Essay on Economy: Meaning and Vital Processes

In this essay we will discuss about Economy. After reading this essay you will learn about: 1. Meaning of an Economy 2. The Vital Processes of an Economy.

Essay # Meaning of an Economy:

An economy refers to the economic system of an area, region or country, “It is a system by which people get a living.” For instance, the Indian economy comprises farms, factories, mines, shops, banks, ships, roads, railways, aircrafts, offices, schools, cinemas, hospitals, houses and the rest…which provide the Indian people with the goods and services which they either use themselves or sell abroad in order to be able to buy imports.

An economy is a system of parts which are interrelated and interdependent like the cells of an animal or plant. Despite the complexities of specialisation involved, it is a system of mutual exchanges between producers and consumers.

As put by Sir John Hicks:

“An economy consists of nothing else but an immense cooperation of workers or producers to make things and do things which consumers want.”

Essay # The Vital Processes of an Economy:

Just as feeding, digestion and growth are the vital processes of living beings; similarly production, consumption and growth are the essentials of economies.

Economies might differ in their organisation but all perform these three functions which are discussed below.

1. Production:

The first vital process of an economy is production which must go on continuously. “Production includes any activity, and the provision of any service, which satisfies and is expected to satisfy a want.” In this wider sense, production includes products produced on farms like wheat, vegetables, pulses, etc. and those manufactured in the factories such as clothes, bicycles, television sets, electric appliances, and the like.

It also includes the services of shopkeepers, traders, transporters, actors, doctors, civil servants, teachers, engineers and the like who help in satisfying the wants of the people in the economy through their services. But the term ‘production’ excludes certain goods and services though they satisfy human wants.

First, domestic work done within the family by the housewife, husband or children.

Second, production of hobby articles, like paintings.

Third, production of vegetables in the kitchen garden.

Last but not the least, voluntary work or shramdan. Though these are productive activities, yet they are not included in production because no payment is made for such goods and services. If all these goods and services are paid for, they will be included in the production of the economy.

Sir John Hicks defines production in this sense when he writes: “Production is any activity directed to the satisfaction of other people’s wants through exchange.” Thus we include in production all consumers’ goods, producers’ goods and the services of all kinds which are exchanged for money.

2. Consumption:

The second vital process of an economy is consumption. Consumption means the use of economic goods and services in the satisfaction of human wants. The consumption that goes on in the economy may be of various types. Prof. Hicks classifies consumption goods into two categories: single-use goods, and durable-use goods. ‘Single-use goods’ are those which are used up in a single act.

Such goods are food stuffs, Cigarettes, matches, fuel, etc. They are the articles of direct consumption because they directly satisfy human wants. Similarly, the services of doctors, bus drivers or waiters are included under ‘single-use goods.’

‘Durable-use goods’ are those which can be used for a considerable period of time. It is immaterial whether the period is short or long. Such goods are pens, bicycles, clothes, fans, television sets, furniture, etc.

Prof. Brown characterizes some of the durable-use goods as long-lived things. Furniture and dwelling houses are the long-lived things which render their services year by year over the whole of their useful physical existence. They should not be thought of as satisfying a want in the year in which they were acquired. They are a piece of production for the future and their consumption is spread over many years. Such goods are fixed investments.

There are some material goods such as ready-made garments which pass through a number of manufacturing processes and stages, from raw material to semi-finished and finished stage, to wholesale and retail trade stage, till they are finally consumed.

As put by Prof. Brown: “For every kind of finished goods, in fact there is a sort of ‘pipeline’, or rather a system of pipeline, stretching from the original sources of materials used to the consumer.” The accumulation of the stocks of such goods is called inventory investment.

The traditional distinction between durable and perishable goods is superfluous these days because with the availability of refrigeration facilities even the single-use goods like fruits, vegetables, milk, etc. are not considered perishable. Thus are all single-use goods which can be stored and have a fair degree of durability.

As in production so in consumption, all goods and services which are not paid for in their act of use are excluded from consumption, such as vegetables grown in the kitchen garden, and the services of the housewife.

3. Growth:

Now we look at the processes by which economies grow like living things. Economic growth is “the process whereby the real per capita income of a country increases over a long period of time.” We enumerate the factors which lead to the growth of an economy.

Growth of population, particularly working population, is the first cause of growth. A rapidly growing population in relation to the growth of the national product keeps the output per head at a low level. This has been the case with developing countries like India.

On the other hand, the increase in the output per head of developed economies like the United States has been much higher because of their low rates of population growth in relation to the growth rates of their national product.

Technical knowledge and progress are the twin factors in increasing output per head. Technical knowledge and progress are interdependent. It is technical knowledge which brings about new methods of production, leads to inventions, and development of new equipment.

Similarly, changes in equipment require new technical knowledge for producing and training personnel in their manufacture and use. Thus for an increase in output per head an economy requires physical capital in the form of improved capital equipment, and human capital in the form of highly qualified and trained personnel.

The rates of growth of technical knowledge and capital depend on the percentages of national income spent on R & D (research and development), of modern technology, and on imparting general and technical education to the people. One of the principal causes of the high growth rates of developed countries has been the spending of higher percentages of their national income on R & D, and on education.

Growth in the quantity of capital per head is another factor which tends to raise the growth rate of an economy. Expansion of capital is particularly essential in those countries where the growth rate of population is quite high. Increase in numbers requires more capital to equip the growing labour force. The tool of capital output ratio measures the amount of capital required to produce an extra unit of output or income.

The supply of savings is another factor that determines the growth rate of an economy. The main sources of saving are the rich, the middle class, the businessmen, the corporations and the governments. The poor countries hardly save 5 per cent of their national income.

The main reasons being low personal incomes, high propensity to consume, lack of enterprise and initiative, expenditure on conspicuous consumption, on traditional items on palatial buildings fitted with luxury gadgets, and economically un-enterprising governments.

On the other hand, the rich countries save about 15 to 20 per cent of their national income. In such countries, the propensity to save of the people on the whole is very high; businessmen, traders, landlords and corporations make huge profits which are taxed by the governments. So all save.

People save in the form of larger bank deposits, businessmen in the form of larger profits, and governments in the form of forced savings (taxes) and public borrowings. It is these increased savings which augment the supply of capital in the economy, and thereby the growth rate of the economy.

Borrowing from abroad is another source of capital for the growth of economies. External borrowing is resorted to for two reasons: one, to supplement low domestic savings; and two, to get foreign currency for the purpose of importing capital for development purposes.

All countries have to borrow in the early stages of their development. The inflow of capital is in the form of loans, technical know-how, skilled personnel, organisational experience, market information, advanced production techniques, capital equipment, etc. Thus all economies whether they are capitalist, socialist or mixed perform these important functions of consumption, production and growth.