Module 3

Macro Economic Overview

Topics covered
❖ An overview of macro economic indicators
❖ Trade or Business Cycle
❖ Determination of National Income
❖ Reasons for Inflation
❖ Balance of Payments
❖ Monetary and Fiscal Policy
❖ Economic Recession
❖ Demand and supply of in money Money market
❖ Money market equilibrium
❖ Contemporary Economic situations in Indian and
Global Scenario
❖ Challenges of Businesses
Indian Economy- An Overview &
Few Economic Indicators
Gross Domestic Product (GDP)
Final monetary value of the goods and services produced within the
geographic boundaries of a country during a specified period of time,
normally a year.

GDP growth rate is an important indicator of the economic

performance of a country-Agriculture and allied services, industry and
service sector. The largest contributor to India's GDP is the services
sector.

In India, GDP is measured as market prices and the base year for
computation is 2011-12. India's Central Statistic Office (CSO)
calculates the nation's gross domestic product (GDP).

Methods for calculation: (a) based on economic activity (at factor cost)
(b) the second is based on expenditure (at market prices).

Indian Government had forecasted GDP to be 8-8.5% for

the current fiscal (2022-23), but recently (Jan 2023)
revised to 7%.
GDP- Methods of Calculation
Calculations are made to arrive at nominal GDP (using the current
market price) and real GDP (inflation-adjusted). The GDP at factor cost
is the most commonly followed figure and reported in the media.

The GDP numbers

from the two
methods may not
match precisely, but
they are close. The
expenditure
approach offers good
insight into which
parts contribute
most to the Indian
economy. For
example, domestic
household
consumption, which
forms 59.05% of the
economy, is the
reason why India
remains unaffected
to a good extent by
economic
slowdowns in other
parts of the world.
Balance of Payments (BoP)
Records all the monetary transaction
made between residents of a country and
the rest of the world during any given
period. There are 3 components.
Capital Account-non-financial sale and
purchase of assets and the flow of taxes
(forex reserves, investments, and loans)
Current Account- sale or purchase of
goods that can either be raw materials or
manufactured goods (meant for daily
transactions).
Financial account -monetary inflows and
outflows pertaining to the investments
made in various sectors such as foreign
direct investment, real estate, or other
business ventures.
BoP surplus is exports are more than
imports & BoP deficit indicates imports
are more than exports.
India’s Current deficit of US$ 23.9
billion (2.8% of GDP).
Balance of payments = Balance of current account + Balance of
capital account + Balance of financial account + Balancing item
Consumer Price Index (CPI)
Measures the overall change
in consumer prices based on
a representative basket of
goods and services.

Measures the level of retail

inflation in an economy by
taking into account the
changes in price of the most
commonly used goods and
services by consumers.

(Cost of the basket in CY/Cost

of the basket in BY) X 100.

In 2013, the consumer price index

replaced the wholesale price
index (WPI) as a main measure of
inflation.
Current CPI in India=175.7
points in December 2022 &
inflation rate is 5.72%.
 Wholesale Price Index (WPI)
Represents the price of a basket of wholesale goods and focuses on the
price of goods that are traded between corporations.

The main objective of WPI is monitoring price drifts that reflect demand
and supply in manufacturing, construction and industry.

Generally, the inflation rate calculated on the basis of the movement of

the Wholesale Price Index.

As WPI captures price movements in a most comprehensive way, it is widely

used by Government, banks, industry and business circles.

Significant monetary and fiscal policy changes are often linked to WPI
movements and hence becomes an influential determinant, in the
formulation of trade, fiscal and other economic policies by the Government
of India.

WPI is used as a deflator of various nominal macroeconomic

variables, including Gross Domestic Product (GDP).

India’s WPI is 152.1 and inflation eased to 5.85 % in Nov’22.

FOREX Reserves
Cash and other reserve
assets such as gold held by a
central bank or other
monetary authority that are
primarily available to
balance payments of the
country, influence the
foreign exchange rate of
its currency, and to
maintain confidence in
financial markets.
Current reserves are at USD
5,76, 761 million as on 27
Jan 2023 (Source RBI).
Fiscal Policy

Policy measures taken by governments to

stabilize the economy, specifically by
controlling allocation of taxes and government
expenditures.

Fiscal Deficit = Government Revenue (GST

and taxes like income tax, customs duties,
corporate tax) – Government Expenditure
(capital expenditure, interest payments, and
revenue payments).

Current Year’s Projection is 6.4%

Monetary Policy and its tools
The primary objectives of monetary policies are the management
of inflation or unemployment and maintenance of currency
exchange rates. The usual goals are to achieve or maintain full
employment, to achieve or maintain a high rate of economic
growth, and to stabilize prices and wages.

Monetary policies can be expansionary (aims to increase the

money supply in the economy by decreasing interest rates) or
contractionary (aims to decrease the money supply in the
economy).
Tools of Monetary Policy
1. Interest rate adjustment
A central bank can influence interest rates by changing the
discount rate. The discount rate (base rate) is an interest rate
charged by a central bank to banks for short-term loans. For
example, if a central bank increases the discount rate, the
cost of borrowing for the banks increases. Subsequently, the
banks will increase the interest rate they charge their
customers. Thus, the cost of borrowing in the economy will
increase, and the money supply will decrease.
Monetary Policy & its tools
2. Change reserve requirements
Central banks usually set up the minimum amount of reserves
that must be held by a commercial bank. By changing the
required amount, the central bank can influence the money
supply in the economy. If monetary authorities increase the
required reserve amount, commercial banks find less money
available to lend to their clients, and thus, money supply
decreases.
Commercial banks can’t use the reserves to make loans or
fund investments into new businesses. Since it constitutes a
lost opportunity for the commercial banks, central banks pay
them interest on the reserves. The interest is known as IOR or
IORR (interest on reserves or interest on required reserves).
3. Open market operations
The central bank can either purchase or sell securities issued
by the government to affect the money supply. For example,
central banks can purchase government bonds. As a result,
banks will obtain more money to increase the lending and
money supply in the economy.
 Economic Recession
Recession is a slowdown or a massive contraction in economic activities. A
significant fall in spending generally leads to a recession.

Such a slowdown in economic activities may last for some quarters

thereby completely hampering the growth of an economy causing
economic indicators such as GDP, corporate profits, employments, etc.,
fall.

To tackle this, economies generally react by loosening their monetary

policies by infusing more money into the system, i.e., by increasing the
money supply (Money supply is increased by reducing the interest rates).

Increased spending by the government and decreased taxation are also

considered by government to handle this problem.

The sup-prime crisis in 2008 and COVID 19 issue in

2020 are examples of a recession.
Trade or Business Cycle
It is a cycle of fluctuations in
the Gross Domestic
Product (GDP) around its
long-term natural growth rate
and explains the expansion
and contraction in economic
activity over time.

Trend line can be formed from

the actual time series data.

A business cycle is
completed when it goes
through single boom or
contraction in a sequence.
Boom is characterised by a
period of rapid growth and
the recession is where the
growth is stagnated.
Trade or Business Cycle-Different Phases
 Inflation
Inflation is the percentage change in the value of the Wholesale
Price Index (WPI) on a year-on year basis. It effectively measures the
change in the prices of a basket of goods and services in a year. In
India, inflation is calculated by taking the CPI as base from 2013
onwards.

Reasons for Inflation

Inflation occurs due to an imbalance between demand and supply

of money, changes in production and distribution cost or increase in Contrary to its negative
taxes on products. effects, a moderate level
of inflation characterizes a
good economy. An
When economy experiences inflation, i.e. when the price level of inflation rate of 2 or 3% is
goods and services rises, the value of currency reduces. This means beneficial for an economy
each unit of currency buys fewer goods and services than previous as it encourages people to
time periods. buy more and borrow
more, because during
Consumers get affected at large as high prices of day-to-day goods times of lower inflation,
the level of interest rate
make it difficult for consumers to afford even the basic commodities also remains low. Hence
in life. the government as well as
the central bank always
The government tries to keep inflation under control. Inflation rate strive to achieve a limited
for 2022-23 is expected to be at 5.6%. It is expected to fall down level of inflation.
beyond 5% next fiscal year as predicted by IMF.
Inflation- Types
 National Income
Defined as the sum total of the monetary value of all final goods and services produced
in a country, i.e., the incomes earned by the citizens of the country in a particular
period. It comprises interest, wages, rent, and profit generated by a nation’s production
elements such as capital, labor, land, and entrepreneurship.

The National Income in India is measured by the Central Statistics Office (CSO) under
the Ministry of Statistics and Programme Implementation.

There are 5 measures of the national income- GDP (Gross Domestic Product), GNP
(Gross National Product), NNP (Net National Product), P.I. (Personal Income), and DPI
(Disposable Personal Income).

We already know what is GDP and hence understand the remaining four measures.

GNP- Similar to GDP, but, includes the value of goods produced by resident and
non-resident citizens of a country (the income of foreigners who reside in India is
excluded).
Net National Product (NNP): NNP = GNP – Depreciation from GNP.
Personal Income = National Income – (Undistributed Corporate Profits+ Corporate Taxes
+ Social Security Contribution) + (Transfer Payments)-Transfer Payments are payments
that are not against any productive work. (Example- Old Age Pension, Unemployment
compensation etc.).
Disposable Personal Income (DPI): Income available to individuals after deducting
direct taxes. Disposable Personal Income = Personal Income – Direct Taxes.
National Income- Determination Methods
Money Market- Indian Financial
System an Overview
Money Market- Why do financial
market Exist?
 Money and its Functions
Money is the most liquid part of wealth and it is a sub-set
of assets which might be acceptable in exchange. Money
supply refers to total quantity of money available to the
people in economy. The demand for money explains the
desire of people for a definite amount of money. Money
is needed to manage transactions, and the value of
transactions decides the money people want to keep.

Functions

Medium of Exchange/ Payment

Store of Value

Unit of account and standard of deferred payments

 Money Market
Money market captures the demand and supply of money in an economy and rep
the space where investors and speculators gather to trade in short-term debt
instruments.

Since the money market space is based on debt obligations (interest

payments received for holding short – term debt instruments like bonds and
debentures), interest payments (the interest paid on loans taken from
banks) play a big role.

The higher the interest payment, the higher the supply of these
money-based debt instruments. The availability of these instruments captures
the so-called "supply" of money.

At the same time, when interest rates are high, demand tends to be lower
due to high cost of borrowing money, balancing out the market.

The popular money market instruments are Bonds & Debentures, where
bonds are debt financial instruments issued by large corporations, financial
institutions and government agencies that are backed up by collaterals or
physical assets and debentures are also debt financial instruments issued by
private companies, but without any collaterals or physical assets as back
up. Both of them pay interest payments to the holders.
Money Market- Features
 Money Market- Instruments
Certificates of Deposit – Bank Commercial Paper is a
acquires specific large sum of Short-term Unsecured
money from a depositor and promissory note issued by
promises to repay the amount highly rated companies to
with interest after maturity. raise capital

Call Money-RBI defines Call Money as Borrowing

& Lending in unsecured funds by banks (SCBs,
Co-operative Banks, Primary Dealers, Payment
Banks, on overnight basis.
Notice Money for tenure up to 14 days
(excluding overnight funding) .
Term Money exceeding 14days upto one year.

Treasury Bills are Issued by Commercial Bills arise out of

the Central government for its large volume of transactions
financial obligations and happen in a day in any country
approach the public to raise between traders, between
funds.Eg-91 day, 182 day and traders and customers. Example-
362 day T- bills are issued in Bills of Exchange (BoEs)
India.
 Money Demand- The Keynes Theory
John Maynard Keynes (1883–1946) was a British economist, best known as the
founder of Keynesian economics and the father of modern macroeconomics
formulated theory of demand ( in response to Great depression in 1930s)
which answers for the following questions

Why is money demanded?

What are key determinants of the demand for money?

Keynes said that money was demanded due to three main motives

(1) The transactions motive - Refers to the demand for cash of the public for
making transactions of all kinds.

(2) The precautionary motive - Induces the public to hold money to provide
for contingencies requiring sudden expenditure and for unforeseen
opportunities.

(3) The speculative motive - Explains why the public may hold surplus cash
(over and above that demanded due to the other two motives) instead of
keeping in banks or investing in bonds (and other financial assets).
speculative demand for money is the most important contribution
Keynes made to the theory of demand for money.
 Money Demand- The Keynes Theory (Transaction&
Precautionary motives)
Keynes considered that an individual’s
total wealth consisted of money and
bonds.

Keynes used the term ‘bonds’ to refer to

all risky assets other than money.

So money holding and bond holding were

alternatives to each other and in turn the
interest rate on bonds determines the
choice of holding them.

People will keep on holding money when

they have transactionary or precautionary
motives and in that case, irrespective of
the interest rates on bonds, the demand
for money is inelastic as shown in the
diagram.

Both these motives are dependant on the

income levels of people.
Money Demand- The Keynes Theory
(Speculative motives)
Example: Mr.X wants to invest in bonds and at 2% interest
rate, he will get Rs.1,020 after a year, if he invests
Rs,1,000 now . But, if he speculates that the interest rate
to rise to 10%, he will get Rs.1,100 after a year. So, he
waits till the interest rate becomes 10% and then decides
to invest.

In general, people do not hold on to cash when the rate of

interest is high because (a) the opportunity cost of
holding ideal cash is high (b) Security prices are low at
higher interest rates.

There is a negative relationship between the demand for

money and the rate of interest when there is a
speculative motive because an increase in the rate of
interest leads to a fall in the bond prices.

The demand for money will be lower because due to a fall in the
bond prices, the public would want to buy more of the bonds.
Thus, demand for money and rate of interest are inversely
related as shown in the diagram- Elastic in nature.

Under a condition of liquidity trap, the rate of interest is so low

that the demand for money becomes infinitely elastic.
Money Demand-Total

Y- Income Levels of People; r = Interest Rate on bonds

On the whole the determinants of Demand for Money can be

summarised as- Price Level, Income, Interest rate (When people
hold on to cash, they incur an opportunity cost in terms of
foregone interest), Velocity of circulation of money.
Money Demand- The Demand Curve
The demand curve for money illustrates
the quantity of money demanded at a
given interest rate.

Notice that the demand curve for money

is downward sloping, which means that
people want to hold less of their wealth
in the form of money when they are able
to earn higher interest rates on bonds
and other alternative investments.

Increases and decreases in interest rates

cause the money demand curve to shift.

Lower interest rates on bonds encourage

people to hold cash, instead of investing
in any other alternative investments.
 Money Supply- Components
There are 4 different measures of Money Supply under RBI guidelines
Reserve money (M0) = Currency in Circulation + Bankers' Deposits with RBI + 'Other‘
Deposits with RBI
The Four Measures
The first measure is denoted as M1, and it is represented as the formula.
M1 = C + DD + OD
Where C represents the currency, including both paper currency and coins held
by public; DD represents the demand deposits made in the banks; OD represents
the other types of deposits made in RBI, like deposits from public sector
financing, foreign banks, or international institutions such as the IMF.
The next measure is denoted as M2. Under the first approach, the deposits made
in a savings account are not included as money supply. The second method
compensates for this by adding the savings account.
M2 = M1 + deposits made as savings deposits in Post office savings banks.
The third method is the net deposits made under a specified period with the
banks. It includes the normal money supply and net deposits.
M3 = M1 + Net Time-deposits included in banks.
The final measure of money supply included under accumulates Post office
savings banks' deposits and the total deposits except those from National Saving
Certificate.
M4 = M3 + Deposits made with Post-office savings institute.
Money Supply- The Supply Curve &
Equilibrium point of Money Market
The supply curve for
money illustrates the quantity of
money supplied at a given
interest rate.

Notice that unlike a typical supply

curve in the product market, the
supply curve for money is
vertical, because it does not
depend on interest rates.

It depends entirely on decisions

made by the central banks like
RBI and its monetary Policies.

Equilibrium in the money market

takes place when the quantity of
money demanded is equal to the
quantity supplied.
 Self learning topics
✔Contemporary Economic situations in Indian and Global Scenario-Challenges
of Businesses (Sector wise challenges can be studied)

(a) Please refer these websites also for Indian Economy’s Outlook
https://www.ibef.org/economy/indian-economy-overview
https://www.worldbank.org/en/news/press-release/2022/12/05/india-better-positioned-to-navigate-gl
obal-headwinds-than-other-major-emerging-economies-new-world-bank-report
https://www.oecd.org/economy/india-economic-snapshot/

(b) Please refer these websites also for Global Economy’s Outlook
https://www.imf.org/en/Publications/WEO
https://blogs.worldbank.org/developmenttalk/global-economic-outlook-five-charts-0
https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/economic-condit
ions-outlook-2022

(c ) Challenges can be categorised into (i) Raising Capital (ii) Government Approvals (iii) Labour
workforce in-terms of shortage of skill sets, attrition (iv) Managerial workforce in terms of skill
sets, attrition (v) Competition (vi) Location of the plants and Pollution (vii) Earning economic
and super normal profits (viii) High Tax Payment to governments
Please try to cover the following sectors
1.Challenges exist in Core Sectors (Coal, Crude Oil, Natural Gas, Refinery Products, Fertilizers,
Steel, Cement, Electricity) and the government initiatives to tackle them.
2.Challenges exist in Agriculture Sectors and the government initiatives to tackle them.
3.Challenges exist in Service Sectors and the government initiatives to tackle them.
4.Challenges exist in Medium and Small Enterprise Sectors and the government initiatives to
tackle them.
Powerful Indian Economists of 20th Century
Renowned World Economists
 The average scores of the
The true tragedy economics department in
that the poor MIT and Harvard goes up
face is that they when the student with
do not have the least academic
enough performance in MIT leaves
aspirations and joins Harvard. –Paul
–Adam Smith Samuelson

If you are talking

about inflation When it comes to
then I would say the long run then
it is a monetary all of us are
phenomenon in dead. – John
every aspect and Maynard Keynes
in every situation
–Milton
Friedman
 Wishing you all the
very best for the
term-End
Examinations

Let the success be all

yours