Introduction to Economics Test - 2

In a capitalist economy, the production units will be called firms. In a firm, an entrepreneur exercises control over major decisions and bear a major risk associated in the production process.

Goods exported to foreign countries are the trading activities with external sector. Purchase and sale of goods with in the domestic country does not relate to trade with external sector.

Household consists of people working in the firms as workers to earn wages. Indeed, the market in which the firms sell their products could not have been functioning without any demand from the households.

All the economies of the world faced the problem of deficient demand and deflation during the period of Great Depression. Many economists thought about the new functioning of economy and the consequences of Great Depression gave birth to the study of Macroeconomics.

Aggregate consumption is the consumption of goods and services in the economy during a period of an accounting year.

Domestic income is the sum total of factor incomes generated within the domestic territory of a country, no matter who generates this income either residents or non-residents. It does not include net factor income from abroad.

The entrepreneurs coordinate the activities of the other agents of production i.e. land, labour and capital. After producing output with the factors of production, they sell the product in the market. The money that is earned is called revenue.

Macroeconomics is concerned with the study of aggregates which represent the economy as a whole. Some of the prominent examples of these aggregates are aggregate consumption, aggregate investment and aggregate demand.

Profits are often used by the producers in the next period to buy new machinery or to build new factories to expand the production capacity. These expenses which raise productive capacity are examples of investment expenditure.

Selling goods within the country does not relate to trade with external sector. Import and export of goods, flow of capital between the domestic country and the rest of the world  are related to trade with external sector.