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(v) Net National Product

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

(vii) NNP = GNP - Depreciation

National Income is calculated by deducting indirect taxes from Net National Product and adding subsidies. National Income (NI) is the NNP at factor cost.
NI = NNP - Indirect Taxes + Subsidies

(viii) Per Capita Income

  • Per Capita Income is per capita GDP: GDP divided by mid year population of the corresponding year.
  • The growth of GDP at constant price shows an annual real growth.
  • The real GDP per capita of an economy is often used as an indicator of the average standard of living of individuals in that country, and economic growth is therefore often seen as indicating an increase in the average standard of living.

(ix) Aims of Economic Growth


The following aims can be attributed to the study of economic growth:

  • Quantified Growth: Growth is quantified to assess adequacy for the economy's goals, understand potential, and set targets.
  • Targets: Understanding growth helps set targets and adjust rates for sustainability.
  • Inflation and Deflation: Quantitative analysis aids in preventing inflation or deflation to some extent by assessing economic performance.
  • Sectoral Balance: Helps balance contributions of the three sectors (agriculture, manufacturing, services) and steer growth towards national goals.
  • Employment and Poverty: Quantitative understanding allows targeting appropriate levels of employment creation and poverty alleviation.
  • Tax Revenues: Enables forecasting tax revenues for governmental objectives.
  • Corporate Planning: Corporates can plan their business investments based on quantitative assessments.

(x) Problems for Calculating National Income


The measurement of national income encounters many problems. The problem of double-counting. Though there are some corrective measures, it is difficult to eliminate double-counting altogether. There are many such problems and the following are some of them:-
  1. Black Money:

    • Illegal activities like smuggling, unreported incomes, tax evasion, and corruption contribute to the parallel economy or black money. Transactions in the parallel economy are not registered, posing a hurdle to accurate GDP estimates.
  2. Non-Monetization:

    • In the rural economy, a significant portion of transactions occurs informally, known as the non-monetized economy or barter economy. This presence keeps GDP estimates in developing countries lower than the actual.
  3. Growing Service Sector:

    • The service sector, including activities like business process outsourcing (BPO), is growing faster than agriculture and industry. However, value addition in services like legal consultancy, health services, and financial services is not accurately reported, leading to an underestimation of the service sector in national income measures.
  4. Household Services:

    • National income accounts do not include the 'care economy', which encompasses domestic work and housekeeping. The valuable work done by women at home is not accounted for in national accounting.
  5. Social Services:

    • Voluntary and charitable work, which is unpaid, is ignored in national income estimates.
  6. Environmental Cost

    • National income estimation does not consider the environmental costs incurred in the production of goods. Examples include land and water degradation from the Green Revolution in India and climate change from the use of fossil fuels. However, efforts like calculating green GDP deduct environmental costs from GDP to arrive at a more comprehensive measure.
  7. GDP Deflator:
    • The GDP Deflator is a comprehensive measure of inflation, derived from national accounts data as the ratio of GDP at current prices to constant prices.
    • It covers the entire spectrum of economic activities, including services, and is available on a quarterly basis with a two-month lag since 1996.
    • The formula to calculate the deflator is:
      GDP deflator = (Nominal GDP / Real GDP) X 100.
    • Dividing nominal GDP by the GDP deflator and multiplying by 100 provides the figure for real GDP, deflating nominal GDP into a real measure.
    • Price Deflator
      1. A price deflator of 200 indicates that the current-year price is twice its base-year price, signifying price inflation.
      2. A price deflator of 50 suggests that the current-year price is half the base-year price, indicating price deflation.
    • Characteristics of GDP Deflator:
      1. Unlike some price indexes, the GDP deflator is not based on a fixed basket of goods and services; it covers the whole economy.
      2. The "basket" in each year for GDP includes all goods produced domestically, weighted by the market value of total consumption for each good.
      3. The GDP deflator allows for new expenditure patterns to show up, reflecting changes in people's responses to changing prices.
      4. The advantage of this approach is that the GDP deflator reflects up-to-date expenditure patterns.
    • CSO's Application of GDP Deflator:
      1. The Central Statistics Office (CSO) uses price indices to reach the base year figure from the current year. However, in September 2010, there was a mistake in applying the deflator for GDP figures, leading to a discrepancy. For the GDP by output figure, one price index was used, and for the GDP by expenditure number, another was used.

(xi) Business Cycles

  • Alternating periods of expansion and decline in economic activity are referred to as the business cycle, representing the ups and downs of the economy.
  • Four Stages of Business Cycle:

    1. Expansion: Period of economic growth and rising activity.
    2. Growth: Continued upward movement, often characterized by increased employment and productivity.
    3. Slowdown: A decrease in the rate of economic growth.
    4. Recession: A significant decline in economic activity, potentially leading to negative growth.
  • Variability in Recession: Recession may not occur after every cycle, and when it does, its intensity can vary. For instance, the 2008 global financial meltdown is considered the deepest since World War II and is labeled the Great Recession.

  • Depression: If a recession deepens to an extreme level, it is referred to as a depression. The occurrence of a depression is rare, and it happened only once in the last century during the 1930s.

  • Universal Economic Cycles: All economies experience economic cycles, with varying degrees of expansion and contraction.

  • Macroeconomics Focus: Explaining and preventing fluctuations in economic cycles is a primary focus of macroeconomics. Macroeconomic policies are often designed to manage and mitigate the impact of these cycles on the overall economy.

(xii) Benefits and Side Effects of Economic Growth


  1. The first benefit of economic growth is wealth creation. It helps create jobs and increase incomes.
  2. It ensures an increase in the standard of living, even if it is not evenly distributed.
  3. Government has more tax revenues: fiscal dividend. Economic growth boosts tax revenues and provides the government with extra money to finances pending projects. For example, the flagship programmes of the government like the MGNREGA are a direct result of the tax buoyancy of growth It sets up the positive spiral:
  4. Rising demand encourages investment in new capital machinery which helps accelerate economic growth and create more employment.
  5. Economic growth can also have a self defeating effect:
    • violate the principles of fairness and equity thus setting off social conflicts.
    • Environmental costs are another disadvantage.

(xiii) Measure Of Real Progress For GDP 

  • Limitations of GDP as a Measure of Welfare:
    1. Intangibles Not Valued: GDP does not account for intangibles like leisure and quality of life, which are significant contributors to overall well-being.

    2. Environmental Impact: Economic activity's negative impact on the environment, including pollution, climate change, unsustainable growth, and ecological issues, is not reflected in GDP.

    3. Average Figures Concealing Inequality: GDP provides average figures that hide economic stratification. It does not reveal economic inequality, and the condition of the poor is not adequately indicated.

    4. Gender Disparities: Gender disparities are not highlighted or measured by GDP, overlooking important aspects of social welfare.

    5. Unbiased Growth: GDP does not distinguish between wealth generated through civilian demand and that generated through war. The nature of economic growth is not considered in this measure.

    6. Sustainability Concerns: GDP does not measure the sustainability of growth. Temporary increases in GDP through over-exploitation of natural resources may not reflect long-term well-being.

  • Advantages of Using GDP as an Indicator:

    1. Frequent Measurement: GDP is measured frequently, with many countries providing quarterly data, allowing for quick trend analysis.

    2. Widespread Availability: GDP information is available for practically every country, facilitating broad comparisons of the standard of living across different nations.

    3. Consistent Definitions: The technical definitions used within GDP are relatively consistent between countries, providing confidence in the comparability of measurements.

  • Disadvantages of Using GDP as an Indicator:

    1. Not a Direct Measure: GDP is not a direct measure of standard of living; it is a proxy that tends to increase as the standard of living improves.

    2. Export-Driven Distortions: GDP can be distorted in cases where a country exports a significant portion of its production, potentially leading to a high GDP but a poor standard of living.

  • Alternative Measures Proposed:

    1. Human Development Index (HDI): A composite index measuring life expectancy, education, and income.

    2. Index of Sustainable Economic Welfare (ISEW): An alternative measure accounting for social and environmental factors.

    3. Genuine Progress Indicator (GPI): An attempt to provide a more complete picture of well-being by considering factors beyond economic output.

    4. Sustainable National Income (SNI): A measure that incorporates natural resource depletion.

    5. Gross National Happiness (GNH): Advocated by nations like Bhutan, focusing on overall happiness and well-being.

    6. Green GDP: A measure deducting environmental costs from GDP.

Human Development Index (HDI):


  • The UN Human Development Index (HDI), introduced in 1990 by Pakistani economist Mahbub ul Haq, is a widely used measure of well-being.
  • Administered by the United Nations Development Programme (UNDP), it aims to provide a comprehensive assessment of a country's development beyond economic indicators.
  • Components of HDI:


    1. Long and Healthy Life:

      • Measurement: Life expectancy at birth.
      • Rationale: Reflects the overall health and well-being of the population.
      • Indicator: Higher life expectancy indicates better health conditions.
    2. Knowledge:

      • Measurements:
        1. Adult literacy rate (with two-thirds weight).
        2. Combined primary, secondary, and tertiary gross enrolment ratio (with one-third weight).
      • Rationale: Assesses the educational achievements and literacy levels of the population.
      • Indicators: Higher literacy rates and comprehensive enrollment ratios contribute positively.
    3. Decent Standard of Living:

      • Measurement: Gross Domestic Product (GDP) per capita at purchasing power parity (PPP) in US Dollars.
      • Rationale: Evaluates the economic well-being and living standards of the population.
      • Indicator: Higher GDP per capita suggests a better standard of living.
  • Ranking and Comparison 

    1. Annual Report: UN member states are listed and ranked based on the HDI measures.
    2. Parameters Considered: It goes beyond GDP to consider parameters such as poverty levels, literacy rates, and gender-related issues.
  • India's HDI Ranking

    1. Rank (2010): India was ranked at 134 among 182 countries in the 2010 HDI.
    2. Parameters Considered: India's HDI reflects its performance on various indicators like poverty levels, literacy, and gender-related issues.
  • Significance of HDI:

    1. Comprehensive Measure: HDI provides a more comprehensive picture of a country's development by considering health, education, and economic factors.
    2. Holistic Assessment: By assessing multiple dimensions, HDI offers a holistic assessment of well-being, beyond economic growth alone.

Human Poverty Index (HPI)


  • The Human Poverty Index (HPI) is an alternative measure developed by the United Nations to assess the extent of poverty in a country.
  • Unlike the Human Development Index (HDI), which provides a comprehensive overview, HPI specifically focuses on poverty-related indicators.
  • Indicators Used in HPI


    1. Lifespan:

      • Measurement: Lifespan or life expectancy.
      • Rationale: Reflects the overall health and mortality conditions in the country.
      • Indicator: Lower life expectancy contributes to a higher level of poverty in the index.
    2. Functional Literacy Skills:

      • Measurement: Functional literacy skills.
      • Rationale: Assesses the population's ability to engage in basic literacy activities for daily life.
      • Indicator: Lower functional literacy rates contribute to higher poverty levels.
    3. Long-term Unemployment:

      • Measurement: Long-term unemployment rate.
      • Rationale: Evaluates the extent of unemployment over an extended period, indicating economic insecurity.
      • Indicator: Higher long-term unemployment rates contribute to a higher level of poverty.
    4. Relative Poverty:

      • Measurement: Relative poverty, referring to poverty concerning the average per capita income.
      • Rationale: Considers the income disparities within the country, emphasizing the relative deprivation of individuals.
      • Indicator: Higher levels of relative poverty contribute to a higher HPI.
  • Calculation and Interpretation 


    1. The HPI is calculated based on a combination of these indicators, providing a quantitative measure of poverty in a country.
    2. A higher HPI score indicates a higher level of human poverty, emphasizing the need for targeted interventions.
  • Significance of HPI


    1. Focused Poverty Assessment: Unlike broader indices, HPI specifically targets poverty, providing a concentrated assessment.
    2. Policy Implications: HPI results can guide policymakers in addressing specific dimensions of poverty highlighted by the indicators.
  • Limitations

     

    1. While HPI offers insights into poverty, it may not capture the overall well-being or development of a country as comprehensively as the HDI.
    2. It focuses on a subset of indicators related to poverty, potentially overlooking other dimensions of development.

Genuine Progress Indicator (GPI)

  • The Genuine Progress Indicator (GPI) is a concept in green economics and welfare economics that aims to replace Gross Domestic Product (GDP) as a metric of economic growth.
  • Advocates argue that GPI provides a more comprehensive measure by distinguishing between economic growth that enhances well-being and growth that is harmful.
  • Key Features of GPI

    1. Distinguishing Uneconomic Growth:

      • Objective: To distinguish between economic growth that contributes to well-being and growth that is harmful.
      • Advantage: GPI proponents argue that it provides a more reliable measure by accounting for the negative impacts of certain economic activities.
    2. Improvement in Welfare:

      • Objective: Measure whether a country's growth, increased production, and expanding services result in the actual improvement of people's welfare.
      • Focus: Emphasizes the importance of well-being beyond economic output.
  • Calculation of GPI:


    1. The GPI is calculated by adjusting the GDP to account for factors that affect well-being positively or negatively.
    2. Positive factors may include volunteer work, housework, and educational achievement.
    3. Negative factors may include income inequality, environmental degradation, and crime.

Green Gross Domestic Product (Green GDP)

  1. Green GDP is an index of economic growth that incorporates the environmental consequences of that growth.
  2. Calculation: Green GDP deducts the cost of ecological degradation from the final value of goods and services produced to arrive at a more environmentally adjusted measure.
  3. Example: 
    • In 2004, the Chinese Premier, Wen Jiabao, announced that the Green GDP index would replace the Chinese GDP index.
    • However, the effort was dropped in 2007, citing concerns about the deceleration of conventional growth rates.
  4. Significance: 
    • Green GDP is significant as it attempts to align economic growth with environmental sustainability.
    • It recognizes that economic progress should not come at the expense of ecological degradation.
  5. Challenges: 
    • Implementing Green GDP faces challenges such as defining and quantifying environmental costs accurately.
    • Balancing economic growth with environmental conservation requires careful consideration and policy adjustments.

Gross National Happiness (GNH)

  1. Gross National Happiness (GNH) is an alternative development philosophy and measurement tool introduced by Bhutan's former King Jigme Singye Wangchuck in 1972.
  2. It focuses on defining the quality of life in holistic and psychological terms rather than solely relying on economic indicators like Gross National Product (GNP).
  3. Key Features of GNH:
    • Holistic Quality of Life:

      • Objective: GNH seeks to assess the well-being of a nation beyond economic factors.
      • Philosophy: Emphasizes the coexistence and reinforcement of material and spiritual development for true development.
    • Four Dimensions of GNH:

      • Equitable and Sustainable Socio-economic Development: Promoting fairness and sustainability in economic progress.
      • Preservation and Promotion of Cultural Values: Valuing and preserving cultural heritage.
      • Conservation of the Natural Environment: Recognizing the importance of environmental sustainability.
      • Establishment of Good Governance: Ensuring effective and ethical governance practices.
  4. Natural Resources Accounting: 
    • Definition: It involves treating natural capital (resources like soil, water, biodiversity) similar to man-made capital in accounting, considering their essential role in production and life-support systems.
    • Significance:
      • Acknowledges the intrinsic value of natural resources.
      • Advocates for sustainable use to ensure the ability to generate income in the future.
    • India's Initiatives:
      • National Biodiversity Action Plan (2008) emphasizes valuing goods and services provided by biodiversity.
      • India declared adopting natural resource accounting from 2012 at the Nagoya Biodiversity Summit (2010).
      • Recognizes the need for global partnerships to mainstream natural resource accounting into economic planning.
  5. Laissez-faire Doctrine: 
    • Definition: Laissez-faire, French for "let do, let go," represents a hands-off approach to economic management, synonymous with free market economics.
    • Principles:
      • Argues against government interference in the economy beyond maintaining peace and property rights.
      • Advocates for a market economy where prices are determined by the interplay of supply and demand.
    • Invisible Hand:
      • Coined by Adam Smith, it refers to the idea that individual pursuit of self-interest can lead to collective social interest.
      • Critics, like Nobel laureate Joseph Stiglitz, question the existence of the invisible hand, especially in the context of economic meltdowns.
  6. Critiques of Market Economy: 
    • Environmental Pollution:

      • Critique: Unregulated markets may lead to environmental pollution.
      • Concern: Lack of mechanisms to internalize environmental costs.
  7. Monopoly Creation:

    • Critique: Markets can lead to the creation of monopolies.
    • Claim: Monopolies may undermine competition and lead to market failures.
The document NCERT Summary: An Introduction- 2 | Indian Economy for UPSC CSE is a part of the UPSC Course Indian Economy for UPSC CSE.
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FAQs on NCERT Summary: An Introduction- 2 - Indian Economy for UPSC CSE

1. What does HDI stand for?
Ans. HDI stands for Human Development Index. It is a measure of human development and well-being in a country, taking into account factors such as life expectancy, education, and income.
2. What is the difference between HDI and HPI?
Ans. HDI (Human Development Index) measures the overall development and well-being of a country's population, while HPI (Human Poverty Index) focuses specifically on the extent of poverty and deprivation within a country.
3. How is the GPI (Genuine Progress Indicator) different from GDP (Gross Domestic Product)?
Ans. GDP measures the monetary value of all goods and services produced within a country, while GPI takes into account factors such as environmental sustainability, social well-being, and inequality, providing a more holistic measure of progress and quality of life.
4. What is GNH (Gross National Happiness)?
Ans. GNH (Gross National Happiness) is a measure of well-being and happiness in a country, developed by the Kingdom of Bhutan. It goes beyond economic indicators and incorporates factors such as psychological well-being, community vitality, and environmental sustainability.
5. What is the role of the National Council of Educational Research and Training (NCERT) in this context?
Ans. The NCERT is responsible for providing an introduction to concepts like HDI, HPI, GPI, and GNH in the field of education. They develop educational materials and resources to promote awareness and understanding of these concepts among students and educators.
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