Sunday, February 28, 2016

AHSEC - Class 11: Unit 2 Associated Concepts

1. What is Barter System? What are the features of Barter System?
Ans: The system in which goods are exchanged for goods is known as Barter System. It is a system in which goods and services are exchanged without the use of money.
The features of Barter System are:
a)      Barter involves direct exchange of goods and services.
b)      It is non-monetised system.
c)       There is absence of market mechanism in barter economy.
d)      In the barter economy, economic activities are at a low level and there is economic backwardness.
2. What are the advantages of Barter System?
Ans: The advantages of Barter System are:
a)      Simple System: The barter system is very easy and simple. Goods and services are exchanged without the use of money.
b)      Balanced production: The Barter economy is a simple economy where people produce goods either for self consumption or for exchange with other goods which they want.
c)       Proper utilization: In this system, natural and personal resources are properly utilized to meet the needs of the society.

d)      Reduction of Economic inequalities: Under this system, there is no possibility of storing goods over a long period. As a result there is no problem of concentration of economic power into the hands of rich people.
e)      Free from problems of foreign trade: Foreign trade problems such as foreign exchange crises does not exist under barter system.

3. Discuss the difficulties of Barter System.
Ans: The basic difficulties of Barter System are:
a)      Lack of Double coincidence of wants: In barter system, goods are exchanged between two people to satisfy their demands and wants if the wants of two people does not coincide, then barter exchange cannot takes place. This is known as lack of Double coincidence of wants.
b)      Absence of common measure of value: In this system, there is absence of common unit in which the value of goods and services should be measured.
c)       Difficulty of Divisibility: It is difficult to fix a rate of exchange for certain goods which are indivisible.
d)      Difficulty in storing of goods: Barter system does not allow any convenient method of storage
of value.
e)      Difficulty in making deferred payments: In a barter economy, it is not easy to make payments in the future
f)       Difficulty of Transportation: The major problem of barter system is to transport goods and services from one place to another conveniently.
4. What is Inflation?
Ans: Inflation simply means a continuous increase in general price level. It can be described as a decline in the real value of money.
According to G. Crowther, “Inflation is a state in which the value of money is falling, i.e., the prices are rising.”
5. Discuss the main features of Inflation?
Ans: The following are the main features of Inflation are:
a)      Increase in prices: Inflation is a process of uninterrupted increase in prices. It is always accompanied by persistent rise in price level.
b)      Monetary phenomenon: It is generally caused due to excessive money supply – overflow of money and credit.
c)       Dynamic process: Inflation is a long-term operating dynamic process. It is irreversible within a short-period of time.
d)      Rising trend in price: Inflation is a rising trend in the price level of goods and services. It is not a cyclical movement of prices.
e)      Economic Phenomenon: Inflation is an economic phenomenon. It occurs in the economic system as a result of action and interaction of economic forces.
6. What are the causes of inflation?
Ans: The causes of inflation are:
a)      Increase in money supply: Inflation may emerge in an economy when the supply of money increases due to increase in the purchasing power of people which may lead to inflation. The increase in supply of money may due to credit expansion of the commercial banks.
b)      Population expansion: The rapid growths of population raise the aggregate demand in the economy due to increase in consumption, investment etc. and thus lead to inflation.
c)       Weak supply of commodities: The weak supply of commodities also leads to rise in prices. When the supply of commodities decreases, the traders are unable to meet the demand of the people and thus they raises the prices of goods and services causing inflation.
d)      International factors: International factors may be the reason of inflation. Sometimes the prices of a basic raw material like diesel rise in the international market which leads to rise in the price of that commodity in all the countries of the world.
7. Discuss the effects of inflation.
Ans: The effects of inflation are as follows:
a)      Effects on fixed income group: This section of people mainly includes pensioners, recipients of rents and interest belong to this group. When the prices of goods and services rises in an economy, their purchasing power reduces as their income is fixed and is unable to meet their expenditure.
b)      Effects on production: Inflation also affects the level of production. When inflation occurs in an economy, the prices of goods and services rises leading to higher profits. This makes the business enterprises to concentrate more on earning profits which leads to misallocation of resources, adulteration of commodities, hoarding and black marketing, etc.
c)       Effects on distribution: When inflation occurs in an economy, its leads to economic inequalities in the economy. The business man, industrialists, speculators, farmers, etc. gain during the inflation as they can sell their produce at higher price to earn profit but the salary earners, wages earners, etc. lose during inflation as they get fixed and less money as compared to their expenditure.
d)      Other effects: The other effects of inflation are increase in the govt. revenues, rise in the balance of payments, decrease in exchange rate, collapse of monetary system.
8. What is Deflation?
Ans: Deflation is a condition of falling prices. It is just the opposite of inflation. In deflation, the value of money goes up and prices fall down. Deflation brings a depression phase of business in the economy.

9. Differentiate between inflation and deflation.
Ans: The main differences between the two are as follows:
In inflation, the price of goods and services rises.
In inflation, the value of money falls.
In inflation, employment increases.
It can be controlled to a certain extent.
In deflation, the price of goods and services falls.
In deflation, the value of money rises.
In deflation, employment decreases.
It once emerged in the economy, cannot be controlled.

10. What are the measures to control inflation? Explain them briefly.
Ans: The measures to control inflation are as follows:
a)      Monetary measures,
b)      Fiscal measures and
c)       Other measures
a)      The monetary measures to control inflation are adopted by the central bank. These measures have direct impaction inflationary process. These measures are:
1.       Reducing the volume of by withdrawing a part of the note-issue.
2.       Reducing the volume of credit money by raising the bank rate, raising the CRR etc.
3.       Freezing or blocking of assets by directing the owners of certain funds to not to use the money.
4.       Issuing of new currency to bring confidence in people’s mind.
b)      Fiscal measures to control inflation are adopted by the government. These measures are:
1.       Reduction in government expenditure
2.       Increase in tax on commodities whose prices are rising.
3.       Voluntary or compulsory borrowings from public.
4.       Avoiding paying back of public debt.
5.       Overvaluation of domestic currency in term of foreign currencies.
c)       The other measures are:

1.       Production of sufficient amount of goods and services in the home country.
2.       Controlling of prices of existing goods and services so that the prices of goods and services do not rise further.
3.       Controlling the wages and allowing increase in wages only if their productivity increases.
4.       Rationing of goods and services so as to make them available to a large no of consumers.
11. What is Trade Cycle or Business cycle?
Ans: The term trade cycle is used to denote the fluctuations in economic activity which occur in a more or less regular interval of time. Each fluctuation, the rise and fall taken together, is called trade cycle.
12. What are the features or characteristics of Trade Cycle?
Ans: The features of Trade cycle are:
a)      It is like a wave movement. It is characteristised by downward and upward movement.
b)      They are irregular in nature. The peaks and troughs do not occur at regular intervals.
c)       The phases of a trade cycle appear in all types of business in different variations.
d)      Though they are international in character, yet they did not affect all the countries equally.
e)      In trade cycle, profits fluctuate more than other incomes.
13. What are the phases of trade cycle?
Ans: the phases of trade cycle are:
a)      Depression phases
b)      Recovery or revival phases
c)       Prosperity phases
d)      Boom phases
e)      Recession phases
14. Explain the term “Depression” of trade cycle?
Ans: The phrase of trade cycle where the economic activity of the country is far below the normal level and economic backwardness occurs is known as Depression. The Depression phrase of trade cycle may be short or it may continue for considerable period of time. In these phases, Economic activity lowers down, unemployment level rises.
15. Explain the Revival or Recovery phrase of Trade cycle.
Ans: The phase of trade cycle when the economic activities of the country undergoes sudden changes for depression to prosperity which leads to improvement in economic activities is known as Revival or Recovery. It is the second phases of trade cycle. In this phases, level of employment, wages prices, profits etc. rises.
16. What is Prosperity? Explain.
Ans: The phrase of trade cycle in which the economy of the country prospers and economic activities increases and causes economic development of a country is called Prosperity. This is the third phrase of trade cycle. In these phases, employment, income, investment, etc are a high level.
17. What is Boom?
Ans: The peak point of prosperity which is marked by greatly accelerated economic activity is called Boom. It is basically the outcome of various development process of the prosperity phases. It is a period of short duration. In this phases, the economic activity are at the highest level.
 18. What is Recession? Explain.
Ans: The phrase where there is downward trend of economic expansion of the country from the peak and the whole of economy retards to zero is known as Recession. In this phases, the factors of production become scare leading to rise in prices, the rate of interest rises due to scarcity of capital, the investment, employment income and demand decline, etc.
19. What are the various types of Inflation?
Ans: Inflation is of various types. It is divided into several bases. Some of the basis is:
1)      On the basis of the rate of inflation :
a)      Moderate inflation: When the rate of inflation is less than 10% p.a., it is considered as Moderate inflation.
b)      Cralloping inflation: When the rise in prices exceeds the range of 10 to 20% p.a., it is called Cralloping inflation
c)       Running inflation: When the movement of prices accelerates rapidly at a rate of 10% annually, it is known as running inflation.
d)      Hyper inflation: When the rate of inflation becomes uncontrollable, it is known as hyper inflation.

2)      On the basis of the nature of time period of occurrence :
a)      War-time inflation: When inflation occurs in the time of war due to increased govt. expenditure on defense, it is known as War-time inflation.
b)      Post-war inflation: When inflation occurs in the immediate post-war period due to repayment of public-dept is known as Post-war Inflation.
c)       Peace-time inflation: When inflation occurs during normal period of peace due to increased govt. expenditure on development projects is known as Peace-time inflation.

3)      On the basis of the scope of coverage:
a)      Comprehensive inflation: When the price of all goods and services through the economy rises, it is called economy wide or comprehensive inflation.
b)      Sporadic inflation: When the price of all goods and services rise through a few sectors of the economy, it is known as sporadic inflation.

4)      On the basis of govt.’s reaction :
a)      Open inflation: When the govt. makes no attempt to cheek or prevent a price rice, then the inflation occurs is known as Open inflation.
b)      Repressed inflation: When the govt. imposed physical and monetary controls to cheek open inflation, it is known as Repressed or suppressed inflation.

5)      On the basis of its causes :
a)      Credit inflation.
b)      Deficit inflation.
c)       Scarcity inflation.
d)      Profit induced inflation.
e)      Foreign trade inflation.
f)       Tax inflation.
g)      Cost or wage push inflation.

h)      Demand pull inflation.