Basic Economic Problems:

I: Poverty:
Poverty is the scarcity or the lack of a certain (variant) amount of material
possessions or money. It refers to the complete lack of the means necessary to meet basic
personal needs such as food, clothing and shelter.
Types of Poverty:
Situational Poverty (Transitory)
People or families can be poor because of some difficulties like earthquakes, floods or
a serious illness. Sometimes, people can help themselves out of this situation quickly if
they are given a bit of assistance, as the cause of their situations was just one unfortunate
event.
Generational or Chronic Poverty
This is a more complicated type and we will see a detailed example here. This is when
poverty is handed over to individuals and families from generations before them. In this type,
there is usually no escape from it, as people are trapped in its causes and have no access to
tools that will help them get out of it.
Absolute Poverty
It is the extreme kind of poverty involving the chronic lack of basic food, clean water,
health and housing. People in absolute poverty tend to struggle to live and experience a lot of
child deaths from preventable diseases like malaria, cholera and water-contamination related
diseases. This type is usually long-term in nature, and often handed to them by generations
before them. This kind of poverty is usually not common in the developed world.
 Relative Poverty
This kind is usually in relation to other members and families in the society. For
example, a family can be considered poor if it cannot afford vacations, or cannot buy presents
for children at Christmas, or cannot send its young to the university. Even though they have
access to government support for food, water, medicine and free housing, they are considered
poor because the rest of the community have access to superior services and amenities.
Urban
This particular type of poverty is only for metropolitan areas with populations over
50,000. Overcrowding, violence, noise, and poor community help programs make it even
more difficult for people suffering of this type of poverty to get out of it.
Rural
Rural poverty occurs only in nonmetropolitan areas with populations below 50,000.
The low population limits services available for people struggling financially, and a lack of
job opportunities only compounds the problem.
Causes of Poverty:
Primary causes of poverty
 Unemployment
 Inflation
 Debt
 Corruption
 Extreme weather
 Over Population
Measure to control poverty:
1. Accelerating Economic Growth:
According to this view, benefits of economic growth will trickle down to the poor in
the form of more employment opportunities, greater productivity and higher wages. With this
it was expected that the poor will be raised above the poverty line.
Lewis’ model of economic development with unlimited supplies of labour suggested rapid
growth of the modern industrial sector to tackle the problem of poverty in the long sun. For
this purpose, they suggested for increasing the rate of capital formation so as to generate
more employment opportunities and increase productivity of labour.
2. Agricultural Growth and Poverty Alleviation:
Agricultural growth has been recognized as an important factor that contributes to marked
reduction in poverty. A study made by Montek Ahuluwalia, former member of Planning
Commission, brought clearly that agricultural growth and poverty are inversely related; the
higher agricultural growth leads to lower poverty ratio.
3. Speedy Development of Infrastructure:
An important measure to generate employment opportunities for the poor and to raise their
productivity is the speedy development of infrastructure. Since private sector is not attracted
to make adequate investment in infrastructure, public investment needs to be stepped up for
its development. Infrastructure development consists of building of roads, highways, ports,
telecommunication, power and irrigation. They involve mainly construction work which is
highly labour intensive.
4. Accelerating Human Resource Development:
Human resource development requires greater investment in educational facilities such as
schools to promote literacy, technical training institutes and vocational colleges to import
skills to the people. This human resource development not only generates a good deal of
employment opportunities but also raises productivity and income of the poor. Further,
people equipped with skills, education can easily get wage employment or self-employment
with higher productivity.
5. Growth of Non-Farm Employment:
Non-farm employment is created in marketing (i.e., petty trade), transportation, handicrafts,
dairying, and forestry, processing of food and other agricultural products, repair workshops.
6. Access to Assets:
Rapid growth of population after independence has led to greater sub- division and
fragmentation of agricultural holdings and lack of employment opportunities in industries and
other non-farm sectors has worsened the conditions of agricultural labour and self-employed
small farmers.
7. Access to Credit:
Availability of credit to the poor on easy terms can create the conditions for small farmers
gaining access to productive resources .This will enable the small farmers to adopt high-
yielding technology to raise their productivity.
8. Public Distribution System (PDS):
Poor households spend nearly 80 per cent of their income on food. Therefore, an effective
way of raising rural incomes and ensuring food security to the poor households is an assured
supply of adequate quantity of food-grains and other essential commodities at subsidised
prices, that is, at prices which are lower than the market prices. A properly functioning public
distribution system which is targeted to the poor households is an important element of the
strategy for poverty reduction.
9. Direct Attack on Poverty: Special Employment Schemes for the Poor:
It was realized in the early seventies that it would take a very long time for economic
growth to generate enough employment opportunities to provide productive employment to
all the unemployed and poor in the country. Therefore, a strategy of providing employment to
the poor in the short run, special schemes of employing poor is the preeminent measure to
control poverty.

II: Unemployment:
Unemployment or joblessness is the situation of actively looking for employment but
not being currently employed.
Types of Unemployment:
1. Voluntary Unemployment:
In every society, there are some people who are unwilling to work at the prevailing
wage rate, and there are some who are lucky enough to get a continuous flow of unearned
income from their unemployed status. Jobs are available for them but they do not want to
accept them.
2. Frictional Unemployment:
According to economists like Keynes and Lerner frictional unemployment is a kind of
unemployment which is quite consistent with the condition of full employment in an
economy. Frictional unemployment is due to difficulties in getting workers and vacancies
together. When some workers are temporarily out of work while changing jobs, it is called
“frictional unemployment.” Similarly, strikes and lockouts may result in the suspension of
work, and there may exist some frictional unemployment for the time being.
3. Casual Unemployment:
In industries such as building construction, catering or agriculture, where workers are
employed on a day- to-day basis, there are chances of casual unemployment occurring due to
short-term contracts, which are terminable any time.
4. Seasonal Unemployment:
There are some industries and occupations such as agriculture, the catering trade in
holiday resorts, some agro-based industrial activities, like sugar mills and rice mills, etc., in
which production activities are seasonal in nature. So, they offer employment for only a
certain period of time in a year.
5. Structural Unemployment:
Structural unemployment is caused by a decline in demand for production in a
particular industry, and consequent disinvestment and reduction in its manpower
requirements.
6. Technological Unemployment:
Technological unemployment is basically created by introduction of machinery. But,
it is a temporary phenomenon. In the long run, the development effectuated by the use of
more capital leads to diversification of activities and promotion of many allied industries
which would create additional job opportunities so that the unemployed workers will be
absorbed in a more remunerative way.
7. Cyclical Unemployment:
Cyclical unemployment is a factor of overall unemployment that relates to the regular
ups and downs, or cyclical trends in growth and production, that occur within the business
cycle. When business cycles are at their peak, cyclical unemployment will tend to be low
because total economic output is being maximized.
8. Chronic Unemployment:
When unemployment tends to be a long-term feature of a country it is called “chronic
unemployment.” Underdeveloped countries suffer from chronic unemployment on account of
the vicious circle of poverty. Lack of developed resources and their underutilisation, high
population growth, backward, even primitive state of technology, low capital formation, etc.
are the major causes of chronic unemployment in underdeveloped economies.
9. Disguised Unemployment:

The term “disguised unemployment” commonly refers to a situation of employment with

surplus manpower, in which some workers have zero marginal productivity so that their
removal will not affect the volume of total output.

Main Causes of Unemployment

(i) Caste System:
In India caste system is prevalent. The work is prohibited for specific castes in some
areas. In many cases, the work is not given to the deserving candidates but given to the
person belonging to a particular community. So this gives rise to unemployment.
(ii) Slow Economic Growth:
Indian economy is underdeveloped and role of economic growth is very slow. This
slow growth fails to provide enough unemployment opportunities to the increasing
population.
(iii) Increase in Population:
Constant increase in population has been a big problem in India. It is one of the main
causes of unemployment. The rate of unemployment is 11.1% in 10th Plan.
(iv) Agriculture is a Seasonal Occupation:
Agriculture is underdeveloped in India. It provides seasonal employment. Large part
of population is dependent on agriculture. But agriculture being seasonal provides work for a
few months. So this gives rise to unemployment.
(v) Joint Family System:
In large families having big business, many such persons will be available who do not
do any work and depend on the joint income of the family.
(vi) Fall of Cottage and Small industries:
The industrial development had adverse effect on cottage and small industries. The
production of cottage industries began to fall and many artisans became unemployed.
(vii) Slow Growth of Industrialization:
The rate of industrial growth is slow. Though emphasis is laid on industrialization yet
the avenues of employment created by industrialization are very few.
(viii) Less Savings and Investment:
There is inadequate capital in India. Above all, this capital has been judiciously
invested. Investment depends on savings. Savings are inadequate. Due to shortage of savings
and investment, opportunities of employment have not been created.
(ix) Causes of Under Employment:
Inadequate availability of means of production is the main cause of under
employment. People do not get employment for the whole year due to shortage of electricity,
coal and raw materials.
(x) Defective Planning:
Defective planning is the one of the cause of unemployment. There is wide gap
between supply and demand for labour. No Plan had formulated any long term scheme for
removal of unemployment.
(xi) Expansion of Universities:
The number of universities has increased manifold. There are 385 universities. As a
result of this educated unemployment or white collar unemployment has increased.
(xii) Inadequate Irrigation Facilities:
Even after the completion of 9th five plans, 39% of total cultivable area could get
irrigation facilities.
(xiii) Immobility of labour:
Mobility of labour in India is low. Due to attachment to the family, people do not go
too far off areas for jobs. Factors like language, religion, and climate are also responsible for
low mobility. Immobility of labour adds to unemployment.

III Inflation:
Inflation is a quantitative measure of the rate at which the average price level of a
basket of selected goods and services in an economy increases over a period of time. Often
expressed as a percentage, inflation indicates a decrease in the purchasing power of a nation's
currency.

Types of Inflation:
A. On the Basis of Causes:
(i) Currency inflation:
This type of inflation is caused by the printing of currency notes.
(ii) Credit inflation:
Being profit-making institutions, commercial banks sanction more loans and advances to the
public than what the economy needs. Such credit expansion leads to a rise in price level.
(iii) Deficit-induced inflation:
The budget of the government reflects a deficit when expenditure exceeds revenue. To meet
this gap, the government may ask the central bank to print additional money. Since pumping
of additional money is required to meet the budget deficit, any price rise may the be called
the deficit-induced inflation.
(iv) Demand-pull inflation:
An increase in aggregate demand over the available output leads to a rise in the price level.
Such inflation is called demand-pull inflation (henceforth DPI).
(v) Cost-push inflation:
Inflation in an economy may arise from the overall increase in the cost of production. This
type of inflation is known as cost-push inflation (henceforth CPI). Cost of production may
rise due to an increase in the prices of raw materials, wages, etc.

B. On the Basis of Speed or Intensity:

(i) Creeping or Mild Inflation:
Creeping inflation is a rise in the general level of prices of goods and services over a
period of time. In everyday lingo, it is usually associated with steep price increases, but in
fact refers to any increase, however big or small.
(ii) Walking Inflation:
Such an increase in prices is regarded safe and essential for economic growth. (b)
Walking or Trotting Inflation: When prices rise moderately and the annual inflation rate is a
single digit (3% - 10%), it is called walking or trotting inflation.
(iii) Galloping and Hyperinflation:
 Galloping or Hyperinflation: When prices rises between 20% to 100% per annum or
even more, it is called galloping or hyperinflation. Such a situation brings a total collapse of
the monetary system because of the continuous fall in the purchasing power of money.