Definitions and scope of economicsUNIT I

BBA N203

Meaning and Scope of EconomicsMain definitions of Economics i) Science of wealth, ii) Science of welfare, iii) Science of scarcity, iv) Science of growth and development.

Science of wealth This definition by the father of economics,

Adam Smith, is the first important and comprehensive definition.

Wealth of Nations by Adam Smith is the first systematic book on Economics,

Science of wealth definition has two dimensions:

i) Meaning of wealth, andii) Causes of wealth.

Meaning of wealthAround the industrial revolution, merchants were

the most powerful class in Western Europe, and wealth for them meant money only. Since money at that time was in the shape of gold, merchants declared gold as the only wealth,

This definition rendered merchants as the only productive class, as they created it by trade,

This definition harmed the interests of newly emerging class of petty industrialists and their hard working workers,

Adam Smith as spokesman of the emerging class widened the definition to include all material goods,

Activities which did not result in material goods production were unproductive.

Causes of wealth of nations: capitalism Traders were not the only cause of wealth, Freedom of trade and enterprise were the greatest

causes of wealth because:i) Human beings are born selfishii) They have self interest, iii) It is not the benevolence but self interest which guides

economic activity iv) So left to themselves, each individual would maximise

his self interest (income/wealth),v) When all the adult citizens of a nation maximise their

self interest, the wealth of nation would grow the fastest,

vi) So why should the mercantilists or anybody else impose restriction on the freedom of individuals,

Exceptions While an invisible hand guides societies

which rely on self interest, there are certain exceptions where it does not work. These are:

DefensePublic utilitiesLaw order and justice

2. Science of welfareAdam Smith’s prophesy that self interest would be

beneficial to all did not materialise after the industrial revolution,

The revolution divided the society between haves and have-nots, including unemployd

Criticism turned reformist and revolutionary,Marshall attempted to offer a compromise and a new

definition:“ Political economy or economics is the study of mankind in

the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being”.

“ The range of our enquiry becomes restricted to that part of social welfare which can be brought directly or indirectly into relashhionship with measuring rod of money”, Pigou.

Criticism of welfare definitionEconomics is not restricted to material

things, non material things like health and education, entertainment are also important,

Welfare is subjective and varies from person to person,

It is difficult to segregate material welfare from other types of welfare,

The concept of welfare is not fixed but subject to change and interpretation,

It differs from time to time, country to country

3. Science of scarcity Economics is “the science which studies human

behaviour as a relationship between ends and scarce means which have alternative uses”. So all goods and services commanding a price fall under the scope of economics. Lionel Robins is the author of this definition.

Unlimited human wants: Necessities, comforts and luxuries’

Necessities:a) Necessities of existenceb) Necessities of efficiency, andc) Necessities of convention.

Science of scarcity….Comforts and luxuries are :A) Related to time, placeB) No watertight compartmentalization as a luxury may be

comfort or even a necessity for someone or at different periods of history.

Criticism; It fails to explain why labour despite being scarce remains

unemployed / underemployed It also fails to explain situations of abundance Is neutral to ends Ignores welfare

Science of growth and development“Economics is the study of how men and

society chose, with or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption now and in future amongst various people and groups of society”

ECONOMIC GROWTH

Economic growth is an increase in the total output of the economy. It occurs when a society acquires new resources or when it learns to produce more by using existing resources.

BENEFITS OF ECONOMIC GROWTH

• Economic growth raises a country’s overall standard of living.

oThis provides people with goods and time for enjoyable leisure activities.

BENEFITS OF ECONOMIC GROWTH

• Economic growth enlarges the tax base, or the income and properties that may be taxed.

o A larger tax base lets government supply more public services and/or lower taxes.

BENEFITS OF ECONOMIC GROWTH

• Economic growth creates jobs and economic security for more people.

BENEFITS OF ECONOMIC GROWTH

• Economic growth can benefit the economies of other countries through increased trade.

o A successful growing economy can be a role model for developing nations.

Factors Economic Development

Institutional factors affecting developmentThere are a number of domestic factors that act as sources of economic development and barriers to developmentWhat do we mean the institutional framework?

Organisations, structures, rulesThe main institutional factors are

EducationHealthcareInfrastructurePolitical Stability and corruptionLegal systemFinancial system, credit and micro financeTaxationThe use of appropriate technologyThe empowerment of womenIncome distribution

Education

Improve the role of women in society – there are high correlations between women’s education and child survival rates and fertility rates

Sen says ‘Nothing arguably, is as important today in the political economy of development as an adequate recognition of political, economic, and social participation and leadership of women’

Improve levels of health – improving education (particularly literacy) improves the health of society.Individuals can read about and be informed about vaccines and water filtering. Also dangers such as HIV, sanitary habits, diet etc

Despite improvements around 38 million children of primary school age are still out of school in sub-Saharan Africa. In southern Asia 18 million.Education requires

vast fundingWithin a country there may be vast disparities between urban and rural areasChildren may need to workOften if the mothers received no education the children do not eitherEnrolment in secondary schools is lower than primary

Healthcare

Strong correlation between health care and life expectancy - it would appear that countries that spend a high proportion of GDP on healthcare have a higher life expectancy (there are many other variables at play)

Throughout the world infant mortality rates have fallen, life expectancy has increased, more children are immunised and maternal mortality rates are falling

Progress - there has been a lot of progress in terms of training doctors and nurses, building of hospitals, and provision of immunisation and safe water

There is still a lot to do

Insert table 29.2 P359

Better roads and better public transport – allows children to get to school, adults to get to market and goods to get to potential buyers

Electricity is needed for food preservationGas is needed for cooking

A developed radio and television network - makes it possible for people to link up with and participate in wider communities

Any improvement in infrastructure will improve the well being of the people

Infrastructure

Countries that have political stability are more likely to attract FDI and Aid – may lead to growth and development

Political instability can lead to wars and complete economic breakdown - this will lead to poor economic performance, high levels of poverty and low standards of living

When there is political stability citizens are more likely to have a say – leads to higher living standards

Corruption = dishonest exploitation of power for personal gain

Political stability and lack of corruption

Corruption is prevalent when- governments are not accountable to the peopleGovernments spend large amounts on large investment projectsAccounting practices are not controlledOfficials are not well paidElections are not well controlledLegal structure is weakFreedom of speech is lacking

Corruption hinders growth and Development

Corruption leads to reduction in effectiveness of legal system (people can buy their way out)

Electoral corruption means peoples wishes are not heeded

Corruption leads to an unfair allocation of resources – contracts don’t go to most efficient bidder

Corruption

Bribes increase the costs of business leading to higher prices

Corruption reduces trust in an economy – hard to attract FDI

Increased risk that contracts are not honoured - leads to lack of investmentOfficials divert funds

to projects that are not in the public interestOfficials turn a blind eye

to regulations – don’t care about environmentFunds leave the country –

capital flightConstant paying of small bribes reduces economic well being of ordinary citizens

No way to uphold property rights and so removes theRight to own assetsRight to benefit from assets e.g. rentRight to sell assetsRight to exclude others from using or taking over assetsInvestment and growth will be reduced and so economic growth and development will be limited (With no property rights there is no incentive to improve that property)

Legal system

Most developing countries have dual financial marketsand so removes theOfficial (big banks that finance established large businesses)Unofficial (illegal who lend to those that are desperate)000

Savings are needed for investment but saving is hard when there is poverty and no where safe to save that will give a good returnPeople will buy assets such as livestock or send their money abroad

Financial System

In developing countries poor people find it almost impossible to access traditional banking systemsNo collateralOften unemployedLack savings

Even if there is entrepreneurial spirit they cannot borrow to start up

Micro-Finance may be the answer

Micro finance videosInsert links

Very difficult for governments to collect3% in developing countries60-80% in developed countriesThere is little

corporate activityOften low tax incentives to encourage FDI

Taxation

Main source is exports, imports and customs duties – country needs to be heavily involved in foreign tradeBeing part of the WTO reduces tariffs

Large informal markets in developing countriesIf incomes are not recorded how can you collect tax?

Problems with administration – inefficiency, lack of information and corruption

If a government finds it difficult to collect taxes it will have less to spend on growth and development objectives

Technology needs to be appropriate for large labour surplusCheap to make and needs labour Provides greater employment than automated systems

Appropriate

Technology

Universal nut sheller – turned by hand and is used to shell nuts

Solar cooker for consumers – aids development because it doesn’t need wood

no loss of treesDon’t need to

look for fire wood – more time for other activities (improves the position of the woman)

Well being of families is improvedBetter informed about health care, hygiene and dietHealthier children lead to healthier adults and a better future workforce

Empowerment of

Women

Increasing income levels for women – leads to increases in family welfare (more than an increase in men’s incomes)

The education of the children in the family group improves – pass on their own educationValue educationEducated children have better life opportunitiesLeads to a better quality future workforce

More control over contraception, marry later and have smaller families – lowers population growth

Low levels of income leads to low levels of savings leads to low levels of investment leads to low growth

Income Distributio

n

The rich dominate politics policies favour the well offNo pro-poor growth

No agreed measures of poverty

The rich consumer foreign goods – does not help domestic economy

Capital flight – rich send their money abroad

Income inequality leads to both poor growth and poor development

Basic characteristics of Indian Economy

1. Low per capita income:Under developed economy is characterized by low per

capital income. India per capital income is very low as compared to the advanced countries. For example the capital income of India was 460 dollar, in 2000. Where as their capita income of U.S.A in 2000 was 83 times than India. This trend of difference of per capita income between under developed and advanced countries is gradually increasing in present times. India not only the per capita income is low but also the income is unequally distributed. This mal-distribution of income and wealth makes the problem of poverty in ore critical and acute and stands an obstacle in the process of economic progress

2. Heavy Population Pressure:The Indian economy is facing the problem

population explosion. It is clearly evident from the total population of India which was 102.67 cores in 2001 census. It is the second highest populated country China being the first. India’s population has reached 110 cores. All the under developed countries are characterized by high birth rate which stimulates the growth of population; the fast rate of growth of population necessitates a higher rate of economic growth to maintain the same standard of living. The failure to sustain the living standard makes the poor and under developed countries poor and under developed.

3. Pre-dominance of Agriculture:Occupational distribution of population in

India clearly reflects the backwardness of the economy. One of the basis characteristics of an under developed economy is that agriculture contributes a very large portion in the national income and a very high proportion of working population is engaged in agriculture

4. Unemployment:

There is larger unemployed and under employment is another important feature of Indian economy. In under developed countries labor is an abundant factor. It is not possible to provide gainful employment the entire population. Lack of job opportunities disguised unemployed is created’ in the agriculture fields. There deficiency of capital formation.

5. Low Rate of Capital Formation:In backward economics like India, the rate of

capital formation is also low. capital formation mainly depends on the ability and willingness of the people save since the per capita income is low and there is mal-distribution of income and wealth the ability of the people to save is very low in under developed countries for which capital formation is very low .

6. Poor Technology:The lever of technology is a common factor in

under developed economy. India economy also suffers from this typical feature of technological backwardness. The techniques applied in agriculture industries milling and other economic fields are primitive in nature.

7. Back ward Institutional and social frame work:

The social and institutional frame work in under developed countries like India is hopelessly backward, which is a strong obstacle to any change in the form of production. Moreover religious institutions such as caste system, joint family universal marriage affects the economic life of the people.

8. Under utilization of Resources:India is a poor land. So our people remain

economically backwards for the lack of utilization of resources of the country.

9. Price instability:Price instability is also a basis feature of

Indian economy. In almost all the underdeveloped countries like India there is continuous price instability. Shortage of essential commodities and gap between consumption aid productions increase the price persistently. Rising trend of price creates a problem to maintain standard of living of the common people.

10. More:(a) Indian economy is basically an agricultural economy. More

than 60% of the population is engaged in agriculture and allied activities.

(b) The occupational structure has not been changed during the last 100 years. In 1950-51 about 73% of the workers were engaged in primary activities, 11% in secondary and 16% in tertiary activities. In 1999-2000 the share of different sectors in employment amounted to 60%, 17% and 23% respectively.

(c) Inequality of income and wealth is other important feature of Indian economy. In India the main resources are concentrated in the hands of the few people. 40% of the total assets is concentrated in the hands of top 20 percent people.

(d) There has been remarkable improvement in social sectors such as education, health, housing, water supply, civic amenities etc.

(e) Planning process is also an important feature. As the government has adopted planned developmental economy. Five years plans are framed for economic development.

Concepts of Human development-Human Development is a development

paradigm that is about much more than the rise or fall of national incomes. It is about creating an environment in which people can develop their full potential and lead productive, creative lives in accord with their needs and interests. People are the real wealth of nations. Development is thus about expanding the choices people have to lead lives that they value. And it is thus about much more than economic growth, which is only a means —if a very important one —of enlarging people’s choices.

Key Issues related to Human Resource Development -Social progress - greater access to

knowledge, better nutrition and health services.

Economics – the importance of economic growth as a means to reduce inequality and improve levels of human development.

Efficiency - in terms of resource use and availability. human development is pro-growth and productivity as long as such growth directly benefits the poor, women and other marginalized groups.

Equity - in terms of economic growth and other human development parameters.

Participation and freedom - particularly empowerment, democratic governance, gender equality, civil and political rights, and cultural liberty, particularly for marginalized groups defined by urban-rural, sex, age, religion, ethnicity, physical/mental parameters, etc.

Sustainability - for future generations in ecological, economic and social terms.

Human security - security in daily life against such chronic threats as hunger and abrupt disruptions including joblessness, famine, conflict, etc.