Project Work on

MACRO ECONOMIC
APPLICATION OF LAW OF
VARIABLE PROPORTION

Submitted in partial fulfilment of the requirement of

Class XI ECONOMICS
Academic Year: 2023 – 24
By
Laksh Hemant Harpalani
Roll No: 21
Under the supervision and guidance of
Mr. Abdul Ravoof
Economics Teacher
Our Own High School, Dubai, U.A.E.
 Certificate
This is to certify that Master Laksh Hemant Harpalani of Grade 11
Section G has carried out the project work in Economics on the topic
Macro Economic Application of Law of Variable Proportion as
prescribed by the Central Board of Secondary Education, New Delhi
during the academic year 2023-24 and the work has been found to be
bona fide.

Mr. Abdul Ravoof Date:01.02.2024

Teacher In-charge

----------------------------------------------- ---------------------------------------
External Examiner Internal Examiner

1
 Acknowledgement
The Author extends his heartfelt gratitude to all
who contributed to this project.
Firstly, his deepest appreciation goes to the
teacher in charge for his invaluable guidance.
Also thanks his Peers for enriching discussions.
To his family, their unwavering support and
belief in The Author’s abilities have been
invaluable.
Lastly, The Author is grateful to everyone who
participated or assisted. Thank you for being
part of this journey.

2
 Table of Contents
S. No. Chapters Page No.

Certificate 1

Acknowledgement 2

1 Introduction 4

2 Review of Literature 9

3 Analysis of Data 14

4 Findings and 29
Conclusions

Bibliography 32

3
INTRODUCTION

4
 1. Introduction
Importance of the study
The law of variable proportions, often known as the law of
factor returns, is a fundamental concept in the study of
production theory. An important economic theory states that an
increase in the quantity of an element of production, holding
other variables unchanged, reduces the marginal product of
that factor. The law of variable proportions is another term for
the law of proportionality. As the variable term increases, the
marginal product can become negative. When a variable factor
is increased and everything else remains constant, the total
score increases first at an increasing rate, then at a decreasing
rate, and finally at a decreasing rate.

The law of variable proportions examines how production

changes as the number of units of a variable component
increases. Accordingly, it refers to the effect of a change in the
factor coefficient on production. In other words, the rule
represents the short-run relationship between units of a
variable item and the volume of production. It assumes that all
other variables remain constant. This is also known as
returning to relationships between variable factors. The rule
states that if you increase the variable component while
keeping the other components constant, total production will
first increase at an increasing rate, then decrease at a
decreasing rate, until finally it begins to decrease.

5
Objectives of the study
1. To Examine Resource Allocation Efficiency: Analysing how
changes in the allocation of resources, such as labour and
capital, impact the overall efficiency of resource utilization
in the economy.
2. To Analyse Productivity Trends: Investigate the
relationship between changes in input factors and overall
productivity at the macroeconomic level.
3. To Understand Labor Market Dynamics: Examining how
changes in the quantity and quality of labour affect overall
production and employment levels in the economy.
4. To Evaluate the Impact on Inflation and Price Stability:
Understanding the impact of changes in input factors on
the overall price level can be crucial for maintaining price
stability.

Methodology of data collection

Data in this study have been found using secondary research. The
sources of the data are:
1. International Monetary Fund (IMF)
The IMF is an international organization established to
promote international monetary cooperation, exchange
rate stability, balanced growth of international trade, and
financial stability. It provides economic analysis and policy
advice, financial assistance, and technical assistance to
its member countries.
2. World Bank

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 The World Bank is an international financial institution that
provides financial and technical assistance to developing
countries for development projects (e.g., infrastructure,
education, health). Comprises two institutions: the
International Bank for Reconstruction and Development
(IBRD) and the International Development Association
(IDA).
3. Ministry of Statistics and Programme Implementation
(MOSPI) – India
MOSPI is a government agency in India responsible for
formulating policies, coordinating statistical activities, and
overseeing the country's statistical system. It plays a
crucial role in collecting, compiling, and disseminating
official statistics related to the Indian economy.
4. National Sample Survey Office (NSSO)
NSSO is a division of MOSPI and is responsible for
conducting large-scale sample surveys to collect data on
various socio-economic aspects in India. It plays a key role
in providing reliable statistical information for policy
formulation.
5. Central Statistical Office (CSO) – India
CSO is also a division within MOSPI and is primarily
responsible for compiling and releasing national accounts
statistics, including GDP estimates. It formulates policies
for maintaining and improving statistical standards.

Limitations of the study

1. This study has been prepared using secondary research
and is hence prone to errors due to possible inauthenticity

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 or non-reliability, despite rigorous research and fact
checking.
2. Institutional data, particularly from international
organizations like the IMF and World Bank, may be
aggregated at a national level, limiting detailed sectoral or
industry-specific analyses.
3. Economic models employed by these institutions often
assume rational behaviour and may oversimplify complex
decision-making processes, impacting the applicability of
the Law of Variable Proportions.
4. The study should account for global economic factors that
may influence domestic conditions, necessitating
consideration of external shocks and global economic
trends.

8
REVIEW OF
LITERATURE

9
 2. Review of Literature
This chapter reviews some of the past research done on the
topic. Some of them are:

1. The 3 stages of the law of variable

proportion by Alfred Marshall, Benham and
Samulson
Statement: As more units of a variable factor are employed
with a given amount of fixed factors, total production will
initially increase at an increasing rate, then at a diminishing rate
and at last falls

It may first show increasing returns, then constant for a while,

and, eventually, diminishing returns. In brief, as additional units
of a variable input are added to a given amount of fixed input,
ultimately, average and marginal products of the variable input
will decline.

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Three Stages of the Law

The law has three stages as explained below:

1. First Stage or Stage of Increasing returns: In this stage, the

TP increases at an increasing rate. This happens because
the efficiency of the fixed factors increases with addition
of variable inputs to the product.
2. Second Stage or Stage of Diminishing Returns: In this
stage, the TP increases at a diminishing rate until it
reaches the maximum point. MP is positive but
diminishing gradually.
3. Third Stage or Stage of Negative Returns: In this stage, the
TP declines and the MP becomes negative.

2. Diminishing Marginal Returns v/s Returns to

Scale by Christina Majaski and Amanda
Jackson

A level of optimal production ensures that all factors of

production are used efficiently. Revising production factors,
or inputs, affects output. Diminishing marginal returns result
from increasing input in the short run after an optimal
capacity has been reached while keeping one production
variable constant, such as labour or capital. Returns to scale
refers to how the degree of change in input factors changes
the output proportionally during production.

In economic theory, the law of diminishing marginal returns

predicts that when an optimal level of capacity is reached,
adding another unit or factor or production will result in smaller
increases in output. A larger amount of one factor of

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production, ceteris paribus inevitably yields decreased per-unit
incremental returns.

Reducing the impact of the law of diminishing marginal returns

may require discovering the underlying causes of production
decreases. Businesses carefully examine the production
supply chain for instances of redundancy or production
activities to reduce the impact of diminishing marginal returns.

Economists David Ricardo and Thomas Robert

Malthus contributed to the development of the law. Ricardo
was also the first to demonstrate how additional labour and
capital added to a fixed piece of land, such as in farming,
would successively generate smaller output increases.

Returns to scale measure the proportion between the increase

in total input and the resulting increase in output. There are
three kinds of returns to scale: constant returns to scale (CRS),
increasing returns to scale (IRS), and decreasing returns to
scale (DRS).

Key Differences

Diminishing marginal returns primarily looks at changes in

variable inputs and is a short-term metric. Variable inputs are
easier to change in a short time horizon when compared to
fixed inputs. Returns to scale focuses on changing fixed inputs
and the long-term production metric.

Both show that an increase in input will increase output until a

point. The main difference between the two is the time horizon
and the inputs that can be changed, whether variable or fixed.
Firms use both metrics in their decision-making process to
reach optimal production and cost efficiency.

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 3. History of the Law of Variable Proportion by
Ben Lutkevich
The first mention of the law of diminishing returns dates back
to the mid-18th century. Jacques Turgot was the first
economist to formulate the law of diminishing returns in
agriculture. He argued that equal amounts of capital and
labour applied sequentially to a given piece of land would
result in monotonically increasing production up to a certain
point, after which production would steadily decline with each
increase in inputs.

The classical economist David Ricardo called this law the

intensive margin of cultivation. He used it to show how
additional labour and capital added to a fixed plot of land
produce smaller and smaller increases in production. The
classical economist Thomas Robert Malthus applied a variation
of the law of diminishing returns to his demographic theory,
arguing that food production increases arithmetically while
population increases geometrically, causing the population to
exceed its food supply. Both theorists attribute diminishing
returns to reduced quality of inputs.

In contrast, neoclassical economists argue that every unit of

labour is equal and that diminishing returns occur as additional
units of labour are added to a fixed amount of capital due to
limitations on the entire production process. They argue that
value arises from the consumer's perception of a product, while
classical economists argue that value reflects the cost of
production.

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ANALYSIS OF
DATA

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 3. Analysis of Data
This chapter analyses the data collected for
the purpose of the objectives mentioned.
1. To Examine Resource Allocation Efficiency
a. Labour
In India, as of 2023, over 151 million, i.e. 60% people
are provided livelihood by agriculture thus providing
18% to the country’s GDP. This means that all these
people know the methods and techniques to conduct
agricultural activities.
On the other hand, in the manufacturing sector, nearly
35.6 people were employed in 2023 which is reportedly
31% less than the year 2017.
Now if these people employed in these 2 sectors
were switched, the production output would have been
affected adversely, as each sector does not know the
methods and techniques to use for the other sector.
Which means that the production output would have
fallen by a huge margin.
So, the Law of Variable Proportion would help us
study these adverse effects and thus would help us
avert such a situation in the future, and such an
application on macro-economic terms would only help
us analyse these effects on a large scale.
Many more factors such as proportion of full-time,
part-time, temporary, and informal workers in each
sector helps analyse workforce utilization patterns and
potential for productivity improvement. Also data on the

15
 age distribution, gender balance, education levels, and
skill profiles of the workforce in different sectors and
regions is crucial for understanding the available labour
pool.

b. Capital
The manufacturing industry is emerging as a key pillar
of the country's economic growth thanks to the
performance of key sectors such as automobile,
engineering, chemicals, pharmaceuticals and consumer
durables. The Indian manufacturing sector accounted for
16-17% of India's GDP before the pandemic and is
expected to be one of the fastest growing sectors. India
has the capacity to export $1 trillion worth of goods by
2030 and will emerge as a major global manufacturing
hub.

The manufacturing sector, which contributes 17% to the

country's GDP and employs over 27.3 million workers,
plays an important role in the Indian economy. The Indian
government hopes to make 25% of economic output
dependent on manufacturing by 2025 through the
implementation of various programs and policies. Thanks
to Indian government initiatives such as the National
Manufacturing Policy, which aims to increase the share of
manufacturing in GDP to 25% by 2025, and the
manufacturing PLI program launched in 2022, India is
gradually moving towards Industry 4.0 of the core
manufacturing sector to the level of global production

16
standards. India plans to offer incentives up to Rs. 18,000
crore (US$2.2 billion) to boost local production in six new
sectors, including chemicals, shipping containers and
vaccine materials.

The manufacturing industry has emerged as one of the

fastest growing sectors in India. Indian Prime Minister
Narendra Modi launched the Make in India program with
the aim of putting India on the world map as a
manufacturing hub and ensuring global recognition of the
Indian economy. The government's goal was to create 100
million new jobs in the industry by 2022.

Manufacturing exports have registered highest ever

annual exports of US$ 447.46 billion with 6.03% growth
during FY23 surpassing the previous year (FY22) record
exports of US$ 422 billion. By 2030, Indian middle class is
expected to have the second-largest share in global
consumption at 17%.

India’s gross value added (GVA) at current prices was

estimated at US$ 626.5 billion as per the quarterly
estimates of the first quarter of FY22.

India has potential to become a global manufacturing

hub and by 2030, it can add more than US$ 500 billion
annually to the global economy. As per the economic
survey reports, estimated employment in manufacturing
sector in India was 5.7 crore in 2017-18, 6.12 crore in
2018-19 which was further increased to 6.24 crore in
2019-20. India's display panel market is estimated to grow
from ~US$ 7 billion in 2021 to US$ 15 billion in 2025. As

17
 per the survey conducted by the Federation of Indian
Chambers of Commerce and Industry (FICCI), capacity
utilisation in India’s manufacturing sector stood at 72.0%
in the second quarter of FY22, indicating significant
recovery in the sector.

The manufacturing GVA at current prices was estimated at US$

110.48 billion in the first quarter of FY24.

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2. To Analyse Productivity Trends
a. Input & Output
The Indian services sector was the largest recipient
of FDI inflows worth US$ 105,400.88 billion between
April 2000-June 2023. According to the IVCA-EY
monthly PE/VC roundup, October 2022 recorded
investments worth US$ 3.3 billion across 75 deals,
including six large deals worth US$ 2.2 billion.
According to the Ministry of Commerce and Industry,
the service sector received US$ 7.1 billion in FDI equity
inflows in FY22.

The services sector of India remains the engine of

growth for India’s economy and contributed 53% to
India’s Gross Value Added at current prices in FY22 (as
per advance estimates). The services sector's GVA
increased by 6.5% in the third quarter (2022-23), and it
was the main driver of aggregate GVA growth
(accounting for approximately 84% of total GVA
growth). The services industry performed well in
H2:2022-23, boosted by contact-intensive services and
building activities. India’s services sector GVA
increased at a CAGR of 11.43% to Rs. 101.47 trillion
(US$ 1,439.48 billion) in FY20, from Rs. 68.81 trillion
(US$ 1,005.30 billion) in FY16. Between FY16 and FY20,
financial, real estate and professional services
augmented at a CAGR of 11.68% (in Rs. terms), while
trade, hotels, transport, communication and services
related to broadcasting rose at a CAGR of 10.98% (in
Rs. terms). India‘s IT and business services market is
projected to reach US$ 19.93 billion by 2025. In March
2023, the Manufacturing Purchasing Managers’ Index
(PMI) in India stood at 57.8. With the fastest growing
(9.2%) service sector globally, the sector accounts for a
66% share of India's GDP and generates about 28% of

19
the total employment in India. As per the First Advance
Estimates, Gross Value Added (GVA) in the services
sector is estimated to grow at 9.1% in FY23, driven by
13.7% growth in the contact-intensive services sector.

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b. Research & Development
Indian companies spent Rs 651.3 trillion in the last
decade, but less than one per cent of that money went
on research and development (R&D). As a share of net
sales, spending on R&D was 0.3 per cent in the
Financial Year 2022-23 (FY23). It was 0.4 per cent in
FY19.

21
 India’s research and development (R&D) expenditure-
GDP ratio of 0.7% is very low when compared to major
economies and is much below the world average of 1.8%.
The main reason is the low investment in R&D by the
corporate sector. While the corporate sector accounts for
about two-thirds of gross domestic expenditure on R&D
(GERD) in leading economies, its share in India is just
37%. There is evidence, however, suggesting that India’s
GERD data are an underestimate.

A 2022 info brief of the National Science Foundation

(NSF) of the United States on Foreign R&D by U.S.-based
multinational corporations (MNCs) shows a spend of $9.5
billion (₹649.7 billion) on R&D in India in 2018, which
increased to $9.8 billion (₹690.2 billion) in the following
year. There are MNCs from other leading countries also
spending on R&D in India. But the latest Research and
Development Statistics, published by the Department of
Science and Technology (DST) in 2020, has provided an
estimate of ₹60.9 billion R&D spending in 2017-18 by
foreign MNCs, which is only about 10% of what U.S. firms
have reported to have spent in India on R&D.

3. To Understand Labor Market Dynamics

a. Employment Patterns

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Employment pattern changes over time

i) Primary: Decreases

• Mechanization of farms reduces need for farm

workers. Rural workers migrate to the urban areas.
Raw materials become exhausted leading to loss of
mining jobs.
• Rural depopulation of farmers in MEDCs. Workers
prefer the better paid and less physically demanding
jobs in the tertiary sector.

ii) Secondary: Increases at first, then decreases

• Factory Industrialization initially requires a large

secondary workforce. Factory jobs are eventually
replaced by automation.

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 • Manufacturing industries increasingly move from
MEDCs to NICs where land and labour are cheaper

iii) Tertiary

• Large and growing informal service sector in urban

areas of LEDCs as workers migrate from the
countryside
• As a country develops, demand grows for services
such as health, education and tourism
• Strong growth in MEDCs of jobs in the knowledge
economy based on the processing of knowledge and
information using telecommunications
• Increase in producer services for manufacturing
industry, e.g. market research

b. Employment Education Levels

The census data on workers and their educational levels goes
on to reveal that a lion’s share of the total Indian workforce is
either illiterate or educated up to the secondary level, indicating its
poor level of competence.
Of the workers who get less than six months’ employment,
called marginal workers, nearly 40% are illiterate. And, of the
362.6 million workers who are employed for more than six months
a year, called main workers, 104 million are illiterate.
“Census 2011 has shown that out of about 55.5 million
marginal workers seeking/available for work in India, 21.9 million
are illiterate, followed by 20.9 million (37.6%) who have studied
below secondary level," the data released by the Registrar
General and Census Commissioner of India underlined. The rest
are matriculates or above.
Among the 60.7 million “non-workers seeking work in India",
33.6% are literate, having studied up to matriculation level,
followed by 31.1% who have received education between

24
 secondary and below graduation levels. Some 17.2% of these
non-workers are illiterate.
Of the 362.6 million main workers, 130.2 million (35.9%) are
literate but have studied below the secondary level. Besides, 71.5
million (19.7%) have studied between matriculation and
undergraduate levels. The rest are graduates and above.
The pool of main workers has 273 million males and 89 million
females. The huge pool of illiterate workers combined with those
who have studied up to the secondary level constitutes a lion’s
share of the India’s labour market, said a labour ministry official,
who declined to be named.
“From a policy point of view, the authorities now have to
improve the education and employability of the workforce to aid
economic growth. This data shows the quality and competitiveness
(or lack of it) of our workforce," the official added.
As per the data, out of the literate population presently
attending an educational institution, below-primary level leads the
table with a share of 32.6%, followed by primary (25.2%), middle
(15.7%), matriculation (11.1%), higher secondary (8.6%) and
undergraduate and above (6.8%).

4. To Evaluate the Impact on Inflation and Price

Stability

a. Consumer Price Index (CPI)

According to the data released by the National

Statistics Office (NSO), the Consumer Price Index (CPI)
inflation has eased to 5.02 percent in September from
6.83 percent in August, a three-month low. In June 2023,
the CPI inflation was 4.81 percent, well below RBI's upper

25
tolerance limit of 6 percent. In May 2023, it reached its
lowest point in over two years at 4.25 percent. In April
2022, the CPI peaked at 7.79 percent, whereas the lowest
point of all time was observed at 4.06 percent in January
2021.

In the context of the Wholesale Price Index (WPI),

which measures overall price levels before products reach
the retail market, the inflation data stood at -0.26 percent
in September, which was -0.52 percent in August. It was
at -3.48 percent in May 2023 and -0.92 percent in April
2023, compared to 1.34 percent in March 2023.

The inflation rate in India decreased from 6.83

percent in August to 5.02 percent in September. Earlier,
inflation rates stood at 7.44 per cent in July, 4.81 percent
in June and 4.25 percent in May.

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*The above table has been provided purely for comparison
purposes*

b. Producer Price Index (PPI)

Producer Prices in India decreased to 151.60 points

in December from 152.90 points in November of 2023.
Producer Prices in India averaged 104.97 points from
2004 until 2023, reaching an all-time high of 155.40 points
in June of 2022 and a record low of 62.44 points in April of
2004.

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Key information about India Producer Price Index Growth

India Producer Price Index (PPI) grew 0.3 % YoY in

Nov 2023, compared with a drop of 0.5 % YoY in the
previous month.

India Producer Price Index data is updated monthly,

available from Apr 1995 to Nov 2023, with an average
change of 5.0 % YoY.

The data reached an all-time high of 16.6 % YoY in

May 2022 and a record low of -6.1 % YoY in Aug 2015.

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FINDINGS AND
CONCLUSIONS

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 4. Findings and conclusions
The salient findings of the project work are
given in the following points:
1) Resource allocation efficiency is crucial, as
evidenced by the impact of switching labour
between agriculture and manufacturing sectors.

2) The manufacturing sector in India is a key driver of

economic growth, and government initiatives aim to
boost its contribution to GDP.

3) The services sector remains a significant contributor

to India's GDP, with notable growth in contact-
intensive services.

4) R&D expenditure in India is relatively low, and there

is a need for increased investment to enhance
competitiveness.

5) Labor market dynamics reveal a significant portion

of the workforce with lower educational levels,
highlighting the need for educational improvements.

6) Inflation, as measured by CPI, has shown variations,

while PPI indicates a slight growth in November
2023.

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Implications:
1) The study's findings suggest the importance of efficient
resource allocation, increased investment in R&D, and
educational improvements to enhance labour market
competitiveness.

2) Policymakers should consider sector-specific interventions

to optimize resource utilization and foster economic growth.

3) Ongoing monitoring of inflation indicators is essential for

maintaining price stability and informed economic decision-
making.

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BIBLIOGRAPHY

32
 Bibliography
International Monetary Fund (IMF)
https://www.imf.org/en/Data
World Bank
https://data.worldbank.org
National Sample Survey Office (NSSO)
https://www.mospi.gov.in/national-sample-survey-
officensso
Education GPS
https://gpseducation.oecd.org

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