Ankon Gopal Banik

ACCORDING TO THE SYLLABUS OF 3RD SEMESTER OF DEPARTMENT OF CSE, GONO BISHWABIDYALAY

ECONOMICS

Without the help of our respective teacher mrs.

Shamima Akter this work was quite impossible

1
ECONOMICS

Contents
Chapter 01: Fundamentals--------------------------------------------------------------------------------------------------------03
Chapter 02: Demands--------------------------------------------------------------------------------------------------------------05
Chapter 03: Supply------------------------------------------------------------------------------------------------------------------11
Chapter 04: Production Cost-----------------------------------------------------------------------------------------------------15
Chapter 05: Market-----------------------------------------------------------------------------------------------------------------18
Chapter 06: National income-----------------------------------------------------------------------------------------------------22
Chapter 07: Money & inflation--------------------------------------------------------------------------------------------------24
Chapter 08: Balance of payment------------------------------------------------------------------------------------------------26
Chapter 09: Unemployment------------------------------------------------------------------------------------------------------27

2
ECONOMICS

Chapter 01: Fundamentals

Economics is the study, that tells about how scare resources to produce valuable commodities and
distribute them among different people and society.
According to famous economist Lionel Robbins-
"Economics is a science which studies human behavior as a relationship between ends and scarce means
which have alternative uses."

There are two types of economics. They are -

01. Micro-economics: Microeconomics is the study of individuals, households and firms' behavior in
decision making and allocation of resources. It generally applies to markets of goods and services
and deals with individual and economic issues. It is also called price theory.
02. Macro-economics: Macroeconomics is the branch of economics that studies the behavior and
performance of an economy as a whole. It focuses on the aggregate changes in the economy such
as unemployment, growth rate, gross domestic product and inflation. It is also called income
theory.

Fundamental/major problems of economics:

1. What commodities are produced and in what quantities.
2. How are goods to produce.
3. For whom are goods to produce.

Production Possibility Frontier (PPF): The production possibility frontier (PPF) is a curve depicting all
maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors.
The PPF assumes that all inputs are used efficiently.
We can represent economy production possibility more vividly in diagram that given in next page-

Figure: Production Possibility Frontier (PPF)

3
ECONOMICS

Any point outside of frontier, such as E is inferable or unattainable. Any point inside of curve, such as D
indicates that the economic has not attained productive efficiency.

Opportunity cost: A benefit, profit, or value of something that must be given up to acquire or achieve
something else. Since every resource (land, money, time, etc.) can be put to alternative uses, every action,
choice, or decision has an associated opportunity cost.
We can represent opportunity cost possibility more vividly in diagram that given below-

Figure: opportunity cost

Economic system: Economic systems are the means by which countries and governments distribute
resources and trade goods and services. They are used to control the five factors of production, including:
labor, capital, entrepreneurs, physical resources and information resources.
There are three types of economic system -
1. Command or capitalistic Economic System: A command economic system is characterized by a
dominant centralized power (usually the government) that controls a large part of all economic
activity. This type of economy is most commonly found in communist countries. It is sometimes
also referred to as a planned economic system, because most production decisions are made by the
government (i.e. planned) and there is no free market at play.
2. Market or Socialistic Economic System: A market economic system relies on free markets and does
not allow any kind of government involvement in the economy. In this system, the government
does not control any resources or other relevant economic segments. Instead, the entire system is
regulated by the people and the law of supply and demand.
3. Mixed Economic System: A mixed economic system refers to any kind of mixture of a market and a
command economic system. It is sometimes also referred to as a dual economy. Although there is
no clear-cut definition of a mixed economic system, in most cases the term is used to describe
market economies with a strong regulatory oversight and government control in specific areas (e.g.
public goods and services).

4
ECONOMICS

Chapter 02: Demands

The quantity of the commodity which will be demanded at any price over some given of time.
In economics, demand is the quantities of a commodity or a service that people are willing and able to buy
at various prices, over a given period of time.
In the words of Prof. Hibdon-
"Demand means the various quantities of goods that would be purchased per time period at different
prices in a given market".

Law of demand: The law of demand states that other factors being constant price and quantity demand of
any good and service are inversely related to each other. When the price of a product increases, the
demand for the same product will fall; when the price of a product falls, the demand for the same product
will increase.

Demand schedule: The demand schedule is a table or formula that tells you how many units of a good or
service will be demanded at the various prices.
For example a demand schedule is given bellow-

Price Quantity of demand

5 taka 25 unit
10 taka 20 unit
15 taka 15 unit

Demand Curve: If you were to plot out how many units you would buy at different prices, then you've
created a demand curve. It graphically portrays the data in a demand schedule.
For example a demand curve is given in next page-

Figure: Demand caurve

5
ECONOMICS

When the demand curve is relatively flat, then people will buy a lot more even if the price changes a little.
When the demand curve is fairly steep, than the quantity demanded doesn't change much, even though
the price does.

Exceptional law of demand:

1. Changes in taste or fashion.
2. Changes in income.
3. Changes in other prices.
4. Time or place.
5. Necessary goods.
6. Luxury goods.

Consumer surplus: Consumer surplus is an economic measure of consumer benefit, which is calculated by
analyzing the difference between what consumers are willing and able to pay for a good or service relative
to its market price, or what they actually do spend on the good or service.
According to prof. Marshall- Consumer surplus is what we are prepared to pay minus what we are actually
to pay.
We can represent consumer surplus more vividly in diagram that given below-

Total utility = OMKD

Total price = OMKP
So, consumer surplus = total utility - total price
= OMKD – OMKP
= PKD

6
ECONOMICS

Elasticity of demand: Demand elasticity means how much more, or less, demand changes when the price
does.
The ratio between the percentage change in quantity of demand and the percentage change in price of any
goods or services is called elasticity of demand. It is denoted as Ed.
percentage change in quantity of demand
Ed = percentage change in price

Elasticity of demand are three types-

1. Price elasticity of demand: The ratio between the percentage change in quantity of demand and
the percentage change in price of any goods or services is called price elasticity of demand. It is
denoted as Ep.

percentage change in quantity of demand

Ep = percentage change in price

2. Income elasticity of demand: The ratio between the percentage change in quantity of demand and
the percentage change in income of any goods or services is called income elasticity of demand. It is
denoted as Ey.

percentage change in quantity of demand

Ey = percentage change in income

3. Cross elasticity of demand: The ratio between the percentage change in quantity of demand and
the percentage change in price of two supplementary goods or services is called cross elasticity of
demand. It is denoted as Ec.

percentage change in quantity of demand of good X

Ec = percentage change in price of good Y

Price elasticity of demand are five types-

1. Elastic demand (Ep> 1): The demand is said to be relatively elastic if the percentage change in
demand is greater than the percentage change in price i.e. if there is a greater change in demand
there is a small change in price.
For example: If the price falls by 5% and the demand rises by more than 5% (say 10%), then it is a
case of elastic demand. The demand for luxurious goods such as car, television, furniture, etc. is
considered to be elastic.

7
ECONOMICS

In the given figure, price and quantity demanded are measured along the Y-axis and X-axis
respectively. The demand curve DD is more flat, which shows that the demand is elastic. The small
fall in price from OP to OP1 has led to greater increase in demand from OM to OM1. Likewise,
demand decrease more with small increase in price.
2. Inelastic demand (Ep<1): The demand is said to be relatively inelastic if the percentage change in
quantity demanded is less than the percentage change in price i.e. if there is a small change in
demand with a greater change in price.
For example: when the price falls by 10% and the demand rises by less than 10% (say 5%), then it is
the case of inelastic demand. The demand for goods of daily consumption such as rice, salt,
kerosene, etc. is said to be inelastic.

In the given figure, price and quantity demanded are measured along the Y-axis and X-axis
respectively. The demand curve DD is steeper, which shows that the demand is less elastic. The
greater fall in price from OP to OP1 has led to small increase in demand from OM to OM1. Likewise,
greater increase in price leads to small fall in demand.
3. Unit elastic demand (Ep = 1): The demand is said to be unitary elastic if the percentage change in
quantity demanded is equal to the percentage change in price.
In such type of demand, 1% change in price leads to exactly 1% change in quantity demanded. This
type of demand is an imaginary one as it is rarely applicable in our practical life.

8
ECONOMICS

In the given figure, price and quantity demanded are measured along Y-axis and X-axis respectively.
The demand curve DD is a rectangular hyperbola, which shows that the demand is unitary elastic.
The fall in price from OP to OP1 has caused equal proportionate increase in demand from OM to
OM1. Likewise, when price increases, the demand decreases in the same proportion.
4. Perfectly elastic or infinity elastic demand (EP = ∞): The demand is said to be perfectly elastic if
the quantity demanded increases infinitely (or by unlimited quantity) with a small fall in price or
quantity demanded falls to zero with a small rise in price. It does not have practical importance as it
is rarely found in real life.

In the given figure, price and quantity demanded are measured along the Y-axis and X-axis
respectively. The demand curve DD is a horizontal straight line parallel to the X-axis. It shows that
negligible change in price causes infinite fall or rise in quantity demanded.
5. Perfectly inelastic or zero elastic demand (EP = 0): The demand is said to be perfectly inelastic if
the demand remains constant whatever may be the price (i.e. price may rise or fall). It also does not
have practical importance as it is rarely found in real life.

9
ECONOMICS

In the given figure, price and quantity demanded are measured along the Y-axis and X-axis
respectively. The demand curve DD is a vertical straight line parallel to the Y-axis. It shows that the
demand remains constant whatever may be the change in price. For example: even after the
increase in price from OP to OP2 and fall in price from OP to OP1, the quantity demanded remains
at OM.

10
ECONOMICS

Chapter 03: Supply

Supply means that amount which will be supplied at any given price over some given period of time.
According to Prof. Hibdon-
“Supply is a fundamental economic concept that describes the total amount of a specific good or service
that is available to consumers.“

Law of supply: Other things remaining the same or constant if price of good or service is rises, the supply
of it's extended; if the price falls then the supply of it's constructed.

Schedule of supply: The supply schedule is a table or formula that tells you how many units of a good or
service will be supplied at the various prices.
For example a demand schedule is given bellow-

Price Quantity of supply

10 taka 5 unit
15 taka 10 unit
20 taka 15 unit

Supply curve: The supply curve is a graphical representation of the correlation between the cost of a good
or service and the quantity supplied for a given period. In a typical illustration, the price will appear on the
left vertical axis, while the quantity supplied will appear on the horizontal axis.

In this supply curve we can see that, the higher the price, the greater the quantity supplied.

Elasticity of supply: Supply elasticity is defined as the percentage change in quantity supplied divided by
the percentage change in price. It is calculated as per the following formula:

11
ECONOMICS

percentage change in quantity of supply

Ed = percentage change in price

Supply elasticity is five types-

(1) Perfectly Elastic (Es=∞): Supply of a commodity is said to be perfectly elastic, when the supply
changes to any extent irrespective of any change in its price. It means that at a price, any quantity
of the good can be supplied. But, at a slightly lower price, the firm will not sell at all. It is purely an
imaginary concept and can only be explained with the help of an imaginary supply schedule.

In this case, the elasticity of supply is infinity and the supply curve is a straight line parallel to the X
axis
(2) Perfectly Inelastic (Es=0): Supply for a commodity is perfectly inelastic, if supply remains same
irrespective of change in price of the commodity.

A perfectly inelastic supply curve is a straight line parallel to the Y- axis. It is clear from the figure
that in this case, supply will not at all how so ever much price may rise.

12
ECONOMICS

(3) Unit Elastic (Es=1): Supply of a commodity is said to be unit elastic, if the percentage change in
quantity supplied is equal to the percentage change in price.

Any straight line supply curve passing through the origin has an elasticity of supply equal to unity
irrespective of the slope of this straight line and the scales of the two axis.
(4) More than Unit Elastic or Elastic (Es> 1): When the percentage change in quantity supplied exceeds
the percentage change in price, supply of the commodity is said to be elastic or more than unit
elastic.

This type of supply curve passes through the price (Y) axis.
(5) Less than Unit Elastic or Inelastic (Es< 1): When the percentage change in quantity supplied is less
than the percentage change in price, supply of the commodity is said to be inelastic or less than
unit elastic.

13
ECONOMICS

This type of supply curve passes through the quantity (X) axis.

Equilibrium of demand and supply curve: Equilibrium of demand and supply curve is a collection of
diagrams for supply and demand.

Demand contracts inwards along the curve and supply extends outwards along the curve. Both of these
changes are called movements along the demand or supply curve in response to a price change.

Determinants of supply:
1. Own price
2. Weather
3. Change in other prices
4. Technical progresses
5. Tax and subsidy
6. Unexpected events

14
ECONOMICS

Chapter 04: Production Cost

Production means the transformation of inputs into outputs. The inputs are what a firm buys and the
outputs are what a firm sells.
In the words of J. R. Hicks-
“Production is any activity directed to the satisfaction of other peoples wants through exchange”.

Factors of production: Factors of production are-

1. Land
2. Labor
3. Capital
4. Organization or enterprise

Production cost: Cost of production refers to the total sum of money needed for the production of a
particular quantity of output. Production costs include a variety of expenses, such as labor, raw materials,
consumable manufacturing supplies, and general overhead. Additionally, taxes levied by the government
or royalties owed by natural resource extracting companies are also considered production costs.
Production cost can be classified into three types-
1. Fixed cost: Fixed costs are costs that don’t change with the quantity of output produced. That is,
they have to be paid even if there is no production output at all. For example, if you want to open a
burger restaurant, you will need to pay rent for your location. Let’s say tk 10000 per month. This is
a fixed cost, because it does not matter if and how many burgers you sell, you will still have to pay
rent. Fixed cost curve is shown follow-

2. Variable cost: Variable costs are costs that change with the quantity of output produced. That is,
they usually increase as output increases and vice versa. For example, in the case of your imaginary
burger restaurant, the costs of meat, burger buns, lettuce, and BBQ sauce would be considered

15
ECONOMICS

variable costs. Let’s assume all ingredients add up to tk 30 per burger. If you sell 20 burgers and
your only variable costs are the costs of the ingredients, your total variable costs result in tk 600. By
contrast, if you sell 200 burgers, your total variable costs add up to tk 6000. If you don’t sell any
burgers at all, your total variable costs are zero. Variable cost curve is shown follow-

3. Total cost: Total cost describes the sum of total fixed costs and total variable costs. It includes all
costs that are incurred during the production process. Again, let’s say you managed to sell 200
burgers in your first month. In that case, your total costs of running your burger restaurant add up
to tk 16000 (i.e. tk 10000 fixed costs + tk 6000 variable costs). Total cost curve is shown follow-

Long rung average cost curve (LAC): Long run average cost is the cost per unit of output feasible when all
factors of production are variable. Long run average cost curve is shown follow-

16
ECONOMICS

The derivation of long run average costs is done from the short run average cost curves.
Long run average costs curve consists thee terms-
1. U shape curve
2. Envelope curve
3. Planning curve

17
ECONOMICS

Chapter 05: Market

A set up where two or more parties engage in exchange of goods, services and information is called a
market.
According to J. R. Hicks-
“A market is a place where two or more parties are involved in buying and selling.”

Classification of market:
On the basis of area market is three types -
1. Local market: The market limited to a certain place of a country is called local market. This type of
market locates in certain place of city or any area and supplies needs and wants of the local people.
Perishable consumer products such as milk, vegetables, fruits, etc are sold and bought in local
markets.
2. National market: If buying and selling of some products is done in the whole nation, this is called
national market. The products such as clothes, steel, cement, iron, tea, coffee, soap, cigarette, etc
are bought and sold nationwide.
3. International market: Market cannot be limited to any geographical border of any country. If the
goods produced in a country are sold in different countries, this is called international market.
Today, not any country of the world is self-dependent. All the countries are exporting the goods
produced in other countries. The market of some goods such as gold, silver, tea, clothes, machines
and machinery, medicines etc. has spread the world over.

On the basis of time market can be classified into three categories -

1. Short time market: Short period market is that in which slight variation can be made regarding the
demand for the goods. The demand for the goods can be increased to some extent and if the
demand diminishes, it can be reduced. For example, The demand of fish or milk or eggs.
2. Long time market: If the period is longer, supply will be influenced by the cost of producing
additional output; and the predominant influence on value will be the forces of supply. If the
demand for goods increases, there is time to increase the supply. Here the price is influenced more
by supply of the goods.
3. Very long time market: The secular period is very long. According to Marshall, it is a period of more
than ten years in which changes in demand fully adjust themselves to supply. Since it is not possible
to estimate the changes in demand due to changes in techniques of production, population, raw-
materials i.e., over a very long period therefore Marshall did not analyses pricing under the secular
period. Here the supply has upper hand in the determination of price.

On the basis of competition market can be classified into two categories -

18
ECONOMICS

1. Perfect competition market: Perfect competition is a type of competitive market where there are
numerous sellers, selling homogeneous products or services to numerous buyers. Conditions of
perfect competition market is given below -
a. Large no of sellers & buyers number.
b. Homogeneous products perfectly.
c. Free entry and exit.
d. Perfect knowledge of price cost (no control over price).
e. Perfectly price elastic demand imperfect competition.
f. Absent of transport cost.
g. No advertisement.
2. Imperfect competition market: Imperfect competition is an economic structure, which does not
fulfill the conditions of the perfect competition.
Imperfect competition market is three types-
i. Monopolistic competition market: Conditions of monopolistic competition
market are given bellow-
a. No of sellers and buyers does not large.
b. Differentiated products which are close substitute.
c. Free entry but firms can produce only close substitutes.
d. Account or ignore transport cost.
e. AD curve does not horizontal straight line.
f. Advertisement is present.
ii. Oligopoly or duopoly competition market: Conditions of oligopoly or
duopoly competition market are given bellow-
a. Few producers.
b. Homogenous (Pure Oligopoly) and differentiated but close
substitutes (Differentiated Oligopoly).
c. Barriers to entry.
iii. Monopoly competition market: Conditions of monopoly competition market
are given bellow-
a. Single firm.
b. Perfectly differentiated product without close substitute.
c. Very strong barriers to entry.
d. Extreme control over price.
e. Near to in elastic price elasticity of demand.

Equilibrium of firm: A firm is in equilibrium position when a firm carriages maximum profit. Equilibrium of
firm can be measured with the help of TR (Total Revenue) and TC(Total Cost) curve.
Conditions of receiving equilibrium position is shown in bellow-
1. TR > TC.
2. The highest distance between the TR and TC curve.
It is mentioned before that equilibrium of firm can be measured with the help of TR (Total Revenue) and
TC(Total Cost) curve. Figure, given in next page can explain more.

19
ECONOMICS

It is shown in the figure, at the beginning, total cost is higher than total revenue. There is no profit. At
points A and B, total revenue is equal to total cost. So, there is neither profit nor loss and is called the
break-even point. After Oq1 output, total revenue is higher than total cost, so profit begins to show. At Oq 3
output, the difference between total revenue and total cost is maximum. The firm is in equilibrium and
earns maximum profit, TR - TC. Point B is again the break-even point. Beyond Oq2 output, total cost
exceeds total revenue and the firm incurs losses.

Equilibrium of firm also can be measured with the help of MR (Marginal Revenue) and MC (Marginal Cost)
curve. For this case conditions of receiving equilibrium position is shown in bellow-
1. MR = MC.
2. MC curve cuts the MR curve from the bellow.
Figure, given bellow can explain more.

In this figure cost has been placed in Y-axis and output has been placed in X-axis. We can see that MC curve
intersected MR curve at the point E as well as F. Both of those points satisfy the condition of being MR =
MC. At the point E, MC curved intersected MR curved from above but at the point F, MC curved

20
ECONOMICS

intersected MR curved from bellow. So according to conditions of receiving equilibrium position, the firm is
in equilibrium and earns maximum profit at the point F.

21
ECONOMICS

Chapter 06: National Income

Income is the most frequently used term in Economics. Income level is the most useful tool which is used
to determine the standard of living of the people in a Country. Actual meaning of National income is
monetary value of all final goods and services produced by the residents of a Country.

Gross National Product (GNP): GNP is the value of all final goods and services produced by the residents of
a country in a financial year. While calculating GNP, income of foreigners in a country is excluded but
income of people who are living outside of that country is included.

Net National Product (NNP): Net National Product (NNP) in an economy is the GNP after deducting the
loss due to depreciation.
NNP = GNP - Depreciation

Gross Domestic Product (GDP): Gross domestic product is the value of all final goods and services
produced within the boundary of a nation during one year. GDP calculation includes income of foreigners
in a country but excludes income of those people who are living outside of that country.

Net Domestic Product (NDP): NDP is calculated by deducting the depreciation of plant and Machinery
from GDP.
NDP = Gross Domestic Product - Depreciation

Personal income (PI): is the total income received by the members of the domestic household sector,
which may or may not be earned from productive activities during a given period of time, usually one year.

Disposable income (DI): Disposable income is the total income that can be used by the household sector
for either consumption or saving during a given period of time, usually one year. Disposable income is
after-tax income.
DI = PI - direct tax.

Measurement of national income: National income can be measured through following three methods-

1. Output /Product method: This method approaches National income from the output side.

There are some problems in Output /Product method, they are-

i. Double counting problem

22
ECONOMICS

ii. The earning of expatriates have to know accurately.

2. Income method: In this method we estimate the income accruing to factors of production
at home and abroad in form of wage income and non-wage income.

The ways of counting Income method are-

i. Rent
ii. Salary/wage.
iii. Interest.
iv. Profit.

There are some problems in Income method and they are -

i. Transfer payment cannot be included with GNP.
ii. Mother service cannot be counted.
3. Expenditure method: This method arrives at national income by adding up all the
expenditure made on goods and services during a year.

Circular flow of income: Circular flow of income refers to continuous circular flow of money income and
flow of goods among major sectors of an economy.

Households supply factor services and spend their income on consumption. The firms hire/purchase factor
services from households and produce goods and services. The households as owners of factors of
production (land, labour, capital and enterprise) receive the payments in terms of money as reward for
rendering productive services. The recipients of these incomes (i.e., households), in turn, spend their
incomes on purchase of goods and services (produced by firms) to satisfy their wants. Expenditure by
households implies income going back to firms (producers of goods and services) making the circular flow
of income complete.

23
ECONOMICS

Chapter 07: Money & inflation

Money is a medium of exchange in the sense that we all agree to accept it in making transactions.
Merchants agree to accept money in exchange for their goods; employees agree to accept money in
exchange for their labour. Money doesn't have own value, by exchanging with goods and labour it's value
can be measured.

Functions of money: Functions of money are shown below -

1. Money as a medium of exchange of value.
2. Money is standard measure of value.
3. Money as a store of value.
4. Money as a different payment of value.
5. Money as a transferring of value.

Inflation: Inflation is the rate at which the general level of prices for goods and services is rising and,
consequently, the purchasing power of currency is falling.

Money laundering: Money laundering is the process of creating the appearance that large amounts of
money obtained from criminal activity, such as drug trafficking or terrorist activity, originated from a
legitimate source.

Black money to white money conversion: Black money is money earned through any illegal activity
controlled by country regulations. Black money proceeds are usually received in cash from underground
economic activity and, as such, are not taxed. Most black money holders attempt to convert the money
into legal money, also known as white money. This is typically done through money laundering, which can
be attempted in a number of ways.

Causes of Inflation: Causes of inflation are follows-

1. Increase in demand: When the demand of goods or services increases its price also
increases. This type of inflation is called demand pull inflation.
2. Population pressure: This will lead to a situation when too much money will be chasing very
few goods.
3. Reduction in supply: supply unable to meet demand and this increase the price of goods.
4. Natural calamities.
5. Deficit financing: Deficit financing or increase in money supply due printing of currencies or
loans breeds inflation.
6. Increase in government expenditure: More government spending will lead to more money
in hands of public hence greater purchasing power.
7. Black money.

24
ECONOMICS

8. Increases in wages/salary: Increases in wages/salary will increase the disposable income

hence demand increase and so does price.

Control of inflation: The ways of controlling inflation are follows -

i. Monetary Measures: Monetary policy is the policy employed by the central bank to alter the cost
of credit, demand for credit and the availability of credit. It is also known as the credit control
policy.
ii. Fiscal Measures: Fiscal policy measures comprise the policy of the government relating to taxation,
ex-penditure and borrowing.
iii. Physical Non-Monetary Measures: The permanent solution towards inflation should be an increase
in output since inflation is caused by the excess aggregate demand over available output. By
shifting resources of the country from the unproductive to the productive sectors, output can be
increased.

Phillips curve: This show that there exists inverse relationship between the rate of unemployment and
growth rate of money wages.

Thus, decrease in unemployment leads to increase in the wage. But when wage increases, the firms cost of
production increases which leads to increase in price. Therefore, it is also called wage inflation, that is,
decrease in unemployment leads to wage inflation.

25
ECONOMICS

Chapter 08: Balance of payment

The balance of payments, also known as balance of international payments and abbreviated B.O.P., of a
country is the record of all economic transactions between the residents of the country and the rest of
world in a particular period of time.
There are two types of Balance of payment, they are-
1. Current account: The current account measures the flows of goods, services, primary
income and secondary income between residents and non-residents.
2. Deposit account: The deposit account measures external transactions in capital transfers,
and the acquisition and disposal of non-produced, non-financial assets.

Internal and external balance:

 Internal Balance: When aggregate demand equals aggregate supply (potential output) and there is
full employment in the labour market.
 External Balance: This refers to the current account balance.

Internal and external balance under fixed exchange rates.

Full employment is obtained at output level at Y*. The internal balance schedule is therefore the vertical
line at Y*. Along BP=0 the balance of payments is in equilibrium. Points above the BP schedule correspond
to surpluses and points below to deficits in the balance of payments. With perfect capital mobility the
balance of payments can only be in equilibrium when home interest rates equal those abroad. Thus BP=0 is
flat at the level of world interest rates.

26
ECONOMICS

Chapter 09: Unemployment

Unemployment occurs when a person who is actively searching for employment is unable to find work.

Measure of unemployment: Unemployment can be measured as follows –

1. Employed unemployment : Employed unemployment includes people who are in a paid job
for one hour or more in a week.
2. Unemployed unemployment: Unemployed unemployment includes people who are not in a
paid job, but who are actively looking for work.
3. Not in the labour force: Not in the labour force includes people not in a paid job, and who
are not looking for work.
4. Labour force: Labour force is the sum of employed and unemployed people.

Unemployment effect: There are some socio-economic effect of unemployment.

Economic effects:
1. Wages are getting lowered. Because there is a surplus of working force in the job market,
people who are currently working are going to earn less money than if the economy was at
full employment.
2. The economy is slowing down. Unemployed people are consuming less, because of their low
purchasing power. So, the growth of GDP is slowing down, which can lead to… more
unemployment.
3. We could also say that lower wages are good for employers. Theoretically, it is. Actually, it’s
more complicated : governments are taxing companies to grant unemployment benefits to
the unemployed. This is not optimal, thus a considerable amount of resources are wasted.

Social effects:

1. Unemployment means low purchasing power, which means an increase in crime and violence.
2. Unemployed people’s children tends to be less educated than employed people’s children (because
of the difference of revenue between employed and unemployed) which increase the odds of being
also unemployed.
3. Unemployment also leads to an increase of people suffering depression, alcoholism, obesity,
gambling addiction and the list goes on…

Okun's law: States that for every 2percent that GDP falls relative to potential GDP, the unemployment rate
rise about 1percent point.

Equilibrium and disequilibrium of unemployment: The causes of unemployment can be divided into two
major categories which is equilibrium and disequilibrium unemployment.

27
ECONOMICS

Equilibrium Unemployment: Equilibrium Unemployment is where can be caused because of people who
are economically independent or the wages are too low for thus people don’t feel the need to be
employed.
Disequilibrium Unemployment: Disequilibrium Unemployment is where usually due to the imposition of
the minimum wage laws by the government which is means there will be higher demand for jobs then the
supply.

28