Chapter 1

BASIC PRINCIPALS OF ECONOMICS

ECONOMIES OF GROWTH: Economies of growth--- economies of development Growth and development are not exactly same but related to each other Definition: economic growth implies both, more output and changes in technical and institutional arrangements by which it is produced Or refers to the process, whereby the people of any country or region come together to utilize the resources available to bring about an increase in per capita production of goods and services Or it is a process, whereby real per capita income of country increases over a long period of time Or it concerns not only mans material needs but also improvement of social conditions of his life.
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Development is therefore not only economic growth but growth plus change---social, cultural, institutional and economic Features of economic growth: 1. Growth activity: brings about continuous growth in vital variables like income, output, trade, consumption, employment etc. 2. Rise in real income: leads to real rise in national or per capita income over a long period of time 3. Resource allocation: optimum (fully and properly) utilization of scarce resources like, natural, human and manmade 4. Long term process: not a short term process but requires a long period may be more than decade 5. Technical changes: part and parcel of process of economic development; bridges up the gap between developed and backward countries

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6. Non-economic changes: emphasizes the need for changes in non-economic aspects (social, cultural, institutional, etc.) Growth V/s Development: Both are complementary ; broadly speaking, are little different in meaning Growth---theoretical policy oriented activity Growth---quantitative change; Development--qualitative improvements Growth---spontaneous and matter of chance; Development----conscious and deliberate Growth---necessary but not sufficient condition for development Growth---associated with developed countries; Development---associated with backward countries Growthmere increase in output; Development--progressive improvement in technical knowledge and application concept; Development---

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 Growth--- increase in volume of economic quantities, steady and gradual; Development--- due to innovations, discontinuous, establishes new higher position of equilibrium Determinants of Growth: All sectors of economy should contribute to raise production and productivity Depends upon quantity and quality of productive resources Abundant and efficient sources---not the only determinant (A) Economic Determinants: Have primary significance 1. Natural resources: Most basic consideration; Adequate and good quality of land, forest resources, minerals---proper utilization; large quantity and high quality; optimum exploration

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Deficiency of natural resources---can be overcome by superior technology, scientific researches, advanced knowledge 2. Human resources: Not only quantity but quality and efficiency is key factor; Developed by proper training, education, and providing medical and other facilities; labor productive efficiency improved; regulating the population size with increasing skills and capacity. 3. Role of capital: Most vital determinant; rate of its formation should be accelerated; leads to technological progress, increased employment, output and income; can improve basic facilities like transport, power and education; Leads to rapid industrialization, market expansion and rapid exploration of resources

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4. Enterprise: Another vital determinant; Entrepreneur---introduces innovations and leads the economy on path of prosperity; proper utilization of resources 5. Technology: Changes production methods, improves economy; Discovers unknown resources; decrease processing cost and increase o/p; materials are economically extracted (B) Non-economic determinants: Economic development has much to do with human endowments, social attitudes, political conditions and historical accidents Determinants of growth are aptitudes, abilities, qualities, capacities & facilities, attitudes, morals, values, objectives, motivation, institutions and political arrangements 1. Religious and cultural determinants: Plays a role in shaping attitudes of society May help or harm economic development of backward countries
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 Nonconductive to economic development Society starts depending upon GOD for good and bad that happens Extreme reliance on destiny---results in laziness and fatalist Beyond the limit involvement in festivals and cultural activities--- wastes man hours reduce & productive activity Huge expenditure on customs and traditions, restricts growth Doesnt mean that values and traditions should be totally give up BUT Instead new religious and cultural ideas assisting development should be adopted; essential flexibilities in this should be adopted 2. Social values and institutions: Certain social attitudes like caste system----kills skills, talent, intelligence, abilities of people in general and of young generation in particular---hence, should be avoided----loss to individual as well economy as whole
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3. Political factors: Stable, efficient, honest, strong will power to overcome challenges----required qualities of politics for countrys economic growth Peace, stability, legal protection----provides incentive to entrepreneurs Govt.---should offer proper services of law and order, protection, justice, defense, freedom---- stimulates economic growth Stages of Growth or Rostows Theory of growth: Six motivational tendencies----must grow in developing countries---stimulates not only economical growth, but improves social, cultural and political conditions. They are: Tendency to 1. develop fundamental science 2. apply science to economic needs 3. accept innovations 4. seek material advance 5. consume high
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6. have children Stages of Growth: 1. Traditional societies: its structure is developed within limited production functions generally undeveloped or backward economy use pre-Newtonian scientific and technical devices economy use simple tools and produces to satisfy domestic needs agriculture is main productive activity adopts ad-hoc innovations confined to agriculture economies---subject to diminishing marginal rate of returns tendency peoples---shows greater interest in spiritual and religious progress rather than economic (material) advancements top class landlords and aristocrats dominates and enjoys all economic, political and social power, by utilizing societys wealth 2. Preconditions of take-off:
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 traditional rigidities and backward conditions start breaking down economic changes start slowly emerging mobility of labor and other resources in social, geographical and occupational spheres of life grows transport and commerce develops not proper beginning of economic development but creates conditions for future development progress of modern education, growth of enterprise, capital formation, starts into motion extension of national and international trades thus slow changes in attitudes and organizations take place 3. Take off stage: developing economy is expected to take off with high speed as like aero plane starts accumulating capital in substantially high proportion of national income economy has to continue to save and invest at such a high rate for 2-3 decades
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 producersmake large profit---reinvestcreates new employment rapid growth rate of investment (5 to 10% or above of national income) leading manufacturing sectors starts growing social and political frameworks change prominently growth rate of income very well exceeds growth rate of population----improves per capita income 4. Drive to maturity: stage during post take off period application of modern technology to bulk of its resources advanced activities---ship building, large scale chemical production, etc, starts rate of growth of investment almost doubles (10 to 20% of national income) growth rate of income sufficiently high than that of population composition of international trade substantially improves
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 export and import increases growth becomes an automatic and routine matter with every economic sector without any special effort workers skill improves substantially dependence on agriculture and primary activities reduces from 80 to 20% traditional capitalists gives way to more efficient and better managers attitudes of politicians and economic leaders change industrial progress becomes a matter of habit rather than a miracle 5. Stage of high consumption: economy---after maturity, goes to level of perfectly advanced society national and per capita income goes much high and keeps growing level of consumption (food, energy, luxury etc.) substantially rises country develops strong sense of superiority and dominance
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 military expenditure increases considerably country enjoys high level of economic welfare

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