Basic Concepts in Economics
1) Production: Any economic activity directed towards the satisfaction of human wants is known as production. The production of goods and services is necessary for the existence of an economy. The level of production in any economy is the best measure of its performance, living standards of its people and the extent of technological development and growth. It includes both the manufacturing of material goods as well as the provision of services. The production of electrical and electronic goods, automobiles etc and the t he work of teachers, doctors, lawyers etc are all production in the economic sense. 2) Consumption: The act of satisfying one’s wants is called consumption. Goods and services are produced only because human wants need to be satisfied. No one will produce if there is no consumption. The quality and quantity of consumption reflects the levels of income and employment in an economy. 3) Investment: Investment is the addition made to the existing total stock of capital. The amount to make investment is coming from saving and this saving is the unspent income. Income comes from employment. An economy can grow only if it saves something from its present consumption and invests it again in the production process. It adds to the productive capacity of an economy. 4) Goods: Anything that can satisfy human wants is called goods in economics. While
services also satisfy human wants, the difference is that goods are tangible and visible but services are intangible and invisible. Goods can be of various types. They can be free goods or economic goods, transferable, private or public and so on.
Utility: The want satisfying capacity of a commodity is called its utility or the power
of a commodity to satisfy human wants is called utility. Utility is subjective that is it does not lie in the good but is a function of the consumer’s mind. Utility of good changes with the change in conditions and circumstances. There are three main forms of utility-form utility, place utility and time utility. Value: The commodity which has utility and possesses the condition of scarcity and
transferability, then it has value. For example air has utility but it is abundant and a free resource, it has no value in economic sense. Likewise rotten eggs are scarce and transferable but possess no utility, they also don’t have value. A television since it possesses utility and is scarce as well as transferable has value. Price: Value of a commodity expressed in terms of money is called price. In modern
times, goods are exchanged for money; the value of a commodity is its price. Wealth: Anything that has value is called wealth. In economics; wealth does not only
refer to money, but to all goods that have value. Wealth includes material wealth and human wealth (education, health, knowledge etc) Income: The amount of money which wealth yields is known as income. Thus,
wealth is a stock concept while income is a flow concept. That is wealth is valued at a particular point of time and income is measured over a period of time particularly a year. Gross Domestic Product (GDP)
When we take the sum total of values of output of goods and services in the country, without adding net factor incomes received from abroad, the figure so obtained is called Gross Domestic Product (GDP). GDP = C+I+G
GNP may be defined as the aggregate market value of all final goods and services produced during a given year. The concept of final goods and services stands for finished goods and services, ready for consumption of households and firms, and exclude raw materials, semi-finished goods and such other intermediary products. More clearly, all sales to households, business investment expenditure, and all government expenditures are obviously regarded as final goods. In an open economy (an economy which has economic relationship with the rest of the world in the form of trade, remittances, investment etc-all economies are open economies), GNP may be obtained by adding up: 1) The value of all consumption goods goods which are currently produced 2) The value of all capital goods produced which is defined as Gross Investment. Gross Investment, in the real sense, here implies the increase in inventories plus gross products of buildings and equipments. It, thus, includes the provision for the consumption of capital assets, i.e., depreciation or replacement allowances. 3) The value of government services which are measured in terms of governmental expenditure on various goods and services for rendering certain services to the benefit of the entire community. 4) The value of net exports, viz, viz, the difference between total exports and total imports of the nation. This value may be positive or negative. 5) The net amount earned abroad. This represents the difference between the income received by the nationals from abroad minus the income remitted by the foreigners working in India. GNP at market price, thus, represents: GNP= C+I+G+(X-M)+(R-P),
Where, C stands for consumption goods, I stands for capital goods/ or gross investment, G stands for government services, X stands for exports, M stands for imports, R stands for income receipts from abroad, and P stands for income remitted by foreigners.
The Sectors of the Economy
The economic activities of an economy is classified mainly into three primary sector economic activities (agriculture and allied), secondary sector (manufacturing, construction etc) and service sector or tertiary sector activities (transport and communication etc).The Ministry of Statistics and Programme Implementation (MOSP), Government of India has been publishing National Accounts Statistics annually classifying the Indian economy into three sectors and re-classifying the sectors into various sub sectors. In this classification primary sector
includes
agriculture, forestry and logging and fishing. The secondary sector includes manufacturing (registered and un-registered manufacturing), construction, electricity, gas and water supply. Tertiary sector or service sector includes transport, storage and communication, railway, trade, hotels and restaurants, banking and insurance, real estate, ownership of dwellings and business services, public administration and other services. In Indian economy the contribution of primary sector is less than 20 per cent
and the agriculture share in national GDP is reducing even though 58 per cent of India’s labour force still engaged in agriculture and allied activities. This is a serious issue in the rural life of India. The agrarian sector has been facing serious crisis and to a greater extent it is structural and institutional. The area under irrigation has been almost constant for the last several years, declining capital expenditure by the public sector in agriculture, lack of infrastructural facilities, declining institutional credit to agriculture etc all these are burning issues of India’s farm sector. Sharp decline of agriculture in value-added terms to GDP, increasing amenities in urban India and not much in rural India where more than 70 per cent of the population lives etc are some disturbing facts to those who hold ‘Indian Economic Miracle’ theory. We have good demographic advantage, vast agricultural land and in this land we can cultivate all most all crops sufficiently to meet the requirements of our growing population. But now the present situations of India like poor state of our education, public health, agriculture and rural economy, poor amenities in rural areas and urban slums, poor public delivery systems, high poverty ratio, still high illiteracy rate, malnutrition and high infant mortality rate are burning issues to be addressed urgently. At the national level the contribution of manufacturing sector is around 18 per cent and it is almost constant for the last so many years. But in Kerala it is around 10 per cent and in Kerala we have a stagnant manufacturing sector. The contribution of service sector to the national economy is nearly 60 per cent. There are serious disparities in the growth rates of agriculture, manufacturing and service sectors of the Indian economy. Functions of Money
The functions of money can be classified as follows. 1) Money as a medium of exchange
The basic function of money in an economy is to act as a medium of exchange. Money has general acceptability and purchasing power so it can act as a medium of exchange. When money is transacted, purchasing power is transacted from one person to another. In earlier periods we had been following barter system. Barter system means exchanging goods for goods. But most of the time, for such exchange to take place, there must occur a double coincidence of wants. That is each party to the exchange must have precisely what the other party requires, and in an appropriate quantity and at the time required. The use of money as a common medium of exchange has facilitated exchange greatly. 2) Money as a Unit of Account.
Money customarily serves as a common unit of account or measure of value in terms of which the values of all goods and services are expressed. This makes possible meaninigful accounting systems by adding up the values of a wide variety of goods and services whose physical quantities are measured in different units 3) Money as a Standard of Differed Payment
Money also serves as a standard or unit in terms of which deferred or future payments are stated. This applies to payments of interest, rents, salaries; pensions etc.Large fluctuations in the value of money (inflation or deflation) make money not only a poor measure of value, but also a poor standard of deferred payment. This is because the value of money is not something intrinsic to it, but a social phenomenon. This makes monetary management for the stable value of money socially very important. 3) Money as a Store of Value
Money also serves as a store of value i.e., members of the public can hold their wealth in the form of money. This function is derived from the use of money as a medium of exchange in a two-fold manner. First, the use of money as a medium of exchange
decomposes a single barter transaction into two separate transactions of purchase and sale. Significance of Money in Modern Economic Life
Money occupies a central position in our modern economy. Money is everywhere and for everything in the modern economic life. Money has become the religion of the day in the ordinary business of life. Every branch of economic activity in a money economy is basically different from what it would have been in a barter economy. Money has created a far reaching effect on all facets of economic activities; consumption, production, exchange and distribution, as also on public finance and economic welfare. Money and Consumption
Money enables a consumer to generalize his purchasing power. It gives him command over a wide variety of goods. It enables him to canalize his purchasing power and get what he wants. In fact, it is money through its immense purchasing power that makes a consumer sovereign in a capitalist economy. The consumer’s sovereignty can be expressed through money spending. Money provides freedom of choice of consumption. Money and the price mechanism help a consumer to allocate his income over goods in such a way so that he derives maximum satisfaction from his consumption. Money and Production
The introduction of money has made present day mass production possible. Without money, production on a large scale would be impossible. The benefits of money in production are as follows
1) Money has made extreme division of labour possible. Intensive specialization is necessary for large scale production. 2) Money is the very essential for modern enterprise. Entrepreneurs are concerned, while planning their production activities, with the cost of production and selling prices together with the resulting profit, all calculated in terms of money. 3) The use of money enables a producer to concentrate on the organization of the production process. Money provides a basis for supporting more complex methods of organizing production. 4) Money has facilitated borrowing and lending and these are essential in present day production. Credit is the main pillar of modern business. 5) Money is the most liquid and general form of capital which is highly mobile between different regions and industries. 6) Money helps the producer to discover through the price mechanism what buyers want and how much they want, so that he can produce and supply accordingly. In fact, money has changed the basic characteristics of production. Money and Exchange.
Money overcomes the difficulties of a barter system of exchange. In a money economy; it is simple matter to ascertain the market price in terms of monetary units. Money facilitates trade by serving as a medium of exchange. Thus, rapid exchange in a modern economic system is possible because of money. Money is the basis of the pricing mechanism through which economic activities are adjusted. Money and Distribution.
Money eases the process of distribution of factors rewards like wages, interests and profits which are all measured and distributed in terms of money. It is with the help of money that the shares of different factors of production are properly adjusted.
Accounting, receiving and storing of its share of income by any factor-unit in kind is most inconvenient. Here money comes to the rescue. Money and Public Finance
In a modern economy, government plays a very important role. Government receives income in the form of taxes, fees, prices of public utility services, etc and uses this income for administrative and developmental purposes. But the great magnitude of public revenues and public expenditure in a modern state would become impossible without money. Further, fiscal devices like public borrowing and deficit financing for economic development can be adopted only in a monetary economy. In recent times, the fiscal policy of a government acquired very great importance in economic life, since economic activities can be regulated through budgetary operations that are facilitated by the institutions of money. Money, thus, plays an important role in the shaping of the economic life of a country. The growth of money economy has made the growth of economic liberalism and, hence, of the present day free enterprise or capitalists system possible. In fact the pattern of economic life has changed in accordance with the changes in the economic progress. For better performance of an economy, a country’s monetary system should be operated in such a manner as to maintain high levels of employment and avoidance of business fluctuations.
Inflation Inflation is commonly understood as a situation of substantial and rapid general increase in the price level and consequent fall the value of money over a period of time. Inflation means persistent rise in the general level of prices. Inflation is a long
term operating dynamic process. By and large, inflation is also a monetary phenomenon. It is usually characterized by an overflow of money and credit. In fact, the root cause of inflation is the expansion of money supply beyond the normal absorbing capacity of the economy.The behaviour of general prices is measured through price indices.The trend of price indices reveals the course of inflation or deflation in the economy. Crowther defines inflation as “a state in which the value of money is falling,ie., prices are rising”. Professor Samuelson defines “Inflation occurs when the general level of prices and costs is rising”.
INFLATION
Inflation is commonly understood as a situation of substantial and rapid general increase in the price level and consequent fall the value of money over a period of time. Inflation means persistent rise in the general level of prices. Inflation is a long term operating dynamic process. By and large, inflation is also a monetary phenomenon. It is usually characterized by an overflow of money and credit. In fact, the root cause of inflation is the expansion of money supply beyond the normal absorbing capacity of the economy.The behaviour of general prices is measured through price indices.The trend of price indices reveals the course of inflation or deflation in the economy. Crowther defines inflation as “a state in which the value of money is falling,ie., prices are rising”. Professor Samuelson defines “Inflation occurs when the general level of prices and costs is rising”.
Types of Inflation .
On
different
grounds,
economists
have
classified
inflation
into
various
types.According to the rate inflation there are four types of inflation. 1) Moderate Inflation 2) Running Inflation 3) Galloping Inflation 4) Hyper Inflation Moderate inflation is a mild and tolerable form of inflation. It occurs when prices are rising slowly. When the rate of inflation is less than 10 per cent annually, or it is a single digit annual inflation rate, it is considered to be moderate inflation in the present day economy. It does not disrupt the economic balance. It is regarded as stable inflation in which the relative prices do not get far out of line. When the movement of price accelerates rapidly, running inflation emerges. Running inflation may record more than 100 per cent rise in prices over a decade. Thus, when prices rise by more than 10 per cent a year, running inflation occurs. When prices are rising at double or triple digit rates of 20,100 or 200 per cent a year, the situation may be described as galloping inflation. Galloping inflation is really a serious problem. It causes economic distortions and disturbances. In the case of hyper inflation prices rise is very severe. It is over 1000 per cent per year.There is at least a 50 per cent price rise in a month, so that in a year it rises to about 130 per cent times.Hyper inflation is a monetary disease.
Two Types of Inflation on the Basis of Cause of Origin: They are Demand Pull Inflation and Cost Push Inflation.
Demand Pull Inflation: According to the demand-pull theory, prices rise in
response to an excess of aggregate demand over existing supply of goods and services. It is also called excess-demand inflation. In the excess-demand theories of inflation, excess demand means aggregate real demand for output in excess of maximum feasible, or potential, or full employment, output (at the going price level). The demand-pull theorists point out that inflation (demand-pull) might be caused, in the first place, by an increase in the quantity of money. Demand-pull or just demand inflation may be defined as a situation where the total monetary demand persistently exceeds total supply of real goods and services at current prices, so that prices are pulled upwards by the continuous upward shift of the aggregate demand function. Causes of Demand-pull inflation are 4) Increase in Public Expenditure 2) Increase in Investment 3) Increase in money supply.
COST PUSH INFLATION
Cost push inflation or cost inflation is induced by the wage-inflation process. This is
especially true for a Country like India, where labour intensive techniques are commonly used. Theories of cost-push inflation (also called sellers’ or mark-up inflation) came to be put forward after the mid-1950s.They appeared largely in refutation of the demand-pull theories of inflation and three important common ingredients of such theories are 1) that the upward push in costs is autonomous of the demand conditions in the concerned market 2) that the push forces operate through
some important cost component such as wages, profits (mark up), or materials cost. Accordingly, cost-push inflation can have the forms of wage-push inflation, profitpush inflation, material-cost push inflation, or inflation of a mixed variety in which several push factors reinforce each other and that the increase in costs is passed on to buyers of goods in the form of higher prices, and not absorbed by producers. Thus, a rise in wages leads to a rise in the total cost of production and a consequent rise in the price level, because fundamentally, prices are based on costs.It has been said that a rise in wages causing arise in prices may , in turn , generate an inflationary spiral because an increase would motivate the workers to demand more wages.
(Graphs of demand pull and cost push inflation)
Causes of Inflation
1) Over- Expansion of Money Supply: Many a times a remarkable degree of correlation between the increase in money and rise in the price level may be observed. The Central Bank (India’s RBI) should maintain a balance between money supply and production and supply of goods and services in the economy. Money supply exceeds the availability of goods and services in the economy, it would lead to inflation. 2) Increase in Population: Increase in population leads to increased demand for goods and services. If supply of commodities are short, increased demand will lead to increase in price and inflation. 3) Expansion of Bank Credit: Rapid expansion of bank credit is also responsible for the inflationary trend in a country.
4) Deficit Financing: Deficit financing means spending more than revenue. In this case government of India accepts more amount of money from the Reserve Bank India (RBI) to spend for undertaking public projects and only the government of India can practice deficit financing in India. The high doses of deficit financing which may cause reckless spending, may also contribute to the growth of the inflationary spiral in a country. 5) High Indirect Taxes: Incidence of high commodity taxation. Prices tend to rise on account of high excise duties imposed by the Government on raw materials and essentials. 6) Black Money: It is widely condemned that black money in the hands of tax evaders and black marketers as an important source of inflation in a country. Black money encourages lavish spending, which causes excess demand and a rise in prices. 7) Poor Performance of Farm Sector: If agricultural production especially foodgrains production is very low, it would lead to shortage of foodgrains, will lead to inflation. 8) High Administrative Pricing Other reasons are capital bottleneck, entrepreneurial bottlenecks, infrastructural bottlenecks and foreign exchange bottlenecks.
EFFECTS OF INFLATION
1) Effects of Inflation on Business Community: Inflation is welcomed by entrepreneurs and businessmen because they stand to profit by rising prices. They find that the value of their inventories and stock of goods is rising in money terms. They also find that prices are rising faster than the costs of production, so that their profit is greatly enhanced.
2) Fixed Income Groups: Inflation hits wage-earners and salaried people very hard. Although wage- earners, by the grace of trade unions, can chase galloping prices, they seldom win the race. Since wages do not rise at the same rate and at the same time as the general price level, the cost of living index rises, and the real income of the wage earner decreases. 3) Farmers: Farmers usually gain during inflation, because they can get better prices for their harvest during inflation. 4) Investors: Those who invest in debentures and fixed-interest bearing securities, bonds, etc, lose during inflation. However, investors in equities benefit because more dividend is yielded on account of high profit made by joint-stock companies during inflation. 5) Inflation will lead to deterioration of gross domestic savings and less capital formation in the economy and less long term economic growth rate of the economy.
MEASURES TO CONTROL INFLATION The measures to control inflation can be broadly divided into TWO- Monetary and
Fiscal Measures. Inflation is primarily a monetary phenomenan.Hence, the most logical solution to check inflation is to check the flow money supply by devising appropriate monetary policy and carefully implementing monetary measures. The Central bank’s monetary management methods, devices for decreasing or increasing the supply of money and credit for monetary stability is called monetary policy. Monetary policy is a policy of money supply influencing the quantity, cost and availability of money supply. Central Banks generally use the three quantitative measures namely:
1) Bank Rate Policy 2) Open Market Operations 3) Variable Reserve Ratio
1) Bank Rate Policy: Bank rate is the rate at which Central Bank lends loans and advances to commercial banks. When bank rates are hiked by the Central bank as a follow up of this increased bank rate, commercial banks hike the rate of interest. Bank rate is hiked during the period of inflation to reduce money supply.During the period of falling prices (deflation) central banks reduces bank rate to increase money supply.As follow up, commercial banks reduce rate of interest.At a low rate of interest, investors find it much attractive to borrow money and make investment. 2) Open market Operations: Open market Operation means open buying and selling of government securities by the Central Bank for the Central Government. In India the term ‘opens market operations’ stands for the purchase and sale of government securities by the RBI from/to the public and banks on its own account. In its capacity as the government’s banker and as the manager of public debt, the RBI buys all the unsold stock of new government loans at the end of the subscription period and thereafter keeps them on sale in the market on its own account. Such purchases of government securities by the RBI are not genuine market purchases but constitute only an internal arrangement between the government and the RBI whereby the new government loans are sold not directly by the government but through the RBI as its agent. 3) Variable Reserve Ratio: Under the existing law enacted in 1956, RBI is empowered to impose statutorily ‘Cash Reserve Ratio’ (CRR) on commercial banks anywhere between 3 per cent and 15 per cent of the net demand and
time liabilities. It is the authority of the RBI to vary the minimum CRR which makes the variable reserve ratio a tool of monetary control. It may be noted that the RBI pays interest to banks on the additional required reserves over the minimum CRR of 3 per cent.
Fiscal Policy
Fiscal policy is the policy of the government implementing through the government treasuries. Fiscal policy intervention areas are taxation, public expenditure, borrowing, subsidies and deficit financing. Inflation means a general rise in prices. To control inflation policy should be directed to reduce the price level and control excess money supply. First measure is reducing indirect taxes. High indirect taxes lead to increase in the prices of goods and services. So to reduce the prices of goods and services widely used by common people and intermediate goods, the indirect taxes should be reduced. Increased public expenditure leads to increase in the level of economic activities and more income to people.It also leads to increase in money supply.So during the period of inflation, we should reduce excess public spending/public expenditure.
Deflation
Deflation is just opposite of inflation. It is essentially a matter of falling prices. Deflation is that state of falling prices when the output of work by productive agents increases relatively to money income. Deflation arises when the total expenditure of the community is not equal to the value of output at existing prices. Consequently, the value of money goes up, and prices fall. In short, deflation is a condition of falling prices, accompanied by the decreasing level of employment, output and income.
Definitions of Economics
The book of Adam Smith “An Enquiry into the Nature and Causes of Wealth of Nations” popularly known as Wealth of Nations, published in the year 1776, laid the strong foundation for the growth of Economics. So Adam Smith is rightly called the “Father of Economics” and pioneer of Classical Economics. Although there is a plethora of definitions, there is no concensus among economists about a precise definition of economics.
Stock Exchange: Stock exchange is a place where second-hand securities are bought and sold.Stock exchange is essential for industrial development and a developed stock exchange is one of the features of a developed industrialized country.
Wealth Definition
The early classical economists defined economics mainly as a study of wealth.To his famous treatise, Adma Smith gave the suggestive tittle ‘An Enquiry into the Nature and Causes of Wealth of Nations’. It means economics investigates into the nature of wealth and the laws of production and distribution. The atmosphere of the Industrial Revolution marked by unprecedented material prosperity and accumulation of wealth should naturally justify the scope which these economists assigned to economics. Criticism of wealth Definition 1) Too much Emphasis on wealth : Literary writers and religious leaders strongly voiced their protest against the study of economics because of its too much attachment to wealth.Adam Smith treated economics as political economy and therefore emphasized the importance of wealth from a national angle
2) Restricted Meaning of Wealth: The classical definition considered wealth as, material goods only, like table, radio,furniture etc.Non-material services of drivers, singers,teachers,professors etc are not taken as wealth.But in modern days wealth denotes both goods and services, material wealth and human wealth. 3) Concept of Economic Man: Classical wealth definition was based mainly upon the assumption of an ‘economic man’ who had no consideration for love, affection, sympathy, patriotism etc.In other words, an economic man was supposed to give attention to economic activities only.But in reality human behaviour cannot be properly understood and analysed unless the other motives are also given due weightage. 4) No Mention of man’s Welfare: Wealth definition explains the wealth-getting and spending activities of man It pays no attention to the equity principle which is of paramount importance to maximize the welfare of the society. 5) Economic Problem: Wealth definition is silent over
the basic economic
problem of meeting unlimited wants with scarce means.In other words, the central problem of economics is not at all touched by wealth definition.
Welfare Definition
Adam Smith’s wealth definition made economics a dismal science.Alfred Marshall was the first neo-classical economist to rescue economics from ridicule, condemnation and misunderstanding. So Marshall gave welfare definition to economics in his classic work ‘Principles of Economics’, published in 1890.His definition shifted the emphasis from wealth to human welfare. According to him wealth is simply a means to and an end in all activities, the end being human welfare.
Marshall defines “economics is a study of man kind in the ordinary business of life; it examines that part of individual and social action which is almost closely connected with the attainment and with the use of the material well being.” He adds that economics is on the one side a study of wealth; and the other and more important side, a part of the study of man. That is Marshall gave primary importance to man and secondary importance to wealth. Criticism of Welfare Definition 1) Material and Non-Material Welfare: Lionel Robbins begins his attack by pointing out that economists should not narrow down the scope of economics by confining their attention to the study of material welfare alone. The services of teachers, actors, singers, lawyers etc. do promote welfare and such welfare may be termed as non-material welfare. The above mentioned services have much economic significance because they are scarce in relation in relation to demand and possess value. 2) Objection to material: Robbins objects not only to the word ‘material’ but also to the very idea of ‘welfare’. For the neo-classical economists, economics is concerned with the causes of material welfare. According to Robbins, there are certain material activities which do not promote welfare. The manufacturers of intoxicants such as wine and opium are certainly economic activities. But they are not conducive to human welfare. 3) Welfare cannot be measured: The neo-classical economists’s idea of welfare is based on cardinal utility. But utility is a psychological entity which cannot be measured. It varies from person to person, place to place and time to time. Therefore, the concept of welfare based on measurable utility is elusive in character.
4) Economics is a Social Science: Robbins disputed the Marshallian conception of economics as a social science.The study of man as they live and move and think in the ordinary business of life.According to Marshall, the activities of an individual living in seclusion like a Himalayan Sadhu or Robinson Crusoe fall outside the orbit of economics.Robbins on the other hand regards economics as a human science.The central problem in economics, according to Robbins is the allocation of scarce means among alternative ends.
Scarcity Definition
After rejecting the materialist definition of Marshall,Lionel Robbins formulated his own conception of economics in his book “ The Nature and Significance of Economic Science” published in 1932. In the words of Lionel Robbins, “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.” He deduced his definition from our fundamental characteristics of human existence. 1) Unlimited Wants: “Ends” refers to human wants which are boundless but the resources available to satisfy these wants are limited. Some wants are inborn but others are acquired through customs and conventions. When one want is satisfied another crops up. 2) Scarcity of Means: The resources (time or money) at the disposal of a person to satisfy his wants are limited. The external world does not offer full opportunities for their complete achievement. If things are available in abundance just like free goods, the economic problem will not arise. 3) Alternative Uses of Scarce Means: Economic resources are not only scarce but are also versatile. If the resources cannot be put to alternative uses, the question of choice will not arise. We may use land for raising crops or for
building houses. We cannot do both. If we choose one thing, we must give up others. 4) The Economic Problem: When the means at the disposal of a person are limited and the resources can be put to several uses and when wants can be graded on the basis of intensity, the behaviour necessarily takes the form of choice. Thus the choosing of one is at the cost of another. In order to make choice scientific, some form of pricing process is inevitable. Criticism of Scarcity Definition Robbins’ definition is based on two foundation stones-multiplicities of wants and scarcity of means. 1) Economics of Abundance: According to Robbins, economic problem arises due to scarcity. But economic problems may also arise due to plenty rather than scarcity as had happened during the great depression of 1930s.Professor John Kenneth Galbraith, a noted American economist in his book,” The Affluent Society”, states that scarcity is not a problem in America. So that the conventional scarcity idea has only little relevance. 2) Not Applicable to Underdeveloped Countries: Robbins definition provides no solution to the problems of underdeveloped countries. A peculiar feature of many under developed countries is that the resources are not scarce, but they are either under utilized, or unutilized. Robbins simply assumes the resources as given and analysed their allocation among alternatives uses.
Growth Definition
Economics has now become a fastly growing discipline in the field of social science and its scope and significance have widened from mere a value theory or a theory of resource allocation. The credit for revolutionizing the study of economics surely goes
to Lord JM Keynes. Keynes defined economics as the study of the administration of scarce resources and the determinants of income and employment. Professor Paul.A Samuelson has given a definition based on Growth aspects which is known as the Growth Definition. “Economics is the study of how people and society end up choosing, with or without the use of money, to employ scarce productive resources that could have alternative uses to produce various commodities and distribute them for consumption, now or in the future, among various persons or groups in society. Economics analyses the costs and the benefits of improving patterns of resource use”. Firstly, it is applicable even in a barter economy where money measurement is not possible. Secondly, the inclusion of time element makes the scope of economics dynamic. Thirdly, this definition possesses universality in its application. Thus we may conclude that though in a sense it is similar to Robbins’ definition, it is an improvement over Robbins’ scarcity definition.
Production Possibility Curve
The concept of production possibility curve was introduced by Professor Samuelson.The set of problems facing in every economic system can be clearly analysed with the tool of production possibility curve. Human wants are unlimited and the economic resources to satisfy these unlimited human wants are scarce or limited. Therefore, the every society faced with the basic problem of choosing and allocating its scarce resources among alternative uses. Production Possibility Curve shows the menu of choice along which a society can choose to substitute one good
for another assuming a given state of technology and given total resources. The production possibility curve illustrates three concepts: scarcity, choice and opportunity cost. Modern economy produces thousands of products, and therefore choices before us are complex. In order to reduce the problem to its simplest form we consider the economy in which two goods ‘butter’ and ‘guns’ are produced with the available resources and technology. Production Possibility Curve is based on the following Assumptions: 1) Only two goods x (butter) and y (guns) are produced in the economy. 2) There is full employment of resources. 3) The resources are fixed in quantity. But they can be re-allocated from the production of one commodity to that of another. 4) The state of technology is given and constant. 5) The time period is short
Law of Supply
The law of supply states that the functional relationship between price and the quantity offered for sale. The law of supply states, other things remaining same, the higher the price, the greater will be the willingness of sellers to make a product available. At higher prices, more sellers are interested in producing the product, and each existing seller wants to sell more.The opposite holds good when prices decline. Factors Determining the Supply of a Commodity
The supply of a commodity depends upon the following factors.
1) Different firms may follow different objectives.Some objectives.Some firms may may be interested in maximizing profit, while others may be interested in in sales
or revenue
maximization or satisfying etc.The amount of commodity supplied is often influenced by the objectives of the firm.Normally, sales maximization firm’s output will be greater than the profit maximization firm’s output. 2) State of Technology: Technical improvements reduce reduce the costs of production enbling a shifting a shifting of the supply curve to the right.Similarly, obstacles in the existing technology increases costs of production, forcing forcing a shift in the supply curve to the left. A constant state of technology keeps the supply at the existing level. 3) Political Disturbances: Political disturbances may destabilize trade and thus create a scarcity for certain kinds of goofs’ 4) Government Policy: Any change in government’s policy would affect the production sector and thereby the supply of goods and services in the market. The government policy related to tax and subsidy will have serious impact on the production and supply of goods and services in the market.
Law of Demand
Meaning of Demand Demand is essential for the Creation, Survival and Profitability of a firm. It is essential to distinguish between demand and desire. A beggar’s demand for a Maruti car is only o nly s desire and does not constitute a demand. A miser may possess enough money but he may not be willing to spend it. In this case also desire will not be called demand. Therefore, demand is not merely a wish or desire but an effective demand, this is, desire backed by purchasing power and willingness to buy.
Demand has the following Four characteristics 1) Price: Demand is always related to price. It It is meaningless to say that demand for refrigerator in the market is one thousand. The person must state the price at which the consumer is prepared to purchase the said quantity of the commodity. 2) Time: Demand always means demand per unit of time, time, per day, per week, per month or per year. 3) Market: demand is always related to the market. Market Market here simply refers to the contact between buyers and sellers. There is no need for a definite geographical area. 4) Amount: Demand is always a specific quantity which a consumer is willing to purchase. It is not an approximation, but is to be expressed numerically.
Demand Schedule: A demand schedule is a list of prices and corresponding quantities. Since the demand schedule obeys the law of demand, price and quantity demanded vary inversely The following is the hypothetical demand schedule of an individual.
Types of Demand: There are three kinds of demand,
1) Price Demand 2) Income Demand 3) Cross Demand
1) Price Demand: Price demand refers to the various quantities of a commodity that a consumer would purchase at a given time in the market at various hypothetical prices. 2) Income Demand: Income refers to the various quantities of a commodity that a consumer would purchase at a given time in a market at various levels of income. 3) Cross Demand: The relationship between the prices of a substitute or complements and the quantity purchased of a related commodity is called cross demand.
Law of Demand: The inverse relationship between the price of a commodity and its
quantity demanded per unit of time is referred to as the law of demand. In the words of Prof. Samuelson, “Law of demand states that people will buy more at lower prices and buy less at higher prices, other things remaining the same.” The phrase “other things being equal” is an important qualification; when we say “other things being equal” we assume;
1) No change in the consumers’ income. 2) No change in the prices of substitutes and complements 3) No change in consumers taste and preferences 4) No new substitutes for the goods have been discovered 5) People do not feel that the present fall in price is a preclude to a further decline in prices. 6) The commodity in question is not one which has a prestige value.
Determinants of Demand
According to D.S Watson a change in demand is caused by changes in income . tastes and prices of substitutes and complements.The various determinants of demand are listed as follows.
1) Changes in Tastes and Fashions: The demand for some goods and services is very susceptible to changes in tastes and fashions.If a commodity becomes more fashionable a larger quantity of it may be bought at the old price or even at a slightly higher price. The fashion among ladies to keep their hair long or short brings about
changes in demand for their hair-pins, hair-nets etc.
Similarly if tastes have deteriorated for a product, less of it will be deamanded without any rise in its price. 2) Changes in Weather : An unusually dry summer results in a decrease in the demand for umbrellas.The demand curve in such a case shifts to the left. 3) Channges in Income and Distribution of income: An
increase in family
income increases the demand for durables like video recorders and refrigerators.The demand curve then shift to the right., More over, if income in a country is evenly redistributed by taking the rich and transferring it to raise the income of the poor, it may increase the demand for goods consumed by the poor people. 4) Changes in expectations: Expectations also bring about a change in demand.Rumours that the government is going to levy fresh taxes on a particular good may push the in favour of purchasing more of that commodity alone.
5) Changes in Savings: Savings and demand are inversely related.If the marginal propensity to save becomes high the amount available for consumption will become less. The demand will therefore decrease. 6) State of Trade Activity: During the periods of boom and prosperity, the demand for all commodities tends to increase. On the contrary, during times of depression there is a general slackening of demand. 7) A Change in Real Income: As money income increases, real income also increases. If the income goes to the rich, demand does not increase as much as it increases when such income benefits go to the poor.The simple reason is that the marginal propensity to consume of the rich is less than that of the poor. 8) Consumer Credit Policy: With a liberalization in the credit policy of the banks or the hire purchase system adopted by companies, the demand for VCRs,Cars, houses etc will increase. 9) Advertisement: In advanced capitalist countries advertising is a powerful instrument affecting the demand in the market. 10) Taxation and subsidy: If fresh taxes are levied or the existing rates of taxation on commodities are increased, their prices go up.The demand for such commodities will decrease. On the other hands, if rebates and subsidies are given as in the case of consumer products during festival seasons, the demand will increase. 11) Change in the value of money:During times of inflation, the prices will rise. Therefore, consumers will have to
their expenditure pattern so that the
demand for certain products will have to be reduced and for others stimulated. 12) Change in Population:The demand for goods and services depend on population.As population increases demand increases and vice versa.
MEANING OF PRODUCTION
In economic terminology ‘production’ implies creation of utility for sales. The act of utility creation is possible by transforming inputs into output. According to Prof.Hicks, “production is any activity directed to the satisfaction of the people’s wants through exchange.” Production is an activity of converting inputs into out put with the help of technology or mode of production. In production process we use four factors of production ie; land, labour,capital and organization.For engaging in economic activity, these factors would get rewards. Land or building would get rent as its reward,labour would get wage / salary,capital would get profit and organizer would get profit as the reward.
Knowledge is the only instrument of production that is not subject to diminishing returns – J.M.Clark, 1957
The production function shows only the physical relationship between inputs and output, but says nothing about the optimal combination of inputs. Two things must be noted when we discuss production function. 1) It must be considered with reference to a particular period of time. 2) It is determined by the state of technology.Any change in technology may alter output, even when the quantities inputs remain fixed.
Law of Returns to Scale
The law of returns to scale examines the relationship between output and the scale of inputs in the long-run when all the inputs are increased in the same proportion.
Assumptions
This law is based on the following assumptions
1)All factors are variable but the enterprise is fixed. 2) There is no change in technology 3) Perfect competition prevails in the market. 4) Returns are measured in physical terms.
Three Phases of the Law of Returns to Scale. First phase is increasing returns to scale Second phase is constant returns to scale Third phase is diminishing returns to scale. Depending on whether the proportionate
change in output exceeds, equals or
decrease in proportionate to the change in both the inputs, the production
is
classified as increasing returns to scale, constant retuns to scale and decreasing returns to scale.
Increasing Returns to Scale
Increasing returns to scale arises due to the following reasons.
a) Dimentional economies,2) economies flowing from indivisibility 3)Economies of specialization 4) Technical economies, 3) Managerial economies, 6) Marketing economies Marshall exlains increasing increasing returns in terms of “ increased efficiency” of labour and capital in the improved organization with the expanding scale of output and employment of factor unit.It is referred to as the economy of organization in the earlier stages of production.
Constant Returns to Scale: As a firm continues to expand, it gradually exhaust the economies, internal and external, which enabled the operation of increasing returns to scale. In this stage, the economies and diseconomies of scale are exactly in balance over a particular range of output. In the case of constant returns to scale increases in all the inputs cause proportionate increases in output. A production function showing constant retuns to scale is often called ‘Linear and Homogeneous’ or ‘Homogeneous of the first Degree’.The Cobb-Douglas production function evolved by the American economists Cobb and Douglas is a linear and homogeneous production function.
Diminishing Returns to Scale
When a business firm continues to expand even beyond the point of constant returns, stage comes when diminishing returns to scale set in. There are decreasing returns to scale when the percentage increase in output is less than the percentage increase in
iutput. As the size of the firm expands, managerial efficieny decreases.Another factor responsible for diminishing retuns to scale in the limitation of exhaustibility of the natural resources, for example, doubling of coal-mining plants may not double the coal output, because of limited availability of coal deposits or due to difficult accessibility to coal deposits.
The Law of Variable proportions OR Law of Diminishing Returns
The law of variable proportions is one of the basic laws in economics. The law of variable proportions is the modern version of the law of diminishing returns. This law states that a technical physical relationship between the fixed and variable factors of production in the short run. Here it is assumed that only one factor of production is a variable factor while other factors are assumed to remain fixed. As we increase the quantity of the variable factor while keeping other factors constant, the output of the variable factor may increase more than proportionately in the initial stages of production, but eventually it will not increase even proportionately. Alfred Marshall, a neo-classical economist, considered the law of diminishing returns in relation to agriculture only.
The law of variable proportions has been defined in the following way; “As the proportion of one factor in a combination of factors is increased, after a point, first the marginal and then the average product of that factor will diminish”.
Assumptions of the Law
The law of variable proportions is valid when the following conditions are fulfilled. 1) The state of technology is given below 2) Only one factor is varied and all other factors remain fixed. 3) The fixed factor and the variable factor are combined together in variable proportions in the process of production. 4) The units of the variable factor are homogeneous 5) The law operates in the short run.
Total Product (TP) : Total Product is the amount of output produced from land with the given number of labourers employed.
Average product (AP): The average product of labourer is the total product (TP) divided by the number of labourers employed AP =TP/No.
Marginal Product (MP): The marginal product is the change in the total product due to change in labour.
DIAGRAM
Law of Supply
The law of supply states that the functional relationship between price and the quantity offered for sale. The law of supply is a hypothesis that states, other things remaining same,, the higher the price, the greater will be the willingness of sellers to make a product available. At higher prices, more sellers are interested in producing the product, and each existing seller wants to sell more.The opposite holds good when prices decline. The law of supply can be explained with the help of a schedule and a curve.
Supply Schedule: Supply schedule represents the relationship between prices and the quantities that the firms are willing to produce and supply.
SUPPLY SCHEDULE
SUPPLY CURVE
MARKET SUPPLY CURVE MARKET SUPPLY SCHEDULE
ECONOMIC REFORMS
NEW ECONOMIC REFORMS OF 1991
Changing Global Scenario
Several major economic and political changes occurred during the 1970s and 1980s, which affected the developing countries and paved the way for the implementation of IMF-sponsored Structural Adjustment Policies (New Economic Policy) in India in 1991. This was due to a combination of factors such as stagnant agriculture, low levels of industrial growth and diversification, inadequate capital formation, adverse terms of trade in international markets, limits to domestic resource mobilization due to a fairly narrow tax-base, loss making public sector enterprises, over regulated and controlled economy, poor industrial productivity, huge amount of fiscal deficit, huge amount of public debt, poor rating of Indian economy by international agencies, foreign exchange crisis etc. New Economic Policy of 1991 includes globalization, liberalization and privatization (Disinvestment) 1) Globalization means flow capital (finance in the form of foreign direct investment (FDI) and foreign portfolio investment (FPI), technology, human resource, goods and service among countries. FDI is investment in real assets like automobile, consumer goods production, service sectors like insurance, telecommunication, air transport etc. 2) Liberalisation means freeing the economic activities and business from unnecessary bureaucratic and other controls imposed by the governments.
3) Privatisation or Disinvestment: Selling the government owned public sector enterprises to private industrialists and opening the government operating sectors for private investment. The New Economic Policy includes reduction in government expenditure, opening of the economy to trade and foreign investment, adjustment of the exchange rate from fixed exchange rate system to flexible exchange rate system, deregulation in most markets and the removal of restrictions on entry, on exit, on capacity and on pricing. Immediate consequences of economic liberalization that are to focus on are (a) an increase in internal and external competition and (b) structural change induced by changes in relative prices in the economy.
The Major areas of New Economic Policy 1991 are
1) Fiscal policy reforms 2) Monetary policy reform 3) Pricing policy reform 4) External policy reform 5) Industrial policy reform 6) Foreign investment policy reform 7) Trade policy reform 8) Public sector policy reform The principal reforms initiated in the year 1991 included; reduction in import tariffs on most goods other than consumer goods, removal of quantitative restrictions and liberal terms of entry for foreign investors. India’s simple average tariff rate was reduced from 128% in 1991 to about 32.3% in 2001-02. Quotas and non-tariff
barriers were also reduced.. To restore Macro economic stability, the reforms package of structural adjustment policies are aimed at freeing markets by dismantling controls on production, prices and trade and reducing intervention in the economy. The need to control the fiscal deficit led to policies to curb public expenditure and these cuts were mainly on social sector expenditure and on production and consumption subsidies, which directly affected the living standards of the economically vulnerable sections of the population. Privatisation, Liberalisation and export-promotion were the main features of the economic reforms recommended by the international institutions for the problems facing by the developing countries .At the same time, the role of the state in advanced industrial economies was not shrinking as expected, but growing despite the ideological bias in favour of a “rolled back” state. The share of national income spends by government, which averaged 30% in the rich industrial countries in 1960 increased to 42.5% by 1980 and 45% by 1990.The experiences of countries, which have undergone these reforms, have in most cases not led to the expected outcome but have infact worsened the state of their economies. In India, the New Economic Policy (NEP) is a set of policy (ies) and administrative procedures introduced in July 1991 to bring about changes in the economic direction of the country.
Industrial Policy Resolution 1991 (IPR-1991) Industrial Policy
The regulatory policy framework which acted as a barrier to entry and growth by the entrepreneur was sought to be basically changed by the Industrial Policy announced in July 1991.The measures introduced in this area along with other economic reforms
were as under: Industrial licensing has been abolished for all projects except for a list of 15 industries related to security, strategic or environmental concerns and certain
items of luxury consumption that have a high proportion of imported inputs. The exemption from licensing also applies to the expansion of existing units.
Industrial licensing was abolished for all projects except for a list of 15 industries related to security, strategic or environmental concerns and certain items of luxury consumption that had a high proportion of imported inputs.
The Monopolies and Restrictive Trade Practices (MRTP) Act applied in a manner which eliminated the need to seek prior government approval for expansion of present undertakings and establishment of new undertakings by large companies.
The set of activities henceforth reserved for the public sector was much narrower than before, and there would be no ban on the remaining reserved areas being opened up to the private sector.
Foreign Investment Policy
The Industrial Policy 1991 also provided increased opportunities for foreign investment with a view to take advantage of technology transfer, marketing expertise and introduction of modern managerial techniques. It was also intended to promote a much – needed shift in the composition of external private capital flows. The following measures were announced in this regard:
Automatic approval would be given for direct foreign investment upto 51 per cent foreign equity ownership in a wide range of industries. Earlier, all foreign investment was generally limited to 40 per cent.
To provide access to international markets, major foreign equity holdings upto 51 per cent equity would be allowed for trading companies primarily engaged in export activities.
Automatic permission would be given for foreign technology agreements for royalty payments upto 5 per cent of domestic sales or 8 per cent of export sales or for lumpsum payments of Rs.10 million. Automatic approval for all other royalty payments will also be given if the projects can generate internally the foreign exchange required.
Abolished MRTP Act and FERA and instead of FERA, FEMA Act was passed in the Parliament.
The threshold (Minimum) asset limit for companies under MRTP Act was raised from Rs.20 crores to Rs.100 Crores.
Public Sector Policy
The Government was of the view that public sector had not generated internal surpluses on a large scale. On account of its inadequate exposure to competition; the public sector was subject to a high cost structure. To provide a solution to the problems of the public sector, Government decided to adopt a new approach, the key elements of which were:
The existing portfolio of public sector investment would be reviewed with a greater sense of realism to avoid areas where social considerations were not paramount or where the private sector would be more efficient.
Enterprises in areas where continued public sector involvement was judged appropriate would be provided a much greater degree of managerial autonomy.
Budgetary support to public enterprises would be progressively reduced
To provide further market discipline for public enterprises, competition from the private sector would be encouraged and part of the equity in selected enterprises would be disinvested; and
Chronically sick public enterprises would not be allowed to incur heavy losses.
As a follow up of this policy, several measures were taken:
The number of industries reserved for the public sector was reduced from 17 to 8. Even in these areas, private sector participation was allowed selectively. Joint ventures with foreign companies would be encouraged.
Public enterprises that were chronically sick and unlikely to be turned around would be referred to the Board for Industrial and Financial Reconstruction (BIFR) for rehabilitation or restructuring.
The existing system of monitoring public enterprises through Memorandum of Understanding (MOU) was strengthened with primary emphasis on profitability and rate of return.
Initiated the disinvestment of public sector enterprises.
Global Financial meltdown in 2008
In the western capitalists economies and the economies closely linked to the United States economies were negatively affected by this financial crisis of 2008. That is all the economies having economic relationship with each other were affected by this financial crisis of 2008 so it is called a global financial crisis. Capitalism is a system of economic organization featured by the private ownership and the use for private profit of man-made and nature-made capital. It is clear that under capitalism all means of production such as farms, factories, mines, transport, communication, education
etc are owned and controlled by private individuals and firms. Private initiatives and ideas are promoted and respected highly and there is personal freedom and liberty. The global financial crisis of 2008 is an extreme manifestation of the crisis in the capitalism due to wrong practice and misuse of freedom enjoyed by the financial institutions in the United States of America. Indian economy was more integrated to the global economy after the introduction of the New Economic Policy (NEP) of 1991. This encouraged more integration of the Indian economy with the global economy.But in the Indian banking system, nearly 90 per cent of the banking institutions are in the public sector and our financial sectors are well regulated by the Reserve bank of India (RBI). So this financial management system, to a greater extent insulated Indian economy from the global financial crisis. The Major Reasons for the Global Financial Crisis are
1) Consumption was seen as the driver of economic growth and prosperity and debt to facilitate such consumption was consequently seen as a good thing. This had led to the rather extreme situation in which vendor financing (i.e., lending of money by producers to consumers for purchasing products they produce) of the US by the developing nations was seen as a necessary business practice. 2) The sub-Prime Crisis – Sub-Prime Lending is the latest chapter in the story of the economics of greed wrapped as modern economics, a process in which the US’s entire financial architecture — the government and the Federal Reserve System (the Central Bank of the US like India’s RBI) is involved . The sub-prime crisis is now presented as the villain of US economy as also the global economic scene. Sub-prime lending refers to loans given to persons who, in simple terms, are unfit to borrow. That is, no lender will part with his
own money to such a borrower. Two reasons are there. First, such lending was popularised from the White House to ordinary American homes as achieving a noble purpose to induce Americans to borrow and shop for their country. That is, it was part of the patriotic duty the Americans as a whole to borrow and shop. The Major Features of the Present Global Financial Crisis are 1) The Current US recession is much deeper than in 1991 or 2001. 2) Yet Asia’s growth will slow by less than in the previous US recessions. It is now less dependent on US demand. 3) Asia is led by India and China increasingly becoming important as the engines of global growth. 4) This global financial crisis is the beginning of the end for the dollar as the main reserve currency 5) The USA has been borrowing $ 3 billion every day to fund its spending 6) The USA’S national debt is more than $10 trillion, which is more than 80 per cent of its national income. 7) The budget deficit is skyrocketing; it is expected to reach mote than 10 per cent soon. 8) The federal deficit as percentage of GDP is now expected to reach more than 10 per cent. 9) Unlike the Great Depression of the 1930s, the current crisis of the West is not just an economic crisis. It has a dimension of demography and conflict.o it. Demographic, because Europe is slowly fading away from the global map. It used to have more than 20 per cent of the global population during the First World War, and now has less than 11 per cent. It is expected to shrink to three per cent in as many decades. The
reproductive rate in many European countries is less than 1.5 whereas the stable one is 2.1. In the case of US, the crisis is more severe due to its declining savings rate. 10) The personal saving as a percentage of disposable income has now become negative. The debt ridden financial institutions like Lehman Brothers’ assets were $ 690 billion and capital was $ 22 billion. Lehman filed for the biggest bankruptcy in American history. Merrill Lynch assets were $ 1020 billion and capital was $ 32 billion, Freddie Mac’s assets were $ 794 and capital was $ 27 billion, Fannie Mae’ assets were $880 billion and capital was $ 44 billion, Bear Stearns’s was $ 400 billion and capital was $ 11 billion. The allegations that ratings are not forward looking has been proved right in more than one occasion in the current financial crisis. Many repackaged sub-prime loans were rated high by global credit rating agencies, down graded only after accelerated defaults and stoppage in trading. Ratings are not sancrosanct and lenders need to form own view about the credit worthiness of borrowers, independent of any external ratings. Conclusions
Asia is more important than the US as a driver of global economic growth. Thanks to the vigour of Asia and other emerging economies, a US recession need not drag the whole world into recession. A prolonged downturn in the US, while emerging economies continue to grow rapidly will reinforce the shift in global power from the old industrial world to the new emerging markets. In future the world economy will be steered not by the US and Europe, but increasingly by India and China. As Maharishi Aurobindo says: “India shall arise upon the ruins of the West”. He says by the year 2011 the Western countries will fall and India will rise. The question is, are we getting ready to create a new world order?
Keynesian Theory Keynes’s Theory and Underdeveloped Countries.
Lord John Maynard Keynes wrote the General Theory of Employment, Interest and Money as a solution to the problem of periodic unemployment faced by developed industrial nations of the West during the great depression of the thirties. Keynesian theory singles out deficiency of effective demand as the major cause of unemployment and low level of income in industrial economy operations under a laissez faire system. Deficiency of effective demand is a prominent feature of economies undergoing depression and in order to improve the level of effective demand in an economy. Keynes suggested policy measures like cheap money policy, government’s compensatory investment spending, deficit financing and other fiscal methods. In essence, therefore, Keynesian economics turn out to be economics of depression applicable to developed countries. Its applicability in underdeveloped countries is very limited. To quote Joan Robinson: “ Keynes’s theory has little to say directly, to the underdeveloped countries, for it was framed entirely in the context of an advanced industrial economy, with highly developed financial institutions and a sophisticated business class. Though Keynesian Economics has revolutionized modern economic thinking, it has inherent weaknesses: 1) It is fundamentally a capitalistic theory. It basically examines the determinants of employment in a free enterprise economy. Though Keynes suggests government intervention and controlled capitalism his theory fails to deal with the socialist economic system. In communism, Keynes is as Ricardo. 2) Keynesian economics is, by and large, characterized as depressionary economics. It was the outcome of the Great Depression of the Thirties. It suggested policy measures like deficit financing to solve the problem of
unemployment in a depressionary phase of the capitalist economy. In the era of inflationary situation, the theory has not much validity. 3) Keynes’s theory deals with short-run phenomena only. It pays little attention to the long-run problems of a dynamic economy. 4) Keynesian theory is not strictly applicable to underdeveloped countries. Keynes deals with the problem of cyclical unemployment. Underdeveloped countries have the problem of chronic unemployment and disguised unemployment. Keynes encouraged spending and condemned savings.But; poor countries need curbs on spending and increase in savings for capital formation and wide-scale investment to break the vicious circle of poverty. In short, Keynes’s theory is not really “general” in application as Keynes claimed. 5) One dangerous practice is that the solution to global economic crisis and depression in advanced capitalism was sought to be applied for solving the economic crisis of less developed countries. In fact in the west there are arguments against Keynes’s economics that it is not Keynesian economics but the Second World war revived the world economy. Keynesian revolution succeeded the industrial revolution as an adhoc theory of countering the industrial depression in Britain during the thirties, just before the Second World War, became the all-encompassing theory of development. Dennis Robertson at the out set of his Cambridge lecturers, delivered between 1945-46 to 195657, warned the under graduate students about the controversial nature of Keynes’s General Theory and to supplement its readings by critical writings on the same. 6) Laws of economics are relative and valid for particular situations in the economic history of a nation. To the British economists, the economic forces generated by the industrial revolution in that country was universal and economic laws were accordingly formulated. What was good for Britain was
good for the entire world, irrespective of differences in socio-economic conditions. But great personalities like Arnold Toynbee argued against this dominant view and the need for region specific models of development. His dream of this way of study never materialized because of his premature death and lack of followers. Adam Smith advocated free trade at a time when British manufacturing industries, particularly the textile mills had increased their capacity through various practical innovations. Trying to universalize economic laws has been one of the greatest disservices to the science of economics. The attempt by the third world countries to formulate their development plans on the basis of these economic laws has created serious imbalances in their economy and has kept them perpetually indebted, leading to erosion of their economic independence. 7) Lord John Maynard Keynes (J.M. Keynes) was a great advocate of easy money policy and abundance of credit for economic prosperity. Keynesian prescriptions failed in developing countries due to inelastic nature of agriculture sector and high inflation. Keynes found D.Robertson’s ideas inconvenient and chose to ignore it. An academically and theoretically sound thesis will not shy away from an academic debate. The relation between agriculture and industry does not form a part of the theoretical frame work of the General Theory of Keynes. Keynes was highly intolerant of his critics and he had high hope in capitalism and he could avoid economists jumped into Marxist band wagon. Indian planning was over influenced by Keynesian school because of the economic experts trained in British Universities or Anglo-Saxon schools. In India Dr.B.S.Minhas resigned from Planning Commission protesting against high inflationary practice (Keynesian model of deficit financing).But no one from the academic world or Planning Commission came to his support. It is of importance to note that deficit financing started with the recommendation of
the IMF in its report in 1953.N.Kaldor says that the deficit financing imply a corresponding increase in privately owned wealth.
Conclusion
Although the policy measures suggested by the Keynesian theory may not be suitable to the problems of underdeveloped countries, it does not mean that Keynesian economics has no significance. Indeed, Keynesian methodology of thinking in macroeconomic terms is very essential and appropriate in understanding the major problems of any economy, whether developed or developing. However, in view of the changing institutional set-up of the developing economies during the process of planning and socio-economic reforms, Keynesian tools have to be adopted with suitable modifications.
Faster Moving Consumer Goods (FMCG)
Indian FMCG sector is the fourth-largest sector in the country, with a current
turnover of over US$ 28 billion (Rs. 113,000 crore), including tobacco. Most large FMCG categories managed to grow in the healthy double digits in 2008 in India. Breaking down the sales growth into categories, detergents, which saw sales value expand by over 25 per cent in 2008, were among the fastest growing categories. Soaps and shampoos grew by about 16 per cent each and beverages such as packaged tea and coffee expanded 13-16 per cent, according to industry estimates. Categories such as toothpaste and confectionery managed lower growth of 14-15 per cent in the same period. Sales growth for the 15 large listed FMCG companies actually accelerated from 14.5 per cent in the last two financial years to 20 per cent in the first nine
months of 2008-09.High penetration categories like soaps and detergents reported flat volumes due to sharp price increases and weight reduction.
The FMCG market shifts from a period of relatively effortless growth to a more challenging environment. The companies are making tactical and strategic shifts to deal with the changed scenario. As growth slows in overseas markets, companies are likely to proceed with caution on acquisitions and refocus on organic growth that is mainly India-driven.
Indian Automobile Industry
The automobile industry consists of passenger cars,multi-utility vehicles,commercial vehicles,two wheelers and three wheelers.After liberalization in 1991, there is a progressive growth in the number of manufacturers, thus replacing the earlier monopoly of a few manufacturers.At present, there are 15 manufacturers of passenger cars and multi-utility vehicles, 9 manufacturers of commercial vehicles,14 manufacturers of two/three wheelers.The Indian automobile industry has come a long way since in the first car ran on the streets of Bombay (now Mumbai) in 1898. The initial years of the industry were characterized by unfavorable government policies. The real big change as we see in the industry today, started to take place with the liberalization policies that the government initiated in the 1991. The liberalization policies had a salutary impact on the Indian economy and the automobile industry in particular. The automobile industry in the country is one of the key sectors of the economy in terms of the employment opportunities. The industry directly employs close to around 0.2 million people and indirectly employs around 10 million people. The prospects of the industry also has a bearing on the auto-component industry
which is also a major sector in the Indian economy directly employing 0.25 million people. The Indian automotive component industry is dominated by around 500 players which account for more than 85% of the production. The turnover of this industry has been growing at a mammoth 28.05% per annum from 2002-03 onwards. Global as well as local forces have affected the Indian auto industry, leading to a rapid transformation over the last decade or so. After the end of licensing era in early 1990s, the industry has witnessed rapid growth in volumes and capacity. 100% Foreign Direct Investment, absence of much government regulations, manufacturing and imports free from licensing & approvals in the automobile sector coupled with customs tariff for a u t o components reducing to 12.5% resulted in increased number of multinationals establishing their bases in India and with export markets looking up, the Indian automobile industry is poised for a phenomenal growth. India has made a mark in the global automobile industry; India is the second largest two-wheeler market in the world, Fourth largest commercial vehicle market in the world, Eleventh largest passenger car market in the world, Fifth-largest bus and truck market in the world (by volume). Envisaged to be the seventh largest automobile market by 2016 and world's third largest by 2030 (behind only China and the US).
ENVIRONMENT AND DEVELOPMENT
ENVIRONMENT
The environment can be defined as one’s surroundings. The welfare of the community depends on the availability of goods and the availability of goods depends on the availability of resources that come from environment. Economic Growth and Environment
Soon after Independence, the Government of India adopted a policy of rapid economic development through extensive and intensive exploitation of natural resources. Unfortunately the Government has allowed landlords, private contractors, mine owners and industrialists to encroach upon public lands, and literally loot and destroy forests, water resources and mineral wealth. While economic development has enriched a small group of people-namely, the rich landlords in the villages, the small and large industrialists, the contractors, the smugglers, the bureaucrats and the politicians-environmental degradation which is the direct result of this economic development has led to tremendous suffering and misery to millions of tribals,traditional craftmen and fisherfolk.It has been responsible for the steady growth in the number of landless labourers’ migration to cities.
Poverty
A major issue is the removal of mass poverty. Indian economy indicates a very high proportion of people below the poverty line. Poverty is defined on the basis of norms of nutritional requirements, i.e., 2400 calories per person per day for rural areas and 2100 calories for the urban areas. According to Planning Commission estimates in 1999-2000 nearly 260 million people (26 per cent of the population) were living below poverty line. Out of this 193 million in rural areas and 67 million in urban areas. The burden of poverty is very massive. Rapid reduction and eventually the elimination of poverty is, there fore, the most important issue of development. The prevalence of
‘mass poverty’ which is the cause as well as consequence of their low level of development. Poverty is the result of low economic and human resource (education and other professional skills) base of the poor who own a very small portion of the total assets in the form of land, capital, house property etc. The low resource base of the poor also inhibits them from giving education and training to their children. This enables them to earn very low and meager wages and thus perpetuate poverty. In other words, inequality in the distribution of assets is the principal cause of unequal distribution of opportunities on the other. Environment – Economy Interaction
Resources include human resources, financial resources and natural resources like land, water, fisheries, minerals, forests,, marine resources, climate, rainfall and topography. Natural resources determine the course of development of a country. While some natural resources such as land, water, fisheries and forest are renewable others like mineral and mineral oils are exhaustible and can be used only once. The principal objective of resource development is to maximize gross domestic output (GDP) or national production and for this purpose there should be optimum utilization of resources not only in the short period but, in a sustained manner, over the long period. But the exploitation of natural resources should not result in the disturbance of ecological balace.The unintended side effects of economic development have to be avoided or controlled They include mismanagement of natural resources, large scale deforestation, the unplanned discharge of residues and wastes, the handling of toxic chemicals, growth of slums etc. Deforestation is directly responsible for greater frequency and intensity of floods, soil erosion, heavy dams built at enormous expense and changes in climate conditions. It has also caused increased suffering to the landless labourers and marginal and small farmers who have steadily lost their
traditional sources of fuel wood and fodder for their cattle. Loss of fuel wood, in turn, has led to the use of cowdung as fuel, resulting in loss of precious organic manure.
Environmental Issues 1) Deforestation 2) Pollution 3)Ground Depletion
4)Climate Change
Climate is weather conditions of a place or area, conditions of temperature, rainfall, wind, etc. The saying goes, “climate is what you expect; weather is what you get.” The word climate describes the general average pattern of the weather in a place over a period of years. Climatologists generally consider 30 years as the time needed to assess the climate of a place.
Change is a fundamental characteristic of the environment.
Earth’s climate is a result of complex interactions between the sun , atmosphere , oceans , land and biosphere. Relatively small changes in climate could have a major effect on our resources like food , energy and water. The factors that influence global climate are the aamount of solar energy the earth receives, the condition of the atmosphere , the shape and rotation of the earth , and the currents and other processes of the ocean. The scientific evidence suggest that the earths climate is
changing . The atmosphere is warming and this trend will continue. By the year 2050, scientists predict that the world will be warmer by an average of between 1.5degree Celsius and 4.5 degree Celsius. A TASK Group set up by WHO had warned that climate change may have serious impact on human health.
5)Green House Effect.
A glass house used for raising delicate plants is called “green house’. A green house has higher temperature inside than outside though the interior receives less radiation. This is called green house effect. The factors that contribute to its effects are; i) glass walls ii) high carbon dioxide content iii) high water vapour content of air in the green house. They let the short wave radiations pass through them but prevent passage of long wave radiation emitted by the earth’s surface. This makes inside of the green house warmer than outside. As the suns radiation enters the atmosphere, some of it is reflected by the clouds and other particles and the rest reaches the earth. Part of the radiation reaching the earth is reflected by the earth’s surface while the rest is absorbed. During this process these gases in the atmosphere called green house gases obstruct the shape of heat from the earth into space while allowing radiation from the sun to the earth. Without green house effect it is not possible to sustain life on the plant as the average temperature of the earth would be 18 degree celsius than 15degree Celsius. The atmospheric gases which are permeable to short wave solar radiation but are strong absorber of long wave relations emitted from the surface of earth are called green house gases. They include i) Carbon dioxide
ii)Methane iii)Nitrous Oxide iv) Chlorofluro Carbons v)Hydrofluro carbon gases vi)Perfluro carbons vii)Sulphur hexafluoride viii) Ozone ix) Carbon monoxide
The green house gases added to the atmosphere by human activities can significantly affect the amount of heat trapped in the atmosphere over time and leads for global warming which had adverse effect on human life. The Inter –Governmental Panel on Climate Change (IPCC) periodically makes an assessment of the atmospheric abundance of green house gases and its possible impact on climate and related issues.
6)Global Warming
Global warming is an increase in the earth’s temperature due to the use of fossil fuels and other industrial professes leading to a build up of green house gases in the atmosphere. Air pollution traps more heat in the atmosphere rendering the earth warmer. This effect is called global warming.
Causes of Global Warming
The main cause of global warming is green house effect. These include carbon dioxide, methane, nitrous oxide , clorofluro carbons and ozone. Human activities during the last few decades of industrialization and population growth have polluted the atmosphere that it has begun to effect the climate. By burning large amount of fossil fuels we release huge quanities of carbon dioxide into the atmosphere. Currently, deforestation also releases carbon trapped in the tissues of the trees. Natural process like volcanic eruptions and earth quake induced fires also contribute to carbon dioxide emissions. The Inter –governmental Panel on Climate Change held earlier in 2007 found that man made additions to the global atmospheric carbon dioxide were indeed responsible for warming .
Effects of Global Warming
i)
Climate Effects a) There will be a warming of the earth’s surface and lower
atmosphere and a cooling of atmosphere. b) The warming trend over the earths surface is varied , warming in the tropics is lesser than the global mean by about 2-3 degree celcius depending on seasonal changeswhich in other latitude the average warming might amount for 510 degree Celsius increase in temperature. C) precipitation patterns will be changed. Some areas will become wetter and some areas dryer.
d)Seasonal patterns will change due to the changing of temperature and prcepitation matters. e) Soil moisture regions will be changed due to the changes in evaporation and precipitation.
f) With the increase in cloud cover over Eurasia in summer, which will enhance the solar heating of the surface and increase the land-sea temperature contrast,tropical mansoon will be driven with more severity and intensity.
g) Wind direction and wind stress over the sea surface will be changed,which will alter ocean cirrents and cause changes in nutrient mixing zones and productivity of the oceans.
7)Rise in Sea Level
The global warming also contributes to rise in sea level due to thermal expansion of ocean and melting of glaciers and Greenland ice sheets.The level of sea has been rising by 1 to 2 mm per year during the 20 th century.A rise of even half a metre in sea level would affect human population,one- third of which lives within 60 km of a coast line.Many important birds and fishes inhabiting in coastal salt marshes and estuaries will become extinct die to inundation of their breeding ground.
The direct effects of rise in sea level are: 1) recession of shorelines and wetlands, 2) increased tidal
range and estuarine salt-front instruction, and
3) an increase in salt-water contamination of coastal fresh-water aquifers.
Thus a rise in sea level will have a negative impact on human settlements, tourism, fisheries, agriculture, water suppliers and coastal ecosystems.
Impacts on Forests
Forests are highly sensitive to climate change and upto one third of currently forested and conservation of forest inhabitats in a rapidly warming world will present us with new challenges.
Effects on range of species distribution
Each plant and animal species occurs within a specific range of temperature.The global warming will shift the temperature range,which would affect attitudinal and latitudinal distribution pattern of organisms. Rapid rise in temperature may cause large scale death of many trees, as they are sensitive to temperature stress and many species may disappear.
Effects on human settlements and society
Population would be displaced by the inundation of low-lying coastal plains,deltas, and islands in the next century if efforts to reduce greenhouse gas accumulation in the atmosphere were unsuccessful.
Effects on Food Production
Global warming will reduce crop production due to increased incidence of plant disease and pests, explosive growth of weeds and enhanced bastal rate of respiration of plants. Global warming could produce colder temperature in Russia and northern Europe resulting in the reduction of crop yields.
Effects on health
As the earth becomes warmer, the floods and droughts become more frequent, increase in water-borne diseases,infectious disease carried by mosquitoes and other disease vectors.Temperature change may have an impact on several major categories of diseases including cardiovascular, cerebrovascular, and respiratory disease.
Solutions for global Warming
The following are some of the suggested solutions to prevent global warming
a) Reduction in the use of fossil fuels. b) Shifting to renewable energy resources that do not emit GHGs. c) Development of substitutes for chlorofluorocarbons. d) Increase of the vegetation cover, particularly forest for photosynthetic utilization of CO2. e) Limiting population f) Exploring other options to sequester carbon. g) Adopting practices and technologies to make agriculture sustainable. h) Reduce deforestation, adopt better forest management practices and undertake afforestation to sequester carbons. i) Reduce deforestation, adopt better forest management practices and undertake afforestation to sequester carbons. j) Use fewer automobiles and public transportation immediate and drastic reduction of emissions.
SUSTAINABLE DEVELOPMENT
Development should be perceived as a multi-dimensional process involving the reorganization and re-orientation of entire economic and social systems. Development is a continuous process which has to be extended over a long period to lead a country to a stage of self-sustained growth or to a self-generating economy. It is an evolutionary product of the idea progress. Progress can be achieved by generating wealth through maximization of productivity of labour and capital.
Friedman defined growth as an expansion of the systems in one or more dimensions without change in the structure and development as also as an innovative process leading to the structural transformation of social systems. For eg; growth can be compared with change in body whereas development can be compared with the change in body and mind together. Growth refers to quantitative improvement in the scale of physical dimension while development signifies improvement in both physical and non-physical dimension. Development is the conservation and management of the natural resources base and the orientation of technological and institutional change in such a manner so as to assure this attachment and continued satisfaction of human needs of present and future generations. Such sustainable development in agriculture, forestry and fisheries section conservation of land , water, plant and animal genetic resources , technically appropriate , economically viable and socially acceptable.
SUSTAINABILITY The term sustainable development refers to keeping an effort going continuously or the ability to last out and keep from falling. Sustainability implies that human use of enjoyment of the worlds natural and cultural resources should not in, in overall terms , diminish or destroy them. Thus sustainability is the ability of an activity or development to continue in the long term without undermining that part of environment which sustains it.
SUSTAINABLE DEVELOPMENT
The term sustainable development comes into common usage after the use by the World commission on Environment and Development (WCED) headed by Dr. Geo Halem Brundland. Sustainable Development.Sustainble development is now widely accepted as a primary goal economic and social activity. Sustainble development suggest that the primary focus of environmental protection efforts on the international level should be to improve the human condition. It also implies the integration of environmental and social concerns into all aspects of economic policy. Principle 4 of the Rio Declaration states that inorder to attain the sustainable development , environmental protection shall constitute an integral part of the development process and cannot be considered in isolation from it.Injecting sustainability concept in developmental policies has broad implication for macro and micro economics.Regarding macro economic policies , the move towards sustainable development requires for example traditional national accounting system be changed to better measure over all qualities of life. Intergenerational Equity and Responsibility.
Sustainable development as defined in our common feature is closely associated with the goal of intergenerational equity. Sustainable development recognizes each generation’s responsibility to be fair to the next generation by leaving an inheritance of wealth no less than they themselves have inherited.At a minimum, meeting this goal may require emphasizing the sustainale use of natural resource for subsequent generation and avoiding any environmental damage. Common but differentiated Responsibilities.
Sustainable development was common challenge to all countries but because of the different development path, industrialized countries may be asked to carry more of the immediate burden. The developed countries explicitly acknowledged the for the
central responsibility for the present environmental degradation and its remediation. To accomplish sustainable development, a number of areas have to be organized such as, 1) Improving energy efficiency 2) Saving forests, 3) Safeguarding biodiversity, 4) Adopting water resource management, 5) Managing coastal zones and oceans fisheries. 6) Arresting pollution, 7) Planning cities better, 8) Accomplishing a second green revolution, 9) Stabilizing world population, and 10) Stopping environmentally destructive subsidies. Guidelines for Sustainable Development
The following guidelines are suggested for achieving sustainable development: 1) Reduce the input of matter and energy resource in production process to prevent excessive depletion and degradation of planetary resources. 2) Use energy more efficiently and economically 3) Shift from exhaustible and potentially polluting fossil and nuclear fuels to less harmful renewable wind energy or solar energy. 4) Avoid wasting non-renewable and use them no faster than the rate at which a renewable resource used sustainably can be sustained. 5) Recycle and use the matter discarded as waste. 6) Use locally adaptable, ecofriendly and resource efficient technology, which will use less of resources and produce minimum wastes.
7) Utilise resources as per carrying capacity of the environment. 8) Adoption of 3-R approach, ie., reduce,reuse,recycle approach to minimize scarce resource use. 9) Emphasise pollution prevention and waste reduction instead of pollution cleanup and waste management. 10) Study before the construction of dams, major highways, mining, industry etc whether they can seriously damage ecosystems and bio-diversity before they are begun. 11) Insist and implement the technique of pollution control of toxic and hazardous gases in existing industries. Global Environmental Concerns
1) Population explosion enhances the ecological demands which resulting degradation on natural resouces. 2) Almost half of the world’s original expanse of tropical forests has been cleared.Within the next 30 to 50 years there may be little of these forests left. 3) Millions of hectares of grass lands have been overgrazed, some especially in Africa and the Middle East,have been converted to desert. 4) Between 25 % and 50 % of the world’s wet lands have been drained, built upon, or seriously polluted. 5) An estimated 36,500 species of plants and animals become extinct each year, mostly because of human activities. 6) About 8.1 million square kilometers of once-productive land (crop land, forests, grasslands) have become desert in the last 50 years. Each year almost 61,000 square kilometers of new desert are formed.
7) Top soil is eroding faster than it forms on about 35 per cent of the world’s crop land. Crop productivity on one-third of the earth’s irrigated crop land has been reduced by salt build up in top soil. 8) Most of the wastes we dump into the air, water, and land eventually end up in the oceans. Oil slicks, floating plastic debris, polluted estuaries and beaches, and contaminated fish and shellfish are visible signs that we are using the oceans as the world’s largest trash dump. 9) In developing countries 61 per cent of the people living in rural areas and 26 per cent of urban dwellers do not have access to safe drinking water. Each year 5 million people die from preventable water diseases. 10) Water is withdrawn from underground reservoirs (aquifers) faster than it is replenished by precipitation. 11) In the world’s population more than one out of every four live in absolute poverty. 12) It is estimated that 70 per cent of the surface water resources are polluted and that in large stretches of major rivers, water is not even fit for bathing, leave alone drinking. 13) Environmental pollution although typically associated with industrialization, is a great and growing concern in developing countries. 14) Use of fertilizers and pesticides pollute the environment. 15) Over the past few years air pollution has been increasing as a regional or global problem, not a local one. Acid rain may fall to earth thousands of miles away from the places of emission of sulphur dioxide world and nitrogen oxide.Thus the clouds generated in the developed world may rain in the territory of the developing world. 16) Emissions of carbon dioxide and other gases into the atmosphere from fossil fuel burning and other human activities may raise the average temperature of
