Economy Basics

All of us want to earn our income in order to spend and save (thereby increasing our economic wealth and well being). Income earning, spending and saving are called Economic Activities. These activities are interrelated and interdependent.
For income generation, goods and services are produced (Production process) from resources. Mere possession of resources does not entail income or wealth. So in production process or flow of production, human resources gets combined with natural and manmade environment with certain social and technological structure.
Part of the income is spent on these products by consumers (Consumption) and rest goes to savings (investment).

Economics is the discipline that studies the economic activities of mankind.
&
Economy is the system where these activities take place.

Economy provides - 

• Goods
• Intermediate Goods   [by the economic nature of its use]
• Finished/ Final Goods  [by the economic nature of its use]
• Producer (or Capital) goods [constitutes the total investment]
• Consumer goods
• Single use
• durable
• Services 
• Producer
• Single use
• Consumer
• Single use

Vital Processes or Activities of Economy

Production

Consumption

Investment through Savings

Stock investment
Fixed investment

The part of final goods that are capital goods constitute Gross Investment of an economy.

Net Investment = Gross Investment - Depreciation

Saving = Income - Consumption Expenditure

Savings are routed to investment via Financial Intermediaries.

Sectors of Economy

Economic Activities are broadly classified into different categories which are known as sectors of economy.

Primary Sector - comprises all those economic activities that use various natural resources. 

Secondary Sector - comprises all those economic activities that uses output of primary sector as raw materials.

Tertiary Sector - It is like a horizontal providing services to all the above sectors.

Types of Economy 

Classification is based on i) relative contribution of particular sector in total production and ii)ration of dependent population on the sector.

Agrarian Economy

Industrial Economy

Service Economy

constitute different stages in the growth of an economy.

National Income

Three methods to measure this.

i)   Income method

ii)   Expenditure method

iii)  Product Method

GDP, NDP, GNP, NNP

GDP = Gross value of all the goods and services produced in the territory of a country (India) during a period of time (generally for a year)

NDP = GDP - Depreciation

GNP = GDP + Net Factor income from abroad 

Net Factor income from abroad = Factor income by domestic factors of production (Indian resources) employed abroad - 
Factor income by foreign factors of production employed in India

NNP = GNP - Depreciation

All these measures can be evaluated - 

i) at factor cost

ii) at market price (factor price/market price = factory price + ex-factory price)

NNPFC = NI = NNPMP - Indirect Taxes + Subsidies

NI = PI + UP + Corporate Tax + Net interest Payments - Net Transfers

PI = PDI + Tax payments + Non-tax payments

National Disposable Income = NNPMP + other current transfers from abroad

In India and in most developing economies, income is calculated at factor cost. why?

The price can be constant or current.

Again India (and most developing economies) calculate income at constant prices. why?

Income of a person or the country can be

• Nominal (measured at current prevailing prices)
• Real      (measured at constant prices) 
• Disposable

GDP Deflator = Nominal GDP/ Real GDP

GDP Deflator is a measure of change in prices. Other two being 

• WPI
• CPI
• for rural
• for urban
• for both

New Changes in the National Income Calculation

Jan 2015 : CSO changed 

• base year from 2004-05 to 2011-12
• methodology

Result : Revised GDP for FY2014-15 is 7.4%, up by 1.5% from 2013-14

Skepticism because

• new manufacturing GDP includes not only the value of production of a business unit, but also distribution (marketing and selling) costs. So, the share of corresponding services should have been reduced
• macroeconomic indicators do not show a significant positive change : The rate of Gross Fixed capital Formation (GFCF) has fallen over the year w.r.t GDP
• lack of clarity