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Macro Economics-Revision
Presented
By
Lalan mishra3/24/2011
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Macroeconomic Policies
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Public
Revenue
policy
Public
Expenditure
policy
Public Debt
policy
Fiscal Policy
Non-Tax
RevenueTax Revenue
DirectTaxes
Indirect
Taxes
Development
Expenditures
Economic
Social
Cultural
PlannedExpenditures
Non-planned
Expenditures
Internal &
External
Productive &
Unproductive
Short-term &
Long-term
FeesFines
Gifts &
Grants
Spcl.
Assessment
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Classification of Taxes
Proportional Tax
Progressive Tax
Regressive Tax
Degressive Tax
Income Tax
PropertyTax
Commodity
Tax
Individual
Interest
Corporation
Wealth Death Duty
Gift
Excise
Customs
Import Export
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Objectives of Fiscal Policy
General Objectives
Economic Growth
Full Employment
Price Stability
Social Justice
Developing Countries
To accelerate the rate ofEconomic Growth
To help build-up-basic andheavy industries
To achieve regional balancedevelopment
To help mobilize capitalformation
To help develop infrastructure
To bring decentralization ofthe economy
To reduce the concentration ofeconomics power in the handsof few.
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Deficit Financing
Net increase in the purchasing power of the
economy arising out of the budgetary
operation of the government. - Planning Commission
Net credit given to th govt. sector from RBI.
Pre-budget economic survey 1974-75
Need for Deficit Budgeting
Prosecution of a war
Fighting of depression
Financing economic development
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Precautions
Should be used in moderatedoses only
Prices of consumer goods &
essential raw materialsshould be effectively ctrld
Concentrate on quickyielding projects
Food imports should be
arranged in time & inadequate qtys to ctrl prices
Rise in wages & salariesshould be checked
Consequences
Increase in
money supply with the
public
Level of income of
people
General price level
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Functions
Of Money
Primary
Medium ofExchange
Measure ofvalue
Secondary
Std for DP
Store of value
Transfer ofvalue
Contingent
Basis for credit
Distribution of NI againstfactors of pdtn
Demand by motives
Equalize the marginalproductivities
Dynamic
functions
Static
Functions
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Classificationof money
Nature
Actual money
Money ofaccount
Legality
Optionalmoney
Legal tendermoney
Limited
Unlimited
Commodity
Metallic money
Standardmoney
FV=IV
Un-ltd LTM
Free Coinage
Main/ principalMoney
Token money
FV>IV
Ltd LTM
No free coinage
SubsidiaryMoney
Paper money
Representative
Fixed Fiduciary
Fiduciary
Fiat
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Supply of Money
Sm = Cp + D
where, Sm Total supply of moneyCp - Currency with the public
D Demand Deposits
Cp includes Currency notes in circulation issued by the Central bank
No. of Rupee notes and coins in circulation
Small coins in Circulation
Demand deposits DD held by public with the commercialbanks
Issued by central govt.
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M3All time deposits of
PO-saving banks(except NSC)
M4
M1Time deposits (FD)
with the banksM3
M1Savings depositswith PO-saving
banksM2
Currencywith thepublic
Demand/currentdeposits
Otherdeposits M1
Four Concepts of Money Supply adopted by RBI from April
1977
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Determinants of Sm
High powered money (H)
H=Cp + R
Reserve ratioCC= Initial deposit*1/RR
Currency deposit ratio of thepublic (k)
Factors influencing Sm
Govt. borrowing from the
banking system
Bank credit to commercial
or pvt. Sector
s in net foreign exchangeassets held by RBI
Govts currency liabilities to
the public
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Cp
R
D
C
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Demand for money
Cash-
Transitionapproach
(Irvin Fisher)
MV= PT Md= kPY
Cambridgeeconomics
Cash-Balanceapproach
(Marshal &Pigou)
Md= M1+M2
M1=L1(Y)
M2=L2(r)
Md=L1(Y)+L2(r)
Keynes'stheory ofdemand for
money
PostKeynesian
theory(Baumol,Tobin andFriedman)
Md= L(Y,r)
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Keynes LP theory of rate of interest
r is determined at the intersection of supply
and demand of money.
E
Sm
LP
m1
r
X
Y
LP
SmSmSm1
Sm
mmm1
LP
LP1
LP
m1
r1r
r
r
r
r1
Fig.bFig.aFig.c
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Hicks- Hansen theory
r1r2r3r4
r5
r2r1
r3r4
r5
y2y1 y3y5y1y5y4y3y2
r1
r2
r5
r3
r4
I
y1y2y3
y4y5
s3
s2
s4s5
s1
0 000
IS
LP5
LP4
LP3LP2LP1
E
IS
LM
r
Level of income
0
IS CurveLM Curve
IS&LM Curve
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Unemployment
Types of Unemployment
Frictional Unemployment
Structural Unemployment
Cyclical Unemployment
Nature of Un N in UDC
Open un N
Disguised un N
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Causes of Unemployment
Population Growth
Lack of the stock of physical capital
Use of Capital intensive techniques
Inequitable distribution of Land
Rigid protective Labour legislation
Neglect of role of Agriculture in N generation
Lack of Infrastructure
Measures for unN
Usual status unN
Current weekly and Daily status unN
Disguised unN
Concept of Full Employment
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Open Economy Macro Economics
(NOEM)
Closed Economy
No marginal International
economic relationship with
other nations. Self sustained economic
unit
NI IdentityY=C+I+G
AD= C+I+G Hardly a domestic sector
Open Economy
It refers to Domestic +
Substantial external sector
NI Identity->Y=C+I+G+(X-M)
=C+I+G+NX
Essentially International
macro economics
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NOEM is extension ofOEM
FIO- FII = NFI NI Identity Y=(C+I+G)+NX+NFI
Open economy may experience
Trade Surplus {X>M, GDP>(C+I+G)} Trade Deficit {X
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Foreign Trade
Why a separate theory of International trade?
Basis for international trade
Comparative cost theory
H-O model
Whether trade takes place or not?
If yes, what are the items of Xs & Ms?
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Comparative Cost theory
The trade or production means only labour costs aretaken into account
The diff units of labour are homogeneous
Pdtn is undertaken under Const returns to scale
Factors of production are perfectly mobile within thecountry and perfectly immobile b/w the countries
No transport costs
Trade takes place only b/w 2 countries & 2 comm
No disturbances in trade cycle.
H-OModel
Diff in the factor prices
Diff in factor endowment
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Balance of Trade
Diff b/w the value ofcommodity exports and
imports
Xs &Ms of visible goods
Balanced BO
T (X=M) Surplus BOT (X>M)
Deficit BOT (X
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Causes for diseqbm in the BOP
Natural factors
Economic factors Cyclical fluctuations
Inflational spiral within the country
Capital movement (outflow & inflow)
Political factors (stable & unstable govt)
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Measures to correct Diseqbm
Automatic
Under gold std
X &Ms of gold
Under paper currency
std Rate of exchange
Deliberate
Trademeasures
Encourageme
nt to exportsthrough
Subsidies to Xindustries
Reduction in Xdties
Reduction inimports
New M duties& Enhancing
existing Mduties
Import quotas
Monetarymeasures
Devaluation
MoneyContraction
Exchangecontrol
Foreign loans
Incentives toforeign tourists
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Paper currency STD
PPP theory
2 indpendent countries, no
restrictions on X &M b/w
them Rt. Of exchange
Absolute version
Relative version
BOP theory
Free exchange rate tends to
be such as to equate the D
& S of foreign exchange.
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