BASIC CONCEPTS

What Is an Economy?
An economy is a complex system of interrelated production, consumption, and exchange activities that ultimately
determines how resources are allocated within a group. The production, consumption, and distribution of goods and
services combine to fulfil the needs of those living and operating within the economy. An economy may represent a
nation, a region, a single industry, or even a family. The study of economies and the factors affecting economies is
called economics.

Understanding Economies and its types

An economy encompasses all the activities related to the production, consumption, and trade of goods and services
in an entity, whether the entity is a nation or a small town. No two economies are identical. Each is formed according
to its own resources, culture, laws, history, and geography. Each evolves according to the choices and actions of the
participants.

Every society has to answer three questions -

 What goods and services should be produced in the country?

 How should the goods and services be produced? Should producers use more human labour or more capital
(machines) for producing things?
 How should the goods and services be distributed among people?

 Market-Based Economies - Market-based or "free market" economies allow people and businesses to
freely exchange goods and services according to supply and demand. Producers determine what’s sold and
produced, and what prices to charge. In a market economy, also called capitalism, only those consumer
goods will be produced that are in demand, i.e., goods that can be sold profitably either in the domestic or in
the foreign markets. Through these decisions, the laws of supply and demand determine prices and total
production. In a capitalist society the goods produced are distributed among people not on the basis of what
people need but on the basis of Purchasing Power—the ability to buy goods and services.
 Command-Based Economies - Command-based economies depend on the central government that
decides what goods are to be produced in accordance with the needs of society. The government decides
how goods are to be produced and how they should be distributed. In principle, distribution under
command-based economy is supposed to be based on what people need and not on what they can afford to
purchase. In such a system, the government owns industries deemed essential on behalf of the consumers
who use them. Competition among companies is discouraged or banned. Prices are controlled. Communism
requires a command-based economy.
 Mixed Economies - Most economies are mixed economies, i.e. the government and the market together
answer the three questions of what to produce, how to produce and how to distribute what is produced. In
a mixed economy, the market will provide whatever goods and services it can produce well, and the
government will provide essential goods and services which the market fails to do.

Microeconomics & Macroeconomics

Micronomics is the study of the behaviour of the individual consumers and businesses that make up the economy in
order to understand why they make the economic decisions they do and how these decisions affect the larger
economic system. Their motivations, habits, and behaviours are studied to determine whether an economy is
functioning in their best interests. Clearly, principles of psychology and marketing influence microeconomics.

Macroeconomics is the study of the overall performance of an economy. It evaluates the stability and progress of an
economy over time by analysis of key indicators. These include gross domestic product (GDP), unemployment,
inflation or deflation, and the balance of trade
 GROWTH AND DEVELOPMENT
Economic growth is an increase in the production of economic goods and services in one period of time compared
with a previous period. It can be measured in nominal or real (adjusted to remove inflation) terms. Traditionally,
aggregate economic growth is measured in terms of gross national product (GNP) or gross domestic product (GDP).

Gross Domestic Product (GDP) - Gross domestic product (GDP) is the total/aggregate monetary or market value
of all the final goods and services produced within the domestic economy during a particular time period (usually a
year). Below Rules are followed while calculating GDP -

Rule 1 - Intermediate goods and services are not considered in calculation of GDP. Only the value of final goods and
services consumed by final consumer are to be added.

Rule 2 - The value of goods and services produced within the domestic economy is used for GDP calculation. The
domestic economy means the area defined as Indian territory.

The definition of Indian territory for the purpose of GDP is the entire landmass (including islands) and 12 nautical
miles of water surrounding the landmass. Further, 200 nautical miles from coast or 188 nautical miles from territorial
waters comes under Exclusive Economic Zone (EEZ) where only Indian residents can carry out economic activity.
Therefore, this area also comes under domestic economy. Any economic activity undertaken within the Indian
territory is considered for GDP calculation, irrespective of the fact of citizenship of the person conducting the
activity.

Nominal GDP Vs Real GDP -

Nominal GDP is an assessment of economic production in an economy that includes current prices in its calculation.
It does not consider effects of inflation, which can inflate the growth figure.

Real GDP is calculated by adjusting Nominal GDP for the level of inflation. It is the true indicator of economic growth
because it shows the actual increase in total goods and services produced. Nominal GDP is used when comparing
different quarters of output within the same year. When comparing the GDP of two or more years, real GDP is used.
This is because, the removal of the influence of inflation allows the comparison of the different years to focus solely
on volume.

GDP Deflator - Real GDP is calculated using a GDP price deflator, which is the difference in prices between the
current year and the base year. GDP Deflator measures the changes in prices for all of the goods and services
produced in an economy. Using the GDP deflator helps economists compare the levels of real economic activity from
one year to another.

GDP Price Deflator = (Nominal GDP ÷ Real GDP) × 100

Gross National Product (GNP) - Gross national income (GNP) is another measure of economic growth. It is the
sum of all income earned by citizens or nationals of a country (regardless of whether the underlying economic
activity takes place domestically or abroad), irrespective of whether it flows back to the country or is spent abroad.

In GDP calculation, we did not consider the income earned by citizens of India working abroad. When we adjust GDP
for income earned by Indians in abroad and income earned by foreign nationals on Indian land, we get GNP.

• GNP = GDP + Net Factor Income from Abroad

• (Net factor income from abroad = Factor income earned by the domestic factors of production employed in the
rest of the world – Factor income earned by the factors of production of the rest of the world employed in the
domestic economy).

Gross National Income (GNI) - Gross national income (GNI) calculates the total income earned by a nation's
people and businesses, including investment income, regardless of where it was earned. It also covers money
received from abroad such as foreign investment and economic development aid. GNP uses the production
approach, while GNI uses the income approach. With GNI, the income of a country is calculated as its domestic
income, plus its indirect business taxes and depreciation (as well as its net foreign factor income). The figure for net
foreign factor income is calculated by subtracting all payments made to foreign companies and individuals from all
payments made to domestic businesses. Product and import taxes that are not already accounted for in GDP are also
added to GNI, while subsidies are subtracted.

GNI = GDP + (Foreign income paid to resident employees) + (Foreign income paid to residential property owners and
investors) + (Net taxes minus subsidies receivable on production and imports)

Net Domestic Product (NDP)/Domestic Income - Net domestic product (NDP) is an annual measure of the
economic output of a nation that is calculated by subtracting depreciation from gross domestic product (GDP). The
depreciation accounted for is often referred to as capital consumption allowance and represents the amount needed
to replace those depreciated assets.

NDP = GDP − Depreciation

Net National Product (NNP)/National Income - It is calculated by subtracting depreciation from gross national
product (GNP).

NNP = GNP – Depreciation

Net National Income (NNI) - NNI = GNI – Depreciation

Personal Income (PI) - Personal Income is that part of national income which accrues to all individuals or
households in a country. Since it is related to households, we make certain adjustments to the national income like
corporate tax, undistributed profits, interest payments, transfer payments. Personal income includes compensation
from a number of sources, including salaries, wages, and bonuses received from employment or self-employment,
dividends and distributions received from investments, rental receipts from real estate investments, and profit
sharing from businesses.

Personal Income (PI) = National Income – undistributed profits – interest payments made by the households +
Interest receipts by households – corporate tax + transfer payments made to households by government.

Net Disposable Income - Out the personal income earned by the households; they have to make tax payments to
the government. Thus, Personal Disposable Income (PDI) is that part of personal income which is left after making
necessary payments to the government and households are free to use this income as they like.

Methods of Calculating GDP -

Expenditure Method (CIGXM) - The expenditure method is a system for calculating gross domestic product (GDP)
that combines consumption, investment, government spending, and net exports. It is the most common way to
estimate GDP. It says everything that the private sector, including consumers and private firms, and government
spend within the borders of a particular country, must add up to the total value of all finished goods and services
produced over a certain period of time.

So, the Formula for Expenditure GDP = C + I + G + (X-M) where, C = Consumer spending on goods and services, I =
Investor spending on business capital goods, G = Government spending on public goods and services, X = Exports, M
= Imports.

Production Method (GVA) - The production approach estimates the total value of economic output and deducts
the cost of intermediate goods that are consumed in the process (like those of materials and services). The result of
this production method is not GDP but GVA. Gross Value Added (GVA) is the value of goods and services produced
less the cost of all inputs used in making that product or service. So, to calculate values to GDP we have to add taxes
and subtract subsidies from GVA.

Income Method - The income approach to measure the gross domestic product (GDP) is based on the accounting
reality that all expenditures in an economy should equal the total income generated by the production of all
economic goods and services. So here, national income is calculated as the sum of all factor incomes.

Land, labour, capital and entrepreneur are the various factors of production. Labour gets wages and salaries, capital
gets interest, land gets rent and entrepreneurship gets profit as their remuneration.
Factor Cost + Production Taxes - Production Subsidies = Basic Price

Basic Price + Product Taxes - Product Subsidies = Market Price

GDP Growth = {(Present year GDP - Last year GDP)/ Last year GDP} *100

Per Capita Income - Per capita income is a measure of the amount of money earned per person in a nation or
geographic region. Per capita income is used to determine the average per-person income for an area and to
evaluate the standard of living and quality of life of the population. Per capita income for a nation is calculated by
dividing the country's national income by its population.

Per capita Income = National Income / Population size

POVERTY AND SUSTAINABLE DEVELOPMENT

Poverty - The term poverty refers to the state or condition in which people or communities lack income and other
resources essential for a minimum standard of living or to ensure a sustainable livelihood. It includes hunger or
malnutrition, limited access to education and other basic services such as proper housing, clean water, medical
attention. Poverty is a socioeconomic condition that is the result of multiple factors and not just limited to income.
These factors include social discrimination and lack of participation in decision making. The importance of poverty is
so much in society that goal number one in sustainable development goals is to end poverty in all forms everywhere.

United Nations has formulated two sub goals on Goal No. 1 of Sustainable development – Poverty Eradication

 1.1 By 2030, eradicate extreme poverty for all people everywhere, currently measured as people living on
less than $1.25 a day.
 1.2 By 2030, reduce at least by half the proportion of men, women and children of all ages living in poverty
in all its dimensions according to national definitions.

Causes of Poverty -
 Limited to no job growth
 Poor infrastructure
 Conflict and war
 High cost of living
 Social barriers
 Lack of government support

Measurement of Poverty -
 Alagh Committee (1979) Task force constituted by the Planning Commission constructed a poverty line for
rural and urban areas on the basis of nutritional requirements. It recommended that calorie intake of per
day for rural should be 2400 and for urban should be 2100. If a person is consuming below that, then he or
she is below poverty line.
 Lakdawala Committee (1993) suggested that Consumption expenditure should be calculated based on
calorie consumption as earlier. It takes same calorie intake formula as Alagh has suggested but added
clothing and shelter in that. So, his poverty line was not based on calorie intake but the consumption
expenditure.
 Suresh Tendulkar Committee (2009) recommended to use monthly per capita expenditure. And he has
created monthly expenditure line of 816 for rural and 1000 for urban. So basically, he just expanded
Lakdawala method.
 Rangarajan Committee (2011-12) recommended to use monthly per family (household of 5) expenditure,
which will be 4860 for rural and 7035 for urban. He also included socioeconomic condition such as social
discrimination as an additional parameter for measuring poverty.

Socio-Economic Caste Census (SECC) 2011 - First Caste Census since 1931
SECC is meant to canvass every Indian family, both in rural and urban India, and ask about their: Economic status, so
as to allow Central and State authorities to come up with a range of indicators of deprivation, permutations, and
combinations of which could be used by each authority to define a poor or deprived person.

It is also meant to ask every person their specific caste name to allow the government to re-evaluate which caste
groups were economically worst off and which were better off. SECC has the potential to allow for a mapping of
inequalities at a broader level.

SECC is conducted by Ministry of Rural Development in rural areas, Ministry of Housing and Urban Affairs in urban
areas and Ministry of Home Affairs.

SECC divides the population into 3 categories - Automatically Excluded, Deprived People, Automatically Included.

Automatically Excluded Family or individuals if any of the below is satisfied -

 Any member owns a vehicle

 Any member is Government employee
 Any member is earning more than Rs.10k per month.
 Paying income tax and professional tax
 House has pucca walls and roof + Three or more rooms
 Own a refrigerator
 Own Landline phone
 Owns irrigated land above a limit.
 Kisan Credit Card with credit limit of Rs. 50k and above

Deprived People if any of the below is satisfied -

 Households with only one room, kucha walls and kucha roof
 No adult member between the ages of 16 and 59
 Female headed households with no adult male member between 16 and 59
 Households with disabled member and no able-bodied adult member
 SC/ST household
 Households with no literate adult above 25 years
 Landless households deriving a major part of their income from manual casual labour

Automatically Included if any of the below is satisfied -

 Households without shelter

 Destitute/ living on alms
 Manual scavengers
 Legally released bonded labourers
 Primitive tribal groups - They are the poorest of poor amongst the Scheduled Tribes (STs). They’re identified
based on three parameters
1. They use pre-agricultural level of technology for farming.
2. Very low level of literacy
3. Their population is either Declining or stagnant.

Caste Census 2011 – Major Findings

 The number of households in India – 24.49 Crore, 17.97 crores live in villages.
 10.74 crore households are considered deprived.
 Approximately 30% of households in rural areas are landless and they majorly get their income from manual
labour.
 Around 13% of families in villages live in houses of 1 room.
  56% of rural households lack agricultural land
 SECC 2011 recorded a higher number of illiterates than the numbers recorded in 2011 Census of India.
 60% of rural households are deprived or poor. 35% of urban households are poor.
 1.80 Lakh households are engaged in manual scavenging for livelihood. Maharashtra has the highest number
of manual scavengers.
 48% of the rural population is female.

Global Multidimensional Poverty Index (MPI) -

 The index is a key international resource that measures acute multidimensional poverty across more than
100 developing countries.
 It was first launched in 2010 by the OPHI and the Human Development Report Office of the UNDP.
 The MPI monitors deprivations in 10 indicators spanning health [1/3] (Child mortality [1/6], Nutrition [1/6]),
education [1/3] (Years of schooling [1/6], Child enrolment [1/6]) and standard of living [1/3] (Electricity
[1/18], Flooring [1/18], Drinking water [1/18], Sanitation [1/18], Cooking fuel [1/18], Assets [1/18]) and
includes both incidence as well as intensity of poverty.
 MPI is based on the idea that poverty is not unidimensional (not just depends on income and one individual
may lack several basic needs like education, health etc.), rather it is multidimensional.
 A person is multidimensionally poor if she/he is deprived in one third or more (means 33% or more) of the
weighted indicators (out of the ten indicators). Those who are deprived in one half or more of the weighted
indicators are considered living in extreme multidimensional poverty.

National Multidimensional Poverty Index (MPI) -

 NITI Aayog took a significant step in 2021 by releasing the first ever MPI for India (based on NFHS 4). This
initiative aims to improve India's position in globally accepted indices, underscoring the importance of
comprehensive poverty alleviation efforts.
 Like the global MPI, India’s national MPI has three equally weighted dimensions – Health [1/3] (Child &
Adolescent Mortality [1/12], Maternal Health [1/12], Nutrition [1/6]), Education [1/3] (Years of schooling
[1/6], School Attendance [1/6]), and Standard of living [1/3] (Electricity [1/21], Housing [1/21], Drinking
water [1/21], Sanitation [1/21], Cooking fuel [1/21], Assets [1/21], Bank Account [1/21]) which are
represented by 12 indicators.
 Sub-indices of the National MPI:
1. Headcount Ratio (H): How many are poor? - Proportion of multidimensionally poor in the
population, which is arrived at by dividing the number of multidimensionally poor persons by total
population.
2. Intensity of Poverty (A): How poor are the poor? - Average proportion of deprivations which is
experienced by multidimensionally poor individuals. To compute intensity, the weighted deprivation
scores of all poor people are summed and then divided by the total number of poor people.
 MPI = H x A, reflecting both the share of people in poverty and the degree to which they are deprived.

Employment Generation Schemes - (Read from Govt. Schemes file)

 Integrated Rural Development Programme (IRDP, 1978-79) --> swarnajayanti gram swarozgar yojana (SGSY,
1999) --> National Rural Livelihood Mission: Ajeevika (NRLM-A, 2011) -->Deendayal Antyodaya Yojana: DAY-
NRLM, DAY-NULM - Previously Swarna Jayanti Shahari Rozgar Yojana SJSRY (2015)
 National Rural Employment Programme (NREP) + Rural Landless Employment Guarantee Programme
(RLEGP) --> Jawahar Rozgar Yojana (JRY, 1989) --> Jawahar Gram Samriddhi Yojana (JGSY, 1999) +
Employment Assurance Scheme (EAS) --> Sampoorna Grameen Rozgar Yojana (SGRY, 2001) + Food for Work
 Programme (FWP) --> National Rural Employment Guarantee Act, 2005 ( NREGA, 2006) --> Mahatma Gandhi
National Rural Employment Guarantee Act (MNREGA) 2005 (2009)
 Prime Minister’s Employment Generation Programme (PMEGP)
 Pradhan Mantri Rojgar Protsahan Yojana (2016-17)
 National Food Security Act, 2013

Sustainable Development - Sustainable development is a Development which meets the needs of the present
without compromising the ability of future generations to meet their own needs. It is an approach to the economic
development of a country without compromising with the quality of the environment for future generations.

Sustainable Development Goals -

 The Millennium Development Goals (MDGs) are eight goals to be achieved by 2015 that respond to the
world’s main development challenges. The 8 MDGs break down into 18 quantifiable targets that are
measured by 48 indicators.
 The Sustainable Development Goals agenda was accepted by all members of the United Nations in 2012 at
the Rio De Janeiro Council Meet with an aim to promote a healthy and developed future of the planet and its
people.
 It was in 2015 when the Sustainable Development Goals were implemented after a successful fifteen-year
plan of development called the Millennium Development Goals. In SDG’s there are 17 goals, 169 targets and
230 indicators to be achieved by 2030.

SDG India Index -

 The Sustainable Development Goals (SDG) India Index is released by NITI Aayog. The SDG India Index is
developed in collaboration with the United Nations in India.
 The NITI Aayog launched its index in 2018 to monitor the country’s progress on the goals through data-
driven assessment and foster a competitive spirit among the States and Union Territories in achieving them.
 The SDG India Index computes goal-wise scores on the SDGs for each State and Union Territory.
 These scores range between 0–100, and if a State/UT achieves a score of 100, it signifies it has achieved the
2030 targets.
 The higher the score of a State/UT, the greater the distance to target achieved. States and Union Territories
are classified in four categories based on their SDG India Index score: Aspirant (0–49), Performer (50–64),
Front-Runner (65–99), Achiever (100).

Environment Issues -
 Climate Change - Climate change is a great concern in today’s scenario. This problem has surfaced in the last
few decades. Greenhouse gases are the major cause of climate change. Environmental changes have several
destructive impacts such as the melting of glaciers, change in seasons, epidemics, etc.
 Global Warming and Ozone Layer Depletion - The burning of fossil fuels, emissions from the automobiles and
chlorofluorocarbons add to the greenhouse gases in the atmosphere. This has led to an increase in earth’s
temperature causing environmental changes. This increase in temperature across the globe is known as
global warming. The ozone layer is a layer of concentrated ozone gas. It protects us from the sun’s harmful
ultraviolet rays. This very important layer is being destroyed by CFCs (chlorofluorocarbons), which are used
in industries and everyday life (e.g. aerosol cans).
 Water Pollution - The introduction of harmful substances into rivers, oceans, lakes and ponds, which changes
the physical, chemical or biological condition of the water is called water pollution. The polluted water lacks
oxygen and therefore the organisms die.
 Air Pollution - Air pollution is the result of emissions from the industries, automobiles, and increasing use of
fossil fuels. The gaseous emissions have added to an increase in the temperature of the earth. Not only this,
but it had also increased the risk of diseases among individuals.
 Solid Waste Management - Solid-waste management is defined as the discipline associated with the
generation, storage, collection, transfer and transport, processing, and disposal of solid waste in a manner
that it does not have a harmful effect on the environment.
  Deforestation - Deforestation is the depletion of trees and forests at an alarming rate. The trees provide us
with oxygen, several raw materials and maintain the temperature of the earth. Due to the depletion of trees
for commercial purposes, there has been a drastic change in the earth’s climate.

Government Programmes for Environment Issues - (Read from Govt. Schemes file)

 National Action Plan on Climate Change (NAPCC), 2008

1. National Solar Mission (MNRE)
2. National Mission for Enhanced Energy Efficiency (MoP)
3. National Mission on Sustainable Habitat (MoHUA)
4. National Water Mission (Jal Shakti)
5. National Mission for Sustaining the Himalayan Ecosystem (MoS&T)
6. National Mission for “Green India” (MoEFCC)
7. National Mission for Sustainable Agriculture (MoA)
8. National Mission on Strategic Knowledge Platform for Climate Change (MoS&T)

 Swatcha Bharat Mission / Swatch Bharat Abhiyan / Clean India Mission

 Unnat Jyoti by Affordable Lighting for All (UJALA)
 Renewable Energy Development 175 GW till 2022
 Green Rating for Integrated Habitat Assessment (GRIHA)
 Energy Saving Certificates (ESCerts)
 Green Bonds
 Zero Defect and Zero Effect (ZED)
 National Green Highway Mission
 Compensatory Afforestation Management and Planning Authority (CAMPA) Act
 Namami Gange Programme
 National Adaptation Fund for Climate Change (NAFCC)
 National Clean Energy Fund (NCEF)
 Paris Climate Agreement 2015
 Kigali Agreement
 International Solar Alliance (ISA)