National Income and

Economic System
by Dr. Forum Dave
You divide the work and
exchange the reward?
Barter System?
Few More enter
….Specialization?
Barter System?
Limitation of Barter System
Chandulala want berries for coconut but the owner of the coconut-
Chapaklala wants Vegetables and not berries but vegetable owner
Mangakaka want some other fruits from Kehvatlala
Limitation of Barter System
Chandulala want berries for coconut but the owner of the coconut-
Chapaklala wants Vegetables and not berries but vegetable owner
Mangakaka want some other fruits from Kehvatlala
Medium
Durable and Portable
Divisible
Identical
Stable
Gold as Money
Supply is Fixed

So, GOLD BACKED PAPER MONEY

Gold as Money
Supply is Fixed

So, GOLD BACKED PAPER MONEY

 Gold as Money
Storm washes away entire supply of GOLD, dose island lose its Money?

FIAT MONEY = all the citizen on island accept it as money- medium of

exchange.

Why they accept ? What is system of that island economy?

 Economic System
There are many types of economies around the world. Each has its own
distinguishing characteristics, although they all share some basic features. Each
economy functions based on a unique set of conditions and assumptions. Economic
systems can be categorized into four main types: traditional economies, command
economies, mixed economies, and market economies.
Production Possibility Curve
 Production Possibility Curve
1) WHAT TO PRODUCE
2) WHERE TO PRODUCE
3) HOW TO PRODUCE
4) FOR WHOM TO PRODUCE
 Laissez Faire
1) Free Market: freedom in produce, exchange of production, labour and capital
combination, right to compete, right to pursue one’s own business.
2) Defense, Public Goods (Railways, roads) and enforced contracts must be taken care of by
Government but not the price.
3) Price Mechanism: What to Produce?
a) Rose: DD>SS  Price -- storage - production from another commodity to rose -
change in social resources
b) Computer: DD>SS  Price  R&D/technology increase which reduces the cost  price
reduce
Consumer’s preferences and Production of Cost
 Laissez Faire
3)Production Planning: Raw Material/resources will be utilized where it is most profitable.
4) Distribution of Products: Price rise will require more resources  with P rise demand will
reduce until more resources will be utilized for the production of roses.
Rationing Goods on the basis of PREFERENCES AND RELATIVE INCOME
Absolute Advantage of Trade
Absolute Advantage of Trade
 Mercantilist
Adam Smith: Wealth of Nations (1776) “economics is a science of the study of
wealth only. It deals with production, distribution, and consumption” Advocate of
the free market.: “Invisible Hand”. Also Absolute Advantage.
However, Mercantilists believed wealth is fixed. One nation can grow at the cost
of another only. Wealth consist of money per se, which at that time meant gold
and silver. It can be achieved through :
a) Thorough expedition and foreign war
b) Increase exploration and reduce the import(+ tariffs)
c) interest of the consumer is sacrificed at the cost of the producer.
A feudal system (also known as feudalism) is a type of social and political
system in which landholders provide land to tenants in exchange for their
loyalty and service.
 Capitalism
Capitalism is a profit-oriented system which is characterized by private ownership of objects
of labour, an instrument of labour and means of labour.
The production is mainly carried out with the help of labour services rendered by the
working class in return for wages and the class of capitalists has the right to whatever
output is produced with the system.
1) Private Ownership of means of production: land, raw material, machinery, tools and
techniques etc. Capitalists purchase the labour power of an individual and use it along
their means of production in the production process which gives them claim to the
resulting output. H1 Visa?
2) Production for Market: Selling the output in the market. (not exchanged).
3) Price Mechanism: It regulates the economy.
 Capitalism
Individual Preferences and disposable income determined the demand.

Limitations of this price mechanism:

a) The growth of monopoly firms in the market put an end to the consumer’s sovereignty.
Giant corporates by spending huge amounts of money on advertisement campaigns distort
the demand patterns of consumers.

b)Income and Wealth are unequally distributed. The production of diamonds may increase
while a larger proportion may die of starvation

c) Price Mechanism is not the solution for social services. It is due to the limitations of
human behaviour.

 
 Capitalism
Individual Preferences and disposable income determined the demand.

Limitations of this price mechanism:

a) The growth of monopoly firms in the market put an end to the consumer’s sovereignty.
Giant corporates by spending huge amounts of money on advertisement campaigns distort
the demand patterns of consumers.

b)Income and Wealth are unequally distributed. The production of diamonds may increase
while a larger proportion may die of starvation

c) Price Mechanism is not the solution for social services. It is due to limitations of human
behaviour

 
 Capitalism
4) Labour Power as a commodity: Labour power is a commodity which can be brought and
sold. An individual owns only one thing i.e. their capacity to work or their labour power.
However, it is also a strength.

5) Exploitation of labour: Does labour has the bargaining power to determine fair prices in
return for their labour power?

6) Growing Wealth of the Capitalists: Capitalists driving force is the profit which they try to
achieve control over greater wealth. The firm makes utmost efforts to eliminate every other
firm which behaves as its competitor for the market in which it operates. Only a handful of
firms survive in the industry. The second method is by exploitation of the workers.
 Capitalism
7) Emergences of the working class: The working class is totally dependent on capitalism as
they do not have any access to any means of production. Further, the increased use of
machinery leads to widespread unemployment.

8) Class Contradiction: The society is divided into two classes. Even though enormous power
is vested in the capitalist class it can not do it without labour. As machines are not self-
operative.
 Capitalism : Limitations
1) Allocation of a given stock of consumer goods: Do we have an equal distribution of income?

2) Allocation of production between commodities: capitalist economy it is profit maximization, in a socialist, it is social
usefulness

3) Allocation of the factor of production among their various uses: socially necessary output and maximizing the factor
income. In a planned economy, it is the state who tacked these issues

4) Market lacks information on double production

5) Presence of externalities many goods have high social values but are not reflected in market price.

6) There may not be an equilibrium between aggregate demand and supply.

 Socialism
Socialism is a system, where the means of production are socially owned also the function
of the economy is such that it maximizes the social benefit rather than the private benefit.
Unlike capitalism, market mechanism dose does not play the all-dominating role of
determining the type and quantity of various commodities produced, their priority
sequences and the necessary allocation of resources.

The scope of private business is non-existent in a socialist economy.

1) Social Ownership of the means of production: There is no private ownership of means of

production. However, in the transit period, some scope of private business is there due to
private ownership.

2) Predominance of the Public Sector: The pre-condition is the social ownership of the
means of production.
 Socialism
3) Decisive role of economic planning: Price mechanism is replaced with economic planning.
It is the planning commission which will determine the basic economic problems. What to
produce, how to produce and for whom to produce. The planning commission has to make
an estimate of the entire economic – human and natural resources at its command and on
the other hand, it has to determine the requirements of the nation for various goods and
services.

Price plays a secondary role: Market price for consumer goods and Producer’s goods
accounting prices are used.

4) Production Guided by the social benefit: The planning Commission takes into account
the social aspects and development-related goals while choosing the techniques of
production. Income equality is drastically reduced so that everyone has an adequate
amount of disposable income. While determining the pattern and size of output the
planning commission has to see to it that its decision in this regard are such that they
ensure the availability of commodities for all in the market.
 Socialism
5) Abolition of exploitation of labour: The working class collectively own the means of
production under a socialist set-up which makes it possible for the people to use these
means of production for their welfare. It is assumed that workers are collective owners of
agriculture, industries etc.

However, in some cases, it is owned by the state.

 Socialism: Limitations
 

1) State has complete control over the means of production however it may lead to inconsistent in planning objective

2) Inappropriate strategy

3) Insufficient and unreliable data

4) Institutional weakness

5) lack of political will

 Mixed Economy
According to Samuelson, a mixed economy is characterized by the existence of both public
and private institutions exercising economic controls.

Many developing economies while retaining their basically capitalist framework have
adopted supportive economic planning. The objective and strategy of development have
been laid down by the state. In the field of production, the market has been allowed to play
an important role, at the same time priorities related to production are being determined
by the state. Apart from performing regulatory activities through monetary and fiscal
devices as well as administrative measures. The state has created a large public sector
which is expected to become a prime mover of growth.
 Mixed Economy
1) Private and State ownership of the means of production and profit-induced private
business. :- In a mixed economy people enjoy the right to property through constitutional
provision. Cultivation of land belongs to individuals and production is done either for self-
consumption or for the market.

A big segment of the industry is owned by private hands. Although industrial set-up in the
public sector sometimes accounts for a substantial portion of industrial output. The main
objectives of their activities nevertheless are determined by the private sector. Their role is
supplementary and supportive of the private sector.

Only the agricultural behavior of small and marginal farmers may not be responsive to
market changes as they usually do not have any marketable surplus.
 Mixed Economy
2) Decision role of market mechanism: The market exists not only for various products but
also for productive factors such as labour and capital. The prices are determined by demand
and supply forces. Factor prices to a greater extent determined by techniques of
production.

A financial market is comprising diversified financial institutions n instruments. Some

institutions are nationalized. However, their working and business dealing in the private
sector are determined by market forces.

Production in the state sector is guided by social benefits.

The investment and its form are influenced by the interest rate prevailing in the money
market.

In the stock market too, the function is not the reflection of the prospect of different
companies but also determines whether particular companies can obtain equity capital for
 Mixed Economy
3) Intervention role of the state: - the market mechanism in a mixed economy may not be
entirely free from state control. Often legislative measure is undertaken to provide a
regulatory system for industrial activities in the nation.

Industrial licensing

Import control

Distribution of goods at fair price shop

 Mixed Economy
3) Intervention role of the state: - the market mechanism in a mixed economy may not be
entirely free from state control. Often legislative measure is undertaken to provide a
regulatory system for industrial activities in the nation.

Industrial licensing

Import control

Distribution of goods at fair price shop

 Government purchases agricultural goods at support prices.

The importance lies in their capacity to correct the irregularities of the certain market
decision by changing them for the better.
 Mixed Economy
4) Public Sector activities are supposed guided by social benefit:

They ignore profit maximization goals. Transport, energy, and other infrastructure was
underdeveloped.

A big Push from the colonial past is required.

5) Supportive role of economic planning

Planning in a capitalist economy is indicative in nature, planning in a mixed economy has

nothing to do with socialism.

However, the mixed economy is also viewed as a variation of capitalism which has a built-in
tendency to slide back and finally emerge as a pure market economy.