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 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 behaviors 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 effects 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 have
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, morales,
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.
INFLATION
DEFINITION OF INFLATION: Inflation represents the rise of commodity prices for a
particular period time.

Or

Inflation is rate at which the general level of prices for goods and services is rising, and,
subsequently, purchasing power is falling.
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
Theories of Inflation and its Economic Consequences
The main theories of inflation are as follows,

Quantity Theory of Money

Keynesian Theory
Monetarism
Structuralism

Quantity Theory of Money

This refers to the identical or equal relationship between national income estimated at market
prices and the velocity of circulation of the money supply. Based on this theory, there is a
positive relationship between price levels and the money supply. This relationship is
presented using the quantity equation (MV=PY) which was observed previously under the
study on money supply.
MV = PY
Where: M is the stock of money in circulation
V is the velocity of circulation
P is the general price level
Y is the total income.
Accordingly there will be a proportionate positive relationship between the money supply and
the price levels of a given economy. That is, when the money supply increases by a certain
percentage the price levels will also increase by an equal percentage.
According to this theory it is believed that inflation is caused by an expansion in the money
supply of a given economy. It is under the view that inflationary situations caused due to an
increase in money supply which is not followed by or supported by an increase in output
levels of an economy.
Keynesian Theory
The Keynesian view on inflation initially introduced in a book titled The General Theory of
Employment, Interest and Money published in 1940.
According to Keynes an increase in general price levels or inflation is created by an increase
in the aggregate demand which is over and above the increase in aggregate supply. If a given
economy is at its full employment output level, an increase in government expenditure (G), an
increase in private consumption (C) and an increase in private investment (I) will create an
increase in aggregate demand; Leading towards an increase in general price levels.
Such an inflationary situation is created due to the fact that at optimum or full employment of
output (maximum utilization of scarce resources) a given economy is unable to increase its
output or aggregate supply in response to an increase in aggregate demand.

According to the graph, when the government uses monetary and fiscal policies to improve
full employment of production levels, there will be an increase in aggregate demand level of
the economy from AD0 toAD1 which would result in the creation of full employment level of
equilibrium out put represented at the point E. If the aggregate demand level increases further
from AD1 to AD2 the general price levels shall increase since the full employment of
production level will remain unchanged at Yf. The output level will not change since all
resources are fully employed at the point of Yf.
An Aggregate demand level over and above the full employment of production level will
create an inflationary gap of EF. In addition, an aggregate demand below the full employment
of production level will create deflationary gap of ED.
Monetarism
The monetarists theory states that when the money supply is increased in order to grow or
increase production and employment, creating an inflationary situation within an economy.
A monetarist believes increases in the money supply will only influence or increase
production and employment levels in the short run and not in the long run. Accordingly, there
will be a positive relationship between inflation levels and money supply. The monetarists
explain this relationship using the theory of natural rate of unemployment.
The theory of natural rate of unemployment suggests that there will be a level of equilibrium
output, employment, and corresponding level of unemployment naturally decided based on
features such as resources employment, technology used and the number of firms in the
country etc, the unemployment level decided in this manner will be identified as natural rate
of unemployment.

In the short run, expansionary monetary policies will result in the decline in the natural rate of
unemployment and increase the production but the effectiveness of the expansionary policies
will be limited in the long run and lead to an Inflationary situation.
Structuralism
This theory states that the main reason for inflation is the in-elasticity in the structures of the
economy. This theory is mainly used to explain the nature and basis of inflation in developing
countries. Originating in Latin America, this theory states that the inflation rates in developing
countries are affected by the in-elasticity of the following reasons;

Production level and capacity

Capital formulation

Institutional framework

High in-elasticity in the agricultural sector

In-elasticity of the labour force and employment structures.

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)
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. 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 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.

10

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.

11