Economics Notes Important Questions Definitions PDF

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Easy Economics Notes
Basic Concepts in Economics

1) Production: Any economic activity
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directed towards the satisfaction of
e.
human wants is known as production. The
production of goods reand services is
ef
necessary for the existence of an
in
economy. The level of production in any

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llo
economy is the best measure of its

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performance, living standards of its

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people and the extent of technological

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development and growth. It includes both

the manufacturing of material goods as
well as the provision of services. The
production of electrical and electronic
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goods, automobiles etc and the work of

teachers, doctors, lawyers etc are all
production in the economic sense.
2) Consumption: The act of satisfying
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ones wants is called consumption. Goods
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and services are produced only because
e.
human wants need to be satisfied. No one
re
ef
will produce if there is no consumption.
in
The quality and quantity of consumption

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reflects the levels of income and

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employment in an economy.
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3) Investment: Investment is the

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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
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the productive capacity of an economy.
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4) Goods: Anything that can satisfy
e.
human wants is called goods in
re
ef
economics. While services also satisfy
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human wants, the difference is that goods

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are tangible and visible but services are

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intangible and invisible. Goods can be of

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various types. They can be free goods or

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economic goods, transferable, private or

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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 consumers mind. Utility of
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good changes with the change in
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conditions and circumstances. There are
e.
three main forms of utility-form utility,
place utility and time utility. re
ef
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Value: The commodity which has utility

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and possesses the condition of scarcity

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and transferability, then it has value. For

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example air has utility but it is abundant

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and a free resource, it has no value in

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economic sense. Likewise rotten eggs are

scarce and transferable but possess no
utility, they also dont have value. A
television since it possesses utility and is

scarce as well as transferable has value.
Price: Value of a commodity expressed in

terms of money is called price. In modern
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times, goods are exchanged for money;
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the value of a commodity is its price.
e.
re
Wealth: Anything that has value is called
ef
wealth. In economics; wealth does not
in
only refer to money, but to all goods that

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llo
have value. Wealth includes material

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wealth and human wealth (education,

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health, knowledge etc)

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Income: The amount of money which

wealth yields is known as income. Thus,
wealth is a stock concept while income is
a flow concept. That is wealth is valued at
a particular point of time and income is

measured over a period of time
particularly a year.
Gross Domestic Product (GDP)
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When we take the sum total of values of
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output of goods and services in the
e.
country, without
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adding net factor
ef
incomes received from abroad, the figure
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so obtained is called Gross Domestic

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llo
Product (GDP).
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GDP = C+I+G
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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-
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finished goods and such other
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intermediary products. More clearly, all
e.
sales to households, business investment
expenditure, and reall government
ef
in
expenditures are obviously regarded as

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final goods. In an open economy (an

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economy which has economic relationship

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with the rest of the world in the form of

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trade, remittances, investment etc-all

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economies are open economies), GNP

may be obtained by adding up:
1) The value of all consumption goods

which are currently produced
2) The value of all capital goods
produced which is defined as Gross
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Investment. Gross Investment, in the
co
real sense, here implies the increase
e.
in inventories plus gross products of
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buildings and equipments. It, thus,
ef
in
includes the provision for the

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consumption of capital assets, i.e.,

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depreciation or replacement
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allowances.
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3) The value of government services

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which are measured in terms of

governmental expenditure on various
goods and services for rendering
certain services to the benefit of the

entire community.
4) The value of net exports, viz, the
difference between total exports and
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total imports of the nation. This value
co
may be positive or negative.
e.
5) The net amount earned abroad.
This represents re
the difference
ef
in
between the income received by the

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nationals from abroad minus the

llo
income remitted by the foreigners

.a
working in India.
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GNP at market price, thus, represents:

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GNP= C+I+G+(X-M)+(R-P),
Where,
C stands for consumption goods,
I stands for capital goods/ or gross

investment,
G stands for government services,
X stands for exports,
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M stands for imports,
e.
R stands for income receipts from abroad,
and re
ef
in
P stands for income remitted by

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foreigners.
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The Sectors of the Economy

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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
m
(MOSP), Government of India has been
co
publishing National Accounts Statistics
e.
annually classifying the Indian economy
re
into three sectors and re-classifying the
ef
in
sectors into various sub sectors. In this

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classification primary sector includes

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agriculture, forestry and logging and

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fishing. The secondary sector includes

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manufacturing (registered and un-

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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
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services. In Indian economy the
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contribution of primary sector is less than
e.
20 per cent and the agriculture share in
national GDP is reducing even though 58 re
ef
in
per cent of Indias labour force still

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engaged in agriculture and allied

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activities. This is a serious issue in the

.a
rural life of India. The agrarian sector has

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been facing serious crisis and to a greater

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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 Indias farm
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sector. Sharp decline of agriculture in
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value-added terms to GDP, increasing
e.
amenities in urban India and not much in
rural India where more than 70 per cent re
ef
in
of the population lives etc are some

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disturbing facts to those who hold Indian

llo
Economic Miracle theory. We have good

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demographic advantage, vast agricultural

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land and in this land we can cultivate all

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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,
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malnutrition and high infant mortality rate
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are burning issues to be addressed
e.
urgently.
re
ef
At the national level the contribution of
in
manufacturing sector is around 18 per

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cent and it is almost constant for the last

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so many years. But in Kerala it is around

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10 per cent and in Kerala we have a

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stagnant manufacturing sector. The

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contribution of service sector to the

national economy is nearly 60 per cent.
There are serious disparities in the growth
rates of agriculture, manufacturing and

service sectors of the Indian economy.
Functions of Money
The functions of money can be classified
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as follows.
co
e.
1) Money as a medium of exchange
The basic function re

of money in an
ef
in
economy is to act as a medium of

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exchange. Money has general

llo
acceptability and purchasing power so it

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can act as a medium of exchange. When

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money is transacted, purchasing power is

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transacted from one person to another. In

earlier periods we had been following
barter system. Barter system means
exchanging goods for goods. But most of
the time, for such exchange to take place,

there must occur a double coincidence of
wants. That is each party to the exchange
must have precisely what the other party
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requires, and in an appropriate quantity
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and at the time required. The use of
e.
money as a common medium of
exchange has re
facilitated exchange
ef
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greatly.
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2) Money as a Unit of Account.

llo
Money customarily serves as a common

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unit of account or measure of value in

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terms of which the values of all goods and

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services are expressed. This makes

possible meaninigful accounting systems
by adding up the values of a wide variety
of goods and services whose physical

quantities are measured in different units
3) Money as a Standard of Differed

Payment
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Money also serves as a standard or unit in
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terms of which deferred or future
e.
payments are stated. This applies to
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ef
payments of interest, rents, salaries;
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pensions etc.Large fluctuations in the

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llo
value of money (inflation or deflation)

.a
make money not only a poor measure of

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value, but also a poor standard of

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deferred payment. This is because the

value of money is not something intrinsic
to it, but a social phenomenon. This
makes monetary management for the
stable value of money socially very

important.
3) Money as a Store of Value

Money also serves as a store of value i.e.,
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members of the public can hold their
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wealth in the form of money. This
e.
function is derived from the use of money
re
ef
as a medium of exchange in a two-fold
in
manner. First, the use of money as a

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medium of exchange decomposes a

llo
single barter transaction into two

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separate transactions of purchase and

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sale.
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Significance of Money in Modern

Economic Life
Money occupies a central position in our

modern economy. Money is everywhere
and for everything in the modern
economic life. Money has become the
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religion of the day in the ordinary
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business of life. Every branch of economic
e.
activity in a money economy is basically
different from what it would have been inre
ef
in
a barter economy. Money has created a

nl
far reaching effect on all facets of

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economic activities; consumption,

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production, exchange and distribution, as

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also on public finance and economic

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welfare.
Money and Consumption
Money enables a consumer to generalize

his purchasing power. It gives him
command over a wide variety of goods. It
enables him to canalize his purchasing
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power and get what he wants. In fact, it is
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money through its immense purchasing
e.
power that makes a consumer sovereign
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in a capitalist economy. The consumers
ef
in
sovereignty can be expressed through

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money spending. Money provides

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freedom of choice of consumption. Money

.a
and the price mechanism help a

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consumer to allocate his income over

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goods in such a way so that he derives

maximum satisfaction from his
consumption.
Money and Production
The introduction of money has made

present day mass production possible.
Without money, production on a large
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scale would be impossible. The benefits of
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money in production are as follows
e.
1)
re
Money has made extreme division
ef
of labour possible. Intensive
in
specialization is necessary for large

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llo
scale production.
.a
2) Money is the very essential for

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modern enterprise. Entrepreneurs are

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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
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organization of the production
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process. Money provides a basis for
e.
supporting more complex methods of
organizing production. re
ef
in
4) Money has facilitated borrowing

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and lending and these are essential in

llo
present day production. Credit is the

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main pillar of modern business.

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5) Money is the most liquid and

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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
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supply accordingly. In fact, money has
co
changed the basic characteristics of
e.
production.
Money and Exchange. re
ef
in
Money overcomes the difficulties of a

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barter system of exchange. In a money

llo
economy; it is simple matter to ascertain

.a
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the market price in terms of monetary

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units. Money facilitates trade by serving

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as a medium of exchange. Thus, rapid

exchange in a modern economic system
is possible because of money. Money is
the basis of the pricing mechanism

through which economic activities are
adjusted.
Money and Distribution.
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Money eases the process of distribution of
co
factors rewards like wages, interests and
e.
profits which are
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all measured and
ef
distributed in terms of money. It is with
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the help of money that the shares of

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llo
different factors of production are

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properly adjusted. Accounting, receiving

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and storing of its share of income by any

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factor-unit in kind is most inconvenient.

Here money comes to the rescue.
Money and Public Finance
In a modern economy, government plays

a very important role. Government
receives income in the form of taxes,
fees, prices of public utility services, etc
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and uses this income for administrative
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and developmental purposes. But the
e.
great magnitude of public revenues and
public expenditure in a modern state re
ef
in
would become impossible without money.

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Further, fiscal devices like public

llo
borrowing and deficit financing for

.a
economic development can be adopted

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only in a monetary economy.

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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
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the shaping of the economic life of a
co
country. The growth of money economy
e.
has made the growth of economic
re
ef
liberalism and, hence, of the present day
in
free enterprise or capitalists system

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possible. In fact the pattern of economic

llo
life has changed in accordance with the

.a
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changes in the economic progress. For

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better performance of an economy, a

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countrys monetary system should be

operated in such a manner as to maintain
high levels of employment and avoidance

of business fluctuations.
Inflation
m
co
Inflation is commonly understood as a
e.
situation of substantial and rapid general
increase in the re
price level and
ef
consequent fall the value of money over a
in
nl
period of time. Inflation means persistent

llo
rise in the general level of prices. Inflation

.a
is a long term operating dynamic process.

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By and large, inflation is also a monetary

w
phenomenon. It is usually characterized

by an overflow of money and credit. In
fact, the root cause of inflation is the
expansion of money supply beyond the
normal absorbing capacity of the

economy.The behaviour of general prices
is measured through price indices.The
trend of price indices reveals the course
m
of inflation or deflation in the economy.
co
Crowther defines inflation as a state in
e.
which the value of money is falling,ie.,
re
prices are rising. Professor Samuelson
ef
in
defines Inflation occurs when the general

nl
level of prices and costs is rising.

llo
.a
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INFLATION
Inflation is commonly understood as a

situation of substantial and rapid general
increase in the price level and
consequent fall the value of money over a
m
period of time. Inflation means persistent
co
rise in the general level of prices. Inflation
e.
is a long term operating dynamic process.
re
By and large, inflation is also a monetary
ef
in
phenomenon. It is usually characterized

nl
by an overflow of money and credit. In

llo
fact, the root cause of inflation is the

.a
expansion of money supply beyond the

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normal absorbing capacity of the

w
economy.The behaviour of general prices

is measured through price indices.The
trend of price indices reveals the course
of inflation or deflation in the economy.
Crowther defines inflation as a state in

which the value of money is falling,ie.,
prices are rising. Professor Samuelson
defines Inflation occurs when the general
m
level of prices and costs is rising.
co
e.
Types of Inflation.
re
ef
On different grounds, economists have
in
nl
classified inflation into various

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types.According to the rate inflation there

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are four types of inflation.

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1) Moderate Inflation
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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
m
single digit annual inflation rate, it is
co
considered to be moderate inflation in the
e.
present day economy. It does not disrupt
re
the economic balance. It is regarded as
ef
in
stable inflation in which the relative

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prices do not get far out of line.

llo
When the movement of price accelerates

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rapidly, running inflation emerges.

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Running inflation may record more than

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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
m
really a serious problem. It causes
co
economic distortions and disturbances.
e.
In the case of hyper inflation prices rise is
re
ef
very severe. It is over 1000 per cent per
in
year.There is at least a 50 per cent price

nl
rise in a month, so that in a year it rises

llo
to about 130 per cent times.Hyper

.a
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inflation is a monetary disease.

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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
m
response to an excess of aggregate
co
demand over existing supply of goods
e.
re
and services. It is also called excess-
ef
demand inflation. In the excess-demand
in
theories of inflation, excess demand

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llo
means aggregate real demand for output

.a
in excess of maximum feasible, or

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potential, or full employment, output (at

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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
m
current prices, so that prices are pulled
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upwards by the continuous upward shift
e.
of the aggregate demand function.
Causes of Demand-pull inflation are re
ef
in
4) Increase in Public Expenditure 2)

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Increase in Investment 3) Increase in

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money supply.
.a
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COST PUSH INFLATION
Cost push inflation or cost inflation is

induced by the wage-inflation process.
This is especially true for a Country like

India, where labour intensive techniques
are commonly used. Theories of cost-
push inflation (also called sellers or
m
mark-up inflation) came to be put forward
co
after the mid-1950s.They appeared
e.
largely in refutation of the demand-pull
re
theories of inflation and three important
ef
in
common ingredients of such theories are

nl
1) that the upward push in costs is

llo
autonomous of the demand conditions in

.a
the concerned market 2) that the push

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forces operate through some important

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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
m
goods in the form of higher prices, and
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not absorbed by producers. Thus, a rise
e.
in wages leads to a rise in the total cost
of production and a consequent rise re in
ef
in
the price level, because fundamentally,

nl
prices are based on costs.It has been

llo
said that a rise in wages causing arise in

.a
prices may , in turn , generate an

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inflationary spiral because an increase

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would motivate the workers to demand

more wages.
(Graphs of demand pull and cost

push inflation)
Causes of Inflation
m
co
e.
1) Over- Expansion of Money Supply:
re
Many a times a remarkable degree of
ef
in
correlation between the increase in

nl
money and rise in the price level may

llo
be observed. The Central Bank (Indias

.a
RBI) should maintain a balance

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between money supply and production

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and supply of goods and services in

the economy. Money supply exceeds
the availability of goods and services
in the economy, it would lead to

inflation.
2) Increase in Population: Increase in
population leads to increased demand
m
for goods and services. If supply of
co
commodities are short, increased
e.
demand will lead to increase in price
and inflation. re
ef
in
3) Expansion of Bank Credit: Rapid

nl
expansion of bank credit is also

llo
responsible for the inflationary trend

.a
in a country.
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4) Deficit Financing: Deficit financing

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means spending more than revenue.

In this case government of India
accepts more amount of money from
the Reserve Bank India (RBI) to spend
for undertaking public projects and

only the government of India can
practice deficit financing in India. The
high doses of deficit financing which
m
may cause reckless spending, may
co
also contribute to the growth of the
e.
inflationary spiral in a country.
5) re
High Indirect Taxes: Incidence of
ef
in
high commodity taxation. Prices tend

nl
to rise on account of high excise

llo
duties imposed by the Government on

.a
raw materials and essentials.

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6) Black Money: It is widely

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condemned that black money in the

hands of tax evaders and black
marketers as an important source of
inflation in a country. Black money
encourages lavish spending, which

causes excess demand and a rise in
prices.
7) Poor Performance of Farm Sector: If
m
agricultural production especially
co
foodgrains production is very low, it
e.
would lead to shortage of foodgrains,
will lead to inflation. re
ef
in
8) High Administrative Pricing

nl
Other reasons are capital bottleneck,

llo
entrepreneurial bottlenecks,
.a
infrastructural bottlenecks and foreign

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exchange bottlenecks.
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EFFECTS OF INFLATION
1) Effects of Inflation on Business

Community: Inflation is welcomed by
entrepreneurs and businessmen
because they stand to profit by rising
m
prices. They find that the value of their
co
inventories and stock of goods is rising
e.
in money terms. They also find that
re
prices are rising faster than the costs
ef
in
of production, so that their profit is

nl
greatly enhanced.
llo
2) Fixed Income Groups: Inflation hits

.a
wage-earners and salaried people very

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hard. Although wage- earners, by the

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grace of trade unions, can chase

galloping prices, they seldom win the
race. Since wages do not rise at the
same rate and at the same time as the
general price level, the cost of living

index rises, and the real income of the
wage earner decreases.
3) Farmers: Farmers usually gain
m
during inflation, because they can get
co
better prices for their harvest during
e.
inflation.
4) Investors: Those re who invest in
ef
in
debentures and fixed-interest bearing

nl
securities, bonds, etc, lose during

llo
inflation. However, investors in

.a
equities benefit because more

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w
dividend is yielded on account of high

w
profit made by joint-stock companies

during inflation.
5) Inflation will lead to deterioration of
gross domestic savings and less
capital formation in the economy and

less long term economic growth rate
of the economy.
m
MEASURES TO CONTROL INFLATION
co
The measures to control inflation can be
e.
broadly divided into TWO- Monetary and
re
ef
Fiscal Measures.
in
nl
Inflation is primarily a monetary

llo
phenomenan.Hence, the most logical

.a
solution to check inflation is to check the

w
w
flow money supply by devising

w
appropriate monetary policy and carefully

implementing monetary measures. The
Central banks monetary management
methods, devices for decreasing or
increasing the supply of money and credit

for monetary stability is called monetary
policy. Monetary policy is a policy of
money supply influencing the quantity,
m
cost and availability of money supply.
co
Central Banks generally use the three
e.
quantitative measures namely:
re
ef
in
1) Bank Rate Policy

nl
llo
2) Open Market Operations

.a
3) Variable Reserve Ratio

w
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w
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
m
inflation to reduce money
co
supply.During the period of falling
e.
prices (deflation) central banks
re
reduces bank rate to increase money
ef
in
supply.As follow up, commercial banks

nl
reduce rate of interest.At a low rate of

llo
interest, investors find it much

.a
attractive to borrow money and make

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investment.
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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
m
and banks on its own account. In its
co
capacity as the governments banker
e.
and as the manager of public debt, the
re
RBI buys all the unsold stock of new
ef
in
government loans at the end of the

nl
subscription period and thereafter

llo
keeps them on sale in the market on

.a
its own account. Such purchases of

w
w
government securities by the RBI are

w
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
m
existing law enacted in 1956, RBI is
co
empowered to impose statutorily
e.
Cash Reserve Ratio (CRR) on
re
commercial banks anywhere between
ef
in
3 per cent and 15 per cent of the net

nl
demand and time liabilities. It is the

llo
authority of the RBI to vary the

.a
minimum CRR which makes the

w
w
variable reserve ratio a tool of

w
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
m
government treasuries. Fiscal policy
co
intervention areas are taxation, public
e.
expenditure, borrowing,
re subsidies and
ef
deficit financing. Inflation means a
in
general rise in prices. To control inflation

nl
llo
policy should be directed to reduce the

.a
price level and control excess money

w
supply. First measure is reducing indirect

w
w
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
m
to people.It also leads to increase in
co
money supply.So during the period of
e.
inflation, we should reduce excess public
spending/public expenditure. re
ef
in
nl
llo
Deflation
.a
Deflation is just opposite of inflation. It is

w
w
essentially a matter of falling prices.

w
Deflation is that state of falling prices

when the output of work by productive
agents increases relatively to money
income. Deflation arises when the total
expenditure of the community is not

equal to the value of output at existing
prices. Consequently, the value of money
goes up, and prices fall. In short, deflation
m
is a condition of falling prices,
co
accompanied by the decreasing level of
e.
employment, output and income.
re
ef
Definitions of Economics
in
The book of Adam Smith An Enquiry into

nl
llo
the Nature and Causes of Wealth of

.a
Nations popularly known as Wealth of

w
Nations, published in the year 1776, laid

w
w
the strong foundation for the growth of

Economics. So Adam Smith is rightly
called the Father of Economics and
pioneer of Classical Economics. Although
there is a plethora of definitions, there is

no concensus among economists about a
precise definition of economics.
Stock Exchange: Stock exchange is a
m
place where second-hand securities are
co
bought and sold.Stock exchange is
e.
essential for industrial development and a
re
ef
developed stock exchange is one of the
in
features of a developed industrialized

nl
country.
llo
.a
w
w
Wealth Definition
w
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
m
atmosphere of the Industrial Revolution
co
marked by unprecedented material
e.
prosperity and accumulation of wealth
re
should naturally justify the scope which
ef
in
these economists assigned to economics.

nl
Criticism of wealth Definition

llo
.a
1) Too much Emphasis on wealth :

w
Literary writers and religious leaders

w
w
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
m
classical definition considered wealth
co
as, material goods only, like table,
e.
radio,furniture etc.Non-material
services re
of drivers,
ef
in
singers,teachers,professors etc are not

nl
taken as wealth.But in modern days

llo
wealth denotes both goods and

.a
services, material wealth and human

w
w
wealth.
w
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
m
economic activities only.But in reality
co
human behaviour cannot be properly
e.
understood and analysed unless the
other motives are also given due re
ef
in
weightage.
nl
4) No Mention of mans Welfare:

llo
Wealth definition explains the wealth-

.a
getting and spending activities of man

w
w
It pays no attention to the equity

w
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
m
other words, the central problem of
co
economics is not at all touched by
e.
wealth definition.
re
ef
in
Welfare Definition
nl
llo
Adam Smiths wealth definition made

.a
economics a dismal science.Alfred

w
Marshall was the first neo-classical

w
w
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
m
a means to and an end in all activities,
co
the end being human welfare.
e.
Marshall defines economics is a study of
re
ef
man kind in the ordinary business of life;
in
it examines that part of individual and

nl
social action which is almost closely

llo
connected with the attainment and with

.a
w
the use of the material well being. He

w
adds that economics is on the one side a

w
study of wealth; and the other and more

important side, a part of the study of
man. That is Marshall gave primary
importance to man and secondary

importance to wealth.
Criticism of Welfare Definition
1) Material and Non-Material Welfare:
m
Lionel Robbins begins his attack by
co
pointing out that economists should
e.
not narrow down
re the scope of
ef
economics by confining their attention
in
to the study of material welfare alone.

nl
llo
The services of teachers, actors,

.a
singers, lawyers etc. do promote

w
welfare and such welfare may be

w
w
termed as non-material welfare. The

above mentioned services have much
economic significance because they
are scarce in relation in relation to

demand and possess value.
2) Objection to material: Robbins
objects not only to the word material
m
but also to the very idea of welfare.
co
For the neo-classical economists,
e.
economics is concerned with the
causes of material welfare. Accordingre
ef
in
to Robbins, there are certain material

nl
activities which do not promote

llo
welfare. The manufacturers of

.a
intoxicants such as wine and opium

w
w
are certainly economic activities. But

w
they are not conducive to human

welfare.
3) Welfare cannot be measured: The
neo-classical economistss idea of
welfare is based on cardinal utility. But

utility is a psychological entity which
cannot be measured. It varies from
person to person, place to place and
m
time to time. Therefore, the concept of
co
welfare based on measurable utility is
e.
elusive in character.
4) Economics is re
a Social Science:
ef
in
Robbins disputed the Marshallian

nl
conception of economics as a social

llo
science.The study of man as they live

.a
and move and think in the ordinary

w
w
business of life.According to Marshall,

w
the activities of an individual living in

seclusion like a Himalayan Sadhu or
Robinson Crusoe fall outside the orbit
of economics.Robbins on the other
hand regards economics as a human

science.The central problem in
economics, according to Robbins is the
allocation of scarce means among
m
alternative ends.
co
e.
Scarcity Definition
re
ef
After rejecting the materialist definition of
in
Marshall,Lionel Robbins formulated his

nl
llo
own conception of economics in his book

.a
The Nature and Significance of

w
Economic Science published in 1932. In

w
w
the words of Lionel Robbins, Economics

is the science which studies human
behaviour as a relationship between ends
and scarce means which have alternative
uses. He deduced his definition from our

fundamental characteristics of human
existence.
1) Unlimited Wants: Ends refers to
m
human wants which are boundless but
co
the resources available to satisfy
e.
these wants are limited. Some wants
re
ef
are inborn but others are acquired
in
through customs and conventions.

nl
When one want is satisfied another

llo
crops up.
.a
w
2) Scarcity of Means: The resources

w
(time or money) at the disposal of a

w
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:
m
Economic resources are not only
co
scarce but are also versatile. If the
e.
resources cannot be put to alternative
re
uses, the question of choice will not
ef
in
arise. We may use land for raising

nl
crops or for building houses. We

llo
cannot do both. If we choose one

.a
thing, we must give up others.

w
w
4) The Economic Problem: When the

w
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
m
of pricing process is inevitable.
co
Criticism of Scarcity Definition
e.
Robbins definition is based on two
re
ef
foundation stones-multiplicities of wants
in
and scarcity of means.

nl
llo
1) Economics of Abundance:
.a
According to Robbins, economic

w
problem arises due to scarcity. But

w
w
economic problems may also arise due

to plenty rather than scarcity as had
happened during the great depression
of 1930s.Professor John Kenneth
Galbraith, a noted American

economist in his book, The Affluent
Society, states that scarcity is not a
problem in America. So that the
m
conventional scarcity idea has only
co
little relevance.
e.
2) Not Applicable to Underdeveloped
re
Countries: Robbins definition provides
ef
in
no solution to the problems of

nl
underdeveloped countries. A peculiar

llo
feature of many under developed

.a
countries is that the resources are not

w
w
scarce, but they are either under

w
utilized, or unutilized. Robbins simply

assumes the resources as given and
analysed their allocation among
alternatives uses.
Growth Definition
Economics has now become a fastly

growing discipline in the field of social
m
science and its scope and significance
co
have widened from mere a value theory
e.
re
or a theory of resource allocation. The
ef
credit for revolutionizing the study of
in
economics surely goes to Lord JM Keynes.

nl
llo
Keynes defined economics as the study of

.a
the administration of scarce resources

w
and the determinants of income and

w
w
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
m
have alternative uses to produce various
co
commodities and distribute them for
e.
consumption, now or in the future, among
various persons or groups in society. re
ef
in
Economics analyses the costs and the

nl
benefits of improving patterns of resource

llo
use.
.a
w
Firstly, it is applicable even in a barter

w
economy where money measurement is

w
not possible.
Secondly, the inclusion of time element

makes the scope of economics dynamic.
Thirdly, this definition possesses

universality in its application. Thus we
may conclude that though in a sense it is
similar to Robbins definition, it is an
m
improvement over Robbins scarcity
co
definition.
e.
re
ef
Production Possibility Curve
in
nl
The concept of production possibility

llo
curve was introduced by Professor

.a
Samuelson.The set of problems facing in

w
w
every economic system can be clearly

w
analysed with the tool of production

possibility curve. Human wants are
unlimited and the economic resources to
satisfy these unlimited human wants are
scarce or limited. Therefore, the every

society faced with the basic problem of
choosing and allocating its scarce
resources among alternative uses.
m
Production Possibility Curve shows the
co
menu of choice along which a society can
e.
choose to substitute one good for another
re
assuming a given state of technology and
ef
in
given total resources. The production

nl
possibility curve illustrates three

llo
concepts: scarcity, choice and

.a
opportunity cost.
w
w
Modern economy produces thousands of

w
products, and therefore choices before us

are complex. In order to reduce the
problem to its simplest form we consider
the economy in which two goods butter

and guns are produced with the
available resources and technology.
Production Possibility Curve is based on
m
the following Assumptions:
co
1) Only two goods x (butter) and y
e.
(guns) are produced in the economy.
re
ef
2) There is full employment of
in
resources.
nl
llo
3) The resources are fixed in quantity.

.a
But they can be re-allocated from the

w
production of one commodity to that

w
w
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
m
the quantity offered for sale. The law of
co
supply states, other things remaining
e.
same, the higher the price, the greater
re
ef
will be the willingness of sellers to make a
in
product available. At higher prices, more

nl
llo
sellers are interested in producing the

.a
product, and each existing seller wants to

w
sell more.The opposite holds good when

w
w
prices decline.
Factors Determining the Supply of a

Commodity
The supply of a commodity depends upon

the following factors.
1) Different firms may

follow different objectives.Some firms
m
may be interested in maximizing
co
profit, while others may be interested
e.
in sales or revenue maximization or
re
ef
satisfying etc.The amount of
in
commodity supplied is often

nl
influenced by the objectives of the

llo
firm.Normally, sales maximization

.a
w
firms output will be greater than the

w
profit maximization firms output.

w
2) State of Technology:
Technical improvements reduce the
costs of production enbling a shifting a
shifting of the supply curve to the

right.Similarly, obstacles in the
existing technology increases costs of
production, forcing a shift in the
m
supply curve to the left. A constant
co
state of technology keeps the supply
e.
at the existing level.
3) re
Political Disturbances:
ef
in
Political disturbances may destabilize

nl
trade and thus create a scarcity for

llo
certain kinds of goofs

.a
4) Government Policy: Any

w
w
change in governments policy would

w
affect the production sector and

thereby the supply of goods and
services in the market. The
government policy related to tax and
subsidy will have serious impact on

the production and supply of goods
and services in the market.
m
Law of Demand
co
e.
Meaning of Demand re
ef
in
Demand is essential for the Creation,

nl
Survival and Profitability of a firm. It is

llo
essential to distinguish between demand

.a
and desire. A beggars demand for a

w
w
Maruti car is only s desire and does not

w
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.
m
Demand has the following Four
co
characteristics
e.
1)
re
Price: Demand is always related to
ef
price. It is meaningless to say that
in
demand for refrigerator in the market

nl
llo
is one thousand. The person must

.a
state the price at which the consumer

w
is prepared to purchase the said

w
w
quantity of the commodity.

2) Time: Demand always means
demand per unit of time, per day, per
week, per month or per year.
3) Market: demand is always related

to the market. Market here simply
refers to the contact between buyers
and sellers. There is no need for a
m
definite geographical area.
co
4) Amount: Demand is always a
e.
specific quantity which a consumer is
willing to re
purchase. It is not an
ef
in
approximation, but is to be expressed

nl
numerically.
llo
.a
w
Demand Schedule: A demand schedule is

w
a list of prices and corresponding

w
quantities. Since the demand schedule

obeys the law of demand, price and
quantity demanded vary inversely The
following is the hypothetical demand

schedule of an individual.
Types of Demand: There are three kinds
m
of demand,
co
e.
1) Price Demand re
ef
in
2) Income Demand
nl
3) Cross Demand
llo
.a
w
1) Price Demand: Price demand refers

w
to the various quantities of a

w
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
m
levels of income.
co
3) Cross Demand: The relationship
e.
between the prices of a substitute or
complements re
and the quantity
ef
in
purchased of a related commodity is

nl
called cross demand.

llo
.a
w
Law of Demand: The inverse

w
relationship between the price of a

w
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
m
things being equal is an important
co
qualification; when we say other things
e.
being equal we assume;
re
ef
in
1) No change in the consumers

nl
llo
income.
.a
2) No change in the prices of

w
substitutes and complements

w
w
3) No change in consumers taste and

preferences
4) No new substitutes for the goods
have been discovered
5) People do not feel that the present

fall in price is a preclude to a further
decline in prices.
6) The commodity in question is not
m
one which has a prestige value.
co
e.
Determinants of Demand
re
ef
in
nl
According to D.S Watson a change in

llo
demand is caused by changes in income

.a
. tastes and prices of substitutes and

w
w
complements.The various determinants

w
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
m
becomes more fashionable a larger
co
quantity of it may be bought at the old
e.
price or even at a slightly higher
price. The fashion among re ladies to
ef
in
keep their hair long or short brings

nl
about changes in demand for their

llo
hair-pins, hair-nets etc. Similarly if

.a
tastes have deteriorated for a product,

w
w
less of it will be deamanded without

w
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
m
family income increases the demand
co
for durables like video recorders and
e.
refrigerators.The demand curve then
re
shift to the right., More over, if income
ef
in
in a country is evenly redistributed by

nl
taking the rich and transferring it to

llo
raise the income of the poor, it may

.a
increase the demand for goods

w
w
consumed by the poor people.

w
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
m
demand are inversely related.If the
co
marginal propensity to save becomes
e.
high the amount available for
consumption will become less. There
ef
in
demand will therefore decrease.

nl
6) State of Trade Activity: During the

llo
periods of boom and prosperity, the

.a
demand for all commodities tends to

w
w
increase. On the contrary, during

w
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
m
simple reason is that the marginal
co
propensity to consume of the rich is
e.
less than that of the poor.
8) Consumer Credit Policy: With are
ef
in
liberalization in the credit policy of the

nl
banks or the hire purchase system

llo
adopted by companies, the demand

.a
for VCRs,Cars, houses etc will

w
w
increase.
w
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
m
demand for such commodities will
co
decrease. On the other hands, if
e.
rebates and subsidies are given as in
re
the case of consumer products during
ef
in
festival seasons, the demand will

nl
increase.
llo
11) Change in the value of

.a
money:During times of inflation, the

w
w
prices will rise. Therefore, consumers

w
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.
m
co
MEANING OF PRODUCTION
e.
In economic
re
terminology production
ef
implies creation of utility for sales. The
in
act of utility creation is possible by

nl
llo
transforming inputs into output.

.a
According to Prof.Hicks, production is

w
any activity directed to the satisfaction of

w
w
the peoples 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.
m
Land or building would get rent as its
co
reward,labour would get wage /
e.
salary,capital would get profit and
re
organizer would get profit as the reward.
ef
in
nl
llo
Knowledge is the only instrument of

.a
production that is not subject to

w
diminishing returns J.M.Clark, 1957

w
w
The production function shows only the

physical relationship between inputs and
output, but says nothing about the

optimal combination of inputs.
Two things must be noted when we

discuss production function.
m
1) It must be considered with
co
reference to a particular period of
e.
time.
re
ef
2) It is determined by the state of
in
technology.Any change in technology

nl
llo
may alter output, even when the

.a
quantities inputs remain fixed.

w
w
w
Law of Returns to Scale
The law of returns to scale examines the

relationship between output and the scale
of inputs in the long-run when all the
inputs are increased in the same

proportion.
Assumptions
m
co
e.
This law is based on the following
assumptions re
ef
in
nl
llo
1)All factors are variable but the

.a
enterprise is fixed.
w
w
2) There is no change in technology

w
3) Perfect competition prevails in the

market.
4) Returns are measured in physical

terms.
Three Phases of the Law of Returns to
m
Scale.
co
e.
First phase is increasing returns to scale
re
Second phase is constant returns to scale
ef
in
Third phase is diminishing returns to

nl
scale.
llo
.a
Depending on whether the proportionate

w
change in output exceeds, equals or

w
w
decrease in proportionate to the change

in both the inputs, the production is
classified as increasing returns to scale,
constant retuns to scale and decreasing

returns to scale.
Increasing Returns to Scale
m
co
Increasing returns to scale arises due to
e.
the following reasons.
re
ef
in
a) Dimentional
nl
economies,2) economies flowing

llo
.a
from indivisibility 3)Economies of

w
specialization 4) Technical
w
economies, 3) Managerial
w
economies, 6) Marketing
economies
Marshall exlains increasing increasing

returns in terms of increased efficiency
of labour and capital in the improved
organization with the expanding scale of
m
output and employment of factor unit.It
co
is referred to as the economy of
e.
organization in the earlier stages of
production. re
ef
in
nl
llo
Constant Returns to Scale: As a firm

.a
continues to expand, it gradually exhaust

w
the economies, internal and external,

w
w
which enabled the operation of increasing

returns to scale. In this stage, the
economies and diseconomies of scale are
exactly in balance over a particular range
of output. In the case of constant returns

to scale increases in all the inputs cause
proportionate increases in output.
A production function showing constant
m
retuns to scale is often called Linear and
co
Homogeneous or Homogeneous of the
e.
first Degree.The Cobb-Douglas
re
ef
production function evolved by the
in
American economists Cobb and Douglas

nl
is a linear and homogeneous production

llo
function.
.a
w
w
w
Diminishing Returns to Scale
When a business firm continues to

expand even beyond the point of
constant returns, stage comes when
diminishing returns to scale set in. There

are decreasing returns to scale when the
percentage increase in output is less than
the percentage increase in iutput. As the
m
size of the firm expands, managerial
co
efficieny decreases.Another factor
e.
responsible for diminishing retuns to
re
scale in the limitation of exhaustibility of
ef
in
the natural resources, for example,

nl
doubling of coal-mining plants may not

llo
double the coal output, because of limited

.a
availability of coal deposits or due to

w
w
difficult accessibility to coal deposits.

w
The Law of Variable proportions OR

Law of Diminishing Returns
The law of variable proportions is one of

the basic laws in economics. The law of
variable proportions is the modern
m
version of the law of diminishing returns.
co
This law states that a technical physical
e.
relationship between the fixed and
re
ef
variable factors of production in the short
in
run. Here it is assumed that only one

nl
factor of production is a variable factor

llo
while other factors are assumed to

.a
w
remain fixed. As we increase the quantity

w
of the variable factor while keeping other

w
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
m
in relation to agriculture only.
co
e.
re
The law of variable proportions has been
ef
defined in the following way; As the
in
proportion of one factor in a combination

nl
llo
of factors is increased, after a point, first

.a
the marginal and then the average

w
product of that factor will diminish.

w
w
Assumptions of the Law
The law of variable proportions is valid

when the following conditions are fulfilled.
1) The state of technology

is given below
m
2) Only one factor is varied
co
and all other factors remain fixed.
e.
3) The fixed factor and the
re
ef
variable factor are combined together
in
in variable proportions in the process

nl
of production.
llo
4) The units of the variable

.a
w
factor are homogeneous

w
5) The law operates in the

w
short run.
Total Product (TP) : Total Product is the

amount of output produced from land
with the given number of labourers
employed.
m
co
Average product (AP): The average
e.
re
product of labourer is the total product
ef
(TP) divided by the number of labourers
in
employed AP =TP/No.
nl
llo
.a
Marginal Product (MP): The marginal

w
w
product is the change in the total product

w
due to change in labour.
DIAGRAM
Law of Supply
m
co
e.
The law of supply states that the
re
ef
functional relationship between price and
in
the quantity offered for sale. The law of

nl
supply is a hypothesis that states, other

llo
.a
things remaining same,, the higher the

w
price, the greater will be the willingness

w
of sellers to make a product available. At

w
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.
m
co
e.
Supply Schedule: Supply schedule
represents the re
relationship between
ef
prices and the quantities that the firms
in
nl
are willing to produce and supply.

llo
.a
w
w
w
SUPPLY SCHEDULE
SUPPLY CURVE
MARKET SUPPLY CURVE
MARKET SUPPLY SCHEDULE
m
co
ECONOMIC REFORMS
e.
re
ef
NEW ECONOMIC REFORMS OF 1991
in
nl
llo
Changing Global Scenario

.a
w
Several major economic and political

w
changes occurred during the 1970s and

w
1980s, which affected the developing

countries and paved the way for the
implementation of IMF-sponsored
Structural Adjustment Policies (New
Economic Policy) in India in 1991. This

was due to a combination of factors such
as stagnant agriculture, low levels of
industrial growth and diversification,
m
inadequate capital formation, adverse
co
terms of trade in international markets,
e.
limits to domestic resource mobilization
due to a fairly narrow tax-base, loss re
ef
in
making public sector enterprises, over

nl
regulated and controlled economy, poor

llo
industrial productivity, huge amount of

.a
fiscal deficit, huge amount of public debt,

w
w
poor rating of Indian economy by

w
international agencies, foreign exchange

crisis etc.
New Economic Policy of 1991 includes

globalization, liberalization and
privatization (Disinvestment)
1) Globalization means flow capital
m
(finance in the form of foreign direct
co
investment (FDI) and foreign portfolio
e.
investment (FPI), technology, human
re
ef
resource, goods and service among
in
countries. FDI is investment in real

nl
assets like automobile, consumer

llo
goods production, service sectors like

.a
w
insurance, telecommunication, air

w
transport etc.
w
2) Liberalisation means freeing the

economic activities and business from
unnecessary bureaucratic and other

controls imposed by the governments.
3) Privatisation or Disinvestment:
Selling the government owned public
m
sector enterprises to private
co
industrialists and opening the
e.
government operating sectors for
re
ef
private investment.
in
The New Economic Policy includes

nl
llo
reduction in government expenditure,

.a
opening of the economy to trade and

w
foreign investment, adjustment of the

w
w
exchange rate from fixed exchange rate

system to flexible exchange rate system,
deregulation in most markets and the
removal of restrictions on entry, on exit,

on capacity and on pricing.
Immediate consequences of economic

liberalization that are to focus on are
m
(a) an increase in internal and
co
external competition and (b)
e.
structural change induced by changes
re
ef
in relative prices in the economy.
in
nl
llo
The Major areas of New Economic

.a
Policy 1991 are

w
w
1) Fiscal policy reforms

w
2) Monetary policy reform

3) Pricing policy reform
4) External policy reform
5) Industrial policy reform
6) Foreign investment policy reform

7) Trade policy reform
8) Public sector policy reform
m
The principal reforms initiated in the
co
year 1991 included; reduction in import
e.
tariffs on most goods other than
re
consumer goods, removal of quantitative
ef
in
restrictions and liberal terms of entry for

nl
foreign investors. Indias simple average

llo
tariff rate was reduced from 128% in

.a
1991 to about 32.3% in 2001-02. Quotas

w
w
and non-tariff barriers were also reduced..

w
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
m
on social sector expenditure and on
co
production and consumption subsidies,
e.
which directly affected the living
re
standards of the economically vulnerable
ef
in
sections of the population. Privatisation,

nl
Liberalisation and export-promotion were

llo
the main features of the economic

.a
reforms recommended by the

w
w
international institutions for the problems

w
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
m
countries in 1960 increased to 42.5% by
co
1980 and 45% by 1990.The experiences
e.
of countries, which have undergone these
re
reforms, have in most cases not led to the
ef
in
expected outcome but have infact

nl
worsened the state of their economies. In

llo
India, the New Economic Policy (NEP) is a

.a
set of policy (ies) and administrative

w
w
procedures introduced in July 1991 to

w
bring about changes in the economic

direction of the country.
Industrial Policy Resolution 1991

(IPR-1991)
Industrial Policy
The regulatory policy framework which
m
acted as a barrier to entry and growth by
co
the entrepreneur was sought to be
e.
re
basically changed by the Industrial Policy
ef
announced in July 1991.The measures
in
introduced in this area along with other

nl
llo
economic reforms were as under:

.a
Industrial licensing has been abolished for

w
all projects except for a list of 15

w
w
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
m
all projects except for a list of 15
co
e.
industries related to security,
re
strategic or environmental concerns
ef
and certain items of luxury
in
consumption that had a high

nl
llo
proportion of imported inputs.

.a
The Monopolies and Restrictive

w
Trade Practices (MRTP) Act applied in

w
w
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
m
much narrower than before, and
co
there would be no ban on the
e.
remaining reserved areas being
re
opened up to the private sector.
ef
in
nl
Foreign Investment Policy

llo
.a
The Industrial Policy 1991 also

w
provided increased opportunities for

w
w
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
m
this regard:
co
Automatic approval would be given
e.
for direct foreign investment upto 51
re
ef
per cent foreign equity ownership in
in
a wide range of industries. Earlier, all

nl
foreign investment was generally

llo
.a
limited to 40 per cent.

w
To provide access to international

w
w
markets, major foreign equity

holdings upto 51 per cent equity
would be allowed for trading
companies primarily engaged in

export activities.
Automatic permission would be
given for foreign technology
m
agreements for royalty payments
co
upto 5 per cent of domestic sales or
e.
8 per cent of export sales or for
re
lumpsum payments of Rs.10 million.
ef
in
Automatic approval for all other

nl
royalty payments will also be given if

llo
the projects can generate internally

.a
w
the foreign exchange required.

w
Abolished MRTP Act and FERA and

w
instead of FERA, FEMA Act was

passed in the Parliament.
The threshold (Minimum) asset limit
for companies under MRTP Act was
raised from Rs.20 crores to Rs.100

Crores.
Public Sector Policy
m
The Government was of the view that
co
public sector had not generated internal
e.
re
surpluses on a large scale. On account of
ef
its inadequate exposure to competition;
in
the public sector was subject to a high

nl
llo
cost structure. To provide a solution to

.a
the problems of the public sector,

w
Government decided to adopt a new

w
w
approach, the key elements of which

were:
The existing portfolio of public sector

investment would be reviewed with a
greater sense of realism to avoid

areas where social considerations
were not paramount or where the
private sector would be more efficient.
m
Enterprises in areas where continued
co
public sector involvement was judged
e.
appropriate would be provided a much
greater degree re of managerial
ef
in
autonomy.
nl
Budgetary support to public

llo
enterprises would be progressively

.a
w
reduced
w
To provide further market discipline

w
for public enterprises, competition

from the private sector would be
encouraged and part of the equity in
selected enterprises would be

disinvested; and
Chronically sick public enterprises
would not be allowed to incur heavy
m
losses.
co
e.
As a follow up of this policy, several
re
ef
measures were taken:
in
The number of industries reserved for

nl
llo
the public sector was reduced from 17

.a
to 8. Even in these areas, private

w
sector participation was allowed

w
w
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.
m
The existing system of monitoring
co
public enterprises through
e.
Memorandum of Understanding (MOU)
was strengthened re with primary
ef
in
emphasis on profitability and rate of

nl
return.
llo
Initiated the disinvestment of public

.a
w
sector enterprises.
w
w
Global Financial meltdown in 2008
In the western capitalists economies and

the economies closely linked to the
United States economies were negatively

affected by this financial crisis of 2008.
That is all the economies having
economic relationship with each other
m
were affected by this financial crisis of
co
2008 so it is called a global financial
e.
crisis. Capitalism is a system of economic
organization featured reby the private
ef
in
ownership and the use for private profit of

nl
man-made and nature-made capital. It is

llo
clear that under capitalism all means of

.a
production such as farms, factories,

w
w
mines, transport, communication,

w
education etc are owned and controlled

by private individuals and firms. Private
initiatives and ideas are promoted and
respected highly and there is personal

freedom and liberty.
The
global financial crisis of 2008 is an
m
extreme manifestation of the crisis in the
co
capitalism due to wrong practice and
e.
misuse of freedom
re
enjoyed by the
ef
financial institutions in the United States
in
of America. Indian economy was more

nl
llo
integrated to the global economy after

.a
the introduction of the New Economic

w
Policy (NEP) of 1991. This encouraged

w
more integration of the Indian economy

w
with the global economy.But in the Indian

banking system, nearly 90 per cent of the
banking institutions are in the public
sector and our financial sectors are well

regulated by the Reserve bank of India
(RBI). So this financial management
system, to a greater extent insulated
m
Indian economy from the global financial
co
crisis.
e.
The Major Reasons for the Global
re
ef
Financial Crisis are
in
nl
1) Consumption was seen as the

llo
driver of economic growth and

.a
prosperity and debt to facilitate such

w
w
consumption was consequently seen

w
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
m
Lending is the latest chapter in the
co
story of the economics of greed
e.
wrapped as modern economics, a
process in which re the USs entire
ef
in
financial architecture the

nl
government and the Federal Reserve

llo
System (the Central Bank of the US

.a
like Indias RBI) is involved. The sub-

w
w
prime crisis is now presented as the

w
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
m
White House to ordinary American
co
homes as achieving a noble purpose
e.
to induce Americans to borrow and
re
shop for their country. That is, it was
ef
in
part of the patriotic duty the

nl
Americans as a whole to borrow and

llo
shop.
.a
w
The Major Features of the Present Global

w
Financial Crisis are

w
1) The Current US recession is much

deeper than in 1991 or 2001.
2) Yet Asias growth will slow by less than

in the previous US recessions. It is now
less dependent on US demand.
3) Asia is led by India and China
m
increasingly becoming important as the
co
engines of global growth.
e.
4) This global financial crisis is the
re
beginning of the end for the dollar as the
ef
in
main reserve currency

nl
5) The USA has been borrowing $ 3 billion

llo
every day to fund its spending

.a
6) The USAS national debt is more than

w
w
$10 trillion, which is more than 80 per

w
cent of its national income.

7) The budget deficit is skyrocketing; it is
expected to reach mote than 10 per cent
soon.
8) The federal deficit as percentage of

GDP is now expected to reach more than
10 per cent.
9) Unlike the Great Depression of the
m
1930s, the current crisis of the West is
co
not just an economic crisis. It has a
e.
dimension of demography and conflict.o
re
it. Demographic, because Europe is slowly
ef
in
fading away from the global map. It used

nl
to have more than 20 per cent of the

llo
global population during the First World

.a
War, and now has less than 11 per cent. It

w
w
is expected to shrink to three per cent in

w
as many decades. The reproductive rate

in many European countries is less than
1.5 whereas the stable one is 2.1. In the
case of US, the crisis is more severe due

to its declining savings rate.
10) The personal saving as a percentage
of disposable income has now become
m
negative.
co
e.
The debt ridden financial institutions like
Lehman Brothers assets were $ 690 re
ef
in
billion and capital was $ 22 billion.

nl
Lehman filed for the biggest bankruptcy

llo
in American history. Merrill Lynch assets

.a
were $ 1020 billion and capital was $ 32

w
w
billion, Freddie Macs assets were $ 794

w
and capital was $ 27 billion, Fannie Mae

assets were $880 billion and capital was $
44 billion, Bear Stearnss 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
m
were rated high by global credit rating
co
agencies, down graded only after
e.
accelerated defaults and stoppage in
re
trading. Ratings are not sancrosanct and
ef
in
lenders need to form own view about the

nl
credit worthiness of borrowers,

llo
independent of any external ratings.

.a
Conclusions
w
w
Asia is more important than the US as a

w
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
m
new emerging markets. In future the
co
world economy will be steered not by the
e.
US and Europe, but increasingly by India
re
and China. As Maharishi Aurobindo says:
ef
in
India shall arise upon the ruins of the

nl
West. He says by the year 2011 the

llo
Western countries will fall and India will

.a
rise. The question is, are we getting ready

w
w
to create a new world order?

w
Keynesian Theory
Keyness Theory and

Underdeveloped Countries.
Lord John Maynard Keynes wrote the

General Theory of Employment, Interest
m
and Money as a solution to the problem of
co
periodic unemployment faced by
e.
developed industrial nations of the West
re
ef
during the great depression of the
in
thirties. Keynesian theory singles out

nl
deficiency of effective demand as the

llo
major cause of unemployment and low

.a
w
level of income in industrial economy

w
operations under a laissez faire system.

w
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,
governments compensatory investment
m
spending, deficit financing and other
co
fiscal methods. In essence, therefore,
e.
Keynesian economics turn out to be
economics of depression applicable tore
ef
in
developed countries. Its applicability in

nl
underdeveloped countries is very limited.

llo
To quote Joan Robinson: Keyness

.a
theory has little to say directly, to the

w
w
underdeveloped countries, for it was

w
framed entirely in the context of an

advanced industrial economy, with highly
developed financial institutions and a
sophisticated business class.
Though Keynesian Economics has

revolutionized modern economic thinking,
it has inherent weaknesses:
1) It is fundamentally a capitalistic
m
theory. It basically examines the
co
determinants of employment in a free
e.
enterprise economy. Though Keynes
re
ef
suggests government intervention and
in
controlled capitalism his theory fails to

nl
deal with the socialist economic

llo
system. In communism, Keynes is as

.a
w
Ricardo.
w
2) Keynesian economics is, by and

w
large, characterized as depressionary

economics. It was the outcome of the
Great Depression of the Thirties. It
suggested policy measures like deficit

financing to solve the problem of
unemployment in a depressionary
phase of the capitalist economy. In the
m
era of inflationary situation, the theory
co
has not much validity.
e.
3) Keyness theory deals with short-
re
run phenomena only. It pays little
ef
in
attention to the long-run problems of a

nl
dynamic economy.
llo
4) Keynesian theory is not strictly

.a
applicable to underdeveloped
w
w
countries. Keynes deals with the

w
problem of cyclical unemployment.

Underdeveloped countries have the
problem of chronic unemployment and
disguised unemployment. Keynes
encouraged spending and condemned

savings.But; poor countries need curbs
on spending and increase in savings
for capital formation and wide-scale
m
investment to break the vicious circle
co
of poverty. In short, Keyness theory is
e.
not really general in application as
Keynes claimed. re
ef
in
5) One dangerous practice is that the

nl
solution to global economic crisis and

llo
depression in advanced capitalism was

.a
sought to be applied for solving the

w
w
economic crisis of less developed

w
countries. In fact in the west there are

arguments against Keyness
economics that it is not Keynesian
economics but the Second World war
revived the world economy.

Keynesian revolution succeeded the
industrial revolution as an adhoc
theory of countering the industrial
m
depression in Britain during the
co
thirties, just before the Second World
e.
War, became the all-encompassing
theory of re
development. Dennis
ef
in
Robertson at the out set of his

nl
Cambridge lecturers, delivered

llo
between 1945-46 to 1956-57, warned

.a
the under graduate students about the

w
w
controversial nature of Keyness

w
General Theory and to supplement its

readings by critical writings on the
same.
6) Laws of economics are relative and

valid for particular situations in the
economic history of a nation. To the
British economists, the economic
m
forces generated by the industrial
co
revolution in that country was
e.
universal and economic laws were
accordingly re
formulated. What was
ef
in
good for Britain was good for the

nl
entire world, irrespective of

llo
differences in socio-economic
.a
conditions. But great personalities like

w
w
Arnold Toynbee argued against this

w
dominant view and the need for region

specific models of development. His
dream of this way of study never
materialized because of his premature
death and lack of followers. Adam

Smith advocated free trade at a time
when British manufacturing industries,
particularly the textile mills had
m
increased their capacity through
co
various practical innovations. Trying to
e.
universalize economic laws has been
re
one of the greatest disservices to the
ef
in
science of economics. The attempt by

nl
the third world countries to formulate

llo
their development plans on the basis

.a
of these economic laws has created

w
w
serious imbalances in their economy

w
and has kept them perpetually

indebted, leading to erosion of their
economic independence.
7) Lord John Maynard Keynes (J.M.

Keynes) was a great advocate of easy
money policy and abundance of credit
for economic prosperity. Keynesian
m
prescriptions failed in developing
co
countries due to inelastic nature of
e.
agriculture sector and high inflation.
Keynes found re
D.Robertsons ideas
ef
in
inconvenient and chose to ignore it.

nl
An academically and theoretically

llo
sound thesis will not shy away from an

.a
academic debate. The relation

w
w
between agriculture and industry does

w
not form a part of the theoretical

frame work of the General Theory of
Keynes. Keynes was highly intolerant
of his critics and he had high hope in
capitalism and he could avoid

economists jumped into Marxist band
wagon. Indian planning was over
influenced by Keynesian school
m
because of the economic experts
co
trained in British Universities or Anglo-
e.
Saxon schools. In India Dr.B.S.Minhas
resigned from Planning Commission re
ef
in
protesting against high inflationary

nl
practice (Keynesian model of deficit

llo
financing).But no one from the

.a
academic world or Planning

w
w
Commission came to his support. It is

w
of importance to note that deficit

financing started with the
recommendation of the IMF in its
report in 1953.N.Kaldor says that the
deficit financing imply a corresponding

increase in privately owned wealth.
Conclusion
m
Although the policy measures suggested
co
by the Keynesian theory may not be
e.
suitable to the
re problems of
ef
underdeveloped countries, it does not
in
mean that Keynesian economics has no

nl
llo
significance. Indeed, Keynesian

.a
methodology of thinking in macro-

w
economic terms is very essential and

w
w
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.
m
co
Faster Moving Consumer Goods
e.
(FMCG)
re
ef
in
nl
Indian FMCG sector is the fourth-largest

llo
sector in the country, with a current

.a
turnover of over US$ 28 billion (Rs.

w
w
113,000 crore), including tobacco. Most

w
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
m
such as packaged tea and coffee
co
expanded 13-16 per cent, according to
e.
industry estimates. Categories such as
toothpaste and confectionery managed re
ef
in
lower growth of 14-15 per cent in the

nl
same period. Sales growth for the 15

llo
large listed FMCG companies actually

.a
accelerated from 14.5 per cent in the last

w
w
two financial years to 20 per cent in the

w
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
m
relatively effortless growth to a more
co
challenging environment. The companies
e.
re
are making tactical and strategic shifts to
ef
deal with the changed scenario. As
in
growth slows in overseas markets,

nl
llo
companies are likely to proceed with

.a
caution on acquisitions and refocus on

w
organic growth that is mainly India-

w
w
driven.
Indian Automobile Industry
The automobile industry consists of

passenger cars,multi-utility
vehicles,commercial vehicles,two
wheelers and three wheelers.After
m
liberalization in 1991, there is a
co
progressive growth in the number of
e.
manufacturers, thus replacing the earlier
monopoly of a few re manufacturers.At
ef
in
present, there are 15 manufacturers of

nl
passenger cars and multi-utility vehicles,

llo
9 manufacturers of commercial
.a
vehicles,14 manufacturers of two/three

w
w
wheelers.The Indian automobile industry

w
has come a long way since in the first car

ran on the streets of Bombay (now
Mumbai) in 1898. The initial years of the
industry were characterized by
unfavorable government policies. The real

big change as we see in the industry
today, started to take place with the
liberalization policies that the government
m
initiated in the 1991. The liberalization
co
policies had a salutary impact on the
e.
Indian economy and the automobile
industry in particular. The automobile re
ef
in
industry in the country is one of the key

nl
sectors of the economy in terms of the

llo
employment opportunities. The industry

.a
directly employs close to around 0.2

w
w
million people and indirectly employs

w
around 10 million people. The prospects

of the industry also has a bearing on the
auto-component industry which is also a
major sector in the Indian economy
directly employing 0.25 million people.

The Indian automotive component
industry is dominated by around 500
players which account for more than 85%
m
of the production. The turnover of this
co
industry has been growing at a mammoth
e.
28.05% per annum from 2002-03
onwards. Global as well as local forcesre
ef
in
have affected the Indian auto industry,

nl
leading to a rapid transformation over the

llo
last decade or so. After the end of

.a
licensing era in early 1990s, the industry

w
w
has witnessed rapid growth in volumes

w
and capacity. 100% Foreign Direct

Investment, absence of much
government regulations, manufacturing
and imports free from licensing &
approvals in the automobile sector

coupled with customs tariff for a u t o
components reducing to 12.5% resulted
in increased number of multinationals
m
establishing their bases in India and with
co
export markets looking up, the Indian
e.
automobile industry is poised for a
phenomenal growth. India has made a re
ef
in
mark in the global automobile industry;

nl
India is the second largest two-wheeler

llo
market in the world, Fourth largest

.a
commercial vehicle market in the world,

w
w
Eleventh largest passenger car market in

w
the world, Fifth-largest bus and truck

market in the world (by volume).
Envisaged to be the seventh largest
automobile market by 2016 and world's
third largest by 2030 (behind only China

and the US).
ENVIRONMENT AND DEVELOPMENT
m
co
e.
re
ef
ENVIRONMENT
in
nl
llo
The environment can be defined as ones

.a
surroundings. The welfare of the

w
w
community depends on the availability of

w
goods and the availability of goods

depends on the availability of resources
that come from environment.
Economic Growth and Environment

Soon after Independence, the

Government of India adopted a policy of
rapid economic development through
extensive and intensive exploitation of
m
natural resources. Unfortunately the
co
Government has allowed landlords,
e.
private contractors, mine owners and
industrialists to encroach upon public re
ef
in
lands, and literally loot and destroy

nl
forests, water resources and mineral

llo
wealth. While economic development has

.a
enriched a small group of people-namely,

w
w
the rich landlords in the villages, the

w
small and large industrialists, the

contractors, the smugglers, the
bureaucrats and the politicians-
environmental degradation which is the
direct result of this economic

development has led to tremendous
suffering and misery to millions of
tribals,traditional craftmen and
m
fisherfolk.It has been responsible for the
co
steady growth in the number of landless
e.
labourers migration to cities.
re
ef
in
Poverty
nl
llo
A major issue is the removal of mass

.a
poverty. Indian economy indicates a very

w
w
high proportion of people below the

w
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
m
poverty line. Out of this 193 million in
co
rural areas and 67 million in urban areas.
e.
The burden of poverty is very massive.
Rapid reduction and reeventually the
ef
in
elimination of poverty is, there fore, the

nl
most important issue of development.

llo
The prevalence of mass poverty which is

.a
the cause as well as consequence of their

w
w
low level of development. Poverty is the

w
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.
m
This enables them to earn very low and
co
meager wages and thus perpetuate
e.
poverty. In other words, inequality in the
re
distribution of assets is the principal
ef
in
cause of unequal distribution of

nl
opportunities on the other.

llo
Environment Economy Interaction

.a
w
Resources include human resources,

w
w
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
m
mineral oils are exhaustible and can be
co
used only once. The principal objective of
e.
resource development is to maximize
re
gross domestic output (GDP) or national
ef
in
production and for this purpose there

nl
should be optimum utilization of

llo
resources not only in the short period but,

.a
in a sustained manner, over the long

w
w
period.
w
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
m
discharge of residues and wastes, the
co
handling of toxic chemicals, growth of
e.
slums etc. Deforestation is directly
responsible for greater frequency andre
ef
in
intensity of floods, soil erosion, heavy

nl
dams built at enormous expense and

llo
changes in climate conditions. It has also

.a
caused increased suffering to the landless

w
w
labourers and marginal and small farmers

w
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
m
co
1) Deforestation
e.
2) Pollution
re
ef
3)Ground Depletion
in
nl
llo
.a
w
w
4)Climate Change
w
Climate is weather conditions of a place

or area, conditions of temperature,
rainfall, wind, etc. The saying goes,

climate is what you expect; weather is
what you get. The word climate
describes the general average pattern of
m
the weather in a place over a period of
co
years. Climatologists generally consider
e.
30 years as the time needed to assess
the climate of a place. re Change is a
ef
in
fundamental characteristic of the

nl
environment. Earths climate is a result of

llo
complex interactions between the sun ,

.a
atmosphere , oceans , land and

w
w
biosphere. Relatively small changes in

w
climate could have a major effect on our

resources like food , energy and water.
The factors that influence global climate
are the aamount of solar energy the earth
receives, the condition of the atmosphere

, the shape and rotation of the earth , and
the currents and other processes of the
ocean. The scientific evidence suggest
m
that the earths climate is changing . The
co
atmosphere is warming and this trend will
e.
continue. By the year 2050, scientists
re
predict that the world will be warmer by
ef
in
an average of between 1.5degree Celsius

nl
and 4.5 degree Celsius. A TASK Group set

llo
up by WHO had warned that climate

.a
change may have serious impact on

w
w
human health.
w
5)Green House Effect.
A glass house used for raising delicate

plants is called green house. A green
house has higher temperature inside than
outside though the interior receives less
m
radiation. This is called green house
co
effect. The factors that contribute to its
e.
effects are; i) glass walls ii) high carbon
re
dioxide content iii) high water vapour
ef
in
content of air in the green house. They let

nl
the short wave radiations pass through

llo
them but prevent passage of long wave

.a
radiation emitted by the earths surface.

w
w
This makes inside of the green house

w
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 earths surface while the
rest is absorbed. During this process
these gases in the atmosphere called
m
green house gases obstruct the shape of
co
heat from the earth into space while
e.
allowing radiation from the sun to the
re
earth. Without green house effect it is not
ef
in
possible to sustain life on the plant as the

nl
average temperature of the earth would

llo
be 18 degree celsius than 15degree

.a
Celsius.
w
w
The atmospheric gases which are

w
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
m
co
iii)Nitrous Oxide
e.
iv) Chlorofluro Carbons
re
ef
v)Hydrofluro carbon gases
in
vi)Perfluro carbons
nl
llo
vii)Sulphur hexafluoride
.a
w
viii) Ozone
w
ix) Carbon monoxide

w
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
m
Governmental Panel on Climate Change
co
(IPCC) periodically makes an assessment
e.
of the atmospheric abundance of green
re
house gases and its possible impact on
ef
in
climate and related issues.

nl
llo
.a
6)Global Warming
w
w
w
Global warming is an increase in the

earths 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.
m
co
Causes of Global Warming
e.
re
ef
in
The main cause of global warming is

nl
green house effect. These include carbon

llo
dioxide, methane, nitrous oxide ,

.a
clorofluro carbons and ozone. Human

w
w
activities during the last few decades of

w
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
m
eruptions and earth quake induced fires
co
also contribute to carbon dioxide
e.
emissions. The Inter governmental Panel
on Climate Change held earlier in 2007re
ef
in
found that man made additions to the

nl
global atmospheric carbon dioxide were

llo
indeed responsible for warming .

.a
w
w
w
Effects of Global Warming
i) Climate Effects
a) There will be a
warming of the earths surface and
lower atmosphere and a cooling of

atmosphere.
b) The warming trend over

the earths surface is varied , warming in
m
the tropics is lesser than the global
co
mean by about 2-3 degree celcius
e.
depending on seasonal changeswhich in
re
ef
other latitude the average warming
in
might amount for 5-10 degree Celsius

nl
increase in temperature.
llo
.a
C) precipitation patterns
w
will be changed. Some areas will

w
w
become wetter and some areas dryer.
d)Seasonal patterns will

change due to the changing of
temperature and prcepitation matters.
e) Soil moisture regions will

be changed due to the changes in
evaporation and precipitation.
m
f) With the increase in cloud
co
cover over Eurasia in summer, which
e.
re
will enhance the solar heating of the
ef
surface and increase the land-sea
in
temperature contrast,tropical mansoon

nl
llo
will be driven with more severity and

.a
intensity.
w
w
w
g) Wind direction and wind

stress over the sea surface will be
changed,which will alter ocean cirrents
and cause changes in nutrient mixing

zones and productivity of the oceans.
7)Rise in Sea Level
m
co
e.
The global warming also contributes to
rise in sea level re
due to thermal
ef
in
expansion of ocean and melting of

nl
glaciers and Greenland ice sheets.The

llo
level of sea has been rising by 1 to 2

.a
mm per year during the 20th century.A

w
w
rise of even half a metre in sea level

w
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
m
are:
co
e.
1) recession of shorelines and
wetlands, re
ef
2) increased tidal range and
in
nl
estuarine salt-front instruction, and

llo
3) an increase in salt-water
.a
contamination of coastal fresh-water

w
w
aquifers.
w
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
m
co
e.
Forests are highly sensitive to climate
re
change and upto one third of currently
ef
in
forested and conservation of forest

nl
inhabitats in a rapidly warming world will

llo
present us with new challenges.

.a
w
w
w
Effects on range of species

distribution
Each plant and animal species occurs

within a specific range of
temperature.The global warming will shift
the temperature range,which would affect
m
attitudinal and latitudinal distribution
co
pattern of organisms. Rapid rise in
e.
temperature may cause large scale death
of many trees, as they are sensitive to re
ef
in
temperature stress and many species

nl
may disappear.
llo
.a
w
Effects on human settlements and

w
w
society
Population would be displaced by the

inundation of low-lying coastal
plains,deltas, and islands in the next

century if efforts to reduce greenhouse
gas accumulation in the atmosphere were
unsuccessful.
m
co
Effects on Food Production
e.
Global warming re
will reduce crop
ef
production due to increased incidence of
in
nl
plant disease and pests, explosive growth

llo
of weeds and enhanced bastal rate of

.a
respiration of plants. Global warming

w
w
could produce colder temperature in

w
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,
m
increase in water-borne
co
diseases,infectious disease carried by
e.
mosquitoes and
reother disease
ef
vectors.Temperature change may have
in
an impact on several major categories of

nl
llo
diseases including cardiovascular,

.a
cerebrovascular, and respiratory disease.

w
w
w
Solutions for global Warming
The following are some of the suggested

solutions to prevent global warming
a) Reduction in the use of fossil fuels.

b) Shifting to renewable energy
m
resources that do not emit GHGs.
co
c) Development of substitutes for
e.
chlorofluorocarbons.
re
ef
d) Increase of the vegetation cover,
in
particularly forest for photosynthetic

nl
utilization of CO2.
llo
e) Limiting population
.a
w
f)Exploring other options to sequester

w
carbon.
w
g) Adopting practices and

technologies to make agriculture
sustainable.
h) Reduce deforestation, adopt better

forest management practices and
undertake afforestation to sequester
carbons.
m
i) Reduce deforestation, adopt better
co
forest management practices and
e.
undertake afforestation to sequester
carbons. re
ef
in
j) Use fewer automobiles and public

nl
transportation immediate and drastic

llo
reduction of emissions.
.a
w
w
w
SUSTAINABLE DEVELOPMENT
Development should be perceived as a

multi-dimensional process involving the
re-organization and re-orientation of
entire economic and social systems.
m
Development is a continuous process
co
which has to be extended over a long
e.
period to lead a country to a stage of self-
re
sustained growth or to a self-generating
ef
in
economy. It is an evolutionary product of

nl
the idea progress. Progress can be

llo
achieved by generating wealth through

.a
maximization of productivity of labour

w
w
and capital.
w
Friedman defined growth

as an expansion of the systems in one or
more dimensions without change in the
structure and development as also as an

innovative process leading to the
structural transformation of social
systems. For eg; growth can be compared
m
with change in body whereas
co
development can be compared with the
e.
change in body and mind together.
Growth refers re
to quantitative
ef
in
improvement in the scale of physical

nl
dimension while development signifies

llo
improvement in both physical and non-

.a
physical dimension.
w
w
Development is the
w
conservation and management of the

natural resources base and the
orientation of technological and
institutional change in such a manner so

as to assure this attachment and
continued satisfaction of human needs of
present and future generations. Such
m
sustainable development in agriculture,
co
forestry and fisheries section
e.
conservation of land , water, plant and
animal genetic resources , technically re
ef
in
appropriate , economically viable and

nl
socially acceptable.
llo
.a
w
SUSTAINABILITY
w
w
The term sustainable

development refers to keeping an effort
going continuously or the ability to last
out and keep from falling. Sustainability
implies that human use of enjoyment of

the worlds natural and cultural resources
should not in, in overall terms , diminish
or destroy them. Thus sustainability is the
m
ability of an activity or development to
co
continue in the long term without
e.
undermining that part of environment
which sustains it. re
ef
in
nl
llo
SUSTAINABLE DEVELOPMENT
.a
The term sustainable development

w
w
comes into common usage after the use

w
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
m
environmental protection efforts on the
co
international level should be to improve
e.
the human condition. It also implies the
re
integration of environmental and social
ef
in
concerns into all aspects of economic

nl
policy. Principle 4 of the Rio Declaration

llo
states that inorder to attain the

.a
sustainable development ,
w
w
environmental protection shall

w
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
m
example traditional national accounting
co
system be changed to better measure
e.
over all qualities of life.
re
ef
Intergenerational Equity and
in
Responsibility.
nl
llo
Sustainable development as defined in

.a
our common feature is closely associated

w
w
with the goal of intergenerational equity.

w
Sustainable development recognizes each

generations responsibility to be fair to
the next generation by leaving an
inheritance of wealth no less than they
themselves have inherited.At a minimum,

meeting this goal may require
emphasizing the sustainale use of natural
resource for subsequent generation and
m
avoiding any environmental damage.
co
Common but differentiated
e.
Responsibilities.
re
ef
Sustainable development was common
in
nl
challenge to all countries but because of

llo
the different development path,

.a
industrialized countries may be asked to

w
w
carry more of the immediate burden. The

w
developed countries explicitly

acknowledged the for the central
responsibility for the present
environmental degradation and its
remediation. To accomplish sustainable

development, a number of areas have to
be organized such as,
1) Improving energy efficiency
m
2) Saving forests,
co
e.
3) Safeguarding biodiversity,
4) Adopting re
water resource
ef
in
management,
nl
llo
5) Managing coastal zones and oceans

.a
fisheries.
w
w
6) Arresting pollution,
w
7) Planning cities better,
8) Accomplishing a second green

revolution,
9) Stabilizing world population, and
10) Stopping environmentally

destructive subsidies.
Guidelines for Sustainable
m
co
Development
e.
The following guidelines are suggested
re
for achieving sustainable development:
ef
in
1) Reduce the input of matter and

nl
llo
energy resource in production process

.a
to prevent excessive depletion and

w
degradation of planetary resources.

w
w
2) Use energy more efficiently and

economically
3) Shift from exhaustible and

potentially polluting fossil and nuclear
fuels to less harmful renewable wind

energy or solar energy.
4) Avoid wasting non-renewable and

use them no faster than the rate at
m
which a renewable resource used
co
sustainably can be sustained.
e.
5) Recycle and re
use the matter
ef
discarded as waste.
in
nl
6) Use locally adaptable, ecofriendly

llo
and resource efficient technology,

.a
w
which will use less of resources and

w
produce minimum wastes.

w
7) Utilise resources as per carrying

capacity of the environment.
8) Adoption of 3-R approach, ie.,

reduce,reuse,recycle approach to
minimize scarce resource use.
9) Emphasise pollution prevention and
m
waste reduction instead of pollution
co
clean-up and waste management.
e.
re
10) Study before the construction of
ef
dams, major highways, mining,
in
nl
industry etc whether they can

llo
seriously damage ecosystems and bio-

.a
diversity before they are begun.

w
w
11) Insist and implement the technique

w
of pollution control of toxic and

hazardous gases in existing industries.
Global Environmental Concerns
1) Population explosion enhances the

ecological demands which resulting
degradation on natural resouces.
2) Almost half of the worlds original
m
expanse of tropical forests has been
co
cleared.Within the next 30 to 50 years
e.
there may be little of these forests
left. re
ef
in
3) Millions of hectares of grass lands

nl
have been overgrazed, some

llo
especially in Africa and the Middle

.a
East,have been converted to desert.

w
w
4) Between 25 % and 50 % of the

w
worlds wet lands have been drained,

built upon, or seriously polluted.
5) An estimated 36,500 species of
plants and animals become extinct
each year, mostly because of human

activities.
6) About 8.1 million square kilometers
of once-productive land (crop land,
m
forests, grasslands) have become
co
desert in the last 50 years. Each year
e.
almost 61,000 square kilometers of
new desert are formed. re
ef
in
7) Top soil is eroding faster than it

nl
forms on about 35 per cent of the

llo
worlds crop land. Crop productivity on

.a
one-third of the earths irrigated crop

w
w
land has been reduced by salt build up

w
in top soil.
8) Most of the wastes we dump into
the air, water, and land eventually end
up in the oceans. Oil slicks, floating
plastic debris, polluted estuaries and

beaches, and contaminated fish and
shellfish are visible signs that we are
using the oceans as the worlds
m
largest trash dump.
co
9) In developing countries 61 per cent
e.
of the people living in rural areas and
re
26 per cent of urban dwellers do not
ef
in
have access to safe drinking water.

nl
Each year 5 million people die from

llo
preventable water diseases.

.a
10) Water is withdrawn from

w
w
underground reservoirs (aquifers)

w
faster than it is replenished by

precipitation.
11) In the worlds population more than

one out of every four live in absolute
poverty.
12) It is estimated that 70 per cent of
m
the surface water resources are
co
polluted and that in large stretches of
e.
major rivers, water is not even fit for
bathing, leave alone drinking. re
ef
in
13) Environmental pollution although

nl
typically associated with

llo
industrialization, is a great and

.a
growing concern in developing

w
w
countries.
w
14) Use of fertilizers and pesticides

pollute the environment.
15) Over the past few years air
pollution has been increasing as a
regional or global problem, not a local

one. Acid rain may fall to earth
thousands of miles away from the
places of emission of sulphur dioxide
m
world and nitrogen oxide.Thus the
co
clouds generated in the developed
e.
world may rain in the territory of the
developing world. re
ef
in
16) Emissions of carbon dioxide and

nl
other gases into the atmosphere from

llo
fossil fuel burning and other human

.a
activities may raise the average

w
w
temperature of the earths lower

w
atmosphere several degrees by

2050.This would disrupt food
production and flood low-lying coastal
cities and croplands.
17) Chlorofluorocarbons and halons

released into the lower atmosphere
are drifting into the upper atmosphere
and reacting with and gradually
m
depleting ozone faster than it is being
co
formed.
e.
18) Atmospheric levels of heat-trapping
re
carbons dioxide are now 26 per cent
ef
in
higher than the pre-industrial

nl
concentration and continue to rise

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higher and higher with green house

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Economics Notes Important Questions Definitions PDF

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Easy Economics Notes

Basic Concepts in Economics

economy. The level of production in any

economy is the best measure of its

performance, living standards of its

people and the extent of technological

development and growth. It includes both

goods, automobiles etc and the work of

2) Consumption: The act of satisfying

The quality and quantity of consumption

reflects the levels of income and

3) Investment: Investment is the

addition made to the existing total stock

comes from employment. An economy

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

power of a commodity to satisfy human

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

television since it possesses utility and is

Price: Value of a commodity expressed in

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

a particular point of time and income is

Gross Domestic Product (GDP)

so obtained is called Gross Domestic

GNP may be defined as the aggregate

The concept of final goods and services

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

1) The value of all consumption goods

includes the provision for the

consumption of capital assets, i.e.,

3) The value of government services

which are measured in terms of

certain services to the benefit of the

between the income received by the

nationals from abroad minus the

income remitted by the foreigners

GNP at market price, thus, represents:

C stands for consumption goods,

I stands for capital goods/ or gross

G stands for government services,

X stands for exports,

P stands for income remitted by

The Sectors of the Economy