Answer key1. Distinguish between GDP and GNP? Gross National
Product (GNP)The total value at market prices of final goods and
services produced withinthe territorial boundaries of an economy,
irrespective of whether it belongs to the inhabitantsof that nation
or not in a specified period. Such an income is known as Gross
Domestic Product (GDP) and found as:GDP = GNP - Net factor income
from abroadNet factor income from abroad = Factor income received
from abroad - Factor incomeGDP includes following types of final
goods and services. Consumer goods and services, Gross private
domestic investment in capital goods, Government expenditure,
Export and imports Gross National Product GNP is defined as the
value of all final goods and services produced during a specific
period, usually one year, plus incomes earned abroad by the
nationals minus incomes earned locally by the
foreigners.GNP=GDP+NFIA (Net Factor Income from Abroad)
1. Define Delphi technique.Extension of simple opinion poll
method Structured communication technique, originally developed as
a systematic, interactive forecasting method which relies on a
panel of experts. The Delphi method conceals the identity of the
individuals Participating in the forecasting. Everyone has the same
weight. Procedurally, moderate creates a questionnaire and
distributes it to participants. Their response are summed and given
back to the entire group along with new set of questions. The
experts answer questionnaires in two or more rounds. After each
round, a facilitator provides an anonymous summary of the experts
forecasts from the previous round as well as the reasons they
provided for their judgments. Thus, experts are encouraged to
revise their earlier answers in light of the replies of other
members of their panel. 3. What are the characteristics of
recession?A business cycle passes through certain well defined
phases. Generally, a business cycle is divided into 4 well-defined
and interconnected recurring phases as follows: Boom,Recession,
Depression,Recovery.Once the economy reaches the peak, the course
changes. A downward tendency in demand is observed. The supply now
exceeds the demand and producers are compelled to give up future
investment plans. Business failures increase, unemployment leads to
fall in income, expenditure, prices, profits. Some firms are forced
into bankruptcy. The failure of one firm affects other firms with
whom it has business connections. This phase of the business cycle
is known as the crisis. 4. What degree of price discrimination is
KSEB practicing?The policy of price discrimination refers to the
practice of a seller to charge different prices for different
customers for the same commodity, produced under a single control
without corresponding differences in cost. When a monopoly firm
adopts this policy, it will become a discriminatory monopoly.
According to Mrs. Joan Robbinson The act of selling the same
article produced under a single control at different prices to
different customers is known as price discrimination. Under Second
Degree Discrimination differential prices are charged for different
amounts of goods and services. The second degree price
discrimination is mostly applicable to the goods and services whose
consumption is metered like electricity KSEB. In Fig. 10.7 (b) for
output less than Qo, price Po is charged. Medium price P1 is
charged for quantities purchased between Qo and Q1, and a low price
P2 for purchases beyond Q1.
5. Define natural monopoly?An industry is a natural monopoly
when one firm can supply a good or service to an entire market at a
smaller cost than could two or more firms. Example: delivery of
electricity, phone service, tap water, etc. The production of a
good may exhibit decreasing marginal and average costs over a wide
range of output levels in this situation, relatively large-scale
firms are low-cost producers. Firms may find it profitable to drive
others out of the industry by cutting prices this situation is
known as natural monopoly. Once the monopoly is established, entry
of new firms will be difficult.6. Distinguish between CRR and SLR
Cash Reserve Ratio (CRR):Each bank has to keep a certain percentage
of its total deposits with RBI as cash reserves. Statutory
Liquidity Ratio (SLR):Amount of liquid assets such as precious
metals(Gold) or other approved se This is because theses are
financial instruments in the hands of apex bank of India, the RBI
(Reserve Bank of India), to control liquidity available to
commercial banks. Thus, despite having similarity in nature and
purpose, there are many differences between CRR and CRR stands for
Cash Reserve Ratio, and specifies in percentage the money
commercial banks need to keep with themselves in the form of cash.
In reality, banks deposit this amount with RBI instead of keeping
this money with them. This ratio is calculated by RBI, and it is in
the jurisdiction of the apex bank to keep it high or low depending
upon the cash flow in the economy. RBI makes judicious use of this
amazing tool to either drain excess liquidity from the economy or
pump in money if so required. When RBI lowers CRR, it allows banks
to have surplus money that they can lend to invest anywhere they
want. On the other hand, a higher CRR means banks have lesser
amount of money at their disposal to distribute. This serves as a
measure to control inflationary forces in economy. Present rate of
CRR is 5%. 7. What is the different techniques price
discrimination? Price discrimination is the practice of charging a
different price for the same good or service. There are three types
of price discrimination first-degree, second-degree, and
third-degree price discrimination. BASIS OF PRICE DISCRIMINATION
Personal differences - Social and or professional status of the
buyer- Different uses of the same commodity- Place- Different uses
of the same commodity Geographical area -Discrimination on the
basis of income and wealth-Explain.. Refer Note
8 The monopolistic competition is a special case of imperfect
competition . DiscussMonopolistic CompetitionPerfect competition
and monopoly are the two extreme forms of market situations, rarely
to be found in the real world. Generally, markets are imperfect. A
number of attempts have been made by different economists like
Piero Shraffa, Hotelling, Zeuthen and others in the early 1920s,
Mrs Joan Robinson and Prof Chamberlin in 1930s to explain the
behavior of imperfect competition. Prof. Chamberlin is the main
architect of the theory of Monopolistic Competition. This market
exhibits the characteristics of both competition and monopoly.
Since modern markets are combined and integrated with monopoly
power and competitive forces they are called as Monopolistic
Competition. It is a market structure in which a large number of
small sellers sell differentiated products which are close, but not
perfect substitutes for one another. Under this market, the
products produced and sold are different, but they are close
substitutes for one another. This leads to competition among
different sellers. Thus, in this market situation every producer is
a sort of monopolist and between such mini-monopolists there exists
competition. It is one of most popular and realistic market
situation to be found in the present day world. A number of
examples may be given for this kind of market. Tooth paste, blades,
motor cycles and bicycles, cigarettes, cosmetics, biscuits, soaps
and detergents, shoes, ice creams etc- explain the features-Refer
note 9. What are the different types of plan models? Planning
models have been increasingly used in LDCs for the drawing up of
plans for economic development. A model expresses relationships
among economic variables which explains and predict past future
events under a set of simplifying assumptions. A planning model is
a series of mathematical equations, help in the drawing up of a
plan for economic development.planning models are of three types,
aggregative or macroeconomics models, sectoral models and
comprehensive inter-industry models-Refer notes 10. What is a
kinked demand curve?The kinked demand curve was first employed by
Prof. Paul M. Sweezy to explainprice rigidity under oligopoly. In
an oligopoly market, the firm knows that if it increases price,
other firms will not follow; but if price is reduced, other firms
will follow the price reduction. In some respect, the price output
analysis in oligopoly is simple. Since each seller wants to avoid
uncertainty, every oligopolistic firm will adhere to the point of
kink, where itis safe and where it can anticipate the reaction of
its rivals. However, the firm will neither increase nor decrease
priceThis is an important consequence of the existence of the kink
in the demand curve of the firm. Because, of the vertical section
in MR, i.e. uncertainty range, without affecting the price or level
of output. Under these circumstances, equality between MC and MR
will notdetermine the point of equilibrium. The profits will,
however, be determined as in any othermarket, by the difference
between AR and AC. With a given marginal cost of production, OP is
more likely to be the profit-maximising price. The length of the
discontinuity portion in the MR depends on the relative elasticity
of demand at point E of AR. The greater the elasticity of demand of
the portion of AR above point E and the lower the elasticity of
demand of the portion of AR below point discontinuity portion of
MR, the bigger will be the discontinuity portion of MR. Figure 5.16
shows that the price is fixed at OP and output is OM- Draw the
fig11. What are the different methods of measuring national
income?The national income of a country can be measured by three
alternative methods: (i) Product Method (ii) Income Method, and
(iii) Expenditure Method. Explain each method.12. Find out the
price, output and profit of a monopolists firm which has a cost
equation of C= Q2-28Q+2 and demand equation of
Q=20-PPrice=P=20-QPxQ=TR=20Q-Q2MR=20-2QC= Q2-28Q+2MC=2Q-28In
equilibrium MC=MR20-2Q=2Q-284Q=48Q= 12Price=P=20-Q----- So
P=20-12=8Profit=TR-TC= 20Q- Q2-(Q2-28Q+2) 13. Distinguish between
Couronts and Chamberlins duopoly model.The Cournot model of
oligopoly assumes that rival firms produce a homogenous product,
and each attempts to maximize profits by choosing how much to
produce. All firms choose output (quantity) simultaneously. The
basic Cournot assumption is that each firm chooses its quantity,
taking as given the quantity of its rivals. The resulting
equilibrium is a Nash equilibrium in quantities, called a Cournot
(Nash) equilibrium. as the number of firms increases, the
equilibrium approaches what it would be under perfect competition.
. As concentration rises, industry performance deviates more from
the norm of perfect competition. Stable equilibrium- Closed
model-Chamberlin developed his own model of oligopoly assuming
interdependence between the competitors. He suggested that each
seller seeking to maximize his profit reflects well and looks in to
consequences of his move. Assuming that there are two firms A&B
let A enter in to the market as a monopolist. A will produce OQ and
charge monopoly price OP2 .When B enters ,it considers that PM is
its demand curve. Under cournots assumption, firm B will sell
output Qnprice OP1.As a result, market price fall from OP2 TO
OP1.Chamberlin assumes that firm A recognizes the interdependence
between them. Here A decides to compromise with the existence of
firm B, and decided to reduce its output to OK which is half of the
monopoly output OQ.According to Chamberlin, by recognizing their
interdependence, the firm reach an equilibrium which is the same as
monopoly. Draw fig-14. Explain the stages of business cycle and
contra cyclical policies in economic planning.Cyclical fluctuations
have become a regular feature of a capitalist system. A capitalist
economy is guided by competition and profit motive. There is
freedom of private enterprise, private ownership of property and
free play of market forces of supply and demand. Businessmen in
their anxiety to earn more and amass wealth, produce much in excess
of the absorption capacity of the economy causing imbalances in the
supply and demand conditions. Thus, the smooth functioning of the
economy is disturbed and subject to many ups and downs. Such ups
and downs have been termed as business cycles.
Explain each phase
Explain each phaseMeasures to Control Business Cycles Control of
business cycles has become an important objective of all most all
economies at present. Broadly speaking, the remedial measures can
be classified under three heads, viz., monetary, fiscal and
miscellaneous measures. 1. Monetary measures: According to Hawtrey,
Hicks and many others expansion and contraction of supply of money
is the major cause for the operation of business cycles. Monetary
policy and the expansionary phase: when the economy is moving fast
in the upward direction, the monetary measures should aim at (i)
restricting the issue of legal tender money (ii) putting
restrictions to the expansion of bank credit by adopting both
quantitative and qualitative techniques of credit control. As
expansionary phase is mainly supported by bank credit, adoption of
a dear money policy can put an effective check on further
expansion. A rise in the Bank Rate, by raising the lending rates of
the commercial banks, making credit costly will have a discouraging
effect on more borrowings. A check can be imposed on the liquidity
position of the commercial banks by raising the Cash Reserve Ratio
and Statutory Liquidity Ratio. Open market sale of securities can
also be conducted to make bank rate more effective. Selective
techniques, like raising of margin requirements, rationing of
credit, moral suasion, direct action, publicity etc., can also be
used efficiently to tighten the credit situation in the economy.
Apart from these direct measures indirect measures like wage
control, price control etc., can also be adopted to put a check on
the inflationary trend in the economy. Such monetary measures are
found fairly successful in controlling unwieldy expansion of the
economy. Many countries like U.K., U.S.A., France, Germany and
India have used monetary measures to control inflation. Monetary
Policy and the Phase of Depression: During the period of
depression, to enlarge employment opportunities and raise the level
of income all out measures are to be adopted to increase the level
of investment. To encourage investment activity the central bank
has to follow a cheap money policy. The bank rate and the lending
rates of the commercial banks should be reduced; money should be
made available freely by reducing the CRR and SLR. Through open
market sale of securities, Cash reserves with the banks should be
increased to enable them to lend money easily for various
investment activities. Various qualitative techniques of credit
control like reducing the margin requirements, moral suasion etc.,
may be adopted to encourage businessmen to borrow and invest. Cheap
money policy, to induce businessmen to borrow and invest is not
very effective as investment is more guided by the marginal
efficiency of capital than the rate of interest. Because of low
level of income and low prices and the low profit margins
entrepreneurs do not come forward to borrow and invest in spite of
the low rates of interest. One can take a horse to the water but
cannot force to have it; a plethora of money cannot induce the
public horse to have it. Thus monetary policy as a remedy to solve
depression has its own limitations. 2. Fiscal policy:During the
period of inflation or uptrend in the economy, when the private
enterprise is over enthusiastic and there is over expansion and
over production government can use taxation and licensing policy as
very effective instruments to check such unwieldy growth. Price
control measures can be adopted. Government should adopt surplus
budget, reduce public expenditure and resort to public borrowing.
The cumulative result of these measures would reduce the supply of
money in circulation, purchasing power and demand. On the
contrary,during the period of depression government should adopt
deficit budget, Increase the volume of public expenditure, redeem
public debt and resort to external borrowings, indulge in a
moderate dose of deficit financing, reduce tax rates, grant
subsidies, development rebates, tax-concessions, tax-reliefs and
freight concessions etc. As a result of these measures, supply of
money in circulation will increase. This in its turn would raise
the purchasing power, demand for goods and services, production and
employment etc. J.M. Keynes recommended a number of public works
programmes to be launched by the government to cure depression. The
New Deal policy of President Roosevelt in the U.S.A. and Blum
experiment in France were based on this very belief. 3. Physical
controls:During the period of inflation, a price control policy has
to be adopted where as during depression a price-support policy has
to be followed. During the period of contraction unemployment
insurance schemes, Proper management of savings, investments,
production, distribution, expansion of income and employment etc.,
are needed depending upon the nature of economic fluctuations. 4.
Miscellaneous Measures:(i) Introduction of automatic stabilizers:
An automatic stabilizer (or built in stabilizer) is an economic
shock absorber that helps to smoothen the cyclical business
fluctuations of its own accord, without requiring deliberate action
on the part of the government e.g., progressive taxation policy,
unemployment Insurance scheme adopted in The U.S.A. (ii) Price
support policy followed in the U.S.A. during the post war period to
fight the prospects of depression. (iii) The policy of
stabilization of the prices of agricultural products in India
through procurement and building up of buffer stocks aim at
economic stability. (iv) Foreign aid is also used for influencing
the aggregate demand and supply of goods in a country. (v) Granting
of aid might help in recovering from slump. In addition to these,
some of the measures can be adopted at international level to
mitigate the adverse effects of business cycles and promote
stability in the world economic growth like control of private
investment, control and distribution of essential goods, regulation
of international investments in developing nations, creation of
international buffer stocks etc. 15. Explain the cyclical process
using Kaldors theory Professor Kaldor in his model of Economic
Growth- follows the Harrodian dynamic approach and the Keynesian
techniques of analysis. The other neoclassical models treat the
causation of technical progress as completely exogenous, but Kaldor
attempts "to provide a framework for relating the genesis of
technical progress to capital accumulation." explanation of the
model. Six observable facts of these model have been explained in
terms of three componentsSAVING FUNCTION ,EMPLOYMENT FUNCTION,
TECHNICAL PROGRESS FUNCTIONY=W+Psaving investment equality can be
expressed as I=SS=Sw+ SpInvestment being given and assuming simple
proportional saving functionSw=SwW and Sp= SpP we obtain the
equationS=Sp (P)+SwW S= I=Sp (P)+Sw(Y-P) since
W=Y-P=SpP+SwY-Swp=(Sp-Sw)P+SwY When the ratio of investment to
national income
And from the above ratio P/Y can be derived as (Sp-Sw)P/Y= I/Y
Sw P/y=1/ Sp-Sw x I/Y- Sw/ Sp-Sw
Exlain the process using equation and fig
16. Analyse the following markets for its market structure and
characteristics.a. Butter- Monopolistic
competitionb.Railway---Monopolyc. AutomobilesOligopoly17. Assume
that a factory can produce a maximum of 20,000 units of output per
month. These 20,000 units can be sold at a price of Rs 100 per
unit. Variable costs are Rs 20 per unit and the total fixed costs
are Rs 2, 00,000. You are required to calculate 1. Break-even
point--------- 2500 2. Break even sales revenue ---------25000 3.
Sales required to earn a profit of Rs50000--------Target sales
volume=
