PGPM I I M- B The Road Ahead Micro vs. Macro 2 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 Schools of Economic Thought 3 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 Schools of Thought - 1 4 Classical/ New Classical Started with Adam Smiths 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 1970s- New Classical School Says Law
Schools of Thought - 2 5 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 6 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
Key Concepts - 1 7 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 Key Concepts - 2 8 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 - 3 9 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
Key Concepts - 4 10 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% Key Concepts - 5 11 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%
Key Concepts - 6 12 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 Key Concepts - 7 13 Causes of Inflation
Monetary Theory Monetary policies of Central Banks Monetary and fiscal restraint
Neo-Keynesian Theory Demand-Pull Cost-Push Key Concepts - 8 14 How to control Inflation?
Monetary Policies Open Market Operations
Fiscal Policy Taxation Government Spending
Key Concepts - 9 15 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 Key Concepts - 10 16 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 SDRs Foreign currency assets Liberalization - 1 17 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 Liberalization - 2 18 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 Currency Convertibility - 1 19 Currency convertibility is defined as the freedom to convert one currency into other internationally accepted currencies
Two forms of convertibility Current account convertibility Capital account convertibility Currency Convertibility - 2 20 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 Financial Markets 21 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 22 Annexures Fiscal Policy - 1 23 Government uses its revenue and expenditure programs to produce desirable effects on National income Production Economy Used as a balancing device Two elements of Fiscal Policy Taxation Public Expenditure Fiscal Policy - 2 24 Objectives of Fiscal Policy Mobilization of resources Acceleration of economic growth Minimization of the inequalities of income and wealth Increasing employment opportunities Price stability
Says Law 25 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. Great Depression 26 Coined by Lionel Robbins Great Depression Started in 1929 and lasted till 1940 Global Scale Black Tuesday 29 th 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 HDI 27 US- GDP & Unemployment 28 Worldwide Impact 29 Great Depression in Pics 30 Great Depression in Pics 31 Great Depression in Pics 32
Great Depression in Pics 33 Dorothea Lange
Migrant Mother
Stamp GDP Growth - Worldwide 34 GDP - Nominal 35 GDP - PPP 36 Gini Coefficient 37 HDI 38 Key Terms - 1 39 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 Key Terms - 2 40 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 Key Terms - 3 41 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