ma eco semster 3

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5. Excess reserves:

The process of credit creation is based on the assumption that banks stick to the required

reserve ratio fixed by the central bank. If banks keep more cash in reserves than the legal reserve

requirements, their power to create credit is limited to that extent. If Bank A of our example

keeps 25 per cent of Rs 1000 instead of 20 per cent, it will lend Rs 750 instead of Rs 800.

Consequently, the amount of credit creation will be reduced even if the other banks in the

system stick to the legal reserve ratio of 20 per cent.

6. Leakages:

If there are leakages in the credit creation stream of the banking system, credit expansion will

not reach the required level, given the legal reserve ratio. It is possible that some persons who

receive cheques do not deposit them in their bank accounts, but withdraw the money in cash for

spending or for hoarding at home. The extent to which the amount of cash is withdrawn from

the chain of credit expansion, the power of the banking system to create credit is limited.

7. Cheque clearances:

The process of credit expansion is based on the assumption that cheques drawn by commercial

banks are cleared immediately and reserves of commercial banks expand and contract uniformly

by cheque transactions. But it is not possible for banks to receive and draw cheques of exactly

equal amount. Often some banks have their reserves increased and others reduced through

cheque clearances. This expands and contracts credit creation of the part of banks. Accordingly,

the credit creation stream is disturbed.

8. Behaviour of other banks:

The power of credit creation is further limited by the behaviour of other banks. If some of the

banks do not advance loans to the extent required of the banking system, the chain of credit

expansion will be broken. Consequently, the banking system will not be “loaned up”.

9. Economic climate:

Banks cannot continue to create credit limitlessly. Their power to create credit depends upon the

economic climate in the country. If there are boom times there is optimism. Investment

opportunities increase and businessmen take more loans from banks. So credit expands. But in

depressed times when the business activity is at a low level, banks cannot force the business

community to take loans from them. Thus the economic climate in a country determines the

power of banks to create credit.

10. Credit control policy of the central bank:

The power of commercial banks to create credit is also limited by the credit control policy of the

central bank. The central bank influences the amount of cash reserves with banks by open



market operations, discount rate policy and varying margin requirements. Accordingly, it affects

the credit expansion or contraction by commercial banks.

Ans iii

1.Knowledge: First an educational component made up of two statistics – mean years of

schooling and expected years of schooling

2.Long and healthy life: Second a life expectancy component is calculated using a minimum value for life expectancy of 25 years and maximum value of 85 years

3. A decent standard of living: The final element is gross national income (GNI) percapita adjusted to purchasing power parity standard (PPP)

How you can break the vicious circle of poverty

1. Proper Use of Natural Resources :-

The developing countries can achieve rapid economic growth by making the efficient use of natural

resources. By proper use of resources we can increase the production and per capita income of the

country.

2. Self Reliance Policy :-

The less developing countries should reduce their dependence on foreign aid. The heavy reliance on

foreign aid and its repeated suspension, delay and breach of agreements have created multiple

problems. The policy of self reliance should be followed for financing development projects.

3. Encouragement of Private Sector :-

The less developed countries should encourage the private sector to increase the rate of investment in

the country. The government has also given incentives to the private sector to promote the rate of

development in the country.

4. Increase in Savings :-

The government of less developed countries should provide incentives to encourage the rate of savings

in the country. New and attractive savings schemes should be introduced.

5. Increase in Exports :-

We should increase our exports to make our balance of payment favorable. We should increase the

exports of manufactured goods instead of primary commodities.

6. Reduction in Imports :-

The developing countries should produce substitutes of imports in side the country to save the foreign

exchange. Import of luxuries should be curtailed.

7. Development of Agriculture :-

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17. Political Stability :-

It is the basic requirement for the development of any country. All the poor countries should prevail

peace and political stability if they want to achieve development.

18. Stable Economic Policy :-

The poor countries should adopt the stable economic policy. There should be no frequent changes in the

taxation and import export policy. Because it discourage the rate of investment in the country.

19. Effective Planning :-

The less developed countries can prepare the development plans to accelerate the rate of development

in the country.

Difference between Economic Growth and Development

Economic growth measures an increase in Real GDP. (real Output). GDP is a measure of the

national income / national output and national expenditure. It basically measures the total volumeof goods and services produced in an economy.

Economic Development

Development looks at a wider range of statistics than just GDP per capita. Development isconcerned with how people are actually affected. It looks at their actual living standards

Measures of economic Development will look at:

Real income per head – GDP per capita

Levels of literacy and education standards Levels of health care e.g. number of doctors per 1000 population

Quality and availability of housing

Levels of environmental standards

Demographic dividend refers to a period – usually 20 to 30 years – when fertility ratesfall due to significant reductions in child and infant mortality rates. As women andfamilies realize that fewer children will die during infancy or childhood, they will beginto have fewer children to reach their desired number of offspring, further reducing the proportion of non-productive dependents. This fall is often accompanied by an extensionin average life expectancy that increases the portion of the population that is in the

working age-group. This cuts spending on dependents and spurs economic growth.

However, this drop in fertility rates is not immediate. The lag between produces agenerational population bulge that surges through society. For a period of time this“bulge” is a burden on society and increases the dependency ratio. Eventually this group begins to enter the productive labor force. With fertility rates continuing to fall and oldergenerations having shorter life expectancies, the dependency ratio declines dramatically.This demographic shift initiates the demographic dividend. With fewer youngerdependents, due to declining fertility and child mortality rates, and fewer olderdependents, due to the older generations having shorter life expectancies, and the largestsegment of the population of productive working age, the dependency ratio declines

dramatically leading to the demographic dividend. Combined with effective public

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policies this time period of the demographic dividend can help facilitate more rapideconomic growth and puts less strain on families. This is also a time period when manywomen enter the labor force for the first time.[1] In many countries this time period hasled to increasingly smaller families, rising income, and rising life expectancy rates.[2] However, dramatic social changes can also occur during this time, such as increasingdivorce rates, postponement of marriage, and single-person households.[3]

We have discussed how the capitalist system seeks to extract the social surplus labor, andtherefore the social surplus product, in the form of surplus value. Surplus value is the difference between the value paid to the worker in the form of a wage and the value of the product that iscreated by their labor.

In order for profits to remain high, and therefore rent, taxes, interests and all other things that reston the extraction of surplus value, the amount of surplus value in the economy must be made to be as high as possible. There are two ways that capitalists can extract surplus value from thelabor of workers.

One way is to extend the working day of theworker without an increase in pay, or to intensify the work of the worker. When bosses try tolimit bathroom breaks, or make you work longer hours or overtime, or try (illegally) to get you towork “off the clock” then they are trying to extract absolute surplus value. By increasing thelength of the workday, the capitalist can get more surplus value per worker.

Let us take an example of a worker who produces $50 worth of widgets an hour, and who makes$10 an hour. Per hour, the capitalist is making $40 worth of surplus value per hour. If the worker

works 8 hours a day, the capitalist makes a total of $320 surplus value per worker per day. But ifthe capitalist extends the work day from 8 to 12 hours, without a corresponding increase in the pay of the worker, then the capitalist can make $520 surplus value per day, per worker.Meanwhile, the rate of exploitation of the worker has gone from 4% to 6.5%. It is because of thisthat unions all over the word have fought long and hard to win the 8 hour day for workers, and itis also why capitalists continually work to break that 8 hour barrier.

But even without unions or an organized working class, the extraction of absolute surplus valuehas definite limits. There are only 24 hours in a day, and it would be impossible to force aworker to work 24 hours with no corresponding increase in pay. This would lead to the death ofthe worker, and while the well being of the worker is certainly of no concern to the capitalist,

they must be concerned enough to make it possible that the worker can come back to work with

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enough health to be productive. Human physiology and the number of hours in a day are thelimits of absolute surplus value.

But there is another way that capitalism can extract surplus value from the worker. This methodis called relative surplus value. Relative surplus value is created by devaluing labor power itself.This can be done by lowering wages and lowering the standard of living. By lowering thestandard of living, and making it so that labor power can be bought even cheaper, the capitalistcan now extract relatively more surplus value than before, since the worker is able to reproducethe value of their wage sooner and render more free labor time to the capitalist.

One way that capitalism does this is to invest in labor saving technology. This technology caneliminate the need for expensive, skilled workers and can effectively thrown them onto thestreets. The capitalist can now afford to only keep on cheap, unskilled labor, therefore decreasingthe value of labor power by increasing investment in making the productive process moreefficient.

We can see that the extraction of surplus value, relative or absolute, is the major source ofcontention between the interests of the ruling class and the working class.

The needs of the worker are human needs. Whetheror not an individual worker is greedy, has expensive tastes, or is merely tying to get by with

raising a family and making a living, the interests of the working class all boil down to the factthat the worker wants to be able to make as much for themselves by working as little as possible.One might object that this is unreasonable, but it really isn‟t. This is the desire that has driven thehuman species towards civilization. It was the desire to get more out of less labor that led to thedomestication of animals, rise of agriculture, etc. These are the general interests that have guidedhumanity and it is these basic interests that are embodied by the needs of the modern dayworking class.

The capitalist class, however, is not interested in human need, it is interested in profit. In order toobtain more and more profits, capitalists must squeeze out more and more surplus value from theworker. They do this by either working them as long and as hard as they can without

compensating them. Another is to cut the very wages of the workers, to decrease the overallstandard of living and to invest in technologies that puts many workers out of a job. In order toget surplus value, the capitalist must come up against the demands of the worker. They mustincrease their work day and pay them less, while the worker is working to work less to makemore.

It is this conflict that is at the center of the class struggle. It is the reason why the interests of thecapitalist and working class are diametrically opposed. It is also the reason why the needs ofcapitalism go against the needs of the human species.

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The Human Development Index (HDI)

The latest and most ambitious attempt to analyze the comparative status of socioeconomic development in both developing

and developed nations systematically and comprehensively has been undertaken by the United Nations Development Program

(UNDP) in its annual series of Human Development Reports5 The centerpiece of these reports, which were initiated in 1990, is

the construction and refinement of a Human Development Index (HDI). Like the PQLI, the HDI attempts to rank all countries on

a scale of 0 (lowest human development) to 1 (highest human development) based on three goals or end products of

development: (1) longevity is measured by life expectancy at birth, (2) knowledge as measured by a weighted average of adult

literacy (two-thirds) and mean years of schooling (one-third weight), and (3) income as measured by adjusted real per capita

income (i.e., adjusted for the differing purchasing power of each country's currency and for the assumption of rapidly

diminishing marginal utility of income). Using these three measures of development and applying a complex formula 6 to 1990

data for 160 countries, the HDI ranks all countries into three groups: low human development (0.0 to 0.50), medium human

development (0.51 to 0.79), and high human development (0.80 to 1.0). It should be noted that HDI measures relative, not

absolute, levels of human development and that its focus is on the ends of development (longevity, knowledge, material

choice) rather than the means (as with per capita GNP alone).

Table A2.4 shows the 1990 Human Development Index for a sample of 20 developed and developing nations ranked from low

to high human development (column 3) along with their respective adjusted real GDP (column 4) and a measure of the

differential between the GDP per capita rank and the HDI rank (column 5). A positive number shows by how much a country's

relative ranking rises when HDI is used instead of GDP per capita, and a negative number shows the opposite. Clearly, this is the

critical issue for HDI as well as any other composite social indicator such as the PQLI. If country rankings did not vary much

when HDI is used instead of GDP or GNP per capita, the latter would (as some economists claim) serve as a reliable proxy for

socioeconomic development, and

there would be no need to worryabout such things as health and

education indicators.

We see from Table A2.4 that the

country with the- lowest HDI (0.050)

in 1990 was



Guinea and the one with the highest (0.982) was Canada. What is more interesting for our purposes is that even though

countries with high HDI tend to have higher adjusted real per capita GDP (and note that we are not using the more commonly

quoted unadjusted per capita GDP, as in, say. Figure 2.1, where distortions are even greater), within and occasionally across the

three subgroups we find some countries whose HDI is considerably higher than others even though the latter have substantially

higher per capita incomes. Thus, for example, we see that Tanzania's HDI is five times higher than Guinea's, even though

Guinea's real per capita GDP is almost 10% higher than Tanzania's. Similarly, Sri Lanka, with less than 75% of the income of

Algeria, has an HDI 29% higher, while Brazil, with a 10% higher GDP than Costa Rica, has a 13% lower HDI. Although far less

significant, the United States, with a higher income, has a lower HDI than Canada. Although the HDI gives us a broader

perspective on progress toward development, it should be pointed out that (1) its creation was in part motivated by a political

strategy designed to refocus attention on health and education aspects of development; (2) the three indicators used are good

but not ideal (e.g., the U.N. team wanted to use nutrition status of children under age 5 as their ideal health indicator, but the

data were not available); (3) the national HDI may have the unfortunate effect of shifting the focus away from the substantial

inequality within countries; (4) the alternative approach of looking at GNP per capita rankings and then supplementing this with

other social indicators is still a respectable one; and, finally, (5) one must always remember that the index is one of relative

rather than absolute development, so that if all countries improve at the same weighted rate, the poorest countries will not get

credit for their progress.

Dependency and world systems theories Modernization theory claimed that once developing societies came into contact with

western European and North American societies, they would be impelled toward

modernization and, eventually, would achieve the economic, political, and social

features characteristic of the nations of western Europe and the United States.

However, by the 1960s it was apparent that theThird World was not passing through a

stage of underdevelopment, as envisioned by modernization theory, but remaining

underdeveloped. Thus, a counterclaim was advanced—that developing countries today

are structurally different from the advanced countries and so will have to develop along

different lines. This claim became the core of the structuralist thesis developed by

intellectuals from Chile, Argentina, Brazil, and Peru brought together by the United

Nations Economic Commission for Latin America (ECLA; today known as Economic

Commission for Latin America and the Caribbe

The main theoretical tenet of ECLA’s approach was that former colonies and nonindustrialized nations were structurally different from industrialized countries and,therefore, needed different recipes for modernization. ECLA argued that colonizationrestructured former colonies’ economies so that they specialized in producing rawmaterials, cash crops, and foodstuff for export at low prices to the colonizers’ home

countries. These structures created a dynamic that was continuing to impoverish formercolonies and to thwart their modernization. According to ECLA, the international divisionof labour created by colonization had separated the international economy into a centre,consisting of the industrialized countries, and a periphery, which included all the rest ofthe countries around the world outside of the socialist camp. Because the prices ofmanufactured goods bought by the periphery were rising faster than those of rawmaterials, cash crops, and foodstuffs sold by the periphery to the centre, internationaltrade ensured the persistence of an unbalanced process of development. Thus, incontrast to modernization theory, which emphasized the benefits of free trade, foreigninvestment, and foreign aid, these theorists argued that free trade and internationalmarket relations occur in a framework of uneven relations between developed and

underdeveloped countries and work to reinforce and reproduce these relations.

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This perspective formed the basis of what came to be known as dependency theory. Dependency theory rejects the limited national focus of modernization theory andemphasizes the importance of understanding the complexity of imperialism and its rolein shaping postcolonial states. Its main tenet is that the periphery of the internationaleconomy is being economically exploited (drained) by the centre. Building on ECLA’sperspective, dependency theorists argued that colonialism recast economies in theThird World in a highly specialized export-producing mold, creating fundamental andinterrelated structural distortions that have continued to thwart development. Once thisreshaping was accomplished, market forces worked to perpetuate the relationship ofdominance and exploitation between centre and periphery.

During the 1970s there also emerged a perspective that elaborated an account of

capitalist exploitation of the periphery from the perspective of the system’s core. This

theoretical enterprise became known as world systems theory. It typically treats the

entire world, at least since the 16th century, as a single capitalist world economy based

on an international division of labour among a core that developed originally in

northwestern Europe (England, France, Holland), a periphery, and a semiperiphery

consisting of core regions in decline (e.g., Portugal and Spain) or peripheries attempting

to improve their relative position in the world economy (e.g., Italy, southern Germany,

and southern France). The division of labour among these regions determined their

relationship to each other as well as their type of labour conditions and political system.

In the core, strong central governments, extensive bureaucracies, and

largemercenary armies enabled the local bourgeoisies to obtain control of international

commerce and accumulate capital surpluses from this trade. The periphery, which

lacked strong central governments or was controlled by other states, exported raw

materials to the core and relied on coercive labour practices. Much of the capital surplus

generated by the periphery was expropriated by the core through unequal trade

relations. The semiperiphery had limited access to international banking and the

production of high-cost, high-quality manufactured goods but did not benefit from

international trade to the same extent as the core.

Dependency and world systems theories share a common emphasis on global analysis

and similar assumptions about the nature of the international system and its impact on

national development in different parts of the world, but they tend to emphasize different

political dynamics. Dependency theorists tend to focus on the power of transnational

classes and class structures in sustaining the global economy, whereas world systems

analysts tended to focus on the role of powerful states and the interstate system.

Initially, the logic of these perspectives supported a strategy that came to be known

as import-substitution industrialization (ISI). The ISI strategy was to produce internally

manufactured goods for the national market instead of importing them from

industrialized countries. Its long-run objective was to first achieve greater domestic

industrial diversification and then to export previously protected manufactured goods as

economies of scale and low labour costs make domestic costs more competitive in the

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world market. In the 1950s, 1960s, and 1970s, ISI strategies were pursued by countries

such as Chile, Peru, Brazil, Mexico, Argentina, Ecuador, India, Pakistan, the

Philippines, Indonesia, Nigeria, Ethiopia, Ghana, Zambia, South Korea, Taiwan, and

Japan. The strategy ultimately foundered because of the smallness of the domestic

market and, according to many structuralist theorists, the role of transnational

corporations in this system. These theorists concluded that ISI, carried out in conditions

of capitalist relations of production dominated by the economic empires led by the

United States, was a recipe for further colonization, domination, and dependency.

Thus, beginning in the 1970s, theorists and practitioners heralded an export-oriented

strategy as the way out of dependency. This strategy gives priority to the growth of

manufacturing production aimed at world markets and the development of a particular

comparative advantage as a basis for success in world trade. The strategy is based on

lower wages and levels of domestic consumption (at least initially) to foster

competitiveness in world markets, as well as to provide better conditions for foreign

investment and foreign financing of domestic investment. By the 1980s, however, many

countries that pursued this strategy ended up with huge foreign indebtedness, causing a

dramatic decrease in economic growth. Though the theorization of types of peripheral

development and their connection with the international system continued to undergo

refinement in the 1980s and 1990s, structural theorists were not able to agree about

what would end dependence and how a nondependent growth could be achieved.

The Nature of Economic Progress: The Stationary State

In the Ricardian system the theory of value, reduced to Ricardo's level of simplification, plus

the theory of rent, provided the key to the central problem of income distribution. It was, of

course, necessary to relate the theory of value to the theory of prices in a complex

economy. Ricardo did this by relating market price to the costs of production in the marginal

(no-rent) firm. He noted:

The exchangeable value of all commodities, whether they be manufactured, or the produce

of the mines, or the produce of the land, is always regulated, not by the less quantity of

labour that will suffice for their production under circumstances highly favorable, and

exclusively enjoyed by those who have peculiar facilities of production; but by the greater

quantity of labour necessarily bestowed on their production by those who continue to

produce them under the most unfavorable circumstances (Works, I, p. 73).

Ricardo recognized that there is no perfect measure of value, since any measure chosen

varies with fluctuations in wages and profit rates. We have seen that different durabilities of

capital and different ratios of fixed to circulating capital will affect market prices differently if

wages change relative to profits. Thus Ricardo devised an analytical gimmick—the "average

firm"—in which both the ratio of capital to labor and capital durability are assumed equal to

the economy average. So armed, Ricardo was ready to solve the problem of income

distribution and its changes over time.

Let us illustrate Ricardo's process utilizing the product information contained in Table.



Suppose that three doses of labor and capital on a given farm produce 270 bushels of corn

per year. Each labor input, by virtue of its advance from the wages-fund, constitutes an

expenditure of circulating capital, whereas each capital input, through annual depreciation,

constitutes an expenditure of fixed capital. Ricardo defined total profits as total revenue

minus the sum of fixed and circulating capital expenditures incurred per production period.

Now assume that the price per bushel of corn is $1, that the wage rate per worker is 10

bushels of corn and $10 of other necessities (the latter can be given in dollar terms because

they are assumed to be produced under conditions of constant cost), and that the annual

depreciation per unit of capital is $10. Profits on No. 1 land would be calculated as in Table.

If all land were equally fertile, profits could continue at the same rate. But with the progress

of capital and population, cultivation must be extended to No. 2 land, where three doses of

labor and capital produce only 240 bushels of corn. Technically, more labor and capital are

now needed to produce the same output on No. 2 land as on No. 1 land. Therefore, the

price of corn must rise to $1,125 (270/240 x $1.00 = $1.25). In Ricardo's system, this

increase in the price of corn has the effect of raising money wages and aggregate rents and

of lowering profits. The ensuing distributional pattern is illustrated in Table .

*Table

Value of product = 270 X $1 = $270

Wage rate = (10X$1) + $10 = 20

Wage bill = 3 X $20 = 60

Depreciation = 3 X $10 = 30

Total profit = $270 - $90 = 180

Rent = 0

Table 2 shows what we learned earlier—that rent arises on No. 1 land only when production

with the same amount of capital and labor is extended to No. 2 land. The calculation of rent

is, as Ricardo indicated, the value of the initial firm's output less the value of the marginal

firm's output. The illustration can be extended to additional firms (i.e., types of land), ofcourse, but the distributional effects of economic growth are already clear. Increased

agricultural production leads to higher money wages but the same real wages. Ricardo

assumed, via the population principle, that wage rates would be at subsistence levels in the

long run. On the other hand, higher nominal wage rates and increasing aggregate rents

place a two-way squeeze on profits. Although under competition profits are the same for all

firms in a given industry, the inevitable tendency of profits is to decline as output increases.

Eventually a minimum profit rate is reached at which new investment (i.e., additional capital

accumulation) ceases. Ricardo described this as the "stationary state." Theoretically, this

minimum profit rate is zero; practically, however, it may be slightly above zero.

*Table 2

No.1 Land

Value of product 270 X $1,125 = $ 303.75

Wage rate (10 X $1,125) + $10 = 21.25

Wage bill 3 X $21.25 = 63.75

Depreciation 3 X $10 = 30.00

Profits $303.75-93.75-33.75 = 176.25

Rent = 33.75



No.2 Land

Value of product =240 X $1,125 = $270.00

Wage rate = (10X $1,125) + $10 =21.25

Wage bill = 3 X $21.25 = 63.75

Depreciation =3 X $10 = 30.00

Profits = $270-93.75 = 176.25

Rent = 0

The process that Ricardo described may therefore be restated as a paradox: The logical

result of economic growth is stagnation! Ricardo's analytical system did not allow for

technological progress, and it uncritically accepted the population principle; it may be

attacked on both these grounds. But granting Ricardo's assumptions, it is a logically

consistent system. In its final version, the stationary state arises in the following manner.

The average wage rate is determined by the proportion of fixed and circulating capital (i.e.,

the wages-fund) to the population. As long as profits are positive, the capital stock is in-

creasing, and the increased demand for labor will temporarily increase the average wage

rate. But when wage rates rise above subsistence, the "domestic delights" come into play,

and population increases. A larger population requires a greater food supply, so that,

barring imports, cultivation must be extended to inferior lands. As this occurs, aggregate

rents increase and profits fall, until ultimately the stationary state is reached.

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