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Define Economics from the view point of scarcity of resources 6 Marks Economics can be defined as a body of knowledge or study that discusses how a society tries to solve the human problems of unlimited wants and scarce resources. Because economics is associated with human behavior, the study of economics is classified as a social science. Because economics deals with human problems, it cannot be an exact science and one can easily find differing views and descriptions of economics. Economics is the study of the production and consumption of goods and the transfer of wealth to produce and obtain those goods. Economics explains how people interact within markets to get what they want or accomplish certain goals. The main concern of economics is economic problem. The source of any economic problem is scarcity. Scarcity of resources forces people to choose from alternatives.Therfore economic problem can be said to be a problem of choice and valuation of the alternatives. The problem of choice arises because limited resources with alternative uses are to be utilized to satisfy unlimited wants, which are of various degrees of importance. Had the resources such as human, natural and capital has not been scare, there would be no problem of choice and hence no economic problem at all. Therefore root cause of all economic problems is scarcity. Resources: Land Labour ( Human Resources) Capital

IIIE SECTION A ECONOMICS NOTES Economics question papers

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Page 1: IIIE SECTION A ECONOMICS NOTES  Economics question papers

Define Economics from the view point of scarcity of resources 6 Marks

Economics can be defined as a body of knowledge or study that discusses how a society tries to solve the human problems of unlimited wants and scarce resources. Because economics is associated with human behavior, the study of economics is classified as a social science. Because economics deals with human problems, it cannot be an exact science and one can easily find differing views and descriptions of economics.

Economics is the study of the production and consumption of goods and the transfer of wealth to produce and obtain those goods. Economics explains how people interact within markets to get what they want or accomplish certain goals.

The main concern of economics is economic problem. The source of any economic problem is scarcity. Scarcity of resources forces people to choose from alternatives.Therfore economic problem can be said to be a problem of choice and valuation of the alternatives. The problem of choice arises because limited resources with alternative uses are to be utilized to satisfy unlimited wants, which are of various degrees of importance. Had the resources such as human, natural and capital has not been scare, there would be no problem of choice and hence no economic problem at all. Therefore root cause of all economic problems is scarcity.

Resources:

Land

Labour ( Human Resources)

Capital

Enturprenurship

Scarcity is a relative concept. It can be defined as excess demand. i. e. demand more than supply. For ex unemployment is essentially scarcity of jobs. Inflation is scarcity of goods.

Establish relationship between need, want and demand 6 Marks

Difference between Want and Need :

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In economic terms, people have unlimited wants; however, resources are scarce. We should not confuse wants and needs. Individuals often want what they don't need. If you consider an automobile example, A person can decide between purchasing a new luxury car or a low-priced pickup truck .Someone might want to drive a large luxury car, but a small pickup truck may be more suited to the purchaser's needs if he or she must have a vehicle for hauling furniture.

Consumers have unlimited wants but all the wants does not increase or decrease the demand. For ex A consumer may need to have a crown put on a tooth but may not want to have it done because of the high cost. But he goes for it when he actually needs it irrespective of price .This increases the demand. But When he founds an alternative the demand reduces.

Illustrate the concept of Utility and Value

8 Marks

Utility can be defined as the extent of satisfaction obtained by consumption of goods and services preferred by consumers. Given the available resources the level of income and the market prices of various goods,the ratinal consumer allocates his spending in such a way that the preferred combination gives him highest utility.

There are two basic approaches that are followed for utility:

Cardinalist approach: Utility can be measured in subjective units

Ordinalist approach : Here utility cannot be measured but can be ranked according to the order of preference.

Total utility received from a good is measured as the total satisfaction enjoyed from the consumption of that good. The total utility increase as no. of goods consumed increase. He eventually reaches a saturation point which is called as total utility. However it is difficult to measure as it is subjective.

Marginal utility is the extra satisfaction a consumer can obtain over a given period by consuming an extra unit of good.

Change in total Utility /1 unit change in quantity consumed = U’(Q))

U’ is he total utility to a consumer

Q is the qty consumed to get U level of total utility.

Utility is taken to be correlative to Desire or Want. It has been already argued that desires cannot be measured directly, but only indirectly, by the outward phenomena to which they give rise: and that in those cases with which economics is chiefly concerned the

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measure is found in the price which a person is willing to pay for the fulfilment or satisfaction of his desire.

Value: Value is the measure of benefit a consumer gets from a product or good. The economic value is not the same as market price.If a consumer is willing to buy a good, it implies that the customer places a higher value on the good than the market price.

It is seen that items of great value( eg ; Air water etc) are sold at negligible prices where as items like diamonds are sold at very high prices although their value to man is not as much as water air etc.

The difference between the value to the consumer( amount of money we are willing to pay) and the market price ( The money we actually pay) is called "consumer surplus".

It is easy to see situations where the actual value is considerably larger than the market price: purchase of drinking water is one example.

Briefly explain the 4 different market categories and highlight the difference among their characteristics.

5 + 5 + 5 + 5 Marks

1. Perfect Competition: A theoretical market structure characterized by complete absence of rivalry between individual firms,

Perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets. Still, buyers and sellers in some auction-type markets say for commodities or some financial assets may approximate the concept. Perfect competition serves as a benchmark against which to measure real-life and imperfectly competitive markets.

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

2. Monopoly : Where there is only one provider of a product or service. Natural monopoly, a monopoly in which economies of scale cause efficiency to increase continuously with the size of the firm. A firm is a natural monopoly if it

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is able to serve the entire market demand at a lower cost than any combination of two or more smaller, more specialized firms.

3. Monopolistic Competition: Monopolistic competition, also called competitive market, where there is a large number of firms, each having a small proportion of the market share and slightly differentiated products.

Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another as goods but not perfect substitutes (such as from branding, quality, or location). In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms.[1]

4 . Oligopoly: In which a market is dominated by a small number of firms that together control the majority of the market share.

Duopoly, a special case of an oligopoly with two firms.

Monopsony, when there is only one buyer in a market.

Oligopsony, a market where many sellers can be present but meet only a few buyers.

An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). A general lack of competition can lead to higher costs for consumers. Because there are few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market participants.

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CHARECTERSTICS :

Perfect Competition Monopoly Monopolistic Competition

Oligopoly

Infinite buyers and sellers who are willing to supply and buy a product at a ceratin price.

Single seller There are many producers and many consumers in the market, and no business has total control over the market price

An oligopoly maximizes profits by producing where marginal revenue equals marginal costs

Zero entry and exit barriers – Easy to enter or exit the market

High Barriers to Entry

There are few barriers to entry and exit. Entry and exit:

Barriers to entry are high

Perfect factor mobility Price Discrimination

Consumers perceive that there are non-price differences among the competitors' products.

Oligopolies are price setters rather than price takers

Perfect information Price Maker Producers have a degree of control over price

"Few" – a "handful" of sellers.[3] There are so few firms that the actions of one firm can influence the actions of the other firms

Zero transaction costs Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering

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market to capture excess profits

Profit maximization Profit Maximizer

Homogenous products Product may be homogeneous (steel) or differentiated

Non-increasing returns to scale

The distinctive feature of an oligopoly is interdependence

Property rights Non-Price Competition

August 2010 Write notes Features of a MonoployMarket

10 Marks

Feb 2010 Discuss main features of Monopoly market 10 Marks

Monopoly is an extreme form of market structure. The word monopoly is derived from two Greek words-Mono and Poly. Mono means single and Poly means 'seller'. Thus monopoly means single seller. Monopoly is a firm of market organization for a commodity in which there is only one single seller of the commodity.

In short monopoly is a form of market structure where there is a single seller producing a commodity having no close substitute? Under monopoly there is no rival or competitors. The degree of competition in monopoly is nil. Thus if the buyers is to purchase the commodity, he can purchase it only from that seller. The seller dictates the price to consumers. Unlike perfect competition a monopolist can fix up the price.

As monopoly is a form of imperfect market organization, there is no difference between firm and industry. A monopoly firm is said to be an industry. Thus monopoly means the

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absence of competition. There are strong barriers to entry into the industry. As a result, seller has full control over the supply of the commodity.

Features of Monopoly:

1. One seller and large number of buyers:

Monopoly is a form of imperfect market structure where there is only one seller of a product. A monopoly firm may be owned by a person, a few numbers of partners or a joint stock company. The characteristic feature of single seller eliminates the distinction between the firm and the industry. A monopolist firm is itself 'the industry. Under monopoly there are large numbers of buyers although the seller is one. No buyer's reaction can influence the price.

2. No close substitute:

Under monopoly a single producer produces single commodities which have no close substitute. As the commodity in question has no close substitute, the monopolist is at liberty to change a price according to his own whimsy. Monopoly can not exist when there is competition.

A firm is said, to be monopolist only when it is the single producer and supplier of the product which have no close substitute. Under monopoly the cross elasticity of demand is zero. Cross elasticity of demand shows a change in the demand for a good as a result of change in the price of another good.

3. Strong barriers to the entry into the industry exist:

In a monopoly market there is strong barrier on the entry of new firms. Monopolist faces no competition. As there is one firm no other rival producers can enter the market of the same product. Since the monopolist has absolute control over the production and sale of the commodity certain economic barriers are imposed on the entry of potential rivals.

4. Nature of demand curve:

In case of monopoly one firm constitutes the whole industry. The entire demand of the consumers for a product goes to the monopolist. Since the demand curve of the individual consumers lopes downward, the monopolist faces a downward sloping demand curve.

A monopolist can sell more of his output only at a lower price and can reduce the sale at a high price. The downward sloping demand curve expresses that the price (AR) goes on falling ns sales are increased. In monopoly AR curve slopes downward mid MR curve lies below AR curve. Demand curve under monopoly la otherwise known as average revenue curve.

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Febraury 2010 How is price – out put fixed under the monopoly market ? 10 Marks

price and output under a pure monopoly

THE MONOPOLISTS DEMAND CURVE- CONSTRAINTS ON MONOPOLY

Be careful of saying that "monopolies can charge any price they like" - this is wrong. It is true that a firm with monopoly has price-setting power and will look to earn high levels of profit. However the firm is constrained by the position of its demand curve. Ultimately a monopoly cannot charge a price that the consumers in the market will not bear.

A pure monopolist is the sole supplier in an industry and, as a result, the monopolist can take the market demand curve as its own demand curve. A monopolist therefore faces a downward sloping AR curve with a MR curve with twice the gradient of AR. The firm is a price maker and has some power over the setting of price or output. It cannot, however, charge a price that the consumers in the market will not bear. In this sense, the position and the elasticity of the demand curve acts as a constraint on the pricing behaviour of the monopolist. Assuming that the firm aims to maximise profits (where MR=MC) we establish a short run equilibrium as shown in the diagram below.

 Assuming that the firm aims to maximise profits (where MR=MC) we establish a short run equilibrium as shown in the diagram below.

The profit-maximising output can be sold at price P1 above the average cost AC at output Q1. The firm is making abnormal "monopoly" profits (or economic profits) shown by the yellow shaded area. The area beneath ATC1 shows the total cost of producing output Qm. Total costs equals average total cost multiplied by the output.

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A CHANGE IN DEMAND

A change in demand will cause a change in price, output and profits.

In the example below, there is an increase in the market demand for the monopoly supplier. The demand curve shifts out from AR1 to AR2 causing a parallel outward shift in the monopolist's marginal revenue curve (MR1 shifts to MR2). We assume that the firm continues to operate with the same cost curves. At the new profit maximising equilibrium the firm increases production and raises price.

Total monopoly profits have increased. The gain in profits compared to the original price and output is shown by the light blue shaded area.

Not all monopolies are guaranteed profits - there can be occasions when the costs of production are greater than the average revenue a monopolist can charge for their products. This might occur for example when there is a sharp fall in market demand (leading to an inward shift in the average revenue curve). In the diagram below notice that ATC lies AR across the entire range of output. The monopolist will still choose an output where MR=MC for this reduces their losses to the minimum amount.

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How do monopolies continue to earn supernormal profits in the long run - revise barriers to entry. See also the pages on price discrimination

Mobile Phone Operators and Supernormal Profits

In the first of its mobile market reviews, OFTEL, the telecommunications industry regulators has found that mobile phone operators are making profits greater than would be expected in a fully competitive market. Their research finds that mobile phone charges have fallen by nearly a quarter since January 1999. And, the level of consumer satisfaction with their mobile phone service continues to run high (at around 90%).

But the OFTEL review finds that consumers do not have sufficient information on the range of prices available from the mobile phone networks and they are being over-charged for calls between mobile networks. OFTEL have stated that some sectors of the industry may require more intensive regulation unless there are improvements in pricing in the coming months.

August 2011 : Describe the important variables that constitute the subject matter of macroeconomics. 14 Marks

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August 2010 :Discuss the salient features of macroeconomics 10 marks

Macro economics is an aggregate study of the economy of a country.

Economy means production, exchange, distribution and consumption activities of a country combined together. Hence, the study of the aggregate behavior of an economy is known as Macro economics. We study aggregate demand, aggregate supply, national income, national output, aggregate consumption, aggregate saving, aggregate investment, aggregate expenditure, general level of employment, business fluctuations, general price level, foreign trade, balance of payments. Etc..in macro economics. Apart from that we also study business fluctuations in the international market, free trade areas and other forms of economic integration, world trade organisation, etc.

The 3 major macroeconomic variables are GDP, unemployment, and inflation.

GDP (Gross Domestic Product), the inflation rate and the unemployment are three widely cited and watched macroeconomic variables of economic activity.

Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period of time.

The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year.

Measuring GDP is complicated, but at its most basic, the calculation can be done in one of two ways: either by adding up what everyone earned in a year (income approach), or by adding up what everyone spent (expenditure method). Logically, both measures should arrive at roughly the same total.

The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports.

As one can imagine, economic production and growth, what GDP represents, has a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy. A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It's not hard to understand

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why: a bad economy usually means lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.

Strengths: GDP is considered the broadest indicator of economic output and growth. Real GDP takes inflation into account, allowing for comparisons against other

historical time periods. The Bureau of Economic Analysis issues its own analysis document with each

GDP release, which is a great investor tool for analyzing figures and trends, and reading highlights of the very lengthy full release

Weaknesses: Data is not very timely - it is only released quarterly. Revisions can change historical figures measurably (the difference between 3%

and 3.5% GDP growth is a big one in terms of monetary policy)

The Closing LineWhile quarter-to-quarter figures can show some volatility, long-term trends in GDP growth remain the single most conclusive piece of information on the economy as a whole. This indicator is a must-know for investors in all asset classes.

Inflation :

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.

Inflation's effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation is rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring that central banks can adjust real interest rates (intended to mitigate recessions), and encouraging investment in non-monetary capital projects.

Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies

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such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.

Today, most economists favor a low and steady rate of inflation. Low (as opposed to zero or negative) inflation reduces the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduces the risk that a liquidity trap prevents monetary policy from stabilizing the economy. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control monetary policy through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements

Inflation in an economy can be the result of an increase in aggregate demand that is unaccompanied by an increase in aggregate supply. This is known as demand-pull inflation. A rise in any component of aggregate demand can bring about demand-pull inflation. One reason for a sudden, unanticipated rise in aggregate demand can be an unanticipated rise in the supply of money. Inflation can also result from a decrease in aggregate supply that occurs when businesses find that production inputs have risen in price. Such occurs when labor costs and the price of raw materials such as crude oil have risen. Decreases in productivity (the ratio of GDP to inputs) can also have a negative impact on aggregate supply and, therefore, cause a rise in prices. This type of inflation is known as cost-push inflation.

Shifts in labor market that can create unemployment. Some of these shifts are attributable changes in GDP caused by changes in aggregate demand or aggregate supply, or both. Additionally, shifts in public policies affecting labor demand (such as minimum wage, worker safety, and even foreign trade legislation) can create shifts in the unemployment rate.

UN EMPLOYMENT :

The amount of unemployment in an economy is measured by the unemployment rate, the percentage of workers without jobs in the labor force. The labor force only includes workers actively looking for jobs. People who are retired, pursuing education, or discouraged from seeking work by a lack of job prospects are excluded from the labor force.

Unemployment can be generally broken down into several types that are related to different causes. Classical unemployment occurs when wages are too high for employers to be willing to hire more workers. Wages may be too high because of minimum wage laws or union activity. Consistent with classical unemployment, frictional unemployment occurs when appropriate job vacancies exist for a worker, but the length of time needed to search for and find the job leads to a period of unemployment. Structural

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unemployment covers a variety of possible causes of unemployment including a mismatch between workers' skills and the skills required for open jobs. Large amounts of structural unemployment can occur when an economy is transitioning industries and workers find their previous set of skills are no longer in demand. Structural unemployment is similar to frictional unemployment since both reflect the problem of matching workers with job vacancies, but structural unemployment covers the time needed to acquire new skills not just the short term search process. While some types of unemployment may occur regardless of the condition of the economy, cyclical unemployment occurs when growth stagnates. Okun's law represents the empirical relationship between unemployment and economic growth. The original version of Okun's law states that a 3% increase in output would lead to a 1% decrease in unemployment.

August 2011 How does Microeconomics differ from macro economics? 6 Marks

Feb 2010 Distingusih between Microeconomics and macro economics? 10 Marks

Micro Economics Macro Economics1 The evolution took place earlier than macro economics.

2. It has a very narrow scope i. e. an indivisual, a market etc.

3. Demand, supply market forms etc relate to macro economics

4. Micro Economics studies the problems of individual economic units such as a firm, an industry, a consumer etc.

5. Micro Economic studies the problems of price determination, resource allocation etc.

6. While formulating economic theories, Micro Economics assumes that other things remain constant.

7. The main determinant of Micro Economics is price

1 Its evolution took place only after publication of kaynes book

2. It has a very wide scope i. e. a country

3. Aggregate demand, aggregate supply and price level etc relate to macro economics

4. Macro Economics studies economic problems relating to an economy viz., National Income, Total Savings etc.

5. Macro Economics studies the problems of economic growth, employment and income determination etc.

6. In Micro Economics economic variables are mutually inter-related independently.

7. In Micro Economics economic variables are mutually inter-related independently.

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8. It adopts Bottoms up approach 8. It adopts Tops down approach

Define the tem GDP 2 Marks

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)

What is the difference between GDP and GNP 4 MarksGDP GNP

Definition: An estimated value of the total worth of a country’s production and services, on its land, by its nationals and foreigners, calculated over the course on one year

An estimated value of the total worth of production and services, by citizens of a country, on its land or on foreign land, calculated over the course on one year

Formula for calculation GDP = consumption + investment + (government spending) + (exports − imports)

GNP = GDP + NR (Net income inflow from assets abroad or Net Income Receipts) - NP (Net payment outflow to foreign assets)

Uses Business economic forecasting

Business economic forecasting

Application (Context in which these terms are used):

To see the strength of a country’s local economy

To see how the nationals of a country are doing economically

Layman Usage Total value of products & Total value of Goods and

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Services produced within the territorial boundary of a country

Services produced by all nationals of a country (whether within or outside the country)

Define the term National income 2 Marks

National income is a measure of the total value of the goods and services (output) produced by an economy over a period of time (normally a year). It also represents the total value of the primary incomes receivable within an economy less the total of the primary incomes payable by resident units .

The Importance of National Income

Measuring national income is crucial for various purposes. It allows to:

1. measure the size of the economy and level of country’s economic performance; 2. trace the trend or the speed of the economic growth in relation to previous year(s)

also in other countries; 3. know the composition and structure of the national income in terms of various

sectors and the periodical variations in them. 4. make projection about the future development trend of the economy. 5. help government formulate suitable development plans and policies to increase

growth rates. 6. fix various development targets for different sectors of the economy on the basis

of the earlier performance. 7. help business firms in forecasting future demand for their products. 8. make international comparison of people’s living standards.

August 2011 How is National Income determined? 8 Marks

August 2010 Explain main determinants of national Income 10 Marks

Output or Product Method

This method is based on the total production of a country during a year. The measures of GDP are calculated by adding the total value of the output (of goods and services)

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produced by all activities during any time period, such as a year. The major challenge of this method is the problem of double-counting. All production units are classified into primary, secondary and tertiary sectors. Then, the various units are identified under these sectors and the goods and services, produced in each of these sectors, will be estimated. The sum total of products generated in these three sectors is the total output of the nation. The next step is to find out the value of these products in terms of money. This method helps to find out contributions of various sectors to national income.

The agriculture and extractive industries 10

PLUS Manufacturing industries 40

PLUS Service and Construction 40

EQUALS GROSS DOMESTIC PRODUCT at Factor Cost 90

PLUS Net factor income from abroad ( =Income received from abroad – Income paid abroad)

10

EQUALS GROSS NATIONAL PRODUCT at Factor Cost 100

LESS Capital Consumption or depreceation 20

EQUALS NETT NATIONAL PRODUCT at factor cost or NATIONAL INCOME

80

Income Method

In the income method, the measures of GDP are calculated by adding all the income earned by various factors of production which are engaged in the production of output. The various incomes included to compute the gross national income are: wages and salaries, income of self-employed, profits and dividends of business corporations, interest, rent, surplus of government enterprises and net flow of income from abroad. Factors of production together produce output and income and the sum will be equal to the income of the nation. In other words, total (national) income is equal to the reward given to various factors of production. See data about GDP measure using the income approach

Income from Employment 50

PLUS Income from Self employment 10

PLUS Gross trading profits of the companies 10

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PLUS Gross trading Surplus of public corporations 10

PLUS Rent 10

EQUALS GROSS Domestic PRODUCT at Factor Cost 90

PLUS Nett factor income from abroad 10

EQUALS Gross National product at factor cost. 100

Expenditure Method

National income can also be calculated by adding up the expenditure incurred for goods and services. Government as well as private individuals spend money for consumption and production purposes. The sum total of expenditure incurred in a country during a year will be equal to national income.

Another important aspect concerning the computation of national income is the difference between a measurement at “current price” and /or at “constant price”. The measure based on current price uses the ongoing market prices to compute the value of output. It is quite possible that the current price may always be higher than real value due to many factors like taxes and inflation (or rising prices). Hence, national income arrived at ‘current price’ includes such influences as inflation and taxes. With inflation as a common feature in almost all the economies, it is necessary to measure the national income after deducting any such increase in the value of any output or income. National income at ‘constant price’ measures the national income after making necessary adjustment to eliminate the effect of inflation. Thus it is based on unchanged price of output. As the national income at ‘constant price’ is computed, based on the real worth of the purchasing power of income, it is also called as ‘real national income’ or national income in ‘real’ terms.

Consumer’s Expenditure 70

Plus Govt Current expenditure on goods and services 20

Plus Gross domestic fixed capital formation 20

Plus Value of physical increase in stocks and Work in progress 10

Equals Total domestic expenditure at market prices 120

Plus Exports and factor income from abroad 20

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Less Imports and factor income paid abroad -30

Equals GNP 110

Less Indirect Taxes -20

Plus Subsidies 10

Equals Gross National product at factor cost. 100

How is National income not equal to GNP? 4 marks

National income is a measure of the total value of the goods and services (output) produced by an economy over a period of time (normally a year). It also represents the total value of the primary incomes receivable within an economy less the total of the primary incomes payable by resident units.

An estimated value of the total worth of production and services, by citizens of a country, on its land or on foreign land, calculated over the course on one year

GNP is one measure of national income, but a more precise measure of national income is GNP adjusted for following:

Depreciation of physical capital results in a loss of income to capital owners, so the amount of depreciation is subtracted from GNP. Unilateral transfers to and from other countries can change national income: payments of expatriate workers sent to their home countries, foreign aid and pension payments sent to expatriate retireesGNP-capital depreciation+Unilateral transfers = National Income

What are the objectives of economic planning in India? Discuss the achievements of these objectives in the various 5 yr plans implemented so far.

10 + 10 marks

Planning without an objective is like driving without any destination. There are generally two sets of objectives for planning, namely the short-term objectives and the long-term objectives. While the short-term objectives vary from plan to plan, depending on the

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immediate problems faced by the economy, the process of planning is inspired by certain long term objectives. In case of our Five Year plans, the long-term objectives are:

(i) A high rate of growth with a view to improvement in standard of living.

(ii) Economic self-reliance;

(iii) Social justice and

(iv) Modernization of the economy

(v) Economic stability

(i) High Rate of Growth

All the Indian Five Year Plans have given primary importance to higher growth of real national income. During the British rule, Indian economy was stagnant and the people were living in a state of abject poverty. The Britishers exploited the economy both through foreign trade and colonial administration. While the European industries flourished, the Indian economy was caught in a vicious circle of poverty. The pervasive poverty and misery were the most important problem that has to be tackled through Five Year Plan.

During the first three decades of planning, the rate of economic growth was not so encouraging in our economy Till 1980, the average annual growth rate of Gross Domestic Product was 3.73 percent against the average annual growth rate of population at 2.5 percent. Hence the per-capita income grew only around 1 percent. But from the 6th plan onwards, there has been considerable change in the Indian economy. In the Sixth, Seventh and Eight plan the growth rate was 5.4 percent, 5.8 percent and 6.8 percent respectively. The Ninth Plan, started in 1997 targeted a growth rate of 6.5 percent per annum and the actual growth rate was 6.8 percent in 1998 - 99 and 6.4 percent in 1999 - 2000. This high rate of growth is considered a significant achievement of the Indian planning against the concept of a Hindu rate of growth.

(ii) Economic Self Reliance

Self reliance means to stand on one’s own legs. In the Indian context, it implies that dependence on foreign aid should be as minimum as possible. At the beginning of planning, we had to import food grains from USA to meet our domestic demand. Similarly, for accelerating the process of industrialization, we had to import, capital goods in the form of heavy machinery and technical know-how. For improving infrastructure facilities like roads, railways, power, we had to depend on foreign aid to raise the rate of our investment.

As excessive dependence on foreign sector may lead to economic colonialism, the planners rightly mentioned the objective of self-reliance from the third Plan onwards. In

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the Fourth Plan much emphasis was given to self-reliance, more specially in the production of food grains. In the Fifth Plan, our objective was to earn sufficient foreign exchange through export promotion and important substitution.

By the end of the fifth plan, Indian became self-sufficient in food-grain production. In 1999-2000, our food grain production reached a record of 205.91 million tons. Further, in the field of industrialization, now we have strong capital industries based on infrastructure. In case of science and technology, our achievements are no less remarkable. The proportion of foreign aid in our plan outlays have declined from 28.1 percent in the Second Plan to 5.5 percent in the Eighth Plan. However, in spite of all these achievements, we have to remember that hike in price of petroleum products in the inter national market has made self-reliance a distant possibility in the near future.

(iii) Social Justice:

Social justice means to equitably distribute the wealth and income of the country among different sections of the society. In India, we find that a large number of people are poor; while few lead a luxurious life. Therefore, another objective of development is to ensure social justice and to take care of the poor and weaker sections of the society. The Five-Year Plans have highlighted four aspects of social justice. They are:

(i) Application of democratic principles in the political structure of the country;

(ii) Establishment of social and economic equity and removal of regional disparity;

(iii) Putting an end to the process of centralization of economic power; and

(iv) Efforts to raise the condition of backward and depressed classes.

Thus the Five Year Plans have targeted to uplift the economic condition of socio-economically weaker sections like scheduled caste and tribes through a number of target oriented programmes. In order to reduce the inequality in the distribution of landed assets, land reforms have been adopted. Further, to reduce regional inequality specific programmes have been adopted for the backward areas of the country.

In spite of various efforts undertaken by the authorities, the problem of inequality remains as great as ever. According to World Development Report (1994) in India the top 20 percent of household enjoy 39.3 percent of the national income while the lowest 20 percent enjoy only 9.2 percent of it. Similarly, another study points out that the lowest 40 percent of rural household own only 1.58 percent of total landed asset while the top 5.44 percent own around 40 percent of land. Thus the progress in the field of attaining social justice has been slow and not satisfactory.

(iv) Modernization of the Economy:

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Before independence, our economy was backward and feudal in character. After attainment of independence, the planners and policy makers tried to modernize the economy by changing the structural and institutional set up of the country. Modernization aims at improving the standard of living of the people by adopting a better scientific technique of production, by replacing the traditional backward ideas by logical reasoning's and bringing about changes in the rural structure and institutions.

These changes aim at increasing the share of industrial output in the national income, upgrading the quality of products and diversifying the Indian industries. Further, it also includes expansion of banking and non-banking financial institutions to agriculture and industry. It envisages modernization of agriculture including land reforms.

(v) Economic Stability:

Economic stability means to control inflation and unemployment. After the Second Plan, the price level started increasing for a long period of time. Therefore, the planners have tried to stabilize the economy by properly controlling the rising trend of the price level. However, the progress in this direction has been far from satisfactory.

Thus the broad objective of Indian plans has been a non-inflationary self-reliant growth with social justice.

August 2011 Relate the growth of infrastructure on the development of Indian economy 20 Marks

Febraury 2010 Writes notes on development of infrastructure in India 10 Marks

India’s rise in recent years is a most prominent development in the world economy.India has re-emerged as one of the fastest growing economies in the world. India’sgrowth, particularly in manufacturing and services, has boosted the sentiments, bothwithin country and abroad. With an upsurge in investment and robust macroeconomicfundamentals, the future outlook for India is distinctly upbeat. According to manycommentators, India could unleash its full potentials, provided it improves the

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infrastructure facilities, which are at present not sufficient to meet the growing demandof the economy. Failing to improve the country’s infrastructure will slow down India’sgrowth process. Therefore, Indian government’s first priority is rising to the challengeof maintaining and managing high growth through investment in infrastructure sector,among others.The provision of quality and efficient infrastructure services is essential to realize thefull potential of the growth impulses surging through the economy. India, while steppingup public investment in infrastructure, has been actively engaged in involving privatesector to meet the growing demand. The demand for infrastructure investment duringthe 11th Five Year Plan (2007-2011) has been estimated to be US$ 492.5 billion(Planning Commission, 2007). To meet this growing demand, Government of India hasplanned to raise the investment in infrastructure from the present 4.7 percent of GDP toaround 7.5 to 8 percent of GDP in the 11th Five Year Plan. In general, efforts towardsinfrastructure development is continued to focus on the key areas of physical and social

infrastructure. Profile of India’s physical infrasturctre : Performance of physical infrastructure in Indian economy in last one and half decadeshas been mixed and uneven. Performance of physical infrastructure in Indian economy in last one and half decades has been mixed and uneven. Over years, India’s soft infrastructure grew much faster than the hard infrastructure.For example the port traffic has been increased where as hard infrastructure like rail, road and air traffic grew little.The performance of soft infrastructure like telecom and port helped in the development of country’s economy , but the little growth of road network negated this development.

Transport

The govt has taken various measures to improve the roads. India’s road network is the largest network in the world. Govt has set up National Highway Authority of India which has implemented NHDP .The

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flovers and roads are built in cities and in highways with the help of some private companies on Build – Operate - Trasfer models.

The management and operation of delhi and Mumbai airports were handed to the joint venture companies,like GMR.Airports regulatory authority has been set up to work out the procedures for JV.Airports authority of India has been set up to maintain and upgrade certain airports.

Railways is the world second largest network managed by single authority. It caters the need of passenger and freight movement. Metro rail commites has been set up in various cities which are building the intracitiy rails which are helping in faster transport .

Special Economic Zones :

SEZs are designated duty-free enclaves with developed industrial infrastructure.These zones are regarded as foreign territory for the purpose of duties and taxes, and areexcluded from the domain of the custom authorities to enjoy full freedom for the in andoutflow of goods. SEZ units enjoy a tax exemption for seven years: 100 percentexemption in first 5 years, and 50 percent in the remaining 2 years. They have thefacility to retain 100 percent foreign exchange earnings in Export Earners ForeignCurrency Exchange accounts. All SEZ units are free to sell goods in the domestic tariffarea (DTA) on payment of applicable duties.

Provision of quality and efficient infrastructure services is essential to realize the fullpotential of the emerging Indian economy. Indian government’s first priority is thereforerising to the challenge of maintaining and managing high growth through investment ininfrastructure sector, among others. To sustain 9 percent growth, the Government ofIndia has estimated that an investment of over US$ 492.5 billion during the 11th FiveYear Plan (2007-2012) is required. Therefore, there is substantial infrastructure needs ininfrastructure sector in India, which, in other words, also offers large investment

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opportunities. Public-Private–Partnership (PPP) is emerging as the preferred instrument,where the private sector gets its normal financial rates of return while the public sectorpartner provides concessional funding based on the long-term direct and indirectbenefits to the economy. New instruments such as Viability Gap Funding (VGF)through a special purpose vehicle (SPV) set up recently by the Government of India tofund mega infrastructure projects may be relevant for other Asian countries as well.The cross-border infrastructure component is an important determinant of regionalintegration. If countries are not inter-linked each other through improved transportationnetwork, regional integration process will not move ahead at a desired pace. In India,development of cross-border infrastructure, especially transportation linkages andenergy pipelines with neighbouring countries is underway and expected to contribute tothe regional integration in Asia by reducing transportation costs and facilitatingintra-regional trade and services. Nevertheless, there are many challenges. It isimportant for India to enhance its overland connectivity with East Asia in order toeffectively facilitate the Asian regional integration.

Distinguish between the roles played by the public and private sectors in Indian industrial development.

10 Marks

How does government promote small scale industries in India 10 Marks

Keeping in view the contribution of small business to employment generation, balanced regional development of the country, and promotion of exports, the Government of India’s policy thrust has been on establishing, promoting and developing the small business sector, particularly the rural industries and the cottage and village industries in

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backward areas. Governments both at the central and state level have been actively participating in promoting selfemployment opportunities in rural areas by providing assistance in respect of infrastructure, finance, technology, training, raw-materials, and marketing. The various policies and schemes of Government assistance for the development of rural industries insist on the utilization of local resources and raw materials and locally available manpower. These are translated into action through various agencies, departments, corporations, etc., all coming under the purview of the industries department. All these are primarily concerned with the promotion of small and rural industries.Some of the support measures and programmers meant for the promotion of small and rural industries are discussed below:

National Bank for Agriculture and Rural Development (NABARD)

NABARD was setup in 1982 to promote integrated rural development. Since then, it has been adopting a multi-pronged, multi-purpose strategy for the promotion of rural business enterprises in the country. Apart from agriculture, it supports small industries, cottage and village industries, and rural artisans using credit and non-credit approaches. It offers counselling and consultancy services and organises training and development programmes for rural entrepreneurs.

The Rural Small Business Development Centre (RSBDC)

It is the first of its kind set up by the world association for small and medium enterprises and is sponsored by NABARD. It works for the benefit of socially and economically disadvantaged individuals and groups. It aims at providing management and technical support to current and prospective micro and small entrepreneurs in rural areas. Since its inception, RSBDC has organised several programmes on rural entrepreneurship, skill upgradation workshops, mobile clinics and trainers training programmes, awareness and counselling camps in various villages of Noida, Greater Noida and Ghaziabad. Through these programmes it covers a large number of rural unemployed youth and women in several trades, which includes food processing, soft toys making, ready-made garments, candle making, incense stick making, two-wheeler repairing and servicing, vermicomposting, and non conventional building materials.

National Small Industries Corporation (NSIC)

This was set up in1955 with a view to promote, aid and foster the growth of small business units in the country. This focuses on the commercial aspects of these functions.

Supply indigenous and imported machines on easy hire-purchase terms. Procure, supply and distribute indigenous and imported raw materials. Export the products of small business units and develop export-worthiness. Mentoring and advisory services. • Serve as technology business incubators. Creating awareness on technological upgradation. Developing software technology parks and technology transfer centres.

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A new scheme of ‘performance and credit rating’ of small businesses is implemented through National Small Industries Corporation (NSIC) with the twin objectives of (i) sensitising the small industries about the need for credit rating and (ii) encouraging the small business units to maintain good financial track record. This is to ensure that they score higher rating for their credit requirements as and when they approach the financial institutions for their working capital and investment requirements.

Small Industries Development Bank of India (SIDBI)

Set up as an apex bank to provide direct/indirect financial assistance under different schemes, to meet credit needs of small business organisations.

To coordinate the functions of other institutions in similar activities.

The National Commission for Enterprises in the Unorganised Sector (NCEUS)

The NCEUS was constituted in September, 2004, with the following objectives:

To recommend measures considered necessary for improving the productivity of small enterprises in the informal sector.

To generate more employment opportunities on a sustainable basis, particularly in the rural areas.

To enhance the competitiveness of the sector in the emerging global environment. To develop linkages of the sector with other institutions in the areas of credit, raw

materials, infrastructure, technology up gradation, marketing and formulation of suitable arrangements for skill development. The commission has identified the following issues for detailed consideration:

o Growth poles for the informal sector in the form of clusters/ hubs, in order to get external economic aid.

o Potential for public-private partnerships in imparting the skills required by the informal sector.

o Provision of micro-finance and related services to the informal sector.o Providing social security for the workers in the informal sector.

Rural and Women Entrepreneurship Development (RWED)

The Rural and Women Entrepreneurship Development programme aims at promoting a conducive business environment and at building institutional and human capacities that will encourage and support the entrepreneurial initiatives of rural people and women. RWE provides the following services:

Creating a business environment that encourages initiatives of rural and women entrepreneurs.

Enhancing the human and institutional capacities required to foster entrepreneurial dynamism and enhance productivity.

Providing training manuals for women entrepreneurs and training them. Rendering any other advisory services.

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World Association for Small and Medium Enterprises (WASME)

It is the only International NonGovernmental Organisation of micro, small and medium enterprises based in India, which set up an International Committee for Rural Industrialisation. Its aim is to develop an action plan model for sustained growth of rural enterprises.

Apart from these, there are several schemes to promote the non-farm sector, mostly initiated by the Government of India. For instance, there are schemes for entrepreneurship through subsidised loans like Integrated Rural Development Programme (IRDP), Prime Minister Rojgar Yojana (PMRY), schemes to provide skills like Training of Rural Youth for Self Employment (TRYSEM), and schemes to strengthen the gender component like Development of Women and Children in Rural Areas (DWCRA).

There are schemes to provide wage employment like Jawahar Rojgar Yojana (JRY), food for work etc., on rural works programmes to achieve the twin objectives of creation of rural infrastructure and generation of additional income for the rural poor, particularly during the lean agricultural season. Last, but not the least, there are schemes for specific groups of industries such as khadi, handlooms and handicrafts.

Scheme of Fund for Regeneration of Traditional Industries (SFURTI)

To make the traditional industries more productive and competitive and to facilitate their sustainable development, the Central Government set up this fund with Rs. 100 crores allocation to begin within the year 2005. This has to be implemented by the Ministry of Agro and Rural Industries in collaboration with State Governments. The main objectives of the scheme are as follows:

To develop clusters of traditional industries in various parts of the country; To build innovative and traditional skills, improve technologies and encourage

public-private partnerships, develop market intelligence etc., to make them competitive, profitable and sustainable; and

To create sustained employment opportunities in traditional industries. 9. The District Industries Centers (DICs)

The District Industries Centers Programme was launched on May 1, 1978, with a view to providing an integrated administrative framework at the district level, which would look at the problems of industrialisation in the district, in a composite manner. In other words District Industries Centers is the institution at the district level which provides all the services and support facilities to the entrepreneurs for setting up small and village industries.

Identification of suitable schemes, preparation of feasibility reports, arranging for credit, machinery and equipment, provision of raw materials and other extension services are the main activities undertaken by these centers.

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Broadly DICs are trying to bring change in the attitude of the rural entrepreneurs and all other connected with economic development in the rural areas. Even within the narrow spectrum, an attempt is being made to look at some of the neglected factors such as the rural artisan, the skilled craftsman and the handloom operator and to tune up these activities with the general process of rural development being taken up through other national programmes. The DIC is thus emerging as the focal point for economic and industrial growth at the district level.

August 2010 Write Notes on Diminishing Marginal utility 10 Marks

LAW IS BASED UPON THREE FACTS:Total wants of a man are unlimited but each single want can be satisfied. As a The law of diminishing marginal utility describes a familiar and fundamental tendency of humanbehavior. The law of diminishing marginal utility states that:

“As a consumer consumes more and more units of a specific commodity, the utility from the successive units goes on diminishing”.

Mr. H. Gossen, a German economist, was first to explain this law in 1854. Alfred Marshal later on restated this law in the following words:

“The additional benefit which a person derives from an increase of his stock of a thing diminishes with every increase in the stock that already has”.

1. Total wants of a man are unlimited but each single wants can be satisfied. As a man gets more and more units of a commodity, the desire of his for that good goes on falling. A point is reached when the consumer no longer wants any more units of that good.

2. Different goods are not perfect substitutes for each other in the satisfaction of various particular wants. As such the marginal utility will decline as the consumer gets additional units of a specific good.

3. The marginal utility of money is constant given the consumer’s wealth.

The basis of this law is a fundamental feature of wants. If people goes to the market to get some commodidity, They do not attach equal importance to all the commodities they buy. In case of some of commodities, they are willing to pay more and in some less. There are two main reasons for this difference in demand. (1) The linking of the consumer for the commodity and (2) The quantity of the commodity which the consumer has with himself. The more one has of a thing, the less he wants the additional units of it. In other words, the marginal utility of a commodity diminishing as the consumer gets larger quantities of it.Example for the law :

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This law can be explained by taking a very simple example. Suppose, a man is very thirsty. He goes to the market and buys one glass of sweet water. The glass of water gives him immense pleasure or we say the first glass of water has great utiltility for him. If he takes second glass of water after that, the utility will be less than that of the first one. It is because the edge of his thirst has been blunted to a great extent. If he drinks third glass of water, the utility of the third glass will be less than that of second and so on.

The utility goes on diminishing with the consumption of every successive glass water till it drops down to zero. This is the point of satiety. It is the position of consumer’s equilibrium or maximum satisfaction. If the consumer is forced further to take a glass of water, it leads to disutility causing total utility to decline. The marginal utility will become negative. A rational consumer will stop taking water at the point at which marginal utility becomes negative even if the good is free. In short, the more we have of a thing, ceteris paribus, the less we want still more of that, or to be more precise.

“In given span of time, the more of a specific product a consumer obtains, the less anxious he is to get more units of that product” or we can say that as more units of a good are consumed, additional units will provide less additional satisfaction than previous units.

In the figure (2.2), along OX we measure units of a commodity consumed and along OY is shown the marginal utility derived from them. The marginal utility of the first glass of water is called initial utility. It is equal to 20 units. The MU of the 5th glass of water is zero. It is called satiety point. The MU of the 6th glass of water is negative (-3). The MU curve here lies below the OX axis. The utility curve MM/ falls left from left down to the right showing that the marginal utility of the success units of glasses of water is falling.

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PRACTICAL IMPORTANCE OF LAW OF DIMINISHING MARGINAL UTILITY:

The law of diminishing utility has great practical importance in economics. The law of demand, the theory of consumer’s surplus, and the equilibrium in the distribution of expenditure are derived from the law of diminishing marginal utility.

(i) Basis of the law of demand: The law of marginal diminishing utility and the law of demand are very closely related to each other. In fact they law of diminishing marginal utility, the more we have of a thing and the less we want additional increment of it. In other words, we can say that as a person gets more and more of a particular commodity, the marginal utility of the successive units begins to diminish. So every consumer while buying a particular commodity compares the marginal utility of the commodity and the price of the commodity which he has to pay.

If the marginal utility of the commodity is higher than that of price, he purchases that commodity. As he buys more and more, the marginal utilility of the successive units begins to diminish. Then he pays fewer amounts for the successive units. He tries to equate at every step the marginal utility and the price of the commodity, he must lower its price so that the consumers are induced to buy large uantities and this is what is explained in the law of demand. From this, we conclude that the law of demand and the law of diminishing are very closely inter-related.

(ii) Consumer’s surplus concept: The theory of consumer’s surplus is also based on the law of diminishing marginal utility. A consumer while purchasing the commodity compares the utility of the commodity with that of the price which he has to pay. In most of the cases, he is willing to pay more than what he actually pays. The excess of the price which he would be willing to pay rather than to go without the thing over that which he actually does pay is the economic measure of this surplus satisfaction. It is in fact difference between the total utility and the actually money spent.

(iii) Importance to the consumer: A consumer in order to get the maximum satisfaction from his relatively scare resources distributes his income on commodities and services in such a way that the marginal utility from all the uses are the same. Here again the concept of marginal utility helps theconsumer in arranging his scale of preference for the commodities and services.

(iv) Importance to finance minister: Some times it is pointed out that the law of diminishing marginal utility does not apply on money. As a person collects money, the desires to accumulate more money increases. This view is superficial. It is true that wealth is acquired for the procurement of goods and services and man is always anxious in getting more and more of money. But what about the utility of money to him? Is it not a fact that as a person gets more and more wealth, its utility progressively decreases, though it does not reach to zero?For example, a person who earns $90,000 per month attaches less importance to $10. But a man who gets $1000 per month, the value of $10 to him is very high. A finance

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minister knowing this fact that the utility of money to a rich man is high and to poor man low bases the system of taxation in such a way that the rich perso

ns are taxed at a progressive rate. The system of modern taxation is therefore, based on the law of diminishing marginal utility.

Write Notes on Law of demand and supply 10 Marks

For a market economy to function, producers must supply the goods that consumers want. This is known as the law of supply and demand. “Supply” refers to the amount of goods a market can produce, while “demand” refers to the amount of goods consumers are willing to buy. Together, these two powerful market forces form the main principle that underlies all economic theory.

The law of supply and demand explains how prices are set for the sale of goods. The process starts with consumers demanding goods. When demand is high, producers can charge high prices for goods. The promise of earning large profits from high prices inspires producers to manufacture goods to meet the demand. However, the law of demand states that if prices are too high, only a few consumers will purchase the goods and demand will go unmet. To fully meet demand, producers must charge a price that will result in the required amount of sales while still generating profits for themselves.

For example, assume that a cell phone manufacturing company perceives demand for new cell phones. The company invests in market research to produce the exact cell phone that consumers want. The company then produces 5,000 units and puts them up for sale at $300 each. Consumers who find the phone to be valuable pay the full $300, and half of the units are soon sold.

Because of the high price, however, sales gradually begin to drop off. Many consumers still want the phone, but are unwilling or unable to pay $300 for one. Because the cell phone company loses money on unsold products, it reduces the phone’s price to $250 in hopes of increasing sales. Consumers begin buying again. The process continues until a price is reached that will both meet demand and maximize the company’s profits. That price is known as the “market-clearing price.”

When supply becomes balanced with demand, the market is said to have reached equilibrium. At equilibrium, resources are used at their maximum efficiency. The study of economics is largely a study in how market economies can best achieve equilibrium, which is why economists spend a great deal of time analyzing the relationship between supply and demand.

The law of supply and demand explains why people behave in certain ways within a market economy, and can even be used to predict behavior and, thereby, economic

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outcomes. Manufacturers, who want the highest price possible for their products, utilize inventory management protocols and invest in advertising to encourage consumers to buy. Consumers who value a low price over the quality or popularity of a product shop at outlets and discount stores, while those who favor popularity over price purchase goods from retail stores at the height of the market.

The law of supply and demand is not just limited to the sale of products, however. It can be used to explain almost any economic phenomenon, such as a rise or drop in employment, increased or decreased enrollment in colleges, the expansion or shrinking of government programs, and increases or reductions in available resources. Therefore, the law of supply and demand is not only vital to economic theory, it is the foundation of economics itself.

Review of the Laws of Supply and Demand

The Law of Supplystates that at higher prices, producers are willing to offer more products for sale than at lower prices

states that the supply increases as prices increase and decreases as prices decrease

states that those already in business will try to increase productions as a way of increasing profits

The Law of Demand  

states that people will buy more of a product at a lower price than at a higher price, if nothing changes

states that at a lower price, more people can afford to buy more goods and more of an item more frequently, than they can at a higher price

states that at lower prices, people tend to buy some goods as a substitute for others more expensive

 

 

August 2011 Write notes on Price elasticity demand 10 Marks

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Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (ceteris paribus, i.e. holding constant all the other determinants of demand, such as income). It was devised by Alfred Marshall.

Price elasticities are almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand, such as Veblen and Giffen goods, have a positive PED. In general, the demand for a good is said to be inelastic (or relatively inelastic) when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded. The demand for a good is said to be elastic (or relatively elastic) when its PED is greater than one (in absolute value): that is, changes in price have a relatively large effect on the quantity of a good demanded.

Revenue is maximized when price is set so that the PED is exactly one. The PED of a good can also be used to predict the incidence (or "burden") of a tax on that good. Various research methods are used to determine price elasticity, including test markets, analysis of historical sales data and conjoint analysis.

Definition

It is a measure of responsiveness of the quantity of a good or service demanded to changes in its price. The formula for the coefficient of price elasticity of demand for a good is:

The above formula usually yields a negative value, due to the inverse nature of the relationship between price and quantity demanded, as described by the "law of demand". For example, if the price increases by 5% and quantity demanded decreases by 5%, then the elasticity at the initial price and quantity = −5%/5% = −1. The only classes of goods which have a PED of greater than 0 are Veblen and Giffen goods. Because the PED is negative for the vast majority of goods and services, however, economists often refer to price elasticity of demand as a positive value (i.e., in absolute value terms).

This measure of elasticity is sometimes referred to as the own-price elasticity of demand for a good, i.e., the elasticity of demand with respect to the good's own price, in order to distinguish it from the elasticity of demand for that good with respect to the change in the price of some other good, i.e., a complementary or substitute good. The latter type of elasticity measure is called a cross -price elasticity of demand .

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As the difference between the two prices or quantities increases, the accuracy of the PED given by the formula above decreases for a combination of two reasons. First, the PED for a good is not necessarily constant; as explained below, PED can vary at different points along the demand curve, due to its percentage nature. Elasticity is not the same thing as the slope of the demand curve, which is dependent on the units used for both price and quantity. Second, percentage changes are not symmetric; instead, the percentage change between any two values depends on which one is chosen as the starting value and which as the ending value. For example, if quantity demanded increases from 10 units to 15 units, the percentage change is 50%, i.e., (15 − 10) ÷ 10 (converted to a percentage). But if quantity demanded decreases from 15 units to 10 units, the percentage change is −33.3%, i.e., (10 − 15) ÷ 15.

Febraury 2010 Factors influencing elasticity of demand. 10 Marks

1. Nature of goods:

Elasticity of demand depends on the nature of goods. The elasticity of demand for a commodity depends upon the necessity of it for a human life. Goods may be necessary for human life, comfort or luxurious. Necessary goods are extremely essential so the demand for these goods-is inelastic.

But the consumption of comfort and luxury goods enhances man's efficiency and social prestige. So their consumption is less important and can be very well postponed. Thus the elasticity of demand for such commodities is elastic.

2. Availability of substitutes:

The demand for a commodity having perfect substitute is relatively more elastic. If a flood gives the same pleasure and satisfaction in place of the consumption of another commodity, it is called a substitute commodity. A substitute may be close and remote.

Close substitute has got more elastic demand and remote substitute has less elastic demand. Tea and coffee are substitute commodities. Both can be used in absence of another. Thus the demand for tea and coffee is elastic.

3. Alternative use:

The demand for those goods having more than one use is said to be elastic. In other words goods having alternative uses are elastic. All the uses are not of same importance. As the commodities are put to certain less urgent needs or uses as a result of fall in price their demand raises. People use those commodities for certain urgent use in response to a rise in price.

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For example electricity can be used for a number of purposes like heating, lighting, cooking, cooling etc. If the electricity hill increases people utilise electricity for certain important urgent purpose and if the bill falls people use electricity for a number of other unimportant uses. Thus the demand for electricity is elastic.

4. Possibility of postponing consumption:

The demand for those goods whose consumption can be postponed for sometime is said to be elastic. On the other hand if the commodities cannot be postponed and need to be fulfilled the demand for them is in elastic.

Medicine for a patient, books for a student and milk for a child cannot be postponed. They are to be satisfied first. That is why the demand for those commodities is in elastic.

5. Proportion of income spent:

Elasticity of demand also depends on the proportion of income spent on different goods. The demand for those goods on which a negligible amount of the total income of the consumer is spent is said to be inelastic.

Salt, edible oil, match box, soap etc account for a very negligible amount of the consumer income. That is why their demand is inelastic.

6. Price-level:

The demand for high priced commodities is elastic. On the other hand the low priced goods is said to have inelastic demand. High priced commodities are luxurious goods and low priced goods are necessaries. Luxurious goods are mainly consumed by the people of high income brackets. For example if the price of a colour TV falls from Rs 15000 to Rs 5000 the price comes to the reach of the people who were unable to buy at the old price.

Now they rush to buy colour TV. Thus with a rise or fall in price the amount demanded of colour TV remarkably falls or rise. But if the price of salt raises from Rs 2.00 to Rs 5.00 it account for no such remarkable fall in the quantity demanded of salt.

7. Force of habit:

A repeated and constant use of a commodity by a person forms habit. A habit can't be avoided. Thus in such a case the consumption of the commodity can't be abstained in spite of the rise in price.

The consumer has to satisfy his habit regardless of change in price. Thus the demand for habitual commodities is fairly inelastic.

8. Durability of Commodities:

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The demand for durable commodities is elastic whereas the demand for less durable commodity is inelastic. Durable commodity is used over a long period of time. The utility of a durable good is destroyed continuously. Once a durable good is bought the buyer feels no want of it for a long period of time. Thus the change (rise or fall) in price can't influence the demand.

Thus the demand becomes elastic. On the other hand less durable or perishable goods are consumed repeatedly. Any change in price affects the demand. Thus the demand for perishable goods is less elastic.

9. Income level:

Elasticity of demand depends on income level. The rich and the poor are not equally affected at the change in price. Poor people are more affected than the rich. Because of high income rich people buy the same amount of an expensive commodity in response to a rise in price.

For example with a rise in price of Horlicks, poor people by other milk powder relatively cheaper than Horlicks. Thus for rich people the demand for Horlicks is inelastic whereas for poor people the demand for the Horlicks is elastic.

What are the types of price elasticity of demand. – August 2010 5 marks / 10 Marks ( Feb 2010)

The price elasticity demand is defined as the ratio of percentage change in quantity demanded to a percentage change in price. Thus elasticity of demand can be expressed in form of the following as price and quantity demanded move opposite.

Five cases of Elasticity of Demand:

1. Perfectly elastic demand

2. Perfectly inelastic demand

3. Relatively elastic demand

4. Relatively inelastic demand

5. Unitary elastic demand

1. Perfectly elastic demand:

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The demand is said to be perfectly .elastic when a very insignificant change in price leads to an infinite change in quantity demanded. A very small fall in price causes demand to rise infinitely. Likewise a very insignificant rise in price reduces the demand to zero. This case is theoretical which is never found in real life.

2. Perfectly inelastic demand:

The demand is said to be perfectly inelastic when a change in price produces no change in the quantity demanded of a commodity. In such a case quantity demanded remains constant regardless of change in price. The amount demanded is totally unresponsive of change in price. The elasticity of demand is said to be zero.

3. Relatively more elastic demand:

The demand is relatively more elastic when a small change in price causes a greater change in quantity demanded. In such a case a proportionate change in price of a commodity causes more than proportionate change in quantity demanded. If price changes by 10% the quantity demanded of the commodity change by more than 10% i.e. 25%. The demand curve in such a situation is relatively flatter.

4. Relatively inelastic demand:

It is a situation where a greater change in price leads to smaller change in quantity demanded. The demand is said to be relatively inelastic when a proportionate change in price is greater than the proportionate change in quantity demanded. For example If price falls by 20% quantity demanded rises by less than 20% i.e 15%.

5. Unitary elastic demand:

The demand is said to be unit when a change in price produces exactly the same percentage change in the quantity demanded of a commodity. In such a situation the percentage change in both the price and quantity demanded is the same. For example if the price falls by 25% the quantity demanded rises by the same 25%. It takes the shape of a rectangular hyperbola. Numerically elasticity of demand is said to be equal to 1.(ed = 1).

Write Notes on Measurement of price elasticity of demand August 2011/10 Marks

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August 2010 Describe the various methods of measurement of price elasticity of demand 15 Marks

Elasticity of demand is known as price-elasticity of demand. Because elasticity of demand is the degree of change in amount demanded of a commodity in response to a change in price. Price elasticity of demand can be measured through three popular methods. These methods are:

1. Percentage method or Arithmetic method

2. Total Expenditure method

3. Graphic method or point method.

1. Percentage method:-

According to this method price elasticity is estimated by dividing the percentage change in amount demanded by the percentage change in price of the commodity. Thus given the percentage change of both amount demanded and price we can derive elasticity of demand. If the percentage charge in amount demanded is greater that the percentage change in price, the coefficient thus derived will be greater than one.

If percentage change in amount demanded is less than percentage change in price, the elasticity is said to be less than one. But if percentage change of both amount demanded and price is same, elasticity of demand is said to be unit.

2. Total expenditure method

Total expenditure method was formulated by Alfred Marshall. The elasticity of demand can be measured on the basis of change in total expenditure in response to a change in price. It is worth noting that unlike percentage method a precise mathematical coefficient cannot be determined to know the elasticity of demand.

By the help of total expenditure method we can know whether the price elasticity is equal to one, greater than one, less than one. In such a method the initial expenditure before the change in price and the expenditure after the fall in price are compared. By such comparison, if it is found that the expenditure remains the same, elasticity of demand is One (ed=I).

If the total expenditure increases the elasticity of demand is greater than one (ed>l). If the total expenditure diminished with the change in price elasticity of demand is less than one (ed<I). The total expenditure method is illustrated by the following diagram.

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3. Graphic method:

Graphic method is otherwise known as point method or Geometric method. According to this method elasticity of demand is measured on different points on a straight line demand curve. The price elasticity of demand at a point on a straight line is equal to the lower segment of the demand curve divided by upper segment of the demand curve.

Thus at mid point on a straight-line demand curve, elasticity will be equal to unity; at higher points on the same demand curve, but to the left of the mid-point, elasticity will be greater than unity, at lower points on the demand curve, but to the right of the midpoint, elasticity will be less than unity.

Write notes on role of aggregate demand in determining output and employment 10 marks  

In macroeconomics, aggregate demand (AD) is the total demand for final goods and services in the economy (Y) at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels. This is the demand for the gross domestic product of a country when inventory levels are static. It is often called effective demand, though at other times this term is distinguished.

It is often cited that the aggregate demand curve is downward sloping because at lower price levels a greater quantity is demanded. While this is correct at the microeconomic, single good level, at the aggregate level this is incorrect

The aggregate demand curve is in fact downward sloping as a result of three distinct effects: Pigou's wealth effect, the Keynes' interest rate effect and the Mundell-Fleming exchange-rate effect.

An aggregate demand curve is the sum of individual demand curves for different sectors of the economy. The aggregate demand is usually described as a linear sum of four separable demand sources.

where

is consumption (may also be known as consumer spending) =

, is Investment, is Government spending, is Net export,

o is total exports, and

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o is total imports = .

These four major parts, which can be stated in either 'nominal' or 'real' terms, are:

personal consumption expenditures (C) or "consumption," demand by households and unattached individuals; its determination is described by the consumption function. The consumption function is C= a + (mpc)(Y-T)

o a is autonomous consumption, mpc is the marginal propensity to consume, (Y-T) is the disposable income.

gross private domestic investment (I), such as spending by business firms on factory construction. This includes all private sector spending aimed at the production of some future consumable.

o In Keynesian economics, not all of gross private domestic investment counts as part of aggregate demand. Much or most of the investment in inventories can be due to a short-fall in demand (unplanned inventory accumulation or "general over-production"). The Keynesian model forecasts a decrease in national output and income when there is unplanned investment. (Inventory accumulation would correspond to an excess supply of products; in the National Income and Product Accounts, it is treated as a purchase by its producer.) Thus, only the planned or intended or desired part of investment (Ip) is counted as part of aggregate demand. (So, I does not include the 'investment' in running up or depleting inventory levels.)

o Investment is affected by the output and the interest rate (i). Consequently, we can write it as I(Y,i). Investment has positive relationship with the output and negative relationship with the interest rate. For example, an increase in the interest rate will cause aggregate demand to decline. Interest costs are part of the cost of borrowing and as they rise, both firms and households will cut back on spending. This shifts the aggregate demand curve to the left. This lowers equilibrium GDP below potential GDP. As production falls for many firms, they begin to lay off workers, and unemployment rises. The declining demand also lowers the price level. The economy is in recession.

The logical starting point of Keynes’s theory of employment is the principle of effective demand. In a entrepreneurial economy, the level of employment is based on effective demand. Thus employment results from a deficiency of effective demand and the level of employment can be raised by increasing the level of effective demand.

Aggregate Demand Price

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       “The aggregate demand price for the output of any given amount of employment is the total sum of money or proceeds which is expected from the sale of the output produced when that amount of labour is employed.” Thus the aggregate demand price is the amount of money which the entrepreneurs expect to get by selling the output produced by the number of men employed. In other words it refers to the expected revenue from the sale of output produced at a particular level of employment. Different aggregate demand prices relate to different levels of employment in the economy.

       A statement showing the various aggregate demand prices at different levels of employment is called the aggregate demand price schedule or aggregate demand function. “The aggregate demand function.” according to Keynes, “relates any given level of employment to the expected proceeds from that level of employment.”

       The below tablet represents the aggregate demand schedule where it reveals that, with the increase in the level of employment proceeds, expected rise and at lower levels of employment decline. When 900 thousand people are provided employment the aggregate demand price is $560 million and when 250 thousand people are provided jobs, it is $480 million.

       According to Keynes the aggregate demand function is an increasing function of the level of employment and is expressed as D = F (N), where D is the proceeds which entrepreneurs expect from the employment of N men.

Level of EmploymentIn 100 thousands

Aggregate Demand Price (D)In Million $

4 460

5 480

6 500

7 520

8 540

9 560

10 580

       The aggregate demand curve can be drawn on the basis of the above schedule. It inclines upward from the left to right for the reason that the level of employment increases aggregate demand price also rises, shown as AD curve in the upcoming diagram 1.

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Aggregate Supply Price

            When an entrepreneur gives employment to a definite amount of labour, it requires certain quantities of co-operant factors like land, capital, raw materials etc. which will be paid remuneration along with labour. Thus each level of employment involves certain money costs of production including normal profits which the entrepreneur must cover. “At any given level of employment of labour aggregate supply price is the total amount of money which all the entrepreneurs in the economy, taken together must expect to receive from the sale of the output produced by that given number of men, if it is to be just worth employing them.”

            In brief, the aggregate supply price refers to the proceeds necessary from the sale of output at a particular level of employment. Thus each level of employment in the economy is related to a particular aggregate supply price and these are different aggregate supply prices for different levels of employment.

            A statement showing the various aggregate supply prices at different levels of employment is called aggregate supply price schedule or aggregate supply function. In the words of Prof. Dillard, “The aggregate supply function is a schedule of the minimum amounts of proceeds required to induce varying quantities of employment.” The below tablet reveals the aggregate supply schedule,

Level of Employment (N)in 100 Thousands

Aggregate Supply Prize (Z)In Million $

4 430

5 460

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6 490

7 520

8 550

9 580

10 610

            The above table reveals that the aggregate supply prices rise with the hike in the level of employment. If entrepreneurs are to provide employment to 400 thousand workers, they must receive $430 millions from the sale of output produced by them. It is only when they expect to receive minimum amounts of proceeds ($460 millions, $490 million and $520 million) that they will provide employment to more workers (5, 6 and 7 hundred thousand dollars respectively).

            But when the economy reaches the level of full employment (at 800 thousand workers, the aggregate supply price ($550 million, $580 million and $610 millions) continues to increase but there is no further is an increasing function of the level of employment and is expressed as Z = ɸ N, Z is the aggregate supply price of the output level from employing N men.

            The aggregate supply curve can be drawn on the basis of the schedule. It inclines upward from left ro right for the reason that the necessary expected proceeds hikes; the level of employment also rises. But when the economy reaches the level of full employment, the aggregate supply curve becomes vertical. Even with the hike in the aggregate supply price, it is not possible to provide more employment as the economy has attained the level of full employment.

         

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August 2011 Write Notes on Agro based industries in India

10 Marks

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Agro Industry Scenario

An IntroductionThe agro industry is regarded as an extended arm of agriculture. The development of the agro industry can help stabilise and make agriculture more lucrative and create employment opportunities both at the production and marketing stages. The broad-based development of the agro-products industry will improve both the social and physical infrastructure of India. Since it would cause diversification and commercialization of agriculture, it will thus enhance the incomes of farmers and create food surpluses.

The agro-industry mainly comprises of the post-harvest activities of processing and preserving agricultural products for intermediate or final consumption. It is a well-recognized fact across the world, particularly in the context of industrial development, that the importance of agro-industries is relative to agriculture increases as economies develop. It should be emphasized that ‘food’ is not just produce. Food also encompasses a wide variety of processed products. It is in this sense that the agro-industry is an important and vital part of the manufacturing sector in developing countries and the means for building industrial capacities.  

The agro Industry is broadly categorised in the following types:

(i) Village Industries owned and run by rural households with very little capital investment and a high level of manual labour; products include pickles, papad, etc. (ii) Small scale industry characterized by medium investment and semi-automation; products include edible oil, rice mills, etc. (iii) Large scale industry involving large investment and a high level of automation; products include sugar, jute, cotton mills, etc.

The development of agro-based industries commenced during pre-independence days. Cotton mills, sugar mills, jute mills

 

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An IntroductionThe agro industry is regarded as an extended arm of agriculture. The development of the agro industry can help stabilise and make agriculture more lucrative and create employment opportunities both at the production and marketing stages. The broad-based development of the agro-products industry will improve both the social and physical infrastructure of India. Since it would cause diversification and commercialization of agriculture, it will thus enhance the incomes of farmers and create food surpluses.

The agro-industry mainly comprises of the post-harvest activities of processing and preserving agricultural products for intermediate or final consumption. It is a well-recognized fact across the world, particularly in the context of industrial development, that the importance of agro-industries is relative to agriculture increases as economies develop. It should be emphasized that ‘food’ is not just produce. Food also encompasses a wide variety of processed products. It is in this sense that the agro-industry is an important and vital part of the manufacturing sector in developing countries and the means for building industrial capacities.

The agro Industry is broadly categorised in the following types:

(i) Village Industries owned and run by rural households with very little capital investment and a high level of manual labour; products include pickles, papad, etc. (ii) Small scale industry characterized by medium investment and semi-automation; products include edible oil, rice mills, etc. (iii) Large scale industry involving large investment and a high level of automation; products include sugar, jute, cotton mills, etc.

The development of agro-based industries commenced during pre-independence days. Cotton mills, sugar mills, jute mills were fostered in the corporate sector. During the post-Independence days, with a view to rendering more employment and using local resources, small scale and village industries were favored.   The increasing environmental concerns will give further stimulus to agro based industries. Jute and cotton bags, which have begun to be replaced by plastic bags, have made a comeback. It is the right time to engage in mass production of low cost jute/cotton bags to replace plastic bags.   The agro industry helps in processing agricultural products such as field crops, tree crops, livestock and fisheries and converting them to edible and other usable forms. The private sector is yet to actualize the full potential of the agro industry. The global market is mammoth for sugar, coffee, tea and processed foods such as sauce, jelly, honey, etc. The market for processed meat, spices and fruits is equally gigantic. Only with mass production coupled with modern technology and intensive marketing can the domestic market as well as the export market be exploited to the fullest extent. It is therefore imperative that food manufacturers understand changing consumer preferences,

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technology,With modernization, innovation and incorporation of latest trends and technology in the entire food chain as well as agro-production, the total production capacity of agro products in India and the world is likely to double by the next decade.

India is the second largest producer of food in the world. Whether it is canned food, processed food, food grains, dairy products, frozen food, fish, meat, poultry, the Indian agro industry has a huge potential, the significance and growth of which will never cease.

Sea fishing, aqua culture, milk and milk products, meat and poultry are some of the agro sectors that have shown marked growth over the years. linkages between members of the food supply chains and prevailing policies and business environments to take advantage of the global market.   Processed Food Segment The processing level of the agro industry may be at the primary, secondary or tertiary stage. In the case of hides and skins, India exports largely semi-processed items whereas in coffee/tea, the exports are mostly in secondary stage by way of fully processed bulk shipments without branding/packing. Exports at the tertiary stage mean branding and packaging the product that are ready for use by the consumer.

A few years ago, companies struggled to sell packaged foods. But now it is much easier to break into the Indian market because of a younger population, higher incomes, new technologies and a growing middle class, estimated at 50 million households. An average Indian spends around 53 per cent of his/her income on food. The domestic market for processed foods is not only huge but is growing fast in tandem with the economy. It is estimated to be worth $90 billion. Processed Food Manufacturing companies are required to be persistent and must adapt products to the Indian cultural preferences.

Many big companies like ITC, HLL, Nestle entered the Indian market a long time ago and have made a deep penetration in the market. From these success stories we can learn some lessons in order to capture the higher end of the local market and get a fair share of the export market. The model is structured around the following:-      * Large scale investment and adoption of the latest technologies    * Intensive marketing efforts    * Perhaps, a foreign tie-up can be beneficial    * Brand name.

  The levels of processing and manufacturing can be classified into three groups, namely manual, mechanical and chemical or a combination thereof. In choosing the process, the main considerations are the nature of the raw materials, technology of processing, and packing.

Other Segments

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Dairy product is another area where there is enormous potential. No doubt the country has made tremendous strides in the last 20 years in production and processing of milk and milk products. But the fact remains that only 15 per cent of all the milk produced is processed. Today, a large number of people suffer from diabetic or cardiac ailments and availability of fat free milk, fat free curd and sugar free food is poor. A simple product like soya milk is not produced in adequate quantity. Fish and shrimp have good export potential but there is an immense lack of cold storage and modern processing facilities. For instance fish production is around six million tonnes a year and the frozen storage capacity spread over 500 units is only one lakh tonnes.

Another area is herbal medicine. It is being increasingly realized the world over that herbal drugs do not have any side effects. India has a good number of tried and tested herbal products in use and what is required is rigorous quality control, proper packaging and a brand name.

The government and modern retailers are addressing these issues with new laws on packaging and labeling as well as greater investment in the supply chain.

The Progress Ahead* With modernization, innovation and incorporation of latest trends and technology in the entire food chain as well as agro-production, the total production capacity of agro products in India and the world is likely to double by the next decade.

India is the second largest producer of food in the world. Whether it is canned food, processed food, food grains, dairy products, frozen food, fish, meat, poultry, the Indian agro industry has a huge potential, the significance and growth of which will never cease.

Sea fishing, aqua culture, milk and milk products, meat and poultry are some of the agro sectors that have shown marked growth over the years.

August 2010 : What is equilibrium price ? 5 marks

Discuss the relative significance of demand and supply in determining the equilibrium price. 15 Marks

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August 2010 : Examine the nature of un employment problem in India 5 marks

“Jobs in India are shrinking at an alarming rate. Privatization and globalization have further aggravated the problem. Instead of generating employment, they have rendered millions of hands idle. American policies are effective there but not in India where the accursed ones are left to fend for themselves leading to frustration, disappointment, anger and violence".

Estimates of the total number of Indians unemployed or underemployed vary between 70 and 100 million. This figure can cause concern to any nation, but to a developing country like ours, it is the cause of great distress.

In India the specter of frustration of misery and hunger of fallen hopes and barren dreams of bitter pain and dark despair haunts the unemployed.

India was Asia's fastest expanding economy in the most recent quarter data Growth is its highest in nearly 15 years. Glitzy shopping malls are springing up and a culture of consumption is taking root as foreign companies are attracted by cheap labour.

But growing unemployment is forcing people from rural areas to migrate in hordes to nearby cities and towns, creating slums, social unrest and electricity and water shortages. "There is some truth in the fact that jobs have not grown as much as expected as the economy has grown

AUGUST 2010 Explain the various schemes to reduce the unemployment in India 15 marks

Schmes to reduce un employment in India

Apart from the programs which are mainly aimed at the development of infrastructure, such as construction of small and large dams, canals and roads, the government strategies to generate employment are closely associated with poverty-alleviation programs. Nevertheless, the government has undertaken many special programs to generate employment opportunities. The major ones among them are:

Rural Works Program: This program aims at construction of civil works of permanent nature in rural areas.

Integrated Dry Land Agricultural Development: Under this scheme, permanent works like soil conservation, development of land and water harnessing are undertaken.

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National Rural Employment Program: This program aims to create community assets for strengthening rural infrastructure, like drinking water wells, community irrigation wells, village tanks, minor irrigation works, rural roads and schools.

The Rural Landless Employment Guarantee Program: It aims at generating gainful employment, creating productive assets in rural areas and improving the overall quality of rural life.

Skill Development: One of the major issues relating to unemployment is skill development. Change in the production methods has led to increase in demand for skilled labor. A skilled laborer is one who has proper training and education to work in a particular field. Training and education increase the productivity of workers.

Skill development means:

To educate and provide specialized training to the labor force in order to increase their productivity.

To ensure continuous employability of labor.

To be able to absorb the new technologies at the work.

To compete with the labor force of the other developed countries.

With a view to impart skills through training, the Government of India has taken many steps. The Central Board of Workers' Education (CBWE), formed in 1958 is doing significant work by creating understanding and enthusiasm among workers for the success of industrial growth. There are around 4300 Industrial Training Institutes (ITIs) operating in India to produce specialized workers. Various ministries of the Government of India are providing vocational education and training. Vocational education has been integrated at the school level as well. In the school system, there is a provision for vocational education after Class X.

But there are a number of problems associated with these steps. The ITIs need restructuring and reorientation of their courses at a much faster rate so as to respond effectively to the current and future needs of the job market Further the Industry-Institute interaction continues to be weak. The vocational courses offered by the school system are to be modified in accordance with the manpower needs of the day.

Entrepreneurial Development: Growth of employment involves setting up of new businesses, which apart from capital need expertise and organizing ability. Providing training for this purpose and implementing schemes to promote entrepreneurship has, therefore, been considered necessary for promoting self-employment.

The government has implemented a number of schemes for providing low cost capital to the small enterprises and self-employed persons. The schemes are aimed at developing

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their entrepreneurial ability, guiding them in preparation of project reports for financial assistance and giving technical and professional help in running their businesses. Financial institutions like banks have helped in this process by providing credit facilities at concessional rates. These measures have brought about positive results in recent years as a new class of entrepreneurs different from the earlier family-based businesses has emerged. This group has helped in expansion of India's industries and businesses into newer domains and regions.

FEBRAURY 2010 Elaborate the causes responsible for un employment in India. Suggest practical remedies to promote employment 10 + 10 marks

It is obvious that the unemployment situation is grim indeed. It has, therefore, to be tackled with appropriate measures and on an urgent basis. However, before we discussed the ways and means of removing unemployment, it is necessary that we understand the causes that given rise to it. The major causes which have been responsible for the wide spread unemployment can be spelt out as under.

1) Rapid Population Growth:

It is the leading cause of unemployment in Rural India. In India, particularly in rural areas, the population is increasing rapidly. It has adversely affected the unemployment situation largely in two ways. In the first place, the growth of population directly encouraged the unemployment by making large addition to labour force. It is because the rate of job expansion could never have been as high as population growth would have required.

It is true that the increasing labour force requires the creation of new job opportunities at an increasing rate. But in actual practice employment expansion has not been sufficient to match the growth of the labor force, and to reduce the back leg of unemployment. This leads to unemployment situation secondly; the rapid population growth indirectly affected the unemployment situation by reducing the resources for capital formation. Any rise in population, over a large absolute base as in India, implies a large absolute number.

It means large additional expenditure on their rearing up, maintenance, and education. As a consequence, more resources get used up in private consumption such as food, clothing, shelter and son on in public consumption like drinking water, electricity medical and educational facilities. This has reduced the opportunities of diverting a larger proportion of incomes to saving and investment. Thus, population growth has created obstacles in the way of first growth of the economy and retarded the growth of job opportunities.

2) Limited land:

Land is the gift of nature. It is always constant and cannot expand like population growth. Since, India population increasing rapidly, therefore, the

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land is not sufficient for the growing population. As a result, there is heavy pressure on the land. In rural areas, most of the people depend directly on land for their livelihood. Land is very limited in comparison to population. It creates the unemployment situation for a large number of persons who depend on agriculture in rural areas.

3) Seasonal Agriculture:

In Rural Society agriculture is the only means of employment. However, most of the rural people are engaged directly as well as indirectly in agricultural operation. But, agriculture in India is basically a seasonal affair. It provides employment facilities to the rural people only in a particular season of the year. For example, during the sowing and harvesting period, people are fully employed and the period between the post harvest and before the next sowing they remain unemployed. It has adversely affected their standard of living.

4) Fragmentation of land:

In India, due to the heavy pressure on land of large population results the fragmentation of land. It creates a great obstacle in the part of agriculture. As land is fragmented and agricultural work is being hindered the people who depend on agriculture remain unemployed. This has an adverse effect on the employment situation. It also leads to the poverty of villagers.

5) Backward Method of Agriculture:

The method of agriculture in India is very backward. Till now, the rural farmers followed the old farming methods. As a result, the farmer cannot feed properly many people by the produce of his farm and he is unable to provide his children with proper education or to engage them in any profession. It leads to unemployment problem.

6) Decline of Cottage Industries:

In Rural India, village or cottage industries are the only mans of employment particularly of the landless people. They depend directly on various cottage industries for their livelihood. But, now-a-days, these are adversely affected by the industrialisation process. Actually, it is found that they cannot compete with modern factories in matter or production. As a result of which the village industries suffer a serious loss and gradually closing down. Owing to this, the people who work in there remain unemployed and unable to maintain their livelihood.

7) Defective education:

The day-to-day education is very defective and is confirmed within the class room only. Its main aim is to acquire certificated only. The present educational system is not job oriented, it is degree oriented. It is defective on the ground that is more general then the vocational. Thus, the people who have getting general education are unable to do any work. They are to be called as good for nothing in the ground that they cannot have any job here, they can find the ways of self employment. It leads to unemployment as well as underemployment.

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8) Lack of transport and communication:

In India particularly in rural areas, there are no adequate facilities of transport and communication. Owing to this, the village people who are not engaged in agricultural work are remained unemployed. It is because they are unable to start any business for their livelihood and they are confined only within the limited boundary of the village. It is noted that the modern means of transport and communication are the only way to trade and commerce. Since there is lack of transport and communication in rural areas, therefore, it leads to unemployment problem among the villagers.

9) Inadequate Employment Planning:

The employment planning of the government is not adequate in comparison to population growth. In India near about two lakh people are added yearly to our existing population. But the employment opportunities did not increase according to the proportionate rate of population growth. As a consequence, a great difference is visible between the job opportunities and population growth.

On the other hand it is a very difficult task on the part of the Government to provide adequate job facilities to all the people. Besides this, the government also does not take adequate step in this direction. The faulty employment planning of the Government expedites this problem to a great extent. As a result the problem of unemployment is increasing day by day

Febraury 2010 Discuss the achievements and failures of Planning in India 10 + 10 marks

REFER THE SEPARATE POWER POINT FOR DETAILED ANSWER

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Febraury 2010 What do you understand by agricultural productivity ? Why is it low in India ? 5 + 15 marks

Agricultural productivity is measured as the ratio of agricultural outputs to agricultural inputs. While individual products are usually measured by weight, their varying densities make measuring overall agricultural output difficult. Therefore, output is usually measured as the market value of final output, which excludes intermediate products such as corn feed used in the meat industry. This output value may be compared to many different types of inputs such as labour and land (yield). These are called partial measures of productivity. Agricultural productivity may also be measured by what is termed total factor productivity (TFP). This method of calculating agricultural productivity compares an index of agricultural inputs to an index of outputs. This measure of agricultural productivity was established to remedy the shortcomings of the partial measures of productivity; notably that it is often hard to identify the factors cause them to change. Changes in TFP are usually attributed to technological improvements.

The productivity of a region's farms is important for many reasons. Aside from providing more food, increasing the productivity of farms affects the region's prospects for growth and competitiveness on the agricultural market, income distribution and savings, and labour migration. An increase in a region's agricultural productivity implies a more efficient distribution of scarce resources. As farmers adopt new techniques and differences in productivity arise, the more productive farmers benefit from an increase in their welfare while farmers who are not productive enough will exit the market to seek success elsewhere.[6]

As a region's farms become more productive, its comparative advantage in agricultural products increases, which means that it can produce these products at a lower opportunity cost than can other regions. Therefore, the region becomes more competitive on the world market, which means that it can attract more consumers since they are able to buy more of the products offered for the same amount of money.

Increases in agricultural productivity lead also to agricultural growth and can help to alleviate poverty in poor and developing countries, where agriculture often employs the greatest portion of the population. As farms become more productive, the wages earned by those who work in agriculture increase. At the same time, food prices decrease and food supplies become more stable. Labourers therefore have more money to spend on food as well as other products. This also leads to agricultural growth. People see that

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there is a greater opportunity earn their living by farming and are attracted to agriculture either as owners of farms themselves or as labourers.[7]

However, it is not only the people employed in agriculture who benefit from increases in agricultural productivity. Those employed in other sectors also enjoy lower food prices and a more stable food supply. Their wages may also increase.[7]

Agricultural productivity is becoming increasingly important as the world population continues to grow. India, one of the world's most populous countries, has taken steps in the past decades to increase its land productivity. Forty years ago, North India produced only wheat, but with the advent of the earlier maturing high-yielding wheats and rices, the wheat could be harvested in time to plant rice. This wheat/rice combination is now widely used throughout the Punjab, Haryana, and parts of Uttar Pradesh. The wheat yield of three tons and rice yield of two tons combine for five tons of grain per hectare, helping to feed India's 1.1 billion people.

The causes for low productivity of Indian agriculture can be divided into 3 broad categories, namely, (1) General factors, (2) Institutional factors and (3) Technological factors.

1. General Factors

(a) Overcrowding in Agriculture:

The increasing pressure of population on land is an important demographic factor responsible for low yield in agriculture. The area of cultivated land per cultivator has declined from 0.43 hectare in 1901 to 0.23 hectare in 1981 despite an expansion of area under cultivation. Hence, agricultural sector has become overcrowded and this has adversely affected the agricultural productivity.

(b) Discouraging Rural Atmosphere: The Indian farmers, living in rural areas are generally tradition-bound, illiterate, ignorant, superstitious and conservative. Their attitude of apathy and neglect keeps the system of cultivation primitive. The farmers are not prepared to accept anything new as a consequence of which modernization of agriculture becomes difficult.

(c) Inadequate non-firm Services:

Shortage of finance, marketing and storage facilities are also responsible for agricultural backwardness in India. The co-operatives and other institutional agencies have not been able to eliminate the village money lenders. Storage facilities for farmers are not still available to preserve their agricultural product for a better price.

(d) Natural Calamities:

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Indian agriculture is a gamble in the monsoon. If monsoon becomes favorable, we have a good crop; otherwise agriculture is affected by drought, flood and cyclone.

2. Institutional Factors

(a) Size of Holding:

The small size of holdings in India is an impediment in the way of progressive agriculture. The average size of holdings in India is less than 2 hectares. In case of very small firms, it is difficult to introduce new technology. Further, due to fragmentation of holdings a great deal of labour and energy is destroyed in cultivation.

(b) Pattern of Land Tenure:

The agrarian structure in India is not conducive for a progressive agriculture. The tendril relationships were such that the big landlords used to have a considerable influence on their respective areas. The actuarial cultivator had known incentive for improvement and more production. Though the zamindari system has been abolished, absentee landlordism still prevails; heavy rents are still extracted and there is no security of tenancy. Under these circumstances, it is unwise to expect any remarkable increase in agricultural productivity due to the apathetic attitude of the tillers of the land.

3. Technological Factors

(a) Poor Technique of Production:

The technique of production adopted by Indian farmers is old, outdated and inefficient. The tradition-bound poor farmers have not yet been able to adopt the modern methods to get the best yield from their land. The seeds they use are of poor quality and the age- old, traditional wooden plough still exists in Indian agriculture. The farmers do not enjoy the benefits of agricultural research and development programmes. They consider agriculture as a way of life rather than a business proposition. Therefore, production remains at a low level.

(b) Inadequate Irrigational Facilities:

Indian agriculture is a gamble in monsoon due to non availability of irrigation facilities. In spite of several measures, irrigation has not substantially increased in India.

Measures to Improve Productivity:

The F.A.O. has suggested following measures to increase the productivity of Indian agriculture:

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1. The farmers should be provided with a stable price for their agricultural products at a remunerative level.

2. There should be an expansion of adequate marketing facilities to sell the agricultural product.

3. The land tenure system should be changed in favour of the cultivator.

4. There should be a provision of cheap credit on reasonable terms especially to small farmers for better techniques of production.

5. The modern inputs like fertilisers. Pesticides and improved seeds should be made available to the farmers at reasonable prices.

6. There should be provisions of education, research and extension of agro-economic services to spread the knowledge of improved methods of farming.

7. The State should make provision for the development of resources which are not possible in the part of individual farmers e.g. large scale irrigation, land reclamation or resettlement projects.

8. There should be an extension of land used and intensification and utilisation of land already in use through improved and scientific implements.

August 2010 Discuss Various factors responsible for economic development in India 20 Marks

The economic development in India followed socialist-inspired policies for most of its independent history, including state-ownership of many sectors; extensive regulation and red tape known as "Licence Raj"; and isolation from the world economy. India's per capita income increased at only around 1% annualized rate in the three decades after Independence.[1] Since the mid-1980s, India has slowly opened up its markets through economic liberalization. After more fundamental reforms since 1991 and their renewal in the 2000s, India has progressed towards a free market economy.

In the late 2000s, India's growth reached 7.5%, which will double the average income in a decade.

Analysts say that if India pushed more fundamental market reforms, it could sustain the rate and even reach the government's 2011 target of 10%

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The economic growth has been driven by the expansion of services that have been growing consistently faster than other sectors. It is argued that the pattern of Indian development has been a specific one and that the country may be able to skip the intermediate industrialization-led phase in the transformation of its economic structure. Serious concerns have been raised about the jobless nature of the economic growth.[

Favorable macroeconomic performance has been a necessary but not sufficient condition for the significant reduction of poverty among the Indian population. The rate of poverty decline has not been higher in the post-reform period (since 1991). The improvements in some other non-economic dimensions of social development have been even less favourable. The most pronounced example is an exceptionally high and persistent level of child malnutrition

The progress of economic reforms in India is followed closely. The World Bank suggests that the most important priorities are public sector reform, infrastructure, agricultural and rural development, removal of labor regulations, reforms in lagging states, and HIV/AIDS

India ranks second worldwide in farm output. Agriculture and allied sectors like forestry, logging and fishing accounted for 18.6% of the GDP in 2005, employed 60% of the total workforce[6] and despite a steady decline of its share in the GDP, is still the largest economic sector and plays a significant role in the overall socio-economic development of India. Yields per unit area of all crops have grown since 1950, due to the special emphasis placed on agriculture in the five-year plans and steady improvements in irrigation, technology, application of modern agricultural practices and provision of agricultural credit and subsidies since the green revolution.

Agriculture development

Emphasis on Industrial output

Aug 2010 Bring out the place of Agriculture in Indian Economy 20 Marks

Agriculture plays an important role in Indian economomy. It contributes 30 % GDP. With gradual industrialization, the share of agriculture has declined. It is the leading industry for employing close to two thirds of the country’s working population.

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India has as much usable farmland as the European Union: 180 million hectares – 140 million of which are planted, covering approximately 60 percent of the country’s total land area.

The Indus and Brahmaputra regions in the north of the country (including the Assam plain, Uttar Pradesh and Punjab), traversed by the Ganges and graced most by the benefits of the monsoons, are the country’s most fertile regions where most agricultural production takes place, sugar cane and wheat production in particular.

These “natural” advantages in part explain India’s leading position with regard to many agricultural products.

India stands at # 1 rank in the manufacture of Milk, livestock, Millet and Tea

# 2 in Wheat, rice and sugar cane

# 3 in cotton and potatoes

Agriculture contributes to economic developments in 4 ways :

1. product Contribution i. e. making available food and raw materials.2. Market Contribution i. e. providing market for goods produced by other

sectors

3. Factor contribution : making available labour and capital to the non agriculture sector

4. Foreign Exchange contribution I, e, By means of producing extra product meant for export and get foreign money in lieu o that

Agriculture plays an important role in our international trade.

The transfer of resources from economy to agriculture aims at Modernisation of agriculture process

To increase resource productivity

To introduce technical change

To orient production to market

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By modernization surplus goods can be produced. public intervention to ‘modernise’ agriculture increases farmers’ incomes. Farmers increase their consumption, both of production means and consumption goods. The increased demand leads to the emergence of local firms producing the newly demanded goods. The final result is that, due to the initial intervention in agriculture, the rural economy develops in a balanced manner.

Problems of agriculture surplus & Modernisation :

It reduced the incentive to the farmers It has increased the pace of decline of the agriculture with serious consequences

on environment and society

It has increased rural poverty and food insecurity

The modernization has rasied many problems :

On environment : Industrial pollution Misuse of natural resources

On Soceity : Pressure on families and communities Migration from rural to urban areas

On the economy : Food insecurity Food dependency

Agenda for action:-If agriculture is to record abundance; if poverty is to be abolished quickly and if the chasm between rural– urban divide is to be curtailed, agriculture must grow at a good rate. This needs action on the following lines:1.Building institutions for People’s participation ;2. Freeing up agricultural markets 3. Carving an investment policy 4. Restructuring rural credit 5. Irrigation 6. Dry land farming7. Revitalising research8. No more discrimination________________________________________________________________________

Agriculture is an important sector of Indian economy as it contributes about 17% to the total GDP and provides employment to over 60% of the population. Indian agriculture has registered impressive growth over last few decades. The foodgrain production has increased from 51 million tonnes (MT) in 1950-51 to 250 MT during 2011-12 highest ever since

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independence. The production of oilseeds (nine-major oilseed) has also increased from 5 MT to 28 MT during the same period. The rapid growth has helped Indian agriculture mark its presence at global level. India stands among top three in terms of production of various agricultural commodities like paddy, wheat, pulses, groundnut, rapeseeds, fruits, vegetables, sugarcane, tea, jute, cotton, tobacco leaves, etc (GOI, 2008-09). However, on marketing front, Indian agriculture is still facing the problems such as low degree of market integration and connectivity, accessibility of reliable and timely information required by farmers on various issues in agriculture. Also, the agricultural marketing sector is characterized by fragmented supply chain. Huge postharvest losses, multiple market intermediaries; higher transaction cost, lack of awareness and several other socio-economic factors are some of the acute problems being faced by the Indian agriculture. Agricultural commodities produced have to undergo a series of operations such as harvesting, threshing, winnowing, bagging, transportation, storage, processing and exchange before they reach the market, and as evident from several studies across the country, there are considerable losses in crop output at all these stages. A recent estimate by the Ministry of Food and Civil Supplies, Government of India, puts the total preventable post-harvest losses of food grains at 10 per cent of the total production or about 20 million Mt, which is equivalent to the total food grains produced in Australia annually. In a country where 20 per cent of the population is undernourished, post-harvest losses of 20 million Mt annually is a substantial avoidable waste. According to a World Bank study (1999), post-harvest losses of food grains in India are 7-10 per cent of the total production from farm to market level and 4-5 per cent at market and distribution levels. For the system as a whole, such losses have been worked out to be 11-15 million Mt of food grains annually, which included 3-4 million Mt of wheat and 5-7 million MT of rice. With an average per capita consumption of about 15 kg of food grains per month, these losses would be enough to feed about 70-100 million people, i.e. about 1/3rd of India’s poor or the entire 2

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population of the states of the Bihar and Haryana together for about one year. Thus, it is evident that the post-harvest losses have impact at both the micro and macro levels of the economy. Horticulture, being one of the important sectors of Indian agriculture, plays an important role in the economy of the country. There are several horticulture crops suitable for almost all the agro-climatic zones of the country. Currently horticulture contributes 28 per cent of agricultural GDP. Country has emerged as the world's largest producer of Mango, Banana, Coconut and the second largest producer and exporter of Tea, Coffee, Cashew and Spices. About 39 per cent mango and 23 per cent banana of the world are produced in India. The country has recorded highest productivity (25.4 tonnes/ha) in the case of grapes in the world. Only 2 per cent of horticulture produce is processed, 0.4 per cent is exported and about 20-30 per cent is lost or gets wasted in market chain. Exports of fresh and processed fruits, vegetables, cut flowers, dried flowers have also been picking up. Production of Fruits and Vegetables in India currently pegged at level of 202.68 million tonnes (NHB, 2008), which was planned to be increased to 300 million tonnes by 2012 (GOI, 2002). Table1.1: Post Harvest Losses in Asia Pacific Region S No Country Estimated Losses (%) 1. India 40 2. Indonesia 20-50 3. Iran 35 4. Korea 20-50 5. Pholippines 27-42 6. Sri Lanka 16-41 7. Thailand 17-35 8. Vietnam 20-35

Aug 2010 Explain the main problems of Public Enterprises in India. 10 Marks

Objective and Role:

In the history of planning in the country, over the last six decades, there has been a definite shift in the assigned role of public enterprises in the country through various Five Year Plans from 'attaining the commanding heights' in the national economy and 'easing out private sector' to the 'opening up', 'liberalisation' and 'globalisation. It has been a perennial problem for the policy makers to set the role of the public sector in the Indian economy and it would continue to be so.

Secondly, the objectives of public sector have been defined and goals being set not very systematically in each case. Even the objectives at the macro level have been mixed-up with a number of propositions, sometimes contradictory in nature.

Extent and Coverage:

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Whether the public sector should extend to wide variety of economic activities or to be confined to a selected few only, is a very crucial decision of great magnitude.

Similarly, whether the economy of the country should be open to private sector or be confined only to the public sector monopoly or both should be given a competitive share in open market becomes another crucial political decision. The problem is consistently persisting in the Indian polity, more particularly from the recent past.

Organisation and Management: Undesirable Bureaucratic Interference

Gradually all public enterprises have come to be treated as if they were all departmental undertakings The public sector is slowly graduating into civil service culture

The organisation and management of the public sector enterprises has been on 'trial and error' ever since independence in the country. Initially, the enterprises were organised as departmental undertakings owing to their simplicity of operations and management.

Then came a time when the government company form was most prevalent. Following the developments in the international field, particularly in England, corporate form was adopted in India too.

And a host of corporation was created, both sectoral and multipurpose as well as development corporations. Lastly, joint ventures came on the scene again taking a cue from the development in the world.

The management has all along been a problem to tackle. In the first place, there has been a consistent dearth of managerial skills in the country, both at the initial stages as well in recent past.

The constitution of management boards is the other major problem, which merits attention most. Here, the government burdens the governing board with the civil servants, undermining the principle of autonomy of the enterprises. The management board tilts the balance of decision making on policy matters greatly in government favour and thus reducing the enterprise to, more or less, a department.

Personnel Administration:

The personnel management of the public sector is beset with a plethora of problems which are mostly responsible for it's inefficient, uneconomic and below standards performance. The recruitment to public enterprises is done by individual enterprises or by a central personnel agency for a group of enterprises in a given sector following general guidelines of the government in matters of reservations, etc.

The tendency to second the civil servants to top management is so rampant in the country that it negates the initiative of inbreeding and the insiders are disillusioned, not to talk of their disappointment and disinterestedness.

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Remuneration or compensation to the employees is another area, which needs prompt attention. While compensation to top managers is usually high in most of the enterprises with innumerable perks and other amenities and benefits, it is progressively lower in the middle and lower level managements.

The performance appraisal in most of the public enterprises is done only as the annual recording of character rolls. These results in the low standards of performance and the efficiency of the enterprises go down progressively.

Financial Management:

The prime requirement of majority of the enterprises is the sound and scientific financial management as they lack financial discipline, consciousness and professionalism.

The financial advisor has to play a crucially important role in the management of finances of the public sector enterprises.

Budgeting, the most crucial of all the segments of financial management, is not properly practised in the public enterprises in most cases.

A number of agencies are involved in the planning and control of financial management of public enterprises in the country, viz., Board of Management, Administrative Ministry, Ministry of Finance, Bureau of Public Enterprises, Planning Commission, Director General of Technical Development and Public Investment Board.

Workers' Participation in Management:

With a view to ensure increased productivity for the larger benefit of the enterprise, the employees and the community, to give workers' better understanding of their role in the production process and to satisfy their demands for self-expression leading to better industrial relations, worker's participation in management (WPM) was launched.

The process of WPM involves four main steps, viz., information sharing, joint consultations, joint decision-making and self-management. The workers are involved at all these levels to take the decisions in the best interest of enterprise.

With regard to workers' participating at various levels including board level, it is beset with a number of problems relating to selection of employees to be represented on the Board of Management.

Autonomy and Accountability:

'Autonomy' implies "freedom to act" and is related to "freedom in internal management". Autonomy in the case of public enterprises does not imply 'full freedom' to act as desired by the individual enterprise management. The Public Enterprises are accountable to Parliament through the concerned minister and therefore cannot act freely.

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At the same time the public enterprises should be accorded sufficient autonomy to run their operations on business lines. It facilitates quick decision-making and encourages initiative.

Accountability of the public enterprises implies rendering of accounts to the public - the ultimate owner of these enterprises. According to S.S. Kher, "accountability involves measurement of top management. It must be remembered that the accountability that we are talking of, is accountability, which has a particular purpose - a demonstrably useful purpose.

A distinction has to be drawn between accountability and control. Control is active function while accountability is a passive function. Control means directing, restraining, or stimulating an organisation or individual to a certain action. In fact, control facilitates accountability. An accountable individual or organisation has to possess control power to give true account.

Underutilization of capacity

One of the general problem is underutilization of capacity. In view of the paucity of investible resources and widespread shortages prevalent in the economy, capacity utilization becomes an important criterion to judge the performance of an enterprise. But, we find that, in most of the cases, a major part of the installed capacity of manufacturing units in the public sector remains unutilized.

In India, Public Sector Undertaking (PSU) is a term used for a gov e rnmen t -own ed co r po r a t i on . Whe re man agemen t con t ro l o f t he company rests with the Government; it can be Central Government or the State Governments .Privatization means transferring the control of an enterprise from the government sector to the private sector.

5 Major Arguments in support of privatization of PSU’s InIndia:1. To promote increased efficiency. The need to promote efficiency in running commercial organizationshas a rguab ly been t he dominan t mo t iva t i on . The re i s a s ense t ha t public ownership somehow leads to lower levels of efficiency than arepossible under private ownership.2. Stops loss-making PSUs from adding to government debt. Thus gives new owners a strong incentive to turn around failing PSUs into successful businesses.3. To reduce government interference in the economy and promote greater private initiative.Depoliticizes PSUs, remove governmental pressures for over-manning and the sub-optimal use of resources;4 . T o p r o m o t e w i d e r s h a r e o w n e r s h i p a n d t h e development of the capital market.Gives new businesses access to investment capital that government cannot provide

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5. Expands an enterprise and an industry, in the long run c r e a t i n g m o r e j o b s a n d g e n e r a t i n g w e a l t h f o r t h e country.

August 2010 Write notes on Assumptions of the Law of Diminishing Marginal utility 10 MarksAccording to the concept of law of diminishing marginal utility as the consumer increases the consumption of a good or service, while keeping other things constant there is decline in the utility or satisfaction which one derives from the usage of that good or service. Example of law of diminishing marginal utility is when you are hungry and as you eat something you fell good but as keep eating more food you begin to get less satisfaction out of eating food.

Assumptions:This law is based on following assumptions and this law is applicable only if these assumptions are true. There are following:1: Continuous use: It is assumed that the unit of commodity should be used continuously. If there is interval between the consumption of the same units then this law will not applicable.2: Reasonable units: It is also assumed that the units of commodity which are used should be suitable and reasonable. if the units are too small, then law will not be operate.3: Nature of commodity: It is also assumed that the income of the consumer should not change. Otherwise this law will not operate.4: No Change in fashion: It is also assumed that there should be not change in fashion. If there is a sudden change in fashion then this law will not be operate.5: No change in prices of substitutes: There should be no change in prices of substitutes. If the price of substitute change then demand of the commodity increases and this law will not be true.6: No change in taste: There should be no change in the taste of consumer. For example if a consumer develops the taste of wine, then every next unit of wine increase marginal utility, which is against of our law.7: No change in weather: Another assumption is that the weather will be remains unchanged. If weather changed then demand of certain commodity changes and this law will not be operated.8: Rare Collection: The law does not apply in the case of rare collections. If a person has a hobby of collecting rare coins, the larger number he collects the greater will be his happiness, whereas according to this law it should be less and less,9. The consumer who is consuming the good or service should be rational or in other words his or her behavior should be rational10. Consumer should consume good without any prejudice so in the above example of food if the consumer came to know that he or she will not get food for next few hours then he or she may consume more food than necessary.

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August 2010 Write Notes on Determinants of Demand 10 Marks

Determinants of Demand

qD = f ( price, income, prices of related goods, tastes and expectations)

1. Price : Price, in many cases, is likely to be the most fundamental determinant of demand, since it's often the first thing that people think about when deciding how much of an item to buy. The vast majority of goods and services obey what economists call the law of demand- that, all else being equal, the quantity demanded of an item decreases when the price increases and vice versa. (There are some exceptions to this rule, but they are few and far between

2. Income: A rise in a person’s income will lead to an increase in demand (shift demand curve to the right), a fall will lead to a decrease in demand for normal goods. Goods whose demand varies inversely with income are called inferior goods (e.g. Hamburger Helper).

People certainly look at their incomes when deciding how much of an item to buy, but the relationship between income and demand isn't as straightforward as one might think.

Do people buy more or less of an item when their incomes increase? As it turns out, that's a more complicated question than it might initially seem. For example, if a person were to win the lottery, he would likely take more rides on private jets than he did before. On the other hand, the lottery winner would probably take fewer rides on the subway than before.

Economists categorize items as normal goods or inferior goods on exactly this basis. If a good is a normal good, then the quantity demanded goes up when income increases, and the quantity demanded goes down when income decreases. If a good is an inferior good, then the quantity demanded goes down when income increases and goes up when income decreases.

In our example, private jet rides are a normal good and subway rides are an inferior good. There are two things to note about normal and inferior goods:

What is a normal good for one person may be an inferior good for another person, and vice versa. For an overall market, a good is normal if market demand increases when income increases, on average, for the people in that market, and a good is inferior if market demand decreases when average income increases.

It's possible for a good to be neither normal nor inferior- for example, it's quite possible that the demand for toilet paper neither increases nor decreases when income changes!

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3. Consumer Preferences : Tastes : How much of a particular good or service also depends on an individual's taste for the item. In general, economists use the term "tastes" as a catchall category for consumers' attitude towards a product. In this sense, if consumers' tastes for a good or service increase, then their quantity demanded increases, and vice versa. 4. Number of Buyers : Although not a determinant of individual demand, the number of buyers in a market is clearly an important factor in calculating market demand. Not surprisingly, market demand increases when the number of buyers increases, and market demand decreases when the number of buyers decreases. 4. Price of related good s: When deciding how much of a good they want to purchase, people take into account the prices of both substitute goods and complementary goods. Substitute goods, or substitutes, are goods that are used in place of one another. For example, Coke and Pepsi are substitutes because people tend to, well, substitute one for the other. Complementary goods, or complements, on the other hand, are goods that people tend to use together. DVD players and DVDs are examples of complements, as are computers and high-speed internet access. The key feature of substitutes and complements is the fact that a change in price of one of the goods has an impact on the demand for the other good. For substitutes, an increase in the price of one of the goods will increase demand for the substitute good. (It's probably not surprising that an increase in the price of Coke would increase the demand for Pepsi as some consumers switch over from Coke to Pepsi.) It's also the case that a decrease in the price of one of the goods will decrease demand for the substitute good.

For complements, an increase in the price of one of the goods will decrease demand for the complementary good. Conversely, a decrease in the price of one of the goods will increase demand for the complementary good. (For example, decreases in the prices of video game consoles serves in part to increase demand for video games.)

Goods that don't have either the substitute or complement relationship are called unrelated goods. In addition, sometimes goods can have both a substitute and a complement relationship to some degree- for example, gasoline is a complement to even fuel-efficient cars, but a fuel-efficient car is a substitute for gasoline to some degree.

6. Expectation of future :

Today's demand can also depend on consumers' expectations of future prices, incomes, prices of related goods, and so on. For example, consumers demand more of an item today if they expect the price to increase increase in the future. Similarly, people who expect their incomes to increase in the future will often increase their consumption today.

a. Future price: consumers’ current demand will increase if they expect higher future prices; their demand will decrease if they expect lower future prices.

b. Future income: consumers’ current demand will increase if they expect higher future income; their demand will decrease if they expect lower future income.

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August 2010 Write notes on Consumption Function

 10 Marks

the consumption function is a single mathematical function used to express consumer spending. It was developed by John Maynard Keynes

The function is used to calculate the amount of total consumption in an economy. It is made up of autonomous consumption that is not influenced by current income and induced consumption that is influenced by the economy's income level. This function

can be written in a variety of ways, an example being . This is probably the most simplistic form of the consumption function.

The simple consumption function is shown as the affine function:

where

C = total consumption, c0 = autonomous consumption (c0 > 0), c1 is the marginal propensity to consume (ie the induced consumption) (0 < c1 <

1), and Yd = disposable income (income after government intervention – benefits, taxes

and transfer payments – or Y + (G – T)).

Autonomous consumption represents consumption when income is zero. In estimation, this is usually assumed to be positive. The marginal propensity to consume (MPC), on the other hand measures the rate at which consumption is changing when income is changing. In a geometric fashion, the MPC is actually the slope of the consumption function.

The MPC is assumed to be positive. Thus, as income increases, consumption increases. However, Keynes mentioned that the increases (for income and consumption) are not equal. According to him, "as income increases, consumption increases but not by as much as the increase in income".

The Keynesian consumption function is also known as the absolute income hypothesis, as it only bases consumption on current income and ignores potential future income (or lack of). Criticism of this assumption lead to the development of Milton Friedman's permanent income hypothesis and Franco Modigliani's life cycle hypothesis. More recent theoretical approaches[1] are based on behavioral economics and suggest that a number of behavioural principles can be taken as microeconomic foundations for a behaviourally-based aggregate consumption function.

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August 2010 Write Notes on Performance of power sector in India 10 marks

POWER: ELECTRIC THERMAL AND NUCLEARIndia’s power sector has witnessed drastic changes in the past decade. The Electricity Act, 2003 (henceforth referred to as ‘The Act’) paved way for the advent of reforms and competition in the power sector. A slew of policies and regulations followed, to facilitate an accelerated growth in the sector. The process started with the restructuring of power distribution utilities, with some states corporatizing the functional entities for power generation, transmission and distribution. The states of Orissa and Delhi went a step further by privatising the distribution function. While Delhi came to be recognised as a successful model, Orissa could not keep up to expectations.“Power for All” is still a distant dream for India’s power sector. Almost 40 per cent of the country’s population today still awaits access to electricity and the per capita electricity consumption is at a little over 730 units (2008-09), which is abysmally low when compared to that of China (2500 units),USA (12,700 units) or the world’s average (3000 units).Through targeted initiatives like the ‘Accelerated Power Development and Reforms Programme’ orAPDRP (now ‘Restructured-APDRP’) and the ‘Rajiv Gandhi Grameen Vidyutikaran Yojana’, which arethe central government-funded programmes at the state level, the sector is trying to achieve itsobjectives of arresting system losses and increasing access to electricity. The Act has provided aboost to captive and merchant generation capacities. The ‘Ultra Mega Power Projects’ have furtherstrengthened the opportunities for investors, in the generation segment.The generation capacity of the country stands at over 180 MW (as in August, 2011) with a dominantshare of the state sector. The private sector, which currently contributes 23% of the generationcapacity, is expected to increase its share to 52% by 2017.The competitive bidding framework has encouraged the private sector to aggressively participate inthe power sector. Since 2006, about 42,000 MW of new capacity have been contracted under thisframework. Foreign companies have come in, in a big way, for manufacturing of electricalequipments.FINANCE/ASSISTANCEThe performance of the power sector has a direct bearing on India’s economic growth. An 8-9 percent growth of the economy warrants an equitable growth in the nation’s power sector. However,over the past few years, this sector has grown only between 5-6 per cent.The Ministry of Power has taken a number of initiatives to accelerate the growth of this sector.Some areas however, need some concerted effort.Fuel reforms need to be accelerated particularly in the coal sector.Logistical arrangements are required for smooth movement of fuels.Performance of the state power sectors, especially the distribution segments, is way below

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the mark and needs immediate actions.Availability of ‘Balance of Plant’ equipments.Availability of skilled manpower, particularly in the hydroelectricity sector.As per the Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce, the year wiseFDI inflows in the power sector have gradually increased from 2003-04 to 2009-10. The details are asunder:Amount in INR CroresSector/Year 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10Power 131 (28) 241 (53) 386 (87) 713 (157) 3875 (967) 4382 (985) 6908 (1437)Note: the figures in brackets shows the amount in US $MillionRESEARCH AND DEVELOPMENTIn its bid to move towards a low carbon footprint in the power sector, the Ministry of Power hasbeen pushing for the adoption of super-critical technologies, which reduce the carbon emissions andare also high on efficiency. There has been a push towards increasing the unit size and adoptingcleaner and more efficient technologies.In recent times, smart grid technologies are finding more and more applications in the power sector.R-APDRP has been supporting utilities’ initiatives for adopting IT applications and capacity buildingthrough the use of updated technologies. Considering the high level of technical and commerciallosses, such intelligent technologies are expected to play a key role in keeping the loss levels undercontrol.REGULATORY NORMSThe opportunities for investment in India’s power sector are huge. The policy and regulatoryframeworks are well defined. All the segments be it generation, transmission, distribution, electricitytrading or equipment manufacturing, are open to private participation. Several path-breakingregulations such as standard bidding guidelines, open access, multi-year tariff regime and so on, arein place. However, while the regulations are all there, what is lacking is their implementation.The financial losses being incurred by the distribution sector are capable of affecting the viability ofthe entire sector. Recent initiatives such as revising retail tariffs and proposed ratings of stateutilities for future lending, on a regular basis are steps in the right direction.CHALLENGESHigh level of technical and commercial lossesFuel sector reformsLack of skilled manpowerClearances and LinkagesTHE FUTUREIndia’s power sector has a long way to go. India’s fast-paced economic growth and its rapid rate ofindustrialisation and urbanisation have fuelled an increased demand for energy. It is estimated that

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if India continues to grow at the current rate, the Indian economy would emerge as the secondlargest in the world, next only to China, by the year 2050. It is therefore expected that, the demandfor energy would also rise substantially in the future.

Feb 2010 Define Wealth and explain its features 2 + 8 Marks

Wealth means abundance of valuable resources or material possessions.According to Adam smith wealth is Annual produce of the land and labour of the society This "produce" is, at its simplest, that which satisfies human needs and wants of utility. In popular usage, wealth can be described as an abundance of items of economic value, or the state of controlling or possessing such items, usually in the form of money, real estate and personal property. An individual who is considered wealthy, affluent, or rich is someone who has accumulated substantial wealth relative to others in their society or reference group. In economics, net wealth refers to the value of assets owned minus the value of liabilities owed at a point in time. Wealth can be categorized into three principal categories: personal property, including homes or automobiles; monetary savings, such as the accumulation of past income; and the capital wealth of income producing assets, including real estate, stocks, bonds, and businesses

'Wealth' refers to some accumulation of resources (net asset value), whether abundant or not. 'Richness' refers to an abundance of such resources (income or flow). A wealthy individual, community, or nation thus has more accumulated resources (capital) than a poor one. The opposite of wealth is destitution. The opposite of richness is poverty.

The term implies a social contract on establishing and maintaining ownership in relation to such items which can be invoked with little or no effort and expense on the part of the owner. The concept of wealth is relative and not only varies between societies, but varies between different sections or regions in the same society. A personal net worth of US $10,000 in most parts of the United States would certainly not place a person among the wealthiest citizens of that locale. However, such an amount would constitute an extraordinary amount of wealth in impoverished developing countries.

Concepts of wealth also vary across time. Modern labor-saving inventions and the development of the sciences have enabled the poorest sectors of today's society to enjoy a standard of living equivalent if not superior to the wealthy of the not-too-distant past. This comparative wealth across time is also applicable to the future; given this trend[citation

needed] of human advancement, it is likely that the standard of living that the wealthiest enjoy today will be considered impoverished by future generations.

Industrialization emphasized the role of technology. Many jobs were automated. Machines replaced some workers while other workers became more specialized. Labour specialization became critical to economic success. However, physical capital, as it came

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to be known, consisting of both the natural capital and the infrastructural capital, became the focus of the analysis of wealth.

In economics, wealth in a commonly applied accounting sense is the net worth of a person, household, or nation, that is, the value of all assets owned net of all liabilities owed at a point in time. For national wealth as measured in the national accounts, the net liabilities are those owed to the rest of the world. The term may also be used more broadly as referring to the productive capacity of a society or as a contrast to poverty. Analytical emphasis may be on its determinants or distribution.

Economic terminology distinguishes between two types of variables: stock and flow. Wealth, as measurable at a date in time, is a stock, like the value of an orchard on December 31 minus debt owed on the orchard. For a given amount of wealth, say at the beginning of the year, income from that wealth, as measurable over say a year is a flow. What marks the income as a flow is its measurement per unit of time, like the value of apples yielded from the orchard per year.

In macroeconomic theory the 'wealth effect' may refer to the increase in aggregate consumption from an increase in national wealth. One measure of it is the wealth elasticity of demand. It is the percentage change in the amount demanded of consumption for each one-percent change in wealth.

Wealth may be measured in nominal or real values, that is in money value as of a given date or adjusted to net out price changes. The assets include those that are tangible (land and capital) and financial (money, bonds, etc.). Measurable wealth typically excludes intangible or nonmarketable assets such as human capital and social capital. In economics, 'wealth' corresponds to the accounting term 'net worth'. But analysis may adapt typical accounting conventions for economic purposes in social accounting (such as in national accounts). An example of the latter is generational accounting of social security systems to include the present value projected future outlays considered to be liabilities. Macroeconomic questions include whether the issuance of government bonds affects investment and consumption through the wealth effect.

Environmental assets are not usually counted in measuring wealth, in part due to the difficulty of valuation for a non-market good. Environmental or green accounting is a method of social accounting for formulating and deriving such measures on the argument that an educated valuation is superior to a value of zero (as the implied valuation of environmental assets)