Key Indicators of Economic Perspectives

7/30/2019 Key Indicators of Economic Perspectives

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KEY INDICATORS


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INTRODUCTION These indicators are imp variables through which the

overall state of the economy is reflected.

The indicators help the enterprises to take a number ofmanagerial decisions particularly relating to newinvestment,scale of production and competitivestrategy.


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CON.. Economic development is indicated by rising shares of

industry and services in national income ,

improvement in HR skills, productivity, technological progress,

growth of social institutions & wider distribution ofnational income


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CON.. It reflects an improvement in the average standard of

living of the masses.

Economic development is invariably attended by socialdevelopment which covershealth,education,nutrition,participation of women ineconomic activities,water supply,empowerment of

socially dis advantaged groups and social welfare.


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CON.. These elements of development are in qualitative

terms to indicate the conditions

of the macro environment.


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KEY INDICATORS GROSS DOMESTIC PRODUCT (GDP)

SECTORAL SHARES

AGRICULTURAL OUTPUT ELECTRICITY GENERATION

RATE OF INFLATION

MONEY SUPPLY

FOREIGN TRADE

FOREIGN EXCHANGE RESERVES


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Con.. EXCHANGE RATE

ECONOMIC INFRASTRUCTURE

SOCIAL INDICATORS


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Measures of Economic

Performance Economic Measures:

Inflation

Unemployment

Growth (GDP) Balance of Payments

Exchange Rate Non-Economic Measures:

Quality of Life Environment

Health

Education


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GDP


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GDP GDP (Gross Domestic Product) is the sum

ofvalue added produced within the country.

GDP is the total market value of all final goods and servicesproduced annually within a countrys borders.


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Con.. Expenditure Approach: compute GDP by adding the

money spent by buyers on final goods and services.What are final goods? What are intermediate goods?

Whats the difference?Ghee is a final good, and the Ingredients

is an intermediate good. The GDP

includes the value of final goods only.

Income Approach: compute GDP by adding all wagesand all profits.Value-Added Approach: compute GDP by adding the

values added to a product at all stages of production


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GDP? GNP? Whats different? Gross National Product is the total market value of

all final goods and services provided annually by

the citizens of a country GDP measures all final goods produced in a

country, whether by citizens or not.

GNP measures all final goods produced by

citizens whether physically in that country or not.GNP = GDP minus foreign investment

in India plus Indian investment overseas


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Con.. EXAMPLES:

Toyota production in the U.S.

counted in U.S. GDP not counted in U.S. GNP

Ford production in Europe

Not counted in U.S. GDP

Counted in U.S. GNP


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What GDP Omits Certain Nonmarket Goods and services

Underground Activities, both legal and illegal

Sale of Used Goods Financial Transactions

Government Transfer Payments.

Leisure

Not adjusted for bads


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Economic Growth (GDP)Potential Growth the overall capacity of the

economy (i.e. what the economy could produceif it used all its resources)

Actual Growth the annual percentage increase inoutputNominal Growth the growth in output not

including any adjustment for price changes expressed as

current prices (the price reigning at the time of themeasurement)

Real Growth growth in GDP adjusted to takeaccount of changes in the price level expressedas constant prices.


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Nominal and Real GDP

Nominal GDP = the value of goods and services measured at current prices. - no adjustment for inflation GDP measured in current prices 1990 nominal GDP uses 1990 prices; 2000 nominal GDP uses 2000 prices Nominal GDP of 2007=

(2007 price X 2007 quantity)

Real GDP = the value of goods and servicesmeasured at a constant set of prices.

adjusted for inflation Calculated using constant, unchanging prices converted to base year prices Real GDP of 2007 using 2005 price =

(2005 price X 2007 quantity)


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Con.. Economic Growth has occurred if Real GDP in one year is

higher than Real GDP in the previous year.


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GDP Deflator

GDP Deflator is a price index number which can beapplied to nominal GDP figure to remove the effect ofchanges in the price level.

It also gives the measure of rate of inflation in thecountry.

Real GDP GDP Deflator = ___________

Nominal GDP


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Computing GDP GDP combines spending of the 4 sectors of the

economy:

C + I + G + (Xn) = GDP

C = consumer spending

I = investment (business) spending

G = govt. spending

(Xn) = net exports (exports - imports)


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y o we nee o a us orinflation?

2000 2001

Quantity = 100 Quantity = 100

Cost per bar = $.50 Cost = $.75

Nominal GDP = $50 Nominal GDP = $75

A country produces only one product, candy bars

Although the country produced the SAME amount,

it LOOKS like more was produced.If you remove the effects of inflation (price

increase), you can see that production remains thesame.


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n erme a e goo sgoods that become part of a

final good

Counted or not

counted? Ford buys Goodyear

Tires for a car in

production?

Not counted

Counted or not

counted?

Ford buys a newassembly line?

Counted


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Transfer Payments Government cash payments to firms and

households for which no good or service

is received in exchange

Counted or not

counted?

Counted or not

counted?

Government pays

unemployment

benefits. Not counted

Government buys a

new computer payroll

system. Counted


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GDP - real growth rate: 7.4% (2008 est.)

9% (2007 est.)

9.7% (2006 est.)Year GDP - real

growthrate

Rank PercentChange

Date ofInformatio

n

2003 4.30 % 54 2002 est.

2004 8.30 % 16 93.02 % 2003 est.

2005 6.20 % 43 -25.30 % 2004 est.

2006 8.40 % 24 35.48 % 2005 est.

2007 9.20 % 23 9.52 % 2006 est.

2008 9.00 % 23 -2.17 % 2007 est.

2009 7.40 % 28 -17.78 % 2008 est.


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National Income National Income = Compensation of employees +

Proprietors Income + Corporate Profits + RentalIncome + Net Interest

GDP=National Income Income earned from the rest ofthe world +Income earned by the rest of the world +Indirect business taxes + Capital consumption allowance +Statistical discrepancy


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Sectoral Shares


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Sectoral shares The sectoral shares of GDP indicate the type and

nature of an economy.

In agrarian economies ,share of agriculture & alliedsectors is the largest and the sector providesemployment to the largest chunk of population.

Such countries are generally low income,slow

developing economies.


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Con.. Economies with higher rate of growth are generally

observed to be those in which the share of industry innational output is rising and that of agriculture is

falling over time.

In Industrialised countries,service sector makeshighest contribution (60%) to national output


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Agricultural Out PutAll is not well with an economy ,if its agricultural

sector under performs.

A dwindling agricultural sector can destabilize aneconomy with far reaching consequences for themacro environment.

Agriculture provides food for population.

Raw materials to industry & Employment to masses


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Con.. Lapses in food production

Import

Scare F/E leads to economically vulnerable

Inequality in distribution of income

Malnutrition

Rising trends of hunger, poverty statistics discourage

private domestic & foreign investment and present apoor image of the country.


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Con.. Falling non-food output.

Agricultural sector demands a number of products asinputs from industry & service.

The Govt. protect the agricultural sector providingsubsidies, imposing import duty on agriculturalproducts.


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Electricity Generation Importance

Scarcity

Transmission & distribution losses Power theft

Self generating power


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RATE OF INFLATION Inflation is a process in which the general price index

records a sustained and appreciable increase.

2-5% Creeping

5-10% Walking

10-20% Running

20-50% Galloping

Above 50% Hyper


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ConAn inflation rate is below 5% it is not

problematic,rather it is considered a good booster forfirms growth.It provides expanding profit

margins,which serve as motivation to invest andproduce more.

It does not attract policy intervention


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Con.. Inflation rate is 5-10% causes concern & double digit

inflation warrants anti-inflationary policy.

Galloping & hyperinflations reflect economic crisesand require bold anti-inflationary programmesincluding macroeconomic restructuring.


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MONEY SUPPLY Money supply in an economy determines liquidity

conditions in the market,interest rate structure andhence the cost of capital to the firms and the rate of

inflation.

Fast expansion of money supply rises money incomesand the level of aggregate demand thereby creatinginflationary pressure.


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Con.. It increases the supply of loanable funds and lowers

the interest rate structure.

RBI has adopted some measures of money supply vizM1,M3.


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M1 Narrow money It consists of :

Currency with the public

Demand deposits with banks Other deposits with the RBI

M3 Broad money:

It includes M1 & time deposits with banks


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Sources of changes in broad money Net credit by the RBI and other banks to central &

state Govt.

Credit by RBI and other banks to commercial sector.

Net F/E assets of the banking sector

Govt.currency liabilities to the public

Banking sector net non-monetary liabilities other than

time deposits


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Money supply is increased due to RBI issues fresh currency to finance the budgetary

deficit of the central & state govt.

Commercial banks increase credit in the economy.

RBI & commercial banks issue domestic currency inexchange for foreign (F/E )remittances from abroad.

Reduction in SLR & CRR of commercial banks


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Con.. Money supply growth rate is one of the reliable

indicators of potential inflation.


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Foreign Trade High rate of growth of foreign trade from last 10 years.

Indias export & import are growing at 25-30% p.a

Export as a % of GDP increasing constantly last 5years.

FT of a country not only affects its NI but also is anindication of its openness and competitiveness in the

world markets.


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Con.. FT as a % of NI is commonly used as a measure of

countrys globalisation.

A high level of FT is viewed favourably by domesticexport firms and MNCs with international businessoperations.

It is indication of competitive conditions,economic

liberalisation and positive attitude of the Govt.towards globalisation


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Con..A country with low imports and exports indicates its

inward orientation,and poor international andeconomic relations.

(EXIM as a% of NI orientation)


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Foreign Trade Policy Policy for 5 years (2004-09)announced on 31st 2004

takes a integrated view of the overall development ofIndias FT.

Key strategies are:

Control Removal (import)

Simplifying the process

Creating an atmosphere of trust and transparency.


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Objective To double Indias % share of global merchandise trade

by 2009.

To act as effective instrument of economic growth bygiving a thrust to employment generation,especially insemi-urban and rural areas


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Indicators of FT Growth rate of EXIM

Exports as % of total o/s external debt

Exports as % of external debt service(int+principal)repayments(debt service ratio).

Export as a% of NI

Export as a% of GDP

Imports as a% of F/E reserves


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EXCHANGE RATE Importance

F/E is demanded for imports,

foreign travel, debt servicing,

withdrawals of foreign deposits & investments.

Profit repatriation to other countries

Gifts & donation made to other countries


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Con..A good macro environment is characterised by

exchange rate stability,among other things.

The market by itself does not ensure stability,centralbank of the country has to constantly monitor the F/Emarket and make corrective intervention from time totime.

Exchange rate flactuations bring uncertainity inforeign trade,encourage speculations and discourageinvestment by foreign companies and in exportsectors.


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Con.. The foreign investors dont prefer weak currency areas.

Exchange rate stability is often regarded as a sign ofstable economy and it facilitates business planning aswell.


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F/E reserve It consists of foreign currency assets,gold holdings of

the central bank and SDRs.

F/E reserves of a country indicate its ability to:

Pay for imports

Discharge its external debt liabilities.

Rise fresh borrowings in international market.

Intervene in the F/E market to stabilize its rate ofexchange.


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SDRs

SDRs are the international reserve assets created byIMF.

These are convertible into leading currencies of theworld and are universally acceptable.

Which are used as international unit of account ininternational official transaction.

SDRs are originally created in 1969 at the rate ofSDR1=1 US$.


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Con.. 1971 SDR1=1.086$ it is revised after devaluation of

dollar.

Since 1989 the SDR valuation has been simplified andlinked to the weighted average of 5 leading currenciesof the world Viz.

US$,British Pound,FF,Japanese Yen,Germany Mark.

The weights are periodically revised according to thechanging importance of these currencies in the worldeconomy.


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Con.. SDRs are created according to the needs of

international liquidity of the world economy and aredistributed to the member countries in proportion to

their contribution to the IMF. To project a good image of the economy,most Govt.

particularly in less developed countries,wouldmaintain a comfortable level of reserves even by

borrowing from abroad .


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Con.. That is why a good level of reserves is often seen co-

exist with a high level of external indebtedness.

Ex.In 2002 april Indias F/E reserve stood at acomfortable level of $55 billion where as its o/sexternal debt was about $100 billion.


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Con.. Low level of F/E reserve of a country indicates an

imminent & substantial devaluation of currency, F/Ecrises and heavy restrictions on imports and outward

remittances.All these signs indicate a negative macro environment,

requiring strong and sweeping policy measures toalleviate the situation.


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Economic Infrastructure Economic infrastructure is the foundation on which

various economic activities take place.

The importance of infrastructure are :

Fuller utilisation of existing and potential.

Support directly to productive activities.

Employment generation & poverty reduction

Balanced regional development Free movement of goods,services and factors of

production


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Con.. Coping with increasing population and demand.

Product diversification

Expansion of domestic & international trade Environmental improvement.

Improve quality of life

Quality infrastructure-huge investment-tax holidays-

flexibility in operation


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Infrastructure TransportationRoad

Rail

Water/seaAir

Communication

postal

TelephoneInternet

mobile


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Con.. Financial sector

Energy

Coal

Petroleum

electricity


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Social Indicators Govt & non-govt organisations are actively involved in

social developments,it is directly related to humandevelopment like

Education

Training

Health care

Family welfare

Social security & social welfare


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Con.. Specific programmes targeted at women,children,old

population,backward & economically poor classes &rural masses.


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ECONOMIC SYSTEMS Market Economy/free economy

It operates in a free market and is not planned orcontrolled by a central authority.

Planned economy/command economy

The Govt. controlls most of the factors of productionand makes of the production decisions,it means strong

Govt.control over the economy on the premise thatindividual wishes are secondary.


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MIXED ECONOMY The equal importance given to public and private

sectors


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SWOT Analysis of Indian EconomySTRENGTHS

Huge pool of labour force

High % of cultivable land

Diversified nature of the economy

Huge english speaking population,availability ofskilled manpower

Stable economy does not get affected by externalchanges


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Con.. Extensive higher education system,third largest

reservoir of engineers

High growth rate of economy

Rapid growth of IT and BPO sector bringing valuableF/E

Abundance of natural resources


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WeaknessVery high % of workforce involved in agriculture which

contributes less % to GDP.

Around a quarter of a population below the poverty

line.

High unemployment rate

Inequality in prevailing socio economic conditions.

Poor infrastructural facilities


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Con.. Low productivity

Huge population leading to scarcity of resources

Low level of mechanization.

Low literacy rates

Unequal distribution of wealth

Rural-urban divide,leading to inequality in living

standards


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Opportunities Scope for entry of private firms in various sectors for

business.

Inflow of FDI is likely to increase in many sectors

Huge foreign exchange earning prospect in IT andITES sector

Investment in R&D ,engineering design

Area of biotechnology


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threats High fiscal deficit

Threat of Govt. intervention in some states

Volatility in crude oil prices across the world

Growing import bill

Population explosion,rate of growth of population stillhigh

Agriculture excessively dependent on monsoon


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Key Indicators of Economic Perspectives

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