The ideas every Macroeconomics chapter builds on: what macroeconomics studies, final and intermediate goods, consumption and capital goods, stocks and flows, gross and net investment and depreciation, and the circular flow of income with its leakages and injections, with worked examples and the traps CUET sets.
Microeconomics looks at one consumer, one firm, one market. Macroeconomics looks at the whole economy through aggregates: total output, total employment, the general price level. It grew into a separate subject after the Great Depression of 1929, when Keynes's General Theory (1936) explained why output and jobs could stay low for years.
Every later chapter counts something: output, income, spending, money. This chapter fixes what gets counted and how it moves round the economy.
A good is final when it has reached its final user, for consumption or investment, and will not be sold on or used up in production that year. It is intermediate when it is used up as an input, or bought for resale, within the year.
The good itself does not decide. Its use does.
| Item | Bought by | Class |
|---|---|---|
| Flour | A family, to cook at home | Final (consumption) |
| Flour | A bakery, to make bread | Intermediate |
| Car | A dealer, to resell this year | Intermediate |
| Tractor | A farmer, for his fields | Final (capital good) |
The price of bread already includes the flour, the wheat and the baker's work. Counting the flour again would count it twice: double counting.
Example 1 · A chain of sales
A farmer sells wheat to a mill for ₹100, the mill sells flour to a baker for ₹160, and the baker sells bread to households for ₹250. What should national income count?
Adding all three sales gives ₹510, but the wheat is counted three times and the flour twice.
Only the bread reaches a final user, so its ₹250 is the value of final output.
₹250, not ₹510
Watch out
A machine is used in production but is not used up in a year, so it is a final good (a capital good), not an intermediate one.
A washing machine is a consumer durable for a family and a capital good for a laundry. Again, the use decides.
A stock is measured at a point of time: capital on 1 April, wealth, money supply on a date. A flow is measured over a period: income per year, investment, depreciation, saving, exports.
A flow changes a stock, as water flowing in fills a tank.
Example 2 · Capital stock
A factory had capital of ₹500 crore on 1 April. It invested ₹80 crore during the year and its machines depreciated by ₹30 crore. What was its capital on 31 March?
Net investment = 80 − 30 = ₹50 crore.
Closing capital = 500 + 50 = ₹550 crore.
₹550 crore
In macroeconomics, investment is an addition to the stock of capital: new machines, buildings, and additions to inventories. Buying shares, a second-hand house or a fixed deposit is not investment for the economy; it only moves existing assets.
Gross and net investment
Depreciation (consumption of fixed capital) is the expected fall in the value of fixed capital through normal wear and tear and obsolescence. A factory lost in a flood is an unexpected capital loss, not depreciation.
Unsold output is not lost: it is added to the firm's inventories, and that addition is counted as investment.
Watch out
Net investment can be negative (when depreciation exceeds gross fixed investment); gross fixed investment cannot.
In a two-sector economy (households and firms), households supply factor services (land, labour, capital, enterprise) and firms pay them rent, wages, interest and profit. Households spend that income on firms' goods, which becomes firms' revenue, which pays the next round of factor incomes.
Because the value of output, the incomes paid out and the spending on output are the same total, national income can be measured at three points: product, income and expenditure.
| Leakages (leave the flow) | Injections (enter the flow) |
|---|---|
| Saving | Investment |
| Taxes | Government spending |
| Imports | Exports |
The flow stays the same size when leakages = injections. If injections are larger, spending exceeds income and the flow grows; if leakages are larger, it shrinks.
Goods
Stocks, flows, investment
Circular flow
How those three totals are measured is in measuring national income.
72 questions, grouped by type, easy to hard. Pick an answer and check it. The worked solution opens when you ask for it.
Macroeconomics studies
AnswerB · the economy as a whole
Macroeconomics looks at totals for the whole economy: output, employment, the price level.
One firm, one good or one consumer is the subject of microeconomics.
Which of these is a macroeconomic question?
AnswerD · Why did India's unemployment rate rise this year?
The unemployment rate is an aggregate for the whole economy, so it is a macro question.
The other three are about one good, one firm or one household.
Worth noting
Tomato prices are prices, but of one good in one market: that is micro.
Macroeconomics grew into a separate branch of economics after
AnswerA · Keynes's General Theory of 1936
The Great Depression of 1929 brought output and employment crashing for years.
Keynes's General Theory (1936) explained it by looking at the economy as a whole, and macroeconomics grew from it.
Read the two statements and choose the correct option.
I. Microeconomics studies individual units such as a consumer or a firm.
II. Macroeconomics studies aggregates such as total output and the general price level.
AnswerC · Both I and II
Both are the textbook definitions of the two branches.
During the Great Depression of 1929, the main problem that classical economics could not explain was
AnswerC · long-lasting unemployment with idle factories
Classical economists expected markets to clear, so unemployment should vanish on its own.
Instead, output and employment stayed low for years, which needed a theory of aggregate demand.
Which pair is studied in macroeconomics?
AnswerB · Inflation and national income
Inflation is a rise in the general price level and national income is total output: both aggregates.
Assertion (A): Macroeconomics treats the economy's many goods as if they were one good, output.
Reason (R): Adding the values of all goods gives one aggregate, such as GDP, that can be studied as a whole.
AnswerA · Both A and R are true, and R is the correct explanation of A.
Aggregation is the method of macroeconomics: many goods are valued in money and added.
R explains why A is possible.
In macroeconomics, the four sectors of an economy are
AnswerC · households, firms, the government and the rest of the world
Macro models group decision makers into households, firms, the government and the external sector.
Primary, secondary and tertiary are kinds of production, not the sectors of the circular flow.
Read the two statements and choose the correct option.
I. Macroeconomics assumes that the economy always stays at full employment.
II. Keynes argued that aggregate demand could be too low to employ all workers.
AnswerB · Only II
Keynesian macroeconomics starts from the fact that unemployment can last, so I is false.
II is Keynes's central idea.
A final good is one that
AnswerA · is bought for final use, not for resale or as an input
What makes a good final is its use: it has left the production process.
Flour bought by a bakery to make bread is
AnswerD · an intermediate good
The bakery uses up the flour in producing bread within the year.
So the flour is an input, an intermediate good.
Flour bought by a family to cook its meals is
AnswerC · a final good
A household is a final user: cooking at home is consumption, not production for sale.
The same flour can be final or intermediate; the buyer's use decides.
Worth noting
The good is the same as the bakery's flour; only the use is different.
Which of these is a final good?
AnswerA · A new tractor bought by a farmer for his fields
The tractor is not used up in one year's production; it is added to the farmer's capital stock.
A capital good bought for investment is a final good. Steel, cotton and the factory's electricity are inputs used up in production.
Worth noting
A tractor is used in production, but it is not used up; that is why it is final.
Why are only final goods counted in national income?
AnswerB · Their value already includes the value of the intermediate goods used to make them
The price of bread covers the flour, the wheat and the baker's work.
Adding the flour again would count it twice: double counting.
A car dealer buys cars from the factory to resell them in the same year. For the dealer, the cars are
AnswerD · intermediate goods
Goods bought for resale within the year are intermediate: they have not reached a final user.
The car becomes final when a household or a firm buys it to use.
Which of these is an intermediate good?
AnswerA · Paper bought by a publisher to print books
The paper becomes part of the books within the year, so it is an input.
The machine is a capital good (final); the book and the laptop go to households (final).
Assertion (A): Milk is always a final good.
Reason (R): Whether a good is final depends on its end use, not on what the good is.
AnswerD · A is false, but R is true.
Milk bought by a sweet shop to make sweets is intermediate; milk bought by a family is final. So A is false.
R is the correct rule.
Read the two statements and choose the correct option.
I. All capital goods are final goods.
II. All final goods are capital goods.
AnswerA · Only I
A capital good bought for investment has reached its final user, so it is final.
But final goods also include consumption goods such as food and clothes, so II is false.
Match each good with how it is classed in national income.
| List I | List II |
|---|---|
| A. Sugar bought by a household | I. Final: fixed investment |
| B. Sugar bought by a sweet shop | II. Final: consumption |
| C. An oven bought by a sweet shop | III. Final: inventory investment |
| D. A dealer's unsold refrigerators at the end of the year | IV. Intermediate |
AnswerB · A-II, B-IV, C-I, D-III
Household sugar is consumed; the shop's sugar is used up making sweets.
The oven lasts for years (fixed investment); unsold stock is an addition to inventory.
A mill buys cotton worth ₹50 lakh in a year. It uses cotton worth ₹42 lakh to make cloth and keeps the rest in its store at the end of the year. The ₹8 lakh of cotton in store is treated as
AnswerD · a final good, as an addition to inventory (investment)
Cotton used up this year (₹42 lakh) is intermediate.
Cotton not used up (₹8 lakh) is an addition to the firm's stock of inventory, which is investment, a final use.
A bakery buys flour worth ₹30 and sells bread worth ₹50 to households. A farmer sold the wheat for that flour to a mill for ₹18. If GDP is found by adding the value of all three sales, it is overstated by
AnswerC · ₹48
Adding all sales: 18 + 30 + 50 = ₹98.
The true value of final output is the bread, ₹50. So the overstatement is 98 − 50 = ₹48, the wheat and flour counted again.
A capital good is
AnswerC · a durable good used to produce other goods over several years
Machines, tools, buildings and vehicles used by firms help produce goods for years.
They wear out slowly; that wear is depreciation.
A washing machine bought by a family is
AnswerC · a consumer durable good
It lasts several years, but the family uses it for its own needs, not to produce goods for sale.
So it is a consumer durable, not a capital good.
Worth noting
A laundry that buys the same machine to wash clothes for customers buys a capital good.
Match each item with its type.
| List I | List II |
|---|---|
| A. Bread eaten at home | I. Durable consumer good |
| B. A family's television | II. Capital good |
| C. A haircut | III. Non-durable consumer good |
| D. A factory's lathe machine | IV. Consumer service |
AnswerB · A-III, B-I, C-IV, D-II
Bread is used up at once; the television lasts years but is for the family's use.
A haircut is a service; the lathe produces goods for years.
Which of these is a capital good?
AnswerD · A truck bought by a transport company
The truck earns income for the company by carrying goods for years.
Diesel is used up (intermediate); the family's car and refrigerator are consumer durables.
Read the two statements and choose the correct option.
I. A capital good is used up completely in one year of production.
II. A capital good loses some value each year through normal wear and tear.
AnswerB · Only II
Capital goods last for many years, so I is false.
The yearly fall in value from use is depreciation, so II is true.
A mobile phone bought by a taxi driver to take bookings for his taxi is
AnswerC · a capital good
The phone is used for years in his business of carrying passengers.
A durable good used in production is a capital good.
Assertion (A): A machine bought by a firm is a final good even though it is used in production.
Reason (R): The machine is not sold on, and is not used up, within the year it is bought.
AnswerA · Both A and R are true, and R is the correct explanation of A.
Only a good that is resold or used up within the year is intermediate.
The machine stays in the firm's capital stock, so it is final, and R is why.
A stock is a quantity measured
AnswerA · at a point of time
A stock has no time dimension: the money in your account on 31 March, the capital of a firm on 1 April.
Which of these is a flow?
AnswerD · National income
National income is earned over a period, usually a year, so it is a flow.
Wealth, capital and money supply on a date are measured at a point of time: stocks.
Which of these is a stock?
AnswerA · Capital
Capital is what a firm owns at a point of time.
Investment, depreciation and exports happen during a period: flows.
Which of these are flows?
A. Savings of a family in a year
B. Wealth of a family
C. Water in a tank at 6 am
D. Water flowing out of a tap per minute
AnswerC · A and D only
Saving per year and water per minute are measured over time: flows.
Wealth and the water in the tank at 6 am are measured at a moment: stocks.
Assertion (A): Saving is a flow but savings (accumulated wealth) are a stock.
Reason (R): Saving is measured over a period, while accumulated savings are measured on a date.
AnswerA · Both A and R are true, and R is the correct explanation of A.
Saving per year adds to the stock of savings, just as a flow of water fills a tank.
R states the time dimension that makes A true.
Read the two statements and choose the correct option.
I. A flow has a time dimension, such as per month or per year.
II. A flow changes the size of a stock.
AnswerC · Both I and II
A flow is always 'per period', so I is true.
Net investment (a flow) changes the capital stock; saving changes wealth. II is true.
Which of these is NOT a flow?
AnswerB · Foreign exchange reserves on 31 March
Reserves 'on 31 March' are measured on a date: a stock.
Income, interest and consumption are per period: flows.
Which pair has a stock first and a flow second?
AnswerB · Capital and investment
Capital is held at a point of time; investment is added over a period.
'Distance travelled by a car' and 'speed of a car' are a good analogy for
AnswerC · a stock and a flow
Distance covered up to now is a total at a moment, like a stock.
Speed is distance per hour, a rate over time, like a flow.
A factory had capital worth ₹500 crore on 1 April. During the year it invested ₹80 crore in new machines and its old machines depreciated by ₹30 crore. What was its capital on 31 March?
AnswerB · ₹550 crore
Net investment = gross investment − depreciation = 80 − 30 = ₹50 crore.
Closing capital = opening capital + net investment = 500 + 50 = ₹550 crore.
Worth noting
₹580 crore adds gross investment and forgets that ₹30 crore of the old capital wore out.
An economy's capital stock was ₹2,000 crore at the start of a year and ₹2,150 crore at the end. Depreciation during the year was ₹90 crore. What was gross investment?
AnswerC · ₹240 crore
Net investment = change in capital stock = 2,150 − 2,000 = ₹150 crore.
Gross investment = net investment + depreciation = 150 + 90 = ₹240 crore.
In macroeconomics, investment means
AnswerB · an addition to the stock of capital
Investment is spending on new capital goods and additions to inventories.
Buying shares, deposits or an old house only transfers existing assets; nothing new is produced.
Worth noting
In everyday speech buying shares is 'investing', but it adds no new capital to the economy.
Depreciation is
AnswerA · the expected fall in the value of fixed capital from use
Depreciation, or consumption of fixed capital, is the expected loss of value from using capital.
Loss from an earthquake is unexpected, so it is a capital loss, not depreciation.
Gross investment − depreciation =
AnswerD · net investment
Part of gross investment only replaces worn-out capital; that part equals depreciation.
What is left is the true addition to capital: net investment.
A firm spends ₹60 lakh on new machines in a year, and depreciation on its machines is ₹15 lakh. Its net investment is
AnswerB · ₹45 lakh
Net investment = 60 − 15 = ₹45 lakh.
A machine costs ₹12 lakh, lasts 8 years and has no scrap value. Using equal yearly amounts, its depreciation each year is
AnswerB · ₹1.5 lakh
Depreciation per year = cost ÷ life = 12 ÷ 8 = ₹1.5 lakh.
Net investment of an economy is negative when
AnswerC · depreciation is greater than gross investment
Net = gross − depreciation, which is below zero when depreciation is larger.
Then the capital stock shrinks: worn-out machines are not fully replaced.
Gross fixed investment can never be negative, but net fixed investment can, because
AnswerD · net investment subtracts depreciation, which may exceed new spending on capital
New spending on fixed capital cannot be below zero.
If machines wear out faster than new ones are bought, gross − depreciation is negative.
Worth noting
This is about fixed capital. Inventory investment on its own can be negative when stocks are run down.
A shop's stock of goods was worth ₹4 lakh on 1 April and ₹5.5 lakh on 31 March. Its inventory investment for the year was
AnswerB · ₹1.5 lakh
Inventory investment = closing stock − opening stock = 5.5 − 4 = ₹1.5 lakh.
A firm produces goods worth ₹900 crore in a year but sells only ₹840 crore of them. In national income, the unsold ₹60 crore is
AnswerB · counted as investment in inventories
Output is counted when produced. Unsold output adds to the firm's stock of goods.
That addition is inventory investment, so all ₹900 crore of output is counted.
Assertion (A): Buying a second-hand machine from another firm is not investment for the economy.
Reason (R): The machine was counted when it was new; the sale only moves it from one owner to another.
AnswerA · Both A and R are true, and R is the correct explanation of A.
No new capital is added to the economy, so A is true.
R gives the reason: it was already counted when it was produced.
Which of these is investment in the macroeconomic sense?
AnswerC · A company builds a new warehouse
A new warehouse adds to the economy's stock of capital.
Shares and existing land change hands without new production, and a fixed deposit is a financial asset; none adds new capital.
Replacement investment is the part of gross investment that
AnswerA · replaces capital worn out during the year
Gross investment = replacement (depreciation) + net investment.
Assertion (A): Net investment adds to the capital stock of an economy.
Reason (R): Gross investment includes the replacement of capital that has worn out.
AnswerB · Both A and R are true, but R is not the correct explanation of A.
A is true: net investment is the addition left after replacing worn-out capital.
R is also true, but it describes gross investment; it does not explain why net investment adds to the stock.
Read the two statements and choose the correct option.
I. Depreciation is also called consumption of fixed capital.
II. A machine destroyed in a flood is part of that year's depreciation.
AnswerA · Only I
Consumption of fixed capital is the national accounts' name for depreciation, so I is true.
Depreciation covers only expected wear and obsolescence; flood damage is an unexpected capital loss. II is false.
In a year, gross investment in an economy is ₹1,200 crore, of which ₹200 crore is an addition to inventories. Depreciation is ₹350 crore. Net fixed investment is
AnswerB · ₹650 crore
Gross fixed investment = 1,200 − 200 = ₹1,000 crore.
Net fixed investment = 1,000 − 350 = ₹650 crore. Depreciation applies to fixed capital.
Worth noting
₹850 crore is net investment including inventories; the question asks for fixed investment only.
In the circular flow of a two-sector economy, households supply to firms
AnswerB · factor services
Households own the factors of production and sell their services to firms.
Firms use them to produce goods, which flow back to households.
Rent, wages, interest and profit in the circular flow are
AnswerD · factor payments from firms to households
Firms pay rent for land, wages for labour, interest for capital and profit to entrepreneurs.
These payments are the households' income.
Match each factor of production with its reward.
| List I | List II |
|---|---|
| A. Land | I. Profit |
| B. Labour | II. Interest |
| C. Capital | III. Wages |
| D. Enterprise | IV. Rent |
AnswerA · A-IV, B-III, C-II, D-I
Land earns rent, labour wages, capital interest, and the entrepreneur profit.
The payment a firm makes to the owner of a building it rents for its office is
AnswerA · rent, a factor payment
Payment for the use of land and buildings is rent.
It pays for a service of a factor, so it is a factor payment.
In the circular flow, the flow of goods from firms to households and of factor services from households to firms are called
AnswerC · real flows
Real (physical) flows are of goods, services and factor services.
Money flows run the other way: factor payments and spending on goods.
Assertion (A): In the circular flow, real flows and money flows move in opposite directions.
Reason (R): Every real flow of goods or factor services is paid for by a money flow the other way.
AnswerA · Both A and R are true, and R is the correct explanation of A.
Goods go to households and payment goes to firms; labour goes to firms and wages go to households.
R explains why the directions are opposite.
Which of these is a leakage from the circular flow of income?
AnswerB · Saving
Income that households save is not spent on firms' goods, so it leaves the flow.
Investment, government spending and exports add spending to the flow: injections.
Which of these are injections into the circular flow?
A. Taxes
B. Exports
C. Imports
D. Investment
AnswerC · B and D only
Exports and investment bring spending into the domestic flow: injections.
Taxes and imports take spending out of it: leakages.
In a two-sector economy with a financial market, household saving reaches firms as
AnswerA · loans for investment
Households deposit savings in the financial market.
Firms borrow from it to invest, so the leakage returns as an injection.
The circular flow of income stays at the same level when
AnswerD · leakages equal injections
What leaves the flow is exactly made up by what enters it.
If leakages are larger, spending and income shrink; if injections are larger, they grow.
The circular flow shows that national income can be measured in three ways because
AnswerC · the value of output, the incomes paid out and the spending on output are all the same total
Firms' sales revenue is paid out as factor incomes, and those incomes are spent on firms' output.
Measuring at any point of the circle, product, income or expenditure, gives one total.
Read the two statements and choose the correct option.
I. In a two-sector model there is no government and no foreign trade.
II. In a two-sector model with no saving, all income is spent on firms' goods.
AnswerC · Both I and II
The two sectors are households and firms only, so I is true.
With no saving, no taxes and no imports, every rupee earned is spent on firms' output. II is true.
In an open economy, money spent by Indian households on goods made abroad is
AnswerB · a leakage, because it does not become income for domestic firms
Spending on imports goes to foreign producers, so it leaves the domestic flow.
In a four-sector model, the four injections and leakages are best paired as
AnswerD · injections: investment, government spending, exports; leakages: saving, taxes, imports
An injection adds spending that does not come from households' current income.
A leakage is income not spent on domestic output.
In a simple two-sector economy, households earn ₹1,000 crore and save ₹150 crore. Firms invest ₹150 crore. How much is spent on goods by households and firms together?
AnswerC · ₹1,000 crore
Household spending = 1,000 − 150 = ₹850 crore.
Add firms' investment spending: 850 + 150 = ₹1,000 crore, equal to income, because saving equals investment.
In a three-sector economy (households, firms and government), which pair is an injection and a leakage, in that order?
AnswerA · Government spending and taxes
Government spending adds demand for firms' output: an injection.
Taxes take income away from spending: a leakage.
Assertion (A): In a two-sector economy, if planned investment is greater than planned saving, income will rise.
Reason (R): Injections greater than leakages mean that spending on output is greater than the income paid out.
AnswerA · Both A and R are true, and R is the correct explanation of A.
Extra spending runs down firms' stocks, so they produce more and pay out more income.
R is why the flow grows: injections exceed leakages.
Which statement about the circular flow is FALSE?
AnswerD · Leakages always reduce national income, whatever the injections
A leakage reduces income only if it is not matched by an equal injection.
When saving equals investment, income stays where it is.
NTA's Economics syllabus is three courses: Introductory Microeconomics, Introductory Macroeconomics and Indian Economic Development, each split into units with a list of topics. It prints no chapters and no split of the 50 questions across the courses. So the areas here are NTA's three courses, and the chapters inside them are ours: a unit that covers several ideas, such as consumer behaviour and demand, is split into a chapter for each, so that a chapter can be practised in one sitting. All three courses are here.