Webinar – Economics BasicsAn initiative by PR Cell, IIM Rohtak

Indian Institute of Management Rohtak

Presented by: Soumya Soni

Macroeconomics Overview National Income Accounting Fiscal and Monetary Policy Emerging Trends

Macroeconomics: Looks at the economy as a whole, and focuses on issues such as growth, unemployment, inflation, and business cycles.Macroeconomics examines the aggregate behavior of the economy – how the actions of all the individuals and firms in the economy interact to produce a particular level of economic performance as a whole.

Economic ActorsHouseholds

FirmsGovernment

Financial SectorExternal Economy

Decision Making Parameters Marginal Cost – The additional cost incurred for choosing an actionMarginal Benefit – The Benefit received by choosing the actionOpportunity Cost - The cost of an alternative that must be forgone in order to pursue a certain actionDecision Making - An action must be chosen only if the marginal benefit exceeds the marginal cost of that action. Or the opportunity cost must be less than the benefits received from the action chosen

Macroeconomic Objectives

Maintaining High Economic GrowthMaintaining economic stability – Controlling InflationReducing unemployment and povertyControlling Fiscal Deficits Maintaining external stability – Balance of payment / Exchange rate fluctuations/ FDI inflows

Business Cycles

Inflation

Inflation is a rise in the overall price level over time. It is measured through the use of price indexes.Price indexes summarize what happens to the prices in a constant “market basket” of goods and services. Different price indexes may produce different results because they contain a different composition in their market baskets.Price indexes choose a base year in which the price level for the market basket of goods is set to 1 or 100. The price level in other years is then shows changes of the price level since the base year.Consumer Price Index (CPI) measures the prices of a fixed basket of consumer goods, which is designed to represent the average consumer’s expenditures. [(Dec. 2015 – Positive 5.61%) (Base Year – 2010)]Wholesale Price Index (WPI) represents the price of goods at a wholesale stage i.e. goods that are sold in bulk and traded between organizations instead of consumers. [(Dec . 2015 – Negative 0.72%) (Base Year – 2004-05)]

Macroeconomics Overview National Income Accounting Fiscal and Monetary Policy Emerging Trends

Important Question : Difference between WPI and CPI. Which is a better measure?Purchasing Power Parity ? Look – Hamburger Index

Macroeconomics Overview National Income Accounting Fiscal and Monetary Policy Emerging Trends

Gross Domestic Product (GDP)

1. GDP is the international standard for measuring the economic output and growth of countries. It is the market value of all final goods and services produced within a country, usually measured in the span of a year, stated in terms of that year’s prices

2. Gross national product (GNP), which is a measure of the final output of the citizens and businesses of a country, regardless of where in the world the output is produced

3. GDP only measures final output, and each final good is multiplied by its price; intermediate products do not count toward GDP; this prevents double-counting. Intermediate goods can be eliminated from the calculations either by only counting final goods or by counting the value added by each firm toward a final product.

4. There are three ways to calculate GDP - expenditure approach, income approach, and production approach

Expenditure Approach

GDP = C + I + G + (X – M))

GDP can be calculated as the sum of four categories: consumption (C), investment (I), government expenditures (G), and net exports (exports – imports, or X – M)

Consumption: Households buy the goods produced by the businesses; this is the biggest category of GDPInvestment: Households can save a portion of their income, which goes into financial marketsGovernment expenditures: This category consists of government payments for goods and services.Net exports are equal to exports minus imports.

You can check for Income and Production Approach .

Nominal GDP: GDP calculated at existing pricesReal GDP: Nominal GDP adjusted for inflation, and it measures what is really produced; real GDP = nominal GDP / GDP deflator

Macroeconomics Overview National Income Accounting Fiscal and Monetary Policy Emerging Trends

Fiscal Policy

1. Fiscal Policy refers to the combined governmental (read Finance minister) decisions regarding a country's taxing and spending

2. The term fiscal policy is associated with British economist John Maynard Keynes, who believed that governments should influence macroeconomic productivity levels by doing such things as improving the employment rate, combating inflation, and flattening business cycles.

3. Government can reduce Tax rates and increase spending to adopt Expansionary fiscal policy and do the vice versa to adopt Contractionary fiscal policy.

4. Expansionary fiscal policy may cause Inflation in the economy whereas Contractionary fiscal policy may lead to recession and high unemployment levels

Monetary Policy

1. Monetary policy is the actions a central bank (RBI in India) takes to influence the country’s money supply and the overall economy

2. Monetary policy objectives are Price stability, credit availability , stability of exchange rate , low unemployment rate , high economic growth

3. RBI influences money supply in three waysa) Buying and selling government bonds through Open

Market Operationsb) Setting the Repo Ratec) Establishing Reserve Requirements

4. RBI can reduce Repo rate , Reserve requirements and buy govt. bonds to adopt Expansionary Monetary policy and do the vice versa to adopt Contractionary Monetary policy

5. Open Market Operation is an activity by a Central Bank to adjust Liquidity in the system by buying and selling Govt. bonds

Macroeconomics Overview National Income Accounting Fiscal and Monetary Policy Emerging Trends

Monetary Policy Instruments - Rates

Repo rate : Bank sells the security to RBI to raise money. When banks sell security , banks promise to buy back the same security from RBI at a predetermined date with an interest at the rate of REPO . It is actually a repurchase agreement. ( 6.75 %)

Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the RBI. Opposite of Repo. (5.75%)

Bank Rate : Bank rate is the rate at which RBI lends money to commercial banks for meeting shortfall for a long period without selling or buying any security. (7.75%)

MSF rate (marginal standing facility) is the rate at which banks borrow funds overnight from the Reserve Bank of India (RBI) against approved government securities. (7.75%)

Monetary Policy Instruments - Ratios

Cash Reserve Ratio (CRR): Each bank has to keep a certain percentage of its total deposits with RBI as cash reserves. (4%)

Statutory Liquidity Ratio (SLR): Amount of liquid assets such as precious metals(Gold) or other approved securities, that a financial institution must maintain as reserves other than the cash. (21.5%)

CRR limits the ability of the banks to pump more money into the economy. SLR is used to limit the expansion of bank credit, for ensuring the solvency of banks

Real vs Nominal RatesReal Rate = Nominal Rate – Inflation Rate

Ex: Your FD gives you a interest rate of 5% and Inflation is 7% then,Real Rate = 5% - 7% = -2%

Negative Nominal Interest Rates - Sweden , Japan , Denmark , Switzerland and more to come…

Macroeconomics Overview National Income Accounting Fiscal and Monetary Policy Emerging Trends

Balance of Payments

Set of accounts that record a country’s international transactions, and which always balance out with no surplus or deficit shown on the overall basis.

A surplus or deficit can be shown in any of its three component accounts • Current account – covers export and import of goods and

services• Capital account – covers investment inflows and outflows• Gold account – covers gold inflows and outflows

BOP = Current + Capital +Gold

Exchange Rates

An exchange rate is the current market price for which one currency can be exchanged for another.

Devaluation - A deliberate downward adjustment to the value of a country's currency, relative to another currency, group of currencies or standard.

Devaluation is a monetary policy tool of countries that have a fixed exchange rate or semi-fixed exchange rate.

Devaluation causes a country's exports to become less expensive, making them more competitive on the global market.

Currency depreciation is the loss of value of a country's currency with respect to one or more foreign reference currencies, typically in a floating exchange rate system.

Deficits

In simple words, it is mount of borrowing the government has to resort to meet its expenses.

Fiscal Deficit = Total Expenditure – Total receipts excluding borrowings Fiscal Deficit = BorrowingsSafe limit of fiscal deficit is considered to be 5% of GDP.

Macroeconomics Overview National Income Accounting Fiscal and Monetary Policy Emerging Trends

Negative Nominal Interest rates around the world Strengthening of US DollarWeakening of domestic currencies for developing countries Low oil prices – What is the reason ?Prediction of slowdown in developing nations including China Lift of US Quantitative Easing and expected rise in interest rates coupled with negative

interests will see a shift of capital inflows from US Devaluation of YuanProblems of Greece – High on Debt ! Sustainability of EuroZone Hyperinflation in Venezuela ( Also see for Zimbabwe )

All the Best !

www.investopedia.com/terms/o/opportunitycost.asphttp://sparkcharts.sparknotes.com/economics/macroeconomics/section1.phphttp://www.slideshare.net/RahulKaurav/xx-unit-iiihttp://www.investopedia.com/articles/04/051904.asphttps://www.rbi.org.in/home.aspx

References