Macro Economics-Revision

Presented
By
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Lalan mishra
 Macroeconomic Policies

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 Fiscal Policy

Public Public Public Debt

Revenue Expenditure policy
policy policy

Development Internal &

Non-Tax Expenditures External
Tax Revenue
Revenue •Economic
•Social
Productive &
•Cultural
Unproductive
Direct Fees Planned
Taxes Fines Expenditures
Gifts & Non-planned Short-term &
Grants Expenditures Long-term
Indirect Spcl.
Taxes Assessment
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Classification of Taxes

Proportional Tax

Progressive Tax

Regressive Tax

Degressive Tax

Import Export

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 Objectives of Fiscal Policy
General Objectives Developing Countries
• Economic Growth • To accelerate the rate of
Economic Growth
• To help build-up-basic and
• Full Employment heavy industries
• To achieve regional balance
development
• Price Stability • To help mobilize capital
formation
• To help develop infrastructure
• Social Justice • To bring decentralization of
the economy
• To reduce the concentration
of economics power in the
hands of 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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 Consequences
Precautions

• Should be used in moderate • Increase in

doses only – money supply with the
• Prices of consumer goods & public
essential raw materials
should be effectively ctrld – Level of income of
• Concentrate on quick people
yielding projects – General price level
• Food imports should be
arranged in time & in
adequate qtys to ctrl prices
• Rise in wages & salaries
should be checked

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 Stock of assets
Money Used for transactions
A type of wealth

Self-sufficiency
Without Money
Barter economy

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 Static Functions
Dynamic
functions

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 Supply of Money
• Sm = Cp + D
where, Sm – Total supply of money
Cp - 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
Issued by central govt.
– Small coins in Circulation
• Demand deposits – DD held by public with the commercial
banks

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Four Concepts of Money Supply adopted by RBI from April
1977

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Determinants of Sm Factors influencing Sm

• High powered money (H) • Govt. borrowing from the

banking system
D • Bank credit to commercial
H=Cp + R Cp
or pvt. Sector
• s in net foreign exchange
assets held by RBI
C R • Govt’s currency liabilities to
the public
• Reserve ratio
CC= Initial deposit*1/RR

• Currency deposit ratio of the

public (k)
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 Keynes’ LP theory of rate of interest
• r is determined at the intersection of supply
and demand of money.
Y Sm
Sm Sm1 Sm Sm’
r’
E
r r r1
LP’ r
LP r1 LP r’ LP
X LP1
m1
m1 m1 m m’
Fig.a Fig.b
Fig.c
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 Hicks- Hansen theory
y1
y2
r1 y3 r1
r2 y4 r1
y5 r2 r2
r3 s1 r3 LP5
r4 s2 r3
r4 LP4
r5 s3 r5 r4 LP3
s4 r5 LP2
s5 I IS LP1
0 0 0
0 y5y4y3y2 y1
y1 y2 y3y5
LM Curve
IS Curve
LM

r E
IS
IS&LM Curve 0
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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 Open Economy
• No marginal International • It refers to Domestic +
economic relationship with Substantial external sector
other nations. • NI Identity->Y=C+I+G+(X-M)
• Self sustained economic =C+I+G+NX
unit • Essentially International
• NI IdentityY=C+I+G macro economics
• AD= C+I+G
• Hardly a domestic sector

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• NOEM is extension of OEM
• 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<M, GDP<(C+I+G)}
– Trade balance {X=0, NX=0, GDP=(C+I+G), NFI=0}
• Degree of openness
DO= TR= 100[(X+M)/GDP]
Trade Ratio is expressed in terms of %.
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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 are
taken into account
– The diff units of labour are homogeneous
– Pdtn is undertaken under Const returns to scale
– Factors of production are perfectly mobile within the
country 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-O Model
– Diff in the factor prices
• Diff in factor endowment

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Balance of Trade Balance of Payments
• Diff b/w the value of • Comprehensive record of
commodity exports and economic transactions of
imports the residents of a country
• Xs &Ms of visible goods with the rest of the world in
• Balanced BOT (X=M) a given period of time.
• Surplus BOT (X>M) • Visible + invisibl goods
• Deficit BOT (X<M) • Current a/c and capital a/c
• Balanced BOP (X=M)
• Deficit BOP (X<M)
• Surplus BOP (X>M)

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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 Deliberate
• Under gold std
– X &Ms of gold
• Under paper currency
std
– Rate of exchange

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 Paper currency STD

PPP theory BOP theory

• 2 indpendent countries, no • Free exchange rate tends to
restrictions on X &M b/w be such as to equate the D
them & S of foreign exchange.
• Rt. Of exchange
– Absolute version
– Relative version

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