# Economic Indicators-2

Module-2

12/14/2008

Surana College PG Centre

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Rate Of Inflation
• Inflation is a rise in the general level of prices of goods and services in an economy over a period of • Inflation Rate = Pt - Pt-1 time -------------- * Inflation is a decline in 100 the real value of money—a loss of Purchasing Power Pt-1 Inflation is measured in • Purchasing Power = 1 Inflation Rate. ----------------* Inflation Rate is the rate Rs of Increase of a price Index 1+ Inflation The price Index measure Rate the cost of buying a standard basket of goods and services at different points of time 12/14/2008 Surana College PG Centre 2

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Rate Of Inflation
Goods & Services Qty 1 10 Kg 2 Ltr 4 Mtrs 1 Ltr Price in 2006 10 Rs. 100 20 1000 45 1175 Price in 2007 10 Rs. 100 30 1100 50 1290 12901175/1 175*10 0= 9.8% Inflatio n Rate

Inflation Rate Fruits Pt - Pt-1 Milk -------------- * 100 Textile Pt-1
Petrol Total

Tooth Paste

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In 2007 We can only purchase 91.2 % of goods Surana College PG Centre 3 bought in 2006

Rate Of Inflation- Basis of calculation
• Consumer Price Index:  Measures the cost of buying a standard basket of goods & services at different point of time at retail level.  The basket of goods & services and consumption pattern are found out through Household Survey  It is the most widely used Index to measure Inflation

Based on: • Consumer Price Index CPI • Wholesale Price Index - WPI • Producer Price Index PPI

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Surana College PG Centre

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Rate Of Inflation- calculation based on CPI
Basket Food Clothing Housing Fuel % 2006 Price Consume 100 Index 0.10 d 0.05 100 0.25 0.10 100 100 100 100 2007 Price 110 Index 100 120 110 115 90 Weighted Index 0.10*110= 11 20 30 11 23 27 124%

Transpor 0.20 t Educatio 0.30 n Total 100%

• The rate of Inflation for 2007 is 24 %
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Rate Of Inflation- Basis of calculation
• Wholesale Price Index:  Measures the General price index at the level of second or subsequent transactions but before the transaction at retail level.  India uses this index to measure inflation India prepares the following indices:  Primary Product Group: Essential commodities like food grains, fruits, milk etc.  Manufactured Product Group:
Processed foods like Sugar, Edible oil, Manufactured products like paper, cement etc
12/14/2008 Surana College PG Centre

Based on: • Consumer Price Index CPI • Wholesale Price Index - WPI • Producer Price Index PPI

 Fuel, Power Light &

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Rate Of Inflation- Basis of calculation

Based on: • Consumer Price Index CPI • Wholesale Price Index - WPI • Producer Price Index PPI

• Producer Price Index:  Measures the General price index at the level of first transactions but before the transaction at retail level.

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Surana College PG Centre

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Rate Of Inflation
Inflation Rate 2–5% 5 – 10 % Type of Inflation Creeping Walking
Impact

Price Stability, Healthy Economy, Motivation for New Investment, Govt. Monitor, In Developed Countriesenjoys Price Rise, Business Increase in Production cost, Interest Rate, & Wages, Firms resort to Hedging,affect exchange rate &start , Increase Speculation will govt .Revenue, In cost,developed countries in less interest,wage continue, attracts foreign Portfolio investors, discourage FDI, Local currency depreciation, exchange rate affected, Govt capital, Massive outflow of implement control measures Intensive speculation Collapse of economy

10 – 20 %

Running

20-50% Above 50%
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Galloping Hyper

Surana College PG Centre

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Rate Of Inflation
Reasons / Sources of Inflation
• • • • • Increased Demand for Goods - Demand Pull Inflation Increase in Cost of Production – Cost Push Inflation Increase in Wages - Wage Push Inflation Increasing Profit – Profit Push Inflation ( Monopoly Situations ) Increase in Income of Low income Groups – Income share Inflation

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Surana College PG Centre

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Rate of Inflation
Sector
Household

Impact
Reduces Purchasing Power, Reduces standard of living, Fixed income earner’s value eroded Invest in Gold Postponed purchases , deposit Initially enjoys more revenue Production cost increases Margin reduced Depending upon price elasticity, demand will reduce Export firms will be affected Local currency depreciates Import firms benefited

Debtor & Creditor
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Surana College PG Centre

Distribute income by benefiting debtor and affects creditor ( Fixed interest )

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Rate of Inflation
Sector
Government

Impact
Increases revenue Increases cost of expenditure Affects fiscal deficit depending upon expenditure or revenue Output & Efficiency – affected if Inf. Accelerates Currency effect – Devalues Balance of Payment - Deficit

Macro - Environment

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Surana College PG Centre

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Rate Of Inflation
Tools of Inflation Control

• • • •

Restrictive Monetary Policy Restrictive Fiscal Policy Wage – Price Controls Deregulation & Privatisation

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Surana College PG Centre

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Rate Of Inflation
• Restrictive Monetary Policy

Tools of Inflation Control

 Purpose: To reduce the demand of Goods & services.

• Restrictive Monetary  Strategy : Reduce money supply Policy
• • • Restrictive Fiscal Policy

 Policy adapted by Government: Increase Interest rate Increase Cash Reserve Ratio (CRR) Wage - Price Controls Increase Statutory Liquidity Deregulation & Privatisation Ratio(SLR) Increase in Prime Lending Rate ( PLR ) Sale of Government Securities ( Treasury bill , Bonds etc. ) Sell Dollars from Market
Surana College PG Centre 13

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Rate Of Inflation
• Restrictive Fiscal Policy

Tools of Inflation Control
• Restrictive Monetary Policy

 Purpose: To reduce the Purchasing Power of People  Strategy : Reduce Government Expenditure

• Restrictive Fiscal Policy
• •

 Policy adapted by Government: Wage-Price Controls Increase Direct & Indirect Tax Decrease Expenditure on New Deregulation & Privatisation Projects Reduce Subsidies Massive borrowing Program Implement Austerity measures
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Rate Of Inflation
• Wage-Price Controls

Tools of Inflation Control
• • Restrictive Monetary Policy Restrictive Fiscal Policy

 Purpose: To reduce the Price of Goods  Strategy : Reduce Price of Essential Commodities, Wages

 Policy adapted by Government: Import Essential Commodities Wage-Price Controls Reduce Excise Duty Wage Freeze Deregulation & Privatisation Austerity Measures Ban Futures Trading on Commodities

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Surana College PG Centre

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Rate Of Inflation
Tools of Inflation Control • Deregulation & Privatisation

 Purpose: • Restrictive Monetary Policy To control Supply side Inflation Strategy : • Restrictive Fiscal Policy Increase Competition & Growth

• Wage-Price Controls

• Deregulation & Privatisation

 Policy adapted by Government: Allow Private players to operate in restricted areas

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Surana College PG Centre

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Money Supply

Total amount of money available in an economy at a particular point of time.
Money supply is :  monitored by Central Bank (RBI) through Monetary Policy  12/14/2008 Divided into Four categories –

Surana College PG Centre

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Money Supply
M0:

 These assets can be converted into money quickly  It is the most liquid measure of Money Money Supply supply  It is called Reserve money

M0, M1, M2, M3

It includes All coins, Currency held by the Public, Traveler's Cheques

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Surana College PG Centre

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Money Supply
It includes M0 Demand Deposits with banks  It is the Very liquid measure of Money supply  This money is used to measure Money in circulation  It is also called Narrow money / Money Supply Transaction Money M1:

M0, M1, M2, M3

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Surana College PG Centre

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Money Supply
M2:

M0, M1, M2, M3

It includes M1 Time Deposits Savings Deposits  It is the Broader measure of Money supply

Money Supply

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Surana College PG Centre

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Money Supply
M3:

M0, M1,  It is the Broader measure of Money M2 & supply  It is called the Broad Money M3
Money Supply

It includes M2 Large Time Deposits

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Surana College PG Centre

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Money Supply

M0, M1, M2 & M3
Money Supply

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Surana College PG Centre

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Money Supply

Sources of Money Supply Bank Credits Foreign Exchange Reserves Government’s Currency Liability to Public

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Surana College PG Centre

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Money Supply
• Low Money Supply

To maintain Price Stability Money supply & Output should match
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    

Liquidity shortage Increase in Interest rate Depress Demand Decrease output Recession

• Excess Money Supply
    Lowers Interest rate Increase Demand Increase output Fuels inflation
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Surana College PG Centre

Money Supply
How to reduce Money Supply?  RBI issues Bonds, treasury bills  Banks Reduce credit  RBI Sells Dollars /Euros  Increase Cash Reserve Ratio ( CRR )  Increase Statutary Liquidity Ratio ( SLR )  Increase Prime Lending Rate ( PLR )
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How to increase Money Supply? RBI issues Fresh Money Banks increase credit RBI buys Dollars /Euros Reduce Cash Reserve Ratio ( CRR )  Reduce Statutary Liquidity Ratio ( SLR )  Reduce Prime Lending Rate ( PLR )    

Surana College PG Centre

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Money Supply
Velocity of Money The velocity of money is the average frequency with which a unit of money is spent in a specific period of time

How to reduce Money Supply?  If RBI Increase CRR by 2% , how much money will be taken out from our economy ?

If, for example, in a very small economy, a farmer and a mechanic, with just \$50 between them, buy goods and services from each other in just three transactions over the course of a year How to increase Money • Mechanic buys \$40 of corn Supply? from farmer. • Farmer spends \$50 on tractor  To infuse one crore rupees repair. • Mechanic spends \$10 on food into economy , how many from farmer dollars should be bought by RBI at 12/14/2008 the exchange rate of Surana College• Centre \$100 changed hands in 26 PG then course of a year, even though Rs.50/- per dollar ?

• Export + Import

•     3 .Growth Rate of Export : In the year 2008 – 30% Value of export - \$ 94937 mn Rs. 4,051,18 Cr. till Sep-08 Export growth will be affected if
 Deteriorating economic condition in other countries  High inflation in local economy  Depreciating Local currency

5. Foreign trade Balance :  Trade balance = Export – Import  If foreign trade balance is negative , it is called Trade Deficit  If foreign trade balance is Positive , it is called Trade Surplus

• Trade Deficit • 4 .Growth Rate of Import :  Decreases Foreign Exchange  In the year 2008 – 40% reserve  Value of Import - \$ 154744 mn  Deficit – 256090 Cr 2008  Rs. 6,612,08 Cr. till Sep-08  Shrinking Deficit - can boost GDP Growth  Dollar appreciates  More export or less import increases GDP  Increase in Deficit – Country 12/14/2008 Surana College PG Centre 28 has to borrow from foreign

•      6 .Export as percent of external debt : In the year 2008 – 30% Value of export - \$ 94937 mn Rs. 4,051,18 Cr. till Sep08 Debt – 6,82000 Cr - in 2008 60 % 7. Import as % of Foreign exchange Reserve : Reserve - \$ 275Bn - Rs. 13 Lakh Crorers  50%  40% of import is crude oil  Import 2.8 Mn barrels / day 8. Export as % of GDP : GDP – \$ 1 Trillion Export - \$ 94937  8%
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Surana College PG Centre

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Foreign Exchange Reserve
The Reserve Consists of:  Foreign currency assets – U.S Treasury Bills , U.S Bonds etc.  Gold  Special Drawing Rights ( SDR) 2. Low Foreign exchange Reserve  Foreign exchange crisis Government Action:  Import restriction  Devalue Local currency  Increase Customs Duty

Sources

Govt Buying Dollars Govt. Investment 3. Increasing Foreign In the event of Heavy inflow of exchange Reserve FIIs money into country  Rupee will appreciate ,the rupee will appreciate .  Benefit import firms Appreciating rupee will hurt export. Indicators 4. Decreasing Foreign exchange Reserve  1. Quantity of Foreign exchange reserve  May be due to appreciating indicates a country’s dollar against the basket of six major currencies.  Ability to pay Imports  Rupee will depreciate  Ability to pay External Debts  Benefit exporters  Ability to raise debt Surana College PG Centre 12/14/2008 31  Ability to intervene market

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Exchange Rate Exchange Rate
 In this basket US & UK currencies have the weightage of 28% & 35% respectively.  The weights reflect the bilateral trade between India and the region represented by currency basket

Nominal Effective Exchange Rate (NEER) It is the weighted average of nominal exchange rate s • Real Effective Exchange in the currency basket Rate (REER) against the domestic It is the weighted currency. average of nominal  Present level of this index is exchange rate adjusted 70.63 for inflation differential  Fall in REER / NEER – Implies against domestic and 1. depreciation of foreign countries. Rupee  Indian REER basket of 2. Improved currencies include US Dollar, competitiveness in that Euro, Yen, Pound Sterling, Hong Kong Dollar, Renminbi Yuan . region 12/14/2008 year 1993-94. Present Surana College PG Centre Base  Increase in REER / NEER 32 – index level is 102.82.

The price of one unit of foreign currency in terms of another currency  Rupee- Exchange rate  Rupee Depreciation Source - Outflow of Capital  Rupee Appreciation Source - Inflow of Capital

Economic Infrastructures
• • • • • Power Telecommunication Transport Roads Posts

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Surana College PG Centre

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Social Indicators
1. Poverty - <\$1 a day 4. Public expenditure on 34.7% Health – 0.6% of GDP - < \$20 a day = 80 % Education – 1.3% of GDP - Bangaldesh, Ethiopia, - 9.6% of Govt. Mali, Nigeria Expend. - 2. Prevalence of Child 5. Per-capita health malnutrition expenditure :\$ 24 / - % of children whose year weight for age is more than 2 sd below the median reference as established by WHO - India 61% poorest quintile - 3. Under 5 Mortality – Probability that a new College PG Centre 12/14/2008 Surana 34 born baby will die •

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