INFLATION

Inflation is a rise in the general level of prices of goods and services in an economy over
a period of time. When the price level rises, each unit of currency buys fewer goods and services;
consequently, inflation is also an erosion in the purchasing power of money – a loss of real value
in the internal medium of exchange and unit of account in the economy. A chief measure of price
inflation is the inflation rate, the annualized percentage change in a general price index

Inflation's effects on an economy are manifold and can be simultaneously positive and
negative. Negative effects of inflation include a decrease in the real value of money and other
monetary items over time, uncertainty over future inflation may discourage investment and
savings, and high inflation may lead to shortages of goods if consumers begin hoarding out of
concern that prices will increase in the future. Positive effects include a mitigation of economic
recession, and debt relief by reducing the real level of debt.

Measures of inflation:
Inflation is usually estimated by calculating the inflation rate of a price index, usually the
Consumer Price Index The Consumer Price Index measures prices of a selection of goods and
services purchased by a "typical consumer". The inflation rate is the percentage rate of change of
a price index over time.

Other widely used price indices for calculating price inflation include the following:

• Producer price indices (PPIs): This measures average changes in prices received by
domestic producers for their output. This differs from the CPI in that price subsidization,
profits, and taxes may cause the amount received by the producer to differ from what the
consumer paid. There is also typically a delay between an increase in the PPI and any
eventual increase in the CPI. Producer price index measures the pressure being put on
producers by the costs of their raw materials. This could be "passed on" to consumers, or
it could be absorbed by profits, or offset by increasing productivity. In India and the
United States, an earlier version of the PPI was called the Wholesale Price Index
• Commodity price indices: This measure the price of a selection of commodities. In the
present commodity price indices are weighted by the relative importance of the
components to the "all in" cost of an employee.
• Core price indices: because food and oil prices can change quickly due to changes in
supply and demand conditions in the food and oil markets, it can be difficult to detect the
long run trend in price levels when those prices are included. Therefore most statistical
agencies also report a measure of 'core inflation', which removes the most volatile
components (such as food and oil) from a broad price index like the CPI. Because core
inflation is less affected by short run supply and demand conditions in specific markets,
central banks rely on it to better measure the inflationary impact of current monetary
policy.
 DEFLATION
Deflation is a decrease in the general price level of goods and services. Deflation occurs
when the annual inflation rate falls below zero percent (a negative inflation rate), resulting in an
increase in the real value of money – allowing one to buy more goods with the same amount of
money. This should not be confused with disinflation, a slow-down in the inflation rate (i.e.
when inflation declines to lower levels). As inflation reduces the real value of money over time,
conversely, deflation increases the real value of money – the functional currency (and monetary
unit of account) in a national or regional economy.

Basic types of deflation:

Some types of deflation can be distinguished.

On the demand side:

• Growth deflation. (Increase in the supply of goods. Decrease in CPI).

• Cash building (hoarding) deflation (More savings of cash. Decrease in velocity of money.
Increase in the demand for money)

On the supply side:

• Bank credit deflation. (Decrease in the bank credit supply by bankruptcy or contraction of
the money supply by the central bank)

Causes of deflation:

Deflation may be caused by a combination of the supply and demand for goods and the
supply and demand for money, specifically the supply of money going down and the supply of
goods going up. Deflation have often been associated with the supply of goods going up (due to
increased productivity) without an increase in the supply of money, or (as with the Great
Depression) the demand for goods going down combined with a decrease in the money supply

Effects of deflation:

1. Decreasing nominal prices for goods and services.

2. Cash money and all monetary items increase in real value over time.
3. Discourages bank savings and decreases investment.
4. Enriches creditors at the expenses of debtors.
5. Benefits fixed income earners.
6. Associated with recessions and unemployment.
 NATIONAL INCOME
The most comprehensive indicator of the level of economic activity is its aggregate
output i.e. the total annual output of finished goods and services known as Gross National
Product (GNP), which is defined as the total market value of all final goods and serviced
products in an economy during a given time period (usually a year ). GNP is a monetary
measure of total output.
There are 3 ways to look at the level of economic activity (the output, income and
expenditure). Depending upon the way we look at them, we call them Gross National Product
(GNP), Gross National Income (GNI) and Gross National Expenditure (GNE), where

 GNP – Sum of the market value of all final goods and serviced products in an

economy during a given time period;

 GNI – Sum of the money incomes derived from activities involving current

production in an economy during a given time period

 GNE – Sum of all that spent of currently produced goods and services by all types
. of buyers in an economy during a given time period
Thus national income can be measured by any of the three ways:
1) As an aggregate of goods and services produced during a year;
2) As an aggregate cost of factor services in the economy during a year; or
3) AS an aggregate of expenditure on consumption, saving and investment during a year.

1. Net Product (or value added) method:

This is basically the production method. According to this method, the sum of net
value of goods and services produced at market prices is found. Three steps are involved
in calculation of national income through this method. (1) gross product is calculated by
summing up the money value of output in the different sectors of the economy, like
industry, agriculture, transport, etc.; (2) the money value of raw material and services
used and amount of depreciation of physical assets involved in the production process are
summed up; and (3) the net output or value added is found by subtracting the aggregate
of the cost of raw material, services and depreciation from the gross product found in
Step 1.

2. Income method:
 This method is also known as the factor – share or income distributed method.
According to this method, the incomes received by all the ‘basic’ factors of production
process are summed up. The basic factors for the purpose of national income estimation
are categorized as labour and capital, for the simple reason that is highly difficult to make
a distinction between the contribution of land and capital and of labour and
entrepreneurship. In those cases where both labour and capital are supplied by the same
individual, it is not possible to know what part of the income of the individual is on
account of laboyr services and what part on account of capital services. The income in
such cases is, therefore, termed as mixed income. Thus there are three components of
national income in this method:
1) Labour income: consists of wages, salaries bonus and social security and
welfare contributions;
2) Capital income: includes dividends, pre-tax retained earnings, interest on
savings and bonus, rent, royalties and profits of government enterprises;
3) Mixed income: comprises the earnings from professions, farming enterprises,
etc.
Formula:
NDP at factor cost = compensation of employee + operating surplus + mixed income of self employee
National income = NDP at factor cost + NFIA (net factor income from abroad) - Depreciation

3. Expenditure method:
This method is known as the final product method. According to this method, the
total national expenditure is the sum of the expenditure is the sum of the expenditure
incurred by the society in a particular year. The expenditures are broadly classified as the
personal consumption expenditure, net domestic investment, government expenditure on
goods and services, and the net foreign investment (i.e., imports-exports).
It is not easy to find the expenditure data. Moreover, reliability of expenditure of
expenditure data is often doubt. It is therefore, that the expenditure method for
calculating national income is not popular, whereas the income and product methods are
employed for calculating national income.
Formula:
GDP = C + I + G + (X - M)
Where:
C = household consumption expenditures / personal consumption expenditures
I = gross private domestic investment
G = government consumption and gross investment expenditures
X = gross exports of goods and services
M = gross imports of goods and services
The Parameters that influence level of economic activity:
1) Aggregate demand and aggregate supply
2) The leakage and injections
3) Propensities to consumption and save
4) Investment
5) Marginal efficiency of capital
6) The Multiplier
7) Acceleration principle

TRADE CYCLE
Trade cycle (or Business cycle) refers to economy-wide fluctuations in production or
economic activity over several months or years. These fluctuations occur around a long-term
growth trend, and typically involve shifts over time between periods of relatively rapid economic
growth (either expansion or boom), and periods of relative stagnation or decline. These
fluctuations are often measured using the growth rate of real gross domestic product. Despite
being termed cycles, most of these fluctuations in economic activity do not follow a mechanical
or predictable periodic pattern.
In short one can observe that:
1) Business cycles are the wave-like fluctuations in economic activity as reflected in the
basic economic variables like employment, income, output and price level
2) These fluctuations are cyclical in nature
3) The sequences of changes in business cycles (recovery, prosperity, depression and
recession) and in a fairly similar pattern
4) The rhythm of the periodicity between the cycles need not be similar
 5) Business cycles are a type of fluctuations found in the agreegate economic activity and
not in any single firm or industry. In fact, it connotes the cyclical changes in overall
economic environment affecting all the business entities
Phases of Trade cycle:
There are 4 phases in trade cycle
1) Recession
2) Peak
3) Trough
4) Boom

Recession:

1) Consumer's confidence starts to decrease a little. People start to stop buying large
items such as cars, major appliances and houses. This results in businesses starting to reduce
their output of these items (inventory levels). Businesses start to decrease their hiring they may
even start to lay off some of their employees. Workers might have to take wage cuts. Resulting
in prices going down.

2) Unemployment is increasing while inflation is dropping

Peak:

1) Consumer’s confidence starts to increase at a faster pace buying more and more
consumer goods. As businesses start to hire even more people national incomes rise an
unemployment levels fall. People now start to buy consumer durable goods such as cars,
houses. Resulting in businesses to start increase their construction levels on homes, factories
and stores. Businesses now also start to buy new equipment and machines increasing their
efficiency levels. This results in workers receiving higher pay. Prices increase.

2) Unemployment levels fall approaching full employment, inflation increases at very

high rates
3) Output starts to standstill and level off. Consumer confidence starts to decline to the
point where people start to stop their buying.
Trough:
Contraction reaches a minimum. Output starts to standstill and level off. Consumer
confidence starts to level off at a low point to the point where people start to stop their
savings, they have to buy a little.
Boom:
Consumer's confidence starts to increase at a faster pace buying more and more
consumer goods. As businesses start to hire even more people national incomes rise an
unemployment levels fall. People now start to buy consumer durable goods such as cars,
houses. Resulting in businesses to start increase their construction levels on homes, factories
and stores. Businesses now also start to buy new equipment and machines increasing their
efficiency levels. This results in workers receiving higher pay. Prices increase. Unemployment
levels fall approaching full employment, inflation increases at very high

ECONOMIC LEGISLATION

Definition: It was a legal theory and system under which economic relations were a legal
discipline independent of criminal laws and civil laws.

Industrial Policy in India:

Industrial policy resolution 1956: The basic aim of this policy is ‘socialistic pattern of society’.
The salient features of this resolution are:
 1) The industrial sector was divided into 3 categories: schedule A,B and C.
Schedule A consisted of those industries which were an exclusively responsibility
of the state. This schedule included 17 industries : arms and ammunition, iron and
steel, heavy castings, heavy electrical machinery, atomic energy, heavy
machinery, coal, oil, iron, ore copper, zinc, lead, aircraft and air transport,
shipping, railways, telephone, telegraph, radio equipment and power.
Schedule B consisted of those industries which the state would set up new
undertakings and which were to be progressively owned by the state. It consisted
of 12 industries: machine tools, Ferro-alloys, antibiotics and essential drugs,
fertilizers, chemicals, chemical pulp, synthetic rubber, carbonization of coal, road
and sea transport.
Schedule C contained all the rest of the industries. These were to be within the
realm of operation of private sector.

2) To make the private sector grow and function effectively, the state was ensure the
development of infrastructural facilities like transport, power, education and to
appropriate fiscal and monetary measures.

3) Small scale and cottage industries were to be encouraged both by restricting

volume of production in the large scale sector and by direct subsidies to small-
scale cottage industries.

4) Industrial development needs to be so patterened that regional disparities are

removed

5) In order to keep industries at efficient level of working, maintenance of industrial

peace and improvement in the working condition of the labour class needs to be
improved. The resolution stresses the need for participative by both the
management and workers and it excepts that public sector would set an example
this regard.

6) Attitude of the state towards foreign capital remains similar to one in the 1948
industrial revolution.

The Monopolies and Restrictive Trade Practices Act

The Monopolies and Restrictive Trade Practices Act(MRTP) act was enacted in 1969 and
brought into force in 1970.The Indian MRTP act is more or less based on the similar act in the
U.K. The preamble of MRTP act says that it is “ an act to provide that the operation of the
economic system does not result in the concentration of economic power to the common
deteirment, and is for the control of monopolies, prohibition of monopolistic and restrictive trade
practices and for matters connected therewith or incidental thereto”
The Monopolistic and Restrictive Trade Practices Act, 1969, was enacted

1. To ensure that the operation of the economic system does not result in the concentration
of economic power in hands of few,
2. To provide for the control of monopolies, and
3. To prohibit monopolistic and restrictive trade practices.

The MRTP Act extends to the whole of India except Jammu and Kashmir. Unless the Central
Government otherwise directs, this act shall not apply to:

1. Any undertaking owned or controlled by the Government Company,

2. Any undertaking owned or controlled by the Government,
3. Any undertaking owned or controlled by a corporation (not being a company established
by or under any Central, Provincial or State Act,
4. Any trade union or other association of workmen or employees formed for their own
reasonable protection as such workmen or employees,
5. Any undertaking engaged in an industry, the management of which has been taken over
by any person or body of persons under powers by the Central Government,
6. Any undertaking owned by a co-operative society formed and registered under any
Central, Provincial or state Act,
7. Any financial institution.

Scope of MRTP act:

Undertakings which came under the purview of the MRTP act were:
a) Undertakings whose own assets together with those of their inter-connected undertakings
are not less than Rs.20 crores in value and
b) Dominant undertaking whose own assets together with those of their inter-connected
undertakings are not less than Rs.1 crore and which enjoy more than one-third of the
market share.
The main regulatory provisions of the act can be summarized under the following categories:
1) regulating expansions, mergers and amalgamations;
2) regulating the establishment of new undertakings
ECONOMICS ASSIGNMENT

BY
M.RAMACHANDRAN