Macro Economic Issues (II)

National Income
Meaning: National income means the value of goods and services  produced by the country during a financial year. Thus, it is the net result of all economics activities of  any country during a period of one year and is valued in  terms of money. National income is an uncertain term and is often used  interchangeably with the national dividend, national output  and national expenditure.
Definition: According to Marshall “The labor and capital of a country  acting on its natural resources produce annually a certain  net aggregate of commodities, material and immaterial  including services of all kinds.
For example, a product runs in the supply from the  producer to distributor to wholesaler to retailer and then to  the ultimate consumer. If on every movement commodity is  taken into consideration then the value of National Income  increases.
Methods of estimating national income:
In this national income we have three methods, There are
Gross Domestic Product (GDP)
Gross National product (GNP)  Net National Product (NNP)
1. GROSS DOMESTIC PRODUCTS (GDP)GDP or gross domestic product is the market value of  all final goods and services produced in a country in a given  time period.
This definition has four parts:
Market value
Final goods and services
Produced within a country
In a given time period

Market value GDP is a market value-goods and services are valued at  their market prices.
To add apples and oranges, computers and popcorn, we  add the market values so we have a total value of output in  rupees.
Final goods and services GDP is the value of the final goods and services produced. A final  goods  (or  services) is an item bought by its final  user during a specified time period.
A final good contrasts with an intermediate good, which  is an item that is produced by one firm, bought by another  firm, and used as a component of a final good or service. Excluding intermediate goods and services avoids double  counting

Produced within a country
GDP  measures  production within  a  country-domestic production.
In a given time period GDP measures production during a specific time period,  normally a year or a quarter of a year.

There are three different ways to measure GDP:
•Product Method
•Income Method and
•Expenditure Method.
These three methods of calculating GDP yield the same result  because, National Product = National Income = National Expenditure.

1. NET DOMESTIC PRODUCTS (NDP)
GDP is aggregate money value of final goods and services  produced in domestic territory of the country during an  accounting year.
According to Prof. Hansen, “By gross domestic product  we mean value of all the goods and services produced in any  given period usually in a year in domestic territory”. GDP can be calculated by using a formula, “NDP=GDP-Depreciation charges”

2. Gross National Product (GNP)
GNP is defined as the money valve of goods and services  produced in a country in a year time.
According to W.C Peterson, “Gross national product may  be defined as the current market value of goods and services  produced by the economy during an income period.”
While calculating GNP, the money value of only goods  and services, which are finally consumed by the people are  to be considered. Hence the value of all intermediary goods and inputs are  to be excluded in order to avoid double counting.

3. Net National Product (NNP)
Net national product is the market value of the net  output of final goods and services produced by the country  during the relevant income period. In the process of production, a certain part of the GNP is  to be kept aside so that worn out capital is replaced this  part of the GNP is not available either for consumption or for  investment purpose. Hence to deduct this replacement charges with that of  GDP to get NNP. Hence, NNP=GNP-Depreciation charges

The Components of GDP
Consumption (C):The spending by households on goods and services, with  the exception of purchases of new housing.
Investment (I):The  spending  on  capital  equipment, inventories,  and structures, including new housing.
Net Exports (NX):Exports minus imports
Government Purchases (G): The  spending  on  goods  and  services  by  local,  state,  and  federal governments.

Inter-sectoral linkages:
Introduction: The three sectors of the economy are related to one  another in many ways. Agriculture depends upon industry for the supply of its  inputs and implements and Industry depends on the  agriculture for the demand of its products. Services are dependent upon both, hence one cannot  be separated from the other in the economy.
Objectives By studying this lesson the students will be in a position to  understand the inter linkage of one sector of the economy to  the other. How agriculture is the back bone of the industries and in  return industries are facilitators of the agriculture.
Content:
1.Agriculture as the provider of livelihood and employment in  underdeveloped economy.
2.Agriculture as the supplier of raw materials to the industry.
3.Agriculture as the placer of demand for industrial goods.
4.Industries as the absorber of the labor force shifted from  agriculture.
5.  Industries  as  the  provider  of  industrial  and  consumer  goods to the agriculture.
6.  Industries  as  the  provider  of  agricultural  implements  to  agriculture.
7.  Services  as the consequence  of  the development  of  these  two Sectors and facilitator to them

Fiscal policy:
Fiscal  policy,  in simple  terms,  is  an  estimate  of taxation  and  government  spending  that  impacts  the economy. Fiscal policy refers to the use of government spending  and tax policies to influence economic conditions,  especially macroeconomic conditions, including aggregate  demand for goods and services, employment, inflation,  and economic growth.
Objectives of Fiscal Policy:
1.To maintain economic stability in the country
2.To bring Price stability
3.To achieve full employment
4.To provide social justice
5.To promote export and introduce import substitution
6.To mobilize more public revenue
7.To reallocate available resources To achieve balanced regional growth.

Importance of Fiscal Policy:
In a country like India, fiscal policy plays a key role in  elevating the rate of capital formation both in the public and  private sectors. Through taxation, the fiscal policy helps mobilize  considerable amount of resources for financing its numerous  projects. Fiscal policy also helps in providing stimulus to elevate  the savings rate.
The fiscal policy gives adequate incentives to the private  sector to expand its activities. Fiscal policy aims to minimize the imbalance in the  dispersal of income and wealth.
Types of policy: There are two types of fiscal policy:
Expansionary fiscal policy  
Contractionary fiscal policy

Tools of fiscal policy:
There are two key tools of the fiscal policy:  Taxation Government spending

Monetary Policy:
Monetary policy is an economic policy that manages the  size and growth rate of the money supply in an economy. It is a powerful tool to regulate macroeconomic variables  such as inflation and unemployment.
Objectives Of Monetary Policy
1.To achieve Price stability
2.To attain Exchange rate stability
3.To avoid the negative impacts of business cycle To experience full employment position

Tools of Monetary Policy  
Interest rate adjustment  
Change reserve requirements  
Open market operations

Monetary Policy And Economic Development:
Economic development needs the support of credit  planning
Improving the efficiency of banking system  
Decide interest rates
Public debt management

Limitations Of Monetary Policy:
1.Monetary policy operates in a broad front
2.Success and failure depends on the banking system  of the country
3.It has Institutional restrictions
4.Unorganized money market does not support the  monetary policy
5.Existence of non monetized sector also defies RBI’s  regulation
6.It is not very effective in overcoming depression.

Difference between Monetary and Fiscal policy

	Monetary policy	Fiscal policy
Definition	It is a financial tool that is  used by the central banks in  regulating the flow of money  and the interest rates in an  economy	It is a financial tool that is used  by the central government in  managing tax revenues and  policies related to expenditure  for the benefit of the economy
Managed By	Central Bank of an economy	Ministry  of  Finance  of  an  economy
Measures	It measures the interest rates  applicable for lending money  in the economy	It measures the capital  expenditure and taxes of an  economy

	Monetary policy	Fiscal policy
Focus Area	Stability of an economy	Growth of an economy
Impact on  Exchange  rates	Exchange rates improve  when there is higher interest  rates	It  has  no  impact  on  the  exchange rates
Targets	Monetary  policy  targets  inflation in an economy	Fiscal policy does not have  any specific target
Impact	Monetary policy has an  impact on the borrowing in  an economy	Fiscal policy has an impact  on the budget deficit

Business and Government
Government of India directly or indirectly plays a major  role in assisting, encouraging and directing private sector,  providing infrastructure facilities, controlling private  economic activity for sustainable economic development of  the country. Overall economy is regulated through fiscal, monetary  policy and trade policies to participate in the globalization.

Role Of Government In India:
1.Individual freedom
2.Coexistence of public and private sector
3.Planning
4.Social welfare

Economic Environment Trough Public Private Participation (PPP)
Public Private Participation (PPP) is defined as cooperative  institutional arrangements between public and private  enterprise which has gained wide interest around the world.
PPP model is a new way to handle infrastructure projects.
It can benefit both the public and private sector enterprise.

The major arrangements between the public and  private participation are:
1.Institutional cooperation.
2.Long term infrastructure contracts. Like construction  of Roads for the public use which reduces the pressure on  the exchequer, but benefits the private through way toll fee.
3.Community development
4.Urbanization and Economic development

Characteristic Features Of PPPs:
1.Cooperative and contractual relationship
2.Shared responsibilities
3.A method of procurement
4.Risk transfer
5.Flexible ownership

Economic indicators technology:
Economic indicators are key stats about the economy  that can help you better understand where the economy is  headed. These indicators can help investors decide when to buy  or sell investments. For example, if the stock market is at its peak, you  may want to sell. If the market is low and on the rise, you  may want to buy.

Types of Economic Indicators
There are three types of economic indicators:
Leading
Lagging and
Coincident
Employment and poverty
Employment:
When persons are holding a job and they perform for  any paid work. Also if workers hold jobs because of  illness, strike or vacation, they are considered as  employed.
Full Employment:
When 94-95% of them are employed or highest  sustainable level of employment over the long run is called  as full employment.
Under Employment: Less  than  full employment  is  called  as  under  employment.
Unemployment: When people are not working and are actively  looking for work or waiting to return to work, such a  situation may be called as unemployment.

Types Of Unemployment
1.Frictional unemployment
2.Structural unemployment
3.Cyclical unemployment
4.Technological unemployment
5.Seasonal unemployment
6.Disguised unemployment

Money Market
The money market refers to trading in very short-term  debt investments. At the wholesale level, it involves large-volume trades  between institutions and traders. At the retail level, it includes money market mutual  funds bought by individual investors and money market  accounts opened by bank customers.
Examples of Money Market Instrument Banker’s Acceptance  
Treasury Bills  
Repurchase Agreements
Certificate of Deposits  
Commercial Papers

Functions of Money Market Instruments
Provides Funds
Use of Surplus Funds
No need to borrow from banks  
Helps Government
Helps in Monetary Policy  
Helps in Financial Mobility  
Promotes Liquidity and Safety
Equilibrium between Demand and Supply of Funds  
Economy in Use of Cash

Instruments of the Money Market
Promissory Note
Bills of exchange or commercial bills  
Treasury Bills (T-Bills)
Call and Notice Money  
Inter-bank Term Market  
Commercial Papers (CPs)
Certificate of Deposits ( CD’s )  
Banker’s Acceptance (BA)  
Repurchase Agreements (Repo)

Capital market: Capital markets are the exchange system platform that  transfers capital from investors who want to employ their  excess capital to businesses that require the capital to  finance various projects or investments.
Types of Capital Markets
There are two types of capital market:
 Primary Market
Secondary Market

Primary Market:
Origination  
Underwriting 
Distribution

Secondary Market:
Regular information about the value of security  
Offers liquidity to the investors for their assets  
Continuous and active trading
Provide a Market Place