New Rules for Opening Banks

The Reserve Bank of India announced the much-awaited new eligibility criteria for opening new banks in India by the private entities, in September 2011 and finalised in February 2013, after considering advices and suggestions form the business and industry.
The issue of giving licences to a few private parties to start commercial banks has always been a sensitive one. More so, at this juncture, when it is believed that the new policy relaxation is primarily for the benefit of large industrial houses and business groups. Before 1969, many leading banks, including Bank of India, Bank of Baroda and United Commercial Bank, were owned or controlled by leading business groups. In a two-stage process that began had as much to do with domestic politics as economics. The case for the takeover was built on the ground that these banks were serving their private promoters interests and that in any case there was a need to reorient the banking system towards national interests. The bias against large industrial houses has continued in the reform era. Following the guidelines of 1993 and 2001, some private banks came into being but none of them was sponsored by large business houses. However, this time it is likely that a few industrial houses will make the grade. The rules are as given below :-

• Eligible promoters :- Entities in the private sectors, owned and controlled by residents, with diversified ownership, sound credentials and integrity and having successful track record of at least ten years will be eligible to promote banks. In a significant move, the RBI has barred groups having even an exposure of 10% in real estate and or broking activities over the past three years.
• Corporate structure :- New banks will be set only through a wholly-owned non-operative holding company, which will be registered with the RBI as a non-banking finance company.
• Capital requirement :- It will be Rs.500 crore. The NOHC will hold a minimum 40% of the capital for five years from the date of licensing and aggregate non-resident shareholding will not exceed 49% for the first 5 years.
• Corporate governance :- 50% of the directors of the NOHC should be independent directors.
• Business Model :- Should be realistic and viable and should address how the bank proposes to achieve financial inclusion.

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Uniqueness Of The Indian Economy

Indian economy did show some traits which were unique :-

• The contribution of the primary sector in its GDP has fallen down regularly and today it stand at 14.1 % which is sufficient to conclude that it is no more an agrarian economy.
• The share of its tertiary sector increased to over 67.5% in i9ts GDP by 2012-13. This proves India is a service economy.
• The dependency of population on the primary sector for its employment still remains at over 56.8% a symptom of an agrarian economy. The expansion of the industries was not sufficient to attract the labour force from the primary activities. India is still lagging on this on this front badly.
• The share of the secondary sector in its GDP is at 18.4% and never crossed 40%.
• In the last decade ( 2003-4 to 2012 - 13), growth has increasing by come from service sector, whose contribution to overall growth of the economy has been 65%, while that of industry and agriculture sectors has been 27% and  8 % respectively.
• India has been basically the first case which directly had either over 50% of its GDP coming from the primary sector or the tertiary sector- an agrarian economy shifting directly to the service economy. It means India jumped the stage of being a fully-developed industrial economy!

Without fully realising the industrial and manufacturing potential and directly merging into a service economy, has created tougher macro and micro challenges for policy makers in India.
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Types of Economies

Depending upon the shares of the particular sectors in the total production of an economy and the ratio of the dependent population on them for their livelihood, economies are given different names, such as :-

1. Agrarian Economy :- An economy is called agrarian if the share of its primary sector is 50 % or more in the total output ( the GDP) of the economy. At the time of independence, India was such as economy. But now it show the typical symptom of a service economy with primary sector's contribution falling to almost 18% of its total produce while almost 60% of its population depends on the primary sector for its livelihood. Thus, in monetary terms India is no more an agrarian economy, the dependency ratio makes it so- India being the first such example to the economic history of the world.
2. Industrial Economy :- If the secondary sector contributes 50% or more to the total produce value of an economy, it is an industrial economy. Higher the contribution, higher is the level of industrialisation. The western economies who went for early industrialisation earning faster and enough income and developing economies. Most of these economies have crossed this phase once the process of industrialisation saturated.
3. Service Economy :- The economy whose 50 % or more produce value comes from the tertiary sector is known as the service economy. First lot of such economies in the world were the early industrialised economies. The tertiary sector provides livelihood to the largest number of people in such economies. In the last decade (2003-04 to 2012-13) , growth has increasingly come from the service  sector, whose contribution to overall growth of the economy has been 65%, while that of the industry and agriculture sectors has been 27% and 8% respectively.

By the end of the 19th century it was a well- established fact, at least in the western world, that industrial activities were a faster way to earn income in comparison to agrarian activities. The Second Woeld war had established the fact for the whole world -and almost every country started their preparation for the process of industrialisation. As country after country successfully industrialised , a pattern of the population shift from one to another sector was established, which was known as the stages of Growth of an economy. With the intensification of industrialisation, dependency on primary sector for livelihood decreased and dependency on secondary sector increased consistently. Similarly, such economies saw a population shift from the secondary to the tertiary sector and these were known as the `post - industrial' societies or the service societies. Almost the whole Euro-America falls under this category- these economies are having over 50% of their  tertiary sectors and over half of the population depends on the sector  for their livelihood. Many other countries which started industrialisation in the post-war period did show abberations in this shift of the population and the income India being one among them.

Capitalistic Economy

The Capitalistic form of economy has its origin in the famous work of Adam Smith- Wealth of Nations (1776). Adam Smith (1723-1790), the Scottish philosopher-economist professor at Glasgow University whose writings formed the basis of classical economics had stressed certain fine ideas which were to take fancy among some of the western countries and finally capitalism took birth. He raised his voice against the heavy-handed government regulation of commerce and industry of the time which did not allow the economy to tap its full economic worth and reach the level of well-being. Stressing `division of labour', an environment of `laissez faire' (non-interference by the government) he proposed that the ` invisible hand' of the `market forces' (price mechanism) will bring a state of equilibrium to the economy and a general well-being to the countrymen. For such an economy to function for public well-being, he has acknowledged the need of competition in the market.

Once the U.S.A. attained Independence the ideas of Adam Smith were made part of its public policy- just one year after Wealth of Nations was published. From here the idea spread to other parts of Euro-American - by 1800 the economic system`capitalism' was established which was later known by different names - Private Enterprise System, Free Enterprise System, Market Economy.
The decisions of what to produce, how much to produce and at what price to sell are taken by the market, by the private enterprises in this system, with the state having no economic role.
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Financing Climate Change

The idea of a global budget for carbon and its corresponding financing stems from the objective of stabilising the GHG concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. There has already been a 0.8 degree C increase in global mean temperature. It is widely believed that we are fast approaching the 2 degree C temperature rise within which the global community is striving to limit itself. This indicates that only a small and fast closing window of opportunity exists for the international community to take actions and ensure that we avoid reaching this point.

Yet the question remains that how to finance actions to achieve this target. A UNFCCC paper (2007) estimated a requirement of US$ 200-210 billion in additional annual investment in 2030 to return GHG emissions to current levels. Further, additional investment needed worldwide for adaptation was estimated to be annual US$ 60-182 billion in 2030. However, with the passage of time and inadequate action, these estimates are being revised upwards. Most recent estimates presented at the UNFCCC's workshop on Long-term Finance (July 2012), point to an even more enormous scale of funds, in the range of  $ 600- $1500 billion a year, that would be needed by developing countries for mitigation and adaptation. This amount is at least 5-10 times the prospective financing flows of US$ 100 billion per year by 2020 agreed upon as the goal under the UNFCCC. Representatives from the International Energy Agency reported ar this workshop that annual global investments for power generation alone, in a 2 degree C temperature rise scenario, would involve #370 billion from 2010 to 2020; $630 billion between 2020 and 2030; and $760 billion between 2030 and 2050.
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Types of Mutual Funds

There are three types of schemes offered by the MF's :-

• Open-ended Schemes :- An open-ended fund is the one which is usually available from a mutual fund on an ongoing basis, that is an investor cab buy or sell as and when they intend to at a NAV-based price. As investors buy and sell units of a particular open-ended scheme, the number of units issued also changes every day and so changes the value of the scheme's portfolio. So, the NAV also changes on a daily basis. In India, fund houses can sell any number of units of a particular scheme, but at times fund houses restrict selling additional units of a scheme for some time.
• Closed-ended Schemes :- A close-ended fund usually issue units to investors only once, when they launch an offer, called new fund offer (NFO) in India. Thereafter, these units are listed on the stock exchanges where they are traded on a daily basis. As these units are listed, any investor can buy and sell these units through the exchange. As the name suggests, close-ended schemes are managed by fund houses for a limited number of years, and  at the end of the term either money is returned to the investors or the scheme is made open ended. However, there is a word of caution here that usually, units of close ended funds which are listed on the stock exchanges, trade at a high discount to their NAV's . But as the date for closure of the fund nears, the discount between the NAV and the trading price narrows, and vanishes on the day of closure of the scheme.
• Exchange - Traded Funds (ETF's) :- ETF's are a mix of open-ended and close-ended schemes. ETF's like close-ended schemes, are listed and traded on a stock exchange on a daily basis, but the price is usually very close to its NAV, or the underlying assets, like gold ETF's.

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Mutual Funds

Of all investment options, mutual funds are routed to be the best tool for wealth creation over the long term. They are of several types, and the risk varies with the kind of asset classes these funds invest in. As the name suggests, a mutual fund is a fund that is created when a large number of investors put in their money, and is managed by professionally qualified persons with experience in investing in different asset classes - shares, bonds, money market instruments like call money, and other assets such as gold and property. Their names usually give a good idea about what type of asset class a fund, also called a scheme, will invest in. For example , a diversified equity fund will invest in a large number of stocks, while a gilt fund will invest in government securities while a pharma fund will mainly invest in stocks of companies from the pharmaceutical and related industries.
Mutual funds are compulsorily registered with the Securities and Exchange Board of India ( Sebi), which also acts as the first wall of the defence for all investors in these funds. For those who do not understand how mutual funds operate but are willing to invest, the move by Sebi is seen as a big relief.
Each mutual fund is run a group of qualified people who form a company, called an asset management company (AMC) and the operations of the AMC are under the guidance of another group of people, called trustees. Both, the people in the AMC as well as the trustees, have a fiduciary responsibility because these are the people who are entrusted with the task of managing the hard-earned money of people who do not understand much about managing money.
A fund house or a distributor working for the fund house ( which could be an individual, a company or even a bank) are qualified too sell mutual funds. Once the fund house allots the `units' of the MF to the investor at a price that is fixed through a process approved by Sebi which is based on the net asset value (NAV). In simple terms, NAV is the total value of investment in a scheme divided by the total number of units issued to investors in the same scheme. In most mutual fund schemes, NAV's are computed and published on a daily basis. However, when a fund house is lauching a scheme for the first time, the units are sold at Rs 10 each.

Tamil Nadu Women in Agriculture (TANWA)

Tamil Nadu Women in Agriculture (TANWA) is a project initiated in Tamil Nadu
to train women in latest agricultural techniques. It induces women to actively
participate in raising agricultural productivity and family income. At a Farm
Women’s Group in Thiruchirapalli, run by Anthoniammal, trained women are
successfully making and selling vermicompost and earning money from this
venture. Many other Farm Women’s Groups are creating savings in their group
by functioning like mini banks through a micro-credit system. With the
accumulated savings, they promote small-scale household activities like
mushroom cultivation, soap manufacture, doll making or other incomegenerating activities.

Community and Non-Profit Organisations in Healthcare

One of the important aspects of a good healthcare system is community
participation. It functions with the idea that the people can be trained and
involved in primary healthcare system. This method is already being used in
some parts of our country. SEWA in Ahmedabad and ACCORD in Nilgiris could
be the examples of some such NGOs working in India. Trade unions have built
alternative health care services for their members and also to give low-cost health
care to people from nearby villages.

The most well-known and pioneering initiative
in this regard has been Shahid Hospital, built in 1983 and sustained by the
workers of CMSS (Chhattisgarh Mines Shramik Sangh) in Durg, Madhya Pradesh.
A few attempts have also been made by rural organisations to build alternative
healthcare initiatives. One example is in Thane, Maharashtra, where in the
context of a tribal people’s organisation, Kashtakari Sangathan, trains women
health workers at the village level to treat simple illnesses at minimal cost.

COMPONENTS OF THE GOVERNMENT BUDGET

1) Revenue Receipts:   Revenue receipts are receipts of the government which are
non-redeemable, that is, they cannot be reclaimed from the government. They
are divided into tax and non-tax revenues. Table 5.1 provides the receipts and
expenditure of the Central Government for the financial year 2012-13.
Tax revenues consist of the proceeds of taxes and other duties levied by the
central government. Tax revenues, an important component of revenue receipts,
comprise of direct taxes – which fall directly on individuals (personal
income tax) and firms (corporation tax), and indirect taxes like excise taxes (duties
levied on goods produced within the country), customs duties (taxes imposed
on goods imported into and exported out of India) and service tax1. Other direct
taxes like wealth tax, gift tax and estate duty (now abolished) have never been of
much significance in terms of revenue yield and have thus been referred to as
‘paper taxes’. Corporation tax contributed the largest share in revenues in
2012-13 (34.4 per cent) while personal income tax contributed the second largest
(190 per cent). The share of direct taxes in gross tax revenue has increased from
19.1 per cent in 1990-91 to 53.4 per cent in 2012-13.

2) Capital Receipts: All those receipts of the government which create liability or
reduce financial assets are termed as capital receipts. The main items of capital
receipts are loans raised by the government from the public which are called
market borrowings, borrowing by the government from the Reserve Bank and
commercial banks and other financial institutions through the sale of treasury
bills, loans received from foreign governments and international organisations,
and recoveries of loans granted by the central government. Other items include
small savings (Post-Office Savings Accounts, National Savings Certificates, etc),
provident funds and net receipts obtained from the sale of shares in Public Sector
Undertakings (PSUs) (This is referred to as PSU disinvestment).

3) Capital Expenditure: There are expenditures of the government which result
in creation of physical or financial assets or reduction in financial liabilities
This includes expenditure on the acquisition of land, building, machinery
equipment, investment in shares, and loans and advances by the central
government to state and union territory governments, PSUs and other parties
Capital expenditure is also categorised as plan and non-plan in the budget
documents. Plan capital expenditure, like its revenue counterpart, relates to
central plan and central assistance for state and union territory plans. Non
plan capital expenditure covers various general, social and economic services
provided by the government.
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Civil services question paper of economics

ECONOMICS

Paper- I

Time Allowed: Three Hours Maximum Marks: 300

INSTRUCTIONS

Candidates should attempt all questions strictly in accordance with the instructions given under each

questions. The number of marks carried by each question is indicated at the end of the question.

SECTION A

1. Answer any three of the following questions. Each answer should not exceed 200 words.                                                                                                                     20x3=60

(a) What is the backward rising input supply curve? Illustrate with the help of suitable example.

(b) With the help of suitable diagram, elaborate Cournot Model. What is the significant of reaction curve in the

model?

(c) What are the different kinds of disequilibrium in balance of payment? Suggest some measures to solve the

problem of structural disequilibrium in balance of payments.

(d) What are the desired structural changes required for achieving the objective of economic development.

2. “Welfare Economic is a branch of economic theory which provides a theoretical framework for optimum use of

resources”. In the Light of above statement, examine the main areas of welfare economics.                                                                                                                     60

3. Outline the Keynesian theory of money and interest. What is the role of expectation in the theory of

determination of rate of interest?                                                                                60

4.” The adjustment to a tax imposition not only affects the distribution of tax burden but also bears upon the

efficiency of resource use in the private sector”. Substantiate the statement highlighting the role of taxation policy in

improving allocation efficiency in economy.                                                  60

SECTION B

5. Answer any three of the following questions. Each answer should not exceed 200 words.                                                                                                                     20x3=60

(a) “The Ministerial Declaration adopted at Hon Kong addresses some of the concerns of developing countries

related to agriculture”. Comment upon the statement. What were the time frames and targets in specific areas

decided in the declaration?

(b) Discuss the Lewis Model of economic growth. Do you think the model is applicable to the Indian Development

progress?

(c) “Under the flexible foreign exchange rate scenario devaluation has become redundant”. Comment upon the

statement”.

(d) Explain Sustainable development.

6. “Heckscher-Ohlin theory does not invalidate the classical theory of comparative cost but rather powerfully

supplements it” . Substantiate the statement.                                                             60

7. What are the human development indices used for international comparison of status of development?

Elaborate the methodology used for developing Human Development Index.         60

8. “With the change in economic policies, relative role of market and state also change”. Do you agree with the

statement? Illustrate your answer with the help of suitable examples.                      60

Paper- II

SECTION-A

1. Answer any three of the following questions. Each answer should not exceed 200 words.                                                                                                         20x3=60

(a) Give a critical account of the development of India during British Rule.

(b) Discuss the nature and incidence of the problem of rural poverty in India. What suggestions do you offer to

solve it?

(c) Examine the role of indirect taxes in India’s Economic Development.

(d) Is Economic planning relevant in the context of the Globlised Economy of India? Elucidate.

2. Discuss the impact of World Trade Organization ( WTO) on Indian Agriculture. 60

3. Explain the nature and the cause of inflation of India. Critically appraise the measure adopted the authorities to

control it.                                                                                                                     60

4. Make a critical assessment of National Rural Employment Guarantee scheme in India                                                                                                                                     60

SECTION-B

5. Answer any three of the following questions. Each answer should not exceed 200 words.                                                                                                         20x3=60

(a): Examine the Progress of Tax Reform in India.

(b). Comment on the recent moves towards liberalization and their effects on Indian industry.

(c). critically examine the functioning of Indian Money Market.

(d). Is privatization a boon or a bane in India.

6. Write a detailed note on the import-Substitution and export promotion strategy of India.                                                                                                                                     60

7. Discuss the need for and justification of Banking Reforms in India.                      60

8. Critically evaluate the reasons for fluctuation in agricultural price in India. What would be the components of an

optimum agricultural price policy regime for India?                                       60

Income & The Substitution Effect

When the price of q1, p1, changes there are two effects on the consumer. First, the price of q1 relative to the other products (q2, q3, . . . qn) has changed. Second, due to the change in p1, the consumer's real income changes. When we compute the change in the optimal consumption as a result of the price change, we do not usually separate these two effects. Sometimes we might want to separate the effects.
The Substitution Effect is the effect due only to the relative price change, controlling for the change in real income. In order to compute it we ask what is the bundle that would make the consumer just as happy as before the price change, but if they had to make their choice faced with the new prices. To find this point we
consider a budget line characterized by the new prices but with a level of income such that it is tangent to the initial indifference curve. In the diagram on the next page, the initial consumer equilibrium is at point A where the initial budget line is tangent to the higher indifference curve. Consumption at this point is 11 units of good 1 and 8 units of good 2. After an increase in the price of good 1, the consumer moves to point E,
where the new budget line is tangent to the lower indifference curve. Consumption of good 1 has fallen to 4 units while consumption of good 2 has increased to 10 units. The substitution effect is the movement from point A to point G. This point is characterized by two things. (1) It is on the same indifference curve as the original consumption bundle; AND (2) it is the point where a budget line that is parallel to the new budget line is just tangent to initial indifference curve. This "intermediate" budget line is attempting to hold real income fixed so we can isolate the substitution effect. The point G reflects the consumer's choice if faced with the new prices (the budget line has the slope reflecting the new prices) and the compensated income (i.e., an income level that holds real income fixed). The substitution effect is the difference between the original consumption and the new "intermediate" consumption. In this case consumption of good 1 falls
from 11 to 6.84 while consumption of good 2 increases to 14.27.
When p1 goes up the Substitution Effect will always be non-positive (i.e., negative or zero).

The Income Effect is the effect due to the change in real income. For example, when the price goes up the consumer is not able to buy as many bundles that she could purchase before. This means that in real terms she has become worse off. The effect is measured as the difference between the “intermediate" consumption” at G and the final consumption of q1 and q2 at E.
Unlike the Substitution Effect, the Income Effect can be both positive and negative depending on whether the product is a normal or inferior good. By the way we constructed them, the Substitution Effect plus the Income Effect equals the total effect of the price change.

British economist:- John Maynard Keynes

John Maynard Keynes, British

economist, was born in 1883. He was educated in King’s College, Cambridge, United Kingdom and later appointed its Dean.

Apart from being a sharp intellectual he actively involved in international diplomacy during the years following the First World War. He prophesied the break down of the peace agreement of the War in the book The EconomicConsequences of the Peace (1919). His book General Theoryof Employment, Interest andMoney (1936) is regarded as one of the most influential economics books of the twentieth century. He was also a shrewd foreign currency speculator. John Maynard Keynes

Father of Modern Economics

Adam Smith is regarded as the founding

father of modern economics (it was known as political economy at that time).

He was a Scotsman and a professor at the University of Glasgow. Philosopher by training, his well known work An Enquiryinto the Nature and Cause of the Wealth ofNations (1776) is regarded as the first major comprehensive book on the subject The passage from the book. ‘It is not from the benevolence of the butcher, the brewer, of the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantage’ is often cited as an advocacy for free market economy. The Physiocrats of France were prominent thinkers of political economy before Smith. Adam Smith

Meaning of the Economy

We find people working on farms, in offices, factories, shops, schools, colleges, hospitals, etc. We all have to work in order to earn. People work and get money income in exchange.With this money income they buy goods and services. We buy most of these goods and services to satisfy our and our family members wants. We also buy goods and services for use in business.

The work places where people work are called production units. These production units are the sources of livelihood to the people working there. Some get wages and salaries. Some get rent by renting out properties. Some get interest by lending money. The work places where people work are called production units. These production units are the sources of livelihood to the people working there. Some get wages and salaries. Some get rent by renting out properties. Some get interest by lending money. The owner of these production units gets profit. All these production units together make an economy.The term ECONOMY is generally associated with a country. But it may need not always be so. It can also be associated with city, town and village. A city's economy includes factories, shops, offices, schools, colleges, banks and all other work places located in  that city. Similarly a village economy includes farms, shops and all establishments in  that village where people work. We can even talk of a world economy which will include all production units existing in the world. Indian economy thus includes all the production units or work places existing in India.

Challenge of the Economies

The main challenge of any economy is to fulfill the needs of its populations. Every population needs to be supplied some goods and services for its survival and well being. These goods might include basic needs such as food, shelter, garmenst, etc. while it might also consist of refrigerators, air conditioners, cars, medicines, computers, etc. Similarly, the services people need may range from healthcare, drinking water supply, education to advanced and highly sophisticated services like banking, insurance, airways, telephomes, internet,etc. As an economy moves on the ladder of development, the process of fulfilling the needsd of the population becomes nerver-ending phenomenon. As an economy achieves success in supplying one set of goods and services to its population, the population starts demanding another set of goods and services which are of a higher order. And thus goes on the struggle of the economy-solving one challenge and focusing on another. Standard of living of one set of population varies from another depending upon the attempts and the successes of the concerned economies as to which comparative extent they have been able to fulfill the needs of their population.

There are two aspects of this challenge. First, the availability of the goods and services required by the population and second, the presence of the supply networks. Every economy has to guarantee required level of goods and services out of its production process at first. For this, proper level of production capacity is bult up which requires a particular level of capital formation or investment. From where the investible funds will be managed is altogether a seperate question. Whether the investment will come from the government, the domestic private sector or the foreigners? Once these details are cleared and selected as per the socio-economic conditions of the economy, a proper distribution network for the goods and services produced is assured.

Focus of Economics

What is the real purpose that economics has been trying to serve? What ultimately economists have been trying to articulate? And what has been the focus of economics and the economists since the birth of the discipline?

Though economics today studies a wide range of issues and topics, if we take an overall picture, its essence has been very simple-the betterment of human life on earth. Improving living conditions of the humanity at large has been the real and the ultimate goal of the discipline. In this process, the economists have been articulating  a number of theories and propositions as to how an economy may maximise its economic potential and worth. The first and the most famous work in this direction was by the Scottish philosopher-economist, Adam smith in The Wealth of Nations (1776). We trace the origin of the classical school to this work. Similarly, in the following years and centuries many masterpieces were produced by a great many economists who were trying to improvise better ways of maximizing the fruits of economic activities. Economics and the economists have common goals, searching for possible alternatives for the betterment of human life.

DIFFERENCES BETWEEN STATIC AND DYNAMIC ANALYSIS

            The main differences between static and dynamic analysis are:-

1.Time element:- In static economic analysis time element has nothing to do.In static economics,all economic variables refer to the same point of time.Static economy is alsocalled a timeless economy.Static economy,according to Hicks,is one where we do not trouble about dating.On the contrary,in dynamic economics,time element occupies an important role.
2. Process of change:- Another difference between static economics and dynamic economics is that static analysis does not show the path of change.It only tells about the conditions of equlibrium.On the contrary,dynamic economic analysis also shows the path of change.Static economics is called a 'still picture' whereas the dynamic economics is called a 'movie'.
3. Equilibrium:- Static economics studies only a particular point of equlibrium.But dynamic economics also studies the process by which equilibrium is acheived.As a result,there may be equilibrium or may be disequilbrium.Therefore,static analysis is a study of only equlibrium whereas dynamic analysis studies both equilibrium and disequilibrium.
4.Study of reality:- Static analysis is far from reality while dynamic analysis is nearer to reality.Static analysis is based on the unrealistic assumptions of perfect competition,perfect knowledge,etc.Here all the important economic variables like fashions,population,models of production,etc are assumed to be constant.On the contrary,dynamic analysis takes these economic variables as changeable.

SIGNIFICANCE OF CIRCULAR FLOW OF INCOME

         The significance of circular flow of income can be explained as below:-

1. It provides the clea cut picture of the working of an economy whether it is working efficently or there is any disturbance in the smooth working.
2. With the help of circular flow of income,we can study the problem of diseqilibrium.It also focusses on the ways and means to restore the position of disequilibrium.
3. The study of circular flow of icome helps to know the importance of monetary policy to bring about the equality between savings and investment in the economy.
4. The study of the circular flow of income highlights the importance of fiscal policy.
5. With the help of circular flow of income, we can judge the significance of compensatory fiscal policy.

LEAKAGES AND INJECTIONS

      LEAKAGES:-Leakage means withdrawal from the flow.When households and firms save part of their incomes it constitutes leakage.They may be in form of tax payments and imports also.Leakages reduce the flow of income.

      INJECTIONS:-Injections means introduction of income into the flow.When households and firms borrow the savings,they constitute injections.Injections increase the flow of income.Injections can take the forms of (a) investment,(b) government spending and (c) exports.So long as leakages are equal to injections circular flow of income continues indefinitely.Financial institutions or capital market play the role of intermediaries.