CONCEPT OF ECONOMY

Broadly, the concept of Economy helps one understand the prevailing status as regards: q GDP / GNP /NNP / National Income q Per Capita Income q Contribution of each sector to the Economy / GDP q State of economic development (developing / developed) q R & D and State of Technology q Productivity

CONCEPT OF ECONOMY

q q q q q Soft

Role of Private / Public Sector Savings and Investment Capital Formation Income distribution & poverty Infrastructure Physical Infrastructure / Institutional Infrastructure

CONCEPT OF ECONOMY

Q Share in Global Trade & BoT/BoP q Imports / Exports

(Primary / Industrial / Capital Goods)

q Foreign Exchange Reserves Q Strength of National Currency in International Markets q Population Growth & Urbanisation q Human Capital q Employment / Unemployment levels and Occupational Structure

ECONOMIC POLICY

The Economic Policy broadly consists of : Fiscal Policy Monetary Policy

FISCAL POLICY

The Fiscal Policy manifests itself in the form of Budget and Budgetary Provisions presented by the National Government and can be said to be the economic expression of the governments political philosophy.

FISCAL POLICY

It encompasses areas such as government income / expenditure, budget deficit, public debt /borrowings, subsidies / grants, tax structure, balance of trade / payment, social sector priorities / activities, role of government ( command / marketdriven), foreign investments etc.

MONETARY POLICY

Monetary Policy, also described as money and credit policy, concerns itself with the supply of money as also of credit to the economy. The monetary policy is devised / designed by the central banking authority and pertains to such matters as money supply, interest rates, bank rate, cash reserve ratio, capital adequacy, inflation etc.

ECONOMIC GOALS:

Efficiency & Effectiveness (Technological & Allocative) Growth Price Stability Competitiveness Low rate of unemployment Equitable distribution of income

MACRO ECONOMIC CONCEPTS:

The concepts of Gross Domestic Product (GDP), Gross National Product (GNP), Net Domestic Product (NDP), Net National Product (NNP) and National Income mirror the macro flows of goods and services and the economic structure of the economy, during a specific time period, normally a year.

WHAT IS DOMESTIC PRODUCT?

Domestic Product = Personal Consumption Expenditure (C) PLUS Domestic Investment (I) PLUS Government Expenditures for current goods and services (G) PLUS Exports of goods and services (X) MINUS Imports of goods and services (M) Therefore, in symbols, DP = C + I + G + X M

Gross Domestic Product

The GDP measures the total (money) value of final output of goods and services produced within the countrys domestic economy by residents and non-residents

Gross National Product

The Gross National Product comprises of the (money) value of GDP plus factor-income accruing to residents from abroad, less the income earned in the domestic economy accruing to persons abroad. In other words, GNP measures the total domestic and foreign output claimed by residents / nationals of a country.

NDP / NNP

NDP Net Domestic Product is the GDP minus depreciation ( reduction in the value of assets through wear and tear). NNP Net National Product is GNP minus depreciation.

NATIONAL INCOME

NNP, when calculated at factor cost, is called National Income. National Income, in a way, is the sum of all income derived from supplying the factors of production. It includes wages and salaries, rents, interest and profits.

NATIONAL INCOME

NATIONAL INCOME IS A MEASURE OF TOTAL OUTPUT OF COMMODITIES AND SERVICES DURING A GIVEN PERIOD WITHOUT DUPLICATION

NATIONAL INCOME

IN INDIA, NATIONAL INCOME IS DEFINED AS TOTALITY OF PRODUCTION , BOTH MATERIAL AND NON-MATERIAL. IN INDIA, THE CSO COMPILES DATA AS REGARDS NATIONAL INCOME

NATIONAL INCOME
CSO CLASSIFIES INDIAN ECONOMY INTO SIX BROAD SECTORS: 1. PRIMARY SECTOR 2. SECONDARY SECTOR 3. TRANSPORT/COMMUNICATIONS/TRADE 4. FINANCE & REAL ESTATE 5. COMMUNITY & PERSONAL SERVICES 6. FOREIGN SECTOR

NATIONAL INCOME
1.PRIMARY SECTOR CONSISTS OF:

AGRICULTURE FORESTRY & LOGGING FISHING MINING & QUARRYING

NATIONAL INCOME
2. SECONDARY SECTOR CONSISTS OF:
q

q
q

MANUFACTURING (REGD./UNREGD.) CONSTRUCTION SUPPLY OF ELECTRICITY, GAS, WATER

NATIONAL INCOME
3.TRANSPORT / COMMUNICATION /

TRADE SECTOR CONSISTS OF: TRANSPORT COMMUNICATION STORAGE RAILWAYS TRADES, HOTELS & RESTAURANTS

NATIONAL INCOME
4. FINANCE & REAL ESTATE SECTOR

CONSISTS OF: BANKING INSURANCE BUSINESS SERVICES REAL ESTATE

NATIONAL INCOME
5. COMMUNITY & PERSONAL SERVICES
SECTOR CONSIST OF: q PUBLIC ADMINISTRATION q DEFENCE q OTHER SERVICES 6. THE FOREIGN SECTOR COVERS THE ACTIVITIES RELATED WITH FOREIGN SECTOR

NATIONAL INCOME

THE COMBINED GROSS OUTPUT IN THE SECTORS 1 TO 5 (viz. PRIMARY SECTOR , SECONDARY SECTOR, TRANSPORT / COMMUNICATION / TRADE , FINANCE & REAL ESTATE, COMMUNITY & PESONAL SERVICES) IS CALLED THE GROSS DOMESTIC PRODUCT AT FACTOR COST

NATIONAL INCOME

THE GROSS NATIONAL PRODUCT IS ARRIVED BY ADDING THE NET FACTOR INCOME FROM ABROAD TO GDP AT FACTOR COST

NATIONAL INCOME MEASUREMENT

NATIONAL INCOME COULD BE MEASURED BY THREE METHODS AS FOLLOWS: THE INCOME APPROACH THE EXPENDITURE APPROACH THE OUTPUT APPROACH

INCOME APPROACH

ACCORDING TO THIS APPROACH, TOTAL OUTPUT COULD BE LOOKED INTO / AT IN TERMS OF THE INCOMES GENERATED IN THE PROCESS OF PRODUCING OUTPUT LIKE WAGES, SALARIES, GROSS TRADING PROFITS, INCOME OF SELF-EMPLOYED, RENT, CAPITAL CONSUMPTION (DEPRECIATION)

EXPENDITURE METHOD

UNDER THIS APPROACH, THE NATIONS TOTAL OUTPUT IS ARRIVED AT BY ADDING UP THE EXPENDITURE OR OUTLAYS NEEDED TO PURCHASE ALL OF THE FINAL OUTPUT OF THE ECONOMY ( GOVT. EXPENDITURE / INVESTMENT / CONSUMPTION etc.)

OUTUT APPROACH

IT INCLUDES: AGRICULTURE, FISHING & FORESTRY ENERGY, WATER, CONSTRUCTION MANUFACTURING, TRANSPORT COMMUNICATION, FIN. SERVICES DISTRIBUTION, HEALTH, EDUCATION GOVT., DEFENCE, OTHER SERVICES

NATIONAL INCOME
WE MUST REMEMBER THAT IN ALL THREE APPROACHES, THE TOTAL VALUE OF NATIONAL OUTPUT AT MARKET PRICES IS SAME HENCE :O =Y = E, WHERE, O = AGGREGATE OUTPUT Y = INCOME GENERATED BY O E = EXP. INCURRED TO PURCHASE O

NATIONAL INCOME

NATIONAL INCOME DATA IS USED FOR: ECONOMIC PLANNING REGULATION OF ECONOMY COMPARING PER CAPITA / STANDARD OF LIVING (OWN / OTHERS) MEASURING NATIONAL ECONOMIC GROWTH

DIFFICULTIES IN ESTIMATIONG NATIONAL INCOME

CONCEPTUAL PROBLEMS:

WHETHER SERVICES SHOULD BE INCLUDED IN NATIONAL INCOME OR NOT WHAT ABOUT ADMINISTRATIVE SERVICES TO PRODUCERS AAAAND CONSUMERS?

DIFFICULTIES IN ESTIMATING NATIONAL INCOME

PRACTICAL PROBLEMS: PRESENCE OF LARGE NON-MONETISED SECTOR LACK OF APPROPRIATE & RELIABLE DATA UNREPORTED ILLEGAL INCOME REGIONAL DISPARITIES DIFFICULTIES IN CLASSIFICATION OF WORKING POPULATION

Per Capita Income

Per Capita Income refers to average per capita income of a country. The Per Capita Income is arrived at by dividing the National Income of a country by its population. An increase in the Per Capita Income indicates a rise in the availability of goods and services and for this reason is often used as an index of welfare of the people.

INFLATION:

During the late 1970s and the second half of 1980s, inflation became a major problem. However, more often than not, inflation is misunderstood as price rise alone. It is therefore important to distinguish between a rise in the average level of prices (inflation) and a change in relative / temporary prices. Inflation is an increase in the average level of prices. Deflation is a fall in the average price level .

TYPES OF INFLATION

Inflation could be Creeping Inflation, Galloping Inflation, or Hyper Inflation. It could also be attributed to Push Factors or Pull Factors.

WHAT IS INFLATION?

INFLATION OCCURS WHEN THE GENERAL LEVEL OF PRICES AND COSTS IS RISING RISING PRICES FOR BREAD, GASOLINE, CARS; RISING WAGES, LAND PRICES, RENTALS ON CAPITAL GOODS PROF. PAUL SAMUELSON

WHAT IS INFLATION?

INFLATION IS A PROCESS OF STEADY AND SUSTAINED RISE IN PRICES PROF. MILTON FRIEDMAN

IMPACT OF INFLATION

While there is considerable controversy about whether any inflationary pressures should be allowed to be built / developed in an economy, there seems to be a general consensus that a moderate rate of inflation may actually be good for the economy as it is felt that a smaller rate of inflation makes it easier for the economy to adjust to changes and to maintain a high level of employment.

IMPACT OF INFLATION
q

# Inter-sectoral terms of the trade adversely affect the poor. # Balance of payments go into deficit. # Consumption levels of the poor are reduced and the conditions of the poor deteriorates. # Inequalities in income rise # Development of the economy gets a setback as Investment & Savings suffer.

BUSINESS CYCLE

BUSINESS / TRADE CYCLES, BOOMS & SLUMPS ARE TYPICAL OF A MARKET ECONOMY THEY INFLUENCE BUSINESS DECISIONS & ALSO AFFECT THE FUTURE BUSINESS GROWTH / TRENDS BUSINESS CYCLE, THEREFORE, IS BOTH A THREAT & AN OPPORTUNITY

BUSINESS CYCLE

IT IS A FLUCTUATION IN AGGREGATE ECONOMIC ACTIVITY IT IS AN ALTERATION OF PERIODS OF PROSPERITY & DEPRESSION, OF GOOD TRADE & BAD TRADE IT IS COMPOSED OF PERIODS OF GOOD TRADE CHARACTERISED BY RISING PRICES & LOW UNEMPLOYMENT, ALTERING WITH PERIODS OF BAD TRADE CHARACTERISED BY FALLING PRICES & HIGH UNEMPLOYMENT PERCENTAGES

BUSINESS CYCLE : FEATURES

A TRADE CYCLE IS WAVE-LIKE MOVEMENT CYCLICAL FLUCTUATIONS ARE RECURRENT IN NATURE EXPANSION & CONTRACTION IN A TRADE CYCLE HAVE CUMULATIVE EFFECT TRADE CYCLES ARE ALL-PERVADING IN THEIR IMPACT

BUSINESS CYCLE : FEATURES

A TRADE CYCLE IS CHARACTERISED BY PRESENCE OF CRISIS I.e. PEAK & TROUGH ARE NOT SYMMETRICAL & DOWNWARD MOVEMENT IS MORE SUDDEN / VIOLENT THOUGH TRADE CYCLES DIFFER IN TIMING & AMPLITUDE,THEY HAVE A COMMON PATTERN OF PHASES WHICH ARE SEQUENCIAL IN NATURE

BUSINESS CYCLE: PHASES

EXPANSION PEAK RECESSION TROUGH RECOVERY & EXPANSION

EXPANSION

RISING NATIONAL OUTPUT RISE IN CONSUMER / CAPITAL EXPENDITURE RISE IN EMPLOYMENT LEVELS EXPANSION IN BANK CREDIT

PEAK / BOOM

INPUTS START FALLING SHORT OF DEMAND WAGE RATES RISE, LABOUR MARKET BECOMING SELLERS MARKET INPUT PRICES (ALL INPUTS) INCREASE PRICES INCREASE & OVERTAKE THE INCREASE IN HOUSEHOLD INCOME CAPITAL GOODS DEMAND SLACKENS

RECESSION / DEPRESSION

INCREASE IN DEMAND HALTED DISCREPANCY/ INEQUILIBRIUM STARTS CREEPING IN DUE TO HIGH OUTPUT / SUPPLY & STAGNATING / DECLINING DEMAND STARTS FROM FEW INDUSTRIES , MOVING THROUGH THE ECONOMY DECLINE IN INCOME EVIDENT

TROUGH

SLIDE DOWN IN ECONOMIC ACTIVITIES LEVEL OF NATIONAL INCOME & EXPENDITURE DECLINES RAPIDLY STEADY DECLINE IN EMPLOYMENT DECLINE IN DEMAND FOR CAPITAL / CONSUMER GOODS LIQUIDITY /PROFITABILITY PROBLEMS

RECOVERY & EXPANSION

RENOVATION / MODERNISATION STARTS WITH INVESTMENTS SLOWLY COMING IN (CAPITAL / CONSUMER GOODS)

THANK YOU
PRESENTATION

BY JAYANT K. OKE, MANAGEMENT CONSULTANT, PUNE