Economics

Economics is a science, which studies human behavior as a relationship between ends and scarce mean, which
have alternative uses. Economics is the social science that studies the behavior of individuals, households, and
organizations (called economic actors, players, or agents), when they manage or use scarce resources, which
have alternative uses, to achieve desired ends. The term economics is derived from two Greek words “OIKOS”
and “NEMEIN” meaning the role or law of the household. Economics is the study of now people and society,
choose to employ scarce resources with or without the use of money, that could have alternative ;uses in order
to productive; various commodities and to distribute them for consumption, now or in the future among
various persons and groups in society.
Scarcity
Scarcity is the fundamental economic problem of having seemingly unlimited human wants in a world of
limited resources. It states that society has insufficient productive resources to fulfill all human wants and
needs. A common misconception on scarcity is that an item has to be important for it to be scarce. However,
this is not true, for something to be scarce, it has to be hard to obtain, hard to create, or both. Simply put, the
production cost of something determines if it is scarce or not. For example, although air is more important to us
than diamonds, it is cheaper simply because the production cost of air is zero. Diamonds on the other hand
have a high production cost. They have to be found and processed, both which require a lot of money.
Additionally, scarcity implies that not all of society's goals can be pursued at the same time; trade-offs are made
of one good against others.
Opportunity cost
Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative forgone
(that is not chosen). It is the sacrifice related to the second best choice available to someone, or group, who has
picked among several mutually exclusive choices. The opportunity cost is also the "cost" (as a lost benefit) of
the forgone products after making a choice. Opportunity cost is a key concept in economics, and has been
described as expressing "the basic relationship between scarcity and choice". The notion of opportunity cost
plays a crucial part in ensuring that scarce resources are used efficiently. Thus, opportunity costs are not
restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit
that provides utility should also be considered opportunity costs.
There are two kinds of opportunity costs
Explicit costs
Explicit costs are opportunity costs that involve direct monetary payment by producers.
Implicit costs
Implicit costs are the opportunity costs in factors of production that a producer already owns. They are
equivalent to what the factors could have earned by alternative uses.
Microeconomics
Microeconomics (from Greek prefix mikro- meaning "small" and economics) is a branch of economics that
studies the behavior of individual households and firms in making decisions on the allocation of limited
resources (see scarcity). Typically, it applies to markets where goods or services are bought and sold.
Microeconomics examines how these decisions and behaviors affect the supply and demand for goods and
services, which determines prices, and how prices, in turn, determine the quantity supplied and quantity
demanded of goods and services.
Macroeconomics
Macroeconomics (from the Greek prefix makro- meaning "large" and economics) is a branch of economics
dealing with the performance, structure, behavior, and decision-making of an economy as a whole, rather than
individual markets. This includes national, regional, and global economies. 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.
Market equilibrium
Market equilibrium refers to a condition where a market price is established through competition such that the
amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers.
This price is often called the competitive price or market clearing price and will tend not to change unless
demand or supply changes and the quantity is called "competitive quantity" or market clearing quantity.

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Market Surplus
Market Surplus occurs when there is excess supply; that is quantity supplied is greater than quantity
demanded. In this situation, some producers won't be able to sell all their goods. This will induce them to
lower their price to make their product more appealing. In order to stay competitive many firms will lower
their prices thus lowering the market price for the product. In response to the lower price, consumers will
increase their quantity demanded, moving the market toward an equilibrium price and quantity. In this
situation, excess supply has exerted downward pressure on the price of the product.
Market Shortage
Market Shortage occurs when there is excess demand; that is quantity demanded is greater than quantity
supplied. In this situation, consumers won't be able to buy as much of a good as they would like. In response to
the demand of the consumers, producers will raise both the price of their product and the quantity they are
willing to supply. The increase in price will be too much for some consumers and they will no longer demand
the product. Meanwhile the increased quantity of available product will satisfy other consumers. Eventually
equilibrium will be reached.
Price Ceilings & floors
Price ceiling is set below the equilibrium price (maximum price), basically lowering the price of certain goods
in order to make these goods affordable for consumers. Price floor is set above the equilibrium price
(minimum price), increasing the price of certain goods in order to protect the interest of certain unproductive
sectors(producers). In short, price ceiling is the maximum price set by the government to protect the
consumers while price floor is the minimum price also set by the government but to protect the producers.
Price Floor: is legally imposed minimum price on the market. Transactions below this price is prohibited.
Policy makers set floor price above the market equilibrium price which they believed is too low. Price floors are
most often placed on markets for goods that are an important source of income for the sellers, such as labor
market. Price floor generate surpluses on the market. Example: minimum wage.
Price Ceiling: is legally imposed maximum price on the market. Transactions above this price is prohibited.
Policy makers set ceiling price below the market equilibrium price which they believed is too high. Intention of
price ceiling is keeping stuff affordable for poor people. Price ceiling generates shortages on the market.
Example: Rent control.
Price Elasticity
The Price Elasticity of Demand (commonly known as just price elasticity) measures the rate of response of
quantity demanded due to a price change. The formula for the Price Elasticity of Demand (PEoD) is:
PEoD = (% Change in Quantity Demanded)/(% Change in Price)
Price elasticities are almost always negative, although analysts tend to ignore the sign even though this can lead
to ambiguity. Only goods which do not conform to the law of demand, such as Veblen and Giffen goods, have a
positive price elasticity.
Income Elasticity
The Income Elasticity of Demand measures the rate of response of quantity demand due to a raise (or lowering)
in a consumers income. The formula for the Income Elasticity of Demand (IEoD) is given by:
IEoD = (% Change in Quantity Demanded)/(% Change in Income)
Cross Elasticity
cross elasticity of demand or cross-price elasticity of demand measures the responsiveness of the demand for a
good to a change in the price of another good. It is measured as the percentage change in demand for the first
good that occurs in response to a percentage change in price of the second good. For example, if, in response to
a 10% increase in the price of fuel, the demand of new cars that are fuel inefficient decreased by 20%, the cross

elasticity of demand would be: . A negative cross elasticity denotes two products that are
complements, while a positive cross elasticity denotes two substitute products. These two key relationships
may go against one's intuition, but the reason behind them is fairly simple: assume products A and B are
complements, meaning that an increase in the demand for A is caused by an increase in the quantity demanded
for B. Therefore, if the price of product B decreases, then the demand curve for product A shifts to the right,
increasing A's demand, resulting in a negative value for the cross elasticity of demand. The exact opposite
reasoning holds for substitutes.
The cross elasticity of demand for substitute goods will always be positive, because the demand for one good
will increase if the price for the other good increases. For example, if the price of coffee increases (but

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everything else stays the same), the quantity demanded for tea (a substitute beverage) will increase as
consumers switch to an alternative. On the other hand, the coefficient for compliments will be negative. For
example, if the price of coffee increases (but everything else stays the same), the quantity demanded for coffee
stir sticks will drop as consumers will purchase fewer sticks. If the coefficient is 0, then the two goods are not
related.
Production
Production refers to the output of goods and services produced by businesses within a market. This production
creates the supply that allows our needs and wants to be satisfied. To simplify the idea of the production
function, economists create a number of time periods for analysis.
Short run production
The short run is a period of time when there is at least one fixed factor input. This is usually the capital input
such as plant and machinery and the stock of buildings and technology. In the short run, the output of a
business expands when more variable factors of production (e.g. labour, raw materials and components) are
employed.
Long run production
In the long run, all of the factors of production can change giving a business the opportunity to increase the
scale of its operations. For example a business may grow by adding extra labour and capital to the production
process and introducing new technology into their operations.
Costs of production
Costs are defined as those expenses faced by a business when producing a good or service for a market. Every
business faces costs and these must be recouped from selling goods and services at different prices if a business
is to make a profit from its activities. In the short run a firm will have fixed and variable costs of production.
Total cost is made up of fixed costs and variable costs
Fixed Costs
These costs relate do not vary directly with the level of output. Examples of fixed costs include:
1. Rent paid on buildings and business rates charged by local authorities.
2. The depreciation in the value of capital equipment due to age.
3. Insurance charges.
4. The costs of staff salaries e.g. for people employed on permanent contracts.
5. Interest charges on borrowed money.
6. The costs of purchasing new capital equipment.
7. Marketing and advertising costs.
Variable Costs
Variable costs vary directly with output. I.e. as production rises, a firm will face higher total variable costs
because it needs to purchase extra resources to achieve an expansion of supply. Examples of variable costs for a
business include the costs of raw materials, labour costs and other consumables and components used directly
in the production process.
Theory of production
In economics, an effort to explain the principles by which a business firm decides how much of each commodity
that it sells (its “outputs” or “products”) it will produce, and how much of each kind of labour, raw material,
fixed capital good, etc., that it employs (its “inputs” or “factors of production”) it will use. The theory involves
some of the most fundamental principles of economics. These include the relationship between the prices of
commodities and the prices (or wages or rents) of the productive factors used to produce them and also the
relationships between the prices of commodities and productive factors, on the one hand, and the quantities of
these commodities and productive factors that are produced or used, on the other.
The Law of variable proportions
There are three phases or stages of production, as determined by the law of variable proportions:
(i) Increasing returns.
(ii) Diminishing returns.
(iii) Negative returns.
(i) Stage of Increasing Returns. The first stage of the law of variable proportions is generally called the stage of
increasing returns. In this stage as a variable resource (labor) is added to fixed inputs of other resources, the
total product increases up to a point at an increasing rate. In the first stage, marginal product curve of a
variable factor rises in a part and then falls. The average product curve rises throughout .and remains below
the MP curve.

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Causes of Initial Increasing Returns: The phase of increasing returns starts when the quantity of a fixed factor
is abundant relative to the quantity of the variable factor. As more and more units of the variable factor are
added to the constant quantity of the fixed factor, it is more intensively and effectively used. This causes the
production to increase at a rapid rate. Another reason of increasing returns is that the fixed factor initially
taken is indivisible. As more units of the variable factor are employed to work on it, output increases greatly
due to fuller and effective utilization of the variable factor.

Diagram/Graph: These stages can be explained with the help of graph below:

(ii) Stage of Diminishing Returns. This is the most important stage in the production function. In stage 2, the
total production continues to increase at a diminishing rate until it reaches its maximum point (H) where the
2nd stage ends. In this stage both the marginal product (MP) and average product of the variable factor are
diminishing but are positive.
Causes of Diminishing Returns: The 2nd phase of the law occurs when the fixed factor becomes inadequate
relative to the quantity of the variable factor. As more and more units of a variable factor are employed, the
marginal and average product decline. Another reason of diminishing returns in the production function is that
the fixed indivisible factor is being worked too hard. It is being used in non-optimal proportion with the
variable factor, Mrs. J. Robinson still goes deeper and says that the diminishing returns occur because the
factors of production are imperfect substitutes of one another.
(iii) Stage of Negative Returns. In the 3rd stage, the total production declines. The TP, curve slopes downward
(From point H onward). The MP curve falls to zero at point L2 and then is negative. It goes below the X axis
with the increase in the use of variable factor (labor).
Causes of Negative Returns: The 3rd phases of the law starts when the number of a variable, factor becomes,
too excessive relative, to the fixed factors, A producer cannot operate in this stage because total production
declines with the employment of additional labor. A rational producer will always seek to produce in stage 2
where MP and AP of the variable factor are diminishing. At which particular point, the producer will decide to
produce depends upon the price of the factor he has to pay. The producer will employ the variable factor (say
labor) up to the point where the marginal product of the labor equals the given wage rate in the labor market.
A firm's production function could exhibit different types of returns to scale in different ranges of output.
Typically, there could be increasing returns at relatively low output levels, decreasing returns at relatively high
output levels, and constant returns at one output level between those ranges.
Short and Long-Run Costs
In the long run, firms change production levels in response to (expected) economic profits or losses, and the
land, labor, capital goods and entrepreneurship vary to reach associated long-run average cost. In the
simplified case of plant capacity as the only fixed factor, a generic firm can make these changes in the long run:
enter an industry in response to (expected) profits: 1)leave an industry in response to losses, 2) increase its
plant in response to profits, 3) decrease its plant in response to losses.
The long run is associated with the long-run average cost (LRAC) curve in microeconomic models along which a
firm would minimize its average cost (cost per unit) for each respective long-run quantity of output.
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Long-run marginal cost (LRMC) is the added cost of providing an additional unit of service or commodity from
changing capacity level to reach the lowest cost associated with that extra output. LRMC equalling price is
efficient as to resource allocation in the long run. The concept of long-run cost is also used in determining
whether the long-run expected to induce the firm to remain in the industry or
shut down production there.
The long run is a planning and implementation stage. Here a firm may decide that
it needs to produce on a larger scale by building a new plant or adding a
production line. The firm may decide that new technology should be incorporated
into its production process. The firm thus considers all its long-run production
options and selects the optimal combination of inputs and technology for its long-
run purposes. The optimal combination of inputs is the least-cost combination of
inputs for desired level of output when all inputs are variable. Once the decisions
are made and implemented and production begins, the firm is operating in the
short run with fixed and variable inputs.
Long-run average total cost curve. In the long-run, all factors of production are variable, and hence, all costs are
variable. The long-run average total cost curve ( LATC) is found by varying the amount of all factors of
production.

Short run
All production in real time occurs in the short run. The short run is the conceptual time period in which at least
one factor of production is fixed in amount and others are variable in amount. Costs that are fixed, say from
existing plant size, have no impact on a firm's short-run decisions, since only variable costs and revenues affect
short-run profits. Such fixed costs raise the associated short-run average cost of an output long-run average
cost if the amount of the fixed factor is better suited for a different output level. In the short run, a firm can raise
output by increasing the amount of the variable factor(s), say labor through overtime.
A generic firm already producing in an industry can make three changes in the short run as a response to reach
a posited equilibrium: 1) increase production, 2) decrease production, 3) shut down.
In the short run, a profit-maximizing firm will: 1)increase production if marginal cost is (<) less than marginal
revenue (added revenue per additional unit of output); 2) decrease production if marginal cost is (>) greater
than marginal revenue; 3) continue producing if average variable cost is (<) less than price per unit, even if
average total cost is greater than price; 4) shut down if average variable cost is (>) greater than price at each
level of output.

In the short-run, some factors of production are fixed. Corresponding to each different level of fixed factors,
there will be a different short-run average total cost curve ( SATC). The average total cost curve is just one of
many SATCs that can be obtained by varying the amount of the fixed factor, in this case, the amount of capital.
Different forms of Market
In economics, market structure is the number of firms producing identical products which are homogeneous.
The types of market structdures include the following: 1) Monopolistic competition, also called competitive
market, where there is a large number of firms, each having a small proportion of the market share and slightly
differentiated products. 2) Oligopoly, in which a market is dominated by a small number of firms that together
control the majority of the market share. 3) Duopoly, a special case of an oligopoly with two firms.
Monopsony, when there is only one buyer in a market. Oligopsony, a market where many sellers can be
present but meet only a few buyers. Monopoly, where there is only one provider of a product or service.
Natural monopoly, a monopoly in which economies of scale cause efficiency to increase continuously with the
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size of the firm. A firm is a natural monopoly if it is able to serve the entire market demand at a lower cost than
any combination of two or more smaller, more specialized firms. Perfect competition, a theoretical market
structure that features no barriers to entry, an unlimited number of producers and consumers, and a perfectly
elastic demand curve. The imperfectly competitive structure is quite identical to the realistic market
conditions where some monopolistic competitors, monopolists, oligopolists, and duopolists exist and dominate
the market conditions. The elements of Market Structure include the number and size distribution of firms,
entry conditions, and the extent of differentiation.
These somewhat abstract concerns tend to determine some but not all details of a specific concrete market
system where buyers and sellers actually meet and commit to trade. Competition is useful because it reveals
actual customer demand and induces the seller (operator) to provide service quality levels and price levels that
buyers (customers) want, typically subject to the seller’s financial need to cover its costs. In other words,
competition can align the seller’s interests with the buyer’s interests and can cause the seller to reveal his true
costs and other private information. In the absence of perfect competition, three basic approaches can be
adopted to deal with problems related to the control of market power and an asymmetry between the
government and the operator with respect to objectives and information: (a) subjecting the operator to
competitive pressures, (b) gathering information on the operator and the market, and (c) applying incentive
regulation.
Perfect Competition Characteristics and Equilibrium Situations
Perfect competition is a market structure in which many firms sell identical products, and no barriers to entry
into the market exist for new potential sellers. Robinson said, perfect competition prevails where the demand
for output of each producer is perfectly elastic. Generally, a perfectly competitive market exists when every
participant is a "price taker", and no participant influences the price of the product it buys or sells. Specific
characteristics may include:
1. Infinite buyers and sellers – An infinite number of consumers with the willingness and ability
to buy the product at a certain price, and infinite producers with the willingness and ability to
supply the product at a certain price.
2. Zero entry and exit barriers – A lack of entry and exit barriers makes it extremely easy to enter
or exit a perfectly competitive market.
3. Perfect factor mobiity In the long run factors of production are perfectly mobile, allowing free
long term adjustments to changing market conditions.
4. Perfect information - All consumers and producers are assumed to have perfect knowledge of price,
utility, quality and production methods of products.
5. Zero transaction costs - Buyers and sellers do not incur costs in making an exchange of goods in a
perfectly competitive market.
6. Profit maximization - Firms are assumed to sell where marginal costs meet marginal revenue, where the
most profit is generated.
7. Homogenous products - The qualities and characteristics of a market good or service do not vary
between different suppliers.
8. Non-increasing returns to scale - The lack of increasing returns to scale (or economies of scale) ensures
that there will always be a sufficient number of firms in the industry.
9. Property rights - Well defined property rights determine what may be sold, as well as what rights are
conferred on the buyer.
10. Rational behavior of buyers and sellers
11. No carrying cost
12. Fixed and same price

How price and output of a product are determined under perfect competition
In a perfect competition, there are many sellers as well as buyer. Price is determined by enormous bargaining.
In this market condition, producers can entry and exit easily. The goods are identical and homogeneous and
price of the good is same everywhere. The demand of a good depends on the marginal utility. Buyers pay the
maximum price for a good while the price of a good is equal to the marginal utility derived from that good. This
price represents the buyers’ willingness to pay for demand of the good. On the other hand, supply of a good
depends on the marginal cost of that good. A firm is willing to supply at the lowest price while the price of the
good is equal to its marginal cost of production. This low price is the supply price of the firm. The equilibrium
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price determined at the point where the demand and supply price of the buyers and sellers respectively are
equal. In perfect competition market, the price is fixed by ups and downs of demand and supply.
The price determination is shown in a tabular format below:
Relationship of D
P D S Pricing status
and S
20 200 1000 D<S
18 400 800 D<S
16 600 600 D=S Equilibrium price
14 800 400 D>S
12 1000 200 D>S

The list is presented in the below drawn diagram:

D S When price increases from 16 to 18

20 demand becomes 400 but supply
Price

stands at 800, at D>S, price falls to 16

18 again. Accordingly, when price falls
from 16 to 14, demand rises to 800
16 but supply remains short to 400,
which pushes up the price again to 16.
14
12

200 400 600 800 1000

Demand and Supply

Thus the price of a good is determined through stages of ups and down of the demand and supply of that good.

Overview of Macroeconomics
Macroeconomics, is concerned with the economic issues that involve the overall economic performance of the
nation, rather than that of particular individuals or firms. Macroeconomics does implicitly deal with the
behavior of individual economic agents in the sense that national outcomes are the sum of individual actions.
But macroeconomics deals with totals, or aggregate measures of the economy, like national income or average
unemployment rates, rather than differences among individuals. Macroeconomics asks how economic
aggregates are determined, why problems related to aggregate economic performance occur, and what
government can and should do about such problems. The macroeconomic view of the economy are Gross
National Product, Inflation, Consumer Price Index and Fiscal Policy. The meaning of each of these is listed
below:
Gross National Product – This is the most common measure of economic productivity for an aggregate
population. GNP is defined as the total value of all goods and services produced in final form during a specific
period of time (usually 1 year).
Inflation – Inflation is defined as a condition of generally increasing prices. The term used for measuring these
prices can vary according to the desires of the individual, government or institution doing the evaluation.
Consumer Price Index – The CPI is a measure of how much prices have increased or decreased as compared to
a baseline years prices. The prices used in arriving at this figure are standard goods and services determined by
the evaluator. Thus, the CPI for the United States might vary greatly as compared the CPI for a country from the
Middle East.
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Fiscal Policy – Fiscal Policy is essentially the manner in which a government achieves economic objectives
through government spending and taxation. Fiscal policy is the alternative to Monetary Policy.
Monetary Policy – Monetary Policy is essentially the practice of a government managing the supply of money
to achieve economic objectives. The United States uses the Federal Reserve System to either increase or
decrease the supply of money, which in turn effects the overall economic environment as a whole.

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Macroeconomic goals:
Three conditions of the mixed economy that are most important for macroeconomics, including full
employment, stability, and economic growth, that are generally desired by society and pursued by governments
through economic policies.
Full Employment
Full employment is achieved when all available resources (labor, capital, land, and entrepreneurship) are used
to produce goods and services. This goal is commonly indicated by the employment of labor resources
(measured by the unemployment rate). However, all resources in the economy--labor, capital, land, and
entrepreneurship--are important to this goal. The economy benefits from full employment because resources
produce the goods that satisfy the wants and needs that lessens the scarcity problem. If the resources are not
employed, then they are not producing and satisfaction is not achieved.
Stability
Stability is achieved by avoiding or limiting fluctuations in production, employment, and prices. Stability seeks
to avoid the recessionary declines and inflationary expansions of business cycles. This goal is indicated by
month-to-month and year-to-year changes in various economic measures, such as the inflation rate, the
unemployment rate, and the growth rate of production. If these remain unchanged, then stability is at hand.
Maintaining stability is beneficial because it means uncertainty and disruptions in the economy are avoided. It
means consumers and businesses can safely pursue long-term consumption and production plans. Policies
makers are usually most concerned with price stability and the inflation rate.
Economic Growth
Economic growth is achieved by increasing the economy's ability to produce goods and services. This goal is
best indicated by measuring the growth rate of production. If the economy produces more goods this year than
last, then it is growing. Economic growth is also indicated by increases in the quantities of the resources--labor,
capital, land, and entrepreneurship--used to produce goods. With economic growth, society gets more goods
that can be used to satisfy more wants and needs--people are better off; living standards rise; and scarcity is
less of a problem.
Macroeconomic policy
Macroeconomic policy is usually implemented through two sets of tools: fiscal and monetary policy. Both forms
of policy are used to stabilize the economy, which usually means boosting the economy to the level of GDP
consistent with full employment.
Monetary policy
Monetary policy instruments consists in managing short-term rates (Fed Funds and Discount rates in the U.S.),
and changing reserve requirements for commercial banks. Monetary policy can be either expansive for the
economy (short-term rates low relative to inflation rate) or restrictive for the economy (short-term rates high
relative to inflation rate). Historically, the major objective of monetary policy had been to manage or curb
domestic inflation. More recently, central bankers have often focused on a second objective: managing
economic growth as both inflation and economic growth are highly interrelated.
Fiscal policy
Fiscal policy consists in managing the national Budget and its financing so as to influence economic activity.
This entails the expansion or contraction of government expenditures related to specific government programs
such as building roads or infrastructure, military expenditures and social welfare programs. It also includes the
raising of taxes to finance government expenditures and the raising of debt (Treasuries in the U.S.) to bridge
the gap (Budget deficit) between revenues (tax receipts) and expenditures related to the implementation of
government programs. Raising taxes and reducing the Budget Deficit is deemed to be a restrictive fiscal policy
as it would reduce aggregate demand and slow down GDP growth. Lowering taxes and increasing the Budget
Deficit is considered an expansive fiscal policy that would increase aggregate demand and stimulate the
economy.

Macroeconomic Accounts
Macroeconomic accounting deals with aggregates and accounting identities, that is with macroeconomic
magnitudes and how they relate to each other by definition. Macroeconomic accounting does not explain how
each magnitude changes as a result of a change in other magnitudes. This will be the task of macroeconomic
analysis, that we will look at in the next units of the course. In this first unit, we just deal with definitions. All
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that we say will therefore always hold by definition. The purpose of the system of national accounts is to keep
record of the transactions that take place in any economy for the purpose of measuring productive activity and
income generated in the economy. Since 1998 all countries should conform the new system of national
accounts of the UN—System of National Accounts 1993 (SNA93). Additionally, the Eurostat (Central Statistical
Agency of the EU) has produced a standard for members of the EU in accordance with SNA93 called the
European System of Accounts 1995 (ESA95). The exposition here will be in accordance with these new systems.
National Income Accounting
National income accounting is used to determine the level of economic activity of a country. Two methods are
used and the results reconciled: the expenditure approach sums what has been purchased during the year and
the income approach sums what has been earned during the year. National Income Accounting is concerned
with summarizing a country's economic perfor mance by measuring its aggregate income and output over a
specified period of time. The purpose of national income accounting is to provide a measure of overall
economic activity or income, indicators of economic well-being, strength or welfare. This accounting is
necessary to assess the health of the country’s economy and to help formulate policy, plan budgets to ensure
economic viability. There are a number of ways to approach national product or national income accounting,
including the expenditures approach (expenditures, Y), the product approach (e.g., Gross Domestic Product,
GDP) or the income approach (e.g., Gross National Income, GNI). The income approach measures production by
the income earned from production; the expenditures approach measures output based on the amount spent
buying production or output. Each of these alternatives to measuring performance should yield the same
figures (at least in theory). Other measures of national income and output include Gross National Product
(GNP), Net National Product (NNP) and Net National Income (NNI).
Gross National Product
The gross national product is the sum total of all final goods and services produced by the people of one
country in one year. The GNP is a flow concept. It can be calculated with either the expenditure approach or the
income approach. The GNP excludes intermediate goods, second hand sales as well as financial transactions.
The GNP is a money amount and must be adjusted for changes in the value of money.
Gross Domestic Product
The gross domestic product is the sum of all the final goods and services produced by the residents of a country
in one year. Summing the production of residents (rather than nationals as in GNP) gives often a more accurate
picture of the level of activity in a country.
The difference between GDP and GNP is net unilateral transfers and factor income of foreigners.
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money,
often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals
usually include relatively stable prices and low unemployment. Monetary economics provides insight into how
to craft optimal monetary policy. Monetary policy is referred to as either being expansionary or contractionary,
where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and
contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary
policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope
that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in
order to avoid the resulting distortions and deterioration of asset values. Monetary policy differs from fiscal
policy, which refers to taxation, government spending, and associated borrowing.
In practice, to implement any type of monetary policy the main tool used is modifying the amount of base
money in circulation. The monetary authority does this by buying or selling financial assets (usually
government obligations). These open market operations change either the amount of money or its liquidity (if
less liquid forms of money are bought or sold). The multiplier effect of fractional reserve banking amplifies the
effects of these actions. Constant market transactions by the monetary authority modify the supply of currency
and this impacts other market variables such as short term interest rates and the exchange rate. The distinction
between the various types of monetary policy lies primarily with the set of instruments and target variables
that are used by the monetary authority to achieve their goals.
Monetary policy uses three main tactical approaches to maintain monetary stability: 1) The first tactic manages
the money supply. This mainly involves buying government bonds (expanding the money supply) or selling
them (contracting the money supply). 2) The second tactic manages money demand. Demand for money, like
demand for most things, is sensitive to price. For money, the price is the interest rates charged to borrowers.
Setting banking-system lending or interest rates in order to manage money demand is a major tool used by
central banks. Ordinarily, a central bank conducts monetary policy by raising or lowering its interest rate target
for the interbank interest rate. 3) The third tactic involves managing risk within the banking system. Banking
10
systems use fractional reserve banking to encourage the use of money for investment and expanding economic
activity. Banks must keep banking reserves on hand to handle actual cash needs, but they can lend an amount
equal to several times their actual reserves.
Types of monetary policy

Monetary Policy: Target Market Variable: Long Term Objective:

Inflation Targeting Interest rate on overnight debt A given rate of change in the CPI

Price Level Targeting Interest rate on overnight debt A specific CPI number

Monetary Aggregates The growth in money supply A given rate of change in the CPI

Fixed Exchange Rate The spot price of the currency The spot price of the currency

Gold Standard The spot price of gold Low inflation as measured by the gold price

Mixed Policy Usually interest rates Usually unemployment + CPI change

Fiscal policy
Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the
economy, or else it involves the government changing the levels of taxation and government spending in order
to influence aggregate demand and the level of economic activity. The two main instruments of fiscal policy are
changes in the level and composition of taxation and government spending in various sectors. These changes
can affect the following macroeconomic variables, amongst others, in an economy: 1) Aggregate demand and
the level of economic activity; 2) The distribution of income & 3) The pattern of resource allocation within the
government sector and relative to the private sector. Fiscal policy refers to the use of taxation and government
spending to influence economic activity. This is distinguished from monetary policy in that fiscal policy only
deals with taxation and spending and is often administered by an executive under laws of a legislature, whereas
monetary policy deals with the money supply, lending rates and interest rates and is often administered by a
central bank.
Interaction between monetary and fiscal policies
Fiscal policy and monetary policy are the two tools used by the State to achieve its macroeconomic objectives.
While the main objective of fiscal policy is to increase the aggregate output of the economy, the main objective
of the monetary policies is to control the interest and inflation rates. The fiscal policies have an impact on the
goods market and the monetary policies have an impact on the asset markets and since the two markets are
connected to each other via the two macrovariables — output and interest rates, the policies interact while
influencing the output or the interest rates.
There is a dilemma as to whether these two policies are complementary, or act as substitutes to each other for
achieving macroeconomic goals. Policy makers are viewed to interact as strategic substitutes when one policy
maker's expansionary (contractionary) policies are countered by another policy maker's contractionary
(expansionary) policies. For example: if the fiscal authority raises taxes or cuts spending, then the monetary
authority reacts to it by lowering the policy rates and vice versa. If they behave as strategic complements,then
an expansionary (contractionary) policy of one authority is met by expansionary (contractionary) policies of
other. The issue of interaction and the policies being complement or substitute to each other arises only when
the authorities are independent of each other. But when, the goals of one authority is made subservient to that
of others, then the dominant authority solely dominates the policy making and no interaction worthy of
analysis would arise.Also, it is worthy to note that fiscal and monetary policies interact only to the extent of
influencing the final objective. So long as the objectives of one policy is not influenced by the other, there is no
direct interaction between them.
Active and passive monetary and fiscal policies
1) Passive fiscal policy is one in which the authority raises or reduces taxes to balance the budget
intertemporally. 2) Active fiscal policy is one in which the tax and spending levels are determined independent
of intertemporal budget consideration. 3) Active monetary policy is one that pursues its inflation target
independent of fiscal policies. 4) Passive monetary policy is one that sets interest rates to accommodate fiscal

11
policies. In case of an active fiscal policy and a passive monetary policy, the economy faces an
expansionary fiscal shock that raises the price levels and money growth as monetary authority is forced
to accommodate these shocks. But in case both the authorities are active, then the expansionary pressures
created by the fiscal authority is contained to some extent by the monetary policies.
Supply shock
During a negative supply shock, the fiscal and monetary authorities are seen to follow conflicting policies as the
fiscal authorities would follow expansionary policies to bring the output at its original state while the monetary
authorities would follow contractionary policies so as to reduce the inflation created due to shortage in output
caused by the supply shock.
Demand shock
During a demand shock (a sudden significant rise or fall in aggregate demand due to external factors) without a
corresponding change in output that results in inflation or deflation which can also be termed as inflation or a
deflation shock, it is observed that the two policies work in harmony. Both the authorities would follow
expansionary policies in case of a negative demand shock in order to bring back the demand at its original state
while they would follow contractionary policies during a positive demand shock in order to reduce the excess
aggregate demand and bring inflation under control.
Cost push shocks
A cost-push shock is defined as a change in inflation that is not a result of pressures in the economy. The
macroeconomic goal under such a situation is to optimise between reducing inflation and reducing the gap
between the actual output and the desired level of output. A contractionary monetary policy under such a
scenario raises the real interest rates which in turn not only reduces consumption thereby dampening
aggregate demand and inflation but also raises the labour supply as workers are willing to sacrifice current
leisure along with current consumption. This further dampens the inflation rates.
Macroeconomic Scenario of Bangladesh
Economic Growth
Although the growth of Bangladesh economy slowed down in the context of negative growth in world trade at
the beginning of the global financial crisis in FY 2008-09, next year this growth bounced back and average
growth remained above 6 percent in the last three years. According to BBS, GDP grew to 6.71 in FY 2010-11
and the estimated GDP growth rate for FY 2011 -12 is 6.32 percent. However, because of high base effect
induced by more than 5 percent growth in agriculture sector during the last two years, the growth of FY 2011-
12 dipped a little which is still satisfactory. Alongside, substantial growth in industry and service sector has
contributed to overall GDP growth. In FY2011-12, growth in agriculture, industry and service sectors has been
estimated to 2.53 percent, 9.47 percent and 6.06 percent respectively. This year GDP and GNI per capita stood
at US$ 772 and US$ 848 which were US$ 748 and US$ 816 respectively in the last fiscal year.
Savings and Investment
Estimated domestic savings slightly increased from 19.3 percent of GDP in FY 2010-11 to 19.4 percent of GDP
in FY 2011-12. Investment in FY 2011-12 also showed similar feature with a slight increase and stood at 25.4
percent of GDP in FY 2011-12 from 25.2 percent of GDP in FY2010-11. Of which the share of private investment
stood at 19.1 percent of GDP while that of public investment was 6.3 percent in FY 2011-12. In FY 2010-11, the
private and the public sector investments were 19.5 and 5.6 percent of GDP respectively. Major initiatives of
the Government implemented in infrastructure sector including power and reduction in cost of doing business
helped create investment-friendly environment. In addition to this, because of satisfactory growth of
remittances, national savings in FY 2011-12 upturned to 29.4 percent of GDP from 28.8 percent of GDP in the
previous year.
Inflation
The 12 month average inflation rate reached to 10.62 percent in FY 2011-12 which was 8.80 percent in FY
2010-11. Oil and food inflation in global market and excessive credit flows to unproductive sectors were mainly
responsible for this upturn. Inflation on point to point basis in June 2012 stood at 8.56 percent. From the trend
analysis of inflation in Bangladesh, it is clear that in the first half of FY 2011-2012 general inflation went up
because of food inflation. However, at the end of FY2011-12, non-food inflation was the key factor in pushing
general inflation upward. At this point in time, food inflation receded to 7.08 (monthly rate, point to point
basis) percent from about 13 percent in the same month of FY2010-11. Satisfactory food production and supply
of essential commodities including demand management through Open Market Sale (OMS) of the essential
commodities and sufficient stock of food grains contributed to the efforts of pulling down food inflation. On the
other hand, there was a non-food inflationary pressure due to price hike in international market, depreciation
in exchange rate and adjustment of oil price. In order to contain inflation, the Government has undertaken

12
necessary steps by forging better coordination between fiscal and monetary policies. Although there was a
pressure of oil price adjustment on food price, it was transitory. It is expected that actions like discouraging
credit flows to unproductive sector alongside adopting restrained and effective monetary policy will reduce the
inflationary pressure.
Fiscal Situation
Revenue A target for revenue receipt was set at Tk.1, 18,385 crore (12.94 percent of GDP) in FY 2011-12 of
which NBR tax revenue accounted for Tk.9,1870.00 crore (10.0 percent of GDP), non-NBR revenue, Tk.3,915
crore (0.4 percent of GDP) and non-tax revenue Tk.22,600 crore (2.47 percent of GDP). Against these targets,
tax revenue from NBR sources stood at Tk. 91,597 crore while revenue receipts from non-NBR source and non-
tax revenue receipts were Tk. 3,633 crore and Tk.18,550 core respectively in FY 2011-12. Total revenue
receipts increased by 19.53 percent from Tk. 95,188 crore in FY 2010-11 to Tk.1,13,781 crore in FY 2011-
12.The growth of tax revenues from NBR sources was 17.47 percent in FY 2011-12 which was 20.95 percent in
FY 2010-11. During this period, VAT at import level registered a remarkable growth of 16.06 percent and VAT
at local level17.48 percent and income tax 24.68 percent.
Money and Credit
During FY 2011-12, year on year growth in broad money (M2) and reserve money (RM) decreased by 17.39 per
cent and 8.99 percent respectively which was much lower than 21.34 percent and 21.09 percent growth in FY
2010-11. There was a deceleration in narrow money (M1) growth which was largely due to the sharp decrease
in growth of both currency notes and coins with the public and demand deposit. Time deposit growth slightly
decreased to 20.74 percent compared to the increase of 22.68 percent in the previous year. On the other hand,
demand deposit decreased by 6.21 percent in FY2011-12 from 15.48 percent in FY 2010-11. The supply of
broad money increased from Tk. 4,40,520.00 crore in FY 2010-11 to Tk. 5,17,109.50 crore in FY 2011-12.
Similarly, the growth of domestic credit on year -on-year basis was 19.53 percent during FY 2011-12, much
lower than 27.43 percent during FY 2010-11. Sector-wise analysis of domestic credit indicates that the net
credit to the government sector increased by 25.15 percent at the end of June 2012 compared to the growth of
35.01 percent during the previous year. The private sector credit growth was 19.72 percent in FY 2011-12,
much lower than year -on-year growth of 25.84 percent of the previous fiscal year. Reserve money increased by
8.99 percent at the end of June 2012, as compared to 21.03 percent growth in the previous year. Due to an
increase of 12.53 percent in net foreign assets (NFA) of Bangladesh Bank, the growth of reserve money was
observed. However, net domestic assets (NDA) of Bangladesh Bank increased by only 1.17 percent during the
period. Bangladesh Bank’s claims on other public sector, claims on government sector (net), deposit money
banks (DMBs), and non-bank depository corporations (NBDCs) increased by 39.26 percent, 18.70 percent,
21.60 and 14.47 percent respectively which eventually pushed upwardthe growth of reserve money. On the
other hand, net other assets also increased by 39.21 percent. Money multiplier increased to 5.29 in FY2012 as
compared to 4.90 at the end of June 2011. This increase was attributable to the decline in reserve-deposit ratio
and currency-deposit ratio.
Interest Rate
Bangladesh Bank conducted its liquidity management with an aim to contain inflation and support attaining
inclusive growth. To this end, repo and reverse repo rates were raised twice by a total of 100 basis points to .75
and 5.75 percent respectively during FY 2011-12. There was a maximum cap of 7 percent interest rate on
export credit fixed since January 10, 2004 to facilitate export earnings. Recently, the cap on interest rate on
lending in all sectors other than pre-shipment export credit and agricultural loans has been withdrawn. This
has brought competitiveness among banks in fixing rate of interest on lending in a rational manner. Banks are
allowed to differentiate interest rate up to a maximum of 3 percent considering comparative risk elements
involved among borrowers in the same lending category. With progressive deregulation of interest rates, banks
have been advised to announce the mid-rate of the limit (if any) for different sectors and they may change
interest 1.5 percent more or less than the announced mid-rate on the basis of the comparative credit risk. The
weighted average rate of interest on commercial lending increased to 13.75 percent at the end of June 2012,
from 12.42 percent at the end of June 2011. On the other hand, the deposit rate increased to 8.15 percent from
7.27 percent over the same period. As a result, the interest rate spread widened to 5.60 percent at the end of
June 2012 from 5.15 percent at the end of June 2011.
Overseas Employment and Remittances
Although export of manpower slowed down in the first half of FY 2010-11 because of the impact of global
recession, particularly on the real estate markets in the Middle East, and on industrial labour demand in some
South East Asian economies such as Malaysia, it began to increase from January, 2011. The amount of
remittances increased by 6.03 percent to US $ 11,650.32 million in FY 2010-11 compared to that of the
previous year. Bangladesh earned remittancesof US$12,843.40 million in FY 2011-12 which was 10.24 percent
13
higher than the amount of the previous year. The Government has undertaken several initiatives including
diplomatic approaches to explore new markets. As a result, the rate of manpower export has started moving
upward. As many as 6.91 lakh workers went abroad in quest of jobs in FY 2011-12, which was 57.40 percent
higher than the number stood at in the previous year. In the recent past, there is an upward trend in both the
number of manpower export and the amount of inward remittances to Bangladesh. The remittance sent by the
Bangladeshi expatriates substantially increased to 11.11 percent of GDP which was again 52.92 percent of the
total export earnings in FY 2011-12. During FY 2011-12, the highest amount of remittance (28.69 percent)
came from Saudi Arabia keeping the trend as usual followed by the United Arab Emirates (18.72 percent),
Kuwait (9.27 percent) and Malaysia (6.60 percent). Among the western and European countries, the United
States of America secured the first position (11.67 percent), followed by the United Kingdom (7.69 percent). To
begin manpower export in full swing to Africa, East Europe and Latin America, a number of diplomatic
initiatives have been undertaken alongside establishing new labour wings in several countries.
Macroeconomic Performance of Bangladesh
Growth Performance
Bangladesh's GDP growth rate of 6.0 percent in FY13 using the 1995-96 base, and 6.2 percent using the 2005-
06 base, remain impressive. Growth in agriculture sector declined from 3.1 percent in FY12 to 2.2 percent in
FY13. Growth in crops and horticulture sub-sector slid to 0.2 percent in FY13 from 2.0 percent in FY12, though
growth in animal farming and forest and related services subsectors increased slightly during the period.
Fishing sub-sector grew above 5.0 percent in FY13.
Industry sector grew slightly more at 9.0 percent in FY13 compared to 8.9 percent in FY12 driven in large part
by faster growth in mining and quarrying, construction and small scale industries (Table 1.2). Mining and
quarrying sub-sectors grew strongly by 11.1 percent in FY13 compared with 7.8 percent in FY12. Power, gas
and water supply subsector demonstrated a lower growth of 8.6 percent in FY13 compared with 12.0 percent
in FY12; however, the growth in FY13 remained above the long run trend.
Services sector growth decreased to 5.7 percent in FY13 from 6.0 percent in FY12 affected mainly by lower
growth of wholesale and retail trade sub-sector. Wholesale and retail trade sub-sector, the major services sub-
sector, declined to 4.7 percent in FY13 from 5.6 percent in FY12 reflecting weaker domestic demand. Growth
rates of hotel and restaurants, transport, storage and communication, real estate, renting and other business
activities, community, social and personal services subsectors increased slightly in FY13. On the other hand,
growth rates of financial intermediation, public administration defense, health and social works sub-sectors
edged down during the period. Education subsector grew strongly from 7.2 percent in FY12 to 9.7 percent in
FY13.
Savings and Investment
Gross fixed investment increased slightly to 26.8 percent of GDP in FY13 from 26.5 percent in FY12 due to
increasing growth of public investment (Chart 1.1). During the same period, private investment decreased from
20.0 to 19.0 percent of GDP and public investment increased from 6.5 to 7.9 percent of GDP. National savings
rates increased slightly from 29.2 percent of GDP in FY12 to 29.5 percent of GDP in FY13. Domestic savings as a
percent of GDP remained unchanged at 19.3 percent in FY13. The domestic savings-investment gap as a
percentage of GDP, correspondingly, increased from 7.2 percent in FY12 to 7.5 percent in FY13.
Price developments
The average inflation rate, using the FY06 new base, moderated to 6.8 percent at the end of FY13 from 8.7
percent at the end of FY12. Over this period, food and non-food inflation both decreased from 7.7 to 5.2 percent
and from 10.2 to 9.2 percent respectively. The decrease in average inflation during FY13 was driven mainly by
a gradual fall of food inflation until January 2013 when food inflation bottomed out at 3.2 percent. A steady
decline in non-food inflation during the second half of FY13 also contributed to fall in average inflation. Though
average inflation went down, point-to-point inflation increased to 8.1 percent in FY13 from 5.6 percent in FY12.
Money and Credit Developments
In FY13, Bangladesh Bank designed its monetary policy stance based on assessment of global and domestic
macroeconomic conditions and outlook. BB continued restrained policy stance in H1 of FY13 to curb inflation.
In H2 of FY13 repo and reverse repo rates were decreased from 7.75 and 5.75 percent in FY12 to 7.25 and 5.25
percent respectively in FY13. Besides, Bangladesh Bank continued to maintain the Cash Reserve Ratio (CRR)
and the Statutory Liquidity Ratio (SLR) for banks at 6.0 percent and 19.0 percent respectively.
Public Finance
Excluding grants, the overall budget deficit to GDP ratio increased from 4.1 percent in FY12 to 4.8 percent in
FY13. However, domestic financing of the deficit decreased to 3.1 percent of GDP in FY13 from 3.3 percent of
GDP in FY12.
External Sector
14
The exports earnings increased to USD 26566 million from USD 23989 million and import payments increased
marginally to USD 33576 million from USD 33309 million in FY13 over FY12. Trade deficit declined to USD
7010 million in FY13 from USD 9320 million in FY12. The services and income account including primary
income and secondary income registered a surplus of USD 9535 million due to a buoyant increasing remittance
inflows. Remittance inflows increased to USD 14338 million in FY13 from USD 12734 million in FY12. As a
result, current account balance moved to a surplus of USD 2525 million as compared to a deficit of USD 447
million in FY12. The capital and financial account surplus continued to increase from USD 1918 million in FY12
to USD 3367 million in FY13, primarily due to increased flow of FDI, medium and long term loan disbursements
and net trade credit. The capital account surplus increased from USD 482 million to USD 588 million during
this period. While taking into account net errors and omissions, the overall balance of payments registered a
huge surplus of USD 5128 million in FY13 compared to a surplus of USD 494 million in FY12. Gross
international foreign exchange reserves at USD 15300 million at end of FY13 reflected improved external
balances, representing 5.5 months of import cover.1.21 The export earnings, expressed as a percent of GDP,
decreased from 20.7 percent in FY12 to 20.5 percent in FY13. The growth rate of exports earnings increased
from 6.2 percent to 10.7 percent during this period. While leather, jute goods, knitwear and woven garments
experienced a positive growth, some of the exports items like fish, shrimps, raw jute, tea, home textile and
engineering products experienced a negative growth. Import payments, as a percent of GDP, decreased from
28.7 in FY12 to 25.9 in FY13. Imports grew at a rate of 0.8 percent in FY13 compared to the 2.4 percent growth
in FY12. This lower growth of import payments resulted mainly from negative growth in imports of food grains,
edible oil, sugar, POL, fertiliser, and capital machinery. However, imports of pulses, chemicals, textile & textile
articles thereof and iron, steel & other base metals showed positive growth in FY13. The rate of growth of
workers' remittance inflows increased by 12.6 percent in FY13 playing an important role in strengthening the
current account balance. In order to achieve BB's monetary policy goal and to avoid undue volatility in the
foreign exchange market, Bangladesh Bank remained vigilant by closely monitoring the exchange rate
movements, and buying and selling of foreign exchanges. In FY13, Bangladesh Taka experienced appreciation of
5.2 percent against US dollar mainly due to strong growth in the flow of inward remittances, increase in export
earnings and sluggish import payments. BB purchased USD 4539.0 million in order to mop up excess liquidity
in the local foreign exchange market. The nominal exchange rate of Taka stood at Taka 77.77 per US dollar as of
end June 2013 compared to Taka 81.82 per US dollar as of end June 2012. In nominal effective terms, against a
trade weighted eight currency basket (base: 2000-01=100), Taka appreciated by 6.4 percent in FY13. The real
effective exchange rate of the Taka also appreciated by 11.3 percent as of end June 2013.
External Trade and the Balance of Payments - the Overall Situation
In the external sector, the Current Account Balance (CAB) continued to be in surplus reflecting the increasing
inflows of remittances bolstered by continued export expansion and declining imports. Import growth was
sluggish in FY13, partly reflecting the significant fall in food import demand, lower petroleum imports as well
as slower demand for imports related to manufacturing output.
Remittances were buoyed by larger numbers of Bangladeshi workers moving abroad in FY12 as well as real
wage growth in the Middle East following the 'Arab Spring' events. Remittance growth of 12.6 percent in FY13
is higher than the 10.2 percent growth in FY12, though this growth did slow to 4.2 percent during the second
half of the year compared to the first half of FY13 when remittance growth was 22 percent. This slow-down is a
function of a 34 percent drop in the number of migrant workers between July-April FY13 relative to the same
period in FY12. The capital account shows that foreign direct investment is projected to have increased from
USD 1.2 billion in FY12 to USD 1.3 billion in FY13. Medium and long term loan disbursements rose from USD
1.5 billion in FY12 to USD 1.7 billion in FY13 and net aid flows increased from USD 671 million to USD 841
million during the same period. Improved external balances are reflected in the accumulation of international
reserves to over USD 15 billion at the end of FY13, sufficient to cover 5.5 months of projected imports. The
overall balance of payments surplus in FY13 was USD 5128 million.
Exports
Total exports in FY13 had a strong growth over the same period of FY12. Aggregate exports increased by 11.2
percent in FY13 to USD 27027.4 million from USD 24301.9 million in FY12. Apparels (woven garments and
knitwear products) continued to occupy an overwhelming (above three fourth) share of the export basket in
FY13.
Readymade garments
(woven and knitwear): Woven and knitwear products, which fetch about 79.6 percent of total export earnings,
registered a high increase in receipts, from USD 19089.7 million of FY12 to USD 21515.8 million in FY13.
Woven and Knitwear products grew by 15.0 percent and 10.4 percent respectively in FY13.
Frozen food
15
The frozen foods sector, comprising mainly of shrimps, registered marked decrease in earnings during FY13.
Receipts from export of shrimp and fish decreased by 11.5 percent from USD 579.8 million of FY12 to USD
512.9 million in FY13.
Raw jute
In FY13, raw jute valued at USD 229.9 million was exported compared with USD 266.3 million in FY12, i.e. a
13.7 percent fall in exports during the year.
Jute goods (excluding carpets)
Jute products valued at USD 800.7 million was exported compared with USD 701.1 million in FY12 showing an
increase of 14.2 percent in FY13.
Leather
Export earnings from leather and leather products increased by 21.0 percent to USD 399.7 million in FY13 from
USD 330.2 million in FY12.
Home Textile
Export earnings from home textile declined by 12.6 percent to USD 791.5 million in FY13 from USD 906.1
million in FY12.
Engineering products
These exports fell marginally from USD 375.5 million in FY12 to USD 367.5 million in FY13.
Chemical Products:
Export earnings from Chemical Products decreased by 9.7 percent to USD 93.0 million in FY13 against
USD 103.0 million in FY12.
Imports
Import payments (fob) in FY13 were USD 33576.0 million registering a positive growth of 0.8 percent
compared to USD 33309.0 million in FY12. Table 10.2 shows the composition of imports; the major items are
petroleum related products, wheat, textiles, raw cotton, edible oil, sugar, capital machinery, plastics, rubber and
fertiliser. Food grains import decreased substantially by 19.4 percent to USD 726.0 million in FY13 (rice 89.6
percent) from USD 901.0 million in FY12 mainly due to adequate domestic supply of rice during the period. On
the other hand wheat import increased by 13.5 percent to USD 696.0 million in FY13. Pulses, oil seeds, wheat,
crude petroleum, chemicals, textile & articles thereof etc. recorded increases of imports during FY13. Imports
of other food items recorded significant negative growth of 13.1 percent to 3128.0 million in FY 13 from USD
3600.0 million in FY12 (sugar 37.9 percent, edible oil 14.7 percent, spices 14.5 percent and milk & cream 3.2
percent). However, pulses recorded positive import growth of 73.7 percent during the year. Consumer and
intermediate goods import 91recorded negative growth which decreased by 0.5 percent to USD 16694.0
million in FY13 from USD 16783.0 million in FY12 (fertiliser 14.0 percent, POL 7.1 percent, raw cotton 3.8
percent, clinker 3.4 percent, yarn 2.0 percent). Except iron, steel & other base metal, capital machinery and
others under the category of capital goods and others showed negative import growth. Therefore, imports of
capital goods and others decreased by 9.0 percent to USD 11031.0 million in FY13 from USD 12118.0 million in
FY12 (others 13.0 percent and capital machinery 8.5 percent). However, imports by EPZ increased by 18.5
percent to USD 2505.0 million in FY13 compared to USD 2114.0 million in FY12. Workers' Remittances10.22
Despite continued global economic slowdown, the flow of inward remittances from Bangladeshi nationals
working abroad remained strong in FY13 and continued to play an important role in strengthening the current
account balance. Remittance inflow increased by 12.6 percent to USD 14338 million in FY13 from USD 12734
million in FY12. (Appendix-3, Table-XVI) However, as discussed above the rate of remittance growth sharply
slowed down in the second half of FY13 compared with the first half.
Foreign Aid
Total official foreign aid disbursement increased by 31.0 percent to USD 2786 million in FY13 from USD 2126
million received in FY12 (Table 10.4). This was despite a decline in food aid which amounted to USD 20 million
in FY13 against USD 69 million in FY12. The disbursement of project assistance stood at USD 2766 million in
FY13, compared with USD 2057 million in FY12. Total outstanding official external debt as of 30 June 2013 was
USD 23319 million (18.0 percent of GDP in FY13) against USD 22095 million as of 30 June 2012 (19.0 percent
of GDP in FY12). Repayment of fficial external debt amounted to USD 1102 million (excluding repurchases from
the IMF) in FY13. Out of the total repayments, principal payments amounted to USD 906 million while interest
payments stood at USD 196 million in FY13, against USD 789 million and USD 200 million respectively during
FY12. The debt-service ratio as percentage of exports was 4.1 percent in FY13.

16
 Questions & Answers
Explain economics is a science of wealth and discuss the subject matter of economics
Q3. “Economics is the study of mankind in the ordinary business of life.”-Discuss the statement
(Dec’12).
Or. “Economics is a science of wealth.”-Discuss (May’12).

Alfred Marshall provides a still widely-cited definition in his textbook Principles of Economics (1890) that
extends analysis beyond wealth and from the societal to the macroeconomic level:
Economics is a study of man's action in the ordinary business of life it inquires how he gets his income and how
he uses it. It examines that part of individual and social actions which is mostly closely connected with the
attainment and with the use of material requisites of well being. Thus economics is on one side a study of
wealth and on the other and important side a part of the study of man ".
From the definition of economics by Alfred Marshall, we see that he lays emphasizes on the below points.
1. Study of an ordinary man: According to Alfred Marshall, economics is that study of an ordinary man who
lives in society. It is not concerned with the lives of only rich persons or who is cut away from the society. Its
subject matter is a particular aspect of human behaviour i.e. earning and spending of incomes for the normal
material needs of human beings.
2. Economics is not a useless study of wealth: Economics does not regard wealth as the be-all and end-all of
economics activities wealth is not of primary importance. It is earned only for promoting human welfare
economics is studied to analyze the causes of material prosperity of individuals and nations.
3. Economics is a social science: It does not study the behaviour of isolated individuals but the actions of
persons living in society. When people live together they interact and cooperate to work at firms, factories,
shop and offices to produce and exchange goods or services. The problems about these activities are studied in
economics.
4. Study of material welfare: According to Alfred Marshall, economics studies only material requisites of well
being or causes of material welfare. It is cleared from this definition that it is materialistic aspect and ignores
non-material aspects. Alfred Marshall stressed that the man’s behaviour and activities to produce and consume
maximum number of goods and services are the main object of study wealth is not an end or final aim, but only
a means to achieve a higher objective of welfare.

Q2. Discuss the subject-matter of Economics (Nov’11).

The subject matter of Economics is the economic behaviour of man which is highly unpredictable. Money which
is used to measure outcomes in Economics is itself a dependent variable. It is not possible to make correct
predictions about the behaviour of economic variables.
Various economists have different views about the subject matter of economics. Adam smith, in his book “An
Inquiry into the nature and causes of Wealth of Nations which was published in 1776 defined economics as an
enquiry into the nature and causes of wealth of Nations in other words it lays importance on wealth rather than
welfare of human beings. It shows to a man uses wealth produces wealth and how wealth is exchanged and
distributed in the economy.
According to the 19th century economists Alfred Marshall, “Economics is the study of mankind in the ordinary
business of life. It enquires how he gets his income and how he uses it. It examines that part of individual and
social action, which is most closely connected with the attainment and with the use of material requisites of
well-being.
It is on the one side a study of wealth and on the other and more important side is a part of the study of man”.
Professor Marshall has shifted the emphasis from wealth to man. Alfred Marshall gives priority to human
beings and placed wealth at secondary level.
If we talk about Robbins concept of subject matter of economics, according to Robins, it studies behavior of a
man and relates it between ends and scarce resources which have alternative uses. According to Robbins
wants are unlimited in number while means are scarce, not only limited but alternative uses. The main
problems arises that how to utilize the scarce resource to fulfill the unlimited wants is a subject matter of
economics.
According to modern economist like Peterson and Samuelson the subject matter of economics is a science that
studies only those activities of human being which he undertakes to maximize his satisfaction by making
proper use of scarce resources.
All these economists have combined in their definition the essential elements of the definitions by Marshall and
Robbins. According to modern economists the efficient allocation and use of scarce means results in increase in
economic growth and social welfare is promoted.
17
Define indifference curve and its characteristics/properties with diagrams

Q. What is an indifference curve and what are its characteristics/properties? Use diagrams in
your answer (Nov’03, Nov’04, Nov’07, Nov’09, and Nov’10).
An indifference curve:
Definition: An indifference curve is a graph showing combination of two goods that give the consumer equal
satisfaction and utility. Each point on an indifference curve indicates that a consumer is indifferent between the
two and all points give him the same utility.
Description: Graphically, the indifference curve is drawn as a downward sloping convex to the origin. The
graph shows a combination of two goods that the consumer consumes.

The above diagram shows the U indifference curve

showing bundles of goods A and B. To the consumer,
bundle A and B are the same as both of them give him the
equal satisfaction. In other words, point A gives as much
utility as point B to the individual. The consumer will be
satisfied at any point along the curve assuming that other
things are constant.

Characteristics/properties of an indifference curve:

Following are the indifference curve properties:

1. If two commodities are perfect substitute the indifference curve is a straight line.

2. When two commodities are not substitutable then the shape is represented by two vertical and
horizontallines.
3. In more typical cases, in which the two commodities can be substituted for each other but are not perfect
substitutes, the indifference curve will be curved as

4. The more easily the two commodities can be substituted for each
other the nearer will the curve approach straight line.
5. Indifference curves normally slope downward, the upward
sloping portion of curve shown here s impossible. Basket A has
more goods than basket B and therefore it could not be on the same
indifference curve. The indifference curves have normally negative
slops – sloping downward.
6. The absolute value of the slope of an indifference curve at any
point represents the ratio of the marginal utility of the good and on
the horizontal axis to the marginal utility of the good on the vertical
axis. The rate at which one good can be substituted for the other
without gain or loss in satisfaction is called marginal rate of
substitution.

18
7. Indifference curves are convex, that is, their slope decrease as one moves down and to the right along them.
The implies that the ratio of the marginal utility of meat to the marginal utility of the ghee (cooking oil) also
known as marginal ratio of substitution of meat for ghee (cooking oil) diminishes as one moves down and to
the right along the curve.
8. Indifference curves can be drawn through the point that represents the basket of goods whatsoever.

Q. Explain with the help of an indifference curve analysis how a consumer reaches the highest
level of satisfaction? (May’06, Nov’07 and Nov’10).
Consumer’s Equilibrium by Indifference Curve: Consumer equilibrium refers to a situation, in which a
consumer derives maximum satisfaction, with no intention to change it and subject to given prices and his
given income. The point of maximum satisfaction is achieved by studying indifference map and budget line
together.
Conditions of Consumer’s Equilibrium: The consumer’s equilibrium under the indifference curve theory
must meet the following two conditions:
(i) MRSXY = Ratio of prices or PX/PY
Let the two goods be X and Y. The first condition for consumer’s equilibrium is that
MRSXY = PX/PY
A) If MRSXY > PX/PY, it means that the consumer is willing to pay more for X than the price prevailing in the
market. As a result, the consumer buys more of X. As a result, MRS falls till it becomes equal to the ratio of
prices and the equilibrium is established.
B) If MRSXY < PX/PY, it means that the consumer is willing to pay less for X than the price prevailing in the
market. It induces the consumer to buys less of X and more of Y. As a result, MRS rises till it becomes equal to
the ratio of prices and the equilibrium is established.
(ii) MRS continuously falls: The second condition for consumer’s equilibrium is that MRS must be diminishing
at the point of equilibrium, i.e. the indifference curve must be convex to the origin at the point of equilibrium.
Unless MRS continuously falls, the equilibrium cannot be established.
Thus, both the conditions need to be fulfilled for a consumer to be in equilibrium.

Let us now understand this with the help of a diagram:

19
In Fig. 2.12, IC1, IC2 and IC3 are the three indifference curves and AB is the budget line. With the constraint of
budget line, the highest indifference curve, which a consumer can reach, is IC 2. The budget line is tangent to
indifference curve IC2 at point ‘E’. This is the point of consumer equilibrium, where the consumer purchases OM
quantity of commodity ‘X’ and ON quantity of commodity ‘Y.
All other points on the budget line to the left or right of point ‘E’ will lie on lower indifference curves and thus
indicate a lower level of satisfaction. As budget line can be tangent to one and only one indifference curve,
consumer maximizes his satisfaction at point E, when both the conditions of consumer’s equilibrium are
satisfied:
(i) MRS = Ratio of prices or PX/PY:
At tangency point E, the absolute value of the slope of the indifference curve (MRS between X and Y) and that of
the budget line (price ratio) are same. Equilibrium cannot be established at any other point as MRS XY > PX/PY at
all points to the left of point E and MRSXY < PX/PY at all points to the right of point E. So, equilibrium is
established at point E, when MRSXY = PX/PY.
(ii) MRS continuously falls:
The second condition is also satisfied at point E as MRS is diminishing at point E, i.e. IC 2 is convex to the origin
at point E.

Q. What is meant by production function? Describe a production indifference curve and its
properties. Use diagram in your answer (Nov’11 and Nov’10).
Productions function: Production is the process by which inputs are transformed in to outputs. Thus there is
relation between input and output. The functional relationship between input and output is known as
production function. In economics, equation that expresses the relationship between the quantities of
productive factors (such as labour and capital) used and the amount of product obtained. It states the amount
of product that can be obtained from every combination of factors, assuming that the most efficient available
methods of production are used.
It can be expressed in algebraical form as under:
x =f (a1, a2,…………………………… an)
This equation tells us the quantity of the product X which can be produced by the given quantities of inputs
(lands labour, capital) that are used in the process of production. Here, it may be noted that production
function shows only the maximum amount of output it which can be produced from given inputs. It is because
production function includes only efficient production process.
A production indifference curve and its properties:
(1) Indifference Curves are Negatively Sloped: The indifference curves must slope down from left to right.
This means that an indifference curve is negatively sloped. In fig. 3.4 the two combinations of commodity
cooking oil and commodity wheat is shown by the points a and b on the same indifference curve. The consumer
is indifferent towards points a and b as they represent equal level of satisfaction.
(2) Higher Indifference Curve Represents Higher Level: A higher indifference curve that lies above and to
the right of another indifference curve represents a higher level of satisfaction and combination on a lower
indifference curve yields a lower satisfaction.

20
In this diagram (3.5) there are three indifference curves, IC1, IC2 and IC3 which represents different levels of
satisfaction. The indifference curve IC3 shows greater amount of satisfaction and it contains more of both goods
than IC2 and IC1 (IC3 > IC2 > IC1).
(3) Indifference Curve is Convex to the Origin: This is an important property of indifference curves. They are
convex to the origin (bowed inward). This is equivalent to saying that as the consumer substitutes commodity X
for commodity Y, the marginal rate of substitution diminishes of X for Y along an indifference curve.
(4) Indifference Curve Cannot Intersect Each Other: Given the definition of indifference curve and the
assumptions behind it, the indifference curves cannot intersect each other. It is because at the point of
tangency, the higher curve will give as much as of the two commodities as is given by the lower indifference
curve. This is absurd and impossible.
In fig 3.7, two indifference curves are showing cutting each other at point B. The combinations represented by
points B and F given equal satisfaction to the consumer because both lie on the same indifference curve IC 2.
Similarly the combinations shows by points B and E on indifference curve IC 1 give equal satisfaction top the
consumer.
(5) Indifference Curves do not touch the Horizontal or Vertical Axis: One of the basic assumptions of
indifference curves is that the consumer purchases combinations of different commodities. He is not supposed
to purchase only one commodity. In that case indifference curve will touch one axis. This violates the basic
assumption of indifference curves.

Q1. Compare the definitions of Economics offered by Adam Smith and Lionel Robbins/Define
Economics (Nov’11).
Economics: Economics is the social science that analyzes the production, distribution, and consumption of
goods and services. The term economics comes from the Ancient Greek “oikonomia”, where ‘oikos’ means
"house" and ` nomos’ means “custom" or "law". In this sense “oikonomia” means "management of a household,
or "rules of the house".
There are a variety of modern definitions of economics. Some of the differences may reflect evolving views of
the subject or different views among economists.
Alfred Marshall provides a still widely-cited definition in his textbook Principles of Economics (1890) that
extends analysis beyond wealth and from the societal to the macroeconomic level: Economics is a study of man
in the ordinary business of life. It enquires how he gets his income and how he uses it. Thus, it is on the one
side, the study of wealth and on the other and more important side, a part of the study of man.
Lionel Robbins (1932) developed implications of what has been termed "perhaps the most commonly accepted
current definition of the subject". Economics is a science which studies human behaviour as a relationship
between ends and scarce means which have alternative uses.
Lastly we can say that, the theories, principles, and models that deal with how the market process works. It
attempts to explain how wealth is created and distributed in communities, how people allocate resources that
are scarce and have many alternative uses, and other such matters that arise in dealing with human wants and
their satisfaction.
Q2. Discuss the subject-matter of Economics (Nov’11).
The subject matter of Economics is the economic behaviour of man which is highly unpredictable. Money which
is used to measure outcomes in Economics is itself a dependent variable. It is not possible to make correct
predictions about the behaviour of economic variables.
Various economists have different views about the subject matter of economics. Adam smith, in his book “An
Inquiry into the nature and causes of Wealth of Nations which was published in 1776 defined economics as an
enquiry into the nature and causes of wealth of Nations in other words it lays importance on wealth rather than

21
welfare of human beings. It shows to a man uses wealth produces wealth and how wealth is exchanged and
distributed in the economy.
According to the 19th century economists Alfred Marshall, “Economics is the study of mankind in the ordinary
business of life. It enquires how he gets his income and how he uses it. It examines that part of individual and
social action, which is most closely connected with the attainment and with the use of material requisites of
well-being.
It is on the one side a study of wealth and on the other and more important side is a part of the study of man”.
Professor Marshall has shifted the emphasis from wealth to man. Alfred Marshall gives priority to human
beings and placed wealth at secondary level.
If we talk about Robbins concept of subject matter of economics, according to Robins, it studies behaviour of a
man and relates it between ends and scarce resources which have alternative uses. According to Robbins
wants are unlimited in number while means are scarce, not only limited but alternative uses. The main
problems arises that how to utilize the scarce resource to fulfill the unlimited wants is a subject matter of
economics.
According to modern economist like Peterson and Samuelson the subject matter of economics is a science that
studies only those activities of human being which he undertakes to maximize his satisfaction by making
proper use of scarce resources.
All these economists have combined in their definition the essential elements of the definitions by Marshall and
Robbins. According to modern economists the efficient allocation and use of scarce means results in increase in
economic growth and social welfare is promoted.
Q3. State and explain the definition of Economics provided by Alfred Marshall.
Alfred Marshall provides a still widely-cited definition in his textbook Principles of Economics (1890) that
extends analysis beyond wealth and from the societal to the macroeconomic level:
"Economics is a study of man's action in the ordinary business of life it inquires how he gets his income and
how he uses it. It examines that part of individual and social actions which is mostly closely connected with the
attainment and with the use of material requisites of well being. Thus economics is on one side a study of
wealth and on the other and important side a part of the study of man ".
Features of Marshall’s definition:
1) Economics is interested in human welfare not in wealth, 2) It is a social science. A person who is cut away
from the society is not the subject of study of economics. 3) Economics does not study of all the activities of
man. It only studies ordinary business of life. 4) Economics is a concerned with the ways in which a man works
on natural resources for the satisfaction of material wants.
Criticisms of Marshall’s Definition: In 1931, Lionel Robbins published his book “Nature and Significance of
Economics Science”, following are the grounds of his criticism of neoclassical economics definition by Alfred
Marshall. 1. Narrow down the Scope of Economics: According to Prof. Lionel Robbins the use of the word
“Material” in Marshall’s definition narrows down the scope of economics. There are many things in the world,
which are non material but they are very significant for promoting human welfare. For example the services of
doctors, lawyers, teachers, engineers, professors etc. these thing satisfy our wants and are scarce in supply. If
we exclude these services from the economics, then its cope will be very much restricted. Therefore, in the
actual study of economics principles, both the material and immaterial things are taken into accounts.
2. Classificatory Type of Definition: Marshall’s definition was rejected by Robins as being classificatory because
it makes a distinction between material and immaterial welfare and says that economic is concerned only with
material welfare.
3. Relation between Economics and Welfare: Robbins hardly criticized Marshall’s definition due to the reason of
the relation between economics and welfare. Robins said that there are many activities which do not promote
human welfare but they can satisfy their wants and therefore, can be regarded economic activities, for example
the manufacturing and sale of alcohol goods or opium etc. here Robins says “whey talk of welfare at all? Why
not throw away the mask along altogether?”
4. Welfare is a Vague Concept: Professor Robins raised another objection about “Welfare”. In Robbins opinion,
welfare is a vague concept. It is purely subjective. It differs from man to man, from place to place and from age
to age. Robins says that what is the use of a concept which cannot be quantitatively measured and on which two
persons cannot agree as to what is conducive to welfare and what is not.
5. Involves Value Judgment: Robins object that the word “Welfare” involves value judgment. According to
Robbins the work of the economists is not to judge the value of a commodity whether it promotes welfare or
not. Economists are forbidden to pass any decision.
6. Impractical: The definition of economics by Alfred Marshall is of theoretical nature. Alfred Marshall definition
of economics is not possible in practice to divide human activities.
22
Q4. Discuss the importance of the study of Economics (Nov’03, May’09, Nov’ 10).
Importance of the study of Economics: The Importance /advantages/ Objectives of the study of economics are
as under:
(1) Intellectual Value: The knowledge of Economics is very useful as it broadens our outlook, sharpens our
intellect, and inculcates in us the habit of balanced thinking. The study of Economics makes us realize that we
as human beings are dependent upon one another for our daily needs. This feeling creates in us the intelligent
appreciation of our position and the spirit of co-operation with others.
(2) Practical Advantages: The practical advantages of Economics are much more important than its theoretical
advantages. These advantages can be looked at from the individual and community point of view.
(3) Personal Stake in Economics: From personal point of view, the study of Economics is useful as it enables
each of us to understand better and appreciate more intelligently the nature and significance of our money
earning and money spending activities. With the knowledge of Economics, the consumer can better adjust his
expenditure to his income. The study of Economics is also useful to a producer. It suggests him the ways of
bringing about the most economical combinations of the various factors of production at his disposal. It also
helps in solving the various intricacies of exchange. From the study of Economics, one can easily judge as to
why the prices have risen or fallen. The knowledge of Economics also explains us as to how the reward of
various factors of production is determined. Thus, we find that every’ individual can rightly hope to become a
better and more efficient consumer, producer and businessman, if he has the working knowledge of economics.
(4) Economics for the Leader: The study of economics is not only helpful from the individual point of view but it
is also very useful for the welfare of the community. It enables a statesman to understand and better grasp the
economic and social problems facing the country. Every government has to tackle different kinds of economic
problems such as unemployment, inflation, over production, under-production, imposition of tariffs and
control, problem of monopolies, etc. the statesman can successfully solve these problems, if he has thorough
knowledge of the subject of Economics. The knowledge of Economics for a finance minister is also
indispensable. He has to raise revenue by imposing taxes on the incomes of the people for meeting the
necessary expenditure of the government. Economics here comes to his rescue and guides him as to how the
taxes could be levied and collected.
(5) Poverty and Development: The greatest advantage of Economics is that it helps in removing traces of
poverty from the country. Take the case of Pakistan; we in Pakistan are confronted with different kinds of
problems. For example, low-per capita income, low productivity of agriculture, slow development of industries,
fast increase in population, under-developed means of communication and transport, etc. The study of
Economics helps in devising ways and means and suggesting practical measures in solving these problems.
(6) Economics for the citizen: Such being, the importance of study of Economics, it is rightly remarked by
Wooten that “you cannot be in real sense a citizen unless you are also in some degree an economist”. He is
perfectly right in giving the statement. The world is so fast changing that we are completely now living in a
world dominated by economic forces and economic ideas. If the people of any country do not have the working
knowledge of an economic system; then the government of that country can easily hoodwink citizens have
knowledge of Economics, then the government will be very vigilant and spend the money in a wise manner.
The importance of the study of Economies can also be judged from this fact that the daily newspapers cannot be
understood without some knowledge of Economics. The newspapers often describe complicated economic
problems such as inflation, balance of payment, balance of trade, imperfect markets, dumping, co-operative
farming, sub-division and fragmentation of holdings, mechanization of agriculture, If you do not have working
knowledge of Economics, you cannot understand these diverse problems.
From brief discussion, we conclude, that the knowledge of Economics is very useful. As such it is necessary that
every citizen, bankers, worker, administrator, consumer, etc., should have at least working knowledge of it. In
the words of Sir Henry Clay: “Some study of Economics is at one a practical necessity and a normal obligation”.
Q5. Distinguish between micro-economics and macro-economic (Nov’03, Nov’12).
Difference between Microeconomics and Macroeconomics:
Microeconomics
1) It is that branch of economics which deals with the economic decision-making of individual economic agents
such as the producer, the consumer, etc; 2) It takes into account small components of the whole economy. 3) It
deals with the price-determination in case of individual products and factors of production. 4) It is known as
price theory (since it explains the process of allocation of economic resources along alternative; 5) It is
concerned with the optimisation goals of individual consumers and producers (e.g., individual consumers are
utility-maximisers, while individual producers are profit-maximisers). 6) It studies the flow of economic

23
resources or factors of production from any individual owner of such resources to any individual user of these
resources, etc. 7) Microeconomic theories help us in formulating appropriate policies for resource allocation at
the firm level. 8) It takes into account the aggregates over homogeneous or similar products (e.g., the supply of
steel in an economy).
Macroeconomics
1) It is that branch of economics which deals with aggregates and averages of the entire economy, e.g.,
aggregate output, national income, aggregate savings and investment, etc. 2) It takes into consideration the
economy of any country as a whole. 3) It deals with general price-level in any economy. (lines of production on
the basis of relative prices of various goods and services). 4) It is also known as the income theory (since it
explains the changing levels of national income in any economy during any particular time period). 5) It is
concerned with the optimisation of the growth process of the entire economy. 6) It studies the circular flow of
income and expenditure between different sectors of the economy (say, between the firm sector and household
sector). 7) Macroeconomic theories help us in formulating appropriate policies for controlling inflation (i.e.,
rising price-level), unemployment, etc. 8) It takes into account the aggregates over heterogeneous or dissimilar
products (say, the Gross Domestic Product of any country during any year.
Q6. What are the main goals of macro-economic policy (Dec’12)?
Macroeconomic goals: Three conditions of the mixed economy that are most important for macroeconomics,
including full employment, stability, and economic growth, that are generally desired by society and pursued by
governments through economic policies.
Macroeconomic goals are three of the five economic goals of a mixed economy that are most important to the
study of macroeconomics. They are full employment, stability, and economic growth.
Full Employment: Full employment is achieved when all available resources (labour, capital, land, and
entrepreneurship) are used to produce goods and services. This goal is commonly indicated by the employment
of labour resources (measured by the unemployment rate). However, all resources in the economy--labour,
capital, land, and entrepreneurship--are important to this goal. The economy benefits from full employment
because resources produce the goods that satisfy the wants and needs that lessen the scarcity problem. If the
resources are not employed, then they are not producing and satisfaction is not achieved.
Stability: Stability is achieved by avoiding or limiting fluctuations in production, employment, and prices.
Stability seeks to avoid the recessionary declines and inflationary expansions of business cycles. This goal is
indicated by month-to-month and year-to-year changes in various economic measures, such as the inflation
rate, the unemployment rate, and the growth rate of production. If these remain unchanged, then stability is at
hand. Maintaining stability is beneficial because it means uncertainty and disruptions in the economy are
avoided. It means consumers and businesses can safely pursue long-term consumption and production plans.
Policies makers are usually most concerned with price stability and the inflation rate.
Economic Growth: Economic growth is achieved by increasing the economy's ability to produce goods and
services. This goal is best indicated by measuring the growth rate of production. If the economy produces more
goods this year than last, then it is growing. Economic growth is also indicated by increases in the quantities of
the resources--labour, capital, land, and entrepreneurship--used to produce goods. With economic growth,
society gets more goods that can be used to satisfy more wants and needs--people are better off; living
standards rise; and scarcity is less of a problem.

Discuss the` importance of the study of Economics (Nov’10)

Q. Discuss the importance of the study of Economics (Nov’10).

Importance of the study of Economics: The Importance /advantages/ Objectives of the study of economics are
as under:
(1) Intellectual Value: The knowledge of Economics is very useful as it broadens our outlook, sharpens our
intellect, and inculcates in us the habit of balanced thinking. The study of Economics makes us realize that we
as human beings are dependent upon one another for our daily needs. This feeling creates in us the intelligent
appreciation of our position and the spirit of co-operation with others.
(2) Practical Advantages: The practical advantages of Economics are much more important than its theoretical
advantages. These advantages can be looked at from the individual and community point of view.
(3) Personal Stake in Economics: From personal point of view, the study of Economics is useful as it enables
each of us to understand better and appreciate more intelligently the nature and significance of our money
earning and money spending activities. With the knowledge of Economics, the consumer can better adjust his
expenditure to his income. The study of Economics is also useful to a producer. It suggests him the ways of
24
bringing about the most economical combinations of the various factors of production at his disposal. It also
helps in solving the various intricacies of exchange. From the study of Economics, one can easily judge as to
why the prices have risen or fallen. The knowledge of Economics also explains us as to how the reward of
various factors of production is determined. Thus, we find that every’ individual can rightly hope to become a
better and more efficient consumer, producer and businessman, if he has the working knowledge of economics.
(4) Economics for the Leader: The study of economics is not only helpful from the individual point of view but it
is also very useful for the welfare of the community. It enables a statesman to understand and better grasp the
economic and social problems facing the country. Every government has to tackle different kinds of economic
problems such as unemployment, inflation, over production, under-production, imposition of tariffs and
control, problem of monopolies, etc. the statesman can successfully solve these problems, if he has thorough
knowledge of the subject of Economics. The knowledge of Economics for a finance minister is also
indispensable. He has to raise revenue by imposing taxes on the incomes of the people for meeting the
necessary expenditure of the government. Economics here comes to his rescue and guides him as to how the
taxes could be levied and collected.
(5) Poverty and Development: The greatest advantage of Economics is that it helps in removing traces of
poverty from the country. Take the case of Pakistan; we in Pakistan are confronted with different kinds of
problems. For example, low-per capita income, low productivity of agriculture, slow development of industries,
fast increase in population, under-developed means of communication and transport, etc. The study of
Economics helps in devising ways and means and suggesting practical measures in solving these problems.
(6) Economics for the citizen: Such being, the importance of study of Economics, it is rightly remarked by
Wooten that “you cannot be in real sense a citizen unless you are also in some degree an economist”. He is
perfectly right in giving the statement. The world is so fast changing that we are completely now living in a
world dominated by economic forces and economic ideas. If the people of any country do not have the working
knowledge of an economic system; then the government of that country can easily hoodwink citizens have
knowledge of Economics, then the government will be very vigilant and spend the money in a wise manner.
The importance of the study of Economies can also be judged from this fact that the daily newspapers cannot be
understood without some knowledge of Economics. The newspapers often describe complicated economic
problems such as inflation, balance of payment, balance of trade, imperfect markets, dumping, co-operative
farming, sub-division and fragmentation of holdings, mechanization of agriculture, If you do not have working
knowledge of Economics, you cannot understand these diverse problems.
From brief discussion, we conclude, that the knowledge of Economics is very useful. As such it is necessary that
every citizen, worker, administrator, consumer, etc., should have at least working knowledge of it. In the words
of Sir Henry Clay: “Some study of Economics is at one a practical necessity and a normal obligation”.

Q3. “Economics is the study of mankind in the ordinary business of life.”-Discuss the statement
(Dec’12).
Or. “Economics is a science of wealth.”-Discuss (May’12).
Alfred Marshall provides a still widely-cited definition in his textbook Principles of Economics (1890) that
extends analysis beyond wealth and from the societal to the macroeconomic level:
"Economics is a study of man's action in the ordinary business of life it inquires how he gets his income and
how he uses it. It examines that part of individual and social actions which is mostly closely connected with the
attainment and with the use of material requisites of well being. Thus economics is on one side a study of
wealth and on the other and important side a part of the study of man ".
From the definition of economics by Alfred Marshall, we see that he lays emphasizes on the below points.
1. Study of an ordinary man: According to Alfred Marshall, economics is that study of an ordinary man who
lives in society. It is not concerned with the lives of only rich persons or who is cut away from the society. Its
subject matter is a particular aspect of human behaviour i.e. earning and spending of incomes for the normal
material needs of human beings.
2. Economics is not a useless study of wealth: Economics does not regard wealth as the be-all and end-all of
economics activities wealth is not of primary importance. It is earned only for promoting human welfare
economics is studied to analyze the causes of material prosperity of individuals and nations.
3. Economics is a social science: It does not study the behaviour of isolated individuals but the actions of
persons living in society. When people live together they interact and cooperate to work at firms, factories,
shop and offices to produce and exchange goods or services. The problems about these activities are studied in
economics.

25
4. Study of material welfare: According to Alfred Marshall, economics studies only material requisites of well
being or causes of material welfare. It is cleared from this definition that it is materialistic aspect and ignores
non-material aspects. Alfred Marshall stressed that the man’s behaviour and activities to produce and consume
maximum number of goods and services are the main object of study wealth is not an end or final aim, but only
a means to achieve a higher objective of welfare.
Q2. Discuss the subject-matter of Economics (Nov’11).
The subject matter of Economics is the economic behaviour of man which is highly unpredictable. Money which
is used to measure outcomes in Economics is itself a dependent variable. It is not possible to make correct
predictions about the behaviour of economic variables.
Various economists have different views about the subject matter of economics. Adam smith, in his book “An
Inquiry into the nature and causes of Wealth of Nations which was published in 1776 defined economics as an
enquiry into the nature and causes of wealth of Nations in other words it lays importance on wealth rather than
welfare of human beings. It shows to a man uses wealth produces wealth and how wealth is exchanged and
distributed in the economy.
According to the 19th century economists Alfred Marshall, “Economics is the study of mankind in the ordinary
business of life. It enquires how he gets his income and how he uses it. It examines that part of individual and
social action, which is most closely connected with the attainment and with the use of material requisites of
well-being.
It is on the one side a study of wealth and on the other and more important side is a part of the study of man”.
Professor Marshall has shifted the emphasis from wealth to man. Alfred Marshall gives priority to human
beings and placed wealth at secondary level.
If we talk about Robbins concept of subject matter of economics, according to Robins, it studies behavior of a
man and relates it between ends and scarce resources which have alternative uses. According to Robbins
wants are unlimited in number while means are scarce, not only limited but alternative uses. The main
problems arises that how to utilize the scarce resource to fulfill the unlimited wants is a subject matter of
economics.
According to modern economist like Peterson and Samuelson the subject matter of economics is a science that
studies only those activities of human being which he undertakes to maximize his satisfaction by making
proper use of scarce resources.
All these economists have combined in their definition the essential elements of the definitions by Marshall and
Robbins. According to modern economists the efficient allocation and use of scarce means results in increase in
economic growth and social welfare is promoted.

Q. Explain the relationship of economics with

(i) Sociology (May 2011)
(ii) Statistics (May 2011) and
(iii) Political science.

i) Relationship between sociology and economics: Sociology and Economics as social sciences have close
relations. Relationship between the two is so close that one is often treated as the branch of the other, because
society is greatly influenced by economic factors, and economic processes are largely determined by the
environment of the society.
Economics deals with the economic activities of man. It deals with production, consumption and distribution of
wealth. The economic factors play a vital role in the very aspect of our social life. Total development of
individual depends very much on economic factors. Without economic conditions, the study of society is quite
impossible. All the social problems are directly connected with the economic conditions of the people. That is
why Marshall defines Economics as "on one side the study of wealth and on the other and more important side
a part of the study of man."
In the same way Economics is influenced by Sociology. Without the social background the study of Economics is
quite impossible.
ii) Relationship between statistics and economics: Statistics and Economics have close relations. Relationship
between the two is so close that one is often treated as the branch of the other, because statistics is greatly
influenced by data and information. Economics would be dependent on those data.
Economics deals with the economic activities of man. It deals with production, consumption and distribution of
wealth, where production is directly related to statistics. Without economic conditions, the study of statistics is
quite impossible.

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iii) Relationship between political science and economics: Political science and economics are social sciences.
Political science is the study of politics in theory and practice, while economics is the study of how resources
are produced, allocated, and distributed. As well as dealing with subjects that often relate to one another in
everyday life, the two are commonly seen as sister subjects in academic terms.
A variety of topics related to politics are addressed by political science. This includes differing political
philosophies about how society should operate. It also includes the way political systems work to produce laws
and government.
Economics deals with two main areas. Microeconomics is the study of how individual consumers and
businesses make production, purchasing, investment, and saving choices. Macroeconomics looks at how an
entire economy works and the way policies can affect the combined effects of microeconomic decisions. It can
be argued that economics is a social science rather than a pure science, because it is based around resolving an
irresolvable dilemma: how to meet people's unlimited wants with limited resources.
Q7. Explain the terms “Want” and “Scarcity” as understood in Economics (Nov’08,’11).
Wants: Want may be defined as an insatiable desire or need by human beings to own goods or services that
give satisfaction. The basic needs of man include; food, housing and clothing. Human needs are many.
They include tangible goods like houses, cars, chairs, television set, radio, etc. while the others are in form of
services, e.g. tailoring, carpentary, medical, etc. Human wants and needs are many and are usually described as
insatiable because the means of satisfying them are limited or scarce.
Scarcity: Scarcity can be defined as a situation in which human wants are greater than the capacity of available
resources to provide for those wants. In other words, it means that people want more than is available.
Economic resources are limited, but human needs and wants are infinite. Indeed the development of society
can be described as the uncovering of new wants and needs - which producers attempt to supply by using the
available factors of production.
Making choices Because of scarcity, choices have to be made on a daily basis by all consumers, firms and
governments.
Q9. How does a private sector firm maximize its profits (Nov’08, Nov’09, May’07, and May’08)?
In economics, profit maximization is the short run or long run process by which a firm determines the price and
output level that returns the greatest profit. There are several approaches to this problem. The total revenue–
total cost perspective relies on the fact that profit equals revenue minus cost and focuses on maximizing this
difference, and the marginal revenue–marginal cost perspective is based on the fact that total profit reaches its
maximum point where marginal revenue equals marginal cost.
The proprietors of those private firms, treat their staff professionally Provide a conductive working
environments for their staff to work in comfort. Regard their marketing departments and their sales persons as
important personnel, to bring in business for the various departments of their firms to process and turn those
business and services into finished goods or services to sell or provide to their customers so that profits can be
made.
Q11. What are the main objectives of a firm in the private sector? (Nov’05,’06)
The main objectives of a firm in the private sector: Basically the main key objective of the private sector is to
get the highest profit as much as they can get. The profit is the Earning before interest and tax. Taxes are
government sanctioned and the private sector tries to give a great cushion to EBIT against interest and tax. To
achieve this aim, the companies in the private business produce, where their total revenues are far higher than
total costs. This creates high reserves for the stockholders.
This indicates that the private sector has to accomplish the goals and desires of the shareholders and it will
always aim to fulfil their satisfaction. Another objective of companies in the private sector is to raise their
market shares to get a sustainable competitive advantage. Companies involved in the private sector also strive
to improve their corporate image by showing social responsibility. In addition, the private sector is highly
involved in sponsoring and participating in social and community events because they know that such events
can make their positioning and image better in the market.
Q12. What do you mean by price Elasticity of demand? Distinguish between elastic and
inelastic demand.
Price Elasticity of demand: A measure of the relationship between changes in the quantity demanded of a
particular good and a change in its price. Price elasticity of demand is a term in economics often used when
discussing price sensitivity. The formula for calculating price elasticity of demand is:
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

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If a small change in price is accompanied by a large change in quantity demanded, the product is said to be
elastic (or responsive to price changes). Conversely, a product is inelastic if a large change in price is
accompanied by a small amount of change in quantity demanded.
For example, if the quantity demanded for a good increases 15% in response to a 10% increase in price, the
price elasticity of demand would be 15% / 10% = 1.5.
The main differences between an elastic demand and an inelastic demand have been explained in details as
follows:
Elastic Demand:
1) When a small change in price brings about more than proportionate change in demand, it is known as the
elastic demand; 2) The demand curve is flatter; 3) Luxuries and comforts have elastic demand.; 4) Examples of
elastic demand are Color T.V. sets, Prestige goods, etc; 5) Perfectly elasticity of demand is not practical, while
relative elasticity is seen in case of moderately priced goods; 6) The coefficient of elasticity of demand is greater
than 1, that it ed > 1.
Inelastic Demand:
1) When a big change in price brings about less than proportionate change in demand, it is known as inelastic
demand; 2) The demand curve is steeper; 3) Necessary items can be termed as inelastic demand; 4) Examples
of Inelastic demand are salt, rice, food grains, etc; 5) Perfectly inelasticity of demand is seen in the demand of
necessary goods, while relative inelasticity is seen in case of very expensive goods; 6) The coefficient of
elasticity of demand is less than 1, that is ed < 1.
Q17. Outline the differences between a perfectly competitive market and a monopoly market.
(Nov’07, Nov’10)/ (Principal features of them, Dec'13).
Perfect Competitive Market: A market with perfect competition is where there are a very large number of
buyers and sellers who are buying and selling an identical product. Since the product is identical in all its
features, the price charged by all sellers is a uniform price. Economic theory describes market players in a
perfect competition market as not being large enough by themselves to be able to become a market leader or to
set prices. Since the products sold and prices set are identical, there are no barriers to entry or exit within such
a market place.
Monopoly market (Dec'13): A Monopoly market is one where there are a large number of buyers but a very few
number of sellers. The players in these types of markets sell goods which are different to each other and,
therefore, are able to charge different prices depending on the value of the product that is offered to the
market. In a monopolistic competition situation, since there are only a few numbers of sellers, one larger seller
controls the market, and therefore, has control over prices, quality and product features.
Difference between Perfect Competition and Monopoly Competition: Perfect and Monopoly competition
marketplaces have similar objectives of trading which is maximizing profitability and avoid making losses.
However, the market dynamics between these two forms of markets are quite distinct. Monopoly competition
describes an imperfect market structure quite opposite to perfect competition. Perfect competition explains an
economic theory of a marketplace which does not happen to exist in reality.
Perfect Competition vs Monopoly Competition
Perfect and Monopoly competitions are both forms of market situations that describe the levels of competition
within a market structure.
A market with perfect competition is where there are a very large number of buyers and sellers who are buying
and selling an identical product.
A Monopoly market is one where there are a large number of buyers but a very few number of sellers. The
players in these types of markets sell goods which are different to each other, and therefore, are able to charge
different prices. Monopoly competition describes an imperfect market structure quite opposite to perfect
competition. Perfect competition explains an economic theory of a marketplace which does not happen to exist
in reality.
Q20. Is there a supply curve for a monopoly firm, explain (Nov’07, Dec'13)?
The monopoly firm has no supply curve that is independent of the demand curve for its product. The
explanation about no supply curve for monopoly curve is following:
The monopolist is the single seller so we don’t need to aggregate all the individual firms’ marginal cost curves
to obtain the industry supply curve. The monopolist’s output decision depends not only on its marginal cost,
but also on the demand curve. Thus, shifts in demand lead to changes in price, in output or both. There is no
one-to-one correspondence between the price and the seller’s quantity, unlike in perfect competition. At last
we can say, because the monopolist's supply decision cannot be set out independently of demand. Since supply
curve tells us the quantity that a firm chooses to supply at any given price and on the other hand, a monopoly

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firm is a price maker; the firm sets the price and at the same time it chooses the quantity to supply. The market
demand curve tells us how much the monopolist will supply.
Q21. What is Inflation and why does it occur (Dec'13)?
Inflation: In terms of economics, inflation can simply be defined as an elevation in the general price levels of
services and goods in the economy over a particular period of time. Whenever the price level increases it
causes depletion in the buying capacity of the currency, so inflation can also be defined as erosion in the
purchasing power of money i.e. a loss of the real value of money in an internal medium of the exchange. One
most common measure of price inflation is inflation rate. Inflation rate can be calculated as the yearly
percentage change in the general price index (Consumer Price Index to be used most commonly) over time.
Reasons of inflation: Situation of inflation can occur at any time, and its occurrence depends upon a number of
reasons. No specific cause is responsible for the occurrence of inflation. But some proposed reasons of the
inflation are mentioned below-
1. If the production cost of various services and goods increases then naturally the prices of the final products
would also increase. This leads into the situation of inflation.
2. Inflation occurs when industries and business houses increase the total prices of their services and goods in
order to amplify their profit margins. This category of inflation is called as “administered price inflation” or
“pricing power inflation”. This type of inflation is tedious to tackle because various industries and business
houses have the complete authority/power of pricing their services and goods.
3. A situation of inflation occurs when a specific section of a mass industry increases the prices of its services
and goods, because this step of a particular section of a mass industry will produce considerable effects on
various other sections of industry also. For example- increase in the price of crude oil will spontaneously cause
increase in the train fares and airfares.
4. A special category of inflation known as “Fiscal inflation” occurs, because of excessive spending of the
government. Fiscal inflation was first observed in United Sates of America at the time of President Mr. Lydon
Baines Johnson.
5. One another type of inflation is known as hyperinflation. Hyperinflation occurs during or after a heavy war.
This inflation is also popular with the name of galloping inflation.
6. Another severe type of inflation is known as stagflation. It occurs in an economy which faces economic
stagnation and high unemployment rate.
So we can say that inflation has some serious consequences on the economy as a whole. So the government
should make some strict policies to curb inflation and thus help the country to have a stable economy.
Q22. Discuss the instruments of monetary policy (Dec'13). How monetary policy can be used
to control inflation?
The statutory liquidity requirement (SLR), as a monetary policy instrument, has experienced infrequent
changes in Bangladesh. Past evidence shows that reduction in SLR produced positive impact on bank credit and
investment especially prior to the 1990s. In recent times, changes in SLR and cash reserve requirement (CRR)
helped to reduce inflation to some extent in some years. Since the 1990s, Bangladesh Bank has used open
market operations (OMOs), more frequently rather than changes in the Bank Rate and SLR as instruments of
monetary policy in line with its market oriented approach. In this context, it should be noted that lately
Bangladesh depends mostly on the money market as the channel for monetary transmission rather than
changes in reserve requirements. The CRR and SLR for scheduled banks are used only in situations of drastic
imbalance resulting from major shocks. The effectiveness of SLR in bringing about desired outcomes, however,
depends on appropriate adjustments of other indirect monetary policy instruments such as repo and reverse
repo rates.
Repo Rate: The repo rate also known as Repurchase Agreement is the rate at which the banks borrow from the
Central Bank. It becomes typical for the banks to borrow from the central bank if there is an increase in the
repo rate. Generally used to control the amount of money in the market, repo rate is usally a short-term
measure which is used for short-term loans.
Reverse Repo: The Federal Open Market Committee adds reserves to the banking system and withdraws them
after a specified period of time. So, reverse repo drains reserves initially and adds them back later. Hence, it can
be used as a tool for stabilizing interest rates with the Federal Reserve using it in the past to adjust the Federal
funds rate to match the target rate.
Monetary policy can be used to control inflation: The primary job of the Central Bank is to control inflation
while avoiding a recession. It does this with monetary policy. To control inflation, the Central Bank must use
contractionary monetary policy to slow economic growth. If the GDP growth rate is more than the ideal of 2-
3%, excess demand can generate inflation by driving up prices for too few goods.

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The Central Bank can slow this growth by tightening the money supply, which is the total amount of credit
allowed into the market. The Central Bank action reduces the liquidity in the financial system, making it
becomes more expensive to get loans. This slows economic growth and demand, which puts downward
pressure on prices.

Q23. Short notes:

A) What is Cross-elasticity of demand (May’11, May’12, and Dec’12, Dec'13)?
Cross-elasticity of demand: In economics, the cross elasticity of demand or cross-price elasticity of demand
measures the responsiveness of the demand for a good to a change in the price of another good. It is measured
as the percentage change in demand for the first good that occurs in response to a percentage change in price of
the second good. For example, if, in response to a 10% increase in the price of fuel, the demand of new cars that
are fuel inefficient decreased by 20%, the cross elasticity of demand would be: -20%/10%=-2
A negative cross elasticity denotes two products that are complements, while a positive cross elasticity denotes
two substitute products. These two key relationships may go against one's intuition, but the reason behind
them is fairly simple: assume products A and B are complements, meaning that an increase in the demand for A
is caused by an increase in the quantity demanded for B. Therefore, if the price of product B decreases, then the
demand curve for product A shifts to the right, increasing A's demand, resulting in a negative value for the cross
elasticity of demand. The exact opposite reasoning holds for substitutes.
The formula used to calculate the coefficient cross elasticity of demand is EA,B=% Change in quantity
demanded of product A/% Change in price of product B

B) What is meant by opportunity cost (May’11, Nov’11, and Dec’12)?

Opportunity cost: Opportunity cost is the cost of any activity measured in terms of the value of the next best
alternative that is not chosen. It is the sacrifice related to the second best choice available to someone, or group,
who has picked among several mutually exclusive choices.
The opportunity cost is a key concept in economics, and has been described as expressing "the basic
relationship between scarcity and choice".
Example: The difference in return between a chosen investment and one that is necessarily passed up. Say you
invest in a stock and it returns a paltry 2% over the year. In placing your money in the stock, you gave up the
opportunity of another investment - say, a risk-free government bond yielding 6%. In this situation, your
opportunity costs are 4% (6% - 2%).

C) What is Basel II Accord (Nov’10, Dec’12)?

Basel II Accord: The Basel Accords determine how much equity capital - known as regulatory capital - a bank
must hold to buffer unexpected losses. Equity is assets minus liabilities. For a traditional bank, assets are loans
and liabilities are customer deposits. But even a traditional bank is highly leveraged (i.e., the debt-to-equity or
debt-to-capital ratio is much higher than for a corporation). If the assets decline in value, the equity can quickly
evaporate. So, in simple terms, the Basel Accord requires banks to have an equity cushion in the event that
assets decline, providing depositors with protection.
The regulatory justification for this is about the system: If big banks fail, it spells systematic trouble. If not for
this, we would let banks set their own levels of equity -known as economic capital - and let the market do the
disciplining. So, Basel attempts to protect the system in much the same way that the Federal Deposit Insurance
Corporation (FDIC) protects individual investors.
H) What is Public good (Nov’11, June’13)?
Public good: In economics, a public good is a good that is both non-excludable and non-rivalrous in that
individuals cannot be effectively excluded from use and where use by one individual does not reduce
availability to others.
Examples of public goods include fresh air, knowledge, lighthouses, national defense, flood control systems and
street lighting. Public goods that are available everywhere are sometimes referred to as global public goods.

I) Definition of 'Gresham's Law' (Dec’12, Dec'13).

Gresham's Law: In currency valuation, Gresham's Law states that if a new coin ("bad money") is assigned the
same face value as an older coin containing a higher amount of precious metal ("good money"), then the new
coin will be used in circulation while the old coin will be hoarded and will disappear from circulation.

30
Coins were first made with gold, silver and other precious metals, which gave them their value. Over time, the
amount of precious metals used to make the coin decreased because the metals were worth more on their own
than when minted into the coin itself. If the value of the metal in the old coins was higher than the coin's face
value, people would melt the coins down and sell the metal. Similarly, if a low quality good is passed off as a
high quality good, then the market will drive down prices because consumers won't be able to determine the
good's real value.

J) Definition of 'Reserve Ratio'/Cash Reserve Ratio/Cash Reserve Requirement (May’12,

June’13).
Reserve Ratio'/Cash Reserve Ratio/Cash Reserve Requirement: A Cash Reserve Ratio, also known as the
Reserve Requirement is a regulation set by Central bank (Bangladesh Bank) which dictates the minimum
amount (reserves) that a commercial bank (in some cases, any bank) must be held to customer notes and
deposits. In simpler terms this is the amount the bank must surrender with/to the Central (governing) Bank.
It is a percentage of bank reserves to deposits and notes. Cash reserve ratio is also known as liquidity ratio or
cash asset ratio and is utilized as a tool (sometimes) in monetary policy and as a tool to influence the country’s
interest rates, borrowing and economy.
For example, if the reserve ratio in the Bangladesh is determined by the central bank to be 11%, this means all
banks must have 11% of their depositors' money on reserve in the bank. So, if a bank has deposits of 1 billion, it
is required to have 110 million on reserve.
K) Definition of 'Floating Exchange Rate' (Nov’10, May’12, Dec'13).
Floating Exchange Rate: A country's exchange rate regime where its currency is set by the foreign-exchange
market through supply and demand for that particular currency relative to other currencies. Thus, floating
exchange rates change freely and are determined by trading in the forex market. This is in contrast to a "fixed
exchange rate" regime.
L) What is Cost-Push Inflation (June’13)?
Cost-Push Inflation: When companies costs go up, they need to increase prices to maintain their profit margins.
Increased costs can include things such as wages, taxes, or increased costs of imports.

Q24. “Economics is the study of mankind in the ordinary business of life.”-Discuss the
statement (Dec’12).
Or. “Economics is a science of wealth.”-Discuss (May’12, Dec'13).
Alfred Marshall provides a still widely-cited definition in his textbook Principles of Economics (1890) that
extends analysis beyond wealth and from the societal to the macroeconomic level:
"Economics is a study of man's action in the ordinary business of life it inquires how he gets his income and
how he uses it. It examines that part of individual and social actions which is mostly closely connected with the
attainment and with the use of material requisites of well being. Thus economics is on one side a study of
wealth and on the other and important side a part of the study of man ".
From the definition of economics by Alfred Marshall, we see that he lays emphasizes on the below points.
1. Study of an ordinary man: According to Alfred Marshall, economics is that study of an ordinary man who
lives in society. It is not concerned with the lives of only rich persons or who is cut away from the society. Its
subject matter is a particular aspect of human behaviour i.e. earning and spending of incomes for the normal
material needs of human beings.
2. Economics is not a useless study of wealth: Economics does not regard wealth as the be-all and end-all of
economics activities wealth is not of primary importance. It is earned only for promoting human welfare
economics is studied to analyze the causes of material prosperity of individuals and nations.
3. Economics is a social science: It does not study the behaviour of isolated individuals but the actions of
persons living in society. When people live together they interact and cooperate to work at firms, factories,
shop and offices to produce and exchange goods or services. The problems about these activities are studied in
economics.
4. Study of material welfare: According to Alfred Marshall, economics studies only material requisites of well
being or causes of material welfare. It is cleared from this definition that it is materialistic aspect and ignores
non-material aspects. Alfred Marshall stressed that the man’s behaviour and activities to produce and consume
maximum number of goods and services are the main object of study wealth is not an end or final aim, but only
a means to achieve a higher objective of welfare.

31
Q. “Economics is the study of mankind in the ordinary business of life.” Discuss the statement
(Dec’12).
Or. “Economics is a science of wealth.” Discuss (May’12, Dec'13).
Alfred Marshall provides a still widely-cited definition in his textbook Principles of Economics (1890) that
extends analysis beyond wealth and from the societal to the macroeconomic level:
"Economics is a study of man's action in the ordinary business of life it inquires how he gets his income and
how he uses it. It examines that part of individual and social actions which is mostly closely connected with the
attainment and with the use of material requisites of well being. Thus economics is on one side a study of
wealth and on the other and important side a part of the study of man ".
From the definition of economics by Alfred Marshall, we see that he lays emphasizes on the below points.
1. Study of an ordinary man: According to Alfred Marshall, economics is that study of an ordinary man who
lives in society. It is not concerned with the lives of only rich persons or who is cut away from the society. Its
subject matter is a particular aspect of human behaviour i.e. earning and spending of incomes for the normal
material needs of human beings.
2. Economics is not a useless study of wealth: Economics does not regard wealth as the be-all and end-all of
economics activities wealth is not of primary importance. It is earned only for promoting human welfare
economics is studied to analyze the causes of material prosperity of individuals and nations.
3. Economics is a social science: It does not study the behaviour of isolated individuals but the actions of
persons living in society. When people live together they interact and cooperate to work at firms, factories,
shop and offices to produce and exchange goods or services. The problems about these activities are studied in
economics.
4. Study of material welfare: According to Alfred Marshall, economics studies only material requisites of well
being or causes of material welfare. It is cleared from this definition that it is materialistic aspect and ignores
non-material aspects. Alfred Marshall stressed that the man’s behaviour and activities to produce and consume
maximum number of goods and services are the main object of study wealth is not an end or final aim, but only
a means to achieve a higher objective of welfare.

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 Final Suggestion of Economics for JAIBB June-2014
Q1. Compare the definitions of Economics offered by Adam Smith and Lionel Robbins.
Q2. Discuss the subject-matter of Economics.
Q3. State and explain the definition of Economics provided by Alfred Marshall.
Q4. Discuss the importance of the study of Economics. (Nov’03,’10, May’09)
Q5. Briefly state the differences between micro-economics and macro-economics. (Nov’03,’12).
Q6. What are the main goals of macro-economic policy?
Q7. Explain the terms “Want” and “Scarcity” as understood in Economics. (Nov’08,’11)
Q8. Discuss the importance of multiplicity of wants and scarcity of resources in the study of Economics.
(Nov’08,’11)
Q9. How does a private sector firm maximize its profits? (Nov’08, Nov’09, May’07 and May’08).
Q10. What are the practical difficulties with profit maximization (Nov’09)?
Q11. What are the main objectives of a firm in the private sector? (Nov’05,’06)
Q12. What do you mean by price Elasticity of demand? Distinguish between elastic and inelastic demand.
Q13. What is an indifference curve and what are its characteristics/properties? Use diagrams in your answer
(Nov’03,’04,’07,’09,’10).
Q14. Explain with the help of an indifference curve analysis how a consumer reaches the highest level of
satisfaction (May’06, Nov’07 and Nov’10)?
Q15. What is meant by production function? Describe a production indifference curve and its properties. Use
diagram in your answer (Nov’11, 10).
Q16. Define production function. Show with the help of a diagram the relationship among ‘total product (TP)’,
‘marginal product (MP)’, and ‘average product (AP)’. (Nov’04,’08,’12)
Q17. Outline the differences between a perfectly competitive market and a monopoly market. (Nov’07,
Nov’10)/ (Principal features of them.)
Q18. How equilibrium price and output are determined by a firm under perfect competition?
Q19. Analyse the short-run equilibrium of a firm under monopoly (Nov’04,’05, 07)?/How output and price are
determined by a monopoly firm?
Q20. Is there a supply curve for a monopoly firm? Explain. (Nov’07,)
Q21. What is inflation and why does it occur? What can the govt. do to keep inflation under control in a country
like Bangladesh?
Q22. Discuss the instruments of monetary policy. How monetary policy can be used to control inflation?
23. (Short Notes)
a) Cross Elasticity of Demand
b) Opportunity Cost
c) Basel-II Accord
d) Quasi-rent
e) Giffen goods
f) Inferior goods
g) Terms of Trade

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