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Social Market

Some proponents of market economies believe that the government should intervene to prevent market failure while preserving the general character of a market economy. It seeks an alternative economic system other than socialism and a laissez-faire economy, combining private enterprise with measures of the state to establish fair competition, low inflation, low levels of unemployment, good working conditions, and social welfare.

Co-relation between Market Economy and Poverty

Free market economists argue that planned economies and Welfare will not solve poverty problems but only make them worse. They believe that the only way to solve poverty is by creating new wealth. They believe that this is most efficiently achieved through low levels of government regulation and interference, free trade, and tax reform and reduction. An open economy, competition and innovation generate growth and employment. Advocates of the third way -social market solutions to poverty- believe that there is a legitimate role the government can 'play in fighting poverty. They believe this can be achieved through the creation of social safety nets such as social security and worker’s compensation.

Most modern industrialized nations today are not typically representative of Laissez-faire principles, as they usually involve significant amounts of government intervention in the economy. This intervention includes minimum wages to increase the standard of living, antimonopoly regulation to prevent monopolies, progressive income taxes, welfare programs to provide a safety net for those without the capacity to find work, disability assistance, subsidy programs for businesses and agricultural products to stabilize prices -protect jobs within a country, government ownership of some industry, regulation of market. Competition to ensure fair standards and practices to protect the consumer and worker, and economic trade barriers in the form of protective tariffs - quotas on imports - or internal regulation favouring domestic industry.

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Differences Between - Market Failure and Government Failure

The inability of an unregulated market to achieve allocative efficiency is known as market failure. The main types of market failure are monopoly, steep inequality, pollution, etc. The Western economic recession since 2008 is the result of market failure where excessive speculation and borrowings have disoriented the economies with huge human and economic costs. Government failure is the public sector analogy to market failure and occurs when the government does not efficiently allocate goods and/or resources to consumers. Just as with market failures, there are many different kinds of government failures. Inefficient use of resources, wastage, and retarded economic growth due to government monopolies and regulation are the results of government failure. Often, the performance of the public sector in India is cited to exemplify government failure.

Structural Composition of the Economy

  • Three-sector hypothesis: Economic theory dividing economies into primary, secondary, and tertiary sectors.
  • Primary sector: Involves extracting raw materials; includes agriculture, fishing, forestry, mining, and quarrying.
  • Secondary sector: Focuses on manufacturing and construction; transforms primary products into finished goods.
  • Tertiary sector: Dominates in highly developed countries; involves services, contributing to a major portion of the economy.
  • Transition effect: Shifts in economic activity lead to increased quality of life, social security, education, culture, and reduced unemployment and poverty.
  • Development stages: Low per capita income countries rely on the primary sector; medium-income countries focus on the secondary sector; high-income countries prioritize the tertiary sector.
  • Primary industry in developing countries: Larger sector, including agriculture, animal husbandry, fishing, and mining.
  • Secondary sector divisions: Light industry (consumer-oriented) and heavy industry (capital-intensive, business-oriented).
  • Light industry: Produces goods for end users, less capital-intensive compared to heavy industry.
  • Heavy industry: Capital-intensive, produces goods as intermediates for other industries.
  • Global examples: Animal husbandry more common in Africa (developing) than in Japan (developed).
  • Major businesses: Agriculture, fishing, forestry, mining, manufacturing, and construction.
  • Role of sectors in developed countries: Tertiary sector dominates the total output of the economy in highly developed nations.

Developing Country

developing country is a country that has not reached the Western-style standards of democratic governmentsfree market economiesindustrializationsocial programs, and human rights guarantees for its citizens. Countries with more advanced economies than other developing nations but which have not yet fully demonstrated the signs of a developed country are grouped under the term newly industrialized countries. 

Developed Country

Development entails a modem infrastructure (both physical and institutional), and a move away from low value-added sectors such as agriculture and natural resource extraction. Developed countries, in comparison, usually have economic systems based on economic growth in the secondary, tertiary, and quaternary sectors and high standards of living.

Newly Industrialized Country

The category of newly industrialized country (NIC) is a socioeconomic classification applied to several Countries around the world. NICs are countries whose economies have not yet reached first-world status but have, in a macroeconomic sense, outpaced their developing counterparts Another characterization of NICs is that of nations undergoing rapid economic growth. Incipient or ongoing industrialization is an important indicator of a NIC. In many NICs, social upheaval can occur as primarily rural agricultural populations migrate to the cities, where the growth of manufacturing concerns and factories can draw many thousands of labourers. NICs usually share some other common features, including:

  • A switch from agriculture to industrial economies, especially in the manufacturing sector
  • An increasingly open-market economy, allowing free trade with other nations in the world. 
  • Emerging MNCs 
  • Strong capital investment from foreign countries.

High-income Economy

A High-income economy is defined by the World Bank as a country with a GDP per capita of $11,456 or more. While the term high income may be used interchangeably with “First World” and “developed country,” the technical definitions of these terms differ. The term “first world” commonly refers to those prosperous countries that aligned themselves with the U.S. and NATO during the Cold War. Several institutions, such as the International Monetary Fund (IMF), take factors other than high per capita income into account when classifying countries as “developed” Or “advanced economies.” According to the United Nations, for example, some high-income countries may also be developing countries. The GCC (Persian Gulf States) Countries, for example, are classified as developing high-income countries. Thus, a high-income Country may be classified as either developed or developing.

The term developed country, or advanced country, is used to categorize countries that have achieved a high level of industrialization in which the tertiary and quaternary sectors of industry dominate. Countries not fitting this definition may referred to as developing countries. This level of economic development usually translates into a high income per capita and a high Human Development Index (HDI) rating. Countries with high gross domestic product (GDP) per capita often fit the above description of a developed economy. However, anomalies exist when determining “developed” status by the factor GDP per capita alone.

Least Development Countries

Least developed countries (LDCs or Fourth World countries) are countries that, according to the United Nations, exhibit the lowest indicators of socioeconomic development, with the lowest Human Development Index ratings of all countries in the world. A country is classified as a Least Developed Country if it meets three criteria based on:

  • low-income (three-year average GDP per capita of less than US $750, which must exceed $900 to leave the list) 
  • human resource weakness (based on indicators of nutrition, health, education, and adult literacy), economic vulnerability (based on instability of agricultural production, instability of exports of goods and services, and the percentage of the population displaced by natural disasters). The classification currently applies to 48 countries.

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India's Initiatives for Green Accounting

India aims to factor the use of natural resources in its economic growth estimates by 2015 as we seek to underscore the actions it is taking to fight global warming. The government said the country would seek to make “green accounting” part of government policy on economic growth. The alternative GDP (Gross Domestic Product) estimates account for the consumption of natural resources as well. This would help find out how much of a natural resource is being consumed in the course of economic growth, how much is being degraded and how much is being replenished. It is expected that in the future, more and more economists are likely to focus their time and energies on social investment accounting or green accounting … so that GDP really becomes not a gross domestic product but a green domestic product. Green gross domestic product, then or green GDP as outlined above, measures economic growth while factoring in the environmental consequences or externalities (how those outside a transaction are affected), of that growth. There are methodological concerns — how do we monetize the loss of biodiversity? How can we measure the economic impacts of climate change due to greenhouse gas emissions? While the green GDP has not yet been perfected as a measure of environmental costs, many countries are working to strike a balance between - green GDP and the original GDP.

Sarkozy's Initiatives for GDP Alternative

The Commission on the Measurement of Economic Performance and Social Progress was set up at the beginning of 2008 on the French government’s initiative. Increasing concerns have been raised for a long time about the adequacy of current measures of economic performance, in particular those based on GDP figures. Moreover, there are broader concerns about the relevance of these figures as measures of societal well-being, as well as measures of economic, environmental, and social sustainability.
Reflecting these concerns, former President Sarkozy decided to create this Commission to look at the entire range of issues; it aims to identify the limits of GDP as an indicator of economic performance and social progress, to consider additional information required for the production of a more relevant picture, etc: The Commission is chaired by Professor Joseph E. Stiglitz. Amartya Sen and Bina Agarwal are also associated with it. The commission gave its report in 2009. The Stiglitz report recommends that economic indicators should stress well-being instead of production, and for non-market activities, such as domestic and charity work, to be taken into account, Indexes should integrate complex realities, such as crime, the environment, and the efficiency of the health system, as well as income inequality. The report brings examples, such as traffic jams, to show that more production doesn’t necessarily correspond with greater well-being. “We’re living in one of those epochs where certitudes have vanished…, we have to reinvent, to reconstruct everything,” Sarkozy said. “The central issue is [to pick] the way of development, the model of society, the civilization we want to live in.”

Stiglitz explained: Stiglitz explained: The big question concerns whether GDP provides a good measure of living standards. In many cases, GDP statistics seem to suggest that the economy is doing far better than most citizens’ own perceptions. Moreover, the focus on GDP creates conflicts: political leaders are told to maximize it, but citizens also demand that attention be paid to enhancing security, reducing air, water, and noise pollution, and so forth — all of which might lower GDP growth. The fact that GDP may be a poor measure of well-being or even of market activity has, of course, long been recognized. But changes in society and the economy may have heightened the problems, at the same time, advances in economics and statistical techniques may have provided opportunities to improve our metrics.
India’s GDP Base Year has changed.

  • The Ministry of Statistics and Programme Implementation (MOSPI) is considering changing the base year for GDP calculation from 2011-12 to 2017-18. 
  • The base year of the national accounts is chosen to enable inter-year comparisons. It gives an idea about changes in purchasing power and allows the calculation of inflation-adjusted growth estimates
  • The last series has changed the base to 2011-12 from 2004-05.

Need a Change

  • Better Representation: Updating the base year allows for a more accurate representation of the economy by considering the latest structural changes, technological advancements, and sectoral shifts. This leads to more reliable data and better policy-making decisions.
  • Inclusion of New Industries: As economies evolve, new industries and services emerge, which may not have existed or were insignificant during the previous base year. Changing the base year ensures these new industries are included in the GDP calculation, providing a more comprehensive picture of the economy.
  • Elimination of Outdated Industries: Over time, some industries may become obsolete or less significant to the economy. By changing the base year, the contribution of these outdated industries is reduced, and the focus is shifted to more relevant sectors.
  • Inflation Adjustment: Changing the base year also helps in adjusting the GDP for inflation, ensuring that the GDP figures are comparable over time and not distorted by price changes.
  • Improved International Comparability: Periodically updating the base year for GDP calculation ensures that a country's economic data remains aligned with international standards and practices. This helps in making cross-country comparisons more accurate and meaningful.
  • Enhanced Policy Formulation: Accurate and up-to-date GDP data is crucial for policymakers to make informed decisions related to fiscal, monetary, and developmental policies. Changing the base year helps in providing them with the most relevant data to address the current economic challenges and opportunities.

GDP based on 2011-12 did not reflect the current economic situation correctly. The new series will be in compliance with the United Nations guidelines in System of National Accounts-2008.

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Calculation of GDP in India

  • In India, the Gross Domestic Product (GDP) is calculated by adding private consumption, gross investment, government investment, government spending, and net foreign trade (exports minus imports)
  • In 2015, the Central Statistics Office (CSO) shifted from using GDP at factor cost to GDP at market price and Gross Value Addition (GVA) to better estimate economic activity.
    The formula for GDP at market price is GDP at factor cost + Indirect Taxes – Subsidies.

GVA - Gross Value Added
In simpler terms, GVA represents the value generated by the production of goods and services in an economy after accounting for the costs of production. It is used to analyze the performance of different sectors within an economy and helps in understanding their contributions to the overall economic growth.

GVA can be calculated using three different approaches:

  1. Production approach: GVA = Total value of output - Total value of intermediate consumption (i.e., the cost of raw materials, services, and other inputs used in the production process).
  2. Income approach: GVA = Compensation of employees (i.e., wages, salaries, and benefits) + Gross operating surplus (i.e., profits) + Taxes on production and imports less subsidies.
  3. Expenditure approach: GVA = Private consumption expenditures + Gross capital formation (i.e., investments) + Government spending + (Exports - Imports) - Taxes on products + Subsidies on products.

GVA is an important indicator for policymakers, businesses, and researchers to evaluate the performance of an economy, identify areas of growth, and make informed decisions on resource allocation and investment. Comparing GVA across different sectors can help in prioritizing industries that need support and in developing strategies for balanced and sustainable economic growth.

The document NCERT Summary: An Introduction- 3 | 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- 3 - Indian Economy for UPSC CSE

1. What is the correlation between a market economy and poverty?
Ans. A market economy can have both positive and negative effects on poverty. On one hand, a market economy can create opportunities for economic growth and job creation, which can potentially reduce poverty. On the other hand, a market economy can also lead to income inequality, as those with more resources and skills may benefit more from market opportunities, leaving those with fewer resources and skills behind. Therefore, the correlation between a market economy and poverty is complex and depends on various factors such as government policies, social safety nets, and access to education and healthcare.
2. What are the differences between market failure and government failure?
Ans. Market failure refers to a situation where the allocation of resources in a market economy is not efficient, leading to an inefficient outcome. This can occur due to externalities, imperfect information, market power, or public goods. On the other hand, government failure refers to a situation where government intervention in the economy leads to an inefficient outcome. This can happen due to bureaucratic inefficiencies, corruption, or the inability of the government to effectively address market failures. While market failure is a result of flaws in the market system, government failure is a result of flaws in the government's ability to intervene and regulate the economy effectively.
3. What is the structural composition of the economy?
Ans. The structural composition of the economy refers to the various sectors or industries that make up the overall economy. It typically includes primary sectors (such as agriculture, mining, and forestry), secondary sectors (such as manufacturing and construction), and tertiary sectors (such as services, finance, and tourism). The structural composition of an economy can vary across countries and can change over time as economies develop and evolve.
4. What is the difference between a developing country, a developed country, and a newly industrialized country?
Ans. A developing country is a term used to describe a country that has lower levels of economic development, often characterized by a lower per capita income, higher poverty levels, and limited access to basic services such as education and healthcare. A developed country, on the other hand, refers to a country that has achieved high levels of economic development, with high per capita income, low poverty levels, and advanced infrastructure and services. A newly industrialized country is an intermediate category between developing and developed countries, usually characterized by rapid industrialization and economic growth, but not yet reaching the level of a developed country.
5. What are India's initiatives for green accounting?
Ans. India has taken several initiatives for green accounting, which refers to integrating environmental factors into national accounting systems. Some of these initiatives include the introduction of the System of Environmental-Economic Accounting (SEEA) framework, which provides a standardized approach for measuring environmental and economic activities. India has also launched the National Green Accounting Program, which aims to develop a comprehensive framework for green accounting at the national and state levels. Additionally, India has implemented various policies and programs to promote sustainable development and address environmental challenges, such as the National Action Plan on Climate Change and the Swachh Bharat Abhiyan (Clean India Mission).
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