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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.
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.
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:
GNP= C+I+G+(X-M)+(R-P),
Where,
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
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.
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 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.
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 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.
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
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
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, profit-
push 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.
Causes of Inflation
EFFECTS OF INFLATION
The measures to control inflation can be broadly divided into TWO- Monetary and
Fiscal Measures.
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
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.
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.
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.
Scarcity Definition
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
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”.
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.
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.
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
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
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;
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.
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
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.
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 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”.
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
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
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.
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:
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 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.
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.
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 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
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.
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 macro-
economic 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.
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.
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.
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.
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
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
vi)Perfluro carbons
vii)Sulphur hexafluoride
viii) Ozone
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 .
i) Climate Effects
a) There will be a warming of the earth’s surface and lower
atmosphere and a cooling of atmosphere.
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.
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 20th 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:
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.
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
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.
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
SUSTAINABILITY
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.
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,