Economics: Basic Concepts and the Indian Economy
This domain tests core economic reasoning - scarcity, choice, cost - and how the Indian economy is organised: sectors, money and banking, poverty and public finance.
Foundations
- Microeconomics studies individual units (a household, a firm); macroeconomics studies aggregates (national income, employment, price level).
- Scarcity forces choice, and every choice carries opportunity cost - the next best alternative given up.
- Utility is want-satisfying power; keep 'value in use' apart from 'value in exchange', which is price.
- Factors of production: land, labour, capital and the entrepreneur.
The Indian economy
Sectors: primary (agriculture, mining), secondary (manufacturing), tertiary (services). India adopted a mixed economy - public and private sectors together - formalised by the Industrial Policy Resolutions of 1948 and 1956; the 1991 reforms liberalised, privatised and globalised the economy. Money acts as medium of exchange, measure of value, store of value and standard of deferred payment; the RBI, established in 1935 and nationalised in 1949, issues currency and controls credit. Poverty is measured against a poverty line; public finance covers the budget, direct taxes (on income, not shiftable) and indirect taxes such as GST (2017).
Worked example
National income is ₹200 lakh crore and population is 100 crore. What is per capita income, and what happens if population grows faster than income? Per capita income = 200,00,000 crore ÷ 100 crore = ₹2 lakh. If population rises faster than national income, the same income is shared among more people, so per capita income falls - a reminder that growth must outpace population growth.
Traps
Using GDP and GNP interchangeably; confusing balance of trade with balance of payments; calling GST a direct tax; treating value in use as market price; describing India as purely capitalist; counting intermediate goods in national income.