What Is an Economy?

Notes

An economy is a system through which a society produces, distributes and consumes goods and services using scarce resources. The central problem is scarcity and choice: every economy must decide what to produce, how to produce and for whom to produce.

Factors of production: land (earns rent), labour (wages), capital (interest) and entrepreneurship (profit).

Branches: Microeconomics studies individual units (households, firms, markets); Macroeconomics studies the economy as a whole (GDP, inflation, unemployment, money supply). The terms were coined by Ragnar Frisch (1933). Landmarks: Adam Smith, The Wealth of Nations (1776); J.M. Keynes, The General Theory (1936).

Types of economies

Capitalist (market) economy: private ownership, prices decide allocation (the USA).
Socialist (command) economy: the State owns and plans (the former USSR).
Mixed economy: public and private sectors coexist. India is a mixed economy.
Traditional economy: custom-based, subsistence.

Sectors of the economy

Primary: agriculture, mining, fishing. Secondary: manufacturing, construction, power. Tertiary: services (trade, banking, transport, IT). Services form the largest share (more than half) of India's Gross Value Added, but agriculture still employs the largest share of workers.
By ownership: public, private, joint. By organisation: organised and unorganised (the majority of workers).

India's economic journey

Industrial Policy Resolutions of 1948 and 1956: the public sector at the "commanding heights"; planning through Five-Year Plans (1951-2017) under the Planning Commission, replaced by NITI Aayog (January 2015).
1991 reforms: after the balance-of-payments crisis, liberalisation, privatisation and globalisation (LPG) were introduced (Prime Minister P.V. Narasimha Rao and Finance Minister Manmohan Singh).

Key economic indicators: GDP, per capita income, inflation, unemployment, fiscal deficit, current account deficit, and human development measures.

Key Points

Economy: production, distribution and consumption under scarcity.
Factors of production: land, labour, capital, entrepreneurship.
Types: capitalist, socialist, mixed (India), traditional.
Sectors: primary, secondary, tertiary.
1991: LPG reforms; Planning Commission replaced by NITI Aayog (2015).

MCQs

Q1. The terms "microeconomics" and "macroeconomics" were coined by:
(a) Adam Smith
(b) Ragnar Frisch
(c) J.M. Keynes
(d) Alfred Marshall
Ans: (b)

Q2. India is a:
(a) Capitalist economy
(b) Socialist economy
(c) Mixed economy
(d) Traditional economy
Ans: (c) .

Q3. The Planning Commission was replaced by NITI Aayog in:
(a) 1991
(b) 2000
(c) 2015
(d) 2017
Ans: (c) . January 2015.