Content Enrichment in Economics

3-Day Workshop On

Content Enrichment in Economics & Identification of difficult topics

&suitable Instructional strategies for PGT (Economics)

29 - 31 August 2016

Reference Manual cum Report

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3- 29312016

KENDRIYA VIDYALAYA SANGATHAN NEW DELHI

: , Venue: ZONAL INSTITUTE OF EDUCATION AND TRAINING, MUMBAI

Website: www.zietmumbai.gov.in , mail id: [email protected],

[email protected], [email protected]

http://www.zietmumbai.gov.in/mailto:[email protected]:[email protected]:[email protected]

2

Patrons

... Mr. Santosh Kumar Mall, IAS

Honble Commissioner ,

KVS New Delhi

. . (.) . . .

Mr.G.K.Srivastava, IAS

Additional Commissioner (Admin.)

KVS New Delhi

. . () . . .

Mr. U.N .Khaware

Additional Commissioner (Acad.)

KVS New Delhi

3

. (.) . . .

Dr. Shachi kant

Joint Commissioner (Trg.) KVS New Delhi

.. () . . .

Dr.V.Vijayalakshmi

Joint Commissioner (Acad.) KVS New Delhi

. . () . . .

Dr. E. Prabhakar

Joint Commissioner (Pers.) KVS New Delhi

. () . . .

Mr. M. Arumugam

Joint Commissioner (Fin.) KVS New Delhi

()

MR. vijayakumar

Joint Commissioner (Admin) KVS New Delhi

4

Acknowledgments

....

mS.USHA ASWATH IYER

DEPUTY COMMISSIONER & director ziet Mumbai

Course director

C0-ORDINATOR

. Mrs. RADHA SUBRAMANIYAN , P.G.T. biology

Resource person

, MrS, PUSHPA VERMA, PGT ECONOMICS

MrS. AMRITA GULIYA, PGT ECONOMICS

K v THANE

5

.. . . SUPPORTED BY faculty & staff, ziet Mumbai

. , mr. m. srinivasan, p.g.t. maths

() Mr m. g. reddy pgt (phy)

. . , mr. eugin d. leen, p.g.t. English

, Mr. Shashi Kant Singhal, PGT Commerce

. , mrs. r. jayalakshmi, h. m.

, MR.HARMAN CHURRA, H.M

, MRS. KANTA BARA LIBRARIAN

, Mr. Dharmendra kumar, section officer

, Mr manoj parnekar, assistant

. ., Mrs. joyce J.P Sr. Stenographer

, MR. PRABHAKAR JILLA, U.D.C

Smt smita raut, ldc

, - Mr. Kishen Nawle, Sub Staff , -

Mr. Gopiram Valmiki, Sub Staff

6

CONTENT Sl.No. PARTICULARS 1. Cover Page

2 Acknowledgement

3 Index

4 Message From the Director

5 Details of the Participants and RPs

6 Time Table

7 Daily Report

8 Demand and Consumer Behaviour

9 Basics of National Income Accounting

10 Introduction to Economics

11 Indian Economy on the Eve of Independence

12 Liberalization, privatization And Globalization: an appraisal

13 Cost & Cost Curve

14 Causes of Low-Scoring

15 Balance of Payments

16 Human Capital Formation

17 Identification of difficult areas:

18 Photographs

7

Whenever result analysis for Economics is taken up, one of the factors which

are mentioned is that our students of Commerce and Arts Stream have secured

less percentage in Class X and hence are not able to cope with the subject.

However I feel this is a golden opportunity as Economics for most of the

students is a new area of learning and all our students, whether they have a

high CGPA or not, are on a level playing field.

It is the duty of the teacher to see where is the difficulty- in the content, in the

teaching or learning methodology or in the language used in these textbooks.

Pinpointing the area of difficulty will help us to come out with strategies to

overcome the problem. The methods can be many- simple language, using

diagrams to clarify concepts, concept mapping, linking Economics with new

trends of entrepreneurship, and encouraging participation in seminars,

discussions, presentations.

Constant guidance and motivation will definitely work wonders. Try to find the

student doing the right thing rather than pointing out all the negatives. Accept

that each child has different abilities; different interests and this will change at

times. Teach them that the real economics is identifying and encouraging the

human resources at our disposal. For a nation can be great when it recognizes

the potential its people have.

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KENDRIYA VIDYALAYA SANGATHAN ZONAL INSTITUTE OF EDUCATION AND TRAINING MUMBAI List of Participants

S.N. Name Of Participants Desig. Name Of K.V. Region E-mail Contact No.

1 Ms. Amrita Gulia PGT (RP) THANE 1stshift MUMBAI [email protected] 9869056812

2 SMT. Pushpa Verma PGT (RP) Ziet Mumbai Ziet mumbai [email protected] 9407516728

3 Mr. R. C. Tak PGT Sabarmati Ahmedabad [email protected] 7415203229

4 Mr. V. J. Gautam PGT AFS Baroda Ahmedabad [email protected] 9427453638

5 Smt. Arti Meena PGT Ahmdabad Cantt Ahmedabad [email protected] 8758890986

6 Mr. G. P. Rathore PGT No.2 EME Baroda Ahmedabad [email protected] 7878398840

7 Mr. Sudhir Tiwari PGT Sect 30 Gandhi Nagar Ahmedabad [email protected] 9998979933

8 Mr. Rajesh banshiwal PGT Ongc Mehsana Ahmedabad [email protected] 9724880129

9 Mr. Dinesh Dhakad PGT Gandhinagar cant Ahmedabad [email protected] 9435986694

10 Mr.G.C. Kasotiya PGT No.1 JAIPUR JAIPUR [email protected] 7426936046

11 Mr. R.L. Meena PGT Bsf Dabla Jaipur [email protected] 9413243969

12 Mr. B.L.Meena PGT Eklinggarh Jaipur [email protected] 8003414777

13 SMT. Inderjit Kaur PGT Sriganganagar Jaipur [email protected] 9413534986

14 Mr. Shokat Ali PGT No.2 Bikaner JAIPUR [email protected] 9983827588

15 Mr. I.C.Pandey PGT AFS Bihta Patna [email protected] 7277708579

16 Mr. Shubash Chandra PGT Gaya no. 2 Patna Subashnidhi231314@gmail 8544178726

17 Mr. Alok Kumar PGT Hfc Barauni Patna [email protected] 9931958431

18 Mr. D. Prasad PGT Danapur cant Patna Absent

19 Mr. U.D.Singh PGT Bailey Road, Patna (2

nd

shift) Patna

Ugandeosingh2rediffmail.com 9430954632

20 Mr. Dr. Vinodanand Bharti PGT Ofn Rajgir Patna [email protected] 9431404184

21 Mrs. Kiran Pandey PGT Kankarbagh Patna 2nd

shift Patna [email protected] 9031007395

22 Mr. B. Kerketta PGT Kusmunda Korba Raipur [email protected] 9424265295

23 MR. Arbinda Biswal PGT Koraput Raipur [email protected] 9556460990

24 Mr .A.N. Shukla PGT NO. 2 Raipur Raipur [email protected] 9826623386

mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]

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KENDRIYA VIDYALAYA SANGATHAN, NEW DELHI

25 Mr. Kishore Kumar Panday PGT Jhagrakhand Raipur [email protected] 7566416816

26 Mr. Sanjay Kumar Saha PGT Raigarh Raipur [email protected] 9406299791

27 Mr. Salik Ram Miri PGT NTPC Korba Raipur [email protected] 9993805918

28 DR.( Smt .) S. Pandya PGT Bilaspur Raipur [email protected] 9425549302

29 Ravi Shankar Singh PGT Bailey Road Patna SHIFT

1 Patna

[email protected] 9472029462

mailto:[email protected]:[email protected]:[email protected]:[email protected]

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VENUE: ZIET, MUMBAI 3 -DAY WORKSHOP ON 'CONTENT ENRICHMENT IN ECONOMICS ' FOR PGT (ECONOMICS)

TIME TABLE DATES: 29.08.16 to 31.08.16

DATE 0915-1100 hrs 1115 -1300 hrs 1400-1545hrs 1600-1730hrs

Day 1 29.08.16

National Income and Related Aggregates

TE

A B

RE

AK

Consumers Equilibrium and Demand

LU

NC

H B

RE

AK

Ten principles of Economics

TE

A B

RE

AK

Discussion on error analysis

Ms. Amrita Gulia PGT Economics(RP) K.V. Thane

Prof.Dr. Haripriya Gundimeda I.I.T Bombay

Prof.Dr. Haripriya GundimedaI.I.T Bombay

Mrs. P. Verma PGT Economics(RP) ZIET Mumbai

Day 2

30.08.16

Cost of Production Measurement of National Income

Difficult areas and Instructional Strategies in Statistics, class XI

Difficult areas and Instructional Strategies in Micro Economics, class XII

Mrs. P. Verma (RP) PGT Economics ZIET Mumbai

Ms. Amrita Gulia PGT Economics(RP) K.V. Thane

Ms. Amrita Gulia & Mrs. P. Verma PGT Economics


Day 3 31.08.16

Balance Of Payment

Use of different teaching methodology in Economics

Difficult areas and Instructional Strategies in Macro Economics , class XII

Difficult areas and Instructional Strategies in Economics , class XII & VALEDICTORY

Prof. Dr. Pushpa Trivedi I.I.T Bombay

Mrs. P. Verma (RP) PGT Economics ZIET Mumba



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(Daily reports) Report of day 1(29th August 2016)

3 days workshop for PGT Economics on content enrichment in Economics and

identification of difficult topics and suitable instructional strategies was started

on 29/8/2016. The session started with the lightening of the lamp by honourable

director, ZIET Mumbai, Mrs. Usha Aswath Ayer. She stressed on to develop easy

teaching methodologies so the result of economics can be improved. Honourable

director told participants to acquaint with the students so their problems can be rectified.

Her way of interaction with the participants was a worthwhile.

Resource person Mrs. Amrita Gulia took session on National Income Accounting. She

stressed on easy concept development. She also told that the unit can be divided in

three parts as per the needs for different students.

The second session started after tea break by Guest lecture, Prof. G Haripriya, IIT

Mumbai. She took the session on consumers equilibrium. She touched all the aspects

of the topic. Post lunch session was again taken by Prof. G Haripriya on 10 basic

principles in economics. Both the sessions were very productive.

The last session was taken by resource person Mrs. Pushpa Verma. She discussed

about the difficult areas of the economics which hinders the result. The day ended with

the thanks to the chair.

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Report of day 2 (30/08/2016)

The second day of the workshop started with a prayer to the almighty. A long with the

prayer the thought of the day, and a short quiz of 10 questions was also presented. The

session started with a discussion on the common mistakes conducted on the basis of

performance analysis issued by CBSE by Mrs. Pushpa Verma. Discussion was very

informative and fruitful. This continued till the short tea break. After tea break the

concept of National Income was taken by Resource Person Amrita gulia. Various

concept such as domestic product vs national, Gross vs Net Product, problem of double

counting etc. was discussed. Measurement of national income discussed by the

participants and various easy methods were derived by the participants on how to make

it easy. A healthy discussion was taken up and all took a keen interest in it. After the

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lunch break at 2:00 PM Mr. Dhakar take a session on Excel sheet on the basis of the

table drawn. Lastly all the groups completed their group work.

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Report of day 3 (31/08/2016)

The day began with prayer to the almighty. Patna Region and Raipur Region presented

the thought for the day, news, special item and a short quiz of ten questions. All items

were well prepared. The day started with a lecture on Balance of Payment by Dr.

Pushpa Laxmi Narayan Trivedi, Prof. I.I.T.Powai. The Discussion was very informative

and fruitful as the data on balance of payments was original and all came to understand

the various concepts included in it in a systematic manner. After a short tea break many

of the participants shared various PPTs on different topics with difficult areas. After the

lunch break session conducted by both the Resource persons on difficult areas in

statistics. After the session certificates were distributed to the participants by the course

director of ZIET Mumbai. Impression of the course was given by one participant and

resource person. The three day workshop came to an end with an assurance to improve

the result In the forthcoming session.

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GUEST SPEAKERS

Sr.no. Name of Guest Speaker Topic Contact details 1 Prof. Haripriya Gundimeda

Prof. IIT Powai Consumer Equilibrium &demand & Ten principles of Economics

022-2576-7382

2 Prof. Pushpa Trivedi Prof. IIT Powai

Balance of Payments 022-2576-7373

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Demand and Consumer Behaviour

Prof. Haripriya Gundimeda,

Dept . Of HSS IIT Bombay

Endless decisions

How to allocate scarce money and time?

To study or spend with friends?

Attend the morning 8.30 economics lecture or sleep?

Should we spend the money today or save for tomorrow?

We make choices that define our lives

The Theory of Consumer Choice

Basic principles of consumer choice and behavior:

i.e Do all demand curves slope downward?

How observed pattern of market demand can be explained?

How to measure the benefits that each of us receives from

participating in a market economy?

Choice and Utility theory

People choose those goods and services they value most highly

that provide them more Utility

denote satisfaction

If A is preferred to B, A provides more utility than B

Utility is a scientic construct that economists use to

undestand how rational consumers divide their limited

resources among the commodities that provide them with

satisfaction.

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THE BUDGET CONSTRAINT: WHAT THE CONSUMER CAN AFFORD

The budget constraint depicts the limit on the consumption bundles that

a consumer can afford.

People consume less than they desire because their spending is

constrained, or limited, by their income.


The budget constraint shows the various combinations of goods the

consumer can afford given his or her income and the prices of the two

goods.

Equimarginal pricinple

Consumer chooses the most preferred bundle from what is available

How do we compare utilities for different goods consumed when prices are

different?

If good A costs twice as much as good B then buy good A only when its

marginal utility is at least twice as great as good Bs marginal utility

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Equimarginal principle

The fundamental condition of maximum satisfaction or utility is the

equimarginal principle.

It states that a consumer having a fixed income and facing given market

prices of goods will achieve maximum satisfaction or utility when the

marginal utility of the last dollar spent on each good is exactly the same as

the marginal utility of the last dollar spent on any other good.

MU1/P1 = MU2/P2 = MU3/P3 = MU per rupeee of income

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The Consumers Budget Constraint

Any point on the budget constraint line indicates the consumers

combination or trade-off between two goods.

For example, if the consumer buys no pizzas, he can afford 500 pints

of Pepsi (point B). If he buys no Pepsi, he can afford 100 pizzas (point

A).


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The Consumers Budget Constraint

Alternately, the consumer can buy 50 pizzas and 250 pints of Pepsi.


The slope of the budget constraint line equals the relative price of the two

goods, that is, the price of one good compared to the price of the other.

It measures the rate at which the consumer can trade one good for the

other.

PREFERENCES: WHAT THE CONSUMER WANTS

A consumers preference among consumption bundles may be illustrated

with indifference curves.

Representing Preferences with Indifference Curves

An indifference curve is a curve that shows consumption bundles that give

the consumer the same level of satisfaction.

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Four Properties of Indifference Curves

Higher indifference curves are preferred to lower ones.

Indifference curves are downward sloping.

Indifference curves do not cross.

Indifference curves are bowed inward.

Property 1: Higher indifference curves are preferred to lower ones.

Consumers usually prefer more of something to less of it.

Higher indifference curves represent larger quantities of goods than

do lower indifference curves.

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Property 2: Indifference curves are downward sloping.

A consumer is willing to give up one good only if he or she gets more of the other

good in order to remain equally happy.

If the quantity of one good is reduced, the quantity of the other good must

increase.

For this reason, most indifference curves slope downward.

Remember, a consumer is equally happy at all points along a given indifference

curve.

Property 3: Indifference curves do not cross.

Points A and B should make the consumer equally happy.

Points B and C should make the consumer equally happy.

This implies that A and C would make the consumer equally happy.

But C has more of both goods compared to A.

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Property 4: Indifference curves are bowed inward.

People are more willing to trade away goods that they have in abundance and

less willing to trade away goods of which they have little.

These differences in a consumers marginal substitution rates cause his or her

indifference curve to bow inward.

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Two Extreme Examples of Indifference Curves

Perfect substitutes

Perfect complements


Perfect Substitutes

Two goods with straight-line indifference curves are perfect substitutes.

The marginal rate of substitution is a fixed number.


Perfect Complements

Two goods with right-angle indifference curves are perfect complements.

Since these goods are always used together, extra units of one good, outside the

desired consumption ratio, add no additional satisfaction.

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OPTIMIZATION: WHAT THE CONSUMER CHOOSES

Consumers want to get the combination of goods on the highest possible

indifference curve.

However, the consumer must also end up on or below his budget constraint.

The Consumers Optimal Choices

Combining the indifference curve and the budget constraint determines the

consumers optimal choice.

Consumer optimum occurs at the point where the highest indifference curve and

the budget constraint are tangent.

The Consumers Optimal Choice

The consumer chooses consumption of the two goods so that the marginal rate of

substitution equals the relative price.

At the consumers optimum, the consumers valuation of the two goods equals

the markets valuation.

This is what we stated in equimarginal principle

Equimarginal principle

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A consumer having a fixed income and facing given market prices of goods will

achieve maximum satisfaction or utility when the marginal utility of the last dollar

spent on each good is exactly the same as the marginal utility of the last dollar

spent on any other good.

MU1/P1 = MU2/P2 = MU3/P3 = MU per rupeee of income

How Changes in Income Affect the Consumers Choices

An increase in income shifts the budget constraint outward.

The consumer is able to choose a better

combination of goods on a higher indifference curve.

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How Changes in Income Affect the Consumers Choices

Normal versus Inferior Goods

If a consumer buys more of a good when his or her income rises, the good is

called a normal good.

If a consumer buys less of a good when his or her income rises, the good is called

an inferior good.

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How Changes in Prices Affect Consumers Choices

A fall in the price of any good rotates the budget constraint outward and

changes the slope of the budget constraint.

Income and Substitution Effects

A price change has two effects on consumption.

An income effect, A substitution effect

The Income Effect

The income effect is the change in consumption that results when a price change

moves the consumer to a higher or lower indifference curve.

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The Substitution Effect

The substitution effect is the change in consumption that results when a price

change moves the consumer along an indifference curve to a point with a

different marginal rate of substitution.

Income and Substitution Effects

A Change in Price: Substitution Effect

A price change first causes the consumer to move from one point on an

indifference curve to another on the same curve.

Illustrated by movement from point A to point B.

A Change in Price: Income Effect

After moving from one point to another on the same curve, the consumer will

move to another indifference curve.

Illustrated by movement from point B to point C.

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Deriving the Demand Curve

A consumers demand curve can be viewed as a summary of the optimal decisions

that arise from his or her budget constraint and indifference curves.

33

Do All Demand Curves Slope Downward?

Demand curves can sometimes slope upward.

This happens when a consumer buys more of a good when its price rises.

Giffen goods

Economists use the term Giffen good to describe an inferior good that violates the

law of demand.

Giffen goods are goods for which an increase in the price raises the quantity

demanded.

The income effect dominates the substitution effect.

They have demand curves that slope upwards.

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Basics of National Income Accounting

Ms. Amrita Gulia, PGT Economics

K.V.THANE 1st

SHIFT

MUMBAI

Gross Domestic Product

Money value of all final goods and services produced within the domestic

territory and valued at market prices in a given time period

Time period : typically one year

: India 1 April to 31 March

Product : output of goods and services

Money value : converting output into a common denominator

of money

Nominal GDP

35

Table shows GDP has increased

Output has remained constant in both years

Rise in GDP due to rise in price

Inflationary trend needs to be discounted to get actual change in

availability of goods and services

Use of Real GDP

36

GDP Deflator

Measures the average price level of all goods and services that constitute

GDP in the economy

Output is kept constant

GDP Deflator = nominal GDP/Real GD X 100

For year 2

GDP Deflator = 190/135 X 100 = 140.74

On an average prices have risen by 41%

Terms to Understand

Domestic product vs National product

Gross product vs Net product

Final product vs Intermediate products

Market price vs Factor Cost

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Normal Residents of a country

All households in an economy resident households

Households = Resident + Non-resident households

Non-resident households in a domestic territory include :

Foreign visitors on conferences, vacations, tours

Seasonal workers within the domestic territory

Diplomats of other countries living within the domestic territory

Foreign employees in international organizations

Foreign consultants, technicians, engineers who come on projects

Resident households outside the domestic territory include:

Citizens of a country employed in their own embassies, consulates,

military bases

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Medical patients and students (as long as they continue to be a part

of a household of their home country)

Citizens working in the local offices of international organizations

Domestic Product vs National product

National income is the income earned by residents of an economy

Domestic income = income of residents in the domestic territory

+ Income of non-residents in the domestic territory

National income =income of residents in the domestic territory

+ Income of residents from abroad

National income =Domestic income + net factor income from abroad

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Domestic Product vs National Product

Domestic Product = National Product NFIFA

National Product = Domestic Product + NFIFA

When NFIFA < 0; Domestic Product > National Product

When NFIFA > 0; Domestic Product < National Product

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Introduction to Economics

Prof. Haripriya Gundimeda,

Dept . Of HSS IIT Bombay

42

What Economics Is All About

Economics is the study of how society manages its scarce resources,

including

how people decide how much to work, save, and spend, and what to buy

how firms decide how much to produce, how many workers to hire

how society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs

Twin themes

Scarcity refers to the limited nature of societys resources.

Efficiency The effective use of a societys resources in satisfying peoples

wants and needs.

Principle #1: People Face Trade-offs.

There is no such thing as a free lunch!

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Principle #1: People Face Trade-offs.

Because resources are scarce to get one thing, we usually have to give up another thing.

Guns v. butter

Food v. clothing

Leisure time v. work

Efficiency (producing the biggest possible pie) vs. equity (fair treatment)

The hit movie Cast Away, starring Tom Hanks, played the sole survivor of

a plane crash, stranded on a remote island. He has limited resources of the

island, a few items he managed to salvage from the plane, and, of course,

his own time and effort. With only these resources, he had to make a life. In

effect, he became a one-man economy

Making decisions requires trading off one goal against another.

Efficiency vs. Equity

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Principle #2: The Cost of Something Is What You Give Up to Get It. Decisions require comparing costs and benefits of alternatives. Whether to go to college or to work?

Whether to study or go out for a movie?

Whether to go to HS 101 class or sleep in? The opportunity cost of an item is what you give up to obtain that item.

Opportunity cost

45

Cricket star Tendulkar understands opportunity costs and incentives. He

chose to skip college and go straight from high school to play cricket and it

paid off

Principle #3: Rational People Think at the Margin. Marginal changes are small, incremental adjustments to an existing plan of action.

People make decisions by comparing costs and benefits at the margin.

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Principle #4: People Respond to Incentives.

Means of urging people to do more of good thing and less of bad thing and they

dont come organically

Economics is, at root, study of incentives: how people get what they want, or

need, esp. when others too want the same thing.

Incentive Economic, social and moral

(blood donation, name and shame, crime, Organ donation, cheating)

Incentives

Principle #5: Trade Can Make Everyone Better Off.

People gain from their ability to trade with one another.

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Competition results in gains from trading.

Trade allows people to specialize in what they do best.

Principle #6: Markets Are Usually a Good Way to Organize Economic Activity.

A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. Households decide what to buy and who to work for.

Firms decide who to hire and what to produce.

Principle #6: Markets Are Usually a Good Way to Organize Economic Activity.

Adam Smith made the observation that households and firms interacting in markets act as if guided by an invisible hand. Because households and firms look at prices when deciding what to buy and sell, they unknowingly take into account the social costs of their actions.

As a result, prices guide decision makers to reach outcomes that tend to maximize the welfare of society as a whole.

Principle #7: Governments Can Sometimes Improve Market Outcomes.

Markets work only if property rights are enforced.

48

Property rights are the ability of an individual to own and exercise control over a scarce resource Market failure occurs when the market fails to allocate resources efficiently.

When the market fails (breaks down) government can intervene to promote efficiency and equity.

49

Principle #7: Governments Can Sometimes Improve Market Outcomes.

Market failure may be caused by: An externality, which is the impact of one person or firms actions on the well-being of a bystander.

Market power, which is the ability of a single person or firm to unduly influence market prices. Principle #7: Governments Can Sometimes Improve Market Outcomes.

Market failure may be caused by: An externality, which is the impact of one person or firms actions on the well-being of a bystander.

Market power, which is the ability of a single person or firm to unduly influence market prices. HOW THE ECONOMY AS A WHOLE WORKS A countrys standard of living depends on its ability to produce goods and services.

Prices rise when the government prints too much money.

Society faces a short-run trade-off between inflation and unemployment. Principle #8: A Countrys Standard of Living Depends on Its Ability to

Produce Goods and Services.

Standard of living may be measured in different ways:

By comparing personal incomes.

By comparing the total market value of a nations production.

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Principle #8: A Countrys Standard of Living Depends on Its Ability to

Produce Goods and Services.

Almost all variations in living standards are explained by differences in

countries productivities.

Productivity is the amount of goods and services produced from each hour

of a workers time.

Principle #9: Prices Rise When the Government Prints Too Much Money.

Inflation is an increase in the overall level of prices in the economy.

One cause of inflation is the growth in the quantity of money.

When the government creates large quantities of money, the value of the

money falls.

Principle #10: Society Faces a Short-run Trade-off between Inflation and Unemployment. The Phillips Curve illustrates the trade-off between inflation and unemployment: Inflation or Unemployment Its a short-run trade-off! The trade-off plays a key role in the analysis of the business cyclefluctuations in economic activity, such as employment and production Three Problems of Organization

What is to be produced? How will it be produced? Who will get what

is produced?

51

Economic systems

Economic system refers to the way a society organizes and directs its resources to answer the basic problems of what, how and who

Three main types

A command, or planned, economy

A market or free market economy

A mixed economy Free enterprise or Market economies Coined by Adam Smith in 1776

Prior to Smith -economies based on the principles of mercantalism

Laissez faire economy

Demand of goods and services Households

Supply resources to firms

Relative scarce resource -----higher incomes

Households use the money to buy goods and services

Consumer sovereignty

Firms motivated by profits

Invisible Hand

Smith and his supporters Classical economists Why market economies perform better? Most of goods and services produced by private firms

Role of government is limited

Existence of private property rights

Right of freedom of enterprise and choice

Competition and self- es consumers wanted would be produced at the best quality and the lowest price

Capitalism exist if three other things exists money, technology and capital Entrepreneur and Market Economy

52

1945 -Milton Reynolds acquired a new type of pen that used a ball bearing instead of a point

Set up Reynolds International Pen Company

Capital investment -26,000 US$

6th October 1945 -Production began

Marketed through Gimbels department stores

Pen would write for two years without refilling

Price -$12.50

Cost of production -80 cents

Sales on first day = 10,000 pens

Volume of production in early 1946 -30,000pens/ day

Pesonal Profit -US$3 million by March 1946

Story of ball point pen Macys-imported pen from South America and sold it at $19.98

April 1946 Eversharp introduced its first model in April 1946, with a retail price of $15.

July 1946 -the Shaeffer Company announced a pen with a retail price of $15

Ever sharp announced a retractable model at a retail price of $25.

Reynolds introduced a new model but maintained its retails price at $12.50 with Production costs estimated at 60 c/pen

Market too profitable

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Ball point pen market

The Ball-point pen company

of Hollywood introduced a new

model for $9.95,

Legal action from Reynolds

arguing patent infringement.

David Kahn -produced a new pen retailing for less than $3.00.

October 1946, Reynolds stuck back with a new model, priced at $3.85 that

cost 30c to produce

December 1946, approx. 100 ball-point pen manufacturers in production

and

Retail prices had fallen to $2.98 for some models.

February, 1947 Gimbels sold a pen made by the Continental Pen

Company for 98c.

Reynolds introduced a new model, retailing at $1.69.

Gimbels, however, sold it for 88c, as part of price war with Macys

Reynoldssoon followed with a new model retailing at 98c

Ball-point pens

Mid 1948, ball-point pens economy items but were still highly profitable.

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Pens were sold for 30c, and cost 10c to produce.

In 1951, popular models of pens cost 25c each.

Today ball-point pens are the commonest writing instrument universally

used.

It was estimated that in the early years Reynolds was earning 5 million

US dollars per month or 200 times his original investment

Efficiency of the capitalist system

Monopolists covered with patent monopoly can charge in the short term,

prices that are not even fairly related to production costs, and make

enormous profits

Competition and the Market

Structure

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Price Control and the Market Structure

.

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Introduction: Between Monopoly and Competition

Two extremes

Competitive markets: many firms, identical products

Monopoly: one firm

In between these extremes

Oligopoly: only a few sellers offer similar or identical products.

Monopolistic competition: many firms sell similar but not identical

products.

Measuring Market Concentration

Concentration ratio: the percentage of the markets total output supplied

by its four largest firms.

The higher the concentration ratio, the less competition.

This chapter focuses on oligopoly, a market structure with high

concentration ratios.

Concentration Ratios in Selected U.S. Industries

Concentration Ratios in Selected

U.S. Industries Industry

Concentration ratio

Video game consoles 100%

Tennis balls 100%

Credit cards 99%

Batteries 94%

Soft drinks 93%

Web search engines 92%

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Breakfast cereal 92%

Cigarettes 89%

Greeting cards 88%

Beer 85%

Cell phone service 82%

Autos 79%

EXAMPLE: Cell Phone Duopoly in Small-town

Small-town has 140 residents The good: Cell phone service with unlimited anytime minutes and free phone

Small towns demand schedule Two firms: Cingular, Verizon (duopoly: an oligopoly with two firms)

P $0 5 10 15 20 25 30

Q 140 130 120 110 100 90 80

Each firms costs: FC= $0, MC= $10

A Comparison of Market Outcomes

When firms in an oligopoly individually choose production to maximize

profit,

Q is greater than monopoly Q but smaller than competitive market Q

P is greater than competitive market P but less than monopoly P

The Output & Price Effects

Increasing output has two effects on a firms profits: output effect: If P > MC, selling more output raises profits.

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price effect: Raising production increases market quantity, which reduces

market price and reduces profit on all units sold.

If output effect > price effect, the firm increases production.

If price effect > output effect, the firm reduces production.

Game Theory

Game theory: the study of how people behave in strategic situations

Dominant strategy: a strategy that is best for a player in a game

regardless of the strategies chosen by the other players

Prisoners dilemma: a game between two captured criminals that

illustrates why cooperation is difficult even when it is mutually beneficial

Prisoners Dilemma Example

The police have caught Bonnie and Clyde, two suspected bank robbers,

but only have enough evidence to imprison each for 1 year.

The police question each in separate rooms, offer each the following deal:

If you confess and implicate your partner, you go free.

If you do not confess but your partner implicates you, you get 20 years in

prison.

If you both confess, each gets 8 years in prison.

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Indian Economy on the Eve of Independence

Introduction:

British colonial rule started from 1757 (The Battle of Plassey) and lasted for 200 years.

Systematic exploitation by British rulers.

The benefits of British rule were only incidental, if any.

The main motive of British policies was to serve the interest of England.

In 1947 India got independence.

Economic Development on the Eve of Independence:

All economic policies formulated by British govt. for the benefit of their own country.

They never made any sincere attempt to estimate Indias National Income and Per Capita Income.

Some individual attempts were made by Dada Bhai Naoroji, William Digby, Findlay Shirras, VKRV Rao, RC Desai, etc.

First estimate on NI and PCI was prepared by Dada Bhai Naoroji in 1876 for year 1867-68. It was published in Poverty and British Rule in India. He estimates NI to be Rs.340 crore and PCI to be Rs.20 in 1867-68.

First scientific estimate was made by Prof. VKRV Rao for year 1931-32. He estimated NI at Rs.1689 crore and PCI at Rs.62.

Agriculture sector on the Eve of Independence:

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India was primarily an Agricultural economy. Almost 85% population lived in rural area and earns their livelihood directly or indirectly from agriculture.

Indian agriculture became backward, stagnant and non-vibrant under the British rule.

Weak productive accumulation (Insufficient use of fertilizers and machines)

Unemployment and underemployment.

Low levels of production and productivity.

Sub division of landholdings into small scattered pieces of land.

Stagnation of agriculture sector

o Reasons for Stagnation of agriculture sector

Land Tenure system introduced by British rulers:

Zamindari system

Mahalwari system

Ryotwari system

Commercialization of agriculture sector (Means production of crops for sell in market rather than self consumption. Farmers were forced to cultivate commercial crops like Indigo).

Partition of Country-Rich food, Jute and cotton producing areas of West Punjab and Sindh went to Pakistan.

Industrial Sector on the Eve of Independence:

De-industrialization policy by British rulers

o Two-fold motive of British rulers (double exploitation of India)

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To get raw material from India at cheap rate (mere exporter of raw material to the British industries)

To sell British manufactured goods in Indian market at higher prices.

Unbalanced Industrial structure

Capital goods industries were lacking

Limited operation of the public sector

Foreign Trade on the Eve of Independence:

Net exporter of Raw material and Importer of Finished goods

Britain had Monopoly control on foreign trade

Drain of Indias wealth

Demographic conditions on the Eve of Independence:

First official Census was conducted in 1881

The year 1921 is described as the Year of Great Divide. From this year onward, population has been growing continuously and rapidly.

High birth rate and Death rate (48 and 40/000)

High Infant Mortality Rate-218/000

Low life expectancy-32 years

Mass illiteracy

Low standard of living

Bengal famine of 1943-3 million people died

Occupational structure on the Eve of Independence:

Largest share of work-force (72%) was working in agriculture sector

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Manufacturing sector and service sector service sector accounted for 10% and 18% respectively.

Almost 85% population earns their livelihood directly or indirectly from agriculture.

Growing regional variations

Infrastructure on the Eve of Independence:

Infrastructure comprises of such industries which help in the growth of other industries. Example: Transport, Electricity, Communication, banking, etc.

However, the real motive behind this development was not to provide basic amenities to the people but to serve various colonial interests.

Railways

o Britishers introduced railways in India in 1850 and began their operation in 1853.

o It is considered as one of their most important contributions.

o The railways affected the structure of the Indian economy in following ways:

It enabled people to undertake long distance travel and break geographical and cultural barriers which promote national unity,

Cheap and rapid source of transport

The volume of Indias export trade expanded substantially but its benefits rarely accrued to the Indian people.

Indias industrial development

It promotes commercialization of Indian agriculture Self-sufficiency of the village economies in India.

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o Construction of railways benefited the Indian economy in many ways but main motives of British rulers behind constructing railways were: To have effective control and administration over the

vast Indian territory To earn profit through foreign trade by linked

railways with major ports and marketing centers To create an opportunity for profitable investment of

British funds in India.

Roads

o The roads that were built primarily served the purposes of mobilising the army within India and drawing out raw materials from the countryside to the nearest railway station or the port to send these too far away England or other foreign destinations.

o There always remained an acute shortage of all-weather roads to reach out to the rural areas during the rainy season.

o Naturally, therefore, people mostly living in these areas suffered grievously during natural calamities and famines.

Water Transport

o Along with the development of roads and railways, the colonial dispensation also took measures for developing the inland trade and sea lanes. However, these measures were far from satisfactory. The inland waterways, at times, also proved uneconomical as in the case of the Coast Canal on the Orissa coast.

o Though the canal was built at a huge cost to the government exchequer, yet, it failed to compete with the railways, which soon traversed the region running parallel to the canal, and had to be ultimately abandoned.

Communication

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o The introduction of the expensive system of electric telegraph in India (1857), similarly, served the purpose of maintaining law and order.

o The postal services (1837), on the other hand, despite serving a useful public purpose, remained all through inadequate.

Conclusion

By the time India won its independence, the impact of the two-century long British colonial rule was already showing on all aspects of the Indian economy.

The agricultural sector was already saddled with surplus labour and extremely low productivity.

The industrial sector was crying for modernization, diversification, capacity building and increased public investment.

Foreign trade was oriented to feed the Industrial Revolution in Britain.

Infrastructure facilities, including the famed railway network, needed up gradation, expansion and public orientation.

Prevalence of rampant poverty and unemployment required welfare orientation of public economic policy.

In a nutshell, the social and economic challenges before the country were enormous.

EXERCISES

What was the focus of the economic policies pursued by the colonial government in India? What were the impacts of these policies?

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Name some notable economists who estimated Indias per capita income during the colonial period.

What were the main causes of Indias agricultural stagnation during the colonial period?

Name some modern industries which were in operation in our country at the time of independence.

What was the two-fold motive behind the systematic deindustrialization effected by the British in pre-independent India?

The traditional handicrafts industries were ruined under the British rule. Do you agree with this view? Give reasons in support of your answer.

What objectives did the British intend to achieve through their policies of infrastructure development in India?

Critically appraise some of the shortfalls of the industrial policy pursued by the British colonial administration.

What do you understand by the drain of Indian wealth during the colonial period?

Which is regarded as the defining year to mark the demographic transition from its first to the second decisive stage?

Give a quantitative appraisal of Indias demographic profile during the colonial period.

Highlight the salient features of Indias pre-independence occupational structure.

Underscore some of Indias most crucial economic challenges at the time of independence.

When was Indias first official census operation undertaken?

Were there any positive contributions made by the British in India? Discuss.

LIBERALISATION, PRIVATISATION

66

AND GLOBALISATION: AN APPRAISAL

INTRODUCTION

Need of NEP 1991 In 1991, India met with an economic crisis relating to its external

debt the government was not able to make repayments on its borrowings from abroad;

Foreign exchange reserves, which we generally maintain to import petrol and other important items, dropped to levels that were not sufficient for even a fortnight.

The crisis was further compounded by rising prices of essential goods.

The origin of the financial crisis can be traced from the inefficient management of the Indian economy in the 1980s.

The continued spending on development programmes of the government did not generate additional revenue.

The government was not able to generate sufficiently from internal sources such as taxation.

The income from public sector undertakings was also not very high to meet the growing expenditure.

Our foreign exchange was spent on meeting consumption needs.

No attempt made to reduce such profligate spending No sufficient attention was given to boost exports to pay for the

growing imports. Imports grew at a very high rate without matching growth of

exports. There was also not sufficient foreign exchange to pay the

interest that needs to be paid to international lenders.

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All these led the government to introduce a new set of policy measures which changed the direction of our developmental strategies.

India approached the International Bank for Reconstruction and Development (IBRD), popularly known as World Bank and the International Monetary Fund (IMF), and received $7 billion as loan to manage the crisis.

For availing the loan, these international agencies expected India to:

o liberalize and open up the economy by removing restrictions on the private sector,

o Reduce the role of the government in many areas and remove trade restrictions.

India agreed to the conditions of World Bank and IMF and announced the New Economic Policy (NEP).

The NEP consisted of wide ranging economic reforms. The thrust of the policies was:

o creating a more competitive environment in the economy and

o Removing the barriers to entry and growth of firms. This set of policies can broadly be classified into two groups: Stabilization measures: Stabilization measures are short term measures, intended to correct some of the weaknesses that have developed in the balance of payments and to bring inflation under control. This means that there was a need to maintain sufficient foreign exchange reserves and keep the rising prices under control. Structural reform measures: structural reform policies are long-term measures, aimed at improving the efficiency of the economy and increasing its international competitiveness by removing the rigidities in various segments of the Indian economy. The government initiated a variety of policies which fall under

three heads viz., o liberalization,

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o privatization and o Globalization.

The first two are policy strategies and the last one is the outcome of these strategies.

LIBERALISATION

Rules and laws which were aimed at regulating the economic activities became major hindrances in growth and development.

Liberalization was introduced to put an end to these restrictions and open up various sectors of the economy.

Though a few liberalization measures were introduced in 1980s in areas of:

o industrial licensing, o export-import policy, o technology upgradation, o fiscal policy and o foreign investment,

Reform policies initiated in 1991 were more comprehensive o industrial sector, o financial sector, o tax reforms, o foreign exchange markets and o foreign trade and o investment sectors

These policies received greater attention in and after 1991. Deregulation of Industrial Sector:

In India, regulatory mechanisms were enforced in various ways (i) industrial licensing under which every entrepreneur had to get permission from government

officials to start a firm, close a firm or to decide the amount of goods that could be produced (ii) private

sector was not allowed in many industries (iii) some goods could be produced only in small scale industries

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and (iv) controls on price fixation and distribution of selected industrial products.

The reform policies introduced in and after 1991 removed many of these restrictions. Industrial licensing was abolished for almost all but product categories alcohol,

Cigarettes, hazardous chemicals industrial explosives, electronics, aerospace and drugs and pharmaceuticals.

The only industries which are now reserved for the public sector are defiance equipments, atomic energy generation and railway transport. Many goods produced by small scale industries have now been deserved. In many industries, the market has been allowed to determine the prices.

Financial Sector Reforms:

Financial sector includes financial institutions such as commercial banks, investment banks, stock exchange operations and foreign exchange market. The financial sector in India is controlled by the Reserve Bank of India (RBI). You may be aware that all the banks and other financial institutions in India are controlled through various norms and regulations of the RBI. The RBI decides the amount of money that the banks can keep with themselves, fixes interest rates, nature of lending to various sectors etc. One of the major aims of financial sector reforms is to reduce the role of RBI from regulator to facilitator of financial sector. This means that the financial sector may be allowed to take decisions on many matters without consulting the RBI.

INDIAN ECONOMIC DEVELOPMENT The reform policies led to the establishment of private sector

banks, Indian as well as foreign. Foreign investment limit in banks was raised to around 50 per cent.

Those banks which fulfil certain conditions have been given freedom to set up new branches without the approval of the RBI and rationalize their existing branch networks.

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Though banks have been given permission to generate resources from India and abroad, certain aspects have been retained with the RBI to safeguard the interests of the account-holders and the nation.

Foreign Institutional Investors (FII) such as merchant bankers, mutual funds and pension funds are now allowed to invest in Indian financial markets.

Tax Reforms: Tax reforms are concerned with the reforms in governments taxation and public expenditure policies which are collectively known as its fiscal policy. There are two types of taxes: direct and indirect. Direct taxes consist of taxes on incomes of individuals as well as profits of business enterprises. Since 1991, there has been a continuous reduction in the taxes on individual incomes as it was felt that high rates of income tax were an important reason for tax evasion. It is now widely accepted that moderate rates of income tax encourage savings and voluntary disclosure of income. The rate of corporation tax, which was very high earlier, has been gradually reduced. Efforts have also been made to reform the indirect taxes, taxes levied on commodities, in order to facilitate the establishment of a common national market for goods and commodities. Another component of reforms in this area is simplification. In order to encourage better compliance on the part of taxpayers many procedures have been simplified and the rates also substantially lowered.

Foreign Exchange Reforms: The first important reform in the external sector was made in the foreign exchange market. In 1991, as an immediate measure to resolve the balance of payments crisis, the rupee was devalued against foreign currencies. This led to an increase in the inflow of foreign exchange. It also set the tone to free the determination of rupee value in the foreign exchange market from government control. Now, more often than not, markets determine exchange rates based on the demand and supply of foreign exchange.

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Trade and Investment Policy Reforms: Liberalization of trade and investment regime was initiated to increase international competitiveness of industrial production and also foreign investments and technology into the economy. The aim was also to promote the efficiency of the local industries and the adoption of modern technologies.

LIBERALISATION, PRIVATISATION AND GLOBALISATION: AN APPRAISAL

Work These Out Give an example each of nationalized bank, private bank,

private foreign bank, FII and a mutual fund. Visit a bank in your locality with your parents. Observe and find

out the functions it performs. Discuss the same with your classmates and prepare a chart on it.

Classify the following as direct and indirect taxes: sales tax, custom duties, property tax, death duties, VAT, income tax.

Find out from your parents if they pay taxes. If yes, why do they do so and how?

Do you know that for a very long time countries used to keep silver and gold as reserves to make payments abroad? Find out in what form do we keep our foreign exchange reserves and find out from newspapers, magazines and the Economic Survey how much foreign exchange reserves we have today. Also find the foreign currency of the following countries and its rupee exchange rate Country Currency Value of 1(one) unit of foreign currency in Indian rupee

U.S.A. U.K. Japan China Korea Singapore Germany

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In order to protect domestic industries, India was following a regime of quantitative restrictions on imports. This was encouraged through tight control over imports and by keeping the tariffs very high.

These policies reduced efficiency and competitiveness which led to slow growth of the manufacturing sector.

The trade policy reforms aimed at (i) dismantling of quantitative restrictions on imports and exports (ii) reduction of tariff rates and (iii) removal of licensing procedures for imports.

Import licensing was abolished except in case of hazardous and environmentally sensitive industries.

Quantitative restrictions on imports of manufactured consumer goods and agricultural products were also fully removed from April 2001. Export duties have been removed to increase the competitive position of Indian goods in the international markets.

RIVATISATION It implies shedding of the ownership or management of a

government owned enterprise. Government companies can be converted into private companies in two ways (i) by

Withdrawal of the government from ownership and management of public sector companies and or (ii) by outright sale of public sector companies.

Privatization of the public sector undertakings by selling off part of the equity of PSUs to the public is known as disinvestment. The purpose of the sale, according to the government, was mainly to improve financial discipline and facilitate modernization. It was also envisaged that private capital and managerial capabilities could be effectively utilized to improve the performance of the PSUs. The Navaratnas and Public Enterprise Policies You must have read in your childhood about the famous Navaratnas or Nine Jewels in the Imperial Court of King Vikramaditya who were eminent persons of excellence in the fields of art, literature and knowledge. In 1996, in order to

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improve efficiency, infuse professionalism and enable them to compete more effectively in the liberalized global environment, the government chose nine PSUs and declared them as navaratnas. They were given greater managerial and operational autonomy, in taking various decisions to run the company efficiently and thus increase their profits. Greater operational, financial and managerial autonomy had also been granted to 97 other profit-making enterprises referred to as mini ratnas.

The first set of navaratna companies included Indian Oil Corporation Ltd (IOC), Bharat Petroleum Corporation Ltd (BPCL), Hindustan Petroleum Corporation Ltd (HPCL), Oil and Natural Gas Corporation Ltd (ONGC), Steel Authority of India Ltd (SAIL), Indian Petrochemicals Corporation Ltd (IPCL), Bharat Heavy Electricals Ltd (BHEL), National Thermal Power Corporation (NTPC) and Videsh Sanchar Nigam Ltd (VSNL). Later, two more PSUsGas Authority of India Limited (GAIL) and Mahanagar Telephone Nigam Ltd (MTNL)were also given the same status.

Many of these profitable PSUs were originally formed during the 1950s and 1960s when self-reliance was an important element of public policy. They were set up with the intention of providing infrastructure and direct employment to the public so that quality end-product reaches the masses at a nominal cost and the companies themselves were made accountable to all stakeholders.

The granting of navaratna status resulted in better performance of these companies. Scholars state that instead of facilitating navaratnas in their expansion and enabling them to become global players, the government partly privatized them through disinvestment. Of late, the government has decided to retain the navaratnas in the public sector and enable them to expand themselves in the global markets and raise resources by themselves from financial markets.

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LIBERALISATION, PRIVATISATION AND GLOBALISATION: AN APPRAISAL:

Government envisaged that privatization could provide strong impetus to the inflow of FDI. The government has also made attempts to improve the efficiency of PSUs by giving them autonomy in taking managerial decisions. For instance, some PSUs have been granted special status as navaratnas and mini ratnas.

GLOBALISATION Globalization is the outcome of the policies of liberalization and

privatization. Although globalization is generally understood to mean

integration of the economy of the country with the world economy, it is a complex phenomenon. It is an outcome of the set of various policies that are aimed at transforming the world towards greater interdependence and integration. It involves creation of networks and activities transcending economic, social and geographical boundaries. Globalization attempts to establish links in such a way that the happenings in India can be influenced by events happening miles away. It is turning the world into one whole or creating a borderless world.

Outsourcing: This is one of the important outcomes of the globalization process. In outsourcing, a company hires regular service from external sources, mostly from other

countries, which was previously provided internally or from within the country (like legal advice, computer service, advertisement, security each provided by respective departments of the company). As a form of economic activity, outsourcing has intensified, in recent times,

because of the growth of fast modes of communication, particularly the growth of Information Technology

(IT). Many of the services such as voice-based business processes (popularly known as BPO or call centers), record keeping, Work These Out

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Some scholars refer to disinvestment as the wave of privatization spreading all over the world to improve the performance of public sector enterprises whereas others call it as outright sale of public property to the vested interests. What do you think?

Prepare a poster which contains 10-15 news clippings which you consider as important and relating to navaratnas from newspapers. Also collect the logos and advertisements of these PSUs. Put these on the notice board and discuss them in the classroom.

Do you think only loss making companies should be privatized? Why?

Losses incurred by public sector undertakings are to be met out of the public budget do you agree with this statement? Discuss.

Accountancy, banking services, music recording, film editing, book transcription, clinical advice or even teaching are being outsourced by companies in developed countries to India. With the help of modern telecommunication links including the Internet, the text, voice and visual data in respect of these services is digitized and transmitted in real time over continents and national boundaries. Most multinational corporations, and even small companies, are outsourcing their services to India where they can be availed at a cheaper cost with reasonable degree of skill and accuracy. The low wage rates and availability of skilled manpower in India have made it a destination for global outsourcing in the post-reform period.

World Trade Organisation (WTO): The WTO was founded in 1995 as the successor Organisation to the General Agreement on Trade and Tariff (GATT). GATT was established in 1948 with 23 countries as the global trade

Organisation to administer all multilateral trade agreements by providing equal opportunities to all countries in the international market for trading purposes. WTO is expected to establish a

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rule based trading regime in which nations cannot place arbitrary restrictions on trade. In addition, its purpose is also to enlarge

Global Footprint! Owing to globalization, you might find many Indian companies expanding their wings to many other countries. In 2000, Tata Tea surprised the world by acquiring the UK based Tetley, the inventor of the tea bag, for Rs 1,870 crore.

In the year 2004, Tata steel bought the Singapore-based Nat steel for Rs 1,245 crore and Tata Motors completed the buyout of Daewoos heavy commercial vehicle unit in South Korea for Rs 448 crore. Now VSNL is acquiring Tycos undersea cable network for Rs 572 crore, which will control over 60,000 km undersea cable network across three continents. The Tatas also plan to invest

Rs 8,800 crore in fertilizer, steel and power plants in Bangladesh.

Source: Business Today, 22 May 2005. Outsourcing: a new employment opportunity in big cities

production and trade of services, to ensure optimum utilization of world resources and to protect the environment. The WTO agreements cover trade in goods as well as services to facilitate international trade (bilateral and multilateral) through removal of tariff as well as non-tariff barriers and providing greater market access to all member countries. As an important member of WTO, India has been in the forefront of framing fair global rules, regulations and safeguards and advocating the interests of the developing world.

India has kept its commitments towards liberalization of trade, made in the WTO, by removing quantitative restrictions on imports and reducing tariff rates.

Work These Out Many scholars argue that globalization is a threat as it

reduces the role of the state in many sectors. Some counter

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argue that it is an opportunity as it opens up markets to compete in and capture. Debate in the classroom.

Prepare a chart consisting of a list of five companies that have BPO services in India, along with their turnover.

Read this excerpt of a news item from a daily newspaper describing something that is now becoming increasingly common.

On a morning, a few minutes before 7 A.M., Greeshma sat in front of her computer with her headset on and said in accented English Hello, Daniella. Seconds later, she gets the reply, Hello, Greeshma. The two chatted excitedly before Greeshma said that we will work on pronouns today.

Nothing unusual about this chat except that Greeshma, 22, was in Kochi and her student Daniella, 13, was at her home in Malibu, California. Using a simulated whiteboard on their computers, connected by the Internet, and a copy of Daniellas textbook in front of Greeshma, she guides the teenager through the intricacies of nouns, adjectives and verbs. Greeshma, who grew up speaking Malayalam, was teaching Daniella English grammar, comprehension and writing.

How has this become possible? Why cant Daniella get lessons in her own country? Why is she getting English lessons from India, where English is not the mother tongue?

India is benefiting from liberalization and integration of world markets. Do you agree?

Is employment in call centers sustainable? What kinds of skills should people working in call centers acquire to get a regular income?

If the multinational companies outsource many services to countries like India because of cheap manpower, what will happen to people living in the countries where the companies are located? Discuss.

Some scholars question the usefulness of India being a member of the WTO, as a major volume of international trade

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occurs among the developed nations. They also say that while developed countries file complaints over agricultural subsidies given in their countries, developing countries feel cheated as they are forced to open up their markets for developed countries but are not allowed access to the markets of developed countries. What do you think?

INDIAN ECONOMY DURING REFORMS: AN ASSESSMENT

The reform process has completed one and a half decades since its introduction. Let us now look at the performance of the Indian economy during this period. In economics, growth of an economy is measured by the Gross Domestic Product. The growth of GDP increased from 5.6 per cent during 1980-91 to 6.4 per cent during 1992-2001. This shows that there has been an increase in the overall GDP growth in the reform period. During the reform period, the growth of agriculture and industrial sectors has declined whereas the growth of service sector has gone up. This indicates that the growth is mainly driven by the growth in the service sector. The Tenth Plan (2002-07) has projected the GDP growth rate at

8 per cent. In order to achieve such a high growth rate, the agriculture, industrial and service sectors have to

Grow at the rates of 4, 9.5 and 9.1 percentage points respectively. However, some scholars raise apprehensions over the projection of such high rates of growth as unsustainable.

The opening up of the economy has led to rapid increase in foreign direct Investment and foreign exchange reserves. The foreign investment, which includes foreign direct investment and foreign institutional investment, has increased from about US $ 100 million in 1990-91 to US $ 150 billion in 2003-04. There has been an increase in the foreign exchange reserves from about US $ 6 billion in 1990-91 to US $ 125 billion in 2004-05. At present, India is the sixth largest foreign exchange reserve holder in the world.

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India is seen as a successful exporter of auto parts, engineering goods, IT software and textiles in the reform period. Rising prices have also been kept under control.

On the other hand, the reform process has been widely criticized for not being able to address some of the basic problems facing our economy especially in the areas of employment, agriculture, industry, infrastructure development and fiscal management.

Growth and Employment: Though the GDP growth rate has increased in the reform period, scholars point out that the reform-led growth has not generated sufficient employment

Work These Out In the previous chapter, you might have studied about

subsidies in various sectors including agriculture. Some scholars argue that subsidy in agriculture should be removed to make the sector internationally competitive.

Do you agree? If so, how can it be done? Discuss in class. Read the following passage and discuss in class. Groundnut is a major oilseed crop in Andhra Pradesh.

Mahadeva, who was a farmer in Anantpur district of Andhra Pradesh, used to spend Rs 1,500 for growing groundnut on his plot of half an acre. The cost included

expenditure on raw materials (seeds, fertilizers etc.), labour, bullock power and machinery used. On an average, Mahadeva used to get two quintals of groundnut, and each quintal was sold for Rs 1,000. Mahadeva, thus, was spending Rs 1,500 and getting an income of Rs 2,000, Anantpur district is a drought-prone area. As a result of economic reforms, the government did not undertake any major irrigation project. Recently, groundnut crop in Anantpur is facing problems due to crop disease. Research and extension work has gone down due to lower government expenditure. Mahadeva and his friends brought this matter repeatedly to the notice of the concerned authorities, but failed. Subsidy was reduced on materials

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(seeds, fertilizers) which increased Mahadevas cost of cultivation. Moreover, the local markets were flooded with cheap imported edible oils, which was a result of removal of restriction on imports. Mahadeva was not able to sell his groundnut in the market as he was not getting the price to cover his cost.

Is a farmer like Mahadeva better off after reforms? Discuss in the class. Opportunities in the country.

You will study the link between different aspects of employment and growth in the next unit.

Reforms in Agriculture: Reforms have not been able to benefit agriculture, where the growth rate has been decelerating.

Public investment in agriculture sector especially in infrastructure, which includes irrigation, power, roads,

market linkages and research and extension (which played a crucial role in the Green Revolution), has been reduced in the reform period. Further, the removal of fertilizer subsidy has led to increase in the cost of production, which has severely affected the small and marginal farmers. Moreover, since the commencement of WTO, this sector has been experiencing a number of

policy changes such as reduction in import duties on agricultural products, removal of minimum support price and lifting of quantitative restrictions on agricultural products; these have adversely affected Indian farmers as they now have to face increased international competition.

Moreover, because of export oriented policy strategies in agriculture, there has been a shift from production for the domestic market towards production for the export market focusing on cash crops in lieu of Production of food grains. This puts Pressure on prices of food grains.

Reforms in Industry: Industrial Growth has also recorded a slowdown.

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This is because of decreasing demand of industrial products due to various reasons such as cheaper imports, inadequate investment in Infrastructure etc. In a globalized world, developing countries are compelled to open up their economies to greater flow of goods and capital from developed countries and rendering their industries vulnerable to imported goods. Cheaper imports have, thus, replaced the demand for domestic goods. Domestic manufacturers are facing competition from imports. The infrastructure facilities, including power supply, have remained inadequate due to lack of Investment. Globalization is, thus, often seen as creating conditions for the free movement of goods and services from foreign countries that adversely affect the local industries and employment Opportunities in developing countries.

Moreover, a developing country like India still does not have the access to developed countries markets because of high non-tariff Barriers. For example, although all quota restrictions on exports of textiles and clothing have been removed from our side, U.S.A. has not removed their quota restriction on import of textiles from India and China!

Disinvestment: Every year, the government fixes a target for Disinvestment of PSUs. For instance, in 1991-92, it was targeted to mobilize Rs 2,500 crore through Disinvestment. The government was able to mobilize Rs 3,040 crore more than the target. In 1998-99, the target was Rs 5,000 crore whereas the achievement was Rs 5,400 crore.

Critics point out that the assets of PSUs have been undervalued and Sold to the private sector. This means that there has been a substantial loss to the government. Moreover, the proceeds from disinvestment were used to offset the shortage of government revenues rather than using it for the development of PSUs and building social infrastructure in the country.

Reforms and Fiscal Policies: Economic reforms have placed limits on the growth of public expenditure

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Especially in social sectors. The tax reductions in the reform period, aimed at yielding larger revenue and to curb tax evasion, have not resulted in increase in tax revenue for the Government. Also, the reform policies involving tariff reduction have curtailed the scope for raising Revenue through customs duties. In order to attract foreign investment, tax incentives were provided to

Foreign investors which further reduced the scope for raising tax revenues. This has a negative impact on developmental and welfare Expenditures.

CONCLUSION The process of globalization through liberalization and

privatization policies has produced positive as well as negative results both for India and other countries. Some scholars argue that globalization should be seen as an opportunity in terms of greater access to global markets, high technology and increased possibility of large industries of developing countries to become important players in the international arena.

COST & COST CURVE

PUSHPA VERMA

PGT (ECO), KVS ZIET MUMBAI

MEANING OF COST: The expenditure incurred on inputs (raw material

and factor of production) to produce a commodity is called cost of

reduction.

COST FUNCTION: Functional relationship between cost of product and

the various determinants of costs.

C = f (Pf, O, T, U, T, etc.)

C = cost, Pf = Price of factors of production,

T = Technology, L= Level of capital utilization,

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T= Time period.

Types of cost

EXPLICIT COST: - Actual payments made by a firm for purchasing or

hiring resources or factor services from the factor owner or other firms.

Explicit costs are the actual money expenses directly incurred for

purchasing the resources

IMPLICIT COSTS: Implicit costs are the imputed costs of the factors of

production owned by the producer himself. It is also called imputed costs

because producers do not make payment to others for them.

Examples: - rent of his own land, interest on his own capital

Money cost and Real cost

Money cost is the amount spent in terms of money by a firm for the

production and sale of commodity (production cost).

Example cost of raw material, interest, wages, depreciation, rent,

advertisement insurance premium etc.

Real cost: Real cost refers to the efforts, sacrifices, inconveniences,

discomforts and pain involved in supplying the factors of production by the

owners.

Private cost: Private cost refers to cost of production incurred by an

individual firm to produce a commodity.

For an individual firm private cost includes both the explicit cost as well as

the implicit costs.

Social cost: Social cost refers to the cost or disadvantages that the society

has to bear on account of the production of the commodity.

For instance water pollution, air pollution, etc. Caused hazards and thereby

involves cost of the entire society.

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Fixed cost: In short run fixed cost does not change with change in output.

Ex. rent, insurance premium, interest on capital, salary of permanent staff

etc. These cost also known as supplementary cost or unavoidable cost.

Short run cost curve

Variable cost: Variable cost change directly with the level of output.

Ex. cost of raw material, wages of causal labour, power and fuel

expanses. It is also known as prime cost or avoidable cost.

TOTAL COST: Total expenditure of producing any amount of output. It is

the sum total of TFC and TVC.

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TC = TFC + TVC

TC = AC x Q

Relationship between TC, TVC & TFC

TC can be obtained by adding TFC and TVC.

TC & TVC curve have the similar shapes, the difference is that TVC starts

from origin while TC starts above the origin.

At 0 level of output TC is equal to TFC.

Average fixed cost: It is per unit fixed cost.

AFC=

, AFC = AC AVC

Variable Cost: It is per unit variable cost. Or

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Per unit cost of variable factors of production is called variable cost.

AVC=

, AVC = AC - AFC

AVERAGE COST

It is per unit cost of production.

AC or ATC=

, AC = AFC + AVC

MARGINAL COST: MC is the change in total cost by producing one more

or one less unit of output. MC is the addition to total cost as one more unit

of output is produced.

MC = TCn TCn -1, MC=

, MC = TVCn TVCn -1, MC =

MC is independent of FC because FC does not change with change in

output. It is only the variable cost which changes with the change in the

level of output in short run.

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TVC = MC

Shape of MC Curve: MC curve U shaped

REASON - The operation of law of variable proportion or law of diminishing

returns. Increasing returns to a factor implies diminishing MC and

Diminishing returns to a factor implies Increasing MC.

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What are the causes of low-scoring by students of Class XII in Board Examination?

General Points: Lack of elementary knowledge in calculus.

Unable to solve numerical questions due to lack of elementary knowledge of coordinate geometry.

Unable to understand VBQs, HOTs and indirect questions due to language deficiency.

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Utter confusion to apply in practical life as the concept of consumer equilibrium is based on psychology.

Unable to represent independent and dependent variables diagrammatically.

No previous knowledge in respect to Micro and Macroeconomics as there is no correlation between the syllabus in Class XI and XII.

Unable to understand and express the answers of application based questions.

Confusion in the (-) sign of Elasticity of Demand (Ed) in case of percentage method or proportionate method.

Lake of clarity in between excess demand in economics and excess demand in market situation i.e. Micro and Macro-economics.

Lack of writing practice of question answer.

Lack of Mathematical ability especially among the students of humanities to solve the numerical questions.

Lack of communication skill and proper understanding of the concepts particularly the Mathematical concept.

Students allowed opting for 6th subject, ignoring the important subject like economics.

The syllabus for class XI contains OTBA and Project work, which is not a part of Class XII syllabus.

Students are not attempting all questions even though they are repeatedly asked to do so.

Students lack interest in studies for which they face difficulties in understanding the concept.

Difficulty in Conceptualization: Students are unable to understand certain technical terms of economics.

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Students dont get support from their family because of illiteracy of parents further they are engaged in other house hold activities by their parents.

Specific Points

Lack of thorough practice of National Income accounting.

Students are not having the practical knowledge of banking system.

They are lacking logical interpretation of different concepts of Economics.

Some concepts like Economic territory and Resident are not included in the syllabus but teaching of which is essential to give the basic idea of the whole chapter.

Students are unable to differentiate between short run and long run, returns to factor and returns to scale, increasing at increasing rate and increasing at diminishing rate etc.

They are not able to identify the stages of production properly.

Due to lack of arithmetic knowledge they commit mistakes in calculating MPP, TPP, APP, ATC, TFC, TVC, AC, AFC, AVC, MC ,MR, AR and TR etc.

They often make mistake in drawing diagrams of TPP, MPP, ATC, TFC, TVC, MC, AR, MR, TR, etc.

Students get confused to calculate AFC, AVC in the questions where fixed cost is not explicitly given even though TC is given at zero level of output.

Sometime they face problem in solving the numerical questions of elasticity of supply, particularly when the price and quantity are niggled with total revenue (TR).

They often confused between increase in supply and extension in supply, decrease in supply and contraction in supply etc.

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They are not able to solve application based questions.

Students find it difficult to understand the basis of differences between revenue receipt & capital receipt as well as differences between revenue expenditure & capital expenditure.

It is difficult for student to understand the types of budgetary deficit and its calculation.

Understanding the implications of different types of deficit becomes tough task for students.

They get confused many times between balance of trade & balance of payments.

In the Balance of Payments chapter the student get confused with the concepts like accommodating items, autonomous items, amortization of capital etc.

Non co-operation of parents.

Question set in AISSCE are complicated and tricky creating confusion for slow learners.

Difficulty in understanding the technical words such as MRT, MOC, Scarcity etc.

Unable to distinguish between Micro and Macro variable.

Confusion between what to produce and for whom to produce.

Try to memorize the topic/ concept instead of understanding.

Students face problem in derivation of concepts like MPC and multiplier mechanism.

Students get confused with different diagrams & curves for example- AD Curve, AS Curve, and equilibrium determination diagram.

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Students find it difficult to make equilibrium of income on output schedule, they try to cr

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