This document provides information about different types of economies. It begins by defining an economy and its key features. It then describes the main characteristics of three types of economies: capitalist economies, socialist economies, and mixed economies. Capitalist economies emphasize private property, free enterprise, profit motive, and competition. Socialist economies involve collective ownership, central planning, and prioritize social welfare over individual profit. Mixed economies combine elements of capitalism and socialism, with both public and private sectors coexisting. The document also distinguishes between developed and developing economies based on their level of economic development and standards of living.

1. MODULE - 2
About Economy
Economy–ItsMeaningandTypes
ECONOMICS
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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

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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)

7. MODULE - 2
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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

9. MODULE - 2
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33
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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Notes
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.