ECONOMICS Economics is the social science that analyzes the production, distribution and consumption of goods and services.

The economics concepts are broadly classified into: 1. Micro economics 2. Macro economics Micro Economics: Micro refers to small. Micro economics refers to all the internal factors that affect the business. Microeconomics is a branch of economics that studies how individuals, households and firms make decisions to allocate limited resources, typically in markets where goods or services are being bought and sold. Microeconomics examines how these decisions and behaviours affect the supply and demand for goods and services, which determines prices; and how prices, in turn, determine the supply and demand of goods and services. One of the goals of microeconomics is to analyze market mechanisms that establish relative prices amongst goods and services and allocation of limited resources amongst many alternative uses. Microeconomics analyzes market failure, where markets fail to produce efficient results, as well as describing the theoretical conditions needed for perfect competition. Important factors in Micro economics are: 1. Suppliers 2. Intermediaries 3. Customers 4. Competitors 5. Public 1. Suppliers:- Suppliers include raw material suppliers, and all the input providers. If the supply was not in required quantity at right time, automatically it affects the output, and finally the business achieves losses in the market. 2. Intermediaries: - The market intermediaries include all the wholesalers, retailers. Financial intermediaries include financiers, banks which provide the loans to the business organizations. 3. Customers: - The customers are the dividers of success or failure of every organization. The customer is the person who purchases the products from particular shop or company. Therefore, the organizations prepare the products to satisfy the customers tastes and preferences.

4. COMPETITORS: - Every business organization from the competitive world has many competitors. The competitor facts also very important, which the business organization have to consider. 5. PUBLIC: - Public gives the permission whether the plant should have to be established. The public have the rights to demand if any business organisation violates their rights and facilities. MACRO ECONOMICS: - Macro economics refers to all the external facts which affect the economic conditions of business. Macroeconomics is a branch of economics that deals with the performance, structure, and behavior of a national or regional economy as a whole. Along with microeconomics, macroeconomics is one of the two most general fields in economics. Macroeconomists study aggregated indicators such as GDP, unemployment rates, and price indices to understand how the whole economy functions. Macroeconomists develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance. In contrast, microeconomics is primarily focused on the actions of individual agents, such as firms and consumers, and how their behavior determines prices and quantities in specific markets. Macro economic factors are: 1. Demographic factors. 2. Economic factors 3. Political & legal factors 4. Social & cultural factors 5. Technological factors 6. International factors 7. Natural factors. 1. Demographic factors: - The study of people is called as the demography. Demography factors to be considered are age, gender, family, occupation, income & expenditure, employment. 2. Economic factors: - These factors are very important which effects more than any other factor for a business organization. These include National income, consumption, Price & distribution, per capita, industry, agriculture, infrastructure, economic systems, economic planning etc.

3. Political & Legal factors: - Political & legal factors include: Legislature (Assembly & Parliament), Executory (State & central government), Judiciary (High courts, supreme court), laws, acts etc. 4. Social & cultural factors: these factors include knowledge, belief, arts, morals, cultures, traditions, habits which are acquired from one generation to other generation. 5. Technological factors: These include all the advancements in technology, new machines, processors, advanced technology etc. 5. International factors: These include fluctuations in business like collapse in world market, terrorist destruction, inflation etc. 6. Natural factors: - These include transport, communication, weather conditions, water availability etc. Engineering Economics: Engineering economics refers an application of engineering or mathematical analysis and synthesis to decision making in economics. The knowledge and techniques concerned with evaluating the worth of commodities and services relative to their cost.

INFLATION DEFINITION OF INFLATION: Inflation represents the rise of commodity prices for a particular period time. subsequently, purchasing power is falling. Inflation is a situation where there is an excessive rise in the price level. According to quantity of money theorists, it is caused by excessive issue of money. According to demand and supply theorists it is caused by total demand exceeding the total supply of goods and services. CAUSES OF INFLATION: 1. Increase in Cost of living 2. Inefficiency in resource utilization 3. Savings are discouraged 4. Long term Investments are decreased 5. Economic Consequences 6. Unfavorable effects 7. Increase in the cost of living Regarding causes for inflation there are three theories, they are Demand Pull Inflation Cost push Inflation Mixed Inflation Demand Pull Inflation: Demand pull inflation occurs when the aggregate demand (The total amount of goods and services demanded in the economy at a given overall price level and in a given time period) for output is in excess of maximum feasible or potential or full-employment output (at the going price level). Since the level of output is taken as given data, the excess demand is supposed to be generated by the factors influencing only the demand side of the commodities market. Demand-pull inflation simply means that aggregate demand has been pulled above what the economy is capable of producing in the short run. Or Inflation is rate at which the general level of prices for goods and services is rising, and,

Cost Push Inflation: When inflation occurs due to rinsing costs. It is called cost-push inflation. When costs of production rise, prices rise. The main reason for increasing costs is higher wages or higher profits secured by monopolistic or oligopolistic forms. If it is due to higher wages, it is called wage-push costs inflation. Wage cost push inflation occurs when wage rates increase faster than the increase in labour productivity. As output increases the demand for labour increases. Trade unions will fight for higher wages and secure them. Profit push cost inflation occurs when monopolistic or oligopolistic firms raise prices with view to get higher profits and to off set any rise in the costs. Generally, profit push is weak. Firms hesitate to raise prices unless there are demand pull factors. Aggregate demand reduction policies may not be useful to control cost push inflation. Mixed Inflation: According some economists, inflation is not demand pull only or cost push only. It will be both demand pull and cost push. Inflation will occur both due to excess demand and rising costs. One leads to the other and both the causes get intermingled. There cannot be a cost push without an increase in demand. Increase in demand leads to rising costs. When both the causes are at work, it is called mixed inflation. ADVANTAGES OF INFLATION The producers, businesses, and organizations will benefit from inflation, since the price levels of goods and services will increase at a higher level that the cost of production, thereby increasing profits. Debtors shall benefit at the expense of creditors as the real value of loan installments and interest rates falls in situations of inflation. An inflationary situation can stimulate or assist in the process of achieving economic growth since producers are encouraged with the increase in profits, resulting in the expansion of business activities. METHODS TO CALCULATE INFLATION Generally economist calculated inflation in three methods WPI (whole sale price Index) CPI (consumer Price Index) PPI (Producers Price Index) 5

Whole sale Price Index (WPI):

Whole sale price index reflects the prices of

commodities which are available to Wholesalers in market. Based on fluctuation prices in market for wholesalers is considered while calculating the Inflation. WPI is an index that measures and tracks the changes in price of goods in the stages before the retail level. Consumer price Index (CPI): consumer price index measures the fluctuations of consumer goods and services. CPI indicates the changes of consumer good prices for a particular period of time. CPI Consider the prices at what rate consumer is buying the product. PRODUCER PRICE INDEX (PPI): PPI Index measures the average change in selling prices received by domestic producer of goods and services over time. PPI considers the three areas of production. They are Industry based, stage of processing based and commodity based. MEASURES TO CONTROL INFLATION To control the inflation the government has to take the following necessary measurements.

Monetary measures- Classical economists are of the view that inflation can be checked by controlling the supply of money. Some of the important monetary measures to check the inflation are as under: Control over money- It is suggested that to check inflation government should put strict restrictions on the issue of money by the central bank. Credit control- Central bank should pursue credit control policy .In order to control the credit it should increase the bank rate, raise minimum cash reserve ratio etc. It can also issue notice to other banks in order to control credit. Fiscal measures: To control the inflation in country the government has to the following fiscal measurements. a) Decrease in public expenditure- One of the main reasons of inflation is excess public expenditure like building of roads, bridges etc. Government should drastically scale down its non essential expenditure. b) Delay in payment of old debts: Payment of old debts that fall due should be postponed for sometime so that people may not acquire extra purchasing power.

c) Increase in taxes: Government should levy some new direct taxes and raise rates of old taxes. d) Over valuation of money: To control the over valuation of money it Is essential to encourage imports and discourage exports. . Apart from the Monetary and fiscal measurements government needs to take following measurements to control the inflation.

Increase in the production- One of the major causes of the inflation is the excess of demand over supply, so those goods should be produced more whose prices are likely to raise rapidly .In order to increase production public sector should be expanded and private sector should be given more incentives. Proper commercial policy- Those goods which are in scarcity should be imported as much as possible from other countries and their export should be discouraged. Encouragement to savings During inflation government should come out with attractive saving schemes. It may issue 5 or 10 year bonds in order to attract savings. Proper investment policy- Investment in those industries should be increased wherein more production of goods can be generated over a short period of time .Less investment should be made in industries having long production period.

THE NEW ECONMIC POLICY The 1991 Balance of Payments [BOP] crisis forced India to procure a $1.8 billion IMF loan and acted as a tipping point in Indias economic history. The IMF bailout wounded the pride of a country that had strove above all for self-sufficiency through its post independence socialist policies. The bailout announced to Indian policymakers and the world the countrys policy failures. The result of financial crisis in country initiated the government take New Economical Policy (NEP). The new economic policy completely focused on three factors they are Liberalisation Globalisation Privatisation Economic Background to the New Economic Policy The economic background to the reforms may also be recalled. Planned economic development since independence, in which the state took an active Role to stimulate economic growth through a more active utilisation of the human and physical resources had made perceptible differences in the economy. The country had overcome the chronic threat of inadequate food grains to meet the needs of a rapidly growing population, and had become practically self-sufficient as fir as consumer goods were concerned. The industrial base had expanded and become substantially diversified Infrastructural facilities had vastly improved though they were still inadequate in some crucial aspects. How ever. In the early 1980s, after three decades of largely state directed development, there was general thinking that the time had come to allow the private sector of the economy to play a more active role in the development process. Since agriculture was almost entirely under private auspices, the change was to be reflected essentially in the industrial sector. In particular, it was felt that controls and regulations that were considerably necessary when the economy was weak. OBJECTIVES OF NEW ECONOMICAL POLICY Increase the Growth rate of the Economy

 Encouraging the FDI ( Foreign Direct Investment) and FII (Foreign Institutional Investors Reduce the Government spending on Public sector Creating the Employment to Professionally qualified persons in private sectors Creating the health competition between private and Public sectors Improving the welfare of Public IMPACT OF NEW ECONMIC POLICY IN INDIAN ECONOMY The NEP policy completely concentrates on Globalisation, liberalisation and Privatisation policies. New economic policy resulted in following reforms in different sectors to develop the country. FINANCIAL REFORMS: To strengthen the Economy, after 1991 the government concentrated on Improving the Revenue of the government. Government put efforts to control the fiscal deficit in country annual budget. And strengthen the tax policies and norms to increase the revenue of the government. Government spending fewer amounts in primary sector and Taking initiatives to encourage participation of private investments in service sector. INTERNATIONAL TRADE AND INVESTMENT REFORMS Indias trade policy prior to the 1991 reforms was characterized by high tariffs and import restrictions. Foreign-manufactured consumer goods were entirely banned, and capital goods, raw materials, and intermediate goods for which domestic substitutes existed were importable only through a bureaucratic licensing process. Illustrative of the severity of the situation, Infosys executives described how the founders had to visit Delhi nine times to Obtain a license to import just one personal computer. Although foreign ownership in some Indian companies was permitted, investors faced complications that included a subjective licensing process. With the effect of new industrial policy the investments from other countries are increased. The free trade policies taken by the government resulted in Exports and imports grew at 19% and 30% in 2004 and 2005 respectively. There is a slow down in International trade and Investments with the effect of global recession. INDUSTRIAL SECTOR REFORMS

Indias industrial policy was one of the areas most changed by the economic liberalization of the 1990s. The early reforms crystallized a trend that had been building since the national government moved toward a pro-business approach to industrial policy during the 1980s. During the following decade, India transitioned from a centrally planned and operated economy to a market-driven economy, reflecting a global trend toward less regulated economies. Most government-operated industries in India are now privatized, though some political contention still exists over the removal of reservation schemes. AGRICULTURAL REFORMS: Before 1990 many of the people in India completely depends on agriculture to survive their family. With the effect of NEP the secondary sector revenues are increased and employment dependency on agriculture sector is reduced. After NEP the government not completely neglected the agricultural sector. Government encouraging the farmers expanding the agribusiness and food processing. Government giving subsidies to fertilizers and also offering the loan waivers to farmers. INFRASTRUCTURE REFORMS A short drive through any Indian city reveals some of the serious deficiencies of Indias infrastructure: roads full of potholes, relentless traffic, suffocating pollution. Since last decades with the effect of globalisation the government inviting Private companies to invest their investments in Infrastructure sector. In this sector government encouraging PPP (Public Private Participation) system to improve the Infrastructure facilities in India. Government also funding more money in this sector for following two reasons. Good Infrastructure facilities always helpful to invite foreign investor. Spending money on Infrastructure simultaneously creates employment to on organised labours. DRAW BACKS IN NEW ECONMIC POLICY: New economic policy shown its impact on growth of the economy but simultaneously, the policy creates negative impact on following sectors. EMPLOYMENT GUARANTEE: The increased growth in private sector decreases the opportunities in government sector, the main reason is the government not concentrated

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on expansion of public undertakings and fails impose the strict rules and regulations to private sector enterprises for employment guarantee to workers. NEGLECTING THE PRIMARY SECTOR: With the effect of new economic policies the government spending on primary sector is decreasing, and the government indirectly involved in converting the farm lands into SEZ (Special economic zones). BIASED DECISIONS: Some times the decisions taken by the government are completely or partially benefiting to Individual entrepreneurs. CONCLUSION New economic policy resulted in faster growth of Indian economy. At the same time some of the decisions taken by the government are resulted in scams. To avoid this problem the government has to frame strict rules and implementations in policy making.

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NATIOANAL INCOME National income is a measure of the total flow of earnings of the factor-owners through the production of goods & services. In a simple way, it is the total amount of income earned by the citizens of a nation. National income is the total of earnings of nation in overall economy. Economy is divided into following three sectors. Agricultural sector Industrial sector Service sector

National income has been defined by different persons in different ways. The definitions stated by Prof. Marshall and Fisher are important definitions among them. Marshall Definition: The labour and capital of a country acting on its natural resources produce annually a certain net aggregate of commodities material and immaterial, including services of all kinds; this is true net annual income or revenue of the county or the national dividend. The word net means the total value of goods and service produced in the country minus imports plus exports. Thus Marshall defines National income from the production side. Fishers Definition: The national dividend or income consists solely of services as received by ultimate consumers, whether from their material or from their human environment. According to him net consumable income is National Income. Thus, Marshall defines national income from production side and national income from consumption side. ADVANTAGES OF NATIONAL INCOME National income estimates are highly useful. They are a valuable instrument of economic analysis and a guide to economic policy. The advantages of national income estimates are: Growth rate of Economy: National income figures show the growth rate of economy.

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 Standard of Living: Per capita income indicates the standard of living of the people. Therefore, we can know the standard of living of the people and the changes in it form time to time. We can also make international comparisons of standard of living on the basis of National income estimates. Importance of different sectors: National income estimates show the contribution made by different sectors of the economy like agriculture, industry, services etc. We can therefore, know the importance of different sectors and the changes that are taking place. Distribution of Income: We can know from the national income estimates how the income is distributed among different sections of society, the extent of inequalities of income and whether inequalities are increasing or decreasing. Planning: National income estimates are absolutely necessary for preparation of economic plans and assessing the success of planning. Levels of consumption, savings and Investment: We can know from the national income accounts how the national expenditure. It shows the levels of consumption, saving and investment in the economy and this is necessary to stabilize output, employment and income. Inflationary and deflationary pressures: We can know from the national income estimates the inflationary and deflationary pressures in the economy. Future trends: we can know the future trends in production etc. from the study of national income estimates. International Comparisons: National income estimates help us to compare the standards of living of different countries and the growth rates. Production and employment capacity: GNP shows the Productive and employment capacity of the country. Effect of Foreign transactions: The foreign transaction on the courtys economy can be known from the national income estimates. Changes in Inventories: GNP shows changes in the inventories. One of the reasons for trade cycles is changes in inventories or stock. Depreciation: NNP show the net growth after depreciation. Role of Government sector: The national income estimates show the magnitude and the role of government sector.

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 Contribution to International bodies: National income is the basis of determining the contributions to be made by the member countries to international bodies like U.N.O. etc. Guide to economic policies: National income estimates the help government to formulate effective and suitable economic policies in the field of taxation, industry, exports & imports and agriculture etc. FACTORS AFFECTING NATIONA INCOME 1. Factors of Production 2. Technology 3. Government policies 4. Political Stability HISTORY OF NATIONAL INCOME CALCULATION IN INDIA The first attempt to calculate national income of India was made by Dada Bai Naoroji in 1867-68. This was followed by several other methods. The first scientific attempt was made by Prof. V.K.R.V.Rao in 1931 -32. But it was not a satisfactory attempt. The first official attempt was made byprof. P.C. Mahalanobis in 1948-49. The final report was submitted in 1954. To day the national income is calculated by the Central Statistical organisation. Methods of calculating National Income National income calculation is not an easy task. For this, we have to collect more facts and figures. We have already seen that income is generated through Production process. Normally we sue this in come for purchasing goods and services. When demand for commodities goes up. We have to produce more. Thus income leads to increased production. Production, income and expenditure are mutually related. Economic activity is directly related to these three stages. Based on this, three methods are used for calculating national income. They are Production method Income method Expenditure method PRODUCTION METHOD: This method is based on total production of a country during a year. All production units are classified into the following sectors. 14

Primary sector Secondary sector Tertiary sector Productive sectors Primary Secondary Tertiary

Agriculture activities Forest Fishing Mining

and

allied Registered Industries Non registered Industries Electricity Trade Manufacturing

Communications Banking/ Insurance Health Education Other services

We estimate the goods and services produced in each of these services. The sum of total of products produced in these three sectors is the total output of the nation. The next step is to find out the value of these products in terms of money. The money sent by Indian citizens working abroad is also added to this. Now we get the gross national income. GNI = MONEY VALUE OF TOTAL GOODS AND SERVICES + INCOME FROM ABROAD INC COME APPROACH The income approach tries to measure the total flows of income earned by the factor-owners in the provision of final goods & services in a current period. There are 4 types of factors of production and 4 types of factor incomes accordingly. National Income = Wages + Interest Income + Rental Income + Profit EXPENDITURE APPROACH The amount of expenditures refers to all those spending on currently-produced final goods & services only.

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In an economy, there are 3 main agencies which buy goods & services. They are the households, firms and the government. In economics, we have the following terms: C = Private Consumption Expenditure ( of all households ) I = Investment Expenditure ( of all firms) G = Government Consumption Expenditure ( of the local government ) The expenditure approach is to measure the GNP. We could not buy all our outputs because some are exported to overseas. Similarly, our consumption expenditures may include the purchases of some imports. In order to find the GNP, the value of exports must be added to C, I & G whereas the value of imports must be deducted from the above amount. Finally, we have : GNP = C + I + G + (X-M) X = Exports from country M = Imports form country The following equation indicates how to reconcile GDP to disposable personal income Gross Domestic product (GDP) Factor payments to Foreigners GNP (Gross National Product) Capital consumption allowances NNP (National net product) Indirect business taxes National income + Transfers Direct taxes (Income personal property) Disposable personal income Relevant Concepts of National Income Gross Domestic product (GDP): is a measure of the overall economic output within a countrys borders over a particular time, Generally a year. GDP is calculated adding together the total value of annual output of all that countrys goods and services. Net National Product ( N N P ) 16 + Factor Payments form Foreigners

The investment expenditure of the firms is made up of 2 parts. One part is to buy new capital goods & machinery for production. It is called net investment because the production capacity of the firms can be expanded. Another part - consumption allowance or depreciation - is spent on replacing the used-up capital goods or the maintenance of existing capital goods because capital goods will wear and tear out over time... Depreciation refers to all those expenses to replace physical capital due to wear and tear, obsolescence, destruction and accidental loss etc. The sum of these 2 amounts is called Gross Investment in economics. Gross Investment = Net Investment + Depreciation Net investment will increase the production capacity and output of a nation, but not by depreciation expenditure. So we have, N N P = G N P - Depreciation G N P at factor cost The amount of national income found by the income approach will not be the same as the amount of G N P at market prices found by the expenditure approach. In the expenditure approach, the value of G N P includes some types of expenses which are NOT factoring incomes earned by the citizens. They include depreciation, indirect business taxes, and government subsidies. G N P at factor cost = GNP at market prices - Indirect Business Taxes + Subsidies GNP at factor cost carries the meaning that we are measuring the total output by their costs of production. As output generates income to the factor-owners, it is also related with the value of national income. G N P at factor cost = National Income + Depreciation FDI (FOREIGN DIRECT INVESTMENT): different country of origin from the investor. is a type of investment that involves the injection of foreign funds into an enterprise that operates in a

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