Introduction(UNIT I)

By: Shikha Gupta

Meaning of Economy

• An economy consists of

– the economic system,

– the production, distribution or trade and

– consumption of goods and services in certain region or country.

• An economy is the total aggregate sum of all transactions of value between two parties, when both parties agree to

the value, commonly expressed in some currency, or price.

• A given economy has main factors such as

– its culture,

– values,

– education,

– technological evolution,

– history,

– social organization,

– political structure and legal systems,

– geography, natural resource endowment and ecology.

Economic Phases • The economy may be considered as having

developed through the following Phases

Phases of Modern Economies

• Primary stage: Involves the extraction and production of raw materials such as corn, coal, wood and iron.

• Secondary stage: Involves the transformation of raw or intermediate materials into goods.

• Tertiary stage: Involves the provision of services to consumers and businesses such as cinema and insurance and banking.

• Quaternary stage: Involves the research and development needed to produce products from natural resources and their subsequent by-products.

Economic measuresMethods of Measuring Economic Activity

Consumer spending Also known as personal consumption expenditure. It is the largest part of aggregate demand at the macroeconomic level.

Exchange Rate The rate at which one currency will be exchanged for another.

Gross Domestic Product The market value all the final goods and services produced within a country in a given period of time.

Gross National Product The market value of all the products and services produced in one year by labour and property supplied by the residents of a country.

Interest Rate The rate at which interest is paid by borrowers for the use of money that they borrow from a lender.

Stock market The size of the world stock market

National debt The debt owed by a central government

Rate of inflation A rise in the prices of goods and services in an economy over a period of time.

Unemployment When people are without work and actively seeking work

Balance of Trade The difference between the monetary value of exports and imports of output in an economy over a certain period.

Economic Development• Economic development refers to process of change in the overall economic activity.

• Acc. To Michael P. Todaro,

“Development must, therefore be conceived as a multi dimensional process involving major changes in social structure, population attitudes and institutions as well as acceleration of economic growth, reduction of inequality and eradication of absolute poverty.”

• Basic core values of Development: (By Prof. Goulet)

– Sustenance: fulfillment of basic needs

– Self Esteem: Feeling of worth, independence and self-respect

– Freedom from servitude: Freedom from evils of want and ignorance

Definitions of Economic Development

• United Nations Expert Committee

• "Development concerns not only man's material needs but also the improvement of the social condition of his life. Development is, therefore, not only economic growth, but growth plus change social, cultural and institutional as well as economic".

ECONOMIC DEVELOPMENT= ECONOMIC GROWTH+ CHANGES

• "Economic development is a continuous process which has to be extended over a long period of time so as to break the vicious circle of poverty and lead a country to a stage of self-sustaining growth or to self-generating

economy".

Vicious circle of poverty

Indicators of Economic Development

• The Physical Quality of Life Index (PQLI) is an attempt to measure the quality of life or well-being of a country. The value is the average of three statistics:

– basic literacy rate,

– infant mortality, and

– life expectancy at age one, all equally weighted on a 0 to 100 scale.

• It was developed in the mid-1970s by Morris David Morris, an indicator of development. PQLI might be regarded as an improvement but shares the general problems of measuring quality of life in a quantitative way.

Steps to Calculate Physical Quality of Life:

1) Find percentage of the population that is literate (literacy rate).

2) Find the infant mortality rate. (out of 1000 births) INDEXED Infant Mortality Rate = (166 - infant mortality) × 0.625

3) Find the Life Expectancy. INDEXED Life Expectancy = (Life expectancy - 42) × 2.7

Physical Quality of Life =

(Literacy Rate + INDEXED Infant Mortality Rate + INDEXED Life Expectancy) _______________________________________________________________ 3

•) Higher the value of PQLI more will be the economic development

Countries Physical Quality of Life Index (PQLI) July, 2013

India 73.70

Canada 186.03

Switzerland 215

Venezuela -48.27

Human Development Index (HDI)

• The Human Development Index (HDI) is a composite statistic of life expectancy, education, and income indices used to rank countries into four tiers of human development. HDI is a standard means of measuring well being, especially child welfare. It is used to distinguish whether the country is a developed, a developing or an under developed country and also to measure the impact of economic policies on quality of life.

• It was created by the Pakistani economist Mahbub Ul Haq and the Indian economist Amartya Sen in 1990 and was published by the United Nations Development Programme.

Three Indicators of HDI

§ Health : Life expectancy at birth

25 years Minimum

85 Years Maximum

§ Knowledge: Adult literacy rate

§ Standard of living: GDP per capita

2012 Very High HDI nations, by population size

Europe 492.3

N.America 350.5

Asia 227.0

S.America 56.7

Oceania 27.4

Africa 0.1

Human Development Report 2013 released by the United Nations Development Programme (UNDP), India’s HDI value is 0.554 and rank is 136 among 186 countries on its human development index (HDI). India is in medium human development category.

It is calculated as under:

• Life expectancy at birth: 65.8

• Expected years of schooling: 10.7

• Mean years of schooling: 4.4

• Standard of living: GDI per capita(US $): 3285

Economic Growth• According to Prof. Meier and Baldwin, "Economic growth is a process

whereby an economy's real national income increases over a long period of time".

• a) process :

– changes in the supply of fundamental factors, and

– changes in the structure of demand for the products.

• b) real national income:

– there is a positive correlation between the real national income and

– economic development.

• c) long period:

– refers to an upward trend in real national output over a long period.

Economic Growth

• “a process of continued (sustained), considerable increase in the real national income over a long period of time.”

– National Income is the sum total of all the final goods and services produced in one country during one year after making some necessary adjustments.

– A rate of increase in national income is the rate of growth of an economy.

Definitions of Economic Growth

– Acc. to Simon Kuznet (1971), “economic growth is a long term rise in the capacity to supply increasingly diversified economic goods and services to its population.”

– As per Jacob Viner, “reduction of mass poverty as a crucial test of economic growth”.

• Indicators of Economic Growth:

– National income

– Real per capita income(most reliable indicator)

Factors in Economic Development

Economic Growth Vs. Economic Development

Basis Economic Development Economic Growth

Implications

Economic development implies changes in income, savings and investment along with

progressive changes in socio-economic structure of country (institutional and

technological changes).

Economic growth refers to an increase in the real output of

goods and services in the country.

Factors

Development relates to growth of human capital indexes, a decrease in inequality

figures, and structural changes that improve the general population's quality of life.

Growth relates to a gradual increase in one of the components of Gross

Domestic Product: consumption, government spending, investment, net

exports.

Measurement

Qualitative.HDI (Human Development Index), gender- related index (GDI), Human

poverty index (HPI), infant mortality, literacy rate etc.

Quantitative. Increase in real GDP. Shown by PPF.

(Production Possibility Frontier)

Basis Economic Development Economic Growth

EffectBrings qualitative and

quantitative changes in the economy

Brings quantitative changes in the economy

Concept Broader conceptNarrower concept than economic

development

Relevance

Economic development is more relevant to measure

progress and quality of life in developing nations.

Economic growth is a more relevant metric for progress in developed countries. But it's widely used in all countries

because growth is a necessary condition for development.

• END