Economic Development

UNIT 1 ECONOMIC DEVELOPMENT

Structure
1.0 Objectives
1.1 Introduction
1.2 How Does an Economy Work
1.2.1 Capitalism
1.2.2 Socialism
1.2.3 Mixed Economy

1.3 Concept of Economic Development

1.4 Measurement of Economic Development
1.5 Determinants of Economic Development
1.6 Role of Government in Development
1.7 Let Us Sum Up
1.8 Key Words
1.9 Answers to Check Your Progress
1.10 Terminal Questions

1.0 OBJECTIVES
After reading this unit, you will be able to:
• Discuss the working of an Economy in different Economic Systems;
• State the concepts of economic development, under development and
developing Economy;
• Describe the various development related concepts;
• Explain the determinants of economic development; and
• Discuss the Role of Government in Development.

1.1 INTRODUCTION
The Economic system also decides the development prospects of a country. There
are economic systems like capitalism, socialism and mixed economy prevailing in
different parts of the world. These economic systems are based on the historical
legacies of the country but objective of these systems is to attain growth and
development. It was increasingly being felt that majority of the population in
most of the developing world did not benefit much from the growth process.
Therefore development is more comprehensive, which includes promoting the
standard of living and economic condition of a country. Such efforts can involve
development of human capital, critical infrastructure, regional competitiveness,
environmental sustainability, social inclusion, health, safety, literacy, and other
initiatives. In this Unit, you will learn the concept measurment and deternimants
fo the economic development.

1.2 HOW DOES AN ECONOMY WORK

The economic system and the historical context of a country also decide the
development prospects to a great extent. The policy of leissez faire (i.e. leave 7
Economic Development: free) was favoured by the classical economists. Capitalist system, Sentrally
Concept and Measurement
planned economic system and Mixed system with efficient market and rational
interventionist role of the state restrictive and liberalization policy are also shaped
in the process of evolution.
Economic system of country provides its broadest process of working of major
economic activities. There are three kinds of economic systems:
• Capitalism
• Socialism
• Mixed Economy
Let us learn them in detail.
1.2.1 Capitalism
In a capitalist economic system, activities of a business firm are market
determined. In a capitalist economy, neither an individual nor any institution
takes decisions in a centralised or planned manner concerning its day-to-day
functioning of economic activities. However, the people of capitalist countries
know that in spite of all this the producers generally produce those commodities
which are effectively demanded in the market. The producers also find it
necessary to demand services of factors of production like land, labour, capital
and organization. There is payment by producers for these services, which is in
the form of rent, wages, salaries, interest and profit. This is also known as income
in lieu of rendering services to the producer. It is only by spending this income
that the people can buy goods and services of their choice.
In a free market economy, the invisible behaviour of the consumers and producers
based on their needs develop a system of price mechanism. This system decides
‘What to produce’, ‘How to produce’ and ‘For Whom to produce’. This system
not only solves the central problems of working of the economy but also helps
in reaching the state of equilibrium. This can be understood with the help of the
following Figure.

Figure 1- Working of the Price Mechanism

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It is clear from the figure that the choice and preferences of the individuals Economic Development
for consumption goods and their income which they wish to spend on buying
these will together determine the demand for various goods in the market. The
production function and the quantity and proportion in which labour, capital,
land and other factors are used in the productive process determine the supply
of the products in the market. It is these conditions of demand and supply in the
commodity market which determine the prices of all products which enter it.
The other factors, such as wage, rate, rent, etc. are determined in more or less
the same manner.
In free market or in the capitalist countries, it is through the working of this price
mechanism that the free enterprise economy takes decisions regarding the three
central problems, viz. what to produce, how to produce and for whom to produce
in favour of maximum social welfare.
This price mechanism works efficiently under the conditions of perfectly
competitive market structure and equitable distribution of income and wealth. But
major challenge in most of the capitalist countries today is neither the equitable
distribution of income nor the perfect competition. Therefore, a number of
weaknesses can be noted in the way in which the price mechanism regulates the
economy. It is very often seen in capitalist countries that on the one hand, there
is scarcity of necessities like wheat and milk, while on the other hand, liquor,
motor car, television and other luxuries are freely available. Moreover, the children
of the poor fail to get basic necessities like food and clothing due to very low
income, rich have all luxuries of life because of high income.
1.2.2 Socialism
Socialism is an economic system where private sector does not have any kind
of control over price fixation by market forces. The production, distribution and
consumption resulting from all major economic activities are centralised. By
centralization means, it is controlled by the state or state-established agencies.
This kind of system is also known as command economy.
According to Paul M. Sweezy, “Socialism is a complete social system which
differs from capitalism not only in the absence of private ownership of the means
of production but also in its basic structure and mode of functioning.”
Market system or market determined prices have no role to play in the working
of a socialist economy. China and Russia are examples of Socialist Economy. In
these economies, generally the planning commission or central decision making
agencies, are required to solve the basic central problems, i.e. what to produce,
how to produce, and for whom to produce. In order to do this, the Planning
Commission or central agencies have to, on the one hand, make an estimate
of the available economic, human and natural resources at its command, while
on the other hand, it has to determine the requirements of the nation for various
goods and services. This process can also be termed as Command Economy.
To put it more clearly, the Commission has to decide upon the various commodities
which the economy should produce with the available resources. There can be
many different ways of achieving the output targets. The Planning Commission
in a socialist country takes into consideration the social welfare aspect and
the development related goals of the nation while choosing the technique of
production to be used. In this system, disposable income of people are given by
state in an equitable way by taking into consideration the poorest section of the
society also. The price mechanism in a capitalist economy operates in such a way
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Economic Development: that production takes place only to meet the demands of all those people who
Concept and Measurement
have considerable amount of disposable income. Under this system, not much
attention is generally paid to the production of those commodities which belong
to the poor man’s basket. In a socialist economy, however, income inequalities
are drastically reduced so that everyone has an adequate amount of disposable
income. While determining the pattern and size of the output, the Planning
Commission has to see to it that its decisions in this regard are such that they
ensure the availability of commodities for all in the market.
Economists view socialist planning as equivalent to planning for economic
development. Therefore, every economic plan of the nation which determines its
economy’s pace and pattern of development should necessarily incorporate two
elements: first, the way in which national income is to be distributed between
consumption and accumulation, and second, the manner in which investment is
to be allocated among the different sectors of the economy.
1.2.3 Mixed Economy
A mixed economy represents a mixture of features of the two types of economies,
capitalism and socialism. Under this form of economic system, the production
is partly in the hands of private individuals and partly owned by the State. The
public authority usually owns public utility services like supply of water and
electricity, roadways and railways, shipping and air services. The Government
tries to remove disparities and inequalities in the income distribution by various
measures, such as taxes and their levies and through public expenditure.
According to Samuelson, a mixed economy is characterized by the existence
of both public and private institutions exercising economic controls. In this
economy, price mechanism and partial planning both play an important role.
Indian is perhaps the best example of such an economy and can legitimately be
called a mixed economy.
A mixed economy contains the good features of both socialism and capitalism.
Every possible effort is made to make the best possible use of available economic
resources. The price mechanism and the profit motive and all kinds of freedoms
result in the efficient allocation and utilisation of the available resources. As a
result, shortages and surpluses are easily avoided and business fluctuations are
eliminated.
Check Your Progress: A
1. Define public sector.
2. Write two characteristics of capitalism.
3. Write two characteristics of socialism.
4. Define the mixed economy.
5. State whether the following statements are True or False.
i) In a capitalist economic system, activities of a business firm are market
determined.
ii) Market system or market determined prices have no role to play in the
working of a socialist economy.
iii) In socialist system, workers are motivated to work hard.
iv) A mixed economy is characterized by the existence of both public and
private institutions exercising economic controls.
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 v) A mixed economy contains the good features of both socialism and Economic Development
capitalism.

1.3 CONCEPT OF ECONOMIC DEVELOPMENT

Economic development is a comprehensive term that generally refers to the
sustained, concerted endeavour of policymakers and community to promote the
standard of living and economic condition in a country. Economic development
can involve efforts in multiple areas such as development of human capital,
critical infrastructure, regional competitiveness, environmental sustainability,
social inclusion, health, safety, literacy, and other initiatives. It should be noted
that economic development is different from economic growth. Economic
development is a policy intervention endeavour which aims to increase economic
as well as social well-being of people,
Development and Underdevelopment
The Indian economy, like every other economy, performs three vital functions,
viz. production, consumption and growth; it produces different types of goods and
services; it enables its people to buy and consume them. While USA, Sweden,
West Germany, Japan, etc. are developed economies with technologically
advanced agriculture, industry, transport and communication system, etc. the
Indian economy has been struggling to become a developed economy.
Economists world over have indicated certain features of underdevelopment.
Economic development may be defined as the process by which a traditional
society employing primitive techniques and capable of sustaining only a low
level of income is transformed into a modern, high technology, high-income
economy. Such a developed economy uses capital, skilled labour and scientific
knowledge to produce wide variety of products for the market. Capital goods
and human capital and relevant scientific knowledge play a major role for the
development of an economy.
The underdeveloped countries face poverty, rising burden of unemployment,
growing disparities in income distribution, low and stagnant agricultural
productivity, sizeable gap between urban and rural levels of living, lack of
adequate education, health and housing facilities, dependence on foreign and
often inappropriate technologies and more or less stagnant occupational structure.
Some of the features of the underdeveloped economy are as follows:
1. Low Per Capita Income: Per capita income refers to the average income
of people of a country. It is calculated by dividing national income by total
population of the country. Per capita income is also often used to measure a
country's standard of living. You must be aware that the national income of
an under developed country is low and the population is high. As a result,
the under developed countries have low per capita income.
2. Inequitable Distribution of Income and Wealth: Disparity of incomes
among different population segments is known as disparities in income.
Growing inequality in the distribution of wealth and poverty has become
a major problem all-over the world. The inequality affects the economic
development of the under developed countries. Disparities in wealth is one
of the important reasons for inequitable distribution of income.
3. Heavy Dependence on Agriculture: A large proportion of population is
dependent on agriculture in underdeveloped countries. The natural calamities
adversely affect the agriculture. As a result, the farmers get less output from 11
Economic Development: agriculture. These days, the contribution of agriculture to the GDP of under-
Concept and Measurement
developed countries has been rapidly declining.
4. Heavy Population Pressure: Growth of population in underdeveloped
countries is very high as compared to the developed nations. The public
investments in education and health have been very meagre. Therefore, the
human resources of underdeveloped countries are not properly harnessed.
The majority population has to depend on informal employment.
5. Unemployment and Underemployment: A situation of unemployment
arises when the people seeking jobs do not find opportunities to work.
Underemployment is a condition in which people in a labour force are
employed on part-time or gig jobs or at jobs inadequate with respect to their
training/skills or economic needs. Many people in underdeveloped countries
are either unemployed or underemployed.
6. Capital Scarcity and Low Rate of Capital Formation: One of the important
problems of underdeveloped countries is scarcity of capital. Capital formation
refers to addition of capital goods, such as equipment, tools, transportation
assets, and electricity. Countries need capital goods to replace the older ones
that are used to produce goods and services. If a country cannot replace capital
goods due to lack of resources, the production starts declining. Generally,
the higher the capital formation of an economy, the faster an economy can
grow its aggregate income. Underdeveloped countries face the problem of
shortage of capital due to low levels of income of people and savings.
7. Use of Primitive Technologies: Technological development is very low in
underdeveloped countries as compared to the developed countries. Most of
the technologies used in underdeveloped countries are outdated and primitive.
Therefore, the cost of production becomes very high. The products are not
able to compete in the international markets. The domestic industry may not
be able to compete with imported goods.
8. Disparities in Rural Urban Living Standards: There has been wide
variation between rural and urban people in the underdeveloped economy.
The disparities are measured in terms of income, consumption and other
non-monetary aspects of standard of life such as access to education, health,
transport, protected water, sanitation etc.
9. Low Financial Inclusion Rate: The lower strata of the society, particularly in
rural areas is less financially inclusive in underdeveloped countries. Financial
inclusion means access of people to useful and affordable financial products,
such as banking services, insurance, etc. The less financial inclusion rate
reduces the number of opportunities for growth.
A Developing Economy
After Independence, the government took keen interest in the economy which
was given a big push through the sector enterprises in the core sectors. As a
result, per capita income has been rising, although not steadily. The dominance of
agriculture is gradually reducing; the secondary and tertiary sectors (services) are
slowly expanding. In the last seventy years, the Indian economy has developed
a large number of basic industries that produce capital equipment and useful
raw materials. India is now in a position to maintain the growth of most of her
industries by the domestic production of capital goods, supplemented with only
marginal imports. India has also built a large number of canals and storage works,
12 hydro and thermal power generation and largely electrified railway system,
expanding post and telecommunication system covering most of the countries Economic Development
and linking its important business centres with other countries, expanding system
of banking and finance and so on.
Economic Growth
The basic aim of economic policy of the Government of India has been to remove
poverty and create means for better standard of living of the people. This aim can
be achieved through rapid economic growth. Economic growth can be defined
as the process whereby an economy’s real national income increases over a long
period of time. Economic growth is an increase (or decrease) in the value of goods
and services that a geographic area produces and sells in comparison to an earlier
time. If the value of an area's goods and services is higher in one year than the
year before, it experiences positive growth, usually known as "economic growth”
However, as economist Amartya Sen points out: “economic growth is only one
aspect of the process of economic development.”
"Big Push" Approach
It is the measure of help to the developing countries trapped in the vicious circle
of poverty trap, by injecting large sums of financial supports, so as to break the
cycle and improve the local living standards based on industrial development
and investment.
Poverty Trap
Poverty trap is a self-perpetuating condition where an economy suffers from
persistent underdevelopment where poverty breeds or perpetuates poverty. Poverty
trap has to be distinguished from (possibly temporary) bad market outcomes,
such as recessions and financial crises.
UN Development Decade
The UN General Assembly declared each decade of the 1960s, 1970s, 1980s
and 1990s, as the first, second, third, and fourth UN Development Decade,
respectively. The first Development Decade was announced by President John.
F. Kennedy of the United States in 1962. Each decade put forth specific sets
of development goals. No announcement of the development decade was made
for the first decade of the 21st century; however, the Millennium Development
Goals (covering the period up to 2015) were adopted at the UN Millennium
Summit in 2000.
Sustainable Development
It is the process of development that "meets the needs of the present without
compromising the ability of future generations to meet their own needs" (the
Brundtland Report, 1987). While the central issue of sustainable development
is the reduction/prevention of environmental degradation, but it must be done
without unduly forgoing the needs of economic development, social equality
and justice.
Millennium Development Goals (MDGs)
The eight goals covering a wide range of social and economic development that
the UN member states have agreed to strive for with the year 2015 as the target
time-limit. The MDGs were adopted on the occasion of the 2000 UN Millennium
Summit. Since then, the UN system has been mobilized to their achievement,
and many NGO have rallied around the UN campaign. The MDGs specifically 13
Economic Development: concern the eradication of extreme hunger and poverty; achieve universal primary
Concept and Measurement
education; promote gender equality and empower women; reduce child mortality;
improve maternal health; combat HIV/AIDS, malaria, and other diseases; ensure
environmental sustainability; develop a global partnership for development.

1.4 MEASUREMENT OF ECONOMIC

DEVELOPMENT
Economic development refers to the total quality of life of a population. It includes
the standard of its education, medical care and diet. The greater a country’s
economic development, the better the living standard of people should be.
A major goal of poor countries is economic development or economic growth.
The two terms are not identical. Growth may be necessary but not sufficient for
development. Economic growth refers to increases in a country's production or
income per capita Production is usually measured by Gross National Product
(GNP) or Gross National Income (GNI), used interchangeably, an economy's
total output of goods and services.
Economic development is accompanied by changes in output distribution and
economic structure. These changes may include an improvement in the material
well-being of the poorer half of the population; a decline in agriculture's share of
GNP and a corresponding increase in the GNP share of industry and services; an
increase in the education and skills of the labour force; and substantial technical
advances originating within the country. As with children, growth involves a stress
on quantitative measures (height or GNP), whereas development draws attention
to changes in capacities (such as physical coordination and learning ability, or
the economy's ability to adapt to shifts in tastes and technology). Currently
measurement of development are:-
• GNP per capita
• Population Growth
• Occupational Structure of the Labour Force
• Human Development Index (HDI)
Let us discuss them one by one.
GNP Per Capita
GNP is the total market value of all final goods and services produced by a country
in one year. It is a measure of economic activity, or how much is produced in a
country. The more that country produces per person, the more "developed" it is
assumed to be.
GNP is measured in US dollars, so that comparisons can be made with other
currencies in the world. For example, in India US$1 will buy far more than in
the USA. This is called Purchasing Power Parity (PPP). This converts a national
income to its equivalent in the USA
Gross Domestic Product (GDP) is closely linked with GNP. It is the value of the
goods and services produced in the country only. It includes all goods and services
produced by foreign owned companies. GDP excludes all goods and services
produced outside the country. The average GDP per person can be calculated by
dividing the GDP by the total population of the country

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Population Growth Economic Development

In general, poorer countries have higher rate of population growth. Many of

the world's countries, including many in Sub-Saharan Africa, the Middle East,
South Asia and South East Asia, have seen a sharp rise in population in the last
few years. The fear is that high population numbers may put further strain on
the natural resources, food supplies, fuel supplies, employment, housing, etc. in
underdeveloped and developing countries. It has been seen that in underdeveloped
and developing countries, rapid growth of population is an important hindrance
to the economic growth. Higher population means less resources per capita.
Since economic growth is measured in terms of an increase in per capita income,
a part of the increase in national income is utilised to maintain the additional
population. In other words, in terms of per capita income, on account of a rise in
population, the country is left with small potential of spreading benefits of growth
across its population. This highlights the need for a large and active programme
of family planning so that the benefits of the massive developmental efforts do
not get dissipated.
But it may be emphasized that it would not be proper to isolate the population
factor because history has shown that birth rate only falls significantly when the
standard of living rises significantly for the majority of the population. Hence
economic development and population are interconnected. Whereas population
hinders economic development, the latter, as it gathers momentum, leads to the
creation of more appropriate conditions to control population.
Occupational Structure of the Labour Force
Economic activities of any country are broadly classified into primary activities,
secondary activities, and tertiary activities. Primary activities are known as
primary because they directly remove resources from the earth, for examples,
agriculture, mining, fishing, and lumbering.
Secondary activities involve converting primary resources into finished products
by further adding values. These are classified as manufacturing activities.
Tertiary activities comprise the service sector of the economy. These facilitate
further adding values to the primary and manufacturing activities. The tertiary
activities include retailing, transportation, education, banking, etc.
As countries develop, the occupational structure of the labour force changes.
It has been observed by developmental economists that in underdeveloped or
developing countries, most people are engaged in the primary activities. In
developed countries like the United States, U.K., France, Japan and South Korea
most people are involved with the tertiary sector. Experience from all over the
world suggests that in the process of development, transfer of workforce from
primary to secondary and then secondary to tertiary sector of the economy has
invariably taken place. For instance between 1870 and 1930, the proportion of
work force engaged in agriculture declined from 54 to 23 percent in U.S.A., from
43to 25 percent in France, and from 80 to 48 percent in Japan. Currently we are
witnessing in countries like China, India and newly industrialised countries,
persons employed in territory sectors are proportionately increasing. The process
of shift in the occupational structure implies the shift of work force from low
productivity of primary sector to the high productivity secondary and tertiary
sectors. Therefore, it is essential that as economic development proceeds, there
is an optimum distribution of the work force in different occupations. This will
not only improve the utilisation of labour but will also boost the overall level of
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productivity of the economy.
Economic Development: Human Development Index
Concept and Measurement
Human Development Index developed by the United Nations Development
Program (UNDP) computes a Human Development Index for each country
each year. Currently, this has been considered a very effective indicator of
development. It takes into consideration social conditions including GNP per
capita. Although it is the most used indicator of development, yet there are some
significant problems with it.
The human development index (HDI), is composed of three indicators, namely
life expectancy, education (adult literacy and combined secondary and tertiary
school enrolment) and real GNP per capita.
Check your progress B
1. Define economic development.
2. Write any four characteristics of underdevelopment.
3. What is the per capita income?
4. Write three indicators of human development index.
5. State which of the following statements are True or False.
i) Economic development refers to the total quality of life of population
ii) Production is usually measured by Gross National Product (GNP) or
Gross National Income (GNI).
iii) United Nations Development Programme (UNDP) computes Human
Development Index for each country.
iv) The average GDP per person can be calculated by dividing the GDP by
the total population of the country.
v) Economic growth refers to decrease in country’s production or income
per capita.

1.5 DETERMINANTS OF ECONOMIC

DEVELOPMENT
The process of development depends on a host of factors like natural resources,
physical and human capital, technology, socio-politico-economic structure of
the country. Determinants of development are broadly classified into economic
factors and non-economic factors.
Economic determinants of the economic development are as follow:
Capital Formation
Growth rate of the national income in the developed nations’ high capital
formation has contributed to higher economic growth. A higher rate of capital
formation leads to productive capacity of a nation, which results into higher
production of goods and services and higher national income.
Capital includes the stock of machines, tools and equipment (which produce
consumer goods as well as machines) and improvements in skill formation of its
work force, which has enhancing effect on the process of growth. Any increment to
this stock year to year are called Capital Formation. Investment is also generally
known as amount of capital formation.
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It is therefore very essential for developing and underdeveloped countries to Economic Development
increase the stock of Capital formation for accelerating the economic development
and growth. Along with capital, it is also important for these countries to focus
on skill formation so that the machines and equipment created can be utilized
efficiently to achieve a rising level of production.
In underdeveloped countries, the level of income is low and due to this, saving
ratio is also low. Low saving results into low investment and lower level of capital
formation. Therefore, increase in income leads to more capital formation. To
make optimum use of the natural wealth, necessary amount of capital is needed
so that they can be used to their fullest. If the level of income is low, the savings
will also be low. In such a case, a country may use foreign capital. The actual
requirement of capital depends upon growth target and capital output ratio.
Capital-Output Ratio
Capital-output ratio is one of the most important determinants of development.
The ‘capital-output ratio' may be defined as ‘number of units of capital required
to produce one unit of output’. In other words, capital-output ratio measures the
productivity of capital that is employed in various sectors of the economy at a
point of time. Also in a developing country like India where there is shortage
of capital, it becomes all the more important to conserve its use by utilizing it
efficiently. But the capital-output ratio is different for different industries. In
capital intensive industries, capital output ratio is higher as compared to the labour
intensive industries. The Capital output ratio therefore varies across different
economies and also over a period of time.
"There is no unique capital-output ratio applicable to all countries at all times.
Much depends on the stage of economic development reached but also on the
precise form of further expansion." (First Five-Year Plan).
Natural Resources
Natural resources include both renewable and non-renewable resources. It has
been observed that availability of natural resources in abundance is an important
but not an essential factor in a country’s economic development. Some developed
countries like the USA, Canada, Australia, New Zealand, etc. have abundance of
natural resources but Japan lacks natural resources as compared to these countries
but it is a developed country. Therefore, it does not mean that all these countries
that have natural resources in abundance, are among the developed nations. The
countries which are in their process of economic growth must direct their efforts
to make fuller use of their existing resources. Renewable and non-renewable
resources increase income, Per Capita Employment, Income and Efficiency.
Non-economic Factors in Economic Development
Human Resources – Optimum level of population can be a boon as well, as the
increasing population provides opportunity for expanding market base in terms
of demand and supply of goods and services, and more work force for producing
such output. Over population can be a problem. Optimum level of population
also provides working age population, educated and skilled manpower, health
and nutrition, demographic dividend of human capital.
Human capital is one of the most important factor of economic development.
Japan is a developed nation because of creation of capabilities and capacities
in people to work efficiently and competently in various economic activities.
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Economic Development: It has been realised that investment on human beings in the form of education,
Concept and Measurement
training and health facilities contributes to increased productivity which is very
significant for development.
In developed nations, the health and education levels are much higher as compared
to the underdeveloped countries. Developed countries with better health and
education produce larger output and higher incomes. The role of human capital
formation in economic development can be stated in terms of increase in output,
in productive capacity, improved quality of life and increase in inventions and
innovations.
Technical Know-how: Technology and technical know-how are also very
significant factors in the process of economic development. More sophisticated
techniques of production always facilitate in increasing the level of production
and productivity levels. As the scientific and technological knowledge advances,
there is more sophistication in the level of technology. Information technology
and digitization are bringing more and more sophistication in the techniques
of production. To incorporate new technology in the production process or in
order to modify the existing plants, a larger investment to procure or produce
new equipment is required. Hence a higher rate of capital formation is necessary
to support technological progress. Since technology has now become highly
sophisticated, still greater attention has to be given to Research and Development
for further advancement.
Institutional Factors Affecting Development
There are a number of non-economic factors that act as catalyst in the process of
economic development. These institutional factors are organisations, structures,
rules, education and educational institutes, healthcare infrastructure and political
stability. Other institutional factors that have impact on the process of development
are legal system, financial system, credit and micro finance, taxation, the use of
appropriate technology and the empowerment of women.

1.6 ROLE OF GOVERNMENT IN DEVELOPMENT

If the economy depends solely on the price mechanism to solve its central
problems, then given the income and wealth inequalities, there is a possibility
that a large number of people die of starvation while a handful possess the good
things of life very much in excess of what is required by them. Here intervention
of government to facilitate inclusive and sustainable development is required. Any
enlightened government finds it necessary to curb inhuman traits in the working
of the price mechanism.
It has been seen that price mechanism due to the individualistic orientation of
human behaviour cannot adequately allocate resources for education, medical
facilities and other social services. Government must allocate resources for
education, medical facilities and other social services by keeping in mind that in
a country like India, there is sizable population living in poverty and they lack
resources to buy these services. Other services of immense national importance,
like transportation, communications, water and electricity, defence, space are
also very important for development. The Government cannot solely depend on
private sector or by the price mechanism alone. Because then it is likely to result
in a very short supply of each one of them. Therefore, it becomes imperative for
the government to participate directly in the production of these services.

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 Economic Development
1.7 LET US SUM UP
The economic system and the historical context of a country also decide the
development prospectus to a great extent. Economic system of country provides
its broadest process of working of major economic activities, namely Capitalism,
Socialism and Mixed Economy.
In a capitalist economic system, activities of a business firm are market
determined. In a capitalist economy neither an individual nor any institution
takes decisions in a centralized or planned manner concerning its day-to-day
functioning of economic activities. Socialism is an economic system where private
sector does not have any kind of control over price fixation by market forces.
The production, distribution and consumption resulting from all major economic
activities are centralized. By centralization means, it is controlled by the State
or State-established agencies. This kind of system is also known as command
economy. A mixed economy represents a mixture of features of the two types of
economies, capitalism and socialism. Under this form of economic system, the
ownership of means of production is partly in the hands of private individuals
and partly owned by the State. Economic development is a comprehensive
term that generally refers to the sustained, concerted endeavor of policymakers
and community to promote the standard of living and economic condition in a
country. Economic development refers to the total quality of life of the population.
It includes the standard of its education, medical care, the diet, etc. The greater
a country’s economic development, the better the living standard of people is.
Currently, measurement of development are:
• GNP per capita
• Population Growth
• Occupational Structure of the Labour Force
• Human Development Index (HDI)
There are a number of non-economic factors that act as catalyst in the process of
economic development. These institutional factors are organisations, structures,
rules, education and educational institutes, healthcare infrastructure and political
stability. If the economy depends solely on the price mechanism to solve its central
problems, then given the income and wealth inequalities, there is a possibility
that a large number of people die of starvation while a handful possess the good
things of life very much in excess of what is required by them. Here intervention
of government to facilitate inclusive and sustainable development is required.

1.8 KEY WORDS

Capitalism: The economic system in which business are owned and run for profit
by individuals and not by the state.
Socialism: The political idea that is based on the belief that all people are equal
and that money and property should be equally divided.
Mixed economy: A economy system combination with private and state
enterprise.
Development: Underdevelopment The process of becoming bigger, stronger
better etc. or of making somebody something do this.
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Economic Development: Underdevelopment: Is low level of development characterized by low real per
Concept and Measurement
capita income wide-spread poverty, lower level of literacy, low life expectancy
and underutilization.
Economic growth: An increase in the amount of goods and services produced
per head of the population over a period of time.
Sustainable Development: Economic development that is conducted without
depletion of natural resources.
Gross National Product (GNP): Total market value of the final goods and
services produced by a nation’s economy during a specific period of time a year
computed before allowance is made for the depreciation or consumption of capital
used in the process of production.
Gross Domestic Product (GDP): GDP is the most commonly used measured
for the site of an economy.

1.9 ANSWERS TO CHECK YOUR PROGRESS

(A) 5 i) True ii) True iii) False iv) True v) True
(B) 5 i) True ii) True iii) True iv) True v) False

1.10 TERMINAL QUESTIONS

1. Discuss in detail about the working of an economy in capitalism, socialism
and mixed economy.
2. What is the difference between underdevelopment and development? Explain
with appropriate examples.
3. What are major determinants of development? Discuss.
4. Discuss the role of non-economic factors in economic development.
5. What are the millennium goals? Discuss in detail.

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