ADVANCED BANK

MAMAGEMENT
ECONOMIC ANALYSIS.
MODULE A

FUNDAMENTALS OF
ECONOMICS
Study of production, allocation and use of
goods and services.
How resources can be best distributed.
How to meet the needs of people.
We are globally connected.
International interdependence.
A science which studies human behaviorbetween ends and scares means
The reality of scarcity- how to organize the
society- efficient use of resources

DEFINITIONS
Adam Smith- father of modern
economics
Defined- a study of wealth(wealth
definition)
Marshall- study of mankind in the
ordinary business of life. It is a study
of wealth and study of man. Wealth
is the means to welfare. Economics is
to promote well-being or welfare. A
SCIENCE OF HUMAN WELFARE

ROBBINS DEFINITION
SCIENCE OF CHOICE

Economics is the science which studies human

behavior as relationship between ends and
scares means which have alternative uses.
A study of means and ends.
Man has UNLIMITED WANTS
MEANS to satisfy human wants are LIMITED.
RESOURCES are limited but have ALTERNATIVE
USES.
Man has to make a CHOICE- USE OF HIS LIMITED
RESOURCES TO SATISFY HIS UNLIMITED WANTS.

MICROECONOMICS
AdamSmith- founder of microeconomics.
It is a branch of economics- how individuals,
households, firms , and markets behave and
prices are set for land, labour and capital.
How decisions are made to allocate limited
resources.
How these behaviors affect the supply and
demand of goods and services.
Analysis the market behavior of individual
consumers and firms to understand the decision
making process of firms and households.

MACROECONOMICS
Deals with the performance, structure and behavior
of a national or regional economy as a whole.
Study of the behavior and decision making of the
entire economies.
Study the aggregated indicators such as GDP,
unemployment rates and price indices to understand
how the whole economy functions.
Develop models to explain the relationship among
such factors as national income, output,
consumption, unemployment, inflation, savings,
investment, international trade, international finance
etc.

DIFFERENCE BETWEEN MICROECONOMICS

AND MACROECONOMICS
Microeconomics is primarily focused on the
actions of individual agents, such as firms and
consumers, and how their behavior determines
prices and quantities in specific markets.
Macroeconomics develop models to explain the
relationship among such factors as national
income, output, consumption, unemployment,
inflation, savings, investment, international
trade, international finance etc.
THESE TWO CONVERGE TO FORM THE CORE OF
MODERN ECONOMICS.

PROBLEMS OF AN ECONOMIC
ORGANISATION
What commodities are produced and in
what quantities?
How are goods produced? Who will do the
production ? With what resources ? What
techniques?
For whom goods produced? Who gets to
eat the fruits of economic activity? Is the
distribution of income and wealth fair and
equitable?
Are many people poor and a few rich?

THE CHALLENGES OF WHAT, HOW

AND WHOM IS ANSWERED
Different societies have answered these
questions through alternative economic systems.
Governments make economic decisions, give
commands to those down under the ladder.
We call this as socialistic or command economy.
In other system, decisions are made in markets.
We call this as capitalistic economy.
The third is a mixed economy - a mixture of both
market and command economy.
In India we follow a mixed economy model.

CONCEPTS OF DEMAND AND

SUPPLY.
There is a relationship between the
market price of a goods and the
demanded quantity of that goods.
( other things being constant- OTBC)
The relationship between price and
quantity bought is called the demand
schedule, or the demand curve.

LAW OF DOWNWARD - SLOPING

DEMAND
When prices of a commodity is raised
, buyers tend to buy less of that
commodity. OTBC
When price is lowered, quantity
demanded increases OTBC.
Shift in demand is when demand
increases (or decreases) when the
quantity demanded at each price
increase ( or decrease)

SUPPLY SCHEDULE OR SUPPLY

CURVE.
It shows the relationship of the
commodity between its market, price
and the amount of that commodity
that producers are willing to produce
and sell. OTBC.
Market equilibrium is when the price
at which quantity demanded equals
quantity supplied. This is also called
market-clearing price.

WHAT IS MONEY?
Medium of exchange- Individual goods and
services, and other physical assets, are priced in
terms of money and are exchanged using money.
A measure of value used to measure and record
value of goods and services.
A store of value over time can be held over a
period of time and used to finance future
payments.
Standard for deferred payments used as an
agreed measure of future receipts and payments
in contracts.

MONEY SUPPLY
Refers to stock of money in circulation in the
economy at a given point of time.
MEASURES OF MONEY SUPPLY IN INDIA.
Narrow money OR( M1) = Currency with public
+ demand deposits with banking system +
other deposits with the RBI.
M2 = M1 + savings deposits of post office SB.
M3 = M1 + time deposits with banking system.
M4 = M3 +All deposits with post office SB
excluding NSCs

MONEY SUPPLY
Currency with public is currency in circulation
LESS cash held by banks
Demand deposits - All liabilities which are
payable on demand like C/A, S B, margins
held against LCs, guarantees, balances in
overdue FDs, Cash certificates, CD, RD
deposits.
Time deposits which are payable otherwise
than on demand like FDs, cash certificates,
CD, RD, Time liabilities portion of SB deposits.

INFLATION.
Refers to a sustained rise in the general level of prices
of goods and services in an economy over a period of
time.
Inflation leads to fall in purchasing power, erosion in
purchasing power of money loss of real value in the
internal medium of exchange and unit of account in the
economy.
Negative effect of inflation is loss in stability in the real
value of money and other monetary items over time,
uncertainty about future. Discourage investment and
savings, shortage of goods, consumers begin hoarding.
Positive effects are mitigation of economic recessions
and debt relief by reducing the real level of debt

CAUSES OF INFLATION
Demand pull inflation.
Rice in general prices caused by increasing
aggregate demand for goods and services.
Increasing quantity of money in the hands of
the people increases the aggregate demand
for goods and services, and if aggregate
supply does not follow the suit, prices rise.
Demand exceeds supply-> shortage-> an
increase in price.

Causes of inflation
Cost push inflation.
Caused by increase in the cost of
production of important goods or services
where no suitable alternative is available.
Eg. Increase in oil prices will increase
costs in out prices. When output declines
because of cost pressure on producers,
there will be a shortage in output
markets and as a result price will rice.

CALCULATING INFLATION WITH

PRICE INDEXES
INFLATION=(PRICE INDEX IN CURRENT
YEAR PRICE INDEX IN BASE YEAR) *
100/ PRICE INDEX IN BASE YEAR
Wholesale price index ( WPI)
Food inflation index
Consumer price index (CPI) CPI-IW,
CPI-AL, CPI- RW, CPI-UNME (urban non
manual employees)
GDP Deflator

INTEREST
Interest is a payment made by a
borrower for use of a sum of money
for a period of time.
It is a payment for the risk involved
in making the loan.
Payment for the trouble involved
(risk).
Pure interest - payment for the use
of money.
Rate of interest depends on the

Keynes liquidity preference theory

of rate of interest
Interest is purely a monetary
phenomenon and is determined by
demand for money and supply of
money. This theory is known as
liquidity preference theory .
Money demand increases with the
fall in the rate of interest or with the
increase in level of nominal income.
(money demand curve)

BUSINESS CYCLES - phases of

prosperity and depression
It is not regular, it is not predictable,
it is not a repetitive phenomenon.
It is random and unpredictable.
Business cycles effect not only the
economy in general, but each
individual business firm

Characteristics of business
cycles.
Synchronic. The wave of prosperity or depression in
one industry will soon generate a wave in other
industries.
Shows a wave like movement. The period of prosperity
and depression can be alternatively seen in a cycle.
Recurring in nature. A boom is followed by depression
visa versa.
There is no eternal boom or depression.
They are pervasive in their effects.
Movements are symmetrical. Downward movement is
more sudden and violent than the up ward movement.
RECOVERY- BOOM- RECESSION- DEPRESSION.

INDIAN ECONOMY
AGRICULTURE - 17% OF GDP
PROVIDES FOOD TO POPULATION, FODDER
TO CATTLE, RAWMATERIAL TO AGRO
BASED INDUSTRY AND SOME QUANTITY
FOR EXPORTS
GREEN REVOLUTION- EXTENDED
IRRIGATION FACILITIES, GOOD SEEDS ,
FERTILISERS, PESTICIDES HAVE
CONTRIBUTED.
MARKETING FACILITIES IMPROVED.

NEED FOR AGRO GROWTH

SECOND GREEN REVOLUTION.
Irrigated area to be doubled.
Improve soil quality and reclaim degraded
lands.
Improve water management, rain harvesting.
Knowledge gaps to be plugged.
Diversify to high value output like fruits,
vegitables, flowers, herbs, spices, medical
plants, bamboo, bio diesel.
Easy access to credit.

INDUSTRY
CONTRIBUTES 19% OF THE GDP
GROWTH IS SEEN ONLY AFTER
LIBERAL ECONOMIC POLICY
FOLLOWED SINCE 1990.
OPENED MARKETS FOR FOREIGN
INVESTMENTS.
F D I STARTED COMING TO INDIA.

NDIUSTRY
CLASIFIED BROADLY IN TO 3 SEGMENTS

MINING AND QUARRYING.

MANUFACTURING AND ELECTRICITY
GAS AND WATER SUPPLY

SERVICES
64% OF GDP COMES FROM
SERVICES.
BIG GROWTH IS SEEN IN IT/ ITES,
TELOCM, BANKING, INSURANCE,
CIVIL AVIATION, TOURSIM,
HOSPITALITY, TRANSPORT ETC.
INDIAN ECONOMY HAS REGISTERED
IMPRESSIVE GROWTH IN RECENT
TIMES.

ECONOMIC REFORMS
IN THE LAST TWO DECADES WE
HAVE SEEN THAT THE ECOMIC
LANDSCAPE OF THE COUNTRY HAS
CHANGED.
WE HAVE MOVED TO HIGHER
GROWTH TRAJECTORY.
REFORMS BROUGHT
TRANSFORMATION IN THE LIVING
AND ECONOMY OF PEOPLE.

TRANSFORMATION
NATIONAL INCOME HAS STEADILY INCREASED.
CONTRIBUTIONS OF AGRICULTURE AND INDUSTRY
IMPROVED.
SERVICE SECTOR CONTRIBUTES TWO THIRDS TO GDP.
TRANSFORMATION IS SEEN ALL SECTORS OF ECONOMY
DOMESTIC ECONOMY GOT INTIGRATED TO WORLD
ECONOMY
TRADE VOLUMES ARE GROWING.
FINANCIAL FLOWS TO AND FROM OUTSIDE WORLD
INCREASING.
THESE THINGS HAVE ALSO RAISED MANY POLETICAL
CHALLENGES IN THE COUNTRY.

REAL SECTOR
TRANSFORMATION.

Deregulation of industry.
Eliminating license raj.
Overhauling of public enterprises.
Enhanced role of private sector.
Abolition of MRTP Act.
Automatic approval of foreign investment.
Elimination of some import restrictions.
Reduction in tariffs.
Efficient scale of production.
Resorting to mergers and acquisitions.
Major impact of service sector.
BOOM IN IFORMATION TECHNOLOGY

FINANCIAL SECTOR
TRANSFERMATION.
NARASIMHAM COMMITTEE
RECOMMENDATIONS.
BASLE GUIDELINES- IMPLEMENTATION.
MONEY MARKET REFORMS.
GOVERNMENT SECURITY MARKET REFORMS.
FOREX MARKET REFORMS.
CAPITAL MARKET REFORMS.
CREDIT MARKET REFORMS.
PAYMENT SYSTEM REFORMS.

INTEGRATION WITH GLOBAL

ECONOMY
TRIGGERED BY BALANCE OF PAYMENT CFRISES IN 1991.
TRANSITION TO MARKET DETERMINED EXCHANGE RATE
REGIME.
DISMANTALING OF TRADE RESTRICTIONS.
MOVING TOWARDS CURRENT ACCOUNT CONVERTABILITY.
LIBERAL INFLOW OF PRIVATE CAPITAL
REMOVAL OF RESTRICTIONS ON SOME INFLOWS AND
OUT FLOWS GRADUALLY.
DEBT DENOMITED CAPITAL ACCOUNT FINANCING.
FOREIGN DIRECT INVESTMENT.
PORTFOLIO INVESTMENT.
EXTERNAL COMMERCIAL BORROWINGS (ECB)

ISSUES WE FACE TODAY.

POVERTY.
SOCIO-ECONOMIC DEVELOPMENT.
HEALTH.
EDUCATION.
AGRICULTURE INVESTMENTS.
LAND REFORMS.
LABOUR REFORMS.
DEMOGRAPHIC DIVIDEND- YOUNG NATION.
FINANCIAL INCLUSION.

MONETARY POLICY AND FISCAL

POLICY
CONTROLLED BY GOVERNMENT AND
RBI.
SUPPLY OF MONEY
AVAILIBILITY OF MONEY.
COST OF MONEY / RATE OF INTEREST.
EXPANSIONARY POLICY- INCRESES
THE TOTAL SUPPLY OF MONEY.
CONTRACTIONARY POLICYDECREASES THE TOTAL SUPPLY OF
MONEY.

TOOLS OF MONETARY POLICY

BANK RATE.
CASH RESERVE RATIO- CRR
STATUTORY LIQUIDITY RATIO SLR
MARKET STABILISATION SCHEME
MSS
REPO RATE.
REVERSE REPO RATE.
OPEN MARKET OPERATION - OMO

FISCAL POLICY
Refers to government spending,
govt. borrowing and govt. tax /
revenue collection.
This has impact on the economy.
They are Aggregate demand and the level of
economic activity:
Pattern of resource allocation:
Distribution of income.

FRBM ACT.
FISCAL RESPONSIBILITY AND BUDGET
MANAGEMENT ACT.
DR. E.A.S.SARMA COMMITTEE
RECOMMENDATIONS.
THIS BECAME LAW IN 2003.
THIS LAW HAS GOT FOUR MAIN
REQUIRMENTS.

FRBM ACT
GOVT .TO PLACE THREE STATEMENTS BEFORE
PARLIAMENT ALONG WITH BUDGET.
1. MEDIUM TERM FISCAL POLICY, FISCAL POLICY
STRATAGY &MACROECONOMIC FRAME WORK.
2. LAYS DOWN THE FISCAL MANAGEMENT PRINCIPLESREDUCE THE FISCAL DEFICIT.
3. CELLING ON GOVT. BORROWING FROM RBI . IT BANS
DEFICIT FINANCING
4. FINANCE MINSTER TO KEEP PARLIAMENT INFORMED
THROUGH QUARTERLY REVIEWS ON THE
IMPLIAMENTATION AND CORRECTIVE MEASURES TAKEN
ON DEVIATIONS IF ANY. NO DEVIATION IS PERMITTED
WITHOUT THE APPROVAL OF PARLIAMENT.

GROSS DOMESTIC
PRODUCT- GDP.
IT IS TOTAL OF MARKET VALUE OF ALL
THE FINAL GOODS AND SERVICES
PRODUCED WITH IN THE TERITORIAL
BOUNDRY OF A COUNTRY ,USING
DOMESTIC RESOURCES DURING A GIVEN
PERIOD OF TIME, USUALLY ONE YEAR.
EXPENDITURE METHOD
INCOME APPROCH
PRODUCT APPROCH

UNION BUDGET.

RECEIPTSGROSS TAX REVENUE

NON TAX REVENUE
NON DEBT RECEIPTS
DEBT RECEIPTS

UNION BUDGET.

EXPENDUTURE
NON PLAN EXPENDITURE.
REVENUE EXPENDITURE
CAPITAL EXPENDITURE
PLAN EXPENDITURE
REVENUE EXPENDITURE
CAPITAL EXPENDITURE.

CHALLENGES FACING INDIAN ECONOMY

GROWTH IS DRIVEN BY DOMESTIC

DEMAND
TWIN DEFICITS FISCAL AS WELL AS
CURRENT ACCOUNT DEFICIT
INFRASTRUCTURE BOTTELNECKSPOWER, ROADS, URBAN AND RURAL
SOCIAL INFRASTRUCTURE.