Best Notes on Economic Growth and its Measures in India

In this post, we are providing the Notes on Indian economic growth and Development pdf – economic growth and its measurement – Recession – Gross Domestic Product – GDP Deflator – Per Capita Income.

Economic growth refers to an increase in the production of goods and services in an economy over time. It is measured by the percentage change in real gross domestic product (GDP), which is the total value of goods and services produced within a country’s borders adjusted for inflation.

Definition of economic growth by authors

There are some authors who define the economic growth

1. Robert Solow: “Economic growth means more output and income per person.”
2. Paul Romer: “Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable.”
3. Amartya Sen: “Economic growth is not just about producing more goods and services; it is also about expanding the capabilities of people to live the kind of lives they value.”
4. Joseph Schumpeter: “Economic growth is a process of creative destruction, in which the old economic structure is replaced by a new and more productive one.”
5. Douglass North: “Economic growth is the process of creating and sustaining an institutional environment that promotes technological change and the accumulation of human and physical capital.”

Economic growth and its measurement

Economic growth can be measured in a number of ways, including:

1. Gross Domestic Product (GDP): GDP is the most commonly used measure of economic growth. It represents the total value of goods and services produced within a country’s borders in a specific period of time, typically a year.
2. Gross National Product (GNP): GNP is similar to GDP, but it includes the value of goods and services produced by a country’s citizens or businesses abroad.
3. Gross National Income (GNI): GNI measures the total income earned by a country’s residents, regardless of where they are located.
4. Real GDP: Real GDP is an inflation-adjusted measure of GDP, which accounts for changes in the price level over time.
5. Per capita GDP: Per capita GDP is calculated by dividing a country’s GDP by its population, providing an estimate of the average economic output per person.

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Types of Economic Growth

There are several types of economic growth that have been observed in India. Here are some of the major types:

1. Agriculture-led growth: In the early years of India’s independence, agriculture played a dominant role in the country’s economy. The Green Revolution of the 1960s and 1970s, which introduced high-yielding varieties of crops, led to a significant increase in agricultural production, and this contributed to overall economic growth.
2. Services-led growth: In recent years, the service sector has become the dominant contributor to India’s economic growth. This includes sectors such as information technology, business process outsourcing, finance, and healthcare.
3. Manufacturing-led growth: While the service sector has grown rapidly, the manufacturing sector has also played an important role in India’s economic growth. This includes sectors such as automobile manufacturing, textiles, and pharmaceuticals.
4. Export-led growth: India has also experienced significant economic growth through its exports. This includes exports of software and services, as well as manufactured goods.
5. Infrastructure-led growth: Infrastructure development, such as the construction of roads, railways, airports, and ports, has also contributed to India’s economic growth.

The Slowdown of Economic Growth

Slowdown refers to a period of deceleration or reduction in the rate of economic growth of an economy. It is typically characterized by a decline in business activity, production, and employment, resulting in a decrease in the overall output of goods and services. Slowdowns can occur due to a variety of factors, including external shocks such as a recession or financial crisis, changes in government policies, or shifts in consumer behavior. Slowdowns can have negative impacts on businesses, employment, and consumer confidence, and can lead to economic stagnation if not addressed.

Recession

A recession is a significant decline in economic activity that lasts for an extended period, typically several months or more. It is characterized by a contraction in gross domestic product (GDP), which is the total value of goods and services produced within a country’s borders. Recession can be caused by various factors, such as a decline in consumer spending, reduced investment, or a global economic downturn. Governments and central banks may take measures such as fiscal stimulus or monetary policy to mitigate the effects of a recession and encourage economic recovery.

Great Recession

The Great Recession refers to a period of severe economic downturn that began in late 2007 and lasted until mid-2009. It was the most significant recession since the Great Depression of the 1930s and had a significant impact on the global economy. The Great Recession was triggered by a housing market bubble in the United States, which burst and led to a financial crisis that spread throughout the world. It resulted in a widespread decline in economic activity, high unemployment rates, a sharp decrease in consumer and business confidence, and a decrease in global trade.

Depression

Depression is a severe and prolonged economic downturn that is marked by a significant decline in economic activity, high unemployment rates, and a decrease in consumer and business confidence. Depressions are characterized by a sustained period of economic contraction, typically lasting several years, and are more severe than a recession. Depressions can be caused by a range of factors, such as financial crises, government policy failures, and significant disruptions to global trade.

Gross Domestic Product (GDP)

Gross Domestic Product (GDP) is a measure of the total value of all goods and services produced within a country’s borders during a specific period, usually a year. It is considered one of the most important indicators of an economy’s size and health, as it reflects the overall level of economic activity and output within a country. GDP can be used to compare the economic performance of different countries or to track changes in an economy over time. It has limitations, such as not taking into account the distribution of income or the value of non-monetary activities such as unpaid household work or volunteer work. India’s current GDP is 3.18 lakh crores USD.

Limitations of GDP

While GDP (Gross Domestic Product) is a commonly used measure of economic activity and growth, there are several limitations to its use as an indicator of overall well-being or welfare. Some of the main limitations of GDP include:

1. GDP does not account for non-market activities: GDP only includes economic activities that are transacted in markets, such as the sale of goods and services. It does not account for non-market activities, such as household work, volunteer work, and informal economic activities, which can be significant in many economies.
2. GDP does not measure income distribution: GDP does not reflect how income is distributed within a population. A country with a high GDP may still have significant income inequality, with a small proportion of the population controlling a large share of the wealth.
3. GDP does not account for environmental degradation: GDP does not account for the environmental costs of economic activity, such as pollution, resource depletion, and climate change. This means that GDP may overstate economic welfare if it does not account for the environmental costs of economic growth.

Estimating GDP

GDP is calculated using three different approaches: the expenditure approach, the income approach, and the production approach. The expenditure approach adds up the total amount spent on final goods and services by households, businesses, governments, and foreign buyers. The income approach adds up all the income earned by individuals and businesses in the production of goods and services. The production approach measures the total value of goods and services produced in each sector of the economy.

Gross National Product (GNP)

Gross National Product (GNP) is a measure of the total value of all goods and services produced by a country’s citizens, regardless of where they are located in the world. It includes the value of goods and services produced domestically, as well as income earned by citizens living abroad. GNP differs from Gross Domestic Product (GDP), which only measures the total value of goods and services produced within a country’s borders, regardless of who produces them. GNP takes into account the income earned by a country’s citizens abroad, as well as any income earned by foreign citizens within the country’s borders.

GDP vs GNP

Gross Domestic Product (GDP) and Gross National Product (GNP) are both measures of economic activity, but they differ in their geographic scope and what they measure. GDP measures the total value of all goods and services produced within a country’s borders during a specific period, regardless of who produces them. This means that GDP only measures economic activity within a country’s borders, regardless of the nationality of the producers.

GNP, on the other hand, measures the total value of all goods and services produced by a country’s citizens, regardless of where they are located in the world. This means that GNP includes the income earned by a country’s citizens abroad, but excludes the income earned by foreigners within a country’s borders.

Gross Value Added (GVA)

Gross Value Added (GVA) is a measure of the economic value generated by a sector, industry, or firm. It is calculated by subtracting the cost of inputs, such as raw materials and services, from the total value of goods and services produced. GVA is an important measure of economic activity, as it allows us to understand the contribution of individual sectors, industries, or firms to the overall economy. By measuring the value generated by a sector or industry, we can determine its contribution to GDP.GVA is often used to compare the performance of different sectors, industries, or firms, as well as to track changes in an economy over time.

Market Price and Factor Cost

In economics, the factors of production refer to the resources used in the production of goods and services. The four factors of production are:

1. Land: This refers to all natural resources used in the production of goods and services, such as land, water, forests, and minerals.
2. Labor: This refers to the human effort and skills used in the production of goods and services. It includes all types of work, from manual labor to highly skilled professional work.
3. Capital: This refers to the tools, machinery, and other equipment used in the production of goods and services. It includes physical capital, such as buildings and equipment, as well as financial capital, such as stocks and bonds.
4. Entrepreneurship: This refers to the ability to take risks and innovate in the production of goods and services. It includes the ability to identify new opportunities, organize resources, and manage a business.

Net Domestic Product (NDP)

Net Domestic Product (NDP) is a measure of the value of all final goods and services produced within an economy during a given period, usually a year, minus the depreciation of capital goods. In other words, it is GDP adjusted for depreciation. NDP is an important economic indicator because it provides a more accurate picture of an economy’s productive capacity than GDP alone. By adjusting for depreciation, NDP reflects the net contribution of capital goods to economic output, rather than just their gross output.

Real and Nominal GDP

Real GDP (Gross Domestic Product) is a measure of the economic output of a country that has been adjusted for inflation. It measures the value of all final goods and services produced within a country’s borders in a given period of time, usually a year or a quarter, using a constant set of prices from a base year. Nominal GDP, on the other hand, is the value of all final goods and services produced within a country’s borders in a given period of time, usually a year or a quarter, using the prices that prevailed in the same period.

GDP Deflator

The GDP deflator is a measure of the level of prices of all new, domestically produced, final goods and services in an economy. It is used to adjust the nominal GDP of a country to real GDP, which is a measure of economic output that takes inflation into account. The GDP deflator is calculated by dividing nominal GDP by real GDP and then multiplying by 100. It essentially measures the price level changes in an economy over time. If the GDP deflator increases, it means that prices of goods and services in the economy have increased, while a decrease in the GDP deflator indicates a decline in the general price level.

National Income

National income refers to the total value of all the goods and services produced by a country within a specific time period, typically a year. It includes all income earned by the citizens and companies of a country, regardless of where they are located in the world. National income is typically measured using Gross Domestic Product (GDP), which is the market value of all final goods and services produced within a country in a given period. National income is an important measure of a country’s economic performance and is used by governments and policymakers to make decisions about taxation, public spending, and other economic policies.

Base Year

A base year in economic growth refers to a specific year that is used as a reference point for measuring changes in economic activity over time. In other words, it is the year against which all subsequent economic activity is compared. The base year is typically chosen based on a number of factors, including data availability, stability of the economy during that period, and relevance to the current economic conditions. The choice of the base year is important because it can affect the interpretation of economic growth rates and other economic indicators.

Current and Constant Year

In the context of economic growth, “current year” refers to the present year in which the growth rate is being measured or reported. For example, if we are in the year 2023 and the economy grew by 3% in 2022, then 2022 would be the current year in terms of economic growth. “Constant year,” on the other hand, is a base year used for comparison purposes. When we want to compare economic growth rates over time, we need to account for inflation, which can distort the actual growth rate. To address this, economists use a constant year, which is typically a year in the past, to measure growth rates in real terms. By using a constant year, we can remove the effects of inflation and get a better sense of how the economy has actually grown.

Seasonality

Seasonality in economic growth refers to regular and predictable patterns in economic activity that occur within a year. These patterns are often related to seasonal factors, such as weather, holidays, and the timing of agricultural production, among others. Seasonality can have a significant impact on economic growth because it can lead to fluctuations in economic activity that are not necessarily related to long-term trends in the economy.

Potential GDP

Potential GDP (Gross Domestic Product) is the maximum level of output that an economy can produce when all resources are utilized efficiently, without generating inflationary pressures. It represents the level of economic activity that an economy can sustain in the long run, given its resources, technology, and institutions. Potential GDP is a theoretical concept that serves as a benchmark for assessing the level of actual economic output relative to its potential. When the actual level of GDP is below potential, it indicates that the economy is operating below its full capacity and that there is room for growth. Conversely, when the actual level of GDP is above potential, it suggests that the economy is overheating, and there is a risk of inflationary pressures.

Per Capita Income

Per capita, income is a measure of the average income earned per person in a given population, typically within a country. It is calculated by dividing the total income earned in a specific area or country by the total population. Per capita, income is often used as an indicator of the economic well-being of a population, as it provides a rough estimate of the income that an average individual earns. Per capita income can be calculated using different measures of income, such as gross national income (GNI) or gross domestic product (GDP), which are both measures of the size of an economy. Per capita, income can be useful for comparing the level of economic development between countries or regions, as well as for tracking changes in income over time.

National Income Statistics in India

National Income Statistics in India refer to the statistical measures of the country’s economic performance, including measures of income, production, and expenditure. The main source of data for national income statistics in India is the Central Statistics Office (CSO), which is responsible for compiling and publishing a range of economic statistics, including Gross Domestic Product (GDP), Gross National Income (GNI), and other related indicators. National income statistics in India are used for a variety of purposes, including policy formulation, economic planning, and international comparisons. They are also used by businesses, investors, and analysts to make informed decisions about the economy and financial markets.

New Institutional Framework for National Statistics 2019

The New Institutional Framework for National Statistics (NIFNS) is a document that was published in 2019 by the United Nations Statistics Division (UNSD). The NIFNS provides guidance and recommendations for the development and strengthening of national statistical systems (NSS) around the world. The document is based on the principles of the Fundamental Principles of Official Statistics (FPOS), which were adopted by the United Nations General Assembly in 1994. The FPOS establish the basic principles and guidelines for the production and dissemination of official statistics that are trustworthy, relevant, and impartial.

New GDP Series 2015

The new GDP series in 2015 refers to a revision of the methodology used to calculate the Gross Domestic Product (GDP) of India. In 2015, the Indian government adopted a new base year of 2011-12 for calculating GDP, replacing the previous base year of 2004-05. The new GDP series takes into account changes in the structure of the economy and updates to the methodology used to calculate GDP. One of the main changes in the new series is the use of gross value added (GVA) as the primary measure of economic activity, instead of GDP at factor cost, which was used in the previous series.

GDP Back Series

GDP back series refers to the process of estimating the Gross Domestic Product (GDP) of a country for previous years using a new methodology or base year. A back series helps to provide a consistent historical perspective on economic growth and allows for comparisons between different periods. In the context of India, the GDP back series refers to the estimation of GDP using the new methodology and base year of 2011-12 for previous years, going back to 1950. The back series was developed by the Committee on Real Sector Statistics, which was appointed by the National Statistical Commission in 2017. The back series for India’s GDP was released in 2018 and showed a lower GDP growth rate for previous years compared to the estimates based on the previous base year of 2004-05. The release of the back series was controversial, with some experts questioning the methodology used and the resulting lower growth rates.

Splicing Method

In economics, the term “splicing method” is used to describe a technique for combining different datasets in order to create a longer time series that spans multiple periods. This is done by taking two or more data series that have overlapping periods and combining them into a single series by splicing them together at the overlapping points.

For example, if one data series covers the period from 1980 to 1990 and another data series covers the period from 1990 to 2000, the two series could be spliced together to create a longer time series that covers the entire period from 1980 to 2000. The splicing method is used in economics to create longer time series for various purposes, such as analyzing economic trends and forecasting future economic activity.

Indian Economy: Sectors and their Components

The Indian economy is divided into three main sectors:

1. Agricultural Sector: The agricultural sector is the primary sector of the Indian economy, employing around 50% of the country’s workforce. It includes farming, animal husbandry, forestry, and fishing. The key components of the agricultural sector include crops such as rice, wheat, pulses, sugarcane, cotton, jute, and tea, as well as livestock and fisheries.
2. Industrial Sector: The industrial sector is the secondary sector of the Indian economy, comprising manufacturing, mining, and construction activities. The key components of the industrial sector include textiles, chemicals, machinery, steel, cement, and petroleum.
3. Service Sector: The service sector is the tertiary sector of the Indian economy, comprising various services such as banking, insurance, transportation, communication, retail, healthcare, education, and hospitality. It is the fastest-growing sector in the Indian economy, contributing to around 55% of the country’s GDP.

Structural Composition of Economy

The structural composition of an economy refers to the way it is organized in terms of its sectors and industries. It is a measure of the relative importance of different sectors and industries in the overall economy, and how they contribute to economic growth and development. The structural composition of an economy can be analyzed in various ways, such as by examining the distribution of labor and capital across different sectors and industries, or by analyzing the contributions of different sectors to GDP and exports.

Structural Change in the Economy

Structural change in the economy refers to the process of shifting resources and workers from one sector or industry to another. This can occur due to a variety of factors, such as changes in technology, globalization, shifts in consumer demand, and government policies.Structural change can also lead to changes in the composition of the workforce, as workers with skills and training in declining sectors may need to retrain or move to other industries. This can be a difficult process for workers and communities that are heavily dependent on a single sector and may require government support and investment in education and training programs.

Formal and Informal Sectors of the Economy

The formal and informal sectors of the economy are two broad categories used to describe the different types of economic activity in a country. The formal sector refers to the part of the economy that is regulated by the government, with businesses and workers operating within legal frameworks and paying taxes. This includes businesses that are registered with the government, workers who receive legal protections and benefits such as minimum wage laws and social security, and economic activities that are formally recognized in national accounts and statistics.

Informal sector refers to economic activity that is unregulated and often takes place outside of formal legal frameworks. This includes activities such as street vending, small-scale farming, and unregistered small businesses. Workers in the informal sector often do not receive legal protections or benefits, and may be paid in cash or in-kind instead of a regular salary. Economic activities in the informal sector are often not recorded in official statistics, making it difficult to measure their contribution to the overall economy.

Economic Growth: Cyclical and Structural

There are two types of economic growth: cyclical and structural.

Cyclical growth refers to the short-term fluctuations in economic activity that occur over a period of months or years. These fluctuations are usually caused by changes in business cycles, such as changes in interest rates, consumer spending, and investment. Cyclical growth tends to be temporary and does not necessarily lead to long-term economic growth.

Structural growth, on the other hand, refers to the long-term growth in an economy that is sustainable and not just a result of short-term fluctuations. This type of growth is caused by changes in the structure of an economy, such as advancements in technology, improvements in education and healthcare, and increases in productivity. Structural growth tends to be more stable and leads to long-term economic growth.

Structural Aspects of Slowdown

Structural aspects of a slowdown refer to the underlying, long-term factors that contribute to a sustained decrease in economic growth. Unlike cyclical factors that cause short-term fluctuations in the economy, structural factors tend to be more persistent and can hinder economic growth over a longer period of time.

Some examples of structural factors that can contribute to a slowdown in economic growth include:

1. Aging population: As the population ages, it can lead to a decrease in the labor force, lower productivity, and a decrease in consumption.
2. Declining innovation: If a country experiences a slowdown in innovation and technological advancement, it can lead to a decrease in productivity and competitiveness.
3. Structural unemployment: If there is a mismatch between the skills of workers and the needs of employers, it can lead to higher unemployment rates and a decrease in productivity.

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