Economy and Economics

2020-06-09 18:58:34

Economy and Economics

Definition of Economy and Economics

Economy : rational mgt of scarce resources it includes equitable and sustainable distribution.

Economic activities are those that involve money.

Economics :

study of human activity aimed at satisfying needs and wants; science of wealth
how individuals, firms and govts withing our society make choices and how these choices determine societies use of its resources.
includes production, distribution, trade and consumption of goods and services

Branches of Economics

Macro : study of economy as a whole, Keynes is father of macroeconomics.
Micro : behaviour of individual actors ex consumers, producers etc
Meso : in b/w macro & micro or specific sectors ex Automobile

MacroE	MicroE
top down approach	bottom up approach
tries to understand inflationa and growth	deals with choices made by by consumers
evolved from theory of how price is determined	from empirical evidence which existing theories could not explain

Econometrics uses statistical and mathematical methods to economic analysis.

Structure of Economy

Primary Sector

transforms natural resources into primary products, often exploits natural resources.
Ex fishing, forestry, agriculture, mining

Secondary Sector

create finished product from primary ones, Manufacturing and Construction are 2 processes by which this is done.
Further divided into Light Industry ie less capital intensive ex shoes, electronics etc and Heavy or more capital intensive ones ex auto, steel, petroleum etc.
One of the largest employers and economies based on it are called industrial economy.
Primary and secondary sectors together are called real sector.

Tertiary or Services Sector

services are produced ex healthcare, education, banking etc.
Quaternary sector
- consists of R&D, Science and Tech, IT, IPR requiring highly educated manpower
- sometimes included w/ tertiary and aka knowledge sector
- defines the quality of human resources and economy has.
Quinary sector
- all activities where top decision are made fall into this.
- CEOs, HODs in gov, Science, Universities, non-profit healthcare etc

Types of Economies

Market Economy

emerged from traditional eco system pioneered by Adam Smith.
Main ideas were
- that self interest motivates individuals this motivating factor was called the invisible hand or animal spirit. Social benefits were an unintended consequence of it.
- To attain higher prosperity there should be a division of labour.
- The invisible hand is determined by forces of demand and supply.
System is regulated by competition and for efficient operation govt should follow a policy of laissez faire/ leave it alone.

Free market Economy	Capitalism
focused on exchange of wealth	focused on creation of wealth and ownership of productive assets
solely based on demand and supply	private owners have monopoly on the market w/ some govt regulation

Problems with this system
- no tool to look after those with lower purchasing power
- negligible absence of welfare actions
- widens economic inequality

Non-Market Economy

Rooted by Karl Marx ex socialist and communist.
Main ideas were
- resources were to be used for wellbeing of all and are best utilised under ownership of society/community.
- no property rights to individuals; absennce of markets
- no competition; major decisions by state of production
Problems
- created scarcity of investible capital
- optimum usage of resource was denied since they were not driven by market forces
- absence of property rights -> no motivation to work hard and internal decay.
- mostly non-democratic poltites adopted it.

Mixed Economy

a mix of both the above, first adopted by France
Main ideas are
- state and private sector both to have economic roles -> private sector to work with motive of profit and state to provide public goods.
- these roles are not fixed and could be modified.
- state to regulate economic system

Liberal Economy and Neo-liberal Economy :

Washington consensus or free market approach of IMF was suggested to developing countries facing economic crisis.
associated w/ free market, trade, privatisation, price regulation, reduce govt intervention
Fiscal discipline, tax reforms, liberalisation of interest rates, trade, FDI.
later came to be called as neo-liberalism, market fundamentalism and globalisation -> belief that markets can handle everything.
it led to LPG reforms in various countries esp those that got WB or IMF aid.

State Capitalism or Beijing Consensus aka China Model :

alternative to Washington consensus and refers to the policies that were followed by Deng Xiaoping.
based on ideas of stable sometime repressive politics and high speed economic growth; liberal use of private initiative
constant experimentation, peaceful distributive growth with gradual reforms and selective inclusion of foreign ideas.

Santiago Consensus

core idea is both economic and social inclusion, harness the power of IT and partnership.

Political economy

Concerns redistributive side of resources and sets framework under which economics operate

Keynesian Economics

stimulate economy when in distress since free markets have no self balancing mechanism,
post great depression ex Bharatmala stimulus

Communist economy

complete ownership by state

Socialist

large part of resource owned by state, more control by workers
eg Nehruvian socialism : Basic sectors controlled by state, supports self reliance and public-private coexistence
Gandhian socialism : locally oriented production, no automation through machinery, everyone should do bread labour

Development economics

after WW2 ==aims at structural change==
Focus of health, education, employment
Amartya Sen, Joseph Stiglitz

Mercantalism :

maximise net exports, huge gold reserves
currently it is accumulation of foreign currency

Behavioural Economics

understand human behaviour
emphasis on nudging behaviours

Green Economics

sustained growth w/o damaging env also includes social well being
Indices like Green GDP, Social Progress Index, Environmental Performance Index

Measuring Economic Growth

GDP

total market value of all final goods and services produced in the country in a given year = National Private Consumption(C) + Gross Investment(I) + Govt spending(G) + Trade balance(Exports - Imports)(X) = GVA + Taxes - Subsidies

focuses on where it is produced, care economy is not included
it is a comparative concept as well as a quantitative concept.
==should be adjusted to seasonality while comparing growth during a time period==
Nominal GDP :
- valued at current year prices, does not account for inflation
= Real GDP x GDP Deflator
- Mo Commerce and Industry publishes a depreciation rate/ wear and tear rate that is used by companies to calculate NDP -> this depreciation rate is used as a tool of policymaking.
- NDP is uded for domestic purposes to analyse sectoral situation of depreciation in industry and trade and to show achievement in R&D to cut depreciation.
Real GDP : calculated on base year prices, considers inflation ^1c427e

= Nominal GDP / GDP Deflator
Net Domestic Product NDP = GDP - Depreciation
GDP Per capita = GDP / Mid year Population ^311874
Aggregate Income : total amount of income generated by all people, businesses and govt in a country.

= Employee Income + Business owner income + Rental Income + Corporate Income + Interest Income + Gov Income - Subsidies

GNP

focuses on who produces products

GNP = GDP + (production by citizens abroad - what foreigners produce)

Production by citizens abroad includes = Private Remittances + Interest of External Loans + External Grants

Net Interest rate in India’s case has been negative since it has been a net borrower.
In India’s case the net income from abroad has been negative dur to trade deficit and interest payment on foreign loans -> that India’s GNP < GDP
Open economies generally have GDP > GNP
Uses of GNP
- it is a quantitative and a qualitative concept.
- enables us to learn production behavior and patter of economy
Potential GDP is level of output that can be produced sustainably without inflating the economy
Net National Product NNP

= GNP - Depreciation = GDP + Income from Abroad - Depreciation
- This is the national income of an economy and the purest form of income of a nation.
National Income = NNP - Indirect Taxes + Subsidies Per Capita Income = NI / Mid year population
National Disposable Income

= National Income at Market Price - Current Transfers payable to non-resident (ex taxes on income, wealth etc) + Current Transfers receivable by resident units (remittance etc)

Personal Income : part of National Income received by households. Households have to pay personal taxes on their PI as well as Non-tax payments like fines.

PI = NI - Undistributed Profits - Net Interest payments made by households - Corporate tax + Transfer Payments

Personal Disposable Income : part of aggregate income that belongs to households, they can either consume it or save the rest.

PDI = PI - Personal tax payments - Non tax payments

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Cost and Price of National Income :

Cost is the value of total goods and services produced calculated at Factor cost or factory price or input price and Market cost
- Market cost or Market price is derived after adding indirect taxes/ product taxes to factor cost
- Since 2015 NI is calculated by CSO using market price.
Price is either constant or current depending on the impact of inflation.
- Contant prices does not include inflation whereas current prices do include inflation.
- Current Price is aka MRP.

Revised National Income accounting rules :

Headline growth rate is now calculated at GDP at constant market prices.
Sector wise estimates of GVA is given at basic prices
GVA Gross Value Added measures the contribution of a corporate subsidiary, company etc. to an economy. It provides value for the amount of goods and services that have been produced in a country minus cost of all inputs and raw materials that are directly attributable to that production.

GVA at basic prices = Compensation of Employees + Operating Surplus/Mixed Income + Consumption of fixed capital + Production taxes - Production subsidies

GVA at factor cost = GVA at basic prices - production taxes + production subsidies

GVA = GDP - taxes on product + subsidies on products

Need now is to shift to a chain-based method of calculating GDP from a fixed base method since it does not account for structural changes in the economy and weight assigned to economic activities changes annually. ![[Pasted image 20220408164200.png]]

Factors of Production :

Primary : Land, labour, capital both goods and human; sometimes Entrepreneurship also included
Secondary : Material, Energy (Fuel)
Factor cost is actual production cost
Market price is actual transacted price including indirect taxes ![[Pasted image 20210529111253.png]]

Transfer payments

no good, service etc received in exchange
part of personal income
subidies to producers not considered as TP
used for income redistribution
diff from subsidies
not included in calculating GNP

Base Year

growth is measure from this year aka constant prices
production of current year is based on this years price #concept
Real growth then calculated by reducing inflation; whatever is left becomes the real inc of goods and services

GDP Deflator

= (Nominal GDP/ Real GDP) x100,

measures inflation in entire economy not only a special basket of goods
not useful for policy making since it comes out once in a year

Hard landing and Soft landing

sudden fall in economic growth that it reaches the brink of recession is Hard
Measured slowdown of growth to make it sustainable is called Soft L

National Income Statistics

CSO under MoSPI
- releases GDP data, National Income and GVA data
- Base year 2011-2012

Need to Measure Eco Growth/ Benefits

understand potential of economy
adjust growth rate to see if they are sustainable
prevent inflation, reorient national goals
targeted reduction of poverty, employment generation

Growth can cause inequal distribution of resources -> social conflicts and degradation of env

Deficiencies in National Income Accounting

black money, unreported income not included undervalues country’s GDP
Non monetised economy viz Barter etc deflates growth
Household, Social services, Env costs are not included

Limitation of GDP

Does not measure intangibles like quality
Economic, Social Inequality, Gender Disparity not measured
Not measures sustainability of growth
standard of living might not be measured appropriately

Advantages

Measured frequently, widely and consistently

Alternatives

Human Development Index HDI

meant to measure development level of economies was first publisded in UNDP report in 1990.
Health + Education + Standard of Living
- Health is measured by life expectancy at brith.
- Education comprises of geometric mean of 1. Mean years of schooling for adults aged 25yrs and 2. expected year of schooling for children.
- Standard of living is measured by GNI per capita at PPP level in USD
Goes beyond GDP to measure general well being of people
Inequality adjusted HDI
2020 #report by UNDP ranks India at 131 w/ score of 0.645
Human Poverty Index by UN to complement HDI

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Genuine Progress Index GPI : deducts environmental loss, resource depletion, social costs like crime and family breakdown, ozone depletion, farmland

Social Progress Index SPI

measures extent to which country provides social and env needs to citizens
Social Progress defined as capacity to meet basic human needs, well-being, opportunity
by NPO Social Progress Imperative

Gross National Happiness GNH

4 dimension are equitable socio economic development, promotion of cultural values, environmental protection and good governance.
by Bhutan

National Biodiverisity Action Plan : asked to incorporate Natural capital or goods and services provided by biodiversity in National Income Accounting

Stiglitz report of France aka Sarkozy’s Alternative

economic indicators should stress well being, include domestic and charity works
integrate complex realities like crime, env, health, income inequality

World Happiness #Report measures Happiness Index published by UNSDSN

talks about causes of happiness and misery, policy implications
takes into account issues like Mental illness, importance of ethics, benefits of happiness

Environmental Protection Index EPI

by Yale ranks countries on the basis of priority env issues in 2 areas ie protection of human health and env consideration

OECD - Better life index

PPP

number of units of a country’s currency required to buy the same amount of goods and services in the domestic economy as a dollar would
allows to estimate exchange rate
removes distortions of volatile market exchange rates

Business Cycle :

Alternating period of expansion and decline in economic activity
4 stages Expansion, Growth, Slowdown and Recession (not necessary)

Recession :

technically below zero growth rate for 2 consecutive quarters
decline in investment, household income, savings, business profits, inflation etc
Recession relapses after brief growth is called double dip.
2008 Great Recession and Subprime crisis due to reckless lending in real estate sector

Depression

abnormally large scale unemployment, fall in availability of credit, reduced trade, investment etc

Growth Recession

Economy grows at such a slow pace that more jobs are being lost than being added.

Indian economy classified into 3 ie Agriculture, Industry, Services
High income country per WB has income > $12,235 aka First World
Least Developed Countries LDCs have per capital income less that $1035 aka 4th World
Opportunity cost - ![[Economy-and-Economics-image2-00072296.png]]
Closed economy : that does not interact with other economies. Savings and investments are equal here since the net capital outflow = 0.
Open Economy : When nations savings exceeds its domestic investment its net capital outflow is +ve -> it means that nation is buying assets abroad. When domestic investment exceeds its savings net capital outflow is negative -> foreigners are financing some of its investments by purchasing domestic assets.

Prelims PYQ

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