Dib april 2016 economics

DIB April’16 (102 : Principles of Economics) 1. ( a) Discuss the basic principles of Islamic Economic System and compare it with Capitalistic Economic System.

Ans. Some of the principles of the Islamic economic system, as laid down by the Qur’an and the Sunnah, are discussed as follows: 1. Allah determines Right and Wrong: Allah is empowered to pronounce what is right and what is wrong. Allah has made demarcation between lawful and unlawful in the economic sphere and has allowed man to enjoy those food items and other articles of use which are lawful and avoid those things which are unlawful. No human being has power to say what is right (Halal) and what is wrong (Haram).

2. Principle of Use: Within the bounds of lawful (Halal) and unlawful (Haram) prescribed by Allah and also keeping in view the rules of moderation and prudence, the man has been allowed to make full enjoyment of God’s gifts bestowed on him.

3.Principle of Moderation: Islam unequivocally discourages its followers to cross the limits and follow extremes. The Muslims have been called by the Qur’an a middle nation (2:143). Therefore, the principle of moderation carries paramount importance especially in the economic field. This principle is followed by the true believers in the production of wealth as well as in the consumption and spending of wealth.

4. Economic Freedom: Every individual, according to Islam, is accountable for his actions done in this world. He would be rewarded for his good actions and punished for his evil actions in the hereafter.

Accountability for individual’s actions is meaningless if the individual is not provided reasonable freedom to act independently. Therefore, Islam puts highest value on individual’s freedom of action in every field of human activity such as social, political, economic religious, moral, etc.

5. Principle of Justice: Islamic principle of justice operates in every sphere of human activity, may it be legal, social, political or economic. Islamic economic system, in fact is based upon the principle of justice which governs all the basic aspects of economy like production, distribution, consumption and exchange.

6. Money is Allah’s property : This means that Allah holds us accountable for money issues; how we earn it and who we spend it.We are obliged to earn money in a legitimate and honest fashion and refrain from using it to hurt others or spending it in an unlawful manner 7. The role of money: Money is a means to value items and to facilitate the exchange or trading of goods; it is not a commodity in and of itself, nor is it a tradable item, consequently money itself, is not to be sold, bought or leased.

8. There is a balance between individual and group interests: In an Islamic economy, the interests of both individuals and communities are addressed, because individuals and communities are not foes and work in harmony.

9. There is a balance between spiritual needs and material needs: Islam encourages such a balance.

Allah says: (O ye who believe! When the call is heard for the prayer of the day of congregation (Friday), haste unto remembrance of Allah and leave your trading. That is better for you if ye did but know. And

when the prayer is ended, then disperse on the land and seek of Allah’s bounty, and remember Allah much, that ye may be successful)[Al-Jumua: 9] 10. Islamic economy is an ethical economy: In Islam the economy and ethics are inseparable unlike other economic systems used in the world,. Consequently, the required qualities of a Muslim economist include being honest, trustworthy, tolerant, decent, humble, merciful and caring. These qualities are one of the reasons why Islam spread throughout the Far East, to both Indonesia and China.

11. Principles of Risk-sharing: This is the basis of all Islamic economies and the characteristic that distinguishes an Islamic economic system from other systems around the world.The sharing of profits and losses is a rule designed to divide wealth between the capital and the efforts and it’s the principle that supports justice in wealth distribution.

12. Private ownership: In an Islamic economy, the right to private ownership is protected providing it does not hurt other members of the society, which can occur when a monopoly exists. This characteristic differs from the communist economic system, which considers everything as public property 13. Public ownership: In an Islamic economy system, public utilities that are essential to people’s lives are the property of the State or under its supervision. This approach helps facilitate the basic needs for al human life and the community’s interest and is contrary to a capitalist economic system, which allows the ownership of everything or anything.

14. Islam’s system of inheritance: In an Islamic economy system the wealth of deceased individuals is distributed among family members. It is not left to accumulate; rather it is divided and distributed to inheritors in a specific and detailed system as outlined in the Holy Quran.

15. Charities and endowment funds: Charity is one of the main characteristics of an Islamic economy.

It seeks to promote social solidarity and to address the needs of the poor, by identifying some projects to raise funds for the needy.

16. Market monitoring: An Islamic economic system has a market monitoring system, however it does not interfere by setting or changing prices, such actions are undertaken only to prevent wrongful action and adjust things should a transaction be performed wrong.

17. Usury is Haram : Usury is best described as the interest one is charged when offered a loan. Under Islamic law it is strictly forbidden to charge interest on the loaning of money as this practice leads to taking advantage of people and turning the money into a commodity itself.

18. Monopolies is Haram: Monopolies are strictly forbidden in Islam because they go against the interests of the general public.

19. Limitations on trade practices: The trading of illegal items is strictly forbidden – this would include transactions for drugs, prostitution services, pornographic materials and alcoholic beverages.

The principles of capitalistic Economy.

1. Private Property 2. Private Enterprise 3. Competitive Markets 4. Profit Motive 5. Laissez-faire (hands off)

(b) Distinguish between microeconomics and macroeconomics Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. This means also taking into account taxes and regulations created by governments. Microeconomics focuses on supply and demand and other forces that determine the price levels seen in the economy. For example, microeconomics would look at how a specific

company could maximize its production and capacity so it could lower prices and better compete in its industry.

Macroeconomics, on the other hand, is the field of economics that studies the behavior of the economy as a whole and not just on specific companies, but entire industries and economies. This looks at economy-wide phenomena, such as Gross National Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels. For example, macroeconomics would look at how an increase/decrease in net exports would affect a nation's capital account or how GDP would be affected by unemployment rate.

While these two studies of economics appear to be different, they are actually interdependent and complement one another since there are many overlapping issues between the two fields. For example, increased inflation (macro effect) would cause the price of raw materials to increase for companies and in turn affect the end product's price charged to the public.

The bottom line is that microeconomics takes a bottoms-up approach to analyzing the economy while macroeconomics takes a top-down approach. Microeconomics tries to understand human choices and resource allocation, and macroeconomics tries to answer such questions as "What should the rate of inflation be?" or "What stimulates economic growth?"

Regardless, both micro- and macroeconomics provide fundamental tools for any finance professional and should be studied together in order to fully understand how companies operate and earn revenues and thus, how an entire economy is managed and sustained. (a ) State the law of demand. What is meant by a demand schedule and demand curve. Illustrate the law of demand with two cases from your own experience. ( a) The Law of Demand The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The diagram below shows that the curve is a downward slope.

Demand Schedule The demand schedule illustrates the relationship between price and quantity demanded by using a table of figures. The demand schedule generally consists of two columns: one for the price of a product and one for the quantity demanded at that price. The price column displays different price levels, arrayed from lowest to highest, or vice versa, while the quantity demanded column displays the quantity of that good or service demanded at each price level. The demand schedule for most products will show a reduction in quantity demanded as the price increases.

Demand Curve The demand curve is a visual form of the demand schedule. Economists depict the demand schedule on a two-dimensional graph, consisting of a vertical axis representing price and a horizontal axis representing quantity demanded. The vertical axis displays different price levels from highest to lowest, while the horizontal axis displays different levels of demand. The apex of the vertical and horizontal axis has a value of zero for both quantity and price. Mankiw notes that the demand curve for most products slopes downward, indicating an increase in demand as the price declines.

Relationship The demand schedule and demand curve are complementary ways of examining the relationship between price and quantity demanded. The demand schedule helps create the demand curve. The individual rows in the demand schedule, showing specific price points and quantity demanded, provide the coordinates to be plotted on the graph. After plotting the individual coordinates, an analyst or business manager can draw the demand curve that connects the individual points.

Illustrate the law of demand : Demand schedule Price in Taka.

Demand in Kg.

5

100

4

200

3

300

2

400

The table shows the demand of all the consumers in a market. When the price decreases there is increase in demand for goods and vice versa. When price is Tk.5 demand is 100 kilograms. When the price is Tk.4 demand is 200 kilograms. Thus the table shows the total amount demanded by all consumers various price levels.

Diagram

There is same price in the market. All consumers purchase commodity according to their needs. The market demand curve is the total amount demanded by all consumers at different prices. The market demand curve slopes from left down to the right.

Qs. Describe the advantages and disadvantages of large scale and small scale production.

Ans : Advantage of Large scale production: Efficient use of capital equipment: There is large scope for use of machinery, which results in lower costs.

A Large producer can install an up-to- date and expensive machinery. He can also have own repairing unit. Specialized in machinery can be employed for each job. The result is that production is very economical. Small producer with small markets can't keep the machinery continuous working. Keeping it idle is uneconomical. A large Producer can work it continuously and reap resulting economies.

Using of specialized labor: Specialized labor produce a large output and of better quality. It is only in a large business organization that every person can be put on the job that he can best perform. Better utilization of special in management: The use of capable manager's time in an enlarged scale production.

His assistance and specialized may be used in a large-scale production where his ability is more fruitful.

Economies of buying and selling: While purchasing raw material and other accessories, a big business can secure especially favorable term an account of its large custom. He can attract customer by offering a greater variety and by ensuring prompt execution of the orders, placed with it when he selling a product.

Economy in rent: A large-scale producer makes a saving in rent too. If the same factory made to produce a large Quantity of goods, the same amount of rent is divided over a large output. This means a smaller addition to the cost per unit in the form of rent.

Experiment and research: A large concern can afford to spend liberally on research and experiments.

Successfully research may lead to the discovery of cheaper process.

Advertisement and salesman ship: A big concern can afford to spend large amount of money on advertisement and salesmanship. Amount of money spent on advertisement per unit comes to a low figure when production is on large scale. Salesman can make a careful study of individual markets and thus acquire a hold on new market or strengthen it on old ones.

Utilization of by-products: A big producer will not have to throw away any of it's by products or waste products. It will be able to make an economical use of them.

Meeting adversity: A big business can show better resistance in times of adversity. It has much better recourses. Losses can easily bear.

Cheap credit: A large business can secure credit facilities at cheap rate. Its credit in the money market is high and banks are only two willing to give advance. Low cost of credit reduces cost of production.

Disadvantage of large-scale production: Over-worked management: A large-scale producer cannot pay off that you can think of full attention to every detail. Costs often rise on account of the employees or waste of material by them. This is due to the lack of supervision. Owing to laxity of control costs of production go up. The management is overworked.

Individual tastes ignored: Large-scale production is a mass production or standardized production. Goods of uniform quality are turned out irrespective of the preferences of individual customers. Individual tastes are not therefore, satisfied.

Personal element: Paid employees generally manage a large-scale business. The owner is usually absent.

The sympathy and personal touch, which ought to exit between the master and the men, are missing frequent misunderstandings lead to strikes and lack outs. This is positively harmful to the business.

Possibility of depression: large-scale production may result overhead production. Production may exceed demand and cause depression unemployment. It is not always easy or profitable to dispose of a large output.

Dependence on foreign market: A large-scale producer has generally to depend on foreign markets. The foreign markets may be cut off by war or some other political upheaval this makes the business risky.

Cut throat competition: Large-scale producers must fight for the markets. These are wasteful competition, which does not to society. Many promising businesses are ruined by senses competition. There is also competition and biddings for resorts and inputs.

International complications and war: When the large-scale producer operates on an international scale, their interest clash either on the score of markets or of materials. These complications sometimes lead to armed conflicts. Many a modem war a rose on account of scramble for materials & markets.

Lack of adaptability: A large scale producing units find it's very difficult to switch on from one business to another, in a depression small firms are able to move away from declining trades to flourishing ones easily. In this way they are able to avoid losses. This adaptability is lacking in a big business.

Q. What is perfect competition market ? Discuss the features of perfect competition. Show graphically, how a competitive firm reaches equilibrium in the short run ?

A perfect market is one where there is perfect competition. This is a model market. It implies absence of rivalry.

According to Boulding, “the competitive market may be defend as a large number of buyers and sellers all engaged in the purchase and sale of identically similar commodity, who are in close contact with one another and who buy and sell freely among themselves�.

Features of Perfect Competition 1. Large number: In perfect competition, there must be large number of buyers and sellers. Each buyer buys a small quantity of the total amount. Each seller is so large that no single buyer or seller can influence the price and affect the market. According to Scitovsky buyers and sellers are price takers in the purely competitive market. Each seller (or firm) sells its products at the price determined by the market. Similarly, each buyer buys the commodity at the price determined by the market.

2. Homogeneous product: Under perfect competition, the product offered for sale by all the seller must be identical in every respect.

The goods offered for sale are perfect substitutes of one another. Buyers have no special preference for the product of a particular seller. No seller can raise the price above the prevailing price or lower the price below the prevailing price.

3. Free entry and exit: Under perfect competition, there will be no restriction on the entry and exit of both buyers and sellers. If the existing sellers start making abnormal profits, new sellers should be able to enter the market freely.

This will bring down the abnormal profits to the normal level. Similarly, when losses will occur existing sellers may leave the market. However, such free entry or free exit is possible only in the long run, but not in the short-run.

4. Perfect knowledge: Perfect competition implies perfect knowledge on the part of buyers and sellers regarding the market conditions. As a results, no buyer will be prepared to pay a price higher than the prevailing price. Sellers will not charge a price higher or lower than the prevailing price. In this market, advertisement has no scope.

5. Perfect mobility of factors of production: The second perfection mobility of factors of production from one use to another use. This feature ensures that all sellers or firms get equal advantages so far as services of factors of production are concerned. This is essential to enable the firms and industry to achieve equilibrium.

6. Absence of transport cost: Under perfect competition transport, cost does not exist. Since commodities have, the same price it logically follows that there will be no transport cost. In the event of the presence of cost of transport, there will be no single price in the market. Transport cost occurs when there is no perfect knowledge of the market conditions on the part of buyers and sellers.

7. No attachment: There is no attachment between the buyers and sellers under perfect competition. Since products of all sellers are identical and their prices are the same a buyer is free to buy the commodity from any seller he likes. He has no special inclination for the product of any seller as in case of monopolistic competition or oligopoly. Theoretically, perfect competition is irrelevant. In reality, it does not exist. So it is a myth.

Short run equilibrium First of all, we need to look at the possible situations in which firms may find themselves in the short run.

With each of the three diagrams above, the situation for the firm is only drawn. The 'market' diagram, from which the given price is derived, is the same every time, so I've missed it out. The main thing is that you understand that the prices P1, P2 and P3 are determined by market demand and market supply. Also note that in all three diagrams, the MC curve cuts the AC curve at its lowest point. Look back at the 'Costs and revenues' topic if you don't remember why.

The three diagrams show the three situations in which a firm could find itself in the short run.

In the top diagram, the given price is P1. The firm wants to maximise profits, so it produces at the level of output where MC = MR. This occurs at point A. Drop a vertical line to find the firm's output (Q1). At Q1, AR > AC and the difference between average revenue and average cost is the distance AB. This is the profit per unit. To find the total super normal profit, we must multiply the profit per unit per the number of units. In the diagram, this is the area ABCP1 (the red box).

In the middle diagram, the given price is P2. In this case, it is clear that the firm will not be making a profit. The AC curve is above the AR curve at all levels of output. The firm will still want to minimise its losses, though. This can be done, again, with the trusty old formula, MC = MR. This occurs at point D giving output Q2. At Q2, AR < AC and the difference between average revenue and average cost is the distance DE. This is the loss per unit. To find the total losses, we must multiply the loss per unit per the number of units. In the diagram, this is the area DEFP2 (the red box).

In the final diagram, at the bottom, the given price is P3. Again the firm will produce the level of output for which MC = MR. This occurs at point G, giving a level of output of Q3. Notice that at this point, AR = AC, so the firm is making normal profit.

So, in the short run, a perfectly competitive firm could be making super normal profit, or a loss, or just normal profit, depending on the given market price. Note that if the firm's losses get too big in the short run (i.e. AR < AVC) then it will have to shut down (see the section above).

Q. What do you mean by budget ? What are the main features of surplus and deficiat budget Budget is an estimate of costs, revenues, and resources over a specified period, reflecting a reading of future financial conditions and goals.

One of the most important administrative tools, a budget serves also as a (1) plan of action for achieving quantified objectives, (2) standard for measuring performance, and (3) device for coping with foreseeable adverse situations.

Purpose Budget helps to aid the planning of actual operations by forcing managers to consider how the conditions might change and what steps should be taken now and by encouraging managers to consider problems before they arise. It also helps co-ordinate the activities of the organization by compelling managers to examine relationships between their own operation and those of other departments. Other essentials of budget include: •

To control resources

•

To communicate plans to various responsibility center managers.

•

To motivate managers to strive to achieve budget goals.

•

To evaluate the performance of managers

•

To provide visibility into the company's performance

•

For accountability

The main features of surplus and deficiat budget

A budget surplus occurs when government spending is less than government revenue in a given time period: surplus = revenue - spending, where revenue > spending.

How does a budget surplus happen?

• Government may have cut back on its spending • Government may have raised taxes to collect more money • There may be a boom. In this case more people will be working, spending and paying taxes (income, VAT, NI), at the same time the Government will have to spend less on benefits.

What to do with a budget surplus?

• Pay off some of the Government debt. The Government owes billions of Taka.

• Use the money to fund extra spending e.g. health, schools, roads • Save the money in case it is needed for an emergency in the future e.g. war, health crisis A budget deficit occurs when the government spending exceeds government revenue in a given time period, usually one year: deficit = government spending - revenue, where spending > revenue.

How does a budget deficit happen?

• Government may have spent more money on projects.

• Government may have cut taxes and lost some revenue.

• There may be a recession. In this case fewer people will be working and paying tax, at the same time the Government will have to spend more on benefits. (b) Q. What is want ? What are the characteristics of wants?

Are wants unlimited and resources scarce in both Conventional Islamic economics ?

Meaning of Human Wants: “Man is a bundle of desires.” In common language, there is not much difference between a ‘desire’ and a ‘want.’ But in economics, there is difference between a ‘desire’ and a ‘want’.

Every desire cannot be a want. If a poor person desires to have a car, his desire cannot be called a want. A desire can become a want only when a consumer has the means (i.e. money) to purchase the thing and he is also ready to spend the means (money). For a desire to become a want, the following four elements must be present.

1. The desire for a thing.

2. Efforts to satisfy the desire.

3. The means (i.e. money) to purchase the thing.

4. Readiness to spend the means (i.e. money) to satisfy the desire.

These four essential elements constitute a want. Suppose, Bhanu desires to possess a car, for this, he should make efforts and earn money to purchase it. He should also be ready to spend the money to purchase it. If all these four elements are present, only then Bhanu’s desire to have a car can become his want.

Characteristics of Human Wants: Human wants have certain characteristics or features, which can be explained as below.

1. Wants are Unlimited: 2. Each Particular Want can be satisfied 3. Wants are Competitive: 4. Wants are Complementary 5. Wants are Alternative: 6. Some Wants become Habits: 7. Wants are Relative: 8. Wants increase due to the Spread of Knowledge and Civilization: 9. Wants are affected by Advertisements 10. Wants are affected by Income: 11. Present wants are more important than Future Wants: Are wants unlimited and resources scarce in both Conventional Islamic economics ?

The definition given by Lord Robbins is among those most accepted by western economics. He said that economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.7 This definition has a wide scope and consequently economics has approached a wide range of issues. Here, the notion of scarcity holds a crucial position, separating the economic dimension from other dimensions of purposeful human behavior involving the utilization of means to achieve ends. So, basically the science of economics is the study of the efforts both as individuals and communities in order to make a choice use of finite resources to meet the infinite demand for goods and services.

Economic Problem in Qur’anic View

Scarcity not the main problem in Economic of a human‟s life, the Qur‟an also provides some argument shown that the economic problem in Islamic economic perspective based on four principles are : - All the wealth belongs to Allah (swt): “And give them of the wealth of Allah which He has given you.”

- The community is the trustee of the wealth:

“Believe in Allah and His Messenger, and spend whereof He has made you heirs.”

- Hoarding of wealth is prohibited: “And those who hoard up gold and silver and spend not in the way of Allah; announce to them a painful chastisement.”

- Circulation of wealth is a duty: “Whatsoever Allah may restore into His Messenger – is due unto Allah and unto His Messenger – the orphans and the needy … so that it may not be confined to the rich amongst you.”

From these principles, Islam differs fundamentally from man- made systems (such as communism/socialism and capitalism) in defining the economic problem. Why? Because in fact the concept scarcity as a main economic problem in mainstream economic not born from nothing. The concept actually started with definitions of human being in the western philosophy, where the human being traditionally is defined as rational animals. The concept of rational animal teaches us that human being always life in unlimited wants.

The Quranic solution to scarcity at the level of „wants‟, is to ask people to lead simple lifestyles, and be content with what they have, not to envy others who have more. The Quran berates those who have taken their desires for their God, and states that paradise is for those who fear God and restrict their desires. Allah teaches us not to envy luxurious lifestyles of those who do not believe in the Day of Judgment, since all they have is the life of this world, which is pitifully small and limited compared to the next.

Therefore based on the discussion above, we agree and propose some of the definition of Islamic Economic as given by Islamic Economists such Yousuf Ibrahim which define Islamic economic as: “Islamic economics is a science studying the guidance of the human behavior towards the use of resources to satisfy the needs". and from Khurshid Ahmad (1981 ) which de fines Islamic economics as, “A study of human behavior in their attempts to satisfy the needs of the abundant resources whose ultimate aim is to maximize benefit of self and society both in this world and the hereafter.”

This because the two definitions is based upon the following facts: ‟ The resources are enough for satisfying the needs. ‟ But the resources should be protected from the waste, improper use and injustice distribution. ‟ The human behavior towards the resources should be controlled by divine injunctions to avoid harm and injustice behavior ‟ Only legal needs, needs that build life on the earth, shou ld be satisfied. ‟ Illegal needs (desires), which destroy life on earth, should not be satisfied; they are never ending and never satisfied.

Conclusion -

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Scarcity is not the problem in Islamic Economics, because Islamic economic describing: Muslim has Tauhid that teach, Allah has created all in the universe with unlimited size. Allah is who emerge lost or dead resources.

Scarcity or abundant resources are Allah‟s prerogative, under His Ilahiyah mechanism.

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Resources will always available to human beings as well as thought and activity of human under the sharia rules. In other words, Islamic Economic must be exist and applied in individual and society to guarantee equal and justice distribution of resources to the social community.

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Relative scarcity appears in the economy based solely on consideration of accessibility and its relation to the dynamic between supply (Availabiltiy) and human demand (desire) The main problem is a Human economic behavior. Therefore scarcity in essence, arise because mistake of human economic activity to fulfill the human unlimited want and desires.

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Q. Distinguish between Cardinal and Ordinal utility approach. How does a consumer maximize utility? Show with a suitable model.

Cardinal vs Ordinal Utility Utility refers to the satisfaction that a consumer obtains from the purchase and use of commodities and services. According to economics there are two theories that are able to measure the satisfaction of individuals. These are the cardinal utility theory and the ordinal utility theory.

• Cardinal utility states that the satisfaction that the consumer derives by consuming goods and services can be measured with numbers.

• Ordinal utility states that the satisfaction that the consumer derives from the consumption of goods and services cannot be measured in numbers. Rather, ordinal utility uses a ranking system in which a ranking is provided to the satisfaction that is derived from consumption.

• While cardinal utility is a quantitative measure, ordinal utility is a qualitative measure.

• In cardinal utility, it is assumed that consumers derive satisfaction through consumption of one good at a time. However, in ordinal utility it is assumed that a consumer may derive satisfaction from the consumption of a combination of goods and services, which will then be ranked according to preference.

Utility maximization

Definition Economics concept that, when making a purchase decision, a consumer attempts to get the greatest value possible from expenditure of least amount of money. His or her objective is to maximize the total value derived from the available money.

Utility maximizing rule To obtain the greatest utility the consumer should allocate money income so that the last dollar spent on each good or service yields the same marginal utility.

MUx/Px = MUy/Py = MUz/Pz But this is really just Benefit-Cost Analysis: a. Benefit-Cost-Analysis:

select all where: MB > MC

up to where: MB = MC but never where: MB < MC

utility maximizing rule: MBx = MUx/Px The MB of product X can be measured by finding the MU per dollar spent on product X Why divide by price?

•

because you cannot compare a $1 beer with a $3 steak sandwich

dividing by price means that we are comparing a dollar's worth of beer with a dollar's worth of a steack sandwich •

MCx = MUy/Py The MC of product X can be measured by finding the MU that you are not receiving from a dollar's worth of your next best alternative (product Y) Therefore: MB = MC or

MUx/Px = MUy/Py = MUz/Pz To obtain the greatest utility the consumer should allocate money income so that the last dollar spent on each good or service yields the same marginal utility.

Q. Who is an Islamic consumer? What principles are to be followed by a consumer in an Islamic Economic System ?

Ans. The concept of ‘Islamic consumer, is new in the world of conventional economics. It can be said that a consumer whose behavior is not against the norms of Islam is called Islamic consumer.In this sense all Muslims come within this category. Since Islamic economics deals with Islamic consumer, it would be useful to know him in some details. The following are the important principles are to be followed by a consumer in an Islamic economic system : The following are the important principles are to be followed by a consumer in an Islamic economic : 1. A rational Islamic consumer tries his best to conform his consumption to the pattern so as to please Allah. This is also treated as an act of worship ( Ibadah ), both satisfying in the present life and rewarding in the hereafter.

2. An Islamic consumer’s total spending is classified into two categories: one, to achieve satisfaction in this world which includes both present consumption and future consumption.

Two, spending for others with a view to earn reward in the hereafter.

3. He spends in moderation : He is neither miser nor extravagant in his consumption behaviour.

4. An Islamic consumer does not hoard his wealth : He is required to save but by necessity he must invest a major portion of his savings in productive activities otherwise zakat would eat away his savings over time.

5. Conesus about about Halal and Haram : An Islamic consumer quite consciously consumes only the Halal things and avoids Haram things.

Qs. Explain the law of Diminishing returns. Does the law apply to agriculture and industry equally ?

Ans: The law of diminishing returns (also law of diminishing marginal returns or law of increasing relative cost) states that in all productive processes, adding more of one factor of production, while holding all others constant ("ceteris paribus"), will at some point yield lower per-unit returns. The law of diminishing returns does not imply that adding more of a factor will decrease the total production, a condition known as negative returns, though in fact this is common.

For example, the use of fertilizer improves crop production on farms and in gardens; but at some point, adding more and more fertilizer improves the yield less per unit of fertilizer, and excessive quantities can even reduce the yield. A common sort of example is adding more workers to a job, such as assembling a car on a factory floor. At some point, adding more workers causes problems such as workers getting in each other's way or frequently finding themselves waiting for access to a part. In all of these processes, producing one more unit of output per unit of time will eventually cost increasingly more, due to inputs being used less and less effectively.

The law of diminishing return can be studied from two points of view, (i) as it applies to agriculture and (ii) as it applies in the field of industry.

(1) Operation of Law of Diminishing Returns in Agriculture: Traditional Point of View. The classical economists were of the opinion that the law of diminishing returns applies only to agriculture and to some extractive industries, such as mining, fisheries , etc. The law was first stated by a Scottish farmer as such. It is the practical experience of every farmer that if he wishes to raise a large quantity of food or other raw material requirements of the world from a particular piece of land, he cannot do so. He knows it fully that the producing capacity of the soil is limited and is subject to exhaustation.

As he applies more and more units of labor to a given piece of land, the total produce no doubt increases but it increases at a diminishing rate.

(2) Operation of the Law in the Field of Industry: The modern economists are of the opinion that the law of diminishing returns is not exclusively confined to agricultural sector, but it has a much wider application. They are of the view that whenever the supply of any essential factor of production cannot be increased or substituted proportionately with the other sectors, the return per unit of variable factor begins to decline. The law of diminishing returns is therefore, also called the Law of Variable Proportions.

In agriculture, the law of diminishing returns sets in at an early stage because one very important factor, i.e., land is a constant factor there and it cannot be increased in right proportion with other variable factors, i.e., labor and capital. In industries, the various factors of production can be co-operated, up to a certain point. So the additional return per unit of labor and capital applied goes on increasing till there takes place a dearth of necessary agents of production. From this, we conclude that the law of diminishing return arises from disproportionate or defective combination of the various agents of production. Or we can say that when increasing amounts of a variable factor are applied to fixed quantities of other factors, the output per unit of the variable factor eventually decreases.

Q. Discuss the Islamic principles of factors pricing and income distribution. Show their application in determining the price of labour in a developing Muslim country like Bangladesh

Ans. Islam has distinctive theory of income and resource distribution. In an Islamic economy, we

can classify factors of production as follows: 1. Land with natural resources.

2. Labor.

3. Physical Capital Stock.

4. Entrepreneur (Working as well as Investing).

In Islamic economics, three principles are applied in pricing the productive factors of production These are : • Justice • Scarcity • Humanity Justce : In effect justice as a principle is universal in the world of Islam . Quran says ‘We send our messengers with the Book and the Balance, so that mankind may establish justice 9 57 : 25 ) ,with regard to factor pricing, this justice is maintained when each factor is priced according to its contribution .

Scarcity : The word ‘scarcity” simply means that man generally has unlimited material wants but the resources by means of which to satisfy those wants are scarce, i.e land is limited in supply.

Humanity : this principle is particularly relevant to the pricing of labour. Biologically, labour is an inseparable attribute of mankind. It can not be purchased and sold like a commodity : the man in question has to take his being to the workplace in order to render his service. This human service gives rise to some special consideration which are not very relevant for the other productive factors of production.

Below, we try to present details of our proposed classification.

Land with natural resources – It includes all things of value which are naturally occurring things such as soil, minerals, land etc and that are used in the creation of products. The payment for the use of those resources in fixed supply is rent. When these are sold, their compensation is profit.

Labor – Providing physical or mental exertion by way of contract for consideration in the form of wage or salary. It does not include entrepreneurial labor as the compensation for entrepreneurial labor is the residual outcome of the productive activity and contains an element of risk and uncertainty.

Physical Capital Stock – It includes human-made goods or produced means of production.

These are goods which are used in the production of other goods. These include machinery, tools and buildings. The payment for the use of those resources in fixed supply is rent. When these are sold, their compensation is profit.

Entrepreneur – It refers to an economic entity, natural person or corporation (juristic person), which undertakes the ultimate responsibility for the production process. It undertakes the responsibility to bear losses (if any) and is entitled to the entire residual positive economic outcome after rent on ‘physical capital stock’ and ‘land with natural resource’ and wages have been paid. Entrepreneur could be classified as Working Entrepreneuras well as Investing Entrepreneur. If entrepreneur is defined as an economic entity which is not entitled to a fixed compensation and that his/her compensation is based on the actual positive but residual economic outcome of the production process, then, we can introduce this classification. In Mudarabah, the Mudarib is the Working Entrepreneur and Rabb-ul-Maal is the Investing Entrepreneur.

Application in determining the price of labour in a developing Muslim country like Bangladesh The situation of less developed countries like Bangladesh charachterised by the adundant supply of labours need a special treatment. In Bangladesh the labours are terribly exploited by the employers. The readymade Garments Industries in Bangladesh may be cited as an example.

Riba: Its Meaning, Classification and Difference among Bai, Riba, Profit, Rent etc and Socio-Economic Impect of Riba.

Meaning of Riba : The word “Riba” means excess, increase or addition, which correctly interpreted according to Shariah terminology, implies any excess compensation without due consideration. Riba may be defined as any excess paid and received over and above the principal, as a condition of loan for which no recompense or exchange value is paid or received, and which tends to increase with the passage of time and is not related with business result.

Modern Definition of Riba/Interest 1. “Riba is a ‘Predetermined’, ‘Fixed’ and ‘Time- related Excess’ over and above the ‘Principal of a Loan’” 2. “Riba is a discrepancy which results from the contractual obligations of a party in the context of a direct exchange of items of the same general kind between two parties.”

3. “Any amount, big or small, over the principal, in a contract of ‘Loan’ or ‘Debt’ is ‘Riba’ prohibited by the ‘Holy Quran’, regardless of whether the loan is taken for the purpose of consumption or for some production activity” (The Historic Judgment on Interest Dr. Taqi Usmani) Characteristics of Riba : • Origin of Riba is unlawful contracts

• Riba Nasiah is related with Quard (Loan) or Dayn (Debt) • Riba is the excess over and above the principal of loan or debtor on counter value.

• Riba Nasiah is charged or paid only as a condition of loan or time and no recompense, price or exchange value is paid for the excess or Riba.

• Riba Nasiah is related with time and becomes doubled, redoubled and multiplied with the passage of time • Riba is not related with the result of business Characteristics of Riba Al Nasia 1.‘Predetermined’ 2.‘Fixed’ 3.‘Time Related Excess’ 4.‘Loan’ Characteristics of Riba Al Fadl 1.‘Homogeneous goods’ 2.‘Hand to hand exchange’ 3.‘Excess or Less through exchange’ 4.‘Basic Foods’ Prohibition of Riba in Islam: Quranic injunctions: 1st Revelation : Su'ratur Rum : Verses 39, 5th year of Nabuwah, 615 A.D" And whatever Riba you give so that it may increase in the wealth of the people, itdoes not increase with Allah; but that which you give in Zakat seeking Allah's countenance, then those they shall have increase” 2nd Revelation: Su'ratun Nisa: Verses 160-61, Around Battle of Uhud"For the inequity of the Jews we made unlawful for them certain (foods) goods and where some of which had been lawful for them; And that they hindered many from Allah's Way; And they took Riba, though they were forbidden; and that they devoured men's substance wrongfully; we have prepared for the disbelievers among them a grievous punishment."

3rd Revelation: Su'rah Ale Imran : Verses 130-134 After Battle of Uhud."O you who believe! Eat not Riba doubled and multiplied; but fear Allah that you may(really) prosper. And fear the fire, which is prepared for those who reject faith; And obey Allah and the Messenger; That ye may obtain mercy. Be quick in the race for forgiveness from your lord; And for a garden whose width Is that (of the whole)of the heavens And of the earth, prepared for the righteous, - Those who spend(freely), Where in prosperity, Or in adversity; who restrain anger, And pardon(all) men;- For Allah loves those who do good.”

4t”Revelation : Su'ratul Baqarah : Verses 275-281 : After conquest of Makkah"Those who eat Riba will not stand except like the standing of a person whom the Shaitan by his touch has driven to madness/insanity. That is because they say "Bai is like Riba", but Allah has permitted Bai and forbidden Riba. Hence whosoever receives this admonition from his lord and stops eating Riba may keep his previous gain; his case is for Allah (to judge) . But whoever reverts to it, they are the companions of the fire, they shall abide therein (forever)."

Classification of Goods and Services in this World :

The goods and services available in this World are divided into two groupsa) Fungible Goods - Fully consuming or once using b) Non Fungible Goods - Can be use again and again Prohibition of Interest by all the Religions 1. Judaism - Prohibited 2. Christianity

-

Prohibited

3. Hinduism

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Prohibited

4. Islam

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Prohibited

The Great Sins of Riba: ‘Riba has seventy equal sins’ The Condemned Parties of the Riba 1. Those who take it 2. Those who give it 3. Those who record the transaction 4. Those who act as witnesses Reason for prohibition of Riba : The main reason to the rationale of prohibition is that it is oppression involving exploitation. In matters of consumption loans, it is necessary that those who have wealth should assist those are have not, and in productive loans, a guaranteed return on capital is unjust given the uncertainty surrounding entrepreneurial profits, whereas a return to both parties as a rate of profit would be more equitable.

Interest mechanism prevents the fair distribution of positive or negative outcomes of economic activities among the lender and borrower and worsens the income distribution.

Interest allows the creation of a group of people who contribute nothing to society, simply generating income from capital.

Lenders would not provide loans to those they believe are unable to repay so such wealth would be restricted to those able to service the debt. This is something forbidden categorically by the Quran and the effects on society result in the accumulation of wealth amongst those who have it and increase the divide between the rich and poor.

Riba ignores the possibility and occurrence of loss that exist in trade and the uncertainty faced by the trader. It guarantees retrieval of principal and a positive yield.

BAI : The arabic word Bai means sale/bay i.e trading which has been a morally acceptable activity in all civilizations since the earliest times and all religions approved of it. In Islam, a great deal of emphasis has been placed on trade (or Bai’) as a recommendable source for the acquisition of wealth. However, Islam distinguishes any increase generated from Riba from the increase in one’s wealth as a result of trading. In fact, while both trading and Riba based activities generate return and increase in capital, the profit in Bai’ is permitted, and the increase Riba is forbidden. Therefore, the rules of trading should be identified to make trade transactions different from Riba-based transactions.

Profit : A financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity. Any profit that is gained goes to the business's owners, who may or may not decide to spend it on the business.

Calculated as: Profit = Total revenue- Total expenses RENT: Classical factor rent is primarily concerned with the fee paid for the use of fixed (e.g., Leasable) resources. The classical definition is expressed as any excess payment above that required to induce or provide for production.

A payment for the services of an economic resource which is not necessary as an incentive for its production.

SOCIO-ECONOMIC IMPACT OF RIBA 1. Social Impact of Riba: i. Interest makes a man selfish and miser ii.

It creates hostile relation between the rich and the poor. iii.

Moral decay spreads out in the society.

2. Economic Impact of Riba : i. Interest hindrances the flow of savings and formation of capital. ii. Interest discourages the Investment iii. Interest creates deficit of capital iv. Interest encourages artificial crisis in financial sector v. Interest creates idleness among the savers vi. Interest is against the efficient distribution of capital vii. Interest increases the price level viii.Interest decreases the demand for goods 3. Impact of interest on distribution: i.

Interest increases unemployment & increases exploitation of labour ii. Interest creates monopolistic opportunity for the capitalist iii. Interest impose unnecessary burden on organization iv. Interest reduces income of the depositors v. Interest Concentrates wealth in the few hand through public finance vi. Interest reduces the number of entrepreneurs and rich.

1.

Define and narrate the functions of money in Conventional and Islamic economics

Answer : In Conventional economics the function of money as medium for exchange required that money acts as a measure of value, otherwise how else would we know how much one item is measured in terms of other items, So human need to facilitate exchange is what gave rise to the role of money as both measure of value and medium of exchange. So far there would be little or no argument as to what money is or its role. As measure, money in and by itself has no value except in terms of the goods and services you can get in exchange for giving up an amount of that money. As a measure, money also is a neutral medium where it only shows how much each commodity is worth in relation to another commodity. A tape measure is the same tape measure whether you are measuring carpet, a pipeline, or how tall or short you are. The value is not in the tape except for the function of standard measuring it provides. It is in what the tape is measuring, and such a value is weighed in

relative terms. The distance a taxi travels is measured in terms of money which the driver gets in return for the services of traveling such a distance, which is the same amount of money the passenger pays the driver in return for the service.

From the Islamic point of view, money should be observed as a medium of exchange and a standard of measurement (of economic value). Money is consideration, not an object that can be traded or something that is expected to generate returns without economic activities. Money is neither a productive good nor a consumption good. Therefore, if money needs to be exchanged with money, the Islamic injunction on trading of money( riba). Such a transaction must take place with the condition that it is on spot basis and for an equal amount. Similar to conventional finance, in Islamic finance money exchanged with money on a deferred basis has become a norm, and the repayment of loaned money with additional charges over the principle amount is riba. Bearing in mind such prohibitions in Islam, there are many other Islamic financial products and instruments which have been developed based on the same basis as the money creation role of the central banks and the commercial banking system.

This is where the pivotal differences concerning money in Islam and conventional finance arise. The above Shariah injunction not only has been less observed in financial products and instruments, but to some extent, is unable to prevent the ‘entrepreneurs’ of money i.e. the financial institutions, from making ‘profit’. (b) Narrow Money & Broad money :Narrow Money : A category of money supply that includes all physical money like coins and currency along with demand deposits and other liquid assets held by the central bank. In the United States narrow money is classified as M1 (M0 + demand accounts), while in the U.K. M0 is referenced as narrow money.

The name comes from the fact that M1/M0 are the narrowest or most restrictive ideas of money that are the basis for the medium of exchange within the economy. This category of money is considered to be the most readily available for transactions and commerce.

Broad money : One measure of the money supply that includes M1, plus savings and small time deposits, overnight repos at commercial banks, and non-institutional money market accounts.

This is a key economic indicator used to forecast inflation, since it is not as narrow as M1 and still relatively easy to track. All the components of M2 are very liquid, and the non-cash components can be converted into cash very easily.

How the central Bank controls Money Supply in an economy Central banks in different countries control the money supply (M1) : M1 can be increased if the coins and currency in circulation increase or the checking account balances (demand deposit) increase. There are four ways that this can happen.

1. Required reserve rate is lowered: The central bank can lower required reserve rate which raises the multiplier effect of high powered money (cash). The cash stays in the banks and each dollar can support more loans/demand deposits.

2. Discount interest rate decreases: The central bank can lower the discount rate and lower the costs for banks holding low excess reserves which will lower the excess reserve rate. If the central bank lowers the discount rate, this can be accomplished if the central bank injects funds into the system which will drive down the price of those funds - interest rates.

3.Publics' holding of cash changes: The central bank can raise confidence in banking system which will lower public's desire for holding cash. If you look at the high-powered money the central bank can inject into the system, a taka in the hands of an individual is simply a taka of money supply. A taka in reserves at the banks, however, can support some multiple expansion of checking accounts. Thus if the central bank can move taka from people's pockets to banks, this will increase the money supply. When people want cash, the reserves in the banks fall which creates a bigger drop in demand deposits. The result is a net decrease in the money supply.

4. Open Market Operations : Open market operations are a way of affecting the money supply by buying or selling securities -- usually government securities.Essentially, if the central bank wants to increase the supply of money, it turns to the market and purchases Treasury securities (such as T-bills, T-notes and Tbonds). When it buys these securities, it gives the sellers money, and that increases the supply of money in the economy & vice versa.

What are the objectives of Monetary policy in an Islamic system ?

Monetary policy in an Islamic system : In Islamic economy, monetary policy is an important instrument of public policy like its capitalist counterpart. The objectives and tools must, however, be different because of the differences in the goals and the nature of the two systems and because of the prohibition of interest in Islam while it is a key ingredient in the capitalist system.

In Islamic economy, monetary policy should only be in conformity with the ethos of Islam. It should also emphasis the socio-economic goals of Islam like, economic well-being with full employment and optimum rate of economic growth; socio-economic justice and equitable distribution of income and wealth; and stability in the value of money to enable the medium of exchange to be a reliable unit of account, a just standard of deferred payments and a stable store of value.

In an Islamic economy, the demand for money will arise basically from the transactions and precautionary needs which are determined largely by the level of money income and its distribution. The abolition of interest and the levy of Zakah at the rate of two-and-a-half per cent will tend to minimize the speculative demand for money.

Objectives of Monetary policy in an Islamic system : 1. Economic growth 2. Exchange stability 3. Price stability 4. Full employment 5. Credit control 6. Reduction in inequalities of income & wealth 7. Creation & expansion of financial institution

Q. Show the relationship among GDP, GNP and NNP. Discuss two approaches for measuring GDP. a)

Gross Domestic Product (GDP)

The most important concept of national income is Gross Domestic Product. Gross domestic product is the money value of all final goods and services produced within the domestic territory of a country during a year.

Algebraic expression under product method is, GDP=(P*Q) where, GDP=Gross Domestic Product P=Price of goods and service Q=Quantity of goods and service denotes the summation of all values.

According to expenditure approach, GDP is the sum of consumption, investment, government expenditure, net foreign exports of a country during a year.

Algebraic expression under expenditure approach is, GDP=C+I+G+(X-M) Where, C=Consumption I=Investment G=Government expenditure (X-M)=Export minus import GDP includes the following types of final goods and services. They are: 1. Consumer goods and services.

2. Gross private domestic investment in capital goods.

3. Government expenditure.

4. Exports and imports.

Gross National Product (GNP) Gross National Product is the total market value of all final goods and services produced annually in a country plus net factor income from abroad. Thus, GNP is the total measure of the flow of goods and services at market value resulting from current production during a year in a country including net factor income from abroad. The GNP can be expressed as the following equation: GNP=GDP+NFIA (Net Factor Income from Abroad)

or, GNP=C+I+G+(X-M)+NFIA Hence, GNP includes the following: 1. Consumer goods and services.

2. Gross private domestic investment in capital goods.

3. Government expenditure.

4. Net exports (exports-imports).

5. Net factor income from abroad.

Net National Product (NNP) Net National Product is the market value of all final goods and services after allowing for depreciation. It is also called National Income at market price. When charges for depreciation are deducted from the gross national product, we get it. Thus, NNP=GNP-Depreciation or, NNP=C+I+G+(X-M)+NFIA-Depreciation Difference Between GDP, GNP and NNP The difference between GDP and GNP is the net foreign income (NFI), which is the difference between factor payments received from the foreign sector by domestic citizens and factor payments made to foreign citizens for domestic production. The "gross" in GDP and GNP indicates that there is no allowance for depreciation (capital consumption), value lost that occurs to inventory while it sits before being sold or consumed or the amount of capital resources used up in the production process. That is the difference between GDP and NNP. Depreciation (DP) is a reduction in the value of an asset with the passage of time, due to wear and tear. It can include consumption of goods in the production of other goods or services.

Examples are the wear and tear that occurs with capital equipment such as machinery, transportation vehicles, office equipment and tools (all of these items eventually wear down and need to be replaced), accidental damage, obsolescence or retirement of capital assets.

GDP is most commonly calculated by the expenditure method. It is done by adding consumer expenditure (C) + firm’s investments (I) + government spending (G) + exports minus imports (X-M). GNP is calculated by taking GDP + net property income from abroad (NFI). NNP is calculated by taking GNP – DP. The relationship among GDP, GNP and NNP GDP= Value added ( Production-Intermediate consumption ) + Taxes+ Duties GNP= GDP+Income receipts from the rest of the world –Income payment to the rest of the world NNP= GNP- Consumption of fixed capital Three Approaches to Measuring GDP 1. Expenditures Approach:

The total spending on all final goods and services (Consumption goods and services (C) + Gross Investments (I) + Government Purchases (G) + (Exports (X) - Imports (M)) GDP = C + I + G + (X-M) 2. Income approach (NY = National Income) Using the Income Approach GDP is calculated by adding up the factor incomes to the factors of production in the society. These include National Income (NY) + Indirect Business Taxes (IBT) + Capital Consumption Allowance and Depreciation (CCA) + Net Factor Payments to the rest of the world (NFP) In this approach, NY = Employee compensation + Corporate profits + Proprietor's Income + Rental income + Net Interest CCA = Igross + Inet (I= Investment) NFP = Payments of factor income to the ROW minus the receipt of factor income from the rest of the world.

Thus, GDP + NFP = GNP â&#x20AC;&#x;GROSS NATIONAL PRODUCT) GNP - CCA = NNP ( NET NATIONAL PRODUCT) NNP - IBT = NY (NATIONAL INCOME) 3. Value added Approach: The value of sales of goods - purchase of intermediate goods to produce the goods sold. b) Point out the limitations of GDP as a measure of welfare of a country.

GDP measures the value of output produced within the domestic boundaries of a country over a year.

Welfare is the health, happiness, and fortunes of a person. A sustained increase in real GDP means there is a sustained increase in the output of goods and services, and growth in the countries economy. However, Though there are three possible limitations of using GDP as a measure of welfare between countries. The three limitations are that it ignores the quality of life, it underestimates informal markets, and overestimates negative externalities.

GDP ignores to measure the quality of life. The quality of life is used to evaluate the general well-being of individuals and societies. Quality of life should not be confused with standard of living, which is based primarily on income. Instead, the quality of life includes wealth, employment, physical and mental health, education, etc. For example, while South Africa is in the top 40 countries for highest GDP, over 50% of its people live in poverty, meaning they have a low quality of life because they lack basic human needs such as food, shelter, and access to education and healthcare, etc. Since GDP does not reflect upon the quality of life, it is limited as a measure of welfare.

GDP underestimates informal markets. GDP does not take into account black market activities, where the money spent isnâ&#x20AC;&#x2122;t registered. An example is if someone sells $1 million worth of illegal goods to someone

else, it will not be counted in the GDP. Though the United States has a very high GDP, it has 10~20% of illegal market activities. Since GDP does take this into account, it is limited as a measure of welfare between countries.

GDP overestimates negative externalities. Negative Externalities are the bad effects that are suffered by a third party when a good or service is produced or consumed. When GDP (production) increases, negative externalities (air and water pollution) also increase. For example, Chinaâ&#x20AC;&#x2122;s GDP is one of the highest in the world, but it emits more carbon dioxide emissions per year than any other country. High CO2 emissions does not equal to a country with high welfare. Since GDP does take this into account, it overestimates negative externalities, limiting it as a measure of welfare between countries.