central problems of an economy

Central problems of an economy http://www.preservearticles.com/201103104450/problems-of-an-economy.html The world around us is at work. The basic aim of man is to earn an income in exchange of his service. Wants prompt people to work for the satisfaction of wants. Human wants are unlimited. But a particular want in satiable. The cycle of human wants is never-ending. The resources at the disposal of human beings are limited. The wants of the society are unlimited too. But the resources of the society like those of an individual are limited. Scarcity of resources is found in every society, in every economy.
An economy is a system by which people get a living and satisfy their wants. Wants being unlimited and resources being scarce we individually and collectively cannot satisfy our wants. This gives rise to the problem of how to use scarce resources to attain maximum satisfaction. This is generally called the economic problem. Scarcity lies at the root of all economic problems.
The individual or the society can maximize satisfaction by allocating the scarce resources on satisfying the most urgent wants. They do this by making choices. Such decisions are made continually by the individuals and society everywhere. They all spring from problems concerned with the need for economizing. This is Economics.
The problem of choice is the problem of economics. Economics is a science of choice when faced with unlimited wants and scarce resources. Prof. Lionel Robbins, Watson, Stigler, Stonier and Hague C.E. Ferguson and Scitovsky have defined Economics in terms of scarcity. The careful analysis of the scarcity definition of economics point out that human wants are unlimited, the resources to satisfy the unlimited wants are scarce, the scarce resources have alternative uses the problem of choice is the basic economic problem. This forms the core of economics.
The economic problem of scarcity of resources and multiplicity of human wants gives rise to four central problems of an economy. These four problems are four critical choices. They are:
1. The problem of allocation of resources:
This refers to what to produce. It implies what goods are to be produced and what not and in which quantities these goods are to be produced. This involves several choices for resources allocation and determination of the list of goods to be produced and their quantities.
2. The problem of efficient use of resources:
This is concerned with how the selected goods are to be produced. In other words, it means whether the goods are to be produced by the labour intensive method or capital-intensive method.
3. The problem of distribution of the goods produced:
In other words how the national income should be distributed among the factors of production. Economists have attempted to answer this question from different angles.
4. The problem of full employment of resources:
Under-utilization of resources will pose a serious problem for an economy. Besides, there is the problem of the growth of resources too.
Effective growth of resources is indispensable for attaining a higher standard of living of the people. Economic problems related to the growth of resources are discussed in the branch of Development Economics. The theoretical framework for dealing with the central problems of an economy is spelt in different branches of economic theory.
Prof. Ragnar Frisch of Oslo University has divided economics into Microeconomics and Macroeconomics. Micro means small. Microeconomics means price theory. It deals with the allocation of resources in a market economy. It studies one particular unit. It is elective not aggregative.
On the contrary, macroeconomics is aggregative economics. It is known as the Employment theory or Monetary Theory. It deals with aggregates like national income, national output, national saving, and national investment. Welfare Economics is a separate branch of economics dealing with the problems of efficiency in the sphere of production and distribution. Moreover, many statistical techniques are being used at present to analyse various economic phenomena.

Problems facing Indian economy : 1. Inflation.
Fuelled by rising wages, property prices and food prices inflation in India is an increasing problem. Inflation is currently between 6-7%. A record 98% of Indian firms report operating close to full capacity (2)With economic growth of 9.2% per annum inflationary pressures are likely to increase, especially with supply side constraints such as infrastructure. The wholesale-price index (WPI), rose to an annualised 6.6% in Janu 2007 (1)
2. Poor educational standards.
Although India has benefited from a high % of English speakers. (important for call centre industry) there is still high levels of illiteracy amongst the population. It is worse in rural areas and amongst women. Over 50% of Indian women are illiterate
3. Poor Infrastructure.
Many Indians lack basic amenities lack access to running water. Indian public services are creaking under the strain of bureaucracy and inefficiency. Over 40% of Indian fruit rots before it reaches the market; this is one example of the supply constraints and inefficiency’s facing the Indian economy.
4. Balance of Payments deterioration.
Although India has built up large amounts of foreign currency reserves the current account deficit has deteriorate in recent months. This deterioration is a result of the overheating of the economy. Aggregate Supply cannot meet Aggregate demand so consumers are sucking in imports. Excluding workers remittances India’s current account deficit is approaching 5% of GDP

5. High levels of debt.
Buoyed by a property boom the amount of lending in India has grown by 30% in the past year. However there are concerns about the risk of such loans. If they are dependent on rising property prices it could be problematic. Furthermore if inflation increases further it may force the RBI to increase interest rates. If interest rates rise substantially it will leave those indebted facing rising interest payments and potentially reducing consumer spending in the future

6. Inequality has risen rather than decreased.
It is hoped that economic growth would help drag the Indian poor above the poverty line. However so far economic growth has been highly uneven benefiting the skilled and wealthy disproportionately. Many of India’s rural poor are yet to receive any tangible benefit from the India’s economic growth. More than 78 million homes do not have electricity. 33% (268million) of the population live on less than $1 per day. Furthermore with the spread of television in Indian villages the poor are increasingly aware of the disparity between rich and poor. (3)

7. Large Budget Deficit.
India has one of the largest budget deficits in the developing world. Excluding subsidies it amounts to nearly 8% of GDP. Although it is fallen a little in the past year. It still allows little scope for increasing investment in public services like health and education.

8. Rigid labour Laws.
As an example Firms employing more than 100 people cannot fire workers without government permission. The effect of this is to discourage firms from expanding to over 100 people. It also discourages foreign investment. Trades Unions have an important political power base and governments often shy away from tackling potentially politically sensitive labour laws.