Economics : Past, Present and Future
Economics is the social science that studies the behavior of individuals,
groups, and organizations (called economic actors,
players, or agents), when they manage or use scarce
resources, which have alternative uses, to achieve
desired ends. Agents are assumed to act rationally, have
multiple desirable ends in sight, limited resources to
obtain these ends, a set of stable preferences, a
definite overall guiding objective, and the capability
of making a choice. There exists an economic problem,
subject to study by economic science, when a decision
(choice) has to be made by one or more
resource-controlling players to attain the best possible
outcome under bounded rational conditions. In other
words, resource-controlling agents must maximize value
subject to the constrains imposed by the information the
agents have, the their cognitive limitations, and the
finite amount of time they have to take a decision.
Economic science centers on the activities of the
economic agents that comprise society. They are the
focus of economic analysis.
The traditional concern of economics is to gain an
understanding of the processes that govern the
production, distribution and consumption of goods and
services in an exchange economy. An agent may have
purposes or ends, such as reducing or protecting
individuals from crime, on which he or she wants to
spend resources. Economics may study how the agent
determines the amount of resources to allocate for this
purpose, aside from the traditional concern of
economics.
An approach to understanding the processes of
production, distribution, and consumption, through the
study of agent behavior under scarcity, may go as
follows: The continuous interplay (exchange or trade)
done by economic actors in all markets sets the prices
for all goods and services which, in turn, make the
rational managing of scarce resources possible. At the
same time, the decisions (choices) made by the same
actors, while they are pursuing their own interest
(their overall guiding objective), determine the level
of output (production), consumption, savings, and
investment, in an economy, as well as the remuneration
(distribution) paid to the owners of labor (in the form
of wages), capital (in the form of profits) and land (in
the form of rent). Each period, as if they were in a
giant feedback system, economic players influence the
pricing processes and the economy, and are in turn
influenced by them until a steady state (equilibrium) of
all variables involved is reached or until an external
shock throws the system toward a new equilibrium point.
Because of the autonomous actions of rational
interacting agents, the economy is a complex adaptive
system.
The term economics comes from the Ancient Greek
οἰκονομία
(oikonomia, "management of a household, administration")
from οἶκος (oikos, "house") and νόμος
(nomos, "custom" or "law"), hence "rules of the
house(hold for good management)". 'Political economy'
was the earlier name for the subject, but economists in
the late 19th century suggested "economics" as a shorter
term for "economic science" to establish itself as a
separate discipline outside of political science and
other social sciences.
Economics focuses on the behavior and interactions of
economic agents and how economies work. Consistent with
this focus, primary textbooks often distinguish between
microeconomics and macroeconomics. Microeconomics
examines the behavior of basic elements in the economy,
including individual agents and markets, their
interactions, and the outcomes of interactions.
Individual agents may include, for example, households,
firms, buyers, and sellers. Macroeconomics analyzes the
entire economy (meaning aggregated production,
consumption, savings, and investment) and issues
affecting it, including unemployment of resources
(labor, capital, and land), inflation, economic growth,
and the public policies that address these issues
(monetary, fiscal, and other policies).
Other broad distinctions within economics include those
between positive economics, describing "what is," and
normative economics, advocating "what ought to be";
between economic theory and applied economics; between
rational and behavioral economics; and between
mainstream economics (more "orthodox" and dealing with
the "rationality-individualism-equilibrium nexus") and
heterodox economics (more "radical" and dealing with the
"institutions-history-social structure nexus").
Besides the traditional concern in production,
distribution, and consumption in an economy, economic
analysis may be applied throughout society, as in
business, finance, health care, and government. Economic
analyses may also be applied to such diverse subjects as
crime, education, the family, law, politics, religion,
social institutions, war, and science; by considering
the economic aspects of these subjects. Education, for
example, requires time, effort, and expenses, plus the
foregone income and experience, yet these losses can be
weighted against future benefits education may bring to
the agent or the economy. At the turn of the 21st
century, the expanding domain of economics in the social
sciences has been described as economic imperialism.
![File:GDP growth (annualized).png](about_economics_files/image002.jpg)
A world map of GDP growth (annualized), from 1990 to
2007.
![File:Map of countries by GDP (nominal) in US$.png](about_economics_files/image004.gif)
A map of world economies by size
of GDP (nominal) in $US, CIA World Factbook, 2011.
There are a variety of modern definitions of economics.
Some of the differences may reflect evolving views of
the subject or different views among economists.
Scottish philosopher Adam Smith (1776) defined what was
then called political economy as "an inquiry into the
nature and causes of the wealth of nations", in
particular as:
a branch of the science of a statesman or legislator
[with the twofold objectives of providing] a plentiful
revenue or subsistence for the people ... [and] to
supply the state or commonwealth with a revenue for the
public services.
J.-B. Say (1803), distinguishing the subject from its
public-policy uses, defines it as the science of
production, distribution, and consumption of wealth. On
the satirical side, Thomas Carlyle (1849) coined "the
dismal science" as an epithet for classical economics,
in this context, commonly linked to the pessimistic
analysis of Malthus (1798). John Stuart Mill (1844)
defines the subject in a social context as:
The science which traces the laws of such of the
phenomena of society as arise from the combined
operations of mankind for the production of wealth, in
so far as those phenomena are not modified by the
pursuit of any other object.
Alfred Marshall provides a still widely cited definition
in his textbook Principles of Economics (1890) that
extends analysis beyond wealth and from the societal to
the microeconomic level:
Economics is a study of man in the ordinary business of
life. It enquires how he gets his income and how he uses
it. Thus, it is on the one side, the study of wealth and
on the other and more important side, a part of the
study of man.
Lionel Robbins (1932) developed implications of what has
been termed "[p]erhaps the most commonly accepted
current definition of the subject":
Economics is a science which studies human behaviour as
a relationship between ends and scarce means which have
alternative uses.
Robbins describes the definition as not classificatory
in "pick[ing] out certain kinds of behaviour" but rather
analytical in "focus[ing] attention on a particular
aspect of behaviour, the form imposed by the influence
of scarcity." He affirmed that previous economist have
usually centered their studies on the analysis of
wealth: how wealth is created (production), distributed,
and consumed; and how wealth can grow. But he said that
economics can be used to study other things, such as
war, that are outside its usual focus. This is because
war has as the goal wining it (as a sought after end),
generates both cost and benefits; and, resources
(human life and other costs) are used to attain the
goal. If the war is not winnable or if the expected
costs outweigh the benefits, the deciding actors
(assuming they are rational) may never go to war (a
decision) but rather explore other alternatives. We
cannot define economics as the science that study
wealth, war, crime, education, and any other field
economic analysis can be applied to; but, as the science
that study a particular common aspect of each of those
subjects (they all use scarce resources to attain a
sought after end).
Some subsequent comments criticized the definition as
overly broad in failing to limit its subject matter to
analysis of markets. From the 1960s, however, such
comments abated as the economic theory of maximizing
behavior and rational-choice modeling expanded the
domain of the subject to areas previously treated in
other fields. There are other criticisms as well, such
as in scarcity not accounting for the macroeconomics of
high unemployment.
Gary Becker, a contributor to the expansion of economics
into new areas, describes the approach he favors as
"combin[ing the] assumptions of maximizing behavior,
stable preferences, and market equilibrium, used
relentlessly and unflinchingly." One commentary
characterizes the remark as making economics an approach
rather than a subject matter but with great specificity
as to the "choice process and the type of social
interaction that [such] analysis involves." The same
source reviews a range of definitions included in
principles of economics textbooks and concludes that the
lack of agreement need not affect the subject-matter
that the texts treat. Among economists more generally,
it argues that a particular definition presented may
reflect the direction toward which the author believes
economics is evolving, or should evolve.
![A vegetable vendor in a marketplace.](about_economics_files/image005.jpg)
Economists study trade, production and consumption
decisions,
such as those that occur in a traditional marketplace.
![Two men sit at computer monitors with financial information.](about_economics_files/image006.jpg)
In Virtual Markets, buyer and seller are not present
and trade via intermediates and electronic information.
Microeconomics examines how entities, forming a market
structure, interact within a market to create a market
system. These entities include private and public
players with various classifications, typically
operating under scarcity of tradable units and
government regulation. The item traded may be a tangible
product such as apples or a service such as repair
services, legal counsel, or entertainment.
In theory, in a free market the aggregates (sum of) of
quantity demanded by buyers and quantity supplied by
sellers will be equal and reach economic equilibrium
over time in reaction to price changes; in practice,
various issues may prevent equilibrium, and any
equilibrium reached may not necessarily morally
equitable. For example, if the supply of healthcare
services is limited by external factors, the equilibrium
price may be unaffordable for many who desire it but
cannot pay for it.
Various market structures exist. In perfectly
competitive markets, no participants are large enough to
have the market power to set the price of a homogeneous
product. In other words, every participant is a "price
taker" as no participant influences the price of a
product. In the real world, markets often experience
imperfect competition.
Forms include monopoly (in which there is only one
seller of a good), duopoly (in which there are only two
sellers of a good), oligopoly (in which there are few
sellers of a good), monopolistic competition (in which
there are many sellers producing highly differentiated
goods), monopsony (in which there is only one buyer of a
good), and oligopsony (in which there are few buyers of
a good). Unlike perfect competition, imperfect
competition invariably means market power is unequally
distributed. Firms under imperfect competition have the
potential to be "price makers", which means that, by
holding a disproportionately high share of market power,
they can influence the prices of their products.
Microeconomics studies individual markets by simplifying
the economic system by assuming that activity in the
market being analysed does not affect other markets.
This method of analysis is known as partial-equilibrium
analysis (supply and demand). This method aggregates
(the sum of all activity) in only one market.
General-equilibrium theory studies various markets and
their behaviour. It aggregates (the sum of all activity)
across all markets. This method studies both changes in
markets and their interactions leading towards
equilibrium.
In microeconomics, production is the conversion of
inputs into outputs. It is an economic process that uses
inputs to create a commodity or a service for exchange
or direct use. Production is a flow and thus a rate of
output per period of time. Distinctions include such
production alternatives as for consumption (food,
haircuts, etc.) vs. investment goods (new tractors,
buildings, roads, etc.), public goods (national defense,
small-pox vaccinations, etc.) or private goods (new
computers, bananas, etc.), and "guns" vs. "butter".
Opportunity cost refers to the economic cost of
production: the value of the next best opportunity
foregone. Choices must be made between desirable yet
mutually exclusive actions. It has been described as
expressing "the basic relationship between scarcity and
choice.". The opportunity cost of an activity is an
element in ensuring that scarce resources are used
efficiently, such that the cost is weighed against the
value of that activity in deciding on more or less of
it. Opportunity costs are not restricted to monetary or
financial costs but could be measured by the real cost
of output forgone, leisure, or anything else that
provides the alternative benefit (utility).
Inputs used in the production process include such
primary factors of production as labour services,
capital (durable produced goods used in production, such
as an existing factory), and land (including natural
resources). Other inputs may include intermediate goods
used in production of final goods, such as the steel in
a new car.
Economic efficiency describes how well a system
generates desired output with a given set of inputs and
available technology. Efficiency is improved if more
output is generated without changing inputs, or in other
words, the amount of "waste" is reduced. A widely
accepted general standard is Pareto efficiency, which is
reached when no further change can make someone better
off without making someone else worse off.
![File:Production Possibilities Frontier Curve.svg](about_economics_files/image008.gif)
An example productionpossibility frontier with
illustrative points marked.
The productionpossibility frontier (PPF) is an
expository figure for representing scarcity, cost, and
efficiency. In the simplest case an economy can produce
just two goods (say "guns" and "butter"). The PPF is a
table or graph (as at the right) showing the different
quantity combinations of the two goods producible with a
given technology and total factor inputs, which limit
feasible total output. Each point on the curve shows
potential total output for the economy, which is the
maximum feasible output of one good, given a feasible
output quantity of the other good.
Scarcity is represented in the figure by people being
willing but unable in the aggregate to consume beyond
the PPF (such as at X) and by the negative slope of the
curve. If production of one good increases along the
curve, production of the other good decreases, an
inverse relationship. This is because increasing output
of one good requires transferring inputs to it from
production of the other good, decreasing the latter.
The slope of the curve at a point on it gives the
trade-off between the two goods. It measures what an
additional unit of one good costs in units forgone of
the other good, an example of a real opportunity cost.
Thus, if one more Gun costs 100 units of butter, the
opportunity cost of one Gun is 100 Butter. Along the
PPF, scarcity implies that choosing more of one good in
the aggregate entails doing with less of the other good.
Still, in a market economy, movement along the curve may
indicate that the choice of the increased output is
anticipated to be worth the cost to the agents.
By construction, each point on the curve shows
productive efficiency in maximizing output for given
total inputs. A point inside the curve (as at A), is
feasible but represents production inefficiency
(wasteful use of inputs), in that output of one or both
goods could increase by moving in a northeast direction
to a point on the curve. Examples cited of such
inefficiency include high unemployment during a
business-cycle recession or economic organization of a
country that discourages full use of resources. Being on
the curve might still not fully satisfy allocative
efficiency (also called Pareto efficiency) if it does
not produce a mix of goods that consumers prefer over
other points.
Much applied economics in public policy is concerned
with determining how the efficiency of an economy can be
improved. Recognizing the reality of scarcity and then
figuring out how to organize society for the most
efficient use of resources has been described as the
"essence of economics", where the subject "makes its
unique contribution."
![File:Late Medieval Trade Routes.jpg](about_economics_files/image010.jpg)
A map showing the main trade routes for goods within
late medieval Europe.
Specialization is considered key to economic efficiency
based on theoretical and empirical considerations.
Different individuals or nations may have different real
opportunity costs of production, say from differences in
stocks of human capital per worker or capital/labour
ratios. According to theory, this may give a comparative
advantage in production of goods that make more
intensive use of the relatively more abundant, thus
relatively cheaper, input. Even if one region has an
absolute advantage as to the ratio of its outputs to
inputs in every type of output, it may still specialize
in the output in which it has a comparative advantage
and thereby gain from trading with a region that lacks
any absolute advantage but has a comparative advantage
in producing something else.
It has been observed that a high volume of trade occurs
among regions even with access to a similar technology
and mix of factor inputs, including high-income
countries. This has led to investigation of economies of
scale and agglomeration to explain specialization in
similar but differentiated product lines, to the overall
benefit of respective trading parties or regions.
The general theory of specialization applies to trade
among individuals, farms, manufacturers, service
providers, and economies. Among each of these production
systems, there may be a corresponding division of labour
with different work groups specializing, or
correspondingly different types of capital equipment and
differentiated land uses.
An example that combines features above is a country
that specializes in the production of high-tech
knowledge products, as developed countries do, and
trades with developing nations for goods produced in
factories where labour is relatively cheap and
plentiful, resulting in different in opportunity costs
of production. More total output and utility thereby
results from specializing in production and trading than
if each country produced its own high-tech and low-tech
products.
Theory and observation set out the conditions such that
market prices of outputs and productive inputs select an
allocation of factor inputs by comparative advantage, so
that (relatively) low-cost inputs go to producing
low-cost outputs. In the process, aggregate output may
increase as a by-product or by design. Such
specialization of production creates opportunities for
gains from trade whereby resource owners benefit from
trade in the sale of one type of output for other, more
highly valued goods. A measure of gains from trade is
the increased income levels that trade may facilitate.
![A graph depicting Quantity on the X-axis and Price on the Y-axis](about_economics_files/image012.gif)
The supply and demand model describes how prices vary as
a result of a
balance between product availability and demand. The
graph depicts an increase
(that is, right-shift) in demand from D1 to D2
along with the consequent increase
in price and quantity required to reach a new
equilibrium point on the supply curve (S).
Prices and quantities have been described as the most
directly observable attributes of goods produced and
exchanged in a market economy. The theory of supply and
demand is an organizing principle for explaining how
prices coordinate the amounts produced and consumed. In
microeconomics, it applies to price and output
determination for a market with perfect competition,
which includes the condition of no buyers or sellers
large enough to have price-setting power.
For a given market of a commodity, demand is the
relation of the quantity that all buyers would be
prepared to purchase at each unit price of the good.
Demand is often represented by a table or a graph
showing price and quantity demanded (as in the figure).
Demand theory describes individual consumers as
rationally choosing the most preferred quantity of each
good, given income, prices, tastes, etc. A term for this
is "constrained utility maximization" (with income and
wealth as the constraints on demand). Here, utility
refers to the hypothesized relation of each individual
consumer for ranking different commodity bundles as more
or less preferred.
The law of demand states that, in general, price and
quantity demanded in a given market are inversely
related. That is, the higher the price of a product, the
less of it people would be prepared to buy of it (other
things unchanged). As the price of a commodity falls,
consumers move toward it from relatively more expensive
goods (the substitution effect). In addition, purchasing
power from the price decline increases ability to buy
(the income effect). Other factors can change demand;
for example an increase in income will shift the demand
curve for a normal good outward relative to the origin,
as in the figure. All determinants are predominantly
taken as constant factors of demand and supply.
Supply is the relation between the price of a good and the quantity
available for sale at that price. It may be represented
as a table or graph relating price and quantity
supplied. Producers, for example business firms, are
hypothesized to be profit-maximizers, meaning that they
attempt to produce and supply the amount of goods that
will bring them the highest profit. Supply is typically
represented as a directly proportional relation between
price and quantity supplied (other things unchanged).
That is, the higher the price at which the good can be
sold, the more of it producers will supply, as in the
figure. The higher price makes it profitable to increase
production. Just as on the demand side, the position of
the supply can shift, say from a change in the price of
a productive input or a technical improvement. The "Law
of Supply" states that, in general, a rise in price
leads to an expansion in supply and a fall in price
leads to a contraction in supply. Here as well, the
determinants of supply, such as price of substitutes,
cost of production, technology applied and various
factors inputs of production are all taken to be
constant for a specific time period of evaluation of
supply.
Market equilibrium occurs where quantity supplied equals
quantity demanded, the intersection of the supply and
demand curves in the figure above. At a price below
equilibrium, there is a shortage of quantity supplied
compared to quantity demanded. This is posited to bid
the price up. At a price above equilibrium, there is a
surplus of quantity supplied compared to quantity
demanded. This pushes the price down. The model of
supply and demand predicts that for given supply and
demand curves, price and quantity will stabilize at the
price that makes quantity supplied equal to quantity
demanded. Similarly, demand-and-supply theory predicts a
new price-quantity combination from a shift in demand
(as to the figure), or in supply.
For a given quantity of a consumer good, the point on
the demand curve indicates the value, or marginal
utility, to consumers for that unit. It measures what
the consumer would be prepared to pay for that unit. The
corresponding point on the supply curve measures
marginal cost, the increase in total cost to the
supplier for the corresponding unit of the good. The
price in equilibrium is determined by supply and demand.
In a perfectly competitive market, supply and demand
equate marginal cost and marginal utility at
equilibrium.
On the supply side of the market, some factors of
production are described as (relatively) variable in the
short run, which affects the cost of changing output
levels. Their usage rates can be changed easily, such as
electrical power, raw-material inputs, and over-time and
temp work. Other inputs are relatively fixed, such as
plant and equipment and key personnel. In the long run,
all inputs may be adjusted by management. These
distinctions translate to differences in the elasticity
(responsiveness) of the supply curve in the short and
long runs and corresponding differences in the
price-quantity change from a shift on the supply or
demand side of the market.
Marginalist theory, such as above, describes the
consumers as attempting to reach most-preferred
positions, subject to income and wealth constraints
while producers attempt to maximize profits subject to
their own constraints, including demand for goods
produced, technology, and the price of inputs. For the
consumer, that point comes where marginal utility of a
good, net of price, reaches zero, leaving no net gain
from further consumption increases. Analogously, the
producer compares marginal revenue (identical to price
for the perfect competitor) against the marginal cost of
a good, with marginal profit the difference. At the
point where marginal profit reaches zero, further
increases in production of the good stop. For movement
to market equilibrium and for changes in equilibrium,
price and quantity also change "at the margin":
more-or-less of something, rather than necessarily
all-or-nothing.
Other applications of demand and supply include the
distribution of income among the factors of production,
including labour and capital, through factor markets. In
a competitive labour market for example the quantity of
labour employed and the price of labour (the wage rate)
depends on the demand for labour (from employers for
production) and supply of labour (from potential
workers). Labour economics examines the interaction of
workers and employers through such markets to explain
patterns and changes of wages and other labour income,
labour mobility, and (un)employment, productivity
through human capital, and related public-policy issues.
Demand-and-supply analysis is used to explain the
behavior of perfectly competitive markets, but as a
standard of comparison it can be extended to any type of
market. It can also be generalized to explain variables
across the economy, for example, total output (estimated
as real GDP) and the general price level, as studied in
macroeconomics. Tracing the qualitative and quantitative
effects of variables that change supply and demand,
whether in the short or long run, is a standard exercise
in applied economics. Economic theory may also specify
conditions such that supply and demand through the
market is an efficient mechanism for allocating
resources.
People frequently do not trade directly on markets.
Instead, on the supply side, they may work in and
produce through firms. The most obvious kinds of firms
are corporations, partnerships and trusts. According to
Ronald Coase people begin to organise their production
in firms when the costs of doing business becomes lower
than doing it on the market. Firms combine labour and
capital, and can achieve far greater economies of scale
(when the average cost per unit declines as more units
are produced) than individual market trading.
In perfectly competitive markets studied in the theory
of supply and demand, there are many producers, none of
which significantly influence price. Industrial
organization generalizes from that special case to study
the strategic behavior of firms that do have significant
control of price. It considers the structure of such
markets and their interactions. Common market structures
studied besides perfect competition include monopolistic
competition, various forms of oligopoly, and monopoly.
Managerial economics applies microeconomic analysis to
specific decisions in business firms or other management
units. It draws heavily from quantitative methods such
as operations research and programming and from
statistical methods such as regression analysis in the
absence of certainty and perfect knowledge. A unifying
theme is the attempt to optimize business decisions,
including unit-cost minimization and profit
maximization, given the firm's objectives and
constraints imposed by technology and market conditions.
Uncertainty in economics is an unknown prospect of gain
or loss, whether quantifiable as risk or not. Without
it, household behavior would be unaffected by uncertain
employment and income prospects, financial and capital
markets would reduce to exchange of a single instrument
in each market period, and there would be no
communications industry. Given its different forms,
there are various ways of representing uncertainty and
modeling economic agents' responses to it.
Game theory is a branch of applied mathematics that
considers strategic interactions between agents, one
kind of uncertainty. It provides a mathematical
foundation of industrial organization, discussed above,
to model different types of firm behavior, for example
in an oligopolistic industry (few sellers), but equally
applicable to wage negotiations, bargaining, contract
design, and any situation where individual agents are
few enough to have perceptible effects on each other. As
a method heavily used in behavioral economics, it
postulates that agents choose strategies to maximize
their payoffs, given the strategies of other agents with
at least partially conflicting interests.
In this, it generalizes maximization approaches
developed to analyze market actors such as in the supply
and demand model and allows for incomplete information
of actors. The field dates from the 1944 classic Theory
of Games and Economic Behavior by John von Neumann and
Oskar Morgenstern. It has significant applications
seemingly outside of economics in such diverse subjects
as formulation of nuclear strategies, ethics, political
science, and evolutionary biology.
Risk aversion may stimulate activity that in
well-functioning markets smoothes out risk and
communicates information about risk, as in markets for
insurance, commodity futures contracts, and financial
instruments. Financial economics or simply finance
describes the allocation of financial resources. It also
analyzes the pricing of financial instruments, the
financial structure of companies, the efficiency and
fragility of financial markets, financial crises, and
related government policy or regulation.
Some market organizations may give rise to
inefficiencies associated with uncertainty. Based on
George Akerlof's "Market for Lemons" article, the
paradigm example is of a dodgy second-hand car market.
Customers without knowledge of whether a car is a
"lemon" depress its price below what a quality
second-hand car would be. Information asymmetry arises
here, if the seller has more relevant information than
the buyer but no incentive to disclose it. Related
problems in insurance are adverse selection, such that
those at most risk are most likely to insure (say
reckless drivers), and moral hazard, such that insurance
results in riskier behavior (say more reckless driving).
Both problems may raise insurance costs and reduce
efficiency in driving otherwise willing transactors from
the market ("incomplete markets"). Moreover, attempting
to reduce one problem, say adverse selection by
mandating insurance, may add to another, say moral
hazard. Information economics, which studies such
problems, has relevance in subjects such as insurance,
contract law, mechanism design, monetary economics, and
health care. Applied subjects include market and legal
remedies to spread or reduce risk, such as warranties,
government-mandated partial insurance, restructuring or
bankruptcy law, inspection, and regulation for quality
and information disclosure.
![A smokestack releasing smoke](about_economics_files/image013.jpg)
Pollution can be a simple example of market failure. If
costs of production are not borne
by producers but are by the environment, accident
victims or others, then prices are distorted.
The term "market failure" encompasses several problems
which may undermine standard economic assumptions.
Although economists categories market failures
differently, the following categories emerge in the main
texts.
Information asymmetries and incomplete markets may
result in economic inefficiency but also a possibility
of improving efficiency through market, legal, and
regulatory remedies, as discussed above.
Natural monopoly, or the overlapping concepts of
"practical" and "technical" monopoly, is an extreme case
of failure of competition as a restraint on producers.
Extreme economies of scale are one possible cause.
Public goods are goods which are undersupplied in a
typical market. The defining features are that people
can consume public goods without having to pay for them
and that more than one person can consume the good at
the same time.
Externalities occur where there are significant social
costs or benefits from production or consumption that
are not reflected in market prices. For example, air
pollution may generate a negative externality, and
education may generate a positive externality (less
crime, etc.). Governments often tax and otherwise
restrict the sale of goods that have negative
externalities and subsidize or otherwise promote the
purchase of goods that have positive externalities in an
effort to correct the price distortions caused by these
externalities. Elementary demand-and-supply theory
predicts equilibrium but not the speed of adjustment for
changes of equilibrium due to a shift in demand or
supply.
In many areas, some form of price stickiness is
postulated to account for quantities, rather than
prices, adjusting in the short run to changes on the
demand side or the supply side. This includes standard
analysis of the business cycle in macroeconomics.
Analysis often revolves around causes of such price
stickiness and their implications for reaching a
hypothesized long-run equilibrium. Examples of such
price stickiness in particular markets include wage
rates in labour markets and posted prices in markets
deviating from perfect competition.
![A woman takes samples of water from a river.](about_economics_files/image014.jpg)
Environmental scientist sampling water
Some specialised fields of economics deal in market
failure more than others. The economics of the public
sector is one example. Much environmental economics
concerns externalities or "public bads".
Policy options include regulations that reflect
cost-benefit analysis or market solutions that change
incentives, such as emission fees or redefinition of
property rights.
Public finance is the field of economics that deals with
budgeting the revenues and expenditures of a public
sector entity, usually government. The subject addresses
such matters as tax incidence (who really pays a
particular tax), cost-benefit analysis of government
programs, effects on economic efficiency and income
distribution of different kinds of spending and taxes,
and fiscal politics. The latter, an aspect of public
choice theory, models public-sector behavior analogously
to microeconomics, involving interactions of
self-interested voters, politicians, and bureaucrats.
Much of economics is positive, seeking to describe and
predict economic phenomena. Normative economics seeks to
identify what economies ought to be like.
Welfare economics is a normative branch of economics
that uses microeconomic techniques to simultaneously
determine the allocative efficiency within an economy
and the income distribution associated with it. It
attempts to measure social welfare by examining the
economic activities of the individuals that comprise
society.
Macroeconomics examines the economy as a whole to
explain broad aggregates and their interactions "top
down", that is, using a simplified form of
general-equilibrium theory. Such aggregates include
national income and output, the unemployment rate, and
price inflation and subaggregates like total consumption
and investment spending and their components. It also
studies effects of monetary policy and fiscal policy.
Since at least the 1960s, macroeconomics has been
characterized by further integration as to micro-based
modeling of sectors, including rationality of players,
efficient use of market information, and imperfect
competition. This has addressed a long-standing concern
about inconsistent developments of the same subject.
Macroeconomic analysis also considers factors affecting
the long-term level and growth of national income. Such
factors include capital accumulation, technological
change and labour force growth.
Growth economics studies factors that explain economic growth the increase in
output per capita of a country over a long period of
time. The same factors are used to explain differences
in the level of output per capita between countries, in
particular why some countries grow faster than others,
and whether countries converge at the same rates of
growth.
Much-studied factors include the rate of investment,
population growth, and technological change. These are
represented in theoretical and empirical forms (as in
the neoclassical and endogenous growth models) and in
growth accounting.
The economics of a depression were the spur for the
creation of "macroeconomics" as a separate discipline
field of study. During the Great Depression of the
1930s, John Maynard Keynes authored a book entitled The
General Theory of Employment, Interest and Money
outlining the key theories of Keynesian economics.
Keynes contended that aggregate demand for goods might
be insufficient during economic downturns, leading to
unnecessarily high unemployment and losses of potential
output.
He therefore advocated active policy responses by the
public sector, including monetary policy actions by the
central bank and fiscal policy actions by the government
to stabilize output over the business cycle. Thus, a
central conclusion of Keynesian economics is that, in
some situations, no strong automatic mechanism moves
output and employment towards full employment levels.
John Hicks' IS/LM model has been the most influential
interpretation of The General Theory.
![http://upload.wikimedia.org/wikipedia/commons/thumb/f/fb/Economic_cycle.svg/450px-Economic_cycle.svg.png](about_economics_files/image016.gif)
A basic illustration of economic/business cycles.
Over the years, understanding of the business cycle has
branched into various research programs, mostly related
to or distinct from Keynesianism. The neoclassical
synthesis refers to the reconciliation of Keynesian
economics with neoclassical economics, stating that
Keynesianism is correct in the short run but qualified
by neoclassical-like considerations in the intermediate
and long run.
New classical macroeconomics, as distinct from the
Keynesian view of the business cycle, posits market
clearing with imperfect information. It includes
Friedman's permanent income hypothesis on consumption
and "rational expectations" theory, lead by Robert
Lucas, and real business cycle theory.
In contrast, the new Keynesian approach retains the
rational expectations assumption, however it assumes a
variety of market failures. In particular, New
Keynesians assume prices and wages are "sticky", which
means they do not adjust instantaneously to changes in
economic conditions.
Thus, the new classicals assume that prices and wages
adjust automatically to attain full employment, whereas
the new Keynesians see full employment as being
automatically achieved only in the long run, and hence
government and central-bank policies are needed because
the "long run" may be very long.
The amount of unemployment in an economy is measured by
the unemployment rate, the percentage of workers without
jobs in the labour force. The labour force only includes
workers actively looking for jobs. People who are
retired, pursuing education, or discouraged from seeking
work by a lack of job prospects are excluded from the
labor force. Unemployment can be generally broken down
into several types that are related to different causes.
![File:US employment 1995-2012.png](about_economics_files/image018.jpg)
The percentage of the US population employed, 19952012.
Classical models of unemployment occurs when wages are
too high for employers to be willing to hire more
workers. Wages may be too high because of minimum wage
laws or union activity. Consistent with classical
unemployment, frictional unemployment occurs when
appropriate job vacancies exist for a worker, but the
length of time needed to search for and find the job
leads to a period of unemployment.
Structural unemployment covers a variety of possible
causes of unemployment including a mismatch between
workers' skills and the skills required for open jobs.
Large amounts of structural unemployment can occur when
an economy is transitioning industries and workers find
their previous set of skills are no longer in demand.
Structural unemployment is similar to frictional
unemployment since both reflect the problem of matching
workers with job vacancies, but structural unemployment
covers the time needed to acquire new skills not just
the short term search process.
While some types of unemployment may occur regardless of
the condition of the economy, cyclical unemployment
occurs when growth stagnates. Okun's law represents the
empirical relationship between unemployment and economic
growth. The original version of Okun's law states that a
3% increase in output would lead to a 1% decrease in
unemployment.
Money is a means of final payment for goods in most
price system economies and the unit of account in which
prices are typically stated. A very apt statement by
Professor Walker, a well-known economist is that, "
Money is what money does]. Money has a
general acceptability, a relative consistency in value,
divisibility, durability, portability, elastic in supply
and survives with mass public confidence. It includes
currency held by the nonbank public and checkable
deposits. It has been described as a social convention,
like language, useful to one largely because it is
useful to others.
As a medium of exchange, money facilitates trade. It is
essentially a measure of value and more importantly, a
store of value being a basis for credit creation. Its
economic function can be contrasted with barter
(non-monetary exchange). Given a diverse array of
produced goods and specialized producers, barter may
entail a hard-to-locate double coincidence of wants as
to what is exchanged, say apples and a book. Money can
reduce the transaction cost of exchange because of its
ready acceptability. Then it is less costly for the
seller to accept money in exchange, rather than what the
buyer produces.
At the level of an economy, theory and evidence are
consistent with a positive relationship running from the
total money supply to the nominal value of total output
and to the general price level. For this reason,
management of the money supply is a key aspect of
monetary policy.
Governments implement fiscal policy by adjusting
spending and taxation policies to alter aggregate
demand. When aggregate demand falls below the potential
output of the economy, there is an output gap where some
productive capacity is left unemployed. Governments
increase spending and cut taxes to boost aggregate
demand. Resources that have been idled can be used by
the government.
For example, unemployed home builders can be hired to
expand highways. Tax cuts allow consumers to increase
their spending, which boosts aggregate demand. Both tax
cuts and spending have multiplier effects where the
initial increase in demand from the policy percolates
through the economy and generates additional economic
activity.
The effects of fiscal policy can be limited by crowding
out. When there is no output gap, the economy is
producing at full capacity and there are no excess
productive resources. If the government increases
spending in this situation, the government use resources
that otherwise would have been used by the private
sector, so there is no increase in overall output. Some
economists think that crowding out is always an issue
while others do not think it is a major issue when
output is depressed.
Skeptics of fiscal policy also make the argument of
Ricardian equivalence. They argue that an increase in
debt will have to be paid for with future tax increases,
which will cause people to reduce their consumption and
save money to pay for the future tax increase. Under
Ricardian equivalence, any boost in demand from fiscal
policy will be offset by the increased savings rate
intended to pay for future higher taxes.
International trade studies determinants of
goods-and-services flows across international
boundaries. It also concerns the size and distribution
of gains from trade. Policy applications include
estimating the effects of changing tariff rates and
trade quotas. International finance is a macroeconomic
field which examines the flow of capital across
international borders, and the effects of these
movements on exchange rates. Increased trade in goods,
services and capital between countries is a major effect
of contemporary globalization.
![File:Gdpercapita.PNG](about_economics_files/image020.gif)
A world map showing GDP (PPP) per capita, 2011.
The distinct field of development economics examines
economic aspects of the economic development process in
relatively low-income countries focusing on structural
change, poverty, and economic growth. Approaches in
development economics frequently incorporate social and
political factors.
Economic systems is the branch of economics that studies
the methods and institutions by which societies
determine the ownership, direction, and allocation of
economic resources. An economic system of a society is
the unit of analysis.
Among contemporary systems at different ends of the
organizational spectrum are socialist systems and
capitalist systems, in which most production occurs in
respectively state-run and private enterprises. In
between are mixed economies. A common element is the
interaction of economic and political influences,
broadly described as political economy. Comparative
economic systems studies the relative performance and
behavior of different economies or systems.
Gross Domestic product means the total value of goods
produced and services provided in a country in a year.
GDP is customarily reported on annual basis.
![GDP = C + I + G + \left (X - M \right )](about_economics_files/image021.gif)
Contemporary economics uses mathematics. Economists draw
on the tools of calculus, linear algebra, statistics,
game theory, and computer science. Professional
economists are expected to be familiar with these tools,
while a minority specialize in econometrics and
mathematical methods.
Mainstream economic theory relies upon a priori
quantitative economic models, which employ a variety of
concepts. Theory typically proceeds with an assumption
of ceteris paribus, which means holding constant
explanatory variables other than the one under
consideration. When creating theories, the objective is
to find ones which are at least as simple in information
requirements, more precise in predictions, and more
fruitful in generating additional research than prior
theories.
In microeconomics, principal concepts include supply and
demand, marginalism, rational choice theory, opportunity
cost, budget constraints, utility, and the theory of the
firm. Early macroeconomic models focused on modeling the
relationships between aggregate variables, but as the
relationships appeared to change over time
macroeconomists, including new Keynesians, reformulated
their models in microfoundations.
The aforementioned microeconomic concepts play a major
part in macroeconomic models for instance, in monetary
theory, the quantity theory of money predicts that
increases in the money supply increase inflation, and
inflation is assumed to be influenced by rational
expectations. In development economics, slower growth in
developed nations has been sometimes predicted because
of the declining marginal returns of investment and
capital, and this has been observed in the Four Asian
Tigers. Sometimes an economic hypothesis is only
qualitative, not quantitative.
Expositions of economic reasoning often use
two-dimensional graphs to illustrate theoretical
relationships. At a higher level of generality, Paul
Samuelson's treatise Foundations of Economic Analysis
(1947) used mathematical methods to represent the
theory, particularly as to maximizing behavioral
relations of agents reaching equilibrium. The book
focused on examining the class of statements called
operationally meaningful theorems in economics, which
are theorems that can conceivably be refuted by
empirical data.
Economic theories are frequently tested empirically,
largely through the use of econometrics using economic
data. The controlled experiments common to the physical
sciences are difficult and uncommon in economics, and
instead broad data is observationally studied; this type
of testing is typically regarded as less rigorous than
controlled experimentation, and the conclusions
typically more tentative. However, the field of
experimental economics is growing, and increasing use is
being made of natural experiments.
Statistical methods such as regression analysis are
common. Practitioners use such methods to estimate the
size, economic significance, and statistical
significance ("signal strength") of the hypothesized
relation(s) and to adjust for noise from other
variables. By such means, a hypothesis may gain
acceptance, although in a probabilistic, rather than
certain, sense. Acceptance is dependent upon the
falsifiable hypothesis surviving tests. Use of commonly
accepted methods need not produce a final conclusion or
even a consensus on a particular question, given
different tests, data sets, and prior beliefs.
Criticism based on professional standards and
non-replicability of results serve as further checks
against bias, errors, and over-generalization, although
much economic research has been accused of being
non-replicable, and prestigious journals have been
accused of not facilitating replication through the
provision of the code and data. Like theories, uses of
test statistics are themselves open to critical
analysis, although critical commentary on papers in
economics in prestigious journals such as the American
Economic Review has declined precipitously in the past
40 years. This has been attributed to journals'
incentives to maximize citations in order to rank higher
on the Social Science Citation Index (SSCI).
In applied economics, input-output models employing
linear programming methods are quite common. Large
amounts of data are run through computer programs to
analyze the impact of certain policies; IMPLAN is one
well-known example.
Experimental economics has promoted the use of
scientifically controlled experiments. This has reduced
long-noted distinction of economics from natural
sciences allowed direct tests of what were previously
taken as axioms. In some cases these have found that the
axioms are not entirely correct; for example, the
ultimatum game has revealed that people reject unequal
offers.
In behavioral economics, psychologist Daniel Kahneman
won the Nobel Prize in economics in 2002 for his and
Amos Tversky's empirical discovery of several cognitive
biases and heuristics. Similar empirical testing occurs
in neuroeconomics. Another example is the assumption of
narrowly selfish preferences versus a model that tests
for selfish, altruistic, and cooperative preferences.
These techniques have led some to argue that economics
is a "genuine science."
The professionalization of economics, reflected in the
growth of graduate programs on the subject, has been
described as "the main change in economics since around
1900". Most major universities and many colleges have a
major, school, or department in which academic degrees
are awarded in the subject, whether in the liberal arts,
business, or for professional study.
In the private sector, professional economists are
employed as consultants and in industry, including
banking and finance. Economists also work for various
government departments and agencies, for example, the
national Treasury, Central Bank or Bureau of Statistics.
The Nobel Memorial Prize in Economic Sciences (commonly
known as the Nobel Prize in Economics) is a prize
awarded to economists each year for outstanding
intellectual contributions in the field.
Economics is one social science among several and has
fields bordering on other areas, including economic
geography, economic history, public choice, energy
economics, cultural economics, family economics and
institutional economics.
Law and economics, or economic analysis of law, is an
approach to legal theory that applies methods of
economics to law. It includes the use of economic
concepts to explain the effects of legal rules, to
assess which legal rules are economically efficient, and
to predict what the legal rules will be. A seminal
article by Ronald Coase published in 1961 suggested that
well-defined property rights could overcome the problems
of externalities.
Political economy is the interdisciplinary study that
combines economics, law, and political science in
explaining how political institutions, the political
environment, and the economic system (capitalist,
socialist, mixed) influence each other. It studies
questions such as how monopoly, rent-seeking behavior,
and externalities should impact government policy.
Historians have employed political economy to explore
the ways in the past that persons and groups with common
economic interests have used politics to effect changes
beneficial to their interests.
Energy economics is a broad scientific subject area
which includes topics related to energy supply and
energy demand. Georgescu-Roegen reintroduced the concept
of entropy in relation to economics and energy from
thermodynamics, as distinguished from what he viewed as
the mechanistic foundation of neoclassical economics
drawn from Newtonian physics. His work contributed
significantly to thermoeconomics and to ecological
economics. He also did foundational work which later
developed into evolutionary economics.
The sociological subfield of economic sociology arose,
primarily through the work of Ιmile Durkheim, Max Weber
and Georg Simmel, as an approach to analysing the
effects of economic phenomena in relation to the
overarching social paradigm (i.e. modernity). Classic
works include Max Weber's The Protestant Ethic and the
Spirit of Capitalism (1905) and Georg Simmel's The
Philosophy of Money (1900). More recently, the works of
Mark Granovetter, Peter Hedstrom and Richard Swedberg
have been influential in this field.
Economic writings date from earlier Mesopotamian, Greek,
Roman, Indian subcontinent, Chinese, Persian, and Arab
civilizations. Notable writers from antiquity through to
the 14th century include Aristotle, Xenophon, Chanakya
(also known as Kautilya), Qin Shi Huang, Thomas Aquinas,
and Ibn Khaldun. The works of Aristotle had a profound
influence on Aquinas, who in turn influenced the late
scholastics of the 14th to 17th centuries. Joseph
Schumpeter described the latter as "coming nearer than
any other group to being the 'founders' of scientific
economics" as to monetary, interest, and value theory
within a natural-law perspective.
Two groups, later called "mercantilists" and
"physiocrats", more directly influenced the subsequent
development of the subject. Both groups were associated
with the rise of economic nationalism and modern
capitalism in Europe. Mercantilism was an economic
doctrine that flourished from the 16th to 18th century
in a prolific pamphlet literature, whether of merchants
or statesmen. It held that a nation's wealth depended on
its accumulation of gold and silver. Nations without
access to mines could obtain gold and silver from trade
only by selling goods abroad and restricting imports
other than of gold and silver. The doctrine called for
importing cheap raw materials to be used in
manufacturing goods, which could be exported, and for
state regulation to impose protective tariffs on foreign
manufactured goods and prohibit manufacturing in the
colonies.
![File:Lorrain.seaport.jpg](about_economics_files/image023.jpg)
A 1638 painting of a French seaport during the heyday of
mercantilism.
Physiocrats, a group of 18th century French thinkers and
writers, developed the idea of the economy as a circular
flow of income and output. Physiocrats believed that
only agricultural production generated a clear surplus
over cost, so that agriculture was the basis of all
wealth. Thus, they opposed the mercantilist policy of
promoting manufacturing and trade at the expense of
agriculture, including import tariffs. Physiocrats
advocated replacing administratively costly tax
collections with a single tax on income of land owners.
In reaction against copious mercantilist trade
regulations, the physiocrats advocated a policy of
laissez-faire, which called for minimal government
intervention in the economy.
Modern economic analysis is customarily said to have
begun with Adam Smith (17231790). Smith was harshly
critical of the mercantilists but described the
physiocratic system "with all its imperfections" as
"perhaps the purest approximation to the truth that has
yet been published" on the subject.
![File:AdamSmith.jpg](about_economics_files/image025.jpg)
The publication of Adam Smith's The Wealth of Nations in
1776
is considered to be the first formalisation of economic
thought.
The publication of Adam Smith's The Wealth of Nations in
1776, has been described as "the effective birth of
economics as a separate discipline." The book identified
land, labor, and capital as the three factors of
production and the major contributors to a nation's
wealth, as distinct from the Physiocratic idea that only
agriculture was productive.
Smith discusses potential benefits of specialization by
division of labour, including increased labour
productivity and gains from trade, whether between town
and country or across countries. His "theorem" that "the
division of labor is limited by the extent of the
market" has been described as the "core of a theory of
the functions of firm and industry" and a "fundamental
principle of economic organization." To Smith has also
been ascribed "the most important substantive
proposition in all of economics" and foundation of
resource-allocation theory that, under competition,
resource owners (of labour, land, and capital) seek
their most profitable uses, resulting in an equal rate
of return for all uses in equilibrium (adjusted for
apparent differences arising from such factors as
training and unemployment).
In an argument that includes "one of the most famous
passages in all economics," Smith represents every
individual as trying to employ any capital they might
command for their own advantage, not that of the
society, and for the sake of profit, which is necessary
at some level for employing capital in domestic
industry, and positively related to the value of
produce. In this:
He generally, indeed, neither intends to promote the
public interest, nor knows how much he is promoting it.
By preferring the support of domestic to that of foreign
industry, he intends only his own security; and by
directing that industry in such a manner as its produce
may be of the greatest value, he intends only his own
gain, and he is in this, as in many other cases, led by
an invisible hand to promote an end which was no part of
his intention. Nor is it always the worse for the
society that it was no part of it. By pursuing his own
interest he frequently promotes that of the society more
effectually than when he really intends to promote it.
Economists have linked Smith's invisible-hand concept to
his concern for the common man and woman through
economic growth and development, enabling higher levels
of consumption, which Smith describes as "the sole end
and purpose of all production." He embeds the "invisible
hand" in a framework that includes limiting restrictions
on competition and foreign trade by government and
industry in the same chapter and elsewhere regulation of
banking and the interest rate, provision of a "natural
system of liberty" national defence, an egalitarian
justice and legal system, and certain institutions and
public works with general benefits to the whole society
that might otherwise be unprofitable to produce, such as
education and roads, canals, and the like. An
influential introductory textbook includes parallel
discussion and this assessment: "Above all, it is Adam
Smith's vision of a self-regulating invisible hand that
is his enduring contribution to modern economics."
The Rev. Thomas Robert Malthus (1798) used the idea of
diminishing returns to explain low living standards.
Human population, he argued, tended to increase
geometrically, outstripping the production of food,
which increased arithmetically. The force of a rapidly
growing population against a limited amount of land
meant diminishing returns to labour. The result, he
claimed, was chronically low wages, which prevented the
standard of living for most of the population from
rising above the subsistence level. Economist Julian
Lincoln Simon has criticised Malthus's conclusions.
While Adam Smith emphasized the production of income,
David Ricardo (1817) focused on the distribution of
income among landowners, workers, and capitalists.
Ricardo saw an inherent conflict between landowners on
the one hand and labour and capital on the other. He
posited that the growth of population and capital,
pressing against a fixed supply of land, pushes up rents
and holds down wages and profits. Ricardo was the first
to state and prove the principle of comparative
advantage, according to which each country should
specialize in producing and exporting goods in that it
has a lower relative cost of production, rather relying
only on its own production. It has been termed a
"fundamental analytical explanation" for gains from
trade.
Coming at the end of the Classical tradition, John
Stuart Mill (1848) parted company with the earlier
classical economists on the inevitability of the
distribution of income produced by the market system.
Mill pointed to a distinct difference between the
market's two roles: allocation of resources and
distribution of income. The market might be efficient in
allocating resources but not in distributing income, he
wrote, making it necessary for society to intervene.
Value theory was important in classical theory. Smith
wrote that the "real price of every thing ... is the
toil and trouble of acquiring it" as influenced by its
scarcity. Smith maintained that, with rent and profit,
other costs besides wages also enter the price of a
commodity. Other classical economists presented
variations on Smith, termed the 'labour theory of
value'. Classical economics focused on the tendency of
markets to move to long-run equilibrium.
![A man facing the viewer](about_economics_files/image026.jpg)
The Marxist school of economic thought comes from the
work of German economist Karl Marx.
Marxist (later, Marxian) economics descends from
classical economics. It derives from the work of Karl
Marx. The first volume of Marx's major work, Das
Kapital, was published in German in 1867. In it, Marx
focused on the labour theory of value and the theory of
surplus value which, he believed, explained the
exploitation of labour by capital. The labour theory of
value held that the value of an exchanged commodity was
determined by the labour that went into its production
and the theory of surplus value demonstrated how the
workers only got paid a proportion of the value their
work had created. The U.S. Export-Import Bank defines a
Marxist-Lenninist state as having a centrally planned
economy. They are now rare, examples can still be seen
in Cuba, North Korea and Laos.
A body of theory later termed "neoclassical economics"
or "marginalism" formed from about 1870 to 1910. The
term "economics" was popularized by such neoclassical
economists as Alfred Marshall as a concise synonym for
'economic science' and a substitute for the earlier
"political economy". This corresponded to the influence
on the subject of mathematical methods used in the
natural sciences.
Neoclassical economics systematized supply and demand as
joint determinants of price and quantity in market
equilibrium, affecting both the allocation of output and
the distribution of income. It dispensed with the labour
theory of value inherited from classical economics in
favor of a marginal utility theory of value on the
demand side and a more general theory of costs on the
supply side. In the 20th century, neoclassical theorists
moved away from an earlier notion suggesting that total
utility for a society could be measured in favor of
ordinal utility, which hypothesizes merely
behavior-based relations across persons.
In microeconomics, neoclassical economics represents
incentives and costs as playing a pervasive role in
shaping decision making. An immediate example of this is
the consumer theory of individual demand, which isolates
how prices (as costs) and income affect quantity
demanded. In macroeconomics it is reflected in an early
and lasting neoclassical synthesis with Keynesian
macroeconomics.
Neoclassical economics is occasionally referred as
orthodox economics whether by its critics or
sympathizers. Modern mainstream economics builds on
neoclassical economics but with many refinements that
either supplement or generalize earlier analysis, such
as econometrics, game theory, analysis of market failure
and imperfect competition, and the neoclassical model of
economic growth for analyzing long-run variables
affecting national income.
![http://upload.wikimedia.org/wikipedia/commons/thumb/0/04/WhiteandKeynes.jpg/170px-WhiteandKeynes.jpg](about_economics_files/image028.jpg)
John Maynard Keynes (right), was a key theorist in
economics.
Keynesian economics derives from John Maynard Keynes, in
particular his book The General Theory of Employment,
Interest and Money (1936), which ushered in contemporary
macroeconomics as a distinct field. The book focused on
determinants of national income in the short run when
prices are relatively inflexible. Keynes attempted to
explain in broad theoretical detail why high
labour-market unemployment might not be self-correcting
due to low "effective demand" and why even price
flexibility and monetary policy might be unavailing. The
term "revolutionary" has been applied to the book in its
impact on economic analysis.
Keynesian economics has two successors. Post-Keynesian
economics also concentrates on macroeconomic rigidities
and adjustment processes. Research on micro foundations
for their models is represented as based on real-life
practices rather than simple optimizing models. It is
generally associated with the University of Cambridge
and the work of Joan Robinson.
New-Keynesian economics is also associated with
developments in the Keynesian fashion. Within this group
researchers tend to share with other economists the
emphasis on models employing micro foundations and
optimizing behavior but with a narrower focus on
standard Keynesian themes such as price and wage
rigidity. These are usually made to be endogenous
features of the models, rather than simply assumed as in
older Keynesian-style ones.
The Chicago School of economics is best known for its
free market advocacy and monetarist ideas. According to
Milton Friedman and monetarists, market economies are
inherently stable if the money supply does not greatly
expand or contract. Ben Bernanke, current Chairman of
the Federal Reserve, is among the economists today
generally accepting Friedman's analysis of the causes of
the Great Depression.
Milton Friedman effectively took many of the basic
principles set forth by Adam Smith and the classical
economists and modernized them. One example of this is
his article in the September 1970 issue of The New York
Times Magazine, where he claims that the social
responsibility of business should be "to use its
resources and engage in activities designed to increase
its profits ... (through) open and free competition
without deception or fraud."
Other well-known schools or trends of thought referring
to a particular style of economics practiced at and
disseminated from well-defined groups of academicians
that have become known worldwide, include the Austrian
School, the Freiburg School, the School of Lausanne,
post-Keynesian economics and the Stockholm school.
Contemporary mainstream economics is sometimes separated
into the Saltwater approach of those universities along
the Eastern and Western coasts of the US, and the
Freshwater, or Chicago-school approach.
Within macroeconomics there is, in general order of
their appearance in the literature; classical economics,
Keynesian economics, the neoclassical synthesis,
post-Keynesian economics, monetarism, new classical
economics, and supply-side economics. Alternative
developments include ecological economics,
constitutional economics, institutional economics,
evolutionary economics, dependency theory, structuralist
economics, world systems theory, econophysics, feminist
economics and biophysical economics.
"The dismal science" is a derogatory alternative name
for economics devised by the Victorian historian Thomas
Carlyle in the 19th century. It is often stated that
Carlyle gave economics the nickname "the dismal science"
as a response to the late 18th century writings of The
Reverend Thomas Robert Malthus, who grimly predicted
that starvation would result, as projected population
growth exceeded the rate of increase in the food supply.
However, the actual phrase was coined by Carlyle in the
context of a debate with John Stuart Mill on slavery, in
which Carlyle argued for slavery, while Mill opposed it.
Some economists, like John Stuart Mill or Lιon Walras,
have maintained that the production of wealth should not
be tied to its distribution.
In The Wealth of Nations, Adam Smith addressed many
issues that are currently also the subject of debate and
dispute. Smith repeatedly attacks groups of politically
aligned individuals who attempt to use their collective
influence to manipulate a government into doing their
bidding. In Smith's day, these were referred to as
factions, but are now more commonly called special
interests, a term which can comprise international
bankers, corporate conglomerations, outright
oligopolies, monopolies, trade unions and other groups.
Economics per se, as a social science, is independent of
the political acts of any government or other
decision-making organization, however, many policymakers
or individuals holding highly ranked positions that can
influence other people's lives are known for arbitrarily
using a plethora of economic concepts and rhetoric as
vehicles to legitimize agendas and value systems, and do
not limit their remarks to matters relevant to their
responsibilities. The close relation of economic theory
and practice with politics is a focus of contention that
may shade or distort the most unpretentious original
tenets of economics, and is often confused with specific
social agendas and value systems.
Notwithstanding, economics legitimately has a role in
informing government policy. It is, indeed, in some ways
an outgrowth of the older field of political economy.
Some academic economic journals are currently focusing
increased efforts on gauging the consensus of economists
regarding certain policy issues in hopes of effecting a
more informed political environment. Currently, there
exists a low approval rate from professional economists
regarding many public policies. Policy issues featured
in a recent survey of AEA economists include trade
restrictions, social insurance for those put out of work
by international competition, genetically modified
foods, curbside recycling, health insurance (several
questions), medical malpractice, barriers to entering
the medical profession, organ donations, unhealthy
foods, mortgage deductions, taxing internet sales,
Wal-Mart, casinos, ethanol subsidies, and inflation
targeting.
In Steady State Economics 1977, Herman Daly argues that
there exist logical inconsistencies between the emphasis
placed on economic growth and the limited availability
of natural resources.
Issues like central bank independence, central bank
policies and rhetoric in central bank governors
discourse or the premises of macroeconomic policies
(monetary and fiscal policy) of the state, are focus of
contention and criticism.
Deirdre McCloskey has argued that many empirical
economic studies are poorly reported, and she and
Stephen Ziliak argue that although her critique has been
well-received, practice has not improved. This latter
contention is controversial.
A 2002 International Monetary Fund study looked at
"consensus forecasts" (the forecasts of large groups of
economists) that were made in advance of 60 different
national recessions in the 1990s: in 97% of the cases
the economists did not predict the contraction a year in
advance. On those rare occasions when economists did
successfully predict recessions, they significantly
underestimated their severity.
Economics has been subject to criticism that it relies
on unrealistic, unverifiable, or highly simplified
assumptions, in some cases because these assumptions
simplify the proofs of desired conclusions. Examples of
such assumptions include perfect information, profit
maximization and rational choices. The field of
information economics includes both
mathematical-economical research and also behavioral
economics, akin to studies in behavioral psychology.
Nevertheless, prominent mainstream economists such as
Keynes and Joskow have observed that much of economics
is conceptual rather than quantitative, and difficult to
model and formalize quantitatively. In a discussion on
oligopoly research, Paul Joskow pointed out in 1975 that
in practice, serious students of actual economies tended
to use "informal models" based upon qualitative factors
specific to particular industries. Joskow had a strong
feeling that the important work in oligopoly was done
through informal observations while formal models were
"trotted out ex post". He argued that formal models were
largely not important in the empirical work, either, and
that the fundamental factor behind the theory of the
firm, behavior, was neglected.
In recent years, feminist critiques of neoclassical
economic models gained prominence, leading to the
formation of feminist economics. Contrary to common
conceptions of economics as a positive and objective
science, feminist economists call attention to the
social construction of economics and highlight the ways
in which its models and methods reflect masculine
preferences. Primary criticisms focus on failures to
account for: the selfish nature of actors (homo
economicus); exogenous tastes; the impossibility of
utility comparisons; the exclusion of unpaid work; and
the exclusion of class and gender considerations.
Feminist economics developed to address these concerns,
and the field now includes critical examinations of many
areas of economics including paid and unpaid work,
economic epistemology and history, globalization,
household economics and the care economy. In 1988,
Marilyn Waring published the book If Women Counted, in
which she argues that the discipline of economics
ignores women's unpaid work and the value of nature;
according to Julie A. Nelson, If Women Counted "showed
exactly how the unpaid work traditionally done by women
has been made invisible within national accounting
systems" and "issued a wake-up call to issues of
ecological sustainability." Bjψrnholt and McKay argue
that the financial crisis of 200708 and the response to
it revealed a crisis of ideas in mainstream economics
and within the economics profession, and call for a
reshaping of both the economy, economic theory and the
economics profession. They argue that such a reshaping
should include new advances within feminist economics
that take as their starting point the socially
responsible, sensible and accountable subject in
creating an economy and economic theories that fully
acknowledge care for each other as well as the planet.
The imperatives of the orthodox research programme [of
economic science] leave little room for maneuver and
less room for originality. ... These mandates ...
Appropriate as many mathematical techniques and
metaphorical expressions from contemporary respectable
science, primarily physics as possible. ... Preserve to
the maximum extent possible the attendant
nineteenth-century overtones of "natural order" ... Deny
strenuously that neoclassical theory slavishly imitates
physics. ... Above all, prevent all rival research
programmes from encroaching ... by ridiculing all
external attempts to appropriate twentieth century
physics models. ... All theorizing is [in this way] held
hostage to nineteenth-century concepts of energy.
In a series of peer-reviewed journal and conference
papers and books published over a period of several
decades, John McMurtry has provided extensive criticism
of what he terms the "unexamined assumptions and
implications [of economics], and their consequent cost
to people's lives."
Nassim Nicholas Taleb and Michael Perelman are two
additional scholars who criticized conventional or
mainstream economics. Taleb opposes most economic
theorizing, which in his view suffers acutely from the
problem of overuse of Plato's Theory of Forms, and calls
for cancellation of the Nobel Memorial Prize in
Economics, saying that the damage from economic theories
can be devastating. Michael Perelman provides extensive
criticism of economics and its assumptions in all his
books (and especially his books published from 2000 to
date), papers and interviews.
Economy of India : past, present and
future
The Economy of India is the tenth-largest in the world by nominal
GDP and the third-largest by purchasing power parity
(PPP). The country is one of the G-20 major economies
and a member of BRICS. On a per-capita-income basis,
India ranked 141st by nominal GDP and 130th by GDP (PPP)
in 2012, according to the IMF. India is the 19th-largest
exporter and the 10th-largest importer in the world. The
economy slowed to around 5.0% for the 201213 fiscal
year compared with 6.2% in the previous fiscal.
According to Moody's, the Economic Growth Rate of India
would be 5.5% in 2014-15. On 28 August 2013 the Indian
rupee hit an all time low of 68.80 against the US
dollar. In order to control the fall in rupee, the
government introduced capital controls on outward
investment by both corporates and individuals. India's
GDP grew by 9.3% in 201011; thus, the growth rate has
nearly halved in just three years. GDP growth rose
marginally to 4.8% during the quarter through March
2013, from about 4.7% in the previous quarter. The
government has forecast a growth rate of 6.1%6.7% for
the year 201314, whilst the RBI expects the same to be
at 5.7%. Besides this, India suffered a very high fiscal
deficit of US$ 88 billion (4.8% of GDP) in the year
201213. The Indian Government aims to cut the fiscal
deficit to US$ 70 billion or 3.7% of GDP by 201314.
The independence-era Indian economy (from 1947 to 1991) was based
on a mixed economy combining features of capitalism and
socialism, resulting in an inward-looking,
interventionist policies and import-substituting economy
that failed to take advantage of the post-war expansion
of trade. This model contributed to widespread
inefficiencies and corruption, and the failings of this
system were due largely to its poor implementation.
In 1991, India adopted liberal and free-market principles and
liberalised its economy to international trade under the
guidance of Former Finance minister Manmohan Singh under
the Prime Ministry of P.V.Narasimha Rao, prime minister
from 1991 to 1996, who had eliminated Licence Raj, a
pre- and post-British era mechanism of strict government
controls on setting up new industry. Following these
major economic reforms, and a strong focus on developing
national infrastructure such as the Golden Quadrilateral
project by former Prime Minister Atal Bihari Vajpayee,
the country's economic growth progressed at a rapid
pace, with relatively large increases in per-capita
incomes. The south western state of Maharashtra
contributes the highest towards India's GDP among all
states. Mumbai (Maharashtra) is known as the trade and
commerce capital of India.
The combination of protectionist, import-substitution, and Fabian
social democratic-inspired policies governed India for
sometime after the end of British occupation. The
economy was then characterised by extensive regulation,
protectionism, public ownership of large monopolies,
pervasive corruption and slow growth. Since 1991,
continuing economic liberalisation has moved the country
towards a market-based economy. By 2008, India had
established itself as one of the world's fastest growing
economies. Growth significantly slowed to 6.8% in
200809, but subsequently recovered to 7.4% in 200910,
while the fiscal deficit rose from 5.9% to a high 6.5%
during the same period. India's current account deficit
surged to 4.1% of GDP during Q2 FY11 against 3.2% the
previous quarter. The unemployment rate for 201011,
according to the state Labour Bureau, was 9.8%
nationwide. As of 2011, India's public debt stood at
68.05% of GDP which is highest among the emerging
economies. However, inflation remains stubbornly high
with 7.55% in August 2012, the highest amotrade
(counting exports and imports) stands at $606.7 billion
and is currently the 9th largest in the world. During
201112, India's foreign trade grew by an impressive
30.6% to reach $792.3 billion (Exports-38.33% &
Imports-61.67%).
The citizens of the Indus Valley civilisation, a permanent
settlement that flourished between 2800 BC and 1800 BC,
practiced agriculture, domesticated animals, used
uniform weights and measures, made tools and weapons,
and traded with other cities. Evidence of well-planned
streets, a drainage system and water supply reveals
their knowledge of urban planning, which included the
world's first urban sanitation systems and the existence
of a form of municipal government.
![File:Silk route.jpg](about_economics_files/image030.jpg)
The spice trade between India and Europe was the main
catalyst for the Age of Discovery.
Maritime trade was carried out extensively between South India and
southeast and West Asia from early times until around
the fourteenth century AD. Both the Malabar and
Coromandel Coasts were the sites of important trading
centres from as early as the first century BC, used for
import and export as well as transit points between the
Mediterranean region and southeast Asia. Over time,
traders organised themselves into associations which
received state patronage. Raychaudhuri and Habib claim
this state patronage for overseas trade came to an end
by the thirteenth century AD, when it was largely taken
over by the local Parsi, Jewish and Muslim communities,
initially on the Malabar and subsequently on the
Coromandel coast.
![http://upload.wikimedia.org/wikipedia/commons/thumb/f/f6/Atashgah-inscription-jackson1911.jpg/170px-Atashgah-inscription-jackson1911.jpg](about_economics_files/image031.jpg)
Atashgah is a temple built by Indian traders before
1745.
The temple is west of Caspian Sea, between West Asia and
Eastern Europe.
The inscription shown is in Sanskrit (above) and
Persian.
Other scholars suggest trading from India to West Asia and Eastern
Europe was active between 14th and 18th century. During
this period, Indian traders had settled in Surakhani, a
suburb of greater Baku, Azerbaijan. These traders had
built a Hindu temple, now preserved by the government of
Azerbaijan. French Jesuit Villotte, who lived in
Azerbaijan in late 1600s, wrote this Indian temple was
revered by Hindus; the temple has numerous carvings in
Sanskrit or Punjabi, dated to be between 1500 and 1745
AD. The Atashgah temple built by the Baku-resident
traders from India suggests commerce was active and
prosperous for Indians by the 17th century.
Further north, the Saurashtra and Bengal coasts played an important
role in maritime trade, and the Gangetic plains and the
Indus valley housed several centres of river-borne
commerce. Most overland trade was carried out via the
Khyber Pass connecting the Punjab region with
Afghanistan and onward to the Middle East and Central
Asia. Although many kingdoms and rulers issued coins,
barter was prevalent. Villages paid a portion of their
agricultural produce as revenue to the rulers, while
their craftsmen received a part of the crops at harvest
time for their services.
![http://upload.wikimedia.org/wikipedia/commons/thumb/2/2b/MauryanCoin.JPG/120px-MauryanCoin.JPG](about_economics_files/image033.jpg)
Silver coin of the Maurya Empire, 3rd century BC.
![http://upload.wikimedia.org/wikipedia/commons/thumb/d/da/Kumaragupta.JPG/120px-Kumaragupta.JPG](about_economics_files/image035.jpg)
Silver coin of the Gupta dynasty, 5th century AD.
Sean Harkin estimates China and India may have accounted for 60 to
70 percent of world GDP in the 17th century.
Assessment of India's pre-colonial economy is mostly qualitative,
owing to the lack of quantitative information. The
Mughal economy functioned on an elaborate system of
coined currency, land revenue and trade. Gold, silver
and copper coins were issued by the royal mints which
functioned on the basis of free coinage. The political
stability and uniform revenue policy resulting from a
centralised administration under the Mughals, coupled
with a well-developed internal trade network, ensured
that India, before the arrival of the British, was to a
large extent economically unified, despite having a
traditional agrarian economy characterised by a
predominance of subsistence agriculture dependent on
primitive technology. After the decline of the Mughals,
western, central and parts of south and north India were
integrated and administered by the Maratha Empire. After
the loss at the Third Battle of Panipat, the Maratha
Empire disintegrated into several confederate states,
and the resulting political instability and armed
conflict severely affected economic life in several
parts of the country, although this was compensated for
to some extent by localised prosperity in the new
provincial kingdoms. By the end of the eighteenth
century, the British East India Company entered the
Indian political theatre and established its dominance
over other European powers. This marked a determinative
shift in India's trade, and a less powerful impact on
the rest of the economy.
![File:HooglyKolkata1945.jpg](about_economics_files/image037.jpg)
An aerial view of Calcutta Port taken in 1945. Calcutta,
which was the economic hub of
British India, saw increased industrial activity during
World War II.
There is no doubt that our grievances against the British Empire
had a sound basis. As the painstaking statistical work
of the Cambridge historian Angus Maddison has shown,
India's share of world income collapsed from 22.6% in
1700, almost equal to Europe's share of 23.3% at that
time, to as low as 3.8% in 1952. Indeed, at the
beginning of the 20th century, "the brightest jewel in
the British Crown" was the poorest country in the world
in terms of per capita income.
Manmohan Singh
Company rule in India brought a major change in the taxation and
agricultural policies, which tended to promote
commercialisation of agriculture with a focus on trade,
resulting in decreased production of food crops, mass
impoverishment and destitution of farmers, and in the
short term, led to numerous famines. The economic
policies of the British Raj caused a severe decline in
the handicrafts and handloom sectors, due to reduced
demand and dipping employment. After the removal of
international restrictions by the Charter of 1813,
Indian trade expanded substantially and over the long
term showed an upward trend. The result was a
significant transfer of capital from India to England,
which, due to the colonial policies of the British, led
to a massive drain of revenue rather than any systematic
effort at modernisation of the domestic economy.
India's colonisation by the British created an institutional
environment that, on paper, guaranteed property rights
among the colonisers, encouraged free trade, and created
a single currency with fixed exchange rates,
standardised weights and measures and capital markets.
It also established a well-developed system of railways
and telegraphs, a civil service that aimed to be free
from political interference, a common-law and an
adversarial legal system. This coincided with major
changes in the world economy industrialisation, and
significant growth in production and trade. However, at
the end of colonial rule, India inherited an economy
that was one of the poorest in the developing world,
with industrial development stalled, agriculture unable
to feed a rapidly growing population, a largely
illiterate and unskilled labour force, and extremely
inadequate infrastructure.
![File:Precolonial national income of India(1857-1900).png](about_economics_files/image039.gif)
Estimates of the per capita income of India (18571900)
as per 194849 prices.
The 1872 census revealed that 91.3% of the population of the region
constituting present-day India resided in villages, and
urbanisation generally remained sluggish until the
1920s, due to the lack of industrialisation and absence
of adequate transportation. Subsequently, the policy of
discriminating protection (where certain important
industries were given financial protection by the
state), coupled with the Second World War, saw the
development and dispersal of industries, encouraging
rural-urban migration, and in particular the large port
cities of Bombay, Calcutta and Madras grew rapidly.
Despite this, only one-sixth of India's population lived
in cities by 1951.
The impact of British occupation on India's economy is a
controversial topic. Leaders of the Indian independence
movement and economic historians have blamed colonial
occupation for the dismal state of India's economy in
its aftermath and argued that financial strength
required for industrial development in Europe was
derived from the wealth taken from colonies in Asia and
Africa. At the same time, right-wing historians have
countered that India's low economic performance was due
to various sectors being in a state of growth and
decline due to changes brought in by colonialism and a
world that was moving towards industrialisation and
economic integration.
Indian economic policy after independence was influenced by the
colonial experience, which was seen by Indian leaders as
exploitative, and by those leaders' exposure to British
social democracy as well as the planned economy of the
Soviet Union. Domestic policy tended towards
protectionism, with a strong emphasis on import
substitution industrialisation, economic
interventionism, a large public sector, business
regulation, and central planning, while trade and
foreign investment policies were relatively liberal.
Five-Year Plans of India resembled central planning in
the Soviet Union. Steel, mining, machine tools,
telecommunications, insurance, and power plants, among
other industries, were effectively nationalised in the
mid-1950s.
Jawaharlal Nehru, the first prime minister of India, along with the
statistician Prasanta Chandra Mahalanobis, formulated
and oversaw economic policy during the initial years of
the country's independence. They expected favourable
outcomes from their strategy, involving the rapid
development of heavy industry by both public and private
sectors, and based on direct and indirect state
intervention, rather than the more extreme Soviet-style
central command system. The policy of concentrating
simultaneously on capital- and technology-intensive
heavy industry and subsidising manual, low-skill cottage
industries was criticised by economist Milton Friedman,
who thought it would waste capital and labour, and
retard the development of small manufacturers. The rate
of growth of the Indian economy in the first three
decades after independence was derisively referred to as
the Hindu rate of growth by economists, because of the
unfavourable comparison with growth rates in other Asian
countries.
Since 1965, the use of high-yielding varieties of seeds, increased
fertilisers and improved irrigation facilities
collectively contributed to the Green Revolution in
India, which improved the condition of agriculture by
increasing crop productivity, improving crop patterns
and strengthening forward and backward linkages between
agriculture and industry. However, it has also been
criticised as an unsustainable effort, resulting in the
growth of capitalistic farming, ignoring institutional
reforms and widening income disparities.
Subsequently the Emergency and Garibi Hatao concept under which
income tax levels at one point rose to a maximum of
97.5%, a record in the world for non-communist
economies, started diluting the earlier efforts.
![File:India GDP without labels.PNG](about_economics_files/image041.gif)
GDP of India has risen rapidly since 1991.
In the late 1970s, the government led by Morarji Desai eased
restrictions on capacity expansion for incumbent
companies, removed price controls, reduced corporate
taxes and promoted the creation of small scale
industries in large numbers. However, the subsequent
government policy of Fabian socialism hampered the
benefits of the economy, leading to high fiscal deficits
and a worsening current account. The collapse of the
Soviet Union, which was India's major trading partner,
and the Gulf War, which caused a spike in oil prices,
resulted in a major balance-of-payments crisis for
India, which found itself facing the prospect of
defaulting on its loans. India asked for a $1.8 billion
bailout loan from the International Monetary Fund (IMF),
which in return demanded de-regulation.[73]
In response, Prime Minister Narasimha Rao, along with his finance
minister Manmohan Singh, initiated the economic
liberalisation of 1991. The reforms did away with the
Licence Raj, reduced tariffs and interest rates and
ended many public monopolies, allowing automatic
approval of foreign direct investment in many sectors.
Since then, the overall thrust of liberalisation has
remained the same, although no government has tried to
take on powerful lobbies such as trade unions and
farmers, on contentious issues such as reforming labour
laws and reducing agricultural subsidies. By the turn of
the 21st century, India had progressed towards a
free-market economy, with a substantial reduction in
state control of the economy and increased financial
liberalisation. This has been accompanied by increases
in life expectancy, literacy rates and food security,
although urban residents have benefited more than
agricultural residents.
While the credit rating of India was hit by its nuclear weapons
tests in 1998, it has since been raised to investment
level in 2003 by S&P and Moody's. India enjoyed high
growth rates for a period from 2003 to 2007 with growth
averaging 9% during this period. Growth then moderated
due to the global financial crisis starting in 2008. In
2003, Goldman Sachs predicted that India's GDP in
current prices would overtake France and Italy by 2020,
Germany, UK and Russia by 2025 and Japan by 2035, making
it the third largest economy of the world, behind the US
and China. India is often seen by most economists as a
rising economic superpower and is believed to play a
major role in the global economy in the 21st century.
Starting in 2012, India entered a period of more anemic growth,
with growth slowing down to 4.4%. Other economic
problems also became apparent: a plunging Indian rupee,
a persistent high current account deficit and slow
industrial growth. Hit by the U.S. Federal Reserve's
decision to taper quantitative easing, foreign investors
have been rapidly pulling out money from India.
Industry accounts for 26% of GDP and employs 22% of the total
workforce. India is 11th in the world in terms of
nominal factory output according to data compiled
through CIA World Factbook figures. The Indian
industrial sector underwent significant changes as a
result of the economic liberalisation in India economic
reforms of 1991, which removed import restrictions,
brought in foreign competition, led to the privatisation
of certain public sector industries, liberalised the FDI
regime, improved infrastructure and led to an expansion
in the production of fast moving consumer goods.
Post-liberalisation, the Indian private sector was faced
with increasing domestic as well as foreign competition,
including the threat of cheaper Chinese imports. It has
since handled the change by squeezing costs, revamping
management, and relying on cheap labour and new
technology. However, this has also reduced employment
generation even by smaller manufacturers who earlier
relied on relatively labour-intensive processes.
Textile manufacturing is the 2nd largest source of employment after
agriculture and accounts for 20% of manufacturing
output, providing employment to over 20 million people.
A previous Indian Minister of Textiles Shankersinh
Vaghela, has stated that the transformation of the
textile industry from a declining to a rapidly
developing one has become the biggest achievement of the
central government. After freeing the industry in
20042005 from a number of limitations, primarily
financial, the government gave a green light to massive
investment inflows both domestic and foreign. During
the period from 2004 to 2008, total investment amounted
to 27 billion dollars. By 2012, this figure was
predicted to reach 38 billion and was expected to create
an additional 17 million jobs. However, demand for
Indian textiles in world markets continues to fall.
Ludhiana produces 90% of woollens in India and is known
as the Manchester of India. Tirupur has gained universal
recognition as the leading source of hosiery, knitted
garments, casual wear and sportswear. Considering the Rs
15,000,000,000 revenue from textile sales with an
approximate of a nominal 20% net profit and with around
257,572 residents of the city, per capita income of
Ichalkaranji is 116,472, among one of the highest per
capita incomes in the country. Textile Development
Cluster : To enhance and improve the infrastructure
facilities of the city, the Municipal Council along with
Ichalkaranji Co-operative Industrial Estate, Laxmi
Co-operative Industrial Estate, Parvati Industrial
Estate and DKTE Textile and Engineering Institute have
jointly come together and formed a Special Purpose
Vehicle (SPV) company viz. Ichalkaranji Textile
Development Cluster Limited (ITDC). The individual
members will contribute to the extent of about 50% of
the project cost and the balance amount would come in
from the grant in aid from Department of Industrial
Promotion and Policy, Government of India, under the
Industrial Infrastructure up-gradation Scheme (IIUS).
India's textile industries depend on child labour from the the
fields to the mills to remain competitive.
India is 13th in services output. The services sector provides
employment to 27% of the work force and is growing
quickly, with a growth rate of 7.5% in 19912000, up
from 4.5% in 195180. It has the largest share in the
GDP, accounting for 57% in 2012, up from 15% in 1950.
Information technology and business process outsourcing
are among the fastest growing sectors, having a
cumulative growth rate of revenue 33.6% between 1997 and
1998 and 200203 and contributing to 25% of the
country's total exports in 200708. The growth in the IT
sector is attributed to increased specialisation, and an
availability of a large pool of low cost, highly
skilled, educated and fluent English-speaking workers,
on the supply side, matched on the demand side by
increased demand from foreign consumers interested in
India's service exports, or those looking to outsource
their operations. The share of the Indian IT industry in
the country's GDP increased from 4.8% in 200506 to 7%
in 2008. In 2009, seven Indian firms were listed among
the top 15 technology outsourcing companies in the
world.
Retail industry is one of the pillars of Indian economy and
accounts for 1415% of its GDP. The Indian retail market
is estimated to be US$ 450 billion and one of the top
five retail markets in the world by economic value.
India is one of the fastest growing retail market in the
world, with 1.2 billion people.
India's retailing industry essentially consists of the local mom
and pop store, owner manned general stores, convenience
stores, hand cart and pavement vendors, etc. Organised
retail supermarkets account for 4% of the market as of
2008. Regulations prevent most foreign investment in
retailing. In 2012 government permitted 51% FDI in multi
brand retail and 100% FDI in single brand retail.
Moreover, over thirty regulations such as "signboard
licences" and "anti-hoarding measures" may have to be
complied before a store can open doors. There are taxes
for moving goods from state to state, and even within
states.
Tourism in India is relatively undeveloped, but a high growth
sector. It contributes 6.23% to the national GDP and
8.78% of the total employment. The majority of foreign
tourists come from USA and UK. India's rich history and
its cultural and geographical diversity make its
international tourism appeal large and diverse. It
presents heritage and cultural tourism along with
medical, business and sports tourism. India has one of
the largest and fastest growing medical tourism sectors.
Mining forms an important segment of the Indian economy, with the
country producing 79 different minerals (excluding fuel
and atomic resources) in 200910, including iron ore,
manganese, mica, bauxite, chromite, limestone, asbestos,
fluorite, gypsum, ochre, phosphorite and silica sand.
India ranks second worldwide in farm output. Agriculture and allied
sectors like forestry, logging and fishing accounted for
17% of the GDP in 2012, employed 51% of the total
workforce, and despite a steady decline of its share in
the GDP, is still the largest economic sector and a
significant piece of the overall socio-economic
development of India. Crop yield per unit area of all
crops have grown since 1950, due to the special emphasis
placed on agriculture in the five-year plans and steady
improvements in irrigation, technology, application of
modern agricultural practices and provision of
agricultural credit and subsidies since the Green
Revolution in India. However, international comparisons
reveal the average yield in India is generally 30% to
50% of the highest average yield in the world. Indian
states Uttar Pradesh, Punjab, Haryana, Madhya Pradesh,
Andhra Pradesh, Bihar, West Bengal, Gujarat and
Maharashtra are key agricultural contributing states of
India.
India receives an average annual rainfall of 1,208 millimetres
(47.6 in) and a total annual precipitation of
4000 billion cubic metres, with the total utilisable
water resources, including surface and groundwater,
amounting to 1123 billion cubic metres. 546,820 square
kilometres (211,130 sq mi) of the land area, or about
39% of the total cultivated area, is irrigated. India's
inland water resources including rivers, canals, ponds
and lakes and marine resources comprising the east and
west coasts of the Indian ocean and other gulfs and bays
provide employment to nearly six million people in the
fisheries sector. In 2008, India had the world's third
largest fishing industry.
India is the largest producer in the world of milk, jute and
pulses, and also has the world's second largest cattle
population with 175 million animals in 2008. It is the
second largest producer of rice, wheat, sugarcane,
cotton and groundnuts, as well as the second largest
fruit and vegetable producer, accounting for 10.9% and
8.6% of the world fruit and vegetable production
respectively. India is also the second largest producer
and the largest consumer of silk in the world, producing
77,000 tons in 2005.
The Indian money market is classified into the organised sector,
comprising private, public and foreign owned commercial
banks and cooperative banks, together known as scheduled
banks, and the unorganised sector, which includes
individual or family owned indigenous bankers or money
lenders and non-banking financial companies. The
unorganised sector and microcredit are still preferred
over traditional banks in rural and sub-urban areas,
especially for non-productive purposes, like ceremonies
and short duration loans.
Prime Minister Indira Gandhi nationalised 14 banks in 1969,
followed by six others in 1980, and made it mandatory
for banks to provide 40% of their net credit to priority
sectors like agriculture, small-scale industry, retail
trade, small businesses, etc. to ensure that the banks
fulfill their social and developmental goals. Since
then, the number of bank branches has increased from
8,260 in 1969 to 72,170 in 2007 and the population
covered by a branch decreased from 63,800 to 15,000
during the same period. The total bank deposits
increased from
59.1
billion (US$960 million) in 197071 to
38309.22
billion (US$620 billion) in 200809. Despite an increase of rural
branches, from 1,860 or 22% of the total number of
branches in 1969 to 30,590 or 42% in 2007, only 32,270
out of 500,000 villages are covered by a scheduled bank.
India's gross domestic saving in 200607 as a percentage of GDP
stood at a high 32.8%. More than half of personal
savings are invested in physical assets such as land,
houses, cattle, and gold. The public sector banks hold
over 75% of total assets of the banking industry, with
the private and foreign banks holding 18.2% and 6.5%
respectively. Since liberalisation, the government has
approved significant banking reforms. While some of
these relate to nationalised banks, like encouraging
mergers, reducing government interference and increasing
profitability and competitiveness, other reforms have
opened up the banking and insurance sectors to private
and foreign players.
![File:ONGC Oil Platform.jpg](about_economics_files/image045.jpg)
As of 2010, India imported about 70% of its crude oil
requirements. Shown here is an ONGC
platform at Mumbai High in the Arabian Sea, one of the
sites of domestic production.
As of 2009, India is the fourth largest producer of electricity and
oil products and the fourth largest importer of coal and
crude-oil in the world. Coal and oil together account
for 66% of the energy consumption of India.
India's oil reserves meet 25% of the country's domestic oil demand.
As of 2012, India's total proven oil reserves of
5.5 million barrels (870 million litres), while gas
reserves stood at 43,800 million cubic feet
(1,240 million cubic metres). Oil and natural gas fields
are located offshore at Mumbai High, Krishna Godavari
Basin and the Cauvery Delta, and onshore mainly in the
states of Assam, Gujarat and Rajasthan. India is the
fourth largest consumer of oil in the world and imported
726386
crore (US$120 billion) worth of oil in 2011-12, which
had an adverse effect on its current account deficit.
The petroleum industry in India mostly consists of
public sector companies such as Oil and Natural Gas
Corporation (ONGC), Hindustan Petroleum Corporation
Limited (HPCL), Bharat Petroleum Corporation Limited
(BPCL) and Indian Oil Corporation Limited (IOCL). There
are some major private Indian companies in the oil
sector such as Reliance Industries Limited (RIL) which
operates the world's largest oil refining complex.
As of December 2011, India had an installed power generation
capacity of 233.929 GW as of December 2013, of which
thermal power contributed 68.31%, hydroelectricity
17.05%, other sources of renewable energy 12.59%, and
nuclear power 2.04%. India meets most of its domestic
energy demand through its 106 billion tonnes of coal
reserves. India is also rich in certain alternative
sources of energy with significant future potential such
as solar, wind and biofuels (jatropha, sugarcane).
India's dwindling uranium reserves stagnated the growth
of nuclear energy in the country for many years. Recent
discoveries of natural uranium in Tummalapalle belt,
which promises to be one of the top 20 of the world's
reserves, and an estimated reserve of 846,477 metric
tons (933,081 short tons) of thorium about 25% of
world's reserves are expected to fuel the country's
ambitious nuclear energy program in the long-run. The
Indo-US nuclear deal has also paved the way for India to
import uranium from other countries.
India has the world's third largest road network, covering more
than 4.3 million kilometers and carrying 60% of freight
and 87% of passenger traffic. Indian Railways is the
fourth largest rail network in the world, with a track
length of 114,500 kilometers. India has 13 major ports,
handling a cargo volume of 850 million tonnes in 2010.
India has a national teledensity rate of 74.15% with 926.53 million
telephone subscribers, two-thirds of them in urban
areas, but Internet use is rare, with around
13.3 million broadband lines in India in December 2011.
However, this is growing and is expected to boom
following the expansion of 3G and WiMAX services.
Until the liberalisation of 1991, India was largely and
intentionally isolated from the world markets, to
protect its economy and to achieve self-reliance.
Foreign trade was subject to import tariffs, export
taxes and quantitative restrictions, while foreign
direct investment (FDI) was restricted by upper-limit
equity participation, restrictions on technology
transfer, export obligations and government approvals;
these approvals were needed for nearly 60% of new FDI in
the industrial sector. The restrictions ensured that FDI
averaged only around $200 million annually between 1985
and 1991; a large percentage of the capital flows
consisted of foreign aid, commercial borrowing and
deposits of non-resident Indians. India's exports were
stagnant for the first 15 years after independence, due
to general neglect of trade policy by the government of
that period. Imports in the same period, due to
industrialisation being nascent, consisted predominantly
of machinery, raw materials and consumer goods.[140]
![File:India treemap.png](about_economics_files/image047.gif)
Graphical depiction of India's product exports in 28
color-coded categories.
Since liberalisation, the value of India's international trade has
increased sharply, with the contribution of total trade
in goods and services to the GDP rising from 16% in
199091 to 47% in 200810. India accounts for 1.44% of
exports and 2.12% of imports for merchandise trade and
3.34% of exports and 3.31% of imports for commercial
services trade worldwide. India's major trading partners
are the European Union, China, the United States of
America and the United Arab Emirates. In 200607, major
export commodities included engineering goods, petroleum
products, chemicals and pharmaceuticals, gems and
jewellery, textiles and garments, agricultural products,
iron ore and other minerals. Major import commodities
included crude oil and related products, machinery,
electronic goods, gold and silver. In November 2010,
exports increased 22.3% year-on-year to
850.63
billion (US$14 billion), while imports were up 7.5% at
1251.33
billion (US$20 billion). Trade deficit for the same month dropped from
468.65
billion (US$7.6 billion) in 2009 to
400.7
billion (US$6.5 billion) in 2010.
India is a founding-member of General Agreement on Tariffs and
Trade (GATT) since 1947 and its successor, the WTO.
While participating actively in its general council
meetings, India has been crucial in voicing the concerns
of the developing world. For instance, India has
continued its opposition to the inclusion of such
matters as labour and environment issues and other
non-tariff barriers to trade into the WTO policies.
Since independence, India's balance of payments on its current
account has been negative. Since economic liberalisation
in the 1990s, precipitated by a balance of payment
crisis, India's exports rose consistently, covering
80.3% of its imports in 200203, up from 66.2% in
199091. However, the global economic slump followed by
a general deceleration in world trade saw the exports as
a percentage of imports drop to 61.4% in 200809.
India's growing oil import bill is seen as the main
driver behind the large current account deficit, which
rose to $118.7 billion, or 11.11% of GDP, in 200809.
Between January and October 2010, India imported
$82.1 billion worth of crude oil.
Due to the global late-2000s recession, both Indian exports and
imports declined by 29.2% and 39.2% respectively in June
2009. The steep decline was because countries hit
hardest by the global recession, such as United States
and members of the European Union, account for more than
60% of Indian exports. However, since the decline in
imports was much sharper compared to the decline in
exports, India's trade deficit reduced to
252.5
billion (US$4.1 billion). As of June 2011, exports and imports have both
registered impressive growth with monthly exports
reaching $25.9 billion for the month of May 2011 and
monthly imports reaching $40.9 billion for the same
month. This represents a year on year growth of 56.9%
for exports and 54.1% for imports.
India's reliance on external assistance and concessional debt has
decreased since liberalisation of the economy, and the
debt service ratio decreased from 35.3% in 199091 to
4.4% in 200809. In India, External Commercial
Borrowings (ECBs), or commercial loans from non-resident
lenders, are being permitted by the Government for
providing an additional source of funds to Indian
corporates. The Ministry of Finance monitors and
regulates them through ECB policy guidelines issued by
the Reserve Bank of India under the Foreign Exchange
Management Act of 1999. India's foreign exchange
reserves have steadily risen from $5.8 billion in March
1991 to $283.5 billion in December 2009.
Share of top five investing countries in FDI
inflows. (20002010) |
Rank |
Country |
Inflows
(million USD) |
Inflows (%) |
1 |
Mauritius |
50,164 |
42.00 |
2 |
Singapore |
11,275 |
9.00 |
3 |
USA |
8,914 |
7.00 |
4 |
UK |
6,158 |
5.00 |
5 |
Netherlands |
4,968 |
4.00 |
As the third-largest economy in the world in PPP terms, India is a
preferred destination for FDI; During the year 2011, FDI
inflow into India stood at $36.5 billion, 51.1% higher
than 2010 figure of $24.15 billion. India has strengths
in telecommunication, information technology and other
significant areas such as auto components, chemicals,
apparels, pharmaceuticals, and jewellery. Despite a
surge in foreign investments, rigid FDI policies were a
significant hindrance. However, due to positive economic
reforms aimed at deregulating the economy and
stimulating foreign investment, India has positioned
itself as one of the front-runners of the rapidly
growing Asia-Pacific region. India has a large pool of
skilled managerial and technical expertise. The size of
the middle-class population stands at 300 million and
represents a growing consumer market.
During 200010, the country attracted $178 billion as FDI. The
inordinately high investment from Mauritius is due to
routing of international funds through the country given
significant tax advantages; double taxation is avoided
due to a tax treaty between India and Mauritius, and
Mauritius is a capital gains tax haven, effectively
creating a zero-taxation FDI channel.
India's recently liberalised FDI policy (2005) allows up to a 100%
FDI stake in ventures. Industrial policy reforms have
substantially reduced industrial licensing requirements,
removed restrictions on expansion and facilitated easy
access to foreign technology and foreign direct
investment FDI. The upward moving growth curve of the
real-estate sector owes some credit to a booming economy
and liberalised FDI regime. In March 2005, the
government amended the rules to allow 100% FDI in the
construction sector, including built-up infrastructure
and construction development projects comprising
housing, commercial premises, hospitals, educational
institutions, recreational facilities, and city- and
regional-level infrastructure. Despite a number of
changes in the FDI policy to remove caps in most
sectors, there still remains an unfinished agenda of
permitting greater FDI in politically sensitive areas
such as insurance and retailing. The total FDI equity
inflow into India in 200809 stood at
1229.19
billion (US$20 billion), a growth of 25% in rupee terms over the previous
period. India's trade and business sector has grown
fast. India currently accounts for 1.5% of world trade
as of 2007 according to the World Trade Statistics of
the WTO in 2006.
Exchange rate policy in India evolved over time. After independence
the Indian rupee was pegged to the British currency
pound sterling. In the aftermath of the two wars in 1962
and 1965 and severe drought, the Government devalued the
rupee by 35% in 1966. The rupee was delinked from the
pound sterling in 1975. In 1991 India faced the major
foreign exchange crisis and the rupee was devalued by
around 19% in two stages on 1 and 2 July. In 1992 a
Liberalized Exchange Rate Mechanism LERMS- was
introduced. Under LERMS exporters had to surrender 40
percent of their foreign exchange earnings to the RBI at
the RBI determined exchange rate. The balance 60% was
allowed to be converted at the market determined
exchange rate. In 1994 the rupee was convertible on the
current account. It is not yet fully convertible on the
capital account. Thus, over the years India has moved
from a fixed exchange rate regime to a managed float
regime. Central Bank intervenes in the foreign exchange
market to curb excessive volatility.
After the sharp devaluation in 1991 and transition to current
account convertibility in 1994, the value of the rupee
is largely determined by the market forces. The rupee
has been fairly stable during the decade 2000 to 2010
even though there were sharp swings in 2008 following
the Lehman collapse and the capital flight that it
triggered. In June 2012 the rupee touched an all time
low 57.33 to the dollar. The sharp depreciation in the
rupee has been caused by the rising and unsustainable
current account deficit which touched 4.5% for 201112.
Port folio flows showed down following the risk aversion
caused by the European debt crisis. The adverse impact
on the investor sentiment caused by the General
Anti-Avoidance Rule (GAAR) legislation introduced in the
2012 union budget also impacted capital inflows. Another
major factor has been the cross currency movements
caused by global risk aversion. Dollar again become the
safe haven and the consequent flight to safety
depreciated many Emerging Market currencies.
Year |
Rupee Per Unit of $ (average annual) |
1975 |
8.4058 |
1980 |
7.8800 |
1985 |
12.3640 |
1990 |
17.4992 |
1995 |
32.4198 |
2000 |
44.9401 |
2005 |
44.1000 |
2010 |
45.7393 |
![http://upload.wikimedia.org/wikipedia/commons/thumb/e/e6/RBI-Tower.jpg/150px-RBI-Tower.jpg](about_economics_files/image048.jpg)
The RBI's new headquarters in Mumbai
The Indian rupee ( ) is the only legal tender in
India, and is also accepted as legal tender in the
neighbouring Nepal and Bhutan, both of which peg their
currency to that of the Indian rupee. The rupee is
divided into 100 paise. The highest-denomination
banknote is the
1,000 note; the
lowest-denomination coin in circulation is the 50 paise
coin; with effect from 30 June 2011 all denominations
below 50 paise have ceased to be legal currency. India's
monetary system is managed by the Reserve Bank of India
(RBI), the country's central bank. Established on 1
April 1935 and nationalised in 1949, the RBI serves as
the nation's monetary authority, regulator and
supervisor of the monetary system, banker to the
government, custodian of foreign exchange reserves, and
as an issuer of currency. It is governed by a central
board of directors, headed by a governor who is
appointed by the Government of India.
The rupee was linked to the British pound from 1927 to 1946 and
then the U.S. dollar till 1975 through a fixed exchange
rate. It was devalued in September 1975 and the system
of fixed par rate was replaced with a basket of four
major international currencies the British pound, the
U.S. dollar, the Japanese yen and the Deutsche mark.
From 2003 to 2008, the rupee appreciated against the
U.S. dollar; thereafter, it has sharply depreciated.
Between 2010 and 2012, the rupee value had depreciated
by about 30% of its value to the U.S. dollar in 2010.
India's gross national income per capita had experienced high
growth rates since 2002. India's Per Capita Income has
tripled from Rs. 19,040 in 200203 to Rs. 53,331 in
201011, averaging 13.7% growth over these eight years
peaking 15.6% in 201011. However growth in the
inflation adjusted Per capita income of the nation
slowed to 5.6% in 201011, down from 6.4% in the
previous year. As of 2010, according to World Bank
statistics, about 400 million people in India, as
compared to 1.29 billion people worldwide, live on less
than $1.25 (PPP) per day. These consumption levels are
on an individual basis, not household.
Per 2011 census, India has about 330 million houses and 247 million
households. The household size in India has dropped in
recent years, with 2011 census reporting 50% of
households have 4 or less members. Some households have
6 or more members, including the grandparents. These
households produced a GDP of about $1.7 Trillion. The
household consumption patterns per 2011 census:
approximately 67% of households use firewood, crop
residue or cow dung cakes for cooking purposes; 53% do
not have sanitation or drainage facilities on premises;
83% have water supply within their premises or 100
metres from their house in urban areas and 500 metres
from the house in rural areas; 67% of the households
have access to electricity; 63% of households have
landline or mobile telephone connection; 43% have a
television; 26% have either a two wheel (motorcycle) or
four wheel (car) vehicle. Compared to 2001, these income
and consumption trends represent moderate to significant
improvements. One report in 2010 claimed that the number
of high income households has crossed lower income
households.
India has about 61 million children under the age of 5 who are
chronically malnourished, compared to 150 million
children worldwide. Majority of malnourished children of
India live in rural areas. Girls tend to be more
malnourished than boys. Malnourishment, claims this
report, is not a matter of income, rather it is
education as in other parts of the world. A third of
children from the wealthiest fifth of India's population
are malnourished. This is because of poor feeding
practices foremost among them a failure exclusively to
breastfeed in the first six months play as big a role
in India's malnutrition rates as food shortages. India's
government has launched several major programs with
mandated social spending programs to address child
malnourishment problem. However, Indian government has
largely failed. A public distribution system that
targets subsidised food to the poor and a vast
midday-meal scheme, to which 120 million children
subscribe are hampered by inefficiency and corruption.
Another government-paid program named Integrated
Childhood Development Service (ICDS) has been operating
since 1975 and it too has been ineffective and a
wasteful program. A 2011 UNICEF report claims recent
encouraging signs. Between 1990 to 2010, India has
achieved a 45 percent reduction in under age 5 mortality
rates, and now ranks 46 in 188 countries on this metric.
According to World Bank international poverty line methodology,
India's poverty dropped from 42% of its total population
in 2005 to about 33% in 2010. In rural India, about 34
percent of the population lives on less than $1.25 a
day, down from 44 percent in 2005; while in urban India,
29 percent of the population lived below that absolute
poverty line in 2010, down from 36 percent in 2005,
according to the World Bank report.
Since the early 1950s, successive governments have implemented
various schemes to alleviate poverty, under central
planning, that have met with partial success. All these
programmes have relied upon the strategies of the Food
for work programme and National Rural Employment
Programme of the 1980s, which attempted to use the
unemployed to generate productive assets and build rural
infrastructure. In 2005, Indian government enacted the
Mahatma Gandhi National Rural Employment Guarantee Act,
guaranteeing 100 days of minimum wage employment to
every rural household in all the districts of India. The
question of whether these government spending programs
or whether economic reforms reduce poverty, by improving
income of the poorest, remains in controversy. In 2011,
the Mahatma Gandhi National Rural Employment Guarantee
programme was widely criticised as no more effective
than other poverty reduction programs in India. Despite
its best intentions, MGNREGA is beset with controversy
about corrupt officials, deficit financing as the source
of funds, poor quality of infrastructure built under
this program, and unintended destructive effect on
poverty.
India's labour regulations among the most restrictive and complex
in the world have constrained the growth of the formal
manufacturing sector where these laws have their widest
application. Better designed labour regulations can
attract more labour- intensive investment and create
jobs for India's unemployed millions and those trapped
in poor quality jobs. Given the country's momentum of
growth, the window of opportunity must not be lost for
improving the job prospects for the 80 million new
entrants who are expected to join the work force over
the next decade.
World Bank: India Country Overview 2008.
Agricultural and allied sectors accounted for about 52.1% of the
total workforce in 200910. While agriculture has faced
stagnation in growth, services have seen a steady
growth. Of the total workforce, 7% is in the organised
sector, two-thirds of which are in the public sector.
The NSSO survey estimated that in 200405, 8.3% of the
population was unemployed, an increase of 2.2% over 1993
levels, with unemployment uniformly higher in urban
areas and among women. Growth of labour stagnated at
around 2% for the decade between 1994 and 2005, about
the same as that for the preceding decade. Avenues for
employment generation have been identified in the IT and
travel and tourism sectors, which have been experiencing
high annual growth rates of above 9%.
Unemployment in India is characterised by chronic (disguised)
unemployment. Government schemes that target eradication
of both poverty and unemployment (which in recent
decades has sent millions of poor and unskilled people
into urban areas in search of livelihoods) attempt to
solve the problem, by providing financial assistance for
setting up businesses, skill honing, setting up public
sector enterprises, reservations in governments, etc.
The decline in organised employment due to the decreased
role of the public sector after liberalisation has
further underlined the need for focusing on better
education and has also put political pressure on further
reforms. India's labour regulations are heavy even by
developing country standards and analysts have urged the
government to abolish or modify them in order to make
the environment more conducive for employment
generation. The 11th five-year plan has also identified
the need for a congenial environment to be created for
employment generation, by reducing the number of
permissions and other bureaucratic clearances required.
Further, inequalities and inadequacies in the education
system have been identified as an obstacle preventing
the benefits of increased employment opportunities from
reaching all sectors of society.
Child labour in India is a complex problem that is basically rooted
in poverty, coupled with a failure of governmental
policy, which has focused on subsidising higher rather
than elementary education, as a result benefiting the
privileged rather than the poorer sections of society.
The Indian government is implementing the world's
largest child labour elimination program, with primary
education targeted for ~250 million. Numerous
non-governmental and voluntary organisations are also
involved. Special investigation cells have been set up
in states to enforce existing laws banning the
employment of children under 14 in hazardous industries.
The allocation of the Government of India for the
eradication of child labour was $21 million in 2007.
Public campaigns, provision of meals in school and other
incentives have proven successful in increasing
attendance rates in schools in some states.
In 200910, remittances from Indian migrants overseas stood at
2500
billion (US$41 billion), the highest in the world, but their share in FDI
remained low at around 1%. India ranked 133rd on the
Ease of Doing Business Index 2010, behind countries such
as China (89th), Pakistan (85th), and Nigeria (125th).
Women in India are mainly employed in agriculture and caring for
livestock with only about 20% of the employed women
engaging in activities outside agriculture. When
employed, women earn substantially less than men, only
about 66% of the male incomes in agriculture and 57% of
the male incomes outside agriculture.
In the revised 2007 figures before the global financial crisis,
based on increased and sustaining growth, more inflows
into foreign direct investment, Goldman Sachs predicted
that "from 2007 to 2020, India's GDP per capita in US$
terms will quadruple", and that the Indian economy will
surpass the United States (in US$) by 2043. In spite of
the high growth rate, the report stated that India would
continue to remain a low-income country for decades to
come but could be a "motor for the world economy" if it
fulfills its growth potential. World growth has since
slowed substantially.
According to the official estimates, Indian economy was expected to
grow at 7.6% (+/- 0.25%) in the fiscal year 20122013.
However, leading financial organisations and economic
think-tanks expect Indian economy to grow slower than
official projections. In the end, India ended up growing
5% during the 20122013 fiscal year.
A media report in early October 2013 stated that five major Indian
IT (information technology) companies have established
offices in Guadalajara, Mexico, while several other
Indian IT companies continue to explore the option of
expanding to Mexico. Due to the competitiveness in the
Indian IT sector, companies are expanding
internationally and Mexico offers an affordable
opportunity for Indian companies to better position
themselves to enter the United States market. The trend
emerged after 2006 and the Mexican government also
offers incentives to foreign companies.
Slow agricultural growth is a concern for policymakers as some
two-thirds of India's people depend on rural employment
for a living. Current agricultural practices are neither
economically nor environmentally sustainable and India's
yields for many agricultural commodities are low. Poorly
maintained irrigation systems and almost universal lack
of good extension services are among the factors
responsible. Farmers' access to markets is hampered by
poor roads, rudimentary market infrastructure, and
excessive regulation.
World Bank: "India Country Overview 2008"
Agriculture is an important part of Indian economy. In 2008, a New
York Times article claimed, with the right technology
and policies, India could contribute to feeding not just
itself but the world. However, agricultural output of
India lags far behind its potential. The low
productivity in India is a result of several factors.
According to the World Bank, India's large agricultural
subsidies are hampering productivity-enhancing
investment. While overregulation of agriculture has
increased costs, price risks and uncertainty,
governmental intervention in labour, land, and credit
markets are hurting the market. Infrastructure such as
rural roads, electricity, ports, food storage, retail
markets and services are inadequate. Further, the
average size of land holdings is very small, with 70% of
holdings being less than one hectare in size. The
partial failure of land reforms in many states,
exacerbated by poorly maintained or non-existent land
records, has resulted in sharecropping with cultivators
lacking ownership rights, and consequently low
productivity of labour. Adoption of modern agricultural
practices and use of technology is inadequate, hampered
by ignorance of such practices, high costs, illiteracy,
slow progress in implementing land reforms, inadequate
or inefficient finance and marketing services for farm
produce and impracticality in the case of small land
holdings. The allocation of water is inefficient,
unsustainable and inequitable. The irrigation
infrastructure is deteriorating. Irrigation facilities
are inadequate, as revealed by the fact that only 39% of
the total cultivable land was irrigated as of 2010,
resulting in farmers still being dependent on rainfall,
specifically the monsoon season, which is often
inconsistent and unevenly distributed across the
country.
Corruption has been one of the pervasive problems affecting India.
A 2005 study by Transparency International (TI) found
that more than half of those surveyed had firsthand
experience of paying bribe or peddling influence to get
a job done in a public office in the previous year. A
follow-on 2008 TI study found this rate to be 40
percent. In 2011, Transparency International ranked
India at 95th place amongst 183 countries in perceived
levels of public sector corruption.
In 1996, red tape, bureaucracy and the Licence Raj were suggested
as a cause for the institutionalised corruption and
inefficiency. More recent reports suggest the causes of
corruption in India include excessive regulations and
approval requirements, mandated spending programs,
monopoly of certain goods and service providers by
government controlled institutions, bureaucracy with
discretionary powers, and lack of transparent laws and
processes.
The Right to Information Act (2005) which requires government
officials to furnish information requested by citizens
or face punitive action, computerisation of services,
and various central and state government acts that
established vigilance commissions, have considerably
reduced corruption and opened up avenues to redress
grievances.
![File:Private and public industry employment in India(2003).png](about_economics_files/image050.jpg)
The number of people employed in non-agricultural
occupations in the public and private sectors. Totals
are rounded. Private sector data relates to
non-agriculture establishments with 10 or more
employees.
The current government has concluded that most spending fails to
reach its intended recipients. A large, cumbersome and
tumor-like bureaucracy sponges up or siphons off
spending budgets. India's absence rates are one of the
worst in the world; one study found that 25% of public
sector teachers and 40% of public sector medical workers
could not be found at the workplace.
Corruption is also endemic in the Indian technology and scientific
development industries. CSIR has been flagged in ongoing
efforts to root out corruption in India. Prime minister
Manmohan Singh spoke at the 99th Indian Science Congress
and commented on the state of the sciences in India,
after an advisory council informed him there were
problems with "the overall environment for innovation
and creative work" and a 'warlike' approach was needed.
There are many issues facing Indian scientists, with
some such as MIT systems scientist VA Shiva Ayyadurai
calling for transparency, a meritocratic system, and
an overhaul of the bureaucratic agencies that oversee
science and technology.
The Indian economy has an underground economy, with an alleged 2006
report by the Swiss Bankers Association suggesting India
topped the worldwide list for black money with almost
$1,456 billion stashed in Swiss banks. This amounts to
13 times the country's total external debt. These
allegations have been denied by Swiss Banking
Association. James Nason, the Head of International
Communications for Swiss Banking Association, suggests
"The (black money) figures were rapidly picked up in the
Indian media and in Indian opposition circles, and
circulated as gospel truth. However, this story was a
complete fabrication. The Swiss Bankers Association
never published such a report. Anyone claiming to have
such figures (for India) should be forced to identify
their source and explain the methodology used to produce
them."
India has made huge progress in terms of increasing primary
education attendance rate and expanding literacy to
approximately three-fourths of the population. India's
literacy rate had grown from 52.2% in 1991 to 74.04% in
2011. The right to education at elementary level has
been made one of the fundamental rights under the
eighty-sixth Amendment of 2002, and legislation has been
enacted to further the objective of providing free
education to all children. However, the literacy rate of
74% is still lower than the worldwide average and the
country suffers from a high dropout rate. Further, there
exists a severe disparity in literacy rates and
educational opportunities between males and females,
urban and rural areas, and among different social
groups.
India continues to grow at a rapid pace, although the government
recently reduced its annual GDP growth projection from
9% to 8% for the current fiscal year ending March 2012.
The slowdown is marked by a sharp drop in investment
growth resulting from political uncertainties, a
tightening of macroeconomic policies aimed at addressing
a high fiscal deficit and high inflation (going well
beyond food and fuel prices), and from renewed concerns
about the European and US economies. Although the
Government was quite successful in cushioning the impact
of the global financial crisis on India, it is now clear
that a number of MDG targets will only be met under the
Twelfth Five Year Plan (201217).
World Bank: India Country Overview 2011
A critical problem facing India's economy is the sharp and growing
regional variations among India's different states and
territories in terms of poverty, availability of
infrastructure and socio-economic development. Six
low-income states Bihar, Chhattisgarh, Jharkhand,
Madhya Pradesh, Odisha and Uttar Pradesh are home to
more than one-third of India's population. Severe
disparities exist among states in terms of income,
literacy rates, life expectancy and living conditions.
The five-year plans, especially in the pre-liberalisation era,
attempted to reduce regional disparities by encouraging
industrial development in the interior regions and
distributing industries across states, but the results
have not been very encouraging since these measures in
fact increased inefficiency and hampered effective
industrial growth. After liberalisation, the more
advanced states have been better placed to benefit from
them, with well-developed infrastructure and an educated
and skilled workforce, which attract the manufacturing
and service sectors. The governments of backward regions
are trying to reduce disparities by offering tax
holidays and cheap land, and focusing more on sectors
like tourism which, although being geographically and
historically determined, can become a source of growth
and develops faster than other sectors. In fact, the
economists fail to realize that ultimately the problem
of equitable growth or inclusive growth is intricately
related to the problems of good governance and
transparency.
In 2011 Engineering Jobs in India have been showing signs of steady
growth.
Critics of the neoliberal turn to policymaking in India, and the
world in general, since the mid-1980s have pointed out
that the growth process under a neoliberal regime is
inherently anti-poor. Most of the dividends of economic
growth is cornered by the already well off. In parallel
with an inegalitarian growth process, neoliberalism also
whittles down whatever welfare State measures might have
been in place before its adoption. Inegalitarian growth
and erosion of State assisted welfare provisioning
increases socio-economic inequality drastically. Drawing
on some recent research, this article has provided
empirical evidence in support of such a view.
Two comparison groups provide a powerful and disturbing insight
into India's growth process. First, there are many
countries which have grown at rates very similar to
India's but which have managed to register marked
declines in socio-economic inequalities. In stark
contrast to this, India has witnessed an increase in
socio-economic inequality since 1990. Second, in
comparison to its close neighbours, with whom India has
many geographical, climactic, cultural and social
commonalities, India emerges as the worst performer
among the South Asian countries.
The growth process currently underway in India is inherently biased
against the poor, the marginalized and underprivileged.
If economic growth is to lead to substantial
improvements in the living standards (measured by
indicators of well being like life expectancy, literacy,
infant mortality) of the vast majority of the world's
population, a radically different socio-economic
paradigm must be put in place of the currently dominant
neoliberal one.
There are 23 private-sector firms providing life insurance, who
have commenced operations over the period 200010. The
industry which reported in annual growth rate of 19.8%
during the period 199697 to 200001 has, post opening
up the sector reported in an annual growth rate of 23.4%
during 200102 to 201011. There has been an average
growth of 34% in the first premium in the insurance
sector between 200102 and 201011. The life insurers
underwrote new business of Rs 1,26,381 crore during
financial year 201011 as against Rs 1,09,894 crore
during the year 200910, recording a growth of 15%. Of
the new business premium underwritten, LIC accounted Rs
87012.65 crore (68.9% market share). The market share of
these insurers was 65.1% and 34.9% respectively in the
corresponding period 200910.
The industry which reported a growth rate of around 10 percent
during the period 199697 to 200010 has, post opening
up the sector, reported average annual growth of 15.85%
over the period 200102 to 201011. In addition, the
specialized insurers Export Credit Guarantee Corporation
and Agriculture Insurance Company (AIC) are offering
credit guarantee and corp insurance respectively. AIC,
which has initially offering coverage under the National
Agriculture Insurance Company (NAIS), has now started
providing crop insurance cover on commercial line as
well. It has introduced several innovative products such
as weather insurance and specific crop related products.
The premium underwritten by the non life insurers during
201011 was Rs 42,576 crore as against Rs 34,620 crore
in 200910. The growth was satisfactory, particularly in
the view of the across the broad cuts in the tariff
rates. The private insurers underwrote premium of Rs
17,424 crore as against rs Rs 13,977 crore in 200910.
The public sector insurers on the other hand, underwrote
a premium of Rs 25,151.8 in 201011 as against Rs
20,643.5 crore in 200910, i.e. a growth of 21.8% as
against 14.5% in 200910.
The growth of insurance sector is internationally measured based
standard of insurance penetration. Insurance Penetration
is defined as the ratio of premium underwritten in a
given year to Gross Domestic Product. Likewise,
insurance density is another well recognized benchmark
and is defined as the ratio of premium underwritten in a
given year to total population (measured in US dollars
for convenience of comparison). The Indian insurance
business has in the past remained under developed with
low levels of insurance penetration. Post
liberalization=, sector has succeeded in raising the
levels of insurance penetration from 2.3 (life 1.8 and
non life 0.7) in 2000 to 5.1 (life 4.4 and non life 0.7)
in 2010.
The Indian Securities Market dates back to the 18th century when
the securities of the East India Company were traded in
Mumbai and Kolkata. However, orderly growth of the
capital market began with setting up of the Stock
Exchange, Mumbai in July 1875 and Ahmedabad Stock
exchange in 1894 and 22 other exchange in various cities
over the years.
During the financial year 201112 (up to 31 December 2011) resource
mobilization through primary market witnessed a sharp
decline over the year 201011. The cumulative amount
mobilized as on 31 December 2011 through equity public
issues stood at Rs 9683 crore as compared to 48564 crore
in 2011. During 201112 30 new companies were listed at
the National Stock Exchange (NSE) and Bombay Stock
Exchange (BSE) amounting to Rs 5043 crore as against 53
companies amounting to Rs 3559 crore listed in 201112.
The mean IPO size of the year 201112 was Rs 168 crore
as compared to Rs 671 crore. in 201011. Further, only
Rs 4791 crore was mobilized through debt issue as
compared to Rs 9451 crore in 201011. The amount of
capital mobilized through private placement in corporate
debt in 201112 (April December) was Rs 188530 crore
as compared to Rs 218785 crore in 201011.
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