Principles of Economics and Management (PEM)
GTU # 3140709
Unit-4
Basic Economic
Problems
Looping
Outline
• Basic Economic Problems
• Poverty
• Meaning
• Absolute and Relative poverty
• Causes and Remedies
• Unemployment
• Meaning
• Types
• Causes and Remedies
• Inflation
• Meaning
• Types
• Causes and Measures to control
Basic Economic Problems
Poverty Unemployment Inflation
Source: Source: [Link] Source: [Link]
[Link]
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Poverty and Concepts of Poverty
Poverty is about not having enough money to meet basic needs including,
Food Clothing Shelter
Source: [Link] Source: [Link] Source: [Link]
There are two concepts of poverty
1) Absolute Poverty
2) Relative Poverty
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1) Absolute Poverty
Absolute poverty refers to a condition where a person does not have the minimum amount of
income needed to meet the minimum requirements for one or more basic living needs over an
extended period of time.
Source: [Link]
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Absolute Poverty in India
Earlier, India used to define the poverty line based on a method defined by a task force in 1979.
It was based on expenditure for buying food worth 2,400 calories in rural, and 2,100 calories in
urban areas.
In 2011, the Suresh Tendulkar Committee defined the poverty line on the basis of monthly
spending on food, education, health, electricity and transport.
According to them, a person who not able spends ` 27.2 in rural and ` 33.3 in urban areas per
day are living below the poverty line(BPL).
In 2014 it was revised by committee headed by former Reserve Bank governor C Rangarajan,
people living on less than ` 32 per day in rural areas and ` 47 per day in urban areas is poor.
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2) Relative Poverty
It is a condition in which people lack the minimum amount of income needed in order to
maintain the average standard of living in the society.
Source: [Link]
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Relative Poverty Example
Person Income
A 5000
B 10000
C 15000
D 25000
It is obvious that A is poorest person while D is richest person.
However, Relative poverty may be assessed on the basis of some standard level of income.
If ` 20,000 per month is considered as standard level of income then A, B, & C are considered
relatively poor.
If ` 10,000 per month is considered as standard level of income then only A is considered
relatively poor.
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Causes of Poverty
1) Low rate of economic growth.
2) Economic inequalities.
3) Benefits of public investment have accrued more to the upper layer of the society.
4) Unemployment and underemployment.
5) Inflationary price rice.
6) Faster population growth amongst the poor.
7) Low level of literacy amongst the poor.
8) Inadequacies of anti poverty programs.
9) Corruption.
10) Natural calamity.
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Measures to Reduce Poverty
1) Rapid economic growth – GDP
2) Reducing economic inequalities – Progressive Income Tax
3) Employment oriented planning – Make in India
4) Adoption of appropriate pattern of production – Drip Irrigation
5) Control of inflation and price stability – Reduction of import duty on essential commodities
6) Removal of illiteracy – Right to free primary education
7) Population control – Family planning
8) Special program of poverty eradication – Garib Kalyan Mela
Self-Employment program - Gram Rozgar Yojana
Wage-Employment program - Mahatma Gandhi NREGA
Social security program - Aam Aadmi Bima Yojana
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Basic Economic Problems
Poverty Unemployment Inflation
Source: Source: [Link] Source: [Link]
[Link]
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Unemployment and Active Labour Force
Unemployment refers to a situation in which a person is jobless though
1) He is able to work,
2) He is willing to work,
3) He is ready to accept the current wage rate &
4) He is in search of job.
Unemployment is a concept which is connected with only active labour force in the country.
Active labour force is age group 15-60 year.
Housewives, physically handicapped, old person and children etc. are not Included in active
labour force.
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Voluntary and Involuntary Unemployment
Voluntarily Unemployed
Person choose not to work because his expected salary is higher than the usual salary.
Involuntarily Unemployed
Person is willing to work at the usual salary yet he is unemployed.
Source: [Link] Source: [Link]
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Dimensions(effects) of Unemployment
1) Economic
It indicates unutilized or underutilized manpower.
We cannot get desired increases in production and national income.
2) Social
He starts support to any activity to oppose the existing economic and social system.
3) Psychological
He cannot live life with self-respect.
Become mentally frustrated.
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Types of Unemployment
1) Cyclical 2) Frictional
Unemployment Unemployment
Types of
Unemployment
3) Structural 4) Seasonal
unemployment unemployment
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1) Cyclical Unemployment
This type of unemployment increases during a recession and decreases during boom.
Businessman are unwilling to spend money on salaries when they believe consumers are not
buying their products.
E.g. when people buy fewer cars, businessman don't need many workers to meet the consumer demand.
As the demand for cars decreases, so does the demand for automobile workers.
An automobile worker may be laid off during a recession, when people are buying fewer cars.
As the economy strengthens, and consumers start to spend more money on goods (e.g. cars),
the unemployed worker will probably be rehired.
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2) Frictional Unemployment
It is always presence in the economy, resulting from temporary transitions made by workers
and employers.
It is caused because, unemployed workers may not always take the first job offer they receive
because of the wages and necessary skills.
This type of unemployment is also caused by failing firms, poor job performance or outdated
skills.
This may also be caused by workers who will quit their jobs in order to move to different parts
of the country.
Frictional unemployment can be seen as a transaction cost of trying to find a new job.
It is the result of not having perfect information of available jobs.
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3) Structural unemployment
It is the situation when the jobs are available, and also the workers are willing to work, but they
don’t have the required job skills suitable for the vacant positions.
It occurs due to the change in the demand for specific types of worker because of the
fundamental shifts in the economy.
Advances in technology and changes in market conditions often turn many skills outdated.
E.g. with the rise of computers, many jobs in manual book keeping have been replaced by highly efficient
software users.
Workers need to acquire new skills in order to obtain such jobs.
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4) Seasonal unemployment
Worker of seasonal business will get employment in season only and in off season they are
unemployed.
E.g. – workers of mango farm.
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Causes of Unemployment
Slow rate of economic growth
Preference to capital centric techniques of production – Buying new machine instead of
increasing workers.
Defective education system – Not giving industry ready students.
Absence of skill development opportunities – Shortage of skill development training providers.
Lack of man-power planning – Imbalance in skill and requirement.
Immobility of labour – Home-sickness.
Rapid growth of population
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Remedies to Resolve Unemployment
1) Accelerating economic growth rate
2) Change in pattern of investment
3) Employment oriented planning
4) Role of employment agencies (Information of available jobs)
5) Appropriate labour policy
6) Encouragement to self employment
7) Reform of education system
8) Population control
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Basic Economic Problems
Poverty Unemployment Inflation
Source: Source: [Link] Source: [Link]
[Link]
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Inflation
Inflation is defined as a continuous increase in the general level of prices for goods and
services.
It is measured as an annual percentage increase.
The value of a rupee does not stay constant during inflation.
The value of a rupee is observed in terms of purchasing power.
I.e. real goods or services that money can buy.
When inflation goes up, there is a decline in the purchasing power of money.
E.g. if the inflation rate is 10% annually, then goods costs ` 100 will be costing ` 110 in next year.
E.g. Inflation rate in Venezuela 50000% 46305%
40000%
30000% 24571%
20000% 13379%
8900%
10000% 4068% 6147%
0%
Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18
*Data may not be correct.
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Types of Inflation
Types of Inflation
Based on
Based on
Degree of Rise
Causes
in Price
Demand-pull Cost-push Creeping Walking
inflation inflation inflation inflation
Currency Running
Credit inflation Hyper inflation
inflation inflation
Deficit-induced
inflation
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Demand-pull inflation
Demand-pull inflation results from strong consumer demand.
Many individuals purchasing the same good will cause the price to increase.
When such an event happens to a whole economy for all types of goods, it is called demand-
pull inflation.
E.g. when swine flu spreads at that time the demand of mask is increased and due to that, the
price of the mask is also increases.
Causes
Growing economy Additional Increase in Demand-pull
Expectation of inflation Demand Price level Inflation
Technological innovation
Overexpansion of the money supply
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Cost-push inflation
Cost push inflation is inflation caused by an increase in prices of inputs like labour, raw
material, etc.
The increased price of the factors of production leads to a decreased supply of these goods.
While the demand remains constant, the prices of commodities increase causing a rise in the
overall price level. This is known as cost push inflation.
E.g. if milk price will increase then price of butter and ghee will also increase.
Causes
Rise in salary of employ will increase cost
Government regulation and taxation
Shift in exchange rates
Natural disasters
Increased cost of Increase in Price
Cost-push Inflation
raw materials level
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Currency inflation
A situation in which more money becomes available without an increase in production and
services, cause rise in price.
This type of inflation is caused by the printing of currency notes.
E.g. in 2013 RBI prints 2100 Billion new money.
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Credit inflation
Being profit-making institutions, commercial banks sanction more loans and advances to the
public than what the economy needs.
Such credit expansion leads to a rise in price level.
E.g. real estate price increases due to the availability of the loan easily and at a cheap rate.
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Deficit-induced inflation
The budget of the government reflects a deficit when expenditure exceeds revenue.
To meet this gap, the government may ask the central bank to print additional money.
Due to pumping of additional money price will rise, this is called the deficit-induced inflation.
E.g. in 2009-10 fiscal deficit finance is 4009.96 Billion.
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Types of Inflation
Types of Inflation
Based on
Based on
Degree of Rise
Causes
in Price
Demand-pull Cost-push Creeping Walking
inflation inflation inflation inflation
Currency Running
Credit inflation Hyper inflation
inflation inflation
Deficit-induced
inflation
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Creeping inflation
Circumstance where the inflation of a nation increases gradually, but continually, over time.
This tends to be a typical pattern for many nations.
Although the increase is relatively small (less than 3%) in the short-term, as it continues over
time the effect will become greater and greater.
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Walking/Moderate/Trotting inflation
When prices rise moderately and the annual inflation rate is a single digit (3% - 10%).
Inflation at this rate is a warning signal for the government to control it before it turns into
running inflation.
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Running inflation
When prices rise rapidly like the running horse at a rate of 10% - 20% per annum, it is called
running inflation.
Its control requires strong monetary and fiscal measures, otherwise it leads to hyperinflation.
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Hyper/ Galloping inflation
When prices rises 20% to 100% per annum or even more.
Such a situation brings a total collapse of the monetary system because of the continuous fall
in the purchasing power of money.
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Causes of Inflation
Demand Side Factors
1) Increase in money supply.
2) Increase in government spending through deficit financing.
3) Expansionary monetary policy will increase money supply.
4) Bouyant economy and expansion of private sector capital projects.
5) Existence of parallel black money economy.
6) Repayment of public debt.
7) Income from exports.
Supply Side Factors
1) Shortage of factor of production (inputs).
2) Labour instability.
3) Producers give more preference to product which gives more profit as compare to basic product.
4) Price rise in the international inputs.
5) Artificial scarcity.
6) Natural calamities.
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Cont…
Perceptual Factors
1) Expected salary rise will increase current consumption and price rise.
2) Due to expectation of getting higher price in future supplier will restrict the supply.
3) Due to expectation of rise in price in future producer will buy more row material.
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Measures to Control Inflation
Monetary measures or Monetary Policy is the policy of Central Bank (RBI) to control money
supply or currency circulation in the country.
1) Credit Control.
2) Issue of New Currency must be stopped or limited .
3) Increase in Bank Rate.
4) Increase in Cash Reserve Ratio (CRR).
5) Increase in Statutory Liquidity Ratio (SLR).
6) Withdraw liquid funds from economy through Open Market Operations (OMO).
Fiscal Measures or Fiscal policy involves the government changing tax rates and levels of
government spending to influence aggregate demand in the economy.
1) Reduction in public Expenditure.
2) Increased taxation.
3) Tax incentives on savings and investments.
4) Extension of repayment of public debt.
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Cont…
Other Measures
1) Price control.
2) Rationing
3) Increase production
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GTU Questions
1. Unemployment is a very serious economic problem. Discuss its types, causes and remedies.
2. What are the causes and remedies for ‘Inflation’?
3. What are the causes of poverty and which measures should be taken to reduce poverty?
4. What is poverty? Discuss various types of poverty.
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Principles of Economics and Management (PEM)
GTU # 3140709
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