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’.