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M.B.A (Gen): 1
st
Year. Enrolment No:

Assignment Topic: MANAGERIAL ECONOMICS



Question 1:- Elucidate the various phase oI Trade Cycle` in Indian economy

Answer:

Trade Cycle: Meaning and Definition

A trade cycle reIers to the recurring Iluctuations which occur in an economy.
Business cycle is an American term Ior which the British economist coined termed Trade
Cycle. During the last 150 years the world has shown tremendous economic development
and growth but it will be wrong to understand that this progress has been steady and
sustained and had no bottle necks.
Every business is subject to ups and downs. The period oI prosperity is
converted into Iailure. AIter every period oI boon the period burst comes which also is
replaced by the boom. The same oscillation in the business are called trade or business
cycle. A trade cycle could be deIined as, 'Trade cycle reIers to the total period oI business
which passes though prosperity and Iailures'.
Trade cycle is the diIIerent phases oI rapid increase oI the national income.
National income increases Iast during the boom period but it slows down gradually and
decreases at last. Decrease in the national income is termed as Economic Recession.
AIter economic recession boom is repeated once gain and when this boom reaches its peak
the trade cycle becomes the recession again.

Stages in Trade Cycle

There are Iour stages oI a trade cycle which are:

!rosperity: In this stage oI the Trade cycle, the economy is at its peak and boom.
People have large disposable incomes so their spending volume increases. Most
Iavorable period Ior companies, as they invest more and more on the sales oI the
product.
Recession: Is normally the period aIter boom. The spending pattern oI the consumers
change. They dread spending. And start saving Ior the unknown times.
Depression: The economy slumps down. People are only spending on their necessities.
At this stage, output and employment are at their lowest. This is also reIerred to as the
stage oI trough. This stage may be short term or may be long term depending on
circumstances and market conditions.
Recovery: The recovery stage, as the name suggests is the rise in output, employment
and trade aIter the depression stage. The policies oI the government would bring back
the business to liIe. It would recover, people would Ieel positive about everything and
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the buying pattern will change in return. The employment levels increase till maximum
employment is reached.


These stages are oIten depicted as a graph. The graph would look like a wave. The peak oI
the wave is the boom phase, the decreasing slope is recession, the rock bottom oI the wave
is the trough/depression, and recovery phase is shown as the increasing slope aIter the
trough. The vertical axis measures real output and the horizontal axis measures time.
The business cycle is identiIied and marked by the National Bureau oI Economic Research
(NEBR), an independent economic 'think tank".

actors affecting Trade Cycle

Fluctuations in trade cycles can be caused by one or many oI the Iollowing Iactors:-

1) Low employment levels or in other words High Unemployment rates may cause
Iluctuations in trade cycles.
2) The cycle may also be aIIected by employment levels above high or Iull employment
levels which disturbs the equilibrium in a market.
3) The ratios between aggregate demands and aggregate supply.
4) Wages increase in periods oI high employment levels and tend to Iall in low
unemployment scenarios which also aIIect the trade cycles and which in turn aIIects the
demand/supply ratios.
5) The disparity between input and output levels.
6) Budget deIicits.
7) Periods oI inIlation or periods oI recession caused by the disparities in demand and
supply.
.

Role of trade cycle in the Indian economy


The slowing down oI growth in the Indian economy, particularly in the industrial
sector, has raised signiIicant interest in business cycle indicators. For India the interest in
business cycle research is relatively new though industrialised economies have witnessed
business cycles Ior many decades. From the great depression oI the thirties to the most
recent slowing down oI growth in the US economy, there have been numerous ups and
downs. Consequently most oI the research on business cycles has been addressed Irom the
point oI view oI advanced industrialised countries.
Research on business cycles in India has been based on the analysis oI data using
National Bureau oI Economic Research`s (NBER) methods. The NBER business cycle
dating committee`s method Ior selecting turning point dates requires a consensus among
members oI the committee who use diIIerent methods to analyse the macroeconomic
conditions and trends. The NBER selects the peaks and trough dates by looking Ior clear
changes in both the trend and level oI economic activity.
Since in the Indian context variables such as sales, retail trade employment etc. are
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not oIten available even on annual basis, as the Iirst step to determine the periods oI
recession we study annual GDP series. We examine GDP data Ior the period 1950-51 to
1999-00 (base1993-94)Irom the National Accounts Statistics. (Quarterly data Ior GDP is
available only since 1996-97.)We Iollow a very simple rule oI thumb to identiIy cycles. As
we will show the dates identiIied using this rule, Iind support Irom other studies that use
more sophisticated techniques to examine business cycles in India.
There have been Iour episodes since 1950-51 when growth in GDP has Iallen
sharply. These have been in 1957-58, 1965-66, 1979-80 and 1991-92 . In each oI these
years the growth rate Iell by 4 or more percentage points and to less than 1. In each oI
these years there was observed a sharp decline in agricultural output. GDP-Agriculture in
each oI these years was negative. While 1957-58 also saw a sharp decline in growth in
manuIacturing which turned to negative, in 1965-66 it was mainly the drought that caused
GDP-Agriculture to decline by over 11 percent. 1979-80 saw a sharp Iall in
GDP-Agriculture by over 12 percent. GDP-ManuIacturing also declined and its growth
was -3.4 per cent. In 1991-92 there was a balance oI payment crisis, a Iall in agricultural
and manuIacturing growth and a decline in GDP growth.
The concept oI the business cycle is contrary to the perception oI business cycles as
continuous expansions that Iollow contractions and are Iollowed by recoveries caused by
the intrinsic characteristics oI market economies. These are cycles caused purely by an
external Iactor - the monsoon. Since agriculture accounted Ior up to 40 per cent oI output
till the end oI the 1970s, the Iall in GDP was mainly due to a monsoon Iailure.
In the literature on business cycles competing economic theories that seek to explain cycles
in market economies are usually based on Iactors such as the stickiness oI prices, wages or
the role oI expectations, technology and inIormation asymmetries. In the Indian economy
it was mainly monsoon cycles rather than market related Iactors that caused a decline in
GDP. Current depression since mid oI 2008 is the recessive phase oI a trade cycle. The
present depressive trend can be a consequence oI successive downward phase oI the same
trade cycle.
As a conclusion ,studies oI business cycles in India show slowdown in that prior to
the nineties GDP growth Iell in 1957-8, 1965-66, 1972-73 and 1979-80. However, beIore
the nineties, Iluctuations in economic activity in India were primarily on account oI the
monsoon. In the 1990`s there has not been an actual Iall in output. Cycles, that did occur,
can be deIined more accurately as "growth cycles" in which there is a periodic Iluctuation
in the growth rate oI output, rather than in the output.
The research on business cycles in Indian economy is continuing it`s journey Ior
Iinding out appropriate indicators and characterizing trade cycles based on latest
technologies.









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Question 2:- DeIine National Income and discuss any one oI the methods Ior calculating
national income oI Indian economy.

Answer:

National Income:

National Income is the total oI Iactor incomes. National output is obtained with
the cooperation oI the various Iactors oI production. So this type oI output is
distributed among those Iactors oI production who could contribute in the
production national income is the total oI incomes which are received by the various
Iactors oI production. ThereIore national income is also called net national product at
Iactor cost. In a simple way, it is the total amount oI income earned by the citizens oI a
nation.
All incomes are based on production. In this sense, national income reIlects the
level oI aggregate output. The term national income carries at least 2 meaning in
economics.
The total value oI the level oI aggregate output is called Gross National Product or
G.N.P. G.N.P. is a measure oI the total market value oI all Iinal goods & services currently
produced by all the citizens oI a nation within a period, usually a year.
There are a Iew points important here:

* It measures how much people produce.
* It counts current production only.
* It counts the level oI output with a market value.
* It relies on the market prices oI goods & services as a measure

National income is a measure oI the total value oI the goods and services (output)
produced by an economy over a period oI time (normally a year). It is also a measure oI the
income Ilown Irom production, and/or the sum total oI all the spending involved Ior the
production oI output.

Definitions

The Iollowing are some oI the notable deIinitions.
AlIred Marshal :'The labour and capital oI the country acting on its natural
resources produce annually a certain net aggregate oI commodities, material and
immaterial, including services oI all kinds. This is the net annual income or revenue oI
the country, or the national dividend.
National Income Committee oI India,:' National income estimate measures the
volume oI commodities and services turned out during a given period counted without
duplication.
Paul A. Samuelson:' Gross national product (GNP) is the most comprehensive
measure oI a nation`s total output oI goods and services. It is the sum oI the dollar (money)
value oI consumption, gross investment, government purchase oI goods and services and
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net exports.
Though there are some variations among these deIinitions, the basic idea is very
clear national income is simply the income oI the whole nation.



actors Affecting National Income

1. actors of !roduction
Normally the more eIIicient and richer the resources, the higher the level oI national
income or GNP will be.
Land
Resources like coal, iron & timber are essential Ior heavy industries so that they must be
available and accessible. In other words, the geographical location oI these natural
resources aIIect the level oI GNP.
Capital
Capital is greatly determined by investment. Investment in turn depends on other Iactors
like proIitability, political stability etc.
Labour & Entrepreneur
The quality or productivity oI human resources is more important than quantity.
Manpower planning and education aIIect the productivity and production capacity oI an
economy.
2. Technology
This Iactor is more important Ior nations with little natural resources. The development in
technology is aIIected by the level oI invention and innovation on production.
3. Government
Government can help to provide a Iavourable business environment Ior investment. It
provides laws and order, regulations that aIIect exchanges. In HK, the government
promotes Iree trade and competition which encourage economic activities.
4. !olitical Stability
A stable economic and political system helps the allocation oI resources. Wars, strikes
and social unrests will discourage investment and business activities.

Computation of National Income

National Income calculation is not an easy task. For this, we have to collect more
Iacts and Iigures. We have already seen that income is generated through production
process. Normally we use this income Ior purchasing goods and services. When demand
Ior commodities goes up, we have to produce more. Thus income leads to expenditure
which again leads to increased production. See the Iollowing Iigure.






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Figure (a)

The Iigure (a ) given above shows how production, income and expenditure are mutually
related. Economic activity is directly related to these three stages. Based on this, three
methods are used Ior calculating national income. They are:
Production method
Income method
Expenditure method
We can calculate national income by Iollowing any one oI these methods.
Considering the nature and requirements oI the economy one or more methods are used Ior
calculating national income.

Methods of Computing National Income

National income is calculated by three methods. There are three methods Ior
computation oI National Income viz.:-
(i) !roduction Method(or Value addition method)
(ii) Income Method and
(iii) Expenditure Method
In spite oI three diIIerent methods, we should consider (or compute) National Income by
all three methods. When a Iactory makes production oI a product, it makes payment not
only to suppliers oI raw material, but also to its employees, and the employees, in turn
makes expenditure Ior house hold or make saving. Thus all three methods should be used
simultaneously. In India, the Central Statistical Organization calculates the national
income.


Production

Expenditure






Income
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!roduction Method

The production method oI national income calculation gives an idea about total
production oI goods and services in an economy during a particular Iinancial year. First oI
all production units are classiIied into primary, secondary and tertiary sectors .Then we
identiIy the various units that come under these sectors. We estimate the goods and
services produced in each oI these sectors. The sum total oI products produced in these
three sectors is the total output oI the nation. The next step is to Iind out the value oI these
products in terms oI money. The money sent by citizens working abroad is also added to
this. Now we get the gross national income.
GNI Money value oI total goods and services Income Irom abroad.

Expenditure Method

Under the expenditure method, national income is calculated by summing up
expenditures incurred Ior diIIerent types oI goods and services. Both private individuals
and government incur expenditure Ior production and consumption oI goods and services.
As per the expenditure method, national income is the sum total oI government
expenditure and individual expenditure.
GNI Individual Expenditure Government Expenditure.

Income Method

Under this method total income earned by Iactors oI production is calculated. Each
Iactor gives its contribution and gets consideration.
Illustratively, Iollowing items are totaled:-
Wages, salary oI workers or employees
Interest on capital, dividend.
Rent on property rented
Notional (or imputed) value oI rent on selI occupied property
ProIit oI company or proIit oI selI employed person, i.e. operating surplus.
Following points are worth noting:-
Net Iactor income Irom abroad shall be added.
ProIit on drawing oI goods Ior selI consumption should be added.
TransIer income (pension, unemployment allowance)should not be added.
Money transIer (hawala), income tax, gambling income should not be included.
In other words, total income is equal to the reward given to various Iactors oI
production. By adding the money sent by the Indian citizens Irom abroad to the income oI
the various Iactors oI production, we get the gross national income.
GNI Rent Wage Interest ProIit Income Irom abroad.

components of income method

Wages and salaries
Interest and dividends Irom shares
Rent including imputed rent.
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ProIits and dividends Irom business
Net Ilow oI income Irom abroad
Income oI selI-employed workers


The way calculation of income approach:-

Wages and salaries (including compensation Ior employees)
Interest and dividends
Rent
ProIits (including undistributed proIits and income Irom selI employment/proprietor`s
income)
Gross domestic income at market price (GDImp)
- Income paid abroad
Income received Irom abroad
Gross national income at market price (GNImp)
Subsidies
- Indirect taxes or taxes on expenditure
Gross national income at Iactor cost (GNIIc)
- Depreciation or capital consumption
Net national income at Iactor cost (NNIIc)
National Income

This method oI estimating national income has the grate advantage oI indicating
the distribution oI national income among diIIerent income group such as landlords,
capitalist, workers etc. thereIore this is called national income by distributive shares.

Difficulties/Limitations in calculating National Income

Non availability oI reliable statistics.
The service oI housewives is not included in the national income because this service
is not sold in the market.
Individuals do not keep correct account oI their consumption.
Illiteracy and ignorance.
Lack oI proper criteria Ior measuring the value oI services.