Economy UPSC Notes Complete

Economics

Economics is a social science that deals with how the people make choices and with the principals behind how the goods produce, distribute and prices are determined. In other words, it deals with the theory and principals behind the demand, production, supply and prices. Under economics following concepts are studied:-

Demand:- Demand refers to the need or requirement of a commodity as well as the purchasing power or the ability to being able to afford it.

Demand = Need * Purchasing Power

Supply:- Supply refers to the level of availability of the given product or service.

Supply = Production * Distribution

Price:- Price refers to the amount of money paid to consume the commodity. It depends upon the various factors such as the cost of raw materials, demand or supply of the goods and services being talked about.
- Cost refers to the amount that goes in producing any given goods or services. It may include the amount paid for raw materials, rent, labour and other factors. When the profit margin is added it become the price.
- Value refers to the satisfaction derive on the consumption of any commodity goods or services. Higher the value attached with the commodity as well as its profits.
Law of Demand:- According to this law of demand when the prices of any commodity increases, its demand decreases. Alternatively the decrease in the price also leads to increase of its demand.
Law of Supply:- As per the law of supply when the price of commodity increase the supply of commodity also increases because more and more produces enter the race to earn more profits.

Goods and it's types

The goods in the economy refer to the products or the commodities which are economically useful and monetarily valuable. e.g. steel, food grains, machinery, etc. Goods can be divided into many categories which are:

Primary Goods:- The goods which are produced during the primary sector activity such as the mining, agriculture, etc. e.g. food grains, milk, iron ore, etc.
Intermediate Goods:- The goods which are used or consume during the production of other goods or the goods used in the intermediate stage of production is known as intermediate goods. e.g. yarn, coal, steel and others.
Final Goods:- The goods which are ready or usage and will not enter into successive or further phases of production is known as final goods. e.g. a car, shirt, a packet of biscuit, etc.
Infrastructure Goods:- The goods which are used in the creation of infrastructure such as building, roads are known as infrastructure goods. e.g. bricks, cement, steel, pipes, etc.
Consumer Goods:- The goods which are produced to be finally consumed by the people and households is known as consumer goods. It can be further divided into two categories:-
1. Consumer Durables: Those goods having a long lifespan. such as TV, AC, refrigerators, car, etc.
2. Consumer Non Durables: The goods having shorter span of life and are consumed frequently e.g. food items, personal care items such as soap, shampoos etc.
Capital Goods:- The goods which add to the productive capacity of the economy or contribute to the economic production e.g. tractors, earth moving machines, office computers, etc. The machinery or the building are known as fixed capital whereas the raw material is known as the working capital
Complementary Goods:- The goods which are consumed together and the presence of one compliments the utility of another are known as complementary goods. e.g. bread and butter, car and petroleum. If the price of one good increases the demand of its complementary good will decrease.
Substitute Goods:- The goods which can be used in place of some other goods and derive the similar level of satisfaction or utility are known as substitute goods. e.g. tea in place of coffee.
Inferior Goods:- The goods on consumption of which low satisfaction or utility is derive is known as inferior good. The demand of these good decrease with the increase in the income of the consumer as the user shift to a superior good on high incomes. e.g. a bicycle used as a medium of transport, bread, etc
Griffin Goods:- The concept was given by Scottish economist Robert Griffin. These are the inferior goods having low substitute available therefore even if the prices of these goods increase the demand will not fall and rather increase with time. One more reason for this trend is the addiction to such goods. e.g. bread, tobacco, etc.
Veblen Goods:- It was proposed by economist T Veblen to identify and classify those goods which are consumed to show off once wealth or prestige such as jewellery, luxury item. Like griffin goods they also don't follow law of demand.
Sin goods:- The goods which create a negative consequence on health and environment is known as a sin good e.g. tabaco, cigarette, alcohol, etc.

Type of Economics

Economics can be divided into two sub-domains

Microeconomics:- It deals with the study of economic activities related to an individual, a family or an enterprise e.g. the production or profits of TATA Steel.
Macroeconomics:- Under this the study is related to the production, consumption, savings or other parameters with regard to the whole country or a broad region. e.g. steel production in India, unemployment in India.

Economy and it's types

The economy refers to the management of resources in the most efficient manner to maximize the potential. The economy involves the planning, assessment and efficient allocation of resources. Since different countries have different geography, different population sizes, different resource base, therefore there are different type of economy. They are as follows:-

1. Open and Closed Economy

An economy or country which undertake the trade and investment with the rest of the world freely with minimum resistance is known as open economy. Such economies have frequent exchange of labour, capital, technology with rest of the world.

Procs	Cons
Promote Exports	The outflow of natural resources take place
Earns foreign currency	Domination on smaller economy by a big economy
Get new technology	Monopolies are also there
Receive investment	Interference in domestic politics.
Helps in modernization	Environmental damages
Get skilled labour	Brain drain

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

Formal Economy	Informal Economy
The terms of employment are fixed, regular and worker enjoy job security.	Contains small scattered unregulated and unmonitored units which are not covered under any defined law or act. Such as the venders, shopkeeper, farmers, domestic help, etc.
The sector is constituted and governed under definite laws such as Minimum Wages act, Provident Fund Act, others. The sector is constituted and governed under definite laws such as Minimum Wages act, Provident Fund Act, others.	The workers in these sectors are paid irregular wages which may be on daily or weekly basis and their work hours, place of works is also not defined.
The work timings, the work place and responsibilities are defined and workers are paid regular salaries on monthly basis.	The workers do not enjoy job security or social security and they can be removed or replaced any time without prior notice or communication.
Employs enjoy social security benefit such as maternity benefits, insurance benefits, pension etc are known as formal or organized sectors of economy. The government sectors and public sector big private companies etc.	Nearly 90% of the Indian workers are engaged in informal or unorganized sector.

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:-

The better estimate of national income, high tax collection, increased labour welfare, job security as well as eliminating poverty.
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

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

It provide flexible working hours as result the women can choose the time of work according.
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.
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.
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.
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:-

The raw material is available form the used products and the burden of mining is minimized.
The volume of discarded products is reduced which reduce the pollution as well.
The activities of recycling is added in the economy which generated new production, GDP and jobs.
The activities of recycling also bring new technologies and innovation.
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:-

It creates new employment opportunity as the activities associated with a payment receives a recognition and becomes a job.
It generates income for the people which helps in fighting poverty.
The monetization of an activity brings skills in those activities and the quality of service improved.
The monetized economy also bring higher formalization in the economy.
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

It helps in extended reach globally.
It helps more access to data and can provide personalized and targeted services.
It has more precision and quality.
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.

National Income, GDP and Others

Factors of Production

It refers to the factors or the inputs that go towards production in a economy are are follows:

Land:- Refers to the area on which production take place an d a rent is paid to the land owner.
Labour:- Refers to the human resource required in the production and wages are paid to the labour.
Capital:- It is the amount required in the process of production either to buy machinery or to buy raw materials. The money that is required to buy the machinery, the tools, etc are known as fixed capital, where as the cost of raw materials refers to working capital.
The Entrepreneur:- The entrepreneur is a person or individual who brings other factors of production together to earn a profit on the same.

Gross Domestic Product (GDP)

The GDP refers to sum of the total monetary value of all goods and services produced within the territory of a country by its residents in a given financial year (1^st April to 31^st March).
The GDP measure the where of production not by whom of production. which means even a German resident doing business in India will contribute of India's GDP.
The GDP consider only the final goods and services produced which could not be entering the successive phase of production.
In the GDP, the territory includes all the land area, exclusive economic zone, enclaves in the foreign countries like embassy or military bases as well as moving vessels like ships and aircrafts.
The GDP is estimated on a quarterly bases as well as annual bases by National Statics Office (NSO) under the Ministry of Statics and Programme Implementation (MoSPI).
In the estimation of GDP the data is collect from different agencies such as the Directorate of Statics and Economics under the Ministry of Agriculture for the data on Agriculture, for mining data from Bureau of Mines is used, for manufacturing data from annual survey of industries as well as Ministry of Cooperate Affairs is taken. The data from RBI, SEBI and other regulators is collected for data on financial services.
For the financial year 2024-25 India GDP at the current prices stood at 331 lac crore or 4.3 trillion dollars. As per IMF, world biggest GDP are USA (30 trillion), China (19.5 trillion), Germany (4.9 trillion) and India (4.3 trillion). In 2025 India now as world fourth largest GDP after beating Japan.
As per IMF India's GDP had double from 2015-2025 form 2.1 trillion dollars to 4.3 trillion dollars.
The government estimate to make 30 trillion GDP by 2047.

Cost and Prices

Different types of cost and prices are taken which are:-

The Factor Cost:- The factor cost involves the cost of production which will be including the cost of rent, wages, interest and the profits. The GDP calculated at factor cost is GDP_FC
Basic Price:- The basic price refer to the price obtained after adding the production taxes and adjusting the production subsidies to the factor cost.

Basic Price = Factor Cost + Production Taxes - Production Subsidies The basic price can be seen as minimum price which are to be collected by producer. The production taxes are the taxes paid during the beginning of the production process such as on purchase of land, installation e.g. Stamp duty, etc. 3. **Market Price:-** The market prices are the prices at which goods and services are available in the market (outside the factory premise). The market price are obtained after adding the product taxed and adjusting the product subsidies. Market Price = Basic Price+ Product Taxes - Product Subsidies The product taxes are the indirect taxes levied on the unit of product or the volume of product such as GST, VAT, etc. ### Gross Value Added ### Nominal and Real GDP ### GDP Growth Rate ### GDP Deflator ### Potential GDP ### Gross National Product #### Relation between GDP and GNP #### NNP

National Income

The national income is the income earned by the national of a country. It is estimated to understand the standard living of the person of that country based on which the policies are to be formed. the measurement of national income is done through measuring Gross domestic production in the country because the production process generates income in the economy and therefore a country's GDP is calculated.