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UNIT I BBA N203

Meaning and Scope of Economics


Main definitions of Economics

i) Science of wealth, ii) Science of welfare, iii) Science of scarcity, iv) Science of growth and development.

Science of wealth

i) ii)

This definition by the father of economics, Adam Smith, is the first important and comprehensive definition. Wealth of Nations by Adam Smith is the first systematic book on Economics, Science of wealth definition has two dimensions: Meaning of wealth, and Causes of wealth.

Meaning of wealth
Around the industrial revolution, merchants were the most

powerful class in Western Europe, and wealth for them meant money only. Since money at that time was in the shape of gold, merchants declared gold as the only wealth, This definition rendered merchants as the only productive class, as they created it by trade, This definition harmed the interests of newly emerging class of petty industrialists and their hard working workers, Adam Smith as spokesman of the emerging class widened the definition to include all material goods, Activities which did not result in material goods production were unproductive.

Causes of wealth of nations: capitalism



i) ii) iii) iv) v)

vi)

Traders were not the only cause of wealth, Freedom of trade and enterprise were the greatest causes of wealth because: Human beings are born selfish They have self interest, It is not the benevolence but self interest which guides economic activity So left to themselves, each individual would maximise his self interest (income/wealth), When all the adult citizens of a nation maximise their self interest, the wealth of nation would grow the fastest, So why should the mercantilists or anybody else impose restriction on the freedom of individuals,

Exceptions
While an invisible hand guides societies which rely on

self interest, there are certain exceptions where it does not work. These are: Defense Public utilities Law order and justice

2. Science of welfare
Adam Smiths prophesy that self interest would be beneficial to all did

not materialise after the industrial revolution, The revolution divided the society between haves and have-nots, including unemployd Criticism turned reformist and revolutionary, Marshall attempted to offer a compromise and a new definition: Political economy or economics is the 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.

The range of our enquiry becomes restricted to that part of social welfare which can be brought directly or indirectly into relashhionship with measuring rod of money, Pigou.

Criticism of welfare definition


Economics is not restricted to material things, non material things like health and education, entertainment are also important, Welfare is subjective and varies from person to person, It is difficult to segregate material welfare from other types of welfare, The concept of welfare is not fixed but subject to change and interpretation, It differs from time to time, country to country

3. Science of scarcity

a) b) c)

Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. So all goods and services commanding a price fall under the scope of economics. Lionel Robins is the author of this definition. Unlimited human wants: Necessities, comforts and luxuries Necessities: Necessities of existence Necessities of efficiency, and Necessities of convention.

Science of scarcity.
Comforts and luxuries are : A) Related to time, place B) No watertight compartmentalization as a luxury may be comfort or

even a necessity for someone or at different periods of history.

Criticism; It fails to explain why labour despite being scarce remains unemployed

/ underemployed It also fails to explain situations of abundance Is neutral to ends Ignores welfare

Science of growth and development


Economics is the study of how men and society chose,

with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption now and in future amongst various people and groups of society

ECONOMIC GROWTH

Economic growth is an increase in the total output of the economy. It occurs when a society acquires new resources or when it learns to produce more by using existing resources.

BENEFITS OF ECONOMIC GROWTH


Economic growth raises a countrys overall standard of living.

oThis provides people with goods and time for enjoyable leisure activities.

BENEFITS OF ECONOMIC GROWTH


Economic growth enlarges the tax base, or the income and properties that may be taxed. o A larger tax base lets government supply more public services and/or lower taxes.

BENEFITS OF ECONOMIC GROWTH


Economic growth creates jobs and economic security for more people.

BENEFITS OF ECONOMIC GROWTH


Economic growth can benefit the economies of other countries through increased trade. o A successful growing economy can be a role model for developing nations.

Institutional factors affecting development


There are a number of domestic factors that act as sources of economic development and barriers to development What do we mean the institutional framework? Organisations, structures, rules The main institutional factors are Education Healthcare Infrastructure Political Stability and corruption Legal system Financial system, credit and micro finance Taxation The use of appropriate technology The empowerment of women Income distribution

Improve the role of women in society there are high correlations between womens education and child survival rates and fertility rates
Improve levels of health improving education (particularly literacy) improves the health of society. Individuals can read about and be informed about vaccines and water filtering. Also dangers such as HIV, sanitary habits, diet etc

Sen says Nothing arguably, is as important today in the political economy of development as an adequate recognition of political, economic, and social participation and leadership of women

Education

Despite improvements around 38 million children of primary school age are still out of school in sub-Saharan Africa. In southern Asia 18 million.

Education requires vast funding Within a country there may be vast disparities between urban and rural areas Children may need to work Often if the mothers received no education the children do not either Enrolment in secondary schools is lower than primary

Strong correlation between health care and life expectancy it would appear that countries that spend a high proportion of GDP on healthcare have a higher life expectancy (there are many other variables at play)

Progress - there has been a lot of progress in terms of training doctors and nurses, building of hospitals, and provision of immunisation and safe water

Throughout the world infant mortality rates have fallen, life expectancy has increased, more children are immunised and maternal mortality rates are falling

Healthcare
There is still a lot to do Insert table 29.2 P359

Better roads and better public transport allows children to get to school, adults to get to market and goods to get to potential buyers

A developed radio and television network makes it possible for people to link up with and participate in wider communities

Electricity is needed for food preservation Gas is needed for cooking

Any improvement in infrastructure will improve the well being of the people

Infrastructure

Countries that have political stability are more likely to attract FDI and Aid may lead to growth and development

Political stability and lack of corruption

Political instability can When there is lead to wars and political stability complete economic citizens are more breakdown - this will likely to have a say lead to poor economic leads to higher living performance, high levels standards of poverty and low standards of living Corruption = dishonest exploitation of power for personal gain Corruption is prevalent whengovernments are not accountable to the people Governments spend large amounts on large investment projects Accounting practices are not controlled Officials are not well paid Elections are not well controlled Legal structure is weak

Corruption hinders growth and Development Corruption reduces trust in an economy hard to attract FDI Corruption leads to an unfair allocation of resources contracts dont go to most efficient bidder

Electoral corruption means peoples wishes are not heeded

Corruption leads to reduction in effectiveness of legal system (people can buy their way out) Bribes increase the costs of business leading to higher prices

Corruption
Funds leave the country capital flight

Increased risk that contracts are not honoured - leads to lack of investment Officials divert funds to projects that are not in the public interest Officials turn a blind eye to regulations dont care about environment Constant paying of small bribes reduces economic well being of ordinary citizens

No way to uphold property rights and so removes the Right to own assets Right to benefit from assets e.g. rent Right to sell assets Right to exclude others from using or taking over assets Investment and growth will be reduced and so economic growth and development will be limited (With no property rights there is no incentive to improve that property)

Legal system

Most developing countries have dual financial markets and so removes the Official (big banks that finance established large businesses) Unofficial (illegal who lend to those that are desperate)000 Savings are needed for investment but saving is hard when there is poverty and no where safe to save that will give a good return People will buy assets such as livestock or send their money abroad

Even if there is entrepreneurial spirit they cannot borrow to start up Micro-Finance may be the answer
Micro finance videos Insert links

Financial System

In developing countries poor people find it almost impossible to access traditional banking systems No collateral Often unemployed Lack savings

Very difficult for governments to collect 3% in developing countries 60-80% in developed countries There is little corporate activity Often low tax incentives to encourage FDI Main source is exports, imports and customs duties country needs to be heavily involved in foreign trade Being part of the WTO reduces tariffs

Taxation

If a government finds it difficult to collect taxes it will have less to spend on growth and development objectives

Problems with administration inefficiency, lack of information and corruption Large informal markets in developing countries If incomes are not recorded how can you collect tax?

Technology needs to be appropriate for large labour surplus Cheap to make and needs labour Provides greater employment than automated systems

Appropriate Technology

Universal nut sheller turned by hand and is used to shell nuts

Solar cooker for consumers aids development because it doesnt need wood no loss of trees Dont need to look for fire wood more time for other activities (improves the position of the woman)

Well being of families is improved Better informed about health care, hygiene and diet Healthier children lead to healthier adults and a better future workforce Increasing income levels for women leads to increases in family welfare (more than an increase in mens incomes)

Empowerment of Women

More control over contraception, marry later and have smaller families lowers population growth

The education of the children in the family group improves pass on their own education Value education Educated children have better life opportunities Leads to a better quality future workforce

Low levels of income leads to low levels of savings leads to low levels of investment leads to low growth

Income Distribution

The rich dominate politics policies favour the well off No pro-poor growth No agreed measures of poverty

Capital flight rich send their money abroad


The rich consumer foreign goods does not help domestic economy

Income inequality leads to both poor growth and poor development

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 India was 460 dollar, in 2000. Where as their capita income of U.S.A in 2000 was 83 times than India. This trend of difference of per capita income between under developed and advanced countries is gradually increasing in present times. India not only the per capita income is low but also the income is unequally distributed. This mal-distribution of income and wealth makes the problem of poverty in ore critical and acute and stands an obstacle in the process of economic progress

2. Heavy Population Pressure: The Indian economy is facing the problem population

explosion. It is clearly evident from the total population of India which was 102.67 cores in 2001 census. It is the second highest populated country China being the first. Indias population has reached 110 cores. All the under developed countries are characterized by high birth rate which stimulates the growth of population; the fast rate of growth of population necessitates a higher rate of economic growth to 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: Occupational distribution of population in India

clearly reflects the backwardness of the economy. One of the basis characteristics of an under developed economy is that agriculture contributes a very large portion in the national income and a very high proportion of working population is engaged in agriculture

4. Unemployment:

There is larger unemployed and under employment is

another 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 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:
The lever of technology is a common factor in under

developed economy. India economy also suffers from this typical feature of technological backwardness. The techniques applied in agriculture industries milling and other economic fields are primitive in nature.

7. Back ward Institutional and social frame work:


The social and institutional frame work in under

developed countries like India is hopelessly backward, which is a strong obstacle to any change in the form of production. Moreover religious institutions such as caste system, joint family universal marriage affects the economic life of the people.

8. Under utilization of Resources:


India is a poor land. So our people remain

economically backwards for the lack of utilization of resources of the country.

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 commodities and gap between consumption aid productions increase the price persistently. Rising trend of price creates a problem to maintain standard of living of the common people.

10. More:
(a) Indian economy is basically an agricultural economy. More

than 60% of the population is engaged in agriculture and allied activities. (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.

Concepts of Human development 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 peoples choices.

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.

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 urbanrural, 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.