Principles of Economics and Bangladesh Economy



Question: Define Economics.
 
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. 
The term economics comes from the Ancient Greek “oikonomia”, where ‘oikos’ means  "house" and ` nomos’ means “custom" or "law". In this sense “oikonomia” means "management of a household, or "rules of the house"

There are a variety of modern definitions of economics. Some of the differences may reflect evolving views of the subject or different views among economists.

Definition of Economics by Alfred Marshall :


"Economics is a study of man in the ordinary business of life. It enquires how he gets his income and how he uses it. Thus, it is on the one side, the study of wealth and on the other and more important side, a part of the study of man."

Definition of Economics by Lionel Robbins:

"Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses."
           

Lastly we can say that, the theories, principles, and models that deal with how the market process works. It attempts to explain how wealth is created and distributed in communities, how people allocate resources that are scarce and have many alternative uses, and other such matters that arise in dealing with human wants and their satisfaction.




Question: What is the importance /advantages/ objectives of the study of economics?


The Importance /Advantages/ Objectives of the study of Economics are mentioned below:


(1) Intellectual Value:


The knowledge of Economics is very useful as it broadens our outlook, sharpens our intellect, and inculcates in us the habit of balanced thinking.

The study of Economics makes us realize that we as human beings are dependent upon one another for our daily needs. This feeling creates in us the intelligent appreciation of our position and the spirit of co-operation with others.



(2) Practical Advantages:  


The practical advantages of Economics are much more important than its theoretical advantages. These advantages can be looked at from the individual and community point of view.


(3) Personal Stake in Economics: 


From personal point of view, the study of Economics is useful as it enables each of us to understand better and appreciate more intelligently the nature and significance of our money earning and money spending activities. With the knowledge of Economics, the consumer can better adjust his expenditure to his income. 
The study of Economics is also useful to a producer. It suggests him the ways of bringing about the most economical combinations of the various factors of production at his disposal. It also helps in solving the various intricacies of exchange. 
From the study of Economics, one can easily judge as to why the prices have risen or fallen. The knowledge of Economics also explains us as to how the reward of various factors of production is determined. 
Thus, we find that every individual can rightly hope to become a better and more efficient consumer, producer and businessman, if he has the working knowledge of economics.


(4) Economics for the Leader:
 

The study of economics is not only helpful from the individual point of view but it is also very useful for the welfare of the community. It enables a statesman to understand and better grasp the economic and social problems facing the country. 
Every government has to tackle different kinds of economic problems such as unemployment, inflation, over-production, under-production, imposition of tariffs and control, problem of monopolies, etc. The statesmen can successfully solve these problems, if he has thorough knowledge of the subject of Economics. 
The knowledge of Economics for a finance minister is also indispensable. He has to raise revenue by imposing taxes on the incomes of the people for meeting the necessary expenditure of the government. Economics here comes to his rescue and guides him as to how the taxes could be levied and collected.


(5) Poverty and Development:
 

The greatest advantage of Economics is that it helps in removing traces of poverty from the country. 
Take the case of Bangladesh; we in Bangladesh are confronted with different kinds of problems. For example, low-per capita income, low productivity of agriculture, slow development of industries, fast increase in population, under-developed means of communication and transport, etc. 
The study of Economics helps in devising ways and means and suggesting practical measures in solving these problems.


(6) Economics for the citizen:
 

Such being, the importance of study of Economics, it is rightly remarked by Wooten that “you cannot be in real sense a citizen unless you are also in some degree an economist”. He is perfectly right in giving the statement. 

The world is so fast changing that we are completely now living in a world dominated by economic forces and economic ideas. 
If the people of any country do not have the working knowledge of an economic system, then the government of that  country can easily hoodwink their citizens. 
On the contrary, if the citizens have proper knowledge of economics, the government will be very vigilant and spend the money in a wise manner.



The importance of the study of Economies can also be judged from this fact that the daily newspapers cannot be understood without some knowledge of Economics. The newspapers often describe complicated economic problems such as inflation, balance of payment, balance of trade, imperfect markets, dumping, co-operative farming, sub-division and fragmentation of holdings, mechanization of agriculture, If you do not have working knowledge of Economics, you cannot understand these diverse problems.


From the above brief discussion, we conclude that the knowledge of Economics is very useful. As such it is necessary that every citizen, worker, administrator, consumer, etc., should have at least working knowledge of it. 

In the words of Sir Henry Clay:

Some study of Economics is at one a practical necessity and a normal obligation”.




Question: What is the meaning of Production?

Production is the conversion of input into output. 
The factors of production and all other things which the producer buys to carry out production are called input. 
The goods and services produced are known as output. 
Thus production is the activity that creates or adds utility and value. 
In the words of Fraser, "If consuming means extracting utility from matter, producing means creating utility into matter". 
According to Edwood Buffa,

“Production is a process by which goods and services are created"




Question: What are the Factors of Production?

The factors of production may be defined as resources which help the firms to produce goods or services. 
In other words, the resources required to produce a given product are called factors of production. 
Production is done by combining the various factors of production. Land, labor, capital and organization (or entrepreneurship) are the factors of production (according to Marshall).





Question: What are the Characteristics of Factors of Production?

The characteristics of factors of production are described below:

1. The ownership of the factors of production is vested in the households.



2. There is a basic distinction between factors of production and factor services. It is these factor services, which are combined in the process of production.



3. The different units of a factor of production are not homogeneous. For example, different plots of land have different level of fertility. Similarly laborers differ in efficiency.



4. Factors of production are complementary. This means their co-operation or combination is necessary for production.





5. There is some degree of substitutability between factors of production. For example, labour can be substituted for capital to a certain extent.




Question: What is Money? Discuss the functions of money.

Money is any good that is widely used and accepted in transactions involving the transfer of goods and services from one person to another. 
Economists differentiate among three different types of money: commodity money, fiat money, and bank money.



The functions of money

     The function of money can be categorized in two classes. These are-

     

     A. Primary or main function

     B. Secondary or Supporting function



Primary or main function

Money is often defined in terms of the four functions or services that it provides. Money serves as a medium of exchange, as a Measure of Value, Standard of Deferred Payments and as Store of Value.


1. Medium of Exchange:


The most important function of money is to serve as a medium of exchange or as a means of payment. To be a successful medium of exchange, money must be commonly accepted by people in exchange for goods and services. 
While functioning as a medium of exchange, money benefits the society in a number of ways:


(a) It overcomes the inconvenience of baiter system (i.e., the need for double coincidence of wants) by splitting the act of barter into two acts of exchange, i.e., sales and purchases through money.

(b) It promotes transactional efficiency in exchange by facilitating the multiple exchange of goods and services with minimum effort and time,

(c) It promotes allocation efficiency by facilitating specialization in production and trade,

(d) It allows freedom of choice in the sense that a person can use his money to buy the things he wants most, from the people who offer the best bargain and at a time he considers the most advantageous.


2. Measure of Value:


Money serves as a common measure of value in terms of which the value of all goods and services is measured and expressed. By acting as a common denominator or numeraire, money has provided a language of economic communication. It has made transactions easy and simplified the problem of measuring and comparing the prices of goods and services in the market. Prices are but values expressed in terms of money.



Money also acts as a unit of account. As a unit of account, it helps in developing an efficient accounting system because the values of a variety of goods and services which are physically measured in different units (e.g, quintals, metres, litres, etc.) can be added up. This makes possible the comparisons of various kinds, both over time and across regions. It provides a basis for keeping accounts, estimating national income, cost of a project, sale proceeds, profit and loss of a firm, etc.



To be satisfactory measure of value, the monetary units must be invariable. In other words, it must maintain a stable value. A fluctuating monetary unit creates a number of socio-economic problems. Normally, the value of money, i.e., its purchasing power, does not remain constant; it rises during periods of falling prices and falls during periods of rising prices.


3. Standard of Deferred Payments:


When money is generally accepted as a medium of exchange and a unit of value, it naturally becomes the unit in terms of which deferred or future payments are stated.

Thus, money not only helps current transactions though functions as a medium of exchange, but facilitates credit transaction (i.e., exchanging present goods on credit) through its function as a standard of deferred payments. But, to become a satisfactory standard of deferred payments, money must maintain a constant value through time ; if its value increases through time (i.e., during the period of falling price level), it will benefit the creditors at the cost of debtors; if its value falls (i.e., during the period of rising price level), it will benefit the debtors at the cost of creditors.


4. Store of Value:


Money, being a unit of value and a generally acceptable means of payment, provides a liquid store of value because it is so easy to spend and so easy to store. By acting as a store of value, money provides security to the individuals to meet unpredictable emergencies and to pay debts that are fixed in terms of money. It also provides assurance that attractive future buying opportunities can be exploited.

Money as a liquid store of value facilitates its possessor to purchase any other asset at any time. It was Keynes who first fully realised the liquid store value of money function and regarded money as a link between the present and the future. This, however, does not mean that money is the most satisfactory liquid store of value. To become a satisfactory store of value, money must have a stable value.



Secondary or Supporting function


1. Transfer of Value:


Money also functions as a means of transferring value. Through money, value can be easily and quickly transferred from one place to another because money is acceptable everywhere and to all. For example, it is much easier to transfer one lakh rupees through bank draft from person A in Amritsar to person B in Bombay than remitting the same value in commodity terms, say wheat.


2. Distribution of National Income:


Money facilitates the division of national income between people. Total output of the country is jointly produced by a number of people as workers, land owners, capitalists, and entrepreneurs, and, in turn, will have to be distributed among them. Money helps in the distribution of national product through the system of wage, rent, interest and profit.


3. Maximization of Satisfaction:


Money helps consumers and producers to maximize their benefits. A consumer maximizes his satisfaction by equating the prices of each commodity (expressed in terms of money) with its marginal utility. Similarly, a producer maximizes his profit by equating the marginal productivity of a factor unit to its price.


4. Basis of Credit System:


Credit plays an important role in the modern economic system and money constitutes the basis of credit. People deposit their money (saving) in the banks and on the basis of these deposits, the banks create credit.


5. Liquidity to Wealth:


Money imparts liquidity to various forms of wealth. When a person holds wealth in the form of money, he makes it liquid. In fact, all forms of wealth (e.g., land, machinery, stocks, stores, etc.) can be converted into money.




Question: What are the Factors Affecting Demand Elasticity?

There are three main factors that influence a demand’s price elasticity:

1. The availability of substitutes
This is probably the most important factor influencing the elasticity of a good or service. In general, the more substitutes, the more elastic the demand will be. 

For example, if the price of a cup of coffee went up by $0.25, consumers could replace their morning caffeine with a cup of tea. This means that coffee is an elastic good because a raise in price will cause a large decrease in demand as consumers start buying more tea instead of coffee. 

However, if the price of caffeine were to go up as a whole, we would probably see little change in the consumption of coffee or tea because there are few substitutes for caffeine. Most people are not willing to give up their morning cup of caffeine no matter what the price. We would, therefore, say that caffeine is an inelastic product because of its lack of substitutes. 

Thus, while a product within an industry is elastic due to the availability of substitutes, the industry itself tends to be inelastic. Usually, unique goods such as diamonds are inelastic because they have few - if any - substitutes.

2. Amount of income available to spend on the good
This factor affecting demand elasticity refers to the total a person can spend on a particular good or service. Thus, if the price of a can of Coke goes up from $0.50 to $1 and income stays the same, the income that is available to spend on Coke, which is $2, is now enough for only two rather than four cans of Coke. In other words, the consumer is forced to reduce his or her demand of Coke. 

Thus if there is an increase in price and no change in the amount of income available to spend on the good, there will be an elastic reaction in demand, that is, demand will be sensitive to a change in price if there is no change in income.


3. Time
The third influential factor is time. If the price of cigarettes goes up $2 per pack, a smoker, with very little available substitutes, will most likely continue buying his or her daily cigarettes. This means that tobacco is inelastic because the change in the quantity demand will have been minor with a change in price. However, if that smoker finds that he or she cannot afford to spend the extra $2 per day and begins to kick the habit over a period of time, the price elasticity of cigarettes for that consumer becomes elastic in the long run.



Question: Define Inflation.

Inflation can be defined as a sustained or continuous rise in the general price level or, alternatively, as a sustained or continuous fall in the value of money.



Several things should be noted about this definition. First, inflation refers to the movement in the general level of prices. It does not refer to changes in one price relative to other prices. These changes are common even when the overall level of prices is stable and the rise in the price level must be somewhat substantial and continue over a period longer than a day, week, or month.



Question: What are the Causes/ Source of Inflation? 

Economists wake up in the morning hoping for a chance to debate the causes of inflation. There is no one cause that's universally agreed upon, but at least two theories are generally accepted:


Demand-Pull Inflation

This theory can be summarized as "too much money chasing too few goods". In other words, if demand is growing faster than supply, prices will increase. This usually occurs in growing economies.


Cost-Push Inflation

When companies' costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports.







Question: What are the Costs/ affects of Inflation?

Almost everyone thinks inflation is evil, but it isn't necessarily so. Inflation affects different people in different ways. It also depends on whether inflation is anticipated or unanticipated. If the inflation rate corresponds to what the majority of people are expecting (anticipated inflation), then we can compensate and the cost isn't high. For example, banks can vary their interest rates and workers can negotiate contracts that include automatic wage hikes as the price level goes up.




Costs/ affects arise when there is unanticipated inflation:



     1. Creditors lose and debtors gain if the lender does not anticipate inflation correctly. For those who borrow, this is similar to getting an interest-free loan.



     2. Uncertainty about what will happen next makes corporations and consumers less likely to spend. This hurts economic output in the long run.



     3. People living off a fixed-income, such as retirees, see a decline in their purchasing power and, consequently, their standard of living.



    4. The entire economy must absorb repricing costs ("menu costs") as price lists, labels, menus and more have to be updated.



     5. If the inflation rate is greater than that of other countries, domestic products become less competitive.



People often complain about prices going up, but they often ignore the fact that wages should be rising as well. The question shouldn't be whether inflation is rising, but whether it's rising at a quicker pace than your wages.



Lastly, inflation is a sign that an economy is growing. In some situations, little inflation (or even deflation) can be just as bad as high inflation. The lack of inflation may be an indication that the economy is weakening. As you can see, it's not so easy to label inflation as either good or bad - it depends on the overall economy as well as your personal situation.



Question: Define Unemployment.

Unemployment occurs when people are without work and actively seeking work.



According to the ILO guidelines, a person is unemployed if the person is (a) not working, (b) currently available for work and (c) seeking work. 
Here a person is to be considered unemployed if he/she during the reference period simultaneously satisfies being:



(a) ‘Without work’, i.e., were not in paid employment or self-employment as specified by the international definition



(b) ‘Currently available for work’, i.e., were available for paid employment or self-employment during the reference period; and



(c) ‘Seeking work’, i.e., had taken specific steps in a specified recent period to seek paid employment or self-employment.



In the words of Fairchild, “unemployment is forced and involuntary separation from remunerative work on the part of the normal wages and normal conditions.”



According to Sergeant Florence, “unemployment has been defined as the idleness of persons able to work.”



Lastly we can say that When a person is failed to get any job and unable to found the means of livelihood, we call him an unemployed person. Thus, unemployment means lack or absence of employment. 
In other words, unemployment is largely concerned with those persons who constitute the labor force of the country, who are able-bodied and willing to work, but they are gainfully employed. Unemployment, therefore, is the lack of earning or idleness on the part of a person who is able to work.


 Question: What are the types of Unemployment?


As unemployment is a universal problem and is found in every country more or less, therefore, it is categorised into a number of types. The chiefs among them are stated below:



1) Structural unemployment:

Basically Bangladesh's unemployment is structural in nature. It is associated with the inadequacy of productive capacity to create enough jobs for all those able and willing to work. In Bangladesh not only the productive capacity is much below the needed quantity, it is also found increasing at a slow rate. As against this, addition to labour force is being made at a first rate on account of the rapidly growing population. Thus, while new productive jobs are on the increase, the rate of increasing being low the absolute number of unemployed persons is rising from year to year.



2) Disguised unemployment:

Disguised unemployment implies that many workers are engaged in productive work. For example, in Indian villages, where most of unemployment exists in this form, people are found to be apparently engaged in agricultural works. But such employment is mostly a work sharing device i.e., the existing work is shared by the large number of workers. In such a situation, even if many workers are withdrawn, the same work will continue to be done by fewer people.

It follows that all the workers are not needed to maintain the existing level of production. The contribution of such workers to production is nothing. It is found that the very large numbers of workers on Indian farms actually hinder agricultural works and thereby reduce production.



3) Cyclical unemployment:

Cyclical unemployment in caused by the trade or business cycles. It results from the profits and loss and fluctuations in the deficiency of effective demand production is slowed down and there is a general state of depression which causes unemployment periods of cyclical unemployment is longer and it generally affects all industries to a greater or smaller extent.



4) Seasonal unemployment:

Seasonal unemployment occurs at certain seasons of the year. It is a widespread phenomenon of Indian villages basically associated with agriculture. Since agricultural work depends upon Nature, therefore, in a certain period of the year there is heavy work, while in the rest, the work is lean. For example, in the sowing and harvesting period, the agriculturists may to engage themselves day and night.

But the period between the post harvest and pre sowing is almost workless, rendering many without work. Thus, seasonal unemployment is largely visible after the end of agricultural works.



5) Underemployment:

Underemployment usually refers to that state in which the self employed working people are not working according to their capacity. For example, a diploma holder in engineering, if for wants of an appropriate job, start any business may be said to be underemployed. Apparently, he may be deemed as working and earning in a productive activity and in this sense contributing something to production.

But in reality he is not working to his capability, or to his full capacity. He is, therefore, not full employed. This type of unemployment is mostly visible in urban areas.



6) Open Unemployment:

Open unemployment is a condition in which people have no work to do. They are able to work and are also willing to work but there is no work for them. They are found partly in villages, but very largely in cities. Most of them come form villages in search of jobs, many originate in cities themselves. Such employment can be seen and counted in terms of the number of such persons.

Hence it is called upon unemployment. Open unemployment is to be distinguished from disguised unemployment and underemployment in that while in the case of former unemployment workers are totally idle, but in the latter two types of unemployment they appear to be working and do not seem to be away their time.



7) Voluntary Unemployment:

Voluntary unemployment occurs when a working persons willingly withdraws himself from work. This type of unemployment may be caused due to a number of reasons. For example, one may quarrel with the employer and resign or one may have permanent source of unearned income, absentee workers, and strikers and so on. In voluntary unemployment, a person is out of job of his own desire. She does not work on the prevalent or prescribed wages. Either he wants higher wages or does not want to work at all.



8) Involuntary unemployment:

Involuntary unemployment occurs when at a particular time the number of worker is more than the number of jobs. Obviously this state of affairs arises because of the insufficiency or non availability of work. It is customary to characterise involuntary unemployment, not voluntary as unemployment proper.




Question: What are the ways to remove unemployment?

Ways and means to remove unemployment in Society of Bangladesh 


In Society we have already seen that there is a good deal of unemployment. This removal of unemployment is necessary for the prosperity of the nation. For this, the following steps have to be taken:



1. Improvement in the agricultural system:

We have already seen that the agricultural system in Bangladesh is backward and underdeveloped. This backwardness is responsible for a lot of unemployment. If the unemployment has to be removed, the system of agriculture has to be modernized and improved, for this the following steps to be taken:


1) Holding should be consolidated and made economic.  

2) Methods of agriculture should be improved and as far as possible farmers should be freed from dependence on nature.  

3) System of crops should be planned scientifically and improved. If more crops earned they would provide more employment.  

4) The farmers should be provided with good seed, good fertilizer, healthy animals, modern implements and tools etc.



2. Adequate arrangement of facilities of irrigation:

In villages the agriculture very much depends on nature. If rains fail, the crops are destroyed. This brings about a good deal of unemployment. Methods of irrigation should be made more modern. They should also be adequate so that it may be possible for people to water their fields.



3. Increasing the area of cultivable land:

Today in the villages there is a great pressure on land. The area under cultivation is not sufficient to provide food to all the people of this country. Barren land should be broken and made fertile. Other methods should also be made for improving the area of cultivable land which is not normally fit for agriculture, also be improved and made fit. This would remove unemployment in the villages.



4. Setting up and develop the cottage and village industries:

In village, people have seasonal employment in agriculture. Apart from it all the persons do not have avenues for the employment. What is needed is to set up of industries so that those who do not have land are employed in it. Apart from it, the agriculturalists during dull season should get employment in these industries. Women and land-less laborers shall also be able to get employment if industries are set up.



5. Improving the means of transport and communication:

In villages there is need to have proper roads and places where offices and stores for seeds etc, may be set up. Public construction should be undertaken in the villages to provide employment to the idle hands. This would improve the employment position in the village. Apart from it, it would also add to the prosperity of the villages.



6. Construction of public Transports, Roads etc:

It is necessary to improve the means of transport and communication. This would have two fold advantages. Firstly, the village people shall be able to send their products to markets for sale and secondly, they shall also be able to go to such other places where they can get employment. Apart from it, this would also provide employment to many persons who shall engage themselves in the task of transporting these people.



7. Organization of the agricultural market:

There is need to organize markets for the agricultural product. At present, there is dearth of such market. This situation creates difficulties for the agriculturalists. On the one hand, they are not able to get proper price and on the other hand they have to suffer from other handicaps. If markets are organized, they would provide employment to certain hands and also help the agriculturalists to get proper price for their labor.



In fact, Bangladesh is such a vast country and unemployment is so large that “Herculean” efforts shall have to be made to surmount this degree. Various economists and social thinkers have suggested various ways for it. Many of these ways have also been incorporated in the Five-Year Plans. In the coming days, our employment position is expected to be better.

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