Basics of Economy and Economics – UPSC Notes

On the other hand a closed economy is a economy which doesn't permits the economic transaction like trades and investment with the outside world. This types of economy have its own advantages and disadvantages. On one hand it protects the country from resources exploitation, brain drain and foreign interference in the domestic policies but on the other hand it restrict the foreign trade, inflow of new technology investment and limit modernization. No country is completely is open or fully closed and their level of openness depends on their requirement, impetus and policies. In 1947 India was more towards a closed economy because of its historical experiences but since 1991 after the adoption of globalization India has shifted more towards and open economy. The USA on the other hand is adopting closed approach by imposing tariff on the produces of other countries. Protectionisms:- The policy of protecting domestic economy from the foreign products by imposing tax and tariffs is known as protectionisms. It has been adopted by USA.

2. State/ Socialist/ Command/ Planned Economy#

A type of economy in which the economic decision regarding the production, distribution and price determination are taken by the state or the government is known as the state economy. Since the sate mainly works for the welfare of the society it is also known as socialist economy. The state decision are the type of order on its people therefore it is also known as command economy. The state takes decision with long perspective in mind and not for the short term profit. This is why is known as planned economy.

Key features of State Economy#

• All economic decisions are taken by the state.
• All factors of production like land, capital, etc. are owned by the state and there is no concept of private property.
• The citizen work for the state and wage.
• The property engaged in the production can't be transferred from one generation to another.

Benefits of State Economy#

• It is centred around the social welfare.
• It fill the gap due to the absence of the market.
• Helps in lowering the economic and regional imbalances.

Issues of State Economy#

• State has monopoly in production which discourage competition and innovation.
• The state economy person lack in the expertise, exposure and experience required for business.
• Due to state command private efforts and participation is reduced. e.g. India after independence had a large nature of state economy in which private participation was very much limited.

3. Market/ Capitalist/ Laissez Faire Economy#

An economy in which the key economic decision with respect to the production, distribution and prices are taken by market forces, demand and capital is known as market economy. the business at times do not want any government interference so the extreme form of capitalist economy is laissez faire economy.

Key Factors of Market Economy#

• The factors of production are owned by private industries or institutions which can be transferred between generations and profit is the sole motive.
• It advantages include the market are competitive, innovative efforts and provide better service to the users.
• However they are exploitative in nature, they created economic divide, they are exclusively in nature it means they exclude person with low purchasing power.

4. Mixed Economy#

The economy which incorporates the features of both state and market economies is known as mixed economy. In such economies the government may present along with the business in most of the areas as well as some some sectors may be reserved only for the government and some may be reserved for the private sectors therefore a mixed structure follows known as mixed economy. Indian Economy is a mixed economy in which atomic energy and railways are controlled by the state, while food, textile, automobiles are completely left for private sectors whereas both are present in defence, oil and gas, banking, insurance and others. Therefore mixed economy crates a balance between the public and private and incorporates the advantage of both.

5. Formal/ Organized v/s Informal/ Unorganized Economy#

Formalization of the Economy#

The rising share of formal or unorganized sector in the economy is known as formalization of economy. The entries of the incorporation of enterprises within the government laws their monitoring and fulfilment of their commitment towards labour, environment and other dimensions also refers to the formalization of economy. The increased formalization bring different benefits such as:-

1. The better estimate of national income, high tax collection, increased labour welfare, job security as well as eliminating poverty.
2. In India the formalization is being achieved through the adoption of different laws such as companies act, GST act, PF act and other laws of the land.

6. Gig Economy#

The gig economy represents an emerging form of economy to characterize by internet based economy having short term contract, flexible jobs and focus on performance and efficiency. Workers are hired from short term contracts and for that they enjoy regular salaries incentives and benefits. Based on the performance their contracts are extended and terminated. e.g. food delivery companies, cab service companies, etc.

Advantages of Gig Economy#

1. The gig economy bring higher formalization in the economy and contributes towards the GDP.
2. Although has a short term contract but even during that contract of that provided job security and regular salaries.
3. With higher formalization the government earn tax revenue which was earlier not earned.
4. Since the gig economy focus on efficiency and productivity, it enhances the skill among the workers.
5. The companies are also not bounded by long term contracts and they can cut their labour cost during the times of low demand.
6. Gig economy promotes and contributes to gender/ women empowerment.

Gig Economy and Women Empowerment#

Gig economy in many ways promotes women empowerment which can be seen in the following ways:-

1. It provide flexible working hours as result the women can choose the time of work according.
2. The gig economy allows multiple entry multiple exit as result they can take a break if required and return in the job at a time suitable to them.
3. Since this economy is internet based and performance based therefore the chances of gender discrimination is minimized and equal wage for equal work is promoted.
4. There is no compulsion visit any formal office on a daily basis at a fixed time which helps them through balance between the work and family.
5. Most of the activity are in the service sector which require less physical labour therefore is more suitable to women.

7. Linear and Circular Economy#

The economy which consists of activities such as taking new material, making products using them and disposing them after the end of their lifecycle is known as linear economy. It is based on the activities of Take --> Make --> Use --> Dispose. This economy created challenges because for the new production new mining is required and the raw may not be available within the country. Further mining leads to deforestation and the disposed of use products like plastic, electronics leads to water and soil pollution. The circular economy, on other hand refers to an economy which focuses on the recycle of the use product after it is disposed. This economy involves the stage such as take, make, use and recycle. This economy has many advantages such as:-

1. The raw material is available form the used products and the burden of mining is minimized.
2. The volume of discarded products is reduced which reduce the pollution as well.
3. The activities of recycling is added in the economy which generated new production, GDP and jobs.
4. The activities of recycling also bring new technologies and innovation.
5. The government has introduced the Vehicle Scrappage Policy, 2021, which promotes circular economy. Under this policy the old ad unfit vehicles could be sent in scrape for recycling.

8. Green and Blue Economy#

The green economy refers the activities which are non polluting and clean for the environment and the economy. This form of economy is sustainable like circular economy. e.g. Generation of power through solar, hydro, wind, etc. That type of economy in which the activities are relative to the extraction of resources from the water bodies particularly the sea and ocean. e.g. fishing, ocean mining, etc. refers to bule economy.

9. Orange Economy#

Orange economy is an economy related to the creativity, intellectual property, imagination and similar activities. The orange economy is a new emerging form of economy which is getting monetized and the crates are turning their passion into profession. The activities of this economy related to the creation of content, movies, animation, gaming and other audio, visuals. This economy is growing at an average annual rate of 18% and it is expected to reach 34 billion dollars by 2026.

10. Care Economy#

The care economy refers to the activities engaged in providing care to the elderly, diseased, children, pets and the anything. It also involves fulfilment of psychological and emotional care. The care economy consist of the person such as caretakers, helpers, baby sitters and another persons providing domestic care. In India these caretakers are unorganized, not paid adequately and their contribution in considered mostly unproductive. In India the rise of nuclear family, working parents, the increase threat of diseases has lead to the increased demand of professional caretakers. Therefore this form of economy should be formalized and monetized.

11. Monetize Economy#

The economy in which generates a monetary value of goods and services being provided is known as monetized economy. An economy in which the different activities are quantified through a monetary rate is known as monetized economy. e.g. If a caretaker or a caregiver charges an amount for its service which was earlier mostly based on the mutual trust it is known as monetized economy. The monetization of economy following benefits:-

1. It creates new employment opportunity as the activities associated with a payment receives a recognition and becomes a job.
2. It generates income for the people which helps in fighting poverty.
3. The monetization of an activity brings skills in those activities and the quality of service improved.
4. The monetized economy also bring higher formalization in the economy.
5. It also contributes to women empowerment as women earn income on those activities which was earlier provided for free.

12. Digital Economy#

The digital economy refers the economic activities that emerge from producing things connecting people, undertaking businesses, providing services through digital technologies and medium. e.g. digital banking, UPI, digital education, etc. The digital economy is more refined and refined version of internet economy and its increase adoption can be seen in many activities such as banking, networking, entertainment, advertisement, manufacturing.

Benefits of Digital Economy#

1. It helps in extended reach globally.
2. It helps more access to data and can provide personalized and targeted services.
3. It has more precision and quality.
4. Increased productivity and reduced cost. By 2030 India expects 20% of its economy to be generated through digital services and the size of digital economy supress the size of agriculture and manufacturing.

Sectors of Economy#

The economy has multiple activities which can be grouped into different sectors based on their nature.

1. Primary Sector#

The sector contains activities which are directly linked to nature, obtains its produce from nature. e.g. agriculture, mining, forestry, animal husbandry, etc. This sector contributes 19.62% in the India's GDP and the share of agriculture is more that 17%. It employs 45% of India's workforce. The workers are known as Red or Brown Collar Workers.

2. Secondary Sector#

The sector of economy which contains activities such as manufacturing, processing, electricity generation, construction and others is known as industrial sector of the economy. It's share in the GDP is nearly 26% and share of manufacturing lies nearly 15%. It employs 25% of the work force and the workers are known as Blue Collar Workers.

3. Tertiary Sector#

The sector contains the activities engage in the provision of services such as telecom, banking, transport, medical, legal and others. therefore it is also known as service sector of the economy. It contributes 54% to the GDP and employs 30% of the workforce. Worker are also known as white collar workers.

4. Quaternary Sector#

This is known as the fourth sector of the economy which consist of expert knowledge based service such as surgeons, tax consultants, etc. The workers are known as silver collar workers.

5. Quinary Sector#

The sector of the economy deals with the services related to top level decision making and leadership e.g. CEO of a multinational company, secretary to government of India, etc. Workers are known as Gold collar workers.

Monopoly, Duopoly and Oligopoly#

Monopoly:- When there is dominance of a single company or brand in the market that they largely effect the product distribution and prices it is known as monopoly e.g. Google monopoly in search engine. Duopoly:- When there is dominant position of two brands or companies it is known as duopoly. e.g. The presence of Pepsi and Coca-Cola in beverage market. Oligopoly:- When only few companies are dominant in a given sector on in a economy e.g. civil aviation. Monopolistic Competition:- It is the situation of monopolistic presence of a brand in a competitive market for e.g. the position of Colgate in the toothpaste market.