Economy – its meaning and types

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4
ECONOMY – ITS MEANING
AND TYPES
Thepurposeofeveryeconomyistosatisfyhumanwantsbyusinglimitedorscarce
resourcesavailableandknowntoasociety.Thesewantscanbesatisfiedbyproduction
andconsumptionofgoodsandservices.Forproduction,thefactorsofproductionare
engagedinsomeeconomicactivities.Theseeconomicactivitiesbringincometothe
economicagentsthatcaneitherbeconsumedorsavedandinvested.Onaccountof
thesegainfuleconomicactivitiesandaccumulatedearnings,somecountriesgrowfast
whileotherscannotattainsuchhighgrowthrate.Asaresultsomeeconomiesattainthe
statusofdevelopedeconomieswhileothersremainunderdevelopedordeveloping
economies. They are also known as rich and poor economies. We can look at
economiesonthebasisofownershipofresources.Theresourcesavailablemaybein
privateownershiporthecollectiveownership.Thustherearedifferentwaystolookat
theeconomyanditslevelofdevelopment.Inthislessonwewillexplainalltheseterms
insimplewaysothatyoumayunderstandanddifferentiatethemeaningandnatureof
aneconomyandunderstanditsvarioustypes.
OBJECTIVES
Aftercompletingthislesson,youwillbeableto:
explain the meaning of an economy;
differentiate between various types of economic organizations on the basis of
ownership and control of resources as well as on the basis of level of
development;
understand the meaning of economic development and economic growth;
distinguish between economic development and economic growth;
understand the important determinants of economic development.

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Notes
4.1 MEANING OF AN ECONOMY
Aneconomyisaman-madeorganizationforthesatisfactionofhumanwants.According
toA.J.Brown,“Aneconomyisasystembywhichpeoplegetliving”.Thewayman
attemptstogetalivingdiffersinmajorrespectsfromtimetotimeandfromplacetoplace.
Inprimitivetimes‘getaliving’wassimplebutwithgrowthofcivilizationithasbecome
muchmorecomplex.Hereitisimportanttonotethatthewaypersonearnshis/herliving
mustbelegalandfair.Unfairandillegalmeanssuchasrobbery,smugglingmayearn
incomeforoneselfbutshouldnotbetakenintoconsiderationasgainfuleconomic
activity or a system of ‘get a living’. It will therefore be appropriate to call that
economy is a framework where all economic activities are carried out.
Some of the salient features of an economy are as follows:
1. Economicinstitutionsaremanmade.Thusaneconomyiswhatwemakeit.
2. Economic institutions can be created, destroyed, replaced or changed. For
examplethecapitalismwasreplacedbycommunismin1917inUSSRandthe
communismwasdestroyedin1989throughaseriesofeconomicreformsbyformer
USSR.InIndiaafterindependencein1947througheconomicandsocialreforms
weabolishedZamindarisystemandintroducedmanylandreform.
3. Levelsofeconomicactivitieskeeponchanging.
4. Producersandconsumersarethesamepersons.Thustheyhaveadualrole.As
producerstheyworkandproducecertaingoodsandservicesandconsumethe
sameasconsumers.
5. Production,consumptionandinvestmentarethevitalprocessesofaneconomy.
6. Inmoderncomplexeconomiesweusemoneyasamedium,ofexchange.
7. Now-a-daysthegovernmentinterventionintheeconomyisconsideredundesirable
andthepreferenceforfreefunctioningofpricesandmarketforcesisincreasingin
alltypesofeconomicsystem.
4.2 TYPES OF ECONOMIES
Asyouknowthateconomyisaman-madeorganization,whichiscreated,destroyed
orchangedaspertherequirementofthesociety.Wecandifferentiateinvarioustypes
ofeconomicsystemsonthebasisoffollowingcriteria.
4.2.1 On the Basis of Ownership and Control over Means of
Production or Resources
Resourcesormeansofproductionremaineitherinprivateownershipwithfullindividual
freedom to use them for the profit motive or they can be in collective ownership

3. MODULE - 2
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(government control) and can be used for the collective welfare of the society as a
whole. Based on the criterion of degree of individual freedom and profit motive,
economiesarelabelledas:
(A) Capitalistorfreeenterpriseeconomy
(B) Socialistorcentrallyplannedeconomy
(C) Mixedeconomy
Nowweshalldiscussaboutthemaincharacteristicsoftheseeconomicsinbrief.
(A) CapitalistEconomy
The capitalist or free enterprise economy is the oldest form of economy. Earlier
economistssupportedthepolicyof‘laissezfair’meaningleavefree.Theyadvocated
minimumgovernmentinterventionintheeconomicactivities.Thefollowingarethemain
featuresofacapitalisteconomy;
(i) Privateproperty
Inacapitalismsystemalltheindividualshavetherighttoownproperty.Anindividual
canacquirepropertyanduseitforthebenefitofhisownfamily.Thereisnorestriction
ontheownershipofland,machines,mines,factoriesandtoearnprofitandaccumulate
wealth.Afterthedeathofapersonthepropertyorwealthistransferredtothelegalheirs.
Thustheinstitutionofprivatepropertyissustainedovertimebytherightofinheritance.
(ii) Freedomofenterprise
Inacapitalisteconomythegovernmentdoesnotcoordinateproductiondecisionsofthe
citizens.Individualsarefreetochooseanyoccupation.Freedomofenterpriseimplies
thatbusinessfirmsarefreetoacquireresourcesandusethemintheproductionofany
goodorservice.Thefirmsarealsofreetoselltheirproductinthemarketsoftheirchoice.
Aworkerisfreetochoosehis/heremployer.Insmallbusinessunitsownerhimselftakes
theriskofproductionandearnsprofitorlossforhimself.Butinmoderncorporations
theshareholderstakeriskswhereaspaiddirectorsmanagebusiness.Thustheindividual
supervisionofone’sowncapitalisnownolongerrequiredtoearnprofit.Government
oranyotheragencydoesnotimposerestrictions/obstaclesinthewayofworkersto
enterorleaveaparticularindustry.Aworkerchoosesthatoccupationwherehisincome
ismaximum.
(iii) Consumer’sSovereignty
Inacapitalisteconomyconsumersarelikeaking.Theyhavethefullfreedomtospend
theirincomeongoodsandservicesthatgivethemmaximumsatisfaction.Incapitalist
systemproductionisguidedbyconsumer’schoices.Thisfreedomofconsumersis
calledconsumer’ssovereignty.

4. ECONOMICS
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Notes
(iv) ProfitMotive
Self-interestistheguidingprincipleincapitalism.Entrepreneursknowthattheywillown
theprofitorlossafterthepaymenttoallotherfactorsofproduction.Thereforetheyare
alwaysmotivatedtomaximizetheirresidualprofitbyminimizingcostandmaximizing
revenue.Thismakesthecapitalisteconomyanefficientandself-regulatedeconomy.
(v) Competition
Therearenorestrictionsontheentryandexitoffirmsinacapitalismsystem.Thelarge
numberofproducersareavailabletosupplyaparticulargoodorserviceandtherefore
nofirmcanearnmorethannormalprofit.Competitionisthefundamentalfeatureof
capitalisteconomyandessentialtosafeguardagainstconsumer’sexploitation.Although
duetolarge-sizeandproductdistinctionmonopolistictendencieshavegrownthese
daysstillthecompetitioncanbeseenamongalargenumberoffirms.
(vi) Importanceofmarketsandprices
Theimportantfeaturesofcapitalismlikeprivateproperty,freedomofchoice,profit
motive and competition make a room for free and efficient functioning of price
mechanism.Capitalismisessentiallyamarketeconomywhereeverycommodityhasa
price.Theforcesofdemandandsupplyinanindustrydeterminethisprice.Firmswhich
areabletoadjustatagivenpriceearnnormalprofitandthosewhofailtodosooften
quittheindustry.Aproducerwillproducethosegoods,whichgivehimmoreprofit.
(vii) Absence of government interference
Inafreeenterpriseorcapitalisteconomythepricesystemplaysanimportantroleof
coordinatingagent.Governmentinterventionandsupportisnotrequired.Theroleof
governmentistohelpinfreeandefficientfunctioningofthemarkets.
Capitalismintoday’sworld
Pure capitalism is not seen in the world now-a-days. The economies of USA, UK,
France,Netherland,Spain,Portugal,Australiaect.areknownascapitalisticcountries
withactiveroleoftheirrespectivegovernmentineconomicdevelopment.
(B) SocialistEconomy
Inthesocialistorcentrallyplannedeconomiesalltheproductiveresourcesareowned
andcontrolledbythegovernmentintheoverallinterestofthesociety.Acentralplanning
authoritytakesthedecisions.Thesocialisteconomyhasthefollowingmainfeatures.
(i) CollectiveOwnershipofmeansofProduction
InaSocialisteconomymeansofproductionareownedbythegovernmentonbehalf
ofthepeople.Theinstitutionofprivatepropertyisabolishedandnoindividualisallowed
toownanyproductionunitandaccumulatewealthandtransferittotheirheirs.However,
peoplemayownsomedurableconsumergoodsfortheirpersonaluse.

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(ii) SocialWelfareObjective
The decisions are taken by the government at macro level with the objective of
maximizationofsocialwelfareinmindratherthanmaximizationofindividualprofit.The
forcesofdemandand supplydonotplayanyimportantrole.Carefuldecisionsaretaken
withthewelfareobjectivesinmind.
(iii) CentralPlanning
Economicplanningisanessentialfeatureofasocialisteconomy.TheCentralPlanning
Authoritykeepingthenationalprioritiesandavailabilityofresourcesinmindallocates
resources.Governmenttakesalleconomicdecisionsregardingproduction,consumption
andinvestmentkeepinginmindthepresentandfutureneeds.Theplanningauthorities
fixtargetsforvarioussectorsandensureefficientutilizationofresources.
(iv) ReductioninInequalities
The institutionsofprivatepropertyandinheritanceareattherootofinequalitiesof
incomeandwealthinacapitalisteconomy.Byabolishingthesetwininstitutionsa
socialisteconomicsystemisabletoreducetheinequalitiesofincomes.Itisimportant
tonotethatperfectequalityinincomeandwealthisneitherdesirablenorpracticable.
(v) No class conflict
Incapitalisteconomytheinterestsoftheworkersandmanagementaredifferent.Both
ofthemwanttomaximizetheirownindividualprofitorearnings.Thisresultsinclass
conflictincapitalisteconomy.Insocialismthereisnocompetitionamongclasses.Every
personisaworkersothereisnoclassconflict.Allareco-workers.
Socialismintoday’sworld
CountriessuchasRussia,ChinaandmanyeasternEuropeancountriesaresaidtobe
socialistcountries.Buttheyarechangingnowandencouragingliberalisationintheir
countriesfortheireconomicdevelopment.
(C) MixedEconomy
Amixedeconomycombinesthebestfeaturesofcapitalismandsocialism.Thusmixed
economyhassomeelementsofbothfreeenterpriseorcapitalisteconomyaswellasa
governmentcontrolledsocialisteconomy.Thepublicandprivatesectorsco-existin
mixedeconomies.Themaincharacteristicsofamixedeconomyareasfollows:
(i) Co-existence of public and private sectors.
Theprivatesectorconsistsofproductionunitsthatareownedprivatelyandworkon
thebasisofprofitmotive.Thepublicsectorconsistsofproductionunitsownedbythe
governmentandworksonthebasisofsocialwelfare.Theareasofeconomicactivities
ofeachsectoraregenerallydemarcated.Governmentusesitsvariouspoliciese.g.
licensingpolicy,taxationpolicy,pricepolicy,monetarypolicyandfiscalpolicytocontrol
andregulatetheprivatesector.

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Notes
(ii) IndividualFreedom
Individualstakeupeconomicactivitiestomaximizetheirpersonalincome.Theyarefree
tochooseanyoccupationandconsumeaspertheirchoice.Butproducersarenotgiven
thefreedomtoexploitconsumersandlabourers.Governmentputssomerestrictions
keepinginmindthewelfareofthepeople.Forinstance,governmentmayputrestrictions
ontheproductionandconsumptionofharmfulgoods.Butwithinrules,regulationsand
restrictionsimposedbythegovernment,forthewelfareofthesocietytheprivatesector
enjoyscompletefreedom.
(iii) EconomicPlanning
Thegovernment prepareslong-termplansanddecidestherolestobeplayedbythe
privateandpublicsectorsinthedevelopmentoftheeconomy.Thepublicsectorisunder
directcontrolofthegovernmentassuchproductiontargetsandplansareformulated
forthemdirectly.Theprivatesectorisprovidedencouragement,incentives,supportand
subsidiestoworkaspernationalpriorities.
(iv) PriceMechanism
Pricesplayasignificantroleintheallocationofresources.Forsomesectorsthepolicy
ofadministeredpricesisadopted.Governmentalsoprovidespricesubsidiestohelpthe
targetgroup.Theaimofthegovernmentistomaximizethewelfareofthemasses.For
thosewhocannotaffordtopurchasethegoodsatmarketprices,governmentmakes
thegoodsavailableeitherfreeofcostoratbelowmarket(subsidized)prices.
Thusinamixedeconomypeopleatlargeenjoyindividualfreedomandgovernment
supporttoprotecttheinterestsofweakersectionsofthesociety.
Indian economy is considered a mixed economy as it has well defined areas for
functioningofpublicandprivatesectorsandeconomicplanning.Evencountriessuch
asUSA,UK,etc.whichwereknownascapitalisticcountriesarealsocalledmixed
economiesnowbecauseof activeroleoftheirgovernmentineconomicdevelopment.
INTEXT QUESTIONS 4.1
1. WhichofthefollowingstatementsareTrueorFalse?
(i) OnthebasisofownershipofresourceswecanclassifyaneconomyasRich
economyandPooreconomy.
(ii) Socialisteconomyaimsatmaximizationofsocialwelfare.
(iii) Freedom of choice, profit maximization and private property are the
characteristicsofaSocialisteconomy.
(iv) Inamixedeconomypublicandprivatesectorscoexist.
2. Fillintheblankswithappropriatewordsgiveninthebracket.
(i) Pricemechanismplays………………….roleincapitalistorfreemarket
economy(themostimportant/averylimited)

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(ii) Thefreedomofchoiceiscalled………………….incapitalisteconomy
(consumerssovereignty/consumersurplus)
(iii) Thesocialisteconomiesare………………….economies.(centrallyplanned
decentralized)
(iv) People can accumulate wealth and transfer it to their legal heirs in
………………….economy.(capitalist/socialist)
(v) Public sector and private sector …………………. in a mixed economy
(co-exist/doesnotexist)
3. Classifythefollowingcharacteristicsofdifferenttypesofeconomiesandputthem
inappropriateboxes.
Profitmotive,centralplanning,consumersovereignty,publicandprivatesector,
lawsofinheritance,socialwelfare,governmentregulations,subsidy,competition,
pricemechanism,inequalities,noclassconflict,economicplanningandlimited
freedomofchoice.
Capitalist Socialist Mixed
Economy Economy Economy
4.2.2 Types of Economics on the Basis of Level of Development
Onthebasisoflevelofdevelopmenteconomiescanbeclassifiedintwocategories:
(i) Developedeconomy
(ii) Developingeconomy
Thecountriesarelabeleddevelopedorrichanddevelopingorpooronthebasisofreal
nationalandpercapitaincomeandstandardoflivingofitspopulation.Developed
countrieshavehighernationalandper-capitaincome,highrateofcapitalformationi.e.
highsavingsandinvestment.Theyhavehighlyeducatedhumanresources,bettercivic
facilities, health and sanitation facilities, low birth rate, low death rate, low infant
mortality,developedindustrialandsocialinfrastructuresandastrongfinancialand
capitalmarket.Inshort,developedcountrieshavehighstandardofliving.
Developingcountriesarelowontheladderofdevelopment.Theyaresometimesalso
calledunderdeveloped,backwardorpoorcountries.Buteconomistsprefertocallthem
developingcountriesbecauseitgivesasenseofdynamism.Thenationalandpercapita
incomeislowinthesecountries.Theyhavebackwardagriculturalandindustrialsectors
withlowsavings,investmentandcapitalformation.Althoughthesecountrieshave
exportearningsbutgenerallytheyexportprimaryagiculturalproducts.Inshort,they
havelowstandardoflivingandpoorhealthandsanitation,highinfantmortality,highbirth

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Notes
anddeathratesandpoorinfrastructure.Thuseconomicdevelopmentdependsonmany
factorsandhasdifferentmeanings.Althoughyouhavealreadyread,itwillbeusefulto
discussagainthemeaningofeconomicdevelopment,itsdeterminantsandthedifference
between the terms economic development and economic growth in the context of
presentlesson.
4.3 MEANING OF ECONOMIC DEVELOPMENT
Economicgrowth,asdistinguishedfromeconomicdevelopment,isasustainedincrease
innationalincome.Takingthedifferencesinpopulationintoconsideration,itisreflected
inthegrowthofper-capitaincome(i.e.nationalincome+totalpopulation).
Althoughtheremaybeyear-to-yearfluctuationsorshort-termvariationsinthegrowth
ofnationalincome,therehastobeacontinuousgrowthinnationalincomeinthelong-
runforittoqualifyaseconomicgrowth.
Economicdevelopment,ontheotherhand,includesnotonlyeconomicgrowthbutalso
variousothereconomicchangesthatimprovethequalityoflifeorstandardoflivingof
peopleinacountry.Ifwitheconomicgrowth,acountryexperiencesvariouseconomic
changessuchasreductioninpovertyandunemployment,reductioninincomeand
wealthinequality,increaseinliteracyrate,improvementinhealthandhygiene,decrease
inpopulationgrowth,improvementinenvironmentalstandardsetc,thatimprovethe
qualityoflifethenthatiseconomicdevelopment.Sucheconomicchangesthatare
conducive toimprovementsinstandardsoflivingofpeoplearenecessaryforeconomic
development. Otherwise, peoples standard of living may not improve in-spite of
economicgrowth.Itmayhappenthatwitheconomicgrowth,therichgetricherwhile
the poor get poorer if the fruits of growth are snatched by the richer sections of the
society.Clearly,economicdevelopmentisamuchbroaderconceptthaneconomic
growth.Itnotonlyincludeseconomicgrowthbutalsovariousothereconomicchanges
thatbringaboutimprovementinthestandardoflivingofpeopleorqualityoflife.
4.4 DETERMINANTS OF ECONOMIC DEVELOPMENT
Theprocessofeconomicdevelopmentisinfluencedbyanumberofeconomicaswell
asnon-economicfactors.
Theimportanteconomicfactorsareasfollows:
(i) NaturalResources:Theavailabilityofnaturalresourcesfacilitateandaccelerate
economic growth and economic development. It is believed that quality and
quantityofnaturalresourcesaffecttherateofgrowth.
(ii) HumanResources:Anotherimportantdeterminantofeconomicdevelopmentis
thequantityandqualityofhumanresourcesorthepopulation.Otherthingsbeing

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equal,educatedandtechnicallyqualifiedmanpowerhelpsinachievinghigher
growthrate.Ontheotherhandilliterateandunskilledpopulationretardseconomic
growth.
(iii) CapitalFormation:Stockofcapitalgoodsiscrucialforrapideconomicgrowth.
Forincreasingthestockofcapital,rateofsavingsmustbehigh.Thesavingsmust
beinvested.Giventherateofsavingsandinvestmenttherateofgrowthwilldepend
uponcapitaloutputratio.Ifthedomesticsavingsarenotsufficientgovernmentcan
seekexternalassistancetoincreasecapitalformationandgrowthrateindeveloping
countries.
(iv) Technology:Technologycanplayanimportantroleintheeconomicdevelopment.
Technologicalprogressdependsuponcontinuousresearchanddevelopment.
Throughtechnologicalprogressanationmayovercomeotherconstraintssuchas
scarcityofnaturalresourcesandlowproductivity.Developedeconomiesinvest
initshumancapital.
Besidestheseeconomicfactorsmanyothernon-economicfactorssuchas(i)caste
system,(ii) familytype,(iii)racialfactors,and(iv)governmentpoliciesalsoaffectthe
rateofgrowthandeconomicdevelopment.Itisverydifficulttomeasureeconomic
developmentandtogiveoneindexofeconomicdevelopment.Themostcommonly
usedindexofeconomicdevelopmenti.e.increaseinpercapitaincomesuffersfroma
seriousdrawback.Thisindexdoesnottakeintoaccounttheconsumptionofnatural
resourcesandenvironmentaldegradationsuchasthesmokefromtheindustriesorthe
pollution caused by various industrial waste and by-products in the air and water
resources. The cutting of forest and selling of timber will earn income and will be
consideredaneconomicactivityandtheincomeaddedinthenationalincomestatistics
buttheharmcausedbydeforestationwillnotbeshownasanegativeentryinthenational
accountsstatistics.Theeconomistthereforeareseriouslyworkingonpreparationof
somenewindexthatmayaccountfortheseenvironmentcoststothesocietyandcan
beusedasawelfareindexofthesociety.
4.5 DISTINCTION BETWEEN ECONOMIC
DEVELOPMENT AND ECONOMIC GROWTH
Economicgrowthisashort-termmeasureandgenerallyreferstoyeartoyearrisein
nationalandpercapitaincomeinrealterms.Buttheincomeindexdoennottakeinto
account thedistributionalaspectsofnationalincome.Anotherimportantthingisthat
incomeapproachdoesnottakeintoaccounttheunproductiveanddysfunctiongrowth
andproductiveandsociallyusefulgrowth.Economicdevelopmentontheotherhand
isalongtermmeasureoveralongperiod.Theeconomicdevelopmentreferstooverall
riseinstandardof livingandabetterqualityoflife.Besidesincomeindexsomenon-
incomeindicesarealsotakenintoaccount.Thesearehighlifeexpectancyatbirth,low

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infantmortalityandhighrateofliteracy.Animprovementinthesenon-incomeindices
imply that the quality of life has also improved. Some important institutions like
UNESCO and ILO include the basic needs approach such as availability of food,
clothingandshelter,availabilityofdrinkingwater,sanitationandpublictransport
facilities good health and education as an index of economic development. The
objective of development, therefore, is meeting the needs of the vast masses of
population.TheUnitedNationsDevelopmentProgrammesemphasizesonHuman
DevelopmentIndex(HDI)thatisbasedonpercapitaincome,educationalattainment
andlifeexpectancy.Thusitisacompositeindexofeconomicandsocialindicators.The
economicdevelopment,therefore,isamuchwidertermtocaptureoverallimprovement
inthequalityoflifeofpeople.
INTEXT QUESTIONS 4.2
Answerthefollowingquestions.
1. Whatarethetwocategoriesofeconomyonthebasisoflevelofdevelopment?
2. Givesimplemeaningofeconomicdevelopment.
3. Giveeconomicfactorsofdeterminantsofdevelopment.
4. Whatarethenon-economicfactorsaffectingdevelopment?
5. Whatistheseriousdrawbackinincomeapproachtodevelopment?
6. Distinguishbetweeneconomicgrowthandeconomicdevelopment.
7. Howiscapitalformationimportantforeconomicgrowth?
WHAT YOU HAVE LEARNT
Inthislessonwehavelearntthemeaningofaneconomy.Itisasystemofsocially
andlegallyacceptablewaysbywhichpeoplegetaliving.Aneconomyisalsolooked
atasasystemofcooperationforthesatisfactionofhumanwants.
Inamoderncomplexeconomy,thecooperationexistsintheform‘youdothisfor
meandIwilldothatforyouisnotenough’.Thecooperationcanbeseenacross
nationalboundaries.Thuseconomycanbeseenasasystemofmutualcooperation
andexchanges.
Economy can be classified into the following three categories on the basis of
ownershipandcontrolovermeansofproduction.

11. MODULE - 2
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(i) CapitalistEconomy
(ii) SocialistEconomy
(iii) MixedEconomy
Economycanbeclassifiedintothefollowingtwocategoriesonthebasisoflevelof
development:
(i) DevelopedEconomy
(ii) DevelopingEconomy
CapitalistEconomygivesmuchimportancetoindividualfreedomandcompretition.
Consumers behave like a king and play a significant role in the allocation of
resourcesthroughpricesystem,profitmotiveandmarkets.
SocialistEconomygivestoomuchimportancetocollectiveownership,society’s
welfareandeconomicplanning.Theinequalitiesarereducedandclassconflictis
avoided.
Mixedeconomygivesimportancetothemeritsofboththesystems.Herepublicand
private sectors coexist. Public sector works on the basis of socialist economy
whereastheprivatesectorworksonthebasisofcapitalisteconomy.
Developedrichcountrieshavehigherpercapitaincomeandbetterstandardofliving
andqualityoflife.
Underdevelopedorpoorcountriesontheotherhandhavelowincome,savingsand
investmentandthereforetheyhavepoorstandardofliving.
Theprocessofeconomicdevelopmentisdeterminedbynumberofeconomicand
non-economicfactors.
There is a difference between development and economic growth. Generally
economicgrowthreferstoshort-runimprovementsinafewselectedsectorsand
variables.Theeconomicdevelopmentontheotherhandreferstolongrunincrease
innationalandpercapitaincomealongwithmanyothernon-economyfactorsthat
improveoverallqualityoflife.
TERMINAL EXERCISE
1. What is meant by an economy? Give the major characteristics of a capitalist
economy.
2. “Economyisasystemofmutualcooperationandexchanges.“Discuss.

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Notes
3. Explainthetypesofeconomyonthebasisofownershipandcontrolovermeansof
production.
4. Distinguishesbetweeneconomicdevelopmentandeconomicgrowth.
5. Whatarethemaindeterminantsofeconomicdevelopment?
ANSWERS TO INTEXT QUESTIONS
Intext Questions 4.1
1. (i)False (ii)True (iii)False (iv)True
2. (i)themostimportant (ii)Consumer’ssovereignty (iii)centrallyplanned
(iv)Capitalist (v)Co-exist
3. Classifythefollowingcharacteristics
CapitalistEconomy SocialistEconomy MixedEconomy
Profitmotive CentralPlanning PublicandPrivateSector
ConsumerSovereignty Socialwelfare GovernmentRegulations
Lawofinheritance NoclassConflict Economicplanning
Competition Subsidy,Economicplanning
Pricemechanism Limitedfreedomofchoice
Inequalities
Intext Questions 4.2
1. DevelopedEconomyandDevelopingEconomy
2. Economicdevelopmentisaprocessbywhichaneconomy’srealnationalincome
increasesoveralongperiodoftime.
3. NaturalResources,HumanResources,CapitalFormation,Technology.
4. Castesystem,familytype,racial
5. Itdoesnottakeintoaccounttheenvironmentalcostsandresourcedepletion.
6. Economicgrowthisashorttermimprovementinrealincomewhereaseconomic
development is long run increase in real income plus improvement in overall
standardoflivingandqualityoflife.
7. Capitalformationdeterminesthegrowthrategiventhecapitaloutputratio.