ECONOMIC GROWTH

ECONOMIC GROWTH

Economics is the social science that studies the production, distribution, and consumption of goods and services.

 

 

Macroeconomics:

 

It analyses the entire economy (meaning aggregated production, consumption, saving, and investment) and issues affecting it, including unemployment of resources (labour, capital, and land), inflation, economic growth, and the public policies that address these issues (monetary, fiscal, and other policies).
Microeconomics:

 

The study of the economic behaviour of individual “agents” such as particular companies, workers, or households.

 

TYPES OF ECONOMY

 

 

TRADITIONAL ECONOMIES

  •         A traditional economy will use the barter system and has no concept of currency or money.
  •         Such economies believe in only producing what and how much they require. They find no need to produce any market surplus.
 

MARKET

ECONOMY

  •         There is no involvement or interference from the government or any such controlling power.
  •          The entire economy is determined by the participants of the economy and the laws of demand and supply.
  •          Example – USA, Hong Kong
COMMAND ECONOMY/PLANNED ECONOMIES
  •          There is one centralized power- In most of the cases, the government.
  •          The government makes all decisions regarding the economy. The price will also be determined by it.
  •         Example – Cuba, China
 

 

MIXED ECONOMY

  •          It is a perfect coordination between a command economy and a free market economy.
  •          The economy is free of government intervention but the government will regulate whenever it feels necessary, and oversee specific sensitive areas of the economy like transportation, public services, defence etc.
  •          Example – India and France

 

 

SECTORS OF THE ECONOMY

 

On basis of Activity Nature:

 

 

PRIMARY SECTOR

  •          The primary sector of the economy is the sector of an economy making direct use of natural resources. This includes agriculture, forestry and fishing, mining, and extraction of oil and gas.
  •          People engaged in primary activities are called red-collar workers due to the outdoor nature of their work.
 

SECONDARY SECTOR (MANUFACTURING)

  •          Secondary sector (also called industrial sector) is an economic sector which describes the role of manufacturing. It encompasses the industries which produce a finished, usable product or are involved in construction. This sector uses the produce of the primary sector as its raw materials.
  •         People engaged in secondary activities are called blue collar workers.
 

 

 

 

 

 

 

TERTIARY (SERVICES)

  •          This sector’s activities help in the development of the primary and secondary sectors. By itself, economic activities in tertiary sector do not produce a goods but they are an aid or a support for the production.
  •          This sector jobs are called white collar jobs.
  •          Pink-collar worker is one who is employed in a job that is traditionally considered to be women’s work. E.g. baby sitter, florist, day care worker, nurses etc
  •          This sector includes all economic activities where different ‘services’ are produced. E.g. Retail sector, Tourism, Banking, medical and health care services.
 

Quaternary Activities: (Knowledge Sector)

  •         Research and development/advanced form of services involving/specialized knowledge and technical skills.
  •          The quaternary sector is the intellectual aspect of the economy. It is the process which enables entrepreneurs to innovate and improve the quality of services offered in the economy.
Quinary Activities: (top decision-makers)
  •         Referred to as ‘gold collar’ professions, they represent another subdivision of the tertiary sector representing special and highly paid skills of senior business executives, government officials, etc.

 

On basis of work condition:

 

 

 

 

ORGANISED

SECTOR

  •          In this sector, employment terms are fixed and regular, and the employees get assured work and social security.
  •          It can also be defined as a sector, which is registered with the government and a number of acts apply to the enterprises. Schools and hospitals are covered under the organised sector.
  •         Workers in the organised sector enjoy security of employment. They are expected to work only a fixed number of hours. If they work more, they have to be paid overtime by the employer.
 

 

 

 

 

 

UNORGANISED SECTOR

  •          An unorganised worker is a home-based worker or a self-employed worker or a wage worker in the unorganized sector and includes a worker in the organized sector who is not covered by any of the Acts pertaining to welfare Schemes as mentioned in Schedule-II of Unorganized Workers Social Security Act, 2008.
  •         In this sector wage-paid labour is largely non-unionised due to casual and seasonal nature of employment and scattered location of enterprises.
  •        The sector is marked by low incomes, unstable and irregular employment, and lack of protection either from legislation or trade unions.
  •         The unorganised sector uses mainly labour intensive and uses indigenous technology.
  •         Contributions made by the unorganised sector to the national income, is very substantial as compared to that of the organised sector. It adds more than 60% to the national income while the contribution of the organised sector is almost half of that depending on the industry.

 

On basis of Asset ownership:

 

THE PUBLIC SECTOR THE PRIVATE SECTOR PPP (PUBLIC PRIVATE PARTNERSHIP)
  •          In the sector, government owns most of the assets and it is the part of the economy concerned with providing various governmental services.
  •          The purpose of the public sector is not just to earn profits. Governments raise money through taxes and other ways to meet expenses on the services rendered by it.

 

  •          In the private sector, ownership of assets and delivery of services is in the hands of private individuals or companies.
  •          Activities in the private sector are guided by the motive to earn profits. To get such services we have to pay money to these individuals and companies.

 

  •          PPP is an arrangement between government and private sector for the provision of public assets and/or public services.
  •          In this type of partnership investments being undertaken by the private sector entity, for a specified period of time.
  •          As PPP involves full retention of responsibility by the government for providing the services it doesn’t amount to privatization.

 

ECONOMIC GROWTH VS ECONOMIC DEVELOPMENT

 

ECONOMIC GROWTH ECONOMIC DEVELOPMENT
The increase in the  production of goods and services is called  Economic Growth The process of Economic Growth which leads to improvement in the general welfare of people is called Economic Development.
Quantitative in nature Qualitative in nature.
Uni-dimensional Multi-dimensional
Can happen without development Cannot happen without Growth.
Indicators – Real GDP, Real Per Capita Income etc. Indicators- Human Development Index, Physical quality of life index etc.

 

ASSOCIATED TERMS

 

 

Domestic Territory includes:

 

  •         Political frontiers of the country including its territorial waters
  •        Military Establishment of the country abroad
  •          Embassies and Consulates
  •          Ships/Aircrafts/Fishing Vessels/Oil Rigs belonging to the residents of the country
 

 

 

Net Factor Income:

 

  •          Domestic factor income: The sum of factor incomes like rent, wages, interest and profits generated within the domestic country. It includes both incomes earned by residents as well as non-residents/foreigners working in India.
  •          At the same time, Indian go abroad to work and earn wages, salaries, profits, and rents.
  •          NFIFA (Net Factor Income from Abroad) = Factor income received by the residents of india working abroad MINUS the factor income paid to the foreign residents for working in india
 

Per Capita Income (PCI)

  •        PCI measures the average income earned per person in a given area, in a specified year.
  •        It is calculated by dividing the area’s total income by its total population.
National Income Accounting
  •          National Income Accounting is the book-keeping system to measure the economic activity in the national economy as a whole.
  •         Done for: Policy Formulation + Effective Decision Making + International comparisons + Indicates the performance of the economy + To find out structural changes in the economy.

 

HISTORICAL DEVELOPMENTS
1867- 68 First estimate of National Income -Dadabhai Naoroji for 1867- 68; in his book “Poverty and Un-British rule in India”
1931-32 First scientific estimate made by Prof V K R V Rao (1931-32)
1948-49 GoI estimated the National Income for the first time in 1948-49 through the Ministry of Commerce
1949 National Income Committee was set up in 1949 (Chairman – Dr P C Mahalanobis)

 

CENTRAL STATISTICAL ORGANISATION (CSO)
  • The Central Statistics Office coordinates the statistical activities in the country and evolves statistical standards. NSO Estimates National Income.
  • CSO revised new series of national accounts with 2011-12 base year for computing size of economy growth.
  • It includes data on unorganized manufacturing and services.
  • The government has decided to merge the National Sample Survey Office (NSSO) with the Central Statistics Office (CSO) under the Ministry of Statistics and Programme Implementation (MoSPI). The order dated 23rd May 2019 has cleared formation of an overarching body – National Statistical Office (NSO)through the merger of the NSSO and the CSO.

 

 

 

Activities by CSO:

 

  •          Human Development Statistics
  •          Gender Statistics
  •          Conduct of Annual Survey of Industries
  •          National Income Accounting
  •          Compilation of Index of Industrial Production,
  •         Compilation Consumer Price Indices for Urban Non-Manual Employees.

 

MEASURES OF ECONOMIC GROWTH

Economic Growth can be measured through following parameters-

 

Meaning of GDP
  •         Gross Domestic Product is the market value of all the goods and services produced within the domestic territory of a country during a specified time period, usually one year.
Accounting Year
  •          1st of April to 31st of March (next year)
  •          The present base year for gross domestic product is 2011-12.
Nominal GDP
  •          The calculation of production of final goods and services at the current prices (inclusive of inflation).
Real GDP
  •         The calculation of Production of final goods and services valued at the base year prices (exclusive of inflation).
GDP at Market Prices
  •         Calculation of GDP at the actually transacted prices.
  •         Includes the indirect taxes levied, subsidies provided.
GDP at Factor Cost
  •          Calculation of GDP at the actual cost of production of goods and services and not the sale
  •          Doesn’t include indirect taxes
  •         Includes subsidies provided for the production
Gross Value Added

 

  •         Gross value added (GVA) is an economic productivity metric that measures the contribution of a corporate subsidiary, company or municipality to an economy, producer, sector or region.
  •          GDP= GVA+ taxes on products – subsidies on products
Gross Capital Formation (GCF)

 

  •          The percentage of the investment made each year out of the total GDP is called Gross Capital Formation
  •          High GCF denotes higher rate of savings in the economy which is required for high rate of production, capital formation, changes in production techniques
  •          GCF includes capital formation in public sector, private sector and also household sector.

 

PRO-CYCLICAL AND COUNTER-CYCLICAL ECONOMIC POLICY

 

 

 

Pro-Cyclical economic policy

 

  •         Any economic quantity that is positively correlated with the overall state of the economy is said to be pro-cyclical.
  •         Any quantity that tends to increase in expansion and tend to decrease in a recession is classified as pro-cyclical. Gross Domestic Product (GDP) is an example of a pro-cyclical economic indicator. Many stock prices are also pro-cyclical because they tend to increase when the economy is growing quickly.
 

Counter-Cyclical Policies

 

  •          Any economic quantity that is negatively correlated with the overall state of the economy is said to be countercyclical. That is, quantities that tend to increase when the overall economy is slowing down are classified as ‘countercyclical’. Unemployment is an example of a countercyclical variable.

 

METHODS OF GDP CALCULATION

 

 

EXPENDITURE METHOD

  •          GDP is calculated by the sum of consumer spending, investment, government purchases, and net exports.
  •          GDP = C + I + G + X -M
  •         Where, (C) Consumption of final goods and services, (I) Investments, (G) Government Purchases, (X-M) Export MINUS Imports
INCOME METHOD
  •         GDP is calculated by the sum of income of all the factors of production i.e., wages, interest earned, profit earned, Rent.
  •          The income approach states that all economic expenditures should equal the total income generated by the production of all economic goods and services.
PRODUCTION (VALUE ADDED) METHOD
  •          Estimated by adding the value added by all the firms.
  •          While GVA gives a picture of economy from the producers’ side or supply side, the GDP gives the picture from the consumers’/ demand side perspective. (Because it considers Indirect taxes and subsidies).

 

DIFFERENCE BETWEEN GNP AND GDP

 

BASIS GROSS NATIONAL PRODUCT (GNP) GROSS DOMESTIC PRODUCT (GDP)
 

 

 

MEANING

  •          Gross National Product (GNP) is the GDP of a country added with its ‘income from abroad’.
  •         Here, the trans-boundary economic activities of an economy is also taken into account.
  •        It is measured at market prices/ value.
  •          GDP is the value of all final goods and services produced by the normal residents as well as non-residents in the domestic territory of the country but does not includes Net Factor Income from Abroad.
  •         From April 2018, RBI decided to use GDP instead of GVA to measure the economic activities.
 

PRODUCED BY WHOM?

  •          Only those goods and services that are produced by the residents of India whether working in India or Abroad are included.
  •          Whatever is produced in India-by an Indian or foreign national is part of Indian GDP.
NET FACTOR INCOME FROM ABROAD AND INTERMEDIATE GOODS
  •         GNP includes Net Factor Income Abroad
  •         No intermediate goods and services should be included in GNP.
  •          Exclusion of Net Factor Income Abroad
  •          Intermediate goods and services are not included to avoid double counting.
 

 

 

HOW IT IS CALCULATED?

  •          GNP = GDP + Net factor income from abroad
  •          GNP = Consumption + Gross Private Investment + Government Expenditure + Net Exports + Net Factor Income from Abroad.
  •          GDP = Consumption + Gross Private Investment + Government Expenditure + Net Exports

Ø  Net Exports = Exports – Imports.

 

  •          NDP = Consumption + Net Private Investment + Government Expenditure + Net Exports.

Ø  Net Private Investment = Gross Private Investment – Depreciation

 

COST Vs PRICE

 

COST PRICE
For some companies, the total costs of making a product are listed under the cost of goods sold, which is the total of the direct costs involved in production. These costs might include direct materials, such as raw materials, and direct labor for the manufacturing plant.

 

The appropriate price for a product or service is based on supply and demand. The two opposing forces of supply in demand are always trying to achieve an equilibrium where the quantity of the goods or services provided matches the demand of the corresponding market and its ability to acquire the good or service. The concept allows for price adjustments as market conditions change.

 

Concepts Related To Cost and Price:

 

 

Market cost

 

The total cost associated with delivering goods or services to customers. The marketing cost may include expenses associated with transferring title of goods to a customer, storing goods in warehouses pending delivery, promoting the goods or services being sold, or the distribution of the product to points of sale.
 

Factory price

 

The prices charged by producers to wholesalers and retailers. Because these prices are eventually passed on to the end customer, changes in factory prices, also known as producer prices, can be a leading indicator of consumer price inflation.
Ex-factory price

 

Applied to a price, this means the price at the factory, and does not include any other charges, such as delivery or subsequent taxes.

 

LIMITATIONS OF USING GDP AS MEASURE OF ECONOMIC GROWTH:
  • Uneven distribution of GDP across various sectors
  • Doesn’t takes into account externalities i.e., benefits (or harms) a firm or an individual causes to another for which they are not paid (or penalized).
  • Does not takes into account non-monetary exchanges for example, household work done by housewife.

 

NATIONAL INCOME (NI) NATIONAL DISPOSABLE INCOME (NDI) PERSONAL INCOME (PI)
Also called Net National Product at factor cost. Gives an idea of what is the maximum amount of goods and services the domestic economy has at its disposal. Personal income refers to an individual’s total earnings from wages, investment enterprises, and other ventures. It is the sum of all the incomes received by all the individuals or household during a given period.
National Income (NI) = NNP at market prices (Indirect taxes – Subsidies)

Or

National Income at Factor Cost = NNP at Market Cost – Indirect Taxes + Subsidies

NDI = NNP + Other Current Transfers from rest of the world (remittances, gift, donations etc.) Personal income (PI) = National Income – Undistributed profits(profits utilised by manufacturers for further production) – Net interest  payments made by households – Corporate tax + Transfer payments to the households from the government and firms (old-age pensions, unemployment compensation, relief payment etc.).

 

TYPES OF INCOMES

 

Personal Disposable Income (PDI)
  •         Refers to the income that is available to the households that they can spent as they wish.   All the Personal Income is not available to individuals to spend. They have to pay taxes (e.g. – Income tax) and non-tax payment such as fines.
  •          PDI = PI – Personal tax payments – Non-tax payments (such as fines etc)
 

Real income

 

  •         Real income is income of individuals or nations after adjusting for inflation. It is calculated by dividing nominal income by the price level.
  •          Real income is a more useful indicator of well-being since it measures the amount of goods and services that can be purchased with the income.
 

 

Nominal Income

 

  •          It is one’s income in actual currency terms unadjusted for inflation.  Inflation is calculated as the change in the CPI year-on-year.
  •          Nominal income is what one is getting paid. Real income is the amount of money one really get after factoring in inflation. Thus, nominal income will always be more than real income.
 

 

 

 

 

 

 

Subsidies

 

  •        A subsidy or government incentive is a form of financial aid or support extended to an economic sector (business, or individual) generally with the aim of promoting economic and social policy.
  •          Although commonly extended from government, the term subsidy can relate to any type of support – for example from NGOs or as implicit subsidies. Subsidies come in various forms including: direct (cash grants, interest-free loans) and indirect (tax breaks, insurance, low-interest loans, accelerated depreciation, rent rebates.
Production subsidy:
  •         A production subsidy encourages suppliers to increase the output of a particular product by partially offsetting the production costs or losses.
Export subsidy:
  •         An export subsidy is a support from the government for products that are exported, as a means of assisting the country’s balance of payments.
 

Import subsidy

 

  •          An import subsidy is support from the government for products that are imported. Rarer than an export subsidy, an import subsidy further reduces the price to consumers for imported goods.

 

GROWTH RATE & GDP DEFLATOR
  • GROWTH RATE (%) = [GDP (Present year – Last Year) / Last Year] x 100
  • The growth rate may be appearing high, only because of inflation in the prices and quantitatively the production may not have improved.
  • To remove the inflation impact on growth rate, a base year is selected, and the current prices are converted to constant prices.
  • GDP DEFLATOR: It presents a picture of inflation like CPI and WPI but, it is not based on a fixed basket of commodities.
  • The GDP deflator, also called implicit price deflator, is a measure of inflation. It is the ratio of the value of goods and services an economy produces in a particular year at current prices to that of prices that prevailed during the base year.
  • This ratio helps show the extent to which the increase in gross domestic product has happened on account of higher prices rather than increase in output.
  • Since the deflator covers the entire range of goods and services produced in the economy — as against the limited commodity baskets for the wholesale or consumer price indices — it is seen as a more comprehensive measure of inflation.
  • The GDP deflator is reported by the Ministry of Statistics and Programme Implementation.

 

Real GDP vs Nominal GDP:

  • GDP price deflator measures the difference between real GDP and nominal GDP.
  • Nominal GDP differs from real GDP as the former doesn’t include inflation, while the latter does.
  • Nominal GDP will most often be higher than real GDP in an expanding economy.

 

Difference between CPI and GDP deflator:

  • GDP deflator measures the prices of all goods and services produced, whereas the CPI measures the prices of only the goods and services bought by consumers. Thus, an increase in the price of goods bought by firms or the government will show up in the GDP deflator but not in the CPI.
  • GDP deflator includes only those goods produced domestically. Imported goods are not part of GDP and do not show up in the GDP deflator.
  • CPI is computed using a fixed basket of goods, whereas the GDP deflator allows the basket of goods to change over time as the composition of GDP changes. 

 

REPORTS

 

REPORT RELEASED BY INFORMATION
Global Economic Prospects World Bank
  •         Issued twice (Biennial) a year – January and June.
  •         Current estimates show that 60 million people could be pushed into extreme poverty in 2020.
 

 

World Economic Outlook

IMF
  •          Published twice a year in the months of April and October.
  •         Global growth would contract by 4.4% in 2020 and bounce back to 5.2% in 2021.
  •         Indian economy, severely hit by the pandemic, is projected to contract by 10.3% in 2020.
  •          According to the IMF’s forecasts, Bangladesh’s per capita GDP is expected to overtake India in 2020. India is likely to grow faster in 2021 and in all likelihood again surge ahead.
 

Global Financial Stability Report

IMF
  •         Twice in a year – April and October.
  •         The Indian industrial sector is now among the most heavily indebted in the world in terms of the ability of its cash flows to meet its bank loan repayments.
Financial Stability Report RBI
  •          Issued twice a year
World Development Report World Bank
  •         Steepest declines in poverty are witnessed among those countries that became an integral part of the Global Value Chain (GVC). For example – Bangladesh, China and Vietnam
World Investment Report  

UNCTAD

  •          Focuses on trends in Foreign Direct Investment (FDI).
  •          Global FDI flows are forecast to decrease by up to 40% in 2020, from their 2019 value of $1.54 trillion.
Trade and Development Report UNCTAD
  •          UNCTAD is a permanent intergovernmental body established by the United Nations General Assembly in 1964.
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