Basic Concepts in Economics Part I

   Basic Concepts in Economics Part I

1) Production: Any economic activity

directed towards the satisfaction of

human wants is known as production. The

production of goods and services is

necessary for the existence of an economy. The level of production in any

economy is the best measure of its

performance, living standards of its

people and the extent of technological

development and growth. It includes both

the manufacturing of material goods as

well as the provision of services. The

production of electrical and electronic goods, automobiles etc and the work of

teachers, doctors, lawyers etc are all

production in the economic sense.

2) Consumption: The act of satisfying

one’s wants is called consumption. Goods

and services are produced only because

human wants need to be satisfied. No one

will produce if there is no consumption.

The quality and quantity of consumption

reflects the levels of income and employment in an economy.

3) Investment: Investment is the

addition made to the existing total stock

of capital. The amount to make investment is coming from saving and

this saving is the unspent income. Income comes from employment. An economy

can grow only if it saves something from

its present consumption and invests it

again in the production process. It adds to

the productive capacity of an economy.

4) Goods: Anything that can satisfy

human wants is called goods in

economics. While services also satisfy

human wants, the difference is that goods

are tangible and visible but services are

intangible and invisible. Goods can be of

various types. They can be free goods or

economic goods, transferable, private or

public and so on.

5) Utility: The want satisfying capacity of a

commodity is called its utility or the power of a commodity to satisfy human

wants is called utility. Utility is subjective

that is it does not lie in the good but is a

function of the consumer’s mind. Utility of

good changes with the change in

conditions and circumstances. There are

three main forms of utility- form utility,

place utility and time utility.

6) Value: The commodity which has utility

and possesses the condition of scarcity

and transferability, then it has value. For

example air has utility but it is abundant

and a free resource, it has no value in

economic sense. Likewise rotten eggs are

scarce and transferable but possess no

utility, they also don’t have value. A television since it possesses utility and is

scarce as well as transferable has value.

Price: Value of a commodity expressed in

terms of money is called price. In modern

times, goods are exchanged for money;

the value of a commodity is its price.

Wealth: Anything that has value is called

wealth. In economics; wealth does not

only refer to money, but to all goods that

have value. Wealth includes material

wealth and human wealth (education,

health, knowledge etc)

7) Income: The amount of money which

wealth yields is known as income. Thus,

wealth is a stock concept while income is

a flow concept. That is wealth is valued at a particular point of time and income is

measured over a period of time particularly a year.

8) Gross Domestic Product (GDP)

When we take the sum total of values of

output of goods and services in the

country, without adding net factor

incomes received from abroad, the figure

so obtained is called Gross Domestic

Product (GDP). GDP = C+I+G GNP may be defined as the aggregate market value of all final goods and services produced during a given year. The concept of final goods and services stands for finished goods and services, ready for consumption of households and

firms, and exclude raw materials, semi-

finished goods and such other intermediary products. More clearly, all

sales to households, business investment

expenditure, and all government expenditures are obviously regarded as

final goods. In an open economy (an

economy which has economic relationship

with the rest of the world in the form of

trade, remittances, investment etc-all

economies are open economies), GNP

may be obtained by adding up: 

I) The value of all consumption goods

which are currently produced

II) The value of all capital goods

produced which is defined as Gross

Investment. Gross Investment, in the

real sense, here implies the increase

in inventories plus gross products of

buildings and equipments. It, thus,

includes the provision for the

consumption of capital assets, i.e.,

depreciation or replacement

allowances.

III) The value of government services

which are measured in terms of

governmental expenditure on various

goods and services for rendering certain services to the benefit of the

entire community.

IV) The value of net exports, viz, the

difference between total exports and

total imports of the nation. This value

may be positive or negative.

V) The net amount earned abroad.

This represents the difference

between the income received by the

nationals from abroad minus the

income remitted by the foreigners

working in India.

GNP at market price, thus, represents:

GNP= C+I+G+(X-M)+(R-P),

Where, 

C stands for consumption goods,

I stands for capital goods/ or gross

investment,

G stands for government services,

X stands for exports, 

M stands for imports,

R stands for income receipts from abroad,

and 

P stands for income remitted by

foreigners.