Answer the following questions in about 150 words each: (a) Stating major assumptions in the Kaldor model of distribution…

(a) Kaldor's Model of Income Distribution

Nicholas Kaldor’s distribution model rests on key assumptions: a two-class economy comprising workers receiving wages (W) and capitalists receiving profits (P), such that total income Y = W + P; full employment where aggregate output is given; constant marginal propensities to save with capitalists saving more than workers (0 ≤ s_w < sₚ ≤ 1); and exogenous investment (I).

Total savings (S) comprises savings from wages and profits: S = s_w W + sₚ P

Substituting W = Y - P: S = s_w (Y - P) + sₚ P = s_w Y + (sₚ - s_w) P

In macroeconomic equilibrium, aggregate investment equals aggregate saving (I = S): I = s_w Y + (sₚ - s_w) P (sₚ - s_w) P = I - s_w Y

Dividing both sides by (sₚ - s_w) Y yields: P/Y = 1/(sₚ - s_w) (I/Y) - (s_w)/(sₚ - s_w)

If workers consume their entire income (s_w = 0), the relation simplifies to: P/Y = 1/(sₚ) (I/Y)

Since sₚ > s_w, the coefficient 1/(sₚ - s_w) is positive, proving that the share of profits in total national income depends directly on the investment-output ratio.

(b) Quantitative Methods of Credit Control

Quantitative credit control tools regulate the overall supply, cost, and availability of credit across the banking sector without sectoral preference.

Cash Reserve Ratio (CRR): The statutory fraction of Net Demand and Time Liabilities (NDTL) that commercial banks must hold as cash balances with the central bank. Raising the CRR contracts the money multiplier, reducing the liquidity base and lending capacity of banks.

Statutory Liquidity Ratio (SLR): The proportion of NDTL banks must maintain in unencumbered liquid assets, predominantly government securities. Altering the SLR affects the allocation of bank funds between sovereign paper and commercial credit.

Open Market Operations (OMOs): The outright sale or purchase of government securities by the central bank. Selling securities absorbs primary liquidity from the banking system, raising short-term money market rates.

Policy Repo and Bank Rate: The benchmark rates at which the central bank lends against collateral or rediscounts bills. Under the Reserve Bank of India’s monetary policy framework (such as its "withdrawal of accommodation" stance maintaining the repo rate at 6.50%), raising policy rates directly escalates the marginal cost of funds, transmitting into higher lending rates and dampening inflationary credit expansion.

(c) Partial Equilibrium Analysis of Tariffs

Under partial equilibrium for a small importing country facing a perfectly elastic world supply at price P_w, imposing a specific tariff t raises the domestic price to Pₜ = P_w + t.

Consumption Effect: The domestic price rise causes consumer demand to contract from D₁ to D₂. The total loss in consumer surplus is the area (a + b + c + d). Here, triangle d represents the pure consumption distortion loss (deadweight loss), as consumers either forgo utility-maximizing consumption or substitute toward higher-cost alternatives.

Revenue Effect: Captured by rectangle c, calculated as the volume of post-tariff imports (D₂ - S₂) multiplied by the tariff rate t. This constitutes a pure transfer of purchasing power from domestic consumers to the fiscal exchequer, causing no net loss in aggregate national welfare.

A prohibitive tariff eliminates imports, driving tariff revenue to zero while maximizing domestic distortion. India’s 2022 customs duty rationalization aimed to balance these effects by lowering duties on critical intermediate inputs to minimize deadweight production and consumption losses, while retaining strategic protective tariffs on finished goods.

(d) Domar's Growth Model and Investment Path

Evsey Domar highlights the dual character of investment: generating aggregate demand via the multiplier and expanding productive capacity.

Demand Side (Multiplier Effect): (dY_d)/dt = 1/s dI/dt where s is the marginal propensity to save.

Supply Side (Capacity Effect): (dYₛ)/dt = σ I where σ is the potential social average productivity of investment and I = dK/dt.

For dynamic equilibrium with continuous full capacity utilization, the growth of demand must equal the growth of productive capacity: (dY_d)/dt = (dYₛ)/dt 1/s dI/dt = σ I implies 1/I dI/dt = s σ

This is a first-order differential equation. Integrating both sides with respect to time t: ∫ 1/I dI = ∫ s σ dt ln I(t) = s σ t + C

Taking antilogs and setting the initial investment at t = 0 as I(0) = I₀: I(t) = I₀ e^s σ t

Thus, in Domar’s equilibrium, the time path of investment must expand exponentially at the constant rate g = s σ.

(e) Flow vs. Stock Renewable Resources and Intergenerational Equity

Flow renewable resources are continuous, non-storable energy streams whose current availability is entirely invariant to past human consumption, such as solar insolation, wind kinetic energy, and tidal flows. Stock renewable resources possess an exhaustible physical inventory that regenerates over time through biological or ecological cycles, such as unconfined groundwater aquifers, timber forests, and topsoil fertility.

The availability of stock renewable resources can be diminished for future generations if the rate of harvest (H) exceeds the resource's natural regeneration or recharge rate (R). When H > R, the stock shrinks. Persistent over-exploitation drives the resource below critical biological thresholds, leading to irreversible depletion. In contrast, flow resources cannot be depleted for future generations because unutilized flows dissipate naturally.

In the Green Revolution belts of Punjab and Haryana, excessive tube-well extraction driven by subsidized power has pushed groundwater draft to over 160% of annual replenishable recharge. This has permanently lowered the water table, exhausted deeper fossil aquifers, and compromised intergenerational resource access.