Economics for 2nd PUC - ToPIC 1

8/22/2019 Economics for 2nd PUC - ToPIC 1

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Economicsfor 2nd

PUC 2013For Old syllabus of 2nd PUC. For students writing March 2014 Exams

Prepared by

Asst.

Professor

Vipin


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Unit 1

Concepts and Indicators for Development

Economic Growth

Economic growth is the increase in the amount of the goods and services produced by an economy over

time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real

GDP. Growth is usually calculated in real terms i.e., inflation-adjusted terms to eliminate the

distorting effect of inflation on the price of goods produced.

Economic Development

Economic development generally refers to the sustained, concerted actions of policymakers and

communities that promote the standard of living and economic health of a specific area. Economic

development can also be referred to as the quantitative and qualitative changes in the economy.

Such actions can involve multiple areas including development of human capital, critical infrastructure,

regional competitiveness, environmental sustainability, social inclusion, health, safety, literacy, and

other initiatives

Difference between Growth and Development

Economic Development Economic Growth

Single dimensional i.e. increase in output

alone.

Multi dimensional i.e. more output and changes

in technical and institutional arrangements.

Quantitative Changes-Change national and percapita income

Qualitative Change-Change in composition anddistribution of national and per capita income

and change in functional capacities

Spontaneous in character. Regulated and controlled in character.

Continuous Change. Discontinuous Change.

Growth is possible without development Growth to some extent is essential for

development.

Determinant of economic growth may be

economic development

Economic development is the determinant of

economic growth

Solution of the problem of developed

countries.

Solution of the problem of under developed

countries.

Sustainable Development

Development that meets the needs of the present without compromising the ability of future

generations to meet their own needs. World Commission on Environment & Development


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Sustainable development promotes the idea that social, environmental, and economic progresses are all

attainable within the limits ofour earths natural resources.

Classification of Countries (Based on Income)

For analytical purposes the World Bank classifies economies as low income, middle income, or high

income. As of 1 July 2011 low-income economies are those that had average incomes of $1,005 or less

in 2010; lower-middle-income economies had average incomes of $1,006 to $3,975; upper-middle-

income economies had average incomes of $3,976 to $12,275; and high-income had average incomes of

$12,276 or more. Low- and middle-income economies are commonly referred to as developing

economies.

However this does not imply that economies in the same income group have reached similar stages of

development or that high-income economies have reached a preferred or final stage of development.

Characteristics of Developing Countries / Economies

a) Dominance of agricultural sector: Major source of income in case of undeveloped anddeveloping economies is agriculture. A large section of population earns living through

agriculture. Agriculture is the primary sector of these economies

b) Small and large scale of production: Both the private and public sectors exist in the economyside by side. Goods are produced on large and also on small scale by public and private sectors.

c) Production for self-consumption: A large amount of goods and services produced is consumedby the producers themselves. Majority of farmers grow props for their own consumption.

d) Illiteracy: The important feature of developing economy is its illiteracy. Though efforts are madeto eradicate illiteracy but there is still considerable illiteracy and unskilled labour.

e)

Under utilisation of resources: Developing economies have got significant amount of naturalresources and large number of labour force. Due to lack of technical knowledge, natural

resources are not discovered and fully utilised.

f) Preference to labour intensive industries: Unemployment and underemployment are also theproblems of developing economies, so small scale and cottage industries which absorb large

number of hands are preferred.

g) Vicious circle of poverty: Poverty is the vicious problems of developing economy due to povertythere is low income, lesser investment, lesser product in and the result is the poverty again.

Our Indian economy is also termed as developing economy. We have achieved considerable

amount of industrialization at faster rate. In certain industrial and technological field we are at

par with developed economies.

Characteristics of Developed Countries / Economies

a) Dominance of industrial sector: Industrial and service sectors dominated the economy.Agriculture remains a subsidiary occupation. The major part of national income is obtained

through industrial production.


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b) Large scale production: Commodities are produced and manufactured on very large scale,mechanization is adopted in the industrial production.

c) Division of work: The work to be performed is divided and subdivided into small pieces andindividuals or group is required to perform only a part of the work. The worker becomes

specialized in his job by doing the same work again and again. Division of labour and

specialization increase the quantity of work and improves the quality of production.

d) Supremacy of capital: Capital plays a dominant role in the economy. Capital intensive industriesare installed. Village, cottage and small scale industries are neglected.

e) Profit motive: Human efforts are directed towards earning more and more income.f) Dependence: Individuals and even group are not self sufficient. They cannot produce all the

commodities they use. Certain commodities used are imported from abroad.

Physical Quality of Life Index (PQLI)

In 1979, D. Morris constructed a composite .Physical Quality of Life Index (PQLI) He found that most of

the indicators were inputs to development process rather than result of the development process.

These indicators reflected that economically less developed countries are simply underdeveloped

versions of industrialized countries.

He, therefore, combines three component indicators of Infant Mortality, Life Expectancy and Basic

Literacy to measure performance in meeting the basic needs of the people. However, the choice of

indicators is

1. Life Expectancy Indicator (LEI)2. Infant Mortality Indicator (IMI)3. Basic Literacy Indicator (BLI)

Human Development Index (HDI)

The Human Development Index (HDI) is a comparative measure of life expectancy, literacy, education

and standards of living for countries worldwide. It 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 underdeveloped country,

and also to measure the impact of economic policies on quality of life. The index was developed in 1990

by Pakistani economist Mahbub ul Haq and Indian economist Amartya Sen.

Standard of Living Index (SOLI)

Standard of living refers to the level of wealth, comfort, material goods and necessities available to a

certain socioeconomic class in a certain geographic area. The standard of living includes factors such as

income, quality and availability of employment, class disparity, poverty rate, quality and affordability of

housing, hours of work required to purchase necessities, gross domestic product, inflation rate, number

of vacation days per year, affordable (or free) access to quality healthcare, quality and availability of

education, life expectancy, incidence of disease, cost of goods and services, infrastructure, national


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economic growth, economic and political stability, political and religious freedom, environmental

quality, climate and safety. The standard of living is closely related to quality of life.

Types and Description of Data

Primary Data

1. Primary data are always original as it is collected by the investigator.2. Suitability of the primary data will be positive because it has been systematically collected.3. Primary data are expensive and time consuming.4. Extra precautions are not required.5. Primary data are in the shape of raw material.6. Possibility of personal prejudice.

Secondary Data

1. Secondary data lacks originality. The investigator makes use of the data collected by otheragencies.

2. Secondary data may or may not suit the objects of enquiry.3. Secondary data are relatively cheaper.4. It is used with great care and caution.5. Secondary data are usually in the shape of readymade products.6. Possibility of lesser degree of personal prejudice.

Cross Section Data

Cross-sectional data, or a cross section of a study population, in statistics and econometrics is a type of

one-dimensional data set. Cross-sectional data refers to data collected by observing many subjects (suchas individuals, firms or countries/regions) at the same point of time, or without regard to differences in

time. Analysis of cross-sectional data usually consists of comparing the differences among the subjects.

Time Series Data

A time series is a sequence of observations which are ordered in time (or space). If observations are

made on some phenomenon throughout time, it is most sensible to display the data in the order in

which they arose, particularly since successive observations will probably be dependent.

Time series are best displayed in a scatter plot. The series value X is plotted on the vertical axis and time

t on the horizontal axis. Time is called the independent variable (in this case however, something overwhich you have little control). There are two kinds of time series data:

1. Continuous, where we have an observation at every instant of time, e.g. lie detectors,electrocardiograms. We denote this using observation X at time t, X(t).


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2. Discrete, where we have an observation at (usually regularly) spaced intervals. We denote thisas Xt.

Survey Data

A survey is a method for collecting information or data as reported by individuals. This is a type of data

collection known as self-report data, which means that individuals complete the survey (or provide the

information) themselves

Census Data

A census is the procedure of systematically acquiring and recording information about the members of a

given population. It is a regularly occurring and official count of a particular population.

The United Nations defines the essential features of population and housing censuses as "individual

enumeration, universality within a defined territory, simultaneity and defined periodicity", and

recommends that population censuses be taken at least every 10 years. United Nations

recommendations also cover census topics to be collected, official definitions, classifications and other

useful information to coordinate international practice.

Construction of Tables

The process of placing classified data into tabular form is known as tabulation. A table is a symmetric

arrangement of statistical data in rows and columns. Rows are horizontal arrangements whereas

columns are vertical arrangements. It may be simple, double or complex depending upon the type of

classification.

1. Simple Tabulation or One-way Tabulation: When the data are tabulated to one characteristic, itis said to be simple tabulation or one-way tabulation. For Example: Tabulation of data on

population of world classified by one characteristic like Religion is example of simple tabulation.

2. Double Tabulation or Two-way Tabulation: When the data are tabulated according to twocharacteristics at a time. It is said to be double tabulation or two-way tabulation. For Example:

Tabulation of data on population of world classified by two characteristics like Religion and Sex

is example of double tabulation.

3. Complex Tabulation: When the data are tabulated according to many characteristics, it is said tobe complex tabulation. For Example: Tabulation of data on population of world classified by two

characteristics like Religion, Sex and Literacy etcis example of complex tabulation.

Components of a Statistical Table

In general, a statistical table consists of the following eight parts. They are as follows:

1. Table Number: Each table must be given a number. Table number helps in distinguishing onetable from other tables. Usually tables are numbered according to the order of their appearance


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in a chapter. For example, the first table in the first chapter of a book should be given number

1.1 and second table of the same chapter be given 1.2 Table number should be given at its top

or towards the left of the table.

2. Title of the Table: Every table should have a suitable title. It should be short & clear. Title shouldbe such that one can know the nature of the data contained in the table as well as where and

when such data were collected. It is either placed just below the table number or at its right.

3. Caption: Caption refers to the headings of the columns. It consists of one or more column heads.A caption should be brief, concise and self-explanatory, Column heading is written in the middle

of a column in small letters.

4. Stub: Stub refers to the headings of rows.5. Body: This is the most important part of a table. It contains a number of cells. Cells are formed

due to the intersection of rows and column. Data are entered in these cells.

6. Head Note: The head-note (or prefactory note) contains the unit of measurement of data. It isusually placed just below the title or at the right hand top corner of the table.

7. Foot Note: A foot note is given at the bottom of a table. It helps in clarifying the point which isnot clear in the table. A foot note may be keyed to the title or to any column or to any row

heading. It is identified by symbols such as *,+,@, etc.

8. Source Note: The source note shows the source of the data presented in the table. Reliabilityand accuracy of data can be tested to some extent from the source note. It shows the name of

the author, title, volume, page, publishers name, year and place of publication of the book or

journal from which data are complied.

Bar Diagrams

A simple bar chart is used to represents data involving only one variable classified on spatial,

quantitative or temporal basis. In simple bar chart, we make bars of equal width but variable length, i.e.the magnitude of a quantity is represented by the height or length of the bars.

Example:


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Pie Charts

Pie chart can used to compare the relation between the whole and its components. Pie chart is a circular

diagram and the area of the sector of a circle is used in pie chart.

To construct a pie chart (sector diagram), we draw a circle with radius (square root of the total). The pie

slices (angle of sectors) are calculated using:

These angles are made in the circle by mean of a protractor to show different components. The

arrangement of the sectors is usually anti-clock wise.

Example

By using


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Computation of Annual Growth

Annual growth rate is calculated by using time series data for two different periods and is expressed in

terms of percentage per annum.

Assuming that the GDP in India for current year is Rs. 50000 crore and in the base year the GDP was Rs

47000 crore, the annual growth rate of GDP is:


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Growth of National Income

Growth of GDP in India

The economy of India is the ninth-largest in the world by nominal GDP and the third-largest by

purchasing power parity (PPP). The country is one of the G-20 major economies and a member of BRICS.

On a per-capita-income basis, India ranked 141st by nominal GDP and 130th by GDP (PPP) in 2012,

according to the IMF.

India is the 19th-largest exporter and the 10th-largest importer in the world. Economic growth rate

slowed to around 5.0% for the 201213 fiscal year compared with 6.2% in the previous fiscal. It is to be

noted that India's GDP grew by an astounding 9.3% in 201011.

Thus, the growth rate has nearly halved in just three years. GDP growth went up marginally to 4.8%

during the quarter through March 2013, from about 4.7% in the previous quarter. The government has

forecasted a growth of 6.1%-6.7% for the year 2013-14, whilst the RBI expects the same to be at 5.7%.

The independence-era Indian economy (from 1947 to 1991) was based on a mixed economy combining

features of capitalism and socialism, resulting in an inward-looking, interventionist policies and import-

substituting economy that failed to take advantage of the post-war expansion of trade. This model

contributed to widespread inefficiencies and corruption, and the failings of this system were due largely

to its poor implementation.

In 1991, India adopted liberal and free-market principles and liberalized its economy to international

trade under the guidance of Former Finance minister Manmohan Singh under the Prime Ministry of P.V.

Narasimha Rao, prime minister from 1991 to 1996, who had eliminated License Raj, a pre- and post-

British era mechanism of strict government controls on setting up new industry

Growth of Primary, Secondary and Tertiary Sectors

Generally, an economy is divided into three major sectors viz primary, secondary and tertiary. With the

development of an economy, the significance of primary sector declines while that of secondary and

tertiary sectors increases.

After independence India has also experienced such changes. The share of primary sector in GDP has

declined from 59% in 1950-51 around 17 per cent in 2009-10.

Within the primary sector, the share of agriculture and allied activities in GDP has gone down from 57

per cent to around 15 per cent over these years. One thing is to be noted that it is a decline only inpercentage share of agriculture in national income, the total volume of agriculture production is actually

rising.

The growth has fallen in percentage terms because industrial output and value of products in the service

sector has grown faster than the pace of growth of agricultural production. The share of the secondary

sector has almost doubled from 13 per cent in 1950-51 to 24.5 per cent in 1990-91.


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However, its share in GDP has not shown much change in the later years. It has varied around 24 to 26

per cent since 2000-01. The share of the registered manufacturing units has gone up from about 4 per

cent in 1950-51 to over 12 per cent in 2009-10.

Within the secondary sector, the percentage share of manufacturing especially registered

manufacturing and construction has been rising and that of gas, electricity and water supply hasremained almost constant.

The service sector (tertiary sector) has grown substantially since 1950-51, with its share in GDP going up

from 28 per cent in 1950-51 to over 57 per cent in 2009-10.

Within the tertiary sector, all sectors have been growing rapidly. Trade, hotels, transport and

communication is the largest sector which contributes about 22.5% share to GDP. Financial sector has

been the fastest growing sector after independence and especially after nationalization of banks in 1969

and 1980.

Since the 1980s growth process in India has been marked by a robust performance of services sector.Growth rate of this sector improved from 6.6 per cent during the decade 1981-90 to 7.6 per cent during

1991-2000. During 2001-02 and 2009-10, services sector grew by nearly 10 per cent.

Though both secondary and tertiary sectors have grown faster than the primary sector but increase in

the share of tertiary sector has been higher than that in secondary sector. The average growth rate of

primary sector has been 2.5% per annum while that of secondary sector and tertiary sector has

remained around 5% during the planning period.

Earlier the primary sector was dominant but now tertiary sector is dominant in the economy. The

secondary sector never remained dominant in the economy. This pattern of structural changes has

deviated from the development pattern of the western countries.

Those countries experienced first a shift from primary to secondary sector and only in their advanced

stage they experienced a significant shift in favour of tertiary sector.

Growth of Per Capita Income

India's per capita income (nominal) is $ 1219, ranked 142nd in the world, while its per capita purchasing

power parity (PPP) of US $3,608 is ranked 129th. It is estimated that India's Per Capita Income will

register an average growth rate of 13% during 2011-20 so as to reach $ 4,200 by 2020. In the year 2020

India's real GDP is projected to be at $5 trillion, and per capita Nominal GDP at $ 3,650.

India's per capita purchasing power parity (PPP) will be at $ 12,800 in the year 2020. States of India have

large disparities. One of the critical problems facing India's economy is the sharp and growing regional

variations among India's different states and territories in terms of per capita income, poverty,

availability of infrastructure and socio-economic development.


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In India, urban areas have seen a much higher growth rate as compared to rural areas. Despite up to

three-fourths of the population living in rural areas, rural areas contribute to only one-third of the

national income.

The main reason for rural India's poor performance in terms of income is the fact that rural India is

mostly dependent on agriculture. The agriculture sector in India grew at a rate of only 1.6% in 2008-09,while the Indian Economy grew at a rate of 6.7%, despite the 2008 Financial Crisis. An extremely slow

rate of growth in the agriculture sector of the Indian economy has serious implications for the rural-

urban divide, both in terms of income and GDP.

Some estimates say that that the average income of a person living in an urban area may be up to 4

times higher than that of a person living in a rural area. The rising level of urbanization in India is a major

reason for the rising levels of income disparity in the country. Despite the fact that up to four-fifths of

Indian households save money, almost a quarter of them spend more than they earn.

Introduction to Economic Reforms

National Economic Reforms since July 1991

In 1991, after India faced a balance of payments crisis, it had to pledge 20 tonnes of gold to Union Bank

of Switzerland and 47 tonnes to Bank of England as part of a bailout deal with the International

Monetary Fund (IMF). In addition, the IMF required India to undertake a series of structural economic

reforms.

As a result of this requirement, the government of P. V. Narasimha Rao and his finance minister

Manmohan Singh (currently the Prime Minister of India) started breakthrough reforms, although they

did not implement many of the reforms the IMF wanted.

The new neo-liberal policies included opening for international trade and investment, deregulation,

initiation of privatisation, tax reforms, and inflation-controlling measures. The overall direction of

liberalisation has since remained the same, irrespective of the ruling party, although no party has yet

tried to take on powerful lobbies such as the trade unions and farmers, or contentious issues such as

reforming labour laws and reducing agricultural subsidies.

Thus, unlike the reforms of 1966 and 1985 those were carried out by the majority Congress

governments, the reforms of 1991 carried out by a minority government proved sustainable. There

exists a lively debate in India as to what made the economic reforms sustainable.

The fruits of liberalisation reached their peak in 2007, when India recorded its highest GDP growth rate

of 9%. With this, India became the second fastest growing major economy in the world, next only to

China. The growth rate has slowed significantly in he first half of 2012.


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Stabilization and Structural Adjustment Programmes (SAP)

Stabilization and SAP were two integral parts of the new economic policy of 1991. Macro economic

stabilization involves returning to low and stable inflation and a sustainable fiscal and balance of

payments position.

Structural adjustment is in relation to industrial licensing and regulation, foreign trade and investment

and the financial sector. SAP included industrial deregulation, disinvestment and pubic enterprise

reforms, trade and capital flow reforms and financial sector reforms.

Main Sectors of Reforms

1. Fiscal Reforms: This includes correcting existing problems in the tax system, resourcemobilization, public expenditure policy and reducing fiscal deficit which had gone up to 8.4% of

GDP.

a) Exemption limit on income tax was raised to Rs. 40,000/- in 1995, Rs. 50,000 in 1998 andcurrently stands at Rs. 200,000.

b) Maximum marginal rate of income tax was reduced from 40% to 30%.c) Corporate tax was reduced to a uniform 10% with a surcharge of 10% in 2005 d) Presumptive tax was introduced for small traders, retailers and road transport

operators.

e) Five year tax holiday for infrastructural investment projectsf) Incentive structure for savings and tax rebates have been strengthened and modified.g) Reforms in indirect taxes by reducing number of rates and removing exemptions.h) Custom duties have been reduced to make importing of goods cheaper.i) Service tax net was widened

j) Downsizing of some government departments was introduced.2. Industrial Policy Reforms: A new industrial policy for India was decided on July 24 1991. This

was done to ensure Indian industries are more efficient, have better production models and

lower costs.

a) Abolition of license raj system except for list of 6 industries related to security,strategic or environment concerns.

b) Reduction of number of industries reserved for PSUs from 17 to 8 and to 3 industries toopen investment for private sectors.

c) Elimination of system for pre-entry scrutiny of investment decisions under MRTP.d) Encouraging private participation in development of infrastructure like power, telecom

and roadways.

e) Allowing disinvestment of PSUs to the tune of 49%.f) Liberalization of FDI.g) De-licensing of coal, lignite, sugar, bulk drugs and petroleum.h) Allowing companies to buy back of shares to the extent of 25% of the paid-up capital.


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i) De-reserving some of the products reserved for extensive manufacture by SSI.3. Financial sector reforms: Reforms of monetary mechanisms is an essential element for financial

sector reforms.

a) Discontinuing ad-hoc treasury bills with effect from 1997-98b) Deregulation of lending rates for banks for credit limits of over Rs. 2 lakhs and freedom

for banks to determine their own prime lending rate.

c) Reduction of reserve ratios for banksd) Banks selectively allowed to access capital markets.e) New banks allowed functioning parallel with public sector banks.f) Granting complete autonomy to public sector banks.g) Guidelines to improve quality of customer care in banks/h) Bill for independent IRA and opening up of insurance and pension funds sector.i) Establishment of SEBI in 1992

j) Allowing Indian companies to have access to international capital markets.4. Public Sector reforms: The Govt. was of the view that the public sector had not generated

enough internal surpluses. Most of the units ran in losses due to inefficiency and inadequate

exposure to competition.

a) Industries reserved for public sector reduced from 17 to 8 and to finally 3.b) Public sector companies that were chronically sick were referred to BIFR for

rehabilitation and reconstruction.

c) Existing system of monitoring PSUs through MoU was strengthened with emphasis onprofitability and rate of return.

d) Enterprises earning higher profits were given a higher degree of managementautonomy.

e) Budgetary support to public enterprises was progressively reduced.f) Private sector participation in select public sector enterprises is allowed by way of

divestment.

g) National Renewal Fund was established to provide, training and redeployment ofworkers besides providing voluntary retirement compensation.

5. External Sector Reforms: As part of globalization, steps were taken to make changes in foreignexchange, trade and foreign investment.

a) Tariffs progressively brought down since 1991-92b) All quantitative restrictions on imports have been removed.c) Liberalized Exchange Rate Management System was introduced to remove import

licensing in most capital goods, intermediaries and components.

d) Scope of items that can be imported under Special Import Licenses increased.e) Export restrictions liberalized to a great extent.f) Exchange rate of rupee is allowed to be determined by market forces in foreign

exchange market.


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g) Full convertibility of rupee in current account and partial convertibility in capitalaccount.

h) Export Oriented Units established and are engaged in export of agriculture and alliedproducts.

i) FDI up to 74% permitted in private banking sector.j) FDI up to 100% with prior approval of government for development of integrated

townships.

k) Foreign equity up to 26% in insurance sector allowed.


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Question Year Part Mks.

Ch 1: Introduction = 15 Marks

Give the meaning of sustainable development. 2010 A 1

Give the meaning of the terms sustainable development. 2008 A 1Mention four characteristics of developed countries. 2012 B 2

State any four differences between economic growth and economic development 2011 B 2

State any two differences between primary and secondary data. 2010 B 2

Mention any four features of developed economy. 2010 B 2

Define Physical Quality of Life Index. 2009 B 2

What is secondary data? Name its two sources. 2008 B 2

Write a note on the classification of countries as per the World Development Report. 2012 C 5

Write a note on economic data. 2011 C 5

What is a table? Mention its components. 2010 C 5

How are countries classified by the World Development Report? Explain 2010 C 5

Difference between Economic Growth and Economic Development. 2008 C 5

Calculate PQLI by using the given actual values: 2008 E 5

Draw a pie-diagram by using the following data of Central Govt. Expenditure: 2008 E 5

Explain the features of developing countries including India. 2012 D 10

Discuss the characteristics of Indian economics as a developing country. 2011 D 10

Explain the features of developing countries with special reference of India. 2009 D 10

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Economics for 2nd PUC - ToPIC 1