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The main objective of economics is to maximize the welfare of individual and society.

At present, the state’s paramount interest has become to ensure the economic welfare of the people.

Economics has the power to interpret and explain, therefore, economics has also the power to predict economic events.

Under this division of economics, public income, public expenditure, public debt, arrangement of deficit financing, etc. are studied.

Following are the 5 components of the subject matter of economics:

• Consumption : Consumption is that economic activity which is associated with the consumption of utility of goods and services for direct satisfaction of individual and collective requirements.
• Production : Production is associated with increasing the utility or value of goods and services.
• Exchange : Exchange is associated with sale and purchase of a product or service. Exchange is required for consumption of goods produced and for fulfillment of wants
• Distribution : Production is the result of collective efforts of various resources. Therefore, it is very important to determine the remuneration for every resource of production under the process of production and this is known as income distribution. 
• Public Finance : Study of public income, public expenditure, public debt, deficit financing system, tariff system, etc. are done under this branch of economics.

The figures given in economics are not simple and credible because they keep changing.

Economics as normative science highlights the merits and demerits of economic events and activities and helps in attaing economic welfare for the society and individual.

The nature of economics is like pure science, so to maintain this relationship, it is not right to consider it as an art.

Science gives us principles of any discipline however, art turns all these principles into reality. Therefore, considering the activities in economics, it can claimed as an art also, because it gives guidance to the solutions of all the economic problems.

In the form of a normative science, economics solves the questions- what should be, done in a given situation.

Yes, a complete and thorough study of knowledge is done economics, which shows the relationship between the cause and effect.

Following are the limitations of economics.

1. Economics is a social science. Only human activities are studied in this. Activities of animals and birds and other living organisms are not studied in economics. 

2. Study of activities of abnormal and unsocial human beings is not done in economics. 

3. That is only those activities are studied in it which can be measured in terms of money. Only economic activities are studied under economics. Although economics is helpful in solving practical problems, yet it does not give a definite solution in their context.

The branch of knowledge that shows the best way to achieve certain objectives is called an art.

(b) What ought to be done

Correct Answer is: (a) What is it

As a positive science, economics explains the relationship between causes and effects. It explains-what it is? Why it happens? and how it happens? It cannot tell anything about the merits and demerits of economic activities, their correctness or faults. That is based on discretion and prudence.

Economics as a Positive Science : Professor J. B. Say, Senior, among classical economists, and Professor Robbins, among modem economists, have regarded economics to be positive science. According to Robbins, “Economics studies the facts which can be examined, while normative science the facts of evaluations and findings.”

1. In economics, the actual viewpoint can provide systematic, argumentative and correct economic conclusions, because the basis of relationship between causes and consequences is logical. 

2. Strong economic principles are formed on the basis of actual view points, beliefs and scientific analysis. 

3. If only the study of authenticity of economic activities is done in economics, then disagreement amongst economists will lessen, understand ability will increase amongst them and the development of economics will also take place in a rapid way. 

4. Professor Robbins had said that realizing the scarcity of resources, mankind should perform work according to the best of his skills. He should undertake only such work in which he specializes. If an individual starts doing all kinds of works, then he will waste both, his time as well as money. Therefore, an economist should concentrate only on the cause and its consequence.

Economics is a Normative Science : Various economists such as Fraser, Henderson, Quandt and others consider economics to be a normative science. 

Following arguments can be given in favour of this :

• Mankind is both emotional and argumentative : Along with being logical, an individual is emotional also, and therefore it is essential to study both the aspects of human behaviour, thus, along with being a positive science, economics is also a normative science. 
• More useful : In fact, economics is an agent of social welfare. Therefore, its use in the form of normative science will be more important. Along with the study of economic activities, an economist should also think about making it more useful and effective. 
• Wrong argument of division of labour : The argument that economists should merely interpret the relationship between causes and consequences, and the task of finding solutions should be assigned to the policy makers and political leaders, is not correct. Its actual analysis will become monotonous and uninspiring and labour and power would not be saved. Therefore, the power of taking decisions should also vest in the economists. 
• More realistic : The nature of economics is continuously changing. Today, economics is rapidly developing in the form of welfare economics. Subjects such as economic planning and social security have become major subjects of economics. In such condition, one cannot ignore the normative aspect of economics. 
• Helpful in betterment of the society : A economics is a social science and it works for the betterment of the society, its normative aspect cannot be ignored.

From the above discussion, it is clear that economics is both, positive as well as normative science. We can consider economics to be pure and real science, but certain normative objectives should also be kept for practical use.

Under distribution, it is determined what the national income is, and how is it to be allocated to different developmental and welfare programmes.

Normative science analyzes the policy related facts. It also explains what should be done in a particular situation.

No, only the human activities are studied in economics.

Distribution ensures a fair distribution of national income among all contributive factors.

Robbins has considered economics to be a human science.

Normative science investigates policy-related facts.

The principle of price determination is based on currency.

(b) Normative Science

Consumption is called the beginning and end of economics.

It is the science that tells the relationship between causes and consequences but does not say anything about merits and demerits. It is also called real science.

In economics, only economic activities are studied.

The activity of exchange relates to the purchase or sale of any commodity or resource.

The subject matter of economics is divided into 5 parts.

Main sources of production are land, labour, capital, organization and entrepreneurship the willing not. ability to take risks.

The exchange action is related to the purchase-sale or exchange of a product or service.

Economic activities like production, exchange, distribution, etc. are done for consumption.

1. Consumption 

2. Production 

3. Exchange 

4. Distribution 

5. Public Finance

The continuous expansion and diversification of economic activities has made the subject matter of economics broader.

In Adam Smith’s wealth centred definition, economics is related to the earning and accumulation of wealth.

The major uses of tax system as an instrument of fiscal policy are as follows: 

• Helps in mobilization of revenue and checking unwanted expenditure. 
• Brings favourable changes in redistribution of income and wealth. 
• Helpful to control inflation and deflation.

Marshall has considered the economic activities related to material welfare as the subject matter of economics,

(i) +(iii) +(vi) +(vii) +(ix) +(ii) +(v) +(viii)

700 + (-20) + 80 + 60- (-10) -40-150 - 70=570

Income earned by the owners in exchange for giving others the right to use mineral mines, copyright, patents, and trademarks, etc. is called royalty.

Correct answer is (b) Pigou

Net indirect taxes is the difference between indirect taxes and economic subsidies. 

Counting the value of commodities at every stage of production more than one time is called double counting. 

It can be avoided by 

a) taking value-added method in the calculation of the national income. 

b) By taking the value of final commodity only while calculating N.I

GDP doesn't account for externalities

Positive Externality: eg: saving commuting time due to the construction of a fly-over, increases welfare, GDP as an index understates welfare

Negative Externalities: eg: Pollution from factories, decreases welfare, GDP overstates welfare.

Whether machine is a final good or it depends on how it is being used (end use). If machine is bought by a household, then it is a final good. If machine is bought by a firm for its own use, then also it is a final good. If the machine is bought by a firm for resale then it is an intermediate good. 

Net Export means the difference between export and imports. 

Net export = Export – Imports

Double counting means counting the value of the commodity more than once.

N.I. at current prices is the money value of final goods and services estimated at current prices produced by normal residents during an accounting year.

A firm is said to be operating under conditions of pure competition when there are many firms, producing a homogeneous commodity with freedom of entry and exit, independent decision-making. Perfect competition is said to exist, when besides conditions of pure competition, two more conditions are satisfied, viz (i) there is perfect knowledge of the market conditions among buyers and sellers, and (ii) there is perfect mobility of factors of production.

1) The national income figures give no indications of the population, skill and resources of the country. A country may be having high national income but it may be consumed by the increasing population, so that the level of people’s wellbeing or welfare standard of living remains low. 

2) High N. I may be due to greater area of the country or due to the concentration of some resources in out particular country. 

3) National income does not consider the level of prices of the country. People may be having income but may not be able to enjoy high standard of living due to high prices. 

4) High N. I may be due to the large contribution made by a few industrialists 

5) Level of unemployment is not taken into account. 

6) National income does not care to reduce ecological degradation. Due to excess of economic activity which leads to ecological degradation reduces the welfare of the people. 

Hence GNP and economic welfare are not positively related. Income in GNP does not bring about increase in economic welfare

Reasons:

(i) Taking care of aged parents - Should be included because it is a productive service rendered to the parents.

(ii) Payments of Corporation Tax - Should not be included because any tax payments is a transfer payment as no good or service is provided in return.

(iii) Expenditure on Providing Police Service by Government - Should be included because expenditure on any free service provided by the government is government's final consumption expenditure.