macro economics basics (for beginners)
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The Road Ahead
A Snapshot of Macroeconomics
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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
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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
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Schools of Thought - 1
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 onlytemporary 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
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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
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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
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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
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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 - 2
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Key Concepts - 3
GNP - Gross National Product
Gross National Product includes income earned by the factorsof production (assets and labor) owned by a country'sresidents but excludes income produced within the country'sborders by factors of production owned by nonresidents
Where - is immaterial
Who - is important
GNP = GDP + Receipts Payments
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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%
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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%
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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 theworld economy
Disinflation A period or process of slowing the rate of inflation
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Key Concepts - 7
Causes of Inflation
Monetary Theory
Monetary policies of Central Banks Monetary and fiscal restraint
Neo-Keynesian Theory
Demand-Pull
Cost-Push
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Key Concepts - 8
How to control Inflation?
Monetary Policies Open Market Operations
Fiscal Policy Taxation
Government Spending
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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
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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 affectthe 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
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Liberalization - 1
The term is used for a more outward-orientedeconomic 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 Indianmanufacturers to Prefer updated technology
Deliver better products at lower costs Face global competition
Deliver world class goods and services
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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
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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
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Currency Convertibility - 2
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 businessesincluding 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 homecurrency can be freely converted into foreigncurrencies for acquisition of capital assets abroad
The rupee is currently not freely convertible on thecapital account
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Financial Markets
Provide facilities for the buying and selling of financialclaims and services
Classified as Primary
Secondary Also classified as
Money Short Term CP & CD
Capital Long term Stocks & Bonds
Stock Markets
SEBI
Forex Markets
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Annexures
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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
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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
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Says 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.25
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Great Depression
Coined by Lionel RobbinsGreat Depression
Started in 1929 and lasted till 1940
Global Scale
Black Tuesday 29th Oct, 1929
Large Scale Unemployment25% 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
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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
Dorothea Lange
Migrant Mother
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
Cash Reserve Ratio CRR is the portion of deposits (ascash) 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 tothe commercial banks
SLR is the portion of their deposits banks are required toinvest in government securities
Repo rate - is the rate at which the RBI borrows short
term money from the market. After economic reforms RBIstarted borrowing at market prevailing rates. So it makesmore sense to banks to lend money to RBI at competitiverate with no risk at all
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Key Terms - 2
Balance of Payments ( BoP)
A statement of economic transactions
showing the relative difference between the
inflow and outflow of goods, services, andcapital claims and liabilities between a
country and its trading partners
BoP= (Exports + Inflows)- (Imports + Outflows)
1991 Crisis
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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 ofcurrency (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