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This document provides an overview of the Indian Economy, outlining key chapters that discuss economics fundamentals, economic models and structures. It includes concepts of scarcity, choice, opportunity cost, supply and demand, marginal analysis, and different economic theories.

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1 Table of Content CHAPTER 1: ECONOMICS FUNDAMENTALS............................................................................................................................................. 2 CHAPTER 2: CONCEPT OF...

1 Table of Content CHAPTER 1: ECONOMICS FUNDAMENTALS............................................................................................................................................. 2 CHAPTER 2: CONCEPT OF INCOME............................................................................................................................................................. 9 CHAPTER 3: INTERNATIONAL STRUCTURAL REFORMS.................................................................................................................. 26 CHAPTER 4: ECONOMY GROWTH AND DEVELOPMENT................................................................................................................... 32 CHAPTER 5: EVOLUTION OF INDIAN ECONOMY.................................................................................................................................. 38 CHAPTER 6: ECONOMIC REFORMS........................................................................................................................................................... 43 CHAPTER 7: PLANNING................................................................................................................................................................................ 54 CHAPTER 8: PLANNING IN INDIA.............................................................................................................................................................. 60 CHAPTER 9: MONEY AND CURRENCY SYSTEM..................................................................................................................................... 74 CHAPTER 10: BANKING................................................................................................................................................................................ 97 CHAPTER 11: INFLATION......................................................................................................................................................................... 121 CHAPTER 12: INDIAN FINANCIAL MARKET....................................................................................................................................... 135 CHAPTER 13: INSURANCE SECTOR IN INDIA..................................................................................................................................... 146 CHAPTER 14: TAXATION SYSTEM IN INDIA....................................................................................................................................... 156 CHAPTER 15: PUBLIC FINANCE IN INDIA............................................................................................................................................ 167 CHAPTER 16: AGRICULTURE................................................................................................................................................................... 179 CHAPTER 17: INDIAN INDUSTRY........................................................................................................................................................... 208 CHAPTER 18: INFRASTRUCTURE........................................................................................................................................................... 233 CHAPTER 19: INVESTMENT MODEL..................................................................................................................................................... 259 CHAPTER 20: SERVICE SECTOR IN INDIA............................................................................................................................................ 270 CHAPTER 21: INDIAN SECURITY MARKET......................................................................................................................................... 280 CHAPTER 22: EXTERNAL SECTOR IN INDIA....................................................................................................................................... 305 CHAPTER 23: POVERTY AND INEQUALITY........................................................................................................................................ 330 CHAPTER 24: UNEMPLOYMENT AND SKILL DEVELOPMENT...................................................................................................... 343 CHAPTER 25: INCLUSIVE GROWTH....................................................................................................................................................... 359 CHAPTER 26: INTERNATIONAL ECONOMIC ORGANIZATIONS.................................................................................................... 372 2 Chapter 1: Economics Fundamentals “Economics is everywhere, and understanding economics can help you make better decisions and lead a happier life” What is economics? individual behavior and market interactions, and macroeconomics, which deals with the overall  Economics is a social science that investigates how performance of economies. Other branches include societies manage their limited resources to satisfy the international economics, development economics, diverse wants and needs of individuals. It delves into the environmental economics, and more. intricate mechanisms that underpin economic activities,  In recent years, economics has increasingly intersected from the decisions made by individuals and businesses to with other disciplines like psychology, sociology, and the broader patterns of production, consumption, and political science, leading to a broader understanding of distribution that shape the functioning of entire economies. how economic systems interact with social and political  The origins of economic thought can be traced back to forces. ancient civilizations where thinkers pondered over  Today, economics remains a dynamic and ever-evolving questions related to trade, value, and wealth. However, field, continually adapting to new challenges, economics as a formal discipline gained prominence technological advancements, and shifts in global dynamics. during the Enlightenment era and further developed during It plays a crucial role in shaping public policy, informing the Industrial Revolution. business strategies, and providing insights into the complex  Classical economists like Adam Smith, often regarded as interplay between human behavior and the allocation of the "father of economics," emphasized the role of self- resources. interest and the invisible hand of the market in allocating resources efficiently. They explored concepts of supply and demand, the division of labor, and the benefits of free Fundamentals of Economics trade.  Economics fundamentals encompass the core principles and concepts that serve as the foundation for understanding Influential Economic Theories how economies operate. Here are some key fundamentals:  Marxism: Developed by Karl Marx, this theory focused o Scarcity and Choice: Resources are limited, while on the role of capitalism in creating class struggles and human wants and needs are boundless. This inequalities. It emphasized the importance of labor and fundamental scarcity requires individuals, businesses, the exploitation of workers by capitalists. and societies to make choices about how to allocate these limited resources efficiently.  Neoclassical Economics: Building upon classical o Opportunity Cost: When making choices, the value economics, neoclassical economists introduced of the next best alternative forgone is the opportunity mathematical models to analyze consumer behavior, cost. This concept highlights the trade-offs inherent market interactions, and equilibrium. in decision-making.  Keynesian Economics: Developed by John Maynard o Supply and Demand: The interaction between Keynes, this theory gained prominence during the Great supply (the quantity of goods and services producers Depression. It emphasized the role of government are willing to offer) and demand (the quantity intervention and fiscal policies to manage economic consumers are willing to buy) determines equilibrium fluctuations and unemployment. prices and quantities in markets.  Monetarism: Associated with economists like Milton o Marginal Analysis: Many decisions involve Friedman, this theory emphasized the importance of comparing the additional benefit gained from one controlling the money supply to maintain stable more unit of something (marginal benefit) to the economic growth and control inflation. additional cost incurred by producing or consuming  Behavioral Economics: This relatively modern that unit (marginal cost). approach incorporates psychological insights into o Trade and Specialization: People and nations economic analysis, recognizing that individuals often engage in trade to take advantage of comparative make decisions that deviate from strict rationality due to advantages, where they can produce goods or services cognitive biases and emotional factors. at a lower opportunity cost, leading to mutually beneficial exchanges.  The field of economics has also expanded to include sub- o Types of Economic Systems: Economies can be disciplines such as microeconomics, which focuses on categorized as traditional, command, market, or 3 mixed economies, based on how resources are Key Concepts: allocated and decisions are made.  Supply and Demand: Microeconomics examines how the o Market Structures: Markets can range from perfect interaction between supply (the quantity of a product competition (many small firms, identical products) to producers are willing to offer) and demand (the quantity monopoly (one firm dominates the market), affecting consumers are willing to buy) determines the equilibrium pricing, production, and competition. price and quantity in a market. o Gross Domestic Product (GDP): GDP measures the o Example: In the market for smartphones, as total value of goods and services produced within a consumer demand for the latest model increases, the country's borders in a specific time period and is a key price may rise due to limited supply. Conversely, if indicator of economic performance. demand decreases, prices may fall. o Unemployment and Inflation: These are critical  Consumer Behavior: Microeconomics studies how economic indicators. Unemployment refers to the consumers make choices based on their preferences and percentage of the labor force that is jobless but budget constraints. It explores concepts like utility, actively seeking work, while inflation is the general indifference curves, and the law of diminishing marginal increase in prices over time. utility. o Fiscal and Monetary Policy: Governments use o Example: A consumer deciding between purchasing fiscal policy (taxation and government spending) and a luxury car or a budget-friendly car is considering central banks use monetary policy (control of the their preferences, the features of each car, and their money supply and interest rates) to influence available budget. economic growth, employment, and inflation.  Producer Behavior: This involves understanding how o Externalities and Market Failures: Externalities firms make production and pricing decisions, considering are unintended effects of economic activities on third factors like costs, production technologies, and market parties, and market failures occur when markets do competition. not allocate resources efficiently, leading to o Example: A firm producing laptops evaluates the potentially suboptimal outcomes. costs of production, including labor, materials, and o Global Trade and Finance: International trade, overhead, to determine the optimal price at which to exchange rates, and global economic sell its laptops. interdependencies play a significant role in shaping  Market Structures: Microeconomics classifies markets national economies. based on their degree of competition. These structures o Income Distribution: Economics also examines the include perfect competition, monopoly, monopolistic distribution of income and wealth within a society, competition, and oligopoly. addressing issues of inequality and poverty. o Example: The smartphone market is characterized by  These fundamentals provide the groundwork for a deeper monopolistic competition, where multiple firms offer understanding of economic systems, policies, and their differentiated products (various brands and models) impact on individual and societal well-being. They are but with some degree of market power. applicable in analyzing a wide range of real-world  Elasticity: Elasticity measures the responsiveness of scenarios and making informed economic decisions. quantity demanded or supplied to changes in price or other factors. Facts by testbook o Example: If the price of gasoline increases  The first recorded instance of economic thinking was in significantly, consumers might reduce their ancient Greece. The philosopher Aristotle wrote about consumption by using public transportation or driving the importance of trade and commerce in his book less, indicating high price elasticity of demand. "Politics."  Market Failure: Microeconomics explores situations where markets don't allocate resources efficiently, leading Types of Economics to outcomes that are not socially optimal. It includes topics 1. Microeconomics: Microeconomics is a branch of like externalities and public goods. economics that focuses on the behavior of individual o Example: Negative externalities, such as air economic agents and the interactions that occur in various pollution from factory emissions, can lead to market markets. It delves into the decisions made by consumers, failure if the costs of pollution are not borne by the firms, and governments at a micro level and how these producers but instead affect public health and the decisions impact prices, quantities, and resource allocation. environment. Here's a closer look at microeconomics with examples: 4  Microeconomics provides a foundation for understanding  Monetary Policy: Monetary policy focuses on central how individual decisions interact to shape market bank actions to control the money supply and influence outcomes and how changes in these decisions can affect interest rates. Macroeconomics assesses the effects of resource allocation, prices, and overall economic welfare. monetary policy on inflation, unemployment, and economic growth. 2. Macroeconomics: Macroeconomics is a branch of o Example: A central bank might lower interest rates economics that focuses on the study of the overall economy to encourage borrowing and spending, thus as a whole. It examines aggregated economic variables and promoting economic growth and reducing analyzes how they interact to influence economic growth, unemployment. stability, and policy. Here's an overview of  Business Cycles: Macroeconomics studies the recurring macroeconomics with examples: pattern of economic expansion and contraction known as the business cycle. It analyzes the causes and consequences Key Concepts: of these fluctuations.  Gross Domestic Product (GDP): GDP measures the total o Example: During a recession, economic output and value of all goods and services produced within a country's employment decline, leading to lower consumer borders in a given time period. It serves as a primary spending and business investments. indicator of the overall economic performance of a nation.  Exchange Rates: Macroeconomics explores how o Example: If a country's GDP experiences a exchange rates affect international trade and financial significant increase, it indicates economic growth and transactions. It examines the impact of exchange rate expansion across various sectors of the economy. fluctuations on trade balances and capital flows.  Inflation: Inflation refers to the general increase in prices o Example: A depreciation of a country's currency can of goods and services over time. Macroeconomics make its exports cheaper for foreign buyers, examines the causes and consequences of inflation and potentially boosting export-related industries. how it impacts purchasing power.  Macroeconomics provides insights into the broader trends o Example: If the inflation rate is high, the cost of and forces that shape an economy's performance. It helps living rises, and consumers may need to allocate more policymakers understand the impact of their decisions on of their income to cover everyday expenses. national economic outcomes and assists businesses and  Unemployment: Macroeconomics studies unemployment individuals in making informed decisions amid changing rates, types of unemployment, and their effects on the economic conditions. economy. It considers the relationship between 3. International Economics: This branch studies global unemployment and other economic indicators. economic interactions. An example is the analysis of how o Example: A rise in structural unemployment due to tariffs and trade agreements affect the export and import changes in technology might lead policymakers to patterns between two countries. consider programs to retrain workers for new job 4. Development Economics: Development economics opportunities. focuses on economic growth in lower-income countries.  Economic Growth: Macroeconomics explores the factors For instance, it might explore how investments in that contribute to long-term economic growth, such as education and infrastructure contribute to improving living productivity increases, technological advancements, and standards in a developing nation. capital accumulation. 5. Labor Economics: Labor economics investigates wage o Example: Countries with sustained high rates of determination. For example, it examines how changes in economic growth tend to experience rising living minimum wage laws influence employment levels in standards and improved quality of life for their specific industries. citizens. 6. Environmental Economics: This field examines the  Fiscal Policy: Fiscal policy involves government decisions economic impact of environmental issues. An example is regarding taxation and government spending. the analysis of the costs and benefits of implementing Macroeconomics analyzes the impact of fiscal policies on renewable energy sources compared to traditional fossil aggregate demand and economic stability. fuels. o Example: During an economic recession, a 7. Behavioral Economics: Behavioral economics studies government might implement expansionary fiscal how psychological factors influence economic decisions. policy by increasing government spending to For example, it might explore how people's tendency to stimulate demand and create jobs. procrastinate affects their savings behavior and investment decisions. 5 8. Health Economics: Health economics analyzes o Exchange and Trade: Economic agents engage in healthcare-related choices. It might investigate how the exchange and trade to acquire the goods and services introduction of a universal healthcare system affects the they desire. This leads to specialization, where utilization of medical services and healthcare costs. individuals and businesses focus on producing what 9. Urban and Regional Economics: This field studies they do best and trading for what they need. economic activities within cities and regions. For instance, o Markets: Markets are where buyers and sellers it might analyze the impact of a new public transportation interact to determine the prices and quantities of system on property values and local businesses in a city. goods and services. These interactions are influenced 10. Public Economics: Public economics examines by supply and demand dynamics. government interventions. An example is the evaluation of o Economic Agents: Individuals, households, the effectiveness of a tax policy aimed at reducing carbon businesses, and governments are key economic emissions and promoting environmental conservation. agents that participate in various economic activities, 11. Financial Economics: Financial economics studies from production and consumption to investment and financial markets. For example, it might analyze how policy-making. changes in interest rates affect stock market performance o Economic Systems: Different societies adopt various and investment decisions. economic systems to organize their economies. These 12. Agricultural Economics: Agricultural economics systems, such as capitalism, socialism, and mixed addresses economic aspects of farming. It might economies, determine the roles of the government, investigate how changes in agricultural subsidies impact markets, and private enterprise. the production and pricing of crops like corn or wheat. o Economic Indicators: Economies are measured and  Each of these specialized areas of economics provides analyzed using indicators such as Gross Domestic insights into specific aspects of economic behavior, Product (GDP), which reflects the total value of systems, and policies, contributing to a deeper goods and services produced, and unemployment understanding of how economies function and evolve rate, which indicates the percentage of the labor force in various contexts. without jobs. o Global Interdependence: In a globalized world, What do we mean by economy? economies are interconnected through trade, An economy is a system that governs the production, investment, and financial flows. Changes in one distribution, and consumption of goods and services within a economy can have ripple effects across the globe. society or geographical region. It encompasses all the activities o Economic Policy: Governments often play a and interactions involving individuals, businesses, significant role in managing and shaping their governments, and other entities as they seek to meet their needs economies through fiscal policies (taxation and and wants through the allocation of limited resources. government spending) and monetary policies (control of the money supply and interest rates). Fundamentals of Economy Understanding the dynamics of an economy involves studying  Economies are complex and diverse, but they share several its various components, interactions, and mechanisms. Economists analyze data, develop theories, and provide insights fundamental features: to help individuals, businesses, and policymakers make o Resource Scarcity: Resources such as labor, land, informed decisions that contribute to sustainable economic capital, and natural resources are limited in relation to growth, development, and the overall well-being of society. the unlimited wants and needs of individuals and society. This scarcity necessitates choices and trade- offs in how resources are allocated. Sectors of Economy o Production: Economies produce goods (physical The economy can be divided into different sectors based on the products) and services (intangible outputs) to satisfy type of economic activity taking place. These sectors represent the demands of consumers. This production involves distinct categories of production and consumption within an transforming raw materials and resources into economy. The classification of sectors can vary slightly finished products. between different countries, but generally, they are grouped as o Consumption: People and organizations consume follows: the goods and services produced. Consumption is driven by individual preferences and the ability to pay, among other factors. 6 5. Quinary Sector:  The quinary sector includes high-level services that involve decision-making and policy formulation.  It represents the top tier of services and includes activities that shape the overall direction of the economy and society.  The quinary sector often involves professionals with specialized expertise. Example: Government, healthcare administration, education administration, 1. Primary Sector: scientific research.  In the primary sector, economic activities involve the direct extraction of natural resources from the environment. Overview of India’s Economic Sector  This sector is often associated with economies in the The following is the data on India's all the sectors of early stages of development or with a significant the economy as of 2021-22: reliance on agriculture and raw material extraction. Example: Agriculture, mining, fishing, forestry. Contribution to GDP (at Workforce Sector current share 2. Secondary Sector: prices)  The secondary sector involves the manufacturing and Primary sector processing of raw materials into finished goods. (agriculture,  It is characterized by factories, production lines, and forestry, fishing, 21.82% 43.96% industrial processes. This sector often experiences mining, and quarrying) structural shifts as economies develop, with a decrease Secondary sector in the relative importance of manufacturing. (manufacturing, Example: Automobile manufacturing, steel electricity, gas, production, textile mills. water supply, and 24.29% 22.24% other utility 3. Tertiary Sector: services, and  The tertiary sector comprises service industries that construction) Tertiary sector cater to the needs and wants of individuals and 53.89% 33.80% (services) businesses.  It is a dominant sector in many advanced economies The tertiary sector is the largest sector of the Indian due to the growth of consumer demands and service- economy in terms of both GDP and employment. The based economies. primary sector is the second largest sector in terms of  The tertiary sector often requires a skilled workforce employment, but it is the smallest sector in terms of and contributes significantly to employment and GDP. GDP. The secondary sector is the smallest sector in Example: Retail, healthcare, education, banking, terms of both GDP and employment. hospitality. The following is a more detailed breakdown of the 4. Quaternary Sector: tertiary sector:  The quaternary sector involves knowledge-based activities that rely on intellectual skills and Subsector Contribution Workforce information technology. to GDP (at share  It has grown with the advancement of technology and current the increasing importance of information and prices) knowledge. Trade, hotels,  This sector contributes to innovation, research, and the transport, development of new products and services. Example: communication, 17.33% 10.28% Research and development, software development, and related education, consulting. services 7 Finance, trade, investment, insurance, real etc. estate, and 10.17% 6.23% Adam Smith, John N/A business Maynard Keynes, Theorists services Milton Friedman, Public etc. administration, N/A Gross Domestic 7.71% 5.46% Key Indicator defense, and Product (GDP) other services Analyzes various Classified into Community, economic systems types like Economic social, and and their impact capitalism, 18.68% 11.83% Systems personal socialism, mixed services economies Analyzes Experiences Facts by testbook Business fluctuations in cycles of  The composition of sectors in an economy can change Cycles economic activity expansion and over time due to technological advancements, contraction globalization, and shifts in consumer preferences. Considers global Has increased  Advanced economies tend to have a larger share of their Globalization interdependence through trade, GDP in the tertiary and quaternary sectors, reflecting finance, their service-oriented nature. technology  According to World Bank data, in many developed Informs economic Influenced by countries, the tertiary sector contributes around 70-80% policies and economic policies Policy Impact of GDP or more. decisions (fiscal and  In developing countries, the primary sector can still play monetary) a significant role in employment and GDP, especially in rural areas. Economic Systems  The growth of the quaternary and quinary sectors is  Economic systems refer to the structures and mechanisms closely linked to education, innovation, and the through which societies organize their production, development of specialized skills. distribution, and consumption of goods and services.  The categorization of sectors helps policymakers, Different economic systems emphasize varying degrees of researchers, and analysts understand the structure of an government intervention, private ownership, and market economy and make informed decisions to promote forces. Here are the main types of economic systems: balanced and sustainable economic development. 1. Capitalism (Market Economy):  In a capitalist system, most economic activities are Difference between Economics and driven by private individuals and businesses operating in competitive markets. Economy  Private ownership of resources, property, and means Aspect Economics Economy of production is central. Academic Real-world  Market forces of supply and demand determine prices, discipline studying system of production levels, and resource allocation. Definition resource allocation economic  Individuals have the freedom to pursue their own and decision- activities and interests and accumulate wealth. making interactions  Example: The United States has a predominantly Microeconomics All economic capitalist economy. Branches and activities within a 2. Socialism: macroeconomics society or region  In a socialist system, the government plays a more Studies behavior of Encompasses significant role in economic decision-making and individual agents production, resource allocation. Focus and market consumption,  The means of production are often owned or interactions controlled by the state or the community. 8  Distribution of wealth is more equitable, with a focus Facts by testbook on reducing income inequality.  According to the World Bank, mixed economies are the  The government provides essential services like most common economic system globally, with various education, healthcare, and welfare programs. degrees of government intervention and market  Example: Scandinavian countries like Sweden and influence. Norway have socialist elements in their economies.  The Global Competitiveness Report by the World 3. Mixed Economy: Economic Forum evaluates countries based on  A mixed economy combines elements of both economic factors. Market-driven economies like capitalism and socialism. Singapore and the United States rank highly for  Private ownership and market forces coexist with innovation and competitiveness. government intervention and regulation.  Economic system transitions can be challenging; post-  The government may provide social safety nets, public Soviet economies, for example, faced difficulties services, and regulate certain industries. adapting to market-oriented systems after the collapse  The balance between government and private sector of the Soviet Union. involvement can vary widely.  Example: Many developed countries, including the UK and Germany, have mixed economies. 4. Command Economy (Planned Economy):  In a command economy, the government has extensive control over all economic activities.  The government decides what to produce, how to produce, and for whom to produce.  Central planning aims to achieve specific economic and social goals.  Individual choices and market forces have limited influence on resource allocation.  Example: The former Soviet Union and North Korea are examples of command economies. 5. Traditional Economy:  In a traditional economy, economic activities are shaped by customs, traditions, and historical practices. Goods and services are produced based on long- established patterns of behavior.  Little specialization and technological advancement occur. This type of economy often exists in remote or indigenous communities. Example: Some tribal societies in remote areas of Africa or South America.  The choice of an economic system reflects a society's values, historical context, and priorities. While each system has its advantages and drawbacks, economies worldwide often incorporate a mix of approaches to best address the needs of their citizens and ensure sustainable growth and development. 9 Chapter 2: Concept of Income Introduction the Gini coefficient, which indicates the level of income inequality within a society. In an economy, the concept of income refers to the total o Labor Income: Labor income is the portion of earnings generated by individuals, households, businesses, and income earned through employment, including other entities within a specific time period. It is a fundamental wages, salaries, and employee benefits. measure that provides insights into the economic activity, well- o Capital Income: Capital income is the portion of being, and distribution of resources within a society. The income generated from ownership of assets, such as concept of income is multifaceted and encompasses various interest, dividends, and capital gains. aspects: o National Income: National income represents the  Understanding the concept of income is essential for total earnings generated within a country's borders in policymakers, economists, and individuals alike. It informs a given time period, usually a year. It includes all economic policies, helps assess the economic well-being of forms of income earned by individuals, businesses, different groups, and guides decisions related to taxation, and the government. National income serves as a key social welfare programs, and economic development indicator of a country's economic performance and is strategies. used to measure and compare the economic growth of different nations. Concept of Factor and Non-Factor Income o Household Income: Household income refers to the Factor and nonfactor incomes are important concepts in total earnings received by all members of a economics that refer to the different ways in which individuals household. It includes wages, salaries, business and entities earn income. These terms help distinguish between profits, rental income, and other sources of income the earnings generated from active participation in production that contribute to the overall financial well-being of (factor incomes) and other forms of income that do not directly the household. involve production activities (nonfactor incomes). o Personal Income: Personal income represents the total earnings received by an individual. It includes Factor Incomes wages, salaries, dividends, interest, rental income,  Factor incomes are earnings derived from the factors of and other sources of individual earnings. Personal production, which are the resources required to produce income serves as the basis for calculating personal goods and services. There are four primary factors of income taxes. production: o Disposable Income: Disposable income is the  Land: Land includes natural resources such as minerals, income remaining for households after deducting water, forests, and agricultural land. Factor income taxes. It is the amount of money available for generated from land is often referred to as "rent." spending, saving, and investment after accounting for  Labor: Labor refers to human effort and skills involved in tax obligations. the production process. The income earned by individuals o Gross Income: Gross income is the total earnings for their work is known as "wages" or "salaries." before any deductions are made, including taxes and other withholdings. It represents the full amount earned from various sources. o Net Income: Net income is the amount of money remaining after deducting taxes and other deductions from gross income. It reflects the actual earnings available for spending and saving. o Per Capita Income: Per capita income is the average income earned by each individual in a country, region, or community. It is calculated by dividing the total income by the total population. o Income Distribution: Income distribution refers to how income is spread across different segments of the population. It is often represented using measures like 10  Capital: Capital encompasses physical assets like of factors, including the growth of the economy, the machinery, equipment, and buildings used in production. expansion of the workforce, and the rising productivity Factor income generated from capital is typically divided of workers. into "interest" (income earned by lending capital) and  The growth of India's factor income is having a positive "profits" (income earned by business owners from capital impact on the lives of Indians. It is leading to higher investment). living standards, increased consumption, and  Entrepreneurship: Entrepreneurship involves the investment in education and healthcare. coordination of the other factors of production to create goods and services. Factor income associated with Non-factor Incomes entrepreneurship is often referred to as "profit" or  Nonfactor incomes, as the name suggests, are earnings that "entrepreneurial income." do not arise directly from participation in the production  Factor incomes are payments made to the owners of these process. Instead, they are generated through other means factors of production as compensation for their that do not involve land, labor, capital, or entrepreneurship. contributions to the production process. These incomes Nonfactor incomes include various forms of income that reflect the value added by each factor to the overall are received without direct involvement in production: production of goods and services.  Transfer Payments: Transfer payments are payments made by the government to individuals or households for India’s Factor Income various reasons, such as social welfare, unemployment India's factor income is the sum of the following: benefits, pensions, and subsidies. These payments are  Compensation of employees: This is the income considered nonfactor incomes because they are not earned earned by workers in the form of wages, salaries, and through productive activity. other benefits.  Unearned Income: Unearned income includes income  Operating surplus: This is the income earned by received without active participation, such as interest on businesses after paying for all of their costs, including savings accounts, dividends from investments, and rental labor, raw materials, and depreciation. income from property ownership.  Property income: This is the income earned from  Gifts and Inheritances: Money or assets received as gifts assets such as land, capital, and financial instruments. or inheritances are considered nonfactor incomes, as they  Net taxes on production and imports: This is the are not earned through productive efforts. difference between the taxes that businesses pay on  Lottery Winnings and Windfalls: Unexpected gains, production and imports, and the subsidies that they such as lottery winnings or unexpected bonuses, are receive from the government. considered nonfactor incomes, as they do not involve active participation in the production process. The following table shows the breakdown of India's factor income by category in 2021-22. India’s Non-Factor Income Variable and Data Category Value (₹ trillion)  Non-factor income is income that is not derived from Compensation of employees 53.14 the production of goods and services. It is also known Operating surplus 42.42 as transfer income. Examples of non-factor income include: Property income 10.27 o Gifts Net taxes on production and -12.91 o Donations imports o Charities Total factor income 92.88 o Pensions o Scholarships  The compensation of employees is the largest category o Government benefits of factor income, accounting for over 50% of the total. o Social security payments The operating surplus is the second largest category of o Unemployment benefits factor income, accounting for over 40% of the total. The  Non-factor income does not contribute to economic property income and net taxes on production and growth, but it does play an important role in reducing imports categories are much smaller, accounting for less poverty and inequality. It also helps to support people than 15% of the total combined. who are unable to work, such as the elderly, the  India's factor income has been growing steadily in disabled, and children. recent years. This growth is being driven by a number 11 The following are some of the key sources of non-factor received through means other than direct involvement in income in India: production, such as transfer payments, unearned income, gifts,  Government social security programs: The Indian inheritances, and windfalls. Both types of incomes contribute to government provides a variety of social security individuals' and households' overall financial well-being and programs to its citizens, including the National Old play significant roles in economic analysis and policy Age Pension Scheme, the Indira Gandhi National considerations. Disability Pension Scheme, and the Integrated Child Development Services. These programs provide Factors of Production financial assistance to the elderly, the disabled, and  Factors of production are the resources or inputs that are children. combined in the production process to create goods and  Remittances from non-resident Indians: Non- services. These factors are essential for the generation of resident Indians (NRIs) send billions of dollars in economic output and play a crucial role in determining the remittances to their families in India each year. These overall efficiency and productivity of an economy. There remittances are a major source of non-factor income are four primary factors of production: for many Indian households. o Land: Land refers to all natural resources used in the  Private charities and foundations: There are a production process. This includes not only physical number of private charities and foundations in India land but also minerals, water bodies, forests, and that provide assistance to the poor and vulnerable. agricultural resources. Land is a fundamental factor These organizations provide a variety of services, that provides the raw materials required for various including food, clothing, shelter, and education. economic activities.  Individual gifts and donations: Many individuals in o Labor: Labor represents the human effort and skills India make gifts and donations to their families, applied in the production of goods and services. It friends, and neighbors in need. These gifts and encompasses both physical and mental work donations are another important source of non-factor performed by individuals. Labor includes all types of income for many Indian households. work, from manual labor to skilled professional  Non-factor income plays an important role in the services. Indian economy. It helps to reduce poverty and o Capital: Capital refers to the tools, equipment, inequality, and it supports people who are unable to machinery, and infrastructure used in production. It work. The Indian government is committed to includes both physical capital (machinery, factories, providing social security programs to its citizens, and vehicles) and financial capital (funds used to purchase it is also encouraging private charities and foundations assets or invest in projects). Capital enhances the to play a greater role in helping the poor and productivity of labor and contributes to the vulnerable. production process. o Entrepreneurship: Entrepreneurship involves the The following is some data on India's non-factor ability to innovate, take risks, and coordinate the income: other factors of production to create goods and  Remittances from non-resident Indians (NRIs): services. Entrepreneurs identify opportunities, India received $89.4 billion in remittances from NRIs organize resources, make business decisions, and in 2022, according to the World Bank. This makes assume the risk associated with business ventures. India the world's largest recipient of remittances. Entrepreneurship is essential for economic growth  Private charities and foundations: Private charities and development. and foundations in India donated an estimated ₹50,000  These four factors of production are often referred to as crores to charitable causes in 2022, according to the "inputs" because they are combined in various ways to Centre for Social Impact and Philanthropy. create outputs or finished goods. The efficiency with which  Individual gifts and donations: Individual gifts and these factors are combined and utilized impacts the overall donations in India are estimated to be in the trillions of productivity of an economy. For instance: rupees, but there is no reliable data on the exact o Land provides the resources necessary for amount. agricultural production, mining, and construction. o Labor contributes the skills and effort required for Factor incomes are earned through the active engagement in the manufacturing, services, and all forms of economic production process, including land, labor, capital, and activity. entrepreneurship. Nonfactor incomes, on the other hand, are 12 o Capital facilitates efficient production by providing Factor Cost represents the subsidies provided to reduce the machinery and technology to enhance labor's cost of production. productivity.  Example: Let's consider a scenario where the Factor Cost o Entrepreneurship drives innovation, identifies (FC) of producing a certain product is ₹100, and the market opportunities, and organizes the other factors government levies a sales tax of ₹20 on this product. The to create value. Market Price (MP) at which consumers buy the product  The interaction and combination of these factors of would be ₹120, which includes both the Factor Cost and production in different proportions lead to the production the sales tax. of goods and services that meet the needs and wants of  In this example: FC = ₹100 (actual cost of production), individuals and society as a whole. Efficient allocation and Sales Tax = ₹20 utilization of these factors are critical for economic growth, o MP = FC + Sales Tax = ₹100 + ₹20 = ₹120. development, and the well-being of a nation's citizens.  The difference between Market Price (₹120) and Factor Cost (₹100) in this case (₹20) represents the sales tax added Concept of Factor cost and Market Price to the product's cost.  The concepts of Factor Cost (FC) and Market Price (MP)  Both Factor Cost and Market Price are crucial concepts for are important in economics and are used to understand understanding the economic transactions, pricing different aspects of pricing and economic transactions mechanisms, and the impact of taxes and subsidies on the within an economy. These concepts are particularly prices of goods and services in an economy. relevant when analyzing the national accounts and the measurement of economic activities. Concept of Constant and Current Price  Factor Cost (FC): Factor Cost refers to the actual cost  The concepts of constant price and current price are incurred by producers or firms in producing goods and fundamental in economics, particularly when comparing services. It includes payments made to the factors of economic data over time or analyzing changes in economic production—land, labor, capital, and entrepreneurship— variables. These concepts help us understand the effects of for their respective contributions to the production process. inflation, changes in price levels, and the real value of Factor Cost does not take into account any taxes or economic indicators. subsidies that are involved in the production and  Constant Price: Constant price refers to the value of a distribution of goods. variable or economic indicator after adjusting for inflation  In simpler terms, Factor Cost represents the income earned or changes in price levels. It allows for comparisons of data by the owners of factors of production for their across different time periods by removing the influence of participation in the production process. It gives us a price changes. Constant price data are also known as real perspective of the economic activities from the producers' terms or real values. Calculating constant price involves side without considering any indirect taxes or subsidies. using a base year as a reference point for prices.  Market Price (MP): Market Price, on the other hand, is  Current Price: Current price refers to the actual value of the price at which a product or service is sold in the market. a variable or economic indicator as measured in the current It includes the actual price paid by consumers to purchase time period without adjusting for inflation or changes in the goods and services. Market Price takes into account not price levels. Current price data reflect the nominal value of only the production costs but also any indirect taxes (such variables and are affected by price changes. as sales tax or value-added tax) that are added to the price  Relation Between Constant Price and Current Price: and any subsidies that are subtracted from the price. The relationship between constant price and current price  In simple terms, Market Price represents the price that is based on the impact of inflation. As time progresses, consumers pay for a product, which includes the actual cost prices tend to increase due to inflation. When comparing of production plus any taxes they have to bear and any economic data over different time periods, using current subsidies they receive. price data might not accurately reflect changes in actual  Relation Between FC and MP: The relationship between economic performance. Constant price data, which adjust Factor Cost and Market Price is influenced by indirect for inflation, provide a more accurate picture of how the taxes and subsidies. If indirect taxes are present (i.e., the quantity or value of goods and services has changed over Market Price is higher than the Factor Cost), the difference time. between Market Price and Factor Cost represents the taxes  Example: Let's consider a simple example to illustrate the that are added to the cost of production. Conversely, if difference between constant price and current price using subsidies are present (i.e., the Market Price is lower than GDP: the Factor Cost), the difference between Market Price and 13  In Year 1:  It doesn't consider variations in the cost of living across o Nominal GDP (Current Price): $1,000 different regions within a country. For example, urban o Price Index: 100 (Base Year) areas may have a higher cost of living than rural areas.  In Year 2:  Per capita income alone doesn't provide a complete picture o Nominal GDP (Current Price): $1,200 of a nation's well-being. Other factors, such as education, o Price Index: 120 healthcare, and overall quality of life, are also crucial for a  To calculate GDP in constant price terms, we adjust the comprehensive assessment. nominal GDP using the price index of the base year: o GDP in Constant Price (Year 1): Rs. 1,000 (Nominal India’s Per Capita Income Statistics GDP) / 1.00 (Price Index) = Rs. 1,000  India's per capita income is the total income of all o GDP in Constant Price (Year 2): Rs. 1,200 (Nominal Indians divided by the total population of India. It is a GDP) / 1.20 (Price Index) = Rs. 1,000 measure of the average income of Indians.  In this example, despite the increase in nominal GDP at  Per capita income can be measured in current or current prices, the GDP in constant price terms remains the constant prices. Current prices reflect the current prices same, indicating that the real economic output has not of goods and services, while constant prices are adjusted changed when accounting for inflation. for inflation.  Constant price data are particularly useful for making  India's per capita income in current US dollars was meaningful comparisons of economic variables over time, $2,303.2 in 2022, according to the World Bank. This as they strip away the impact of price changes and provide means that the average Indian earned $2,303.2 in 2022. insights into the actual changes in the quantity or value of  India's per capita income in constant US dollars was goods and services produced. $1,817.5 in 2022, according to the World Bank. This means that the average Indian earned $1,817.5 in 2022, Concept of Per capita Income adjusted for inflation.  India's per capita income has been growing steadily in  Per capita income, also known as per capita GDP (Gross recent years. This growth is being driven by a number Domestic Product), is a measure of the average income of factors, including the growth of the economy, the earned by each individual in a nation, region, or area. It is expansion of the workforce, and the rising productivity a key indicator used to assess the economic well-being and of workers. standard of living of the population.  The growth of India's per capita income is having a  Calculation: Per capita income is calculated by dividing positive impact on the lives of Indians. It is leading to the total income (usually Gross Domestic Product) of a higher living standards, increased consumption, and country or region by its population. The formula is as investment in education and healthcare. follows:  It is important to note that India's per capita income is o Per Capita Income = Total Income (e.g., GDP) / still relatively low compared to other countries. Population However, the rapid growth of India's economy is Purpose: expected to lead to significant increases in per capita  Per capita income is used to gauge the economic prosperity income in the coming years. and wealth distribution within a country or region.  It helps policymakers and economists assess the standard of living, compare living standards across different countries, and make international economic comparisons.  It can also be used to identify disparities in income distribution within a country, as a high per capita income may mask significant income inequality. Limitations:  Per capita income provides an average income figure and doesn't account for income inequality. A high per capita income does not necessarily mean that all individuals in a country are well-off; it might result from a small wealthy elite. 14 National Income helps gauge the overall health of the economy, whether it's growing, contracting, or stagnating.  National income, also known as national income and  Standard of Living: National income per capita is often product accounts (NIPA), refers to the total monetary value used as a measure of the standard of living of a country's of all goods and services produced within a country's citizens. Higher national income generally corresponds to borders over a specific period, usually a year. higher average incomes and a better quality of life.  It provides a comprehensive measure of a country's  Economic Growth: National income data over time can economic performance and is a crucial indicator for reveal trends in economic growth. Consistently increasing understanding the overall health of an economy. National national income indicates a growing economy, while income calculations involve various components, and stagnation or decline may signal underlying problems. different measures capture different aspects of economic activity.  Income Distribution: National income data can highlight income distribution patterns within a country. By examining how income is distributed among different Components of National Income segments of the population, policymakers can address  National income serves as the foundation for various issues of inequality and social disparities. economic analyses, policy decisions, and comparisons  Policy Formulation: Governments use national income between countries. It helps policymakers and economists data to formulate economic policies. Policies related to assess the economic growth, standard of living, income taxation, social welfare programs, public spending, and distribution, and overall development of a nation. There are economic development are often based on an several important concepts related to national income: understanding of the overall economic performance  Gross Domestic Product (GDP): GDP, a key national indicated by national income figures. income measure, represents the total value of final goods  Business Cycle Analysis: Changes in national income are and services produced within a country's borders, closely linked to business cycles, which are fluctuations in calculated using production, income, and expenditure economic activity. By analyzing these fluctuations, approaches. policymakers can implement measures to stabilize the  Gross National Product (GNP): GNP is the sum of GDP economy during periods of recession or inflation. plus net income from abroad, accounting for both domestic  Resource Allocation: National income data provide and international income generated by a country's insights into which sectors of the economy are thriving and residents. which may need attention. This information helps in  Net Domestic Product (NDP): NDP is obtained by resource allocation and directing investments to areas that subtracting depreciation (wear and tear of capital assets) contribute to growth. from GDP. It represents the value of goods and services  International Relations: National income figures produced after accounting for the replacement of worn-out influence a country's standing in the global economic capital. community. Strong economic performance enhances a  Net National Income (NNI): NNI is derived from NDP by country's credibility and can impact its trade relationships adjusting for taxes, subsidies, and other factors. It accounts and borrowing ability. for income earned by residents of the country, whether it's  Economic Policies Evaluation: By comparing national earned domestically or abroad. income data before and after implementing specific  Per Capita Income: Per capita income is calculated by policies, policymakers can assess the effectiveness of those dividing the total national income by the total population. policies in achieving desired economic outcomes. It provides an average measure of income per individual  Development Planning: National income data are crucial and is often used to assess the standard of living and for long-term development planning. They help identify economic well-being of the population. areas of strength and weakness in an economy, enabling the formulation of strategies for sustainable economic Significance of National Income growth.  The concept of national income holds significant  In essence, national income serves as a foundational metric importance in economics and policymaking due to its that informs economic analysis, guides policy decisions, ability to provide valuable insights into various aspects of and contributes to a deeper understanding of the economic an economy. Here are some key reasons why national dynamics within a country and on the global stage. income is significant:  Economic Performance: National income serves as a primary indicator of a country's economic performance. It 15 Limitations of National Income  Quality and Composition of Output: National income  While national income is a valuable economic indicator, it doesn't differentiate between types of goods and services also has several limitations that need to be considered when produced. It treats all economic activities as equal, even interpreting its significance and drawing conclusions about though some sectors might have greater social or an economy. Some of the key limitations of national environmental costs. income include: o Example: A country might have high national  Excludes Non-Market Activities: National income income due to substantial arms manufacturing, but calculations primarily focus on market activities, excluding this might not contribute positively to societal well- non-market activities like household production, volunteer being in the same way as investments in education or work, and informal economy transactions. As a result, it healthcare. may not provide a complete picture of economic well-  Price Changes and Inflation: Changes in national income being. over time might be influenced by inflation or deflation, o Example: Many individuals provide unpaid which can distort the real economic performance. caregiving services to family members. While this o Example: If a country experiences high inflation, the activity has significant economic value, it is not nominal national income might increase even if the included in national income calculations. real economic output remains relatively unchanged.  Quality of Life and Well-Being: National income doesn't  Externalities: National income calculations generally capture factors that contribute to overall quality of life and don't consider externalities, which are the unintended well-being, such as environmental sustainability, access to consequences of economic activities, such as education, healthcare, leisure time, and social cohesion. environmental degradation, pollution, and public health o Example: A country might have a high national impacts. income due to high levels of industrial production, but o Example: The production of goods might generate if this leads to environmental pollution and health pollution that affects public health. While the income issues, the well-being of its citizens may still be from producing these goods contributes to national compromised. income, the negative health impacts are not directly  Income Distribution: While national income provides an factored in. average measure of income, it doesn't reveal the  Depreciation: While depreciation (wear and tear of distribution of income among different segments of the capital) is deducted to arrive at net measures like Net population. High average income doesn't necessarily Domestic Product (NDP), these deductions can sometimes indicate equitable income distribution. be arbitrary and not accurately reflect the true extent of o Example: Country A and Country B both have the capital deterioration. same average national income per capita. However, o Example: A country might report a high GDP due to in Country A, income is evenly distributed, while in significant investment, but if the depreciation rate of Country B, it is highly concentrated among a small capital assets is high, the net increase in wealth might elite. be lower than suggested.  Non-Monetary Contributions: It doesn't account for non-  International Comparisons: National income figures can monetary contributions to the economy, such as unpaid be misleading when comparing economies with different household labor, which plays a crucial role in supporting price levels, cost structures, and quality of life factors. economic activities. o Example: When comparing national incomes o Example: A significant portion of agricultural between countries with vastly different cost production in developing countries is carried out by structures, a higher national income in one country subsistence farmers who consume much of what they might not necessarily mean higher living standards. produce. This activity doesn't contribute directly to market income but is vital for livelihoods. Interesting Fact  Hidden Economies: National income calculations might  The informal economy, which includes unreported not accurately capture the activities of underground or economic activities, can account for a significant informal economies, which can be significant in some portion of national income in some countries. For countries. instance, the informal sector contributes about 50% of o Example: Informal street vendors who don't report India's GDP and over 85% of Ghana's GDP. their earnings might contribute significantly to a  The Gini coefficient, a measure of income inequality, country's economy, yet their income isn't accounted can vary widely among countries. For example, South for in official national income estimates. Africa has a Gini coefficient of around 0.63, indicating 16 significant income inequality, while Denmark has a Gini utilized to ensure a complete representation of the coefficient of around 0.25, reflecting a more equitable financial sector in economic measurements. distribution of income. o Local Governments and Autonomous  These examples and data highlight how the limitations Organizations: Activities of local governments and of national income can impact our understanding of autonomous organizations are also taken into economic realities and underscore the need to consider account, expanding the scope of economic data a broader range of indicators for a comprehensive collection to include their contributions. assessment of economic well-being and development.  These changes reflect efforts to enhance the accuracy and relevance of economic statistics and to adapt to changes in  It's important to recognize these limitations when using the economy over time. Accurate and comprehensive national income as a basis for economic analysis and economic data is crucial for informed policymaking and policymaking. While it provides valuable insights, relying economic planning. solely on this indicator might lead to an incomplete understanding of an economy's complexity and dynamics. India’s National Income Overview Supplementing national income analysis with other  India's national income is the total value of all final economic and social indicators is essential for a more goods and services produced in India in a given year. It comprehensive assessment. is a measure of the size of the Indian economy.  National income can be measured in current or constant Changes Done in National Income prices. Current prices reflect the current prices of goods and services, while constant prices are adjusted for Calculations in 2015 inflation.  Change in Base Year: The base year for calculating  India's national income in current prices was ₹272.04 economic indicators like GDP was shifted from 2004-05 to lakh crore in 2022-23, according to the National 2011-12. This change is a standard practice to reflect the Statistical Office (NSO). This means that the total evolving economic structure and inflation rates. value of all final goods and services produced in India  Shift from GDP at Factor Cost to GDP at Market Price: in 2022-23 was ₹272.04 lakh crore. The method of calculating GDP was switched from GDP  India's national income in constant (2011-12) prices at Factor Cost (FC) to GDP at Market Price (MP). This was ₹159.71 lakh crore in 2022-23, according to the change likely involved accounting for taxes and subsidies NSO. This means that the total value of all final goods on products, as GDP at Market Price accounts for these and services produced in India in 2022-23, adjusted for factors. inflation, was ₹159.71 lakh crore.  GDP at Constant Market Prices: GDP is now measured  India's national income has been growing steadily in at constant market prices. This means that the impact of recent years. This growth is being driven by a number inflation or deflation has been removed to provide a clearer of factors, including the growth of the economy, the picture of real economic growth. expansion of the workforce, and the rising productivity  Gross Value Added (GVA) Calculation: GVA, an of workers. important component of GDP, is now calculated at basic  The growth of India's national income is having a prices rather than factor costs. This adjustment is made to positive impact on the lives of Indians. It is leading to better reflect the value addition by different economic higher living standards, increased consumption, and sectors. investment in education and healthcare.  Data Sources and Coverage: Various data sources have  It is important to note that India's national income is been mentioned to improve the accuracy and coverage of still relatively low compared to other countries. e

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