CU-BA-Eng-SEM-V-Economics-V-Second Draft

BACHELOR OF ARTS ENGLISH SEMESTER-V ECONOMICS-V

First Published in 2021 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event, Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. 2 CU IDOL SELF LEARNING MATERIAL (SLM)

CONTENT Unit - 1: Economic Growth And Development ...................................................................... 4 Unit - 2: Capital Formation ................................................................................................. 25 Unit - 3: Disguised Unemployment ..................................................................................... 48 Unit - 4: Models Of Economic Growth Part I ...................................................................... 70 Unit - 5: Models Of Economic Growth Part II ..................................................................... 90 Unit - 6: Strategies Of Economic Development Part I........................................................ 109 Unit – 7: Strategies Of Economic Development Part II...................................................... 130 Unit - 8: Theory Of Planning In Developing Countries...................................................... 146 3 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 1: ECONOMIC GROWTH AND DEVELOPMENT STRUCTURE 1.0 Learning Objectives 1.1 Introduction 1.2 Concept of Economic Growth 1.2.1 Meaning of Economic Growth 1.2.2 Measurement of Economic Growth 1.2.3 Factors Affecting Economic Growth 1.3 Concept of Economic Development 1.3.1 Meaning of Economic Development 1.3.2 Features of Economic Development 1.3.3 Comparison chart: Economic Growth Vs. Economic Development 1.4 Underdeveloped Economy 1.4.1 Main Features of an Underdeveloped Economy 1.4 Summary 1.5 Keywords 1.6 Learning Activity 1.7 Unit End Questions 1.8 References 1.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  To study the concept of Economic growth and Development.  To list out the factors affecting Economic Growth  To understand the characteristics of an underdeveloped economy.  To identify and explain the factors responsible for influencing the process of development and underdevelopment 4 CU IDOL SELF LEARNING MATERIAL (SLM)

1.1 INTRODUCTION Economics is all about making smart choices to cope with scarcity in the economy. The most fundamental measurement used to evaluate the success in allocating scarce resources is economic growth. Individuals monitor their income and therefore the changing value of their assets throughout their life. Companies track their earnings and their market share. Nations monitor a variety of statistics to measure economic growth such as national income, productivity, capital formation, etc. In addition to growth and productivity, some economists believe that the assessment of the national economy must also include the measurement of distribution, equity, and per capita income. Further, the country should also focus on other needs of society, like environmental justice or cultural preservation to sustain the economic growth process and allow an overall human development in the economy through the creation of more opportunities in the sectors of education, healthcare, employment, and the conservation of the environment. Economic growth is the most powerful instrument for reducing poverty and improving the standard of living in developing countries. Both i.e., cross-country type studies and country case studies provide overwhelming evidence that rapid and sustained growth is essential for faster progress. Economists have been always known that growth is an essential ingredient for economic development. Economic growth and change are part of the normal experience of the economic life of societies. This unit attempts to explain how economic theory can be used to gain a better understanding of the process of economic growth and change. Though there are no universal laws that govern the process of economic growth there are many economies that face a relatively small set of dominating constraints on their process of growth and structural change. Today economic growth is everybody's concern and in a growth process and growth theory, it has received particular attention from economists and policymakers. Yet, there is no universally accepted definition of the term. Different economists use 'economic growth' to convey different meanings. In the general term ‘economic growth’ occurs whenever people take resources and rearrange them in ways that are more valuable to society. Economic growth can be defined as the transformation of an underdeveloped country from a nearly self- sufficient lifestyle to a higher level of expansion in a relatively short period, that is, decades rather than centuries. Historically, rapid economic growth has always been accompanied by 5 CU IDOL SELF LEARNING MATERIAL (SLM)

greater industrialization. But more precisely the process of economic growth is described in terms of greater commercialization of economic activities. As discussed above, in the recent literature the term economic growth refers to an increase in a country's real output of goods and services. In contrast, the term economic development is much more comprehensive. It also implies progressive changes in the socio-economic structure of the country. Viewed in this way, economic development involves a steady decline in agriculture's share in the GDP and a corresponding rise in the share of the industrial sector as well as of the economic (productive) services. Hence, a distinction is made between the two economic terms. It is mentioned along the following lines. 1.2 CONCEPT OF ECONOMIC GROWTH 1.2.1 Meaning of Economic growth Economic growth has been variously defined. Some people say it is an increase in the production of goods and services over some time. Some people define it as the continuous annual increase in the real national income of an economy over a long period, while others define it as an increase in income. The actual per capita level over a long period. All of these terms say that economic growth means an increase in the level of output of goods and services that is sustained over a long period, measured in terms of value-added. So, in general, the term economic growth can be defined as the process whereby the country’s real national and per capita income increases over a long period. Economic growth is the increase in the value of goods and services in the economy.Economic growth generates more profits for companies. As a result, stock prices went up. This provides the company with funds to invest and hire more employees. As more jobs are created, incomes rise. Consumers have more money to purchase additional products and services. Purchases drive higher growth. For this reason, all countries want economic growth. This makes economic growth the most observed economic indicator. 1.2.2 Measurement of Economic Growth Usually, economist’s measure economic growth based on the gross domestic product (GDP) or related indicators, such as gross national product (GNP) or gross national income (GNI).GDP is calculated based on a country’s national accounts, which report annual data on income, expenditure, and investment in each economic sector. With these data, it is possible 6 CU IDOL SELF LEARNING MATERIAL (SLM)

to estimate the country's total income (GDP) or the country's citizens' total income (GNP or GNI) in a given year. GNP is obtained by adjusting GDP, including repatriated income earned abroad, excluding the income of foreigners earned by foreigners at home. In countries where such outflows and inflows are important, GNP may be a more appropriate national income indicator than GDP. Use the gross national product (GNP) or gross domestic product (GDP) or its regional counterpart to measure national income, and then divide by the population of the corresponding country or region, which is convenient to measure economic well-being first. Since total income equals total product, this measure can sometimes be replaced by per capita product or labour productivity, where the denominator is the size of the labour force; or even the product per worker hour, and then this measure reduces labour. The hours of work are taken into account. In a detailed analysis, these alternatives can provide useful different insights about the economic performance of different countries and different periods. Their workforce and population are significantly different, or they have workers and make different decisions about the length of the workday. 1.2.3 Factors Affecting Economic Growth The process of economic growth is a complex phenomenon and is influenced by numerous factors such as political, social, and cultural factors. A) Economic Factors: The following are important factors that determine the economic growth of an eco no my. 1. Natural Resources: The main factor affecting economic development is natural resources. Among the natural resources, we generally include the land area and the quality of the soil, forest wealth, river system, minerals, and oil resources, etc. For economic growth, the existence of abundant natural resources is very necessary. A country lacking natural resources may not be able to develop rapidly. Natural resources are a necessary condition for economic growth, but not a sufficient condition. Japan and India are two contradictory examples. As Lewis noted, \"In other respects, other things being equal, people can make better use of abundant resources than poor 7 CU IDOL SELF LEARNING MATERIAL (SLM)

people.\" In less developed countries, natural resources are underutilized, underutilized, or mis-utilized. Professor Lewis state that \"a country considered resource poor may be considered very rich at some point in the future, not only by the discovery of unknown resources but also by the discovery of new methods for known resources.\" Japan is a country. A country lacking natural resources, but it is one of the most advanced countries in the world because it can discover new uses for limited resources. 2. Capital Formation: Among various economic factors, capital formation is another important factor in economic development. Capital can be defined as the stock of renewable physical factors of production. Capital formation is cumulative and self-sufficient and consists of three interrelated stages; a) the existence and increase of real savings; b) the existence of credit and financial institutions to mobilize savings and transfer them to the required channels; and c) to use these savings for investment in capital goods. The low tendency to save in underdeveloped countries is due to the low per capita income of the population, which cannot be increased by voluntary saving alone. Therefore, the per capita savings rate can be increased by emphasizing the reduction of consumption and the release of savings for mandatory savings for capital fo r mat io n. In addition, external resources, such as loans and grants from abroad and larger exports, can also help these economies in capital formation. On the one hand, it increases the productivity of sectors in the economy; on the other hand, it ultimately increases national production by increas ing effective demand. According to Kuznets' estimates, in the process of modern economic growth, the total capital formation and net capital formation in developed countries have gradually declined between 11.13% and 20%, and between 6% and 12.14%. Lewis believes that the ratio of less developed countries is 5% or lower, and should rise to the level of 12-15%. 8 CU IDOL SELF LEARNING MATERIAL (SLM)

3. Technological Progress: Technological changes are essential in the process of economic growth. Adam Smith, the father of political economy, pointed out the importance of technological progress for economic development. Technological advances have also improved the ability to use capital goods more efficiently. Technological progress is closely related to capital formation. The two are compleme ntary. Without capital formation, technological progress is impossible, because the use of better and more efficient production methods requires substantial investment, although once these methods are established, the cost of capital per unit of production may fall. 4. Human Resources: A good population quality is very important for determining the speed of economic progress. The country has a small population but high quality, rather than a large population; it is more suitable for development. Therefore, fo r economic growth, it is highly desirable to invest in human capital in the form of education and health care, and other similar social programs. B) Non-Economic Factors Both economic and non-economic factors play an important role in the process of economic growth. We are here to discuss some basic non-economic factors that determine the economic growth of an economy. 1. Political Factors: Political stability and sound administrative management are essential and beneficial to modern economic growth. Due to t he stable political situation and strong management, the economic growth of the United Kingdom, the United States, Germany, France, and Japan ranks among the top in the world. But in most poor countries, political instabilit y and poor management have great ly affected their economic development plans. 2. Social Factors: 9 CU IDOL SELF LEARNING MATERIAL (SLM)

It includes all factors, such as the coherence of people's attitudes towards work, the social environment, and societal attitudes towards change and development. These factors affect the rate of capital formation and affect economic development too. 3. Religious Factors: Includes people's religious beliefs, feelings, and emotions. These factors play an important role in the economic development of an economy. 1.3 CONCEPT OF ECONOMIC DEVELOPMENT 1.3.1 Meaning of Economic Development Economic development can be defined as a simple transition from a low -income national economy to a modern industrial economy. Although the term is sometimes synonymous with economic growth, it is often used to describe changes in a country’s economy, including improvements in quality and quantity. Economic development firstly became a major concern after World War II. Since European colonialism has ended, many original colonials and other countries with high living standards are now called developing countries. Western Europe, the most European Oriental countries, then the Soviet Union, Japan, South Africa, Australia, New Zealand. Because the living standards of poor countries have begun to increase their subsequent decades, they have renamed developing countries. Developing countries are generally classified into a standard of income, and economic development is generally considered to increase per capita. A company per capita (almost synonymous with per capita product ion) is requesting the annual society the highest measure of the value of products and services per person. There are several problems with the level of measurement of the level of income per capita and its growth rate, but these two indicators are optimal to provide the level of economic happiness in Japan and its estimate of economic growth level is. 10 CU IDOL SELF LEARNING MATERIAL (SLM)

1.3.2 Features of Economic Development Economic development means that the overall welfare of the people of an economy generally improves. The following are some of the characteristics of economic development. 1. It is a continuous and Long-term concept: Economic development requires long-term maintenance of national real income. This is an ongoing process. The temporary increase in national income due to some special reasons does not mean economic development. Development is a long -term process, not a temporary process. Therefore, this is a long -term phenomenon. 2. It is a Qualitative concept: Economic development has qualitative characteristics because it mainl y studies those concepts that are essentially qualitative, such as people's tastes and preferences, people's sense of happiness and well-being. 3. It results in a high degree of structural transformation: The process of economic development implies the trans formation of the economic structure. Economic development has led to a change in the economic structure from agriculture to industry and service industries. In other words, as the economy develops, the share of the agricultural sector decreases, while the share of industry and services increases. Below given is a case study with reference to India: A report emphasizes that India is a country with huge potential. Since independence, it has been the world's largest democracy, and in the process, it has established a strong and ever-improving institution. Since economic liberalization in the early 1990s, per capita income has grown at an average annual rate of 4%, lifting millions of people out of poverty. Since then, the Indian economy has become more and more dynamic and diversified, and by 2050, it may become the largest economy in the world. 11 CU IDOL SELF LEARNING MATERIAL (SLM)

Challenges:There are recent signs that the economy is slowing down and this report highlights some areas that still severely restrict growth. Reforms to meet these challenges are neither straightforward nor politically easy. However, India has shown in its history that, provided there is political will, it can face enormous challenges. India has an extraordinary record of using reforms to transform the economy and improve people's lives. Conclusion: This report explores the extent to which India has the four basic characteristics of an open economy and where the opportunities lie for further development. It shows that India is ranked 57th overall on the Glo bal Economic Openness Index, which has risen 15 places in the last ten years and has improved on all four pillars. It performed the best in terms of corporate and government conditions, and the worst in terms of market access and infrastructure. India's market access and infrastructure (87th) is improving and has risen eight places in the world rankings over the past decade. Despite the improvement, it remains a weakness of the economy. India's investment environment (rank 76) has historically been weaker than other countries. However, significant improvements have been made in recent years, reversing the long-term deterioration. India’s Enterprise Conditions (42nd) has become a source of economic power. With the joint efforts of the federal government, the four pillars have improved the most, and the global ranking has risen 22 places in the past decade. Until recently, the quality of governance in India (46 th) has been declining. In recent years, due to improvements in political accountabilit y and government integrity, India's governance ranking is four places higher than in 2009. 1.3.3 Comparison Chart: Economic Growth vs. Economic Development Economic development without growth is almost inconceivable. Economic growth and economic development are two terms that are often used interchangeably to 12 CU IDOL SELF LEARNING MATERIAL (SLM)

express economic progress. However, the truth is that there is an enormous difference between it as quantitative and qualitative. Economic deve lopment means that the quantity of goods and services produced and consumed increases with the improvement of the living environment, the distribution is fair, and the outcomes of medical services improve so that everyone can receive education and improve the overall quality of health services. Personal and social services and professional conditions the most important thing is that there is no environmental degradation. Economic Growth refers to an increase in size evident through a physical change in the economy. On the other hand, Economic Development refers to a process of gradual transformation and improvement in the level of functioning of an economy based on the acquisition of quality abilities. For example: When a person's body takes on an adult form, with fully developed limbs, increased height and weight, but lacks functional strength and cognitive ability, that body will be called a fully developed body, not a fully developed body. body because it lacks quality and function. The comparison between the two concepts i.e. Economic Growth and Economic Development is given in the following table: Economic Growth Economic Development Meaning Economic growth refers Economic development means to an increase in the real changes in income, the output of goods and services in the country. savings and investments and gradual changes in the socio- economic structure of the country. (institutional and technological changes). Scope This is a uni-dimensional method This is a multidimensional of approaching the economic method that can examine the growth of a country. income and quality of life of a 13 CU IDOL SELF LEARNING MATERIAL (SLM)

country. The increase in is related to the gradual increase in , which is one of the Factors Growth relates to agradual Development relates to growth Measurement increase in one ofthe components of human capital, decrease in Effect Indicators of GDP like consumption, inequality figures, and government spending, investment, structuralchanges that improve net exports. the quality of life. Economic Growth ismeasured by The qualitative measures such quantitativefactors such as an as increase in real GDP or per capitaincome HDI (Hu ma n DevelopmentIndex), gender- related index, Human poverty index (HPI), infant mortality, literacy rate etc. are used to measure economicdevelopment. Economic growthbrings Economic Development leads quantitative changes in the to qualitative as well as economy quantitative changes in the economy. Main indicators of Economic Main indicators of economic growth are development are  Real GDP  Human Development Index  Real per capita income (PCI) (HDI)  Net Economic Welfare (NEW)  Physical Quality of Life Index (PQLI) 14 CU IDOL SELF LEARNING MATERIAL (SLM)

After examining the above-mentioned information, we can say that Economic Growth is a subset of Economic development. Economic Development is a wider concept as compared to economic growth. Economic development uses various indicators to measure the progress in an economy as a whole, however, economic growth uses only specific indicators like the gross domestic product (GDP ), individual income (PCI), etc. for the calculation. Economic growth is often contrasted with Economic Development, which can be defined as the increase in the economic wealth of an economy or a nation, for the welfare of its residents. Here, we must know that economic growth is very essential but not the only condition for economic development. 1.4 UNDERDEVELOPED ECONOMY When talking about an underdeveloped economy, we must first understand the concept of underdevelopment. This is a relative concept because it compares the quality of life of the entire economy, which creates the difference between the developed population and the underdeveloped population. This concept refers to the livelihood of absolute poverty, which refers to the type of poverty w here people cannot meet their basic needs such as clothing, food, and housing. People are constantly struggling for survival. The field of development economics deals with the causes of underdevelopment and policies that can accelerate the growth rate of per capital income. Some common characteristics of underdeveloped economies, such as low per capita income, economic inequality, slow per capita growth rate, low labour productivity and low standard of living, crude production technology, low rate of capital formation, low resource utilization, etc. According to UN experts, underdeveloped countries are countries with lower real per capita income compared to real per cap ita income in the United States, Canada, Australia, and Western Europe. The revised definition of the Planning Commission can work as follows: \"An underdeveloped country is characterized by a more or less wasted or underutilized 15 CU IDOL SELF LEARNING MATERIAL (SLM)

labour force, on the one hand, and underdeveloped natural resources, on the other. The reason is the low rate of capital formation. ” Professor Colin Clark, the pioneer of research on underdeveloped economies, also described: “Underdeveloped economies are like this, where primary o ccupations like agriculture dominate and economic development are at the bottom. the third occupation of the economy proportion is gradually expanding 1.4.1 Features of an Underdeveloped Economy The terms \"underdeveloped\", \"underdeveloped\", \"backward\", \"poverty\" and \"developing\" are often used to refer to low-income countries. Countries with low living standards due to low per capita income are called underdeveloped countries. Countries are divided into developed and underdeveloped countries according to per capita income. For example, in 1949, high- income countries, which accounted for 18% of the world's population, enjoyed 67% of the world's income, while low-income countries, which accounted for 67% of the world's population, only accounted for 15% of the world's population. world income. Rich countries include the United States, Canada, Western Europe, and Australia. Poor counties cover most of Asia, Africa, Southeast Europe, and Latin America. There are also some middle-income countries whose population accounts for 18% of the world's total income, while the population accounts for 15%. They are made up of countries such as Argentina, South Africa, Israel, and the former Soviet Union Russia. The following points highlight the basic characteristics of an u nderdeveloped country: 1. Lack of Capital Formation: Developing or underdeveloped countries of the world are suffering from poor rates of capital formation. Since the level of per capita income in these countries is very low, their savings and savings rate is also very low. This has resulted in a lack of capital formation and is again responsible for the low rate of investment in these countries. For example, the rate of investment in countries like India and Pakistan is lower than even 10 percent but, on the other hand, the same rate is ranging between 15 to 30 percent in developed countries like U.S.A., Canada, etc. Since the level of per capita 16 CU IDOL SELF LEARNING MATERIAL (SLM)

income in these countries is very low, their savings and savings rate is also very low. 2. Low Per Capita Income: Underdeveloped countries of the world indicate low per capita income in comparison to developed countries of the world. 3. High Growth Rate of Population and Dependency Burden: The demographic pressure of the least developed countries is also high. Due to the high birth rate and the decrease in the death rate in these countries, the natural growth rate of the population is very high. This excessive d emographic pressure has caused the problem of the low standard of living and the reduction of the average size of holding 4. Technical Backwardness: Underdeveloped countries face low technical standards and a serious shortage of skilled labour. The scarce technology and the scarcity of skills are the causes of the low production efficiency and the insufficiency that lead to poverty among the population. Due to technological backwardness, the economic growth rate of these countries is very slow. 5. A Dualistic Economy: A dual economy is one of the important characteristics of underdeveloped economies. Therefore, under dualism, the modern or advanced sector and the traditional or backward sector coexist and operate at the same time. Dualism can be roughly divided into two types, namely technological dualism, and social dualism. As Benjamin Higgins mentioned in his book \"Economic Development\", the dualism of technology shows the application of different production functions in advanced and traditional sectors. Under this dualism, advanced sectors are capital-intensive, while backward sectors are labour-intensive. Social dualism, as J.H. Bok pointed out in his book \"Economics and Economic Policy of a Dual Society\" has two different classes, namely the upper and lower 17 CU IDOL SELF LEARNING MATERIAL (SLM)

classes of society. Bock’s social dualism demonstrates the existence and conflict between the foreign social system and the local social system of the country. In this dualism, \"productive employment opportunities are limited; not because of a lack of effective demand, but because of technology and resource constraints in the two sectors.” In less developed countries, the economy is represented by the traditional rural sector, with smallholder agriculture, Featured by small handicraft industry and handicraft industry, mainly using labour-intensive production technology. On the other hand, the economy also supports advanced modern sectors composed of large-scale industries, such as mining, steel, plantations, power plants, etc., which are characterized by fixed technical coefficients, low factor substitutability, and massive use of capital-intensive industries. Production technology. 6. Existence of unemployment and disguised unemployment: Mass unemployment is another characteristic of underdeveloped countries. Disguised unemployment is widely prevalent. It is chronic. Unemployment exists largely in the agricultural sector of the economy. All these people share the income of the country and do not contribute to production. This is a consumption of national resources and an obstacle to its development. 7. Lower participation in foreign trade: Less developed countries export agricultural products, minerals, petroleum, and other primary products, and import manufactured products, especially consumer products. The terms of trade are very unfavourable for underdeveloped countries. 8. Greater dependence on agriculture with a backward industrial structure: In these countries, agriculture and allied activities generally account for 30% to 80% of the labour force. It mainly depends upon the production of raw materials and food grains or on non-agricultural primary production, viz. minerals. This is true for most Asian and African countries. Compared with overall labour productivity, labour productivity in the agricultural sector in developing countries is lower than in developed countries. 18 CU IDOL SELF LEARNING MATERIAL (SLM)

The high concentration of the agricultural sector is a manifestation of poverty. Agriculture, as the main occupation of the population, is mostly unproductive. This is mainly because it is carried out the old-fashioned way using outdated production methods As a result, the yield from the land is very low and farmers are still barely living. Recently, attempts have been made to adopt modern agricultural techniques that increase agricultural productivity. Even so, the production of the main food crops in India remains well below the production of the United States, Japan, or the United Kingdo m. Simon Kuznets commented: “One of the main implications of the relatively low per capita output of agricultural workers in underdeveloped countries is that a large part of the population belongs to the productive forces operating under the conditions of rural life and impenetrable insulation. Lower sectors. Use modern economic methods. \" The characteristic of underdeveloped countries is the lack of industrial development. The pace of industrialization in all these countries is very slow due to lack of capital formation, paucity in the supply of plant and machinery and tools, and also due to lack of initiative and enterprise. 9. Lack of Infrastructural Development: Lack of infrastructural development is a common feature of underdeveloped countries around the globe. In respect of communication, transportation, generation, and distribution of electricity, credit facilities, social overheads, etc. as these countries are much backward than most of the other developed countries. Thus, due to inadequate infrastructure facilities, the pace of economic development in these countries is very slow. 1.5 SUMMARY  Economic growth implies a process of increase in real national income and real per capita income. 19 CU IDOL SELF LEARNING MATERIAL (SLM)

 Economic development is defined as the continuous improvement of social material welfare.  Economic factors affecting growth and development are: natural resources, capital formation, technological progress, entrepreneurship, human resource development, population growth and social overheads.  Non-economic factors affecting economic growth and development are: social factors, political and psychological factors, education and desire for material betterment.  Measures of economic growth based on the gross domestic product (GDP) or related indicators, such as gross national product (GNP) or gross national income (GNI).  Main indicators of Economic growth are  Real GDP  Real per capita income (PCI)  Main indicators of economic development are  Human Development Index (HDI)  Net Economic Welfare (NEW)  Physical Quality of Life Index (PQLI)  Common features of developing countries are: i) low per capita income, ii) low standard of living, iii) high population growth rate, (iv) High inequality in income distribution, (v) Large-scale poverty epidemic, (vi)Low level of productivity, (vi) Low capital training rate, (viii) Technological lag, (ix) High unemployment rate and (x) Low social development indicators. 1.6 KEYWORD  Growth: An increase in economic activity. 20 CU IDOL SELF LEARNING MATERIAL (SLM)

 Economic: related to the development of commerce, industry and national wea lt h.  Indicators: signs that show how things look like or how things have changed  Development: The gradual growth of something so that it becomes more advanced in its nature.  Gross Domestic Product: Measures level of economic activity in an economy’s boundaries in a particular time period, normally a year or a quarter.  Per capita income: is often used as an indicator of level of living and development. As it takes no account of income distribution, it can be a biased index.  Economic growth: A simple definition is that it is an increase in the level of output of goods and services that is sustained over a long period of time, measured in terms of value added. 1.7 LEARNING ACTIVITY 1. Define economic growth _____________________________________________________________________ _____________________________________________________________________ 2. Explain meaning of economic development _____________________________________________________________________ _____________________________________________________________________ 3. Elaborate various measurement of economic development _____________________________________________________________________ _____________________________________________________________________ 4. Define dualistic economy _____________________________________________________________________ _____________________________________________________________________ 1.8 UNIT END QUESTIONS A. Descriptive Questions 21 CU IDOL SELF LEARNING MATERIAL (SLM)

Short Questions 1. What are the features of economic development? 2. “Economic growth is a quantitative concept”. Give reasons and explain 3. Explain various factors affecting economic growth 4. Describe features of underdeveloped economy 5. Describe measurement of economic growth Long Questions 1. What is economic growth? Do you think that economic growth and economic development are two names for the same concept? 2. What are the common features of Underdeveloped countries? 3. Explain the concept of economic development. 4. What are the features of economic growth? 6. Industrial progress is an important indicator of economic development. B. Multiple Choice Questions 1. Which of the following characteristics are most likely found in developing countries around the world? a. High population growth rates. b. Large number of people living in poverty. c. Very traditional methods of agricultural production. d. All of these 2. Economic development refers to a. Economic growth b. Economic growth plus changes in output distribution and economic structure c. Sustainable increase in gross national product d. Increase in labour force 3. Developing nations have 22 a. A lower infant mortality rate. b. A greater degree of equality in the income distribution. c. Lower rate of illiteracy. CU IDOL SELF LEARNING MATERIAL (SLM)

d. None of these 4. The common measure of economic development is a. The level of health and education of the population. b. The rate of population growth. c. Per Capita GDP d. All of these 5. Economic growth can be measured by: a. The CPI b. The CBI c. GDP d. MPC 6. Inclusive growth is the agenda of economic development in the future. The strategy of inclusive growth does not focus on a. Promotion of ancillary industry in industrial regions b. Reduction of poverty among backward castes c. Enhancement of education opportunities d. Diversifying livelihood for tribal population 7. It is a good measure of economic development a. Rate of change in real incomes b. Rate of population growth c. Rate of increase in exports and imports d. Rate of increase in money incomes 8. With economic growth, the proportion of labour-force engaged in agriculture a. Increases b. Decreases 23 CU IDOL SELF LEARNING MATERIAL (SLM)

c. Changes in an uncertain manner d. Remains unaffected 9. The concept of economic growth is a. Narrower than the concept of economic development b. Identical with the concept of economic development c. Unrelated to the concept of economic development d. Wider as compared to that of economic development 10. Why might economic growth have 'costs' a. Because of it can cause inequality of income distribution b. It leads to more violence c. People become poorer d. Government increases its power Answers 1-d, 2-b, 3-d. 4-c, 5-c, 6-a, 7-a, 8- b, 9-a, 10-a 1.9 REFERENCES References book  Lewis, W. Arthur (1955) Theory of Economic Growth, George Allen & Unwin, London,  Thirwal, A.P., Growth and Development, Macmillan, London, 1999.  Higgins, B., Economic Development, W.W. Norton, New York, 1959.  Todaro, M.P., Economic Development, Longman, London, 1996.  Meier, G, Leading Issues in Economic Development, Oxford Universit y Press, New Delhi, 1990. 24 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 2: CAPITAL FORMATION STRUCTURE 2.0 Learning Objectives 2.1 Introduction 2.2 Meaning and Definition of Capital Formation 2.3 Importance of Capital Formation 2.4 Sources of Capital Formation 2.5 Stages of Capital Formation 2.6 Factors Affecting Capital Formation 2.7 Summary 2.8 Keywords 2.9 Learning Activity 2.10 Unit End Questions 2.11 References 2.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Know the meaning of capital formation.  Know the importance of capital formation  Know the various Sources of Capital Formation 2.1 INTRODUCTION Economic development is mainly related to the increase in the capital of the head. Therefore, capital formation appears as an important aspect of economic progress issues. In economics, capital means that the element of production we use to make goods. A country uses capital shares along with the work to produce goods. The accumulation of capital occurs when this 25 CU IDOL SELF LEARNING MATERIAL (SLM)

capital increases. The greater the accumulation of capital in an economy, the faster its total income will grow. The term capital accumulation has the same meaning as it. The accumulation of capital includes the creation of more capitalists. For example, buildings, equipment, tools, machines, and vehicles are capitalists. We use the capital to create products and provide services. The term capital in the economic sense is always related to investment. Capital is considered as a stock of assets; investment is a flow or addition to the capital stock. Capital formation is defined as the stock of various commodities in the hands of producers, housing and durable physical assets in the hands of people and governments, and the net stock of international financial assets. Savings are the source of capital. But the most desirable capital is productive capital that takes the form of investment. Hoarding cash or currency or gold jewellery is a form of savings, but it is considered unproductive capital. Capital is the core of economic development. Simply put, it refers to the part of the economy's wealth that is used to increase wealth production. It includes all forms of renewable wealth used directly or indirectly in the production of a large number of products. A large number of funds have been invested in the construction of irrigation systems, farm tools, large-scale dams and bridges, reclamation machinery, railways, and airports. Economists say that capital formation is an essential means of assessing the true financial status of the country. If you do not have economists, it will be extremely difficult to check the GDP growth rate. GDP refers to gross domestic product. 2.2 MEANING AND DEFINITION OF CAPITAL FORMATION The term \"capital formation\" can be used in a narrow sense and a broad sense. However, in a narrow sense, it refers to physical capital, including machinery, equipment, etc. In a broader sense, it includes intangible capital or human resources composed of public health, efficiency, technology, tangible and intangible capital. According to Prof. Colin Clark, capital goods \"are renewable wealth used for production purposes. But capital formation refers to the net increase in the existing capital stock in a certain period. Therefore, capital formation is said to involve sacrificing direct consumption to obtain more consumer goods in the future, and \"capital\" is the part of the current product that is used for greater production rather than immediate consumption. 26 CU IDOL SELF LEARNING MATERIAL (SLM)

Here, we must distinguish between \"maintaining capital intact\" and “formation of capital \". When resources are used to replace spent assets (including wear and tear on machinery), the process is called keeping capital constant, because it does not increase economic productivity. By contrast, capital formation refers to the increase in the stock of real capital, which helps to increase the level of production of goods and services. Therefore, the essence of the capital formation process is to transfer some of the resources currently available in society to consumer products that can be expanded in the future. The term \"capital\" is usually used for capital goods, such as factories, machinery, tools, and factories. Capital formation refers to the net increase in the existing capital stock in a certain period. This means making more capital goods such as machines, tools, factories, canals, electricity, media, and transportation. When resources are used to replace obsolete assets, including machine wear and tear, this is called maintaining capital intact. In economics, the terms investment and capital formation can be used interchangeably, and these two terms have the same meaning, that is, the increase in the capital stock of an economy in a particular year. The only difference between the two is that the term investment is more popular in economic analysis, while the term capital formation is more suitable for use by national accountants. Capital formation (or investment) refers to the increase in the country's physical capital stock over some time. It means that some products of a country are not consumed, but are used to increase the production capacity of a country. In short, the process of creating or forming real capital in various forms is called \"capital formation\" or \"investment.\" In summary, capital formation in national income accounting is defined as the excess of surplus production over consumption in a fiscal year. Nurkse defines capital formation as “Capital formation implies that the firm uses current production not only to satisfy consumer needs, but also partly to capitalize on capital production machinery, means of transport, or other production equipment. Professor. Kuznets defines it as \"In the context of economic growth and industrialization being restricted, the capital formation must be understood as being limited to machinery, instruments, and inventory that can be used directly at work.\" Benham defined it as \"The amount of capital that a country increases in a period is called capital formation during that period.\" 27 CU IDOL SELF LEARNING MATERIAL (SLM)

Capital formation refers not only to the development of physical goods but also to the development of human capital. Like education, health, skills development, etc. Capital formation includes not only tangible assets such as crops, tools, and machinery, but also intangible assets such as high-standard education, health, scientific progress, and research. 2.3 IMPORTANCE OF CAPITAL FORMATION 1. Helps to increase per capita productivity: Capital helps to increase per capita productivity because the capital stock in the economy is closely related to the possibility of changes in the scale of production technology. 2. Improving Method of Production: According to BohmBawerk, Capital makes possible the roundabout methods of production as there is a net gain in productivity as a result of using such methods. The rapid accumulation of capital can lead to an increase in the supply of tools and machines per worker. 3. Proper use of Human Capital Formation: Human capital formation depends on people's education, training, health, social, and welfare facilities and requires sufficient capital. Therefore, capital formation plays an extraordinary role in the development of quality human resources. 4. Necessary for Implementation of Production: With the rapid population growth, more capital accumulation is a prerequisite for expanding production and providing employment for the growing labour force. 5. Capital and Population Growth: Rapid population growth is an obstacle on the path to economic development, according to some economists. Therefore, capital is needed to control population growth. Capital is needed to apply family planning techniques and other methods of 28 CU IDOL SELF LEARNING MATERIAL (SLM)

population control, especially in poor and underdeveloped countries. At the same time, capital is the main requirement to meet the demand for food, shelter, and shelter, etc. in these countries. 6. Capital and Natural Resources: Generally, in underdeveloped countries, natural resources are mostly underutilized or misused because these countries do not possess sufficient capital. In this way, it is capital that leads to the proper utilization of natural resources. 7. Capital and Agricultural Development: The development of the agricultural sector also requires capital. In most underdeveloped countries, more than 70% of the people depend directly or indirectly on this sector. Therefore, in poor countries, funds are needed to develop irrigation, flood control, and crop rotation. 8. Capital and Industry: Capital is a basic need for the development of industry, it is necessary to apply the latest and moderate technology, especially in less developed countries. Production methods are rudimentary and backward. As a result, it negatively affects productivity. Thus, to accelerate the economic development of the industrial sector, capital is a key factor. 9. Technical Progress is Possible: More capital is needed to apply new technology. Thus capital leads to the advancement of technology at the highest speed. 10. Attaining Higher Rate of Economic Growth: The higher the capital formation rate of a country means the higher the economic growth rate. Generally speaking, compared with developed countries, the capital formation rate of less developed countries is very low. 11. Capital and Public Utility services: 29 CU IDOL SELF LEARNING MATERIAL (SLM)

Professor Lewis noted that less developed countries have to spend a lot on utilities and infrastructure such as roads, railways, electricity, and communications, etc. Indeed, these services require significant capital. 12. Increase in Economic Welfare: With the increase in the rate of capital formation, the public automatically gets more facilities. The capital formation led to an unexpected increase in their productivity and income, thus improving their standard of living. This helps in raising the welfare of the people in general. Thus, capital formation is the principal solution to the problems of poor countries. 13. Lesser Dependence on Foreign Capital: The process of capital formation increases dependence on domestic resources and domestic savings, and capital formation reduces dependence on foreign capital. 2.4 SOURCES OF CAPITAL FORMATION The stock of capital goods can be established and increased through two main sources: (A) Domestic Resources and (B)External Resources. (A) Domestic Resources: Domestic resources play an important role in promoting development activities in the country. These sources are summarized below: (i) Voluntary Savings: Regarding the amount of personal savings of the family. This depends on various factors, such as per capita income, wealth distribution, availabilit y of banking services, social value system, etc. 30 CU IDOL SELF LEARNING MATERIAL (SLM)

In underdeveloped countries, people’s savings potential is low because more people suffer from absolute poverty. As far as the affluent class of society is concerned, most of them use their wealth to buy real estate. Luxury goods, or take them abroad for safekeeping. Therefore, high-income groups have very little savings. The commercial sector is an important source of voluntary savings in less developed economies. They are often unwilling to take risks associated with investments. The fear of nationalization and political instability further requires you to have the motivation to save and invest in the country. Statistics from many underdeveloped countries show that these two sources can hardly save 15% of their GDP. This is not even enough to maintain the current standard of living of the masses. (ii) Involuntary Savings: In developing countries, the per capita income of the population is very low. Their propensity to consume is mainly due to the very high demonstration effect. Since the flow of savings was insufficient to meet the cou ntry's funding needs, the government adopted measures to restrict consumption and increase the amount of savings. The traditional method used to increase savings is: (a) Taxes and (b) Compulsory plans to provide loans to the government. The above two fiscal measures are very sensitive and delicate: they must be carefully designed and handled. For example, if people in low- and middle-income groups are heavily taxed through various forms of taxes, then their ability to save (no matter how much) will be taxed. The tax structure should be designed to provide incentives for work, savings, and investment for different income groups. 31 CU IDOL SELF LEARNING MATERIAL (SLM)

(iii) Government Borrowing: Domestic savings can also be increased through government loans. The government issues long and short-term bonds of various denominations to mobilize the savings of all ethnic groups! Public and financial institutions. In developing countries, there are many barriers to government borrowing. For example, the foreign exchange and capital markets are not organized. There are not enough financial institutions in the rural sector. Illiterate people are more willing to invest their savings in gold, jewellery, etc. Therefore, the governments of developing countries should formulate a feasible plan to mobilize the savings of urban and rural residents. (iv) Use of Idle Resources: In the developing countries of the world, there are still many unused and underutilized resources. If it is properly utilized and used for production purposes, the capital formation rate can increase rapidly. For example, in most low-income countries, there is hidden unemployment in the rural sector. If surplus farmers are employed in or near their villages to build roads, tube wells, canals, school buildings, etc., at nominal wages, or if their services are purchased as self-service for capital creation projects, they can become a valuable source of income. The capital formation of the country. (v) Deficit Financing: Deficit financing is seen as an important source of capital. Training. In developed countries, this method is used to increase effective demand and ensure that economic activity continues to remain high. In less developed countries, it is used to pay for government development and non-development expenditures. 32 CU IDOL SELF LEARNING MATERIAL (SLM)

(B) External Resources: External resources have the following types: (i) Foreign Economic Assistance: In the developing countries of the world, there are still many unused and underutilized resources. If it is properly utilized and used for production purposes, the capital formation rate can increase rapidly. For example, in most low-income countries, there is hidden unemployment in the rural sector. If surplus farmers are employed in or near their villages to build roads, tube wells, canals, school buildings, etc., at nominal wages, or if their services are purchased as self-service for capital creation projects, they can become a valuable source of income. The capital formation of the country. (a) Foreign loans bridge the saving gap: Financing the deficit is seen as an important source of capital. Training. In developed countries, this method is used to increase effective demand and ensure that economic activity continues to remain high. In less developed countries, it is used to pay for government development and non-development expenditures. (b) Close the trade gap: In developing countries, export revenue is always lower than import demand. The exchange rate gap caused by excess imports and exports is being filled by capital inflows. (c) Provides greater employment opportunities: Funding various projects with the help of foreign aid can provide a country with more employment opportunities. (d) Increase in productivity of various sectors in the economy: 33 CU IDOL SELF LEARNING MATERIAL (SLM)

The inflow of capital and technology has increased the production capital of all sectors of the economy. (e) Increase in real wages: Foreign resources can help increase the marginal productivity of labour in host countries. Therefore, with the help of foreign aid, the real wa ges of workers have increased. (f) Provision of higher products: Foreign capital helps to establish industry in the country. The influx of know - how has increased the quantity and quality of manufactured products and enabled domestic consumers to obtain t hese products at lower prices. (g) Increase in tax revenue: The profits of foreign investment are taxed by the government. Therefore, the country's income has been increased. (h) External economies: The entry of foreign capital and advanced technology st imulated domestic enterprises. The company takes advantage of the external economy, such as training manpower, introducing new technologies, new machinery, etc. (ii) Donor Country and the Economic Assistance: Here you may ask yourself a question: Why would developed countries help developing countries in good faith? According to rich countries, foreign aid is provided for a combination of humanitarian and self-interest (a) Humanitarian ground: If a country faces famine, drought, epidemics, diseases, earthquakes, etc., developed countries must help the country economically for purely 34 CU IDOL SELF LEARNING MATERIAL (SLM)

humanitarian reasons. Rich countries provide economic assistance to poor countries in the world in the form of grants. (b) Self-interest reasons. Donor countries also provide foreign economic assistance for the following personal interests. (a) Foreign aid can be provided to protect developing countries from the influence of other countries in the field. (b) Donor countries may have product surpluses. To curb the fall in product prices in the domestic market and maintain production levels, surplus goods will be exported to needy countries. (c) Financial assistance is also provided. Donor countries close the economic g ap between countries of the world. (d) Some advanced countries, especially socialist countries, provide financial and technical assistance to propagate political ideology in developing capitalist countries. (e) Foreign aid is also provided to increase the following in the camps of donor countries. 2.5 STAGES OF CAPITAL FORMATION In our modern structured enterprise economy, the process of capital formation consists of the following three stages. They are as follows: a) Creation of Savings: Increasing the amount of real savings so that the resources that should have been used to produce consumer goods are released for capital formation. (b) Mobilization of Savings: 35 CU IDOL SELF LEARNING MATERIAL (SLM)

A financing and credit mechanism that allows private investors or governments to obtain available resources for capital formation. (c) Investment of Savings: The act of investing itself so that resources are used for the production of capital goods. We shall now explain these three stages: I. Creation of Savings: Savings are made by individuals or families. They save money by not spending all their income on consumer goods. When individuals or families save, they free resources from the production of consumer goods. The workers, natural resources, materials, etc. liberated in this way can be used to produce capital goods. The saving level of a country depends on its saving capacity and willingness to save. The saving capacity or saving capacity of an economy depends mainly on the level of average income and the distribution of national income. The higher the income level, the greater the amount of savings. Countries with higher income levels can save more. This is the reason why the saving rates of the United States and Western European countries are much higher than those of underdeveloped and po or countries like India. Furthermore, the greater the degree of income inequality, the greater the amount of savings in the economy. In addition to saving capacity, the total amount of saving depends on the willingness to save. Various personal, family and national considerations motivate people to save. People save to protect themselves from old age and unforeseen emergencies. Some people want to save a lot of money to start a new business or expand an existing business. In addition, people hope to provide children with a good start in education, marriage, and career. 36 CU IDOL SELF LEARNING MATERIAL (SLM)

In addition, it can be noted that saving can be voluntary or forced. Voluntary savings are savings that people make voluntarily. As mentioned above, voluntary saving depends on people's ability and willingness to save. On the other hand, government taxes represent mandatory savings. Furthermore, not only households can save, but also companies and governments. When a company does not distribute all its profits but keeps a part of it in the form of undistributed profits, the company can save. They then use these undistributed proceeds to invest in actual capital. The third source of savings is the government. Government savings are funds collected from the taxes and profits of listed companies. The more taxes levied and profits earned, the more the government saves. The government can use the money saved in this way to build new capital goods, such as factories, machinery, roads, etc., or it can lend to private companies to invest in capital goods. II. Mobilization of Savings: The next step in the capital formation process is to mobilize household savings and transfer them to businessmen or entrepreneurs who need them to invest. In the capital market, funds are provided by individual investors (who can buy securities or shares issued by companies), banks, investment trusts, insurance companies, finance companies, and governments. The development of the capital market is very necessary if the rate of capital formation is to be increased. A developed capital market will ensure that society's savings are mobilized and transferred to entrepreneurs or entrepreneurs who need them. III. Investment of Savings in Real Capital: For savings to form capital, it must be invested. To invest in savings, the country must have a large number of honest and energetic entrepreneurs who can take risks and withstand the uncertainty of production. 37 CU IDOL SELF LEARNING MATERIAL (SLM)

There are a large number of entrepreneurs in a country, and they will only invest when there are sufficient incentives to invest. Investment incentives depend on the marginal efficiency of capital (that is, the expected rate of profit) on the one hand, and interest rates on the other. Finally, it can be noted that the three stages of capital formation are all interdependent. When the first two phases are completed, the third phase becomes important. It should be noted that a high rate of capital formation is essential to accelerate economic growth, because the production of large quantities of capital goods constitutes and strengthens the economic infrastructure. However, due to the lack of facilities with high savings and investment rates, developing countries like India have low rates of capital formation. However, in these countries, the government plays an active role in promoting capital formation by expanding public enterprises and increasing institutional facilities for saving and investment. The government's construction of roads and bridges, factories, canals and irrigation centres, soil and water conservation, and transportation systems can speed up capital fo r mat io n. 2.6 FACTORS AFFECTING CAPITAL FORMATION: The following are the various factors affecting the formation of capital in a country: 1. The amount of saving: The accumulation of capital depends directly on saving. In general, saving means the difference between income and consumption. The difference can be used for capital formation. Marshall said, \"The greater the amount of savings, the greater the capital scale, and the smaller the amount of savings, the smaller the capital scale.\" The amount of money saved is mobilized and then converted into capital assets. 2. Saving capacity: 38 CU IDOL SELF LEARNING MATERIAL (SLM)

It depends directly on personal income and government fiscal policies. Higher-income and lower taxes lead to higher rates of capital formation. 3. Willingness to save: It depends on many personal, family, and national factors, such as family affection, entrepreneurial desire, old-age considerations, and unforeseen emergencies. 4. Benefits of public sector companies: Public sector companies are a very important form of business organization. Since these are owned by the government and not by individuals, all the profits of the company can be used for the formation of public capital. 5. Market conditions: Prosperity encourages and increases savings, but depression reduces people's savings. Capital formation is severely affected by prosperous and depressed market conditions. 6. Investment convenience: When people have more convenience to mobilize savings, people will save more and invest more. Commercial banks, mutual funds, etc. encourage people to save more as more savings leads to more capital formation. 7. Amend the income tax policy: The government can help potential investors in a variety of ways to promote capital formation. For example, through technical and economic surveys of various production lines, tax incentives are granted to newly established production units, or income tax incentives are granted to people who wish to save (for example, income tax exemption). 39 CU IDOL SELF LEARNING MATERIAL (SLM)

These steps are particularly useful when investment is restricted, not because of savings policies, but because producers are unwilling to invest available savings in the economy. 8. Monetary policy: The economic policy adopted by the government is also an important factor affecting the formation of domestic capital. Although these policies themselves are not the source of capital formation, they are factors that influence the source. 9. Commodity tax: Commodity tax can also be used to increase the savings rate. If consumer goods, especially luxury consumer goods, are levied a high sales tax, this will increase the price of consumer goods (because sales tax is added to the price of goods). This will reduce consumption in the country. Of course, if income does not change, savings will increase. 10. Deficit budget: Other fiscal measures can be taken to increase capital formation in the country. Often government comes forward to build large public sector projects. These increase capital formation by creating indirect social capital. The cost of building these projects is generally met from budget deficits. Below given is a case study: The Czech Republic’s prosperity growth rate is higher than the Western European average, but from a base starting point; according to the first Central and Eastern Europe Prosperity Index study published by the Legatum Institute, it is currently ranked 27th out of 149 countries in the world. Although its ranking has only slightly improved over time (from 28th in 2007 to 27th in 2016), the country has established a solid foundation and has performed on most pillars of the prosperity index good. Research shows that the Czech Republic has a \"prosperity surplus\"; in other words, it provides more prosperity relative to wealth leve l. However, although the country 40 CU IDOL SELF LEARNING MATERIAL (SLM)

is already engaged in high-end manufacturing, the transition to a knowledge economy can help it move further up the value chain. The index divides the country into nine aspects: economic quality, business environment, governance, education, health, safety and security, personal freedom, social capital and natural environment. It surpasses macroeconomic indicators and comprehensively measures prosperity based on material wealth and social well - being. Therefore, it believes that economic and social prosperity are inseparable and mutually promote each other. In the prosperity sub-index rankings, the Czech Republic performs best on Education i.e.,24th and scores lowest on Social Capital i.e.,78th. The four components of social capital are trust, family and community, citizen participation, and citizen participation. The study emphasizes the mixed development of the field of trust between individuals—for example, families and communities have lower levels of social capital in helping strangers and financially helping others; but higher levels in obtaining help from others. A particularly prominent sign is the low level of citizen participation. Compared with ten years ago, the number of people expressing opinions to public officials has decreased. The index found that poor social capital is a destructive and decisive feature throughout Central and Eastern Europe, limiting the ability of countries to create prosperity. The deficit in social capital is significantly related to higher levels of corruption, weaker rule of law, and worse business regulation. The biggest improvement in score is the business environment pillar, where the country's ranking has jumped 20 places in the past decade to 30 th in 2016. However, the score is still below the average of Germany and Europe. Improvements in the west and other regions. Although the overall score for ease of starting a business has been improving and is now higher and comparable to the average in Western Europe, this contrasts sharply with the view of the Czech Republic as a good place to start a business, which has not improved over the past three years. The perception of whether it is possible to achieve success through hard work is also lower than the average in the world and Western Europe. This gap in perception may stem from 41 CU IDOL SELF LEARNING MATERIAL (SLM)

bureaucracy and frequent changes in laws and taxes, and reflects the higher expectations of the private sector on the public sector. Over time, the Czech Republic’s education scores have been increasing and it is n ow one of the highest countries in Central and Eastern Europe. The country is ready to catch up with more developed economies such as Hong Kong, Germany or Sweden in this regard. However, the study authors pointed out that the technical/professional enrollment rate is relatively high, while the higher education enrollment rate is relatively low compared to the Western European average. If the Czech Republic is to successfully transition to a knowledge-based economy, higher education must also keep pace with the development of industry and manufacturing. Improvements in social capital, business environment and education can help the Czech Republic avoid falling into the middle-income trap. Examples of other economies (Hong Kong, Singapore, Sweden) that have s hifted from manufacturing to a knowledge-based economy show that they tend to score higher in these areas. Foreign capital: The capital formation of a country can also be done with the help of foreign capital, that is, external savings. Foreign capital can take the following forms: (a) Direct private investment by foreigners, (b) Loans or donations from foreign governments, (c) Loans from international institutions such as the World Bank. Few countries have successfully embarked on the path of ec onomic development without using foreign capital in one way or another. Under the five -year plan, India is acquiring large amounts of foreign capital from abroad for investment and capital fo r mat io n. Deficit financing: 42 CU IDOL SELF LEARNING MATERIAL (SLM)

Deficit financing, that is, the newly created currency is another source of capital formation in developing economies. Due to the low standard of living of the population, the degree of mobilization of voluntary savings is very limited. Furthermore, taxes that exceed the limit become oppressive and therefore politically inopportune. Therefore, deficit financing is one way the government can rely on to obtain financing. However, the inherent danger of this source of development finance is that it can generate inflationary pressures on the economy. However, some degree of deficit financing can be accomplished without causing such pressure. There is a particularly good case where deficit financing can be used to utilize the existing underemployed workforce in a quick payback plan. In this w ay, the inflation potential of deficit financing can be offset by an increase in the supply of production in the short term. Disguised unemployment: Another source of capital formation is to mobilize savings potential in the form of disguised unemployment. The remaining agricultural workers can be transferred from the agricultural sector to the non-agricultural sector without reducing agricultural production. Publicity: The goal of is to mobilize these unproductive workers and use them in various capital-building projects, such as roads, canals, schools, health centers, and flood control dams. In these projects, they do not need more capital. Works. In this way, it can be said that the labor of the unemployed so far can be used productively and converted into capital. Capital formation in the public sector: These days, the role of government has greatly increased. In an underdeveloped country like India, the government is very concerned about economic development. The government is building dams, steel plants, roads, machinery factories and other 43 CU IDOL SELF LEARNING MATERIAL (SLM)

forms of the royal capital in the country. Therefore, capital formation is not only carried out by individual entrepreneurs in the private sector, but also by the government in the public sector. The government can obtain resources for investment purposes or capital formation in a variety of ways. The government can raise the level of direct and indirect taxes, and then can provide funding for its various projects. Another way to obtain the necessary resources is the government’s debt to the public. The government can also fund its development plans through deficit financing. Deficit financing means creating new currency. By issuing more bills and exchanging them with production resources, the government can generate actual capital. But the deficit financing method as a source of development financing is dangerous because it often leads to inflationary pressures in the economy. However, a certain degree of deficit financing can be obtained without such pressure. 2.7 SUMMARY  Capital is considered as a stock of assets; investment is a flow or addition to the capital stock.  Capital formation led to an unexpected increase in their productivity and income, thus improving their standard of living.  Two sources of capital formation are Domestic and external sources  Professor. Kuznets defines it as \"In the context of economic growth and industrialization being restricted, the capital formation must be understood as being limited to machinery, instruments, and inventory that can be use d directly at work.\"  Nurkse defines capital formation as “Capital formation implies that the firm uses current production not only to satisfy consumer needs, but also partly to capitalize on capital production machinery, means of transport, or other production equipment.  Stages of Capital Formation:  Creation of Savings  Mobilization of Savings 44 CU IDOL SELF LEARNING MATERIAL (SLM)

 Investment of Savings: 2.8 KEYWORD  Capital Formation: Net addition to the existing stock ofphysical assets.  Rate of Capital Formation:It is the ratio of the gross capital formation to the gross domestic product at market prices.  Consumption good: good or service that satisfies the needs of consumers over a short period.  Free trade: Trade that takes place without tariffs or other barriers.  Yield: an amount of money produced as a return on an investment, shown as a percentage of the money invested 2.9 LEARNING ACTIVITY 1. Define capital formation _____________________________________________________________________ ____________________________________________________________ 2. State importance of capital formation _____________________________________________________________________ ____________________________________________________________ 2.10 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. State features of capital formation 2. Elaborate factors affecting capital formation 3. What is dual economy 4. Explain the importance of capital formation 5. Explain domestic source of capital formation Long Questions 45 CU IDOL SELF LEARNING MATERIAL (SLM)

1. Describe voluntary and involuntary savings as source of capital formation 2. “Capital is a necessary but not a sufficient condition of economic development.” Discuss. 3. Briefly explain the various sources of capital formation 4. Explain external source of capital formation 5. Explain the various stages of capital formation B. Multiple Choice Questions 1. Scarcity of capital, technological backwardness and unemployment are generally found in a. Developed countries b. Underdeveloped countries c. Both d. None of these 2. Capital formation in underdeveloped countries is a major bottleneck. The reason can be a. Demonstration effect b. Small size of market with no incentive for investment c. Low level of income d. All of these 3. By ___________ growth rate of an economy can be speeded up a. Investment in primary sector b. Investment abroad c. Investment in share market d. Investment in human capital formation 4. The capital that is consumed by an economy or a firm in the production process is known as: a. Dead-weight loss b. Capital loss c. Depreciation 46 CU IDOL SELF LEARNING MATERIAL (SLM)

d. Production cost 5. Which of the following is a characteristic of capital as a factor of production? a. It is a passive factor of production b. It never depreciates c. It is fixed in supply d. It is an active factor of production Answers 1-b, 2-c, 3-d. 4-c, 5-d 2.11 REFERENCES References book  CSO (1989) National Accounts Statistics – Sources and Methods, New Delhi.  SIDDHARTHAN, N.S. AND K. NARAYANAN (Eds.). 2013. Human Capital and Development — The Indian Experience. Springer, New Delhi.  FREEMAN, RICHARD. 1976. The Overeducated American. Academic Press, New York  BECKER, GARY S. 1964. Human Capital. 2nd Edition, Columbia University Press, New York.  Bhatia, D.P. (1992) Capital and Productivity, Khama Publishers, New Delhi, Chapters 2, 3 and 7. 47 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 3: DISGUISED UNEMPLOYMENT STRUCTURE 3.0 Learning Objectives 3.1 Introduction 3.2 Disguised Unemployment 3.2.1 Meaning and characteristics of disguised unemployment 3.2.2 Causes of disguised unemployment 3.3 Nurkse’s theory of disguised unemployment as a saving potential 3.3.1 Nurkse’s theory of disguised unemployment as a saving potential 3.3.2 Critical appraisal 3.3.3 Conclusion 3.4 The Lewis Model of development with unlimited labor supply 3.5 Summary 3.6 Keywords 3.7 Learning Activity 3.8 Unit End Questions 3.9 References 3.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  State the concept of Disguised Unemployment  Lewis model of Economic Development or the model of Unlimited Supply of Labour  Drawbacks of Lewis Model of Development 3.1 INTRODUCTION The nature of unemployment in underdeveloped economies is quite different from that in developed economies. In economically developed countries, unemployment occurs due to business cycles. Therefore, the main unemployment problem is cyclical unemployment Cyclical unemployment occurs during an economic recession, depression is also described as deflationary unemployment. Deflationary unemployment is the result of insufficient 48 CU IDOL SELF LEARNING MATERIAL (SLM)

aggregate demand. Demand efficiency leads to overproduction, which in turn leads to lower prices (deflation). Due to the fall in the price level, the return on investment decreases, which in turn leads to divestment and thus unemployment? Economic activity accumulated during the severe depression resulted in massive unemployment. Developed economies do not have the issue of the availability of productive resources, but the biggest problem is that the resources cannot be used due to insufficient demand. Therefore, there is poverty in the potentially large amount of resources. Therefore, Keynes suggested that the level of aggregate demand can be increased by generating additional expenditures in the economy in the form of compensatory investment projects by the public sector, thus eliminating cyclical unemployment in developed countries. In addition, the goal of monetary and fiscal policies in advanced economies is to maintain economic stability at the level of full employment. In underdeveloped countries, there is no problem of insufficient aggregate demand. Therefore, cyclical unemployment is not that important. Long-term unemployment exists in underdeveloped countries. As Lord Keynes said, this is a long-standing long-term unemployment problem that cannot be solved simply by increasing the level of expenditure. The underdeveloped countries are caught in a vicious circle of poverty in the economy. These countries all have labour and capital shortages. Therefore, there is a problem of labour surplus relative to available capital and land. Therefore, the labour force has been unemployed for a long time. To solve this problem of long-term unemployment, it is essential to develop the economy through rapid industrialization. Capital formation requires saving resources. Savings can only be increased by reducing expenditures on current income. Increasing the savings income rate is a good way to solve the unemployment problem in underdeveloped countries. Once again, unlike advanced economies, underdeveloped countries are characterized by large-scale hidden unemployment, especially in the agricultural sector. To solve this disguised unemployment problem, it is necessary to create a wide range of employment opportunities in different sectors other than the agricultural sector. In short, unlike the situation in developed industrialized countries, the problem of underdeveloped countries is that underemployment in underdeveloped countries is long-term 49 CU IDOL SELF LEARNING MATERIAL (SLM)

rather than cyclical. The most important thing is that, unlike developed countries, the incidence of unemployment in poor countries has expanded to the majority of the population, rather than within a limited range of specific groups of workers. 3.2 DISGUISED UNEMPLOYMENT Disguised unemployment or hidden unemployment is an economic term that is used to refer to a part of the workforce whose productivity is extremely low or zero. Hidden unemployment will not affect the total output of the economy. Furthermore, disguised unemployment is considered as the part of the population that is not employed and is not included in the total number of employed or unemployed. Hidden unemployment includes people who have not fully utilized their work abilities and work abilities, those who are engaged in work tasks that do not add much production value or the unemployed who do not actively seek job opportunities despite their ability to improve. productivity. In addition, one way to look at unemployment in disguise may be to consider people not getting effective employment. These people may have significant advantages and skills that are lost by performing tasks that are less than their skill set. 3.2.1 Meaning and Characteristics of Disguised Unemployment The characteristic of disguised unemployment is that the number of people working in the field exceeds the number needed. As a result, the marginal productivity of some workers is zero. In other words, if some workers leave the fields, the total output will remain unchanged. This situation exists in underdeveloped countries such as India, where the growing population is absorbed only by the agricultural sector. Therefore, it can be seen from the meaning of this word that although these people seem to have jobs at first glance, they are unemployed in disguise. Suppose a family owns a 15-acre farm. Based on the method used for cultivation, we assume that 4 workers are sufficient to take care of all operations on the farm. Therefore, this family has 6 workers. If all of them are employed on this farm, we can say that two of them are redundant. Therefore, even if the two workers retire, the total output will remain the same. These two people are unemployed in disguise. 50 CU IDOL SELF LEARNING MATERIAL (SLM)