Question

a)Define economic theory and give an example of a ceteris paribus problem
b)Discuss broadly into details why the balance of payments report is useful to the Ministry of Finance.
c)Differentiate between:
i)normative economics and positive economics
ii)price elasticity of demand and income elasticity of demand
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Answer 1

A. The economic theory basically means the general economic principles which are applicable in day to day life economic theory explain how the demand and supply forces work in the market and this is the theory where everyone depends for the production, consumption and distribution. Economic theory is really very important for understanding the basic economic structure on which the activities of a nation depend.
In economic theory there are two basic principles: one is law of demand and another one is law of supply. In the law of demand explanation is ceteris paribus it means other things remaining the same if the price of the commodity increases then its quantity demand decreases and vice versa.
In the law of supply there is a direct relationship between price and quantity supply it means if price increases then quantity supply also increases and vice versa here also the principle of ceteris paribus means other things remaining the same are applicable.
B. The balance of payment reports is useful to the Ministry of Finance because this report includes the balance of current account and the balance of capital account balance of current account includes the transactions that are not related to Assets and liabilities and the balance of capital account includes all the transactions related to Assets and liabilities in the economy so therefore it is important for the Ministry of Finance to decide which is the most profitable projects where we can invest in abroad.
Balance of payment is basically the difference between value of export of goods and services and the value of import of goods and services.
C. Normative economics means the things which are based on the assumptions and forecasts suppose farmers believe on the good crop only when the rain will happen so it all depends on the future based condition.
Positive economics means the things which are based on the real fact it means the rain happened bad then the crop is destroyed so here crop is destroyed because of bad rain.
Price elasticity of demand means the percentage change in quantity demand to the percentage change in price of the commodity it means the ratio of change in quantity demand to change in price of the commodity.
Income elasticity of demand means the percentage change in quantity demand to the percentage change in income of the consumer. It shows how much the quantity demand changes as there is change in income of the consumer it is the degree of responsiveness of change in quantity demand to change in income of the consumer.