Tuesday, 25 November 2014


There are various concepts of National Income. The main concepts of NI are: GDP, GNP, NNP, NI, PI, DI, and PCI. These different concepts explain about the phenomenon of economic activities of the various sectors of the various sectors of the economy.

Gross Domestic Product (GDP):

The most important concept of national income is Gross Domestic Product. Gross domestic product is the money value of all final goods and services produced within the domestic territory of a country during a year.
Algebraic expression under product method is,
GDP=Gross Domestic Product
P=Price of goods and service
Q=Quantity of goods and service
denotes the summation of all values.
According to expenditure approach, GDP is the sum of consumption, investment, government expenditure, net foreign exports of a country during a year.
Algebraic expression under expenditure approach is,
G=Government expenditure
(X-M)=Export minus import
GDP includes the following types of final goods and services. They are:
Consumer goods and services.
Gross private domestic investment in capital goods.
Government expenditure.
Exports and imports.

Gross National Product (GNP):

Gross National Product is the total market value of all final goods and services produced annually in a country plus net factor income from abroad. Thus, GNP is the total measure of the flow of goods and services at market value resulting from current production during a year in a country including net factor income from abroad. The GNP can be expressed as the following equation:
GNP=GDP+NFIA (Net Factor Income from Abroad)
or, GNP=C+I+G+(X-M)+NFIA
Hence, GNP includes the following:
Consumer goods and services.
Gross private domestic investment in capital goods.
Government expenditure.
Net exports (exports-imports).
Net factor income from abroad.

Net National Product (NNP):

Net National Product is the market value of all final goods and services after allowing for depreciation. It is also called National Income at market price. When charges for depreciation are deducted from the gross national product, we get it. Thus,
or, NNP=C+I+G+(X-M)+NFIA-Depreciation

National Income (NI):

National Income is also known as National Income at factor cost. National income at factor cost means the sum of all incomes earned by resources suppliers for their contribution of land, labor, capital and organizational ability which go into the years net production. Hence, the sum of the income received by factors of production in the form of rent, wages, interest and profit is called National Income. Symbolically,
NI=NNP+Subsidies-Interest Taxes
or,GNP-Depreciation+Subsidies-Indirect Taxes
or,NI=C+G+I+(X-M)+NFIA-Depreciation-Indirect Taxes+Subsidies

Personal Income (PI):

Personal Income i s the total money income received by individuals and households of a country from all possible sources before direct taxes. Therefore, personal income can be expressed as follows:
PI=NI-Corporate Income Taxes-Undistributed Corporate Profits-Social Security Contribution+Transfer Payments

Disposable Income (DI):

The income left after the payment of direct taxes from personal income is called Disposable Income. Disposable income means actual income which can be spent on consumption by individuals and families. Thus, it can be expressed as:
DI=PI-Direct Taxes
From consumption approach,
DI=Consumption Expenditure+Savings

Per Capita Income (PCI):

Per Capita Income of a country is derived by dividing the national income of the country by the total population of a country. Thus,

PCI=Total National Income/Total National Population

Monday, 10 November 2014


                                          BURDEN OF PUBLIC DEBT
There are two types of sources of public debt, so that sources are burden i.e burden of internal debt and burden of external debt..

Introduction To The Burden of Public Debt :

Over the years, the public debt of the India's Central and that of State government has increased considerably during the planning period. The Government borrows funds by way of public debt to meet the various development and non-development expenses.
Apart from internal debt, there are also internal liabilities of the central government in the form of small savings of the public, provident funds, reserve funds & deposits of Government department.
Both internal and external debt carry a burden on the economy of nation.

The Burden of Internal Public Debt :

1. Internal debt trap:

One of the bad effects of internal debt is the interest paid by the government. Such interest payments increase public expenditure and may become a cause for fiscal deficit. If internal public debt is not checked and kept within limits, it may take the country to the worst position called 'Internal Debt Trap'.

2. More burden on poor and weaker sections:

Internal debt provides opportunities for the rich and higher middle class to earn a higher rate of interest from the state on their lending. At the same time the pobr suffer a lot due to the tax burden. The government levies taxes to repay interest on public debt. But the tax burden does not necessarily fall on the rich unless it is progressive in nature. In the case of indirect taxes, the burden is felt more by the poor than the rich.

3. Increasing interest burden:

Public borrowing may become costlier for the government especially when it resorts to public borrowing by issuing bonds and debentures. Such bonds and debentures carry a high rate of interest to the extent of 15 percent. The impact of such interest payments may develop manifold and still worsen in the future if the government stick to the same policy of borrowing in the years to come.

4. Unjustified transfer:

The servicing of internal debt involves transfers of income from the younger to the older generations and from the active to the inactive enterprises.
The government imposes taxes on enterprises and earnings from productive efforts for the benefit of the idle, inactive, old and leisurely class of bond holders. Hence work and productive risk taking efforts are penalised for the benefit of accumulated wealth. This adds to the net real burden of debts.

5. Indirect real burden:

Internal debt involves an additional indirect real burden on the community. This is because the taxation required for servicing the debts reduces the tax payer's ability to work and save and affects production adversely. The government may also economise social expenditure thereby, reducing the economic welfare of the people.
Taxation will reduce the personal efficiency and desire to work. Thus there would be a net loss in the ability and desire to work. The creditor class will also not have any incentive to work hard due to the prospect of receiving interest on bonds. This would further cause a loss to production and increase the indirect burden of debt.

The Burden of External Public Debt:-

External debt is beneficial in the initial stages as it increases the resources available to the country. But its repayment & servicing creates a burden on the debtor country.

1. External debt trap:

The external debt creates direct money burden. This is because; it involves transfer of funds from the debtor country to foreign citizens. The degree of burden depends upon the interest rate, and the loan amount. The loans are normally to be paid in foreign currency. Therefore, the funds are mostly transferred from export earnings or by raising more funds from foreign markets. Borrowing by way of additional loans would put extra burden on the country. The situation may become so worse, that the country may be caught in the external debt trap. It may have to borrow from foreign markets to repay the interest amount and it would be very difficult to repay the principal amount.

2. Direct real burden:

The external debt may also result in direct real, burden. The citizens of the debtor will have to suffer loss of economic welfare to the extent of repayment of principle amount and interest burden. The foreign currency earned through exports would have been utilized to import better goods and technology. Which would have increased the economic welfare of the citizens of the debtor country. But because of external debt repayment, they have to restrict their welfare which the imported goods would have provided. In other words, the citizens of debtor country are deprived of imported goods and service to the extent till the loans and interest amount is repaid.

3. Decline in expenditure to public welfare programmes:

When the government spends a significant portion of its resources towards the payment of foreign debt it reduces the government expenditure to that extent which otherwise would have been spent for public welfare programmes.

4. Decline in the value of nation's currency:

The repayment of external debt involves an increase in the demand for the currency of the creditor country. This will raise the exchange rate of the creditor country's currency, and aggravate the problem of foreign exchange crisis.
The creditor country may also be adversely affected if it is induced to import more from the debtor country. This may hinder the growth of their domestic industries and cause unemployment.

5. Burden of unproductive foreign debt:

The magnitude of external debt burden depends upon whether the debt is incurred for productive purposes or for unproductive purposes. If it is incurred for unproductive purposes, it will create a greater burden and sacrifice on the citizens of the debtor country.

6. Political exploitation:

In recent years, it was found that the lending countries who dominate international organisations like World Bank & international monetary fund use the lending opportunity as an instrument to exploit the borrowing countries economically & politically.

Sunday, 9 November 2014



A big issue in economics is the trade off between efficiency and equity.
        An economic situation in which there is a perceived tradeoff between the equity and efficiency of a given economy. This tradeoff is commonly viewed within the context of the production possibility frontier, where any additional gains in production efficiency must be offset by a reduction in the economy's equity.
       Equity is concerned with how resources are distributed throughout society.
  1. Vertical equity is concerned with the relative income and welfare of the whole population e.g. Relative poverty when people have less than 50% of average income. Vertical equity is concerned with how fairly resources are distributed and may imply higher tax rates for high income earners.
  2. Horizontal equity is treating everyone in same situation the same. e.g. everyone earning £15,000 should pay same tax rates.
            Efficiency is concerned with the optimal production and allocation of resources given existing factors of production.  There are different types of efficiency
1. Productive efficiency.
       This occurs when the maximum number of goods and services are produced with a given amount of inputs. This will occur on the production possibility frontier. On the curve it is impossible to produce more goods without producing less services.Productive efficiency will also occur at the lowest point on the firms average costs curve
2. Allocative efficiency
           This occurs when goods and services are distributed according to consumer preferences. An economy could be productively efficient but produce goods people don’t need this would be allocative inefficient. Allocative efficiency occurs when the price of the good = the MC of production
3. X inefficiency:
      This occurs when firms do not have incentives to cut costs, for example a monopoly which makes supernormal profits may have little incentive to get rid of surplus labour.

Therefore a firms average cost may be higher than necessary.

4. Efficiency of scale
             This occurs when the firms produces on the lowest point of its Long run average cost and therefore benefits fully from economies of scale
5. Dynamic efficiency:
            This refers to efficiency over time for example a Ford factory in 1920 would be very efficient for the time period, but by comparison would now be inefficient.. Dynamic efficiency involves the introduction of new technology and working practises to reduce costs over time.
6. Social efficiency
         This occurs when externalities are taken into consideration and occurs at an output where the social cost of production (SMC) = the social benefit (SMB)
7. Technical Efficiency:
        Optimum combination of factor inputs to produce a good: related to productive efficiency.
8. Pareto Efficiency
             A situation where resources are distributed in the most efficient way. It is defined as a situation where it is not possible to make one party better off without making another party worse off.
9. Distributive Efficiency
           Concerned with allocating goods and services according to who needs them most. Therefore, requires an equitable distribution.

Increased Inequality and Increased Growth:

    Sometimes, economic policies create a situation where everyone becomes better off (rising real incomes across population). However, those on high incomes gain a bigger % rise in real incomes. The result is that everyone becomes better off, but, there is also greater income inequality. Therefore, some people may feel that relatively they appear worse off compared to others in society.
This is a pareto improvement in economic welfare but also an increase in inequality.The final point is that there doesn’t have to be a trade off between equality and efficiency. An improvement in efficiency, should generally make the economy better off. There is no reason why improved efficiency has to lead to inequality. It is compatible to improve both efficiency and equity within society.
         Within this equity and efficiency tradeoff, equity refers to the economy's financial capital, while efficiency refers to the future efficiency in the production of goods and services. This theory asserts that, in order for a nation to become wealthier, it must save its equity. However, these additional savings will hurt the development of more efficient production in the future.