Economic Growth: Policy Challenges and Opportunities

Economic Growth: Policy Challenges and Opportunities #

Macroeconomics:

• A traditional economy will use the barter system and has no concept of currency or money.
• Such economies believe in only producing what and how much they require. They find no need to produce any market surplus.

• There is no involvement or interference from the government or any such controlling power.
• The entire economy is determined by the participants of the economy and the laws of demand and supply.
• Example – USA, Hong Kong

• There is one centralized power- In most of the cases, the government.
• The government makes all decisions regarding the economy. The price will also be determined by it.
• Example – Cuba, China

• It is a perfect coordination between a command economy and a free market economy.
• The economy is free of government intervention but the government will regulate whenever it feels necessary, and oversee specific sensitive areas of the economy like transportation, public services, defence etc.
• Example – India and France

• The primary sector of the economy is the sector of an economy making direct use of natural resources. This includes agriculture, forestry and fishing, mining, and extraction of oil and gas.
• People engaged in primary activities are called red-collar workers due to the outdoor nature of their work.

• Secondary sector (also called industrial sector) is an economic sector which describes the role of manufacturing. It encompasses the industries which produce a finished, usable product or are involved in construction. This sector uses the produce of the primary sector as its raw materials.
• People engaged in secondary activities are called blue collar workers.

• This sector’s activities help in the development of the primary and secondary sectors. By itself, economic activities in the tertiary sector do not produce goods but they are an aid or a support for the production.
• This sector jobs are called white collar jobs.
• Pink-collar worker is one who is employed in a job that is traditionally considered to be women’s work. E.g. babysitter, florist, day care worker, nurses etc
• This sector includes all economic activities where different ‘services’ are produced. E.g. Retail sector, Tourism, Banking, medical and health care services.

• Research and development/advanced form of services involving/specialized knowledge and technical skills.
• The quaternary sector is the intellectual aspect of the economy. It is the process which enables entrepreneurs to innovate and improve the quality of services offered in the economy.

• Referred to as ‘gold collar’ professions, they represent another subdivision of the tertiary sector representing special and highly paid skills of senior business executives, government officials, etc.

• In this sector, employment terms are fixed and regular, and the employees get assured work and social security.
• It can also be defined as a sector, which is registered with the government and a number of acts apply to the enterprises. Schools and hospitals are covered under the organised sector.
• Workers in the organised sector enjoy security of employment. They are expected to work only a fixed number of hours. If they work more, they have to be paid overtime by the employer.

• An unorganised worker is a home-based worker or a self-employed worker or a wage worker in the unorganized sector and includes a worker in the organized sector who is not covered by any of the Acts pertaining to welfare Schemes as mentioned in Schedule-II of Unorganized Workers Social Security Act, 2008.
• In this sector wage-paid labour is largely non-unionised due to casual and seasonal nature of employment and scattered location of enterprises.
• The sector is marked by low incomes, unstable and irregular employment, and lack of protection either from legislation or trade unions.
• The unorganised sector is mainly labour intensive and uses indigenous technology.
• Contributions made by the unorganised sector to the national income, is very substantial as compared to that of the organised sector. It adds more than 60% to the national income while the contribution of the organised sector is almost half of that depending on the industry.

• In the sector, the government owns most of the assets and it is the part of the economy concerned with providing various governmental services.
• The purpose of the public sector is not just to earn profits. Governments raise money through taxes and other ways to meet expenses on the services rendered by it.

• In the private sector, ownership of assets and delivery of services is in the hands of private individuals or companies.
• Activities in the private sector are guided by the motive to earn profits. To get such services we have to pay money to these individuals and companies.

• PPP is an arrangement between government and private sector for the provision of public assets and/or public services.
• In this type of partnership investments are undertaken by the private sector entity, for a specified period of time.
• As PPP involves full retention of responsibility by the government for providing the services it doesn’t amount to privatization.

Domestic Territory includes:

• Political frontiers of the country including its territorial waters
• Military Establishment of the country abroad
• Embassies and Consulates
• Ships/Aircrafts/Fishing Vessels/Oil Rigs belonging to the residents of the country

• Domestic factor income: The sum of factor incomes like rent, wages, interest and profits generated within the domestic country. It includes both incomes earned by residents as well as non-residents/foreigners working in India.
• At the same time, Indians go abroad to work and earn wages, salaries, profits, and rents.
• NFIFA (Net Factor Income from Abroad) = Factor income received by the residents of india working abroad MINUS the factor income paid to the foreign residents for working in india

• PCI measures the average income earned per person in a given area, in a specified year.
• It is calculated by dividing the area’s total income by its total population.

• National Income Accounting is the book-keeping system to measure the economic activity in the national economy as a whole.
• Done for: Policy Formulation + Effective Decision Making + International comparisons + Indicates the performance of the economy + To find out structural changes in the economy.

• Human Development Statistics
• Gender Statistics
• Conduct of Annual Survey of Industries
• National Income Accounting
• Compilation of Index of Industrial Production,
• Compilation Consumer Price Indices for Urban Non-Manual Employees.

• Gross Domestic Product is the market value of all the goods and services produced within the domestic territory of a country during a specified time period, usually one year.

• 1st of April to 31st of March (next year)
• The present base year for gross domestic product is 2011-12.

• The calculation of production of final goods and services at the current prices (inclusive of inflation).

• The calculation of Production of final goods and services valued at the base year prices (exclusive of inflation).

• Calculation of GDP at the actually transacted prices.
• Includes the indirect taxes levied, subsidies provided.

• Calculation of GDP at the actual cost of production of goods and services and not the sale
• Doesn’t include indirect taxes
• Includes subsidies provided for the production

• Gross value added (GVA) is an economic productivity metric that measures the contribution of a corporate subsidiary, company or municipality to an economy, producer, sector or region.
• GDP= GVA+ taxes on products – subsidies on products

• The percentage of the investment made each year out of the total GDP is called Gross Capital Formation
• High GCF denotes higher rate of savings in the economy which is required for high rate of production, capital formation, changes in production techniques
• GCF includes capital formation in the public sector, private sector and also the household sector.

• Any economic quantity that is positively correlated with the overall state of the economy is said to be pro-cyclical.
• Any quantity that tends to increase in expansion and tends to decrease in a recession is classified as pro-cyclical. Gross Domestic Product (GDP) is an example of a pro-cyclical economic indicator. Many stock prices are also pro-cyclical because they tend to increase when the economy is growing quickly.

• Any economic quantity that is negatively correlated with the overall state of the economy is said to be countercyclical. That is, quantities that tend to increase when the overall economy is slowing down are classified as ‘countercyclical’. Unemployment is an example of a countercyclical variable.

• GDP is calculated by the sum of consumer spending, investment, government purchases, and net exports.
• GDP = C + I + G + X -M
• Where, (C) Consumption of final goods and services, (I) Investments, (G) Government Purchases, (X-M) Export MINUS Imports

• GDP is calculated by the sum of income of all the factors of production i.e., wages, interest earned, profit earned, Rent.
• The income approach states that all economic expenditures should equal the total income generated by the production of all economic goods and services.

• Estimated by adding the value added by all the firms.
• While GVA gives a picture of the economy from the producers’ side or supply side, the GDP gives the picture from the consumers’/ demand side perspective. (Because it considers Indirect taxes and subsidies).

• Gross National Product (GNP) is the GDP of a country added with its ‘income from abroad’.
• Here, the trans-boundary economic activities of an economy is also taken into account.
• It is measured at market prices/ value.

• GDP is the value of all final goods and services produced by the normal residents as well as non-residents in the domestic territory of the country but does not include Net Factor Income from Abroad.
• From April 2018, RBI decided to use GDP instead of GVA to measure economic activities.

• Only those goods and services that are produced by the residents of India whether working in India or Abroad are included.

• Whatever is produced in India-by an Indian or foreign national is part of Indian GDP.

• GNP includes Net Factor Income Abroad
• No intermediate goods and services should be included in GNP.

• Exclusion of Net Factor Income Abroad
• Intermediate goods and services are not included to avoid double counting.

• GNP = GDP + Net factor income from abroad
• GNP = Consumption + Gross Private Investment + Government Expenditure + Net Exports + Net Factor Income from Abroad.

• GDP = Consumption + Gross Private Investment + Government Expenditure + Net Exports
  • Net Exports = Exports – Imports. 
• NDP = Consumption + Net Private Investment + Government Expenditure + Net Exports.
  • Net Private Investment = Gross Private Investment – Depreciation

Or

National Income at Factor Cost = NNP at Market Cost – Indirect Taxes + Subsidies

• Refers to the income that is available to the households that they can spend as they wish. All the Personal Income is not available to individuals to spend. They have to pay taxes (e.g. – Income tax) and non-tax payment such as fines.
• PDI = PI – Personal tax payments – Non-tax payments (such as fines etc)

• Real income is the income of individuals or nations after adjusting for inflation. It is calculated by dividing nominal income by the price level.
• Real income is a more useful indicator of well-being since it measures the amount of goods and services that can be purchased with the income.

• It is one’s income in actual currency terms unadjusted for inflation. Inflation is calculated as the change in the CPI year-on-year.
• Nominal income is what one is getting paid. Real income is the amount of money one really get after factoring in inflation. Thus, nominal income will always be more than real income.

• A subsidy or government incentive is a form of financial aid or support extended to an economic sector (business, or individual) generally with the aim of promoting economic and social policy.
• Although commonly extended from government, the term subsidy can relate to any type of support – for example from NGOs or as implicit subsidies. Subsidies come in various forms including: direct (cash grants, interest-free loans) and indirect (tax breaks, insurance, low-interest loans, accelerated depreciation, rent rebates.

• A production subsidy encourages suppliers to increase the output of a particular product by partially offsetting the production costs or losses.

• An export subsidy is a support from the government for products that are exported, as a means of assisting the country’s balance of payments.

• An import subsidy is support from the government for products that are imported. Rarer than an export subsidy, an import subsidy further reduces the price to consumers for imported goods.

• Issued twice (Biennial) a year – January and June.
• Current estimates show that 60 million people could be pushed into extreme poverty in 2020.

• Published twice a year in the months of April and October.
• Global growth would contract by 4.4% in 2020 and bounce back to 5.2% in 2021.
• The Indian economy, severely hit by the pandemic, is projected to contract by 10.3% in 2020.
• According to the IMF’s forecasts, Bangladesh’s per capita GDP is expected to overtake India in 2020. India is likely to grow faster in 2021 and in all likelihood again surge ahead.

• Twice in a year – April and October.
• The Indian industrial sector is now among the most heavily indebted in the world in terms of the ability of its cash flows to meet its bank loan repayments.

• Issued twice a year

• Steepest declines in poverty are witnessed among those countries that became an integral part of the Global Value Chain (GVC). For example – Bangladesh, China and Vietnam

• Focuses on trends in Foreign Direct Investment (FDI).
• Global FDI flows are forecast to decrease by up to 40% in 2020, from their 2019 value of $1.54 trillion.

• UNCTAD is a permanent intergovernmental body established by the United Nations General Assembly in 1964.