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ECONOMY
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Definition of Economics: Economics is the study of how societies use scarce
resources to produce valuable commodities and distribute them among different people.
Types of Economies:
Market Economy: It is based on the principles of supply and demand, with
minimal government intervention.
Command Economy: All economic activities are controlled and regulated by the
government.
Mixed Economy: Combines elements of both market and command economies. It
allows private ownership while the government regulates certain sectors.
Basic Economic Concepts:
Supply and Demand: The fundamental forces that drive the market. Demand
represents consumers' desire for a product, while supply represents its availability.
Market Equilibrium: The point where supply equals demand, determining the
price of a good or service in the market.
Gross Domestic Product (GDP): It measures the total value of all goods and
services produced within a country's borders in a specific time frame. It's a key
indicator of a country's economic performance.
Inflation: The rate at which the general level of prices for goods and services rises,
eroding purchasing power.
Unemployment: The percentage of people who are willing and able to work but
are unable to find employment.
Factors of Production:
Land: Natural resources used in production.
Labor: Human effort used in production.
Capital: Tools, machinery, and equipment used in production.
Entrepreneurship: The ability to organize factors of production to create goods
and services.
Economic Systems:
Capitalism: An economic system where the means of production are privately
owned, and prices, production, and distribution of goods are determined by
competition in a market
Socialism: An economic system where the means of production are owned or
regulated by the state, aiming for equitable distribution of wealth among citizens.
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Fiscal and Monetary Policy:
Fiscal Policy: The government's use of taxing and spending to influence the economy.
Monetary Policy: Control of the money supply and interest rates by the central bank
to achieve economic goals.
International Trade:
Imports and Exports: Goods and services bought from and sold to other countries.
Trade Surplus and Deficit: A surplus occurs when exports exceed imports, while a
deficit happens when imports exceed exports.
Average Fixed Cost (AFC): AFC refers to the per-unit cost of fixed expenses. It's
calculated by dividing total fixed costs by the quantity of output produced.
Average Revenue: This denotes the revenue received per unit of output sold. It is
found by dividing the total revenue by the quantity sold.
Average Tax Rate: The average tax rate is calculated by dividing the total taxes paid
by a taxpayer's taxable income.
Average Total Cost (ATC): ATC refers to the total cost per unit of output. It
encompasses both fixed and variable costs and is calculated by dividing total cost by the
quantity of output.
Balanced Budget: A budget is considered balanced when a government's income
matches its expenditure.
Balance of Trade: This reflects the relationship between a country's import and export
values. It focuses on visible trade items and forms part of the balance of payments, which
also includes invisible items and capital movements.
Budget Deficit: When a government's expenditure exceeds its revenue, resulting in a
shortfall, it is termed as a budget deficit.
Call Money: It refers to short-term loans made for very brief periods, often a few days
or a week, typically at low interest rates, and often used in stock exchange transactions.
Cash Reserve Ratio (CRR): CRR represents the percentage of a bank's holdings that
it must maintain with the central bank (RBI in the case of India) as reserves against its
time liabilities.
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Circular Flow Diagram: A visual representation used in economics to demonstrate the
flow of money, goods, and services among firms, markets, households, and the government
in an economy.
Coase Theorem: An economic theory that, in the absence of transaction costs and with
competitive markets, an efficient outcome occurs, regardless of how property rights are
initially distributed.
Deadweight Loss: The loss of economic efficiency that occurs when the equilibrium for a
good or service is not achieved or when resources are not allocated efficiently.
Diseconomies of Scale: Situations where increased production leads to higher average
costs due to inefficiencies or increased input costs.
Deflation: A decrease in the general price level of goods and services leading to increased
purchasing power of money.
Devaluation: The official reduction of a country's currency value against foreign
currencies, often done to boost exports and discourage imports.
Direct Tax: A tax whose burden cannot be shifted and is directly imposed on the
individual or entity that owes it, like income tax or social security tax paid by employees.
Equity: The value of assets minus liabilities. In accounting terms, it refers to the ownership
interest in an asset after debts are paid off.
Elasticity: It measures the responsiveness of quantity demanded or supplied concerning
changes in price, income, or other factors.
Externality: The positive or negative impact of an economic activity on a third party not
directly involved in the activity.
Equilibrium: A state where economic forces are balanced, resulting in quantity demanded
equaling quantity supplied.
Excise Tax: A tax levied on specific goods manufactured, sold, or consumed within a
country, such as taxes on alcohol, tobacco, or fuel.
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Fiscal Policy: The use of government spending and taxation to influence the economy.
Foreign Exchange: Claims on a country by another, typically held in the form of
currencies and facilitating international trade.
Foreign Exchange Rate: The price of one country's currency in terms of another
country's currency.
Fixed Costs: Costs that do not change with the quantity of output produced or sold, such
as rent or insurance.
Factors of Production: Inputs used to produce goods and services: land, labor, capital,
and entrepreneurship.
Indirect Taxes: Taxes levied on goods and services, where the taxpayer's liability varies
based on the quantity of goods purchased or sold.
Inflation: The persistent increase in the general price level of goods and services over time.
Inferior Good: A good for which demand decreases when consumer income rises.
Import Quota: A restriction on the quantity of goods that can be imported and sold
domestically.
Implicit Costs: Costs that are incurred but not necessarily reported as expenses.
Laissez-Faire: The economic principle advocating minimal government intervention in
market activities.
Law of Supply: A microeconomic principle stating that, all else being equal, the quantity
of goods or services supplied increases with an increase in their price.
Lorenz Curve: A graphical representation of income or wealth distribution within a
population, displaying inequality.
Monopoly: A market structure where a single entity dominates the industry with no close
substitutes.
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Marginal Cost: The additional cost incurred from producing one more unit of a good or
service.
Marginal Revenue: The change in total revenue from selling one additional unit of a
good or service.
Marginal Product: The change in output resulting from employing one more unit of
input.
National Income (at Factor Cost): The total income earned by factors of production
in an economy.
Oligopoly: A market structure characterized by a small number of firms dominating the
market.
Per Capita Income: Total Gross National Product (GNP) of a country divided by its
population, used as an economic indicator.
Phillips Curve: Represents the trade-off between inflation and unemployment in an
economy.
Pigovian Tax: A tax levied to correct negative externalities by discouraging certain
behaviors or activities.
Price Elasticity of Demand: A measure of how demand for a good or service responds
to a change in its price.
Price Elasticity of Supply: A measure of how supply of a good or service responds to a
change in its price.
Statutory Liquidity Ratio (SLR): The percentage of a bank's total deposit liabilities
that it is mandated to hold in the form of cash reserves or specified securities with the
central bank.
Supply-Side Economics: An economic theory advocating that economic growth can be
most effectively created by reducing barriers to production and investing in capital.
Sunk Cost: A cost that has already been incurred and cannot be recovered.
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Scarcity: The fundamental economic problem of limited resources and unlimited wants.
Tariff (Ad Valorem): A tax levied on imported goods based on a percentage of their
value at the point of entry into the importing country.
Tobin Tax: A suggested global tax on financial transactions to generate revenue for
supporting developing economies or debt relief.
Total Revenue: The overall income received from selling a specific quantity of goods or
services.
Value-Added Tax (VAT): A tax imposed at each stage of the production and
distribution process based on the value added at each stage.
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5 Year Plans
India's Five Year Plans were strategic initiatives, each with its distinct objectives and targets.
Understanding the finer details of each plan is crucial to grasp their essence and achievements.
Here's an overview of the key points of every Five Year Plan in India.
First Five Year Plan:
• From 1951 to 1956, India saw the implementation of its inaugural Five Year Plan,
spearheaded by Prime Minister Jawaharlal Nehru.
• The primary emphasis of this plan was the development of key sectors like agriculture,
alongside the establishment of five Indian Institutes of Technology (IITs).
• It was modeled on the Harrod-Domar model, albeit with some modifications.
Second Five Year Plan:
• Under Nehru's leadership, the Second Five Year Plan ran from 1956 to 1961.
• The focal point shifted towards the industrial sector's development.
• Although the government aimed for a 4.5% growth rate, achieving 4.27% was
commendable, considering the payment crisis in 1957.
• The plan was designed based on the P.C. Mahalanobis Model, but experts doubted the
attainment of such ambitious growth rates.
Third Five Year Plan:
• Continuing under Nehru's leadership, this plan was furthered by Lal Bahadur Shastri after
he assumed office as Prime Minister.
• The key objective was to bolster India's economy for self-reliance and self-sufficiency, with a
major focus on agriculture.
• Lal Bahadur Shastri introduced the Green Revolution, prioritizing increased wheat
production.
• Modeled on D.R. Gadgil's framework, termed the 'Gadgil Yojana', this plan faced setbacks
due to the Sino-India conflict of 1962 and the Indo-Pakistani war of 1965, causing
economic weakness, price destabilization, and inflation.
• Unfortunately, this plan, targeting 5.6% growth, faltered significantly, achieving only a 2.4%
growth rate due to the impact of wars and drought.
Plan Holidays:
Following the failure of the Third Five Year Plan, the Indian Government implemented three
annual plans between 1966 to 1969, known as Plan Holidays.
These plans aimed at economic development by emphasizing agriculture and related sectors
while announcing rupee devaluation to bolster exports.
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Fourth Five Year Plan:
• Led by Indira Gandhi from 1969 to 1974, this plan aimed for expansion with stability
and gradual self-sufficiency.
• Key initiatives included nationalizing 14 major Indian banks and continuing the Green
Revolution, with a focus on family planning and population control programs.
• However, the plan was marred by the conflict between India and Pakistan over
Bangladesh, resulting in a dismal 3.3% growth rate against the target of 5.7%.
Fifth Five Year Plan:
• Introduced in 1974 and concluded prematurely in 1978 by the newly appointed Morarji
Desai Government.
• The Indira Gandhi-led government prioritized poverty eradication, employment,
justice, agriculture, and defense during this period.
• India witnessed the "Emergency" from 1975 to 1976, and several initiatives were
introduced, such as the Indian National Highway System and amendments to the
Electricity Supply Act.
• Despite challenges, the Fifth Five Year Plan saw relative success, achieving a growth rate
of 4.8%, surpassing the 4.4% target growth rate.
Rolling Plan:
• Introduced during the governance of Morarji Desai in 1978, the Rolling Plan remained
in force until 1980 when it was dismissed by the subsequent Congress Government.
• This plan unfolded in two distinct phases: an initial one-year segment which primarily
concentrated on the annual budget, followed by a subsequent phase devoid of a fixed
time frame.
• One of the notable advantages of the Rolling Plan lay in its adaptability. It provided the
government with the flexibility to dynamically adjust priorities, financial projections,
and resource allocations based on the ever-evolving conditions and circumstances of the
nation.
Sixth Five Year Plan:
• Under the leadership of Indira Gandhi spanning from 1980 to 1985, the Sixth Five
Year Plan was chiefly oriented towards fostering economic liberalization.
• Its focal points revolved around achieving technological self-sufficiency while
concurrently combating poverty.
• This plan laid its groundwork on infrastructural overhauls, substantial investments in
developmental initiatives, and the formulation of a comprehensive growth model.
• Despite setting a target growth rate of 5.2%, the Sixth Five Year Plan notably
outperformed expectations, culminating in an impressive 5.7% growth rate.
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Seventh Five Year Plan:
• Implemented during Rajiv Gandhi's tenure as Prime Minister from 1985 to 1990, the
Seventh Five Year Plan emphasized the realization of a self-sufficient economy,
technological advancements, and the creation of substantial employment opportunities.
• A key emphasis was placed on enhancing "food, work, and productivity" to augment
food grain production, expand employment prospects, and escalate overall productivity.
Annual Plans:
• Owing to the volatile political landscape, two annual programs were introduced for the
fiscal years 1990-91 and 1991-92.
• These Annual Plans were implemented with the aim of bolstering India's economy,
aligning it with the increasing engagement in international trade and services.
Eighth Five Year Plan:
• Executed during the tenure of P.V. Narasimha Rao's government from 1992 to 1997,
the Eighth Five Year Plan placed a predominant focus on enhancing human resources
encompassing education, employment, and public health.
• This period marked the advent of India's New Economic Policy, contributing
significantly to its success with an annual growth rate of 6.8%, surpassing the original
target of 5.6%.
Ninth Five-Year Plan:
• Launched under the stewardship of Atal Bihari Vajpayee in 1997 and extending until
2002, the Ninth Five-Year Plan centered on achieving "Growth with Social Justice and
Equality." Despite achieving a commendable growth rate of 5.6%, it fell short of the
intended 6.5%.
Tenth Five Year Plan:
• Encompassing the years 2002 to 2007 and led by both Atal Bihari Vajpayee and
Manmohan Singh, the Tenth Five Year Plan aimed at doubling India's per capita
income within the subsequent decade. Additionally, it aspired to curtail the poverty rate
by 15% by the year 2012.
Eleventh Five-Year Plan:
• Under the stewardship of Prime Minister Manmohan Singh spanning from 2007 to
2012, the Eleventh Five Year Plan was steadfast in its objective of achieving rapid and
more inclusive growth. Prepared under the guidance of C. Rangarajan, this plan
achieved an 8.0% growth rate, albeit slightly below the intended 9%.
Twelfth Five-Year Plan:
• Steered by Manmohan Singh from 2012 to 2017, the Twelfth Five Year Plan was
formulated with the aspiration of achieving swifter, more inclusive, and sustainable
growth for the nation's economy.
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Balance
of
Payments
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