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1. State and explain the definition of Economics provided by Alfred Marshall?


Marshall is a well-known economist. He was behind Smith and for him all the way, approximately
hundred twenty years after Smiths book on Economics. Alfred Marshall wrote a book in Cambridge
which was entitled PRINCIPALES OF ECONOMICS.
In this book, Marshall defined Economics as an instrument to remove the doubts of the people
regarding the subject.
Marshall stated , Economics is the study of mankind in the ordinary business of life; it examines
that part of individual and social Action which is most is closely connected with the attainment and
use of the material requisites of well-being
From the definition, we able to achieve three main points:
(i) Ordinary business of life or Economics as a social science.
(ii) Attainment and use of material requisites or production and consumption of wealth.
(iii) Well-being or welfare of the society.
(i) ORDINARY BUSINESS OF LIFE OR ECONOMICS AS A SOCIAL SCIENCE:
According to Marshall, Economics is studies the economic behavior of the people living in the
society. Economic activities of the people outside the society are not, therefore, considered in the
study of economics. Hence Economics does not study the isolated individuals or any Robinson
Crusoe. By this he shows that economics is a social science.
(ii) ATTAINMENT AND USE OF MATERIAL REQUISITES OR PRODUCTION AND
CONSUMPTION OF WEALTH:
In the ordinary business of life, human beings perform different types of activities such as political
activities , sports, economic activities , moral and religious activities, of all these activities of ordinary
life, Economics Studies only those activities which are related with the attainment and use of material
requisites or in other words, the production and consumption of wealth.
(iii) WELL BEING OR WELFARE OF THE SOCIETY:
According to Marshall, the objective of the study of Economics is to promote the material welfare of
the people, to Marshall. Economics focuses on only material aspects of life and therefore studies
material requisites well-being. Hence, according to him economics does not regard wealth to be the
goal of all human activities. In 1931, other economists, Loinel Robbins, wrote a book entitled
NATURE AND SIGNIFICANCE OF ECONOMIC SCIENCE
(i)THE DEFINITION NAROWS THE SCOPE OF ECONOMICS:
The use of the word Material by Marshall narrows the scope of economics as well need both the
material and non-material requisites of life i.e. goods and services.
The need for non-material requisites is certainly over-whelming, Examples of the nonmaterial
requisites are the service of lawyers, teachers and doctors etc, these non-material requisites satisfy our
wants in the same way as material requisites (or goods) and if we exclude them from the study of
economics, the scope of economics would certainly be restricted.
(II)WELL BEING IS A NONMEASURABLE CONCEPT:
True enough in its meaning one cannot measure wellbeing. It is something that cannot be estimated
to figures, although it can be stated in theories. Thus, according to Robbins, well-being cannot be
measured as stated by Marshall.
(iii)ECONOMICS SHOULD NOT PASS VALUE JUDGEMENT:
Robbins, Economics should emphasize only on human and their satisfaction and, therefore it is not
concerned with whether these wants are being satisfied buy good things or bad things.
(iv) IT CREATES PROBLEMS FOR POLICY MAKING:
According to Marshal, the study of economics should be directed to pursue the concept of welfare, but
Robbins objects to this point of view on the ground that the concept of welfare would place the
government in a vulnerable position in the making of economic policies

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Today all over the world people have become highly economic minded. They have realized that the
study of economics can provide them a solution to their economic and social problems. Today
economics is more useful than any other branch of knowledge because it makes human welfare its
direct and primary concern.My. Durbin says "Economics is the intellectual religion of the days."
Following are the main importance of the study of economics.
1. USEFUL FOR THE PRODUCER:Economics is very useful for the producer. It guides him that how he should combine the four factors
of production and minimize the cost of production.
2. USEFUL FOR THE CONSUMER:The consumer can adjust his expenditure of various goods in better way if he knows the principles of
economics. He will spend his income according the law of Equi-Marginal utility in order to get
maximum satisfaction.
3. POVERTY AND DEVELOPMENT:It helps in removing the poverty from the country. Under developed countries are facing many
problems like unemployment, over population low per capita income and low production. Economics
is very useful in solving these problems.
4. USEFUL FOR THE LEADER:Its study is helpful for the leader5s to understand the economic problems if they have a knowledge of
Economics.
5. USEFUL FOR THE FINANCE MINISTER:Finance minister prepares the yearly budget of the country. Economics guides him that how he should
frame the tax policy and monetary policy.
6. USEFUL FOR THE DISTRIBUTION OF NATIONAL INCOME :From the study of economics one can easily judge that how the income should be distributed among
the four factors of production.For this purpose Marginal productivity theory is suggested by economic
7. CULTURAL VALUE:A person's education can not be considered complete unless he has some knowledge of economics.
The things which happen daily around us have an important economic bearing. So there is also the
cultural value of the study of economics.
8. IMPORTANCE FOR A COMMON MAN :The study of economics is very useful for every citizen. It enables him to understand and criticize the
economic policies of the government. He can also guide the government.
9. ECONOMIC PLANNING:In the modern age the importance of economic planning cannot be ignored. Through planning we can
utilize our natural resources in better way and can improve our economic condition.
10. IMPORTANCE FOR LABOUR:It guides the workers that how they can get maximum wages from the employer. It enables them to
get the right of trade union , collective bargaining and fixation of working hours.
11. SOLUTION FOR ECONOMIC CRISES:It guides the nations that how they can save themselves from the economic crises. The advanced
countries desire is that there should be economic stability and full employment without inflation to
achieve these objectives, economics is very useful for them.
12. INSPIRES FOR DEVELOPMENT:The study of advanced countries economy inspires the less development countries that they can also
improve their economics conditions.

2.(Discuss the importance of the study of Economics?

3. What is the difference between changes in demand and increase/decrease in


demand?

Changesindemand

IncreaseinDemand

DecreaseinDemand

D1

D2

D2D1

Shift to the right of the Demand


Curve

Shift to the left of the Demand


Curve

First, a demand (or


supply) determinant changes.
Second, this determinant
change causes the demand
curve (or supply curve) to
shift.
Third, the change in
demand (or supply) causes
either a shortage or a surplus
imbalance in the market. The
market is in a temporary state
of disequilibrium.
Fourth, the shortage and
surplus imbalance causes the
price of the good to change.
Fifth, the change in price
causes a change in quantity
demanded (and supplied).
Sixth, the change in quantity
demanded (and supplied)
eliminates the shortage or
surplus and restores market
equilibrium.

Change in Factors Other


Than Price
1.Increase in Taste increases
the demand curve.
2.Increase in population
increases the demand curve.
3.Increase in income in
income increases demand if
a normal good.
4.Decrease in income
increases demand if an
inferior good.
5.Increase in price of
substitute (pepsi) increases
demand for good (coke).
6.Decrease in price of
complement (beer)
increases demand for good
(pizza).
7.If I expect the price of the
product to increase in the
future, my demand today
will increase.

Change in Factors Other


Than Price
1.Decrease in Taste
decreases the demand
curve.
2.Decrease in population
decreases the demand
curve.
3.Increase in income
decreases demand if an
inferior good.
4.Decrease in income
decreases income if a
normal good.
5.Decrease in price of
substitute (pepsi) decreases
demand for good (coke).
6.Increase in price of
complement (beer)
decreases demand for good
(pizza).
7.If I expect the price of the
product to decrease in the
future, my demand today
will decrease

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4. Illustrate how equilibrium market price is determined through the interaction of


demand and supply?
Introduction

Price is arrived at by the interaction between demand and supply. Price is dependent upon the characteristics of
both these fundamental components of a market. Demand and supply represent the willingness of consumers
and producers to engage in buying and selling. An exchange of a product takes place when buyers and sellers
can agree upon a price.
Equilibrium Price

When a product exchange occurs, the agreed upon price is called an "equilibrium" price, or a "market clearing"
price. Graphically, this price occurs at the intersection of demand and supply as presented in Figure 1. In Figure
1, both buyers and sellers are willing to exchange the quantity Q at the price P. At this point, supply and demand
are in balance.
Price determination depends equally on demand and supply. It is truly a balance of the two market components.
To see why the balance must occur, examine what happens when there is no balance, for example when market
price is below that is shown as P in Figure 1. At any price below P, the quantity demanded is greater than the
quantity supplied. In such a situation, consumers would be clamouring for a product that producers would not be
willing to supply; a shortage would exist. In this event, consumers would choose to pay a higher price in order
to get the product they want, while producers would be encouraged by a higher price to bring more of the
product onto the market.

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The end result is a rise in price, to P, where supply and demand are in balance. Similarly, if a price above P were
chosen arbitrarily the market would be in surplus, too much supply relative to demand. If that were to happen,
producers would be willing to take a lower price in order to sell, and consumers would be induced by lower
prices to increase their purchases. Only when the price falls would balance be restored.
A market price is not necessarily a fair price, it is merely an outcome. It does not guarantee total satisfaction on
the part of buyer and seller. Typically some assumptions about the behaviour of buyers and sellers are made,
which add a sense of reason to a market price. For example, buyers are expected to be self-interested and,
although they may not have perfect knowledge, at least they will try to look out for their own interests.
Meanwhile, sellers are considered to be profit maximizers. This assumption limits their willingness to sell to
within a price range, high to low, where they can stay in business.

5. What is an indifference curve and what are its characteristics?


A diagram depicting equal levels of utility (satisfaction) for a consumer faced with various combinations of
goods.

As an example, consider the diagram above. This consumer would be most satisfied with any combination of
products along curve U3. This consumer would be indifferent between combination Qa1, Qb1, and Qa2, Qb2.

Characteristics:
(1) Indifference Curves are negatively Sloped:
The indifference curves must slope down from left to right. This means that an indifference curve is negatively
sloped. It slopes downward because as the consumer increases the consumption of X commodity, he has to give
up certain units of Y commodity in order to maintain the same level of satisfaction.

In fig. 3.4 the two combinations of commodity cooking oil and commodity wheat is shown by the points a and b
on the same indifference curve. The consumer is indifferent towards points a and b as they represent equal level
of satisfaction.
At point (a) on the indifference curve, the consumer is satisfied with OE units of ghee and OD units of wheat.
He is equally satisfied with OF units of ghee and OK units of wheat shown by point b on the indifference curve.
It is only on the negatively sloped curve that different points representing different combinations of goods X and
Y give the same level of satisfaction to make the consumer indifferent.

(2) Higher Indifference Curve Represents Higher Level:


A higher indifference curve that lies above and to the right of another indifference curve represents a higher
level of satisfaction and combination on a lower indifference curve yields a lower satisfaction.

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In other words, we can say that the combination of goods which lies on a higher indifference curve will be
preferred by a consumer to the combination which lies on a lower indifference curve.

In this diagram (3.5) there are three indifference curves, IC1, IC2 and IC3 which represents different
3
levels of satisfaction. The indifference curve IC shows greater amount of satisfaction and it contains
2
1
3
2
more of both goods than IC and IC (IC > IC > IC1).

(3) Indifference Curve are Convex to the Origin:


This is an important property of indifference curves. They are convex to the origin (bowed inward).
This is equivalent to saying that as the consumer substitutes commodity X for commodity Y, the
marginal rate of substitution diminishes of X for Y along an indifference curve.

In this figure (3.6) as the consumer moves from A to B to C to D, the willingness to substitute good X for good
Y diminishes. This means that as the amount of good X is increased by equal amounts, that of good Y
diminishes by smaller amounts. The marginal rate of substitution of X for Y is the quantity of Y good that the
consumer is willing to give up to gain a marginal unit of good X. The slope of IC is negative. It is convex to the
origin.

(4) Indifference Curve Cannot Intersect Each Other:

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If combination F is equal to combination B in terms of satisfaction and combination E is equal to combination B


in satisfaction. It follows that the combination F will be equivalent to E in terms of satisfaction. This conclusion

Given the definition of indifference curve and the assumptions behind it, the indifference curves cannot intersect
each other. It is because at the point of tangency, the higher curve will give as much as of the two commodities
as is given by the lower indifference curve. This is absurd and impossible.
In fig 3.7, two indifference curves are showing cutting each other at point B. The combinations represented by
points B and F given equal satisfaction to the consumer because both lie on the same indifference curve IC2.
Similarly the combinations shows by points B and E on indifference curve IC1 give equal satisfaction top the
consumer.


looks quite funny because combination F on IC2 contains more of good Y (wheat) than combination which gives
more satisfaction to the consumer. We, therefore, conclude that indifference curves cannot cut each other.

(5) Indifference Curves do not Touch the Horizontal or Vertical Axis:


One of the basic assumptions of indifference curves is that the consumer purchases combinations of
different commodities. He is not supposed to purchase only one commodity. In that case indifference
curve will touch one axis. This violates the basic assumption of indifference curves.

In fig. 3.8, it is shown that the indifference IC touches Y axis at point C and X axis at point E. At point C, the
consumer purchase only OC commodity of rice and no commodity of wheat, similarly at point E, he buys OE
quantity of wheat and no amount of rice. Such indifference curves are against our basic assumption. Our basic
assumption is that the consumer buys two goods in combination.

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3(b) by the help of budget line and indifference curve how a consumer reaches the
highest level of satisfaction?

6. What is the price elasticity of demand?


A measure of the relationship between a change in the quantity demanded of a particular good and a change in
its price. Price elasticity of demand is a term in economics often used when discussing price sensitivity. The
formula for calculating price elasticity of demand is:
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
If a small change in price is accompanied by a large change in quantity demanded, the product is said to be
elastic (or responsive to price changes). Conversely, a product is inelastic if a large change in price is
accompanied by a small amount of change in quantity demanded.
Price elasticity of demand measures the responsiveness of demand to changes in price for a particular good. If
the price elasticity of demand is equal to 0, demand is perfectly inelastic (i.e., demand does not change when
price changes). Values between zero and one indicate that demand is inelastic (this occurs when the percent
change in demand is less than the percent change in price). When price elasticity of demand equals one, demand
is unit elastic (the percent change in demand is equal to the percent change in price). Finally, if the value is
greater than one, demand is perfectly elastic (demand is affected to a greater degree by changes in price).
For example, if the quantity demanded for a good increases 15% in response to a 10% increase in price, the
price elasticity of demand would be 15% / 10% = 1.5.

7. what relationship does the price elasticity of demand bear with marginal revenue and
average revenue?
There is a crucial relationship dose the price elasticity of demand bear with marginal revenue and average

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revenue which is used extensively in the theory of pricing. The relationship is expressed in the form of formula,


But, AQ is marginal revenue and SQ is average revenue corresponding to point B at OQ level of output.
Hence, equation (2.9) can be written as

The above relationship can be utilised to find out the marginal revenue corresponding to the average revenue at
any given level of quantity sold, provided the price elasticity of demand is known.
The relation between AR, MR and elasticity of demand (e) can now be written as

With the help of the above formula, it is possible to find MR, given AR (price) and elasticity of demand. For
example, for AR = 10 and e = 2,

Thus, for e = I, MR = 0. This is very useful relationship and should be noted carefully. Here, total revenue
outlay is not affected by change in price, as discussed under Total Outlay Method in Chapter 2 on Elasticity of
Demand.
It can also be shown that at every point on the demand curve, where elasticity is greater than unity, MR is
positive (but, less than AR). Further, at every point on the demand curve where elasticity is less than unity, MR
is negative. This can be verified by substituting the value of elasticity in equation (14.9). An increase in the
price will result in an increase and a decrease of the total revenue in these two cases respectively and vice-versa.
AR, being price is always positive.

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8.what are the characteristics of a perfectly competitive market?


Generally, a perfectly competitive market exists when every participant is a "price taker", and
no participant influences the price of the product it buys or sells. Specific characteristics may
include:

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InfinitebuyersandsellersAninfinitenumberofconsumerswiththewillingness
andabilitytobuytheproductatacertainprice,andinfiniteproducerswiththe
willingnessandabilitytosupplytheproductatacertainprice.
ZeroentryandexitbarriersAlackofentryandexitbarriersmakesitextremely
easytoenterorexitaperfectlycompetitivemarket.
PerfectfactormobilityInthelongrunfactorsofproductionareperfectlymobile,
allowingfreelongtermadjustmentstochangingmarketconditions.
PerfectinformationAllconsumersandproducersareassumedtohaveperfect
knowledgeofprice,utility,qualityandproductionmethodsofproducts.
ZerotransactioncostsBuyersandsellersdonotincurcostsinmakinganexchange
ofgoodsinaperfectlycompetitivemarket.
ProfitmaximizationFirmsareassumedtosellwheremarginalcostsmeetmarginal
revenue,wherethemostprofitisgenerated.
HomogenousproductsThequalitiesandcharacteristicsofamarketgoodor
servicedonotvarybetweendifferentsuppliers.
NonincreasingreturnstoscaleThelackofincreasingreturnstoscale(or
economiesofscale)ensuresthattherewillalwaysbeasufficientnumberoffirmsin
theindustry.
PropertyrightsWelldefinedpropertyrightsdeterminewhatmaybesold,aswell
aswhatrightsareconferredonthebuyer.
Rationalbuyersbuyerscapableofmakingrationalpurchasesbasedoninformation
given
Noexternalitiescostsorbenefitsofanactivitydonotaffectthirdparties

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9. How equilibrium price and output are determined by a firm under perfect
competition?
The equilibrium is the point where economic forces are balanced and there are no external influences.
The equilibrium is the condition where a market price is established through competition such that the
amount of goods or services sought by buyers is equal to the amount of goods or services produced by
sellers.
A perfectly competitive market has many distinguishing factors. A market in perfect competition has
many people who are willing and able to buy a product as well as a many buyers who are willing and
able to produce the products. The products the firms supply are exactly the same. Another
distinguishing characteristic in a perfectly competitive market is that there are low entry and exit
barriers to the market, and it is relatively
Under prefect competition how equilibrium price and output are determined this are given
below -----Large number of buyers and sellers: It is assumed that in pure competition market there should be
a large number of buyers and sellers. If it is so, the output of any single firm is only a small proportion
of the total output and each consumer buys small part of the total. Hence no individual purchaser can
influence the market price by varying his own demand and no single firm is in the position to affect
the market price by varying its own output.
Homogenous product: The commodity produced by all firms should be identical in pure
competition. Thus the commodity produced by different firms are perfect substitutes. Hence the
buyers are indifferent as to the firm from which they purchase.
Perfect competition is wider term than pure competition. Besides the two conditions of pure
competition mentioned above several other conditions must be fulfilled to make it a perfect
competition.
Free entry and exit: There should be no restrictions legal or other on the firms to entry and exit the
industry. In this situation all the firms can earn only normal profit. Because if the profit is more than
the normal, new firms will enter and extra profit will be reduced and if the profit is less than normal,
some firms will leave the industry raising the profits for the remaining firms. Hence the firms can earn
normal profit in long run.
Perfect knowledge: Another assumption of perfect competition is that the purchasers and sellers
should have perfect knowledge about costs, price and quality. Due to this fact neither the seller can
charge more than the ruling price nor the purchaser are willing to pay more.
Free mobility of the resources: The mobility of resources is essential to the firms in order to adjust
their supply to demand. If the demand exceeds supply additional factors of production move into the
industry and vice versa.

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10. Concepts of gross domestic product (GDP), Gross national product (GNP), and Net
national product (NNP)
Definition of 'Gross Domestic Product - GDP'
The monetary value of all the finished goods and services produced within a country's borders in a
specific time period, though GDP is usually calculated on an annual basis. It includes all of private
and public consumption, government outlays, investments and exports less imports that occur within a
defined territory.
GDP = C + G + I + NX
where:
"C" is equal to all private consumption, or consumer spending, in a nation's economy
"G" is the sum of government spending
"I" is the sum of all the country's businesses spending on capital
"NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports Imports)

GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a
country's standard of living. Critics of using GDP as an economic measure say the statistic does not
take into account the underground economy - transactions that, for whatever reason, are not reported
to the government. Others say that GDP is not intended to gauge material well-being, but serves as a
measure of a nation's productivity, which is unrelated.

Definition of 'Gross National Product - GNP'


An economic statistic that includes GDP, plus any income earned by residents from overseas
investments, minus income earned within the domestic economy by overseas residents.
GNP is a measure of a country's economic performance, or what its citizens produced (i.e. goods and
services) and whether they produced these items within its borders.

Definition of 'Net National Product - NNP'


The monetary value of finished goods and services produced by a country's citizens, whether
overseas or resident, in the time period being measured (i.e., the gross national product, or
GNP) minus the amount of GNP required to purchase new goods to maintain existing stock
(i.e., depreciation).
Alternatively, net national product (NNP) can be calculated as total payroll compensation +
net indirect tax on current production + operating surpluses.

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In other words, NNP is the amount of goods that can be consumed within a nation each year
without reducing the amount that can be consumed in following years.

11. Discuss the problems faced in estimating the GDP of a country?


First, GDP figures omit production of goods and services that are not sold on markets. This
component includes housework, meals cooked at home, and child care provided by parents, as well as
services volunteered for charities and other groups. For example, when parents care for their own
children, the value of their care does not appear in GDP. However, when parents pay for child care,
those services appear in GDP (for more examples see the book).
Second, GDP includes only a very imperfect estimate of production of goods and services sold on the
underground economy (or black market). This activity includes production of illegal goods and
services (such as drugs and prostitution). It also includes production of legal goods that goes
unreported to avoid taxes. Many estimates suggest that the underground economy in the United States
amounts to between 5 and 10 percent of GDP; this figure is even larger in many other countries.
Third, special measurement problems result when GDP includes certain goods that are not sold on
markets. When you rent a house or apartment, your expenses appear in GDP as payments for housing
services. However, if you own the house or apartment where you live, GDP includes the
governments estimate of the rent that you would pay if you were renting.
Fourth: Substitution bias: As consumers' tastes change and as new technological improvements are
introduced, the relative prices of goods change. Such changes are independent of inflation so
optimally we would like the real GDP measure to take them into consideration. For example, as more
people started using cellular phones, the cost of supplying this service went down and so has price. In
the real GDP the value of these services is measured using old, higher prices, overstating the increase
in the value of production.
New-good bias: it is very difficult to include new goods into the real GDP: In the base year they did
not exist and hence their price was infinite.
Quality-change bias: if you simply take the number of TV sets produced and multiply it by the price
of a typical TV set in the base year, the value of production is going to be underestimated, as this
measure does not take into account the improvements in quality.

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12. What is meant by budget deficit?

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Government budget deficits can be cured by cutting spending, raising taxes or a combination of the
two. Deficits must be financed by borrowing money. Interest must be paid on borrowed funds, which
worsens the deficit.

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A financial situation that occurs when an entity has more money going out than coming in. The term
"budget deficit" is most commonly used to refer to government spending rather than business or
individual spending. When it refers to federal government spending, a budget deficit is also known as
the "national debt." The opposite of a budget deficit is a budget surplus, and when inflows are equal to
outflows, the budget is said to be balanced.

13. How can a deficit budget be financed? Give your answer in Bangladesh perspective?
A budget deficit occurs when government expenditure (G) is greater than revenue (T) (G>T).
There are several main ways that the Bangladesh government can finance a deficit.
i.

Firstly, the government can borrow funds from the other sectors of the economy. This
involves the selling of new Commonwealth Government Securities (CGS) such as treasury
bonds through a tender system.
This is the preferred government method of raising funds, as it does not add to net foreign
debt, because the government is not borrowing from overseas. However, there is a
disadvantage to this form of debt financing.
When the Federal Government sells CGS it competes with the private sector for domestic
savings, creating what is referred to as a crowding out effect. A shortage of funds in the
domestic market can result and domestic investors may need to borrow funds from overseas.
Government borrowing has then, effectively crowded out private investment. Private
investment may be postponed as interest rates and the cost of credit rise.

ii.

The second possible method of financing a deficit is for the Commonwealth Government to
sell CGS to the Reserve Bank. This form of borrowing from the Reserve Bank basically
means that the government prints money to finance the deficit. The Government has not used
this method of deficit financing since the deregulation of the Australian financial market in
1982. This is because it is highly inflationary: when the government spends the money, there
is an increase in the money supply; if the economy is near full employment, demand inflation
occurs rapidly, as there is too much money chasing a limited supply of goods.

iii.

Thethirdpossiblemethodusedtofinanceabudgetdeficitisforthegovernmenttoborrow
fundsfrominternationalfinancialmarkets.Thegovernmenthasnotborrowedfrom
overseassincethelate1980stofinancethedeficit.Whenusingthismethod,theReserve
BanksellsnewCGStooverseasbuyers,andreceivesforeignfundsthatareconvertedinto
Australiandollars.Thismethodoffinancingthedeficitaddstoforeigndebtwheninterestis
paidonthesecurities(netincomecomponentofthebalanceofpayments).
The government may decide to borrow funds from overseas to reduce the crowding out effect.
Under a floating exchange rate such borrowing has no effect on the domestic money supply.
However, exchange rates and domestic interest rates can be affected; further, it adds directly
to foreign debt.

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The selling of government assets is an alternative method to borrowing that the government
can also use to fund a budget deficit. The sale of assets can create a headline budget surplus
and reduce the crowding out effect typically caused by the sale of government bonds.

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iv.

14. Discuss the instruments of monetary policy?

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The main monetary policy instrument of The bank is the key policy rate interest rate applied in its
main open market operations (currently, reverse repo transactions repo sale of securities, with oneweek transaction maturity).
Other
monetary policy instruments of The bank have a supporting role, facilitating unhindered transmission
of the key policy rate effects to the market, as well as the development of the financial market. These
instruments include:
open market operations,
required reserves,
lending and deposit facilities (standing facilities), and
Interventions in the foreign exchange market.
Monetary policy instruments do not have a direct impact on monetary policy objectives. As there can
be a several months lag in the effect of monetary policy, The bank focuses on the achievement of
operating and intermediate targets. Operating targets are easy to control, but are remote from the
ultimate objective, while intermediate targets are hard to control, but closer to the ultimate objective.
As in the case of more developed market economies, and particularly those pursuing inflation
targeting regime, the Banks operating target are interest rates in the interbank money market, and its
intermediate target is the inflation projection.
Open Market Operations
The bank conducts open market operations in order to regulate banking sector liquidity, influence
short-term interest rate movements and signal its monetary policy stance. The bank implements open
market operations through repo or outright purchase and sale of securities.
Required Reserves
Required reserves are the amount of funds that banks are required to keep on deposit in accounts with
the central bank.
Required reserves are calculated by applying the required reserve ratio to the reserving base. Required
reserve base may be composed of all funding sources or a part of them It may be uniform or
differentiated, according to maturity and/or currency structure of the funding sources.
Lending and Deposit Facilities (Standing Facilities)
Central banks standing facilities include lending and deposit facilities available to banks on an
ongoing basis. Overnight in maturity, these operations are initiated by commercial banks. Lending
facilities include loans for maintaining daily liquidity, collateralized by eligible securities. Interest
rates on standing facilities constitute the ceiling and floor of the corridor of interest rates in the
interbank market. As an important control factor in managing banking sector liquidity, they ease the
fluctuations of short-term interest rates in the interbank market which would be more pronounced
without such facilities.
Interventions in the Foreign Exchange Market
In inflation targeting regime, foreign exchange interventions are an infrequently used secondary
instrument which contributes to the achievement of the targeted inflation rate after the effective
impact of the key policy rate has been exhausted.
Short Term Liquidity Loans Collateralized by Securities
In
addition to applying the above main monetary policy instruments, The bankalso approves to banks
short-term liquidity loans against collateral of securities.

15. How monetary policy can be used to control inflation?


Monetary policy, to a great extent, is the management of expectations.[4] Monetary policy
rests on the relationship between the rates of interest in an economy, that is, the price at
which money can be borrowed, and the total supply of money. Monetary policy uses a variety
of tools to control one or both of these, to influence outcomes like economic growth,
inflation, exchange rates with other currencies and unemployment. Where currency is under a
monopoly of issuance, or where there is a regulated system of issuing currency through banks
which are tied to a central bank, the monetary authority has the ability to alter the money
supply and thus influence the interest rate (to achieve policy goals). The beginning of
monetary policy as such comes from the late 19th century, where it was used to maintain the
gold standard.
A policy is referred to as contractionary if it reduces the size of the money supply or
increases it only slowly, or if it raises the interest rate. An expansionary policy increases the
size of the money supply more rapidly, or decreases the interest rate. Furthermore, monetary
policies are described as follows: accommodative, if the interest rate set by the central
monetary authority is intended to create economic growth; neutral, if it is intended neither to
create growth nor combat inflation; or tight if intended to reduce inflation.
There are several monetary policy tools available to achieve these ends: increasing interest
rates by fiat; reducing the monetary base; and increasing reserve requirements. All have the
effect of contracting the money supply; and, if reversed, expand the money supply. Since the
1970s, monetary policy has generally been formed separately from fiscal policy. Even prior
to the 1970s, the Bretton Woods system still ensured that most nations would form the two
policies separately.
Within almost all modern nations, special institutions (such as the Federal Reserve System in
the United States, the Bank of England, the European Central Bank, the People's Bank of
China, the Reserve Bank of New Zealand, and the Bank of Japan) exist which have the task
of executing the monetary policy and often independently of the executive. In general, these
institutions are called central banks and often have other responsibilities such as supervising
the smooth operation of the financial system.
The primary tool of monetary policy is open market operations. This entails managing the
quantity of money in circulation through the buying and selling of various financial
instruments, such as treasury bills, company bonds, or foreign currencies.
Usually, the short term goal of open market operations is to achieve a specific short term
interest rate target. In other instances, monetary policy might instead entail the targeting of a
specific exchange rate relative to some foreign currency or else relative to gold.

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The other primary means of conducting monetary policy include: (i) Discount window
lending (lender of last resort); (ii) Fractional deposit lending (changes in the reserve
requirement); (iii) Moral suasion (cajoling certain market players to achieve specified
outcomes); (iv) "Open Mouth Operations" (talking monetary policy with the market).

16. Distinguish between balance of Trade and balance of payment?


Balance of Trade (BOT)

1. Definition

Balance of trade may be defined as


difference between export and
import of goods and services.

2. Formula

BOT = Net Earning on


Export - Net payment for imports

4. Solution of
Unfavorable
Problem

5. Factors

6. Meaning of
Debit and
Credit

If export is more than


import, at that time, BOT will be
favourable. If import is more than
export, at that time, BOT will be
unfavourable.

Balance of payment is flow of cash between


domestic country and all other foreign countries.
It includes not only import and export of goods
and services but also includes financial capital
transfer.
BOP = BOT + (Net Earning
on foreign investment - payment made to foreign
investors) + Cash
Transfer + Capital Account +or - Balancing Item
or
BOP = Current Account + Capital Account + or
- Balancing item ( Errors and omissions)
Balance of Payment will be
favourable, if you have surplus in current
account for paying your all
past loans in your capital account.
Balance of payment will be unfavourable, if you
have current account deficit and you took more
loan from foreigners. After this, you have to
pay high interest on extra loan and this will make
your BOP
unfavourable.

To Buy goods and services


from domestic country.

To stop taking of loan


from foreign countries.

Following are main factors


which affect BOT
a) cost of production
b) availability of raw materials
c) Exchange rate
d) Prices of goods manufactured at
home

Following are main factors


which affect BOP
a) Conditions of foreign lenders.
b) Economic policy of Govt.
c) all the factors of BOT

If you see RBI' Overall


balance of payment report, it shows
debit and credit of current account.
Credit means total export of
different goods and services and
debit means total import of goods
and services in current account.

Credit means to receipt and earning both current


and capital account and debit means total
outflow of cash both current and capital account
and difference between debit and credit will be
net balance of payment.

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3. Favourable or
Unfavourable

Balance of Payment (BOP)

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Basis of Difference

17. What measures would you suggest to solve the problem of balance of payment
deficit in BD?
A country's balance of payments reflects its net earnings on trade in goods and services with
other countries. A positive balance of payments situation, or a surplus, comes about when a
country exports more than it imports. A deficit situation arises when a country imports more
than it exports. Governments manage their balance of payments situations in accordance with
their larger goals for the economy.
Increased Exports

One way of reducing a balance of payments deficit situation is to export more to other
countries. For instance, in July 2010, the U.S. goods and services deficit went down to
$42.8 billion, from $49.8 billion in June 2010. This came about as the country's
exports rose to $153.3 billion in July, from $104.9 billion in June 2010. As the global
recession abated, there was more demand for U.S. exports in other countries and this
led to the rise in exports, according to the U.S. Census Bureau.

Decreased Imports

Another way of reducing a balance of payments deficit is to import less from other
countries. In July 2010, U.S. imports decreased to $196.1 billion, from $200.3 billion
in June 2010, according to the U.S. Census Bureau. A slow U.S. recovery from the
recession of 2007 meant that U.S. consumers were consuming fewer goods, including
imported goods. This too causes a country's balance of payments deficit to go down.

Government Policy
Another factor that impacts a country's balance of payments situation is trade policies
relating to specific countries. If a country has a protectionist trade policy, it has
various ways of making imports more expensive. For instance, a government could
levy a tax or tariff on imported goods. This makes the goods more expensive to its
citizens who might then opt to buy local goods over the more expensive imported
goods. This tends to reduce a country's balance of payments deficit. Countries also
have various mutual trade agreements with other countries, whereby they could give
preferred treatment to each other's products for import purposes. Such government
policies impact a country's balance of payments situation

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18. what do you mean by positive economics and normative


economics? Indicate their differences.
Positive economics
The study of economics based on objective analysis. Most economists today focus on positive
economic analysis, which uses what is and what has been occurring in an economy as the basis
for any statements about the future. Positive economics stands in contrast to normative
economics, which uses value judgments.
For example, a positive economic statement would be: "Increasing the interest rate will
encourage people to save." This is considered a positive economic statement because it does not
contain value judgments and its accuracy can be tested.

Normative economics
A perspective on economics that incorporates subjectivity within its analyses. It is the study or
presentation of "what ought to be" rather than what actually is. Normative economics deals
heavily in value judgments and theoretical scenarios. It is the opposite of positive economics.
Normative statements are often heard in the media because they tend to represent a theory or
opinion rather than objective analysis. Normative economics is a valuable way to establish goals
and generate new ideas, but it should not be used as a basis for policy decisions.
An example of a normative economic statement would be, "We should cut taxes in half to
increase disposable income levels"

The difference between positive economics and normative economics are -------Positive economics

Normative economics

Positive economics deals with what is while

Normative economics deals with what should be.

Positive economics deals with facts

Normative economics deals with opinions on what a


desirable economy should be.

Positive economics is also called descriptive

Normative economics is called policy economics.

economics

Positive economic statements can be tested using

Normative economics cannot be tested.

It is based on ethics and values.

Positive economics depends upon real


experience and observation.

The subject of normative economics is related


to development.

Positive economics based on real evidence.

Normative economics describes about good or


bad

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There is no relation of ethics here.

19

scientific methods

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19. Explain the relationship of economics with (i) statistics and (ii) sociology?
Statistics:
Econometrics can be defined as the study in which the tools of economic theory, statistical
inference and mathematics are systematically applied, using observed data, to the analysis of
economic laws. It is therefore concerned with the "empirical determination of economic laws.
Economic theories are written in mathematical form and are then analyzed using statistical
methods. If the observed data are found to be incompatible with the predictions of the theory, it
is rejected. Theories are accepted if the data are found to fit the theory."Econometrics is a
branch of economics that applies statistical methods to the empirical study of economic theories
and relationships. It is as a form of mathematical economics.
Economists base most theories and policies on statistics stats are a vital part of economics.
Economics study trends and patterns based on stats used in economics: mean f tests, t tests, and
regressions, confidence intervals stats are used to measure growth rates, inflation, and any
relationship between two variables (regressions)
Sociology:
Sociology and Economics as social sciences have close relations. Relationship between the two is
so close that one is often treated as the branch of the other, because society is greatly influenced
by economic factors, and economic processes are largely determined by the environment of the
society.
Economics deals with the economic activities of man. It deals with production, consumption and
distribution of wealth. The economic factors play a vital role in the very aspect of our social life.
Total development of individual depends very much on economic factors. Without economic
conditions, the study of society is quite impossible. All the social problems are directly
connected with the economic conditions of the people.
In the same way Economics is influenced by Sociology. Without the social background the study
of Economics is quite impossible. Sociologists have contributed to the study of different aspects
of economic organization. Property system, division of labour, occupations etc. are provided by
a sociologist to an economist.
The area of co-operation between Sociology and Economics is widening. Economists are more
and more making use of the sociological concepts in the study of economic problems.
Economists are working with the sociologists in their study of the problems of economic
development in underdeveloped countries. Combined efforts of both the experts may be of great
practical help in meeting the challenges.

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20

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20. what is meant by 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.
Opportunity costs are fundamental costs in economics, and are used in computing cost benefit
analysis of a project. Such costs, however, are not recorded in the account books but are recognized
in decision making by computing the cash outlays and their resulting profit or loss.
In economic terms, the opportunities forgone in the choice of one expenditure over others. For a
consumer with a fixed income, the opportunity cost of buying a new dishwasher might be the value of
a vacation trip never taken or several suits of clothes unbought. The concept of opportunity cost
allows economists to examine the relative monetary values of various goods and services.
The fundamental problem of economics is the issue of scarcity. Therefore we are concerned with the
optimal use and distribution of these scarce resources. Wherever there is scarcity we are forced to
make choices. If we have 20 0 tk we can spend it on an economic textbook or we can enjoy a meal in
a restaurant. If we spend that 200 tk on a textbook, the opportunity cost is the restaurant meal we
cannot afford to pay.

Moving from Point A to B will lead to an increase in services (22-25). But, the
opportunity cost is that output of goods falls from 15 to 11.

Therefore, the opportunity cost of increasing consumption of services is the 4 goods


foregone
opportunity cost.

..........oooooo..

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any

21

At point C, the economy is inefficient. We can increase both goods and services without

21. What is the implication of the opportunity cost curve being (i) convex ;( II) Concave; and
(III) a straight line?
The implication of the opportunity cost curve being convex, concave and a straight line are
given below-------

Convex: (Increasing Cost) this is the standard convex production possibilities


curve with increasing opportunity cost. Because it best reflects the economy, it is
the one most commonly seen throughout the study of economics. In this case the
economy foregoes increasing amounts of one good when producing more of the
other.

Straight Line: (Constant Cost): This is a straight line production possibility


"curve" that indicates constant opportunity cost. In this case, opportunity cost
does not change with production. This is not a realistic reflection of the entire
economy, but it can represent the production of some goods. Here the economy
foregoes the same amount of one good when producing more of the other.

Concave: (Decreasing Cost ): This is concave production possibilities curve with


decreasing opportunity cost. In this case, opportunity cost actually decreases with
greater production. While opportunity cost can decrease in limited circumstances,
this is unlikely to happen for the economy as a whole. To do so would contradict
the assumption of technical efficiency and it is contrary to real world
observations. In this case the economy foregoes decreasing amounts of one good
when producing more of the other.

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22

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22. What is the law of demand? Explain the law with the help of a diagram?
A microeconomic law that states that, all other factors being equal, as the price of a good or
service increases, consumer demand for the good or service will decrease and vice versa.
This law summarizes the effect price changes have on consumer behavior. For example, a
consumer will purchase more pizzas if the price of pizza falls. The opposite is true if the price of
pizza increases.
Explanation:
In ordinary language the word demand means desire. But in economics demand means desire
backed up by the enough money to pay for the good. Only desire can not be called demand.
There is also functional relationship between price and demand. Second point is that demand is
always per unit of time.

LAW OF DEMAND: -Other things remaining the same when the price of any commodity
increases its demand falls and when price falls its demand increases."
According to the law of demand there is inverse relationship between demand and price.
In simple language was can say that when the price of any commodity falls, people are tempted
to purchase more commodities. On the other hand when price of any commodity rises people
demand less quantity.

.oooo

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Law of Supply: A microeconomic law stating that, all other factors being equal, as the price of
a good or service increases, the quantity of goods or services offered by suppliers increases and
vice versa.
As the price of a good increase, suppliers will attempt to maximize profits by increasing the
quantity of the product sold.

23

23. What is the law of supply?

24.what is meant by the phrase other things remaining the same used by the law?
By the phrase other things remaining the same, law of demand assumes the following:

Consumers income, tastes and preferences are constant.

Prices of substitutes and complements do not change.

There are no new substitutes for the goods under consideration.

People do not speculate on prices. It means that if price of the commodity in


question falls, people will not wait for further decline in prices.
The commodity under consideration does not have prestige value.

The law of demand will not work as expected if any one of the aforementioned
assumptions is violated.

oooo
25. State, if any, the expectation of the law of demand?
The law of demand states that, if all other factors remain equal, the higher the price of a
good, the less people will consume that good. In other words, the higher the price, the
lower the quantity demanded. This principle is illustrated when _____________
a) Company A has a monopoly over the widget market so an increase in widget price
has little effect on the quantity demanded.
b) A manufacturer of luxury cars noticed that its customer base is relatively
unresponsive to changes in price.
c) A city experiences an increase in both gasoline prices and the number of people
taking public transportation.
d) An increase in the number of computer retailers led to decrease in the average price
of computers.
e) A reduction in the price of oranges from $2 per pound to $1 per pound results in 75
pounds of oranges being sold as opposed to 50 pounds.
.000000.

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24

26. Using formulas, distinguish between price elasticity of demand and income elasticity of
demand?
Price elasticity
1. (Equation) Price elasticity of demand =
(percentage change in quantity demanded) /
(percentage change in price).
2. Quantity demanded is always negatively
related to the price, which makes the price
elasticity of demand a negative number
mathematically.
3. In economics, we often ignore the negative
sign and represent the elasticity as a positive
number.
4. When price is high and quantity demanded
is low, the demand is elastic. If price increases,
total revenue decreases.
5. Elasticity changes at different prices along
the linear demand curve.

6. When price is low and quantity demanded is


high, the demand is inelastic. If price
increases, total revenue increases.

Income elasticity
1. (Equation) Income elasticity of demand =
(percentage change in quantity demanded) /
(percentage change in income).
2. For normal goods, the quantity demanded
increases when income increases. Therefore,
the income elasticity is positive.
3. For inferior goods, the quantity demanded
decreases when income increases. Therefore,
the income elasticity is negative.
4. Among normal goods, for necessities,
income elasticity is small because they are
necessary to our lives and people still need
them even though the income is low.
5. For luxuries, income elasticity is large
because people can choose not to buy them if
their income is low
6. Income elasticity of demand measures the
responsiveness of quantity demanded to the
change of income.

27. What is the importance of the concept of price elasticity of demand in real life?
1. Determination of price policy:
While fixing the price of this product, a businessman has to consider the elasticity of demand for the
product. He should consider whether a lowering of price will stimulate demand for his product, and if
so to what extent and whether his profits will also increase a result thereof. If the increase in his sales
is more than proportionate, to the reduction in price his total revenue will increase and his profits
might be larger.
2. Price discrimination:
Price discrimination refers to the act of selling the technically same products at different prices to
different section of consumers or in different in sub-markets.

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To what extent a producer can shift the burden of indirect tax to the buyers by increasing price of his
product depends upon the degree of elasticity of demand.

25

3. Shifting of tax burden:

4. Taxation and subsidy policy:


Thegovernmentcanimposehighertaxesandcollectmorerevenueifthedemandforthe
commodityonwhichataxistobeleviedisinelastic.Ontheotherhand,ineaseofacommodity
withelasticdemandhightaxratesmayfailtobringintherequiredrevenueforthegovernment.
5. Importance in international trade:
Theconceptofelasticityofdemandisofcrucialimportanceinmanyaspectsofinternational
trade.Thesuccessofthepolicyofdevaluationtocorrecttheadversebalanceofpayment
dependsupontheelasticityofdemandforexportsandimportsofthecountry.
6. Importance in the determination of factors prices:
Factorwithaninelasticdemandcanalwayscommandahigherpriceascomparedtoafactor
withrelativelyelasticdemand.
7. Determination of sale policy for supper markets:
SuperMarketsisamarketwhereinavarietyofgoodsaresoldbyasingleorganization.These
itemsaregenerallyofmassconsumption.
8. Pricing of joint supply products:
Thegoodsthatareproducedbyasingleproductionprocessarejointsupplyproducts.Thecost
ofproductionofthesegoodsisalsojoint.
9. Public utilities:
Thenationalizationofpublicutilityservicescanalsobejustifiedwiththehelpofelasticityof
demand.Demandforpublicutilitiessuchaselectricity,watersupply,postandtelegraph,public
transportationetc.isgenerallyinelasticinnature.
10. Output decisions:

Theelasticityofdemandhelpsthebusinessmantodecideaboutproduction.Abusinessman
choosestheoptimumproductmixonthebasisofelasticityofdemandforvariousproducts.
..ooooooooo.

28. Price elasticity of demand when the price per unit of a product falls from taka 5 to taka 3,
and the quantity purchased rises from 5 to 8 units as a result.

Itisshownthatwhenthepriceoftheproductwastk.5,thanthe
quantityofpurchasedproductdemandwas5unit,butwhenits
pricefallsfromtaka5totaka3,thanthequantityofpurchased
productdemandincreasesfrom5unitto8unit.Sotheelasticityof
demandisQ2Q1/Q2+Q12
P2p1/P2+P12

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26

29. The distinguishing features of prefect competition and monopolistic competition.


Give at least one example of a firm in each of this market?

FeaturesofPerfectCompetition
1. Large number:
perfect competition, there must be large number of buyers and sellers. Each buyer buys a
small quantity of the total amount. Each seller is so large that no single buyer or seller can
influence the price and affect the market.
2. Homogeneous product:
Under perfect competition, the product offered for sale by all the seller must be identical in
every respect. The goods offered for sale are perfect substitutes of one another. Buyers have
no special preference for the product of a particular seller. No seller can raise the price above
the prevailing price or lower the price below the prevailing price.
3. Free entry and exit:
Under perfect competition, there will be no restriction on the entry and exit of both buyers
and sellers. If the existing sellers start making abnormal profits, new sellers should be able to
enter the market freely. This will bring down the abnormal profits to the normal level.
4. Perfect knowledge:
Perfect competition implies perfect knowledge on the part of buyers and sellers regarding the
market conditions. As a result, no buyer will be prepared to pay a price higher than the
prevailing price. Sellers will not charge a price higher or lower than the prevailing price.
5. Perfect mobility of factors of production:
The second perfection mobility of factors of production from one use to another use. This
feature ensures that all sellers or firms get equal advantages so far as services of factors of
production are concerned.
6. Absence of transport cost:
Under perfect competition transport, cost does not exist. Since commodities have, the same
price it logically follows that there will be no transport cost.
7.Noattachment:
There is no attachment between the buyers and sellers under perfect competition. Since
products of all sellers are identical and their prices are the same a buyer is free to buy the
commodity from any seller he likes.

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Agricultural markets: are the closest representations of perfectly competitive markets.


These are marketplaces which have a large number of vendors selling fruit, vegetables, and
poultry - namely, identical produce. The prices of goods are competitive, and no single seller
can yield an influence over the pricing. Consumers are free to pick any seller, depending
upon their choice.

27

Examples of Perfect Competition

Important features of monopolistic competition


1. Existence of large number of firms:
The first important feature of monopolistic competition is that there is a large number of firms
satisfying the market demand for the product. As there are a large number of firms under monopolistic
competition
(2) Product differentiations:
The various firms under monopolistic competition bring out differentiated products which are
relatively close substitutes for each other. So their prices cannot be very much different from each
other.
(3) Some influence over the price:
As the products are close substitutes of others any reduction of price of a commodity by a seller will
attract some customers of other products. Thus with a fall in price quantity demanded increases. It
therefore, implies that the demand curve of a firm under monopolistic competition slopes downward
and marginal revenue curve lies below it.
(4) Absence of firm's interdependence:
Under oligopoly, the firms are dependent upon each other and can't fix up price independently. But
under monopolistic competition the case is not so. Under monopolistic competition each firm acts
more or less independently
(5) Non-price competition:
Firmsundermonopolisticcompetitionincuraconsiderableexpenditureonadvertisementand
sellingcostssoastowinovercustomers.Inordertopromotesalefirmsfollowdefinitemethodsof
competingrivalsotherthanprice.Advertisementisaprominentexampleofnonpricecompetition.
(6)Freedomofentryandexit:
Inamonopolisticcompetitionitiseasyfornewfirmstoenterintoanexistingfirmortoleavethe
industry.
MonopolisticCompetitionExamples

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28

A very nice example for monopolistic competition is farmers: Farmers produce crops for
the entire world population, but again they have different characteristics by virtue of things
like size and quality.

30. How equilibrium price and output are determined by a monopoly firm?
Price and Output Determination in Monopolistic firm
Monopolistically competitive industries are made up of a large number of firms, each small relative to
the size of the total market. Thus, no one firm can affect market price by virtue of its size alone. But
firms differentiate their products, and by so doing gain some control over price.
Price/Output Determination in the Short Run
Since the firm has a downward-sloping demand curve, it will also have a downward-sloping marginal
revenue (MR) curve. A profit-maximizing firm produces where marginal cost (MC) equals marginal
revenue (q0 in the graph below) and charges the price determined by demand (P0).

In panel (a) of the figure, the monopolistic competitor will make a profit. However, like a monopoly,
a monopolistic competitor is not guaranteed to make a profit in the short run. The firm may make a
loss in the short run; its profitability will depend on the demand. This is shown in panel (b)
Price/Output Determination in the Long Run
The action in a monopolistically competitive market occurs when the market moves to the long run.
Since other competitors selling a similar good can enter the market, two changes will occur:
Firm demand will decrease.
Firm demand will become more elastic.

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A decrease in demand implies a leftward shift in the demand curve. Since the entering firms are
producing substitutes for the existing firms good, the demand for the existing good will become more
elastic. An increase in elasticity implies the demand curve is getting flatter. By combining these
effects, as a monopolistically competitive market moves from short-run profits to the long run, the
firms demand curve will move to the left and get flatter. Furthermore, the demand curve will

29

As more firms enter the market, the demand for any one firm will decrease, since the firm is now
sharing the market with other firms.


continue to move until there are no more firms entering the market. Firms will stop entering the
market when profits are zero.

This occurs when the demand curve just barely touches (i.e., is tangent to) the ATC curve, as shown
in the figure above. Once the demand curve is tangent to the ATC curve, the profit-maximizing price
is equal to the average total cost, and thus, profits are zero. In the long run, competition will drive
monopolistically competitive markets to make zero profits. The goal of the firm is to try to maintain
as much short-run profit as possible by differentiating its product. Eventually, though, in the long run,
economic profits will be zero.

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30

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31. What does production means in economics?


The production of final goods and services taking place during a given time period. The emphasis
here is on time period, especially the CURRENT time period. Gross domestic product is the
macroeconomy's prime measure of current production. Current production is best contrasted with
transactions for past production and future production, both of which are excluded from gross
domestic product.
6(b) what is meant by fixed cost and variable cost and show the correct position of total cost, total fixed
cost and total variable cost curve in a diagram.

A cost that does not change with an increase or decrease in the amount of goods or
services produced. Fixed costs are expenses that have to be paid by a company, independent
of any business activity. It is one of the two components of the total cost of a good or service,
along with variable cost.
An example of a fixed cost would be a company's lease on a building. If a company has to
pay $10,000 each month to cover the cost of the lease but does not manufacture anything
during the month, the lease payment is still due in full.
A corporate expense that varies with production output. Variable costs are those costs that
vary depending on a company's production volume; they rise as production increases and fall
as production decreases. Variable costs differ from fixed costs such as rent, advertising,
insurance and office supplies, which tend to remain the same regardless of production output.
Fixed costs and variable costs comprise total cost.
Variable costs can include direct material costs or direct labor costs necessary to complete a
certain project. For example, a company may have variable costs associated with the
packaging of one of its products. As the company moves more of this product, the costs for
packaging will increase

This graph shows the relationship between fixed, variable, and total cost with a production function
that first has increasing and then decreasing marginal productivity.
As stated earlier, total cost can be broken down into total fixed cost and total variable cost. The graph
of total fixed cost is simply a horizontal line since total fixed cost is constant and not dependent on
output quantity. Variable cost, on the other hand, is an increasing function in quantity and has a
similar shape to the total cost curve, which is a result of the fact that total fixed cost and total variable
cost have to add to total cost. The graph for total variable cost starts at the origin because the variable
cost of producing zero units of output, by definition, is zero.

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1.

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Total cost, Total fixed cost, total variable cost

oooooooo.
32. What is inflation and why does it occur?
Inflationisdefinedasasustainedincreaseinthegenerallevelofpricesforgoodsandservices.Itis
measuredasanannualpercentageincrease.Asinflationrises,everydollaryouownbuysasmaller
percentageofagoodorservice.
Thevalueofadollardoesnotstayconstantwhenthereisinflation.Thevalueofadollarisobserved
intermsofpurchasingpower,whichisthereal,tangiblegoodsthatmoneycanbuy.Wheninflation
goesup,thereisadeclineinthepurchasingpowerofmoney.
Intermsofeconomics,inflationcanbedefinedastheriseintheprices(generallevel)ofservicesand
goodsinan economyoveracertainperiodoftime.Inearlierdays,theterminflationwasusedto
refertheincreasesinsupplyofmoney,butthesedaystheinflationispurelyusedtoreferthe
increaseinlevelsofprices.
On the other hand inflationcanalsobedefinedasdecreaseinthe value of money (orlossofthe
purchasingpowerinsomemediumofthe commodity exchange).Mostaccuratemeasureofthe
inflationisknownasinflationrate.Inflationrateisdefinedaspercentagechangeinthepriceindex
overacertainperiodoftime.
Inmostsimplewords,youcanconcludethatinflationoccursinan economy whenthenetdemand
forservicesandgoodsexceedsthetotalsupply.Now,becauseoflesssupply,thenet prices of these
services/goodsincreasesandthiskindofsituationisknownasinflation.

33. Account for the recent increase in the inflationary pressure in Bangladesh and find
remedies?
In recent months, we see several opinion pieces on the various aspects of inflation in
Bangladesh. Inflationary pressure has been increasing again in recent months. The latest
figure shows a 7.41 percent inflation in November. Fuel import, energy price hike and Takas
devaluation against the US dollar have combined to increase Bangladeshs non-food
inflation. Food inflation has also increased, although not by the same amount.
The countrys general inflation has also been in double digits for some time now. The last
time it happened was in the early 1980s. In addition to price hike of electricity and fuel oils,
and devaluation of taka, the rise in governments spending and credit growth in both public
and private sectors have also contributed to the rise in inflation.

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Last year, the International Monetary Fund (IMF) had asked the Bangladesh Bank to tighten
monetary policy to contain inflation. The IMF recommended, among other measures,
safeguarding reserves through continued exchange rate flexibility and interventions only to

32

Prices of a number of essential food commodities have also increased in recent months.
However, despite the best of intention of the Ministry of Food, the retail prices of food grains
in the local market have increased significantly in recent months and are likely to increase
further until the next harvest. This raises concerns about economic stability and food insecurity
as the purchasing power of low-income families has been reduced.

smooth short-term volatility, and addressing financial sector vulnerabilities by strengthening


and enforcing bank supervisory framework and market oversight and ensuring sound
governance.
Over the last few months, the Bangladesh Bank has followed a restrictive monetary policy by
raising rates on a number of occasions. The Bank has also increased statutory liquidity ratio
and cash reserve requirement in an effort to keep inflation in check.
However, the problem with such an effort is that these policy measures would be adequate if
only excess demand were driving inflation. Inflation caused by changes on the supply side of
the market would remain mostly unaffected by the policies recommended by the IMF and
undertaken by the Bangladesh Bank.
A look at the causes of inflation would show that in recent months changes the supply side
has been as much of a factor in raising the inflation rate as changes in the demand side. In
short, inflation in Bangladesh has been both a cost-push and demand-pull phenomena.
Rapid increase in the prices of food items eroded the purchasing power as well as standard of
living of the poor, government and non-government employees, industrial workers, the
unemployed and the people with limited income. This has forced a section of the population
to drop below the poverty line.
Remedies of inflation:
1. REDUCE DEMAND PRESSURES

If inflation is caused by high demand then


* Raise interest rates to reduce consumers disposable incomes
* Raise interest rates to discourage borrowing and demand
* Raise taxes to reduce disposable income and spending
* These policies should all reduce peoples ability to spend too much money
2 REDUCE COST PUSH PRESSURES
If inflation is caused by high costs
Limit wage increases if possible e.g. public sector workers
Force electricity and gas companies to hold their prices
Increase the value of in order to reduce the cost of importing
3. REDUCE MONEY SUPPLY PRESSURES

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Print less money


Withdraw some money from circulation.

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If inflation is caused by too much money in the economy

34. How does Foreign Direct Investment (FDI) help accelerates a countrys economic
development?
One of the advantages of foreign direct investment is that it helps in the economic development of the
particular country where the investment is being made.
This is especially applicable for the economically developing countries. During the decade of the 90s
foreign direct investment was one of the major external sources of financing for most of the countries
that were growing from an economic perspective. It has also been observed that foreign direct
investment has helped several countries when they have faced economic hardships.
An example of this could be seen in some countries of the East Asian region. It was observed during
the financial problems of 1997-98 that the amount of foreign direct investment made in these
countries was pretty steady. The other forms of cash inflows in a country like debt flows and
portfolio equity had suffered major setbacks. Similar observations have been made in Latin America
in the 1980s and in Mexico in 1994-95.
Foreign direct investment also permits the transfer of technologies. This is done basically in the way
of provision of capital inputs. The importance of this factor lies in the fact that this transfer of
technologies cannot be accomplished by way oftrading of goods and services as well as investment of
financial resources. It also assists in the promotion of the competition within the local input market of
a country.
The countries that get foreign direct investment from another country can also develop the human
capital resources by getting their employees to receive training on the operations of a particular
business. The profits that are generated by the foreign direct investments that are made in that country
can be used for the purpose of making contributions to the revenues of corporate taxes of the recipient
country.
Foreign direct investment helps in the creation of new jobs in a particular country. It also helps in
increasing the salaries of the workers. This enables them to get access to a better lifestyle and more
facilities in life. It has normally been observed that foreign direct investment allows for the
development of the manufacturing sector of the recipient country.
Foreign direct investment can also bring in advanced technology and skill set in a country. There is
also some scope for new research activities being undertaken.
Foreign direct investment assists in increasing the income that is generated through revenues realized
through taxation. It also plays a crucial role in the context of rise in the productivity of the host
countries. In case of countries that make foreign direct investment in other countries this process has
positive impact as well. In case of these countries, their companies get an opportunity to explore
newer markets and thereby generate more income and profits.

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35. What ways Bangladesh could attract more FDI in the country?
Some of the recent major measures undertaken by the government to attract FDI are:
a) Private Export processing Zone Act has been enacted. Korea has set up a private EPZ at
Chittagong.
b) A Regulatory Reform Commission (RRC) has been set up.
c) A permanent Law Reform Commission has been set up to ensure greater transparency
and predictability in the way rules and regulations work.
d) An Administrative Reform Commission has been set up
e) The company law 1913 has been updated and revised in 1994.
f) The Industrial relations Act has been enacted to enhance labor market efficiency.
g) Power generation in the private sector has been allowed.
h) Telecommunication in the private sector has been allowed. Foreign Direct Investment in
Bangladesh 107
i) Multiple entry visas to visiting foreign investors are being given by all the Bangladesh
Missions abroad.
j) Provision made for allowing import of standby generators free of tax and sale of excess
electricity to nearby industrial units without permission from any agency provided own
distribution line is used.
k) Licenses issued to six cellular telecom phone operators, which illustrate governments
Commitment to a competitive and market economy.
l) Establishment of Bangladesh Better Business Forum (BBBF)
On the other hand, some of the incentives allowed for attracting FDI in Bangladesh are:
i) No ceiling on investment
ii) 100% foreign equity participation allowed
iii) Tax holiday up to 10 years
iv) Allowances of accelerated depreciation in lieu of tax holiday
v) Tax exemption and duty free importation of capital machinery and spare parts for
100% export oriented industries
vi) Residency permits for foreign nationals
vii) No restriction on issuing work permit to a foreign national
viii) Capital, profit and dividend repatriation facilities
ix) Term loans and working capital loans from local banks
x) Avoidance of double taxation on the basis of bilateral agreement
xi) Tax exemption on the interest of payable to foreign loans and on royalties and technical
know how fees
xii) Open exchange control
xiii) Multiple entry visas for investors
xiv) Convertibility of Taka for current account transactions
xv) Protection of foreign investment through The Foreign Private Investment Act-1980
and Settlement of Investment Dispute (ICSID), The Multilateral Investment Guarantee
(MIGA), and World Intellectual Property Organization (WIPO).
xvi) Adequate protection is available for intellectual property rights such as patents,
designs, trademarks and copyrights.

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36. compares the definition of economics offered by Adam smith and Lionel Robbins?
Adam Smith wrote a book in 1776 whose title was Wealth of Nations. In his book he discussed the
word wealth through its four aspects: production of wealth, exchange of wealth, distribution of
wealth and consumption of wealth. Therefore it can be said according to Adam Smith: Economics is
a science of wealth. Wealth means goods and services transacted with the help of money. Lets
discuss four aspects of wealth; first one is production of wealth it shows as to how goods
and services are produced. Goods and services are produced by the combination of four factors of
production i.e. land, labour, capital and organization. Second aspect is exchange of wealth there are
many procedures of goods and services in a society. Every procedure produces goods
and services more than his personal requirement. The exchange of wealth enables everyone in the
society to satisfy his multiple wants. Third aspect is distribution of wealth, which means the
distribution of goods and services among different sections or individuals of a society. As known by
explanation of exchange of wealth that procedures of goods and services exchange the surplus wealth
with each other throughout the year. The last and forth aspect is consumption of wealth that is using
up the utility of goods and services for the satisfaction of wants is called the consumption of wealth.

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"Economics is the science which studies human behavior as a relationship between given ends and
scarce means which have alternative uses," Robbins wrote.
According to Robbins, economics is a positive science but in reality it is not positive science deals
with material things, the results of which are certain but economics deals with human behavior which
is uncertain. Only A Valuable Theory: Robbins has reduced economics merely to
the valuationtheory. According to 'Frazer' economics is more than a valuation theory. Robbins has
widened the scope of economics extra ordinary. He has included number of matters in economics
which are in fact not discussed in economics. According to Robbins, it covers the whole human life.
For example, if you are to choose between the worship of God and that of Mammon (riches), it will be
an economic problem while it is spiritual issue. According to Robbins, economics has no normative
aspect while it is incorrect. Normative science is that which deals with the matter of material well
beings. It is also pointed out that Robbins definition ignores the macro aspect like determination
of national income and employment. But in reality this is very important work of economists. It is
also pointed out that Robbins definition has made economics colorless, abstract and difficult. It is in
fact a definition of economics only for economists. A common man cannot get any utility from it.
Human Love Missing: Human love is entirely missing in Robbins definition of economics. He has not
mentioned any thing about man's welfare. According to Robbins, an economist is aneutral person.
He has no concern whether the ends are good or bad. But in reality an economist cannot
be neutral person. He must give views on the solution of actual economic problems. Some writers
point out that it fails to explain the problem of unemployment which is a main economic problem
present time. According to Robbins, means are always scarce. But in some countries, one of the
economic means, i.e., labour is not scarce. It means Robbins definition is based on wrong
assumption. The theory of economic growth or economic development has become the
importantbranch of economics. This definition ignores it. It means it should be discussed in
economics that how does economy grow and which factors bring about increase in nation income and
productive capacity of the economy.

37. Discuss the subject matter of economics?


There are two approaches to the study of the subject matter of economics.
1. Traditional Approach 2. Modern approach
1. Traditional Approach: The traditional approach was introduced by classical economists.
Classical means something, which has been followed for a long period of time. It functions as
the basis from which new ideas are developed. It must have its originality. The ideas of
classical economists are the basis of modern economic theories.
According to the traditional approach, economics deals with man. Yet economics does not
deal with the body or the mind of man. Economics deals with the activities of man.
Economics deals only with those activities of man through which man tries to satisfy his
economic wants. There are three fundamental economic wants.
a) Food
b) Clothing
c) Shelter
In order to satisfy the economic wants man uses goods and services. This is known as
consumption in economics. In the Theory of Consumption we try to analyze the behavior of
the consumer.
For the purpose of consumption, there is a need for production. In the Theory of
Production we try to analyze the behavior of the producer. We try to find out how the
producer will allocate his resources so as to get the maximum profit out of his production.
For the purpose of production, we must take the help of the factors of production. There
arefour factors of production, such as land, labour, capital and organization.

2. Modern Approach: according to modern approach of economics the subject matter of


Economics can be divided into
a) Micro Economics b) Macro Economics
a) When we study the problem of Economics from a particular point of view, such as one
individual consumer, one firm, the price of one commodity, that is known as Micro
Economics.
b) When we study the problem as a whole, all consumers, all commodities and all producers,
it is known as Macro Economics.
The important components of the subject matter of economics
are:
1. The presence of scarcity;
2. The behavior of individuals who are faced with that scarcity;
3. Interaction of individuals who are faced with scarcity; and
4. The existence of institutions to facilitate the interaction of individuals who are faced with
scarcity.

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38. Explain the term want and scarcity as understood in economics?


Want:Thisisoftenthoughtofasapsychologicaldesirewhichmakeslifejustalittlemore
enjoyable,butwhichisnotphysiologicalnecessarytolife.Youneedoxygen,butyouwanta
hotfudgesundae.Satisfactionisachievedbyfulfillingwants.
Generally,thetermswantanddesireareusedtomeanthesamething.Butineconomics
wantreferstothedesirewhichisbackedbytheabilityandwillingnesstosatisfyit.
Asimpledesireforanythingdoesnotbecomeawantunlessthepersonhasthecapacityto
satisfyitandiswillingtoapplythatcapacityforsatisfyingthedesire.
Therefore,humanwantsmaybedefinedaseffectivedesiresforparticularthingswhich
expressthemselvesintheeffortsorsacrificesnecessarytoobtainthem.
Therearefouressentialelementsofhumanwants.
i.Scarcityofthings
ii.Desiretogetthescarcethings
iii.Sufficientamountofmoneytosatisfythedesire.
iv.Willingnesstospendthemoneytogetthedesiredthings.
Humanwantsareunlimited,variedanddiverse.Theyencouragepeopletoundertake
economicactivity.Satisfactionsofwantsthroughproductionandexchangeofgoodsand
servicesisthebasicaimofeconomicactivity.

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Scarcity: An economic principle in which a limited supply of a good, coupled with a high
demand for that good, results in a mismatch between the desired supply and demand
equilibrium. In pricing theory, the scarcity principle suggests that the price for a scarce good
should rise until equilibrium is reached between supply and demand. However, this would
result in the restricted exclusion of the good only to those who can afford it. If the scarce
resource happens to be grain, for example, individuals will not be able to attain their basic
needs.
When a product is scarce, consumers are faced with conducting their own cost-benefit
analysis, since a product in high demand but low supply will likely be expensive. This means
that the consumer should only take action and purchase the product if he or she sees a greater
benefit from having the product than the cost associated with obtaining it.

38

Wantsmaybeclassifiedintotwobroadcategories.
1.Primaryorbasicwantse.g.,food,clothingandshelterwhicharecommontoallpersons;
and
2.Secondaryornonbasicwantse.g.,education,travelling,etc.,whichdifferfrompersonto
person.
Apersonfirstofalltriestosatisfyhisprimarywantsatallcosts.Secondarywantsare
satisfiedasandwhenthenecessaryresourcesbecomeavailable.

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2(b) discusses the importance of multiplicity of wants and scarcity of resource in economics?

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39. Distinguishing features of market structure (1) perfect competition, monopoly, monopolistic
competition and oligopoly?


40.Market structure of the following product(i)water supply in Dhaka city(ii)Rice market(iii)Mobile
telephone service (iv)Banking services?

(i)water supply in Dhaka:


The Dhaka Water and Sewerage Authority (DWASA) currently supplies water to about 70%
of the population of the Dhaka City Corporation (DCC) and its suburbs through a distribution
network. The four million people living in the 3,000 Dhaka slums also rely on DWASA's
piped water, as there is no other reliable source of water available; but public standpipes are
always remotely located. DWASA's sewerage network covers only about 1 1 0 km2. Trunk
sewers suffered major damage during the 1998 and 2004 floods; as a result, only about 40%
of the waste water generated by the existing 50,000 Connections currently reach the waste
water treatment plant. High standard buildings dispose of their black waters in septic tanks
and their grey waters in storm water drains. Lower income households rely DWASA is also
responsible for developing and operating the underground storm water drainage system that
covers an area of about 140 km2; Dhaka City Corporation is in charge of surface
drains. Natural channels and wetlands that help Dhaka cope with storm water flows are
rapidly being destroyed by the urban development. Public health is affected by the limited
coverage of both the water supply and waste water facilities and recurrent flooding. DWASA
needs to update its water supply master plan to help protect existing sources, develop new
ones, and rationalize its distribution network. DWASA also needs to update its sanitation
strategy and its wastewater management master plan, as well as its storm water drainage
master plan, to ensure that minimum retention capacity of storm water flows is
reserved in the city whose population is expanding at a rate of almost 0.8 million per year.
The Government of Bangladesh has requested assistance from the World Bank to prepare the
proposed
project to improve water supply, sewerage disposal, and sanitation and storm water drainage
facilities in
Dhaka.
(ii) Rice market:

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Rice is very important because about 40% farmers in Bangladesh are producing rice. By
which most people in Bangladesh regulate their living condition. Rice is the seed of
the monocot plant Orzo sativa. As acereal grain, it is the most important food for a large part
of the worlds human population, especially in East and South Asia, the Middle East, Latin
America, and the West Indies. It is the grain with the second-highest worldwide production.
Rice production increases must be achieved at a faster rate than in most other countries, while
the land planted to rice is not expanding. But in our country there is some major factor which
is affect on production of rice price. There are some causes which are affecting on our
production of rice Such as 1.All kinds of natural disaster. Rice price is high because we are
not self-sufficient in producing rice and we import rice from many countries. On the other
hand we are some facing some problem on production process such down technology
corruption , syndicate , middle man .lack of improve technology ,lack of capital , hybrid and
lack of supply and inputs. Mostly consumers and producer are affected.

(iii) Mobile phone services:


There is a wide choice of mobile telephone services. You can choose different types of
services; including pre-pay or contract services. There are also different pricing options and
additional services to opt for, as well as different makes, models and types of mobile phone
handsets to choose from.
Before you buy, you should carefully examine what each mobile phone services offers to
determine what's best for you and your budget.
(iv) Banking services:
Banking service in Bangladesh is characterized as a highly competitive and highly regulated
sector. With a good number of banks already in operation and a few more in the pipeline, the
market is becoming increasingly competitive by the day.With the global slowdown in the
face of rising competition, the commercial banks are constantly looking for ways to develop
their market and product offers to remain ahead of others. A significant amount of regulation
by Bangladesh Bank prevents the scope of introducing newer products into the market and
thereby restricts a banks ability to outperform others with a diversified product range.
However, recent trends have shown banks shifting away from vanilla products (basic
products) towards higher value added products that are highly structured, to meet the needs of
the clients.
Involvement of the banking sector in different financial events is increasing day by day. At
the same time the banking process is becoming faster, easier and the banking arena is
becoming wider. As the demand for better service increases, the banking organizations are
coming with innovative ideas. In order to survive in the competitive field of the banking
sector, all banking organizations are looking for better service opportunities to provide to
their clients.

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41. What is meant by production function?


A production function shows the relationship between inputs of capital and labor and other factors and
the outputs of goods and services.
Production of goods requires resources or inputs. These inputs are called factors of production named
as land, labour, capital and organization. What ss Production Function in Economics with one or two
variables input. A rational producer is always interested that he should get the maximum output from
the set of resources or inputs available to him. He would like to combine these inputs in a technical
efficient manner so that he obtains maximum desired output of goods.
The relationship between the inputs and the resulting output is described as production function in
Economics. Maximum desired output of goods.

42. Describes a production indifference curve and its properties?


A diagram depicting equal levels of utility (satisfaction) for a consumer faced
with various combinations of goods.

As an example, consider the diagram above. This consumer would be most


satisfied with any combination of products along curve U3. This consumer would
be indifferent between combination Qa1, Qb1, and Qa2, Qb2.

Properties of Indifference Curves

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The main attributes or properties or characteristics of indifference curves are as follows:


1. Indifference Curves are negatively Sloped: The indifference curves must slope downward from
left to right. As the consumer increases the consumption of X commodity, he has to give up certain
units of Y commodity in order to maintain the same level of satisfaction. In the above diagram, two
combinations of commodity cooking oil and commodity wheat is shown by the points a and b
on the same indifference curve. The consumer is indifferent towards points a and b as they
represent equal level of satisfaction.

(2) Higher Indifference Curve Represents Higher Level of Satisfaction:


Indifference curve that lies above and to the right of another indifference curve represents a
higher level of satisfaction. The combination of goods which lies on a higher indifference
curve will be preferred by a consumer to the combination which lies on a lower indifference
curve. In this diagram, there are three indifference curves, IC1, IC2 and IC3 which
represents different levels of satisfaction. The indifference curve IC3 shows greater amount
of satisfaction and it contains more of both goods than IC2 and IC1. IC3 > IC2> IC1.

(3) Indifference Curves are Convex to the Origin:


This is an important property of indifference curves. They are convex to the origin. As the consumer
substitutes commodity X for commodity Y, the marginal rate of substitution diminishes as X for Y
along an indifference curve. The Slope of the curve is referred as the Marginal Rate of Substitution.
The Marginal Rate of Substitution is the rate at which the consumer must sacrifice units of one
commodity to obtain one more unit of another commodity. Diagram:In the above diagram, as the
consumer moves from A to B to C to D, the willingness to substitute good X for good Y diminishes.
The slope of IC is negative. In the above diagram, diminishing MRSxy is depicted as the consumer is
giving AF>BQ>CR units of Y for PB=QC=RD units of X. Thus indifference curve is steeper towards
the Y axis and gradual towards the X axis. It is convex to the origin.

(4) Indifference Curves cannot Intersect Each Other:


The indifference curves cannot intersect each other. It is because at the point of tangency, the higher
curve will give as much as of the two commodities as is given by the lower indifference curve. This is
absurd and impossible.
In the above diagram, two indifference curves are showing cutting each other at point B. The
combinations represented by points B and F given equal satisfaction to the consumer because both lie
on the same indifference curve IC2. Similarly the combinations shows by points B and E on
indifference curve IC1 give equal satisfaction top the consumer.

(5) Indifference Curves do not Touch the Horizontal or Vertical Axis:

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Diagram: In the above diagram, it is shown that the in difference IC touches Y axis at point P and X
axis at point S. At point C, the consumer purchase only OP commodity of Y good and no commodity
of X good, similarly at point S, he buys OS quantity of X good and no amount of Y good. Such
indifference curves are against our basic assumption. Our basic assumption is that the
consumer buys two goods in combination.

44

One of the basic assumptions of indifference curves is that the consumer purchases combinations of
different commodities. He is not supposed to purchase only one commodity. In that case indifference
curve will touch one axis. This violates the basic assumption of indifference curves.

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"Returns to scale" is a term that is used to describe the type of changes that may occur to the output of
a production process when some type of change takes place with the inputs involved in the process.
Within the broader context of the returns to scale, the results are often qualified as increasing,
decreasing, or constant, depending on what has occurred with the inputs and how those changes
impacted the output of the production process. Identifying the returns to scale aids businesses in
determining if those changes are positive for the company, and may even aid in providing valuable
data that can be used to reverse an emerging negative trend.
One way to understand returns to scale is to think in terms of what will happen when factors shift and
have an effect on the total output of the operation. For example, if the production line is shut down
for a few days due to an equipment failure and there is no time to make up that lost time later in the
accounting period, there is a good chance that the output for the period will be adversely affected in
terms of finished units produced. When considered in light of the costs of repairing and restarting the
machinery are taken into consideration, this may indicate a decreased returns to scale.
At the same time, if changes in the production process make it possible to produce more finished units
with the same level of resources consumed, those changes in the input factors lead to increased output
that may be identified as an increased returns to scale. When changes to the inputs make no real
difference in the relationship between inputs and outputs, the production is said to be constant returns
to scale.
5. Distinguish between increasing returnto scale,constant returnto scale and decreasing returnto scale?
Increasing Returns to Scale
Increasing returns to scale is closely associated with economies of scale Increasing returns to scale
occurs when a firm increases its inputs, and a more-than-proportionate increase in production results.
For example, in year one a firm employs 200 workers, uses 50 machines, and produces 1,000
products. In year two it employs 400 workers, uses 100 machines (inputs doubled), and produces
2,500 products (output more than doubled).
When input prices remain constant, increasing returns to scale results in decreasing long-run average
costs (economies of scale). A firm that gets bigger experiences lower costs because of increased
specialization, more efficient use of large pieces of machinery (for example, use of assembly lines),
volume discounts, and other advantages of producing in large quantities.
Decreasing Returns to Scale
Decreasing returns to scale is closely associated with diseconomies of scale. Decreasing returns to
scale happens when the firm's output rises proportionately less than its inputs rise. For example, in
year one, a firm employs 200 workers, uses 50 machines, and produces 1,000 products. In year two it
employs 400 workers, uses 100 machines (inputs doubled), and produces 1,500 products When input
prices remain constant, decreasing returns to scale results in increasing long-run average costs
(diseconomies of scale). An organization may become too big, thus creating too many layers of
management, too many departments, and too much red tape. This leads to a lack of communications,
inefficiency, delays in decision-making and inefficient production.
Constant Returns to Scale
Constant returns to scale occurs when the firm's output rises proportionate to the increase in inputs.
Problem: In the example above, after doubling the inputs in year one, what would output have to be in
year two for the firm to experience constant returns to scale? Solution: 2,000 products. At 2,000
products, the output doubles. Because the inputs double, the increase in production is proportionate.
By definition, this equates to constant returns to scale.

45

43. what do you mean returns to scale?

44. Distinguishes between gross national product and net national product?
Gross National Product
An economic statistic that includes GDP,
plus any income earned by residents from
overseas investments, minus income earned
within the domestic economy by overseas
residents.
Gross National Product (GNP) measures the
total income earned by residents of a nation
GNP = GDP + Net Factor Income From
Abroad
Gross National Product (GNP) represents the
market value of all goods and services
produced by nationals

Net National Product


The monetary value of finished goods and
services produced by a country's citizens,
whether overseas or resident, in the time
period being measured , minus the amount of
GNP required to purchase new goods to
maintain existing stock
Net National Product (NNP) is GNP net of
the capital stock used up
NNP = GNP Depreciation
Net national product, or NNP, represents a
mathematical result of a country's production
after accounting for depreciation of
inventory.

45.what is meant by the problem of double counting in the measurement of national


income? A term used to describe the problematic situation that occurs when the costs of intermediate

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46. How can the double counting problem be avoided?
The simplest way to think about national income is to consider what happens when one
product is manufactured and sold. Typically, goods are produced in a number of 'stages',
where raw materials are converted by firms at one stage, then sold to firms at the next stage.
Value is added at each, intermediate, stage, and, at the final stage, the product is given a retail
selling price. The retail price reflects the value added in terms of all the resources used in all
the previous stages of production.
In accounting terms, only the value of final output is recorded. To avoid the problem
of double counting, only the value of the final stage, the retail price, is included, and not the
value added in all the intermediate stages - the costs of production, plus profits. In short,
national income is the value of all the final output of goods and services produced in one
year.
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46

goods used by a business to produce a finished good are included in the computation of
a nation's gross domestic product. Since the final price of a good already includes the value of all the
intermediate goods used to produce it, including the price of intermediate goods when calculating
gross domestic product would involve double counting.
Double counting is an error caused as a result of illogical calculation. This term is used in economics
to refer to the faulty practice of counting the value of a nation's goods more than once. Since goods
are produced in stages, through specialized channels of production, many intermediate goods are used
to produce a final good. If the values of each of these intermediate goods is added together, without
subtracting expenditures incurred during the production process, the error of double counting will be
committed.

47. What is unemployment and what are its various types?


Unemploymentoccurswhenapersonwhoisactivelysearchingforemploymentisunabletofind
work.Unemploymentisoftenusedasameasureofthehealthoftheeconomy.Themostfrequently
citedmeasureofunemploymentistheunemploymentrate.Thisisthenumberofunemployed
personsdividedbythenumberofpeopleinthelaborforce.

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Types of Unemployment:
Varioussocialthinkersandeconomistshavecategorizedtheunemploymentinvariousways.
Generallyunemploymentoftwotypes:
1)Voluntaryunemployment2)Involuntaryunemployment.
1) Voluntary unemployment:
Inthistypeofunemploymentapersonisoutofjobofhisowndesire.Hedoesnotworkonthe
prevalentorprescribedwages.Eitherhewantshigherwagesordoesnotwanttoworkatall.Itisin
factanimposedsituation.Ineconomicterminology,thissituationisvoluntaryunemployment.
2) Involuntary unemployment:
Inthesetypesofsituationthepersonwhoisunemployedhasnosayinthematter.Itmeansthata
personisseparatedfromremunerativeworkanddeniedofwagesalthoughheiscapableofearning
hiswagesandisalsoanxioustoearnthem
Types of Unemployment According to Hock:
AlfredHockhascategorizedunemploymentunderthefollowing5heads:
1) Cyclical unemployment:
Thisistheresultofthetradecyclewhichisapartofthecapitalistsystem.Insuchasystem,thereis
goingupofprofitandalsolossofprofit.Whenthereishighprofit,thereisgreateremploymentand
whenthereisdepression,alargenumberofpeoplearerenderedunemployment.Sincesuchan
economiccrisisistheresultoftradecycle,thenunemploymentisapartofit.
2) Sudden unemployment:
Whenattheplacewhereworkershavebeenemployed,thereissomechange;alargenumberof
personsareunemployed.Itallhappenswiththeindustries,tradesandbusinesswherepeopleare
employedforajobandsuddenlywhenthejobhasendedtheyareaskedtogo.
3) Unemployment caused by failure of industries or business:
Inmanycases,abusiness,afactoryoranindustryhastoclosedown.Theremaybevariousfactors
responsibleforit.Theremaybedisputeamongstthepartners,thebusinessmaygivehugelossor
thebusinessmaynotturnouttobeusefulandsoon.Normallythisthingalsohappensallofa
sudden.
4) Unemployment caused by deterioration in industry and business:
Invariousindustries,tradesorbusiness,sometimes,thereisdeterioration.Thisdeteriorationmay
beduetovariousfactors.Inefficiencyoftheemployerskeencompetition,lessprofitetc,issomeof
thefactorsresponsiblefordeteriorationintheindustryandthebusiness.
5) Seasonal unemployment:
Certain industriesandtradesengageworkersforaparticularseason.Whentheseasonhasended
theworkersarerenderedunemployed.Sugarindustryisatypicalexampleofthistypeofseasonal
unemployment.

48. Remedies for unemployment in Bangladesh?


Bangladesh is most densely populated country with a partial resource. There are about 150
millions of people and 49 percent of them live under poverty line. Unquestionably,
unemployment is a Big Macroeconomic Issue of Bangladesh.
According to a study of the International Labor Organization (ILO), the rate of growth of
unemployment in Bangladesh was 1.9 per cent in the decade of the nineties. But the growth
in unemployment currently is 3.7 per cent. The ILO figures also show Bangladesh in the
twelfth position among the top twenty countries in the world where unemployment is rising.
The number of the unemployed in Bangladesh now is estimated at 30 million. The way the
rate of unemployment is increasing, it is feared that at this rate unemployment would soar to
some 60 million by 2015. According to another estimate, every year some 2.7 million young
persons are becoming eligible for jobs whereas only about 0.7 million of them are getting
employment.
Some recommendations to reduce Unemployment:
1. Create a National Office of Employment to develop long term strategies and oversight of
the Bangladesh labor market in order to track trends, analyze data, research emerging
problems, and prepare early interventions.
2. Identify growing and potential industries and the skills they will need in future staff.
3. Design a plan which allows for the rapid retargeting of training courses as Community
Colleges and vocational schools are traditionally 5 to 15 years behind current needs.
4. Renovate the processes of State Unemployment Offices by implementing coordinated
support programs in which workers participate as part of receiving unemployment benefits
and employers participate as a means of meeting their future needs for staff.
5. Provide incentives for employers to hire more part-time workers

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49. Objective of monetary policy in a developing country like Bangladesh?


Monetarypolicyaimsandmethodshavechangedovertime.Bothindeveloped
andd e v e l o p i n g e c o n o m i e s , m o n e t a r y p o l i c i e s s e e k t o m a i n t a i n p r i c e s t
a b i l i t y b y sustainedstableoutputgrowthinthefaceofinternalandexternalshocksthat
arefacedfromtimetotime.
Indevelopedeconomieswithproductionfactorsatorclosetofullemployment,
monetarypoliciesareformulatedtypicallywiththeoutputgap(differencebetweentheactualand
thelongerrunpotentialoutput)inview;thepolicystanceiseasedtoprovidestimulusattimes
ofslowdownwhenactualoutputlagsthelongerrun p o t e n t i a l , a n d t h e s t a n c e i s
t i g h t e n e d t o s l o w t h i n g s d o w n w h e n t h e e c o n o m y overheatswithactualoutput
runningaheadofthesustainablelongerrunpotential.Diagnosingandtreatingassetpricebubbles
symptomaticofoverheatingaremajorissuesofcurrentdebateinmonetarypolicy.

FordevelopingeconomieslikeBangladeshwithsignificantunderemployment/u
nderexploitationofproductionfactors,stimulatinghighergrowthisimperativeforrapidreductionand
eventualeliminationofendemicpoverty,andisthereforeanoverridingpriority.The
stimulusprovidedbymonetarypoliciesin
accommodatingt h e g r o w t h a s p i r a t i o n s m u s t n o t h o w e v e r o v e r s t e p t o w a
r d s m a c r o e c o n o m i c imbalancedestabilizingandjeopardizingfuturegrowth;andthepursuitof
monetarypoliciescomprisethecontinualbalancingactofsupportingthehighestsustainable
outputgrowthwhileadjustingsmoothlytointernalandexternalshocksthat
theeconomyencounterfromtimetotime.
TheprimaryobjectiveoftheMonetaryPolicyofBangladeshistooutl
i n e t h e formulationandimplementationofmonetarypolicyoftheBangladeshBank(BB),
andtoconveyitsassessmentoftherecentandtheexpectedmonetaryandinflation
developmentstothestakeholdersandthepublicatlarge
TheBangladeshBankOrderof1972outlinesthemainobjectivesof
monetarypolicyinBangladesh,whichcomprises
Toachievethepricestability
Toregulatecurrencyandreserves
Topromoteandmaintainahighlevelofproduction,employmentandrealincome,and
economicgrowth,sinceindependenceBBoperatedunderavarietyofpegged
exchangeratesystemsamidcapitalcontrols
Tomanagethemonetaryandcreditsystem

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Topromotegrowthanddevelopmentofthecountry'sproductiveresourcesinthebest
nationalinterest
AlthoughthelongtermfocusofmonetarypolicyinBangladeshis
ongrowthwithstability,theshorttermobjectivesaredetermined

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Tomaintaintheparvalueofdomesticcurrency

50.ExplainsInterdependenceofmonetaryandfiscalpolicies?
Fiscal policy and monetary policy are the two tools used by the State to achieve
its macroeconomic objectives. While the main objective of fiscal policy is to increase the
aggregate output of the economy, the main objective of the monetary policies is to control the
interest and inflation rates. The celebrated IS/LM model is one of the models used to depict
the effect of interaction on aggregate output and interest rates. The fiscal policies have an
impact on the goods market and the monetary policies have an impact on the asset markets
and since the two markets are connected to each other via the two macrovariables output
and interest rates, the policies interact while influencing the output or the interest rates.
Traditionally, both the policy instruments were under the control of the national governments.
Thus traditional analyses made with respect to the two policy instruments to obtain the
optimum policy mix of the two to achieve macroeconomic goals as the two were perceived to
aim at mutually inconsistent targets. But in recent years, owing to the transfer of control with
respect to monetary policy formulation to Central Banks, formation of monetary unions
(like European Monetary Union formed via the Stability and Growth Pact) and attempts
being made to form fiscal unions, there has been a significant structural change in the way in
which fiscal-monetary policies interact.
There is a dilemma as to whether these two policies are complementary, or act as substitutes
to each other for achieving macroeconomic goals. Policy makers are viewed to interact as
strategic substitutes when one policy maker's expansionary (contractionary) policies are
countered by another policy maker's contractionary (expansionary) policies. For example: if
the fiscal authority raises taxes or cuts spending, then the monetary authority reacts to it by
lowering the policy rates and vice versa. If they behave as strategic complements, then an
expansionary (contractionary) policy of one authority is met by expansionary (contractionary)
policies of other.

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51. Economics is the science of wealth-discuss?


Adam Smith and his distinguished followers called classical economists defined economics
as a science of wealth. Adam Smith (1723-1790) in his famous book An Enquiry into the
Nature and Causes of the Wealth of Nations described economics as a body of knowledge
which relates to wealth. According to him if a nation has larger amount of wealth, it can help
in achieving its betterment. Adam Smith defined economics as the study of nature and
causes of generating of wealth of a nation. Adam Smith emphasized the production and
expansion of wealth as the subject matter of economics. Ricardo, another British classical
economist shifted the emphasis from production of wealth to the distribution of wealth in the
study of economics. J. B. Say, a French classical economist, described economics as the
science which treats of wealth J. S. Mill an other classical economist in the middle of 19th
century looked upon economics as the practical science of production and distribution of
wealth. According to Malthus Man is motivated by self interest only The desire to collect
wealth never leaves him till he goes into the grave. The main points of the definitions of
economics given by the above classical economists are that (1) economics is the study of
wealth only. It deals with consumption, production, exchange and distribution aspects of
wealth. (2) Only those material goods which are scarce are included in wealth.
Adam smith and the other classical economists considered wealth as the central issue of the
study of economics. According to them economics studies the principles of term of the
following aspects of wealth.
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52. explains the relationship between economics and political science and statistics?
Political science:
The link between economics and political science is economic policy. These are rules, or regulation,
or policies that politicians make concerning the economy. Economic policy is a vast area that range
from minimum wage to taxation to banking regulations. They have both political and economic
consequences. A large portion of politics is about how government can (or should) influence the
economy. The study of these economic effects relate to (a portion of) political science.

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Econometrics can be defined as the study in which the tools of economic theory, statistical inference
and mathematics are systematically applied, using observed data, to the analysis of economic laws. It
is therefore concerned with the "empirical determination of economic laws. Economic theories are
written in mathematical form and are then analyzed using statistical methods. If the observed data are
found to be incompatible with the predictions of the theory, it is rejected. Theories are accepted if the
data are found to fit the theory."Econometrics is a branch of economics that applies statistical methods
to the empirical study of economic theories and relationships. It is as a form of mathematical
economics.Economistsbasemosttheoriesandpoliciesonstatisticsstatsareavitalpart
ofeconomics.Economicsstudytrendsandpatternsbasedonstatsusedineconomics:meanftests,
ttests,andregressions,confidenceintervalsstatsareusedtomeasuregrowthrates,inflation,and
anyrelationshipbetweentwovariables(regressions)

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Statistics:

53. How does an imperfect market affect the interest of an average consumer?
A market where information is not quickly disclosed to all participants in it and where the matching of
buyers and sellers isn't immediate. Generally speaking, it is any market that does not adhere rigidly to
perfect information flow and provide instantly available buyers and sellers.
Imperfect market structure is where the firms that operate in a market have a lot of control over the
good or service they produce. This will happen when the numbers of firms that produce that good or
supply a certain services are very few in the market. Imperfect competition market structure is the
most common type of market structure in the market. We can illustrate imperfect competition by an
example in the energy sector. If there is only one gas station in your geographical area and you cannot
afford to go and buy fuel from the neighboring gas station because of its distance and costs. Then your
local gas station will price its commodity above the prevailing market prices because there is no
competition from other firm. The consumers do not have any choice but to purchase from this station
at the inflated prices. The gas station has therefore created an imperfect market.
The characteristic of imperfect market structure is that they reduce the economic surplus to varying
degrees. Economic surplus is the extra revenue you acquire from selling a commodity at a higher
price more than what you were willing to sell in the market. There are five major sources of market
power in the imperfect market competition. There are

Exclusive control of the factors of production

Having the patent right or copy rights in the production of a good or service

Government regulation

Firms network in a market to create economies of scales.

Natural monopolies

As a result the average consumer will be faced problem to achieve their desired interested
product.

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54. What are the methods of computing the Gross Domestic Produtct?
Two different approaches are used to calculate GDP. In theory, the amount spent for goods and
services should be equal to the income paid to produce the goods and services, and other costs
associated with those goods and services. Calculating GDP by adding up expenditures is called the
expenditure approach, and computing GDP by examining income for resources (sometimes referred to
as gross domestic income, or GDI, is known as the resource cost/income approach.
Expenditure Approach
The expenditure approach utilizes four main components:
Consumption (C) - These are personal consumption expenditures. They are typically broken down
into the following categories: durable goods, non-durable goods, and services.
Investment (I) - This is gross private investment; it is generally broken down into fixed investment
and changes in business inventories.
Government (G) - This category includes government spending on items that are "consumed" in the
current period, such as office supplies and gasoline; and also capital goods, such as highways,
missiles, and dams. Note that transfer payments are not included in GDP, as they are not part of
current production.
Net Exports - This is calculated by subtracting a nations imports (M) from exports (X). Imports are
goods and services produced outside the country and consumed within, and exports are goods and
services produced domestically and sold to foreigners.
GDP = C + I + G + (X - M)
Resource Cost/Income Approach
To calculate Gross Domestic Income (GDI), first consider how revenues received for products and
services are used:
1. Pay for the labor used (wages + income of self-employed proprietors)
2. Pay for the use of fixed resources, such as land and buildings (rent);
3. Pay a return to capital employed (interest);
4.Pay for the replenishment of raw material used.
Remaining revenues go to business owners as a residual cash flow, which is used to replenish capital
(depreciation), or it becomes a business profit. So with the resource cost/income approach, GDP (or
GDI) is calculated as wages, rent, interest and cash flow paid to business owners or organizers of
production.

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So GDP by resource cost/income approach = wages + self-employment income + Rent + Interest +


profits + indirect business taxes + depreciation + net income of foreigners.

55. is high per capital income the only measure of economic development?
Actually the high per capital income is not the only measure of economic development.
There are a number of measures which have been used to estimate the economic development of a
country. These measures, in brief, are:
(i) Increase in real GNP.
(ii) Increase in real per capita income.
(iii) Rise in overall wellb eing of the people.
(iv) Basic needs approach.
Human Development index.
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56.. what according to you are the main causes of the present state of inflation in the country?

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The economy of Bangladesh has been suffering from a double-digit inflation. A shortage of
oil production or energy crisis world-wide, increase in energy prices and cost-of production
in combination with a demand-pull inflation from expansionary economic policies have
caused a persistent inflation. Altogether these have created a supply-side problem by
decreasing the productivity. The situation of Bangladesh has been aggravated due to political
problems and effort of minimizing corruption and a lack of confidence in business and
manufacturing. It is hard to assume that we can ever get back to the single digit inflation. It is
almost clear that we have to live with this double-digit inflation.
The natural rate of inflation from four to five percent is accepted in almost any developing
country. But, a double-digit inflation of more than ten percent must have some reasons.
Inflation is the persistent and generalized increase in the level of prices of goods and services.
Consumers are worried about higher or increasing prices of their consumer goods as their real
income, purchasing power and their standard of living is going down.
Inflation is normally caused by a combined effect of demand-pull, cost-push, and
expansionary monetary or fiscal policy. The recent inflation in Bangladesh is relatively more
a cost-push inflation than a demand-pull. Rising prices of goods of all kinds including the
goods of necessities is mere a reflection of the rising cost of production than a higher demand
for these goods and commodities.
Productivity, or output per labor, is not increasing as much as their wages are increasing.
Factors of production and their productivity in our economy of recession including land,
labor, capital, technology, innovation and management are not increasing due to land erosion
and land fragmentation, lack of training, wear and tear of capital equipment, and their lack of
replacement, backwardness of technology and innovation. The lack of skilled manpower,
leadership, smart management and productive working environment and discipline is
common in Bangladesh. The higher import prices of raw-materials, energies, fuel and
intermediate goods are also increasing the cost of production.
Wages in the major employment - or the public sector in Bangladesh has been increasing for
more than the last two decades due to both strong and moderately strong labor union. Due to
political, social and cultural tradition and for a humanitarian reason,. Finally, we have the
nationwide increase in wages relative to the productivity or output per labor. Higher wage is
easily transferred to higher cost of production and higher prices of consumer goods. Increased
wages lead to the rising inflation.

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(v)

57. What is money? Discuss the function of money?


An officially-issued legal tender generally consisting of currency and coin. Money is the circulating
medium of exchange as defined by a government. Money is often synonymous with cash, including
negotiable instruments such as checks. Each country has its own money, or currency, that is used as a
medium of exchange within that country . The currency of one country can be exchanged for the
currency of another via a currency exchange. The current exchange rate determines how much of one
currency must be used to purchase a specified amount of the other currency.
Generally, economists have defined four types of functions of money which are as follows:
1. Measurement of value (ii) Medium of Exchange ;(iii) Standard of deferred payments(iv) Store
of value.
These four functions of money have been summed up in a couplet which says: Money is a matter of
functions four, a medium, a measure, a standard and a store.
These functions have been presented below in the charitable.
(i) Money as a Unit of Value:
Money measures the value of various goods and services which are produced in an economy. In other
words, money works as unit of value or standard of value. In barter economy it was very difficult to
decide as to how much volume of goods should be given in exchange of a given quantity of a
commodity. Money, by performing the function of common measure of value, has saved the society
from this difficulty
(ii) Medium of Exchange:
Right from the beginning, money has been performing an important function as medium of exchange
in the society. Money facilitates transactions of goods and service as a medium of exchange.
Producers sell their goods to the wholesalers in exchange of money. Wholesalers sell the same goods
to the consumers in exchange of money.
In the same way, all sections of society sell their services in exchange of money and with that buy
goods and services which they need. Money, working as medium of exchange, has eliminated
inconvenience which was faced in barter transactions. However, money can operate as medium of
exchange only when it is generally accepted in that role. Bank money can be treated as money simply
on the basis of their general acceptability for they are highly useful.
(iii) Standard of Deferred Payments:
Modem economic setup is based on credit and credit is paid in the form of money only. In reality the
significance of credit has increased so much that it will not be improper to call it as the foundation
stone of modem economic progress. Money, besides being the basis of current transactions, is also the
basis of deferred payments. Only money is such a commodity in whose form accounts of deferred
payments can be maintained in such a way so that both creditors and debtors do not stand to lose.
(iv) Store of Value:
It was virtually impossible to store surplus value under barter economy; the discovery of money has
removed this difficulty. With the help of money, people can store surplus purchasing power and use it

become the only basis of promoting capital formation and modern production technique and corporate
business facilitated there from.
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less. Besides, it can be used whenever need be. By facilitating accumulation of money, money has

55

whenever they want. Saving in money is not only secure but its possibility of being destroyed is very

58. State and explain the component of money supply in Bangladesh?

Economics defines money supply as the total assets of stock that is accepted as an
exchange media at a given time in an economy. Money supply has a standardized
representation with three monetary components which has been delineated as M0,
M1 and M2.
The M0 component comprises of the currency which is in the hands of the public,
the statutory deposits of the banks held by the central bank and itscash reserves.
This component represents central banks monetary liabilities. The M0 is, thus,
generally referred to as the reserve money or monetary base of the economy. The
next standard component, M1 includes the currency that is present outside the
banking system and the transaction currency of the commercial bank current
account liabilities. This component may include foreign currency deposits which
are needed in domestic transactions.
The M2 component of money supply tries to expand the liquid assets range to add
up few interest earning items like fixed deposits, saving deposits or time deposits.
This is a broad component of money supply and takes into account M1, short term
savings, deposit certificates, transferable foreign currency deposits as well as
repurchase agreements. Some countries have extended the broad component of
money supply beyond M2.
The M0, M1 and M2 are considered the primary money supply components or
monetary aggregates which satisfy the liquidity criteria. However, there can be
other cases where the broader measurements are required. For example, when there
are less liquid financial assets, M3 and M4 components are taken into account.

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59. Why does government borrow?


There are many different reasons for government borrowing

Tax revenues are less than predicted. Borrowing means the government can meet a
temporary shortfall by borrowing, rather than having to immediately cut back on spending. Like an
overdraft facility, government borrowing gives the government more flexibility and means they can
maintain wages and spending commitments without having to keep cutting spending.

Automatic fiscal stabilizers. In a recession, government tax revenues fall (e.g. people earn
less so pay less income tax). Also the government has to spend more on unemployment benefits.
Therefore, in an economic downturn, borrowing rises. To eliminate borrowing in a recession would
make the recession worse and increase inequality. If the government couldnt borrow in a recession,
the unemployed may not get any benefits and have no income.

Investment. The government may invest in public sector investment. For example, building
schools, hospitals, better roads. This investment can give a return on the investment which helps to
boost productive capacity and increase economic growth. In this case, the government is acting like a
firm who takes out a loan to finance investment.

Political. The biggest tendency to borrow comes from political pressures. Voters generally
like to hear the promise of lower taxes and increasing spending. A manifesto to tackle a budget
deficit (higher taxes and lower spending) is unlikely to be popular. Voters often are supportive of the
general idea of reducing government debt, but when it comes to actual policies like lower benefits,
higher pension age, increased VAT rate, then it is likely to hit some particular pressure group with a
vested interest in maintaining low tax and spending.

War. During a war, government spending is stretched leading to higher borrowing. The
highest rates of borrowing occurred during the two world wars. Also, during wars, it may be easier to
sell bonds as you can play the patriotic card to encourage people to finance government borrowing.

Its Cheap. Governments like the UK can usually borrow at very low interest rates,
especially during an economic downturn. This is because people have confidence government bonds
are secure and so are willing to lend at low interest rates.
Economic Growth tends to reduce real debt burden. In the early 1950s, UK public sector
debt was over 200% of GDP. However, over next few decades, economic growth helped to reduce the
burden of debt. Assuming constant economic growth of 3% a year, the government can borrow more,

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but maintain the same % of tax revenue on interest payments

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60. Disucss the domestic sources of government borrowing in Bangladesh and their likely
effect on the economy?
The acquisition of funds through the financial markets by the government sector which are used to
finance government expenditures. In terms of the simple circular flow model, this is one of two basic
demands for household saving diverted into financial markets. The other is investment borrowing.
Government borrowing is also one of two methods of financing government expenditures. The other
is taxes.
Government borrowing is one of two sources of funds used by the government to pay for government
expenditures. The primary source of financing comes from taxes. Government borrowing is necessary
when the government sector spends more than it
The Circular Flow

collects in taxes.
Government borrowing by the
Government borrowing by the government sector can
be illustrated with the circular flowmodel. The circular
flow captures the continuous movement of
production, consumption, income, and factor payments
between producers and consumers.
The household sector at the far left contains the
consuming population of the economy. The business
sector at the far right includes all of the producers. The
government sector is positioned in the middle of the
diagram and the foreign sector is at the very top.

The product markets near the top of the flow direct


production from the business sector to the household
sector in exchange for payment flowing in the opposite
direction. The resource markets at the bottom of the flow direct factor services from the household
sector to the business sector in exchange for payment flowing in the opposite direction. The financial
markets located just above the resource markets divert saving from the household sector to business
and government borrowing.
There are some economic risks associated with a high level of government borrowing:

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If the economy has only a small supply of savings, increased government borrowing
may force up interest rates and crowd out private sector investment
Higher borrowing in the long-run requires an increase in the tax burden - this may
dampen demand and economic growth
If the national debt increases, annual interest payments on the debt goes up money that might have been spent in priority areas

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61. Economics is the study of mankind in the ordinary business of life-discuss?

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Although then some of the evils which commonly go with poverty are not its necessary consequences;
yet, broadly speaking, "the destruction of the poor is their poverty," and the study of the causes of
poverty is the study of the causes of the degradation of a large part of mankind.

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Political economy or economics is a study of mankind in the ordinary business of life; it examines that
part of individual and social action which is most closely connected with the attainment and with the
use of the material requisites of wellbeing.
Thus it is on the one side a study of wealth; and on the other, and more important side, a part of the
study of man. For man's character has been molded by his every-day work, and the material resources
which he thereby procures, more than by any other influence unless it be that of his religious ideals;
and the two great forming agencies of the world's history have been the religious and the economic.
Here and there the ardour of the military or the artistic spirit has been for a while predominant: but
religious and economic influences have nowhere been displaced from the front rank even for a time;
and they have nearly always been more important than all others put together. Religious motives are
more intense than economic, but their direct action seldom extends over so large a part of life. For the
business by which a person earns his livelihood generally fills his thoughts during by far the greater
part of those hours in which his mind is at its best; during them his character is being formed by the
way in which he uses his faculties in his work, by the thoughts and the feelings which it suggests, and
by his relations to his associates in work, his employers or his employee.
And very often the influence exerted on a person's character by the amount of his income is hardly
less, if it is less, than that exerted by the way in which it is earned. It may make little difference to the
fullness of life of a family whether its yearly income is 1000 or 5000; but it makes a very great
difference whether the income is 30 or 150: for with 150 the family has, with 30 it has not, the
material conditions of a complete life. It is true that in religion, in the family affections and in
friendship, even the poor may find scope for many of those faculties which are the source of the
highest happiness. But the conditions which surround extreme poverty, especially in densely crowded
places, tend to deaden the higher faculties. Those who have been called the Residuum of our large
towns have little opportunity for friendship; they know nothing of the decencies and the quiet, and
very little even of the unity of family life; and religion often fails to reach them. No doubt their
physical, mental, and moral ill-health is partly due to other causes than poverty: but this is the chief
cause.
And, in addition to the Residuum, there are vast numbers of people both in town and country who are
brought up with insufficient food, clothing, and house-room; whose education is broken off early in
order that they may go to work for wages; who thenceforth are engaged during long hours in
exhausting toil with imperfectly nourished bodies, and have therefore no chance of developing their
higher mental faculties. Their life is not necessarily unhealthy or unhappy. Rejoicing in their
affections towards God and man, and perhaps even possessing some natural refinement of feeling,
they may lead lives that are far less incomplete than those of many, who have more material wealth.
But, for all that, their poverty is a great and almost unmixed evil to them. Even when they are well,
their weariness often amounts to pain, while their pleasures are few; and when sickness comes, the
suffering caused by poverty increases tenfold. And, though a contented spirit may go far towards
reconciling them to these evils, there are others to which it ought not to reconcile them. Overworked
and undertaught, weary and careworn, without quiet and without leisure, they have no chance of
making the best of their mental faculties.

62. Why is it important for a banker to know the basic principles of economics?
Economicsisthestudyofhowbusinessesandcountriesoperateandreactto
situations.Therearenumerousbasiceconomicconceptsthatisimportantfora
banker.Thisimportantthingsaregivenbelow
SupplyandDemand
This is the cornerstone of studying economics and is an easy way to work out the trade-offs
between production of an item and its cost. If demand for a product or service is high, then
the supply of a product or service is high and vice versa.
Economies of Scale
Economies of scale are a business term used to demonstrate the cheapest way of producing
something.

Microeconomics
Microeconomics is the study of how individuals and specific industries react to economic
conditions.
Macroeconomics
Macroeconomics is the study of the economic system as a whole.
Inflation
The amount the price of a product goes up each year. Most governments try to keep inflation
at around the two percent mark. This means the price of a product will go up two percent
every year.
Interest Rates
Interest rates are normally set either by the government or by a national bank and are the
amount of extra money in percentage terms people give back on loans or receive for saving
money. It is one of the few economic tools that a government can use to move the economy.
Price Index
There are two main types of price index, the retail and the consumer. These both show how
much the average basket of goods costs a consumer.
Economic Growth
This is the statistic most thrown around on the news, as it is the simplest idea to get your head
around. Growth or Gross Domestic Product (GDP) is a measure of how much money is spent
in the country

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63. Distinguish between micro and macro economics?


The main differences between micro and macro economics are given below:MICRO ECONOMICS:-

1.Evolution of micro economics took place earlier than macro economics.


2.It is branch of economics, which studies individual economic variables like
demand,supply,price etc.
3.It has a very narrow scope i.e. an individual, a market etc.
4.Demand,supply,market forms etc.relate to micro economics.
5.It is helpful in analysis of an individual economics unit like firm.
6. Theory of demand, theory of production, price determination theory etc.develop from
micro economics.
MACRO ECONOMICS:-

1.It evolved only after the publication of Keynesbook.Genral.theory of employment,


interest and money.
2.It is a branch of economics which studies aggregate economic variables, like aggregate
demand, aggregate supply, price level etc.
3.It has a very wide scope i.e. a country.
4. Aggregate demand aggregate supply,national income etc.relate to macro economics.
5.It is helpful for analysing the level of employment,income,economic growth etc.
6.Theory of national income, theory of employment, theory of money, theory of genral
price level etc.develop from macro economics.

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64. What are the main goals of macro economics policy?


Three conditions of the mixed economy that are most important for macroeconomics, including full
employment, stability, and economic growth, that are generally desired by society and pursued by
governments through economic policies.
Full Employment
Full employment is achieved when all available resources (labor, capital,land, and entrepreneurship)
are used to produce goods and services. This goal is commonly indicated by the employment of labor
resources (measured by the unemployment rate). However, all resources in the economy--labor,
capital, land, and entrepreneurship--are important to this goal. The economy benefits from full
employment because resources produce the goods that satisfy the wants and needs that lessens
thescarcity problem. If the resources are not employed, then they are not producing and satisfaction is
not achieved.
Stability
Stability is achieved by avoiding or limiting fluctuations in production, employment, and prices.
Stability seeks to avoid the recessionary declines and inflationary expansions of business cycles. This
goal is indicated by month-to-month and year-to-year changes in various economic measures, such as
the inflation rate, the unemployment rate, and the growth rate of production. If these remain
unchanged, then stability is at hand. Maintaining stability is beneficial because it means uncertainty
and disruptions in the economy are avoided. It means consumers and businesses can safely pursue
long-term consumption and production plans. Policies makers are usually most concerned with price
stability and the inflation rate.
Economic Growth
Economic growth is achieved by increasing the economy's ability to produce goods and services. This
goal is best indicated by measuring the growth rate of production. If the economy produces more
goods this year than last, then it is growing. Economic growth is also indicated by increases in the
quantities of the resources--labor, capital, land, and entrepreneurship--used to produce goods. With
economic growth, society gets more goods that can be used to satisfy more wants and needs--people
are better off; living standards rise; and scarcity is less of a problem.

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65. Are price always determined by the laws of demand and supplu?explain
Price is derived by the interaction of supply and demand. The resultant market price is
dependant upon both of these fundamental components of a market. An exchange of goods or
services will occur whenever buyers and sellers can agree on a
price. When an exchange occurs, the agreed upon price is
called the "equilibrium price", or a "market clearing price" .
This can be graphically illustrated as follows: ( Figure 3)
In figure 3, both buyers and sellers are willing to exchange the
quantity "Q" at the price "P". At this point supply and demand
are in balance or "equilibrium". At any price below P, the
quantity demanded is greater than the quantity supplied. In this
situation consumers would be anxious to acquire product the
producer is unwilling to supply resulting in a product shortage.
In order to ration the shortage consumers would have to pay a
higher price in order to get the product they want; while producers would demand a higher
price in order to bring more product on to the market. The end result is a rise in prices to the
point P, where supply and demand are once again in balanceA market price is not a fair price
to all participants in the marketplace. It does not guarantee total satisfaction on the part of
both buyer and seller or all buyers and all sellers.
When either demand or supply changes, the equilibrium
price will change. For example, good weather normally
increases the supply of grains and oilseeds, with more
product being made available over a range of prices. With
no increase in the quantity of product demanded, there will
be movement along the demand curve to a new equilibrium
price in order to clear the excess supplies off the market.
Consumers will buy more but only at a lower price. This
can be illustrated graphically as follows: (see Figure 4.)

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With no reduction in supply, the effect on price results from a


movement along the supply curve to a lower equilibrium
price where supply and demand is once again in balance. In
order for prices to increase producers will have to reduce the
quantity of hard red spring wheat brought to the market place
or find new sources of demand to replace the consumers who
withdrew from the marketplace due to changing preferences
or a shift in demand.

63

Likewise a shift in demand due to changing consumer


preferences will also influence the market price. In recent years there has been a shift in
demand on the part of overseas Canadian wheat buyers toward the Canada Prairie Spring
varieties, away from the Hard Red Spring varieties. A decline in the preference for Hard Red
Spring wheat shifts the demand curve inward, to the left, as
illustrated in figure 5.

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