Maharashtra HSC Board : Economics (49) : (Q.P. 2023 with Solution)

 

Maharashtra HSC Board 2023

Economics (49) 

 Time: 3 Hrs.                Sub: Economics           Max. Marks: 80

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Notes :(1) All questions are compulsory

(2) Draw neat tables / diagrams wherever necessary.

(3) Figures to the right indicate full marks.

(4) Write answers to all main questions on new page.

Q.1 (A) Complete the following statements:                                                (5) [20]

(i) Micro Economics is also called as _________.

(a) Income Theory            (b) Price Theory

(c) Growth Theory           (d) Employment Theory

(ii) Money Market faces shortage of funds due to _________.

(a) Inadequate saving        (b) Growing demand for cash

(c) Unorganized sector        (d) Financial Mismanagement 

(iii) Marginal utility of the commodity becomes negative when Total Utility of a commodity is _________.

(a) rising                        (b) constant

(c) falling                       (d) Zero

(iv) Public expenditure of any government shows _________.

(a) Constant trend            (b) Increasing trend

(c) Decreasing trend        (d) Fluctuating demand

(v) The relationship between income and demand for inferior goods is __________.

(a) direct                         (b) inverse 

(c) no effect                    (d) can be direct and inverse 

(B) Find the odd word out : 

(i) Revenue concepts : Total Revenue, Average Revenue, Total Cost, Marginal Revenue. 

(ii) Quantitative Tools of credit control : Bank rate, Open market operations, Foreign Exchange rate, Variable reserve ratio. 

(iii) Scope of Micro Economics : Theory of product pricing, Theory of factor pricing, Theory of Economic growth and Development. Theory of Economic welfare. 

(iv) Non-tax revenue: Fees, Penalty, Wealth tax, Special levy. 

(v) Types of Simple Index Number : Laspeyre's Price Index Number, Price Index Number, Quantity Index Number, Value Index Number. 

(C) Give economic term:                                                                             (6) 

(i) The volume of commodities and services turned out during a given period counted without duplication. 

Ans: National Income Committee (NIC)

(ii) A desire which is backed by willingness to purchases and ability to pay. 

Ans: Demand

(iii) Degree of responsiveness of a change of quantity demanded of a good to a change in its price. 

Ans: Price Elasticity of Demand

(iv) Very realistic competition in nature. 

Ans: Monopolistic

(v) Swati purchased raincoat for her father in rainy season. 

Ans: Time Utility

(D) Assertion and reasoning questions : 

(i) Assertion (A) : In perfect competition, price is determined by the forces of demand and supply. Reasoning (R): The number of buyers and sellers is so large that one person can not influence prices. Options : 

(1) (A) is true, but (R) is false. 

(2) (A) is false, but (R) is true. 

(3) Both (A) and (R) are True and (R) is the correct explanation of (A). 

(4) Both (A) and (R) are True and (R) is not the correct explanation of (A). 

(ii) Assertion (A) :A change in quantity demanded of one commodity due to a change in the price of other commodity is cross elasticity. 

Reasoning (R) : Changes in consumers' income leads to a change in the quantity demanded. 

Options:

(1) (A) is true, but (R) is false. 

(2) (A) is false, but (R) is true. 

(3) Both (A) and (R) are True and (R) is the correct explanation of (A). 

(4) Both (A) and (R) are True and (R) 0s not the correct explanation of (A). 

(iii) Assertion (A):Production for self-consumption is not accounted for in the national income. Reasoning (R) : The products kept for self consumption do not enter the market. 

Options: 

(1) (A) is true, but (R) is false. 

{2) (A) is false, but (R) is true. 

(3) Both (A) and (R) are True and (R) is the correct explanation of (A). 

(4) Both (A) and (R) are True and (R) is not the correct explanation of (A). 

(iv) Assertion (A): Foreign exchange management and control is undertaken by commercial banks. Reasoning (R): RBI has to maintain the official rate of exchange of rupee and ensure its stability. Options : 

(1) (A) is true, but (R) is false. 

(2) (A) is false, but (R) is true. 

(3) Both (A) and (R) are True and (R) is the correct explanation of(A). 

(4) Both (A) and (R) are True and (R) is not the correct explanation of (A). 

(V) Assertion (A): Supply is a relative term. 

Reasoning (R) : Supply is always expressed in relation to price, time and quantity. 

Options: 

(1) (A) is true, but (R) is false. 

(2) (A) is false, but (R) is true. 

(3) Both (A) and (R) are True and (R) is the correct explanation of(A). 

(4) Both (A) and (R) are True and (R) is not the correct explanation of (A). 

Q. 2. (A) Identify and explain the following concepts (Any THREE):                                     (6) [12] 

(i) A table seller sold the table for 2,000 per piece. In this way he sold 15 tables and earned 30,000. 

(ü) England imported cotton from India, made readymade garments from it and sold them to Malaysia. 03 14 

(iil) Ashok paid the tax on his income and property. 

(iv) Raju's father invests his money in a market for long term funds both equity and debt raised within and outside the country. 

(v) Apoor person wants to buy a car. 

(B) Distinguish between (Any THREE) : 

(i) Unitary elastic demand and Relatively elastic demand 

Ans: 

Unitary elastic demand	Relatively elastic demand
When a percentage change in price leads to a proportionate change in quantity demanded then demand is said to be unitary elastic.	When a percentage change in price leads to more than proportionate change in quantity demanded, the demand is said to be relatively elastic.
For example, 50% fall in price of a commodity leads to 50% rise in quantity demanded	For example, 50% fall in price leads to 100% rise in quantity demanded
Ed = % ∆ Q / % ∆ P     = 50 /50   = 1	Ed = % ∆ Q / % ∆ P Ed = 100 / 50       Ed = 2
Unitary elastic demand (Ed = 1)	Relatively elastic demand (Ed >1)

(ii) Output method of measuring national income and Income method of measuring national income 

Ans: 

Output method of measuring national income	Income method of measuring national income
Income method of measuring national income	This method of measuring national income is also known as factor cost method. This method estimates national income from the distribution side.
According to this method, the economy is divided into different sectors, such as agriculture, mining, manufacturing, small enterprises, commerce, transport, communication and other services	According to this method, the income payments received by all citizens of a country, in a particular year, are added up, that is, incomes that accrue to all factors of production by way of rents, wages, interest and profits are all added together, but income received in the form of transfer payments are ignored.
To avoid double counting this method suggests two alternative approaches for the measurement of GNP.	GNP can be treated as the sum of factor incomes, earned as a result of undertaking economic activity, on the part of resource owners and reflected in the production of the total output of goods and services during any given time period.

(iii) Demand deposit and Time deposit 

Ans:

Time deposit	Demand deposit
Deposits that are repayable after a certain period of time are known as time deposits or term deposits.	Deposits that are withdrawable on demand are known as demand deposits.
Commercial banks provides more interest on time deposits.	Commercial banks provides less interest on demand deposits.
Fixed deposits and Recurring deposits are the time deposits.	Saving deposits and Current deposits are the demand deposits.

(iv) Simple index number and Weighted index number 

Ans:

Simple index number	Weighted index number
It is the ratio of two values representing the variable, measured in two different situations or time periods.	It is calculated by assigning weights to different items is called weighted index number.
In this method equal importance is given to all items.	In this method equal importance is not given to all items.
Price index, Quantity index and Value index are the types of Simple index number.	Laspeyres’ index and Paasche’s index, Fisher’s ideal index etc. are the types of weighted index number.

(v) Stock and Supply

Supply	Stock
Supply is the actual part of the stock which the sellers are able and willing to offer for sale at a given price.	Stock is the total quantity of goods manufactured or stored.
Supply comes from stock.	Stock is the source of supply.
Supply is always less than stock or supply cannot exceed stock.	Stock is always greater / more than supply or stock can exceed supply.
Supply is the function of stock.	Stock is the function of production.
In case of perishable goods, supply would be equal to stock.	In case of durable goods, the stock is more than supply.
Supply is a flow concept.	Stock is a fund.
Supply is more elastic.	Stock is less elastic.

Q. 3. Answer the following (Any THREE): 

(i) Explain any four points of importance of Micro economics. 

Ans:

Importance of Micro Economics : 

 1) Price Determination : Micro economics explains how the prices of different products and various factors of production are determined. 

 2) Free Market Economy : Micro economics helps in understanding the working of a free market economy. A free market economy is that economy where the economic decisions regarding production of goods, such as ‘What to produce?, How much to produce?, How to produce? etc.’ are taken at individual levels. There is no intervention by the Government or any other agency. 

 3) Foreign Trade : Micro economics helps in explaining various aspects of foreign trade like effects of tariff on a particular commodity, determination of currency exchange rates of any two countries, gains from international trade to a particular country etc.

 4) Economic Model Building : Micro economics helps in understanding various complex economic situations with the help of economic models. It has made a valuable contribution to economics by developing various terms, concepts, terminologies, tools of economic analysis etc. Economic models are built using various economic variables

 

(ü) Explain the Ratio or percentage method of measuring price elasticity of demand. 

Ans; 

Ratio or Percentage method :

Ratio method is developed by Prof. Marshall. According to this method, elasticity of demand is measured by dividing the percentage change in demand by the percentage change in price. 

Percentage method is also known as Arithmetic method. 

Price elasticity is measured as : 

Ed = Percentage change in Quantity demanded / Percentage change in Price 

Ed = % ∆ Q / % ∆ P 

 Mathematically, the above formula can be presented as under. 

Ed = ∆ Q /Q ÷ ∆ P/ P 

 Ed = ∆ Q /Q × P / ∆ P 

Q = Original quantity demanded 

∆Q = Difference between the new quantity and original quantity demanded. 

P= Original price 

∆P= Difference between new price and original price Numerical example :

(iii) Explain any four features of national income. 

Ans: 

Features of National Income : 

 1) Macro Economic concept : National income represents income of the economy as a whole rather than that of an individual. Hence it is a macro economic concept. 

 2) Value of only final goods and services : In order to avoid double counting in national income, the value of only final goods and services produced in the economy are considered. The value of intermediate goods or raw materials is not considered. For example, while estimating the production of shirts, there is no need to take the value of cotton, as it is already included in the price of the shirts. 

 3) Net aggregate value : National income includes net value of goods and services produced and does not include depreciation cost. (i.e. wear and tear of capital assets) 

 4) Net income from abroad : National income includes net income from abroad i.e. difference between export value and import value (X-M) and net difference between receipts from abroad and payments made abroad (R-P). 

 5) Financial year : National income is always expressed with reference to a time period. In India, it is from 1st April to 31st March.

 6) Flow concept : National income is a flow concept as it shows flow of goods and services produced in the economy during a year. 

 7) Money value : National income is always expressed in monetary terms. It represents only those goods and services which are exchanged for money 

(iv) Explain any four problems faced by the money market in India. 

Ans;

Problems of the Indian Money Market : Compared to advanced countries, the Indian money market is less developed in terms of volume and liquidity.

 Following points explain the problems of the Indian Money Market : 

 1) Dual Structure of the Money Market : Presence of both, the organized and unorganized sector in the money market leads to disintegration, lack of transparency and increased volatility. The unorganized markets lack co-ordination and do not come under the direct control and supervision of the RBI. 

 2) Lack of uniformity in the rates of interest : The money market comprises of various entities such as commercial banks, co-operative banks, non-bank finance companies, development finance institutions, investment companies etc. The category of borrowers is also different. 

 3) Shortage of funds : Money market faces shortage of funds due to inadequate savings. Low per capita income, poor banking habits among the people, indulgence in wasteful consumption, inadequate banking facilities in the rural areas etc. have also been responsible for the paucity of funds in the money market. 

 4) Seasonal fluctuations : Demand for funds varies as per the seasons. During the peak season, from October to June, finance is required on a large scale for various purposes such as trading in agricultural produce, investment in business activities etc. This results in wide fluctuations in the money market. 

 5) Lack of financial inclusion : Banking facilities in the country are still inadequate and inaccessible to the vulnerable groups such as the weaker sections and the low income groups. This shows lack of financial inclusion. 

 6) Delays in technological upgradation : Use of advanced technology is a prerequisite for the development and smooth functioning of financial markets. Delays in upgradation of technology hampers the working of the money market 

(v) Explain any four exceptions of the law of Diminishing marginal utility. 

Ans:

Exceptions to the Law of Diminishing Marginal Utility : 

 Following are the exceptions to the law of diminishing marginal utility : 

 1) Hobbies : In certain hobbies like collection of various stamps and coins, rare paintings, music, reading etc., the law does not hold true because every additional increase in the stock gives more pleasure. This increases marginal utility. However, this violates the assumption of homogeneity and continuity. 

 2) Miser : In the case of a miser, every additional rupee gives him more and more satisfaction. Marginal utility of money tends to increase with an increase in his stock of money. However, this situation ignores the assumption of rationality.

 3) Addictions : It is observed in case of a drunkard that the level of intoxication increases with every additional unit of liquor consumed. So MU received by drunkard may increase. Actually it is only an illusion. This condition is similar to almost all addictions. However, this violates the assumption of rationality. 

 4) Power : This is an exception to the law because when a person acquires power, his lust for power increases. He desires to have more and more of it. However, this again violates the rationality assumption. 

 5) Money : It is said that the MU of money never becomes zero. It increases when the stock of money increases. This is because money is a medium of exchange which is used to satisfy various wants. However, according to some economists, this law is applicable to money too. For example, marginal utility of money is more to a poor person than to a rich person.

However, these, exceptions are only apparent. Since they violate some or the other assumptions of the law and hence, they are not real exceptions.

Q. 4. State with reasons whether you agree or disagree with the following statements (Any THREE) : 

(i) There are no exceptions to the law of supply. 

Ans: Disagree 

There are Following are the exceptions to the law of supply.

 1) Supply of labour : Labour supply is the total number of hours that workers to work at a given wage rate. It is represented graphically by a supply curve. In case of labour, as the wage rate rises the supply of labour (hours of work) would increase.

2) Agricultural goods : The law of supply does not apply to agricultural goods as they are produced in a specific season and their production depends on weather conditions. 

3) Urgent need for cash : If the seller is in urgent need for hard cash, he may sell his product at which may even be below the market price. 

 4) Perishable goods : In case of perishable goods, the supplier would offer to sell more quantities at lower prices to avoid losses. For example, vegetables, eggs etc. 

 5) Rare goods : The supply of rare goods cannot be increased or decreased according to its demand. Even if the price rises, supply remains unchanged. For example, rare paintings, old coins, antique goods etc

 

(ü) Balance of Trade and Balance of Payment are two different concepts. 

Ans: Agree

The Balance of payments of a country is a systematic record of all international economic transactions of that country during a given period, usually a year. 

 According to Ellsworth, “Balance of payments is a summary statement of all the transactions between the residents of one country and the rest of the world.

Balance of trade is the difference between the value of a country’s exports and imports for a given period. Balance of trade is also referred to as the international trade balance

According to Samuelson, “if export value is greater than the import value it is called as trade surplus and if import value is greater than export value, then it is called as trade deficit.”

(üi) Index numbers are very significant / important in economics. 

Ans: Agree

Index numbers are indispensable tools of economic analysis. Following points explain the significance of index numbers : 

 1) Framing suitable policies : Index numbers provide guidelines to policy makers in framing suitable economic policies such as agricultural policy, industrial policy, fixation of wages and dearness allowances in accordance with the cost of living etc. 

 2) Studies trends and tendencies : Index numbers are widely used to measure changes in economic variables such as production, prices, exports, imports etc. over a period of time. For example, by examining the index of industrial production for the last five years, we can draw important conclusions about the trend of industrial production whether it shows an upward tendency or a downward tendency. 

 3) Forecasting about future economic activity : Index numbers are useful for making predictions for the future based on the analysis of the past and present trends in the economic activities. For example, based on the available data pertaining to imports and exports, future predictions can be made. Thus, forecasting guides in proper decision making.

 4) Measurement of inflation : Index numbers are also used to measure changes in the price level from time to time. It enables the government to undertake appropriate anti-inflationary measures. There is a legal provision to pay the D.A. to the employees in organised sector on the basis of changes in Dearness Index. 

 5) Useful to present financial data in real terms : Deflating means to make adjustments in the original data. Index numbers are used to adjust price changes, wage changes etc. Thus, deflating helps to present financial data in real terms (at constant prices)

(iv) There are no theoretical difficulties in the measurement of National Income. 

Ans; Disagree

A) Theoretical Difficulties or Conceptual Difficulties : 

 1) Transfer payments : Individuals get pension, unemployment allowance etc. but whether these transfer payments should be included in national income or not, is a major problem. On one hand they are a part of individual income and on the other hand, they are part of Government expenditure. Hence, these transfer payments are not included in national income. 

 2) Illegal income : Illegal incomes like income from gambling, black marketing, theft, smuggling etc. are not included in national income. 

 3) Unpaid services : For the purpose of calculating national income, only paid goods and services are considered. However, there are a number of unpaid services which are not accounted for in the calculation of national income. For example, services of housewives and the services provided out of love, affection, mercy, sympathy, charity etc. are not included in national income. 

 4) Production for self consumption : The products kept for self consumption by the farmers and other allied producers do not enter the market. Hence, it is not accounted for in the national Income. 

 5) Income of foreign firms : According to IMF, income of a foreign firm, should be included in the national income of the country, where the firm actually undertakes the production work.

(v) Macro economics is different from Micro economics. 

Ans: Agree

Micro economics and Macro economics are the two main branches of modern economics. The term ‘micro’ is derived from the Greek word, ‘Mikros’ which means small or a millionth part. The term ‘macro’ is derived from the Greek word, ‘Makros’ which means large.

Micro means a small part of a thing. Micro economics thus deals with a small part of the national economy. It studies the economic actions and behaviour of individual units such as an individual consumer, individual producer or a firm, the price of a particular commodity or a factor etc

Macro economics is the branch of economics which analyses the entire economy. It deals with the total employment, national income, national output, total investment, total consumption, total savings, general price level interest rates, inflation, trade cycles, business fluctuations etc. Thus, macro economics is the study of aggregates

Prof A. P. Lerner - “Micro economics consists of looking at the economy through a microscope, as it were, to see how the millions of cells in the body of economy – the individuals or households as consumers and individuals or firms as producers play their part in the working of the whole economic organism.”

J. L. Hansen - “Macro economics is that branch of economics which considers the relationship between large aggregates such as the volume of employment, total amount of savings, investment, national income etc.” 

Q.5. Study the following table, figure, passage and answer the questions given below it (Any TWO) : 

(i) Observe the following table and answer the questions given below it :

Unit of Commodity	Total Utility (TU) unit	Marginal Utility (MU) units
1	6
2		5
3	15	4
4	15
5		-1

Questions: 

 (1) Complete the above table. 

Ans: 

Unit of Commodity	Total Utility (TU) unit	Marginal Utility (MU) units
1	6	6
2	11	5
3	15	4
4	15	0
5	14	-1

(2) (a) When total utility is Maximum, the marginal utility is 

Ans: When total utility is Maximum, the marginal utility is ZERO

 (b) When total utility falls. the marginal utility becomes                      (1) 

Ans: When total utility falls. the marginal utility becomes Increased

(ii) In the following diagram AE is the linear demand curve of a commodity. On the basis of the given diagram state whether the following statements are True or False :

(1) Demand at point 'C' is relatively elastic demand. 

Ans: True

(2) Demand at point 'B' is unitary elastic demand. 

Ans: False

 (3) Demand at point 'D' is perfectly inelastic demand.

Ans: False

 (4) Demand at point ´A' is perfectly elastic demand. 

Ans: False

(iii) Read the given passage and answer the questions:

 Index Number is a technique of measuring changes in a variable or group of related variables with reference to time, geographical location and other characteristics.

Index Number is very useful for economists, farmers, traders, government, educationalists and trade union leaders for planning and. implementing the plans according to their sector. 

 The scope of index number is not limited to only one subject but it extends to many subjects such as Economics, Educational science, Psychology, History, Sociology, Geography etc. 

    While framing index number its objective must be determined. To attain the objective the information is collected in various ways and this information is used for comparing two different time periods. For this purpose, the base year's index is assumed as 100 and accordingly the value of the current year is calculated. 

     Laspeyre, Paasche and Fisher have suggested different methods for constructing index numbers. 

 Questions: 

 (1) Explain the meaning of Index Number. 

Ans:  Index Number is a technique of measuring changes in a variable or group of related variables with reference to time, geographical location and other characteristics.

 (2) To whom the Index Number is useful? 

Ans: Index Number is very useful for economists, farmers, traders, government, educationalists and trade union leaders for planning and. implementing the plans according to their sector. 

 (3) Express your opinion about the given passage. 

Ans: To attain the objective the information is collected in various ways and this information is used for comparing two different time periods. For this purpose, the base year's index is assumed as 100 and accordingly the value of the current year is calculated. 

     Laspeyre, Paasche and Fisher have suggested different methods for constructing index numbers. 

 Q.6 Answer the following questions in detail (Any TWO):             [16]

 (i) State and explain the law of demand with exceptions. 

Ans;

The law of demand was introduced by Prof. Alfred Marshall in his book, ‘Principles of Economics’, which was published in 1890. The law explains the functional relationship between price and quantity demanded. 

Statement of the Law : 

 According to Prof. Alfred Marshall, “Other things being equal, higher the price of a commodity, smaller is the quantity demanded and lower the price of a commodity, larger is the quantity demanded.”

Exceptions to the Law of Demand : There are certain exceptions to the law of demand. It means that under exceptional circumstances, consumer buys more when the price of commodity rises and buys less when price of commodity falls. In such cases, demand curve slopes upwards from left to right. i.e. the demand curve has a positive slope as shown in fig

Exceptional Demand Curve

Following are the exceptions to the law of demand: 

 1) Giffen's paradox : Inferior goods or low quality goods are those goods whose demand does not rise even if their price falls. At times, demand decreases when the price of such commodities fall. Sir Robert Giffen observed this behaviour in England in relation to bread. He noted that, when the price of bread declined, people did not buy more because of an increase in their real income or purchasing power. They preferred to buy superior good like meat. This is known as Giffen's paradox. 

 2) Prestige goods : Expensive goods like diamond, gold etc. are status symbol. So rich people buy more of it, even when their prices are high. 

 3) Speculation : The law of demand does not hold true when people expect prices to rise still further. In this case, although the prices have risen today, consumers will demand more in anticipation of further rise in price. For example, prices of oil, sugar etc. tend to rise before Diwali. So people go on purchasing more at a high price as they anticipate that prices may rise during Diwali. 

 4) Price illusion : Consumers have an illusion that high priced goods are of a better quality. Therefore, the demand for such goods tend to increase with a rise in their prices. For example, branded products which are expensive are demanded even at a high price. 

 5) Ignorance : Sometimes, due to ignorance people buy more of a commodity at high price. This may happen when consumer is ignorant about the price of that commodity at other places. 

 6) Habitual goods : Due to habit of consumption, certain goods like tea is purchased in required quantities even at a higher price

(ii) Explain the meaning of Monopoly with its features.

Ans:

Monopoly : Meaning and Definition : The term monopoly is derived from the Greek word ‘Mono’ which means single and ‘poly’ which means seller. Monopoly is a market in which there is only one seller who controls the entire market supply for a product which has no close substitute. 

 According to E. H. Chamberlin, “Monopoly refers to a single firm which has control over the supply of a product which has no close substitute.”  

Following are the main features of monopoly market : 

 1) Single seller : In monopoly, there is no competition as there is only one single producer or seller of the product. But, the number of buyers is large. 

 2) No close substitute : There are no close substitutes for the product of the monopolist. Therefore, the buyers have no choice. They have to either buy the product from the monopolist or go without it. The cross elasticity of demand for his product is either zero or negative. 

 3) Barriers to entry : Entry of the rivals is restricted due to legal, natural, technological barriers which do not allow the competitors to enter the market.

 4) Complete control over the market supply: The monopolist has complete hold over the market. He is the sole producer or seller of the product. 

 5) Price maker : A monopolist can fix the price of his own product as he controls the whole market supply. Monopolist is a price maker. 

 6) Price discrimination : Monopolist being a price maker, he can charge different prices to different consumers for the same product, on the basis of time, place etc. Thus, price discrimination is an important feature of monopoly market. For example, students and senior citizens are provided railway tickets at concessional rates. 

 7) No distinction between firm and industry: A monopolist is the sole seller and producer of the product. A monopoly firm itself is an industry.

(iii) Explain various reasons for the growth of public expenditure. 

Ans:

 Public Expenditure : Public expenditure is that expenditure which is incurred by the public authority [Central, State and Local Bodies] for protection of their citizens, for satisfying their collective needs and for promoting their economic and social welfare.

Reasons for Growth in Public Expenditure : It is observed that there is a continous growth in public expenditure in a developing country like India. 

Let us study some of the important reasuns : 

 1) Increase in the Activities of the Government : As mentioned earlier, the modern government performs many functions for the social and economic development of the country. These functions include spread of education, public health, public works, public recreation, social welfare schemes etc. It is observed that new functions are continuously being undertaken and old functions are being performed more efficiently on a large scale by the government. This leads to increase in public expenditure. 

 2) Rapid Increase in Population : Population of developing countries like India is increasing fast. In 2011 Census, it was 121.02 crores. As a result, the government has to incur greater expenditure to fulfil the needs of the increasing population. 

 3) Growing Urbanization : Spread of urbanization is a global phenomenon of the day. This leads to increase in the government expenditure on water supply, roads, energy, schools and colleges, public transport, sanitation etc. 

 4) Increasing Defence Expenditure : In modern times, defence expenditure of the government is increasing even in the peace time due to unstable and hostile international relationships. 

 5) Spread of Democracy : Majority of the countries in the world are democratic in nature. A democratic form of government is expensive due to regular elections and other such activities. This results in the increase in total expenditure of the government. 

 6) Inflation : Just like a private individual, the government has to buy goods and services from the market for the spread of economic and social development. Normally, prices show a rising trend. Due to this, the government has to incur increasing costs.

 7) Industrial Development : Industrial development leads to an increase in production, employment and overall growth in the economy. Hence, the government makes huge efforts for implementing various schemes and programmes for industrial development. This results in increase in government expenditure. 

 8) Disaster Management : Many natural and man-made calamities like earthquakes, floods, cyclones, social unrest etc. are occurring more frequently. The government has to spend a huge amount for the disaster management which increases total expenditure. Modern governments are working for ‘welfare state’. Hence, there is a continuous increase in the public expenditure.