economics ch1 concept final

8/16/2019 Economics Ch1 Concept Final

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ECONOMICSBasic Concepts

Nature of Economics

National Income Accounting

Economic Systems

Types of Economies

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A

B

Concepts and definition ofNI, GNP, GDP, NNP

Economic entities: Consumer, Producer, Households and

government

Production, factors of production

Consumption saving and investment

Micro and Macro economies

Economic entities: Consumer, Producer, Households and

government

Production, factors of production

Consumption saving and investment

Micro and Macro economies

Nature of Economics

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Types of Economies

C

D

Capitalist, Socialistic, Mixed,mechanism used to solve thebasic problems faced by each

economy. The role of governmentalong with the price mechanism

Developed and

Developing Economy

Economic Systems

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Nature of Economics

Producer: A producer is someone who creates and supplies

goods or services. Producers combine labor and capital—called

factor inputs or factors of production—to create—that is, to

output—something else.

Consumer: An end user, and not necessarily a purchaser, in the

distribution chain of a good or service.

Households: The household is the basic unit of analysis in many

social, microeconomic and government models, and is important

to the fields of economics and inheritance.

Government: The government formulates policies that govern

how trade is going to be done within the country, as well as

internationally. The level of government involvement may differ

with circumstances. It might also involve in the production of

goods and services.

Economic entities:


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Production

Production refers to the output of goods and

services produced by business with is a must that

satisfies Human need and wants.

FACTORS OF PRODUCTION

LANDLABOR

CAPITAL


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ENTREPRENEURSHIP


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Consumption:

Savings:

Investment:

The satisfaction of human wants

through the use of goods andservices is called consumption.

An investment is the purchase

of goods that are not consumed

today but are used in the future

to create wealth.

According to Keynesian economics,

the amount left over when the cost

of a person’s consumer expenditure

(consumption) is subtracted from the

amount of disposable income that he

or she earns in a given period of time.


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Microeconomics

Macroeconomics

MICROECONOMICS is a branch

of economics that studies thebehavior of individuals and firms

in making decisions regarding the

allocation of limited resources.

Typically, it applies to markets

where goods or services arebought and sold.

MACROECONOMICS studies the

behaviour of the economic system as

a whole or all the decision-making

units put together. Macroeconomics

deals with the behaviour of

aggregates like total employment,

Gross National Product (GNP),

National Income, General

price level etc.


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Nominal and Real GDPWhen GDP is measured on the basis of current price, it is called GDP at current prices or nominal GDP. On the

other hand, when GDP is calculated on the basis of fixed prices in some year, it is called GDP at constant prices

or real GDP.

GDP Deflator:GDP deflator is an index of price changes of goods and services included in GDP. It is a price index which is calcu-

lated by dividing the nominal GDP in a given year by the real GDP for the same year and multiplying it by 100. Thus,

GDP Deflator = Nominal (or Current Prices) GDP

Real (or constant Prices) GDPx 100

Gross Domestic Product (GDP)Gross Domestic Product measures the aggregate production of final goods and services taking place within the

domestic economy during a year. GDP includes all private and public consumption, government outlays,

investments and exports minus imports that occur within a defined territory.

CONSUMPTION + GOVERNMENT SPENDING + INVESTMENT + NET EXPORTSGDP

Net Domestic Product (NDP)

NDP is the value of net output of the economy during the year. Some of the country’s capital equipment wearsout or becomes obsolete each year during the production process. The value of this capital consumption is some

percentage of gross investment which is deducted from GDP.

GDP AT FACTOR COST – DEPRECIATION.NET DOMESTIC PRODUCT

GDP at Factor Cost:GDP at factor cost is the sum of net value added by all producers within the country. Since the net value added gets

distributed as income to the owners of factors of production, GDP is the sum of domestic factor incomes and fixed

capital consumption (or depreciation).

GDP AT MARKET PRICE – INDIRECT TAXES + SUBSIDIES. +NET EXPORTS

GDP AT FACTOR COST


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Gross National Product (GNP)GNP is a measure of a country’s economic performance, or what its citizens produced (i.e. goods and services) and

whether they produced these items within its borders.

Depreciation - A part of the capital gets consumed during a year due to

wear and tear. This wear and tear is called depreciation.

GDP + NET FACTOR INCOME FROM ABROADGNP

Net National Product (NNP)Net national product (NNP) refers to gross national product (GNP), i.e. the total market value of all final goods

and services produced by the factors of production of a country or other polity during a given time period, minus

depreciation.

GNP – DEPRECIATIONNNP

National Income (NI)The value of NNP is evaluated at market prices.

We need to add subsidies and deduct indirect taxes to the NNP evaluated at market prices. The measure that we

obtain by doing so is called Net National Product at factor cost or National Income.

NNP at market prices – Net indirect taxes

(Net indirect taxes = Indirect taxes – Subsidies)

NNP at factor cost = National Income (NI ) =NNP at market prices – (Indirect taxes – Subsidies)

Per capita IncomePer capita income or average income measures 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.

National Income/Total population of the country

i.e. Per capita income of a Country

Domestic Income:Income generated (or earned) by factors of production within the country from its own resources is called domestic

income or domestic product.

NATIONAL INCOME-NET INCOME EARNED FROM ABROAD.DOMESTIC INCOME

Private Income:Private income is income obtained by private individuals from any source, productive or otherwise, and the retained

income of corporations. It can be arrived at from NNP at Factor Cost by making certain additions and deductions.

NATIONAL INCOME (OR NNP AT FACTOR COST) +TRANSFER PAYMENTS + INTEREST ON PUBLIC DEBT –SOCIAL SECURITY – PROFITS AND SURPLUSES OF PUBLICUNDERTAKINGS.

PRIVATE INCOME


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Personal Income:Personal income is the total income received by the individuals of a country from all sources before payment of

direct taxes in one year. Personal income is never equal to the national income, because the former includes the

transfer payments whereas they are not included in national income.

Disposable Income:Disposable income or personal disposable income means the actual income which can be spent on consumption

by individuals and families. The whole of the personal income cannot be spent on consumption, because it is the

income that accrues before direct taxes have actually been paid.

Real Income:Real income is national income expressed in terms of a general level of prices of a particular year taken as base.

National income is the value of goods and services produced as expressed in terms of money at current prices. But

it does not indicate the real state of the economy.

Personal Income = NATIONAL INCOME – UNDISTRIBUTED CORPORATE

PROFITS – PROFIT TAXES – SOCIAL SECURITY CONTRIBUTION +TRANSFER PAYMENTS + INTEREST ON PUBLIC DEBT.

Disposable Income = PERSONAL INCOME – DIRECT TAXES.

Inter-Relationship among differentconcept of National Income1. Gross National Product (GNP) = Gross National Expenditure (GNE)

2. Gross Domestic Product (GDP) = GNP - Net Income rom abroad

3. GNP at Market Prices = GNP at Factor Cost + Indirect Taxes - Subsidies

4. NNP at Market Prices = GNP at Market Prices - Depreciation or Capital Consumption Allowance

5. Naet Domestic Product (NDP) atMarket Prices

= NNP at Market Prices - Net Factor Income rom abroad

6. NNP at Factor Cost or NationalIncome or National Product

= NNP at Market Prices - Indirect Taxes + Subsidies

7. NDP at Factor Cost or Domestic

Income or Domestic Product

= National Income - Net Factor Income rom abroad

8. Private Income = NNP at Factor Cost + Government and Business Transer Payments + CurrentTransers rom abroad in the orm o Gifs and Remittances + Windall Gains+ Net Factor Income rom abroad + Interest on Public Debt and Consumer In-terest - Social Security Contribution - Income rom Government Departmentsand property - Profits and Surpluses o Public Corporations (or Unertakings)Or

Income rom Domestic Product accruing to Private Sector + Interest on PublicDept + Net Factor Income rom abroad + Transer Payments + Current Trans-ers rom the rest o the world (or abroad)

9. Income rom Domestic Productaccruing to Private Sector

= NDP at Factor Cost - Income rom Domestic Product accruing to Govern-ment Departments - Saving o Non-Departmental Enterprises.

10. Personal Income = Private Income - Saving o Private Corporate Sector (or Undistributed Corpo-rate Profits) - Corporation Tax (or Profit Taxes)

11. Personal Disposable Income orDisposable Income

= Personal Income - Direct Taxes paid by paid by Households (or Direct Person-al Taxes) and Miscellaneous Fees, Fines etc.Or


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Economic System

= NDP at Factor Cost + Transer Payments + Net Factor

Income rom abroad - Corporation Tax - Undistributed Corporate Profits -Social Security Payments - Direct Personal TaxesOr

= National Income at Factor Cost + Transer payments + Net Income romabroad - Corporate Tax - undistributed Corporate Profits - Social Securitypayments - Direct Personal Taxes - Indirect Taxes + Subsidies.

What type of goods and services

should be produced?

How much should be produced?

How should it be produced?

For whom should it be produced?

An economic system is the way a society organizes

the production, distribution, and consumption of

goods and services to meet people’s needs and wants.

Basically, economic systems address the followingquestions:


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Types of

Economic System

Based on the criterion of degree

of individual freedom and profit

motive, economies are labeled as:

ACapitalist or FreeEnterprise Economy

B Socialist or CentrallyPlanned Economy

C Mixed Economy


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CAPITALIST ECONOMY

MIXED ECONOMY

SOCIALIST ECONOMY

Capitalism is one of the economic systems which the means of production are

owned and managed by private individual and institutions. They are at liberty to

use any technique of production and produce anything they like. State is to take

care of only internal and external security of the country.

Mixed economy is part of economic systems which combines in itself the features

of capitalism and that of socialism. Unlike a pure capitalistic economy, it has

important public sector i.e. number of industries are owned and managed by

the state. Private enterprises is allowed and even encouraged to operate large

number of industries and to own the various means of production. Thus in mixed

economy, the public and private sectors exists side by side.

Socialism is that part of economic system which means of production are

owned and managed by the State. Private ownership of means of production

is not allowed. People can have personal property which is transferable and

inheritable. The anti-social activities like smuggling and hoarding find no

place in socialism. Economic activities are planned with the motive of social

benefit by a central planning authority.

EXAMPLES The economies of USA, UK,France, Netherland, Spain, Portugal, Australia

etc. are known as capitalistic countries with

active role of their respective government in

economic development.

FEATURES Private property

Freedom of enterprise

Consumer’s Sovereignty

Profit Motive

Competition

Importance of markets and prices

Absence of government interference

EXAMPLES Indian economy is considered amixed economy as it has well defined areas for

functioning of public and private sectors and

economic planning.

FEATURES Co-existence of public and private

sectors

Individual Freedom

Economic Planning

Price Mechanism

EXAMPLES Countries such as Russia,China and many eastern European countries

are said to be socialist countries.

FEATURES Collective Ownership of means of Production

Social Welfare Objective

Central Planning

Reduction in Inequalities

No class conflict


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Capitalist Economy Co-existence of public and private sectors

Individual Freedom

Economic Planning

Price Mechanism

Mixed Economy Spontaneous Order and the Price System

Government Market Failure

Regime Uncertainty

Socialist Economy Elimination of Individualism

Red-Tapism and Inefficiency

An Artificial System

Consumers Suffer

Economic Equality Non Existence of economic and political freedom

Non Existence of competition

But the methods used for solving these problems are different.

Capitalist economies resolve their problems through a price mechanism

Socialist economies through a central planning authority

Mixed economy, through a combination of the two


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Problems

The economic problems of unlimited wants and scarce

means are the same to any economy.


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Types of Economics

on the Basis of

Level of Development

Developed countries have higher national and per-capita

income, high rate of capital formation i.e. high savings

and investment.

They have highly educated human resources, better civic

facilities, health and sanitation facilities, low birth rate,

low death rate, low infant mortality, developed industrial

and social infrastructures and a strong financial and

capital market.

In short, developed countries have high standard of

living.

Developing countries are low on the ladder of

development. They are sometimes also called

underdeveloped, backward or poor countries. But

economists prefer to call them developing countries

because it gives a sense of dynamism.

The national and per capita income is low in these

countries. They have backward agricultural and

industrial sectors with low savings, investment and

capital formation. Although these countries have export

earnings but generally they export primary agricultural

products.

In short, they have low standard of living and poor health

and sanitation, high infant mortality, high birth and

death rates and poor infrastructure.

The countries are labeled developed or rich and

developing or poor on the basis of real national

and per capita income and standard of living of

its population.

Developed

Economy

Developing

Economy


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Meaning of Economic growthand development

Economic Growth, as distinguished from eco-nomic development, is a sustained increase in national

income. Taking the differences in population into consid-

eration, it is reflected in the growth of per-capita income

(i.e. national income + total population).

Economic Development, on the other hand, includes not onlyeconomic growth but also various other economic changes that improve

the quality of life or standard of living of people in a country.

If with economic growth, a country experiences various economic

changes such as reduction in poverty and unemployment, reduction in

income and wealth inequality, increase in literacy rate, improvement

in health and hygiene, decrease in population growth, improvement in

environmental standards etc, that improve the quality of life then that is economic

development.

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Determinants of Economic Development The process of economic development isinfluenced by a number of economic as well asnon-economic factors.

The important economic factors are as follows:

Besides many other non-economic factorsalso affect the rate of growth and economicdevelopment

Natural Resources

Human Resources

Capital Formation

Technology

Caste System

Family Type

Racial Factors

Government Policies

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COMPARISON VARIABLES ECONOMIC DEVELOPMENT ECONOMIC GROWTH

Implications Economic development implies an

upward movement o the entire social

system in terms o income, savings

and investment along with progressive

changes in socioeconomic structure o

country (institutional and technologi-

cal changes).

Economic growth reers to an in-

crease over time in a country`s real

output o goods and services (GNP)

or real output per capita income.

Factors Development relates to growth o hu-

man capital indexes, a decrease in ine-

quality figures, and structural changes

that improve the general population's

quality o lie.

Growth relates to a gradual increase

in one o the components o Gross

Domestic Product: consumption,

government spending, investment,

net exports.

Measurement Qualitative.HDI (Human Develop-

ment Index), gender- related index

(GDI), Human poverty index (HPI),

inant mortality, literacy rate etc.

Economic Planning

Quantitative. Increases in real GDP. Price Mechanism

Effect Brings qualitative and quantitative

changes in the economy

Brings quantitative changes in the

economy

Relevance Economic development is more rele-

vant to measure progress and quality

o lie in developing nations.

Economic growth is a more rele-

vant metric or progress in devel-

oped countries. But it's widely used

in all countries because growth is

a necessary condition or develop-

ment.

Scope Concerned with structural changes in

the economy

Growth is concerned with increase

in the economy's output

Distinction between Economic Development and Economic Growth


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economics ch1 concept final

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