KEY ECONOMIC PARAMETERS

ECONOMIC POLICY AND GOVERNMENT

GDP

INFLATION

INTEREST RATES
EXCHANGE RATES

KEY ECONOMIC PARAMETERS

GDP(1/2)
It is the total market value of all final goods and

services produced in a country in a given year.

It includes

Production by American or Japanese Company in India Production by Indian Company outside India

It excludes

The most important question to ask is WHERE IS

IT PRODUCED

GDP (2/2)
It can be measured in 3 ways

It is the sum total of all the expenditure on all final goods and services produced It is the sum total of all the income generated by production in the country It is the sum total of value added at every stage of production of goods and services

GDP = consumption + gross investment + government spending +

(exports imports)

GDP = C + I + G + (X M).

Demerits of the measure

Doesnt include own consumed production Doesnt include house-wifes work at home Doesnt include underground economy

INFLATION
Rate of change in Prices: Factors affecting this will be

discussed later
Price Indexes GDP Deflator Consumer Price Index (CPI) Wholesale Price Index (WPI)

Difference b/w WPI and CPI

Learn to distinguish between

Disinflation / Deflation / Stagflation / Hyperinflation /

EXCHANGE RATES

Fixed Determined by Central Bank

Floating Market-determined
Effect of Currency Appreciation (Rs/$ goes from 50 to 40) Costly Exports: A Rs 50 Chocolate which costs $1 would now cost $1.25 Cheap Imports: Oil barrel ($100) costing Rs 5K would now cost Rs 4K Decreased Interest burden for the government loan in international market
What would be the effect of Currency Depreciation

THE BUDGET

MONETARY POLICY

FISCAL POLICY

MANAGING DEFICIT

DISINVESTMENT

ECONOMIC POLICY & GOVERNMENT

THE BUDGET
Revenue Deficit = Revenue Exp.

Revenue Receipts (Tax + Non -Tax)

(Plan + Non - Plan)

Fiscal Deficit

= Total Expenditure - ( Revenue Receipts

(Rev.+ Cap. Exp.) +Recovery of Loans +Receipts from PSU

Disinvestment)
Primary Deficit

= Fiscal Deficit - Interest Payments

Definition & the Process

Fiscal policy is the manipulation of government spending and taxation.

The Budget Deficit

A governments budget deficit is the

difference between what it spends (G) and what it collects in taxes (T) in a given period:

Budget deficit G T
If G exceeds T, the government must borrow from the public to finance the deficit. It does so by selling Treasury bonds and bills. In this case, a part of household saving (S) goes to the government.

ECONOMIC POLICY
Monetary Policy Key rates of the economy Money Growth vs Inflation Targeting Money Multiplier Fiscal Policy Managing Government Revenue Managing Government Expenditure Crowding Out Effect: less availibilty of money for

private company due to low liquidity in market

Policies

Fiscal
Manage Growth Rate Manage Employment

Monetary
Stabilize Economy Manage Inflation
Repo CRR
Open Market Ops

Tools

Govt. Expenses Subsidies/ Taxes

Tools

Monetary Policy

Monetary Policy

Targets
Inflation Money Supply

Instruments
Repo CRR Sterilization

Indicators
Interest Ex rate

KEY INTEREST RATES

CRR- Cash reserve ratio Minimum %age in form of cash and deposits Repo rate Rate at which banks borrows from RBI Reverse repo rate Call money market rate Inter-bank lending rate SLR- Statutory Liquidity ratio Min %age in form of govt. securities

BALANCE OF PAYMENTS
Record of all the transactions made between the country and rest of the world. Current A/C

Deals with exports and imports of goods, services and transfers Capital A/C Accounts the international capital flowing in and out of the domestic country

See more details of current Account & Capital Account Forex Reserves

on next slide

Liquid assets held by a central bank or government of a country, for use in intervening in the foreign exchange market. Includes

Countrys gold holdings Convertible foreign currencies Exchange reserves balances with International Monetary Fund (IMF)

FISCAL DEFICIT
Budget 2012-13 Fiscal deficit projected at 5.1 per cent of GDP FRBM Act Revenue Deficit to 0% by 2009-10 Fiscal Deficit to 3% by 2008-09 Disinvestment, Sale of 3G Spectrum,PSU

stocks(ONGC,NTPC,SAIL,OIL ) Cause Economic Downturn Increased Government Spending That lead to reduce the current fiscal deficit

THE GREAT DEPRESSION

ECONOMIC PERSPECTIVES

A PEEP INTO THE PAST