economics notes for b.tech students
TRANSCRIPT
Basic Concepts in Economics
1) Production: Any economic activity directed towards the
satisfaction of human wants is known as production. The
production of goods and services is necessary for the existence of
an economy. The level of production in any economy is the best
measure of its performance, living standards of its people and
the extent of technological development and growth. It includes
both the manufacturing of material goods as well as the
provision of services. The production of electrical and electronic
goods, automobiles etc and the work of teachers, doctors,
lawyers etc are all production in the economic sense.
2) Consumption: The act of satisfying one’s wants is called
consumption. Goods and services are produced only because
human wants need to be satisfied. No one will produce if there is
no consumption. The quality and quantity of consumption reflects
the levels of income and employment in an economy.
3) Investment: Investment is the addition made to the existing
total stock of capital. The amount to make investment is coming
from saving and this saving is the unspent income. Income comes
from employment. An economy can grow only if it saves
something from its present consumption and invests it again in
the production process. It adds to the productive capacity of an
economy.
4) Goods: Anything that can satisfy human wants is called goods
in economics. While services also satisfy human wants, the
difference is that goods are tangible and visible but services are
intangible and invisible. Goods can be of various types. They can
be free goods or economic goods, transferable, private or public
and so on.
Utility: The want satisfying capacity of a commodity is called its
utility or the power of a commodity to satisfy human wants is
called utility. Utility is subjective that is it does not lie in the
good but is a function of the consumer’s mind. Utility of good
changes with the change in conditions and circumstances. There
are three main forms of utility-form utility, place utility and time
utility.
Value: The commodity which has utility and possesses the
condition of scarcity and transferability, then it has value. For
example air has utility but it is abundant and a free resource, it
has no value in economic sense. Likewise rotten eggs are scarce
and transferable but possess no utility, they also don’t have
value. A television since it possesses utility and is scarce as well
as transferable has value.
Price: Value of a commodity expressed in terms of money is
called price. In modern times, goods are exchanged for money;
the value of a commodity is its price.
Wealth: Anything that has value is called wealth. In economics;
wealth does not only refer to money, but to all goods that have
value. Wealth includes material wealth and human wealth
(education, health, knowledge etc)
Income: The amount of money which wealth yields is known as
income. Thus, wealth is a stock concept while income is a flow
concept. That is wealth is valued at a particular point of time and
income is measured over a period of time particularly a year.
Gross Domestic Product (GDP)
When we take the sum total of values of output of goods and
services in the country, without adding net factor incomes
received from abroad, the figure so obtained is called Gross
Domestic Product (GDP).
GDP = C+I+G
GNP may be defined as the aggregate market value of all final
goods and services produced during a given year. The concept of
final goods and services stands for finished goods and services,
ready for consumption of households and firms, and exclude raw
materials, semi-finished goods and such other intermediary
products. More clearly, all sales to households, business
investment expenditure, and all government expenditures are
obviously regarded as final goods. In an open economy (an
economy which has economic relationship with the rest of the
world in the form of trade, remittances, investment etc-all
economies are open economies), GNP may be obtained by adding
up:
1) The value of all consumption goods which are currently
produced
2) The value of all capital goods produced which is defined as
Gross Investment. Gross Investment, in the real sense, here
implies the increase in inventories plus gross products of
buildings and equipments. It, thus, includes the provision
for the consumption of capital assets, i.e., depreciation or
replacement allowances.
3) The value of government services which are measured in
terms of governmental expenditure on various goods and
services for rendering certain services to the benefit of the
entire community.
4) The value of net exports, viz, the difference between total
exports and total imports of the nation. This value may be
positive or negative.
5) The net amount earned abroad. This represents the
difference between the income received by the nationals
from abroad minus the income remitted by the foreigners
working in India.
GNP at market price, thus, represents:
GNP= C+I+G+(X-M)+(R-P),
Where,
C stands for consumption goods,
I stands for capital goods/ or gross investment,
G stands for government services,
X stands for exports,
M stands for imports,
R stands for income receipts from abroad, and
P stands for income remitted by foreigners.
The Sectors of the Economy
The economic activities of an economy is classified mainly into
three primary sector economic activities (agriculture and allied),
secondary sector (manufacturing, construction etc) and service
sector or tertiary sector activities (transport and communication
etc).The Ministry of Statistics and Programme Implementation
(MOSP), Government of India has been publishing National
Accounts Statistics annually classifying the Indian economy into
three sectors and re-classifying the sectors into various sub
sectors. In this classification primary sector includes
agriculture, forestry and logging and fishing. The secondary
sector includes manufacturing (registered and un-registered
manufacturing), construction, electricity, gas and water supply.
Tertiary sector or service sector includes transport, storage and
communication, railway, trade, hotels and restaurants, banking
and insurance, real estate, ownership of dwellings and business
services, public administration and other services. In Indian
economy the contribution of primary sector is less than 20 per
cent and the agriculture share in national GDP is reducing even
though 58 per cent of India’s labour force still engaged in
agriculture and allied activities. This is a serious issue in the
rural life of India. The agrarian sector has been facing serious
crisis and to a greater extent it is structural and institutional.
The area under irrigation has been almost constant for the last
several years, declining capital expenditure by the public sector
in agriculture, lack of infrastructural facilities, declining
institutional credit to agriculture etc all these are burning issues
of India’s farm sector. Sharp decline of agriculture in value-
added terms to GDP, increasing amenities in urban India and not
much in rural India where more than 70 per cent of the
population lives etc are some disturbing facts to those who hold
‘Indian Economic Miracle’ theory. We have good demographic
advantage, vast agricultural land and in this land we can
cultivate all most all crops sufficiently to meet the requirements
of our growing population. But now the present situations of
India like poor state of our education, public health, agriculture
and rural economy, poor amenities in rural areas and urban
slums, poor public delivery systems, high poverty ratio, still high
illiteracy rate, malnutrition and high infant mortality rate are
burning issues to be addressed urgently.
At the national level the contribution of manufacturing sector is
around 18 per cent and it is almost constant for the last so many
years. But in Kerala it is around 10 per cent and in Kerala we
have a stagnant manufacturing sector. The contribution of
service sector to the national economy is nearly 60 per cent.
There are serious disparities in the growth rates of agriculture,
manufacturing and service sectors of the Indian economy.
Functions of Money
The functions of money can be classified as follows.
1) Money as a medium of exchange
The basic function of money in an economy is to act as a medium
of exchange. Money has general acceptability and purchasing
power so it can act as a medium of exchange. When money is
transacted, purchasing power is transacted from one person to
another. In earlier periods we had been following barter system.
Barter system means exchanging goods for goods. But most of
the time, for such exchange to take place, there must occur a
double coincidence of wants. That is each party to the exchange
must have precisely what the other party requires, and in an
appropriate quantity and at the time required. The use of money
as a common medium of exchange has facilitated exchange
greatly.
2)Money as a Unit of Account.
Money customarily serves as a common unit of account or
measure of value in terms of which the values of all goods and
services are expressed. This makes possible meaninigful
accounting systems by adding up the values of a wide variety of
goods and services whose physical quantities are measured in
different units
3) Money as a Standard of Differed Payment
Money also serves as a standard or unit in terms of which
deferred or future payments are stated. This applies to payments
of interest, rents, salaries; pensions etc.Large fluctuations in the
value of money (inflation or deflation) make money not only a
poor measure of value, but also a poor standard of deferred
payment. This is because the value of money is not something
intrinsic to it, but a social phenomenon. This makes monetary
management for the stable value of money socially very
important.
3)Money as a Store of Value
Money also serves as a store of value i.e., members of the public
can hold their wealth in the form of money. This function is
derived from the use of money as a medium of exchange in a two-
fold manner. First, the use of money as a medium of exchange
decomposes a single barter transaction into two separate
transactions of purchase and sale.
Significance of Money in Modern Economic Life
Money occupies a central position in our modern economy.
Money is everywhere and for everything in the modern economic
life. Money has become the religion of the day in the ordinary
business of life. Every branch of economic activity in a money
economy is basically different from what it would have been in a
barter economy. Money has created a far reaching effect on all
facets of economic activities; consumption, production, exchange
and distribution, as also on public finance and economic welfare.
Money and Consumption
Money enables a consumer to generalize his purchasing power.
It gives him command over a wide variety of goods. It enables
him to canalize his purchasing power and get what he wants. In
fact, it is money through its immense purchasing power that
makes a consumer sovereign in a capitalist economy. The
consumer’s sovereignty can be expressed through money
spending. Money provides freedom of choice of consumption.
Money and the price mechanism help a consumer to allocate his
income over goods in such a way so that he derives maximum
satisfaction from his consumption.
Money and Production
The introduction of money has made present day mass
production possible. Without money, production on a large scale
would be impossible. The benefits of money in production are as
follows
1) Money has made extreme division of labour possible.
Intensive specialization is necessary for large scale
production.
2) Money is the very essential for modern enterprise.
Entrepreneurs are concerned, while planning their
production activities, with the cost of production and selling
prices together with the resulting profit, all calculated in
terms of money.
3) The use of money enables a producer to concentrate on the
organization of the production process. Money provides a
basis for supporting more complex methods of organizing
production.
4) Money has facilitated borrowing and lending and these are
essential in present day production. Credit is the main pillar
of modern business.
5) Money is the most liquid and general form of capital which
is highly mobile between different regions and industries.
6) Money helps the producer to discover through the price
mechanism what buyers want and how much they want, so
that he can produce and supply accordingly. In fact, money
has changed the basic characteristics of production.
Money and Exchange.
Money overcomes the difficulties of a barter system of exchange.
In a money economy; it is simple matter to ascertain the market
price in terms of monetary units. Money facilitates trade by
serving as a medium of exchange. Thus, rapid exchange in a
modern economic system is possible because of money. Money is
the basis of the pricing mechanism through which economic
activities are adjusted.
Money and Distribution.
Money eases the process of distribution of factors rewards like
wages, interests and profits which are all measured and
distributed in terms of money. It is with the help of money that
the shares of different factors of production are properly
adjusted. Accounting, receiving and storing of its share of income
by any factor-unit in kind is most inconvenient. Here money
comes to the rescue.
Money and Public Finance
In a modern economy, government plays a very important role.
Government receives income in the form of taxes, fees, prices of
public utility services, etc and uses this income for
administrative and developmental purposes. But the great
magnitude of public revenues and public expenditure in a
modern state would become impossible without money. Further,
fiscal devices like public borrowing and deficit financing for
economic development can be adopted only in a monetary
economy.
In recent times, the fiscal policy of a government acquired very
great importance in economic life, since economic activities can
be regulated through budgetary operations that are facilitated by
the institutions of money.
Money, thus, plays an important role in the shaping of the
economic life of a country. The growth of money economy has
made the growth of economic liberalism and, hence, of the
present day free enterprise or capitalists system possible. In fact
the pattern of economic life has changed in accordance with the
changes in the economic progress. For better performance of an
economy, a country’s monetary system should be operated in
such a manner as to maintain high levels of employment and
avoidance of business fluctuations.
Inflation
Inflation is commonly understood as a situation of substantial
and rapid general increase in the price level and consequent fall
the value of money over a period of time. Inflation means
persistent rise in the general level of prices. Inflation is a long
term operating dynamic process. By and large, inflation is also a
monetary phenomenon. It is usually characterized by an overflow
of money and credit. In fact, the root cause of inflation is the
expansion of money supply beyond the normal absorbing
capacity of the economy.The behaviour of general prices is
measured through price indices.The trend of price indices
reveals the course of inflation or deflation in the economy.
Crowther defines inflation as “a state in which the value of
money is falling,ie., prices are rising”. Professor Samuelson
defines “Inflation occurs when the general level of prices and
costs is rising”.
INFLATION
Inflation is commonly understood as a situation of substantial
and rapid general increase in the price level and consequent fall
the value of money over a period of time. Inflation means
persistent rise in the general level of prices. Inflation is a long
term operating dynamic process. By and large, inflation is also a
monetary phenomenon. It is usually characterized by an overflow
of money and credit. In fact, the root cause of inflation is the
expansion of money supply beyond the normal absorbing
capacity of the economy.The behaviour of general prices is
measured through price indices.The trend of price indices
reveals the course of inflation or deflation in the economy.
Crowther defines inflation as “a state in which the value of
money is falling,ie., prices are rising”. Professor Samuelson
defines “Inflation occurs when the general level of prices and
costs is rising”.
Types of Inflation.
On different grounds, economists have classified inflation into
various types.According to the rate inflation there are four types
of inflation.
1) Moderate Inflation
2) Running Inflation
3) Galloping Inflation
4) Hyper Inflation
Moderate inflation is a mild and tolerable form of inflation. It
occurs when prices are rising slowly. When the rate of inflation is
less than 10 per cent annually, or it is a single digit annual
inflation rate, it is considered to be moderate inflation in the
present day economy. It does not disrupt the economic balance.
It is regarded as stable inflation in which the relative prices do
not get far out of line.
When the movement of price accelerates rapidly, running
inflation emerges. Running inflation may record more than 100
per cent rise in prices over a decade. Thus, when prices rise by
more than 10 per cent a year, running inflation occurs. When
prices are rising at double or triple digit rates of 20,100 or 200
per cent a year, the situation may be described as galloping
inflation. Galloping inflation is really a serious problem. It causes
economic distortions and disturbances.
In the case of hyper inflation prices rise is very severe. It is over
1000 per cent per year.There is at least a 50 per cent price rise
in a month, so that in a year it rises to about 130 per cent
times.Hyper inflation is a monetary disease.
Two Types of Inflation on the Basis of Cause of Origin: They
are Demand Pull Inflation and Cost Push Inflation.
Demand Pull Inflation: According to the demand-pull theory,
prices rise in response to an excess of aggregate demand over
existing supply of goods and services. It is also called excess-
demand inflation. In the excess-demand theories of inflation,
excess demand means aggregate real demand for output in
excess of maximum feasible, or potential, or full employment,
output (at the going price level). The demand-pull theorists point
out that inflation (demand-pull) might be caused, in the first
place, by an increase in the quantity of money. Demand-pull or
just demand inflation may be defined as a situation where the
total monetary demand persistently exceeds total supply of real
goods and services at current prices, so that prices are pulled
upwards by the continuous upward shift of the aggregate
demand function. Causes of Demand-pull inflation are
4) Increase in Public Expenditure 2) Increase in Investment 3)
Increase in money supply.
COST PUSH INFLATION
Cost push inflation or cost inflation is induced by the wage-
inflation process. This is especially true for a Country like India,
where labour intensive techniques are commonly used. Theories
of cost-push inflation (also called sellers’ or mark-up inflation)
came to be put forward after the mid-1950s.They appeared
largely in refutation of the demand-pull theories of inflation and
three important common ingredients of such theories are 1) that
the upward push in costs is autonomous of the demand
conditions in the concerned market 2) that the push forces
operate through some important cost component such as wages,
profits (mark up), or materials cost. Accordingly, cost-push
inflation can have the forms of wage-push inflation, profit-push
inflation, material-cost push inflation, or inflation of a mixed
variety in which several push factors reinforce each other and
that the increase in costs is passed on to buyers of goods in the
form of higher prices, and not absorbed by producers. Thus, a
rise in wages leads to a rise in the total cost of production and a
consequent rise in the price level, because fundamentally, prices
are based on costs.It has been said that a rise in wages causing
arise in prices may , in turn , generate an inflationary spiral
because an increase would motivate the workers to demand
more wages.
(Graphs of demand pull and cost push inflation)
Causes of Inflation
1) Over- Expansion of Money Supply: Many a times a
remarkable degree of correlation between the increase in
money and rise in the price level may be observed. The
Central Bank (India’s RBI) should maintain a balance
between money supply and production and supply of goods
and services in the economy. Money supply exceeds the
availability of goods and services in the economy, it would
lead to inflation.
2) Increase in Population: Increase in population leads to
increased demand for goods and services. If supply of
commodities are short, increased demand will lead to
increase in price and inflation.
3) Expansion of Bank Credit: Rapid expansion of bank credit is
also responsible for the inflationary trend in a country.
4) Deficit Financing: Deficit financing means spending more
than revenue. In this case government of India accepts
more amount of money from the Reserve Bank India (RBI)
to spend for undertaking public projects and only the
government of India can practice deficit financing in India.
The high doses of deficit financing which may cause
reckless spending, may also contribute to the growth of the
inflationary spiral in a country.
5) High Indirect Taxes: Incidence of high commodity taxation.
Prices tend to rise on account of high excise duties imposed
by the Government on raw materials and essentials.
6) Black Money: It is widely condemned that black money in
the hands of tax evaders and black marketers as an
important source of inflation in a country. Black money
encourages lavish spending, which causes excess demand
and a rise in prices.
7) Poor Performance of Farm Sector: If agricultural production
especially foodgrains production is very low, it would lead
to shortage of foodgrains, will lead to inflation.
8) High Administrative Pricing
Other reasons are capital bottleneck, entrepreneurial
bottlenecks, infrastructural bottlenecks and foreign exchange
bottlenecks.
EFFECTS OF INFLATION
1) Effects of Inflation on Business Community: Inflation is
welcomed by entrepreneurs and businessmen because they
stand to profit by rising prices. They find that the value of
their inventories and stock of goods is rising in money
terms. They also find that prices are rising faster than the
costs of production, so that their profit is greatly enhanced.
2) Fixed Income Groups: Inflation hits wage-earners and
salaried people very hard. Although wage- earners, by the
grace of trade unions, can chase galloping prices, they
seldom win the race. Since wages do not rise at the same
rate and at the same time as the general price level, the
cost of living index rises, and the real income of the wage
earner decreases.
3) Farmers: Farmers usually gain during inflation, because
they can get better prices for their harvest during inflation.
4) Investors: Those who invest in debentures and fixed-interest
bearing securities, bonds, etc, lose during inflation.
However, investors in equities benefit because more
dividend is yielded on account of high profit made by joint-
stock companies during inflation.
5) Inflation will lead to deterioration of gross domestic savings
and less capital formation in the economy and less long
term economic growth rate of the economy.
MEASURES TO CONTROL INFLATION
The measures to control inflation can be broadly divided into
TWO- Monetary and Fiscal Measures.
Inflation is primarily a monetary phenomenan.Hence, the most
logical solution to check inflation is to check the flow money
supply by devising appropriate monetary policy and carefully
implementing monetary measures. The Central bank’s monetary
management methods, devices for decreasing or increasing the
supply of money and credit for monetary stability is called
monetary policy. Monetary policy is a policy of money supply
influencing the quantity, cost and availability of money supply.
Central Banks generally use the three quantitative measures
namely:
1) Bank Rate Policy
2) Open Market Operations
3) Variable Reserve Ratio
1) Bank Rate Policy: Bank rate is the rate at which Central
Bank lends loans and advances to commercial banks. When
bank rates are hiked by the Central bank as a follow up of
this increased bank rate, commercial banks hike the rate of
interest. Bank rate is hiked during the period of inflation to
reduce money supply.During the period of falling prices
(deflation) central banks reduces bank rate to increase
money supply.As follow up, commercial banks reduce rate
of interest.At a low rate of interest, investors find it much
attractive to borrow money and make investment.
2) Open market Operations: Open market Operation means
open buying and selling of government securities by the
Central Bank for the Central Government. In India the term
‘opens market operations’ stands for the purchase and sale
of government securities by the RBI from/to the public and
banks on its own account. In its capacity as the
government’s banker and as the manager of public debt, the
RBI buys all the unsold stock of new government loans at
the end of the subscription period and thereafter keeps
them on sale in the market on its own account. Such
purchases of government securities by the RBI are not
genuine market purchases but constitute only an internal
arrangement between the government and the RBI whereby
the new government loans are sold not directly by the
government but through the RBI as its agent.
3) Variable Reserve Ratio: Under the existing law enacted in
1956, RBI is empowered to impose statutorily ‘Cash Reserve
Ratio’ (CRR) on commercial banks anywhere between 3 per
cent and 15 per cent of the net demand and time liabilities.
It is the authority of the RBI to vary the minimum CRR
which makes the variable reserve ratio a tool of monetary
control. It may be noted that the RBI pays interest to banks
on the additional required reserves over the minimum CRR
of 3 per cent.
Fiscal Policy
Fiscal policy is the policy of the government implementing
through the government treasuries. Fiscal policy intervention
areas are taxation, public expenditure, borrowing, subsidies and
deficit financing. Inflation means a general rise in prices. To
control inflation policy should be directed to reduce the price
level and control excess money supply. First measure is reducing
indirect taxes. High indirect taxes lead to increase in the prices
of goods and services. So to reduce the prices of goods and
services widely used by common people and intermediate goods,
the indirect taxes should be reduced. Increased public
expenditure leads to increase in the level of economic activities
and more income to people.It also leads to increase in money
supply.So during the period of inflation, we should reduce excess
public spending/public expenditure.
Deflation
Deflation is just opposite of inflation. It is essentially a matter of
falling prices. Deflation is that state of falling prices when the
output of work by productive agents increases relatively to
money income. Deflation arises when the total expenditure of the
community is not equal to the value of output at existing prices.
Consequently, the value of money goes up, and prices fall. In
short, deflation is a condition of falling prices, accompanied by
the decreasing level of employment, output and income.
Definitions of Economics
The book of Adam Smith “An Enquiry into the Nature and Causes
of Wealth of Nations” popularly known as Wealth of Nations,
published in the year 1776, laid the strong foundation for the
growth of Economics. So Adam Smith is rightly called the
“Father of Economics” and pioneer of Classical Economics.
Although there is a plethora of definitions, there is no concensus
among economists about a precise definition of economics.
Stock Exchange: Stock exchange is a place where
second-hand securities are bought and sold.Stock exchange is
essential for industrial development and a developed stock
exchange is one of the features of a developed industrialized
country.
Wealth Definition
The early classical economists defined economics mainly as a
study of wealth.To his famous treatise, Adma Smith gave the
suggestive tittle ‘An Enquiry into the Nature and Causes of
Wealth of Nations’. It means economics investigates into the
nature of wealth and the laws of production and distribution. The
atmosphere of the Industrial Revolution marked by
unprecedented material prosperity and accumulation of wealth
should naturally justify the scope which these economists
assigned to economics.
Criticism of wealth Definition
1) Too much Emphasis on wealth : Literary writers and
religious leaders strongly voiced their protest against the
study of economics because of its too much attachment to
wealth.Adam Smith treated economics as political economy
and therefore emphasized the importance of wealth from a
national angle
2) Restricted Meaning of Wealth: The classical definition
considered wealth as, material goods only, like table,
radio,furniture etc.Non-material services of drivers,
singers,teachers,professors etc are not taken as wealth.But
in modern days wealth denotes both goods and services,
material wealth and human wealth.
3) Concept of Economic Man: Classical wealth definition was
based mainly upon the assumption of an ‘economic man’
who had no consideration for love, affection, sympathy,
patriotism etc.In other words, an economic man was
supposed to give attention to economic activities only.But in
reality human behaviour cannot be properly understood and
analysed unless the other motives are also given due
weightage.
4) No Mention of man’s Welfare: Wealth definition explains the
wealth-getting and spending activities of man It pays no
attention to the equity principle which is of paramount
importance to maximize the welfare of the society.
5) Economic Problem: Wealth definition is silent over the
basic economic problem of meeting unlimited wants with
scarce means.In other words, the central problem of
economics is not at all touched by wealth definition.
Welfare Definition
Adam Smith’s wealth definition made economics a dismal
science.Alfred Marshall was the first neo-classical economist to
rescue economics from ridicule, condemnation and
misunderstanding. So Marshall gave welfare definition to
economics in his classic work ‘Principles of Economics’,
published in 1890.His definition shifted the emphasis from
wealth to human welfare. According to him wealth is simply a
means to and an end in all activities, the end being human
welfare.
Marshall defines “economics is a study of man kind in the
ordinary business of life; it examines that part of individual and
social action which is almost closely connected with the
attainment and with the use of the material well being.” He adds
that economics is on the one side a study of wealth; and the
other and more important side, a part of the study of man. That
is Marshall gave primary importance to man and secondary
importance to wealth.
Criticism of Welfare Definition
1) Material and Non-Material Welfare: Lionel Robbins begins
his attack by pointing out that economists should not
narrow down the scope of economics by confining their
attention to the study of material welfare alone. The
services of teachers, actors, singers, lawyers etc. do
promote welfare and such welfare may be termed as non-
material welfare. The above mentioned services have much
economic significance because they are scarce in relation in
relation to demand and possess value.
2) Objection to material: Robbins objects not only to the word
‘material’ but also to the very idea of ‘welfare’. For the neo-
classical economists, economics is concerned with the
causes of material welfare. According to Robbins, there are
certain material activities which do not promote welfare.
The manufacturers of intoxicants such as wine and opium
are certainly economic activities. But they are not conducive
to human welfare.
3) Welfare cannot be measured: The neo-classical economists’s
idea of welfare is based on cardinal utility. But utility is a
psychological entity which cannot be measured. It varies
from person to person, place to place and time to time.
Therefore, the concept of welfare based on measurable
utility is elusive in character.
4) Economics is a Social Science: Robbins disputed the
Marshallian conception of economics as a social science.The
study of man as they live and move and think in the
ordinary business of life.According to Marshall, the
activities of an individual living in seclusion like a
Himalayan Sadhu or Robinson Crusoe fall outside the orbit
of economics.Robbins on the other hand regards economics
as a human science.The central problem in economics,
according to Robbins is the allocation of scarce means
among alternative ends.
Scarcity Definition
After rejecting the materialist definition of Marshall,Lionel
Robbins formulated his own conception of economics in his book
“ The Nature and Significance of Economic Science” published in
1932. In the words of Lionel Robbins, “Economics is the science
which studies human behaviour as a relationship between ends
and scarce means which have alternative uses.” He deduced his
definition from our fundamental characteristics of human
existence.
1) Unlimited Wants: “Ends” refers to human wants which are
boundless but the resources available to satisfy these wants
are limited. Some wants are inborn but others are acquired
through customs and conventions. When one want is
satisfied another crops up.
2) Scarcity of Means: The resources (time or money) at the
disposal of a person to satisfy his wants are limited. The
external world does not offer full opportunities for their
complete achievement. If things are available in abundance
just like free goods, the economic problem will not arise.
3) Alternative Uses of Scarce Means: Economic resources are
not only scarce but are also versatile. If the resources
cannot be put to alternative uses, the question of choice will
not arise. We may use land for raising crops or for building
houses. We cannot do both. If we choose one thing, we must
give up others.
4) The Economic Problem: When the means at the disposal of a
person are limited and the resources can be put to several
uses and when wants can be graded on the basis of
intensity, the behaviour necessarily takes the form of
choice. Thus the choosing of one is at the cost of another. In
order to make choice scientific, some form of pricing
process is inevitable.
Criticism of Scarcity Definition
Robbins’ definition is based on two foundation stones-
multiplicities of wants and scarcity of means.
1) Economics of Abundance: According to Robbins, economic
problem arises due to scarcity. But economic problems may
also arise due to plenty rather than scarcity as had
happened during the great depression of 1930s.Professor
John Kenneth Galbraith, a noted American economist in his
book,” The Affluent Society”, states that scarcity is not a
problem in America. So that the conventional scarcity idea
has only little relevance.
2) Not Applicable to Underdeveloped Countries: Robbins
definition provides no solution to the problems of
underdeveloped countries. A peculiar feature of many under
developed countries is that the resources are not scarce,
but they are either under utilized, or unutilized. Robbins
simply assumes the resources as given and analysed their
allocation among alternatives uses.
Growth Definition
Economics has now become a fastly growing discipline in the
field of social science and its scope and significance have
widened from mere a value theory or a theory of resource
allocation. The credit for revolutionizing the study of economics
surely goes to Lord JM Keynes. Keynes defined economics as the
study of the administration of scarce resources and the
determinants of income and employment.
Professor Paul.A Samuelson has given a definition based on
Growth aspects which is known as the Growth Definition.
“Economics is the study of how people and society end up
choosing, with or without the use of money, to employ scarce
productive resources that could have alternative uses to produce
various commodities and distribute them for consumption, now
or in the future, among various persons or groups in society.
Economics analyses the costs and the benefits of improving
patterns of resource use”.
Firstly, it is applicable even in a barter economy where money
measurement is not possible.
Secondly, the inclusion of time element makes the scope of
economics dynamic.
Thirdly, this definition possesses universality in its application.
Thus we may conclude that though in a sense it is similar to
Robbins’ definition, it is an improvement over Robbins’ scarcity
definition.
Production Possibility Curve
The concept of production possibility curve was introduced by
Professor Samuelson.The set of problems facing in every
economic system can be clearly analysed with the tool of
production possibility curve. Human wants are unlimited and the
economic resources to satisfy these unlimited human wants are
scarce or limited. Therefore, the every society faced with the
basic problem of choosing and allocating its scarce resources
among alternative uses. Production Possibility Curve shows the
menu of choice along which a society can choose to substitute
one good for another assuming a given state of technology and
given total resources. The production possibility curve illustrates
three concepts: scarcity, choice and opportunity cost.
Modern economy produces thousands of products, and therefore
choices before us are complex. In order to reduce the problem to
its simplest form we consider the economy in which two goods
‘butter’ and ‘guns’ are produced with the available resources and
technology.
Production Possibility Curve is based on the following
Assumptions:
1) Only two goods x (butter) and y (guns) are produced in the
economy.
2) There is full employment of resources.
3) The resources are fixed in quantity. But they can be re-
allocated from the production of one commodity to that of
another.
4) The state of technology is given and constant.
5) The time period is short
Law of Supply
The law of supply states that the functional relationship between
price and the quantity offered for sale. The law of supply states,
other things remaining same, the higher the price, the greater
will be the willingness of sellers to make a product available. At
higher prices, more sellers are interested in producing the
product, and each existing seller wants to sell more.The opposite
holds good when prices decline.
Factors Determining the Supply of a Commodity
The supply of a commodity depends upon the following factors.
1) Different firms may follow different objectives.Some firms
may be interested in maximizing profit, while others may be
interested in sales or revenue maximization or satisfying
etc.The amount of commodity supplied is often influenced
by the objectives of the firm.Normally, sales maximization
firm’s output will be greater than the profit maximization
firm’s output.
2) State of Technology: Technical improvements reduce the
costs of production enbling a shifting a shifting of the
supply curve to the right.Similarly, obstacles in the existing
technology increases costs of production, forcing a shift in
the supply curve to the left. A constant state of technology
keeps the supply at the existing level.
3) Political Disturbances: Political disturbances may
destabilize trade and thus create a scarcity for certain kinds
of goofs’
4) Government Policy: Any change in government’s policy
would affect the production sector and thereby the supply of
goods and services in the market. The government policy
related to tax and subsidy will have serious impact on the
production and supply of goods and services in the market.
Law of Demand
Meaning of Demand
Demand is essential for the Creation, Survival and Profitability of
a firm. It is essential to distinguish between demand and desire.
A beggar’s demand for a Maruti car is only s desire and does not
constitute a demand. A miser may possess enough money but he
may not be willing to spend it. In this case also desire will not be
called demand. Therefore, demand is not merely a wish or desire
but an effective demand, this is, desire backed by purchasing
power and willingness to buy.
Demand has the following Four characteristics
1) Price: Demand is always related to price. It is meaningless
to say that demand for refrigerator in the market is one
thousand. The person must state the price at which the
consumer is prepared to purchase the said quantity of the
commodity.
2) Time: Demand always means demand per unit of time, per
day, per week, per month or per year.
3) Market: demand is always related to the market. Market
here simply refers to the contact between buyers and
sellers. There is no need for a definite geographical area.
4) Amount: Demand is always a specific quantity which a
consumer is willing to purchase. It is not an approximation,
but is to be expressed numerically.
Demand Schedule: A demand schedule is a list of prices and
corresponding quantities. Since the demand schedule obeys the
law of demand, price and quantity demanded vary inversely The
following is the hypothetical demand schedule of an individual.
Types of Demand: There are three kinds of demand,
1) Price Demand
2) Income Demand
3) Cross Demand
1) Price Demand: Price demand refers to the various
quantities of a commodity that a consumer would purchase
at a given time in the market at various hypothetical prices.
2) Income Demand: Income refers to the various quantities of
a commodity that a consumer would purchase at a given
time in a market at various levels of income.
3) Cross Demand: The relationship between the prices of a
substitute or complements and the quantity purchased of a
related commodity is called cross demand.
Law of Demand: The inverse relationship between the price of a
commodity and its quantity demanded per unit of time is referred
to as the law of demand. In the words of Prof. Samuelson, “Law
of demand states that people will buy more at lower prices and
buy less at higher prices, other things remaining the same.” The
phrase “other things being equal” is an important qualification;
when we say “other things being equal” we assume;
1) No change in the consumers’ income.
2) No change in the prices of substitutes and complements
3) No change in consumers taste and preferences
4) No new substitutes for the goods have been discovered
5) People do not feel that the present fall in price is a preclude
to a further decline in prices.
6) The commodity in question is not one which has a prestige
value.
Determinants of Demand
According to D.S Watson a change in demand is caused by
changes in income . tastes and prices of substitutes and
complements.The various determinants of demand are listed
as follows.
1) Changes in Tastes and Fashions: The demand for some
goods and services is very susceptible to changes in tastes
and fashions.If a commodity becomes more fashionable a
larger quantity of it may be bought at the old price or even
at a slightly higher price. The fashion among ladies to keep
their hair long or short brings about changes in demand for
their hair-pins, hair-nets etc. Similarly if tastes have
deteriorated for a product, less of it will be deamanded
without any rise in its price.
2) Changes in Weather : An unusually dry summer results in a
decrease in the demand for umbrellas.The demand curve in
such a case shifts to the left.
3) Channges in Income and Distribution of income: An
increase in family income increases the demand for
durables like video recorders and refrigerators.The demand
curve then shift to the right., More over, if income in a
country is evenly redistributed by taking the rich and
transferring it to raise the income of the poor, it may
increase the demand for goods consumed by the poor
people.
4) Changes in expectations: Expectations also bring about a
change in demand.Rumours that the government is going to
levy fresh taxes on a particular good may push the in favour
of purchasing more of that commodity alone.
5) Changes in Savings: Savings and demand are inversely
related.If the marginal propensity to save becomes high the
amount available for consumption will become less. The
demand will therefore decrease.
6) State of Trade Activity: During the periods of boom and
prosperity, the demand for all commodities tends to
increase. On the contrary, during times of depression there
is a general slackening of demand.
7) A Change in Real Income: As money income increases, real
income also increases. If the income goes to the rich,
demand does not increase as much as it increases when
such income benefits go to the poor.The simple reason is
that the marginal propensity to consume of the rich is less
than that of the poor.
8) Consumer Credit Policy: With a liberalization in the credit
policy of the banks or the hire purchase system adopted by
companies, the demand for VCRs,Cars, houses etc will
increase.
9) Advertisement: In advanced capitalist countries advertising
is a powerful instrument affecting the demand in the
market.
10) Taxation and subsidy: If fresh taxes are levied or the
existing rates of taxation on commodities are increased,
their prices go up.The demand for such commodities will
decrease. On the other hands, if rebates and subsidies are
given as in the case of consumer products during festival
seasons, the demand will increase.
11) Change in the value of money:During times of inflation,
the prices will rise. Therefore, consumers will have to their
expenditure pattern so that the demand for certain products
will have to be reduced and for others stimulated.
12) Change in Population:The demand for goods and
services depend on population.As population increases
demand increases and vice versa.
MEANING OF PRODUCTION
In economic terminology ‘production’ implies creation of utility
for sales. The act of utility creation is possible by transforming
inputs into output. According to Prof.Hicks, “production is any
activity directed to the satisfaction of the people’s wants
through exchange.” Production is an activity of converting inputs
into out put with the help of technology or mode of production.
In production process we use four factors of production ie; land,
labour,capital and organization.For engaging in economic
activity, these factors would get rewards. Land or building would
get rent as its reward,labour would get wage / salary,capital
would get profit and organizer would get profit as the reward.
Knowledge is the only instrument of production that is not
subject to diminishing returns – J.M.Clark, 1957
The production function shows only the physical relationship
between inputs and output, but says nothing about the optimal
combination of inputs.
Two things must be noted when we discuss production function.
1) It must be considered with reference to a particular period
of time.
2) It is determined by the state of technology.Any change in
technology may alter output, even when the quantities
inputs remain fixed.
Law of Returns to Scale
The law of returns to scale examines the relationship between
output and the scale of inputs in the long-run when all the inputs
are increased in the same proportion.
Assumptions
This law is based on the following assumptions
1)All factors are variable but the enterprise is fixed.
2) There is no change in technology
3) Perfect competition prevails in the market.
4) Returns are measured in physical terms.
Three Phases of the Law of Returns to Scale.
First phase is increasing returns to scale
Second phase is constant returns to scale
Third phase is diminishing returns to scale.
Depending on whether the proportionate change in output
exceeds, equals or decrease in proportionate to the change in
both the inputs, the production is classified as increasing
returns to scale, constant retuns to scale and decreasing returns
to scale.
Increasing Returns to Scale
Increasing returns to scale arises due to the following reasons.
a) Dimentional economies,2) economies flowing from
indivisibility 3)Economies of specialization 4) Technical
economies, 3) Managerial economies, 6) Marketing
economies
Marshall exlains increasing increasing returns in terms of “
increased efficiency” of labour and capital in the improved
organization with the expanding scale of output and employment
of factor unit.It is referred to as the economy of organization in
the earlier stages of production.
Constant Returns to Scale: As a firm continues to expand, it
gradually exhaust the economies, internal and external, which
enabled the operation of increasing returns to scale. In this
stage, the economies and diseconomies of scale are exactly in
balance over a particular range of output. In the case of constant
returns to scale increases in all the inputs cause proportionate
increases in output.
A production function showing constant retuns to scale is often
called ‘Linear and Homogeneous’ or ‘Homogeneous of the first
Degree’.The Cobb-Douglas production function evolved by the
American economists Cobb and Douglas is a linear and
homogeneous production function.
Diminishing Returns to Scale
When a business firm continues to expand even beyond the point
of constant returns, stage comes when diminishing returns to
scale set in. There are decreasing returns to scale when the
percentage increase in output is less than the percentage
increase in iutput. As the size of the firm expands, managerial
efficieny decreases.Another factor responsible for diminishing
retuns to scale in the limitation of exhaustibility of the natural
resources, for example, doubling of coal-mining plants may not
double the coal output, because of limited availability of coal
deposits or due to difficult accessibility to coal deposits.
The Law of Variable proportions OR Law of Diminishing
Returns
The law of variable proportions is one of the basic laws in
economics. The law of variable proportions is the modern version
of the law of diminishing returns. This law states that a technical
physical relationship between the fixed and variable factors of
production in the short run. Here it is assumed that only one
factor of production is a variable factor while other factors are
assumed to remain fixed. As we increase the quantity of the
variable factor while keeping other factors constant, the output
of the variable factor may increase more than proportionately in
the initial stages of production, but eventually it will not increase
even proportionately. Alfred Marshall, a neo-classical economist,
considered the law of diminishing returns in relation to
agriculture only.
The law of variable proportions has been defined in the following
way; “As the proportion of one factor in a combination of factors
is increased, after a point, first the marginal and then the
average product of that factor will diminish”.
Assumptions of the Law
The law of variable proportions is valid when the following
conditions are fulfilled.
1) The state of technology is given below
2) Only one factor is varied and all other factors remain fixed.
3) The fixed factor and the variable factor are combined
together in variable proportions in the process of
production.
4) The units of the variable factor are homogeneous
5) The law operates in the short run.
Total Product (TP) : Total Product is the amount of output
produced from land with the given number of labourers
employed.
Average product (AP): The average product of labourer is the
total product (TP) divided by the number of labourers employed
AP =TP/No.
Marginal Product (MP): The marginal product is the change in
the total product due to change in labour.
DIAGRAM
Law of Supply
The law of supply states that the functional relationship between
price and the quantity offered for sale. The law of supply is a
hypothesis that states, other things remaining same,, the higher
the price, the greater will be the willingness of sellers to make a
product available. At higher prices, more sellers are interested in
producing the product, and each existing seller wants to sell
more.The opposite holds good when prices decline.
The law of supply can be explained with the help of a schedule
and a curve.
Supply Schedule: Supply schedule represents the relationship
between prices and the quantities that the firms are willing to
produce and supply.
SUPPLY SCHEDULE
SUPPLY CURVE
MARKET SUPPLY CURVE
MARKET SUPPLY SCHEDULE
ECONOMIC REFORMS
NEW ECONOMIC REFORMS OF 1991
Changing Global Scenario
Several major economic and political changes occurred during
the 1970s and 1980s, which affected the developing countries
and paved the way for the implementation of IMF-sponsored
Structural Adjustment Policies (New Economic Policy) in India in
1991. This was due to a combination of factors such as stagnant
agriculture, low levels of industrial growth and diversification,
inadequate capital formation, adverse terms of trade in
international markets, limits to domestic resource mobilization
due to a fairly narrow tax-base, loss making public sector
enterprises, over regulated and controlled economy, poor
industrial productivity, huge amount of fiscal deficit, huge
amount of public debt, poor rating of Indian economy by
international agencies, foreign exchange crisis etc.
New Economic Policy of 1991 includes globalization,
liberalization and privatization (Disinvestment)
1) Globalization means flow capital (finance in the form of
foreign direct investment (FDI) and foreign portfolio
investment (FPI), technology, human resource, goods and
service among countries. FDI is investment in real assets
like automobile, consumer goods production, service sectors
like insurance, telecommunication, air transport etc.
2) Liberalisation means freeing the economic activities and
business from unnecessary bureaucratic and other controls
imposed by the governments.
3) Privatisation or Disinvestment: Selling the government
owned public sector enterprises to private industrialists and
opening the government operating sectors for private
investment.
The New Economic Policy includes reduction in government
expenditure, opening of the economy to trade and foreign
investment, adjustment of the exchange rate from fixed exchange
rate system to flexible exchange rate system, deregulation in
most markets and the removal of restrictions on entry, on exit,
on capacity and on pricing.
Immediate consequences of economic liberalization that are to
focus on are (a) an increase in internal and external competition
and (b) structural change induced by changes in relative prices
in the economy.
The Major areas of New Economic Policy 1991 are
1) Fiscal policy reforms
2) Monetary policy reform
3) Pricing policy reform
4) External policy reform
5) Industrial policy reform
6) Foreign investment policy reform
7) Trade policy reform
8) Public sector policy reform
The principal reforms initiated in the year 1991 included;
reduction in import tariffs on most goods other than consumer
goods, removal of quantitative restrictions and liberal terms of
entry for foreign investors. India’s simple average tariff rate was
reduced from 128% in 1991 to about 32.3% in 2001-02. Quotas
and non-tariff barriers were also reduced.. To restore Macro
economic stability, the reforms package of structural adjustment
policies are aimed at freeing markets by dismantling controls on
production, prices and trade and reducing intervention in the
economy. The need to control the fiscal deficit led to policies to
curb public expenditure and these cuts were mainly on social
sector expenditure and on production and consumption
subsidies, which directly affected the living standards of the
economically vulnerable sections of the population. Privatisation,
Liberalisation and export-promotion were the main features of
the economic reforms recommended by the international
institutions for the problems facing by the developing
countries .At the same time, the role of the state in advanced
industrial economies was not shrinking as expected, but growing
despite the ideological bias in favour of a “rolled back” state. The
share of national income spends by government, which averaged
30% in the rich industrial countries in 1960 increased to 42.5%
by 1980 and 45% by 1990.The experiences of countries, which
have undergone these reforms, have in most cases not led to the
expected outcome but have infact worsened the state of their
economies. In India, the New Economic Policy (NEP) is a set of
policy (ies) and administrative procedures introduced in July
1991 to bring about changes in the economic direction of the
country.
Industrial Policy Resolution 1991 (IPR-1991)
Industrial Policy
The regulatory policy framework which acted as a barrier to
entry and growth by the entrepreneur was sought to be basically
changed by the Industrial Policy announced in July 1991.The
measures introduced in this area along with other economic
reforms were as under: Industrial licensing has been abolished
for all projects except for a list of 15 industries related to
security, strategic or environmental concerns and certain items
of luxury consumption that have a high proportion of imported
inputs. The exemption from licensing also applies to the
expansion of existing units.
Industrial licensing was abolished for all projects except
for a list of 15 industries related to security, strategic or
environmental concerns and certain items of luxury
consumption that had a high proportion of imported
inputs.
The Monopolies and Restrictive Trade Practices (MRTP)
Act applied in a manner which eliminated the need to
seek prior government approval for expansion of present
undertakings and establishment of new undertakings by
large companies.
The set of activities henceforth reserved for the public
sector was much narrower than before, and there would
be no ban on the remaining reserved areas being opened
up to the private sector.
Foreign Investment Policy
The Industrial Policy 1991 also provided increased
opportunities for foreign investment with a view to take
advantage of technology transfer, marketing expertise and
introduction of modern managerial techniques. It was also
intended to promote a much – needed shift in the composition of
external private capital flows. The following measures were
announced in this regard:
Automatic approval would be given for direct foreign
investment upto 51 per cent foreign equity ownership in
a wide range of industries. Earlier, all foreign investment
was generally limited to 40 per cent.
To provide access to international markets, major foreign
equity holdings upto 51 per cent equity would be allowed
for trading companies primarily engaged in export
activities.
Automatic permission would be given for foreign
technology agreements for royalty payments upto 5 per
cent of domestic sales or 8 per cent of export sales or for
lumpsum payments of Rs.10 million. Automatic approval
for all other royalty payments will also be given if the
projects can generate internally the foreign exchange
required.
Abolished MRTP Act and FERA and instead of FERA,
FEMA Act was passed in the Parliament.
The threshold (Minimum) asset limit for companies under
MRTP Act was raised from Rs.20 crores to Rs.100 Crores.
Public Sector Policy
The Government was of the view that public sector had not
generated internal surpluses on a large scale. On account of its
inadequate exposure to competition; the public sector was
subject to a high cost structure. To provide a solution to the
problems of the public sector, Government decided to adopt a
new approach, the key elements of which were:
The existing portfolio of public sector investment would be
reviewed with a greater sense of realism to avoid areas
where social considerations were not paramount or where
the private sector would be more efficient.
Enterprises in areas where continued public sector
involvement was judged appropriate would be provided a
much greater degree of managerial autonomy.
Budgetary support to public enterprises would be
progressively reduced
To provide further market discipline for public enterprises,
competition from the private sector would be encouraged
and part of the equity in selected enterprises would be
disinvested; and
Chronically sick public enterprises would not be allowed to
incur heavy losses.
As a follow up of this policy, several measures were taken:
The number of industries reserved for the public sector was
reduced from 17 to 8. Even in these areas, private sector
participation was allowed selectively. Joint ventures with
foreign companies would be encouraged.
Public enterprises that were chronically sick and unlikely to
be turned around would be referred to the Board for
Industrial and Financial Reconstruction (BIFR) for
rehabilitation or restructuring.
The existing system of monitoring public enterprises
through Memorandum of Understanding (MOU) was
strengthened with primary emphasis on profitability and
rate of return.
Initiated the disinvestment of public sector enterprises.
Global Financial meltdown in 2008
In the western capitalists economies and the economies closely
linked to the United States economies were negatively affected
by this financial crisis of 2008. That is all the economies having
economic relationship with each other were affected by this
financial crisis of 2008 so it is called a global financial crisis.
Capitalism is a system of economic organization featured by the
private ownership and the use for private profit of man-made and
nature-made capital. It is clear that under capitalism all means of
production such as farms, factories, mines, transport,
communication, education etc are owned and controlled by
private individuals and firms. Private initiatives and ideas are
promoted and respected highly and there is personal freedom
and liberty.
The global financial crisis of
2008 is an extreme manifestation of the crisis in the capitalism
due to wrong practice and misuse of freedom enjoyed by the
financial institutions in the United States of America. Indian
economy was more integrated to the global economy after the
introduction of the New Economic Policy (NEP) of 1991. This
encouraged more integration of the Indian economy with the
global economy.But in the Indian banking system, nearly 90 per
cent of the banking institutions are in the public sector and our
financial sectors are well regulated by the Reserve bank of India
(RBI). So this financial management system, to a greater extent
insulated Indian economy from the global financial crisis.
The Major Reasons for the Global Financial Crisis are
1) Consumption was seen as the driver of economic growth
and prosperity and debt to facilitate such consumption was
consequently seen as a good thing. This had led to the
rather extreme situation in which vendor financing (i.e.,
lending of money by producers to consumers for purchasing
products they produce) of the US by the developing nations
was seen as a necessary business practice.
2) The sub-Prime Crisis – Sub-Prime Lending is the latest
chapter in the story of the economics of greed wrapped as
modern economics, a process in which the US’s entire
financial architecture — the government and the Federal
Reserve System (the Central Bank of the US like India’s
RBI) is involved. The sub-prime crisis is now presented as
the villain of US economy as also the global economic scene.
Sub-prime lending refers to loans given to persons who, in
simple terms, are unfit to borrow. That is, no lender will
part with his own money to such a borrower. Two reasons
are there. First, such lending was popularised from the
White House to ordinary American homes as achieving a
noble purpose to induce Americans to borrow and shop for
their country. That is, it was part of the patriotic duty the
Americans as a whole to borrow and shop.
The Major Features of the Present Global Financial Crisis are
1) The Current US recession is much deeper than in 1991 or
2001.
2) Yet Asia’s growth will slow by less than in the previous US
recessions. It is now less dependent on US demand.
3) Asia is led by India and China increasingly becoming
important as the engines of global growth.
4) This global financial crisis is the beginning of the end for the
dollar as the main reserve currency
5) The USA has been borrowing $ 3 billion every day to fund its
spending
6) The USA’S national debt is more than $10 trillion, which is
more than 80 per cent of its national income.
7) The budget deficit is skyrocketing; it is expected to reach mote
than 10 per cent soon.
8) The federal deficit as percentage of GDP is now expected to
reach more than 10 per cent.
9) Unlike the Great Depression of the 1930s, the current crisis of
the West is not just an economic crisis. It has a dimension of
demography and conflict.o it. Demographic, because Europe is
slowly fading away from the global map. It used to have more
than 20 per cent of the global population during the First World
War, and now has less than 11 per cent. It is expected to shrink
to three per cent in as many decades. The reproductive rate in
many European countries is less than 1.5 whereas the stable one
is 2.1. In the case of US, the crisis is more severe due to its
declining savings rate.
10) The personal saving as a percentage of disposable income
has now become negative.
The debt ridden financial institutions like Lehman Brothers’
assets were $ 690 billion and capital was $ 22 billion. Lehman
filed for the biggest bankruptcy in American history. Merrill
Lynch assets were $ 1020 billion and capital was $ 32 billion,
Freddie Mac’s assets were $ 794 and capital was $ 27 billion,
Fannie Mae’ assets were $880 billion and capital was $ 44
billion, Bear Stearns’s was $ 400 billion and capital was $ 11
billion. The allegations that ratings are not forward looking has
been proved right in more than one occasion in the current
financial crisis. Many repackaged sub-prime loans were rated
high by global credit rating agencies, down graded only after
accelerated defaults and stoppage in trading. Ratings are not
sancrosanct and lenders need to form own view about the credit
worthiness of borrowers, independent of any external ratings.
Conclusions
Asia is more important than the US as a driver of global
economic growth. Thanks to the vigour of Asia and other
emerging economies, a US recession need not drag the whole
world into recession. A prolonged downturn in the US, while
emerging economies continue to grow rapidly will reinforce the
shift in global power from the old industrial world to the new
emerging markets. In future the world economy will be steered
not by the US and Europe, but increasingly by India and China.
As Maharishi Aurobindo says: “India shall arise upon the ruins of
the West”. He says by the year 2011 the Western countries will
fall and India will rise. The question is, are we getting ready to
create a new world order?
Keynesian Theory
Keynes’s Theory and Underdeveloped Countries.
Lord John Maynard Keynes wrote the General Theory of
Employment, Interest and Money as a solution to the problem of
periodic unemployment faced by developed industrial nations of
the West during the great depression of the thirties. Keynesian
theory singles out deficiency of effective demand as the major
cause of unemployment and low level of income in industrial
economy operations under a laissez faire system. Deficiency of
effective demand is a prominent feature of economies
undergoing depression and in order to improve the level of
effective demand in an economy. Keynes suggested policy
measures like cheap money policy, government’s compensatory
investment spending, deficit financing and other fiscal methods.
In essence, therefore, Keynesian economics turn out to be
economics of depression applicable to developed countries. Its
applicability in underdeveloped countries is very limited. To
quote Joan Robinson: “ Keynes’s theory has little to say directly,
to the underdeveloped countries, for it was framed entirely in the
context of an advanced industrial economy, with highly
developed financial institutions and a sophisticated business
class.
Though Keynesian Economics has revolutionized modern
economic thinking, it has inherent weaknesses:
1) It is fundamentally a capitalistic theory. It basically
examines the determinants of employment in a free
enterprise economy. Though Keynes suggests government
intervention and controlled capitalism his theory fails to
deal with the socialist economic system. In communism,
Keynes is as Ricardo.
2) Keynesian economics is, by and large, characterized as
depressionary economics. It was the outcome of the Great
Depression of the Thirties. It suggested policy measures like
deficit financing to solve the problem of unemployment in a
depressionary phase of the capitalist economy. In the era of
inflationary situation, the theory has not much validity.
3) Keynes’s theory deals with short-run phenomena only. It
pays little attention to the long-run problems of a dynamic
economy.
4) Keynesian theory is not strictly applicable to
underdeveloped countries. Keynes deals with the problem of
cyclical unemployment. Underdeveloped countries have the
problem of chronic unemployment and disguised
unemployment. Keynes encouraged spending and
condemned savings.But; poor countries need curbs on
spending and increase in savings for capital formation and
wide-scale investment to break the vicious circle of poverty.
In short, Keynes’s theory is not really “general” in
application as Keynes claimed.
5) One dangerous practice is that the solution to global
economic crisis and depression in advanced capitalism was
sought to be applied for solving the economic crisis of less
developed countries. In fact in the west there are
arguments against Keynes’s economics that it is not
Keynesian economics but the Second World war revived the
world economy. Keynesian revolution succeeded the
industrial revolution as an adhoc theory of countering the
industrial depression in Britain during the thirties, just
before the Second World War, became the all-encompassing
theory of development. Dennis Robertson at the out set of
his Cambridge lecturers, delivered between 1945-46 to
1956-57, warned the under graduate students about the
controversial nature of Keynes’s General Theory and to
supplement its readings by critical writings on the same.
6) Laws of economics are relative and valid for particular
situations in the economic history of a nation. To the British
economists, the economic forces generated by the industrial
revolution in that country was universal and economic laws
were accordingly formulated. What was good for Britain
was good for the entire world, irrespective of differences in
socio-economic conditions. But great personalities like
Arnold Toynbee argued against this dominant view and the
need for region specific models of development. His dream
of this way of study never materialized because of his
premature death and lack of followers. Adam Smith
advocated free trade at a time when British manufacturing
industries, particularly the textile mills had increased their
capacity through various practical innovations. Trying to
universalize economic laws has been one of the greatest
disservices to the science of economics. The attempt by the
third world countries to formulate their development plans
on the basis of these economic laws has created serious
imbalances in their economy and has kept them perpetually
indebted, leading to erosion of their economic
independence.
7) Lord John Maynard Keynes (J.M. Keynes) was a great
advocate of easy money policy and abundance of credit for
economic prosperity. Keynesian prescriptions failed in
developing countries due to inelastic nature of agriculture
sector and high inflation. Keynes found D.Robertson’s ideas
inconvenient and chose to ignore it. An academically and
theoretically sound thesis will not shy away from an
academic debate. The relation between agriculture and
industry does not form a part of the theoretical frame work
of the General Theory of Keynes. Keynes was highly
intolerant of his critics and he had high hope in capitalism
and he could avoid economists jumped into Marxist band
wagon. Indian planning was over influenced by Keynesian
school because of the economic experts trained in British
Universities or Anglo-Saxon schools. In India Dr.B.S.Minhas
resigned from Planning Commission protesting against high
inflationary practice (Keynesian model of deficit
financing).But no one from the academic world or Planning
Commission came to his support. It is of importance to note
that deficit financing started with the recommendation of
the IMF in its report in 1953.N.Kaldor says that the deficit
financing imply a corresponding increase in privately owned
wealth.
Conclusion
Although the policy measures suggested by the Keynesian theory
may not be suitable to the problems of underdeveloped
countries, it does not mean that Keynesian economics has no
significance. Indeed, Keynesian methodology of thinking in
macro-economic terms is very essential and appropriate in
understanding the major problems of any economy, whether
developed or developing. However, in view of the changing
institutional set-up of the developing economies during the
process of planning and socio-economic reforms, Keynesian tools
have to be adopted with suitable modifications.
Faster Moving Consumer Goods (FMCG)
Indian FMCG sector is the fourth-largest sector in the country,
with a current turnover of over US$ 28 billion (Rs. 113,000
crore), including tobacco. Most large FMCG categories managed
to grow in the healthy double digits in 2008 in India. Breaking
down the sales growth into categories, detergents, which saw
sales value expand by over 25 per cent in 2008, were among the
fastest growing categories. Soaps and shampoos grew by about
16 per cent each and beverages such as packaged tea and coffee
expanded 13-16 per cent, according to industry estimates.
Categories such as toothpaste and confectionery managed lower
growth of 14-15 per cent in the same period. Sales growth for
the 15 large listed FMCG companies actually accelerated from
14.5 per cent in the last two financial years to 20 per cent in the
first nine months of 2008-09.High penetration categories like
soaps and detergents reported flat volumes due to sharp price
increases and weight reduction.
The FMCG market shifts from a period of relatively effortless
growth to a more challenging environment. The companies are
making tactical and strategic shifts to deal with the changed
scenario. As growth slows in overseas markets, companies are
likely to proceed with caution on acquisitions and refocus on
organic growth that is mainly India-driven.
Indian Automobile Industry
The automobile industry consists of passenger cars,multi-utility
vehicles,commercial vehicles,two wheelers and three
wheelers.After liberalization in 1991, there is a progressive
growth in the number of manufacturers, thus replacing the
earlier monopoly of a few manufacturers.At present, there are 15
manufacturers of passenger cars and multi-utility vehicles, 9
manufacturers of commercial vehicles,14 manufacturers of
two/three wheelers.The Indian automobile industry has come a
long way since in the first car ran on the streets of Bombay (now
Mumbai) in 1898. The initial years of the industry were
characterized by unfavorable government policies. The real big
change as we see in the industry today, started to take place with
the liberalization policies that the government initiated in the
1991. The liberalization policies had a salutary impact on the
Indian economy and the automobile industry in particular. The
automobile industry in the country is one of the key sectors of
the economy in terms of the employment opportunities. The
industry directly employs close to around 0.2 million people and
indirectly employs around 10 million people. The prospects of the
industry also has a bearing on the auto-component industry
which is also a major sector in the Indian economy directly
employing 0.25 million people. The Indian automotive component
industry is dominated by around 500 players which account for
more than 85% of the production. The turnover of this industry
has been growing at a mammoth 28.05% per annum from 2002-
03 onwards. Global as well as local forces have affected the
Indian auto industry, leading to a rapid transformation over the
last decade or so. After the end of licensing era in early 1990s,
the industry has witnessed rapid growth in volumes and capacity.
100% Foreign Direct Investment, absence of much government
regulations, manufacturing and imports free from licensing &
approvals in the automobile sector coupled with customs tariff
for a u t o components reducing to 12.5% resulted in increased
number of multinationals establishing their bases in India and
with export markets looking up, the Indian automobile industry is
poised for a phenomenal growth. India has made a mark in the
global automobile industry; India is the second largest two-
wheeler market in the world, Fourth largest commercial vehicle
market in the world, Eleventh largest passenger car market in
the world, Fifth-largest bus and truck market in the world (by
volume). Envisaged to be the seventh largest automobile market
by 2016 and world's third largest by 2030 (behind only China
and the US).
ENVIRONMENT AND DEVELOPMENT
ENVIRONMENT
The environment can be defined as one’s surroundings. The
welfare of the community depends on the availability of goods
and the availability of goods depends on the availability of
resources that come from environment.
Economic Growth and Environment
Soon after Independence, the Government of India adopted a
policy of rapid economic development through extensive and
intensive exploitation of natural resources. Unfortunately the
Government has allowed landlords, private contractors, mine
owners and industrialists to encroach upon public lands, and
literally loot and destroy forests, water resources and mineral
wealth. While economic development has enriched a small group
of people-namely, the rich landlords in the villages, the small and
large industrialists, the contractors, the smugglers, the
bureaucrats and the politicians-environmental degradation
which is the direct result of this economic development has led
to tremendous suffering and misery to millions of
tribals,traditional craftmen and fisherfolk.It has been responsible
for the steady growth in the number of landless labourers’
migration to cities.
Poverty
A major issue is the removal of mass poverty. Indian economy
indicates a very high proportion of people below the poverty line.
Poverty is defined on the basis of norms of nutritional
requirements, i.e., 2400 calories per person per day for rural
areas and 2100 calories for the urban areas. According to
Planning Commission estimates in 1999-2000 nearly 260 million
people (26 per cent of the population) were living below poverty
line. Out of this 193 million in rural areas and 67 million in urban
areas. The burden of poverty is very massive. Rapid reduction
and eventually the elimination of poverty is, there fore, the most
important issue of development. The prevalence of ‘mass
poverty’ which is the cause as well as consequence of their low
level of development. Poverty is the result of low economic and
human resource (education and other professional skills) base of
the poor who own a very small portion of the total assets in the
form of land, capital, house property etc. The low resource base
of the poor also inhibits them from giving education and training
to their children. This enables them to earn very low and meager
wages and thus perpetuate poverty. In other words, inequality in
the distribution of assets is the principal cause of unequal
distribution of opportunities on the other.
Environment – Economy Interaction
Resources include human resources, financial resources and
natural resources like land, water, fisheries, minerals, forests,,
marine resources, climate, rainfall and topography. Natural
resources determine the course of development of a country.
While some natural resources such as land, water, fisheries and
forest are renewable others like mineral and mineral oils are
exhaustible and can be used only once. The principal objective of
resource development is to maximize gross domestic output
(GDP) or national production and for this purpose there should
be optimum utilization of resources not only in the short period
but, in a sustained manner, over the long period.
But the exploitation of natural resources should not result in the
disturbance of ecological balace.The unintended side effects of
economic development have to be avoided or controlled They
include mismanagement of natural resources, large scale
deforestation, the unplanned discharge of residues and wastes,
the handling of toxic chemicals, growth of slums etc.
Deforestation is directly responsible for greater frequency and
intensity of floods, soil erosion, heavy dams built at enormous
expense and changes in climate conditions. It has also caused
increased suffering to the landless labourers and marginal and
small farmers who have steadily lost their traditional sources of
fuel wood and fodder for their cattle. Loss of fuel wood, in turn,
has led to the use of cowdung as fuel, resulting in loss of
precious organic manure.
Environmental Issues
1) Deforestation
2) Pollution
3)Ground Depletion
4)Climate Change
Climate is weather conditions of a place or area, conditions of
temperature, rainfall, wind, etc. The saying goes, “climate is
what you expect; weather is what you get.” The word climate
describes the general average pattern of the weather in a place
over a period of years. Climatologists generally consider 30 years
as the time needed to assess the climate of a place. Change is a
fundamental characteristic of the environment. Earth’s climate is
a result of complex interactions between the sun , atmosphere ,
oceans , land and biosphere. Relatively small changes in climate
could have a major effect on our resources like food , energy and
water. The factors that influence global climate are the aamount
of solar energy the earth receives, the condition of the
atmosphere , the shape and rotation of the earth , and the
currents and other processes of the ocean. The scientific
evidence suggest that the earths climate is changing . The
atmosphere is warming and this trend will continue. By the year
2050, scientists predict that the world will be warmer by an
average of between 1.5degree Celsius and 4.5 degree Celsius. A
TASK Group set up by WHO had warned that climate change
may have serious impact on human health.
5)Green House Effect.
A glass house used for raising delicate plants is called “green
house’. A green house has higher temperature inside than
outside though the interior receives less radiation. This is called
green house effect. The factors that contribute to its effects are;
i) glass walls ii) high carbon dioxide content iii) high water
vapour content of air in the green house. They let the short wave
radiations pass through them but prevent passage of long wave
radiation emitted by the earth’s surface. This makes inside of the
green house warmer than outside. As the suns radiation enters
the atmosphere, some of it is reflected by the clouds and other
particles and the rest reaches the earth. Part of the radiation
reaching the earth is reflected by the earth’s surface while the
rest is absorbed. During this process these gases in the
atmosphere called green house gases obstruct the shape of heat
from the earth into space while allowing radiation from the sun
to the earth. Without green house effect it is not possible to
sustain life on the plant as the average temperature of the earth
would be 18 degree celsius than 15degree Celsius.
The atmospheric gases which are permeable to short
wave solar radiation but are strong absorber of long wave
relations emitted from the surface of earth are called green
house gases. They include
i) Carbon dioxide
ii)Methane
iii)Nitrous Oxide
iv) Chlorofluro Carbons
v)Hydrofluro carbon gases
vi)Perfluro carbons
vii)Sulphur hexafluoride
viii) Ozone
ix) Carbon monoxide
The green house gases added to the atmosphere by human
activities can significantly affect the amount of heat trapped in
the atmosphere over time and leads for global warming which
had adverse effect on human life. The Inter –Governmental Panel
on Climate Change (IPCC) periodically makes an assessment of
the atmospheric abundance of green house gases and its possible
impact on climate and related issues.
6)Global Warming
Global warming is an increase in the earth’s temperature due to
the use of fossil fuels and other industrial professes leading to a
build up of green house gases in the atmosphere. Air pollution
traps more heat in the atmosphere rendering the earth warmer.
This effect is called global warming.
Causes of Global Warming
The main cause of global warming is green house effect. These
include carbon dioxide, methane, nitrous oxide , clorofluro
carbons and ozone. Human activities during the last few decades
of industrialization and population growth have polluted the
atmosphere that it has begun to effect the climate. By burning
large amount of fossil fuels we release huge quanities of carbon
dioxide into the atmosphere. Currently, deforestation also
releases carbon trapped in the tissues of the trees. Natural
process like volcanic eruptions and earth quake induced fires
also contribute to carbon dioxide emissions. The Inter –
governmental Panel on Climate Change held earlier in 2007
found that man made additions to the global atmospheric carbon
dioxide were indeed responsible for warming .
Effects of Global Warming
i) Climate Effects
a) There will be a warming of the earth’s
surface and lower atmosphere and a cooling of atmosphere.
b) The warming trend over the earths surface is
varied , warming in the tropics is lesser than the global mean
by about 2-3 degree celcius depending on seasonal
changeswhich in other latitude the average warming might
amount for 5-10 degree Celsius increase in temperature.
C) precipitation patterns will be changed. Some
areas will become wetter and some areas dryer.
d)Seasonal patterns will change due to the
changing of temperature and prcepitation matters.
e) Soil moisture regions will be changed due to
the changes in evaporation and precipitation.
f) With the increase in cloud cover over Eurasia in
summer, which will enhance the solar heating of the surface
and increase the land-sea temperature contrast,tropical
mansoon will be driven with more severity and intensity.
g) Wind direction and wind stress over the sea surface
will be changed,which will alter ocean cirrents and cause
changes in nutrient mixing zones and productivity of the
oceans.
7)Rise in Sea Level
The global warming also contributes to rise in sea level due to
thermal expansion of ocean and melting of glaciers and
Greenland ice sheets.The level of sea has been rising by 1 to 2
mm per year during the 20th century.A rise of even half a
metre in sea level would affect human population,one- third of
which lives within 60 km of a coast line.Many important birds
and fishes inhabiting in coastal salt marshes and estuaries will
become extinct die to inundation of their breeding ground.
The direct effects of rise in sea level are:
1) recession of shorelines and wetlands,
2) increased tidal range and estuarine salt-front instruction,
and
3) an increase in salt-water contamination of coastal fresh-
water aquifers.
Thus a rise in sea level will have a negative impact on human
settlements, tourism, fisheries, agriculture, water suppliers and
coastal ecosystems.
Impacts on Forests
Forests are highly sensitive to climate change and upto one third
of currently forested and conservation of forest inhabitats in a
rapidly warming world will present us with new challenges.
Effects on range of species distribution
Each plant and animal species occurs within a specific range of
temperature.The global warming will shift the temperature
range,which would affect attitudinal and latitudinal distribution
pattern of organisms. Rapid rise in temperature may cause large
scale death of many trees, as they are sensitive to temperature
stress and many species may disappear.
Effects on human settlements and society
Population would be displaced by the inundation of low-lying
coastal plains,deltas, and islands in the next century if efforts to
reduce greenhouse gas accumulation in the atmosphere were
unsuccessful.
Effects on Food Production
Global warming will reduce crop production due to increased
incidence of plant disease and pests, explosive growth of weeds
and enhanced bastal rate of respiration of plants. Global
warming could produce colder temperature in Russia and
northern Europe resulting in the reduction of crop yields.
Effects on health
As the earth becomes warmer, the floods and droughts become
more frequent, increase in water-borne diseases,infectious
disease carried by mosquitoes and other disease
vectors.Temperature change may have an impact on several
major categories of diseases including cardiovascular,
cerebrovascular, and respiratory disease.
Solutions for global Warming
The following are some of the suggested solutions to prevent
global warming
a) Reduction in the use of fossil fuels.
b) Shifting to renewable energy resources that do not emit
GHGs.
c) Development of substitutes for chlorofluorocarbons.
d) Increase of the vegetation cover, particularly forest for
photosynthetic utilization of CO2.
e) Limiting population
f) Exploring other options to sequester carbon.
g) Adopting practices and technologies to make agriculture
sustainable.
h) Reduce deforestation, adopt better forest management
practices and undertake afforestation to sequester carbons.
i) Reduce deforestation, adopt better forest management
practices and undertake afforestation to sequester carbons.
j) Use fewer automobiles and public transportation immediate
and drastic reduction of emissions.
SUSTAINABLE DEVELOPMENT
Development should be perceived as a multi-dimensional process
involving the re-organization and re-orientation of entire
economic and social systems. Development is a continuous
process which has to be extended over a long period to lead a
country to a stage of self-sustained growth or to a self-generating
economy. It is an evolutionary product of the idea progress.
Progress can be achieved by generating wealth through
maximization of productivity of labour and capital.
Friedman defined growth as an expansion of the
systems in one or more dimensions without change in the
structure and development as also as an innovative process
leading to the structural transformation of social systems. For
eg; growth can be compared with change in body whereas
development can be compared with the change in body and mind
together. Growth refers to quantitative improvement in the scale
of physical dimension while development signifies improvement
in both physical and non-physical dimension.
Development is the conservation and management of
the natural resources base and the orientation of technological
and institutional change in such a manner so as to assure this
attachment and continued satisfaction of human needs of present
and future generations. Such sustainable development in
agriculture, forestry and fisheries section conservation of land ,
water, plant and animal genetic resources , technically
appropriate , economically viable and socially acceptable.
SUSTAINABILITY
The term sustainable development refers to
keeping an effort going continuously or the ability to last out and
keep from falling. Sustainability implies that human use of
enjoyment of the worlds natural and cultural resources should
not in, in overall terms , diminish or destroy them. Thus
sustainability is the ability of an activity or development to
continue in the long term without undermining that part of
environment which sustains it.
SUSTAINABLE DEVELOPMENT
The term sustainable development comes into common usage
after the use by the World commission on Environment and
Development (WCED) headed by Dr. Geo Halem Brundland.
Sustainable Development.Sustainble development is now
widely accepted as a primary goal economic and social
activity. Sustainble development suggest that the primary
focus of environmental protection efforts on the international
level should be to improve the human condition. It also implies
the integration of environmental and social concerns into all
aspects of economic policy. Principle 4 of the Rio Declaration
states that inorder to attain the sustainable development ,
environmental protection shall constitute an integral part of
the development process and cannot be considered in isolation
from it.Injecting sustainability concept in developmental
policies has broad implication for macro and micro
economics.Regarding macro economic policies , the move
towards sustainable development requires for example
traditional national accounting system be changed to better
measure over all qualities of life.
Intergenerational Equity and Responsibility.
Sustainable development as defined in our common feature is
closely associated with the goal of intergenerational equity.
Sustainable development recognizes each generation’s
responsibility to be fair to the next generation by leaving an
inheritance of wealth no less than they themselves have
inherited.At a minimum, meeting this goal may require
emphasizing the sustainale use of natural resource for
subsequent generation and avoiding any environmental damage.
Common but differentiated Responsibilities.
Sustainable development was common challenge to all countries
but because of the different development path, industrialized
countries may be asked to carry more of the immediate burden.
The developed countries explicitly acknowledged the for the
central responsibility for the present environmental degradation
and its remediation. To accomplish sustainable development, a
number of areas have to be organized such as,
1) Improving energy efficiency
2) Saving forests,
3) Safeguarding biodiversity,
4) Adopting water resource management,
5) Managing coastal zones and oceans fisheries.
6) Arresting pollution,
7) Planning cities better,
8) Accomplishing a second green revolution,
9) Stabilizing world population, and
10) Stopping environmentally destructive subsidies.
Guidelines for Sustainable Development
The following guidelines are suggested for achieving
sustainable development:
1) Reduce the input of matter and energy resource in
production process to prevent excessive depletion and
degradation of planetary resources.
2) Use energy more efficiently and economically
3) Shift from exhaustible and potentially polluting fossil and
nuclear fuels to less harmful renewable wind energy or
solar energy.
4) Avoid wasting non-renewable and use them no faster than
the rate at which a renewable resource used sustainably
can be sustained.
5) Recycle and use the matter discarded as waste.
6) Use locally adaptable, ecofriendly and resource efficient
technology, which will use less of resources and produce
minimum wastes.
7) Utilise resources as per carrying capacity of the
environment.
8) Adoption of 3-R approach, ie., reduce,reuse,recycle
approach to minimize scarce resource use.
9) Emphasise pollution prevention and waste reduction instead
of pollution clean-up and waste management.
10) Study before the construction of dams, major highways,
mining, industry etc whether they can seriously damage
ecosystems and bio-diversity before they are begun.
11) Insist and implement the technique of pollution control of
toxic and hazardous gases in existing industries.
Global Environmental Concerns
1) Population explosion enhances the ecological demands
which resulting degradation on natural resouces.
2) Almost half of the world’s original expanse of tropical
forests has been cleared.Within the next 30 to 50 years
there may be little of these forests left.
3) Millions of hectares of grass lands have been overgrazed,
some especially in Africa and the Middle East,have been
converted to desert.
4) Between 25 % and 50 % of the world’s wet lands have been
drained, built upon, or seriously polluted.
5) An estimated 36,500 species of plants and animals become
extinct each year, mostly because of human activities.
6) About 8.1 million square kilometers of once-productive land
(crop land, forests, grasslands) have become desert in the
last 50 years. Each year almost 61,000 square kilometers of
new desert are formed.
7) Top soil is eroding faster than it forms on about 35 per cent
of the world’s crop land. Crop productivity on one-third of
the earth’s irrigated crop land has been reduced by salt
build up in top soil.
8) Most of the wastes we dump into the air, water, and land
eventually end up in the oceans. Oil slicks, floating plastic
debris, polluted estuaries and beaches, and contaminated
fish and shellfish are visible signs that we are using the
oceans as the world’s largest trash dump.
9) In developing countries 61 per cent of the people living in
rural areas and 26 per cent of urban dwellers do not have
access to safe drinking water. Each year 5 million people
die from preventable water diseases.
10) Water is withdrawn from underground reservoirs
(aquifers) faster than it is replenished by precipitation.
11) In the world’s population more than one out of every
four live in absolute poverty.
12) It is estimated that 70 per cent of the surface water
resources are polluted and that in large stretches of major
rivers, water is not even fit for bathing, leave alone
drinking.
13) Environmental pollution although typically associated
with industrialization, is a great and growing concern in
developing countries.
14) Use of fertilizers and pesticides pollute the
environment.
15) Over the past few years air pollution has been
increasing as a regional or global problem, not a local one.
Acid rain may fall to earth thousands of miles away from the
places of emission of sulphur dioxide world and nitrogen
oxide.Thus the clouds generated in the developed world
may rain in the territory of the developing world.
16) Emissions of carbon dioxide and other gases into the
atmosphere from fossil fuel burning and other human
activities may raise the average temperature of the earth’s
lower atmosphere several degrees by 2050.This would
disrupt food production and flood low-lying coastal cities
and croplands.
17) Chlorofluorocarbons and halons released into the
lower atmosphere are drifting into the upper atmosphere
and reacting with and gradually depleting ozone faster than
it is being formed.
18) Atmospheric levels of heat-trapping carbons dioxide
are now 26 per cent higher than the pre-industrial
concentration and continue to rise higher and higher with
‘green house effect’.