Basics of Economics: Growth, development and HDI

NCERT divides economics into two broad branches. Microeconomics studies the behaviour of individual economic agents (consumers and firms) in the markets for particular goods and services, and how prices and quantities are determined through their interaction. Macroeconomics studies the economy as a whole through aggregate measures such as total output, employment and the aggregate price level, and asks how these are determined and how they change over time. Question 1 is about the price of one commodity in one market, so it is microeconomic. Question 2 concerns total output and employment, the core aggregates of macroeconomics. Question 3 asks why the general price level rises, which NCERT itself lists among the questions studied in macroeconomics; the price of a single good is micro, but the overall price level is macro. Question 4 is a single firm's output decision and so belongs to microeconomics. Hence only two of the four questions, 2 and 3, are macroeconomic.

The PPF shows the maximum combinations of two goods that an economy can produce when its given resources are fully and efficiently used with a given stock of technology. NCERT states that a point strictly below the frontier is a combination produced when some resources are under-employed or utilised in a wasteful fashion, so statement 1 is correct. OpenStax explains the outward-bowed shape through the law of increasing opportunity cost: resources are not equally suited to every product, so as more resources are shifted into one good, each extra unit costs more units of the other good; statement 2 is correct. Statement 3 is wrong because full employment of the existing resources takes the economy only up to the frontier, not beyond it. A combination outside the PPF is unattainable with present resources and technology; it becomes possible only if the frontier itself shifts outward through more resources, better technology or more capital. That is why economic growth is shown as an outward shift of the PPF, not as a movement to a point outside it.

The three-sector model divides an economy into the extraction of raw materials (primary), manufacturing (secondary) and services (tertiary). Many economists argue that in a modern economy the generation, analysis and dissemination of information is important enough to warrant a separate category, the quaternary sector. It is based on intellectual or knowledge-based activity: information technology, media, research and development, information-based services, and knowledge-based services such as consultation, education and financial planning. Some definitions go further and place top-level decision-making and pure services in a quinary sector. Unlike the sequence implied by the three-sector model, the quaternary sector does not process the output of the tertiary sector, and it has only limited and indirect links to industrial production. It grows in highly developed economies where primary and secondary activities are a minority and it requires a highly educated workforce. In India's official statistics such activities are still counted within services, but the quaternary label is widely used in economics and geography to describe the knowledge economy.

NCERT traces a common pattern in the now-developed countries: at the initial stages of development the primary sector was the most important; as farming improved, people moved into crafts, trade and transport, and with new manufacturing methods the secondary sector became the most important in production and employment; over the past hundred years there has been a further shift to the tertiary sector. Statement 1 is correct. For India, the chapter shows that the tertiary sector emerged as the largest producing sector, replacing the primary sector, but it stresses that 'a similar shift has not taken place in employment': the primary sector continued to be the largest employer. Statement 2 claims the opposite and is wrong. Among the reasons NCERT gives for the rising importance of services are the need for basic services that the government must provide, rising incomes that create demand for eating out, tourism and private schools, new ICT-based services, and the point in statement 3: the development of agriculture and industry leads to more demand for transport, trade and storage. Statement 3 is correct.

Opportunity cost is the value of the next best alternative forgone when a resource is used in one way. NCERT notes that the concept applies to individuals as well as to society, and that it is so central that it is sometimes called the economic cost. A zero price at the counter only changes who pays; it does not make the resources costless. The surgeon's time, the operation theatre, the drugs and the money in the hospital budget could have been used for other patients, for schools or for roads, and that forgone output is the cost to society. Statement-I is therefore correct. Statement-II states precisely why: the inputs have alternative uses, and the best of those uses is what society gives up. Because the second statement is the reason the first holds, Statement-II correctly explains Statement-I. The same logic shows why a free public service is financed by taxpayers or by cuts elsewhere in the budget: the patient does not bear the cost, but the economy does.

Because resources are scarce and have alternative uses, every society must settle three central questions. NCERT's Introductory Microeconomics lists them as what to produce, how to produce and for whom to produce. The 'how' question is about techniques of production: how much of which resource to use, whether to use more labour or more machines, and which technology to adopt, so statement 1 is correct. The 'for whom' question is about distribution: who gets how much of the output, whether a minimum consumption is assured to everyone, and, in NCERT's own words, whether elementary education and basic health services should be freely available; statement 2 is therefore correct. Statement 3 misplaces a choice of output mix. Whether to produce more consumption goods today or more investment goods such as machines, which raise production tomorrow, is a decision about what to produce, exactly like the choice between food and clothing or between agricultural and industrial goods. Together, allocation of scarce resources and distribution of the final goods are the central problems of any economy.

The three-sector model divides economies into the extraction of raw materials (primary), manufacturing (secondary) and services (tertiary). It was developed by Allan Fisher, Colin Clark and Jean Fourastié in the first half of the twentieth century. According to the model, the main focus of an economy's activity shifts from the primary through the secondary and finally to the tertiary sector: countries with low per capita income earn most of their income in the primary sector, middle-income countries mostly in the secondary sector, and in high- income countries the tertiary sector dominates. Fourastié saw the process as broadly positive, expecting the service sector to absorb labour released by productivity gains in farming and industry. The model has been criticised as a representation of an industrial economy that does not fit the twenty-first century well, which is one reason why quaternary and quinary sectors were later proposed. NCERT's Class X textbook describes the same historical shift for the now- developed countries without naming the authors. The other groups are associated with different ideas: terms-of-trade pessimism and cumulative causation, growth models, and balanced or unbalanced growth.

Economists classify technological progress by which factor it effectively augments, and three names are standard. An innovation is Harrod-neutral, after Roy Harrod, if the technology is labour-augmenting, that is, it helps labour, so that a given workforce produces as much as a larger workforce would have done with the old technology. It is Solow-neutral, after Robert Solow, if the technology is capital-augmenting, so that a given stock of machines works like a larger stock. It is Hicks-neutral, after John Hicks (1932), if the change in technology does not change the ratio of capital's marginal product to labour's marginal product for a given capital-to-labour ratio; it raises the productivity of both factors in the same proportion. These labels are easily confused, which is why UPSC has tested the idea through examples. In 2015 it asked what kind of progress the substitution of steel for wooden ploughs represents, and its answer was capital-augmenting progress, since a better tool makes each unit of capital more productive. Labour-augmenting progress is the counterpart on the labour side, as with better skills or work methods. Capital-reducing progress is not one of the three standard neutrality concepts.