Monday, August 26, 2013

Economics XI | NEB Notes


    
  
Economics XI | NEB Notes


NATURE OF ECONOMICS

a.     Origin of Economics
b.     Development of Economics
c.      Definition of Economics
i.       Wealth definition – Adam smith
ii.     Welfare definition- Alfred Marshall
iii.   Wealth and welfare definition compared
iv.   Scarcity definition-Lionel Robbins
v.      Comparison between welfare and scarcity definition of economics
vi.    Superiority of Robbins’definition over Marshall definition
                   d. Scope of economics
                               - Subject matter of economics
                               - Is economics a science or an art?
                   e. Meaning of microeconomics and macro economics
                               - Microeconomics
                               - Macroeconomics
                  f. Importance of economics analysis in policy formulation
                     - Differentiate between microeconomicsand macroeconomics


a.     Concept
           -Scarcity
                               - Choice
b.     Allocation of resources
c.      Concept of production possibility curve
            – Introduction
            – Shifting of the curve

a.   Meaning of national income
b.   Different concept of national income
              – GDP
              – GNP
              – NNP
              - NATIONAL INCOME (NI)
              – PERSONAL INCOME
              – DISPOSABLE INCOME
- PCI
 c.  Computation or measurement of national income
              - Expenditure method
              – Income method
              – Product approach (output method)
d. Difficulties in the measurement of national income

ECONOMIC DEVELOPMENT: MEANING AND INDICATORS

a.     Concept of economic growth and economic development
              – Economic growth
              – Economic development
b. Indicators of economic development
c. Characteristics of developing countries
    
NEPALESE ECONOMICS

1.     NATURAL RESOURCES
a.     Water resources
         - Introduction
         - Importance
         - Current situation of water resources
         - Problem of water resource development
b. Forest resources
        – Benefits of forest resources
        – Causes of rapid deforestation in nepal
        – Consequences of deforestation in Nepal
c. Mineral resources
        – introduction
        – Importance of mineral resources
        – Problems in mineral resource utilization
d. Environment and natural resource management
        – Meaning
        – Causes of environmental pollution
        – Consequences of environmental pollution
        – Remedial measures to control environmental pollution
    

2.     HUMAN RESOURCES
a.     Meaning
b.     Role of human resources
e.     Causes of rapid population growth in Nepal
f.      Consequences of rapid population growth
g.     Remedies to control population growth

3.     AGRICULTURE
a.     Background
e.      Remedial measures
f.       Agriculture finance
g.     Agricultural marketing in Nepal
h.     Nature of agricultural market in Nepal
i.       Problems of agricultural marketing
j.       Remedies against problems of agricultural marketing

4.     POVERTY
a.     Concept of poverty
b.     Types of poverty
c.     Poverty line
f.      Measures of poverty reduction

5.     INDUSTRY
a.     Introduction
b.     Types of industries: small and cottage industries, medium and large scale industries
g.      Tourism industry
            - Introduction
            - Importance of Tourism Industry
            - Prospects of tourism industry
            - Problems of tourism industry
            – Remedial measures of problems of tourism industry
6.     TRANSPORTATION AND COMMUNICATION
a.     Introduction
b.     Means of transportation and communication
                              – Means of transportation
                              – Means of communication services
                              – Role of transportation and communication in economic development
    7. FOREIGN TRADE
          a. Introduction
          b. Nepalese foreign trade: growth and trend, composition, direction
          c. Problems of foreign trade

8.     PUBLIC FINANCE
a.     Concept
b.     Importance of public finance
c.     Public revenue : meaning and sources
d.     Public expenditure :meaning, importance and classification
9.     Development planning
a.     Concept
b.     THE 10TH plan (2059-2064): objectives, priorities, policies
c.     THE THREE YEAR INTERIM PLAN(2007/008-2009/10)
d.     Process of plan formulation


      QUANTITATIVE ANALYSIS IN ECONOMICS
a.     Concept and need
b.     Use of statistics in economics
c.      Use of mathematics in economics


STATISTICS

1. INTRODUCTION TO STATISTICS
                a. Origin and development of statistics
b. Definition of statistics
           - Plural definition
           - Singular definition
c. Importance and scope of statistics
d. Functions of statistics
e. Limitations or weakness of statistics

2. COLLECTION OF DATA
a.     Concept
b.     Pre-requisites of data collection
c.      Types of data
d.     Methods of collecting primary data
                           - Direct personal interview
                           - Indirect oral interview
                           - Information through local correspondent
                           - Mailed questionnaire method
                           - Schedules sent through enumerators
               e. Sources of secondary data
               f. Precaution sin use of secondary data
               g. Techniques of data collection: census and sampling
               h. Method of sampling :probability and non probability

3. ORGANISATION OF DATA
                  a. Concept
                  b. Classification : features, objectives, bases and types
                 c. Variables
                 d. Frequency of distribution
                 e. Tabulation of data : advantages. Parts and type of table

4. DIAGRAMMATIC AND GRAPHIC PRESENTATION OF DATA
                a. Concept
                b. Diagrammatic presentation of data
                c. General rules for construction
                d. Bar diagrams : simple, subdivided, multiple and percentage bar diagram
                e. Angular or pie diagrams
                f. Time series, histogram, frequency distribution, ogives, curves

5. MEASURES OF CENTRAL TENDENCY
                 a. Averages: arithmetic mean, weighted average, geometric mean, harmonic mean
                 b. Median: individual data, discrete series, continuous series
                 c. Partitions: quartiles, deciles, percentiles
                 d. Mode: grouping, table
                 e. Relationship between averages, median, partitions and mode   

6. MEASURES OF DISPERSION
                a. Range
                b. Quartile deviation and semi inter quartile
                c. Average deviation
                d. Standard deviation
                                
MATHEMATICS
1. LAWS OF INDICES
2. EQUATIONS: SIMULTANEOUS EQUATIONS, QUADRATIC
3. LOGARITHMS AND ANTILOGARITHMS
4. EQUATIONS OF STRAIGHT LINE


Re
DEFINITION OF ECONOMICS
                       
               The term economics is derived from the word “oeconomicus” by Xenophon in 431 B.C. It is derived from two words economy and science. Economy means proper utilization of resources. It means economics is the science of economy or science of proper utilization of resources. It is comprised of theories, laws, principle related to utilization of resources so as to solve the economic problems, satisfy the human wants or need and so on. However, the economics is defined in different ways by different economists. 
There are mainly three definitions of economics:-
a. classical or wealth definition (Adam Smith)-1776 A.D
b. neo-classical or welfare definition (Alfred Marshall )-1890 A.D
c. modern or scarcity and choice definition (Lionel Robbins)-1932 A.D

a. classical or wealth definition (Adam Smith)-1776 A.D
                                   The famous classical economist Adam smith for the firs time defined economics as “science of wealth”. The definition was given in the book “an enquiry to the nature and the causes of wealth of nations” published in 1776 A.D. the book is popularly known as “wealth of nations”. According to smith, labor is the main source of income or wealth. More wealth is accumulated only if more labor is used. Economics explains the human behavior and activities they do for wealth. This definition was based upon the assumptions of full employment, perfect competition, no governmental interventions, money just as a medium of exchange and so on.
                                     This definition has following main proposition:-
i. economics is science of wealth
ii. labor is the only source of income
iii. there is perfect competition in product as well as labor market
iv. the government should not interfere the activities of people and business organizations
v. this definition is influenced by physiocracy and mercantilism.
Criticism:-
            Wealth definition has over emphasized wealth. Economics is science of human activities rather than only wealth. Adam smith considers only material things or wealth as subject matter of economics but human beings require some immaterial things like self esteem or dignity, social prestige, national identity and so on too. The immaterial things are called essential things for human satisfaction. Wealth definition is based upon the theory of subsistence wage which is known as iron law of wage. The law was against the workers and in favor of employers. Adam smith doesn’t explain about scarcity
of resource and choice of best alternative for the use of resources. The problem of scarcity and choice is burning issue in the modern economics but he fails to explain about the problems of scarcity and choice. The wealth definition is based upon assumptions of full employment and perfect competition but none of these two is in existence. This definition is based upon the assumption of no intervention of government in economic activities of people and business organization but we find in every country more or less governmental intervention.
b. neo-classical or welfare definition (Alfred Marshall )-1890 A.D
                                 In 1890, Alfred Marshall, a famous neo-classical economist and a great contributor to micro economics defined economics as the science of material welfare. Here, the material welfare means the quantities of physical goods consumed by people. if the people are consuming large quantities of goods, they are said to have high level of welfare into two types
1.       material welfare
2.        immaterial welfare
 According to him, only the material welfare is the subject matter of economics. He assumes every person is rational and s/he uses the resources in his/her possession very properly so as to maximize their own welfare. Economics is therefore the science that studies the rational behavior revealed by the people. Major propositions of Marshall’s welfare definition are:-
1. Economics is science of material welfare
2. Economics is social science i.e. science of mankind
3. Economics is the study of rational behavior of people revealed for maximization of material welfare.

Criticisms:-
This definition of economics a science of material welfare was assumed correct until the arrival of Lionel Robbins. He criticized the definition under the following aspects:-
1. Classificatory activities of Marshall into material non material welfare, economics and non economic goods is only classificatory not analytical because single human cannot be material as well as non material according to the nature and purpose of work.
2. Non material activities like feeling of social service, human desire also satisfy human needs. This idea has not been prioritized
3. Non welfare consumption like harmful drugs, tobacco, and alcohol don’t promote social welfare but still are in the study of economics
4. Economics should study about total human beings but wealth definition doesn’t study about isolated people like saints, nuns, monks etc.
c. modern or scarcity and choice definition (Lionel Robbins)-1932 A.D
                                 According to Lionel Robbins, economics is the science of scarcity of the resources and the choice of best alternative for their utilization. The resources are limited in supply. Each resource is usable for different purposes. The wants or need of people are unlimited. The wants differ in importance. They differ from place to place, from time to time and from person to person. Some wants are more important whereas some are not. All wants cannot be fulfilled because of insufficiency of resources. Therefore, we have to go on utilizing the resources in such a way, so that, our more wants can be fulfilled leaving no one in most important wants unfulfilled. For it, we must select best ways for the utilization of the resources. We should have the complete information of resources available, needs of the country and their importance and ways for the utilization of resources. This definition is given in 1930 A.D after WWI. During third decade of the twentieth century, the European countries were badly in need of large quantities of resources for rehabilitation, construction of infrastructures, renovation etc. they were destructed in war. This definition is both normative and positive in nature. The major propositions are:-
1. there is unlimited human needs or wants
2. there is scarce means of resources
3. there are alternative use of resources
4. there is need of choice
Criticisms:
         The definition is criticized in the following ways:-
1. economic problems arises not only due to scarcity but due to under, miss  or over utilization of resources
2. economic problems arises due to inequality too
3. there is political consideration
4. needs and resources may vary
Superiority of Robbins definition over Marshall’s definition:-
1. the definition is scientific
2. the definition is universally accepted
3. the definition has wide scope
4. the definition has science of choice
Microeconomics:-
      The term microeconomics is derived from the word micro economy and science. The term micro is also derived from the Greek word micros which means small or tiny. Microeconomics is defined as the science of small or tiny part of the economy. It provides us the detail information of microeconomics units. The units are single consumer or consumer of a firm or an industry. A single firm or firms belonging to an industry is called worm’s eye view of an economy. In microeconomics we study about the relationships between microeconomic variables like utility, cost of purchasing, demand, supply, price, cost of production, and revenue from sale, profit or loss and so on, it is the study of behavior of consumers and firms.
Scope of microeconomics:-
  The scope of microeconomics means its subject matter. it means area of application too. The scopes are:-
1. study of consumers behavior
                   -cardinal utility theory
                  – ordinal theory
                  -revealed preference theory
                  -cardinal behavior theory
2. Study of production and cost function
           Mathematically.
                       Q=output (quantity)
                       C=cost of production
                       K=capital
  Q=f (K and other inputs)
  C=f (Q)
          Therefore, C ∞ input
3. Study of price and output determination
              Profit=revenue-cost
Markets = monopoly, duopoly, oligopoly, monopolistic competition and perfect competition
4. Study of microeconomic distribution
     Factors of production-land, labor, capital and organization
     Factor wages-rent, wage, interest, profit
     
                 
Macroeconomics
 Macroeconomics is derived from the word macro, economy and science. The term “macro” is also derived from Greek word “macros” which means large or big. Therefore, macroeconomics can be defined as the science of large segment of the economy or economy as a whole. It provides bird’s eye view of the economy. It gives general features of the economy. It is study of features of economic problems, causes and remedies of the problems in different sectors. The sectors are divided into household sectors, government sector, foreign trade sector, business sector. In macroeconomics we study about the relationship between macro economic variables, the variables are:
a) Aggregate consumption
b) Aggregate income
c) Aggregate saving
d) Aggregate investment
e) Aggregate demand
f) Aggregate supply
g) Price level
In macroeconomics we study about the causes and remedies of trade and payment, price instability, Inequality etc
Scope or subject matter of macroeconomics:
Scope means the subject matter. It means the area of application…
1. Study of wage level and employment level
The macroeconomics deals with wage level and employment level. The level of employment depends upon demand for labor and supply of labor. Both of these factors depend upon wage level. There are different theories of employment like classical theory, Keynesian theory, Kaltorian theory and other modern theory
2. The study of price level and output level
Macroeconomics is concerned with determination of equilibrium price level and output level. The price level means average of the prices of goods and services bought and sold in the country in a year. The level of output depends upon aggregate demand and price level. There are different theories of determination of price level and output level. Among them, Keynesian theory of effective demand is very popular. The theories are the subject matter of macroeconomics.
3. The study of trade cycle
Macroeconomics is concerned with trade cycle too. It explains how the economics ups and downs
occur, what are their causes, how the country can overcome fluctuation. There are different theories of trade cycle. Some of them are Schumpeter theory, Hessian theory, Calder’s theory etc.
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4) Study of macroeconomic distribution
The macroeconomics is the study of distribution of income, wealth or resources in the country among the people. It is the study of different theories, laws and principles of distribution of income in the form of wage, interest, profit and rent. It gives us knowledge of effects of high inequality in the distribution of income and wealth. It gives us remedies of unequal distribution and the economic problems due to the inequality.
Normative or positive economics
Economics is both positive and normative science. It is the study of facts as well as ideal theories and principles too. It can be explained as following:
a) Positive economics
Economics is positive science. It is the study of facts or things in reality or existence. In economics the large number of economic problems or questions like what are produced, how goods are priced and distributed, how much profit is earned by firms, what different type of resources are available, hoe the resources are utilized, who are performing different economic activities, why the economic problems are occurring, why is the country suffering from unemployment, price instability, economic instability, import dependency and so on are put and answered. There are different theories laws and principles based upon facts we study in economics. That’s why economics is called positive science
b) Normative economics
Economics is normative science. It is the study of things ought to be. In economics, we study different ideal theories and principles. They are concerned with different economic problems. They give us ideas for overcoming of different economic problems. They are helpful to formulate proper policies and plans. They are helpful to solve the problems of unemployment, import dependency, improper allocation of resources, price and economic instability, unequal distribution of income and wealth and so on. Economics helps us to decide how much goods should be produced, hoe much they should be priced, hoe the government should control money supply, interest rate, public debt, government expenditure etc , how the consumer should allocate the money to get maximum satisfaction from the expenditure, how the firms should combine the inputs to earn maximum profit and so on. This all have ethical importance. That’s why economics is call normative science.
Economics is a science or an art
Economics is both art and science. It is called a science because it is the scientific study of relationships between economic variables, behavior of consumers and firms, nature of market and economy, effect of change in one or more economic variables on the others and so on. The different theories, laws and principles are studied in economics. All of them are generalized and simplified on the basis of facts so as to make them easily understandable. Therefore, economics is said to be science.
Economics is an art. The different theories, laws are explained with the help of graphs, figures, tables, charts, equations etc simplifying and generalizing them. Simplification is to make them easily understandable and generalization is to make them applicable to all economies. In order to explain theories, laws and relationships between economic variables we make some assumptions. The assumptions define the conditions for the application of theories, laws and\d the relationships. That’s why economics is an art.
Importance of microeconomics:
1. Important to the consumers
Microeconomics provides the ways for proper allocation of money on different goods and services so that they can get maximum utility. There are different theories of consumers behavior, the theories explain how the consumers should spend the limited money they have to maximize their satisfaction
2. Important to the firms or businessmen
The firms or businessmen use the microeconomic theories of consumer behavior, production, cost, market, revenue and so on to make proper economic decisions. The microeconomics helps them to know the purchasing power of ability to pay, proper combination of inputs to maximize cost or maximize profit, effects of change in tax rates, subsidies and so on
3. Important to the government
Government can determine taxes, subsidies, wage level, allowances etc on the basis of effects of change in these factors on the demand for goods and services. Some goods are levied while some are subsidized. The salaries and allowances are adjusted on the basis of relationship between these variables and demand. Interest rate, exchange rate and money supply too are changed with the help of microeconomic theories.
4. Important for the study of other economic science.
Microeconomics helps us to study of other economic sciences like macro economics, public finance, monetary economics, labor economics, and international trade economics and so on. The theories and laws of these economic sciences are based upon micro economics theories and laws.
Importance of macroeconomics
1. To know the relationship between macro economics variables:
The macroeconomics helps us in the study of relationship between large numbers of macro economics variables. The variables are Aggregate consumption, Aggregate income, aggregate saving, Aggregate investment, Aggregate demand, Aggregate supply, Price level
2.  To know the functioning of economy
     Macroeconomics helps us to know how the economy functions, how it is regulated, For it macro economics provides us the knowledge of product market, labor market, capital market, land market, international trade market etc. it in forms us the country can achieve equilibrium only if all of the markets are in equilibrium.
3. To correct unfavorable balance of trade and payment
Macroeconomics provides us different theories of international trade. It provides us different remedies of import dependency and greater outflow of money from the country. The government or country may adjust custom duty, exchange rate, transaction of gold etc to promote export and to reduce import.
4. To achieve high economic growth and employment level
With the help of theories and models of economic growth and employment we can induce investment increase in income and employment opportunities
Thus, these are the importance of micro and macro economics.
Chapter 2.
National income
Basic concepts
1. Factors of production:
The factors that are used in production are called factors of production. The factors are: land, labor, capital an organization. For the contribution made by factors of production, they are paid the amounts the factors of production obtains are called factor incomes. The factor incomes are rent, wage, interest and profit. The factor incomes are also called factor costs. They are parts of national income. It we sum up the factor incomes of the country we obtain national income.
a.        Factors of production : land, labor, capital , organization
b.        Factor incomes: rent, wage , interest, profit
2. Transfer of payments
The payments or receipts without contribution in production are called transfer of payments. Some of the examples are pension, subsidies, indirect taxes, windfall gains, grants, allowances paid to old aged, handicapped; under privileged people etc. it is not part of national income
3. Final products
The products directly consumed by final consumers are called final products. The final products are parts of national income. Their monetary values are distributed in forms of factor incomes. The goods and services used as raw materials, fuels or energies for the production of other goods and services are called intermediary goods or products. They are not added to measure the national income
Basic concept of national income accounting
1. Gross domestic product at market price ( GDP at MP )
GDP at MP is the sum of monetary values of all final products of a country in a year. The monetary value of each product is obtained multiplying the quantity and price of the product.
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2. Net domestic product at market price (NDP at MP)
NDP at MP is the net monetary value of final products produced in a year in a country. It we subtract depreciation from GDP at MP we obtain NDP at MP.
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3. Net national product at market price(NNP at MP)
If we add net factor income from abroad to NDP at MP we obtain NNP at MP. Here the factor income means rent wage,  Interest and profit. For it we factor income earned from rest of the world but subtract the factor income earned by rest of the world from our country.
                    Mathematically,
          NNP at MP = NDP at MP + net factor income from abroad
4. Net national product at factor cost (NNP at FC):
If we subtract net indirect tax from NNP at MP we obtain NNP at FC.
                 Mathematically,
       NNP at FC = NNP at MP – net indirect tax
      NNP at FC = NNP at MP – (indirect tax-subsidies)
      NNP at FC is the national income…
5. Private income
Private income is the income of people and private business organization of the country. If we subtract government’s income from national income we obtain private income.
                  Mathematically,
       Private income = NI-GOVT’S INCOME
Here,
    The government’s income means rent, profit and interest earned by government. However, there is transfer of payments from government to private sector and from private sector to government. They are adjusted subtracting the transfer of payment from private sector to government and adding the transfer of payment from government to the private sector including individuals. Besides it, the corporate taxes are also subtracted from national income to obtain private income.
                Mathematically,
     Private income = NI- factor income of govt-corporate taxes-transfer of payments to govt+transfer of payment from government
6. Personal  income
The income of individual in total is called personal income. It includes all factor incomes earned by people of the country. Moreover, it includes the transfer of payments from government and business organizations too. But, the transfers of payment from people to government are subtracted to find it.
                   Mathematically,
Personal income = private income-undistributed profit
7. disposable income:-
The personal income left after the payment of direct taxes is called disposable income. The direct taxes are income tax, house tax, land tax etc.
                Mathematically,
  Disposable income= personal income-direct tax
   If the people pay other social security contribution or charges they too should be subtracted to obtain disposable income
               Mathematically,
 Disposal income= personal income-direct tax-social security contribution
8. per capita income:
it is the ratio of national income and population size. it is known as national income per head of the country
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.          
Methods of measuring national income:-
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1. income method:-
In this method, we measure national income on the basis of factor incomes of people, business organization and the government of the country. The factor incomes mean rent, wage, interest and profit. These are the payments made to or received by land, labor, capital and organization respectively and is used in the country in a year. Moreover, we add net factor incomes earned from abroad. There are people self-employed too. Their income is in mixed form. That’s; why, it is added separately. Profit, interest and rent earned by government in a year is added as property and entrepreneurial income of government. The savings of non-departmental organizations too is added separately as factor income. The sum of factor incomes in the country gives NDP at FC. To NDP at FC we add net factor income from abroad and we get NNP at FC or NI as following.
2. expenditure method
in this method, national income is calculated summing up the expenditures of household sector, business sector, government sector and foreign trade sector. The expenditures of these sectors are called consumption expenditure, investment expenditure, government expenditure and net export. However, the expenditure may be on goods produced in previous years. That’s why; we adjust it subtracting opening inventory and adding closing inventory. If we sum op the expenditures we obtain GDP at MP .then from GDP at MP we subtract depreciation and net indirect tax as following to get NI
Consumption expenditure of household sector
XXXX
Government expenditure on final goods
XXXX
Investment expenditure ( private +public)
XXXX
Foreign trade sector (export-import)
XXXX
Change in inventory (closing-opening)
XXXX
Gross domestic product at market price
XXXX
Less: depreciation
XXXX
Net factor income from abroad
XXXX
Less: net indirect tax
XXXX
National income
XXXX
3.  Product method:
In this method, we measure NI on the basis of monetary values of final products or value added in each stage of production and distribution. The economy (country) is divided into 3 different sectors namely: primary, secondary, tertiary.
Primary: agriculture, forestry, livestock rearing etc.
secondary: health, sanitation, transportation, education etc
tertiary: tourism, sports, music etc.
Types of method

 A. final product method
    In this method, NI is measured on the basis of monetary values of final product. Firstly, we find monetary values of final product of primary, secondary and tertiary sectors. Sum of the final products gives GDP at MP. To GDP at MP we add net factor income from abroad and from it we subtract depreciation and net indirect tax to find NI.
Final product of  primary sector
XXXX
Final product of secondary sector
XXXX
Final product of tertiary sector
XXXX
GDP at MP
XXXX
Depreciation
XXXX
Net indirect tax
XXXX
Net factor income from abroad
XXXX
NI
XXXX
B. value added method:
In this method, NI is measured adding the values added in each stage of production and distribution. Firstly we add values added in primary, secondary and tertiary sectors. Sum gives GDP at FC. From that we subtract depreciation and to it we add net factor income from abroad to find NI.
       
Value added in primary sector
XXXX
Value added in secondary sector
XXXX
Value added in primary sector
XXXX
GDP at FC
XXXX
Depreciation
XXXX
Net factor income from abroad
XXXX
NI
XXXX
 Thus, these are the methods of measuring national income
Difficulties while measuring national income
1. Non-monetary transactions
   There are many non monetary income and output in developing countries like owner occupied house, self consumed agriculture products etc. due to non monetary nature they aren’t included in national income
2. Problems of double counting
Only final goods and services should be included in national income. But it is arduous to distinguish between final goods and intermediate goods. Intermediate goods also can be used for final consumption. There are possibilities of double counting
3. Underground economy
Under ground economy consists of illegal transactions like drugs, gambling, smuggling etc. they are not included in national income thus income become less than actual amount
4. Petty production
There are large numbers of petty producers and it is difficult to include their production in national income because they don’t maintain any account.
5. Public services
Public services like general administration, police, and army services are difficult to evaluate and they become hard to include in national income accounting
6. Illiteracy and ignorance
If majority of people are illiterate and ignorant, they can’t keep the records of production activities accurately. Hence, it is difficult to get correct information.
7. Capital gains or losses
When price of any assets alters then owner can make gains or losses. Such gains or losses are not included in national income.
8. Wages and salaries paid in kind
Payments made in kind mayn’t be included in national income. But facilities given in kind are calculates as supplements of wages and salaries on the income side
9. Conceptual problem
The major obstacles is whether to include the income generated within country or even generated abroad in national income and which method  should be used in  measuring national income
10. Transfer payments
Individual get pension, unemployment, allowance, windfall gains, subsidies on many measures , but they create difficulty in the measurement of national income.
  Thus, these are the difficulties in measuring national income.


Chapter 3
Scarcity and choice
Basic economic issues:
 The major causes of economic problems are basic economic issues,
https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEintCtYP7y8Uy9-aSJc5xyTwPc3_F-Bd57jH_sOSX1Uih-gi6JuogfIzDr7sQmPGwZHvJDhOEYM3UM9G-pO7IlXjpeb_XDfxggiMtcvNJ0uAOfh1sJkf1R74sLNyAainQ6x_aSPOdl0qbI/s640/fig5.png

1. Scarcity of resources
The common meaning of scarcity refers to unavailability in the market of a certain commodity. A commodity is scarce, in economic view, not due to itsd rarity in market but due to its means is limited. Scarcity explains this relationship between limited resources and unlimited wants and the problem therein. Scarcity raises national economic problems. There is poverty and human misery due to scarcity. Scarcity tells us about importance of commodity. The resources are not only scarce but they also have alternative uses.
The resources mean all of the national resources, artificial resource and human resource itself. However the main economic problems are abused by scarcity of natural resource. The resources differ from place to place in their types, quantities and the qualities. They are usable for the production of varieties of goods and services to satisfy different human wants. But they are very in sufficient to satisfy all of human wants. Their supply is very limited and changeable with the flight of time. Their quantities and qualities may decrease if we don’t utilize them properly.
2. Choice of best alternatives:-
Choice is involved in economic activities at both consumption and production levels. The problem of choice begins with an individual’s liking of how much time he would allot for work and how much for leisure. On the income earned, the choice is between how much to consume now and how much to save for the future. The chain of choice goes on deeper and deeper referring to the profitable use of resources at the hand of economic actors.

The choice of best alternative is the selection of best combination of goods producible with the use of all of the resources available that gives maximum social benefits to the nation. The problem of choice is accused by limited resources and unlimited human wants. Since, each resource can be put for the production of varieties of goods; there is the possibility of large number of combination of goods producible in the country. However, they give more or less social benefit or utility to the nation. As per the requirements, importance or preference of human needs/ human requirements or importance of the goods the choice of best alternative is met.
https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFEZS4zxtBsH-ciBQbwojoPCiVm2Nc42zxK-clO9HV3bnJt8zL_Qim1XPrIYHXcy60LAj8quWtyuD7NgdS02jZg3WtUsETeW5_9-KQTRQCKkARyuGHwE9DHiy7uDR5liUEYXA-wTOFjac/s1600/fig6.png

3. Allocation of resources:-
The allocation of resources means use of the resources dividing them for the production of the combination of goods that gives the maximum social benefit or utility to the nation. It is called appropriation of the resources to satisfy most important wants out of their unlimited types. The allocation of the resources is necessary because of insufficiency of limited resources for the fulfillment of unlimited human wants. Allocation is usually made to the basis of market demand or people’s preference on the goods. For it the concepts of demand and supply or the concepts of production possibility curve and preference curve of people are used.
The resources have alternative uses. One use can be chosen and all other have to be satisfied. Allocation is related to the choice of how much of resource to be allocated in what sector. The whole body of planning, programmingand even budgeting is nothing, but the statement of allocation of resources. Resource allocation occupies central position in economics. Economics is the principle governing the allocation of scarce means among competing ends.
Production possibility curve (PPC):-
A production possibilities curve is the graphical illustration of all the combinations of goods and services that can be produced in a given economy at a given time, if all the available resources in the economy in the economy are fully and efficiently employed. All points on PPC are points of maximum production efficiency or minimum production inefficiency; resources are allotted in such a way that it is impossible to increase the output of one commodity without reducing the output of other.
The PPC has following assumptions and features:-
a. It is based upon two commodities or two goods model
b. There is no change in technology and production technique
c. All the resources are utilized
d. PPC is downwardly sloped concave curve.
e. PPC  shifts upward if the new resources are explored or technology is advanced
To explain the concept of production possibility curve lat assume the country can produce one of the following combinations of goods utilizing all of the resources available as shown in the table below.
Table:
combinations
butter
guns
A
15
0
B
14
4
C
12
7
D
9
9
E
5
11
F
0
12
In the above table there are six different possible combinations of butter and guns. If we represent them we obtain the PPC as shown in the graph.
https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihm85DcsHQsMTOodkspH6EaX9ibYKi8B39_8Qk4R_0DTNw124g-Erou4fFRuaNf2tdljNXqCwxmF8d9LSvy4Usdk4LRrPCn-d2GGBcvufwiSAur0SdXMVpV11E3CYOde30bEuCHBOhErc/s1600/fig7.gif

In the above figure, if production of butter is decreased from 15 units to 14 units, then the production of guns increase from 0 units to 4 units which signifies 1 pound of butter production decrement causes to increase guns production to 4. If production of butter is decreased from 14 units to 12 units, then the production of guns increase from 4 units to 7 units, which signifies 2 pound of butter production decrement causes to increase guns production to 3 and so on.
https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPpnNhZnu2ZFtDyuWio9donh6nu_tVvGGN8qpdMwkeV6tqsHQ8H4h4Ci5UC8U5F5sMh8tKq6Ln7yPEKDEXKhxhamE5RkoQU_VLcII1l1wDjlVuD5XDqObu2CJo6bGPW-5b4rh2bnticyU/s640/fig8.png

Shifting of the curve:-
The rightward shift in PPC indicates increase in production capacity of economy due to improvement in technology or new resources or both.
https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_1_kho7JxyG__ps7wubQsXQL-ouDp01ztsB8NYgnH93JbBYJdl2vHHi_VdjbZD_PlgBI3_IakF9hP229cmdAC30-lVkbho-dxbIrWHjbCpDRFU4Izt_feX6TFb3Y2_zlPp0WZQDux3tk/s1600/fig9.gif

Limitations:-
1. PPC says nothing about which goods people wants and which to provide the most satisfaction but only indicates about available options.
2. PPC are not related to preferences of consumer or producers so there is no economic efficiency.
3. It does not show if there is efficient use of resources.
Conclusion:-
1. Opportunity cost is shown by negative slope of PPC.
2. Full employment is shown by maximum production obtained with existing technology ,given that all available resources are engaged in production
3. There is indication of unemployment, economic growth and investment.


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