Revealing the Layers of Poverty in India and Government Initiatives for Change

Discussing various economic factors like national income, price levels, and interest rates is important, but it’s equally crucial to delve into  few macroeconomic models which help to understand the processes that influence these economic factors. 

In this article, the multifaceted issue of poverty in India and its various dimensions will be discussed along with the causes of poverty. Examining the government’s initiatives and anti-poverty programs, such as the Mahatma Gandhi National Rural Employment Guarantee Act and others, this article will shed light on the progress made in poverty reduction, the disparities that persist, and the broader goals of human development, gender equality, and empowerment that underpin the fight against poverty in India.

Understanding Economic Determinants: A Keynesian Approach to National Income and Employment

• Economic processes are influenced by different variables such as price levels, interest rates and the causes of poverty.  However, considering the complexity of economic systems, it’s challenging to account for all variables simultaneously. 
  • Therefore, focusing on determining a specific variable assumes that all other variables remain constant. 
  • This assumption, known as “ceteris paribus,” which translates to “other things remaining equal,” is a common simplification in theoretical exercises.

Based on the above considerations, the examination of  how National Income is determined assumes that the prices of final goods and the interest rate remain fixed in the economy. The theoretical model we use is based on the ideas developed by John Maynard Keynes.

Aggregate Demand: Components and Significance in Economic Analysis

• In earlier articles, terms like consumption, investment, and GDP have been encountered each with distinct meanings.
  • Consumption may refer to what people intended to consume during a given period, and 
  • Investment can signify the amount a producer planned to add to their inventory, which might differ from the actual outcome.
• Example: 
  • A producer plans to invest Rs 100 in goods but ends up with Rs 70 due to unexpected market demand. 
  • These planned values are known as ex-ante measures.
• In simpler terms, ex-ante reflects what was planned, while ex-post reflects what actually occurred.
• To understand income determination, it’s essential to grasp the planned values of various components of aggregate demand. Let’s explore these components now.

Economic Dynamics: Imagenia’s Consumption Function, MPC, and Savings Insight

• The Consumption Function: 
  • It is a fundamental concept in economics that explores the relationship between household income and spending. 
  • The simplest form of this function assumes that consumption changes consistently as income changes. 
• Autonomous Consumption: It means even when income is minimal or zero, households tend to have a certain level of consumption. 
• The simplest consumption function assumes that consumption changes at a constant rate as income changes.
• Since this level of consumption is independent of income, it is called autonomous consumption.
  • This can be described as,

C = C + cY

• • The above equation is called the consumption function.
  •  Here C is the consumption expenditure by households. 
    • This consists of two components: autonomous consumption and induced consumption(cY).
• Autonomous consumption is denoted by C and shows the consumption which is independent of income. 
• If consumption takes place even when income is zero, it is because of autonomous consumption. 
• The induced component of consumption, cY shows the dependence of consumption on income. 
• When income rises by Re 1. induced consumption rises by MPC i.e. c or the marginal propensity to consume. 
• It may be explained as a rate of change of consumption as income changes.

MPC =  C /  Y = c

• Now, let us look at the value that MPC can take. 
  • When income changes, change in consumption ( C) can never exceed the change in income ( Y). 
  • The maximum value which c can take is 1. 
  • On the other hand, consumers may choose not to change consumption even when income has changed. 
  • In this case MPC = 0. Generally, MPC lies between 0 and 1 (inclusive of both values). 
  • This means that as income increases either the consumers do not increase consumption at all (MPC = 0) or use the entire change in income on consumption (MPC = 1) or use part of the change in income for changing consumption (0< MPC<1).

• Imagine a country called Imagenia which has a consumption function described by C=100+0.8Y.
  • This indicates that even when Imagenia does not have any income, its citizens still consume Rs. 100 worth of goods. 
  • Imagenia’s autonomous consumption is 100.
  • Its marginal propensity to consume is 0.8. 
  • This means that if income goes up by Rs. 100 in Imagenia, consumption will go up by Rs. 80.
• Let us also look at another dimension of this i.e. savings. Savings is that part of income that is not consumed. In other words,

S =Y − C

• We define the marginal propensity to save (MPS) as the rate of change in savings as income increases

MPS =  S /  Y = s

• Since, S = Y – C.

S =  (Y – C) /  Y

  =  Y/ Y –  C/ Y

  = 1 – c

The Essence of Investment: A Comprehensive Look at Physical Assets and Autonomous Investment in Economic Growth

• Meaning: Investment refers to the increase in a nation’s physical assets, such as machinery, buildings, and infrastructure, which enhances its future productivity. 
  • Additionally, it encompasses alterations in a producer’s inventory of finished goods. 
• Notably, investment goods like machines are considered final goods, not raw materials, and contribute to production over several years.
• The determination of investment decisions, such as the acquisition of new machinery by producers, is significantly influenced by the prevailing market interest rate. 
• However, for simplification, assume a constant annual investment plan for firms. This can be expressed as:

I = I 

• Where  I is a positive constant which represents the autonomous (given or exogenous) investment in the economy in a given year.