Question

a)Define economic theory and give an example of a ceteris paribus problem
b)Discuss 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)

# Economic theory---- Economic theory is an organized system of accepted knowledge that explains commercial activities such as the production and consumption of goods .It is a particular idea or principle that aims to describe how an economy works.

# Example of Ceteris Paribus problem---

Ceteris Paribus is a latin phrase which means " other things being equal". This phrase is widely used in explaining economic laws.Using the concept of Ceteris Paribus helps us to understand the theoretical relationship between cause and effect.

For example --- In the law of drmand ,there is an inverse relationship between price and quantity demanded ceteris Paribus,that is assuming that other factors are constant ,no change in income, fashion, price of other goods etc,etc.

But, in the real world all other thingd don't remain equal.This is the problem in reality.

For Example--- Currently, during Covid-19, the demand for oil drastically dropped, but the petrol prices are still rising.rising.The point is, if law of demand states ,with the decrease in demand, price should fall, why it is not happening in the real world.

b) Usefulness of BOP report for Ministry of Finance

Balance of payment is a statement which records all the monetary transactions made between residents of a country and the reast of the world during a particular period.

* It helps ministry to take decisions regarding Economic dealings with rest of the world.The govt evaluates that which trade decision is beneficial / harmful for the country.

* The govt comes to know the currency value of the country, whether it is depreciating or appreciating.

* The BOP statement helpz the ministry to take decisions regarding fiscal and trade policies.

* The status of countries exports and imports is visible to go t through BOP statement only.

* The vital decisions regarding devaluation of domestic currency is also taken with the help of statement of BOP.

* The ministry of finance monitors the flow of funds( inflow /outflow) and transactions made by corporations with the help of BOP statement.

C)

# Normative v/s Positive Economics

C)# Price Elasticity of demand vs Income elasticity of demand

Price elasticity of demand	Income elasticity of demand
* It is degree of responsiveness of Quantity demanded due to change in price * Formula= percentage change in quantity demanded / percentage change in the price * Price elasticity of demand for a normal good is negetive * It classifies goods into----- - unitary elastic - Elastic - Inelastic	* It is the degree of responsiveness of Quantity demanded due to change in the Income level. Formula-- percentage change in quantity demanded / percentage change in income * Income Elasticity of demand for a normal good is positive It classifies goods into--- - Normal - inferior - giffen