Traditional vs Socialist vs Capitalist vs Anarcho Capitalism vs Mixed Economy, Formal vs Informal Economy

 

Traditional Economy: 

• A traditional economy is an original and primitive economic system. 
• The traditions, customs, and belief system of the economy define the nature of   the goods and the services to be produced in an economy, as well as the rules and manner of their distribution. 
• Example: Tribal Communities.

CAPITALIST ECONOMY:

• The purchasing power /desire /demand /wants rather than the basic needs of the people decides what goods are to be  produced and  distributed among people .
• As the control is in the hands of industrialist ,then methods of production will always be selected in the manner in which it is more and more profitable to the businessmen. 
• The produced goods and services are distributed as per the demand /purchasing power of the people.
• Most of the countries in today’s world are moving towards Capitalist mode of Economies.
• Ex. Cheaper housing  for the poor is the basic need of the masses but this demand don’t create demand in the market sense because the poor do not have the purchasing power to support the demand. 

SOCIALIST ECONOMY:

• In a socialist society , the government which decides what goods are to be produced. 
• The decision is  in accordance with the needs rather than the demands  of the society. 
• It is assumed that the government knows what is good for the people of the country and so it takes care of the needs of the people and the desires of individual consumers are not given much importance.
• Ideally, a socialist society has no private property since everything is owned by the state. 
• The methods used for production are labour intensive creating more and more of the jobs.
• In principle, distribution under socialism is supposed to be based on what people need and not on what they can afford to purchase. 
• Example: The then USSR and China of 1990,s and Cuba.

MIXED ECONOMY:

• In the mixed Economy, both the government and the market together answer the three questions of what to produce, how to produce and how to distribute what is produced.
•  In a mixed economy, the market will provide whatever goods and services it can produce well and it is concerned about the demand /desires/purchasing power  of the society. 
• On the other hand, the government will provide essential goods and services which the market fails to do. 
• India is the classic case of mixed Economy.

Anarcho Capitalism : 

• A radical concept of Political state which advocates for demolition of state and talks of police and legal services to be provided by  the private sector .
• Javier Milei ,the rpesident of Argentina is of this ideology and considered to be the ultra right.

INFORMAL ECONOMY: 

• The informal sector, informal economy, or grey economy is the part of an economy that is not part of the formal system ie it is neither taxed, nor accounted in government records. 
• Unlike the formal economy, activities of the informal economy are not included in Gross Domestic Product (GDP).
• Ex. any nearby shop from which you make purchases without any bill.

FORMAL ECONOMY:

• All the activities of an economy which pay taxes to the government and are accounted in the government records. 
• This economy constitutes a part of Gross Domestic Product (GDP). 
• Example: All the purchases from any mall in which you receive the bill.

Budget Deficits: Fiscal Deficit, Twin deficit, Gross Primary Deficit, Effective Revenue Deficit

 

CLASSIFICATION OF BUDGET:

Budgets are broadly categorized into three main types based on their financial outcomes, each playing a distinct role in fiscal planning:

●        Balanced Budget

●        Surplus Budget

●        Deficit Budget

 

A balanced budget occurs when planned revenue match or exceed the amount of planned expenses. A balanced budget occurs when tax revenue is equal to government spending.

A surplus budget is a condition when incomes exceeds the expenditures. In simpler words, when government revenue exceeds the expenses then it is known as a surplus budget.

A budget deficit occurs when expenditures exceeds revenue. In simpler words, when government revenue is less than the expenses then it is known as a deficit budget.

Revenue Deficit: The revenue deficit refers to the excess of government’s revenue expenditure over revenue receipts.

               Revenue deficit = Revenue expenditure – Revenue receipts.

• The revenue deficit includes only such transactions that affect the current income and expenditure of the government. 
• When the government incurs a revenue deficit, it implies that the government is dissaving and is using up the savings of the other sectors of the economy to finance a part of its consumption expenditure.

Budgetary deficit:

• It is the difference between all receipts and expenses in both revenue and capital account of the government. 
• Budgetary deficit is the sum of revenue account deficit and capital account deficit. 
• Budgetary deficit is usually expressed as a percentage of GDP. 
• Prior to 1997, GOI  used the following methods for making budget deficit zero:

1.Printing of new currency

2.Borrowing from RBI.

But after 1991 reforms ,Sukhmoy Chakraborty committee recommended for FISCAL DEFICIT.

Fiscal Deficit: Fiscal deficit is the difference between the government’s total expenditure and its total receipts excluding borrowing.

Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts).

From financing side:

Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad.

Net borrowing at home includes directly borrowed from the public through debt instruments (for example, the various small savings schemes) and indirectly from commercial banks through Statutory Liquidity Ratio (SLR). 

Non-debt creating capital receipts:

• Those receipts which are not borrowings and, therefore, do not give rise to debt.
•  Examples are recovery of loans and the proceeds from the sale of PSUs.
• The fiscal deficit will have to be financed through borrowing. 
• Thus, it indicates the total borrowing requirements of the government from all sources.

TWIN DEFICIT / DOUBLE DEFICIT :

• When a country has both current account deficit and fiscal deficit, it is said to be twin/double deficit. 
• This means the country's economy is importing more than it is exporting, and the country's government is spending more money than it is generating.

Gross Primary Deficit:

• It is Gross Fiscal Deficit less interest payments of the current fiscal year .
• This deficit is about actual liability for the particular year.
•  A shrinking primary deficit indicates progress towards fiscal health as it shows that your deficit in the current year is decreasing . 
• When the primary deficit is zero, the fiscal deficit becomes equal to the interest payment. 
• This means that the government has resorted to borrowings just to pay off the interest payments. Further, nothing is added to the existing loan.

EFFECTIVE REVENUE DEFICIT (ERD):

• Effective Revenue deficit is a new term introduced in the Union Budget 2011-12. 
• The concept of effective revenue deficit has been suggested by the Rangarajan Committee on Public Expenditure.
• Revenue deficit is the difference between revenue receipts and revenue expenditure but  the present accounting system includes all grants from the Union Government to the state governments/Union territories/other bodies as revenue expenditure, even if they are used to create assets. 
• Such assets created by the sub-national governments/bodies are owned by them and not by the Union Government. Nevertheless they do result in the creation of durable assets. 
• According to the Finance Ministry, such revenue expenditures contribute to the growth in the economy and therefore, should not be treated as unproductive in nature.
• Effective Revenue Deficit signifies that amount of revenue deficit that is being used for actual consumption expenditure of the Government and not for creating the assets. 
• ERD is revenue deficit excluding capital expenditures  used for creating durable assets out of revenue expenditure .