Lecture by S. Maitra on IAS Indian Economy at Civil Services Study Centre

Macroeconomics
Subir Maitra/ATI-CSSC
iasstudymat.blogspot.in
 Aggregate demand shock: Shocks such as change in
government expenditure or change in money supply that
cause a change in aggregate demand in an economy.
 Aggregate supply shock: Shocks such as increase in
petroleum price, a drought etc. that lead to a change in
aggregate supply in an economy.
 Depreciation: The reduction in value of asset through
wear and tear. Also, fall in the value of a currency in
terms of another currency.
 Rational expectations: Expectations about the future
making best use of available information.
 Efficiency wage: Modern-sector urban employers
sometimes pay a higher wage than the equilibrium wage
rate in order to attract a higher-quality work-force or to
obtain higher productivity on the job. 09/02/20142

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Macroeconomics
 Keynesian model: Model developed by Lord John
Maynard Keynes in the early 1930s to explain the
cause of economic depression and hence the
unemployment of that period. The model states that
unemployment is caused by insufficient aggregate
demand and can be eliminated by increasing
government expenditure. Increase in aggregate
demand would lead to increase in production and
hence create further employment.
 Laissez-faire: Free-enterprise market economy
without any government intervention.
 Macroeconomic instability: When an economy is
passing through a phase with high inflation
accompanied by rising budget and trade deficits and
a rapidly expanding money supply.
09/02/20144

Macroeconomics
 Macroeconomic stabilization: Policies designed to
eliminate macroeconomic instability.
 Pro-cyclical fiscal policy: Changes in government
spending and taxes that increase the cyclical fluctuations
in the economy instead of reducing them.
 Natural rate of unemployment The average rate of
unemployment around which the economy fluctuates.
The natural rate is the rate of unemployment toward
which the economy gravitates in the long run, given all
the labor-market imperfections that impede workers from
instantly finding jobs.
 Recession: A recession is a decline in a country's gross
domestic product growth for two or more consecutive
quarters of a year.
 Sacrifice Ratio: The sacrifice ratio, is the percentage of
a year’s real GDP that must be forgone to reduce
inflation by 1 percentage point. A typical estimate is about
5: for every percentage point that inflation is to fall, 5
percent of one year’s GDP must be sacrificed.
09/02/20145

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Macroeconomics
Subir Maitra/ATI-CSSC iasstudymat.blogspot.in
• Gross domestic product (GDP): The sum of
values of all final goods and services
produced within the geographical limit of a
country.
• Gross National Product (GNP): The sum of
values of all final goods and services
produced by the citizens of a country within
the country and the rest of the world.
Gross National Product (GNP) = Gross
Domestic Product (GDP) + Net Factor Income
from
Abroad (NFIA)
09/02/20147

• Gross domestic product at market price (GDPMP):
While deriving GDP of a country we estimate value
added at the market prices. The estimate of GDP
obtained this way is known as GDP at market price.
• Gross national product at factor cost (GNPFC):
Market prices normally include indirect taxes net of
subsidies. Gross national product at factor cost
{GNPFC) is simply, Gross national product at market
price (GNPMP) minus net indirect taxes (Net IT), i.e.
GNPFC = GNPMP – Net IT
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• Net National Product (NNP): Net National
Product (NNP) is simply obtained as gross
national product (GNP) minus depreciation
(D) i.e.
Net National Product (NNP) = Gross
National Product (NDP) -- Total
Depreciation (D).
• Fixed capitals have their own life-time and
depreciates in value every period of time
after their participation in the productive
process. Depreciation of fixed capital
takes place because of their normal ‘wear09/02/201410

• Gross national product at factor cost (GNPFC) :
Gross national product at factor cost {GNPFC) is
simply, Gross national product at market price
(GNPMP) minus net indirect taxes (Net IT), i.e.
GNPFC = GNPMP – Net IT
• National income (NI): Net national product at factor
cost is equivalent to the notion of national income
{NI), which the accrual of income to all normal
residents in a country due to their participation in
production anywhere in the world. Therefore,
National Income(NI) = NNPFC
09/02/201411

• Gross domestic product at factor cost at current
prices: Gross domestic product at factor cost
(GDPFC) when measured at the current period prices
is known as Gross Domestic Product at factor cost at
current price.
• Gross domestic product at factor cost at
constant prices: Gross domestic product at factor
cost (GNPFC) when measured at any previous period
prices is known as Gross Domestic Product at factor
cost at constant price. Gross domestic product at
factor cost at constant prices is also known as Real
GDP.
09/02/201412

• GDP Deflator: The GDP deflator, also called
the implicit price deflator for GDP, is defined as
the ratio of nominal GDP to real GDP:
GDP Deflator = (Nominal GDP/ Real GDP)
• Nominal GDP measures the value of the output
of the economy at current prices. Real GDP
measures output valued at constant prices. The
GDP deflator measures the price of output
relative to its price in the base year.
09/02/201413

Accounting Classification of Union Budget
Accounting classification of government expenditure:
(i) Revenue and Capital (ii) Developmental and Non-
Developmental and (iii) Plan and Non-Plan.
REVENUE AND CAPITAL EXPENDITURE
 Expenditures that result in the creation of new assets and
those which do not.
 Revenue expenditure is for the normal running of
government departments and various services, interest
charges etc.
 The main purpose of the capital account is to show the
gross and net capital formation in the public sector during
the accounting period. Capital expenditure results in
creation of assets in the economy.
09/02/201414

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 Government budget comprises Revenue Budget and
Capital Budget.
 Revenue budget consists of revenue receipts of
government (tax revenues and other revenues) and the
expenditure met from these revenues.
 Tax revenues comprise proceeds of taxes and other
duties levied by the Union.
 Revenue expenditure is for the normal running of
government departments and various services.
Broadly speaking, expenditure which does not result in
creation of assets is treated as 'Revenue expenditure'.
All financial administration grants given to state
governments and other parties are also treated as
revenue expenditure.

Capital budget consists of capital receipts and payments.
 The main items of capital receipts are
a) loans raised by government from public which are called market
loans,
b) borrowings from Reserve Bank of India and other parties through
sale of Treasury Bills,
c) loans received from foreign governments and
d) loans granted by Central government to state and union territory
governments and other parties.
09/02/201417

09/02/2014
 A capital expenditure may be defined as any
expenditure the benefits of which extend over a
period of time exceeding one year.
 Capital expenditure is the expenditure which is
intended for creating concrete assets of a
material character in the economy.
 Examples of capital expenditure are the
acquisition of assets like land, buildings
machinery, equipment and also investment in
shares and loans and advances granted by
Central government to state and union territory
governments, government companies etc.

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Developmental and non-developmental expenditure:
 Developmental expenditure comprises expenditure incurred on
education. medical care, public health and family planning, labour
and employment, agriculture, cooperation, irrigation, transport and
communication and other miscellaneous services. Expenditure
incurred on these items both on Revenue and Capital accounts is
also treated as development expenditure.
 Non-Developmental expenditure, on the other hand, comprises
expenditure incurred on items like defence, collection of taxes and
duties, administrative services, interest on debt and other services,
stationery and printing and other expenditure on general services.
 Developmental expenditure leads to economic growth and
development whereas Non-Developmental expenditure does not, at
least directly.
09/02/201420

Plan and Non-Plan Expenditure:
 Plan expenditure refers to the expenditure
incurred by the Central Government on
programmes / projects, which are recommended
by the Planning Commission.
 Non-Plan expenditure, on the contrary, is a
generic term used to cover all expenditure of
government, not included in the plan.
 The distinction between 'plan expenditure' and
non-plan expenditure' is purely an administrative
classification.
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09/02/2014
 Non-Plan expenditure consists of many items of
expenditure, which are obligatory in nature.
 Items of expenditure, such as interest payments,
pensionary charges, statutory transfer to states come
under the obligatory nature.
 Defence, internal security are essential obligations of a
state.
 Besides, there are special responsibilities of the Central
Government like external affairs, currency and mint,
cooperation with other countries and the expenditure
incurred in this connection are treated as "non-plan"
expenditure.
 Of all the major items of Non-plan expenditure of the
Central Government, interest payments, defence,
subsidies take the lion's share of expenditure.

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Revenue Deficit, Fiscal Deficit and Primary
Deficit of Central Government
 Revenue Deficit = Revenue expenditure
–
Revenue receipts
 Fiscal Deficit = Total expenditure—
Revenue receipt—
Recovery of loans —
Other receipt
 Primary Deficit = Fiscal Deficit –
Interest payment
09/02/201424

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Unemployment
 Frictional Unemployment: A temporary phenomenon which
arises when workers are temporarily out of work while
changing jobs or are suspended due to strikes or lockouts.
 Casual Unemployment: In industries /services such as
construction, catering etc., also in agriculture, where workers
are employment on a day to day basis, there are chances of
casual unemployment occurring due to short-term contracts
which are terminable anytime.
 Seasonal Unemployment: Industries or occupations such
as agriculture, catering, holiday resorts, where production
activities are seasonal in nature offer employment only for a
certain period of time in a year. People engaged in such type
of work may remain unemployed during the off-season, which
is known as seasonal unemployment.
 Structural Unemployment: Unemployment which arises
due to change in the pattern of demand leading to changes in
the structure of production in the economy is termed as the
structural unemployment. 09/02/201426

Unemployment
 Technological Unemployment: Due to introduction of
new machinery, improvements in methods of production,
labour-saving devices etc. some workers tend to be
replaced by machines. This unemployment is known as
technological unemployment. For example, use of
synthetic rubber is bound to reduce demand for natural
rubber leading to unemployment in rubber plantation.
 Cyclical Unemployment: Associated with cyclical
fluctuations of economic activity due to trade cycle;
Mostly found in the capitalist countries like USA etc.
 Chronic Unemployment: When unemployment tends to
a long time feature of a country, it is called chronic
unemployment. Underdeveloped countries suffer from
chronic unemployment on account of the vicious cycle of
poverty, resource scarcity, high population growth, low
capital formation etc. 09/02/201427

Unemployment
 Disguised Unemployment: Refers to a situation where
people may be working and apparently employed, yet
their contribution to output may be zero or negative.
Found mainly in agriculture, public sector enterprises
etc.
 Labour force participation rate (LFPR): LFPR is
defined as the number of persons/ person-days in the
labour force per 1000 persons /person-days.
 Worker Population Ratio (WPR): WPR defined as the
number of persons/person days employed per 1000
persons/person-days.
 Proportion Unemployed (PU): It is defined as the
number of persons/person-days unemployed per 1000
persons/person-days.
 Unemployment Rate (UR): UR is defined as the
number of persons/person-days unemployed per 1000
persons/person-days in the labour force (which includes
both the employed and unemployed). 09/02/201428

Price and Inflation
 Inflation: A persistent and appreciable rise in the
general level of prices of goods and services in an
economy over a period of time.
 Demand-pull Inflation: It is a situation when “too many
money chasing after too few goods”. An excess of
aggregate demand over aggregate supply generates
inflationary rise in prices. When money supply increases
it creates more demand for goods but if supply of goods
cannot be increased due to full employment or other
reasons, demand-pull inflation is caused.
 Cost-push inflation: Cost-push inflation is caused by
wage increase enforced by labour unions, profit
increase by the entrepreneurs and input price rise due
to structural or external reasons
 Inflation Tax: Printing of money to raise government
revenue is like imposing a tax as it causes inflation and
inflation eats up a part of the value of money. This is
09/02/201429

Price and Inflation
 Wholesale Price Index (WPI): WPI is a weighted
average of price (whole sale) relatives of commodities,
classified into three categories namely, primary,
manufacturing and fuel and power.
 Consumer Price Index (CPI): CPI is a weighted
average of price relatives of a basket of goods and
services consumed by the people.
 Headline inflation: While ‘headline inflation’ covers the
entire set of goods and services included in the general
index, ‘core inflation’ otherwise known as ‘underlying
inflation’ ignores the volatile items in the general index.
 Inflation targeting: Inflation targeting refers to the
practice of the central bank to set an inflation target and
then adjust its monetary policy accordingly. 09/02/201430

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Price and Inflation
 Inflationary Gap: The inflationary gap is the
amount by which aggregate expenditure would
exceed aggregate output at the full employment
level of income.
 Producer Price Index (PPI): The Producer Price
Index is a family of indices that measures the
average change over time in the selling prices
received by domestic producers of goods and
services. PPIs measure price change from the
perspective of the seller.
 Headline inflation: Headline inflation covers the
entire set of goods and services included in the
general index.
 Core inflation: Core inflation, otherwise known as
‘underlying inflation’, ignores the volatile items in09/02/201432

Banking and Insurance
 Monetary Policy: The term monetary policy refers to
actions taken by central banks to affect monetary
magnitudes or other financial conditions.
 Bank Rate: Bank rate is the rate at which the central
bank of a country provides loan to the commercial
banks.
 Open Market Operations: Open market operation
consists of purchase and sale of securities by the
central bank of the country.
 Cash Reserve Ratio: Cash Reserve Ratio is a certain
percentage of bank deposits which banks are required
to keep with RBI in the form of reserves or balances.
 Selective Credit Control: Selective Credit Controls
are aimed at regulating the distribution of credit
amongst sectors or purposes. 09/02/201433

 Repo Rate: Repo (Repurchase) rate is the rate at which the
RBI lends shot-term money to the banks against securities.
 Reverse Repo Rate: Reverse Repo rate is the rate at which
banks park their short-term excess liquidity with the RBI.
 Financial inclusion: Financial inclusion is the process of
ensuring access to appropriate financial products and
services needed by vulnerable groups such as weaker
sections and low-income groups at an affordable cost in a fair
and transparent manner by mainstream institutional players.
 Non-Performing Asset: An asset, including a leased asset,
becomes non performing when it ceases to generate income
for the bank. A non performing asset (NPA) is a loan or an
advance where interest and/ or instalment of principal remain
overdue for a period of more than 90 days in respect of a
term loan.
 Call money market: The call money market is an important
segment of the money market where uncollateralized
borrowing and lending of funds take place on overnight basis.09/02/201434

 Liquidity Adjustment Facility: RBI stands ready, on
daily basis, to lend or borrow money from the banking
system, as per the latter’s requirement, at fixed interest
rates. The primary aim of such an operation is to assist
banks to adjust to their day-to-day mismatches in
liquidity, via repo and reverse repo operations.
 Lead Bank Scheme: Lead Bank Scheme emphasizes
making specific banks in each district the key
instruments of local development by entrusting them with
the responsibility of locating growth centres, assessing
deposit potential, identifying credit gaps and evolving a
co-ordinated approach to credit deployment in each
district, in concert with other banks and credit agencies.
 Development banks: Specialized public and private
financial intermediaries providing medium and long-term
credit for development projects. 09/02/201435

Five Year Plans
 Economic planning: Economic planning is a sort
of conceiving, initiating, regulating and controlling
economic activity by the State according to set
priorities with a view to achieving well defined
objectives within a given time span.
 Differentiate between plan and non-plan
expenditure: The expenditure in developing
‘planned’ projects is plan expenditure while that on
maintenance and running of the existing projects is
known as non-plan expenditure.
 Democratic planning: Planning is ‘democratic’ if
people are associated at both formulation and
implementation stages and it is finalized through
debate among people’s representatives.
09/02/201436

Five Year Plans
 Regional planning: Regional planning is a sort of spatial
planning at various territorial levels (such as
block/district/state) for achieving sustainable development for
the region.
 Indicative planning: Indicative planning is peculiar to the
mixed economy. In a mixed economy, the public and private
sectors work together. In indicative planning the private sector
is neither rigidly controlled nor directed to fulfill the targets and
priorities of the plan. The state provides all types of facilities
to the private sector but does not direct it, rather indicates the
areas in which it can help in implementing the plan.
 Imperative planning: Under imperative planning all
economic activities and resources of the economy operate
under the direction of the state. There is complete control
over the factors of production by the state. There is no
consumers sovereignty in such planning.
 Comprehensive plan: An economic plan that sets targets to
cover all the major sectors of the national economy.
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 Poverty: According to the World Bank (2000),
“poverty is pronounced deprivation in wellbeing.”
 Headcount Index: By far, the most widely used
measure is the headcount index, which simply
measures the proportion of the population that is
counted as poor, often denoted by P0.
 Poverty Gap Index: A moderately popular measure
of poverty is the poverty gap index (PGI), which adds
up the extent to which individuals on average fall
below the poverty line, and expresses it as a
percentage of the poverty line.
 Definition of Poverty Line: A poverty line which
distinguishes the poor from the non-poor is derived by
estimating the value of the minimum required
consumption levels of food, clothing, shelter, fuel and
health care, etc.
Poverty
09/02/201439

Poverty
 Absolute poverty: The people are said to be in
absolute poverty if the minimum amounts of food,
clothing and shelter necessary for survival absorb all of
their income.
 Poverty trap: A bad equilibrium for a family,
community, or nation, involving a vicious cycle in which
poverty and underdevelopment breed more poverty and
underdevelopment, often from one generation to the
next.
 Basic needs: A term used by the International Labor
Organization to describe the basic goods and services
(food, shelter, clothing, sanitation, education, etc.)
necessary for a minimum standard of living.
 Poverty line: A poverty line which distinguishes the
poor from the non-poor is derived by estimating the
value of the minimum required consumption levels of
food, clothing, shelter, fuel and health care, etc. 09/02/201440

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Demography and Census
 Demography: Demography is the statistical study of
human population. It encompasses the study of the size,
structure, and distribution of these populations.
 Crude Birth Rate (CBR): CBR measures the number of
live births per 1000 population in a given year.
 Age-Specific Fertility Rate (ASFR): ASFR measures
the annual number of births to women of a specified age
or age group per 1,000 women in that age group.
 General Fertility Rate (GFR): GFR is the number of live
births per 1000 women ages 15-49 in a given year.
 Total Fertility Rate (TFR): TFR is the sum of the Age-
Specific Fertility Rates (5-year age groups between 15
and 49) for female residents during a year multiplied by
5, whole divided by 1000.
09/02/201442

Demography and Census
 Crude Death Rate (CDR): CDR is the total number of
deaths to residents in a given year divided by the total
population of that year per thousand.
 Infant Mortality Rate (IMR): IMR is the number of
newborns dying under one year of age divided by the
number of live births per thousand.
 Neonatal mortality rate (NMR): NMR the ratio of the
number of deaths of children less than 29 days of age in
one year to the number of live births in that year per
thousand.
 Post neonatal mortality rate (PNMR): PNMR the ratio
of the number of deaths in one year of children more
than 29 days upto one year of age to the number of live
births in that year per thousand.
 Demographic Dividend: An increase in the working
age ratio can raise the rate of economic growth. This is
known as “demographic dividend.”
09/02/201443

09/02/2014
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