Irish Economy

Nominal GDP (2010): $208.3 billion. Real GDP growth (2010): -1.6%. Nominal GDP per capita (2010): $46,592. Natural resources: Zinc, lead, natural gas, barite, copper, gypsum, limestone, dolomite, peat. Agriculture (2% of GDP): Products--cattle, meat, and dairy products; barley; hay; silage; wheat. Industry (29% of GDP): Types--food processing, beverages, engineering, computer equipment, textiles and clothing, chemicals, pharmaceuticals. Trade (2010, Ireland Central Statistics Office data): Exports--$119.9 billion (excluding services): machinery, transport equipment, chemicals, food, manufactured materials, beverages. Imports--$59.9 billion (excluding services): grains, petroleum products, machinery, transport equipment, chemicals, textile yarns. Major suppliers--Great Britain and Northern Ireland 30%, U.S. 18%, France 5%, Germany 7%, China 6%, Japan 2%; rest of the world (including other EU member states) 32%.

Boom to bust
Ireland's economy began to grow rapidly in the 1990s, fuelled by foreign investment. This attracted a wave of incomers to a country where, traditionally, mass emigration had been the norm. The boom that earned Ireland the nickname of "Celtic Tiger" faltered when the country fell into recession in the wake of the global financial crisis of 2008. The property boom had been fuelled by massive lending from the banks, and when this collapsed - and lenders were unable to repay - the Irish banking system was plunged into crisis. The Irish economy underwent one of the deepest recessions in the eurozone, with its economy shrinking by 10% in 2009. In November 2010, Ireland and the EU agreed a financial rescue package for the republic worth 85bn euros, ending weeks of speculation about a bail-out. Ireland's budget deficit reached an alarming 32% of gross domestic product after a state bailout of the country's banks, which had lent recklessly and fuelled an unsustainable property boom It is no exaggeration to say that we now face one of the darkest hours in the history of our independent state. Our economy and our politics have been shattered. But our people's spirit has not," the parties said. Mr Kenny said he would make renegotiating the terms of the economic bailout by the EU and the IMF his first priority.

MACRO AGGREGATES GROSS NATIONAL PRODUCT (GNP) GNP IS THE SUM OF ALL FINAL GOODS AND SERVICES PRODUCED DURING A SPECIFIED PERIOD OF TIME (1 Yr.) WHICH CAN BE MEASURED AT MARKET VALUE (GNPmp) OR AT FACTOR COST (GNPfc) ARRIVING AT REAL GNP NOMINAL GNP IS GROSS NATIONAL PRODUCT EXPRESSED IN CURRENT Rs. Where as REAL GNP IS DEFLATED FOR CHANGES IN THE PRICES OF ITEMS REAL GNP (current period) = NOMINAL GNP * (current period) GNP DEFLATOR (base period) GNP DEFLATOR (current period)

PERSONAL DISPOSABLE = PERSONAL INCOME PERSONAL INCOME TAXES

PERSONAL INCOME=NNPfcRETAINED EARNINGS-CORPORATE TAXES+TRANSFER PAYMENTS+NET INTEREST & DIVIDENDS =WAGES + PROPRIETORS INCOME + NET INTEREST + DIVIDENDS + TRANSFER PAYMENTS
PERSONAL SAVING = PERSONAL DISPOSABLE INCOME - CONSUMPTION NET EXPORTS = GNPmp - (C+I+G) absorption Where (C+I+G) is Domestic

PRIVATE INCOME = INCOME FROM DOMESTIC PRODUCTION ACCRUING TO THE PRIVATE SECTOR + NET FACTOR INCOME FROM ABROAD+ CURRENT TRANSFER FROM GOVERNMENT + NET TRANSFERS FROM ROW TO THE PRIVATE SECTOR PERSONAL INCOME = PRIVATE INCOME - RETAINED PROFITS - CORPORATE PROFIT TAX NET FACTOR INCOME FROM ABROAD = FACTOR INCOMES PAID income generated in domestic productive activity paid to foreigners(eg repatriated profits, payment to consultants)- FACTOR INCOMES RECEIVED(domestic residents earn incomes abroad)

Open Economy

GDP at Market Price Value at market prices of all goods and services during a specified period GDPmp = C+I+G+E-M GDP at Factor Cost Income generated in the productive activities in an economy during a year GDPfc = W+INT+P+R KEY TO FLOW CHART NATIONAL PRODUCT DOMESTIC PRODUCT = NET INCOME FROM ABROAD (NIA) GROSS VALUE NET VALUE = DEPRECIATION

MARKET PRICE FACTOR COST = INDIRECT TAXES + SUBSIDIES

SUMMARY OF THE FLOW CHART KEY RELATIONSHIPS GNPmp-NET INDIRECT TAXES = GNPfc GNPmp-NET INCOME FROM ABROAD = GDPmp GNPmp DEPRECIATION = NNPmp GDPmp DEPRECIATION = NDPmp NNPmp NET INCOME FROM ABROAD = NDPmp (SAME RELATIONSHIPS HOLD FOR NATIONAL INCOME VARIABLES MEASURED AT FACTOR COST) CONCEPTUAL FRAMEWORK STOCKS AND FLOWS Stocks Measured at a point of time eg. Total number of persons employed at a time in India Flows Measured over a period of time eg. No. of persons who get new jobs Stocks MONEY SUPPLY CPI Flows INFLATION EXPORTS / IMPORTERS FOREX RESERVES INVESTMENT CAPITAL STOCK WAGES UNEMPLOYMENT TAXES

Measurement of national income

The Output (Value Added) Method refers to value of all final goods and services produced during a year by different sectors of the economy or aggregating values imparted to intermediate Products at each stage of production The agricultural and extractive industries 10 + Manufacturing Industries 40 + Services and construction 40 = Gross Domestic Product at factor cost 90 + Net factor income from abroad (Income received from abroadincome paid abroad) 10 = Gross National Product at factor cost 100 Capital consumption or depreciation 20 = Net National Product at factor cost or National Income 80

INCOME METHOD
MONEY PAYMENTS MADE TO ALL FACTORS OF PRODUCTION FACTOR INCOMES FOR CURRENT SERVICES TO PRODUCTION

Income from employment Income from self employment Gross trading profits of cos Gross trading surplus of public cos Rent Total domestic income Stock appreciation GDPfc NFIA GNPfc

80 10 10 10 10 120 -30 90 10 100

EXPENDITURE METHOD AGGREGATES ALL MONEY SPEND BY PRIVATE CITIZENS FIRMS AND GOVERNMENT Consumer Expenditure (C) Govt.Expenditure (G) 70 + 20

Gross Domestic Fixed Capital Formation (GDFC) (I) + 20 Value of Physical increase in stocks + 10 Total domestic expenditure (mp) 120 Exports & factor income received + 20 Imports & factor income paid - 30 GNPmp 110 Indirect Taxes - 20 Subsidies +10 GNPfc 100

DIFFICULTIES IN MEASUREMENT OF NI
Non Market production Imputed values Underground economy Side effects and Economic Bads Double counting USE OF NI ECONOMIC PLANNING STANDARD OF LIVING CHANGES IN COUNTRYS ECONOMIC GROWTH COMPARATIVE ANALYSIS FACILITATED

Possible steps by the RBI to correct Rs slide- Intervention Possible steps by the Govt to correct Rs slideDemand for gold ,silver which has seen a 56% increase in demand Because it is thought of as a hedge against inflation So provide inflation indexed bonds with high returns Decontrol diesel prices, allow third party marketing to break The oil companies cartel Opening up organised retail to foreign investment and give resettlement package to deserving beneficiaries BACKGROUND CLASSICAL SCHOOL *Full employment - SayS Law Supply creates its own demand No room for Fiscal or M policy-Automatic equilibrium. KEYNESIAN SCHOOL SHOT INTO PROMINENCE DURING THE GREAT DEPRESSION OF 1930 *UNEMPLOYMENT -Fiscal policy in raising AD. Use of multiplier According to a recent CRISIL study released today, the IT and ITeS services sector has a multiplier effect on the Indian economy with every input of a rupee resulting in a 100 per cent return.

The study, conducted for NASSCOM, says, "Every rupee spent by the IT-ITeS sector translates into a total output of 2 rupees in the economy.
Nearly 58% of GDP comprises of Consumption expenditure which is a component growing in importance.

One way or another, there's really no way for the economy to grow strongly and consistently unless middle-class consumers spend more, and they can't spend more unless they make more The only sustainable source of consistent growth is rising median wages. The rich just don't spend enough all by themselves. Kevin seems to be arguing that as income distribution gets more tilted from the poor and middle class towards the rich, consumption as a share of national income will fall. OK, we are currently concerned about an insufficiency of aggregate demand given that the sum of net investment and net exports is barely above zero. During the transitional (perhaps defined as a couple of years) Keynesian period of weak investment demand, we have the paradox of thrift where any upwards shift of the national savings schedule will only deepen the recession. But even the most die-hard Keynesians accept the Solow proposition that in the long-run, any increase in national savings will encourage more investment. And if Kevin is right about the rich having a lower propensity to consume that is, a higher propensity to save the old trickle down nonsense about taking from the poor to give to the rich would at least spur more investment demand and longterm growth.

Figure 1 confirms the continuation of the long term downward trend of US savings, with inevitable oscillations in business cycles, since 1981. Each cyclical savings peak was lower than previous one 21.4% of GDP in 1981, 19.0% in 1998, and 16.4% in 2006. Each cyclical trough was also lower than the one before 14.2% in 1992, 13.6% in 2003, 10.2% in 2009.

GDP UNEM INF

IG

Source: Economist The Business Confidence Index (BCI) of SACCI is a market-related index that reflects not what business is saying, but what it is doing and experiencing. It is therefore not an opinion/perception-based index. It is likely that in any one month the business mood will be influenced both positively and negatively by various developments in the economy. The BCI seeks to reflect the net results of

these influences. The BCI is a composite weighted index of thirteen sub-indices. Various economic indicators are used to compile the thirteen sub-indices. The indicators that are monitored have been judged by business to have the greatest bearing on the business mood. Average monthly weighted exchange rate of the rand against the US dollar, the euro and the British pound as well as the volatility of the rand exchange rate Core consumer inflation rate for metropolitan and urban areas The real predominant prime overdraft rate Retail sales volumes Rate of change in real credit extension to the private sector Average weighted US dollar price of gold and platinum Merchandise import volumes Merchandise export volumes New vehicle sales Liquidations of companies and closed corporations Volume of manufacturing production Real value of private sector building plans passed, and

Results of the December 2011 Ifo Business Survey The Ifo Business Climate for trade and industry in Germany continued to improve in December after stabilising in the previous month. Survey participants responses showed that their assessment of the current business situation continues to remain favourable. Business expectations improved for the second time in succession. The German economy seems to be successfully countering the downturn in Western Europe. This bodes well for Christmas. In manufacturing the business climate remains unchanged. Manufacturing firms may assess their current business situation as slightly less positive than in November, but there is no question of a meltdown comparable to that of 2008. On the contrary, the German economy is showing signs of stabilisation. Firms even view their six-month business outlook more favourably. They also see greater opportunities in the export business. The overhang of firms wishing to increase their staff numbers has nevertheless fallen slightly. The business climate index increased somewhat in wholesaling and clearly in retailing. The business situation is assessed more positively than previously at both levels of trade. In addition, retailers and wholesalers are more optimistic. This suggests brisk Christmas trade.

EQUILIBRIUM OUTPUT
EQUILIBRIUM OUTPUT = AGGREGATE DEMAND QUANTITY OF OUTPUT PRODUCE EQUALS AGGREGATE DEMAND

= CONSUMPTION (C) + INVESTMENT GOVERNMENT PURCHASES (G) + NET EXPORTS (NX)

AD Y AD

= = =

C+I+G+NX C+I+G+NX Y

EXANTE SENSE = ALL THE ABOVE MENTIONED VARIABLES ARE PLANNED OR DESIRED VALUES AND NOT ACTUAL VALUES

SIMPLE CONSUMPTION FUNCTION

M.THAMPY MPC (1951-1979) = 0.82 C = 19.60 + 0.824 Yd C/N = 91.69 + 0.733 (Yd/N) Marginal propensity to consume India 0.82 Japan 0.66 West Germany 0.72 Australia 0.76

SAVINGS FUNCTION
TWO SECTOR ECONOMY - INCOME IS EITHER SAVED OR SPENT Y = C+S which implies S = Y-C Substituting the consumption function we get by = -a+(1-b) Y

S = Y-C

= Y-a-

(1-b) = MPS =

Marginal propensity to save (MPS) Increase in savings per unit of income

MPC + MPS = 1

CONSUMPTION FUNCTION

PLANNED INVESTMENT (I) GOVERNMENT PURCHASES & NET EXPORTS AD = = C+I+G+NX a+by+I-G+NX = (a+I+G+NX) +by = A+by (where A = (a+I+G+NX)

DETERMINATION OF CONSUMPTION
STOCK OF WEALTH - Wealthier economies consume more EXPECTATIONS - Regarding future movements in incomes and prices TAXATION POLICY - Taxation policy influences the Average propensity to consume and shifts the consumption function DISTRIBUTION OF INCOME - Income accruing greatly to the Higher income class is likely to Be saved AGE COMPOSITION OF POPULATION -Young families have higher Propensities to consume

DETERMINATION OF EQUILIBRIUM INCOME

ASSUMPTION : CONPONENTS OF INVESTMENT, GOVERNMENT EXPENDITURE, NET EXPORTS CONSTITUTING (AD) ARE HELD CONSTANT AD = C+I+G+NX, Substituting the consumption equation we get AD = a+by+I+G+NX Where (I+G+NX) are AUTONOMOUS components (independent of the level of income)

GIVEN THE ABOVE FACTS EQUILIBRIUM INCOME IS WHERE (AD) CURVE EQUALS THE 45 DEGREE LINE AS SHOWN IN THE FIG(PLANNED(EXANTE) SPENDING=ACTUAL (EXPOST)OUTPUT

Problem :
C yd = = 50 + 0.9 yd y-T T = 10+0.2y Y = I

C+I+G = I G = G (a) CALCULATE EQUILIBRIUM INCOME, AGG CONS,. GOVT. BUDGET DEFICIT, I = 50, G = 40

Solution:
C Yd C C C Y = = = = = = 50 + 0.9 yd y (10+0.2y) 50-+0.9 (y-10-0.2y) 50+0.9 y 9 0.18y 41+0.72y C+I+G Y= 41+0.72y+50+40

Y-0.72Y = 41+50+40 Y = ( 41+50+40 ) / 0.28 C+I+G = 467.86 T = 10+0.2Y =10+93.57 = 103.57 Yd =Y-T = 467.86-103.57 = 364.29 C = 50+0.9Yd = 50+0.9 x 364.29 = 377.86 Budget deficit = Govt. expenditure Taxes = 40-103.57

40+byd, MPC = b, MPS 1-b

MPC =
MPS

C 40 400 40 360 = = = 0.72 yd 500 500

= (1-0.72) = 0.28
Multiplier effect
D S e F F F o M f s o c in in h re en s e s in in c e s rv e e g g r t r

2.4 2.6 2.7 2.9 3.13 3.14 3.15 0 2 4 S eries1

trade Agri Transpo Water s Manu Constr 0 2

3.2 3.4 4.3 Series1 4.9 6.5 7.5 4 6 8

MULTIPLIER ANALYSIS
Multiplier INCREASE IN THE LEVEL OF EQUILIBRIUM INCOME FOR A UNIT INCREASE IN AUTONOMOUS SPENDING

For e.g. If Consumption function is given as Y=a+by (where b is MPC) then Y-by = a (where a is the autonomous consumption component) Y (1-b) = a Y = 1/1-b* a (where 1/1-b is the multiplier) In case of we Include Govt. exp a can be represented as A (autonomous Component) and we can write the above as Y=A/1-b

DERIVATION

O th e r

(Y*1 AND Y*2 ARE EQUILIBRIUM

OUTPUT)

The following economy

relations represent

simple model Of

an open

Consumption function (C) = 250+ 0.75Y Investment function Government exp Exports Import function (G ) (X) (M) = (I) = = 65 + 0.15 Y 90

= 125 0.15Y

Due to an exogenous boost in the economy exports Increase by 25. Compute the change in equilibrium Level of income and also compute foreign trade multiplier.

Y= C+ I+G+X-M Y = 250 + 0.75 Y + 65 + 0.15Y + 90 +125 - 0.15 Y Y = 530 + 0.75Y 0.25Y = 530 Y = 530/0.25 = 2120 When X increases by 25 0.25Y = (530 + 25) = 555 Y = 2220

Increase in income is 100 Foreign trade multiplier = 100/25 =4

Balanced Budget Multiplier

1/1-b x G 1/(1-b) (a-bt +I+G) -b/1-b x T Since G = T (1/1-b - b/1-b) G 1-b/1-b = 1 Eg. a =20, b = 0.80 , I = 50 If G = T = 10 then 2.Using the consumption function C= 40+byd If MPC is 0.8 calculate the consumption for Disposable income of a) 800 b) 90

Factory output and order book touched a six month high, RBI hinted a rate Cut . However investors are wary. Manufacturing activity rises in the first six months -8 core industries Register growth. PMI also shows growth. However growth should Remain the priority Weak Rs to encourage margins in IT companies. Companies to lower Prices to raise volumes Fiscal deficit in India 2008-09 2009-10 2010-11 6.4 5.1 5.5

INVESTMENT FUNCTION
INVESTMENT DEMAND -DEMAND BY BUSINESS FOR OUTPUT WITH WHICH TO MAINTAIN OR INCREASE THE TOTAL CAPITAL STOCK The investment function expressed mathematically as I = f(y)=n- I/r r =rate of interest N = Autonomous component I/r is the marginal response of investment to rate of interest

The following fig. Indicates the relationship between investment. Interest rate and income.

INCOME DETERMINATION MODEL (INCLUDING MONEY AND INTEREST) INTRODUCTION IS-LM MODEL Studies the interaction of the goods & assets markets using the
IS-LM curves. Interest rate is considered in determination of (AD) Illustrates how monetary and Fiscal policies can prove effective Assumption of the earlier model are done away with. E.g. Autonomous Investment concept. Investment dependant on interest.

STRUCTURE

OF

THE

IS LM

MODEL

Derivation of the IS Curve(GOODS MARKET Where Agg demand =output) First of all, we will have to modify the aggregate demand function of the earlier chapter to reflect the new planned investment spending schedule. Here we see that only I is redefined as I- i

AD C + I + G + NX

= a + (Y [ b tY +J )] + I i ] + G ] + N ] [ [ [ X =A + (1 )Y i b t (W e e hr A =a + J +I + +N ) b G X

Fr o

e ul bi q i i ru

i te nh

gos od

m kt a e r

Y =D A A i = Y 1 - b1 - t ( ) = +( - tY - A b1 ) i

Solving for i

A [1 (1 ) b t ] = i Y (I c re S uv

Now, let us derive some important properties of the IS curve. The equation of the IS curve[1 b(l t )] is A i= Y
s c in e th m ltip r e u lie 1 1 - b - t) (1 th e u tio e qa n o th IS c rv f e u e

w c n re rite e a w A Y

a s

i=

From the above equation it can be seen that the steepness of the IS curve depends on the multiplier () and investment sensitiveness to change in interest rates () is large, then the IS curve would flat because 1/ would be small.

It can also be inferred that larger the multiplier, the flatter would be the IS curve. Since the slope of the IS curve is dependent on the multiplier and the multiplier in turn is dependent on fiscal policy more specifically, the tax rate t we see that fiscal policy can affect the slope of the multiplier. An increase in the tax rate would reduce the multiplier, which in turn increases the steepness of the IS curve). Thus the steepness of the IS curve and the tax rate go in the same direction.

ASSETS MARKETS AND THE LM CURVE(money market where Md=Ms) The assets markets are the markets in which money, bonds, stocks, houses and other forms of wealth are traded. There are a large variety of assets and a lot of trading takes place in the assets markets everyday. But we shall simplify matters by grouping all available assets into two groups, money and all other assets. Given the level of financial wealth, an individual who has decided how much money to hold. Our focus will be on the money market, which implicitly takes care of the other assets market. L=Ky-hi ; k,h>O

k,h is the sensitivity of Demand for real balances to changes in income and interest rate DEMAND FOR MONEY Transactions demand for Money= DEPENDENT ON INCOME PRECAUTIONARY DEMAND = DEPENDENT ON INCOME SPECULATIVE DEMAND = DEPENDENT ON INTEREST RATE.

DERIVATION OF THE LM CURVE

Changes in (1)

money demand affect AD - TRANSMISSION MECHANISIM (2)

Portfolio adjustments lead to change in asset prices and interest rates

(3)
spending adjusts to changes in interest rate

(4)

Change in money supply Output adjusts to change in AD

Monetary policy(dig1) Govt. uses the monetary tool of open market operations to increase Money Supply - Shifts LM curve to the right to LM1. Initially in intersects the IS Curve at E1. i and also causes a)changes in portfolio and people start holding more financial assets thereby raising its prices and reducing yields. In Ms with constant Md i

b) Investment to pick up thereby raising AD and moving to point EWhere IS and LM1 curve intersects at i1(interest rate) and goods market and money Market are in equilibrium. (note:at E1 only money market was in equilibrium) Fiscal Policy(dig2) G - pushes IS curve to the right to IS1 thereby reducing i and reaching point E2 at income Y2.(Here only goods market is in Equilibrium). b)Now in Y raises Md with Ms being constant and this in turn raises i which leads to falls in private I and Y at E1 where new IS1 curve intersects old LM curve and goods and money market equilibrium is restored. However this leads to crowding out(of Private I) and reduction of Y WHICH IS CALLED CROWDING OUT CONTROVERSY.

CROWDING OUT EFFECT :INTERACTION OF MONETARY AND FISCAL POLICY

POLICY PREVENTION OF CROWDING OUT Dig 3 Shows that the only way to prevent crowding out is to Reduce i to i0 by increasing money supply so as to push LM curve to LM1. New equilibrium is obtained at E1 where (new IS curve) IS1=(new LM curve) LM1 and both goods and money markets are in equilibrium POLICY EFFECTS ON INCOME AND INTEREST RATES :Monetary expansion Fiscal expansion POLICY RATES Monetary exp Fiscal exp ALTERNATIVE - Increase in Money supply - Increase in G or reduction in t EQUILIBRIUM INTEREST + POLICIES :-

EQUILIBRIUM INCOME + + FISCAL

INTEREST RATE Y (GDP) Income Tax Cut + Investment Subsidy + + + Govt. Spending + +

C + + + +

GDP

Measurement

-Output method

Yr 1995-96 1996-97

Nominal GNP 2500 3200 1994 -95 =100

GNP deflator 120 145

Base yr GNP deflator

What is real GNP of 1995-96 What is the real GNP of 1996-97

What is the growth rate of real GNP from 1995-96 to 1996-97? What is the inflation rate in 1996-97 in relation to 1995-96 ? Real GNP 2500 x 100/120 = 2083.33 3200 x 100/145 = 2207 Growth rate Growth Rate = Real GNP 1996-97 Real GNP 1995-96 2207/2083.3 1 Inflation rate GNP deflator (cp- 96-97) - GNP(BP95-96) GNP def (1995-96)bp 145-120/120 x 100 = 20.83% = 0.059 = 5.9%

Following are the data relating to the national accounts Of an economy for the year 1995 in mn units of currency Capital consumption allowance 1000 Personal consumption spending 12500 income taxes 500 Undistributed corporate profits 250 Net exports 25 Dividends 750 Rent 1000 Interest 500 Indirect business taxes 1250 Gross private investment 550 Compensation to employees 8487.5 Government spending 912.5 Proprietors income 1250 Compute GNP using income method and expenditure method (a) GNP INCOME METHOD INDIRECT BUSINESS TAXES COMPENSATION TO EMPLOYEES 1250 8487.50

Corporate

RENTS INTEREST PROPRIETORS INCOME CORPORATE TAX DIVIDENDS UNDISTRIBUTED PROFITS (b) GNP = EXPENDITURE METHOD = = C+I+G+X-M 12500+550+912.5+25

1000.00 500.00 1250.00 500.00 750.00 250.00 13987.50

= 13987.5 From the following figures compute a) GDP at factor cost b) National income c) Personal disposable income GNP mp Personal income tax Corporate taxes Subsidies FIPA FIRFA Undistributed profit Indirect taxes Depreciation 5000 1000 800 400 800 900 200 450 350

GDP fc = GNP fc - NFIA GNPfc = GNP mp - IT + subsidies GDP fc = 4950 (900-800) National income NNPfc = GNP fc - Dep

= 5000 - 450 + 400 = 4850 = 4950 350

= 4950

= 4600

Personal disposable income = Personal income Personal Taxes Personal income = 3600 GDP mp 6000 Corporate income tax 1200 Personal income tax 900 Subsidies 475 Factor incomes received from abroad Factor incomes paid abroad 1200 Undistributed profits 225 Indirect taxes 900 Depreciation 600 = National income - Retained earning - Corp tax 4600 200 800

1500

Compute Personal Disposable income, national income and GNP at market prices GNPmp = GDPmp +NFIA = 6000+1500 -1200 = 6300

National income = NNPfc GNPfc = GNP mp + Subsidies - Indirect taxes -900 =5875 NNPfc = 5875- 600 = 5275

= 6300 + 475

Personal disposable income = National income - Retained earnings Corporate taxes - Personal txes
= 5275 -225 -1200 -900 = 2950

NATIONAL INCOME ACCOUNTING

INTRODUCTION MODERN ECONOMY IS VERY COMPLEX IN NATURE INVOLVES A NUMBER OF TRANSACTIONS eg HOUSEHOLDS CONSUME GOODS AND SERVICES AND PROVIDE THEIR LABOUR SERVICES TO FIRMS THEY PROVIDE SAVINGS TO Fis WHICH ACT AS INTERMEDIARIES BETWEEN SAVERS AND INVESTORS GOVERNMENT PLAYS A ROLE IN COLLECTING TAXES AND PROVIDING PUBLIC SERVICES TRANSFER OF PHYSICAL AND FINANCIAL ASSETS TAKE PLACE WITH FOREIGNERS NATIONAL INCOME ACCOUNTS SUMMARY PICTURE OF ALL TRANSACTIONS NATIONAL ACCOUNTING INVOLVES A SUBSTANTIAL AMOUNT OF AGGREGATION HELPS IDENTIFY IMPORTANT ECONOMIC RELATIONSHIPS MAJOR TYPES OF ACCOUNTS NATIONAL ECONOMY
NATIONAL INCOME ACCOUNTS - FLOW OF GOODS AND SERVICES IN AN ECONOMY DURING A YEAR INPUT OUTPUT ACCOUNT - FLOWS OF GOODS AND SERVICES BETWEEN PRODUCTIVE & HOUSEHOLD SECTORS NATIONAL BALANCE SHEET- REFLECTS NATIONS WEALTH AT A POINT OF TIME

NATIONAL ACCOUNTS SIMPLE ECONOMY NUMBER OF HOUSEHOLDS SINGLE FIRM (OWNED BY SOME HOUSEHOLDS) LABOUR IS THE ONLY SCARCE INPUT

CONSOLIDATED PRODUCTION ACCOUNT (WITH BUSINESS SAVING & DEPRECIATION)

INVENTORY INVESTMENT GNP IS NOT EQUAL TO GNI-ROLE OF SAVING & INVESTMENT PRODUCTION A/C

HOUSEHOLD A/C.

SAVINGS A/C

(ROLE OF GOVERNMENT)-PR0DUCTION SECTOR

GOVERNMENT SECTOR

HOUSEHOLD A/C

SAVINGS & INVESTMENT

INDIRECT TAXES AND SUBSIDIES-PR0DUCTION SECTOR

GOVERNMENT SECTOR

HOUSEHOLD A/C

SAVINGS & INVESTMENT

A COMPLETE PICTURE PRODUCTION A/C

EXTERNAL A/C.

SAVINGS & INVESTMENT A/C

HOUSEHOLD SECTOR

GOVERNMENT A/C.

ia

h in

tn a

In

ie

in

Eo u r Ca h i n Jp an a U S 0

0 . 9 1 . 3

Id na i

7 . 1 7 . 7

.K

sKe . oa r

4 . 2 4 . 4

re

1 2 1 0 8 6 4 2 0

9895 . .

85 . 7

81 . 6 58 . 4 .5 53 . 45 . Otlo k in A r u o pil Otlo kin Ot u o c

re

A o p ii e i t r cmr v p u at c e

G gw 2 9 D r t 0 Poh 0 8 . 5 9 . 8 G gw 2 8 D r t 0 Poh 0

0 . 9 1 1 . 3 1 . 6 5 1 0 1 5

B d e d f ita a p r e t g o G P u g t eic s e c na e f D
2 0 .0 % 1 0 .0 % 0 0 .0 % - .0 % 1 0 - .0 % 2 0 - .0 % 3 0 - .0 % 4 0 - .5 % 2 0 - .8 % 2 0 U S U K S . Kr a oe Id n ia C in ha Sr s eie 1 1 0 .5 % 0 0 .6 %

- .4 % 3 0

G w in in u t i l po u t n r t o h d sra r d cio 1. 0 2 % 8 1. 0 4 % 0 1. 0 2 % 0 90 . % 1 1. 0 0 % 0 70 . % 1 80 . % 0 Gw i r t n o h 60 . % 0 in u t i l d sra 40 . % 0 20 . % 4 po u t n r d cio 2 0 following is the information from the national income accounts for a . % 0 The 00 . % 0 hypothetical country : -.0 2 % 0 -.0 1 % 5 -.0 1 % 7 -.0 4 % 0
E u ro .S . h in d ia K U U C In S . K o re a a

Required to compute :

(45) The following are inter-industry transactions in an economy. (The figures represent money valued of output)

Calculate the National Income in the economy and value added in industry Y (45)

(20)

The following is the information drawn from the National Income Accounts for an economy

Item A. B. C. D. E. GNP Gross investment Net investment Consumption Government Spending

Amount (Rs. In crore) 4850 854 310 3095 968

Calcutta the NNP and net export for the economy.

(20) NNP = = Net Exports = = GNP Depreciation (i.e. Gross Investment Net Investment) 4850-544=4306 GNP Domestic absorption (i.e. C+I+G) 4850-4917= -67

Note : While calculating Domestic Absorption we have to consider gross investment

(3) SOLUTION :

(a)

The equation of the IS curve is : Y = 120+0.6Y+150-80i or Y = 270+0.6Y-80i or Y-0.6Y = 270-80i or Y = 675-200i (i) The equation of the LM curve is MS = Md or 300 = 0.3Y + 120 160i or Y = 600+533.33i . (ii) Putting the value of Y in equation (I), we have : 675-200i = 600+533.33i or, 733.33i = 75 or i = 75/733.33 or, i = 0.10%

(b) (c)

Y or, Y Consumption

= =

675-200x0.10 655 = 120+0.6x655 142 196.50 104 = 513

Investment = (d) (e) Mt Ma = =

150-80x0.10 = 0.3x655 120-160i = =

IS Curve Savings function = Consumption function Y = = = 0.40 Y = Y = -50+0.2Yd = 50+0.8Yd C+I+G 50+0.8 (Y-0.25Y) +200-10i+400 650+0.8Y 0.2Y 10i 650-10i 1625-25i .. IS Curve

LM Curve Demand for money = Transactions demand Mt +Speculative demand = 0.25Y + 125 50i Supply of money Ms = 250 In equilibrium Md = Ms = 0.25Y + 125-50i=250 0.25Y = 250-125+50i = 125+50i Y = 500+200i .. LM curve When money market and goods market are in equilibrium IS = LM 1625-25i = 500+200i

1625-500 1125 i i

= = = =5

200i + 251 225i 1125/225

Investment (I) = 200 10i

200-(10*5)

150

When the Government increases its expenditure by 135, IS curve will change but LM curve will remain unchanged. New IS curve of IS Y = 50+0.8 (Y-0.25Y) + 200-10i+(400+135) = 50+0.8Y 0.2Y +200-10i+535 0.4 Y = 785-10i Y = 1962.5-15i When money market and goods market are in equilibrium IS = LM 1962.5-25i = 500+200i 1962.5 500 = 200+25i 1462.5 = 225 i i = 6.5 When money market and goods market are in equilibrium Investment (I) = 200-10i = 200-10(6.5) = 135

Crowing out of private investment on account of increase in Government expenditure is = 150-135 =15
b)Investment will not be crowded out if money supply is maintained at 5%. This can happen only when LM Curve shifts to the right IS curve after increase in Government expenditure is Y=1962.5-25i Substituting i=5% in the above equation Y=1837.5 Substituting Y=1837.5 and i=5% in the demand for money function we get Md(Mt+Ma) =0.25Y+125-50i = 0.25(1837.5)+125-50(5) =334.38 Since Ms=Md , Ms=334.38 Increase in Ms =334.38-250=84.38