Unit 2
Unit 2
Unit 2
MACRO ECONOMICS
NATIONAL INCOME:
To simply understand what National Income is, it can be represented
as - National Income defines a country's wealth. This income depicts
the value of goods and services which are produced by an economy.
This gives effect to the net result of all the economic activities
performed in the country.
Imagine how you would define a country’s wealth without any
economic term?In that case, there would be no accountability and
responsibility linked with the production in the country. The resources
would go uncalculated and there would be a vague economic
atmosphere. Thus, let us indulge in this study which talks about
National Income.
Understanding National Income
National income is the sum total of the value of all the goods and
services manufactured by the residents of the country, in a year.,
within its domestic boundaries or outside. It is the net amount of
income of the citizens by production in a year. To be more precise,
national income is the accumulated money value of all final goods
and services produced in a country during one financial year.
Computation of National Income is very vital as it indicates the
overall health of our economy for that particular year.The aggregate
economic performance of a nation is calculated with the help of
National income data. The basic purpose of national income is to
throw light on aggregate output and income and provide a basis for
the government to formulate its policy, programs, to maximize the
national welfare of the people. Central Statistical Organization
calculates the national income in India.
Traditional Definition of National Income-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. This is the true net annual
income or revenue of the country Modern Definition
This definition has two subparts
GDP
Gross Domestic ProductGross Domestic Product, abbreviated as
GDP, is the aggregate value of goods and services produced in a
country. GDP is calculated over regular time intervals, such as a
quarter or a year. GDP as an economic indicator is used worldwide to
measure the growth of countr Goods are valued at their market prices,
so:
All goods measured in the same units (e.g., dollars in the U.S.)
Things without exact market value are excludedies economy.
GNP
Gross National ProductGross National Product (GNP) is an estimated
value of all goods and services produced by a country’s residents and
businesses. GNP does not include the services used to produce
manufactured goods because its value is included in the price of the
finished product. It also includes net income arising in a country from
abroad.
Components of GNP
Consumer goods and services
Gross private domestic income
Goods produced or services rendered
Income arising from abroad.
Formula to Calculate GNP
GNP = GDP + NR (Net income from assets abroad or Net Income
Receipts) - NP (Net payment outflow to foreign assets).
GDP Vs GNP
The Gross Domestic Product and the Gross National Product are the
two most widely used measures in a country’s calculation of
aggregate economic unit. GDP is the measure of the value of goods
and services that are being produced within a country's borders, by the
citizens and the non-citizens. While GNP determines the value of
goods and services that are being produced by the country's citizens in
the domestic and abroad spectrum. GDP is popularly used by the
global economies at large. While, the United States eliminated the use
of GNP in the year 1991, thereby adopting GDP as the measure to
compare their economy with other economies.
What is Economic Collapse?
1. Hyperinflation
2. Stagflation
ECONOMIC RESILIENCE:
The National Association of Counties (NACO) describes economic
resilience as a community's ability to foresee, adapt to, and
leverage changing conditions to their advantage
.
INTERNATIONAL TRADE;
If you can walk into a supermarket and find Costa Rican bananas,
Brazilian coffee, and a bottle of South African wine, you're
experiencing the impacts of international trade.
KEY TAKEAWAYS
ISLM MODEL:
What Is the IS-LM Model?
The IS-LM model, which stands for "investment-savings" (IS) and
"liquidity preference-money supply" (LM) is a
Keynesian macroeconomic model that shows how the market for
economic goods (IS) interacts with the loanable funds market (LM)
or money market. It is represented as a graph in which the IS and LM
curves intersect to show the short-run equilibrium between interest
rates and output.
KEY TAKEAWAYS
The IS curve depicts the set of all levels of interest rates and output
(GDP) at which total investment (I) equals total saving (S). At lower
interest rates, investment is higher, which translates into more total
output (GDP), so the IS curve slopes downward and to the right.
The LM curve depicts the set of all levels of income (GDP) and
interest rates at which money supply equals money (liquidity)
demand. The LM curve slopes upward because higher levels of
income (GDP) induce increased demand to hold money balances for
transactions, which requires a higher interest rate to keep money
supply and liquidity demand in equilibrium.
The intersection of the IS and LM curves shows the equilibrium point
of interest rates and output when money markets and the real
economy are in balance. Multiple scenarios or points in time may be
represented by adding additional IS and LM curves.
MONETARY POLICY:
KEY TAKEAWAYS
A central bank may revise the interest rates it charges to loan money
to the nation's banks. As rates rise or fall, financial institutions adjust
rates for their customers such as businesses or home buyers.
Contractionary
Expansionary
Inflation
Contractionary monetary policy is used to target a high level of
inflation and reduce the level of money circulating in the economy.
Unemployment
Exchange Rates
Interest Rates
3
The Federal Reserve commonly uses three strategies for monetary
policy including reserve requirements, the discount rate, and open
market operations.
Reserve Requirements
Lowering this reserve requirement releases more capital for the banks
to offer loans or buy other assets. Increasing the requirement curtails
bank lending and slows growth.
FISCAL POLICY:
What Is Fiscal Policy?
Fiscal policy refers to the use of government spending and tax
policies to influence economic conditions,
especially macroeconomic conditions. These include aggregate
demand for goods and services, employment, inflation, and economic
growth.
KEY TAKEAWAYS
This means that to help stabilize the economy, the government should
run large budget deficits during economic downturns and run budget
surpluses when the economy is growing. These are known
as expansionary or contractionary fiscal policies, respectively.
To illustrate how the government can use fiscal policy to affect the
economy, consider an economy that's experiencing a recession. The
government might issue tax stimulus rebates to increase aggregate
demand and fuel economic growth.
The logic behind this approach is that when people pay lower taxes,
they have more money to spend or invest, which fuels higher
demand. That demand leads firms to hire more,
decreasing unemployment, and causing fierce competition for labor.
In turn, this serves to raise wages and provide consumers with more
income to spend and invest. It's a virtuous cycle or positive feedback
loop.
KEY TAKEAWAYS
CRR SLR:
Key Takeaways
The RBI charges the repo rate when commercial banks borrow
funds by leveraging securities.
The reverse repo rate is the rate at which banks earn interest
when they park surplus funds with the RBI.
The repo rate helps control inflation, and the reverse repo rate
increases liquidity.
The repo rate set by the RBI is always higher than the reverse
repo rate.
You can check the repo rate and reverse repo rate on the RBI
website.
When you deposit money in a bank, the bank pays you interest.
Conversely, when you borrow money, the bank levies interest on the
funds borrowed. But where does the bank find the funds to loan you
the money? Banks utilise the deposits in their custody or borrow
funds from the central bank of the country – The Reserve Bank of
India. The interest rates levied on the transactions between the RBI
and commercial banks are known as repo rate and reverse repo rate.
This article explains these terms and the difference between repo rate
and reverse repo rate.
What is a Repo Rate?
The repo rate is the rate the RBI levies when commercial banks
borrow funds from it. Usually, commercial banks borrow money from
the RBI by using government securities like treasury bills and bonds
as collateral. Thus, the repo rate is the lending rate charged by the
RBI.
Essentially, the word ‘repo’ stands for repurchasing agreement/option.
It is an agreement wherein both the RBI and the bank agree to
repurchase securities at a predetermined price and date. The RBI
relies on the repo rate to control inflation in the economy of the
country.
What is a Reverse Repo Rate?
The reverse repo rate is contrary to RBI’s repo rate. It is applied to the
interest paid by the RBI. When banks have surplus money, they
deposit funds with the RBI and earn interest. This rate is the reverse
repo rate.
In turn, the RBI uses those excess funds to create liquidity in the
economy. Lowering the reverse repo rate also helps the RBI increase
the purchasing power in the nation.