(IGP) GS Paper 1 - Economic & Social Development - "Economics: An Introduction (Part -1)"

Integrated Guidance Programme of General Studies for IAS (Pre)

Subject - Economic and Social Development
Chapter - Economics: An Introduction (Part -1)

Important Points of the Chapter:

Definition of Economics:

  • Economics as a word comes from the Greek: oikos means ‘family, household, or estate’, and nomos stands for ‘custom, law’ etc. Thus, “household management” or manage-ment of scarce resources is the essential meaning of economics.

The Father of Economics:

  • Adam Smith, generally regarded as the Father of Economics

Different Branches of Economics

Economics is usually divided into two main branches:

  • Microeconomics which examines the economic behavior of individual actors such as consumers, businesses households etc to understand how decisions are made in the face of scarcity and what effects they have.
  • Macroeconomics, which studies the economy as a whole and its features like national income, employment ,poverty, balance of payments and inflation.


  • Mesoeconomics studies the intermediate level of economic organization in between the micro and the macro economics like institutional arrangements etc.

Keynesian Theory of Macroeconomics

  • Keynesian macroeconomics based on the theories of twentieth-century British economist John Maynard Keynes. It says that the state can stimulate economic growth and restore stability in the economy through expansionary policies.


  • Neoliberalism refers to advocacy of policies such as individual liberty, free markets, and free trade. Neoliberalism “proposes that human well being can best be advanced by liberating individual entrepreneurial freedoms and skills within an institutional framework characterized by strong private property rights, free markets and free trade”.

Socialist Theory of Economics:

  • socialist economics based on public (State) ownership of means of production to achieve greater equality and give the workers greater control of the means of production. It establishes fully centrally planned economy which is also called command economy - economy is at the command of the State.

Development Economics:

  • Development economics is a branch of economics which deals with economic aspects of the development process, mainly in low-income countries. Its focus is not only promoting economic growth and structural change but also improving the well being of the population as a whole through health and education and workplace Conditions, whether through public or private channels.
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What is Structural change ?:

  • Structural change of an economy refers to a long-term widespread change of a fundamental structure, rather than microscale or short-term change. For example a subsistence economy is transformed into a manufacturing economy, or a regulated mixed economy is liberalized.

Green Economics:

  • Green economics focuses on and supports the harmonious interaction between humans and nature and attempts to reconcile the two.

What is Economic Growth:

  • Economic growth is the change- increase or decrease, in the value of goods and services produced by an economy.

National Income Accounting:

  • National income accounting refers to a set of rules and techniques that are used to measure the national income of a country.

Market Price and Factor Cost:

  • Market price refers to the actual transacted price and it includes indirect taxes- custom duty, excise duty, sales tax, service tax etc.
  • Factor cost refers to the actual cost of the Various factors of production includes government grants and subsidies but it excludes indirect taxes.

Transfer Payments:

  • Transfer payment refers to payments made by government to individuals for which there no economic activity is produced in return by these individuals. Examples of transfer are scholarship, pension.

Define Final Goods:

  • Final goods are goods that are ultimately consumed rather than used in the production of another good. For example, a car sold to a Consumer is a final good; the components such as tyres sold to the car manufacturer are not; they are intermediate goods used to make the final goods.

What is GDP:

  • GDP considers only marketed goods. If a cleaner is hired, their pay is included in GDP. If one does the work himself, it does not add to the GDP.

Net National Product:

  • In the production process a country uses machines and equipment. When there is depreciation, we have to repair or replace the machinery. The expenses incurred for this are called the depreciation expenditure. Net National Product is calculated by deducting depreciation expense from gross national product.
    NNP = GNP - Depreciation

Per Capita Income:

  • Per Capita Income is per capita GDP: GDP divided by mid year population of the corresponding year.

Why We Need to Measure Economic Growth:

  • The following aims can be attributed to the study of economic growth.
  • when growth is quantified , we can understand whether it is adequate or not for the given goals of the economy.
  • we can understand its potential and accordingly set targets.
  • we can adjust growth rates for their sustainability.
  • we can prevent inflation or deflation to some extent if we see the performance of the economy in quantitative terms.
  • we can balance the contributions of the three sectors of the economy and steer the direction of growth towards national goals- away from agriculture to manufacturing as in the case of India in recent years.
  • target appropriate levels of employment creation and poverty alleviation.
  • forecast tax revenues for governmental objectives.
  • corporates can plan their business investments.

The Problems for Calculating National Income:

(i) Black Money

  • Illegal activities like smuggling and unreported incomes due to tax evasion and corruption are outside the GDP estimates. Thus, parallel economy poses a serious hurdle to accurate GDP estimates. GDP does not take into account the ‘parallel economy’ as the transactions of black money are not registered.

(ii) Non-Monetization

  • In most of the rural economy, considerable portion of transactions Occurs informally and they are called as non-monetized economy- the barter economy. The presence of such non-monetary economy in developing countries keeps the GDP estimates at lower level than the actual.

(iii) Growing Service Sector

  • In recent years, the service sector is growing faster than that of the agricultural and industrial sectors. Many new services like business process outsourcing (BPO) have come up. However, value addition in legal consultancy, health services, financial and business services and the service sector as a whole is not based on accurate reporting and hence underestimated in national income measures.

(iv) Household Services

  • The national income accounts do not include the ‘care economy’- domestic work and housekeeping. Most of such valuable work rendered by our women at home does not enter our national accounting.

(v) Social Services

  • It ignores voluntary and charitable work as it is unpaid.

(vi) Environmental Cost

  • National income estimation does not account for the environmental costs incurred in the production of goods. For example, the land and water degradation accompanying the Green revolution in India. Similarly, the climate change that is caused by the use of fossil fuels. However, in recent years, green GDP is being calculated where the environmental costs are deducted from the GDP value and the Green GDP is arrived at.
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