24

EXPLANATORY ANSWERS|

net increase in the quantity demanded of

and
inferior good when its price falls. It means
1. Price /S demana appues to an
"inferior
that the law of
P to a normmal good".
good' as it applies
Po However, there
are certain cases of inferio.
ior
goods to whichthe law of demand does not
D apply. Such goods are known as Giffen goods.
substitution effect
Quantity In case of Giffen goods, is
Q1 Qo
and income effective is negative but
positive
Deadweight rectangle and
Loss: The shaded income efect 1s so powerful that it
and producer negative
triangles show changes in
consumer
outweighs the positive substitution effect.
surplus when moving from competitive price Therefore, when price of an inferior good of
and quantity, Po and Q, to a monopolist's price
Giffen type decreases, its demand decreases
and quantity, P, and Q. Because of the higher
price, consumers lose x + y and producer gains and vice versa. This phenomenon shows a
X-z. The deadweight loss is y + z paradoxical situation, i.e., when the price of
an inferior good increases, its quantity
2. Features of Cournot's model
demanded increases. This paradox is known
1. Cournot's equilibrium is Nash equilibrium.
as Giffen paradox. Giffen's paradox is a ver
This particular equilibrium is reached by
the assumption strong exception to the law of demand.
of
zero conjectural
variation. 4. The Edgeworth Box diagram is a conceptual
2. Cournot's equilibrium is stable. device often used in economics to show how
3. Cournot's model assumes autonomous a given basket of goods can be efficienty
behaviour. There is however the for (and also inefficiently) distributed among a
scope
any firm to improve its position by strategic set of individuals. The basic idea of an
behaviour. A strategic behaviour here is to efficient distribution is that of Pareto-
observe the other firm's behaviour
pattern optimality: the goods must be allocated in
and determine output
accordingly. This Such a way that no
redistritution is possibie
behaviour is known as
leadership
behaviour, which we consider
So that one individual increases his/her utility
in
Stackelberg model in the following section.
without someone else
decreasing his/hers
5. Price effect and its
4. Cournot's equilibrium is not
joint profit components: The tol
effect on the
maximizing. There is
scope for quantity demanded or
improvement for both firms by joint commodity of a change in its price 1S Called
maximization through collusion profit
and
price effect. It can be divided into two
p
arts:

formulation of cartel the substitution effect and income effect.

3. In case ofinferior good, income
an Substitution effect: The substitution effect of
and
substitution effects of a price change work in a
change is measured by holding real income
opposite directions and that substitution effect constant on
single indifference curveand
a

outweighs the income effect so that there is io of

ining the effect of changing the ratio of

the two the

prices by altering the slope
f

hudget line. Substitution effect refers to the
change in the consumption of a commodity
that occurs when the consumer moves along
the same indifference curve, after a change in
relative has occurred. It is the same for all
commodities.
Income effect: The income of a price change
is the difference between price effect and
income effect. It is found by holding relative
prices constant and varying the position of
the budget line with its slope remaining
constant.
6. Three problems arise in connection with a
general equilibrium:
1. Does a general equilibrium solution exist?
(Existence problem).
2. If an equilibrium solution exists, is it
unique? (Uniqueness problem.)
3. If an equilibrium solution exists, is it stable?
(Stability problem.)
8. A resource allocation is efficient if it is
impossible to make one or more persons better
off in terms of welfare without making at least
one other person worse off. Conversely, an
allocation is inefficient, if it is possible to
improve someone's position without worsening
the position of any other individual. The
Italian Economist Vilfredo Pareto has specified
a condition of optimal or efficient allocation
referred to as Pareto Optimality Condition.
An allocation is Pareto optimal or Pareto
efficient, if it is impossible to make changes
in production and consumption activities of
irms and households to increase the welfare
of at least one individual without
affecting
the welfare of at least another individual.
There are three conditions that must be
satisfied for the allocation to be Pareto
or Pareto
efficient. They are:
.Efficiency in consumption.
2.
Efficiency in production.
3.
Efficiency in product mix.
25 996 (UGC-Eco) Nov. 174
Conditions for Pareto Efficiency
Efficiency in Consumption: MRSA = MRSB
Mux Mux
Muy Muy
fficiency in Production: MRTS = MRTS
MR MP
MPk MPk
Efficiency in Product Mix: MRPT =MRS
MC/MCy = MU,/MU,
9. Shadow Prices: For social cost-benefit
analysis, the market prices of both inputs and
outputs of a project are required to be corrected
suitably if they do not represent the 'real
prices of inputs/outputs. Such corrected price
of inputs/outputs is known as shadow price.
Hence, the shadow price takes care of the
distortions in the market price by suitably
adjusting the market price.
For example, newly set up Small Scale
Industries in India are granted subsidy on
electricity charges by the Government, for the
initial few years. The State Electricity Boards
(SEB) may produce electricity at a cost of, say
2.50 per unit. A newly set up Small Scale
Industry may be charged at a rate of sayy
1.50 per unit of electric power consumed in
its first year of operation. ? 1.75 per unit, in
its second year of operation, 2.00
per unit
in its third year of operation etc., In such a
situation, the cost of electric power for the
Small Scale Industry is T 1.50 per unit, 1.75
per unit and 2.00 per unit for the first, second
and third year of operation
respectively.
However, the cost for the SEB is 2.50 per
optimal unit which is the actual cost, though the SEB
charges a lower price. The price of electric
power to be used for social cost-benefit
analysis is only 2.50 per unit which is the
shadow price of electric power.
 26

10. In micro-economics demonstrative effects are wealth (or capital). In simple words. it means
studied under the name of "Veblen'".
typically labour income plus capital incomes, I
"Snob" and "Bandwagon" effects as proposed material, financial and human sources A
of
by Leibeinstein. Although hardly central to income are treated as wealth, then
the
the mainstream, "Veblen", "Bandwagon" and permanent income of the current year can be
"Snob" effects, rely on the acceptance that an defined as
individual's consumption of goods is affected Y, = rW

by the behaviour of other consumers.

"Veblen's" effect is at work when the function
of consumption is to manifest pecuniary
strength, and the demand of a good may
increase with price, the latter being an index
of the scarce commodity of status.
Bandwagon" and "Snob" effects
individual's demand for goods or services is
either increased or decreased by the fact that
others are seen consuming them.
14. The absolute income hypothesis relates
household consumption to the current
absolute income and the relative income
hypothesis relates it to the current relative
income. Both these hypotheses relate
consumption to current income-absolute or
relative. Milton Friedman rejected the 'current
income hypotheses and developed another
theory of consumption, popularly known as
permanent income hypothesis. According to
the permanent income hypothesis, it is the
permanent income, not the current income,
which determines the level of current
where Y is the permanent disposable income
with reference to the current year, W represents
overall wealth and r is the rate of return.
16. There is direct relationship between investment
With multiplier and marginal propensity to consume.
an Higher the marginal propensity to consume,
greater is the size of multüplier. On the contrary,
lower the marginal propensity to consume,
smaller is the size of multiplier. In fact, the
value of multiplier is determined by the value
of marginal propensity to consume. i.e.,
K1-MPC
Where, K = Multiplier and MPC = Marginal
propensity to consume.
18. For each savings rate, there is a unique steady
state per capita capital stock, given the
production function, the growth rate of labour
and depreciation. As per capita consumption
in the steady state depends on the savings
rate, one can calculate which savings rate

consumption expenditure. maximises per capita consumption. This

rule
Friedman's theory postulates that consumption savings rate is known as the golden
is the function of permanent income, i.e., savings rate. The steady state per capita
consumption is maximised when the marginal
C AY)
growth rate of
product of capital equals the
and that C is proportional to Yp i.e., rate. This IS
labour plus the depreciation
C Y known as the golden rule of capital
stock
Permanent income, defined broadly, is the accumulation, as it defines the capital
that maximises the steady state per capla
mean of all the incomes anticipated by the
households in the long run. The method of consumption level.

estimating permanent income, as described 19. In Schumpeter's theory of economl

below, is an approximation of incomes development, three key words conCc
anticipated from all human and non-human economic development. The first is innovallo
 27
cause of economic development. a series of changes including those in the
the
covers the introduction of a new business cycle will occur in the economic
Innovation transformation is
product or a new method of production, the process; in its totality such
ofmarket, the acquisition of a
a new called economic development. Economic
opening
new source of supply, and the reorganization development pre-supposes capitalism as an

institution. Although capitalism is ordinarily

of an existing industry. With the introduction
defined in terms of private ownership and profit
of these new elements into an economy, the
incentives through market mechanisms,
traditional channels of the economy have to
bank credit as essential
be changed. Innovation destroys old things Schumpeter stipulated
and creates new ones and is thus called creative
to the functioning of capitalism.

destruction. 20. The rate of profit is the relationship of profit

and investment or of the monetary expression
The second key word is entrepreneur, the
of
subject of economic development or the agent of surplus-value and the value of the means
and
of innovation. Schumpeter's entrepreneur is production and labour-power (constant
not a business manager himself. In contrast to variable capital).
a manager, who depends on existing goods S

and existing methods of production, the ROP = c+1

entrepreneur carries out new and creative
If we divide the numerator and the denominator
projects. When one attempts to initiate new
by v, then we get the following:
things, he is confronted with various kinds of
risk, resistance, and hesitation. Those who are S

able to prevail are scarce, for innovation

ROP =
requires foresight and originality, resolution
succeeds in introducing a
C+1
and action. If one

change, he can get entrepreneurial profits. This formula shows that the rate of profit
The third element is bank credit, the means by
depends (a) on the rate of surplus-value, which
which the entrepreneur accomplishes Marx also calls the rate of exploitation because
innovation. If one wants to undertake
it described the relationship of unpaid and
innovative activities, one must have control paid labour, and (b) the organic composition
Over productive resources. When an economy
of capital, which represents the relationship of
employment, the
1S in a static state with full dead and living labour, constant and variable
for new
utilization of productive resources
capital, the value of machinery/resources and
of
activities requires the forced withdrawal labour-power. The rate of profit is directly
ne resources from existing uses. T he
proportional to the rate of surplus-value and
credit from
Chrepreneur acquires new
indirectly proportional to the organie
capitalists or banks and by means of the newly
composition of capital.
reated power, pays higher prices
purchasing
than before for the needed resources. He 1s 21. The early mathematical expression of
neoclassical growth models show that the
ypically a debtor and repays what he owes
Out of long-run rate of growth is exogenously
entrepreneurial profits.
determined by either the rate of savings
As the implementation of new combinations
(Harrod-Domar model) or the rate of technical
defined by innovation (cause), entrepreneur
(Subject), and bank credit (means)- proceeds. progress (Solow-Swan model). In reality, if a
 28

higher per capita growth, endogenous growth theory perceives

forcipn
country
then it
demonstrates
that the country devotes large
means
investors as forei
promoters of domestic fim
ms n
gn
shares of its output to saving and
investment, technical,
terms of marketing, and managerial
neoclassical know-how.
and this is not reflected in thhe
growth model. 22. Theories of Social Transformation: T.
The
In the 1980s, it realized that the historical development capitalism has
of
was
been
neoclassical framework was not adequate for widely presented as a linear progression. Thi
As a perception was codified by authors like Fisher
the analysis of actual growth experience.
and Clark, who presented the trajectory
result of this, the endogenous growth model of
start taking shape building macroeconomic capitalist development as one based upon
models out of microeconomic fundamentals. sectoral change in which
employment moved
The microeconomic groundwork starts at the from a primary sector (agriculture) to a
household level where households maximize secondary sector (manufacturing) and then on
utility subject to budget constraints and firms to a tertiary or service sector. The Fisher/Clark
are projected to maximize profits with the thesis' emerged in the 1930s and 1940s. This
production of new technologies and human influential analysis defined manufacturing as
capital. Based on the above microeconomic the making of tangible goods and
groundwork, the AK model is the starting commodities, while services were associated
version of endogenous growth model which with the provision of the intangible or non-
assumes a constant exogenous saving rate and material. This "thesis' was subsequently
a fixed level of technology. The AK model is reworked in the post-1945 period by authors
a distinct case of the like Bell (1973), for whom the shift to the
Cobb-Douglas function
and holds constant return to scale as the post-industrial society was characterized by
key
assumption, and is presented as: the replacement of goods-producing activities
Y =AKL-a by those concerned with the provision of
services. Service work involved all
Where Y the total production, A =the total
=

those employed in activities such as

factor productivity, K capital, K (K embodies
=

information handling and the knowledge-based

both physical capital and human
L =labour, and the
capital). industries.
parameter a the =
output 23. Hagen's Theory: On the Theory of Social
elasticity of capital. As a special case when
a =
1 =the production function
is linear and Change (1962), by the economist Everett
the property of constant returns to
scale in the Hagen, uses psychology, sociology, anu
capital stock hold. This will prevail for any anthropology to explain how a tradition
other value of the
capital intensity between agricultural society (with a hierarchical and
0 and 1. An authoritarian social structure where status
endogenous growth model can be
constructed by having or inherited) becomes one in which continuing
relaxing the perfect he
competition assumption. technical progress occurs. Because
industrial and cultural complex of low-inco
Technological development is the key societies is unique, they cannot merely nu
itate

component of an
endogenous growth
model rowth

and investment in research will Western techniques. Thus, economie Eoa n d

enhance requires widespread adaptation, creativity
technotogical enhancements and generate a problem solving, in addition to po
predictable rate of economic growth. The attitudes toward manual labour.

1954, 1.ewis produced a seminal paper
24. aIn dual economy modei. In this model, there
are two sectors: a modern capitalist (industrial)
sector and a traditional subsistence
(agricultu sector. The traditional sector has
"unlimited" supplies of labour (a very large
population) where wages are at subsistence.
Agricultural production remains unchanged as
workers move out to the industrial sector, there
is surplus labour (disguised unemployment)y"
in agriculture. Capitalists in the modern sector
reinvest all their profits and hence in the next
period they can increase production,
employment increases, profits increase,
reinvestment takes place and the system
continues to groW.
This was a very attractive model for a long
time as it appears that we can have something
for nothing: agricultural production
remains constant as workers move out to the
modern sector, while industrial production
increases with increased employment and
investment.
In many of these models agriculture is simply
treated as a sector that is there to produce
goods and provide labour for the dominant
sector, the industrial sector. Eventually, when
the unlimited supply of labour is exhausted
wages in the industrial sector would rise, hence
slowing down employment and profits.
Subsequently, capitalists would continue to
reinvest profits and the economy would
Continue to grow. For Lewis the economy
SWitches from a classical model to a
neoclassical one.
course, what happened in many developing
Countries is that there was a mass movement
abour from the agricultural sector to
urban industrial areas that created
unemployment, homelessness, slums, and
POverty. The industrial sector could not absorb
the
large number of migrants.
29
on 26. Harrod-Domar Growth Model: A model in
growth theory developed independently by
Roy Harrod and E.D. Domar. The model works
on the basis of three growth rates, the actual
rate of growth, the warranted rate of growth
and the natural rate of growth. As the name
implies, the actual rate of growth is the growth
followed by the economy. The
path actually
warranted rate of growth is derived fromn a
savings function and the accelerator principle
It can be shown that the warranted rate of
growth (g,) is given by the expression,
slc, where is the savings propensity and
8 s
is the capital-output ratio. The natural rate
c
of growth is determined by the rate of growth
of the labour force and the rate of growth in
labour productivity. In equilibrium, all three
growth rates will have to be identical. One of
the highlights of the Harrod-Domar growth
model is the fact that if there is a divergence
between the three growth rates, the divergence
will not be reduced so that the economy moves
towards the equilibrium path. Instead, there
will be a cumulative divergence away from
the equilibrium path.
If all firms expect demand to grow at the
warranted rate and invest appropriately to meet
that demand, then their expectations will be
fulfilled. If, however, they expect demand to
grow more quickly than the warranted rate,
the actual rate of growth will be greater than
the expected rate and there will be excess
demand. By contrast, if expectations are
pessimistic, the actual rate of growth will
be less than the expected rate and there
will1
be excess supply. This is the essence of
Harrod's instability, which can be
considered a statement of the implausibility
of a market economy ensuring dynamically
the
stable conditions of equal supply and
demand.
28. The twin deficits hypothesis relers to the belief
that changes in fiscal policy that increase the
 30

deficit will also increase the current

ASEAN's FTA Partners', covering
budget ng a broad
in range of areas including trade in
account deficit. The term gained popularity goods
the U.S. services, investmne technical and
tax cuts that caused
the 1980s, when
budget deficit to increase 3 per cent of
by intellectual property, competition cooperatio
anddisn
between 1980 settlement. spute
gross domestic product (GDP)
trade deficits
and 1985 were followed by 35. The new trade theory came into
GDP in 1985 and
existen
exceeding 3 per cent of during 1970s. It held that with the
1986. The concept
received renewed presence of
of the 21st
substantial economies of scale there
ca
attention in the first decade be
increasing returns to specialisation rather then
century, when a deterioration of the U.S. long-
term or structural budget balance of 6 per cent decreasing returns. The economies of
scale
2000 and 2004 was refers to the reduction in the unit cost due
of GDP between to

accompanied by current account deficits of 5 large scale production. These are derived
per cent of GDP in 2004 and 6.5 per cent of by spreading the fixed input over a
large
GDP in 2005. output.
30. Agreement on Agriculture: The Agreement The new trade theorists believe that due to the
on Agriculture is an international treaty of the presence of substantial economies of scale in
World Trade Organization. It was negotiated many industries, the world market may be able
during the Uruguay Round of the General to support only a limited number of fims
Agreement on Tariffs and Trade, and entered based in a limited number of countries
into force with the establishment of the WTO producing that product. Those countries where
on January 1, 1995. the product was first produced will
Three Pillars: The AoA has three central predominate in the export of that product.
concepts, or "pillars": domestic support, The producing firms of that product in the
market access and export subsidies. concerned country may gain economies of
scale and early training in the handling of
31. In 1960, Belgian-American economist Robert
Triffin first identified the Triffin dilemma (or things. These advantages accruing to a fim
Triffin paradox), that is, when a national for entering early in a particular industry are
first These
currency also serves as an international reserve called mover advantages.
nto
advantages create barriers for new entrants
currency, there can be conflicts of interest
between short-term the market.
domestic and long-term vard
international economic objectives. 36. Hedging: important feature of the
An
forwau

33. The Regional Comprehensive Economic exchange market is hedging (or coverng
Partnership (RCEP) negotiations commenced Hedging is settling the exchange rate to
advance for future transactions with a vIe
in late 2012 among 16 countries (that is, the ation

10-member Association of Southeastt Asian avoiding loss due to deprecla the

exchanges
Nations (ASEAN) plus the six countries with In future. Hedging is essentialy covering
existing PTAS with ASEAN). The goal of the risk of exchange rate fluctuations.
RCEP negotiations is to achieve a modern. 37. Competition Act2002
comprehensive. high-quality and mutually
Foreign Exchange Management Act
beneficial economic partnership agreement 1986
Consumer Protection A c t -
among the ASEAN Member States and The Factories Act 1948
 31

Base year 2011-12 Base year 2004-05

39
Sector Weights (%) Ttem groups Weights (%) Item groups
Mining 14.373 14.157

Manufacturing 77.633 405 75.527 397

Electricity 7.994 10.316

Total 100 407 100 399

core inflation is defined as the

42. In theory, 45. % Growth in GDP = x 20 %=0.8%.
underlying. or persistent, part of inflation that 100
provides an indication of future inflation, 46. Theory of Optimum Population: The theory
although precise definitions vary. In practice, of optimum population was first formulated
core inflation is commonly measured using Prof. Sidwick and later developed by Prof.
by
the CPI that excludes food and energy prices, Dalton and Prof. Carr Saunders. They
or their most volatile components, but
these the concept of optimum population,
developed
measures differ across countries. The variation the best
i.e., that size of population which is
in measurements of core inflation tends to be for a country at a particular time. At this level
emerging and
especially significant among of optimum population, per capita income
inferences
developing economies, for which would be maximum.
about the underlying inflation need to be made
In other words, it is that level of population
with caution.
which enables an economy to produce with
Otto Eckstein (1981), is considered the
Inflation". given natural resources, technology and capital
originator of the term "Core stock, the highest per capita income.
of
Eckstein defined it as "the trend increase According to Prof. Carr Saunders, optimum
observed
the cost of factors of production" and
population is that which produces maximum
that this notion of core inflation... originates economic welfare. The concept of economic
inflation in
in the long-term expectation of welfare includes environmental maintenance,
in the
minds of households and business, check, ecological balance, etc. A
sustain the pollution
contractual arrangements which country would then said to be under populated
wage-price and in the tax system."
momentum, if its population is less than the optimum and
inflation
Eckstein definition divides core over populated if its population is more than
into demand, supply shock and production
the optimum.
cost.
of
44. The Coase Theorem: The modern analysis
has been
neighbourhood effects or externalities
work of Ronald
strongly influenced by the article in N
Coase. Coase wrote a pathbreaking
1960 that focused on simple negative
Spillovers, such as aconfectioner whosee Optimum
population
vibrations that disrupt
a
machinery causes
a
M
or Over population
OCLor examining room next door,
s Under
s population
rancher whose cattle wander onto a farmer
Fig.: Optimum Population
land and
trample the crops.
 32
produces honey for the owner but also
Accordingly, three concepts of population are: so help in
the pollination of plants. Another exa.
of
1. Optimum Population: It is that level externali in eof
incomeis
negative productio is the
population at which per capita riverside chemical factory which
the highest, This level of population is
chemical wastes in the river and dumps its
and pollute its
changeable with changes in
resources
water.
technology. Negative Externality and Market Failure: i
of
2. Over Population: It is that level
a

income falls the case of negative externality, the

population where per capita
to food
with rise in population. It leads
and low
shortage, unemployment, poverty
standard of living.
3. Under Population: It is that level of
population where per capita income rises
with rise in population. It occurs
underutilisation of resources.
51. Externality is an influence that does not come
from the institution of market but affects the
welfare of a person either adversely or
favourably. Externalities adversely
economic efficiency.
Externalities can be positive or negative. Air
pollution is an example of negative
externality. A negative externality is a cost
which is not reflected in the market place. A
positive externality is a benefit accruing to a
person without his own effort and it is not
generated from market transaction. Education
is a good example of a positive externality.
An educated person is likely to produce many
benefits to the society as a better citizen, as a
source of information, advice, and so on.
Positive and negative externalities can be
found both in the case of consumption and
social
cost is higher than the private, cost. To be
more precise, the marginal social cost is higher
than the marg1nal private cOst, and the actual
output produced by the negative externality
creating industry (or film) does not take into
account the social cost that it creates. Thus
due to
the competitive equilibrium will result in,
() more than the efficient output and (i) less
than the efficient price. The market price falls
short of the actual marginal social cost of the
product. Under such a situation, an excessive
affect the
amount of resources is allocated to produce
the output which involves externality. The
market fails to achieve allocative efficiency.
52. The literature on optimal taxation is highly
technical. Contributions have been made by
Ramsey (1927), Mirrlees (1971) and Auerbach
(1985).
The basic problem of optimal taxation is to
choose tax rates to minimize the loss of an
individual's utility, that is, minimize excess
burden, subject to a amount of tax
required
revenue to be raised by the government. The
theory derives rules of efficient taxation
solution to this problem. These
providing a

production. An example of positive externality
in consumption is vaccination. By vaccination,
not only is the individual vaccinated and
protected from certain diseases, but the whole
society is protected. An example of negative
externality in consumption is the noisy
motorbike which creates disturbances to the
others. An example of positive externality in
production is the beehive which not only
rules are the Ramsey rule, the inverse elastiCiy
rule, and the Corlett-Hague rule.
The Ramsey rule states that in order o
minimize excess burden "the proportionai
reduction in compensated demand as a resu
of the imposition of the set of taxes shoud
the same for all goods". There are
The
rule.
important aspects of the Ramsey
first is that it is stated in quantity te
 996 (UGC-Eco) Nov.'17-5
33

because it is the reduction Women and Child Development, "It is a

not prices. This is so

powerful tool for achieving gender
quantity which leads to a loss in excess
in
mainstreaming so as to ensure that benefits of
burden. Changes in relative prices merely
women as much as men."
development reach
induce quantity changes. Second, it is the
accounting exercise but
an
It is not just an
compensated or Hicksian demand change that a gender
matters. The Hicksian demand curve depends ongoing process of keeping
formulation,
perspective in policy/ programme
only on the substitution effect. This is review. Budget 2016-
its implementation and
important because excess burden relates to in its
17 mention that "Gender Budgeting
the distortion in consumer preferences due to 'Gender Analysis' of
the substitution effect. simplest connotation is
the budgetary
the budget aimed at examining
lens." The budget
The second rule is the inverse elasticity rule allocation through
a gender
which states that tax rates should be inversely is an evolving
accepts that gender budgeting
more ministries
and
related to elasticities of demand. The rule area in India. More and
to the
contributing
implies that since excess burden varies directly departments are

in the country.
with elasticities, this means that high tax rates development of the practice
should be imposed on inelastic goods, a policy to establish
GB requires Government budgets
that
which would lead to less distortion in its gender specific impacts and to ensure

to Stern, the translated into

consumer preferences. According commitments are
gender
rule to be
inverse elasticity appears budgetary commitments.

inegalitarian. To the extent that Ramsey allocation and the specific

in terms of one Budgetary r e s o u r c e
formulated the problem specific
expenditure amount for
women

distributional
the rule ignores mentioned as part
programnmes are separately
consumer

in India.
questions. of gender specific budgeting
(Ahluwalia,
57. There are a large number of studies The central government introduced gender
1994; Pradhan
1991; Dholakia, and Dholakia, budgeting in 2005-06 as a budgetary practice.
Balakrishnan et.al, 2000;
and Barik, 1999; It has Budgeting by
institutionalized Gender

Goldar and Kumari, 2003; Goldar,

2004; Unel, Statement (GBS)
introducing a Gender Budget
2005) on total
2003; TSL, 2003 and Reddy, since 2005-06. The GBS captures the total
manufacturing of resources earmarked for in
TFP for India's registered quantum
women

Sector. However, there

is no conclusive a financial year.
scholars regarding the
agreement among the 59. Multi Dimension Poverty Index 2010
neither for Indian
manufacturing
trends of TFP Human Poverty Index 1997
about the appropriate
industries nor Capability Poverty Measure 1996
TEP. There are
methodology for calculating Human Development Index 1990
(Sivasubramonian, 2001;
only a few studies Total cost function is
Virmani, 2004; (2004); Bosworth and67. Here,
Pallikata

Virmani, 2007; Gupta, 2008 and

Das et.al, TC = - 10g2 + 17q + 66
to estimate
2010) which have made an attempt Total profit
the TFP at the aggregate level. II = TR - TC
that
8. Gender budgeting (GB) is a practice = q.5 - (q - 104 + 174 + 66)
accounts budgetary m e a s u r e s to support
gender
commitments. According to the
Ministry of 5q - q + 10g -

17q -
66
 996
34 (UGC-Eco) Nov.
17-5
70. Price Elasticity
For Maximum Profit

dl1
da5-3q +20q - 17 =0 E dpdq P4
0 Here, q = 4
3q 20g + 12 =

p 16 - q - 0.5q2
2q 12 0
3q -

18q + =

3q(q -

6) -

2(q -

6) = 0 = 16 -
4 -

0.5 (4)2
= 16 - 4 - 0.5 x 16
(q-6)(3q - 2) = 0
= 16 - 4 - 8 =4
q=6 or
q =2/3
For maximum, Here, p 16 - 4 - 0.5q

dTI 64 + 20 <0 ap - 1 -
1.0q
da dq
At q = 6, This condition is satisfied. Give q =4
68. Supply response: S, AP-+B
Consumer demand: D,= ap, +b ap = -1 -
4 =
- 55
S, = D
dg
Market equilibrium:
This is the famous cobweb model developed
by Ezekiel (1938) and Waugh (1964), which
dg
they used to explain the unstable performance
dp
of many agricultural commodity markets. The
solution to this model, assuming that p =
Po E= - = 0.2.
at= 0, is (Henderson and Quandt, 1971):
71. Cobb-Douglas Rroduction Function: The
B-b
P,=Po- American economists like Charles W. Cobb
a-A and Paul H. Douglas have studied
the
which gives the time path of P, as a function relationship between physical input and
of t. A dynamic market physical output and formed an empirical
equilibrium is as
achieved if production function, popularly known
prices stabilize, i.e., if p,
p, as
=

1 > . This requires that p, (B Cobb-Douglas Production Function.

=
-b/(a A). -

For this to occur, the first right hand term in

Given a specific production function
the p, equation must tend to zero as t 0o, Q= SL, K), Cobb-Douglas productu
which will be the case if Ala slope S/slope = function is of the form:
D<1, assuming normal slopes for supply and Q = A.L4K [a + b = 1]
demand, i.e., A > 0 and a < 0. Thus:
Where,
if Ala < 1, the market oscillates toward a stable output (or
total

equilibrium price and quantity; Q=the rate of

production) ved
ifAla> 1, the market oscillates toward unstable L= the quantity of labour employ
and explosive equilibrium. capital employed
K = the quantity of
 35

A. a, b = the positive constants

a = the elasticity of output with respect OK K

to labour
average product of labour is equal
to
7. The
b = the elasticity of output with respect the ratio between output and labour input.
to capital. That is,
This function can also be written as:

Q =A.L4.K [ b = 1 - al
-A-L.K
L
8. The average product of capital is equal to
It is noted here that the value of a is greater
the ratio between output and capital input.
than zero (a > 0) but less than one (a < 1).
That is,
In their research, Cobb and Douglas estimated
the function from time series data between =A-L K-1
K
1899 and 1992. The result was that labour's
share in national income of the USA is about 9. If one of the inputs is zero, the output will
3/4 or 0.75 and that of capital share is about also be zero.

1/4 or 0.25. The estimated value of efficiency 10. The 'expansion path' generated by this
function is linear homogeneous and it
parameter A is 1.01 (i.e., e > 1). Hence, the
result of their research studies was of the form passes through the origin.
Q = 1 -01.L0.75. K0.25 11. It satisfies the Euler's theorem. That is,

Properties: The following are tie Amportant MP. L+ MP.K = Q

properties of Cobb-Douglas production 12. a and b represent elasticities of output

function: with respect to labour and capital
1. The general form of Cobb-Douglas respectively.
production function is homogenous of 13. The multiplicative form of the function
degree one, i.e., a +b =1. can be changed into a log-linear form as:
2. If a + b = 1, then the production is
scale.
log Q =
log A + a
log L +b log K
operating under constant returns to
73. The Durbin-Watson Test: The Durbin-Watson
3. If the inputs-labour and capital-are test (DW) is may be the most common test for
increased by m times, the total output will autocorrelation and is based on the assumption
also be increased by m times. that the structure is of first order. Since first
4

4. The of substitution between order autocorrelation is most likely to appear

elasticity
labour and capital is equal to one. in time series data, the test is very relevant,
and all statistical software has the option of
5. The marginal product of labour is equal
calculating it automatically for you.
to the increase in output when labour input
is increased 'by one unit. That is,
The Durbin-Watson test statistic for first order
autocorrelation is given by:
Q a

OL LQ
2e--1
t=2
6. The marginal product of capital is equal DW .(1)
to the increase e in output when capital
input is increased by one unit. That is,
 36

with e being the estimated residual from a Where p the

on right hand side is the
the
sample regression nodel. To see that this test autocorrelationcoefficient from an first order
statistie is related to the first order autoregression scheme.
autocorrelation case we may rewrite (1) in the
However, it is only an
approximation
since
following way: the expressionsin the numerator sum from
2
to T instead of 1 to T as 1s the case in
the
e,-e,- denominator. The larger the value of T the
DW= 1=2 better is the approximation.
From (2) it is possible to see that the DW test
statistic only takes values between 0 and 4
since the autocorrelation coefficient only takes
values between -1 and 1. Hence, when the
e- 22,-1
1=2 autocorrelation coefficient equals 0, the DW
test statistics equals 2. If DW>2 we have an
indication of a negative autocorrelation, and
if DW < 2 we would have an indication of a
1+1+2p =2(1-p) .(2)
positive autocorrelation.