Role of State in an Economy?

MEASURES OF NATIONAL INCOME
Measures like GDP, GNP and per capita income are important aspects in understanding the state of any economy and are also required to compare a countrys growth story with any other in the world. The National Income estimates are very valuable in assessing the performance of different production sectors in an economy. National income estimates, throw light on the importance and backwardness of various sectors of the less developed or developing economics and help in formulating appropriate economic policies.

In this chapter we will also try to understand how to calculate GDP and what are the various parameters required for such calculations. More importantly, lets understand what are the latest changes and initiatives taken by India in aligning our statistical calculations with the rest of the world.

Economics?
Economics is the study of how societies use scare resources to produce valuable commodities and distribute them among different people. Economics is a social science that studies human activity aimed at satisfying unlimited needs and wants through the scarce resources.

It is that discipline of study which is concerned with the production, consumption, and transfer of wealth. It encompasses production, distribution, trade and consumption of goods and services.

Difference between Economics and Economy?
In simple words, Economics is the theory, while Economy is the practice.
Economics is a science that studies economies and develops possible models for their functioning, e.g.
He studied economics at college.
Economy is the relationship between production, trade and the supply of money in a particular country or region, so we can say, for example: The Indian economy is in a very good growth phase.

The 2 main branches of Economics?
Micro economics
Macro economics
Macroeconomics and Microeconomics are a pair of terms coined by Ragnar Frisch.

Microeconomics is the study of economics at an individual, group or company level. Microeconomics explores issues such as how families reach decisions about what to buy and how much to save. It also affects how firms, determine how many products to make and at what price to sell, as well as how competitive different industries are and how that affects consumers.

Macroeconomics, on the other hand, is the study of a national economy as a whole. It is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole. This includes national, regional, and global economies.

Macroeconomists study aggregated indicators such as GDP, unemployment rates, national income, price indices, and the interrelations among the different sectors of the economy to better understand how the whole economy functions.

Welfare Economics ?
Welfare economics focuses on the optimal allocation of resources and goods and how the allocation of these resources affects social welfare. This relates directly to the study of income distribution and how it affects the common good.Welfare economics looks at the distribution of resources and how it affects an economys overall sense of well-being. With different optimal states existing in an economy in terms of the allocation of resources, welfare economics seeks the state that will create the highest overall level of social satisfaction among its members.

Behavioral Economics?
The study of psychology as it relates to the economic decision making processes of individuals and institutions. Behavioral economics explores why people sometimes make irrational decisions, and why and how their behavior does not follow the redictions(forecast/expectations ) of economic models.

Role of State in an Economy?
The role and function played by the government or state in a particular economy is very important for us to understand how that economy performs, behaves and is bounded by external factors. There can be three forms
1. Police state
2. Laissez faire state
3. Welfare state

1. Police state ?
It is a state where the state controls all economics activities by force and not really keeping in mind the welfare of the people. Police state is a term denoting a government that exercises power arbitrarily through power. It is an undesirable state of living, characterized by the overbearing presence of the civil authorities in every walk of life.

2. Laissez faire state?
Laissez Faire is French for leave alone which means that the government leaves the people alone regarding all economic activities. It is the separation of economy and state.

3. Welfare state?
A welfare state is a concept of government where the state plays a key role in the protection and promotion of the economic and social well-being of its citizens. It is based on the principles of equality of opportunity, equitable distribution of wealth, and public responsibility for those unable to avail themselves of the minimal provisions for a good life.
Police state and laissez faire, are both not desirable in modern economies. Most of the modern democratic economies are today Welfare states. Communist countries with totalitarian regimes are fine examples of Police states. Excessive welfare policies also ruin the countrys economy with increasing costs and revenue deficits.

Open and Closed economy?
An open economy is an economy in which there are economic activities between the domestic community and outside. People and even businesses can trade in goods and services with other people and businesses in the international community, and funds can flow as investments across the border. Most of the modern capitalist economies like Singapore, Australia are almost absolutely open.
A closed economy is self-sufficient, meaning no imports are brought in and no exports are sent out, the goal being to provide consumers with everything they need, from within the economys borders. Not many countries in the world today are closed, except for probably North Korea to an extent.

Maintaining a closed economy is difficult in modern society, where certain raw materials, such as crude oil, have such a vital role as inputs and final goods; a country is forced to import if these resources are not naturally within its borders. Closed economies run counterintuitive to modern, liberal economic logic, which preaches opening up domestic markets to international markets to capitalize on comparative advantages and gains from trade.

India after independence opted to be more of a socialist economy and therefore was not an Open economy. But after the economic reforms of 1991, India started to Open up slowly and the country is now more an Open economy rather than a Closed one.

Test
1. Issues concerning a company are studied under
A. Micro economics
B. Macro economics
C. Welfare economics
D. Both A and B

2. Arbitrary power is used in which of the following ?
A. Welfare state
B. Laissez faire state
C. Police state
D. All the above

3. A self sufficient economy is best described as
A. Open economy
B. Laissez faire economy
C. Closed economy
D. Welfare economy

4. India immediately after independence was
A. A Capitalistic economy
B. A Socialistic economy
C. An Open economy
D. A Mixed economy

5. Which of the following is considered a literary work?
A. Study of Economics
B. Study of Economy
C. Study in Finance
D. Both b and c

Answers :
1.C, 2.D, 3.B, 4.A, 5.B