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1. State and explain the definition of Economics provided by Alfred Marshall? Marshall is a well-known economist. He was behind Smith and for him all the way, approximately hundred twenty years after Smith’s book on Economics. Alfred Marshall wrote a book in Cambridge which was entitled “PRINCIPALES OF ECONOMICS”. In this book, Marshall defined Economics as an instrument to remove the doubts of the people regarding the subject. Marshall stated , “Economics is the study of mankind in the ordinary business of life; it examines that part of individual and social Action which is most is closely connected with the attainment and use of the material requisites of well-being” From the definition, we able to achieve three main points: (i) Ordinary business of life or Economics as a social science. (ii) Attainment and use of material requisites or production and consumption of wealth. (iii) Well-being or welfare of the society. (i) ORDINARY BUSINESS OF LIFE OR ECONOMICS AS A SOCIAL SCIENCE: According to Marshall, Economics is studies the economic behavior of the people living in the society. Economic activities of the people outside the society are not, therefore, considered in the study of economics. Hence Economics does not study the isolated individuals or any “Robinson Crusoe”. By this he shows that economics is a social science. (ii) ATTAINMENT AND USE OF MATERIAL REQUISITES OR PRODUCTION AND CONSUMPTION OF WEALTH: In the ordinary business of life, human beings perform different types of activities such as political activities , sports, economic activities , moral and religious activities, of all these activities of ordinary life, Economics Studies only those activities which are related with the attainment and use of material requisites or in other words, the production and consumption of wealth. (iii) WELL BEING OR WELFARE OF THE SOCIETY: According to Marshall, the objective of the study of Economics is to promote the material welfare of the people, to Marshall. Economics focuses on only material aspects of life and therefore studies material requisites well-being. Hence, according to him economics does not regard wealth to be the goal of all human activities. In 1931, other economists, Loinel Robbins, wrote a book entitled “NATURE AND SIGNIFICANCE OF ECONOMIC SCIENCE” (i)THE DEFINITION NAROWS THE SCOPE OF ECONOMICS: The use of the word “Material” by Marshall narrows the scope of economics as well need both the material and non-material requisites of life i.e. goods and services. The need for non-material requisites is certainly over-whelming, Examples of the nonmaterial requisites are the service of lawyers, teachers and doctors etc, these non-material requisites satisfy our wants in the same way as material requisites (or goods) and if we exclude them from the study of economics, the scope of economics would certainly be restricted. (II)WELL BEING IS A NONMEASURABLE CONCEPT: True enough in its meaning one cannot measure “wellbeing”. It is something that cannot be estimated to figures, although it can be stated in theories. Thus, according to Robbins, well-being cannot be measured as stated by Marshall. (iii)ECONOMICS SHOULD NOT PASS VALUE JUDGEMENT: Robbins, Economics should emphasize only on human and their satisfaction and, therefore it is not concerned with whether these wants are being satisfied buy good things or bad things. (iv) IT CREATES PROBLEMS FOR POLICY MAKING: According to Marshal, the study of economics should be directed to pursue the concept of welfare, but Robbins objects to this point of view on the ground that the concept of welfare would place the government in a vulnerable position in the making of economic policies

 

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2.(Discuss the importance of the study of Economics? Today all over the world people have become highly economic minded. They have realized that the study of economics can provide them a solution to their economic and social problems. Today economics is more useful than any other branch of knowledge because it makes human welfare its direct and primary concern.My. Durbin says "Economics is the intellectual religion of the days." Following are the main importance of the study of economics. 1. USEFUL FOR THE PRODUCER:- Economics is very useful for the producer. It guides him that how he should combine the four factors of production and minimize the cost of production. 2. USEFUL FOR THE CONSUMER:- The consumer can adjust his expenditure of various goods in better way if he knows the principles of economics. He will spend his income according the law of Equi-Marginal utility in order to get maximum satisfaction. 3. POVERTY AND DEVELOPMENT:- It helps in removing the poverty from the country. Under developed countries are facing many problems like unemployment, over population low per capita income and low production. Economics is very useful in solving these problems. 4. USEFUL FOR THE LEADER:- Its study is helpful for the leader5s to understand the economic problems if they have a knowledge of Economics. 5. USEFUL FOR THE FINANCE MINISTER:- Finance minister prepares the yearly budget of the country. Economics guides him that how he should frame the tax policy and monetary policy. 6. USEFUL FOR THE DISTRIBUTION OF NATIONAL INCOME :- From the study of economics one can easily judge that how the income should be distributed among the four factors of production.For this purpose Marginal productivity theory is suggested by economic 7. CULTURAL VALUE:- A person's education can not be considered complete unless he has some knowledge of economics. The things which happen daily around us have an important economic bearing. So there is also the cultural value of the study of economics. 8. IMPORTANCE FOR A COMMON MAN :- The study of economics is very useful for every citizen. It enables him to understand and criticize the economic policies of the government. He can also guide the government. 9. ECONOMIC PLANNING:- In the modern age the importance of economic planning cannot be ignored. Through planning we can utilize our natural resources in better way and can improve our economic condition. 10. IMPORTANCE FOR LABOUR:- It guides the workers that how they can get maximum wages from the employer. It enables them to get the right of trade union , collective bargaining and fixation of working hours. 11. SOLUTION FOR ECONOMIC CRISES:- It guides the nations that how they can save themselves from the economic crises. The advanced countries desire is that there should be economic stability and full employment without inflation to achieve these objectives, economics is very useful for them. 12. INSPIRES FOR DEVELOPMENT:- The study of advanced countries economy inspires the less development countries that they can also improve their economics conditions. ……………oooooooo………………..

 

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3. What is the difference between “changes in demand’’ and increase/decrease in demand?

Changes in demand  Increase in Demand  Decrease in Demand 

 

 

 

 

 

 

 

 

 

� First, a demand (or supply) determinant changes. � Second, this determinant change causes the demand curve (or supply curve) to shift. � Third, the change in demand (or supply) causes either a shortage or a surplus imbalance in the market. The market is in a temporary state of disequilibrium. � Fourth, the shortage and surplus imbalance causes the price of the good to change. � Fifth, the change in price causes a change in quantity demanded (and supplied). ·Sixth, the change in quantity demanded (and supplied) eliminates the shortage or surplus and restores market equilibrium.  

P

 

 

                                                                          D1 D2   

                                                                                              Q    

Shift to the right of the Demand Curve Change in Factors Other Than Price 1.Increase in Taste increases the demand curve. 2.Increase in population increases the demand curve. 3.Increase in income in income increases demand if a normal good. 4.Decrease in income increases demand if an inferior good. 5.Increase in price of substitute (pepsi) increases demand for good (coke). 6.Decrease in price of complement (beer) increases demand for good (pizza). 7.If I expect the price of the product to increase in the future, my demand today will increase.  

P 

 

 

 

                                            D2                         D1

Q

Shift to the left of the Demand Curve

Change in Factors Other Than Price

1.Decrease in Taste decreases the demand curve. 2.Decrease in population decreases the demand curve. 3.Increase in income decreases demand if an inferior good. 4.Decrease in income decreases income if a normal good. 5.Decrease in price of substitute (pepsi) decreases demand for good (coke). 6.Increase in price of complement (beer) decreases demand for good (pizza). 7.If I expect the price of the product to decrease in the future, my demand today will decrease 

 

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4. Illustrate how equilibrium market price is determined through the interaction of demand and supply? Introduction Price is arrived at by the interaction between demand and supply. Price is dependent upon the characteristics of both these fundamental components of a market. Demand and supply represent the willingness of consumers and producers to engage in buying and selling. An exchange of a product takes place when buyers and sellers can agree upon a price. Equilibrium Price When a product exchange occurs, the agreed upon price is called an "equilibrium" price, or a "market clearing" price. Graphically, this price occurs at the intersection of demand and supply as presented in Figure 1. In Figure 1, both buyers and sellers are willing to exchange the quantity Q at the price P. At this point, supply and demand are in balance. Price determination depends equally on demand and supply. It is truly a balance of the two market components. To see why the balance must occur, examine what happens when there is no balance, for example when market price is below that is shown as P in Figure 1. At any price below P, the quantity demanded is greater than the quantity supplied. In such a situation, consumers would be clamouring for a product that producers would not be willing to supply; a shortage would exist. In this event, consumers would choose to pay a higher price in order to get the product they want, while producers would be encouraged by a higher price to bring more of the product onto the market.

The end result is a rise in price, to P, where supply and demand are in balance. Similarly, if a price above P were chosen arbitrarily the market would be in surplus, too much supply relative to demand. If that were to happen, producers would be willing to take a lower price in order to sell, and consumers would be induced by lower prices to increase their purchases. Only when the price falls would balance be restored. A market price is not necessarily a fair price, it is merely an outcome. It does not guarantee total satisfaction on the part of buyer and seller. Typically some assumptions about the behaviour of buyers and sellers are made, which add a sense of reason to a market price. For example, buyers are expected to be self-interested and, although they may not have perfect knowledge, at least they will try to look out for their own interests. Meanwhile, sellers are considered to be profit maximizers. This assumption limits their willingness to sell to within a price range, high to low, where they can stay in business.

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5. What is an indifference curve and what are its characteristics?

A diagram depicting equal levels of utility (satisfaction) for a consumer faced with various combinations of goods.

As an example, consider the diagram above. This consumer would be most satisfied with any combination of products along curve U3. This consumer would be indifferent between combination Qa1, Qb1, and Qa2, Qb2.

Characteristics:

(1) Indifference Curves are negatively Sloped: The indifference curves must slope down from left to right. This means that an indifference curve is negatively sloped. It slopes downward because as the consumer increases the consumption of X commodity, he has to give up certain units of Y commodity in order to maintain the same level of satisfaction.

In fig. 3.4 the two combinations of commodity cooking oil and commodity wheat is shown by the points a and b on the same indifference curve. The consumer is indifferent towards points a and b as they represent equal level of satisfaction. At point (a) on the indifference curve, the consumer is satisfied with OE units of ghee and OD units of wheat. He is equally satisfied with OF units of ghee and OK units of wheat shown by point b on the indifference curve. It is only on the negatively sloped curve that different points representing different combinations of goods X and Y give the same level of satisfaction to make the consumer indifferent. (2) Higher Indifference Curve Represents Higher Level: A higher indifference curve that lies above and to the right of another indifference curve represents a higher level of satisfaction and combination on a lower indifference curve yields a lower satisfaction. In other words, we can say that the combination of goods which lies on a higher indifference curve will be preferred by a consumer to the combination which lies on a lower indifference curve.

 

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In this diagram (3.5) there are three indifference curves, IC1, IC2 and IC3 which represents different levels of satisfaction. The indifference curve IC3 shows greater amount of satisfaction and it contains more of both goods than IC2 and IC1 (IC3 > IC2 > IC1). (3) Indifference Curve are Convex to the Origin: This is an important property of indifference curves. They are convex to the origin (bowed inward). This is equivalent to saying that as the consumer substitutes commodity X for commodity Y, the marginal rate of substitution diminishes of X for Y along an indifference curve.

In this figure (3.6) as the consumer moves from A to B to C to D, the willingness to substitute good X for good Y diminishes. This means that as the amount of good X is increased by equal amounts, that of good Y diminishes by smaller amounts. The marginal rate of substitution of X for Y is the quantity of Y good that the consumer is willing to give up to gain a marginal unit of good X. The slope of IC is negative. It is convex to the origin. (4) Indifference Curve Cannot Intersect Each Other: Given the definition of indifference curve and the assumptions behind it, the indifference curves cannot intersect each other. It is because at the point of tangency, the higher curve will give as much as of the two commodities as is given by the lower indifference curve. This is absurd and impossible. In fig 3.7, two indifference curves are showing cutting each other at point B. The combinations represented by points B and F given equal satisfaction to the consumer because both lie on the same indifference curve IC2. Similarly the combinations shows by points B and E on indifference curve IC1 give equal satisfaction top the consumer.

If combination F is equal to combination B in terms of satisfaction and combination E is equal to combination B in satisfaction. It follows that the combination F will be equivalent to E in terms of satisfaction. This conclusion

 

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looks quite funny because combination F on IC2 contains more of good Y (wheat) than combination which gives more satisfaction to the consumer. We, therefore, conclude that indifference curves cannot cut each other. (5) Indifference Curves do not Touch the Horizontal or Vertical Axis: One of the basic assumptions of indifference curves is that the consumer purchases combinations of different commodities. He is not supposed to purchase only one commodity. In that case indifference curve will touch one axis. This violates the basic assumption of indifference curves.

In fig. 3.8, it is shown that the indifference IC touches Y axis at point C and X axis at point E. At point C, the consumer purchase only OC commodity of rice and no commodity of wheat, similarly at point E, he buys OE quantity of wheat and no amount of rice. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.

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3(b) by the help of budget line and indifference curve how a consumer reaches the highest level of satisfaction?

 

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6. What is the price elasticity of demand?

A measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price elasticity of demand is a term in economics often used when discussing price sensitivity. The formula for calculating price elasticity of demand is: Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price If a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to price changes). Conversely, a product is inelastic if a large change in price is accompanied by a small amount of change in quantity demanded.

Price elasticity of demand measures the responsiveness of demand to changes in price for a particular good. If the price elasticity of demand is equal to 0, demand is perfectly inelastic (i.e., demand does not change when price changes). Values between zero and one indicate that demand is inelastic (this occurs when the percent change in demand is less than the percent change in price). When price elasticity of demand equals one, demand is unit elastic (the percent change in demand is equal to the percent change in price). Finally, if the value is greater than one, demand is perfectly elastic (demand is affected to a greater degree by changes in price). For example, if the quantity demanded for a good increases 15% in response to a 10% increase in price, the price elasticity of demand would be 15% / 10% = 1.5.

7. what relationship does the price elasticity of demand bear with marginal revenue and average revenue?

There is a crucial relationship dose the price elasticity of demand bear with marginal revenue and average revenue which is used extensively in the theory of pricing. The relationship is expressed in the form of formula,

 

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But, AQ is marginal revenue and SQ is average revenue corresponding to point ‘B’ at OQ level of output. Hence, equation (2.9) can be written as

The above relationship can be utilised to find out the marginal revenue corresponding to the average revenue at any given level of quantity sold, provided the price elasticity of demand is known.

The relation between AR, MR and elasticity of demand (e) can now be written as

With the help of the above formula, it is possible to find MR, given AR (price) and elasticity of demand. For example, for AR = 10 and e = 2,

Thus, for e = I, MR = 0. This is very useful relationship and should be noted carefully. Here, total revenue outlay is not affected by change in price, as discussed under ‘Total Outlay Method’ in Chapter 2 on Elasticity of Demand.

It can also be shown that at every point on the demand curve, where elasticity is greater than unity, MR is positive (but, less than AR). Further, at every point on the demand curve where elasticity is less than unity, MR is negative. This can be verified by substituting the value of elasticity in equation (14.9). An increase in the price will result in an increase and a decrease of the total revenue in these two cases respectively and vice-versa. AR, being price is always positive.

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8.what are the characteristics of a perfectly competitive market?

Generally, a perfectly competitive market exists when every participant is a "price taker", and no participant influences the price of the product it buys or sells. Specific characteristics may include:

• Infinite buyers and sellers – An infinite number of consumers with the willingness and ability to buy the product at a certain price, and infinite producers with the willingness and ability to supply the product at a certain price. 

• Zero entry and exit barriers – A lack of entry and exit barriers makes it extremely easy to enter or exit a perfectly competitive market. 

• Perfect factor mobility – In the long run factors of production are perfectly mobile, allowing free long term adjustments to changing market conditions. 

• Perfect information ‐ All consumers and producers are assumed to have perfect knowledge of price, utility, quality and production methods of products. 

• Zero transaction costs ‐ Buyers and sellers do not incur costs in making an exchange of goods in a perfectly competitive market. 

• Profit maximization ‐ Firms are assumed to sell where marginal costs meet marginal revenue, where the most profit is generated. 

• Homogenous products ‐ The qualities and characteristics of a market good or service do not vary between different suppliers. 

• Non‐increasing returns to scale ‐ The lack of increasing returns to scale (or economies of scale) ensures that there will always be a sufficient number of firms in the industry. 

• Property rights ‐ Well defined property rights determine what may be sold, as well as what rights are conferred on the buyer. 

• Rational buyers ‐ buyers capable of making rational purchases based on information given 

• No externalities ‐ costs or benefits of an activity do not affect third parties 

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9. How equilibrium price and output are determined by a firm under perfect competition?

The equilibrium is the point where economic forces are balanced and there are no external influences. The equilibrium is the condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers. A perfectly competitive market has many distinguishing factors. A market in perfect competition has many people who are willing and able to buy a product as well as a many buyers who are willing and able to produce the products. The products the firms supply are exactly the same. Another distinguishing characteristic in a perfectly competitive market is that there are low entry and exit barriers to the market, and it is relatively

Under prefect competition how equilibrium price and output are determined this are given below ------

Large number of buyers and sellers: It is assumed that in pure competition market there should be a large number of buyers and sellers. If it is so, the output of any single firm is only a small proportion of the total output and each consumer buys small part of the total. Hence no individual purchaser can influence the market price by varying his own demand and no single firm is in the position to affect the market price by varying its own output.

Homogenous product: The commodity produced by all firms should be identical in pure competition. Thus the commodity produced by different firms are perfect substitutes. Hence the buyers are indifferent as to the firm from which they purchase.

Perfect competition is wider term than pure competition. Besides the two conditions of pure competition mentioned above several other conditions must be fulfilled to make it a perfect competition.

Free entry and exit: There should be no restrictions legal or other on the firms to entry and exit the industry. In this situation all the firms can earn only normal profit. Because if the profit is more than the normal, new firms will enter and extra profit will be reduced and if the profit is less than normal, some firms will leave the industry raising the profits for the remaining firms. Hence the firms can earn normal profit in long run.

Perfect knowledge: Another assumption of perfect competition is that the purchasers and sellers should have perfect knowledge about costs, price and quality. Due to this fact neither the seller can charge more than the ruling price nor the purchaser are willing to pay more.

Free mobility of the resources: The mobility of resources is essential to the firms in order to adjust their supply to demand. If the demand exceeds supply additional factors of production move into the industry and vice versa.

 

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10. Concepts of gross domestic product (GDP), Gross national product (GNP), and Net national product (NNP)

Definition of 'Gross Domestic Product - GDP' The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. GDP = C + G + I + NX where: "C" is equal to all private consumption, or consumer spending, in a nation's economy "G" is the sum of government spending "I" is the sum of all the country's businesses spending on capital "NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports)

GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a country's standard of living. Critics of using GDP as an economic measure say the statistic does not take into account the underground economy - transactions that, for whatever reason, are not reported to the government. Others say that GDP is not intended to gauge material well-being, but serves as a measure of a nation's productivity, which is unrelated.

Definition of 'Gross National Product - GNP' An economic statistic that includes GDP, plus any income earned by residents from overseas investments, minus income earned within the domestic economy by overseas residents.

GNP is a measure of a country's economic performance, or what its citizens produced (i.e. goods and services) and whether they produced these items within its borders.

Definition of 'Net National Product - NNP' The monetary value of finished goods and services produced by a country's citizens, whether overseas or resident, in the time period being measured (i.e., the gross national product, or GNP) minus the amount of GNP required to purchase new goods to maintain existing stock (i.e., depreciation). Alternatively, net national product (NNP) can be calculated as total payroll compensation + net indirect tax on current production + operating surpluses.

In other words, NNP is the amount of goods that can be consumed within a nation each year without reducing the amount that can be consumed in following years.

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11. Discuss the problems faced in estimating the GDP of a country?

First, GDP figures omit production of goods and services that are not sold on markets. This component includes housework, meals cooked at home, and child care provided by parents, as well as services volunteered for charities and other groups. For example, when parents care for their own children, the value of their care does not appear in GDP. However, when parents pay for child care, those services appear in GDP (for more examples see the book). Second, GDP includes only a very imperfect estimate of production of goods and services sold on the underground economy (or black market). This activity includes production of illegal goods and services (such as drugs and prostitution). It also includes production of legal goods that goes unreported to avoid taxes. Many estimates suggest that the underground economy in the United States amounts to between 5 and 10 percent of GDP; this figure is even larger in many other countries. Third, special measurement problems result when GDP includes certain goods that are not sold on markets. When you rent a house or apartment, your expenses appear in GDP as payments for housing services. However, if you own the house or apartment where you live, GDP includes the government’s estimate of the rent that you would pay if you were renting. Fourth: Substitution bias: As consumers' tastes change and as new technological improvements are introduced, the relative prices of goods change. Such changes are independent of inflation so optimally we would like the real GDP measure to take them into consideration. For example, as more people started using cellular phones, the cost of supplying this service went down and so has price. In the real GDP the value of these services is measured using old, higher prices, overstating the increase in the value of production. New-good bias: it is very difficult to include new goods into the real GDP: In the base year they did not exist and hence their price was infinite. Quality-change bias: if you simply take the number of TV sets produced and multiply it by the price of a typical TV set in the base year, the value of production is going to be underestimated, as this measure does not take into account the improvements in quality.

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12. What is meant by budget deficit?

A financial situation that occurs when an entity has more money going out than coming in. The term "budget deficit" is most commonly used to refer to government spending rather than business or individual spending. When it refers to federal government spending, a budget deficit is also known as the "national debt." The opposite of a budget deficit is a budget surplus, and when inflows are equal to outflows, the budget is said to be balanced.

Government budget deficits can be cured by cutting spending, raising taxes or a combination of the two. Deficits must be financed by borrowing money. Interest must be paid on borrowed funds, which worsens the deficit.

 

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13. How can a deficit budget be financed? Give your answer in Bangladesh perspective?

A budget deficit occurs when government expenditure (G) is greater than revenue (T) (G>T).

There are several main ways that the Bangladesh government can finance a deficit.

i. Firstly, the government can borrow funds from the other sectors of the economy. This involves the selling of new Commonwealth Government Securities (CGS) such as treasury bonds through a tender system.

This is the preferred government method of raising funds, as it does not add to net foreign debt, because the government is not borrowing from overseas. However, there is a disadvantage to this form of debt financing.

When the Federal Government sells CGS it competes with the private sector for domestic savings, creating what is referred to as a “crowding out effect”. A shortage of funds in the domestic market can result and domestic investors may need to borrow funds from overseas. Government borrowing has then, effectively “crowded out” private investment. Private investment may be postponed as interest rates and the cost of credit rise.

ii. The second possible method of financing a deficit is for the Commonwealth Government to sell CGS to the Reserve Bank. This form of borrowing from the Reserve Bank basically means that the government prints money to finance the deficit. The Government has not used this method of deficit financing since the deregulation of the Australian financial market in 1982. This is because it is highly inflationary: when the government spends the money, there is an increase in the money supply; if the economy is near full employment, demand inflation occurs rapidly, as there is too much money chasing a limited supply of goods.

iii. The third possible method used to finance a budget deficit is for the government to borrow funds from international financial markets. The government has not borrowed from overseas since the late 1980s to finance the deficit. When using this method, the Reserve Bank sells new CGS to overseas buyers, and receives foreign funds that are converted into Australian dollars. This method of financing the deficit adds to foreign debt when interest is paid on the securities (net income component of the balance of payments). 

The government may decide to borrow funds from overseas to reduce the crowding out effect. Under a floating exchange rate such borrowing has no effect on the domestic money supply. However, exchange rates and domestic interest rates can be affected; further, it adds directly to foreign debt.

iv. The selling of government assets is an alternative method to borrowing that the government can also use to fund a budget deficit. The sale of assets can create a headline budget surplus and reduce the crowding out effect typically caused by the sale of government bonds.

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14. Discuss the instruments of monetary policy? The main monetary policy instrument of The bank is the key policy rate – interest rate applied in its main open market operations (currently, reverse repo transactions – repo sale of securities, with one-week transaction maturity). Other monetary policy instruments of The bank have a supporting role, facilitating unhindered transmission of the key policy rate effects to the market, as well as the development of the financial market. These instruments include: open market operations, required reserves, lending and deposit facilities (standing facilities), and Interventions in the foreign exchange market. Monetary policy instruments do not have a direct impact on monetary policy objectives. As there can be a several months’ lag in the effect of monetary policy, The bank focuses on the achievement of operating and intermediate targets. Operating targets are easy to control, but are remote from the ultimate objective, while intermediate targets are hard to control, but closer to the ultimate objective. As in the case of more developed market economies, and particularly those pursuing inflation targeting regime, the Banks operating target are interest rates in the interbank money market, and its intermediate target is the inflation projection. Open Market Operations The bank conducts open market operations in order to regulate banking sector liquidity, influence short-term interest rate movements and signal its monetary policy stance. The bank implements open market operations through repo or outright purchase and sale of securities. Required Reserves Required reserves are the amount of funds that banks are required to keep on deposit in accounts with the central bank. Required reserves are calculated by applying the required reserve ratio to the reserving base. Required reserve base may be composed of all funding sources or a part of them It may be uniform or differentiated, according to maturity and/or currency structure of the funding sources. Lending and Deposit Facilities (Standing Facilities) Central bank’s standing facilities include lending and deposit facilities available to banks on an ongoing basis. Overnight in maturity, these operations are initiated by commercial banks. Lending facilities include loans for maintaining daily liquidity, collateralized by eligible securities. Interest rates on standing facilities constitute the ceiling and floor of the corridor of interest rates in the interbank market. As an important control factor in managing banking sector liquidity, they ease the fluctuations of short-term interest rates in the interbank market which would be more pronounced without such facilities. Interventions in the Foreign Exchange Market In inflation targeting regime, foreign exchange interventions are an infrequently used secondary instrument which contributes to the achievement of the targeted inflation rate after the effective impact of the key policy rate has been exhausted. Short Term Liquidity Loans Collateralized by Securities In addition to applying the above main monetary policy instruments, The bankalso approves to banks short-term liquidity loans against collateral of securities.

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15. How monetary policy can be used to control inflation?

Monetary policy, to a great extent, is the management of expectations.[4] Monetary policy rests on the relationship between the rates of interest in an economy, that is, the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (to achieve policy goals). The beginning of monetary policy as such comes from the late 19th century, where it was used to maintain the gold standard.

A policy is referred to as contractionary if it reduces the size of the money supply or increases it only slowly, or if it raises the interest rate. An expansionary policy increases the size of the money supply more rapidly, or decreases the interest rate. Furthermore, monetary policies are described as follows: accommodative, if the interest rate set by the central monetary authority is intended to create economic growth; neutral, if it is intended neither to create growth nor combat inflation; or tight if intended to reduce inflation.

There are several monetary policy tools available to achieve these ends: increasing interest rates by fiat; reducing the monetary base; and increasing reserve requirements. All have the effect of contracting the money supply; and, if reversed, expand the money supply. Since the 1970s, monetary policy has generally been formed separately from fiscal policy. Even prior to the 1970s, the Bretton Woods system still ensured that most nations would form the two policies separately.

Within almost all modern nations, special institutions (such as the Federal Reserve System in the United States, the Bank of England, the European Central Bank, the People's Bank of China, the Reserve Bank of New Zealand, and the Bank of Japan) exist which have the task of executing the monetary policy and often independently of the executive. In general, these institutions are called central banks and often have other responsibilities such as supervising the smooth operation of the financial system.

The primary tool of monetary policy is open market operations. This entails managing the quantity of money in circulation through the buying and selling of various financial instruments, such as treasury bills, company bonds, or foreign currencies.

Usually, the short term goal of open market operations is to achieve a specific short term interest rate target. In other instances, monetary policy might instead entail the targeting of a specific exchange rate relative to some foreign currency or else relative to gold.

The other primary means of conducting monetary policy include: (i) Discount window lending (lender of last resort); (ii) Fractional deposit lending (changes in the reserve requirement); (iii) Moral suasion (cajoling certain market players to achieve specified outcomes); (iv) "Open Mouth Operations" (talking monetary policy with the market).

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16. Distinguish between balance of Trade and balance of payment?

Basis of Difference

Balance of Trade (BOT)

Balance of Payment (BOP)

1. Definition

Balance of trade may be defined as difference between export and import of goods and services.

Balance of payment is flow of cash between domestic country and all other foreign countries. It includes not only import and export of goods and services but also includes financial capital transfer.

2. Formula

BOT = Net Earning on Export - Net payment for imports

BOP = BOT + (Net Earning on foreign investment - payment made to foreign investors) + Cash Transfer + Capital Account +or - Balancing Itemor BOP = Current Account + Capital Account + or - Balancing item ( Errors and omissions)

3. Favourable or Unfavourable

If export is more than import, at that time, BOT will be favourable. If import is more than export, at that time, BOT will be unfavourable.

Balance of Payment will be favourable, if you have surplus in current account for paying your all past loans in your capital account. Balance of payment will be unfavourable, if you have current account deficit and you took more loan from foreigners. After this, you have to pay high interest on extra loan and this will make your BOP unfavourable.

4. Solution of Unfavorable Problem

To Buy goods and services from domestic country.

To stop taking of loan from foreign countries.

5. Factors

Following are main factors which affect BOT a) cost of production b) availability of raw materials c) Exchange rate d) Prices of goods manufactured at home

Following are main factors which affect BOP a) Conditions of foreign lenders. b) Economic policy of Govt. c) all the factors of BOT

6. Meaning of Debit and Credit

If you see RBI' Overall balance of payment report, it shows debit and credit of current account. Credit means total export of different goods and services and debit means total import of goods and services in current account.

Credit means to receipt and earning both current and capital account and debit means total outflow of cash both current and capital account and difference between debit and credit will be net balance of payment.

 

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17. What measures would you suggest to solve the problem of balance of payment deficit in BD?

A country's balance of payments reflects its net earnings on trade in goods and services with other countries. A positive balance of payments situation, or a surplus, comes about when a country exports more than it imports. A deficit situation arises when a country imports more than it exports. Governments manage their balance of payments situations in accordance with their larger goals for the economy.

Increased Exports

• One way of reducing a balance of payments deficit situation is to export more to other countries. For instance, in July 2010, the U.S. goods and services deficit went down to $42.8 billion, from $49.8 billion in June 2010. This came about as the country's exports rose to $153.3 billion in July, from $104.9 billion in June 2010. As the global recession abated, there was more demand for U.S. exports in other countries and this led to the rise in exports, according to the U.S. Census Bureau.

Decreased Imports

• Another way of reducing a balance of payments deficit is to import less from other countries. In July 2010, U.S. imports decreased to $196.1 billion, from $200.3 billion in June 2010, according to the U.S. Census Bureau. A slow U.S. recovery from the recession of 2007 meant that U.S. consumers were consuming fewer goods, including imported goods. This too causes a country's balance of payments deficit to go down.

Government Policy

• Another factor that impacts a country's balance of payments situation is trade policies relating to specific countries. If a country has a protectionist trade policy, it has various ways of making imports more expensive. For instance, a government could levy a tax or tariff on imported goods. This makes the goods more expensive to its citizens who might then opt to buy local goods over the more expensive imported goods. This tends to reduce a country's balance of payments deficit. Countries also have various mutual trade agreements with other countries, whereby they could give preferred treatment to each other's products for import purposes. Such government policies impact a country's balance of payments situation

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18. what do you mean by positive economics and normative economics? Indicate their differences.

Positive economics The study of economics based on objective analysis. Most economists today focus on positive economic analysis, which uses what is and what has been occurring in an economy as the basis for any statements about the future. Positive economics stands in contrast to normative economics, which uses value judgments. For example, a positive economic statement would be: "Increasing the interest rate will encourage people to save." This is considered a positive economic statement because it does not contain value judgments and its accuracy can be tested. 

Normative economics A perspective on economics that incorporates subjectivity within its analyses. It is the study or presentation of "what ought to be" rather than what actually is. Normative economics deals heavily in value judgments and theoretical scenarios. It is the opposite of positive economics. Normative statements are often heard in the media because they tend to represent a theory or opinion rather than objective analysis. Normative economics is a valuable way to establish goals and generate new ideas, but it should not be used as a basis for policy decisions. An example of a normative economic statement would be, "We should cut taxes in half to increase disposable income levels"

The difference between positive economics and normative economics are --------

Positive economics Normative economics

Positive economics deals with what is while Normative economics deals with what should be.

Positive economics deals with facts Normative economics deals with opinions on what a

desirable economy should be.

Positive economics is also called descriptive

economics Normative economics is called policy economics.

Positive economic statements can be tested using

scientific methods Normative economics cannot be tested.

There is no relation of ethics here.

It is based on ethics and values.

Positive economics depends upon real experience and observation.

The subject of normative economics is related to development.

Positive economics based on real evidence. Normative economics describes about good or bad

 

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19. Explain the relationship of economics with (i) statistics and (ii) sociology?

Statistics:

Econometrics can be defined as the study in which the tools of economic theory, statistical inference and mathematics are systematically applied, using observed data, to the analysis of economic laws. It is therefore concerned with the "empirical determination of economic laws. Economic theories are written in mathematical form and are then analyzed using statistical methods. If the observed data are found to be incompatible with the predictions of the theory, it is rejected. Theories are accepted if the data are found to fit the theory."Econometrics is a branch of economics that applies statistical methods to the empirical study of economic theories and relationships. It is as a form of mathematical economics.

Economists base most theories and policies on statistics stats are a vital part of economics. Economics study trends and patterns based on stats used in economics: mean f tests, t tests, and regressions, confidence intervals stats are used to measure growth rates, inflation, and any relationship between two variables (regressions)

Sociology:

Sociology and Economics as social sciences have close relations. Relationship between the two is so close that one is often treated as the branch of the other, because society is greatly influenced by economic factors, and economic processes are largely determined by the environment of the society.

Economics deals with the economic activities of man. It deals with production, consumption and distribution of wealth. The economic factors play a vital role in the very aspect of our social life. Total development of individual depends very much on economic factors. Without economic conditions, the study of society is quite impossible. All the social problems are directly connected with the economic conditions of the people.

In the same way Economics is influenced by Sociology. Without the social background the study of Economics is quite impossible. Sociologists have contributed to the study of different aspects of economic organization. Property system, division of labour, occupations etc. are provided by a sociologist to an economist.

The area of co-operation between Sociology and Economics is widening. Economists are more and more making use of the sociological concepts in the study of economic problems. Economists are working with the sociologists in their study of the problems of economic development in underdeveloped countries. Combined efforts of both the experts may be of great practical help in meeting the challenges.

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20. what is meant by opportunity cost?

A benefit, profit, or value of something that must be given up to acquire or achieve something else. Since every resource (land, money, time, etc.) can be put to alternative uses, every action, choice, or decision has an associated opportunity cost.

Opportunity costs are fundamental costs in economics, and are used in computing cost benefit analysis of a project. Such costs, however, are not recorded in the account books but are recognized in decision making by computing the cash outlays and their resulting profit or loss. In economic terms, the opportunities forgone in the choice of one expenditure over others. For a consumer with a fixed income, the opportunity cost of buying a new dishwasher might be the value of a vacation trip never taken or several suits of clothes unbought. The concept of opportunity cost allows economists to examine the relative monetary values of various goods and services. The fundamental problem of economics is the issue of scarcity. Therefore we are concerned with the optimal use and distribution of these scarce resources. Wherever there is scarcity we are forced to make choices. If we have 20 0 tk we can spend it on an economic textbook or we can enjoy a meal in a restaurant. If we spend that 200 tk on a textbook, the opportunity cost is the restaurant meal we cannot afford to pay.

• Moving from Point A to B will lead to an increase in services (22-25). But, the opportunity cost is that output of goods falls from 15 to 11.

• Therefore, the opportunity cost of increasing consumption of services is the 4 goods foregone

At point C, the economy is inefficient. We can increase both goods and services without any opportunity cost.

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21. What is the implication of the opportunity cost curve being (i) convex ;( II) Concave; and (III) a straight line?

The implication of the opportunity cost curve being convex, concave and a straight line are given below--------

• Convex: (Increasing Cost) this is the standard convex production possibilities curve with increasing opportunity cost. Because it best reflects the economy, it is the one most commonly seen throughout the study of economics. In this case the economy foregoes increasing amounts of one good when producing more of the other.

• Straight Line: (Constant Cost): This is a straight line production possibility "curve" that indicates constant opportunity cost. In this case, opportunity cost does not change with production. This is not a realistic reflection of the entire economy, but it can represent the production of some goods. Here the economy foregoes the same amount of one good when producing more of the other.

• Concave: (Decreasing Cost ): This is concave production possibilities curve with decreasing opportunity cost. In this case, opportunity cost actually decreases with greater production. While opportunity cost can decrease in limited circumstances, this is unlikely to happen for the economy as a whole. To do so would contradict the assumption of technical efficiency and it is contrary to real world observations. In this case the economy foregoes decreasing amounts of one good when producing more of the other.

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22. What is the law of demand? Explain the law with the help of a diagram?

A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease and vice versa.

This law summarizes the effect price changes have on consumer behavior. For example, a consumer will purchase more pizzas if the price of pizza falls. The opposite is true if the price of pizza increases.

Explanation: In ordinary language the word demand means desire. But in economics demand means desire backed up by the enough money to pay for the good. Only desire can not be called demand. There is also functional relationship between price and demand. Second point is that demand is always per unit of time.

LAW OF DEMAND: -”Other things remaining the same when the price of any commodity increases its demand falls and when price falls its demand increases." According to the law of demand there is inverse relationship between demand and price. In simple language was can say that when the price of any commodity falls, people are tempted to purchase more commodities. On the other hand when price of any commodity rises people demand less quantity.

……….oooo………… 23. What is the law of supply?

Law of Supply: A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity of goods or services offered by suppliers increases and vice versa. As the price of a good increase, suppliers will attempt to maximize profits by increasing the quantity of the product sold.

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24.what is meant by the phrase “other things remaining the same” used by the law?

By the phrase “other things remaining the same”, law of demand assumes the following:

• Consumer’s income, tastes and preferences are constant.

• Prices of substitutes and complements do not change.

• There are no new substitutes for the goods under consideration.

• People do not speculate on prices. It means that if price of the commodity in question falls, people will not wait for further decline in prices.

• The commodity under consideration does not have prestige value.

The law of demand will not work as expected if any one of the aforementioned assumptions is violated.

……………oooo…………… 25. State, if any, the expectation of the law of demand?

The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will consume that good. In other words, the higher the price, the lower the quantity demanded. This principle is illustrated when _____________ a) Company A has a monopoly over the widget market so an increase in widget price has little effect on the quantity demanded. b) A manufacturer of luxury cars noticed that its customer base is relatively unresponsive to changes in price. c) A city experiences an increase in both gasoline prices and the number of people taking public transportation. d) An increase in the number of computer retailers led to decrease in the average price of computers. e) A reduction in the price of oranges from $2 per pound to $1 per pound results in 75 pounds of oranges being sold as opposed to 50 pounds.

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26. Using formulas, distinguish between price elasticity of demand and income elasticity of demand?

Price elasticity Income elasticity

1. (Equation) Price elasticity of demand = (percentage change in quantity demanded) / (percentage change in price).

1. (Equation) Income elasticity of demand = (percentage change in quantity demanded) / (percentage change in income).

2. Quantity demanded is always negatively related to the price, which makes the price elasticity of demand a negative number mathematically.

2. For normal goods, the quantity demanded increases when income increases. Therefore, the income elasticity is positive.

3. In economics, we often ignore the negative sign and represent the elasticity as a positive number.

3. For inferior goods, the quantity demanded decreases when income increases. Therefore, the income elasticity is negative.

4. When price is high and quantity demanded is low, the demand is elastic. If price increases, total revenue decreases.

4. Among normal goods, for necessities, income elasticity is small because they are necessary to our lives and people still need them even though the income is low.

5. Elasticity changes at different prices along the linear demand curve.

5. For luxuries, income elasticity is large because people can choose not to buy them if their income is low

6. When price is low and quantity demanded is high, the demand is inelastic. If price increases, total revenue increases.

6. Income elasticity of demand measures the responsiveness of quantity demanded to the change of income.

27. What is the importance of the concept of price elasticity of demand in real life?

1. Determination of price policy:

While fixing the price of this product, a businessman has to consider the elasticity of demand for the product. He should consider whether a lowering of price will stimulate demand for his product, and if so to what extent and whether his profits will also increase a result thereof. If the increase in his sales is more than proportionate, to the reduction in price his total revenue will increase and his profits might be larger.

2. Price discrimination:

Price discrimination refers to the act of selling the technically same products at different prices to different section of consumers or in different in sub-markets.

3. Shifting of tax burden:

To what extent a producer can shift the burden of indirect tax to the buyers by increasing price of his product depends upon the degree of elasticity of demand.

 

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4. Taxation and subsidy policy: The government can impose higher taxes and collect more revenue if the demand for the commodity on which a tax is to be levied is inelastic. On the other hand, in ease of a commodity with elastic demand high tax rates may fail to bring in the required revenue for the government.  5. Importance in international trade: The concept of elasticity of demand is of crucial importance in many aspects of international trade. The success of the policy of devaluation to correct the adverse balance of payment depends upon the elasticity of demand for exports and imports of the country.  6. Importance in the determination of factors prices: Factor with an inelastic demand can always command a higher price as compared to a factor with relatively elastic demand.  7. Determination of sale policy for supper markets: Super Markets is a market where in a variety of goods are sold by a single organization. These items are generally of mass consumption.  8. Pricing of joint supply products: The goods that are produced by a single production process are joint supply products. The cost of production of these goods is also joint.  9. Public utilities: The nationalization of public utility services can also be justified with the help of elasticity of demand. Demand for public utilities such as electricity, water supply, post and telegraph, public transportation etc. is generally inelastic in nature.                                                                                     10. Output decisions:  The elasticity of demand helps the businessman to decide about production. A businessman chooses the optimum product‐ mix on the basis of elasticity of demand for various products.  

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28. Price elasticity of demand when the price per unit of a product falls from taka 5 to taka 3, and the quantity purchased rises from 5 to 8 units as a result.

 

It is shown that when the price of the product was tk.5, than the quantity of purchased product demand was 5 unit, but when its price falls from taka 5 to taka 3, than the quantity of purchased product demand increases from 5 unit to 8 unit.So the elasticity of demand is  Q2‐Q1/Q2+Q1÷2                       P2‐p1/P2+P1÷2 

 

                         

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29. The distinguishing features of prefect competition and monopolistic competition. Give at least one example of a firm in each of this market?

Features of Perfect Competition 

1. Large number: perfect competition, there must be large number of buyers and sellers. Each buyer buys a small quantity of the total amount. Each seller is so large that no single buyer or seller can influence the price and affect the market.

2. Homogeneous product: Under perfect competition, the product offered for sale by all the seller must be identical in every respect. The goods offered for sale are perfect substitutes of one another. Buyers have no special preference for the product of a particular seller. No seller can raise the price above the prevailing price or lower the price below the prevailing price.

3. Free entry and exit: Under perfect competition, there will be no restriction on the entry and exit of both buyers and sellers. If the existing sellers start making abnormal profits, new sellers should be able to enter the market freely. This will bring down the abnormal profits to the normal level.

4. Perfect knowledge: Perfect competition implies perfect knowledge on the part of buyers and sellers regarding the market conditions. As a result, no buyer will be prepared to pay a price higher than the prevailing price. Sellers will not charge a price higher or lower than the prevailing price.

5. Perfect mobility of factors of production: The second perfection mobility of factors of production from one use to another use. This feature ensures that all sellers or firms get equal advantages so far as services of factors of production are concerned.

6. Absence of transport cost: Under perfect competition transport, cost does not exist. Since commodities have, the same price it logically follows that there will be no transport cost.

7. No attachment:                                                                                                                                    There is no attachment between the buyers and sellers under perfect competition. Since products of all sellers are identical and their prices are the same a buyer is free to buy the commodity from any seller he likes.

Examples of Perfect Competition

Agricultural markets: are the closest representations of perfectly competitive markets. These are marketplaces which have a large number of vendors selling fruit, vegetables, and poultry - namely, identical produce. The prices of goods are competitive, and no single seller can yield an influence over the pricing. Consumers are free to pick any seller, depending upon their choice.

 

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Important features of monopolistic competition

1. Existence of large number of firms:

The first important feature of monopolistic competition is that there is a large number of firms satisfying the market demand for the product. As there are a large number of firms under monopolistic competition

(2) Product differentiations:

The various firms under monopolistic competition bring out differentiated products which are relatively close substitutes for each other. So their prices cannot be very much different from each other.

(3) Some influence over the price:

As the products are close substitutes of others any reduction of price of a commodity by a seller will attract some customers of other products. Thus with a fall in price quantity demanded increases. It therefore, implies that the demand curve of a firm under monopolistic competition slopes downward and marginal revenue curve lies below it.

(4) Absence of firm's interdependence:

Under oligopoly, the firms are dependent upon each other and can't fix up price independently. But under monopolistic competition the case is not so. Under monopolistic competition each firm acts more or less independently

(5) Non-price competition:

Firms under monopolistic competition incur a considerable expenditure on advertisement and selling costs so as to win over customers. In order to promote sale firms follow definite ‐methods of competing rivals other than price. Advertisement is a prominent example of non‐price competition. 

 (6) Freedom of entry and exit: 

In a monopolistic competition it is easy for new firms to enter into an existing firm or to leave the industry.  

Monopolistic Competition Examples 

A very nice example for monopolistic competition is farmers: Farmers produce crops for the entire world population, but again they have different characteristics by virtue of things like size and quality. ………..oooooo………..

 

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30. How equilibrium price and output are determined by a monopoly firm?

Price and Output Determination in Monopolistic firm Monopolistically competitive industries are made up of a large number of firms, each small relative to the size of the total market. Thus, no one firm can affect market price by virtue of its size alone. But firms differentiate their products, and by so doing gain some control over price.

Price/Output Determination in the Short Run

Since the firm has a downward-sloping demand curve, it will also have a downward-sloping marginal revenue (MR) curve. A profit-maximizing firm produces where marginal cost (MC) equals marginal revenue (q0 in the graph below) and charges the price determined by demand (P0).

In panel (a) of the figure, the monopolistic competitor will make a profit. However, like a monopoly, a monopolistic competitor is not guaranteed to make a profit in the short run. The firm may make a loss in the short run; its profitability will depend on the demand. This is shown in panel (b) Price/Output Determination in the Long Run The action in a monopolistically competitive market occurs when the market moves to the long run. Since other competitors selling a similar good can enter the market, two changes will occur: Firm demand will decrease. Firm demand will become more elastic.

As more firms enter the market, the demand for any one firm will decrease, since the firm is now sharing the market with other firms.

A decrease in demand implies a leftward shift in the demand curve. Since the entering firms are producing substitutes for the existing firm’s good, the demand for the existing good will become more elastic. An increase in elasticity implies the demand curve is getting flatter. By combining these effects, as a monopolistically competitive market moves from short-run profits to the long run, the firm’s demand curve will move to the left and get flatter. Furthermore, the demand curve will

 

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continue to move until there are no more firms entering the market. Firms will stop entering the market when profits are zero.

This occurs when the demand curve just barely touches (i.e., is tangent to) the ATC curve, as shown in the figure above. Once the demand curve is tangent to the ATC curve, the profit-maximizing price is equal to the average total cost, and thus, profits are zero. In the long run, competition will drive monopolistically competitive markets to make zero profits. The goal of the firm is to try to maintain as much short-run profit as possible by differentiating its product. Eventually, though, in the long run, economic profits will be zero.

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31. What does production means in economics?

The production of final goods and services taking place during a given time period. The emphasis here is on time period, especially the CURRENT time period. Gross domestic product is the macroeconomy's prime measure of current production. Current production is best contrasted with transactions for past production and future production, both of which are excluded from gross domestic product. 6(b) what is meant by fixed cost and variable cost and show the correct position of total cost, total fixed cost and total variable cost curve in a diagram.

A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses that have to be paid by a company, independent of any business activity. It is one of the two components of the total cost of a good or service, along with variable cost.

An example of a fixed cost would be a company's lease on a building. If a company has to pay $10,000 each month to cover the cost of the lease but does not manufacture anything during the month, the lease payment is still due in full. A corporate expense that varies with production output. Variable costs are those costs that vary depending on a company's production volume; they rise as production increases and fall as production decreases. Variable costs differ from fixed costs such as rent, advertising, insurance and office supplies, which tend to remain the same regardless of production output. Fixed costs and variable costs comprise total cost.

Variable costs can include direct material costs or direct labor costs necessary to complete a certain project. For example, a company may have variable costs associated with the packaging of one of its products. As the company moves more of this product, the costs for packaging will increase

Total cost, Total fixed cost, total variable cost

1. This graph shows the relationship between fixed, variable, and total cost with a production function that first has increasing and then decreasing marginal productivity. As stated earlier, total cost can be broken down into total fixed cost and total variable cost. The graph of total fixed cost is simply a horizontal line since total fixed cost is constant and not dependent on output quantity. Variable cost, on the other hand, is an increasing function in quantity and has a similar shape to the total cost curve, which is a result of the fact that total fixed cost and total variable cost have to add to total cost. The graph for total variable cost starts at the origin because the variable cost of producing zero units of output, by definition, is zero.

 

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32. What is inflation and why does it occur?

Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.  The value of a dollar does not stay constant when there is inflation. The value of a dollar is observed in terms of purchasing power, which is the real, tangible goods that money can buy. When inflation goes up, there is a decline in the purchasing power of money. In terms of economics, inflation can be defined as the rise in the prices (general level) of services and goods in an economy over a certain period of time. In earlier days, the term inflation was used to refer the increases in supply of money, but these days the “inflation” is purely used to refer the increase in levels of prices. On the other hand inflation can also be defined as decrease in the value of money (or loss of the purchasing power in some medium of the commodity exchange). Most accurate measure of the inflation is known as “inflation rate”. Inflation rate is defined as percentage change in the price index over a certain period of time. In most simple words, you can conclude that inflation occurs in an economy when the net demand for services and goods exceeds the total supply. Now, because of less supply, the net prices of these services/goods increases and this kind of situation is known as inflation. 

33. Account for the recent increase in the inflationary pressure in Bangladesh and find remedies?

In recent months, we see several opinion pieces on the various aspects of inflation in Bangladesh. Inflationary pressure has been increasing again in recent months. The latest figure shows a 7.41 percent inflation in November. Fuel import, energy price hike and Taka’s devaluation against the US dollar have combined to increase Bangladesh’s non-food inflation. Food inflation has also increased, although not by the same amount.

The country’s general inflation has also been in double digits for some time now. The last time it happened was in the early 1980s. In addition to price hike of electricity and fuel oils, and devaluation of taka, the rise in government’s spending and credit growth in both public and private sectors have also contributed to the rise in inflation.

Prices of a number of essential food commodities have also increased in recent months. However, despite the best of intention of the Ministry of Food, the retail prices of food grains in the local market have increased significantly in recent months and are likely to increase further until the next harvest. This raises concerns about economic stability and food insecurity as the purchasing power of low-income families has been reduced.

Last year, the International Monetary Fund (IMF) had asked the Bangladesh Bank to tighten monetary policy to contain inflation. The IMF recommended, among other measures, safeguarding reserves through continued exchange rate flexibility and interventions only to

 

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smooth short-term volatility, and addressing financial sector vulnerabilities by strengthening and enforcing bank supervisory framework and market oversight and ensuring sound governance.

Over the last few months, the Bangladesh Bank has followed a restrictive monetary policy by raising rates on a number of occasions. The Bank has also increased statutory liquidity ratio and cash reserve requirement in an effort to keep inflation in check.

However, the problem with such an effort is that these policy measures would be adequate if only excess demand were driving inflation. Inflation caused by changes on the supply side of the market would remain mostly unaffected by the policies recommended by the IMF and undertaken by the Bangladesh Bank.

A look at the causes of inflation would show that in recent months changes the supply side has been as much of a factor in raising the inflation rate as changes in the demand side. In short, inflation in Bangladesh has been both a cost-push and demand-pull phenomena.

Rapid increase in the prices of food items eroded the purchasing power as well as standard of living of the poor, government and non-government employees, industrial workers, the unemployed and the people with limited income. This has forced a section of the population to drop below the poverty line.

Remedies of inflation:

1. REDUCE DEMAND PRESSURES

If inflation is caused by high demand then

* Raise interest rates to reduce consumers disposable incomes * Raise interest rates to discourage borrowing and demand * Raise taxes to reduce disposable income and spending * These policies should all reduce peoples ability to spend too much money

2 REDUCE COST PUSH PRESSURES

If inflation is caused by high costs

• Limit wage increases if possible e.g. public sector workers • Force electricity and gas companies to hold their prices • Increase the value of £ in order to reduce the cost of importing

3. REDUCE MONEY SUPPLY PRESSURES

If inflation is caused by too much money in the economy

• Print less money • Withdraw some money from circulation.

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34. How does Foreign Direct Investment (FDI) help accelerates a country’s economic development?

One of the advantages of foreign direct investment is that it helps in the economic development of the particular country where the investment is being made.

This is especially applicable for the economically developing countries. During the decade of the 90s foreign direct investment was one of the major external sources of financing for most of the countries that were growing from an economic perspective. It has also been observed that foreign direct investment has helped several countries when they have faced economic hardships.

An example of this could be seen in some countries of the East Asian region. It was observed during the financial problems of 1997-98 that the amount of foreign direct investment made in these countries was pretty steady. The other forms of cash inflows in a country like debt flows and portfolio equity had suffered major setbacks. Similar observations have been made in Latin America in the 1980s and in Mexico in 1994-95.

Foreign direct investment also permits the transfer of technologies. This is done basically in the way of provision of capital inputs. The importance of this factor lies in the fact that this transfer of technologies cannot be accomplished by way oftrading of goods and services as well as investment of financial resources. It also assists in the promotion of the competition within the local input market of a country. The countries that get foreign direct investment from another country can also develop the human capital resources by getting their employees to receive training on the operations of a particular business. The profits that are generated by the foreign direct investments that are made in that country can be used for the purpose of making contributions to the revenues of corporate taxes of the recipient country. Foreign direct investment helps in the creation of new jobs in a particular country. It also helps in increasing the salaries of the workers. This enables them to get access to a better lifestyle and more facilities in life. It has normally been observed that foreign direct investment allows for the development of the manufacturing sector of the recipient country.

Foreign direct investment can also bring in advanced technology and skill set in a country. There is also some scope for new research activities being undertaken. Foreign direct investment assists in increasing the income that is generated through revenues realized through taxation. It also plays a crucial role in the context of rise in the productivity of the host countries. In case of countries that make foreign direct investment in other countries this process has positive impact as well. In case of these countries, their companies get an opportunity to explore newer markets and thereby generate more income and profits.

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35. What ways Bangladesh could attract more FDI in the country?

Some of the recent major measures undertaken by the government to attract FDI are: a) Private Export processing Zone Act has been enacted. Korea has set up a private EPZ at Chittagong. b) A Regulatory Reform Commission (RRC) has been set up. c) A permanent Law Reform Commission has been set up to ensure greater transparency and predictability in the way rules and regulations work. d) An Administrative Reform Commission has been set up e) The company law 1913 has been updated and revised in 1994. f) The Industrial relations Act has been enacted to enhance labor market efficiency. g) Power generation in the private sector has been allowed. h) Telecommunication in the private sector has been allowed. Foreign Direct Investment in Bangladesh 107 i) Multiple entry visas to visiting foreign investors are being given by all the Bangladesh Missions abroad. j) Provision made for allowing import of standby generators free of tax and sale of excess electricity to nearby industrial units without permission from any agency provided own distribution line is used. k) Licenses issued to six cellular telecom phone operators, which illustrate governments Commitment to a competitive and market economy. l) Establishment of Bangladesh Better Business Forum (BBBF) On the other hand, some of the incentives allowed for attracting FDI in Bangladesh are: i) No ceiling on investment ii) 100% foreign equity participation allowed iii) Tax holiday up to 10 years iv) Allowances of accelerated depreciation in lieu of tax holiday v) Tax exemption and duty free importation of capital machinery and spare parts for 100% export oriented industries vi) Residency permits for foreign nationals vii) No restriction on issuing work permit to a foreign national viii) Capital, profit and dividend repatriation facilities ix) Term loans and working capital loans from local banks x) Avoidance of double taxation on the basis of bilateral agreement xi) Tax exemption on the interest of payable to foreign loans and on royalties and technical know how fees xii) Open exchange control xiii) Multiple entry visas for investors xiv) Convertibility of Taka for current account transactions xv) Protection of foreign investment through ‘The Foreign Private Investment Act-1980’ and Settlement of Investment Dispute (ICSID), The Multilateral Investment Guarantee (MIGA), and World Intellectual Property Organization (WIPO). xvi) Adequate protection is available for intellectual property rights such as patents, designs, trademarks and copyrights. …………ooooo…………..

 

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36. compares the definition of economics offered by Adam smith and Lionel Robbins?

Adam Smith wrote a book in 1776 whose title was “Wealth of Nations”. In his book he discussed the word ‘wealth’ through its four aspects: production of wealth, exchange of wealth, distribution of wealth and consumption of wealth. Therefore it can be said according to Adam Smith: “Economics is a science of wealth”. Wealth means goods and services transacted with the help of money. Let’s discuss four aspects of wealth; first one is production of wealth it shows as to how goods and services are produced. Goods and services are produced by the combination of four factors of production i.e. land, labour, capital and organization. Second aspect is exchange of wealth there are many procedures of goods and services in a society. Every procedure produces goods and services more than his personal requirement. The exchange of wealth enables everyone in the society to satisfy his multiple wants. Third aspect is distribution of wealth, which means the distribution of goods and services among different sections or individuals of a society. As known by explanation of exchange of wealth that procedures of goods and services exchange the surplus wealth with each other throughout the year. The last and forth aspect is consumption of wealth that is using up the utility of goods and services for the satisfaction of wants is called the consumption of wealth.

"Economics is the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses," Robbins wrote. According to Robbins, economics is a positive science but in reality it is not positive science deals with material things, the results of which are certain but economics deals with human behavior which is uncertain. Only A Valuable Theory: Robbins has reduced economics merely to the valuationtheory. According to 'Frazer' economics is more than a valuation theory. Robbins has widened the scope of economics extra ordinary. He has included number of matters in economics which are in fact not discussed in economics. According to Robbins, it covers the whole human life. For example, if you are to choose between the worship of God and that of Mammon (riches), it will be an economic problem while it is spiritual issue. According to Robbins, economics has no normative aspect while it is incorrect. Normative science is that which deals with the matter of material well beings. It is also pointed out that Robbins definition ignores the macro aspect like determination of national income and employment. But in reality this is very important work of economists. It is also pointed out that Robbins definition has made economics colorless, abstract and difficult. It is in fact a definition of economics only for economists. A common man cannot get any utility from it. Human Love Missing: Human love is entirely missing in Robbins definition of economics. He has not mentioned any thing about man's welfare. According to Robbins, an economist is aneutral person. He has no concern whether the ends are good or bad. But in reality an economist cannot be neutral person. He must give views on the solution of actual economic problems. Some writers point out that it fails to explain the problem of unemployment which is a main economic problem present time. According to Robbins, means are always scarce. But in some countries, one of the economic means, i.e., labour is not scarce. It means Robbins definition is based on wrong assumption. The theory of economic growth or economic development has become the importantbranch of economics. This definition ignores it. It means it should be discussed in economics that how does economy grow and which factors bring about increase in nation income and productive capacity of the economy.

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37. Discuss the subject matter of economics?

There are two approaches to the study of the subject matter of economics. 1. Traditional Approach 2. Modern approach 1. Traditional Approach: The traditional approach was introduced by classical economists. Classical means something, which has been followed for a long period of time. It functions as the basis from which new ideas are developed. It must have its originality. The ideas of classical economists are the basis of modern economic theories. According to the traditional approach, economics deals with man. Yet economics does not deal with the body or the mind of man. Economics deals with the activities of man. Economics deals only with those activities of man through which man tries to satisfy his economic wants. There are three fundamental economic wants. a) Food b) Clothing c) Shelter In order to satisfy the economic wants man uses goods and services. This is known as consumption in economics. In the Theory of Consumption we try to analyze the behavior of the consumer. For the purpose of consumption, there is a need for production. In the Theory of Production we try to analyze the behavior of the producer. We try to find out how the producer will allocate his resources so as to get the maximum profit out of his production. For the purpose of production, we must take the help of the factors of production. There arefour factors of production, such as land, labour, capital and organization. 2. Modern Approach: according to modern approach of economics the subject matter of Economics can be divided into a) Micro Economics b) Macro Economics a) When we study the problem of Economics from a particular point of view, such as one individual consumer, one firm, the price of one commodity, that is known as Micro Economics. b) When we study the problem as a whole, all consumers, all commodities and all producers, it is known as Macro Economics. The important components of the subject matter of economics are: 1. The presence of scarcity; 2. The behavior of individuals who are faced with that scarcity; 3. Interaction of individuals who are faced with scarcity; and 4. The existence of institutions to facilitate the interaction of individuals who are faced with scarcity. …………oooooooo………..

 

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38. Explain the term want and scarcity as understood in economics? Want: This is often thought of as a psychological desire which makes life just a little more enjoyable, but which is not physiological necessary to life. You need oxygen, but you want a hot fudge sundae. Satisfaction is achieved by fulfilling wants. Generally, the terms want and desire are used to mean the same thing. But in economics want refers to the desire which is backed by the ability and willingness to satisfy it. A simple desire for anything does not become a want unless the person has the capacity to satisfy it and is willing to apply that capacity for satisfying the desire. 

Therefore, human wants may be defined as effective desires for particular things which express themselves in the efforts or sacrifices necessary to obtain them. 

There are four essential elements of human wants. i. Scarcity of things ii. Desire to get the scarce things iii. Sufficient amount of money to satisfy the desire. iv. Willingness to spend the money to get the desired things. 

Human wants are unlimited, varied and diverse. They encourage people to undertake economic activity. Satisfactions of wants through production and exchange of goods and services is the basic aim of economic activity. 

Wants may be classified into two broad categories. 1. Primary or basic wants e.g., food, clothing and shelter which are common to all persons; and 2. Secondary or non‐basic wants e.g., education, travelling, etc., which differ from person to person. A person first of all tries to satisfy his primary wants at all costs. Secondary wants are satisfied as and when the necessary resources become available. 

Scarcity: An economic principle in which a limited supply of a good, coupled with a high demand for that good, results in a mismatch between the desired supply and demand equilibrium. In pricing theory, the scarcity principle suggests that the price for a scarce good should rise until equilibrium is reached between supply and demand. However, this would result in the restricted exclusion of the good only to those who can afford it. If the scarce resource happens to be grain, for example, individuals will not be able to attain their basic needs. When a product is scarce, consumers are faced with conducting their own cost-benefit analysis, since a product in high demand but low supply will likely be expensive. This means that the consumer should only take action and purchase the product if he or she sees a greater benefit from having the product than the cost associated with obtaining it. ……….oooooooo……….

 

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2(b) discusses the importance of multiplicity of wants and scarcity of resource in economics?

 

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39. Distinguishing features of market structure (1) perfect competition, monopoly, monopolistic competition and oligopoly?

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40.Market structure of the following product(i)water supply in Dhaka city(ii)Rice market(iii)Mobile telephone service (iv)Banking services?

(i)water supply in Dhaka:

The Dhaka Water and Sewerage Authority (DWASA) currently supplies water to about 70% of the population of the Dhaka City Corporation (DCC) and its suburbs through a distribution network. The four million people living in the 3,000 Dhaka slums also rely on DWASA's piped water, as there is no other reliable source of water available; but public standpipes are always remotely located. DWASA's sewerage network covers only about 1 1 0 km2. Trunk sewers suffered major damage during the 1998 and 2004 floods; as a result, only about 40% of the waste water generated by the existing 50,000 Connections currently reach the waste water treatment plant. High standard buildings dispose of their black waters in septic tanks and their grey waters in storm water drains. Lower income households rely DWASA is also responsible for developing and operating the underground storm water drainage system that covers an area of about 140 km2; Dhaka City Corporation is in charge of surface drains. Natural channels and wetlands that help Dhaka cope with storm water flows are rapidly being destroyed by the urban development. Public health is affected by the limited coverage of both the water supply and waste water facilities and recurrent flooding. DWASA needs to update its water supply master plan to help protect existing sources, develop new ones, and rationalize its distribution network. DWASA also needs to update its sanitation strategy and its wastewater management master plan, as well as its storm water drainage master plan, to ensure that minimum retention capacity of storm water flows is reserved in the city whose population is expanding at a rate of almost 0.8 million per year. The Government of Bangladesh has requested assistance from the World Bank to prepare the proposed project to improve water supply, sewerage disposal, and sanitation and storm water drainage facilities in Dhaka. (ii) Rice market:

Rice is very important because about 40% farmers in Bangladesh are producing rice. By which most people in Bangladesh regulate their living condition. Rice is the seed of the monocot plant Orzo sativa. As acereal grain, it is the most important food for a large part of the world’s human population, especially in East and South Asia, the Middle East, Latin America, and the West Indies. It is the grain with the second-highest worldwide production. Rice production increases must be achieved at a faster rate than in most other countries, while the land planted to rice is not expanding. But in our country there is some major factor which is affect on production of rice price. There are some causes which are affecting on our production of rice Such as 1.All kinds of natural disaster. Rice price is high because we are not self-sufficient in producing rice and we import rice from many countries. On the other hand we are some facing some problem on production process such down technology corruption , syndicate , middle man .lack of improve technology ,lack of capital , hybrid and lack of supply and inputs. Mostly consumers and producer are affected.

 

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(iii) Mobile phone services:

There is a wide choice of mobile telephone services. You can choose different types of services; including pre-pay or contract services. There are also different pricing options and additional services to opt for, as well as different makes, models and types of mobile phone handsets to choose from. Before you buy, you should carefully examine what each mobile phone services offers to determine what's best for you and your budget. (iv) Banking services:

Banking service in Bangladesh is characterized as a highly competitive and highly regulated sector. With a good number of banks already in operation and a few more in the pipeline, the market is becoming increasingly competitive by the day.With the global slowdown in the face of rising competition, the commercial banks are constantly looking for ways to develop their market and product offers to remain ahead of others. A significant amount of regulation by Bangladesh Bank prevents the scope of introducing newer products into the market and thereby restricts a banks’ ability to outperform others with a diversified product range.

However, recent trends have shown banks shifting away from vanilla products (basic products) towards higher value added products that are highly structured, to meet the needs of the clients.

Involvement of the banking sector in different financial events is increasing day by day. At the same time the banking process is becoming faster, easier and the banking arena is becoming wider. As the demand for better service increases, the banking organizations are coming with innovative ideas. In order to survive in the competitive field of the banking sector, all banking organizations are looking for better service opportunities to provide to their clients.

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41. What is meant by production function? A production function shows the relationship between inputs of capital and labor and other factors and the outputs of goods and services. Production of goods requires resources or inputs. These inputs are called factors of production named as land, labour, capital and organization. What ss Production Function in Economics with one or two variables input. A rational producer is always interested that he should get the maximum output from the set of resources or inputs available to him. He would like to combine these inputs in a technical efficient manner so that he obtains maximum desired output of goods.

The relationship between the inputs and the resulting output is described as production function in Economics. Maximum desired output of goods.

42. Describes a production indifference curve and its properties?

A diagram depicting equal levels of utility (satisfaction) for a consumer faced with various combinations of goods.

As an example, consider the diagram above. This consumer would be most satisfied with any combination of products along curve U3. This consumer would be indifferent between combination Qa1, Qb1, and Qa2, Qb2.

Properties of Indifference Curves

The main attributes or properties or characteristics of indifference curves are as follows:

 

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1. Indifference Curves are negatively Sloped: The indifference curves must slope downward from left to right. As the consumer increases the consumption of X commodity, he has to give up certain units of Y commodity in order to maintain the same level of satisfaction. In the above diagram, two combinations of commodity cooking oil and commodity wheat is shown by the points a and b on the same indifference curve. The consumer is indifferent towards points a and b as they represent equal level of satisfaction.

(2) Higher Indifference Curve Represents Higher Level of Satisfaction:

Indifference curve that lies above and to the right of another indifference curve represents a higher level of satisfaction. The combination of goods which lies on a higher indifference curve will be preferred by a consumer to the combination which lies on a lower indifference curve. In this diagram, there are three indifference curves, IC1, IC2 and IC3 which represents different levels of satisfaction. The indifference curve IC3 shows greater amount of satisfaction and it contains more of both goods than IC2 and IC1. IC3 > IC2> IC1. (3) Indifference Curves are Convex to the Origin: This is an important property of indifference curves. They are convex to the origin. As the consumer substitute’s commodity X for commodity Y, the marginal rate of substitution diminishes as X for Y along an indifference curve. The Slope of the curve is referred as the Marginal Rate of Substitution. The Marginal Rate of Substitution is the rate at which the consumer must sacrifice units of one commodity to obtain one more unit of another commodity. Diagram:In the above diagram, as the consumer moves from A to B to C to D, the willingness to substitute good X for good Y diminishes. The slope of IC is negative. In the above diagram, diminishing MRSxy is depicted as the consumer is giving AF>BQ>CR units of Y for PB=QC=RD units of X. Thus indifference curve is steeper towards the Y axis and gradual towards the X axis. It is convex to the origin. (4) Indifference Curves cannot Intersect Each Other:

The indifference curves cannot intersect each other. It is because at the point of tangency, the higher curve will give as much as of the two commodities as is given by the lower indifference curve. This is absurd and impossible.

In the above diagram, two indifference curves are showing cutting each other at point B. The combinations represented by points B and F given equal satisfaction to the consumer because both lie

on the same indifference curve IC2. Similarly the combinations shows by points B and E on indifference curve IC1 give equal satisfaction top the consumer.

(5) Indifference Curves do not Touch the Horizontal or Vertical Axis:

One of the basic assumptions of indifference curves is that the consumer purchases combinations of different commodities. He is not supposed to purchase only one commodity. In that case indifference curve will touch one axis. This violates the basic assumption of indifference curves.

Diagram: In the above diagram, it is shown that the in difference IC touches Y axis at point P and X axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such indifference curves are against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.

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43. what do you mean returns to scale? "Returns to scale" is a term that is used to describe the type of changes that may occur to the output of a production process when some type of change takes place with the inputs involved in the process. Within the broader context of the returns to scale, the results are often qualified as increasing, decreasing, or constant, depending on what has occurred with the inputs and how those changes impacted the output of the production process. Identifying the returns to scale aids businesses in determining if those changes are positive for the company, and may even aid in providing valuable data that can be used to reverse an emerging negative trend. One way to understand returns to scale is to think in terms of what will happen when factors shift and have an effect on the total output of the operation. For example, if the production line is shut down for a few days due to an equipment failure and there is no time to make up that lost time later in the accounting period, there is a good chance that the output for the period will be adversely affected in terms of finished units produced. When considered in light of the costs of repairing and restarting the machinery are taken into consideration, this may indicate a decreased returns to scale. At the same time, if changes in the production process make it possible to produce more finished units with the same level of resources consumed, those changes in the input factors lead to increased output that may be identified as an increased returns to scale. When changes to the inputs make no real difference in the relationship between inputs and outputs, the production is said to be constant returns to scale. 5. Distinguish between increasing returnto scale,constant returnto scale and decreasing returnto scale? Increasing Returns to Scale Increasing returns to scale is closely associated with economies of scale Increasing returns to scale occurs when a firm increases its inputs, and a more-than-proportionate increase in production results. For example, in year one a firm employs 200 workers, uses 50 machines, and produces 1,000 products. In year two it employs 400 workers, uses 100 machines (inputs doubled), and produces 2,500 products (output more than doubled). When input prices remain constant, increasing returns to scale results in decreasing long-run average costs (economies of scale). A firm that gets bigger experiences lower costs because of increased specialization, more efficient use of large pieces of machinery (for example, use of assembly lines), volume discounts, and other advantages of producing in large quantities. Decreasing Returns to Scale Decreasing returns to scale is closely associated with diseconomies of scale. Decreasing returns to scale happens when the firm's output rises proportionately less than its inputs rise. For example, in year one, a firm employs 200 workers, uses 50 machines, and produces 1,000 products. In year two it employs 400 workers, uses 100 machines (inputs doubled), and produces 1,500 products When input prices remain constant, decreasing returns to scale results in increasing long-run average costs (diseconomies of scale). An organization may become too big, thus creating too many layers of management, too many departments, and too much red tape. This leads to a lack of communications, inefficiency, delays in decision-making and inefficient production. Constant Returns to Scale Constant returns to scale occurs when the firm's output rises proportionate to the increase in inputs. Problem: In the example above, after doubling the inputs in year one, what would output have to be in year two for the firm to experience constant returns to scale? Solution: 2,000 products. At 2,000 products, the output doubles. Because the inputs double, the increase in production is proportionate. By definition, this equates to constant returns to scale.

 

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44. Distinguishes between gross national product and net national product?

Gross National Product Net National Product

An economic statistic that includes GDP, plus any income earned by residents from overseas investments, minus income earned within the domestic economy by overseas residents.

The monetary value of finished goods and services produced by a country's citizens, whether overseas or resident, in the time period being measured , minus the amount of GNP required to purchase new goods to maintain existing stock

Gross National Product (GNP) measures the total income earned by residents of a nation

Net National Product (NNP) is GNP net of the capital stock used up

GNP = GDP + Net Factor Income From Abroad

NNP = GNP − Depreciation

Gross National Product (GNP) represents the market value of all goods and services produced by nationals

Net national product, or NNP, represents a mathematical result of a country's production after accounting for depreciation of inventory.

45.what is meant by the problem of double counting in the measurement of national income? A term used to describe the problematic situation that occurs when the costs of intermediate goods used by a business to produce a finished good are included in the computation of a nation's gross domestic product. Since the final price of a good already includes the value of all the intermediate goods used to produce it, including the price of intermediate goods when calculating gross domestic product would involve double counting. Double counting is an error caused as a result of illogical calculation. This term is used in economics to refer to the faulty practice of counting the value of a nation's goods more than once. Since goods are produced in stages, through specialized channels of production, many intermediate goods are used to produce a final good. If the values of each of these intermediate goods is added together, without subtracting expenditures incurred during the production process, the error of double counting will be committed. …………….oooooooo…………………… 46. How can the double counting problem be avoided? The simplest way to think about national income is to consider what happens when one product is manufactured and sold. Typically, goods are produced in a number of 'stages', where raw materials are converted by firms at one stage, then sold to firms at the next stage. Value is added at each, intermediate, stage, and, at the final stage, the product is given a retail selling price. The retail price reflects the value added in terms of all the resources used in all the previous stages of production. In accounting terms, only the value of final output is recorded. To avoid the problem of double counting, only the value of the final stage, the retail price, is included, and not the value added in all the intermediate stages - the costs of production, plus profits. In short, national income is the value of all the final output of goods and services produced in one year. ………..oooooooo………..

 

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47. What is unemployment and what are its various types? Unemployment occurs when a person who is actively searching for employment is unable to find work. Unemployment is often used as a measure of the health of the economy. The most frequently cited measure of unemployment is the unemployment rate. This is the number of unemployed persons divided by the number of people in the labor force. 

Types of Unemployment: Various social thinkers and economists have categorized the unemployment in various ways. Generally unemployment of two types: 1) Voluntary unemployment 2) Involuntary unemployment. 1) Voluntary unemployment: In this type of unemployment a person is out of job of his own desire. He does not work on the prevalent or prescribed wages. Either he wants higher wages or does not want to work at all. It is in fact an imposed situation. In economic terminology, this situation is “voluntary unemployment”. 2) Involuntary unemployment: In these types of situation the person who is unemployed has no say in the matter. It means that a person is separated from remunerative work and denied of wages although he is capable of earning his wages and is also anxious to earn them  Types of Unemployment According to Hock: Alfred Hock has categorized unemployment under the following 5 heads: 1) Cyclical unemployment: This is the result of the trade cycle which is a part of the capitalist system. In such a system, there is going up of profit and also loss of profit. When there is high profit, there is greater employment and when there is depression, a large number of people are rendered unemployment. Since such an economic crisis is the result of trade cycle, then unemployment is a part of it. 2) Sudden unemployment: When at the place where workers have been employed, there is some change; a large number of persons are unemployed. It all happens with the industries, trades and business where people are employed for a job and suddenly when the job has ended they are asked to go. 3) Unemployment caused by failure of industries or business: In many cases, a business, a factory or an industry has to close down. There may be various factors responsible for it. There may be dispute amongst the partners, the business may give huge loss or the business may not turn out to be useful and so on. Normally this thing also happens all of a sudden. 4) Unemployment caused by deterioration in industry and business: In various industries, trades or business, sometimes, there is deterioration. This deterioration may be due to various factors. Inefficiency of the employer’s keen competition, less profit etc, is some of the factors responsible for deterioration in the industry and the business. 5) Seasonal unemployment: Certain industries and trades engage workers for a particular season. When the season has ended the workers are rendered unemployed. Sugar industry is a typical example of this type of seasonal unemployment. 

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48. Remedies for unemployment in Bangladesh?

Bangladesh is most densely populated country with a partial resource. There are about 150 millions of people and 49 percent of them live under poverty line. Unquestionably, unemployment is a Big Macroeconomic Issue of Bangladesh.

According to a study of the International Labor Organization (ILO), the rate of growth of unemployment in Bangladesh was 1.9 per cent in the decade of the nineties. But the growth in unemployment currently is 3.7 per cent. The ILO figures also show Bangladesh in the twelfth position among the top twenty countries in the world where unemployment is rising. The number of the unemployed in Bangladesh now is estimated at 30 million. The way the rate of unemployment is increasing, it is feared that at this rate unemployment would soar to some 60 million by 2015. According to another estimate, every year some 2.7 million young persons are becoming eligible for jobs whereas only about 0.7 million of them are getting employment.

Some recommendations to reduce Unemployment:

1. Create a National Office of Employment to develop long term strategies and oversight of the Bangladesh labor market in order to track trends, analyze data, research emerging problems, and prepare early interventions. 2. Identify growing and potential industries and the skills they will need in future staff. 3. Design a plan which allows for the rapid retargeting of training courses as Community Colleges and vocational schools are traditionally 5 to 15 years behind current needs. 4. Renovate the processes of State Unemployment Offices by implementing coordinated support programs in which workers participate as part of receiving unemployment benefits and employers participate as a means of meeting their future needs for staff. 5. Provide incentives for employers to hire more part-time workers

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49. Objective of monetary policy in a developing country like Bangladesh?

Monetary policy aims and methods have changed over time. Both in developed anddeve l op i ng  econom ie s ,  mone t a r y  po l i c i e s   s ee k   t o  ma in t a i n  p r i c e   s tab i l i t y  by sustained stable output growth in the face of internal and external shocks that are faced from time to time. In  developed  economies  with  production  factors  at  or  close  to  full  employment,  monetary policies are formulated typically with the output gap (difference between the actual and the longer run potential output) in view; the policy stance is eased to provide  stimulus  at  t imes of  slowdown  when  actual  output   lags  the   longer  run  po t e n t i a l ,   an d   t h e   s t a n c e   i s  t i g h t e n e d   t o   s l ow   t h i n g s  down  when   t h e   e c onomy  overheats with actual output running ahead of the sustainable longer run potential. Diagnosing and treating asset price bubbles symptomatic of overheating are major issues of current debate in monetary policy. 

For  developing  economies   like  Bangladesh  with  significant  underemployment/under exploitation of production factors, stimulating higher growth is imperative for rapid reduction and eventual elimination of endemic poverty, and is therefore an overriding priority. The stimulus provided by monetary policies in accommodatingthe  g row th  a s p i r a t i on s  mus t  no t  howeve r  ove r   s t ep   t oward s  mac roe conomi c imbalance destabilizing and jeopardizing future growth; and the pursuit of monetary policies comprise the continual balancing act of supporting the highest sustainable output  growth while  adjusting  smoothly to   internal and  external  shocks  that  the  economy encounter from time to time. The  p r ima r y  ob j e c t i v e  o f   t he  Mone t a r y  Po l i c y  o f  Bang l ade sh   i s   t o  ou t li ne   t he formulation and implementation of monetary policy of the Bangladesh Bank (BB), and to convey its assessment of the recent and the expected monetary and inflation developments to the stakeholders and the public at large The  Bangladesh  Bank Order  of  1972 outlines  the main  objectives  of  monetary policy in Bangladesh, which comprises—  ■ To achieve the price stability 

■ To regulate currency and reserves 

■ To promote and maintain a high level of production, employment and real  income,  and  economic  growth,  since   independence  BB operated  under  a  variety of pegged exchange rate systems amid capital controls 

■ To manage the monetary and credit system 

■ To maintain the par value of domestic currency 

■ To promote growth and development of the country's productive resources in the best national interest ■  A l t hough   t he   l ong   t e rm   f o cu s  o f  mone t a r y  po l i c y   i n  Bang l a de sh   i s  ong rowth  wi t h   s t ab i l i t y ,   t he   s ho r t ‐ t e rm  ob j e c t i v e s  a r e  de te rm ined    

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50. Explains Interdependence of monetary and fiscal policies? 

Fiscal policy and monetary policy are the two tools used by the State to achieve its macroeconomic objectives. While the main objective of fiscal policy is to increase the aggregate output of the economy, the main objective of the monetary policies is to control the interest and inflation rates. The celebrated IS/LM model is one of the models used to depict the effect of interaction on aggregate output and interest rates. The fiscal policies have an impact on the goods market and the monetary policies have an impact on the asset markets and since the two markets are connected to each other via the two macrovariables — output and interest rates, the policies interact while influencing the output or the interest rates.

Traditionally, both the policy instruments were under the control of the national governments. Thus traditional analyses made with respect to the two policy instruments to obtain the optimum policy mix of the two to achieve macroeconomic goals as the two were perceived to aim at mutually inconsistent targets. But in recent years, owing to the transfer of control with respect to monetary policy formulation to Central Banks, formation of monetary unions (like European Monetary Union formed via the Stability and Growth Pact) and attempts being made to form fiscal unions, there has been a significant structural change in the way in which fiscal-monetary policies interact.

There is a dilemma as to whether these two policies are complementary, or act as substitutes to each other for achieving macroeconomic goals. Policy makers are viewed to interact as strategic substitutes when one policy maker's expansionary (contractionary) policies are countered by another policy maker's contractionary (expansionary) policies. For example: if the fiscal authority raises taxes or cuts spending, then the monetary authority reacts to it by lowering the policy rates and vice versa. If they behave as strategic complements, then an expansionary (contractionary) policy of one authority is met by expansionary (contractionary) policies of other.

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51. Economics is the science of wealth-discuss?

Adam Smith and his distinguished followers called classical economists defined economics as a science of wealth. Adam Smith (1723-1790) in his famous book “An Enquiry into the Nature and Causes of the Wealth of Nations” described economics as a body of knowledge which relates to wealth. According to him if a nation has larger amount of wealth, it can help in achieving its betterment. Adam Smith defined economics “as the study of nature and causes of generating of wealth of a nation.” Adam Smith emphasized the production and expansion of wealth as the subject matter of economics. Ricardo, another British classical economist shifted the emphasis from production of wealth to the distribution of wealth in the study of economics. J. B. Say, a French classical economist, described economics as the science which treats of wealth” J. S. Mill an other classical economist in the middle of 19th century looked upon economics “as the practical science of production and distribution of wealth’. According to Malthus “Man is motivated by self interest only The desire to collect wealth never leaves him till he goes into the grave”. The main points of the definitions of economics given by the above classical economists are that (1) economics is the study of wealth only. It deals with consumption, production, exchange and distribution aspects of wealth.” (2) Only those material goods which are scarce are included in wealth.

Adam smith and the other classical economists considered wealth as the central issue of the study of economics. According to them economics studies the principles of term of the following aspects of wealth.

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52. explains the relationship between economics and political science and statistics?

Political science: The link between economics and political science is economic policy. These are rules, or regulation, or policies that politicians make concerning the economy. Economic policy is a vast area that range from minimum wage to taxation to banking regulations. They have both political and economic consequences. A large portion of politics is about how government can (or should) influence the economy. The study of these economic effects relate to (a portion of) political science. Statistics: Econometrics can be defined as the study in which the tools of economic theory, statistical inference and mathematics are systematically applied, using observed data, to the analysis of economic laws. It is therefore concerned with the "empirical determination of economic laws. Economic theories are written in mathematical form and are then analyzed using statistical methods. If the observed data are found to be incompatible with the predictions of the theory, it is rejected. Theories are accepted if the data are found to fit the theory."Econometrics is a branch of economics that applies statistical methods to the empirical study of economic theories and relationships. It is as a form of mathematical economics.Economists base most theories and policies on statistics stats are a vital part of economics. Economics study trends and patterns based on stats used in economics: mean f tests, t tests, and regressions, confidence intervals stats are used to measure growth rates, inflation, and any relationship between two variables (regressions)  ………..ooooooo………….

 

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53. How does an imperfect market affect the interest of an average consumer?

A market where information is not quickly disclosed to all participants in it and where the matching of buyers and sellers isn't immediate. Generally speaking, it is any market that does not adhere rigidly to perfect information flow and provide instantly available buyers and sellers.

Imperfect market structure is where the firms that operate in a market have a lot of control over the good or service they produce. This will happen when the numbers of firms that produce that good or supply a certain services are very few in the market. Imperfect competition market structure is the most common type of market structure in the market. We can illustrate imperfect competition by an example in the energy sector. If there is only one gas station in your geographical area and you cannot afford to go and buy fuel from the neighboring gas station because of its distance and costs. Then your local gas station will price its commodity above the prevailing market prices because there is no competition from other firm. The consumers do not have any choice but to purchase from this station at the inflated prices. The gas station has therefore created an imperfect market.

The characteristic of imperfect market structure is that they reduce the economic surplus to varying

degrees. Economic surplus is the extra revenue you acquire from selling a commodity at a higher

price more than what you were willing to sell in the market. There are five major sources of market

power in the imperfect market competition. There are

Exclusive control of the factors of production

Having the patent right or copy rights in the production of a good or service

Government regulation

Firms network in a market to create economies of scales.

Natural monopolies

As a result the average consumer will be faced problem to achieve their desired interested product.

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54. What are the methods of computing the Gross Domestic Produtct?

Two different approaches are used to calculate GDP. In theory, the amount spent for goods and services should be equal to the income paid to produce the goods and services, and other costs associated with those goods and services. Calculating GDP by adding up expenditures is called the expenditure approach, and computing GDP by examining income for resources (sometimes referred to as gross domestic income, or GDI, is known as the resource cost/income approach. Expenditure Approach The expenditure approach utilizes four main components: Consumption (C) - These are personal consumption expenditures. They are typically broken down into the following categories: durable goods, non-durable goods, and services. Investment (I) - This is gross private investment; it is generally broken down into fixed investment and changes in business inventories. Government (G) - This category includes government spending on items that are "consumed" in the current period, such as office supplies and gasoline; and also capital goods, such as highways, missiles, and dams. Note that transfer payments are not included in GDP, as they are not part of current production. Net Exports - This is calculated by subtracting a nations imports (M) from exports (X). Imports are goods and services produced outside the country and consumed within, and exports are goods and services produced domestically and sold to foreigners. GDP = C + I + G + (X - M) Resource Cost/Income Approach To calculate Gross Domestic Income (GDI), first consider how revenues received for products and services are used: 1. Pay for the labor used (wages + income of self-employed proprietors) 2. Pay for the use of fixed resources, such as land and buildings (rent); 3. Pay a return to capital employed (interest); 4.Pay for the replenishment of raw material used. Remaining revenues go to business owners as a residual cash flow, which is used to replenish capital (depreciation), or it becomes a business profit. So with the resource cost/income approach, GDP (or GDI) is calculated as wages, rent, interest and cash flow paid to business owners or organizers of production. So GDP by resource cost/income approach = wages + self-employment income + Rent + Interest + profits + indirect business taxes + depreciation + net income of foreigners. ……………..ooooooooo…………………

 

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55. is high per capital income the only measure of economic development? Actually the high per capital income is not the only measure of economic development.

There are a number of measures which have been used to estimate the economic development of a country. These measures, in brief, are: (i) Increase in real GNP. (ii) Increase in real per capita income. (iii) Rise in overall wellb eing of the people. (iv) Basic needs approach. (v) Human Development index. ……………oooooooooooo……………………. 56.. what according to you are the main causes of the present state of inflation in the country? The economy of Bangladesh has been suffering from a double-digit inflation. A shortage of oil production or energy crisis world-wide, increase in energy prices and cost-of production in combination with a demand-pull inflation from expansionary economic policies have caused a persistent inflation. Altogether these have created a supply-side problem by decreasing the productivity. The situation of Bangladesh has been aggravated due to political problems and effort of minimizing corruption and a lack of confidence in business and manufacturing. It is hard to assume that we can ever get back to the single digit inflation. It is almost clear that we have to live with this double-digit inflation. The natural rate of inflation from four to five percent is accepted in almost any developing country. But, a double-digit inflation of more than ten percent must have some reasons. Inflation is the persistent and generalized increase in the level of prices of goods and services. Consumers are worried about higher or increasing prices of their consumer goods as their real income, purchasing power and their standard of living is going down. Inflation is normally caused by a combined effect of demand-pull, cost-push, and expansionary monetary or fiscal policy. The recent inflation in Bangladesh is relatively more a cost-push inflation than a demand-pull. Rising prices of goods of all kinds including the goods of necessities is mere a reflection of the rising cost of production than a higher demand for these goods and commodities. Productivity, or output per labor, is not increasing as much as their wages are increasing. Factors of production and their productivity in our economy of recession including land, labor, capital, technology, innovation and management are not increasing due to land erosion and land fragmentation, lack of training, wear and tear of capital equipment, and their lack of replacement, backwardness of technology and innovation. The lack of skilled manpower, leadership, smart management and productive working environment and discipline is common in Bangladesh. The higher import prices of raw-materials, energies, fuel and intermediate goods are also increasing the cost of production. Wages in the major employment - or the public sector in Bangladesh has been increasing for more than the last two decades due to both strong and moderately strong labor union. Due to political, social and cultural tradition and for a humanitarian reason,. Finally, we have the nationwide increase in wages relative to the productivity or output per labor. Higher wage is easily transferred to higher cost of production and higher prices of consumer goods. Increased wages lead to the rising inflation.

 

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57. What is money? Discuss the function of money? An officially-issued legal tender generally consisting of currency and coin. Money is the circulating medium of exchange as defined by a government. Money is often synonymous with cash, including negotiable instruments such as checks. Each country has its own money, or currency, that is used as a medium of exchange within that country . The currency of one country can be exchanged for the currency of another via a currency exchange. The current exchange rate determines how much of one currency must be used to purchase a specified amount of the other currency. Generally, economists have defined four types of functions of money which are as follows: 1. Measurement of value (ii) Medium of Exchange ;(iii) Standard of deferred payments(iv) Store of value. These four functions of money have been summed up in a couplet which says: Money is a matter of functions four, a medium, a measure, a standard and a store. These functions have been presented below in the charitable.

(i) Money as a Unit of Value: Money measures the value of various goods and services which are produced in an economy. In other words, money works as unit of value or standard of value. In barter economy it was very difficult to decide as to how much volume of goods should be given in exchange of a given quantity of a commodity. Money, by performing the function of common measure of value, has saved the society from this difficulty (ii) Medium of Exchange: Right from the beginning, money has been performing an important function as medium of exchange in the society. Money facilitates transactions of goods and service as a medium of exchange. Producers sell their goods to the wholesalers in exchange of money. Wholesalers sell the same goods to the consumers in exchange of money. In the same way, all sections of society sell their services in exchange of money and with that buy goods and services which they need. Money, working as medium of exchange, has eliminated inconvenience which was faced in barter transactions. However, money can operate as medium of exchange only when it is generally accepted in that role. Bank money can be treated as money simply on the basis of their general acceptability for they are highly useful. (iii) Standard of Deferred Payments: Modem economic setup is based on credit and credit is paid in the form of money only. In reality the significance of credit has increased so much that it will not be improper to call it as the foundation stone of modem economic progress. Money, besides being the basis of current transactions, is also the basis of deferred payments. Only money is such a commodity in whose form accounts of deferred payments can be maintained in such a way so that both creditors and debtors do not stand to lose. (iv) Store of Value: It was virtually impossible to store surplus value under barter economy; the discovery of money has removed this difficulty. With the help of money, people can store surplus purchasing power and use it whenever they want. Saving in money is not only secure but its possibility of being destroyed is very less. Besides, it can be used whenever need be. By facilitating accumulation of money, money has become the only basis of promoting capital formation and modern production technique and corporate business facilitated there from. ……………….ooooooo……………………..

 

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58. State and explain the component of money supply in Bangladesh? Economics defines money supply as the total assets of stock that is accepted as an exchange media at a given time in an economy. Money supply has a standardized representation with three monetary components which has been delineated as M0, M1 and M2. The M0 component comprises of the currency which is in the hands of the public, the statutory deposits of the banks held by the central bank and itscash reserves. This component represents central bank’s monetary liabilities. The M0 is, thus, generally referred to as the reserve money or monetary base of the economy. The next standard component, M1 includes the currency that is present outside the banking system and the transaction currency of the commercial bank current account liabilities. This component may include foreign currency deposits which are needed in domestic transactions. The M2 component of money supply tries to expand the liquid assets range to add up few interest earning items like fixed deposits, saving deposits or time deposits. This is a broad component of money supply and takes into account M1, short term savings, deposit certificates, transferable foreign currency deposits as well as repurchase agreements. Some countries have extended the broad component of money supply beyond M2. The M0, M1 and M2 are considered the primary money supply components or monetary aggregates which satisfy the liquidity criteria. However, there can be other cases where the broader measurements are required. For example, when there are less liquid financial assets, M3 and M4 components are taken into account. ………….ooooooooo…………

 

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59. Why does government borrow?

There are many different reasons for government borrowing

• Tax revenues are less than predicted. Borrowing means the government can meet a

temporary shortfall by borrowing, rather than having to immediately cut back on spending. Like an

overdraft facility, government borrowing gives the government more flexibility and means they can

maintain wages and spending commitments without having to keep cutting spending.

• Automatic fiscal stabilizers. In a recession, government tax revenues fall (e.g. people earn

less so pay less income tax). Also the government has to spend more on unemployment benefits.

Therefore, in an economic downturn, borrowing rises. To eliminate borrowing in a recession would

make the recession worse and increase inequality. If the government couldn’t borrow in a recession,

the unemployed may not get any benefits and have no income.

• Investment. The government may invest in public sector investment. For example, building

schools, hospitals, better roads. This investment can give a return on the investment which helps to

boost productive capacity and increase economic growth. In this case, the government is acting like a

firm who takes out a loan to finance investment.

• Political. The biggest tendency to borrow comes from political pressures. Voters generally

like to hear the promise of lower taxes and increasing spending. A manifesto to tackle a budget

deficit (higher taxes and lower spending) is unlikely to be popular. Voters often are supportive of the

general idea of reducing government debt, but when it comes to actual policies like lower benefits,

higher pension age, increased VAT rate, then it is likely to hit some particular pressure group with a

vested interest in maintaining low tax and spending.

• War. During a war, government spending is stretched leading to higher borrowing. The

highest rates of borrowing occurred during the two world wars. Also, during wars, it may be easier to

sell bonds as you can play the patriotic card to encourage people to finance government borrowing.

• It’s Cheap. Governments like the UK can usually borrow at very low interest rates,

especially during an economic downturn. This is because people have confidence government bonds

are secure and so are willing to lend at low interest rates.

• Economic Growth tends to reduce real debt burden. In the early 1950s, UK public sector

debt was over 200% of GDP. However, over next few decades, economic growth helped to reduce the

burden of debt. Assuming constant economic growth of 3% a year, the government can borrow more,

but maintain the same % of tax revenue on interest payments

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60. Disucss the domestic sources of government borrowing in Bangladesh and their likely effect on the economy? The acquisition of funds through the financial markets by the government sector which are used to finance government expenditures. In terms of the simple circular flow model, this is one of two basic demands for household saving diverted into financial markets. The other is investment borrowing. Government borrowing is also one of two methods of financing government expenditures. The other is taxes.

Government borrowing is one of two sources of funds used by the government to pay for government

expenditures. The primary source of financing comes from taxes. Government borrowing is necessary

when the government sector spends more than it

collects in taxes.

Government borrowing by the Government borrowing by the government sector can be illustrated with the circular flowmodel. The circular flow captures the continuous movement of production, consumption, income, and factor payments between producers and consumers.

The household sector at the far left contains the consuming population of the economy. The business sector at the far right includes all of the producers. The government sector is positioned in the middle of the diagram and the foreign sector is at the very top.

The product markets near the top of the flow direct production from the business sector to the household sector in exchange for payment flowing in the opposite direction. The resource markets at the bottom of the flow direct factor services from the household sector to the business sector in exchange for payment flowing in the opposite direction. The financial markets located just above the resource markets divert saving from the household sector to business and government borrowing.

There are some economic risks associated with a high level of government borrowing:

• If the economy has only a small supply of savings, increased government borrowing may force up interest rates and crowd out private sector investment

• Higher borrowing in the long-run requires an increase in the tax burden - this may dampen demand and economic growth

• If the national debt increases, annual interest payments on the debt goes up - money that might have been spent in priority areas

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The Circular Flow

 

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61. Economics is the study of mankind in the ordinary business of life-discuss? Political economy or economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing. Thus it is on the one side a study of wealth; and on the other, and more important side, a part of the study of man. For man's character has been molded by his every-day work, and the material resources which he thereby procures, more than by any other influence unless it be that of his religious ideals; and the two great forming agencies of the world's history have been the religious and the economic. Here and there the ardour of the military or the artistic spirit has been for a while predominant: but religious and economic influences have nowhere been displaced from the front rank even for a time; and they have nearly always been more important than all others put together. Religious motives are more intense than economic, but their direct action seldom extends over so large a part of life. For the business by which a person earns his livelihood generally fills his thoughts during by far the greater part of those hours in which his mind is at its best; during them his character is being formed by the way in which he uses his faculties in his work, by the thoughts and the feelings which it suggests, and by his relations to his associates in work, his employers or his employee. And very often the influence exerted on a person's character by the amount of his income is hardly less, if it is less, than that exerted by the way in which it is earned. It may make little difference to the fullness of life of a family whether its yearly income is £1000 or £5000; but it makes a very great difference whether the income is £30 or £150: for with £150 the family has, with £30 it has not, the material conditions of a complete life. It is true that in religion, in the family affections and in friendship, even the poor may find scope for many of those faculties which are the source of the highest happiness. But the conditions which surround extreme poverty, especially in densely crowded places, tend to deaden the higher faculties. Those who have been called the Residuum of our large towns have little opportunity for friendship; they know nothing of the decencies and the quiet, and very little even of the unity of family life; and religion often fails to reach them. No doubt their physical, mental, and moral ill-health is partly due to other causes than poverty: but this is the chief cause. And, in addition to the Residuum, there are vast numbers of people both in town and country who are brought up with insufficient food, clothing, and house-room; whose education is broken off early in order that they may go to work for wages; who thenceforth are engaged during long hours in exhausting toil with imperfectly nourished bodies, and have therefore no chance of developing their higher mental faculties. Their life is not necessarily unhealthy or unhappy. Rejoicing in their affections towards God and man, and perhaps even possessing some natural refinement of feeling, they may lead lives that are far less incomplete than those of many, who have more material wealth. But, for all that, their poverty is a great and almost unmixed evil to them. Even when they are well, their weariness often amounts to pain, while their pleasures are few; and when sickness comes, the suffering caused by poverty increases tenfold. And, though a contented spirit may go far towards reconciling them to these evils, there are others to which it ought not to reconcile them. Overworked and undertaught, weary and careworn, without quiet and without leisure, they have no chance of making the best of their mental faculties.

Although then some of the evils which commonly go with poverty are not its necessary consequences; yet, broadly speaking, "the destruction of the poor is their poverty," and the study of the causes of poverty is the study of the causes of the degradation of a large part of mankind.

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62. Why is it important for a banker to know the basic principles of economics?

Economics is the study of how businesses and countries operate and react to situations. There are numerous basic economic concepts that is important for a banker. This important things are given below­­­­ Supply and Demand 

This is the cornerstone of studying economics and is an easy way to work out the trade-offs between production of an item and its cost. If demand for a product or service is high, then the supply of a product or service is high and vice versa.

Economies of Scale

Economies of scale are a business term used to demonstrate the cheapest way of producing something.

 Microeconomics 

Microeconomics is the study of how individuals and specific industries react to economic conditions.

Macroeconomics

Macroeconomics is the study of the economic system as a whole.

Inflation

The amount the price of a product goes up each year. Most governments try to keep inflation at around the two percent mark. This means the price of a product will go up two percent every year.

Interest Rates

Interest rates are normally set either by the government or by a national bank and are the amount of extra money in percentage terms people give back on loans or receive for saving money. It is one of the few economic tools that a government can use to move the economy.

Price Index

There are two main types of price index, the retail and the consumer. These both show how much the average basket of goods costs a consumer.

Economic Growth

This is the statistic most thrown around on the news, as it is the simplest idea to get your head around. Growth or Gross Domestic Product (GDP) is a measure of how much money is spent in the country

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63. Distinguish between micro and macro economics? The main differences between micro and macro economics are given below:-

MICRO ECONOMICS:-

1.Evolution of micro economics took place earlier than macro economics. 2.It is branch of economics, which studies individual economic variables like demand,supply,price etc. 3.It has a very narrow scope i.e. an individual, a market etc. 4.Demand,supply,market forms etc.relate to micro economics. 5.It is helpful in analysis of an individual economics unit like firm. 6. Theory of demand, theory of production, price determination theory etc.develop from micro economics.

MACRO ECONOMICS:-

1.It evolved only after the publication of Keynes’book.Genral.theory of employment, interest and money. 2.It is a branch of economics which studies aggregate economic variables, like aggregate demand, aggregate supply, price level etc. 3.It has a very wide scope i.e. a country. 4. Aggregate demand aggregate supply,national income etc.relate to macro economics. 5.It is helpful for analysing the level of employment,income,economic growth etc. 6.Theory of national income, theory of employment, theory of money, theory of genral price level etc.develop from macro economics.

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64. What are the main goals of macro economics policy?

Three conditions of the mixed economy that are most important for macroeconomics, including full

employment, stability, and economic growth, that are generally desired by society and pursued by

governments through economic policies.

Full Employment Full employment is achieved when all available resources (labor, capital,land, and entrepreneurship) are used to produce goods and services. This goal is commonly indicated by the employment of labor resources (measured by the unemployment rate). However, all resources in the economy--labor, capital, land, and entrepreneurship--are important to this goal. The economy benefits from full employment because resources produce the goods that satisfy the wants and needs that lessens thescarcity problem. If the resources are not employed, then they are not producing and satisfaction is not achieved.

Stability Stability is achieved by avoiding or limiting fluctuations in production, employment, and prices. Stability seeks to avoid the recessionary declines and inflationary expansions of business cycles. This goal is indicated by month-to-month and year-to-year changes in various economic measures, such as the inflation rate, the unemployment rate, and the growth rate of production. If these remain unchanged, then stability is at hand. Maintaining stability is beneficial because it means uncertainty and disruptions in the economy are avoided. It means consumers and businesses can safely pursue long-term consumption and production plans. Policies makers are usually most concerned with price stability and the inflation rate.

Economic Growth

Economic growth is achieved by increasing the economy's ability to produce goods and services. This

goal is best indicated by measuring the growth rate of production. If the economy produces more

goods this year than last, then it is growing. Economic growth is also indicated by increases in the

quantities of the resources--labor, capital, land, and entrepreneurship--used to produce goods. With

economic growth, society gets more goods that can be used to satisfy more wants and needs--people

are better off; living standards rise; and scarcity is less of a problem.

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65. Are price always determined by the laws of demand and supplu?explain

Price is derived by the interaction of supply and demand. The resultant market price is dependant upon both of these fundamental components of a market. An exchange of goods or

services will occur whenever buyers and sellers can agree on a price. When an exchange occurs, the agreed upon price is called the "equilibrium price", or a "market clearing price" . This can be graphically illustrated as follows: ( Figure 3)

In figure 3, both buyers and sellers are willing to exchange the quantity "Q" at the price "P". At this point supply and demand are in balance or "equilibrium". At any price below P, the quantity demanded is greater than the quantity supplied. In this situation consumers would be anxious to acquire product the producer is unwilling to supply resulting in a product shortage. In order to ration the shortage consumers would have to pay a

higher price in order to get the product they want; while producers would demand a higher price in order to bring more product on to the market. The end result is a rise in prices to the point P, where supply and demand are once again in balanceA market price is not a fair price to all participants in the marketplace. It does not guarantee total satisfaction on the part of

both buyer and seller or all buyers and all sellers.

When either demand or supply changes, the equilibrium price will change. For example, good weather normally increases the supply of grains and oilseeds, with more product being made available over a range of prices. With no increase in the quantity of product demanded, there will be movement along the demand curve to a new equilibrium price in order to clear the excess supplies off the market. Consumers will buy more but only at a lower price. This can be illustrated graphically as follows: (see Figure 4.)

Likewise a shift in demand due to changing consumer preferences will also influence the market price. In recent years there has been a shift in demand on the part of overseas Canadian wheat buyers toward the Canada Prairie Spring varieties, away from the Hard Red Spring varieties. A decline in the preference for Hard Red

Spring wheat shifts the demand curve inward, to the left, as illustrated in figure 5.

With no reduction in supply, the effect on price results from a movement along the supply curve to a lower equilibrium price where supply and demand is once again in balance. In order for prices to increase producers will have to reduce the quantity of hard red spring wheat brought to the market place or find new sources of demand to replace the consumers who withdrew from the marketplace due to changing preferences or a shift in demand.

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