A S N A P S H O T O F M A C R O E C O N O M I C SS A I K U M A R S W A M Y

P G P M I I M - B

The Road Ahead

Micro vs. Macro2

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 Thought3

Mercantilism Colonies – Positive BoT – Accumulation of Bullion (Bullionism) Staple ports – Tenets – Zero Sum Game "We must always take heed that we buy no more from strangers than

we sell them, for so should we impoverish ourselves and enrichthem.“ – 1549

East India Company – Silk Route

Physiocracy Physiocrats – Agrarian philosophy Francois Quesnay Tableau Economique - 1759 Land Agriculture Proprietary – Productive - Sterile

Diminishing Returns

American School (National System)

Alexander Hamilton - Three Reports to Congress Tenets protecting industry through selective high tariffs (especially 1861–1932)

and through subsidies (especially 1932–70) government investments in infrastructure creating targeted internal

improvements (especially in transportation) a national bank with policies that promote the growth of productive

enterprises rather than speculation

Patents Office – 1802 Coast and Geodetic Survey – 1807 Rivers and Harbors Act – 1824 Similarity to the British system?

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Schools of Thought - 15

Classical/ New Classical Started with Adam Smith’s Wealth of Nations (1776) Prices and wages are flexibleMarkets 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

Great Depression6

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

US- GDP & Unemployment7

Worldwide Impact8

Great Depression in Pics

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Schools of Thought - 210

Keynesian/New Keynesian Prices and wages are not flexibleMarkets 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

Great Depression in Pics11

“Migrant Mother” Florence Owens Thompson "Seven hungry children. Father is

native Californian. Destitute in peapickers’ camp … because of failureof the early pea crop. These peoplehad just sold their tires to buy food."

Great Depression in Pics

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Sectors of Economy13

Sectors of Economy

Sector - India Emp GDPAgriculture 51 17

Manufacturing 22 26

Services 27 57

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Sector - USA Emp GDPAgriculture 0.7 1

Manufacturing 20.3 19

Services 79 80

Sector - China Emp GDPAgriculture 35 10.1

Manufacturing 30 45.3

Services 35 44.6

Key Concepts - 115

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)

GDP Nominal - $ 1.8 Tn (10th) – GDP PPP - $ 5.6 Tn (3rd) What is PPP?

Top 10 GDP

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PPP Illustration - Starbucks

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BigMac Index

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How much do you pay for…..

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Largest Economies 2013

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Growth Forecasts

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GDP Growth - Worldwide

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Key Concepts - 223

Issues with GDP Parallel economy/Shadow economy Barter Transactions Double Counting Quality of Data/ EstimatesHousehold Production Ignores Externalities Distribution of wealth Sustainability of Growth

AlternativesHDI Gini Coefficient GHI or GNH

HDI

Mahbub ul Haq Amartya Sen 1990

Life Expectancy Education Index Income Index

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Gini25

GNH - BhutanGNH - Bhutan

GHI or GNH

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Key Concepts - 327

GNP - Gross National Product

Gross National Product includes income earned by the factors ofproduction (assets and labor) owned by a country's residents butexcludes income produced within the country's borders by factors ofproduction owned by nonresidents

“Where” - is immaterial

“Who” - is important

GNP = GDP + Receipts – Payments

Key Concepts - 428

CPI – Consumer Price Index It is the annual percentage change in the cost of acquiring a

fixed basket of goods and servicesMeasures Inflation Purchasing power of consumers – Today vs. Yesterday

Basis for Dearness Allowance 4 types

• Working class (urban non manual)• Agricultural labor• Industrial workers• Rural labor

Food-60% ;Clothing-8% ;Fuel-6% ;Housing-8% ;Misc-18% CPI – 8.5% (29th Jan, 2014)

Key Concepts - 529

Wholesale price index - WPI It is the index used to measure the change in the average

price level of goods traded in wholesale market 676 commodities data tracked Captures price movements in a comprehensive wayWidely used in Business, Industry, Government

Better approximate of inflation Primary Articles

• 102 items – 20.12% Mfcg. Goods

• 555 items – 64.97% Fuel

• 19 items – 14.91%

Key Concepts - 630

Inflation An increase in the general level of pricesMeasured 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

Factors influencing Inflation

Demand > Supply Changes in Agricultural output Increase in Money Supply Interest Rate fluctuation Govt. Expenditure High Fiscal Deficits Deficit Financing

Higher Indirect taxes – rise in costs

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Key Concepts - 732

Causes of Inflation

Monetary TheoryMonetary policies of Central Banks Monetary and fiscal restraint

Neo-Keynesian Theory Demand-Pull Cost-Push

Hyperinflation

Key Concepts - 833

How to control Inflation?

Monetary Policies Open Market Operations

Fiscal Policy Taxation Government Spending

Key Concepts - 934

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 RecessionDecrease in Consumer SpendingDecrease in industrial productionGrowing unemployment Slump in personal income An unhealthy stock market

Key Concepts - 1035

Forex External assets that are readily available to and controlled by monetary

authorities for direct financing of external payments imbalances, forindirectly regulating the magnitudes of such imbalances throughintervention in exchange markets to affect the currency exchange rate,and/or for other purposes

Foreign exchange reserves targets are fixed to accommodate imports ofthree months

Foreign exchange reserves include three items Gold SDR’s Foreign currency assets

India - $292Bn Currency – $266Bn Gold – $20Bn

Foreign Exchange Reserves

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The Dollar Dominance

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Key Terms - 138

Cash Reserve Ratio – CRR is the portion of deposits (as cash) which bankshave to keep/maintain with the RBI.

Purpose Ensures that a portion of bank deposits is totally risk-free Enables that RBI control liquidity in the system, and thereby, inflation Currently it is at 4%

Bank Rate - is the rate at which the central bank lends to thecommercial banks Currently 9%

SLR - the portion of their deposits banks are required to invest ingovernment securities

Repo rate - The rate at which the RBI lends money to commercial banks iscalled repo rate. It is an instrument of monetary policy. Whenever banks haveany shortage of funds they can borrow from the RBI. Currently 8% (up from 7.75%)

Reverse Repo - the rate at which the RBI borrows money from commercialbanks. Banks are always happy to lend money to the RBI since their money isin safe hands and earns a good interest. Currently 7% (up from 6.75%)

Key Terms - 139

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

Key Terms - 240

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 itstrading partners

BoP= (Exports + Inflows)- (Imports + Outflows)

1991 Crisis

Liberalization - 141

The term is used for a more ‘outward-oriented’ economicpolicy 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 Indianmanufacturers to Prefer updated technology Deliver better products at lower costs Face global competition Deliver world class goods and services

Liberalization - 242

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 - 143

Currency convertibility is defined as the freedom toconvert one currency into other internationallyaccepted currencies

Two forms of convertibility Current account convertibility Capital account convertibility

Currency Convertibility - 244

Current account convertibility has been defined as thefreedom to buy or sell foreign exchange for International transactions consisting of payments due in connection

with foreign trade, other current businesses including services andnormal short-term banking and credit facilities

Payments due as interest on loans Moderate remittances for family living expenses

Capital account convertibility means that the homecurrency can be freely converted into foreign currencies foracquisition of capital assets abroad

The rupee is currently not freely convertible on thecapital account

Financial Markets45

Provide facilities for the buying and selling of financialclaims and services Classified as Primary Secondary

Also classified asMoney – Short Term – CP & CD Capital – Long term – Stocks & Bonds

Stock Markets SEBI

Forex Markets

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Annexures

Phillip Von Hornick

Austria Over All, If She Only Will - 1684 To inspect the country's soil with the greatest care, and not to leave the agricultural

possibilities of a single corner or clod of earth unconsidered... All commodities found in a country, which cannot be used in their natural state, should be

worked up within the country Attention should be given to the population, that it may be as large as the country can

support gold and silver once in the country are under no circumstances to be taken out for any

purpose The inhabitants should make every effort to get along with their domestic products Foreign commodities should be obtained not for gold or silver, but in exchange for other

domestic wares Foreign commodities should be imported in unfinished form, and worked up within the

country Opportunities should be sought night and day for selling the country's superfluous goods to

these foreigners in manufactured form No importation should be allowed under any circumstances of which there is a sufficient

supply of suitable quality at home.

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Say’s Law48

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 ofits 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 inhis 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 ofmoney is in the purchase of some product or other. Thus the merecircumstance of creation of one product immediately opens a vent for otherproducts”

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 produceundesirable commodities, or produce desirable commodities but atunprofitable costs, will fail.

The Harmony of Interests – Agricultural,Manufacturing and Commercial

Henry Carey – American Economist – Advisor to Lincoln

“Two systems are before the world;... One looks to increasing thenecessity of commerce; the other to increasing the power to maintain it.One looks to underworking the Hindoo, and sinking the rest of theworld to his level; the other to raising the standard of man throughoutthe world to our level. One looks to pauperism, ignorance,depopulation, and barbarism; the other to increasing wealth, comfort,intelligence, combination of action, and civilization. One looks towardsuniversal war; the other towards universal peace. One is the Englishsystem; the other we may be proud to call the American system, for it isthe only one ever devised the tendency of which was that of elevatingwhile equalizing the condition of man throughout the world”

Laissez-Faire Free Trade Capitalism Vs. Developmental Capitalism

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Silk Route50

Alexander Hamilton51

Fiscal Policy - 152

Government uses its revenue and expenditure programs toproduce desirable effects onNational income Production Economy

Used as a balancing device Two elements of Fiscal Policy

Taxation Public Expenditure

Fiscal Policy - 253

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