Transcript The Road Ahead

The Road Ahead
A Snapshot of Macroeconomics
Micro vs. Macro
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Macroeconomics deals with the Economy as a whole
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GDP
Unemployment
Prices
Consumption
Investment
International Trade
Term coined by Ragnar Frisch in 1933
Microeconomics deals with
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Actions of individuals
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Firms and Consumers
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Schools of Economic Thought
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Mercantilism
Physiocracy
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Physiocrats – Agrarian philosophy
Francois Quesnay
Land Agriculture
Term coined by Ragnar Frisch in 1933
Microeconomics deals with
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Actions of individuals
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Firms and Consumers
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Schools of Thought - 1
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Classical/ New Classical
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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
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Keynesian/New Keynesian
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John Maynard Keynes – 1930s
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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
The General theory of Employment, Interest and Money
Great Depression
Advocated Government Intervention
Multiplier Effect
Resurgence in 2008-2009
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Global Financial Crisis – Sub-prime Crisis
Paul Krugman, Joseph Stiglitz, Greg Mankiw, Akerlof
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Schools of Thought - 3
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Austrian School
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Von Mises, Murray Rothbard, Hayek
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Mathematical Modeling impossible
Rejected Mathematical & Statistical methods
No Government intervention
Criticizes Central Bank actions
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Unscientific Economist
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
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GDP - Gross Domestic Product
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Definition
Broadest measure of Economic activity
Who- ‘Where’ is important
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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)
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Product, Income and Expenditure Approach
 GDP Growth rates - Worldwide
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Key Concepts - 2
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Issues with GDP
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Parallel economy/Shadow economy
Barter Transactions
Double Counting
Quality of Data/ Estimates
Household Production
Ignores Externalities
Distribution of wealth
Sustainability of Growth
Alternatives
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HDI – Gini Coefficient
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Key Concepts - 3
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GNP - Gross National Product
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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
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“Where” - is immaterial
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“Who” - is important
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GNP = GDP + Receipts – Payments
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Key Concepts - 4
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CPI – Consumer Price Index
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It is the annual percentage change in the cost of acquiring a
fixed basket of goods and services
 Measures
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Inflation
Purchasing power of consumers – Today vs. Yesterday
Basis for Dearness Allowance
4 types
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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
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Wholesale price index - WPI
 It is the index used to measure the change
in the average price level of goods traded in
wholesale market
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600+ commodities data tracked
Captures price movements in a comprehensive way
Widely used in Business, Industry, Government
Better approximate of inflation
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Primary Articles - 22%
Mfcg. Goods - 64%
Fuel – 14%
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Key Concepts - 6
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Inflation
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Deflation
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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?
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
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A period or process of slowing the rate of inflation
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Key Concepts - 7
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Causes of Inflation
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Monetary Theory
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Monetary policies of Central Banks
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Monetary and fiscal restraint
Neo-Keynesian Theory
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Demand-Pull
Cost-Push
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Key Concepts - 8
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How to control Inflation?
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Monetary Policies
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Open Market Operations
Fiscal Policy
Taxation
 Government Spending
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Key Concepts - 9
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Recession
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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
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Decrease in Consumer Spending
Decrease in industrial production
Growing unemployment
Slump in personal income
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An unhealthy stock market
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Key Concepts - 10
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Forex
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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
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Gold
SDR’s
Foreign currency assets
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Liberalization - 1
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The term is used for a more ‘outward-oriented’
economic policy
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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
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Prefer updated technology
Deliver better products at lower costs
Face global competition
Deliver world class goods and services
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Liberalization - 2
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Liberalization in Various Sectors
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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
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Currency convertibility is defined as the
freedom to convert one currency into other
internationally accepted currencies
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Two forms of convertibility
Current account convertibility
 Capital account convertibility
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Currency Convertibility - 2
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Current account convertibility has been defined as the
freedom to buy or sell foreign exchange for
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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
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Capital account convertibility means that the home
currency can be freely converted into foreign
currencies for acquisition of capital assets abroad
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The rupee is currently not freely convertible on the
capital account
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Financial Markets
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Provide facilities for the buying and selling of financial
claims and services
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Primary
Secondary
Also classified as
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Money – Short Term – CP & CD
Capital – Long term – Stocks & Bonds
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Stock Markets
 SEBI
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Forex Markets
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Annexures
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Fiscal Policy - 1
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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
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Fiscal Policy - 2
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Objectives of Fiscal Policy
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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
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Say’s Law
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Jean Baptiste Say - “Products are paid for with Products”
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“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”
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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
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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
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Collapse of banks
Smoot Hawley Act
Monetary Contraction
Recovery in 1933
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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
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Dorothea Lange
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“Migrant Mother”
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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
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Cash Reserve Ratio – CRR is the portion of deposits (as
cash) which banks have to keep/maintain with the RBI.
This serves two purposes:
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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
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Balance of Payments ( BoP)
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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
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BoP= (Exports + Inflows)- (Imports + Outflows)
1991 Crisis
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Key Terms - 3
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Exchange Rate
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the price of a national currency in terms of the currency of
another nation.
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Fixed
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Rate held fixed in terms of a foreign currency
Floating
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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
Market forces allowed to determine the rate
Mixed
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