## FYBCOM Sem 1 Basic Tools in Economics Chapter 1 Notes 2024 – (Variables)

**FYBCOM Sem 1 Basic Tools in Economics Chapter 1 Notes – **Variables play a crucial role in understanding and analysing economic phenomena. It is important for policymakers to understand the various types of variables, and their significance to enable them to make informed decisions and shape economic outcomes. Therefore, variables serve as essential tools for understanding, predicting, and shaping economic outcomes.

The FYBCOM Sem 1 notes basic tools in economics chapter 1 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) What is a variable in economics?

a) A constant value that does not change.

b) **A factor that can vary and affect economic outcomes.**

c) A mathematical equation used to calculate prices.

d) A government policy that influences economic decisions.

2) Which of the following is an example of a continuous variable?

a) **Height of individuals**

b) Number of students in a classroom

c) Number of cars produced in a factory

d) Number of apples in a basket

3) Why are variables important in economic analysis?

a) They allow economists to predict future market trends.

b) **They help measure and explain economic relationships.**

c) They determine government policies.

d) They ensure equal distribution of resources.

4) Which type of variable represents a specific point in time?

a) Flow variable

b) Continuous variable

c) **Stock variable **

d) Discrete variable

5) The total population of a country is an example of which type of variable?

a) Flow variable

b) Continuous variable

c) Discrete variable

d) **Stock variable**

6) Which of the following is a discrete variable?

a) Temperature in degrees Celsius

b) **47 Number of cars sold in a month**

c) Height of a mountain

(d)’ Weight of an elephant

7) Why do economists use variables in economic models?

a) To create complex equations

b) To confuse policymakers

c) increase government spending

d) **To simplify economic analysis**

8) Which of the following is an example of an independent variable?

a) Unemployment rate

b) Income level

c) **Price of a product **

d) Consumer preferences

9) Why is understanding the relationship between dependent and independent variables crucial in economics?

a) **It guides policy decisions**.

b) It helps predict stock market trends.

c) It determines tax rates.

d) It ensures equal distribution of wealth.

10) Which one of the following is not a qualitative variable?

a) Binary variable

b) Nominal variable

c) **Omitted variable **

d) Ordinal variable

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

- A constant is something whose value can change, while a variable is something whose value remains the same.
**– False** - The speed at which a car is travelling is an example of a variable.
**– True** - The number of minutes in an hour is an example of a constant.
**– True** - Economic theories and models rely only on constants to predict and explain economic outcomes.
**– False** - Variables can be continuous (like height) or discrete (like the number of cars sold).
**– True** - Understanding the relationship between dependent and independent constants is crucial for guiding policy decisions.
**– False** - Variables allow economists to measure and explain economic relationships.
**– True** - Real variables describe the monetary value of variables and tell us how rupee values and the cost of living are changing.
**– False** - An exogenous variable is also known as an induced variable.
**– False** - Inverse relationships occur when variables move in the same direction (that is, they increase or decrease together).
**– False**

### 1) What are variables? Describe various types of variables.

**Answer:** A variable is an item or magnitude of interest that can be defined and measured. It takes on different values at different times or places. A variable is a quantity that can take on more than one value, examples include the number of years of education a person has, the price of a kilo of wheat, or a household’s income.

An economic variable represents a measurable quantity that influences or reflects economic behaviour, outcomes, or conditions.

#### Types of Economic Variable

There are various types of variables. The choice/use of variable/s is determined by the type of observation or investigation being undertaken, Economic variables may be classified in terms of the following:

- Quantitative and Qualitative Variables
- Real and Nominal Variables
- Dependent and Independent Variables
- Endogenous and Exogenous Variables
- Leading Indicator Variables and Lagging Indicator Variables
- Flow Variables and Stock Variables
- Omitted Variables

**1) Quantitative Variables**:

Quantitative Variables are numeric in nature and represent measurable quantities. They involve numbers, counts, or percentages. When a variable can be reported numerically, it is called a quantitative variable.

**Examples of quantitative variables **are the balance in a **savings account**, the number of gigabytes of data used on the cell phone plan last month, the life of a car battery (such as 42 months), and the number of people employed by a company.

**Importance of Quantitative Variables:**

a) Quantitative variables allow precise analysis and modelling.

b) They help economists make informed decisions and predict economic trends.

**Qualitative (Categorical) Variables:**

Qualitative (Categorical) variables represent qualitative data, such as opinions, preferences, or characteristics. They do not represent quantitative data, such as measurements or counts. When an object or individual is observed and recorded as a non-numeric characteristic, it is a qualitative variable or an attribute.

Examples of qualitative variables are gender, beverage preference, type of vehicle owned, state of birth, and eye colour.

When a variable is qualitative, we usually count the number of observations for each category and determine what percentage is in each category.

**For example**, if we observe the variable eye colour, what per cent of the population has brown eyes and what per cent has blue eyes? If the variable is a type of vehicle, what per cent of the total number of cars** **sold last month were SUVs? Qualitative variables are often summarised in **charts **and **bar graphs**.

**2) Real and Nominal Variables:**

Real variables describe the physical state of the economy and tell us what is really happening to economic well-being. The real variables include real GDP, employment and unemployment, the real wage rate, consumption, saving and investment.

Nominal variables describe the monetary value of variables, and tell us how rupee values and the cost of living are changing. Nominal variables include the price level (Wholesale Price Index, Consumer

Price Index, and GDP deflator), the inflation rate, nominal GDP and the nominal wage rate.

**3) Dependent and Independent Variables**

The dependent variable may be presented as depending upon one independent variable, with the influence of the other independent variables held constant. An economic model will also specify whether the dependent and independent variables are positively or negatively related i.e., moving in the same or opposite directions.

Although it is not easy always easy, economists seek to determine which variable is the “**cause**” and which is the “**effect**.” Or, more formally, they try to find the independent variable and the dependent variable. The independent variable is the cause or source; it is the variable that changes first.

The dependent variable is the effect or outcome: it is the variable that changes because of the change in the independent variable.

**4) Endogenous Variables**

An endogenous variable also known as an induced variable, is a variable in a model that is changed or determined by its relationship with other variables within the model. For example, changes in consumption are induced by changes in income.

Endogenous variables have values that change as part of a funvliunal relationship between other variables within the mode]. The relationship is also referred to as dependent, and is se predictable.

**Exogenous Variables**

Exogenous variables are also called external variables. They are independent variables. However, exogenous variables can have an impact on endogenous factors.

Economists also use independent or exogenous variables to help determine to what which extent a result can be attributed to an exogenous or endogenous cause.

### 2) Discuss the meaning and importance of variables.

**Answer:** A variable is an item or magnitude of interest that can be defined and measured. It takes on different values at different times or places. A variable is a quantity that can take on more than one value, examples include the number of years of education a person has, the price of a kilo of wheat, or a household’s income

**The Importance of variables are:**

**1) Understand Economics Trends:**

Variables help us comprehend economic growth, price influations, and inflation. Variables help us track economic trends. They provide insights into factors driving economic changes, such as technological advancements, consumer behaviour, and government policies

**2) Policy Formulation:**

Policymakers rely on variables to design effective economic policies. By analyzing variables like GDP, inflation rates, and unemployment, governments can tailor policies to stabilise the economy, promote growth, and address societal needs.

**For Example**, for formulating monetary policy central banks adjust interest rates based on economic variables; such as the inflation rate and the unemployment rate. For formulating fiscal policy governmets use variables like tax rates and public expenditure to influence the economy.

**3) Predication / Forecasting and Planning:**

Variables allow economists to make informed predications. For instance, studying interests rates, exchange rates, and investment levels helps antiipate future economic conditions. Understanding variables helps predict economic trends and plan for the future.

**4) Quantitative Analysis:**

Variables enable quantitative analysis of relationships: For example, studying how variables move together; e.g., GDP and investment, or in opposite direction, crude oil prices and airlines stock prices. Predicting one variables based on others is an example of regression analysis.

**5) Comparative Analysis:**

Variables allow comparisons across countries, regions, or time periods.

**6) Understanding and Tracking Trends:**

Variables helps us track economic trends. For instance, Gross Domestic Product (GDP) reflects overall economic performance; the inflation rate indicates changes in price levels, and the unemployment rate highlights labour market conditions.

**7) Business Decisions:**

Firms consider variables for decision making. For example, studying demand helps in understanding consumer preferences and behavior. Studying costs helps to analyse production costs and pricing strategies.

### 3) Discuss the meaning and uses of variables.

**Answer:** A variable is an item or magnitude of interest that can be defined and measured. It takes on different values at different times or places. A variable is a quantity that can take on more than one value, examples include the number of years of education a person has, the price of a kilo of wheat, or a household’s income. Here are some practical uses of economic variables:

**1) Gross Domestic Product (GDP): **GDP measures the total value of all goods and services produced within a country’s borders. Policymakers use GDP to assess economic growth, compare

living standards across countries, and allocate resources efficiently.

**2) Inflation Rate:** Inflation reflects the general increase in prices over time. Central banks monitor inflation to set interest rates and maintain price stability. High inflation erodes purchasing power, affecting consumers and businesses. Central banks and the government take account of inflation in designing and implementing monetary policy and fiscal policy respectively.

**3) Unemployment Rate:** The unemployment rate indicates labour market conditions. Governments use it to design employment policies and assess economic health. High unemployment may signal economic distress.

**4) Interest Rates: **Central banks adjust interest rates to influence borrowing, spending, and investment. When central banks lower rates, it encourages borrowing and stimulates economic activity. Conversely, higher rates curb inflation but may slow growth.

**5) Population:** Population size affects resource allocation, demand, and economic growth. A growing population signals an Increased demand for housing, healthcare, and education.

### 4) Explain the relationship between variables.

**Answer:** Relationship between variables are represented mathematically by equations. Graphs are a visual representation of the relationship between variables.

Graphs can be upward – sloping as in the case of positive relationships or downward-sloping as in the case of inverse relationships.

Variables are also depicted by special graphs; example time series which show how a particular variable moves over time: and scatter diagrams which show two or more relationships in a single graph.

**Causal relationship:** A causal relationship exists between two variables when the value taken by one variable directly influences or determines the value taken by the other variable.

.In a causal relationship, the determining variable is called the independent variable; the variable it defines is called the dependent variable. Two variables are unrelated when the dependent variable is constant regardless of the value of the independent variable.

The value of the dependent variable (the “effect”) is determined by the value of the independent variable (the “cause”). When the “other factors” that might affect a two-variable relationship are allowed to change, the graph of the relationship will most likely shift to a new location.

**Linear relationship:** When variables can have a linear relationship a graph that illustrates the relationship between the variables is a straight line.

**Nonlinear relationship:** In the case of nonlinear relationships between two variables, the curve graph is not a straight line. The graph is a curved line.

Direct or positive relationships: Direct relationships occur when variables move in the same direction (thatis, they increase or decrease together). A relationship in which two variables move in the same direction is also called a positive relationship.

An example of a direct relationship is the one between income and consumption. Consumption and income change in the same direction. An increase in consumption is associated with an increase in income; similarly, a decrease in consumption accompanies a decrease in income. Another example is the relationship between price and quantity supplied. When the price increases, the quantity supplied increases.

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