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Assignment

On
Managerial Economics
Topics
Inflation and Deflation
National Income
Trade Cycle
Government Control on
Monopoly

Submitted to:

Dr. Raman
PSG IM

Submitted By:
Senthil Subramaniam
PSG IM PT Ist year
1

Roll No. 12MB29


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 an 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

Demand pull inflation is driven by purchase of goods and services. If the economy is strong the
consumer income rises and demand 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 :

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 inititated 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, excise duty can be increased to reduce demand.
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 nondiscountable 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 the
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.
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 i s 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
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

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 lose 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
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 deploy
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 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 allow 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 characterised 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 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 monopolise 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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