the road ahead a snapshot of macroeconomics. 2 micro vs. macro macroeconomics deals with the economy...
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The Road Ahead
A Snapshot of Macroeconomics
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Micro vs. Macro
Macroeconomics deals with the Economy as a whole GDP Unemployment Prices Consumption Investment International Trade
Term coined by Ragnar Frisch in 1933 Microeconomics deals with
Actions of individuals Firms and Consumers
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Schools of Economic Thought
Mercantilism Physiocracy
Physiocrats – Agrarian philosophy Francois Quesnay Land Agriculture
Term coined by Ragnar Frisch in 1933 Microeconomics deals with
Actions of individuals Firms and Consumers
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Schools of Thought - 1
Classical/ New Classical Started with Adam Smith’s Wealth of Nations (1776)
Prices and wages are flexible Markets carry out their functions efficiently The supply side of the economy is very important Changes in the demand side of the economy have only
temporary effects on the economy No role for the Government to play- Laissez-Faire
Alfred Marshall, Adam Smith, David Ricardo Failed to predict/correct the Great Depression of 1929 Early 1970’s- New Classical School Say’s Law
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Schools of Thought - 2
Keynesian/New Keynesian Prices and wages are not flexible Markets are not efficient The demand side of the economy is very important Government has a major role to play - Fiscal Policy
John Maynard Keynes – 1930s The General theory of Employment, Interest and Money Great Depression Advocated Government Intervention Multiplier Effect
Resurgence in 2008-2009 Global Financial Crisis – Sub-prime Crisis Paul Krugman, Joseph Stiglitz, Greg Mankiw, Akerlof
Schools of Thought - 3
Austrian School Von Mises, Murray Rothbard, Hayek
Unscientific Economist
Mathematical Modeling impossible Rejected Mathematical & Statistical methods No Government intervention Criticizes Central Bank actions
Central Bank actions responsible for Depressions and Recessions Inflation caused by Central Bank actions
Absolute Laissez Faire Praxeology – logical processes of human action Predicted the Great Depression – Hayek Advocate Gold standard Criticized by Krugman, Friedman and Jeffrey Sachs
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Key Concepts - 1
GDP - Gross Domestic Product Definition Broadest measure of Economic activity Who- ‘Where’ is important
Ex: MNC in India is incl. In GDP Ex: Indian in the Gulf is not included in GDP
GDP = C + I + G + X – M Personal consumption (C), Gross private domestic investment (I),
Government purchases (G), and Net Exports (X-M)
Product, Income and Expenditure Approach GDP Growth rates - Worldwide
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Issues with GDP Parallel economy/Shadow economy Barter Transactions Double Counting Quality of Data/ Estimates Household Production Ignores Externalities Distribution of wealth Sustainability of Growth
Alternatives HDI – Gini Coefficient
Key Concepts - 2
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Key Concepts - 3
GNP - Gross National Product
Gross National Product includes income earned by the factors of production (assets and labor) owned by a country's residents but excludes income produced within the country's borders by factors of production owned by nonresidents
“Where” - is immaterial
“Who” - is important
GNP = GDP + Receipts – Payments
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Key Concepts - 4
CPI – Consumer Price Index It is the annual percentage change in the cost of acquiring a
fixed basket of goods and services Measures
Inflation Purchasing power of consumers – Today vs. Yesterday
Basis for Dearness Allowance 4 types
Working class Agricultural labor Industrial workers Rural labor
Food-60% ;Clothing-8% ;Fuel-6% ;Housing-8% ;Misc-18%
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Key Concepts - 5
Wholesale price index - WPI It is the index used to measure the change
in the average price level of goods traded in wholesale market
600+ commodities data tracked Captures price movements in a comprehensive way Widely used in Business, Industry, Government Better approximate of inflation
Primary Articles - 22% Mfcg. Goods - 64% Fuel – 14%
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Key Concepts - 6
Inflation An increase in the general level of prices Measured by CPI and WPI Is it Bad and undesirable? Could it be an incentive to invest?
Deflation A fall in the general price level or a contraction of credit
and available money Deflation, not inflation, is now the greatest concern for the
world economy
Disinflation A period or process of slowing the rate of inflation
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Key Concepts - 7
Causes of Inflation
Monetary Theory Monetary policies of Central Banks
Monetary and fiscal restraint
Neo-Keynesian Theory Demand-Pull Cost-Push
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Key Concepts - 8
How to control Inflation?
Monetary PoliciesOpen Market Operations
Fiscal PolicyTaxationGovernment Spending
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Key Concepts - 9
Recession A recession is a prolonged period of time when a
nation's economy is slowing down, or contracting Prerequisite: Two consecutive Quarters Trends indicating Recession
Decrease in Consumer Spending Decrease in industrial production Growing unemployment Slump in personal income An unhealthy stock market
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Key Concepts - 10
Forex External assets that are readily available to and controlled by
monetary authorities for direct financing of external payments imbalances, for indirectly regulating the magnitudes of such imbalances through intervention in exchange markets to affect the currency exchange rate, and/or for other purposes
Foreign exchange reserves targets are fixed to accommodate imports of three months
Foreign exchange reserves include three items Gold SDR’s Foreign currency assets
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Liberalization - 1
The term is used for a more ‘outward-oriented’ economic policy Elimination of anti-export biases Lowering high import tariffs Reducing/phasing out Quantitative Restrictions (QRs) on inputs Switching to tariff-related measures
The goals of liberalization were to motivate Indian manufacturers to Prefer updated technology Deliver better products at lower costs Face global competition Deliver world class goods and services
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Liberalization - 2
Liberalization in Various Sectors Infrastructure Power Telecom Oil Insurance Automobiles Agriculture Software
Second Generation of Reforms Cutting down the fiscal deficit Reform the archaic labor laws Remove the QRs on consumer goods imports
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Currency Convertibility - 1
Currency convertibility is defined as the freedom to convert one currency into other internationally accepted currencies
Two forms of convertibilityCurrent account convertibilityCapital account convertibility
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Currency Convertibility - 2
Current account convertibility has been defined as the freedom to buy or sell foreign exchange for International transactions consisting of payments due in
connection with foreign trade, other current businesses including services and normal short-term banking and credit facilities
Payments due as interest on loans Moderate remittances for family living expenses
Capital account convertibility means that the home currency can be freely converted into foreign currencies for acquisition of capital assets abroad
The rupee is currently not freely convertible on the capital account
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Financial Markets
Provide facilities for the buying and selling of financial claims and services Classified as
Primary Secondary
Also classified as Money – Short Term – CP & CD Capital – Long term – Stocks & Bonds
Stock Markets SEBI
Forex Markets
Annexures
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Fiscal Policy - 1
Government uses its revenue and expenditure programs to produce desirable effects on
National incomeProductionEconomy
Used as a balancing device Two elements of Fiscal Policy
TaxationPublic Expenditure
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Fiscal Policy - 2
Objectives of Fiscal Policy Mobilization of resources Acceleration of economic growth Minimization of the inequalities of income and
wealth Increasing employment opportunities Price stability
Reflationary Fiscal Policy Deflationary Fiscal Policy
Say’s Law
Jean Baptiste Say - “Products are paid for with Products”
“It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products”
What does it mean – Supply equals Demands In order to obtain a desired commodity, one must first and necessarily
produce a commodity which is itself desirable. Those who produce undesirable commodities, or produce desirable commodities but at unprofitable costs, will fail.
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Great Depression
Coined by Lionel Robbins – “Great Depression” Started in 1929 and lasted till 1940 Global Scale Black Tuesday – 29th Oct, 1929 Large Scale Unemployment – 25% in US Frantic Attempts at Protectionism – Smoot Hawley Tariff Act Causes
Collapse of banks Smoot Hawley Act Monetary Contraction
Recovery in 1933 Public Works Government Spending WWII
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US- GDP & Unemployment
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Worldwide Impact
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Great Depression in Pics
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Great Depression in Pics
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Great Depression in Pics
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Great Depression in Pics
Dorothea Lange
“Migrant Mother”
Stamp
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GDP Growth - Worldwide
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GDP - Nominal
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GDP - PPP
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Gini Coefficient
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HDI
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Key Terms - 1
Cash Reserve Ratio – CRR is the portion of deposits (as cash) which banks have to keep/maintain with the RBI. This serves two purposes: Ensures that a portion of bank deposits is totally risk-free Enables that RBI control liquidity in the system, and thereby, inflation
Bank Rate - is the rate at which the central bank lends to the commercial banks
SLR is the portion of their deposits banks are required to invest in government securities
Repo rate - is the rate at which the RBI borrows short term money from the market. After economic reforms RBI started borrowing at market prevailing rates. So it makes more sense to banks to lend money to RBI at competitive rate with no risk at all
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Key Terms - 2
Balance of Payments ( BoP)A statement of economic transactions
showing the relative difference between the inflow and outflow of goods, services, and capital claims and liabilities between a country and its trading partners
BoP= (Exports + Inflows)- (Imports + Outflows)
1991 Crisis
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Key Terms - 3
Exchange Rate the price of a national currency in terms of the currency of
another nation. The exchange rate is a way of stating how many units of
currency (dollars, for example) it would take to buy a unit of a foreign currency
Changes in the exchange rate of a country's currency can make a difference in the price of its imports and exports
Fixed Rate held fixed in terms of a foreign currency
Floating Market forces allowed to determine the rate
Mixed
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