## FYBCOM Sem 1 Basic Tools in Economics Chapter 5 Notes 2024 – Identities

**FYBCOM Sem 1 Basic Tools in Economics Chapter 5 Notes** is Identities.

In this chapter Economic refer to fundamental relationships or equations that hold true by definition. They provide essential insights into economic behaviour, decision making, and policy formation.

The notes we provide for FYBCOM students are not tied to a certain course. Students pursuing FYBAF and FYBMS study similar subjects in their first semester, such as Basic Economics Tools, so these notes are equally beneficial to them. Our detailed notes are meant to make it easier for all students in these courses to understand the important concepts. Whether you are in FYBCOM, FYBAF, or FYBMS, these notes will help you succeed academically.

**Q.1 A) Select the most appropriate alternative and rewrite the statement:**

1) Identities may be

a) Numerical

b) Literal**c) Numerical of literal**d) None of the above

2) Which of the following is not a type of economic identity ?

a) National income identity

b) Savings Investment identity**c) Equilibrium identity**d) BOP identity

3) Which of the following is an example of an economic identity

a) The Law of demand

b) The production possibility frontier

c) The budget constraint **d) The saving investment identity **

4) The national income identity for an open economy states that.

a) GNP = GDP minus net factor income from abroad

b) GDP = GNP plus net factor income from abroad**c) GNP = GDP (C + I + G) plus net factor income from abroad (NX)**d) GDP = GNP minus net factor income from abroad

5) In theory, the balance of payments (BOP) should balance, with**a) Assets (credits) = Liabilities (debits)**(b) Assets (credits) > Liabilities (debits)

(c) Assets (credits) < Liabilities (debits)

(d) None of the above

6) All of the following describe the importance of identities in economics except

a) Policy Formulation by the government

b) Policy Formulation by private businesses

c) Policy Formulation by the central bank**d) Complicating economic analysis**

7) Which one of the following is not a description of the use of in economics?

a) Understanding Economic Systems

b) Policy formulation

c) Providing definitional structure to economic model**d) They lead to fallacies of composition**

8) Which one of the following identities is the core of monetarism ?**a) Equation of exchange**b) National income identity

c) Saving investment identity

d) Balance of payments identity

9) Which one of the following identities led to the definition of the velocity of money ?**a) Equation of exchange **b) National income

c) Saving investment identity

d) Balance of payments identity

10) In a firm’s balance sheet the fundamental identity that helps us to find the net worth is

a) Total Assets = Total Liabilities – Net Worth**b) Total Assets = Total Liabilities + Net Worth**c) Total Liabilities = Total Assets + Net Worth

d) Total Liabilities = Total Assets + Net Worth

**Q.1 B) State whether the following statements are true or false.**

- Definitional equations may be written with the three bar identity symbol (≣).
**– True** - The literal equation (a – b) (a + b) = a
^{2}– b^{2}is an identity.**– True** - Economic identities refer to fundamental relationships or equations that are false by definition.
**– False** - Y = C + I + G + NX is a national income accounting identity for a closed economy.
**– False** - Identities are not important to the government for policy decisions.
**– False** - Identities help businessmen understand economic systems and make informed decisions.
**– True** - Economic identities may not adequately account for human behavioural biases, or changing preferences over time.
**– True** - Identities are important components of economic models as they provide definitions.
**– True** - Consumption, investment, government spending, and net exports are an important identity in national income accounting.
**– True** - The equation of exchange identity led to the development of the quantity theory of money.
**– True**

**Answer the following question**

### 1) What is an Identity ? Write an explanatory note on identites in economics.

**Answer:** An Identity in mathematics and economics is an equation that holds true for all values of the variable involved. it represents a fundamental relationship between different quantities. For example, in mathematics, the equation (a – b) (a + b) = a2 – b2 is an identity because it is true for any values of a and b. In economics, identities serve to express relationships between economic variables that are always valid due to their definitions.

An identity in economics refers to a relationship or equation that is always true due to the definitions of the variables involved. These identities serve as foundational elements in economic theory, helping to clarify relationships between different economic variables and ensuring consistency in economic analysis.

**Types of economic identities **

1) **National Income Accounting Identities**: These identities arise from the definitions of national income components. For example, the identity for Gross Domestic Product (GDP) is expressed as: Y = C + I + G + NX

where Y is GDP, C is consumption, I is investment, G is government spending, and NX is net exports. This equation holds true because every unit of expenditure in an economy must equal the total income generated from that expenditure.

2) **Saving Investment Identity**:

This identity states that total savings in an economy must equal total investment: S = I

Here, S represents national savings and I represents national investment. This relationship underscores the importance of savings and for funding investments in an economy.

3) **Equation of exchange**:

The equation of exchange expresses a fundamental relationship in monetary economics:

MV = PQ

Where M is the money supply, V is the velocity of money, P is the price level, and Q is the output. This identity illustrates how money supply relates to economics activity and price levels.

4) **Balance of Payments Identity**:

In international economics, this identity states that: BOP = CA + KA = 0

where BOP is the balance of payments, CA is the current account, and KA is the capital account. This identity ensures that all financial transactions are accounting for, maintaining equilibrium in international trade.

### 2) Write a note on the importance and uses of identities.

**Answer: Importance and Uses of identities in Economics**

Economic identities are foundational equations that express relationships between different economic variables. Their importance and uses can be categorized into several key areas:

**1) Understanding Economic Systems**

Economic identities provide essential insights into various components of an economy interact. They help economists and policymakers understand the underlying mechanisms of economic systems, facilitating informed decision making

**2) Policy Formulation**

Policymakers rely heavily on economic identites to design effective strategies. By understanding realtionships such as those between money supply and inflation, authorities can make informed adjustments to monetary policy. Similarly, the balance of payments identity helps in formulating polices related to international trade and finance by ensuring that all financial transactions are accounted for maintainingequlibrium in the economy.

**3) Quantitative Analysis**

Economics identites allow for the quantification of economic concepts, providing a rigorous framework for analysis.

**4) Framework for Data Classification**

Identities serve as framework for organizing and classifying real world data. They help economists categorize various economic activities and transactions systematically, making it easier to analyze trends and patterns over time.

**5) Informing Business Decisions**

Business utilize economic identities to understand market dynamics and make strategic decisions regarding production, investment, and resource allocation. For example, firmly analyze income statements using the identity that net income equals total revenue minus total expenses to assess profitability.

**6) Development of Economic Theories**

Identities often underpin significant economic theories. The equation of exchange (MV = PQ), which relates money supply to national income, has led to the development of monetarism and the quantity theory of money. This theory emphasizes the role of money in influencing price levels and overall economic activity.

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