Professional Documents
Culture Documents
Macro Economics For Business Decisions (WWW - Bustudymate.in (BUStudymate - In)
Macro Economics For Business Decisions (WWW - Bustudymate.in (BUStudymate - In)
in
Macro Economics for Business Decisions 2017
Module 1
Introduction to Macro Economics and National Income
Economics:
Economics is a science that analyzes production, distribution and consumption of goods and
services or wealth.
Branches of economics:
1. Micro economics
2. Macro economics
Micro economics
Micro economics is a branch of economics that studies the behavior of the how individuals,
households and firm make decision to allocate limited resources.
For ex; micro economics studies only the employment in a firm or in industry. It is not
concerned with aggregate employment in the whole economy. In brief micro economic studies
the individual economic units.
Macroeconomic:
Macro economics is a branch of economics that studies the economic behavior not of an
individual but the economic system as a whole. It studies the overall conditions of the economy
such as total consumption, total national income, aggregate supply and demand, general price
level.
Instead of studying the income employment, output of a particular firm or industry. In macro
economics we are studying aggregates like total income, total employment, total output in the
economy.
3 It deals with individual income, individual It deals with aggregate like national
price & individual output income general price level, national
output.
7 It focus on issues that affect individual & It will focus on issues that affect whole
company economy
10 The word micro delivered from Greek The word macro delivered from Greek
word Mikros which means small word Makros which means large
1. Economic growth
2. Full employment
3. Economic efficiency
4. Price stability
5. Economic security
6. Equal distribution of income
7. Balance of trade
8. Raising the standard of living
9. Rapid industrialization
10.Elimination of wasteful competition
Economic system
Every individual is free to start any business are choose any occupation with the limits of law.
Eg: united states, Canada, France, US, UK, Germany, Spain, Mexico…
Features of capitalistic:
1. Private property
2. Factors of production are owned by private individuals
3. Profit motive
4. Law of inheritance
5. Economic freedom
6. Indirect role of government
7. Consumer sovergenity
8. No social welfare
9. Existence of perfect competition
Merits:
2. Socialistic economy:
Under socialistic economy the factor of production that is land, labor, money, organization has
owned manage, control by state / government. They carried business for social welfare.
E.g.: China
Merits:
3. Mixed economy:
It refers to the all the factors of production like land, labor, money, organization are owned,
managed, and controlled by both private individuals and government. Business carried over for
profit and social welfare.
Definition:-
According to samual son “mixed economy is that economy in which the public and
private sector exercise economic control”.
E.g.: India.
Merits:
Demerits:
1. Lack of co-ordination
2. No freedom of private sector
3. In efficient public sector
4. Government interference
5. Corruption
National Income:
National income is the total net value of all goods and services produced within a nation over a
specified period of time. It represents sum of wages, profits, rents, interests and pension
payments of citizens of a nation.
Where C = consumption
I = Investment
G = Government expenditure
(X-M) = Exports minus Imports
2. Income method:
According to this method national income obtained by adding up of incomes of all individuals
in the country.
National income is calculated by adding all the incomes earned in the form of rent, wages,
salaries, interest on capital, profit from business, income of self employed people.
3. Expenditure method:
In this method National income is calculated by adding up of all the expenditure made on
goods and services during a year.
If we add the total expenditure incurred by all individuals, households, business units and the
government in a year then we get total national income of the country.
The following expenditures to be added to calculate National income
a. Expenditure by individuals and households on goods and services denoted by C
b. Expenditure by private business peoples on capital goods denoted by I
c. Government expenditure i.e. government purchase denoted by G
d. Expenditure made by foreigners on goods and services denoted by (X-M)
Y = C + I + G + (X-M)
10. Incomes earned through lottery, dowry, pensions, unemployment relief, etc should be
excluded from the calculation of national income because the above items are gratis.
Model questions
1. Explain the significance of macro economics in business decisions? OR Explain the
interface of macro economics with business and Industry.
2. Explain the difference between Micro Economics and Macro Economics.
3. What are various economic systems? Explain the essential features of each one of
them. Which economic system do you prefer and why?
4. “Free market economy enables better allocation of resources, promotes innovation
and injects dynamism in the industry”. Substantiate this statement highlighting the
significance of free market economy.
5. What is national Income? What are the methods of measuring national income? OR
Critically examine the different approaches advocated for measuring the national
Income.
6. Explain the difficulties encountered in computation of N.I.? OR Enumerate the
difficulties which an underdeveloped economy faces in the calculation of national
income.
7. Define national income. Explain the variables included in national income.
8. Distinguish between GNP and NNP.
Module 2
Consumption, Savings and Investment
CONSUMPTION
It means the satisfaction of Human wants by using goods and services. In other words
Consumption is not only related with using of commodities but the use of utilities contain in
goods and services in order to satisfy wants.
For e.g.: when we eat food its utility is completely destroyed but at the same time our want is
satisfied distribution of utility does not mean consumption of commodity.
For e.g.: If a house catches fire and its utility is destroyed. It’s not means that it is consumption
because Human wants are not satisfied.
Where c = consumption
Y = income
F = functional relationship
Here, Income (y) is independent variable and consumption (c) is dependent variable.
1. The law states that when Income increases consumption also increases but it increases not as fast
as income. (This shows that people fails to spend on consumption the full amount of increased
income. If Income increases they save more than what they spent).
2. The increased income divided between Consumption and saving. It means a part of increased
income is spent on consumption and the remaining is saved.
3. As income increases both consumption and saving increases in different proportion.
After this stage income is increased by 100 crs and consumption increased by 50 crs. This
implies that increase in consumption is less than increase in income. The same data is shown in
fig below.
In the diagram “OX” axis represents the level of income and “OY” axis represent the level of
consumption.
‘C’ is consumption expenditure curve. ‘c’ curve slope upward from left to right in the diagram
which shows income increases the consumption expenditure also increases.
At the point ‘B’ consumption equals to income and there is 0 savings. B is called breakeven
point.
Left to the point of ‘B’ the consumption line (C) is above the income line (y).
It indicates negative savings.
Right to the point of ‘B’ the consumption line (c) is below the income line (y). It indicates
positive savings.
Keynes has developed two concepts to analyze the consumption function .they are
I. APC
The average propensity to consume explains the relationship between total consumption
and total income at a certain period of time.
In other words, APC explains what percentage of income spent on consumption of goods and
services. We can drive APC by dividing consumption expenditure by total income.
APC = Total consumption/Total income or APC = C/Y
For instance the income of the community is 2000 crs and consumption expenditure is 1500crs
the average propensity to consume is
APC = 1500/2000
= 0.75 or 75%
This shows that out of the income of Rs.2000 crs 75% will be used for consumption purpose.
II. MPC
The concept of MPC is very important in macro economics J.M Keynes has defined MPC
“as the relationship between changes in consumption and changes in income”
In other words, the ratio of changes in consumption to the changes in income. It may be derived
by dividing changes in consumption by changes in income.
MPC = 7000/10000
= 0.7
A. Subjective factors:
1. Motive of precautions
2. Religious belief of the people towards spending
3. The motive of enterprise
4. The motive of forecasting
B. Objective factors
1. Real income
2. Distribution of income
3. Expectation change in price
4. Change in the fiscal policy
5. Change in the rate of interest
6. Availability of goods
7. Credit facilities
8. Stock of liquid assets
9. Consumer indebtness
10. Demographic factors
11. High living standards
12. Windfall gains
Types of consumption
1) Physical consumption
2) Conspicuous consumption
3) Risk averse consumption
Physical consumption: physical consumption is all about buying and using goods and services.
This type of consumption leads to physiological well being.
Conspicuous consumption: buying expensive items to display wealth and income rather than to
fulfill the real needs of the consumer.
Risk averse consumption: buying and using the goods and services in order to reduce the risk
.ex: healthcare products, banking services, insurance etc..
Saving:
According to Keynes “saving is the amount left over when the cost of a person’s consumer
expenditure is subtracted from the amount of income that he or she earns in a given period of
time”.
S=Y–C
Saving is dependent on Income, where saving(s) is an dependent variable and Income (y) is an
Independent variable.
Symbolically Y = f(S)
As income increases saving also increases finally S=0 and then S>0
As shown in table when income increases savings also increases. When income is zero saving is
negative because people spend out their past savings on consumption. A rise in income to Rs.
100 is not enough to meet the consumption expenditure of Rs. 125 at this stage -25 is the saving.
When income increases to 200 consumption is also increases to 200 at this stage S = 0 after this
sage income increased by 100 and consumption increased by 75 remaining 25 is saving.
Therefore rise in the level of income leads to rise in the level of savings
It is the % of income saves at given level of income. In other words it is a relationship between
savings and income.
For instance if the disposable income is 100 crore and expenditure is 80 crore om consumption
of goods and services then savings will be 20 crore
APS = 1 – APC
80 / 100 = 0.8
MPS is the ratio of changes in savings to changes in income. The following formula is used to
find out MPS
MPS = changes in savings / changes in income
OR
MPS = S / Y
Suppose income increases from 1000 crore to 2000 crores, consumption increases from 800
crores to 1600 crores. Then savings would be go up from 200 crores to 400 crores.
In this case MPS would be
MPS = S / Y
MPS = 200 / 1000
MPS = 0.2 or 20%
It is also calculated by subtracting MPC from 1
MPS = 1 – MPC
Therefore MPC = C / Y
MPC = 800 /1000 = 0.8
MPS = 1- MPC
MPS = 1- 0.8
MPS = 0.2 or 20%
According to Keynes an act of saving of one individual would reduce the savings capacity of
other further he says that an Increase in Individual savings does not lead to an Increase is the
community savings.
The Paradox of Thrift explains that an attempt to Increase an Individuals savings would lead to a
decrease in total savings of the community. This is because of the simple reason that “One man’s
expenditure is another man’s Income”.
An Increase is savings of one person leads to decline in Income & savings of other another
person.
Eg: Assume everybody receives 10000 of Income .They save 50% [5000] and spent the rest
[5000]. This means everybody is spending Rs.5000 which supports demand for products which
creates jobs & generates tax revenue for the Govt.
Now assume that everybody decides to save more, they start saving Rs.7500 of their Rs.2500
which leads to a drop in the demand for goods & services lay off workers &lowest tax revenue
with the Govt.
In this diagram initial saving curve is S, S suppose the people decide to increase their savings
then i.e. A E, savings curve shifts upward from SS to S1S1
INVESTMENT:
MEANING OF INVESTMENT:
Investment refers to the expenditure incurred by individual and business on purchase of new
plant and machinery the building of the house, factories, schools, construction of roads etc……..
TYPES OF INVESTMENT:
1. Induced Investment
2. Autonomous Investment
3. Financial Investment
4. Real Investment
5. Planed Investment
6. Unplanned Investment
7. Gross Investment
8. Net Investment
1. INDUCED INVESTMENT:
Investment which varies with the changes in the level of national income is called induced
investment. The larger the national income the higher is the investment and vice versa
In the above figure the investment curve high is slot upward from left to right. It indicates that
the level of income raises from OY to OY as a result the level of investment rises from OI1 to
OI2
2. AUTONOMOUS INVESTMENT:
The investment which is not influenced by national income is called autonomous investment
It is influenced by many basic factors such as increase in population changes in technology, rate
of interest etc…….
In the above figure autonomous investment curve I it’s a horizontal straight line it indicates that
when national income is OY, the investment is 10 bullion if the national income increases to
OY1 the investment remains 10 bullions
3. FINICIAL INVESTMENT:
Investment made in buying financial investment such as new shares, bonus, securities
The money used for buying old shares old bonus, old securities cannot be considered as financial
investment it’s considered as transfer of financial assets from one person to another person.
Investment made in new plant and equipment construction of public utility like school, roads and
railways it’s considered as real investment.
5. PLANNED INVESTMENT:
6. UNPLANNED INVESTMENT:
7. GROSS INVESTMENT:
It is the total amount of money spent on new capital assets like plant and machinery, factory,
building etc……..
8. NET INVESTMENT:
According to JM Keynes marginal efficiency of capital is the rate of return expected on new
capital asset over its lifetime.
A businessman while investing in new capital asset examines the expected rate of return [profit]
during its life time against the cost of capital asset. if the expected rate of profit is greater than
the replacement cost of the asset the business man will invest the money in the project. if
expected rate of profit is less than the replacement cost of the assets then the investor not going
to invest.
MEC:-
* Expected rate of return [profit] on capital assets > replacement cost of the assets – invest
*If expected rate of return [profit]< replacement cost of assets – Don’t invest
EXAMPLE:-
If a business man spent Rs 10,000 on the purchase of machinery
The NCF return of the machine expected to Rs 1000 p.a
The marginal efficiency of capital [MEC] will be= 10%
The following formula is used to know the expected income though out the life span of capital
assets.
SP= R+R2+--------- Rn
SCHEDULE:-According to T.N Keynes as the stock of capital increases in the economy the
marginal efficiency of capital goes on diminishing
INVESTMENT MEC
20 10
25 9
40 7
70 5
100 2
In the above diagram the MEC curve is stop downward from left to right when stock of capital
is 20 million , the marginal efficiency of capital is 10% while the capital stock of 100 billion it
declines to 2 percent.
MULTIPLIER:-
The theory of multiplier has occupied a very important place in the modern theory on income
and employment. It has become an effective instrument to explain the process of income
generation in an economy when the volume of investment changes.
The original concept of multiplier as been developed by professor “F.A KHAN” in the year
1931. He made a successful attempt to analyze the effect of an increase in investment on the
level of employment. Hence, khan multiplier as been described as “employment multiplier”.
Lord Keynes on the lines of employment multiplier as systematically developed a new
multiplier. Which is known popularly described as investment multipliers. Which show the
effect of increase in investment on the level of income
OR K = Y /I
For example:-
If an income increases for Rs 1,00,000 to Rs 2,00,000 then the investment increased from Rs
10,000 to Rs 20,000.
The multiplier process is based on 1 principle that 1 man’s expenditure is another man’s income
from the above table it is clear that as the move from 1 round to another the initial investment
gives raise to dwindling series of successive increment in income.
OX axis represents income and OY axis represents consumption and savings. C+S is aggregate
supply curve and C+I is aggregate demand curve. Aggregate demand curve interests aggregate
supply curve at the point of E. E point is equilibrium Y is equilibrium investment.
New increase in investment that is EA leads to aggregate demand curve goes upward. it interests
at E1 and Y1 is equilibrium income.
From the above diagram it is understand that initial changes in investment leads to greater
increase in income.
Multiplier works satisfactory if the volume of goods & service on which the income spent are
available in plenty otherwise people have unable to spend their income on consumption.
Consequently MPC falls leading to decline in the volume of "k".
In the process of income generation the MPC should be constant. If there is any change in the
size of MPC then the value of "k" also changes.
If there is a gap between receipt of income, and its consumption, the full value of ‘k’ can’t be
realized.
If the economy is working at full employment level in that case there is scope for further
increase in output, income, and employment.
5) No net investment:-
In order to get the full value of 'k' there should be a net increase in investment. Increase in
investment in one sector of economy should not be offset by decrease in investment in another
sector.
6) Maintenance of investment :-
In order to achieve a high level of multiplier it's necessary that the increment in invested are be
repeated in regular time intervals.
7) Closed economy :-
Working of the multiplier depend upon the fast whether economy is closed or open multiplier
works at closed economy.
Absence of international trade helps to achieve higher value of 'k' more imports over exports act
as a leakage in the process of income generation.
9) Constant prices :-
It assumes that there is no changes in the prices of commodities, if it goes up, consumption
will be go down and the value of multiplier will be affected.
Like MPC should be constant, less than full employment conditions, constant prices,
absence of foreign trade, closed economy etc....
Significance of multiplier :-
5) Importance in investment.
This theory is based on “Law of Market” which states that supply creates its own demand.
For this theory French economist J.B SAY formulated a law which is known as say’s law of
market.
According to him supply creates its own demand, its means that production of goods will create
demand for them. According to their views under perfect competition unemployment will be
temporary and after some time it will disappear. Classical economists assume full employment
in the free market economic system.
Assumptions
1. Existence of free market economy.
2. Exist perfect completion.
3. Absence of govt intervention.
4. Money is a medium of exchange.
5. Closed economy.
6. No International trade.
7. Wages and price are flexible.
Sn=supply of labor
W/p=wage rate
When the D&S curves intersect at a point E is called full employment level that time real wage
rate is w/p0, if the wage rate is increased from w/p0 to w/p2 the supply of labor will be more
than demand of labor. Which creates involuntary employment that leads to competition among
workers for work, they will be willing to accept a lower wage rate, consequentially the wage rate
decrease from w/p2 to w/p0.
If the wage rates decreased from w/p0 to w/p1, the demand for the labor will be, more than its
supply. Competitions by employer for workers will increase the wage rate from w/p1 to w/p0.
Limitations
1. Supply does not create its own demand, presence govt intervention.
2. Assumption of perfect competition.
3. Role of money -money is demanded for transaction motive as well as speculative motive.
Keynes states that the equilibrium level of income and employment will be where
Keynes proved that the supply cannot create its own demand. If at any time aggregate demand
falls then unemployment takes place.
Aggregate Demand
Aggregate Demand is the amount of consumption and amount of investment expenditure at each
level of income.
Aggregate Supply
Aggregate Supply is equal to National Income in others Words, National Income is equal to the
price of Goods and Services produced in the country so
Assumptions
1. No Changes in Technology and Efficiency of labour
2. No Foreign Trade
3. No Govt Interference
4. No charges in method of production
Model Questions
Module 3 and 4
Inflation, RBI, Fiscal Policy, Monetary policy, Business Cycle, Economic Growth
Inflation:
Inflation is the rise in the general price level of goods and services in an economy over a period
of time. The increase in price level leads to decrease in purchasing power of currency.
I. Monetary Measures
1. Credit control
a. Increase in bank rate
b. Increase in SLR and CRR
c. Sale of Government securities in open market
d. Restrictions on bank credit
e. Regulations of consumers credit
2. Demonetization of currency
(Demonetize currency of higher denomination- this method is adopted when there is
abundance of black money in the country)
3. Issue of new currency
(Issue of new currency in the place of old currency- under this system one new note is
exchanged for a number of notes of old currency)
Types of Inflation:
3. Stagflation:
Fall in output and employment level, increases the price of goods and services in an
economy.
4. Hyper inflation:
Hyper inflation caused mainly by excessive deficit financing (financed by printing more
money) by a Government
5. Open inflation:
Price of the goods and services increases due to economic trends of spending products and
services.
6. Suppressed inflation:
Existing inflation disguised by government price controls and other interferences in an
economy such a s subsidies. Such suppression can only be temporary.
7. Galloping Inflation:
Very rapid inflation which is almost impossible to control.
8. Creeping inflation:
Where the inflation of a nation increases gradually, but continually over time.
1. Reduction in taxes
2. Redistribution of income
3. Credit expansion
4. Repayment of public debt
5. Deficit financing
6. Reduction in interest rates
7. Regulation of production
8. Subsidies
Monetary policy:
Monetary policy is the process by which the monetary authority of a country (RBI) controls the
supply of money.
RBI functions:
Functions of RBI
3. Banker’s bank:
The activities of all commercial banks are controlled and managed by the RBI. The
regulation of banks may be related to their licensing, branch expansions, liquidity of
assets, maintaining reserves etc..
5. Clearing house:
The RBI act as a clearing house for transfer and settlement of mutual claims of the
commercial banks. It is easy for commercial banks to settle each other’s debts or transfer
of funds from one bank to another bank through the RBI.
7. Controller of credit:
The important functions of RBI is the control of credit. For this purpose , it uses various
credit control measures such as bank rate, open market operations, variable reserve ratio,
selective credit controls etc..
9. Agricultural finance:
Te RBI has been extending finance assistance to the cooperative institutions for the
development of agriculture. For this purpose it has set up an agricultural credit
department.
10.Industrial finance:
The RBI provides credit facilities to both small scale and medium scale industries through
SFC, IFCI, IDBI, ICICI etc…it also established National industrial credit fund in 1964 to
provide financial assistance to large scale industries.
11.Research functions:
The RBI collects and publishes information relating to agriculture, industrial, financial
sectors of the economy, exports and imports, banking, trends in money and capital
markets, price trends etc..
Explain the measures of control imposed by RBI to regulate the Monetary System in India.
OR What are the Quantitative and Qualitative credit control measures of RBI?
The various methods imposed by RBI to control Credit creation power of commercial banks can
be classified into two groups. i.e. quantitative and qualitative controls.
Quantitative controls are designed to regulate the volume of credit created by commercial banks.
Qualitative or selective measures are designed to regulate the flow of credit in specific uses.
I Quantitative methods:
Bank rate is the rate at which RBI lends money to the commercial banks. It is also called as
discounted rate. A change in the bank rate affects the credit creation power of the RBI.
During the period of Inflation, there will be excess money supply. In order to control money
supply bank rate is used as a instrument. An increase in bank rate leads to increase in rates of
interests, Increase in rate of interest leads to increase in cost of borrowing and decrease in
demand for credit finally decrease in demand for credit leads to decrease in money supply.
During the period of deflation, there will be shortage of money supply, an decrease in bank rate
leads to decrease in rate of interest, decrease in rate of interest leads to decrease in cost of
borrowings and increase in demand for credit, increase in demand for credit leads to increase in
money supply.
Open market operation refers to the sale and purchase of securities by the central bank to
commercial banks.
During the period of inflation, central bank will sell the securities to commercial bank in order to
control credit creation and money supply
During the period of deflation, central bank will buy the securities from commercial banks to
increase the credit creation and money supply in the economy.
Variable cash reserve ratio refers to percentage of bank deposits that the commercial banks are
required to keep in the form of cash.
The reserve bank of India imposes mainly 2 types of reserve ratio. Viz. CRR and SLR
The CRR refers to that portion of the aggregate demand deposits which the commercial banks
are required to keep with RBI
A rise in CRR leads to decline in the credit creation power of the commercial banks and fall in
CRR leads to increase in the credit creation power of the RBI
The SLR refers to that portion of the aggregate demand deposits which the commercial banks
are required to keep with themselves in a liquid form.
A rise in SLR leads to decline in the credit creation power of the commercial banks and fall in
SLR leads to increase in the credit creation power of the RBI
(c) Repo rate: Repo rate is the rate at which RBI lends money to the commercial banks
(d) Reverse repo rate: RRR is the rate at which RBI borrows money from the commercial banks.
II Qualitative methods:
1. Margin requirements:
Margin is the difference between the loan value and the market value of the securities offered by
borrowers against loan.
A rise in Margin result in to decrease in credit creation and money supply in the economy and
decrease in margin leads to increase in credit creation and money supply in the economy.
For example: if the margin is 30% then commercial banks lend only 70% of the market value of
the securities. If it is raised to 40% then they can lend only 60% of the market value of the
securities.
Under this method consumers have to pay certain % of the price of the durable goods in the form
of down payment, the remaining part of the price of the goods finance d by the bank which is
repayable by consumer in Installments over a period of time.
If RBI wants to control the money supply then it will increase the down payment amount and
increase the interest rates on consumer credit and vice versa
3. Credit Rationing:
Rationing of credit is a system under which the central bank limits the total amount of loans and
advances or specific categories of loans and advances granted by commercial banks.
4. Moral Suasion:
It is a convincing action and request made by RBI to the commercial banks to follow the
monetary policy without making any deviations. It may in the form of request, appeal, and
convincing action by the RBI.
During the period of Inflation RBI request the commercial banks not to lend more credit to
speculative and non essential activities. During the period of deflation RBI request the
commercial banks to provide more credit.
Central bank can exercise control over commercial banks through directives from time to time.
These directives may be in the form of oral or written orders, statements, warnings or even
threats.
6. Direct action:
When moral suasion and directives fails, the central bank make use of this method as a last
resort. It will take direct action against banks by imposing punishments like higher interest on
borrowings, stoppage of credit, delicensing of the banks and liquidation
7. Publicity:
Publicity includes publishing regularly the statements of commercial banks assets and liabilities,
reports on operations and activities of commercial banks, Money market, banking, public
finance, industry, agriculture etc.. This information give clues to commercial banks to formulate
their own polices.
Fiscal policy:
Fiscal policy refers to the policy of Government as regards taxation, public debt and public
expenditure with specific objectives in view. It defined as the government’s program of taxation,
expenditure and other financial operations to achieve national goals.
1. Full employment
2. Economic stability
3. Rapid economic growth
4. Price stability
5. Encourage investment
6. Reducing inequalities in income
7. Break the circle of poverty
8. Reducing unemployment and underemployment
9. Capital formation
10.Control inflation and deflation effects
11.Optimum allocation of resources
12. Increase standard of living
1. Public revenue
2. Public expenditure
3. Public debt
4. Deficit financing – printing of fresh and new currency notes by government without
keeping any sort of gold reserve or foreign exchange reserves.
5. Budgetary policy
Fiscal tools:
1. Subsidies
2. Development rebates
3. Tax relief, tax concession, tax exemptions and tax holidays
4. Freight concessions 5. Relief expenditure, debt relief 6. Public work programs
“Fiscal policy regarding public revenue, public expenditure and public debt”
Fiscal policy refers to the policy of Government as regards taxation, public debt and public
expenditure with specific objectives in view. It defined as the government’s program of taxation,
expenditure and other financial operations to achieve national goals.
1. Public revenue:
Public revenue refers to the income earned by the Government from both tax and non tax
revenues. A suitable tax policy is always regarded as an important technique in bringing
about economic stability. Because changes in the rates of taxes will cause change in the
level of disposable income and consumption expenditure of the people.
Generally government generates revenues through tax and non tax sources.
I. Tax revenues:
It refers to the revenues collected by the government in the form of taxes.
a. Income tax: it refers to taxes levied on income of individuals, HUF, partnership firms,
joint stock companies etc..
b. Corporate tax: it refers to the tax levied on the net profit of joint stock companies
c. Custom duties: it refers to the duties imposed on the goods imported into and exported
from India.
d. GST: goods and services taxes imposed on commodities produced in India and
services rendered.
II. Non tax revenues:
These are the several sources of non tax revenues of the central government. They are
a. Profits earned by industries and commercial enterprises owned by central government.
b. Profits earned by Indian railways
c. Profits earned by posts and telegram
d. Profits earned by RBI
e. Interest on loans and advances granted to local governments
f. Fees collected from educational institutions and health departments
g. Fines and penalties
2. Public expenditure:
public expenditures refers to the expenditures incurred by the government for the
promotion of economic and social welfare of the people. Public expenditure is broadly
classified into revenue expenditure and capital expenditure.
I. Revenue expenditure:
It refers to the expenditure incurred by government for the day to day administration
and for maintenance of social, economic, administration and defense services.
a. Civil expenditure:
It refers to administration expenditure of the government relating to maintenance of
law and order.
b. Expenditure on general services:
Expenditure incurred on the maintenance of law and order.
c. Expenditure on social service:
Expenditure incurred on providing social services like education, medical, housing
etc..
d. Expenditure on economic services:
Expenditure incurred on economic services like agriculture, industry, mining,
power, transportation and communication etc…
e. Defense expenditure: expenditure incurred on defense forces such as army, navy,
air force etc..
f. Grants to state and local governments:
g. Miscellaneous expenditure:
Subsidies to exporters, industries, relief to the peoples in times of flood, draughts
and natural calamities etc..
3. Public Debts:
Public debt refers to the borrowings of the government to meet budget deficits. It is used
as an effective instrument of fiscal policy to control inflation and deflation.
Sources of public debts
Internal debt: it refers to money borrowed by the government of India from individuals
and institutions within country.
External debt: it refers to the borrowings of the government of India from foreign
countries and from international financial institutions.
Internal debt External debt
1. Borrowings from 1. Borrowings from international
commercial banks financial institutions
2. Borrowings from RBI 2. Borrowings from foreign
3. Treasury bills governments
4. Issue of bonds 3. Borrowings from foreign banks,
5. Market loans individual and non financial
institution
1. To provide certain basic facilities such as education, medical facilities, house etc..
2. To meet fiscal emergencies like war, floods cyclone etc..
3. To control effects of business cycle
4. To undertake social welfare schemes
52 Anil Kumar K Y Asst Professor Department of Commerce Post Graduation SIMS
File Downloaded From www.BUstudymate.in
File Downloaded From www.BUstudymate.in
Macro Economics for Business Decisions 2017
1. Depression :
Depression is the first phase of trade cycle when the economic activity is extremely low.
During depression all construction activities come to a more or less halting stage. Capital
goods industries suffer more than consumer goods industries. Producers suffer heavy
losses, purchasing power of consumers low.
Features:
a. A sharp reduction in output, trade activities
b. A sharp reduction income of the community
c. A fall in price of products
d. Decline in consumer expenditure
e. Increase in the level of unemployment
2. Recovery or revival:
After a period of depression, recovery starts. It is a period where economic activities
recover from shocks. Recovery is the turning point of economy from depression to
expansion. Recovery period helps the business people to restore the confidence and
creates the favorable climate for business activities. As result of these factors, business
people take more risks and invest more.
Features:
a. Increase in government expenditure
b. New innovations – developing new products and services, new marketing strategy
c. Changes in the production techniques
d. Investments in new regions
5. Recession:
It is the period where in the aggregate level of economic activities starts declining. There
is a slowing down of business activities. After reaching the peak point, demand for the
goods decline, over investment and production creates imbalance between supply and
demand
Features:
a. Unemployment
b. Fall in wages, income and profits
c. Fall in market price
d. Banks curtails credits
e. Decline in share price
f. Decline in investment, income and consumption
I. Monetary measures:
When economy in moving in upward direction:
1. Restricting the issue of legal tender money
2. Putting restrictions to the expansion of bank credit
3. A rise in bank rate and lending rates
4. Increase in CRR and SLR
5. Open market sale of securities
6. Raising margin requirements
7. Making credit costly
Economic Growth
An increase in the amount of goods and services produced per head of the population over a
period of time.
I. Economic Factors:
1. Natural resources:
Countries with abundant natural resources can develop its economy much faster when
compared to a country that is deficient in natural resources.
2. Capital formation:
Capital is life blood of all economic activities. Capital creation means creation of
capital goods or assets. Larger quantity of capital assets results into higher output and
vice versa.
3. Technological progress:
Adoption of new technology, changes in method of production, improvements results
into higher output and vice versa.
4. Division of labor:
It means right man in the right job. Division of labor and specialization leads to higher
output.
5. Economic stability:
It means absence of fluctuations in economic activities. Which result in to higher
output.
6. Population growth:
Increase in population leads to increase in output and vice versa.
7. Size of the market:
Expansion in the size of the market leads to increase in output and vice versa.
8. Removal of market imperfections:
Removal of market imperfections like low efficiency in productions, under and misuse
of resources, monopoly practices and price rigidity results into increase in output and
vice versa.
1. Fiscal policy
2. Monetary policy
3. Floating exchange rates – in the event of negative demand or supply, the exchange rate
will fall
4. Flexible labor markets
It means the ration of capital used to produce the desired level of output over a period of time.
This ratio has a tendency to be high when the capital is available at cheaper rates as compare to
other inputs.
It explains the relationship between changes in capital investment and corresponding changes in
output.
The average capital output ratio express the quantitative relationship between the stock of capital
available in a period of time and the output of that time.
It express the relationship between the amount of increase in output or income (Y), resulting
from a given increase in the stock of capital (K)
ICOR = k / Y
Growth models
Economic growth models is been proposed by different economist on their own way that result
in economic growth under different perception.
1. Harrod-Domor model
2. Exogenous growth model
3. Surplus labor model
4. Harris-Tadoro model
Harrod-domor model
It is proposed by Sir.Roy Harrod of Britain and E.V Domor of USA.
According to this model a functional economic relationship in which the growth rate GDP(g)
depends directly on national saving ratio(s) and inversely related to the National capital output
ratio(k).
Therefore with this we can say that g=s/k
Model questions:
1. Discuss briefly the principal methods adopted by central bank to control credit. OR
Explain the measures of control imposed by RBI to regulate the monetary system in India.
OR
Explain the Tools of monetary policy OR
What factors have attribute to recent economic tsunami? Explain the techniques used by RBI
to overcome this problem. OR
Critically examine the process of commercial banks in creation of credit and their
limitations.
2. “Fiscal policy refers to the policy of the Government regarding public revenue, public
expenditure and public debt”. Elucidate.
3. Discuss the different stages of Inflation. Give a detailed description about the causes and the
various measures adopted by RBI to control Inflation.
4. What is business cycle? What are its phases? Explain the causes and Mechanism to
overcome the trade cycles.
5. Explain the various problems of Economic growth and economic development of India.
6. How do you differentiate between economic growth and economic development? Explain
the factors determining the economic growth.
7. Objectives of fiscal policy, monetary policy
8. Discuss the significance of monetary policy
9. Explain the role of Financial intermediaries in economic growth
10.Explain the functions of money.
11.Discuss the various policies towards economic stability.
12.Capital output ratio
13.Economic growth models
Macro economics is a branch of economics that studies the economic behavior not of an
individual but the economic system as a whole. It studies the overall conditions of the economy
such as total consumption, total national income, aggregate supply and demand, general price
level.
Instead of studying the income employment, output of a particular firm or industry. In macro
economics we are studying aggregates like total income, total employment, total output in the
economy.
1) Economic growth
2) Full employment
3) Economic efficiency
4) Price stability
5) Economic security
Socialistic economy:
Under socialistic economy the factor of production that is land, labor, money, organization has
owned manage, control by state / government. They carried business for social welfare.
Mixed economy:
It refers to the all the factors of production like land, labor, money, organization are owned,
managed, and controlled by both private individuals and government. Business carried over for
profit and social welfare.
National Income:
National income is the total net value of all goods and services produced within a nation over a
specified period of time. It represents sum of wages, profits, rents, interests and pension
payments of citizens of a nation.
Consumption
It means the satisfaction of Human wants by using goods and services. In other words
Consumption is not only related with using of commodities but the use of utilities contain in
goods and services in order to satisfy wants
Consumption function
Consumption function is also known as propensity to consume. It shows the relationship
between Income and Consumption.
The average propensity to consume explains the relationship between total consumption and
total income at a certain period of time.
In other words, APC explains what percentage of income spent on consumption of goods and
services. We can drive APC by dividing consumption expenditure by total income.
APC = Total consumption/Total income or APC = C/Y
MPC = C /Y
Physical consumption:
Physical consumption is all about buying and using goods and services. This type of
consumption leads to physiological well being.
Conspicuous consumption:
Buying expensive items to display wealth and income rather than to fulfill the real needs of the
consumer.
Saving:
According to Keynes “saving is the amount left over when the cost of a person’s consumer
expenditure is subtracted from the amount of income that he or she earns in a given period of
time”.
It is the % of income saves at given level of income. In other words it is a relationship between
savings and income.
MPS is the ratio of changes in savings to changes in income. The following formula is used to
find out MPS
MPS = changes in savings / changes in income
OR
67 Anil Kumar K Y Asst Professor Department of Commerce Post Graduation SIMS
File Downloaded From www.BUstudymate.in
File Downloaded From www.BUstudymate.in
Macro Economics for Business Decisions 2017
MPS = S / Y
The Paradox of Thrift explains that an attempt to Increase an Individuals savings would lead to
a decrease in total savings of the community. This is because of the simple reason that “One
man’s expenditure is another man’s Income”.
Induced Investment:
Investment which varies with the changes in the level of national income is called induced
investment. The larger the national income the higher is the investment and vice versa
Autonomous Investment:
The investment which is not influenced by national income is called autonomous investment
According to JM Keynes marginal efficiency of capital is the rate of return expected on new
capital asset over its lifetime.
Multiplier:-
Multiplier explains the relationship between increases in investment due to increases in income
Multiplier (k) = changes in Income / changes in Investment
OR K = Y /I
Aggregate Demand
Aggregate Supply
Aggregate Supply is equal to National Income in others Words, National Income is equal to the
price of Goods and Services produced in the country so
Inflation:
Inflation is the rise in the general price level of goods and services in an economy over a period
of time. The increase in price level leads to decrease in purchasing power of currency.
Monetary policy:
Monetary policy is the process by which the monetary authority of a country (RBI) controls the
supply of money.
Formulated by RBI
Fiscal policy:
Fiscal policy refers to the policy of Government as regards taxation, public debt and public
expenditure with specific objectives in view.
The CRR refers to that portion of the aggregate demand deposits which the commercial banks
are required to keep with RBI
The SLR refers to that portion of the aggregate demand deposits which the commercial banks
are required to keep with themselves in a liquid form.
Repo rate:
Repo rate is the rate at which RBI lends money to the commercial banks
RRR is the rate at which RBI borrows money from the commercial banks.
Recession:
It is the period where in the aggregate level of economic activities starts declining. There is a
slowing down of business activities. After reaching the peak point, demand for the goods
decline, over investment and production creates imbalance between supply and demand
Economic Growth
It is an Increase in the capacity of an economy to produce goods and services compared from
one period to another.
An increase in the amount of goods and services produced per head of the population over a
period of time.
It means the ration of capital used to produce the desired level of output over a period of time.
This ratio has a tendency to be high when the capital is available at cheaper rates as compare to
other inputs.
The average capital output ratio express the quantitative relationship between the stock of
capital available in a period of time and the output of that time.
It express the relationship between the amount of increase in output or income (Y), resulting
from a given increase in the stock of capital (K)
ICOR = k / Y
a. Subsidies
b. Tax relief, tax concessions
c. Public work programs
d. Development rebate
Interest rate at which the banking sector lends to the borrower is called interests rate. It is
normally expressed as % rate over a period of one year
The relationship between maturity period and rate of interest rate is called interest rate
structure
a. Capital
b. Technology
c. Human resource
d. Natural resources
An asset that derives the value because of contractual claim. In other words assets in the form of
stock, rights, certificates, bank balance etc.. as distinguished from tangible, physical assets. Ex:
stocks, bonds, bank deposits
Disguised unemployment
Disguised unemployment is a kind of unemployment in which some people look like being
employed but are actually not employed fully. This situation is also known as hidden
unemployment
Trading down
Trading down means switching from an expensive or branded product to a lower priced, lower
quality product due to economic constraints
Trading down means offering a lower quality product by reducing the number of features in
order to reduce selling price.
Scarcity inflation:
Increase in the price of goods and services due to fall in production or artificial Hoarding.
Capital formation:
Capital formation means creation of capital goods or capital assets to increase the productivity.
Under this inflation price rises every moment and there is no upper limit to the price rise.
Liquidity trap
The liquidity trap is a situation in which injections of cash into private banking system by a
central bank fail to decrease interest rate.
A PPF shows the output combinations of two goods or services attainable when all resources
are fully and efficiently employed.
Qualitative or selective measures are designed to regulate the flow of credit in specific uses.