (A) and Reason (R) are true, but Reason (a) Increase
(R) is not the correct explanation of Assertion (A). (b) Decrease
(c) Assertion (A) is false, but Reason (R) is true (c) Remains constant
(d) Both the statements are false (d) Either increase or decrease
Ans. (a) Both Assertion (A) and Reason (R) are true and Reason Ans. (b) Decrease
(R) is the correct explanation of Assertion (A).
(iii) Public borrowings by the government will lead to
2. Direction Read the following text and answer the ………… money supply in the economy.
question no. (i) to (vi) on the basis of the same. (a) increase
In the simple Keynesian model of income (b) decrease
determination, we assume that there is no (c) remains constant
government activity in the economy. If we remove (d) increase in a three-sector closed economy
this assumption to see how the equilibrium level of Ans. (a) increase
income can be determined in the presence of
economic activity of the government, it can be seen (iv) Which of the following statements is/are correct?
that, the government collects money from the (i) Government raises money through sale of treasury
economy and spends money into the economy. bills and other securities.
Government expenditures and receipts have an (ii) Treasury bills are considered as risk free and the
return so achieved is referred as risk free rate of
important effect on the economy.
return.
Government budget has two sides viz. the
Alternatives
expenditure side and the receipt side. Money
(a) Both are true (b) Both are false
inflows in the receipt side of the budget are of
three types, i.e. taxation, public borrowing and (c) (i) is true, but (ii) is false (d) (i) is false, but (ii) is true
sales of goods and services; money outflow in the Ans. (a) Both are true
CBSE Term-II Economics XII 59

(v) The Keynesian solution to deal with a problem of along with high rate of unemployment. How can
deficient demand or to correct recessionary gap is to you explain this paradox?
(a) enhance the level of government expenditure Ans. Keynesian theory is related to the problem of developed
economies. In these economies, unemployment occurs
(b) lower the level of taxes
because of the lack of Aggregate Demand (AD). Lack of
(c) Both (a) and (b) AD leads to a cut in planned output. Accordingly, lay-off
(d) None of the above occurs and excess capacity emerges. In such situations,
Ans. (c) Both (a) and (b) increase in expenditure (implying increase in AD) would
lead to increase in planned output,without any increase in
(vi) Assertion (A) Central Bank buys government the price level.
securities in the open market to correct the The inflationary gap would emerge only when AD
situation of inflationary gap. continues to rise even when excess capacity is totally
Reason (R) By buying the securities, the banks exhausted and full employment is reached.
soaks liquidity from the market which is required In developing countries like India , unemployment
to correct inflationary gap. occurs not because of the lack of AD, but because of the
lack of production capacity or the lack of capital. Unlike
Alternatives
developed countries, there is no excess capacity in less
(a) Both Assertion (A) and Reason (R) are true and Reason
developed countries like India. Accordingly, price level
(R) is the correct explanation of Assertion (A).
starts rising following increase in AD, even when there is
(b) Both Assertion (A) and Reason (R) are true, but Reason
(R) is not the correct explanation of Assertion (A). unemployment in the economy.
(c) Assertion (A) is false, but Reason (R) is true 3. What is ‘deficient demand’? Explain the role of
(d) Both the statements are false ‘bank rate’ in removing it. (CBSE 2015)
Ans. (d) Central Bank sells government securities in the open Ans. Deficient demand refers to a situation when Aggregate
market to correct the situation of inflationary gap. It is by Demand (AD) is short of Aggregate Supply (AS)
selling the securities that the banks soaks liquidity from corresponding to full employment in an economy.
the market which is required to correct inflationary gap.
Bank rate is the rate at which the central bank lends
money to the commercial banks. To correct the situation
PART 2 of deficient demand, bank rate is decreased. As a
follow-up action, the commercial banks lower the market
rate of interest (the rate at which the commercial banks
Subjective Questions lend money to the consumers and the investors). This
increases demand for credit.
l
Short Answer (SA) Type Questions Consequently, consumption expenditure and investment
expenditure are increased, implying an expansion in
1. Explain the concept of inflationary gap. Explain the aggregate demand, as required to correct deficient
role of repo rate in reducing this gap. (CBSE 2015) demand.
Ans. Inflationary gap is the excess of aggregate demand over 4. Explain the concept of deflationay gap and the role
and above its level required to maintain full employment of ‘open market operations’ in reducing this gap.
equilibrium in the economy. It causes excess demand in (CBSE 2015)
the economy. Owing to excess demand, price levels tend
Ans. Deflationay gap is the shortfall in aggregate demand
to rise without any rise in the level of income or
from the level required to maintain full employment
employment in the economy.
equilibrium in the economy. It causes deficient demand in
Repo rate is the rate at which the central bank lends the economy . Owing to deficient demand, planned level
money to the commercial banks. To correct the situation of output is reduced. Along with reduction in the level of
of inflationary gap, repo rate is increased. As a follow-up output, level of income and employment also tend to
action, the commercial banks raise the market rate of reduce. The economy is driven into a state of low level
interest (the rate at which the commercial banks lend equilibrium trap.
money to the consumers and the investors) which
Open market operations is the policy that focuses on
reduces demand for credit.
increasing and decreasing the stock of liquidity (or cash
Consequently, consumption expenditure and investment balances) with the people as well as with the commercial
expenditure are reduced implying a reduction in banks, through sale and purchase of securities by the
aggregate demand, as required to correct inflationary central bank. During the situation of deflationary gap,
gap. when cash balances need to be increased (to stimulate the
2. Keynesian theory tell us that inflationary gap level of aggregate demand), the central banks starts buying
emerges only when full employment is reached. securities. Purchase of securities injects purchasing power
But, in India we often find high rate of inflation into the money market.
60 CBSE Term-II Economics XII

Cash balances of the commercial banks start picking up. 8. If government spending leads to multiple times
This enhances their capacity to create credit. Flow of increase in GDP, why should fiscal deficit be
credit increases, leading to increase in AD and
curbed?
deflationary gap is corrected.
Ans. Government spending leads to multiple times increase
5. What is ‘excess demand’? Explain the role of in GDP only when there is excess capacity in the
‘reverse repo rate’ in removing it. economy or when planned output is low owing to lack of
Ans. Excess demand refers to the situation when aggregate Aggregate Demand (AD).
demand is in excess of aggregate supply corresponding to But, in situations when excess capacity does not exist
full employment. (or when AD is not deficient), government spending
Reverse repo rate is the rate of interest at which would only contribute to inflationary spiral in the
commercial banks can park their surplus funds with the economy. In such situations (when inflation needs to
central bank, for short period of time. To correct the be curbed), the government must curb fiscal deficit.
situation of excess demand, reverse repo rate is increased.
As a follow-up action, the commercial banks will be 9. Explain all the changes that takes place in an
encouraged to increase their deposits with the central economy when aggregate demand and aggregate
bank. This, in return, will reduce their ability to lend supply are not equal.
money. Consequently, consumption expenditure and
Ans. (i) If aggregate demand is greater than aggregate supply
investment expenditure will be reduced, implying a
i.e., AD > AS, flow of goods and services in the
reduction in aggregate demand, as required to correct
economy tends to be less than their demand. The
excess demand.
existing stocks of the producers would be sold out and
6. What is ‘deficient demand’'? Explain the role of the producers would suffer the loss of unfulfilled
‘margin requirements’ in removing this gap. demand.
(CBSE 2015) To rebuild the desired stocks and avoid the loss of
Ans. Deficient demand refers to a situation when Aggregate unfulfilled demand, the producers would plan greater
Demand (AD) is short of Aggregate Supply (AS) production. AS would increase to become equal to
corresponding to full employment in an economy. AD. This is how AS converges with AD.
Margin requirements refer to minimum down payment (ii) If aggregate demend is less than aggregate supply, i.e.,
that the borrowers have to make as a percentage of their AD < AS, flow of goods and services in the economy
total borrowing from the commercial banks. To correct the tends to exceed their demand. As a result, some of the
situation of deficient demand, margin requirement is goods would remain unsold.
reduced. Lower margin requirement acts as an incentive To clear unwanted stocks, the procedures would plan
to borrow. This induces borrowers to raise more credit a cut in production. Consequently, AS would reduce to
implying a rise in aggregate demand, as desired to correct become equal to AD. This is how AS adapts itself to
deficient demand. AD.

7. Giving valid reasons, state whether the following 10. Covid-19 has significantly impacted the income
statements are true or false. level of the households and thus have reduced the
level of household and investment expenditure and
(i) An excess of aggregate demand over full
thereby the level of AD.
employment level of aggregate supply
represents a situation of inflationary gap. Examine the economic implications of increase in
(ii) If the ratio of Marginal Propensity to Consume government investment expenditure when the
(MPC) and Marginal Propensity to Save (MPS) economy is in a state of depression.
is 4 : 1, then the value of investment multiplier Ans. During depression, the economy faces a deficient
will be 4. (CBSE 2019)
demand situation. To correct this situation,the
government takes various fiscal measures. Increase in
Ans. (i) The given statement is true, an excess of aggregate government investment expenditure is the principal
demand over full employment level of aggregate supply instrument to correct the deficiency in demand.
represents the situation of inflationary gap because when Increase in government investment expenditure acts as a
economy is working at full employment level, there is no pump priming when the inducement to invest is low,
chance of increase in production and aggregate demand owing to deficiency of demand.
still increases then producers have to increase the general
It breaks the vicious circle of ‘low demand-low
price level to control the situation.
inducement to invest-low production-low income-low
(ii) The given statement is false. demand’. The economy is pulled out of the state of
Ratio of MPC and MPS is 4:1 depression.
4 1 1
MPC = 0.8; MPS = = 0. 2 ⇒ K = The GDP growth accelerates in response to increase in
5 5 MPS AD, trigged by increase in government investment
K = 1 / 0.2 = 5 expenditure.
Thus, the value of multiplier is 5 not 4.
CBSE Term-II Economics XII 61

11. How can the problems of excess and deficient 14. Explain the role of taxation in reducing excess
demand be combated? demand. (CBSE 2016)
Ans. Monetary and fiscal instruments are the key to combat Ans. Excess demand refers to the situation when Aggregate
the problems of excess and deficient demand. Fiscal Demand (AD) is in excess of Aggregate Supply (AS)
instruments revolve around revenue and expenditure corresponding to full employment in the economy.
policy of the government. Monetary instruments relate to
Y
the regulation of money supply in the economy. AS = Y = C + S
To combat excess demand, the government needs to curb
its expenditures and raise its revenue. On the monetary

Aggregate Demand/
AD1 (above full employment)

Aggregate Supply
front, it needs to pursue a ‘Dear Money Policy’, making E′
= C1 + I 1
availability of credit tougher than before and shrinking the F AD (at full employment)
credit creation capacity of the commercial banks. =C+I

To combat deficient demands, on the other hand,

{E Excess demand

expenditure needs to be stimulated while revenue needs

to be curbed. On the monetary front, cheap money policy
45°
needs to be pursued, facilitating easy availability of credit O
X
S R
and enhancing credit creation capacity of the commercial Income and employment
banks. For employment

12. Explain three measures by which excess demand in In a situation of excess demand, government raises the
an economy can be corrected. rates of all taxes.
Ans. The problem of excess demand can be corrected through This reduces the purchasing power of the people and
the following measures reduces both consumption and investment expenditures.
(i) Public expenditure on public works, public welfare and A fall in consumption and investment expenditures
public investment should be reduced. Reduction in reduces the level of aggregate demand and helps to check
expenditure will lead to a fall in aggregate demand. the problem of excess demand.
(ii) The direct and indirect taxes should be increased. It
will lead to decrease in disposable income and thereby, 15. State which of the following statements are true or
decrease in demand. false? Give valid reasons. (CBSE 2019)
(iii) The repo rate should be increased. It will induce an (i) According to Keynesian theory of employment,
increase in the market rate of interest. Consequently, a state of under-employment can never exist in
demand for the funds for the purpose of consumption an economy.
expenditure and investment expenditure will reduce.
Implying a fall in aggregate demand.
(ii) In a two-sector economy, if income is zero,
average propensity to consume will also zero.
13. Read the following statements carefully. Write true Ans. (i) The given statement is false, according to Keynesian
or false with a reason. theory of employment, a state of under-employment
(i) Excess demand raises the market value of output. can exist. This may occur at that level of income where
(ii) Prices and output increase in a situation of inflationary equilibrium between AD and AS happens at less than
gap in an economy. full employment level.
Ans. (i) True, excess demand raises the market value of the (ii) The given statement is false, because when income is
output. Because in a situation of excess demand, output zero, autonomous consumption may exist in economy for
level remaining constant, higher demand (higher than  C
survival, thus APC   will never be zero.
the supply) leads to a rise in general price level,  Y
implying a situation when market value of the output
increases in the economy. 16. Read the following statements carefully. Write true
(ii) False, inflationary gap is the excess of AD over and or false with an appropriate reason.
above its level required to maintain full employment (i) Central bank buys government securities in the
equilibrium in the economy. Inflationary gap generates open market to correct the situation of
extra pressure on the existing flow of goods and
inflationary gap.
services at the level of full employment. Accordingly,
prices tend to rise but output will not increase. Output (ii) SLR is increased to correct the situation of
remains constant corresponding to full employment deflationary gap.
level in the economy.
62 CBSE Term-II Economics XII

Ans. (i) False, Central bank sells government securities in the It reduces the supply of money and credit creation
open market to correct the situation of inflationary gap. capabilities of commercial banks. Due to lesser supply
It is by selling the securities that the banks soaks of money, the Aggregate Demand comes down and the
liquidity from the market which is expected to correct economy attains equilibrium situation.
the inflationary gap. (ii) Statutory Liquidity Ratio (SLR) It refers to a fixed
(ii) False, SLR is decreased to correct the situation of percentage of the total assets of a bank in the form of
deflationary gap. Lower SLR increases credit creation cash or other liquid assets that is required to be
capacity of the commercial banks because a cut in the maintained by the bank. During the situation of
SLR raises cash balances with the commercial banks. inflationary gap, SLR is increased. This reduces the
Accordingly, availabiltiy of credit increases in the credit creation capacity of commercial banks and
capital market. This increases aggregate demand and reduces the flow of money in the economy. As a result
deflationary gap is corrected. of that, the Aggregate Demand comes down and
ultimately, the economy attains equilibrium.
l
Long Answer (LA) Type Questions
2. In the given figure, what does the gap ‘KT’
1. Explain the concept of inflationary gap. Also represent? State and discuss any two fiscal
explain the role of legal reserves in reducing it. measures to correct the situation. (CBSE 2020)
(All India, 2012, 2009)
Y
AD1 (C + I + DI)
Or Define and represent inflationary gap on a diagram.
Explain the role of the varying reserves

Aggregate demand
requirement in removing the gap. (Delhi 2010C) K AD(C + I)
Ans. Inflationary gap occurs when AD>AS corresponding to
full employment level. This inflationary gap, i.e, excess of
Aggregate Demand causes inflation in the economy and T
price levels tend to rise.
Y
Aggregate Demand/

Y = AS
Aggregate Supply

45
X
A D AE
F YF Income
AD FE
E Ans. ‘KT’ represents inflationary gap which means aggregate
demand is more than aggregate supply corresponding to
Inflationary gap
full employment level. Two fiscal measures to correct the
X situation of inflationary gap are
O P Income/Output
(i) Revenue Policy To correct the situation of inflationary
In this figure, gap, government raises the rate of all taxes. This reduces
the purchasing power by reducing disposable income
AD FE = AD at full employment level (i.e., after tax income) of the people which in turn will
AD AE = AD above full employment level reduce the aggregate demand in the economy.
The point E is the equilibrium point where AD = AS. But (ii) Expenditure Policy To correct the situation of
there is excess demand (current) at AD AE , where inflationary gap, government should reduce its public
Aggregate Demand FP is more than the Aggregate expenditure. This reduces the purchasing power by
Supply in the economy. This difference of actual reducing total income of the people which in turn will
Aggregate Demand and Supply, i.e. EF is the inflationary reduce the aggregate demand in the economy.
gap. 3. What is fiscal policy? What fiscal measures would
Inflationary Gap = Excess Demand = AD AE − AD FE = EF you recommend to correct deficient demand?
Role of Legal Reserves to Correct the Ans. Fiscal policy refers to the revenue and expenditure
Problem of Inflationary Gap policy (or budgetary policy) of the government to correct
Legal reserves like Cash Reserve Ratio and Statutory the situations of excess or deficient demand.
Liquidity Ratio are the tools to correct the problem of Following fiscal measures are recommended to correct
inflationary gap deficient demand
(i) Cash Reserve Ratio (CRR) Each and every commercial (i) The government should step up its expenditure on
bank has to keep a certain proportion of its demand and (a) public works programmes
time deposits in the form of cash and other liquid assets (b) education and public welfare
with the Central Bank. This ratio is termed as Cash (c) subsidies to the producers
Reserve Ratio. To correct the problem of inflationary
(d) defence and law and order
gap, the Central Bank increases the CRR.
CBSE Term-II Economics XII 63

(ii) The government should reduce tax burden on the feature of the deficient demand), private expenditure
households and the producers, so that they are left with remains low. It is in such a situation that the
greater cash balances. government expenditure (which is not driven by profit
(iii) The government should raise more funds from the RBI motive) can play a significant role. It will act as an
so that there is a greater flow of liquidity in the injection of demand into the system and is expected to
economy. Higher liquidity implies higher level of AD. induce private expenditure. Accordingly, the situation
(iv) The government should plan a cut in public of deficient demand will be corrected.
borrowings, so that people are left with greater (ii) Inflationary gap refers to a situation of excess demand,
liquidity (or cash balances). Greater cash balances when aggregate demand is greater than aggregate
implies higher AD. supply corresponding to full employment level in the
Briefly, deficient demand is corrected when the economy.
government steps up its own expenditure and ensures, During this situation, general price level tends to rise,
that cash balances with the people are high. causing a rise in the rate of interest and consequently,
a fall in investment and a fall in the growth rate of
4. Explain the role of government expenditure in GDP.
correcting the situation of Correction of inflation gap calls for a cut in
(i) deficient demand in the economy expenditure. But owing to rising prices, wage rate
(ii) inflationary gap in an economy tends to rise (along with other factor cost) which stokes
the rate of inflation. In such a situation, a cut in
Ans. (i) In a situation of deficient demand, aggregate demand
government’s non-development expenditure like on
(measured in terms of aggregate expenditure) is less
defence, law and order and subsides will cause an
than the aggregate supply corresponding to the full
overall cut in aggregate demand. So that excess
employment level in the economy.
aggregate demand is corrected and inflationary gap is
Accordingly, aggregate demand needs to be raised. But eliminated.
because of poor market sentiments (a characteristic
Chapter Test
Multiple Choice Questions
1. In case of excess demand, RBI …… the bank rate or interest rate which makes the credit dear.
(a) increases (b) decreases
(c) deposit (d) None of these
2. …… is equal tothe difference between ‘AD beyond full employment’ and ‘AD at full employment’.
(a) Recession (b) Inflationary gap
(c) Deflationary gap (d) None of these
3. Which of the following statements is/are true?
(a) Ex-ante savings is the actual level of savings in the economy.
(b) Ex-post investment is the planned investment at a given point of time.
(c) Ex-ante saving is always equal to ex-post savings.
(d) All of the above statements are false.
4. Which of the following can be used to correct the situation of deflationary gap?
(a) Increase in bank rate
(b) Increase in CRR
(c) Reduction in SLR
(d) Increase in margin requirement
5. By increasing the tax burden on the producers, the government intends to
(a) correct the situation of deficient demand
(b) correct the situation of inflationary gap
(c) correct the situation of excess demand
(d) Both (b) and (c)

Short Answer (SA) Type Questions

1. Define effective demand. Discuss how effective demand can be restored, if ex-ante Aggregate Demand (AD) is more
than ex-ante Aggregate Supply (AS).
2. Explain three reasons by which deficit demand in an economy can be corrected.
3. Explain the ‘varying reserve requirements’ method of credit control by the central bank.
4. ‘‘To boost the falling demand in the economy, the reserve Bank of India recently reduced repo rate.’’ Elaborate the
rationale behind the steps taken by the central bank.
5. Read the following statements carefully. State true or false with an appropriate reason.
(i) Full employment implies there is zero unemployment in the economy.
(ii) Excess demand refers to the situation when AD> AS, corresponding to underemployment in the economy.
Long Answer (LA) Type Questions
1. Explain the concept of deflationary gap. Also, explain the role of margin requirement in reducing it.
2. What is monetary policy? Briefly state how monetary policy is used to correct deficient demand?

Answers
Multiple Choice Questions
For Detailed Solutions
1. (a) 2. (b) 3. (d) 4. (c) 5. (d)
Scan the code
CBSE Term-II Economics XII 67

CHAPTER 01

Employment and
Unemployment in India

In this Chapter...
l Employment
l Unemployment
l Government and Employment
Generation

Employment
It is an activity which helps an individual to earn his living. It is (ii) Regular Salaried Workers When workers are
basically a relationship between two parties, i.e, the employer engaged by someone or by an enterprise and
and the employee who are binded in a contract of doing paid their wages on a regular basis, they are
something valuable or it is an act of employing or state of being known as regular salaried employees or regular
employed. workers. e.g. teachers, chartered accountants,
etc.
Workers
Important Terms
All those who are engaged in production activities, in whatever
capacity high or low, are workers. Terms associated with workers and employment are
stated below
Types of Workers 1. Productive Activities Those activities which
1. Self-Employed The workers who own and operate an contribute to the gross national product are called
enterprise to earn their livelihood are known as productive activities.
self-employed. e.g. a farmer working on his own farm. This 2. Workforce Persons who are engaged in productive
category accounts for more than 50% of the workforce. activities are termed as workers and they constitute
2. Hired Workers Those people who are hired by others and the workforce. It is the total number of persons
are paid wages or salaries as a reward for their services are actually working.
called hired workers. 3. Labour Supply It refers to the amount of workers that
Hired workers can be of two types are willing to work, corresponding to a particular
wage rate.
(i) Casual Workers Those people who are not hired by
their employers on a regular/permanent basis and do 4. Labour Force It refers to the number of workers
not get social security benefits are said to be casual actually working or who are able to work. It is not
workers. e.g. construction workers. related to wage rate.
 68 CBSE Term-II Economics XII

Distribution of Self-Employed and l

Casualisation of workforce
Hired Workers in India l
Jobless growth
The distribution of self-employed and hired workers across l
Informalisation of Indian workforce
different regions and on the basis of gender is discussed below
Rate of Participation of People in
1. According to Region (Rural and Urban) Employment/Worker Population Ratio
l
43% of workers are self-employed and 57% of workers are hired in It refers to participation of people in production activity.
urban areas. It is measured as a ratio of workforce to total population of
the country. Symbolically,
l
56% of workers are self-employed and 44% of workers are hired in
rural areas.
Worker Population Ratio
Total Number of Workers
Urban Workers Rural Workers = × 100
Total Population
15%
43% 35% The data on rate of participation of people in employment
56%
in rural and urban areas, are as follows
42%
9% Worker-Population Ratio in India, 2017-2018
Casual Wage Labourers Self-employed Worker-Population Ratio
Regular Salaried Workers Sex
Distribution of Employment by Region (2011-12) Total Rural Urban
Men 52.1 51.7 53.0
The above chart shows that the self-employed and casual wage
labourers are found more in rural areas than in urban areas. It is Women 16.5 17.5 14.2
because in urban areas, people are skilled and work for jobs in Total 34.7 35.0 33.9
offices and factories. But in rural areas, people work on their
own farms. Employment in Primary,
Secondary and Tertiary Sector
2. According to Gender (Male and Female) Generally, we divide all the productive activities of an
l
51% of male workers are self-employed and 49% of male workers economy into different sectors which are as follows
are hired.
1. Primary Sector It includes agriculture, forestry and
l
56% of female workers are self-employed and 44% of female logging, fishing, mining, quarrying, etc.
workers are hired. 2. Secondary Sector It includes manufacturing,
Male Workers Female Workers electricity, gas and water supply, construction, etc.
3. Tertiary Sector It includes trade, transport, storage,
29%
51%
31%
56%
services, etc.
20%
In the course of economic development of a country,
%

labour flows from primary sector to secondary and tertiary

13

Casual Wage Labourers Self-Employed sector. In this process, workers migrate from rural to
Regular Salaried Workers urban areas.
Distribution of Employment by Gender (2011-12) Trends in Employment Pattern (Sectorwise)
The above chart shows that self-employment and hired 1972-2012 (in %)
employment are equally important for male workers. But female
Sector 1972–73 2011–2012
workers give preference to self-employment than to hired
employment. It is because women, both in rural and urban areas Primary 74.3 48.9
are less mobile and thus, prefer to engage themselves in Secondary 10.9 24.3
self-employment.
Tertiary/Sector Services 14.8 26.8
State of Employment in India Total 100.0 100.0
The state of employment in India can be adjudged on the basis
The above table reveals that in 1972-73, about 74.3% of
of the following factors
workforce was engaged in primary sector and in 2011-12
l
Rate of participation of people in employment this proportion has declined to 48.9%. Secondary and
l
Employment in primary, secondary and tertiary sector tertiary/services sectors are showing promising future for
the Indian workforce.
CBSE Term-II Economics XII 69

Casualisation of Workforce
The movement of labour from regular salaried workers to
Unemployment
casual wage workers is known as the process of casualisation It refers to the situation in which a person is willing and able
of workforce. Consider the table given below which shows to work at the existing wage but he is not getting employment.
the statuswise trend in employment pattern Types of Unemployment in India
Trends in Employment Pattern (Statuswise) Following are the types of unemployment in India
1972-2012 (in%)
1. Rural Unemployment Unemployment found in rural areas
Status 1972-73 2011-2012 is referred to as rural unemployment. Rural unemployment
Self-employed 61.4 52.0 can be of the following three types
Regular Salaried Employees 15.4 18.0
(i) Open Unemployment It refers to that situation
wherein the worker is willing to work and has the
Casual Wage Labourers 23.2 30.0 necessary ability to work, yet he does not get work
Total 100.0 100.0 and remains unemployed for full time.
(ii) Seasonal Unemployment It refers to a situation
The distribution of workforce on the basis of status indicates where number of persons are not able to find a job in
that over the last four decades (1972-2012), people have a particular season. It occurs in case of agri- culture,
moved from self-employment to regular salaried ice-cream factories, woollen factories, etc.
employment and casual wage work implying that (iii) Disguised Unemployment It exists when marginal
casualisation is picking up. physical productivity of labour is zero or sometimes
Jobless Growth it becomes negative.
It refers to the situation in which growth in employment 2. Urban Unemployment Unemployment found in urban
opportunities do not correspond with economic growth. In areas is referred to as urban unemployment. Urban
other words, it is a phenomenon which means that the unemployment is of three types
GDP of the country is rising, but without generating (i) Industrial Unemployment It includes those illiterate
employment. persons who are willing to work in industries, mining,
Informalisation of Indian Workforce transport, trade, construction activities, etc. Problem
of unemployment in industrial sector has become
Informalisation of Indian workforce implies that there is a
acute because of increasing migration of rural people
continuous decline in the percentage of workforce in the
to urban industrial areas in search of employment.
formal sector and a corresponding rise in the percentage of
workforce in informal sector. The explanations of formal (ii) Educated Unemployment In India, the problem of
sector and informal sector are given below unemployment among the educated people is also
quite grave. It is a problem spread across all parts of
1. Formal Sector All the public sector establishments and the country because the massive expansion of the
those private sector establishments which employ 10 or education facilities have contributed to the growth of
more hired workers are called formal sector educated persons who are on the look out for white
establishments and those who work in such collar jobs.
establishments are formal sector workers. Those who are
working in the formal sector enjoy social security (iii) Technological Unemployment Technological
benefits and they earn more than the workers working in upgradation is taking place in all spheres of activity.
the informal sector. People who have not updated their skills in the
latest technology become technologically
The workers working in this sector are aware of their unemployed.
rights and form trade unions which represents them in
meetings with employers and also help them in many Causes of Unemployment
other ways.
The causes of unemployment in India are given below
2. Informal Sector All other enterprises and workers
1. Slow Economic Growth In Indian economy, the rate of
working in those enterprises form the informal sector. economic growth is very slow. This slow growth rate fails
Informal sector also includes millions of farmers, to provide enough employment opportunities to the
agricultural labourers, owners of small enterprises and rising population. Supply of labour is much more than the
people working as self-employed in these small available employment opportunities.
enterprises which do not have any hired workers.
Workers and enterprises in the informal sector do not 2. Rapid Growth of Population Constant increase in
get regular income and they do not have any protection population has been a grave problem of India. It is one of
the main causes of unemployment. The number of
or regulation from the government. Workers are
unemployed persons has actually increased instead of
dismissed without any compensation.
decreasing during the plan period.
 70 CBSE Term-II Economics XII

3. Faulty Employment Planning The Five Year Plans in India 2. Social Effects These effects manifest themselves in
have not been designed for employment generation. A the form of many social problems which are discussed
frontal attack to solve the problem of unemployment was below
missing. In the FYPs, it was assumed that economic growth (i) Rise in Poverty Unemployment and poverty are
will take care of unemployment problem. directly correlated. With increase in
4. Excessive Use of Foreign Technology There is lack of unemployment, the level of poverty in the
scientific and technical research in India due to its high country also rises.
cost. This has resulted in excessive use of foreign (ii) Increase in Inequalities Unemployment
technology which has led to technical unemployment in generates inequality in the distribution of income
our country. and wealth, thus defying the objective of social
5. Lack of Financial Resources The expansion and diversi- justice and resulting in class conflicts between the
fication programme of agriculture and small scale industries rich and the poor.
have suffered because of lack of financial resources. (iii) Low Standard of Living Unemployment affects
6. Agriculture still a Seasonal Occupation Even after the income of an individual adversely and leads to
approximately 70 years of independence, agriculture in a fall in his standard of living.
India, still does not have access to adequate irrigation (iv) Social Unrest An unemployed person
facilities, rendering it to be a seasonal occupation. Because creates social unrest by indulging in anti-social
of this, the workforce engaged in farming activities remain activities such as theft, extortion, kidnapping,
unemployed for 3-4 months in a year. etc. In extreme cases, he can also resort to
7. Decay of Cottage and Small Industries The cottage and terrorism.
small industries are labour-intensive and generate a (v) Results in Depression An unemployed person
number of employment opportunities. But the British rule considers himself unwanted and useless, and
led to their decay and the government of independent suffers from depression.
India did not initiate adequate measures for their revival.
8. Low Savings and Investment In India, a low rate of capital Government and
formation prevails due to low savings and investment. Employment Generation
Shortage of capital prevents a business to expand and grow,
Since independence, the Union and State Government
thus limiting their power to generate employment.
have played an important role in generating employment or
9. Mobility of Labour In India, mobility of labour is quite creating opportunities for employment generation. Their
low. Because of family obligations, social constraints, efforts can be broadly categorised as
language and cultural barriers, people are unwilling to
1. Direct Employment In this, government employs
move to a new place when offered a job there.
people in various departments for administrative
Adverse Effects of Unemployment purposes. It also runs industries, hotels and transport
Unemployment results in a number of adverse effects which companies and hence provides employment directly to
can be classified as workers.
1. Economic Effects These effects are visible in terms of loss 2. Indirect Employment When output of goods and
which is measurable in monetary terms. The various adverse services from government enterprises increases, then
effects belonging to this category are explained below private enterprises which receive raw materials from
government enterprises will also raise their output.
(i) Loss of Output Unemployment is basically
Hence, the number of employment opportunities in the
underutilisation of the human resources of the
economy increases. This is the indirect generation of
country leading to loss of output.
employment opportunities by the government
(ii) Loss of Human Resources Unemployment is a initiatives in the economy.
situation in which the productive capacity of able and
willing persons is wasted. This leads to a waste of Employment Generation Programmes
human resources. The government has also initiated various employment
(iii) Low Productivity Unemployment increases the generation programmes such as Prime Minister’s Rozgar
dependence on agriculture and this results in low Yojana, Sampoorna Gramin Rozgar Yojana, Mahatma
productivity per labour employed. Low productivity Gandhi National Rural Employment Guarantee Act, etc.
adversely affects the growth rate of the economy. These programmes aim at providing not only employment
(iv) Low Rate of Capital Formation Capital formation but also services in areas such as primary health, primary
depends on the level of income in the country. Due education, rural drinking water, nutrition, assistance for
to unemployment, the income levels are low, people to buy employment generating assets, development
resulting in low rate of capital transformation. of community assets by generating wage employment, etc.
CBSE Term-II Economics XII 71

Chapter
Practice
6. In which type of unemployment, the
PART 1 marginal productivity of an additional worker is
zero?
Objective Questions (a) Disguised unemployment
(b) Involuntary unemployment
(c) Seasonal unemployment
l
Multiple Choice Questions (d) Structural unemployment
1. Percentage of population participating in production Ans. (a) Disguised unemployment
activity is called ……… . 7. Unemployment which occurs for the time period
(a) Labour force (b) Workforce when workers move from one job to another job is
(c) Labour supply (d) Participation rate known as ……… .
Ans. (d) Participation rate (a) Cyclical unemployment
(b) Seasonal unemployment
2. Worker who are on permanent payroll of their
(c) Technological unemployment
employer are called
(d) Frictional unemployment
(a) Self-employed workers (b) Casual workers
Ans. (d) Frictional unemployment
(c) Regular workers (d) None of these
Ans. (c) Regular workers 8. Two months ago, Shyam was working as part time
salesman on commission basis in a company. Due
3. Agriculture labourers, farmers, owners of small to his excellent performance, company appointed
enterprise which employ less than 10 workers fall in him as a permanent sales manager on fixed
the category of monthly salary. From the point of view of
(a) formal sector (b) informal sector employment currently he is a
(c) casual workers (d) regular workers (a) skilled worker
Ans. (b) informal sector (b) regular salaried worker
4. Data on unemployment in India can be obtained (c) unskilled worker
from which source? (d) casual wage labour
(a) Reports of census of India Ans. (b) regular salaried worker
(b) National sample survey organisation 9. Hired workers are those
(c) Directorate general of unemployment (a) who work for others
(d) All of the above (b) who are not self-employed
Ans. (d) All of the above (c) who are engaged in their own business
5. Which of the following correctly defines (d) Both (a) and (b)
unemployment rate? Ans. (d) Both (a) and (b)
Total Number of Employed 10. If a person is ready to work at the prevailing wage
(a) × 100
Total Labour Force rate in the market but he is unable to find the work,
Total Labour Force then what type of unemployment would it be
(b) × 1000
Total Number of Unemployed called?
Total Labour Force (a) Voluntary unemployment
(c) × 1000 (b) Involuntary unemployment
Total Number of Employed
(c) Seasonal unemployment
(d) None of the above
(d) None of the above
Total Number of Employed
Ans. (a) × 100 Ans. (b) Involuntary unemployment
Total Labour Force
72 CBSE Term-II Economics XII

11. A situation where percentage of work force in the 17. Write the correct pair.
formal sector tends to decline and that in the
informal sector tends to rise as known as Column I Column II
(a) Informalisation A. Voluntary (i) Worker is willing to work but
(b) Casualisation unemployment is not getting work
(c) Jobless growth
B. Involuntary (ii) Worker is not willing to work
(d) None of the above unemployment at existing wage rate
Ans. (a) Informalisation
C. Frictional (iii) A worker is not getting work
12. The ratio expressing percentage change in unemployment in a particular season
employment of labour in response to a percentage
D. Disguised (iv) Marginal productivity of a
change in GDP growth is called ……… . unemployment worker is zero
(a) Employment elasticity of growth
(b) Unemployment elasticity of growth Codes
(c) Workforce participation rate (a) A-(i)
(d) Labour force participation rate (b) B-(ii)
Ans. (a) Employment elasticity of growth (c) C-(iii)
13. If new computers are being installed in a company (d) D-(iv)
and some employees are fired from the job due to Ans. (d) D-(iv)
lack of computer knowledge, then what kind of 18. Which of the following statements is/are correct?
unemployment will it be called? (i) A worker is an individual who is does some
(a) Disguised unemployment productive work to earn a living.
(b) Structural unemployment
(ii) Majority of population in India is finding
(c) Hidden unemployment
employment in the service sector which is
(d) Frictional unemployment
growing at a fast pace and growing
Ans. (b) It is an unemployment that happens because of a
continuously.
mismatch between the skilled workers and the jobs that are
actually available. Alternatives
(a) Both are true
14. Which of the following is the main source of
(b) Both are false
employment for majority of workers in India?
(c) (i) is true, but (ii) is false
(a) Primary sector
(d) (i) is false, but (ii) is true
(b) Secondary sector
Ans. (a) Both are true
(c) Tertiary sector
(d) All of the above 19. Which one is the cause of unemployment in
Ans. (a) Primary sector India?
(a) Rapid growth of population
15. Which of the given unemployment is predominant in
(b) Rising prices
context of Indian agriculture?
(c) Increasing public expenditure
(a) Structural unemployment
(d) Defective monetary policy
(b) Frictional unemployment
Ans. (a) The proportion of job-seekers is much higher than
(c) Disguised unemployment
employment opportunities and the skill-gap in the
(d) All of the above
existing labourforce makes labour market more
Ans. (c) Disguised unemployment competitive.
16. Which of the following correctly defines disguised 20. You are a factory owner and have given
unemployment? employment to 400 workers. If 10 workers are
(a) More number of workers are engaged in a particular work dismissed by you without loss of production then
than required
this situatioin will be described as
(b) Marginal productivity of an additional worker is close to zero
(a) casual unemployment
(c) Additional workers act as a hindrance towards the
productivity of other workers implying diminishing returns
(b) disguised unemployment
(d) All of the above
(c) structural unemployment
(d) seasonal unemployment
Ans. (d) All of the above
Ans. (b) disguised unemployment
CBSE Term-II Economics XII 73

Ans. (a) Both Assertion (A) and Reason (R) are true and Reason
l
Assertion-Reasoning MCQs
(R) is the correct explanation of Assertion (A).
Directions (Q.Nos. 1 to 6) There are two statements marked
as Assertion (A) and Reason (R). Read the statements and
6. Assertion (A) Primary sector is an important source
choose the appropriate option from the options given below of labour supply to the secondary and tertiary sectors
(a) Both Assertion (A) and Reason (R) are true and Reason of the economy.
(R) is the correct explanation of Assertion (A). Reason (R) When productivity rises in agriculture
(b) Both Assertion (A) and Reason (R) are true, but Reason (owing to the use of innovative technology), less
(R) is not the correct explanation of Assertion (A). labour is needed to produce a given level of output.
(c) Assertion (A) is true, but Reason (R) is false. Ans. (a) Both Assertion (A) and Reason (R) are true and Reason
(d) Assertion (A) is false, but Reason(R) is true. (R) is the correct explanation of Assertion (A).
1. Assertion (A) Urban unemployment is a spillover
of rural unemployment.
l
Case Based MCQs
Reason (R) Owing to the lack of opportunities of 1. Direction Read the following text and answer the
employment, people in the rural areas are question no. (i) to (vi) on the basis of the same.
compelled to migrate to the urban areas in search This paragraph talks about economic inequalities in
of livelihood. India that have been driven by employment patterns
Ans. (a) Both Assertion (A) and Reason (R) are true and and changes in labour markets, which in turn have
Reason (R) is the correct explanation of Assertion (A). been affected by macroeconomic policies and
2. Assertion (A) India is considered as favourite processes as well as forms of social discrimination
outsourcing destination leading to increase in and exclusion. While many Asian economies have
foreign exchange reserve. shown indications of rising inequality in recent
Reason (R) India’s growth rate of population is decades, the Indian experience is particularly
one major concern which makes this country remarkable in the way inequalities have intertwined
labour cost efficient. with the economic growth process.
Ans. (a) Both Assertion (A) and Reason (R) are true and Structural change (or the relative lack of it) and the
Reason (R) is the correct explanation of Assertion (A). persistence of low productivity employment in India
3. Assertion (A) Lack of training in farming activity are strongly related to falling wage shares of national
leads to low productivity and growth of income and growing wage inequalities and the close
agriculture in India. relationship between formal and informal sectors is
Reason (R) Reforms in India focused upon the sharpest exemplar of this.
development of industries which was failed to Patterns of social discrimination alongwith gender
generate enough employment. and caste lines have reinforced tendencies to create
Ans. (a) Both Assertion (A) and Reason (R) are true and segmented labour markets that offer little incentive
Reason (R) is the correct explanation of Assertion (A). for employers to focus on productivity
improvements.
4. Assertion (A) Economic activity means production
activity. (i) Why did the government shift its strategy from
Reason (R) There is difference between long-term to short-term programmes to remove
production activity and economic activity. It is like unemployment?
this, economic activity relates to the use of scarce (a) Short-term policies are more effective
of resources. (b) Long-term policies do not give appropriate response
Ans. (d) An economic activity is an activity of providing, (c) Its easy to check the progress
making, buying or selling commodities or services by (d) All of the above
people. It includes any activity that deals with the Ans. (d) All of the above
manufacturing, distributing or utilising of products or
services. (ii) Women participation in rural areas is found to be
higher in rural areas as compared with areas in India,
5. Assertion (A) Entrepreneurial development has due to which of the following reason?
been considered necessary for generating (a) Widespread poverty
self-employment opportunities. (b) Male members do not earn sufficient income
Reason (R) It is therefore quintessential to (c) Wages levels are low in rural areas
enhance entrepreneurial ability of the people and (d) All of the above
aid them in preparation of financial, technical and
Ans. (d) All of the above
professional reports.
74 CBSE Term-II Economics XII

(iii) Increase in the proportion of casual workers as a other services, and an overall decline in the
proportion of total workforce is known as ……… . quality of urban life is in the main course due to
(a) Casualisation the influx of migrants from the rural areas. Many
(b) Informalisation developing countries have, therefore, initiated
(c) Employment elasticity of growth policies and programmes which aim at
(d) None of the above decelerating the growth of urban population
Ans. (a) Casualisation through restricting the scale of rural-urban
migration.
(iv) Due to introduction of new technology, workers may
be replaced by machines leading to which type of (i) Migration of labour in search of employment has
been a major concern for the government. This
unemployment?
was also evident from the movement of labour
(a) Disguised unemployment (b) Frictional unemployment
during lockdown in India. Which of the reasons
(c) Seasonal unemployment (d) Structural unemployment
could be accounted for the migration?
Ans. (d) Structural unemployment
(a) Lack of regular source of income
(v) Which of the following situation correctly explains (b) Low level of development of agriculture
the case of structural unemployment? (c) Low level of skills
(a) Web-based advertising has drawn advertisers away from (d) All of the above
newspaper ads. Ans. (d) All of the above
(b) Online news media has drawn customers away from
physical newspapers. (ii) Which of the following type of unemployment is
(c) Ticket machines in train stations has reduced the need prevalent in rural areas in India?
for ticket officers. (a) Disguised unemployment
(d) All of the above (b) Structural unemployment
Ans. (d) All of the above (c) Seasonal unemployment
(vi) Assertion (A) There is a need to bridge the skill-gap (d) Both (a) and (c)
and enhance labour productivity in India. Ans. (d) Both (a) and (c)
Reason (R) Structural unemployment is a major issue (iii) What is the right formula to know the
in India and thus there is a need to tackle with the same. unemployment rate?
Alternatives (a) (Total Number of Unemployed / Total Labour Force)
(a) Both Assertion (A) and Reason (R) are true and Reason (R) × 100
is the correct explanation of Assertion (A). (b) (Total Labour Force / Total Number of Unemployed)
(b) Both Assertion (A) and Reason (R) are true, but Reason × 100
(R) is not the correct explanation of Assertion (A). (c) (Total Number of Unemployed / Total Workforce)
(c) Assertion (A) is false, but Reason (R) is true × 100
(d) Both the statements are false (d) (Total Workforce / Total Number of Unemployed)
× 100
Ans. (a) Both Assertion (A) and Reason (R) are true and Reason
Ans. (a) (Total Number of Unemployed / Total Labour Force) ×
(R) is the correct explanation of Assertion (A).
100
2. Direction Read the following text and answer the
(iv) Which of the following is the most preferred form
question no. (i) to (vi) on the basis of the same.
of employment among women in India?
Many developing countries are experiencing an (a) Self-employment (b) Technical employment
unprecedented growth of urban population. Since the (c) Both (a) and (b) (d) Wage employment
early 1970s, the trend has accelerated and it is
Ans. (a) Self-employment
expected that the less developed regions of the world
will add about 1,000 million people to its urban (v) Which of the following is the major initiative
population till the last quarter of this century as taken by the GoI which guarantees 100 days of
against 400 million people in the preceding quarter. assured employment to every rural household
The explosion of this magnitude cannot be without who asks for it?
far-reaching economic, social and political (a) Swarnajayanti Gram Swarozgar Yojana
consequences which will have to be countered (b) Mahatma Gandhi National Rural Employment
through appropriate public policies. Guarantee Act
(c) Pradhan Mantri Gram Sadak Yojana
Many observers have feared that rising urban (d) Pradhan Mantri Jan Dhan Yojana
unemployment, scanty housing, inadequate water Ans. (b) Mahatma Gandhi National Rural Employment
and electricity supply, poor sanitation, transport and Guarantee Act
CBSE Term-II Economics XII 75

(vi) Assertion (A) Raj owns a Kirana store and has hired 4. ‘‘It is necessary to create employment in the formal
four workers to handle day-to-day work. He comes sector rather than in the informal sector.’’ Defend
under the purview of formal sector. or refute the given statement with valid arguments.
Reason (R) An establishment with four hired (CBSE 2020)
workers is known as formal sector establishment. Ans. ‘‘It is necessary to create employment in the formal
sector rather than in the informal sector.’’ The statement
Alternatives
is defended because workers of the formal sector enjoys
(a) Both Assertion (A) and Reason (R) are true and Reason social security benefits and job security which remain
(R) is the correct explanation of Assertion (A). protected by the labour laws. On the other hand, people
(b) Both Assertion (A) and Reason (R) are true, but Reason engaged in the informal sector do not enjoy any social
(R) is not the correct explanation of Assertion (A). security benefits and do not have job security. As a result,
(c) Assertion (A) is false, but Reason (R) is true informal workers are generally very poor and live in
(d) Both the statements are false slums.
Ans. (d) All the public sector establishments and those private
sector establishments which employ 10 or more hired 5. The rate of women participation in workforce of
workers are called formal sector establishments. All other rural areas is greater than urban areas. Do you
enterprises fall under informal sector. agree? Justify.
Or Compared to urban women more rural woman are
l
Short Answer (SA) Type Questions found working. Why? (NCERT)
1. Why is employment considered so important in the Ans. Yes, I agree with the given statement. The difference in
Indian development policy? participation rates is very high between urban and rural
women. In urban areas, for every 100 urban females,
Ans. Employment is considered so important in the Indian
only about 14 are engaged in some economic activities.
development policy because of the following reasons In rural areas, for every 100 rural women, about 26
(i) More employment will lead to higher level of participate in the employment market.
national income since, production and employment It is common to find that where men are able to earn
are directly related. high incomes, families discourage female members from
(ii) Employment is crucial for removal of poverty. taking up jobs. Earnings of urban male workers are
2. Give the meaning of labour supply, labour force and generally higher than rural males and so urban families
workforce. do not want females to work.
Ans. Labour supply refers to the number of persons willing to
Apart from this, many activities of the households in
work at different wage rates. It depends upon the existing which urban women are engaged, are not recognised as
wage rate and is measured in terms of man-days. productive work, while women working on farms in the
rural areas are considered a part of the workforce if they
Labour force refers to the number of persons actually are being paid wages in cash or in the form of food
working or willing to work. It does not depend upon the grains.
wage rate and is measured in terms of number of days.
Workforce refers to the numbers of persons actually 6. “Women in rural areas are ready to work even at
working. This measure does not include those persons low wages.” Comment.
who are willing to work but are not getting work. Ans. The given statement is correct because of the following
reasons
3. (i) Victor is able to get work only for two hours in a
(i) There is widespread poverty in rural areas. Poverty
day, rest of the day, he is looking for work. Is he
compels the women in rural areas to accept low
unemployed? Why? What kind of jobs could wage occupations.
persons like Victor be doing?
(ii) Women in rural areas are averse to migration. They
(ii) Children are not considered a part of workforce. are reluctant/unwilling to migrate to urban areas for
Given reason for the same. jobs. Owing to the lack of education, they are not
Ans. (i) No, Victor is employed because he works for two even capable of finding jobs outside rural areas.
hours daily for which he is paid. He is a casual Accordingly, they prefer to be engaged in farm and
worker. Victor might be doing jobs on a casual basis, non-farm activities but in the rural areas only.
such as painting a house, plumbing work, working as
an electrician, distributing newspaper, milk, etc.
7. ‘‘Unemployment is related to poverty.’’ Comment.
Ans. Poverty and unemployment usually go together. Those
(ii) Working population includes able-bodied persons who fail to get employment become a burden on the
and adults. Children are unable to perform limited family income and thus, depress already low
productive activities. Also, use of children in work is levels of consumption. Therefore, many programmes
equivalent to denying them their childhood, i.e. which aim at removing poverty provide employment
children right to playing.
76 CBSE Term-II Economics XII

opportunities to the poor like Prime Minister’s Rozgar (iii) Cottage industry should be encouraged.
Yojana, Swarna Jayanti Shahri Rozgar Yojana, etc. Most of (iv) More and more facilities of education, health
the urban poors are either unemployed or intermittently services, roads, etc should be created in the village.
employed as casual labourers. Casual labourers are among
the most vulnerable in society as they have no job security, 12. Mention the salient features of the unemployment
no assets, limited skills, sparse opportunities and no surplus situation in India.
to sustain them. Poverty is therefore, closely related to Ans. Following are some of the salient features of the
unemployment. unemployment situation in India
8. Low employment among women is a reflection of (i) The incidence of unemployment is much higher in
economic backwardness of a country. Suggest some urban areas than in rural areas.
measures for increased employment opportunities for (ii) Unemployment rates for women are higher than
women. those for men.
Ans. I shall suggest the following measures to increase the (iii) Under employment is higher in case of women.
employment opportunities for women
(iv) Incidence of unemployment among the educated
(i) Education and training opportunities for women
is much higher.
should be further expanded, diversified and made
easily accessible. 13. How is unemployment an economic as well as a
(ii) Residential accommodation for working mothers social problem?
should be increased. Ans. Unemployment is both an economic and a social
(iii) There should be much more facilities of creches and problem. Unemployment is an economic problem in the
child care during the working hours of mothers. sense that unemployed persons will be consumers only
(iv) There should be large scale publicity and building of without being a producer. Non utilisation of human
public opinion in favour of employment of women. resources due to unemployment involves double cost of
9. What role does government play in generating maintenance and loss of output.
employment opportunities? Unemployment is a social problem in the sense that it
Ans. The government generates employment through direct and causes enormous sufferings to unemployed workers due
indirect efforts. The government makes direct efforts at to their reduced or nil income. Many social evils like
employing people in various departments for administrative dishonesty, immorality, drinking, gambling, robbery, etc
purposes. It runs various enterprises and when the output are the outcome of unemployment. It causes social
of goods and services of these enterprises increase, it leads disruption in the society and the government has to
to further increase in employment. incur a heavy unproductive expenditure on law and
order.
The various private enterprises that are linked to the
government enterprises might also benefit from increased 14. Why do people prefer to be voluntarily
output of these enterprises and thus, increase their output unemployed?
and employment also. This way government indirectly Ans. People prefer to be voluntarily unemployed for the
generates employment also. below mentioned reasons
10. Why is unemployment in India considered to be a (i) They do not want to work at the wages that are
chronic problem? being offered.
Ans. Unemployment in India is considered to be a chronic (ii) They are not willing to migrate to the place at which
problem because it has been a long-term phenomenon. job is being offered.
India is facing this problem ever since independence and (iii) They think that the job offered is below their
has not yet been able to solve this problem. The absolute calibre.
number of unemployed is increasing year by year. India has While computing the level of unemployment in the
not been able to generate enough jobs due to lack of capital country, people who prefer to be voluntary unemployed
and low rate of growth in the industrial sector. are not taken into consideration. This in turn would not
11. You are residing in a village. If you are asked to advise inflate the unemployment statistic.
the village panchayat, what kinds of activities would 15. “Unemployment in India is stubborn (almost
you suggest for the improvement of your village which permanent in nature) while in developed
would also generate employment? (NCERT) countries (like USA) it is critical.” Comment.
Ans. I would suggest the following activities to generate Ans. Unemployment in India is stubborn because it is
employment in village related to the lack of production capacity which is
(i) There should be multiple cropping in the village. lacking because of the lack of capital. The problem of
(ii) Other activities related to agriculture such as lack of capital is a long period problem, and therefore
plantation, etc. horticulture, dairying, animal stubborn in nature.
husbandry, etc. should be encouraged.
CBSE Term-II Economics XII 77

In developed countries like USA, unemployment is largely Ans. From the given table, following points can be noticed
related to the lack of demand. Lack of demand is not about the nature of workforce distribution
stubborn, but cyclical in nature. This is why, the problem of (i) Majority of the workforce was residing in the rural
unemployment in these countries is cyclical in nature. areas in India in the year 1972-73. The total
workforce was 233 million out of which 194 million
l
Long Answer (LA) Type Questions workers were from rural areas and 39 million from
the urban areas. Thus, 83% of the total workforce was
1. (i) Why are less women found in regular salaried rural as compared to 17% of the urban work- force.
employment? The reason for this was that a majority of population
(ii) Analyse the recent trends in sectoral distribution was living in rural areas during that period.
of workforce in India (ii) The rural workforce comprises of 64% of the male
workforce and 36% of female workforce. On the
Trends in employment pattern (sector-wise), other hand, the urban workforce comprises of
1993 – 2012 (in %) about 82% of male workforce and 18% of female
Sector 1993-94 1999-200 2011-2012 workforce. This shows that participation of males
in both rural as well as urban areas is higher than
Primary 64 60.4 48.9 that of the females because of lack of opportunities
Secondary 16 15.8 24.3 available to women for acquiring education and
also the social structure and family norms which
Service 20 23.8 26.8
did not encourage women to work.
(CBSE 2020) (iii) Another feature of workforce distribution is the
Ans. (i) Less woman are found in regular salaried employment difference between urban female workforce and
due to the following reasons rural female workforce. Females in the rural areas
formed 36 % of the workforce, whereas, the
(a) Lack of Education Facilities Female education is females in the urban areas formed only 18% of the
not given due importance in India and hence, workforce. This may be attributed to the fact that
majority of the woman in India do not have the where men are able to earn high incomes, families
educational qualification and professional skills discourage female members from taking up jobs.
required. Earnings of urban male workers are generally
(b) Discouragement from Family In India, families do higher than rural males and so the urban families
not want the female member to step out from the do not want females to work.
house for work expecially if it is for long hours, as in Thus, it can be concluded by analysing the above table
regular salaried employment. that majority of the workforce was from the rural areas
(c) Family Responsibilities Women are expected to and there was low female participation rate in the
look after household chores including food, taking workforce during that period.
care of children. This posses a restriction for women
3. (i) Comment upon the informalisation of labour
to be engaged in regular employment.
force in India.
(ii) The given data indicates that over the given period, the
proportion of workforce in primary sector has gone (ii) Define the worker population ratio. (CBSE 2020)
down significantly. Whereas, the employment share of Ans. (i) Informalisation of labour force in India implies
both secondary sector and the service sector has that there is a continous rise in the percentage of
increased gradually. workforce in informal sector as a percentage of
While the share of secondary sector has gone up by total work force and a corresponding decline in the
approximately 9% recently, the corresponding figure percentage of workforce in formal sector. These
for service sector has gone up by approximately 7.1%. sectors can be understood as follows
This also shows that dependency on agriculture (a) Formal Sector All the public sector
remained high as secondary and service sector wasn’t establishments and those private sector
created enough employment. establishments which employ 10 or more hired
workers, are known as formal sector
2. The following table shows distribution of workforce in establishments. Those who are working in this
India for the year 1972-73. Analyse it and give reasons sector, enjoy social security benefits and they
for the nature of workforce distribution. (NCERT) earn more than the informal sector employees.
Place of Residence Workforce (in millions) (b) Informal Sector This sector includes all those
private sector enterprises which employ less
Male Female Total
than 10 workers. This sector includes farmers,
Rural 125 69 194 agricultural labourers, owner of small
Urban 32 7 39 enterprises etc. They are not entitled to any
social security benefits.
78 CBSE Term-II Economics XII

(ii) Worker population ratio is an indicator which is used 6. What is seasonal unemployment? Suggest
to analyse the employment situation in the country. It measures for reducing this kind of
is measured as a ratio of workforce to total population
unemployment in India.
of the country.
Ans. It refers to a situation where a number of persons are
Total Number of Workers
Worker Population = × 100 not able to find job in a particular season. It occurs in
Total Population case of agriculture, ice-cream factories, woollen
4. The following table shows the population and worker factories, etc. Following measures may be suggested to
reduce seasonal unemployment
population ratio for India in 1999-2000. Can you
estimate the workforce (rural and urban) for India? (i) Promotion of multiple cropping, i.e., raising more
(NCERT) than one crop on the same piece of land in a year.
(ii) Development of activities allied to agriculture
Estimates of Worker Estimated Number such as animal husbandry, dairy farming,
Region Population Population of Workers horticulture, etc to provide extra employment
(in crore) Ratio (in crore) throughout the year.
Rural 71.88 71.88 (iii) Public investment in rural areas in such fields as
41.9 × 41.9 = 3012
.
100 irrigation, drainage, flood control, land and
environment, improvement of rural roads, schools,
Urban 28.52 33.7 ? hospitals, etc.
Total 100.40 75.6 ? (iv) Promotion of on-farm investment. Overhaul of
machinery, training of farm labour and
Total Number of Workers programmes for eradication of illiteracy during
Ans. Worker Population Ratio = × 100
Total Population slack seasons.
∴ Number of Workers (v) Mechanisation of peak season activities so that a
proportion of the labour force is permanently
Total Population
= × Worker Population Ratio shifted from agriculture to non-seasonal activities
100 and surplus labour in the slack season is reduced.
Estimates of Worker (vi) Establishment of a variety of industries which
Estimated Number operate at different times of the year so that labour
Region Population Population
of Workers (in crore)
(in crore) Ratio may be kept employed almost throughout the year
71.88 by shifting from one seasonal industry to another.
Rural 71.88 41.9 × 41.9 = 3012
.
100 7. How is unemployment different from
Urban 28.52 33.7 28.52 underemployment? How is unemployment
× 33.7 = 9.61124 measured in India?
100
Ans. Unemployment is a situation in which people are
Total 100.40 75.6 100.40
× 75.6 = 75.9024 willing to work and capable to work, but still they are
100 not getting work. Underemployment, on the other
hand, is a situation in which an individual is working
5. What should be the main elements of ‘employment much below his potential. As per 27th round of NSSO,
policy’ in India in the present context? three types of estimates are available
Ans. Following should be the main elements of employment (i) Usual Status Unemployment It is measured in
policy in India in the present context number of persons who remained unemployed for
(i) The employment policy should emphasise on both a major part of the year.
complete and more productive employment. (ii) Weekly Status Unemployment It is measured in
(ii) Employment policy must have the objective of higher number of persons who did not find any work even for
rate of capital formation. an hour during the week proceeding the survey week.
(iii) Employment should be generated in the normal (iii) Daily Status Unemployment Daily status
process of development. unemployment is measured in terms of number of
(iv) Employment policy should give more emphasis to man days a person was not getting work on a day
self-employment. during the week proceeding the survey week.
(v) Measures should be taken to increase employment Out of these three, the daily status unemployment
opportunities for women. concept is most appropriate because it takes into
(vi) Emergence of destabilising factors in the economy consideration both open and under employment.
should be avoided through greater efficiency in Unemployment Rate by Daily Status
planning. Daily Status Unemployment
= ×100
Number of Man Days Available
Chapter Test
Multiple Choice Questions
1. A worker who owns and operates his own enterprise is said to be a ……… .
(a) casual wage worker
(b) self-employed worker
(c) regularly employed worker
(d) None of the above
2. Workers enjoy job security in
(a) private sector (b) unorganised sector
(c) organised sector (d) agricultural sector
3. Female worker participation is
(a) higher in urban areas (b) lower in rural areas
(c) higher in rural areas (d) None of these
4. Unemployment is defined as
(a) a section of the population is not capable of being employed
(b) a section of population willing to work but unable to find employed
(c) the section of population that is waiting to be employed
(d) the section of population that are without the skill needed by employers
5. The problem of unemployment in India is largely
(a) seasonal (b) frictional
(c) structural (d) cyclical

Short Answer (SA) Type Questions

1. Briefly define casual wage labourers.
2. Explain briefly the different categories of hired workers.
3. A modest transformation in occupational structure of India only points to its modest achievement in the area of growth
and development. Do you agree?
4. There are several examples in the rural areas of India where there are more workers in the family but gross income of
the family is low. How do you explain this paradox?
5. How can the problem of educated unemployment be solved?

Long Answer (LA) Type Questions

1. (i) Empowerment of women is related to employment of women. Comment.
(ii) Government has initiated many unemployment reduction programmes. Describe any two such programmes.
2. There is a mismatch between ‘GDP growth’ and ‘employment growth’ in India. How do you justify this statement?

Answers
Multiple Choice Questions
For Detailed Solutions
1. (b) 2. (c) 3. (c) 4. (b) 5. (c)
Scan the code
80 CBSE Term-II Economics XII

CHAPTER 02

Infrastructure
in India

In this Chapter...
l Infrastructure
l Health Sector : Component of
Social Infrastructure

Infrastructure Importance of Infrastructure in Development

l
It helps to increase the productivity of factors of
It is a basic physical and organisational structure needed for
production.
the operation of a society or an enterprise. It provides
supporting services in the main areas of industrial and l
It induces investment.
agricultural production, domestic and foreign trade and l
It generates linkages in production.
commerce. l
It enhances size of the market.
l
It enhances ability to work.
Types of Infrastructure
Infrastructure is broadly categorised as social and economic The State of Infrastructure in India
infrastructure. The state of infrastructure in India is highly inadequate.
They are discussed below India is lagging behind on various sectors of infrastructure
1. Social Infrastructure It refers to the core from not only developed countries but also from many small
elements of social change which serve as a foundation for and developing countries. Also, in addition to concentrating
the process of social development of a country. on basic infrastructure such as irrigation, transportation and
It contributes to economic processes indirectly and from power generation, proper attention should also be given to
outside the system of production and distribution. develop banking, finance and communication sector.
For example, educational institutions, hospitals, sanitary Traditionally, the government has been solely responsible for
conditions and housing facilities, etc. developing the country’s infrastructure. But it was found that
the government’s investment in infrastructure was not
2. Economic Infrastructure It refers to all such elements
adequate.
of economic change which serve as a foundation for the
process of economic growth. So, in joint partnership with the public sector, the private
These help in the process of production directly. For sector has started playing a very important role in
example, transportation, communication, energy/ infrastructural development. But, still India invests only 5%
power, etc. of its GDP in infrastructure.
CBSE Term-II Economics XII 81

Infrastructural development and economic development go 1. Primary Healthcare Primary healthcare system in
hand-in-hand. If proper attention is not paid to infrastructure India includes
development, then economic development will also be (i) Education concerning prevailing health problems
adversely affected. and methods of identifying, preventing and
controlling them.
Infrastructure in Rural Area (ii) Promotion of food supply and proper nutrition and
State of infrastructure in rural India can be understood from adequate supply of water and basic sanitation.
the following points (iii) Maternal and child healthcare.
l
Inspite of the technological progress, women of rural India (iv) Immunisation against major infectious diseases and
are still using bio-fuels to meet their daily energy injuries.
requirement. About 90% of the rural households use (v) Promotion of health and provision of essential
bio-fuels for cooking. drugs.
l
The Census 2001 shows that in rural India, only 56%
2. Secondary Healthcare When condition of a patient is
households have an electricity connection and 43% still use
not managed by PHCs, they are referred to secondary
kerosene.
or tertiary hospitals. Healthcare institutes having better
l
Tap water availability is limited to only 24% rural facilities for surgery, X-ray, ECG (Electro Cardio
households. About 76% rural population drinks water from Graph) are called secondary healthcare institutes.
open resources such as wells, ponds, etc. Women go long
3. Tertiary Healthcare In tertiary sector, there are the
distances to fetch water for their basic needs.
hospitals which have advanced level equipments and
l
Access to improved sanitation in rural areas was only 20%. medicines and undertake all the complicated health
problems, which could not be managed by primary and
Health Sector: Component of secondary hospitals.
For exmaple, All India Institute of Medical Sciences
Social Infrastructure (AIIMS), Post Graduate Institute (PGI), Chandigarh,
A person’s ability to work depends largely on his health. Jawaharlal Institute of Postgraduate Medical Education
Good health enhances the quality of life. Health is not only and Research (JIPMER), Pondicherry, National
the absence of disease but also the ability to realise one’s Institute of Mental Health and Neuro Sciences
potential. It is a yardstick of one’s well-being. (NIMHNS), Bangalore and All India Institute of
Hygiene and Public Health, Kolkata.
Health Infrastructure in India
Health infrastructure includes hospitals, doctors, nurses and Health Infrastructure in Private Sector
other para-medical professionals, beds, equipment required In recent time, private health infrastructure has grown largely.
in hospitals and a well developed pharmaceutical industry. Private sector health infrastructure is explained below
Only the presence of infrastructure is not enough to have l
About 70% of the hospitals running in India belong to
healthy people, but it should also be accessible to all the private sector.
people easily. In India, health infrastructure comprises both, l
Nearly 60% of dispensaries are run by the same private
the public sector and the private sector. sector. They provide healthcare for 80% of out-patients and
46% of in-patients.
Health Infrastructure in Public Sector l
It has also been contributing significantly in medical
The government has the constitutional obligation to guide education and training, medical technologies and
and regulate all health related issues such as medical diagnostics, manufacture and sale of pharmaceuticals,
education, adulteration of food, drugs and poisons, medical hospital construction and medical services.
profession, vital statistics, mental deficiency and lunacy. l
There are large number of hospitals run by voluntary
Central council of health and family welfare collects agencies and the private sector, equipped with
information and renders financial and technical assistance to professionals and para-medical professionals trained in
state governments, union territories and other bodies for medical, pharmacy and nursing colleges.
implementation of important health programmes in the
country. India’s health infrastructure and healthcare is made
l
It provides quality healthcare services at reasonable cost
up of a three-tier system which is as follows and has also earned foreign exchange for the country by
promoting medical tourism.
 82 CBSE Term-II Economics XII

Problems Related to Measures to Improve Health Sector

Health Infrastructure in India The following measures should be undertaken to improve the
The following problems are related to health infrastructure health sector
in India l
Public health services should be decentralised.
1. Urban-rural and Poor-rich Divide Differences in l
For long-term benefits, education and health infrastructure
medical healthcare between urban-rural and poor-rich should be improved.
can be understood from the points given below l
The importance of telecom and IT sector in spreading
l
Only one-fifth of total hospitals are located in rural health awareness should be recognised.
areas. Rural India has about half the number of l
Primary healthcare centres should be improved.
dispensaries. People in rural areas do not have l
The divide between the urban and rural healthcare should
sufficient medical infrastructure. be checked because it can destabilise the socio-economic
This leads to difference in the health status of people. fabric of our country.
Out of 6.3 lakh beds in government hospitals, roughly
30% are available in rural areas. Indicators of Health : A Critical Appraisal
l
There are only 0.36 hospitals for every one lakh people The following indicators will help the students to assess
in rural areas while urban areas have 3.6 hospitals for health and health infrastructure in India
the same number of people. l
The infant mortality rate is quite high in India. In 2013, it
l
The PHCs located in rural areas do not offer even was 41.
X-ray or blood testing facilities which, for a city l
The under-5 mortality rate is also high at 53.
dweller, constitute basic healthcare. Even though 380 l
Only 67% of the births in India are monitored by skill
recognised medical colleges produce 44,000 medical attendants.
graduates every year, still there is shortage of doctors l
Only 72% of the population is fully immunised.
in rural areas. One-fifth of these doctors migrate from l
Government spends only 4% of its GDP on health. It is
one country to another for better job opportunities. 4.5% of the total government spending.
l
The poorest 20% of Indians living in both urban and l
India bears a frightening 20% of the Global Burden of
rural areas spend 12% of their income on healthcare, Diseases (GBD). More than half of GBD is accounted for
while the rich spend only 2%. by communicable diseases such a diarrhoea, malaria and
tuberculosis.
2. Women’s Health Women constitute about half the total l
Every year around five lakh children die of water-borne
population in India. They suffer many disadvantages as diseases. Malnutrition and inadequate supply of vaccines
compared to men in the areas of education, lead to the death of 2.2 million children every year. AIDS
participation in economic activities and healthcare. is also a major threat.
The child sex ratio has been deteriorated from 927 in l
Less than 20% of the population utilises public health
2001 to 914 in 2011. There is growing incidence of facilities. This is because only 38% of PHCs have the
female foeticide in the country. required number of doctors and only 30% of PHCs have
Close to 3,00,000 girls under the age of 15 are not only adequate stock of medicines.
married but have already borne children at least once.
More than 50% of married women between the age Indian Systems of Medicine (ISM)
group of 15 and 49 years suffer from anaemia caused by India has its own well–developed alternate system of health
iron deficiency. care, namely AYUSH consisting of six systems, Ayurveda,
It has contributed to 19% of maternal deaths. Abortions Yoga, Unani, Siddha, Naturopathy and Homeopathy.
are major cause of maternal morbidity and mortality in At present, there are 3167 ISM hospitals, 26,000 dispensaries
India. and 7 lakhs registered practitioners in India.
CBSE Term-II Economics XII 83

Chapter
Practice
PART 1 4. Match the following.
Column I Column II
Objective Questions (Economies) (Infrastructural Needs)
A. Low income economies (i) Telecommunications
and power
l
Multiple Choice Questions
B. Developing economies (ii) Health, housing and
1. The structure which contributes directly to the sanitation
economic process within the system of production C. Developed economies (iii) Irrigation and
and distribution is known as transportation
(a) Social infrastructure
(b) Political infrastructure Codes
(c) Technological infrastructure A B C
(d) Economic infrastructure (a) (i) (ii) (iii)
Ans. (d) Internal facilities of a country make business activity (b) (iii) (ii) (i)
possible, such as communication transportation and (c) (ii) (i) (iii)
distribution networks, financial institutions and markets (d) (i) (iii) (ii)
and energy supply systems. Ans. (b) (iii) (ii) (i)
2. Which of the given statement(s) explain the 5. Which of the following programmes was launched
relevance of infrastructure? in 2006 with the objective of correcting regional
(a) Modern agriculture is highly dependent on imbalances in provision of healthcare?
infrastructural facilities (a) Pradhan Mantri Swasthya Suraksha Yojana
(b) Infrastructure helps in increasing productivity of (b) National Rural Health Mission
factors of production (c) Janani Suraksha Yojna
(c) It helps in improving quality of life of people (d) Integrated Disease Surveillance
(d) All of the above Ans. (a) Pradhan Mantri Swasthya Suraksha Yojana (PMSSY)
Ans. (d) All of the above aims at correcting the imbalances in the availability of
3. Which of the following statements is incorrect with affordable healthcare facilities in the different parts of the
country. The scheme was approved in March 2006.
regards to infrastructure?
(a) Infrastructure contributes to economic development. 6. Indian system of medicine comprises of ……
(b) Infrastructure provides support service. systems.
(c) All infrastructural facilities have a direct impact on the (a) three
production of goods and services. (b) four
(d) Inadequate infrastructure can have multiple adverse (c) five
effects on health. (d) six
Ans. (c) Some infrastructural facilities have a direct impact on Ans. (d) India’s medicine system comprises of Homeopathy,
production of goods and services while others give indirect Allopathic, Unani,Yoga, Siddha and Naturopathy.
support by building the social sector of the economy.
84 CBSE Term-II Economics XII

7. Which of the following statements is/are correct? 12. Which of the following comes under the purview of
(a) Social infrastructure directly contributes in the primary healthcare system in India?
production activities. (a) Immunisation, proper nutrition and health education
(b) ‘Jail Cost of Living’ index was introduced by Amartya (b) Surgery, research and specialised healthcare
Sen. (c) X-rays and ECG
(c) Poverty line of rural areas has been set below poverty (d) All of the above
line of urban areas.
Ans. (a) Immunisation, proper nutrition and health education
(d) India’s infant mortality rate is higher than that of
Bangladesh. 13. Vaccination, proper diet, promotion of food supply,
Ans. (d) India’s infant mortality rate is higher than that of sanitation, maternal and child healthcare, provision
Bangladesh. of essential drugs, etc. health services are provided
8. Write the correct pair. by ............. in India.
(a) primary healthcare system
Column I Column II (b) secondary healthcare system
A. Mid-day Meal Scheme (i) This scheme was launched (c) tertiary healthcare system
on 2nd October, 1975 (d) All of the above
B. Valmiki Ambedkar (ii) It seeks to improve the Ans. (a) primary healthcare system
Awaas Yojana living conditions of slum
dwellers in urban areas 14. Morbidity is defined as …… .
C. Pradhan Mantri (iii) This scheme was launched (a) proneness to fall ill
Gramodya Yojana in 2007 (b) high infant mortality rate
D. Integrated Child (iv) Under it, cooked meal is
(c) high maternal mortality rate
Development Scheme provided to students (d) low life expectancy rate
studying in government Ans. (a) The term morbidity refers to the rate at which a disease
schools occur in a population.

Codes 15. Which of the following is not a function of primary

(a) A-(i) (b) B-(ii) (c) C-(iii) (d) D-(iv) health care?
Ans. (b) B-(ii) (a) Spreading education concerning prevailing health
problems
9. Health infrastructure includes..... . (b) Promoting food supply and proper nutrition
(a) nurses (b) pharmaceutical industries (c) Conducting research
(c) doctors (d) All of these (d) Providing essential drugs
Ans. (d) Health infrastructure includes advanced machine, Ans. (c) The main functions of primary health care are
specialised doctor, nurses and other paramedic treatment and care of people with health problem,
professionals and pharmaceutical industries. promoting good health, preventing health problems,
10. Infrastructure contributes to economic development early intervention, managing ongoing and long-term
of the country through…… . conditions.
(a) improving the quality of life. 16. Which of the given state is not lagging behind in
(b) raising the productivity of factors of production. terms of healthcare system?
(c) Both (a) and (b) (d) None of these (a) Kerala (b) Bihar
Ans. (c) Both (a) and (b) (c) Uttar Pradesh (d) Madhya Pradesh
11. Write the correct pair. Ans. (a) Kerala continued to top the list for the best performing
State in the health sector among the 21 large States.
Column I Column II
17. Which plan is to provide at least one community
A. Primary healthcare (i) Facilities for surgery health worker for every village at a norm of 1,000
centres
population?
B. Secondary (ii) Maternal and child
healthcare centres healthcare only
(a) JSY
(b) National Health Programme
C. Tertiary healthcare (iii) Advanced level equipment
centres and specialised healthcare (c) NRHM
(d) IDPS
Codes Ans. (a) JSY, Janani Suraksha Yojana (JSY) under the overall
(a) A-(i) (b) B-(ii) umbrella of National Rural Health Mission (NRHM). The
(c) C-(iii) (d) None of these objective is to reduce overall maternal mortality ratio and
Ans. (c) C-(iii) infant mortality rate.
CBSE Term-II Economics XII 85

18. AYUSH is a part of Indian systems of medicine. It Ans. (b) Infrastructure contributes to the economic development
does not include ............. . of a country both by increasing the productivity of the
factors of production and improving the quality of life of
(a) Allopathy (b) Naturopathy
its people.
(c) Homeopathy (d) Ayurveda
Ans. (a) AYUSH stands for Ayurveda, Yoga, Unani, Siddha, 5. Assertion (A) The health status of India has
Naturopathy and Homeopathy. surpassed those of Europe and North America.
Reason (R) India still has high birth rate as
l
Assertion-Reasoning MCQs compared to developed nations. Frequent births of
Directions (Q.Nos. 1 to 7) There are two statements children adversely affect the health of mothers.
marked as Assertion (A) and Reason (R). Read the Unhealthy mothers give birth to unhealthy child.
statements and choose the appropriate option from the Ans. (d) In developing countries, children are needed as a
options given below labour force and to provide care for their parents in old
age. In these countries, fertility rate is higher due to the
(a) Both Assertion (A) and Reason (R) are true and Reason
lack of access to contraceptives and generally lower level
(R) is the correct explanation of Assertion (A).
of female education.
(b) Both Assertion (A) and Reason (R) are true, but Reason
(R) is not the correct explanation of Assertion (A). 6. Assertion (A) The distribution of our existing health
(c) Assertion (A) is true, but Reason (R) is false. infrastructure is inequitable.
(d) Assertion (A) is false, but Reason (R) is true. Reason (R) About 70 percent of India’s population
1. Assertion (A) Economic infrastructure and social lives in urban area but only one-fifth of hospitals
infrastructure are interdependent on each other. are located in urban areas.
Reason (R) Infrastructure such as power, water, Ans. (c) Access to health care is very much asymmetric
transport, communication, etc. are used as inputs between rural and urban India. While urban residents
have a choice between public or private providers, the
for production in the directly productive sector.
rural residents face far fewer choices.
Ans. (b) Both economic and social infrastructures are
interdependent and complementary to each other. While 7. Assertion (A) There has been a reduction in infant
economic infrastructure fosters economic growth, social mortality rate in India.
infrastructure enhances the quality of standard of living Reason (R) Factors contributing to this slowing
and thereby leads to the welfare of the economy as a decline include the lower social, cultural and health
whole. status of women in India. Thus, improving female
2. Assertion (A) It is imperative to develop the status education and nutrition, as well as increasing the use
of both social and economic infrastructure. of health services during pregnancy and delivery
Reason (R) It enhances overall productivity and would lower child mortality.
expands the dimensions of economic development. Ans. (a) Both Assertion (A) and Reason (R) are true and Reason
Ans. (b) Social infrastructure plays an important role in both (R) is the correct explanation of Assertion (A).
the economic development of a nation and the
development of society’s quality of life. Social
l
Case Based MCQs
infrastructure enhances social well being and furthers
1. Direction Read the following text and answer the
economic growth by providing basic services and
facilities which allow businesses to develop and flourish.
question no. (i) to (vi) on the basis of the same.
India is now the fourth largest and one of the
3. Assertion (A) Government has launched the fastest growing economy in the world. However, it
‘National Infrastructure Pipeline’ for period of faces both a tremendous backlog and a growing
2020-2030. demand for infrastructure. The Indian economy
Reason (R) The objective of the NIP is to provide expanded significantly in fiscal year 2006.
equitable access to infrastructure to all. According to advance estimates released by the
Ans. (d) The National Infrastructure Pipeline (NIP) is a group central statistical organisation, the economy
of social and economic infrastructure projects in India recorded a Gross Domestic Product (GDP) growth
over a period of five years with an initial sanctioned rate (at factor cost) of 9.2% at constant prices,
amount of ` 102 lakh crore.
compared with 9% in the previous year.
4. Assertion (A) Infrastructure is a support system on The increase in growth rates in recent years is
which the efficient working of a modern industrial reflected in the 11th five-year plan (FY 2007–FY
economy depends. 2012) average annual growth target of 9%
Reason (R) The quality of transport and compared with the 10th plan target of 8%.
communication can affect access to healthcare.
86 CBSE Term-II Economics XII

High quality infrastructure is essential to harness (vi) Who is an ANM?

the growth impulses in the economy. The planning (a) Auxiliary Nursing Midwife
commission (equivalent to a ministry of planning) (b) Auxiliary National Medication
has observed that poor infrastructure is India’s (c) Auxiliary Neuropathic Medicine
‘‘Achilles’ heel’’ which is estimated to cost India (d) Auxiliary Nursing Method
3-4% of lost GDP a year. The planning commission Ans. (a) Auxiliary Nursing Midwife is the first person who
has estimated that India needs to increase its provides primary health care in rural areas.
spending on infrastructure from 4-5% to 9% of
2. Direction Read the following text and answer the
GDP, if it is to achieve its growth targets.
question no. (i) to (vi) on the basis of the same.
(i) Which of the following are advantages of a sound
Infrastructure is often called as the lifeline of the
infrastructure in India?
economy of a nation. It comprises of a well
(a) Cost effectiveness
established and well knit network of power, telecom,
(b) Attracts foreign capital
ports, airports, roads, civil aviation, railways and
(c) Improves growth process
road transport in a country. Countries need adequate
(d) All of the above
infrastructure so that various economic activities in
Ans. (d) All of the above
an economy are executed efficiently, smoothly and
(ii) ……… is not a component of economic above all in time.
infrastructure. The deficiencies in the infrastructural needs of a
(a) Energy (b) Education nation cannot be made up through imports rather
(c) Communication (d) Transport the best approach is that it must be created within
Ans. (b) Roads, railways, telecommunication systems, the domestic economy to put it on through the
waterways, airways, financial institutions, electricity, higher growth trajectory.
water supply etc are the examples of economic
infrastructure.
However,building of infrastructure requires large
and lumpy investment and has a relatively long
(iii) GDP, growth and infrastructure are ………… gestation period.
proportionate.
Due to this fact, infrastructural facilities are either
(a) directly
built or run by the government and public sector
(b) increasing
enterprises and if private sector is permitted to
(c) indirectly
make investment and run infrastructural projects,
(d) declining
they must be regulated in order to ensure quality
Ans. (a) directly infrastructure to one and all in the society.
(iv) Infrastructural development in India has been a (i) Identify the main category of infrastructure
responsibility of government sector only. Private mentioned in the above paragraph.
sector has not been actively involved in (a) Social (b) Economic
infrastructural development. Which of the (c) Personal (d) Financial
following is/are the reason(s) for the same?
Ans. (b) Economic
(a) Huge cost involvement (b) Long gestation period
(c) Less profitability (d) All of these (ii) The demand-supply gap of major infrastructural
facility like power, transport can be met through
Ans. (d) All of these
.......... .
(v) Assertion (A) India is a case of an ‘over-urbanised’ (a) active role of public and private sector
country. (b) active role of public sector only
Reason (R) Most of the large cities in India do not (c) active role of private sector only
have adequate infrastructure. (d) None of the above
Alternatives Ans. (a) active role of public and private sector
(a) Both Assertion (A) and Reason (R) are true and Reason
(iii) ‘Infrastructure is often called as the lifeline of the
(R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason
economy of a country,as it helps in increasing the
(R) is not the correct explanation of Assertion (A). productivity of the factors of production and
(c) Assertion (A) is false, but Reason (R) is true enhancing the quality of life’.
(d) Both the statements are false (a) True (b) False
Ans. (a) Both Assertion (A) and Reason (R) are true and Reason (c) Partially true (d) Partially false
(R) is the correct explanation of Assertion (A). Ans. (a) True
CBSE Term-II Economics XII 87

(iv) Infrastructure enhances economic growth through power stations, oil and gas pipelines, telecommunication,
(a) improved health and educational status schools and colleges, hospitals, sanitary system and also
(b) bridging regional development the monetary system including banks, insurance and
(c) provision of employment opportunities other financial institutions. Infrastructure provides
support system to economic and social development.
(d) All of the above
Ans. (d) All of the above 2. Explain the two categories into which infrastructure
is divided. How are both interdependent?
(v) Assertion (A) Infrastructure is the basic fundamental
Ans. Infrastructure is divided into two categories, i.e.
structure of economics development of a country.
economic infrastructure and social infrastructure.
Reason (R) Economic impact has a direct bearing Infrastructure associated with energy, transportation and
withthe production activity of an economy. communication are included in the former category
Alternatives whereas those related to education, health and housing
(a) Both Assertion (A) and Reason (R) are true and Reason are included in the latter.
(R) is the correct explanation of Assertion (A) Economic infrastructure and social infrastructure are
(b) Both Assertion (A) and Reason (R) are true, but Reason interdependent on each other. For example, the
(R) is not the correct explanation of Assertion (A) development and expansion of transport and
(c) Assertion (A) is true, but Reason (R) is false communication network requires a team of qualified and
(d) Assertion (A) is false, but Reason (R) is true skilled persons. Similarly, a strong infrastructure of
Ans. (b) Economic infrastructure definitely shows the mobility education and health becomes meaningless, if it is not
of labour and capital within the economy. It results in the supported by a good transport and communication
overall growth of towns and cities. Infrastructure provides system.
for a lot of employment generation and employment 3. Some infrastructural facilities have a direct impact
opportunities. on production of goods and services while others
(vi) Match the following give indirect support by building the social sector
Column I Column II of the economy. Using the above information,
differentiate between social and economic
A. Social infrastructure (i) The poor
infrastructure.
B. Nonconventional energy (ii) Education
Ans. Difference between social and economic infrastructure is
C. Health infrastructure (iii) Outsourcing as follows
biased against
D. Essential indication of (iv) Biomass Basic Social Infrastructure Economic
good health Infrastructure
E. Infrastructural facilities (v) High expectancy of life Meaning Social infrastructure Economic infrastructure
helps the economic helps the economic
Codes system from outside (i.e. system from the inside
A B C D E indirectly). (i.e. directly).
(a) (ii) (iv) (i) (v) (iii) Resource Social infrastructure Economic infrastructure
(b) (i) (ii) (iii) (iv) (v) improvement improves the quality of improves the quality of
(c) (iii) (iv) (i) (iii) (v) human resources. economic resources.
(d) (v) (iv) (iii) (ii) (i) Expenditure Expenditure on it will Expenditure on it will
Ans. (a) (ii) (iv) (i) (v) (iii) raise the stock of human raise the stock of
capital over time. Social physical capital over
infrastructure leads to time.Economic
economic infrastructure. infrastructure leads to
PART 2 social infrastructure.
Example Health, education and Energy, transport and
Subjective Questions housing. communication.

4. How are economic growth and infrastructure

l
Short Answer (SA) Type Questions development related to each other?
1. Explain the term ‘infrastructure’. (NCERT) Ans. Infrastructure Promotes Growth Sufficient availability
of the power, water, transport, etc. may result in optimal
Ans. Infrastructure refers to the supporting services in the
utilisation of assets. Infrastructure developments such as
main areas of industrial and agricultural production,
transport, power, finance, etc. expand the size of markets
domestic and foreign trade and commerce. These
and improve productivity significantly. Infrastructure
services include roads, railways, ports, airports, dams, brings modern technology in all sectors.
88 CBSE Term-II Economics XII

There is a close association between infrastructure 8. What is the state of rural infrastructure in India?
spending and GDP growth. Around 6.5 % of the total (NCERT)
value added is contributed by infrastructure services in
UDCs, 9 % in developing countries and 11 % in Ans. State of infrastructure in rural India can be
developed countries. Infrastructural development is understood from the following points
important not only for economic growth, globalisation (i) Inspite of the technological progress, women of rural
technological innovation in manufacturing but also for India are still using bio-fuels to meet their daily
poverty reduction. energy requirements. About 90% of the rural
Growth Promotes Infrastructure Growth increases households use bio-fuels for cooking.
demand of infrastructure. Obviously, as income (ii) The Census 2001 shows that in rural India, only 56%
increases, people will demand more of transport, households have an electricity connection and 43%
communication, energy, etc. Consequently, in UDCs, still use kerosene.
basic infrastructure such as water, irrigation is most (iii) Tap water availability is limited to only 24% rural
important. In developing economies, demand for households. About 76% of the population drinks
transport grows fast. In developed economies, water from open resources such as wells, ponds, etc.
power and telecommunication occupy more Women go long distances to fetch water for their
importance. basic needs.
5. How is the national income of a country related to (iv) Access to improved sanitation in rural areas was only
the level of infrastructural development? Explain. 20%.
Ans. The composition of infrastructure requirements changes 9. Why do medical tourists come to India?
significantly with the increase in country’s national Ans. Medical tourists come to India to avail our health services
income. Basic infrastructure facilities such as irrigation, which combine latest medical technologies with qualified
transport and power are more important for low income professionals and are cheaper for foreigners as compared to
countries. costs of similar healthcare services in their own countries.
However, as economies grow and they are able to satisfy They come for surgeries, liver transplants, dental and even
their basic consumption demand, the share of cosmetic care. In the year 2004-05, as many as 1,50,000
agriculture in the economy shrinks and more service foreigners visited India for medical treatment.
related infrastructure become important. Thus, the
share of power and telecommunication infrastructure is
10. Write a note on the various healthcare centres in
greater in high income countries.
India.
(i) Primary healthcare centre
6. How does infrastructure impact productivity and
induce investment? (ii) Secondary healthcare centre
Ans. Impact on Productivity Infrastructure plays a major (ii) Tertiary healthcare centre
role in raising the productivity of primary, secondary Ans. (i) Primary healthcare centres are small hospitals
and tertiary sector. managed by a single doctor, a nurse and a limited
Productivity of primary sector has increased due to the quantity of medicines. They are located in villages
provision of better irrigation facilities. Productivity of and small towns.
secondary sector has increased because of development (ii) Secondary healthcare centres are better healthcare
in energy sector and tertiary sector has benefitted by centres and provide facilities for surgery, ECG and
changes in transportation and communication sector. X-ray. They are located in bigtowns and district
Induces Investment A well-developed infrastructure headquarters.
attracts foreign investors. Thus, infrastructure induces (iii) Tertiary healthcare institutions are specialised
investment and increases profitability. medical centres and undertake complicated
healthcare problems.
7. Expansion of one industry facilitates the expansion
of the other. How economic growth can become a 11. Give an account of the contribution of community
dynamic process and a self-propelling activity of and non-profit organisation to healthcare in India.
change? Ans. Community participation functions with the idea that the
Ans. Availability of proper means of transport and people can be trained and involved in Primary Healthcare
communication, ample sources of energy and System. Trade unions have built Healthcare services to
a developed system of banking and finance generate an give low-cost healthcare to their members as well as the
environment of inter-industrial linkages. people from nearby villages. For instance, Shahid hospital
In this situation, expansion of one industry facilitates the was built in 1983 and is sustained by the workers of
expansion of the other. Accordingly, growth becomes a Chhattisgarh mines Shramik Sangh in Durg, Madhya
dynamic process and a self-propelling activity Pradesh. SEWA in Ahmedabad and ACCORD in Nilgiris
of change. are examples of some non-profit organisations that
contribute to healthcare in India.
CBSE Term-II Economics XII 89

12. Highlight the points that reflect development in PHCs located in rural areas do not have even X-ray or
the health services after independence in India. blood test facility. 20% of doctors passing leave the
country for better prospects.
Ans. The following are the points that reflect development in
the health services after independence in India Many others are interested in urban areas, rare are the
ones interested in rural areas. The poorest one fifth
(i) Decline in Death Rates Death rate has come down
spends 12% of their income on health while rich spend
from as high as 27.4 per thousand in 1951 to 6.3 per
only 2% of their income on health.
thousand in 2015.
(ii) Reductions in Infant Mortality Infants mortality l
Long Answer (LA) Type Questions
rate has significantly reduced from 140 per thousand
in 1951 to 32 per thousands in 2015. 1. Infrastructure provide supporting service in the
(iii) Rise in Life Expectancy Expectancy of life has risen main areas of industrial and agricultural
from 50 years in 1951 to 68.3 years in 2012. production. In the context of the above statement,
13. A study estimates that medical costs alone push explain how infrastructural facilities boost-up the
production?
down 2.2% of the population below the poverty line
Ans. Infrastructural facilities increases production of the
each year. How?
country both by increasing the productivity of the factors
Ans. Public health facilities are highly inadequate in our of production and improving the quality of life of its
country. These facilities are also lacking in quality. So people. Infrastructure plays a major role in raising the
even poor and middle class people do not prefer to use productivity in all the three sectors, viz. primary,
these facilities. secondary and tertiary sector.
So, in case of a medical emergency, they are forced to (i) Productivity in primary sector is increased because
avail expensive services of private hospitals and health irrigation facilities have reduced the dependence on
centres. These expenses prove to be a heavy burden monsoon.
on these families and they are forced to sell whatever
(ii) Production in the secondary sector has increased
valuables they have, to fund the treatment. This pushes
due to the improvements made in the energy sector.
the families below poverty line.
(iii) Production in the tertiary sector has increased due
14. Do you think regional inequality exists even in health to the improvements made in the means of
infrastructure in India? Give reasons for your answer. transportation and communication.
Ans. Yes, the development of health infrastructure has shown Also, social infrastructure increases the quality of life of
gender, income and regional biasness in India. Rural workers, thereby increasing their efficiency. Health care
areas do not have access to or cannot afford medical care. centres, educational institutions and other such facilities
Even though majority of population lives in rural areas, develop the skills of the workers, which increases the
only one-fifth of India’s hospitals are located in rural ability and efficiency to work. Thus, we can conclude that
areas with only half the number of dispensaries. Out of infrastructure boosts production.
6.3 lakh beds, roughly 30% of them are available in rural 2. Infrastructure contributes to the economic
areas. The PHCs in rural areas do not offer basic medical
development of a country. Do you agree? Explain.
care like X-ray or blood testing devices.
(NCERT)
In rural areas, the percentage of people who have no access
Ans. Yes, infrastructure acts as a support system for production
to proper aid has risen from 15 in 1986 to 24 in 2003. States
activity in the economy and thereby, contributes to
like Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh
economic development.
are relatively lagging behind in health care facilities.
The following points will further explain the role of
15. Health care in India is suffering from urban-rural infrastructure in the economic development of a country
and rich-poor divide. Explain how? (i) Infrastructure Increases Productivity Social and
Ans. It is rightly said that health care in India suffers from economic infrastructure facilitates production. The
urban-rural and rich-poor divide. 70% population is availability of quality infrastructure guarantees
living in rural areas while only 20% of the hospitals are increase in production and productivity. Infrastructure
located in rural areas. It means 80% hospitals are serving ensures easy movement of goods and raw materials,
30% population. There are only 0.36% hospitals for one thereby, reducing inefficiencies and lead to efficient
lakh people in rural areas whereas there are 3.6% utilisation of scarce resources and eliminate wastages.
hospitals per one lakh population in urban areas, i.e. (ii) Infrastructure Encourages Investment
number of hospitals in urban areas is 10 times the Infrastructure provides an environment conducive
number of hospitals in rural areas. to investment. Lack of facilities discourage
In villages, specialised medical care is completely investment. For example, an investor will not invest
missing like paediatrics, gynaecology, anaesthesia and in absence of basic infrastructure such as transport
obstetrics. and communication.
90 CBSE Term-II Economics XII

(iii) Infrastructure generates Linkages in Production effectiveness of health care facilities and play an
Infrastructure promotes economic development by important role in spreading health awareness.
way of various forward and backward linkages. In (iv) Indian system of medicine including ayurveda and
other words, infrastructure provides scope for naturopathy should be explored and used to support
expansion of one industry due to the expansion of public health as they are based on natural healing and
the other by way of forward and backward linkages. are of preventive nature.
The process of economic growth becomes a 5. Differentiate the six systems of Indian medicine.
dynamic process in the presence of sufficient (NCERT)
infrastructure facilities. This can be explained with
the help of a forward linkage. For example, if Or Explain the six systems of Indian medicine.
irrigation facilities boost agricultural production, Ans. The six systems of Indian medicine can be differentiated
then the related industries that depend on from the points below
agriculture for the supply of raw materials (i) Ayurveda Atharvaveda, the last of the four great
simultaneously experience increased production. bodies of knowledge known as Vedas, contains 114
(iv) Infrastructure enhances Size of the Market hymns related to formulations for the treatment of
Infrastructure widens the size of the market. The different diseases.
fast and cost effective movement of raw materials The Ayurvedic practitioners recommend diet and
and finished goods in bulk enables a producer to lifestyle changes alongwith drug therapy. The methods
offer its products across the country and even of Ayurveda such as applying herbs and massage can
across international boundaries. simultaneously be used alongwith other systems.
3. Describe the meaning of public health. Discuss (ii) Yoga It is being practised in India from thousands of
years. It has references in Upanishads and Puranas
the major public health measures undertaken by
composed by Aryans in the Vedic period. The main
the state in recent years to control diseases. credit for systematising Yoga goes to Patanjali who
(NECRT)
wrote ‘Yoga Sutra’ which is the most important and
Ans. The science and practice of protecting and improving basic text on Yoga. Yoga is defined as an art of
the health of a community, as by preventive medicine, righteous living or an integrated system for the benefit
health education, control of communicable diseases, of the body, mind and inner spirit.
application of sanitary measures and monitoring of
(iii) Unani This also means ‘Greek medicine’, and is a form
environmental hazards, is called public health. In the
of traditional medicine widely practised in South Asia.
recent years, government has built up a vast health
infrastructure equipped with trained manpower at Unani medicine is based on the concept of the four
different levels. humours, Phlegm, Blood, Yellow bile and Black bile.
Unani medicine first arrived in India with
The following measures have been initiated by the
establishment of Delhi Sultanate (1206–1527 CE) and
state in recent years to promote public health
muslim rule over North India and subsequently
(i) Establishing health care institutions. flourished under Mughal empire.
(ii) Expanding the health facilities. (iv) Siddha It comes from the word Siddhi which means
(iii) Expanding the facilities for medical education. an object to attain perfection or heaven. Siddhi is
(iv) Promoting preventive medicine. attained through meditation which cures mental
All these measures have helped to control diseases like illness and promotes mental, emotional and physical
smallpox, malaria, TB, etc. well-being.
4. How can we increase the effectiveness of (v) Naturopathy It heals with the power of nature as it
healthcare programmes? (NCERT) assumes that all healing powers are within our body. It
uses the inbuilt immune system of the human body for
Ans. We can increase the effectiveness of healthcare curing. Naturopathy regards that we fall ill only when
programmes in the following manner we go against nature. An ailing body can purify and
(i) The wide gap between rural and urban areas, poor recover itself with thorough rest and fasting or having
and rich in utilising health care facilities must be natural diet which helps in healing.
addressed through more investment in health
facilities in rural and backward areas by the (vi) Homeopathy It consists of two words ‘homeo’
government as private investment is not meaning similar and ‘pathos’ meaning suffering. In
forthcoming in these areas. this system, a drug and a disease that produces similar
(ii) Women’s health across the country should be symptoms are believed to be having a neutralising
taken into greater focus as a healthy mother gives effect on each other. Thus, the homeopathic treatment
birth to a healthy off spring and health status of is based on symptoms the body is showing and
population can be improved. medication is given accordingly. It is popular among the
(iii) Regulated private sector health services, NGOs people due to its remarkable healing capacity. Also, its
and community participation can improve the remedies are free from side effects.
Chapter Test
Multiple Choice Questions
1. Why are education, health and housing called social infrastructure?
(a) Core elements of social change
(b) Helps in development
(c) Necessary for growth
(d) Help in increasing per capita income
2. Which programme was launched in 2006 with objective of correcting regional imbalances in provision of health care?
(a) Pradhan Mantri Swasthya Suraksha Yojana
(b) National Rural Health Mission
(c) Janani Suraksha Yojana
(d) Integrated Disease Surveillance
3. Since independence, the eradication of smallpox, guinea worms were possible with the help of
(a) increase in circulation of money
(b) creation of education system
(c) expansion of health infrastructure
(d) raise in income level
4. In which city, All India Institute of Medical Science has been set up?
(a) Chennai (b) Pune
(c) Karnataka (d) New Delhi
5. The hospitals which have better facilities such as surgery, X-ray, ECG are called ……… .
(a) Primary health care provider
(b) Secondary health care institutions
(c) Community health care centres
(d) Sub-centres

Short Answer (SA) Type Questions

1. Why is it important to have strong infrastructure?
2. Explain tertiary health care as a component of public health system in India.
3. How has women’s health become a matter of great concern?
4. Write a short note on ‘Private Sector Health Infrastructure in India’.
Long Answer (LA) Type Questions
1. What are the main characteristics of health of the people of our country?
2. Discuss the main drawbacks of our healthcare system.

Answers
Multiple Choice Questions
For Detailed Solutions
1. (a) 2. (a) 3. (c) 4. (d) 5. (b)
Scan the code
 92 CBSE Term-II Economics XII

CHAPTER 03

Environment and
Sustainable
Development
In this Chapter...
Environment
State of India’s Environment
Sustainable Development

Environmental Crisis
Environment The environment performs its functions without any
It is defined as the total planetary inheritance and the totality of interruption as long as the demand of these functions is
all natural resources. It includes all the biotic (e.g, birds, within its carrying capacity.
animals, plants, forests, etc.) and abiotic (e.g. water, sun, land, This means that if the rate of extraction of resources will be
mountains, etc) factors that influence each other. above the rate of their regeneration, the environment will
Functions of Environment not be able to sustain life and this results an environmental
crisis.
Environment performs four vital functions, which are as follows
Resources are becoming extinct and wastes are generated
1. Supply Resources for Production Resources include both beyond the absorptive capacity of the environment. All this
renewable and non-renewable sources of energy. Resources has led to the environmental crisis. It refers to ecological
which can be used without any fear of getting depleted are crisis that occurs when the environment of a species or a
renewable sources of energy. e.g. Trees, fishes, etc. population changes and destablises its survival.
Non-renewable sources are those which are getting depleted
or exhausted. e.g. Fossil fuel, etc. Environment supplies all Consequences of Environmental Crisis
these resources, so that the production process can be l
Development has polluted and dried up rivers and other
carried out in the society. aquifiers making water an economic good.
2. Assimilates Waste Production and consumption activity l
Intensive and extensive excavation of both renewable and
generates wastes. Environmental components help in their non-renewable resources has exhausted some of the vital
degradation, thereby preventing their accumulation. resources, compelling to spend a huge amount of money
3. Sustains Life Sun, water, soil and air are part of the on technology and research to explore new resources.
environment. Life without them is impossible. Therefore, l
Decline in air and water quality have resulted
environment helps in the existence of life on Earth. in increased number of respiratory and water borne
4. Enhances Quality of Life Environmental surroundings diseases, with the consequence that expenditure of health
include forests, rivers, waterfalls, oceans, mountains, etc. care is also rising.
Man finds peace and tranquility in these surroundings, The above consequences of environmental crisis have
enhancing his quality of life. increased the opportunity costs of negative environmental
impacts.
CBSE Term-II Economics XII 93

Global Environmental Issues Some of the priority issues are discussed below
The environmental issues which affect the whole world are 1. Land Degradation in India Land in India suffers from
called global environmental issues, such as global warming and varying degrees and types of degradation mainly due to
ozone depletion. These issues are discussed below excessive use and inappropriate management practices.
1. Global Warming The gradual increase in the average The factors responsible for land degradation in India are
temperature of Earth’s lower atmosphere is called global
l
Loss of vegetation occurring due to deforestation.
warming. It occurs due to greenhouse gases, (carbon
l
Unsustainable fuel, wood and fodder extraction.
dioxide, methane and other gases which have the capacity l
Shifting cultivation and reduction of forest lands.
to absorb heat) through burning of fossil fuels (coal and l
Forest fires and overgrazing.
petroleum) and deforestation (increases the carbon dioxide l
Non-adoption of adequate soil conservation
level in atmosphere). Much of the recent observed and measures.
projected global warming is human induced. l
Improper crop rotation.
2. Ozone Depletion It refers to the phenomenon of reduction l
Indiscriminate use of agro chemicals such as
in the amount of ozone layer in the stratosphere. It is caused fertilisers and pesticides.
by high levels of chlorine and bromine compounds in the l
Improper planning and management of irrigation
stratosphere. Origin of these compounds are Chloroflurocar- system.
bons (CFCs), used as cooling substances in air conditioners l
Extraction of ground water in excess of the
and refrigerators or as aerosol propellants and bromofluro- regenerative capacity.
carbons (halons) used in fire extinguishers. l
Poverty of the agriculture-dependent people.
l
Open access to resources.
State of India’s Environment 2. Loss of Biodiversity Biodiversity is the variety of all life
India is rich in natural resources. It is clear from the following forms including animals and plants that can be found
points either in just one location or on the whole planet. Loss
of biodiversity means that some of the species of
l
India has rich quality of soil, hundreds of rivers and
animals and plants will be lost as a consequence of
tributaries, lush green forests, plenty of mineral deposits
environmental degradation.
beneath the land surface, vast stretch of the Indian ocean,
range of mountains, etc. Deforestation at such a large scale has the following
consequences
l
The black soil of the Deccan Plateau is particularly suitable
for cultivation of cotton. It has lead to concentration of textile
l
It leads to soil erosion. According to an estimate,
industries in this region. quantity of nutrients lost due to soil erosion each
year ranges from 5.8 to 8.4 million tonnes.
l
The Indo Gangetic plains spread from Arabian Sea to the
Bay of Bengal are one of the most fertile, intensively
l
The forests sustain all types of life forms. Destruction
of these forests means losing the various life forms
cultivated and densely populated regions in the world.
sustained by these forests.
l
India’s forests though unevenly distributed, provide green
cover for majority of its population and natural cover for its 3. Air Pollution Pollution from vehicles and industries are
wildlife. the major sources of air pollution. These are as follow
l
Large deposits of iron-ore, coal and natural gas are found in
l
Vehicle emissions are of particular concern since
the country. India alone accounts for nearly 20% of the these are ground level sources and thus, have the
world’s total iron-ore reserves. maximum impact on the general pollution.
l
Bauxite, copper, chromate, diamonds, gold, lead, lignite,
l
India is one of the ten most industrialised nations of
manganese, zinc, uranium, etc are also available in different the world. This status has brought with it unwanted
parts of the country. and unanticipated consequences like unplanned
urbanisation, pollution and the risk of accidents.
Threat to India’s Environment 4. Management of Fresh Water Water is an equally
The developmental activities in India have resulted in pressure important element of life and its pollution is equally
on its finite natural resources, besides creating impacts on serious. Water becomes polluted when chemicals and
human health and well-being. Air pollution, water other waste materials are dumped into it. Polluted
contamination, soil erosion, deforestation and wildlife water is the principal cause of diseases like diarrhoea
extinction are some of the most pressing environmental issues and hepatitis. Thus, the management of fresh water is
of India. essential to sustain life.
 94 CBSE Term-II Economics XII

5. Management of Solid Waste It is very essential that 5. Solar Power through Photovoltaic Cells India is naturally
solid waste should be treated chemically. Efforts should endowed with a large quantity of solar energy in the form
be made for effective management of non-biodegradable of sunlight. Now, with the help of photovoltaic cells, solar
waste. Also biodegradable waste should be converted energy can be converted into electricity.
into compost. 6. Bio Composting The use of chemical fertilisers has
adversely affected the waterbodies, ground water system,
Sustainable Development etc. So, farmers should be encouraged to use organic
According to the United Nations Conference on fertilisers for production. Cattles should be maintained
Environment and Development (UNCED), sustainable because their waste is very useful in the form of fertiliser.
development can be defined as “development strategy that Earthworm can also be used to convert organic matter
meets the need of present generation without compromising into compost faster than the normal composting process.
the ability of future generation to meet their own needs.” 7. Mini-Hydel Plants Mountainous regions have streams
everywhere. Most of such streams are perennial.
Features of Sustainable Development Mini-hydel plants use the energy of such streams to move
l
Sustained rise in real per capita income and economic small turbines which generate electricity.
welfare.
8. Traditional Knowledge and Practices Traditionally,
l
Rational use of natural resources.
Indian people have been close to their environment. If we
l
No reduction in the ability of future generations to meet
look back at our agricultural system, healthcare system,
their own needs.
housing, transport, etc we find that all practices have been
l
Check on pollution.
environment friendly.
Strategies for Sustainable Development But in recent years, we have been moving away from
These are as follows these practices. This has caused large scale damage to our
1. Use of Non-conventional Sources of Energy India environment. For sustainable development we should
heavily depends on thermal and hydro power plants to revert back to these practices.
meet its power needs. Both of these have adverse 9. Biopest Control With the advent of green revolution, the
environmental impacts. Thermal power plants emit large country entered into the use of chemical pesticides to
quantities of carbon dioxide, which is a greenhouse gas. produce more which had adverse impacts on soil, water
If it is not used properly, it may cause land and water bodies, milk, meat and fishes. To meet this challenge,
pollution. Therefore, the use of non-conventional better methods of pest control should be used like
sources such as solar, wind and nuclear energy should be pesticides based on plants like neem etc.
encouraged to achieve the objective of sustainable
development. Measures to Achieve Sustainable Development
2. LPG, Gobar Gas in Rural Areas Rural households in According to Herman Daly, leading environmental economist,
India generally use wood, dungcake (upla) or other the following measures should be undertaken to achieve
biomass as fuel. This practice has several adverse sustainable development
implications like deforestation, reduction in green cover l
Limiting the human population to a level within the carrying
and air pollution. To rectify the situation, subsidised capacity of the environment. Daly compared the carrying
LPG should be provided. It does not create any capacity to ‘plimsoll line’ of the ship, which is the load limit
household pollution and also wastage is minimised. mark in a ship. According to him, if the population exceeds
Besides it, gobar gas plants should be encouraged the ‘plimsoll line’ sustainable development cannot be
through easy loans and subsidy. achieved.
3. CNG in Urban Areas In Delhi, the use of Compressed
l
Technological progress should be input efficient and not
Natural Gas (CNG) as fuel in public transport system has input consuming.
significantly lowered air pollution and the air has l
Renewable resources should be extracted on a sustainable
become cleaner in the last few years. Steps should be basis, i.e., rate of extraction should not exceed rate of
taken to popularise this fuel in other parts of the country. regeneration.
4. Wind Power In areas where speed of wind is usually
l
For non-renewable resources, rate of depletion should not
high, wind mills can provide electricity without any exceed the rate of creation of renewable substitutes.
adverse effect on the environment. l
Inefficiencies arising from pollution should be corrected.
CBSE Term-II Economics XII 95

Chapter
Practice
PART 1
Objective Questions
l
Multiple Choice Questions 4. Out of the following, what is/are the correct
reason(s) of high opportunity cost of negative
1. Which of the following conditions is/are necessary for environmental impact?
sustainable development? (a) Spending amount on technology and research to
(a) Conservation of natural resources explore alternative resource
(b) Eco-friendly environment (b) Health cost of degraded environmental quality
(c) Use of renewable resources on sustainable basis (c) Global warming
(d) All of the above
(d) All of the above
Ans. (d) All of the above
Ans. (d) All of the above
2. Out of the following, which is not the function of 5. What do we mean when we say “Think Globally, Act
Locally” in relation to environmental problems?
environment?
(a) Global environmental problems are essential issues
(a) It supplies resources
(b) Environmental problems have to be thought at a
(b) It assimilates waste global level
(c) It sustains life by providing non-genetic and (c) Extensive research and thinking has been carried
non-biodiversity out by global level
(d) It provides aesthetic services like scenery (d) Think about global impact of local activities
Ans. (c) The environment includes the sun, soil, water, and air, Ans. (d) Think about global impact of local activities
which are essential for human life. It sustains life by 6. Match the following.
providing genetic and biodiversity.
Column I Column II
3. The environment performs four vital functions and
the environment is able to perform these functions A. Global warming (i) Caused by rising population
consumption
without any interruptions as long as the demand on
these functions is within its carrying capacity. In the B. Ozone depletion (ii) Caused by high level of
chlorine and bromine
statement ‘carrying capacity’ implies to
C. Environmental crisis (iii) Gradual increase in average
(i) the resource extraction is not above the rate of
temperature of earth
regeneration.
(ii) wastes generated are beyond the absorptive capacity of Codes
the environment. A B C A B C
(iii) the resource extraction is not below the rate of (a) (i) (ii) (iii) (b) (iii) (ii) (i)
regeneration. (c) (ii) (i) (iii) (d) (i) (iii) (ii)
(iv) the resource and the waste generated are within the Ans. (b) (iii) (ii) (i)
assimilating capacity of the environment.
7. What are the consequences of environmental crisis?
Alternatives (a) Polluted and dried up rivers and other aquifers
(a) (i), (ii) and (iv) (b) Extinction of vital resources
(b) Both (ii) and (iv) (c) Decline in air and water quality
(c) Both (i) and (iv) (d) All of the above
(d) All of the above Ans. (d) All of the above
Ans. (c) Both (i) and (iv)
96 CBSE Term-II Economics XII

8. Global warming is mainly caused by ……… . 14. Which household waste has an excellent recycling
(a) burning of coal and petroleum products potential?
(b) deforestation (a) Vegetable scraps (b) Metal
(c) release of methane gas from animal waste (c) Plastic (d) Rubber
(d) All of the above Ans. (a) Vegetable scraps
Ans. (d) All of the above 15. Use of non-conventional sources of energy is
9. Mercury and lead are toxic elements that cause …… . strategy for sustainable development. Out of the
(a) land contamination (b) air pollution following, which are the non-conventional sources
(c) water pollution (d) noise pollution of energy?
Ans. (a) land contamination (i) Crude oil (ii) Solar
(iii) Wind (iv) Wood
10. Which of the following is not used as a strategy for (v) Coal (vi) Nuclear
sustainable development? (CBSE 2020)
Alternatives
(a) Use of bio-gas
(a) (ii), (iv), (vi) and (v)
(b) Use of solar power
(b) (ii), (iii), (iv), (v) and (vi)
(c) Use of thermal power
(c) (i), (ii), (iii), (iv), (v) and (vi)
(d) Use of hydel power
(d) (ii), (iii) and (vi)
Ans. (c) For thermal power, water is heated with the help of coal.
Ans. (d) (ii), (iii) and (vi)
As coal is non-renewable source of energy, so using it can’t
be beneficial in sustainable development. 16. Environment has many resources for us. A
11. Use of which of the following has resulted in a resource that can be totally replaced or is always
sufficient reduction in Delhi’s pollution? available naturally, or that is practically
(a) LPG at homes inexhaustible is known as ……… .
(b) Solar cell for electricity (a) Conventional resource
(c) Thermal power plant (b) Renewable resource
(d) CNG in public transport (c) Non-renewable resource
(d) Non-conventional resource
Ans. (d) CNG in public transport
Ans. (b) Renewable resource
12. Which of the following is not a part of sustainable
development goal target to be achieved by 2030? 17. After mining, the huge holes left behind are used
(a) Providing free primary and secondary schooling to all for ……… .
boys and girls (a) waste water storage (b) waste and water storage
(b) Universal access to a quality higher education (c) waste disposal (d) waste storage
(c) Equal access to affordable vocational training Ans. (c) waste disposal
(d) Free higher education to all 18. What is the other word for landscaping?
Ans. (d) Free higher education to all (a) Reduction (b) Restoration
13. With reference to solar water pumps, consider the (c) Removing topsoil (d) Restore
following statements. Ans. (b) Restoration
(i) Solar power can be used for running surface pumps and 19. What does a firm seek for when the price of the
not for submersible pumps. mineral remain high?
(ii) Solar power can be used for running centrifugal pumps (a) New countries (b) Remains the same
and not the one with piston.
(c) New miners (d) New deposits
Which of the statements given above is/are correct?
Ans. (d) New deposits
(a) Only (i)
(b) Only (ii) 20. Which of the following options is/are correct
(c) Both (i) and (ii) when we only accomplish two out of three pillars
(d) Neither (i) nor (ii) of sustainable development?
Ans. (d) Pumps can be classified as submersible and surface (a) Economic+ Environmental Sustainability = Viable
pumps based on their placement. Solar power can be used (b) Social + Environmental Sustainability = Bearable
for both running surface pumps and for submersible (c) Social + Economic Sustainability = Equitable
pumps. The pumping action is cyclic and can be driven by (d) All of the above
piston, screw, gear, roller, diaphragm and vanes. Ans. (d) All of the above
CBSE Term-II Economics XII 97

environmental sound policy do not harm the

l
Assertion-Reasoning MCQs
environment or deplete the natural resources.
Directions (Q. Nos. 1 to 7) There are two statements marked
as Assertion (A) and Reason (R). Read the statements and
6. Assertion (A) Non-renewable resources are
abundant in nature.
choose the appropriate option from options given below
(a) Both Assertion (A) and Reason (R) are true and Reason (R) Non-renewable resources will get
Reason (R) is the correct explanation of Assertion (A). exhausted after several years of usage.
(b) Both Assertion (A) and Reason (R) are true, but Reason Ans. (d) Non- renewable resources are fixed in amount and
(R) is not the correct explanation of Assertion (A) will get exhausted after several years of usage.
(c) Assertion (A) is true, but Reason (R) is false 7. Assertion (A) All resources are not exhaustible.
(d) Assertion (A) is false, but Reason (R) is true
Reasoning (R) Renewable resources can become
1. Assertion (A) Presently, global atmosphere is non-renewable.
warming up. Ans. (b) Depending upon the abundance and availability,
Reason (R) The depletion of stratospheric ozone natural resources are classified into two categories i.e,
layer has resulted in increase in ultraviolet radiations exhaustible and inexhaustible. Few examples of
reaching the earth. inexhaustible resources are air, clay and fungi.
Ans. (b) Global warming is the overheating of the earth due to
the increased concentration of greenhouse gases.
l
Case Based MCQs
Greenhouse gases generally trap the radiation of the earth 1. Direction Read the following text and answer the
which leads to increase in the temperature of the earth and question no. (i) to (vi) on the basis of the same.
global warming.
In recent years, awareness of the harmful effect of
2. Assertion (A) The crude oil reserves are going down chemical-based fertilizers and pesticides on our
for the entire world and the countries need to find health is on a rise. Conventional agriculture relies
substitute fuel for crude oil. heavily on chemical fertilizers and toxic pesticides
Reason (R) A country that is dependent on import for etc., which enter the food supply, penetrate the
crude oil will demand more crude oil in future. water sources, harm the livestock, deplete the soil
Ans. (b) This is because, if the crude oil reserves gets depleted and devastate natural eco-systems.
then it will be necessary to find an alternative sources and Efforts in evolving technologies which are
the countries depending on other countries for crude oil eco-friendly, are essential for sustainable
will demand more. development and one such technology which is
3. Assertion (A) Sustainable development is essential eco-friendly is organic farming.
for economic growth of the country. In short, organic agriculture is a whole system of
Reason (R) Sustainable development ensures that farming that restores, maintains and enhances the
environment friendly measures are adopted for ecological balance. There is an increasing demand
carrying out production process. for organically grown food to enhance food safety
Ans. (a) Both Assertion (A) and Reason (R) are true and Reason throughout the world.
(R) is the correct explanation of Assertion (A) (i) In context of sustainable development, which of
4. Assertion (A) Sustainable development must be the following is/are strategies to achieve it?
adopted to save environment from degradation. (a) Use of sustained methods of farming
Reason (R) It is a matter of discussion among (b) Use of bio-pest
different countries of the world. (c) Use of natural manure
Ans. (c) Assertion (A) is true, but Reason (R) is false (d) All of the above
Ans. (d) All of the above
5. Assertion (A) Sustainable development is critical to
well-being of human society. (ii) Green revolution was a major reason of rise in
productivity of farming. What are the advantages
Reason (R) Environmentally sound policies do not
harm the environment or deplete the natural of conventional farming methods?
resources. (a) Higher output
Ans. (b) A sustainable society focuses on the current and future (b) Cost effective
well-being of its citizen and the environment. Presently, our (c) Wider range
national policies are dedicated to producing the highest (d) All of the above
possible rate of economic growth and consumption while Ans. (d) All of the above
98 CBSE Term-II Economics XII

(iii) ………… is more popular non-farm activity after about ever widening inclusion and movement away
farming. from decisions that erode democratic space and do
(a) Horticulture (b) Pisciculture not address social inequality, intolerance and
(c) Plantation (d) Animal husbandry violence. Sustainable development is about change
Ans. (b) Pisciculture that transforms impoverished peoples, communities
and countries into informed, educated, healthy and
(iv) ……… helps in maintaining ecological balance.
productive societies. It is about wealth creation that
(a) Organic food (b) Conventional food
generates equality and opportunity; it is about
(c) Dairy (d) Protein
consumption and production patterns that respect
Ans. (a) Organic food planetary boundaries; it is about increasing
(v) Assertion (A) A country rich in natural resources tolerance and respect for human rights.
has mainly relied on oil extraction for revenue Building on the human development legacy that
generation. However, scientists predict that the originated with Amartya Sen and Mahbub-Ul-Haq
country may become poor in the future if other and was captured by the first human development
means of generating income are not devised. report in 1990, UNDP has long promoted
Reason (R) Oil is a non-renewable resource, and it alternative approaches to measuring human
is likely to get exhausted if not used judiciously. progress, including with the human development
Alternatives index. Today, we are building on this legacy by
(a) Both Assertion (A) and Reason (R) are true and Reason (R) exploring how to adjust the index to reflect
is the correct explanation of Assertion (A). environmental sustainability, so that governments
(b) Both Assertion (A) and Reason (R) are true, but Reason and citizens might better track real progress
(R) is not the correct explanation of Assertion (A). towards truly sustainable development. This must
(c) Assertion (A) is false, but Reason (R) is true be our collective objective.
(d) Both the statements are false
Source UNDP Report, June, 2012
Ans. (a) Both Assertion (A) and Reason (R) are true and Reason
(R) is the correct explanation of Assertion (A). (i) Which of the following are ways to attain the goal
of sustainable development?
(vi) Which of the following statements is/are correct?
(a) Use of cleaner fuels
(i) Sustainable development is synonymous with the
conservation of the environment. (b) Use of traditional knowledge and practices
(ii) The environment is able to perform its functions (c) Spreading awareness
without any interruption as long as the resource (d) All of the above
extraction increases the rate of regeneration. Ans. (d) All of the above
Alternatives (ii) As per United Nations, following is/are the broader
(a) Both are true issue(s) of human development?
(b) Both are false (a) Education
(c) (i) is true, but (ii) is false (b) Public health
(d) (i) is false, but (ii) is true (c) Standard of living
Ans. (a) The environment is able to perform its functions (d) All of the above
without any interruption as long as the resource Ans. (d) All of the above
extraction does not exceed the rate of regeneration.
(iii) The word ‘Sustainable Development’ came in
2. Direction Read the following text and answer the existence in ……… .
question no. (i) to (vi) on the basis of the same. (a) 1980 (b) 1982
Sustainable development is synonymous in the (c) 1987 (d) 1990
minds of many with the colour green and for good Ans. (a) 1980
reason. Twenty years ago, at the first Earth Summit (iv) Sustainable development and economic growth
in Rio de Janeiro, leaders set out what today is ………… proportional.
conventional wisdom human progress—both social (a) directly
and economic—cannot be divorced from (b) increasing
environmental protection. Unless both are (c) indirectly
advanced together, both will flounder or fail.
(d) decreasing
Sustainable development is as much about health, Ans. (a) directly
education and jobs, as it is about ecosystems. It is
CBSE Term-II Economics XII 99

(v) Assertion (A) Sustainable development is about To ensure a balanced development when there is
changes that transform impoverished people, less than one acre per capita of cultivable
communities, and countries into informed, educated, landholding and over 14,000 villages out of 18,563
healthy and productive societies. are suffering from water scarcity, there is no other
Reason (R) Sustainable development advocates about alternative but to transfer water from surplus to
wealth creation that generates socio-economic scarce areas of the state.
equality and opportunity. (i) Which of the following is/are not an objective(s) of
Alternatives sustainable development?
(a) Both Assertion (A) and Reason (R) are true and Reason (R) (a) Control over growth rate of population
is the correct explanation of Assertion (A). (b) Maintain ecological balance
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) (c) Maintain a dynamic balance of water resources by
is not the correct explanation of Assertion (A). reducing water consumption
(c) Assertion (A) is false, but Reason (R) is true (d) To bring about a gradual and sometimes,
(d) Both the statements are false catastrophic transformation of environment
Ans. (a) Both Assertion (A) and Reason (R) are true and Reason Ans. (d) To bring about a gradual and sometimes,
(R) is the correct explanation of Assertion (A). catastrophic transformation of environment
(vi) The Sustainable Development Goals (SDGs) (ii) Which of the following is not included in the
recognise that all countries must stimulate action in strategies of sustainable development?
the following key areas (a) Maintain carrying capacity of environment
(a) people, planet, prosperity, peace and partnership.
(b) Maintain inter and intra-generation equity
(b) people, planet, prosperity, plants and planning.
(c) people, planet, prosperity, plants and partnership.
(c) Bring gender disparity and diversity
(d) people, planet, prosperity, peace and planning. (d) None of the above
Ans. (a) people, planet, prosperity, peace and partnership Ans. (d) None of the above

3. Direction Read the following text and answer the (iii) The ……… commission emphasises on protecting
question no. (i) to (vi) on the basis of the same. the future generation.
(a) Brundtland
Along with being a basic human need, water is also a
(b) Mundell
basic constituent for the survival of eco-systems of
which people and their cultures are important (c) Indian
components. The water resources distribution in (d) French
India, predominantly an agrarian economy, is highly Ans. (a) Brundtland
asymmetric and has been accompanied by severe (iv) Water is an important resource for all biotic
decline in per capita water availability during the past components. Over use of water has posed a
50 years, with agriculture being the maximum water serious threat on the future generations. Which of
user, leading to over-exploitation of ground water and the following measures can be taken to improve
steadily depleting water tables along with a heavy availability of water across generations?
energy bill. (a) Encouraging rain water harvesting
Gujarat State falls in a water stressed zone of the (b) Check on overuse of ground water level
country and is also the victim of intra-state (c) Spreading awareness about water conservation
asymmetric water availability leading to an unwanted (d) All of the above
socio-economic disparity, with the following results Ans. (d) All of the above
A poor literacy rate in water-deficit districts; (v) Assertion (A) Environmentalists have used the
concentration of industry and housing in regions with term sustainability in an attempt to classify the
better water resources endowment; and demographic defined balance between economic growth and
change, e.g. the shift of the prime workforce from environment conservation.
drought-prone districts to water-surplus districts.
Reason (R) A developmental path is sustainable if
This in turn denies the right to life, development,
the stock of overall capital assets remains constant
health, food, education and work for these migrant
or increases over time.
communities.
100 CBSE Term-II Economics XII

Alternatives (ii) It absorbs waste.

(a) Both Assertion (A) and Reason (R) are true and Reason (R) (iii) It sustains life by providing genetic and
is the correct explanation of Assertion (A). biodiversity.
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) (iv) It also provides aesthetic services like scenery, etc.
is not the correct explanation of Assertion (A).
(c) Assertion (A) is false, but Reason (R) is true 3. Explain how the opportunity costs of negative
(d) Both the statements are false environmental impacts are high? (NCERT)
Ans. (a) Both Assertion (A) and Reason (R) are true and Reason Ans. Opportunity cost of negative environmental impacts are
(R) is the correct explanation of Assertion (A). high in terms of the following
(vi) Match the following (i) The past development has polluted and dried up
rivers and other acquifers making water an
Column I Column II economic good.
A. Condition of sustainable (i) Industrial machines (ii) Due to excessive utilisation of natural resources’,
development we are compelled to spend huge amount of money
B. Reason for noise (ii) Long term increase in on technology and research to discover new
pollution real per capital income resources.
C. Cause of environmental (iii) Reduction in level of (iii) Health cost of degraded environment is rising.
degradation pollution. (iv) Global environmental issues such as global
D. Non-renewable (iv) Rapid industrialisation warming and ozone depletion have also
resources contributed to increased financial commitments for
E. Economic growth (v) Exhausted after use the government.
Codes 4. Is environmental crisis a recent phenomenon? If
A B C D E so, why? (NCERT)
(a) (ii) (iv) (i) (v) (iii) Ans. Yes, environmental crisis is a recent phenomenon. In
(b) (i) (ii) (iii) (iv) (v) early days, when civilisation just began, before the
(c) (iii) (i) (iv) (v) (ii) phenomenal increase in population and growth of
industrialisation, the demand for environmental
(d) (v) (iv) (iii) (ii) (i)
resources was within the carrying capacity of the
Ans. (c) (iii) (i) (iv) (v) (ii) environment and so the pollution was also within the
absorptive capacity of the environment. Therefore,
environmental problems did not arise.
But with the advent of the industrialisation and out
PART 2 break of the population, environmental problems arisen
and the resources for both production and consumption
Subjective Questions proved to be beyond the rate of regeneration of the
resources and the absorptive capacity of the
environment.
l
Short Answer (SA) Type Questions
5. Write a brief note on ozone depletion.
1.
(i) What is meant by environment? Ans. Ozone depletion means the thinning of the ozone layer
(ii) What happens when the rate of resource extraction present in the upper atmosphere which is harmful to
exceeds that of their regeneration? (NCERT) the nature and atmosphere. Ozone layer depletion is
Ans. (i) Environment is defined as the total planetary one of the major problem for all the living beings
inheritance or the totality of all resources. It includes including flora and fauna on this earth. These ozone
all biotic (birds, animals, plants, forest, etc.) and a depletion substances float and then reach the
abiotic (water, sun, land, mountains, etc.) factors that stratosphere.
influence or depend on each other. Therefore, the formation of chlorine and bromine takes
(ii) When the rate of resource extraction exceeds that of place and these chemicals causes the depletion of the
regeneration, then environment fails to perform its ozone layer at a very high speed. They are capable of
important functions and it leads to the situation of breaking down the molecules of the ozone layer. One
environmental crisis. chlorine molecule has the capacity to breakdown
thousands of molecules present in ozone layer.
2. What are the functions of the environment? (NCERT)
Ans. The environment performs four important functions 6. “India has abundant natural resources”.
(i) It supplies resources, both renewable and Substantiate the statement. (NCERT)
non-renewable resources. Ans. India has plenty of natural resources at its disposal.
This becomes clear from the following facts
CBSE Term-II Economics XII 101

(i) India has abundant natural resources in terms of rich (iii) Extraction of groundwater in excess of the
quality of soil, hundred of rivers and tributaries, lost recharge capacity.
green forests, plenty of mineral deposits beneath the (iv) Non-adoption of adequate soil conservation
land surface, vast stretch of the Indian ocean, ranges of measures.
mountains, etc. (v) Improper crop rotation.
(ii) The black soil of the Deccan plateau is particularly (vi) Indiscriminate use of agro chemicals such as
suitable for cultivation of cotton, leading to fertilizers and pesticides.
concentration of textile industries in this region.
(iii) The Indo-Gangetic plains spread from the Arabian sea 10. Give two instances of
to the Bay of Bengal are one of the most fertile (i) overuse of environmental resources.
intensively cultivated and densely populated regions (ii) misuse of environmental resources. (NCERT)
in the world. Ans. Instances of overuse of environmental resources and
(iv) India alone accounts for nearly 20% of the world’s total misuse of environmental resources are as under
iron-ore reserve. Bauxite, copper, chromate, diamonds, (i) Overuse of environmental resources
gold, lead, lignite, manganese, zinc, uranium, etc. are
also available in different parts of the country. (a) Soil degradation due to improper crop rotation
However, the developmental activities in India have and crop shifting.
resulted in pressure on its finite natural resources (b) Drying up of rivers due to overuse of water
besides creating impacts on human health and well from them through dams and reservoirs.
being. (ii) Misuse of environmental resources
7. (i) State any four pressing environmental concerns of (a) Excess use of electricity leads to depletion of
India. resources like coal and water from which
electricity is generated.
(ii) Correction for environment damages involves
opportunity costs. Explain. (NCERT)
(b) Excess use of petrol and diesel in vehicles.
Ans. (i) Four pressing environmental concerns of India are 11. Highlight any two serious adverse environmental
(a) Land degradation and solid waste management consequences of development in India. India’s
environmental problems pose a dichotomy-they are
(b) Bio-diversity loss
poverty induced and at the same time arise due to
(c) Air pollution with special reference to vehicular affluence in living standards, is it true? (NCERT)
pollution in urban cities
Ans. Two serious adverse environmental consequences of
(d) Management of fresh water. development in India are
(ii) Correction for environmental damages involves (i) Land degradation (ii) Air pollution
opportunity costs as the industrial development in past
has polluted and dried up rivers and other aquifers Yes, it is true, the threat to India’s environment is of two
making water an economic good. dimension- threat of poverty induced environmental
degradation and the threat to pollution from affluence.
8. Write a brief note on global warming. Environmental crisis is poverty induced in the sense
Ans. Global warming refers to the increase in average global that poor people depend on natural assets for their
temperature since the industrial revolution. The average survival. They collect forest products and firewood for
global temperature has increased by about one degree their survival. On the other hand, due to affluent
celsius (1.8 degrees fahrenheit) since 1880. Global warming consumption and production standards of the rich
is an ongoing process; scientists expect the average global generate huge amount of wastes. For example, rich
temperature to rise an additional 0.3 to 0.7 degrees celsius people in India own motor vehicles, air conditioners
(0.54–1.26 degrees fahrenheit) through 2035. Higher which heavily contribute to air pollution.
concentrations of these greenhouse gases in the atmosphere
trap more heat on earth, causing an anthropogenic (i.e., 12. How has population explosion and the advent of
human-caused) rise in global temperatures. Climate industrial revolution resulted in environmental
scientists agree that human activity is the main driver crisis?
behind the global warming we are experiencing. Ans. With population explosion and with the advent of
industrial revolution, to meet the growing needs of the
9. Identify six factors contributing to land degradation expanding population, the demand for resources for both
in India. (NCERT) production and consumption has gone beyond the rate of
Ans. Land degradation means loss of fertility of land. Six of the regeneration of the resources and due to this, the
factors responsible for land degradation are pressure on environment has increased tremendously.
(i) Loss of vegetation occurring due to deforestation. The increasing population has led to increased demand
(ii) Unsustainable fuel, wood and fodder extinction. for housing and this has led to widespread deforestation.
102 CBSE Term-II Economics XII

In order to accelerate the process of industrialisation, Future generation have also the right to enjoy the same
natural resources are being used up at a much faster pace. quality of life that is enjoyed by the present generation.
We are now faced with increased demand for Hence, future generation should not suffer at the cost of
environmental resources and services but their supply is present generation well-being.
limited due to overuse and misuse of these resources.
Hence, the environmental issues of waste generation and
17. Distinguish between economic development and
pollution have become critical today. sustainable development.
Ans.
13. Explain the supply demand reversal of environmental
Economic Sustainable
resources. Basis Developement Developement
Ans. Before the advent of the industrial revolution, the rate of
Concept It refers to long term It implies an increase in
resource extraction was less than the rate of regeneration of increase in national national income and
these resources, i.e., demand was less than supply. But with income and per capita welfare of both the
the expanding population and its growing needs, the income. present as well as future
demand for resources for both production and consumption generations.
went beyond the rate of regeneration of the resources. This Environment It does not take into It emphasises on
has resulted in a reversal of supply-demand relationship for Protection account pollution and environmental
environmental resources as now there is very high demand environmental protection.
for environmental resources and services, but their supply protection.
is limited and even these limited resources are being Exploitation In the process, natural In the process, natural
overused and misused. of Natural resources are resources are rationally
Resources exploited. utilised to give benefits
14. “Sustainable development is a paradigm shift in to the future generation.
development thinking”. Comment.
Ans. Sustainable development implies meeting the basic needs
of all and extending to all the opportunity to satisfy their
l
Long Answer (LA) Type Questions
aspirations for a better life, without compromising the 1. “Today development has become a burden on
needs of future. The strategies for sustainable development nature/environment”. Comment.
imply the use of non-conventional sources of energy to
minimise the adverse environmental impacts. Ans. The present thinking with regard to relationship
Promotion of natural resources, conservation, preserving between nature and development is that there should
regenerative capacity of ecological system and avoiding the be maximum exploitation of natural resources for
imposition of environmental rules on future generations development. As a result, people are using nature
would lead to sustainable development. beyond its carrying capacity. Our present technology is
creating a number of environmental problems. A
15. Why is sustainable development so often associated number of non-degradable materials are being
with protecting the environment? produced in present day through the production
Ans. In the 1970s, environmental groups sounded the alarm about technology. Following are the some important reasons
the boom in economic the environment. Their efforts to responsible for the heavy burden on nature
sensitise people to the ecological downside of development (i) Rise in human population in underdeveloped
bore fruit and gradually there emerged an environmental countries.
awareness in societies around the world. (ii) Affluent consumption style in developed countries.
This explains why for many people, it is still a valid (iii) Misuse of production technology in almost all the
association. But sustainable development is really a much countries and poor planning of development.
broader concept, which puts human beings at the heart of
As a result of above, there is a reckless use of resources
decision-making. It brings a new way of conceiving and
creating negative effects on the society.
carrying. In the 1980s, the concept of sustainable
development was associated with protecting the The negative effects of development on nature are:
environment and development in which economic, social (i) Pollution (ii) Degradation of resources
and environmental considerations are all taken into 2. What is meant by global warming? Give any five
account.
effects of global warming.
16. Explain the relevance of intergenerational equity in Ans. The gradual increase in average temperature of Earth’s
the definition of sustainable development. (NCERT) lower temperature is called global warming.
Ans. Sustainable development is the development that meets the Different effects of global warming are described below
needs of the present generation without compromising the (i) During the past century the atmospheric
ability of the future generation to meet their own needs. temperature has risen by 1.10°F (0.60°C).
This definition of sustainable development is most
appropriate and justified.
CBSE Term-II Economics XII 103

(ii) Melting of polar ice resulted in increase in sea level (viii) Reduction of Forest Coverage The per capita forest
(during the past century, sea level has risen by land in the country is only 0.08 hectare. There is an
several inches) and the risk of coastal flooding has excess felling of about 15 million cubic meter forests
increased. over the permissible limit.
(iii) Disruption of drinking water supplies, dependent Indiscriminate felling of trees has led to destruction of
on snow melts. forest cover.
(iv) Extinction of species. Once forests have been cut down, essential nutrients
(v) More frequent tropical storms. are washed out of the soil all-together. This leads to
soil erosion. It leads to disastrous flooding since there
3. How do the following factors contribute to the is no soil to soak up the rain.
environmental crisis in India? What problem do (ix) Poaching Poaching leads to extinction of wildlife.
they pose for the government? (NCERT) Generally, wild species which are endangered are
(i) Rising population poached leading to the danger of them becoming
(ii) Air pollution extinct.
(iii) Water contamination (x) Global Warming The long-term results of global
(iv) Affluent consumption standards warming are
(v) Illiteracy (a) Melting of polar ice caps with a resulting rise in
(vi) Industrialisation the sea level and coastal flooding.
(vii) Urbanisation (b) Disruption of drinking water supplies as snow
melts.
(viii) Reduction of forest coverage
(ix) Poaching 4. Outline the steps involved in attaining sustainable
(x) Global warming development in India.
Ans. (i) Rising Population The high rate of growth of Ans. Sustainable development refers to the achievement of
population adversely affects the environment. It economic development by careful and judicial utilisation of
certainly leads to soil and water pollution. the natural resources so that the present generation needs
are fulfilled without compromising that of the future
(ii) Air Pollution India is one of the ten most
generations’. Aligned with the view of a leading
industrialised nations of the world. It has led to
environmental economist, Herman Daly, India has taken
unplanned urbanisation, pollution and the risk of
the following steps to achieve the aim of sustainable
accidents. The CPCB (Central Pollution Control
development
Board) has identified 17 categories of industries
which are significant polluters. (i) Population Control Measure India has promoted
various measures to arrest population explosion. The
(iii) Water Contamination Many states in India are on
various population control measures include spread of
the edge of famine. Whatever water is available, it
awareness and knowledge of birth control measures
is polluted or contaminated. It causes diseases like
and literacy.
diarrheao and hepatitis.
(ii) Use of Environment Supportive Fuel As the fuels
(iv) Affluent Consumption Standards With affluent
such as petrol and diesel emit huge amount of carbon
consumption standards, people use more air
dioxide that leads to global warming so, the Indian
conditioners. CFCs are used as cooling agents in
government has promoted the use of CNG and LPG.
air conditioers which leads to ozone depletion.
These clean, eco-friendly fuels emit lesser smoke.
(v) Illiteracy Illiteracy and ignorance about the use of
(iii) Use of Solar and Wind Energy India, being a
non- renewable resources and alternative energy
moderate country, is enriched with sunlight and wind
sources, lead to environmental crisis.
power. These are two free gifts of nature are non-
(vi) Industrialisation With rise in national income or exhaustible. It solves the problem of economic growth
economic activity, there is rise in industrialisation with due focus on sustainable development.
and urbanisation. This raises pollution of air, water
(iv) Recycling and Ban on Plastic Bags The industrial
and noise. There are accidents, shortage of water,
and household wastes are accumulated on daily basis.
housing problems, etc. In other words, with rise in
There is a need to develop the habit of recycling of
national income, there is ecological degradation
waste products in order to sustain the environment.
which reduces welfare of the people.
Household waste can be used as manure for organic
(vii) Urbanisation Whenever there is large migration of farming. A very recent step taken by the Indian
population from rural to urban areas, it leads to fast government is banning the use of plastic bags. This is
growth of slum areas. There is excess of load on the a very good step as plastic bags do not get
existing infrastructural facilities. It causes decomposed easily and leads to pollution while
environmental degradation and ill-health. recycling.
104 CBSE Term-II Economics XII

5. Briefly discuss any four strategies of sustainable For example, we use sunlight to get the clothes
development. drains dried, to keep our body warm in winter with
the help of photovoltaic cells, etc. Solar energy can
Ans. Four strategies of sustainable development are as follows
be converted into electricity.
(i) Use of Non-conventional Sources of Energy India is
These cells use special kind of materials to capture
hugely dependent on thermal and hydro power plants
solar energy and then convert the energy into
to meet its power needs. Both of these have adverse
electricity.
environmental impacts, thermal power plants emit
large quantities of carbon dioxide which is a green This energy is extremely useful for remote area
house gas while hydroelectric project inundate forests and for place where supply of power through grid
and interfere with the natural flow of water in or power lines are either not possible or are very
catchment areas and the river basins. costly.
(ii) LPG, Gobar Gas in Rural Areas Households in rural (iv) Mini–hydel Plants In mountainous regions,
areas generally use wood, dung cake or other bio-mass stream can be found almost everywhere. A large
as fuel. This practice has several adverse implications percentage of such streams are perennial. Mini-
like deforestation, reduction in green cover, wastage of hydel plants use the energy of such streams to
cattle dung and air pollution. To rectify the situation, move small turbines which generate electricity
subsidised LPG is provided and gobar gas plants are that can be used locally.
provided. LPG is a clean fuel, which reduces Such power plants are more or less environment-
household pollution to a large extent. Also, energy friendly as they do not use pattern in areas where
wastage is minimised. they are located.
(iii) Solar Power through Photovoltaic Cells India is They generate enough power to meet local
naturally endowed with a large quantity of solar demands. This shows that they can reduce the
energy in the form of solar energy through sunlight. requirement of large scale transmission tower and
We use it in different ways. cables and avoid transmission loss.
Chapter Test
Multiple Choice Questions
1. The maximum number of individual that can be supported by a given environment is called
(a) Biotic potential (b) Environmental resistance
(c) Carrying capacity (d) Population size
2. An adulterated element leak into the ground filtration and are carried into a ground water reservoir is known as ……… .
(a) Land contamination (b) Noise pollution
(c) Water pollution (d) Air pollution
3. When the consumption of natural resource is equal to the nature’s ability to replenish, then sustainability is ……… .
(a) not sustainable (b) steady state economy
(c) environmentally sustainable (d) None of these
4. What is ‘3E’?
(a) Energy, Economy and Environment
(b) Reduce, Reuse and Recycle
(c) Energy, Economy and Envision
(d) Ergonomics, Evolution and Economy
5. Which of the following relates the three elements of ‘3E’?
(a) Energy from fossil fuels
(b) Energy from natural gas
(c) Renewable energy sources and technology
(d) Economy

Short Answer (SA) Type Questions

1. Explain carrying capacity of environment with examples.
2. How population growth is the cause of depletion of natural resources?
3. (i) How does thermal power plant cause pollution?
(ii) How do animals help in bio-pest control?
4. ‘‘Water has become an economic commodity.’’ Justify the statement.
5. Explain the term ‘affluence trap’.

Long Answer (LA) Type Questions

1. How does air pollution contribute to the environmental crisis in India?
2. Give the benefits and limitations of using solar power.

Answers
Multiple Choice Questions
For Detailed Solutions
1. (c) 2. (c) 3. (b) 4. (a) 5. (c)
Scan the code
106 CBSE Term-II Economics XII

CHAPTER 04

Comparative Development
Experience of India and
Its Neighbours

In this Chapter...
l India and its Neighbours
l Comparative Study between Countries
l Development Strategies-An Appraisal

l
Economic reforms took place in all the three countries.
India and its Neighbours Reforms started in India in 1991, in China in 1978 and in
The process of globalisation has made the whole world a global Pakistan in 1988.
village. Because of this, there is an increasing eagerness in
various nations to try and understand the developmental Development Strategies of India
strategies pursued by their neighbouring nations as it helps Some of the prominent strategies of India are discussed
them to comprehend their own strengths and weaknesses. below
Therefore, it is necessary for India to understand 1. Sound Trade System India initiated economic reforms
the developmental strategies pursued by two of its most in 1991 and introduced globalisation, liberalisation and
important neighbours viz. Pakistan and China.
privatisation as measure to encourage global and
domestic trade. These reforms formed a basis of a
Development Strategies of sound trade system and encouraged economic growth.
India, China and Pakistan 2. Reduction in Poverty India has adopted several
India, China and Pakistan have many similarities in their poverty alleviation programmes to reduce poverty in
development strategies which are as follows India. This helped in increasing per capita income and
l
All the three countries had started planning their rise in nutrition level of poor.
development strategies in similar ways. India announced its
3. Rural Development Under this strategy, India
Five Year. Plan in 1951-56, while Pakistan announced its
First Five Year Plan in 1956, which is called Medium Term adopted various measures for the development of areas
Plan. China announced its First Five Year Plan in 1953. that were lagging behind in the rural economy.
l
India and Pakistan adopted similar strategies such as 4. Employment Generation Several economic reforms
creating a large public sector and raising public expenditure were initiated to generate employment in the country.
on social development. Many employment generation programmes were also
l
Till the 1980s, all the three countries had similar growth initiated with an aim to provide gainful self-employment.
rates and per capita incomes.
CBSE Term-II Economics XII 107

Development Strategies of China

Certain development strategies of China are discussed below
1. Great Leap Forward (GLF) Campaign This campaign, initiated in 1958, aimed at industrialising the country on a massive
scale. People were encouraged to set up industries in their backyards. In rural areas, communes were started under which,
people collectively cultivated land. However, this campaign met with many problems, important among them are
A severe drought caused havoc in China, killing about 30 million people.
l

Due to a political conflict, Russia withdrew its professionals from China which were sent to help in the industrialisation
l

process.
2. Great Proletarian Cultural Revolution (1966-76) In this revolution, students and professionals were sent to work and
learn from the countryside. Unlike GLF campaign, the cultural revolution did not have an explicit economic rationale.
3. 1978 Reforms Since 1978, China began to introduce many reforms in phases. The reforms were initiated in agriculture,
foreign trade and investment sector. In agriculture, lands were divided into small plots which were allocated to individual
households. In later phase, reforms were initiated in industrial sector. All enterprises which were owned and operated by
local collectives in particular, were allowed to produce goods.

Development Strategies of Pakistan

The development strategies of Pakistan are discussed below
1. Mixed Economy Pakistan follows a mixed economy system where both public and private sectors co-exist.
2. Import Substitution Pakistan adopted a regulatory policy framework in the late 1950s and 1960s for import substitution
industrialisation. The policy combined tariff protection for manufacturing of consumer goods together with direct import
controls on competing foreign goods.
3. Green Revolution This was introduced to increase the productivity and self-sufficiency in food. This increased the output
of foodgrains and changed the agrarian structure dramatically.
4. Nationalisation of Capital Goods Industries In 1970s, nationalisation of capital goods industries took place. Pakistan
shifted its policy orientation in 1970s and 1980s when private sector got encouragement.

Comparative Study Between Countries

We will have a comparative study between India, China and Pakistan with respect to demographic indicators, GDP and HDI.

Demographic Indicators
We shall compare some demographic indicators of India, China and Pakistan
l
Out of every six persons living in this world, one is an Indian and one is Chinese. The population of Pakistan is very small
and accounts for roughly about one-tenth of China or India. Though China is the largest nation and geographically occupies
the largest area among the three nations, its density is the lowest.
l
One child norm was introduced in China in late 1970s to check the problem of population growth. This measure led to
decline in the sex ratio. Although sex ratio is biased against females in all three countries, in recent times, all three countries
are trying to adopt various measures to improve the situation.
l
The fertility rate is low in China and very high in Pakistan.
l
Urbanisation is high in both Pakistan and China. China and Pakistan have more proportion of urban people than India.
Selected Demographic Indicators, 2017-18
Country Estimated Population Annual Growth of Density Fertility Urbanisation
Sex Ratio
(in million) Population (per sq km) Rate
India 1352 1.03 455 924 2.2 34
China 1393 0.46 148 949 1.7 59
Pakistan 212 2.05 275 943 3.6 37

Source World Development Indicators, www.worldbank.org

108 CBSE Term-II Economics XII

Gross Domestic Product and Sectors

According to the latest data available, we find
l
China has the second largest GDP (PPP) of US$ 22.5 trillion whereas, India’s GDP (PPP) is US$ 9.03 trillion and Pakistan’s
GDP (PPP) is US $ 0.94 trillion, roughly about 11% of India’s GDP.
l
In 1980s, Pakistan was ahead of India, China was having double-digit growth and India was at the bottom.
l
In 2015-17, there has been a decline in Pakistan and China’s growth rate, whereas India met with moderate increase in
growth rates.
l
In China, the area suitable for cultivation is relatively small; only about 10% of its total land area. The total cultivable area in
China accounts for 40% of the cultivable area in India.
l
Until the 1980s, more than 80% of the people in China were dependent on farming as their sole source of livelihood. In
2018-19, with 26% of its workforce engaged in agriculture, its contribution to GDP in China is 7%.
Sectoral Share of Employment and GVA (%) in 2018-19
Contribution to GVA Distribution of Workforce

Sector India China Pakistan India China Pakistan

Agriculture 16 7 24 43 26 41
Industry 30 41 19 25 28 24
Service 54 52 57 32 46 35
Total 100 100 100 100 100 100

Source Human Development Report 2019; Key Indicators of Asia and Pacific 2019
l
In both India and Pakistan, the contribution of agriculture to GVA were at 16% and 24% respectively. In Pakistan, about
41% of people work in agriculture whereas in India it is 43%.
l
The sectoral share of output and employment also shows that in all the three economies, service sector contributes highest
share of GVA. Service sector is emerging as major player of development.
l
24% of Pakistan workforce is engaged in industry but it produces 19% of GVA. In India, industry workforce account for 25%
but produces goods worth 30% of GVA. In China, industries contribute to GVA at 41% and employ 28% of workforce.
l
The proportion of workforce engaged in industry in India and Pakistan were low at 25 and 24% respectively.
l
In the 1980s India, China and Pakistan employed 17, 12 and 27% of its workforce in the service sector respectively. In 2019,
it has reached the level of 32, 46 and 35% respectively.
Trends in Output Growth in Different Sectors, 1980–2015
1980–90 2014–2018
Country Agriculture Industry Service Agriculture Industry Service
India 3.1 7.4 6.9 3.1 6.9 7.6
China 5.9 10.8 13.5 3.1 5.3 7.1
Pakistan 4 7.7 6.8 1.7 4.8 5.0
l
In the last five decades, the growth of agriculture sector, which employs the largest proportion of workforce in all the three
countries has declined.
l
In the industrial sector, China has maintained annear double-digit growth rate in 1980s, but began showing decline in
recent years. Whereas, for India and Pakistan, growth rate has declined.
l
In case of service sector, China was able to maintain its rate of growth during 1980-1990 while there was a positive and
increasing growth of India’s service sector output.
CBSE Term-II Economics XII 109

Human Development Indicator

The performance of India, China and Pakistan in some of the selected indicators of human development are given below
Some Selected Indicators of Human Development, 2017–19
Items India China Pakistan
Human Development Index (Value) 0.645 0.761 0.557
Rank (Based on HDI) 130 87 154
Life expectancy at birth (Years) 69.7 76.9 67.3
Mean years of schooling (% aged 15 and above) 6.5 8.1 5.2
GDP per capita (PPP US $) 6,681 16,057 5,005
People below poverty line (%) (National) 21.9* 1.7** 24.3*
Infant mortality rate (Per 1,000 live births) 29.9 7.4 57.2
Maternal mortality rate (Per 1 lakh births) 133 29 140
Population using at least basic sanitation (%) 60 75 60
Population using at least basic drinking water source (%) 93 96 91
Percentage of children under nourished 37.9 8.1 37.6

Note *For the year 2011; ** For the year 2015

Sources Human Development Report 2019 and 2020 and World Development Indicators (www.worldbank.org), Key indicators for Asia and
the Pacific 2019, Asian Development Bank (ADB).
From the data, we would be able to conclude that
l
China is moving ahead of both India and Pakistan in terms of indicators of human development.
l
China and Pakistan are ahead of India in reducing proportion of people below the poverty line and also its performance in
sanitation.
l
In China, for one lakh births, only 29 women die whereas, in India 133 women die and in Pakistan 144 women die.
l
All the three countries report providing improved drinking water sources for most of its population. China has a smallest
share of poor among the three countries.

Development Strategies-An Appraisal

The success and failures of development strategies pursued by China and Pakistan have been discussed below
Success of Structural Reforms in China
l
There was existence of infrastructure in the areas of education and health and land reforms.
l
There was decentralised planning and existence of small enterprise.
l
Through the commune system, there was more equitable distribution of foodgrains.
l
There was extension of basic health services in rural areas.
Failures of Structural Reforms in China
l
There was slow pace of growth and lack of modernisation in the Chinese economy under the Maoist rule.
l
Maoist vision of economic development based on decentralisation, self-sufficiency and shunning of foreign technology
had failed.
l
Despite extensive land reforms, collectivisation, the great leap forward and other initiatives, the per capita gain in output in
1978 was the same as it was in the mid-1950s.
Success of Structural Reforms in Pakistan
l
Pakistan has succeeded in more than doubling its per capita income inspite of high growth rate of population.
l
Pakistan has achieved self-sufficiency in the production of food.
l
Pakistan has succeeded in developing its service and industry sectors at a fast rate.
l
The use of modern technology is improving in Pakistan.
Failures of Structural Reforms in Pakistan
l
Growth rate of GDP and its sectoral constituents have fallen in 1990s.
l
Poverty and unemployment are still areas of major concerns.
110 CBSE Term-II Economics XII

Chapter
Practice
Codes
PART 1 A B C D E A B C D E

Objective Questions (a) (iii)

(c) (i)
(v)
(ii)
(i) (ii) (iv)
(iii) (iv) (v)
(b)
(d)
(iv) (ii) (i) (v) (iii)
(ii) (i) (iv) (iii) (v)
Ans. (a) (iii) (v) (i) (ii) (iv)
l
Multiple Choice Questions 5. Name any two areas where India is ahead of
1. Which of the following is the feature of Indian Pakistan?
economy? (a) Human development index and rate of GDP
(a) Contribution of industry to GDP is the highest (b) Rate of GDP and infant mortality rate
(b) Contribution of agriculture to employment is the largest (c) Improvement in health sector and rate of GDP
(c) High level of human development (d) Rate of GDP and per capita income.
(d) Poor growth of service sector Ans. (d) Rate of GDP and per capita income.
Ans. (b) Contribution of agriculture to employment is the 6. The LPG model of development in context of
largest Indian economy aimed at ……… .
2. Which of the following features relates to the (a) export led growth strategy as against import
substitution strategy
Chinese economy?
(b) import led growth strategy as against export led growth
(a) Very high fertility rate
(c) encouraging FDIs to support the growth process
(b) Growth due to service sector (d) Correctly explained by (a) and (c)
(c) Growth due to manufacturing sector
Ans. (d) The LPG model of 1991emphasized the role of private
(d) High density of population sector and advocated more liberal and market driven
Ans. (c) Growth due to manufacturing sector pattern of development.
3. Special Economic Zones are set up by China to 7. Which particular year marked the introduction of
(a) attract foreign investors economic reforms in Pakistan?
(b) to develop the backward regions (a) 1978 (b) 1980 (c) 1988 (d) 1991
(c) to maintain income equality Ans. (c) In 1988, Pakistan adopted the model of liberalisation,
(d) to promote private sector stabilisation and structural adjustment.
Ans. (a) Policy regarding special economic zones were meant 8. Find the correct sequence explaining the commenc-
to incentivise foreign investors by providing low-cost ement of five year plans in chronological order.
labour, specifically planning economic zones with ports
(a) India, China and Pakistan
and airports so that goods and material could be easily
exported, reducing corporate income tax and even (b) Pakistan, China and India
offering tax exemption. (c) China, India and Pakistan
(d) India, Pakistan and China
4. Match the following.
Ans. (a) India commenced its five year plan s in 1951 while
Column I Column II China in 1953 and Pakistan in 1956.
A. Economic development in China (i) Mao 9. Arrange the given events in chronological order and
B. India’s new development policy (ii) China choose the correct alternative.
C. The great leap forward (iii) 1978
(i) Great Proletarian Cultural Revolution
(ii) Great Leap Forward Campaign
D. Commune (iv) Pakistan
(iii) Introduction of Economic Reforms
E. First contribution in 1956 (v) 1991 (iv) First Five Year Plan
CBSE Term-II Economics XII 111

Alternatives 16. Choose the correct statement from the following.

(a) (ii), (iv), (iii), (i) (b) (iv), (ii), (i), (iii) (a) China’s economy growth is mainly contributed by the
(c) (ii), (iv), (i), (iii) (d) (iv), (i), (ii), (iii) service sector.
Ans. (b) (iv), (ii), (i), (iii) (b) One child norm policy was adopted in India.
(c) The largest share in national income comes from
10. ……… is the population density, the ……… is the agriculture in India.
pressure of population on land and more are the (d) Pakistan is ahead of India in providing improved
economic problems. sanitation facilities.
(a) Lower, higher (b) Lower, lower Ans. (d) Pakistan is ahead of India in providing improved
(c) Higher, lower (d) Higher, higher sanitation facilities.
Ans. (d) The population density of an area can greatly affect 17. Which of the following is not an indicator of human
that area’s economy and social conditions.
development index?
11. Structural changes are ……… . (a) National income
(a) changes in the relative contribution of tertiary sector (b) GDP per capita
of Indian economy (c) Life expectance at birth
(b) changes in relative structure of primary sector of (d) Literacy rate
Indian economy
Ans. (a) National income
(c) All of the above
(d) changes in the relative contribution of primary sector 18. Which of the following nation has most skewed sex
of Indian economy ratio?
Ans. (d) A structural change is an economic condition that (a) India (b) China
occurs when an industry or market changes. How it (c) Pakistan (d) None of these
functions or operates an instance of such a change or
Ans. (a) Sex ratio is the number of female per thousand males.
improvement.
Amongst the given three nations, India has the lowest sex
12. In Pakistan, the reforms were introduced as a result ratio of 929 females per thousand males.
of the pressure from 19. The main reason that can be argued for high
(a) IMF (b) World Bank growth of population in context of India and
(c) Swis Bank Pakistan is ……… .
(d) Both IMF AND World Bank (a) high level of illiteracy and high fertility rates
Ans. (d) Both IMF and World Bank (b) low level of illiteracy and low fertility rates
13. The reason for slow growth rate and re-emergence (c) high level of illiteracy and low fertility rates
of poverty is ……… . (d) low level of illiteracy and high fertility rates
(a) earning more foreign exchange Ans. (a) In 2012, fertility rates in Pakistan, India and China
(b) growing dependence on foreign loan were 3.3, 2.6 and 1.6 respectively.
(c) decline in poverty rate 20. Highlight the success which is not common
(d) All of the above between India and Pakistan?
Ans. (b) There was an increasing dependence on foreign loan (a) Reduction in poverty
and repayment of these loans became difficult. New loans (b) Self sufficient in food production
were taken to repay older ones and thus, interest (c) Rise in GDP per capita
obligation mounted over years.
(d) Dismal fiscal management
14. ……… has followed the classical development Ans. (d) Dismal fiscal management
pattern of gradual shift from agriculture to
manufacturing and then to service. l
Assertion-Reasoning MCQs
(a) Pakistan (b) India
Direction (Q. Nos. 1 to 6) There are two statements
(c) China (d) All of these
marked as Assertion (A) and Reason (R). Read the
Ans. (c) China
statements and choose the appropriate option from the
15. Per capita GNI means options given below
(a) how much is country’s national income (a) Both Assertion (A) and Reason (R) are true and
(b) how much is country’s GDP Reason (R) is the correct explanation of Assertion (A).
(c) how much on average a person earns (b) Both Assertion (A) and Reason (R) are true, but
(d) how much on an average a country earns Reason (R) is not the correct explanation of Assertion (A)
(c) Assertion (A) is true, but Reason (R) is false
Ans. (c) how much on an average a person earns (d) Assertion (A) is false, but Reason (R) is true
112 CBSE Term-II Economics XII

1. Assertion (A) India and Pakistan adopted the mixed l

Case Based MCQs
economic model. 1. Direction Read the following text and answer the
Reason (R) Mixed economic model allows both question no. (i) to (vi) on the basis of the same.
public and private sector to work hand-in-hand
Though India, Pakistan and China have totally
thereby allowing for efficiency.
different political systems but all of them have
Ans. (a) Both Assertion (A) and Reason (R) are true and Reason
followed plans for their economic and social
(R) is the correct explanation of Assertion (A).
development. India and Pakistan have followed the
2. Assertion (A) The major policy initiatives, i.e. land path of mixed economy. China, on the other hand,
reforms and green revolution helped India to had command economy. All the three countries
become self-sufficient in food grain production. launched their economic development programme
Reason (R) The proportion of people depending on almost simultaneously in the early part of the
agriculture did not decline as excepted. decade of 1950s. While India and Pakistan
Ans. (b) The green revolution has made India self-sufficient in depended heavily on the public sector for giving a
food grain production. India has adopted a new strategy in big push to the economy, China was absolutely the
the field of agriculture. In this, insecticides and pesticides state controlled economy.  Till the early 1980s, the
were used which resulted in great production of wheat and major development indicators of all the three
rice. Due to green revolution, highest rate of growth was nations such as growth rate, sectorial distribution of
achieved in Punjab and Haryana. output/income and employment and human
development were more or less similar. The level of
3. Assertion (A) Every year the government fixes a development was also low in all these three
target for disinvestment of private sector enterprise. countries. But with the introduction of economic
Reason (R) Disinvestment is an excellent tool for reforms, changes in their level of development
discarding the loss incurring public sector enterprise. became visible. As a result of various policy
Ans. (d) Disinvestment targets are set under each union budget measures in three countries, China has surpassed
and every year the target changes. The government takes both India and Pakistan in terms of social and
final decision on whether to raise disinvestment target or economic development.
not. Disinvestment means sale or liquidation of assets by
the government, usually of central and state public sector (i) What is peculiar about the structural transformation
enterprises, projects and other fixed assets. process in context of Indian and Pakistan economy?
(a) Balanced development of all the sectors with equal
4. Assertion (A) Regional and economic groups are contribution to the GDP
formed to strengthen the economies of member (b) Direct jump from agriculture to services with later
nations. contributing more to the GDP
Reason (R) It helps to understand the development (c) Transformation in the economic outlook- from
process followed by member countries and evaluate agrarian to industrial
(d) A jump from agriculture to industry with later
our own strength and weakness. contributing more to the GDP
Ans. (a) Both Assertion (A) and Reason (R) are true and
Ans. (b) The ‘structural change’ theory argues that with
Reason (R) is the correct explanation of Assertion (A).
development, the share of agriculture sector declines and
5. Assertion (A) India, Pakistan and China have started that of industry becomes dominant and at higher levels of
planning their developmental strategies in the same development, the service sector contributes more than
way. the other two sectors. However, in context of India and
Pakistan, there has been a jump directly from agriculture
Reason (R) India, China and Pakistan have started
to services in context of GDP contribution.
working on their developmental plans at the same
time. (ii) Which of the following pair is incorrectly matched
Ans. (b) China announced its first five year plan in 1953. India with regard to the introduction of economic
and Pakistan adopted similar strategies such as creating a reforms in context of the given three nations?
large public sector and raising public expenditure on
Column I Column II
social development. Till the 1980s, all the three countries
have similar growth rate and per capita income. A. India (i) 1991
B. China (ii) 1998
6. Assertion (A) There was low population growth in
C. Pakistan (iii) 1988
China.
Reason (R) One child policy was adopted by China. Codes
Ans. (a) Both Assertion (A) and Reason (R) are true and Reason (a) A-1 (b) B-2 (c) C-3 (d) None of these
(R) is the correct explanation of Assertion (A). Ans. (b) Reforms were introduced in China in 1978.
CBSE Term-II Economics XII 113

(iii) Which of the following factor is relates close to the foreign currency reserves facilitates trade with
Chinese economy? other nations and lowers transaction costs
(a) Very high fertility rate associated with international commerce. If a nation
(b) Growth due to the service sector depletes its foreign currency reserves and finds that
(c) Growth due to the manufacturing sector its own currency is not accepted abroad, the only
(d) High density of population option left to the country is to borrow from
Ans. (c) China’s growth is primarily encouraged by the growth abroad.
of the manufacturing sector. 1991 is often cited as the year of economic reform
(iv) As against India’s rank at 131, the HDI rank of in India. Surely, the government’s economic
Pakistan for the year 2020 is 154. The given policies changed drastically in that year.
statement is The Import-Export Policy of 1985-1988 replaced
(a) True import quotas with tariffs.
(b) False This represented a major overhaul of Indian trade
(c) Partially true, true for India and false for Pakistan policy as previously, India’s trade barriers mostly
(d) None of the above took the form of quantitative restrictions.
Ans. (a) True After 1991, the Government of India further
(v) Which of the following factors is not considered reduced trade barriers by lowering tariffs on
while constructing the HDI Index? imports. In the post-liberalisation era, quantitative
(a) Long and healthy life measured by life expectancy at
restrictions have not been significant.
birth While the devaluation of 1991 was economically
(b) Knowledge as measured by the adult literacy rate necessary to avert a financial crisis, the radical
(c) A good environment as measured by appropriate changes in India’s economic policies were, to some
environment policies extent, undertaken voluntarily by the government
(d) A decent standard of living as measured by GDP per of P V Narasimha Rao.
capita
(i) The reforms under liberalisation in the above
Ans. (c) A good environment as measured by appropriate situation were referred to as ……… .
environment policies
(a) depreciation
(vi) Assertion (A) Dual price policy in China was an (b) devaluation
attempt to encourage industrialisation. (c) appreciation
Reason (R) Special Economic Zones were an (d) revaluation
attempt to attract foreign capital in the country. Ans. (b) devaluation
Alternatives (ii) Which of the following reason(s) is/are responsible
(a) Both Assertion (A) and Reason (R) are true and Reason for removal of licensing policy in India?
(R) is the correct explanation of Assertion (A). (a) To reduce inefficiency of public sector
(b) Both Assertion (A) and Reason (R) are true, but
(b) Increase the role of private sector
Reason (R) is not the correct explanation of
Assertion (A). (c) To attract foreign investment
(c) Assertion (A) is false, but Reason (R) is true (d) All of the above
(d) Both the statements are false Ans. (b) Increase the role of private sector
Ans. (b) Chinese economic reformers took the view that the (iii) As compared to India, Pakistan opted for which of
best way was to keep the existing planned economy, but the following policies during the economic reforms
gradually to build up a free market system alongside. of 1988?
2. Direction Read the following text and answer the (a) Liberalisation
question no. (i) to (vi) on the basis of the same. (b) Privatisation
Since its independence in 1947, India has faced (c) Globalisation
two major financial crises and two consequent (d) All of these
devaluations of the rupee. These crises were in Ans. (d) All of these
1966 and 1991 and this paragraph highlights the (iv) Which of the following reginal economic groups
case of 1991. are formed between India, China and Pakistan?
Foreign exchange reserves are an extremely critical (a) ASEAN (b) G-8
aspect of any country’s ability to engage in (c) SAARC (d) All of these
commerce with other countries. A large stock of Ans. (d) All of these
114 CBSE Term-II Economics XII

(v) Assertion (A) China has done better than India 2. What similar development and strategies have India
and Pakistan, as it is a socialist economy. and Pakistan followed for their respective
Reason (R) In socialism, government can development paths? (NCERT)
implement policies which are in interest of Ans. They followed following similar strategies in their
people. respective development plans
(i) Both India and Pakistan have followed five year
Alternatives
planning. India announced its first plan in 1951and
(a) Both Assertion (A) and Reason (R) are true and Pakistan in 1956.
Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but (ii) Both nations adopted a strategy of creating a large
Reason (R) is not the correct explanation of public sector and raising public expenditures on
Assertion (A). social development.
(c) Assertion (A) is false, but Reason (R) is true (iii) Both of them have adopted the mixed economic
(d) Both the statements are false system involving the co-existence of both the public
and the private sector.
Ans. (a) Both Assertion (A) and Reason (R) are true and
Reason (R) is the correct explanation of Assertion (A). 3. China’s rapid industrial growth can be traced back
(vi) Read the following statements given below and to its reforms in 1978. Do you agree? Elucidate.
choose the correct alternative. (NCERT)
Statement I In 1980s, India, China and Pakistan Ans. Yes, it cannot be denied that China’s rapid industrial
had similar growth rate. growth is an aggregate outcome of the various economic
reforms that were introduced in phases since 1978. In the
Statement II Fertility rate in India was lowest in initial phase, reforms were initiated in agriculture, foreign
2017-18. trade and investment sectors. The system of collective
Alternatives farming known as Commune System was implemented.
(a) Both are correct. In the later phase, reforms were initiated in the industrial
(b) Both are incorrect sector. During this phase, the private firms, village and
(c) Statement I is correct and Statement II is incorrect. township enterprises were allowed to produce goods and
(d) Statement I is incorrect and Statement II is correct. services and to compete with the state owned enterprises.
The reforms also included dual pricing.
Ans. (c) Fertility rate in China was lowest in 2017-18.
The reforms also included setting up of special economic
zones to attract foreign investors. Therefore, China’s rapid
industrial growth is attributable to the success of different
phases of its economic reforms.
PART 2
4. Critically appraise the development strategies of
Subjective Questions Pakistan.
Ans. The development strategies of Pakistan are summarised
below
l
Short Answer (SA) Type Questions (i) Mixed Economy Pakistan follows a mixed economy
1. What are the various means by which countries are system where both the public and private sectors
trying to strengthen their own domestic co-existed.
economies? (NCERT) (ii) Import Substitution Pakistan adopted a regulatory
Ans. The various means used by countries to strengthen their policy framework in the late 1950s, and 1960s for
own domestic economies are import industrialisation.
(i) Countries are forming regional and economic groups The policy combined tariff protection for
such as SAARC, European union, G-8, G-20, etc. manufacturing of consumer goods together with
direct import controls on competing imports.
(ii) Countries try to understand the development
processes followed by their neighbouring countries (iii) Green Revolution This was introduced to increase
as it helps them to better understand their strength productivity and self-sufficiency in food. This
and weakness. increased the output of food grains. This had changed
the agrarian structure dramatically.
(iii) Nations have also resorted to liberalise their
economies by minimising government interference In 1970’s, nationalisation of capital goods took place.
in economic activities. The economy is governed by Pakistan shifted its policy orientation in 1970’s and
market forces which promote efficiency and 1980’s when the private sector got
strengthen the economy. encouragement.
CBSE Term-II Economics XII 115

5. (i) What is the important implication of the ‘one 9. Critically assess pre and post-reform period in China.
child norm’ in China? Ans. Pre-reform Period
(ii) Explain the great leap forward campaign of (i) There was massive establishment of infrastructure in
china as initiated in 1958. (NCERT) the areas of education and health.
Ans. (i) One child policy was introduced in china in the late (ii) Extensive land reforms were introduced to bring
1970s. This policy resulted in a decline in the about changes in the ownership of land holdings and
growth of population. It has an important encourage equity.
implication also. After a few decades, there will be (iii) Development of small enterprises was promoted on
more elderly people in proportion to young people. a large scale.
This will compel China to initiate step to provide Post-reform Period
social security measures with fewer workers
(i) Reforms in agriculture brought about prosperity to a
(ii) The great leap forward campaign initiated by China vast number of poor people.
in 1958 aimed at industrialising the country on a
massive scale. Under this programme, people were (ii) Reforms created conditions for the subsequent
encouraged to set up industries in their backyards. phenomenal growth in rural industries.
The system of collective farming known as commune (iii) Strong support base was built up for more reforms.
system was implemented. 10. ‘‘India, China and Pakistan have many similarities
6. Mention the salient demographic indicators of in their development strategies.’’ Elaborate.
China, Pakistan and India. (NCERT) Ans. India, China and Pakistan have many similarities in
Ans. The salient demographic indicatiors of China, Pakistan development strategies which are as follows
and India are discussed below (i) All the three countries had started planning their
(i) China is the most populous country followed by India development strategies in similar ways. India
with 1352 million and Pakistan with 212 million. announced its five year plan in 1951-56, while
Pakistan announced its first five year plan in 1956,
(ii) China has the lowest density of population and India
which is called ‘Medium Term Plan’ China announced
has the highest with 455. For Pakistan this figure is
its first five year plan in 1953.
275.
(ii) India and Pakistan adopted similar strategies such as
(iii) Sex ratio is baised against females in all the three
creating a large public sector and raising public
nations. It is estimated at 924, 949 and 943 for India,
expenditure on social development.
China and Pakistan respectively.
(iii) Till the 1980s, all the three countries had similar
(iv) Urbanisation is high in both Pakistan (37 %) and
growth rates and per capita incomes.
China (59%). In India, 34% of people are living in
urban areas. (iv) Economic reforms took place in all the three
countries, reforms started in India in 1991, in China
7. Write a brief note on the commune system in China. in 1978 and in Pakistan in 1988.
Ans. Commune system was started in the rural areas of China,
under which people collectively cultivated lands.
11. (i) Enumerate the reasons of success of structural
Commune lands were divided into small plots. These reforms in China.
plots were allocated to individual households for (ii) Enumerate the failures of the structural reforms
cultivation, not ownership. Households were allowed to in China.
keep all income from the land after paying specified Ans. (i) The reasons of success of structural reforms in China
taxes. In 1958, there were 26,000 communes covering are enumerated below (any two)
almost all the farm population. The commune system (a) There was existence of infrastructure in the areas of
resulted in more equitable distribution of food grains in education, health and land reforms.
China. (b) There was decentralised planning and existence of
8. State the factors which created a conducive small enterprise.
environment for new investments in Pakistan. (c) Through the commune system, there was more
Ans. Following factors created conducive environment for new equitable distribution of foodgrains.
investments in Pakistan (d) There was extension of basic health services in rural
areas.
(i) Adoption of green revolution
(ii) Following are the failure of structural reforms in
(ii) Shift of the orientation of nationalisation policy to
China (any two)
denationalisation and encouragement to private sector
(a) There was slow pace of growth and lack of
(iii) Financial support from western nations
modernisation in the Chinese economy under the
(iv) Growing remittances from Pakistani workers in the Maoist rule.
middle-east.
116 CBSE Term-II Economics XII

(b) Maoist vision of economic development is based on 14. ‘‘India, China and Pakistan have travelled more
decentralisation, self-sufficiency and shunning of
than seven decades of developmental path with
foreign technology had failed.
varied results.’’ Explain the given statement with
(c) Despite extensive land reforms, collectivisation, the
great leap forward and other initiatives, the per valid arguments. (CBSE 2020)
capita gain in output in 1978 was the same as it was Ans. ‘‘India, China and Pakistan have travelled more than
in the mid-1950s. seven decades of developmental path with varied
results.’’ This statement can be explained with the help of
12. Explain briefly the various development strategies following arguments
of China.
(i) Till the late 1970s, all of them were maintaining the
Ans. Certain development strategies of China are discussed same level of low development. The last three
below decades have taken these countries to different
(i) Great Leap Forward (GLF) Campaign This levels.
campaign initiated in 1958, aimed at industrialising (ii) Indian economy performed moderately, but majority
the country on a massive scale. People were of the population depends on agriculture and 1/4th
encouraged to setup industries in their backyards. In of the population lives below poverty line.
rural areas, communes were started. Under the Infrastructure is also lacking in many parts of the
commune system, people collectively cultivated country.
land.
(iii) Pakistan economy was slowdown because of political
(ii) Great Proletarian Cultural Revolution (1966-76) In instability, over dependence on remittances and
1965, Mao Tse Tung started a cultural revolution on a foreign aid along with volatile performance of
large scale. In this revolution, students and agriculature sector.
professionals were sent to work and learn from the
(iv) China used the market system without losing
countryside.
political commitment and succeeded in raising the
(iii) 1978 Reforms Since 1978, China began to level of growth along with alleviation of poverty.
introduce many reforms in phases. The reforms were Public intervention in providing social infrastructure
initiated in agriculture, foreign trade and investment bought positive results in human development
sector. In agriculture, lands were divided into small indicators in China.
plots which were allocated to individual households.
They were allowed to keep all income from the land 15. Compare India and Pakistan on the basis of their
after paying taxes. In later phase, reforms were demography. (CBSE 2020)
initiated in industrial sector. All enterprises which Ans. India and Pakistan can be compared on demographic
were owned and operated by local collectives in front as follows
particular, were allowed to produce goods. (i) The population of Pakistan is very small and
(iv) One Child Norm The Chinese government accounts for roughly about 1/10th of India.
introduced one-child norm to check its growing (ii) Pakistan have more proportion of urban people than
population. Couples were allowed to have only one India.
child. In case, they gave birth to second child, social (iii) The fertility rate is very high in Pakistan as
assistance was stopped. compared to India.
13. Comment on the growth rate trends witnessed in (iv) The sex ratio of the two nations stand quite near to
China, India and Pakistan in the last two decades. each other, showing preference of male child in both
(NCERT) the nations. India stands at 924 females per 1,000
Ans. China has a second largest GDP (PPP) of $ 2.5 trillion in males and Pakistan stands at 943 females per 1,000
the world where as India’s GDP (PPP) $ 9.03 trillion and males.
Pakistan GDP (PPP) is $ 0.94 trillion, roughly about 11% 16. Define liberty indicators. Give some examples of
of India’s GDP. In 1980, Pakistan was ahead of India. liberty indicators. (NCERT)
China was having double digit growth and India was at
Ans. ‘Liberty indicators’ are those indicators which represent
the bottom. In 2015-2017, there was a decline in Pakistan
the degree of civil and political freedom to individuals in
and China’s growth rate, whereas India met with
a country. They should also be considered alongwith
moderate increase in growth rate.
indicators of income, health and education in the human
In both India and Pakistan, the contribution of development index.
agriculture was 16 and 24% respectively but the portion
One such indicator has actually been added as a measure
of workforce that work in this sector is more in India. In
is ‘the extent of democratic participation in social and
Pakistan, about 41% of people work in agriculture
political decision-making’ but it has not been given any
whereas in India it is 43%.
extra weight.
CBSE Term-II Economics XII 117

Some other ‘liberty indicators’ are measures of ‘the extent (ii) High Dependence on Public Sector Enterprises
of constitutional protection given to rights of citizens’ or Great emphasis on the significant role of the public
the extent of constitutional protection of the sector was given in  the process of  growth as they
‘Independence of the Judiciary’ and the ‘Rule of Law’ rely on huge investment of the government. As
which have not been introduced in HDI till now. public sector enterprises lack operational efficiency
Without including such indicators and giving them and poor management of scarce resources, it led to
adequate weightage, the construction of a human slow progress in productivity.
development index remains incomplete and its usefulness (iii) High Dependence on Foreign Loans Generally, the
remains limited. balance of payment crisis was set right by borrowing
funds from external sources such as International
17. In which areas India has an edge over Pakistan? Monetary Fund (IMF) and World Bank. Foreign
Ans. In the area of skilled manpower, research and exchange earnings are one of the essential
development institutions, India is better placed than components where a country can earn through
Pakistan. sustainable export of manufactured goods. In
Indian scientists excel in the areas of defence technology, Pakistan, major foreign exchange was earned from
space research, electronics and avionics, genetics, tele the remittances of Pakistani workers in the Middle
communications, etc. The number of PhDs produced by East and export of highly unstable agricultural
India in science and engineering every year (about 5000) products. There was a high dependence on foreign
is higher than the entire stock of PhDs in Pakistan. Issues loans and this increased the problem to repay the
of health facilities in general and infant mortality in loan amount.
particular are better addressed in India. (iv) Lack of Political Stability  Huge public expenditure
was incurred on law and order to stabilise the
l
Long Answer (LA) Type Questions unfavourable political situation. This unproductive
1. Describe the path of development initiatives taken expenditure caused a drain on economic resources.
by Pakistan for its economic development. (NCERT) (v) Inadequate Infrastructure  Pakistan was not able to
Ans. For economic development Pakistan followed the mixed attract foreign investment and trade activities
economy model with co-existence of public and private because they lack infrastructural facility for business
sectors. development.
The different policies adopted by Pakistan are stated 3. Compare and contrast the development of India,
below China and Pakistan with respect to some salient
(i) A variety of regulated policy frameworks were human development indicators. (NCERT)
introduced in late 1950s and 1960s. Ans. The development of India, China and Pakistan with
(ii) Protection of consumer goods, domestic industries respect to some salient human development indicators
through tariff harriers. can be assessed and compared with the help of the
(iii) The introduction of green revolution and following points
mechanisation in agriculture sector. (i) China is ahead of India and Pakistan in human
(iv) Public investment in infrastructure in selected areas. development indicators. China has better ranking in
(v) Nationalisation of capital goods, industries was terms of income indicator such as GDP per capita or
introduced in 1970s. proportion of population below poverty line or
health indicators such as mortality rates, access to
(vi) In 1980s, denationalisation and encouragement to sanitation, literacy, life expectancy or
private sector. malnourishment.
(vii) In 1988, economic reforms were initiated in the (ii) India is ahead of Pakistan in reducing proportion of
economy. people below the poverty line as per Human
2. What are the reasons for slow growth and Development Report 2019.
re-emergence of poverty in Pakistan? (iii) India’s performance in education, sanitation and
Ans. Reasons for the slow growth and re-emergence of access to water is better than Pakistan.
poverty in Pakistan (iv) Maternal mortality is very high in India and Pakistan
(i) Traditional Method in the Agricultural Sector  The as compared to China. In China, for one lakh births,
agricultural production method was not based on only 29 women die whereas in India and Pakistan,
institutional basis of technology. As a result of a good more than 130 women die.
harvest system, agricultural production remained (v) All the three countries provide improved water
unstable and highly vulnerable to climatic sources for most of their population.
conditions. Good harvest relies largely on a good (vi) Considering the international poverty rate of $ 2 a
monsoon. If the conditions were not good, then the day, India has the largest share of poor among the
economic growth showed a negative trend. three countries in absolute terms.
118 CBSE Term-II Economics XII

4. Write a brief note on the following international (iv) G-8 It is an inter-governmental political forum of
organisations the industrialised economies of the world, which are
democratic in character. Initially, formed in 1975,
(i) SAARC (ii) ASEAN with six member countries, viz.
(iii) European Union (iv) G-8 France, Germany, Italy, Japan, The United Kingdom
(v) G-20 (vi) BRICS and The United States, this association came to be
Ans. (i) SAARC South Asian Association for Regional known as G-8 with the inclusion of Canada in 1976
Cooperation (SAARC) was established on 8th and of Russia in 1997. However, in 2014 Russia has
December, 1985 to encourage cooperation among been expelled from the membership of G-8,
member countries in the fields of agriculture, health, temporalily. This forum represents about 65% of the
population control, anti-terrorism measurs, rural world economy.
development, science and technology and narcotics (v) G-20 It is an international form comprising of the
control Afghanistan, Bangladesh, Bhutan, India, governments and Central Bank governors of 20
Maldives, Nepal, Sri Lanka and Pakistan are its major economies. It was founded in 1999 with an
members. It was formed on the proposal of objective to study, review and promote high-level
Zia-Ur-Rehman, the then President of Bangladesh. discussions of measures to promote international
Its head quarter is in Kathmandu. financial stability.
(ii) ASEAN Association of South East Asian Nation The members include 19 individual countries, viz.
(ASEAN) was created on 8th August, 1967 by Argentina, Australia, Brazil, Canada, China, France,
Indonesia, Malaysia, the Philippines, Singapore and Germany, India, Indonesia, Italy, Japan, South
Thailand with objectives to accelerate economic Korea, Mexico, Russia, Saudi Arabia, South Africa,
growth, social progress, regional stability and to Turkey, The United Kingdom, The United States,
resolve their differences peacefully. Subsequently, alongwith the European Union.
Brunei, Cambodia, Laos, Myanmar and Vietnam also (vi) BRICS BRICS is the acronym representing
joined this association. It is headquartered at Jakarta. association of five major emerging national
(iii) European Union It is a political and economic economies, viz. Brazil, Russia, India, China and
union of 27 member states that is primarily located South Africa.
in Europe. It was formed to develop an internal All the member countries are leading developing or
single market regulated by a same set of laws to newly industrialised countries and are characterised
ensure free movement of people, goods and services by their fast growing economies and those who
between the member nations. A common currency significantly influence their regional affairs. It was
‘Euro’ circulates in all the member nations. Austria, formed in 2011 and works on the principles of
France, Germany, Italy, Spain and Sweden are non-interference, equality and mutual benefit.
important member nations. Brussels is the defacto
capital of the European Union.
Chapter Test
Multiple Choice Questions
1. Due to introduction of ‘one child policy’, China’s fertility rate declined from ……… to ……… births.
(a) 3 to 1 (b) 2 to 1
(c) 3 to 1.8 (d) None of these
2. China has a very less proportion of cultivable land due to which of the following reasons?
(a) Topographic condition (b) Climatic condition (c) Economic condition (d) Both (a) and (b)
3. Apart from instruction of international agencies, which other reasons forced Pakistan to implement economic reforms?
(a) Political instability
(b) Over dependency on foreign aid
(c) Volatile performance of agriculture
(d) All of the above
4. After India’s independence and partition of country. India imported huge amount of food grains from Pakistan due to
which of the following reasons?
(a) India’s fertile land went to Pakistan during the partition of India and Pakistan in 1947.
(b) India’s policy were inappropriate
(c) Due to famines there were food insecurity
(d) All of the above
5. Which sector of the economy contributes the highest to China’s GDP?
(a) Primary sector (b) Secondary sector
(c) Tertiary sector (d) All of these
Short Answer (SA) Type Questions
1. Scholars find son preference as a common phenomenon in many developing countries including India, China and
Pakistan. Do you find this phenomenon in your family and neighborhood? Why do people practice discrimination
between male and female children? What do you think?
2. The phenomenon of male child-preference is common in many developing countries including India, China and
Pakistan. Why do people practice discrimination between male and female child?
3. Group the following features pertaining to the economies of India, China and Pakistan under three heads.
(i) One-child norm (ii) Low fertility rate
(iii) High degree of urbanisation (iv) Mixed economy
(v) Very high fertility rate (vi) Large population
(vii) High density of population (viii) Growth due to manufacturing sector
(ix) Growth due to service sector
4. Write a short note on the history of revolution of PRC. 
5. What were the economic reforms introduced in all the three countries (India, China and Pakistan)? 
Long Answer (LA) Type Questions
1. Is it possible for India to introduce ‘One Child Norm’ like China to reduce population? Write your views.
2. What is demography and demographic indicators? 

Answers
Multiple Choice Questions For Detailed Solutions
1. (c) 2. (d) 3. (d) 4. (a) 5. (b)
Scan the code
Economics
Class 12th ( Term II )

Practice Paper 1 *

(Solved)
Instructions Time : 2 Hours
Max. Marks : 40
1. There are 12 questions in the question paper. All questions are compulsory.
2. Question no. 1-3 are Case Based MCQs. Each question carries 1 mark.
3. Question no. 4-6 and 9 are Short Answer Type Questions. Each question carries 3 marks.
4. Question no. 7-8 and 10-12 are Long Answer Type Questions. Each question carries 5 marks.
5. There is no overall choice. However, internal choices have been provided in some questions. Students have to attempt
only one of the alternatives in such question.

* As exact Blue-print and Pattern for CBSE Term II exams is not released yet. So the pattern of this
paper is designed by the author on the basis of trend of past CBSE Papers. Students are advised
not to consider the pattern of this paper as official, it is just for practice purpose.

Part-I Macroeconomics
Case Based MCQs (1 × 3 = 3 Marks)
If all the people of the economy increase the proportion of income they save (i.e. if the MPS of the economy
increases) the total value of savings in the economy will not increase-it will either decline or remain
unchanged. This result is known as the Paradox of Thrift-which states that as people become more thrifty
they end up saving less or same as before. Let us understand it with the help of an example.
Suppose at the initial level, income (Y) = 250, MPC = 0 8. and MPS = 0 2.
Now, people decide to cut down their expenditure as there is a threat of an imminent war. Hence the MPS
of the economy increases, or, alternatively, the MPC decreases from 0.8 to 0.5. At the initial income level of
this sudden decline in MPC will imply a decrease in aggregate consumption spending and hence in
aggregate demand, by an amount equal to (0.8 - 0.5) 250 = 75. But as aggregate demand decreases by 75,
there emerges an excess supply equal to 75 in the economy. So, producers decide to cut the value of
production by 75 in the next round to restore equilibrium in the market.
But that would mean a reduction in factor payments in the next sound and hence a reduction in income by
75. As income decreases, people reduce consumption proportionately but, this time, according to the new
value of MPC which is 0.5. Consumption expenditure, and hence aggregate demand, decreases by (0.5) 75,
which creates again an excess supply in the market. In the next round, therefore, producers reduce output
further by (0.5)75. Income of the people decreases accordingly and consumption expenditure and aggregate
demand goes down again by (0.5)75 . So, as income decreases, savings also decreases.
1. What situation occurred in the market with decrease in consumption expenditure?
(a) It create excess demand in the market (b) It create excess supply in the market
(c) No effect on market (d) None of these
2. Statement I Individual accumulation in savings doesn’t necessarily implies decrease in aggregate demand in
absolute terms.
Statement II MPC tends to fall with rise in income as people start to save a portion of their increased
income.
124 CBSE Term-II Economics XII

Alternatives
(a) Both are correct
(b) Both are incorrect
(c) Statement I is correct and Statement II is incorrect
(d) Statement II is correct and Statement I is incorrect
3. Assertion (A) The aggregate demand in the economy changes according to the proportion of total income
that is spent on consumption.
Reason (R) As the level of income rises, APC tends to fall and APS tends to rise.
Alternatives
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A)
(c) Assertion (A) is false, but Reason (R) is true
(d) Both are false
Short Answer (SA) Type Questions (3 Marks)
4. ‘Investment demand includes financial investment like purchase of shares from secondary market’. Do
you agree?
5. Giving reasons, state whether the following statements are true or false.
(i) Average propensity to save is always greater than zero.
(ii) Value of investment multiplier varies between zero and infinity.
Or
Define multiplier. What is the relation between marginal propensity to consume and multiplier? Calculate
the marginal propensity to consume if the value of multiplier is 4.
6. Complete the following table
Income Consumption Marginal Propensity to Save (MPS) Average Propensity to Consume (APC)
0 15 − −
50 50 L L
100 85 L L
150 120 L L
Or
Calculate autonomous consumption expenditure from the following data about an economy which is in
equilibrium
National Income = ` 500
Marginal Propensity to Save = 0.30
Investment expenditure = 100
Long Answer (LA) Type Questions (5 Marks)
7. Giving reason, justify whether the following are included in the estimation of national income or not.
(i)School examination fee paid by a student.
(ii)Free medicines provided by the government.
(iii)Subsidised lunch provided to workers by their employer.
(iv) Financial help given to recover from capital loss.
(v) Old age pension paid to elderly people.
Or
There are only two producing sectors A and B in an economy. Calculate.
(i) Gross Value Added at Market Price by each sector.
CBSE Term-II Economics XII 125

(ii) National Income.

S.No. Contents ` (in crore)
(a) Net Factor Income from Abroad 20
(b) Sales by A 1,000
(c) Sales by B 2,000
(d) Change in Stock of B (–) 200
(e) Closing Stock of A 50
(f) Opening Stock of A 100
(g) Consumption of Fixed Capital by A and B 180
(h) Indirect Taxes Paid by A and B 120
(i) Purchase of Raw Materials by A 500
(j) Purchase of Raw Materials by B 600
(k) Exports by B 70

8. Write down the three identities of calculating the GDP of a country by three methods.
Part-II Indian Economic Development
Short Answer (SA) Type Question (3 Marks)
9. A study estimates that medical costs alone push down 2.2% of the population below the poverty line each
year. How?
Or
‘‘Employment is considered as important in the Indian development policy.” Comment.
Long Answer (LA) Type Questions (5 Marks)
10. (i) ‘Special Economic Zone (SEZ) increases foreign investment’. Explain.
(ii) There is a general perception going around in India that there is sudden increase in dumping of
Chinese goods into India which will have implications for manufacturing sector in India and also that
we do not engage ourselves in trading with our neighbouring nations. Look at the following table,
which shows export from India to, and imports from, Pakistan and China. Interpret the results.
Exports from India (` in crore) Imports to India (` in crore)
Country Annual Rate of Annual Rate
2004-05 2014-15 2004-05 2014-15
Growth (%) of Growth (%)
Pakistan 2,341 11,351 39 427 3,041 61
China 25,232 73,038 19 31,892 3,69,541 106

11. What do you mean by public health? Also, discuss the major public health measures undertaken by the
state in recent years to control diseases.
Or
How has women’s health become a matter of concern?
12. Describe the meaning of seasonal unemployment. Suggest measures for reducing this kind of
unemployment in India.
Or
‘‘Air pollution contribute to the environmental crisis in India.’’ Comment.
126 CBSE Term-II Economics XII

Answers
1.(b) It create excess supply in the market.
2.(a) Both are correct
3.(c) Assertion (A) is false, but Reason (R) is true
4.No, I do not agree. The term ‘investment’, here refers to real investment not the financial investment. Real investment
is concerned with the increase in stock of capital assets such as, tools, equipments, structure, inventories and also
increase in consumer goods.
5. (i) No, the statement is false. When consumption is greater than the income level, the value of average propensity to
save is less than zero or negative.
1
(ii) No, the statement is false. We know that, K = , so, even if the MPC will have its minimum value, i.e.
1 − MPC
zero, the investment multiplier will be 1.
Similarly, when MPC = 1, the value of investment multiplier is infinity. So, we can say that the value of
investment multiplier varies between 1 and infinity.
Or
Multiplier It is measured as the ratio between change in income and change in investment.
∆Y
K=
∆I
Relation between Marginal Propensity to Consume and Multiplier There is direct and positive relationship
between MPC (Marginal Propensity to Consume) and multiplier. Higher the MPC, higher will be the value of
multiplier and vice-versa.
1
K=
1 − MPC
1
If multiplier is 4 K=
MPS
1
4=
MPS
1
MPS = = 0 .25
4
MPC + MPC =1
MPC+ 0.25 = 1
MPC = 0 .75
6. S = Y − C ,
Income (Y) Consumption (C) Saving (S) ( Y − C ) ∆S ∆Y MPS ( ∆S / ∆Y) APC (C/Y)
0 15 − 15 – – – –
50 50 0 15 50 0.3 1.0
100 85 15 15 50 0.3 0.85
150 120 30 15 50 0.3 0.8
Or
Given, Y = ` 500, MPS = 0.30, I = 100, C = ?
b or MPC = 1 − MPS = 1 − 0.30 = 0.70
Y = C + I or Y = C + bY + I
500 = C + 0.70 × 500 + 100
500 = C + 350 + 100
C = 500 − 450 = 50
∴ Autonomous consumption ( C ) = 50
CBSE Term-II Economics XII 127

7. (i) Yes, as it is a part of private final consumption expenditure.

(ii) Yes, as it is a part of government final consumption expenditure.
(iii) Yes, as it is a part of compensation to the employees.
(iv) No, as it is a transfer payment and does not affect National Income.
(v) No, as it is a transfer payment and does not affect National Income.
Or
(i) Gross Value Added by A = Sales by A + Change in Stock of A (Closing Stock of A − Opening Stock of A)
− Purchases of Raw Materials by A
= 1, 000 + ( 50 − 100 ) − 500 = 950 − 500 = ` 450 crore
Gross Value Added by B = Sales by B + Change in Stock of B − Purchase of Raw Materials by B
= 2, 000 + ( − 200 ) − 600 = 1, 800 − 600 = ` 1,200 crore
Gross Value Added by A and B = 450 + 1, 200 = ` 1,650 crore
(ii) National Income (NNPFC)
= GDPMP (Gross Value Added by A and B) − Consumption of Fixed Capital by A and B
− Indirect Taxes Paid by A and B + Net Factor Income from Abroad
= 1, 650 − 180 − 120 + 20 = ` 1,370 crore
8. Three identities of calculating GDP are as follows
(i) Product Method or Value Added Method It is that method which measures national income in terms of value
addition by each producing enterprise in the economy.
It is calculated as
Gross Value Added in the Primary Sector at Market Price + Gross Value Added in the Secondary Sector at
Market Price + Gross Value Added in the Tertiary Sector at Market Price = GDP MP .
GDP MP – Depreciation = Net Domestic Product at Market Price (NDPMP )
NDP MP – Net Indirect Tax = Net Domestic Product at Factor Cost (NDPFC )
NDP FC+ NFIA = National Income
(ii) Income Method Under this method, National Income is measured in terms of factor payments to the owners of
factors of production.
It is calculated as
Compensation of Employees + Operating Surplus + Mixed Income of the Self-employed
= Net Domestic Income at Factor Cost
Net Domestic Income at Factor Cost + NFIA = National Income
(iii) Expenditure Method Under this method, National Income is measured in terms of expenditure on the
purchase of final goods and services produced in the economy.
It is calculated as
Private Final Consumption Expenditure + Government Final Consumption Expenditure
+ Gross Domestic Fixed Capital Formation + Change in Stock + Net Exports = GDP MP
GDP MP – Depreciation = Net Domestic Product at Market Price (NDPMP )
NDPFC NDP MP – Net Indirect Tax = NDP FC
NDP FC + NFIA = National Income
9. Public health facilities are highly inadequate in our country. These facilities are also lacking in quality. So even poor
and middle class people do not prefer to use these facilities.
So, in case of a medical emergency, they are forced to avail expensive services of private hospitals and health
centres. These expenses prove to be a heavy burden on these families and they are forced to sell whatever
valuables they have, to fund the treatment. This pushes the families below poverty line.
Or
Employment is considered so important in the Indian development policy because of the following reasons
(i) More employment will lead to higher level of national income since, production and employment are directly
related.
(ii) Employment is crucial to removal of poverty.
128 CBSE Term-II Economics XII

10. (i) A Special Economic Zone (SEZ) is a geographical income. Women’s health also becomes important
region that has economic laws different from a because only a healthy mother can give birth to a
country’s typical economic laws. Usually, the goal healthy child, which will also reduce the risk of
is to increase foreign investment. maternal deaths.
Special Economic Zones attract investors since 12. It refers to a situation where a number of persons are
they offer high quality infrastructure facilities and not able to find job in a particular season. It occurs in
support services. Besides allowing duty free case of agriculture, ice-cream factories, woollen
import of capital goods and raw materials, factories, etc.
attractive fiscal incentives and simpler customs, Following measures may be suggested to reduce
banking and other procedures are offered in such seasonal unemployment
zones. (i) Promotion of multiple cropping, i.e., raising
(ii) The given table reveals that trade with Pakistan more than one crop on the same piece of land in
and China has grown over the years. But what is a year.
disturbing, is the fact that imports have grown (ii) Development of activities allied to agriculture
more than the exports. Also, imports from China such as animal husbandry, dairy farming,
have grown at a staggering rate of 106%. This horticulture, etc to provide extra employment
statistic helps in proving the perception that there throughout the year.
is sudden increase in dumping of Chinese goods
into India. This definitely will affect our secondary (iii) Public investment in rural areas in such fields as
sector adversely. irrigation, drainage, flood control, land and
environment, improvement of rural roads,
11. The science and practice of protecting and improving schools, hospitals, etc.
the health of a community, as by preventive medicine,
health education, control of communicable diseases, (iv) Promotion of on-farm investment. Overhaul of
application of sanitary measures and monitoring of machinery, training of farm labour and
environmental hazards, is called public health. programmes for eradication of illiteracy during
slack seasons.
In the recent years, government has built up a vast
(v) Mechanisation of peak season activities so that a
health infrastructure equipped with trained manpower
proportion of the labour force is permanently
at different levels.
shifted from agriculture to non-seasonal
The following measures have been initiated by the activities and surplus labour in the slack season
state in recent years to promote public health is reduced.
(i) Establishing healthcare institutions (vi) Establishment of a variety of industries which
(ii) Expanding the health facilities operate at different times of the year so that
(iii) Expanding the facilities for medical education. labour may be kept employed almost throughout
(iv) Promoting preventing medicine. the year by shifting from one seasonal industry to
All these measures have helped to control diseases like another.
small pox, malaria, TB, etc. Or
Or In India, air pollution is widespread in urban areas
Women constitute about half the total population in where vehicles are the major contributors and in a
India. They suffer from many disadvantages as few other areas which have a high concentration of
compared to men in the areas of education, industries and thermal power plants. Vehicular
participation in economic activities and healthcare. emissions are of particular concern since these are
There is growing incidence of female foeticide in the ground level sources and thus, have the maximum
country which is the cause of deterioration of child sex impact on the general population. The number of
ratio from 927 in 2001 to 914 in 2011. Close to motor vehicles has increased from about 3 lakh in
3,00,000 girls under the age of 15 are not only married 1951 to 67 crore in 2003. In 2003, personal transport
but have already borne child, at least once. vehicles (two–wheeled vehicles and cars only)
More than 50% of married women between the age constituted about 80% of the total number of
group of 15 and 49 years suffer from anaemia caused registered vehicles thus, contributing significantly to
total air pollution load.
by iron deficiency. It has contributed to 19% of
maternal deaths. Abortions are major cause of India is one of the ten most industrialised nations of
the world. But this status has brought with
maternal morbidity and mortality in India. All these
it unwanted and unanticipated consequences such as
statistics present a grim picture of women health in
unplanned urbanisation, pollution and the risk of
India and are a cause of concern. accidents. The CPCB (Central Pollution Control
Because of poor health, women in rural areas specially, Board) has identified 17 categories of industries
are not able to work and supplement their low family (large and medium scale) as significantly polluting.
Economics
Class 12th ( Term II )

Practice Paper 2 *

(Unsolved)
Instructions Time : 2 Hours
Max. Marks : 40
1. There are 12 questions in the question paper. All questions are compulsory.
2. Question no. 1-3 are Case Based MCQs. Each question carries 1 mark.
3. Question no. 4-6 and 9 are Short Answer Type Questions. Each question carries 3 marks.
4. Question no. 7-8 and 10-12 are Long Answer Type Questions. Each question carries 5 marks.
5. There is no overall choice. However, internal choices have been provided in some questions. Students have to attempt
only one of the alternatives in such question.

* As exact Blue-print and Pattern for CBSE Term II exams is not released yet. So the pattern of this
paper is designed by the author on the basis of trend of past CBSE Papers. Students are advised
not to consider the pattern of this paper as official, it is just for practice purpose.

Part I Macroeconomics
Case Based MCQs (1 × 3 = 3 Marks) (b) Both Assertion (A) and Reason (R) are true, but Reason
(R) is not the correct explanation of Assertion (A)
The Reserve Bank of India (RBI), cut Repo Rate (c) Assertion (A) is false, but Reason (R) is true
to 4.4%, the lowest in at least 15 years. RBI also (d) Both are false
introduced the Cash Reserve Ratio (CRR) to be
maintained by the banks for the first time in over 3. The impact of ‘excess demand’ under Keynesian
seven years. CRR for all banks was cut by 100 theory of income and employment, in an economy
basis points to release Rs. 1.37 lakh crores across are
the banking system. RBI governor Dr. Shakti (a) decrease in income, output, employment and general
price level
Kanta Das predicted a big global recession and
(b) decrease in nominal income, but no change in real
said India will not be immune. It all depends how output
India responds to the situation. Aggregate (c) increase in income, output, employment and general
demand may weaken and ease core inflation. price level
(d) No change in output/employment but increase in
1. Decrease in cash reserve ratio will lead to general price level
……… .
(a) fall in aggregate demand Short Answer (SA) Type Questions (3 Marks)
(b) rise in aggregate demand 4. In an economy, Aggregate Demand is greater
(c) no change in aggregate demand than Aggregate Supply. Explain the changes that
(d) fall in general price level will take place in this economy.
2. Assertion (A) Cash reserve ratio is the most Or
effective tool used by Central Bank under its What is bank rate policy? How does it work as a
quantitative policy measure. method of credit control?
Reason (R) Quantitative tools directly impact 5. An economy is in equilibrium. Calculate
money supply and thus most often used Marginal Propensity to Consume
Alternatives National Income = ` 1,000
(a) Both Assertion (A) and Reason (R) are true and Autonomous Consumption Expenditure = ` 200
Reason (R) is the correct explanation of Assertion (A). Investment Expenditure = ` 100
130 CBSE Term-II Economics XII

Or An economy is in equilibrium. From the (ii) Find Net Value added at Market Price.
following data, calculate the Marginal Items (`n in lakhs)
Propensity to Save.
(a) Income = ` 10,000 (a) Fixed Capital Good with a
Life Span of 5 Years 15
(b) Autonomous consumption = ` 500
(c) Consumption expenditure = ` 8,000 (b) Raw Materials 6

6. In an economy, (c) Sales 25

S = −100 + 0.6 Y (d) Net Change in Stock ( −) 2
is the saving function, where S is saving and Y is
National Income. If investment expenditure is (e) Taxes on Production 1
` 1,100, calculate 8. Explain the precautions that are taken while
(i) Equilibrium level of National Income. estimating national income by value added
(ii) Consumption expenditure at equilibrium method.
level of National Income. Or
Long Answer (LA) Type Questions (5 Marks) Explain the precautions that you will keep in
7. (i) Define externalities. Give an example of mind while estimating domestic income by
negative externality. What is its impact on expenditure method?
welfare?

Part II Indian Economic Development

Short Answer (SA) Type Question (3 Marks) (ii) Explain the Great Leap Forward (GLF)
campaign of China initiated in 1958.
9. You are residing in a village. If you are asked to
advise the village panchayat, what kinds of 11. ‘‘Unemployment different from
activities would you suggest for the underemployment’’. Comment. Also, how is
improvement of your village which would also unemployment measured in India?
generate employment? Or
Or Categorise canals, house, schools, railways, Explain the six systems of Indian medicine.
ships, hospitals, banks, development banks,
aerodromes, courts, power plants, transmission
12. Explain the relevance of intergenerational
equity in the definition of sustainable
lines and satellites into economic and social
development.
infrastructure.
Or
Long Answer (LA) Type Questions (5 Marks)
‘‘Can we increase the effectiveness of healthcare
10. (i) Enumerate the areas in which Pakistan has programmes’’. Comment.
an edge over India.

Answers
1. (b) 2. (b) 3. (d)
5. Marginal Propensity to Consume (MPC) = 0. 7
Or
Marginal Propensity to Save = 0.25
6. (i) Y = ` 2, 000 (ii) C = ` 900
7. (ii) ` 14 lakh
Economics
Class 12th ( Term II )

Practice Paper 3 *

(Unsolved)
Instructions Time : 2 Hours
Max. Marks : 40
1. There are 12 questions in the question paper. All questions are compulsory.
2. Question no. 1-3 are Case Based MCQs. Each question carries 1 mark.
3. Question no. 4-6 and 9 are Short Answer Type Questions. Each question carries 3 marks.
4. Question no. 7-8 and 10-12 are Long Answer Type Questions. Each question carries 5 marks.
5. There is no overall choice. However, internal choices have been provided in some questions. Students have to attempt
only one of the alternatives in such question.

* As exact Blue-print and Pattern for CBSE Term II exams is not released yet. So the pattern of this
paper is designed by the author on the basis of trend of past CBSE Papers. Students are advised
not to consider the pattern of this paper as official, it is just for practice purpose.

Part I Macroeconomics
Case Based MCQs (1 × 3 = 3 Marks)
India’s wholesale inflation accelerated for the third consecutive month and firmed up to an eight-month
high of 1.48% in October, driven by manufactured items, data released by the commerce and industry
ministry showed on 16 Nov. The WPI had increased 1.32% in September, the annual rate of inflation based
on the WPI Food Index, which comprises ‘food articles’ from the primary articles group and ‘food product’
from the manufactured products group, decreased to 5.78% in October from 6.92% in September. The
government also revised the wholesale inflation for August to 0.41% from 0.16% earlier. Food inflation
cooled to 6.37% in October from 8.17% in September, led by decline in meat, egg and fish inflation that
slowed to 1.65% in October from 4.15% the previous month.
Inflation in vegetables and potatoes was 25.23% and 107.70% respectively. In the manufactured products
category, inflation was 2.12% as compared to 1.61% in September.
1. Increase in core inflation implies improvement in ……… condition after covid 19 related lockdown was
lifted.
(a) demand (b) supply
(c) Both (a) and (b) (d) Neither (a) nor (b)
2. Assertion (A) Inflation leads to fall in the value of money in circulation.
Reason (R) Increase in money supply increases the demand for goods leading to fall in value of money.
Alternatives
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A)
(c) Assertion (A) is false, but Reason (R) is true
(d) Both are false
3. Deflationary gap causes ……… .
(a) fall in the level of output (b) fall in the level of employment
(c) fall in general price level (d) All of these
132 CBSE Term-II Economics XII

Short Answer (SA) Type Questions (3 Marks)

4. Giving reasons, state whether the following statements are true of false.
(i) When MPC is zero, the value of investment multiplier will also be zero.
(ii) Value of Average Propensity to Consume can never be less than zero.
Or In an economy, C = 200 + 0.75 Y is the consumption function where C is consumption expenditure and Y is
National Income. Investment expenditure is ` 4,000. Calculate equilibrium level of income and
consumption expenditure.
5. If National Income is ` 90 crore and consumption expenditure is ` 81 crore, find out Average Propensity
to Save. When income rises to ` 100 crore and consumption expenditure to ` 88 crore, what will be the
Marginal Propensity to Consume and Marginal Propensity to Save?
6. Find investment from the following
National Income = ` 600
Autonomous consumption = ` 150
Marginal Propensity to Consume = 0.70
Or If Personal Disposable Income is `1,000 crore and consumption expenditure is `750 crore, find out
Average Propensity to Save.
Long Answer (LA) Type Questions (5 Marks)
7. (i) Calculate sales from the following data
S.No. Contents ` (in lakh)

(a) Net Value Added at Factor Cost 560

(b) Depreciation 60
(c) Change in Stock (− )30
(d) Intermediate Cost 1,000
(e) Exports 200
(f) Indirect Taxes 60
(ii) Giving reason, classify the following into intermediate products and final products.
(a) Computers installed in an office. (b) Mobile sets purchased by a mobile dealer.
8. Calculate Gross National Product at Market Price by production method and income method.
S.No. Contents ` (in crore)
(a) Value of Output by Primary Sector 1,000
(b) Indirect Tax 200
(c) Compensation of Employees 780
(d) Net Factor Income to Abroad 100
(e) Intermediate Purchases by all Sectors 2,900
(f) Value of Output by Secondary Sector 2,000
(g) Rent 300
(h) Subsidy 50
(i) Interest 600
(j) Consumption of Fixed Capital 120
(k) Value of Output by Tertiary Sector 3,000
(l) Profits 320
(m) Mixed Income of Self-employed 830
CBSE Term-II Economics XII 133

Or
Give reason and identify whether the following are final expenditures or intermediate expenditures.
(i) Expenditure on maintenance of an office building.
(ii) Expenditure on improvement of machine in a factory.

Part-II Indian Economic Development

Short Answer (SA) Type Question (3 Marks)
9. Give two instances of
(i) Overuse of environmental resources.
(ii) Misuse of environmental resources.
Or
You are residing in highly populated area of Mumbai. Due to over population your locality harms the
environment, suggest any four measures to your neighbours to protect environment.

Long Answer (LA) Type Questions (5 Marks)

10. Keeping in view your locality, describe any four strategies of sustainable development.
Or
Explain the measures to solve unemployment problems.
11. Write a brief note on the state of infrastructure in India in general and of rural areas in particular.
Or
Explain the relationship between environment and the economic development.
12. (i) Group the following features pertaining to the economies of India, China and Pakistan under three heads
(a) One-child norm (b) Low fertility rate
(c) High degree of urbanisation (d) Mixed economy
(e) Very high fertility rate (f) Large population
(g) High density of population (h) Growth due to manufacturing sector
(i) Growth due to service sector
(ii) How is China able to lead in all the human development indicators?

Answers
1. (a) 2. (a) 3. (d) 4. (Or) Y = ` 16,800; C = ` 12,800
5. MPC = 0.70; MPS = 0.30 6. Investment = ` 30 Or APS = 0.25 7. (i) Sales = ` 1, 710 lakh 8. GNPMP = ` 3,000 crore