Theories of Employment and Public Finance (VSAQs)

Economics-1 | 8. Theories of Employment and Public Finance – VSAQs:
Welcome to VSAQs in Chapter 8: Theories of Employment and Public Finance. This page includes the most important FAQs from previous exams. Each answer is provided in simple English and presented in the exam format. This approach helps you prepare effectively and aim for top marks in your final exams.

Overview:

VSAQ-1: What do you mean by Full Employment?

Full Employment is like a situation where every capable and willing person in your neighborhood who wants a job has one. Imagine your town has a job available for everyone who’s ready and able to work—no one is left jobless unless they’re in between jobs by choice or temporarily. In economics, full employment means that the labor market is in equilibrium, where the unemployment rate is at its natural level. This includes only frictional (short-term, transitional unemployment) and voluntary unemployment (people choosing to be unemployed, perhaps between jobs), with no cyclical or involuntary unemployment (caused by economic downturns). When full employment is achieved, the economy is running at its maximum potential, with all resources fully utilized.

VSAQ-2: What is Effective Demand?

Effective Demand is like the perfect balance in a marketplace where all goods produced are sold without leaving any surplus or causing a shortage. Imagine a local farmers’ market where every tomato, apple, and loaf of bread brought by sellers is bought by customers, and no one leaves the market without getting what they wanted. In economic terms, effective demand represents the level of demand that results in full employment of available resources, meaning there’s no waste, and production is at an optimal level. It’s the point where aggregate demand (total demand for goods and services) equals aggregate supply (total production), ensuring there’s no inflation (rising prices) or deflation (falling prices).

VSAQ-3: What is the Wage-Cut Policy?

Wage-Cut Policy is like a store owner reducing the price of goods to attract more customers during a slow season. This policy, proposed by economist A.C. Pigou, suggests that by cutting wages, employers might find it more affordable to hire more workers, which could help reduce unemployment. The idea is that if workers are willing to accept lower wages, more jobs could be created, making it easier for people to find employment. It’s a strategy aimed at making employment more attractive to employers by lowering the cost of labor.

VSAQ-4: Define Public Finance.

Public Finance is like managing the finances of a large household, where the government acts as the head of the family, ensuring there’s enough money to cover all the expenses. It involves studying and managing how the government raises funds (through taxes, borrowing, etc.) and how it spends those funds to meet public needs, like building roads, providing healthcare, or funding education. Public finance is crucial for ensuring that the government can effectively plan and implement policies that support the well-being of its citizens and the overall economy.

VSAQ-5: Differentiate Tax Revenue and Non-Tax Revenue.

Tax Revenue is like the steady allowance a teenager gets from their parents every month—it’s a stable and mandatory source of income. In government terms, tax revenue includes money collected from various taxes, like income tax or sales tax, which citizens and businesses are required to pay.

Non-Tax Revenue, on the other hand, is like the extra money the teenager might earn from doing odd jobs or selling handmade crafts—it’s more irregular and voluntary. For the government, non-tax revenue includes income from sources other than taxes, such as fees, grants, interest income, or dividends from government-owned enterprises.

VSAQ-6: What is Public Debt?

Public Debt is like when a household borrows money to cover expenses when they spend more than they earn. In the context of a government, public debt occurs when the government needs to borrow funds because its expenditure (like building infrastructure or funding social programs) exceeds its revenue (money from taxes and other sources). The government might borrow from the public, foreign governments, or international organizations to make up for this shortfall.

VSAQ-7: What are the Debt Redemption Methods?

Debt Redemption Methods are like different strategies a family might use to pay off a loan. When a government borrows money, it needs to plan how to repay that debt. Some common methods include:

Surplus Budget: Using any extra funds (a surplus) to pay off debt, similar to paying more on a credit card when you have extra cash.
Refunding: Replacing old debt with new debt at a lower interest rate, like refinancing a mortgage to get a better deal.
Annuities: Making regular, fixed payments over time, like paying off a car loan with equal monthly installments.
Sinking Fund: Setting aside money over time specifically for repaying the debt, like a savings account dedicated to paying off a student loan.
Conversion: Changing the terms of the debt, such as extending the repayment period or lowering the interest rate.
Additional Taxation: Introducing extra taxes to raise money for debt repayment.
Capital Levy: A one-time tax on wealth or assets to reduce debt.
Trade Surplus: Using excess money earned from exports to pay down the debt, similar to using extra income from a side job to pay off a loan.

VSAQ-8: What is a Budget?

A Budget is like planning out your monthly expenses in advance, knowing how much money you’ll have coming in and deciding where it will go. For a government, a budget is an annual financial plan that outlines its estimated income and expenses for a specific period, usually a fiscal year. It acts as a financial roadmap, helping the government allocate resources to various sectors like healthcare, education, and defense while ensuring it stays on track with its financial goals. Just like a household budget helps manage spending and savings, a government budget is crucial for effective financial management and achieving broader economic objectives.

VSAQ-9: Distinguish Between Revenue Account and Capital Account.

The Revenue Account is like your regular checking account, which you use for day-to-day expenses like groceries, utilities, and rent. For the government, the revenue account deals with short-term, day-to-day income and expenses, primarily for running the government’s operations. Transactions here are short-term and do not create assets or reduce liabilities—think of it like paying salaries or subsidies.

The Capital Account, on the other hand, is like a savings account used for long-term investments, such as buying a car or a house. For the government, the capital account covers long-term investments and asset creation, such as building roads, schools, or hospitals. These transactions are long-term and can either reduce liabilities or create new assets for the country.

VSAQ-10: What are the Exclusive Powers of the Union Government?

The Union Government (central government) holds certain exclusive powers, much like how a principal has specific responsibilities that only they can manage within a school. These exclusive powers include:

Foreign Affairs: Managing international relations, treaties, and diplomacy with other countries.
Defense: Overseeing the armed forces and ensuring national security.
Atomic Energy: Controlling the development and use of atomic energy and related policy matters.
Currency: Regulating and issuing currency, ensuring the stability and reliability of the nation’s money.

These powers are reserved for the Union Government to maintain uniformity and coherence in critical areas that impact the entire country.

VSAQ-11: What is Fiscal Deficit?

Fiscal Deficit is like the shortfall you might experience if your monthly expenses exceed your income. Imagine you planned to spend ₹10,000 this month, but you only have ₹8,000 coming in. The ₹2,000 difference is your fiscal deficit—the amount you’ll need to borrow to cover your expenses. Similarly, in a country, the fiscal deficit represents the gap between the government’s total revenue (money it earns from taxes and other sources) and its total expenditure (money it spends on public services, infrastructure, etc.). When the government’s spending exceeds its income, it needs to borrow money to make up the difference.

VSAQ-12: Write a Note on Deficit Budget.

A Deficit Budget is like planning to spend more money than you have saved or will earn in a month. Imagine you want to buy new furniture, but your savings aren’t enough to cover the cost, so you decide to take a loan or use a credit card. This is similar to what happens when a government creates a deficit budget—it plans to spend more than the revenue it expects to collect during a specific fiscal period. To cover this gap, the government needs to borrow money, leading to an increase in public debt.

VSAQ-13: What is the Reserve Bank of India (RBI)?

The Reserve Bank of India (RBI) is like the head of all banks in the country, making sure everything in the financial system runs smoothly. Imagine the RBI as the coach of a sports team, setting the rules, guiding the players (banks), and ensuring the game (economy) is played fairly. The RBI is the apex financial institution responsible for overseeing and regulating the country’s financial system. It manages monetary policy, controls inflation, issues currency, and ensures the stability of the banking sector. Essentially, the RBI keeps the country’s economy on track.

VSAQ-14: What is a Laissez-Faire Economy?

Laissez-Faire is like letting a group of friends run a business without anyone telling them what to do—they make their own decisions with minimal outside interference. In economics, laissez-faire refers to the belief that economies and businesses function most efficiently when there’s minimal government intervention. This principle is a cornerstone of free-market capitalism, where the government takes a hands-off approach, allowing the forces of supply and demand to guide economic activity. The idea is that businesses should be free to operate as they see fit, which proponents argue leads to innovation and economic growth.

VSAQ-15: What are the Components of a Budget?

A Budget is like a detailed plan for your household’s finances, showing where your money will come from and how you’ll spend it. For a government, a budget typically includes:

Budget Receipts:
- Revenue Receipts: Income from regular activities like taxes and fees, similar to a steady salary.
- Capital Receipts: Income from sources like loans or selling assets, like borrowing money or selling an old car.
Budget Expenditure: All the planned spending, such as salaries, infrastructure, and welfare programs, similar to household expenses like rent, groceries, and utility bills.

This structure helps the government manage its finances effectively, just as a family budget helps manage household money.

VSAQ-16: Write a Brief About GST.

GST (Goods and Services Tax) is like a one-stop-shop for all taxes on goods and services, simplifying how taxes are applied and collected. Introduced in India in July 2017, GST replaced many different central and state taxes with a unified system that applies the same tax rules across the country. GST has multiple tax rates—5%, 12%, 18%, and 28%—depending on the type of goods or services. One of its key features is the input tax credit, which allows businesses to reduce their tax liability by claiming credit for taxes already paid on inputs. This system reduces tax evasion, makes compliance easier through online filing, and helps create a single market across the country, making it easier to do business.

VSAQ-17: Mention the Functions of the Finance Commission.

The Finance Commission in India is like a mediator ensuring that everyone gets their fair share of resources. Imagine a group of friends pooling their money for a trip, and one person is responsible for dividing the money so that everyone gets enough to enjoy the vacation. Similarly, the Finance Commission:

Divides tax revenues fairly between the central and state governments, ensuring that each has the funds needed for its responsibilities.
Recommends grants to states to help them manage specific needs, just like giving a friend extra money for a more expensive activity on the trip.
Evaluates fiscal positions by checking how well the central and state governments are managing their finances, ensuring no one is overspending.
Suggests resource mobilization methods to help states generate more income, similar to planning extra activities to fund the trip.
Manages debts by advising on how much borrowing is appropriate, like deciding how much money to borrow if the group falls short.
Promotes financial discipline by encouraging prudent spending, ensuring no one wastes money on unnecessary things.
Provides other financial recommendations to ensure smooth financial management, just like offering tips to make the trip enjoyable and affordable for everyone.

VSAQ-18: What is Meant by Primary Deficit?

Primary Deficit is like the amount of money you’re short after paying all your bills, except for your loan’s interest. Imagine you have a monthly budget where you cover all your living expenses—rent, groceries, utilities—but you still have to pay off a loan. Primary deficit is the difference between the fiscal deficit (the gap between total spending and income) and the interest payments on debt. It shows how much more the government needs to borrow just to cover its expenses, excluding the cost of servicing existing debt. This measure is important because it gives a clearer picture of whether the government is managing its finances well or if it’s living beyond its means.

VSAQ-19: What is Meant by Public Expenditure?

Public Expenditure is like the money a family spends to maintain their household and improve their living conditions. In the context of a country, public expenditure refers to the government’s spending on various activities and programs that benefit society. This includes building infrastructure like roads and bridges, funding social welfare programs to help those in need, supporting education and healthcare, and even ensuring the country’s defense. Public expenditure is a key tool for governments to achieve economic and social goals. When managed well, it can stimulate economic growth, reduce inequality, and improve the well-being of citizens. However, just like a household needs to budget wisely, the government must manage this spending carefully to avoid creating financial problems.

VSAQ-20: What is Say’s Law of Markets?

Say’s Law of Markets is like saying, “If you bake a cake, someone will buy it.” This idea, proposed by the economist Jean-Baptiste Say, suggests that “supply creates its own demand.” In simpler terms, when goods and services are produced, they generate income for those who made them. This income then leads to demand for other goods and services. For example, if a factory produces cars, the workers get paid, and they spend their earnings on food, clothing, and other items, which supports other businesses. Say’s Law implies that markets tend to naturally balance out because production creates the ability to purchase other goods. However, this idea is often debated among economists, especially during times when demand doesn’t seem to match supply, like during economic recessions.