I S S U

OFMICRO

ECONOMICS

E

GROUP 3

Santosh Singh

Rahul nadarajan

Prasanna Nair

Sagar sawant

Rajesh Mudaliyar

INDEX1. Inflation

2. Unemployment and Poverty3. Maintaining High Rate of Economic Growth

4. Preventing Business Cycle5. Budgetary Deficit

Unemployment & PovertyUnemployment Is enforced Idleness of the workforce who are able and willing to work but cannot find jobs

Unemployment is often used as a measure of the health of the economy.

The most frequently cited measure of unemployment is the unemployment rate.

This is the number of unemployed persons divided by the number of people in the labor force.

Unemployment & Poverty1) In a slow or diminishing economy, consumers

begin reducing their consumption, causing businesses to lay off workers

2) Employers expenses start rising, so to cut costs they lay off workers

3) Hazardous, discriminatory practices, domestic violence victimization, or toxic working conditions cause people to leave

4) Spouses get re-located causing a working spouse to quit their job to follow the spouse, etc.

5) Companies out-source their work to other locations (even out of the country)

6) Natural attrition, without hiring to fill the vacancies, etc.

Unemployment & Poverty

Unemployment & Poverty1) There aren’t enough jobs.

2) Fewer new jobs & Youth Unemployment In India

3) Shifting Industry Priorities Have Exacerbated the Problem of Unemployment in India

4) Unemployment Problems in India as a result of the commoditization of the green revolution

5) Educated Unemployment in India – Can read and write but unable to find a stable job

6) Rural-Urban Migration And Figuring Out why Indian Agriculture Can Solve India’s Unemployment

Unemployment & PovertyIn the set up of a modern market economy, there are many

factors, which contribute to unemployment. Causes of unemployment are varied and it may be due to the following factors:

Rapid changes in technology Recessions Inflation Disability Undulating business cycles Changes in tastes as well as alterations in the climatic conditions. This may in turn lead to decline in demand for certain services as well as products. Attitude towards employers Willingness to work Perception of employeesEmployee values Discriminating factors in the place of work (may include discrimination on the basis of age, class, ethnicity, color and race). Ability to look for employment

Unemployment & PovertyThe factors discussed may be categorized into the

following:

Cyclical Unemployment

Structural Unemployment

Agricultural Activities

Hard Core Unemployment

Disguised Unemployment

Seasonal Unemployment

Unemployment & PovertyStabilization Policy

A macroeconomic strategy enacted by governments and central banks to keep economic growth stable, along with price levels and unemployment. Ongoing stabilization policy includes monitoring the business cycle and adjusting benchmark interest rates to control aggregate demand in the economy. The goal is to avoid erratic changes in total output, as measured by Gross Domestic Product (GDP) and large changes in inflation; stabilization of these factors generally leads to moderate changes in the employment rate as well.

Measures to Prevent/ Remove/ Control Unemployment & Poverty

Adoption of Labour Intensive Techniques

Rapid IndustrializationPopulation Control

Re-orientation of Education System

Extension of Social Services

Decentralization

Encouragement to Small Enterprises

Guiding Centers and More Employment Exchanges

Rural Development Schemes

Why China Better Economic or Social factor Units China India

Total Area (out of which water) millions of sq km 9.60 (2.8%) 3.29 (9.5%)

Arable Land millions of sq km 1.48 1.79

Irrigated Land millions of sq km 0.53 0.61

Railways - length in km '000 71.9 63.23

Roadways - paved - length in km '000 1447 2411

Waterways - length in km '000 123 14.5

Natural Gas - Proved Reserves in billion cu m 2530 854

Oil - Proved Reserves billion bbl 18.6 5.7

Coastline in km 14500 7000

Steel Production million tons/year 280 45

Food grain production million tons/year 418 210

Cement Production million tons/year 650 150

Crude Oil production million tons/year 180 40

Coal Production million tons/year 1300 300

Electricity generated Billions of Kilowatts 2190 557

Transmission & distribution losses as % of total power 6.8 23.4

Electricity tariff US$ / 100 KW 4 to 5 8 to 10

Cost of commercial borrowing as % interest/ year 41096 42583

Telephone lines connected millions 311 67

TV sets in households millions 500 85

Mobile/cellular phones millions 400 100

Internet users millions 111 51

Foreign trade (China+HongKong) US$ billions/year 1038+923=1961 260

External debt (China+Hong Kong) US$ billions 242+416= 658 120

Why China Better Economic or Social factor Units China India

Exports (China+HongKong) US$ billions/year 752+286= 1038 120

Imports (China + HongKong) US$ billions/year 632+291= 923 138

Tourist Arrivals millions/year 87 4

TV broadcast stations numbers 3240 562

FDI inflow (China + Hong Kong) US$ billions/year 106 8

Forex Reserves (China+Hong Kong) US$ billions 1017+122= 1,139 175

GDP (China+Hong Kong) US$ billions 2102+179= 2,281 750

GDP Growth (2006) in % rate over last year 9.3 7.9

Labour Composition Agriculture %/Industry %/ Services % 49/22/29 60/17/23

Population millions 1314 1095

Population increase per year millions 7.2 15.3

Birth rate Numbers per 1000 13 22

Per Capita income US$ per year/person 1498 658

Life expectancy Years 74 64

Investment % of GDP 44 25

Poverty line - numbers %/Numbers in millions 10/131 25/273

Inflation Rate % 1.9 4.6

Median age Numbar of years 33 25

Population Growth Rate % of population 0.59 1.38

GDP (PPP) US$ billions 8182 3699

GDP (PPP) per person US$ per person/year 6300 3400

Fertility Rate children born/woman 1.73 2.73

Literacy Rate - Definied as age 15 and over can read & write - % of Pop 91 60

Death Rate Rate per 1,000 pop 6.97 8.18

Public Debt % of GDP 29 82

Unemployment rate % of workforce 20 30

Labour force in millions 797 496

What is Inflation?

Inflation is when the prices of most goods and services continue to creep upward. When this happens, your standard of living falls. That's because each dollar buys less, so you have to spend more to get the same goods and services

States of Inflation : Deflation

Hyperinflation Stagflation Disinflation

Causes for Inflation

Increase In Public Expenditure Increase In Private Expenditure Increase in Money supply Rise in disposable income Increase in consumer spending Deficit Financing Black Money Increase in Exports Repayment of Public Debt

Factors Causing an Increase in Demand

Factors Causing an Increase in Demand

Factors Causing a Decrease in Supply

Shortage supply of FOP Industrial Disputes Natural Calamities Hoarding by Traders Hoarding by Consumers Increase in Exports International Factors Lop-sided production

Factors Causing a Decrease in Supply

Causes for Inflation Factors Causing an Increase in

Demand Factors Causing a Decrease in

Supply

Effects of Inflation

Poor Educational standards Poor Infrastructure Balance of Payment deterioration High levels of debt Demand for pay hikes and wage increases Social tensions Exchange rate falls Interest may rise

MEASURES TO SOLVE INFLATION

MONETARY MEASURES OTHER

MEASURES

Credit control

Increase in production Price Control Rationing

FISCAL MEASURES

Decrease in Public expenditure Increase in Savings Increase in taxes Surplus Budgets Public Debt

Achieving and Maintaining high rate of economic growth

Economic growth- An increase in the capacity of an economy to produce goods and services, compared from one period of time to another.

Measured in 2 ways:i) conventionally – percent rate of increase in GDP,ii) real terms – adjusted inflation.

A measure of economic growth from one period to another in percentage terms is rate of economic growth. 

1) Capital flows and the stock market

2) Global currency trends

3) RBI Intervention

4) Political factors

5) Oil factors

Factors affecting economic growth in India

Achieving high rate of economic growth

1) Accountable governments

2) Open and effective markets

3) Infrastructure

4) Capable human capital

5) Equality of opportunity

6) Sound environmental management

Maintaining high rate of economic growth

Identifying viable opportunities and key challenges limiting economic growth

Effective policies and institutions, political stability, transparent and adequate enforced laws, sound public financial systems and reduction of corruption.

Good infrastructure- Adequate transport systems, availability of reliable energy and communication technologies.

A skilled workforce with good education to men and women both.

Investments in all the facets of agriculture.

Environmental management.

Higher living standards

Employment effects

Fiscal dividend

The investment accelerator effect

Growth and business confidences

Benefits

Two years ago, the global boom, the IT revolution, and all round optimisms led many to believe that India can gain a rate of 9 to 10% growth..but India’s current rate of economic growth is 6.5%

India today

2.7

Case study

17 % of the national income of India comes through the agricultural sector

In 1980’s the Green Revolution had gained momentum enabling 3.77% annual growth in agricultural production but it gradually degraded to 2.72% in 1990’s owing to reduction in public investment in agriculture and agricultural research. India needs to sustain a growth rate of 4 to 4.5% for achieving and maintaining high rate of economic growth.

Such an achievement is well within reach, provided there is requisite commitment in areas such as greater public investments in research and development and commercialization, infrastructure like transport facilities and markets, improved farmer education etc.

BUSINESS CYCLE

Business Cycles are the recurring, but irregular, expansions and contractions of economic activity in the macro economy. While business cycles are frequently measured by real gross domestic product, they show up in many aggregate measures of economic activity, including the unemployment rate, the inflation rate, consumption expenditures, and tax collections, to name just a few.

Meaning

A cycle consists of:• Expansions• Contractions• Recessions• Revivals which merge into the expansion phase of the next cycle.

CAUSES OF BUSINESS CYCLE

Economics Causes: Change in Government Policies such as:

Tax Rates Interest Rates effecting Capital

Investment High in military expenditure by Govt.

especially during war-time Change in Foreign trade due to trade

barriers Non-economic Causes:

Natural Disasters like Drought, Weather conditions

Man-made Disasters like shock of 09/11 at U.S., War, Structural Changes (technology), etc.

Political Elections

MEASURES TO STABILIZE BUSINESS CYCLE

• Economic Policies are undertaken by governments to counteract business-cycle fluctuations and prevent high rates of unemployment and inflation.

1) The two most common stabilization policies are:• Monetary Policy• Fiscal Policy

2) The other policies include:• Physical Controls• Miscellaneous measures

MONETARY POLICY• Monetary Policy is employed by the Government as an effective tool to promote the economic stability and achieve certain predetermined objectives.

• It deals with the total money supply and its management in an economy.

• Monetary Policy is an action undertaken by the monetary authorities generally the Central Bank to control and regulate the supply of money with the public and the flow of credit with a view to achieving economic stability.

OBJECTIVES OF MONETARY POLICY

The general objectives of Monetary Policy are as under:

• Price Stability• Exchange Rate Stability• Control of Trade Cycles• Full Employment• Inducement to Savings• Equilibrium in the Balance of Payments• Rapid Economic Growth• Creation and Expansion of Financial Institutions• Debt Management• Long Term loan for Industrial Development

MONETARY POLICY TO CONTROL INFLATION

• Reduce the aggregate spending. Monetary policy can help in reducing the pressure on demand.

• During Inflation, raise the cost of borrowing and reduce credit creation capacity of the banks, thus making them more cautious in their lending policies.

• Rise the Bank rate, raising the interest rates, not only makes the borrowing costly but will also have an adverse psychological effect on business confidence.

MONETARY POLICY to check DEFLATION

• Deflation is a matter of falling prices.

• It arise when the total expenditure of the community is not equal to the value of the output at existing prices.

• Consequently the value of money goes up and prices fall down.

• Deflation has an adverse effect on the level of production, business activity and employment.

• The monetary Authority can only encourage the business enterprises and the lower interest rate may only improve the state of liquidity in the economy.

FISCAL POLICY

• Fiscal Policy is represented by the executive and legislative branches of government and captures changes in Taxes and Government spending.

• If the economy is in a recession, a combination of tax cuts and increases in government spending can stimulate economic activity.

OBJECTIVES OF FISCAL POLICY

The general objectives of Fiscal Policy are as under:

• Helps to formulate a rational consumption policy• Raise the rate of Savings• Break the vicious circle of poverty• Raise the volume of investment• Reduce economic inequalities• To control the operations of the Business Cycle• To control Inflation and Deflation• To create more job opportunities• To Raise living standard

FISCAL POLICY TO CONTROL INFLATION

• Unessential and unproductive expenses of the Government should be cut down

• Taxation as an anti-inflationary measure should be used carefully

• Public borrowing from Non Banking lenders

• Reduction in Personal Income tax and corporate tax

• Increase in Public expenditure

• Encouraging Investment in public work programs, social and economic overheads

• Social Security Schemes, unemployment insurance, pension, subsidies should be provided.

FISCAL POLICY TO CONTROL DEFLATION

PHYSICAL POLICY

• When monetary and fiscal measures are inadequate to control prices government resorts to direct control.

• During wars etc. when inflationary force are strong, price control involve imposing ceilings in respect of certain prices and prices are to be stopped from rising too high

• Price control is done by control of distribution of commodities through rationing.

• Under certain circumstances government may even resort to dual pricing.

INSTRUMENTS OF PHYSICAL POLICY

• Direct controls are imposed by govt. to ensure proper allocation of scarce resources like food, raw materials, consumer goods, capital goods etc.

• Govt. can strictly forbid or restrict certain kinds of investments or economic activity.

• During the period of inflation govt. can directly exercise control over prices and wages.

• Monetary and fiscal controls will have a general impact on the economy while physical controls can be employed to affect specific scarcity areas.

TYPES OF DIRECT CONTROL

Control over consumption and distribution through price control and rationing.

Control over investment and production through licensing and fixing of quotas etc.

Control over Foreign Trade through import control, import quotas, export control, etc.

Dual Pricing – Wherein two prices prevail in the market at the same time for the same product, out of which one is the controlled price for the lower income group and the other is a free market price determined by the conditions of demand and supply.

Administered Prices - Fixed by the Government for a few goods which serve as raw materials for other industries.

MISCELLANEOUS MEASURES

BUDGETARY DEFICIT

When the government expenditure exceeds revenues, the government is having a budget deficit. Thus the budget deficit is the excess of government expenditures over government receipts (income). When the government is running a deficit, it is spending more than it's receipts The government finances its deficit mainly by borrowing from the public, through selling bonds, it is also financed by borrowing from the Central Bank.

Meaning

TYPES OF DEFICIT

Revenue Deficit

Fiscal Deficit

Primary Deficit

Budgetary Deficit

Monetised Deficit

REVENUE DEFICIT

Meaning

Revenue Deficit takes place when the revenue expenditure is more than revenue receipts. The revenue receipts come from direct & indirect taxes and also by way of non-tax revenue. The revenue expenditure takes place on account of administrative expenses, interest payment, defence expenditure & subsidies.

CAUSES OF REVENUE DEFICT IN INDIA

Population Growth

Increase in Government Administration

Surplus Government Staff

Non- Planned Expenditure

Natural Calamities

Political Rules

High Rate of Interest Payment

EFFECTS OF REVENUE DEFICIT

Less Revenue

Borrowing Loan from

World Bank and

IMF

High Rate of Interest

Interest Payment is a part

of Revenue Expendit

ure

Leads to Revenue

Expenditure

1

2

34

5

Financial Year

% of GDP

2004-2005 2.4

2009-2010 4.6

2010-2011 4.3

TABULAR REPRESENTATION OF REVENUE DEFICIT

FISCAL BUDGET

Meaning

Fiscal Deficit is a difference between total expenditure (both revenue and capital) and revenue receipts plus certain non-debt capital receipts like recovery of loans, proceeds from disinvestment.

In 1980, the growing burden of non-development expenditure caused deterioration in the fiscal situation of India. Later this resulted in a fiscal crisis at the beginning of 1991-1992.

CAUSES OF FISCAL CRISIS

1. Increase in Subsidies

2. Payment of Interest

3. Defence Expenditure

4. Poor Performance of Public Sector

5. Excessive Government borrowings

6. Tax Evasion

7. Weak Revenue Mobilization

8. Huge Borrowings

EFFECTS OF FISCAL CRISIS

1. Debt Trap

2. Cut in Capital Expenditure

3. No Increase in Expenditure on Education and

4. Health

5. High Interest Rates

6. Slow Economic Growth

7. Other Consequenceso Inflationo Discourage Foreign Investment

Financial Year

% of GDP

2001-2002 6.2

2009-2010 6.5

2010-2011 5.7

TABULAR REPRESENTATION OF

FISCAL DEFICIT

From the above table, it is clear that fiscal deficit is about 4.1% of GDP. Overall the revenue deficit has declined from 3.3% in 1990-91 to 2.7% of GDP in 2005-06.

MEASURES TO IMBALANCE FISCAL DEFICIT