Introduction

Economics, economy, and national income are closely linked concepts that help us understand how nations function, grow, and develop. Economics is the study of how people manage limited resources to fulfill their needs and improve their standard of living. The economy refers to the actual structure through which this management occurs, while national income is a measure of a country’s economic activity. These three elements form the backbone of policy-making, development planning, and financial decision-making at both national and international levels.

Economics

What is Economics?

• It is the study of economic activities carried out by humankind.
• The main objective is the betterment of human life through efficient use of resources.

Challenges in Economics

• Goods and Services:
  • Availability: Dependent on population, basic needs, and services.
  • Frequent changes in demand create further complexity.
• Production:
  • Needs capital, which comes from:
    • Public sector
    • Private sector
    • Foreign investment
• Distribution:
  • Ensuring equitable distribution of goods and services.

Sectors of the Economy

Based on Resource Utilization

• Primary Sector:
  • Involves direct use of natural resources.
  • Examples: Agriculture, fishing, forestry.
• Secondary Sector:
  • Converts output from the primary sector into usable goods.
  • Example: Manufacturing sector.
• Tertiary Sector:
  • Known as the service sector.
  • Provides services to individuals and businesses.
  • Examples: Banking, insurance, trade, communication.

Based on Transactions

• Real Sector:
  • Deals with actual goods and services.
  • Includes production, purchase, and flow of products.
• Financial/Monetary Sector:
  • Deals with money and financial assets.
  • Examples: Stock markets, banks.

Economy

Based on Social and Economic Conditions

• State Economy:
  • Concept given by Karl Marx.
  • Types:
    • Socialist: State control, no labor freedom.
    • Communist: State and labor under absolute control.
  • Also called:
    • Non-Market Economy
    • Centralized Economy
    • Centrally Planned Economy
• Capitalist Economy:
  • Propounded by Adam Smith.
  • Features:
    • No government interference.
    • Relies on price mechanisms or market forces.
  • Also called:
    • Market Economy
    • Private Enterprise System
    • Free Enterprise System
• Mixed Economy:
  • Introduced by Keynes and Oscar Lange.
  • Mix of capitalist and socialist principles.
  • Market economy with socialist ideals like social justice.
  • Objectives:
    • Social Justice (from socialism)
    • Efficiency and Liberty (from capitalism)

Transition Economies

• China:
  • Adopted Open Door Policy in 1985.
  • Shifted to market-led development.
• Russia:
  • Glasnost (Openness) introduced in mid-1980s.
  • Economy broke down due to:
    • Lack of prerequisites
    • Political and social issues
    • Disintegration of the Soviet Union

Role of the World Bank

• Promotes free-market economies.
• In its World Development Report:
  • Suggests that the state should act as:
    • Regulator
    • Producer or supplier, depending on market and social needs.

Based on Sector’s Total Production and Population Dependence

• Agrarian Economy:
  • Agriculture contributes over 50% of GDP.
• Industrial Economy:
  • Manufacturing sector contributes over 50% of GDP.
  • Industrialization rose after the Second World War.
• Service Economy:
  • Services contribute over 50% of GDP.
  • Comparison:
    • Other countries industrialized first, then moved to services.
    • India moved directly to service sector without experiencing full industrialization.

National Income: Concepts, Calculation, and Importance

Introduction

National income is one of the most important indicators to understand the overall economic health and standard of living in a country. It reflects the total income earned by a nation’s people and businesses, including the value of goods and services produced. Studying national income involves understanding the different types of income, methods of calculation, and key indicators like GDP, GNP, NDP, and more. It also helps policymakers, economists, and international organizations make data-driven decisions to improve development outcomes.

Types of Income

• Nominal Income:
  • Income earned without adjusting for inflation.
  • Shows earnings based only on work done.
• Real Income:
  • Adjusts nominal income for inflation.
  • Reflects actual purchasing power.
• Disposable Income:
  • Considers inflation and direct taxes.
  • Indicates the money left for spending and saving.

Key Indicators and Measuring Formulas

Gross Domestic Product (GDP)

• Definition: Market value of all final goods and services produced within a country in a given time.
• Uses:
  • To calculate the percentage change in growth rate.
  • IMF and World Bank use it to analyze different economies.
• Limitations:
  • Only includes domestic production.
  • Does not reflect qualitative improvements.
• Calculation:
  • Cost-based:
    • Factor Cost: Excludes taxes, reflects producer’s price. Also known as factory price.
    • Market Cost: Includes indirect taxes like VAT, customs, excise. Also known as market price.
  • Price-based:
    • Constant Price: Uses base year prices (before inflation).
    • Current Price: Adjusts for inflation.
  • Tax Adjustments:
    • Direct taxes are not adjusted in either factor or market cost.
    • Indirect taxes are included only in market cost.
  • Subsidies:
    • Impact national income when using market cost.
  • Formula:
    • National Income at Factor Cost = National Income at Market Cost + Subsidies – Indirect Taxes

Net Domestic Product (NDP)

• Definition: GDP minus depreciation.
• Depreciation:
  • Includes wear and tear of goods and devaluation of currency.
• Uses:
  • Helps identify and manage depreciation.
• Limitations:
  • Only includes domestic production.
  • Does not measure quality of output.

Gross National Product (GNP)

• Definition: GDP + Income from overseas.
• Components of Overseas Income:
  • Trade: Imports and exports.
  • Cash Transfers: Gifts, remittances, donations, funds.
  • Investment Earnings.
• Uses:
  • IMF and World Bank use GNP for comparative analysis.
  • Reflects both quantitative and qualitative aspects.
  • Helps industries assess overseas demand and financial support.

Net National Product (NNP)

• Definition: GNP minus depreciation.
• Uses:
  • Analyzes national income more precisely.
  • Used to calculate Per Capita Income (PCI):
    • PCI = NNP / Population
  • Useful for policy formulation.
• Limitations:
  • IMF does not use NNP due to variation in depreciation methods across countries.

Per Capita Income (PCI)

• Definition: Income or output per person.
• Significance:
  • Measures living standards.
  • Rising real PCI suggests better living conditions.
• Calculation:
  • PCI = GDP / Population.
  • Can also be adjusted using other national income measures.

Gross Value Added (GVA)

• Background:
  • In 2015, India revised its national accounting methods to align with the 2008 UN System of National Accounts (SNA).
  • SNA provides a globally accepted standard for measuring economic activity.
• Definition:
  • GVA = Value of Output – Intermediate Consumption.
  • Reflects the contribution of each producer, industry, or sector to the economy.
• Macro-level Formula:
  • GVA = GDP + Product Subsidies – Product Taxes.
• Old vs. New Method in India:
  • Earlier:
    • GVA measured at factor cost (excluded taxes and subsidies).
    • Base year: 2004–05.
  • Now:
    • GVA measured at basic prices (includes production taxes, excludes production subsidies).
    • Base year: 2011–12.
• Agency Responsible:
  • National Statistical Office (NSO) provides both quarterly and annual GVA estimates.
• Sectoral Data Classification (8 Sectors):
  • Agriculture, Forestry and Fishing
  • Mining and Quarrying
  • Manufacturing
  • Electricity, Gas, Water Supply, and Other Utility Services
  • Construction
  • Trade, Hotels, Transport, Communication, and Broadcasting Services
  • Financial, Real Estate, and Professional Services
  • Public Administration, Defence, and Other Services

Difference Between GDP and GVA

• GDP and GVA are related but not identical.
• Difference arises due to the treatment of net taxes:
  • GDP includes taxes and excludes subsidies.
  • GVA subtracts intermediate consumption from output.

Conclusion

In conclusion, understanding the concepts of economics, economy, and national income is vital for analyzing a country’s development and policy direction. Various measures like GDP, GNP, NDP, and GVA offer unique perspectives—some from the consumer side and others from the producer side. While GDP is useful for international comparisons, GVA provides deeper insight into sectoral performance. National income indicators help in framing effective economic policies and understanding living standards. Together, these tools give a comprehensive picture of a nation’s economic health, guiding policymakers to make informed and balanced decisions for inclusive and sustainable growth.

1. Discuss the merits and limitations of using GDP and GVA as tools for measuring economic growth and sectoral performance in a developing country like India.
2. Why is understanding different national income indicators like GDP, GNP, NDP, and PCI crucial for formulating effective and inclusive economic policies?
3. Examine the structural transformation of the Indian economy from agriculture to services, bypassing industrialization, and its implications for long-term growth and employment.