8/7/2019 Eco-rev 12

1/29

Macro Economics-Revision

Presented

By

Lalan mishra3/24/2011

8/7/2019 Eco-rev 12

2/29

Macroeconomic Policies

3/24/2011

8/7/2019 Eco-rev 12

3/29

Public

Revenue

policy

Public

Expenditure

policy

Public Debt

policy

Fiscal Policy

Non-Tax

RevenueTax Revenue

DirectTaxes

Indirect

Taxes

Development

Expenditures

Economic

Social

Cultural

PlannedExpenditures

Non-planned

Expenditures

Internal &

External

Productive &

Unproductive

Short-term &

Long-term

FeesFines

Gifts &

Grants

Spcl.

Assessment

3/24/2011

8/7/2019 Eco-rev 12

4/29

Classification of Taxes

Proportional Tax

Progressive Tax

Regressive Tax

Degressive Tax

Income Tax

PropertyTax

Commodity

Tax

Individual

Interest

Corporation

Wealth Death Duty

Gift

Excise

Customs

Import Export

3/24/2011

8/7/2019 Eco-rev 12

5/29

Objectives of Fiscal Policy

General Objectives

Economic Growth

Full Employment

Price Stability

Social Justice

Developing Countries

To accelerate the rate ofEconomic Growth

To help build-up-basic andheavy industries

To achieve regional balancedevelopment

To help mobilize capitalformation

To help develop infrastructure

To bring decentralization ofthe economy

To reduce the concentration ofeconomics power in the handsof few.

3/24/2011

8/7/2019 Eco-rev 12

6/29

Deficit Financing

Net increase in the purchasing power of the

economy arising out of the budgetary

operation of the government. - Planning Commission

Net credit given to th govt. sector from RBI.

Pre-budget economic survey 1974-75

Need for Deficit Budgeting

Prosecution of a war

Fighting of depression

Financing economic development

3/24/2011

8/7/2019 Eco-rev 12

7/29

Precautions

Should be used in moderatedoses only

Prices of consumer goods &

essential raw materialsshould be effectively ctrld

Concentrate on quickyielding projects

Food imports should be

arranged in time & inadequate qtys to ctrl prices

Rise in wages & salariesshould be checked

Consequences

Increase in

money supply with the

public

Level of income of

people

General price level

3/24/2011

8/7/2019 Eco-rev 12

8/29

8/7/2019 Eco-rev 12

9/29

Functions

Of Money

Primary

Medium ofExchange

Measure ofvalue

Secondary

Std for DP

Store of value

Transfer ofvalue

Contingent

Basis for credit

Distribution of NI againstfactors of pdtn

Demand by motives

Equalize the marginalproductivities

Dynamic

functions

Static

Functions

3/24/2011

8/7/2019 Eco-rev 12

10/29

Classificationof money

Nature

Actual money

Money ofaccount

Legality

Optionalmoney

Legal tendermoney

Limited

Unlimited

Commodity

Metallic money

Standardmoney

FV=IV

Un-ltd LTM

Free Coinage

Main/ principalMoney

Token money

FV>IV

Ltd LTM

No free coinage

SubsidiaryMoney

Paper money

Representative

Fixed Fiduciary

Fiduciary

Fiat

3/24/2011

8/7/2019 Eco-rev 12

11/29

Supply of Money

Sm = Cp + D

where, Sm Total supply of moneyCp - Currency with the public

D Demand Deposits

Cp includes Currency notes in circulation issued by the Central bank

No. of Rupee notes and coins in circulation

Small coins in Circulation

Demand deposits DD held by public with the commercialbanks

Issued by central govt.

3/24/2011

8/7/2019 Eco-rev 12

12/29

M3All time deposits of

PO-saving banks(except NSC)

M4

M1Time deposits (FD)

with the banksM3

M1Savings depositswith PO-saving

banksM2

Currencywith thepublic

Demand/currentdeposits

Otherdeposits M1

Four Concepts of Money Supply adopted by RBI from April

1977

3/24/2011

8/7/2019 Eco-rev 12

13/29

Determinants of Sm

High powered money (H)

H=Cp + R

Reserve ratioCC= Initial deposit*1/RR

Currency deposit ratio of thepublic (k)

Factors influencing Sm

Govt. borrowing from the

banking system

Bank credit to commercial

or pvt. Sector

s in net foreign exchangeassets held by RBI

Govts currency liabilities to

the public

3/24/2011

Cp

R

D

C

8/7/2019 Eco-rev 12

14/29

Demand for money

Cash-

Transitionapproach

(Irvin Fisher)

MV= PT Md= kPY

Cambridgeeconomics

Cash-Balanceapproach

(Marshal &Pigou)

Md= M1+M2

M1=L1(Y)

M2=L2(r)

Md=L1(Y)+L2(r)

Keynes'stheory ofdemand for

money

PostKeynesian

theory(Baumol,Tobin andFriedman)

Md= L(Y,r)

3/24/2011

8/7/2019 Eco-rev 12

15/29

Keynes LP theory of rate of interest

r is determined at the intersection of supply

and demand of money.

E

Sm

LP

m1

r

X

Y

LP

SmSmSm1

Sm

mmm1

LP

LP1

LP

m1

r1r

r

r

r

r1

Fig.bFig.aFig.c

3/24/2011

8/7/2019 Eco-rev 12

16/29

Hicks- Hansen theory

r1r2r3r4

r5

r2r1

r3r4

r5

y2y1 y3y5y1y5y4y3y2

r1

r2

r5

r3

r4

I

y1y2y3

y4y5

s3

s2

s4s5

s1

0 000

IS

LP5

LP4

LP3LP2LP1

E

IS

LM

r

Level of income

0

IS CurveLM Curve

IS&LM Curve

3/24/2011

8/7/2019 Eco-rev 12

17/29

Unemployment

Types of Unemployment

Frictional Unemployment

Structural Unemployment

Cyclical Unemployment

Nature of Un N in UDC

Open un N

Disguised un N

3/24/2011

8/7/2019 Eco-rev 12

18/29

Causes of Unemployment

Population Growth

Lack of the stock of physical capital

Use of Capital intensive techniques

Inequitable distribution of Land

Rigid protective Labour legislation

Neglect of role of Agriculture in N generation

Lack of Infrastructure

Measures for unN

Usual status unN

Current weekly and Daily status unN

Disguised unN

Concept of Full Employment

3/24/2011

8/7/2019 Eco-rev 12

19/29

Open Economy Macro Economics

(NOEM)

Closed Economy

No marginal International

economic relationship with

other nations. Self sustained economic

unit

NI IdentityY=C+I+G

AD= C+I+G Hardly a domestic sector

Open Economy

It refers to Domestic +

Substantial external sector

NI Identity->Y=C+I+G+(X-M)

=C+I+G+NX

Essentially International

macro economics

3/24/2011

8/7/2019 Eco-rev 12

20/29

NOEM is extension ofOEM

FIO- FII = NFI NI Identity Y=(C+I+G)+NX+NFI

Open economy may experience

Trade Surplus {X>M, GDP>(C+I+G)} Trade Deficit {X

8/7/2019 Eco-rev 12

21/29

Foreign Trade

Why a separate theory of International trade?

Basis for international trade

Comparative cost theory

H-O model

Whether trade takes place or not?

If yes, what are the items of Xs & Ms?

3/24/2011

8/7/2019 Eco-rev 12

22/29

Comparative Cost theory

The trade or production means only labour costs aretaken into account

The diff units of labour are homogeneous

Pdtn is undertaken under Const returns to scale

Factors of production are perfectly mobile within thecountry and perfectly immobile b/w the countries

No transport costs

Trade takes place only b/w 2 countries & 2 comm

No disturbances in trade cycle.

H-OModel

Diff in the factor prices

Diff in factor endowment

3/24/2011

8/7/2019 Eco-rev 12

23/29

Balance of Trade

Diff b/w the value ofcommodity exports and

imports

Xs &Ms of visible goods

Balanced BO

T (X=M) Surplus BOT (X>M)

Deficit BOT (X

8/7/2019 Eco-rev 12

24/29

Causes for diseqbm in the BOP

Natural factors

Economic factors Cyclical fluctuations

Inflational spiral within the country

Capital movement (outflow & inflow)

Political factors (stable & unstable govt)

3/24/2011

8/7/2019 Eco-rev 12

25/29

Measures to correct Diseqbm

Automatic

Under gold std

X &Ms of gold

Under paper currency

std Rate of exchange

Deliberate

Trademeasures

Encourageme

nt to exportsthrough

Subsidies to Xindustries

Reduction in Xdties

Reduction inimports

New M duties& Enhancing

existing Mduties

Import quotas

Monetarymeasures

Devaluation

MoneyContraction

Exchangecontrol

Foreign loans

Incentives toforeign tourists

3/24/2011

8/7/2019 Eco-rev 12

26/29

Paper currency STD

PPP theory

2 indpendent countries, no

restrictions on X &M b/w

them Rt. Of exchange

Absolute version

Relative version

BOP theory

Free exchange rate tends to

be such as to equate the D

& S of foreign exchange.

3/24/2011

8/7/2019 Eco-rev 12

27/29

3/24/2011

8/7/2019 Eco-rev 12

28/29

3/24/2011

8/7/2019 Eco-rev 12

29/29

3/24/2011