Escolar Documentos
Profissional Documentos
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DR. P. RAVILOCHANAN
STOCKS AND FLOWS
STOCK Measured at a specified point of time – Long run
concept
[Example : Total number of persons employed, balance sheet of a
company, money supply, price level, consumer price
index, unemployment level, foreign exchange reserves ]
Stock and flow are interdependent, that one affects the other
[Example : Capital stock and investment]
REAL GNP AND NOMINAL GNP
‘Real’ implies that the data have been adjusted for changes in
the level of prices
FACTOR INCOME
HOUSEHOLD BUSINESS
SECTOR SECTOR
FACTOR SERVICES
MIC 1
CIRCULAR FLOW OF INCOME – 3 SECTOR MODEL
GOVERNMENT SECTOR
TAXES
GOVT. EXPENDITURE
MIC 2
CIRCULAR FLOW OF INCOME – 4 SECTOR MODEL
EXPORTS
IMPORTS
GOVERNMENT SECTOR
TAXES
GOVT. EXPENDITURE
B
U
T
T
E
R
GUNS
ME
PERSONAL
METHODS OF MEASURING NATIONAL INCOME
1. OUTPUT METHOD [VALUE ADDED METHOD]
EXPENDITURE REVENUE
Factor incomes
A) Paid to Domestic Sales to Households
residents
B) Paid to Foreign residents Sales to Government
EXTERNAL ACCOUNT
RECEIPTS PAYMENTS
EXPORTS IMPORTS
GOVERNMENT SAVINGS
CONSUMPTION
[C] C
b δ
MPC = δ C/δ Y
C
δ
Y
a
INCOME [Y]
CONSUMPTION FUNCTION (3)
Keynes’ equation :
Y = C + S
Y = C + I
So, S ≡ I
Marginal Propensity to Consume [MPC]
The extent of change in consumption[C] for a change in
income [Y] MPC = δ C / δ Y
• - Income re-distribution
• - Increase in wages / salaries
• - Introducing Social security measures
• - Extending credit facilities
• - Improving distribution of resources
• - Urbanization
LONG RUN CONSUMPTION FUNCTION IN A STEADY
STATE
Ct = a + b Ytd + gCt – 1
a = Autonomous consumption
ROUND ∆ I ∆ Y ∆C ∆ S
MPC = 0.5
1 100 100 50 50
2 50 25 25
3 25 12.5 12.5
Y=C
C C+I
+
I
∆ I C
Y1 ∆ Y Y2 (Y)
INVESTMENT MULTIPLIER (13)
Leakages in Multiplier
1. Savings
2. Tax imposed
3. Transfer of additional income to other countries
4. Hoarding of additional income
5. Investment in unproductive investment [like jewels]
6. Purchase of old shares and securities
7. Cancellation of debts
8. Undistributed profits
9. Maintaining excess of consumption goods
BALANCED BUDGET MULTIPLIER
Balanced budget means that revenue and expenditure of the
government would be equal. Hence, whenever a tax is imposed,
there would be reduction in consumption, but this is
neutralized by increasing public expenditure to the extent of
the tax amount. However, when tax is imposed, the level of
disposable income is reduced which is used for consumption
purpose. Hence, the economy’s consumption expenditure
would not fall by the full amount of tax.
•
This shows that change in income will equal the multiplier times the
changes in autonomous government expenditure
This shows that the change in income will equal multiplier times the
product of the MPC and change in taxes.
[∆ Y / ∆ G ] + [ ∆ Y / ∆ T] = [ 1/ 1-c ] – [c / 1 – c] = [1 – c] / [1 – c] =
1
∆ Y = [3 x ∆ G - 2 ∆ T ] = 3 x 10 – 2 x 10 = 10
INVESTMENT, TAX AND FOREIGN TRADE MULTIPLIER
MULTIPLIER = 1 / [1- β (1 – t) + µ ]
β - MPC
t - Tax rate
µ - MPI
FOREIGN TRAD MULTIPLIER
Y = C + I + X - M
[Y – Income, C – Consumption, I – Investment, X –
Exports and M – Imports
The above relationship could be stated as :
Y - C = I + X–M
S = I+ X - M
S + M = I + X
In an open economy, Investment is divided as :
Domestic investment Id and Foreign
investment If
I = S
Id + If = S
Foreign investment = If = X - M
So Id + X - M = S [or]
Id + X = S + M
Foreign trade multiplier co-efficient
[ kf] = ∆ Y / ∆ X and
∆ X = ∆ S +∆ M
Dividing both sides by ∆ Y
∆ X / ∆ Y = (∆ S + ∆ M ) / ∆ Y
1 / kf = (∆ S + ∆ M ) / ∆ Y
or kf = ∆ Y / (∆ S + ∆ M ) Dividing by
∆ Y
Therefore kf = 1 / (∆ S / ∆ Y ) + (∆
M / ∆ Y]
= 1 / MPS + MPI
PRINCIPLOE OF ACCELERATOR
ACCELERATION COEFFICIENT
β =ΔI / ΔC
ΔI =βΔC
β - is accelerator coefficient
Δ C is the net change in consumption expenditure
Δ I is the net change in investment
t 100 400 40 0 40
TYPES OF INFLATION
1. DEMAND PULL INFLATION
WHEN DEMAND FOR GOODS & SERVICES CONTINUE TO INCREASE
AND EXCEED THE SUPPLY OF GOODS AND SERVICES, THE PRICE
LEVEL WILL GO UP. BEYOND FULL EMPLOYMENT, INCREASE IN
DEMAND WILL BE FOLLOWED ONLY BY INCREASE IN PRICE AND
TILL FULL EMPLOYMENT, INCREASE IN DEMAND IS FOLLOWED BY
INCREASE IN OUTPUT AND PRICE.
PRICE WAGE
3 6
2 5
4
1
0 3
-1
-2 2
1
1 2 3 4 5 UNEMPLOYMENT RATE
CONTROL OF BUSINESS CYCLES – FISCAL POLICY
• PUBLIC EXPENDITURE
JUSTIFICATIONS
• EFFECTS OF PUBLIC EXPENDITURE
• CONTROL OF PUBLIC EXPENDITURE
• AS AN INSTRUMENT OF FISCAL CONTROL
PUBLIC DEBT
JUSTIFICATIONS
. EFFECTS OF PUBLIC DEBTS
. DEBT SERVICING
. DEBT REDEMPTION
CONTROL OF BUSINESS CYCLES - MONETARY POLICY
Debits
Remittances under the above items Made by residents to
non - residents
• 1. Government not included elsewhere
•
• Credit : Funds received from foreign government for the
maintenance of their embassy, consulates, etc., in India.
• Debit : Payment to foreign technical consultant for professional
services rendered by him
• 2. Transfers
• A] Official transfers
• Debit :
• Revenue contributions by the government to international
institutions or any transfer in the form of gifts also, of
commodities by the government to non-residents
• B] Private transfers
• Debit :
• Cash remittances by non resident Indians for their family
maintenance in India and redemption in rupees of both principal
and interest under Non resident external [rupee] accounts and
non-resident non-repatriable rupee deposit schemes
• CAPITAL ACCOUNT
•
• Debits Credits
• Country’s foreign
• Financial Assets Increase Decrease
•
• Foreign financial liabilities Decrease Increase
•
• MONETARY MOVEMENTS
•
• Repayments made to IMF or
• Addition made to existing reserves Debit
•
• Drawings from the IMF or drawing down
• Of reserves Credit
•
METHODS OF CORRECTING BALANCE OF PAYMENTS
DISEQUILIBRIUM
• TYPE OF DISEQUILIBRIUM
– STRUCTURAL DISEQUILIBRIUM
– FUNDAMENTAL DISEQUILIBRIUM
– EXCHANGE DEPRECIATION
– DEVALUATION
– EXCHANGE CLEARING AGREEMENTS
– EXCHANGE CONTROLS
» TARIFFS
» QUOTAS
MONEY STOCK MEASUREMENTS
A. MONETARY AGGREGATES
CONSTITUTENTS
M0 = Currency in circulation + Bankers’ deposits with RBI + Other
deposits with RBI
[Weekly]
= [ 1 + c + t ] / c + r [1 +t]
Ms [ without the influence of time deposits with commercial
banks]
= [1 + c] / [ c + r]
With excess reserve m = [1 + c] / [r + c + e]
MONETARY LIABILITIES
1. NOTES IN CIRCULATION
2. OTHER DEPOSITS
A. Deposits of quasi-government
b. Balances in the accounts of foreign central
banks and governments
c. Accounts of internal agencies such as the
IMF, etc.
3. Deposits of Banks [Reserves]
NON MONETARY LIABILITIES
B. Capital account
C. Government deposits
D. IMF Accounts
E. Miscellaneous - Bills payable, Pension fund,
etc.
FINANCIAL ASSETS
A. Credit to government
- To central govt.
- To state govt.
B Credit to commercial sector
C. RBI’s gross claims on banks
- Refinance of RBI to the banks
- Fixed investments in commercial banks’ shares, etc
D. Net foreign assets – gold, bullion, foreign securities,
Balances held abroad with IMF, etc
E. Other assets
OPEN ECONOMY
STERILIZATION
- Contractionary & Expansionary monetary
policy to correct imbalance due to foreign
exchange reserve is called sterilization
POLICY MIX FOR BALANCE
S–I
FE
EX.BAL
X – M*
X-M
MONETARY POLICY
t1 – Equilibrium status
INTERMEDIATE LAG
ADMINISTRATION DECISION PRODUCTION
RECOGNITION
LAG LAG LAG
LAG
EFFECT
ACTION NEED ACTION EFFECT EFFECT
NEEDED RECOGNISED FELT ON RI & FELT ON FELT ON
TAKEN CREDIT
CONDITIONS
SPENDING OUTPUT
DECISIONS &N
FISCAL POLICY
BUDGET DEFICIT AND THE GOVERNMENT DEBT
Definitions
Revenue receipts = Tax revenue + Non - tax revenue
[Direct taxes + Indirect taxes + internal
receipts + Total profit ]
Capital receipts = Recoveries of Loans + Other
capital receipts + Borrowings
and other liabilities
Revenue expenditure = Non plan expenditure on revenue
Solution :
Revenue receipts = 1,16,857 + 45,137 =
1,61,994
Capital receipts = 9,908 + 5,000 + 91,025 =
1,05,933
Revenue expenditure = 1,66,301 + 43,761 =
2,10,062
Capital expenditure = 29,624 + 28,241 = 57,865
Revenue deficit = 2,10,062 - 1,161,994 =
48,068
Fiscal deficit = 2,67,927 - [1,61,994 + 9,908 + 5,000]
91,025
Primary deficit = 91,025 - 75,000 = 16,025