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Irish EconomyNominal GDP (2010): $208.3 billion.Real GDP growth (2010): -1.6%.Nominal GDP per capita (2010): $46,592.Natural resources: Zinc, lead, natural gas, barite, copper, gypsum, limestone,

dolomite, peat.Agriculture (2% of GDP): Products --cattle, meat, and dairy products; barley; hay;silage; wheat.Industry (29% of GDP): Types --food processing, beverages, engineering, computerequipment, textiles and clothing, chemicals, pharmaceuticals.

Trade (2010, Ireland Central Statistics Office data): Exports --$119.9 billion(excluding services): machinery, transport equipment, chemicals, food,manufactured materials, beverages.

Imports --$59.9 billion (excluding services): grains, petroleum products, machinery,transport equipment, chemicals, textile yarns.

Major suppliers --Great Britain and Northern Ireland 30%, U.S. 18%, France 5%,Germany 7%, China 6%, Japan 2%; rest of the world (including other EU memberstates) 32%.

Boom to bust

Ireland's economy began to grow rapidly in the 1990s, fuelled by foreigninvestment. This attracted a wave of incomers to a country where, traditionally,mass emigration had been the norm.

The boom that earned Ireland the nickname of "Celtic Tiger" faltered when thecountry fell into recession in the wake of the global financial crisis of 2008.

The property boom had been fuelled by massive lending from the banks, and whenthis collapsed - and lenders were unable to repay - the Irish banking system wasplunged into crisis.

The Irish economy underwent one of the deepest recessions in the eurozone, withits economy shrinking by 10% in 2009.

In November 2010, Ireland and the EU agreed a financial rescue package for therepublic worth 85bn euros, ending weeks of speculation about a bail-out.

Ireland's budget deficit reached an alarming 32% of gross domestic product after astate bailout of the country's banks, which had lent recklessly and fuelled anunsustainable property boom

It is no exaggeration to say that we now face one of the darkest hours in thehistory of our independent state. Our economy and our politics have beenshattered. But our people's spirit has not," the parties said.

Mr Kenny said he would make renegotiating the terms of the economic bailout bythe EU and the IMF his first priority.

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MACRO AGGREGATES

GROSS NATIONAL PRODUCT (GNP)GNP IS THE SUM OF ALL FINAL GOODS AND SERVICES PRODUCED DURING ASPECIFIED PERIOD OF TIME (1 Yr.) WHICH CAN BE MEASURED AT MARKET VALUE(GNPmp) OR AT FACTOR COST (GNPfc)

ARRIVING AT REAL GNPNOMINAL GNP IS GROSS NATIONAL PRODUCT EXPRESSED IN CURRENT Rs. Whereas REAL GNP IS DEFLATED FOR CHANGES IN THE PRICES OF ITEMS

REAL GNP (current period) =

NOMINAL GNP * GNP DEFLATOR (base period)

(current period) GNP DEFLATOR (current period)

PERSONAL DISPOSABLE = PERSONAL INCOME PERSONAL INCOME TAXES

PERSONAL INCOME=NNPfcRETAINED EARNINGS-CORPORATE TAXES+TRANSFER PAYMENTS+NET INTEREST & DIVIDENDS

=WAGES + PROPRIETORS INCOME + NET INTEREST +DIVIDENDS + TRANSFER PAYMENTS

PERSONAL SAVING = PERSONAL DISPOSABLE INCOME - CONSUMPTION

NET EXPORTS = GNPmp - (C+I+G) Where (C+I+G) is Domesticabsorption

PRIVATE INCOME = INCOME FROM DOMESTIC PRODUCTION

ACCRUING TO THE PRIVATE SECTOR +

NET FACTOR INCOME FROM ABROAD+

CURRENT TRANSFER FROM GOVERNMENT +

NET TRANSFERS FROM ROW TO THE PRIVATE SECTOR

PERSONAL INCOME = PRIVATE INCOME - RETAINED PROFITS - CORPORATEPROFIT TAX

NET FACTOR INCOME FROM ABROAD = FACTOR INCOMES PAID income generatedin domestic productive activity paid to foreigners(eg repatriated profits, payment

to consultants)- FACTOR INCOMES RECEIVED(domestic residents earn incomesabroad)

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Open Economy

GDP at Market PriceValue at market prices of all goods and services during a specified periodGDPmp = C+I+G+E-M

GDP at Factor Cost Income generated in the productive activities in an economy during a year GDPfc= W+INT+P+R

KEY TO FLOW CHART

NATIONAL PRODUCT DOMESTIC PRODUCT = NET INCOME FROM ABROAD (NIA)

GROSS VALUE NET VALUE = DEPRECIATION

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MARKET PRICE FACTOR COST = INDIRECT TAXES + SUBSIDIES

SUMMARY OF THE FLOW CHART

KEY RELATIONSHIPS

GNPmp-NET INDIRECT TAXES = GNPfcGNPmp-NET INCOME FROM ABROAD = GDPmpGNPmp DEPRECIATION = NNPmpGDPmp DEPRECIATION = NDPmpNNPmp NET INCOME FROM ABROAD = NDPmp(SAME RELATIONSHIPS HOLD FOR NATIONAL INCOME VARIABLES MEASURED ATFACTOR COST)

CONCEPTUAL FRAMEWORK STOCKS AND FLOWS

Stocks Measured at a point of time eg. Total number of persons employed at atime in India Flows Measured over a period of time eg. No. of personswho get new jobs

Stocks FlowsMONEY SUPPLY INFLATION

CPI EXPORTS / IMPORTERSFOREX RESERVES INVESTMENT

CAPITAL STOCK WAGESUNEMPLOYMENT TAXES

Measurement of national income

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The Output (Value Added) Method refers to value of all final goods and servicesproduced during a year by different sectors of the economy or aggregating valuesimparted to intermediate Products at each stage of production

The agricultural and extractive industries

10 + ManufacturingIndustries 40+ Services and construction 40= Gross Domestic Product at factor cost 90+ Net factor income from abroad (Income received from abroadincome paidabroad) 10 = Gross National Product atfactor cost 100 -

Capital consumption or depreciation -20 = Net NationalProduct at factor cost or National Income 80

INCOME METHOD

MONEY PAYMENTS MADE TO ALL FACTORS OF PRODUCTION FACTOR INCOMESFOR CURRENT SERVICES TO PRODUCTION

Income from employment 80Income from self employment 10Gross trading profits of cos 10Gross trading surplus of public cos 10Rent 10

Total domestic income 120

Stock appreciation -30GDPfc 90NFIA 10GNPfc 100

EXPENDITURE METHOD

AGGREGATES ALL MONEY SPEND BY PRIVATE CITIZENS FIRMS ANDGOVERNMENT

Consumer Expenditure (C) 70Govt.Expenditure (G) + 20

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Gross Domestic Fixed Capital Formation (GDFC) (I) + 20Value of Physical increase in stocks + 10

Total domestic expenditure (mp) 120Exports & factor income received + 20Imports & factor income paid - 30GNPmp 110Indirect Taxes - 20Subsidies +10GNPfc 100

DIFFICULTIES IN MEASUREMENT OF NI

Non Market productionImputed valuesUnderground economy

Side effects and Economic BadsDouble counting

USE OF NIECONOMIC PLANNINGSTANDARD OF LIVINGCHANGES IN COUNTRYS ECONOMIC GROWTH

COMPARATIVE ANALYSIS FACILITATED

Possible steps by the RBI to correct Rs slide- InterventionPossible steps by the Govt to correct Rs slide-

Demand for gold ,silver which has seen a 56% increase indemand Because it is thought of as a hedge against inflationSo provide inflation indexed bonds with high returnsDecontrol diesel prices, allow third party marketing to break

The oil companies cartelOpening up organised retail to foreign investment and give resettlementpackage to deserving beneficiaries

BACKGROUND

CLASSICAL SCHOOL*Full employment - SayS Law Supply creates its own demandNo room for Fiscal or M policy-Automatic equilibrium.

KEYNESIAN SCHOOL SHOT INTO PROMINENCE DURING THE GREATDEPRESSION OF 1930 *UNEMPLOYMENT -Fiscal policy in raisingAD. Use of multiplier

According to a recent CRISIL study released today, the IT and ITeS services sectorhas a multiplier effect on the Indian economy with every input of a rupee resulting

in a 100 per cent return.

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The study, conducted for NASSCOM, says, "Every rupee spent by the IT-ITeS sectortranslates into a total output of 2 rupees in the economy.

Nearly 58% of GDP comprises of Consumption expenditure which is a componentgrowing in importance.

One way or another, there's really no way for the economy to grow strongly andconsistently unless middle-class consumers spend more, and they can't spendmore unless they make more The only sustainable source of consistent growthis rising median wages. The rich just don't spend enough all by themselves.

Kevin seems to be arguing that as income distribution gets more tilted from thepoor and middle class towards the rich, consumption as a share of national incomewill fall. OK, we are currently concerned about an insufficiency of aggregate

demand given that the sum of net investment and net exports is barely abovezero. During the transitional (perhaps defined as a couple of years) Keynesianperiod of weak investment demand, we have the paradox of thrift where anyupwards shift of the national savings schedule will only deepen the recession.

But even the most die-hard Keynesians accept the Solow proposition that in thelong-run, any increase in national savings will encourage more investment. And if Kevin is right about the rich having a lower propensity to consume that is, ahigher propensity to save the old trickle down nonsense about taking from thepoor to give to the rich would at least spur more investment demand and long-

term growth.

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Figure 1 confirms the continuation of the long term downward trend of US savings, with inevitableoscillations in business cycles, since 1981. Each cyclical savings peak was lower than previous one 21.4% of GDP in 1981, 19.0% in 1998, and 16.4% in 2006. Each cyclical trough was also lowerthan the one before 14.2% in 1992, 13.6% in 2003, 10.2% in 2009.

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GDP IG

UNEM INF

Source:Economist The Business Confidence Index (BCI) of SACCI is a market-related indexthat reflects not what business is saying, but what it is doing and experiencing. Itis therefore not an opinion/perception-based index. It is likely that in any onemonth the business mood will be influenced both positively and negatively byvarious developments in the economy. The BCI seeks to reflect the net results of

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these influences. The BCI is a composite weighted index of thirteen sub-indices. Various economicindicators are used to compile the thirteen sub-indices. The indicators that aremonitored have been judged by business to have the greatest bearing on thebusiness mood. Averagemonthly weighted exchange rate of the rand against the US dollar, the euro andthe British pound as well as the volatility of the rand exchange rateCore consumer inflation rate for metropolitan and urban areas

The real predominant prime overdraft rateRetail sales volumesRate of change in real credit extension to the private sectorAverage weighted US dollar price of gold and platinumMerchandise import volumesMerchandise export volumesNew vehicle salesLiquidations of companies and closed corporationsVolume of manufacturing production

Real value of private sector building plans passed, and

Results of the December 2011 Ifo Business Survey The Ifo Business Climate for trade and industry in Germany continued to improvein December after stabilising in the previous month. Survey participantsresponses showed that their assessment of the current business situationcontinues to remain favourable. Business expectations improved for the secondtime in succession. The German economy seems to be successfully countering thedownturn in Western Europe. This bodes well for Christmas.

In manufacturing the business climate remains unchanged. Manufacturing firmsmay assess their current business situation as slightly less positive than inNovember, but there is no question of a meltdown comparable to that of 2008. Onthe contrary, the German economy is showing signs of stabilisation. Firms evenview their six-month business outlook more favourably. They also see greateropportunities in the export business. The overhang of firms wishing to increasetheir staff numbers has nevertheless fallen slightly.

The business climate index increased somewhat in wholesaling and clearly inretailing. The business situation is assessed more positively than previously at

both levels of trade. In addition, retailers and wholesalers are more optimistic. Thissuggests brisk Christmas trade.

EQUILIBRIUM OUTPUT

EQUILIBRIUM OUTPUT = QUANTITY OF OUTPUT PRODUCE EQUALS AGGREGATE DEMAND

AGGREGATE DEMAND = CONSUMPTION (C) + INVESTMENT GOVERNMENT PURCHASES (G) + NET EXPORTS

(NX)

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AD = C+I+G+NX Y = C+I+G+NX

AD = Y

EXANTE SENSE = ALL THE ABOVE MENTIONED VARIABLES

ARE PLANNED OR DESIRED VALUES AND NOT ACTUALVALUES

SIMPLE CONSUMPTION FUNCTION

M.THAMPY MPC (1951-1979) = 0.82C = 19.60 + 0.824 YdC/N = 91.69 + 0.733 (Yd/N)Marginal propensity to consumeIndia - 0.82

Japan - 0.66West Germany - 0.72Australia - 0.76

SAVINGS FUNCTION

TWO SECTOR ECONOMY - INCOME IS EITHER SAVED OR SPENT

Y = C+S which impliesS = Y-CSubstituting the consumption function we get S = Y-C = Y-a-by = -a+(1-b) Y

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(1-b) = Marginal propensity to save (MPS)

MPS = Increase in savings per unit of income

MPC + MPS = 1

CONSUMPTION FUNCTION

PLANNED INVESTMENT (I) GOVERNMENT PURCHASES & NET EXPORTS

AD = C+I+G+NX= a+by+I-G+NX

= (a+I+G+NX) +by= A+by (where A = (a+I+G+NX)

DETERMINATION OF CONSUMPTION

STOCK OF WEALTH - Wealthier economies consume moreEXPECTATIONS - Regarding future movements in incomes and pricesTAXATION POLICY - Taxation policy influences the Average propensity toconsume and shifts the consumption functionDISTRIBUTION OF INCOME - Income accruing greatly to the Higher income classis likely to Be saved AGE COMPOSITION OF POPULATION -Youngfamilies have higher Propensities to consume

DETERMINATION OF EQUILIBRIUM INCOME

ASSUMPTION : CONPONENTS OF INVESTMENT, GOVERNMENT EXPENDITURE, NET EXPORTS CONSTITUTING (AD) ARE HELD CONSTANT

AD = C+I+G+NX, Substituting the consumption equation we get AD = a+by+I+G+NX Where (I+G+NX) are AUTONOMOUS components (independent of the level of income)

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GIVEN THE ABOVE FACTS EQUILIBRIUM INCOME IS WHERE (AD) CURVE EQUALSTHE 45 DEGREE LINE AS SHOWN IN THE FIG(PLANNED(EXANTE)SPENDING=ACTUAL (EXPOST)OUTPUT

Problem : C = 50 + 0.9 ydyd = y-T

T = 10+0.2y Y = C+I+G

I = IG = G

(a) CALCULATE EQUILIBRIUM INCOME, AGG CONS,. GOVT. BUDGET

DEFICIT, I = 50, G = 40

Solution :C = 50 + 0.9 yd

Yd = y (10+0.2y) C = 50-+0.9 (y-10-0.2y) C = 50+0.9 y 9 0.18yC = 41+0.72y

Y = C+I+G Y = 41+0.72y+50+40

Y-0.72Y = 41+50+40 Y = ( 41+50+40 ) / 0.28C+I+G = 467.86

T = 10+0.2Y =10+93.57 = 103.57 Yd =Y-T = 467.86-103.57 = 364.29C = 50+0.9Yd = 50+0.9 x 364.29 = 377.86Budget deficit = Govt. expenditure Taxes = 40-103.57

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C = 40+byd, MPC = b, MPS 1-b

MPS = (1-0.72) = 0.28

MULTIPLIER ANALYSIS

Multiplier INCREASE IN THE LEVEL OF EQUILIBRIUM INCOME FOR A UNIT INCREASE INAUTONOMOUS SPENDINGFor e.g. If Consumption function is given as

Y=a+by (where b is MPC) then

Y-by = a (where a is the autonomous consumption component)

Y (1-b) = a

Y = 1/1-b* a (where 1/1-b is the multiplier)

In case of we Include Govt. exp a can be represented as A (autonomousComponent) and we can write the above as Y=A/1-b

DERIVATION

72.0500

360

500

4040040==

=

=

yd C MPC

Multiplier effect

7.5

6.5

4.9

4.3

3.4

3.2

0 2 4 6 8

Constr

Manu

Water s

Transpo

Agri

trade

Series1

3.15

3.14

3.13

2.9

2.7

2.6

2.4

0 2 4

O t h e

r s e r S

o c s e

M i n i n g

F i n s e

F s h i n

F o r e

s t D e f e

n c

Series1

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(Y*1 AND Y*2 ARE EQUILIBRIUM

OUTPUT)

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The following relations represent a simple model Of an openeconomy

Consumption function (C) = 250+ 0.75Y

Investment function ( I ) = 65 + 0.15 Y

Government exp (G ) = 90

Exports (X) = 125

Import function (M) = 0.15Y

Due to an exogenous boost in the economy exports Increase by 25. Computethe change in equilibrium Level of income and also compute foreign trade

multiplier.

Y= C+ I+G+X-MY = 250 + 0.75 Y + 65 + 0.15Y + 90 +125 - 0.15 Y

Y = 530 + 0.75Y0.25Y = 530

Y = 530/0.25 = 2120When X increases by 25

0.25Y = (530 + 25) = 555

Y = 2220

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INCOME DETERMINATION MODEL (INCLUDING MONEY ANDINTEREST)

INTRODUCTIONIS-LM MODEL Studies the interaction of the goods & assets markets using theIS-LM curves. Interest rate is considered in determination of (AD)

Illustrates how monetary and Fiscal policies can prove effective

Assumption of the earlier model are done away with. E.g. AutonomousInvestment concept.

Investment dependant on interest.

STRUCTURE OF THE IS LM MODEL

Derivation of the IS Curve(GOODS MARKET Where Agg demand =output)

First of all, we will have to modify the aggregate demand function of the earlierchapter to reflect the new planned investment spending schedule. Here we seethat only I is redefined as I- i

NX G I C AD +++

)(

)1(

][][][)]([

NX G I J ba AWhere

iY t b A

NX Gi I J tY Y ba

++++=

+=

+++++=

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Solving for i

Now, let us derive some important properties of the IS curve. The equation of theIS curve is

From the above equation it can be seen that the steepness of the IS curvedepends on the multiplier ( ) and investment sensitiveness to change in interestrates ( ) is large, then the IS curve would flat because 1/ would be small.

)()]1(1[A

i

t)- b(1-1A

Y

i-t)Y- b(1A

ADY

market goods in theequilibriuFor

curve IS Y t b

i

=

=

+=

=

Y

Y t l b A

i

=

=

=

Ai

ascurveIStheof equationtherewritecanwe

t)- b(1-11 multiplier thesince

)](1[

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It can also be inferred that larger the multiplier, the flatter would be the IS curve.Since the slope of the IS curve is dependent on the multiplier and the multiplier inturn is dependent on fiscal policy more specifically, the tax rate t we see thatfiscal policy can affect the slope of the multiplier. An increase in the tax rate wouldreduce the multiplier, which in turn increases the steepness of the IS curve). Thusthe steepness of the IS curve and the tax rate go in the same direction.

ASSETS MARKETS AND THE LM CURVE(money market where Md=Ms)

The assets markets are the markets in which money, bonds, stocks, houses andother forms of wealth are traded. There are a large variety of assets and a lot of trading takes place in the assets markets everyday. But we shall simplify mattersby grouping all available assets into two groups, money and all other assets. Giventhe level of financial wealth, an individual who has decided how much money tohold. Our focus will be on the money market, which implicitly takes care of theother assets market.

L=Ky-hi ; k,h>O

k,h is the sensitivity of Demand for real balances to changes in income andinterest rate

DEMAND FOR MONEY

Transactions demand for Money= DEPENDENT ON INCOME

PRECAUTIONARY DEMAND = DEPENDENT ON INCOME

SPECULATIVE DEMAND = DEPENDENT ON INTEREST RATE.

DERIVATION OF THE LM CURVE

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Changes in money demand affect AD - TRANSMISSION MECHANISIM

(1) (2) (3) (4)

Change in money supply Portfolio adjustments lead to change spending adjusts to changesOutput adjusts to

in asset prices and interest rates in interest ratechange in AD

Monetary policy(dig1)

Govt. uses the monetary tool of open market operations to increase

Money Supply - Shifts LM curve to the right to LM1. Initially in

intersects the IS Curve at E1. In Ms with constant Md - i

i and also causes

a)changes in portfolio and people start holding more financial assets therebyraising its prices and reducing yields.

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INTEREST RATE C I Y (GDP)

Income Tax Cut + + -+ Govt. Spending + +

- +Investment Subsidy + + ++

GDP Measurement -Output method

Yr Nominal GNP GNP deflator

1995-96 2500 120

1996-97 3200 145

Base yr GNP deflator 1994 -95 =100

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What is real GNP of 1995-96

What is the real GNP of 1996-97

What is the growth rate of real GNP from 1995-96 to 1996-97?

What is the inflation rate in 1996-97 in relation to 1995-96 ?

Real GNP

2500 x 100/120 = 2083.33

3200 x 100/145 = 2207

Growth rate

Growth Rate = Real GNP 1996-97

Real GNP 1995-96

2207/2083.3 1 = 0.059 = 5.9%

Inflation rate

GNP deflator (cp- 96-97) - GNP(BP95-96)

GNP def (1995-96)bp

145-120/120 x 100 = 20.83%

Following are the data relating to the national accounts Of an economyfor the year 1995 in mn units of currency

Capital consumption allowance 1000Personal consumption spending

12500 Corporateincome taxes 500Undistributed corporate profits 250Net exports 25

Dividends 750Rent 1000Interest 500Indirect business taxes 1250Gross private investment 550Compensation to employees 8487.5Government spending 912.5Proprietors income 1250

Compute GNP using income method and expenditure method

(a) GNP INCOME METHOD

INDIRECT BUSINESS TAXES 1250COMPENSATION TO EMPLOYEES 8487.50

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RENTS 1000.00INTEREST 500.00PROPRIETORS INCOME 1250.00CORPORATE TAX 500.00DIVIDENDS 750.00

UNDISTRIBUTED PROFITS 250.00 13987.50

(b) GNP = EXPENDITURE METHOD

= C+I+G+X-M

= 12500+550+912.5+25

= 13987.5

From the following figures compute

a) GDP at factor costb) National incomec) Personal disposable income

GNP mp 5000Personal income tax 1000Corporate taxes 800Subsidies 400FIPA 800FIRFA 900Undistributed profit 200Indirect taxes 450

Depreciation 350

GDP fc = GNP fc - NFIAGNPfc = GNP mp - IT + subsidies = 5000 - 450 + 400 = 4950GDP fc = 4950 (900-800) = 4850

National incomeNNPfc = GNP fc - Dep = 4950 350 = 4600

Personal disposable income = Personal income Personal Taxes

Personal income = National income - Retained earning - Corp tax4600 - 200 - 800

= 3600

GDP mp 6000Corporate income tax 1200Personal income tax 900Subsidies 475

Factor incomes received from abroad 1500Factor incomes paid abroad 1200Undistributed profits 225Indirect taxes 900Depreciation 600

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Compute Personal Disposable income, national income and GNP at marketprices

GNPmp = GDPmp +NFIA = 6000+1500 -1200 = 6300

National income = NNPfcGNPfc = GNP mp + Subsidies - Indirect taxes = 6300 + 475-900 =5875

NNPfc = 5875- 600 = 5275

Personal disposable income = National income - Retained earnings -Corporate taxes - Personal txes

= 5275 -225 -1200 -900 = 2950

NATIONAL INCOME ACCOUNTING

INTRODUCTION

MODERN ECONOMY IS VERY COMPLEX IN NATURE INVOLVES A NUMBEROF TRANSACTIONS eg HOUSEHOLDS CONSUME GOODS AND SERVICES ANDPROVIDE THEIR LABOUR SERVICES TO FIRMS

THEY PROVIDE SAVINGS TO Fis WHICH ACT AS INTERMEDIARIES BETWEEN SAVERS AND INVESTORS

GOVERNMENT PLAYS A ROLE IN COLLECTING TAXES AND PROVIDING PUBLICSERVICES

TRANSFER OF PHYSICAL AND FINANCIAL ASSETS TAKE PLACE WITH FOREIGNERS

NATIONAL INCOME ACCOUNTS SUMMARY PICTURE OF ALL

TRANSACTIONS

NATIONAL ACCOUNTING INVOLVES A SUBSTANTIAL AMOUNT OF AGGREGATION HELPS IDENTIFY IMPORTANT ECONOMIC RELATIONSHIPS

MAJOR TYPES OF ACCOUNTS NATIONAL ECONOMY

NATIONAL INCOME ACCOUNTS - FLOW OF GOODS AND SERVICES IN AN ECONOMY DURING A YEAR INPUT OUTPUT ACCOUNT - FLOWS OF GOODS AND SERVICES BETWEENPRODUCTIVE & HOUSEHOLD SECTORS

NATIONAL BALANCE SHEET- REFLECTS NATIONS WEALTH AT A POINT OF TIME

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NATIONAL ACCOUNTS

SIMPLE ECONOMY NUMBER OF HOUSEHOLDS SINGLE FIRM (OWNED BY SOME HOUSEHOLDS)

LABOUR IS THE ONLY SCARCE INPUT

CONSOLIDATED PRODUCTION ACCOUNT (WITH BUSINESS SAVING &DEPRECIATION)

INVENTORY INVESTMENT

GNP IS NOT EQUAL TO GNI-ROLE OF SAVING & INVESTMENT

PRODUCTION A/C

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HOUSEHOLD A/C.

SAVINGS A/C

(ROLE OF GOVERNMENT)-PR0DUCTION SECTOR

GOVERNMENT SECTOR

HOUSEHOLD A/C

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SAVINGS & INVESTMENT

INDIRECT TAXES AND SUBSIDIES-PR0DUCTION SECTOR

GOVERNMENT SECTOR

HOUSEHOLD A/C

SAVINGS & INVESTMENT

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A COMPLETE PICTURE

PRODUCTION A/C

EXTERNAL A/ C.

SAVINGS & INVESTMENT A/C

HOUSEHOLD SECTOR

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GOVERNMENT A/C.

9.8 8.5 8.1

5.8 5.3

9.5

76

4.5 4.5

02

468

1012

C h i n

I n d i

V i e t

n a

S i n g

a p

S. K o

r

Outlook in AprilOutlook in Oct

A compari tive picture

1.6

1

9.8

1.3

7.7

4.4

1.3

0.9

8.5

0.9

7.1

4.2

0 5 10 15

US

Japan

Chi na

Euro

India

s. Korea

GDPgr owt h 2009

GDPgr owt h 2008

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The following is the information from the national income accounts for ahypothetical country :

Budget deficit as a percentage of GDP

-2.50% -2.80%

1.50%

-3.40%

0.60%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%2.00%

US UK S.Korea

India China Series1

Growth in industrial production

-1.50%

2.40%

-1.70%

12.80%

7.10%9.10%

-4.00%-2.00%

0.00%2.00%4.00%6.00%8.00%

10.00%12.00%14.00%

U. U E u r C h i n I n d

i

S. K

o

Growth inindustrialproduction

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Required to compute :

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(20)

(20)

NNP = GNP Depreciation (i.e. Gross Investment Net Investment)

= 4850-544=4306

Net Exports = GNP Domestic absorption (i.e. C+I+G)

= 4850-4917= -67

Note : While calculating Domestic Absorption we have to consider grossinvestment

(3) SOLUTION :

The following is the information drawn fromthe National Income Accounts for an economy

Amount(Rs. In crore)

A. GNP 4850B. Gross investment 854C. Net investment 310D. Consumption 3095E. Government Spending 968

Calcutta the NNP and net export for theeconomy.

Item

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(a) The equation of the IS curve is : Y = 120+0.6Y+150-80ior Y = 270+0.6Y-80ior Y-0.6Y = 270-80ior Y = 675-200i (i)

The equation of the LM curve is MS = Mdor 300 = 0.3Y + 120 160ior Y = 600+533.33i . (ii)

Putting the value of Y in equation (I), we have :675-200i = 600+533.33ior, 733.33i = 75or i = 75/733.33or, i = 0.10%

(b) Y = 675-200x0.10or, Y = 655

(c) Consumption = 120+0.6x655 = 513

Investment = 150-80x0.10 = 142

(d) Mt = 0.3x655 = 196.50

(e) Ma = 120-160i = 104

IS Curve

Savings function = -50+0.2YdConsumption function = 50+0.8Yd

Y = C+I+G= 50+0.8 (Y-0.25Y) +200-10i+400= 650+0.8Y 0.2Y 10i

0.40 Y = 650-10i Y = 1625-25i .. IS Curve

LM Curve Demand for money = Transactions demand Mt +Speculative demand= 0.25Y + 125 50i

Supply of money Ms = 250In equilibrium Md = Ms

= 0.25Y + 125-50i=2500.25Y = 250-125+50i

= 125+50i Y = 500+200i .. LM curve

When money market and goods market are in equilibrium

IS = LM1625-25i = 500+200i

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1625-500 = 200i + 2511125 = 225ii = 1125/225i = 5

Investment (I) = 200 10i = 200-(10*5) = 150

When the Government increases its expenditure by 135, IS curve will change butLM curve will remain unchanged.New IS curve of IS

Y = 50+0.8 (Y-0.25Y) + 200-10i+(400+135)= 50+0.8Y 0.2Y +200-10i+535

0.4 Y = 785-10i Y = 1962.5-15i

When money market and goods market are in equilibriumIS = LM1962.5-25i = 500+200i1962.5 500 = 200+25i1462.5 = 225 ii = 6.5

When money market and goods market are in equilibrium

Investment (I) = 200-10i = 200-10(6.5) = 135

Crowing out of private investment on account of increase inGovernment expenditure is = 150-135 =15

b)Investment will not be crowded out if money supply is maintained at 5%. Thiscan happen only when LM Curve shifts to the right

IS curve after increase in Government expenditure is

Y=1962.5-25i

Substituting i=5% in the above equation

Y=1837.5

Substituting Y=1837.5 and i=5% in the demand for money function we get

Md(Mt+Ma) =0.25Y+125-50i = 0.25(1837.5)+125-50(5) =334.38

Since Ms=Md , Ms=334.38

Increase in Ms =334.38-250=84.38