2. Meaning of Economy
• An economy consists of
– the economic system,
– the production, distribution or trade and
– consumption of goods and services in certain
region or country.
• An economy is the total aggregate sum of all transactions
of value between two parties, when both parties agree to
the value, commonly expressed in some currency, or
3. • A given economy has main factors such as
– its culture,
– technological evolution,
– social organization,
– political structure and legal systems,
– geography, natural resource endowment and
4. Economic Phases
• The economy may be considered as having
developed through the following Phases
5. Phases of Modern Economies
• Primary stage: Involves the extraction and production of raw
materials such as corn, coal, wood and iron.
• Secondary stage: Involves the transformation of raw or
intermediate materials into goods.
• Tertiary stage: Involves the provision of services to consumers
and businesses such as cinema and insurance and banking.
• Quaternary stage: Involves the research and development
needed to produce products from natural resources and their
6. Methods of Measuring Economic Activity
Consumer spending Also known as personal consumption expenditure. It is the
largest part of aggregate demand at the macroeconomic level.
Exchange Rate The rate at which one currency will be exchanged for another.
Gross Domestic Product The market value all the final goods and services produced
within a country in a given period of time.
Gross National Product The market value of all the products and services produced in
one year by labour and property supplied by the residents of a
Interest Rate The rate at which interest is paid by borrowers for the use of
money that they borrow from a lender.
Stock market The size of the world stock market
National debt The debt owed by a central government
Rate of inflation A rise in the prices of goods and services in an economy over a
period of time.
Unemployment When people are without work and actively seeking work
Balance of Trade The difference between the monetary value of exports and
imports of output in an economy over a certain period.
7. Economic Development • Economic development refers to process of change in the
overall economic activity.
• Acc. To Michael P. Todaro,
“Development must, therefore be conceived as a multi dimensional process
involving major changes in social structure, population attitudes and
institutions as well as acceleration of economic growth, reduction of inequality
and eradication of absolute poverty.”
• Basic core values of Development: (By Prof. Goulet)
– Sustenance: fulfillment of basic needs
– Self Esteem: Feeling of worth, independence and self-respect
– Freedom from servitude: Freedom from evils of want and ignorance
9. • United Nations Expert Committee
• "Development concerns not only man's material needs but also the
improvement of the social condition of his life. Development is, therefore,
not only economic growth, but growth plus change social, cultural and
institutional as well as economic".
ECONOMIC DEVELOPMENT= ECONOMIC GROWTH+ CHANGES
• "Economic development is a continuous process which has to be extended
over a long period of time so as to break the vicious circle of poverty and
lead a country to a stage of self-sustaining growth or to self-generating
11. Indicators of Economic Development
• The Physical Quality of Life Index (PQLI) is an attempt to measure the
quality of life or well-being of a country. The value is the average of three
– basic literacy rate,
– infant mortality, and
– life expectancy at age one, all equally weighted on a 0 to 100 scale.
• It was developed in the mid-1970s by Morris David Morris, an indicator
of development. PQLI might be regarded as an improvement but shares the
general problems of measuring quality of life in a quantitative way.
12. Steps to Calculate Physical Quality of Life:
1) Find percentage of the population that is literate (literacy rate).
2) Find the infant mortality rate. (out of 1000 births) INDEXED Infant
Mortality Rate = (166 - infant mortality) × 0.625
3) Find the Life Expectancy. INDEXED Life Expectancy = (Life expectancy -
42) × 2.7
Physical Quality of Life =
(Literacy Rate + INDEXED Infant Mortality Rate + INDEXED Life Expectancy)
•) Higher the value of PQLI more will be the economic development
14. Human Development Index (HDI)
• The Human Development Index (HDI) is a composite statistic of life
expectancy, education, and income indices used to rank countries into four
tiers of human development. HDI is a standard means of measuring well
being, especially child welfare. It is used to distinguish whether the country
is a developed, a developing or an under developed country and also to
measure the impact of economic policies on quality of life.
• It was created by the Pakistani economist Mahbub Ul Haq and the Indian
economist Amartya Sen in 1990 and was published by the United Nations
15. Three Indicators of HDI
2012 Very High HDI nations, by population size
§ Health : Life expectancy at birth
25 years Minimum
85 Years Maximum
16. Human Development Report 2013 released by the United Nations
Development Programme (UNDP), India’s HDI value is 0.554 and rank
is 136 among 186 countries on its human development index (HDI).
India is in medium human development category.
It is calculated as under:
• Life expectancy at birth: 65.8
• Expected years of schooling: 10.7
• Mean years of schooling: 4.4
• Standard of living: GDI per capita(US $): 3285
17. Economic Growth
• According to Prof. Meier and Baldwin, "Economic growth is a process
whereby an economy's real national income increases over a long period of
• a) process :
– changes in the supply of fundamental factors, and
– changes in the structure of demand for the products.
• b) real national income:
– there is a positive correlation between the real national income and
– economic development.
• c) long period:
– refers to an upward trend in real national output over a long period.
18. Economic Growth
• “a process of continued (sustained), considerable increase in
the real national income over a long period of time.”
– National Income is the sum total of all the final goods and services
produced in one country during one year after making some necessary
– A rate of increase in national income is the rate of growth of an
19. Definitions of Economic Growth
– Acc. to Simon Kuznet (1971), “economic growth is a long term
rise in the capacity to supply increasingly diversified economic
goods and services to its population.”
– As per Jacob Viner, “reduction of mass poverty as a crucial test of
• Indicators of Economic Growth:
– National income
– Real per capita income(most reliable indicator)
21. Economic Growth Vs. Economic Development
Basis Economic Development Economic Growth
Economic development implies changes in
income, savings and investment along with
progressive changes in socio-economic
structure of country (institutional and
Economic growth refers to an
increase in the real output of
goods and services in the
Development relates to growth of human
capital indexes, a decrease in inequality
figures, and structural changes that improve
the general population's quality of life.
Growth relates to a gradual
increase in one of the
components of Gross
spending, investment, net
Qualitative.HDI (Human Development
Index), gender- related index (GDI), Human
poverty index (HPI), infant mortality, literacy
Quantitative. Increase in real
GDP. Shown by PPF.
22. Basis Economic Development Economic Growth
Brings qualitative and
quantitative changes in the
Brings quantitative changes in
Concept Broader concept Narrower concept than economic
Economic development is
more relevant to measure
progress and quality of life in
Economic growth is a more
relevant metric for progress in
developed countries. But it's
widely used in all countries
because growth is a necessary
condition for development.