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in

1semesterM.comExamination,February2019

MacroEconomicsforBusinessDecisions

SECTION-A

1.A)DefineMultiplier.Giveanexample
Multiplier-thistermgivestherelationbetweentotalincomeinducedbygovernmental
spendingandtheoriginalamountofmoneyspent.Example-Inaneconomywhere
dollarsofgovernmentalwouldresultinahundreddollarslessofprivateinvestment,the
ratiooftotalinducednationalincometotheinitialexpenditureisnegativebutyetthe
multipliershouldbepositive.

B)Whatismeantbypercapitaincome?
Percapitaincomereferstotheaverageincomeperheadinthecountry.Itisauseful
aspecttomeasuretheeconomicstandingofthepeopleofthecountry,whethertheyare
forwardorbackwardpercapitaincomeinconsideredasanindexofthecountry’s
economicdevelopmentoveraperiodoftime.
Percapitaincome=NationalIncome/population.

C)Whatdoyoumeanbymixedeconomy?
Itreferstotheallthefactorsofproductionlikeland,labor,money,organizationare owned,
managed,andcontrolledbybothprivateindividualsandgovernment.Businesscarried
overforprofitandsocialwelfare.

D)GivethemeaningofDisposableincome.
Theincomeleftafterthepaymentofdirecttaxesfrompersonalincomeiscalledas
DisposableIncome.Disposableincomemeansactualincomewhichcanbespenton
consumptionbyindividuals.Thusitcanbeexpressedas:
DI=PI-directTaxes

E)Differentiatebetweenmonetarypolicyandfiscalpolicy.
Thefollowingarethedifferencesbetweenthemonetarypolicyandfiscalpolicy.
MonetaryPolicy FiscalPolicy

1.Implementedbythecentralbank Setbythenationalgovernment.

2.Itinvolvesthemanipulationofthe Itinvolveschangingthelevelofspending

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availablemoneysupplywithinthe andgovernmenttaxation.
economy.

3.Focusesonstrategyofbanks. Relatestoeconomicpositionofanation.

4.Helpsstabilizethepositionfthe Administersthetaxationstructure.
economy.

H)WhatisPublicdebt?
Publicdebtreferstothetotalborrowingsbytheuniongovernmentwhichincludessuch
itemsasmarketloans,specialbearerbonds,treasurybillsandsecuritiesissuedbythe
reservebank.Italsoincludestheoutstandingexternaldebt.

I)whatisParadoxofthrift?
ItwaspopularizedbytherenownedeconomistJohnMaynardKeynes.Itstatesthat
individualstrytosavemoreduringaneconomicrecessionwhichessentiallyleadstoa
fallinaggregatedemandandhenceineconomicgrowth.

J)StatethedriversofEconomicGrowth.
a.Capital
b.Technology
c.Humanresources
d.NaturalResources.

SECTION–B

2.ExplainbrieflythenatureandconceptsofIndianeconomy.

NatureofIndianeconomy:

∙ SinceindependenceIndiahasbeena'MixedEconomy'.India'slargepublic
sectorswereresponsibleforrenderingthecountrya'mixedeconomy'feature.

∙ Indianeconomyisbasicallybasedinthecontributionofservicesector(currently
provides60%shareofGDP)andnearabout53%ofitspopulationisdependent
ontheAgriculture.

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 ∙ Assoonasthetimeispassing,theshareofAgricultureisdecreasingandshare
ofservicesectorisincreasing.CurrentlyIndiaiscalledadevelopingeconomyof
theworld.

∙ In1956-57,industrialpolicychangedandlongtermobjectiveforindustrial
developmentwereadoptedbyIndiangovernment.

∙ Governmenttookmanystepstoresolvetheissue.Thestepsincluded
nationalizationofBanks,enactmentofmonopoliesandrestrictivetradepractice
Act,povertyeradicationprogrametc.

BasicConceptsofIndianeconomyareasfollows;Economicsisatoughnuttocrack formany–
GDP,GNP,NDP,NNP,Repo,ReverseRepo,SLR,CLR,CRAR–therearemany
conceptstobeunderstoodconceptsare

NationalIncome
UnderthebroadtopicofnationalincomeyoumayheartermslikeGDP,GNP,NNPetc.

GDP:GrossDomesticProduct(GDP)isthetotalmoneyvalueoffinalgoodsand
servicesproducedintheeconomicterritoriesofacountryinagivenyear.Totalvalueof
goodsandservicesproducedinIndiafor2014-15isprojectedtobearound100lakh
coreIndianrupeesoraround2trillionUSdollarsatcurrentmarketprices.Thisisthe
valueofIndianGDPwhenexpressedatcurrentmarketprice.

GDPstandsfortotalvalueofgoodsandservicesproducedinsidetheterritoryofIndia
irrespectiveofwhomproducedit–whetherbyIndiansorforeigners.

GNP: GrossNationalProduct(GNP)isthetotalvalueofgoodsandservicesproduced
bythepeopleofacountryinagivenyear.Itisnotterritoryspecific.Ifweconsiderthe
GNPofIndia,itcanbeseenthatGNPislesserthanGDP.

MonetaryPolicy

MonetaryPolicyreferstothepolicyofthecentralbank.InIndiaReserveBankofIndia
(RBI)isresponsibleformonetarypolicy.Repo,ReverseRepo,CRR,SLRetcarepartof
monetarypolicy.

REPOrate:REPOmeansRe Purchase Option–theratebywhichRBIgivesloansto

otherbanks.Bankre-purchasethesecuritiesdepositedwithRBIattheREPOrate.
Presentrateis8%.

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ReverseREPOrate:RBIattimesborrowsfrombanksataratelowerthanREPOrate,
andthatrateisknownasReverseREPOrate(now7%).REPOandReverseRepoaretwo
majoroptionsunderLAF(LiquidityAdjustmentFacility).

BankRate: Bankrateisahigherrate,(1%higherthanREPOrate)chargedbyRBIwhenit
givesloanstocommercialbanks. Presentbankrateis9%.Bankrateisdifferentfrom
MSFinthenaturethatBankrateislongterm,appliesforallcommercialbanksand
thereisnolimitationlike2percentoftheirrespectiveNetDemandandTimeLiabilities (NDTL).

CRR:CRRcorrespondstoCashReserveRatio.Itcorrespondstothepercentageofliquid
reserveseachbankshavetokeepascashreservewithRBI(intheircurrentaccounts)
correspondingtothedepositstheyhave.Bankswillnotgetanyinterestfor
thesedeposits.PresentCRRis4%.

SLR:SLR(StatutoryLiquidityRatio)correspondstothepercentageofliquidreserves
eachbankshavetokeepascashreservewiththemselvescorrespondingtothe
depositstheyhave.BankshavetomandatorykeepreservescorrespondingtoSLR
lockedwiththemselvesintheformofgoldorgovernmentsecurities.PresentSLRis22
%.ThemaindifferencebetweenCRRandSLRisthatbanksneedtokeepCRRwithRBI,
butSLRwiththemselves,butlocked.

FiscalPolicy
FiscalpolicyreferstothepolicyactionsoftheGovernment.Budget,tax,subsidies,
expenditureetc.formspartofthefiscalpolicy.Youmightneedtounderstandvarious
deficitslikeFiscalDeficitandPrimaryDeficitaspartofFiscalPolicy.

FiscalDeficit(FD): Thefiscaldeficitisthedifferencebetweenthegovernment’stotal
expenditureanditstotalreceipts(excludingborrowing).Inlayman’stermFD
correspondstoborrowingsandotherliabilities.

3.Mentionthemajortypesofmultipliers.Brieflyexplainthesignificanceofinvestment multiplier.

Typesofmultipliersareasfollows
1.EmploymentMultiplier:ItreferstotypeofmultiplierbyKahn’swherethenumberof
employmentiscreated,activatedandsuppliedfrom thebaseorprimaryjobs.let’s
supposeincosmeticproductsthemultiplierismeansthatforeveryjobincosmetic
productsindustryeffectsotherjobs.Generally,
thismeansthatifemploymentincreasesbyonejobincosmeticcompany,thenother
jobsarecreatedthroughouttheeconomy.

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2.FiscalMultiplier:Itsreferringtothattypeofmultiplierwhereanincrementof
governmentspendingtendstoleavealargerimpactonthenationalincome(GDP).The
MechanismusedinthiscaseisthataninitialincrementofspendingbytheGOVTleads to
increaseconsumptionwillmakeanincomeofanotherandhencefurtherincrease
thelevelofexpenditurethatresultsinanoverallincreaseinnationalincomeofthe country.

3.MoneyMultiplier:MoneyMultiplierisgenerallytheamountofmoneythatbanks
generatewitheachdollarofreserves.Reserveistheamountofdepositthatbanks
reserveforallthereservethatwantstoreserveinthebankthantolend.Themoney
multiplieristheratioofdepositstoreservesinthebankingsystem.thehigherreserve
ratio,thetighterwillbethemoneysupply,whichwillresultlesserexcessreserveand
wouldbelowermultipliereffectforeverydollardeposited.Thelargerthemoneysupply,
thelowerthereserverequirementswhichmeansmoremoneyIbeinggeneratedfor
everydollardeposited.

4.IncomeMultiplier:Aninjectionofinvestmentwillultimatelyresultmanytimeshigher
increaseintheincomeofanindividualortonationcausedbythatinitialinvestment.
Thatiswhyit’scalledincomemultiplieratthesametime.

5.Negative/ReverseMultiplier:Thenegativemultiplierreferstosuchsituationinthe
economywhereaminordeclineininvestmentwilltriggerahugedeclineinthebusiness activity.

6.Taxmultipliercanbethoughtinnegativeordownwordmultiplier becauseifan increase in

governmentspending leadsin everlargerincreasein GDP,then a
contradictorycasewouldbeanincreaseintax,decreasingGDPorspending.

SIGNIFICANCEOFINVESTMENTMULTIPLIER:
Aninvestmentmultiplierreferstotheconceptthatanyincreaseinpublicorprivate
investmentspendinghasamorethanproportionatepositiveimpactonaggregate
incomeandthegeneraleconomy.

Importanceofmultiplierareasfollows:

1)Investment:Themultipliertheoryhighlightstheimportanceofinvestmentinincome
andemploymenttheory.Sincetheconsumptionfunctionisstableduringtheshortrun
fluctuationsinincomeandemploymentareduetofluctuationsintherateofinvestment.

2)Tradecycle:Asacorollarytotheabove,whentherearefluctuationsinthelevelof
incomeandemploymentduetovariationsintherateofinvestment,themultiplier
processthrowsaspotlightonthedifferentphasesofthetradecycle.

3)Saving–InvestmentEquality:Italsohelpsinbringingtheequalitybetweensaving
andinvestment.Ifthereisadivergencebetweensavingandinvestment,andincreasein
investmentleadstoariseinincomeviathemultiplierprocessbemorethanthe

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increaseininitialinvestment

4)FormulatingofEconomicpolicies:Themultiplierisanimportanttoolinthehandsof
modernstatesinformulatingeconomicpolicies.Thusthisprinciplepre-supposesstate
interventionineconomicaffairs.
 5)Tocontroltradecycles:Thestatecancontrolboomsanddepressioninatradecycle
onthebasisofthemultipliereffectonincomeandemployment.Whentheeconomyis
experiencinginflationarypressures,thestatecancontrolthem byareductionin
investmentwhichleadstocumulativedeclineinincomeandemploymentviathe
multiplierprocess.

6)DeficitFinancing:The multiplierprinciple highlightsthe importance ofdeficit

financing.When the economy is reeling undera state ofrecession increased
governmentspendingthroughpublicinvestmentprograms,createsabudgetdeficitand helps
in expanding income and employmentby multipliertimes in increase in investment.

4)Whatisinflation?Whatarethefiscalmeasurestocontrolit?Explain.
Inflationisaquantitativemeasureoftherateatwhichtheaveragepricelevelof
abasketofselectedgoodsandservicesinaneconomyincreasesoveraperiodoftime.
Itistheconstantriseinthegenerallevelofpriceswhereaunitofcurrencybuysless
thanitdidinpriorperiods.Oftenexpressedasapercentage,inflationindicatesa
decreaseinthepurchasingpowerofanation’scurrency.

Fiscalmeasurestocontroltheinflationareasfollows:
Monetarypolicyaloneisincapableofcontrollinginflation.Itshouldtherefore,be
supplementedbyfiscalmeasures.Fiscalmeasuresarehighlyeffectiveforcontrolling
governmentexpenditurepersonalconsumptionexpenditureandprivateandpublic
investment.Theprincipalfiscalmeasuresarethefollowing

a)ReductioninunnecessaryExpenditure:Thegovernmentshouldreduceunnecessary
expenditureonnon-developmentactivitiesinordertocurbinflation.Thiswillalsoputa
checkonprivateexpenditurewhichisdependentupongovernmentdemandforgoods
andservices.Butitisnoteasytocutgovernmentexpenditure.Thoughthismeasureis
alwayswelcomebutitbecomesdifficulttodistinguishbetweenessentialandnon
essentialexpenditure.Thereforethismeasureshouldbesupplementedbytaxation.

b)IncreaseinTaxes.Tocutpersonalconsumptionexpenditure,theratesofpersonal,
corporateandcommoditytaxesshouldberaisedandevennewtaxesshouldbelevied,
buttheratesoftaxesshouldnotbesohighastodiscouragesaving,investmentand
production,Ratherthetaxsystem shouldprovidelargerincentivestothosewhosave,
investandproducemore.

C)IncreaseinSavings.Anothermeasureistoincreasesavingsonthepartofthe
people.Thiswilltendtoreducedisposableincomewiththepeople,andhencepersonal

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consumptionexpenditure.Butduetotherisingcostofliving,peoplearenotina
positiontosavemuchvoluntarily.Keynes,therefore,advocatedcompulsorysavingsor
whathecalled‘deferredpayment‘wherethesavergetshismoneybackaftersome
years.Forthispurpose,thegovernmentshouldfloatpublicloanscarryinghighratesof
interest,startsavingschemeswithprizemoneyorlotteryforlongperiodsetc,Itshould
alsointroducecompulsoryprovidentfund,providentfund-cum-pensionschemes,etc,All
suchmeasuresincreasesavingsandarelikelytobeeffectiveincontrollinginflation.
d)SurplusBudgets.Animportantmeasureistoadoptanti-inflationarybudgetarypolicy.
Forthispurpose,thegovernmentshouldgiveupdeficitfinancingandinsteadhave
surplusbudgets.Itmeanscollectingmoreinrevenuesandspendingless.

e)Publicdebt:Atthesametime,itshouldstoprepaymentofpublicdebtandpostpone
ittosomefuturedatetillinflationarypressurearecontrolledwithineconomy.Instead
thegovernmentshouldborrowmoretoreducemoneysupplywiththepublic.

5.Discussvariousfactorsdeterminingeconomicgrowth.

Economicgrowthcanbedefinedasanincreaseinthecapacityofaneconomyto
producegoodsandserviceswithinaspecificperiodoftime.

Ineconomics,economicgrowthreferstoalong-termexpansionintheproductive
potentialoftheeconomytosatisfythewantsofindividualsinthesociety.Sustained
economicgrowthofacountry’hasapositiveimpactonthenationalincomeandlevelof
employment,whichfurtherresultsinhigherlivingstandards.

Followingaresomeoftheimportantfactorsthataffecttheeconomicgrowthofa country:
I.EconomicFactors:

1.Naturalresources:Countrieswithabundantnaturalresourcescandevelopits
economymuchfasterwhencomparedtoacountrythatisdeficientinnaturalresources.

2.Capitalformation:Capitalislifebloodofalleconomicactivities.Capitalcreation
meanscreationofcapitalgoodsorassets.Largerquantityofcapitalassetsresultsinto
higheroutputandviceversa.

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production,improvementsresultsintohigheroutputandviceversa.

4.Divisionoflabor:
Itmeansrightmanintherightjob.Divisionoflaborandspecializationleadstohigher output.
5.Economicstability:
Itmeansabsenceoffluctuationsineconomicactivities.Whichresultintohigheroutput.

6.Populationgrowth:Increaseinpopulationleadstoincreaseinoutputandviceversa.

7.Sizeofthemarket:Expansioninthesizeofthemarketleadstoincreaseinoutput
andviceversa.

8.Removalofmarketimperfections:Removalofmarketimperfectionslikelow
efficiencyinproductions,underandmisuseofresources,monopolypracticesandprice
rigidityresultsintoincreaseinoutputandviceversa.

II.NonEconomicfactors:
1.Humanresources
2.Naturalresources
3.Socialandpoliticalfactors

1.HumanResource:Referstooneofthemostimportantdeterminantofeconomic
growthofacountry.Thequalityandquantityofavailablehumanresourcecandirectly
affectthegrowthofaneconomy.Thequalityofhumanresourceisdependentonits
skills,creativeabilities,training,andeducation.Ifthehumanresourceofacountryis
wellskilledandtrainedthentheoutputwouldalsobeofhighquality .
2.NaturalResources:Affecttheeconomicgrowthofacountrytoalargeextent.
Naturalresourcesinvolveresourcesthatareproducedbynatureeitheronthelandor
beneaththeland.Theresourcesonlandincludeplants,waterresourcesand
landscape.Theresourcesbeneaththelandorundergroundresourcesincludeoil,natural
gas,metals,non-metals,andminerals.Thenaturalresourcesofacountrydependon

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theclimaticandenvironmentalconditions.Countrieshavingplentyofnaturalresources
enjoygoodgrowththancountrieswithsmallamountofnaturalresources.

Theefficientutilizationorexploitationofnaturalresourcesdependsontheskillsand
abilitiesofhumanresource,technologyusedandavailabilityoffunds.Acountryhaving
skilledandeducatedworkforcewithrichnaturalresourcestakestheeconomyonthe
growthpath.
3.SocialandPoliticalFactors:
Playacrucialroleineconomicgrowthofacountry.Socialfactorsinvolvecustoms,
traditions,valuesandbeliefs,whichcontributetothegrowthofaneconomytoa
considerableextent.

Referstooneoftheimportantfactorsthataffectthegrowthofaneconomy.
Technologyinvolvesapplicationofscientificmethodsandproductiontechniques.In
otherwords,technologycanbedefinedasnatureandtypeoftechnicalinstruments
usedbyacertainamountoflabor.

6.Explaininbriefthelinkagesamongconsumption,savingandinvestment.
Animportantcontroversyinmacroeconomicsrelatestotherelationshipbetween
savingandinvestment.ManyeconomistsbeforeJ.M.Keynesweregenerallyoftheview
thatsavingandinvestmentaregenerallynotequal;theyareequalonlyundercondition
ofequilibrium.Besides,theythoughtthatequalitybetweensavingandinvestmentis
broughtaboutbychangesintherateofinterest.Keynesinhisfamouswork“General
TheoryofEmployment,InterestandMoney”putforwardtheviewthatsavingand
investmentarealwaysequal.

Thisgaverisetoaseverecontroversyineconomicsastowhethersavingand
investmentarealwaysequalortheyaregenerallyunequal.Thiscontroversyhasnow
beenresolved,andthereisgeneralagree¬mentamongtheeconomistsaboutthe
correctrelationshipbetweensavingandinvestment.

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Inordertoobtainthesaving,wehaveonlytodeducttheconsumptionexpenditurefrom
incomeandnottheinvestmentexpenditure.Whenanindividualmakesinvestment
expenditureheisdeemedtospendhissavedincomeoninvestment.Forinstance,ifa
farmer’sannualincomeisRs.10,000andhespendsRs.6,000onconsumergoodsand

servicesandspendsRs.1,000ontheconstructionofawellforhisfields,and
anotherRs.1,000onbuildingadrainagesystemforhisfieldsandprovidingfencing,
thenhissavingwouldbe10–6=Rs.4thousands.
TheexpenditureofRs.2,000onwell,drainageandfencingwillbeincludedinthesaving
andwillnotconstitutetheconsumptionexpenditure.IfYrepresentsthenationalincome
ofacountryandCthetotalconsumption,thenthesavingofthecountrywillbeequalto Y–C.Thus,

S=Y–C

Thiscanbeexpressedintheformofthefollowingequation:
NationalIncome=Consumption+Investment

or

Y=C+I

whereYstandsfornationalincome,CforconsumptionandIforinvestment.

Theaboveequationrepresentstheproductionorearningsideofthenationalincome.
Thesecondaspectofnationalincomeistheexpenditureside.Thetotalnationalincome
canbefullyconsumedbutgenerallyitdoesnothappenso.Inactualpractice,apartof
thetotalincomeisspentonconsumptionandtheremainingpartissaved.

Fromthiswegetthefollowingequation:

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NationalIncome=Consumption+Saving
Or
Y=C+S
whereYstandsfornationalincome,CforconsumptionandSforsaving.

Intheabovetwoequations(i)and(ii)itisclearthatnationalincomeisequaltothesum
ofconsumptionandinvestmentandalsoequaltothesumofconsumptionandsaving.
Fromthisitfollowsthat:

Consumption+Saving=Consumption+Investment

C+S=C+I

Inequation(iii)above,sinceCoccursonbothsidesoftheequation,weget:

Saving=Investment

or

S=I

Fromtheforegoinganalysis,itfollowsthatsavingandinvestmentaredefinedinsucha
waythattheyarenecessarilyequaltoeachother.Inequation(i)investmentisthatpart
ofnationalincomewhichisobtainedfromtheproductionofgoodsotherthanthose
consumedandequation(ii)savingisthatpartofnationalincomewhichisnotspenton
consumption.

Now,whensavingincreases,itimpliesthatconsumptionwillbeless.Thedeclinein
consumptionwouldresultintheadditiontotheinventoriesofconsumergoodswiththe

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shopkeepersandmanufacturers,whichwerenotplannedorintendedbythem.This
additiontoinventories,thoughunintended,willraisethelevelofactualinvestment.

Thusunintendedincreaseininventorieswillraisethelevelofinvestmentandinthisway
investmentwillincreasetobecomeequaltothegreatersaving.Ontheotherhand,ifin
anyyearsavingdeclines,itwillresultintheunplanneddeclineintheinventoriesof
consumergoodswiththetradersandmanufacturers.Thisunintendeddeclinein
inventorieswillmeanthefallinactualinvestment.Inthisway,investmentwilldeclineto
becomeequaltothelowersavings.
Therefore,savingsandinvestmentinplannedorex-antesensegenerallydifferfrom
eachother.Butthroughthemechanismofchangeintheincomelevel,thereistendency forex-
antesavingandex-anteinvestmenttobecomeequal.

Wheninayearplannedinvestmentislargerthanplannedsaving,thelevelofincome
rises.Atahigherlevelofincome,moreissavedandthereforeintendedsavingbecomes
equaltointendedinvestment.Ontheotherhand,whenplannedsavingisgreaterthan
plannedinvestmentinaperiod,thelevelofincomewillfall.

Atalowerlevelofincome,lesswillbesavedandthereforeplannedsavingwillbecome
equaltoplannedinvestment.Wethusseethatplannedorex-antesavingandplannedor ex-
anteinvestmentarebroughttoequalitythroughchangesinthelevelofincome. Whenex-
antesavingandex-anteinvest¬mentareequal,levelofincomeisin
equilibriumi.e.,ithasnotendencytoriseorfall.

Itisthusclearthatwhereasrealisedorex-postsavingisequaltorealisedorex-post
investment,intended,plannedorex-antesavingandinvestmentmaydiffer;intendedor ex-
antesavingandinvestmenthaveonlyaten¬dencytobeequalandareequalonlyat
theequi¬libriumlevelofincome.

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Thattheplannedorintendedsavingisequaltointendedinvestmentonlyatthe
equilibriumlevelofincomecanbeeasilyunderstoodfromFig.8.3.Inthisfigure,
nationalincomeismeasuredalongtheX-axiswhilesavingandinvestmentare
measuredalongtheY-axis.

SSisthesavingcurvewhichslopesupwardindicatingtherebythatwiththerisein
income,savingalsoincreases.IIistheinvestmentcurve.InvestmentcurveIIisdrawn
ashorizontalstraightlinebecause,followingKeynes,ithasbeenassumedthat
investmentisindependentofthelevelofincomei.e.,itdependsuponfactorsotherthan
thecurrentlevelofincome.

ItwillbeseenfromtheFig.8.5thatsavingandinvestmentcurvesintersectatpointE.

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Therefore,OYistheequilibriumlevelofincome.IfthelevelofincomeisOY1,the
intendedinvestmentisY1HwhereastheintendedsavingisY1L.Itisthusclearthatat
OY1levelofincome,intendedinvestmentisgreaterthanintendedsaving.
Asaresultofthis,levelofincomewillriseandathigherlevelsofincomemorewillbe
saved.ItwillbeseenthatwiththeriseinincometoOY2,savingrisesandbecomes
equaltoinvestment.Ontheotherhand,ifinanyperiod,levelofincomeisOY3intended
investmentisY3KandintendedsavingisY3J.Asaresultofthis,levelofnationalincome
willfalltoOY2atwhichex-antesavingandex-anteinvestmentareonceagainequaland
thuslevelofnationalincomeisinequilibrium.
7.ExplainthemonetaryintermediariesinIndianeconomicgrowth.

Banksdirectlyplayanimportantroleintheeconomicdevelopmentofthecountry,Here,
wecanseecertainspecificroleofbanksasfinancialintermediary.

1.Self-employmentprogramme
Employmentgrowthisasignofeconomicdevelopment.FinancialIntermediaries,by providing
finance forstarting self-employmentprogrammes are generating more
productionandincomeinthecountry.InIndia,afterthenationalizationofcommercial
banks,anumberofprogrammeshavebeeninitiatedbybanksforself-employment schemes.

2.EntrepreneurialDevelopmentProgrammes(EDPs):
EntrepreneurialDevelopmentprogrammeshavebeensuccessfullylaunchedbyvarious
banks.Initiallythrough Lead Bank Scheme,banks were developing employment
opportunitiesatthedistrictlevel.Lateron,ServiceAreaApproachwasadoptedin1978
bywhichcertainspecificareaswereallottedtothebanksforlaunchingdifferent
economicprogrammesforthedevelopmentofsuchareas.

3.IntegratedRuraldevelopmentscheme
Underthisscheme,financialintermediarieswerefinancingsociallyandeconomically
depressedpeoplebyprovidingloanstothem forvariouseconomicactivities.Onethird
oftheloanwillbeasubsidyandtheremainingtwo-thirdsoftheloanwillcarryalower

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rateofinterestundertheinterestsubsidyschemeofRBI.Inthisway,variouseconomic
programmesaimedatimprovingruraleconomicconditionswereundertaken

4.HousingFinance
Asapartofimprovingdwellinghouses,financialintermediariesareprovidinghousing
loans.TheyarealsoprovidingrefinancingfacilitytoagenciessuchasHUDCO(Housing
andUrbanDevelopmentCorporation).Thishasenabledmanyfixedincomegroup
peopletoavailthehousingloan.Normally,toaborrowerunderthisfacility,abank provides3-
yearaggregatenetincomeasamaximum amountorthecostofthehouse,
whicheverisless.

5.PrioritySector
AsperRBIguidelines,commercialbankshavetoprovidecertainpercentageoftheir
lendingtoprioritysectorwhichconsistsofagricultureanditsalliedactivities,suchas
poultry,dairy,etc,cottageindustries,smallscaleindustries,smallindustryandbusiness.

6.BackwardareaDevelopment
Inordertopreventregionaldisparities,financialintermediarieshavebeenadvancing
loanstoindustrieswhicharestartedinbackwardareas.Governmenthasgivencertain
concessionsintheform oftaxbenefitstosuchindustriesandbanksprovidecheap
loanssothatthebackwardareascouldattractmoreindustries.

7.IntroductionofElectronicsystem
 Computersarebeingusedbyfinancialintermediariesformostoftheiractivitiesnow
andtheyareabletolinktheirbranchesthroughanetwork.Thishasresultedinquicker
transferoffundsbetweencentresandthishashelpedcustomersinrealizingtheir
chequesinaspeedymanner.Itisforthispurpose,thatMagneticInkCharacter
Recognition(MICR)chequeshavebeenintroduced.

ThecustomercanalsomakeuseofHomebankingfacilitybylinkingtheircomputer
systemwiththebankandinstructionscanbeprovidedfortransferoffunds.Thisfacility,
ifdevelopedthroughoutthecountry,willnotonlyhelpinthemovementoffundsbut
alsoreducethedisparityintheinterestrate.

SECTION-C

1.Criticallyexaminethedifferentapproachesadvocatedformeasuringthenational income.

Nationalincomemeasurestheincomegeneratedbyacountrythroughtheproduction
activitiesthatarecarriedoutwithinacountryduringaspecificperiodoftime.

Acircularflowofincomeandexpenditureexistswithinaneconomy,wherefactor
incomeisearnedfromtheproductionofgoodsandservices,andtheincomeisspent

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onthepurchaseofproducedgoods.Thus,therearethreealternativemethodsof
computingnationalincome.Thisincludes:

1.Productmethod:Accordingtothismethodthetotalvalueoffinalgoodsandservices
producedinacountryduringtheyeariscalculatedatmarketpricestofindouttheGDP
thedataofallproductiveactivitiessuchasagricultureproducts,woodreceivedfrom
forest,mineralsreceivedfrommines,commoditiestoproductionbyindustriesthe
contributiontoproductionmadebytransportcommunicationtoproductionmadeby
transportcommunicationinsurancecompanies,lawyer,doctor,teachersetcare
collectedandassessedatmarketpricesonlythefinalgoodsandservicesareincluded
andtheintermediarygoodsandservicesareleftout.

2.Accordingtothismethodthenetincomepaymentreceivedbyallcitizensofa
countryinaparticularyearareaddedupthatisnetincomethataccruetotallfactorsof
productionbywayofnetrent,netwages,netinterest,andnetprofit,arealladded
togetherbutincomereceivedintheformoftransferpaymentsarenotincludedinit.
ThedatapertainingtoincomeareobtainedfromdifferentsourcesforinstanceforIT
departmentinrespectofhighlyincomegoodsandincaseofworkersfromtheirwage bills.

3.Expendituremethod:Accordingtothismethodthetotalexpenditureincurredbythe
societyinaparticularyearisaddedtogetherandincludespersonalconsumption
expenditurenetdomesticinvestment,governmentexpenditureongoodsandservices
andnetforeigninvestment.ThisconceptisbasedontheassumptionthatNational
Income=NationalExpenditure.
4.Valueaddedmethod:Anothermethodofmeasuringnationalincomeisthevalue
addedbyindustries.Thedifferencebetweenthevalueofmaterialoutputandinputat
eachstageofproductionisthevalueaddedifallsuchdifferencesareaddedupforall
industriesintheeconomy.

2.Discussthevariousconceptsofmarginalpropensitytoconsumeandmarginal
propensitytosavewiththehelpofnumericalexamplesandthegraph.

MarginalPropensityToConsume(MPC)
Itisdefinedastheproportionofanaggregateraiseinpaythataconsumerspendson
theconsumptionofgoodsandservices,asopposedtosavingit.Marginalpropensityto
consumeisacomponentofKeynesianmacroeconomictheoryandiscalculatedasthe
changeinconsumptiondividedbythechangeinincome.
Formula:
Itisfoundoutbydividingchangesinconsumptiontoagiveninchangein disposableincome.
MPC=changeinconsumption/changeinincome
Thiswemakethisconceptclearbytakinganexampleofletussuppose File Downloaded From

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thedisposableincomeraisesfromrupees2000billionto3000billionand
totheconsumptionexpenditureincreasefromrupees1500-2000billion.
Themarginalpropensitytoconsumeis
∆c/∆y
=500/1000=½=0.5
Alltheconcertofconsumptionfunctionarenowexplainedwiththehelpofschedule andadiagram
disposable consumption Average marginalpropensity
income(Y) expenditure(C) propensitytoconsu toconsume∆c/∆y
meC/Y)

A1000 1100 1.1 0.9

B2000 2000 1.0 0.6

C3000 2600 0.86 0.5

D4000 3100 0.77 0.3

E5000 3400 0.68 0.2

F6000 3600 0.6 0.1

G7000 3700 0.53

From the above schedule thatwith the increase in the disposable income,the
propensitytoconsumedecreaseandconverselywithafallinincomethepropensityto
consumeandthemarginalpropensitytoconsumeincrease.Theconsumptionschedule
canalsobeexplainedwiththehelpofcurvewhichisgivenbelow:

In the above figure the disposable income is

measuredalongthehorizontalaxisOXandconsumptionalongtheverticalaxisOY.let
usnowdraw45°helpinglinefrom OtoONifwetakeanypointonthe45°helpingline,
incomewillbeexactlyequaltoexpenditure.Thecurve‘AG’representtheincome
consumptionschedule,indicatingthepropensitytoconsumeratvariouslevelsof
income.Atpoint’A’whichisabove45°helpinglineshow sthattheexpenditureis
greaterthanit’sincome
Thisdeficitinincomecanbeconvertedintoeitherfrom borrowingorfrom thesaleof
assets.AtpointBconsumptionexpenditureexactlyequaltothedisposableincomeand
thereisneithersavingnotdissaving.thispointisknownasbreakevenpoint. From
BonwarduptoG,thecurveliesbelowthe45°helpingline.Thisshowsthatthe

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consumptionexpenditureislessthanthedisposableincome.Netsavingismeasured
bythedistancefromthepropensitytoconsumecurveupto45°helpingline.

MarginalPropensityToSave(MPS)
Themostistheratioofthechangeinsavingtothechangeinincreaseitcanalsobe
definedastherateofchangeinAPSasincomechanges.Itcanbefoundbychangein
savingbychangeinincome(∆S/∆Y).

Italsofoundoutbysubtractingmarginalpropensitytoconsumefrom1.
thusMPS=1-MPC

disposable consumptio NetSaving(S) Average Marginal

income(Y) n propensity propensity
expenditure tosave(1- toSAVE(1-
(C) PC=PS) MPC=MPS

A1000 1100 100 1 0.1

B2000 2000 000 0 0.4

C3000 2600 400 0.14 0.5

D4000 3100 900 0.23 0.7

E5000 3400 1600 0.32 0.8

F6000 3600 2400 0.4 0.9

Fromtheaboveschedulethattheincreaseintheincome,theaveragepropensityto
saveandthemarginalpropensitytosavealsoincreasesandincomedecreases,the
averagepropensitytosaveandthemarginalpropensitytosavealsodecreases.

IntheabovefigurethedisposableincomeismeasuredalongtheXaxisandsaving
alongtheaxisY.atpointAtheconsumptionexpenditurers.1100billionagainstthe
disposableincomeofRs1000billion.Theexpenditureismorethanthedisposable
income.ThereisdissavingofRs100billionismeteitheroutofaccumulatedsavingorby
borrowing.WhenincomeincreasestoRs2000billion.

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AtpointB,consumptionisexactlyequaltoexpenditure.BistheBreakEvenpointwhere
C=Y.fromBonwarduptoGpoint,savinggoesorincreasingwithincreasesin
disposableincome.AGthusisthesavingcurvewhichhasrisenwiththeriseinincome.

3.Explaininbrieftherecentcontrolmeasuresimposedbycentralbanktoregulatethe
MonetarySystemsinIndia.

ThevariousmethodsimposedbyRBItocontrolCreditcreationpowerofcommercial
bankscan
beclassifiedintotwogroups.i.e.quantitativeandqualitativecontrols.
Quantitativecontrolsaredesignedtoregulatethevolumeofcreditcreatedby
commercialbanks.
Qualitativeorselectivemeasuresaredesignedtoregulatetheflowofcreditinspecific uses.
Quantitativecontrols
1)BankRatepolicy:
2)Openmarketoperations:
3)Variablecashreserveratio:
a.CRR
b.SLR
c.Reporate
d.Reservereporate

Qualitativeorselectivemeasures
1)Marginrequirements:
2)Regulationofconsumercredit:
3)CreditRationing:
4)MoralSuasion:
5)Controlthroughdirectives
6)Directaction:
7)Publicity:

IQuantitativemethods:

1.BankRatepolicy:
BankrateistherateatwhichRBIlendsmoneytothecommercialbanks.Itisalsocalled as
discountedrate.AchangeinthebankrateaffectsthecreditcreationpoweroftheRBI.
DuringtheperiodofInflation,therewillbeexcessmoneysupply.Inordertocontrol money
supplybankrateisusedasainstrument.Anincreaseinbankrateleadstoincreasein
ratesofinterests,Increaseinrateofinterestleadstoincreaseincostofborrowingand
decreaseindemandforcreditfinallydecreaseindemandforcreditleadstodecreasein
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moneysupply.Duringtheperiodofdeflation,therewillbeshortageofmoneysupply,an
decreaseinbankrateleadstodecreaseinrateofinterest,decreaseinrateofinterest
leadstodecreaseincostofborrowingsandincreaseindemandforcredit,increasein
demandforcreditleadstoincreaseinmoneysupply.

2.Openmarketoperations:
Openmarketoperationreferstothesaleandpurchaseofsecuritiesbythecentralbank to
commercialbanks.Duringtheperiodofinflation,centralbankwillsellthesecuritiesto
commercialbankinorderDuringtheperiodofinflation,centralbankwillsellthe
securitiestocommercialbankinordertocontrolcreditcreationandmoneysupply
Duringtheperiodofdeflation,centralbankwillbuythesecuritiesfromcommercial
bankstoincreasethecreditcreationandmoneysupplyintheeconomy.

3.Variablecashreserveratio:
Variablecashreserveratioreferstopercentageofbankdepositsthatthecommercial
banksarerequiredtokeepintheformofcash.ThereservebankofIndiaimposes
mainly2typesofreserveratio.Viz.CRRandSLR
(a)Cashreserveratio:
TheCRRreferstothatportionoftheaggregatedemanddepositswhichthecommercial
banksarerequiredtokeepwithRBI.AriseinCRRleadstodeclineinthecreditcreation
powerofthecommercialbanksandfallinCRRleadstoincreaseinthecreditcreation poweroftheRBI.
(b)Statutoryliquidityratio:TheSLRreferstothatportionoftheaggregatedemand
depositswhichthecommercialbanksarerequiredtokeepwiththemselvesinaliquid
form.AriseinSLRleadstodeclineinthecreditcreationpowerofthecommercial
banksandfallinSLRleadstoincreaseinthecreditcreationpoweroftheRBI,

(c)Reporate:ReporateistherateatwhichRBIlendsmoneytothecommercialbanks

(d)Reversereporate:RRRistherateatwhichRBIborrowsmoneyfromthecommercial banks.

IIQualitativemethods:

1.Marginrequirements:
Marginisthedifferencebetweentheloanvalueandthemarketvalueofthesecurities
offeredbyborrowersagainstloan.AriseinMarginresultintodecreaseincredit
creationandmoneysupplyintheeconomyanddecreaseinmarginleadstoincreasein
creditcreationandmoneysupplyintheeconomy.
Forexample:ifthemarginis30%thencommercialbankslendonly70%ofthemarket
valueofthesecurities.Ifitisraisedto40%thentheycanlendonly60%ofthemarket
valueofthesecurities.
2.Regulationofconsumercredit:
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theformofdownpayment,theremainingpartofthepriceofthegoodsfinancedbythe
bankwhichisrepayablebyconsumerinInstallmentsoveraperiodoftime.IfRBIwants
tocontrolthemoneysupplythenitwillincreasethedownpayment
amountandincreasetheinterestratesonconsumercreditandviceversa

3.CreditRationing:
Rationingofcreditisasystemunderwhichthecentralbanklimitsthetotalamountof
loansandadvancesorspecificcategoriesofloansandadvancesgrantedby
commercialbanks.

4.MoralSuasion:
ItisaconvincingactionandrequestmadebyRBItothecommercialbankstofollowthe
monetarypolicywithoutmakinganydeviations.Itmayintheformofrequest,appeal, and
convincingactionbytheRBI.DuringtheperiodofInflationRBIrequestthecommercial
banksnottolendmorecredittospeculativeandnonessentialactivities.Duringthe
periodofdeflationRBIrequestthecommercialbankstoprovidemorecredit.

5.Controlthroughdirectives:
Centralbankcanexercisecontrolovercommercialbanksthroughdirectivesfromtime
totime.Thesedirectivesmaybeintheformoforalorwrittenorders,statements,
warningsoreventhreats.

6.Directaction:
Whenmoralsuasionanddirectivesfails,thecentralbankmakeuseofthismethodasa last
resort.Itwilltakedirectactionagainstbanksbyimposingpunishmentslikehigher
interestonborrowings,stoppageofcredit,delicensingofthebanksandliquidation

7.Publicity:
Publicityincludespublishingregularlythestatementsofcommercialbanksassetsand
liabilitiesreportsonoperationsandactivitiesofcommercialbanks,Moneymarket,
banking,publicfinance,industry,agricultureetc..Thisinformationgivecluesto
commercialbankstoformulatetheirownpolices.

4)Whatisbusinesscycle?WhatareitsPhases?Explainthemechanismtoovercome
thebusinesscycle.
Theterm“businesscycle”(oreconomiccycleorboom-bustcycle)referstoeconomy
widefluctuationsinproduction,trade,andgeneraleconomicactivity.Fromaconceptual
perspective,thebusinesscycleistheupwardanddownwardmovementsoflevelsof
GDP(grossdomesticproduct)andreferstotheperiodofexpansionsandcontractions
inthelevelofeconomicactivities(businessfluctuations)aroundalong-termgrowth trend.

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Phasesofbusinesscycle:
1.depression:Depressionisthefirstoftradecyclewhentheeconomicactivityis
extremelylow.Duringdepressionallconstructionactivitiescometoamoreorless
haltingstage.Capitalgoodsindustriessuffermorethanconsumergoodsindustries.
Producerssufferheavylosses,purchasingpowerofconsumerislow.

2.Recoveryorrevival:Afteraperiodofdepression,recoverystarts,Itisaperiodwhere
economicactivitiesrecoverfromshocks.Recoveryistheturningpointofeconomyfrom
depressiontoexpansion.Recoveryperiodhelpsthebusinesspeopletorestorethe
confidenceandcreatesthefavorableclimateforbusinessactivities.Asresultofthese
factor,businesspeopletakemorerisksandinvestmore.

3.Prosperityorfullemployment:Thisstageisalsocalledasexpansion,theprosperity
stageischaracterizedbyhighlevelofoutputandtrade,highlevelofemploymentand
income,largeexpansionofbankcredit,highdemand,highlevelofpurchasingpower,
consumerexpenditureetc.

4.Boomorfullemploymentorinflation:Theprosperityphasedoesnotstopatfull
employment.Itgivesthewaytoboom.Businessoptimismstimulatesfurther
investmentleadingtorapidexpansioninallbusinessactivities.Atthisstageincreased
pressureininvestmentleadstoincreaseinwagesandprices.Noproductiveresources
arefacingunemploymentathisstagesavingmustbeequaltoinvestment.

5.Recession:Itistheperiodwhereintheaggregatelevelofeconomicactivitiesstarts
declining.Thereisaslowingdownofbusinessactivities.Afterreachingthepeakpoint,
demandforthegoodsdecline,overinvestmentandproductioncreatesimbalance
betweensupplyanddemand.

MeasurestoControlBusinessCyclesorStabilizationPolicies:
Variousmeasureshavebeensuggestedandputintopracticefromtimetotimeto
controlfluctuationsinaneconomy.Theyaimatstabilizingeconomicactivitysoasto
avoidtheill-effectsofaboomandadepression.Thefollowingthreemeasuresare
adoptedforthispurpose.

1.MonetaryPolicy:Monetarypolicyasamethodtocontrolbusinessfluctuationsis
operatedbythecentralbankofacountry.Thecentralbankadoptsanumberof
methodstocontrolthequantityandqualityofcredit.Tocontroltheexpansionofmoney
supplyduringaboom,itraisesitsbankrate,sellssecuritiesintheopenmarket,raises
thereserveratio,andadoptsanumberofselectivecreditcontrolmeasuressuchas
raisingmarginrequirementsandregulatingconsumercredit.Thusthecentralbank

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adoptsadearmoneypolicy.Borrowingsbybusinessandtradebecomedearer,difficult
andselective.Effortsaremadetocontrolexcessmoneysupplyintheeconomy.
 Tocontrolarecessionordepression,thecentralbankfollowsaneasyorcheap
monetarypolicybyincreasingthereservesofcommercialbanks.Itreducesthebank
rateandinterestratesofbanks.Itbuyssecuritiesintheopenmarket.Itlowersmargin
requirementsonloansandencouragesbankstolendmoretoconsumers,businessmen,
traders,etc.

2.FiscalPolicy:
Monetarypolicyaloneisnotcapableofcontrollingbusinesscycles.Itshould,therefore,
besupplementedbycompensatoryfiscalpolicy.Fiscalmeasuresarehighlyeffective
forcontrollingexcessivegovernmentexpenditure,personalconsumptionexpenditure,
andprivateandpublicinvestmentduringaboom.Ontheotherhand,theyhelpin
increasinggovernmentexpenditure,personalconsumptionexpenditureandprivateand
publicinvestmentduringadepression.

PolicyduringBoom:
Thefollowingmeasuresareadoptedduringaboom.Duringaboom,thegovernment
triestoreduceunnecessaryexpenditureonnon-developmentactivitiesinorderto
reduceitsdemandforgoodsandservices.Thisalsoputsacheckonprivate
expenditurewhichisdependentonthegovernmentdemandforgoodsandservices.But
itisdifficulttocutgovernmentexpenditure.Moreover,itisnotpossibletodistinguish
betweenessentialandnon-essentialgovernmentexpenditure.Therefore,thismeasure
issupplementedbytaxation.

Tocutpersonalexpenditure,thegovernmentraisestheratesofpersonal,corporateand
commoditytaxes.

Thegovernmentalsofollowsthepolicyofhavingasurplusbudgetwhenthe
governmentrevenuesexceedexpenditures.Thisisdonebyincreasingthetaxratesor
reductioningovernmentexpenditureorboth.Thistendstoreduceincomeand
aggregatedemandthroughthereverseoperationofthemultipher.

PolicyduringDepression:
Duringadepression,thegovernmentincreasespublicexpenditure,reducestaxesand
adoptsabudgetdeficitpolicy.Thesemeasurestendtoraiseaggregatedemand,output,
income,employmentandprices.Anincreaseinpublicexpenditureincreasesthe
aggregatedemandforgoodsandservicesandleadstoincreaseinincomeviathe
multipher.Thepublicexpenditureismadeonsuchpublicworksasroads,canals,dams,
parks,schools,hospitalsandotherconstructionworks.

Theycreatedemandforlabourandtheproductsofprivateconstructionindustriesand
helpsinrevivingthem.Thegovernmentalsoincreasesitsexpenditureonsuchrelief

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measuresasunemploymentinsurance,andothersocialsecuritymeasuresinorderto
stimulatethedemandforconsumergoodsindustries.Borrowingbythegovernmentto
financebudgetdeficitsutilizesidlemoneylyingwiththebanksandfinancialinstitutions
forinvestmentpurposes.

5)ExplainindetailvariousproblemsofEconomicGrowthandDevelopmentofIndia
*Introduction:economicsisgrowingsubject.Variouseconomisthavedevelopedday
numberofnewbranchesfrom timetotime.Economicdevelopmentisonesuchnew
branchdevelopedinthefirstpartof20thcentury.Itisalsocalledaseconomicsof
growthandeconomicsofunderdevelopment.Thisnew branchmainlydealswith
developmentandgrowthproblemsofdifferenteconomics.Itisasubjectofrecent
interestandspecialisation.Severalfactorslikethefirstworldwar1914-18,theRussian
revolutionof1917.hyperinflationof1920swhichstartedinGermany,launchingof
economicplanninginUSSRin1928,GreatDepressionof1930swhichstartedinUSA,
thesecondworldWar,1939-1945etchavecontributedforthedevelopmentofthisnew
branchofeconomic.Thefollowingarethevariousproblemsofeconomicgrowthand
developmentofIndia:
1)Consumerism :growthmayleadtoconsumerism byencouragingthecreationof
whatsomeregardedasartificialneeds.Industriescauseconsumerstodevelopnew
tasteandpreferencesforgrowthoccur.

2)ResourcesDepletion:manyearlierpredictionsofresourcedepletionsuchas
ThomasMalthus.Itmeanstheconsumptionofaresourcefasterthanitcanbe
replenished.Resourcedepletionismainlycommonlyusedinreferencetofarming ,fishing,mining,w
aterusageandconsumptionoffossilfuels.

3)Environmentalimpact:isthedeteriorationoftheenvironmentthroughdepletionof
resourcesuchasairwaterandsoil,thedestructionofecosystem,Habitatdestruction,
theextinctionofwildlifeandpollution.Itisdefinedasonechangeoranychangeare
disturbancetotheenvironmentperceivedtobeDeleteriounorundesirable.

4)Equitablegrowth:itmeansintheeconomytheRiseinlivingstandardofallfamilies
ithelpsforthegrowthofeachandeveryindividual.

5)Implicationsofglobalwarming:globalwarmingandclimatechangereferstoan
increaseinaverageGlobaltemperatures.Itprimarilycausedbyincreaseingreenhouse
gases.Theindicatorsaretemperatureoverland,snowcoveronhills,humidity,sealevel,
temperatureoveroceans.

6) Policies towards economic stability : economic stability enables other

macroeconomicobjectivesto beachievedsuchasstablepricesandstableand
sustainablegrowth.ItalsocreatestherightenvironmentforjobcreationandaBalance
ofpayments.Thisislargelybecausestabilitycreatescertaintyandconfidenceandthis
encouragesinvestmentintechnologyandhumancapital.

7)Lackoffinancialresources:undercapitalizationisoneofthekeyreasonsforfailure File

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ofsmallbusinessVentures.Lackoffinancialresourcesisamajorproblem forsmall
companies.Thesmallcompaniesgenerallyhavefourpossiblesourcesoffundwhich are,
∙ Internallygeneratedprofits
 ∙ Overdraftandloanfunding

∙ Additionalequityfinancing

∙ CorporateventuringCashisakeyresourcebecauseaswellasbeingprofitable,
companiesmustbecashgeneratingtoservice.

8)Managementproblems:anygrowing companymustundertakeaprocessof
managementdevelopmenttoensurethattheorganisationhasasuitablemanagement
whichwillmeetitspresentandfutureneeds.Thefollowingareasmustbeexplored: ∙
Developmentofexistingmanagement
∙ Additionstotheexistingmanagement

∙ Complementaryrelationshipwithexternaladvisors
9)Inadequate systems :smallcompanies particularlyin the startup phase are
characterizedbyanumberofinformalsystemswhichrelayonthedirectinvolvementof
themanagement.Majorareasinwhichadequacyoftheexistingcontrolsystem should
beexaminedare:1)Financialsystem 2)Productionsystem 3)Marketingsystem.The
processofeconomicdevelopmentindevelopingNationsisacomplicatedonesuchas
Indiaithasmultiplefaces.ManydevelopingNationshavecontinuedtoremainas
underdeveloped Nations fora long time the process ofEconomic Development
innovationsiscomplicatedmonstersinbecausemypeoplephases.Mindhelping
nationshavecontinuedtoremainasandthedevilofNationsforalongtimeonapoint
ofseveralreasons.

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