Chapter 1 - INTRODUCTION to Indian Economy Flashcards
What is the Primary sector?
The economic activities which take place while exploiting the natural resources fall under it, such as mining, agricultural activities, oil exploration, etc.
When the agriculture sector contributes more than 50% of the GDP it’s known as an agrarian economy.
What is the Secondary sector?
It contains all of the economic activities under which the raw materials extracted out of the primary sector are processed (also called the industrial sector).
When the industry sector contributes more than 50% of the GDP it’s known as an industrial economy.
What is the Tertiary sector?
All of the economic activities where services are produced falls in this sector, such as education, healthcare, banking, communication, etc.
When this sector contributes a minimum of half of the national income and livelihood in a country it is called a service economy
What is the Quaternary sector?
Known also as the ‘knowledge’ sector, the activities related to education, research and development, etc. come under it.
The sector plays the most important role in defining the quality of the human resources an economy has.
What is the Quinary sector?
All activities where top decisions are made fall under it. The highest level of decision-makers in governments (inclusive of their bureaucracy) and the private corporate sector fall under it. The number of people involved in this sector is very low rather they are considered the ‘brain’ behind socio-economic
performance of an economy.
What are the 3 types of economies?
- Market economy
- State economy
- Mixed economy
Summarize Adam Smith’s Wealth of Nations.
■ It is the self-interest that motivates individuals/firms to do economic activities out of which society gets goods and services supplied with. It means the products society gets is unintended social benefits of someone’s self-interested actions. Adam Smith called this motivating factor the invisible hand (often called as the ‘animal spirit’). This way the questions like ‘who’ will invest in productive assets and ‘why’ seem to get answered.
■ To attain higher prosperity there should be increasing division of labour (specialisation of the labour force by breaking down large jobs into small components). Specialisation brings in speed, precision and quality in the labour force.
■ For the invisible hand to operate properly a suitable environment (i.e., market) determined by the forces of demand and supply (called the market forces) is required. What to produce, how much to produce and at what price to sell (i.e., supply) all such decisions depend on these forces.
■ Such an economic system needs to be regulated by competition prevailing in the market.
■ For efficient operation of the economic activities, the government should follow a policy of laissez-faire (French word which means ‘leave it alone which is generally translated by economists as ‘non-interference). Lesser the government, the better the economic performance.
Here, non-interference by government means a great many different things such as—government playing no or least economic role (producing none of the goods and services), no economic regulation, no taxes imposed, etc.
What is the difference between capitalism and a free-market economy?
■ While capitalism is focused on the creation of ‘wealth’ and ownership of productive assets,
a free-market economy is focused on the ‘exchange’ of wealth (through production and supply
of goods and services).
■ In a capitalist system, there might be some government regulation but the private owner can
have a monopoly on the market and thus prevents competition.
However, a free-market economy is solely based on market forces (demand and supply), and there is little or no government regulation. That is why in a free-market economy free competition is possible
without any intervention from outside forces.
What are the drawbacks of a market economy?
■ There was almost no tool to look after those who have lower purchasing power (i.e., the poor).
■ Negligible to a total absence of welfare actions from the state.
■ Widening economic inequality even after launching distributive measures such as progressive taxation (in which richer are taxed with higher rates).
What is the state economy?
■ Resources of a country should be used for the well-being of all.
■ Resources are best used once they are under the ownership of society/community (Socialism/Communism). Thus, all economic roles will be played by the state only.
■ No property rights are given to individuals guided by the belief that it promotes the exploitation of the labourers (i.e., proletariat) and helps a small minority (i.e., bourgeoisie) to get richer over time—resulting in increasing economic inequality.
■ Absence of market (i.e., inter-play of demand and supply was totally absent).
■ No idea of competition (i.e., total state monopoly is an economic sphere).
■ People to play economic role (employed in the state-owned enterprises) according to their ability and in return to get all facilities from the state as per their needs.
■ The decisions such as what to produce, how much to produce and how to supply them to
people were taken by the state itself.
What are the drawbacks of the state economy?
■ to serve all there was no idea of creating capital or wealth—which created a scarcity of investible capital in the coming times.
■ The state used to prioritise the uses of resources—thus the best or optimum uses of resources (driven by market forces) were denied leading to their misallocation and wastage.
■ In the absence of property rights, there was no motivation to work hard and tap the animal spirit of the people (as no money was paid to them)—leading to the virtual absence of innovation (i.e., research and development)—a process of internal decay.
■ Being non-democratic political systems the things like liberty and freedom were totally absent. Aimed at avoiding exploitation of the labourers at the hand of the capitalist state itself emerged as the sole agent of exploitation—critics called this ‘State Capitalism’.
What is a mixed economy?
■ The state and private sectors both have economic roles.
■ The private sector plays those roles where the invisible hand (the motive of profit) can work properly. Production and supply of the ‘private goods’ (which people use by purchasing them from their own income) is the best example in this case. But the state is not prohibited from playing this role.
■ Those roles which private sector will not be motivated to play (due to the absence of any profit element) should be better taken care of by the state. Supply of the ‘public goods’ is the best example in this case. But the private sector is free to play this role also.
■ The economic roles played by either state or private sector may not remain fixed for all times to come and may get modified as per the needs of the time.
■ Regulation (things like rules, competition, taxation, etc.) of the economic system to be taken care of by the state.
What are the 10-point reform policy prescriptions by the Washington consensus?
(i) Fiscal discipline
(ii) A redirection of public expenditure priorities toward fields offering both high economic returns and the potential to improve income distribution, such as primary health care, primary education, and infrastructure.
(iii) Tax reform (to lower marginal rates and broaden the tax base)
(iv) Interest rate liberalisation
(v) A competitive exchange rate
(vi) Trade liberalisation
(vii) Liberalisation of FDI inflows
(viii) Privatisation
(ix) Deregulation (in the sense of abolishing barriers to entry and exit)
(x) Secure property rights
What are the 3 main pillars of the Beijing consensus?
- Constant experimentation and innovation;
- Peaceful distributive growth with gradual reforms;
- Self-determination and inclusion of selective foreign ideas.
What is GNP?
All that is produced by the citizens of a country-whether it is within the geography of the country or aboard,
