The word Economics is derived from the Greek word “OKIOS NEMEIN”
meaning household management
Man is a bundle of desires. Goods and services satisfy these wants. But
almost all the goods are scares
To produce goods factors of production are needed and these are all scarce
ECONIMICS is the branch of knowledge concerned with the production
consumption and transfer of wealth.
Economics – the study of how individuals and societies make decisions
about ways to use scarce resources to fulfill wants and needs.
ECONOMICS AS SCIENCE: Systematic study, scientific laws, validity of
ECONOMICS AS ART: solution of the problems, realistic situation,
verification of economic theories.
ECONOMICS AS A POSITIVE : more logical, more efficiency, more
neutrality, more uniformity, formulation of theories.
ECONOMICS AS A NORMATIVE SCIENCE: more practical, useful
science, more realistic, maximum welfare.
The horizon of economics is gradually expanding. It is no more a branch of
knowledge that deals only with the production and consumption. However,
the basic thrust still remains on using the available resources efficiently
while giving the maximum satisfaction or welfare to the people on a
sustainable basis. Given this, we can list some of the major branches of
economics as under:
1. Microeconomics: This is considered to be the basic economics.
Microeconomics may be defined as that branch of economic analysis which
studies the economic behaviour of the individual unit, may be a person, a
particular household, or a particular firm. It is a study of one particular unit
rather than all the units combined together. The microeconomics is also
described as price and value theory, the theory of the household, the firm
and the industry. Most production and welfare theories are of the
2. Macroeconomics: Macroeconomics may be defined as that branch of
economic analysis which studies behaviour of not one particular unit, but of all
the units combined together. Macroeconomics is a study in aggregates. Hence it
is often called Aggregative Economics. It is, indeed, a realistic method of
economic analysis, though it is complicated and involves the use of higher
mathematics. In this method, we study how the equilibrium in the economy is
reached consequent upon changes in the macro-variables and aggregates.
3. International economics: As the countries of the modern world are realising
the significance of trade with other countries, the role of international economics
is getting more and more significant nowadays.
4. Public finance: The great depression of the 1930s led to the realisation of the
role of government in stabilising the economic growth besides other objectives
like growth, redistribution of income, etc. Therefore, a full branch of economics
known as Public Finance or the fiscal economics has emerged to analyse the
role of government in the economy. Earlier the classical economists believed in
the laissez faire economy ruling out role of the government in economic issues.
5. Development economics: As after the second world war many countries got
freedom from the colonial rule, their economics required different treatment for
growth and development. This branch developed as development economics.
6. Health economics: A new realisation has emerged from human
development for economic growth. Therefore, branches like health
economics are gaining momentum. Similarly, educational economics is
also coming up.
7. Environmental economics: Unchecked emphasis on economic growth
without caring for natural resources and ecological balance, now,
economic growth is facing a new challenge from the environmental side.
Therefore, Environmental Economics has emerged as one of the major
branches of economics that is considered significant for sustainable
8. Urban and rural economics: Role of location is quite important for
economic attainments. There is also much debate on urban-rural divide.
Therefore, economists have realised that there should be specific focus
on urban areas and rural areas. Therefore, there is expansion of branches
like urban economics and rural economics. Similarly, regional economics
is also being emphasised to meet the challenge of geographical
There are many other branches of economics that form the scope of
economics. There are welfare economics, monetary economics, energy
economics, transport economics, demography, labour economics,
agricultural economics, gender economics, economic planning, economics
of infrastructure, etc.
The economic growth of a economy can be
measured with the help of the following
The national income
Balance of payments
Foreign exchange reserves
The national income: National income may be defined as the factor income earned
by the residents of a country i.e., the aggregate of labour income and capita income.
National income measures the monetary value of the flow of output of goods and
services produced in an economy over a period of time.
The total net value of all goods and services produced within a nation over a specifie
d period of time, representing thesum of wages, profits, rents, interest, and pension p
ayments to residents of the nation.
There are three methods of calculating national income:
The income method, which adds up all incomes received by the factors of production
generated in the economy during a year. This includes wages from employment and
self-employment, profits to firms, interest to lenders of capital and rents to owners of
The output method, which is the combined value of the new and final output
produced in all sectors of the economy, including manufacturing, financial services,
transport, leisure and agriculture.
The expenditure method, which adds up all spending in the economy by households
and firms on new and final goods and services by households and firms.
The national income can be explained with the help of the following concepts:
Gross Domestic Product (GDP): Gross domestic product is the money value of all
final goods and services produced within the domestic territory of a country during a
year. GDP includes the output of foreign owned businesses that are located in a
country following foreign direct investment. For example, the output produced at the
Nissan car plant on Tyne and Wear and by foreign owned restaurants and banks all
contribute to the UK’s GDP.
GDP=Gross Domestic Product
P=Price of goods and service
Q=Quantity of goods and service
Gross National Product
Gross National Product (GNP) is the market value of all the final goods and
services produced by factors of production owned by the residents of the
economy over a period of time. Although GDP focuses on the location of
factors of production, GNP focuses on the ownership. Some of the goods
and services produced in the economy are produced by factors of
production owned by foreigners. When these foreigners earn wages, rent,
interest and profit, they remit the income to their home countries. This
income is called ‘factor income to abroad’. Similarly, some of the income
earned by domestic residents comes from the ownership of factors of
production located overseas. This income is called ‘factor income from
abroad’. GNP can be obtained by adding factor income from abroad and
subtracting factor income to abroad from GDP.
GNP = GDP + factor income from abroad – factor income to abroad
Net National Product (factor cost)
In the absence of indirect taxes and subsidies, market prices will be
equal to the factor cost. In reality, the government imposes indirect
taxes which make market prices higher than the factor cost.
Conversely, subsidies make market prices lower than the factor cost.
GNP at factor cost can be obtained by subtracting indirect taxes from
and adding subsidies to GNP at market prices. When capital goods are
used to produce goods and services, they wear out over time and this
is called depreciation or capital consumption. If we subtract
depreciation from gross investment, we get net investment. Net
National Product (NNP) at factor cost can be obtained by subtracting
depreciation from GNP at factor cost.
NNP (factor cost) = GNP (factor cost) – Depreciation
Personal Income (PI)
Personal Income i s the total money income received by individuals and
households of a country from all possible sources before direct taxes.
Therefore, personal income can be expressed as follows:
PI=NI-Corporate Income Taxes-Undistributed Corporate Profits-Social
Security Contribution+Transfer Payments
Economists are interested to find out how consumption expenditure varies
with income. For this purpose, instead of national income, disposable
income is used. Disposable income is the income that households have
available to spend or save after paying direct taxes and receiving transfer
payments. To get disposable income from national income, we subtract
undistributed corporate profits and direct taxes and add transfer payments.
Disposable income = National income – Undistributed corporate profits –
Direct taxes + Transfer payments
Per Capita Income (PCI)
Per Capita Income of a country is derived by dividing the national income of
the country by the total population of a country. Thus,
PCI=Total National Income/Total National Population
The balance of payments (BOP) records all financial transactions made
between consumers, businesses and the government in one country with
The BOP figures tell us about how much is being spent by consumers and
firms on imported goods and services, and how successful firms have been
in exporting to other countries.
Inflows of foreign currency are counted as a positive entry (e.g. exports sold
Balance of Payment=Current Account+Financial Account
Outflows of foreign currency are counted as a negative entry (e.g. imported
goods and services)
The balance of payments is made up of these key parts
i) The current account
ii) The capital account
Current account showing export and import of visibles (also called
merchandise) and invisibles (also called non-merchandise). Invisibles take
into account services, transfers and income.
Capital account showing a capital expenditure
and income for a country. It gives a summary of
the net flow of both private and public
investment into an economy. External
commercial borrowing (ECB), foreign direct
investment, banking capital, rupee debt service,
other capital, etc form a part of capital account.