Basic Economic Problems covering some highlights of Unemployment Inflation Poverty Parallel Economy

1. ECONOMIC
PROBLEMS

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CONTENT
Basic Economic Problems
Unemployment
Inflation
Poverty
Parallel Economy

3. Central Economic Problems
What to Produce
It refers to the selection of goods
and services which can be produced
within an Economy. The quantity in
which a commodity is to be
produced is set in this level where
demand equals supply.
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4. How to Produce
It refers to the selection of
technique to be used for
production of goods and
services.
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5. For whom to produce
It refers to distribution of national
product among the members of the society.
Since resources are scarce, the economy
cannot satisfy all the wants of people.
Therefore, economy has to decide who should
get how much of the total output of goods and
services
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6. Unemployment
Unemployment is a situation
where a person is jobless and is
actively seeking for attention.

7. Economists divide
unemployment into many
different categories. The
two broadest categories of
unemployment are
voluntary and involuntary
unemployment.

8. Types of
Unemployment
Classical
Structural
Frictional
Cyclical
Hidden
Seasonal

9. Unemployment in India
Unemployment in India can be divided
into two categories
Rural Unemployment
Urban Unemployment
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10. Unemployment
rate
Unemployed workers
Total labour force
____________________________x100

11. High rate of unemployment leads to
economic distress or economic crisis,
whereas its low rate leads to Overheating
economy.
An overheated economy is one that has
experienced a prolonged period of
good economic growth and activity that
has led to high levels of inflation (from
increased consumer wealth). This sharp
rise in prices causes inefficient supply
allocations as producers overproduce and
create excess production capacity in an
attempt to capitalize on the high levels of
wealth.

12. Effects of Unemployment
Unemployment is harmful because other than
wasting of resources, it creates
redistributive pressures and subsequent
distortion.
Unemployed persons engage themselves in
destructive activities they consider
government as worthless and thus lead to
political instability.
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13. Cost of
Unemployment
The effect of unemployment on
the economy is also more or less
severe to an individual, society
and politics.

14. Cost to the
individual
Social cost
Socio political
cost

15. Solutions of
unemployment
Supply-side economic says that
reduction in taxes leads to
employment growth
Reforms increase long-term
growth. Reforms increase supply
of goods and services. This
requires more workers and thus
increasing employment.

16. Inflation
Inflation is substantial and rapid
general increase in the level of
prices and consequent devaluation
in the value of money over a
period of time.

17. Inflation as a
monetary
phenomenon
It is said that when money supply
exceeds the normal absorbing
capacity of the economy, it leads
to persistently rising prices. In
other words when too much
money chases too few goods,
infaltion occurs.

18. Inflation as full
employment
In the Keynesian view, rising prices in all
terms cannot be considered as inflation as
increase in money supply may not cause
costs and prices to rise more than the
expansion of output and employment. This
maybe termed as ‘semi-inflation’ till the
ceiling of full employment is reached.
Once full employment is reached the
entire increase in money supply is
reflected simply by the rising prices.

19. Types of inflation
Demand pull inflation
Cost pull inflation

20. Causes of inflation
trend in India
Monetary factor
 Over expansion of money supply-
during the last four decades there has
been a disproportionate increase in
money supply in India. There is a strong
correlation between the increase in
money supply and price rise.
Deficit financing- the high doses of
deficit financing by government of India
also contributed to the growth of
inflationary trend in the country.

21. Non-monetary factor
Increase in the population is an
important non-monetary factor that
leads toward the increase in inflation.
There is increase in demand due to the
growth of population. It has caused a
high price rise.
Inadequate growth of agriculture due
to rapid industrialization is also
responsible for inflation in the Indian
Economy.

22. Poverty
Poverty is a state or
condition in which a person
or community lacks the
financial resources and
essentials to enjoy a
minimum standard of life

23. There are two types
of Poverty
Absolute poverty
Relative poverty

24. Absolute poverty refers to a condition
where a person does not have the
minimum amount of income needed
Relative poverty is the condition in
which people lack the minimum amount
of income needed in order to maintain the
average standard of living in the society
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25. Situational poverty is the type of poverty
based on occurrence of an adverse event like
environmental disaster, job loss and severe
health related problems.
Generational poverty occurs in families
where at least two generations have been born
to poverty. Families living in this type of
poverty equipped with the tools to move out
of the situation.
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27. Causes of poverty
High population growth
Unemployment
Inflation
Potential Causes

28. Measures to reduce
poverty
Establishment of small scale
industries
Education
Check population growth
Employment opportunities

29. Parallel economy
Parallel economy often could be
demonstrated as hidden economy
of a country. People or business
entities when do not show their
exact income as per the
government rules the income
comes under parallel economy.

30. Black Money
The term parallel money
literally means the presence of
black money

31. Factors leading to
generation of black
money
The corrupt component of such money
could rise from bribery and theft by
those holding public offices
There is a significant amount of block
money generated activities are not
accounted for and disclosed to the
public activities are converted into
black money.

32. Effects of black money
on Economy
It results into the loss of revenue of the
government.
Black money increases conspicuous
consumption
Black money encourages more
consumption with higher prosperity to
consume. This creates an inflationary
situation

33. Measures to control
parallel economy
Checking tax invasion
Reduction of tax rates
Economic liberalization
Special Bearer Bond Scheme
1981