DIPLOMA IN SOCIAL WORK AND COMMUNITY DEVELOPMENT

MODULE ONE
DEVELOPMENT ECONOMICS

TOPIC ONE: INTRODUCTION TO DEVELOPMENT ECONOMICS

MEANING OF DEVELOPMENT ECONOMICS
COMPONENTS OF DEVELOPMENT ECONOMICS
ROLE OF DEVELOPMENT ECONOMICS
TOPIC TWO: ECONOMIC GROWTH AND DEVELOPMENT
MEANING OF ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT
CHARACTERISTICS OF DEVELOPING COUNTRIES
THEORIES OF ECONOMIC GROWTH AND DEVELOPMENT
FACTORS INFLUENCING ECONOMIC GROWTH AND DEVELOPMENT
STRATEGIES FOR ECONOMIC GROWTH
TOPIC THREE: POPULATION AND DEMOGRAPHIC FACTORS
MEANING OF TERMS POPULATION AND DEMOGRAPHY
THEORIES OF POPULATION
FACTORS INFLUENCING POPILATION SIZE AND STRUCTURE
IMPORTANCE OF POPULATION CENSUS
EFFECTS OF DEMOGRAPHY ON DEVELOPMENT
IMPACT OF POPULATION CHANGE ON ECONOMIC DEVELOPMENT
TOPIC FOUR: LABOUR MOVEMENT
MEANING OF LABOUR MOVEMENT
HISTORICAL BACKGROUND OF LABOUR MOVEMENT IN KENYA
ROLE OF TRADE UNIONISM IN ECONOMIC DEVELOPMENT
ROLE OF EMPLOYER ASSOCIATION IN ECONOMIC DEVELOPMENT
IMPORTANCE OF MANPOWER PLANNING
TOPIC FIVE: EMPLOYMENT AND UNEMPLOYMENT
MEANING OF EMPLOYMNT AND UNEMPLOYMENT
TYPES OF EMPLOYMENT
TYPES AND CAUSES OF UNEMPLOYMENT
MEASURES TO MANAGE UNEMPLOYMENT
ROLE OF CHANGE AGENTS N MANAGING UNEMPLOYMENT PROBLEMS
TOPIC SIX: POVERTY AND STANDARDS OF LIVING
MEANING OF POVERTY AND STANDARDS OF LIVING
CAUSES OF POVERTY
MEANING OF NATIONAL INCOME
FACTORS THAT INFLUENCE NATIONAL INCOME
METHODS OF MEASURING NATIONAL INCOME
DISTINCTION BETWEEN INCOME AND WEALTH INEQUALITY
MEASURES TO OVERCOME INCOME INEQUALITIES
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TOPIC SEVEN: MONEY MARKET
MEANING OF MONEY MARKET
IMPORTANCE OF MONEY MARKET IN THE ECONOMY
ROLE OF NON BANKING INSTITUTIONS IN ECONOMIC DEVELOPMENT
EMERGING TRENDS IN MONEY MARKETS

TOPIC EIGHT: PUBLIC FINANCE

MEANING OF PUBLIC FINANCE
SOURCES OF GOVERNMENT REVENUE
PURPOSE OF TAXATION
TYPES OF PUBLIC EXPENDITURE
IMPORTANCE OF FISCAL POLICY
ROLE OF BUDGET IN PUBLIC FINANCE
MANAGEMENT OF PUBLIC DEBT

TOPIC NINE: INFLATION

MEANING OF INFLATION
TYPES AND CAUSES OF INFLATION
EFFECTS OF INFLATION ON ECONOMY
CONTROLLING INFLATION

TOPIC TEN: INTERNATIONAL TRADE

MEANING OF INTERNATIONAL TRADE
TERMS OF TRADE
BALANCE OF PAYMENT COMPONENTS
DOCUMENTS USED IN INTERNATIONAL TRADE
TRADE RESTRICTIONS
TRENDS IN INTERNATIONAL TRADE

TOPIC ELEVEN: DEVELOPMENT PLANNING

MEANING OF DEVELOPMENT PLANNING
TYPES OF DEVELOPMENT PLANS
CHALLENGES OF DEVELOPMENT PLANS
STRATEGIES OF INDUSTRIALIZATION

EMERGING TRENDS IN DEVELOPMENT

EMERGING TRENDS IN DEVELOPMENT ECONOMICS

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TOPIC ONE: INTRODUCTION TO DEVELOPMENT ECONOMICS
Economics: is the study of human efforts in order to satisfy what appears to be unlimited and
competing through careful use of relatively scarce resources.
It is therefore a social science that studies the relationship between the scarce resources and the
various uses/needs that compete these resources.
Scope of Economics
The study of economics is divided into two groups namely:
i. Micro Economics
ii. Macro Economics
Micro Economics
 Is a branch of economics that studies/deals with problems that affect individual units of
economy. It causes problems of a particular firm/industry, pricing of goods and services in a
market e.t.c. It mainly deals with problems of price determination and resource.
Macro Economics
 This is a branch of economics that studies and handles the problems of the entire economy in
general. It studies the aggregate behaviour with unit of the economy and problems that affect
the economy as a whole e.g. unemployment, inflation, poverty e.t.c.

Development Economics
Is a branch of economic that studies the various aspects of the development process especially in
the least developed areas. It focuses not only on methods of promoting economic growth and
structural changes but also on improving the potential of the mass/population through health and
education on workplace conditions. It is concerned with economic and political processes
necessary for effecting rapid and institutional transformation of the entire society in a manner
that will most efficiently bring the fruits of economic progress to the broadest segments of the
population.
It is concerned with economic, social and institutional mechanisms, both public and private,
necessary for bringing about rapid and large scale improvement in the levels of living for the
masses.

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Components of Development Economics
Development economics will deal with issues that will help to bring the fruits of economic
progress in order to improve the level of living for the people and these include areas such as:
 Industrialization
 Education
 Health
 Employment
 Governance
 Urbanization
 Research
 Trade

Significance/Role of Development economics in society

1. Distributes scarce resources effectively and efficiently among the community so as to satisfy
every person’s needs.
2. Improves the living standards of people by ensuring that there is satisfaction of what appears
to be unlimited.
3. Resources are mobilized efficiently and effectively in order to better people’s way of life.
4. Creates employment among the citizens thus abolish ignorance and poverty.
5. Develops infrastructure such as roads, electricity e.t.c.
6. Through economic development, health in societies has been improved which reduces
mortality rate of children thus increases life expectancy.
7. Creates a balance in development thus eradicates rural-urban migration.
8. Since people are supposed to begin their choice, development economics propels social
cohesion thus promotes unity about rapid economic growth.

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TOPIC TWO: ECONOMIC GROWTH AND DEVELOPMENT
Economic growth -Refers to the changes (increases/decreases) in the level of output (amount of
goods and services) produced in an economy within a period of one year i.e. It is an
increase/decrease in real Gross Domestic Product (GDP) and real per capita income in a nation
over a given period. Thus it is a quantitative change in the volume of goods and services
produced and the production capacity of a country over a given period of time.
N/B: An increase would be realized when the demand of amount of goods and services in a
particular country increases more steadily than the number of population growth and vice versa.

Economic Development -Refers to a multi-dimensional process of transformation/change

involving accumulated qualitative and quantitative changes in an economy leading to better
standards of living, cultural changes, economic transformation, education reforms, and political
revolutions e.t.c. It is a continuous process covering a long period; economic development
involves economic growth which eventually leads to change in people’s way of life, fairer
distribution of wealth and provision of essential goods and services thus improvement of living
standards.

Distinct differences between Economic Growth and Economic Growth

Economic Growth Economic Development
Involves only changes in the quality of goods Involves both qualitative and quantitative
and services. changes.
Is a rapid process that occurs within a short Is a slow and gradual period since it
period. involves several qualitative and
quantitative changes in several sectors
May involve only changes in only one sector Is a multi disciplinary change involving
of the economy. many sectors.

May be achieved through changing the There must be a change in technology to

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 technology by extensive use of available achieve economic development.
resources.
May not transform people’s way of life. Must bring about transformation in
people’s way of life through improvement
of people’s living standards, cultural
changes.

Characteristics of a Developing nation

1. Low standards of living – most LDCs are characterized by low standards of living as noted
by poor nutrition, medical care, sanitary services, poor transport and education e.t.c.
2. Low levels of income
Low income leading to low purchasing power and limited market, it is because much of labour
force is engaged in agriculture which is the dominant sector.
3. Pre-dominance of peasant agriculture
Majority of the populations are engaged in agriculture which is the dominant sector.
Agriculture is unproductive since primitive tools and methods of production are used and
production is done at subsistence level.
4. Weak industrial sector
The industrial sector is small, weak and underdeveloped due to capital constraints and poor
entrepreneurial abilities.
5. Underutilization of resources
Most of natural resources of the developing countries are either unutilized, underutilized or
misutilized.This is due to lack of knowledge, skills, capital and market.
6. High population growth rate
Demographically, low developing countries have high population growth rate due to high birth
rates and declining death rates. They are associated with the problems of dependency,
unemployment and balance of payment problems.
7. Low life expectancy
This is due to general poor living conditions e.g. poor medical care, poor food diets e.t.c.
8. Conservatism
Culturally, the behaviour of the majority is based on traditional beliefs and superstition.

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The culture prohibits economic development and acceptance of new ideas. Women are generally
underprivileged as they are considered inferior to man.
9. Poor technology-The developing countries use backward technology with little use of
scientific techniques in production.
10. Low literacy level: there is abundant of unskilled labour due to high rate of illiteracy.
11. High degree of independence: there is over dependence on external resources and trade.
12. Shortage of entrepreneurial abilities.
13. Dualism: there exist contradictory sectors i.e. traditional and modern sectors.
14. Low productivity: is associated with low labour efficiency and low technology.
15. Poor infrastructure: infrastructure is poorly developed i.e. poor roads, poor transports.

Factors influencing economic growth of a country

1. Availability of natural resources
When natural resources are available and properly exploited then economic growth will be
registered i.e. there will be an increase of the output and vice versa.
2. Availability of capital stock and capital accumulation
Increased level of capital stock may result in capital widening and capital accumulation which
may eventually lead to increase in level of output and vice versa.
3. Technological changes
Advancement of technology significantly raises the productivity of the economy as it enables
work to be done faster and leads to production of better quality of goods and services and vice
versa.
4. Political stability
A stable political condition is good for production to take place in an economy thus may result in
increase of output. Instances of political instability however would discourage production
activities to be taken.
5. Increase in level of investment
Investments increase the productive capacity of an economy thus leading to high growth and vice
versa.
6. Government policies/interventions

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If government policies are those that encourage active economic growth/production as well as
promote the private sector (e.g. through reduced legal requirements, low taxes e.t.c.) the rate of
economic growth is likely to be high and vice versa.
7. Availability of market
When market is available and expanding i.e. both domestic and external market, the output of
production will expand leading to economic growth and vice versa.
8. Improvement in terms of trade
Favorable terms of trade increases the productive capacity of the economy due to high growth
leading to high production and vice versa.
9. Existence of good infrastructure
Existence of roads, power supply, and storage facilities e.t.c. enables production to take place
leading to output increase.
10. Ideal population-When the population size of a country is ideal, resource exploitation
increases with increasing marginal productivity thereby leading to economic growth and vice
versa.

11. Industrialization
As the standard of living increases, spending on goods change from agricultural to manufactured
goods. Since the opportunity for employing more capital and technology are greatest in
manufacturing.

Stages of economic Growth

There are basically two attempts to classify the pattern of economic growth as passage of
defining economic growth. Two stages include:

The Marx’s Classification (Karl Marx)

He saw the society as passing through the following stages:
 Primitive communism to slavery to federalism through capitalism and finally to socialism and
communism.

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Rostows Stages
 He views economic growth and development to take place in stages and attributed this to an
analogy of an aero plane. He noted that before a plane flies off the ground, it first prepares in
running in the run way, gains speed and takes off; gains altitude then stabilizes in the sky. He
therefore, calls the stages of growth as: traditional, precondition to take off/transition, drive to
maturity and high mass consumption.
i. Traditional stage
Is the stage of traditional peasant agriculture and is the first in the growth path.
Is characterized by:-
 Rudimentary methods
 Agriculture is the dominant activity
 No industrialization
 Low rate of income leading to low savings and capital accumulation.
ii. Pre-conditional/Transitional stage
Is the stage when societies are in process of transition i.e. the period when the society lays
foundation for take off.
Characteristics
 The society starts to get influenced by external forces.
 The idea of the economy progress spreads.
 Education starts spreading.
 Society starts to imitate the advanced ideas.
 Banks and other financial institutions start appearing for savings.
 Commerce and external trade widens.
 Transformation of people’s beliefs.
 Modest investment in manufacturing and communication begins to take place.

iii. Take off stage

Involves a severe historical transformation in society where social, economic and political
transformations are experienced in the economy. Is the stage when the obstacles to steady
growth are removed leading to reduction of foreign dependence. The forces of the economic
progress from the modern economic activities expand and dominate the society.

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Characteristics
 Elimination of all obstacles of economic growth e.g. high population, growth rate,
traditional cultural beliefs.
 Savings and investment increases
 Industries and market expands.
 New techniques in production are introduced in all sectors.
 One or more leading sectors of the economy emerge.
 The economy exploits formerly unused natural resources.
 Expansion of labour service and many goods are produced thus increases the availability
of consumers’ choice.
 Increased urbanization and monetization.
iv. Drive to maturity stage
Is a relatively more advanced stage than the take off stage. Is a period of long sustained
economic growth where modern technology is extended to all economic activities.
Characteristics
 New production techniques replace old ones.
 High level of research and discovery.
 New leading sectors are created.
 Savings are so high.
 Development of many industries.
 Labour and other factors of efficiency are advanced hence high productivity.
 Import substitution strategy i.e. goods formerly imported are produced at home.
 Low population growth rate.
 Employment opportunities increase.
 Increased level of secondary urbanization.
 High level of infrastructure development.

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 v. High mass consumption stage
Is a stage of high consumption of goods and services. The leading industries of the economy
shift from producing mainly capital goods to consumer goods. The resources are fully
developed.
Characteristics
 Income of majority rise beyond subsistence
 Savings level is very high.
 Labour is highly skilled and expensive.
 Social welfare and security schemes are emphasized as the society progresses to welfare
state.
Criticism of Rostows Theory
 The growth theory postulated by Rostows is not a developed strategy but merely a description
of growth and development process which simply indicates that the process of economic
growth is evolutionary and gradual.
 Though Rostows developed stages to elaborate accelerated growth, it is difficult to demarcate
one stage from the other stage of growth i.e. there is a considerable overlapping between the
different stages.
 Explains the growth in terms of savings however savings are not the only source of economic
growth but other factors such as political stability etc also contribute to economic growth.
 Some countries have achieved high savings (say 5-10%) but have never taken off.

Theories of Economic Growth

Economists have put forward theories which can be used to promote economic growth. These
include:-
1. Balanced Growth theory
It was formulated by Ragnar Narks in his article (the problem of capital formation in under
developed countries).The strategy goes for simultaneous investments in several industries,
projects or sectors which will compliment each other so that where one industry alone would not
be viable because of small market, the large number of industries/sectors can help to support
each other. It is believed that because of the vicious cycle of poverty, there may be insufficient
demand to support one industry but if many new industries are set up, income may be raised and

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demand increases sufficiently to support the product on industry and other industries. Different
industries might also supply each other with raw materials or generate other kinds of external
economies. The theory therefore, suggests simultaneous investment in large number of mutually
supportive industries/sectors so that there is an equilibrium expansion and development of all
sectors/industries.

Criticism of Balanced Growth theory with respect to Developing countries

 The idea of mutually supporting industries providing market for others is self- defeating since
it calls for establishment of a vast number of projects simultaneously which may not be
possible.
 Since projects in low developing countries face high degree of uncertainty placing high stake
of minimum critical
efforts implies very heavy loss incase of failure of projects.
 Shortage of skills, trained manpower and entrepreneurial activities limit the efficient
application of balanced theory.
 Low developing countries have limited capital and resources to sustain balanced growth.
 Balanced growth implies over reliance on foreign aid with associated problems in debt
servicing.
2. Unbalanced Theory
 Proposed by Professor Albert Hirschman who said that since typical developing countries
face shortage of capital, managerial abilities and entrepreneurial abilities, the resources
available should be invested in all industries/sectors which have maximum effects on the
economy through linkages with other potential sectors/industries.
 Such key industries/sectors which have got the highest number of forward and backward
linkages are referred to as leading industries/sectors. Thus the unbalanced theory asserts that
instead of investments being made on abroad front as in the case of balanced theory, it should
be focused on the growing point of the leading sectors which are vital and can ultimately lead
to the growth of other sectors.
Criticism of Unbalanced Growth theory
 It does not offer solutions to the problems of vicious cycle of poverty in small market.

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 It advocates for specialization which involves risks. Concentrating on one product/a small
number of products can make the country suffer cyclical fluctuations in the world demand and
supply e.g. if the taste of a commodity changes, the commodity would eventually loose its
demand in market.
 May trigger inflationary problem due to inadequate/shortage in aggregate supply.

3. Big push theory

It was formulated by Paul Rodeisten and calls for a comprehensive program that enables an
economy to overcome problems of under development. It assigns capital, central role in the
process of economic growth and development. According to the theory there should be a
minimum level of resources that must be devoted to development programs for economic
progress. It therefore calls for a sudden sharp increase in the rate of investment so as to achieve
economic progress.

Criticisms of Big push Theory

 Neglects the economy from investing in exports industry and import substitution industries.
 Ignores investment in agricultural sectors which is the dominant sector in low developing
countries.
 Generates inflationary pressure arising from the fluctuations of prices in the economy.
 Low developing countries lack capital to launch a high minimum amount investment of social
overhead which is very expensive.

Strategies for economic growth and development

 Industrialization strategy - this aims at creation of industries in the economy for
production of goods and services i.e. expansion of the industrial sector.
 Population control policies - aim at ensuring an ideal population size that enables
optimum resources exploitation thereby increasing productivity.
 Technological advancement - refers to the movement of technology from one country to
another especially from most developed countries to the least developed ones. It
facilitates the exploitation of resources increasing productivity and production of new and
better quality products.

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TOPIC THREE: POPULATION AND DEMOGRAPHIC FACTORS
Population: refers to the number of people living in a particular area at a specific period of time.
It includes both permanent and temporary residence of a place.
Demography: refers to population composition, patterns and structures in terms of age, sex,
occupation and settlement.
Population growth rate: refers to the changes in population size that can be brought about due
to changes in migration, births and death rates and other factors.
The difference between the crude birth rate and crude death rate in a country gives as the
Natural population growth rate. I.e. CBR- CDR=NPGR
Population explosion: refers to the rapid increase in population in a given area relative to the
available resources such that the resources cannot adequately satisfy the needs of people.
Optimum population: It is the population size and structure which is most suitable and
conducive for exploitation of available resources of the economy. It is the population size that
provides the labour force that when combined with other factors of production e.g. capital, land
e.t.c yields the maximum output per worker/average output. It occurs at a level where the
average output or output per head of population is at the maximum.
Under population: this is the population size which is too small to effectively use the available
resources in an area such that the average product of labour increases with increase in
population/workforce. This population size falls below the optimum level where there is
insufficient labour to fully exploit the existing resources.
Over population: is a situation where the size of the population exceeds the optimum and
available resources is not sufficient to sustain population size such that the average product of
labour declines with the increase in population size. It implies that population size is too large to
be sustained by the existing resources and it happens when the population size exceeds the
capacity of existing resources at given particular technology.
An aging population: this is the population structure in which a bigger percentage is made up of
old people. May be caused by the fall in the birth rate and rise in the life expectancy

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 Optimum level

Output/
product

Under population over population

Population size

Declining population: is a situation where population trend is towards smaller families and
people try to keep families as small as possible. This leads to the fall of the size of population.
Population census: refers to the enumeration of people living in an area in a given period of
time in order to establish the various aspects and structure of the population for planning
purposes.

Importance of population census

1. To establish the correct size of the population.
2. To discover the distribution of the population and also to establish population densities which
help in planning and distribution of social services and other resources.
3. Helps to establish both birth and death rates that are useful in formulation of population
policies.
4. To establish the size of labour force, the middle age or economically active and number of
dependants (the old, the middle age, the young).
5. To establish the quality of the population by establishing the level of education of people.
6. To establish rate of migration i.e. immigrants.
7. To discover the sex composition in a given population in a country (male and female).

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8. To establish the rate of unemployment in a country.
9. To establish the extent of population variables such as divorce, separation, migration e.t.c. for
various purposes.

Population Theory
Malthusian Population Theory
 It was formulated by Rev. Malthus Thomas. He expresses his worries about rapidly increasing
population in his essay on population in the year 1798.It states that a population increases
faster than food supply and if left unchecked may lead to human misery (state of starvation).It
presupposes that man’s biological capacity to reproduce exceeds his capacity to increase the
food supply. It further assumes that population grows at Geometric rate/progression (i.e. 2,
4, 8, 16, 32…..) if unchecked can double itself every 25 years. Food supply however increases
at arithmetic rate/procreation (i.e. 2, 4, 6, 8, 10……) due to the operation of low diminishing
returns based on idea that the supply of land is fixed and the best land is used first and worst is
cultivated last. At least step of population growth, Malthus argued that the amount of food
produced is often less than even before and that at certain point in time; population growth
exceeds food supply. In such a situation the resources would be unable to support a given size
of population and any additional population is likely to starve to death, leading to Malthusian
population trap.
 The point at which the production of food equals that of population growth is termed
population trap.

Population/ population
Food supply
T

Food supply
Time (years)

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The point T is the termed population trap where food supply is equal to population growth.
Beyond point T i.e. the suggested region is a state of misery (starvation and death).
To avoid entering misery, he suggested two checks on population growth rate:-
1. Negative or preventive checks
They are voluntary measures aimed at controlling population growth rate by controlling the birth
rate e.g. late marriages, celibacy, restraints.
2. Positive checks
Is involuntary control measures aimed at controlling population growth rate by increasing death
rates: - e.g.
 Famine
 Diseases
 Wars
 Starvation
 Calamities

Factors that influence population size and structure

1. The crude birth rate-Refers to the number of births per annum per 1000 of population
It is crude because it only records live births but doesn’t take into account the infant mortality
rate. Increase in this rate will lead to an increase in population size and vice versa.
2. The crude death rate-Refers to the number of people that die in a country per 1000 of
population. It is crude because it does not take into account the age of a person who dies. If
this rate is low the population size is said to be big and vice versa assuming other factors are
constant.
3. The reproduction rate
It measures the number of daughters that a new born girl would bear during her lifetime
assuming that her fertility rate and life expectancy is constant. If the net reproduction rate is high,
the population size would be big composing of majority being female and vice versa.

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4. Infant mortality rate
It records the number of deaths of children below the age of 1 year expressed as number of 1000
of children in that age group per annum.If the rate is low then it implies that the population size
would be big and vice versa.
5. Fertility rate
It measures the average number of children born per woman during her active child bearing
years (15-45 years).If the fertility rate is high then the population size is said to be big and vice
versa.
6. Marriage patterns
Given that majority of births are to married women, the number of marriages will directly affect
the population size. The age at which people marry also influences the population size e.g. if
girls get married at younger age then the population is likely to be high. When the population
also has preference for big family size then the population size is likely to be big and vice versa.
7. Migration patterns
It records the number and way in which people move into and out of a country. If the number of
immigrants is more than the number of emigrants population size will be big and vice versa.
8. Moral values -If the moral values are observed then the population size will be controlled and
vice versa.

Impact of population changes on Economic Development

Effects of an Ageing population
1. Leads to greater dependence on the young; it reduces the level of savings in the economy
thereby limiting investment thus leading to low capital formation.
2. It leads to a small size of labour force
3. It leads in changes of pattern of production and consumption of goods; since more goods
are produced for the old.
4. It decreases labour mobility; an ageing population is less mobile as compared to one
dominated by the young.
5. Leads to shortage of labour in new industries; economy becomes unable to supply the
required labour to both the new and expanding industries.

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6. It is more conservative and less innovative; it retards the rate of economic development, it
may lead to problem of structural unemployment due to the demand for the products of those
industries engaged in production for young falls thus some categories of workers may be laid
off.

Effects of a Declining population

1. It changes the distribution of wealth in the economy.
2. It reduces the pressure on key resources of production such as capital, labour.
3. It leads to a fall in aggregate demand resulting into smaller markets thus affecting the level of
production of goods and services.
4. It strengthens the government’s ability to provide essential goods and services.
5. It reduces the chances of unemployment; the supply of labour will be low.

Impact of over population

1. Problem of inflation
Over population creates imbalance in forces of demand and supply where the aggregate demand
exceeds that of supply causing inflationary tendencies as prices constantly rise.
2. Existence of unskilled labourforce-The resources/funds may not be adequate or enough to
meet the training needs of the population leading to unskilled labour force.
3. Over exploitation of resources
4. Over strained infrastructure
Overpopulation causes heavy strain on the existing infrastructural facilities e.g. water supply,
electricity, roads e.t.c. which cannot cope up with the high demand.
5. Land fragmentation; lands have been subdivided thus less production
6. Rural-urban migration
People move from rural to urban areas in search for job opportunities. Rapid population increase
in the rural centre forces people out of agricultural sector into urban areas in search of good
opportunities.
7. Leads to low investment level.

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Effects of under population in economy
1. Resource under utilization
Under population creates insufficient labour force to fully exploit and utilize the existing
resources thus leading to low output.

2. Low aggregate demand or limited market

The demand for goods and services would be low thereby reducing the size of markets in the
economy for most goods and services.
3. Low investment resulting to low capital formation
The associated small markets do not stimulate investments in various sectors of the economy
especially the industrial sector. Due to low investment level, capital accumulation remains low,
leading to low capital formation.
4. Results to underdeveloped infrastructure
Under population discourages investments on social and economic infrastructure e.g. roads,
schools, power supply e.t.c. this leads to under development of the economy as a whole.
5. Slow economic progress
Under population slows down and may as well hinder economic development due to lack of
pressure on resources and also because of less competition.
6. High transport costs
Under population is characterized by thin population distribution that involves high transport
costs hindering trade within areas or regions.

20 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
TOPIC FOUR: LABOUR MOVEMENT
The concept of labour movement is used to refer to trade unions or labour unions, their
organization and operations.

Types of Labour unions/trade unions

1. Craft Trade union
This refers to an association of skilled workers who perform the same kind of work i.e. they have
the same skills e.g. KNUT e.t.c
2. Industrial/ general union
This is an association of all workers in a given industry/economy regardless of what job each
perform and their qualification e.g. COTU.

Roles of Trade Unions

1. Bargains with employer for high wages for their members.
2. To negotiate for fringed benefits e.g. housing, medical and hardship allowances.
3. They protect workers against unfair treatment and dismissal by the employers.
4. They advice the government on major economic policies that affect the workers in the
economy.
5. They negotiate for improvement for the working conditions and standard of living of the
workers.
6. Help settle/regulate dispute between workers and employers as well as between workers
themselves.
7. They keep in establishing friendly relationship between workers in different
industries/sectors.

Role of employers associations

Employers association: is a formal group of employers set up to defend, represent or advise
affiliated employers and to strengthen their position in society at large with regard to labour
matters.

21 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
 Aims of employers association:
1. To regulate trade and competition by mutual agreement
2. To seek statutory protection in trade
3. To provide services in the fields of industrial relations and personal administration
4. To lobby within the political arena in opposition to social legislation e.g. minimum
pay laws, reduced hours of work e.t.c.

Functions of employers association

 Provision of a forum to enable individual employers to exchange views to develop and
express policies
 Representation of employers interests to governments and other public policy making
bodies.
 Communication of employers interest and views to the media and the community
generally.
 Provision of specialized services to members
 Industrial relations activities and services to members including representing employers
generally and individual employers in conciliation and arbitration proceedings.

Industrial relations
Industrial relations are concerned with the employer-employee relations in industry.
Significance of industrial relations
Smooth industrial relations are indispensable for the following reasons:
1. Smooth industrial relations would help in economic progress of an economy. Sound industrial
relations results in increased productivity which is necessary for bringing rapid economic
development
2. Good industrial relations help in establishing and maintaining true industrial democracy
which is necessary for establishment of a socialist society.
3. Sound industrial relations result in smooth collective bargaining on the part of both labour and
management
4. Sound industrial relations would help the government in framing and implementing various
laws pertaining to labour, forbidding unfair practices of unions and employers

22 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
5. Good industrial relations result in less number of disputes and grievances, and it boosts the
morale and discipline of workers
6. Good industrial relations result in orderliness, effectiveness and efficiency of economy.
Unions gain more strength and vitality. Inter union rivalry gets reduced considerably.

Objectives of industrial relations

Industrial relations are basically aimed at:-
1. Safeguarding the interests of labour and management by securing the highest level of mutual
understanding and goodwill among all those workers and sections in the industry which
participate in the process of production.
2. Avoiding the industrial conflict or strife and developing harmonious relations, which are
absolutely essential for improving productivity and industrial progress.
3. Raising productivity to a higher level by reducing absenteeism and labour turnover.
4. Establishing and nursing the growth of industrial democracy based on labour partnership in
the sharing of profits and of management decisions, so that an individual can grow to his/her
fullest potentials and contribute to the industry as well as a country.
5. Eliminating the possible strikes and lockouts, by providing reasonable wages, improved
working conditions, and settling the grievances.
6. Establishing government controls over such plants and units which are running at substantial
losses and those units producing goods prohibited in the public interest.

MANPOWER PLANNING
Manpower is regarded as the quantitative/qualitative measurement of labourforce required in a
given economy. However in relation to may be regarded as establishing objectives in order to
develop human resources in line with broad objectives of an economy/an organization thus
manpower planning is a process by which the government of an economy/management of an
organization ensures the right number and kind of people at the right place doing the right
things/jobs.

23 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
Significance of Manpower planning
1. It helps in attaining the right number of persons required to carry out the organizational plans
and activities in order to achieve its various objectives and this also ensures the right flow and
maintains the pace of production.
2. It aids/assists in forming/designing training development programs for the personnel because
it takes into account the effect of anticipated changes in technology, markets and products on
manpower requirement.
3. It helps in formulating the managerial promotional plans as part of the replacement planning
process.
4. It provides enough opportunity for identifying and developing managers to move up the
ladder.

TOPIC FIVE: EMPLOYMENT AND UNEMPLOYMENT

Employment: people are said to be employed if they engage in some economically productive
activities with the purposes of earning income/money.
Employment can be divided into two types mainly:-
i. Self employment/informal employment
ii. Salaried/wage or formal.
Self employment/informal
Is a situation where an individual works for himself to earn income which may be inform of
profits, interest or rent.
Salaried/wage employment
Is a situation where an individual sells his/her labour/service to another and is paid wage/salary.
Employment rate

24 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
Refers to the total number of people employed expressed as a percentage of the total number in
an economy.
Employment Rate (ER) = Total number of Employees * 100%
Total number of population
Unemployment -Is a situation where labour force is idle at the ongoing market wage rates i.e. is
a situation where an individual is willing to work at the existing market wage rate but cannot find
a job.
Unemployment rate
Refers to the total number of people unemployed expressed as a percentage of the total number
of people in an economy.

Concept of underemployment
Is as situation where labour is not effectively employed to its full potential leading to under
utilization of the workers ability or potential.
There are two categories of unemployment namely:
1. Involuntary unemployment- this is a situation where members of the labor force are idle
and willing to work but are unable to find work at the existing situation and ongoing
market wage rate.
2. Voluntary unemployment- this is a situation where jobs are available but the individuals
do not want to work at the ongoing market wage rate.

Causes of voluntary unemployment:-

 Laziness-people who are lazy hate work and prefer to remain unemployed even when the
jobs are available.
 Availability of socially unacceptable jobs
 Accumulation of past savings
 Low wage rate/poor remuneration
 Existence of good economic backgrounds
 Expectations of better future jobs
 Being too qualified for the jobs
 Unfavourable geographical location of jobs

25 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
  Desire for leisure
 Poor working conditions
 High risks in involved in doing the jobs

General causes of involuntary unemployment:-

 Rural-urban migration; when people move from rural to urban areas, the demand for jobs
exceed the supply for jobs in the urban areas causing open urban unemployment.
 Seasonal variation in economic activities especially in the agricultural sector
 Natural disabilities
 High population growth rate
 Inappropriate education
 Labour immobility
 Technological changes
 Structural adjustment programmes
 Low rate of investments
 Decline in demand for products

Types and causes of unemployment

1. Cyclical unemployment
Is a temporary unemployment caused by lack of aggregate demand due to economic
recessions/depressions; also referred to as demand deficiency/Keynesians unemployment
2. Structural unemployment
It arises due to lack of factor mobility. If the demand for a specific factor in its present
occupation falls then such factor becomes unemployed.
Structural changes may result due to:-
a) Changes in demand resulting in changes in consumers’ tastes and preference that lead
to changes in composition of goods and services produced.
b) Changes in supply caused by lack of factors of production.
c) Changes in technology: if they result in the use of labour saving techniques as those of
labour saving machines may render workers redundant.
3. Frictional unemployment

26 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
Is a sub category of structural unemployment. It arises because of the time lags occurring in the
functioning of the labour market and which are inevitable in a free market economy for instance
the delays in moving from one job to another.
4. Seasonal unemployment-Occurs on a regular basis when workers are kept out of
employment at regular intervals of period. It is caused by annual regular variation of seasons
and mainly affects agricultural sector and other outdoor activities e.g. tourism, constructions.
In developing countries, this type of unemployment is widespread in agriculture where periodic
changes in weather renders labour idle especially after harvesting and planting.
5. Residual unemployment-Refers to unemployment due to mental disability of those
concerned. The solution to this type lies in the provision of special educational training to the
disabled persons and other special packages of the affirmative action.
6. Disguised unemployment-Occurs when the work available given the labourforce is
insufficient to keep it fully employed so that some members of the workforce could be
withdrawn without any loss of output. Occurs when the marginal product of labour is zero

Measures and Management of unemployment

1) Fiscal policy
There should be adequate expenditure (public and private) to prevent deficiency of demand. In
this case, the Government has the duty of actively stimulating demand through public investment
to supplement the inadequate private investment. This can be achieved through expansionary
fiscal policy where the government adopts fiscal policy by decreasing taxes, providing subsidies
and increasing its expenditure and utilities so that investment increases and more jobs are
created.
2) Expansionary monetary policy: the attempt by the government to adopt policies to increase
money supply in an economy. When the government adopts expansionary monetary policy
e.g. by reducing interest rates, reducing legal reserve requirement e.t.c. More money is
available in the hands of both consumers and entrepreneurs and they are encouraged to
borrow more money from commercial banks for investment purposes which in turn increases
job opportunities.

27 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
3) Population control policies: to reduce pressure which population explosion exerts on
employment, the government can adopt population control measures in a way to reduce
unemployment.
4) Training programs for workers; the government can provide continuous training programs
for workers so that they can have a variety of skills that enables them to change employment
during periods of structural adjustment.
5) Manpower planning: the government can ensure that only relevant skills that are demanded
and the rate of labour supply required in the economy is produced in a given time period. This
helps in ensuring balance between the demand and supply in the economy.
6) Diversification of the economy: the government can introduce to the economy a variety of
economic activities to be undertaken so as to reduce seasonal unemployment.
7) Industrialization strategy: since industries have a high rate of job creation, the government
can encourage the expansion of the industrial sector by both the local and foreign investors.
8) Technological improvement and adoption of appropriate intermediate and appropriate
technology: the government can improve on the state of technology to reduce over reliance
on nature whose variation causes seasonal unemployment e.g. introduction of irrigation
system. The government can also encourage the adoption of technologies which are
employment creative e.g. labour intensive technologies which provide job opportunities to
workers.
9) Provision of credit facilities: the government can give credit facilities to potential investors
to create employment opportunities and also to encourage self help projects.

28 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
TOPIC SIX: POVERTY AND STANDARDS OF LIVING
Poverty can be defined in two ways:
 Absolute terms
 Relative terms

Absolute terms – we define poverty by picking a certain period income level (10,000 p.m) and
say that any family or individual whose income falls below this level is said to be living in
poverty.
Relative terms - we define poverty by ranking individual income earners and say that any
family or individual that fall in the bottom 10% of the income earners per the rank is said to be
living in poverty.
Generally poverty can be defined as inability to acquire the basic needs in one’s life.

Standards of living
 People require basic needs in their lives (shelter, clothing and food) and other support- needs
(education, health care e.t.c.).The extent to which an individual is able to obtain these needs
will determine his/her standards of living. With improved income distribution among
individuals they will be able to access better housing facilities, education and welfare services
as well as clothing and feeding habits. Low standards of living are closely associated with
poverty and therefore attempts to eliminate poverty would raise the living standards of people.
Poverty line
Is the dividing line between those considered poor and those not officially considered to be poor.
The line identifies the income below which people are considered to be living in poverty and
therefore individuals or families with income below the line are considered to be poor.

Causes of poverty
The causes can be attributed to the various factors that lead to unequal distribution of income i.e.
between various groups of people or individual or regions in an economy.
1. Unequal regional distribution of natural resources
The imbalance of regional natural resources endowment implies that people who have access to
the natural resources will acquire more income than those who have no access at all.

29 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
2. Difference in skill endowment
Since skills depend on the level of education the higher the level of education the higher the
skills and vice versa. Skilled people (doctors, engineers) earn higher income than unskilled
causing income inequality that may lead to poverty.
3. Personal income distribution
It refers to the pattern of income distribution according to the relative size of the people income.
The comparative analysis is best shown by Lawrence curve as shown below:

The bottom axis (x) shows households divided into five equal groups according to the income
received. The vertical axis (y) shows the percentage of total income earned by each group.
Perfect equality distribution of income would be represented by diagonal straight line from low
left corner to right left corner. The extent to which the actual distribution shown varies from the
diagonal straight line indicates the extent of inequality of income distribution. The more the
curve bows away from a straight line the greater the inequality of income thus leading to
poverty.
4. Level of Wealth
Incomes also tend to vary because some people in a country or in an economy may own more
wealth than others, which has an impact on their ability to earn income. Those who do not own
wealth may be considered poor because of their limited ability to own wealth.
5. Discrimination
It influences the distribution of income and occurs on the basis of gender and ethnicity.
For example, women may not be promoted to executive positions in certain companies or
organizations because men believe that they cannot handle those positions.Certain unions also

30 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
deny immigrants/ethnic minority members on the grounds that certain ethnic groups do not
belong to certain professions.
6. Ability/talents
Some people earn more income because they have certain natural abilities that when exploited
would enhance their potential to acquire certain level of income.
7. Monopoly power
The degree of monopoly power held by certain groups would also determine the difference in the
distribution of income e.g. trade unions have considerable power and they have been able to
obtain high wages and better working conditions.

Other factors are:-

i. Unequal access to finance e.g. loans or grants
ii. Differences in employment in some jobs are more paying than others.
iii. Age difference
iv. Effects of inflation
v. Political favoritism
vi. Unequal distribution of socio-economic infrastructure such as schools, hospitals, factories.

National Income
Is the measure of the total money value of all goods and services arising from the productive
activities of a nation in any country in a given period usually one year.
N/B: National income is measured in monetary terms, however the interest is in the value of the
commodities produced and the money itself.
Description of National income figures
When measuring national income, it can be expressed in the following ways:
1. The G.D.P (Gross Domestic Product)
The total monetary (money value) of all the final goods and services produced within a territorial
boundary of a country by both the nationals and non-nationals over a given period of time
usually one accounting year.

31 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
2. The G.N.P.(Gross National Product)
Is the measure of the money value of all goods and services produced by all the nationals/citizens
(both within and abroad) during a given period of time usually one year.
N/B: It excludes the value of output by non-nationals within the country.
G.N.P= G.D.P +Income
Thus we can compute G.N.P from G.D.P as:-
G.N.P= G.D.P + Income earned by nationals abroad – income earned by national within the
country.
3. The NNP (Net National Product)
Is the measure of the Net Monetary value of goods and services produced by the nationals of a
country after removing amount or value needed to replace the assets worn out in processing or
producing the output in a given period of time usually one year.
It is derived from GNP as:-
GNP; NNP= GNP – Capital allowance (capital depreciation)
4. Net Domestic Product (NDP)
Is the actual monetary value of goods and services produced within a country by both nationals
and non-nationals in a given period of time after removing the amount (value) needed to replace
parts of the capital assets warn out during the production process.
NDP is obtained by deducting from GDP the capital depreciation. It can be computed as:-
NDP= GDP- Capital Allowance
5. National income (NI)
Is computed by subtracting all indirect business taxes except the co-operate profit tax from the
Net National Product.
NI= NNP- All indirect business taxes except cooperative taxes plus social security contributions.
Examples of Indirect taxes
Excise tax
Sales tax
Import duty
Property tax

32 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
 Personal Income (PI)
Is the total amount of income that goes to consumers before individual taxes are subtracted. To
move from NI to PI four major adjustments must be made.
a) Income that does not go to the consumers must be subtracted from national income e.g.
retained earnings (undistributed cooperate profits)
b) Income taxes paid by cooperative to the Government must also be deducted from national
income.
c) Social security contributions must also be subtracted from national income e.g.NHIF, NSSF
etc.
d) You add all government transfer payments.
7. Disposable Personal income (DPI)
Refers to the total amount of income that the consumer- sector has at its disposal after the
individual taxes (PAYE) has been deducted.
PI = PI – personal income taxes (PAYE)

Methods of measuring National Income

There are three methods/approaches used to measure national income.
i. Output/product approach
In this method national income is measured by taking the summation of all the total monetary
contributions made by various sectors. To avoid double counting only the ‘value added’ by each
sector/business enterprise at each successful stage of production should be included and thus
considers values of only the final products. This method presents NI as the total output from
domestically owned resources during the cause of the year. It is commonly used and gives the
GDP of the country.
ii. Expenditure approach
It means the total expenditure incurred on final goods and services produced by firms and
individuals during the course of the year and is given as:
NI = C+I+G+XM)
Where: C – consumption Expenditure
I – Investment expenditure
NI – National income exp

33 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
 G – Government expenditure
X – Expenditure by national s from exports
M – Expenditure by national from imports
It gives the NI at the market price.

iii. Income method/approach

In this method, national income is measured as a summation of total factor income payments in
the causing of producing the output while excluding the transfer of payment.
It is expressed as;
NI = W+I+R II
WHERE: W – Wages on labour
I – Interest on capital assets
R – Rent on land
II – Profit paid to entrepreneur
It presents national income in terms of income earned by factors of production engaged in
producing the output.
It gives national income at factor cause.

Determinants of the size of a country’s national income

1. Availability and exploitation of national resources. The size of natural resource availability
and the level of its exploitation determine the size of a country’s national income. If these
resources which include all gifts of nature are largely available and highly exploited then the
size of national income will be big and vice versa.
2. Size of the capital stock
If the size of the country’s stock such as factories, machines or equipment, private and social
capital used to produce other assets is large, then the size of national income rises through
massive/extensive production and vice versa.
3. Level of technological advancement of a country
Advanced technology leads to higher growth of national income through massive production and
vice versa.

34 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
4. The level of human resource availability
A large number of high quality or skilled working population leads to a bigger size of income,
than where the quality and the size of labour force are low.
5. The investment level
If the level of both domestic and foreign investment is high then the size of national income will
be big and vice versa.
6. Government will and incentives (attractive policy)
If the government or political will is positive with regard to resources utilization and where the
private sector is strong then the size of national income will be bigger and vice versa.
7. Political stability
Conducive political atmosphere makes it possible for investment and production to take place in
a country leading to growth in the size of national income and vice versa.
8. The level of market size
A country that has larger domestic and external market will have a big size of national income
and vice versa.
9. The level of industrialization
Where the level of industrialization is high and the TOT is favourable, the size of national
income will be increased and vice versa.
10. The population growth rate
11. The culture and attitude of people
12. Entrepreneurial abilities

General problems of measuring national income in LDCs especially by GDP

The problems faced when measuring national income in LDCs are either conceptual or
statistical. Conceptual problems are those that are related to the subject matter of national income
and relate the determination of items for inclusion in the national income figures. Statistical
problems on the other hand are those that are faced during the process of data collection
The problems generally include the following:-
1. Boundary of production; it is difficult to determine which goods or activities should be
included or excluded from the national income statements e.g. prostitution, gambling etc.

35 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
2. Double counting; this problem arises from the failure to distinguish between final and
intermediate products. Some items can be included in the estimates more than once.
3. Inadequate statistical information; there is always inadequate information because few
entrepreneurs and consumers keep accurate information about what they produce or consume.
4. Price changes; the always prevalent price changes affect the value of national income such
that when the general price level in the economy rises, the national income shows an increase
even though the real production of goods and services may have fallen and vice versa. It is very
difficult to adjust the effects of inflation.
5. Omitted market transactions; in the economy, not all transactions which take place are
included in the national income. Only those that result from productive economic activities are
relevant when compiling NY. Those which are unproductive are excluded e.g. transfer payments,
capital gains etc. making adjustments for such exclusion is also a problem when compiling
national income.
6. Determination of income from abroad; it is difficult to determine the net income from
abroad since import and export trade are carried out by many people or groups of people with
little data available to verify the amount imported and exported by private individuals. There is
also additional problem of non – disclosure.
7. Inadequate skilled manpower; in LDCs there is lack of sufficient skilled manpower to do the
exercise. There is a shortage of qualified and experienced personal to collect data effectively.
8. Determination of depreciation allowances; it is difficult to measure so as to determine the
net income because firms use different methods to measure depreciation which makes national
income to exact but an estimate.
9. Timing of production; it is difficult to determine the output produced in a country during the
year e.g. crops may stay in the field for more than one year and there is likelihood that they may
be counted when they were produced.
10. Inadequate facilities; facilities like computers to collect and analyze data are not sufficiently
employed.
11. Subsistence production; this problem arises because there are some goods and services
which people prefer to provide for themselves. It is difficult to get the value of such output which
is not offered to the market.

36 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
Per capita income as an index for standard of living
Per capita income refers to average income per individual in a country at a given period of time.
It is given dividing the country’s total income by its total population i.e.
Per capita income = Total National Income
Total population

Short comings of per capita income as an index of standard of living

1. It ignores the distribution of goods and services which is other wise very essential in
determining the individuals’ welfare. Per capita income does not give any information on how
the goods and services are produced are distributed in the country.
2. It ignores the composition and quality of goods and services. The per capita income may be
high yet the country produces mainly capital goods and weapons which do not contribute to the
people’s welfare directly. In this case the per capital income will be high but the standard of
living will be low and vice versa.
3. Inaccurate national income and population figures are always lead to false index. Population
figures in LCDs are always inaccurate because of political factors and ignorance of the local
people about population census aims.
4. It ignores the contribution of the subsistence sector. National income figures exclude
subsistence production yet this is very essential component of the general welfare of an
individual. Thus the per capita income could be low but people could still enjoy a satisfactory
level of welfare.
5. Changes n the general price level over time also renders per capita income a weak index of
standard of living.
6. It ignores the effects of climate factors. Climate affects the general welfare of the people yet
per capita income does not take this into consideration.
7. It ignores the effects of foreign investments. The income generated may be of a foreign
investor which does not improve the material well being of the local people.
8. It does not reflect the quality of life e.g. life in a crowded city is full of tension: roads are
overcrowded, there is loss of time, accidents occur daily which kill or cripple people’
environment becomes polluted, there are problems of water, power, housing, transportation etc.

37 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
crimes spread, life becomes complex and the quality of life deteriorates. Consequently social
welfare reduces which is not reflected in per capita income.

Measures/Remedies used to overcome income inequalities

Positive remedies for income inequalities
1) Progressive taxation policy so that the rich are taxed heavily to reduce their income e.g.
P.A.Y.E.
2) Increased expenditure on social services that benefit the poor.
3) Rural development policies to increase the earning powers and opportunity of the rural poor
and reduce rural urban migration e.g. the decentralization policy to bring services nearer to
the people.
4) Minimum wage legislation to reduce on the earning disparities of the workers.
5) Balanced regional allocation of economic infrastructure to balance the employment
opportunities in all regions.
6) Land reform measures to give land to the landless for agricultural production.
7) Strong anti-trust and inheritance laws with high taxation to minimize gains from such.
8) Special programs for the disadvantaged groups like women, disabled e.t.c. to give them equal
opportunities e.g. affirmative actions.
9) Promotion of indigenous technologies to provide employment opportunities e.g. in the
informal sector.
10) Education reform measures to produce job makers and not job seekers.
11) Improvement in general infrastructure e.g. road construction to facilitate income
generating activities.
12) Liberalization of the economy to promote self help projects.
13) Agricultural modernization to boost the income.
14) Provision of rural and general credit schemes for the low income earners.
15) Subsidization policy i.e. giving subsidies to low income earners and tax relief.

38 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
 TOPIC SEVEN: MONEY MARKETS
Money – is anything valuable which is generally acceptable for the discharge or settlement or
debt or obligation.
This therefore means that; whatever is used as money should be immediately and unquestionably
acceptable in exchange of goods and services.
Money has a legal tender.
Characteristics of Money
i. Valuable: it has a store of value and must be acceptable.
ii. Portable: easy to move from one place to another.
iii. Durable: it should be used for long.
iv. Homogeneity: it should be looking the same to avoid confusion.
v. Divisible: should be able to be broken into small units.
vi. Legal tender: it should be accepted by law.
vii. Limited supply: not all would get access to it.
viii. Stability: it should have a stable value for a long time, with very minor variation.
ix. Should be difficult to change: should be easily made.

Money markets
Is a sub category of financial markets.
Financial markets are institutions and organizations that receive and lend large sums of money
for a short period of time i.e. they are where credit or primary liabilities are traded.
Most money market transactions are concerned with sale and purchases of near money assets
such as - bills of exchange
- shares
- Treasury bills
- Bonds
Near money assets
This is anything that fulfils the store of value function and is readily convertible into medium of
exchange but itself is not a medium of exchange also known as Quasi Money and it includes:-
Bills of Exchange – a document giving unconditional order to another person to pay to another
individual some amount of money.

39 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
Treasury bills
Bonds
Company shares:
Money markets make short term loans which are self liquidating and are mostly invested as
working capital in the production of consumer goods and the rate of interest is usually low.
The capital market
These are institutions which are concerned with the provision of long term finance/loans.
This may include - Bank loans
- Investment in permanent capital
- Purchase of shares.
The rate of interest charged is usually higher in order to compensate the lender for the possible
risk in capital loss and interest which is normally associated with long term lending.

Importance of Money Markets in the Economy

a) They help in controlling the amount of money supply in the economy.
b) It controls the level of demand for money in the economy i.e. the total money balances that
every one in the economy wishes to hold.
N/B: By controlling supply and demand for money, money markets help control the problem
of inflation.
c) They enhance or increase the production capacity in the economy by availing money to
investors thus increasing the level of output of the economy or Gross Domestic Product.
d) They enhance extensive investments in the economy especially the private sector thus
creating employment opportunities.
e) They help in diversification of the economy i.e.it enables creation of a wide range of
economic activities in almost all sectors of the economy thus leading to diversification of the
economy.

Central Bank
Is established by the government to control the banking system and formulate and manage the
monetary policies in order to control the economy.

40 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
Functions of Central Bank
1. It maintains the financial/monetary control over the commercial banks and other financial
institutions i.e. it supervises and provides licenses to the commercial banks.
2. It issues currencies on behalf of the government i.e. it prints and supply the currency in the
economy.
3. It regulates credit (money supply) and the rate of interest through its monetary tools and
therefore maintains price stability.
4. It acts as a financial advisor to the government i.e. the Central Bank advises the government
on its key financial operations.
5. It is a banker to the government i.e. it keeps and maintains all the financial accounts of the
government institutions and its ministries.
6. It acts as a lender of the last resort i.e.it lends money to the commercial banks and
government institutions when they are in temporary financial difficulties.
7. It is bankers’ bank i.e. every commercial bank is bound by the law to keep certain percentage
of its deposits with Central Bank. It also keeps and maintains the foreign exchange reserves in
the country.

Monetary tools used by the Central Bank to control the economy

1. Legal reserve requirement
It is a fraction of the total deposits which commercial banks are required to keep in the Central
Bank. During inflationary periods, when the Central Bank wants to restrict credit creation, it
raises the legal reserve requirements. This reduces the capacity of the commercial banks to lend
money to the public.
During depression or recessionary period, when the Central Bank wants to expand credit and
boosts the economy; it lowers the legal reserve requirement so as to increase the capacity of
commercial banks to lend money to the public.

2. Omo (open market operations)

Open market operations involve buying and selling of securities by the Central Bank through
commercial banks from or to the public so as to stabilize the economy during periods of

41 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
recession or inflation respectively. During inflation when there is need to reduce the amount of
money circulating in the economy, the Central Bank removes money in the economy by selling
to the public the securities. During recessionary periods when there is scarcity of money in the
economy the Central Bank injects the money in the economy by buying securities from the
economy or public.
3. Bank rates (interest rates)
When the economy is experiencing inflation, Central Bank raises the bank rates to discourage the
public from borrowing and thus encouraging them to save with the bank this helps to control
inflationary pressure. However, during recession when there is scarcity of money the Central
Bank however lowers the rates to encourage more borrowing to facilitate investments and create
employment opportunities.
4. Selective credit control
It is a tool in which the Central Bank instructs commercial banks to favour/discriminate against
certain sectors or borrowers in the country. It is intended to control the flow of credit in different
activities in the economy i.e. the Central Bank directs from time to time the commercial banks to
give or not give loans.
5. Liquidity ratio
It involves the control of money supply in the economy by converting the physical assets into
money or cash assets.
6. Special deposit requirement
Are deposits which the Central Bank directs the commercial banks to keep with the Central Bank
over and above the legal reserve requirements. It is only used during severe inflation in the
economy.
7. Moral suasion
It is the issuing of persuasive instructions by the Central Bank to commercial banks requiring
their cooperation in the implementation of the monetary policies.

Non-Banking financial institutions

Are financial institutions that receive deposits from the public and give loans but don’t create
new deposits or new credit.

42 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
Examples
Insurance companies
Development banks
Saving and credit schemes
Building societies
Housing finance

Roles or Functions of non-banking financial institutions

1) They facilitate the financing of medium and long term projects which ordinary commercial
banks don’t undertake in preference to short projects.
2) They offer unique services e.g. the insurance companies offer unique services which
commercial banks can’t undertake e.g the insuring and indemnifying against risks.
3) They promote investment projects; institutions like development banks are very useful in
financing industries/projects and undertaking feasibility study on projects.
4) Facilitate the raising of capital for business formation i.e. institutions like stock exchange
markets facilitate the transfer of shares and securities which promote the formation and
development of large companies large scale business.
5) They cater for small time savers, such institutions assist people who have low incomes to save
their money at even very short time deviations.

43 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
TOPIC EIGHT: PUBLIC FINANCE
Is a macro-economic discipline which deals with the principles concerning the collection of
government revenue and how it is allocated for public expenditures in order to achieve certain
objectives and targets in the economy.
It is made up of the following branches:-
1. Public revenue: it deals with the methods of raising public revenues through public taxation.
2. Public expenditure: it deals with total amount of money that government spends on social
services and the effects of such expenditure. The government spends public revenue on
services such as:-Defense, Health,, Infrastructure,Education etc.
3. The public debts: it deals with the causes and effects of debts which the state, local
authorities and public co operations borrow for various reasons. It also examines the methods of
public debt management.
4. Financial Administration: this deals with preparation and sanctioning of the budget and
auditing of all government ministries, government departments and all other organs of the state.
5. Fiscal policy: it studies the use of public finance operations especially taxation through
budget to supplement the monetary policy so as to bring about economic stability and growth in
the economy.

Sources of Government Revenue

1. Taxes: Are the most vital sources of Government revenue. It is a compulsory contribution by
the population to any public authority.
2. License: is the payment made to the government by an individual in order to secure
permission or right to operate trade/business or any other gainful activity.
3. Fines: are penalties imposed on citizens who break the laws of a country. They form also a
substantial source of government revenue.
4. Fees: are payments made by individuals for personal services rendered by the government
e.g. money paid for surveying the land of an individual.
5. Gifts and Grants: are voluntary contributions made by individuals and societies to the
government for meeting the cost of specific projects/schemes in public interest.
6. Disinvestment/privatization: it involves the sale of state-owned firms and assets to private
individual and the proceeds are used to finance other government obligations.

44 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
7. Compulsory savings: the government also gets revenue from such savings like insurance
payments, social security funds e.t.c.
8. Treasury bills/bonds: the government may at times “float” its treasury bills to the public as a
means of raising revenue.
9. Loans/borrowings: the government can at times borrow internally (from public) or externally
(foreign countries) to finance its budget deficits.
10. Government investments: the government also gets its revenue in form of profits from its
commercial productive activities or the public co-operations.
11. Deficit financing: at times there is shortage of money supply in the economy then the
government may print more money to finance its obligations. This is usually inflationary in
nature.
12. Rates: are payments made on urban private properties e.g. lands, houses e.t.c. They are
usually calculated on the basis of the value of income received or property value.

Reasons why the Government impose taxes

1. Raise revenue-Taxes are the major sources of the government revenue and is the primary
purpose of imposing taxes. The revenue collected is used to finance development economic
projects and promote economic growth.
2. Redistribute income
Through progressive taxes inequalities of income can be reduced by taxing the rich heavily and
the poor less or by granting subsidies from tax revenue to industries and projects that benefit the
poor.
3. To protect home industries
The home industries especially infant industries can be protected by imposing heavy taxes on
commodities coming from outside; thus making the imports expensive and encourage the
consumption of locally commodity.
4. To correct the balance of payment deficit.
When taxes are imposed on imports, taxes can be used to reduce consumption and expenditure
on imports because the imports become more expensive and therefore it is an attempt to correct
BOP deficit.
5. To discourage consumption of dangerous goods

45 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
Taxes can be imposed on commodities which are considered dangerous to human health so as to
make item expensive and discourage their consumption. Consumption of such products may
include polythene, alcohol, cigarettes, and drugs.
6. To control inflation
Taxes can be imposed so as to reduce the disposable income and consequently to reduce demand
pressure in the economy.
7. To discourage dumping
The government may impose tax on dumped commodities so as to raise their prices and reduce
their competitive advantage over the locally produced commodities.
8. To control monopolies
When imposed a lump sum tax can control monopolies by increasing the cost of production and
reducing their profit margins forcing them to increase their output and open up.
9. To promote savings-The government can tax and discourage the consumption of luxuries so
as to encourage people to save for economic growth and development.
Principles of Taxation (Adam Smith’s Cannon of Taxation)
In his book the ‘wealth of nations’ Adam Smith gave four rules or cannons which should be
followed when imposing tax throughout assessment and collection.
1. Equity/Equality
A tax should impose equal sacrifice on all tax payers. The burden of the tax should be distributed
equally to people’s ability to pay. There are two types of equality namely:-
a) Horizontal equality – where different tax payers in similar situation/position are treated
equally.
b) Vertical equality – this is when tax payer who are in unequal situation are treated different
e.g. the rich are taxed heavily than the poor.
2. Certainty principle
The nature of the tax payer i.e. its base, the amount to be paid, the time of payment, the manner
of payment should all be certain and known and not arbitrary.
3. Convenience principle
Taxes should be collected during periods which are convenient to the tax payer in respect to
time, season and availability of income. It should be imposed when the tax payer is in position to
pay, the mode and places of payment should also be convenient.

46 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
4. Economy principle (cheapness)
The cost of collecting the tax should be small in relation to the tax revenue i.e. the general cost of
collection and administration of tax should be lower than the total revenue realized.
Other principles include:
5. Productivity; tax should be able to generate enough revenue to justify its imposition.
6. Elasticity; the tax collected should be able to increase or decrease with a rise or a fall in a tax
payer’s taxable income or property respectively.
7. Simplicity; the nature of the tax and the mode of assessment and collection should be
straight forward and simple to understand by both the collector and the payers.
8. Flexibility; the tax should be flexible depending on the economic circumstances and
according to the requirement of the state.
Public Expenditure
Public expenditure is the amount of money the government spends on social services and the
effects of such expenditures. Types of public expenditure:
1. Re-current Expenditure
This is the money the government spends on daily consumption of goods and services in order to
carry out administrative activities and to maintain law and order throughout the country.
These are expenditures that are continuous and are made in order to facilitate the day to day
operations of the government.
2. Capital development expenditure-This involves government expenditure on investments in
sectors such as agriculture, industries, machinery and equipment, infrastructure, power e.t.c.
3. Transfer payment
This is the money spent by the government on emergencies like relief and other types of
disasters. It also includes grants, pension, scholar ship, bursary, resettlement packages.

Fiscal policy
Fiscal policy is a set of economic measures that use the public finance operations especially
taxation and government spending through the budget to bring about economic stability in the
economy.

47 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
Aims / Importance of Fiscal policy
1. To reduce inflationary pressure in the economy
This is done by reducing money supply in the economy by increasing taxes, reducing
government expenditures and internal borrowing in order to deflate the economy.
2. To reduce unemployment in the economy
By increasing expenditure on investment projects and decreasing taxes and increasing internal
borrowing.
3. To achieve more acquitable income distribution in the economy
This is done by levying progressive taxes, subsidizing and setting up projects for the poor.
4. To improve the infrastructure so as to raise the productivity of the economy. This involves
setting up roads, schools, etc.
5. To attain a balanced economic growth: this can be achieved through balancing expenditure
between sectors and regions.
6. To protect the home industries against aggressive competition from well established
domestic firms.
7. To improve Balance of Payment: this can be achieved by raising prices of imports through
high import duties thereby reducing the import bills to overcome Balance of Payment.
8. To provide social services and raise labour productivity: this is through building hospitals,
schools e.t.c. and other social services.
Government Budget
A government budget is a fiscal statement of the revenue and expenditure estimate of
government for a particular accounting period usually one year. It is usually prepared on annual
basis and presented to the parliament by the minister for finance for approval. A budget deals
with policy techniques that are aimed at directing the course of the nation for the coming fiscal
year while also giving a preview of the precious one.
Types of Budget
The Government budget is basically of two categories namely:-
 The balanced budget
 The unbalanced budget

48 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
Balanced Budget
This occurs when the projected fiscal revenue equals the proposed total expenditure in a financial
year; that is the planned revenue = the planned expenditure.
Unbalanced Budget
This is a type of budget in which the planned expenditure and revenue are not equal, there are
two types namely: the deficit budget and the surplus budget.
Surplus – it is one in which the projected revenue is greater than planned expenditure in a given
period usually a year.
Deficit –this is where expenditure is greater than revenue within a fiscal year.

Functions of a budget
1. It indicates the estimate of revenue.
2. It indicates estimate of recurrent and development expenditure of government.
3. It outlines the economic and social policies whose implementation requires government
expenditure.
4. The Government budget stabilizes the economy through the fiscal policy.
5. It regulates government expenditures and programs.

Public Debt
This includes the national debt plus the debt incurred by the local government authorities and
public co operations. National Debt is a debt owned by the Central government to the people and
institutions within its own borders (internal debts) and to foreign creditors (external debts).
National debts therefore refer to debt which the central government owns both to its nationals
and outsider but doesn’t include the debt incurred by the local authorities.
Measures to reduce the debt burdens (debt servicing)
1. Increased exports and expansion of foreign market for the exports.
2. Improvement of domestic market so as to create a self sustaining economy.
3. Reduction of domestic consumption to boost domestic investment; this helps to produce more
goods for exports to increase foreign exchange earning.
4. Reduction of imports by imposing strict foreign exchange condition.

49 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
5. Reduction in the volume of debt programs to reduce borrowing from international financial
market.
6. Adoption of import substitution industries to reduce the need to import expensive
commodities and save foreign exchange.
7. Reduction of unproductive loans whose payment impose heavy burden on the population and
are no self liquidating.
8. Regulation of Government expenditure to reduce government budget deficit which are often
caused borrowings.
9. Encourage borrowing from low interest sources to pay high interest loans.
10. Improving terms of trade of the commodities so as to improve BOP and minimize the
need for borrowing.
11. Debt cancellation; where the creditors are persuaded to cancel the debt.
12. Debt relief measures where the affected countries get debt relief from the creditor nation.

Challenges of Public Debt

1. An external debts leads to transfer of resources to a foreign country and this imposes a burden
to the society as a whole.
2. It may widen income disparity when the repayment of locally incurred debt redistributes
income from the poor to the rich. This is because it is the rich who can afford to lead the
government yet it is the poor who pay taxes to enable the government to repay the rich.
3. The availability of loans encourages the government to use tax revenue on unproductive
expenditures.
4. Borrowing shifts the burden of repayment to the future generations who took no part in the
decision to incur the loans.
5. Debt servicing leads to forgoing current consumption especially the social service and
infrastructure which is stalled.
6. It encourage debt depends on other governments and institution that leads.
7. External debts put pressure on the BOP position due to debt servicing.
8. Debt servicing limits capital accumulation and investment in the economy.
9. It may lead to inflation situation in the economy.

50 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
TOPIC NINE: INFLATION
A situation where there is persistent rise in the general price level of goods and services in the
economy.
Types and causes of inflation in an economy
General causes of inflation
a) High cost of production/cost push effects
It may arise from the following:-
 High cost of raw materials
 High wages and salaries
 High cost of transport
 High fuel cost
 High level of taxation
 High interest rate/cost of borrowing money
 High cost of advertisement
b) Excessive demand for goods and services (demand pull effects)
If the demand is excessively high and supply is low it would force the suppliers to increase the
price of goods and services due to the forces of demand and supply in the market.
c) Irrational expansionary monetary policy
It results into uncontrolled increase in the supply of money leading to increased purchasing
powers that eventually leads to increase in the level of aggregate demand as opposed to the level
of aggregate supply thereby leading to general rise in supply of goods and services.
d) Desire for higher profits
The desire by business firms to make higher or super normal profits makes them to raise the
prices of goods and services leading to inflation.
e) Excessive Government expenditure in the economy
It leads to excessive/increased money supply without corresponding output of goods and services
leading to inflation in the economy.
f) Political instability
It disrupts production in the economy contributing to shortage of goods and services which may
eventually lead to inflation as the producer tries to cover up the losses incurred.
g) Depreciation of the local currency

51 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
When the local currency loses value against foreign currency then the prices of goods begin to
rise due to increase in the price of level of imports.
h) Rising of fuel prices
When prices of petroleum products rise then the general price level in the economy also rises
because it affects almost every sector in the economy but more particularly the industrial and
transportation sectors.
i) Excessive printing of money
The Central bank may also lead to increase in money supply without corresponding increase in
output of goods and services. When excess money is printed this may eventually lead to
inflation.

Types of Inflation
1. Demand pull inflation (demand side inflation)
This is a situation where aggregate demand exceeds aggregate supply at current prices and at full
employment level of the economy so that prices keep on rising. This type of inflation is usually
associated with full employment situation where an increase in demand leads to upward
movement in prices. Demand pull inflation is sometimes described as ‘a situation where there is
too much money chasing a few goods.’

In the diagram above, the aggregate demand curve, AD0 , and the aggregate supply curve (AS0)
gives the equilibrium price (Po) and the equilibrium quantity (Qo).

52 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
Suppose the aggregate demand increases and the aggregate supply remains constant, the
aggregate demand d curve ADO shifts upwards to AD 1. Assuming the aggregate supply side
remains constant, and then the price level will change from P o – P1 thus the economy experiences
inflation. This type of inflation caused by increase in aggregate demand as aggregate supply
remains the same is called demand pull inflation

2. Cost push inflation (supply side inflation)

This type of inflation originates on the supply side and is a situation where rising prices are
initiated and sustained by the rising prices of factors of production.
It occurs when costs are pushed upwards by the increases in factor prices i.e. cost of production.

Considering the diagram above, and the AS1 and AD1, their point of intersection will give us the
equilibrium price level p1 and equilibrium quantity Q1. Due to increased costs of production that
forces the producers to cut down their level of production, the AS curve shifts to the left from
AS1 to AS2 increasing the equilibrium price from P1 to P2 and since this occurs, the economy
experiences inflation.
Types of Cost push inflation
1. Wage push inflation
Is an inflation that occurs when trade unions are strong enough to cause an increase in the wages
especially where there is excess demand for labour due to competitive nature of the market. The
workers may also demand for wages increase due to increased cot of living in the economy.
Higher wages would mean higher cost of production and if the increase in wage rate exceeds the
increase in productivity then the aggregate supply curve shifts to the left leading to commodity

53 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
 shortage that will force prices upwards. Besides, the producers will increase the prices of
products in order to cope up the increased cost of production.
2. Profit push inflation
This is inflation which results from increased prices in order to obtain excess profit; may be the
effect of monopolist operations in the market. If there is large number of monopolists in the
economy, then there will be a greater possibility of profit push inflation since price determination
depends on the monopolist.

Measures to correct cost push inflation

i. Provision of subsidies to producers
The government can help to reduce the cost of production by giving producers assistance in
form of subsidies. This reduces the prices of factors of production to affordable level.
ii. Increase the availability of goods
This can be achieved in the following ways:-
a) Through increased local production of goods and services.
b) Through importation of goods and services that are lacking.
iii. Price policy: The government institutes price control by fixing maximum prices for essential
goods so as to control inflation.
iv. Income policy: the Government sets a maximum wage rate which is followed by wage freeze
in order to reduce the rising wage rate in the economy that may cause inflation.
Measures to correct demand pull inflation
i. Restrictive/contractionary monetary policy
This policy reduces money supply in the economy by selling government securities, increasing
the bank rates, increasing the legal requirements in the economy e.t.c. It reduces the level of
money circulation in the economy which in turn affects the purchasing power of consumers and
thus leading to reduction of aggregate demand towards aggregate supply.
ii. Restrictive fiscal policy-This involves the reduction in government expenditure and increase
in domestic taxes so as to reduce the disposable incomes and purchasing powers of the public.

54 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
iii. Restrictive income policy
Is where the Government fixes maximum wage rates in order to reduce the purchasing power of
the consumers and the gap between demand and supply. The wages are kept constant through
wage freeze so that the workers demand stays constant to avoid demand exceeding supply.
iv. Price policy
The government controls the prices of major commodities.This helps to prevent prices from
rising continuously.
v. Through increased importation of goods
The supply can be increased by importing from other countries. This policy includes reducing
restrictions/barriers on imports so as to increase the supply and goods in the economy in order to
reduce the pressure of aggregate demand on domestic goods.
vi. Increase in the flow of foreign investment
Since this type of inflation occurs in a period of full employment when there are no additional
resources for production the government can encourage foreign investors to bring in more
resources so as to raise output.
Other types of inflation
1. Suppressed inflation: is a situation where demand exceeds supply but the effects are
minimized by the use of such devices such as price control and rationing.
2. Bottle neck/structural inflation: it is caused by a reduction in the output (supply) of the
major sectors due to inevitable and /or unforeseen factors.
a) Structural break down in production process.
b) Fall in agricultural production due to bad weather, pests, floods etc.
c) Foreign exchange constraints.
d) Shortage of technical and entrepreneurial skills.
e) Mismanagement of the economy.
3. Imported inflation: it arises from importing goods and services from countries that are
already experiencing inflation. It therefore means that a country imports the other country’s
inflation in form of higher prices of imports e.g. high prices of petroleum products (oil) may
lead to higher cost of transport which may affect all other sectors of the economy leading to
general price increase.

55 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
4. Inflation spiral: is a situation in which persistent rising prices leads to arise in the cost of
living and demand of higher wages by workers to raise their standards of living.
Once the wages increase the prices of goods and services rise further leading to further increase
in the cost of living and more demand for upward adjustment and the process continues without
end.
General Measures to control inflation
1. Restrictive monetary policies
2. Reducing Government expenditure in order to control the purchasing power.
3. Increasing the rates of taxation in order to reduce the purchasing power.
4. The consolidation of allowance and wage freezing for those in high income.
5. Provision of investment incentives in order to encourage more investors.
6. Improving the infrastructure to facilitate resource movement and consequently increase
production.
7. Privatization move or drive in order to boost production in the economy.
8. Controlled printing of money.
9. Provision of subsidies to producers to minimize the price rise.
Effects of inflation in an economy
1. Discourage savings: it affects the rate of saving through constant loss of money value i.e. it
represents a major disincentive to save and therefore discourages investment initiatives as
well.
2. Balance of payment problem: the rising prices at home would lead to a fall in export,
because they become too expensive for the foreigners to buy yet imports become cheaper.
3. Unfair income distribution: during times of inflation some groups become better off while
others worsen off, the stronger groups gain while the weaker group losses and this causes
misery among majority who cannot afford high prices of goods and services.
4. Unemployment: some workers may be forced to quit wage employment especially in urban
areas because they cannot afford high cost of living.
5. Falls in real income: fixed income earners of the salaried workers suffer from inflation as
their real income falls with the size of prices of goods and services.

56 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
6. Effects of the exchange rates: the foreign currency (dollar) will buy less of our currency
(kshs) because the purchasing power of the foreign currency falls as the domestic prices rise
and this may affect the nation.

TOPIC TEN: INTERNATIONAL TRADE

It refers to trade between different countries. It is a financial transaction that takes place across
national political frontiers/boundaries. It is composed of import and export trade and involves
movement of goods and services and finances between nations.

Benefits of International Trade

1. It promotes growth of gross domestic product (GDP) thereby raising the standard of living.
2. Helps the country to overcome its shortages especially during times of disaster.
3. It expands market scope of a country’s products.
4. It promotes international specialization / division of labour.
5. It widens the range of commodities that a country can enjoy.
6. It facilitates optimum resource exploitation through increased demand for output.
7. Helps a country to dispose of its surplus products.
8. It encourages competition leading to better quality services/goods and lower
prices/output/products.
9. It brings in revenue in form of foreign exchange earning to the country from exports and taxes
on imports.
10. It brings benefit of forward and backward linkage between home and foreign industries.
11. It promotes political co operation (peace, unity).

Theories/Principles of International Trade

Comparative advantage theory
The theory explains the basis upon which countries specialize in the production of certain goods
and services. It emphasizes that countries should concentrate on the production of goods and

57 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
services in which they incur the least domestic opportunity cost in production and ignore the rest
so that exchange may be enforced leading to international trade.
Absolute advantage theory
The absolute cost difference arises when a country produces a commodity at an absolute lower
cost of production than the other, that is, when a country can produce more of a commodity than
the other using the same quantity of given resources, it is said to have an absolute advantage in
production of that commodity over the other country.
Terms of Trade
A term of trade is the relationship between the price index of exports and price index of
imports.
It is a measure of the relative force of exports and imports.
It may also be referred to as the ratio of price index of exports to the price index of imports
expressed as:
TOT = PX = Price index of Exports
PM Price index of Imports
TOT is therefore, the rate at which a country’s export exchange against its import to represent
the unit of domestically produced goods that are forgone in order to acquire one unit of imported
goods.
Description of TOT
Favourable TOT
This is when the export prices are higher than the prices of imports i.e. X >M.
Unfavourable TOT
It is when the import prices are higher than export prices i.e. M<X.
Deteriorating TOT
This is when the export prices are falling and import payments are rising.
Improving TOT
This is when the import payment is falling and export prices are rising.

Balance of Payment

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BOP is a record/a statement of a country’s monetary transactions it engages in which the rest of
the world in a given period of time usually 1 year.
It is therefore a balanced sheet of a country’s economic/monetary transactions with the rest of the
world plus changes in the country’s claims assets) and liabilities to the rest of the world for a
given period.

Components of a BOP account

1. Current account
This section records all the transaction involving physical movement of goods and provision of
services. It is further subdivided into the following subsections.
i. Visible trade account
The subsection keeps a record of all the receipts the export of tangible goods and all the
expenditure abroad on import of goods. The different between these receipts from abroad and the
expenditure abroad is referred to as balance of trade.
ii. Invisible trade account
This subsection records all transactions arising from provision of services such as tourism,
insurance, banking, transportation e.t.c. It records all expenditure on services rendered by non-
national to the economy and receipts from of service by nationals abroad.
N/B: The different between all the expenditure abroad (both visible and non-visible) and all the
receipt from abroad arising from both visible and invisible trade account is known as BOP
current account.
2. Capital account
This section records all transactions arising from capital movement into and out of the country. It
records capital inflows into the country and capital outflows from the country in a given period
of time usually one year.
a) Capital inflows
They may include things like:-
a) Investment by foreigners in a country
b) Purchase of local currency by foreign residents.
Buying treasury bills, shares, real estates (physical investment e.g. buildings, stocks, equipment).
These constitute credit entry on the Balance of Payment account.

59 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
 b) Capital outflows
These include investments by nationals in other countries, purchase of shares, buying treasury
bills by nationals in foreign countries. These constitute the debit entry in Balance of Payment.
3. Cash/Monetary account
This section records all the transactions related to changes in the country; foreign exchange
reserves and it’s a summary of the net difference between the inflows and outflows from current
and capital accounts. An increase in the foreign exchange reserve between the two accounts
leads to a surplus in the monetary account and vice-versa.
4. Balancing account
This section acts as the balancing item of the Balance of Payment account of the country. If the
records of the Balance of Payment account are complete, both the credit and debit side of the
Balance of Payment statement must be balanced i.e.be equal; incase of any
disagreement/discrepancy between the ideal totals and what has been recorded on the cash
account or difference between the credit and debit totals on the Balance of Payment account e.g.
if the debit side is 10 and the credit side is 15 the then balancing item is 5 which is the difference
between the two sides.

Role of International financial institutions in International Trade

There are two (2) main international financial institutions.
 World Bank
 International Monetary Fund (IMF) also known as the Briton Woods Institutions of
1944.
The World Bank formerly known as the International Bank for Reconstruction and Development
provides loans for projects to member countries whereas the IMF provides loans for member
countries with Balance of Payment deficit problem.

IMF (International Monetary Fund)

It requires countries to own membership i.e. to register. The members contribute to the
institution according to each country’s economic position. The institution assists member
countries facing a Balance of Payment deficit in their country.

60 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
The Role of IMF in economic growth and development
1. It facilitates expansion and balanced growth of International trade by providing funds to
member countries with Balance of Payment problems. This contributes to promotion and
maintenance of high level of employment and real income leading to economic growth and
development.
2. It promotes international monetary co-operation through provision of machinery and
collaboration on international monetary progress.
3. It promotes foreign exchange stability by maintaining orderly exchange rates among member
countries and this avoids competitive exchange rate causing fluctuations.
4. It avails temporarily to member countries the general resources for production thus providing
members with opportunity to correct mal-adjustment in their balance of payment without
resorting to measures which are destructive to national and international prosperity.
5. It assists in the establishment of multi-lateral system of payment in respect of current
transaction and elimination of foreign exchange restrictions which hinder growth of
international trade.

World Bank
Roles of World Bank in economic growth and development
1. It assists in reconstruction and development of territories of its member countries by
facilitating of capital for productive purposes.
2. It promotes foreign private investments through participation in loans and other investments
or capital.
3. Where private capital is not available in reasonable terms, the World Bank makes loans for
productive purposes out of its own resources.
4. It promotes long range growth in international trade and maintenance of equilibrium of
Balance of Payment of members by encouraging international investment for development of
productive resources.

The Balance of Payment Equilibrium and Disequilibrium

Disequilibrium in the Balance of Payment account arises in the form of either a deficit or surplus
that is, when the credit and debit sides of Balance of Payment account fail to reconcile. On the

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other hand, Balance of Payment equilibrium is a situation when the credit and debit sides of the
Balance of Payment accounts are equal.

Causes of BOP disequilibrium (BOP problem)

1. Effect of domestic inflation: it makes the export of a country more expensive than the export
of the other countries. This limits the export revenue and may result into BOP deficit.
2. Political stability: this reduces the productive capacity of a country leading to less foreign
exchange earning and increased military spending.
3. Effect of imported inflation: this results into high prices of imports which means increased
import expenditure that creates a BOP deficit.
4. Deteriorating TOT: the continuous fall in the price of exports and appreciation in the prices
of imports implies that the import expenditure is high while the export revenue is low creating
a deficit.
5. Lack of competitiveness of products in the world market: poor quality products which
cannot compete effectively in the international market as well as low productivity results into
less export revenue.
6. Limited capital inflow: due to structural rigidities in the economy e.g. narrow markets,
political instability, poor infrastructure, complicated administrative procedure e.t.c. may fail
to attract foreign capital in the country through foreign investment.
7. Excessive capital outflow: this may occur due to high rate of profit repatriation and capital
flight by foreigners due to weak government policies.
8. Protectionalism on trade: because of trade restrictions that developed countries impose on
products from developing countries, the market for and the amount of product sold in the
international market is always limited.
9. Increased needs for capital goods: the LCDs have inelastic demands for capital goods as
spare parts e.t.c. which led to increased foreign exchange expenditures.
10. Excess expenditure by the government: the high expenditure by the government
bureaucrats on foreign travels, diplomatic missions abroad, and importation e.t.c. leads to a
deficit.
11. Over reliance on expatriates’ manpower: due to low level of skills development
especially in LDCs they import skilled labour from other countries at high cost.

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12. Heavy external debt servicing: this causes BOP deficit due to more money spent in
paying bank loans plus interests accumulated.

Possible solutions to BOP disequilibrium

Measures that correct the BOP problems aimed at reducing the deficit by reducing the demand
and increasing the supply of foreign exchange. These measures may include the following:
a) Import restrictions: this can be done though tariffs, quota regulations, complete ban e.t.c.
this reduces the balance of foreign exchange in the economy.
b) Restrictive monetary policies: these are aimed at reducing the amount of money in
circulation so as to reduce the balance of foreign exchange in the economy.
c) Restrictive fiscal policy: this reduces the level of disposable income and discourages the
expense on foreign goods. It also increases revenues through taxation while reducing
government expenditure thereby conserving expenditure.
d) Import substitution strategy: the government can encourage the production at home of
formerly imported goods so as to reduce the volume of imports and conserve foreign
exchange.
e) Export promotion strategy: through this the government can encourage the production for
exchange so as to earn more forex.
f) The creation of peaceful, stable and conducive atmosphere reduces military expenditure. It
also facilitates/enhances international trade.
g) Through manpower development: the training of local skills reduces the need to import
expatriates thereby reducing expenditure on expatriate manpower.
h) Through devaluation of currencies: devaluation aims at making export cheaper and import
expensive so as to encourage more exportation and discourage importation.
i) Devaluation policies: it is a legal reduction in exchange rate (of a country’s currency in
relation to the rate of the value of the other country’s currency).
j) Debt manipulation: refers to the servicing through rescheduling or postponing payment, loan
cancellation and debt conversion e.t.c.

Trade Restriction (trade protectionalism)

Refers to the restrictions imposed on freedom of trade among trading partners/between nations.

63 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
There are various forms of trade restrictions:-
1. Quotas
These are the quantative restriction on the amount of imports and exports in a country in a given
period and may either be imposed in physical quantities or in terms of the value of foreign
currency that can be spent.

2. Tariffs
This is a tax duty imposed on imports and exports of a country, tariffs are used either to raise
revenue of the government/to protect the home industries. The effect of a tariff (import duty) is
to raise the prices of imported goods in relation to the domestically produced goods so that
consumers are discouraged from buying foreign goods.
3. Foreign exchange control
This involves the government restricting the amount of foreign exchange reserve that should be
availed for the importation of certain commodities.
4. Total Ban (embargo)
A country may impose a total ban on the importation/exportation of certain commodities. An
embargo may also be endorsed on the importation of products from certain country/trade links
with certain country.
5. Special deposits on imports
Imports can be limited by requiring importers to make special advance deposits on their imports.
This limits the ability to import.
6. Administrative regulation
The government may stipulate a complicated and lengthy bureaucratic system which makes it
hard to carry out trade.

Reasons for trade restrictions

1. To protect the infant industries
Taxes may be imposed on imported products in order to enable the newly established local firms
to gain competitive advantage over foreign firms and secure markets.
2. To prevent dumping

64 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
It is justified and necessary for a country to protect its industries/firms from unfair competition
from foreign markets that export their products at less than their domestic prices/production costs
but simply for disposal.
3. To reduce unemployment
The government may impose a ban on importation and encourage domestic production by
enhancing development of industries so as to create employment opportunities at home.
4. To protect declining industries
When products of an industry become outdated and the demand is declining the government can
save such an industry by imposing restriction on importation of substitutes.

5. To improve the BOP position

The government can correct BOP deficit through trade restrictions by restricting the amount of
imports into the country.
6. To improve the terms of trade (TOT)
A country can improve its terms of trade by increasing its prices of exports through restrictions
on the supply of the commodities on the expense of importers.
7. To discourage consumption of dangerous goods
It is sometimes undertaken to prevent the nationals from consuming certain goods e.g. bhang
e.t.c. which are considered be harmful for human consumption.
8. Revenue objective
Most activities especially the LDCs would impose restriction of tariffs in order to raise revenue
for the government.

65 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
TOPIC ELEVEN: DEVELOPMENT PLANNING
Economic Development Planning – is a deliberate government attempt to influence, direct and
in some cases control economic choices and activities towards specific objectives over a period
of time. It is therefore a deliberate government effort aimed at influencing, directing/controlling
economic decisions and levels of growth of a nation’s economic variables such as income,
consumption, employment, savings, and investment e.t.c. to achieve a specific objective of
national development within a specific period of time.

Levels of development planning

Development plan can be carried out at three major levels:
a) Micro planning level
b) Macro planning level
c) Tertiary planning
Micro planning
This is planning carried out for the whole economy over a given duration of time. It covers all
the sectors and regions of the economy. There are three subsets of macro planning:-
1. Annual planning
Are plans focused for one year relating to the economy as a whole. They are more flexible and in
most cases contained in the national budget of the country.
2. Five year plan
This is the most common plans especially in the LDC. They are intended for over a period of 4-5
years and duration of regime in power.
3. Perspective plan
This represents tentative outline/possible development over a long period of time e.g. over 15
years, 25 years or more. They provide useful guides and backgrounds to the medium term plans.
Micro planning
It is the level of planning which does not cover the whole economy but may cover specific
sectors/regions.
Basically it is of two types:-

66 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
1. Sectorial planning
This is the detailed planning of a specific sector of the economy e.g. planning for agricultural
sector or industrial sector.
2. The regional planning
This type of planning where attention is focused on a particular region/used within economy.
3. Tertiary planning
It is planning at projected level that involves identification of possible development projects,
appraisal of theses projects and their implementation.
Types of plans
There are two types of development plans:
a) Partial plan
b) Comprehensive plan

Partial plan
It is one that only covers a section/part of the national economy such as the agricultural or
industrial sectors.
Comprehensive plan
This is one that looks at the economy as a whole both the private and public sectors of the
economy.
N/B: It is usually fitted into the framework of the expected overall development of the economy.

Problems facing in planning, formulation and implementation

1. Limited information
The available data is always unreliable and inadequate thus making the implementation of the
plans very difficult. It becomes very difficult to focus what will happen in future. If the plan
cannot tell what is happening now.
2. Unexpected economic disturbance
Most economists especially those of LDCs are vulnerable to external factors which are beyond
their control e.g. fluctuation in the international economic prices, domestic economic policies
which directly/indirectly affect the economic plans e.g. fluctuation in oil prices.

67 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
3. Unstable political administration
Lack of stable political administration systems lead to lack of sustained commitment to a
development plan.
4. Over ambitious plans
Some plans are too ambitious and try to accomplish too many objectives in a very short time and
without considering the competing and conflicting objectives.
5. Institutional weakness
Most LDCs have weak administrative and technical staff to draw plans thus there is institutional
weakness and lack of co operation resulting into a gap between the planning body and the day to
day decision making machinery of government.
6. Limited and unreliable sources of funding
Most LDCs experience BOP deficit and resources shortages and therefore heavily depend on
foreign resources which don’t flow steadily.
7. Lack of public support
The plans lack the public good will and support because the public is not well informed and also
the plans are contained in massive document which are hard to follow.
8. Plans rigidities; LDCs plans are rigid and are sometimes formulated by foreigners who never
supervise the implementation thus making the plan adjustment difficult.
8. Corruption
Corruptions in the part of plan formulators also affect plan formulation and implementation.
9. External pressure/influence
The donors tend to interfere with the planning process of LDCs by dictating the projects which
should be catered for by the planners.

Strategies for Industrialization

The term industrialization refers to creation/expansion of industrial capacity in an economy
through development of industries in an economy.
There are two main strategies of achieving industrialization in an economy, they include:-
a) Import substitution strategy
b) Export substitution strategy

68 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
Import substitution strategy (ISS)
This refers to the establishment of industries to produce for the domestic market the
manufactured goods which were previously imported. It is thus an industrialization strategy that
emphasizes on the production of formerly import goods for the domestic/local market.
It is also referred to as inward looking development strategy.

Merits/Arguments for import substitution strategy

1. It is aimed at conserving foreign exchange: what we could have spent to import is saved.
2. Employment opportunities: it acts as a source of employment opportunity for the locals.
3. It creates self reliance: it acts as a means of reducing foreign dependence as a country
produces what it used to import.
4. Development of local skills: it promotes the training of industrial labour force to acquire the
required technological know how (skills) thereby facilitating the development of the local
skills.
5. Use of local resources (raw materials): it facilitates the exploitation of local resources in
order to reduce excess capacity in the economy.
6. Expansion of manufacturing sector: the setting up of numerous industries locally promotes
development of manufacturing sector in a given country.
7. Control of imported inflation: it helps a country to avoid inflationary pressure caused by
importing price rising goods from other countries.
8. Facilitate technology transfer: the establishment of industries facilitates technological
transfer from most developed countries to least developed countries.
9. It may also act as a source of foreign exchange: in the long run the industries may serve as
a source of forex through exportation after the domestic market has been satisfied and the
industries have grown out of infant stage.
10. Development of infrastructure: establishment of industries to enhance development of
infrastructural facilities e.g. roads, power supply, water and drainage system, communication
network e.t.c. that increases production and supply of goods.
11. Increase income: industries generate income to individual firms and government.

69 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
12. Solving of BOP problem.
13. Facilitates capital inflow (foreign investment)
14. Promote economic growth (increase in Gross Domestic Product)

Challenges/Limitations of Import substitution strategy

1. Small domestic market
2. Poor quality goods
3. High costs of industries; the final product are always more expensive than the imported ones.
4. Shortage of raw materials.
5. High costs of subsidies (government provide low cost subsidies)
6. Limited capital
7. Unreliable source of funding
8. Limited skills
9. Political instability
10. Poor infrastructure

Demerits/Disadvantages of Import Substitution Strategy

1. Poor quality goods; it encourages the production of inferior goods.
2. Resource wastage; underutilization due to low markets.
3. Unemployment; use of capital intensive method in industries.
4. Limited variety of goods; ISS limits the variety of goods available in an economy thus low
standard of living.
5. Monopoly tendency; this is promoted through too much protection offered to the import
substitution industries in the local market.
6. Production of consumer goods; ISS is based on the production of consumer goods instead of
capital goods.
7. High domestic prices; ISS industries lead to establishment of high cost of industries which
produce expensive goods thus the final products are very expensive for the local consumer.
Export promotion strategy (EPS)
This is an industrialization strategy that emphasizes on the production of goods and services for
export or for foreign market.

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It is a deliberate policy to expand the volume of manufactured goods for exports in order to earn
forex.

Requirement for Export promotion strategy

1. Availability of raw materials; there should be sufficient quantities of raw materials.
2. Availability of skilled labour; it should be available to facilitate production of goods of
goods that can compete in the international market.
3. Power adequacy; power should be sufficient to enable non stop productions.
4. Development of infrastructure; it requires good infrastructural development to guide
movement of finished goods to the market with ease.
5. Market research; there should be efforts to establish manufacturing of the goods.
6. Export promotion institution; these should be put in place e.g. export promotion council
which will promote and facilitate exportation of commodities.
7. Trade promotion; the strategy call for advertisement and promotional activities to expose the
availability of the goods.
8. Provision of incentives; government should provide credit and fiscal incentives like tax relief
or subsidies to enable the exporters cut down on cost so as to make their products competitive
in the market.
9. Regional integration; the EPS calls for trade agreement and economic co-operation so as to
encourage trade.

Merits of Export Promotion Strategy

1. Employment opportunities; job opportunities are expanded especially when labour intensive
methods are used which increase production.
2. Economic growth; facilitates economic growth through increased output.
3. Diversification of exports; it promotes diversification of export of goods and market instead
of relying on agricultural commodities or one product only.
4. Improve BOP position; through enhancement of forex earning, BOP deficit in LCDs are
solved.
5. Promotes manufacturing sectors; setting up of industries promote the expansion of the
manufacturing sector.

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6. Promotion of international trade; it fosters international trade by reducing geographic
concentration of trade.
7. Improve international trade; it promotes international understanding among trade partners.
8. Improve TOT; enables a country’s export to sell at higher value.
9. High quality output; products had to be of high quality as even the agricultural products are
to be added.
10. Developed infrastructure; it encourages the development of infrastructure like roads,
airports, storage facilities for export production.
Shortcomings of Export promotion strategy
1. Massive capital requirement; the strategy is associated with the need of high capital
investment which is beyond the ability of LDCs.
2. High marketing expenditure; it requires heavy expenditure on market research and
extensive advertising in the foreign market yet LDC lacks fund for such.
3. Poor quality products; LDC produces poor quality products which cannot compete in the
world market.
4. Highly priced goods; LCD establishes high cost industries which produce expensive
products that cannot compete.
5. Depletion of resources; it leads to quick depletion of natural resources in the LDCs.
6. Wastage of resources; industries may run at loss if foreign market are hard to break through
and may lead to resource wastage if all output is not brought.

72 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
TOPIC TWELVE: EMERGING TRENDS IN DEVELOPMENT ECONOMICS
I) International Trade; aimed at improving economies through export trade and import trade;
further it improves the B.O.P of countries.
Emerging trends under international trade include;

a) Globalization; carrying out trade globally / worldwide.

Aims; _ build economies especially of the L.D.Cs by the DCs
_supplement shortages in terms of goods and services
_create political cooperation between countries

b) Economic intergration: is the coming together of different countries with common interest
purposefully to trade in order to improve the B.O.Ps of their members e.g. ECOWAS, PTA etc.
Aims: _ expand trade
_Expand the markets
_Develop infrastructures e.g. roads, communication networks e.t.c
c) Export processing zones

II: Development of strategic approaches to economic growth and development e.g.

i) Millennium development goals to achieve universal growth and development through
their implementation and accomplishment
ii) Economic recovery strategies e.g. 2002 NARC government ERSP i.e. it outlines the path to
economic growth through specific strategies
iii) 2030 vision paper; developed to help us achieve a middle-based economy by the year 2030
iv) Kazi Kwa vijana programmes to create employment opportunities for the youths.
v) AGOA summits & its goals towards achieving development in Africa generally e.t.c.
III: Development planning - the government draws up development plans (i.e. short-term,
middle-term &long-term plans aimed at directing the economy towards achieving economic
growth and development through their formulation and implementation.
IV: Labour movements/Trade unions; establishment of workers unions/organizations aimed at
improving the working environment &welfare of workers for the betterment of their standards of
living.

73 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)
V: Industrialization strategies; these are aimed at achieving industrialized economies
especially by the LDCs e.g. EPs (Export promotion strategies) &ISS (import substitution
strategy)
VI: Population control measures aimed at attaining optimum population for efficient &effective
utilization of resources in order to obtain optimum output e.g. the adoption of family planning
measures e.t.c
VII: Education/training programmes; these have been tailored towards science &technology
based programs to match world-economic changing trends& requirements in production.
VIII: Manpower planning; aimed at solving the problems of labour shortages & supplies. This
is an important measure towards solving unemployment &development of irrelevant skills in the
labourforce
IX: Switch from subsistence production to market-oriented production accompanied with the
adoption of irrigated agriculture rather than rained agriculture.
X: Credit facilities programs; aimed at availing finance to potential investors &entrepreneurs
to invest in economic activities. In Kenya, the government has created various financial kitties
e.g. youth enterprise development funds, women development funds e.t.c

74 Timothykisaka (ettitimothykisaka@eldorettti.ac.ke)