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Economics Ch1 Concept Final
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Transcript of 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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National Income Accounting
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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A
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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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National Income Accounting
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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B
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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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C
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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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