Economics (Macro, Micro)
The branch of knowledge concerned with the production, consumption, and transfer of wealth.
- Father of Economics – Adam Smith, writer of The Wealth of Nations (1976)
- Ragnar Frisch – One of the founders of the discipline of econometric, and for coining the widely used term pair macroeconomics/microeconomics in 1933.
- The first prize in economics was awarded in 1969 to Ragnar Frisch and Jan Tinbergen “for having developed and applied dynamic models for the analysis of economic processes”.
List of Contents
- Types of Unemployment
- Economic Systems
- Types of Goods
- Types of Market Structure
- Various Economic Organisations
- Important Stock Exchange
- Terms related to National Income
- Degrees of Price Elasticity Demand
- Budget Deficit
- Terms related to decline in Economy
- Main types of taxes
- Tools that RBI uses to control Inflation & Growth
- Economic Curves
- 5 Year Plans
- The term was coined by – John Maynard Keynes
- Monetary Policy, Inflation, FOREX, Fiscal Policy (Tax, Budget), National Income, RBI & Financial Institutions, Balance of Payment
- Father of Micro-Economics – Adam Smith
- Demand, Supply, Production, Price
Important Definitions in Economics
- Per capita income (PCI) / Average income: The average income earned per person in a given area (city, region, country, etc.) in a specified year. It is calculated by dividing the area’s total income by its total population.
- Literacy rate: The number of persons who is 7 or above and has the ability to read, write and understand in any language. It is calculated by dividing ‘number of literate persons aged 7 or above’ to the total ‘population aged 7 or above’ and multiplying by 100.
- Bank Rate / Discount Rate: The rate of interest which a central bank charges on its loans and advances to a commercial bank.
- Prime Lending Rate / Prime Rate: The interest rate charged by banks to their largest, most secure, and most creditworthy customers on short-term loans.
- Neo-Malthusian Theory: Malthusian theory is based on the idea that population growth will outstrip the ability to feed people. Malthus called for abstinence from sex was necessary to stop population growth.
- General Equilibrium Theory (Walras): Explains the behavior of supply, demand, and prices in a whole economy with several or many interacting markets, by seeking to prove that the interaction of demand and supply will result in an overall general equilibrium.
- Gresham’s law: A monetary principle stating that “bad money drives out good”. For example, if there are two forms of commodity money in circulation, which are accepted by law as having similar face value, the more valuable commodity will gradually disappear from circulation.
Types of Unemployment
- Disguised Unemployment: A kind of unemployment where some people seem to be employed but are actually not. This type usually exists where part of the labor force is either left without work or is working in a redundant manner where worker productivity is essentially zero.
- Frictional Unemployment: The unemployment which exists in any economy due to people being in the process of moving from one job to another.
- Seasonal Unemployment: Type of employment when people are unemployed at particular times of the year when demand for labour is lower than usual.
- Cyclical Unemployment: A factor of overall unemployment that relates to the regular ups and downs, or cyclical trends in growth and production, that occur within the business cycle.
- Structural unemployment: A form of unemployment caused by a mismatch between the skills that workers in the economy can offer and the skills demanded of workers by employers.
- Voluntary unemployment: The situation when the worker deliberately chooses not to work because of a low wage scale or not able to find out the suitable employment for him.
- Casual unemployment: The unemployment when the worker is employed on a day-to-day basis for a contractual job and have to leave it once the contract terminates.
- Technological unemployment: The loss of jobs caused by technological change. Such change typically includes the introduction of labour-saving machines or automation.
Economic System Based on Inter-Relation (Open, Closed)
1. Open Economy
An economy in which there are economic activities between the domestic community and outside.
2. Closed Economy
A self-sufficient economy, which means no imports come into the country and no exports leave the country.
Economic System Based on Production (Capitalism, Socialism, Mixed economy)
An economy is an area of the production, distribution, or trade, and consumption of goods and services by different agents.
1. Capitalist Economy (Free-Market Economy)
A country’s trade and industry are controlled by private owners for profit, rather than by the state.
- Works on Laissez-faire (free from government intervention) economic system.
- Properties: Private Property, Price Mechanism, Freedom of Enterprise, Sovereignty of that consumer, Profit Motive, No Government Interference
- Capitalist Countries: UK, UAE, Australia
2. Socialist Economy
Socialism is an economic system where everyone in society equally owns the factors of production.
- Creator: Carl Marx
- The four factors of production are labor, entrepreneurship, capital goods, and natural resources.
- Socialist Countries: People’s Republic of China
3. Mixed Economy
A mixed economy is a system that combines the characteristics of market, command and traditional economies.
- Creator: John Maynard Keynes, author of The General Theory of Employment, Interest and Money
- Properties: protects private property, allows the free market and the laws of supply and demand to determine prices, driven by the motivation of the self-interest of individuals.
- Mixed Countries: US, India
|Factors of production are owned by||Individuals||Everyone||Everyone||Everyone|
|Factors of production are valued for||Profit||Usefulness to people||Usefulness to people||Nation building|
|Allocation decided by||Supply and demand||Central plan||Central plan||Central plan|
|From each according to his||Market decides||Ability||Ability||Value to the nation|
|To each according to his||Wealth||Contribution||Need|
Great Depression (1929-30)
A severe worldwide economic depression which started from US (1929) but affected whole world.
- It was the longest, deepest, and most widespread depression of the 20th century.
- Most of the counties adopted the mixed economy after this.
Types of Goods in Economics
- Normal Goods – Any good for which demand increases when income increases, i.e. with a positive income elasticity of demand.
- Luxury good / Upmarket good – A good for which demand increases more than proportionally as income rises, and is a contrast to a “necessity good”, where demand increases proportionally less than income. Luxury goods is often used synonymously with superior goods and Veblen goods.
- Inferior good – A good whose demand decreases when consumer income rises unlike normal goods, for which the opposite is observed.
- Complementary Goods – A complementary good is a good whose use is related to the use of an associated or paired good. Two goods (A and B) are complementary if using more of good A requires the use of more of good B. For example, the demand for one good (printers) generates demand for the other (ink cartridges).
- Substitute goods – At least two products that could be used for the same purpose by the same consumers. If the price of one of the products rises or falls, then demand for the substitute goods or substitute good (if there is just one other) is likely to increase or decline.
- Giffen good – A good that is in greater demand as its price increases. For example, if the price of an essential food staple, such as rice, rises it may mean that consumers have less money to buy more expensive foods, so they will actually be forced to buy more rice.
- Veblen / Snob good – A Veblen good is a good for which demand increases as the price increases, because of its exclusive nature and appeal as a status symbol.
- Public goods – An item whose consumption is not decided by the individual consumer but by the society as a whole, and which is financed by taxation.
- Merit goods – Those goods and services that the government feels that people will under-consume, and which ought to be subsidised or provided free at the point of use so that consumption does not depend primarily on the ability to pay for the good or service.
- Demerit goods – A demerit good is “a good or service whose consumption is considered unhealthy, degrading, or otherwise socially undesirable due to the perceived negative effects on the consumers themselves”.
- Private goods – A private good is “an item that yields positive benefits to people” that is excludable, i.e. its owners can exercise private property rights, preventing those who have not paid for it from using the good or consuming its benefits; and rivalrous, i.e. consumption by one necessarily prevents that of another.
- Free goods – A resource, such as sunlight or air, which is so abundant that its availability is not a constraint on economic activity.
- Consumption / Consumer / Final goods – Any commodity that is produced or consumed by the consumer to satisfy current wants or needs. Consumer goods are ultimately consumed, rather than used in the production of another good.
- Capital goods – Goods that are used in producing other goods, rather than being bought by consumers.
- Intermediate goods / Producer goods / Semi-finished products – Goods which are under process goods, such as partly finished goods, used as inputs in the production of other goods including final goods.
- Investment goods – The goods that enable production, and are the main input into new installed capital. e.g. machine,factory,equipment etc.
Types of Market Structures
1. Monopolistic Competition
Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another and hence are not perfect substitutes.
2. Perfect Competition
A market structure, where a large number of small firms compete against each other.
A market structure characterized by a single seller/firm, selling a unique product in the market.
Bilateral monopoly: A market structure consisting of both a monopoly (a single seller) and a monopsony (a single buyer).
A market structure of limited competition, in which a market is shared by a small number of producers or sellers.
Various Economic Organisations of India & World
SEBI (Securities and Exchange Board of India)
The regulator for the securities market in India.
- Founded: 12 April 1992
- Headquarter: Mumbai
- Chairman: Ajay Tyagi
RBI (Reserve Bank of India)
India’s central banking institution, which controls the monetary policy of the Indian rupee.
- Founded: 1 April 1935
- Headquarter: Mumbai
- Governor: Shaktikanta Das
- Subsidiary: National Housing Bank
IRDA (Insurance Regulatory and Development Authority)
An autonomous, statutory body tasked with regulating and promoting the insurance and re-insurance industries in India.
- Founded: 1999
- Headquarter: Hyderabad
- Chairman: Subhash Chandra Khuntia
AGMARK (Agriculture + Mark)
A certification mark employed on agricultural products in India, assuring that they conform to a set of standards approved by the Directorate of Marketing and Inspection, an agency of the Government of India.
- Certifying agency: Directorate of Marketing and Inspection, Government of India
- Product category: Agricultural products
FCI (Food Corporation of India)
The role of Food Corporation of India is to maintain sufficient buffer stock in the country and price stabilisation. FCI purchases food grains mainly from surplus states such as Punjab, Haryana and supplies them to deficit states.
- Founded: 1965
- Headquarter: New Delhi
Important Stock Exchanges of the World
NYSE (New York Stock Exchange)
World’s largest stock trading platform
- Founded: 8 March 1817
- Chairman: Jeffrey Sprecher
- Headquarter: New York City, NY, US
NASDAQ (NASDAQ Stock Exchange)
World’s 2nd largest stock trading platform
- Founded: February 4, 1971
- CEO: Adena Friedman
- Location: New York City, NY, U.S.
JPX (Japan Exchange Group)
World’s 3rd largest stock trading platform
- Founded: 1 January 2013
- CEO: Akira Kiyota
- Headquarter: Chūō, Tokyo, Japan
NSE (National Stock Exchange of India Limited)
The leading stock exchange of India and 11th largest in the world.
- Founded: 1992, Mumbai
- Headquarter: Mumbai
- CEO: Vikram Limaye
- NIFTY: The stock market index for NSE.
BSE (Bombay Stock Exchange Limited)
The BSE is the world’s 10th largest stock exchange with an overall market capitalization of more than $2.3 trillion on as of April 2018.
- Founded: 9 July 1875/li>
- Location: Mumbai, India
- Chairman: Shri S. Ravi
- MD & CEO: Ashishkumar Chauhan
- SENSEX: The stock market index for BSE Limited
Terms related to National Income
GDP (Gross domestic product)
The monetary value of all the finished goods and services produced within a country’s borders in one year.
GDP = Value of gross domestic output - value of intermediate consumption
NDP (Net Domestic Product)
Net domestic product accounts for capital that has been consumed over the year in the form of housing, vehicle, or machinery deterioration.
NDP = GDP – Depreciation
The monetary value of an asset decreases over time due to use, wear and tear or obsolescence. This decrease is measured as depreciation.
GNP (Gross National Product) / GNI (Gross National Income)
An estimate of total value of all the final products and services turned out in a given period (usually a year) by the means of production owned by a country’s residents.
GNP = GDP + Net income inflow from abroad – Net income outflow to foreign countries
NNP (Net National Product)
The monetary value of finished goods and services produced by a country’s citizens, overseas and domestically, in a given period (usually a year).
NNP = GNP - Depreciation
Types or degrees of price elasticity of demand
- Perfectly Elastic Demand – A demand where any price increase would cause the quantity demanded to fall to zero, and reducing the price of a good or service will not increase sales.
- Perfectly Inelastic Demand – A demand where a consumer will buy a good or service regardless of the increase or decrease of price.
- Relatively Elastic Demand – A demand where relatively small changes in price cause relatively large changes in quantity.
- Relatively Inelastic Demand – A demand where where quantity demanded doesn’t change much with respect to change in price of the good.
- Unitary Elastic Demand – The demand for a good is unitary elastic if a change in the price of that good causes an equal change in quantity demanded.
Deficit and Surplus: A deficit occurs when the government spends more than it taxes; and a surplus occurs when a government taxes more than it spends.
The difference between all receipts and expenses in both revenue and capital account of the government.
Types of Budgetary Deficit
- Revenue Deficit: Total revenue expenditure – Total revenue receipts
- Fiscal Deficit: Total expenditure – Total receipts excluding borrowings
- Primary Deficit: Fiscal Deficit – Interest Payments
- Monetised Deficit (net reserve bank credit to the government): Part of the government deficit which is financed solely by borrowing from the RBI
Terms related to Decline in Economies
- Inflation – A sustained increase in the general price level of goods and services in an economy over a period of time.
- Stagflation – A combination of stagnant economic growth, high unemployment, and high inflation. It can also be defined as inflation and a decline in gross domestic product (GDP).
- Depression – A sustained, long-term downturn in economic activity in one or more economies. It is a more severe economic downturn than a recession.
- Recession – A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.
Main Types of Taxes in India
- Income Tax – A tax that governments impose on income generated by businesses and individuals within their jurisdiction.
- Service Tax – A tax levied by the government on service providers on certain service transactions, but is actually borne by the customers.
- VAT (Value Added Tax) – A tax on the amount by which the value of an article has been increased at each stage of its production or distribution.
- Custom Duty – A kind of indirect tax that is imposed on the goods that are imported or exported from the country.
- Central Excise Duty – An indirect tax levied on those goods which are manufactured in India and are meant for home consumption.
- Wealth Tax / Capital Tax / Equity Tax – A tax which is levied on the total value of personal assets, including: bank deposits, real estate, assets in insurance and pension plans, ownership of unincorporated businesses, financial securities, and personal trusts.
- Goods and Services Tax – An indirect tax levied in India on the supply of goods and services. GST is levied at every step in the production process, but is meant to be refunded to all parties in the various stages of production other than the final consumer. The single GST subsumed several taxes and levies which included: central excise duty, services tax, additional customs duty, surcharges, state-level value added tax and Octroi.
Regressive and progressive tax: A progressive tax is defined as a tax whose rate increases as the payer’s income increases. A regressive tax, on the other hand, is one whose rate increases as the payer’s income decreases.
The rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in relation to another currency.
- Fixed Exchange Rate (pegged exchange rate): A type of exchange rate regime in which a currency’s value is fixed against either the value of another single currency to a basket of other currencies or to another measure of value, such as gold.
- Floating Rate: A type of exchange-rate regime in which a currency’s value is allowed to fluctuate in response to foreign-exchange market mechanisms.
Tools that RBI uses to control inflation and growth
- CRR (Cash Reserve Ratio) – A certain minimum amount of deposit that the commercial banks have to hold as reserves with the central bank (RBI).
- SLR (Statutory Liquidity Ratio) – The reserve requirement that the commercial banks in India are required to maintain in the form of cash, gold reserves, government approved securities before providing credit to the customers.
- Repo Rate – The rate at which the central bank of a country (RBI) lends money to commercial banks in the event of any shortfall of funds.
- Reverse Repo Rate – The rate at which the central bank of a country (RBI) borrows money from commercial banks within the country.
Various Economic Curves
1. Demand curve
The graph depicting the relationship between the price of a certain commodity and the amount of it that consumers are willing and able to purchase at any given price.
2. Supply curve
Graphical representation of the correlation between the cost of a good or service and the quantity supplied for a given period.
3. Indifference Curve
A graph showing combination of two goods that give the consumer equal satisfaction and utility. Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility.
4. Lorenz curve
A graphical representation of income inequality or wealth inequality developed by American economist Max Lorenz in 1905.
Five Year Plans
The planning commission was established on 15th March 1950, with Former Prime Minister Jawaharlal Nehru as the Chairman. The planning commission used to directly report to the PM of India.
The concept of economic planning in India is derived from the Russia (then USSR). India has launched 12 five year plans so far. First five-year plan was launched in 1951 by Jawaharlal Nehru.
First Five Year Plan (1951-56)
- It was based on the Harrod-Domar model.
- Main Focus: Development of the primary sector
- Target Growth Rate: 2.1% | Actual growth rate: 3.6%.
Second Five Year Plan (1956-61)
- It was based on the P.C. Mahalanobis Model.
- Main Focus: Development of the public sector and “rapid Industrialisation”
- Target Growth Rate: 4.5% | Actual growth rate: 4.27%.
Third Five Year Plan (1961-66)
- This plan is called Gadgil Yojna also.
- Main Focus: Agriculture and improvement in the production of wheat
- The brief Sino-Indian War of 1962 exposed weaknesses in the economy and shifted the focus towards the defence industry and the Indian Army.
- The war led to inflation and later the priority was shifted to price stabilisation.
- Target Growth Rate: 5.6% | Actual growth rate: 2.4%
Due to miserable failure of the Third Plan the government was forced to declare “plan holidays” (from 1966–67, 1967–68, and 1968–69). Three annual plans were drawn during this intervening period and equal priority was given to agriculture and the industry sector.
Fourth Five Year Plan (1969-74)
- Main Focus: Growth with stability and progressive achievement of self reliance.
- During this plan the slogan of Garibi Hatao was given during the 1971 elections by Indira Gandhi.
- The Indira Gandhi government nationalised 14 major Indian banks and the Green Revolution in India advanced agriculture.
- Target Growth Rate: 5.6% | Actual Growth rate: 3.3%
Fifth Five Year Plan (1974-79)
- Main Focus: Employment, poverty alleviation (Garibi Hatao), and justice.
- The draft of this plan was prepared and launched by the D.P. Dhar. This plan was terminated in 1978.
- Target Growth Rate: 4.4% | Actual Growth rate: 4.8%
Rolling Plan (1978–80): The Janata Party government rejected the Fifth Five-Year Plan and introduced a new Sixth Five-Year Plan. This plan was again rejected by the Indian National Congress government in 1980 and a new Sixth Plan was made.
Sixth Five Year Plan (1980–85)
- The Sixth Five-Year Plan marked the beginning of economic liberalisation and the end of Nehruvian socialism.
- The National Bank for Agriculture and Rural Development was established for development of rural areas on 12 July 1982 by recommendation of the Shivaraman Committee.
- Target Growth Rate: 5.2% | Actual Growth Rate: 5.4%
Seventh Five Year Plan (1985–90)
- Main Focus: To establish growth in areas of increasing economic productivity, production of food grains, and generating employment through “Social Justice”.
- Target Growth Rate: 5.0% | Actual Growth Rate: 6.0%
Annual Plans (1990–92): Eighth five Plan could not take place due to volatile political situation at the centre and the years 1990–91 and 1991–92 were treated as Annual Plans.
Eighth Five Year Plan (1992–97)
- Main Focus: Controlling population growth, poverty reduction, employment generation, strengthening the infrastructure, institutional building, tourism management, human resource development, involvement of Panchayati rajs, Nagar Palikas, NGOs, decentralisation and people’s participation.
- During this plan Narasimha Rao Govt. launched New Economic Policy of India.
- It was the beginning of liberalization, privatisation and globalization (LPG) in India.
- Target Growth Rate: 5.6% | Actual Growth Rate: 6.8%
Ninth Five Year Plan (1997–2002)
- Main objective: Increase growth in the country with an emphasis on social justice and equity
- It was launched in the 50th year of independence of India.
- Target Growth Rate: 7.1% | Actual Growth Rate: 6.8%
Tenth Five Year Plan (2002–2007)
- This plan aims to double the per capita income of India in the next 10 years.
- Aim was to reduce the poverty ratio to 15% by 2012.
- Target growth: 8.1% | Growth Achieved: 7.7%
Eleventh Five Year Plan (2007–12)
- It was prepared by the C. Rangarajan.
- Its main theme was “faster and more inclusive growth”
- Target growth: 9% | Growth Achieved: 8%
Twelfth Five Year Plan (2012–2017)
- Its main theme is “Faster, More Inclusive and Sustainable Growth”.
- Target growth: 8%
- It was the last five year plan of India.
The planning commission was replaced by NITI Aayog (National Institute for Transforming India) on 1st Jan 2015.
NITI (National Institution for Transforming India) Aayog
- Formed on 1 Jan 2015.
- Aim: To achieve Sustainable Development Goals and to enhance cooperative federalism
- “15 year road map”, “7-year vision, strategy and action plan”
- Chairperson: PM of India
- Vice Chairperson: Rajiv Kumar