Economics Briefs

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    KEY ECONOMIC PARAMETERS

    ECONOMIC POLICY AND GOVERNMENT

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    KEY ECONOMIC PARAMETERS

    GDP

    INFLATION

    INTERESTRATES

    EXCHANGERATES

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    GDP(1/2)

    It is the total market value of all final goods andservices produced in a country in a given year.

    It includes

    Production by American or Japanese Company in India

    It excludes

    Production by Indian Company outside India

    The most important question to ask is WHERE ISIT PRODUCED

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    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 ofvalue 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

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    INFLATION

    Rate of change in Prices: Factors affecting this will bediscussed 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 /

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    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 internationalmarket

    What would be the effect of Currency Depreciation

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    ECONOMIC POLICY&

    GOVERNMENT

    THE BUDGET

    MONETARYPOLICY

    FISCAL POLICY

    MANAGING

    DEFICIT

    DISINVESTMENT

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    THE BUDGET

    Revenue Deficit = Revenue Exp. - Revenue Receipts

    (Plan + Non - Plan) (Tax + Non -Tax)

    Fiscal Deficit = Total Expenditure - ( Revenue Receipts

    (Rev.+ Cap. Exp.) +Recovery of Loans

    +Receipts from PSU

    Disinvestment)

    Primary Deficit = Fiscal Deficit - Interest Payments

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    Definition & the Process

    Fiscal policy is the manipulation of government spending andtaxation.

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    The Budget Deficit

    A governments budget deficitis thedifference between what it spends (G) and

    what it collects in taxes (T) in a given period:

    Budget def G Ticit

    IfG 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.

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    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 forprivate company due to low liquidity in market

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    Fiscal

    Manage Growth RateManage Employment

    Govt. Expenses

    Subsidies/ Taxes

    Monetary

    Stabilize Economy

    Manage Inflation

    Repo

    CRR

    Open Market Ops

    Tools Tools

    Policies

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    Monetary Policy

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    Targets

    Inflation Money Supply

    Instruments

    Repo CRR Sterilization

    Indicators

    Interest Ex rate

    Monetary Policy

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    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

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    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 on next slide

    Forex Reserves

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

    Includes Countrys gold holdings

    Convertible foreign currencies

    Exchange reserves balances with International Monetary Fund (IMF)

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    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,PSUstocks(ONGC,NTPC,SAIL,OIL )

    Cause Economic Downturn Increased Government

    Spending

    That lead to reduce the current fiscal deficit

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    A PEEP INTO THE PAST

    THE GREAT

    DEPRESSION

    ECONOMICPERSPECTIVES

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