Underdeveloped Economy

An economy is a system that provides people with goods and services and directly or indirectly satisfies their wants. In this article, you are going to read about the Underdeveloped Economy.

Underdeveloped Economy

On the basis of the level of economic development, economies are classified into the following categories:

  • Developed economy
  • Underdeveloped economy

What is Underdeveloped Economy?

An underdeveloped economy is one in which the per capita income and the standard of living of the people are low. According to the World Development Report 2011, economies having a per capita income of $995 or less are considered underdeveloped economies. They are also known as developing
economies as they are passing through a phase of development and growth.

Important characteristics of an underdeveloped economy

  • The per capita income in an underdeveloped economy is low, and therefore, majority of the population live below the poverty line. Consequently, people in this economy live in miserable conditions.
  • In most underdeveloped economies, the population growth rate is very high as compared to the other economies. Also, because of improved medical facilities, the mortality rate among all the sections of society is reduced. As a result, as the population increases, the consumption of the limited resources also increases, resulting in less saving of resources and a slower growth rate.
  • For many underdeveloped economies enriched with large and sufficient resources, most of these resources remain underutilized because of lack of skilled personnel and technology.
  • Underdeveloped economies suffer from widespread unemployment. Because of various reasons, such as rapid population growth and lack of investment, unemployment prevails in such an economy. It is estimated that underemployment and unemployment together constitute nearly 30% of the workforce of an underdeveloped economy.
  • Inequality in the distribution of income is prevalent in these economies. As a large part of the national income goes to smaller sections of society, the larger sections of society have to be satisfied with whatever part of income is available to them. According to the Human Development Index, the top 20% of India’s population receives 45.3% of the national income, while the poorest 20% of the population receives 8.1% of the national income.

Difference between Developed Economy and Underdeveloped Economy

Developed EconomyUnderdeveloped Economy
A high per capita income leads to a higher standard of living.A low per capita income leads to a low
standard of living.
The incidence of poverty is low.The incidence of poverty is high.
Industrial and service sectors are predominant.Agricultural or the primary sector is
Resources are properly used and highly advanced capital-intensive techniques are used in production. Therefore, productivity is high.Resources are underused and traditional techniques are used in production. Therefore,
productivity is low.
The gap between the rich and the poor is narrow.The gap between the rich and the poor is wide.

Economic Growth and Economic Development

Economic growth is an increase in the national income or per capita output over a period. It is a sign of quantitative growth in the country. On the other hand, economic development is a process where the real per capita income of a country increases over a period with a decrease in poverty ratio, unemployment, and income inequality.

Economic Problem

The demand for goods and services arises from human wants. No individual in the whole world can fulfill all his/her wants. Wants are unlimited and means are limited. Thus, this scarcity of means in relation to wants brings forth the economic problem of how many resources should be used in satisfying different wants. In this way, one has to choose a set of wants from among unlimited wants which are to be satisfied with limited resources. Scarcity means a situation where only a limited amount of goods can be produced because of the existence of a limited amount of resources.

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Open Economy

Complex Economy

Developed Economy

Underdeveloped Economy

Mixed Economy

Socialist economy

Capitalist economy

Industrial Economy

Agricultural Economy

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