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Basic concepts of economics: Economics Micro Economics Macro Economics Economic Growth Economic Development

ECONOMICS 1. What is Economics? A. 1. Adam Smith Economics was concerned with An enquiry in to the nature and causes of wealth of Nations. The early economists called Economics, the science of wealth. 2. According to French Economist J.B says, Economics is the science which treats of wealth. 3. The American Economist F.A. Walker says that Economics is that body of knowledge which relates to wealth. 4. Alferd Marshall defined economics political Economy, or Economics, is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well being. As per Marshall Economics studies only material requisites of well-being or causes of material welfare. It has thus materialistic aspect and ignores non material aspects. 5. According to Robinsons Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. On analysis, we find that this lays down the following three fundamental proposition which constitute the basis of the structure of economic science. (a)Ends refer to wants.(A desire of a person cannot become want unless and until he has money to purchase and is also willing to give away money for that good.wants are fulfilled by consumption of goods and services. Wants are three types necessities, comforts, luxuries) Human beings have wants which are unlimited in number. If one want is satisfied another crops up. Multiplicity of wants calls forth continuous effort for their satisfaction, and the unending cycle of economic activity move on. If want had been limited, they would have been adequately satisfied and there would have been no economic problem; all incentive to economic effort would have ceased. Also since human wants are unlimited, one is compelled to choose between the more urgent and less urgent wants. That is also called a science of choice. (b)scarce means: Although wants are unlimited yet the means to satisfy them are limited. Economic resources are the various types of labour, capital, land and entrepreneurship used

in producing goods and services. Since these resources are limited, the ability of community to produce goods and services is also limited. The term scarcity is used here in relative sense. It is scarcity in relation to requirements. Scarcity is not to be taken in absolute sense. A commodity may exist in a small quantity but nobody has any use for it, we shall not call it scarce in the economic sense. On the other hand, there may be huge stocks of a commodity like rice, wheat or coal, yet it is called scarce because the demand is even larger than the supply. It is the demand, in relation to supply for a commodity and not its quantity alone which determines whether a commodity is scarce or not. Scarcity is thus a relative term. (c)The proposition underlying Robbins definition is that scarce means are capable of Alternative uses. If a commodity could be put only to one use and to none else, few economic problems would arise in its connection. After it has met that use, it will become a free good will have no further economic significance. Actually, however, the uses to which a commodity can be put are numerous and almost unlimited. Further, these alternative uses are of varying importance; some are most urgent and others less urgent and we can select the use to which a commodity may be put. Choice comes in again. Thus, in the Robbins sense, economic activity lies in mans utilization of scarce means having alternative uses, for the satisfaction of multiple ends. Means refers to time, money, or any other form of property. They are all limited. But since the ends are unlimited, choice making is essential. That is why Economics has been called science of choice. SCOPE OF ECONIMICS National Income Percapita Saving Rate Capital Formation Consumption National output Gross domestic product Markets Cost Analysis Prices Unemployment Business cycles Money & Money supply Demand Supply Production Cost of living Standard of living Trade

Foreign exchange Industry policies Insurance Banking Financing Economic Systems Transport Communication Advertisement Welfare Utility Profits Taxation - fiscal policy Budgets Inflation Economic growth & development Etc.

ECONOMIC GROWTH The overall economic trend in a country is the most important element of its business environment. A growing economy with a considerably high and sustained growth rate in its GNP over a long period of time provides a promising business prospect and builds business confidence. Ex: The Indian Economy registered to an annual growth rate of 5-6 percent during the 1980s and 1990s compared to annual average growth rate of 3.4 percent during the period 1950-51 to 1979-80. The growth rate during the post 1980 has been one of the highest in the world. Economy registered record growth of 8.1 percent during 2003-04. This growth rate, along with economic reforms and liberalization has built a very optimistic business environment. So much so that multinationals have entered the Indian market in a large measure. The Indian economy is being called The future economic power of the world and Indian economy is emerging as a world economic power and so on, despite occasional recessions and hick-ups in the economy. The annual inflow of Foreign Direct Investment (FDI) has increased from $155 million in 1991 to $3557 million in 1997-98 and to $ in 2009. (By the end of 2000 total FDI is $17063 millions as per International Financial Statistics) on the contrary, a down trend in the economy or recession demolishes business prospects and confidence, reduces overall consumer demand and, therefore, business prospects. Capital begins to flow out of

the country. Therefore, it is important for business decision-makers to understand the logistics of economic growth and to have a general awareness to growth parameters. This is all important where business decisions have long-run repercussions. Our purpose here is not to provide full-length discussion on economics of growth. Just you will be given a first idea of basic aspects of economic growth. Meaning: Economic growth means a sustained increase in percapita income national output or net national output over a long period of time. It implies that the rate of increase in total output must be greater than the rate of population growth. If there is an increase in percapita income as a result of faster decrease in population than the decrease in output, it doesnt mean economic growth. Thus economic growth implies a considerable and sustained increase in per capital income with or without increase in population. Another qualification of economic growth is that the national output should be composed of such goods and services which satisfy the maximum wants of the maximum number of people. Besides, for economic growth to be, the increase in output must be sustained over a long period. Short-run increased followed by a similar decrease in the output doesnt mean economic growth. Also seasonal, occasional and cyclic increase in output does not satisfy the conditions of sustained economic growth. Determinants of economic growth: There are four most important determinants of economic growth as follows. These four factors are considered as the four wheels of economic growth. 1. Human resources and its quality: Human resources are composed of the available labour force and its quality. Quality of labour force depends on the level of its education, training, and its inventive and innovative abilities. An important aspect of human resources is that excess and scarcity of labour force are both an advantage and a disadvantage in the process of economic growth. The excess of labour force in India has proved a burden on economy and a barrier to rapid economic growth, particularly uneducated, untrained and unskilled man power. There millions of unemployed persons in India . unemployed people consume without producing it reduces the rate of savings and investments. On the other hand, scarcity of labour in oil rich middle east countries constrained their real growth severely. They had to depend on imported labour for all kinds of their man power needs and they still do to a great extent. Quality of labour, it includes not only skill and productivity but also discipline, honest and sincere work efforts, commitment to productivity and job performance and professionalism. A highly trained and qualified labour will be much less productive, if it lacks these qualities. This is what makes a difference between Indian and Japanese labour force, whatever may be the reason.

2. Natural Resources: Natural Resources include area of usable land, and resources on land surface and underground. -Land surface resources include sources of natural water, forests etc. -Underground resources include minerals, oil, natural gas. -Favourable climatic conditions. -A country with rich natural resources with favourable climatic conditions will have larger growth potential than countries lacking natural resources. -Economic growth depends on how best these resources are utilized. The use and exploitation of these resources depends on quality of man power, availability of capital and technology. -The countries with rich resources and a highly skilled and motivated man power can do miracles in economic growth. -All these factors have contributed to rapid growth in USA, UK, Canada, Australia, etc. -In contrast, there are tiny countries with small resources have achieved high economic growth. Taiwan, Singapore, Hong Kong. Japan is a prominent example of country which has achieved highest growth rate in post war II period. The quality of man power has played a vital role in economic growth of these countries. 3. Capital Formation: Economic growth of any country depends on industrial development which ultimately depend on establishment and development of key and basic industries, development of infrastructural facilities. To do so, a large amount of capital is required. Capital is defined as man-made means of production. Larger the rate capital formation, higher the growth rate. Capital formation requires saving men and material resources. Capital formation means sacrificing current consumption and saving incomes to be invested in capital goods (machine, plant, building equipment) Countries with high rate of saving and investment have a high rate of economic growth. 4. Technology: It is another important determinant of growth. Technology means the amount of machinery and technical equipment used with a given amount of labour. Technological developments results in a larger output for a given amount of men, material and time. Evidence available in the history that the countries which achieved technological developments have high economic growth. 5. Social and political factors: Social factors like customers, traditions, believe, social harmony, etc. determine the pace of economic growth. A society of illiterate and ignorant people living with unscientific believes resists modern ways of life. Such a society finds it very difficult to achieve high growth rate. Political stability in the country also influence growth rate in the country. If the government is dishonest, inefficient, manned by current and dishonest ministers, bureaucrats, it promotes inefficiency even in the private sector, increases cost

of production, encourages inefficient allocation of resources, black marketing and encourages malpractices. All these hamper growth.

INDICATORS OF ECONOMIC DEVELOPMENT 1. Infra-structure Index: Extension of the following facilities to all parts of the economy indicates the development. -Road ways -Rail ways -Air ways -Power generation and distribution -Banking, insurance -Medical and health facilities. 2. Exports and imports: Net level of foreign exchange is another parameter which indicates level of development achieved. -India has $297 billion foreign exchange at its disposal. -USA has $124 billion and -China has $1200 billion foreign exchange. 3. Population stability: China recorded zero population growth rates where as population growth rate in India at present is 1.6 against 2.1 in the last year. 4. Skills of population: Literacy rate in India is 61-62 percent whereas in Russia it is 99.8 percent. Still there are four states in India with least literacy rate and they are considered as under developed states. They are known as BEMARU states. BE-Bihar MA-Madhya Pradesh R-Rajasthan U-Uttar Pradesh 5. Dependence on expertise. 6. Transparency index: Honesty levels in the public system are another important indicator of development. As far as honesty levels are concerned Ireland, Finland, Singapore and Australia occupied first four places and Indias position in this regard is 88 among the world countries. 7. Percapita income 8. Distribution of income and wealth/disparities of income and wealth 9. Technology levels -low level -middle level -high level 10. Balanced regional development

How best the benefits of economic growth have reached all sections of the economy will determine level of development taken place.

CALCULATION OF GNI, GNP, GDP, NNP AND PERCAPITA INCOME


1. Gross National Income(GNI) = It is the final outcome of all economic activities of country valued in terms of money 2. Gross National Product(GNP) = Value of all final goods and services produced during a specific period of time usually one year + income earned abroad by the nationals income earned locally by the foreigners. It is widely used measure of national income. GNP is estimated on the basis of product flows, whereas GNI is estimated on the basis of money income flows. Hence, GNI=GNP. 3. Gross Domestic Product(GDP) = Market value of final goods and services produced in domestic economy during a period of one year + income earned locally by the foreigners income earned abroad by the nationals. (Or) GDP = Total consumption + government expenditure balance of trade The GDP is similar to that of GNP (only procedural difference). 4. Net National Product(NNP) = GNP Depreciation 5. Percapita income = GDP/population