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ECO401 Virtual University

Virtual University ECO401 Final Term Short and long questions with answer Paper 2

Q. Briefly discuss the concept of Pareto efficiency. (3 marks)

Pareto efficiency, or Pareto optimality, is an economic state where resources cannot be reallocated to make one individual better off without making at least one individual worse off.

Q. When does the Real wage unemployment occur in an economy? Discuss. (3 marks)

Real wage unemployment occurs when wages are set above the equilibrium level causing the supply of labour to be greater than demand.

Q. Differentiate between demand-pull and cost-push inflation. (3 marks)

If prices rise continuously due to rise in demand for goods, it is called demand-pull inflation. Demand may rise due to rapid increase in population, change in the taste of the people, change in fashion or decrease in the production of goods etc.

If the price rises continuously due to the rise in cost of production, then it is called cost-push inflation. Cost of production may rise due to rise in the price of raw material and rise in wages etc.

Q. How can a current account, which is in deficit, be restored into balance under fixed exchange rate regime. (5 marks)

To Give Subsidies to Exporters

Any country which faces deficit in BOP should give subsidies to the exporters. These subsidies may consist of rebates and giving of foreign exchange to the exporters and selling of domestic products in the world markets at cheaper prices etc.

Restrictions on Imports

Any country which faces deficit in BOP may also impose restrictions on imports. Such restrictions may be consisting of increase in import duties, imposition of exchange control etc.

Import Substitution:

Instead of import of consumer goods we must import machinery for import substitution which will save foreign exchange on imports and make balance of payments unfavorable.

Stimulating Exports and Checking Imports:

If total export earnings have fallen short then steps should be taken to increase and for this purpose subsidies should be given to exporters. The imports of luxuries and other unnecessary imports either be prohibited or curtailed.

Protection of Local Industry:

Government should protect local industries and there should be trade restrictions on the import of goods competing with local good.

Industrial Development:

Pakistan’s Balance of payments is unfavorable because Pakistan exports primary goods. To avoid further increasing of balance of payments there must be industrial development.

Q. Differentiate between Total Utility and Marginal Utility. (2 marks)

The main difference between total and marginal utility is that total utility refers to the total satisfaction received by the consumer from consuming different units of a commodity while the marginal utility, connotes the additional utility derived from the consumption of the extra unit of a commodity.

Q. It is well known that the study of National Income accounting is highly Important from the point of view of economic development of a country. Discuss the importance of national income accounting especially for developing countries like Pakistan. (5 marks)


The study of National income is very much important as explained below:

Solution of Economic Problems

Study of National income is important to understand and analyze the economic problems and economic inequalities and to solve the economic problems.

Analysis of Economic Conditions

The economic status of a country is analyzed on the basis of national income, higher is the level of national income higher the living standard and vice versa.

Study of Rate of Economic Development

Persistent rise in the national income of a country over a long period of time depicts the rate of economic development economic welfare and economic prosperity.

Study of Different Sectors of the Economy

The study of national income reveals the contribution made by different sectors of the economy e.g. agriculture, industry, minerals, bade, transportation etc.

Consumption, Saving and Investment

Study of national income provides information about the share of consumption expenditure, savings of the people and investment expenditures.

Economic Policies and Planning

Study of national income helps in formulation of economic policies because natural income figures depicts which sectors are developing and which sectors are backward therefore to make plans for industrial, agricultural, trade etc. study of national income provide the base.

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