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UPPSC Batch

DAILY
CLASS NOTES
Economics

Lecture – 02
National Income and Growth &
Development
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National Income and Growth & Development

Base Year:
❖ The base year for GDP calculation refers to the year chosen as a reference point for comparing economic
data over time.
❖ It provides a benchmark for measuring the real growth or decline in an economy by eliminating the effects of inflation.
❖ In GDP calculations, a base year is used to express the value of goods and services at constant prices, which
allows for an accurate assessment of economic growth in real terms.
Current Base Year: The current base year for GDP calculation in India is 2011-12.
❖ This base year was adopted in 2015 by the Central Statistics Office (CSO), which is now part of the
National Statistical Office (NSO).
Selection of Base Year: The base year is typically revised every 5-10 years to reflect changes in the economy,
such as the structure of production, consumption patterns, and relative prices.
Nominal GDP vs. Real GDP with Base Year:
❖ Nominal GDP: Calculated at current market prices.
❖ Real GDP: Real GDP is measured using constant prices from a base year. It helps compare GDP across
different years by removing the effect of price changes.
Example of Nominal and Real GDP Calculation
Suppose a country produces only bread.
❖ In 2000, production was 100 units, price per unit was Rs 10, so GDP = 100 × 10 = Rs 1,000.
❖ In 2001, production increased to 110 units, price per unit rose to Rs 15, so Nominal GDP = 110 × 15 = Rs 1,650.
❖ Real GDP in 2001, calculated at the price of the year 2000 (2000 will be called the base year) will be 110 ×
Rs 10 = Rs 1,100
Nominal GDP
❖ Nominal GDP measures the total value of all goods and services produced in a country within a specific time
period, using current market prices. It does not adjust for inflation.
❖ It shows the economic activity at current prices but may give a distorted view of growth if inflation is high.
❖ Formula: Nominal GDP=Quantity of Goods and Services×Current Prices
Example:
Suppose a country produces:
❖ 100 units of product A at ₹50 each in 2023.
❖ 100 units of product B at ₹30 each in 2023.
Nominal GDP for 2023: (100×₹50)+(100×₹30)=₹5000+₹3000=₹8000
Real GDP
❖ Real GDP measures the total value of goods and services produced, adjusted for inflation. It reflects the
actual economic output by valuing production at constant (base year) prices.
❖ It provides a more accurate picture of an economy’s growth by eliminating the effects of price level changes.
❖ Formula: Real GDP = Quantity of Goods and Services×Base Year Prices
Example:
Using the same example as above:
❖ Base year prices: Product A = ₹40, Product B = ₹20.
❖ The quantity produced remains the same (100 units of each).
Real GDP for 2023: (100×₹40)+(100×₹20)=₹4000+₹2000=₹6000
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GDP Deflator
The ratio of Nominal GDP to Real GDP shows the overall
price level change (inflation or deflation):
Using the example:
This indicates a 33.33% price increase from the base year.
Gross Value Added (GVA):
❖ The GVA is estimated from GDP by adding subsidies on
production and subtracting indirect taxes.
❖ Gross value added (GVA) is defined as the value of output minus the value of intermediate consumption.
Limitations of GDP:
GDP is primarily designed to measure economic growth, not social well-being. As a result, it has several
limitations when used as an indicator of welfare. The key limitations are as follows:
❖ GDP does not incorporate any measures of welfare
➢ GDP only measures the value of finished goods and services produced within an economy over a
specific period.
➢ It does not consider factors like health, education, or happiness, which are important for a good life.
❖ GDP only includes market transactions
➢ It does not account for domestic work (e.g., household chores, caregiving) or voluntary work, even
though these activities contribute significantly to social welfare.
➢ It excludes black market transactions and other illegal economic activities, which can have both
positive and negative impacts on the economy.
❖ GDP does not reflect income distribution
➢ A high GDP does not mean that everyone in the country is benefiting equally.
➢ If wealth is concentrated in a few hands, most people may not see any real improvement in their lives.
❖ GDP does not distinguish between beneficial and harmful production
➢ It includes the value of all goods and services produced, regardless of their impact on society.
➢ It includes all goods and services, even those that harm society, like weapons or cigarettes.
➢ A country with a large arms industry may have a high GDP, but if the weapons are used in wars, social
well-being may decline.
❖ GDP ignores externalities
➢ Economic growth often leads to the overuse of natural resources and environmental degradation.
➢ Negative externalities such as pollution, deforestation, and overfishing are not reflected in GDP calculations.
➢ As a result, GDP may indicate economic progress while ignoring long-term environmental and social costs.
Alternatives to GDP
❖ Green GDP
➢ Green GDP is an alternative economic indicator that integrates the environmental costs, such as
pollution, deforestation, and resource depletion.
➢ It aims to measure sustainable economic growth rather than just economic output.
❖ Gross National Happiness (GNH)
➢ Its purpose is to measure how prosperous a country is by focusing on the happiness and well-being of its citizens.
➢ It is based on four pillars:
✓ Good governance
✓ Sustainable development
✓ Preservation and promotion of culture
✓ Environmental conservation.
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❖ Social Progress Index (SPI)

➢ The SPI measures the well-being of a society by observing social and environmental outcomes
directly rather than the economic factors.
➢ The social and environmental factors include wellness (including health, shelter and sanitation),
equality, inclusion, sustainability and personal freedom and safety.
➢ It considers basic human needs, well-being, and opportunity rather than economic factors.
❖ Human Development Index (HDI)
➢ HDI measures a country's development by focusing on people and their capabilities, rather than just
economic growth.
➢ It is a composite index that ranks countries based on three key indicators:
✓ Life Expectancy Index – Measures health and longevity.
✓ Education Index – Includes mean years of schooling and expected years of schooling.
✓ Per Capita income – Represents standard of living.
Economic Growth and Economic Development
Economic Growth
Economic growth refers to the rise in the production of goods and services in an economy over a specific period.
It can be expressed in nominal terms or adjusted for inflation (real terms). The most common indicators used to
measure economic growth are Gross Domestic Product (GDP) and Gross National Product (GNP), although other
metrics may also be applied.
Ways to Achieve Economic Growth:
❖ Increase in Physical Capital: Expanding the stock of tools and equipment enables workers to produce more
output within the same time frame.
❖ Technological Advancements: Innovations allow for more efficient production processes, improving the
output per unit of input.
➢ Example: The adoption of petroleum-based technology facilitated faster and more efficient
transportation of goods.
❖ Expansion of the Labor Force: A larger workforce contributes to increased production of goods and
services, provided other factors remain constant.
❖ Enhancement of Human Capital: Improving the skills and expertise of workers boosts productivity
through training, experience, or practice.
Savings, investments, and specialization are critical, manageable factors that consistently support economic growth.
Economic Development
Economic development signifies a sustained improvement in the material well-being of society. It is a broader
concept than economic growth and encompasses not only the increase in national income but also social, cultural,
political, and economic changes that contribute to overall progress.
Key Features of Economic Development:
❖ It involves transformations in resource availability, capital formation, population structure, technology,
skills, and institutional frameworks.
❖ The objectives of economic development include equitable income distribution, employment generation, and
poverty reduction.
❖ It represents a long-term process where interrelated changes in supply and demand dynamics contribute to a
rise in net national product.
While economic growth focuses on quantitative output, economic development integrates qualitative
improvements such as changes in societal attitudes, customs, and living standards.
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Differences Between Economic Growth and Economic Development

Parameter Economic Growth Economic Development

Concept Refers to the increase in economic Involves both quantitative and qualitative changes in the
indicators like GDP. economy.

Factors Focuses on components like Encompasses human capital growth, reduced inequality,
consumption, investment, government and structural improvements in quality of life.
spending, and net exports.

Impact Indicates the rise in goods and Addresses issues like poverty, unemployment, and
services produced by the economy. inequality within a growing economy.

Focus Primarily on the production of goods Concentrates on equitable distribution of resources.

and services.

Measurement Quantified through metrics like real Assessed using indicators like the Human Development
GDP and per capita income. Index (HDI), gender equality index, human poverty index,
literacy rates, and infant mortality rates.

Relevance Reflects increases in national or per Highlights progress in overall quality of life.
capita income.

Time Frame Short-term and measured over Long-term and continuous, without a fixed timeframe for
specific periods. measurement.

Interaction Growth can occur naturally and may Development involves deliberate government policies and
not always require government interventions.
intervention.

Expectations Does not consider public happiness or Emphasizes public well-being and life satisfaction.
life satisfaction.

Application More applicable for measuring More relevant for assessing progress and quality of life in
progress in developed countries. developing countries.
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UPPSC Batch
Economics DMP–01
National Income and Growth & Development – Practice Questions
1. India's economic growth in recent years has been remarkable, positioning it as one of the fastest-
growing major economies. Discuss the key factors contributing to this growth and the challenges that
may hinder sustained progress. (12 Marks, 200 Words)
How to approach the question:
❖ Introduction: Briefly define economic growth and its significance in 20-30 words.
❖ Main Body: Discuss key factors driving growth and the challenges that may hinder sustained
progress in 130-140 words.
❖ Conclusion: Summarize India’s progress and future potential, emphasizing the need for inclusive,
sustainable growth with policy support in 20-30 words.
Model Answer:
Introduction:
Economic growth refers to the increase in the value of goods and services produced by an economy
over time. It is a crucial measure as it influences government policies, private sector decisions,
employment levels, and overall development. In 2025, India emerged as the fastest-growing major
economy, with its GDP reaching $4.3 trillion, marking a 105% increase in the last decade. This
remarkable achievement positions India on the brink of becoming the fourth-largest economy in the
world, surpassing Japan.
Main Body:
Factors Contributing to India’s Economic Growth
❖ Economic Reforms and Policies
➢ Pro-market reforms, including the Goods and Services Tax (GST), Insolvency and
Bankruptcy Code (IBC), and Digital India initiative, have improved business efficiency.
➢ The Make in India and Atmanirbhar Bharat policies have encouraged domestic production
and reduced dependency on imports.
❖ Infrastructure Development
➢ Investments in roads, highways, railways, and smart cities have facilitated industrial
growth and connectivity.
➢ The expansion of renewable energy projects has helped sustain economic growth while
addressing environmental concerns.
❖ Demographic Advantage
➢ With a young and growing workforce, India has a demographic dividend that contributes
to innovation and productivity.
➢ Government initiatives like Skill India have improved employment potential.
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❖ Technological Advancements
➢ India has witnessed rapid digital transformation with increased internet penetration and
a booming fintech sector.
➢ The rise of startups and unicorns has further propelled economic expansion.
❖ Global Trade and Investment
➢ Increased foreign direct investment (FDI) inflows and free trade agreements have
strengthened India's global trade position.
➢ The expansion of exports, particularly in IT, pharmaceuticals, and manufacturing, has
fueled growth.
Challenges to India's Growth
❖ Income Inequality: The benefits of growth need to be distributed equitably.
❖ Unemployment: Despite economic expansion, job creation remains a challenge.
❖ Inflation and Fiscal Deficit: Managing price stability and government spending is crucial.
❖ Environmental Concerns: Sustainable growth must balance industrial expansion with
ecological preservation.
Conclusion
India's journey from a $2.1 trillion economy in 2015 to $4.3 trillion in 2025 showcases its resilience
and potential. With continued policy reforms, investment in human capital, and technological
advancements, India is well-positioned to become a $10 trillion economy by 2032. However,
inclusive growth, job creation, and environmental sustainability must remain key focus areas.
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