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
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
– 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:-
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.
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.
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.
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.
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
.
Methods of measuring national income:-
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.
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,
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.
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.
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.
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.
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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