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labour which is sold and purchased against wages is referred to as wage labour). If we apply the above mentioned four criteria to the countries of the world we would find that capitalist countries have come into being only during the last three to four hundred years. Moreover, strictly speaking, even at present, a handful of countries in North America, Europe and Asia will qualify as capitalist countries. In many underdeveloped countries production (in agriculture especially) is carried out by peasant families. Wage labour is seldom used and most of the labour is performed by the family members themselves. Production is not solely for the market; a great part of it is consumed by the family. Neither do many peasant farms experience significant rise in capital stock over time. In many tribal societies the ownership of land does not exist; the land may belong to the whole tribe. In such societies the analysis that we shall present in this book will not be applicable. It is, however, true that many developing countries have a significant presence of production units which are organised according to capitalist principles. The production units will be called firms in this book. In a firm the entrepreneur (or entrepreneurs) is at the helm of affairs. She hires wage labour from the market, she employs the services of capital and land as well. After hiring these inputs she undertakes the task of production. Her motive for producing goods and services (referred to as output) is to sell them in the market and earn profits. In the process she undertakes risks and uncertainties. For example, she may not get a high enough price for the goods she is producing; this may lead to fall in the profits that she earns. It is to be noted that in a capitalist country the factors of production earn their incomes through the process of production and sale of the resultant output in the market. In both the developed and developing countries, apart from the 7 private capitalist sector, there is the institution of State. The role of I the state includes framing laws, enforcing them and delivering justice. r The state, in many instances, undertakes production – apart from d t imposing taxes and spending money on building public infrastructure, n running schools, colleges, providing health services etc. These economic functions of the state have to be taken into account when we want to describe the economy of the country. For convenience we shall use the term “Government” to denote state. Apart from the firms and the government, there is another major sector in an economy which is called the household sector. By a household we mean a single individual who takes decisions relating to her own consumption, or a group of individuals for whom decisions relating to consumption are jointly determined. Households also save and pay taxes. How do they get the money for these activities? We must remember that the households consist of people. These people work in firms as workers and earn wages. They are the ones who work in the government departments and earn salaries, or they are the owners of firms and earn profits. Indeed the market in which the firms sell their products could not have been functioning without the demand coming from the households. Moreover, they can also earn rent by leasing land or earn interest by lending capital. Reprint 2026-27