Chapter-1: Introduction of Economics
Economics is a social science concerned with the production, distribution, and consumption of goods and services. It studies how individuals, businesses, governments, and nations make choices about how to allocate resources.
Branches of Economics
FATHER OF ECONOMICS
Adam Smith is the founding father of modern economics
According to Adam Smith’s Economics is “An Inquiry into the Nature and Causes of Wealth of Nations” in the year 1776
An economy is a system of organization & Institution. It is large set of inter-related production, consumption, and exchange activities that aid in determining how scarce resources are allocated. The production, consumption, and distribution of goods and services are used to fulfill the needs of those living and operating within the economy, which is also referred to as an economic system.
TYPES OF ECONOMY
- Socialist Economy: In the Socialist Economy, as that of the Russia and China, all means of production, farms, factories, etc., are socialized. That is, they belong to the State. There is no private sector; it is all public sector enterprise.
- Capitalist Economy: Such an economy prevails in the U.S.A., the U.K., Western Europe .and most other countries of the world. In this economy, economic decisions regarding production are taken by private entrepreneurs who are solely guided by the expected rate of profit based on consumer’s preferences, actual or anticipated.
- Mixed Economy: In a mixed economy, the private sector (capitalism) and public sector (socialism) exist side by side. There are industries which are owned by private capitalists; there are industries which are owned exclusively by the State; and there are industries in which the State and the private capitalists form partnerships.
The term Macro in English has its origin in the Greek term Makros which means large. In the context of macroeconomics, ‘large’ means economy as a whole. Thus, macroeconomics is defined as that branch of economics which studies economic issues or economic problems at the level of an economy as a whole.
The scope/subject matter of macroeconomics includes:
- Estimation of national income
- Money and banking
- Determination of income and employment
- Government budget and the economy
- Determination of foreign exchange rate
- Balance of payments
Macroeconomics focuses on issue which explain (a) how an economy functions and (b) how can it be regulated such that social welfare is maximized. The knowledge of macroeconomic variables (like national income, aggregate demand, aggregate supply, general price level, etc) is extremely essential in the formulation of policies and programmes for the growth and development of an economy.
Lord John Maynard Keynes, an eminent British economics, played an important role in the development of Macroeconomics. He is called ‘The Father of Modern Macroeconomics’. He wrote a book on Macroeconomics named “The General Theory of Employment, Interest and Money” published in 1936.
IMPORTANCE OF MACROECONOMICS
- It helps in policy formulation of government.
- It helps to understand the distribution of income among different groups of people.
- It has special significance in studying monetary problems that adversely affects the economy.
- It facilitates international comparison.
Economics agents are 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
MAJOR SECTORS OF MACROECONOMICS
- Household sector: It is engaged in the consumption of goods and services and is also the provider of factor services.
- Producing sector: It is engaged in the production of goods and services. It is also referred to as ‘firms’.
- Government sector: It is engaged in such activities which are related to taxation in such activities which are related to taxation and subsidies as well as consumption and production.
- Rest of the word: It is engaged in exports and imports.