Economic Agents

Economic Agents

An economic agent is an entity that engages in economic activity. This activity can be buying, selling, or producing goods and services and influencing capital markets. There are four main types of economic agents: households or individuals, businesses, governments, and central banks. Each type of economic agent has different objectives.

Following are different types of Economic agents and there objectives:-

  1. Household or Individual,
  2. Firms or Business,
  3. Government,
  4. Central Bank.

 

 

 

 

 

Basic Economic Activities:-

Production, Consumption and Investment (Capital Formation) are three basic economic activities of an economy.

These are interrelated and interdependent. These three economic activities are responsible for generating the income flows in the economy.

An increase in the production of goods and services increases the level of consumption and capital formation.

Increase in consumption is an indicator of rising standard of living of people and increase in capital formation is very important as the growth of the country depends on it.

More consumption is possible if there is more production and more production is possible if there is more capital formation.

Economic agents and their working in economy

 

 

 

Production :-

  • Land, labour, capital and entrepreneurship are called the factors of production. These factors are owned by the households of the country.
  • Production of goods and services is a result of joint efforts of four factors of production. The producers try to produce maximum amount of goods and services by using various combination of factors of production.

1. Factor Incomes :-

  • Factors are paid rent, wages, interest and profits for their productive services. Rent is paid to the landlords, wages to the labourers, interest to lender for loan to buy the capital resources like Machinery, Tractor and profit to the entrepreneurs.
  • Since they are paid in return to their productive services, they are called factor payments and their incomes are called factor incomes.

2. Non- factor incomes :-

  • There are certain money receipts which do not involve any sacrifice on the part of their recipients, the examples are gifts, donation etc. No production activity is involved in getting these incomes.
  • These incomes are called transfer incomes because such income merely represents transfer of money without any good or service being provided in return for the receipts. These incomes are not included in national income.

Consumption:-

  • The consumption activity consists of the use of goods and services for satisfaction of human wants.

Investment/Capital Formation:-

Capital formation is the process by which a community’s savings are channeled into investments in capital goods such as plant, equipment, and machinery. Capital formation refers not only to the creation of physical goods, but also to the creation of human capital such as education, health, skill development, etc.

As you have read, factor owners get factor incomes in return for their productive services. They spend a large part of their incomes on goods and services such as food articles, cloth, furniture, housing, education, health care etc. However, they do not spend their entire income on these goods and services. They also save some income and deposit it in bank for future.

For example, if an individual has an income of Rs. 25000/- all of which he consumes, there is no saving. Instead if he restricts his consumption to Rs.20000/, saves Rs.5000/ and may use this money to deposit in bank for future use. The bank, in turn, may use this money to lend an industrialist to invest in the expansion of his business.

Thus current consumption is forgone and used towards adding to existing capital stock like, plant, machinery, building etc. every year in order to expand production potential in future.

This increase in the stock of capital goods in a year is called capital formation or investment. Capital formation increase economic growth in country.

Hence Capital formation is done by refraining from present/current consumption. Saving, if kept idle, cannot constitute capital formation. If a person saves money and locks up in the house, no capital formation takes place. If only the saved money is invested in capital goods it leads to capital formation. To sum up, whatever is produced is disposed of either for consumption or for capital formation or both.

Incremental Capital Output Ratio (ICOR): -

ICOR is a measure of the productivity of capital investments in the economy. e.g. First year Additional Capital investment in the economy is Rs. 100000/- and additional output is 25000 units then ICOR is 4.

Next year Additional Capital investment Rs. 100000/- and additional output is 20000 unit then ICOR is 5.

A higher ICOR is an indicator of inefficiency (decline in the marginal productivity of capital) i.e. investment capital accumulated in projects is not yielding commensurate output.

The rise in ICOR can be attributed to the delay in completion of projects or the lack of complementary investments. In some cases, it can also be due to non-availability of critical inputs.

Some of the Renowned Indian Economists are:

  • The Modern Science of Economics was born with Causes of Wealth of the Nation -1776. That is why, the publication of Adam Smith’s “An Enquiry into the Nature and Adam Smith is known as the Father of Modern Economics.
  1. Chanakya (Kautilya): He was an Indian teacher, philosopher, and royal advisor. Originally, a professor of economics and political science at the ancient Takshashila University. Chanakya is traditionally identified as “Kautilya” or “Vishnu Gupta”, who authored the ancient political treatise called Arthashastra (Economics).
  2. Mahavira: Economics in Jainism is influenced by the Mahavira and his principles and philosophies. His philosophies have been used to explain the economics behind it. He was the last of the 24 Tirthankars, who spread Jainism.
  3. Shri DadaBhai Naroji: He is fondly called the Grand Old Man of India. He was a pioneer in the field of Economics. He prepared the first estimates of National Income in 1876.
  4. Prof. V.K.R.V. Rao: He was a prominent Indian Economist, Politician, Professor & Educator. He was the first person to adopt scientific procedure in estimating National Income in 1931.
  5. Prasant Chandra Mahalanobis: He was a renowned Indian Statistician and was instrumental in formulating India’s strategy for Industrialization in Second Five Year Plan (1956-61).
  6. Jagdish Natwarlal Bhagwati:- He is an India-born, naturalized American, economist. He is a professor of Economics and Law at Columbia University. Bhagwati is notable for his researches in International Trade and advocacy of Free Trade.
  7. Prof. Amartya Sen: He is a renowned Economist and social worker. He was awarded Nobel Prize for the welfare Economics in Market oriented Economics in 1998.