ROLE OF MONEY SUPPLY IN DEFICIT FINANCING AND GROWTH RATE OF AGRICULTURE SECTOR
SUBMITTED BY: NASIR MEHMOOD
INTRODUCTION:
Deficit Financing is the most useful methods of promoting economic development in under developed countries. The nature of an UDC is such that sufficient private investment is not forth coming due to various social, Economic and institutional factors.
Therefore, the responsibilities of augmenting the rate of net investment in the Economy is on Government on account of the lack of sufficient resources to finance public investment, Govt. have resort to the method of deficit financing.
Deficit Financing may be used for the development of economic and social over heads, such as construction of Road, Railway, Power Project, School, Hospitals, Water management system and basic infrastructure, small link Road to Irrigation Lands ,New irrigation water channels etc.
By providing socially use full capital, Deficit Financing is able to break bottle necks and structural rigidities and thereby increasing productivity.
Moreover, the fiscal apparatus in (UDCS) is neither efficient nor cannot be easily made so, to enforce the required savings needs for capital formation. Further deficit financing by increasing money income Augments Community Savings. It is an effective instrument of forced savings, when the Govt. Resorts to Deficit financing. It takes away Real Resources from the peoples.
The transfer of resources takes place in concealed manner, when the Govt. bays goods and services for its own uses. There being a shortage of real resources in an UDCS little is left to be used by the people who are forced to save more. Moreover, deficit spending by the state on Development project leads to increased employment, output and income.
This increase in income tends to raise the Demand for consumer Goods which lead to the rise in price due to deficient supplies and this process lead to inflation.
In such situation a part of the increased incomes can be taken away through taxation by the Government. It is another way of forced saving which can be Utilized tor capital formation. However. Some price rises may well occurred in an economy trying to increase its real capital.
INCREASE IN AGREGATE SPENDING
In 2 Sector Economy aggregate spending equals the sum of Consumption and investment expenditures with a stable consumption Function. Consumption expenditure will rise only as a result of rise in Income, therefore. A rise in investment expenditure is necessary to initiate a Rise in income. Consequently we may determines total rise in income that will resulted from any given rise in investment by using the simple Multiplier expression.
Dy/DG = 1/(1-MPC) = DY/DG = 1/ (mps)
MPC=O.8
MPS=O.2
Putting the values in simple multiplier equation.
K=Dy/dg=1/ (1-0.8) =5 k=5 THEN
If dG = 100$ THEN
Dy= 5*100$=500$
THE EQUALIBRIUM RATE OF GROWT
There is some rate of Growth at which the increase in actual output in each period DYA will just equal that's periods increase in capacity output DYP. This rate is called the equilibrium rate of Growth or in other words this is the rate of growth at which as government expenditure increase output of the country will increase with the same proportion. It government Invest 1SbilIion in agriculture sector the net change in output of the country' Due to this investment must be equal or more to invested amount.
ROLE OF DEFICIT FINANCE IN AGRICULTURE SECTOR.
In this paper the basic concept involves that how we can increase in level of National Income, Employment, Investment, in an UDCS like Pakistan through increase in investment in agriculture sector without any bad impact in economy. In an under development country when private investment is not sufficient to promote economic activities in the economy, we could increase national income through increase in government investment (Especially in Agriculture Sector). Because in UDCS a slight change in investment bring
More change in production, employment, price level and personal income of
Farmers. This Government spending through deficit financing can affect the
Agriculture sector in different ways.
BACK WARD AGRICULTURE REGIONS.
These funds will spend in the poor/backward Regions to increase the productivity of the country in Agriculture Sector. The following measures can be taken by the Government:-
1. Water management at small level.
2. Leveling of Land for water saving
3. Pesticide, fertilizer, and high yield breeds at subsidies rate.
4. Subsidy on Electricity and Energy prices introduction of agriculture
5. Subsidy on Modern Technology.
6. To develop new River Canals.
7. Small link roads to irrigation lands.
8. To build up new Dams.
9. To increase water storage capacity during rainy season.
10. To introduce buffer stock schemes
11. Price support for agriculture product.
12. Agriculture awareness programmed
13. Short term loan ill Door Step.
14. Long term loan at low interest rate.
This investment through deficit financing will bring an increase in output, foods products raw material for industrial products in the economy. The use of pesticides, fertilizer, Vligh yielding breeds, water management and awareness programme will return outcome within 2/3 month, due to which personal income DI crops grower will increase to 50% in this period of time, only use of pesticide will affect the productivities up to 35% in Agriculture Sector. This increase in income will improve their living standard due to which consumer goods demands will increase and this increase in demand of consumer goods is not as much which increase price level in the economy but this will generate a healthy economic activity in economy.
CRASH PROGRAMME OF AWARENESS:
To implement this investment policy properly Government should invest some money on awareness programme for formers and Distributors of Agriculture inputs in the back ward areas of the economy.
TO INCREASE IN CULTIVATION AREA
Funds should investment in the area of the country where land is not able to cultivation. In these areas investment should be made on leveling of barons' lands, management of water for barons' areas and use of modern agriculture machinery. The production function will shift upward to Q1f (I) as shown in diagram.
DIAGRAM:
In this Way cultivation area of the country will be increased due to which GNP Will increase in the economy from (a to b) only due to technical, biological and mechanical changes Will same labor force. This investment will bring change within a very short time, so price level will not change in the economy.
According to economies survey of paining and development commission of Pakistan total irrigation land in the country is 55 million hector and only 21 million hector lands is cultivated during the last years. According to this economic survey 0.4 million hector land is going to barons annually due to the seepage of water from canals.
1. SIRILANKA has increased his rice crops during 1965-1969 34% by these techniques.
2. Wheat output also increases 60% in Pakistan during 1967-1969 by these methods.
EFFECT ON PRICE LEVEL
AS money supply increase due to deficit finance output will also increase more than invested amount. The prices of foods product consumer product and capital goods/items will not be changed due to the fact that in the absence of perfect competition there are so may produce in the economy and latest technology used by the producer of agriculture product price Jewel will not be changed.
I can also support my point of view with the logic that if there is d possibilities of shortage of goods in the economy then. A huge investment on publicity will not be required to the producer of consumer as well as capital items.
ROLE OF INTERNATIONAL TRADE IN PRICE LEVEL
In the presence of INTL Trade and internet access of buyer and seller, there is not any possibility of inflation in the economy by opting deficit finance method because shortage of supply could meet by imports throughout the world and surpluses stock could be export to the whole world.
EFFECT OF MONEY SUPPLY BY USING IS.LM FRAMME WORK
We can also explain the change in Government expenditure through
Diagram shown as below using IS, LM Frame work.
Diagram:
In this diagrammed we see that as Government increased money supply through monetary decision LM curve shill right wards due to which rate of interest fall i1 to i2 and due to this change in money supply and fall ill interest rate government and private investment increase and IS CURVE shift right wards and intersect LN'II curve at point E2 where level of national income increase from Y ItoY2.
In the above diagram, we see that increase in level of National Income from y to y1 is due to money supply effect in (Agriculture sector effects). And change in (yl-Y2) IS deficit finance effect in other words as money supply increase rate of interest fall i1 to i2 due to which investment increase in
Other sectors of the economy and due to this increase in investment, output level and national income also increase from yl-y2.
1. Shift in IS-ISI, due to deficit finance.
2. Change y-y1 due to money supply.
3. Shift in LM-LM1 due to increase in money supply.
4. Change in rate of interest i1 to i2 is due to money supply.
5. Change in y I-Y2 is due to fall in rate of interest and due to this investment increase in other sectors of the economy.
THREE MARKET ANALYSIS
We may explain three markets equilibrium at the same time .these three markets determine different things ,price determine in money markets, saving and investment determine in goods markets ,but level of employment determine in labor markets shown in diagrammed below,
ABRIVATIONS'
1. M/P = Real money supply
2. N-M = Supply curve of labor in classical model.
3. r = Real rate of interest
4. YF = Level of full employment.
5. N.I = National income.
6. NM = AS SUPPLY CURVE OF LABOR IN CLASSICAL ECONOMICS.
LEVEL OF NATIONAL IMCOME, EMPLOYMENT
Diagram:
In this diagram we see that economic is in equilibrium point E0. This point determine the level of employment Y/P=YF which is also level of full employment. In classical economics labor market is always in full employment and rate of interest is r.
MONEY SUPPLY AS POLICY INSTROMENTS IN 3 MARKET ANALYSIS
If there is deflationary gap in the economy or situation oi under full employment we can use money supply as a policy instruments in the economy as shown in diagram below,
Diagram
In this diagram 3 markets are in equilibrium at point E2 but IS Lm/p0 at point EO and associated employment level is YB and rale of interest is ro. we can achieve YF by change in money supply. in this diagram we increase money supply and LM curve shift right clown wards L.M2/P() intersect with goods market curve IS and labor market curve at point E2.whree full employment level is YF and rate 01 interest is r2.
DANGER OF SAYING.
In this working paper I concentrate on the fact that high rate of individual saving are critical to the growth & expansion of the economy. I believe that consumption and Government expenditure has more positive effect than saving. It’s clear that less spending may not be good for the economy. As a nation. We might actual hurt business does no capital [or investment, but saving is not the primary source of business capital, to use an extreme example. If everybody saved all their income business would sell nothing and the economy would collapse.
THE PROBLEMS.
1. Market imperfections.
2. Low elasticizes in food products.
3. Poor administration by the Government Institution.
4. Long term project needs continuous dosages of finance.
5. Re-distribution of Income in favor of employers
6. Disparities in income.
7. Exports not increase as much imports increase.
8. Increase in price level in the economy
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