Chanderprabhu Jain College of Higher Studies School of Law

Chanderprabhu Jain College of Higher Studies
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School of Law
An ISO 9001:2008 Certified Quality Institute
(Recognized by Govt. of NCT of Delhi, Affiliated to GGS Indraprastha University, Delhi)

Class : BA LLB – Fourth Semester
Paper Code : 210
Subject : Economics - II
UNIT I: OVERVIEW OF MACROECONOMICS
1.1. Basic Concepts: Stock and flow, National Product and Domestic
Product, Circular Flow of Income, Real and Nominal GNP, Marginal
Efficiency of Investment, Balance of Trade and Balance of Payments,
Exchange Rate
A. Stock and Flow: Macro economics makes use of the concepts of sltocks
and flows. Both of these are variables, as their quantity may grow smaller or
bigger over time. A stock is measured at one specific time, and represents a
quantity existing at that point in time, which may have accumulated in the
past. A flow variable is measured over an interval of time. Therefore, a flow
would be measured per unit of time (say a year). Thus, a stock refers to the
value of an asset at a balance date (or point in time), while a flow refers to
the total value of transactions (sales or purchases, incomes or expenditures)

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during an accounting period. Capital is a stock concept which yields a
periodic income which is a flow concept.
B. National Product and Domestic Product
a. Gross National Product - Gross national product (GNP) is the monetary

value of all the goods and services produced in one year by labor and
property supplied by the citizens of a country. Unlike gross domestic
product (GDP), which defines production based on the geographical
location of production, GNP indicates allocated production based on
location of ownership. GNP is an economic statistic that is equal to GDP
plus any income earned by residents from overseas investments minus
income earned within the domestic economy by overseas residents, i.e.,
the difference between GNP and GDP is due to “net factor income from
abroad.”
GNP can be expressed as under:
GNP = Money Value of Final Goods and Services (both consumer

and capital) + Income Earned by National Residents in Foreign
Countries – Income earned locally but accruing to Foreigners.
GNP can be computed both at factor cost and at market price.
GNPMP = GNPFC + Indirect taxes – Subsidies
GNPFC = GNPMP - Indirect taxes + Subsidies

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b. Net National Product – Net national product (NNP) is the monetary
value of finished goods and services produced by a country's citizens,
overseas and domestically, in a given period (i.e., the gross national
product (GNP) minus the amount of GNP required to purchase new
goods to maintain existing stock (i.e., depreciation). In national
accounting, net national product (NNP) is given by the following
formula:
NNP = GNP - Depreciation

GNP = NNP + Depreciation
GNP can be computed both at factor cost and at market price.
NNPMP = NNPFC + Indirect taxes – Subsidies
NNPFC = NNPMP - Indirect taxes + Subsidies
c. Gross Domestic Product – Gross domestic product (GDP) is the

monetary value of all the finished goods and services produced within a
country's borders in a specific time period. GDP includes all private and
public consumption, government outlays, investments, private
inventories, paid-in construction costs and the foreign balance of trade
(exports are added, imports are subtracted). Put simply, GDP is a broad
measurement of a nation’s overall economic activity. GDP can be
expressed as under:

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GDP = Money Value of final Goods and Services produced by
national residents + Income Earned locally by foreigners – Income
received by Nationals Abroad
GDP can be computed both at factor cost and at market price.
GDPMP = GDPFC + Indirect taxes – Subsidies
GDPFC = GDPMP - Indirect taxes + Subsidies
d. Net Domestic Product – The net domestic product (NDP) equals the
gross domestic product (GDP) minus depreciation on a country's capital
goods. Net domestic product accounts for capital that has been consumed
over the year in the form of housing, vehicle, or machinery deterioration.
Net domestic product (NNP) is given by the following formula:
NDP = GDP - Depreciation
NDP can be computed both at factor cost and at market price.
NDPMP = NDPFC + Indirect taxes – Subsidies
NDPFC = NDPMP - Indirect taxes + Subsidies
C. Circular Flow Of Income
The circular flow of income or circular flow is a model of the economy in

which the major exchanges are represented as flows of money, goods and
services, etc. between economic agents. The flows of money and goods
exchanged in a closed circuit correspond in value, but run in the opposite

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direction. The circular flow analysis is the basis of national accounts and
hence of macroeconomics. The circular flow diagram illustrates the
interdependence of the “flows,” or activities, that occur in the economy,
such as the production of goods and services (or the “output” of the
economy) and the income generated from that production. The circular flow
also illustrates the equality between the income earned from production and
the value of goods and services produced.
a. Circular flow of income in two-sector economy – The circular flow

model in the two-sector economy is a hypothetical concept which states
that there are only two sectors in the economy, household sector and
business sector (business firms) and the state of equilibrium is defined as
a situation in which there is no tendency for the levels of income (Y),
expenditure (E) and output (O) to change, that is:
In this model, money flows from business firms to households as factor

payments and then it flows from households to firms. Thus there is, in
fact, a circular flow of money or income. This circular flow of money
will continue indefinitely week by week and year by year. This is how
the economy functions.

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Circular money flow with saving and investment is illustrated in following

figure where in the middle part a box representing financial market is drawn.
Money flow of savings is shown from the households towards the financial
market. Then flow of investment expenditure is shown as borrowing by
business firms from the financial market.

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b. Circular flow of income in three-sector economy – In the basic, it

includes household sector, producing sector and government sector. It
will study a circular flow income in these sectors excluding rest of the
world i.e. closed economy income. Here flows from household sector and
producing sector to government sector are in the form of taxes. The
income received from the government sector flows to producing and
household sector in the form of payments for government purchases of
goods and services as well as payment of subsidies and transfer
payments. Every payment has a receipt in response of it by which
aggregate expenditure of an economy becomes identical to aggregate
income and makes this circular flow unending.

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c. Circular flow of income in four-sector economy – Four-sector

economy explains the money flows that are generated in an open
economy, that is, economy which have trade relations with foreign
countries. Thus, the inclusion of the foreign sector will reveal to us the
interaction of the domestic economy with foreign countries. Foreigners
interact with the domestic firms and households through exports and
imports of goods and services as well as through borrowing and lending
operations through financial market. Figure 6.4 illustrates additional
money flows that occur in the open economy when exports and imports
also exist in the economy. In our analysis, we assume it is only the
business firms of the domestic economy that interact with foreign
countries and therefore export and import goods and services.

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D. Real and Nominal GNP – Nominal national income is measured at current

market prices. As market prices change, national income changes. If prices
remain constant year after year, then changes in nominal GNP will reflect
accurately the underlying changes in production. But prices rise or inflation
occurs. Now national income may go up, even if it does not increase at all
over the previous year. This is due to the rise in prices. We have to eliminate
the price change so that the figure does reflect the true measure of economic
growth. National income thus obtained is called real national income or real
GNP or GNP at constant prices. The GNP estimated at current (market)
prices is called nominal GNP and GNP estimated at constant prices is called
real GNP.

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E. Marginal Efficiency of Capital – The marginal efficiency of capital (MEC)
is that rate of discount which would equate the price of a fixed capital asset
with its present discounted value of expected income. The MEC is the net
rate of return that is expected from the purchase of additional capital. It is
calculated as the profit that a firm is expected to earn considering the cost of
inputs and the depreciation of capital. It is influenced by expectations about
future input costs and demand. The MEC and capital outlays are the
elements that a firm takes into account when deciding about an investment
project.
The MEC needs to be higher than the rate of interest, r, for investment to
take place. This is because the present value PV of future returns to capital
needs to be higher than the cost of capital, Ck. These variables can be
expressed as follows:
Where Sp is the supply price or the cost of capital asset, R1,R2… Rn are the
prospective yields or the series of expected annual returns from the capital
asset in the years 1,2…….. n, and i is the rate of discount. This makes the
capital asset exactly equal to the present value of the expected yield from it.
Hence, for investment to take place, it is necessary that PV > Ck; that is,
MEC > r. As a consequence, an inverse relationship between the rate of

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interest and investment is found (i.e.: a higher rate of interest generates less
investment).
F. Marginal Efficiency of Investment (MEI) - The marginal efficiency of

investment is the rate of return expected from a given investment on a
capital asset after covering all its costs, except the rate of interest. Like the
MEC, it is the rate which equates the supply price of a capital asset to its
prospective yield. The investment on an asset will be made depending upon
the interest rate involved in getting funds from the market. If the rate of
interest is high, investment is at a low level. A low rate of interest leads to an
increase in investment. Thus the MEI relates the investment to the rate of
interest.
MEC versus MEI
(i) The MEC is based on a given supply price for capital, and the MEI on
induced changes in this price.
(ii) The MEC shows the rate of return on all successive units of capital
without regard to the existing stock of capital. On the other hand, the MEI
shows the rate of return on only units of capital over and above the existing
stock of capital.

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(iii) In the MEC, the capital stock is taken on the horizontal axis of a
diagram, while in the MEI the amount of investment is taken horizontally on
the X-axis.
(iv) The MEC is a ‘stock’ concept, and the MEI is a ‘flow’ concept.
(v) The MEC determines the optimum capital stock in an economy at each
level of interest rate. The MEI determines the net investment of the economy
at each interest rate, given the capital stock.
G. Balance of Payments – The balance of payments, also known as balance

of international payments and abbreviated as B.O.P. or BoP, of a country
is the record of all economic transactions between the residents of the
country and the rest of world in a particular period (over a quarter of a year
or more commonly over a year). The balance of payments is a summary of
all monetary transactions between a country and rest of the world. These
transactions are made by individuals, firms and government bodies. Thus the
balance of payments includes all external visible and non-visible
transactions of a country. The balance of payments provides detailed
information concerning the demand and supply of a country's currency. A
country's balance of payments data may signal its potential as a business
partner for the rest of the world. If a country is grappling with a major
balance of payments difficulty, it may not be able to expand imports from
the outside world. Instead, the country may be tempted to impose measures

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to restrict imports and discourage capital outflows in order to improve the
balance of payments situation. On the other hand, a country with a
significant balance-of payment surplus would be more likely to expand
imports, offering marketing opportunities for foreign enterprises, and less
likely to impose foreign exchange restrictions.
Balance of Payments on Current Account - Current account refers to an

account which records all the transactions relating to export and import of
goods and services and unilateral transfers during a given period of time.
Current account contains the receipts and payments relating to all the
transactions of visible items, invisible items and unilateral transfers. The
main components of Current Account are:
1. Export and Import of Goods (Merchandise Transactions or Visible
Trade).
2. Export and Import of Services (Invisible Trade).
3. Unilateral or Unrequited Transfers to and from abroad (One sided
Transactions).
4. Income receipts and payments to and from abroad.
Current Account records all the actual transactions of goods and services
which affect the income, output and employment of a country. So, it shows
the net income generated in the foreign sector.

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In the current account, receipts from export of goods, services and unilateral
receipts are entered as credit or positive items and payments for import of
goods, services and unilateral payments are entered as debit or negative
items. The net value of credit and debit balances is the balance on current
account.
1. Surplus in current account arises when credit items are more than debit
items. It indicates net inflow of foreign exchange.
2. Deficit in current account arises when debit items are more than credit
items. It indicates net outflow of foreign exchange.
Balance of Payments on Capital Account - Capital account of BOP

records all those transactions, between the residents of a country and the rest
of the world, which cause a change in the assets or liabilities of the residents
of the country or its government. It is related to claims and liabilities of
financial nature. Capital Account is used to (i) Finance deficit in current
account; or (ii) Absorb surplus of current account. Capital account is
concerned with financial transfers. So, it does not have direct effect on
income, output and employment of the country. The main components of
capital account are:
1. Borrowings and lendings to and from abroad.

2. Investments to and from abroad.

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3. Change in Foreign Exchange Reserves.
The transactions, which lead to inflow of foreign exchange (like receipt of
loan from abroad, sale of assets or shares in foreign countries, etc.), are
recorded on the credit or positive side of capital account. Similarly,
transactions, which lead to outflow of foreign exchange (like repayment of
loans, purchase of assets or shares in foreign countries, etc.), are recorded on
the debit or negative side. The net value of credit and debit balances is the
balance on capital account.
1. Surplus in capital account arises when credit items are more than debit
items. It indicates net inflow of capital.
2. Deficit in capital account arises when debit items are more than credit
items. It indicates net outflow of capital.
Disequilibrium in Balance of Payment
Meaning – The BOP deficit or surplus indicate imbalance in the BOP. This
imbalance is interpreted as BOP Disequilibrium. A country's balance of
payments is said to be in disequilibrium when its autonomous receipts
(credits) are not equal to its autonomous payments(debits).
Causes of Disequilibrium:
Economic factors – The important economic factors are 1.Structural changes
in the economy 2.Changes in exchange rates (overvaluation /

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undervaluation) 3.Changes in the level of foreign exchange reserves
4.Cyclical fluctuations 5.Inflation / deflation Developmental expenditure
undertaken by developing countries, etc.
Social factors – The social factors may include changes in tastes &
preferences due to demonstration affect, population growth rate, rate of
urbanization, etc.
Political factors – The political factors may include – political stability /
instability in a country, war, change in diplomatic policy, etc.
Measures to correct disequilibrium in BOP – (1) Export Promotion, (2)
Import restrictions and substitution, (3) Exchange control, (4) Devaluation of
Domestic Currency, (4) Depreciation.
H. Foreign Exchange Rate- An exchange rate is the price of a nation’s

currency in terms of another currency. Thus, an exchange rate has two
components, the domestic currency and a foreign currency, and can be
quoted either directly or indirectly. In a direct quotation, the price of a unit
of foreign currency is expressed in terms of the domestic currency. In an
indirect quotation, the price of a unit of domestic currency is expressed in
terms of the foreign currency. Exchange rates are quoted in values against
the US dollar. However, exchange rates can also be quoted against another
nations currency, which are known as a cross currency, or cross rate.

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Spot and Forward Rates –Exchange rates can also be categorized as the
spot rate – which is the current rate – or a forward rate, which is the spot rate
adjusted for interest rate differentials.
Floating and Fixed Rates - Exchange rates can be floating or fixed. A

floating exchange rate is where a currency rate is determined by market
forces. This is the norm for most major nations. However, some nations
prefer to fix or peg their domestic currencies to a widely accepted currency
like the US dollar. Reasons for fixing an exchange rate can be to reduce
volatility or better manage trade relations. For example, Saudi Arabia pegs
its currency, the riyal, to the U.S. dollar because its main export is oil, which
is priced in U.S. dollars.
Determination of Exchange Rate - For the determination of the par values

of different currencies, alternative theoretical explanations have been given.
Some of the prominent explanations are:
1. Trade or Elasticities Approach – According to this approach, the
equilibrium rate of exchange is the one that balances the value of
country’s imports and exports. Since the pace of adjustment depends on
the elasticity of exports and imports to exchange rate changes, this
approach is known as elasticity approach.
2. Portfolio Balance Approach – The portfolio balance approach brings

trade explicitly into the analysis for determining the rate of exchange. It

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considers the domestic and foreign financial assets such as bonds to be
imperfect substitutes. The essence of this approach is that the exchange
rate is determined in the process of equilibrating or balancing the demand
for and supply of financial assets out of which money is only one form of
asset.
3. Purchasing Power Parity Theory - The purchasing power parity theory

enunciates the determination of the rate of exchange between two
inconvertible paper currencies. This theory states that the equilibrium rate
of exchange is determined by the equality of the purchasing power of two
inconvertible paper currencies. It implies that the rate of exchange
between two inconvertible paper currencies is determined by the internal
price levels in two countries.
1.2. Development of Macro Economics: Schools of Thought (Classical,

Keynesian and Post-Keynesian)
The field of macroeconomics is organized into many different schools of

thought, with differing views on how the markets and their participants
operate.

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A. Classical School of Thought – Under classical theory, there is choice only
between employment here and there, and not between employment and
unemployment. Classical economists hold that prices, wages and rates are
flexible and markets always clear. As there is no unemployment, growth
depends upon the supply of production factors.
Say’s Law of Market - Say’s law of markets, developed in 1803 by French

classical economist and journalist, Jean-Baptiste Say, was influential
because it deals with how a society creates wealth and the nature of
economic activity. To have the means to buy, you first have to have
something to sell, Say reasoned. So, the source of demand is production, not
money. Supply creates, in other words, its own demand.
One of the burning issues of Say’s law was the question whether a free
economy could experience a depression as a result of overproduction, or
excess demand. Say’s law says that a supply glut cannot be the cause of such
downturns, because macroeconomic activity tends towards stability and the
economy should always be close to full employment. Because the supply of
one type of good constitutes the demand for other, different goods, aggregate
demand is not only equal to, but identical to, aggregate supply. To boost the
economy, the focus should be on increasing production rather than demand.
B. Keynesian School of Thought –Keynesian economics is an economic

theory of total spending in the economy and its effects on output and

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inflation. Keynesian economics was developed by the British economist
John Maynard Keynes during the 1930s in an attempt to understand
the Great Depression. Keynes advocated increased government expenditures
and lower taxes to stimulate demand and pull the global economy out of the
depression. Subsequently, Keynesian economics was used to refer to the
concept that optimal economic performance could be achieved -– and
economic slumps prevented– by influencing aggregate demand through
activist stabilization and economic intervention policies by the government.
Keynesian economics is considered a "demand-side" theory that focuses on
changes in the economy over the short run.
Keynesian economics represented a new way of looking at spending, output

and inflation. Previously, classical economic thinking held that cyclical
swings in employment and economic output would be modest and self-
adjusting. According to this classical theory, if aggregate demand in the
economy fell, the resulting weakness in production and jobs would
precipitate a decline in prices and wages. A lower level of inflation and
wages would induce employers to make capital investments and employ
more people, stimulating employment and restoring economic growth. The
depth and severity of the Great Depression, however, severely tested this
hypothesis.

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The multiplier effect is one of the chief components of Keynesian economic
models. According to Keynes' theory of fiscal stimulus, an injection of
government spending eventually leads to added business activity and even
more spending. This theory proposes that spending boosts aggregate output
and generates more income. If workers are willing to spend their extra
income, the resulting growth in gross domestic product( GDP) could be even
greater than the initial stimulus amount.
The magnitude of the Keynesian multiplier is directly related to the marginal

propensity to consume. Its concept is simple: Spending from one consumer
becomes income for another worker. That worker's income can then be spent
and the cycle continues. Keynes and his followers believed individuals
should save less and spend more, raising their marginal propensity to
consume, to effect full employment and economic growth.
C. Post-Keynesian School of Thought – Post-Keynesian economics is a

school of economic thought with its origins in The General Theory of John
Maynard Keynes, with subsequent development influenced to a large degree
by Michał Kalecki, Joan Robinson, Nicholas Kaldor, Sidney Weintraub,
Paul Davidson, Piero Sraffa and Jan Kregel. Historian Robert Skidelsky
argues that the post-Keynesian school has remained closest to the spirit of
Keynes' original work.

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The theoretical foundation of post-Keynesian economics is the principle of
effective demand, that demand matters in the long as well as the short run,
so that a competitive market economy has no natural or automatic tendency
towards full employment. Contrary to the views of new Keynesian
economists working in the neoclassical tradition, post-Keynesians do not
accept that the theoretical basis of the market's failure to provide full
employment is rigid or sticky prices or wages. Post-Keynesians typically
reject the IS–LM model of John Hicks, which is very influential in neo-
Keynesian economics.[citation needed]
The contribution of post-Keynesian economics has extended beyond the

theory of aggregate employment to theories of income distribution, growth,
trade and development in which money demand plays a key role, whereas in
neoclassical economics these are determined by the forces of technology,
preferences and endowment. In the field of monetary theory, post-Keynesian
economists were among the first to emphasize that money supply responds
to the demand for bank credit, so that a central bank cannot control the
quantity of money, but only manage the interest rate by managing the
quantity of monetary reserves.
1.3. Goals of Macroeconomic Policy - 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.

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1. Positive economic growth. This means we want GDP to go up, which it
does in growth periods, but we don't want it to go down. When there is
negative growth, it is called a recession. It is our goal for positive growth,
the opposite of recession.
2. Full employment. We would like our macroeconomic policy to be such

that the vast majority, about 95%, of people who want a job at any given
point in time can have a job. Simply put, we want to avoid high
unemployment.
3. Price stability. We don't want prices to go way down because that would
put many companies and people out of business. We also don't want
prices to go way up and hurt consumers. That means we want
predictable, steady inflation of 0.5% to 1.5%, give or take, it can go
higher without causing much trouble.
1.4 Business Cycle
A. Meaning - The business cycle describes the rise and fall in production
output of goods and services in an economy. Business cycles are generally
measured using rise and fall in real – inflation-adjusted – gross domestic
product (GDP), which includes output from the household and nonprofit
sector and the government sector, as well as business output. "Output cycle"

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is therefore a better description of what is measured. The business or output
cycle should not be confused with market cycles, measured using broad
stock market indices; or the debt cycle, referring to the rise and fall in
household and government debt.
B. Phases of Business Cycle
Business cycles are identified as having four distinct phases: expansion,

peak, contraction, and trough. An expansion is characterized by increasing
employment, economic growth, and upward pressure on prices. A peak is
the highest point of the business cycle, when the economy is producing at
maximum allowable output, employment is at or above full employment,
and inflationary pressures on prices are evident. Following a peak, the
economy typically enters into a correction which is characterized by a
contraction where growth slows, employment declines (unemployment
increases), and pricing pressures subside. The slowing ceases at the trough
and at this point the economy has hit a bottom from which the next phase of
expansion and contraction will emerge.

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C. Features:
1. Business cycles occur periodically. Though they do not show same

regularity, they have some distinct phases such as expansion, peak,
contraction or depression and trough. Further the duration of cycles varies a
good deal from minimum of two years to a maximum of ten to twelve years.
2. Secondly, business cycles are synchronic. That is, they do not cause changes
in any single industry or sector but are of all-embracing character. For
example, depression or contraction occur simultaneously in all industries or
sectors of the economy.

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3. Thirdly, it has been observed that fluctuations occur not only in level of
production but also simultaneously in other variables such as employment,
investment, consumption, rate of interest and price level.
4. An important feature of business cycles is that consumption of non-durable

goods and services does not vary much during different phases of business
cycles. Past data of business cycles reveal that households maintain a great
stability in consumption of non-durable goods.
5. Another important feature of business cycles is that investment and

consumption of durable consumer goods such as cars, houses, refrigerators
are affected most by the cyclical fluctuations. As stressed by J.M. Keynes,
investment is greatly volatile and unstable as it depends on profit
expectations of private entrepreneurs.
6. Another important feature of business cycles is that profits fluctuate more

than any other type of income. The occurrence of business cycles causes a
lot of uncertainty for businessmen and makes it difficult to forecast the
economic conditions.
7. Lastly, business cycles are international in character. That is, once started in
one country they spread to other countries through trade relations between
them.

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UNIT II: ISSUES IN ECONOMIC DEVELOPMENT
2.1 Concept of Economic Development and Growth, Factors of Economic

Development and Obstacles of Economic Development
A. Economic Growth versus Economic Development
Economic Growth – Economic growth is an increase in the capacity of an

economy to produce goods and services, compared from one period of time
to another. It can be measured in nominal or real terms, the latter of which is
adjusted for inflation. Traditionally, aggregate economic growth is measured
in terms of gross national product (GNP) or gross domestic product (GDP),
although alternative metrics are sometimes used. Let's first examine
economic growth. A country's economic growth is usually indicated by an
increase in that country's gross domestic product, or GDP. Generally
speaking, gross domestic product is an economic model that reflects the
value of a country's output. In other words, a country's GDP is the total
monetary value of the goods and services produced by that country over a
specific period of time.
Economic Development - Economic development is a broader concept than

economic growth. Development reflects social and economic progress and
requires economic growth. Growth is a vital and necessary condition for

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development, but it is not a sufficient condition as it cannot guarantee
development.
Now let's take a look at economic development. A country's economic

development is usually indicated by an increase in citizens' quality of life.
'Quality of life' is often measured using the Human Development Index,
which is an economic model that considers intrinsic personal factors not
considered in economic growth, such as literacy rates, life expectancy and
poverty rates.
Economic Growth versus Economic Development:
1. Economic growth is the positive change in the real output of the country
in a particular span of time economy. Economic Development involves a
rise in the level of production in an economy along with the advancement
of technology, improvement in living standards and so on.
2. Economic growth is one of the features of economic development.
3. Economic growth is an automatic process. Unlike economic

development, which is the outcome of planned and result-oriented
activities.
4. Economic growth enables an increase in the indicators like GDP, per

capita income, etc. On the other hand, economic development enables

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improvement in the life expectancy rate, infant mortality rate, literacy
rate and poverty rates.
5. Economic growth can be measured when there is a positive change in the

national income, whereas economic development can be seen when there
is an increase in real national income.
6. Economic growth is a short-term process which takes into account yearly

growth of the economy. But if we talk about economic development it is
a long term process.
7. Economic Growth applies to developed economies to gauge the quality

of life, but as it is an essential condition for the development, it applies to
developing countries also. In contrast to, economic development applies
to developing countries to measure progress.
8. Economic Growth results in quantitative changes, but economic

development brings both quantitative and qualitative changes.
B. Factors and Obstacles of Economic Development - There are many

barriers and difficulties in the way of economic development of less
developed countries. Development for developing nations is desirable but
not achievable due to a lot of hurdles. These obstacles are grouped into the
following five categories:

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1. Economic Obstacles – These include (i) Deficiency of Capital and
Foreign Exchange, (ii) Vicious Circle of Poverty, (iii) Backward Natural
Resources, (iv) Backward State Technology, (v) Inflation, (vi) Low Per
Capita Income, (vii) Internal and External Debts, (viii) Dependence on
Agriculture, (ix) Dualistic Economy, (10) Deficit Balance of Payment.
2. Social Obstacles – These include (i) Illiteracy, (ii) Low of Living
Standard, (iii) Joint Family and Caste system, (iv) Unproductive
Expenditure, (v) Consumption Oriented Society, (v) Rapidly Rising
Population.
3. Cultural Obstacles – These include (i) Customs and Traditions, (ii)
Wastage of Resources in Litigation, (iii) Low Participation of Women,
(iv) Outflow of the Best Brain, (v) In-efficient Entrepreneur
4. Political Obstacles – These include (i) Political Instability, (ii) Misuse of
Authorities, (iii) Insincere Leaders, (iv) Changes in Fiscal Policy
5. Administrative Obstacles – These include (i) Corruption, (ii) Lengthy
Legal Process, (iii) Lengthy Legal Process, (iv) Misuse of Authorities,
(v) Law and Order
2.2. Infrastructure and Development
A. Infrastructure Meaning –Infrastructure is the fundamental facilities and

systems serving a country, city, or other area, including the services and
facilities necessary for its economy to function. Infrastructure is composed

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of public and private physical improvements such as roads, bridges, tunnels,
water supply, sewers, electrical grids, telecommunications (including
Internet connectivity and broadband speeds). In general, it has also been
defined as "the physical components of interrelated systems providing
commodities and services essential to enable, sustain, or enhance societal
living conditions." Thus, infrastructure refers to basic physical and
organizational structures and facilities (e.g. buildings, roads, power supplies)
needed for the operation of a society or enterprise.
B. Types of Infrastructure - Broadly speaking infrastructure can be divided in

two categories:
(a) Economic Infrastructure
(b) Social Infrastructure
(а) Economic Infrastructure- Economic infrastructure means those basic

facilities and services which directly benefit the process of production and

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distribution of an economy. Irrigation, power, transport and communication
are the examples of economic infrastructure.
(b) Social Infrastructure - Social infrastructure means those basic activities

and services which, in addition to achieving certain social objectives,
indirectly help various economic activities. For example, education does not
directly affect economic activities like production and distribution but
indirectly helps in the economic development of the country by producing
scientists, technologists and engineers. So education, health service,
sanitation and water supply etc. are the examples of social infrastructure.
C. Relation between Infrastructure and Development- Infrastructure has a

two-way relationship with economic development. One, infrastructure
promotes economic growth and development, and two economic growth and
development brings about changes in infrastructure. The linkage between
infrastructure and economic development derives from the following factors:
i. Output of infrastructure sectors such as power, water, transport, etc. are

used as inputs for production in the directly productive sectors, viz.
agriculture, manufacturing, etc. Therefore, insufficient availability of the
former results in sub-optimal utilisation of assets in the latter.
ii. Infrastructure development such as transport improves productivity

significantly.

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iii. Infrastructure provides the key to modem technology in practically all
sectors.
iv. A close .association between infrastructure and GDP growth is observed

in many studies. These studies have indicated that 1 per cent growth in the
infrastructure stock is associated with 1 per cent growth in per capita GDP.
v. Studies have also revealed that generally around 6.5 per cent of the total
value added is contributed by infrastructure services in low income
countries. This proportion increases to 9 per cent in middle income countries
and 11 per cent in high income countries.
Thus given the above type of linkage, infrastructural development is

important not only for economic growth, (vis-a-vis globalisation and
technological innovation in manufacturing) but also for poverty reduction.
D. Infrastructure in India - Infrastructure sector is a key driver for the Indian

economy. The sector is highly responsible for propelling India’s overall
development and enjoys intense focus from Government for initiating
policies that would ensure time-bound creation of world class infrastructure
in the country. Infrastructure sector includes power, bridges, dams, roads
and urban infrastructure development. In 2016, India jumped 19 places in
World Bank's Logistics Performance Index (LPI) 2016, to rank 35th
amongst 160 countries.

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At the present moment, India’s infrastructure sector can be termed as a fairly
inadequate one – factors like the present economic condition and an ever-
increasing population mean that there is an urgent requirement to modernize
the sector and expand it as well.
In order to help the infrastructure come up at par with global standards it is

essential to attract a lot of investment so that both quality and quantity issues
can be addressed adequately, as per experts.
Infrastructure related investment is required for – highway modernization,

railways development, civil aviation, telecom development, irrigation
system, power development, ports development, tourism infrastructure, SEZ,
urban infrastructure, water infrastructure, rural infrastructure, sanitation
infrastructure, etc.
E. Government Initiatives
The Government of India is expected to invest highly in the infrastructure

sector, mainly highways, renewable energy and urban transport, prior to the
general elections in 2019.
The Government of India is taking every possible initiative to boost the

infrastructure sector. Some of the steps taken in the recent past are being
discussed hereafter.

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 Announcements in Union Budget 2018-19:
o Massive push to the infrastructure sector by allocating Rs 5.97 lakh
crore (US$ 92.22 billion) for the sector.
o Railways received the highest ever budgetary allocation of Rs 1.48
trillion (US$ 22.86 billion).
o Rs 16,000 crore (US$2.47 billion) towards Sahaj Bijli Har Ghar
Yojana (Saubhagya) scheme. The scheme aims to achieve
universal household electrification in the country.
o Rs 4,200 crore (US$ 648.75 billion) to increase capacity of Green
Energy Corridor Project along with other wind and solar power
projects.
o Allocation of Rs 10,000 crore (US$ 1.55 billion) to boost telecom
infrastructure.
 A new committee to lay down standards for metro rail systems was
approved in June 2018.
 Rs 2.05 lakh crore (US$ 31.81 billion) will be invested in the smart cities
mission. All 100 cities have been selected as of June 2018.
 Contracts awarded under the Smart Cities Mission would show results by
June 2018 as the work is already in full swing, according to Mr Hardeep
Singh Puri, Minister of State (Independent Charge) for Housing and
Urban Affairs, Government of India.

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 The Government of India is working to ensure a good living habitat for
the poor in the country and has launched new flagship urban missions
like the Pradhan Mantri Awas Yojana (Urban), Atal Mission for
Rejuvenation and Urban Transformation (AMRUT), and Swachh Bharat
Mission (Urban) under the urban habitat model, according to Mr Hardeep
Singh Puri, Minister of State (Independent Charge) for Housing
2.3. Poverty, Unemployment and Inequalities of income: Concept and

Policy Measures
A. Poverty
Meaning: Poverty is a multifaceted concept, which may include social,

economic, and political elements. Absolute poverty, extreme poverty, or
destitution refers to the complete lack of the means necessary to meet basic
personal needs such as food, clothing and shelter. Poverty is a state or
condition in which a person or community lacks the financial resources and
essentials to enjoy a minimum standard of life and well-being that's
considered acceptable in society.
Poverty Line in India - Below Poverty Line is an economic benchmark

used by the government of India to indicate economic disadvantage and to
identify individuals and households in need of government assistance and
aid. It is determined using various parameters which vary from state to state

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and within states. The present criteria are based on a survey conducted in
2002. Going into a survey due for a decade, India's central government is
undecided on criteria to identify families below poverty line. Criteria are
different for the rural and urban areas. In its Tenth Five-Year Plan, the
degree of deprivation is measured with the help of parameters with scores
given from 0–4, with 13 parameters. Families with 17 marks or less
(formerly 15 marks or less) out of a maximum 52 marks have been classified
as BPL. Poverty line solely depends on the per capital income in India rather
than level of prices.
Causes of Poverty: Main causes of poverty are:
(i) Heavy pressure of population - Population has been rising in India

at a rapid speed. This rise is mainly due to fall in death rate and more
birth rate.
(ii) Unemployment and under employment - Due to continuous rise in
population, there is chronic unemployment and under employment in
India. There is educated unemployment and disguised unemployment.
Poverty is just the reflection of unemployment.
(iii) Capital Deficiency -Capital is needed for setting up industry,
transport and other projects. Shortage of capital creates hurdles in
development.
(iv) Under-developed economy - he Indian economy is under developed
due to low rate of growth. It is the main cause of poverty.

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(v) Increase in Price - The steep rise in prices has affected the poor
badly. They have become more poor.
(vi) Net National Income - The net national income is quite low as
compared to size of population. Low per capita income proves its
poverty. The per capita income in 2003-04 was Rs. 20989 which
proves India is one of the poorest nations.
(vii) Rural Economy -Indian economy is rural economy. Indian
agriculture is backward. It has great pressure of population.
(viii) Lack of Skilled Labour - In India, unskilled labour is in abundant
supply but skilled labour is less due to insufficient industrial education
and training.
(ix) Deficiency of efficient Entrepreneurs - For industrial development,
able and efficient entrepreneurs are needed. In India, there is shortage
of efficient entrepreneurs. Less industrial development is a major
cause of poverty.
(x) Lack of proper Industrialisation -Industrially, India is a backward
state. 3% of total working population is engaged in industry. So
industrial backwardness is major cause of poverty.
(xi) Low rate of growth - The growth rate of the economy has been 3.7%
and growth rate of population has been 1.8%. So compared to
population, per capita growth rate of economy has been very low. It is
the main cause of poverty.

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(xii) Outdated Social institutions -The social structure of our country is
full of outdated traditions and customs like caste system, laws of
inheritance and succession. These hamper the growth of economy.
(xiii) Improper use of Natural Resources -
India has large natural resources like iron, coal, manganese, mica etc.
It has perennial flowing rivers that can generate hydro electricity. Man
power is abundant. But these sources are not put in proper use.
(xiv) Lack of Infrastructure - The means of transport and communication

have not been properly developed. The road transport is inadequate
and railway is quite less. Due to lack of proper development of road
and rail transport, agricultural marketing is defective. Industries do
not get power supply and raw materials in time and finished goods are
not properly marketed.
Measures to Reduce Poverty
Top nine measures to reduce poverty in India are: Accelerating Economic

Growth: Agricultural Growth and Poverty Alleviation: Speedy Development
of Infrastructure: Accelerating Human Resource Development: Growth of
Non-Farm Employment: Access to Assets: Access to Credit: Public
Distribution System (PDS).

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B. Unemployment
Meaning - Unemployment or joblessness is the situation of actively looking

for employment but not being currently employed. The unemployment rate
is a measure of the prevalence of unemployment and it is calculated as a
percentage by dividing the number of unemployed individuals by all
individuals currently in the labor force. During periods of recession, an
economy usually experiences a relatively high unemployment rate.
Types of Unemployment- There are three major types of unemployment

including cyclical, frictional, and structural. Cyclical Unemployment.
Frictional Unemployment. Structural Unemployment. We can also classify
unemployment as rural and urban.
Causes of Unemployment - The following are the main causes of

unemployment: (i) Caste System: (ii) Slow Economic Growth: (iii) Increase
in Population: (iv) Agriculture is a Seasonal Occupation: (v) Joint Family
System: (vi) Fall of Cottage and Small industries: (vii) Slow Growth of
Industrialisation: (ix) Causes of Under Employment:
Programmes to generate employment - Anti Poverty & Employment

Generation Programmes in India. Integrated Rural Development Programme
(IRDP): Jawahar Rozgar Yojana/Jawahar Gram Samriddhi Yojana: Rural
Housing – Indira Awaas Yojana: Food for Work Programme: Sampoorna

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Gramin Rozgar Yojana (SGRY): Mahatma Gandhi National Rural
Employment Guarantee Act.
C. Inequalities of income
Concept - Income inequality is the unequal distribution of household or

individual income across the various participants in an economy. It is often
presented as the percentage of income related to a percentage of the
population. For example, a statistic may indicate that 70% of a country's
income is controlled by 20% of that country's residents.
Measurement –The Gini Coefficient, which is derived from the Lorenz

Curve, can be used as an indicator of economic development in a country.
The Gini Coefficient measures the degree of income equality in a
population. The Gini Coefficient can vary from 0 (perfect equality) to 1
(perfect inequality).
Measures to reduce Inequalities of Income –
1. Land Reforms and Redistribution of Ceiling Surplus Land:
2. Control Over Monopolies and Restrictive Trade Practices.
3. Social Security Measures:
4. Employment Programme and Wage Policies.

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5. Minimum Needs Programme.
6. Upliftment of the Rural Poor:
7. Taxation
2.4 Debate on State versus Market
There has been a constant debate as to what shall be the instrumental

influencing factor for the economic arrangement and economic development
of an organized state. This is very important because economic development
has a very big impact on the development of a nation.
There is a question as to whether the Market as in western countries should

take the lead to do so or should the neutral and just State be the leader as in
developing countries. A State led economic arrangement consists of planned
social and economic development through five year plans,etc whereas the
Market led mechanism on the other hand is associated with increased
economic enterprise/industries and better quality of products and services.
Therefore, in between these counter views in the era of Liberalization,

privatisation and globalisation post 1990’s there has been a sort of
compromise between the two schools of thought and we have as a result the
arrangements of Public Private Partnership, etc. and it has been suggested
the State should be present to provide an indicative framework with
sufficient free play to market forces in enterprises within that framework.

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Which means simply that the State shall regulate and create a framework
with necessary objectives and goals for development of society and the
production of products and services shall be given to the market for proper
competition and efficient, quality products and services that will be
distributed equally by the State as per its policy framework established. So,
both factors will be playing and driving the economic arrangement and
development in a society(mostly in developing countries).
2.5 Inclusive Growth
Meaning: Inclusive growth means economic growth that creates

employment opportunities and helps in reducing poverty. It means having
access to essential services in health and education by the poor. It includes
providing equality of opportunity, empowering people through education
and skill development.
Elements of Inclusive Growth - There are several interrelated elements of
inclusive growth: Poverty Reduction. Employment generation and Increase
in quantity & quality of employment. Agriculture Development. Industrial
Development. Social Sector Development. Reduction in regional disparities.
Protecting the environment. Equal distribution of income.
Twelfth Five Year Plan and Inclusive Growth - Twelfth Five Year Plan
(2012–2017): Faster, More Inclusive and Sustainable Growth. The Twelfth
Five-Year Plan is centralized and integrated national economic program.

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The broad vision and aspirations which the Twelfth Plan seeks to fulfill are
reflected in the subtitle: 'Faster, Sustainable, and More Inclusive Growth'.
Problems before inclusive growth strategies in India – The
undermentioned jobs are the major concerns for developing states like India
to accomplish the inclusive growing. They are:
1. Poverty ( The World Bank estimates that 456 million Indians ( 42 % of

the entire Indian population ) now live under the planetary poorness line
of $ 1.25 per twenty-four hours ( PPP ) )
2. Employment ( Unorganized employed people in India are about 85 % )
3. Agribusiness
4. Problems in Social Development ( 127th rank among 170 states on
Human Development index )
5. Regional Disparities ( Per capita income is highest at Rs.16,679 in
Punjab and lowest per capita income is at Bihar with Rs.3557. Female
infant mortality varies from 12 in Kerala to 88 in Madhya Pradesh.
Female literacy varies from 33.6 % in Bihar to 88 % in Kerala. Richer
states grew faster than the poorer provinces ).

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UNIT III: PUBLIC FINANCE
3.1 Concept of Public Finance and Private
Public Finance
Meaning - Public finance is the study of the role of the government in the
economy. It is the branch of economics which assesses the government
revenue and government expenditure of the public authorities and the
adjustment of one or the other to achieve desirable effects and avoid
undesirable ones.
According to Findlay Shirras

“Public finance is the study of principles underlying the spending and raising
of funds by public authorities”.
Importance of Public Finance:
1. To Increase the Rate of Saving and Investment: Most of the people

spend their income on consumption. Saving is very low so the
investment is also low. The government can encourage the saving and
investment.
2. To Secure Equal Distribution of income and Wealth: Unequal
distribution of income and wealth is the basic problem of the under
developed countries. The rich are getting richer and richer while the

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poor are becoming poorer and poorer. So for the equal distribution of
income and wealth there is need of government.
3. Optimum Allocation of Resources: Fiscal measures like taxation
and public expenditure programmers can greatly affect the allocation
of resources in various occupation and sectors.
4. Capital Formulation and Growth: Fiscal policy will be designed in
a manner to perform two functions as of expanding investment in
public and private enterprises and by diverting resources from socially
less desirable to more desirable investment channels.
5. Promoting Economic Development: The state can play a prominent
role in promoting economic development especially through control
and regulation of economic activities. It is fiscal policy which can
promote economic development.
6. Implementation of Planning: Under democratic planning fiscal
policy plays crucial role as financial plan is as much important as
physical plan and the implementation of the financial will obviously
depend upon the uses of fiscal measures.
7. Infrastructure Building: Public finance helps to build up well-
development physical and institutional infrastructure.
8. To Control Inflation: The imbalance between demand for and supply
of real resources may lead to inflations to under-development
countries inflation ruins the entire economic structure of the national

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and the process of economic development in these countries comes to
stand still. So to check inflation, budgetary policies can be used by the
government.
B. Private Finance
Private Finance can be classified into two categories the personal finance
and business finance. Personal finance deals with the process of optimizing
finances by individuals such as people, families and single consumers. A
great example is an individual financing his/her own car by mortgage.
Personal finance involves financial planning at the lowest individual level. It
includes savings accounts, insurance policies, consumer loans, stock market
investments, retirement plans and credit cards.
Business Finance involves the process of optimizing finances by business

organizations. It involves asset acquisition and proper allocation of funds to
in a way that maximizes the achievement of set goals. Businesses can
require finances on either of the three levels; short, medium or long term.
C. Public Finance versus Private Finance
1. Income and Expenditure Adjustment - The government adjusts the

income according to the expenditure budget. The private sector including
individuals and private businesses adjust their expenditure according to
the income or future estimates. The government first creates an outline
for the expenditure then devices means of acquiring the monetary budget

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needed. Private finance involves cutting your coat according to your
cloth.
2. Borrowing - The government can borrow from itself, it can simply go

back to the people to ask for loans in whichever financial asset e.g.
bonds, when shortages arise. However, an individual can’t borrow from
itself.
3. Currency ownership - The government is in charge of all aspects related

to currency. This involves the creation, distribution and monitoring. No
one in the private sector is allowed to create currency, this is illegal and
most countries classify it as a capital offense.
4. Present vs. future Income - The public sector is more involved with
future planning and making long-term decisions. The government makes
decisions that will bear fruits in the long-term even ten years. These
investments could include building of schools, hospitals and
infrastructure. The private industry makes financial decisions on projects
with a shorter returns waiting time.
5. Objective Difference - The public sector’s main objective is to create

social benefit in the economy. The private industry seeks to maximize on
personal or profit benefits.

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6. Coercion to get Revenue - The government can use force to get revenue
from individuals. This could involve the use of force to get taxes. The
private sector however, doesn’t have this authority.
7. Ability to Make Huge and Deliberate Changes - The public finance

sector has the ability to make huge decisions on income amount without
much consequences. For example, it can effectively and deliberately
increase or decrease the income amount instantly. Businesses and
individuals can’t make these decisions and implement them immediately.
8. Surplus Budget Concept - Excess income or surplus budgets is a great

virtue in the private sector, this is however not the case in public finance.
The government is expected to only raise what is needed for a fiscal year.
Of what use would it be to have surplus budgets? It would be much easier
to offer tax reliefs to the tax-payers so as to off-set the surplus.
3.2 Tax system: Meaning and Classification
A. Meaning
A tax (from the Latin taxo) is a mandatory financial charge or some other
type of levy imposed upon a taxpayer (an individual or other legal entity) by
a governmental organization in order to fund various public expenditures. A
failure to pay, along with evasion of or resistance to taxation, is punishable

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by law. Taxes consist of direct or indirect taxes and may be paid in money or
as its labour equivalent.
Most countries have a tax system in place to pay for public/common/agreed

national needs and government functions: some levy a flat percentage rate of
taxation on personal annual income, some on a scale based on annual
income amounts, and some countries impose almost no taxation at all, or a
very low tax rate for a certain area of taxation. Some countries charge a tax
both on corporate income and dividends; this is often referred to as double
taxation as the individual shareholder(s) receiving this payment from the
company will also be levied some tax on that personal income.
B. Classification of Tax
There are four main types of taxes charged on taxpayers. The types are: 1.
Direct and Indirect Taxes 2. Proportional, Progressive, Regressive and
Degressive Taxes 3. Ad-Valorem and Specific Duties 4. Value Added Tax
(VAT).
1. Direct and Indirect Taxes
Direct Taxes - Direct taxes are imposed by the state upon persons
who are expected to bear the burden of these taxes and who are not
expected to be able to shift the tax burden to other persons. In other
words, in the case of direct taxes, impact and incidence are on the one
and the same person.

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Indirect Taxes - Indirect taxes are taxes which are imposed upon
persons, who are expected to shift the burden of the tax to other
persons. In other words, in the case of indirect taxes, usually the
impact and incidence will be on different persons.
2. Proportional, Progressive, Regressive and Degressive Taxation

Proportional Taxation – “A schedule of proportional tax system is
one at which the rate of taxation remains constant as the tax base
changes”. In other words when the rate of taxation remains the same
for all incomes (or property) large or small, then we have proportional
taxation.
Progressive Taxation - “A schedule of progressive tax system is one
in which, the rate of taxation increases as the tax base increases”. That
is if the rate of taxation increases as the income (or property)
increases, then we have progressive or graduated taxation.
Regressive Taxation – “A schedule of regressive tax rate is one in

which the rate of taxation decreases as tax base increases”. In other
words, if the rate of taxation diminishes as the income or property
increases, we have regressive taxation.
Degressive Taxation - If the rate of taxes increases, faster than
income or property but towards a fixed maximum rate, which it can
never exceed, it is known as degressive taxation. Degression is a

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special case of progression where the acceleration of the tax rate
decrease as the tax base increases. These types of taxes are mildly
progressive, but not very steep.
3. Ad-valorem and specific duty

Ad-valorem Duty - When a tax is levied on the basis of the value of a
commodity or property it is known as Ad-valorem duty. This duty is
expressed as a percentage of the value of a commodity. In this case
irrespective of the weight and size of the commodity, tax is charged
purely according to its value.
Specific Duty - When a tax is imposed on a commodity as per its

weight, it is called specific duty. Specific duties are expressed as
definite sums to be paid for the definite weight of a commodity. For
example, when the excise duty is imposed as rupees ten per quintal or
excise duty on cloth as ten paise per meter, it is a case of specific
duty. In both the cases, weight and length is used as the basis of
taxation.
4. Value Added Tax (VAT)
Value added tax (VAT) belongs to the family of sales tax. It is of

recent origin. This tax has been adopted as an important tool to impart
greater flexibility to the revenue base of an economy. VAT is not a tax

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on the total value of goods being sold. It is a tax on the value added to
the good by the last seller. The seller therefore is liable to pay a tax
not on the gross value, but on net value.
C. Characteristics of a good tax structure
A good tax system should meet five basic conditions: fairness, adequacy,
simplicity, transparency, and administrative ease.
1. Fairness, or equity, means that everybody should pay a fair share of taxes
2. Adequacy means that taxes must provide enough revenue to meet the
basic needs of society.
3. Simplicity means that taxpayers can avoid a maze of taxes, forms and
filing requirements.
4. Transparency means that taxpayers and leaders can easily find

information about the tax system and how tax money is used.
5. Administrative ease means that the tax system is not too complicated or
costly for either taxpayers or tax collectors.

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D. Taxes by Central and State Government
Taxes in India are levied by the Central Government and the State
governments. Some minor taxes are also levied by the local authorities such
as the Municipality.
The authority to levy a tax is derived from the Constitution of India which
allocates the power to levy various taxes between the Central and the State.
An important restriction on this power is Article 265 of the Constitution
which states that "No tax shall be levied or collected except by the authority
of law". Therefore, each tax levied or collected has to be backed by an
accompanying law, passed either by the Parliament or the State Legislature.
3.3. Burden of Deficit and Debts
A. Public Debt
Meaning - In India, public debt refers to a part of the total borrowings by the
Union Government which includes such items as market loans, special
bearer bonds, treasury bills and special loans and securities issued by the
Reserve Bank. It also includes the outstanding external debt. However, it
does not include the following items of borrowings:
(i) small savings,

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(ii) provident funds,
(iii) other accounts, reserve funds and deposits.
The aggregate borrowings by the Union Government comprising the public

debt and these other borrowings are generally known as ‘net liabilities of the
Government’.
Objectives - In India, most government debt is held in long-term interest

bearing securities such as national savings certificates, rural development
bonds, capital development bonds, etc. The State generally borrows from the
people to meet three kinds of expenditure:
(a) to meet budget deficit,
(b) to meet the expenses of war and other extraordinary situations and
(c) to finance development activity.
Burden of public debt
Burden of internal debt - It is said that an internal debt has no direct money
burden since the interest payment on debt and the imposition of taxation to
pay interest to the lenders is simply a transfer of purchasing power from one
to another. This means that in case of internal debt, money is borrowed from
individuals and institutions within the country.

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Burden of external debt - During a given period, the direct money burden
of external debt is the interest payment as well as the principal repayment
(i.e., debt servicing) to external creditors. The direct real burden of such
external borrowing is measured by the sacrifice of goods and services which
these payments involve to the members of the debtor country.
There is also indirect money burden of external debt. Loan repayment by the
debtor country implies more exports of goods and services to the creditor
country. Thus a debtor country experiences a fall in welfare of the
community.
B. Deficit financing
Meaning - Deficit financing in advanced countries is used to mean an

excess of expenditure over revenue, the gap being covered by borrowing
from the public by the sale of bonds and by creating new money. In India,
and in other developing countries, the term deficit financing is interpreted in
a restricted sense. The National Planning Commission of India has defined
deficit financing in the following way. The term ‘deficit financing’ is used
to denote the direct addition to gross national expenditure through budget
deficits, whether the deficits are on revenue or on capital account.
Objectives
i. To finance defense expenditures during war.

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ii. To lift the economy out of depression so that incomes, employment,
investment, etc., all rise.
iii. To activate idle resources as well as divert resources from unproductive

sectors to productive sectors with the objective of increasing national
income and, hence, higher economic growth.
iv. To raise capital formation by mobilizing forced savings made through

deficit financing.
Adverse Effects of Deficit Financing - Deficit financing is a tool of

economic development. However, it is not an unmixed blessing. It has its
dangers. The dangers are inherent in its inflationary potential. We shall now
state the adverse effects of deficit financing:
1. Less developed countries are characterized by market imperfections

where immobility of resources is the common feature and leads to low
elasticity of supplies.
2. When incomes increase as a result of deficit spending, they tend to
increase the demand for food products. If the supply of food does not
increase much due to low-level of agricultural productivity, the prices
of food articles rise and spread to the entire economy.
3. It is argued that inflation affects the habit of voluntary saving a lot. Its
ability to enforce and encourage savings is also very much limited. In

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the face of rising prices, people find it difficult to maintain the same
rate of saving.
4. Inflation by bringing about uncertainty in future expectations affects
investment decisions adversely.
5. Inflation may retard economic development in another way. With the
rise in the price level, the cost of development projects also rises
resulting in larger doses of deficit financing on the part of the
Government.
6. Severe inflation also leads to balance of payments difficulties. Since
the marginal propensity to import is high in underdeveloped countries,
rise in domestic incomes and prices may encourage people to import
more commodities from abroad.
Measures to overcome limitations of deficit financing
1. The amount of deficit financing should be limited to the needs of the
economy.
2. Efforts should be taken to mop up surplus money thus injected for

new part. So that saved money is not allowed to go back again into the
money-stream soon after its withdrawal.
3 Controls on the prices of goods, in particular wage-goods, and their

equitable distribution through formal or informal rationing will go a

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long way in curbing the inflationary impact on low-income group
people and on cost structure of the economy.
3.4 Fiscal Policy: Concept, Objective and Instruments
Concept - Fiscal policy means the use of taxation and public expenditure by
the government for stabilization or growth of the economy. According to
Culbarston, “By fiscal policy we refer to government actions affecting its
receipts and expenditures which ordinarily as measured by the government’s
receipts, its surplus or deficit.” The government may change undesirable
variations in private consumption and investment by compensatory
variations of public expenditures and taxes.
Objectives of Fiscal Policy - General objectives of Fiscal Policy are given

below:
1. To maintain and achieve full employment.
2. To stabilize the price level.
3. To stabilize the growth rate of the economy.
4. To maintain equilibrium in the Balance of Payments.
5. To promote the economic development of underdeveloped countries.
Defects of Deficit Financing - The defects of deficit financing are:

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(i) It leads to increase in inflationary rise of prices of goods and services in
the country.
(ii) Inflationary forces created by deficit financing are reinforced by

increased credit credition by banks.
(iii) Investment caused by inflation may not be of the pattern sought under
the plan. It normally changed.
(iv) If as a result of deficit financing inflation goes too far, it becomes self-
defeating.
Instruments of fiscal policy - Some of the major instruments of fiscal

policy are as follows:
1. Budget - The budget of a nation is a useful instrument to assess the

fluctuations in an economy.
2. Taxation - Taxation is a powerful instrument of fiscal policy in the hands

of public authorities, which greatly effect the changes in disposable
income, consumption and investment.
3. Public Expenditure - The active participation of the government in

economic activity has brought public spending to the front line among

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the fiscal tools. The appropriate variation in public expenditure can have
more direct effect upon the level of economic activity than even taxes.
4. Public Works - Keynes General Theory highlighted public works

programme as the most significant anti-depression device. There are two
forms of expenditure i.e., Public Works and ‘Transfer Payments.
5. Public Debt - Public debt is a sound fiscal weapon to fight against

inflation and deflation. It brings about economic stability and full
employment in an economy.
3.5 Central Budget
A. Definition - According to Article 112 of the Indian Constitution, the Central

(Union) Budget of a year, also referred to as the annual financial statement,
is a statement of the estimated receipts and expenditure of the government
for that particular year.
B. Description: Union Budget keeps the account of the government's finances

for the fiscal year that runs from 1st April to 31st March. Union Budget is
classified into Revenue Budget and Capital Budget.
(i) Revenue budget includes the government's revenue receipts and

expenditure. There are two kinds of revenue receipts - tax and non-tax
revenue. Revenue expenditure is the expenditure incurred on day to

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day functioning of the government and on various services offered to
citizens. If revenue expenditure exceeds revenue receipts, the
government incurs a revenue deficit.
(ii) Capital Budget includes capital receipts and payments of the

government. Loans from public, foreign governments and RBI form a
major part of the government's capital receipts. Capital expenditure is
the expenditure on development of machinery, equipment, building,
health facilities, education etc. Fiscal deficit is incurred when the
government's total expenditure exceeds its total revenue.
C. Objectives – The main objectives of central budget are:
(i) Economic growth.

(ii) Reduction of poverty and unemployment.
(iii) Reduction of inequalities/Redistribution of income.
(iv) Reallocation of resources.
(iv) Price stability/Economic stability.
(v) Financing and management of public enterprises.
D. Types of Budget
Budgets are of two types: balanced and unbalanced (surplus and deficit)
budgets—depending upon whether the estimated receipts are equal to, less

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than or more than estimated receipts, respectively its three types are
explained hereunder.
(1) Balanced Budget - A government budget is said to be a balanced budget
in which government estimated receipts (revenue and capital) are equal to
government estimated expenditure. Let us suppose for the sake of
convenience that the only source of revenue is a lump sum tax. A balanced
budget will then imply that the amount of tax is equal to the amount of
expenditure.
Balanced Budget means
Estimated Govt. Receipts = Estimated Govt. Expenditure
(2) Unbalanced Budget: When government estimated expenditure is either

more or less than government estimated receipts, the budget is said to be an
unbalanced budget. It may be either surplus budget or deficit budget.
(a) Surplus Budget - When government receipts are more than government
expenditure in the budget, the budget is called a surplus budget. In other
words, a surplus budget implies a situation where in government revenue is
in excess of government expenditure.
Surplus Budget = Estimated Govt. Receipts > Estimated Govt. Expenditure
(b) Deficit Budget - When government estimated expenditure exceeds

government receipts in the budget, the budget is said to be a deficit budget.

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In other words, in a deficit budget, government estimated revenue is less
than estimated expenditure.
Deficit Budget = Estimated Govt. Expenditure > Estimated Govt. Receipts
Unit IV: LIBERALIZATION, GLOBALIZATION AND RELATED ISSUES
4.1 New economic policy: Structural Adjustment Programme (SAP)
A. New Economic Policy – The year 1991 is an important landmark in the

economic history of post-Independent India. The country went through a
severe economic crisis triggered by a serious Balance of Payments situation.
The crisis was converted into an opportunity to introduce some fundamental
changes in the content and approach to economic policy. The response to the
crisis was to put in place a set of policies aimed at stabilization and
structural reform. While the stabilization policies were aimed at correcting
the weaknesses that had developed on the fiscal and the Balance of
Payments fronts, the structural reforms sought to remove the rigidities that
had entered into the various segments of the Indian economy. Former Prime
Minister Manmohan Singh is considered to be the father of New Economic
Policy of India.

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Main Objectives of New Economic Policy – 1991, July 24
1. The main objective was to plunge Indian economy in to the arena of

‘Globalization and to give it a new thrust on market orientation.
2. The NEP intended to bring down the rate of inflation and to remove
imbalances in payment.
3. It intended to move towards higher economic growth rate and to build

sufficient foreign exchange reserves.
4. It wanted to achieve economic stabilization and to convert the

economic in to a market economy by removing all kinds of
unnecessary restrictions.
5. It wanted to permit the international flow of goods, services, capital,

human resources and technology, without many restrictions.
6. It wanted to increase the participation of private players in the all

sectors of the economy. That is why the reserved numbers of sectors
for government were reduced to 3 as of now.
Reforms under NEP-1991

The following points highlight the four major economic reforms under new
economic policy of India since 1991.
Reform 1# De-Reservation of Industries of the Public Sector.
Reform 2# Liberalization: Abolition of Industrial Licensing System.

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Reform 3# Privatization of Public Sector Enterprises.
Reform 4# Globalisation.
B. Structural Adjustment Programme (SAP)
Structural adjustment programmes (SAPs) consist of loans provided by the

International Monetary Fund (IMF) and the World Bank (WB) to countries
that experienced economic crises. The two Bretton Woods Institutions
require borrowing countries to implement certain policies in order to obtain
new loans (or to lower interest rates on existing ones). The conditionality
clauses attached to the loans have been criticized because of their effects on
the social sector. SAPs are created with the goal of reducing the borrowing
country's fiscal imbalances in the short and medium term or in order to
adjust the economy to long-term growth. The bank from which a borrowing
country receives its loan depends upon the type of necessity. The IMF
usually implements stabilization policies and the WB is in charge of
adjustment measures.
Conditions - Typical stabilisation policies include:
 balance of payments deficits reduction through currency devaluation

 budget deficit reduction through higher taxes and lower government
spending, also known as austerity
 restructuring foreign debts

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 monetary policy to finance government deficits (usually in the form of
loans from central banks)
 eliminating food subsidies
 raising the price of public services
 cutting wages
 decrementing domestic credit.
B. Free Trade and Protection
Free Trade - Free trade is a policy to eliminate discrimination against

imports and exports. Buyers and sellers from different economies may
voluntarily trade without a government applying tariffs, quotas, subsidies or
prohibitions on goods and services. Free trade is the opposite of trade
protectionism or economic isolationism.
In a free-trade regime, both economies can experience faster growth rates.

This is no different than voluntary trade between neighbors, towns or states.
Free trade enables companies to concentrate on manufacturing goods and
services where they have a distinct comparative advantage, a benefit widely
popularized by economist David Ricardo in 1917 in “On the Principles of
Political Economy and Taxation.” By expanding the economy’s diversity of
products, knowledge and skills, free trade also encourages specialization and
the division of labor.

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Regional Trade Agreements - In the WTO, regional trade agreements
(RTAs) are defined as reciprocal trade agreements between two or more
partners. They include free trade agreements and customs unions.
Regional Trade Agreements are usually established between neighbouring

countries to reduce trade barriers like custom duties on imports. Regional
Trading Agreements (RTA) can be segregated to two classes- customs
unions and free trade areas. In a custom union agreement, the countries have
zero tariffs internally and a unified tariff against the rest of the world. Unlike
them, a free trade area agreement, does not force the countries to have a
unified tariff rate for the rest of the countires, outside the agreement i.e. The
concerned countries of the agreement have no internal trade barrier, but
against non-member countries, they set their own tariffs.
Free Trade Agreement - Whenever some countries sit together and decide
to eliminate tariffs, import quotas, and preferences on most (if not all) goods
and services traded between them, they are creating a FTA. The aim of a
free-trade area is to reduce barriers to exchange so that trade can grow as a
result of specialization, division of labor, and most importantly via
comparative advantage. A Free trade agreement can be an agreement
between two countries (bilateral ) or many countries (multilateral). For
example, Canada – United States Free Trade Agreement between the U.S.
and Canada was signed in 1988. Please note that every customs union, trade

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common market, economic union, customs and monetary union and
economic and monetary union also has a free-trade area. NAFTA is one such
trade block. An FTA covers extensive reduction or elimination of tariffs on
substantially all trade allowing for the free movement of goods and in more
advanced agreements also reduction of restrictions on investment and
establishment allowing for the free movement of capital and free movement
of services.
Advantages of Free Trade Agreements - Free trade agreements are

designed to increase trade between two countries. Increased international
trade has six main advantages:
1. Increased economic growth.
2. More dynamic business climate.
3. Lower government spending.
4. Foreign direct investment.
5. Expertise.
6. Technology transfer.

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Disadvantages of Free Trade Agreements - The biggest criticism of free
trade agreements is that they are responsible for job outsourcing. There are
seven total disadvantages:
1. Increased job outsourcing.
2. Theft of intellectual property.
3. Crowd out domestic industries.
4. Poor working conditions.
5. Degradation of natural resources.
6. Destruction of native cultures.
7. Reduced tax revenue.
4.3 International Institutions: IMF, WB, WTO
An international organization is an organization with an international

membership, scope, or presence. There are two main types: International
nongovernmental organizations (INGOs): non-governmental organizations
(NGOs) that operate internationally.

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A. International Monetary Fund (IMF) - The International Monetary Fund is
an international organization that aims to promote global economic growth
and financial stability, to encourage international trade, and to reduce
poverty. The International Monetary Fund (IMF) is based in Washington,
D.C. and currently consists of 189 member countries, each of which has
representation on the IMF's executive board in proportion to its financial
importance, so that the most powerful countries in the global economy have
the most voting power. The IMF's primary methods for achieving these
goals are monitoring, capacity building, and lending.
Objectives of IMF: (i) International Monetary Co-Operation: (ii) Ensure

Exchange Stability: (iii) Balanced Growth of Trade: (iv) Eliminate Exchange
Control: (v) Multilateral Trade and Payments: (vi) Balanced Growth: (vii)
Correction of BOP Maladjustments: (viii) Promote Investment of Capital:
Functions of IMF – The main functions of IMF are (i) International

Monetary Fund (IMF) Exchange Stability, (ii) Eliminating BOP
Disequilibrium, (iii) Determination of Par Value, (iv) Stabilize Economies,
(v) Credit Facilities, (vi) Maintaining Balance Between Demand and Supply
of Currencies, (vii) Maintenance of Liquidity, (viii) Technical Assistance:
Organizational Structure and Surveillance of IMF - The organization of

the IMF has, at its top a board of governors and alternate governors, who are

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usually the ministers of finance and heads of central banks of each member
country.
The IMF staff is headed by its managing director, who is appointed by the
executive board. The managing director chairs meetings of the executive
board. The managing director chairs meetings of the executive board after
appointment.
At least annually, a team of IMF staff members visits each member country
for two weeks. The team of four or five meets with government officials,
makes inquiries, engages in discussions and gathers information about the
country’s economic policies and their effectiveness.
B. World Bank (WB) - The World Bank (French: Banque mondiale) is an

international financial institution that provides loans to countries of the
world for capital projects. It comprises two institutions: the International
Bank for Reconstruction and Development (IBRD), and the International
Development Association (IDA). The World Bank is a component of the
World Bank Group.
Functions of World Bank
I. To assist in the construction and development of the territories of its

members by facilitating investment of capital for productive purposes,

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including the ‘restoration of economies destroyed or disrupted by war’,
and the encouragement of the “development” of productive facilities and
resources in less developed countries.
II. To promote private investment and long run balanced growth of

international trade and BOP equilibrium by means of guarantees or
participation in international loans and investments.
III. To arrange loans made or guaranteed by it. so that more useful and urgent
projects receive preference.
IV.To provide finance to projects from its own capital, funds raised by it and
by participating with other members.
In addition, the Bank provides advice and expertise. It now puts more
emphasis on institutional technical assistance and infrastructure assistance
Organizational Structure - The headquarter is in Washington, D.C. It is an

international organization owned by member governments; although it
makes profits, these profits are used to support continued efforts in poverty
reduction.
Technically the World Bank is part of the United Nations system, but its
governance structure is different. Each institution in the World Bank Group
is owned by its member governments, which subscribe to its basic share

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capital, with votes proportional to shareholding. Membership gives certain
voting rights that are the same for all countries but there are also additional
votes which depend on financial contributions to the organization.
As a result, the World Bank is controlled primarily by developed countries,

while clients have almost exclusively been developing countries. Some
critics argue that a different governance structure would take greater account
of developing countries’ needs.
C. World Trade Organization (WTO)
The World Trade Organization is the only international institution that

oversees the global trade rules between nations. The WTO is based on
agreements signed by the majority of the world's trading nations. The main
function of the organization is to help producers of goods and services,
exporters, and importers protect and manage their businesses. The WTO
provides a platform that allows member governments to negotiate and
resolve trade issues with other members. The WTO was created through
negotiation, and its main focus is to provide open lines of communication
concerning trade between its members.

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Functions
i. It shall facilitate the implementation, administration and operation of the

WTO trade agreements, such as multilateral trade agreements, plurilateral
trade agreements.
ii. It shall provide forum for negotiations among its members concerning
their multilateral trade relations.
iii. It shall administer the ‘Understanding on Rules and Procedures’ so as to

handle trade disputes.
iv. It shall monitor national trade policies.
v. It shall provide technical assistance and training for members of the

developing countries.
vi. It shall cooperate with various international organisations like the IMF
and the WB with the aim of achieving greater coherence in global
economic policy-making.
Principles of WTO – The fundamental principles that facilitate the

functioning of WTO as a multiple trading system are: (1) Non-
discrimination, (2) Free Trade, (3) Stability in Trading System, (4)
Promotion of Fair Competition, (5) Market Access.

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4.4. Special Economic Zones (SEZ) and Foreign Direct Investment (FDI)
A. Special Economic Zones (SEZ)
Meaning - A special economic zone is an area in a country that is subject to

unique economic regulations that differ from other areas in the same
country. The SEZ regulations tend to be conducive to foreign direct
investment. Conducting business in an SEZ typically implies that the
company will receive tax incentives and the opportunity to pay lower tariffs.
Objectives – Objectives of Special Economic Zones in India are (i)

Generation of additional economic activity, (ii) Promotion of exports of
goods and services, (iii) Promotion of investment from domestic and foreign
sources, (iv) Creation of employment, (v) Development of infrastructure
facilities.
Facilities and Incentives - The incentives and facilities offered to the units
in SEZs for attracting investments into the SEZs, including foreign
investment include:-
 Duty free import/domestic procurement of goods for development,

operation and maintenance of SEZ units
 100% Income Tax exemption on export income for SEZ units under
Section 10AA of the Income Tax Act for first 5 years, 50% for next 5

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years thereafter and 50% of the ploughed back export profit for next 5
years.
 Exemption from Minimum Alternate Tax (MAT) under section 115JB of
the Income Tax Act.
 Exemption from Central Sales Tax, Exemption from Service Tax and
Exemption from State sales tax. These have now subsumed into GST and
supplies to SEZs are zero rated under IGST Act, 2017.
 Other levies as imposed by the respective State Governments.
 Single window clearance for Central and State level approvals.
B. Foreign Direct Investment (FDI)
Foreign direct investment (FDI) is an investment made by a firm or

individual in one country into business interests located in another country.
Generally, FDI takes place when an investor establishes foreign business
operations or acquires foreign business assets, including establishing
ownership or controlling interest in a foreign company. Foreign direct
investments are distinguished from portfolio investments in which an
investor merely purchases equities of foreign-based companies.
Foreign direct investments are commonly made in open economies that offer
a skilled workforce and above-average growth prospects for the investor, as
opposed to tightly regulated economies. Foreign direct investment frequently
involves more than just a capital investment. It may include provisions of

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management or technology as well. The key feature of foreign direct
investment is that it establishes either effective control of, or at least
substantial influence over, the decision-making of a foreign business.
Role of FDI in Economic Development
FDI plays an important role in the development process of a country. It has

potential for making a contribution to the development through the transfer
of financial resources, technology and innovative and improved management
techniques along with raising productivity. Developing countries like India
need substantial foreign inflows to achieve the required investment to
accelerate economic growth and development. It can act as a catalyst for
domestic industrial development. Further, it helps in speeding up economic
activity and brings with it other scarce productive factors such as technical
knowhow and managerial experience, which are equally essential or
economic development.
Government Policy Towards FDI
At the time of independence, the Government of India’s attitude towards

foreign capital was one of fear and suspicion, of course, quite expectedly.
Apathy towards foreign capital was even marked in the Government’s
Industrial Policy of 1948. In this policy, the Government insisted upon the

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gradual Indianisation of foreign companies. This scared the foreign firms
from investing more in India.
The attitude towards foreign capital remained unchanged in the 1956

Industrial Policy Resolution. In view of all these announcements and
assurances on the part of the Government, private foreign capital entered
India rather happily since the beginning (1956) of the Second Plan.
Since then, more and more liberal policies had been announced at different
times. For instance, in 1972, the Government permitted entry of wholly-
owned subsidiaries of foreign companies provided they undertake to export
100 p.c. or more of their output. In 1977, the Janata Party showed its
reservations against foreign collaboration when Coca-Cola and IBM were
asked to close their businesses in India.
However, the 1990s saw a U-turn in the policy of the Government towards
foreign capital. Earlier, Government regulated its foreign capital investments
and collaborations in such a way that these fit into the overall framework of
the national economic plans.
It now allows huge concessions and relaxations rather than its selected stand
taken earlier when foreign capital was permitted only in certain areas which
were of basic and/or strategic importance to this country. The 1991
Industrial Policy announced several concessions and relaxations as far as

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foreign capital is concerned. It has opened up doors of several industries
even of minor importance for foreign investment.
The policies and procedures pertaining to FDI and PI have been

progressively liberalized over the years. With increased liberalization,
Government has permitted FDI up to 100 p.c. under automatic route in most
sectors, Equity caps on FDI now exist in limited sectors.
These measures have so far been taken to make India a most favourable
destination for FDI.

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Class : BA LLB – Fourth Semester

Paper Code : 210

UNIT I: OVERVIEW OF MACROECONOMICS

B. National Product and Domestic Product

a. Gross National Product - Gross national product (GNP) is the monetary

GNP can be expressed as under:

GNP = Money Value of Final Goods and Services (both consumer

GNP can be computed both at factor cost and at market price.

GNPMP = GNPFC + Indirect taxes – Subsidies

GNPFC = GNPMP - Indirect taxes + Subsidies

NNP = GNP - Depreciation

GNP can be computed both at factor cost and at market price.

NNPMP = NNPFC + Indirect taxes – Subsidies

NNPFC = NNPMP - Indirect taxes + Subsidies

c. Gross Domestic Product – Gross domestic product (GDP) is the

GDP can be computed both at factor cost and at market price.

GDPMP = GDPFC + Indirect taxes – Subsidies

GDPFC = GDPMP - Indirect taxes + Subsidies

NDP = GDP - Depreciation

NDP can be computed both at factor cost and at market price.

NDPMP = NDPFC + Indirect taxes – Subsidies

NDPFC = NDPMP - Indirect taxes + Subsidies

C. Circular Flow Of Income

The circular flow of income or circular flow is a model of the economy in

a. Circular flow of income in two-sector economy – The circular flow

In this model, money flows from business firms to households as factor

Circular money flow with saving and investment is illustrated in following

b. Circular flow of income in three-sector economy – In the basic, it

c. Circular flow of income in four-sector economy – Four-sector

D. Real and Nominal GNP – Nominal national income is measured at current

F. Marginal Efficiency of Investment (MEI) - The marginal efficiency of

MEC versus MEI

G. Balance of Payments – The balance of payments, also known as balance

Balance of Payments on Current Account - Current account refers to an

Balance of Payments on Capital Account - Capital account of BOP

1. Borrowings and lendings to and from abroad.

Disequilibrium in Balance of Payment

H. Foreign Exchange Rate- An exchange rate is the price of a nation’s

Floating and Fixed Rates - Exchange rates can be floating or fixed. A

Determination of Exchange Rate - For the determination of the par values

2. Portfolio Balance Approach – The portfolio balance approach brings

3. Purchasing Power Parity Theory - The purchasing power parity theory

1.2. Development of Macro Economics: Schools of Thought (Classical,

The field of macroeconomics is organized into many different schools of

Say’s Law of Market - Say’s law of markets, developed in 1803 by French

B. Keynesian School of Thought –Keynesian economics is an economic

Keynesian economics represented a new way of looking at spending, output

The magnitude of the Keynesian multiplier is directly related to the marginal

C. Post-Keynesian School of Thought – Post-Keynesian economics is a

The contribution of post-Keynesian economics has extended beyond the

1.3. Goals of Macroeconomic Policy - Macroeconomic goals are three of the

2. Full employment. We would like our macroeconomic policy to be such

1.4 Business Cycle

B. Phases of Business Cycle

Business cycles are identified as having four distinct phases: expansion,

1. Business cycles occur periodically. Though they do not show same

4. An important feature of business cycles is that consumption of non-durable

5. Another important feature of business cycles is that investment and

6. Another important feature of business cycles is that profits fluctuate more