Public Administration

INDIAN ECONOMY
 CLASSIFICATION OF ECONOMIES

 The World Bank assigns the world’s economies to four income groups—low, lower-middle, upper-
middle, and high-income countries. The classifications are updated each year on July 1 and are based
on GNI per capita in current USD (using the Atlas method exchange rates) of the previous year (i.e.
2019 in this case). The classifications change for two reasons:
1. In each country, factors such as economic growth, inflation, exchange rates, and population
growth influence GNI per capita. Revisions to national accounts methods and data can also influence
GNI per capita.
2. To keep the income classification thresholds fixed in real terms, they are adjusted annually for
inflation. The Special Drawing Rights (SDR) deflator is used which is a weighted average of the GDP
deflators of China, Japan, the United Kingdom, the United States, and the Euro Area.

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CLASSIFICATION OF ECONOMIES

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 DEVELOPED, DEVELOPING & UNDERDEVELOPED COUNTRIES
 Usually, the economies are categorised into developed, underdeveloped & developing on the basis of their
prevailing levels of per capita incomes & living standards of their masses. But strictly speaking not all the high
income or rich countries can be classified as developed because the term development also takes account of
economic structure e.g. Structure of output, pattern of economic activities, social institutions & behaviour.
 DEVELOPED COUNTRIES: The developed countries are the high income countries such as USA, Canada,
North America, UK, France, Sweden, Norway, etc. These countries have strong & diversified economic
structures, well developed industrial, agriculture & service sector, efficient & skilled manpower, all of which
contribute to their higher national & per capita income & ensure decent living standards to their people. It
should be categorised as a developed economy, the country must have strong & diversified economic structure.
However, countries like Saudi Arabia, Kuwait & some other oil exporting nations are very rich, their people
have high incomes that are comparable to the advanced European countries. Yet these nations whose only or
main source of income is production & sale of oil cannot be called developed countries. They do not have a
diversified industrial or economic structure.
 UNDERDEVELOPED ECONOMIES: The term ‘underdevelopment’ refers to that state of an economy
where living standards of masses are extremely low due to very low levels of per capita income resulting from
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 DEVELOPED, DEVELOPING & UNDERDEVELOPED COUNTRIES
low levels of productivity & high growth rates of population. According to UN, an underdeveloped country is
one which has a real per capita income that is lower in relation to the real per capita income of USA, Canada,
Australia & Western Europe. According to Planning Commission, an underdeveloped country’s economy is
characterised by the existence, in a greater or lesser degree, of un-utilised or under-utilised manpower on one
hand and unexploited natural resources on the other. This state of affairs may be due to stagnancy of
techniques or to certain inhibiting socio-economic factors which prevent the more dynamic forces in an
economy from asserting themselves.
 DEVELOPING ECONOMIES: Underdeveloped countries are these days referred to as the developing
countries signifying that these poor underdeveloped nations are capable of making reasonable economic
progress through organised efforts, well conceived policies & with a measure of economic assistance provided
by the advances countries. A developing economy is essentially an underdeveloped economy on the march
to progress & prosperity. It is an economy which has, through conscious efforts, shed off some burden of
its backwardness & stagnation, & making reasonable progress in many socio-economic sphere of
activity. However, in many areas, economy may still be showing not much perceptible change & thus continue
persisting with its backward character & underdeveloped status.

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 FIRST, SECOND & THIRD WORLD NATIONS
 THIRD WORLD COUNTRIES: The underdeveloped or the developing countries are also known as counties
of the “THIRD WORLD” or Third World Nations.
 According to this nomenclature, the FIRST WORLD comprises of the advanced capitalist countries also
called as FREE MARKET ECONOMIES.
 SECOND WORLD ECONOMIES comprised of the countries under the totalitarian communist regimes or
the nations that existed behind the iron curtain, with no reference to their developed or underdeveloped nature.
Third world was the collective name given to the underdeveloped nations outside that iron curtain. Now even
though the totalitarianism or communist regimes have largely disintegrated to give way to free market
economies & thus the second world is no more existing, still the Third World name has got stuck & the
underdeveloped countries are largely known by this name.
 Another name for developing countries is COUNTRIES of SOUTH because most of the underdeveloped
countries fall in Southern Hemisphere where as rich or advanced countries are in Northern Hemisphere.

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 FEATURES OF UNDERDEVELOPED COUNTRIES
 Low Per capita Income

 Low levels of Living standards

 Highly unequal income distribution or income inequality.

 Widespread Poverty

 Low levels of productivity

 High rates of Population Growth

 Low rates of capital formation

 Technological backwardness

 Predominance of Agriculture in economy

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 FEATURES OF UNDERDEVELOPED COUNTRIES
 Export of Primary Products

 High levels of unemployment & underemployment

 Weak Infrastructure

 Poor quality of Human Capital

 Dualistic Economy

 Low social indicators of development

 Dependence & vulnerability in International Relations

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 CAUSES OF UNDERDEVELOPMENT

 Scarcity of Natural Resources

 Technological Backwardness

 Shortage of Capital

 Colonialism

 Other factors like Joint family System, caste system, absence of infrastructure
for education & health , banking etc.

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ECONOMIC GROWTH
&
Development
 CONCEPT OF ECONOMIC GROWTH & DEVELOPMENT

 The term economic growth & economic development are frequently used interchangeably to denote
the process of an economy. However, the concepts of economic growth & economic development, even
though they both are related to economic progress; they are distinct & different in terms of their contents &
coverage.
 Economic growth can be defined as a process whereby a country’s real national income increases over a
long period of time. The concept of economic growth thus refers to (a). Increase in country’s real national
& per capita income & (b). Increase in sustained over a long period of time. In other words, economic
growth is concerned with increase in national income.
 Economic development not only concerns itself with increase in income but with its composition &
distribution as well. It is quite possible that national & per capita income may increase, yet more & more
people may become poor if due to extremely unequal income distribution pattern, the richer sections of
society get all the increased income. Hence, economic development covers the process of achieving long-
term increase in income, as well as more equitable income distribution along with adopting some
measures of poverty alleviation.

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 MEASURES OF ECONOMIC GROWTH

1. Gross Domestic Product

2. Net Domestic Product = GDP - Depreciation

3. Gross National Product

4. Net National Product = GNP - depreciation

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 GROSS DOMESTIC PRODUCT

 Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services
produced within a country's borders irrespective of ownership in a specific time period. As a broad measure
of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic
health.
 Nominal GDP: GDP evaluated at current market prices, in either the local currency or in U.S. dollars at
currency market exchanges rates in order to compare countries' GDP in purely financial terms.
 Real GDP: Real GDP is an inflation-adjusted measure that reflects the quantity of goods and services
produced by an economy in a given year, with prices held constant from year to year in order to separate
out the impact of inflation or deflation from the trend in output over time.
 GDP Per Capita: GDP per capita is a measurement of the GDP per person in a country's population. It
indicates the amount of output or income per person in an economy can indicate average productivity or
average living standards. GDP per capita can be stated in nominal, real (inflation adjusted), or PPP terms.

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 METHODS FOR GDP CALCULATIONS
 Real GDP is calculated using a GDP price deflator, which is the difference in prices between the current
year and the base year. For example, if prices rose by 5% since the base year, the deflator would be 1.05.
Nominal GDP is divided by this deflator, yielding real GDP. Nominal GDP is usually higher than real
GDP because inflation is typically a positive number. Real GDP accounts for changes in market value,
and thus, narrows the difference between output figures from year to year. If there is a large discrepancy
between a nation's real GDP and its nominal GDP, this may be an indicator of either significant inflation or
deflation in its economy.
1. The Expenditure Approach: The expenditure approach, also known as the spending approach, calculates
spending by the different groups that participate in the economy. The U.S. GDP is primarily measured based
on the expenditure approach. This approach can be calculated using the following formula: GDP = C + G +
I + NX (where C=consumption; G=government spending; I=Investment; and NX=net exports). All
these activities contribute to the GDP of a country.

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 METHODS FOR GDP CALCULATIONS

2. The Production (Output) Approach: The production approach is essentially the reverse of the
expenditure approach. Instead of measuring the input costs that contribute to economic activity, the
production approach estimates the total value of economic output and deducts the cost
of intermediate goods that are consumed in the process (like those of materials and services). Whereas
the expenditure approach projects forward from costs, the production approach looks backward from the
vantage point of a state of completed economic activity.
3. The Income Approach: The income approach represents a kind of middle ground between the two other
approaches to calculating GDP. The income approach calculates the income earned by all the factors of
production in an economy, including the wages paid to labor, the rent earned by land, the return on
capital in the form of interest, and corporate profits.

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 GROSS NATIONAL PRODUCT OR INCOME

 Gross National Income (GNI) is another measure of economic growth. It is the sum of all income earned
by citizens or nationals of a country (regardless of whether or not the underlying economic activity takes
place domestically or abroad). The relationship between GNP and GNI is similar to the relationship between
the production (output) approach and the income approach used to calculate GDP. GNP uses the production
approach, while GNI uses the income approach. With GNI, the income of a country is calculated as its
domestic income, plus its indirect business taxes and depreciation (as well as its net foreign factor income).
The figure for net foreign factor income is calculated by subtracting all payments made to foreign
companies and individuals from those payments made to domestic businesses.
 History of GDP: GDP first came to light 1937 in a report to the U.S. Congress in response to the Great
Depression, conceived of and presented by an economist at the National Bureau of Economic Research,
Simon Kuznets. At the time, the pre-eminent system of measurement was GNP. After the Bretton
Woods conference in 1944, GDP was widely adopted as the standard means for measuring national
economies, though ironically the U.S. continued to use GNP as its official measure of economic welfare
until 1991, after which it switched to GDP.

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FACTOR OF PRODUCTION & FACTOR INCOME

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