Introduction - Economics

• The study of how society uses scarce resources, to produce valuable commodities and distribute them among different people.

Microeconomics vs Macroeconomics

Macroeconomics

• Microeconomics is the study of economics at an individual, group, or company level.
• Whereas, macroeconomics is the study of a national economy as a whole.
• Microeconomics focuses on issues that affect individuals and companies. Macroeconomics focuses on issues that affect nations and the world economy.
• Unemployment, interest rates, inflation, GDP, all fall into Macroeconomics. Consumer equilibrium, individual income and savings are examples of microeconomics.

Macro-economics

• Macroeconomics, on the other hand, is the field of economics that studies the behaviour of the economy as a whole and not just on specific companies, but entire industries and economies.
• This looks at economy-wide phenomena, such as Gross National Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels.
• For example, macroeconomics would look at how an increase/decrease in net exports would affect a nation's capital account or how GDP would be affected by unemployment rate.

Organizing an Economy

• Capitalistic Economy
• State Economy
• Mixed Economy

Factors that Determine the type of Economy

• Who owns factors of production?
• What goods and Services produced?
• How they are distributed?

Capitalist Economy

• Its origin is ―Wealth of nations by Adam Smith (1776) – Scottish philosopher at Glasgow university.
• Capitalism is defined as an economic system in which the means of production, trade, and industry are owned and controlled by the private individuals or corporations for profit.
• Also known as the free market economy or laissez-faire economy.
• Under this political system, there is minimal government interference, in the financial affairs.
• The key elements of a capitalistic economy are private property, capital accumulation, profit motive and highly competitive market.

State Economy

• Proposed by German Philosopher KarlMarx.
• State Economy or Socialism is defined as an economy in which the resources are owned, managed and regulated by the State.
• The central idea of this kind of economy is that all the people have similar rights and in this way, each and every person can reap the fruits of planned production.
• As the resources are allocated, in the direction of the centralized authority, that is why it is also termed as a Command Economy or Centrally Planned Economy.
• Under this system, the role of market forces is negligible in deciding the allocation of factors of production and the price of the product.
• Public Welfare is the fundamental objective of production and distribution of product and service.

Mixed Economy

• A mixed economy is defined as an economic system consisting of a mixture of either markets and economic planning, public ownership and private ownership, or markets and economic interventionism.
• However, in most cases, "mixed economy" refers to market economies with strong regulatory oversight and governmental provision of public goods, although some mixed economies also feature a number of state-run enterprises.
• The government would wield indirect macroeconomic influence over the economy through fiscal and monetary policies designed to counteract economic downturns and capitalism's tendency toward financial crises, unemployment, and growing income and wealth disparities, along with playing a role in interventions that promote social welfare.

Growth vs Development

Economic Growth

• Economic growth refers the long term increase in real national output or real national income.
• Any increase in national income can offset with rapid growth of population if we don’t take per capita income as a measure of economic growth.
• Further, despite of increase in per capita income, the number of poor people may rise if the distribution of income remains unequal.
• Thus, Economic growth is a single dimensional quantitative concept which is concerned only with the rate of increase in national income.
• It ignores distribution of income and it ignores qualitative aspects of human life.

Economic Development

• Economic development is broader in nature.
• It not only includes the quantitative change but also includes certain qualitative changes in the economy.
• Economic development means not just increase in the real per capita income but also reduction in economic-divide, poverty, illiteracy and unemployment.
• Thus, economic development includes both economic growth as well as social welfare.
• Economic development should focus on inclusive growth – growth that includes all sectors of the economy and all sections of the society.

Sectors of Economy

Primary Sector

• Activities undertaken by directly using natural resources.
• Example—Agriculture, Mining, Fishing, Forestry, Dairy etc.
• It is called primary sector because it forms the base for all other products that we subsequently make.

Secondary Sector

• It covers activities in which natural products are changed into other forms through ways of manufacturing that we associate with industrial activity.
• It is a next step after primary, where the product is not produced by nature but has to be made.

Tertiary Sector

• These are the activities that help in the development of the primary & secondary sector.
• These activities by themselves do not produce good but they are an aid and support to the production process.

Example

1. Transportation--Goods that are produced in the primary sector need to be transported by trucks or trains and than sold in the wholesale and retail shops;
2. Storage--at times it is necessary to store these products in godowns, which is also a service made available.
3. Communication --talking to others on telephone);
4. Banking--borrowing money from the banks.

Since these activities generate services rather than goods it is also called Service sector.

• Quaternary activities are specialized tertiary activities in the ‘Knowledge Sector’ which demands a separate classification.
• There has been a very high growth in demand for and consumption of information-based services from mutual fund managers to tax consultants, software developers and statisticians.
• Quinary activities are another subdivision of the tertiary sector representing special and highly paid skills of senior business executives, government officials, research scientists, financial and legal consultants, etc.
• The highest level of decision-makers or policymakers performs quinary activities.

TYPES OF ECONOMIES

1) Agrarian Economy:

• If the share of primary sector is 50% or more in the total output(GDP) of the economy, it is called Agrarian Economy
• India at the time of Independence was an Agrarian economy (more than 50% of total output was from Primary sector)
• Now 20% of total output
• However, 50% of Indian population are working in Agricultural activities

2) Industrial Economy:

• If Secondary Sector Contribute more than 50% of total output of the economy
• Most developed countries passed this phase
• Indian Economy was not an Industrial Economy
• Industrial Share = 25%

3) Service Economy:

• If share of tertiary sector is more than 50% in the total output of the country
• Indian Economy became in 1999 Service Economy when tertiary crossed 50%
• 54% as of 2018
• Normally primary to secondary to tertiary (Euro American Model)
• However, as India skipped the manufacturing sector growth

Problems of Indian Economy

• Disproportionate Employment & GDP share of Primary (Agriculture Sector)
• Skipping the Manufacturing growth
• Jumping from Primary to Service Economy
• Jobless Growth
• Disguised Unemployment in Agriculture
• Land fragmentation
• Huge Poverty & Hunger levels
• Informal economy