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UPPSC Batch
DAILY
CLASS NOTES
Economics
Lecture – 01
Introduction to Economics
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Introduction to Economics
Economics:
❖ Economics is the study of how people, businesses, and governments use limited resources to meet their
needs and wants.
❖ It examines how goods and services are produced, distributed, and consumed.
Stock and Flow
Stocks
❖ Stocks refer to quantities measured at a particular point in time.
❖ Example:
➢ Money in a bank account
➢ The total population of a country
➢ Total wealth of a nation
Flow
❖ A flow is measured over a period of time.
❖ Example:
➢ Monthly salary (adds to bank balance)
➢ Number of births in a year (adds to population)
➢ A company's yearly profit (adds to total wealth)
Illustrative Example:
Imagine a tank being filled with water from a tap:
❖ Stock: The total amount of water in the tank at a given moment.
❖ Flow: The water flowing in or out of the tank over time.
Circular Flow of Income
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❖ The circular flow of income is a model representing how money, goods, and services move among different
economic agents.
❖ The flows of money and goods/services exchanged in a closed circuit correspond in value, but run in the
opposite direction.
❖ Two-Sector Model (Basic Circular Flow):
➢ Households: Provide labor and receive wages.
➢ Businesses – Produce goods/services, pay wages, rent, and profits.
Capital Output Ratio (COR):
❖ The Capital Output Ratio (COR) measures how much capital (investment) is needed to produce one unit
of output (GDP). It shows the relationship between investment and economic growth.
❖ A lower COR means higher efficiency, as less investment is needed for the same level of production.
Incremental Capital Output Ratio (ICOR)
❖ The Incremental Capital Output Ratio (ICOR) measures how much additional investment is needed to
produce one extra unit of output.
❖ It helps understand how efficiently a country is using its capital for economic growth.
❖ ICOR shows the relationship between investment and economic growth.
❖ A low ICOR is good because it means the country is producing more with less investment. A lower ICOR
means a country is using its resources efficiently.
❖ A high ICOR indicates less efficiency, as more investment is required for the same amount of output.
National Income
❖ The final value of all goods and services produced in a country in a given period of time is called national income.
➢ National Wealth: Measures total assets available at a given time.
➢ National Income: Measures economic production capacity over time.
Measures of National Income
❖ Gross Domestic Product at Market Prices (GDP):
➢ GDP is the market value of all final goods and services produced within a domestic territory of a
country measured in a year.
➢ All production done by the national residents or the non-residents in a country gets included, regardless
of whether that production is owned by a local company or a foreign entity.
➢ Example: If an Indian citizen works in Saudi Arabia, their earnings count in Saudi Arabia's GDP, not
India’s. Similarly, profits from Hyundai (a Korean company) in India are included in India’s GDP
but belong to Korea.
➢ Thus, a country’s GDP is the total of consumer spending (C), business investment (I), government
spending (G), and net exports. (total exports minus total imports (X – M)).
❖ GDP at Factor Cost (GDPFC):
➢ GDP at factor cost is gross domestic product at market prices, minus net product taxes.
➢ Market prices are the prices as paid by the consumers Market prices also include product taxes and
subsides. The term factor cost refers to the prices of products as received by the producers. Thus, factor
cost is equal to market prices, minus net indirect taxes.
➢ GDP at factor cost measures money value of output produced by the firms within the domestic
boundaries of a country in a year.
✓ GDPFC= GDP − Net Indirect Taxes
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❖ Net Domestic Product at Market Prices (NDP):
➢ This measure allows policy-makers to estimate how much the country has to spend just to maintain their
current GDP. If the country is not able to replace the capital stock lost through depreciation, then GDP
will fall.
➢ Net Domestic Product at Market Prices is equal to the GDP at market price minus depreciation.
➢ NDP = GDP-Depreciation
❖ Gross National Product at Market Prices (GNP)
➢ It is the value of all the final goods and services that are produced by the normal residents of India and
is measured at the market prices, in a year. •
➢ GNP refers to all the economic output produced by a nation’s normal residents, whether they are located
within the national boundary or abroad.
➢ Everything is valued at the market prices.
➢ GNP = GDP + NFIA (Net factor income from abroad = Factor income earned from abroad – Factor
income paid abroad)
❖ NNP (Net National Product):
➢ This is a measure of how much a country can consume in a given period of time. NNP measures output
regardless of where that production has taken place (in domestic territory or abroad).
➢ Formula: NNP = GNP-Depreciation.
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