BHARATI VIDYAPEETH

(Deemed to be University)

SCHOOL OF ONLINE EDUCATION

Name of Student: Sanu Kumar

Date of submission: 28/06/21

Registered Email ID: kumar.sanu568@gmail.com

MASTER OF BUSINESS ADMINISTRATION

BATCH -: JANUARY 2021
SEMESTER - I

Subject: Managerial Economics

Topic: Inflation and Deflation, National Income Trade Cycle and,

Government Control on Monopoly

Registration No:
BVP20212891
(Starting with BVP)

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Inflation and Deflation

Topics Covered
• Concepts of Inflation and Deflation
• Types of Inflation
• Inflation in India
• Measures taken to reduce inflation and deflation
• Problems in measuring inflation

Concepts of Inflation and Deflation

Inflation is a rise in the general level of prices of goods and services in an economy over
a period of time. When the general price level rises, each unit of currency buys fewer
goods and services.
Inflation reflects erosion in the purchasing power of money.

Deflation is a decrease in the general price level of goods and services. Deflation occurs
when the inflation rate falls below 0%. Inflation reduces the real value of money over
time; deflation increases the real value of money.

Types of Inflation

There are three major types of inflation

• Demand Pull inflation
• Cost-Push inflation
• Hyperinflation

Demand Pull Inflation

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Demand pull inflation is driven by purchase of goods and services. If the economy is
strong the
Consumer income rises and demands for goods and services increases,

The rightward shift in demand curve pushes the price of the goods from P0 to P1.
Price rise in finished goods also affects the relative price of the raw materials used for
finished goods.

Cost Push Inflation

With demand as constant, shifting the supply curve to the left pushes the price up which
causes inflation. Higher production cost causes the supply curve to shift to left resulting
in higher prices.
Leading indicator for the cost-push infation or supply side inflation is commodity prices.

Hyperinflation

The price increase is so much out of control that the concept of inflation goes meaning
less.
Example: the recent price rice in Zimbabwe.

Inflation in India:

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Measures taken to reduce inflation and deflation
Monetary Measure

The measures taken to reduce the total supply or quantity of money in the country and
prevent a price rise, are called monetary measures. These measures are taken by central
bank of the country. The supply of legal tender of money is directly controlled by central
bank.

Fiscal Measure

All measures which are initiated through government measures are called fiscal measure.
These measures are implemented by the government. They are

a. Curtailing public expenditure

During inflationary period, prices go on increasing because there is an increase in
demand. This increase in demand is brought about by an increase in expenditure of
the government and the public. It is possible for the government to curtail expenditure
to combat inflation

b. Increase in Taxation
Another fiscal measure which can be used to curb demand is to increase taxation and
reduce the purchasing power at the disposal of consumers. Direct tax, taxes on
durable and luxury articles, sales tax, and excise duty can be increased to reduce
demand.

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 c. Public Debts
Resorting to public loans is one more fiscal measure which can be used to reduce the
purchasing power in the hands of the people. As an anti-inflationary measure, the
government can also collect small savings and compulsory deposits from the people.
This measure has been adopted by Indian government in the last few years.

d. The management of public debts

The management of old public debts is to be done in such a way that an additional
purchasing power is placed at the disposal of the people and banks. From this point of
view, surplus budgeting and repaying bank loans from this surplus is one way.
Issuing non-discountable bonds is another way.

National Income

National income is the money value of all goods and services produced by a country during a
period of one year. National income consists of a collection of different types of goods and
services of different types.

The main concepts of National Income are: GDP, GNP, NNP, NI, PI, DI, and PCI.
These different concepts explain about the phenomenon of economic activities of
various sectors of the economy.

Gross Domestic Product (GDP)

The most important concept of national income is Gross Domestic Product. Gross domestic
product is the money value of all final goods and services produced within the domestic territory
of a country during a year.

Algebraic expression under product method is,

GDP= (P*Q)

Where,

GDP=Gross Domestic Product

P=Price of goods and service
Q=Quantity of goods and service

According to expenditure approach, GDP is the sum of consumption, investment, government

expenditure, net foreign exports of a country during a year.

GDP includes the following types of final goods and services. They are:

1. Consumer goods and services.

2. Gross private domestic investment in capital goods.
3. Government expenditure.
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 4. Exports and imports.

Gross National Product (GNP)

Gross National Product is the total market value of all final goods and services produced annually
in a country plus net factor income from abroad. Thus, GNP is the total measure of the flow of
goods and services at market value resulting from current production during a year in a country
including net factor income from abroad. The GNP can be expressed as the following equation:

GNP = GDP + NFIA (Net Factor Income from Abroad)

Or, GNP = C + I + G + (X-M) + NFIA

Hence, GNP includes the following:

1. Consumer goods and services.

2. Gross private domestic investment in capital goods.
3. Government expenditure.

Net National Product (NNP)

Net National Product is the market value of all final goods and services after allowing for
depreciation. It is also called National Income at market price. When charges for depreciation are
deducted from the gross national product, we get it. Thus,

NNP = GNP – Depreciation

National Income (NI)

National Income is also known as National Income at factor cost. National income at
factor cost means the sum of all incomes earned by resources suppliers for their
contribution of land, labor, capital and organizational ability which go into the years net
production. Hence, the sum of the income received by factors of production in the form
of rent, wages, interest and profit is called National Income. Symbolically,

NI = NNP + Subsidies - Interest Taxes

Or, GNP- Depreciation + Subsidies - Indirect Taxes

Or, NI = C+G+I+(X-M) + NFIA-Depreciation-Indirect Taxes + Subsidies

Personal Income (PI)

Personal Income is the total money income received by individuals and households of a
country from all possible sources before direct taxes. Therefore, personal income can be
expressed as follows:

PI = NI - Corporate Income Taxes - Undistributed Corporate Profits - Social Security

Contribution + Transfer Payments

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Disposable Income (DI)

The income left after the payment of direct taxes from personal income is called Disposable
Income. Disposable income means actual income which can be spent on consumption by
individuals and families. Thus, it can be expressed as:

DI = PI - Direct Taxes

From consumption approach,

DI = Consumption Expenditure + Savings

Per Capita Income (PCI)

Per Capita Income of a country is derived by dividing the national income of the country by the
total population of a country. Thus,

PCI = Total National Income / Total National Population

Trade Cycle

Topics Covered
• Concepts of Trade Cycle
• Phases of Trade Cycle and Indicators
• Stabilization Policy

Concepts of Trade Cycle

Trade cycle refers to the ups and downs in the level of economic activity which extends over a
period of several years. Looking at the past statistical record of business condition, it can be
observed that business has never run smoothly for ever. There are many fluctuations in the
period.

According to Keynes, “A trade cycle is composed of periods of good trade characterized by rising
prices and low unemployment percentages, alternating with period of bad trade characterized by
falling prices and high unemployment percentages”

Phases of Trade Cycle and Indicators

There are four phases in a trade cycle

• Prosperity phase : Expansion or upswing of economy
• Recession phase : from prosperity to recession
• Depressing phase : Contraction or Downswing of economy
• Recovery phase : from depression to prosperity

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1. Prosperity Phase
When there is an expansion in output, income, employment, prices and profits,
There is also increase in the standard of living. This period is termed as Prosperity phase.

Features of Prosperity Phase:

• High level of output and trade
• High level of effective demand
• High level of income and employment
• Rising interest rate
• Inflation
• Large expansion of bank credit
• Overall business optimism

2. Recession Phase
During the recession period, the economic activities slow down. When demand starts
Falling, the overproduction and future investment plans are also given up. There is a
steady decline in the output, income, employment, prices and profits. The business loses
confidence and become pessimistic. The increase in unemployment causes a sharp
decline in income and aggregate demand. Generally, recession lasts a for a short period.

3. Depression Phase
When there is continuous decrease in output, income, employment, prices and profits,
There is a fall in the standard of living and depression sets in.

Features of depression:
• Fall in volume of output and trade
• Fall in income and rise in unemployment
• Decline in consumption and demand

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 • Fall in interest rate
• Deflation
• Contraction of bank credit

4. Recovery Phase
The turning point from depression to expansion is termed as Recovery or revival phase.
During the revival or recovery, there are expansions and rise in economic activities.
When demand starts rising, production increases and this caused an increase in
investment. There is a steady rise in output, income, employment, prices and profits.

Stabilization Policy

Business cycle moves between boom and bust peaks. Recession and recovery are the
periods happening between boom and bust. During the business cycle activity, there will
a change in aggregate demand and aggregate supply. Government along with central
bank deploys stabilization policies to control the business cycle.

When the economy is in boom period, there is will be more money supply causing greater
demand for goods and services in the market. Cost of commodity will increase causing
increase in inflation.
When the economy is in recession period, there will be less investment in new projects.
Money supply will come down.
When the economy reaches bust period, there will be no new investments.

Government Control on monopoly

In economics, a government monopoly (or public monopoly) is a form of coercive

monopoly in which a government agency or government corporation is the sole provider
of a particular good or service and competition is prohibited by law. It is a monopoly
created by the government. It is usually distinguished from a government-granted
monopoly, where the government grants a monopoly to a private individual or company.

A government monopoly may be run by any level of government - national, regional,

local; for levels below the national, it is a local monopoly. The term state monopoly
usually means a government monopoly run by the national government, although it may
also refer to monopolies run by regional entities called "states".

In many countries, the postal system is run by the government with competition
forbidden by law in some or all services. Also, government monopolies on public
utilities, telecommunications and railroads have historically been common, though recent
decades have seen a strong privatization trend throughout the industrialized world.

In Scandinavian countries some goods deemed harmful are distributed through a

government monopoly. For example, in Finland, Iceland, Norway and Sweden,
government-owned companies have monopolies for selling alcoholic beverages. Casinos

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and other institutions for gambling might also be monopolized. In Finland, the
government has also a monopoly
to operate slot machines.

Governments often create or allow monopolies to exist and grant them patents. This
limits entry and allows the patent-holding firm to earn a monopoly profit from an
invention.

Health care systems where the government controls the industry and specifically
prohibits competition, such as in Canada, are government monopolies

A natural monopoly by contrast is a condition on the cost-technology of an industry

whereby it is most efficient (involving the lowest long-run average cost) for production to
be concentrated in a single firm. In some cases, this gives the largest supplier in an
industry, often the first supplier in a market, an overwhelming cost advantage over other
actual and potential competitors. This tends to be the case in industries where capital
costs predominate, creating economies of scale that are large in relation to the size of the
market, and hence high barriers to entry; examples include public utilities such as water
services and electricity.

Characteristics:

• Profit Maximiser: Maximizes profits.

• Price Maker: Decides the price of the good or product to be sold.
• High Barriers to Entry: Other sellers are unable to enter the market of the
monopoly.
• Single seller: In a monopoly, there is one seller of the good that produces all the
output. Therefore, the whole market is being served by a single company, and for
practical purposes, the company is the same as the industry.
• Price Discrimination: A monopolist can change the price and quality of the
product. He sells more quantities charging less price for the product in a very
elastic market and sells less quantities charging high price in a less elastic
market.

Sources of monopoly power:

Monopolies derive their market power from barriers to entry – circumstances that
prevent or greatly impede a potential competitor's ability to compete in a market.

There are three major types of barriers to entry; economic, legal and deliberate.

• Economic barriers: Economic barriers include economies of scale, capital

requirements, cost advantages and technological superiority.
• Economies of scale: Monopolies are characterized by decreasing costs for a
relatively large range of production. Decreasing costs coupled with large initial
costs give monopolies an advantage over would-be competitors. Monopolies are

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 often in a position to reduce prices below a new entrant's operating costs and
thereby prevent them from continuing to compete.
• Legal barriers: Legal rights can provide opportunity to monopolize the market of
a good. Intellectual property rights, including patents and copyrights, give a
monopolist exclusive control of the production and selling of certain goods.

An alcohol monopoly is a government monopoly on manufacturing and/or retailing of

some or all alcoholic beverages, such as beer, wine and spirits. It can be used as an
alternative for total prohibition.

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