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These indicators are imp variables through which the
overall state of the economy is reflected. The indicators help the enterprises to take a number of managerial decisions particularly relating to new investment,scale of production and competitive strategy.
Economic development is indicated by rising shares of
industry and services in national income , improvement in HR skills, productivity, technological progress, growth of social institutions & wider distribution of national income
Economic development is invariably attended by social development which covers health.education. It reflects an improvement in the average standard of living of the masses.participation of women in economic activities..CON. .empowerment of socially dis advantaged groups and social welfare.nutrition.water supply.
These elements of development are in qualitative terms to indicate the conditions of the macro environment.. .CON.
KEY INDICATORS GROSS DOMESTIC PRODUCT (GDP) SECTORAL SHARES AGRICULTURAL OUTPUT ELECTRICITY GENERATION RATE OF INFLATION MONEY SUPPLY FOREIGN TRADE FOREIGN EXCHANGE RESERVES .
Con.. EXCHANGE RATE ECONOMIC INFRASTRUCTURE SOCIAL INDICATORS .
Measures of Economic Performance Economic Measures: Inflation Unemployment Growth (GDP) Balance of Payments Exchange Rate Non-Economic Measures: Quality of Life Environment Health Education .
GDP • GDP (Gross Domestic Product) is the sum of value added produced within the country. . GDP is the total market value of all final goods and services produced annually within a country’s borders.
What are final goods? What are intermediate goods? What’s the difference? Ghee is a final good. The GDP includes the value of final goods only. Income Approach: compute GDP by adding all wages and all profits. Expenditure Approach: compute GDP by adding the money spent by buyers on final goods and services. Value-Added Approach: compute GDP by adding the values added to a product at all stages of production .. and the Ingredients is an intermediate good.Con.
GDP? GNP? What’s different? Gross National Product is the total market value of all final goods and services provided annually by the citizens of a country GDP measures all final goods produced in a country. GNP measures all final goods produced by citizens whether physically in that country or not. whether by citizens or not. GNP = GDP minus foreign investment in India plus Indian investment overseas .
.S. –counted in U.S. GDP –not counted in U.Con.S.S. GNP •Ford production in Europe –Not counted in U. GNP .S. GDP –Counted in U. EXAMPLES: •Toyota production in the U.
both legal and illegal Sale of Used Goods Financial Transactions Government Transfer Payments. Leisure Not adjusted for “bads” .What GDP Omits Certain Nonmarket Goods and services Underground Activities.
Economic Growth (GDP) Potential Growth – the overall capacity of the economy (i.e. what the economy could produce if it used all its resources) Actual Growth – the annual percentage increase in output Nominal Growth – the growth in output not including any adjustment for price changes expressed as ‘current prices’ (the price reigning at the time of the measurement) account of changes in the price level – expressed as ‘constant prices’. Real Growth – growth in GDP adjusted to take .
2000 nominal GDP uses 2000 prices Nominal GDP of 2007= Σ (2007 price X 2007 quantity) • Real GDP = the value of goods and services measured at a constant set of prices.Nominal and Real GDP • Nominal GDP = the value of goods and services measured at current prices.no adjustment for inflation – GDP measured in current prices – 1990 nominal GDP uses 1990 prices. adjusted for inflation – Calculated using constant. . unchanging prices – converted to base year prices Real GDP of 2007 using 2005 price = Σ (2005 price X 2007 quantity) .
Economic Growth has occurred if Real GDP in one year is higher than Real GDP in the previous year.. .Con.
GDP Deflator is a price index number which can be
applied to nominal GDP figure to remove the effect of changes in the price level. It also gives the measure of rate of inflation in the country. Real GDP GDP Deflator = ___________ Nominal GDP
GDP combines spending of the 4 sectors of the
economy: C + I + G + (Xn) = GDP C = consumer spending I = investment (business) spending G = govt. spending (Xn) = net exports (exports - imports)
Why do we need to adjust GDP for inflation?
2000 2001 Quantity = 100 Quantity = 100 Cost per bar = $.50 Cost = $.75 Nominal GDP = $50 Nominal GDP = $75 A country produces only one product, candy bars Although the country produced the SAME amount, it LOOKS like more was produced. If you remove the effects of inflation (price increase), you can see that production remains the same.
Intermediate goods goods that become part of a final good Counted or not Counted or not counted? Ford buys Goodyear Tires for a car in production? Not counted counted? Ford buys a new assembly line? Counted .
Not counted new computer payroll system. Counted .Transfer Payments Government cash payments to firms and households for which no good or service is received in exchange Counted or not counted? Government pays Counted or not counted? Government buys a unemployment benefits.
78 % 2003 est.real growth rate 4.30 % 35. 2005 est. 2003 54 2004 2005 2006 2007 2008 2009 8.00 % 7.7% (2006 est. .40 % 16 43 24 23 23 28 93.48 % 9.) Year GDP . 2006 est.30 % Rank Percent Change Date of Informatio n 2002 est.) 9.GDP . 2008 est.30 % 6.4% (2008 est.52 % -2.real growth rate: 7.17 % -17.) 9% (2007 est.40 % 9. 2004 est.20 % 8.20 % 9. 2007 est.02 % -25.
National Income National Income = Compensation of employees + Proprietors’ Income + Corporate Profits + Rental Income + Net Interest GDP=National Income – Income earned from the rest of the world +Income earned by the rest of the world + Indirect business taxes + Capital consumption allowance + Statistical discrepancy .
Sectoral Shares .
Sectoral shares The sectoral shares of GDP indicate the type and nature of an economy. In agrarian economies . .share of agriculture & allied sectors is the largest and the sector provides employment to the largest chunk of population.slow developing economies. Such countries are generally low income.
Economies with higher rate of growth are generally observed to be those in which the share of industry in national output is rising and that of agriculture is falling over time.service sector makes highest contribution (60%) to national output ..Con. In Industrialised countries.
Agriculture provides food for population. Raw materials to industry & Employment to masses .if its agricultural sector under performs.Agricultural Out Put All is not well with an economy . A dwindling agricultural sector can destabilize an economy with far reaching consequences for the macro environment.
Con. Lapses in food production Import Scare F/E leads to economically vulnerable Inequality in distribution of income Malnutrition Rising trends of hunger. poverty statistics discourage private domestic & foreign investment and present a poor image of the country.. .
protect the agricultural sector providing subsidies.Con. The Govt. Agricultural sector demands a number of products as inputs from industry & service. . Falling non-food output. imposing import duty on agricultural products..
Electricity Generation Importance Scarcity Transmission & distribution losses Power theft Self generating power .
2-5% Creeping 5-10% Walking 10-20% Running 20-50% Galloping Above 50% Hyper .RATE OF INFLATION Inflation is a process in which the general price index records a sustained and appreciable increase.
Con… An inflation rate is below 5% it is not problematic.It provides expanding profit margins.rather it is considered a good booster for firm’s growth.which serve as motivation to invest and produce more. It does not attract policy intervention .
Inflation rate is 5-10% causes concern & double digit inflation warrants anti-inflationary policy. . Galloping & hyperinflations reflect economic crises and require bold anti-inflationary programmes including macroeconomic restructuring.Con..
.interest rate structure and hence the cost of capital to the firms and the rate of inflation. Fast expansion of money supply rises money incomes and the level of aggregate demand thereby creating inflationary pressure.MONEY SUPPLY Money supply in an economy determines liquidity conditions in the market.
RBI has adopted some measures of money supply viz M1.Con. . It increases the supply of loanable funds and lowers the interest rate structure.M3..
M1 Narrow money It consists of : Currency with the public Demand deposits with banks Other deposits with the RBI M3 Broad money: It includes M1 & time deposits with banks .
currency liabilities to the public Banking sector net non-monetary liabilities other than time deposits . Credit by RBI and other banks to commercial sector.Sources of changes in broad money Net credit by the RBI and other banks to central & state Govt. Net F/E assets of the banking sector Govt.
RBI & commercial banks issue domestic currency in exchange for foreign (F/E )remittances from abroad. Commercial banks increase credit in the economy.Money supply is increased due to RBI issues fresh currency to finance the budgetary deficit of the central & state govt. Reduction in SLR & CRR of commercial banks .
. . Money supply growth rate is one of the reliable indicators of potential inflation.Con.
Foreign Trade High rate of growth of foreign trade from last 10 years. FT of a country not only affects its NI but also is an indication of its openness and competitiveness in the world markets.a Export as a % of GDP increasing constantly last 5 years. India’s export & import are growing at 25-30% p. .
Con. A high level of FT is viewed favourably by domestic export firms and MNC’s with international business operations.economic liberalisation and positive attitude of the Govt. FT as a % of NI is commonly used as a measure of country’s globalisation. It is indication of competitive conditions.. towards globalisation .
. A country with low imports and exports indicates its inward orientation.Con. (EXIM as a% of NI –orientation) .and poor international and economic relations.
Key strategies are: Control Removal (import) Simplifying the process Creating an atmosphere of trust and transparency.Foreign Trade Policy Policy for 5 years (2004-09)announced on 31st 2004 takes a integrated view of the overall development of India’s FT. .
Objective To double India’s % share of global merchandise trade by 2009.especially in semi-urban and rural areas . To act as effective instrument of economic growth by giving a thrust to employment generation.
Indicators of FT Growth rate of EXIM Exports as % of total o/s external debt Exports as % of external debt service(int+principal) repayments(debt service ratio). Export as a% of NI Export as a% of GDP Imports as a% of F/E reserves .
withdrawals of foreign deposits & investments. Profit repatriation to other countries Gifts & donation made to other countries .EXCHANGE RATE Importance F/E is demanded for imports. debt servicing. foreign travel.
central bank of the country has to constantly monitor the F/E market and make corrective intervention from time to time.among other things.Con.encourage speculations and discourage investment by foreign companies and in export sectors. .. A good macro environment is characterised by exchange rate stability. Exchange rate flactuations bring uncertainity in foreign trade. The market by itself does not ensure stability.
Exchange rate stability is often regarded as a sign of stable economy and it facilitates business planning as well. . The foreign investors don’t prefer weak currency areas.Con..
F/E reserves of a country indicate its ability to: Pay for imports Discharge its external debt liabilities. . Rise fresh borrowings in international market.F/E reserve It consists of foreign currency assets.gold holdings of the central bank and SDR’s. Intervene in the F/E market to stabilize its rate of exchange.
Which are used as international unit of account in international official transaction. These are convertible into leading currencies of the world and are universally acceptable. . SDR’s are originally created in 1969 at the rate of SDR1=1 US$.SDR’s SDR’s are the international reserve assets created by IMF.
086$ it is revised after devaluation of dollar.Japanese Yen.Con. .British Pound. The weights are periodically revised according to the changing importance of these currencies in the world economy. Since 1989 the SDR valuation has been simplified and linked to the weighted average of 5 leading currencies of the world Viz.FF.Germany Mark.. 1971 SDR1=1. US$.
.would maintain a comfortable level of reserves even by borrowing from abroad . SDR’s are created according to the needs of international liquidity of the world economy and are distributed to the member countries in proportion to their contribution to the IMF.Con.most Govt. . To project a good image of the economy. particularly in less developed countries.
Con. . Ex. That is why a good level of reserves is often seen co- exist with a high level of external indebtedness..In 2002 april India’s F/E reserve stood at a comfortable level of $55 billion where as it’s o/s external debt was about $100 billion.
. F/E crises and heavy restrictions on imports and outward remittances. Low level of F/E reserve of a country indicates an imminent & substantial devaluation of currency. All these signs indicate a negative macro environment. .Con. requiring strong and sweeping policy measures to alleviate the situation.
Employment generation & poverty reduction Balanced regional development Free movement of goods. The importance of infrastructure are : Fuller utilisation of existing and potential.Economic Infrastructure Economic infrastructure is the foundation on which various economic activities take place. Support directly to productive activities.services and factors of production .
Coping with increasing population and demand. Product diversification Expansion of domestic & international trade Environmental improvement.Con. Improve quality of life Quality infrastructure-huge investment-tax holidaysflexibility in operation ..
Infrastructure Transportation Road Rail Water/sea Air Communication postal Telephone Internet mobile .
Con.. Financial sector Energy Coal Petroleum electricity .
it is directly related to human development like Education Training Health care Family welfare Social security & social welfare .Social Indicators Govt & non-govt organisations are actively involved in social developments.
backward & economically poor classes & rural masses.old population.children. Specific programmes targeted at women.Con.. .
Planned economy/command economy The Govt. controlls most of the factors of production and makes of the production decisions.control over the economy on the premise that individual wishes are secondary.it means strong Govt.ECONOMIC SYSTEMS Market Economy/free economy It operates in a free market and is not planned or controlled by a central authority. .
MIXED ECONOMY The equal importance given to public and private sectors .
availability of skilled manpower Stable economy does not get affected by external changes .SWOT Analysis of Indian Economy STRENGTHS Huge pool of labour force High % of cultivable land Diversified nature of the economy Huge english speaking population.
Con..third largest reservoir of engineers High growth rate of economy Rapid growth of IT and BPO sector bringing valuable F/E Abundance of natural resources . Extensive higher education system.
Poor infrastructural facilities .Weakness Very high % of workforce involved in agriculture which contributes less % to GDP. High unemployment rate Inequality in prevailing socio economic conditions. Around a quarter of a population below the poverty line.
Con..leading to inequality in living standards . Low productivity Huge population leading to scarcity of resources Low level of mechanization. Low literacy rates Unequal distribution of wealth Rural-urban divide.
engineering design Area of biotechnology . Inflow of FDI is likely to increase in many sectors Huge foreign exchange earning prospect in IT and ITES sector Investment in R&D .Opportunities Scope for entry of private firms in various sectors for business.
threats High fiscal deficit Threat of Govt.rate of growth of population still high Agriculture excessively dependent on monsoon . intervention in some states Volatility in crude oil prices across the world Growing import bill Population explosion.
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