Principles of Economics & Bangladesh Economy

Principles of Economics & Bangladesh Economy
Prepared by: Md. Shafiul Alam
Principles of Economics & Bangladesh Economy (JAIBB)
What is Demand?
The demand for any commodity at a given price is the quantity of it which will be bought per unit of time at that price. Elements of Demand: According to the definition of demand here are three elements of demand for a commodity:(i) There should be a desire for a commodity. (ii) The consumer should have money to fulfill that desire. (iii) The consumer should be ready to spend money on that commodity. Thus we can define demand as the desire to buy a commodity which is backed by sufficient purchasing power and a willingness to spend.
What are the Determinants of Demand?
Ans.: There are many economic, social and political factors which greatly influence the demand for a commodity. Some of these factors are discussed below: (1) Price of the Commodity (2) Price of Related Goods (i) Complementary Goods (ii) Substitute Goods (3) Level of Income and Wealth of the Consumer (i) Necessaries (ii) Inferior goods (iii) Luxuries (4) Tastes and Preference (5) Government Policy (6) Other Factors: (i) Size and Composition of Population (ii) Distribution of Income and Wealth (iii) Economic Fluctuations
What is the Law of Demand? The law of demand states that, other things being equal, the demand for a good increase with a decrease in price and decreases in demand with an increase in price. The term other things being equal implies the prices of related goods, income of the consumers, their tastes and preferences etc. remain constant.
What are the types of Unemployment? 1) Structural unemployment: Basically Bangladesh's unemployment is structural in nature. It is associated with the inadequacy of productive capacity to create enough jobs for all those able and willing to work. In Bangladesh not only the productive capacity much below the needed quantity, it is also found increasing at a slow rate. As against this, addition to labour force is being made at a first rate on account of the rapidly growing population. Thus, while new productive jobs are on the increase, the rate of increasing being low the absolute number of unemployed persons is rising from year to year. 2) Disguised unemployment: Disguised unemployment implies that many workers are engaged in productive work. For example, in Indian villages, where most of unemployment exists in this form, people are found to be apparently engaged in agricultural works. But such employment is mostly a work sharing device i.e., the existing work is shared by the large number of workers. In such a situation, even if many workers are withdrawn, the same work will continue to be done by fewer people. It follows that all the workers are not needed to maintain the existing level of production. The contribution of such workers to production is nothing. It is found that the very large numbers of workers on Indian farms actually hinder agricultural works and thereby reduce production. 3) Cyclical unemployment: Cyclical unemployment in caused by the trade or business cycles. It results from the profits and loss and fluctuations in the deficiency of effective demand production is slowed down and there is a general state of depression which causes unemployment periods of cyclical unemployment is longer and it generally affects all industries to a greater or smaller extent. 4) Seasonal unemployment: Seasonal unemployment occurs at certain seasons of the year. It is a widespread phenomenon of Indian villages basically associated with agriculture. Since agricultural work depends upon Nature, therefore, in a certain period of the year there is heavy work, while in the rest, the work is lean. For example, in the sowing and harvesting period, the agriculturists may to engage themselves day and night. But the period between the postharvest and pre sowing is almost workless, rendering many without work. Thus, seasonal unemployment is largely visible after the end of agricultural works. 5) Underemployment: Underemployment usually refers to that state in which the self-employed working people are not working according to their capacity. For example, a diploma holder in engineering, if for wants of an appropriate job, start any business may be said to be underemployed. Apparently, he may be deemed as working and earning in a productive activity and in this sense contributing something to production. But in reality he is not working to his capability, or to his full capacity. He is, therefore, not full employed. This type of unemployment is mostly visible in urban areas. 6) Open Unemployment: Open unemployment is a condition in which people have no work to do. They are able to work and are also willing to work but there is no work for them. They are found partly in villages, but very largely in cities. Most of them come from villages in search of jobs, many originate in cities themselves. Such employment can be seen and counted in terms of the number of such persons. Hence it is called upon unemployment. Open unemployment is to be distinguished from disguised unemployment and underemployment in that while in the case of former unemployment workers are totally idle, but in the latter two types of unemployment they appear to be working and do not seem to be away their time. 7) Voluntary Unemployment: Voluntary unemployment occurs when a working persons willingly withdraws himself from work. This type of unemployment may be caused due to a number of reasons. For example, one may quarrel with the employer and resign or one may have permanent source of unearned income, absentee workers, and strikers and so on. In voluntary unemployment, a person is out of job of his own desire. She does not work on the prevalent or prescribed wages. Either he wants higher wages or does not want to work at all.
8) Involuntary unemployment: Involuntary unemployment occurs when at a particular time the number of worker is more than the number of jobs. Obviously this state of affairs arises because of the insufficiency or non-availability of work. It is customary to characterize involuntary unemployment, not voluntary as unemployment proper. What are the ways to remove unemployment? Ways and means to remove unemployment in Society of Bangladesh removal of unemployment is the responsibility of the state. The Constitutional of Bangladesh has the Directive Principles o f the State and enjoined this duty on the State Government. In Society we have already seen that there is a good deal of unemployment. This removal of unemployment is necessary for the prosperity of the nation. For this, the following steps have to be taken: 1) Improvement in the agricultural system: We have already seen that the agricultural system in Bangladesh is backward and underdeveloped. This backwardness is responsible for a lot of unemployment. If the unemployment has to removed, the system of agriculture has to be modernized and improved, for this the following steps to be taken: a) Holding should be consolidated and made economic. b) Methods of agriculture should be improved and as far as possible farmers should be freed from dependence on nature. c) System of crops should be planned scientifically and improved. If more crops earned they would provide more employment. d) The farmers should be provided with good seed, good fertilizer, healthy animals, modern implements and tools etc. 2) Adequate arrangement of facilities of irrigation: In villages the agriculture very much depends on nature. If rains fail, the crops are destroyed. This brings about a good deal of unemployment. Methods of irrigation should be made more modern. They should also be adequate so that it may be possible for people to water their fields. 3) Increasing the area of cultivable land: To day in the villages there is a great pressure on land. The area under cultivation is not sufficient to provide food to all the people of this country. Barren land should be broken and made fertile. Other methods should also be made for improving the area of cultivable land which is not normally fit for agriculture, also be improved and made fit. This would remove unemployment in the villages. 4) Setting up and develop the cottage and village industries: In village, people have seasonal employment in agriculture. Apart from it all the persons do not have avenues for the employment. What is needed is to set up of industries so that those who do not have land are employed in it. Apart from it, the agriculturalists during dull season should get employment in these industries. Women and land less laborers shall also be able to get employment if industries are set up. 5) Improving the means of transport and communication: In villages there is need to have proper roads and places where offices and stores for seeds etc, may be set up. Public construction should be undertaken in the villages to provide employment to the idle hands. This would improve the employment position in the village. Apart from it, it would also add to the prosperity of the villages. 6) Construction of public Transports, Roads etc: It is necessary to improve the means of transport and communication. This would have two fold advantages. Firstly, the village people shall be able to send their products to markets for sale and secondly, they shall also be able to go to such other places where they can get employment. Apart from it, this would also provide employment to many persons who shall engage themselves in the task of transporting these people. 7) Organization of the agricultural market: There is need to organize markets for the agricultural product. At present, there is dearth of such market. This situation creates difficulties for the agriculturalists. On the one hand, they are not able to get proper price and on the other hand they have to suffer from other handicaps. If markets are organized, they would provide employment to certain hands and also help the agriculturalists to get proper price for their labor.
In fact Bangladesh is such a vast country and unemployment is so large that Herculean efforts shall have to be made to surmount this degree. Various economists and social thinkers have suggested various ways for it. Many of these ways have also been incorporated in the Five Year Plans. In spite of these Five Year Plans employment position is far from satisfactory. What is a Repo Rate? The rate at which the central bank lends money to commercial banks keeping the treasury bills as security is called repo rate. It is an instrument of monetary policy. Whenever banks have any shortage of funds they can borrow from the BB. A reduction in the repo rate helps banks get money at a cheaper rate and vice versa. The repo rate in Bangladesh is similar to the discount rate in the US. What is Reverse Repo rate? Reverse Repo rate is the rate at which the central bank borrows money from commercial banks. Banks are always happy to lend money to the BB since their money is in safe hands with a good interest. An increase in reverse repo rate can prompt banks to park more funds with the central bank to earn higher returns on idle cash. It is also a tool which can be used by the BB to drain excess money out of the banking system. Short Note: Opportunity Cost Opportunity cost is the cost of not selecting the next best choice when investing resources in an activity. Opportunity cost can be used to weigh the merits of various capital investment opportunities. Short Note: Consumer's Surplus Consumer surplus is the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually do pay (i.e. the market price).
Consumer surplus is shown by the area under the demand curve and above the equilibrium price. Short Note: Quasi-Rent Quasi-rent is the income of a seller of a good or service over and above its opportunity cost when the good is temporarily in fixed supply. The concept was applied by Alfred Marshall to the determination of the price of capital in the short run when supply of capital is fixed. The owners if capital receive a payment which differs from the opportunity cost of leasing that service by the amount of quasi-rent/ in the long run when the supply of such a factor can be augmented or depleted, the equilibrium price will reflect the cost of alternative uses. Quasi-rent arises because prices in the short run are not in equilibrium. Marshall used this concept as an element in his explanation of rate of profit. According to Marshall, Quasi Rent will emerge if the price of the product exceeds the prime cost in the short
period. The Quasi Rent is measured by the extent of price over the prime cost in the short period Thus QuasiRent = Price - average prime cost (Average variable cost). The modern economists express Quasi-Rent as a short-run surplus over average variable cost. It is the difference between total revenue and total variable cost in the short-period. Short Note: Public Goods Public goods are services which must be provided collectively for two main reasons: Non-excludability and Non-rivalry in consumption. Non-excludability - the goods cannot be confined to those who have paid for it Non-rivalry in consumption - the consumption of one individual does not reduce the availability of goods to others Examples of pure public goods include flood control systems, street lighting and national defense. Short Note: Floating Exchange Rate Floating Exchange Rates refer to the value of a currency as decided by supply and demand. Short Note: Depreciation of currency Depreciation of currency is a fall in the price of one currency relative to another. Depreciation of currency makes exports cheaper, imports more expensive.
Production Possibility Curve A production possibility curve is a curve measuring the maximum combination of outputs that can be obtained from a given number of inputs. It is a graphical representation of the opportunity cost concept.
The production possibility curve demonstrates that: 1. There is a limit to what you can achieve, given the existing institutions, resources, and technology. 2. Every choice you make has an opportunity cost. You can get more of something only by giving up something else. An isoquant An isoquant (equal quantity) is a curve that shows the combinations of certain inputs such as Labor (L) and Capital (K) that will produce a certain output Q. Mathematically, the data that an isoquant projects is expressed by the equation f (K,L) = Q
RETURNS TO SCALE Returns to scale is the rate at which output increases in response to proportional increases in all inputs. In the eighteenth century Adam Smith became aware of this concept when he studied the production of pins. Adam Smith identified two forces that come into play when all inputs are increased. A doubling of inputs permits a greater division of labor allowing persons to specialize in the production of specific pin parts. This specialization may increase efficiency enough to more than double output. Returns to scale = %Q / %Inputs, and there are three possible classes of returns: constant returns, increasing returns and decreasing returns.
1. Constant Returns to Scale: A production function is said to exhibit constant returns to scale if a doubling of all inputs results in a precise doubling of output. Example: a firm's production process can be replicated easily, such as when a dry cleaner, fast food restaurant, gas station, grocery store increase volume by increasing the number of outlets and does not face any economies of scale OR diseconomies of scale. Or the firm does not: a) face increasing costs when it expands or b) decreasing costs when it expands. 2. Increasing Returns to Scale: If doubling all inputs results in more than a doubling of output, the production function exhibits increasing returns to scale. It indicates increased efficiency at higher levels of output due to greater specialization, more advanced production techniques, etc. Example: You are making a handmade desk in your woodshop. If you build two desks at the same time, you could easily double production (Q) without doubling your time. Maybe it would take 25% more time but you would increase output by 100%. 3. Decreasing Returns to Scale: If doubling all inputs yields less than a doubling of output, the production function is said to exhibit decreasing returns to scale. Decreasing returns could result from inefficiencies of large organizations, the cost of bureaucracy, inflexible, rigid and overly complex decision-making, and inefficiencies of coordinating large-scale production.
INDIFFERENCE CURVES An indifference curve is the combination of all bundles that a consumer views as being equally desirable. Or in other words, the combination of all bundles that give the consumer the same level of utility. We can see graphically how an indifference curve looks like:
y b e d B a
Indifference curve
A f
x
By the definition of the indifference curve, on that curve there should be only bundles that give the same level of utility to our consumer. All the indifference curves of a given consumer can be plotted and they form what we call a Map of Indifference Curves. An example is in the following figure:
y
Increasing utility
f e I2 d I0 x
Here we plotted 3 possible indifference curves for our consumer. Indifference curves are a graphical device to summarize the preferences of our consumers.
I1
Properties of Indifference Curves 1. Indifference curve does not touch the axes. The indifference curve continuously approaches the two axes but never touches them. It is because the consumer consumes some quantity of each good. If it touches any of the axis it creates a possibility that consumer consumes only one good X or Y which never happens. 2. Indifference Curves slope downwards from left to right: The curve is negatively sloped because to obtain more quantity of one good the consumer must give up some quantity of the other good in order to remain at the same utility level the curve represents. If quantity of good x is increased and quantity of good y increases or remains the utility level of the consumer would increase. The utility level can remain the same only if quantity of good y decreases with increase in the quantity of good x. 3. Convex to origin: Indifference curves are strictly convex towards the origin because the marginal rate of substitution (which is the slope of the Indifference Curve) declines as the consumer consumes more and more units of good x. This is due to the Law of Diminishing Marginal Utility, which states that as the consumer consume more and more units of a commodity, the marginal utility of the commodity falls. 4. Higher indifference curve represents higher utility: It is because of the assumption that consumer preferences are monotonic and more quantity consumed means more total utility. Higher indifference curve represents more quantity of either or both goods x and y. 5. Indifference curves never intersect: Two different indifference curves means two different utility levels. If two indifference curves intersect it means that at one point their utility level is the same. This is logically inconsistent. In the above diagram as compared to point B point C shows the same level of consumption of X, but more consumption of Y. This implies the utility level is more at point C as compared to point A. (Statement 1) As points A and B are one the same indifference curve (I1), their utility level is the same. (Statement 2) As points A and C are one the same indifference curve (I2), their utility level is the same. (Statement 3) From the statements 2 & 3 it can be logically concluded that utility level is the same at points B & C. (Statement 4) Statements 1 & 4 are logically inconsistent. The above analysis proves that indifference curves can never intersect.
Good X A C
Good Y
I2 I1
Different forms of Market Structures
CENTRAL BANKING
What is Central Bank? The Central Bank is the supreme monetary and banking authority. According to De
Cock, " a central bank is a bank which constitutes the apex of the monetary and banking structure." In the statutes of Bank for International Settlement (BIS), a central bank is defined as "the bank in any country to which has been entrusted the duty of regulating the volume of currency and credit in that country."
Functions: Monetary Management, Banking Supervision and Developmental. A) MONETARY MANAGEMENT: Note issuance
Previously almost every bank could issue notes. It led to over issue of notes very often and as such it created many troubles. Then Government decided to give the power of issuing notes to a single institution. Now the central bank enjoys the sole right to issue notes. Notes are issued according to requirements on the basis of a certain principle. The notes issued by the central bank represent cash. This cash constitutes the assets of other banks. Hence, the note-issue function is necessary for the central bank to control the banking system by being the ultimate source of cash.
Banker to the Government
The central bank acts as the banker to the government in the following ways:
a) It acts as the custodian of all the funds of the government. The bank usually pays no interest on these balances. b) All payments of the government are made through the central bank. c) The central bank also acts as the lender to the government in times of financial difficulties. The loans are allowed on short-term basis against treasury bills and other securities. d) It acts as the adviser to the government about financial matters. e) It manages the public debt on behalf the government.
Banker's Bank
The central bank acts as the banker to the commercial banks. The commercial banks, either by law or custom, have to maintain a certain percentage of their deposits as cash reserves with the central bank. The reserve maintenance allows the central bank to exercise control over the activities of those banks.
Clearing House Operation

The central bank acts as the clearing house for other banks. Its function in this respect is to help the settlement of their mutual claims that arise by way of collection and payment to cheques. All banks have their reserves with the central bank. They settle their clearing differences by drawing cheques on the central bank. The central bank will clear up these differences by means of debit and credit entries in their accounts with it.
Lender of the last Resort

The central bank not only maintains the reserves of the commercial banks, it also acts as the lender of the last resort to them. Sometimes they fail to meet the depositors demand for cash. They may not get funds from other sources to meet their demand. Then they can approach the central bank for help in such and other emergency needs. The purpose of the central bank is not to compete with them but to help them. Hence, the central bank will come forward to provide these banks with necessary funds. The funds are allowed by rediscounting their bills of exchange, promissory notes and other commercial papers or against approved securities. Thus, the central bank acts as the lender of the last resort or the ultimate source of cash to other banks. In times of financial crisis and panic, the central banks help the commercial banks not only by granting advances but by giving them the benefit of advice as well.
Foreign Exchange Operations

The value of national currency may fluctuate both at home and abroad. The central bank is to keep certain reserves for maintaining confidence in home currency. This reserve is the safeguard against domestic monetary circulation. Similarly, it is to keep necessary foreign exchange reserves for maintaining stability in the external value of national currency. Hence, the central bank acts as the custodian of the foreign exchange reserves and conducts foreign exchange operations in such a way as to keep the external value of the currency stable.
Controller of Credit.
The very important function of a central bank is that it acts as the controller of credit. Expansion and contraction of credit may be associated with many evils. As the leader of the money market, the central bank controls the volume of credit according to the total needs of the economy. The supply of credit takes place through the commercial banks. Hence, the central bank regulates their credit creation activities through different instruments of control, such as the bank rate, open market operation, variable reserve ratio and selective methods.
METHODS OF CREDIT CONTROL: Quantitative and Qualitative. Quantitative or General Methods

(i) Bank rate policy: Bank rate is the rate at which the central bank will rediscount bills of exchange or promissory notes and grant loans on approved securities. Bank rate is also known as discount rate. Sometimes, there may be more volume of credit in the economy. This will lead to higher prices, higher wages and unusual economic activities. Then the central bank may raise up the bank rate. With the rise in the bank rate, the market rates will also go up. This will restrict new investment or expansion or replacement. The ultimate result is that prices will fall due to reduction in the volume of credit, employment and income. The reverse will happen when bank rate is lowered. (ii) Open market operations: Open market operations refer to purchase and sale of securities by the central bank in the open market on its own initiative. When commercial banks possess more reserves for credit expansion purpose, the central bank will sell securities in the market. The buyers will pay the central bank with cheques drawn on their own banks. As a result the reserves of these banks will fall, and this will reduce their credit operations. Similarly, when it buys securities it will pay the sellers in cash or with cheques drawn on itself. This will increase credit expansion capacity. (iii) Variable reserve ratio: The central bank can control volume of credit by varying cash reserve ratio whenever necessary. If central bank raises the reserve ratio, it will lead to a reduction in the supply of credit. Similarly, by an opposite process the supply of credit may be expanded.
Qualitative or Selective Methods

(i) Rationing of credit: Rationing of credit means that central bank puts restrictions on accommodation for credit. The credit is now rationed, and as such it will not be available as a general rule. Here central bank limits the amount of credit for each applicant. (ii) Direct action: Some of the commercial banks conduct their activities against the instructions as laid down by the central bank. Direct action means that central bank will penalize these banks by charging penalty rates over and above the official discount rate. (iii) Moral suasion: This refers to central bank's policy of persuading he commercial banks to conduct their business in a particular way. (iv) Regulation of consumer's credit: Consumer's credit is created through the purchase and sale of consumer's durable goods like cars, TV. etc. Their prices are repayable in installments. The central bank may impose strict terms and conditions for restricting this credit or liberalize terms and conditions for encouraging this credit. (v) Fixation of Margin requirements: The central bank can also control the flow of credit by varying the 'margin' on borrowing against certain types of securities which are offered by a particular class of borrowers for taking loans.
B) BANKING SUPERVISION:
The process of bank supervision takes two forms. One is the regulatory or off-site monitoring process, while the other is on-site inspection or bank examination process. Bank regulation usually deals with the formulation and implementation of specific rules and regulations for the conduct of banking business, including the monitoring of the compliance with such rules. Bank examination, on the other hand, ensure compliance with the rules and regulations and assesses the soundness of individual institutions. Sometimes, the function of bank regulation and examination are centered in one department, while in some central banks, they are separated into different departments as a matter of policy.
C) DEVELOPMENTAL FUNCTIONS:
In the under-developed countries, the central bank takes keen interest in the promotion of economic development. It also takes part in the development of commercial and other banking institutions. This development function does not fall within the traditional functions of a central bank.
Goals/ Objectives of Monetary Policy

(1) High employment, (2) Economic growth, (3) Price stability, (4) Interest Rate stability, (5) Stability of financial markets, and (6) Stability in foreign exchange markets.

Principles of Economics & Bangladesh Economy

Diunggah oleh

Informasi Dokumen

Deskripsi Asli:

Judul Asli

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Principles of Economics & Bangladesh Economy

Diunggah oleh

Hak Cipta:

Format Tersedia

Principles of Economics & Bangladesh Economy

Prepared by: Md. Shafiul Alam