Question

Ans and elaboration (20 Mark, 10 Mark each, within 100 words)

2A) How do economists evaluate the performance of economic system?

(Provided point)

Economic growth: increase in the volume of real output generated over time or in output per capita

Efficiency: the effectiveness with which a system utilizes its available resources at a particular time or through time

Income distribution: the Lorenz curve

Stability: cyclical stability, inflation, unemployment

Viability: can an economic system be viable in the long run?

2B) What problems are involved in evaluating economic system?

(Provided point)

Wealth distribution, non-market transaction, underground economy, non-monetary economy, externalities, sustainability of growth, transfer pricing.

Answer 1

2A) How do economists evaluate the performance of economic system?(Provided point)

An economic system is a system of production, allocation and distribution of resources. If a state owns all factors of [roduction then it becomes planned and if market owns then it becomes market system and if there is coexistence of both then it is mixed. Evaluation of economic system is done on the basis of following points:

Economic growth: increase in the volume of real output generated over time or in output per capita: This point means how per capita income is increasing for a country. It happens when quality and quantity of resources increase. It needs state support for creation of human and physical capital. Eg. China growth rate consistently is around 7 % for last decade.

Efficiency: the effectiveness with which a system utilizes its available resources at a particular time or through time. Labor productivity along with production volume will make this aspect clear. Indicators like ease of doing business, competitiveness index shows this performance.

Income distribution: the Lorenz curve: Lorenz curve shows income inequality. It measures % population vs % income. Ginni coefficient is derived from Lorenz curve. Value ranges from 0 to 1: 1 Shows inequality and 0 shows equality.

Stability: cyclical stability, inflation, unemployment: Indices like Consumer price index, Unemployment data published by labor bureau shows stability. Higher CPI and unemployment values show economic instability and social unrest.

Viability: Economic viability is determined by all factors discussed above.

2B) What problems are involved in evaluating economic system?

Wealth distribution, non-market transaction, underground economy, non-monetary economy, externalities, sustainability of growth, transfer pricing.

Generally growth is calculated by GDP growth rate. This does not involve environmental degradation cost. GDP per capita may increase but income inequality may also increase making poor worse off. Eg. India. Many countries have large informal economies and hence economic indicators may underestimate or overestimate data. Eg. In India 85 % labors work in an informal economy and hence collection and reliability of data comes under scanner. Govts also intervene in price controls through price ceiling and flooring which creates market distortions by disturbing demand-supply equilibrium.

Hence there is no one single indicator for evaluation but a combination of many.