Insitute of Economics and Management studies

RBI Grade B Exams for Economics students

2024-08-21T08:12:00.000-07:00

RBI GRADE B Exams for Economics students

"Dear Economics students,

Are you interested in a career in central banking and economic policy-making? Look no further than the RBI Grade B exam! As an economics student, you already have a solid foundation in the subject matter. With dedicated preparation, you can crack this prestigious exam and join the Reserve Bank of India (RBI) as a Grade B officer.

To prepare, focus on:

1. *Microeconomics*: Theory of consumer behavior, production, market structures, and welfare economics.

2. *Macroeconomics*: National income accounting, aggregate demand and supply, inflation, and monetary policy.

3. *International Trade*: Gains from trade, tariffs, exchange rates, and balance of payments.

4. *Economic Growth and Development*: Models, indicators, and strategies.

5. *Indian Economy*: Historical perspective, planning, liberalization, and economic reforms.

6. *Statistics*: Descriptive and inferential statistics, data interpretation, and analysis.

7. *Finance and Management*: Public finance, financial management, banking, and financial institutions.

8. *Current Affairs*: Stay updated on economic developments, policy changes, and news.

Additionally:

- Practice with previous years' question papers and mock tests.

- Develop your analytical, problem-solving, and communication skills.

- Stay focused, motivated, and disciplined in your preparation.

Remember, cracking the RBI Grade B exam requires dedication and hard work. But with your economics background and persistence, you can achieve your goal and start a rewarding career with the RBI. Good luck!"

Syllabus

Here is a detailed syllabus for RBI Grade B:

Phase 1: Preliminary Examination

- *General Awareness* (80 questions, 80 marks):

- Current affairs (national and international)

- Economic developments (India and global)

- Banking and financial institutions

- Monetary policy and RBI functions

- *English Language* (30 questions, 30 marks):

- Reading comprehension

- Grammar and usage

- Vocabulary

- *Quantitative Aptitude* (30 questions, 30 marks):

- Arithmetic (numbers, percentages, etc.)

- Algebra (equations, functions, etc.)

- Geometry (points, lines, etc.)

- Data interpretation (charts, graphs, etc.)

- *Reasoning* (30 questions, 30 marks):

- Logical reasoning (arguments, conclusions, etc.)

- Analytical reasoning (puzzles, etc.)

Phase 2: Main Examination

- *Economics* (50 questions, 50 marks):

- Microeconomics (theory of consumer behavior, production, market structures, etc.)

- Macroeconomics (national income accounting, aggregate demand and supply, etc.)

- International trade (gains from trade, tariffs, exchange rates, etc.)

- Economic growth and development (models, indicators, strategies)

- *Finance and Management* (50 questions, 50 marks):

- Public finance (taxation, public expenditure, budget, etc.)

- Financial management (financial statements, ratio analysis, etc.)

- Banking and financial institutions (commercial banking, central banking, etc.)

- Human resource management (motivation, leadership, etc.)

- *Statistics* (30 questions, 30 marks):

- Descriptive statistics (mean, median, mode, etc.)

- Inferential statistics (hypothesis testing, confidence intervals, etc.)

- Data interpretation and analysis

- *English* (30 questions, 30 marks):

- Reading comprehension

- Grammar and usage

- Vocabulary

Phase 3: Interview

- *Personality Test* (30 marks):

- Communication skills

- Leadership qualities

- Problem-solving abilities

- Knowledge of economics, finance, and banking

RBI GRADE B cutoffs

The RBI Grade B cut-off marks vary each year, depending on factors like the difficulty level of the exam, the number of vacancies, and the number of candidates appearing for the exam ¹. Here's a breakdown of the cut-off marks for the RBI Grade B exam for the years 2023 and 2022 ¹:

RBI Grade B Cut Off 2023

- *Prelims*: The cut-off marks for the preliminary examination are 112 for the general category, 98.0 for SC and ST categories.

- *Mains*: The cut-off marks for the mains examination are 169 for the general category, 169 for OBC, 156 for SC and 148.50 for ST categories.

- *Final*: The final cut-off marks are 322 for OBC, 293.17 for SC.

RBI Grade B Cut Off 2022

- *Prelims*: The cut-off marks for the preliminary examination are 63.75 for the general category, 63.75 for EWS, 60.25 for OBC, 55.25 for SC, 50.75 for ST, and 49.75 for PwBD.

- *Mains*: The cut-off marks for the mains examination are 171.25 for the general category, 167 for OBC, 150.50 for SC, 150.25 for ST, and 148.00 for PwBD.

- *Final*: The final cut-off marks are 234 for the general category, 223 for OBC, 202.50 for SC, 179 for ST, and 208.25 for PwBD.

Also, it's important to note that the RBI Grade B exam is highly competitive, and it's recommended to have a strong understanding of the subjects, as well as practice with previous years' question papers and mock tests.

Feel free to ask if you have any questions or need further guidance whatapp at 7737896705

Net Economics #Classical Economists and their work# Economic theory

2024-06-19T05:24:00.000-07:00

Net Economics #Classical Economists and their work# Economic theory

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Classical economics, also known as classical political economy, is a school of economic thought that emerged in the late 18th and early 19th centuries. It laid the foundation for modern economics and was dominant until the late 19th century. Classical economists focused on understanding the mechanisms of economic growth, production, and distribution of goods and services in market economies

significant contributions and the years in which they were active:

Adam Smith (1723-1790):

Major Work: "The Wealth of Nations" (1776)

Contributions: Smith is often referred to as the father of economics. In "The Wealth of Nations," he introduced the concept of the invisible hand, arguing that individuals pursuing their own self-interest in a free market economy unintentionally promote the general welfare. He also discussed the division of labor, productivity, and the role of markets in allocating resources efficiently.

David Ricardo (1772-1823):

Major Work: "Principles of Political Economy and Taxation" (1817)

Contributions: Ricardo expanded on Smith's work, particularly in the areas of distribution and international trade. He introduced the theory of comparative advantage, which explains why countries benefit from specializing in the production of goods in which they have a lower opportunity cost.

Thomas Malthus (1766-1834):

Major Work: "An Essay on the Principle of Population" (1798)

Contributions: Malthus is best known for his theory of population growth. He argued that population tends to grow exponentially while the food supply grows arithmetically, leading to the inevitable checks of famine, disease, and war unless birth rates are controlled. His ideas had significant implications for understanding economic development and social policy.

Jean-Baptiste Say (1767-1832):

Major Work: "A Treatise on Political Economy" (1803)

Contributions: Say is known for Say's Law, which states that supply creates its own demand. He emphasized the role of production and argued against the possibility of general overproduction or excess supply in an economy. Say's Law became a cornerstone of classical economic thought.

John Stuart Mill (1806-1873):

Major Work: "Principles of Political Economy" (1848)

Contributions: Mill synthesized and expanded upon the ideas of earlier classical economists. He delved into topics such as the distribution of income, the role of government in the economy, and the labor theory of value. Mill's work helped to solidify classical economic theory in the 19th century.

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List of prominent scholars and the work in field of economics

2024-01-30T02:03:00.000-08:00

List of prominent scholars and the work in field of economics

Adam Smith - "The Wealth of Nations" (1776) - Laid the foundation for classical economics.
John Maynard Keynes - "The General Theory of Employment, Interest, and Money" (1936) - A key figure in the development of modern macroeconomics.
Milton Friedman - "A Monetary History of the United States" (1963) - Championed monetarism and free-market principles.
Amartya Sen - Work on welfare economics and development, notably "Development as Freedom" (1999).
Paul Krugman - Contributions to international trade theory and economic geography. Won the Nobel Prize in 2008.
Joseph Stiglitz - Work on information asymmetry, development economics, and global economic issues. Nobel Prize in 2001.
Thomas Piketty - "Capital in the Twenty-First Century" (2013) - Analyzed wealth and income inequality over time.
Gary Becker - Pioneer in the field of human capital theory and the economic analysis of social issues.
Elinor Ostrom - Won the Nobel Prize in 2009 for her work on economic governance, particularly in relation to the commons.
Friedrich Hayek - "The Road to Serfdom" (1944) - A key figure in the Austrian School of Economics, emphasizing free-market capitalism.

Econometrics Regression Analysis part 1

2024-01-28T05:54:00.000-08:00

Econometrics Regression Analysis

Part 1

Regression analysis is a statistical method used to model and analyze the relationship between a dependent variable and one or more independent variables. In the context of econometrics, this technique is widely employed to understand and quantify the relationships between economic variables. Here's a more detailed breakdown:

Dependent Variable (Y): This is the variable that you want to predict or explain. In econometrics, it often represents an economic outcome or phenomenon, such as GDP, inflation, or unemployment rate.

Independent Variable(s) (X): These are the variables that you believe influence or explain changes in the dependent variable. They are also referred to as predictor variables. In economics, independent variables can include factors like interest rates, government spending, or consumer income.

Linear Regression Model: The simplest form of regression assumes a linear relationship between the dependent and independent variables. The model is represented as Y = β0 + β1X1 + β2X2 + ... + ε, where β0 is the intercept, β1, β2, etc. are the coefficients for the independent variables, and ε is the error term.

Estimation of Coefficients: The goal is to estimate the coefficients (β values) that minimize the difference between the predicted values from the model and the actual observed values. This is typically done using methods like the method of least squares.

Interpretation of Coefficients: Once coefficients are estimated, they provide information about the strength and direction of the relationships. For example, a positive coefficient indicates a positive relationship, while a negative coefficient suggests an inverse relationship.

Hypothesis Testing: Econometricians often conduct hypothesis tests to determine whether the coefficients are statistically significant. This helps assess whether the observed relationships are likely to be real or could have occurred by chance.

Goodness of Fit: Measures such as R-squared are used to evaluate how well the regression model fits the data. A higher R-squared indicates a better fit, suggesting that the model explains a larger proportion of the variability in the dependent variable.

Residual Analysis: Examining the residuals (the differences between predicted and observed values) helps ensure that the model assumptions, such as homoscedasticity and normality of residuals, are met.

Regression analysis is a powerful tool in econometrics, enabling researchers to quantify and analyze relationships in economic data, make predictions, and test hypotheses about the factors influencing economic analysis

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Mercantile theory

2024-01-26T05:57:00.000-08:00

Mercantile theory

Mercantilism was an economic theory prevalent from the 16th to the 18th centuries, emphasizing the importance of a nation's wealth in terms of accumulating precious metals, especially gold and silver. Here are key aspects of the mercantile theory:

Bullionism: Mercantilists believed that a nation's wealth was determined by the amount of precious metals it possessed. The goal was to export more goods than import, ensuring a surplus that could be settled in gold or silver.
Balance of Trade: Mercantilists emphasized maintaining a positive balance of trade, where a nation exports more goods than it imports. This would lead to a flow of gold and silver into the country, increasing its wealth.
Colonialism and Imperialism: Mercantilism often justified colonial expansion as a means to secure valuable resources and markets. Colonies were viewed as sources of raw materials and as captive markets for the mother country's finished goods.
Protectionism: Mercantilist policies included protective tariffs and trade barriers to shield domestic industries from foreign competition. The idea was to promote self-sufficiency and reduce dependence on other nations.
Government Intervention: Mercantilists advocated for strong government involvement in the economy. Governments were expected to regulate and control economic activities to achieve the desired balance of trade and accumulation of wealth.
Navigation Acts: In countries like England, mercantilist policies were implemented through Navigation Acts, which restricted colonial trade to benefit the mother country. These laws aimed to ensure that colonial goods were primarily exported to the mother country.
Mercantile Policies in Practice: Governments stockpiled precious metals, regulated the prices of goods, and often subsidized industries. The emphasis was on building up a strong navy and fostering a favorable trade balance.
Critiques and Decline: Over time, critics argued that the focus on accumulating precious metals was simplistic and that real wealth should be measured by a nation's overall economic productivity. As economic thought evolved, mercantilism gradually gave way to more liberal economic theories, such as classical economics.

Net Economics Important Interpretation in one place

2023-10-17T06:08:00.000-07:00

Net Economics Important Interpretation in one place

MICRO Economics

Microeconomics is the branch of economics that deals with the behavior of individual economic units such as consumers, firms, and resource owners. Here are some important definitions in microeconomics:

Supply and Demand: The fundamental concept in microeconomics where the price and quantity of goods in the market are determined by the balance between what producers are willing to supply and what consumers are willing to buy.

Elasticity: A measure of how sensitive the quantity demanded or supplied of a good is to changes in price, income, or other factors.

Utility: The satisfaction or pleasure derived from consuming goods and services. It is a fundamental concept in understanding consumer behavior.

Costs of Production: The expenses incurred by firms in the process of producing goods and services, including fixed and variable costs.

Perfect Competition: A market structure in which there are many small firms, identical products, and no barriers to entry. Prices are determined solely by supply and demand.

Monopoly: A market structure in which there is only one producer or seller for a product. The monopolist has significant control over the price and supply of the product.

Oligopoly: A market structure in which a small number of large firms dominate the market. These firms have the ability to influence the market price and other market outcomes.

Market Failure: When the market fails to allocate resources efficiently, leading to an overallocation or underallocation of resources. Market failures can occur due to externalities, public goods, asymmetric information, and monopolies.

Game Theory: A branch of microeconomics that deals with the strategic interactions between different players in a situation involving choices of actions, analyzing their behaviors and outcomes.

Consumer Surplus and Producer Surplus: Concepts used to measure the benefits that consumers and producers receive when the market price for a good or service is lower or higher than their willingness to pay or receive.

MACRO Economics

Gross Domestic Product (GDP): The total monetary value of all goods and services produced within a country's borders within a specific time period. It is a key indicator of a nation's economic performance.

Inflation: The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. Central banks often target a specific inflation rate as a monetary policy goal.

Unemployment Rate: The percentage of the labor force that is jobless and actively seeking employment. It is a crucial measure of economic health and labor market conditions.

Fiscal Policy: The use of government spending and taxation to influence the economy. Governments use fiscal policy to stabilize the economy, promote economic growth, and control inflation.

Monetary Policy: The management of the money supply and interest rates by a central bank (such as the Federal Reserve in the United States) to control inflation and stabilize the economy.

Budget Deficit: When a government's expenditures exceed its revenues in a fiscal year. It leads to an increase in national debt.

National Debt: The total amount of money that a country's government has borrowed, typically over many years. It is the accumulation of all past deficits and surpluses.

Trade Balance: The difference between a country's exports and imports of goods and services. A surplus occurs when exports exceed imports, and a deficit occurs when imports exceed exports.
Interest Rate: The cost of borrowing money, usually expressed as a percentage. Changes in interest rates influence consumer spending, business investments, and overall economic growth.

Economic Growth: An increase in the production of goods and services in an economy over a period of time, often measured as the percentage change in GDP.
Business Cycle: The recurring pattern of expansion and contraction in economic activity that occurs over time. It consists of phases such as recession, recovery, and expansion.

Aggregate Demand and Aggregate Supply: Aggregate demand represents the total quantity of goods and services demanded by households, businesses, government, and foreign buyers at different price levels. Aggregate supply represents the total quantity of goods and services that producers in an economy are willing and able to produce

Mathematical Economics

Function: In mathematics, a function is a relation between a set of inputs (independent variable) and a set of possible outputs (dependent variable) such that each input is related to exactly one output.

Derivative: The derivative of a function represents the rate at which the output of the function changes with respect to the change in the input. It is a fundamental concept in calculus and is often used to model marginal changes in economics.

Integral: The integral of a function represents the area under the curve of the function. In economics, integrals are used to calculate total quantities, such as total consumer surplus or total producer surplus.

Optimization: Optimization involves finding the best solution to a problem from all possible solutions. In economics, optimization techniques are used to find the maximum or minimum of functions representing utility, profit, cost, etc.

Equilibrium: A state in which opposing forces or factors are balanced. In economics, equilibrium refers to a situation where demand equals supply, and there is no tendency for prices or quantities to change.

Partial Derivative: A derivative of a function of several variables with respect to one variable, treating the remaining variables as constants. It measures how the function changes as one variable changes, holding other variables constant.

Elasticity: In mathematical economics, elasticity measures the responsiveness of demand or supply to changes in price or income. It is often calculated using derivatives.

Differential Equations: Mathematical equations that involve derivatives. They are used in economics to model dynamic processes, such as economic growth, population growth, and investment over time.

Matrix: A mathematical structure consisting of an ordered set of numbers arranged in rows and columns. Matrices are used in various economic models, including input-output analysis and simultaneous equations systems.

Game Theory: The study of mathematical models of strategic interactions among rational decision-makers. Game theory is used to analyze economic and social situations where individuals or organizations make decisions interdependently.

Econometrics

Econometrics is the branch of economics that applies statistical and mathematical methods to analyze economic data and test economic theories.

Regression Analysis: A statistical method used to examine the relationship between two or more variables. In econometrics, regression analysis is widely used to estimate the effect of one or more independent variables on a dependent variable.

Independent Variable: A variable that is manipulated or varied in an experiment or analysis. It is used to predict or explain changes in the dependent variable.

Dependent Variable: A variable being studied and tested in an experiment. It represents the output or outcome whose variation is being studied.

OLS (Ordinary Least Squares) Regression: A common method in econometrics for estimating the parameters of a linear regression model. It minimizes the sum of the squared differences between observed and predicted values.

Heteroskedasticity: A term used to describe the situation in which the variance of errors (residuals) in a regression model is not constant across all levels of the independent variables. Dealing with heteroskedasticity is important for accurate statistical inference.
Multicollinearity: A phenomenon in which two or more independent variables in a regression model are highly correlated, making it difficult to assess the individual effect of each variable.

Autocorrelation: The correlation of a signal with a delayed copy of itself. In econometrics, autocorrelation often occurs in time series data, indicating that the observations are not independent over time.

Endogeneity: A situation in which an explanatory variable in a regression model is correlated with the error term. It can lead to biased and inefficient parameter estimates.

Instrumental Variables: Variables used in econometric techniques to address endogeneity issues by providing an external source of variation for the potentially endogenous explanatory variable.

Time Series Analysis: A statistical method used to analyze time-ordered data points. It is commonly used in econometrics to study economic indicators and other time-based data.

Causality: The relationship between cause and effect, indicating that a change in one variable leads to a change in another variable. Establishing causality is a central goal in econometric analysis.
Understanding these econometric concepts is crucial for conducting empirical research in economics and drawing meaningful conclusions

Money and Banking

Money: Money is any widely accepted medium of exchange used for transactions, as well as a store of value and a unit of account. It can st in various curencies, or even certain commodities historically used as money.

Currency: Currency refers to physical forms of money, such as coins and paper notes, issued by the government and used as a medium of exchange in an economy.

Central Bank: A central bank is an institution responsible for managing a country's monetary policy, issuing currency, regulating banks, and controlling the money supply. Examples include the Federal Reserve in the United States and the European Central Bank in the Eurozone.RBI in India

Commercial Bank: Commercial banks are financial institutions that accept deposits from the public and provide loans to individuals, businesses, and governments. They play a crucial role in the creation of money through the lending process

Fractional Reserve Banking: Fractional reserve banking is a system in which banks are required to hold only a fraction of their customers' deposits in reserve. The rest can be lent out, effectively creating new money.

Interest Rate: Interest rate is the cost of borrowing money, usually expressed as a percentage of the loan amount. It is set by central banks and influences economic activity, investment, and inflation.

Monetary Policy: Monetary policy refers to the management of the money supply and interest rates by a central bank to control inflation and stabilize the economy. Central banks use tools like open market operations and changes in interest rates to implement monetary policy.

Inflation: Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power. Central banks often aim to maintain stable inflation rates to support economic growth.

Deflation: Deflation is the opposite of inflation, indicating a decrease in the general price level of goods and services. It can lead to reduced consumer spending and economic slowdown.

Liquidity: Liquidity refers to the ease with which an asset or security can be quickly bought or sold in the market without causing a significant price change. Cash is the most liquid asset.

Reserve Requirement: Reserve requirement is the percentage of deposits that banks are required to hold in reserve, as set by the central bank. It influences the amount of money that banks can create through lending.

Bank Run: A bank run occurs when a large number of customers withdraw their deposits from a bank due to concerns about the bank's solvency, leading to a crisis for the bank.

International Economics

International Trade: The exchange of goods and services across international borders. Countries engage in trade to benefit from comparative advantages, leading to increased efficiency and economic growth.

Comparative Advantage: The ability of a country to produce a good or service at a lower opportunity cost than another country. It forms the basis for specialization and trade between nations.

Protectionism: The use of trade barriers, such as tariffs and quotas, to protect domestic industries from foreign competition. Protectionist policies can restrict international trade but may also lead to trade disputes.

Balance of Trade: The difference between the value of a country's exports and imports of goods. A trade surplus occurs when exports exceed imports, while a trade deficit occurs when imports exceed exports.

Foreign Direct Investment (FDI): Investment made by a company or individual in one country in business interests in another country. FDI plays a significant role in the global economy, promoting economic development and international business integration.

Exchange Rate: The price of one currency expressed in terms of another currency. Exchange rates fluctuate based on supply and demand factors and are crucial for international trade and investment

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Foreign Exchange Market: The global marketplace for buying and selling currencies. It is the largest financial market in the world and determines exchange rates between different currencies.

Trade Surplus and Trade Deficit: A trade surplus occurs when a country exports more goods and services than it imports. A trade deficit occurs when a country imports more goods and services than it exports.

Balance of Payments: A comprehensive record of all economic transactions between residents of a country and the rest of the world during a specific period. It includes the trade balance, foreign aid, investments, and other financial transactions.

World Trade Organization (WTO): An international organization that regulates international trade. It provides a framework for negotiating trade agreements and resolving trade disputes between member countries.

Tariff: A tax imposed on imported goods, making them more expensive and less competitive in the domestic market. Tariffs are a common form of trade barrier.

Free Trade: The policy of allowing goods and services to be traded across borders without imposing tariffs, quotas, or other restrictions. Free trade promotes efficiency, competition, and economic growth.

Public Economics

Public economics is the study of ow government policy decisions impact the economy.

Public Goods: Goods that are non-excludable and non-rivalrous, meaning that individuals cannot be excluded from using them, and one person's use does not diminish their availability to others. Public goods include clean air, street lighting, and national defense.

Externalities: The unintended side effects of economic activities on third parties, which can be positive (benefits) or negative (costs). Externalities can lead to market failures and are often used as a rationale for government intervention.

Market Failure: Situations in which the allocation of goods and services by a free market is not efficient, leading to overproduction or underproduction of certain goods. Market failures can occur due to externalities, public goods, imperfect information, and monopoly power.

Government Intervention: The actions taken by the government to correct market failures or achieve specific social and economic goals. Interventions can include regulations, taxes, subsidies, and public provision of goods and services.

Taxation: The process by which governments collect revenue from individuals and businesses to fund public expenditures. Taxes can be progressive (higher income individuals pay a higher percentage of their income) or regressive (higher income individuals pay a lower percentage of their income).

Subsidies: Financial assistance provided by the government to specific industries, sectors, or activities. Subsidies are often used to promote desired outcomes, such as encouraging renewable energy production or supporting agriculture.

Redistribution: The transfer of income and wealth from one group of individuals to another, often through taxation and social welfare programs. Redistribution aims to reduce income inequality and improve the overall well-being of society.

Social Welfare Function: A mathematical representation of society's preferences over different income distributions. It helps in understanding the trade-offs between equity and efficiency when making policy decisions.

Pigovian Taxes: Taxes imposed on activities that generate negative externalities, such as pollution or smoking. Pigovian taxes are designed to internalize the external costs, making the market outcome more efficient.

Public Choice Theory: A branch of economics that applies economic analysis to public sector decision-making. It explores how individuals' self-interest and rational behavior influence government policies and outcomes.

Growth and Development Economics

Growth and development economi focus on the economic procs of growth, development, and the factors that influence economic progress.

Economic Growth: Economic growth refers to the increase in the production and consumption of goods and services in an economy over a specific period of time. It is often measured by the growth rate of Gross Domestic Product (GDP).

Human Development Index (HDI): HDI is a composite index that measures a country's average achievements in three basic aspects of human development: health (life expectancy at birth), education (mean years of schooling and expected years of schooling), and standard of living (GNI per capita).

Sustainable Development: Sustainable development aims to meet the needs of the present without compromising the ability of future generations to meet their own needs. It involves economic, social, and environmental considerations to ensure long-term well-being.

Capital Accumulation: The process of increasing the stock of physical and human capital in an economy.

Physical capital includes machinery, infrastructure, and technology, while human capital refers to the skills, knowledge, and health of the workforce.

Total Factor Productivity (TFP): TFP measures the efficiency with which inputs (capital and labor) are used in production. It captures technological progress and improvements in organizational and managerial skills.

Poverty Trap: A situation in which individuals or communities are trapped in poverty due to factors that reinforce and perpetuate their low income, making it difficult to escape poverty without external assistance or intervention.

Inclusive Growth: Inclusive growth focuses on economic growth that benefits all segments of society, especially the marginalized and vulnerable groups. It emphasizes reducing income inequality and improving opportunities for all.

Convergence Theory: Convergence theory suggests that poorer economies tend to grow at faster rates than richer economies, leading to a convergence in per capita income levels over time.

Economic Development: Economic development refers to the sustained improvement in the standard of living, well-being, and economic health of a country's population. It involves economic growth as well as improvements in education, healthcare, infrastructure, and institutions.

Poverty Alleviation: Poverty alleviation refers to efforts and policies aimed at reducing the prevalence and severity of poverty in a society. It includes social welfare programs, education initiatives, and employment opportunities for the poor.

Gender Development Index (GDI): GDI measures gender gaps in human development achievements by considering the disparities between men and women in life expectancy, education, and income

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Foreign Direct Investment (FDI) and Economic Growth: FDI refers to investment made by a firm or individual in one country in business interests in another country. It can stimulate economic growth by bringing in capital, technology, and employment opportunities.

Environmental and Demography

Environment: The surroundings in which organisms live, including the air, water, land, natural resources, plants, and animals. It encompasses both biotic (living) and abiotic (non-living) factors.

Ecology: The scientific study of the interactions between organisms and their environment. It examines the relationships between living organisms and their physical and biological surroundings.

Biodiversity: The variety of life forms, including different species, genetic variations within these species, and ecosystems.

Biodiversity is important for ecosystem stability and resilience.

Climate Change: Long-term changes in the average weather patterns that have come to define Earth's local, regional, and global climates. Human activities, especially the burning of fossil fuels, contribute significantly to climate change.

Sustainability: The ability to meet the needs of the present without compromising the ability of future generations to meet their own needs. Sustainable practices aim to balance economic, social, and environmental considerations.
Pollution: The introduction of contaminants into the natural environment that cause adverse changes. Pollution can affect air, water, soil, and ecosystems, leading to environmental degradation and health issues.

Natural Resource: Any resource found in nature that is used by humans, such as water, minerals, forests, and fossil fuels. Sustainable management of natural resources is crucial for future generations.

Renewable Energy: Energy derived from natural processes that are continuously replenished, such as sunlight, wind, and geothermal heat. Unlike fossil fuels, renewable energy sources do not deplete over time.

Demographic

Demography: The statistical study of populations, including the structure, distribution, and trends within a population. Demography analyzes factors such as birth rates, death rates, migration patterns, and age distribution.

Population Growth Rate: The rate at which a population's size increases or decreases in a given period, usually expressed as a percentage. It considers births, deaths, and migration.

Fertility Rate: The average number of children born to women of childbearing age in a specific population.

Total fertility rate (TFR) is a common measure representing the average number of children a woman would have during her lifetime.

Mortality Rate: The number of deaths in a population, usually expressed per 1,000 individuals per year. Crude death rate refers to the total number of deaths per year for every 1,000 people.

Life Expectancy: The average number of years a person can expect to live, based on current mortality rates. It is often used as an indicator of a population's overall health and well-being.

Migration: The movement of people from one place to another, whether within a country (internal migration) or between countries (international migration). Migration can be voluntary or forced due to various factors.

Dependency Ratio: A demographic measure showing the ratio of dependents (individuals under the age of 15 and over the age of 64) to the working-age population (ages 15-64). It provides insights into the economic burden on the working population.

Indian Economy:

Gross Domestic Product (GDP): The total monetary value of all goods and services produced within a country's borders in a specific time period. GDP is a key indicator of a nation's economic performance.

Inflation Rate: The rate at which the general level of prices for goods and services rises, leading to a decrease in purchasing power. Inflation in India is measured by the Consumer Price Index (CPI) and Wholesale Price Index (WPI).

Fiscal Deficit: The difference between the government's total expenditure and its total revenue (excluding borrowing) in a fiscal year. It indicates the total borrowing requirements from all sources.

Monetary Policy: The management of money supply and interest rates by the Reserve Bank of India (RBI) to control inflation, stabilize the currency, and promote economic growth.

Repo Rate: The interest rate at which the RBI lends money to commercial banks for a short term. Changes in the repo rate affect borrowing and spending in the economy.

Current Account Deficit (CAD): The difference between a country's total imports of goods, services, and transfers and its total exports of goods, services, and transfers. A persistent CAD can put pressure on the country's currency value.

Foreign Direct Investment (FDI): Investment made by a company or individual in one country in business interests in another country. FDI inflows play a significant role in India's economic development.

Goods and Services Tax (GST): A comprehensive indirect tax on the manufacture, sale, and consumption of goods and services throughout India. It replaced various indirect taxes and simplified the taxation system.
Make in India: A government initiative launched to encourage companies to manufacture their products in India. It aims to boost domestic manufacturing and create employment opportunities.

NITI Aayog: The National Institution for Transforming India, a policy think tank of the Government of India. It replaced the Planning Commission and focuses on sustainable and inclusive development.

Demonetization: A government policy where specific currency notes are removed from circulation and replaced with new notes. India experienced demonetization in 2016, impacting cash transactions and the economy.

Goods and Services Tax (GST): A unified indirect tax system implemented in India in 2017, replacing multiple state and central taxes. It aims to streamline the taxation process and create a single market for goods and services

I hope the above definition will help you in preparation of Net Economics and other Competitive papers.If u have any query u can whatsapp at 7737896705 .

Institute of Economics and management studies ( IEMS)

2023-09-17T22:08:00.002-07:00

Institute of Economics and Management studies ( IEMS)

IEMS NET JRF Coaching Jaipur , Rajasthan

The Institute of Economics and Management Studies, commonly referred to as IEMS, offers comprehensive coaching for the National Eligibility Test (NET) in Economics, Commerce, Management, and Political Science. This coaching program is designed to help aspiring candidates excel in the NET examination, which is a crucial step for those seeking a career in academia or research. In this update, we will explore the key features, benefits, and offerings of IEMS' NET JRF coaching program.

1. Comprehensive Syllabus Coverage

IEMS' coaching program boasts a meticulously designed curriculum that covers the entire syllabus for the NET examination in Economics, Commerce, Management, and Political Science. The syllabus is extensive and includes topics ranging from microeconomics and macroeconomics to international trade and finance in Economics, or accounting principles and business management in Commerce and political science usually take 7/8 Month for completion of both the paper.

2. Expert Faculty

One of the standout features of IEMS is its team of expert faculty members. The institute prides itself on having a faculty composed of accomplished scholars and experienced educators in the respective fields. These faculty members are well-versed in the intricacies of the NET examination and are dedicated to guiding students towards success.

3. Small Batch Sizes

IEMS maintains small batch sizes to ensure that students receive personalized attention. This allows for interactive sessions, where students can engage with faculty, ask questions, and clarify doubts. The smaller class sizes also foster a collaborative learning environment among peers.

4. Regular Mock Tests and Assessments

To gauge the progress of students and help them become familiar with the exam pattern, IEMS conducts regular mock tests and assessments. These simulated exams closely resemble the NET examination, giving students the opportunity to practice and improve their time management and question-solving skills.

5. Study Material

IEMS provides comprehensive study material that is specifically tailored to the NET syllabus in Economics, Commerce, Management, and Political Science. This material is regularly updated to align with any changes in the exam pattern or content.

6. Focus on Conceptual Clarity

Understanding that the NET examination emphasizes a deep understanding of concepts, IEMS places a strong emphasis on building conceptual clarity. Faculty members employ various teaching methods and resources to ensure that students grasp the fundamentals of their respective subjects thoroughly.

7. Research Guidance

For candidates aspiring to pursue a career in academia or research, IEMS offers guidance and support beyond the standard NET coaching. The institute helps students identify potential research areas, offers assistance with research proposals, and provides access to academic resources.

8. Personality Development

Recognizing that success in academia and research requires more than just subject knowledge, IEMS also focuses on the overall development of students. Soft skills, presentation skills, and interview preparation are integral parts of the coaching program.

9. Online and Offline Modes

In response to changing circumstances and evolving technology, IEMS offers both online and offline coaching options. This flexibility ensures that students from diverse backgrounds and locations can access high-quality coaching.

10. Past Success Stories

IEMS boasts a track record of success, with many of its students clearing the NET examination and securing Junior Research Fellowships (JRF). These success stories serve as inspiration and motivation for current aspirants.

11. Scholarships and Financial Assistance

Recognizing the financial constraints that some students may face, IEMS offers scholarships and financial assistance programs to deserving candidates. This ensures that talented individuals are not held back due to economic limitations.

12. Continuous Support

Even after the completion of the coaching program, IEMS continues to provide support to its alumni. This includes assistance with post-graduate and research program admissions, as well as guidance on career options.

13. Student Testimonials

To give you a glimpse into the experiences of IEMS' students, here are a few testimonials:

Sarah, a successful NET qualifier in Economics, says, "IEMS' coaching not only helped me crack the NET but also deepened my understanding of economic concepts."

Rohit, who secured a JRF in Political Science, states, "The faculty's guidance and the extensive study material provided by IEMS were instrumental in my success."

Priya, a Commerce NET qualifier, shares, "The small batch sizes at IEMS allowed for one-on-one interaction with professors, which made a huge difference in my preparation."

In conclusion, the Institute of Economics and Management Studies (IEMS) offers comprehensive NET JRF coaching in Economics, Commerce, Management, and Political Science. With a dedicated faculty, small batch sizes, a focus on conceptual clarity, and a track record of success, IEMS equips students with the knowledge and skills needed to excel in the NET examination and beyond. Whether you choose online or offline coaching, IEMS is committed to helping you achieve your academic and career goals in these disciplines.

Insitute of Economics and Management studies Empowering Minds in Economics & Management Studies

2023-06-30T08:13:00.000-07:00

Insitute of Economics and Management studies Empowering Minds in Economics & Management Studies

Welcome to Institute of Economics and Management Studies, a renowned institution dedicated to shaping future leaders in the domains of economics, management, commerce, and Indian Economic Services. With a rich legacy of excellence and a commitment to nurturing intellectual growth, we provide a comprehensive education that prepares students for dynamic careers in today's global marketplace.

Our Courses:

Net Economics:

Our Net Economics program is designed to equip students with a strong foundation in economic principles, theories, and quantitative methods. Through a blend of theoretical knowledge and practical applications, students gain a deep understanding of economic systems, policy analysis, and research methodologies. With a focus on developing analytical and critical thinking skills, our graduates are prepared to tackle complex economic challenges in academia, government, research institutions, and various industries.

Net Management:

In our Net Management course, we offer a comprehensive curriculum that covers various aspects of management, including strategic planning, organizational behavior, marketing, finance, and human resources. Through case studies, real-world projects, and experiential learning, students develop leadership qualities, effective communication skills, and a holistic understanding of business dynamics. Our program empowers students to excel as managers, entrepreneurs, consultants, and leaders in diverse industries.

Net Commerce:

The Net Commerce program is tailored to meet the evolving needs of the commerce sector. It equips students with a strong foundation in accounting, finance, taxation, business laws, and entrepreneurship. With a focus on practical skills and industry-relevant knowledge, our graduates are well-prepared to excel in fields such as banking, finance, taxation, auditing, and consulting.

Indian Economic Services:

Our specialized Indian Economic Services course prepares students for the prestigious Indian Economic Services (IES) examination. Through a comprehensive curriculum that covers subjects such as macroeconomics, microeconomics, public finance, and economic policy, we provide students with the necessary knowledge and skills to excel in this highly competitive exam. Our faculty members, who are experts in the field, provide personalized guidance and support to help students achieve their goals of serving in key positions within the Indian Economic Services.

Why Choose Insitute of Economics and management studies

Experienced Faculty: Our faculty members are renowned experts in their respective fields, bringing a wealth of knowledge and industry experience to the classroom.

Industry-Relevant Curriculum: Our courses are designed in consultation with industry experts to ensure that students acquire the skills and knowledge required by employers in today's competitive job market.

Career Support: We offer career counseling and work on skill development

Join us at and embark on a transformative educational journey that will empower you to excel in the exciting fields of economics, management, commerce, and Indian Economic Services.

Indian Economic Services

2023-06-20T08:44:00.000-07:00

INDIAN Economic Services

IES Details

Indian Economic services detail

The Indian Economic Services (IES) is a specialized cadre of the Indian Civil Services that deals with economic policymaking and analysis in India. It is administered and controlled by the Ministry of Finance, Department of Economic Affairs. The IES officers are responsible for providing economic advice, formulating policies, conducting economic research, and analyzing economic data to support the government in decision-making processes.

Here are some key details about the Indian Economic Services:

Recruitment: The recruitment to the Indian Economic Services is conducted through a competitive examination conducted by the Union Public Service Commission (UPSC). The UPSC conducts the examination once a year, and candidates who qualify are appointed as officers in the Indian Economic Services.

Eligibility Criteria: To be eligible for the Indian Economic Services examination, candidates must have a postgraduate degree in Economics, Applied Economics, Business Economics, Econometrics, or a related subject from a recognized university. There are also certain age criteria and nationality requirements that candidates must fulfill.

Job Profile: Once selected, IES officers are primarily responsible for economic policy analysis, economic research, and providing advice to the government on various economic matters. They work in different departments and ministries of the central government, such as the Ministry of Finance, Ministry of Commerce, Planning Commission, and Reserve Bank of India (RBI), among others.

Career Progression: The career progression of IES officers is similar to that of other civil servants in India. They start as Assistant Directors in various government departments and can rise to higher positions such as Director, Joint Secretary, Additional Secretary, and Secretary, depending on their experience and performance.

Roles and Responsibilities: The roles and responsibilities of IES officers may vary depending on the department or ministry they are posted in. They may be involved in policy formulation, economic analysis, project evaluation, financial management, budget planning, trade policy, foreign exchange management, or other related areas.

Training: After selection, IES officers undergo training at the Lal Bahadur Shastri National Academy of Administration (LBSNAA) in Mussoorie, Uttarakhand. The training program aims to equip them with the necessary skills and knowledge required to handle economic policy and analysis responsibilities effectively.

Pay Scale and Benefits: IES officers are offered a competitive salary and benefits package. The pay scale is determined by the recommendations of the 7th Central Pay Commission, and it varies based on the officer's rank and years of service. Other benefits include allowances, medical facilities, pension, and other perks as per the government rules.

The Indian Economic Services play a crucial role in formulating and implementing economic policies in India. These officers contribute to the country's economic development, financial management, and overall growth by providing expert advice and analysis to the government.

IES Preparation at Institute of Economics and Management studies Jaipur Rajasthan

If you are a student preparing for the Indian Economic Services (IES) examination and considering joining the Institute of Economics and Management Studies (IEMS) for coaching, here are some details to help you make an informed decision:

Expert Faculty: IEMS boasts a team of highly qualified and experienced faculty members who specialize in economics and have a deep understanding of the IES examination pattern. The faculty members possess both academic knowledge and practical expertise in the field, providing you with valuable insights and guidance.

Comprehensive Course Curriculum: IEMS offers a comprehensive course curriculum that covers all the subjects and topics specified in the IES examination syllabus. The curriculum is designed to provide you with a thorough understanding of microeconomics, macroeconomics, Indian economy, international economics, statistics, and econometrics, among other relevant areas.

Study Materials and Resources: IEMS provides updated and well-structured study materials, including textbooks, reference books, and practice sets, to support your learning and preparation. These study materials are designed to help you grasp concepts effectively and practice questions that mirror the actual examination.

Mock Tests and Assessments: The institute conducts regular mock tests and assessments to evaluate your progress and simulate the actual examination environment. These mock tests help you become familiar with the exam pattern, manage time efficiently, and identify areas that require further improvement.

Personalized Attention and Doubt Clearing: IEMS believes in providing personalized attention to students. The institute ensures that students receive individual attention from faculty members and organizes doubt-clearing sessions to address specific queries and challenges. This personalized approach enables you to strengthen your understanding and resolve any conceptual doubts.

Indian Income Tax Net JRF Commerce

2023-05-31T01:17:00.000-07:00

Indian Income Tax Net JRF Commerce

The Indian income tax system is a progressive tax system that is governed by the Income Tax Act, 1961. It is administered by the Central Board of Direct Taxes (CBDT), which is a part of the Department of Revenue under the Ministry of Finance, Government of India. The system applies to all individuals, Hindu Undivided Families (HUFs), companies, firms, and other entities that generate income within the country.

Here are the key aspects of the Indian income tax system:

1. Residential Status: The liability to pay income tax in India depends on an individual's residential status. There are three categories of residential status: Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), and Non-Resident (NR). The tax rates and exemptions vary based on the residential status.

2. Income Categories: The income tax system in India categorizes income into five heads: a. Income from Salary: This includes salary, wages, perquisites, allowances, and profits in lieu of salary. b. Income from House Property: It covers income from a property owned by an individual, whether it is self-occupied, let out, or deemed to be let out. c. Profits and Gains from Business or Profession: This includes income from a business or profession carried out by an individual or a partnership firm. d. Capital Gains: It pertains to profits or gains arising from the sale of capital assets like property, stocks, bonds, etc. e. Income from Other Sources: This category includes income from sources such as interest, dividends, lottery winnings, etc.

3. Tax Slabs and Rates: The income tax rates in India are structured in slabs, where the tax rates increase with the increase in income. The rates are subject to change from year to year as per the budget announcements. As of the knowledge cutoff in September 2021, the tax slabs for individuals and HUFs were as follows:

· Up to INR 2.5 lakh: No tax

· INR 2.5 lakh to INR 5 lakh: 5% tax

· INR 5 lakh to INR 10 lakh: 20% tax

· Above INR 10 lakh: 30% tax

4. Deductions and Exemptions: The Indian income tax system provides various deductions and exemptions that can help reduce the taxable income. Some common deductions include:

· Section 80C: Deduction for investments in specified instruments such as Provident Fund (PF), Public Provident Fund (PPF), National Savings Certificates (NSC), etc.

· Section 80D: Deduction for premiums paid for health insurance policies.

· Section 80G: Deduction for donations made to specified charitable institutions.

· Section 24(b): Deduction for interest on home loan for a self-occupied or let-out property.

· Section 10(14): Exemption for certain allowances like house rent allowance (HRA), leave travel allowance (LTA), etc.

5. Tax Filing and Compliance: Individuals and entities subject to income tax are required to file their tax returns annually with the Income Tax Department. The filing deadline is usually July 31st of the assessment year. The process involves reporting income, deductions, and exemptions accurately, and paying any tax liability that may arise. Non-compliance can result in penalties, interest, or legal consequences.

6. Advance Tax and Tax Deducted at Source (TDS): Under the Indian income tax system, individuals and entities are required to pay taxes in advance throughout the financial year if their tax liability exceeds a certain threshold. This is known as advance tax. Additionally, TDS is deducted by the payer at the time of making certain payments like salaries, rent, interest, etc., and is deposited with the government on behalf of the recipient.

7. Tax Audit: Certain individuals and entities, such as businesses, professionals, and those with high-income levels, are required to undergo a tax audit. A tax audit involves a detailed examination of the taxpayer's financial records and compliance with the provisions of the Income Tax Act. The audit report must be submitted by a chartered accountant.

It is important to note that the Indian income tax system is subject to change as per amendments and budgetary announcements made by the government. It will be updated to u shortly

UGC NET JRF coaching inpolitical science jaipur Rajasthan

2023-05-29T10:43:00.000-07:00

UGC NET JRF coaching in Net political science in jaipur

IEMS s a reputed institution in all aspects and provides quality guidance for UGC NET/ JRF . Our sole motto is to provide high quality education and inspiring atmosphere to post graduate youths aspiring for UGC NET/JRF in Economics, Management, Commerce and political science

Students are today enlightened and focused. They know what they are up to. They need just a ray of guidance. The unique teaching methodology, experienced faculty and extensive course ware has mad

Regular classes for all the subjects with experience faculty

11 Reason to be sucessful in Net Jrf Economics exam

2023-03-31T12:03:00.000-07:00

11 Reason to be sucessful in Net Jrf Economics exam

1) Interested in the mind- Start developing mentally that you are learning best ie Economics , it's particularly important that you're interested in and engaged with your subject.

2) Aptitude for Mathematical Economics -

Interpreting visual data like graphs and some basic Mathematics like Calculus, Linear algebra and statistics will help you in basic prepartion of Net Exams.You should work on this .

3) Knowledge of Basic Economics - Read Basic books to make your concept clear.This will help you to understand complex Economics concept.

4) Understanding Diffrent theories of scholars - Read some concepts Theories of Classical, Neo classical , Keynes and other scholars.which will be help you to start on your prepartion

5) Self Motivated - Self driven, Committed, Concentrated, Trust yourself.

6) Time Management-Successful students should plan their weeks well in advance to complete their study.

7) Admitting you don't understand some Economics concept- Ask from your Teacher or Guide without feeling Embarassed. This will make you more curious , Initatior.

8) Postive Thinker to learn Economics-
Increase your ability to think and learn about problems in Economic world which will make you Exceptional student.Give your view Teachers will welcome your opinion.Adjust your ideas to give some solution to theories.Which you will have command in your subject.

9) Reading and writting skills- Develop your notes and learning skills by reading Economic times, Govt data , Reasarch work and publication.

10) Work on your communication - Discuss with your freind about some economic problems

11) Practice last years papers.- Understand the pattern and topics of questions.

I hope from above information you can crack the Net Economics paper easily..If you need any other information you can whatsapp us on 7737896705

Income and substitution effect

2023-01-21T21:25:00.001-08:00

INCOME & SUBSTITUTION EFFECT

INCOME EFFECT

The income effect, in Microeconomics is

the resultant change in demand for a good or service caused by an increase or decrease in a consumer's purchasing power of real Income As one's income grows, the income effect predicts that people will begin to demand more (and vice-versa).

So-called normal goods will exhibit this typical pattern. Inferior goods, on the other hand, may see their demand actually fall as income increases. An example of such an inferior good could be store-brand items: as people become wealthier they may opt instead for more expensive name brands

Understanding the Income Effect

The income effect is a part of consumer choice theory—which relates preferences to consumption expenditures andre consumer demand curvethat expresses how changes in relative market prices and incomes impact consumption patterns for consumer goods and service when real consumer income rises, consumers will demand a greater quantity of goods for purchase

SUBSTITUTION EFFECT

It is in the decrease in sales for a product that can be attributed to consumers switching to cheaper alternatives when its price rises. A product may lose market share for many reasons, but the substitution effect is purely a reflection of frugality. If a brand raises its price, some consumers will select a cheaper alternative. If beef prices rise, many consumers will eat more mutton.

In general, when the price of a product or service increases but the buyers income stays the same, the substitution effect kicks in. This is not only evident in consumer behavior. For example, a manufacturer faced with a price hike for an essential component from a domestic supplier may switch to a cheaper version produced by a foreign competitor.

How, then, does any company get away with increasing its price? In addition to the substitution effect, there's the income effect some of its customers may be enjoying an increase in spending power and be willing to buy a pricier product. A company's success in repricing its product is determined in part by how much of the substitution effect is offset by the income effect.

Agricultural and Industrial policy in India Ugc Net Economics

2022-11-30T05:36:00.001-08:00

Agricultural and Industrial policy in India Ugc Net Economics

National Agriculture Policy, 2000

The Government of India announced a National Agriculture Policy on July 28, 2000.

This policy aims to attain:

(i) growth rate in excess of 4% per annum in the agriculture sector,

(ii) growth, that is based on conservation of soil, water and biodiversity,

(iii) growth with equality,

(iv) growth that is demand driven and caters, the small markets and maximises benefits from exports of agricultural products in the face of the challenges arising, from economic liberalisation and globalisation,

The important characteristic features of this policy are as follows:

(1) Privatisation of agriculture and price protection of farmers in the post QR (Qualitative Restriction) regime would be part of the government’s strategy to synergise agricultural growth. The main focus is on use of resources and technology, adequate availability, of credit to the farmers and protecting them from seasonal and price fluctuations.

(2) Contract farming and land leasing is done to promote private sector participation, to allow accelerated technology transfer, capital inflow, assured markets for crop production, especially of oilseeds, cotton and horticulture crops.

3 ) Private sector investment in agriculture would be encouraged, particularly in areas like agricultural research, human resource development, post-harvest management and marketing.

(4) After the dismantling of QRs (quantitative restrictions) on imports, the policy has recommended formulation of commodity wise strategies and arrangement to protect farmers from adverse impact of undue price fluctuation in the world market and promote exports.

(5) In order to minimise the wide fluctuations in commodity prices the government would enlarge coverage of future markets.

(6) Restriction on the movement of agricultural commodities within the country is reduced.

(7) Main stress is given on rural electrification.

(8) The excise duty on materials such as farm machinery and implements and fertilizers, post -harvest storage and processing would be reviewed.

(9) The use of new and renewable source of energy for irrigation and other agriculture purposes would be encouraged.

(10) Progressive institutionalisation of rural and farm credit would be continued for providing timely and adequate credit to farmers.

Issues Under Focus.

The strategy that has been indicated by the New Agricultural Policy (NAP), 2000 covers many critical issues of agriculture in the country so that the atrgetted growth rate is achieved by maintaining sustainahility and euity at the same time. The main focus points are:

Sustainable agriculture.
Food and nutritional security.
Generation and transfer of technology.
Inputs management.
Incentives for agriculture.
Investments in agriculture.
Institutional structure.
Risk management including other management refIndia

Industrial policy in India.

Industrial Policy Resolution of 1948- It defined the broad contours of the policy delineating the role of the State in industrial development both as an entrepreneur and authority.
- It made clear that India is going to have a Mixed Economic Model.
- It classified industries into four broad areas:
  - Strategic Industries (Public Sector): It included three industries in which Central Government had monopoly. These included Arms and ammunition, Atomic energy and Rail transport.
  - Basic/Key Industries (Public-cum-Private Sector): 6 industries viz. coal, iron & steel, aircraft manufacturing, ship-building, manufacture of telephone, telegraph & wireless apparatus, and mineral oil were designated as “Key Industries” or “Basic Industries”.
    - These industries were to be set-up by the Central Government.
    - However, the existing private sector enterprises were allowed to continue.
  - Important Industries (Controlled Private Sector): It included 18 industries including heavy chemicals, sugar, cotton textile & woollen industry, cement, paper, salt, machine tools, fertiliser, rubber, air and sea transport, motor, tractor, electricity etc.
    - These industries continue to remain under private sector however, the central government, in consultation with the state government, had general control over them.
  - Other Industries (Private and Cooperative Sector): All other industries which were not included in the above mentioned three categories were left open for the private sector.
- The Industries (Development and Regulation) Act was passed in 1951 to implement the Industrial Policy Resolution, 1948.
Industrial Policy Statement of 1956 : Government revised its first Industrial Policy (i.e.the policy of 1948) through the Industrial Policy of 1956.
- It was regarded as the “Economic Constitution of India” or “The Bible of State Capitalism”.
- The 1956 Policy emphasised the need to expand the public sector, to build up a large and growing cooperative sector and to encourage the separation of ownership and management in private industries and, above all, prevent the rise of private monopolies.
- It provided the basic framework for the government’s policy in regard to industries till June 1991.
- IPR, 1956 classified industries into three categories
  - Schedule A consisting of 17 industries was the exclusive responsibility of the State. Out of these 17 industries, four industries, namely arms and ammunition, atomic energy, railways and air transport had Central Government monopolies; new units in the remaining industries were developed by the State Governments.
  - Schedule B, consisting of 12 industries, was open to both the private and public sectors; however, such industries were progressively State-owned.
  - Schedule C- All the other industries not included in these two Schedules constituted the third category which was left open to the private sector. However, the State reserved the right to undertake any type of industrial production.
- The IPR 1956, stressed the importance of cottage and small scale industries for expanding employment opportunities and for wider decentralisation of economic power and activity
- The Resolution also called for efforts to maintain industrial peace; a fair share of the proceeds of production was to be given to the toiling mass in keeping with the avowed objectives of democratic socialism.
- Criticism: The IPR 1956 came in for sharp criticism from the private sector since this Resolution reduced the scope for the expansion of the private sector significantly.
  - The sector was kept under state control through a system of licenses.

Industrial Licenses

In order to open new industry or to expand production, obtaining a license from the government was a prerequisite.
Opening new industries in economically backward areas was incentivised through easy licensing and subsidization of critical inputs like electricity and water. This was done to counter regional disparities that existed in the country.
Licenses to increase production were issued only if the government was convinced that the economy required more of the goods.

Industrial Policy Statement, 1977- In December 1977, the Janata Government announced its New Industrial Policy through a statement in the Parliament.
- The main thrust of this policy was the effective promotion of cottage and small industries widely dispersed in rural areas and small towns.
- In this policy the small sector was classified into three groups—cottage and household sector, tiny sector and small scale industries.
- The 1977 Industrial Policy prescribed different areas for large scale industrial sector- Basic industries,Capital goods industries, High technology industries and Other industries outside the list of reserved items for the small scale sector.
- The 1977 Industrial Policy restricted the scope of large business houses so that no unit of the same business group acquired a dominant and monopolistic position in the market.
- It put emphasis on reducing the occurrence of labour unrest. The Government encouraged the worker’s participation in management from shop floor level to board level.
- Criticism: The industrial Policy 1977, was subjected to serious criticism as there was an absence of effective measures to curb the dominant position of large scale units and the policy did not envisage any socioeconomic transformation of the economy for curbing the role of big business houses and multinationals.
Industrial Policy of 1980 sought to promote the concept of economic federation, to raise the efficiency of the public sector and to reverse the trend of industrial production of the past three years and reaffirmed its faith in the Monopolies and Restrictive Trade Practices (MRTP) Act and the Foreign Exchange Regulation Act (FERA).

New Industrial Policy During Economic Reforms of 1991

The long-awaited liberalised industrial policy was announced by the Government of India in 1991 in the midst of severe economic instability in the country. The objective of the policy was to raise efficiency and accelerate economic growth.

Features of New Industrial Policy

De-reservation of Public sector: Sectors that were earlier exclusively reserved for public sector were reduced. However, pre-eminent place of public sector in 5 core areas like arms and ammunition, atomic energy, mineral oils, rail transport and mining was continued.
- Presently, only two sectors- Atomic Energy and Railway operations- are reserved exclusively for the public sector.
De-licensing: Abolition of Industrial Licensing for all projects except for a short list of industries.
- There are only 4 industries at present related to security, strategic and environmental concerns, where an industrial license is currently required-
  - Electronic aerospace and defence equipment
  - Specified hazardous chemicals
  - Industrial explosives
  - Cigars and cigarettes of tobacco and manufactured tobacco substitutes
Disinvestment of Public Sector: Government stakes in Public Sector Enterprises were reduced to enhance their efficiency and competitiveness.
Liberalisation of Foreign Investment: This was the first Industrial policy in which foreign companies were allowed to have majority stake in India. In 47 high priority industries, upto 51% FDI was allowed. For export trading houses, FDI up to 74% was allowed.
- Today, there are numerous sectors in the economy where government allows 100% FDI.
Foreign Technology Agreement: Automatic approvals for technology related agreements.
MRTP Act was amended to remove the threshold limits of assets in respect of MRTP companies and dominant undertakings. MRTP Act was replaced by the Competition Act 2002.

Outcomes of New Industrial Policies

The 1991 policy made ‘Licence, Permit and Quota Raj’ a thing of the past. It attempted to liberalise the economy by removing bureaucratic hurdles in industrial growth.
Limited role of Public sector reduced the burden of the Government.
The policy provided easier entry of multinational companies, privatisation, removal of asset limit on MRTP companies, liberal licensing.
- All this resulted in increased competition, that led to lower prices in many goods such as electronics prices. This brought domestic as well as foreign investment in almost every sector opened to private sector.
The policy was followed by special efforts to increase exports. Concepts like Export Oriented Units, Export Processing Zones, Agri-Export Zones, Special Economic Zones and lately National Investment and Manufacturing Zones emerged. All these have benefitted the export sector of the country.

Limitations of Industrial Policies in India

Stagnation of Manufacturing Sector: Industrial policies in India have failed to push manufacturing sector whose contribution to GDP is stagnated at about 16% since 1991.
Distortions in industrial pattern owing to selective inflow of investments: In the current phase of investment following liberalisation, while substantial investments have been flowing into a few industries, there is concern over the slow pace of investments in many basic and strategic industries such as engineering, power, machine tools, etc.
Displacement of labour: Restructuring and modernisation of industries as a sequel to the new industrial policy led to displacement of labour.
Absence of incentives for raising efficiency: Focussing attention on internal liberalisation without adequate emphasis on trade policy reforms resulted in ‘consumption-led growth’ rather than ‘investment’ or ‘export-led growth’.
Vaguely defined industrial location policy: The New Industrial Policy, while emphasised the detrimental effects of damage to the environment, failed to define a proper industrial location policy, which could ensure a pollution free development of industrial climate.

Way Forward

Industrial policies in India have taken a shift from predominantly Socialistic pattern in 1956 to Capitalistic since 1991.
India now has a much liberalised industrial policy regime focusing on increased foreign investment and lesser regulations.
India ranked 77th on World Bank’s Doing Business Report 2018. Reforms related to insolvency resolution (Bankruptcy and Insolvency Act, 2017) and the Goods and Services Taxes (GST) are impressive and will result in long-term gains for the industrial sector.
Campaigns such as Make in India and Start up India have helped to enhance the business ecosystem in the country.
However, electricity shortages and high prices, credit constraints, high unit labour costs due to labour regulations, political interference and other regulatory burdens continue to remain challenges for firm growth of the industrial sector in India.
There is a need for a new Industrial Policy to boost the manufacturing sector in the country. Government in December 2018 also felt the need to introduce a new Industrial Policy that would be a road map for all business enterprises in the country.

Unit-9 : Top 50 Mcq Net Economics Environmental Economics and Demography

2022-11-18T07:54:00.003-08:00

Unit-9 : Top 50 Mcq Net Economics Environmental Economics and Demography

1) Which year is called the 'demographic divide' in India?

a) 1881
b) 1901
c) 1921
d) 1951

2) Which period is referred to as the period of population explosion?

a) 1901-1921

b)1921-1951

c) 1951-1971

d) 1971-1991

3) Which is the state with maximum sex ratio in India?

a) Chhattisgarh
b) Karnataka
c) Kerala
d) Odisha

4) In India,the state with highest density of population is
A. Uttar Pradesh
B. Bihar
C. West Bengal
D. Har yana

5) As per the data released in July 2011, Sex Ratio in Rural Areas is less than urban areas
A. Five Times
B. Four Times
C. Three Times
D. Two Time's

6)According to the figures of Census 2011,which state has the maximum difference in the male
and female literacy
A. Rajasthan
B. Kerala
C. Uttar Pradesh
D. Madhya Pradesh

7)The Growth rate of population means
A. Difference between the growth of male and female
B. Difference between the population of urban and rural areas
C. No. of births per thousand persons
D. Difference between birth rate and death date

8)In context of population, which of the following describes the correct meaning of “Sex-Ratio”
A. Number of males per 1000 females
B. Number of females per 1000 males
C. Number of female per 1000 populace
D. Number of female per 1000 sample of person's

9)During which decade did the population record a negative growth rate?
A. 1921-1931
B. 1911-1921
C. 1941-1951
D. 1931-1941

10Child Sex Ratio as per the provisional results of the 2011 Census in India is
A. 927
B. 924
C. 917
D. 914

11According to census 2001, the average annual growth rate during 1991-2001 is almost
A. 1.22%
B. 1.93%
C. 2.13%
D. 2.24%

12As per the data released in July 2011, what is the percentage of population living in Indian villages?
A. 80%
B. 75%
C. 70%
D. 60%

13Which of the following is mainly responsible for the lack of female population in India?
A. Political Factors
B. Economic Factors
C. Social Factors
D. Superstitions

14What percentage of Indian population is below poverty line?
A. Less than 30
B. 30% to 35%
C. More than 35% but less than 40%
D. 40% to 45%

15) According to the census 2001,which was the largest state of India demographically?
A. Maharashtra
B. Bihar
C. Uttar Pradesh
D. West Bengal

16)What is the Stage in the population cycle in which India is classified on the basic of its
demographic characteristics?
A. Early expanding stage
B. High stationary stage
C. Late expanding stage
D. Declinning State

17The Density of population in India is defined as
A. Number of persons in an area of one mile square
B. Number of persons in an area of one lakh mile square
C. Number of persons inan area of one lakh km square
D. Number of persons in an area of one km square

18What is the main reason behind the faster population growth in India
A. Low Birth Rate and Low Mortality Rate
B. High Birth Rate and Low Mortality Rate
C. Faster Birth Rate and Faster Mortality Rate
D. High Birth Rate and High Mortality Rate

19Which of the following is called the biggest leap forward in the history of Indian population?
A. 1921-1931
B. 1941-1951
C. 1951-1961
D. 1961-1971

20According to the figure of census 2011, which of the union territories is last ranked in child sex ratio
A. Dadar and Nagar Haveli
B. Daman and Diu
C. Chandigarh
D. Andaman and Nicobar Island's

21)India’s population growth is characterized by
A. An increase in rate of death
B. An increase in ratio of females
C. An increase in the birth rate and declining death rate
D. Increasing number of old people�22In

22In general it is observed that the rate of population growth has been ________ in the densely populated areas compared to sparsely populated areas.
A. Low
B. High
C. Negligible
D. Almost the same

23)The Birth rate measures the birth during an year per
A. 100 populace
B. 1000 populace
C. 10000 populace
D. 100000 populace

24)According to the latest figures, literacy in India is
A. 63%
B. 65%
C. 67%
D. None of the above�25)

25) Public goods __________. *

a. Can only be provided by government

b. Provide value even to users who don’t pay for them

c. Cover everyone within a geographic region

d. All of the above.

26) What is the result of the free rider problem?

a. Public goods are underprovided.

b. Public goods are overprovided.

c. Public goods are arbitrarily priced.

d. People who should pay for public goods get them for free.

27)Which of the following describes a free rider problem? *

a. Four roommates want to buy a new couch, but can’t afford it. If there were a fifth roommate, they could afford it, but there isn’t.

b. Four roommates want to buy a new couch. They need all four to afford it but if all four split the use of it, none of them will get enough value from the couch to be worth their share of the cost.

c. Four roommates want to buy a couch, but aren’t sure who will get to keep it once they go their separate ways. The cost of having to figure that out ahead of time disincentivizes them from buying the couch.

d. Four roommates want to buy a couch, but each figures that if he or she just lets the other three pay for it, he or she will still be able to use it once it's bought. They don’t buy the couch.

28)Free riding" is a characteristic of which type of good

a. a private good

b. a common resource

c. a public good

d. a good that is both rival and excusable

29)Benefit-cost analysis should adopt ___________ in evaluating benefits and costs of a public project.

A(private perspective

B)social perspective

C)a or b above, as both perspectives lead to the same estimates.

D)none of the above perspectives

30) What is the present value of Rs121 expected two years from today at a discount rate of 10% per year?

A)100

B)110

C)120

D)121

31)Consider a factory, located in the middle of nowhere, producing a nasty smell. As long as no one is around to experience the unpleasant odor, what type of externality is produced? *
a. Negative externality
b. Positive externality
c. Indeterminate from the given information.
d. None of the above.

32)author of the book An Essay on Principles of Population is

a. Malthus
b. James Princep
c. Keynes
d. Frank Note stein

33)Consider the following statements and identify the right ones.

i. According to the Malthusian theory, supply of food grains increase in geometric progression
ii. The population grows in arithmetic progression.

a. I only
b. ii only
c. both
d. nine

34)The theory that says the level of population at which per capita income is maximum is

a. Theory of population by Malthus
b. Theory of optimum population
c. Theory of demographic transition
d. None of the below

35)Consider the following statements and identify the right ones.

i. According to the theory of demographic transition, in the first stage, birth rate is low but death rate is high
ii. The difference between them is high

a. I only
b. ii only
c. both
d. none

36)The difference between birth rate and death rate decreases

a. I only
b. ii only
c. both
d. none

37)which stage of demographic transition is the population growth rate highest?

a. First
b. Second
c. Third
d. Forth

38)Consider the following statements and identify the right ones.

i. The third stage is the period of declining growth rates.
ii. The second stage of demographic transition witnesses population explosion

a. I only
b. ii only
c. both
d. nine
39)nP_x column of life table refers to

(A) Survival function

(B) Probability of death

(D) Expectation of life at birthday

40)The Total Fertility Rate is

(A) The total number of children born in a country in a given year divided by labour force.

(B) The number of children born to the average woman during her reproductive years.

(D) The number of women age 15 – 45 in a country divided by total population.

41)With population growth rate of 1.0 how much time it would take to double the population?

(A) 28 years

(B) 46 years

(D) 100 years

42)disease burden could be measured by the following index:

(A) Mortality adjusted life years

(B) Premature deaths

(D) Disability adjusted life years

43)Most of the early development in demography took place in

(A) England, France, Germany and few other European countries

(B) United States of America and few Latin American countries

(D) None of the above countries

44)What is the working population age considered as per UNPFA?

15-64 years

18-62 years

16-60 years

17-65 years

45)Most useful single measure of mortality is,
a. Case fatality rate
b. CDR
c. ASDR
d. Proportional Mortality date

46) Which of the following is the best indicator of health status of a community?
a. Birth rate
b. Infant mortality rate
c. Crude death rate
d. None of the above

47) Mortality experience is taken into consideration when defining:
a. General fertility rate
b. Total fertility rate
c. Net reproduction rate
d. Gross reproduction rate

48). Demographic gap means:
a. Differences in sex ratio
b. Differences between age specific birth and death rates
c. Differences between birth and death rates
d. Differences in child and women ratio

49) Denominator of prenatal mortality is:
a. Number of live births
b. Number of deliveries (live and still births)
c. Live births –still births
d. Number of still births)

50). Total fertility rate (TFR) refers to:
a. Number of births per one thousands woman
b. Number of women between 15-49 years
c. Number of children per women approximate completed family size

Only Economics for Ugc Net some basic terminology

2022-11-08T10:11:00.000-08:00

Only Economics for Ugc Net some basic Terminology

Absolute minimum: The output value of the lowest point on a graph over a given input interval or over all possible input values. An absolute minimum point is a local minimum point and occurs at an endpoint of the given input interval.

Absolute vs. Relative Price: Absolute price is the number of dollars that can be exchanged for a specified quantity of a given good. Relative price is the quantity of some other good that can be exchanged for a specified quantity of a given good. Suppose we have two goods A and B. The absolute price of good A is the number of dollars necessary to purchase a unit of good A. The relative price of good A in terms of B is the amount of good B necessary to purchase a unit of good A. The change in relative prices is not the same thing as changes in absolute prices. Sometimes, the absolute prices of goods may change but relative prices may remain constant. In general, we measure absolute prices in terms of dollars and relative prices in terms of units of some other good. However, many times we measure relative prices in terms of dollars also keeping in mind that the word dollar is being used to refer not to a piece of green paper but to a basket of goods. In microeconomics, the word prices always refer to relative prices.
Angle: The amount of rotation in a turn. An angle can be thought of as the counterclockwise rotation of its initial side into its terminal side. The size of an angle is the measure of this rotation, and a negative sign in front of the size indicates clockwise rotation.
Antiderivative: A function F is an antiderivative of another function f if the derivative of F is f. If F is an antiderivative of f, where both F and f have input x and C is an arbitrary constant, then y = F(x) + C is called a general antiderivative of f .
Annual percentage rate (APR): The percentage used in calculating interest each compounding period. In an investment context, the annual percentage rate (or nominal rate) is the advertised rate of interest, 100r%.
Annual percentage yield (APY): A percentage by which an investment grows over one year. Unlike APR, APY indicates the affect of the compounding periods. APY will be larger than APR any time interest is compounded more frequently than once a year.
Approximate change in a function: The rate of change of the function times a small change in the input of the function. That is, for the function f with input variable x, the approximate change in f is f ' (x).h where h represents the small change in x. The exact change is f(x + h) - f(x).
Autocorrelation: A correlation between a component of a stochastic process and itself lagged a certain period of time.
Average cost : The total production cost divided by the number of units produced.
Average rate of change: The amount that a quantity changes over an interval divided by the length of the interval. That is, if a quantity changes from a value of m to a value of n over a certain interval, the average rate of change equals n - m length of interval. The average rate of change is the slope of the secant line. Average rates of change have labels of output units per input unit.

Beta: A measure of systematic risk.
Bias: Bias is the difference between the parameter and the expected value of the estimator of the parameter.
Black-Scholes Theory: Another name for option pricing theory. Differential equations approach is an informal name for derivatives pricing models based upon the original Black-Scholes methodology.
Bootstrapping: Bootstrapping method is to obtain an estimate by combining estimators to each of many sub-samples of a data set. Often M randomly drawn samples of T observations are drawn from the original data set of size n with replacement, where T is less than n.
Break-even point: The number of units (produced or sold) for which revenue equals cost so that profit is zero.
Business Cycle Frequency: The business cycle frequency is often considered to be three to five periods.
Buyer's Market: A buyer's market is a market for a good (stocks, housing, etc.) where prices are falling and there are more parties interested in selling than in buying.
Business risk: Exposure to uncertainty in economic value that cannot be marked-to-market.

Calculus: The branch of mathematics involving derivatives and integrals.
Capital allocation: A process of choosing what ventures, deals or trades to engage in, usually based upon some cost or risk-return analysis.
Capital asset pricing model: A model for valuing financial assets based upon their systematic risk.
Cash instrument: An instrument whose value, unlike that of a derivative instrument, is determined directly by the markets.
Change: If a quantity changes from a value of m to a value of n over a certain interval, then the change in the quantity is n - m.
Changes in demand: A change in price does not lead to a change in demand. But a change in a factor other than price such as income and prices of related goods etc, does lead to a change in demand. In that case the change in demand leads to a shift in the demand curve. A fall in demand shifts the demand curve to the left and a rise in demand shifts the curve to the right. Other factors includes:

Sales tax is a tax that is paid directly by consumers to the government. A sales tax makes a good less desirable and as such it affects demand. It causes the demand curve to shift towards the left parallel to itself by the amount of the tax.
So far, we have been concerned with the demand by a single buyer. If there are N buyers in the market, then market demand is the sum of the demand by all the N buyers. The market demand curve is the horizontal summation of individual demand curves.

Compound interest: A method of crediting interest in which interest is earned on interest.
Composition: A method of combining two functions in which the output of one function (called the inside function) is used as the input of the other function (called the outside function).
Compound interest formulas: Exponential formulas that are used to determine the amount A(t) accumulated in an account after t years when P dollars are initially invested, if the nominal interest rate is 100r% compounded n times a year.
Concavity: A description of the curvature of a graph. A graph is concave up at a point if the tangent to that point lies below the graph near the point of tangency and concave down if the line tangent to that point lies above the graph near the point of tangency. The point at which the concavity changes to convexity is called an inflection point.
Constant dollars: Dollar values that have been adjusted for inflation by means of price indexes to eliminate inflationary factors and allow direct comparison across years. Conversion to constant dollars for a given year t may be calculated as the current dollar value multiplied by the purchasing power of the dollar based on a dollar value of $1 in year t.
Correlation: A parameter, related to covariance, that indicates the tendency for two random variables to "move together" of "co-vary."
Correlation matrix: A symmetric matrix indicating all the correlations of a random vector.
Consumer Behavior: The behavior of consumers in general depends upon two major factors:
1. Tastes (as represented by the concept called indifference curves)
2. Opportunities (as represented by the income or budget line)
Consumer price index (CPI): A measure that is 100 times the ratio obtained by comparing the current cost of a specified group of goods and services to the cost of comparable items determined at an earlier date. The consumer price index or CPI is a measure of the level of inflation. CPI measures how much the price of a basket of consumer goods has changed over a given time period.
Consumers' expenditure: The actual amount spent by consumers for a certain quantity of goods or services. The consumers' expenditure equals the market price times the quantity in demand.
Consumers' surplus: The amount that consumers are willing and able to spend but do not actually spend for a certain quantity of goods or services.
Consumers' willingness and ability to spend: The maximum amount that consumers say they will spend and/or actually spend for a certain quantity of goods or services.
Continuous graph/function: A continuous graph is an unbroken curve whose set of inputs is assumed to fill up an entire interval of values along the horizontal axis. A continuous graph can be drawn without lifting the writing instrument from the page. A smooth continuous graph is one with no sharp points. A continuous function is a function whose graph is continuous. When modeling real-life situations, continuous functions could be used without restriction or could be discretely interpreted.
Continuous function used without restriction: A continuous function for which inputs of any value make sense in context.
Continuous function with discrete interpretation: A continuous function whose interpretation makes sense only at certain distinct points.
Continuous compound interest: A limiting form of compound interest where the frequency with which interest is credited approaches infinity.
Contour curve: A two-dimensional outline of a three-dimensional graph at a given output level. For a three-dimensional function f, the k-contour curve is the collection of all points (x, y) for which f (x, y) = k, where k is a constant. Contour curves are also called level curves.
Contour graph: A graph of the contour curves f(x, y) = k for several values of a constant k. Usually, the values of k are equally spaced.
Count data: Totals that are reported for a specific time period but that are not cumulative because the counter that tallies the data during the period is reset to zero at the beginning of each period. When working with count data, accumulated change in a quantity is calculated by summing the output data.
Control Variables: A control variable is a variable in a model controlled by an agent in order to optimize a specific objective.
Costs and Efficiency: A cost is a foregone opportunity. Comparative advantage is the ability to perform a given task at a lower cost. An individual/country is said to be more efficient if it has a comparative advantage in the production of some good. In other words it is said to be more efficient.
Covariance: A parameter, related to correlation, that indicates the tendency for two random variables to "move together" or "co-vary."
Covariance matrix: A symmetric matrix indicating all the covariances and variances of a random vector.
Covariance stationarity: A property of some stochastic processes. A stochastic process is covariance stationary if neither its mean nor its autocovariances depend on the index t.
Critical point: A saddle point or a point corresponding to a relative maximum or relative minimum on a multivariable surface.
Cross section: For a two-variable function, the curve resulting when the function is intersected with a plane. A cross section of a function will always have one less dimension (variable) than the function itself.
Cross-sectional function/model: An equation describing a cross section of a multivariable function.
Cubic function/model: A function of the form f (x) = ax³+ bx² + cx + d where a, b, c, and d are constants and not equal to zero. Cubic functions have one change in concavity (i.e., one inflection point) and no end behavior limiting values.
Cumulative density function: An accumulation function of a probability density function. The cumulative density function shows how probabilities accumulate as the value of the random variable increases.
Cyclic function: A periodic, continuous function that varies between two extremes. The part of the graph of the function that keeps repeating itself is called a cycle of the graph.

Data: Real-world information recorded as numerical values.
Decision Rules: A decision rule is either a function that maps from the current state to the agent's decision or choice, or a mapping from the expressed preferences of each of a group of agents to a group decision. The first is more relevant to decision theory and dynamic optimization; the second is relevant to game theory. The phrase allocation rule is sometimes used to mean the same thing as decision rule. The term strategy-proof has been defined in both contexts.
Decreasing without bound: A term applied to the output of a function that infinitely decreases in height. Decreasing without bound may describe either the end behavior of a function or the limiting value of a function as the input approaches a certain value.
Degree: One of 360 equal parts into which a complete revolution is divided. Degree measure is one of the ways angles can be measured and is denoted by a small circle as a superscript.
Delta: The Greek letter for the factor sensitivities measuring a portfolio's first order (linear) sensitivity to the value of an underlier.
Delta approximation: A linear approximation for how a portfolio's value will change in response to a small change in an underlier's value.
Delta-gamma approximation: A quadratic approximation for how a portfolio's value will change in response to a small change in an underlier's value.
Delta-gamma remapping: A quadratic remapping constructed from a portfolio's deltas and gammas.
Demand: The amount of a good or service that an individual is willing and able to buy at each possible price.
Demand curve/function: A graph or equation relating the quantity of goods or services that consumers demand and the price per unit of those goods or services. Mathematicians use price as input and quantity demanded as output; economists use quantity demanded as input and price per unit as output.
Demand curve: A graph illustrating demand, with prices on the vertical axis and quantity demanded on the horizontal axis. Demand curve slopes downward because of the negative relationship between price and quantity demanded.
Demand vs. Quantity demanded: Demand is a set of number that lists the quantity demanded corresponding to each possible price whereas quantity demanded is the amount of a good or service that an individual is willing and able to buy at a given price. For instance, the information on price and quantity demanded presented in a table/demand schedule is collectively referred to as the demand.
Derivative: The mathematical term for an instantaneous rate of change. The terms derivative, rate of change, instantaneous rate of change, slope of a curve, and slope of the line tangent to a curve are synonymous.
Derivative instrument: An instrument which derives its value from the value of other financial instruments.
Depression: A depression is a severe downturn in economic activity. These are considerably worse than recessions.
Determinants of demand: Demand is affected by a number of factors. Price is the most important factor but there are other factors also that can influence demand such as:

income
prices of related goods
taste
expectation of the future, price and other factors

Deterministic Functions and Variables: Deterministic means not random. A deterministic function or variable often means one that is not random, in the context of other variables available. That is, those other variables determine the variable in question unerringly, by a function that would give the same value every time those other variables were given to it as arguments, unlike a random one which with some probability would give different answers.
Differential equation: An equation involving one or more derivatives. A general solution for a differential equation is a function that has derivatives that satisfy the differential equation, and a particular solution is a function obtained from the general solution and the initial conditions stated in a specific problem.
Diminishing marginal utility: Each additional unit of X yields less utility than the previous ones. This is known as the law of diminishing marginal utility. For instance, a thirsty person would derive more utility from the first glass of water than the successive ones.
Direct proportionality: For variables x and y, y is proportional to x if there exists some constant k such that y = kx. The terms proportional and directly proportional are used interchangeably. The constant k is referred to as the constant of proportionality.
Discrete: Discrete information is represented by a scatter plot or a table of data. Discrete graphs are scatter plots of data. In some situations, continuous functions are interpreted discretely; that is, outputs of the function have meaning in the context of a real-life situation only at some, not all, input values in an interval.
Diverge: A term applied to an improper integral for which the limit does not exist.
Dynamic Optimization: Dynamic optimizations are maximization problems to which the solution is a function; equivalently, optimization problems in infinite-dimensional spaces.

Econometric Model: An econometric model is an economic model formulated so that its parameters can be estimated if one makes the assumption that the model is correct.
Economics: Economics is the study of how scarce resources are allocated to satisfy unlimited and competing ends.
Efficiency: Efficiency activity or turnover ratios provide information about management's ability to control expenses and to earn a return on the resources committed to the business, for example:

Cash Turnover = Net Sales / Cash
Inventory Turnover = Cost of Goods Sold / Average Inventory

Efficient frontier: A theoretical set of portfolios offering optimal risk-reward tradeoffs.
Elasticity: A measure of responsiveness. The responsiveness of behavior measured by variable Z to a change in environment variable Y is the change in Z observed in response to a change in Y. Specifically, elasticity = (percentage change in Z) / (percentage change in Y).
(Price) Elasticity of Demand: It is a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price:
Ed = Price Elasticity of demand = (Percentage change in quantity demanded) / (Percentage change in Price)
Inelastic: If percentage change in quantity demanded is less than the percentage change in price.
Unit Elastic: If percentage change in quantity demanded is exactly equal to the percentage change in price.
Elastic: If percentage change in quantity demanded is greater than the percentage change in price.
Elasticity and the Shape of the Demand curves: A steep demand curve represents inelastic demand whereas a flat demand curve represents elastic demand. A vertical demand curve represents perfectly inelastic demand. A horizontal demand curve represents perfectly elastic demand curve.
(Price) Elasticity of Supply: It is a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price.
Es = Price Elasticity of supply = (Percentage change in quantity supplied) / (Percentage change in Price)
Inelastic: If percentage change in quantity supplied is less than the percentage change in price.
Unit Elastic: If percentage change in quantity supplied is exactly equal to the percentage change in price.
Elastic: If percentage change in quantity supplied is greater than the percentage change in price
Elasticity and the Shape of the Supply curves: A steep supply curve represents inelastic supply whereas a flat supply curve represents elastic supply. A vertical supply curve represents perfectly inelastic supply. A horizontal supply curve represents perfectly elastic supply curve. Since the economic incidence of a sales or an excise tax is independent of its legal incidence. In other words, the burden of the tax is shared by both buyers and sellers regardless of whether it is a sales tax or an excise tax. The magnitude of the burden however depends upon the elasticity of demand and supply curves. For instance, buyers will share a greater burden of the tax if demand is less elastic and sellers will share a greater burden if supply is less elastic.
End behavior: The behavior of the output of a graph as the input becomes infinitely large or infinitely small.
Endogenous: A variable is endogenous in a model if it is at least partly a function of other parameters and variables in a model, in contrast to exogenous.
Equilibrium: Equilibrium is some balance that can occur in a model, which can represent a prediction if the model has a real-world analogue. The standard case is the price-quantity balance found in a supply and demand model. If the term is not otherwise qualified, it often refers to the supply and demand balance.
Equilibrium point: The point at which the demand curve and the supply curve intersect. At this point, there is market equilibrium; that is, the supply of a product is equal to the demand for that product.
Event: An outcome of some happening whose results are subject to chance.
Exogeneous: A variable is exogenous to a model if it is not determined by other parameters and variables in the model, but it is set externally and any changes to it come from external forces, in contrast to endogenous.
Expected value : The expected value is a parameter indicating the "center of gravity" of a probability/density distribution. It is also the average of the data. The expected value is a parameter indicating the "center of gravity" of a probability distribution.
Exponential function/model: A function with an equation of the form f(x) = ab^x or f (x) = ae^kx . Exponential models are characterized by constant percentage change (percentage differences) in output values when input values are evenly spaced.
Extrapolation: The process of predicting an output value using an input value that is outside a given interval of input data. Extrapolation should always be viewed with caution.
Extreme point: A point at which a maximum or minimum output occurs. At an extreme point on a graph, the slope of the line tangent to the curve at that point is zero or the slope does not exist at that point (but the function output exists at that point). Extreme points occur at an input value, but the extreme value is an output value. For multivariable functions, relative extreme points cannot be visually identified on the edges of tables or contour graphs.

First differences: The changes in successive output values. It is helpful to calculate first differences for a data set only if all input data values are evenly spaced.
Fixed costs: Also called start-up costs, these costs do not vary with the number of items produced or the amount of service performed.
Four-Step Method: An algebraic method of finding the derivative of a function using the definition of the derivative.
Function: A function is a rule that assigns exactly one output to each input. Functions are represented verbally by word descriptions, numerically in tables, visually with graphs, or algebraically with equations. If x is the input symbol and f is the rule, then f(x) symbolizes the output. Input/output diagrams display the input, how the input is measured (input units), the rule that relates the input and output; and the output, including how the output is measured (output units).
Future value: The value of an investment at some time in the future. Future value for discrete situations is calculated using the appropriate compound interest formula. The future value of a continuous income stream is the total accumulated value of the income stream and its earned interest.

Gamma: The Greek letter for the factor sensitivities measuring a portfolio's second order (quadratic) sensitivity to the value of an underlie.
Generalized Linear Model: A generalized linear model is a model where y is a vector of dependent variable, and x is a column vector of independent variables. The model is often called a link function.
Graph: One of the ways to represent a function or a real-life situation by plotting output and input points on coordinate axes. Discrete graphs are scatter plots. Continuous graphs can be drawn without lifting the writing instrument from the page.

Hedging: The taking of offsetting risks.
Hessian Matrix: The Hessian matrix is the matrix of second derivatives of a multivariate function. That is, the gradient of the gradient of a function. Properties of the Hessian matrix at an optimum of differentiable function are relevant in many places in economics and finance.
Histogram: A graph that is composed of rectangles and constructed so that the area of each rectangle is the percentage of outputs in the corresponding input interval. These histograms are also called probability histograms because the area of each rectangle is the probability that the value of the random variable under discussion is in the interval that forms the base of the rectangle.

Identification: A parameter in a model is identified, if and only if, complete knowledge of the joint distribution of the observed variables gives enough information to calculate the parameter exactly.
If the model has been written in such a way that its parameters can be consistently estimated from the observables, then the parameters are identified. A model is identified if there is no observationally equivalent model. That is, potentially observable random variables in the model have different distributions for different values of the parameter.
Indifference curve (IC): IC is a locus of points representing different baskets of commodities X and Y that may give consumers the same level of utility or satisfaction so that he is indifferent among them.
Income stream : A flow of money into an interest-bearing account over a period of time. When the money flows continuously into the account, the flow is called a continuous income stream. A discrete income stream is a one into which money flows at specific intervals of time (quarterly, monthly, daily, and so on.)
Increasing without bound: A term applied to the output of a function that infinitely increases in height. Increasing without bound may describe either the end behavior of a function or the limiting value of a function as the input approaches a certain value.
Inflation: An ongoing rise in the average level of absolute prices.
Inflection point : A point where the concavity of a graph changes. Cubic and logistic functions have one point. Sine and cosine functions have two inflection points in each cycle and an infinite number of inflection points over all real number inputs. In real-life applications, the inflection point is interpreted as the point of most rapid change or least rapid change in an area near the inflection point.
Initial condition : A known point on the graph of a particular solution for a differential equation.
Instantaneous rate of change: The instantaneous rate of change at a point on a curve is the slope of the curve at that point and the slope of the line tangent to the curve at that point. Instantaneous rates of change have labels of output units per input unit.
Integration: The process of evaluating a definite integral to determine the accumulation of change or the process of recovering a quantity function from a rate-of-change function.
Interpretation of a result: A simple non-technical sentence explaining the real-life meaning of a result.
Intercept: The input value where the graph crosses or touches the horizontal axis or the output value where the graph touches or crosses the vertical axis.
Interpolation: The process of predicting an output value using an input value that is within a given interval of input data.
Inverse function: If a rule obtained by reversing the input and output of a function is also a function, then it is called an inverse function.
Ito Process: An Ito process is a stochastic process: a generalized Wiener process with normally distributed jumps. A generalized Wiener process is a continuous-time random walk with a drift and random jumps at every point in time.

Jackknife Estimator: A jackknife estimator creates a series of estimates, from a single data set by generating that statistic repeatedly on the data set, leaving one data value out each time. This produces a mean estimate of the parameter and a standard deviation of the estimates of the parameter.
Joint proportionality: For variables x, y, and z, y is jointly proportional to x and z if there exists some constant k such that y = kxz. The constant k is the constant of proportionality.

Kurtosis: A parameter describing the peakedness and tails of a probability distribution.

Law of demand: All else equal, if the price of a good goes up, quantity demanded goes down and vice versa.
Least squares method: A procedure to determine the line that best fits a set of data using the criterion that the sum of the squares of the deviations of all the data points from the fitted line, i.e., SSE is at a minimum.
Least squares line: The linear function that best fits a set of data, where best fit is defined according to the least squares method.
Legal Incidence vs. Economic Incidence of a Tax Legal incidence refers to the division of a tax burden according to who is required by law to pay the tax, while economic incidence refers to the division of a tax burden according to who actually pays the tax after all price adjustments are taken into account. A change in the legal incidence of a tax will have no effect on the economic incidence. If the legal incidence of a per-unit tax is entirely on suppliers, the supply curve will shift up by the amount of the tax. On the other hand, if the legal incidence is entirely on demanders, the demand curve will shift down by the amount of the tax. In both situations, the equilibrium quantity will fall, suppliers will receive a lower post-tax price, and demanders will pay a higher post-tax price.
Leverage Ratios: Leverage ratios measure the degree of protection of suppliers of long-term funds and can also aid in judging a firm's ability to raise additional debt and its capacity to pay its liabilities on time, for example:

Total Debts to Assets = Total Liabilities / Total Assets
Capitalization Ratio= Long-Term Debt /(Long-Term Debt + Owners' Equity)

Limit: A number to which the output of a function becomes closer and closer as the input becomes closer and closer to a stated value.
Linear function/model: A function that repeatedly and at even intervals adds the same value to the output. A linear model is a function of the form f(x) = ax + b representing a situation in which incremental change is constant. In the linear function, a is the constant rate of change of the output, i.e., the slope of the graph of the linear function and b is the output corresponding to an input of zero, i.e., the vertical axis intercept. When input values in a set of data are evenly spaced and the first differences of the output values are constant, the data should be modeled by a linear function.
Linear system of equations: Two or more equations in which all the variables occur to the first power and there are no terms in which two different variables are multiplied or divided.
Liquidity Ratios: Liquidity ratios measure a firm's ability to meet its current obligations, for example:

Acid Test or Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
Cash Ratio = (Cash Equivalents + Marketable Securities) / Current Liabilities

Local linearity: The principle that if we graph a smooth, continuous function over a small enough interval around a point, then the graph looks like the line tangent to the curve at that point. That is, the tangent line and the curve are basically indistinguishable over the interval.
Logarithmic (log) function/model: A function with an equation of the form f(x) = a + blnx. This function is the inverse of the exponential function y = AB , where A = e^x/b and B = e^-a/b.
Logistic function/model: A function of the form f(x) = L + Ae^-bx. The graph of a logistic function is bounded by the horizontal axis and the line f(x) = L. We refer to L as the limiting value (or carrying capacity or saturation level) of the function.

Marginal analysis: A type of approximation of change used in economics. The rates of change of cost, revenue, and profit with respect to the number of units produced or sold are called marginal cost, marginal revenue, and marginal profit. These rates are often used to approximate the actual change in cost, revenue, or profit when the number of units produced or sold is increased by one.
Marginal utility: The marginal utility of a good say X is defined to be the amount of additional utility derived from the consumption of an additional unit of X while keeping the quantity of the other good say Y as constant.
Market price: The actual price that a consumer pays for one unit of goods or services.
Mathematical modeling: The process of translating a real-world problem into a useable mathematical equation.
Matrix: A rectangular arrangement of numbers in rows and columns. Matrices are useful in solving systems of linear equations.
Mean: One of the measures of the center of a probability distribution, the mean (also called the expected value or average) is the input value of the "balance point" of the region between the density function and the horizontal axis.
Microeconomics: Microeconomics is the study of the economic choices made by individual economic units such as consumers, households and firms etc.
Model: A mathematical model is an equation, along with descriptions and units of the variables, that describes a real-life situation. There are four important elements to every model: an equation, a label denoting the units on the output, a description (including units) of what the input variable represents, and an indication of the interval of input values over which the model is valid.
Monopoly: If a certain firm is the only one that can produce a certain goodsor service, it has a monopoly in the market for that goods or service.
Mortgage Terms:

"Good faith" estimate: It is an estimate of the fees that you will pay to close your loan.
A cash-out option? If your equity in your property qualifies, you can refinance with a loan amount greater than your current mortgage - and keep the difference! Use it for home improvement, debt consolidation, or whatever you desire.
Housing-to-income ratio: Your income, debt, and mortgage payments are the primary factors that affect whether you qualify for a loan. If you do qualify for a loan, you can apply, and ditech.com will move to the next step of checking to see if you can be approved.
To determine your qualification, the first thing ditech.com will do is divide the monthly payment of your proposed loan by your gross monthly income. This provides your housing-to-income ratio. If the resulting percentage falls within a certain range, the next step is to divide your total monthly debt by your gross monthly income. This provides your debt-to-income ratio. Again, if the ratio falls within prescribed limits, you are qualified for the loan.
The limits within which your housing and debt ratios must fall are determined primarily by the size of the loan, the value of the property, and the ratio between the two (known as the loan-to-value ratio, or LTV). This loan-to-value ratio is one of the most important factors in determining a home loan.
Appraisal: The appraisal determines the value of the property in question, which becomes a prime factor in determining the loan-to-value - or LTV - ratio (the amount of your loan divided by the value of your property). Your LTV is important because it determines your equity in the property. With the exception of leveraged equity and some second mortgages, ditech.com will arrange an appraisal of your property to verify its value. An appraiser is an authorized professional who estimates the value of the property and sends the information to ditech.com and to you.
An impound/escrow account: An impound account or an escrow account (the terms are interchangeable; each is used in different states) is the name of the account in which a lender collects payments you make toward your property taxes and hazard/fire insurance. If you have an impound/escrow account, each of your monthly payments will contain a fraction of your annual property tax and insurance costs. Your lender keeps these funds in the impound/escrow account and then pays your taxes and insurance directly when they become due.
An impound/escrow account can be a convenient and trouble-free manner of ensuring that your insurance and tax payments are made on time. Additionally, choosing the convenience of an impound/escrow account allows ditech.com to offer you a better rate or lower fee. Please note that impound/escrow accounts are mandatory for purchase or refinance Loans where the loan amount is 80.01 percent or more of the property value (loan-to-value ratios of 80.01 percent or more), unless otherwise restricted by laws in your property's state (in California, impound accounts are required for refinance loans, purchase loans with LTV of 90 percent or greater, and for second mortgages with LTVs of 80.01 percent or greater).
Income-to-debt ratio: Your income, debt, and mortgage payments make up your income-to-debt ratio. These are the primary factors that affect whether or not you qualify for a loan. If you do qualify for a loan, you can apply, and ditech.com will move to the next step of checking to see if you can be approved. To determine your qualification, the first thing ditech.com will do is divide the monthly payment of your proposed loan by your gross monthly income. This provides your housing-to-income ratio.
If the resulting percentage falls within a certain range, the next step is to divide your total monthly debt by your gross monthly income. This provides your debt-to-income ratio. Again, if the ratio falls within prescribed limits, you are qualified for the loan.
The limits within which your housing and debt ratios must fall are determined primarily by the size of the loan, the value of the property, and the ratio between the two (known as the loan-to-value ratio, or LTV). This loan-to-value ratio is one of the most important factors in determining a home loan.
Owner's estimate of value: For the 125% Freedom loan product, ditech.com relies on your estimate of the value of your property. You can estimate the value by reviewing neighborhood comparable properties (comps). A good way to do this is to simply call a local real estate agent. You can also visit open house events in your neighborhood. This may give you an indication of what prices are being asked for various properties.
PITI: PITI is the acronym for Principal, Interest, Taxes and Insurance. That is, each month your payment to your lender will consist of:
- Funds to be applied to the principal - to repay the actual money you borrowed
- Funds to be applied to the interest - to repay the interest you're being charged on the loan, over the life of the loan
- Funds being collected in an impound/escrow account to pay your property taxes when they come due
- Funds being collected in an impound/escrow account to pay your hazard/fire Insurance when it comes due
PMI: Private Mortgage Insurance (PMI) is usually mandatory for loans when the ratio of the loan amount to the value of the subject property is greater than 80 percent; that is, 80.01 percent or more of the property is being paid for by the loan. This is known as the loan-to-value ratio, or LTV. Basically, the lower your loan-to-value ratio, the higher your equity in the property will be. You can think of equity as the part of your property you actually own. If you sold your property (for its appraised value), equity is the amount of cash you'd have left after you repay your loan balance in full.
Common wisdom holds that the more equity a borrower has in a property, the lower the risk of defaulting on the loan. Thus, Private Mortgage Insurance (PMI) must be paid for lower equity (high LTV) loans to safeguard the lender from possible loan defaults.
What is prequalification vs. preapproval: Ditech.com simultaneously gives prequalification and preapproval based upon the information you provide in the online application. Because this preapproval is based on information provided to ditech.com verbally and as set forth on the application, it is considered conditional loan approval.
The conditional approval is subject to the verification and/or receipt of additional information. Once all closing conditions and lender requirements are satisfied, the loan will receive final approval.
Refinancing: Rolling in your loan costs is especially attractive when refinancing. By rolling in your costs, you incur no expenses, thus you have no "payback period." The payback period is the time required to recoup the cost of your new loan through the monthly savings you get from the difference between your new lower payments and your old ones. For example, if your new loan's payments are $100 a month less than your old one, but you had to pay $1,200 to refinance, you'd have a payback period of 12 months before you'd actually start saving. By rolling in the cost of your refinance, your actual savings begin immediately. Rolling in your costs is particularly appropriate if you are planning to sell or refinance again in a few years because, in this case, it doesn't really matter that your loan amount is higher as long as you enjoy savings right now.
Equity Line of Credit and another type of second mortgage: An Equity Line of Credit is money in an account that can be used as you need it. You can use any portion of it at any time and pay it back at any time. The interest rate is usually variable and is tied to the prime rate. Other types of second mortgages, such as the Home Equity Loan and 125 percent Freedom Loans are simple interest products. You borrow a lump sum and pay it back over a period of years with interest. The interest rate for these products is fixed.
Closing costs: Closing costs are sometimes also called settlement costs. These are the costs a lender charges for funding and completing your loan and are generally charged at the time of closing (or settlement). They often include discount points, which are fees paid to lower your interest rate. Settlement costs/closing costs vary greatly depending on your state, county, and/or metropolitan area. They also vary from one lender to another, so it pays to shop around.
Income, debt, and mortgage payments: These are the primary factors that effect whether you qualify for a loan. In order to determine if you qualify for a loan, your lender will calculate two defining ratios: the housing-to-income ratio and the debt-to-income ratio. The first of the two ratios, the housing-to-income ratio, is calculated by dividing the monthly payment of your proposed loan by your gross monthly income. If the resulting percentage falls within a predetermined range, the lender will then go on to calculate your debt-to-income ratio. The debt-to-income ratio is calculated by dividing your total monthly debt by your gross monthly income. Once again, if this ratio falls within prescribed limits, the lender will qualify you for the loan. The limits within which your housing and debt ratios must fall are determined primarily by the size of the loan, the value of the property, and the ratio between the two (known as the loan-to-value ratio, or LTV). This loan-to-value ratio is one of the most important factors in determining a home loan.
Prepaid interest and impound/escrow funds: Prepaid interest and impound/escrow funds are costs generally associated with a mortgage. At the time of closing your loan, a lender will often require you to provide the funds to establish your impound/escrow accounts (so your taxes and insurance can be paid on time) and to pay the interest for the time period between the loan closing date and the end of the closing month.
Rates, terms, and APR: All mortgages have an interest rate, a term, and an annual percentage rate (APR). For example, a mortgage might be defined as a 30-year fixed-rate loan at 7.625 percent, with an APR of 7.800 percent. In this example, the mortgage term is 30 years. As the borrower, you will pay back the loan in installments over the course of 30 years.
The interest rate in this example is 7.625 percent. This means you must pay interest on the money you've borrowed at a rate of 7.625 percent per year. That is, in addition to paying back the loan, you will pay your lender an additional 7.625 percent of the current loan balance every year. This interest is basically the fee your lender charges you in return for lending you the money.
The annual percentage rate (APR) is a measure of the cost of credit, expressed as a yearly rate. Because APR includes points and other costs such as origination fees, it's usually higher than the advertised rate. The APR allows you to compare different mortgages based on actual annual costs.
"Locking in a rate": You can secure your rate by completing a written agreement in which ditech.com guarantees a specified interest rate for a specified period of time. Locking in a mortgage rate protects you against interest rate changes from the date of the rate lock until the date of the closing as long as your rate lock has not expired. Should interest rates rise during that period, ditech.com is obligated to honor the committed rate. Should interest rates fall during that period, you must honor the lock.
Mortgage: A mortgage is a loan you acquire in order to purchase property, but you can also get cash for other purposes using the property as equity. In return for the loan, you pledge real property (land and/or a building) as security in case you fail to live up to your obligation.
When you borrow money against property, you commit to two financial documents:
- The NOTE that is a personal obligation to repay the loan on a timely basis
- The MORTGAGE DEED OF TRUST that is the pledge of the property as security; the mortgage deed of trust defines your obligations to your lender, as well as your rights and those of the lender.
You are pledged to repay the mortgage loan, along with an additional charge for the lender's service of lending you the money.
The cost of borrowing the money is the interest rate specified in your note. The amount of time you have to pay back the loan is the note's term.
Amortization:Amortization means paying down your principal. You repay your loan in monthly installments. If you have a fixed mortgage (that is, an interest rate that remains fixed for the entire term of the loan), your payments will always be the same amount. Part of the payment goes toward the payment of the interest, and part toward the repayment of the money you've borrowed (the principal).
The balance of the principal (what you still owe at any given time) is reduced with each payment. As a result, your monthly payment will pay the principal in increasing amounts over time. With a fixed-interest rate, the amount of interest you owe will decrease as your principal balance decreases.
You can create an amortization schedule for fixed loans when they are originated. This schedule will show how much of each payment will go toward interest and how much will go toward principal over the life of the loan.
As your principal decreases, your equity in the mortgaged property increases. Equity is a very important factor in mortgage financing.
Equity: Equity is a crucial aspect of home loans. Equity is simply the value of a homeowner's unencumbered interest on real estate. Equity is computed by subtracting the total of the unpaid mortgage balance and any outstanding liens or other debts against the property from the property's fair market value. A homeowner's equity increases as he or she pays off his or her mortgage or as the property appreciates in value. When a mortgage and all other debts against the property are paid in full, the homeowner has 100 percent equity in his or her property.
Equity exists in conjunction with your loan-to-value ratio (or LTV). Your LTV is a ratio expressing the value of your property to the amount of your loan. You determine your LTV by dividing your loan amount by your property's value or selling/purchase price, whichever is lower.
For example, you buy a $100,000 home with a $20,000 down payment of your own money, and cover the remaining $80,000 with a mortgage - 80,000 divided by 100,000 gives you a loan-to-value ratio of 80 percent and equity of 20 percent.
Equity and LTVs are important because lenders prefer a borrower to have as much equity as possible. Traditional wisdom holds that the higher the LTV on a loan, the higher the risk of default; alternatively, the higher the equity, the lower the risk - and therefore the lower the interest rate, cost, and fees associated with doing the loan. Equity also determines how much a lender will allow you to refinance your property for and how much they will lend you for a second mortgage.
Another way to think of equity is as the amount that you'll receive when you sell the property and pay back the remaining loan balance. Again, for a $100,000 house bought with an $80,000 loan and sold for $100,000, you would get $20,000 in cash back - or 20 percent of the home's value.

Multivariable function: A function that has two or more input variables and one output variable. Multivariable functions with two input variables can be illustrated with graphs of three-dimensional surfaces, tables of data, and/or contour graphs.

Normal distribution: A continuous probability distribution whose probability density function has a "bell" shape.

Oligopoly: A market for a good where a few major suppliers account for a large majority of sales.
Operational risk: Risk to financial or other institutions from inadequate or failed internal processes, people and systems or from external events.
Optimization: The process of finding relative or absolute extreme points.
Option: A type of derivative instrument. A contract which gives the holder of the contract the right to buy or sell a commodity or financial asset for a given price before a specified date.

Partial derivative: A derivative of a multivariable function found by taking the derivative of the function with respect to one of the input variables while all the other input variables are held constant.
Partial rate of change: The rate of change of a cross-sectional function that is computed as a partial derivative.
Percentage change: A quantity calculated from data with increasing input values by dividing each first difference by the output value of the lesser input value and multiplying by 100%. That is, if a quantity changes from a value of m to a value of n over a certain interval, then the percentage change equals n-mm×100%.
Percentage rate of change : A quantity that is useful in describing the relative magnitude of a rate of change. A percentage rate of change at a point is found by dividing the rate of change at the point by the function value at that same point and multiplying the result by 100%. Percentage rates of change have labels of percent per input unit.
Piecewise continuous function: A function formed by combining two or more pieces of continuous functions. A piecewise continuous function is not necessarily a continuous function.
Point of diminishing returns: An inflection point on the graph of a function beyond which the function output increases at a decreasing rate.
Point of tangency: The point at which the line tangent to a curve touches the curve and at which the slope of the line tangent to the curve is the instantaneous rate of change of the curve.
Polynomial function: A function that has the form f(x) = a_nxⁿ+ a_n-1x^n-1+ … + a₁x + a₀ , where a₀, a₁, … , a_n are constants and n is a positive integer called the degree of the polynomial. If n = 1, then the polynomial function is a linear function; if n = 2, it is a quadratic function; and if n = 3, it is a cubic function.
Portfolio: The entire collection of financial assets held by an investor.
Premium: The purchase price of an option.
Present value: The amount of money that would have to be invested now in an interest-bearing account in order for the amount to grow to a given future value.
Probability: A measure of how likely an event is to happen. The probability of an event is always a number between 0 (for an impossible event) and 1 (for a sure event). One of the methods for computing probabilities is to find areas under probability density functions.
Probability density function: A continuous or piecewise continuous function with input consisting of some interval of real numbers and output satisfying the conditions that each output value is greater than or equal to 0 and the area of the region between the density function and the horizontal axis is 1.
Probability distribution: When all outcomes of a particular situation are considered, the pattern indicated by the variability in the data is called the distribution of the quantity being studied.
Producers' revenue: The actual amount of money that producers receive for supplying a certain quantity of goods or services. The producers' revenue equals the market price times the quantity supplied.
Producers' surplus: The amount of money that producers receive above the minimum amount they are willing and able to accept for a certain quantity of goods or services.
Producers' willingness and ability to receive: The minimum amount of money that producers are willing and able to receive for supplying a certain quantity of goods or services.
Profit: Revenue minus total cost.
Profitability Ratios: Profitability ratios profitability ratios measure management's ability to control expenses and to earn a return on the resources committed to the business, for example:

Operating Income Margin = Operating Income / Net Sales
Gross Profit Margin = Gross Profit / Net Sales

Properties of indifference curves (IC):

All points on the same indifference curve carry same level of satisfaction or utility. A point with higher level of utility will be on a higher indifference curve while a point with lower level of satisfaction will be on a lower indifference curve.
Indifference curves slope downward. This is because when a person moves along an indifference curve, he/she faces a tradeoff. In order to get more of one good, one has to give up some amount of the other.
Indifference curves do not intersect each other. The IC's are convex to the origin. The indifference curves slope downward.
The Marginal Rate of Substitution / The marginal value and the Slope of IC. The marginal rate of substitution is the rate at which the consumer is just willing to substitute one good for another. For instance the marginal rate of substitution of Y for X is the amount of Y that a consumer is willing to give up in order to get one additional unit of X. The marginal rate of substitution is in fact the slope of the indifference curve. The steeper the indifference curve is, higher would be the slope and so higher would be the marginal rate of substitution.
Shape of the Indifference Curves and the Law of Diminishing Marginal Utility. Indifference curves are convex to the origin. In other words, they are steeper in the beginning and then flatten out towards the end. Since the slope of the IC is simply the marginal rate of substitution of X for Y , therefore we can say that the marginal rate of substitution of X for Y declines as we move along the curve. This is due to the law of diminishing marginal utility. As we move along the indifference curve, we are having more and more units of Y (measured on horizontal axis) and according to the law of diminishing marginal utility, each additional unit gives less and less marginal utility compared to the previous ones. So as we get more of Y, it becomes less valuable for us and we are willing to give up less of the other good in order to get more Y.

Quadratic function/model : A function of the form f(x) = ax²+ bx + c where a, b, and c are constants and a is nonzero. In this function, a is called the leading coefficient. The graph of a quadratic model is called a parabola. If a is less than zero, the parabola is cocave and if a If a is more than zero, the parabola is concvex. When input values of a set of data are evenly spaced and the second differences of the output values are constant, the data should be modeled by a quadratic function.
Quadratic portfolio: In the context of value-at-risk (VaR), a portfolio whose portfolio mapping function is a quadratic polynomial.

Random variable: A variable whose numerical values are determined by the results of a situation involving chance.
Ratings transition matrix: A matrix indicating probabilities of upgrades or downgrades in bonds' credit ratings.
Reduced form model: Intensity model.
Relative maximum: An output value that is larger than all other output values in some interval around the maximum. A graph increases to the relative maximum and decreases after it. For a multivariable function, a relative maximum is an output value that is greater than all values around it.
Relative minimum: An output value that is that is smaller than all other output values in some interval around the minimum. A graph decreases to the relative minimum and increases after it. For a multivariable function, a relative minimum is an output value that is smaller than all values around it.
Replacement cost : The cost of replacing an obligation of a counterparty.
Revenue: Quantity sold times price per unit.
Risk: Comprises two components: uncertainty and exposure.
Risk averse: Preferring less risk to more.

Saddle point: For a multivariable function, a saddle point appears to be a maximum point when approached from one direction and a minimum point when approached from another direction. Saddle points cannot be visually identified on the edges of tables or contour graphs.
Scatter plot: A discrete graph showing points in isolation from one another on a rectangular grid. A graph of data is a scatter plot.
Secant line: A line through two points on a scatter plot or a function graph. The slope of the secant line through two points is the average rate of change of the quantity between the input values of those two points.
Second derivative: The derivative of the derivative (provided it exists). At a point of inflection on a graph, the second derivative is zero or does not exist. Where the second derivative of a function is positive, the function graph is convex up, and where the second derivative of a function is negative, the function graph is concave.
Second differences : The differences between the first differences. Separation of variables : A technique for solving certain differential equations in which all terms containing one variable are put on one side of the equation, all terms involving the other variable are put on to the other side of the equation, and then antiderivatives of both sides are taken.
Shutdown price: The price below which producers are not willing or able to supply any quantity of particular goods or services to consumers. The point on the supply curve that corresponds to the shutdown price is called the shutdown point.
Signed area : The negative of the area of a region.
Semi-variance: An alternative to variance that focuses on negative values of a distribution.
Slope: A measure of how steeply tilted a line or curve is. The rate of change of a linear function is its slope. The slope of the line tangent to a curve at a point is the limiting value of the slopes of nearby secant lines. The slope of a curve (graph) at a point is the slope of the line tangent to the curve at that point (provided the slope exists). The instantaneous rate of change (also called the derivative or rate of change) at a point on a curve is the slope of the curve at that point (provided that slope exists).
Slope graph: Also called the rate-of-change graph or derivative graph, a slope graph depicts the changing nature of the slopes of lines tangent to a graph of a function. Where a function is increasing, its slope graph is positive; where a function is decreasing, its slope graph is negative. Where a function has a maximum, has a minimum, or levels off, the slope graph is zero. Where a function has an inflection point, the slope graph has a maximum or minimum point.
Smooth: A continuous function is smooth if it has no sharp points; that is, no points where two pieces of a function have different slopes at the point where they meet.
Solvency Ratios: These ratios measure the financial soundness of a business and how well the company can satisfy its short- and long-term obligations:

Quick Ratio – This ratio, also called "acid test" or "liquid" ratio, considers only cash, marketable securities (cash equivalents) and accounts receivable because they are considered to be the most liquid forms of current assets. A Quick Ratio less than 1.0 implies dependency on inventory and other current assets to liquidate short-term debt. This ratio is calculated using the following formula:
Cash + Accounts Receivable / Current Liabilities
Current Ratio – This ratio is a comparison of current assets to current liabilities, commonly used as a measure of short-run solvency, i.e., the immediate ability of a business to pay its current debts as they come due. Potential creditors use this ratio to measure a company's liquidity or ability to pay off short-term debts. This ratio is calculated using the following formula:
Current Assets / Current Liabilities
Current Liabilities to Net Worth Ratio – This ratio indicates the amount due creditors within a year as a percentage of the owners or stockholders investment. The smaller the net worth and the larger the liabilities, imply the less security for creditors. Normally a business starts to have trouble when this relationship exceeds 80%. This ratio is calculated using the following formula:
Current Liabilities / Net Worth
Current Liabilities to Inventory Ratio – This ratio shows, as a percentage, the reliance on available inventory for payment of debt (how much a company relies on funds from disposal of unsold inventories to meet its current debt). This ratio is calculated using the following formula:
Current Liabilities / Inventory
Total Liabilities to Net Worth Ratio – This ratio shows well how all of a company's debt relates to the equity of the owners or stockholders. The higher this ratio, the less protection there is for the creditors of the business. This ratio is calculated using the following formula:
Total Liabilities / Net Worth
Fixed Assets to Net Worth Ratio – This ratio shows the percentage of assets centered in fixed assets compared to total equity. Generally the higher this percentage is over 75%, the more vulnerable a concern becomes to unexpected hazards and business climate changes. Capital is frozen in the form of machinery and the margin for operating funds becomes too narrow for day-to-day operations. This ratio is calculated using the following formula:
Fixed Assets / Net Worth

Standard deviation: A measure of how closely the values of a probability distribution cluster about its mean.
Standard position: An angle drawn so that one side, called the initial side, is along the positive x-axis and the other side, called the terminal side, is in one of the four quadrants.
Stochastic process: A model for a time series.
Sum of squared errors (SSE): A measure of best fit for linear functions. SSE is calculated as the sum of the squares of the deviations where the deviation for each data point is the data output minus the output of the fitted linear function y = ax + b.
Supply: Supply is the amount of a good or service that a producer is willing and able to offer for sale at each possible price. Supply is affected by a number of factors. Price is the most important factor but there are other factors also that can influence supply such as technology, future expectations and
prices of inputs: A change in price leads to a change in quantity supplied. A change in price does not lead to a change in supply. All else equal, if the price of a good goes up, quantity supplied goes up and vice versa.
Supply vs. Quantity supplied: Supply is a set of number that lists the quantity supplied corresponding to each possible price whereas quantity supplied is the amount of a good or service that a producer is willing to offer for sale at a given price. For instance, the information on price and quantity supplied presented in a table/demand schedule is collectively referred to as the supply.
Supply curve: A graph illustrating supply, with prices on the vertical axis and quantity supplied on the horizontal axis. Supply curve slopes upward because of the positive relationship between price and quantity. A change in supply leads to a shift in the supply curve. A fall in supply shifts the supply curve to the left and a rise in supply shifts the curve to the right supplied.
Supply and the Excise Tax: An excise tax is a tax that is paid directly by suppliers to the government. An excise tax affects the supply curve. It causes the curve to shift to the left parallel to itself by the amount of the tax.
Supply Market: Market supply is the sum of the individual supplies by all the sellers. Market supply curve is the horizontal summation of individual supply curves.
Demand and Supply Equilibrium: The points where the demand and supply curves intersect each other. Shifts in demand, supply or both the curves changes the equilibrium. In order to find the effect of a certain event on equilibrium, we have to know first whether the event shifts the demand or supply curve and then trace the effect on equilibrium systematically. Both the sales tax and excise tax reduce the equilibrium quantity. In both cases, the price paid by demanders increase and the price received by suppliers decrease. In other words, both the suppliers and demanders are worse off regardless of whether it is a sales tax or an excise tax. In other words, both the demanders and the suppliers bear the burden of the tax. The magnitude of burden however, depends upon the shapes of the demand and supply curves.
Supply curve/function: A graph or equation that expresses the quantity supplied relative to the price per unit.
Symmetric difference quotient: A method of approximating instantaneous rates of change from data or an equation by using a close point on either side of the point of interest and the same horizontal distance away. The symmetric difference quotient is the difference between the outputs of the two close points divided by the corresponding difference in inputs of the two close points.
Systematic risk: That component of an instrument or portfolio's market risk that is correlated with the overall market.

Tangent line: A line that touches a graph at a point and is tilted exactly the way the graph is tilted at that point. The tangent line at a point on a smooth continuous graph is the limiting position of the secant lines between nearby points and that point (if the limiting position exists). Provided the slope exists, the slope of the tangent line at a point is a measure of the slope of the graph at that point and gives the instantaneous rate of change of the graph at that point.
Time series: A series of observations made over a period of time.
Total cost: The sum of the fixed costs and the variable costs.
Total social gain: The benefit to society whenever consumers and/or producers have surplus funds. When the market price of a product is the equilibrium price for that product, the total social gain is the consumers' surplus plus the producers' surplus.
Trend : As associated with limits, a trend is a value to which a quantity becomes closer and closer as the input becomes infinitely large or infinitely small.

Unexpected loss: A risk metric related to the second moment of a portfolio's losses due to default over a specified horizon.
Uniform distribution: A continuous probability distribution that has constant probability on a finite interval.
Unit of measure: A word or short phrase telling how a quantity is measured, not an entire description telling what the variable represents.
Utility: Utility is a measure of pleasure or satisfaction. Suppose we have two goods: X and Y and there is a basket containing 5 units of X and 7 units of Y, and the consumption of this basket gives 6 units of utility, then we can write: U(5,7) = 6.
Utilization: Given a risk limit, the amount of risk being taken as a fraction of the limit.
Value-at-risk (VaR): A category of market risk measures.
Variable costs: Costs that change according to the number of items produced or the amount of service performed.
Variation: the spread of a set of observations or of a random variable, usually measured by the variance, the standard deviation, the range or the inter-quartile range.
Vertical Line Test: A method of visually determining whether a graph with inputs located along the horizontal axis and outputs located along the vertical axis is a function. If there is no input at which a vertical line crosses or touches the graph in two or more places, then the graph represents a function.
Why People Trade? Everyone benefits when each person specializes in his area of comparative advantage and then engages in trade. Trade can help people specialize in different activities and helps them enjoy a variety of goods and services. Trade can take place because of two major reasons: difference in tastes and difference in abilities.
Volatility: A metric of variability in a stochastic process.
Work Simplification: Analysis of any aspects of work with the objective of removing any unnecessary obstacles to its effective achievement, such as motion and time study.

X-bar chart: A quality control chart for the mean of a process.

Yates' correction for continuity: An old correction to adjust chi-square for a 2 by 2 table for the fact that cell frequencies are integer, rather than continuous; however, rarely recommended any longer.

Zero Defects: A type of quality control in which the objective is to make no mistake or produce no reject material whatsoever.
Z score: Number of standard deviations above or below the mean

Working with Economics Students a approach of our institute

2022-10-03T11:29:00.003-07:00

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Model of economic growth(vol 2)

2022-08-14T06:13:00.001-07:00

MODEL of ECONOMIC GROWTH

The Harrod-Domar Economic Growth Model (With Assumptions)

Introduction to the Harrod-Domar Economic Growth Model:

Ever since the end of Second World War, interest in the problems of economic growth has led economists to formulate growth models of different types.

These models deal with and lay emphasis on the various aspects of growth of the developed economies. They constitute in a way alternative stylized pictures of an expanding economy.

feature common to them all is that they are based on the Keynesian saving-investment analysis. The first and the simplest model of growth—the Harrod-Domar Model—is the direct outcome of projection of the short-run Keynesian analysis into the long-run.

This model is based on the capital factor as the crucial factor of economic growth. It concentrates on the possibility of steady growth through adjustment of supply of demand for capital. Then there is Mrs. Joan Robinson’s model which considers technical progress also, along with capital formation, as a source of economic growth. The third type of growth model is that built on neoclassical lines.

It assumes substitution between capital and labour and a neutral technical progress in the sense that technical progress is neither saving nor absorbing of labour or capital. Both the factors are used in the same proportion even when neutral technical takes place. We deal with the prominent growth models here.

Although Harrod and Domar models differ in details, they are similar in substance. One may call Harrod’s model as the English version of Domar’s model. Both these models stress the essential conditions of achieving and maintaining steady growth. Harrod and Domar assign a crucial role to capital accumulation in the process of growth. In fact, they emphasise the dual role of capital accumulation.

On the one hand, new investment generates income (through multiplier effect); on the other hand, it increases productive capacity (through productivity effect) of the economy by expanding its capital stock. It is pertinent to note here that classical economists emphasised the productivity aspect of the investment and took for granted the income aspect. Keynes had given due attention to the problem of income generation but neglected the problem of productive capacity creation. Harrod and Domar took special care to deal with both the problems generated by investment in their models.

General Assumptions:

The main assumptions of the Harrod-Domar models are as follows:

(i) A full-employment level of income already exists.

(ii) There is no government interference in the functioning of the economy.

(iii) The model is based on the assumption of “closed economy.” In other words, government restrictions on trade and the complications caused by international trade are ruled out.

(iv) There are no lags in adjustment of variables i.e., the economic variables such as savings, investment, income, expenditure adjust themselves completely within the same period of time.

(v) The average propensity to save (APS) and marginal propensity to save (MPS) are equal to each other. APS = MPS or written in symbols,

S/Y= ∆S/∆Y

(vi) Both propensity to save and “capital coefficient” (i.e., capital-output ratio) are given constant. This amounts to assuming that the law of constant returns operates in the economy because of fixity of the capita-output ratio.

(vii) Income, investment, savings are all defined in the net sense, i.e., they are considered over and above the depreciation. Thus, depreciation rates are not included in these variables.

(viii) Saving and investment are equal to ex-ante as well as in ex-post sense i.e., there is accounting as well as functional equality between saving and investment.

These assumptions were meant to simplify the task of growth analysis; these could be relaxed later.

Harrod’s growth model raised three issues:

(i) How can steady growth be achieved for an economy with a fixed (capital- output ratio) (capital-coefficient) and a fixed saving-income ratio?

(ii) How can the steady growth rate be maintained? Or what are the conditions for maintaining steady uninterrupted growth?

(iii) How do the natural factors put a ceiling on the growth rate of the economy?

In order to discuss these issues, Harrod had adopted three different concepts of growth rates: (i) the actual growth rate, G, (ii) the warranted growth rate, Gw (iii) the natural growth rate, Gn.

The Actual Growth Rate is the growth rate determined by the actual rate of savings and investment in the country.

Solow’s Model of Growth

Prof. Robert M. Solow made his model an alternative to Harrod-Domar model of growth.

It ensures steady growth in the long run period without any pitfalls. Prof. Solow assumed that Harrod-Domar’s model was based on some unrealistic assumptions like fixed factor proportions, constant capital output ratio etc.

Solow has dropped these assumptions while formulating its model of long-run growth. Prof. Solow shows that by the introduction of the factors influencing economic growth, Harrod-Domar’s Model can be rationalised and instability can be reduced to some extent.

He has shown that if technical coefficients of production are assumed to be variable, the capital labour ratio may adjust itself to equilibrium ratio in course of time.

In Harrod-Domar’s model of steady growth, the economic system attains a knife-edge balance of equilibrium in growth in the long-run period.

This balance is established as a result of pulls and counter pulls exerted by natural growth rate (Gn) (which depends on the increase in labour force in the absence of technical changes) and warranted growth rate (Gw) (which depends on the saving and investment habits of household and firms).

However, the key parameter of Solow’s model is the substitutability between capital and labour. Prof. Solow demonstrates in his model that, “this fundamental opposition of warranted and natural rates turns out in the end to flow from the crucial assumption that production takes place under conditions of fixed proportions.”

The knife edge balance established under Harrodian steady growth path can be destroyed by a slight change in key parameters.

Prof. Solow retains the assumptions of constant rate of reproduction and constant saving ratio etc. and shows that substitutability between capital and labour can bring equality between warranted growth rate (Gw) and natural growth rate (Gn) and economy moves on the equilibrium path of growth.

In other words, according to Prof. Solow, the delicate balance between Gw and Gn depends upon the crucial assumption of fixed proportions in production. The knife edge equilibrium between Gw and Gn will disappear if this assumption is removed. Solow has provided solution to twin problems of disequilibrium between Gw and Gn and the instability of capitalist system.

In short, Prof. Solow has tried to build a model of economic growth by removing the basic assumptions of fixed proportions of the Harrod-Domar model. By removing this assumption, according to Prof. Solow, Harrodian path of steady growth can be freed from instability. In this way, this model admits the possibility of factor substitution.

Assumptions:

Solow’s model of long run growth is based on the following assumptions:

1. The production takes place according to the linear homogeneous production function of first degree of the form

Y = F (K, L)

Y= Output

K = Capital Stock

L = Supply of labour force

The above function is neo-classic in nature. There is constant returns to scale based on capital and labour substitutability and diminishing marginal productivities. The constant returns to scale means if all inputs are changed proportionately, the output will also change proportionately. The production function can be given as aY = F (aK, al)

2. The relationship between the behaviour of savings and investment in relation to changes in output. It implies that saving is the constant fraction of the level of output. In this way, Solow adopts the Harrodian assumption that investment is in direct and rigid proportion to income.

symbolic terms, it can be expressed as follows:

I = dk/ dt = sY

Where

S—Propensity to save.

K—Capital Stock, so that investment I is equal

3. The growth rate of labour force is exogenously determined. It grows at an exponential rate given by

L = L0 ent

Where L—’Total available supply of labour.

n—Constant relative rate at which labour force grows.

4. There is full employment in the economy.

5. The two factors of production are capital and labour and they are paid according to their physical productivities.

6. Labour and capital are substitutable for each other.

7. Investment is not of depreciation and replacement charges.

8. Technical progress does not influence the productivity and efficiency of labour.

. There is flexible system of price-wage interest.

10. Available capital stock is fully utilized.

Following these above assumptions, Prof. Solow tries to show that with variable technical co-efficient, capital labour ratio will tend to adjust itself through time towards the direction of equilibrium ratio. If the initial ratio of capital labour ratio is more, capital and output will grow more slowly than labour force and vice-versa.

To achieve sustained growth, it is necessary that the investment should increase at such a rate that capital and labour grow proportionately i.e. capital labour ratio is maintained.

Solow’s model of long-run growth can be explained in two ways:

A. Non-Mathematical Explanation.

B. Mathematical Explanation.

A. Non-Mathematical Explanation:

According to Prof. Solow, for attaining long run growth, let us assume that capital and labour both increase but capital increases at a faster rate than labour so that the capital labour ratio is high. As the capital labour ratio increases, the output per worker declines and as a result national income falls.

The savings of the community decline and in turn investment and capital also decrease. The process of decline continues till the growth of capital becomes equal to the growth rate of labour. Consequently, capital labour ratio and capital output ratio remain constant and this ratio is popularly known as “Equilibrium Ratio”.

Prof. Solow has assumed technical coefficients of production to be variable, so that the capital labour ratio may adjust itself to equilibrium ratio. If the capital labour ratio is larger than equilibrium ratio, than that of the growth of capital and output capital would be lesser than labour force. At some time, the two ratios would be equal to each other.

In other words, this is the steady growth, according to Prof. Solow as there is the steady growth there is a tendency to the equilibrium path. It must be noted here that the capital-labour ratio may be either higher or lower.

Like other economies, Prof. Solow also considers that the most important feature of an underdeveloped economy is dual economy. This economy consists of two sectors-capital sector or industrial sector and labour sector or agricultural sector. In industrial sector, the rate of accumulation of capital is more than rate of absorption of labour.

With the help of variable technical coefficients many employment opportunities can be created. In agricultural sector, real wages and productivity per worker is low. To achieve sustained growth, the capital labour ratio must be high and underdeveloped economies must follow Prof. Solow to attain the steady growth.

This model also exhibits the possibility of multiple equilibrium positions. The position of unstable equilibrium will arise when the rate of growth is not equal to the capital labour ratio. There are other two stable equilibrium points with high capital labour ratio and the other with low capital labour ratio.

If the growth process starts with high capital labour ratio, then the development variables will move in forward direction with faster speed and the entire system will grow with high rate of growth. On the other hand, if the growth process starts with low capital labour ratio then the development variables will move in forward direction with lesser speed.

To conclude the discussion, it is said that high capital labour ratio or capital intension is very beneficial for the development and growth of capitalist sector and on the contrary, low capital-labour ratio or labour-intensive technique is beneficial for the growth of labour sector.

B. Mathematical Explanation:

This model assumes the production of a single composite commodity in the economy. Its rate of production is Y (t) which represents the real income of the community. A part of the output is consumed and the rest is saved and invested somewhere.

The proportion of output saved is denoted by s. Therefore, the rate of saving would be sY (t). The capital stock of the community is denoted by K it). The rate of increase in capital stock is given by dk/dt and it gives net investment.

Since investment is equal to saving so we have following identity:

K = sY … (1)

Since output is produced by capital and labour, so the production function is given by

Y = F (K, L) … (2)

Putting the value of Y from (2) in (1) we get

S = s F (K, L) … (3)

Where

L is total employment

F is functional relationship

Equation (3) represents the supply side of the system. Now we are to include demand side too. As a result of exogenous population growth, the labour force is assumed to grow at a constant rate relative to n. Thus,

L (t) = L0ent … (4)

Where

L—Available supply of labour

Putting the value of L in equation (3) we get

K = sF (K, L0ent) …(5)

The right hand of the equation (4) shows the rate of growth of labour force from period o to t or it can be regarded as supply curve for labour.

“It says that the exponentially growing labour force is offered for employment completely in elastically. The labour supply curve is a vertical line, which shifts to the right in time as the labour force grows. Then the real wage rate adjusts so that all available labour is employed and the marginal productivity equation determines the wage rate which will actually rule.”

If the time path of capital stock and of labour force is known, the corresponding time path of real output can be computed from the production function. Thus, the time path of real wage rate is calculated by marginal productivity equation.

The process of growth has been explained by Prof. Solow as, “At any moment of time the available labour supply is given by (4) and available stock of capital is also a datum. Since the real return to factors will adjust to bring about full employment of labour and capital we can use the production function (2) to find the current rate of output. Then the propensity to save tells us how much net output will be saved and invested. Hence, we know the net accumulation of capital during the current period. Added to the already accumulated stock this gives us the capital available for the next period and the whole process can be repeated.”

Possible Growth Patterns:

To find out whether there is always a capital accumulation path consistent with any rate of growth of labour force, we should know the accurate shape of production function otherwise we cannot find the exact solution.

Joan Robinson’s Model of Growth

Joan Robinson has given her model of growth in her classic book.

‘The Accumulation of Capital’ in 1956. Joan Robinson’s model clearly takes the problem of population growth in a developing economy and analyses the influence of population on the role of capital accumulation and growth of output.

The two fundamental propositions of the model are as under:

1. The capital formation depends on the manner of distribution of income.

2. The rate at which labour is utilized depends upon the supply of capital and that of labour.

Assumptions:

1. Labour and capital are the only productive factors. It implies that the national output is the result of combined efforts of these two factors of production.

2. The economy is assumed to be closed i.e., there is no foreign trade.

3. Total wage bill is the product of real wage rate and number of workers.

4. Total income is divided between capital and labour as these are the two factors of production.

5. The production is not affected by the technological changes i.e. there is no progress in technology.

6. Total profit is the product of profit rate and amount of capital invested.

7. There is constancy in price level.

8. Wage earners spend all of their wage income on consumption, while profit takers save and invest all of their profit income.

. Capital and labour are combined in a fixed proportion for a given output.

10. The national income is the sum of wage bill and total profits.

11. There is no scarcity of labour and entrepreneurs can employ as much labour as they wish.

12. Entrepreneurs consume nothing but save and invest their entire income for capital formation. If they have no profits, there is no accumulation and if they do not accumulate, they have no profits.

Open Model:

In an open economy, the conditions for the steady growth and conditions for rising rate of capital accumulation will be discussed. According to Mrs. Joan Robinson, national income is the sum of the total wage bill and total profit. Total wage bill is the real wage multiplied by the number of workers and total profits are equal to profit rate multiplied by the amount of capital.

This relationship can be expressed as under:

PY = WN + πPK

Where P — Average Price level.

Y— Net national income.

W — Net money wage rate.

N— Amount of labour employed.

K— Amount of capital invested.

π — Rate of profit.

convert the expression into real terms, divide both sides of equation by p (average price level), we get

Where ρ Y/N i. e Labour/ Productivity, W/P real The

State of Disequilibrium:

The economy will possess any equilibrium mechanism if and when it diverges from Golden age equilibrium for some reason.

There are two possibilities of divergence:

(i) ∆N/N˃ ∆K/K

(ii) ∆K/K ˃ ∆K/ A

1. The first possibility (i.e., ∆N/N ˃ ∆K/ K) shows that the growth rate of population is greater than growth rate of capital. This type of situation occurs in underdeveloped countries. Mrs. Robinson is of the view that it is the ‘profit wage relation’ which pushes the economy back on the path of Golden age. The excess of labour supply would depress the money wage rate and if the prices remain constant, the real wages would fall.

This fall in real wages would increase the level of profit, which in turn would stimulate the growth of capital. The increase in the growth rate is unable to fulfil the labour supply of population. When the parity between the two growth rates are restored, then the economy would be on Golden age.

On the other hand, if real wages do not fall because of subsistence wage floor or if the general price level does not fall in same proportion as money wage rate, it would be difficult to restore the position of Golden age and it will lead to under employment.

2. The second possibility comes out as the economy is in the disequilibrium and can be expressed as ∆N/N ˂ ∆K/K Under the situation, the growth rate of population is less as compared to growth rate of capital. This type of situation occurs in developed countries. The possibility of advanced countries returning to the path of Golden age equilibrium is greater than that of underdeveloped economies.

This is due to the fact that developed countries can move to higher production curve through the technological improvement. The higher production curve will lead to higher capital labour ratio. Thus, the equality between growth rate of capital and growth rate of labour is a pre-requisite for achieving the Golden age. equation illustrates that the rate of growth of capital is capable of increasing if the net returns to capital rise in greater proportion than the capital-labour ratio and vice-versa. In other words, lower rate of profit always affects the supply of capital adversely which in turn widens the gap between supply of capital and labour. The main feature of the model is that the rate of growth of capital is dependent on profit rate.

Closed Model:

In a closed economy, the concepts of Golden age and Platinum age are to be discussed. In simple words, Golden age is a situation of smooth steady growth with full employment arising out of the equality of the ‘Desired’ and ‘Possible’ rates of accumulation and has been designated by Mrs. Joan Robinson as the Golden age equilibrium.

However, if an increase in labour supply is not accompanied by proportionate increase in the capital supply, then it will cause unemployment in the economy. To achieve full employment of labour the growth rate of population must be equal to growth rate of capital i.e.

∆N/N = ∆K/K

When the rate of growth of labour and capital are equal to each other, then there is full utilisation of capital in the economy. Such a switch on is called Golden age. The existence of Golden age is the indicator of full employment level.

The concept of Golden age implies that there must be equality in actual, warranted and natural growth rates.

In short, in Mrs. Robins

on Joan’s words, when technical progress is neutral and proceeding steady, without any change in the time pattern of production, the competitive mechanism works freely, population grows (if at all) at a steady rate and accumulation goes on fast enough to supply productive capacity for all available labour, the rate of profit tends to be constant and the level of real wages rises with output per head.

Then there are no internal contradictions in the system, we may describe these conditions as a Golden age (thus indicating that it represents a mythical state of affairs not likely to obtain in any actual economy). This is explained with the In the figure 1, capital labour ratio is illustrated along positive direction of X-axis and wage rate of labour on Y-axis and the growth rate of labour on negative side of X-axis. The production function is represented by OP. Each point on this curve shows the proportion in which capital and labour are combined to produce a particular level of output.

Tangent NT touches the curve OP at A and intersects Y-axis at W. At point A capital labour ratio is OC, the productivity of labour is OD and out of which OW is the wage rate. The surplus DW is rate of return to capital.

The point A shows the position of equilibrium because the slope of tangent NT and the slope of production curve OP is the same. It can also be said that at A, the growth rate of capital ∆K/K is equal to growth rate of labour ∆N/N. of a diagram 1. ratethe figure 1, capital labour ratio is illustrated along positive direction of X-axis and wage rate of labour on Y-axis and the growth rate of labour on negative side of X-axis. The production function is represented by OP. Each point on this curve shows the proportion in which capital and labour are combined to produce a particular level of output.

θ = K/N i.e., Capital Labour Ratio

The above equation indicates that the profit rate is a function of labour productivity (p) and real wage rate (W/P) and capital labour ratio (8). In other words, the profit rate is shown as capable of varying directly with the rate of net return to capital and inversely with the coefficient of capital intensity. The necessary condition for maximization is that the first derivative must be zero.

Keynesian income expenditure analysis shows that the net national real income (Y) is the sum of real consumption expenditure (C) and real net investment which can be expressed as;

Y = C + I

Now we know that labour spends its entire income and saves nothing. The profit earning class makes saving in the form of profit. According to Mrs. Robinson, savings must be equal to total profits. Thus, savings in a given period are equal to capital investment multiplied by rate of profit.

Th above equation illustrates that the rate of growth of capital is capable of increasing if the net returns to capital rise in greater proportion than the capital-labour ratio and vice-versa. In other words, lower rate of profit always affects the supply of capital adversely which in turn widens the gap between supply of capital and labour. The main feature of the model is that the rate of growth of capital is dependent on profit rate.

Closed Model:

∆N/N = ∆K/K

The concept of Golden age implies that there must be equality in actual, warranted and natural growth rates.

In short, in Mrs. Robinson Joan’s words, when technical progress is neutral and proceeding steady, without any change in the time pattern of production, the competitive mechanism works freely, population grows (if at all) at a steady rate and accumulation goes on fast enough to supply productive capacity for all available labour, the rate of profit tends to be constant and the level of real wages rises with output per head.

the figure 1, capital labour ratio is illustrated along positive direction of X-axis and wage rate of labour on Y-axis and the growth rate of labour on negative side of X-axis. The production function is represented by OP. Each point on this curve shows the proportion in which capital and labour are combined to produce a particular level of output.

State of Disequilibrium:

The economy will possess any equilibrium mechanism if and when it diverges from Golden age equilibrium for some reason.

There are two possibilities of divergence:

(i) ∆N/N˃ ∆K/K

(ii) ∆K/K ˃ ∆K/ A

Desired Rate of Accumulation:

Mrs. Robinson established a relation between the desired rate of accumulation and possible rate of accumulation.

The desired rate of accumulation which would make the firms feel satisfied with economic conjecture in which they find themselves. It is necessary to know the relation between “the rate of profit caused by the rate of accumulation and the rate of accumulation which the rate of profit will induce

Applicability to Underdeveloped Countries:

This model deals with the problem of population and its effect on rate of capital accumulation in a developing economy. There is Golden age which any country can witness through planned economic development. The main problem of an underdeveloped country is that the rate of population growth is faster than capital growth i.e. ∆N/ N ˃ ∆K/K.

This results in the under-employment. In underdeveloped country, we need a growth theory which is based on only practical ideas and techniques which could be operative in their present socio-economic environment. The process of economic growth in underdeveloped country without changing the price level would simply be a blind man’s buff. Therefore, some rise in price level is necessary.

The model of Joan Robinson is dictum against ‘Capitalist rules of the game’.

Prof. K.K. Kurihara who opines that “Joan Robinson’s discussion of capital growth has subtle effect of discrediting the whole idea of leaving so important a problem as economic growth to capitalist rules of the game for her model of Laissez faire growth demonstrates how precarious and insecure it is to entrust to private profit makers the paramount task of achieving the stable growth of economy consistent with the needs of a growing population and possibility of advancing technology.”

This model brings out cogently that the main problem to achieve steady growth depends upon population growth and capital accumulation.

The ‘potential growth ratio’ is crucial to Mrs. J. Robinson theory of economic growth. The Golden age depends upon growth ratio. The planning process becomes easier if the potential growth ratio of the economy is calculated for such period on the basis of the growth rate of labour force and of output per head.

The chief hurdle in the path of capital accumulation is population growth. When the rate of growth of population is above the rate of capital formation it leads to progressive unemployment. Thus, the plan can be made more realistic and executed more efficiently to achieve the desired goals.

Furthermore, it suggests to take initiative in controlling not the private investment but also public investment in under developed countries. In this way, Mrs. Joan Robinson hints at the adoption of the Keynesian technique of the mixed public private economy to gear the autonomous investment with the help of fiscal and monetary policies

Critical Evaluation:

Mrs. Joan Robinson presents an interesting classification of growth process. This model seems to provide more realistic analysis of the problem of economic development in under developed countries.

In Harrod-Domar model, the capital accumulation depends upon saving ratio and capital productivity but in Robinson Model, it depends upon the profit wage relation and labour productivity bringing her theory closer to a real market economy.

The idea of Golden age lays stress on the parity between the growth rate of capital and growth rate of population. This difference between two growth rates is necessary for underdeveloped countries striving to achieve development with stability. Despite of many merits, the model is not free from flaws.

Some of these weak points are summarised below:

1. Neglects Institutional Transformation,

2. Constant Price Level,

3. Closed Economy,

4. Unrealistic Assumptions,

5. Neutrality to Policy Implications,

6. Role of Human Capital ignored,

7. Low Rate of Capital Accumulation in relation to Potential Growth,

8. No Role of State, and

9. No Technical Progress.

1. Neglects Institutional Transformation:

This model ignores institutional transformations for promoting savings.

The capital accumulation among other things implies:

(a) An increase in the volume of savings

(b) Finance and credit mechanism

(d) Pattern of investment involving the use of capital

(e) Changing technology. But these factors find no place in the model.

The development of an economy depends upon social, cultural and institutional changes to a greater extent.

2. Constant Price Level:

This model is based on the unrealistic assumption of constant price level. The investment has to be increased continuously which tends to raise the demand for factors but their supply cannot be increased to meet the demand. This results in increase in prices which is a contradiction.

3. Closed Economy:

The model is based on the closed economy but this is unreal because underdeveloped countries are open rather than closed economies in which foreign trade and aid play creditable role in increasing the growth rate.

4. Unrealistic Assumptions:

Another weakness of the model is that it is based on certain assumptions which do not hold good in the present era. The technical neutrality does not fit in the dynamic process of growth. Growth model becomes irrelevant if factors like these are taken to be neutral.

The assumption of closed economy Laissez faire, free market system, price stability and neglect of institutional forces are all unrealistic, and this makes the economy static. Static economy and economic development cannot go side by side.

5. Neutrality to Policy Implications:

It does not suggest any fiscal or monetary policy for economic development. Prof. K.K. Kurihara is of the opinion that Mrs. Robinson’s model is not capable to introduce fiscal and monetary policy parameters. Prof. V.B. Singh has observed.

“That the critical deficiency of this model consists in its neutrality to the important policy implications in economic development.” The crux of the discussion is that this model fails to consider fiscal or monetary parameters without which theory of development remains more or less incomplete.

6. Role of Human Capital Ignored:

This model lays more emphasis on material capital but ignores the role of human capital. The essential ingredients of capital are education and technical training. Marx emphasised the role of labour productivity in the accumulation of capital. Mc Cullach included, The dexterity skill the accumulation of capital. Further, he says, the dexterity skill and intelligence of labour in his concept of capital.

The contemporary development writes subscribe to this approach by including, “investment in human capital” in their development theories. Human capital means investment in education, health, sanitation and nutrition etc. This model gives an explanation for economic development because it emphasizes the accumulation of physical capital while neglects the role of human capital.

7. Low Rate of Capital Accumulation in Relation to Potential Growth:

Generally underdeveloped countries are backward due to shortage of capital accumulation than potential growth ratio and have surplus labour force. In this regard Prof. K. Kurihara has rightly mentioned, “Joan Robinson’s discussion of capital growth has the subtle effect of discrediting the whole idea of leaving so important a problem as economic growth to the capitalist rule of the game, for her model of Laissez-faire growth demonstrates how precarious and insecure it is to entrust to provide profit makes the paramount task of achieving the stable growth of an economy consistent with the needs of a growing population and the possibility of advancing technology.”

8. No Role of State:

In Mrs. Joan Robinson’s model, the role of state has been left out of picture. In the present world, it is precarious to rely solely on the private entrepreneurs for attaining the stable growth in them with the requirements of a growing population and rapidly changing technology.

9. No Technical Progress:

According to the model, there is no technical progress. But in a dynamic setting where technical progress is inherent, technical co-efficient of production can no longer remain fixed.

KALDOR MODEL OF ECONOMIC GROWTH

del f Economic Growth

his essay titled A Model of Economic Growth, originally published in Economic Journal in 1957, postulates a growth model, which follows the Harrodian dynamic approach and the Keynesian techniques of analysis. In his growth model, Kaldor attempts "to provide a framework for relating the genesis of technical progress to capital accumulation", whereas the other neoclassical models treat the causation of technical progress as completely exogenous

The purpose of a theory of economic growth is to show the nature of non-economic variables which ultimately determine the rate at which the general level of production of economy is growing, and thereby contribute to an understanding of the question of why some societies grow so much faster than other

AssumptionsEdit
The basic properties of Kaldor's growth model are as follows:
Short period supply of aggregate goods and services in a growing economy is inelastic and not affected by any increase in effective monetary demand. As it is based on the Keynesian assumption of "full employment".
The technical progress depends on the rate of capital accumulation. Kaldor postulates the "technical progress function", which shows a relationship between the growth of capital and productivity, incorporating the influence of both the factors. Where the capital-output ratio will depend upon the relationship of the growth of capital and the growth of productivity.
Wages and profits constitute the income, where wages comprise salaries and earnings of manual labour, and profits comprise incomes of entrepreneurs as well as property owners. And total savings consist of savings out of wages and savings out of profit.
General price level is constant.

facts of economic growth

Kaldor summarized the statistical properties of long-term economic growth in an influential 1957 paper.

pointed out the 6 following 'remarkable historical constancies revealed by recent empirical investigations

The shares of national income received by labor and capital are roughly constant over long periods of time
The rate of growth of the capital stock per worker is roughly constant over long periods of time
The rate of growth of output per worker is roughly constant over long periods of time
The capital/output ratio is roughly constant over long periods of time
The rate of return on Investment is roughly constant over long periods of time
There are appreciable variations (2 to 5 percent) in the rate of growth of labor productivity and of total output among countries.

Kaldor did not claim that any of these quantities would be constant at all times; on the contrary, growth rates and income shares fluctuate strongly over the business cycle. Instead, his claim was that these quantities tend to be constant when averaging the data over long periods of time. His broad generalizations, which were initially derived from U.S. and U.K. data, but were later found to be true for many other countries as well, came to be known as 'stylized facts'.
These may be summarized and related as follows:
Output per worker grows at a roughly constant rate that does not diminish over time.
Capital per worker grows over time.
The capital/output ratio is roughly constant. (1+2)
The rate of return to capital is constant.
The share of capital and labor in net income are nearly constant.
Real wage grows over time. (2+4+5)

TECHNICAL PROGRESS

Technical progress can be classified into two parts:
Embodied Technical Progress: improved technology which is exploited by investing in new equipment. New technical changes made are embodied in the equipment.
Disembodied Technical Progress: improved technology which allows increase in the output produced from given inputs without investing in new equipment.
In the real world, many innovations do not require replacing the entire or some part of the equipment. It can be improved for better use depending upon the change required. Hence technological progress, embodied or disembodied, is matter of degree

Theory of Economic Growth ( vol 1)

2022-08-13T21:26:00.000-07:00

Theory of Economic Growth

What Is Economic Growth?

Economic growth is an increase in the production of economic goods and services, compared from one period of time to another. It can be measured in nominal or real (adjusted for inflation terms. Traditionally, aggregate economic growth is measured in terms of GNP or gross domestic product (GDP), although alternative metrics are sometimes used

Important points

Economic growth is an increase in the production of goods and services in an economy.
Increases in capital goods, labor force, technology, and human capital can all contribute to economic growth.
Economic growth is commonly measured in terms of the increase in aggregated market value of additional goods and services produced, using estimates such as GDP.

Understanding Economic Growth

In simplest terms, economic growth refers to an increase in aggregate production in an Economy, but not necessarily, aggregate gains in production correlate with increased average Marginal productivity.. That leads to an increase in income, inspiring consumers to open up their wallets and buy more, which means a higher material quality of life or standard of living.

In economics, growth is commonly modeled as a function of physical capital, human capital, Labour force, and technology. Simply put, increasing the quantity or quality of the working age population, the tools that they have to work with, and the recipes that they have available to combine labour, capital, and raw material which leads to increase in output.

There are a few ways to generate economic growth. The first is an increase in the amount of physical capital is goods in the economy. Adding capital to the economy tends to increase productivity of labor. Newer, better, and more tools mean that workers can produce more output per time period. For a simple example, a fisherman with a net will catch more fish per hour than a fisherman with a pointy stick. However two things are critical to this process. Someone in the economy must first engage in some form of saving (sacrificing their current consumption) in order to free up the resources to create the new capital, and the new capital must be the right type, in the right place, at the right time for workers to actually use it productively.

second method of producing economic growth is technological improvement. An example of this is the invention of gasoline fuel; prior to the discovery of the energy-generating power of gasoline, the economic value of petroleum was relatively low. The use of became a better and more productive method of transporting goods in process and distributing final goods more efficiently. Improved technology allows workers to produce more output with the same stock of capital goods, by combining them in novel ways that are more productive. Like capital growth, the rate of technical growth is highly dependent on the rate of savings and investment, since savings and investment are necessary to engage in research and development.

Another way to generate economic growth is to grow the labor force. All else equal, more workers generate more economic goods and services. During the 19th century, a portion of the robust U.S. economic growth was due to a high influx of cheap, productive immigrant labor. Like capital driven growth however, there are some key conditions to this process. Increasing the labor force also necessarily increases the amount of output that must be consumed in order to provide for the basic subsistence of the new workers, so the new workers need to be at least productive enough to offset this and not be net consumers. Also just like additions to capital, it is important for the right type of workers to flow to the right jobs in the right places in combination with the right types of complementary capital goods in order to realize their productive potential.

The last method is increases in human capital. This means laborers become more skilled at their crafts, raising their productivity through skills training, trial and error, or simply more practice. Savings, investment, and specialization are the most consistent and easily controlled methods. Human capital in this context can also refer to social and institutional capital; behavioral tendencies toward higher social trust and reciprocity and political or economic innovations like improved protections for property rights are in effect types of human capital that can increase the productivity of the economy.

Measured in Dollars, Not Goods and Services

A growing or more productive economy makes more goods and provides more services than before. However, some goods and services are considered more valuable than others. For example, a smartphone is considered more valuable than a pair of socks. Growth has to be measured in the value of goods and services, not only the quantity.

Another problem is not all individuals place the same value on the same goods and services. A heater is more valuable to a resident of Alaska, while an air conditioner is more valuable to a resident of Florida. Some people value steak more than fish, and vice versa. Because value is subjective, measuring for all individuals is very tricky.

The common approximation is to use the current market value In the United States, this is measured in terms of U.S. dollars and added all together to produce aggregate measures of output including GDP

What is Economic Development?

Economic Development is the creation of wealth from which community benefits are realized.. It is more than a jobs program, it’s an investment in growing your economy and enhancing the prosperity and quality of life for all residents.

Economic development means different things to different people. On a broad scale, anything a community does to foster and create a healthy economy can fall under the auspice of economic development. Today’s economic development professionals are trying harder than ever to define their field in terms that are more concrete and salient to policymakers, the public, and other professionals. There are probably as many definitions for economic development as there are people who practice it. Below is CALED’s definition as published in the Economic Development Handbook:

From a public perspective, local economic development involves the allocation of limited resources – land, labor, capitol and entrepreneurship in a way that has a positive effect on the level of business activity, employment, income distribution patterns, and fiscal solvency.

It is a process of deliberate intervention in the normal economic growth by making it easier or more attractive. Today, communities in California are giving attention to what they can do to promote fiscal stability and greater economic development.

Economic development is a concerted effort on the part of the responsible governing body in a city or county to influence the direction of private sector investment toward opportunities that can lead to sustained economic growth. Sustained economic growth can provide sufficient incomes for the local labor force, profitable business opportunities for employers and tax revenues for maintaining an infrastructure to support this continued growth. There is no alternative to private sector investment as the engine for economic growth, but there are many initiatives that you can support to encourage investments where the community feels they are needed the most.

It is important to know that economic development is not community development. Community development is a process for making a community a better place to live and work. Economic development is purely and simply the creation of wealth in which community benefits are created. There are only three approaches used to enhance local economic development. They are:

Business Retention and Expansion – enhancing existing businesses
Business Expansion – attracting new business
Business Creation – encouraging the growth of new businesCapitalm Smith Theory of Development in Economics

Adam Smith is considered to be the father of economics. It is not so because he was first explorer in the field of economics, also not because he revolutionized economic planning by his maiden ideas, but because he abbreviated what he had received from his predecessors and handed it down as a guide to the coming generations.

He was the editor and not the author, organizer and not the originator of economic science.

“He was the man of systematic work and balanced presentation, not of great new ideas but a man who carefully investigates the given data, criticizes them cooly and sensibly, and coordinates the judgements arrived at with others which have already been established”.

Adam Smith contained all his ideas in his “Wealth of Nations”. The most important aspect of this book was a Theory of Economic Development. Physio racy came into existence due to mercantilism. They believed in science of natural laws and emphasised the significance of agriculture and contended that it is the only industry that can make country wealthy. Adam Smith’s ‘Wealth of Nations’ was scientific not because it contained the absolute truth but because it came as a turning point, the beginning of all that came after, as it was the end of all that came before.

The main points of the theory are as under:

Natural Law:

Adam Smith proposes natural law in economic affairs. He advocated the philosophy of free and independent action. If every individual member of society is left to peruse his economic activity, he will maximize the output to the best of his ability. Freedom of action brings out the best of an individual which increases society wealth and progress. Adam Smith opposed any government intervention in industry and commerce.

He was a staunch free trader and advocated the policy of Laissez-Faire in economic affairs. He opines that natural laws are superior to law of states. Statutory law or manmade law can never be perfect and beneficial for the society, that is why Smith respects nature’s law because nature is just and moral. Nature teaches man the lesson of morality and honesty. These exercise favourable effects on the economic progress of society.

Laissez Faire:

Adam Smith’s theory is based on the principle of ‘Laissez-Faire’ which requires that state should not impose any restriction on freedom of an individual. The theory of economic development rests on the pillars of saving, division of labour and wide extent of market. Saving or capital accumulation is the starting point of this theory. He believed that “there is a set of rules or rights of justice and perhaps even of morality in general which are, or may be known by all men by hello either or reason or of a moral sense, and which possesses an authority superior to that of such commands of human sovereigns and such customary legal and moral regulations as may contravene them”.
The policy of laissez-faire allows the producers to produce as much they like, earn as much income as they can and save as much they like. Adam Smith believed that it is safe to leave the economy to be propelled, regulated and controlled by invisible hand i.e. the forces of competition motivated by self interest be allowed to play their part in minimizing the volume of savings for development.
Production Function:
Adam Smith recognized three factors of production namely labour, capital and land i.e.
Y = f (K, L, N)
K = Stock of Capital
L = Labour force
N = Land
He emphasized labour as an important factor of production along with other factors and observed, “The annual labour of nation is the fund which originally supplies it with all necessaries and conveniences of life which it annually consumes and which consists always either in immediate produce from other nations”. Since the growth is a function of capital, labour, land and technology and land being passive element is least important. Prof. Adam Smith regarded labour as father and land as mother. He wrote, “To him (farmer) land is the only instrument which enables him to earn the wages of his labour and to make profits of this stock”.
The production function does not conceive the possibility of diminishing marginal productivity. It is subject to law of increasing returns to scale. Smith argued that real cost of production shall tend to diminish with the passage of time, as a result the existence of internal and external economies occurring out of the increases in market size.
Adam Smith asserted that division of labour does not depend merely on technological feasibility, it greatly depends on the extent of the market as well and the size of market depends on the available stock and the institutional restrictions placed upon both domestic and international trade. Smith observes that, “when the market is small, no person can have encouragement to dedicate himself entirely to one employment, for want of power to exchange all the surplus part of production of his own labour, which is over and above his own consumption, for such parts of the produce of other man’s labour as he has occasion for”.
Smith also recognizes the importance of technological development for improvement in productivity and which is possible only if sufficient capital is available. He wrote, “The person who employs his stock in maintaining labour, endeavors, therefore, both to make among his workmen the most proper distribution of employment and furnish them with the best machines which he can either invent or afford to purchase. His ambition in both these respects is generally in proportion to the extent of his stock or to the number of people which it can employ”.
Division of Labour:
The rate of economic growth is determined by the size of productive labour and productivity of labour. The productivity of labour depends upon technological progress of a country and which, in turn, depends upon the division of labour. This division of labour becomes the true dynamic force in Adam Smith’s theory of growth. The only remarkable feature of Smith’s account of division of labour is pointed by Prof.
Schumpeter as “nobody, either before or after Adam Smith ever thought of putting such a burden upon division of labour. With Adam Smith it is practically the only factor in economic progress”.
Division of labour increases the productivity of labour through specialization of tasks. When a work is sub-divided into various parts and the worker is asked to perform small parts of whole job, his efficiency increases as now he can focus his attention more carefully. Thus, the concept of division of labour means the transference of a complex production process into number of simpler process in order to facilitate the introduction of various methods of production.
Adam Smith concentrated upon the social division of labour which emphasized the co-operation of all for satisfaction of the desires of each. It is the process by which different types of labour which produce goods to satisfy the individual needs of their producers are transformed into social labour which produces goods for exchanging them for other goods.
Adam Smith in his book ‘Wealth of Nations’ pointed out three benefits of division of labour:
1. Increase of dexterity of workers.
. Saving time required to produce commodity.
3. Invention of better machines and equipment.
The third advantage implies that invention is the result of worker’s intelligence. But Smith wrote that workers become ‘as stupid and ignorant as it is possible for human creature to become as a result of division of labour’. Division of labour necessarily leads to exchange of goods, which highlights the importance of trade. In short, division of labour leads to exchange of goods which, in turn, promotes trade and widens the extent of market. Wide extent of market is an essential pre- requisite for economic development.
Capital Accumulation:
It is the pivot around which the theory of economic development revolves. The growth is functionally related to rate of investment. According to Smith, “any increase in capital stock in a country generally leads to more than proportionate increase in output on account of continually growing division of labour”.
Capital stock consists of:
(а) Goods for the maintenance of productive workers.
(b) Goods for helping the workers in their productive activities.
Adam Smith distinguished between non capital, circulating capital and fixed capital goods. Non capital goods refer to those which are useful directly and immediately to their owner. Fixed capital refers to those goods which are directly used in production processes, without changing hands. Fixed capital consists of all the means of production.
Capital is increased by parsimony and diminished by prodigality and misconduct. The rate of investment was determined by the rate of saving and savings were invested in full. The classical economists also believed in the existence of wage fund. The idea is that wages tend to equal to the amount necessary for the subsistence of labourers.
If the total wages at any time become higher than subsistence level, the labour force will increase, competition for employment will become keener and the wages come down to the subsistence level. Thus, Smith believed that, “under stationary conditions, wage rate falls to the subsistence level, whereas in periods of rapid capital accumulation, they rise above this level. The extent to which they rise depends upon the rate of population growth”. Thus, it can be concluded that wage fund could be raised by increasing the rate of net investment
According to Smith, “investments are made because the capitalist want to earn profits on them. When a country develops and its capital stock expands, the rate of profit declines. The increasing competition among capitalists raises wages and tends to lower profits”. So it is a great difficulty of finding new profitable investment outlets that leads to falling profits.
Regarding the role of interest, Smith postulated a negatively sloped supply curve of capital implying that supply of capital increased in response to decline in interest rate. Smith wrote that with the increase in prosperity, progress and population, the rate of interest falls and as a result, capital is augmented. With the fall in interest rate, the money lenders will lend more to earn more interest for the purpose of maintaining their standard of living at the previous level.
Thus, the quantity of capital for lending will increase with the fall in rate of interest. But when the rate of interest falls considerably, the money lenders are unable to lend more in order to earn more to maintain their standard of living. Under these circumstances, they will themselves start investing and become entrepreneurs. Smith believed that economic progress- involves rise in money as well as real rentals, and a rise in rental share of national income. This is because the interest of land owners is closely related to general interest of the society.
Agents of Growth:
Smith has observed that farmers, producers and businessmen are the important agents of economic growth. It was the free trade, enterprise and competition that led farmers, producers and businessmen to expand the market and which, in turn, made the economic development inter-related. The development of agriculture leads to increase in construction works and commerce. When agricultural surplus arises as a result of economic development, the demand for commercial services and manufactured articles arises.
This leads to commercial progress and establishment of manufacturing industries. On the other hand, their development leads to increase in agricultural production when farmers use advanced techniques. Thus, capital accumulation and economic development take place due to the emergence of the farmer, the producer and the businessmen.
Process of Growth:
“Taking institutional, political and natural factors for granted, Smith starts from the assumption that a social group may call it a ‘nation’ will experience a certain rate of economic growth that is accounted for by increase in numbers and by savings. This induces a widening of market which, in turn, increases division of labour and thus, increases productivity. In this theory, the economy grows like a tree. This process is no doubt exposed to disturbances by external factors that are not economic… but in itself, it proceeds continuously and steadily
Each situation grows out of preceding one in a uniquely determined way and the individuals whose act combine to produce each situation count individually for no more than the individual cells of a tree”. The process of growth is cumulative. Division of labour made possible by accumulation of capital and expansion of market, increases national income and output, which in turn, facilitates saving and further investment and in this way, economic development rises higher and higher. Smith’s progressive state is in reality the cheerful and hearty state to all the different orders to the society. But this progressive state is not endless. It ultimately leads to stationary state.
It is the scarcity of natural resources that stops growth. An economy in stationary state is characterized by unchanged population, constant total income, subsistence wage, elimination of profit in excess of the minimum consistent with risk and absence of net investment. In his opinion, an economy is stationary state finds itself at the highest level of prosperity consistent with its natural resources and environment.
The competition for employment reduces wages to subsistence level and competition among the businessmen brings profits as low as possible. Once profit falls, it continues to fall. Investment also starts declining and in this way, the end results of capitalist is stationary state.
When this happens, capital accumulation stops, population becomes stationary, profits are minimum, wages are at subsistence level, there is no change in per capita income and production and the economy reaches the state of stagnation. The stationary state is dull, declining, melancholy life is hard in stationary state for different sections of the society and miserable in declining state.
Conclusion:
It can be concluded that Prof. Adam Smith did not propound any specific growth theory. His views relating to economic development are part of general economic principle propounded by him. R. Lekachaman says, “A good deal of Smith’s analysis reads as though written with todays UDC’s in mind”. In a very important aspect then this book (Wealth of Nations) was the theory of economic development.

Ricardian Theory of Development –

Economics as a science is, on the one hand, a body of knowledge and on the other hand, an engine of analysis.
As a result of knowledge, it contains generalizations about the working of economic system. Prof. Ricardo added little to the economic knowledge gathered by Smith.
As an analytical engine, economics provides an apparatus through which actual economic problems are analyzed.
Ricardo’s greatest contribution to economics is the provision of engine of analysis. By using the technique of deductive or abstract reasoning, he constructed a rigorous model in which some selected economic variables were systematically placed to form a logic. Such a theoretical model helps to understand how a system works and how the change in variables affects the working of the system.
Ricardo propounded no theory of development. He simply discussed the theory of distribution. This theory is based on the marginal and surplus principles. The marginal principle explains the share of rent in national output and surplus principle explains the division of the remaining share between wages and profits.
Assumptions:
The Ricardian theory is based on certain assumptions which are as under:
1. Supply of land is fixed.
2. Land is used for production of corn and the working force in agriculture helps in determining the distribution in industry.
3. Law of diminishing returns operates on land.
4. Demand for corn is perfectly inelastic.
5. Labour and capital are variable inputs.
6. Capital consists of circulating capital.
7. There is capital homogeneity.
8. All workers are paid subsistence wages
9. The state of technological knowledge is given.
10. There is perfect competition.
11. Demand for labour depends upon accumulation of capital.
12. Demand and supply price are independent of the marginal productivity of labour.
13. The supply price of labour is given and constant.
14. Capital accumulation results from profits.
Ricardian system considers agriculture as the most important sector of the economy. The difficulty of providing food to expanding population is the main problem. According to Ricardo, there are three major groups in the economy. They are landlords, capitalists and labourers among whom the entire productive land is distributed. It is the capitalists who initiate the process of economic development in the society by reinvesting profits and, thus, increasing capital formation.
The total national output is distributed among the three groups as rents, profits and wages, respectively and the share of each group can be determined as under:
1. Rent per unit of labour is the difference between average and marginal product or total rent equals the difference between average product and marginal product multiplied by the quantity of labour and capital on land.
2. The wage rate is determined by wage fund divided by number of workers employed at subsistence wage. Thus, output of total corn produced and sold, rent has the first right and the residual is distributed among wages and profits, while interest is included in profits.
Production Function:
Ricardo’s production function assumes the existence of three factors-land, labour and capital and it is subjected to the restriction of diminishing marginal productivity due to perfectly inelastic of land and its variable quality He regarded economic development as the process of these factors of production. The marginal productivity of land, labour and capital declines with the increase in cultivation.
In agriculture, the rate of innovation introduced would be insufficient to affect the tendency for diminishing returns to set in at either intensive or extensive margin of cultivation. Thus, the introduction of improvements in the agriculture techniques might check the progress of diminishing returns it could have temporary effect on cost of agricultural production.
For the overall growth of the economy, it is necessary to examine as to which of these patterns prevail with respect to the output of industry and agriculture together. Ricardo is of the opinion that “Although, then it is probable that under the most favourable circumstances, the power of production is still greater than that of population, it will not long continue so, for the land being limited in quantity and differing in quality, with every increased portion of capital employed on it there will be a decreased rate of production while the power of population continues always to be the same”. As Smithian economy grows at an accelerated rate, Ricardian economy develops at a progressively slower pace.
Ricardian production function is given as:
Y = F (K ,N,L)
K = Capital
N = Labour
L = Land
Capital Accumulation:
Ricardo emphasized the rate of capital accumulation as capital acts as an engine of growth. “Capital” is the part of the wealth of a country which is employed in production and consists of food, clothing tools, raw materials, machinery etc., necessary to give effect to labour.
Capital accumulation depends upon two factors:
(a) Capacity to save.
(b) Will to save.
The capacity to save is more important in capital accumulation. This depends on the net income of society which is a surplus out of the total output after meeting the cost of workers subsistence. The larger the surplus, the larger will be the capacity to save. Landlords and capitalists invest through this surplus and the size of this surplus depends upon the rate of profit.
The Profit Rate:
The rate of profit is the ratio of profits to capital employed. But since capital consists of working capital, it is equal to the wage bill. So, as long as rate of profit is positive, the process capital accumulation will continue and the economy will progress. The labour force will grow proportionately and the total wage fund will increase. The profit depends upon wages, wages on price of the corn and price of the corn on the fertility of marginal land. Hence, profits and wages are inversely proportional to each other.
When there is improvement in agriculture, the productivity power of land increases and there is fall in the price of corn and as a result, subsistence wage also falls, but profits increase and there is more capital accumulation. This will increase the demand of labour and wage rate will rise, which will increase population and demand for corn and its price. Since the wages rise, the profit will decline and there will be less capital accumulation.
The process of growth will continue till the profits fall to zero or the whole of the total product less rent is used for the maintenance of labour at subsistence level. At this stage, capital accumulation stops and the progress of the economy reaches a stationary state.
Increase in Wages:
In Ricardian Scheme, wages play an active role in determining income between capital and labour. The wage rate depends upon the number of workers and wage fund. The wage rate falls with the increase in number of workers and vice-versa.
If the wage rate is sufficient to enjoy the comforts of life by labourers, the population is expected to increase and if the wage rate is the lowest the working class cannot meet the necessities of life, the population will decrease. Thus, there is positive co-relation between wage rate and size of population. The increase in wages with the increase in population absorbs the rise in price of corn. Since wages also increase, profits decline. These opposite tendencies ultimately retard the capital accumulation.
Declining Profits in Other Industries:
According to Ricardo, “The profits of the farmer regulate the profits of all other trades”. Ricardo uses agricultural profits as a basis and it is the agricultural profit which determines the industrial profit. The money rate of profit earned on capital must be equal in equilibrium in both agriculture and industry.
The rate of profit in the agricultural sector determines the rate of profit in the industrial sector of an economy. Thus, when the profit declines in the agricultural sector, it also declines in the industrial sector. The industry would have to raise the wages of labourers with the increase in price of corn and which in turn, reduces the profit. Thus, the price of corn determines the rate of profit in an industry. When profit declines in agricultural sector, it declines in all trades.
Other Sources of Capital Accumulation:
Ricardo is of the view that economic development depends upon the difference between production and consumption. He stresses on increasing production and reducing unproductive consumption. The productivity of labour can be increased through technological changes and better organisation and thereby stimulating capital accumulation. But the use of machines will employ less workers which will lead to unemployment and reduced wages since the economic condition of workers decreases with the employment of more machines. So Prof. Ricardo regards the technological conditions as given and constant.
Taxes are the source of capinnovationalation in the hands of the government. According to Ricardo, taxes are levied only to reduce conspicuous consumption, otherwise the imposition of taxes on capitalists, landlords and labourers will transfer resources from these groups to government. Taxes adversely affect the investment. Therefore, Ricardo is not in favour of imposition of taxes, as taxes reduce income, profit and capital accumulation.
Prof. Ricardo is in favour of free trade as it is an important factor of development of the country. Free trade provides vast opportunities of investment to capitalists. The capitalists can make investment in export oriented industries and earn profits. The re-investment of profit by the capitalists will further enhance the developing activities.
The capital accumulation can be raised by importing corn. But the import of corn leads to fall in demand for labour which deteriorates the economic conditions of labourers. On the other hand, landlords and capitalists do not think it fit to import cheap corn from the foreign countries, as a result, their profits decline
Stationary State:
When the economic development proceeds real wage rate remains at the subsistence level and profit tends to fall. When the capital accumulation rises with increase in profit, total output increases which raises the wage fund. With the increase in the wage fund’ population increases which raises the demand for corn and its price. As population increases, inferior grade lands are cultivated to meet increasing demand of corn. Ricardo assumes that labourers and landlords spend all their income on consumption and hence, save nothing.
The saving is done by the capitalist for profit earners. But as the society progresses, the share of profit begins to decline. Fall in the rate of profit slackens the process of capital accumulation and the development receives a set back and at this stage, there is no further increase in capital and the economy enters in a stationary state.
In this state, capital accumulation stops, population does not grow, the wage rate is at subsistence level and technological progress ceases. “The basic casual force in this scheme is the fact of diminishing returns in agriculture, a grim tendency which can be postponed temporarily by technical progress. But technical progress cannot prevent the ultimate disappearance of profit and the onset of stationary state”. The phenomenon of stationary state is explained with the help of a diagram 3.
With the increase in capital accumulation, profits and wages tend to increase and the rise in wages bring about a decline in profits. The decline in profits will continue till a stage comes when the net product curve intersects the wage line
Conclusion:
The model tries to deal with the various problems relating to development. It determines the relative shares of different agents of production in national income. The economy in this model is considered to be ever changing with the passage of time, till it reaches stationary state.
This theory highlights the importance of major development variables such as capital accumulation, population, profits, wages and rent etc. Harrod observed, “May I remind you the bare bones of Ricardo’s dynamic theory? It was a large part of this whole theory. The prime motive for these was the tendency to accumulate. This may be identified with what we regard as savings and is rightly treated by Ricardo as dynamic concept……

Schumpeter’s Theory of Economic Development | Economics

Shumpeter’s theory of development assigns paramount role to the entrepreneur and innovations introduced by him in the process of economic development. According to Schumpeter, the process of production is marked by a combination of material and immaterial productive forces. The material productive forces arise from the original factors of production, viz., land and labour, etc., while the immaterial set of productive forces are conditioned by the ‘technical facts’ and ‘facts of social organization’. The Schumpeterian production function can, therefore, be written as –
Q = ƒ [k, r, I, u, ν) …(1)
Where, Q stands for the output, k for the Schumpeterian concept of “produced means of production”, r for natural resources, l for the employed labour force. The symbol u represents the society’s fund of technical knowledge and ν represents the facts of social organization, i.e., the socio-cultural milieu within which the economy operates.
The above function shows that the rate of growth of the output depends upon the rate of growth of productive factors, the rate of growth of technology and the rate of growth of investment friendly socio-cultural environment. Schempeter held that the alterations in the supply of productive factors can only bring about gradual, continuous and slow evolution of the economic system.
On the other hand, the impact of technological and social change calls for spontaneous, discontinuous change in the channels of output flow. Thus taking into account these two types of distinct influences Schumpeter distinguished two components in the dynamic evolution of the economy – (a) the “growth component” which brings about gradual, continuous and slow evolution due to the changes in the factor availability, (b) the “development component” which brings about spontaneous and discontinuous change in the channels of output flow due to changes in the technical and social environments.
Schumpeter regarded land to be constant. The growth component will, therefore, include only the effects of changes in population and of increase in the producer goods. But Schumpeter further maintains that there does not exist any a priori relationship between the changes in population and the changes in the flow of goods and services. In other words, Schumpeter considers the population growth to be exogenously determined. Now, the increase in producer goods results from a positive rate of net savings.
The major part of savings and accumulations are attributed by Schumpeter to profits. But, according to him, the profits can arise if innovations such as new techniques of production are employed or if new product is introduced. Hence ultimately it is the change in the technical knowledge (i.e., variable u) which is responsible for any change in the stock of producer goods, i.e., the rate of capital accumulation directly depends on the rate of technical change.
Regarding the historical development, Schumpeter subscribed to Marx’s materialistic interpretation of history and he maintained that the economic state of people emerges only from the preceding total situation. However, the most important point of Schumpeter’s theory is that the expansion of output depends upon the history of technological development. In simple words, we can say, according to Schumpeter, the growth of output is geared to the rate of innovations.
No doubt, Schumpeter holds that the trend of economic growth shall be fixed by the exogenous variable of population growth, yet according to him, the process of economic development is synonymous with discontinuous technical change, i.e., innovations. The agent which brings about innovations is called by Schumpeter as entrepreneur. Thus, entrepreneur becomes the pivot of Schumpeter’s model.
Role of Entrepreneur as an Innovator:
In economic development as outlined by Schumpeter, the entrepreneur plays a key role. The credit for innovations and the outburst of economic activity goes entirely to the entrepreneur.
Innovation consists in:
(i) Introduction of anew good,
(ii) Introduction of a new method of production,
(iii) The opening of a new market,
(iv) The discovery of a new source of supply of raw materials or semi-manufactured goods, and
(v) Introduction of a new organisation in an industry.
In a world characterised by a high degree of risk and uncertainty, only businessmen of exceptional ability and daring will be able to undertake innovations and launch enterprises and exploit opportunities for profit. But these entrepreneurs are not only lured by profit but are also motivated with a desire to found a dynasty in the business world or a desire for conquests in the competitive world or have the joy of creating. Thus, in the Schumpeterian analysis, the role of the entrepreneur is a determining factor of the rate of economic growth. In his absence the growth rate is bound to be slow.
The supply of entrepreneurs depends not only on the rate of profits (which is obvious) but also on the favourable social climate. They will appear and continue only in a society which honours them, where prestige is attached to them and the social rewards or recognition they are able to earn. In short, the conditions or social values in which they have to operate must be favourable. The rate of profit is an unfailing thermometer of the favourable climate. Any tendency to squeeze profits, increase taxes, intensify welfare programmes, strengthening of the trade union movement or measures of redistribution of income will deteriorate the climate for investment and so for economic development.
Development Cycle-The Circular Flow and the Process of Creative Destruction:
Schumpeter’s starting point in the “circular flow” is a stationary equilibrium in which there is no investment, population growth is at a standstill position and there is full employment. But there are numerous opportunities in business which the entrepreneurs are quick to exploit and innovations are undertaken. The success of the original innovators attracts ‘swarmlike’ many others who follow them. Economic activity becomes more and more brisk and the boom gathers momentum with the result that prices and money incomes rise. There is then the secondary economic wave ‘imitative investment’ superimposed upon the earlier one, i.e., ‘‘innovational investment’.
But soon follows the process of creative destruction. The boom gives way to slump or recession. Completion of innovations brings in a large supply of goods which cannot be marketed at profitable price. There are forced bankruptcies since the banks call back loans. The repayment of bank loans accentuates deflationary forces. Business risks scare away the prospective entrepreneurs. In this unfavourable climate, the ‘‘innovational investment’.But activity comes to a halt. After this painful process of adjustment in which weak enterprises are liquidated, the businessmen find conditions again ripe for a further spurt of entrepreneurial activity. The economic activity is resumed at a higher equilibrium. This is how the circle of development process is completed. There is a new wave of innovations and the development cycle repeats itself.
Role of Credit:
Another new point introduced by Schumpeter in this analysis of economic development is the important role that credit plays in economic development. It is not the saving out of current income which supplies funds for investment, but the credit creation by the banking system. The classical and the neoclassical economists thought in terms of given supply of money or the supply coming forth to match the increased supply of goods and services, so that the price level is not affected. To them “money is a mere veil which tends to hide the behaviour of the basic forces at work”.
But Schumpeter makes credit creation an integral part of the development, process. In this analysis the entrepreneurs expand their business merely by borrowing from banks who will lend not because some persons have made savings and deposited in the banks. But the banks just create credit themselves to accommodate the business borrowers. This pushes up the prices. “Thus credit- creating facilities tend to free investors from the voluntary abstinence routine of the savers. Forced savings become an important means of capital accumulation.”
Two points are worth mentioning in regard to Schumpeter’s analysis of development process in a capitalist society. In the first place, the dominance of the entrepreneur or the producer limits and reduces correspondingly the sovereignty of the consumer. The producer does not passively produce the goods as dictated by consumers’ tastes and preferences. By his dynamic role, through high pressure of salesmanship, he attempts and succeeds fairly in changing even the tastes of consumers or in creating in them new wants and desires.
This again emphasises the crucial role of the entrepreneur in giving new directions and dimensions to the development process. Secondly, unlike the neoclassical economists who believed that the process of economic development was gradual and harmonious, Schumpeterian analysis brings out the uneven and disharmonious nature of economic growth. It proceeds by spurts and leaps and bounds. “The essence of development is a discontinuous disturbance of the circular flow.” This disturbance appears in the form of innovations. This arises from the fact that the world is dynamic and not static. In the static world rational calculations are possible and reasonable forecasting is feasible, but the dynamic world is full of risk and uncertainty mainly arising from the ‘innovational activity of the entrepreneur who is able to exploit new investment horizons.
Capitalism- Its Potentialities and its Degeneration:
The classical economists were depressed by the inexorable law of diminishing returns and the irresistible growth of population. Schumpeter does not share their pessimism. He also does not believe in the inherent tendency towards a mal distribution of incomes resulting in ever-recurring severe crises as Marx did. Nor does he agree with the stagnationists that there is persistent lack of investment opportunities together with institutional rigidities making for an equilibrium at less than full employment. Schumpeter, on the other hand, has faith in the capacity of the capitalist system in attaining ever increasing levels of national output and income. He is prepared to admit, however, that there might be temporary setbacks.
Although Schumpeter has infinite faith in the potentialities of capitalism, but he also believes in a Marxian fashion that the very success of capitalism will breed the germs of its ultimate degeneration which will pave the way for socialism. In Schumpeter’s view, it is not failure of capitalism which will spell its doom, but its very success that would result in killing the goose that lays the golden egg. He thus says – “The actual and prospective performance of the capitalist system is such as to negative the idea of its break-down under the weight of economic failure, but its very success undermines the social institutions which protect it, and inevitably create conditions in which it will not be able to live and which strongly point to socialism as the heir apparent.” In other words, it is not the economic barriers but social factors which will undermine capitalism.
According to Schumpeter, the economic and social foundations of capitalism will crumble on account of:
(a) The decay of the entrepreneurial function,
(b) The destruction of the institutional framework, and
(c) The disintegration of the protecting political framework.
The entrepreneurs make their business grow so big that innovation itself becomes a routine and is in the charge of salaried persons and technological progress now becomes the province of specialists; marketing and administration become automatic. “Innovation thus degenerates into a depersonalised routine activity carried on in big business through a bureaucracy of highly trained managers.”
This is how the entrepreneurial function is rendered obsolete. The concentration of business and the growth of monopolies destroy the institution of private property and freedom of contract. Whereas ‘bigness’ contributes to more rapid economic progress, it also weakens the concepts of private property and freedom of contract. In a big business corporation, the proprietary interest is replaced by shareholders, big and small, none of whom is particularly interested in the business. The part that the proprietor used to play is now played by professional salaried managers.
The social class that used to protect capitalism also loses its political power which is captured by a new group of politicians who are ill-equipped to rule and unwilling to support the established trade and industry. They adopt policies inimical to capitalists’ interest. This is what we are witnessing in India. The common people and many politicians are now positively hostile to big business like the Birlas, Tatas and Ambanis. The intellectuals who derived freedom and power from capitalism now lead the anti-capitalist groups. The educated unemployed is another group of ‘have-nots’ against the capitalist class of ‘haves’. Labour also organises itself for fight against capital and the intellectuals supply the leadership. All these new forces lead to the gradual degeneration of capitalism and strengthen the movement towards socialism. Capitalism cannot function in this new atmosphere.
Evaluation of Schumpeter’s Theory of Development:
Schumpeter has been a great ‘theorist’ whose writings contain brilliant thoughts and a deep insight into the working of an economy. However, his analysis of the entrepreneurial innovations is not applicable to modern conditions in which the act of invention and innovation is carried on not by individual entrepreneurs but by large corporations as a routine affair. It is not possible to identify entrepreneurs who introduced many actual innovations. He himself recognises the tendency towards obsolescence of the entrepreneur.
It has been pointed out by critics that what Schumpeter gives is the theory of business cycles and not an analysis of economic development. Even Schumpeter’s analysis of business cycles can be accepted only with some modifications to suit modern economic conditions. According to Shumpeter, crisis in capitalism is brought about by maladjustment caused by waves of innovations. But big businesses in modern times can absorb these waves and produce steadier and larger expansion of the total output. Further, the main cause of business cycles is fluctuations in aggregate demand as pointed out by J.M. Keynes.
The assumption that innovations are financed by borrowing from credit creation by the banks is also not very realistic. It is a well-known fact that most of the bank loans are short-term loans whereas the implementation of innovations requires long-term finances. The long-term projects are financed by retained profits or by the issue of shares and debentures by the companies concerned.
Schumpeter’s socio-economic analysis of the capitalist process is also not fully convincing. He seems to overemphasise the influence of economic factors on social culture. It is not one-way link between rationalism in economic matters and rationalism in other fields, social and political. Not many would agree that capitalism was about to crumble and socialism was round the corner.
Capitalism in countries like the U.K. and the U.S.A. which were its traditional homes too strongly established themselves to yield place to socialism. Only, we can say with him that the nature of capitalism has changed. There is no doubt that the political strata protecting the old type capitalism are weakening and the traditional entrepreneurship too is becoming obsolete, as Schumpeter said. But it does not mean that capitalism is about to collapse and socialism is coming.
On the contrary, it is socialism that collapsed in eighties of the 20th century. In both Soviet Russia and Republic of China socialism came to end and in its place free-market economy came into existence. Meier and Baldwin rightly write- “Although Schumpeter’s analysis is provocative, it seems one-sided and overemphasised. To recognise that history involves perpetual change is quite different from concluding that a socialist form of society will emerge from an equally inevitable decomposition of capitalist society.”
Relevance of Schumpeter’s Theory for Developing Countries:
The conditions obtaining in Western Europe and America after the First World War presented a capitalist system in full swing, wherein the innovator acted as the initiator and controller of economic development. Schumpeter’s observant eye got the clue to formulate a theory of development presenting a unified view of the whole economic process. Schumpeter viewed “development” as a distinct phenomenon which, he says, “is spontaneous and discontinuous change in the channels of flow, disturbance of equilibrium, which forever alters and displaces the equilibrium state previously existing.”
This springs from changes in the economic life due to endogenous factors (initiated from within) and not exogenous factors which are forced upon it. Explaining his contention further, he holds that “Should it turn out that there are no such changes arising in the economic system itself, and that the phenomenon that we call economic development is in practice simply founded upon the fact that the data change and the economy continuously adapts itself to them, then we should say that there is no economic development.” This concept wherein endogenous changes in the economy act as the sole prime mobile of development restricts the relevance of Schumpeter’s theory to the growth problems of developing economies.
Rigid and outmoded socio-economic institutions, low saving potential and laggard technology are completely incapable to generate developmental impulses from “within” in the underdeveloped countries. They have to take recourse to imported capital, technology and skill to initiate and propel their developmental wheels. For instance, India made a big stride forward in growth and it has sought foreign capital to help in its economic development. It has also gone for foreign collaboration in terms of loan, equipment, skill and technical know-how. Since factors from ‘without’ are responsible for initiating and operating development projects, they cannot, according to Schumpeter, be regarded as embodiments of India’s genuine process of economic development. This contention of Schumpeter is unsustainable and unconvincing.
It cannot be gainsaid that every such plant has generated a developmental wave in the Indian Economy. Thus, Alfred Bonne remarks, “Exclusion from Schumpeter’s definition would not make the new plant cease to be a case of development, having in view precisely those goods which are the essential objectives of development activities in economically backward countries.” In this view, therefore, Schumpeter’s theory of development is incongruent with the conditions prevailing in the developing world.
Further, Schumpeter’s preoccupation with only the endogenous factors and his insistence on development as embodying only the spontaneous and discontinuous changes makes him oblivious of the role of population growth as an economic force in the developmental process. He regarded population as exogenously determined and held that there does not exist any deterministic a priori relationship between population growth and variations in the flow of goods and services. But it is precisely the excessive population pressure that is responsible for revolutionising the methods and techniques of agricultural production in the presently overpopulated developing countries.
In fact, some of the post-Keynesian theories regard population growth as a stimulant for autonomous investment. By failing to take proper cognisance of one of the most vital phenomena operating in the presently underdeveloped economies, Schumpeter rendered his theory almost ineffectual to such countries.
Further, the existence of a business elite, i.e., the entrepreneurial class, is fundamental to Schumpeter’s theory of economic development. The carrying out of innovations and using new production functions is the prerogative of this elite group of private entrepreneurs. However, there are serious doubts about the effectiveness of this social group in the development of the developing countries. The contemporary history of economic development of these countries provides ample evidence to reveal that it is not only the private entrepreneurial class, but also the national governments that are responsible for preparing and launching programmes of industrialisation.
With the development process of these countries being rapidly imbued with the socialistic hues, their governments have increasingly assumed the role of a national entrepreneur. Not the innovations of the private entrepreneur but the “government action and mass impulses today seem to be the most characteristic motive forces of economic development.” So much so that even in the private sector of these economies the entrepreneurs cannot fulfill their functions without the active and substantial assistance from the government and semi-public bodies. Moved by such a un-Schumpeterian economic landscape in the developing countries, Prof. Gunnar Myrdal remarks that “it represents, indeed, an attempt at a complete reversal of what once happened in the now developed countries as described by the Schumpeterian model.”
In developing economies, a number of factors such as the outmoded socio-economic institutional framework, tradition-ridden investment horizon and unreliable attitude for undertaking of new ventures, have all contributed in denigrating the pivotal role assigned to the Schumpeterian entrepreneur in his functional aspects. The governments of these countries under such conditions cannot afford to remain an idle and passive spectator. It is incumbent for them to come forward and become the herald of industrialization by playing the role of a unified national entrepreneur.
Furthermore, the governments of the developing countries are committed to the rapid creation of ‘social overheads’ or what is now called infrastructure in order to fulfill the popular demand for higher standards of living. The private capital fails to come forward because of the lumpy nature of such investments and the long gestation periods involved. On the other hand, an agency like the government has sufficient means to mobilize the capital resources of the economy through various fiscal and monetary measures and by borrowing from abroad.
The very exigency of the situation in the developing economies compels their governments to shoulder the responsibility of initiating and steering the gigantic task of economic development. Thus, the Schumpeterian model of development which assigns the primary and central role to the private entrepreneur and only a secondary and passive function for the government is a misfit to the conditions obtaining in the developing countries.
Besides, the entrepreneurial innovation so pivotal to the working of Schumpeter’s model has no significance to the process of development in the developing countries. Henry C. Wallich and H.W. Singer have held that due to the demonstration effect on an international plane, the businessmen in the developing countries are prone to import and assimilate the already known technology and methods of production from the developed countries rather than undergo the risks of innovating anew (some of which in any case may prove to be abortive). Hence the development process in the developing countries is increasingly becoming a process of derived development, being based on assimilation of existing innovations made elsewhere rather than on the Schumpeterian type of indigenous innovations.
In the Schumpeterian model, by its very nature and approach, inflationary pressures are bound to operate as the development process gathers momentum. The entrepreneurs’ innovational activity being financed by the credit-creating banking system, credit-creation assumes a vital role in his model. The creation of credit leads to a rise in purchasing power of the community without a corresponding increase in production. Increased purchasing power results in an increased demand for production services and consumer goods. The increased demand coupled with the increased volume of money in circulation results in a general price rise.
But in the consumption-oriented development process of a developing economy, the inflationary tendencies are very powerful, persistent and cumulative in nature. “It is not only development and associated investment that are responsible for inflationary tendencies, but the entire social climate of demand-oriented economy.” They become a serious drag on the development process itself. Thus, the production-oriented Schumpeterian vision of development process fails to realise the hurdles like secular inflation that characterise the consumption-oriented development of the developing economies. What in fact is needed is a totally different framework of analysis and theory that is realistic to the circumstances of these economies.
However, certain aspects of Schumpeter’s model retain universality of application. Irrespective of the type of economy and its stage of development, the importance of innovations as one of the major factors in economic development remains unassailable. ‘Technological possibilities are an uncharted sea’, and in this Apollo age, we can safely assume that the developing countries can hardly afford to remain mere imitators and assimilators.
Even if mere transfer of ready-made and proven techniques of production is sought, there remains the problem of adaptation of foreign technology in the domestic economy. It calls for a certain amount of pioneering spirit and entrepreneurial skill in so far it is new to the country in which it is to be adapted. Further, the risks of transplanting such technology in underdeveloped economics would be considerable. Hence the entrepreneurs in these countries should possess at least some of the basic qualities of the Schumpeterian entrepreneur.
From the point of view of successful development in developing countries Schumpeter’s theory highlights the urgency of bringing about drastic transformation of the tradition-ridden socioeconomic institutions and reshaping of the inimical attitudes to develop a favourable climate for the growth of entrepreneurship. Adequate entrepreneurship is one of the prerequisites for sparking off a take-off stage in these countries.
Further, once the process of industrialisation sets apace in the developing countries, Schumpeter’s theory can undoubtedly throw considerable light on the problems associated with the long-run increase in productivity. It shall also provide clues to the problem of absorption of ‘surplus labour’ in gainful employment as a result of innovations. In this way Schumpeter’s theory of development can provide some valuable lessons to the countries for avoiding waste and extra hardships that are liable to attend an unplanned and uncoordinated development.

Rostow’s Theory of Growth |

At the end of the Second World War (1939-45) there was a renewal of interest in the subject of development economics and the stages of growth once again preoccupied many scholars. As a non-communist manifesto, W. W. Rostow’s stages of economic growth (1960, 1971) is a foray into positioning the sweep of modern economic history under capitalism into neat and hopeful epochs.
Rostow’s version is an outstanding examples of continuity and evolution. Moreover, if Marx’s theory is regarded as the banner of capitalism doomed, Rostow’s version may be referred to as a capitalism viable.
Stages of Growth:
Rostow has conceived five universal stages; viz:
(i) The traditional society,
(ii) The preparation for the take-off—a stage in which communities build up their propensities in such a way as would be conducive to the take-off,
(iii) The period of takeoff in which the productive capacity of the community registers a distinct upward rise,
(iv) The stage of drive to maturity, the period of self-sustained growth in which the economy keeps on moving, and
(v) The stage of high mass consumption.
Let us analyse each stage in detail:
(i) The Traditional Society:
A traditional society is one of the simplest and primitive forms of social organisation. It is one whose structure is developed within limited production function, based on Pre-Newtonian science and technology and old Pre-Newtonian attitude to the physical world.
The characteristics are:
(a) Per Capita:
Within a limited range of available technology there is a low ceiling per capita output.
(b) Employment in Agriculture:
A high proportion of workforce (75% or more) are devoted in the production of agricultural goods. High proportion of resources are also devoted in the agricultural section.
(c) Social Mobility:
A hierarchical, hereditary, status-oriented social structure held down the mobility of society at that time
(d) Political Power:
The centre of gravity of political power was localistic, region-bound and primarily based on land ownership.
(ii) Pre-Conditions for Take-Off:
It is that stage of economic growth in which the progressive elements creep into the otherwise barbaric and primitive psyches of the members of the society. People try to break free from the rigidities of the traditional society and a scientific attitude—a quest for knowledge in short—a questioning mid-set is very much visible in the changing face of the society.
The features are:
(a) Economic Progress:
Economic progress became an accepted social value. At this time the change of human mind took place and they were able to think about their respective countries.
(b) New Enterprises:
New types of enterprising people emerged on the society. Their objective was to establish a firm or industry and produce output for a long time.
(c) Investment:
As the new enterprising persons emerged in the society, the gross investment raised from 5% to 10%, so that the rate of growth of output outstrips the rate of population growth.
(d) Infrastructure:
As different industries were established in different parts of the country, automatically transportation, more mobilised communication, roads, railways, ports were required. So infrastructure was built all over the country.
(e) Credit Institutions:
At that time necessary credit institutions were developed in order to mobilise savings for investment.
(f) Mobilisation of Work Force:
Due to industrialisation a large portion of workforce was shifted from agricultural section to the manufacturing sector. This was experienced in Great Britain in the time of “Industrialisation (1760 onwards)”.
(g) Decline of Birth rate:
that time medical science was slowly developing. The citizens understood the essence of control of birth rate and death rates. At first the death rate was controlled and then the birth rate was controlled. This was the second stage of Demographic Transition experienced by the developed countries.
(h) Political Power:
Centralised political power based on nationalism replaced the land- based localistic or colonial power.
(iii) The Take-Off Stage:
The take-off stage marks the transition of the society from a backward one to one that is on the verge of freeing itself from the elements that retard growth. In fact, it is one stage in which there is a dynamic change in the society and there is a meteoric rise in the standards set by the members of society in all walks of life like industry, agriculture, science and technology, medicine, etc.
There is a marked discontinuity between the first two stages as mentioned earlier and the stage of take-off. The winds of change are triggered by some important political event that revolutionizes the political structure or a sudden infuse of new techniques and methods of production attributed to formidable advances in science and technology.
The former type of events took place in nations, like erstwhile USSR, East and West Germany, Japan, China and India. The latter category may be observed in nations like UK, USA and the OPEC countries. Events like the “Industrial Revolution” that was the brainchild of technological innovations in Britain since 1760s or say, the “Manhattan Project (1940s)” that signaled the arrival of USA on the world political scenario with a that are living examples of take-off stage as mentioned by Rostow.
The characteristics of this stage are:
(a) The Rate of Investment:
The first property of the stage of take-off is nothing but the rate of investment. At the time of “Industrial Revolution” the rate of investment was from 5% or less to over 10% of the national income. At this time, agricultural lands were acquired for industrialisation.
This led to a depression in the further period. For this purpose colonialism was required for Britain. As a result they came to India and other colonies for business purpose at the first time and gradually took the political power of this country.
(b) Development of One Leading Sector:
At the time of Industrial Revolution (1760 on) we saw the development of particular secondary section of each country in Europe. In Britain we saw a large development in textile and iron and steel industry. As iron and steel industry is essential for development of every country each country experienced growth in iron and steel industry in Europe. Nowadays the development of a country is measured by per capita consumption of iron and steel.
(c) Existence of Different Frameworks in the Society:
There was the existence of political, social and institutional framework which exploited impulses to expansion in the modern sector and the potential external economies affected the take-off and gave the process of growth a sustained and cumulative character.
(iv) The Drive to Maturity:
Maturity in the context of Rostow’s theory refers to that state of economy and the society as a whole, when winning on all fronts becomes a habit or an addiction. Each and every effort to stimulate the economy meets with success and the time period when the society tastes success is a rather long one and the progress made on all fronts is there to stay.
It is a period when a society effectively applies the range of available modern technology to the bulk of its resources; and growth becomes the normal mode of existence. Industries like heavy engineering, iron and steel, chemicals, machine tools, agricultural implements, automobiles etc. take the driver’s seat.
Electric power generations as well as consumption are high due to sudden acceleration of industrial activities. Admittedly, it is difficult to date this period precisely in view of indistinct or hazy demarcations between the end of take-off and the beginning of maturity. Rostow would date it as about 60 years after beginning of take-off.
The economic characters of this stage are:
(a) Shift in the Occupational Distribution:
As due to Industrial Revolution many industries were established in Britain and the countries of. Western Europe, the work force was shifted from agricultural sector to the manufacturing sector. The proportion of the working force engaged in the agricultural sector went down to 20% or less.
(b) Shift in the Consumption Pattern:
A new type of workforce was created which was termed white-collar workers. They were mainly officials or managing officials of a factory’s governing body. Due to high income their preferences were shifted to luxury goods. As a result the consumption pattern of non-agricultural goods increased. This led to development of the existing industries and also variation in tastes and preferences took place more rapidly in this period.
(c) Shift in the Consumption of Leading Sector:
The change in composition was observed to vary from country to country. The Swedish take-off was initiated by timber exports, wood pulp and pasteboard products followed by the emergence of railways, hydropower, steel, and animal husbandry and dairy products. The Russian take-off started with grain exports, followed by railways, iron and steel, coal and engineering.
The non-economic factors of “The Drive to Maturity” are:
(a) Entrepreneurial Leadership:
In the stage of drive to maturity the change in the entrepreneurial leadership took place. Cotton-steel-railway-oil barons gave way to the managerial bureaucracy.
(b) Boredom:
Certain boredom with industrialisation gave rise to social protest against the costs of industrialisation.
(v) The Age of High Mass Consumption:
From maturity the economy moves with growth to high mass consumption, the stage at which durable consumer goods like radios, TV sets, automobiles, refrigerators, etc., life in the suburbs, college education for one-third to one half the population came within reach. In addition the economy, through its political process, expresses willingness to allocate increased resources to social welfare and security. This stage was defined in terms of shift in emphasis from problems of production to that of consumption.
Necessarily, therefore, attention veers towards problems of allocation of resources which, according to Rostow, came to be governed by the following considerations:
(i) Pursuit of national power and world influence,
(ii) Welfare state redistributing income to correct the aberrations of the market process,
(iii) Extension of consumer demand on durable consumer goods and high grade foods.
Critical Review of Rostow’s Theory:
(i) Reduction of Growth:
Rostow’s theory reduces the economic growth to a single pattern. He only highlighted the growth of one or more sectors of the economy. He did not highlight the overall condition of the economy.
(ii) Mechanism of Evolution:
Rostow’s stages of growth failed to specify the mechanism of evolution which links different stages of growth. He explained the stages without any interrelationship.
(iii) Economic Variables:
By the stage theory Rostow described how the existing economic variables reduce the growth rate of the country. But he did not say anything about the solution of these problems. He did not explain how the variables interact and generate economic growth.
(iv) Lack of Symmetry:
Rostow’s stage theory was not based on a systematic scheme of causation,
(v) Predictive Value:
Paul Baran opined that Rostow’s theory had no predictive value and was without any operational significance for underdeveloped countries attempting to break through the barriers of underdevelopment.
(vi) Hoffman Thesis:
Although Rostow seemed to have been inspired by the Hoffman thesis, his conclusions were inconsistent with those of his mentor Rostow’s thoughts as regards the rate of investment were tied to the assumption of a constant marginal capital-output ratio.
Hoffman’s analysis stressed on an increasing ratio of the net output of capital goods to that of consumer goods in the manufacturing sector. This implied an increasing capital-output ratio over the various stages of industrialisation.
(vii) Habits of Saving:
It lacked originality as a piece of academic research. It had heavily borrowed from Max Weber’s and Tawney’s pioneering work in the field of sociology. Rostow’s reference to changing habits of saving, the increasing pursuit of economic motives in everyday life, etc. share the same passions as those of Weber and Tawney.
Conclusion:
Rostow had advocated his theory as an alternative to Marx’s theory. While Marx’s vision of the stages of growth was embodied in The Communist Manifesto (1848), Rostow described his own works as the Non-Communist Manifesto. In fact the bottom-line was that Rostow based his theory on the flows of the Marxian theory. He criticised Marx’s theory on the ground that if suffers from “economic determinism”.
The great merit of Rostow’s doctrine was that its main facts was on continuity and evolution of society and did not treat each stage as being mutually exclusive from the other stages. Moreover, instead of limiting human behaviour to simple act of maximisation, Rostow interpreted human behaviour as an act of balancing alternatives and often conflicting human objectives.

Karl Marx Theory of Economic Development

Karl Marx, the father of scientific socialism, is considered a great thinker of history.
He is held in high esteem and is respected as a real prophet by the millions of people.
He is regarded as the father of history who prophesied the decline of capitalism and the advent of socialism.
The Marxian analysis is the greatest and the most penetrating examination of the process of economic development. He expected capitalistic change to break down because of sociological reasons and not due to economic stagnation and only after a very high degree of development is attained. His famous book ‘Das Kapital’ is known as the Bible of socialism (1867). He presented the process of growth and collapse of the capital economy.
Assumptions of the Theory:
Marxian economic theory of growth is based on certain assumptions:
1. There are two principal classes in the society. (1) Bourgeoisie and (2) Proletatiat.
2. Wages of the workers are determined at subsistence level of living.
3. Labour theory of value holds good. Thus labour is the main source of value generation.
4. Factors of production are owned by the capitalists.
. Capital is of two types: constant capital and variable capital.
6. Capitalists exploit the workers.
7. Labour is homogenous and perfectly mobile.
8. Perfect competition in the economy.
. National income is distributed in terms of wages and profits.
Marxian Concept of Economic Development:
In Marxian theory, production means the generation of value. Thus economic development is the process of more value generating, labour generates value. But high level of production is possible through more and more capital accumulation and technological improvement.
At the start, growth under capitalism, generation of value and accumulation of capital underwent at a high rate. After reaching its peak, there is a concentration of capital associated with falling rate of profit. In turn, it reduces the rate of investment and as such rate of economic growth. Unemployment increases. Class conflicts increase. Labour conflicts start and there is class revolts. Ultimately, there is a downfall of capitalism and rise of socialism.

Balanced Vs. Unbalanced Growth for Economic Development

Both the theories are based on the theory of Big Push which advocates investment to break the vicious circle of poverty. The balanced growth aims at the development of all sectors simultaneously but unbalanced growth recommends that the investment should be made only in leading sectors of the economy.
Underdeveloped countries have insufficient resources in men, material and money for simultaneous investment in number of complementary industries. The investment made in selected sectors leads to new investment opportunities. The aim is to keep alive rather than to eliminate the disequilibrium by maintaining tensions and disproportions.
Balanced growth aims at harmony, consistency and equilibrium whereas unbalanced growth suggests the creation of disharmony, inconsistency and disequilibrium. The implementation of balanced growth requires huge amount of capital.
On the other hand, unbalanced growth requires less amount of capital, making investment in only leading sectors. Balanced growth is long term strategy because the development of all the sectors of economy is possible only in long run period. But the unbalanced growth is a short term strategy as the development of few leading sectors is possible in short span of period.
The doctrine of balanced growth and unbalanced growth have two common problems on relating to role of state and the role of supply limitations and supply inelasticity’s. The private enterprise is only incapable of taking investment decisions in underdeveloped countries. Therefore, balanced growth presupposes planning. In unbalanced growth strategy, the states play a pioneer role in encouraging SOC investments, there by creating disequilibrium.
If the development starts via Investment in DPA, political pressures force the state to undertake investment in SOC. The theory of balanced growth is mainly concerned with the lack of demand and neglects the role of supply limitations.
This is not true as underdeveloped country lacks in supply of capital, skills, infrastructures and other resources which are- inelastic in supply. Similarly, unbalanced growth doctrine also neglects the role of supply limitations and supply in elasticity’s. Under such situations, a judicious compromise has to be made between the benefits from balanced growth and unbalanced growth.
There is no second opinion that the developing countries are wedded to democracy who should try to control the twin evils of inflation and adverse balance of payments during the course of pursuing any strategy of economic development. The need of the hour is that it should be done to make the doctrine effective as a vehicle of economic development with added strength and vigour.
In this context, Prof. Meier has rightly observed that, “From the discussion we may also now recognize that the phrases balanced growth and unbalanced growth initially caught on too readily, and that each approach has been overdrawn. After much reconsideration, each approach has become so highly qualified that the controversy is essentially barren.
Instead of seeking to generalize either approach we should more appropriately look to the conditions under which each can claim some validity. It may be concluded that while a newly developing country should aim at balance in an investment criterion, this objective will be attained only by initially following, in most case, a policy of unbalanced investment

BIG PUSH THEORY
The theory of ‘big push’ first put forward by P.N. Rosenstein-Rodan is actually a stringent variant of the theory of ‘balanced growth’. The crux of this theory is that the obstacles of development are formidable and pervasive. The development process by its very nature is not a smooth and uninterrupted process. It involves a series of discontinuous ‘jumps’. The factors affecting economic growth, though functionally related with each other, are marked by a number of “discontinuities” and “hump.”
Therefore, any strategy of economic development that relies basically upon the philosophy of economic “gradualism” is bound to be frustrated. What is needed is a “big push” to undo the initial inertia of the stagnant economy. It is only then that a smooth journey of the economy towards higher levels of productivity and income can be ensured.
Unless big initial momentum is imparted to the economy, it would fail to achieve a self- generating and cumulative growth. A certain minimum of initial speed is essential if at all the race is to be run. A big thrust of a certain minimum size is needed in order to overcome the various discontinuities and indivisibilities in the economy and offset the diseconomies of scale that may arise once development begins According to Rosenstein-Rodan, marginal increments in investment in unrelated individual spots of the economy would be like sprinkling here and there a few drops of water in a desert. Sizable lump of investment injected all at once can alone make a difference.
Rationale for the Big Push:
The basic rationale of the ‘Big Push’ like the ‘Balanced Growth’ theory is based upon the idea of ‘external economies’. In the theory of welfare economics, external economies are defined as those unpaid benefits which go to third parties. The private costs and prices of products fail to reflect these. And the market prices have to be corrected if an account of these external economies is to be taken. However, the concept of external economies has a different connotation in growth theory. Here, they are pecuniary in nature and get transmitted through the price system.
To explain the emergence of such external economies and their transmission, let us consider two industries A and B. If the industry A expands in order to overcome the technical indivisibilities, it shall derive certain internal economies. This may result in the lowering of the price for the product of the industry A. Now if the industry B uses A’s output as an input, the benefits of A’s internal economies shall then be passed on to the industry B in the form of pecuniary external economies. Thus, “the profits of industry B created by the lower prices of product. A call for investment and expansion in industry B, one result of which will be an increase in industry B’s demand for industry A’s product. This in turn will give rise to profits and call for further investment and expansion of industry A.”
Following such a line of argument, Prof. Rosenstein-Rodan contends that the importance of external economies is one of the chief points of difference between the static theory and a theory of growth. “In the static allocative theory there is no such importance of the external economies. In the theory of growth however,” remarks Prof. Rodan, “external economies abound because given the inherent imperfection of the investment market, imperfect knowledge and risks, pecuniary and technological external economies have a similarly disturbing effect on the path towards equilibrium.”Now, the basic contention of the “big push” theory is that such a mutually beneficial way of output expansions is not likely to occur unless the initial obstacles are overcome. There are “non- appropriabilities” or “indivisibilities” of different kinds which if not removed through a “big push” will not permit the emergence and transmission of ‘external economies’ – which lie at the back of a self-generating development process.
Associated with the removal of each set of indivisibilities is a stream of external economies. A ‘bit by bit’ approach to development would not enable the economy to cross over certain indivisible economic obstacles to development. What is required is a vigorous effort to jump over these obstacles. As such, for the economy to be successfully launched on the path of self-generating growth a “big push” in the form of a minimum size of investment programme is necessary. In essence, therefore, an all-or-nothing approach to development is stressed in big-push approach to development.
Requirements for Big Push:
The hallmark of the ‘big-push’ approach lies in the reaping of external economies through the simultaneous installation of a host of technically interdependent industries. But before that could become possible, we have to overcome the economic indivisibilities by moving forward by a certain “minimum indivisible step”. This can be realised through the injection of an initial big dose of a certain size of investment.
Prof. Rodan distinguishes three kinds of indivisibilities and externalities with a view to specify the areas where big push needs to be applied They are:
(i) Indivisibilities in the production function, i.e., lumpiness of capital, especially in the creation of social overhead capital.
(ii) Indivisibility of demand, i.e., complementarity of demand.
(iii) Indivisibility of savings, i.e., kink in the supply of savings.
1v) Let us study each of these individually so as to bring out their importance in providing a self- generating stimulus to the development process.
(i) Indivisibilities in the Production Function:
Prof. Rodan argues that it is possible to generate enormous pecuniary external economies by overcoming the ‘indivisibilities of inputs, processes and outputs.’ The emergence of such externalities would bring about a wide range of increasing returns. To corroborate his contention he cites the case of United States. He feels that the fall in the capital-output ratio in U.S.A. from 4:1 to 3:1 over the last eighty years was chiefly due to the increasing returns made possible by the levelling down of production indivisibilities.
The most important case of indivisibilities and external economies on the supply side resides in the social overhead capital which is now called infrastructure. The most important effect of jumping over this indivisibility is the “investment opportunities created in other industries”. Social overhead capital consists of all the basic industries such as transport, power, communications, and such other public utilities.
The construction of these infrastructures involves ‘lumpy’ capital investments. And the capital- output ratio in the social overheads is considerably higher than in other industries. Moreover, these services are only indirectly productive and involve long gestation periods. Besides, their “minimum feasible size” is large enough. As such it is well-nigh difficult to avoid excess capacity in these, at least in the initial periods. Above all, there is a “minimum industry mix of public utilities” that must be required to divert at least 30 to 40 per cent of their total investment in the creation of social overhead capital.
In this view, therefore, it is possible to distinguish four types of indivisibilities of creating social overhead capital.
They are:
(a) Indivisibility of Time:
The creation of social overhead capital must precede other directly productive industries so that it is irreversible or indivisible in time.
(b) Indivisibility of Durability:
The infrastructures generally last long. The overhead capital with lesser durability is either technically not feasible or is very poor in efficiency.
(c) Indivisibility of Long Gestation Periods:
The investments in social overhead capital, by all counts, involve a highly protracted period of time for their fruition as compared with investments in other directly productive channels.
(d) Indivisibility of an Irreducible Industry Mix of Public Utilities:
Social overhead capital must grow collectively. There is an irreducibly minimum industry mix of different public utilities that have to be created all at one stroke.
As it is impossible to import the infrastructures, they have got to be produced domestically. And because of the existence of above explained indivisibilities, it is necessary to make ‘lumpy’ investments in them. And their creation is a precondition to the investments in directly productive and other quick-yielding productive activities. Only then the way for a self-generating economy can be paved. Thus the absence of adequate social overhead capital constitutes the most important bottleneck in the development of developing countries.
(ii) Indivisibility of Demand:
This refers to the complementarity of demand arising from the diversity of human wants. The very fact that there is an indivisibility of complementarity of demand requires simultaneous setting up of interrelated industries in countries to initiate and accelerate the process of development.
Indivisibility of demand generates interdependencies in investment decisions. As such, if each investment project was undertaken independently, it is in most cases likely to flop down. This is because individual investment projects generally have “high risks because of uncertainty as to whether their products will find a market,” This point can be clarified with the help of the following well known example given by Rosenstein-Rodan for a closed economy.
To start with, let us suppose that 100 disguisedly unemployed workers in an underdeveloped country were withdrawn and employed in a shoe factory. The wages of the newly employed workers would provide an additional income to them. Now, if they spend all their newly received purchasing power on the shoes, an adequate market for the shoe industry would be ensured. As a result, the industry would succeed and survive.
But the fact is that human beings having diversity of wants cannot simply afford to survive simply by the consumption of shoes and nothing else. As such, they will not spend all their earnings on the purchase of shoes. The market for the shoe industry will, therefore, remain limited as before. Therefore, the incentives to invest will be adversely affected. As a result, the shoe factory investment project might end in a fiasco.
Now let us make a somewhat different assumption to see how an atmosphere congenial to the undertaking of investments can occur. Suppose that instead of only 100 workers being engaged in the shoe factory, 10,000 workers are put to work in 100 different factories producing a variety of consumer goods. These new factories provide larger employment and thus purchasing power to their workers. There is an increase in the total volume of purchasing power and the total size of the market. This is because the “new producers would be each other’s customers”.
In a way, what has happened is that due to the complementarity of demand, the risk of limitedness of market is greatly reduced. The result is that the incentives to invest are increased. “Thus provided that the total volume of employment and purchasing power is increased by a minimum indivisible step, each factory Will have enough market to reach full capacity production and the point of minimum cost per unit.”
We, therefore, find that the indivisibility of demand requires the simultaneous production of a “bundle” of large number of wage goods on which the newly employed workers could spend their income. That alone would ensure adequate market for the product of each producer. In terms of investment the implication is that “unless there is assurance that the necessary complementary investments will occur, any single investment project may be considered too risky to be undertaken at all.”
This, as Prof. Higgins remarks, results into indivisibility in the decision-making process. A large-scale investment programme based on complementarity of demand undertaken as a unit may bring forth large increases in national income. But each of the individual investment projects undertaken singly may not fructify at all.
The essence of the whole analysis is that a high minimum quantum of investment in interdependent industries is needed to overcome the indivisibility of demand and hence that of decision-making. That, according to the big push theory, is the only reliable way of overcoming the smallness of the market size and low inducement to invest in the developing economies.
(iii) Indivisibility in the Supply of Savings:
A high minimum package of investment cannot be undertaken without an adequate supply of savings. But it is not possible to have such high volume of savings in underdeveloped countries due to an extremely low price and high income elasticities of the supply of savings. The savings are low primarily because incomes are low. This, thus, constitutes the third indivisibility. “The way out of the vicious circle,” remarks Rosenstein-Rodan, “is to have first an increase in income and to provide mechanisms which assure that in every second stage the marginal rate of savings will be very much higher than the average rate of savings.” The Smithian advice that ‘frugality is a virtue and prodigality a vice’ has to be adapted to a situation of growing income.” But in the ultimate analysis the initial big increase in income has got to be provided through an initial big increase in investment.
The existence of the three indivisibilities outlined above make it abundantly clear that the solution to all these lies in a high minimum quantum of investment. Thus, a big push through a minimum indivisible step forward in the form of a high minimum quantity of investment could alone make it possible to jump over the economic obstacles to development in the underdeveloped countries.
Lastly, Resenstein-Rodan considers the role of international trade vis-a-vis the strategy of big push in generating a self-sustaining process of development. In this regard he is of the view that international trade cannot be a substitute for “big push.” The provision of some of the needed wage goods through imports can at best help in narrowing down the range of fields which call for a ‘big push’. The historical experience provided by the nineteenth century corroborates Rosenstein- Rodan’s conclusion that international trade cannot by itself obviate the need for ‘big push’ altogether.
Once the process of development by an initial application of ‘big push’ is underway, its sequel course would tend to follow simultaneously three sets of balanced growth relations.

They are:
(i) A balance between the social overhead capital and the directly productive activities (in both the consumer and capital goods sectors).
(ii) A vertical balance between capital goods and consumer goods (including the intermediate goods).
(iii) Lastly, there should be the horizontal balance between various consumer goods industries due to complementary nature of expanding consumer demand.
The Need for Balanced Growth of Centralised Planning:
The mutual benefits arising from the external economies for industrialisation cannot be included in the cost calculations of entrepreneurs to the fullest possible extent without recourse to some sort of centralized ‘balanced growth’ planning. This is because of a number of reasons. First, due to the imperfections in the market, the free market price system does not adequately give proper signal to the private investors for the future possibilities of expansion in complementary industries.
Second, in developing countries due to the imperfections of knowledge and risks, the response of the private entrepreneurs to any given price signal is quite imperfect and unsatisfactory. Thus, due to the failure to take advantage of the external economies to the fullest extent, investments which may be profitable in terms of ‘social marginal net product’ remain unprofitable in terms of ‘private marginal net product’. In this view, therefore, there is a need for an integrated investment scheme to be carried out in complementary industries. The best way to do that would be to carry out the investment programme under the direction of some centralised planning authority. An individual entrepreneur in a developing country cannot hope to have all the necessary data which the central planning authority can draw upon.
The crash programme of investment envisaged by the ‘big-push’ theory cannot by its very nature be made just at random. It has to take into consideration the various balances – horizontal as well as vertical. Only then could the achievement of self-generating, cumulative and harmonious growth of the economy is possible. For this what is necessary is a unified decision-making process. “Allocation of capital,” remarks Prof. Higgins, “on the basis of individual estimates of short-run returns on various marginal investment projects is the very process by which the underdeveloped countries got where they are.
The basic reason for government action to promote development is that each of a set of individual private investment decisions may seem unattractive in itself, whereas a large scale investment program undertaken as a unit may yield substantial increase in national income.” Prof. Rosenstein-Rodan’s theory is essentially a theory of development and thus helps us to examine the path towards development rather than restricting itself simply to the study of conditions at the point of equilibrium. The theory highlights the inefficiency of price system of signalling the desirable directions for investment. It is big-push investment through a centralised planning that could put the developing countries on a self-generating development process.
Evaluation of Rosenstein’s Big Push Strategy:
However, Prof. Rosenstein-Rodan’s all-or-nothing approach is not perfect in itself in all respects. It suffers from a number of lacunae.
First, the main implication of the ‘big-push’ theory is State intervention and centralised planning. It is argued that due to imperfections of market the free price system fails to register and thus communicate properly the economic events, much less their future course. But the pertinent question involved here is – will the prevailing circumstances of the developing countries warrant a conclusion to the contrary? The actual fact of the matter is that the current institutional and administrative set-up of the government machinery of the poor developing countries is too weak to cope with the dictates of the ‘big push’ theory. It is, therefore, quite doubtful whether the government sponsored brand of communication system about the future events would at all be more effective than the free price mechanism.
The governments of developing countries may somehow manage to draw up their initial integrated economic plans. But they are bound to be faced with tremendous difficulties in the execution of these plans. In any comprehensive programme comprising a complex set of related projects, delays and continued revision of the original time-bound schedules are inevitable. “The greater the interdependence”, remarks Prof. Myint, “between the different components of the plan, the greater the repercussions of an unexpected or an unavoidable change in one part of the plan on the rest and the greater the need to keep the different parts of the plans continually revised in the light of the latest information available.” These are indeed formidable hurdles for the developing countries to cross.
Besides, on account of the poor and incompetent institutional set-ups of the developing countries, there is bound to be insufficient knowledge about the local conditions and an “inefficient feedback of this vital local knowledge from different parts of the country to the central planning machinery.” Mere improvement in the standard type of statistical information would not remedy all this.
Above all, the process of unified decision-making and coordination becomes all the more difficult in mixed economies like India. This is so because not often, the public and private sectors rather than being complementary are in fact competitive with each other. Thus, it may so happen that the “private enterprise is inhibited by uncertainties not only about the general economic situation but also about the future intention of the government regulations.”
Thus, it is quite clear that the application of a ‘big push’ programme in the developing countries with their weak and incompetent institutional and administrative machinery is likely to die its own death. In fact, as Prof. Myint remarks, it can be compared to “an attempt to impose a complete and brand new ‘second floor’ on the weak and imperfectly developed one floor economy of these countries.”
Secondly, the chief plank on which the ‘big push’ theory is founded is the emergence of a wide range of external economies. Prof. Viner has shown that international trade can provide much more external economies than does the domestic investments. However, the developing countries being primarily primary producing countries, engage a large part of their total investment for their exports and marginal import substitutes, the field where the external economies are found to be very- negligible.
Thirdly, the ‘big push’ theory concentrates mainly on the industrial sector – viz., capital goods, consumer goods and social overhead capital. The manufacturing sector is considered inherently to be a better vehicle of economic growth. But in the developing countries, the most dominant sector is composed of agricultural and primary production. For a balanced growth of the economy, agriculture also requires a corresponding ‘big push’. Any neglect of the agricultural sector in these countries is bound to jeopardise the ‘big push’ effort.
Fourthly, the major part of the ‘lumpy’ investments involved in the ‘all-or-nothing’ approach is called for by the ‘technical indivisibilities’ embodied in the creation of social overhead capital. Not only is the quantum of investment enormously ‘lumpy’ but also the capital-output ratio high in the provision of social overhead services than in other directions. Thus, due to the inherent capital scarcity in the developing countries, it is really a matter of dubious wisdom to require these countries to overstrain their meagre resources in the provision of a complete outfit of infrastructures.
The ‘big push’ theory recommends a ‘starting from scratch’ concerted action in the creation of social overheads. This is on the implicit assumption that these services are totally non-existent in these economies. However, for most of these countries, remarks Prof. Myint, “the practical question is not whether to have a completely new outfit of these services starting from scratch but how to extend and improve the existing facilities.”
Further, the ‘big push’ theory by its very nature requires the ‘lumpy’ investments in different social overheads to be made simultaneously and once for all. With the very long gestation periods usually associated with such investments, there are bound to be inflationary pressures in the economy due to the shortage of consumption goods. In an inflationary atmosphere, the process of construction of the social overheads is bound to be a protracted one. In this light it would be better to spread the infrastructure-building activity over a period of time through phasing and changing the time dimension of the projects. This requires selection of a suitable economic size of the social overhead investments.

Adam Smith theory of Economic development

2022-07-27T04:57:00.000-07:00

Adam Smith theory of Economic development

Economic Development?

Economic Development is the creation of wealth from which community benefits are realized. It is more than a jobs program, it’s an investment in growing your economy and enhancing the prosperity and quality of life for all residents.

Business Retention and Expansion – enhancing existing businesses
Business Expansion – attracting new business
Business Creation – encouraging the growth of new businesses

Adam Smith Theory of Development in Economics

He was the editor and not the author, organizer and not the originator of economic science.

Adam Smith contained all his ideas in his “Wealth of Nations”. The most important aspect of this book was a Theory of Economic Development. Physiocracy came into existence due to mercantilism. They believed in science of natural laws and emphasised the significance of agriculture and contended that it is the only industry that can make country wealthy. Adam Smith’s ‘Wealth of Nations’ was scientific not because it contained the absolute truth but because it came as a turning point, the beginning of all that came after, as it was the end of all that came before.

The main points of the theory are as under:

Natural Law:

Laissez Faire:

Analysis of Net Management

2022-04-02T23:12:00.001-07:00

Analysis of Net Management

There were 3 important features of exam for Management:

1. The NTA has started giving questions, which are framed by creating, more than one option correct. Such questions increase difficulty level of question paper. Earlier such questions were asked in UPSC exams, but hardly in UGC exams. There were 25 questions of this type. This is a big change.

2. Earlier UGC exams were keyword based. You needed to understand meaning of a list of keywords and you are ready. Bur now, the focus is getting more and more on conceptual clarity. You need to understand big picture. Students need to understand application of concepts in Business world.

3. There were more than 15 such questions, which required just acumen of business student. The students should easily get them right just by eliminating smart choices.

4. There were 10 RC based questions, which were on “application of concepts”. Vey easy.

5. Except 2-3 questions, there were nothing, which can be considered “out of syllabus”

Game Theory Net Economics

2022-04-01T10:22:00.001-07:00

Game theory

CUCET 2022 attention 12 appearing students

2022-03-23T01:57:00.007-07:00

CUCET 2022 attention 12 appearing Students

Whatsapp at 7737896705 for joining online program

CUCET 2022: The first ever mandatory common entrance test for admission to undergraduate programmes in all the 45 Central universities will be held in the first week of July, UGC chairman M Jagadesh Kumar announced on Monday.

The Common University Entrance Test (CUCET) is a computerised exam and will be conducted by the National Testing Agency (NTA), which will announce the test pattern on Tuesday, he said. The application window for the examination will open in the first week of April.

Admission to undergraduate courses in these universities will henceforth be solely based on the CUCET score, and Class 12 Board marks will not carry any weightage, Kumar said. The universities can, at best, use the Board exam marks as an eligibility criterion for the test, he said.

This effectively means that performance in the Class 12 Board examination will no longer be a factor in admissions across Central universities. In other words, the sky-high cut-off marks at Delhi University are now history. This year, seven DU colleges had asked for 100 per cent marks in the first list to admit students to a total of 10 programmes.

The Government did not favour using Board marks for admission because of the “diversity” in evaluation methods. “Some Boards are more generous than others in marking and this gives their students an unfair advantage over others,” said an official who spoke on the condition of anonymity.

Following the CUCET, each university will admit students based on a merit list prepared by NTA, and there will be no common counselling.

Delhi University, Jawaharlal Nehru University, Jamia Millia Islamia and Indira Gandhi National Open University in the national capital, and Aligarh Muslim University and Banaras Hindu University in UP, are among the well-known Central universities that will now be covered by CUCET.

When asked whether Central universities that reserve seats for minorities, such as AMU and Jamia, will also have to adopt CUCET, Kumar clarified that the test is compulsory for all 45 Central universities funded by UGC. He added that CUCET will not affect the quota of reserved seats at such institutions, but they will have to mandatorily admit all students through the common test.

“The only difference is that these students will also have to come through CUCET, like students to be admitted on general seats. The reservation policies and ordinances of the universities will remain unchanged,” the UGC chairperson said.

If students have any queiry regarding CUCET 2022 or you need any queiry you can write or whatsapp at7737896705.

We also conduct online classes for Preparation of CUCET2022

Complete Information of Net Economics,Management & Commerce

2022-03-07T05:43:00.000-08:00

Complete Information of Net Economics, Management & Commerce

Net EconoProfessionalsent and Commerce

Eligibility

UGC NET 2022 Eligibility Criteria for JRF (Junior Research Fellowship) and Assistant Professorship are different. Candidates must check the detailed eligibility criteria for the fellowship to which he/she is interested in applying. Recently, the upper age limit for JRF has been increased from 30 years to 31 years. Also, candidates applying must have obtained a least 55% marks in their Master’s Degree.

UGC NET Eligibility: Educational Qualification

Educational Qualification

Candidates securing at least 55% marks in their Master’s Degree or equivalent from a recognized university in Humanities,Economics, Commerce , Management ,Social Science, Computer Science and Applications, Electronic Science, etc. are eligible to appear for NTA.

However, candidates belonging to the Non-Creamy Layer of Other Backward Classes (OBC-NC), Scheduled Caste (SC), Scheduled Tribe (ST), Persons with Disability (PwD), and Transgender category have to score at least 50% marks.
Candidates who are pursuing their Master’s degree or are waiting for their result or whose qualifying examinations have been delayed can apply for the test. However, such candidates will be admitted provisionally and will be considered for award of JRF or recruitment as Assistant Professor only when they will pass their Master’s Degree with at least 55% marks (50% marks for reserved category).in addition, they are required to complete their Master's degree within two years from the date of UGC result

UGC NET Age Limit and Relaxation 2022

UGC NET 2022 Age Limit and Relaxation for Junior Research Fellowship and Assistant Professorship are given below:

Junior Research Fellow (JRF): Candidates should not be more than 31 years as of October 01, 2022.

Candidates belonging to OBC-NC, SC, ST, PwD categories, Transgenders, and Women applicants are provided with a relaxation of up to 5 years.
Candidates with research experience will also be provided age relaxation equivalent to the years/ period spent on research in the respective subject or Post Graduation Degree.
Relaxation to researchers can be of up to 5 years and will only be provided on production of a certificate from the appropriate authority.
Candidates with L.L.M. Degree will be permitted an upper age relaxation of 3 years.
Candidates who have served in the armed forces will be provided with the benefit of relaxation of up to 5 years subject to the length of service in the armed forces up to June 01, 2022.
Total age relaxation on the above grounds shall not exceed 5 years under any circumstances.

Assistant Professor: There is no upper age limit to apply for Assistant Professor

Net Economics Syllabus

Unit-1: Micro Economics

Theory of Consumer Behaviour
Theory of Production and Costs
Decision making under uncertainty Attitude towards Risk
Game Theory–Non-Cooperative games
Market Structures, competitive and non-competitive equilibria and their efficiency properties
General Equilibrium Analysis
Factor Pricing
Efficiency Criteria: Pareto-Optimality, Kaldor –Hicks and Wealth Maximization
Asymmetric Information: Adverse Selection and Moral Hazard
Welfare Economics: Fundamental Theorems, Social Welfare Function

Unit-2: Macro Economics

Determination of output and employment: Classical & Keynesian Approach
National Income: Concepts and Measurement
Consumption Function
Investment Function
Multiplier and Accelerator
Demand for Money
Supply of Money
IS-LM Model Approach
Inflation and Phillips Curve Analysis
Monetary and Fiscal Policy
Business Cycles
Rational Expectation Hypothesis and its critique

Unit-3: Statistics and Econometrics

Probability Theory: Concepts of probability, Distributions, Moments, Central Limit Theorem
Descriptive Statistics– Measures of Central tendency & dispersions, Correlation, Index Numbers
Sampling Methods & Sampling Distribution
Statistical Inferences, Hypothesis testing
Linear Regression Models and their properties – BLUE
Simultaneous Equation Models – recursive and non-recursive
Identification Problem
Discrete choice models
Time Series Analysis

Unit-4: Mathematical Economics

Linear Algebra –Matrices, Vector Spaces
Input-Output Model, Linear Programming
Sets, functions and continuity, sequence, series
Differential Calculus and its Applications
Static Optimization Problems and their applications
Difference and Differential equations with applications

Unit-5: International Economics

International Trade: Basic concepts and analytical tools
Theories of International Trade
Balance of Payments: Composition, Equilibrium and Disequilibrium and Adjustment Mechanisms
International Trade under imperfect competition
Exchange Rate: Concepts and Theories
Foreign Exchange Market and Arbitrage
Tariff and Non-Tariff barriers to trade; Dumping
Gains from Trade, Terms of Trade, Trade Multiplier
GATT, WTO and Regional Trade Blocks; Trade Policy Issues
IMF & World Bank

Unit-6: Public Economics

Market Failure And Remedial Measures: Asymmetric Information, Public Goods, Externality
Public Revenue: Tax & Non-Tax Revenue, Direct & Indirect Taxes, Progressive and non-Progressive Taxation, Incidence and Effects of Taxation
Regulation of Market – Collusion and Consumers’ Welfare
Public Budget and Budget Multiplier
Fiscal Policy and its implications
Public expenditure
Public Debt and its management

Unit-7: Money and Banking

Central Bank
Commercial Banking
Components of Money Supply
Instruments and Working of Monetary Policy
Capital Market and its Regulation
Non-banking Financial Institutions

Unit-8: Growth and Development Economics

Economic Growth and Economic Development
Theories of Economic Development: Adam Smith, Ricardo, Marx, Schumpeter, Rostow, Balanced & Unbalanced growth, Big Push approach
Models of Economic Growth: Harrod-Domar, Solow, Robinson, Kaldor
Technical progress–disembodied & embodied; endogenous growth
Indicators of Economic Development: PQLI, HDI, SDGs
Poverty and Inequalities – Concepts and Measurement
Social Sector Development: Health, Education, Gender

Unit-9: Environmental Economics and Demography

Environment as a Public Good
Market Failure
Coase Theorem
Theories of Population
Concepts and Measures: Fertility, Morbidity, Mortality
Age Structure, Demographic Dividend
Cost-Benefit Analysis and Compensation Criteria
Valuation of Environmental Goods
Migration
Life Table

Unit-10: Indian Economy

Economic Growth in India: Pattern and Structure
Agriculture: Pattern & Structure of Growth, Major Challenges, Policy Responses
Services: Pattern & Structure of Growth, Major Challenges, Policy Responses
Industry: Pattern & Structure of Growth, Major Challenges, Policy Responses
Urban Development –Issues, Challenges and Policy Responses
Rural Development –Issues, Challenges & Policy Responses
Infrastructure Development: Physical and Social; Public-Private Partnerships
Foreign Trade: Structure and Direction, BOP, Flow of Foreign Capital, Trade Policies
Centre-State Financial Relations and Finance Commissions of India; FRBM
Reforms in Land, Labour and Capital Markets
Poverty, Inequality & Unemployment

Net Management Syllabus

NET Management unit-i : Marketing

Management: Concept, Process, Theories and Approaches, Management Roles
and Skills
Functions: Planning, Organizing, Staffing, Coordinating and Controlling.
Communication: Types, Process, and Barriers.
Decision Making: Concept, Process, Techniques, and Tools
Organization Structure and Design: Centralisation, Decentralisation, and Span of Control, Types, Authority, Responsibility
Managerial Economics: Concept & Importance
Demand analysis Utility Analysis, Indifference Curve, Elasticity & Forecasting
Market Structures: Market Classification & Price Determination
National Income: Concept, Types and Measurement
Inflation: Concept, Types and Measurement, Business Ethics & CSR, Ethical Issues & Dilemma, Corporate Governance, Value-Based Organisation

Unit–II: Organizational Behaviour

Organizational Behaviour: Its Significance & Theories
Individual Behaviour: Personality, Attitude, Perception, Values, Learning and
Motivation
Group Behaviour: Team Building, Leadership, Interpersonal Behaviour & Transactional Analysis, Group Dynamics, Organizational Culture & Climate, Workforce Diversity & Cross Culture Organisational Behaviour, Organisational Justice and Whistle Blowing, Emotions and Stress Management
Human Resource Management: Concept, Perspectives, Influences and
Recent Trends, Human Resource Planning, Recruitment, and Selection, Induction, Training and Development, Job Analysis, Job Evaluation, and Compensation Management

Unit–III: Competency Mapping

Competency Mapping & Balanced Scoreboard
Career Planning and Development
Strategic Role of Human Resource Management
Performance Management and Appraisal
Talent Management & Skill Development
Employee Engagement & Work-Life Balance
Organization Development, Change & OD Interventions
Industrial Relations: Disputes & Grievance Management, Labour Welfare and
Social Security
Trade Union & Collective Bargaining
International Human Resource Management: HR Challenge of International, Business, Green HRM

Unit– IV: Accounting Principles and Standards

Accounting Principles and Standards, Preparation of Financial Statements
Financial Statement Analysis, Ratio Analysis, Funds Flow and Cash Flow
Analysis, DuPont Analysis, Preparation of Cost Sheet, Marginal Costing, Cost Volume Profit Analysis, Standard Costing & Variance Analysis, Financial Management, Concept & Functions
Capital Structure: Theories, Cost of Capital, Sources, and Finance; Budgeting and Budgetary Control, Types and Process, Zero base Budgeting
Leverages: Operating, Financial and Combined Leverages, EBIT–EPS, Analysis, Financial Breakeven Point & Indifference Level.

Unit–V: Value & Returns

Value & Returns: Time Preference for Money, Valuation of Bonds and Shares,
Risk and Returns; Capital Budgeting: Nature of Investment, Evaluation, Comparison of Methods;
Risk and Uncertainty Analysis
Dividend: Theories and Determination
Mergers and Acquisition: Corporate Restructuring, Value Creation, Merger
Negotiations, Leveraged Buyouts, Takeover
Portfolio Management: CAPM, APT
Derivatives: Options, Option Payoffs, Option Pricing, Forward Contracts &
Future Contracts
Working Capital Management: Determinants, Cash, Inventory, Receivables and
Payables Management, Factoring
International Financial Management, Foreign exchange market

Unit–VI: Strategic Management

Strategic Management: Its Concept, Process, Decision & Types
Strategic Analysis: External Analysis, PEST, Porter’s Approach to industry
analysis, Internal Analysis: Resource-Based Approach, Value Chain Analysis
Strategy Formulation: SWOT Analysis, Corporate Strategy – Growth, Stability,
Retrenchment, Integration and Diversification, Business Portfolio Analysis – BCG,
GE Business Model, Ansoff’s Product-Market Growth Matrix
Strategy Implementation: Challenges of Change, Developing Programs
Mckinsey 7s Framework
Marketing: Concept, Orientation, Trends and Tasks, Customer Value and
Satisfaction
Market Segmentation, Positioning and Targeting
Product and Pricing Decision: Product Mix, Product Life Cycle, New Product
development, Pricing: Types and Strategies
Place and promotion decision: Marketing channels and value networks, VMS,
IMC, Advertising and Sales promotion

Unit–VII: Consumer and Industrial Buying Behaviour

Theories and Models of Consumer
Behavior
Service Marketing: Managing Service Quality and Brands, Marketing Strategies
of Service Firms Customer Relationship Marketing: Relationship Building, Strategies, Values and Process
Brand Management: Role of Brands, Brand Equity, Equity Models, Developing
a Branding Strategy; Brand Name Decisions, Brand Extensions, and Loyalty
Logistics and Supply Chain Management, Drivers, Value creation, Supply Chain
Design, Designing and Managing Sales Force, Personal Selling
Retail Marketing: Recent Trends in India, Types of Retail Outlets.
Emerging Trends in Marketing: Concept of e-Marketing, Direct Marketing,
Digital Marketing and Green Marketing
International Marketing: Entry Mode Decisions, Planning Marketing Mix for
International Markets

Unit–VIII – Statistics for Management

Statistics for Management: Concept, Measures Of Central Tendency and
Dispersion, Probability Distribution: Binominal, Poison, Normal and Exponential, Data Collection & Questionnaire Design
Sampling: Concept, Process, and Techniques
Hypothesis Testing: Procedure; T, Z, F, Chi-square tests
Correlation and Regression Analysis
Operations Management: Role and Scope
Operation Research: Transportation, Queuing Decision Theory, PERT / CPM
Facility Location and Layout: Site Selection and Analysis, Layout – Design and
Process
Enterprise Resource Planning: ERP Modules, ERP implementation; Scheduling; Loading, Sequencing, and Monitoring; Quality Management and Statistical Quality Control, Quality Circles, Total Quality
Management: KAIZEN, Benchmarking, Six Sigma; ISO 9000 Series Standards

Unit–IX: International Business

International Business: Managing Business in Globalization Era; Theories of International Trade; Balance of payment
Foreign Direct Investment: Benefits and Costs; Multilateral regulation of Trade and Investment under WTO; International Trade Procedures and Documentation; EXIM Policies
Data Warehousing, Data Mining, and Knowledge Management: Concepts
Managing Technological Change
Role of International Financial Institutions: IMF and World Bank
Information Technology: Use of Computers in Management Applications; MIS,
DSS, Artificial Intelligence and Big Data

Unit–X: Entrepreneurship Development

Entrepreneurship Development: Its Concept, Types, Theories, and Process, Developing Entrepreneurial Competencies
Innovations in Business: Types of Innovations, Creating and Identifying, Women Entrepreneurship and Rural Entrepreneurship
Intrapreneurship: Concept and Process, Opportunities, Screening of Business Ideas
Business Plan and Feasibility Analysis: Concept and Process of Technical,
Market and Financial Analysis; Micro and Small Scale Industries in India; Role of Government in Promoting SSI
Sickness in Small Industries: Reasons and Rehabilitation
Institutional Finance to Small Industries: Financial Institutions, Commercial
Banks, Cooperative Banks, Micro Finance

Ugc Net Commerce syllabus

Unit 1: Business Environment and International Business

Unit 2: Accounting and Auditing

Unit 3: Business Economics

Unit 4: Business Finance

Unit 5: Business Statistics and Research Methods

Unit 6: Business Management and Human Resource Management

Unit 7: Banking and Financial Institutions

Unit 8: Marketing Management

Unit 9: Legal Aspects of Business

Unit 10: Income-tax and Corporate Tax Planning

Unit 1: Business Environment and International Business

Concepts and elements of business environment: Economic environment- Economic systems, Economic policies(Monetary and fiscal policies); Political environment- Role of government in business; Legal environment- Consumer Protection Act, FEMA; Socio-cultural factors and their influence on business; Corporate Social Responsibility (CSR)
Scope and importance of international business; Globalization and its drivers; Modes of entry into international business
Theories of international trade; Government intervention in international trade; Tariff and non-tariff barriers; India’s foreign trade policy
Foreign direct investment (FDI) and Foreign portfolio investment (FPI); Types of FDI, Costs and benefits of FDI to home and host countries; Trends in FDI; India’s FDI policy
Balance of payments (BOP): Importance and components of BOP
Regional Economic Integration: Levels of Regional Economic Integration; Trade creation and diversion effects; Regional Trade Agreements: European Union (EU), ASEAN, SAARC, NAFTA
International Economic institutions: IMF, World Bank, UNCTAD
World Trade Organisation (WTO): Functions and objectives of WTO; Agriculture Agreement; GATS; TRIPS; TRIMS

Unit 2: Accounting and Auditing

Basic accounting principles; concepts and postulates
Partnership Accounts: Admission, Retirement, Death, Dissolution and Insolvency of partnership firms
Corporate Accounting: Issue, forfeiture and reissue of shares; Liquidation of companies; Acquisition, merger, amalgamation and reconstruction of companies
Holding company accounts
Cost and Management Accounting: Marginal costing and Break-even analysis; Standard costing; Budgetary control; Process costing; Activity Based Costing (ABC); Costing for decision-making; Life cycle costing, Target costing, Kaizen costing and JIT
Financial Statements Analysis: Ratio analysis; Funds flow Analysis; Cash flow analysis
Human Resources Accounting; Inflation Accounting; Environmental Accounting
Indian Accounting Standards and IFRS
Auditing: Independent financial audit; Vouching; Verification ad valuation of assets and liabilities; Audit of financial statements and audit report; Cost audit
Recent Trends in Auditing: Management audit; Energy audit; Environment audit; Systems audit; Safety audit

Unit 3: Business Economics

Meaning and scope of business economics
Objectives of business firms
Demand analysis: Law of demand; Elasticity of demand and its measurement; Relationship between AR and MR
Consumer behavior: Utility analysis; Indifference curve analysis
Law of Variable Proportions: Law of Returns to Scale
Theory of cost: Short-run and long-run cost curves
Price determination under different market forms: Perfect competition; Monopolistic competition; Oligopoly- Price leadership model; Monopoly; Price discrimination
Pricing strategies: Price skimming; Price penetration; Peak load pricing

Unit 4: Business Finance

Scope and sources of finance; Lease financing
Cost of capital and time value of money
Capital structure
Capital budgeting decisions: Conventional and scientific techniques of capital budgeting analysis
Working capital management; Dividend decision: Theories and policies
Risk and return analysis; Asset securitization
International monetary system
Foreign exchange market; Exchange rate risk and hedging techniques
International financial markets and instruments: Euro currency; GDRs; ADRs
International arbitrage; Multinational capital budgeting

Unit 5: Business Statistics and Research Methods

Measures of central tendency
Measures of dispersion
Measures of skewness
Correlation and regression of two variables
Probability: Approaches to probability; Bayes’ theorem
Probability distributions: Binomial, poisson and normal distributions
Research: Concept and types; Research designs
Data: Collection and classification of data
Sampling and estimation: Concepts; Methods of sampling – probability and non-probability methods; Sampling distribution; Central limit theorem; Standard error; Statistical estimation
Hypothesis testing: z-test; t-test; ANOVA; Chi–square test; Mann-Whitney test (U-test); Kruskal-Wallis test (H-test); Rank correlation test
Report writing

Unit 6: Business Management and Human Resource Management

Principles and functions of management
Organization structure: Formal and informal organizations; Span of control
Responsibility and authority: Delegation of authority and decentralization
Motivation and leadership: Concept and theories
Corporate governance and business ethics
Human resource management: Concept, role and functions of HRM; Human resource planning; Recruitment and selection; Training and development; Succession planning
Compensation management: Job evaluation; Incentives and fringe benefits
Performance appraisal including 360 degree performance appraisal
Collective bargaining and workers’ participation in management
Personality: Perception; Attitudes; Emotions; Group dynamics; Power and politics; Conflict and negotiation; Stress management
Organizational Culture: Organizational development and organizational change

Unit 7: Banking and Financial Institutions

Overview of Indian financial system
Types of banks: Commercial banks; Regional Rural Banks (RRBs); Foreign banks; Cooperative banks
Reserve Bank of India: Functions; Role and monetary policy management
Banking sector reforms in India: Basel norms; Risk management; NPA management
Financial markets: Money market; Capital market; Government securities market
Financial Institutions: Development Finance Institutions (DFIs); Non-Banking Financial Companies (NBFCs); Mutual Funds; Pension Funds
Financial Regulators in India
Financial sector reforms including financial inclusion
Digitisation of banking and other financial services: Internet banking; mobile banking; Digital payments systems
Insurance: Types of insurance- Life and Non-life insurance; Risk classification and management; Factors limiting the insurability of risk; Re-insurance; Regulatory framework of insurance- IRDA and its role

Unit 8: Marketing Management

Marketing: Concept and approaches; Marketing channels; Marketing mix; Strategic marketing planning; Market segmentation, targeting and positioning
Product decisions: Concept; Product line; Product mix decisions; Product life cycle; New product development
Pricing decisions: Factors affecting price determination; Pricing policies and strategies
Promotion decisions: Role of promotion in marketing; Promotion methods – Advertising; Personal selling; Publicity; Sales promotion tools and techniques; Promotion mix
Distribution decisions: Channels of distribution; Channel management
Consumer Behaviour; Consumer buying process; factors influencing consumer buying decisions
Service marketing
Trends in marketing: Social marketing; Online marketing; Green marketing; Direct marketing; Rural marketing; CRM
Logistics management

Unit 9: Legal Aspects of Business

Indian Contract Act, 1872: Elements of a valid contract; Capacity of parties; Free consent; Discharge of a contract; Breach of contract and remedies against breach; Quasi contracts;
Special contracts: Contracts of indemnity and guarantee; contracts of bailment and pledge; Contracts of agency
Sale of Goods Act, 1930: Sale and agreement to sell; Doctrine of Caveat Emptor; Rights of unpaid seller and rights of buyer
Negotiable Instruments Act, 1881: Types of negotiable instruments; Negotiation and assignment; Dishonour and discharge of negotiable instruments
The Companies Act, 2013: Nature and kinds of companies; Company formation; Management, meetings and winding up of a joint stock company
Limited Liability Partnership: Structure and procedure of formation of LLP in India
The Competition Act, 2002: Objectives and main provisions
The Information Technology Act, 2000: Objectives and main provisions; Cyber crimes and penalties
The RTI Act, 2005: Objectives and main provisions
Intellectual Property Rights (IPRs) : Patents, trademarks and copyrights; Emerging issues in intellectual property
Goods and Services Tax (GST): Objectives and main provisions; Benefits of GST; Implementation mechanism; Working of dual GST

Unit 10: Income-tax and Corporate Tax Planning

Income-tax: Basic concepts; Residential status and tax incidence; Exempted incomes; Agricultural income; Computation of taxable income under various heads; Deductions from Gross total income; Assessment of Individuals; Clubbing of incomes
International Taxation: Double taxation and its avoidance mechanism; Transfer pricing
Corporate Tax Planning: Concepts and significance of corporate tax planning; Tax avoidance versus tax evasion; Techniques of corporate tax planning; Tax considerations in specific business situations: Make or buy decisions; Own or lease an asset; Retain; Renewal or replacement of asset; Shut down or continue operations
Deduction and collection of tax at source; Advance payment of tax; E-filing of income-tax returns

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Set Theory Mathematical Economics

2022-02-10T04:10:00.000-08:00

Mathematical Economics

Mathematical economics is the application of mathematical method to represent theories and analysed problem in Economics.
Mathematics allows economists to form meaningful, testable propositions about wide-ranging and complex subjects which could less easily be expressed informally. Further, the language of mathematics allows economists to make specific positive claims about controversial or contentious subjects that would be impossible without mathematics.

Today we will discuss about Set theory

Set Theory is a branch of mathematical logic where we learn sets and their properties. A set is a collection of objects or groups of objects. These objects are often called elements or members of a set. For example, a group of players in a cricket team is a set.

Since the number of players in a cricket team could be only 11 at a time, thus we can say, this set is a finite set. Another example of a finite set is a set of English vowels. But there are many sets that have infinite members such as a set of natural numbers, a set of whole numbers, set of real numbers, set of imaginary numbers, etc.

Set Theory Origin

Georg Cantor (1845-1918), a German mathematician, initiated the concept ‘Theory of sets’ or ‘Set Theory’. While working on “Problems on Trigonometric Series”, he encountered sets, that have become one of the most fundamental concepts in mathematics. Without understanding sets, it will be difficult to explain the other concepts such as relations, functions, sequences, probability, geometry, etc.

Definition of Sets

As we have already learned in the introduction, set is a well-defined collection of objects or people. Sets can be related to many real-life examples, such as the number of rivers in India, number of colours in a rainbow, etc.

Example

To understand sets, consider a practical scenario. While going to school from home, Nivy decided to note down the names of restaurants which come in between. The list of the restaurants, in the order they came, was:

$L i s t 1 : R_{A} R_{B} R_{C} R_{D} R_{E}$

The above-mentioned list is a collection of objects. Also, it is well-defined. By well-defined, it is meant that anyone should be able to tell whether the object belongs to the particular collection or not. E. g. a stationary shop can’t come in the category of the restaurants. If the collection of objects is well-defined, it is known as a set.

The objects in a set are referred to as elements of the set. A set can have finite or infinite elements. While coming back from the school, Nivy wanted to confirm the list what she had made earlier. This time again, she wrote the list in the order in which restaurants came. The new list was:

$L i s t 2 : R_{E} R_{D} R_{C} R_{B} R_{A}$

Now, this is a different list. But is a different set? The answer is no. The order of elements has no significance in sets so it is still the same set.

Representation of Sets

Sets can be represented in two ways:

Roster Form or Tabular form
Set Builder Form

Roster Form

In roster form, all the elements of the set are listed, separated by commas and enclosed between curly braces { }.

Example: If set represents all the leap years between the year 1995 and 2015, then it would be described using Roster form as:

A ={1996,2000,2004,2008,2012}

Now, the elements inside the braces are written in ascending order. This could be descending order or any random order. As discussed before, the order doesn’t matter for a set represented in the Roster Form.

Also, multiplicity is ignored while representing the sets. E.g. If $L$ represents a set that contains all the letters in the word ADDRESS, the proper Roster form representation would be

L ={A,D,R,E,S }= {S,E,D,A,R}

L≠ {A,D,D,R,E,S,S}

Set Builder Form

In set builder form, all the elements have a common property. This property is not applicable to the objects that do not belong to the set.

Example: If set S has all the elements which are even prime numbers, it is represented as:

S={ x: x is an even prime number}

where ‘x’ is a symbolic representation that is used to describe the element.

‘:’ means ‘such that’

‘{}’ means ‘the set of all’

So, S = { x:x is an even prime number } is read as ‘the set of all x such that x is an even prime number’. The roster form for this set S would be S = 2. This set contains only one element. Such sets are called singleton/unit sets.

Another Example:

F = {p: p is a set of two-digit perfect square numbers}

How?

F = {16, 25, 36, 49, 64, 81}

We can see, in the above example, 16 is a square of 4, 25 is square of 5, 36 is square of 6, 49 is square of 7, 64 is square of 8 and 81 is a square of 9}.

Even though, 4, 9, 121, etc., are also perfect squares, but they are not elements of the set F, because the it is limited to only two-digit perfect square.

Types of Sets

The sets are further categorised into different types, based on elements or types of elements. These different types of sets in basic set theory are:

Finite set: The number of elements is finite
Infinite set: The number of elements are infinite
Empty set: It has no elements
Singleton set: It has one only element
Equal set: Two sets are equal if they have same elements
Equivalent set: Two sets are equivalent if they have same number of elements
Power set: A set of every possible subset.
Universal set: Any set that contains all the sets under consideration.
Subset: When all the elements of set A belong to set B, then A is subset of B

Symbol	Corresponding Set
N	Represents the set of all Natural numbers i.e. all the positive integers. This can also be represented by $Z^{+}$ . Examples: 9, 13, 906, 607, etc.
Z	Represents the set of all integers The symbol is derived from the German word Zahl, which means number. Positive and negative integers are denoted by $Z^{+}$ and $Z^{-}$ respectively. Examples: -12, 0, 23045, etc.
Q	Represents the set of Rational numbers The symbol is derived from the word Quotient. It is defined as the quotient of two integers (with non-zero denominator) Positive and negative rational numbers are denoted by $Q^{+}$ and $Q^{-}$ respectively. Examples: $\frac{13}{9}$ , $- \frac{6}{7}$ , $\frac{14}{3}$ , etc.
R	Represents the Real numbers i.e. all the numbers located on the number line. Positive and negative real numbers are denoted by $R^{+}$ and $R^{-}$ respectively. Examples: $4.3$ , $π$ , $4 \sqrt{3}$ ,, etc.
C	Represents the set of Complex numbers. Examples: 4 + 3i, i, etc

Symbol	Symbol Name
{ }	set
A ∪ B	A union B
A ∩ B	A intersection B
A ⊆ B	A is subset of B
A ⊄ B	A is not subset B
A ⊂ B	proper subset / strict subset
A ⊃ B	proper superset / strict superset
A ⊇ B	superset
A ⊅ B	not superset
Ø	empty set
P (C)	power set
A = B	Equal set
Ac	Complement of A
a∈B	a element of B
x∉A	x not element of A

Venn diagrams

Venn diagrams are a useful way of visualizing relationships between sets.
When we draw Venn diagrams, sets are represented by circles. The inside of a circle represents all the elements that are members of that set and the outside of the circle represents all elements which are not members of that set.
The areas where circles overlap represents the set of elements which are in all of the sets corresponding to the overlapping circles. We call this area the intersection of the (overlapping) sets.
The sample space is represented by a rectangle which is drawn around all of the circles and we write the set name of the sample space (typically the letter $S$ ) in the left-hand corner. If we want to partition the sample set into multiple parts, we draw lines to divide the rectangle into the required number of parts.

Worked Example

In an Economics seminar group there are $32$ students. $19$ of these students say they enjoy studying Microeconomics, $17$ say they enjoy studying Macroeconomics, and $5$ say that they enjoy studying neither Microeconomics nor Macroeconomics. How many of the students in the seminar group enjoy studying both Microeconomics and Macroeconomics?

Solution

We can solve this problem by drawing a Venn diagram to represent the situation and adding each new piece of information to the diagram as we go.
The sample space is the set of all $32$ students in the seminar group. We will denote the sample space by the letter $S$ .
Denote the set of ( $19$ ) students who enjoy studying Microeconomics by $I$ and the set of ( $17$ ) students who enjoy studying Macroeconomics by $A$ . These sets are represented by circles. We want to known how many students there are in the intersection of these two circles (who enjoy studying both subjects).
The $5$ students who enjoy neither of the subjects go on the outside of the circles. We know the total in the Microeconomics circle needs to be $19$ but we can't put this in the circle because we don't know how many should go in the intersection and how many should go in the right hand part of the Microeconomics circle (those who enjoy studying only Microeconomics). We have the same problem for the Macroeconomics circle so our Venn diagram currently looks like this:

Ven Diagram

We know there are

32

students in the group, and if there are

5

students outside the circles then the other three sections must add up to

27

. We know there are

17

students who enjoy Macroeconomics, so the middle and left section must add up to

17

. This leaves

10

in the right-hand section of the

I

circle because

27 - 17 = 10

Since there are

19

students who enjoy Microeconomics, the two parts of the Microeconomics circle should add up to

19

so we can now find the number in the intersection by subtracting

10

from

19

19 - 10 = 9

There are $19$ students who enjoy Microeconomics, and $27 - 19 = 8$ , so the number who enjoy Macroeconomics but not enjoy Macroeconomics must be $8$ .

we check all four facts we were given, we can now see they are all true. In particular, there are $32$ students in the seminar group and $32$ in the venn diagram.
There are $9$ students who enjoy both Microeconomics and Macroeconomics.
Symbol

we check all four facts we were given, we can now see they are all true. In particular, there are $32$ students in the seminar group and $32$ in the venn diagram.
There are $9$ students who enjoy both Microeconomics and Macroeconomics.

A complement Ac Every element. Is not element of A set{6.7.8__)

2,€ A 2 is element of Set A and belong to A

- 4 does not belong to C and not belong to C

A contain B Every element. Of B is also an element of A
B is subset of A

A U C. A union C Evey element which is member Of A&C

A intersection C every element which is member of A& C

Set Theory Formulas

n( A ∪ B ) = n(A) +n(B) – n (A ∪ B)
n(A∪B)=n(A)+n(B) {when A and B are disjoint sets}
n(U)=n(A)+n(B)–n(A∩B)+n((A∪B)c)
n(A∪B)=n(A−B)+n(B−A)+n(A∩B)
n(A−B)=n(A∩B)−n(B)
n(A−B)=n(A)−n(A∩B)
n(Ac)=n(U)−n(A)
n(PUQUR)=n(P)+n(Q)+n(R)–n(P⋂Q)–n(Q⋂R)–n(R⋂P)+n(P⋂Q⋂R)

Set Operations

The four important set operations that are widely used are:

Fundamental Properties of Set operations:

Like addition and multiplication operation in algebra, the operations such as union and intersection in set theory obeys the properties of associativity and commutativity. Also, the intersection of sets distributes over the union of sets.

Sets are used to describe one of the most important concepts in mathematics i.e. functions. Everything that you observe around you, is achieved with mathematical models which are formulated, interpreted and solved by functions.

Problems and Solutions

Q.1: If U = {a, b, c, d, e, f}, A = {a, b, c}, B = {c, d, e, f}, C = {c, d, e}, find (A ∩ B) ∪ (A ∩ C).

Solution: A ∩ B = {a, b, c} ∩ {c, d, e, f}

A ∩ B = { c }

A ∩ C = { a, b, c } ∩ { c, d, e }

A ∩ C = { c }

∴ (A ∩ B) ∪ (A ∩ C) = { c }

Q.2: Give examples of finite sets.

Solution: The examples of finite sets are:

Set of months in a year

Set of days in a week

Set of natural numbers less than 20

Set of integers greater than -2 and less than 3

Q.3: If U = {2, 3, 4, 5, 6, 7, 8, 9, 10, 11}, A = {3, 5, 7, 9, 11} and B = {7, 8, 9, 10, 11}, Then find (A – B)′.

Solution: A – B is a set of member which belong to A but do not belong to B

∴ A – B = {3, 5, 7, 9, 11} – {7, 8, 9, 10, 11}

A – B = {3, 5}

According to formula,

(A − B)′ = U – (A – B)

∴ (A − B)′ = {2, 3, 4, 5, 6, 7, 8, 9, 10, 11} – {3, 5}

(A − B)′ = {2, 4, 6, 7, 8, 9, 10, 11}.

Insitute of Economics and Management studies

RBI Grade B Exams for Economics students

RBI GRADE B Exams for Economics students

"Dear Economics students,

Syllabus

*Phase 1: Preliminary Examination*

*Phase 2: Main Examination*

*Phase 3: Interview*

RBI GRADE B cutoffs

*RBI Grade B Cut Off 2023*

RBI Grade B Cut Off 2022

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Net Economics #Classical Economists and their work# Economic theory

Net Economics #Classical Economists and their work# Economic theory

Adam Smith (1723-1790):

David Ricardo (1772-1823):

Thomas Malthus (1766-1834):

Jean-Baptiste Say (1767-1832):

John Stuart Mill (1806-1873):

List of prominent scholars and the work in field of economics

List of prominent scholars and the work in field of economics

Econometrics Regression Analysis part 1

Econometrics Regression Analysis

Part 1

Mercantile theory

Mercantile theory

Mercantilism was an economic theory prevalent from the 16th to the 18th centuries, emphasizing the importance of a nation's wealth in terms of accumulating precious metals, especially gold and silver. Here are key aspects of the mercantile theory:

Net Economics Important Interpretation in one place

Net Economics Important Interpretation in one place

MICRO Economics

Supply and Demand: The fundamental concept in microeconomics where the price and quantity of goods in the market are determined by the balance between what producers are willing to supply and what consumers are willing to buy.

Elasticity: A measure of how sensitive the quantity demanded or supplied of a good is to changes in price, income, or other factors.

Utility: The satisfaction or pleasure derived from consuming goods and services. It is a fundamental concept in understanding consumer behavior.

Costs of Production: The expenses incurred by firms in the process of producing goods and services, including fixed and variable costs.

Perfect Competition: A market structure in which there are many small firms, identical products, and no barriers to entry. Prices are determined solely by supply and demand.

Monopoly: A market structure in which there is only one producer or seller for a product. The monopolist has significant control over the price and supply of the product.

Oligopoly: A market structure in which a small number of large firms dominate the market. These firms have the ability to influence the market price and other market outcomes.

Market Failure: When the market fails to allocate resources efficiently, leading to an overallocation or underallocation of resources. Market failures can occur due to externalities, public goods, asymmetric information, and monopolies.

Game Theory: A branch of microeconomics that deals with the strategic interactions between different players in a situation involving choices of actions, analyzing their behaviors and outcomes.

Consumer Surplus and Producer Surplus: Concepts used to measure the benefits that consumers and producers receive when the market price for a good or service is lower or higher than their willingness to pay or receive.

MACRO Economics

Gross Domestic Product (GDP): The total monetary value of all goods and services produced within a country's borders within a specific time period. It is a key indicator of a nation's economic performance.

Inflation: The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. Central banks often target a specific inflation rate as a monetary policy goal.

Unemployment Rate: The percentage of the labor force that is jobless and actively seeking employment. It is a crucial measure of economic health and labor market conditions.

Fiscal Policy: The use of government spending and taxation to influence the economy. Governments use fiscal policy to stabilize the economy, promote economic growth, and control inflation.

Monetary Policy: The management of the money supply and interest rates by a central bank (such as the Federal Reserve in the United States) to control inflation and stabilize the economy.

Budget Deficit: When a government's expenditures exceed its revenues in a fiscal year. It leads to an increase in national debt.

National Debt: The total amount of money that a country's government has borrowed, typically over many years. It is the accumulation of all past deficits and surpluses.

Mathematical Economics

Function: In mathematics, a function is a relation between a set of inputs (independent variable) and a set of possible outputs (dependent variable) such that each input is related to exactly one output.

Derivative: The derivative of a function represents the rate at which the output of the function changes with respect to the change in the input. It is a fundamental concept in calculus and is often used to model marginal changes in economics.

Integral: The integral of a function represents the area under the curve of the function. In economics, integrals are used to calculate total quantities, such as total consumer surplus or total producer surplus.

Optimization: Optimization involves finding the best solution to a problem from all possible solutions. In economics, optimization techniques are used to find the maximum or minimum of functions representing utility, profit, cost, etc.

Equilibrium: A state in which opposing forces or factors are balanced. In economics, equilibrium refers to a situation where demand equals supply, and there is no tendency for prices or quantities to change.

Partial Derivative: A derivative of a function of several variables with respect to one variable, treating the remaining variables as constants. It measures how the function changes as one variable changes, holding other variables constant.

Elasticity: In mathematical economics, elasticity measures the responsiveness of demand or supply to changes in price or income. It is often calculated using derivatives.

Differential Equations: Mathematical equations that involve derivatives. They are used in economics to model dynamic processes, such as economic growth, population growth, and investment over time.

Matrix: A mathematical structure consisting of an ordered set of numbers arranged in rows and columns. Matrices are used in various economic models, including input-output analysis and simultaneous equations systems.

Game Theory: The study of mathematical models of strategic interactions among rational decision-makers. Game theory is used to analyze economic and social situations where individuals or organizations make decisions interdependently.

Econometrics

Regression Analysis: A statistical method used to examine the relationship between two or more variables. In econometrics, regression analysis is widely used to estimate the effect of one or more independent variables on a dependent variable.

Independent Variable: A variable that is manipulated or varied in an experiment or analysis. It is used to predict or explain changes in the dependent variable.

Dependent Variable: A variable being studied and tested in an experiment. It represents the output or outcome whose variation is being studied.

OLS (Ordinary Least Squares) Regression: A common method in econometrics for estimating the parameters of a linear regression model. It minimizes the sum of the squared differences between observed and predicted values.

Autocorrelation: The correlation of a signal with a delayed copy of itself. In econometrics, autocorrelation often occurs in time series data, indicating that the observations are not independent over time.

Endogeneity: A situation in which an explanatory variable in a regression model is correlated with the error term. It can lead to biased and inefficient parameter estimates.

Instrumental Variables: Variables used in econometric techniques to address endogeneity issues by providing an external source of variation for the potentially endogenous explanatory variable.

Time Series Analysis: A statistical method used to analyze time-ordered data points. It is commonly used in econometrics to study economic indicators and other time-based data.

Money and Banking

Money: Money is any widely accepted medium of exchange used for transactions, as well as a store of value and a unit of account. It can st in various curencies, or even certain commodities historically used as money.

Currency: Currency refers to physical forms of money, such as coins and paper notes, issued by the government and used as a medium of exchange in an economy.

Central Bank: A central bank is an institution responsible for managing a country's monetary policy, issuing currency, regulating banks, and controlling the money supply. Examples include the Federal Reserve in the United States and the European Central Bank in the Eurozone.RBI in India

Commercial Bank: Commercial banks are financial institutions that accept deposits from the public and provide loans to individuals, businesses, and governments. They play a crucial role in the creation of money through the lending process

Fractional Reserve Banking: Fractional reserve banking is a system in which banks are required to hold only a fraction of their customers' deposits in reserve. The rest can be lent out, effectively creating new money.

Interest Rate: Interest rate is the cost of borrowing money, usually expressed as a percentage of the loan amount. It is set by central banks and influences economic activity, investment, and inflation.

Monetary Policy: Monetary policy refers to the management of the money supply and interest rates by a central bank to control inflation and stabilize the economy. Central banks use tools like open market operations and changes in interest rates to implement monetary policy.

Inflation: Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power. Central banks often aim to maintain stable inflation rates to support economic growth.

Deflation: Deflation is the opposite of inflation, indicating a decrease in the general price level of goods and services. It can lead to reduced consumer spending and economic slowdown.

Liquidity: Liquidity refers to the ease with which an asset or security can be quickly bought or sold in the market without causing a significant price change. Cash is the most liquid asset.

Reserve Requirement: Reserve requirement is the percentage of deposits that banks are required to hold in reserve, as set by the central bank. It influences the amount of money that banks can create through lending.

Phase 1: Preliminary Examination

Phase 2: Main Examination

Phase 3: Interview

RBI Grade B Cut Off 2023

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Foreign Exchange Market: The global marketplace for buying and selling currencies. It is the largest financial market in the world and determines exchange rates between different currencies.

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Foreign Direct Investment (FDI) and Economic Growth: FDI refers to investment made by a firm or individual in one country in business interests in another country. It can stimulate economic growth by bringing in capital, technology, and employment opportunities.