Custom Search


Monday, 30 May 2011

Explain the Duties, Rights and Liabilities of each Partner


Following are the important duties of the partner :

1. To be Sincere and Faithful :-
Every partner should be fair and faithful in dealing to other partners.

2. Maintenance of True Account :-
Every partner should prepare the true account of the firm for the other partners.

3. Common Advantage :-
Every partner should performs his duties for the common advantage of all the partners.

4. To keep the Secrecy :-
It is the duty of the partner that he should maintain the secrecy of the business from outside.

5. Use of Firm Property :-
It is the duty of the partner that he may not use the property of the firm for his personal interest.

6. Provide All Information's :-
It is the duty of the partner that he must provide all the necessary information's about the business to other partners.

7. To Carry on Other Business :-
It is the duty of the partner that he should not carry on any other business except the partnership.

8. Profit should be Paid to the Firm :-
If a partner earn profit from any sources of the firm, it should be paid to the management of the firm.

9. Compensation for Loss :-
If a partner commits a fraud his co-partner he must compensate the loss.

10. Distribution of Loss :-
In the absence of agreement, each partner will pay equally.

11. Use of Powers Within Limits :-
It is the duty of the partner that he should use his powers within the limits delegated by the firm.

12. To Abide the Decision :-
A partner should abide by the decisions taken by the majority of the partners.


1. Right of Profit :-
All the partners are entitled to share the profits of the firm equally.

2. Right of Opinion :-
Every partner has right to express his opinion relating to business activities. But the nature of business can not be changed by a single partner.

3. Right of Inspection :-
Every partner has right to check the accounts of the business.

4. Right of Management :-
Every partner has a right to take part in the management of the business of the firm.

5. Right of Salary :-
A partner has a right to demand salary for performing his duties in the management of a business.

6. Right to Exercise Power :-
To protect the firm from loss, every partner has a right to use his powers.

7. Right of Retirement :-
Every partner has a right to retire from the firm serving notice.

8. Right of Existence :-
A partner cannot be expelled by any other partner from the business. Every partner has a right to live in the business.

9. Right of Admission :-
No new partner can be admitted without the consent of all the present partners in business.

10. Right of Interest :-
If a partner has provided extra capital than his share, he can also receive interest on it.


1. Loss Liability :-
In case of loss each partner will equally contribute the loss. If there is no agreement.

2. Liability of All Actions :-
All the partners of the firm are jointly responsible for all the actions done by the firm.

3. Liability of New Partner :-
A new partner is liable for all the acts of the firm done after he becomes a partner.

4. Liability of Insolvent Partner :-
The property of insolvent partner is not liable for any obligations of the firm after the date on which the order of insolvent is issued by the Court.

5. Liability of Deceased Partner :-
If a partner dies and the firm suffers losses the property of the deceased can not be held liable for any payment.

6. Liability of Retired Partner :-
A retired partner will not be responsible for any act of the firm after the date of retirement.

7. Liability of Fraud :-
If any partner commits fraud the other partners will also be equally liable.


Explain the Procedure of Admission and Withdrawal of a Partner


Following are the important conditions of admission :

1. Consent of Other Partners :-
At any time new partner can be admitted in the partnership with the consent of all existing partners.

2. Not be Insolvent :-
A new partner admitted in a firm may not be insolvent.

3. Liable for All Acts :-
After the date of admission new partner will be liable for all acts of the firm.

4. Not Liable Before the Admission Date :-
A new partner will not be responsible about any action or obligation of the firm before his admission.

5. Other Conditions :-
If there are some other conditions, these will be determined according the provisions of partnership agreement.


A partner may retire or withdrawal from the partnership in the following ways :

1. With the Consent of Other Partners :-
A partner may withdraw or retire from the firm with the consent of all other partners.

2. According to Agreement :-
A partner may retire or withdraw from a firm accordance with an express agreement by the partners.

3. Partnership At Will :-
In case of partnership at will a partner may cure by the giving 14 days notice to other partners.

4. Liable to Third Parties :-
A withdrawing partner will be liable to third parties for all acts of the firm until he gives public notice.

5. Not Liable After Retirement :-
After the retirement a partner is not liable for any act of the firm.

6. Right of Benefits :-
Under the provisions of agreement a retired partner has a right to receive all the benefits from other partners.


Describe the Qualities of an Ideal Form of Organization

There are various kinds of business organization and each partner selects any one keeping in view his circumstances. Any how following are the important factors for choosing the ideal form of organization.

1. Easy Formation.

2. Easy Financing.

3. Limited Liability.

4. Flexibility in Business Operation.

5. Secrecy.

6. Lighter Tax Liability.

7. Saving of time, money and Energy.

8. Stability in Life.

9. Control of owners in the Management.

10. No risk of Fraud.

11. Easy Transfer.

12. Minority Protection.


Discuss the Various Forms of Business Partnership under Islamic Law

There are four kinds of partnership in Islamic Law :

In this partnership partners contribute their share in cash. Contribution of capital is also not equal. The profit or loss is also divided on the basis of Capital amount. The liability of each partner is limited to his invested capital. This type of partnership can be formed between any two parties (Women, Children, Muslims, Non Muslims). Generally one partner provides the major source of finance. A partner has no right to lend any thing out of joint assets of the firm.

In this partnership, each partner provides equal capital. Each partner has equal share in the profit and loss. Each partner is helper and agent of the other partner. All the partners have an equal status. There is a written agreement . It can not be formed between the slave persons.

Rights and Duties :- In this partnership each partner has the right to negotiate or do any business contract on the behalf of the other partners.

It is an associate of different skills involved in business. Skilled persons like manager, accountants and labourers provide their skill. While capitalists provide their capital. All these people join together to start the business. The profit is distributed among them according to terms of agreement.

This type of partnership is formed by agreement for the object of purchasing goods on credit in order to supply them in the market. One partner is an agent of another partner. The profit and loss is distributed equally. In this partnership no partner contributes any amount of capital in business.

Termination of Partnership :- A partnership cab be terminated as under :

1. Notice :- In all the above four forms a partner can terminate the contract by giving the notice to other partners.

2. Death :- Partnership is also terminated on the death of a partner.


Sunday, 29 May 2011

Discuss the Various forms and types of Partnership

Following are the important forms of partnership

1. Partnership for Fixed Period :-
When the business partnership is formed for the definite period of time it is called partnership of time it is also called partnership to the fixed period. At the expiry of this period partnership comes to an end.

2. Partnership At Will :-
Duration period of partnership is not fixed before starting the business. It can be dissolved by partner by serving the notice to other partners. It may be created under the following circumstances :
1. When the partnership is formed for indefinite period.
2. When the partnership is formed for a definite period but remains continue after the expiry of this period.
3. If a partnership is formed to complete a particular venture but it remains continue after its completion. It is called partnership at will.

3. Particular Partnership :-
When a partnership is formed for the object of conducting a particular business. It is called particular partnership. The particular undertaking he can not be extended to any other business.

4. Limit Partnership :-
In this organization the liability of some persons is limited to their invested capital and other persons are liable for all the obligations of the firm.
Following are its main characteristics :

1. Number of Members :- There should be not more than twenty and not less than two in the ordinary business. In a banking business not more than ten.

2. Registration :- The registration of the firm compulsory by law.

3. Limited Partner :- There must be at least one limited partner.

4. General Partner :- There must be one or more partners who are liable for all the debts of the firm.

5. Limited Participation :- Limited partner cannot participate in the business management of the firm.

6. Transfer of Share :- A limited partner can transfer his share to others with the consent of other partners.

7. Entry of New Partner :- A new member can be admitted to the partnership firm without consulting by the limited partner.

8. Suggestions :- A limited partner can give his suggestions to improve the business.

9. Inspection of Books :- A limited partner may inspect the records of business and accounts at any time.

10. Word Limited :- The word Limited is written with the name of firm for public information.


Saturday, 28 May 2011

Distinguish or Difference between in these 1. Business 2. Industry 3. Commerce 4. Trade 5. Profession

Business :-
We may define the term business in the following words :
" As an institution organized by person or group of persons to produce or distribute goods or services within incentive of earning profit through the satisfaction of human wants. The element of risk is also involved in it."

Following are the main characteristics of a business :
1. Every business deals in goods and services.
2. The profit motive in the business is essential.
3. Element of risk is also involved in business.
4. In a business there should be a series of deal.
5. People should do the business for money. Free consumption of goods is not included in business.

2. Industry :-
Industry is a branch of a business. Industry is concerned with the production of goods and preparation of goods.
All those activities which produce the goods, or convert the raw material into finished goods or intermediate goods are included in industry. To produce agricultural goods and mining is also included in industry. Anyhow the term industry refers to that pan of business activity which is concerned with the extraction ,production or preparation of products. Following are the main kinds of industry.
1. Primary industry :- It may refers to agriculture and forestry.
2. Extractive industry :- It includes mining and fishing.
3. Manufacturing industry :- It includes the changing of raw material into a more useful form.
4. Constructive industry :- The construction of buildings, dams and roads includes in this industry.

Commerce :-
Commerce includes all those activities which are helpful in transferring goods from the place of production to the consumer. For example purchases, sale, transportation's, banking, insurance, storage and advertisement are the activities which come within the scope of commerce. Manufactured goods do not reach directly from the producer to the consumer. For example wholesaler purchases the goods from producer and uses the transportation to transfer these to his store. He also hires the services of bank and insurance company. Then he sells the goods to retailer. A consumer purchases the goods from retailer . So there are many obstacles in the way of producer an consumer.
Mr. James Stephon has rightly stated that " Commerce includes those activities which remove the hind ranees of time, person and places in the exchange of goods."

Trade :-
Trade is an important part of commerce. All those activities are included in the trade which are helpful for the exchange of goods between the producer and consumer. The exchange of goods can be direct or indirect. Those factors which removes the obstacles in the exchange of goods are included in the scope of trade. Trade can be carried out inside and outside the country. Within the country trade has two kinds.
Whole sale retail :- Trade with the foreign countries is either in the form of exports or in the form of imports.

Profession :-
It means vocation which a person adopts after getting specialized training. The professional man provides the services of specialized nature to the people. Some people adopt the particular profession only for the profit motive but others provide the services only. The doctors,accountants and professor fall in the category of professional. These are performing very useful service to the society because they have a specialized knowledge particular field. The professionals who rend free services are very negligible.


Which factors should kept in view of Businessman before Starting the Business or Prerequisites of a Business

Following are the prerequisites of a successful business :

1. Market Condition :-
First of all businessman keeps in view the demand of the goods which he wants to produce and keeps in view his own skill and experience. If the demand is inelastic then chances of success are bright.

2. Availability of Capital :-
Capital is considered an important factor in the business. It is required for the purchase of land, machines, wages and for raw material. A businessman has to decide before starting the business that how much capital he can arrange.

3. Scale of Production :-
Before starting the business a businessman also decides that he has to produce the goods on small scale or large scale. He makes the decision keeping in view the availability of capital and demand of the goods.

4. Form of Organization :-
A businessman also to decide about the form of organization. He may start the business as a sole proprietor or as a partnership or in the form of joint stock company.

5. Selection of Location :-
A businessman select the place for business keeping in view the availability of raw material cheap labour and transportation. If these things are easily available then he will start the business there.

6. Government Policy :-
The attitude of the Govt,. towards the business is also considered by the businessman. If Govt. is encouraging the business then it will be profitable for the businessman.

7. Govt. Concessions :-
Sometimes Govt. provides loan on low rate of interest to particular industries. Sometimes tax holiday is provided in particular areas. So a businessman also considers the Govt. concessions before starting the business.

8. Availability of Raw Material :-
A businessman should also keep in view the availability of raw material. If it is imported from the other countries then it may create problems for him.

9. Availability of Labour :-
Before starting the business, a businessman should also consider the availability of labour. If skilled and efficient labour is not available then business will not be profitable.

10. Availability of Machines :-
A businessman should also examine that machines required for the business are available in side the country or not. If these will be imported then Govt. will provide the foreign exchange or not.

11. Means of Transportation and Communication :-
If the means of transportation are quick and cheap then cost of production will be low and rate of profit will be high. The expansion of the market also depends upon the quick and cheap means of production.

12. Administrative Conditions :-
The success of business depends upon the administration. If the administration is efficient and capable then rate of profit will be high in the business. So a businessman should pay proper attention to the administrative aspect of the business.

13. Formulation of Business Policy :-
A businessman also frames the policy about the methods of payments, receipts and techniques of production. These are very essential for the successful business.


Principles of Organization

Business means those activities which are concerned with the production and distribution of goods and services. Earning of profit and satisfying of human wants are the two major objectives of business.

Millard has defined it in the following words. " A process of dividing the work into convenient tasks or reduce of grouping each duties in the form of parts of delegating authority to each post and appointing staff to be responsible that the work carried out is planned."

Business organization is an act of grou[ing activities into effective co-operation to obtain the objectives of the business.


Following are the important principles which are related to organization :

1. Division of Work :-
Business activities must be devoted into several sections. It will make the work more easy for the businessman.

2. Right man for Right Job :-
This principle should be applied and each section should be given under supervision of qualified and efficient person. It will improve the performence of the section.

3. Flexibility :-
There should be flexibility in the structure of organization. In order to meet the changing circumstances we may be able to bring the changes in the organization.

4. Division of Responsibility :-
There should be clear division of responsibility. Each person and each section should be clear about his duty.

5. Co-Ordination :-
The organization must be arranged in such a way that it may coordinate all the departments or sections.

6. Balance in Various Sections :-
For the successful business there should be balance in various sections organization.

7. Specialization :-
It is also an important principle of organization. At each stage of production higher degree of specialization should be achieved.

8. Delegation :-
It is also basic principle of the organization. The scope of delegation of authority and responsibility must be clear to the workers.

9. Line of Authority :-
The process of business can be performed very well. If there is an unbroken line of authority from the highest level to the lowest.


Discuss the Great Qualities of a good Businessman

In the modern age we can see the various changes in the business field. Due to technological advancement it is necessary that a good businessman should possess the basic skill and knowledge about his business.


Following are the important qualities of a good businessman :

1. Honest :-

It is the first quality of a good businessman that he should honest and sincere in public dealing. There should be no fraud and commercial bribery in business. If he fails to perform his moral and religious responsibility then he can not become a good businessman.

2. Efficient and Hard Worker :-

A good businessman must be hard worker and capable of working for long hours. A lazy and inefficient businessman can not compete the market.

3. Ability of Planning :-

It is a basic quality of a businessman that he should possess the ability to plan his business. For example there are various decisions like what to produce? Where to produce? Which are made by the businessman. A good planner can only make the best decision.

4. Careful About Future :-

A businessman should be careful about the future expectations. If he fails to estimate the future demand for his product then he will suffer a loss. If he has a foresight about the future then he can earn profit.

5. Ability of Financial Management :-

A good businessman tries to meet the financial needs from internal and external sources. He uses the finance in such a way in his business that it gives him maximum profit. A successful business has a quality that he can manage the finance easily.

6. Ability of Innovation :-

In the modern age new product attracts the customer easily. So a good businessman should have an ability to produce new goods and services according to his new ideas.

7. Research on Business :-

A good businessman always pays proper attention to the research work. He also uses his experiences to minimize the cost of production.

8. Steady :-

In a business there is a need of patience. A good businessman should be courageous and steady. If he fails to face the business problems on the basic stage then he will run away from the field.

9. Co-Ordination :-

A businessman should be able to coordinate the various departments of his business. For example if he wants to produce new item, then he should involve the in-charges of research. production, finance and marketing departments to achieve the common objectives. It will be beneficial for his business.

10. Technical Skill :-

A businessman should have specialized knowledge and technical skill for understanding and completing the process of production. If he has no technical skill about his business, he can not become a good businessman.

11. Sympathetic Attitude :-

A good businessman always loves his workers. He should be aware of the temperament , feelings and limitations of his workers. He should always take interest in the problems of his workers and try to solve them.They will also reply positively . It will increase the profit of the business.

12. Good Reputation :-

In a business dealings good reputation is an assets for the businessman. A good businessman always improves his goodwill and expands the business.

13. Follows the Ethics :-

A good businessman always follows the ethics rules and he never cheats others. He dislikes the commercial bribery and never uses the unethical practices.

14. Foresighted :-

It is the most important quality for the successful businessman. A businessman must keep an eye on the future. He may be able to predict for future.

15. Cool Minded :-

In competitive market for the success of business it is necessary that businessman should be cool minded and a man of balanced personality.


Define Business and discuss the major functions of a Business

Definition of Business :-
"As an institution organized by a person or a group of persons to produce or distribute goods or services with an incentive of earning profit through the satisfaction of human wants. The element of risk is also involved in it."

Business involves the all the human activities which are perform to earn profit. There are various kinds of human activities which include in business, Like purchase, sale, transport, finance and production of goods.


Following are the important functions of the business :

1. Risk Taking Function :-
In a business every moment there is a chance of loss. For example price of the product may fall suddenly. There is also a chance of property destruction. So it an important function of a businessman that he takes the risk and starts the business.

2. Management :-
The basic function of the businessman is to manage the business. Management solves many problems like starting , operating, planning, staffing and controlling the business. The management has also to provide direction for all the subordinates.

3. Planning :-
To organize the business is an important function of a businessman. While organizing the business a businessman has to decide that what work each worker has to perform has also to fix the responsibility of each worker. He has also to distribute the authority for each worker. The businessman also establishes the relationship between the officers and workers of his enterprise. Because it will increase the production and sale of the product. So profit of businessman can increase due to better organizational planning.

4. Financial Function :-
Money plays very important role in business. Without capital a businessman can not establish and expand the business. When a firm has not sufficient amount , it borrows the money from banks and other financial institutions to operate the business. Credit control loans, wages, purchase and sale discount are the financial functions.

5. Innovative Functions :-
Today there is a stiff competition in the business market. Innovation is essential for the business advancement. A businessman keeps in view the needs and wants of the consumer introduces new goods according the demands of the peoples. So he tries to find out new productive techniques and new forms of business organization.

6. Payment of Rent Wages and Interest :-
A businessman hires the other factors like land labour and capital to produce goods and services. He pays the reward to these factors in the shape of rent, wages and interest. After making the payments renaming money he will keep in his own pocket as a profit.

7. Production Function :-
A businessman combines the factors of production and produces the goods with object of earning profit. A businessman conducts this process for his own profit.

8. Use of Technology :-
A businessman also uses the technology and new methods of production according to the nature of his business. It increases his profit.

9. Optimum Combination :-
A businessman tries to combine the factors of production in such a way that cost of production should be minimum and profit should be maximum.

10. Improvement In quality :-
A businessman also improves the quality of the product to increase his sale. Otherwise he will suffer a loss.

11. Sales Function :-
It is very difficult Job of the businessman because there is a hard competition on each market. A businessman also performs various other duties before selling like grading sorting and packaging.

12. Transportation and Communication Function :-
Transportation and communication functions performed by the businessman. It involves transfer of goods from one hand to another in exchange for money.

13. Social Function :-
In urban areas pollution is increasing due to industrial expansion. So business should also share the cost of pollution. It is responsibility of business to reduce the ills of the society.

14. Sound Organization :-
There is a need of sound organizational structure for the business. It will use the sources properly and will increase the profit and production.

15. Motivation :-
It is an important function of a business. It encourages employees to give their best performance to achieve the objectives.


Friday, 27 May 2011

Define Business Organization and discuss the Importance of Business Organization

Business Organization :-
It is a process of establishing effective co operation between the factors of production for producing goods or services to earn profit.

In the present age production and distribution activities are increasing day by day with the rise in world population standard of living is also improving due to the business activities. Today the man is enjoying all the facilities of life due to the business efficiency. But without business organization we can not solve the business problems. Business organization consists of the skillful activities of the business man which are helpful for promoting the trade commerce and industry. business organization plays very effective role for the business development.

Importance Of Business Organization :-

We can discuss its importance as under :

1. Production of Goods :-
Business organization is very useful for the production process of goods and services. It increases the efficiency of various sections.

2. Reduces the Cost :-
Business organization principles are used to minimize the cost of production. So the profit of the business increases.

3. Distribution :-
Marketing and distribution problem is also being solved by the business organization.

4. Common Link :-
It provides a common link between various of the business activities. So effective cooperation among the various factors increases the profit of the enterprise.

5. Saves the Time :-
Due to business organization we can save our time which is more precious in the present age.

6. Minimum Wastage :-
Business organization reduces the wastage of material and other expenditure. So rate of profit increases.

7. Secretariat Function :-
Business organization teaches us the principles of office organization. It tells us the best way of performing the secretarial functions.

8. Finance Management :-
Business organization also guides the businessman that how he should meet his financial needs and expand the business.

9. Transportation Use :-
It guides the businessman that which type of transport he should utilize to increase the sale and profit of his product.

10. Makes the Businessman Efficient :-
Business organization has enabled the businessman to conduct the business affairs efficiently. It also provides the solution of many problems.

11. Fixes Responsibility :-
It fixes the responsibility of ever individual in a different manner. It also introduces the scheme or internal check with works automatically.

12. Solve the Market Problems :-
Business organization solves the problems of buying, selling storage and grading.

13. Technical Development :-
It also very helpful for improving the technology in the country. New methods and innovations are used in the production process.

14. Decision Making :-
Decision making is very important factor for the success of business. The business organization is very useful in making the decisions in time.

15. Provides Skill :-
Business organization provides the skilled people like salesman to satisfy the customers.

16. Supply according the Demand :-
It guides the producer that he should produce the goods according the demand of the market. Facts about market are collected and demand is produced accordingly.


Thursday, 26 May 2011

Discuss the various measures which should be adopted to fight against the business fluctuations

Following are the main measures which can be suggested for the effective control of business fluctuations :

1. Monetary Policy :-

Monetary policy refers to all these measures which are taken with a view to control money and credit supply in the country. When there is full employment and we are facing inflation the central bank can reduces the total quantity of money in circulation. The bank can adopt different measures like bank rate policy, open market operation or rationing of credit.
On the other hand in case of deflation the central bank can increase the quantity of money by lowering the bank rate, or purchasing the securities.
Monetary policy has achieved very limited success in the past, because central bank has not full powers over the supply of money and credit in the country. Moreover the quantity theory of money has failed during the world depression.

2. Fiscal Policy :-

Fiscal policy involves the process of shaping the public finance with a view to reduce fluctuations in the business and attainment of full employment without inflation.
In case of inflation Govt. curtails the public works programmed. Imposes heavy taxes discourages private investment, reduce the purchasing surplus budget.
In case of deflation the Govt. spends money on the construction of canals, roads and offices. Increase in Govt. expenditure increases the income, employment, profit and consumption of the people. Deficit budget is prepared and tax holidays are given.
The fiscal policy must be co-ordinates with the monetary policy to improve its efficiency.

3. International Measures :-

Today every country has trade relation, with the rest of the world. If there is inflation or deflation in one country it can be easily carried to other countries, the example of great depression can be given. Business cycle is an international phenomena and it should tackled on international level. Different measures have been suggested by the economists to control the business fluctuation efficiency. Such as
1 ). Control of international production
2 ). International Bill stock control international investment control.

4. State Control on Private Investment :-

Some economists have suggested that if Govt. controls the private investment, the cyclical fluctuations can be controlled within limits while the other economists who disagree with the above view, they say that private investment will be discouraged. Low investment will reduce employment and income. J.M.Keynes says that if we adopt the middle way we can control the fluctuations.

5. Re-Organization of Economic System :-

Some economists suggest that there should be re-organization of the whole economic system. The capitalistic economic system should be replaced by the socialistic system.Because in socialistic economy there are a few chances of cyclical fluctuation. In 1930 when all depression, it was only socialistic countries which remained free from crises.


Modern Theory of Trade Cycle

The modern economists are of the view that it is the interaction of multiplier and accelerator which cause movement in the national income. According to multiplier when investment increases it increases the income. But income increases more than the investment according the size of multiplier. For example is MPC (Marginal Propensity to Consume ) is 3/4 an investment of one lakh will increase national income by 4 lakh.If MPC is 7/8 on investment of one lakh will cause income to Rs. 8 lakh. If investment falls by me Rs. one lakh and the MPC is 2/3 the national income will fall by 3 lakh.
Multiplier is also reciprocal of Marginal propensity to save (MPC). If MPC is 1/3, net investment spending of Rs. 5 lakh will causes. Income to increase to 15 lakh. We conclude that :

Charge in income = 1/1-MPC x Change in investment

Change in income = 1/MPC x Change in investment

The increase in income further leads to greater investment through the accelerator effect. The stock of capital depends upon the level income. If the income level is higher the capital assets will be also higher. When the demand for consumer goods increases, it will effect the demand for capital assets. So we find that investment first affects income which and then income effects income which and then income effects capital assets when net investment increases. The income rises in a greater proportion depending upon the size of multiplier. The expansion phase of the trade cycle starts when the investment increases.
The recession phase starts when the investment falls which ultimately reduces income, output and employment in the country.


Various or Different Theories of Trade Cycle

Various theories have been offered to explain the causes of trade cycle. Now we will discuss them one by one.


Keynes has not offered a pure theory of trade cycle. But he explains those factors which brings changes in income, output and employment. Yet it is an incomplete explanation of the trade cycle.
According to Keynes, the cyclical fluctuations are caused by changes in the marginal efficiency of capital. According to Keynes if the rate of return of capital is greater than the rate of interest then businessman expands the business and increases the investment. On the other hand if ratio of interest is higher than rate of return the business will be contracted. While the marginal efficiency of capital depends upon two factors.
1 ). Expected return from capital assets.
2 ). Replacement cost of the assets.
Marginal efficiency of capital is raised by new investment and by expectation of rising prices. It is lowered by falling prices and fall in investment.
When the rate of capital return is higher then the rate of interest, it leads to investment. The volume of employment and income increases. The demand for consumer goods and capital goods increases. It is called the expansion phase of the trade cycle.
When marginal efficiency of capital relatively falls than the current rate of interest. It is the phase of Contraction. Because further scope of investment declines. People save more money due to higher rate of interest. More savings reduce the demand of consumer goods.
Due to the excess of savings the income and employment declines. We are in the phase of recession which finally results depression.
Keynes has also introduced very important terms which brings change in the economic activities. There are :
( 1 ). Propensity to Consumer.
( 2 ). Propensity to Save.
( 3 ). Marginal efficiency of Capital.
He says that down swing of the trade is caused by the fall in the propensity to consume. Because when the income increases or decreases, consumption also changes but not according to that ratio as the income changes. There is always less change then the change in income. Whenever saving begins to exceed then the investment a depression is developed.

Criticism on Keynes Theory of Trade Cycle:-

1. This theory fails to explain the repetition of booms and depression at almost regular intervals.
2. Multiplier concept of Keynes does not offer the satisfactory explanation of the business cycle.
3. Hicks says that cyclical fluctuations are caused by the interaction of multiplier and acceleration.


Mr. Jevan has offered this theory. He says that trade cycle are caused by sun spots which appears on the face of the sun at almost regular intervals of 10.4 years. He says that when these spots appear the sun emits less heat and leads to the failure of crops when the crops yield will be low, the income of the farmer will fall. So the demand or purchasing power of the farmers will decreases. In this way demand of consumption goods will fall. The industrialist income will be also affected. The industrialist will reduce the demand of raw material. He may also reduce the employees in his factory. So the down war swing starts.
On the other hand when the sun is clear it emits normal heat and there is a bomber crops. The purchasing power of the farmers will increase. They buy more commodities and it will be a period of expansion.

Criticism on Sun Spot Weather Theory of Trade Cycle :-

1. They trade cycle do not occur at regular intervals of 10.4 year while length of the trade cycle is 7 to 8 years.
2. Good or bad crop can be only one factor of depression or expansion but they cannot account for all the features.


This theory is associated with professor Pigou. According to him trade cycles are caused by the optimistic and pessimistic attitude of the businessman. When the trade is brisk businessman earns high profit and expands the investment and production. They over-estimate the futures demand of the goods and increases the production. An optimistic wave cover all the quarter of the business and over all production increases. In this stage a period of prosperity is in full swing. The aggregate supply increases then the aggregate demand.The market becomes over flooded with consumption goods when supply will exceed then the demand, and prices will fall. Rate of profit will decrease. Producer will reduce the investment. So rate of employment will also fall and economy will be caught by the rises.
Now businessman will under estimate the future prospects of business. A offer the true explanation of the trade cycle.
No doubt here is some truth in this story but it does not offer the true explanation of the trade cycle.


Sir Ralph Howtery offered this theory. He says that main cause of trade cycle is the contraction and expansion of bank credit. He says that most of the business are carried on with loans. When the trade is good, the bank expand credit by lowering the rate of interest. The merchants are attracted by the low rate of interest and they expand the business. The producer expand production keeping in view the demand. Employment output and money income increases. The expansion of credit brings up swing in the business cycle. A stage comes when the commercial banks realize that they have advance more than their limits. Some of the banks will feel that their cash reservation has reached to the danger point. They will increase the rate of interest and recall the advances. When the rate of interest will be high the rate of profit will fall and business will not borrow and he will reduce the production. Employment, profit and income decreases. According to Prof. Howtery the merchants are very sensitive to the change in the rate of interest. So changes in the rate of interest first affect merchants and then manufacturers when the rate of interest is low the merchants will increase their stock and they will place more orders with the manufacturers. When the rate of interest is high than there will be reserve situation.

Criticism on Monetary Theory of Trade Cycle :-

1. Critics says that trade cycle is not purely monetary phenomena.
2. Secondly trade cycle is a world wide phenomena. It can not only occur in one or two countries.


Prof. J.A Hobson had developed the theory. He says that due to over savings depression takes place. He says that modern capitalistic world has divided the people into two classes rich and poor. Rich class is in small number, but possesses a large portion of the total wealthy. The wealthy community is so well-off that they can not consume all their income. So they use their savings in investment. They total production or supply of goods increases. But on the other side the poor class is in large number. They are so poor that they even cannot get basic needs of life. So the demand remain low the supply. Demand and supply balance is disturbed. The market becomes over flooded with unsold goods. The businessman will stop the production and it will lead to depression.
Hobson says that if there is an equality of income there would be no crises or depression in the economy.

Criticism on Under Consumption Theory of Trade Cycle :-

1. The first objection on this theory is that it only explains the depression not the trade cycle.
2. This theory also fails to explain the period of trade cycle.


What is Trade Cycle and describe its various Stages or Phases

The trade cycle refers to the ups and downs in the level of economic activity which extends over a period of several years. If we examine the past statistical record of the business conditions, we will find that business has never run smoothly for ever. There are many fluctuations in the period. Some times prosperity is followed by adversely. In Economics this tendency of the business activities, to fluctuate from prosperity to adversely is called business cycle.

Prof. Keynes says : " A trade cycle is composed of periods of bad trade characterized by falling prices and high unemployment percentages while a period of good trade is characterized by rising prices and high employment, percentages."


There are four phases of trade cycle, depression , recovery, boom and recession. Let us discuss one by one.

Slump or Depression :-

In the period of depression economic activities are low and there is a fall in the national income, employment and production. The costs are relatively higher than the prices. Profit falls and there is a reduction in the consumer and capital goods, producer suffers loss. Bank credit demand also falls. Effective demand and savings remains low. In the world this phase occurred in 1710, 1837, 1873, 1893, 1907, and 1929.

2. Recovery :-

This phase develops when the stock with the businessman is exhausted. Due to this cost begins to decline and the prices which are at its lowest level stop falling further. There is complete harmony between cost and price. Profit begins to re-appear in the business. The repairs and replacement of capital equipment starts. There is a gradual re-employment of labour. The money income increases the purchasing power. Govt. also starts some productive and non-productive projects. The commercial banks also expand the credit. The marginal efficiency of capital begins to rise and rate of investment increases.

3. Expansion Phase or Boom :-

In this phase economic activities increases production, prices, employment, wages, interest rate, profit volume of credit and investment also increases. New plants and factories are set up and old ones are fully utilized. Demand for labour increases and there is a rich profit.

Note :- It is not necessary that boom should reach the level of full employment.

4. Recession :-

In this phase the costs begins to increases than the prices. Because the less efficient factors of production are employed at higher costs. The profit begins to disappear. A wave of pessimism and uncertainly prevails in the business. There is a fall in the production, Investment and employment. Even the businessman closing the business.
The recession phase comes to an end and goes into depression. These four phases goes on replacing each other.

ACCORDING TO SAMUELSON :- " Business conditions never stands still. Prosperity is followed by panic."


Wednesday, 25 May 2011

What is Monetary Policy and discuss the objectives of Monetary Policy

Meaning of Monetary Policy :-
Monetary policy refers to the measures which the central bank of the country takes in controlling the money and credit supply in the country with a view to achieving certain specific economic objectives.

Objectives of Monetary Policy :-

The objectives of monetary policy differ from country to country according to their economic conditions. In the less developing countries like India or Pakistan its objective may be the maintenance of monetary stability and help in the process of economic development. In the developed countries its objective may be to achieve full employment, without inflation. Anyhow following are the main objectives of the monetary policy.

1. Control of Inflation and Deflation :-
Inflation and deflation both are not suitable for the economy. If the price level is reasonable and there is an adjustment between the price and cost, rate of out put can increase. Monetary policy is used to coordinate the cost and price. So price stability is achieved through the monetary policy.

2. Exchange Stability :-
Monetary policy second objective is to achieve the stable foreign exchange rate. If the rate of exchange is stable it shows that economic condition of the country is stable.

3. Economic Development :-
Monetary policy plays very effective role in promoting economic growth by providing adequate credit to productive sectors.

4. Increase in the Rate of Employment :-
Monetary policy another objective is to achieve full employment but without inflation.

5. Equal Distribution of Credit :-
Monetary policy should also ensure that distribution of credit should be equitable and purposeful. The credit priority should be given to backward areas.

6. Improvement in Standard of Living :-
It is also the major objective of the monetary policy that it should improve the quality of life in the country.

These are the objectives of the monetary policy but efforts should be made to minimize the conflicts.


Define Inflation and what are the causes of Inflation in India or Pakistan and suggest Measures to remove it

According to Gardner Ackely " A Persistent and appreciable rise in the general level of prices is called inflation."

There are so many causes of inflation in the less developing countries like India and Pakistan.

It is generated when aggregate demand increases then the supply. Following are the causes of demand pull inflation in India and Pakistan.

i ). High Monetary Expansion :-
The supply of money expanding quickly every year but the supply of goods and services is not increasing according to that rate. Due to this prices are rising.

ii ). Foreign Remittances :-
These are sent by those people who are working abroad. Those families who are living in India or Pakistan there purchasing power increasing day by day. In other words their demand is increasing in India or Pakistan.

iii ) Foreign Aid :-
The volume of foreign aid is also increasing with the passage of time. According to Finance Minister every year we receive million dollars aid. So when this aid is used inside the country it increases the demand.

iv ). Consumption Habits :-
In India or Pakistan urban population particularly feels proud spending money on those items which are commonly used in the advanced countries. So there is a demonstration effect also in India or Pakistan.

v ). Construction of Houses :-
Since 1970, the people are spending their savings on the purchase and construction of houses. So this expenditure has also contributed inflation.

vi ). Nationalization of Industries :-
After the nationalization of industries in India and Pakistan, the investors class is hesitating to do the investment due to the fear of nationalization. Now they are using their resources in speculation and in hoarding.

vii ). Increase in Wages :-
The rise in wages, salaries and pensions have increased the purchasing power of the people. Wages and prices chase each other.

viii ). Increase in Population :-
The rate of population growth in India or Pakistan and other less developing countries 3% due to this aggregate demand is increasing day by day.

In India or Pakistan it has also occurred in the following ways :

i ). Increase in Indirect Taxation :-
The government increasing the taxes on goods every year. The indirect taxes have also increased the rate of inflation.

ii ). Rising Prices of Imported Goods :-
Different commodities are imported whose prices are rising in the world market. So these commodities also bring inflation with them.


1. Restriction on the Import of Luxury Items :-
The import of luxury items must be restricted. It will protect us from international inflation and it will be favorable for the balance of payment.

2. Cut on Expenditure :-
There should be a drastic cut on the non-productive expenditure.

3. Denationalization :-
Nationalized industries should be denationalized and private sector should be allowed to play its role more efficiently.

4. Change in Taxation System :-
The taxation system should be revised in order to encourage the private sector. Tax holidays should be given to expand the industrial sector.

5. Sick Industries Problem :-
Sick industries should be handed over to private sector and their production and profit can be restored.

6. Market Economy :-
Market economy should be allowed to function and there should be no fixation of price.

7. Check on Unplanned Cities :-
The unplanned and unregulated growth of cities should be checked.

8. Effective Administration :-
The administration should be made effective and clean to increase the out put of the country.

9. Discipline :-
Discipline should be restored in factories and offices to improve the out put of country.

10. Coordination Between Monetary and Fiscal Policy :-
Government should coordinate the monetary and fiscal policy in such a manner that it should check the rate of inflation.


1. When prices rises businessman and entrepreneurs are greatly filled.

2. When prices are rising investment expands.

3. Debtor obtain greater advantage while creditor suffers a loss.

4. During inflation farmers reap greater profit.

5. People who receive fixed income also suffer heavily.

6. Inflation also creates social unrest and unemployment in the country.

7. The tax payers feel easy to pay tax in case of inflation.


Keynes General Theory of Income and Employment or Explain the following concepts Effective Demand and Aggregate Demand

Keynes General Theory of Employment :-
Keynes offered this theory in 1936. Keynes explained in this theory that employment depends upon the income. If the standard of national income is higher then rate of employment will also be higher. On the other hand if the level of national income is lower then the level of employment will also be lower. The equilibrium level of income and employment will be that where aggregate demand is equal to the aggregate supply.

1. It has been assumed that period taken is short run.
2. There is no change in the amount of capital.
3. There is no change in technology and efficiency of labour.
4. There is no foreign trade.
5. There is no government interference.
6. The propensity to consume is stable.
7. There should be no change in the methods of production.
8. There should be no change in a distribution of wealth.
9. Employment is the function of the income.

Keynes proved this fact that supply can not create its own demand, and there is no tendency of the economy towards full employment. If at any time aggregate demand falls, then unemployment takes places and if aggregate demand increases then inflation takes place. As regards the question of national income and employment determination it is determined by the aggregate supply and aggregate demand.

According to Keynes aggregate supply is equal to national income at market price. In other words national income is equal to the price of goods and services produced in the country.The national income is divided into three parts, consumption saving and taxes. So Aggregate supply = National income = Consumption + Savings + Taxes
AS = Y = C + S + T

In the above Figure real national income is measured along OX axis and expected revenue along OY. This 45 degree curve "OS" shows the aggregate supply. It explains that which minimum revenue should be received to the producers and they may be able to produce a particular amount of goods and services and may be able to provide employment to the workers.

Aggregate demand is the amount of consumption and amount of investment expenditure at each level of income.
There are two components of aggregate demand.

1. Consumption expenditure ( C ).
2. Investment expenditure ( I ).
Aggregate demand can be expressed as Y = C + I

Consumption Expenditure :-
It depends upon the size of national income. If the size of national income is greater then greater amount will be spent on consumption. In other words the marginal propensity to consume is grater then the gap between consumption and income is small and the level of employment will be high.

Investment Expenditure :-
The investment expenditure depends upon the following two factors :

1. Marginal Efficiency of Capital
2. Current Rate of Interest
If the marginal efficiency of capital is lower than the rate of interest, the demand for investment will be low. The aggregate demand curve rises upward from left to right.

According to Keynes the level of income and employment is determined at a point there aggregate demand curve intersect aggregate supply curve.
Now by the following diagram we can explain it :

Explanation :- In the above diagram income is measured along OX-axis and consumption and investment along OY. OS curve shows the aggregate supply (45 degree) or C + S line. C + I is the aggregate demand curve.
Aggregate demand and supply curves intersect each other at the point "M". M is the point of effective demand and OP is the equilibrium level of national income. If we assume that national income is greater than OP in that situation new equilibrium point will be F. If total expenditure fall short then the aggregate supply, the producer will also reduce the production. Further income and employment will also reduce and again equilibrium will be M.


1. In the under developed countries there are so many other factors which are responsible for unemployment, like over population and lack of skill.
2. Perfect competition is not found in real world.
3. In the long run its chances of success are limited.
4. It is not applicable in socialistic economy.
5. This theory was produced by the depression of 1930 and it is not applicable in ordinary economic condition.

Anyhow this theory has much importance for all the countries.


State the Say's Law of Markets and how does it represents the Classical Economists or Critically examine the Say's Law of Market

The classical economists were of the view that economy has always tendency to operate at the level of full employment. If at any time general over production or general unemployment takes place in the country, it will purely temporary. The assert that market forces automatically allocate resources among different uses and determines the share of each factor of production and help the economy to operate at the level of full employment, if government adopts the non-interference policy. The assumption of full employment is based on the says law of market.

J.B Say was french economist. He says that aggregate demand is always equal to the aggregate supply. There can be no general over production or unemployment in the country and in the long run supply always creates its own demand. If at any time excess commodities are produced then excess demand is automatically created. According to this law the income of the community is spent at such rate that it automatically maintains full employment. The income is mostly spent on consumption and the rest is saved. The savings are again spent on capital, goods. There is a circular flow of national income.

As regard aggregate saving and aggregate investment, it is again automatically maintained through the rate of interest. If total savings exceeds then the total investment at any particular time, the rate of interest will fall. If the volume of saving is lower than the volume of investment, the rate of interest will go up. The equality between the saving and investment at full employment level is brought about the changes in the rate of interest.According to says market has a capability to expand with the increase in supply. So supply always creates its own demand. David Recardo, J.S.Mill and Malthus agreed with the statement that supply always creates its own demand.
But classical economists admit that there can be voluntary unemployment and over production.


1. It has been assumed that government should interfere in the economic affairs of the public.
2. All the savings must be used for investment.
3. The extent of the market depends upon the volume of production of wealth.
4. Rate of wages is equal to marginal product.
5. Labour is not ready to accept the reduction in wages.
6. There is no gap in national income as it received and it is spent.
7. Rate of interest brings an equilibrium in the savings and investment.
8. Prices and wages are elastic.
9. This law is applicable in a free enterprise economy.


Keynes has criticized this theory on the following grounds :

1. Savings are not Always Equal to Investment :-
It is not correct to say that savings are always equal to each other because savers and investors are different people.

2. Interference of Government :-
In the present age it is not possible that government should not interfere in economic affairs.

3. 1930 World Depression :-
19030, world depression has proved the failure of this law.

4. Trade Cycle Case :-
This theory does not throw light on the trade cycle.

5. No Perfect Competition :-
In real world, we can not find the conditions of perfect competition.

6. Below or Above the Level :-
According to Keynes, the equilibrium of the economy can take place below or above the level of full employment.

7. Supply Creates Demand :-
The aggregate demand remains below the aggregate supply because when income increases, all the money is not spent.

8. Reduction in Real wages :-
It is also wrong to say that unemployment will disappear if the workers accept the reduction in wages. Because when their wages will fall, their purchasing power will also fall, which will adversely affect the economy.


Tuesday, 24 May 2011

Concept of Accelerator

Accelerator :-
The concept of accelerator was introduced by Clark. It shows the opposite effect of multiplier. According to it when income increases it leads to increase in investment.

Example :- When the income of any community rises, the purchasing power of the people increases. They being to buy more goods. The demand for consumption increases. The rise in investment is greater than the rise in demand of consumption goods. So investment is a function of income.
I = F (Y)
Accelerator principle explains the concept that a rise in national income, increases the total demand and expenditure. It leads to investment. The rise in investment will be greater than the rise in income. On the other hand if there is a fall in income, investment will decrease more than the income. There can also be negative effect of accelerator. We can explain it by the following example.

Example :- Let us suppose that there are 100 machines producing 1000 shoes in the country, and average life of the machine is 10 year. It means that every year 10 machines will be reduced to replace the old ten machines. Further we assume that demand for shoes increase by 10%. To meet the new demand, there will be a need of 10 more machines. Now capital industry will produce 20 machines instead ( 0f 10 machines). So we find that 10% increase in consumption goods will increase 100% increase in the production of capital goods. There will also be 100% increase in employment.

Explanation :
1. When there is 10% increase in consumption there is 100% increase in induced investment.
2. If the rate of increase in consumption remains constant the induced investment is zero.
3. If the rate of rise in consumption decreases the induced investment will fall.


1. Constant Ratio :-
It is assumed that the ratio between capital and out put remains constant.

2. Working in Full Capacity :-
It has been assumed that machines are working in full capacity, so further production can not increase.

3. Continuous Increase in Demand :-
It has been assumed that demand of consumption goods increases constantly.

4. Capital Goods Industries :-
It has been assumed that capital goods industries are not working in full capacity. With the increase in demand the capital goods can be produced by the machine working industry.

5. Full Employment :-
There is a full employment in all the industries of consumption goods.


1. Capital Out put Ratio :-
In this theory it has been assumed that capital out put ratio remains constant but it is not correct.

2. Machines Replacement :-
Accelerator is applied on new investment and not on replacement investment.

3. Temporary Demand :-
It is also criticized that temporary increases in demand of consumption goods will not increase the investment.

4. Investment which Lowers the Cost :-
In this theory, that investment is not considered which lowers the cost of production.

5. Financial Condition of the Firm Ignored :-
According to this theory with the rise in the demand of consumption goods, a firm increases the investment. If the financial condition is not sound then it will not be possible for that.


Concepts of Inflationary and Deflationary GAPS and how these can be wiped out by the government

National Income and full Employment :-
The most desirable level of national income is that which is equal to the level of full employment. But it is not necessary that equilibrium of national income is always at the level full employment. It may be below the full employment level or above the full employment level. We can bring the savings equal to the investment by employing all the resources of the country, including human resources.

When the national income is below the level of full employment, it means that at the full employment savings are not utilized by the increase in investment. There is gap between full employment, saving and the actual investment taking place.

Deflationary Gap :-
Samulson says, "The size of deflationary gap is measured by the deficiency of investment schedule at full employment saving."
Deflationary gap arises when C + I or aggregate demand is less than the full employment NNP level.
1. Deflationary gap = National income at full employment level - Total expenditure (C+I).
2. Deflationary gap = National saving at the level of full employment - Real investment.
We can explain it by following diagram :

Explanation :- In this diagram national income is measuring along OX - axis and expenditure along OY. The full employment level is on 45 degree line. The aggregate demand curve (C+I) intersects the aggregate supply curve (45 degree line) at the point "B" CD gap is equal to 40 million rupees which represents the deflationary gap. Now the deficiency in national income will not be equal to 40 million. But due to multiplier it will be more than 40 million. For example if multiplier is 4 then deficiency in income will be 4 x 40 = 160. The equilibrium of national income will be 280 - 160 = 120 at the point "B". Noe this gap shows that sources of the country are under utilized. So to fill this gap there is need of increase in investment. There should be an increase of 40 million in investment, if multiplier is 4 , the gap of 160 million in income will be filled and full employment level will be achieved.

Inflationary Gap :-
It is the opposite to deflationary gap. This gap indicates that situation when the saving fall short then scheduled investment at the level of full employment there is said to be an inflationary gap. When the investment is excess then the real savings and it is above the level of employment, is called inflationary gap.
So the excess of consumption and investment (C+I) cover the full employment gap.
The national income here rises in money terms. The value of money falls short and a country is in the grip of inflation. The desired aim is that economy should operate at the level of full employment. The economy should not operate below the level of full employment. There are two methods of measuring the inflationary gap :
Inflationary gap = Total expenditure - National income at the level of full employment.
Inflation gap = Investment in terms of money - real saving at the level of full employment.

Explanation :- The aggregate supply schedule is the 45 degree helping line. It shows the various levels of out put. The aggregate demand (C+I) cuts the aggregate supply curve at the point "B".
At the level of full employment level equilibrium of national income is 280 million rupees, the total expected expenditure (C+I) is 320 million, which is shown between C and D. So 40 million inflationary gap is available, it is excess investment and there is an increase of 160 million in national income but in terms of money. If we want to remove inflationary gap we will have to decrease only 40 million investment.


Google+ Followers

Best Punjabi song Guzaray by Fysul Mirza

  © Blogger template Blue Surfing by Trade Cycle 2014

Back to TOP