BBA-II SEM
INDIAN ECONOMICS
MEANING OF ECONOMY INTRODUCTION : Economics is the social science that analyzes the production, distribution, and consumption of goods of goods and services. The term economics comes from the Ancient Greek word (oikonomia, "management of a household, administration") from ( oikos, "house") + (nomos, "custom" or "law"), hence "rules of the house(hold)". Current economic models emerged from the broader field of political economy in the late 19th century. A primary stimulus for the development of modern economics was the desire to use an empirical approach more akin to the physical sciences. Economics aims to explain how economies work and how economic agents interact. Economic analysis is applied throughout society, in business, finance and government, but also in crime, education, the family, health, law, politics, religion, social institutions, war, and science. At the turn of the 21st century, the expanding domain of economics in the social sciences has been described as economic imperialism. Common distinctions are drawn between various dimensions of economics. The primary textbook distinction is between microeconomics, which examines the behaviour of basic elements in the economy, including individual markets and agents (such as consumers and firms, buyers and sellers), and macroeconomics, which addresses issues affecting an entire economy, including unemployment, inflation, economic growth, and monetary and fiscal policy. Other distinctions include: between positive economics (describing "what is") and normative economics (advocating "what ought to be"); between economic theory and applied economics; between mainstream economics (more "orthodox" dealing with the "rationality-individualism-equilibrium nexus") and heterodox economics (more "radical" dealing with the "institutionshistory-social structure nexus");and between rational and behavioural economics. DEFINATIONS OF ECONOMICS : Economics is social science, which is concerned with the efficient use of scarce resources to achieve the maximum satisfaction of economic wants. A basic understanding of economics is essential for well-informed people. Most of today’s political problems have important economic aspects. What level of taxes should we have? How can we make social security retirement program financially secure? How can we increase rate of economic growth? How can we reduce poverty? How can we ensure that companies directors act in the long-run interest of their shareholders and not just for themselves? As citizens & voters we can influence decisions of our elected politicians in responding to such questions, therefore, a sound grasp of economics is very helpful to all of us. WEALTH DEFINITION: ACCORDING TO ADAM SMITH:
Prof. Amit Kumar FIT Group of Institutions
UNIT-I Adam Smith was a professor at University of Glasgow. He wrote his book, ‘An enquiry into the Nature and Causes of Wealth of Nations’ in 1776 (231 years ago). Adam Smith argued that if producers were free to seek profits by providing goods and services then the‘ invisible hand’ of market forces would ensure that right goods services were produced. He explained concept of Pr ice System. He divided this book into four main chapters, production, consumption, exchange and distribution. To him Economics is a science of wealth and one of the great objects of political economy of every country is to increase wealth and power of that country. According to Adam Smith rights of private property and wealth are natural and moral rights. He emphasized on profit motive and said that ‘it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner but from their regard to their own interest’ and that interest is profit. Adam Smith was in favour of accumulation of wealth and free trade policy. He finally defines economics as: Economics is a study of causes of Wealth of Nations. WELFARE DEFINITION: ACCORDING TO ALFRED MARSHALL: Alfred Marshall was a professor at University of Cambridge. He wrote his book ‘Principles of Economics’ in 1890 (117 years ago). Marshall has emphasized on material welfare of an individual. He says that ‘Economics is a study of mankind in ordinary business of life. It examines that part of individual and social action which is most closely connected with attainment and with use of material requirements of well-being.’ It enquires how man gets his income and how he uses it. Thus to him economics is mainly concerned with material welfare of an individual. Marshall was able to show how value is partly determined by marginal utility of a good and how intensity of want decreases with the units acquired. He was able to explain how luxuries like diamonds have a higher price than essential goods like water, because consumers have few diamonds while water is plentiful. He gave concept of consumer’s surplus, elasticity of demand and laws of return He said that industries would experience reducing costs and prices due to Economies of Scale by greater specialization. SCARCITY DEFINITION: ACCORDING TO LIONEL ROBBINS: Lionel Robbins was a professor at University of London. He wrote his book ‘Essay on Nature and Significance of Economic Science’ in 1932 (75 years ago). According to him “Economics is science, which studies human behaviour as a relationship between ends and scarce means, which have alternative, uses.” Ends means wants of human beings, which are unlimited whereas resources to satisfy them are limited. Scarce resources have alternative uses; therefore, choice making becomes essential. A person fulfils that desire; first, which is more important to him. Robbins emphasized that, ‘Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses’.
Page 1
BBA-II SEM
INDIAN ECONOMICS
UNIT-I There is larger unemployed and under employment is another
GROWTH DEFINITION: ACCORDING TO PAUL A. SAMUELSON: “ Economics is the study of how men and society choose , with or without the use of money , to employ scare productive resources which could have alternative uses , to produce various commodities overtime and distribute them for consumption now and in future among people and group of society ”
important feature of Indian economy. In under developed countries labor is an abundant factor. It is not possible to provide gainful employment the entire population. Lack of job opportunities disguised unemployed is created’ in the agriculture fields. There deficiency of capital formation. 5. Low Rate of Capital Formation:
In backward economics like India, the rate of capital formation is also low. capital formation mainly depends on the ability Basic characteristics of Indian Economy 1. Low per capita income:
Under developed economy is characterized by low per capital income. India per capital income is very low as compared to the advanced countries. For example the capital income of
and willingness of the people save since the per capita income is low and there is mal-distribution of income and wealth the ability of the people to save is very low in under developed countries for which capital formation is very low . 6. Poor Technology:
India was 460 dollar, in 2000. Where as their capita income of
The lever of technology is a common factor in under
U.S.A in 2000 was 83 times than India. This trend of difference
developed economy. India economy also suffers from this
of per capita income between under developed and advanced
typical feature of technological backwardness. The techniques
countries is gradually increasing in present times. India not
applied in agriculture industries milling and other economic
only the per capita income is low but also the income is
fields are primitive in nature.
unequally distributed. This mal-distribution of income and wealth makes the problem of poverty in ore critical and acute
7. Back ward Institutional and social frame work:
and stands an obstacle in the process of economic progress The social and institutional frame work in under developed 2. Heavy Population Pressure:
countries like India is hopelessly backward, which is a strong obstacle to any change in the form of production. Moreover
The Indian economy is facing the problem population
religious institutions such as caste system, joint family
explosion. It is clearly evident from the total population of
universal marriage affects the economic life of the people.
India which was 102.67 cores in 2001 census. It is the second highest populated country China being the first. India’s
8. Under utilization of Resources:
population has reached 110 cores. All the under developed countries are characterized by high birth rate which stimulates
India is a poor land. So our people remain economically
the growth of population; the fast rate of growth of
backwards for the lack of utilization of resources of the
population necessitates a higher rate of economic growth to
country.
maintain the same standard of living. The failure to sustain the living standard makes the poor and under developed countries poor and under developed. 3. Pre-dominance of Agriculture:
9. Price instability:
Price instability is also a basis feature of Indian economy. In almost all the underdeveloped countries like India there is continuous
price
instability.
Shortage
of
essential
Occupational distribution of population in India clearly reflects
commodities and gap between consumption aid productions
the backwardness of the economy. One of the basis
increase the price persistently. Rising trend of price creates a
characteristics of an under developed economy is that
problem to maintain standard of living of the common people.
agriculture contributes a very large portion in the national income and a very high proportion of working population is engaged in agriculture 4. Unemployment:
Prof. Amit Kumar FIT Group of Institutions
10. More:
(a) Indian economy is basically an agricultural economy. More than 60% of the population is engaged in agriculture and allied activities.
Page 2
BBA-II SEM
INDIAN ECONOMICS
(b) The occupational structure has not been changed during the last 100 years. In 1950-51 about 73% of the workers were engaged in primary activities, 11% in secondary and 16% in tertiary activities. In 1999-2000 the share of different sectors in employment amounted to 60%, 17% and 23% respectively. (c) Inequality of income and wealth is other important feature of Indian economy. In India the main resources are concentrated in the hands of the few people. 40% of the total assets is concentrated in the hands of top 20 percent people. (d) There has been remarkable improvement in social sectors such as education, health, housing, water supply, civic amenities etc. (e) Planning process is also an important feature. As the government has adopted planned developmental economy. Five years plans are framed for economic development. NATURE OF ECONOMICS- IS ECONOMICS A SCIENCE OR AN ART: ECONOMICS AS A SCIENCEEconomics, like other social sciences, make little use of laboratory methods in which changes in variables can be explained in controlled conditions. Economists usually have to examine what has already happened in the past in the real world in order to test their theories. If a simple model can explain observed behaviour repeatedly, it has some value, for example, law of demand explains cause and effect relationship between price and demand for a good. With the fall in price (cause), demand of a good increases (effect) and with rise in price of good, its demand decreases. All economic laws have similar cause and effect relationships. Economics is not an exact science because it depends upon economic behaviour of a man and behaviour of a person is very complex and unpredictable. Economics is a social science, which is concerned with proper use and allocation of resources for the achievement and maintenance of growth with stability. In Economics for analyzing facts we move step by step. We firstly, collect facts, (secondly), we very analyze these collected facts, (thirdly), we put these facts under suitable classifications and (fourthly), we discover general theories governing these facts. ECONOMICS AS AN ARTScience is a theoretical aspect whereas Art is a practical aspect. In economics we study consumption, production, public finance etc, which provide practical solutions to our daily economic problems. Study of cause and effect of inflation or deflation falls within the purview of science but framing appropriate and suitable monetary and fiscal policies to control inflation and deflation is an art.
UNIT-I The economic development in India followed a socialistinspired policies for most of its independent history, including state-ownership of many sectors; extensive regulation and red tape known as "Licence Raj"; Raj"; and isolation from the world economy. India's per capita income increased at only around 1% annualized rate in the three decades after Independence. Since the mid-1980s, India has slowly opened up its markets through economic liberalization. After more fundamental reforms since 1991 and their renewal in the 2000s, India has progressed towards a free market economy. In the late 2000s, India's growth has reached 7.5%, which will double the average income in a decade. Analysts say that if India pushed more fundamental market reforms, it could sustain the rate and even reach the government's 2011 target of 10%.States have large responsibilities over their economies. The annualized 1999–2008 growth rates for Gujarat (9.6%), Haryana (9.1%), or Delhi (8.9%) were significantly higher than for Bihar (5.1%), Uttar Pradesh (4.4%), or Madhya Pradesh [2] (6.5%). (6.5%). India is the ninth-largest economy in the world and the fourth largest by purchasing power parity adjusted exchange rates (PPP). On per capita basis, it ranks 128th in the world or 118th by PPP. The economic growth has been driven by the expansion of services that have been growing consistently faster than other sectors. It is argued that the pattern of Indian development has been a specific one and that the country may be able to skip the intermediate industrialization-led phase in the transformation of its economic structure. Serious concerns have been raised about the jobless nat ure of the economic growth. Favourable macroeconomic performance has been a necessary but not sufficient condition for the significant reduction of poverty among the Indian population. The rate of poverty decline has not been higher in the post-reform period (since 1991). The improvements in some other non -economic dimensions of social development have been even less favourable. The most pronounced example is an exceptionally high and persistent level of child malnutrition (46% in 2005– 6). The progress of economic reforms in India is followed closely. The World Bank suggests that the most important priorities are public sector reform, infrastructure, agricultural and rural development, removal of labour regulations, reforms in lagging states, and HIV/AIDS. For 2010, India ranked 133rd in Ease of Doing Business Index, which is setback as compared with China 89th and Brazil 129th. According to Index of Economic Freedom World Ranking an annual survey on economic freedom of the nations, India ranks 124th as compared with China and Russia which ranks 140th and 143rd respectively in 2010.
Economic growth & developmentConcepts of Human development -
Prof. Amit Kumar FIT Group of Institutions
Page 3
BBA-II SEM
INDIAN ECONOMICS
Introduction-
Human Development is a development paradigm that is about much more than the rise or fall of national incomes. It is about creating an environment in which people can develop their full potential and lead productive, creative lives in accord with their needs and interests. People are the real wealth of nations. Development is thus about expanding the choices people have to lead lives that they value. And it is thus about much more than economic growth, which is only a means —if a very important one —of enlarging people’s choices. Fundamental to enlarging these choices is building human capabilities —the range of things that people can do or be in life. The most basic capabilities for human development are to lead long and healthy lives, to be knowledgeable, to have access to the resources needed for a decent standard of living and to be able to participate in the life of the community. Without these, many choices are simply not available, and many opportunities in life remain inaccessible.
UNIT-I Equity - in terms of economic growth and other human development parameters. • Participation and freedom - particularly empowerment, democratic governance, gender equality, civil and political rights, and cultural liberty, particularly for marginalized groups defined by urban-rural, sex, age, religion, ethnicity, physical/mental parameters, etc. • Sustainability - for future generations in ecological, economic and social terms. • Human security - security in daily life against such chronic threats as hunger and abrupt disruptions including joblessness, famine, conflict, etc. •
Factors Affecting Economic Growth-
Economic growth is an increase in real GDP. It means an increase in the value of goods and services produced in an economy. The rate of economic growth measures the annual percentage increase in real GDP. There are several factors affecting economic growth, but it is helpful to split them up into:
Origins of the Human Development Approach •
The Human Development approach arose in part as a result of growing criticism to the leading development approach of the 1980s, which presumed a close link between national economic growth and the expansion of individual human choices. Many economist who played a key role in formulating the human development paradigm, came to recognize the need for an alternative development model due to many factors, including: •
•
•
•
Growing evidence that did not support the then prevailing belief in the “trickle down” power of market forces to spread economic benefits a nd end poverty; The human costs of Structural Adjustment Programmes became more apparent; Social ills (crime, weakening of social fabric, HIV/AIDS, pollution, etc.) were still spreading even in cases of strong and consistent economic growth; A wave of democratization in the early 90’s raised hopes for people-centred models.
Key Issues related to Human Resource Development •
•
•
Social progress - greater access to knowledge, better nutrition and health services. Economics – the importance of economic growth as a means to reduce inequality and improve levels of human development. Efficiency - in terms of resource use and availability. human development is pro-growth and productivity as long as such growth directly benefits the poor, women and other marginalized groups.
Prof. Amit Kumar FIT Group of Institutions
•
Demand side factors Supply side factors
Demand Side Factors Influence Growth of Aggregate Demand (AD)
AD= C+I+G+X-M. Therefore a rise in Con sumption, Investment, Government spending or exports can lead to higher AD and higher economic growth. What Could Affect AD? Interest Rates. Lower interest rates would make borrowing cheaper and should encourage firms to invest and consumers to spend. People with mortgages will have lower monthly mortgage payments so more disposable income to spend. However, recently we had a period of zero interest rates, but due to low confidence and reluctant banks growth was still sluggish. • Consumer Confidence . Consumer and business confidence is very important for determining economic growth. If consumers are confident about the future they will be encouraged to borrow and spend. If they are pessimistic they will save and reduce spending. • Asset Prices. Rising house prices create a positive wealth effect. People can remortgage against the rising value of their home and this encourages more consumer spending. House prices are an important factor in the UK, because so many people are homeowners. • Real Wages. Recently, the UK has experienced a situation of falling real wages. Inflation has been higher than nominal wage, causing a decline in real incomes. In this situation, consumers will have to cut back on spending reducing their purchase of luxury items. •
Page 4
BBA-II SEM
INDIAN ECONOMICS
UNIT-I
Value of Exchange Rate . If the Pound devalued, exports would become more competitive and imports more expensive. This would help to increase demand for domestic goods and services. A depreciation could cause inflation, but in the short term at least it can provide a boost to growth. •
Factors that determine Long Run Economic Growth-
In the long run, economic growth is determined by factors which influence the growth of Long Run Aggregate Supply (the PPF of the economy). If there is no increase in LRAS, then a rise in AD will just be inflationary. 1.
2.
3.
Levels of infrastructure. Investment in roads, transport and communication can help firms reduce costs and expand production. Without necessary infrastructure it can be difficult for firms to be competitive in the international markets. This lack of infrastructure is often a factor holding back some developing economies. Human Capital. Human capital is the productivity of workers. This will be determined by levels of education, training and motivation. Increased labour productivity can help firms take on more sophisticated production processes and become more efficient. Development of Technology . In the long run development of new technology is a key factor in enabling improved productivity and higher economic growth.
Other Factors that Can Affect Growth in the Short Term-
•
•
•
Commodity Prices. A rise in commodity prices such as a rise in oil prices can cause a shock to growth. It causes SRAS to shift to the left leading to higher inflation and lower growth. Political Instability. Political instability can provide a negative shock to growth. Weather . The exceptionally cold December in UK 2010, led to a shock fall in GDP
Prof. Amit Kumar FIT Group of Institutions
Page 5
