Macroeconomics Made Easy1

8/3/2019 Macroeconomics Made Easy1

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MACRO-ECONOMICS


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TYPES OF ECONOMY

Market Economy

Socialist Economy

Mixed Economy


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THE 3 SECTORS OF ECONOMY

Primary agriculture, forestry, fishery,animal husbandry

Secondary mineral, power, mining,manufacturing industries.

Services transport, trade,communication, banking, other services


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INDICATORS OF ECONOMY

GDP total flow of goods and servicesproduced in a country in one year.

GNP = GDP +Net income from abroad GDP-PPP = GDP based on Purchasing

Power Parity

PCI = Per capita GDP


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WPI - WHOLESALE PRICE INDEX

Measures increase / decrease in industrial, commercial

prices of commodities under 3 broad categories.

Primary articles - 98 items

Fuel, power etc. - 19 items

Manufactured products - 318 items

Certain weight to each category of commodities

Base year - 1993-94 Used for calculating INFLATION.


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CPICONSUMER PRICE INDEX

Calculates increase / decrease in retail price.

Direct bearing on consumers.

Different types of CPIs for various consumers.

for agricultural laborers.

for industrial workers.for urban non-manual employee.


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INDICATORS OF ECONOMYINFLATION

Steady rise in prices, resulting in decline inpurchasing power of the money.

2 types - cost push An increase in wage rates

An increase in the prices of raw materials

Demand pull.

Increases in the money supply Increases in government purchases

Increases in the price level in the rest of the world

Moderate inflation is good for economy.


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Factors behind Inflation

Heavy non-plan expenditure by Govt.

High fiscal deficits and deficit financing

Large parallel economy Fluctuation in agricultural output

Govt.s attempts to bridge deficits by

higher indirect taxes

rise in costs. Increase in Money Supply


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HDI - HUMAN DEVELOPMENT INDEX

Developed by UNDP in 1996

Measures physical quality of life in acountry along 3 key parametersLife expectancy at birth

No. of years in schoolPer capita income


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POVERTY LINE

Consumption expenditure required for getting

2100 calories per person in urban area and2400 calories in rural areas.

Key parameters

No. of people BPL

% of population BPL


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EMPLOYMENT

Standard person year of 273 days. Person working atleast 4 hours a day is considered employed.

Drop in employment growth rate in post-reform years,nearly 1% p.a.

Manufacturing sector not keeping pace with populationgrowth.

Seasonal and disguised unemployment in agri. sector.

Stringent wage laws adding to involuntaryunemployment.


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MONEY SUPPLY

M1 = currency in circulation - cash with banks+ demand deposits with banks

( also called narrow money most liquid )

M2 = M1+ small saving deposits M3 = M1+ time deposits with banks

( also called broad money )

M3 > GDP Inflation.


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MONETARY POLICY

Regulates the money supply in the economy

1. Bank Rate - official rate of interestcharged by RBI as the lender of lastresort. Current rate 6%

2. Open market operations - RBI buyingand selling securities to regulate moneysupply. Repo rate 4.5% . Reverse Repo

3.25%


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MONETARY POLICY

1. A) CRR - every commercial bank to keep a certainpercent of its demand and time deposits with the RBI( 5.5% ).

B) SLR - commercial banks keep a fixed percentage oftheir demand and time deposits in liquid assets ( cash,securities, gold ) currently at 25%.

1. Priority sector lending

2. Differential Interest Rates ( PLRs )


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ROLE OF THE RBI

Issue of bank notes of all denominations

Regulates money supply

Lender of last resort to banks

Controls FOREX operations.


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TRADE CYCLE

Refers to fluctuation in economic activity

which forms a regular pattern.

Expansionary phase characterized by increasein income, output, employment and inflation.

Contraction phase is characterized by drop in

income, output , employment and deflation (sustained fall in prices).


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TRADE CYCLE

BOOM - Refers to a particularly sharp upwardsturn in demand and output.

RECESSION -Two consecutive quarters of falling

GDP in an economy. Beginning of slump ordepression. Occurs due to over productionduring earlier phase, rise in fuel and rawmaterial prices, etc.

SLUMP - Severe down-turn phase. Opposite ofboom, e.g., the great US slump


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TRADE CYCLE

DIS-INFLATIONARY MEASURES

Steps taken by govt. to BRING DOWN prices inface of chronic inflation.

STAGFLATION

Decline in economic activity even in face ofinflation. Production doesnt rise even with price

rise, due to poor infrastructure or high rawmaterial cost.


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MONEY MARKETS

Market in short term securities, loans, gold andFOREX. Mainly commercial banks are involved.

Inter-bank call money market, the mostsignificant part. An over-the-phone market.

Basic objectives To even out short term surpluses and deficits To provide easy access to short term money

to meet commercial requirements at a realisticprice.


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CAPITAL MARKET

Market for long term loans.

Consists of a) Govt. securities

b) Industrial securities

Govt. securities aimed at bridging fiscal deficitand financing public sector projects. Major

holders are RBI, commercial banks, insurancecos. etc.; captive market for govt. securities.


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CAPITAL MARKET

Industrial securities

Aimed at mobilizing long term funds forcorporate to finance capital expenditures,

e.g. new projects, acquisitions etc. Equities market consists of primary and

secondary markets.

Equity shares traded through stock exchangesby brokers in an online environment. BSE andNSE the two largest stock exchanges.


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CAPITAL MARKET

STOCK EXCHANGE - an organized market for trading ofstocks and bonds. 22 in India. Facilitate financing forcorporates.

BSE- estd. 1875. Oldest in Asia. Getting overshadowed

by newer NSE. 4000 listed companies. Sensexrepresents top 30 companies on free float basis.

NSE - Also located in Mumbai. Nifty top 50 companieson total market cap basis.

SEBI- estd. 1992. Regulates working of stockexchanges, brokers and mutual funds. Registers FPI.


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BANKING SECTOR IN INDIA

RBI- guides, controls and regulates other commercialbanks. Formulates monetary and credit policies.

COMMERCIAL BANKS- mobilize savings and lend to

borrowers ensuring maximum possible spread rate.They keep demand deposits ( current a/c), savingsdeposits and time deposits ( FDs). Nationalised in1969 & in 1980. These include

A) PSU banks ( 7 SBI group + 19 nationalized )

B) Pvt. Sector banks ( Indian and foreign )


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STRUCTURE OF UNION BUDGET

REVENUE SIDE

1. Revenue receipts

A) tax revenue central excise, customs duty,

corporation tax, income tax, service tax, FBT, CTT, STT.B) non-tax revenueinterest receipts on loans , profitsfrom PSUs.

2. Capital receipts

Dividends from PSUs, principal repayment from debtors,disinvestment proceeds , market borrowings.


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STRUCTURE OF UNION BUDGET

EXPENDITURE SIDE

1. Plan expenditureincurred in central development schemes. Costs

around 25% of total expenditure.- Revenue and Capital

2. Non-plan expenditureInterest payments, defense, subsidies, salary of govt.

employees.Accounts for approx. 75% of total expenditure.


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DEFICITS

Revenue deficit

Revenue expenditure ( interest + subsidy + defense+ law and order) revenue receipts

( tax + non tax)

Budget deficit

Total expenditure - total receipts

Fiscal deficitBudget deficit + borrowings from banks and public


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DEFICIT FINANCING AND IMPACT

Govt. borrows from RBI by transferring securities. RBIprints new currency and puts it into circulation on behalfof the govt.

increases money supply. Adds inflationary pressure ineconomy.

In some countries, market borrowing is also termed asdeficit financing.

evacuates funds available for pvt. investors. Also,

Govt. ends up paying more interest in future.Development expenditure takes back seat.


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TAXES

DIRECT TAXESDirect incidence of tax on the person who pays the tax.liability to pay tax is NOT passed on to someone else.e.g. INCOME TAX, CORPORATION TAX, WEALTH TAX,LAND REVENUE, GIFT TAX etc.

INDIRECT TAXES

Levied on goods and services. traders / producers pay it.Liability passed on to end customer. e.g. VAT, EXCISE

TAX, CUSTOMS DUTY, SERVICE TAX


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KEY GOVT. INTERVENTIONS

MSPFloor price. minimum guaranteed price forthe producer. Announced in order toencourage production of certain goods e.g.

pulses, oilseeds, sugarcane etc.

PROCUREMENT PRICEThe price at which govt. agencies

compulsorily purchase a commodityaccording to a fixed quota from theproducer.


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TYPES OF PSUs

Departmental undertakings - Railways,P&T

Fully Govt.-owned: LIC, HAL etc.

Govt. majority-owned - Indian Oil, BHEL,HPCL,

Govt. minority owned MUL, BALCO,

VSNL Holding company - GIC, Coal India


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OTHER KEY TERMS

DEVALUATION OF CURRENCYDeliberate decision to reduce the value of acurrency against other. Makes exports more

price competitive in international market. EasesBOP situation.

DEPRECIATION OF CURRENCY

Has same effect as devaluation. But it is broughtabout by the market forces.


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OTHER KEY TERMS

SDRSpecial drawing rights. An international reserveasset introduced by IMF to support expansion in

global trade. IMF creates, allocates and cancelsSDRs as and when necessary.

EMBARGO

Prohibition of entry to goods from a particularcountry. Shows strained relations between twonations.


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OTHER KEY TERMS

GILT EDGED SECURTIESSecurities with minimum risk - Govt. securities.

BARTER

Trade in goods and services by exchangemethod, without use of money.

COUNTER-TRADE

Barter in international trade in order to avoidFOREX outgo.


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OTHER KEY TERMS

DUMPINGWhen an entity sells product below costprice to injure others.

ANTI-DUMPING DUTY

Additional import duty levied when

dumping takes place to protect localindustry.


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EXTERNAL AID AGENCIES

IDASoft loan window of world bank. Gives aid forsocial sector and infrastructure development.Interest free loans.

WORLD BANK

IBRD. no aid but loans cheaper than marketrate.

IMFHelps member countries tide over short termBoP problems . Charter to promote world trade.

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Macroeconomics Made Easy1