Economics Chapter 10 National Income of Pakistan Class 12

Table of Contents

Q.1) Review your understanding of the following terms, the vicious circle of poverty, capital accumulation, social evils, saving.

Answer:

1. Vicious circle of poverty

In economics, the vicious circle of poverty is the “set of factors or events by which poverty, once started, is likely to continue unless there is outside intervention.”

2. Capital accumulation

This refers to profits that a company uses to increase its capital base. Capital accumulation involves acquiring more assets that can be used to create more wealth or that will appreciate.

3. Social evil

“Social evils are issues which in one way or another affects members of a society and is often considered controversial or problematic in terms of moral values. Some of the most common social evils would be alcoholism, racism, (child) abuse, organized crime and inequality.”

4. Saving

The portion of disposable income not spent on consumption of consumer goods but accumulated or invested directly in capital equipment or in paying off a home mortgage, or indirectly through the purchase of securities.

Q.2) What is per capita income? Discuss the causes of low per capita income in Pakistan.

Answer:

PER CAPITA INCOME and EXTENT OF POVERTY

We study per capita income of Pakistan for two purposes. Firstly, to evaluate the improvement in the living standard of our people over the past years and secondly to compare the economic condition of Pakistanis with the residents of other countries.

TABLE

Year	Per capita income Rs.	Annual percentage increase
1999-2000	25310	1990-00 1
2009-10 2010-11	34213 34289	2000-10 2.5 2010-11 0.7

The above table indicates that per capita income of Pakistan has been slowly increasing. In some periods the rate of increase has been higher than in other periods. For example, during the ten years from 1980 to 1990, the change was 2.5% per year. Then it grew at a low average rate of 1%. Since independence, real per capita income has risen by about three times which means that the living standard of our people has been improving, though not at a satisfactory rate.” The growth during 2009-11 was negligible. We see that at present the average annual income of a Pakistani is Rs. 34289. If we assume an average family size of 6 members, it comes to Rs. 205734 annually or about Rs.17144 per month per family.

Keeping in view the high level of prices, this income is quite insufficient. However, the main problem is that the average income does not show the extreme poverty of l/3rd of Pakistanis who don’t get even Rs.5000 per month and cannot buy basic needs of life. Distribution of national income in Pakistan is quite unequal. On the one hand, we can see people rolling in millions while on the other hand, a great majority of people are getting income much below what this national average income. About 50% of our families are getting less than Rs. 10,000 per month). Poverty in Pakistan has been rising since 2005. As a result of unprecedented food inflation, the percentage of the extremely poor population has risen to 35 per cent in 20ll. Real wages of poor workers have fallen. The Govts is following some programs like the Benazir Income Support Program, Sasti Roti, and Food Support Program, Zakat and BaitulMaal to reduce absolute poverty

Causes of low per capita income in Pakistan

When we divide national income by population, we get average income, which is also called per capita income

Per capita income = National Income / population

Compared to other countries, our per capita income is very low e.g., Pakistan’s per capita income is less than 5% of the income of Japanese*0 or an American. Moreover, the difference in living standards of Pakistanis and the people of developed countries is widening. The following factors are responsible for the situation.

1. Scarcity of natural resources

Economic performance of a country and the availability of natural resources have close links. The abundance of natural resources promotes economic development while shortage acts as an obstacle to raise national production. We have some good fertile land and water resources, yet Pakistan has a shortage of some basic minerals: oil, iron.

2. Shortage of capital

Pakistan has less amount of capital in the form of machines, buildings, roads, and equipment. Less capital means low efficiency of labor. Capital is created through saving. But we save less than 14 % of our national income whereas the average saving rate around the world is above 20%. Shortage of capital puts the country in a vicious circle of poverty shown below.

3. High rate of population growth

Pakistan’s population is increasing at a very high rate of 2 % per year. Every year about 3 million new persons join us to have their share in the national output. The rapid growth of population is the most important factor in keeping our economic condition poor. (During the past decade, the growth rate has been slowly coming down]

4. Illiteracy

Illiterate persons lack the necessary skills and opportunities which can bring them high incomes. A person who cannot write telephone numbers, and cannot do elementary arithmetic is doomed to remain poor in the modern world. Half of our population is illiterate. Moreover, Pakistan allocates small amounts for education.

5. Over-dependence on agriculture

Pakistan’s economy heavily depends upon agriculture, which contributes 21% of national income. Low productivity of this sector is the cause of low incomes of 43 % of the labor force engaged in it. The farmers use old methods of farm management and remain at the mercy of uncontrollable natural factors.

6. Low efficiency of labor

The efficiency of an average Pakistani is low because of illiteracy, outdated social system, poor training and lack of work opportunities women and low dignity of labor. Unfortunately, 32% of our population works and the rest are dependents

7. Defective planning

Most of Pakistan’s economic plans could not achieve the targets. They were formulated without having correct estimates of resources and requirements. And were Based on unreliable statistical data. Another defect of our economic planning was that it depended on foreign loans. Political uncertainties also had a bad effect on planning efforts.

8. Political instability

Political instability, frequent changes in Govt, and military rule, people have no confidence in the ability of Govt, to improve their economic condition. Governments and politicians mislead the common man in the name of religion, language, race, province etc. Sect-based’ political parties are an obstacle to collective thinking. Such an atmosphere discourages investors.

9. Inefficient administration

Government machinery in Pakistan has been inefficient and irresponsible. It has supported, promoted and shared corruption with political leaders.

Flight of capital from Pakistan

10. In the past, billions of dollars were transferred outside Pakistan. Corrupt officials, politicians, smugglers and business people deposited their ill-got wealth and black money in western banks. This drain of capital kept the country poor.

11. Unfavorable circumstances

Pakistan has been unlucky to find itself afflicted with some serious problems such as large-scale migration of population, wars with India, separation of East Pakistan, Afghan refugees. Earthquakes etc.

12. Social evils

Our social system encourages false social values and inefficiency. Evils such as corruption, nepotism, hoarding, profiteering, litigation, tax evasion, caste system etc. damage the economy. Most so-called influential respectable people have illegal sources of income. They eat away large parts of national wealth through political pressure Bank loans and utility bills are not paid. People are anxious to become rich overnight by hook or by crook. Women are kept downgraded, ignorant and superstitious by miss interpreting religion. Women’s the participation in economic life is low.

13. Dominance of Jagerdars, feudal lords and hereditary Peers

By their very nature, jagirdars, feudal lords and peers are backwards-looking. Economic progress and prosperity of common man in their area of influence are against their political and social interests. They create fear around them and suppress the economic activity of masses.

14. The following have also contributed towards lower per capita income in Pakistan.

1. Unemployment: It is wastage of labor hours and potential output.

2. Defective tax structure: Slows down industrial activity. let promotes dishonesty, tax evasion and unproductive activities

3. Misuse of bank loans and large-scale write-offs: Small business and industry has been deprived of necessary bank credit for investment.

4. Low foreign exchange earnings which limit our development efforts.

5. High inflation rate badly affects savings and investment activity.

Q.3) How can per capita income of Pakistan be raised?

Answer:

How to increase per capita income

The following steps are suggested for raising per capita income.

1. Will and determination

The key factor for improving our economic condition is the strong will and determination both at the individual and national level. If a nation commits itself to the cause of development whole-heartedly, then lack of resources and other material deficiencies cannot stand in its way.

2. Population control

The pop the lotion growth rate should be reduced through family planning and education, especially female education. At the present rate of growth, efforts to remove poverty will not succeed.

3. Education, technical training and rise in labor productivity

Education creates awareness among the people about their present condition. It gives them a sense of direction for action. Education and economic development are twins. Our vast human resources can prove an asset if they are skilled and can use modem technology.

4. Raising saving rate for capital accumulation.

National production can be raised if large amounts of capital are available in the form of machines, buildings, tools, dams and roads etc. So, the rate of savings must be raised from the present low level of 14% to at least 20% of GNP.

5. Modernization of agriculture

Agriculture is the largest sector of the economy should be given more attention, so that yield per acre is raised. It should be modernized through mechanized and scientific farming and change in the outlook of farmers.

6. Industrial development

A sound industrial base is essential to achieve high per capita income. We must produce high-value-added and high-tech goods. Textiles, leather and chemical industries should be modernized to keep them competitive in world markets. Pakistan must also make progress in electronics.

7. Development of energy resources

Cheap energy is a basic requirement for industrial and agricultural development. Since Pakistan lacks oil resources, it should produce more hydroelectricity and nuclear energy. New atomic reactors will be set up like the ones presently working at Karachi and Chashma. Bhasha Dam and others are completed urgently.

8. Effective planning

Our country needs regular planning. Due to frequent political changes regular planning was abandoned. Every Govts announced some Adhoc annual plan.

9. Reformation of the social system

Our social system is outdated and needs reforms. It does not condemn illegal sources of income. It encourages wasteful consumption, inefficiency, hatred for manual labor, negative attitude towards women participation in economic life. Social parasites like beggars, sardars,jagirdars, touts, hereditary peers and so-called various kinds of agents must be removed.

10. Employment of surplus labor

If our unemployed surplus labor is provided opportunities for productive work, Pakistan’s per capita income can rise. Those who are presently dependent upon other incomes will themselves earn their living.

11. Political stability

Political stability accelerates economic growth and a better law and order situation boosts confidence of investors. Life and property of the people must be secure. Regional parties and parties based on sects be dinned.

12. Good governance

Good governance is a prerequisite for good economic progress. War against corruption is globally tackled. Black money should not find safe haven abroad

13. International cooperation is needed in two directions:

14. Market access: Trade promotes growth, employment and poverty reduction. Every extra dollar of exports from a developing country feeds a poor family and builds a better future for them. So, developing countries need a level playing field in trade with developed countries.

15. Debt relief: Debt relief is needed for poverty reduction. It has a critical role to play in helping poor countries attain high rates of growth.

16. Other measures

The following steps will also have favorable effects on per capita income.

a. Quality control measures to expand export capacity.

b. Expansion of transport and telecommunication facilities

c. Control of inflation.

d. Promotion of Islamic values to establish rule of law, eradicate corruption, increase efficiency, merit and honor for the working hands.

Q.4) How can the standard of living of the people of Pakistan be raised?

Answer:

HOW LIVING STANDARD SHOULD BE IMPROVED.

The following steps are suggested for raising per capita income.

1. Will and determination

The key factor for improving our economic condition is the strong will and determination both at individual and national level. If a nation commits itself to the cause of development whole-heartedly, then lack of resources and other material deficiencies cannot stand in its way.

2. Population control

Population growth rate should be reduced through family planning and education, especially female education. At the present rate of growth, efforts to remove poverty will not succeed.

3. Education, technical training and rise in labor productivity

4. Raising saving rate for capital accumulation.

5. Modernization of agriculture

Agriculture being the largest sector of the economy should be given more attention, so that yield per acre is raised. It should be modernized through mechanized and scientific farming and change in outlook of farmers.

6. Industrial development

A sound industrial base is essential to achieve high per capita income. We must produce high-value added and high-tech goods. Textiles, leather and chemical industries should be modernized to keep them competitive in world markets. Pakistan must also make progress in electronics.

7. Development of energy resources

Cheap energy is a basic requirement for industrial and agricultural development. Since Pakistan lacks oil resources, it should produce more hydro-electricity and nuclear energy. New atomic reactors will be set up like the ones presently working at Karachi and Chashma. Bhasha Dam and others are completed urgently.

8. Effective planning

Our country needs regular planning. Due to frequent political changes regular planning was abandoned.’*6 Every govt, announced some adhoc annual plan.

9. Reformation of social system

10. Employment of surplus labor

11. Political stability

12. Good governance

Good governance is a prerequisite for good economic progress. War against corruption be globally tackled. Black money should not find safe haven abroad

13. International cooperation is needed in two directions:

15. Debt relief: Debt relief is needed for poverty reduction. It has a critical role to play in helping poor countries attain high rates of growth.

16. Other measures

The following steps will also have favorable effects on per capita income.

a. Quality control measures to expand export capacity.

b. Expansion of transport and telecommunication facilities

c. Control of inflation.

d. Promotion of Islamic values to establish rule of law, eradicate corruption, increase efficiency, merit and honor for the working hands.

Q.5) What are difficulties in measuring national income of Pakistan

Answer:

Difficulties in the measurement of national income

Measurement of the national income of a country is not a simple task. There are practical and conceptual difficulties. The important difficulties are the following.

1. Non-marketed production (or Unpaid Services)

National income estimates exclude many kinds of productive work such as services of housewife, teaching of one’s child, growing vegetables for home use. These services are ignored because it is difficult to compute the money value of non- marketed production. This practice gives an underestimate of national income.

2. Barter transactions

Since national income is calculated in money terms, the valuation of barter- traded goods in money creates problems. Some indirect methods are used to provide only approximate measures.

3. Government expenditure

In national accounting the government expenditure on education, health, defense etc. creates a problem. Is such expenditure a part of consumption or investment? The general practice followed is that defense, police and general administration are counted in consumption. Expenditure on education or health is split into two parts, i.e., non-development and development expenditure.

4. Foreign firms

Incomes of foreign firms also create a difficulty. Should their incomes be added to our national income or as a part of the national income of their home countries?

5. Inadequate statistical data

In under-developed countries like Pakistan, sufficient, reliable and up-to-date data are not available for many economic activities. For many sectors like small businesses instead of using scientific methods for collecting data only rough estimates of production are made. This creates a difference between the true income of a country and its estimate.

6. Lack of trained staff

Collection of data requires trained and qualified persons. But the underdeveloped countries like Pakistan don’t have sufficient numbers of trained people. For example, a Pakistani Patwari has little training for scientific calculation of agricultural produce. His estimate of output of crops is at the best a rough approximation.

7. Illiteracy

Due to illiteracy most of the producers have no idea of quantity and the value of their output. They do not keep regular accounts. This creates difficulty in correct estimation of national income.

8. Lack of specialization

Some people are engaged in many jobs at a time, e.g., a farmer may manage a poultry farm and may be a seasonal industrial worker also. It is difficult to know the exact earnings of such people. It becomes a problem to count his income in any sector of production. (In Pakistan many village teachers are also engaged in agriculture).

9. Quality of product

The quality of goods produced and services provided changes over time. Some new products, which did not exist previously, come into use. This makes the use of GNP statistics as an indicator of changes in welfare of the nation a difficult task28.

10. Non-co-operation of people

In under-developed countries people do not cooperate with data-collection agencies. Due to fear of taxes, they give wrong information about sources and value of their incomes. To avoid tax, they tell their income or quantity of production as too low but at other occasions, they will claim too high production e.g., to get a bank loan.

(If people want to get some concession from the government or have to get a loan, they give a much greater figure than the actual but on the other side if a person owns two houses, he would inform them about one. When 4 ACs are being used in a house, they would concede only one).

11. Environmental factors

Spread of industries, extension of towns and population explosion causes large- scale degradation of the environment in the form of air and water pollution and soil deterioration. But such environmental ‘costs’ are not recorded. As a result, the value of national income is shown higher than actual.

12. Black economy

About 20% of our economy is unrecorded or underground. The officially declared incomes or payments are much less than the actual values.

Q.6) Explain measures to increase investment in Pakistan.

Answer:

HOW TO INCREASE SAVINGS AND INVESTMENT

To achieve a high growth rate, Pakistan has to become a high-saving country. There are two main sources of savings-private saving and public saving. Different strategies will have to be adopted for each type.

To raise saving and investment rates the following specific steps are suggested.

1. Saving drives: Saving is a habit and attitude of the people. Publicity can persuade them to save in their own interest and in the interest of family; children’s education, marriage, building of a house and old age

2. Literacy: An educated person is more conscious of his future and utilizing his income. Female education is very useful to encourage family savings.

3. Financial institutions: Expansion of banking facilities helps. Every saver should have access to a financial institution for depositing the saved amount.

4. Tax concessions: To encourage business savings, tax concessions should be allowed to those who save at a higher ratio of their profits.

5. Discouraging use of luxuries by heavy taxes on them.

6. Economy in government expenditure: The government departments and public corporations like WAPDA should observe the economy in expenditure. No development expenditure should be curtailed to the minimum.

7. Progressive Taxes: In case of progressive tax, and wealth. These can be helpful in collecting large amounts from persons with very high incomes.

8. Tax on big landlords: Since they squander their wealth on useless nonproductive activities such as horse-races and dog-races, ceremonies, they must be taxed heavily.

9. Promoting industrial class: Those who get their incomes from profit i.e., industrialists save more than the persons who get their incomes from rent i.e., landlords. So, the government, through monetary and fiscal policies, should try to increase the income of profit earning classes.

10. Better use of foreign Remittance: Pakistanis working abroad send huge amounts in the form of foreign exchange. These Pakistanis can be induced to invest their money on different projects, provided the government ensures security of investment.

11. Forced savings: If the government uses deficit financing judiciously (printing new money) it raises price level. People are forced to buy less and government resources increase. (Inflation caused by new money is a kind of hidden tax)

12. Foreign investment must be attracted: By offering incentives. Foreign firms like SUZUKI, PHILIPS, NESTLE are rendering valuable services. More firms should be induced to invest in Pakistan. (Fast growth of China and India is because of the huge flow of foreign investment).

13. Proper guidance: In technical and marketing matters should be provided to prospective investors. Many people have funds but are unable to invest due to ignorance.

14. Infrastructure: Basic facilities like roads, electricity and telephone should be provided so that investors have no difficulty to establish some industry.

15. Law and Order Situation should be improved: Terrorism and unrest, particularly in Karachi is not helpful for investment activity.

Q.7) Why do savings and investment low in Pakistan. How these can be increased

Answer:

CAUSES OF LOW SAVINGS IN PAKISTAN

1. Low income: Savings depend upon income level. A poor person cannot be expected to save much. Pakistan is a poor country. So, our saving rate is low.

2. Consumption-oriented society. Ours is a consumption-oriented society. People are fond of spending and want to impress others by purchasing new consumer items. They want to enjoy more in the present than in the future.

3. Illiteracy. An illiterate person has a limited outlook and poor planning expenditure and investment. He spends more on wasteful items. Illiteracy of women is a big hurdle for saving out of family) budgets.

4. Fast growing population eats away national income through consumption and little is left over for investment.

5. Inadequate chances for investment, unsatisfactory law and order situation, political uncertainty, undue interference by the government, departments leave little incentives for people to save.

6. Sow industrial growth: Our industrial sector is not expanding rapidly. As a result, incomes of the majority of our people do not rise and they cannot save.

7. Feudalistic political system: Pakistan’s political system is dominated by landlords who find no urge to reform the present situation. They waste their savings on luxury items and political adventurism. They resist change and industrial progress.

8. Inadequate financial institutions People of small means in urban and rural areas find difficulty in putting their savings somewhere safely.

9. Wastage of public money. Wastage of tax money on unnecessary expenditure by the governments leaves little scope for public saving.

10. Land and gold hungry people of Pakistan waste their savings on these items. But transfer of land from one person to another does not make a difference in the productive capacity of the country.

11. Social Evils: Social evils of our society are an obstacle for saving and investment activities. Corruption, wasteful ceremonies, litigation, nepotism, contributions to idle class of hereditary peers, large family size leave little scope for saving. Black money is spent freely on luxurious living and expensive marriages.

HOW TO INCREASE SAVINGS AND INVESTMENT

To raise saving and investment rates the following specific steps are suggested.

2. Literacy: An educated person is more conscious of his future and utilizing his income. Female education is very useful to encourage family savings.

3. Financial institutions: Expansion of banking facilities helps. Every saver should have access to a financial institution for depositing the saved amount.

4. Tax concessions: To encourage business savings, tax concessions should be allowed to those who save at a higher ratio of their profits.

5. Discouraging use of luxuries by heavy taxes on them.

6. Economy in government expenditure. The government departments and public corporations like WAPDA should observe the economy in expenditure. No development expenditure should be curtailed to the minimum.

7. Progressive Taxes In case of progressive tax, and wealth. These can be helpful in collecting large amounts from persons with very high incomes.

8. Tax on big landlords Since they squander their wealth on useless nonproductive activities such as horse-races and dog-races, ceremonies, they must be taxed heavily.

9. Promoting industrial class Those who get their incomes from profit i.e., industrialists save more than the persons who get their incomes from rent i.e., landlords. So, the government, through monetary and fiscal policies, should try to increase the income of profit earning classes

12. Foreign investment must be attracted by offering incentives. Foreign firms like SUZUKI, PHILIPS, NESTLE are rendering valuable services. More firms should be induced to invest in Pakistan. (Fast growth of China and India is because of huge flow of foreign investment)

13. Proper guidance in technical and marketing matters should be provided to prospective investors. Many people have funds but are unable to invest due to ignorance.

14. Infrastructure: Basic facilities like roads, electricity and telephone should be provided so that investors have no difficulty to establish some industry.

15. Law and Order Situation should be improved: Terrorism and unrest, particularly in Karachi is not helpful for investment activity.