UPSC Economics Indian Economy An Introduction

An Introduction

Category : UPSC


An Introduction





Contents of the Chapter

  • Introduction
  • Types of Economics
  • Keynesian theory of Macro Economics
  • Mesoeconomics
  • Socialist theory of Economics
  • Structural Change
  • Green Economics
  • Measuring Growth
  • National Income Accounting
  • Market Price and Factor cost
  • Factor Costs
  • Final Goods
  • GDP
  • Net National Product
  • Business Cycles
  • Benefits and Side Effect of Economic Growth
  • Measure Of Real Progress FOR GDP
  • High-income Economy
  • Least Development Countries
  • India’s Initiatives for Green Acounting
  • Sarkozy’s Initiatives for GDP Alternative
  • India GDP Base Year is changed




Economics as a word comes from the Greek: oikos means ‘family, household, or estate’, and nomos stands for ‘custom, law’ etc. Thus, "household management" or management of scare resources is the essential meaning of economics. Economics encompasses production, distribution, trade and consumption of goods and services. Economic logic is applied to any problem that involves choice under scarity.


Intially, economics focused on “wealth” and later “welfare”. Still later, in recent years, it has given sufficient attention to the study of tradeoffs- giving up one to gain another. The focus on tradeoffs arises from the traditional assumption that resources are scare and that it is necessary to choose between competing alternatives. Choosing one benefit implies forgoing another alternative that opportunity cost (cost of foregoing an Opportunity).


Adam Smith, generally regarded as the Father of Economics, author of ‘An Inquiry into the Nature’ and Causes of the Wealth of Nations (generally known as The Wealth of Nations) defines economics as “The science of wealth.” Smith offered another definition, “The Science relating to the laws of production, distribution and exchange.”


Definitions in terms of wealth emphasize production and consumption, and do not deal with the economic activities of those not significantly involved in these two processes, for example, children and old people. The belief is that non-productive activity is a cost on society. It meant that man was relegated to the secondary position and wealth was placed above life.

Thus arose the shift in the focus to welfare economics study of man and of human welfare, not of money alone. Economics involves social action connected with the attainment of human well being.


Types of Economics

Economics is usually divided into two main branches:


Microeconomics which examines the economic behavior of individual actors such as consumers, businesses, households etc. to understand how decisions are made in the face of scarcity and what effects they have.


Macroeconomics, which studies the economy as a whole and features like national income, employment, proverty, balance of payments and inflation.


The two are linked closely as the behavior of a firm or consumer or household depends upon the state of the national and global economy.



‘Mesoeconomics’ studies the intermediate level of economic organization in between the micro and the macro economics like institutional arrangements etc.



There are broadly the following approaches in the mainstream economics. The basis of all the streams is the same: resources are scarce while wants are unlimited (often mentioned as the economic problem).


Keynesian theory of Macro Economics

Keynesian mecroeconomics based on the theories of twentieth-century British economist John Maynard Keynes. It says that the state can stimulate economic growth and restore stability in the economy through expansionary policies. For example- through massive programme of spending on infrastructure when the demand is low and growth is negative.


In the necessionary phase that the economics of the western world in particular and rest of the world in general, went through (some are still undergoing the recession) due to 2008 financial crisis, the relevance of Keynes is growing. The intervention by State is only when the economics cycle turns down and growth slows down or is negative. In normal times, it is the market that drives growth through the force of supply and demand.


Indian government stepped up expenditure with three fiscal stimuli since December 2008 to revive growth. With growth spurting, the gradual and calibrated exit from the stimulus was begun in the 2010-11 Union Budget.


The theories of Keynesian economics were first presented in ‘The General Theory or Employment, Interest and Money’ (1936).



Neo-liberalism refers to advocacy of policies such as individual liberty, free markets, and free trade. Neo-liberalism “proposes that human well being can best be advanced by liberating individual entrepreneurial freedoms and skills within an institutional framework characterized by strong private property rights.


Socialist theory of Economics

In distinction to the above, there is the school of socialist economics based on public (State) ownership of means of production to achieve greater equality and give the workers greater control of the means of production. It establishes fully centrally planned economy which is also called command economy - economy is at the command of the state. Private ownership of assets is not allowed. For example, erstwhile USSR, Cuba etc.


Development Economics

Development economics is a branch of economics which deals with economic aspects of the development process, mainly in low-income countries.


Its focus is not only promoting economic growth and structural change but also improving the well being of the population as a whole through health and education and workplace Conditions, whether through public or private channels. The most prominent contemporary development economists are Nobel laureates Amartya Sen and Joseph Stiglitz.


Structural Change

Structural change of an economy refers to a long-term widespread change of a fundamental structure, rather than microscale or short-term change. For example a subsistence economy is transformed into a manufacturing economy, or a regulated mixed economy is liberalized. An insulated and protectionist economy becomes open and globalized. A current structural change in the world economy is globalization.


Green Economics

Green economics focuses on and supports the harmonious interaction between humans and nature and attempts to reconcile the two.


Economic Growth and its Measument Methods

Economic growth is the change- increase or decrease, in the value of goods and services produced by an economy. If it is positive, it means an increase in the output and the income of a country. It is generally shown as the increase in percentage terms of real gross domestic product (GDP adjusted to inflation) or real GDP.


Measuring Growth

Measures of national income and output are used in economics to estimate the value of goods and services produced in an economy. They use a system of national accounts or national accounting. Some of the common measures are Gross National Product (GNP) and Gross Domestic Product (GDP).


National Income Accounting

National income accounting refers to a set of rules and techniques that are used to measure the national income of a country.


GDP is defined as the total market value of all final goods and services produced within the country in a given period of time- usually a calendar year or financial year.


GDP can be real or nominal. Nominal GDP refers to the current year production of final goods and services valued at current year prices. Real GDP refers to the current year production of goods and service valued all base year prices. Base year prices are Constant prices.


In estimating GDP, only final marketable goods and services are considered. Only their values are added up and they pertain to a given period. When it is compared to the base year figure; the growth levels are Seen.


To explain further, gains from resale are excluded but the services provided by the agents are counted. Similarly, transfer payments (pensions, scholarships etc) are excluded as there is income received but no good or service produced in return. However, not all goods and services from productive activities enter into market transactions. Hence, imputations are made for these non-marketed but productive activities: for example, imputed rental for owner occupied housing.


Market Price and Factor Cost

Market price refers to the actual transacted price and it includes indirect taxes- custom duty, excise duty, sales tax, service tax etc.


Factor cost refers to the actual cost of the Various factors of production includes government grants and subsidies but it excludes indirect taxes.


Relationship between market price and factor cost.


GNP at factor cost = GNP at market price - indirect taxes + subsidies


GDP at factor cost = GDP at market price - indirect taxes + subsidies


Factor Costs

Factor costs are the actual production costs at which goods and services are produced by the firms and industries in an economy. They are really the costs of all the factors of production such as land, labour, capital, energy, raw materials like steel etc. that are used to produce & given quantity of output in an economy. They are also called factor gate costs (farm gate, firm gate and factory gate) since all the costs that are incurred to produce a given quantity of goods and services take place behind the factory gate i.e. within the walls of the firms, plants etc in an economy.


Transfer Payments

Transfer payment refers to payments made by government to individuals for which there no economic activity is produced in return by these individuals. Examples of transfer are scholarship, pension.




Three Approaches

There are three different ways of calculating GDP. The expenditure approach adds consumption, investment, government expenditure and net exports (exports minus imports). On the other hand, the income approach adds what factors earn: wages, profits, rents etc.


Output approach adds the market value of final goods and services.


The three methods must yield the same results because the total expenditures on goods and services must by definition be equal to the value of the goods and services produced (GNP) which must be equal to the total income paid to the factors that produced these goods and services.


In reality, there will be minor differences in the results obtained from the various methods due to changes in inventory levels. This is because goods in inventory have been produced (and therefore included in GDP), but not yet sold. Similar timing issues can also cause a slight discrepancy between the value of goods produced (GDP) and the payments to the factors that produced the goods, particularly if inputs are purchased on credit.


Final Goods

Final goods are goods that are ultimately consumed rather than used in the production of another good. For example, a car sold to a Consumer is a final good; the components such as tyres sold to the car manufacturer are not; they are intermediate goods used to make the final goods. The same tyres, if sold to a consumer, would be a final goods. Only final goods are included when measuring national income. If intermediate goods were included too, this would lead to double counting; for example, the value of tyres would be counted once when they are sold to the car manufacturer, and again when the car is sold to the consumer.


Only newly produced goods are counted. Transactions in existing goods such as second- hand cars, are not included, as these do not involve the production of new goods.



GDP considers only marketed goods. If a cleaner is hired, their pay is included in GDP. If one does the work himself, it does not add to the GDP. Thus much of the work done by women at home-taking care of the children, aged; chores etc which is called ‘care economy’ is outside the GDP. Gross means depreciation (wear and tear of machinery in their use) of capital stock is not subtracted. If depreciation is subtracted, it becomes net domestic product.


Calculating the real GDP growth – inflation adjusted GDP growth- allows us to determine if production increased or decreased, regardless of changes in the - inflation and purchasing power of the currency.


Differences between GDP and GNP

The two are related. The difference is that GNP includes net foreign Income. GNP adds net foreign investment Income compared to GDP. GDP shows how much is produced within the boundaries of the country by both the citizens and the foreigners. It is the market value of all the output produced in the territory of a nation in one year. GDP focuses on where the output is produced rather than who produced it. GDP measures all domestic production, disregarding the producing entities nationalities.


In contrast, GNP is a measure of the value of the output produced by the “nationals” of a country- both with in the geographical boundaries and outside. That is, all the output that the Indian citizens produce in a given year - both within India and all other countries.


For example, there are Indian and foreign firms operating in India. Together what they produce within the Indian geography is the GDP of India. The profits of foreign firms earned within India are included in India’s GDP, but not in India’s GNP.


In other words, income is counted as part of GNP according to who owns the factors of production rather than where the production takes place. For example, in the case of a German-owned car factory operating in the US, the profits from the factory would be counted as part of German GNP rather than US GNP because the capital used in production (the factory, machinery, etc.) is German owned. The wages of I the American workers would be part of US GDP, while the wages of any German workers on the site would be part of German GNP.


GDP is essentially about where production takes place. GNP is about who produces. If it is an open economy with great levels of foreign investment (FD1) and lesser levels of outbound FDI, its GDP is likely to be larger than GNP.


If it is an open economy but more of its nationals tend to move economic activity abroad or earn more from investing abroad compared with non-nationals doing business and earning incomes within its borders, its GNP will be larger than GDR If it is a closed economy where nobody leaves its shores, nobody invests abroad, nobody comes in and nobody invests in the country, its GDP will be equal to GNP.


Japan used to belong in the last category. Until the mid-1990s, the difference between Japan's GDP and GNP amounted to less than one percentage point of GDP. With only limited numbers of people doing business abroad, the GDP and GNP were essentially the same thing.


Net National Product

In the production process a country uses machines and equipment. When there is depreciation, we have to repair or replace the machinery. The expenses incurred for this are called the depreciation expenditure. Net National Product is calculated by deducting depreciation expense from gross national product.


NNP = GNP - Depreciation

National Income is calculated by deducting indirect taxes from Net National Product and adding subsidies. National Income (N1) is the NNP at factor cost


N1 = NNP - Indirect Taxes + Subsidies


Per Capita Income

Per Capita Income is per capita GDP: GDP divided by mid year population of the corresponding year.


The growth of GDP at constant price shows an annual real growth.


The real GDP per capita of an economy is often used as an indicator of the average standard of living of individuals in that country, and economic growth is therefore often seen as indicating an increase in the average standard of living.


Aims of Economic Growth

The following aims can be attributed to the study of economic growth:


  • When growth is quantified, we can understand whether It is adequate or not for the given goals of the economy.


  • We can understand its potential and accordingly set targets.


  • We can adjust growth rates for their sustainability.


  • We can prevent inflation or deflation to some extent if we see the performance of the economy in quantitative terms.
  • We can balance the contributions of the three sectors of the economy and steer the direction of growth towards national goals- away from agriculture to manufacturing as in the case of India in recent years.


  • Target appropriate levels of employment creation and poverty alleviation.


  • Forecast tax revenues for governmental objectives.


  • Corporates can plan their business investments.


Problems for Calculating National Income

The measurement of national income encounters many problems. The problem of double-counting. Though there are some corrective measures, it is difficult to eliminate double-counting altogether. And there are many such problems and the following are some of them.


  1. Black Money

Illegal activities like smuggling and unreported incomes due to tax evasion and corruption are outside the GDP estimates. Thus, parallel economy poses a serious hurdle to accurate GDP estimates. GDP does not take into account the 'parallel economy' as the transactions of black money are not registered.


  1. Non-Monetization

In most of the rural economy, considerable portion of transactions Occurs Informally and they are called as non-monetized economy- the barter economy.


The presence of such non-monetary economy in developing countries keeps the GDF estimates at lower level than the actual.


  1. Growing Service Sector

In recent years, the service sector is growing faster than that of the agricultural and industrial sectors. Many new services like business process outsourcing (BPO) have come up. However, value addition in legal consultancy, health services, financial and business services and the service sector as a whole is not based on accurate reporting and hence underestimated in national ii-.come measures.


  1. Household Services

The national income accounts do not include the ‘care economy’- domestic work and housekeeping. Most of such valuable work rendered by our women at home does not enter our national accounting.


  1. Social Services

It ignores voluntary and charitable work as it is unpaid.


  1. Environmental Cost

National income estimation does not account for the environmental costs incurred in the production of goods.


For example, the land and water degradation accompanying the Green revolution in India Similarly, the climate change that is caused-by the use of fossil fuels.


However, in recent years, green GDP is being calculated where the environmental costs are deducted from the GDP value and the Green GDP is arrived at.


GDP deflator

GDP Deflator is a comprehensive measure of inflation, implicitly derived from national accounts data as a ratio of GDP at current prices to constant prices. While it encompasses the entire spectrum of economic activities including services, it is available on a quarterly basis with a lag of two months since 1996. Therefore, national income aggregates extensively use WPI for deflating nominal price estimates to derive real price estimates.


The formula used to calculate the deflator is:


GDP deflator = (Nominal GDP / Real GDP) X 100


Dividing the nominal GDP by the GDP deflator and multiplying it by 100 would then give the figure for real GDP, hence deflating the nominal GDP into a real measure.


A price deflator of 200 means that the current-year price of this computing power is twice its base-year price - price inflation. A price deflator of 50 means that the current-year price is half the base year price - price deflation.


Unlike some price indexes, the GDP deflator is not based on a fixed basket of goods and services. It covers the whole economy.


Specifically, for GDP, the “basket” in each year is the set of all goods that were produced domestically, weighted by the market value of the total consumption of each good. Therefore, new expenditure patterns are allowed to show up in the deflator as people respond to changing prices. The advantage of this approach is that the GDP deflator reflects up to date expenditure patterns. The CSO uses the price indices to reach the base year figure from the current year one. In September 2010, for the first quarterly figure, it made a mistake while applying the deflator- for the GDP by output figure, it used one price index and for the GDP by expenditure number, it used another. It led to huge discrepancy.


Business Cycles

Alternating periods of expansion and decline in economic activity is called business cycle- That is, the ups and downs of the economy. There are four stages in the business cycle: expansion, growth, slowdown and recession. Recession may not follow every time. When recession takes place, it may not be of the same intensity every times. For example, the 2008 global financial meltdown is the deepest since the WW2 and is called the Great Recession. If recession deepens, it is called depression and occurred only once in the last century in 1930’s. Ail economies experience economic cycles. Explaining and preventing these fluctuations Is one of the main focuses of macroeconomics.


Benefits and Side Effects of Economic Growth


  1. The first benefit of economic growth is wealth creation. It helps create jobs and increase incomes.


  1. It ensures an increase in the standard of living, even if it is not evenly distributed.


  • Government has more tax revenues: fiscal dividend. Economic growth boosts tax revenues and provides the government with extra money to finance spending projects. For example, the flagship programmes of the government like the MGNREGA are a direct result of the tax buoyancy of growth It sets up the positive spiral:


  • rising demand encourages investment in new capital machinery which helps accelerate economic growth and create more employment.


Economic growth can also have a self-defeating effect:


  1. violate the principles of fairness and equity thus setting off social conflicts.


  1. Environmental costs are another disadvantage.


Measure Of Real Progress FOR GDP

Ans. Economic growth is generally taken as the measure of advancement in the standard of living of the country. Countries with higher GNP often score highly on measures of welfare, such as life expectancy. However, there are limitations to the usefulness of GNP as a measure of welfare:


  • GDP does not value intangibles like Leisure, quality of life etc. Quality of life is determined by many other things than economic goods.


  • The impact of economic activity on the environment may be harmful- pollution, climate change, unsustainable growth, ecological refugees, life style diseases etc,


  • It only gives average figures that hide stratification. Economic inequality is not revealed by GDP figures


  • Condition of poor is not indicated For example, Indian economy grew at 8.9% in the first half of 2010-2011 but the food inflation was over 14% and on a high base causing immiserization of the lower classes.


  • Gender disparities are not indicated.


  • It does not matter how the increase in wealth takes place- whether by civilian demand or war.


  • GDP does not measure the sustainability of growth. A country may achieve a temporarily high GDP by over-exploiting natural resources.



The major advantages to using GDP per capita as an indicator of standard of living are that it is measured frequently, widely and consistently. Frequently in that most countries provide information on GDP on a quarterly basis, which allows a user to spot trends more quickly. Widely in that some measure of GDP is available for practically every country in the world, which allows crude comparisons between the standard of living in different countries. And consistently in that the technical definitions used within GDP are relatively consistent between countries, and so there can be confidence that the same thing is being measured in each country.



The major disadvantage of using GDP as an indicator of standard of living is that it is not, strictly speaking, a measure of standard of living. For instance, in an extreme example, a country which exported 100 per cent of its production would still have a high GDP, but a very poor standard of living.


The argument in favour of using GDP is not that it is a good indicator of standard of living, but rather that (all other things being equal) standard of living tends to increase when GDP per capita increases. This makes GDP a proxy for standard of living, rather than a direct measure of it.


Because of the limitations in the GDP concept, other, measures of welfare such as the Human Development Index (HDI), Index of Sustainable. Economic Welfare (ISEW), Genuine Progress Indicator (GPI) and Sustainable National Income (SN1), Gross National Happiness (GNH), Green GDP, natural resource accounting have been suggested.


They are proposed in an attempt to give a more complete picture of the level of well- being and the position with reference to natural resource depletion, but there is no consensus as to which is a better measure than GDP. Some of the above defy quantification. GDP still remains by far the most often-used measure.


Other Measures Used as Alternative to GDP

Some economists have attempted to create a replacements for GDP which attempt to address many of the above criticisms regarding GDP. Other nations such as Bhutan have advocated gross national happiness as a standard of living, claiming itself as the world's happiest nation.



The UN Human Development Index (HDI) is a standard means of measuring wellbeing. The index was developed in 1990 by the Pakistani economist Mahbub ul Haq, and has been used since 1993 by the United Nations Development Programme in its annual report.


The HDI measures the average achievements in a country in three basic dimensions of human development:


  • A long and healthy life, as measured by life expectancy at birth.


  • Knowledge, as measured by the adult literacy rate (with two-thirds weight) and the combined primary, secondary, and tertiary gross enrolment ratio (with one-third weight).


  • A decent standard of living, as measured by gross, domestic product (GDP) per capita at purchasing power parity (PPP) in US Dollars. Each year, UN member states are listed and ranked according to these measures.


India is ranked at 134 among 182 countries on the Human Development Index of the United Nations Development Programme (UNDP) that was released in late 2010. The HDI goes beyond a nation's gross domestic product (GDP) to measure the general well-being of people under a host of parameters, such as poverty levels, literacy and gender-related issues.



An alternative measure, focusing on the amount of poverty in a country, is the Human Poverty Index. The Human Poverty Index is an indication of the standard of living in a country, developed by the United Nations.


Indicators used are:


  • Lifespan


  • functional literacy skills Long-term unemployment


  • Relative poverty ('poverty with reference to the average per capita income).



The Genuine Progress Indicator (GPI) is a concept in green economics and welfare economics that has been suggested as a replacement metric for gross domestic product (GDP) as a metric of economic growth. Unlike GDP it is claimed by its advocates to more reliably distinguish uneconomic growth – almost all advocates of a GDP would accept that some economic growth is very harmful.


A GPI is an attempt to measure whether or not a country’s growth, increased production of goods, and expanding services have actually resulted in the improvement of the welfare (or well-being) of the people in the country.


Green GDP

Green Gross Domestic Product (Green GDP) is an index of economic growth with the environmental consequences of that growth factored in. From the final value of goods and services produced, the cost of ecological degradation is deducted to arrive at Green GDP.

In 2004, Wen Jiabao, the Chinese premier, announced that the green GDP index would replace the Chinese GDP index. But the effort was dropped in 2007 as it was seen that the conventional growth rates were decelerating.



Gross National Happiness (GNH) is an attempt to define quality of life in more holistic and psychological terms than Gross National Product.


The term was coined by Bhutans former King Jigme Singye Wangchuck in 1972 to indicate his commitment to building an economy that would serve Bhutan’s unique culture based on Buddhist spiritual values. While conventional development models stress economic growth as the ultimate objective, the concept of GNH is based on the premise that true development takes place when material and spiritual development occur side by side to complement and reinforce each other. The four dimensions of GNH are the promotion of equitable and sustainable socio-economic development, preservation and promotion of cultural values, conservation of the natural environment, and establishment of good governance.


Natural Resources Accounting

Natural resources are essential for production and consumption, maintenance of life-support systems, as well as having intrinsic value in existence for intergenerational and other reasons. It can be argued that natural capital should be treated in a similar manner to manmade capital in accounting terms, so that the ability to generate income in the future is sustained by using the stock of natural capital judiciously. By failing to account reductions in the stock of natural resources, standard measures of national income do not represent economic growth genuinely. Soil, water and biodiversity are the three basic natural resources.


National Biodiversity Action Plan published by Government of India, Ministry of Environment and Forests in 2008 highlights as an action point the valuation of goods and services provided by biodiversity. More specifically, the Action Plan states : to assign appropriate market value to the goods and services provided by various ecosystems and strive to incorporate these costs into national accounting.


In the Nagoya (Japan) meet in 2010 on biodiversity protection, India declared that it will adopt natural resource accounting from 2012.


In the October 2010 UN biodiversity summit, it was said that the link between economic policy, natural capital and human wellbeing should be understood. There should be global partnership is to mainstream natural resources accounting into economic planning. India, Colombia and Mexico accepted it. This will plug deficiencies in traditional accounting systems. As mentioned above, India's national biodiversity action plan has already incorporated some of these concepts.


Laissez-faire Doctrine

Ans. A market economy is an economic system in which goods and services are traded, with the price being determined by demand and supply.


Laissez-faire is a French phrase meaning “let do, let go, let pass.” Its proponents make arguments against government interference with economy and trade. It is synonymous with free market economics. It is generally understood to be a doctrine opposing economic-interventionism by the state beyond the extent which is perceived to be necessary to maintain peace and property rights.


A market economy has no central coordinator guiding its operation, yet theoretically self-organization emerges amidst the complex interplay of supply and demand. Supporters of a market economy generally hold that the pursuit of self- interest is actually in the best interest of society. Adam Smith says:


“By pursuing his own interest (an individual) frequently promotes that of the society more effectually than when he really intends to promote it.” (Wealth of Nation).


Adam Smith calls it the invisible hand- the force that combines the individual self interest into a collective social interest. However, as we have seen in the melt down of the western economies since 2008 and as Nobel laureate Joseph Stiglitz commented, invisible hand may not exist.


There are a variety of critics of market as an organizing principle of an economy. These critics range from those who reject markets entirely, In favor of a planned economy, such as that advocated by communism to those who wish to see them regulated to various degrees. One prominent practical objection is the environmental pollution generated. Another is the claim that through the creation of monopolies, markets sow the seeds of their own destruction.


Social Market

Some proponents of market economies believe that government should intervene to prevent market failure while preserving the general character of a market economy.


It seeks an alternative economic system other than socialism and laissez-faire economy, combining private enterprise with measures of the state to establish fair competition, low inflation, low levels of unemployment, good working conditions, and social welfare.


Co-relation between Market Economy and Poverty

Free market economists argue that planned economies and Welfare will not solve poverty problems but only make them worse. They believe that the only way to solve poverty is by creating new wealth. They believe that this is most efficiently achieved through low levels of government regulation and interference, free trade, and tax reform and reduction. Open economy, competition and innovation generate growth and employment.


Advocates of the third way social market solutions to poverty- believe that there is a legitimate role the government can ‘play in fighting poverty. They believe this can be achieved through the creation of social safety nets such as social security and workers compensation.


Most modern industrialized nations today are not typically representative of Laissez-faire principles, as they usually involve significant amounts of government intervention in the economy. This intervention includes minimum wages to increase the standard of living, anti-monopoly regulation to prevent monopolies, progressive income taxes, welfare programs to provide a safety net for those without the capacity to find work, disability assistance, subsidy programs for businesses and agricultural products to stabilize prices - protect jobs within a country, government ownership of some industry, regulation of market, competition to ensure fair standards and practices to protect the consumer and worker, and economic trade barriers in the form of protective tariffs – quotas on imports - or Internal regulation favoring domestic industry.


Differencies Between Market Failure and Government Failure

The inability of an unregulated market to achieve allocative efficiency is known as market failure. The main types of market failure are: monopoly, steep inequality, pollution etc. The western economic recession since 2008 is the result of market failure where excessive speculation and borrowings have disoriented the economies with huge human and economic cost.


Government failure is the public sector analogy to market failure and occurs when government does not efficiently allocate goods and/or resources consumers. Just as with market failures, there are many different kinds of government failures. Inefficient use of resources, wastage and retarded economic growth due to government monopolies and regulation are the results of government failure. Often, the performance of the public sector in India is cited to exemplify government failure.


Structural Composition of the Economy

The three-sector hypothesis is an economic theory which divides economies into three sectors of activity: extraction of raw materials (primary), manufacturing (secondary), and services (tertiary).


According to the theory the main focus of an economy’s activity shifts from the primary, through the secondary and finally to the tertiary sector. The increase in quality of life, social security, blossoming of education and culture and avoidance of unemployment with reduction of poverty are the effects of such transition.

Countries with a low per capita income are in an early state of development; the main part of their national income is achieved through production in the primary sector. Countries in a more advanced state of development, with a medium national income, generate their income mostly in the secondary sector. In highly developed countries with a high income, the tertiary sector dominates the total output of the economy. The primary sector of the economy involves changing natural resources into primary products. Most products from this sector are considered raw materials for other industries. Major businesses in this sector include agriculture, fishing, forestry and all mining and quarrying industries.


Primary industry is a larger sector in developing countries; for instance, animal husbandry is more common in Africa than in Japan.

The secondary sector of the economy includes those economic sectors that create a finished, usable product: manufacturing and construction.


This sector generally takes the output of the primary sector and manufactures finished goods or where they are suitable for use by other businesses, for export, or sale to domestic consumers.


This sector is often divided into light industry and heavy industry.


Light industry is usually less capital intensive than heavy Industry, and is more consumer- oriented than business-oriented (i.e., most light industry products are produced for end users rather than as intermediates for use by other - industries). Examples of light industries include the manufacture of clothes, shoes, furniture and household items (e.g. consumer electronics).


Heavy industry means products which are either heavy in weight or in the processes leading to their production. Examples are heavy machinery, big factories, chemical plants, production of construction equipment such as cranes and bulldozers. Alternatively, heavy industry projects can be generalized as more capital intensive or as requiring greater or more advanced resources, facilities or management.


The tertiary sector of economy (also known as the service sector) is defined by exclusion of the two other sectors. Services are defined in conventional economic literature as “intangible or invisible goods”. The tertiary sector of economy involves the provision of services to businesses as well as final consumers.


Services may involve-the transport, distribution and-sale of goods from producer to a consumer as may happen in wholesaling and retailing, or may involve the provision of a service, such as or entertainment. The service sector consists of the “soft” parts of the economy such as insurance, government, tourism, banking, retail, education, and social services. Examples of service may include retail, insurance, and government.


The quaternary sector of the economy is an extension of the three-sector hypothesis. It principally concerns the intellectual services: information generation, information sharing, consultation and research and development It is sometimes incorporated into the tertiary sector but many argue that intellectual services are distinct enough to warrant a separate sector.


The quaternary sector can be seen-as the sector in which companies invest in order to ensure further expansion. Research will be directed into cutting costs, tapping into markets, producing innovative ideas, new production methods and methods of manufacture, amongst others. To many industries, such as the pharmaceutical industry, the sector is the most valuable because it creates future branded products which the company will profit from. This sector evolves in well developed countries and requires a highly educated workforce.


The quinary sector of the economy is the sector suggested by some economists as comprising health, education, culture, research, police, fire service, and other government industries not intended to make a profit. The quinary sector also includes domestic activities such as those performed by stay-at-home parents or homemakers. These activities are not measured by monetary amounts but make a considerable contribution to the economy.


Developing Country

A developing country is a country that has not reached the Western-style standards of democratic governments, free market economies, industrialization, social programs, and human rights guarantees for their citizens.


Countries with more advanced economies than other developing nations, but which have not yet fully demonstrated the signs of a developed country, are grouped under the term newly industrialized countries.


Developed Country

Development entails a modem infrastructure (both physical and institutional), and a move away from low value added sectors such as agriculture and natural resource extraction. Developed countries, in comparison, usually have economic systems based on economic growth in the secondary, tertiary and quaternary sectors and high-standards of living.


Newly Industralized Country

The category of newly industrialized country (NIC) is a socioeconomic classification applied to several Countries around the world.


NICs are countries whose economies have not yet reached first world status but have, in a macroeconomic sense, outpaced their developing counterparts Another characterization of NICs is that of nations undergoing rapid economic growth. Incipient or ongoing industrialization is an important indicator of a NIC. In many NICs, social upheaval can occur as primarily rural, agriculture populations migrate to the cities, where the growth of manufacturing concerns and factories can draw many thousands of laborers.


NICs usually share some other common features, including:.


  • A switch from agriculture to industrial economies, especially in the manufacturing sector.


  • An increasingly open-market economy, allowing free trade with other nations in the world.


  • Emerging MNCs


  • Strong capital investment from foreign countries.


High-income Economy

A High-income economy is defined by the World Bank as a country with a GDP per capita of $11,456 or more. While the term high income may be used interchangeably with “First World” and “developed country,” the technical definitions of these terms differ. The term “first world” commonly refers to those prosperous countries that aligned themselves with the U.S. and NATO during the cold war. Several institutions, such as International Monetary Fund (IMF) take factors other than high per capita income into account when classifying countries as “developed” Of “advanced economies” According to the United Nations, for example, some high Income countries may also be developing countries. The GCC (Persian Gulf States) Countries, for example, are classified as developing high income countries Thus, a high income Country may be classified as either developed or developing.


The term developed country, or advanced country, is used to categorize countries that have achieved a high level of industrialization in which the tertiary and quaternary sectors of industry dominate. Countries not fitting this definition may referred to as developing countries.


This level of economic development usually translates into a high income per capita and a high Human Development Index (HDI) rating. Countries with high gross domestic product (GDP) per capita often fit the above description of a developed economy. However, anomalies exist when-determining “developed” status by the factor GDP per capita alone.



Least Development Countries

Ans. Least Developed Countries (LDCs or Fourth World countries) are countries which according to the United Nations exhibit the lowest indicators of socioeconomic development, with the lowest Human Development Index ratings of all countries in the world. A country is classified as a Least Developed Country if it meets three criteria based on:


  • Low-income (three-year average GDP per capita of less than US $750, which must exceed $900 to leave the list)


  • Human resource weakness (based on indicators of nutrition, health; education and adult literacy) economic vulnerability (based on instability, of agricultural production, instability of exports of goods and services and the percentage of population displaced-by natural disasters). The classification currently applies to 48 countries.


India’s Initiatives for Green Acounting

India aims to factor the use of natural resources in its economic growth estimates by 2015 as we seek to underscore the actions it is taking to fight global warming.


Government said the country would seek to make “green accounting” part of government policy on economic growth.


The alternative GDP (Gross Domestic Product) estimates account for the consumption of natural resources as well. This would help find out how much of a natural resource is being consumed in the course of economic growth, how much being degraded and how much being replenished.


It is expected that in future more and more economists are likely to focus their time and energies upon social investment accounting or green accounting... so that GDP really becomes not gross domestic product but green domestic product.


Green gross domestic product, then or green GDP as outlined above, measures economic growth while factoring in then environmental consequences, or externalities (how those outside a transaction are affected), of that growth. There are methodological concerns — how do we monetize the loss of biodiversity? How can we measure the economic impacts of climate change due to green house gas emissions? While the green GDP has pot yet been perfected as a measure of environmental costs, many countries are working to strike a balance between - green GDP and the original GDP.


Sarkozy’s Initiatives for GDP Alternative

The Commission on the measurement of economic performance and social progress was set up at the beginning of 2008 on French government’s initiative.


Increasing concerns have been raised since a long time about the adequacy of current measures of economic performance, in particular those based on GDP figures. Moreover, there are broader concerns, about the relevance of these figures as measures of societal well-being, as well as measures of economic, environmental, and social sustainability.


Reflecting these concerns, the former President Sarkozy has decided to create this Commission, to look at the entire range of issues, its aim is to identify the limits of GDP as an indicator of economic performance and social progress, to consider additional information required for the production of a more relevant picture etc. The Commission is chaired by Professor Joseph E. Stiglitz. Amartya Sen and Bina Agarwal are also associated with it. The commission gave its report in 2009.


The Stiglitz report recommends that economic indicators should stress well-being instead of production, and for non market activities, such as domestic and charity work, to be taken into account, Indexes should integrate complex realities, such as crime, the environment and the efficiency of the health system, as well as income inequality. The report brings examples, such as traffic jams, to show that more production doesn’t necessarily correspond with greater well-being.


“We’re living in one of those epochs where certitudes have vanished.., we have to reinvent, to reconstruct everything,” Sarkozy said. “The central issue is [to pick] the way of development, the model of society, the civilization we want to live in.”


Stiglitz explained: The big question concerns whether GDP provides a good measure of living standards. In many cases, GDP statistics. Seem to suggest-that-the economy is doing far better then most citizens’ own perceptions. Moreover, the focus on GDP creates conflicts: political leaders are told to maximise it, but citizens also demand that attention be paid to enhancing security, reducing air, water, and noise pollution, and so forth — all of which might lower GDP growth. The fact that GDP may be a poor measure of well-being, or, even of market activity, has, of course, long been recognized. But changes in society and the economy may have heightened the problems, at the same time that advances in economics and statistical techniques may have provided opportunities to improve our metrics.


India GDP Base Year is changed

The Government changed the base year for calculating national income to 2004-05 as against 1999-2000 earlier. The Central Statistical Organisation (CSO) made the changes in early 2010.

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