Escolar Documentos
Profissional Documentos
Cultura Documentos
1
Amity School of Insurance, Banking and Actuarial Science
Economics
Course Contents/Syllabus:
Actuarial Economics-II
Syllabus.doc
3
Amity School of Insurance, Banking and Actuarial Science
4
Amity School of Insurance, Banking and Actuarial Science
Business Environment
Value System
Mission and
Objectives
Organizational Micro Environment Macro Environment
Structure
Corporate Culture Customers Political
Quality of Human Suppliers Economic
Resources Marketing Social
Labor Unions Intermediaries Technological
Physical resources Competitors Legal
and Technological Public Environmental
capabilities
6
Amity School of Insurance, Banking and Actuarial Science
National Income
Two measures:
GDP (Gross Domestic Product)
GNP (Gross National Product)
7
Amity School of Insurance, Banking and Actuarial Science
Approaches to National
Income Measurement
Product/ Value Added Method
Expenditure Method
9
Amity School of Insurance, Banking and Actuarial Science
11
Amity School of Insurance, Banking and Actuarial Science
Performance of Country
To understand how a country is doing over
a period of time, it is necessary to
compare national income figures for
different years. Aggregates are based on
constant 2005 U.S. dollars.
13
Amity School of Insurance, Banking and Actuarial Science
14
Amity School of Insurance, Banking and Actuarial Science
Factor
Incomes:
Two Sector Rent
+Wages
Goods and Model +Interest
Services
+Profits
Payments
for Goods FOP: Land, Labor,
and Capital and Organization
Services
Households
Product or
Factor Market
Commodity Market 16
Amity School of Insurance, Banking and Actuarial Science
Four Sector
Factor Model
Payments Banks Govt. Abroad
Consumption of Goods
and Services
Net
Taxes(T)
Households Net
Savings(S) Import
Expenditure(M)
Withdrawals
17
Amity School of Insurance, Banking and Actuarial Science
Investment Multiplier
The concept of Investment Multiplier is an
important contribution of Prof. J.M. Keynes.
Keynes believed that an initial increment in
investment increases the final income by many
times.
Multiplier expresses the relationship between
an initial increment in investment and the
resulting increase in aggregate income.
K= Y/I
Y = C + S, MPC=C / Y, MPS=S / Y
MPC+MPS=1 18
Amity School of Insurance, Banking and Actuarial Science
19
Amity School of Insurance, Banking and Actuarial Science
Module II
20
Amity School of Insurance, Banking and Actuarial Science
Money
A medium that can be exchanged for
goods and services and is used as a
measure of their values in the market.
Functions:
1. Medium of exchange
2. Measure of value
3. Standard of deferred payment
4. Store of value
21
Amity School of Insurance, Banking and Actuarial Science
Liquidity Preference
Function
Liquidity preference refers to the demand for
money, considered as liquidity. The concept was
first developed by John Maynard Keynes to explain
determination of the interest rate by the supply and
demand for money.
Keynes defines the rate of interest as the reward
for parting with liquidity for a specified period of
time.
According to him, the rate of interest is determined
by the demand for and supply of money.
22
Amity School of Insurance, Banking and Actuarial Science
Demand of Money
1. Transaction motive
2. Precautionary motive: A desire to hold cash in
order to be able to deal effectively with
unexpected events that require cash outlay.
3. Speculative motive: John Maynard Keynes, in
laying out speculative reasons for holding
money, stressed the choice between money
and bonds. If agents expect the future nominal
interest rate (the return on bonds) to be lower
than the current rate they will then reduce their
holdings of money and increase their holdings
23
of bonds.
Amity School of Insurance, Banking and Actuarial Science
Transaction motive
The transactions motive for demanding money
arises from the fact that most transactions involve
an exchange of money.
Because it is necessary to have money available
for transactions, money will be demanded.
The total number of transactions made in an
economy tends to increase over time as income
rises.
Hence, as income or GDP rises, the transactions
demand for money also rises.
24
Amity School of Insurance, Banking and Actuarial Science
Precautionary motive
People often demand money as
a precaution against an uncertain future.
Unexpected expenses, such as medical or
car repair bills, often require immediate
payment.
The need to have money available in such
situations is referred to as
the precautionary motive for demanding
money.
25
Amity School of Insurance, Banking and Actuarial Science
Speculative motive
The speculative motive relates to the desire to
hold ones resources in liquid form to take
advantage of future changes in the rate of
interest or bond prices.
Bond prices and the rate of interest are inversely
related to each other. If bond prices are
expected to rise, i.e., the rate of interest is
expected to fall, people will buy bonds to sell
when the price later actually rises.
If, however, bond prices are expected to fall, i.e.,
the rate of interest is expected to rise, people will
sell bonds to avoid losses.
26
Amity School of Insurance, Banking and Actuarial Science
Supply of Money
27
Amity School of Insurance, Banking and Actuarial Science
Module III
29
Amity School of Insurance, Banking and Actuarial Science
Business Cycle
Business Cycle is the upward and downward
movement of economic activity that occurs
around the growth trend.
The top of the Cycle is called the peak.
A very high peak, representing a big jump in
output, is called a boom.
When the economy starts to fall from the peak,
there is a downturn in business activity.
30
Amity School of Insurance, Banking and Actuarial Science
Business Cycle
If that downturn persists for more than two
consecutive quarters of the year, that downturn
becomes recession.
A large recession is called a depression, which is
much longer and more severe than a recession.
The bottom of recession or depression is called a
trough.
When economy comes out of the trough,
economists say it an upturn.
If an upturn lasts two consecutive quarters of the
year, it is called expansion.
31
Amity School of Insurance, Banking and Actuarial Science
Business Cycle
Output
Trough
Year / Quarter
32
Amity School of Insurance, Banking and Actuarial Science
Inflation
Inflation is defined as a sustained increase in the
general level of prices for goods and services.
It is measured as an annual percentage increase.
When the general price level rises, each unit of
currency buys fewer goods and services. Thus,
inflation results in loss of value of money.
As inflation rises, every rupee you own buys a
smaller percentage of a good or service.
The value of a rupee does not stay constant (it
decreases) when there is inflation.
33
Amity School of Insurance, Banking and Actuarial Science
Deflation
34
Amity School of Insurance, Banking and Actuarial Science
Types of Inflation
Cost-push inflation is supposed to be a
type of inflation caused by rising prices in
goods or services with no suitable
alternatives.
An example of this inflation is the oil crisis
of the 1970s.
Demand-pull inflation is a rise in the
price of goods and services created by
aggregate demand in excess of aggregate
supply.
36
Amity School of Insurance, Banking and Actuarial Science
Types of Inflation
1. Creeping Inflation
Creeping or mild inflation is when prices rise
3% a year or less.
Creeping inflation is beneficial to economic
growth because this mild inflation sets
expectations that prices will continue to rise.
As a result, it sparks increased demand as
consumers decide to buy now before prices rise
in the future.
By increasing demand, mild inflation drives
economic expansion.
37
Amity School of Insurance, Banking and Actuarial Science
Types of Inflation
2. Walking Inflation
This type of strong, or pernicious, inflation is
between 3-10% a year.
It is harmful to the economy because it heats up
economic growth too fast.
People start to buy more than they need, just to
avoid tomorrow's much higher prices.
This drives demand even further, so that
suppliers can't keep up.
As a result, common goods and services are
priced out of the reach of most people.
38
Amity School of Insurance, Banking and Actuarial Science
Types of Inflation
3. Galloping Inflation
When inflation rises to ten percent or greater, it
wreaks absolute havoc on the economy.
Money loses value so fast that business and
employee income can't keep up with costs and
prices.
Foreign investors avoid the country, depriving it
of needed capital.
The economy becomes unstable, and
government leaders lose credibility. Galloping
inflation must be prevented.
39
Amity School of Insurance, Banking and Actuarial Science
Types of Inflation
4. Hyperinflation
Hyperinflation is when the prices skyrocket more
than 50% a month.
It is fortunately very rare. In fact, most examples
of hyperinflation have occurred when the
government printed money recklessly to pay for
war.
Examples of hyperinflation include Germany in
the 1920s, Zimbabwe in the 2000s, and during
the American Civil War.
40
Amity School of Insurance, Banking and Actuarial Science
Types of Inflation
5. Stagflation
Stagflation is just like its name says: when
economic growth is stagnant, but there still
is price inflation.
It happened in the 1970s when the U.S.
went off the gold standard.
Once the dollar's value was no longer tied
to gold, the number of dollars in circulation
skyrocketed. This increase in the money
supply was one of the causes of inflation.
41
Amity School of Insurance, Banking and Actuarial Science
Economic Policies
Economic policy is the term used to describe
government actions that are intended to
influence the economy of a city, state or nation.
Some examples of these actions include setting
tax rates, setting interest rates, and government
expenditures.
Most factors of economic policy can be divided
into either fiscal policy, which deals with
government actions regarding taxation and
spending, or monetary policy, which deals with
central banking actions regarding the money
supply and interest rates.
42
Amity School of Insurance, Banking and Actuarial Science
Fiscal Policy
Fiscal policy deals with the taxation and
expenditure decisions of the government.
Monetary policy, deals with the supply of money in
the economy and the rate of interest.
These are the main policy approaches used by
economic managers to steer the broad aspects of the
economy.
In most modern economies, the government
deals with fiscal policy while the central bank is
responsible for monetary policy.
The two main instruments of fiscal policy are changes
in the level and composition of taxation and
government spending in various sectors. 43
Amity School of Insurance, Banking and Actuarial Science
Monetary Policy
Monetary policy is the process by which
the monetary authority of a country
controls the supply of money, often
targeting an inflation rate or interest rate to
ensure price stability and general trust
in the currency.
Further goals of a monetary policy are
usually to contribute to economic growth
and stability, to lower unemployment,
and to maintain predictable exchange
rates with other currencies. 45
Amity School of Insurance, Banking and Actuarial Science
Instruments of Monetary
Policy
1. Cash Reserve Ratio (CRR): The share of net
demand and time liabilities (deposits) that banks
must maintain as cash balance with the Reserve
Bank.
2. Statutory Liquidity Ratio (SLR): The share of
net demand and time liabilities (deposits) that
banks must maintain in safe and liquid assets,
such as, government securities, cash and gold.
Changes in SLR often influence the availability of
resources in the banking system for lending to the
private sector. 46
Amity School of Insurance, Banking and Actuarial Science
Instruments of Monetary
Policy
3. Liquidity Adjustment Facility (LAF): Consists of overnight
and term repo/reverse repo auctions. Repo is the rate at which
RBI lends money to the commercial Banks. Reverse repo is
the rate at which commercial banks lends money to the RBI.
Progressively, the Reserve Bank has increased the proportion
of liquidity injected in the LAF through term-repos.
4. Term Repos: Since October 2013, the Reserve Bank has
introduced term repos (of different tenors, such as, 7/14/28
days), to inject liquidity over a period that is longer than
overnight. The aim of term repo is to help develop inter-bank
money market, which in turn can set market based
benchmarks for pricing of loans and deposits, and through that
improve transmission of monetary policy. 47
Amity School of Insurance, Banking and Actuarial Science
Instruments of Monetary
Policy
5. Marginal Standing Facility (MSF) is a new scheme
announced by the Reserve Bank of India (RBI) in its
Monetary Policy (2011-12) and refers to the penal rate
at which banks can borrow money from the central bank
over and above what is available to them through the
Liquidity Adjustment Facility (LAF) window.
MSF, being a penal rate, is always fixed above the
repo rate. The MSF would be the last resort for banks
once they exhaust all borrowing options including the
liquidity adjustment facility by pledging through
government securities, which has lower rate of interest
in comparison with the MSF. 48
Amity School of Insurance, Banking and Actuarial Science
Instruments of Monetary
Policy
6. Open Market Operations (OMOs): These include
both, outright purchase or sale of government
securities (for injection/absorption of liquidity)
7. Bank Rate: It is the rate at which the Reserve
Bank is ready to buy or rediscount bills of exchange
or other commercial papers. This rate has been
aligned to the MSF rate and, therefore, changes
automatically as and when the MSF rate changes
alongside policy repo rate changes.
8. Moral suasion is an advise, oral or written, by the
central bank to the commercial banks to expand or
49
restrict credit.
Amity School of Insurance, Banking and Actuarial Science
Monetary Policy
Policy Repo Rate 6.00%
Reverse Repo Rate 5.75%
CRR 4%
SLR 20.00%
Marginal Standing
6.25%
Facility Rate
Bank Rate 6.25%
As on August 2017
Source: RBI
50
Amity School of Insurance, Banking and Actuarial Science
Module IV
51
Amity School of Insurance, Banking and Actuarial Science
Financial Markets
52
Amity School of Insurance, Banking and Actuarial Science
53
Amity School of Insurance, Banking and Actuarial Science
Capital Market
Slice of the financial markets that deal with
medium/long term financial instruments (eg.
Bonds, equities)
It deals with funds having long maturity (more
than a year) or an indefinite maturity.
Transactions take place formally over stock
exchanges with the help of brokers unlike money
markets wherein transactions take place without the
help of brokers.
Basic Role: To transfer funds from those who have
surplus and make available funds to those who are
running a deficit.
They deal in both debt and equity. 54
Amity School of Insurance, Banking and Actuarial Science
55
Amity School of Insurance, Banking and Actuarial Science
Primary Market
If some entrepreneur wants to start up a new
business, he would not be able to arrange the
huge fund requirements from his friends and
relatives.
the promoter has the option of raising money
from the public across the country by selling
(issuing) shares of the company.
small savings of, say, even Rs. 5,000 can
contribute in setting up, say, a Rs. 5,000 crore
Cement or Steel plant.
This mechanism by which corporates raise
money from public is called the primary
56
markets.
Amity School of Insurance, Banking and Actuarial Science
Secondary Markets.
As a shareholder, if you need your money back,
you can sell these shares to other or new investors.
Such trades do not reduce or alter the companys
capital.
Stock exchanges bring such sellers and buyers
together and facilitate trading.
Therefore, companies raising money from public
are required to list their shares on the stock
exchange.
This mechanism of buying and selling shares
through stock exchange is known as the
secondary markets.
57
Amity School of Insurance, Banking and Actuarial Science
Benefits to Investors:
The Capital market helps the investors, i.e., those
who have funds to invest in long-term financial
instruments, in following ways:
It brings together the buyers and sellers of
securities and thereby makes possible the
marketability of investments,
By advertising security prices, the Stock Exchange
helps the investors to keep track of their
investments and channelize them into most profitable
lines
It protects the interests of the investors by
compensating them from the Stock Exchange
Compensating Fund in case of any fraud/default.
58
Amity School of Insurance, Banking and Actuarial Science
Mutual Hybrid
Equity Debt Derivatives
Funds Instruments
62
Amity School of Insurance, Banking and Actuarial Science
Foreign Exchange
Foreign currency means any currency other
than Indian currency
Foreign exchange means foreign currency and
includes -
(i) all deposits, credits and balances payable in
any foreign currency, and any drafts, traveller's
cheques, letters of credit and bills of exchange,
expressed or drawn in Indian currency but
payable in any foreign currency;
(ii) any instrument payable, at the option of the
drawee or holder thereof or any other party
thereto, either in Indian currency or in foreign
currency or partly in one and partly in the other. 64
Amity School of Insurance, Banking and Actuarial Science
Participants
Players in the Indian Forex market include
(a) Authorised Dealers (Ads), mostly
banks who are authorised to deal in
foreign exchange,
(b) foreign exchange brokers who act as
intermediaries, and
(c) customers individuals, corporates
66
Amity School of Insurance, Banking and Actuarial Science
International Trade
International trade is the exchange of capital,
goods, and services across international
borders or territories, which could involve the
activities of the government and individual.
A product that is sold to the global market is an
export, and a product that is bought from the global
market is an import.
Increasing international trade is crucial to the
continuance of globalization.
Without international trade, nations would be limited
to the goods and services produced within their
own borders.
69
Amity School of Insurance, Banking and Actuarial Science
International Trade
MERCHANDISE COMMERCIAL
2013 TRADE SERVICES TRADE
70
Amity School of Insurance, Banking and Actuarial Science
WTO
It is a forum for governments to negotiate trade agreements.
It is a place for them to settle trade disputes. It operates a
system of trade rules.
It helps developing countries build their trade capacity.
Essentially, the WTO is a place where member governments
try to sort out the trade problems they face with each other.
Where countries have faced trade barriers and wanted them
lowered, the negotiations under WTO have helped to open
markets for trade.
But the WTO is not just about opening markets, and in some
circumstances its rules support maintaining trade barriers
for example, to protect consumers or prevent the spread of
disease.
72
Amity School of Insurance, Banking and Actuarial Science
Objectives of WTO
1. To improve the standard of living of people in the
member countries.
2. To ensure full employment and broad increase
in effective demand.
3. To enlarge production and trade of goods.
4. To increase the trade of services.
5. To ensure optimum utilization of world
resources.
6. To protect the environment.
7. To accept the concept of sustainable
development. 73
Amity School of Insurance, Banking and Actuarial Science
Functions of WTO
1. To implement rules and provisions related to trade
policy review mechanism.
2. To provide a platform to member countries to decide
future strategies related to trade and tariff.
3. To provide facilities for implementation,
administration and operation of multilateral and bilateral
agreements of the world trade.
4. To administer the rules and processes related to
dispute settlement.
5. To ensure the optimum use of world resources.
6. To assist international organizations such as, IMF
and IBRD for establishing coherence in Universal
Economic Policy determination. 74
Amity School of Insurance, Banking and Actuarial Science
Current Account
The current account includes flows of
goods, services, primary income, and
secondary income between residents and
non-residents and thus constitutes an
important segment of BoP.
Current account balance shows the
difference between the sum of exports of
goods and services as well as income
receivable, on the one hand, and the sum
of imports and income payable on the
other 77
Amity School of Insurance, Banking and Actuarial Science
Capital Account
The capital account comprises credit and
debit transactions under non-produced
nonfinancial assets and capital transfers
between residents and non-residents.
Thus, acquisitions and disposals of non-
produced non-financial assets, such as
land sold to embassies and sales of
leases and licences, as well as transfers
which are capital in nature, are recorded
under this account.
78
Amity School of Insurance, Banking and Actuarial Science
Financial Account
The financial account reflects net acquisition and
disposal of financial assets and liabilities during
a period.
The sum total of net transactions under the
current and capital account represents net
lending (surplus) or net borrowing (deficit) by the
economy from the rest of the world, which is
reflected in the financial account as net outflow
or inflow of capital.
Thus, the financial account shows how the net
lending to or borrowing from the rest of the world
has occurred.
79