Keynes said that) AD- DEMAND At height of prosperity,while consumption and investment (30 to 35%) Invest meet percentages came down … Consumption didn’t (check empirical data) Check psychological factor of consumption….. Unemployment vs. output rationality Based on the definition of unemployment Keynes theory Fiscal theories based on Keynes theory Upton sass everything was good. Then oil shock came up. “Philips curve relationship” Then came up Monetarism. They said Inflation is primarily a monetary effect. Monetary policies should be in place They said,they need a stable growth of money supply. Volatility gets changed..
In the short run Do not have fluctuations in money supply. In long run,the nominal variable. Fiscal policy doesn’t play a role. The most recent thought is the Rational expectation thoughts. Anything which is systematic wont work. Unsystematic changes work. Supply side economics – LOAFERS CURVE If you have very high tax rates,it will affect incentive to produce,supply etc. Low tax rates gives more incentives-India has seen some version of the supply side economics implemented on it. Like tax base widening etc. Growth rate Investment and Incremental Capital Output Ratio (IGOR) in Indian context is Savings rate -??Investment rate = 36%
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IGOR = IGOR = I/Q Q- I/IGOR 36/4 Difference between savings and investments = external savings 36. 8+1. 3 = 38. 1 Domestics plus international savings Circular flow model which has 5 different actors/players. Interaction between them.. Savings = leakages echo on track. Output – (Land,Labor,capital) = residual (profit) Output=lonesome=Expenditure If I don’t do a lot of expenditure, we use it for leakages, savings,taxes and imports Leakages = Injections When leakages > injections – contractions When leakages Product method/value added method Income method – add wages,add rent,add interest,add profit Expenditure method – C(house)+I(firms)+g(gobo)+x-m (rest of world) Financial assets investment not added to gap Flip – BALANCE OF PAYMENTS accounts NATIONAL INCOME ACCOUNTS – IN GAP Income method (gap at factor cost) Expenditure method (gap at market prices) Durables,non durables,services – consumptions Pensions,subsidies,scholarships are transfer payments but not in Lieu of current production Government expenses = government purchase plus transfer payments Gobo purchases is taken in this method.. UT not transfer payments Remittances are transfer payments (Saudi guy sending money to India) Analysis Crowding out concept,consumption proportion etc are very important concepts. If consumption is stable, we need to look at the sectors Gap analysis -?? from macro to micro analysis can be done… (consumption goes down,which sector,which segment is driving it etc) Used goods are not counted in gap,financial transactions is not recorded in gap.
Concepts of national income Receipts and payments( be careful) Factor income is wages plus rent plus interest plus profit We are not allowed to invest in property abroad as well as capital, net factor income tends to be negative. Depreciation is used because that part is used up. FCC is received by factors of productions. PM is what buyer pays to sell. Why just indirect taxes? Here it is just taking into account what the seller gets.
Difficult to calculate depreciation,so not IN but GAP is used Disposable income is greater than GAP ( Transfer Payments are high) Fiscal deficit will be high When we look at economic growth of a country – GAP at factor cost (at constant prices) When we look at debt to gap ratio ,deficit to gap ratio ,current account deficit,savings rate,investment rates all these are at current rises (gap at market prices) So relevant concept is gap at market prices at current prices. Why market prices?
Because we are looking at expenditure How was per capita income increased post liberalizing etc? GAP calculation Find out gap deflator value Points from analysis * Output lesser * Manufacturing industry less * Derived demand (services sector) * Agricultural sector output has actually come down GAP at current exchange – convert into dollars at current exchange rate Prices might be different in different countries -?? we use APP Conversion rates. In India it is 0. 41. We are ranked 3rd. National Income identities
S -I = g+try -TA +nix S g+try -TA) – nix=l S + (TA -(g +try)) + (m-x) = I Domestic pet savings + public savings + external savings = investment Current account deficit is a measure of external savings External savings is quite bad in the long run – exchange rate,growth etc will get affected Business cycles are fluctuations,trend ratepayers term fluctuations around the trend rate Trend growth rate Recession 2 successive quarter where output declines- recession- if it persists its a depression When output fluctuates other indicators also fluctuate Investment goes down,employment goes down,consumption goes own,prices have to come down Output changes and price levels Why? * Model of aggregate demand and aggregate supply * How to overcome it? Policy measures – fiscal and monetary AD downwards AS can be upward,vertical,horizontal We take AS as upward/ Why does AD curve slope downwards? What causes shifts in the aggregate demand curve?
When price goes up (here its ICP,whip or any price level) – c changes I changes changes All will move downwards Y will go downwards c- wealth of households reduces-consumption comes down investment effect – rate of interest changes sell stocks assets,price of assets goes down, rate of interest goes p,investment goes down (BP and r are inversely related) Max, exports becomes expensive, imports becomes cheaper,net exports goes down one component which is fixed purchasing manager index pm is the index of business confidence yen is defined as the natural rate of output = natural rate of employment it is the potential output. Booms means ad curve shifts to right (stock market boom,tax incentive etc or some kind of prosperity in your exporting partner nation or increased gobo spending) Sustaining this in the long run is hard Any kind of change in c I g or nix will cause shift in ad curve Explanation : Policy changes leads to shift in AD Curve.
If autonomous measures are there,policy changes brings it back. Economy should be made back to ado. If there was no policy intervention, production of more can be done using overexploitation of capacity, in the long run as will shift upwards till it interests ad which has shifted already. Economy is at you, but higher price In 2008. 2009 We had monetary expansion and fiscal stimulus tried to expand the economy, to avoid contractions-As result of AD going up and up (08-13), growth rate has come down from 9 to 5% and coming back at higher level of inflation. Economy can’t be growing forever just by stimulus packages. What happens when there is supply shock? AS will go down.
Prices go up and output comes down (stagflation) Supply shock which affects AS curve. This can be countered through policy measures. AD can be shifted outwards and can be back to You. Balance of payments,open economy Growth,inflation,exchange rate stability – focus maybe different of RIB during different times 08-09 -growth objective 12-13 -?? inflation controlling Since may – exchange rate stabilization Our system is called managed float – rupee can fluctuate, but rib can step in and intervened to bring from 61 to 59. Cad went from 4. 2 to 4. Coos of gold, services also went down,remittances came down and these 2 were the reasons ,why we didn’t have earlier cushioning effect.
Balance of payments Current account (flow of goods and services) (how do finance my CAD? Either by capital flow and monetary aspects) Credits – payments being received Refer to one article : Capital account (flows of capital) – Equity flow and debt flow What type of capital flow can use to finance my CAD? What is hierarchy of preferences with respect to capital account? Equity preferable to debt Capital flow can be exactly equal to CAD ( theoretical) Usually less or more. If it is less. The balance is managed from monetary policies ( RIB gives money) 100 , 80 gets funded. 20 from rib Depletion of foreign exchange reserves . By 20. Capital account plus current account -100 + 80 -20 which gets balanced by Ribs +20.
Equity – fed and FBI (equity) Debt – Merchandise invisible * Services * Income * Transfers How vulnerable are we when it comes to shocks? (2012) Exports growth rate have come down (rib report) . Why? -1. 8% Rest of the world has been experiencing a contraction Gap growth of row is coming (gap at FCC at constant prices) Trade in goods alone Services Go through PPTP, different components in services Software services have come down Imports Non gold non Oil cold Imports have been growing. Gold import has been up,oil as well. Crude oil price has been coming down. Despite that imports are up. Financial savings have come down,fiscal savings are going up.
So we are moving into gold. Not using oil efficiently. Non gold non oil imports have gone down. Growth has actually decelerated. All these are actually manifestations of economic fundamentals. Invisible component sufficiently large to take care of trade deficit. Earlier we had a trade deficit but within current account,balance on invisible was efficiently large to take care of part of trade deficit. Such that overall current account deficit was not high as it as today. Not only trade deficit has grown,surplus has come down. Profits,interest income etc being bayed out (short term) -?? it is part of current account Fed etc – capital account CAD has worsened. Exports not growing or declining) (imports growing) Invisible (not supporting trade deficits) Within invisible software,trade deficits are all very high. If there is 8% growth rate,that should support a 3% CAD. 2. 5% is a good CAD value. We have to look at FED numbers. Other component is the HI flows. If there is n investment of 10% or more,it is FED (international FED) 1/3 of capital flows are equity flows, 2/3 is debt flows… Not really a good pattern of financing. FL debt external commercial borrowings (NOR deposits) Short term debt External assistance Short term debt has increased, greater burden of repayment. Total debt to gap ratio (19. 7 to 21 would need to service my debt. Short term debt to gap has also gone up.
Short term debt is problematic as you have to finance it every 3 months etc, 3rd vulnerability indicator – reserves to total debt. Reserves down means, ability to service debt comes down Short term debt to reserves is actually owing up… Last and most important – import cover has actually come down. How many months of import can my foreign exchange service. ? 15 month come down to 7 months of import cover. Exports plus imports to gap – 43. 8%, services and transfers it becomes 61. 5, all these gaps are gap at current market prices .. Current account and capital account – 108% of gap Fiscal policy Tax buoyancy refers to the responsiveness of tax receipts with respect to national income or gap. F your tax receipts increase by more than 1 percent ,for every 1 percent increase in gap then your taxes are said to be buoyant. Buoyancy of direct and indirect taxes fed figure of 4. 8% is based on assumption that gap is growing by 6. 1 to 6. 7%. Corporate taxes -?? buoyancy is less than 1 -?? investment climate is not as good as earlier. PIP is going down. DIRECT TAXES – TAX Buoyancy will be less than 1 . How does gobo want to increase overall tax collections? Indirect taxes -?? excise and customs duty have been imposed on additional kind of goods Service tax – negative list declared by gobo Direct taxes ( gobo has actually rationalized tax structures) Fiscal marksmanship – actual vs. budgetary estimates as a ratio of the gap. How good were you at targeting.