1 Basics of Economics

DIFFERENCE BETWEEN ECONOMY of production, namely land, labour, capital and

organization. It also deals with the relationship
AND ECONOMICS between inputs and outputs.
When people come together to stock, produce, trade, ‰ Exchange: It deals with determination of price in
distribute and facilitate the consumption of goods and different market forms. It covers trade and commerce.
services in an economy as a social activity; it is known Consumption depends on the product ending up with
the consumer.
as an economy. The whole activity is meant for buying
‰ Distribution: Any kind of production is result of land,
and selling or barter (exchanging one good or service for
labour, capital and organization. These four factors of
other). production deserve a share in the wealth. The reward
On the other hand, Economics is an academic discipline for factors of production (rent, wages, interests and
that studies economic activity in general and strives to profits) and their prices is studied in this sub-division.
make it achievable even when there are scarcities. The word
comes from two Greek words Oikos (family, household, CONCEPT OF POSITIVE ECONOMICS
estate) and Nomos (law or norms). According to British
economist Lionel Robbins; economics is a “science of
AND NORMATIVE ECONOMICS
scarcity”. ‰ Economics is considered as both- arts and science.
‰ Positive economics analyses the facts as they are and
examines causes of a situation. E.g. why have prices of
WHY TO STUDY ECONOMICS? goods and services increased?
‰ Economy is a discipline based on scarcity. There
exists most of the time, a scarcity of resources (food, ‰ Whereas, normative economics is prescriptive in
land, fuel, money etc) while the needs seems to be nature. It asks “what should be the prices of articles?”
endless. Hence it is subjective and depends on social, cultural
‰ Thus, it is important to balance the needs with the and political realms.
available resources. Economy enables us to rationally ‰ Thus, positive economics is concerned with “how” and
manage the scarce resources and make priorities. “why”. While normative is concerned with “what ought
‰ Economic rationality now also includes equity and to be”.
sustainability along with the traditional studies of
production, distribution and consumption. Examples of positive Examples of normative
‰ Initial focus of economics was only on the creation economics economics
of wealth by any means. The human dimension was
‰ Injection of money in ‰ Inflation in an economy
missing.
‰ This created misery and inequality. There was -a hue
an economy will lead to is preferable over
and cry about overworked and underpaid population, prices rising. deflation.
the inhuman conditions of work and so on. ‰ Better irrigation and ‰ Government should
‰ After some time, when the society was prosperous fertilizer access will target reducing
enough and democracy strengthened; the focus of lead to increased food inequalities in an
economics shifted to welfare.
grain production. economy.

ECONOMICS AND ITS SUB DIVISION

‰ Increasing birth rate ‰ If a less developed
‰ Consumption: This is the starting point of economic
activity as it dictates demand. The demand is dealt with and decreasing death economy is witnessing
based on consumer behaviour along with surplus and rate implies that the large production of
diminishing marginal utility. population growth rate luxury and sin goods; it
‰ Production: It is the process in which input is is increasing. is not desirable.
transformed into output. It covers the factors
 MACRO, MICRO AND
MESOECONOMICS

‰ The great depression (1930s) divided the domain into two- Macroeconomics and Microeconomics.
‰ The former which dealt with issues at a much greater scale came into prominence.
‰ John Maynard Keynes is considered the father of macroeconomics.
‰ For better understanding, if microeconomics is a tree in a forest, then macroeconomics is the entire forest.

Importance of studying micro and macroeconomics:

‰ Microeconomics helps us understand the operations of an economy.

‰ It provides tools for policy and decision making. E.g. price determination.
Microeconomics ‰ It helps us understand the level of economic welfare in an economy.
‰ It helps in efficient use and allocation of resources.
‰ We can make predictions based on microeconomic studies.
‰ Macroeconomics helps us understand functioning of an economy at a larger level.
‰ It helps us develop suitable strategies to solve basic problems in an economy.
‰ We can understand future problems and needs that may arise and develop strategies
Macroeconomics accordingly.
‰ We can make comparisons and do analysis of various economic indicators.
‰ Studying macroeconomics can help us avoid and predict future crises.

Difference between Micro and Macro-economics:

Microeconomics Macroeconomics
‰ Microeconomics takes into account small ‰ Macroeconomics is the study of the economy as a whole.
components of the whole economy. ‰ Top-down approach to analyze the economy.
‰ It deals with matters of individual agents. Like why ‰ Macro Economics is also known as ‘Income Theory’.
a consumer or producer makes a certain decision. ‰ E.g. It will try to understand the dynamics of national income,
‰ Bottoms-up approach to analyze the economy. employment, inflation, poverty, inequality, investment and
‰ Micro Economics is also known as ‘Price Theory’. saving, capital formation, infrastructure development,
‰ E.g. It will try to understand consumer choices and international trade, the balance of trade and balance of
their decisions. payments, exchange rate and economic growth.
‰ Evolved from the theories of how prices are ‰ Macro is based on empirical observations that theories
determined. alone cannot explain.
‰ There are no competing schools of thought here ‰ It has a competing school of thought like- New Keynesian
or classical.

Both micro and macro are interdependent and of theories.

complementary since there are many overlapping
issues. For example, a rise in inflation will cause a rise in Economic Agents or Units
raw materials leading to price rises which consumers will ‰ These are individuals or institutions that take economic
pay. Similarly, taxes, cesses and inflation targeting policy decisions.
etc. ‰ Consumers decide what goods and services and in
Meso-economics study the intermediate level of what quantity they consume.
economics between the macro and the micro. Eg auto ‰ While, producers decide what and how much of a good
sector, infrastructure etc. or service they produce. Both are economic agents or
There are many schools of thought and approaches in units.
this discipline. Lately, behavioural economics, welfare
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‰ They can also be governments, corporations, banks etc ‰ In China, the political system decides the priorities
which can decide interest rates, taxation, investment in and policies of the economy. Politics sets the values but
a sector etc. economists set the prices.

2. LIBERAL AND NEO-LIBERAL ECONOMICS:

DIFFERENT APPROACHES TO STUDY
‰ Adam Smith proposed the idea of an “invisible hand”
ECONOMICS in the economy; meaning people working for their own
self-interest produce unintended social benefits and
the public good.
‰ Economic rationality: This philosophy is based on the
belief that individuals take rational decisions within
an economic system. Each individual’s self-interest
becomes a common interest for all.
1. POLITICAL ECONOMICS: ‰ Role of the State: Based on the above principles, Adam
‰ According to this approach, politics and economics Smith said that the state should limit itself to providing
are studied together to understand why a particular support services like infrastructure, defence, judiciary
public policy takes a certain direction. etc.
‰ For example, land reforms may be a political ‰ Laissez-faire approach: The economy should be left
decision; but the impact it has is also on the to the market forces. (French meaning- let people do
economic situation of the country, on agriculture, as they wish).
investment, livelihood etc. ‰ Early 20th century USA is a good example of a
‰ This approach helps us understand why a certain liberal economy. Whereas, UK post Margaret Thatcher
decision was taken and the context behind it. and India post LPG reforms are examples of neo-liberal
E.g. Liberalization, privatization and globalization economies
happened close to the demise of the USSR and
communism as an economic system.

‰ Private ownership of property and law of inheritance: All resources like land, capital,
machines, mines etc. are owned by private individuals and they can use, keep, sell these
as per their wish. This property can be transferred to their heirs.
‰ Freedom of choice and enterprise: Individuals can carry out any trade or occupation
at the place of their choosing. Similarly, consumers are free to buy products and services
as per their wishes.
‰ Profit as the main motive: The aim of every producer is to maximize profits. It is the
Features of force behind all economic activity.
Capitalistic Economy:
‰ Free competition: Government has no control over buyers and sellers’ choices. It can’t
prevent them from buying and selling in the market. There is competition between them.
‰ Price mechanism: The market forces i.e. demand and supply determine the prices.
‰ Role of government: It only provides basic services like defence, public health, education
etc. and has a very limited role.
‰ Inequalities of income: It is observed that the rich get richer and the poor get poorer
thus increasing economic inequalities.
‰ Less government interference: Market forces dominate and individuals are in control.
‰ Efficient use of resources for production: As profit is the motive, resources are best
utilized to avoid loss.
‰ Incentivizes hard work: To make best use of opportunities and maximize profits.
‰ Economic progress: Production and productivity are very high and thus capitalist
Merits of the
Basics of Economics

countries have high living standards.

principle:
‰ Consumer is valued: consumer satisfaction is the ultimate goal of every producer.
‰ Higher rates of capital formation: Savings ultimately lead to investments for production
of resources. Thus, capital production happens rapidly.
‰ Development of new technology: To maintain market dominance and improve
production; new technology is developed regularly.

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 ‰ After the economic crisis post Covid pandemic; the neo- 4. SOCIALISTS AND COMMUNISTS ECONOMICS:
liberal policies of privatisation and lesser government ‰ Communist Economics: Here, the concept of private
role in key sectors are being questioned again. property doesn’t exist. The national economy is
completely in the hands of the government. E.g.
3. KEYNESIAN ECONOMICS:
Erstwhile USSR, Cuba, China, Laos etc.
‰ It is centred around the same principles as the
‰ Socialist Economics: It believes that a large part of
liberal school holds, but with a key difference is the
the economic resources should be in the hands of the
state intervention whenever required.
government. This approach believes it is important
‰ Pump priming: State is expected to provide economic
that the means of production remain partly in control
stimulus during periods of de-growth or slowdown. of the workers. E.g. Pre-LPG reforms India, Nepal, etc.
E.g. Government of India announced the Atma Nirbhar
‰ One example of socialist economics is the Nehruvian
Bharat package of around 20 lakh crore ($275 billion).
economics.
‰ Government is expected to spend on certain sectors
 State owns the basic sectors- banking, infrastructure,
to create economic activity which will attract private
communication etc.
investment, create jobs, and increase demand and
business. E.g. PM Gram Sadak Yojana or MGNREGA.  It has centralised socio-economic planning.

‰ Central bank is expected to reduce interest rates to  India went for this because we had a bad experience
increase borrowing and thus affect positively; the with the capitalist model and we lacked a private
demand and supply which will boost economic activity. sector presence.
‰ This approach is a time-tested approach and was  Also, PM Nehru wanted India to be a welfare state.
practiced globally in the aftermath of the 2008 The soviet “planned economy” model was working
well at that time.
crisis.

‰ Public ownership of the means of production: The government owns the means of production.
‰ Central planning: All major decisions are in top-down manner and by a central authority. E.g.
erstwhile planning commission in India, Polit Bureau in China.
‰ Maximum social benefits: Wealth distribution is a major goal and not wealth production.

Features ‰ Non-existence of competition: Thus, the consumers have a limited choice.

of Socialist ‰ Absence of price mechanism: Prices are determined by the government and not by market forces.
Economy: ‰ Equality of income: Private property and law of inheritance is either regulated heavily or does not
exist at all.
‰ Equality of opportunity: Free health, education and other facilities ensure equal opportunities.
‰ Classless society: Everyone is equal in terms of economic status in the eyes of state.

‰ Reduction in inequalities: Exploitation of the poor and resources by the rich is not allowed.
‰ Rational allocation of resources: Central authority plans distribution thus reducing wastage.
Merits of ‰ Absence of class conflicts: There is no conflict between the rich and the poor as the society is
Socialist classless.
Economy: ‰ End of trade cycles: Less economic fluctuations as economic growth is planned by a central authority.
‰ Promotes social welfare: wealth distribution is to be done by the state in an impartial manner.

‰ Red tapism of the bureaucracy: There are delays due to inefficiency, corruption and favoritism.
‰ Absence of incentives: There is little benefit of working hard as the state doesn’t allow competition
and profits are discouraged.
Demerits ‰ Limited freedom of choice: The consumer and producer both have less choices as the state
of Socialist determines demand and supply.
Economy:
‰ Concentration of power: Local empowerment and representation is absent.
‰ Poor quality of service: Wealth creation is slow and little and thus technology development and
efficient governance suffers.
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5. MIXED ECONOMY:
‰ Here both private and public sectors co-exist and work together towards economic development. It is a
combination of both capitalism and socialism. It tends to eliminate the evils of both and choose positives of both
capitalism and socialism.
‰ E.g. India, China, Vietnam and even western capitalist economies that have welfare programs.

‰ Ownership of property and means of production: Owned by both the public and the private sector.
Although the state has the upper hand in decision making.
‰ Public and private sector co-exists: Private sector takes care of industries where profit is the motive
Features while the government is in sectors which can ensure welfare.
of mixed ‰ Economic planning: National level planning for both public and private sector.
economy: ‰ Solution to economic problems: Price mechanism and state intervention solves the problems of
how much, what and for whom to produce and how to distribute.
‰ Freedom and control: The state has the ultimate control over how much freedom the private sector
will enjoy.
‰ Rapid economic growth: This allows fulfillment of both public as well as private goals (welfare and
profits).
‰ Balanced economic growth: Different sectors get adequate attention as state is not as disengaged as
Merits of the capitalist economy.
a mixed ‰ Proper utilization of resources: Government controls how much does the private sector expands.
economy: Thus, whenever needed, the state steps in.
‰ Economic equality: Taxation is progressive and the wealth distribution is better.
‰ Other advantages: The government protects the interests of poor and the weaker sections via labour
laws, taxation, subsidies etc.
‰ Lack of coordination: Since both the private and the public sector have different motives; coordination
is difficult.
‰ Competitive attitude: Both government and private sector competes more often than cooperates.
Demerits
‰ Inefficiency: Lethargic bureaucracy, red tapism, corruption keeps the system inefficient.
of a mixed
‰ Fear of nationalization: Discourages the private players to invest in technology upgradation and
economy:
large investment.
‰ Widening inequality: since ownership of resources, laws of inheritance and private properties are
allowed; thus, inequalities are large.

6. GANDHIAN ECONOMICS: ‰ “Trusteeship” is another principle. Here he

‰ This is based on a set of ideas of Mahatma Gandhi recommends, after keeping aside enough for personal
about the distribution and economic management of need or investment, the owner should make a trust of
wealth. the surplus for the welfare of the poorest of poor.
‰ Although it is socialist in content; it does not 7. DEVELOPMENTAL ECONOMICS:
recommend a centralised approach.
‰ On the basis of per capita income, the Human
‰ It supports decentralised growth based on equal Development Index, and the Happiness Index, the
participation of labour and some moral prescriptions. nations have been divided into developed, developing,
‰ It recommends local economies where local and underdeveloped groups.
resources fulfill local needs and employment is ‰ Post the 2nd world war, the countries that gained
available everywhere equally. independence inherited a devastated economy and
‰ It does not object to machines in general but is large population that was poverty-stricken.
Basics of Economics

against technologies that replace labour. ‰ These nations didn’t have any private sector and
‰ Gandhi was impressed by Tolstoy and John Ruskin there was no model for the solution to their problems.
when he proposed that every man should be able to ‰ These poor economies were the focus of the
do some labour to earn his own bread. He didn’t see developmental school. The concern was not just
manual labour in contempt.

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 economic growth or structural changes; but also well- improve income distribution. Such as primary health
being of the people. care, primary education, and infrastructure.
‰ This school focused on health, education and 3. Tax reform to lower marginal rates and broaden the
employment; either through private or public or a mix tax base.
of both. 4. Interest rate liberalization as per the market.
‰ Some prominent economists of this school are Amartya 5. A competitive exchange rate
Sen, Jean Dreze, Joseph Stiglitz and Jeffery Sachs. 6. Trade liberalisation
7. Liberalisation of FDI inflows
BEIJING CONSENSUS OR STATE 8. Privatisation
CAPITALISM OR CHINESE MODEL OF 9. Deregulation
DEVELOPMENT 10. Secure property rights
‰ It refers to the policies followed by Deng Xiaoping ‰ In later times, it came to be associated with terms like
of China since 1978 which were forwarded as an “Neo-Liberalism, market fundamentalism and even
alternative to the Washington consensus. globalisation”. It was seen as an extreme belief that
‰ The idea of this consensus was propagated by Josua the markets can handle everything.
Cooper Remo in 2004. ‰ Impact:
‰ Here, the authoritarian state is a dominant player  These prescriptions led to the process known as
that allows capitalism or market economy and controls Liberalization, Privatization and Globalization.
businesses.  Countries that went to ask help from the IMF or
‰ Three main pillars of this consensus are: World Bank due to Balance of Payment crises; ended
1. Constant experiments and innovation. up with reduced role of the State in economic affairs
2. Peaceful, distributive growth with gradual reforms. and greater role of the private sector.
 It also led to reduced tariffs through promotion of
3. Self-determination and inclusion of selective foreign
ideas. globalization by international bodies like WTO.
 Countries were nudged to produce products and
‰ It drew attention when the western economies were
struggling while China was rising. It is capitalism with services where they had competitive advantage.
Chinese characteristics. ‰ Limitations:

‰ Some experts proclaimed that “death of market” had  Free trade is advantageous to countries only when
occurred. But with economic growth in China slowing domestic industries are able to compete. Otherwise
down; economists recommend caution in following it is harmful.
this model blindly.  One size doesn’t fits all. Some countries can grow
‰ Criticism: faster and better by state intervention. Like China
 What worked for China may not work for every
and Vietnam.
economy.  Privatisation before basic social needs are fulfilled

 Some blame the rise of protectionism and reduced

can leave a nation with little consumers and deter
globalisation on countries that had tilted towards investors as their income levels are low. E.g. Bolivia
Beijing consensus to witness rapid growth. privatised its water industry under IMF pressure
and many could no longer afford water.
 Increased deregulation can make economies more
WASHINGTON CONSENSUS vulnerable to financial disasters. The sub-prime
‰ This was a policy reform suggested by IMF, crisis of 2008 impacted economies that had invested
World Bank and the US Treasury department. It in the housing market
recommended structural reforms to increase the
 South East Asian economic crisis of 1990’s made
role of market forces in exchange of immediate help.
these principles unpopular as they were seen as the
‰ The term was first coined by a US based economist US dictating terms of economic development for
named John Williamson in 1989. It had policy sovereign nations.
prescriptions for developing countries that needed
‰ India and the Washington consensus:
economic help.
 To maintain a balance in fiscal matters and attain
‰ It had a 10 point reform policy prescriptions:
macroeconomic stability; India has shown prudence
1. Fiscal discipline to avoid fiscal deficits. and fiscal consolidation.
2. Public expenditure priorities toward areas offering
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  This was made legally mandatory to follow after the to build in china for export purposes. This led to Chinese
Fiscal Responsibility and Budget Management Act companies coming up to compete.
2003. (FRBM Act) ‰ But China didn’t follow the import substitution policy;
 But, the pandemic put a lot of strain on economies i.e., in order to export it had to import.
worldwide. This led to IMF and World Bank ‰ Another model is of the USA under Trump
suggesting governments all over the world to spend administration. Trade wars were used to cut the US
more putting aside fiscal deficit threats. trade deficit with the rest of the world. It involved:
 India also undertook massive spending measures to  Renegotiating trade agreements.
boost the economic growth and keep economy on  Imposing high tariffs on imports.
the track.
 Using state power to open markets for the US made
 This is an expansionary fiscal policy which is products.
expected to increase growth.
 Weakening the multilateral bodies like WTO.
‰ Latest trends:
 Tightening the immigration norms.
 Since the pandemic posed unique problems to the
economies of the world; the IMF and WB suggested
a deviation from fiscal consolidation. They BEHAVIOURAL ECONOMICS
recommended increased government spending. ‰ It is a school which uses methods and learnings of
 India mostly has a higher growth rate than the rate various fields to study the economic behaviour of
of interest. Thus; this policy will help boost growth people and influence the same.
and not lower it. It will also reduce our debt to GDP ‰ While Adam Smith’s invisible hand assumes that people
ratios. make “rational” decisions; this school denies this as a
 India’s basic indicators are strong and thus the fact.
economy can handle such aggressive spending ‰ Richard Thaler (Nobel in economics,2017) says
atleast till 2030. there can be anomalies in the behaviour of people which
can’t be explained by the existing rational theories.
SANTIAGO CONSENSUS ‰ This school promotes “nudges” to bring desirable
changes in the behaviour of people. These
‰ This is considered an alternative to the Washington
nudges can have an impact on both macro as well as
Consensus for developing countries.
microeconomics.
‰ It was recommended by the then World Bank group
‰ Its uses can be - bring better adherence to tax laws,
president James Wolfensohn.
cleanliness, volunteer social work etc.
‰ It focuses on economic as well as social inclusion and
‰ The Economic Survey 2019 has drawn on Nobel
thus is closer to Beijing consensus which also has social
Laureate Richard Thaler’s Behavioural Economics
overtones.
Theory to lay out what it describes as an “ambitious
‰ The World Bank proposed apart from financial aid, agenda” for behaviour change that will bring in social
harnessing the power of global best practices and change, which in turn, will help India transit to a $5
information technology to suit local conditions. trillion economy by 2024-25.
‰ It enabled governments to focus on socio-economic ‰ It has been used in India, in schemes like the Swachh
development and inclusive growth. We see this Bharat Mission, Jan Dhan Yojana, Beti Bachao Beti
happening in India as well. Padhao, etc.

MERCANTILISM GREEN ECONOMICS

‰ It is a school of thought which thinks that the ‰ This school informs us about the costs in terms of land,
government should have policies that promote air and water pollution that come with economic
exports. growth without keeping in mind the environment.
‰ It expects that forex reserves build-up will bring in ‰ It warns us about the growth that is unsustainable
more investment, make loans cheaper and other and that causes productivity losses. It advocates
benefits.
Basics of Economics

harmony between nature and economic growth.

‰ This was the dominant thought in Europe between ‰ It promotes advancing all three together i.e.
16th and 18th centuries. The country with the most economic, social and environmental well-being.
gold was expected to dominate the whole world.
‰ In India we have had a growth that has not been
‰ One model of mercantilism was followed by China sustainable - e.g. green revolution caused land
since the 1980s where; it allowed foreign companies

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 degradation and water scarcity in large parts of the HEALTH ECONOMICS
country.
‰ A branch of economics concerned with efficiency,
‰ Thomas Malthus’ “An essay on the Principle of values and behaviour in healthcare sector. It covers:
Population” of 1798 is among the earliest warnings.
 Health indicators
‰ Limits to Growth report of 1972 by the Club of
 Preventive and curative measures
Rome also reminded us about unsustainable growth.
 Medical research and education
‰ Brundtland commission report titled “Our common
 Rural Health Mission, Drug Price control
future” of 1987 of a UN body defined sustainable
development as “A development which meets the  Neo-natal care, Maternity and Child health
need of the present without compromising the  Budgetary allocation for health etc.
ability of the future generations to meet their own ‰ Health economists study the healthcare system and
needs.” those behaviours that affect health. For e.g. smoking,
‰ William Nordhaus (Nobel in economics 2018) drinking etc. They determine how to improve outcome
integrated climate change into long-run macroeconomic of measures targeting this sector. Multiple costs,
analysis. financial expenditure and charges are evaluated in
‰ Lately, different bodies and governments have come up health economics.
with new indices to measure the Green economy- Green
GDP, Social Progress Index, and Environmental
Performance Index are a few examples.

SECTORS AND TYPES OF ECONOMIES

‰ As per economic activity; there are following sectors in
an economy:

Primary ‰ This sector involves economic activities that take place while exploiting the natural resources.
Sector ‰ Agricultural activities, mining, oil exploration etc. are all sub-sectors that belong to this sector.
‰ When agriculture contributes a minimum of 50% or more to the national income and livelihood; the
economy is called an “Agrarian Economy”.
Secondary ‰ It involves all those economic activities that involve the processing of raw materials extracted from
Sector the primary sector.
‰ Manufacturing is a sub-sector which has been a large job-providing sector.
‰ If the contribution of manufacturing is a minimum of 50% to the national income and employment;
the economy is called an Industrial Economy.
Tertiary ‰ This sector is dominated by
services-led economic activities; such as education, banking, healthcare
Sector etc.
‰ An economy can be said to be a “Services Economy” when it is dominated by the activities of the
service sector.
Quaternary ‰ It decides the quality of human resources an economy has. It is also called as “knowledge sector”.
Sector
Quinary ‰ The bureaucracy and the corporate sector; where all high-level decision-making happens, fall under
Sector this category. The people involved are few but enjoy high status in the society due to their role.

Knowledge Economy
‰ Here, innovation based on research and development is capitalized upon in the forms of patents and other forms of
intellectual property.
‰ In a knowledge economy; the commercialisation of science and academic scholarship takes place.
‰ It is mostly present in very highly developed countries and depends on skilled labour, communication networks and
incentives present for innovation.
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‰ On the basis of ownership; the economy can be divided into the following three sectors:

Public ‰ It has organizations and bodies that are owned, controlled and managed either fully or with a
Sector majority stake of central or state governments or local bodies.
‰ The main focus is to serve the public and their welfare.
‰ It is run based on capital from tax collection, duties, excise, etc.
‰ This sector provides job security, housing and other benefits, allowances and pension.
‰ This is a preferred sector for job in India because it provides the above-mentioned benefits and
chances of getting fired on non-performance are low.
‰ Some major areas of public sector are railways, defence, police, civil administration, health, education
etc.
Private ‰ Here the ownership, management and control lie with either individuals, groups or privately-
Sector owned companies.
‰ The government has no interference in the day-to-day business and running of this sector.
‰ The main focus is not public welfare but profits. Hence, cost cutting and efficiency are hallmarks
of this sector.
‰ The private sector runs on capital of promoters/owners, loans, issuing shares, debentures etc.
‰ This sector offers better salary, merit-based promotion and recognition of good work. It has
incentives to work hard.
‰ Employees can be sacked if they don’t perform or if the company decides to cost-cut or downsize. It
has competitive environment and employees get bonuses as incentives.
‰ Some major areas of Private sector are IT, finance, consulting, services-based industries, pharma
industry, hospitality and tourism etc.
Public- ‰ It is a partnership between one or multiple public and private sector bodies usually to develop a
Private long-term project.
Partnership ‰ It helps in attracting funding and expertise for a certain project which is usually for the benefit of
(PPP) general public. E.g. Metro, airports, telecom infrastructure etc.
‰ As the demand of delivering faster and better governance expands; the challenge grows in complexity
and scale. Thus, PPP tries to combine the best of both sectors.
‰ Benefits of this model are as follows:
 Accountability of public sector and efficiency of the private sector: The private sector brings
better consumer satisfaction, newer technology and innovative approach. The public sector brings
confidence of completion, accountability and reduced red tapism
 Time and cost bound completion of work: The private sector adopts technology faster and is
more efficient with expenses and time.
 Resource availability: The government is finding it increasingly difficult to mobilize the resources
alone. Thus, inviting investors (foreign and domestic) is a wise step.
‰ The different kinds of PPP projects that are undertaken are in health sector (linking private medical
colleges with districts to increase number of available doctors), power, railways (Tejas express),
urban infrastructure etc.
On the basis of working conditions; the economy can be divided into the following two:
Organised ‰ In this sector the working conditions are good and are fixed. The employees also have social
Sector security benefits (Provident fund, pension, health insurance etc.)
‰ Jobs in this sector are registered with the government and various laws and rules apply to
them.
Basics of Economics

‰ Employees have job security, fixed working hours and extra pay if they decide to work extra
hours. E.g. banking, teaching, nursing etc.
‰ The prevalence of jobs in India in this sector is very low.

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 Unorganized ‰ This sector includes those workers who are self-employed, gig economy workers and daily
Sector wagers.
‰ Those workers from the organised sector that are not covered under welfare schemes mentioned
in “Unorganized Workers Social Security Act” 2008 are a part of this sector.
‰ The employment is casual and seasonal and hence workers are non-unionized and depend entirely
on their daily earnings (in most cases).
‰ There is no legal or unionized protection and a lack of stable income and employment.
‰ Even if protections are brought in; it is difficult to implement as the workers are scattered.
‰ All of the above doesn’t mean that this sector is not important. It contributes almost 60% to the
national income.

DOMESTIC ECONOMY AND ITS

SECTORS

‰ An economy can be divided into domestic and external/rest of the world. A domestic economy includes all resident
economic units. These are:
 Households: A group of people who share accommodation, save collectively, consume certain goods and services
and may engage in productive activity.
 Legal entities: are those that engage in economic transactions, decision making and concluding contracts in its
own rights. They can be: Governments, Corporations or enterprises, Non-profit entities (legal or social entities), etc.
‰ Domestic economy may be divided into three larger sectors namely:

General ‰ It includes all those departments that provide free services to the people. Inclusion of a department
government in this sector is based on objectives and functions and not ownership.
sector: ‰ Its functions are:
 Provide households with certain goods and services financed through taxes or other incomes.
 Redistribute wealth by means of transfer.
 Produce non-market goods and services.
‰ Examples are defence, governance, national security, health, education etc.
Real sector: ‰ It refers to all real or non-financial elements of an economy.
‰ It consists of:
 Enterprises (non-financial corporations)- Those domestic units that are involved in production of
market goods (those that are sold at market prices) and non-financial services.
 Households
 Non-profit institutions serving households.
‰ It is the sector which holds money or the money holding sector.
Financial ‰ It is the economy’s money issuing sector. It includes corporations included principally in financial
sector: activities and intermediations.
‰ E.g. a bank, an institution that borrows and lends, an institution that attracts funds from shareholders
to invest in equities/shares, a body that invest in securities from funds raised from policyholders.
‰ It does not include those corporations that don’t incur liability on their own account for provisioning
financial assets. E.g. brokers, dealers, stock exchanges, foreign currency exchanges, securities market
etc.

Services Led Growth In India

‰ India transitioned from agriculture to a services economy directly; thus skipping the industrial economy during
the 1990s.
‰ This is one of the major reasons for India witnessing a phase of “jobless growth” because manufacturing generates
more jobs than services.
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‰ Even within services; modern services
(communications, IT, financial, business etc.) have

Inequality
dominated over traditional services like the retail and
wholesale markets.

PREVIOUS YEAR QUESTION (PRELIMS)

Q. Which of the following activities include real sector
in economy?
Income per Capita
1. Farmers harvesting their crops.
‰ As per the modified curve, environmental indicators
2. Textile mills converting raw cotton into fabric.
deteriorate as an economy industrializes until a turning
3. A commercial bank lending money to a trading point is reached.
company.
‰ The indicators then begin improving again with the aid
4. A corporate body issuing rupee denominated of new technology and more money.
bonds overseas.
‰ For example, sulphur dioxide levels decreased in the
(a) 1 and 2 only USA with increased regulation even as the number of
(b) 2, 3 and 4 only cars on its roads held steady or increased.
(c) 1, 2 and 4 only Trade-offs
(d) 1, 2, 3 and 4 only ‰ Since the basic assumption of eonomics is “scarcity;
there have to be trade-offs.
KUZNETS CURVE ‰ It is the policy decision which prioritises one goal or
‰ It is a hypothetical inverted U-curve that plots compromises on one goal to achieve the other.
economic inequality against income per capita over the ‰ For example; RBI will hike the interest rates to target
course of economic development. inflation, even though the move will limit economic
‰ Simon Kuznets was the economist who propagated growth.
this curve. ‰ Similarly, the government may borrow to subsidise
‰ It helps in understanding how these two variables some agricultural expense. This increases government
change as an economy turns industrial from primarily debt, but addresses poverty and ensures stability.
agricultural. Opportunity Costs
‰ It shows that income inequality first increases and then
‰ Whenever we make a trade-off i.e. prioritize one goal
decreases after reaching a peak as per capita income over the other; there is a hidden opportunity cost.
increases.
‰ It is literally the cost of not choosing the other option or
‰ Rapidly industrialised economies of England, Sweden,
the second best option.
France and Germany appear to follow the curve. But
‰ For example; money can be spent to either build
Netherlands and Norway didn’t, and had a different
roads or build schools. If we build roads; then there is
experience of inequality.
an opportunity cost for benefits we let go due to not
building schools.
ENVIRONMENTAL KUZNETS CURVE ‰ Similarly, we can keep our money in a savings account
‰ A modification of Kuznets curve has become popular to or invest it. If we invest the money; then we bear an
chart the rise and subsequent decline in pollution opportunity cost in terms of interest forgone had we
levels of developing economies. kept the money in a savings account.
‰ First developed by Gene Grossman and Alan
Krueger and later popularised by the world bank. PREVIOUS YEAR QUESTION (PRELIMS)
‰ It follows the same pattern as the original curve. Q. If a commodity is provided for free to the public by
the government, then: (2018)
(a) The opportunity cost is zero.
Basics of Economics

(b) The opportunity cost is ignored.

(c) The opportunity cost is transferred from the
consumers of the product to the tax paying
public.
(d) The opportunity cost is transferred from the
consumers of the product to the government.

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