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GROWTH AND DEVELOPMENT
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• Macroeconomics, as a separate branch of economics, emerged after the British economist John Maynard
Keynes published his celebrated book The General Theory of Employment, Interest and Money in 1936.
• Macroeconomics is a branch of economics that studies how an overall economy—the market systems that
operate on a large scale—behaves. Macroeconomics studies economy-wide phenomena such as inflation, rate
of economic growth, national income, gross domestic product (GDP), and changes in unemployment
Economic agents
• By economic units or economic agents, we mean those individuals or institutions which take economic
decisions. They can be consumers who decide what and how much to consume. They may be producers of
goods and services who decide what and how much to produce. They may be entities like the government,
corporation, banks which also take different economic decisions like how much to spend, what interest rate to
charge on the credits, how much to tax, etc.
Four (broadly defined) economic actors are:
• Households
• Firms
• Governments
The Rest of the World
• They are the inputs needed for supply. They produce all the goods and services in an economy. The four factors
of production are land, labor, capital, and entrepreneurship.
Circular flow of income
Two sector model
• The households receive their payments from the firms for productive activities they perform for the latter.
• As we have mentioned before, there may fundamentally be four kinds of contributions that can be made during
the production of goods and services:
• Contribution made by human labour, remuneration for which is called wage.
• Contribution made by capital, remuneration for which is called interest.
• Contribution made by entrepreneurship, remuneration of which is profit.
• Contribution made by fixed natural resources (called ‘land’), remuneration for which is called rent.
• In this simplified economy, there is only one way in which the households may dispose off their earnings – by
spending their entire income on the goods and services produced by the domestic firms.
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Economic growth
• Economic growth refers to an increase in the size of a country’s economy over a period of time. The time period
may be a quarter (3 months), half-a- year (6 months) or a year (12 months). The size of an economy is typically
measured by the total production of goods and services in the economy, which is called gross domestic product
(GDP).
• Before coming to what is GDP and how is it measured, let us first understand about Goods and Services.
What are goods
• A commodity, or a physical, tangible item that satisfies some human want or need, or something that people
find useful or desirable and make an effort to acquire it.
Classification of goods
Economic goods and free goods
Economic goods
• Economic goods are those goods (manmade or free gifts of nature) whose demand is more than supply (i.e.
they are scarce). They command a price and they can be bought in the market.
• Example: toothpaste, soap, shaving cream, footwear, bread, machines, buses, table, chair, books, fans,
television etc.
Free goods
• We can define free goods as goods which possess utility but which are not scarce.
• Free goods are free gifts of nature. They are available in abundance i.e. in unlimited quantity and the supply is
much more than the demand.
• Example: Sand, clean air, water etc.
Consumer goods and producer goods
Consumer goods
• Consumer goods are those goods, which satisfy the want of consumers directly. They are goods, which are used
for consumption.
• Example: bread, fruits, milk, clothes etc.
Producer goods
• Producer goods are those goods, which satisfy the want of consumers indirectly. As they help in producing
other goods, they are known as producer goods.
• Example: machinery, tools, raw materials, seeds, manure and tractor etc are all example of producer goods.
Single use and durable use goods
Single use goods
• Single use goods are those goods, which can be used only once. They are finished in one use itself.
• Example: bread, butter, egg, milk etc are the single use consumer goods as they are consumed immediately
and once and for all.
• Similarly, single use producer goods are exhausted in one production process. Example: coal, raw material,
seeds, manure etc.
Durable use goods
• Durable use goods are those goods, which can be used again and again for a long period of time. There are
durable use consumer goods as well as durable use producer goods.
• Durable use consumer goods are cloth, furniture, television, scooter etc. that can be used by consumer again
and again.
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• Durable use producer goods are used in production again and again for example, machines, tools, tractors and
implements etc. This does not mean that repeated use of these goods does not make any difference to them.
• In fact, the value of these goods gets depreciated after continuous use.
Private goods and public goods
Private goods
• All goods that are privately owned and are exclusively enjoyed by individuals are called private goods. For
example, all the goods owned by you are private goods.
• Examples: watch, pen, scooter, books, table, chair, bed, clothes etc. If you own a factory then its building,
machinery; tools etc are your private goods.
Public goods:
• Public goods are those goods, which are owned and enjoyed by the society as a whole. They are available to all
people in a society without any discrimination, i.e. no one is denied from the consumption of public goods.
• Both government and private entrepreneurs may produce public goods, but it is usually the former.
• Example: roads, bridges, park, town hall etc. are all collectively owned.
• Economists refer to public goods as "non-rivalrous" and "non-excludable," and most such goods are both.
• Their non-rivalry refers to the fact that the goods don't dwindle in supply as people consume them; a country's
defenses, for example, do not run out or diminish as its population grows.
• Non-excludability means just that; the good is available to all and cannot be withheld, even from people who
do not contribute to its public funding.
• That characteristic, in turn, leads to what is called the free-rider problem with public goods. Since you need not
contribute to the provision of a public good to benefit from it, some people will inevitably choose to use the
good and yet shirk the public responsibility to help pay for it.
Intermediate goods
• Intermediate Goods – What are they? How are they different from Consumer Goods and Capital Goods? Are
they factored in calculating Gross Domestic Product?
What are intermediate goods
• An intermediate good is a product used to produce a final good or finished product—also referred to as a
consumer good.
• Intermediate goods are vital to the production process, which is why they are also called producer goods.
Industries sell these goods to each other for resale or to produce other goods.
• These goods are also called semi-finished products because they are used as inputs to become part of the
finished product. When they are used in the production process, they are transformed into another state.
Intermediate goods versus consumer and capital goods
• Intermediate goods can be used in production, but they can also be consumer goods. How it is classified
depends on who buys it.
• If a consumer buys a bag of sugar to use at home, it is a consumer good (final good). But if a manufacturer
purchases sugar to use during the production of another product, it becomes an intermediate good.
• Capital goods, on the other hand, are assets that are used in the production of consumer goods. Key thing to
note about capital goods is that they don’t transform, or change shape in the production process.
Distinction between goods and services
• Goods are tangible in nature i.e. they can be seen and touched. Services are non-tangible in nature i.e. they
can neither be seen nor be touched.
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• There is a time gap between production and consumption of goods as they are produced first and consumed
later. There is no time gap between the production and consumption of services. That is why they are produced
and consumed simultaneously.
• Goods can be stored and utilized when required. Services cannot be stored.
• Goods can be transferred from one place to another. Transfer of service is not possible.