ECONOMICS

Economics is the social science that analyzes the production, distribution and
consumption of goods and services. The economics concepts are broadly classified into:
1. Micro economics
2. Macro economics
Micro Economics: Micro refers to small. Micro economics refers to all the internal
factors that affect the business.
Microeconomics is a branch of economics that studies how individuals, households and
firms make decisions to allocate limited resources, typically in markets where goods or
services are being bought and sold. Microeconomics examines how these decisions and
behaviours affect the supply and demand for goods and services, which determines
prices; and how prices, in turn, determine the supply and demand of goods and services.
One of the goals of microeconomics is to analyze market mechanisms that establish
relative prices amongst goods and services and allocation of limited resources amongst
many alternative uses. Microeconomics analyzes market failure, where markets fail to
produce efficient results, as well as describing the theoretical conditions needed for
perfect competition.
Important factors in Micro economics are:
1. Suppliers
2. Intermediaries
3. Customers
4. Competitors
5. Public
1. Suppliers:- Suppliers include raw material suppliers, and all the input providers. If
the supply was not in required quantity at right time, automatically it affects the output,
and finally the business achieves losses in the market.
2. Intermediaries: - The market intermediaries include all the wholesalers, retailers.
Financial intermediaries include financiers, banks which provide the loans to the business
organizations.
3. Customers: - The customers are the dividers of success or failure of every
organization. The customer is the person who purchases the products from particular
shop or company.

Therefore, the organizations prepare the products to satisfy the

customers tastes and preferences.

4. COMPETITORS: - Every business organization from the competitive world has

many competitors.

The competitor facts also very important, which the business

organization have to consider.

5. PUBLIC: - Public gives the permission whether the plant should have to be
established. The public have the rights to demand if any business organisation violates
their rights and facilities.
MACRO ECONOMICS: - Macro economics refers to all the external facts which affect
the economic conditions of business.
Macroeconomics is a branch of economics that deals with the performance, structure,
and behavior of a national or regional economy as a whole. Along with microeconomics,
macroeconomics is one of the two most general fields in economics. Macroeconomists
study aggregated indicators such as GDP, unemployment rates, and price indices to
understand how the whole economy functions. Macroeconomists develop models that
explain the relationship between such factors as national income, output, consumption,
unemployment, inflation, savings, investment, international trade and international
finance. In contrast, microeconomics is primarily focused on the actions of individual
agents, such as firms and consumers, and how their behavior determines prices and
quantities in specific markets.
Macro economic factors are:
1. Demographic factors.
2. Economic factors
3. Political & legal factors
4. Social & cultural factors
5. Technological factors
6. International factors
7. Natural factors.
1. Demographic factors: - The study of people is called as the demography.
Demography factors to be considered are age, gender, family, occupation, income &
expenditure, employment.
2. Economic factors: - These factors are very important which effects more than any
other factor for a business organization. These include National income, consumption,
Price & distribution, per capita, industry, agriculture, infrastructure, economic systems,
economic planning etc.

3. Political & Legal factors: - Political & legal factors include: Legislature (Assembly &
Parliament), Executory (State & central government), Judiciary (High courts, supreme
court), laws, acts etc.
4. Social & cultural factors:

these factors include knowledge, belief, arts, morals,

cultures, traditions, habits which are acquired from one generation to other generation.
5. Technological factors: These include all the advancements in technology, new
machines, processors, advanced technology etc.
5. International factors: These include fluctuations in business like collapse in world
market, terrorist destruction, inflation etc.
6. Natural factors: - These include transport, communication, weather conditions, water
availability etc.
Engineering Economics: Engineering economics refers an application of engineering or
mathematical analysis and synthesis to decision making in economics. The knowledge
and techniques concerned with evaluating the worth of commodities and services relative
to their cost.

INFLATION
DEFINITION OF INFLATION: Inflation represents the rise of commodity prices for a
particular period time.

Or

Inflation is rate at which the general level of prices for goods and services is rising, and,
subsequently, purchasing power is falling.
Inflation is a situation where there is an excessive rise in the price level. According to
quantity of money theorists, it is caused by excessive issue of money. According to
demand and supply theorists it is caused by total demand exceeding the total supply of
goods and services.
CAUSES OF INFLATION:
1. Increase in Cost of living
2. Inefficiency in resource utilization
3. Savings are discouraged
4. Long term Investments are decreased
5. Economic Consequences
6. Unfavorable effects
7. Increase in the cost of living
Regarding causes for inflation there are three theories, they are
Demand Pull Inflation
Cost push Inflation
Mixed Inflation
Demand Pull Inflation: Demand pull inflation occurs when the aggregate demand (The
total amount of goods and services demanded in the economy at a given overall price
level and in a given time period) for output is in excess of maximum feasible or potential
or full-employment output (at the going price level). Since the level of output is taken as
given data, the excess demand is supposed to be generated by the factors influencing only
the demand side of the commodities market. Demand-pull inflation simply means that
aggregate demand has been pulled above what the economy is capable of producing in
the short run.

Cost Push Inflation: When inflation occurs due to rinsing costs. It is called cost-push
inflation. When costs of production rise, prices rise. The main reason for increasing costs
is higher wages or higher profits secured by monopolistic or oligopolistic forms. If it is
due to higher wages, it is called wage-push costs inflation.
Wage cost push inflation occurs when wage rates increase faster than the increase in
labour productivity. As output increases the demand for labour increases. Trade unions
will fight for higher wages and secure them.
Profit push cost inflation occurs when monopolistic or oligopolistic firms raise prices
with view to get higher profits and to off set any rise in the costs.
Generally, profit push is weak. Firms hesitate to raise prices unless there are demand pull
factors. Aggregate demand reduction policies may not be useful to control cost push
inflation.
Mixed Inflation: According some economists, inflation is not demand pull only or cost
push only. It will be both demand pull and cost push. Inflation will occur both due to
excess demand and rising costs. One leads to the other and both the causes get
intermingled. There cannot be a cost push without an increase in demand. Increase in
demand leads to rising costs. When both the causes are at work, it is called mixed
inflation.
ADVANTAGES OF INFLATION
The producers, businesses, and organizations will benefit from inflation, since the
price levels of goods and services will increase at a higher level that the cost of
production, thereby increasing profits.
Debtors shall benefit at the expense of creditors as the real value of loan
installments and interest rates falls in situations of inflation.
An inflationary situation can stimulate or assist in the process of achieving
economic growth since producers are encouraged with the increase in profits,
resulting in the expansion of business activities.
METHODS TO CALCULATE INFLATION
Generally economist calculated inflation in three methods
WPI (whole sale price Index)
CPI (consumer Price Index)
PPI (Producers Price Index)
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Whole sale Price Index (WPI):

Whole sale price index reflects the prices of

commodities which are available to Wholesalers in market. Based on fluctuation prices in

market for wholesalers is considered while calculating the Inflation.
WPI is an index that measures and tracks the changes in price of goods in the stages
before the retail level.
Consumer price Index (CPI): consumer price index measures the fluctuations of
consumer goods and services. CPI indicates the changes of consumer good prices for a
particular period of time. CPI Consider the prices at what rate consumer is buying the
product.
PRODUCER PRICE INDEX (PPI): PPI Index measures the average change in selling
prices received by domestic producer of goods and services over time. PPI considers the
three areas of production. They are Industry based, stage of processing based and
commodity based.
MEASURES TO CONTROL INFLATION
To control the inflation the government has to take the following necessary
measurements.

Monetary measures- Classical economists are of the view that inflation can be
checked by controlling the supply of money. Some of the important monetary
measures to check the inflation are as under: Control over money- It is suggested
that to check inflation government should put strict restrictions on the issue of money
by the central bank. Credit control- Central bank should pursue credit control
policy .In order to control the credit it should increase the bank rate, raise minimum
cash reserve ratio etc. It can also issue notice to other banks in order to control credit.

Fiscal measures: To control the inflation in country the government has to the
following fiscal measurements.
a) Decrease in public expenditure- One of the main reasons of inflation is
excess public expenditure like building of roads, bridges etc. Government
should drastically scale down its non essential expenditure.
b) Delay in payment of old debts: Payment of old debts that fall due should be
postponed for sometime so that people may not acquire extra purchasing
power.

c) Increase in taxes: Government should levy some new direct taxes and raise
rates of old taxes.
d) Over valuation of money: To control the over valuation of money it
Is essential to encourage imports and discourage exports.
.
Apart from the Monetary and fiscal measurements government needs to take
following measurements to control the inflation.

Increase in the production- One of the major causes of the inflation is the
excess of demand over supply, so those goods should be produced more whose prices
are likely to raise rapidly .In order to increase production public sector should be
expanded and private sector should be given more incentives.

Proper commercial policy- Those goods which are in scarcity should be

imported as much as possible from other countries and their export should be
discouraged.

Encouragement to savings During inflation government should come out with

attractive saving schemes. It may issue 5 or 10 year bonds in order to attract savings.

Proper investment policy- Investment in those industries should be increased

wherein more production of goods can be generated over a short period of time .Less
investment should be made in industries having long production period.

THE NEW ECONMIC POLICY

The 1991 Balance of Payments [BOP] crisis forced India to procure a $1.8 billion IMF
loan and acted as a tipping point in Indias economic history. The IMF bailout wounded
the pride of a country that had strove above all for self-sufficiency through its post
independence socialist policies. The bailout announced to Indian policymakers and the
world the countrys policy failures. The result of financial crisis in country initiated the
government take New Economical Policy (NEP). The new economic policy completely
focused on three factors they are
Liberalisation
Globalisation
Privatisation
Economic Background to the New Economic Policy
The economic background to the reforms may also be recalled. Planned economic
development since independence, in which the state took an active
Role to stimulate economic growth through a more active utilisation of the human and
physical resources had made perceptible differences in the economy. The country had
overcome the chronic threat of inadequate food grains to meet the needs of a rapidly
growing population, and had become practically self-sufficient as fir as consumer goods
were concerned. The industrial base had expanded and become substantially diversified
Infrastructural facilities had vastly improved though they were still inadequate in some
crucial aspects. How ever. In the early 1980s, after three decades of largely state directed
development, there was general thinking that the time had come to allow the private
sector of the economy to play a more active role in the development process. Since
agriculture was almost entirely under private auspices, the change was to be reflected
essentially in the industrial sector. In particular, it was felt that controls and regulations
that were considerably necessary when the economy was weak.
OBJECTIVES OF NEW ECONOMICAL POLICY
Increase the Growth rate of the Economy

 Encouraging the FDI ( Foreign Direct Investment) and FII (Foreign Institutional
Investors
Reduce the Government spending on Public sector
Creating the Employment to Professionally qualified persons in private sectors
Creating the health competition between private and Public sectors
Improving the welfare of Public
IMPACT OF NEW ECONMIC POLICY IN INDIAN ECONOMY
The NEP policy completely concentrates on Globalisation, liberalisation and
Privatisation policies. New economic policy resulted in following reforms in different
sectors to develop the country.
FINANCIAL REFORMS:
To strengthen the Economy, after 1991 the government concentrated on
Improving the Revenue of the government. Government put efforts to control the fiscal
deficit in country annual budget. And strengthen the tax policies and norms to increase
the revenue of the government. Government spending fewer amounts in primary sector
and Taking initiatives to encourage participation of private investments in service sector.
INTERNATIONAL TRADE AND INVESTMENT REFORMS
Indias trade policy prior to the 1991 reforms was characterized by high tariffs and import
restrictions. Foreign-manufactured consumer goods were entirely banned, and capital
goods, raw materials, and intermediate goods for which domestic substitutes existed were
importable only through a bureaucratic licensing process. Illustrative of the severity of
the situation, Infosys executives described how the founders had to visit Delhi nine times
to Obtain a license to import just one personal computer. Although foreign ownership in
some Indian companies was permitted, investors faced complications that included a
subjective licensing process.
With the effect of new industrial policy the investments from other countries are
increased. The free trade policies taken by the government resulted in Exports and
imports grew at 19% and 30% in 2004 and 2005 respectively.
There is a slow down in International trade and Investments with the effect of
global recession.
INDUSTRIAL SECTOR REFORMS

Indias industrial policy was one of the areas most changed by the economic
liberalization of the 1990s. The early reforms crystallized a trend that had been building
since the national government moved toward a pro-business approach to industrial policy
during the 1980s. During the following decade, India transitioned from a centrally
planned and operated economy to a market-driven economy, reflecting a global trend
toward less regulated economies. Most government-operated industries in India are now
privatized, though some political contention still exists over the removal of reservation
schemes.
AGRICULTURAL REFORMS:
Before 1990 many of the people in India completely depends on agriculture to
survive their family. With the effect of NEP the secondary sector revenues are increased
and employment dependency on agriculture sector is reduced.
After NEP the government not completely neglected the agricultural sector.
Government encouraging the farmers expanding the agribusiness and food processing.
Government giving subsidies to fertilizers and also offering the loan waivers to farmers.
INFRASTRUCTURE REFORMS
A short drive through any Indian city reveals some of the serious deficiencies of Indias
infrastructure: roads full of potholes, relentless traffic, suffocating pollution.
Since last decades with the effect of globalisation the government inviting Private
companies to invest their investments in Infrastructure sector. In this sector government
encouraging PPP (Public Private Participation) system to improve the Infrastructure
facilities in India. Government also funding more money in this sector for following two
reasons.
Good Infrastructure facilities always helpful to invite foreign investor.
Spending money on Infrastructure simultaneously creates employment to on
organised labours.
DRAW BACKS IN NEW ECONMIC POLICY:
New economic policy shown its impact on growth of the economy but
simultaneously, the policy creates negative impact on following sectors.
EMPLOYMENT GUARANTEE: The increased growth in private sector decreases the
opportunities in government sector, the main reason is the government not concentrated

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on expansion of public undertakings and fails impose the strict rules and regulations to
private sector enterprises for employment guarantee to workers.
NEGLECTING THE PRIMARY SECTOR:

With the effect of new economic

policies the government spending on primary sector is decreasing, and the government
indirectly involved in converting the farm lands into SEZ (Special economic zones).
BIASED DECISIONS: Some times the decisions taken by the government are
completely or partially benefiting to Individual entrepreneurs.
CONCLUSION
New economic policy resulted in faster growth of Indian economy. At the same time
some of the decisions taken by the government are resulted in scams. To avoid this
problem the government has to frame strict rules and implementations in policy making.

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NATIOANAL INCOME
National income is a measure of the total flow of earnings of the factor-owners through
the production of goods & services. In a simple way, it is the total amount of income
earned by the citizens of a nation.
National income is the total of earnings of nation in overall economy. Economy is
divided into following three sectors.
-

Agricultural sector

Industrial sector

Service sector

National income has been defined by different persons in different ways. The definitions
stated by Prof. Marshall and Fisher are important definitions among them.
Marshall Definition:
The labour and capital of a country acting on its natural resources produce annually a
certain net aggregate of commodities material and immaterial, including services of all
kinds; this is true net annual income or revenue of the county or the national dividend.
The word net means the total value of goods and service produced in the country minus
imports plus exports. Thus Marshall defines National income from the production side.
Fishers Definition:
The national dividend or income consists solely of services as received by ultimate
consumers, whether from their material or from their human environment. According to
him net consumable income is National Income.
Thus, Marshall defines national income from production side and national income from
consumption side.
ADVANTAGES OF NATIONAL INCOME
National income estimates are highly useful. They are a valuable instrument of economic
analysis and a guide to economic policy. The advantages of national income estimates
are:
Growth rate of Economy: National income figures show the growth rate of
economy.

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 Standard of Living: Per capita income indicates the standard of living of the
people. Therefore, we can know the standard of living of the people and the
changes in it form time to time. We can also make international comparisons of
standard of living on the basis of National income estimates.
Importance of different sectors: National income estimates show the
contribution made by different sectors of the economy like agriculture, industry,
services etc. We can therefore, know the importance of different sectors and the
changes that are taking place.
Distribution of Income: We can know from the national income estimates how
the income is distributed among different sections of society, the extent of
inequalities of income and whether inequalities are increasing or decreasing.
Planning: National income estimates are absolutely necessary for preparation of
economic plans and assessing the success of planning.
Levels of consumption, savings and Investment: We can know from the
national income accounts how the national expenditure. It shows the levels of
consumption, saving and investment in the economy and this is necessary to
stabilize output, employment and income.
Inflationary and deflationary pressures: We can know from the national
income estimates the inflationary and deflationary pressures in the economy.
Future trends: we can know the future trends in production etc. from the study of
national income estimates.
International Comparisons: National income estimates help us to compare the
standards of living of different countries and the growth rates.
Production and employment capacity: GNP shows the Productive and
employment capacity of the country.
Effect of Foreign transactions: The foreign transaction on the courtys economy
can be known from the national income estimates.
Changes in Inventories: GNP shows changes in the inventories. One of the
reasons for trade cycles is changes in inventories or stock.
Depreciation: NNP show the net growth after depreciation.
Role of Government sector: The national income estimates show the magnitude
and the role of government sector.

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 Contribution to International bodies: National income is the basis of

determining the contributions to be made by the member countries to international
bodies like U.N.O. etc.
Guide to economic policies: National income estimates the help government to
formulate effective and suitable economic policies in the field of taxation,
industry, exports & imports and agriculture etc.
FACTORS AFFECTING NATIONA INCOME
1. Factors of Production
2. Technology
3. Government policies
4. Political Stability
HISTORY OF NATIONAL INCOME CALCULATION IN INDIA
The first attempt to calculate national income of India was made by Dada Bai
Naoroji in 1867-68. This was followed by several other methods. The first scientific
attempt was made by Prof. V.K.R.V.Rao in 1931 -32. But it was not a satisfactory
attempt. The first official attempt was made byprof. P.C. Mahalanobis in 1948-49. The
final report was submitted in 1954. To day the national income is calculated by the
Central Statistical organisation.
Methods of calculating National Income
National income calculation is not an easy task. For this, we have to collect more facts and figures. We
have already seen that income is generated through Production process. Normally we sue this in come for
purchasing goods and services. When demand for commodities goes up. We have to produce more. Thus
income leads to increased production.
Production, income and expenditure are mutually related. Economic activity is directly related to
these three stages. Based on this, three methods are used for calculating national income. They are
Production method
Income method
Expenditure method
PRODUCTION METHOD:
This method is based on total production of a country during a year. All production units
are classified into the following sectors.
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Primary sector
Secondary sector
Tertiary sector
Productive sectors
Primary

Agriculture

Secondary

and

allied Registered Industries

Tertiary

Communications

activities

Non registered Industries

Banking/ Insurance

Forest

Electricity

Health

Fishing

Trade

Mining

Manufacturing

Education
Other services

We estimate the goods and services produced in each of these services.

The sum of total of products produced in these three sectors is the total output of the
nation. The next step is to find out the value of these products in terms of money.
The money sent by Indian citizens working abroad is also added to this. Now we
get the gross national income.
GNI = MONEY VALUE OF TOTAL GOODS AND SERVICES + INCOME
FROM ABROAD
INC COME APPROACH
The income approach tries to measure the total flows of income earned by the
factor-owners in the provision of final goods & services in a current period.
There are 4 types of factors of production and 4 types of factor incomes
accordingly.
National Income = Wages + Interest Income + Rental Income + Profit
EXPENDITURE APPROACH
The amount of expenditures refers to all those spending on currently-produced final
goods & services only.

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In an economy, there are 3 main agencies which buy goods & services. They are
the households, firms and the government.
In economics, we have the following terms:
C = Private Consumption Expenditure ( of all households )
I = Investment Expenditure ( of all firms)
G = Government Consumption Expenditure ( of the local government )
The expenditure approach is to measure the GNP. We could not buy all our outputs
because some are exported to overseas. Similarly, our consumption expenditures
may include the purchases of some imports. In order to find the GNP, the value of
exports must be added to C, I & G whereas the value of imports must be deducted
from the above amount. Finally, we have :
GNP = C + I + G + (X-M)
X = Exports from country
M = Imports form country
The following equation indicates how to reconcile GDP to disposable personal income
Gross Domestic product (GDP)
-

Factor payments to Foreigners

+ Factor Payments form Foreigners

GNP (Gross National Product)
-

Capital consumption allowances

NNP (National net product)

Indirect business taxes

National income

+ Transfers
-

Direct taxes (Income personal property)

Disposable personal income

Relevant Concepts of National Income

Gross Domestic product (GDP): is a measure of the overall economic output
within a countrys borders over a particular time, Generally a year.
GDP is calculated adding together the total value of annual output of all that countrys
goods and services.
Net National Product ( N N P )
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The investment expenditure of the firms is made up of 2 parts. One part is to buy
new capital goods & machinery for production. It is called net investment because the
production capacity of the firms can be expanded.
Another part - consumption allowance or depreciation - is spent on replacing the
used-up capital goods or the maintenance of existing capital goods because capital goods
will wear and tear out over time...
Depreciation refers to all those expenses to replace physical capital due to wear and
tear, obsolescence, destruction and accidental loss etc.
The sum of these 2 amounts is called Gross Investment in economics.
Gross Investment = Net Investment + Depreciation
Net investment will increase the production capacity and output of a nation, but not
by depreciation expenditure. So we have,
N N P = G N P - Depreciation
G N P at factor cost
The amount of national income found by the income approach will not be the
same as the amount of G N P at market prices found by the expenditure approach.
In the expenditure approach, the value of G N P includes some types of expenses
which are NOT factoring incomes earned by the citizens. They include depreciation,
indirect business taxes, and government subsidies.
G N P at factor cost = GNP at market prices - Indirect Business Taxes + Subsidies
GNP at factor cost carries the meaning that we are measuring the total output by
their costs of production. As output generates income to the factor-owners, it is also
related with the value of national income.
G N P at factor cost = National Income + Depreciation
FDI (FOREIGN DIRECT INVESTMENT):

is a type of investment that

involves the injection of foreign funds into an enterprise that operates in a

different country of origin from the investor.

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