GDP & Markets

A note on figures. GDP size, growth and rankings change every year. The values here are indicative for the period shown; use the latest Economic Survey and the Ministry of Statistics (MoSPI) releases for exact numbers.

What is economics?

Economics is the study of how individuals, businesses and governments use scarce resources to satisfy unlimited wants. Its central problem is scarcity and choice. Adam Smith (The Wealth of Nations, 1776) is the "father of economics"; Alfred Marshall defined it as the study of man in the ordinary business of life; Lionel Robbins as the science of scarcity; J. M. Keynes (General Theory, 1936) founded modern macroeconomics; Paul Samuelson wrote a famous textbook.

• Microeconomics studies individual units — consumers, firms, markets, prices. Macroeconomics studies the economy as a whole — national income, inflation, employment, growth.
• Factors of production: land (rent), labour (wages), capital (interest), entrepreneurship/organisation (profit).
• Basic economic problems of every society: what to produce, how to produce and for whom to produce.
• Production Possibility Frontier (PPF) shows the maximum combinations of two goods possible with given resources; the opportunity cost is the value of the next-best alternative given up.

Economic sectors

• Public sector (owned by the government), private sector, joint sector, and the cooperative sector. Organised (registered, regulated) vs unorganised (informal) sector — the unorganised sector employs the large majority of workers.
• Structure of the Indian economy: the services sector contributes over half of the Gross Value Added (GVA) (about 55 %), industry about 25–30 % and agriculture about 15–18 %, while agriculture still employs the largest share of the workforce. (Approximate; check the latest figures.)

Types of economic systems

India adopted a mixed economy with planning after independence (Industrial Policy Resolution 1948 and 1956 — the "Economic Constitution of India"), with the public sector on the "commanding heights", and moved towards a market-oriented model after 1991.

National income concepts

National income is the total value of all final goods and services produced by a country in a year.

• Gross = including depreciation; Net = excluding it. Domestic = within the territory; National = by the nationals.
• At market prices includes indirect taxes less subsidies; at factor cost excludes them. Since 2015 India measures growth by GDP at market prices (and GVA at basic prices).
• Nominal (current-price) GDP is measured at the prices of the current year; real (constant-price) GDP at base-year prices, removing the effect of inflation. GDP deflator = (nominal GDP ÷ real GDP) × 100.
• Base year: the current series has the base 2011–12 (introduced in 2015); a new series with base year 2022–23 was to be released by MoSPI in 2026 (check the current status).
• Statistical bodies: MoSPI and the National Statistical Office (NSO), which release the National Accounts (quarterly and annual GDP estimates), the Index of Industrial Production (IIP) and Consumer Price Index (CPI); the Central Statistics Office merged into the NSO in 2019; the National Statistical Commission (2006).

Methods of measuring national income

1. Product (value-added) method: sum of the value added in each sector. Avoids double counting.
2. Income method: sum of factor incomes — wages, rent, interest, profit and mixed income.
3. Expenditure method: $\text{GDP}=C+I+G+(X-M)$ — consumption, investment, government spending, and net exports.

In India, the product method is used for agriculture, industry, and the income method for services; the expenditure method is used to cross-check.

Size of the Indian economy (indicative)

India is the fifth-largest economy by nominal GDP in recent years (about 3.5–4 trillion US dollars, having passed the UK in 2022 and then approaching Japan and Germany) and the third-largest by purchasing power parity (PPP). It has been one of the fastest-growing major economies (growth of about 6–8 % in recent years). Per capita income remains in the lower-middle income category. The government's goal is "Viksit Bharat" by 2047 (a developed nation) and a 5 trillion US dollar economy. (Check the latest rank and value.)

Utility

Utility is the want-satisfying power of a good.

• Total utility (TU): the total satisfaction from consuming a given quantity. Marginal utility (MU): the addition to total utility from consuming one more unit: $MU=\Delta TU/\Delta Q$.
• Law of diminishing marginal utility (Gossen's first law): as a consumer consumes more units of a good, the marginal utility from each successive unit falls. TU rises at a decreasing rate until MU = 0 (the maximum TU, the point of satiety), after which MU is negative.
• Law of equi-marginal utility (Gossen's second law): a consumer maximises satisfaction when the ratio of marginal utility to price is equal for all goods: $\frac{M{U}_x}{P_x}=\frac{M{U}_y}{P_y}$.
• Consumer's surplus (Marshall): the difference between what a consumer is willing to pay and what he actually pays. Indifference curves (Hicks and Allen) show combinations of two goods giving the same satisfaction; the budget line shows what he can afford; equilibrium is where the budget line is tangent to the highest indifference curve.

Demand

Demand is the quantity of a good a consumer is willing and able to buy at a given price over a given time. Effective demand needs the ability to pay.

Law of demand: other things being equal, when the price of a good rises, the quantity demanded falls, and vice versa — an inverse relationship; the demand curve slopes downward (left to right).

• Reasons: the income effect, the substitution effect, and diminishing marginal utility.
• Exceptions to the law of demand: Giffen goods (inferior goods whose demand rises when the price rises — Sir Robert Giffen, coarse grains in Ireland), Veblen goods (status symbols, luxuries — demand rises when the price rises), expectations of a further price rise, and necessities in an emergency.

Determinants of demand

Price of the good; income of the consumer (normal goods vs inferior goods); prices of related goods (substitutes — tea and coffee; complements — car and petrol); tastes and preferences; population; expectations; advertising, seasonal factors and distribution of income.

Movement vs shift

• Movement along the curve (expansion or contraction of demand): caused by a change in the price of the good itself.
• Shift of the curve (increase or decrease in demand): caused by a change in any other determinant. A rightward shift is an increase; a leftward shift a decrease.

Elasticity of demand

Price elasticity of demand ($E_d$) measures the responsiveness of quantity demanded to a change in price:

(ignoring the negative sign).

Determinants: availability of substitutes (more substitutes → more elastic), nature of the good (necessity or luxury), the share of income spent, time period (elasticity is greater in the long run), and habit.

Total expenditure method: when the price falls — if total expenditure rises, demand is elastic; if it is unchanged, unitary; if it falls, inelastic.

• Income elasticity of demand $E_y=\frac{\%\Delta Q}{\%\Delta \text{income}}$: positive for normal goods (greater than 1 for luxuries), negative for inferior goods.
• Cross elasticity of demand $E_c=\frac{\%\Delta Q_A}{\%\Delta P_B}$: positive for substitutes, negative for complements, zero for unrelated goods.