The Road Ahead

1. The Road Ahead A Snapshot of Macroeconomics

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. Key Concepts - 2 • 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

9. 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

10. 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%

11. 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%

12. 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

13. Key Concepts - 7 • Causes of Inflation • Monetary Theory • Monetary policies of Central Banks • Monetary and fiscal restraint • Neo-Keynesian Theory • Demand-Pull • Cost-Push

14. Key Concepts - 8 • How to control Inflation? • Monetary Policies • Open Market Operations • Fiscal Policy • Taxation • Government Spending

15. 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

16. 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

17. 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

18. 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

19. Currency Convertibility - 1 • 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

20. 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

21. 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

22. Annexures

23. Fiscal Policy - 1 • 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

24. 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

25. 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.

26. 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

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 • Dorothea Lange • “Migrant Mother” • Stamp

33. GDP Growth - Worldwide

34. GDP - Nominal

35. GDP - PPP

36. Gini Coefficient

37. HDI

38. 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

39. 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

40. 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