The following are some points to consider about the nature of economics:

1. Economics as a Science: Economics has the characteristics of science in that it is a systematic body of knowledge that explains the cause and effect relationship between various variables such as price, demand, supply, and so on.
   However, economics cannot compete with physical sciences in terms of precision because human and social behaviour is complex and unpredictable. As a result, economics is an imprecise or social science.
   
   1. Economics as a positive science: A positive science is one in which the analysis is limited to the cause and effect relationship. It simply states ‘what is’ rather than ‘what ought to be.’ It makes no value judgments about what is right or wrong. Positive economics is concerned with economic facts as they exist.
      Positive economics, for example, addresses problems such as “what causes unemployment?” and “why are prices rising?”
   2. Economics as a normative science: Economics, as a normative science, is concerned with the question of ‘what ought to be.’ It examines real economic events from moral and ethical viewpoints and determines whether or not certain economic events are desirable. It makes value judgments and prescribes methods to correct unfavourable events.
2. Economics as an Art: JM Keynes defines art as “a system of rules for achieving a given end.” As a result, unlike science, which is theoretical, art is practical. With the above interpretation in mind, we can easily conclude that economics is an art.
   For example, the theory of demand directs the consumer to maximise satisfaction with a given income, thereby assisting him in solving an economic problem.
3. Economics as a Science and an Art:In methodology, economics is a science, and in application, it is an art. ‘Economics is the oldest of the arts and the newest of the sciences—indeed, the queen of social sciences,’ says Paul A Samuelson.

The following are the primary methods of economic analysis:

1. Deductive method:The logic in this method moves from general to specific. A general or universal truth is discovered using this method, and deductions are made from it. For example, we can infer from the basic law of demand that a consumer will buy more at lower prices. This method is also known as an abstract method or a priori method.
2. Inductive method: The logic in this method continues to progress from particular to general. This method collects a large amount of data from actual experience with regard to an economic phenomenon, and on the basis of these observations, certain generalizations are made and conclusions are drawn.
   The two approaches aren’t mutually exclusive. They are used in conjunction in any scientific study, i.e. they are complementary.

An economy is a system in which and through which people earn a living in order to satisfy their desires through the processes of production, exchange, and distribution. There are two types of economies:

1. On the Basis of Government Control:

   1. Capitalist economy:Also known as a market economy or a free economy, this economy allows the market to operate without government intervention.
      Private entrepreneurs manage business activities, and the government’s role is limited to governance. In this economy, market forces of demand and supply determine price and output, with profit being the primary motivator. America and Germany, for example, are examples of capitalist economies.
   2. Socialist economy: Under this economy, also known as a centrally planned or controlled economy, the government or a central authority of a country plans all important activities such as production, distribution, exchange, and so on. Prices are set by the same authority, and social welfare is the primary motivator. China, for example, is an example of a socialist economy.
   3. Mixed economy: This economy combines elements of both the capitalist and socialist economies. In this economy, the government and private entrepreneurs coexist.
      Certain business sectors that are not of strategic importance are given autonomy and operate according to market forces of demand and supply. Strategic units, on the other hand, are managed and regulated by the government. Profit maximization and social welfare are both goals of this economy. India, for example, is an example of a mixed economy.
2. On the Basis of Development:
   
   1. Underdeveloped economy: This economy is differentiated by a low Gross Domestic Product and per capita income.
      The primary sector is the most visible and important sector, contributing the most to GDP and providing the most jobs. Infrastructure is underdeveloped, birth and death rates are high, superstition reigns supreme, and the standard of living is extremely low. Countries with such economies are referred to as “third world countries,” such as Zambia and Kenya.
   2. Developing economy: (Emerging economy) This economy is distinguished by rising but still low GDP and per capita income. The primary sector, despite its prominence, is declining. Secondary and tertiary education are expanding. Death rates are decreasing as medical facilities improve, but the birth rate remains high.
      Infrastructure is still in need of improvement. As an example, consider India.
   3. Developed economy: This economy is distinguished by a high GDP and per capita income. Secondary and tertiary education are becoming increasingly important, with the secondary and tertiary sectors accounting for the majority of Gross Domestic Product. The primary sector is losing its clout.
      Infrastructure is highly developed and advanced. Both birth and death rates are low. People are well educated, and the standard of living is high. Countries that exhibit characteristics of a developed economy, such as America and Germany, are referred to as “first world countries.”
   4. Transitional economy: These economies are going to transition from one type of economy to another. As a result, a transitional economy exists when the socialist economy is replaced by a mixed or market economy.

Now that we’ve learned about the different types of economies, let’s try to understand the nature of the Indian economy.

India : An Underdeveloped Economy
In the case of India, we can say that it has a developing economy. This is due to the following characteristics:

(i) Agriculture is still the most common occupation in India. Even today, agriculture employs roughly 53% of the total workforce.
(ii) Poverty is extremely prevalent in India. Indians account for one-third of the world’s poor. In 2009-10, 29.8 percent of the population was poor, according to the Planning Commission.
(iii) The Indian population has increased at a rate of more than 2% per year over the years. The country is dealing with a population explosion.
India has a dependency ratio of 57.5 percent, which is much higher than that of other developing countries.

(iv) In 2011, India’s per capita income was $1420. It is low not only in comparison to developed countries such as the United States, the United Kingdom, and Germany, but also in developing countries such as Sri Lanka and Indonesia.
(v) Due to low incomes, the rate of savings is also low, resulting in a low rate of gross capital formation.
(vi) Production techniques, particularly in the agricultural sector, remain archaic.
(vii) Unemployment is also quite common in India. As per National Sample Survey Office’s (NSSO) 66th round of survey, 66 people out of 1000 in the labour force are unemployed.
(viii) The level of human well-being in India is also quite low. According to the most recent UNDP Report 2013, India ranked 136 out of 187 countries in terms of relative global ranking on the HDI index.
(ix) Income and wealth distribution in India is unbalanced.
According to the Human Development Report-2010, India’s Gini Index from 2000 to 2010 was 0.368.

Gini Index

It assesses how far the distribution of income/consumption among individuals within an economy deviates from a perfectly equal distribution. A Gini Index of 0 indicates perfect equality, while a Gini Index of 1 indicates perfect inequality.
n The observations made above lead to the conclusion that the Indian economy is underdeveloped. However, this is not entirely correct.

It is a combination of three fundamental indicators of human development: longevity, knowledge, and standard of living.

This is an important tool for determining ‘what to produce and in what quantities.
A country first assesses its resources, and then, with those resources in mind, develops a schedule known as a Production Possibility Schedule, which depicts all of the possible combinations of different goods that can be produced using the resources.
The Production Possibility Curve is a graphical representation of this schedule (PPC).
PPC is also known as:
(i) The Production Possibility Frontier (PPF),
(ii) the Production Possibility Boundary (PPB),
(iii) the Transformation Curve (TC),
(iv) the Transformation Boundary (TB), and
(v) the Transformation Frontier (TF)

A imaginary Production Possibility A schedule depicting the production of only two goods, namely a cold drink and cheesy pizza, with a country’s resources totaling 100 lakhs.