Introduction (Part 2) — NCERT Solutions

According to the macroeconomic point of view, the economy has four major sectors:

1. Household sector — consists of individuals or groups that make consumption decisions, save, and pay taxes. Households earn income by working in firms or government, owning firms, lending capital, or leasing land.
2. Firms — production units in which entrepreneurs hire labour, use capital and land, produce output, and sell it in the market for profit.
3. Government — the state, which frames and enforces laws, delivers justice, collects taxes, spends on public goods and services, and may also undertake production.
4. External sector — the rest of the world, which is linked to the domestic economy through exports, imports, and international flows of capital.

These four sectors together describe the economy in macroeconomics.

The Great Depression began in 1929 and continued in the following years. It caused a severe fall in output and employment in Europe, North America, and other countries. Demand for goods became very low, many factories remained idle, and workers lost jobs. In the USA, between 1929 and 1933, the unemployment rate rose from 3% to 25%, and aggregate output fell by about 33%.

These events made economists realize that an economy could suffer from long-lasting unemployment and that the functioning of the economy had to be studied in a new way. This was one of the main reasons for the emergence of macroeconomics.