VisionIAS - Video Classroom Lecture

Economics Class 03

INTRODUCTION (9:00 AM)

GROWTH AND DEVELOPMENT (9:15 AM)

The flow of Income (Continued from the previous class)

Savings => Investment => Output
Output depends on Capital Output Ratio
COR shows the efficiency of the usage of capital
More COR implies inefficient usage of capital.
COR can be high either because of inefficiency or because a country is investing in projects which require high capital.

Capital-Output Ratio:

Incremental Capital-Output Ratio:

High COR/ICOR :

They may be high because of two reasons:
(a) Due to poor usage of capital which might be because of lack of technology, poor government policy, administrative bottlenecks, lack of skills in the economy, etc.
(b) Due to the specific nature of the project where capital-intensive projects would require more capital to generate output.
For example, Steel, heavy machinery, etc.
Therefore, a higher COR/ICOR is not conclusive proof of inefficient use of capital instead it reflects the intensity of capital.
It is a resultant variable and should not be used to control growth.

Four-Sector Model (9:41 AM)

Sectors in the Economy (10:09 AM)

Sectors:

(1) Government
Function is the redistribution and production of goods and services which are universal and non-marketable.
(2) Real Sector
Production by firms, Consumption by Households, and Non-profit institutions that serve the households.
(3) Financial
Deals with money or claim on money
Bonds, Deposits, Shares, etc.
Deposit-taking institutions- Banks
Non-Deposit institutions- NBFCs (will be dealt with later)
Financial auxiliaries - Stock Exchange, Brokers, Depositary institutions, etc.
Insurance and Pensions

What is non-financial debt? (10:19 AM)

Sectors of the economy based on functions:

Any domestic economy can be divided into three sectors:
(a) Government Sector: includes the function of redistribution and provision of non-marketable goods & services.
(b) Real Sector: it consists of non-financial firms, households, and non-profit institutions that serve the households.
The function of non-financial firms is the production of marketable goods and non-financial services.
The non-profit institutions provide goods and services to individual households or the entire community without any charge or prices that are not economically significant.
For example, religious organizations, charities, cultural organizations, research institutions, etc.
The real sector transactions can happen in bundles of goods and services.
A monetary system can help transact better but it is not necessary.
(c) Financial sector:
It consists of firms that are principally engaged in the function of financial intermediation or in auxiliary financial activities that contribute to financial intermediation.
For example, deposit-taking institutions like banks, asset financing companies, stock markets, insurance companies, pension companies, etc.
All the transactions in this sector can not happen without money or related financial instruments that are a claim on the money.

Measurement of Output (10:52 AM)

For common accounting purposes: UN-SNA (System of National Accounts)
GDP is the market value of final goods and services produced in a domestic territory in a specific period of time.
Market Value = Quantity * Price
Unilateral transfers are not a part of GDP because no production activities are happening here. For example, old-age pension, gifts, etc.
Goods for own self-consumption are included because a resource has been used for the same.
Services for own self-consumption are not included because the market value can not be calculated. For example, nursing a child by mother.

Final Goods and Services (11:13 AM)

Goods

Territory

GNP (11:23 AM)

Indians earning in India + (Indian residents outside - Outside residents in India)
National concept (GDP is a territorial concept)
GNP = GDP + NFIA

Please note that GDP and GNP are time-bound concepts. It is not a count of the total wealth of the nation. It is rather a flow concept.

GDP (11:42 AM)

GDP is the market value of all final goods and services produced in a domestic territory in a specific time period.
Market Value is the monetary value of goods and services received for a bilateral exchange in the market.
Therefore, unilateral transfers such as donations, charity, and transfer payments from the government in the form of old-age pensions, scholarships, etc. will not be included.
Subsidies will be included as they aid in production.
Goods produced for own self-consumption will be included as tangible resources are involved in its production and its value can be expressed in monetary terms.
Final goods and services are those which are purchased for final use and are not meant for resale or further processing.

Goods can be classified into:

(A) Consumer Goods
Those goods which satisfy the wants. It includes both durable and non-durable goods.
(B) Producer Goods
Producer goods are those which are used for further production and include producer durables (capital goods) that are not consumed within the process and producer non-durables that are further transformed.
GDP is a territorial concept where the territory includes land and sea boundaries.
Oil vessels and natural gas rigs operated outside India.
Indian embassies abroad
Indian aircraft or Indian ships operating outside India.
Therefore, GDP includes all production activity done by both residents and non-residents within the domestic territory.
In a specific time, period represents the flow of income or expenditures in a particular time frame.
It is not an account of a nation's wealth at any point of time.

Gross National Product (11:52 AM)

GNP is a residential concept where an Indian resident abroad is someone who stays for more than 1 year and has a centre of economic interest outside India's domestic territory.
Therefore, GNP will include the income of Indian residents within India and the income of Indian residents abroad.
It will not include the income of non-residents within India.
GNP = (GDP + Factor Income of Indian residents outside - Factor income of non-residents within India)
GNP = GDP + NFIA
The factor income here is the compensation employees receive- profits, rent, interest, and retained earnings of companies abroad.

TOPIC FOR THE NEXT CLASS: CONTINUATION OF GDP