According to the Latest Syllabus Prescribed by Central Board ofDr. Abhijit Das Dedication I dedicate this book to my beloved wife Sutapa, without her active support, patience and perseverance

According to the Latest Syllabus Prescribed by Central Board ofSecondary Education and NCERT

INTRODUCTORY STATISTICSFOR ECONOMICS AND INDIAN

ECONOMIC DEVELOPMENT(CLASS-XI CBSE)

Dr. Abhijit Das(M.Sc., M.Phil, Ph.D.)

Head of the Department of EconomicsVijoygarh Jyotish Ray College

Kolkata, West BengalFormerly

Assistant ProfessorDepartment of Economics

Kandi Raj College, Kandi, Murshidabad.

Dr. Kalyan Basu(M.Sc., B.Ed., Ph.D.)

Senior Teacher and MentorHead of the Department of Economics

Delhi Public School, MegacityKolkata, West Bengal.

MUMBAI NEW DELHI NAGPUR BENGALURU HYDERABAD CHENNAI PUNE LUCKNOW AHMEDABAD ERNAKULAM BHUBANESWAR INDORE KOLKATA GUWAHATI

© AuthorsNo part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form orby any means, electronic, mechanical, photocopying, recording and/or otherwise without the priorwritten permission of the publisher.

First Edition : 2015

Published by : Mrs. Meena Pandey for Himalaya Publishing House Pvt. Ltd.,“Ramdoot”, Dr. Bhalerao Marg, Girgaon, Mumbai - 400 004.Phone: 022-23860170/23863863, Fax: 022-23877178E-mail: [email protected]; Website: www.himpub.com

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DTP by : SunandaPrinted at : M/s Sri Sai Art Printer Hyderabad. On behalf of HPH.

DedicationI dedicate this book to Munna, Rup, Kutu, Shreya and Tubu

Dr. Abhijit Das

DedicationI dedicate this book to my beloved wife Sutapa, without her active support,

patience and perseverance it would not have seen the light of the day.

Dr. Kalyan Basu

PrefaceIt is immense pleasure on our part to bring out the first edition of Himalaya

Publication’s ‘Introductory Statistics for Economics and Indian Economic Development’ forthe students of Class XI CBSE. The edition has been prepared strictly according to thesyllabus of Economics prescribed by Central Board of Secondary Education (Delhi) andNCERT. Our book is very compact, concise, to the point and strictly based on CBSE syllabus.This book is remarkable due to its lucidity of expression and right choice of direction. Thisbook is enriched with economic explanation of both microeconomics and macroeconomicideas with real-life examples, diagrams, mathematical formulae and derivation along withnumerical problems – solved and unsolved and CBSE question scanners with appendix. Weare very much confident that this book is going to cater the needs of young scholars andrespected teachers of several reputed institutions. We sincerely invite suggestions forimprovement from all readers of the book, teachers and students alike.

We are deeply indebted to those who have sincerely helped us in making our dreamcome true. Our heartful gratitude to the Principal and other Professors and Students ofKandi Raj College, Kandi, Murshidabad as well as all the Managing Committee members,Pro-vice Chairman (Mr. Vijay Agarwal), Principal (Mrs. Indrani Sanyal), Head Mistress,Co-ordinator, Mentors, Teachers and Staffs of the Delhi Public School, Megacity, Kolkata fortheir moral support and co-operation to complete this work. We express our special thanksto Mr. Sumitro Sanyal for his co-operation.

We are thankful and appreciative of the creative mindset of the publisherM/s Himalaya Publishing House Pvt. Ltd. for bringing out this book in an attractive format.We are also thankful to Mr. Vijay Pandey and Mr. N.K. Mitra, Regional Manager as well asthe production department of HPH.

Dr. Abhijit DasDr. Kalyan Basu

SyllabusCentral Board of Secondary Education, Delhi (Class XI)

Paper I 3 Hours 100 Marks

Units Periods MarksPART A: STATISTICS FOR ECONOMICS1. Introduction 5 32. Collection, Organisation and Presentation of Data 25 123. Statistical Tools and Interpretation 64 304. Developing Projects in Economics 10 5

104 50PART B: INDIAN ECONOMIC DEVELOPMENT5. Development Policies and Experience (1947-90) 18 106. Economic Reforms since 1991 14 87. Current Challenges Facing Indian Economy 60 258. Development Experience of India – A Comparison with

Neighbours12 7

104 50

PART A: STATISTICS FOR ECONOMICSIn this course, the learners are expected to acquire skills in collection, organisation and

presentation of quantitative and qualitative information pertaining to various simpleeconomic aspects systematically. It also intends to provide some basic statistical tools toanalyse and interpret any economic information and draw appropriate inferences. In thisprocess, the learners are also expected to understand the behaviour of various economic data.

Unit 1: Introduction 5 PeriodsWhat is Economics?Meaning, Scope and Importance of Statistics in Economics.

Unit 2: Collection, Organisation and Presentation of Data 25 PeriodsCollection of Data: Sources of Data, Primary and Secondary, How Basic Data

is Collected?, Methods of Collecting Data, Some Important Sources of SecondaryData, Census of India and National Sample Survey Organisation.

Organisation of Data: Meaning and Types of Variables; FrequencyDistribution.

Presentation of Data: Tabular Presentation and Diagrammatic Presentationof Data: (i) Geometric Forms (Bar Diagrams and Pie Diagrams), (ii) FrequencyDiagrams (Histogram, Polygon and Ogive) and (iii) Arithmetic Line Graphs(Time Series Graph).

Unit 3: Statistical Tools and Interpretation 64 Periods(For all the numerical problems and solutions, the appropriate economic

interpretation may be attempted. This means, the students need to solve theproblems and provide interpretation for the results derived).

Measures of Central Tendency: Mean (Simple and Weighted), Median andMode.

Measures of Dispersion: Absolute Dispersion (Range, Quartile andDeviation, Mean Deviation and Standard Deviation); Relative Dispersion (Co-efficient of Quartile Deviation, Co-efficient of Mean Deviation, Co-efficient ofVariation); Lorenz Curve: Meaning and its Applications.

Correlation: Meaning, Scatter Diagram, Measures of Correlation, KarlPearson’s Method (Two Variables Ungrouped Data), Spearman’s RankCorrelation.

Introduction to Index Numbers: Meaning, Types – Wholesale Price Index,Consumer Price Index and Index of Industrial Production, Uses of IndexNumbers; Inflation and Index Numbers.

Some Mathematical Tools Used in Economics: Equation of a Line, Slope of aLine, Slope of a Curve.

Unit 4: Developing Projects in Economics 10 PeriodsThe student may be encouraged to develop projects, which have primary

data, secondary data or both. Case studies of a few organisations/outlets mayalso be encouraged. Some of the examples of the projects are as follows (they arenot mandatory but suggestive):

(i) A report on demographic structure of your neighbourhood;(ii) Consumer awareness amongst households;(iii) Changing prices of a few vegetables in your market;(iv) Study of a cooperative institution: milk cooperatives.The idea behind introducing this unit is to enable the students to develop

the ways and means by which a project can be developed using the skills learnedin the course. This includes all the steps involved in designing a project startingfrom choosing a title, exploring the information relating to the title, collection ofprimary and secondary data, analysing the data, presentation of the project andusing various statistical tools and their interpretation and conclusion.

PART B: INDIAN ECONOMIC DEVELOPMENT

Unit 5: Development Policies and Experience (1947-90) 18 PeriodsA Brief Introduction of the State of Indian Economy on the Eve of

Independence.Common Goals of Five Year Plans.Main Features, Problems and Policies of Agriculture (Institutional Aspects

and New Agricultural Strategy, etc.), Industry (Industrial Licensing, etc.) andForeign Trade.

Unit 6: Economic Reforms since 1991 14 PeriodsNeed and Main Features: Liberalisation, Globalisation and Privatisation; An

Appraisal of LPG Policies.

Unit 7: Current Challenges Facing Indian Economy 60 PeriodsPoverty: Absolute and Relative, Main Programmes for Poverty Alleviation:

A Critical AssessmentRural Development: Key Issues, Credit and Marketing – Role of

Cooperatives; Agricultural Diversification; Alternative Farming – OrganicFarming.

Human Capital Formation: How People Become Resource?, Role of HumanCapital in Economic Development and Growth of Education Sector in India.

Employment: Formal and Informal, Growth and Other Issues, Problems andPolicies.

Inflation: Problems and Policies.Infrastructure: Meaning and Types, Case Studies, Energy and Health,

Problems and Policies – A Critical Assessment.Sustainable Economic Development: Meaning, Effects of Economic

Development on Resource and Environment Including Global Warming.

Unit 8: Development Experience of India: A Comparison with Neighbours 12 PeriodsIndia and PakistanIndian and ChinaIssues: Growth, Population, Sectoral Development and Other Development

Indicators.

Contents1. Introduction to Economics and Statistics 1 - 20

1.1 Introduction1.2 Economy1.3 Economic and Non-economic Activities1.4 Definition of Economics1.5 Wealth Definition

1.5.1 Important Characteristics of Smith’s Definition1.5.2 Criticism

1.6 Welfare Definition1.6.1 Important Characteristics Marshall’s Definition1.6.2 Criticism

1.7 Comparative Study between Marshall’s and Smith’s Definition1.8 Scarcity Definition

1.8.1 Important Characteristics of Robbins’ Definition1.9 Comparison between Robbins’ Definition and Marshall’s Definition

1.10 Growth-oriented Definitions1.10.1 Important Characteristics of Samuelson’s Definition

1.11 Nature of Economics1.11.1 Economics as a Science1.11.2 Economics and Positive Science1.11.3 Economics and Normative Science1.11.4 Economics as an Art

1.12 Micro and Macro Economics – An Introduction1.13 Meaning of Micro and Macro Economics1.14 Importance of These Two Branches in the History of Economics Literature1.15 What is Micro Economics?1.16 Importance or Usefulness of Micro Economics1.17 Limitations of Micro Economics1.18 What is Macro Economics?1.19 Importance or Usefulness of Macro Economics1.20 Limitations of Macro Economics1.21 Difference between Micro and Macro Economics1.22 Meaning of Statistics1.23 Definition of Statistics1.24 Scope of Statistics1.25 Importance of Statistics in Economics1.26 Limitations of Statistics1.27 Statistical Techniques Used in Economic Analysis1.28 Stages of Statistical Study

Summary Assignments

2. Collection of Data 21 - 402.1 Introduction2.2 Statistical Enquiry2.3 Data

2.3.1 Sources of Data2.3.2 Types of Data2.3.3 Difference between Primary Data and Secondary Data2.3.4 Methods of Collecting Primary Data2.3.5 Methods of Collecting Secondary Data

2.4 Concept of Population and Sample2.5 Qualities of a Good Sample2.6 Techniques of Data Collection2.7 Questionnaire: An Instrument of Data Collection

2.7.1 What is Questionnaire?2.7.2 Qualities of a Good Questionnaire

2.8 Methods of Sampling2.9 Statistical Errors

2.10 Quantitative Data (Variable) and Qualitative Data (Attribute) Summary Assignments

3. Organisation of Data: Classification 41 - 583.1 Introduction3.2 Classification of Data3.3 Characteristics of a Good Classification3.4 Purpose or Objective of Classification of Data3.5 Types of Classification3.6 Classification of Data and Tabular Presentation3.7 Statistical Series and Its Methods of Classification3.8 What is Frequency Distribution?3.9 Useful Terms Associated with Grouped Frequency Distribution

3.10 How Should we Get the Frequency of Each Class or Tally Marks?3.11 Types of Continuous Series or Frequency Distribution

Summary Assignments Numerical Problems

4. Presentation of Data 59 - 894.1 Introduction4.2 Presentation of Statistical Data

4.2.1 Textual Presentation4.2.1.1 Advantages and Disadvantages of Textual Presentation

4.2.2 Tabular Presentation4.2.2.1 Objectives of Tabulation4.2.2.2 Different Parts of a Statistical Table4.2.2.3 Features of a Good Table

4.2.2.4 Types of Tabulation4.2.2.5 Advantages and Disadvantages of Tabular Presentation

4.3 Diagrammatic and Graphical Presentation4.3.1 Objectives or Purposes of Diagrammatic and Graphical Presentation4.3.2 Guidelines for Diagrammatic and Graphical Presentation4.3.3 Line Diagram4.3.4 Bar Diagram4.3.5 Pie Diagram4.3.6 Histogram

4.3.6.1 Construction of Histogram4.3.7 Frequency Polygon4.3.8 Frequency Curve4.3.9 Cumulative Frequency Curve or Ogive4.3.10 Time Series Graph4.3.11 Types of Frequency Curve4.3.12 Advantages and Disadvantages of Graphical Presentation Summary Assignments Numerical Problems

5. Measures of Central Tendency or Averages 90 - 1655.1 Introduction and Meaning of Average5.2 Definition5.3 Objectives of Statistical Average5.4 Features of a Good Average5.5 Types of Averages5.6 Need of Average – An Example5.7 Arithmetic Mean (A.M)5.8 Important Properties of A.M5.9 Methods to Calculate Arithmetic Mean

5.9.1 Arithmetic Mean of an Ungrouped Data5.9.2 Arithmetic Mean for Grouped Data (Continuous Series)

5.10 Corrected Mean5.11 Missing Value or Item5.12 Combined Mean5.13 Advantages of Arithmetic Mean5.14 Disadvantages of Arithmetic Mean

Median5.15 Definition5.16 Calculation of Median5.17 Graphic Method of Locating Median5.18 Advantages of Median5.19 Disadvantages of Median

Mode5.20 Definition5.21 Type of Modal Distribution

5.22 Calculation5.23 Graphic Method of Locating Mode5.24 Advantages of Mode5.25 Disadvantages of Mode5.26 Nature of the Frequency Distribution5.27 Relation between Mean, Median, Mode (Empirical Relation)5.26 Nature of the Frequency Distribution5.27 Relation between Mean, Median, Mode (Empirical Relation)5.29 Suitability (or Uses) of Average5.30 Some More Numerical Examples of Central Tendency


6. Measures of Dispersion 166 - 2266.1 Introduction, Meaning and Definition of Dispersion6.2 Purposes or Objectives of Measurement of Dispersion6.3 Characteristics of a Good Measure of Dispersion

Range6.4 Measures of Dispersion6.5 Definition6.6 Calculation of Range6.7 Advantages of Range6.8 Disadvantages of Range

Quartile Deviation (Q.D.) OR Semi-inter-quartile Range6.9 Definition

6.10 Calculation of Quartile Deviation6.11 Advantages of Quartile Deviation6.12 Disadvantages of Quartile Deviation

Mean Deviation or Mean Absolute Deviation6.13 Definition6.14 Calculation of M.D.6.15 Advantages of Mean Deviation6.16 Disadvantages of Mean Deviation

Standard Deviation6.17 Definition6.18 Important Properties of S.D.6.19 Calculation of Standard Deviation6.20 Calculation of Standard Deviation by Correcting Incorrect Values6.21 Advantages of Standard Deviation6.22 Disadvantages of Standard Deviation6.23 Relative Measures of Dispersion

6.23.1 Need for Measures of Relative Dispersion6.24 Combined (or Composite) S.D.6.25 Lorenz Curve6.26 Comparisons of Various Measures of Dispersion

6.27 Some More Numerical Examples of Dispersion Summary Assignments Numerical Problems

7. Correlation 227 - 2597.1 Introduction7.2 Definition7.3 Types and Kinds of Correlation

7.3.1 Positive and Negative Correlation7.3.2 Linear and Non-linear (Curvilinear) Correlation7.3.3 Simple, Multiple and Partial Correlation

7.4 Degrees of Correlation7.4.1 Perfect Correlation7.4.2 Absence of Correlation or Zero Correlation7.4.3 Limited Degree of Correlation

7.5 Methods to Estimating Correlation7.5.1 Scatter Diagram7.5.2 Karl Pearson’s Coefficient of Correlation

7.5.2.1 Properties of Correlation Coefficient (rxy)7.5.2.2 Calculation of Karl Pearson’s Coefficient of Correlation7.5.2.3 Interpretation of the Coefficient of Correlation7.5.2.4 Use of Correlation Coefficient7.5.2.5 Advantages of Correlation Coefficient7.5.2.6 Limitations of the Correlation Coefficient

7.5.3 Edward Spearman’s Coefficient of Rank Correlation7.5.3.2 Merits and Demerits of Rank Correlation

7.6 Some More Numerical Examples of Correlation Summary Assignments Numerical Problems

8. Index Number 260 - 2858.1 Introduction and Meaning8.2 Different Types of Index Numbers8.3 Features or Characteristics of Index Numbers8.4 Different Steps Involved in the Construction of Index Number8.5 Problems Involved in Constructing a Price Index Number8.6 Uses (Purposes) of Index Numbers8.7 Limitations of Index Numbers8.8 Methods of Construction of Index Numbers8.9 Fisher’s Method: An Ideal Method

8.10 Consumer Price Index (CPI) or Cost of Living Index (CLI) Number8.10.1 Methods of Constructing Consumer Price Index (CPI)

8.11 Whole Sale Price Index (WPI)8.12 Industrial Production Index


9. Mathematical Tools Used in Economics: Some Basic Concepts 286 - 3029.1 Introduction9.2 Functions9.3 Inverse Functions9.4 Graphs of Linear Functions9.5 Slope (or Gradient) of a Straight Line

9.5.1 To Find the Slope of a Line through Two Given Points9.5.2 Different Forms of the Equations of a Line

9.6 Slope of a Curve (Non-linear Curve) Summary Key Terms Assignments

10. Steps of Preparing Project in Economics 303 - 31810.1 Introduction10.2 Meaning of Project10.3 How to Make a Questionnaire?10.4 How to Write a Project?10.5 How to Make a Good Project Report?10.6 Two Projects

11. Indian Economy on the Eve of Independence 319 - 33211.1 Introduction11.2 Evolution of Indian Economic Ideas11.3 Indian Economy during the Pre-British Period11.4 Economic Conditions of India in British Rule11.5 Forms of Colonial Exploitation11.6 Consequences of Colonial Exploitation

Summary Key Terms Assignments

12. Goals of Five Year Plans 333 - 36212.1 Introduction12.2 Economic System and Independent India12.3 Indian Economy – A Mixed Economy12.4 Economic Planning – Definition and Implication12.5 Economic Planning in India12.6 Main Characteristics of India’s Five Year Plan12.7 Basic Objectives or Goals of Planning in India12.8 Plan-wise Objectives and Achievements

12.9 Performance of Economic Planning Till 1990-91

12.9.1 Achievements of Economic Plans12.9.2 Drawbacks of the Five Year Plans

12.10 Decentralised Planning In India: A Note Summary Key Terms Assignments

13. Features, Problems and Policies of Agriculture,Industry and Foreign Trade 363 - 395

13.1 Introduction13.2 Agriculture

13.2.1 Role and Importance of Agriculture in India13.2.2 Main Features of Indian Agriculture13.2.3 Drawbacks of Indian Agriculture13.2.4 Measures to Solve Agricultural Problems13.2.5 Impact or Effects of Green Revolution13.2.6 Subsidy and Agriculture: A Debate13.2.7 Indian Agriculture: A Brief Evaluation

13.3 Industry13.3.1 Growth of Industries in India (From 1st to 7th Five Year Plan)13.3.2 Strategy for Industrial Development: Public Sector or Private Sector

13.4 Foreign Trade Summary Key Terms Assignments

14. New Economic Policy – Liberalisation,Privatisation and Globalisation 396 - 419

14.1 Introduction14.2 Causes Behind Economic Crisis14.3 Need of New Economic Policy (NEP)14.4 New Economic Policy, 1991

14.4.1 Elements (Components) of New Economic Policy14.5 Liberalisation14.6 Economic Liberalisation in India14.7 Main Characteristics of Liberalisation Policy14.8 Flaws of Liberalisation Policy14.9 Privatisation

14.9.1 Arguments in Favour of Privatisation14.9.2 Arguments in Against of Privatisation

14.10 Disinvestment Programme14.11 Globalisation

14.11.1 Advantages of Globalisation14.11.2 Disadvantages of Globalisation

14.12 Measures towards Globalisation14.13 International Organisation for Facilitating Globalisation

14.14 Effects of Globalisation on Indian Economy14.15 Achievements of Globalisation in India14.16 Multinational Corporations (MNCs)14.17 Advantages and Disadvantages of LPG Policies in India


15. Problem of Poverty 420 - 43515.1 Introduction15.2 Meaning of Poverty

15.2.1 Poor and Poverty15.3 Poverty Line15.4 Estimation of Poverty

15.4.1 Earlier Estimation15.4.2 Recent Estimation

15.5 Trends of Poverty15.6 Vicious Circle of Poverty15.7 Do You Think Per Capita Expenditure Per Month is a Good Measurement of Poverty?15.8 Causes Behind Poverty

15.8.1 Economic Causes15.8.2 Social Causes15.8.3 Political Causes15.8.4 Unequal Distribution of Labour15.8.5 Administrative Causes

15.9 Suitable Measures for Solution15.10 Government Measures Undertaken to Remove Poverty15.11 Poverty Eradication Programme: An Appraisal


16. Rural Development 436 - 46316.1 Introduction16.2 Meaning of Rural Development16.3 Key Issues of Rural Development16.4 Policies for Agricultural and Rural Development: An Overview16.5 Rural Agricultural Credit16.6 Agricultural Marketing16.7 Agricultural Diversification in India16.8 Organic Farming


17. Human Capital Formation 464 - 47617.1 Introduction17.2 Meaning of Human Capital17.3 Difference between Human Capital with Physical Capital and Financial Capital17.4 Sources or Determinants of Human Capital Formation17.5 Importance or Role of Human Capital Formation17.6 Are Human Capital and Human Development Same?17.7 Basic Problems Related to Human Capital Formation in India17.8 Education17.9 Objectives of Education

17.10 Government Intervention on Human Capital Formation17.11 Growth of Education in India after Independence17.12 Problems and Challenges Related to Education


18. Employment and Problem of Unemployment 477 - 50318.1 Introduction18.2 Employment and Worker18.3 Types of Worker18.4 Labour Supply and Labour Force18.5 Workforce and Women’s Work in the Household18.6 Employment and Indian Economy18.7 Definition of Unemployment18.8 Meaning of Unemployment18.9 Types of Unemployment in India

18.9.1 Rural Unemployment18.9.2 Urban Unemployment18.9.3 Underemployment

18.10 Magnitude of Unemployment in India18.11 Extent of Unemployment: An Estimation of National Sample Survey Organisation (NSSO)18.12 Causes of Unemployment in India18.13 Consequences of Unemployment18.14 Measures to Solve Unemployment

18.14.1 Long-term Measures18.14.2 Short-term Measures

18.15 Different Government Schemes to Remove Unemployment Summary Key Terms Assignments

19. Inflation: Problems and Policies in India 504 - 51419.1 Introduction19.2 Definition of Inflation19.3 Types of Inflation

19.4 Indicators of Inflation19.5 Inflationary Trends in India19.6 Causes of Inflation19.7 Effects or Consequences of Inflation in India

19.7.1 Favourable Effects19.7.2 Adverse Effects

19.8 Concepts Related to Inflation19.9 Control of Inflation

19.10 Suggestions to Control Inflation Summary Key Terms Assignments

20. Infrastructure 515 - 53920.1 Introduction20.2 Importance of Infrastructure for Economic Development20.3 Investment in Infrastructure20.4 Economic Infrastructure of the Indian Economy20.5 Energy20.6 Conventional Sources of Energy20.7 Non-Conventional Sources of Energy20.8 Consumption of Recent Trends in Commercial Energy20.9 Energy Crisis in India

20.10 Introduction to Social Infrastructure20.11 Components of Social Infrastructure20.12 Importance of Social Infrastructure20.13 Health20.14 Health Status in India20.15 Health Infrastructure in India


21. Environment and Sustainable Economic Development 540 - 56421.1 Introduction21.2 Interaction between Economy and Environment21.3 Meaning of Environment21.4 Importance or Significance of Environment21.5 Effects of Economic Development on Resources and Environment21.6 Problems Related to Environment21.7 Main Causes Behind Degradation of Environment21.8 Steps to Protect our Environment and Ecosystem

21.8.1 Environmental Laws under Indian Constitution21.8.2 How Can We Help?21.8.3 Government Initiatives

21.9 Concept of Sustainable Development

21.10 Features of Sustainable Development21.11 Strategies for Sustainable Development21.12 Global Warming: Meaning and Effects


22. A Comparative Study between India, China and Pakistan 565 - 57922.1 Introduction22.2 Brief Economic History of the People’s Republic of China22.3 Brief Economic History of Pakistan22.4 Comparative Study between India, China and Pakistan22.5 Development Strategies of Our Neighbouring Countries: A Special Note22.6 Main Conclusion

Summary Key Terms Assignments Appendix

Model Test Paper - 1 580 - 581

Model Test Paper - 2 582 - 583

Chapter 1Introduction toEconomics and Statistics

1.1 INTRODUCTIONTo start discussion about any subject, it is necessary to know the definition of that subject.In this chapter, we are going to discuss about the definition of Economics followed by a briefdiscussion of the meaning, scope, importance and limitations of statistics. Economics is animportant branch of social science, which studies those human activities which deal withproduction, consumption, exchange and distribution of the scarce means. It is a livingsubject and mainly deals with those economic activities which are concerned with efficientuse of scarce resources to satisfy maximum human wants with limited resources.

The word ‘Statistics’ has been derived from the Latin word ‘Status’, Italian word‘Statista’, German word ‘Statistik’ each one of which means a political state. The word‘statistics’ is known to have been used for the first time in the Elements of UniversalErudition by Baran J.F. Von Bielfeld, translated by W. Hooper M.D. (3 Vols, London, 1970).In modern times, the use of Statistics is wide. It is not only helpful for the Government andthe Semi-government Organisations, but it is also required for the study of Economics,Commerce, Trade and Humanities.

1.2 ECONOMYAccording to Prof. A.J. Brown, economy is “a system by which people get a living”. We areencircled with several institutions like industries, farms, cultivation, transports andcommunications, schools, hospitals, offices, shops, mines etc. These institutions directly orindirectly have helped the people to earn money by producing various economic goods andservices. Hence, an economy is the combination of all these various organisations andenterprises satisfying the needs and wants of the human beings. Thus, “Economy is a systemwhich provides people with goods and services which directly or indirectly satisfy theirwants”. Hence, an economy is a system where all the human activities are related witheconomic and non-economic aspects performed continuously.

1.3 ECONOMIC AND NON-ECONOMIC ACTIVITIESEconomics is a social science and man is a social being. Hence, within an economy, everyperson has to perform several activities either to earn money or to satisfy various wants.These include cultivation and farming, industrial works, teaching, marketing, washingcloths, etc. Thus, all these activities have been performed to earn money in order to satisfyseveral wants and to maintain a peaceful and comfortable life. Therefore, we can say that,

activities which are performed with a view to earn wealth or income are called economicactivities. Economics deals with all the economic activities of men and women.

In our daily life, we are engaged in several activities related with earning and spendingof money (income or wealth) to satisfy our unlimited wants. These are all the economicactivities. Hence, the main economic activities are categorised into following types:

(i) Production: It is the main or primary economic activity of human beings. It means creation ofutility to satisfy human wants by producing several goods and services. For instance, a teacher isteaching in the classroom, a carpenter is making wooden furnitures, a farmer is cultivating crops,etc. are the examples of production.

(ii) Consumption: It is also another important economic activity which is concerned with use ofgoods and services for the direct satisfaction of human wants. Consumption means simply thedestruction of utility. For instance, by consuming foodstuffs, a consumer can satisfy his or herwant for food or hunger. Similarly, a glass of water can quench the thirst of a consumer, who isfeeling very thirsty. Therefore, a consumer’s utility can be destroyed either temporarily orpermanently after consuming the particular commodity.

(iii) Distribution: Pricing of different factors of production is known as distribution. That is, fixationof rent, wages, interest etc. have been included under the theory of distribution. Hence, it is alsotermed as ‘Factor Pricing’ theory.

(iv) Exchange: This is also considered as an important economic activity. Exchange means sale andpurchase of different goods and services either directly by barter system or through monetarysystem for the maximisation of consumer’s satisfaction or utility. Thus, the term exchange inmonetary system is known as ‘Product Pricing.’

Hence, all the activities which are related with the production, consumption,distribution and exchange of all goods and services possess utility and scarce in nature canbe considered as economic activities. The main aim of these activities is to ensure thesatisfaction of human wants. The important elements of economic activities are:

(i) These must possess utility.(ii) These are measured with money or wealth.

(iii) These satisfy the human wants.(iv) These are scarce.

On the contrary, non-economic activities are not concerned with money or wealth.These activities are again divided into following groups:

(i) Social Activities: For instance, attending marriage parties of relatives or friends, birthday parties,cultural festivals, programmes, etc.

(ii) Political Activities: For instance, attending the meetings and seminars of various political partieslike Congress, BJP and other local parties.

(iii) Religious Activities: For instance, worshipping of God, donation for constructing temples,churches, mosques, etc.

(iv) Charitable Activities: For instance, helping poor or disabled persons, donation of blood, etc.(v) Parental Activities: For instance, parent’s love, affection, and caring to their child or children.(vi) Recreational Activities: For instance, playing games, watching television, performing dance or

singing, etc.

1.4 DEFINITION OF ECONOMICSThe word “Economics” has been derived from Greek words “Okis” means household and“Nemein” means management. The great philosopher, Aristotle had used the term asmanagement of family and the state in his famous book “Political Economy”. However,economists are not ready to consider it as a book of economics. Even Indian famoushistorical figure Kautilya’s book “Arthasashtra” is also not considered as economics book.

In order to understand the nature and scope of Economics, it is necessary to analyse thedefinition of economics. There are as many definitions as there are economists. Severaleconomists, from time to time, have given several definitions of Economics. It is actuallydifficult to give an acceptable definition of Economics. Wooton humorously observed that,“Whenever six economists are gathered, there are seven opinions”. However, keeping inview with these problems, it is essential to define the concept of ‘economics’ with scientificand systematic study. Hence, broadly, several definitions can be discussed as under:

A. Adam Smith’s Wealth definition;B. Alfred Marshall’s Welfare definition;C. Lionel Robbins’ Scarcity definition;D. Paul Samuelson’s Growth-oriented

definition.

1.5 WEALTH DEFINITIONThe classical economists like Adam Smith, J.S. Mill, Ricardo, Senior and others were thefirst to give a systematic definition of Economics. Adam Smith, father of Economics andfounder of classical school of economics, in his famous book, “An Enquiry into the Natureand Causes of Wealth of Nations,” had defined Economics as “the science of wealth”.According to him, “Economics is concerned with an enquiry into the nature and cause ofwealth of nations, and it related to the laws of production, exchange, distribution andconsumption of wealth”.

1.5.1 Important Characteristics of Smith’s DefinitionThe main characteristics of Wealth definition are as follows:

(i) Study of Wealth: According to wealth definition, economics is the study of wealth. Hence, itdeals with production, consumption, exchange and distribution of wealth only.

(ii) Only Material Commodities: This definition has expressed the feelings that economicsconstitutes only material commodities while it ignores non-material goods such as sunlight, rainwater, sea water etc.

(iii) Causes of Wealth: Economics is considered as the study of causes of wealth accumulationwhich brings economic development. Hence, wealth can only be increased with the increase inthe production of only material goods.

(iv) Huge Stress on Wealth: The main aim of an economy is to become rich. Hence, it gives morestress on wealth not anything else in the world.

(v) Economic Man: Wealth definition is based on the man, who is always ‘self-centred’ and ‘self-interested’ in nature. Self-interest leads to material gains. Thus, such a man is known as‘Economic Man.’

1.5.2 CriticismsThe wealth definition has a number of defects. Economists, like Caryle and Morris, hadclaimed it as a bastard and dismal science.

(i) Materialistic Concept: According to wealth definition, wealth is the sole end of all humanbeings. However, in reality, wealth is not an end in itself. It is only a means and that too one ofmany means for man’s happiness and welfare.

(ii) Ambiguous: The wealth definition is ambiguous, i.e., meaning is not clear. In earlier days,wealth means only material goods like money, gold, silver, land, cattle, horse, etc. which arevisible. However, it ignores non-material goods like services of doctor, washerman, barber,teacher and etc. All these immaterial goods are as good as wealth.

(iii) Narrow Scope: This definition has claimed ‘wealth’ as the only subject matter of economics.Hence, it ignores the most fundamental concept, viz., welfare. The definition is, therefore,incomplete and narrow.

(iv) Concept of Economic Man: Smith’s definition is based on the concept of economic man. Marshall andPigou had believed that ‘economic man’ who works for selfish ends alone is not found in real life. Inpractical life, man’s activities are not only influenced by selfish motives but also by moral, social andreligious factors.

(v) Scarcity and Choice: Smith’s definition has ignored the two most important concepts of economics,i.e., scarcity and choice. In true sense, economic activities take place because not due to all the goods andservices which satisfied the human wants are scarce in nature but all these have several uses. Thus, thequestion of choice arises. In this way, this definition neglects both the aspects.

(vi) Importance of Man Ignored: The definition has given unnecessary stress on wealth whileimportances of human beings are neglected. Actually, wealth is a mean to human welfare. Thus, thesubject matter does not remain only as a social science.

(vii) Stagnant: The main drawback of this definition is stagnant in nature. Some critics have pointed out that thedefinition is static and basedon deductive method.

1.6 WELFARE DEFINITIONProfessor Alfred Marshall had propounded welfare definition in his book “Principles ofEconomics” in 1890. According to him, “Economics is a study of mankind in the ordinarybusiness of life. It examines that part of individual and social action which is most closelyconnected with the attainment and with the use of material requisites of well-being. Thus, itis one side a study of wealth; on the other and more important side a part of the study ofman.”

There are three important aspects of this definition, such as:(a) Economics is a study of man and his ordinary business of life;(b) It examines the economic aspect of an individual, and his social actions;(c) The attainment of material welfare as the end of economics.

From the above three aspects, it is clear that Marshall had supported material welfareas the subject matter of economics. This view had also been well supported by Pigou andCannon.

1.6.1 Important Characteristics of Marshall’s Definition

Marshall’s definition is widely accepted by a group of economists. However, the maincharacteristics of material welfare definition are as follows:

(i) Study of Mankind: It is a study of mankind than wealth. Welfare and wealth are means tosatisfy human wants.

(ii) Study of Ordinary Man: It studies the activities of a man who earns wealth and spends it to getthe maximum satisfaction. Thus, it studies ordinary but not extraordinary man like saints, monksand likewise.

(iii) Study of Real Man: Economics does not study a man who is selfish and self-centred in nature.However, it studies about the real man who has several qualities and is influenced by economicand non-economic factors in the society.

(iv) Promotion of Welfare: It studies material means which promote human welfare. An exactcombination of wealth and welfare is necessary for mankind.

(v) Use of Money: This definition considers material economic welfare as a part of social welfarewhich can be easily measured with the measuring rod money.

1.6.2 CriticismsMarshall’s definition is no doubt superior than Smith’s definition. Robbins had criticisedMarshall’s definition on the following grounds:

(i) Unscientific: According to Robbins, welfare definition is unscientific. Marshall explains onekind of behaviour as distinct from another in a haphazard way. Thus, subject matter is highlyvariable, indefinite and uncertain.

(ii) Welfare is vague: Welfare refers to material happiness of the people. However, in reality,welfare is a mental make-up of a person which depends on the psychological feelings. Thus, it ishighly subjective. Hence, it is difficult to define, measure and compare at all.

(iii) Narrow Scope: Marshall shortens the scope of economics by making it a mere study of materialmeans of welfare. Since concepts of non-material welfare are excluded from his definition,hence, the scope becomes very narrow.

(iv) Unrealistic: Prof. Marshall had divided the activities into both economic and non-economic.However, such classification is not sound, because all the activities are economic in nature.Prof. Robbins had considered the distinction between economic and non-economic activities asunrealistic and impractical.

(v) Materialistic Welfare Only: According to Marshall, welfare can be achieved only bymaterialistic goods. However, Robbins had pointed out that non-material means like services ofteachers, lawyers, washermen, servants and etc can also promote welfare to mankind. So, theyare called as immaterial welfare.

(vi) Economics is not considered with Ends: Economics is a normative science. Thus, Marshallhad presented the meaning of welfare as the ends of economics. This implies that economics isconcerned with ends and as such it makes judgement whether an end is desirable or considerableand so on.

(vii) Improper Explanation: Marshall’s definition fails to explain the main economic problem, i.e.,the problem of how to satisfy the unlimited wants with limited means which have alternativeuses.

(viii) Social Science Only: Marshall had been highly criticised for considering economics as a socialscience. This is because economics studies all the individuals within the society. In true sense,economics should be considered more as a human science rather than a social science.

1.7 COMPARATIVE STUDY BETWEEN MARSHALL’S AND SMITH’SDEFINITION

1. Adam Smith had regarded wealth as a subject matter of economics. Marshall had regardedhuman welfare as a subject matter of economics.

2. Adam Smith had provided more importance to wealth. Marshall had provided moreimportance to man.

3. Wealth had both means and end, according to Smith. However, Marshall had consideredwealth as only means.

4. Adam Smith had given more emphasis on production of wealth. On the other hand,Marshall had given more emphasis on consumption of wealth.

5. Smith had claimed economics as a study of economic man; whereas Marshall claimedeconomics is the study of real man.

6. According to Smith, economics is a mere social science. However, Marshall had explainedeconomics as human science rather than only social science.

1.8SCARCITY DEFINITION

Prof. Lionel Robbins had formulated a new definition in his book ‘Essay on the Nature andSignificance of Economic Science’ published in the year 1932. According to Robbins,“Economics is a science which studies human behaviour as a relationship between ends andscarce means which have alternative uses.”

Other economists like, Stoiner, Hague, and Scitovosky had also supported Robbinsdefinition.

1.8.1 Important Characteristics of Robbins’ Definition(i) Unlimited Wants: Human wants are unlimited in number. Whenever one want is satisfied, then

automatically several wants grow up. Hence, it is endless. With the progress of civilisation andthe development of science and technology numerous wants have developed. Again severalhuman wants are reoccurring in nature. Hence, wants are ‘ever growing and never ending’.

(ii) Limited Means: Human wants are unlimited but resources or means to satisfy them are limited.The means refer to goods and services which we are used to satisfy our wants. These are bothmaterial and non-material goods like time, money, services, resources and etc. These resourcesare scarce in nature. Here, the term scarcity is used not in the absolute sense but in the relativesense, i.e., in relation to demand. A commodity may be available in small quantity but if nobodydemands it, then it is not scarce. Hence, the scarce means are the basis of all economic problems.This is because, if all these means or resources are not scarce, then there will be no problem ineconomics.

(iii) Alternative Use of Resource: All the scarce means can be used in more than one purpose. Inother words, they can be used in several purposes. For instance, land is scarce, but land can beused for construction of buildings, cultivation, playground and etc. Likewise, all these economic

resources are used for various purposes. Thus, in reality goods can be put to alternative uses ofvarying importance.

(iv) Economising Resources: The main problem of economics is how to satisfy the unlimited wantswith limited means which have alternative uses. Robbins had described this problem as theproblem of economising scarce means. In other words, it is the choice of making of an economicactivity. According to Cassel, “Economics is the Science of Scarcity.” Economics is, thus, astudy of economising the scarce resources.

(v) Problem of Choice: The problem of economising resources leads to the problem of choice.Since, wants are numerous and means are scarce, we have to choose the most urgent wants fromthese unlimited wants. Hence, the consumer has to select few wants from the numerous wantsaccording to his preference pattern. Thus, scarcity of resources makes the choice necessary.Hence, economics is termed as a Science of Choice.

1.8.2 CriticismsScarcity definition is more scientific than both wealth and welfare definitions, but still it hasfollowing criticisms:

(i) Static: Prof Samuelson has pointed correctly that Robbins’ definition is not dynamic in nature,because it has only discussed about the problems of present generation, not anything about futuregeneration. Hence, the definition suffers with the problem of economic growth.

(ii) Too Vast: This definition has discussed with the scope of economics to all the activities ofmankind that are related to the problem of choice. The problem of choice is found in both socialand unsocial beings. Thus, this definition has no social significance in real world.

(iii) Economic Problems also Arise from More Supply: Some economists have claimed thateconomic problem also arises from the plenty of goods as well. The Great Depression of 1930s inUSA was due to abundance of goods, but not due to scarcity of resources.

(iv) Not Fit for Socialistic Economy: Prof. Maurice has criticised Robbins’ definition on the groundthat this definition is not applicable for a socialistic economy. This is because in this type ofeconomy, the Government takes all the initiatives for supplying the basic necessities of lifeamong the citizens. For the betterment of whole society, the Government usually launchesseveral beneficiary activities.

(v) Not fit for Rich Country: The economic problem for a rich and developed economy is differentfrom the underdeveloped or poor economy. Here, the resources are not limited. In fact, resourcesare plenty in this type of economy.

(vi) Relation with Welfare: Robbins’ had criticised Marshall’s definition on the ground of welfare.However, limited means are used to fulfil unlimited wants. Thus, it means that maximisingsatisfaction will lead to more welfare. Hence, Robbins’ definition is related with welfare also.

1.9 COMPARISON BETWEEN ROBBINS’ DEFINITION AND MARSHALL’SDEFINITION

1. Marshall’s definition is unscientific because it explains one kind of behaviour as distinctfrom another. On the other hand, Robbins’ definition is scientific in nature because itexplains any behaviour under one aspect.

2. Marshall’s definition has limited scope, because it has only emphasised on the materialwelfare. However, Robbins’ definition has wider scope because it is connected to anybehaviour with scarcity.

3. Welfare definition is based on value judgement and, therefore, it has lead to confusion. Onthe other hand, scarcity definition is free from any confusion, because it has consideredneutral between ends.

4. Marshall’s definition is not universal but Robbins’ definition is universal in character.Since, it is applicable to all individuals, groups and society.

5. According to Marshall, economics is both a science (positive and normative) and an art.However, according to Robbins’ economics is a positive science only.

6. Marshall’s definition is classifactory, but Robbins’ definition is analytical in nature.1.10 GROWTH-ORIENTED DEFINITIONS

Growth-oriented definition has been propounded by Prof. Paul Andy Samuelson. Accordingto Samuelson, “Economics is the study of how people and society end up choosing, with orwithout the use of money, to employ scarce productive resources that could have alternativeuses to produce various commodities over time and distributing them for consumption, nowor in the future, among various persons and groups in society. It analyses costs and benefitsof improving patterns of resource allocation.”

1.10.1 Important Characteristics of Samuelson’s DefinitionThe followings are the main characteristics of growth-oriented definition:

(i) Economic Resources: Samuelson’s definition deals with the economic resources which may benatural, human and physical. These are required to satisfy human wants. All these resources arescarce but have alternative uses.

(ii) Efficient Allocation of Resources: All the economic resources have alternative uses, hence mainproblem lies in choice making. Therefore, all the scarce resources should be utilised in variousways so that these can able to bring maximum welfare in a society.

(iii) Increase in Productivity: Another feature of this definition is that it must increase productivityresulting in an increase in economic growth, employment and higher standard of living.According to this definition, economics is concerned with determining the pattern of employmentof scarce resources to produce over time. Thus, the dynamic problems of production have beenbrought within the purview of economics.

(iv) Full Utilisation of Resources: This definition does not only acknowledged the allocation ofresources but these must also be fully utilised. Improvement of resource allocation and betterdistribution of economic resources will lead to economic development. Thus, issues ofdevelopment of a less developed economy have also been taken as the subject matters to studyeconomics.

Growth-oriented definition is universal innature. This is concerned with the economic problems of all types of economies, developed orunderdeveloped. In developed economies, the problem is to maintain full employment. On theother hand, in underdeveloped economies, the main problems are to achieve full employment andraise the standard of living of the people. Economics is, thus, concerned with all these issues andhence, this definition is universal in nature.

1.11 NATURE OF ECONOMICSThere is a great controversy among the economists regarding the nature of economics,whether the subject ‘economics’ is considered as science or an art. If it is a science, then itmay be either positive science or normative science.

1.11.1 Economics as a ScienceBefore we start discussing whether

economics is science or not, it is necessary to have a clear idea about science. Science is asystematic study of knowledges and facts which developed the correlationship between causeand effect. Science is not only the collection of facts, according to Prof. Poincare. In reality, allthe facts must be systematically collected, classified and analysed. There are followingcharacteristics of any science subject, such as;

(i) It is based on systematic study of knowledges and facts;(ii) It develops correlationship between cause and effect;

(iii) All the laws are universally accepted;(iv) All the laws are tested and based on experiments;(v) It can make future predictions;

(vi) It has a scale of measurement.

On the basis of all these characteristics, Prof. Robbins, Prof Jordon and Prof. Robertson hadclaimed economics as one of the subject of science like physics, chemistry etc. According to allthese economists, ‘economics’ has also several characteristics similar to other science subjects.Such as,

(i) Economics is also a systematic study of knowledges and facts. All the theories and factsrelated with both micro and macro economics are systematically collected, classified andanalysed.

(ii) Economics deals with the correlationship between cause and effect. For example, supplyis a positive function of price, i.e., change in price is the cause but change in supply is theeffect.

(iii) All the laws in economics are also not universally accepted, like, law of demand, law ofsupply, law of diminishing marginal utility etc.

(iv) Theories and laws of economics are based on experiments, like, mixed economy is anexperimental outcome between capitalist and socialist economies.

(v) Economics has a scale of measurement. According to Prof. Marshall, ‘money’ is used asthe measuring rod in economics. However, according to Prof. A.K. Sen, HumanDevelopment Index (HDI) is used to measure economic development of a country.

However, the most important question is to find out whether economics is a positive science or anormative science?

Positive science deals with all the real things or activities. It gives the solution of severalquestions like; ‘what is’, ‘what was’ and ‘what will be’. It deals with all the practicalproblems for example, poverty and unemployment are the biggest problems in India. Thelife expectancy at birth in India is gradually rising. All these above statements are known aspositive statements. These statements are all concerned with real facts and information.

On the contrary, normative science deals with ‘what ought to be’ or ‘what ought tohave happened’. Normative science offers suggestions to the problems. The statementsdealing with these suggestions are coming under normative statements. These statementsgive the ideas about both good and bad effects of any particular problem or policy. Forexample, illiteracy is a curse for Indian economy. The backwardness of Indian economy isdue to ‘population explosion’.

The economists like Prof. Senior (classical economist) and Prof. Robbins, Prof.Freightmen (modern economists) had claimed that economics is a ‘positive science’.However, Prof. Pigou (classical economist), Prof. Marshall (neoclassical economist) etc. hadclaimed that economics is a ‘normative science’.

1.11.2 Economics and Positive ScienceThe following statements can ensure economics as a positive science, such as;

(i) Logically Based: The ideas of economics are all based on absolute logical clarifications.Moreover, it develops the relationship between cause and effect.

(ii) Labour Specialisation: Labour law is an important topic of economics. It is based on the law ofspecialisation of labour. All the economists must concern with the causes and effects of labour-division.

(iii) Not Neutral: Economics is not a neutral between positive and normative sciences. According tomost the economists, economics is merely positive science rather than normative science.

1.11.3 Economics and Normative ScienceThe following statements can ensure economics as a normative science, such as,

(i) Emotional View: A rational human being has not only logical views but also has sentimentalattachments and emotional views regarding any activity. These emotional attachments are allcoming under normative statements. Hence, economics is a normative science.

(ii) Welfare Activity: Economics is a science of welfare. All the economists forwarded their theoriesfor the development of standard of living. Hence, all the economic statements have theirrespective normative views.

(iii) Economic Planning: Economic planning is one of the main instruments of economicdevelopment. Several economists have given their personal views for the successfulimplementation of economic plan. Hence, economics is coming under normative science.

All these lead to the conclusion that ‘economics’ is both positive science and normativescience. It does not only tell us that why certain things are happening. However, it also givesidea whether it is right thing to be happened or not.

1.11.4 Economics as an ArtAccording to T.K. Mehta, ‘Knowledge is science, action is art.’ According to Pigou andMarshall, economics is also considered as an art. In other way, art is the practicalapplication of knowledges for achieving particular goals. Science gives us ideas about theprinciples of any discipline, however, art turns all these principles into reality. Therefore,considering the activities in economics, it can be claimed as an art also. This is because itgives guidance to the solutions of all the economic problems.

Therefore, from all the above discussions we can conclude that economics is neither ascience nor an art only. However, it is a golden combination of both. According to Cossa,science and art are complementary to each other. Hence, economics is considered as both ascience as well as an art.

1.12 MICRO AND MACRO ECONOMICS – AN INTRODUCTIONModern economists have divided economics into two branches – Micro Economics andMacro Economics. These two words – Micro and Macro – were first introduced inEconomics in 1936 by Prof. Ragnar of Oslo University and later these are used by othereconomists.

1.13 MEANING OF MICRO AND MACRO ECONOMICSMicro Economics may be defined as that branch of economic analysis which studies theeconomic behaviour of the individual unit, may be a person, a particular household or aparticular firm. It is a study of the particular unit rather than all units combined together.

Macro Economics, on the other hand, is the study of economic system as a whole. Itmay be defined as that branch of economics in which behaviour of all the units are takentogether. In this branch, we can study about the economic behaviour of the whole, i.e.,national income, aggregate demand and supply, total savings and investment,unemployment problem and etc. In other words, macro economics is the economics ofaggregate.

1.14 IMPORTANCE OFTHESE TWO BRANCHES IN THE HISTORY OF

ECONOMIC LITERATUREOn the basis of analytical survey of the history of economics it is not possible to say exactlywhen both micro and macro economics are become more popular. It is said that AdamSmith is the ‘father of modern economics’, i.e., better to say micro economics. Smith in hisfamous book “An Enquiry into the Nature and Causes of Wealth of Nations” published in1776, first time gave the idea of micro economics. Adam Smith had believed on thephilosophy of self-interest. However, later Alfred Marshall and his followers of theNeoclassical School had laid foundation on micro economics. As a matter of fact, Marshallhad developed the concept of micro economics.

The credit to develop macro economics went to J.M. Keynes and his book “The GeneralTheory of Employment, Interest and Money” published in 1936. However, Keynes did notsay that macro economics is in any way superior but he rejected the postulates of microeconomics. Thus, the credit to develop macro economics went to Keynes.

1.15 WHAT IS MICRO ECONOMICS?The term micro economics has been derived from the Latin word “Mikros” meaning toosmall or very small. Therefore, micro economics is the study of individual units likeindividual household, pricing of a firm, wages of a worker, profit of an entrepreneur and soon. In simple words, micro economics is that part of economics which deals with theindividual part of a system. Hence, it is also known as ‘price theory’ or ‘value theory’. Thus,micro economics can be defined as the study of economics decision-making by the micro-units.

Definitions“Micro economics theory explains the compositions or allocation of total production, why

more of some things are produced than of others.” – Watson“Micro economics is the study of particular firms, particular households, individual prices,

wages, incomes, individual industries, particular commodities.” – Boulding“Micro economics is concerned with economic activities of economic units as consumers

resource owners and business firms.” – Leftwitch“Micro economics deals with small parts of the economy.” – Shapiro“Micro economics relates to the study of the following three problems:

(a) How resources are allocated to the production of particular good and service?(b) How goods and services are distributed among the society?(c) How efficiently these resources are distributed?” – Ackley

1.16 IMPORTANCE OR USEFULNESS OF MICRO ECONOMICSThe study of micro economics has several uses:

1. Optimum Utilisation of Resources: It is helpful in the efficient employment of scarceresources among competing ends. This is the main problem faced by any economy andmicro economics helps in this regard for achieving growth with stability.

2. Operation of an Economy: Micro Economics explains how a free enterprise of an economy worksand functions. It explains how a market economy with huge number of consumers and producershave decided the allocation of limited productive resources among relatively less number of goods.

3. Pricing: In economics most important question is the determination of price. The pricesof various goods and services can determine the pattern of resource allocation in theeconomy. The prices are determined by the interaction between the forces of demand andsupply of the goods and services. However, by determining demand and supply, microeconomics helps us in understanding the process of price determination.

4. Economic Policy: It refers to all the actions of the Government that are intended toinfluence the economy. The Government with the help of tax and subsidy policies tries topromote a parity between producers and consumers.

5. Expectation: Expectations are made on the basis of micro economic theories. All theexpectations of the real world are based on certain assumptions and conditions. Forexample, if supply increases then price will fall.

6. Economic Welfare: It also studies economic welfare. In simple sense, we can say that thetotal theories of economic welfare are based on micro economics. The whole theory ofperfect competition enhances social welfare. On the other hand, the theories of imperfectcompetition do not build the sense of economic welfare. Micro economics helps us to controlmaladjustment of economic resources in order to maximise the social welfare.

7. International Trade: The theories of international trade are depended on micro economics.It explains how two or more countries can gain from international trade through mutualexchange. It explains how the elasticities of demand and supply can help to determine thebasis of international trade. It also explains how the foreign exchange rates are fixedbetween two countries with the help of demand and supply.

1.17 LIMITATIONS OF MICRO ECONOMICSHowever, micro economics also has several limitations:

1. Income Determination: Micro economics does not tell us anything about how the income of acountry (i.e., national income) is determined.

2. Imaginary or Unrealistic Assumptions: It is based on imaginary or unrealistic assumptions.The assumption like Ceteris Paribus, i.e., when all other things remain constant, is itself anunrealistic assumption. Moreover, entire micro economics assumed laissez faire policywhich has already become outdated.

3. Limited study: There are several economic problems which cannot be analysed throughmicro economics. Thus, important economic problems related with public revenue, publicexpenditure, public debt etc. are excluded from micro economics.

1.18 WHAT IS MACRO ECONOMICS?The term macro economics has been derived from the Latin word “Makros” meaning toolarge or very large. It is that branch of economics which is concerned with the economicmagnitudes related to the economic system as a whole, rather than to the micro economicunits like individuals or firms. Therefore, it has been called as ‘Aggregative Economics’.

Definitions“Macro economics deals with the functioning of the economy as a whole.” – Shapiro

“Macro economics theory is the theory of income, employment, prices and money”. –Culburtson

“Macro economics concerns with such variables as the aggregate volume of the output ofan economy with the extent to which its resources are employed with the size of nationalincome and with the general price level.” – Ackley

“Macro economics deals not with individual quantities but with aggregate of thesequantities, not with individual incomes but with national income, not with individual prices butwith price levels, not with individual outputs but with the national output.” – Boulding

1.19 IMPORTANCE OR USEFULNESS OF MACRO ECONOMICS

According to Prof. Samuelson, “No area of economics is today more vital and controversialthan macro economics”.

Some of the important issues analysed in macro economics are listed below:1. Formulation of Economic Policy: Macro economics helps to formulate and execute economic

policies. The problems related with poverty, unemployment, inflation, population andeconomic growth can only be solved through this theory. The Government with the help offiscal and monetary policies has tried to formulate the effective economic solution of theseproblems.

2. Helps in Comparison: Macro economics helps to compare one economy with othereconomies of the world regarding national income, per capita income, economicdevelopment and etc.

3. Price Level: The determination of the general price level is discussed in macro economictheories. Upward movement of the general price level are discussed in macro economics. Ithelps to control inflation.

4. Economic Planning: Macro economics is very much helpful to the government informulation of correct economic policies for the economic plans. The government makesvarious targets and has also tried to fulfil these targets through effective economic policies.

5. Balance of Payments: The balance of payment theory is an important part of macroeconomics. The difference between the total inflow and the total outflow of foreignexchange is known as balance of payments of a country. The causes and remedies of suchbalance of payments problems are discussed as a part of macro economics.

6. Business Cycles: We have already noted that boom and depression in the levels of incomeand employment have followed one another in a cyclical fashion. While income andemployment have expanded during boom period, but they shrink during depression.

1.20 LIMITATIONS OF MACRO ECONOMICSInspite of several merits of macro economics, it has number of demerits or limitations also.These are as follows:

1. Study of Aggregates: The main limitation of the macro economics is that it studieseverything in terms of aggregates and presumes all the circumstances to be homogeneousand simple, but in reality all the aggregates are heterogeneous in character.

2. Specific Individual Items Ignored: In several cases while aggregating the variables, the basiccharacteristics of the data or the parameters are completely ignored. Hence, in those casesthe features of the individual components may not be tallied with the aggregate.

3. Unable to Reflect the True Picture: Macro economic theory may not always able to reflectthe true picture of the society or an economy in equal perspectives. For example,unemployment problem may not have equal effects on the different strata of the economy.

4. Dangerous to Study Aggregates: In the time of statistical data collection, there are lots ofstatistical errors and mistakes. However, all the macro economic observations and policiesare based on these statistical data. Hence, sometimes it becomes dangerous to conclude orexplain on these basis only.

1.21 DIFFERENCE BETWEEN MICRO AND MACRO ECONOMICS

Table 1.1 shows the comparative study between these two branches.

Table 1.1: Difference between Micro and Macro Economics

Nature Micro Economics Macro Economics

1. Meaning It is the branch ofeconomics which studiesindividual economic,variables, like demand,supply, price and etc.

It is the branch of economicswhich aggregate economicvariables like aggregate demand,aggregate supply, price level andetc.2. Scope It has very narrow scope,

i.e., an individual, a marketand etc.

It has a very wide scope, i.e., acountry.

3. Evolution Evolution of microeconomics has taken placeearlier than macroeconomics

It has evolved only after thepublication of Keynes book,‘General Theory of Employment,Interest and Money’.

4. Relatedconcept

Demand, supply, marketforms and etc. are relatedto micro economics

Aggregate demand, aggregatesupply, national income and etc.are related to macro economics.

5. Purpose ofstudy

It is helpful for analysing ofan individual economic unitlike firm, household andetc.

It is helpful for analysing the levelof employment, income, economicgrowth and etc.

6. Theories Theory of demand, theoryof production, pricedetermination theory andetc, have developed frommicro economics.

Theory of national income, theoryof employment, theory of money,theory of general price level andetc. have developed from macroeconomics.

1.22 MEANING OF STATISTICSThe word ‘statistics’ is used in two different senses − Plural and Singular. In plural sense, itmeans numerical data collected in a systematic manner with some definite objective. Insingular sense, it means the science of statistics which deals with the statistical methods ofcollecting, analysing and interpreting numerical data.

1.23 DEFINITION OF STATISTICSDifferent authors have given different definitions of Statistics. These are listed below:

(a) Plural Definition of StatisticsIn the plural sense, Webster has defined statistics as “Statistics are the classified factsrepresenting the conditions of the people in a state especially those facts which can be statedin number or in a table of numbers or in any tabular or classified arrangement.” Accordingto Professor Horace Secrist, Statistics can be defined as “the aggregated of facts affected to amarked extent by multiplicity of causes, numerically expressed enumerated or estimatedaccording to reasonable standards of accuracy collected in a systematic manner for apredetermined purpose and placed in relation to each other.”

(b) Singular Definition of Statistics

According to A.L. Bowley, “Statistics may be called as the science of counting.” But thisdefinition is inadequate and incomplete since it considers only one aspect, i.e., counting. Aclear and concise definition of statistics is given by Croxton and Cowden. According to them,statistics may be defined as the collection, presentation, analysis and interpretation ofnumerical data.

1.24 SCOPE OF STATISTICSIn the modern economy, statistics has become an important device for making decisions.The scope of statistics is expanding rapidly in different fields like Economics, Biology,Psychology, Business Management, Education, Chemistry, Physics, Agriculture andEngineering. The followings are some of the fields of economics where Statistics isextensively used.

1. Consumption: Statistical data on consumption enables us to find out the ways in whichpeople in different strata of society spend their incomes.

2. Production: The statistics of production have described the total productivity in thecountry. This enables us to compare ourselves with other countries of the world.

3. Business Cycles: The upswings and downswings of business activities (known as businesscycles) can be explained by Statistical tools (like time series).

4. Economy: Statistics is important for understanding the performance of any economyover the periods. Statistics is also helpful to know about the contribution of various sectors(primary, secondary and tertiary) in the economy.

5. Econometrics: With the help of econometrics (which is the combination of Economics,Mathematics and Statistics), economics has become the exact science.

6. Public Finance: In Public finance, we have studied the revenue and expenditure activitiesof a country. Country’s budget, fiscal policy, deficit financing and etc. are the importantconcepts of economics which are primarily based on statistics.

7. Input-output Analysis: The input-output analysis is based on statistical data. It explainsthe relationship between the inputs used and output produced.

8. Quality Control: Statistical methods are used for quality control, i.e., to find out whethera product has been confirmed to give specification in any production process, or not.

1.25 IMPORTANCE OF STATISTICS IN ECONOMICSThe interaction between Statistics and Economics is increasing day-by-day. Statistical dataand advanced techniques of statistical analysis have proved immensely useful in the variousfields of economics. For instance,

(i) The studies of consumption statistics have revealed the pattern of the consumption of thevarious commodities by the different sections of the society. It helps to give some ideasabout the purchasing capacity and as well as the standard of living of the people.

(ii) The studies of production statistics have revealed the pattern of the production ofvarious goods and services. It enables us to get ideas about excess demand and excesssupply situations.

(iii) The studies of income and wealth statistics have revealed the pattern of incomeinequality persists in the society.

(iv) The statistics of prices are needed to study the condition of inflationary situation in theeconomy through the construction of consumer price index number (CPI) and wholesaleprice index number (WPI).

(v) The statistics of market price, cost and profit of different individual firms are needed forthe study of perfect competition and monopoly.

(vi) Statistics related to some macro economic variables like production, consumption,savings, investments, expenditures are used for the measurement of National IncomeAccounts. All these are important for economic planning.

(vii) Time Series Analysis, Index Numbers, Forecasting Techniques are some of the veryimportant powerful statistical tools used in the economic analysis.

1.26 LIMITATIONS OF STATISTICSDespite of universal acceptability, statistics suffers from number of limitations. Followingare the important limitations of statistics:

1. Statistics does not deal with individual item. Hence, statistical study is not applicable whenone wants to study individual cases.

2. Statistics deals with quantitative data. It cannot be easily used in analysis the qualitativephenomena like honesty, beauty, goodwill, efficiency and etc.

3. Statistics can not reveal the entire story of a problem.4. Statistical laws are true only on averages. What is true for a group may not be true for an

individual in applying statistical conclusion.5. Statistics is liable to be misused. According to King, “Statistics are like clay which you can

make a God or Devil as you wish”.1.27 STATISTICAL TECHNIQUES USED IN ECONOMIC ANALYSIS

The following important statistical techniques are used in economic analysis.1. Collection of data.2. Tabulation3. Measures of Central Tendency4. Measures of Dispersion5. Correlation6. Index Numbers7. Time series8. Probability9. Business Forecasting

10. Sampling11. Test of Significance and Analysis of Variance12. Statistical Quality Control.

1.28 STAGES OF STATISTICAL STUDYCroxton and Cowden have defined statistics as “science of collection, presentation, analysisand interpretation of numerical data”. From this definition, it is clear that one has to go

through five stages for any statistical study. Table 1.2 presents different stages of statisticalstudy with related statistical tools.

Table 1.2: Different Stages of Statistical Study with Related Statistical Tools

BOX 1.1: Statistical Methods are Not Substitute for Common Sense!

There is an interesting story which is told to make fun of statistics. It is said that a familyof four persons (husband, wife and two children) once set out to cross a river. The fatherknew the average depth of the river. So he calculated the average height of his familymembers. Since the average height of his family members was greater than the averagedepth of the river, he thought they could cross safely. Consequently some members of thefamily (children) drowned while crossing the river.

Does the fault lie with the statistical method of calculating averages or with the misuse of theaverages?

(Source: NCERT, Pg 7)

SUMMARY1. The word “Economics” is derived from Greek word “Okis” means household and

“Nemein” means management.2. Economy is a system where all the human activities are related with economic and non-

economic aspects performed continuously.3. Economic activities are production, consumption, distribution and exchange.4. Non-economic activities are social activities, political activities and religious activities.5. In order to understand the nature and scope of economics, it is necessary to analyse the

definition of economics.6. In order to understand the nature and scope of economics, it is necessary to analyse the

definition of economics. There are as many definitions as there are economists; several

Stages of Statistical Study Statistical Tools

First stage: Collection of Data Complete enumeration (census) method OR differentsample survey methods

Second stage: Organisation ofData

Array of DataORTally marking

Third stage: Presentation ofData

Graphical as well as Tabular presentation.

Fourth stage: Analysis of Data Univariate Analysis (like percentages, averages) andBivariate Analysis (correlation, regression)

Fifth stage: Interpretation ofData

Magnitudes of averages, percentages, degree ofassociation etc.

economists from time to time have given several definitions of economics, but none of themis correct, complete and satisfactory.

7. The definitions of economics are broadly divided into following types: Wealth definition,Welfare definition, Scarcity definition and Growth-oriented definition.

8. The main features of wealth definitions are study of wealth, material commodities, causes ofwealth, economic man and etc.

9. The main criticisms of wealth definitions are materialistic concept, ambiguous, narrowscope, concept of economic man, scarcity and choice.

10. The main features of welfare definition are study of mankind, study of ordinary man, use ofmoney, promotion of welfare and etc.

11. The important criticisms of the wealth definition are unscientific, vague, narrow scope,unrealistic, social science only, improper explanation and etc.

12. There are two main branches of economics, i.e., micro economics and macro economics.13. The word ‘statistics’ has been derived from the Latin ‘status’, Italian word ‘statista’,

German word ‘statistik’ each one of which means a political state.14. The word statistics is used in two different senses plural and singular.15. In the plural sense, it means numerical data collected in a systematic manner with some

definite objective.16. In the singular sense, it means the science of statistics which deals with the statistical

methods of collecting, analysing and interpreting numerical data.17. In the modern economy, statistics has become one important device for making economic

decisions in various fields.18. Despite of universal acceptability, statistics suffers from a number of limitations. For

example:

(i) Statistics does not deal with individual item.(ii) Statistics deals with quantitative data,

(iii) Statistics cannot reveal the entire story of a problem,(iv) Statistical laws are true only on averages,(v) Statistics is liable to be misused.

ASSIGNMENTS(A) IQ Test {you have to simply tick (√) YES or NO}

(i) Economics is a social science. [Yes/No](ii) The term distribution in economics is termed as ‘Product Pricing’. [Yes/No]

(iii) Worshipping of God is an economic activity. [Yes/No](iv) The word economics has been derived from Greek words “Okis” and “Nemein”.[Yes/No](v) Prof. Marshall had introduced the concept of “economic man” in economics. [Yes/No]

(vi) The concept of national income comes under the context of micro economics. [Yes/No](vii) The word “Makros” means too large. [Yes/No]

(viii) The word statistics has been derived from the Latin word ‘status’. [Yes/No]The word statistics is used in two different senses − plural and singular [Yes/No]

(ix) In the modern economy, the scope of the statistics is limited [Yes/No](x) Statistics suffers from a number of limitations [Yes/No]

(xi) There is no important of Statistics in Economics [Yes/No](xii) Statistics is a branch of Economics [Yes/No]

(xiii) Statistics presents data in compact form [Yes/No]

(B) Very Short Answer Type Questions [1 mark each](i) Define Economy.

(ii) What do you mean by economic activities?(iii) Give two examples of economic activities.(iv) Define non-economic activities.(v) Give two examples of non-economic activities.

(vi) State the definition given by Adam Smith.(vii) Define Welfare definition.

(viii) What do you mean by scarcity definition?(ix) Give the growth-oriented definition of economics.(x) State the main features of wealth definition.

(xi) State the main features of Marshall’s definition.(xii) Point out the main features of Robbins’ definition.

(xiii) Indicate the features of Samuelson’s definition.(xiv) State two criticisms of wealth and welfare definition.(xv) Indicate two demerits of scarcity definition.

(xvi) What is positive economics?(xvii) Define normative economics.

(xviii) Why economics is considered as an art?(xix) Define statistics.(xx) Define statistics as a singular sense.

(xxi) Define statistics as a plural sense.(xxii) Mention two limitations of statistics.

(xxiii) Mention two scopes of statistics.(xxiv) Define micro economics.(xxv) Define macro economics.

(xxvi) Mention any two different stages of statistical study.

(C) Short Answer Type Questions (3 and 4 marks each)(i) Write a note on economic activity.

(ii) Briefly discuss the concept of non-economic activity.(iii) “Economics is a science of wealth.” Explain.(iv) Critically explain Smith’s definition.(v) Explain any three features of welfare definition.

(vi) Explain any three defects of Marshall’s definition.(vii) Make a comparative study between Smith’s and Marshall’s definitions.

(viii) Discuss any two important characteristics of Robbins’ definition.(ix) Explain any three demerits of scarcity definition.

(x) Point out the differences between wealth and welfare concepts.(xi) Explain any two characteristics of Samuelson’s growth-oriented definitions.

(xii) Why economics is considered as both science and art? Explain.(xiii) Define statistics. Discuss any two limitations of statistics.(xiv) Discuss any two scope of statistical methods in Economics.(xv) Distinguish between micro economics and macro economics.

(xvi) Discuss any two importance of micro economics.(xvii) Discuss any two importance of macro economics.

(xviii) Discuss any two limitations of micro economics.(xix) Discuss any two limitations of macro economics.(xx) Briefly explain the role of statistics in Economics.

(D) Long Answer Type Questions (6 marks each)(i) Explain the concepts of economic and non-economic activities with relevant examples.

(ii) Explain the features and limitations of Wealth definition in economics.(iii) Discuss the features and limitations of welfare definition in economics.(iv) Elucidate the main features and limitations of scarcity definition in economics.(v) Explain the main features of growth-oriented definition in economics.

(vi) Discuss the importance and limitations of micro economics.(vii) Explain the importance and limitations of macro economics.

(viii) Discuss the scope of statistics.(ix) Elucidate the importance of statistics in economics.

According to the Latest Syllabus Prescribed by Central Board ofDr. Abhijit Das Dedication I dedicate this book to my beloved wife Sutapa, without her active support, patience and perseverance

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