Nature of economy

The level of economy has lot of implications for business- it

has significant bearing on the nature and size demand,
government policies affecting business etc.

Countries and even different regions within a country , show

great differences in the level and pattern of economic
development.

Classification of the economies is on the basis of per capita

income(i.e. average annual income per person). According to
this, the countries are broadly classified as low income,
middle income and high income economies.

The World Bank classifies countries into four income groups: -

 Low Income Economies – are economies with very low level
of per capita income. All economies with per capita have
GNI(gross national income- new term for GNP) per capita of
US$975 or less in 2009 and $875 or less in 2005 are
regarded as low income economies. There were 54 low
income economies in 2005. for example –

Afghanistan, Bangladesh, Cambodia, Central African Republic,

India, Kenya, Madagascar , Nepal ,North Korea , Pakistan,
Somalia, Sudan , Zealand, Oman, Singapore, South Korea,
Spain, Sweden, Switzerland, Taiwan, United Kingdom,
United States
High Income economies – are countries with very rich
income per capita. A high-income economy is defined by
the World Bank as a country with a Gross National Income
per capita of $11,905 or more in 2009. In 2005 there were 57
high income economies. There are mainly two categories of
high income economies – industrial economies and oil
exporters. Fo eq-

Australia, Austria, Belgium , Canada, Denmark , France,

Germany , Greece , Hongkong , Hungary, Iceland, Ireland,
Israel, Italy, Japan, Kuwait, Macau, Netherlands, New
Middle Income Economies – in between low and high
income economies there exist middle income economies. In
2005 , there were 98 middle income economies.
It is further subdivided into –

•lower middle income (Lower middle income countries have

GNI per capita of US$976–$3,855. in 2009) for example –
Albania , Algeria ,Bhutan, China, Colombia ,Egypt, Georgia,
Iran, Iraq, Peru, Philippines ,Sri Lanka, Thailand and many
more and
•upper middle income (GNI per capita between US$3,856–
$11,905 in 2009) economies for eq- Argentina, Brazil, Chile,
Hungary, Kazakhstan, Libya, Malaysia, Mauritius, Mexico,
Oman Russian Federation , Serbia , South Africa , Turkey,
Venezuela
 Developing country
The development of a country is measured with statistical indexes such
as income per capita (per person) (GDP), life expectancy, the rate of
literacy, et cetera. The UN has developed the HDI, a compound indicator
of the above statistics, to gauge the level of human development for
countries where data is available.
Developing countries are in general countries which have not achieved a
significant degree of industrialization relative to their populations, and
which have, in most cases a medium to low standard of living. There is a
strong correlation between low income and high population growth.
The terms utilized when discussing developing countries refer to the
intent and to the constructs of those who utilize these terms. Other terms
sometimes used are less developed countries (LDCs), least economically
developed countries (LEDCs), "underdeveloped nations" or Third World
nations, and "non-industrialized nations". Conversely, the opposite end of
the spectrum is termed developed countries,
most economically developed countries (MEDCs), First World nations
and "industrialized nations".
 Developed country
The term developed country is used to describe countries that
have a high level of development according to some criteria. Which
criteria, and which countries are classified as being developed, is a
contentious issue and is surrounded by fierce debate. Economic
criteria have tended to dominate discussions. One such criterion is
income per capita; countries with high gross domestic product
(GDP) per capita would thus be described as developed countries.
Another economic criterion is industrialization; countries in which the
tertiary and quaternary sectors of industry dominate would thus be
described as developed. More recently another measure, the
Human Development Index (HDI), which combines an economic
measure, national income, with other measures, indices for life
expectancy and education has become prominent. This criterion
would define developed countries as those with a very high (HDI)
rating. However, many anomalies exist when determining
"developed" status by whichever measure is used
Classification by income does not necessarily reflect
development status. The group of the high income economies,
the industrial economies are developed economies; all the oil
exporters are not developed economies (for eq: Kuwait and
UAE, though high income economies, are regarded as
developing economies). Besides income, some other criteria
such as sectoral distribution of the income and employment
generation, social development indicators etc. are applied to
consider whether an economy is a developed or developing
one.
Besides the income and social dimensions, there are a number
of common characteristics of developed economies.

They are –
•Use of modern and sophisticated technology
•Continuous innovations
•Fast diffusion of new ideas and technologies
•Low share of the primary sector (mainly agriculture)
•Dominance of the tertiary (service sector) and secondary
(mostly manufacturing) sector in the income and
employment generation
•Market friendly economic policies
•Open trade and investment policies
•Democratic rights
•Competition
•And consume choice etc.
 Less Developed (LDC) & More
Developed countries(MDC)
Some times the term less developed countries(LDC) and more
developed countries(MDC) are used to refer to the developing and
developed countries. The use of the term underdeveloped to refer
to the developing countries is also common.

Low income is just an indication of deprivation people in developing

countries. Low income prevents access to even basic necessities,
not only better and modern amenities.

In the developing economies the inequality in the distribution of

income is very high and as a result a large proportion of population
lives under the poverty line. Many countries have achieved
considerable reduction in poverty. They are generally characterised
by high birth rate and population growth rates. Death rate is also
higher than in developed countries
 Differences Between Developed &
Developing Countries
Birth Rates

Developing countries have high birth rates because

•Many parents will have a lot of children in the expectation that

some will die because of the high infant mortality rate
•Large families can help in looking after the farm
•The children will be able to look after their parents if they
become old or sick; there may not be a old age pension scheme
•There may be a shortage of family planning facilities and advice
This scattergraph shows that a country with a high infant
mortality (many children dieing young) will tend to have
a higher birth rate.
Developed countries have low birth rates because

•It is expensive to look after large families

•More women prefer to concentrate on their careers
•There is a good family planning advice
Natural Increase

Developing countries have high rates of natural increase as

their birth rates are high, and although their death rates are
also high there is usually a big gap between the two figures.
Malawi's natural increase is 30 per year for every 1,000
people. This is calculated from the birth rate of 51 minus the
death rate of 21 (51 - 21 = 30).

Developed countries have both a low death rate and low birth
rate, with only a small gap between the two. Norway's natural
increase is 3 per year for every 1,000 (14 - 10 = 3).
Countries that have a high rate of natural increase will have a
short population doubling time.
Infant Mortality

The infant mortality rates are higher in developing countries.

The reasons for these higher rates are that developing
countries often have

•A shortage of medical services

•A greater number of children born to mothers
•Poor nutrition of mothers and babies
•Less knowledge of health matters
•Dirty water supplies

The chances of surviving to your fifth birthday depend on

where you are born in the world
Developing countries are also characterised by the prevalence of
rudimentary and traditional methods and obsolete technology
Developing countries are also characterised by the prevalence of
rudimentary and traditional methods and obsolete technology.

Some New Economies

Within the category of low income economies for example , a

special category is also identified which is called as least
developed economies. Most of the least developed economies
suffer from one or more of the following constraints : a ery low
GNP per capita or exposure to the natural diaster.

Within the category of developing economies there are some

countries which have been experiencing rapid industrialization ,
such as Hong Kong , South Korea, Singapore and Taiwan. They
are sometimes referred as newly industrialising economies.
These countries show a very high growth rate and also
presenting very impressive export performance.
So income is not only the criteria to consider a country
developed. There is some important difference between
economic growth and development. An increase in income is
an indication of economic growth but economic development
has some qualitative dimensions also such as distribution of
income, standard of living, composition of output, character of
working conditions and overall imporovement in economic
welfare.
SECTORS OF THE INDAN ECONOMY

•Primary Sector
•Secondary Sector
•Tertiary Sector
Primary Sector
When the economic activity depends mainly on exploitation
of natural resources then that activity comes under the
primary sector. Agriculture and agriculture related activities
are the primary sectors of economy.

Secondary Sector
When the main activity involves manufacturing then it is the
secondary sector. All industrial production where physical
goods are produced come under the secondary sector.

Tertiary Sector

When the activity involves providing intangible goods like

services then this is part of the tertiary sector. Financial
services, management consultancy, telephony and IT are
good examples of service sector.
Evolution of an Economy from Primary Sector Based to
Tertiary Sector Based

During early civilization all economic activity was in primary

sector. When the food production became surplus people’s need
for other products increased. This led to the development of
secondary sector. The growth of secondary sector spread its
influence during industrial revolution in nineteenth century.

After growth of economic activity a support system was the need

to facilitate the industrial activity. Certain sectors like transport
and finance play an important role in supporting the industrial
activity. Moreover, more shops were needed to provide goods in
people’s neighbourhood.

Ultimately, other services like tuition, administrative support

developed.
Interdependency of Sectors:
To understand this interdependency, let us take an example of a
cold drink. A cold drink contains water, sugar and artificial flavor.
Suppose if there is no sugarcane production then procuring
sugar will become difficult and costly for the cold drink
manufacturer. Now to transport sugarcane to sugar mills and
sugar to the cold drink plant needs the services of a transporter.
A person or system of persons is required
to maintain and monitor all these movements of goods from farm
to factory to shop in different locations. That is where role of
administrative staffs comes. Let us go back to the farmer. He
also needs fertilizers and seeds which is processed in some
factory and which will be delivered to his doorstep by some
means of transportation.
To top it all at every step of these activities we require the proper
monetary and banking system. So, in a nutshell this describes
how interrelated all sectors of an economy are.
Other Classifications of Economy
Organised Sector

The sector which carries out all activity through a system and
follows the law of the land is called organized sector. Moreover,
labor rights are given due respect and wages are as per the
norms of the country and those of the industry. Labour working
organized sector get the benefit of social security net as framed
by the Government.

Certain benefits like provident fund, leave entitlement, medical

benefits and insurance are provided to workers in the organized
sector. These security provisions are necessary to provide source
of sustenance in case of disability or death of the main
breadwinner of the family. Otherwise the dependents
will face a bleak future.
Unorganised Sector:
The sector which evade most of the laws and don’t follow the
system come under unorganized sector. Small shopkeepers,
some small scale manufacturing units keep all their attention on
profit making and ignore their workers basic rights. Workers
don’t get adequate salary and other benefits like leave, health
benefits and insurance are beyond the imagination of people
working in unorganized sectors.
Public Sector
Companies which are run and financed by the Government
comprise the public sector. After independence India was a very
poor country. India needed huge amount of money to set up
manufacturing plants for basic items like iron and steel,
aluminium, fertilizers and cements. Additionally infrastructure like
roads, railways, ports and airports also require huge investment.
In those days Indian entrepreneur was not cash rich so
government had to start creating big public sector enterprises
like SAIL (Steel Authority of India Limited), ONGC(Oil & Natural
Private Sector

Companies which are run and financed by private people

comprise the private sector. Companies like Hero Honda, Tata
are from private sectors.

Government Aided Schemes to Fight Unemployment

Government, from time to time, announces and implements

various employment scheme to fight unemployment or hidden
employment to help the weaker section of society. Shcemes
like NREG (National Rural Employment Guarantee) is the
latest announced by the UPA government in 2004. This
programme guarantees a minimum of 100 days of employment
to at least one person from every rural household. This is
part of government’s effort to ensure the ‘Right to Work’ to the
rural poor citizen.
 Indian Economic Structure:
Indian Industry Sectors & Industries
Agriculture(primary sector)
More than 52% of country's population depends on agriculture, a
sector contributing only 17.5% of the GDP. Food grain production in
2009/10 is expected at 216.9mt, which is 17.6mt lower than the
output in 2008/09. While looking at some of the agricultural
products, one finds that India is the largest producer of tea, jute and
jute like fiber. India is not only the largest producer but also the
largest consumer of tea in the world. India accounts for more than
15% of the global tea trade. Indian tea is exported in various forms,
such as tea bags and instant tea, to more than 80 countries of the
world. The total milk production in India is the highest in the world.
India also has the largest irrigated land area in the world. India is
placed third in the world in cereal production, with the second
largest production capacity for wheat and rice, and the largest
production capacity for pulses.
Industry

Index of industrial production, which measures the overall

industrial growth rate, stood at 5.2% in 2009 and is expected at
7.5% in 2010.

The textile industry is the largest industry in terms of

employment and is expected to generate $85 billion by 2010 and
create 12 million new jobs in the sector, and also pave the way
for modernization & consolidation in order to create a globally
competitive textile industry.

The automobile sector has demonstrated the inherent strengths

of Indian labor and capital. The pharma and IT industries are the
sectors that have performed exceedingly well in recent years for
India. Among the sectors that have experienced the greatest
transformation in India, the pharmaceutical sector is the most
significant.
Services
The services sector has maintained a steady growth pattern since
1996-97, except for the fall in 2000-01. Trade hotels, transport &
communications have witnessed growth, followed by financial
services. The services sector accounted for 62.6% of India’s total
GDP in 2009.
While in most parts of the developed world, the services sector's
share of employment rose faster than its share of output, India
witnessed a relatively slow growth of jobs in the service sector.
This is primarily because of the rise in labor productivity in sectors
such as information technology, which is dependent on skilled
labor. Growth in tourism and tourism-related services, such as
hotels, holds a large potential for employment generation.
IT enabled services, such as Business Process Outsourcing,
have grown rapidly in the recent past and will continue to rise.
India's large English speaking skilled work force has made the
nation a major exporter of software services and skilled
manpower.
Economic Polices