Macroeconomics-Overview

CA MADHUSUDAN KUMAR PODDAR

FCA, Insolvency Professional, DISA, DIRM, Certification in MSME(IIBF), B.com (H)
 What is Economics
• Two fundamental facts:-
– Human wants are unlimited
– Means to satisfy wants are unlimited.

Economics is the branch of study that focus on how

the scarce resource to be allocated to
produce/distribute/consume goods/services to
satisfy human want that brings maximum wealth,
and prosperity in a society.
CENTRAL PROBLEMS OF AN ECONOMY
• What to produce?
• How much to produce?
• How to produce?
• By whom to produce?
• For whom to produce?
• When to produce?
• Where to produce?
Micro Vs Macro Economics
ECONOMIC FUNCTION OF GOVERNMENT
• ALLOCATION OF RESOURCE FOR PRODUCTION

• FAIR DISTRIBUTION OF VALUE ADDITION

• STABLISATION FUNCTION

The allocation and distribution function is primarily microeconomic

function, while stabilization is a macro economic function.

In a free market economy government intervene to correct

market failure through FISCAL AND MONITARY function.
 Capitalist vs Socialist economy
• Capitalist Economy- majority of resource Owned
managed and controlled by private enterprise

• Socialist economy- Majority of resource Owned

managed and controlled by state

• Mixed economy- Majority of resource Owned

managed and controlled by state as well as
private enterprise in some proportion
 Market Vs Centrally planned economy
• Basic problems can be solved either by:-
– the free interaction of the individuals pursuing their own objectives
as is done in the market or
– in a planned manner by some central authority like the
government.
– In reality, all economies are mixed economies where some
important decisions are taken by the government and the
economic activities are by and large conducted through the market.
Market Economy Centrally planned economy

Mixed Economy
 POSITIVE AND NORMATIVE ECONOMICS

• Positive economics:- what exist, the fact.

• Normative Economics:- what should be, the

goal.
 Study under Macro Economics
• National Income Accounting
• Public Finance & budget
• Monetary function (Money & Banking)
• Open Economy Macroeconomics
National Income Accounting
 What is National Income
• National income is aggregate of total value of all new goods and
services produced with in in an accounting year.

• It can also be termed as sum of all factor income. It is same as net

national product at cost.

• It provide framework to analyze the performance of an economy.

NI is sum of all
new production.
Hence C is not
right.
Measurement of National Income in India

Base year for GDP calculation- 2011-12 (now changed to 2017-18). A base year is used for
comparison in the measure of a business activity or economic index. For example, to find the
rate of inflation between 2013 and 2018, 2013 is the base year or the first year in the time
set.

National income accounting is a double-entry accounting system used by

governments to measure how well a country's economy is performing.
Circular flow of Income
 Three sides of national income

Non reported output and illegal incomes such as from narcotics/gambling etc are
not part of national income.
 Some Varients of National Income
REAL VS NOMINAL-
NOMINAL:- PRODUCTION VALUED AT CURRENT PRICE.

REAL:- PRODUCTION VALUES ARE CALCULATED AT A BASE YEAR PRIC E. IT IGNORING CHANGE DUE TO PRICE
FLUCTUATION BY MEASURING PRODUCTION ONLY AT CONSTANT PRICE.

GDP Deflator:= Nominal GDP/Real GDP*100 (MEASURE EFFECT OF INFLATION)

DOMESTIC VS NATIONAL-
DOMESTIC:- PRODUCTION WITHIN ECONOMY TERRITORY IS ADDED.

NATIONAL:- PRODUCTION BY CITIZENS OF ECONOMY IS ADDED.

GROSS VS NET-
GROSS:- CAPITAL STOCK DEPLATED DUE TO VALUE ADDITION IS NOT ADJUSTED.

NET:- CAPITAL STOCK DEPLATED DUE TO VALUE ADDITION IS ADJUSTED.

MARKET VALUE VS FACTOR COST-

MARKET VALUE- MARKET VALUE INCLUDE INDIRECT TAXES AND SUBSIDIES.

FACTOR COST:- MARKET VALUE- INDIRECT COST+SUBSIDIES

 Product side measurement- GDP
• Final goods Vs Intermediate goods:- If goods is for consumption or
investment it is final goods. If goods is for further sale or
transformation, it is intermediate goods.

• While calculating GDP there can be two approach.

– First is only Value of final goods are taken as these include value of
intermediate goods.
– The alternate is to sum GVA i.e. gross value added of all the entity.
GVA= Value of Output- Value of intermediate consumption

• GDP ignores depletion in fixed assets ie depreciation. The same is

factored in while calculating NDP.

• Basic variant of GDP is measured at Current market price. Then

adjustments are made to arrive other variants of GDP.
 FORMULA
• GDP:- ∑ VALUE ADDED = VALUE OF OUTPUT PRODUCED IN DOMESTIC TERRITORY-VALUE OF
INTERMEDIATE CONSUMPTION

• GNP:- GDP+- NET FACTOR INCOME FROM ABROAD BY INDIAN CITIZEN

• NDP= GDP-DEPRICIATION (CAPITAL STOCK DEPLATED DUE TO VALUE ADDITION)

• NNP= GNP-DEPRICIATION (CAPITAL STOCK DEPLATED DUE TO VALUE ADDITION)

• NOMINAL VS REAL:- NOMINAL INCOME CALCUATED CONSIDERING CURRENT PRICE OF

PRODUCT. REAL INCOME IS CALCULATED BY IGNORING CHANGE DUE TO PRICE FLUCTUATION BY
MEASURING PRODUCTION ONLY AT CONSTANT PRICE.

• GDP DEFLATOR:- NOMINAL GDP/REAL GDP (MEASURE EFFECT OF INFLATION )

• GDP/NDP AT MARKET PRICE VS FACTOR COST- MARKET PRICE OF A PRODUCT INCLUDE

INDIRECT TAX ALSO.

• MARKET PRICE= FACTOR COST+INDIRECT TAXES

• FACTOR COST= MARKET PRICE-INDIRECT TAXES ON PRODUCT

 Income Method
• Production is carried out by all factors of production.

• Each factor gets its share out of total value addition.

• This method assumes - Sum of all factor income= total value addition at factor
cost

• This method is also called as Factor income method/factor payment

method/distributed share method.

• National income= Wage + Rent + Interest + Profit

 Expenditure method

Government Net export (E-I)

Sector Import is expense
Spending on consumer Spending on outside India. Hence
Expenditure- G goods- C Capital goods- I reduced. Export is
added

Net Export
 Leakage or injection in flow of income
• Leakage means withdrawal from the flow. Ex- Taxes, Saving.

• Injection means introduction of income into the flow.- Ex- Gov expenditures, Investment.

• When house hold save, its leakage.

• When the saving is converted in to investment, which is then borrowed by firms, it become
injection. Financial institutions or capital market play the role of intermediaries in converting
saving in to investment.

• Leakages must be rectified by injections, otherwise the economy stagnates or declines.

• When leakages equal injections, total spending will equal total output and the macro
economy will be in equilibrium.

• If leakages exceed injections, then total output exceeds total spending and the level of
national output (GDP) will fall.

• If there is too much spending, GDP may reach equilibrium at a level in which there is
inflation.
Right answer should be C
Problem of Non-Monetized Sector
• What is non monetized sector:- There exists an
unorganized barter economy where money is not
used for transaction purposes. Naturally, a large
amount of output does not come to the market and
is not subjected to recording for national income
calculation.

• The soundness of national income estimates is

affected badly if there exists a large non-
monetized sector. This creates valuation problem.
 Problem of Illegal income
• Illegal incomes are not reported in national
income accounts.
• In other words, illegal forms of economic
activity and illegal activities that are not
reported to the authority for the purpose of
paying taxes are left out from national income
accounts.
• This is what is called underground or black
economy.
 Facts about gross domestic products
Contribution to GDP:- Sectors are- Agriculture, industry, services.
The services sector is the largest sector of India. Gross Value
Added (GVA) at current prices for the services sector is estimated
at 96.54 lakh crore INR in 2020-21. The services sector accounts
for 53.89% of total India's GVA of 179.15 lakh crore Indian rupees.

Contribution to Gross domestic savings:- from saving point of view,

saving comprises household sector, private corporate sector and
public sector. In terms of contribution, household sector leads the
tally with a contribution of 73% as per 2013 data. It is followed by
23% contribution from private corporate sector and 4% from
public sector.
 NATIONAL INCOME VS PI VS DI
• NATIONAL INCOME VS PERSONAL INCOME VS DISPOSIBILE INCOME-

• NATIONAL INCOME- INCOME EARNED

• PERSONAL INCOME-INCOME RECEIVED (WHETHER OR NOT EARNED).

• DISPOSIBLE INCOME- PI- INCOME TAXES

• PERSONAL INCOME- NI+INCOME RECD BUT NOT EARNED- INCOME EARNED BUT NOIT RECD

• DISPOSIBLE INCOME- PI- INCOME TAX- OTHER COMPULSARILY PAYABLE TAX

• PER CAPITA INCOME:- GDP/TOTAL POPULATION

Transfer payment are part

of personal income, not
national income.
 Rate of growth
• Economic Growth Rate is the rate at which a
nation's Gross Domestic product (GDP)
changes/grows from one year to another.

• Per capital growth rate:- The growth rate of per

capita income roughly equals the difference
between the growth rate of income and the growth
rate of population.
Inflation/Growth rate trade off

Inflation and cost of capital has

positive relation- Ibbotson Chen Model
 Stock Vs Flow
• Stock refers to the value of an asset at a point in time,
while a flow refers to the total value of transactions (sales
or purchases, incomes or expenditures) during an
accounting period.

• In economics, capital consists of anything that can

enhance a person's power to perform economically
useful work.
• At any given moment in time, total physical capital may
be referred to as the capital stock
Fiscal Function
 What is Fiscal(Public finance) Function of
Government

• Fiscal function is also called as public finance

function.
– Public- General peoples
– Finance- Resources
– Public finance: Resources of the masses, how they are
collected and utilized.

• Fiscal function involve- Collection of revenue &

Expenditure.
 Scope of Public Finance
• Scope of public finance can be categorized into four areas:

– Public Income-Public finance deals with all those sources or methods through which
a government earns revenue. It studies the principles of taxation, methods of raising
revenue, classification of revenue etc.

– Public Expenditure-In public expenditure, we study various types of classification, the

principles which govern public expenditure and its effects on various factors like
production, employment, income stability and growth.

– Financial Administration-It includes collection, custody and disbursement of public

money, management of public debt, general control on financial operations of the
govt. etc.

Public debt-When public expenditure exceeds public revenue, the gap is filled by public
borrowing or public debt.
Funds of India
 Budget
• Article 112 (202): “Annual Financial
statements” to be laid before both houses of
parliament: to include estimated expenditure-
Charged and voted from the CFI.

• Budget cycle contains:-

Formation
Audit
Enactment
Implementation
Plan VS non Plan:- Plan expenditure are those which are incurred on the program
detailed under current 5 year plan. Non plan expenditures are those outside 5 year
plan.

Charged vs Voted Expenditure:- Expense charged upon consolidated fund of India,

like president salary etc. These are not voted, can only be discussed in parliament.
Voted expenditures are first voted and approved, then only can be withdrawn from
consolidated funds of India.
 REVENUE RECEIPT VS CAPITAL RECEIPT
• All government receipts which either create
liability or reduce assets are treated as capital
receipts. Government is either under future
obligation to return the amount, or it is a
recovery of an asset like disinvestment.

• Whereas receipts which neither create

liability nor reduce assets of government are
called revenue receipts, like taxes.
 REVNUE EXPENDITURE VS CAPITAL
EXPENDITURE
• Revenue expenditure refers to
the expenditure which neither creates assets
nor reduces the liability of the government.

• Capital expenditure refers to

the expenditure which either creates an asset
or reduces the liability of the government.
 Budgetary/Government Deficit
• Budgetary/government Deficit can be measured in to:-

• Revenue Deficit = Revenue Expenditures (RE) – Revenue Receipts (RR)

• Fiscal Deficit = Revenue Deficit + Capital Deficit (Excluding Borrowing) = Total expenditure-
total receipts excluding borrowings. It shows amount of borrowing to meet expenditures.

• Primary Deficit = Fiscal Deficit of the current year minus interest payments on previous
borrowings. Primary Deficit shows the amount of borrowing excluding interest payments.

** FISCAL DEFICIT IS EXCLUDING BORROWING. TOTAL RECT-TOTAL EXP INCLUDING BORROWING=BUDGETARY DEFICIT.

Effective Revenue Deficit- The term was first introduced in 2010-11. It is not globally
accepted, but an Indian version.
Effective revenue deficit= Revenue deficit – Grants for creation of capital assets.
(The present accounting system includes all grants from the union government to the state
governments/union territories/other bodies as revenue expenditure, even if they are used to create
assets.)
The Fiscal Responsibility and Budget Management
Act, 2003
 FISCAL FEDELARISM IN INDIA
• It refers to division of powers and responsibilities
related to public between various layers of
government, ie Central, State, Municipal/Panchayat.

Advised by
Finance
commission
(1 Chairman+4 other member)
 Expansionary policy

• Expansionary fiscal policy includes tax cuts, transfer

payments, rebates and increased government
spending on projects such as infrastructure improvements.
• Expansion policy- if economy in slow down
• It being up fiscal deficit.

• Contractionary fiscal policy occurs when government

raises tax rates or cuts government spending, bring down
demand.
• Contraction policy- if economy is in inflation/boom
• It result fiscal surplus.
Fiscal policy impact on balance of payment

• Expansionary policy:- demand increase, import increase. In short run

Balance of payment detoriate.

• Contractionary policy:- demand decreases, import decreases. In short

run Balance of payment improve.

• If there is both fiscal deficit as well as current account deficit it is

termed as twin deficit.
 Monetized deficit
• Monetized deficit is the monetary support the
Reserve Bank of India (RBI) extends to the
Centre as part of the government's borrowing
programme. In other words, the term refers to
the purchase of government bonds by the
central bank to finance the spending needs of
the government.
Monetary Function
 What is money
• Any thing that can-
– Store value
– Serve as unit of price measurement
– Medium of exchange
 Theory of Money demand
• Fisher quantity theory
• Cambridge approach
• Keynes Liquidity preference theory
• Bomoul and Tobin cash management theory
• Friedmans restatement theory
 Money Supply
• High Powered Money/Monetary base

• Money multiplier

• Credit Multiplier

Narrow money (M1, M2) VS Broad money (M3 & M4)

Narrow money- Highly Liquid cash & Demand deposit
Broader money- Narrow money+ Term deposit
 High Powered Money/Monetary base
• High powered money or powerful money refers to that
currency that has been issued by the Government and
Reserve Bank of India. Some portion of this currency is
kept along with the public while rest is kept as funds in
Reserve Bank.

• H=C+R
• Where H = High Powered Money
• C = Currency with the public (Paper money + coins)
• R = Government and bank deposits with RBI
 Interest rate
• Real interest rate
• Nominal interest rate
• Relationship of interest rate with inflation
(Fisher Effect)
• How interest rate is determined
 Yield Curve
• The term structure of interest rate is also
known as Yield curve.

• Upward slope indicates that long term rates are

higher than short term rates.

• Upward slope is normal curve.

• Downward slope is evidenced when recession is

expected. In expectation of recession, more
buying pressure is on long term bonds with high
YTM which result in to their price go up, and
lowering their YTM resulting in to downward
curve.

• A Flat curve is evidenced while Yield curve is in

transition from upward to downward or
downward to upward. It is temporary. Time to yield curve or simply yield
curve
 MEANING OF MONITARY POLICY
• Use of monetary instrument which are at the disposal of
central bank to regulate the availability/cost/demand of
MONEY/CURRENCY to achieve economic objectives.

Under the amended

RBI Act,
the monetary
policy committee is
required to meet at
least four times in
a year.
 Quantitative Vs Qualitative Instruments of
Monetary Policy

• Quantitative Methods:- The quantitative instruments are also known as general tools
used by the RBI (Reserve Bank of India). As the name suggests, these instruments are
related to the quantity and volume of the money. These instruments are designed to
control the total volume/money of the bank credit in the economy. These instruments
are indirect in their nature and are used to influence the quantity of credit in the
economy.

• Qualitative instruments:- are also known as selective tool of the RBI's monetary policy.
These instruments are used for discriminating between various uses of credit; for example,
they can be used for favouring export over import or essential over non-essential credit
supply. This method has an influence on both borrowers and lenders.

• EX:- Credit rationing:- In banking, credit rationing is a situation when banks limit the supply
of loans to consumers. In economics, rationing refers to an artificial control of the supply and
demand of commodities. RBI fixes a credit amount to be granted for commercial banks.
Direct Vs indirect Instrument of Monetary policy

Direct
command
 Instruments
RBI PAYS NO INTEREST ON CRR - 18% AT PRESENT

- 3.5% AT PRESENT

4.00% AT PRESENT

3.25% AT PRESENT

4.25% AT PRESENT
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 Hard currency vs soft currency
• Hard currency is a stable and reliable form
of currency that is issued by the government and
widely accepted around the world. It is used as
foreign currency reserve globally. EX- Dollar

• Soft currency is an unstable form of currency that

is unconvertable, fluctuates erratically, and/or
depreciates against other currencies.
 Bank rate vs Repo rate
• Bank Rate is charged against loans offered by the central bank to
commercial banks, whereas, Repo Rate is charged for repurchasing
the securities sold by the commercial banks to the central bank.

• No collateral is involved while charging Bank Rate but securities,

bonds, agreements and collateral is involved when Repo Rate is
charged.

• Repo Rate is always lower than the Bank Rate.

• Comparatively, Bank Rate caters to long term financial requirements

of commercial banks whereas Repo Rate focuses on short term
financial needs.
Deficit financing increase
liquidity in market
resulting in to inflation.
Hence to stabilize, RBI
increase CRR/SLR.

Credit basically means

getting the purchasing
power now and
promising to pay at some
time in the future.

Statutory definition
Business cycle and Yield Curve
 What is Business Cycle
• The business cycle, also known as the economic cycle, are the
fluctuations of gross domestic product (GDP) around its long-
term growth trend.
• Growth path of an economy is not smooth. It is cyclical (With
ups and downs).
High
volatility
means less
Trend Line
economic
efficiency,
low
volatility
means high
economic
efficiency
Expansion Vs Recovery- Expansion is above trend line, Recession Vs Depression- Recession is declining phase
recovery is under trend line. Both show upward of economy. When the declining phase remain too
movement long, it become depression.
 Completion of business cycle
• A business cycle is completed when
it goes through a single boom and a single
contraction in sequence. The time period to
complete this sequence is called the length of
the business cycle.
Characteristics of economy in each stage of cycle

Right answer is 6. In
answer recession and
depression is clubbed.
 Reason for a business cycle
Internal Causes:- Changes in Demand, Fluctuations in Investments, Macroeconomic
Policies, Supply of Money
Supply side factors:- Wars, Technology Shocks, Natural Factors (flood,disaster), Population
Expansion
 Indicator of business cycle

• Business cycle indicators (BCI) are consist of

leading, lagging, and coincident indicators.
 Real Business Cycle theory
• The real business cycle theory makes the fundamental
assumption that an economy witnesses business cycles due
to technology shocks.
• According to the theory, economic shocks are not caused by
change in aggregate demand, but by change in aggregate
supply. Aggregate supply is changed due to real factor, ie
technological change.
• Technological shock may be positive or negative.
• These shock result in to shift of output scale upward or
downward becoming reason for business cycle.
 Political business cycle
• The term political business cycle is used mainly
to describe the stimulation of the economy
(by adopting expansionary fiscal policies, and
often monetary policies) just prior to an
election in order to improve prospects of the
incumbent government getting reelected.
International Trade
 Theories of international trade
• Mercantilist view
• Absolute advantage theory
• Comparative advantage theory
• Heckscher and Ohlin theory of trade
• New international trade theory
 Instrument of international trade
• Free trade vs Control
• Tariff barrier- Advalorem, specific tariff, mixed
• Non tariff barrier- License, quota, subsidy, VER
 Trade negotiation
• GATT
• WTO
 Exchange rate
• What is exchange rate (nominal exchange
rate)
• Purchasing power parity
• Real exchange rate
• Nominal rate= Real exchange rate * domestic
Price level/Foreign price level
• Effect of currency appreciation and
depreciation
• Effect of interest rate on Exchange rate
 Balance of Payment
• Definition
• Component
• How BOP affect national income
• Effect of exchange rate on BOP
• Effect of interest rate on BOP
Thank You