Basic Concepts in Economics

1) Production: Any economic activity directed towards the satisfaction of human

wants is known as production. The production of goods and services is necessary for

the existence of an economy. The level of production in any economy is the best

measure of its performance, living standards of its people and the extent of

technological development and growth. It includes both the manufacturing of

material goods as well as the provision of services. The production of electrical and

electronic goods, automobiles etc and the work of teachers, doctors, lawyers etc are all

production in the economic sense.

2) Consumption: The act of satisfying one’s wants is called consumption. Goods and

services are produced only because human wants need to be satisfied. No one will

produce if there is no consumption. The quality and quantity of consumption reflects

the levels of income and employment in an economy.

3) Investment: Investment is the addition made to the existing total stock of capital.

The amount to make investment is coming from saving and this saving is the unspent

income. Income comes from employment. An economy can grow only if it saves

something from its present consumption and invests it again in the production

process. It adds to the productive capacity of an economy.

4) Goods: Anything that can satisfy human wants is called goods in economics. While

services also satisfy human wants, the difference is that goods are tangible and visible

but services are intangible and invisible. Goods can be of various types. They can be

free goods or economic goods, transferable, private or public and so on.

Utility: The want satisfying capacity of a commodity is called its utility or the power

of a commodity to satisfy human wants is called utility. Utility is subjective that is it

does not lie in the good but is a function of the consumer’s mind. Utility of good

changes with the change in conditions and circumstances. There are three main forms

of utility-form utility, place utility and time utility.

Value: The commodity which has utility and possesses the condition of scarcity and

transferability, then it has value. For example air has utility but it is abundant and a

free resource, it has no value in economic sense. Likewise rotten eggs are scarce and

transferable but possess no utility, they also don’t have value. A television since it

possesses utility and is scarce as well as transferable has value.

Price: Value of a commodity expressed in terms of money is called price. In modern

times, goods are exchanged for money; the value of a commodity is its price.

Wealth: Anything that has value is called wealth. In economics; wealth does not only

refer to money, but to all goods that have value. Wealth includes material wealth and

human wealth (education, health, knowledge etc)

Income: The amount of money which wealth yields is known as income. Thus,

wealth is a stock concept while income is a flow concept. That is wealth is valued at a

particular point of time and income is measured over a period of time particularly a

year.

Gross Domestic Product (GDP)

When we take the sum total of values of output of goods and services in the country,

without adding net factor incomes received from abroad, the figure so obtained is

called Gross Domestic Product (GDP).

GDP = C+I+G

GNP may be defined as the aggregate market value of all final goods and services

produced during a given year. The concept of final goods and services stands for

finished goods and services, ready for consumption of households and firms, and

exclude raw materials, semi-finished goods and such other intermediary products.

More clearly, all sales to households, business investment expenditure, and all

government expenditures are obviously regarded as final goods. In an open economy

(an economy which has economic relationship with the rest of the world in the form

of trade, remittances, investment etc-all economies are open economies), GNP may

be obtained by adding up:

1) The value of all consumption goods which are currently produced

2) The value of all capital goods produced which is defined as Gross Investment.

Gross Investment, in the real sense, here implies the increase in inventories

plus gross products of buildings and equipments. It, thus, includes the

provision for the consumption of capital assets, i.e., depreciation or

replacement allowances.

3) The value of government services which are measured in terms of

governmental expenditure on various goods and services for rendering certain

services to the benefit of the entire community.

4) The value of net exports, viz, the difference between total exports and total

imports of the nation. This value may be positive or negative.

5) The net amount earned abroad. This represents the difference between the

income received by the nationals from abroad minus the income remitted by

the foreigners working in India.

GNP at market price, thus, represents:

GNP= C+I+G+(X-M)+(R-P),

Where,

C stands for consumption goods,

I stands for capital goods/ or gross investment,

G stands for government services,

X stands for exports,

M stands for imports,

R stands for income receipts from abroad, and

P stands for income remitted by foreigners.

The Sectors of the Economy

The economic activities of an economy is classified mainly into three primary sector

economic activities (agriculture and allied), secondary sector (manufacturing,

construction etc) and service sector or tertiary sector activities (transport and

communication etc).The Ministry of Statistics and Programme Implementation

(MOSP), Government of India has been publishing National Accounts Statistics

annually classifying the Indian economy into three sectors and re-classifying the

sectors into various sub sectors. In this classification primary sector includes

agriculture, forestry and logging and fishing. The secondary sector includes

manufacturing (registered and un-registered manufacturing), construction, electricity,

gas and water supply. Tertiary sector or service sector includes transport, storage and

communication, railway, trade, hotels and restaurants, banking and insurance, real

estate, ownership of dwellings and business services, public administration and other

services. In Indian economy the contribution of primary sector is less than 20 per cent

and the agriculture share in national GDP is reducing even though 58 per cent of

India’s labour force still engaged in agriculture and allied activities. This is a serious

issue in the rural life of India. The agrarian sector has been facing serious crisis and to

a greater extent it is structural and institutional. The area under irrigation has been

almost constant for the last several years, declining capital expenditure by the public

sector in agriculture, lack of infrastructural facilities, declining institutional credit to

agriculture etc all these are burning issues of India’s farm sector. Sharp decline of

agriculture in value-added terms to GDP, increasing amenities in urban India and not

much in rural India where more than 70 per cent of the population lives etc are some

disturbing facts to those who hold ‘Indian Economic Miracle’ theory. We have good

demographic advantage, vast agricultural land and in this land we can cultivate all

most all crops sufficiently to meet the requirements of our growing population. But

now the present situations of India like poor state of our education, public health,

agriculture and rural economy, poor amenities in rural areas and urban slums, poor

public delivery systems, high poverty ratio, still high illiteracy rate, malnutrition and

high infant mortality rate are burning issues to be addressed urgently.

At the national level the contribution of manufacturing sector is around 18 per cent

and it is almost constant for the last so many years. But in Kerala it is around 10 per

cent and in Kerala we have a stagnant manufacturing sector. The contribution of

service sector to the national economy is nearly 60 per cent. There are serious

disparities in the growth rates of agriculture, manufacturing and service sectors of the

Indian economy.

Functions of Money

The functions of money can be classified as follows.

1) Money as a medium of exchange

The basic function of money in an economy is to act as a medium of exchange.

Money has general acceptability and purchasing power so it can act as a medium of

exchange. When money is transacted, purchasing power is transacted from one

person to another. In earlier periods we had been following barter system. Barter

system means exchanging goods for goods. But most of the time, for such exchange

to take place, there must occur a double coincidence of wants. That is each party to

the exchange must have precisely what the other party requires, and in an appropriate

quantity and at the time required. The use of money as a common medium of

exchange has facilitated exchange greatly.

2) Money as a Unit of Account.

Money customarily serves as a common unit of account or measure of value in terms

of which the values of all goods and services are expressed. This makes possible

meaninigful accounting systems by adding up the values of a wide variety of goods

and services whose physical quantities are measured in different units

3) Money as a Standard of Differed Payment

Money also serves as a standard or unit in terms of which deferred or future payments

are stated. This applies to payments of interest, rents, salaries; pensions etc.Large

fluctuations in the value of money (inflation or deflation) make money not only a

poor measure of value, but also a poor standard of deferred payment. This is because

the value of money is not something intrinsic to it, but a social phenomenon. This

makes monetary management for the stable value of money socially very important.

3) Money as a Store of Value

Money also serves as a store of value i.e., members of the public can hold their wealth

in the form of money. This function is derived from the use of money as a medium of

exchange in a two-fold manner. First, the use of money as a medium of exchange

decomposes a single barter transaction into two separate transactions of purchase and

sale.

Significance of Money in Modern Economic Life

Money occupies a central position in our modern economy. Money is everywhere and

for everything in the modern economic life. Money has become the religion of the day

in the ordinary business of life. Every branch of economic activity in a money

economy is basically different from what it would have been in a barter economy.

Money has created a far reaching effect on all facets of economic activities;

consumption, production, exchange and distribution, as also on public finance and

economic welfare.

Money and Consumption

Money enables a consumer to generalize his purchasing power. It gives him command

over a wide variety of goods. It enables him to canalize his purchasing power and get

what he wants. In fact, it is money through its immense purchasing power that makes

a consumer sovereign in a capitalist economy. The consumer’s sovereignty can be

expressed through money spending. Money provides freedom of choice of

consumption. Money and the price mechanism help a consumer to allocate his

income over goods in such a way so that he derives maximum satisfaction from his

consumption.

Money and Production

The introduction of money has made present day mass production possible. Without

money, production on a large scale would be impossible. The benefits of money in

production are as follows

1) Money has made extreme division of labour possible. Intensive specialization is

necessary for large scale production.

2) Money is the very essential for modern enterprise. Entrepreneurs are

concerned, while planning their production activities, with the cost of

production and selling prices together with the resulting profit, all calculated in

terms of money.

3) The use of money enables a producer to concentrate on the organization of the

production process. Money provides a basis for supporting more complex

methods of organizing production.

4) Money has facilitated borrowing and lending and these are essential in present

day production. Credit is the main pillar of modern business.

5) Money is the most liquid and general form of capital which is highly mobile

between different regions and industries.

6) Money helps the producer to discover through the price mechanism what

buyers want and how much they want, so that he can produce and supply

accordingly. In fact, money has changed the basic characteristics of production.

Money and Exchange.

Money overcomes the difficulties of a barter system of exchange. In a money

economy; it is simple matter to ascertain the market price in terms of monetary units.

Money facilitates trade by serving as a medium of exchange. Thus, rapid exchange in a

modern economic system is possible because of money. Money is the basis of the

pricing mechanism through which economic activities are adjusted.

Money and Distribution.

Money eases the process of distribution of factors rewards like wages, interests and

profits which are all measured and distributed in terms of money. It is with the help

of money that the shares of different factors of production are properly adjusted.

Accounting, receiving and storing of its share of income by any factor-unit in kind is

most inconvenient. Here money comes to the rescue.

Money and Public Finance

In a modern economy, government plays a very important role. Government receives

income in the form of taxes, fees, prices of public utility services, etc and uses this

income for administrative and developmental purposes. But the great magnitude of

public revenues and public expenditure in a modern state would become impossible

without money. Further, fiscal devices like public borrowing and deficit financing for

economic development can be adopted only in a monetary economy.

In recent times, the fiscal policy of a government acquired very great importance in

economic life, since economic activities can be regulated through budgetary

operations that are facilitated by the institutions of money.

Money, thus, plays an important role in the shaping of the economic life of a country.

The growth of money economy has made the growth of economic liberalism and,

hence, of the present day free enterprise or capitalists system possible. In fact the

pattern of economic life has changed in accordance with the changes in the economic

progress. For better performance of an economy, a country’s monetary system should

be operated in such a manner as to maintain high levels of employment and avoidance

of business fluctuations.

Inflation

Inflation is commonly understood as a situation of substantial and rapid general

increase in the price level and consequent fall the value of money over a period of

time. Inflation means persistent rise in the general level of prices. Inflation is a long

term operating dynamic process. By and large, inflation is also a monetary

phenomenon. It is usually characterized by an overflow of money and credit. In fact,

the root cause of inflation is the expansion of money supply beyond the normal

absorbing capacity of the economy.The behaviour of general prices is measured

through price indices.The trend of price indices reveals the course of inflation or

deflation in the economy. Crowther defines inflation as “a state in which the value of

money is falling,ie., prices are rising”. Professor Samuelson defines “Inflation occurs

when the general level of prices and costs is rising”.

INFLATION

Inflation is commonly understood as a situation of substantial and rapid general

increase in the price level and consequent fall the value of money over a period of

time. Inflation means persistent rise in the general level of prices. Inflation is a long

term operating dynamic process. By and large, inflation is also a monetary

phenomenon. It is usually characterized by an overflow of money and credit. In fact,

the root cause of inflation is the expansion of money supply beyond the normal

absorbing capacity of the economy.The behaviour of general prices is measured

through price indices.The trend of price indices reveals the course of inflation or

deflation in the economy. Crowther defines inflation as “a state in which the value of

money is falling,ie., prices are rising”. Professor Samuelson defines “Inflation occurs

when the general level of prices and costs is rising”.

Types of Inflation.

On different grounds, economists have classified inflation into various

types.According to the rate inflation there are four types of inflation.

1) Moderate Inflation

2) Running Inflation

3) Galloping Inflation

4) Hyper Inflation

Moderate inflation is a mild and tolerable form of inflation. It occurs when prices are

rising slowly. When the rate of inflation is less than 10 per cent annually, or it is a

single digit annual inflation rate, it is considered to be moderate inflation in the

present day economy. It does not disrupt the economic balance. It is regarded as

stable inflation in which the relative prices do not get far out of line.

When the movement of price accelerates rapidly, running inflation emerges. Running

inflation may record more than 100 per cent rise in prices over a decade. Thus, when

prices rise by more than 10 per cent a year, running inflation occurs. When prices are

rising at double or triple digit rates of 20,100 or 200 per cent a year, the situation may

be described as galloping inflation. Galloping inflation is really a serious problem. It

causes economic distortions and disturbances.

In the case of hyper inflation prices rise is very severe. It is over 1000 per cent per

year.There is at least a 50 per cent price rise in a month, so that in a year it rises to

about 130 per cent times.Hyper inflation is a monetary disease.

Two Types of Inflation on the Basis of Cause of Origin: They are Demand Pull

Inflation and Cost Push Inflation.

Demand Pull Inflation: According to the demand-pull theory, prices rise in

response to an excess of aggregate demand over existing supply of goods and services.

It is also called excess-demand inflation. In the excess-demand theories of inflation,

excess demand means aggregate real demand for output in excess of maximum

feasible, or potential, or full employment, output (at the going price level). The

demand-pull theorists point out that inflation (demand-pull) might be caused, in the

first place, by an increase in the quantity of money. Demand-pull or just demand

inflation may be defined as a situation where the total monetary demand persistently

exceeds total supply of real goods and services at current prices, so that prices are

pulled upwards by the continuous upward shift of the aggregate demand function.

Causes of Demand-pull inflation are

4) Increase in Public Expenditure 2) Increase in Investment 3) Increase in money

supply.

COST PUSH INFLATION

Cost push inflation or cost inflation is induced by the wage-inflation process. This is

especially true for a Country like India, where labour intensive techniques are

commonly used. Theories of cost-push inflation (also called sellers’ or mark-up

inflation) came to be put forward after the mid-1950s.They appeared largely in

refutation of the demand-pull theories of inflation and three important common

ingredients of such theories are 1) that the upward push in costs is autonomous of the

demand conditions in the concerned market 2) that the push forces operate through

some important cost component such as wages, profits (mark up), or materials cost.

Accordingly, cost-push inflation can have the forms of wage-push inflation, profit-

push inflation, material-cost push inflation, or inflation of a mixed variety in which

several push factors reinforce each other and that the increase in costs is passed on to

buyers of goods in the form of higher prices, and not absorbed by producers. Thus,

a rise in wages leads to a rise in the total cost of production and a consequent rise in

the price level, because fundamentally, prices are based on costs.It has been said that

a rise in wages causing arise in prices may , in turn , generate an inflationary spiral

because an increase would motivate the workers to demand more wages.

(Graphs of demand pull and cost push inflation)

Causes of Inflation

1) Over- Expansion of Money Supply: Many a times a remarkable degree of

correlation between the increase in money and rise in the price level may be

observed. The Central Bank (India’s RBI) should maintain a balance between

money supply and production and supply of goods and services in the

economy. Money supply exceeds the availability of goods and services in the

economy, it would lead to inflation.

2) Increase in Population: Increase in population leads to increased demand for

goods and services. If supply of commodities are short, increased demand will

lead to increase in price and inflation.

3) Expansion of Bank Credit: Rapid expansion of bank credit is also responsible

for the inflationary trend in a country.

4) Deficit Financing: Deficit financing means spending more than revenue. In this

case government of India accepts more amount of money from the Reserve

Bank India (RBI) to spend for undertaking public projects and only the

government of India can practice deficit financing in India. The high doses of

deficit financing which may cause reckless spending, may also contribute to the

growth of the inflationary spiral in a country.

5) High Indirect Taxes: Incidence of high commodity taxation. Prices tend to rise

on account of high excise duties imposed by the Government on raw materials

and essentials.

6) Black Money: It is widely condemned that black money in the hands of tax

evaders and black marketers as an important source of inflation in a country.

Black money encourages lavish spending, which causes excess demand and a

rise in prices.

7) Poor Performance of Farm Sector: If agricultural production especially

foodgrains production is very low, it would lead to shortage of foodgrains, will

lead to inflation.

8) High Administrative Pricing

Other reasons are capital bottleneck, entrepreneurial bottlenecks, infrastructural

bottlenecks and foreign exchange bottlenecks.

EFFECTS OF INFLATION

1) Effects of Inflation on Business Community: Inflation is welcomed by

entrepreneurs and businessmen because they stand to profit by rising prices.

They find that the value of their inventories and stock of goods is rising in

money terms. They also find that prices are rising faster than the costs of

production, so that their profit is greatly enhanced.

2) Fixed Income Groups: Inflation hits wage-earners and salaried people very

hard. Although wage- earners, by the grace of trade unions, can chase galloping

prices, they seldom win the race. Since wages do not rise at the same rate and at

the same time as the general price level, the cost of living index rises, and the

real income of the wage earner decreases.

3) Farmers: Farmers usually gain during inflation, because they can get better

prices for their harvest during inflation.

4) Investors: Those who invest in debentures and fixed-interest bearing securities,

bonds, etc, lose during inflation. However, investors in equities benefit because

more dividend is yielded on account of high profit made by joint-stock

companies during inflation.

5) Inflation will lead to deterioration of gross domestic savings and less capital

formation in the economy and less long term economic growth rate of the

economy.

MEASURES TO CONTROL INFLATION

The measures to control inflation can be broadly divided into TWO- Monetary and

Fiscal Measures.

Inflation is primarily a monetary phenomenan.Hence, the most logical solution to

check inflation is to check the flow money supply by devising appropriate monetary

policy and carefully implementing monetary measures. The Central bank’s monetary

management methods, devices for decreasing or increasing the supply of money and

credit for monetary stability is called monetary policy. Monetary policy is a policy of

money supply influencing the quantity, cost and availability of money supply. Central

Banks generally use the three quantitative measures namely:

1) Bank Rate Policy

2) Open Market Operations

3) Variable Reserve Ratio

1) Bank Rate Policy: Bank rate is the rate at which Central Bank lends loans and

advances to commercial banks. When bank rates are hiked by the Central bank

as a follow up of this increased bank rate, commercial banks hike the rate of

interest. Bank rate is hiked during the period of inflation to reduce money

supply.During the period of falling prices (deflation) central banks reduces

bank rate to increase money supply.As follow up, commercial banks reduce

rate of interest.At a low rate of interest, investors find it much attractive to

borrow money and make investment.

2) Open market Operations: Open market Operation means open buying and

selling of government securities by the Central Bank for the Central

Government. In India the term ‘opens market operations’ stands for the

purchase and sale of government securities by the RBI from/to the public and

banks on its own account. In its capacity as the government’s banker and as the

manager of public debt, the RBI buys all the unsold stock of new government

loans at the end of the subscription period and thereafter keeps them on sale in

the market on its own account. Such purchases of government securities by the

RBI are not genuine market purchases but constitute only an internal

arrangement between the government and the RBI whereby the new

government loans are sold not directly by the government but through the RBI

as its agent.

3) Variable Reserve Ratio: Under the existing law enacted in 1956, RBI is

empowered to impose statutorily ‘Cash Reserve Ratio’ (CRR) on commercial

banks anywhere between 3 per cent and 15 per cent of the net demand and

time liabilities. It is the authority of the RBI to vary the minimum CRR which

makes the variable reserve ratio a tool of monetary control. It may be noted

that the RBI pays interest to banks on the additional required reserves over the

minimum CRR of 3 per cent.

Fiscal Policy

Fiscal policy is the policy of the government implementing through the government

treasuries. Fiscal policy intervention areas are taxation, public expenditure, borrowing,

subsidies and deficit financing. Inflation means a general rise in prices. To control

inflation policy should be directed to reduce the price level and control excess money

supply. First measure is reducing indirect taxes. High indirect taxes lead to increase in

the prices of goods and services. So to reduce the prices of goods and services widely

used by common people and intermediate goods, the indirect taxes should be

reduced. Increased public expenditure leads to increase in the level of economic

activities and more income to people.It also leads to increase in money supply.So

during the period of inflation, we should reduce excess public spending/public

expenditure.

Deflation

Deflation is just opposite of inflation. It is essentially a matter of falling prices.

Deflation is that state of falling prices when the output of work by productive agents

increases relatively to money income. Deflation arises when the total expenditure of

the community is not equal to the value of output at existing prices. Consequently, the

value of money goes up, and prices fall. In short, deflation is a condition of falling

prices, accompanied by the decreasing level of employment, output and income.

Definitions of Economics

The book of Adam Smith “An Enquiry into the Nature and Causes of Wealth of

Nations” popularly known as Wealth of Nations, published in the year 1776, laid the

strong foundation for the growth of Economics. So Adam Smith is rightly called the

“Father of Economics” and pioneer of Classical Economics. Although there is a

plethora of definitions, there is no concensus among economists about a precise

definition of economics.

Stock Exchange: Stock exchange is a place where second-hand securities

are bought and sold.Stock exchange is essential for industrial development and a

developed stock exchange is one of the features of a developed industrialized country.

Wealth Definition

The early classical economists defined economics mainly as a study of wealth.To his

famous treatise, Adma Smith gave the suggestive tittle ‘An Enquiry into the Nature

and Causes of Wealth of Nations’. It means economics investigates into the nature of

wealth and the laws of production and distribution. The atmosphere of the Industrial

Revolution marked by unprecedented material prosperity and accumulation of wealth

should naturally justify the scope which these economists assigned to economics.

Criticism of wealth Definition

1) Too much Emphasis on wealth : Literary writers and religious leaders strongly

voiced their protest against the study of economics because of its too much

attachment to wealth.Adam Smith treated economics as political economy and

therefore emphasized the importance of wealth from a national angle

2) Restricted Meaning of Wealth: The classical definition considered wealth as,

material goods only, like table, radio,furniture etc.Non-material services of

drivers, singers,teachers,professors etc are not taken as wealth.But in modern

days wealth denotes both goods and services, material wealth and human

wealth.

3) Concept of Economic Man: Classical wealth definition was based mainly upon

the assumption of an ‘economic man’ who had no consideration for love,

affection, sympathy, patriotism etc.In other words, an economic man was

supposed to give attention to economic activities only.But in reality human

behaviour cannot be properly understood and analysed unless the other

motives are also given due weightage.

4) No Mention of man’s Welfare: Wealth definition explains the wealth-getting

and spending activities of man It pays no attention to the equity principle

which is of paramount importance to maximize the welfare of the society.

5) Economic Problem: Wealth definition is silent over the basic economic

problem of meeting unlimited wants with scarce means.In other words, the

central problem of economics is not at all touched by wealth definition.

Welfare Definition

Adam Smith’s wealth definition made economics a dismal science.Alfred Marshall was

the first neo-classical economist to rescue economics from ridicule, condemnation

and misunderstanding. So Marshall gave welfare definition to economics in his classic

work ‘Principles of Economics’, published in 1890.His definition shifted the emphasis

from wealth to human welfare. According to him wealth is simply a means to and an

end in all activities, the end being human welfare.

Marshall defines “economics is a study of man kind in the ordinary business of life; it

examines that part of individual and social action which is almost closely connected

with the attainment and with the use of the material well being.” He adds that

economics is on the one side a study of wealth; and the other and more important

side, a part of the study of man. That is Marshall gave primary importance to man and

secondary importance to wealth.

Criticism of Welfare Definition

1) Material and Non-Material Welfare: Lionel Robbins begins his attack by

pointing out that economists should not narrow down the scope of economics

by confining their attention to the study of material welfare alone. The services

of teachers, actors, singers, lawyers etc. do promote welfare and such welfare

may be termed as non-material welfare. The above mentioned services have

much economic significance because they are scarce in relation in relation to

demand and possess value.

2) Objection to material: Robbins objects not only to the word ‘material’ but also

to the very idea of ‘welfare’. For the neo-classical economists, economics is

concerned with the causes of material welfare. According to Robbins, there are

certain material activities which do not promote welfare. The manufacturers of

intoxicants such as wine and opium are certainly economic activities. But they

are not conducive to human welfare.

3) Welfare cannot be measured: The neo-classical economists’s idea of welfare is

based on cardinal utility. But utility is a psychological entity which cannot be

measured. It varies from person to person, place to place and time to time.

Therefore, the concept of welfare based on measurable utility is elusive in

character.

4) Economics is a Social Science: Robbins disputed the Marshallian conception of

economics as a social science.The study of man as they live and move and

think in the ordinary business of life.According to Marshall, the activities of an

individual living in seclusion like a Himalayan Sadhu or Robinson Crusoe fall

outside the orbit of economics.Robbins on the other hand regards economics

as a human science.The central problem in economics, according to Robbins is

the allocation of scarce means among alternative ends.

Scarcity Definition

After rejecting the materialist definition of Marshall,Lionel Robbins formulated his

own conception of economics in his book “ The Nature and Significance of

Economic Science” published in 1932. In the words of Lionel Robbins, “Economics

is the science which studies human behaviour as a relationship between ends and

scarce means which have alternative uses.” He deduced his definition from our

fundamental characteristics of human existence.

1) Unlimited Wants: “Ends” refers to human wants which are boundless but the

resources available to satisfy these wants are limited. Some wants are inborn

but others are acquired through customs and conventions. When one want is

satisfied another crops up.

2) Scarcity of Means: The resources (time or money) at the disposal of a person to

satisfy his wants are limited. The external world does not offer full

opportunities for their complete achievement. If things are available in

abundance just like free goods, the economic problem will not arise.

3) Alternative Uses of Scarce Means: Economic resources are not only scarce but

are also versatile. If the resources cannot be put to alternative uses, the

question of choice will not arise. We may use land for raising crops or for

building houses. We cannot do both. If we choose one thing, we must give up

others.

4) The Economic Problem: When the means at the disposal of a person are

limited and the resources can be put to several uses and when wants can be

graded on the basis of intensity, the behaviour necessarily takes the form of

choice. Thus the choosing of one is at the cost of another. In order to make

choice scientific, some form of pricing process is inevitable.

Criticism of Scarcity Definition

Robbins’ definition is based on two foundation stones-multiplicities of wants and

scarcity of means.

1) Economics of Abundance: According to Robbins, economic problem arises

due to scarcity. But economic problems may also arise due to plenty rather than

scarcity as had happened during the great depression of 1930s.Professor John

Kenneth Galbraith, a noted American economist in his book,” The Affluent

Society”, states that scarcity is not a problem in America. So that the

conventional scarcity idea has only little relevance.

2) Not Applicable to Underdeveloped Countries: Robbins definition provides no

solution to the problems of underdeveloped countries. A peculiar feature of

many under developed countries is that the resources are not scarce, but they

are either under utilized, or unutilized. Robbins simply assumes the resources as

given and analysed their allocation among alternatives uses.

Growth Definition

Economics has now become a fastly growing discipline in the field of social science

and its scope and significance have widened from mere a value theory or a theory of

resource allocation. The credit for revolutionizing the study of economics surely goes

to Lord JM Keynes. Keynes defined economics as the study of the administration of

scarce resources and the determinants of income and employment.

Professor Paul.A Samuelson has given a definition based on Growth aspects which is

known as the Growth Definition. “Economics is the study of how people and society

end up choosing, with or without the use of money, to employ scarce productive

resources that could have alternative uses to produce various commodities and

distribute them for consumption, now or in the future, among various persons or

groups in society. Economics analyses the costs and the benefits of improving

patterns of resource use”.

Firstly, it is applicable even in a barter economy where money measurement is not

possible.

Secondly, the inclusion of time element makes the scope of economics dynamic.

Thirdly, this definition possesses universality in its application. Thus we may conclude

that though in a sense it is similar to Robbins’ definition, it is an improvement over

Robbins’ scarcity definition.

Production Possibility Curve

The concept of production possibility curve was introduced by Professor

Samuelson.The set of problems facing in every economic system can be clearly

analysed with the tool of production possibility curve. Human wants are unlimited

and the economic resources to satisfy these unlimited human wants are scarce or

limited. Therefore, the every society faced with the basic problem of choosing and

allocating its scarce resources among alternative uses. Production Possibility Curve

shows the menu of choice along which a society can choose to substitute one good

for another assuming a given state of technology and given total resources. The

production possibility curve illustrates three concepts: scarcity, choice and

opportunity cost.

Modern economy produces thousands of products, and therefore choices before us

are complex. In order to reduce the problem to its simplest form we consider the

economy in which two goods ‘butter’ and ‘guns’ are produced with the available

resources and technology.

Production Possibility Curve is based on the following Assumptions:

1) Only two goods x (butter) and y (guns) are produced in the economy.

2) There is full employment of resources.

3) The resources are fixed in quantity. But they can be re-allocated from the

production of one commodity to that of another.

4) The state of technology is given and constant.

5) The time period is short

Law of Supply

The law of supply states that the functional relationship between price and the

quantity offered for sale. The law of supply states, other things remaining same, the

higher the price, the greater will be the willingness of sellers to make a product

available. At higher prices, more sellers are interested in producing the product, and

each existing seller wants to sell more.The opposite holds good when prices decline.

Factors Determining the Supply of a Commodity

The supply of a commodity depends upon the following factors.

1) Different firms may follow different objectives.Some firms may be interested in

maximizing profit, while others may be interested in sales or revenue

maximization or satisfying etc.The amount of commodity supplied is often

influenced by the objectives of the firm.Normally, sales maximization firm’s

output will be greater than the profit maximization firm’s output.

2) State of Technology: Technical improvements reduce the costs of production

enbling a shifting a shifting of the supply curve to the right.Similarly, obstacles

in the existing technology increases costs of production, forcing a shift in the

supply curve to the left. A constant state of technology keeps the supply at the

existing level.

3) Political Disturbances: Political disturbances may destabilize trade and thus

create a scarcity for certain kinds of goofs’

4) Government Policy: Any change in government’s policy would affect the

production sector and thereby the supply of goods and services in the market.

The government policy related to tax and subsidy will have serious impact on

the production and supply of goods and services in the market.

Law of Demand

Meaning of Demand

Demand is essential for the Creation, Survival and Profitability of a firm. It is essential

to distinguish between demand and desire. A beggar’s demand for a Maruti car is only

s desire and does not constitute a demand. A miser may possess enough money but

he may not be willing to spend it. In this case also desire will not be called demand.

Therefore, demand is not merely a wish or desire but an effective demand, this is,

desire backed by purchasing power and willingness to buy.

Demand has the following Four characteristics

1) Price: Demand is always related to price. It is meaningless to say that demand

for refrigerator in the market is one thousand. The person must state the price

at which the consumer is prepared to purchase the said quantity of the

commodity.

2) Time: Demand always means demand per unit of time, per day, per week, per

month or per year.

3) Market: demand is always related to the market. Market here simply refers to

the contact between buyers and sellers. There is no need for a definite

geographical area.

4) Amount: Demand is always a specific quantity which a consumer is willing to

purchase. It is not an approximation, but is to be expressed numerically.

Demand Schedule: A demand schedule is a list of prices and corresponding quantities.

Since the demand schedule obeys the law of demand, price and quantity demanded

vary inversely The following is the hypothetical demand schedule of an individual.

Types of Demand: There are three kinds of demand,

1) Price Demand

2) Income Demand

3) Cross Demand

1) Price Demand: Price demand refers to the various quantities of a commodity

that a consumer would purchase at a given time in the market at various

hypothetical prices.

2) Income Demand: Income refers to the various quantities of a commodity that a

consumer would purchase at a given time in a market at various levels of

income.

3) Cross Demand: The relationship between the prices of a substitute or

complements and the quantity purchased of a related commodity is called cross

demand.

Law of Demand: The inverse relationship between the price of a commodity and its

quantity demanded per unit of time is referred to as the law of demand. In the words

of Prof. Samuelson, “Law of demand states that people will buy more at lower prices

and buy less at higher prices, other things remaining the same.” The phrase “other

things being equal” is an important qualification; when we say “other things being

equal” we assume;

1) No change in the consumers’ income.

2) No change in the prices of substitutes and complements

3) No change in consumers taste and preferences

4) No new substitutes for the goods have been discovered

5) People do not feel that the present fall in price is a preclude to a further decline

in prices.

6) The commodity in question is not one which has a prestige value.

Determinants of Demand

According to D.S Watson a change in demand is caused by changes in income .

tastes and prices of substitutes and complements.The various determinants of

demand are listed as follows.

1) Changes in Tastes and Fashions: The demand for some goods and services is

very susceptible to changes in tastes and fashions.If a commodity becomes

more fashionable a larger quantity of it may be bought at the old price or even

at a slightly higher price. The fashion among ladies to keep their hair long or

short brings about changes in demand for their hair-pins, hair-nets etc.

Similarly if tastes have deteriorated for a product, less of it will be deamanded

without any rise in its price.

2) Changes in Weather : An unusually dry summer results in a decrease in the

demand for umbrellas.The demand curve in such a case shifts to the left.

3) Channges in Income and Distribution of income: An increase in family

income increases the demand for durables like video recorders and

refrigerators.The demand curve then shift to the right., More over, if income in

a country is evenly redistributed by taking the rich and transferring it to raise

the income of the poor, it may increase the demand for goods consumed by

the poor people.

4) Changes in expectations: Expectations also bring about a change in

demand.Rumours that the government is going to levy fresh taxes on a

particular good may push the in favour of purchasing more of that commodity

alone.

5) Changes in Savings: Savings and demand are inversely related.If the marginal

propensity to save becomes high the amount available for consumption will

become less. The demand will therefore decrease.

6) State of Trade Activity: During the periods of boom and prosperity, the

demand for all commodities tends to increase. On the contrary, during times of

depression there is a general slackening of demand.

7) A Change in Real Income: As money income increases, real income also

increases. If the income goes to the rich, demand does not increase as much as

it increases when such income benefits go to the poor.The simple reason is that

the marginal propensity to consume of the rich is less than that of the poor.

8) Consumer Credit Policy: With a liberalization in the credit policy of the banks

or the hire purchase system adopted by companies, the demand for VCRs,Cars,

houses etc will increase.

9) Advertisement: In advanced capitalist countries advertising is a powerful

instrument affecting the demand in the market.

10) Taxation and subsidy: If fresh taxes are levied or the existing rates of taxation

on commodities are increased, their prices go up.The demand for such

commodities will decrease. On the other hands, if rebates and subsidies are

given as in the case of consumer products during festival seasons, the demand

will increase.

11) Change in the value of money:During times of inflation, the prices will rise.

Therefore, consumers will have to their expenditure pattern so that the

demand for certain products will have to be reduced and for others stimulated.

12) Change in Population:The demand for goods and services depend on

population.As population increases demand increases and vice versa.

MEANING OF PRODUCTION

In economic terminology ‘production’ implies creation of utility for sales. The act of

utility creation is possible by transforming inputs into output. According to

Prof.Hicks, “production is any activity directed to the satisfaction of the people’s

wants through exchange.” Production is an activity of converting inputs into out put

with the help of technology or mode of production. In production process we use

four factors of production ie; land, labour,capital and organization.For engaging in

economic activity, these factors would get rewards. Land or building would get rent as

its reward,labour would get wage / salary,capital would get profit and organizer

would get profit as the reward.

Knowledge is the only instrument of production that is not subject to diminishing returns –

J.M.Clark, 1957

The production function shows only the physical relationship between inputs and

output, but says nothing about the optimal combination of inputs.

Two things must be noted when we discuss production function.

1) It must be considered with reference to a particular period of time.

2) It is determined by the state of technology.Any change in technology may alter

output, even when the quantities inputs remain fixed.

Law of Returns to Scale

The law of returns to scale examines the relationship between output and the scale of

inputs in the long-run when all the inputs are increased in the same proportion.

Assumptions

This law is based on the following assumptions

1)All factors are variable but the enterprise is fixed.

2) There is no change in technology

3) Perfect competition prevails in the market.

4) Returns are measured in physical terms.

Three Phases of the Law of Returns to Scale.

First phase is increasing returns to scale

Second phase is constant returns to scale

Third phase is diminishing returns to scale.

Depending on whether the proportionate change in output exceeds, equals or

decrease in proportionate to the change in both the inputs, the production is

classified as increasing returns to scale, constant retuns to scale and decreasing

returns to scale.

Increasing Returns to Scale

Increasing returns to scale arises due to the following reasons.

a) Dimentional economies,2) economies flowing from indivisibility

3)Economies of specialization 4) Technical economies, 3) Managerial

economies, 6) Marketing economies

Marshall exlains increasing increasing returns in terms of “ increased efficiency” of

labour and capital in the improved organization with the expanding scale of output

and employment of factor unit.It is referred to as the economy of organization in the

earlier stages of production.

Constant Returns to Scale: As a firm continues to expand, it gradually exhaust the

economies, internal and external, which enabled the operation of increasing returns to

scale. In this stage, the economies and diseconomies of scale are exactly in balance

over a particular range of output. In the case of constant returns to scale increases in

all the inputs cause proportionate increases in output.

A production function showing constant retuns to scale is often called ‘Linear and

Homogeneous’ or ‘Homogeneous of the first Degree’.The Cobb-Douglas production

function evolved by the American economists Cobb and Douglas is a linear and

homogeneous production function.

Diminishing Returns to Scale

When a business firm continues to expand even beyond the point of constant returns,

stage comes when diminishing returns to scale set in. There are decreasing returns to

scale when the percentage increase in output is less than the percentage increase in

iutput. As the size of the firm expands, managerial efficieny decreases.Another factor

responsible for diminishing retuns to scale in the limitation of exhaustibility of the

natural resources, for example, doubling of coal-mining plants may not double the

coal output, because of limited availability of coal deposits or due to difficult

accessibility to coal deposits.

The Law of Variable proportions OR Law of Diminishing Returns

The law of variable proportions is one of the basic laws in economics. The law of

variable proportions is the modern version of the law of diminishing returns. This law

states that a technical physical relationship between the fixed and variable factors of

production in the short run. Here it is assumed that only one factor of production is a

variable factor while other factors are assumed to remain fixed. As we increase the

quantity of the variable factor while keeping other factors constant, the output of the

variable factor may increase more than proportionately in the initial stages of

production, but eventually it will not increase even proportionately. Alfred Marshall, a

neo-classical economist, considered the law of diminishing returns in relation to

agriculture only.

The law of variable proportions has been defined in the following way; “As the

proportion of one factor in a combination of factors is increased, after a point, first

the marginal and then the average product of that factor will diminish”.

Assumptions of the Law

The law of variable proportions is valid when the following conditions are fulfilled.

1) The state of technology is given below

2) Only one factor is varied and all other factors remain fixed.

3) The fixed factor and the variable factor are combined together in variable

proportions in the process of production.

4) The units of the variable factor are homogeneous

5) The law operates in the short run.

Total Product (TP) : Total Product is the amount of output produced from land with

the given number of labourers employed.

Average product (AP): The average product of labourer is the total product (TP)

divided by the number of labourers employed AP =TP/No.

Marginal Product (MP): The marginal product is the change in the total product due

to change in labour.

DIAGRAM

Law of Supply

The law of supply states that the functional relationship between price and the

quantity offered for sale. The law of supply is a hypothesis that states, other things

remaining same,, the higher the price, the greater will be the willingness of sellers to

make a product available. At higher prices, more sellers are interested in producing the

product, and each existing seller wants to sell more.The opposite holds good when

prices decline.

The law of supply can be explained with the help of a schedule and a curve.

Supply Schedule: Supply schedule represents the relationship between prices and the

quantities that the firms are willing to produce and supply.

SUPPLY SCHEDULE

SUPPLY CURVE

MARKET SUPPLY CURVE

MARKET SUPPLY SCHEDULE

ECONOMIC REFORMS

NEW ECONOMIC REFORMS OF 1991

Changing Global Scenario

Several major economic and political changes occurred during the 1970s and 1980s,

which affected the developing countries and paved the way for the implementation of

IMF-sponsored Structural Adjustment Policies (New Economic Policy) in India in

1991. This was due to a combination of factors such as stagnant agriculture, low levels

of industrial growth and diversification, inadequate capital formation, adverse terms

of trade in international markets, limits to domestic resource mobilization due to a

fairly narrow tax-base, loss making public sector enterprises, over regulated and

controlled economy, poor industrial productivity, huge amount of fiscal deficit, huge

amount of public debt, poor rating of Indian economy by international agencies,

foreign exchange crisis etc.

New Economic Policy of 1991 includes globalization, liberalization and privatization

(Disinvestment)

1) Globalization means flow capital (finance in the form of foreign direct

investment (FDI) and foreign portfolio investment (FPI), technology, human

resource, goods and service among countries. FDI is investment in real assets

like automobile, consumer goods production, service sectors like insurance,

telecommunication, air transport etc.

2) Liberalisation means freeing the economic activities and business from

unnecessary bureaucratic and other controls imposed by the governments.

3) Privatisation or Disinvestment: Selling the government owned public sector

enterprises to private industrialists and opening the government operating

sectors for private investment.

The New Economic Policy includes reduction in government expenditure, opening of

the economy to trade and foreign investment, adjustment of the exchange rate from

fixed exchange rate system to flexible exchange rate system, deregulation in most

markets and the removal of restrictions on entry, on exit, on capacity and on pricing.

Immediate consequences of economic liberalization that are to focus on are (a) an

increase in internal and external competition and (b) structural change induced by

changes in relative prices in the economy.

The Major areas of New Economic Policy 1991 are

1) Fiscal policy reforms

2) Monetary policy reform

3) Pricing policy reform

4) External policy reform

5) Industrial policy reform

6) Foreign investment policy reform

7) Trade policy reform

8) Public sector policy reform

The principal reforms initiated in the year 1991 included; reduction in import tariffs

on most goods other than consumer goods, removal of quantitative restrictions and

liberal terms of entry for foreign investors. India’s simple average tariff rate was

reduced from 128% in 1991 to about 32.3% in 2001-02. Quotas and non-tariff

barriers were also reduced.. To restore Macro economic stability, the reforms package

of structural adjustment policies are aimed at freeing markets by dismantling controls

on production, prices and trade and reducing intervention in the economy. The need

to control the fiscal deficit led to policies to curb public expenditure and these cuts

were mainly on social sector expenditure and on production and consumption

subsidies, which directly affected the living standards of the economically vulnerable

sections of the population. Privatisation, Liberalisation and export-promotion were

the main features of the economic reforms recommended by the international

institutions for the problems facing by the developing countries .At the same time, the

role of the state in advanced industrial economies was not shrinking as expected, but

growing despite the ideological bias in favour of a “rolled back” state. The share of

national income spends by government, which averaged 30% in the rich industrial

countries in 1960 increased to 42.5% by 1980 and 45% by 1990.The experiences of

countries, which have undergone these reforms, have in most cases not led to the

expected outcome but have infact worsened the state of their economies. In India, the

New Economic Policy (NEP) is a set of policy (ies) and administrative procedures

introduced in July 1991 to bring about changes in the economic direction of the

country.

Industrial Policy Resolution 1991 (IPR-1991)

Industrial Policy

The regulatory policy framework which acted as a barrier to entry and growth by the

entrepreneur was sought to be basically changed by the Industrial Policy announced in

July 1991.The measures introduced in this area along with other economic reforms

were as under: Industrial licensing has been abolished for all projects except for a list

of 15 industries related to security, strategic or environmental concerns and certain

items of luxury consumption that have a high proportion of imported inputs. The

exemption from licensing also applies to the expansion of existing units.

� Industrial licensing was abolished for all projects except for a list of 15

industries related to security, strategic or environmental concerns and

certain items of luxury consumption that had a high proportion of imported

inputs.

� The Monopolies and Restrictive Trade Practices (MRTP) Act applied in a

manner which eliminated the need to seek prior government approval for

expansion of present undertakings and establishment of new undertakings

by large companies.

� The set of activities henceforth reserved for the public sector was much

narrower than before, and there would be no ban on the remaining reserved

areas being opened up to the private sector.

Foreign Investment Policy

The Industrial Policy 1991 also provided increased opportunities for foreign

investment with a view to take advantage of technology transfer, marketing expertise

and introduction of modern managerial techniques. It was also intended to promote a

much – needed shift in the composition of external private capital flows. The

following measures were announced in this regard:

� Automatic approval would be given for direct foreign investment upto 51

per cent foreign equity ownership in a wide range of industries. Earlier, all

foreign investment was generally limited to 40 per cent.

� To provide access to international markets, major foreign equity holdings

upto 51 per cent equity would be allowed for trading companies primarily

engaged in export activities.

� Automatic permission would be given for foreign technology agreements

for royalty payments upto 5 per cent of domestic sales or 8 per cent of

export sales or for lumpsum payments of Rs.10 million. Automatic approval

for all other royalty payments will also be given if the projects can generate

internally the foreign exchange required.

� Abolished MRTP Act and FERA and instead of FERA, FEMA Act was

passed in the Parliament.

� The threshold (Minimum) asset limit for companies under MRTP Act was

raised from Rs.20 crores to Rs.100 Crores.

Public Sector Policy

The Government was of the view that public sector had not generated internal

surpluses on a large scale. On account of its inadequate exposure to competition; the

public sector was subject to a high cost structure. To provide a solution to the

problems of the public sector, Government decided to adopt a new approach, the

key elements of which were:

� The existing portfolio of public sector investment would be reviewed with a

greater sense of realism to avoid areas where social considerations were not

paramount or where the private sector would be more efficient.

� Enterprises in areas where continued public sector involvement was judged

appropriate would be provided a much greater degree of managerial autonomy.

� Budgetary support to public enterprises would be progressively reduced

� To provide further market discipline for public enterprises, competition from

the private sector would be encouraged and part of the equity in selected

enterprises would be disinvested; and

� Chronically sick public enterprises would not be allowed to incur heavy losses.

As a follow up of this policy, several measures were taken:

� The number of industries reserved for the public sector was reduced from 17

to 8. Even in these areas, private sector participation was allowed selectively.

Joint ventures with foreign companies would be encouraged.

� Public enterprises that were chronically sick and unlikely to be turned around

would be referred to the Board for Industrial and Financial Reconstruction

(BIFR) for rehabilitation or restructuring.

� The existing system of monitoring public enterprises through Memorandum of

Understanding (MOU) was strengthened with primary emphasis on

profitability and rate of return.

� Initiated the disinvestment of public sector enterprises.

Global Financial meltdown in 2008

In the western capitalists economies and the economies closely linked to the United

States economies were negatively affected by this financial crisis of 2008. That is all

the economies having economic relationship with each other were affected by this

financial crisis of 2008 so it is called a global financial crisis. Capitalism is a system of

economic organization featured by the private ownership and the use for private

profit of man-made and nature-made capital. It is clear that under capitalism all means

of production such as farms, factories, mines, transport, communication, education

etc are owned and controlled by private individuals and firms. Private initiatives and

ideas are promoted and respected highly and there is personal freedom and liberty.

The global financial crisis of 2008 is an extreme

manifestation of the crisis in the capitalism due to wrong practice and misuse of

freedom enjoyed by the financial institutions in the United States of America. Indian

economy was more integrated to the global economy after the introduction of the

New Economic Policy (NEP) of 1991. This encouraged more integration of the

Indian economy with the global economy.But in the Indian banking system, nearly 90

per cent of the banking institutions are in the public sector and our financial sectors

are well regulated by the Reserve bank of India (RBI). So this financial management

system, to a greater extent insulated Indian economy from the global financial crisis.

The Major Reasons for the Global Financial Crisis are

1) Consumption was seen as the driver of economic growth and prosperity and

debt to facilitate such consumption was consequently seen as a good thing.

This had led to the rather extreme situation in which vendor financing (i.e.,

lending of money by producers to consumers for purchasing products they

produce) of the US by the developing nations was seen as a necessary business

practice.

2) The sub-Prime Crisis – Sub-Prime Lending is the latest chapter in the story

of the economics of greed wrapped as modern economics, a process in which

the US’s entire financial architecture — the government and the Federal

Reserve System (the Central Bank of the US like India’s RBI) is involved. The

sub-prime crisis is now presented as the villain of US economy as also the

global economic scene. Sub-prime lending refers to loans given to persons

who, in simple terms, are unfit to borrow. That is, no lender will part with his

own money to such a borrower. Two reasons are there. First, such lending was

popularised from the White House to ordinary American homes as achieving a

noble purpose to induce Americans to borrow and shop for their country. That

is, it was part of the patriotic duty the Americans as a whole to borrow and

shop.

The Major Features of the Present Global Financial Crisis are

1) The Current US recession is much deeper than in 1991 or 2001.

2) Yet Asia’s growth will slow by less than in the previous US recessions. It is now

less dependent on US demand.

3) Asia is led by India and China increasingly becoming important as the engines of

global growth.

4) This global financial crisis is the beginning of the end for the dollar as the main

reserve currency

5) The USA has been borrowing $ 3 billion every day to fund its spending

6) The USA’S national debt is more than $10 trillion, which is more than 80 per cent

of its national income.

7) The budget deficit is skyrocketing; it is expected to reach mote than 10 per cent

soon.

8) The federal deficit as percentage of GDP is now expected to reach more than 10

per cent.

9) Unlike the Great Depression of the 1930s, the current crisis of the West is not just

an economic crisis. It has a dimension of demography and conflict.o it. Demographic,

because Europe is slowly fading away from the global map. It used to have more than

20 per cent of the global population during the First World War, and now has less

than 11 per cent. It is expected to shrink to three per cent in as many decades. The

reproductive rate in many European countries is less than 1.5 whereas the stable one

is 2.1. In the case of US, the crisis is more severe due to its declining savings rate.

10) The personal saving as a percentage of disposable income has now become

negative.

The debt ridden financial institutions like Lehman Brothers’ assets were $ 690 billion

and capital was $ 22 billion. Lehman filed for the biggest bankruptcy in American

history. Merrill Lynch assets were $ 1020 billion and capital was $ 32 billion, Freddie

Mac’s assets were $ 794 and capital was $ 27 billion, Fannie Mae’ assets were $880

billion and capital was $ 44 billion, Bear Stearns’s was $ 400 billion and capital was $

11 billion. The allegations that ratings are not forward looking has been proved right

in more than one occasion in the current financial crisis. Many repackaged sub-prime

loans were rated high by global credit rating agencies, down graded only after

accelerated defaults and stoppage in trading. Ratings are not sancrosanct and lenders

need to form own view about the credit worthiness of borrowers, independent of any

external ratings.

Conclusions

Asia is more important than the US as a driver of global economic growth. Thanks to

the vigour of Asia and other emerging economies, a US recession need not drag the

whole world into recession. A prolonged downturn in the US, while emerging

economies continue to grow rapidly will reinforce the shift in global power from the

old industrial world to the new emerging markets. In future the world economy will

be steered not by the US and Europe, but increasingly by India and China. As

Maharishi Aurobindo says: “India shall arise upon the ruins of the West”. He says by

the year 2011 the Western countries will fall and India will rise. The question is, are

we getting ready to create a new world order?

Keynesian Theory

Keynes’s Theory and Underdeveloped Countries.

Lord John Maynard Keynes wrote the General Theory of Employment, Interest and

Money as a solution to the problem of periodic unemployment faced by developed

industrial nations of the West during the great depression of the thirties. Keynesian

theory singles out deficiency of effective demand as the major cause of

unemployment and low level of income in industrial economy operations under a

laissez faire system. Deficiency of effective demand is a prominent feature of

economies undergoing depression and in order to improve the level of effective

demand in an economy. Keynes suggested policy measures like cheap money policy,

government’s compensatory investment spending, deficit financing and other fiscal

methods. In essence, therefore, Keynesian economics turn out to be economics of

depression applicable to developed countries. Its applicability in underdeveloped

countries is very limited. To quote Joan Robinson: “ Keynes’s theory has little to say

directly, to the underdeveloped countries, for it was framed entirely in the context of

an advanced industrial economy, with highly developed financial institutions and a

sophisticated business class.

Though Keynesian Economics has revolutionized modern economic thinking, it has

inherent weaknesses:

1) It is fundamentally a capitalistic theory. It basically examines the determinants

of employment in a free enterprise economy. Though Keynes suggests

government intervention and controlled capitalism his theory fails to deal with

the socialist economic system. In communism, Keynes is as Ricardo.

2) Keynesian economics is, by and large, characterized as depressionary

economics. It was the outcome of the Great Depression of the Thirties. It

suggested policy measures like deficit financing to solve the problem of

unemployment in a depressionary phase of the capitalist economy. In the era of

inflationary situation, the theory has not much validity.

3) Keynes’s theory deals with short-run phenomena only. It pays little attention to

the long-run problems of a dynamic economy.

4) Keynesian theory is not strictly applicable to underdeveloped countries. Keynes

deals with the problem of cyclical unemployment. Underdeveloped countries

have the problem of chronic unemployment and disguised unemployment.

Keynes encouraged spending and condemned savings.But; poor countries need

curbs on spending and increase in savings for capital formation and wide-scale

investment to break the vicious circle of poverty. In short, Keynes’s theory is

not really “general” in application as Keynes claimed.

5) One dangerous practice is that the solution to global economic crisis and

depression in advanced capitalism was sought to be applied for solving the

economic crisis of less developed countries. In fact in the west there are

arguments against Keynes’s economics that it is not Keynesian economics but

the Second World war revived the world economy. Keynesian revolution

succeeded the industrial revolution as an adhoc theory of countering the

industrial depression in Britain during the thirties, just before the Second World

War, became the all-encompassing theory of development. Dennis Robertson

at the out set of his Cambridge lecturers, delivered between 1945-46 to 1956-

57, warned the under graduate students about the controversial nature of

Keynes’s General Theory and to supplement its readings by critical writings on

the same.

6) Laws of economics are relative and valid for particular situations in the

economic history of a nation. To the British economists, the economic forces

generated by the industrial revolution in that country was universal and

economic laws were accordingly formulated. What was good for Britain was

good for the entire world, irrespective of differences in socio-economic

conditions. But great personalities like Arnold Toynbee argued against this

dominant view and the need for region specific models of development. His

dream of this way of study never materialized because of his premature death

and lack of followers. Adam Smith advocated free trade at a time when British

manufacturing industries, particularly the textile mills had increased their

capacity through various practical innovations. Trying to universalize economic

laws has been one of the greatest disservices to the science of economics. The

attempt by the third world countries to formulate their development plans on

the basis of these economic laws has created serious imbalances in their

economy and has kept them perpetually indebted, leading to erosion of their

economic independence.

7) Lord John Maynard Keynes (J.M. Keynes) was a great advocate of easy money

policy and abundance of credit for economic prosperity. Keynesian

prescriptions failed in developing countries due to inelastic nature of agriculture

sector and high inflation. Keynes found D.Robertson’s ideas inconvenient and

chose to ignore it. An academically and theoretically sound thesis will not shy

away from an academic debate. The relation between agriculture and industry

does not form a part of the theoretical frame work of the General Theory of

Keynes. Keynes was highly intolerant of his critics and he had high hope in

capitalism and he could avoid economists jumped into Marxist band wagon.

Indian planning was over influenced by Keynesian school because of the

economic experts trained in British Universities or Anglo-Saxon schools. In

India Dr.B.S.Minhas resigned from Planning Commission protesting against

high inflationary practice (Keynesian model of deficit financing).But no one

from the academic world or Planning Commission came to his support. It is of

importance to note that deficit financing started with the recommendation of

the IMF in its report in 1953.N.Kaldor says that the deficit financing imply a

corresponding increase in privately owned wealth.

Conclusion

Although the policy measures suggested by the Keynesian theory may not be suitable

to the problems of underdeveloped countries, it does not mean that Keynesian

economics has no significance. Indeed, Keynesian methodology of thinking in macro-

economic terms is very essential and appropriate in understanding the major problems

of any economy, whether developed or developing. However, in view of the changing

institutional set-up of the developing economies during the process of planning and

socio-economic reforms, Keynesian tools have to be adopted with suitable

modifications.

Faster Moving Consumer Goods (FMCG)

Indian FMCG sector is the fourth-largest sector in the country, with a current

turnover of over US$ 28 billion (Rs. 113,000 crore), including tobacco. Most large

FMCG categories managed to grow in the healthy double digits in 2008 in India.

Breaking down the sales growth into categories, detergents, which saw sales value

expand by over 25 per cent in 2008, were among the fastest growing categories. Soaps

and shampoos grew by about 16 per cent each and beverages such as packaged tea

and coffee expanded 13-16 per cent, according to industry estimates. Categories such

as toothpaste and confectionery managed lower growth of 14-15 per cent in the same

period. Sales growth for the 15 large listed FMCG companies actually accelerated

from 14.5 per cent in the last two financial years to 20 per cent in the first nine

months of 2008-09.High penetration categories like soaps and detergents reported flat

volumes due to sharp price increases and weight reduction.

The FMCG market shifts from a period of relatively effortless growth to a more

challenging environment. The companies are making tactical and strategic shifts to

deal with the changed scenario. As growth slows in overseas markets, companies are

likely to proceed with caution on acquisitions and refocus on organic growth that is

mainly India-driven.

Indian Automobile Industry

The automobile industry consists of passenger cars,multi-utility vehicles,commercial

vehicles,two wheelers and three wheelers.After liberalization in 1991, there is a

progressive growth in the number of manufacturers, thus replacing the earlier

monopoly of a few manufacturers.At present, there are 15 manufacturers of passenger

cars and multi-utility vehicles, 9 manufacturers of commercial vehicles,14

manufacturers of two/three wheelers.The Indian automobile industry has come a

long way since in the first car ran on the streets of Bombay (now Mumbai) in 1898.

The initial years of the industry were characterized by unfavorable government

policies. The real big change as we see in the industry today, started to take place with

the liberalization policies that the government initiated in the 1991. The liberalization

policies had a salutary impact on the Indian economy and the automobile industry in

particular. The automobile industry in the country is one of the key sectors of the

economy in terms of the employment opportunities. The industry directly employs

close to around 0.2 million people and indirectly employs around 10 million people.

The prospects of the industry also has a bearing on the auto-component industry

which is also a major sector in the Indian economy directly employing 0.25 million

people. The Indian automotive component industry is dominated by around 500

players which account for more than 85% of the production. The turnover of this

industry has been growing at a mammoth 28.05% per annum from 2002-03 onwards.

Global as well as local forces have affected the Indian auto industry, leading to a rapid

transformation over the last decade or so. After the end of licensing era in early 1990s,

the industry has witnessed rapid growth in volumes and capacity. 100% Foreign

Direct Investment, absence of much government regulations, manufacturing and

imports free from licensing & approvals in the automobile sector coupled with

customs tariff for a u t o components reducing to 12.5% resulted in increased number

of multinationals establishing their bases in India and with export markets looking up,

the Indian automobile industry is poised for a phenomenal growth. India has made a

mark in the global automobile industry; India is the second largest two-wheeler

market in the world, Fourth largest commercial vehicle market in the world, Eleventh

largest passenger car market in the world, Fifth-largest bus and truck market in the

world (by volume). Envisaged to be the seventh largest automobile market by 2016

and world's third largest by 2030 (behind only China and the US).

ENVIRONMENT AND DEVELOPMENT

ENVIRONMENT

The environment can be defined as one’s surroundings. The welfare of the

community depends on the availability of goods and the availability of goods depends

on the availability of resources that come from environment.

Economic Growth and Environment

Soon after Independence, the Government of India adopted a policy of rapid

economic development through extensive and intensive exploitation of natural

resources. Unfortunately the Government has allowed landlords, private contractors,

mine owners and industrialists to encroach upon public lands, and literally loot and

destroy forests, water resources and mineral wealth. While economic development has

enriched a small group of people-namely, the rich landlords in the villages, the small

and large industrialists, the contractors, the smugglers, the bureaucrats and the

politicians-environmental degradation which is the direct result of this economic

development has led to tremendous suffering and misery to millions of

tribals,traditional craftmen and fisherfolk.It has been responsible for the steady

growth in the number of landless labourers’ migration to cities.

Poverty

A major issue is the removal of mass poverty. Indian economy indicates a very high

proportion of people below the poverty line. Poverty is defined on the basis of norms

of nutritional requirements, i.e., 2400 calories per person per day for rural areas and

2100 calories for the urban areas. According to Planning Commission estimates in

1999-2000 nearly 260 million people (26 per cent of the population) were living below

poverty line. Out of this 193 million in rural areas and 67 million in urban areas. The

burden of poverty is very massive. Rapid reduction and eventually the elimination of

poverty is, there fore, the most important issue of development. The prevalence of

‘mass poverty’ which is the cause as well as consequence of their low level of

development. Poverty is the result of low economic and human resource (education

and other professional skills) base of the poor who own a very small portion of the

total assets in the form of land, capital, house property etc. The low resource base of

the poor also inhibits them from giving education and training to their children. This

enables them to earn very low and meager wages and thus perpetuate poverty. In

other words, inequality in the distribution of assets is the principal cause of unequal

distribution of opportunities on the other.

Environment – Economy Interaction

Resources include human resources, financial resources and natural resources like

land, water, fisheries, minerals, forests,, marine resources, climate, rainfall and

topography. Natural resources determine the course of development of a country.

While some natural resources such as land, water, fisheries and forest are renewable

others like mineral and mineral oils are exhaustible and can be used only once. The

principal objective of resource development is to maximize gross domestic output

(GDP) or national production and for this purpose there should be optimum

utilization of resources not only in the short period but, in a sustained manner, over

the long period.

But the exploitation of natural resources should not result in the disturbance of

ecological balace.The unintended side effects of economic development have to be

avoided or controlled They include mismanagement of natural resources, large scale

deforestation, the unplanned discharge of residues and wastes, the handling of toxic

chemicals, growth of slums etc. Deforestation is directly responsible for greater

frequency and intensity of floods, soil erosion, heavy dams built at enormous expense

and changes in climate conditions. It has also caused increased suffering to the

landless labourers and marginal and small farmers who have steadily lost their

traditional sources of fuel wood and fodder for their cattle. Loss of fuel wood, in turn,

has led to the use of cowdung as fuel, resulting in loss of precious organic manure.

Environmental Issues

1) Deforestation

2) Pollution

3)Ground Depletion

4)Climate Change

Climate is weather conditions of a place or area, conditions of temperature, rainfall,

wind, etc. The saying goes, “climate is what you expect; weather is what you get.” The

word climate describes the general average pattern of the weather in a place over a

period of years. Climatologists generally consider 30 years as the time needed to assess

the climate of a place. Change is a fundamental characteristic of the environment.

Earth’s climate is a result of complex interactions between the sun , atmosphere ,

oceans , land and biosphere. Relatively small changes in climate could have a major

effect on our resources like food , energy and water. The factors that influence global

climate are the aamount of solar energy the earth receives, the condition of the

atmosphere , the shape and rotation of the earth , and the currents and other

processes of the ocean. The scientific evidence suggest that the earths climate is

changing . The atmosphere is warming and this trend will continue. By the year 2050,

scientists predict that the world will be warmer by an average of between 1.5degree

Celsius and 4.5 degree Celsius. A TASK Group set up by WHO had warned that

climate change may have serious impact on human health.

5)Green House Effect.

A glass house used for raising delicate plants is called “green house’. A green house

has higher temperature inside than outside though the interior receives less radiation.

This is called green house effect. The factors that contribute to its effects are; i) glass

walls ii) high carbon dioxide content iii) high water vapour content of air in the green

house. They let the short wave radiations pass through them but prevent passage of

long wave radiation emitted by the earth’s surface. This makes inside of the green

house warmer than outside. As the suns radiation enters the atmosphere, some of it is

reflected by the clouds and other particles and the rest reaches the earth. Part of the

radiation reaching the earth is reflected by the earth’s surface while the rest is

absorbed. During this process these gases in the atmosphere called green house gases

obstruct the shape of heat from the earth into space while allowing radiation from the

sun to the earth. Without green house effect it is not possible to sustain life on the

plant as the average temperature of the earth would be 18 degree celsius than

15degree Celsius.

The atmospheric gases which are permeable to short wave solar radiation but

are strong absorber of long wave relations emitted from the surface of earth are called

green house gases. They include

i) Carbon dioxide

ii)Methane

iii)Nitrous Oxide

iv) Chlorofluro Carbons

v)Hydrofluro carbon gases

vi)Perfluro carbons

vii)Sulphur hexafluoride

viii) Ozone

ix) Carbon monoxide

The green house gases added to the atmosphere by human activities can significantly

affect the amount of heat trapped in the atmosphere over time and leads for global

warming which had adverse effect on human life. The Inter –Governmental Panel on

Climate Change (IPCC) periodically makes an assessment of the atmospheric

abundance of green house gases and its possible impact on climate and related issues.

6)Global Warming

Global warming is an increase in the earth’s temperature due to the use of fossil fuels

and other industrial professes leading to a build up of green house gases in the

atmosphere. Air pollution traps more heat in the atmosphere rendering the earth

warmer. This effect is called global warming.

Causes of Global Warming

The main cause of global warming is green house effect. These include carbon

dioxide, methane, nitrous oxide , clorofluro carbons and ozone. Human activities

during the last few decades of industrialization and population growth have polluted

the atmosphere that it has begun to effect the climate. By burning large amount of

fossil fuels we release huge quanities of carbon dioxide into the atmosphere.

Currently, deforestation also releases carbon trapped in the tissues of the trees.

Natural process like volcanic eruptions and earth quake induced fires also contribute

to carbon dioxide emissions. The Inter –governmental Panel on Climate Change held

earlier in 2007 found that man made additions to the global atmospheric carbon

dioxide were indeed responsible for warming .

Effects of Global Warming

i) Climate Effects

a) There will be a warming of the earth’s surface and lower

atmosphere and a cooling of atmosphere.

b) The warming trend over the earths surface is varied , warming in

the tropics is lesser than the global mean by about 2-3 degree celcius depending on

seasonal changeswhich in other latitude the average warming might amount for 5-

10 degree Celsius increase in temperature.

C) precipitation patterns will be changed. Some areas will become

wetter and some areas dryer.

d)Seasonal patterns will change due to the changing of temperature

and prcepitation matters.

e) Soil moisture regions will be changed due to the changes in

evaporation and precipitation.

f) With the increase in cloud cover over Eurasia in summer, which will

enhance the solar heating of the surface and increase the land-sea temperature

contrast,tropical mansoon will be driven with more severity and intensity.

g) Wind direction and wind stress over the sea surface will be

changed,which will alter ocean cirrents and cause changes in nutrient mixing zones

and productivity of the oceans.

7)Rise in Sea Level

The global warming also contributes to rise in sea level due to thermal expansion

of ocean and melting of glaciers and Greenland ice sheets.The level of sea has

been rising by 1 to 2 mm per year during the 20th century.A rise of even half a

metre in sea level would affect human population,one- third of which lives within

60 km of a coast line.Many important birds and fishes inhabiting in coastal salt

marshes and estuaries will become extinct die to inundation of their breeding

ground.

The direct effects of rise in sea level are:

1) recession of shorelines and wetlands,

2) increased tidal range and estuarine salt-front instruction, and

3) an increase in salt-water contamination of coastal fresh-water aquifers.

Thus a rise in sea level will have a negative impact on human settlements, tourism,

fisheries, agriculture, water suppliers and coastal ecosystems.

Impacts on Forests

Forests are highly sensitive to climate change and upto one third of currently forested

and conservation of forest inhabitats in a rapidly warming world will present us with

new challenges.

Effects on range of species distribution

Each plant and animal species occurs within a specific range of temperature.The

global warming will shift the temperature range,which would affect attitudinal and

latitudinal distribution pattern of organisms. Rapid rise in temperature may cause large

scale death of many trees, as they are sensitive to temperature stress and many species

may disappear.

Effects on human settlements and society

Population would be displaced by the inundation of low-lying coastal plains,deltas,

and islands in the next century if efforts to reduce greenhouse gas accumulation in the

atmosphere were unsuccessful.

Effects on Food Production

Global warming will reduce crop production due to increased incidence of plant

disease and pests, explosive growth of weeds and enhanced bastal rate of respiration

of plants. Global warming could produce colder temperature in Russia and northern

Europe resulting in the reduction of crop yields.

Effects on health

As the earth becomes warmer, the floods and droughts become more frequent,

increase in water-borne diseases,infectious disease carried by mosquitoes and other

disease vectors.Temperature change may have an impact on several major categories

of diseases including cardiovascular, cerebrovascular, and respiratory disease.

Solutions for global Warming

The following are some of the suggested solutions to prevent global warming

a) Reduction in the use of fossil fuels.

b) Shifting to renewable energy resources that do not emit GHGs.

c) Development of substitutes for chlorofluorocarbons.

d) Increase of the vegetation cover, particularly forest for photosynthetic

utilization of CO2.

e) Limiting population

f) Exploring other options to sequester carbon.

g) Adopting practices and technologies to make agriculture sustainable.

h) Reduce deforestation, adopt better forest management practices and undertake

afforestation to sequester carbons.

i) Reduce deforestation, adopt better forest management practices and undertake

afforestation to sequester carbons.

j) Use fewer automobiles and public transportation immediate and drastic

reduction of emissions.

SUSTAINABLE DEVELOPMENT

Development should be perceived as a multi-dimensional process involving the re-

organization and re-orientation of entire economic and social systems. Development

is a continuous process which has to be extended over a long period to lead a country

to a stage of self-sustained growth or to a self-generating economy. It is an

evolutionary product of the idea progress. Progress can be achieved by generating

wealth through maximization of productivity of labour and capital.

Friedman defined growth as an expansion of the systems in one or

more dimensions without change in the structure and development as also as an

innovative process leading to the structural transformation of social systems. For eg;

growth can be compared with change in body whereas development can be compared

with the change in body and mind together. Growth refers to quantitative

improvement in the scale of physical dimension while development signifies

improvement in both physical and non-physical dimension.

Development is the conservation and management of the natural

resources base and the orientation of technological and institutional change in such a

manner so as to assure this attachment and continued satisfaction of human needs of

present and future generations. Such sustainable development in agriculture, forestry

and fisheries section conservation of land , water, plant and animal genetic resources ,

technically appropriate , economically viable and socially acceptable.

SUSTAINABILITY

The term sustainable development refers to keeping an effort going

continuously or the ability to last out and keep from falling. Sustainability implies that

human use of enjoyment of the worlds natural and cultural resources should not in, in

overall terms , diminish or destroy them. Thus sustainability is the ability of an activity

or development to continue in the long term without undermining that part of

environment which sustains it.

SUSTAINABLE DEVELOPMENT

The term sustainable development comes into common usage after the use by the

World commission on Environment and Development (WCED) headed by Dr.

Geo Halem Brundland. Sustainable Development.Sustainble development is now

widely accepted as a primary goal economic and social activity. Sustainble

development suggest that the primary focus of environmental protection efforts

on the international level should be to improve the human condition. It also

implies the integration of environmental and social concerns into all aspects of

economic policy. Principle 4 of the Rio Declaration states that inorder to attain the

sustainable development , environmental protection shall constitute an integral

part of the development process and cannot be considered in isolation from

it.Injecting sustainability concept in developmental policies has broad implication

for macro and micro economics.Regarding macro economic policies , the move

towards sustainable development requires for example traditional national

accounting system be changed to better measure over all qualities of life.

Intergenerational Equity and Responsibility.

Sustainable development as defined in our common feature is closely associated with

the goal of intergenerational equity. Sustainable development recognizes each

generation’s responsibility to be fair to the next generation by leaving an inheritance

of wealth no less than they themselves have inherited.At a minimum, meeting this

goal may require emphasizing the sustainale use of natural resource for subsequent

generation and avoiding any environmental damage.

Common but differentiated Responsibilities.

Sustainable development was common challenge to all countries but because of the

different development path, industrialized countries may be asked to carry more of

the immediate burden. The developed countries explicitly acknowledged the for the

central responsibility for the present environmental degradation and its remediation.

To accomplish sustainable development, a number of areas have to be organized such

as,

1) Improving energy efficiency

2) Saving forests,

3) Safeguarding biodiversity,

4) Adopting water resource management,

5) Managing coastal zones and oceans fisheries.

6) Arresting pollution,

7) Planning cities better,

8) Accomplishing a second green revolution,

9) Stabilizing world population, and

10) Stopping environmentally destructive subsidies.

Guidelines for Sustainable Development

The following guidelines are suggested for achieving sustainable development:

1) Reduce the input of matter and energy resource in production process to

prevent excessive depletion and degradation of planetary resources.

2) Use energy more efficiently and economically

3) Shift from exhaustible and potentially polluting fossil and nuclear fuels to less

harmful renewable wind energy or solar energy.

4) Avoid wasting non-renewable and use them no faster than the rate at which a

renewable resource used sustainably can be sustained.

5) Recycle and use the matter discarded as waste.

6) Use locally adaptable, ecofriendly and resource efficient technology, which will

use less of resources and produce minimum wastes.

7) Utilise resources as per carrying capacity of the environment.

8) Adoption of 3-R approach, ie., reduce,reuse,recycle approach to minimize

scarce resource use.

9) Emphasise pollution prevention and waste reduction instead of pollution clean-

up and waste management.

10) Study before the construction of dams, major highways, mining, industry etc

whether they can seriously damage ecosystems and bio-diversity before they are

begun.

11) Insist and implement the technique of pollution control of toxic and hazardous

gases in existing industries.

Global Environmental Concerns

1) Population explosion enhances the ecological demands which resulting

degradation on natural resouces.

2) Almost half of the world’s original expanse of tropical forests has been

cleared.Within the next 30 to 50 years there may be little of these forests left.

3) Millions of hectares of grass lands have been overgrazed, some especially in

Africa and the Middle East,have been converted to desert.

4) Between 25 % and 50 % of the world’s wet lands have been drained, built

upon, or seriously polluted.

5) An estimated 36,500 species of plants and animals become extinct each year,

mostly because of human activities.

6) About 8.1 million square kilometers of once-productive land (crop land,

forests, grasslands) have become desert in the last 50 years. Each year almost

61,000 square kilometers of new desert are formed.

7) Top soil is eroding faster than it forms on about 35 per cent of the world’s

crop land. Crop productivity on one-third of the earth’s irrigated crop land has

been reduced by salt build up in top soil.

8) Most of the wastes we dump into the air, water, and land eventually end up in

the oceans. Oil slicks, floating plastic debris, polluted estuaries and beaches,

and contaminated fish and shellfish are visible signs that we are using the

oceans as the world’s largest trash dump.

9) In developing countries 61 per cent of the people living in rural areas and 26

per cent of urban dwellers do not have access to safe drinking water. Each year

5 million people die from preventable water diseases.

10) Water is withdrawn from underground reservoirs (aquifers) faster than it is

replenished by precipitation.

11) In the world’s population more than one out of every four live in absolute

poverty.

12) It is estimated that 70 per cent of the surface water resources are polluted and

that in large stretches of major rivers, water is not even fit for bathing, leave

alone drinking.

13) Environmental pollution although typically associated with industrialization, is

a great and growing concern in developing countries.

14) Use of fertilizers and pesticides pollute the environment.

15) Over the past few years air pollution has been increasing as a regional or global

problem, not a local one. Acid rain may fall to earth thousands of miles away

from the places of emission of sulphur dioxide world and nitrogen oxide.Thus

the clouds generated in the developed world may rain in the territory of the

developing world.

16) Emissions of carbon dioxide and other gases into the atmosphere from fossil

fuel burning and other human activities may raise the average temperature of

the earth’s lower atmosphere several degrees by 2050.This would disrupt food

production and flood low-lying coastal cities and croplands.

17) Chlorofluorocarbons and halons released into the lower atmosphere are

drifting into the upper atmosphere and reacting with and gradually depleting

ozone faster than it is being formed.

18) Atmospheric levels of heat-trapping carbons dioxide are now 26 per cent

higher than the pre-industrial concentration and continue to rise higher and

higher with ‘green house effect’.