Indicators And Approaches

Question 1

Define economic growth

Answer 1

Economic Growth has been defined as a sustained increase in real per capita income over a long period of time.

Question 2

List three features of economic growth

Answer 2

⦁ Growth is a continuing and sustained process.
⦁ Growth results in increase in per capita real income.
⦁ Growth is a long term process.

Question 3

Explain any one difference between money national income and real national income.

Answer 3

⦁ When both changes in physical production and price are accounted for, we say that the variable is measured at current prices, also known as Money National Income or Money Per Capita Income.
⦁ When changes only in the physical production and not in the prices are considered, we say that the variable is measured at constant prices, also known as Real National Income or Real Per Capita Income.

Question 4

Explain circular flow of income with the help of a diagram

Answer 4

National Income is based on three approaches: 1. Production 2. Income. 3.
Expenditure. In simple words, whatever is produced in the economy gets
distributed among the various factors of production which in turn spend the
same income. The spending lead to creation of more demand and thus further
production. National Income can be calculated to get the same result, using any of the three methods mentioned above.

Question 5

List any 4 factors of production in an economy.

Answer 5

Land: The natural resource used to produce things.
Labor: The people who work to produce goods and services.
Capital: The tools and machinery used to produce goods.
Entrepreneurship: The person or people who take risks, plan, and take decisions needed to produce goods.

Question 6

Distinguish between intermediate and final goods with examples.

Answer 6

Goods that are used in producing final goods and services are Intermediate
Goods. They are used as inputs/ raw materials.
Goods that are sold and not used for further production or resale in the same
year are classified as Final Goods.
Vegetables purchased by a restaurant (intermediate)
Paper purchased by a publisher (intermediate)
Books purchased by a student (final)

Question 7

Explain economic development

Answer 7

Economic Development is Economic growth plus changes in the standard of living. It is a sustained increase in the real per capita income (at rates varying from 5 per cent to 7 per cent or more) along with qualitative changes in life measured
over a long period of time. Economic Growth + Qualitative changes in life = Economic Development

Question 8

Explain how economic growth and development bring about structural changes in an economy

Answer 8

Economic growth and development bring about structural changes in the economy. By structural changes, we mean a shift in the relative significance of
different sectors in the economic set up of the country. For example, in an economy
which is primitive, agriculture is the only source of livelihood. As an economy
develops, there is a change in the relative significance of the three main sectors
(primary, secondary and tertiary). Relative importance of agriculture declines;
industrial and tertiary sectors offer more job opportunities and thus become
comparatively more significant.

Question 9

Distinguish between primary, secondary and tertiary sectors.

Answer 9

Primary sector includes agriculture, forestry and logging, fishing, mining and
quarrying.
Secondary sector consists of manufacturing, construction, electricity, gas and
water supply.
Tertiary sector comprises transport, communication and trade, banking and
insurance, real estate, public administration, defense and other services.

Question 10

Write a note on per capita income and national income.

Answer 10

Per Capita Income is the average income or the income per person. Real Per Capita Income is obtained when Per Capita Income is measured at constant prices. In economic terms, Per Capita Income is calculated as National Income divided by midyear population.
National Income is the sum total of the income of all the individuals in a country during a year. It may also be called the sum total of the monetary value of final goods and services produced during a year in an economy (Gross Domestic Product). Another way to calculate National Income would be to
add the expenses incurred during a year in an economy by all individuals plus
savings.

Question 11

Explain the 3 objectives of development which an economy has

Answer 11

The three objectives of development of all economies should be:
⦁ To increase the availability and to widen the distribution of basic life sustaining goods such as food, shelter, health and safety.
⦁ To raise the level of living, including, in addition to higher incomes, the provision for more jobs, better education and greater attention to cultural and human values, all of which will serve not only to enhance material well-being but also to generate greater individual and national self-esteem.
⦁ To expand the range of economic and social choices available to individuals and nations.

Question 12

Developmental goals differ for different groups of people. Explain.

Answer 12

Developmental goals differ for different groups of people. When they are different and more so conflicting, they may lead to distress. Industrialists may
want better infrastructure in a country to facilitate commerce but it may be developed by clearing forests or by reallocating funds earlier earmarked for
poverty alleviation programmes. Developmental goals may also get modified or replaced with other goals once one level of goals is achieved. Earning higher
income may be the goal of a young management graduate who may become a philanthropist as he becomes middle aged.

Question 13

What are Millennium Development Goals?

Answer 13

1. Eradicate extreme hunger and poverty
2. Achieve universal primary education
3. Promote gender equality and empower women
4. Reduce child mortality
5. Improve maternal health
6. Combat HIV/AIDS, malaria and other diseases
7. Ensure environmental sustainability
8. Develop a global partnership for development

Question 14

Explain the factors affecting economic development of an economy.

Answer 14

a. Economic Factors:
Among the various Economic Factors, a few are mentioned:
⦁ Natural Resources. Other things being equal, the existence of natural resources in abundance is essential for economic development. In developing and underdeveloped economies, natural resources are unutilized, underutilized or misutilised.
⦁ Capital Accumulation. Capital means the stock of physical reproducible factors of production – when the capital stock increases with the passage of time, it is known as capital formation. Capital formation leads to increased national output, increased employment opportunities, improvement in technology and hence larger production and economies of large scale production.
b. Non-Economic Factors:
⦁ Among the many non-economic factors, a few are social, cultural, psychological, human political and administrative factors.
⦁ Development is defined not just as an only economic phenomenon. It embraces all aspects of social behaviors, the establishment of law and order, scrupulousness in business dealings including dealings with the revenue authorities, relationships between the family, literacy, familiarity with mechanical gadgets etc.

Question 15

Explain the factors that hinder the development of an economy.

Answer 15

Poverty: Poverty and underdevelopment are synonymous. A country is poor
because it is underdeveloped and vice versa. Poverty perpetuates itself.
Low rate of capital formation: This stems from Poverty. Poverty is both a cause
and a consequence of a country’s low rate of capital formation. Since people are
poor, illiterate and unskilled and use outmoded capital equipment and methods
of production, their productivity is extremely low.
Low productivity leads to low real income, low savings, low investments and
thus a low rate of capital formation (the component of income that is not
consumed is saved). The high income group does most of the savings in
developing countries, but these savings too do not flow into productive channels.
Hence, investments required for economic development do not take place.
Socio-cultural constraints: Social attitude towards education, lack of critical
skills and knowledge, large population and agricultural constraints are some of
the other impediments to development.

Question 16

Explain in detail the adverse effects of economic development.

Answer 16

All over the world, and particularly in the developed countries, high rate of
economic development has caused some adverse effects in terms of ecological
degradation and environmental pollution. When human exploitation of nature
surpasses the bearable limit, nature gives way and begins to adversely affect
development itself. If too much of logging is done, forests for logging in the
future would not be there. Besides, deforestation will cause soil erosion,
flooding and fall in the intensity of rainfall, thereby adversely affecting
agricultural production adversely. Similarly, if all the oil reserves are exhausted,
nothing will be left for supporting development in future. It is this sort of
phenomena which lies behind the idea of sustainable development.

Question 17

Write a short note on economic indicators.

Answer 17

Economic Development comprises of both economic growth and economic
welfare. Economists have designed many ways of measuring economic
development.
Some of the important ones are:
National Income as a Measure of Economic Development
⦁ Money National Income is calculated on the basis of current prices. National Income may rise even in the absence of increase in the production of goods and services. The increase may be due to increase in prices of the commodities.
⦁ Thus, Real National Income serves as a better index to measure the level of economic development. It will increase only when there is an increase in production of goods and services. Increased production would make more goods and services available to the people. It will satisfy more wants of the people and can be taken as a better measure of economic development or welfare.
⦁ For comparing development of countries, income has been considered the main factor. Higher income is expected to mean more of all things that human beings need.
⦁ There has been a discussion among economists as to the utility of national income as an index of economic development. Factors crucial to human wellbeing such as freedom, pollution–free environment, brotherhood among people, equality of opportunity, etc., are ignored.

Per Capita Income as an Indicator of Economic Development
⦁ Real per capita income is taken as an indicator of welfare. It shows the per head income and hence is better than using National Income as an index.
⦁ Generally speaking, a developed country is a country that has a high level of development and has a high real per capita income. Countries not fitting into this definition are classified as developing countries.
⦁ They are the countries with low, lower-middle or upper-middle income.
⦁ Examples of developed countries include Australia, Japan, and United Kingdom (U.K), USA while those of developing countries could be China, India, etc.

Question 18

Per Capita Income is not an adequate indicator. Explain.

Answer 18

By itself, Per Capita Income is not an adequate indicator.
⦁ Per Capita Income is an average; it still does not say anything about the distribution of income in the economy. Level of Per Capita Income may increase but the distribution of income may get more unequal as mentioned earlier, the gulf between haves and have-nots may increase. In this situation, most of the population may have even lesser goods than before (even when Per Capita Income has risen).
⦁ Per Capita Income may raise but the composition of production may not be welfare oriented. Production of defense goods or goods that are harmful to the society may go up but may also lead to reduced development.
⦁ Impact of externalities is not accounted for, resulting in overestimating or underestimating of the level of development.
⦁ Per Capita Income does not place any value on leisure either. The income earned by two persons may be the same but one may be working for longer hours or in unhygienic working conditions which reduces welfare.

Question 19

How are economies classified on World Bank classification system

Answer 19

In the World Bank’s classification system, economies are ranked by their
levels of Gross National Income (GNI) Per Capita. The World Development
Report, published by the World Bank classifies countries according to 2010
GNI per capita.

Countries GNI Per capita
Low income = $1,005 or less
Lower middle income = $1,006 - $3,975
Upper middle income = $3,976 - $12,275
High income = $12,276 or more

Question 20

Explain PQLI and HDI by UNDP.

Answer 20

Physical Quality of Life Index (PQLI)
Quality of life of the people is the status of the standard of living of the
people. Morris D. Morris constructed a composite PQLI in 1979 relating to
23 developing countries for a comparative study. He combined three
component indicators:
⦁ Infant Mortality
⦁ Life Expectancy at age one
⦁ Basic Literacy at age 15
This index represents a wide range of indicators such as health, education,
drinking water, nutrition and sanitation. Each indicator of the three
components is placed on a scale of 0-100 where zero represents an
absolutely defined worst performance and 100 represents an absolutely
defined best performance. The PQLI index is calculated by averaging the
three indicators giving equal weightage to each. Morris’s PQLI is
considered to be a limited measure of basic needs. It does not measure
economic development.
Human Development Index (HDI)By UNDP
Human Development is the process of both quantitative change and
qualitative growth. The concept of human development embraces all
aspects of human life—not just the economic aspect. The utilization effect
of income is important and not the income itself. It is about enlarging or
widening human choices, opportunities and capabilities as the general
objective of development.
The breakthrough for the HDI was the creation of a single statistic which was to serve
as a frame of reference for both social and economic development. The HDI sets
a minimum and a maximum for each dimension, called goalposts, and then
shows where each country stands in relation to these goalposts, expressed as a
value between 0 and 1.

Question 21

Explain Social Indicators

Answer 21

Economists have tried to measure social indicators of basic needs by taking one,
two or more indicators for constructing composite indices of human
development. Two of them are discussed below:
⦁ Physical Quality Of Life Index(PQLI)
⦁ Human Development Index(HDI)

Question 22

National Income is not a satisfactory index. Analyze.

Answer 22

⦁ National Income if distributed among a larger population would not lead to higher income per person. If a rise in real national income is accompanied by a faster growth of population, there will be no economic growth but retardation.
⦁ National Income does not reveal the costs to society of environmental pollution, urbanization and industrialization. Higher National Income may be earned due to increased production in the economy which may be at the cost of rise in environment-pollution destruction of forests and other negatives as a consequence.
⦁ National Income does not say anything about the distribution of income in the economy. If with every increase in the level of National Income, the distribution of income gets more unequal, welfare of the society may not rise. The rich may get richer, while the poor may get poorer, the gulf between the haves and the have-nots may increase. In this situation, most of the population may have even lesser goods than before (even when National Income has risen).
⦁ National Income may rise but the composition of production may not be welfare oriented. A large production of defense goods will lead to higher production and hence higher income but may not make the position of the underprivileged any better. Production of harmful goods such as cigarettes may go up but this may lead to reduction in development.
⦁ National Income does not account for the impact of externalities. Externalities refer to good and bad impact of an activity without paying the price or penalty for that. A beautiful garden maintained by a corporate house provides benefits to all residents of the area (without paying any price for the same). This is a positive externality. When there are huge traffic jams in the same area due to the same corporate house, the residents suffer (nobody is penalized for it). This is a negative externality. Thus the index may overestimate or underestimate the level of development.
⦁ National Income does not place any value on leisure. The income earned by two persons may be the same but one may be working for longer hours or in unhygienic working conditions which affect welfare.