In capitalism, only those consumer goods will be produced that are in demand, i.e.

, goods that can

be sold profitably either in the domestic or in the foreign markets.
© Ina capitalist society the goods produced are distributed among people not on the basis of what
people need but on the basis of Purchasing Power—the ability to buy goods and services.
Adam Smith (1723-1790) laid down certain ideas that led to the birth of capitalism. He raised his voice
against the heavy-handed government regulation of commerce and industry of the time which did not
allow the economy to tap its full economic worth and reach the level of well-being. Stressing ‘division
of labour’, an environment of ‘laissez-faire’ (non-interference by the government), he proposed that
the ‘invisible hand’ of ‘market forces' (price mechanism) will bring a state of equilibrium in the
economy anda general wellbeing to the countrymen. For such an economy to function for public well-
being, he has acknowledged the need of competition in the market.
Concept Check
Capitalism: What does the capitalist thinker say about the following in a capitalistic market system:
1. prices,
2. competition,
3. private property,
4, exchange,
5. government,
6. income distribution,
7. and power?
Do attempt the question before taking a sneak-peak at the answer!
Answer: 1, Prices — controlled by market; 2. Competition — multiple sellers competeto sell their goods
and services; 3. Private Property — allowed; 4. Exchange — driven by market forces; 5. Government —
role of facilitator and regulator; 6. income distribution — based on one’s earnings in the market
economy; 7. Power~ what do you think?
CONCEPT NOTE MEASUREMENT OF GROWTH, NATIONAL INCOME AND PE

1.7.2. Socialism
In theory, an economy thats a transition between capitalism and commu!
* Itis based on
government, rather than individual, ownership of resources
worker control of the government, such that workers, rather than capitalist, control capital
and other productive resources
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 1.7.3. Mixed Economy
¢ An economy, or economic system, that relies on both markets and governments to allocate
resources
While, in theory, we could have a pure market economy or a pure command economy, in the real
world al economies are mixed, relying on both markets and governments for allocation decisions.
© Markets allocate resources through voluntary choices made by living, breathing people. Government
forces allocation through involuntary taxes, laws, restrictions, and regulations. Both institutions play
vital roles in an economy.
The belief in the self-correcting quality of the market and the ‘invisible hand’ of Adam Smith got a
major setback in carly 20th century during the Great Depression (1929), which was a period of
escalating large scale unemployment, downfall in demand and economic activities and lockouts in
industrial enterprises. Questioning the limitations of market mechanism. Keynes suggested strong
government intervention in the economy. To get the economy out of the depression, he suggested an
increase in government expenditure, discretionary fiscal policy (fiscal deficit, lower interest rates,
cheap money supply, etc.) to boost the demand of goods and services. Keynes suggested the
capitalistic order to assimilate the goals of the socialistic economy. Gradually, governments started
producing and supplying essential ‘public goods' intended to guarantee minimum level of nutrition to
I, healthcare, sanitation, education and social security. The essential goods and services which were
date being purchased by the people as ‘private goods' were soon made available by the state 'free-
of-cost' giving people more spare money to create demand for the goods and services which were part
of the market. The mixed economy arrived in this way.
Before we move on to the serious task of calculating GDPs and National incomes, let us understand the
different sectors into which economic activity has been categorized and the different types of goods
produced in an economy.
CONCEPT NOTE MEASUREMENT OF GROWTH, NATIONAL INCOME AND PE

Concept Check
Q. According to the analysis of the British economist John Maynard Keynes.
a) _...markets coordinate supply and demand so thata policy of laissez-faire would prevent recession.
b) ...economic fluctuations were the cumulative result of mistakes made by businesses and
households in an uncertain world.
c} government demand could be used to smooth fluctuations in aggregate output and income.
d) supply creates its own demand through the circular flow of economic activity
e) None of the above
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 income allocated on need rather than on resource ownership or contribution to production
(using the needs standard rather than the contributive standard).
© Ina socialist society the government decides what goods are to be produced in accordance with the
needs of society.
© The primary goals of modern real-world socialism are:
To correct the inefficiencies of market failures*.
To obtain more equal wealth and income distributions.
To equalize economic opportunities.
Rooted in the ideas of historical change proposed by the German philosopher Karl Marx (1818-1883)
more specifically, this kind of economic system came up in the erstwhile USSR after the Bolshevic
Revolu: n (1917) and got its ideal shape in the People's Republic of China (1949).
* Market failure happens when the price mechanism fails to allocate scarce resources efficiently or
when the operation of market forces lead to a net social welfare loss. Complete market failure occurs
when the market simply does not supply products at all - we see "missing markets", Partial market failure
occurs when the market does actually function but it produces either the wrong quantity of a product or
at the wrong price.
Concept Check
ism: What does the socialist thinker say about the following in a capitalistic market system:
prices,
Nor

competition,
private property,
ew

exchange,
5. government,
6. income distribution,
CONCEPT NOTE MEASUREMENT OF GROWTH, NATIONAL INCOME AND PE

7. and power?
Do attempt the question before taking a sneak-peak at the answer!
Answer: 1. Prices — controlled by government; 2. Competition — limited competition between
government firms; 3. Private Property — not allowed; 4. Exchange — determined by government; 5.
Government- role of producer, facilitator and regulator; 6. Income distribution — based on one’s need;
7. Power ~ what do you think?
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 1.8.3 Tertiary activitie:
© The ter ry sector of the economy is also known as the service industry. This sector sells the goods
produced by the secondary sector and provides commercial services to both the general population
and to businesses in all five economic sectors.
* Activities associated with this sector include retail and wholesale sales, transportation and
distribution, restaurants, clerical services, media, tourism, insurance, banking, health care, and law.
* In most developed and developing countries, a growing proportion of workers is devoted to the
tertiary sector.
Although many economic models divide the economy into only three sectors, others di ide into four or
even five (quaternary and quinary being the fourth and the fifth). These two sectors are closely linked
with the services of the tertiary sector, which is why they can also be grouped into this branch.
1.8.4 Quaternary activities
© The fourth sector of the economy, the quaternary sector, consists of intellectual activities often
associated with technological innovation. It is sometimes called the knowledge economy.
MEASUREMENT OF GROWTH, NATIONAL INCOME AND PE

* Activities associated with this sector include government, culture, libraries, sdentific research,
education, and information technology.
ies are what drive technological advancement, which can have
a huge impact on economic growth
QUERY? 146207241
CONCEPT NOTE

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3g
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 Answer: C
In this section we will be discussing about five sectors into which economic activity can be classified —
primary activities, secondary activities, tertiary activities, quaternary activities and quinary activities.
A nation’s economy can be divided into sectors to define the proportion of a population engaged in
different activities.
This categorization represents a continuum of distance from the natural environment.
The continuum starts with primary economic activity, which concerns itself with the utilization of raw
materials from the earth, such as agriculture and mining. From there, the distance from natural
resources increases as sectors become more detached from the processing of raw materials.
The primary sector of the economy extracts or harvests products from the earth such as raw
materials and basic foods.
Activities associated with primary economic activity include agriculture (both subsistence and
mining, forestry, grazing, hunting and gathering, fishing, and quarrying. The packaging
and processing of raw materials are also considered to be part of this sector.
The secondary sector of the economy produces finished goods from the raw materials extracted by
the primary economy. Al manufacturing, processing, and construction jobs lie within this sector
MEASUREMENT OF GROWTH, NATIONAL INCOME AND PE

Aci les associated with the secondary sector include metalworking and smelting, automobile
production, textile production, the chemical and engineering industries, aerospace manufacturing,
energy utilities, breweries and bottlers, construction, and shipbuil
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CONCEPT NOTE