Day to Day Economics
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Note: Word
CHAPTER 1 MEDLEY OF GOVERNMENT AND PRIVATE SECTOR
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Note: Ch
The second factor is this: at a given market price, the relative buying power of different consumers might exclude some of them from buying the car or the toothpaste. In the case of the street-performing couple, this ‘excludability’ feature is missing, because they cannot prevent individuals—either physically or by charging an appropriate price—from viewing the performance. Thus, due to the non-rivalry and the non-excludability of the service which they provide, the problem of free riding occurs, and the market fails to deliver—ergo, the street performers cannot run a profitable business.
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Note: Point
There are several instances of services that are non-rival in consumption and non-excludable. Such services are termed ‘pure public goods’.
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Note: Important
Thus, we see that, when excludability is brought in, it is possible for a private enterprise to provide a public good profitably. Such goods are called ‘club goods’.
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Note: Point
governments often allow private monopolies to run utilities as long as their pricing and output levels are regulated by the government. Some firms, such as, Tata Power (Mumbai) and Torrent Power (Ahmedabad), are examples of private firms running electric utilities very efficiently, but their pricing and output decisions are regulated by the state electricity regulatory commissions.
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Note: Point
This happens when economic activities are characterized by what is known in economics as ‘externality’. Externality occurs when a specific economic activity—production, consumption, or trade—affects a bystander who is not party to the specific economic activity.
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Note: Point
CHAPTER 2 BUDGET, DEFICITS, AND TAXATION
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Note: Chapter
Along with the other items presented in the budget document, the finance minister submits the Annual Financial Statement which consists of estimated receipts and spending, which are operated through three separate accounts: (i) the Consolidated Fund, (ii) the Contingency Fund, and (iii) the Public Account.
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Note: Note
All revenues and loans raised and recovered form part of the Consolidated Fund, of which no amount can be spent without the approval of Parliament.
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Note: Word
there is the Public Account which holds amounts which are held by the government in trust. These include items such as the Employees’ Provident Fund and the Small Savings Collections. The funds in these items do not belong to the government, and have to be eventually returned to the people who have deposited them. No parliamentary approval is needed for such payments, except when the amounts are withdrawn from the Consolidated Fund and kept in the Public Account for specific expenditures (for example, road construction).
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Note: Point
All the expenditures incurred on the functioning of the judiciary, maintaining law and order, routine administration, salaries, subsidies, pensions for the administrative staff, and payments on past debts are classified as revenue expenditures. Essentially, these are expenditures that do not lead to the creation of assets and are used up for the normal functioning of the government.
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Note: Point
Capital expenditures, on the other hand, include asset-creating expenditures for providing public goods, such as, dams, bridges and roads, and plants and machineries built for use in the government sector.
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Note: Point
In fact, lower tax and non-tax revenue receipts as a percentage of GDP does not really mean that government interference in the economy is low. It could mean that the government is inefficient in collecting sufficient revenue in relation to its expenditures.
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Note: Im
The government has three choices for generating debt capital receipts: borrowing domestically from the public; borrowing from external financial institutions; or, under extreme conditions, borrowing from the central bank of the country. These three forms of borrowing are undertaken by selling new government securities or bonds.
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Note: Important
The first is the Revenue Deficit, which measures the difference between revenue expenditure and revenue receipts. A deficit of this kind shows the management of government finances in a poor light, for it shows that the government has to borrow money to finance administrative activities which do not lead to the creation of any assets.
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Note: Point
When the government’s Fiscal Deficit is large, it implies that the government has to borrow heavily. This means that the demand for loans will rise in the market, causing interest rates to go up. As interest rates rise, the cost of borrowing for private firms goes up. As the cost of borrowing rises, firms find that fewer and fewer investment projects are economically viable.
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Note: Government Borrowing and private investment
In economics, this phenomenon is called the ‘Crowding Out’ of private investments by public borrowing.
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Note: Important
First, there is the Benefit Principle which holds that people and firms must be taxed in proportion to the benefits they receive from the government. That is, if A uses a toll road five times more than B, then A must pay a toll which is five times the toll paid by B.
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Note: Tax principle philosophy
All taxes are classified as either Direct Taxes or Indirect Taxes
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Note: Point
However, indirect taxes turn out to be Regressive, for poor individuals generally end up paying a larger proportion of their income as indirect taxes than the rich individual.
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Note: Important
VAT, charged by the state governments, is now levied only on the value addition made by a particular firm or enterprise, where value addition refers to the total sales proceeds of a firm minus the cost of the material inputs used. For example, if the sales proceeds of an apparel manufacturing firm are Rs 1 million, and the cost of materials consumed, such as, textile, leather, buttons, and electricity, is Rs 600,000, then VAT will be applied only on Rs 400,000, not on Rs 1 million.
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Note: VAT taxing
If a government does not levy tax, that is, the tax rate is zero, there will be no tax revenue. As the tax rate increases, so will the tax revenue until the tax rate reaches an optimal level T. If the tax rate rises above T, the tax revenue will begin to fall. Of course, at 100 percent tax rate, the tax revenue would be zero since it would completely discourage all economic activity.
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Note: Laffer curve
So, the next time you tune in to the budget presentation, here is a draft checklist of questions for which you may seek answers:
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Note: Note
1. How much is the projected Fiscal and Revenue Deficit? Is the government moving towards the prudent norms of 3 percent and 0 percent, respectively?
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Note: Point
2. How much is the Revenue Deficit as a percentage of the Fiscal Deficit? That is to say, ‘Is the deficit spending going into asset-creation or is it simply for administrative purposes?’
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Note: Point
3. How much is India’s GDP and what is the projected GDP growth rate? A better growth rate of, say, 8 percent or more, is an indicator of a positive environment for your business growth as well.
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Note: Point
9. Is there any further reduction in customs duties on imports that are of interest to my business?
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Note: Point
CHAPTER 3 MONEY, BANKING, AND THE STOCK MARKET
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Note: CHR.
Hence, apart from being a unit of measurement, money is also a medium of exchange and a temporary store of value (abode of purchasing power).
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Note: Important
The world over, the currency with the public (that is, cash balances on hand) and the demand deposits with banks are considered money. With some variation, the central banks of almost all countries accept this definition of money as the narrow definition of money, denoted as M1.
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Note: Important : M1 money
Therefore, another definition called ‘Broad Money’—which is popularly denoted as M3 by central banks—also includes time deposits as money.
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Note: Important : M3 money
First, when people deposit money in a bank, generally, they do not withdraw their money immediately. That is a foregone conclusion, else, why would they deposit money in the bank to start with?
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Note: Point
And third, people do not withdraw money simultaneously with others.
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Note: Point
the scare of a bank run were to spread to other banks, there is always a chance that the banking system would collapse. To prevent this, RBI sets some minimum limits on the cash reserve to be maintained by banks against their deposit liabilities. This minimum limit, enforced by RBI, is called the Cash Reserve Ratio (CRR), and it varies from 20 percent to 3 percent of the deposit liabilities of banks.
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Note: CRR
To guard against this, RBI mandates that banks maintain a certain proportion of their deposit liabilities in the form of secure investments—government securities, gold and/or cash. This RBI requirement is called the Statutory Liquidity Ratio (SLR), which was as high as 39 percent a few decades ago and currently is at 23 percent.
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Note: SLR
Interestingly, the currency term Rupee, used in countries, such as, India, Indonesia, Pakistan, Nepal, and Sri Lanka, is derived from the Sanskrit word for silver, rupyaka.
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Note: Fact
The owners of the shares of a firm are also the owners of the firm. Those who give loans to firms in various ways, including buying debentures or keeping fixed deposits, are the creditors or lenders to the firm; they are not the owners of the firm.
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Note: Shares vs debentures
therefore, that the Bombay Stock Exchange (BSE) is the oldest stock market in Asia and was established in Mumbai during the British rule. Its origin can be traced to the 1850s, when share brokers used to gather under a banyan tree for trading, and they formed an official organization in 1875 known as The Native Share and Stock Brokers’ Association. After Independence, BSE was the first in the country to be granted permanent recognition under the Securities Contracts (Regulation) Act of 1956.
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Note: BSE
Therefore, specialized firms evolved into what are called mutual fund managers, which invest in shares on behalf of small individual customers. Individuals invest in the mutual funds of these specialized financial firms which, in turn, invest in shares of different companies on behalf of the individual customers. Mutual funds have come as a big relief to small investors who can take advantage of the expertise of mutual fund managers in getting a sound return on their financial investments.
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Note: Mutual funds
CHAPTER 4 FREER TRADE AND WORLD TRADE ORGANIZATION
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Note: CHR.
The statement from his treatise quoted at the beginning of this chapter underlines the basic premise in economics—the self-interest of each economic agent compels them to specialize in the production of what they are good at and to exchange it with others to satisfy their needs. He believed that such self-interest-driven specialization and exchange maximizes a society’s welfare.
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Note: Self interest and adam smith
But, what if one is good at producing two or more things? Should he produce all those things by himself? This issue was addressed by another economist, David Ricardo. He further refined Adam Smith’s idea and came up with the concept of comparative advantage.
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Note: Idea Of comparative advantage
in the early 1930s by two economists—Eli Heckscher and Bertil Ohlin of the Stockholm School of Economics. They advocated what is now known as the factor abundance theory or, more popularly, the Heckscher–Ohlin theory.
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Note: Term
Trade economists like Paul Krugman addressed this ‘intra-industry’ trade among countries by advocating complementary theories now christened as New Trade Theories (NTTs).
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Note: Term
During the two world wars, the industrialized countries followed a different form of protection of domestic industries. Europe and America devalued their currencies in the hope that it would promote exports.
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Note: Note
Towards the end of the war, they gathered in Bretton Woods, New Hampshire, USA, in July 1944. The gathering—popularly known as the Bretton Woods Conference—was held out of an expressed need to establish international organizations that would facilitate and regulate international trade and the monetary and financial environment.
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Note: Bretton Woods
To this end, the general purpose of all the agreements is to remove quantitative restrictions such as import bans or quota; to ease customs duty protection for domestic industry; to reduce subsidies on production and/or exports; and to harmonize product standards and specifications on a scientific basis so that trade is not withheld due to ad hoc non-tariff barriers.
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Note: Purpose of agreements Wto
For example, a hallmark of WTO is the principle of non-discrimination among member countries. This principle, christened as the MFN principle in Article I of GATT, mandates that the trade policy treatment which a member country metes out to its most favoured nation should also be meted out to all other member countries. In essence, simply put, it means that all member countries have to be given MFN status. For example, if India removes quota restrictions on the import of agricultural products from a particular country, the quota removal must apply to all the other member countries as well.
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Note: MFN
The catch is that an exemption is granted by Article XXI of GATT which allows member countries to apply trade controls if they are deemed necessary due to concerns of national security. By not granting each other MFN status in 1995, both India and Pakistan had exercised the use of this exemption at the time of the formation of WTO.
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Note: The carch in MFN status
While the developed countries point at the high customs duties, the developing countries are quick to point at the humongous subsidies that the former grant to their agriculture sector, and the procedural loopholes that they use to avoid reducing their subsidies.
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Note: Customs Vs subsidies
CHAPTER 5 ANATOMY OF INFLATION
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Note: CHR.
Supply Shock/Cost–Push Inflation
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Note: Term
Shortage of crude oil and the resultant high prices of goods which use crude oil in the market result in overall smaller quantities of goods being purchased in the market. This leads to a general reduction in output and employment in the economy. Such an inflation that leads to a lowering of output and employment is known as Stagflation.
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Note: Stagflation
Prices administered by the government can also be inflationary.
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Note: Important
We must note at this time, however, that a small measure of demand–pull inflation is considered good for the economy as it gives an incentive to producers to produce more. And, if the output level rises as a result of a moderate rise in price, inflation stays in check.
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Note: Important
The most acute form of demand–pull inflation is called hyperinflation. It occurs when the government and the central bank engage in reckless printing of money to make additional payments to various stakeholders.
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Note: Important
This postulate is popularly described by an equation: M V = P Y where M is the money supply in the economy (we have defined what is ‘money’ in an earlier chapter); P is the price level or the index number prevailing in a given period of time; Y is the level of output in the economy; and V is the velocity of money. Velocity of money refers to the average number of times a unit of currency (say, a rupee or a mark) is used in a given period of time. The right-hand side of the equation shows that P times Y (PY) is nothing but the current or nominal GDP as we have defined it in an earlier chapter. If the velocity of money is V, to carry out transactions related to the PY level of GDP, one needs to have M units of money. On an average, each unit of M will be used V times during a given period.
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Note: Marh behind hyperinflation
Someone who complains despite both prices and income rising in the same proportion is considered to be suffering from, as economists call it, ‘money illusion’.
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Note: Term
Therefore, between debtors and creditors, inflation causes a redistribution of real income in favour of debtors. And, because the real value of cash holdings goes down, one would like to spend before prices rise further, to save less, and to borrow more! As a society, such changes in real income distribution and spending habits are certainly worrisome.
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Note: Important
A rise in the cost of production ultimately leads to a rise in the retail prices paid by the consumer. Therefore, cost–push inflation is likely to get reflected first in WPI and subsequently in CPI and, hence the name, headline inflation.
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Note: Important
However, LAF mandates that banks must repurchase the same securities at a later date. The securities are repurchased by the banks at a price higher than their selling price. Essentially, the difference in the two prices expressed as an annualized percentage of the selling price is the repo rate. Thus, the repo rate is nothing but the short-term interest rate at which commercial banks borrow from RBI.
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Note: Important
If the repo rate is increased, it becomes costlier for commercial banks to borrow from RBI. In turn, banks would also give loans to private firms at a higher interest rate. At a higher interest rate, a smaller number of investment projects become viable for the private sector. This causes the demand for investment goods to fall and, thereby, stall inflation.
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Note: Repo Rate and inflation
CHAPTER 6 THE BOOM AND BUST PHENOMENA
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Note: CHR.
Therefore, a workforce consists of those who are employed and those who are involuntarily unemployed. The unemployment rate is defined as a percentage of the workforce that is involuntarily unemployed.
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Note: Important
Expansionary fiscal policy was a revolutionary idea which Keynes propounded for reducing unemployment—a deficient demand in a recessionary period could be countered by an increase in government spending or by tax cuts which increase demand in multiples of the initial spending or of the tax cut.
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Note: Important
Monetary policy, therefore, can be summarized as the management of market interest rates, changing the stock of money supply in the economy, and changing the availability of credit in the market.
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Note: Important
This meant that India in 2011 was suffering from stagflation, that is, the simultaneous existence of inflation and unemployment.
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Note: Important
It determines the PPP every five years by obtaining and coordinating data regarding the prices of a basket of more than 1000 commodities from all countries through its International Comparison Programme (ICP), and identifying the PPP exchange rate of each country in relation to the US dollar. This exchange rate is used to calculate PC–GNI valued at the PPP exchange rate. Essentially, through the PPP exchange rate, ICP answers the question—how much local currency would be required for buying a given basket that may cost $1 in the US?
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Note: PPP
However, a high GDP and its growth cannot be an end in itself. It is only a means to achieve higher welfare for the common man.
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Note: Important
being celibate as he was, he needed time to imbibe
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Note: Word
esoteric
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INTRODUCTION
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‘If there’s a book you really want to read but it hasn’t been written yet, then you must write it.’ —TONI MORRISON
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The term ‘economics’ comes from the Ancient Greek word oikonomia (oikos, house + nomos, custom or law), meaning ‘rules or management of a household’.
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circa 327 BCE, the Indian statesman Kautilya also wrote a treatise, Arthashastra, in which he describes economics as the basis for attaining material goods and spiritual goods.
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its modern form, attained visibility when Adam Smith wrote his famous treatise, An Inquiry into the Nature and Causes of the Wealth of Nations in
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its modern form, attained visibility when Adam Smith wrote his famous treatise, An Inquiry into the Nature and Causes of the Wealth of Nations in 1776.
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One of the branches of economics that focuses on individual economic decisions of households and firms is called microeconomics.
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Another—which focuses on understanding the changes in the aggregate business environment—is called macroeconomics.
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‘We do not defend the perversions of the natural economic system; but because they are perversions merely, we shall remove them and keep the system.’ —JOHN BATES CLARK
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medley
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There is a tremendous diversity in stamps in terms of images, colours, language, currency, denominations, and the countries that issue them. But there is one thing common to all postage stamps—they are issued by governments
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One is the non-rivalry in consumption—you watched the street performance, but you did not prevent others from viewing it, too. Thus, there was no rivalry in the consumption of the service among different consumers. That is not so with other goods, say, a car or a toothpaste. If you buy a car, that same car is not available to anyone else.
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Private firms will not offer these services, because the free market cannot provide the required environment for making a profit. In this sense, the market fails to deliver these services, and the institution of government has to undertake these economic activities. Even in hardcore capitalist economies, these services are provided by the government.
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As the name suggests, many social clubs which cater to high society restrict membership and charge high fees. This creates excludability and retains non-rivalry in the use of facilities such as swimming pools and gymnasiums.
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The per-unit cost of delivering potable tap water would come down only if a single firm were to offer this service. That way, there would be no duplication of capital costs, and the capital cost for a single operator would get distributed over the large volume of water delivered. This implies that there is room only for a single firm—that is, a monopoly.
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In the absence of competition from other players, a profit-maximizing monopolist would charge a high price for water delivery, and the quantity supplied would also be quite low compared to what it would have been under competitive conditions. Goods and services that fall into this category are called ‘natural monopolies’.
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Governments avoid the dilemma of such natural monopolies by undertaking these activities themselves and charging a low average price which would be close to the competitive price.
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It is this same feature of natural monopoly that enables governments to own and run other activities, such as, the generation and supply of electricity, and the provision of landline telephone services. These natural monopolies are referred to in common parlance as ‘public utilities’ or, simply, utilities.
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Lee Iacocca, former head of the Chrysler Corporation, once said, ‘One of the things the government can’t do is run anything. The only things our government runs are the post office and the railroads, and both of them are bankrupt.’
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raison d’être
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The social benefit of the electric car far exceeds the private benefit to the consumer. This means that there is a positive externality enjoyed by society when an individual buys a Reva. The government would certainly want to encourage more production of Reva and, hence, it offers a subsidy so that more such cars (and fewer petrol-driven cars) are manufactured and bought.
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High taxes on liquor and tobacco also demonstrate the government’s efforts to curtail consumption as it perceives a significant negative externality on society. The government taxes mentioned above—for protecting the environment and for curtailing the consumption of liquor and the use of tobacco—are popularly termed ‘green’ taxes and ‘sin’ taxes, respectively!
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In a broader sense, these policies can also be interpreted as measures for reducing negative externalities: inflation and unemployment lead to lower real incomes for households and make fewer goods and services available to them.
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The existence of pure public goods, natural monopolies, and externalities are clear cases of market failures. In such situations, the private sector either cannot provide goods and services profitably, or provides them with a disregard of social costs and social benefits. Therefore, the government has legitimate reasons both for undertaking the economic activities and for intervening in their functioning.
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Among others, these goods and services include defence, postal services, water supply, utilities, education, and conservation of the environment.
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Externality: A situation in an economic activity where there is a divergence of private benefit (cost) and social benefit (cost).
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Natural Monopoly: A situation where the per-unit cost of producing a good or a service for a given market is lower for a single firm than it would be if there were two or more firms.
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‘The state collects tax for the greater welfare of its citizens in the same way as the sun evaporates water only to return it manifold in the form of rain.’ (Ch. 1.18) —KALIDAS, RAGHUVANSHA, CIRCA 4 CE
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The preparation of such an expenditure and revenue statement by the government took a formal shape in England by the middle of the eighteenth century, and used to be presented by the Chancellor of the Exchequer in the House of Commons.
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Circa 1760, the Chancellor of the Exchequer in England would carry the statement of government finances to the House of Commons in a leather bag. The French word for such a leather bag is bougette, which became budget in English. Thus, the Chancellor would present the ‘budget’ in the House of Commons.
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While the Indian government, for all its civil and administrative purposes, follows the Gregorian calendar that begins on January 1, it mandates a different twelve-month period called the fiscal year for taxation, budget, and financial reporting by the private sector. The fiscal year begins on April 1 and ends on March 31. The government has to operationalize the budget from April 1.
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imprest
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The Contingency Fund is an imprest that is available to the president of India to meet unforeseen expenditures, such as, expenditure to tackle natural disasters or accidents. Post-facto approval of such expenditure is sought from Parliament, and an equivalent amount is drawn from the Consolidated Fund. The current corpus of this Contingency Fund is Rs 500 crore.
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Revenue receipts include tax receipts and non-tax receipts, such as, stamp duties, fees, and dividends, if any, from Public Sector Undertakings (PSUs).
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Capital receipts, on the other hand, include grants received and loans recovered by the government, and occasional disinvestment proceeds earned by selling PSUs. These are called non-debt capital receipts.
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Therefore, borrowing is a capital receipt, albeit a debt-creating capital receipt.
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GDP at market prices is defined as the value of final goods and services at current market prices produced in a given period (generally one year) within the territorial boundaries of a country. Since GDP is calculated at current market prices, it is also referred to as the Nominal GDP.
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The adjective ‘gross’ is used, because durable assets get depreciated and the depreciated value is not subtracted from GDP. If it is, it is called the Net Domestic Product.
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Thus, in calculating GDP, the value of the book will be included but not the value of all the intermediate products or services.
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expenditures are being incurred to finance activities leading to the creation of national assets. High
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The second type of deficit is the Fiscal Deficit, which refers to the difference between the government’s total expenditure and the total non-debt receipts. In short, this indicates that the government has exhausted all options for financing its expenditure, and the only recourse left is to borrow. Thus, Fiscal Deficit shows the total debt generated by the government to finance the total budget expenditure. Such a deficit is justified as long as the expenditures are being incurred to finance activities leading to the creation of national assets.
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Yet another deficit that is considered by an incumbent government is the Primary Deficit. This deficit is defined as the difference between the Fiscal Deficit and the interest payment on debts incurred in earlier years. If one removes the interest payments from the Fiscal Deficit, the Primary Deficit becomes a smaller number. The incumbent government uses this statistic to show that the interest payments on the previous debt are not of its making. When this component is removed from the Fiscal Deficit and the resultant deficit turns out to be very small, it proves the prudent management of the budget by the incumbent government.
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Ceteris Paribus,
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When the rupee appreciates in this manner, one US dollar fetches fewer rupees and, therefore, Indian exports become expensive and imports become cheaper. This results in lower exports and higher imports for India, leading to a higher trade deficit for the country. Thus, a high Fiscal Deficit may lead to a very high trade deficit.
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Second, the Ability to Pay Principle holds that the taxes which people pay should relate to their income and wealth; that is, if A has a higher income than B, A should pay higher taxes than B, because A’s ability to earn and, therefore, pay, is more.
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Third, the Horizontal Equity and the Vertical Equity Principles state that those who are equal should be taxed equally, and those who are unequal must be taxed unequally. That is, if A and B have the same income, they should pay the same tax, but if A has a higher income than B, then A should pay more tax than B. These Equity principles essentially focus on the issue of fairness.
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Finally, yet another principle that is considered is the Principle of Economic Efficiency. It states that taxes should have a minimal effect on free market consumption and production decisions.
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Direct taxes, such as, personal income tax, corporate tax and wealth tax, are charged directly on people and firms. Taxes like income tax are consistent with the Ability to Pay Principle.
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Income tax is generally made even more redistributive by making it Progressive, in that, a higher-income individual not only pays a higher amount as tax but also pays a higher proportion of income as tax. A Regressive income tax, on the other hand, takes a higher proportion of income in taxes from a poor individual than it does from a rich individual.
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Indirect taxes are taxes that are charged on goods and services and, therefore, are charged indirectly on people or firms. These taxes include Excise Duty charged on the production of goods; Sales Tax imposed on goods at the time of sale; Octroi charged on goods entering a city; Service Tax imposed on services; Property Tax on real estate; and Customs Duty on the import of goods.
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This effort has been popularly known as revenue-led fiscal consolidation. To this end, therefore, a concerted effort was made to rationalize the tax system, make it fair and efficient, and enable it to generate more tax revenue, keeping in mind that very high income tax rates have a negative impact on the incentive to work.
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This is a far cry from the highest bracket marginal income tax rate of 97.75 percent that existed in India in 1974–75.
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excise duty is the duty charged at the production stage of a good.
Page: 39, Location: 593-593
a government does not levy tax, that is, the tax rate is zero, there will be no tax revenue.
Page: 40, Location: 606-606
the idea is that, after the level of optimal tax rate T, any increase in the tax rate would lead to a substantive disincentive to work, and the resultant fall in GDP would lower the tax revenue. High tax rates may also lead to tax evasion which is illegal. Thus, whether or not tax revenue will increase or decrease when the tax rate is changed depends upon which side of the hump the original tax rate is.
Page: 40, Location: 609-612
President Ronald Reagan reduced tax rates and the same paper napkin convinced Prime Minister Margaret Thatcher to reduce tax rates
Page: 40, Location: 612-613
Ability to Pay Principle: The taxes which people pay should relate to their earning capacity, income and wealth.
Page: 44, Location: 673-674
Benefit Principle: Individuals and firms must be taxed in proportion to the benefits they receive from the government.
Page: 44, Location: 674-675
Capital Receipt: The debt receipt, which includes domestic borrowings from the public, external borrowings, and occasional borrowing from the central bank of the country. And the non-debt receipt which comprises net grants received by the government, loan recoveries, and disinvestment proceeds earned by selling PSUs.
Page: 45, Location: 677-679
Horizontal Equity: Those who are equal should be taxed equally.
Page: 45, Location: 684-685
Primary Deficit: The difference between Fiscal Deficit and the interest on the previous government’s debt.
Page: 45, Location: 688-689
Regressive Income Tax: Income tax where a higher income attracts a lower proportion of income tax.
Page: 46, Location: 692-692
Value Added Tax: Tax levied on the difference between sales proceeds and material cost. Essentially, it is a tax on the factor income generated in an economic activity.
Page: 46, Location: 697-698
‘It is a wise man who lives with money in the bank, it is a fool who dies that way.’ —AN OLD FRENCH PROVERB
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In common English parlance, the word ‘money’ is a catch-all used to describe salary, profit, rent, interest earned, income, savings and wealth.
Page: 47, Location: 716-717
Salary, profit, rent, interest earned are all sources of income for individuals or firms. This income is measured per unit of time.
Page: 47, Location: 718-719
On the other hand, wealth is a stock concept, which is the result of accumulation of savings over time. Therefore, it is quoted at a given point in time and not for a given period of time.
Page: 47, Location: 720-721
Finally, money as understood in economics, or money supply as defined by the central bank, is yet another concept.
Page: 48, Location: 723-724
Thus, money is a standard unit of measurement for economic magnitudes just as a kilometre and an hour are for distance and time, respectively.
Page: 48, Location: 729-730
It also represents the cash balance that a household has on an average during a given period.
Page: 48, Location: 731-731
Thus, a household needs to hold a cash balance as a precaution against unanticipated expenses. The demand for such cash balances is referred to as the ‘precautionary demand’ for money.
Page: 49, Location: 746-747
In the process, some cash balances are held for speculative purposes.
Page: 49, Location: 750-751
The above discussion shows that households keep cash balances for three purposes—transactions, precautionary, and speculative. These cash balances facilitate the exchange of goods and services, including the buying (and selling) of financial or real assets. Milton Friedman, recipient of the Nobel Memorial Prize in Economic Sciences, called these cash balances the ‘temporary abode of purchasing power’.
Page: 49, Location: 751-754
Therefore, the value of demand deposits or chequable deposits against which one can write cheques is also money.
Page: 50, Location: 756-757
It is easy to figure out why the value of shares or stocks is not included in the definition of money. Shares are not used as a medium of exchange to buy goods and services.
Page: 50, Location: 760-761
In this sense, shares are ‘illiquid’ financial assets, where liquidity is defined as the ease with which a financial or a real asset can be converted into cash without much loss of value.
Page: 50, Location: 763-764
Therefore, money—the currency with the public and the chequable demand deposits—is the most liquid financial asset.
Page: 50, Location: 764-765
The degree of liquidity for a time deposit is less than that for cash or a demand deposit but is higher than that for real assets and shares
Page: 50, Location: 766-767
Thus, money eliminates the problem of a double coincidence of wants. You can see that the evolution of money in modern times, in the form of paper currency, has made our lives immensely simpler.
Page: 52, Location: 783-785
A bank is, after all, a profit-making entity and must earn income through some activities. They earn a profit as a consequence of three tendencies of the depositors.
Page: 52, Location: 789-790
Second, even if people do withdraw cash from their bank accounts sooner or later, they do not withdraw it in full.
Page: 52, Location: 792-792
Therefore, it keeps aside as reserve a certain portion of the initial cash deposit (primary deposit) of an account holder and lends the remaining amount to a firm, on condition that the firm opens an account in the bank, in which the money loaned is deposited. This creates an additional deposit—a secondary deposit—with the bank, for which no new cash was actually deposited in the bank.
Page: 52, Location: 793-796
As the volume and value of transactions increased exponentially over time, people found it cumbersome and risky to carry valuable silver and gold wherever they went for business. Instead, they started depositing the silver and gold with goldsmiths who would give them deposit receipts. These deposit receipts were used as money, which were actually a proxy for the people’s silver and gold held with the goldsmiths. Thus, private currency notes began to get issued and circulated.
Page: 54, Location: 817-820
As time passed, the enormous growth in trade and commerce had to be measured in terms of currency, the supply of which was limited by the availability of silver and gold.
Page: 54, Location: 823-824
Today, RBI is not required to have more than Rs 115 crores in gold to back rupee currency.
Page: 54, Location: 826-827
A ‘great depression’ is the description of a phenomenon where GDP, employment, and prices in the economy fall quite drastically and remain at that level for a number of years.
Page: 56, Location: 852-853
Money is essentially a medium of exchange and it also functions as a temporary store of value.
Page: 57, Location: 865-866
the government securities are, as the name suggests, a form of loan by the public to the government.
Page: 58, Location: 875-876
They are considered almost-risk-free assets, for the government is not expected to default on the periodic payment of interest or the repayment of borrowed funds on maturity.
Page: 58, Location: 876-877
Debentures are also a form of loan by the public, but, given to private firms. The risk associated with debentures is somewhat higher but the interest earned on debentures is also higher than on government securities. Of course, debenture holders receive interest irrespective of whether or not a firm makes higher or lower profits, or makes profits at all.
Page: 58, Location: 877-879
Gold bonds, which indicate the value of gold that a purchaser holds, can be bought and sold in the market, thereby avoiding the physical handling of the precious metal.
Page: 58, Location: 880-882
Extending that logic, the owners of the firm, that is, the shareholders are the residual claimants of the profits made by the firms. This residual amount received by the shareholders is called dividend.
Page: 58, Location: 886-888
used to gather under a banyan tree for trading, and they formed an official organization
Page: 59, Location: 903-903
Since these indices show the general trend of the stock market, they are also called derivatives, where investors can trade in these indices.
Page: 60, Location: 920-921
Informally, share brokers and their clients are classified as either bulls or bears depending upon their sentiment about share prices.
Page: 61, Location: 929-930
Those who expect share prices to go up and hence are likely to buy shares are termed ‘bulls’.
Page: 61, Location: 930-931
Those who expect prices to fall and hence either wait to buy shares and/or sell shares are termed ‘bears’.
Page: 61, Location: 931-931
Therefore, rising stock prices are an indicator of public perception and sentiment that the firms or the economy will perform better in future.
Page: 62, Location: 938-939
Thus, it is the collective expectations of a rise or fall in share prices that lead to a rise or fall in share prices!
Page: 62, Location: 942-942
caveat emptor!
Page: 63, Location: 956-956
ceteris paribus,
Page: 63, Location: 964-964
Lastly, we also know now that RBI can change the money supply in the economy by altering the CRR or SLR requirements for commercial banks. For example, a lowering of CRR would imply that more cash from a fresh deposit is available to banks to be further lent out to firms.
Page: 63, Location: 965-967
Double coincidence of wants: The matching of mutual demands for two goods for a successful barter exchange.
Page: 65, Location: 989-990
Money Supply (M1): Currency with the public plus chequable demand deposits with banks, plus other deposits with
Page: 65, Location: 991-992
Money Supply (M1): Currency with the public plus chequable demand deposits with banks, plus other deposits with RBI.
Page: 65, Location: 991-992
Money Supply (M3): M1 plus time deposits with banks.
Page: 65, Location: 993-993
SLR: Statutory Liquidity Ratio. A minimum percentage of net demand and time liabilities that banks are mandated by RBI to maintain in the form of government securities, cash on hand, and gold.
Page: 66, Location: 1000-1001
‘It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest.’ —ADAM SMITH, THE WEALTH OF NATIONS
Page: 66, Location: 1009-1013
in 1776. And, halfway between India and America, the same year, two Scotsmen revolutionized the way we produced industrial goods, travelled, and understood the working of the economic system and the benefits of free trade.
Page: 67, Location: 1019-1020
One of them was the Scottish inventor and engineer, James Watt. He invented the steam engine which was used in factories, railways, and ocean liners (steamers), allowing larger production volumes and faster transport of goods and people than ever before.
Page: 67, Location: 1020-1022
The other Scot, Adam Smith, had a profound impact on our understanding of the working of the economic system and free trade. Universally cited as the ‘father of modern economics’, Adam Smith wrote the famous treatise titled An Inquiry into the Nature and Causes of the Wealth of Nations, in 1776.
Page: 67, Location: 1022-1024
Therefore, the welfare of economic agents will improve when they specialize in those activities in which they have a comparative advantage and engage in free trade through exchange among themselves.
Page: 68, Location: 1040-1041
They argued that a country will export that commodity which uses its abundant factor more intensively, and that the abundant factor will gain from trade. For example, if India is a labour-abundant country—which it is—it would export goods that use labour more intensively than capital.
Page: 69, Location: 1046-1048
The source of intra-industry trade, according to these theories, lies in the fact that consumers like a variety to choose from, and firms enjoy economies of scale by concentrating on producing large volumes of a particular variety of a good.
Page: 69, Location: 1058-1060
markets by discouraging imports and exports. Such discouragement takes various forms: bans or
Page: 70, Location: 1066-1066
Such discouragement takes various forms: bans or quota restrictions on import volumes; making foreign exporters agree to Voluntary Export Restraints (VERs); high customs duties (tariffs) on imported products; and Non-Tariff Barriers (NTBs) in the form of stricter quality specifications on imports.
Page: 70, Location: 1066-1068
Obviously, the objective behind high customs duties was not revenue generation but protection of domestic markets.
Page: 71, Location: 1077-1078
autarkic
Page: 72, Location: 1091-1091
Competitive efforts by various countries, consisting of imposition of quotas, VERs, bans, and high customs duties, in general, and the devaluation of their respective currencies, in particular, are termed as beggar-thy-neighbour policies. They are so called because each country tries to offer an advantage to the domestic industry at the cost of other countries. In the process—when every country does this—it leads to an almost autarkic (no-trade among countries) situation, and worsens trade, production, and employment prospects everywhere.
Page: 71, Location: 1088-1092
Two international organizations were born out of the deliberations of the Bretton Woods Conference—one was the International Bank for Reconstruction and Development (IBRD), namely, the World Bank, and the other was the International Monetary Fund (IMF).
Page: 72, Location: 1096-1098
The World Bank was to help the war-ravaged Western world in its reconstruction and the third world countries in their development programmes while IMF was to take care of the issues of balance of payment and exchange rate management among the countries.
Page: 72, Location: 1098-1100
Towards this end, the eighth round of trade negotiations under the auspices of GATT began in Punta del Este in the Latin American country, Uruguay. The negotiations continued from September 1986 to April 1994 and, at the conclusion of the Uruguay Round, member countries agreed to establish an organization, the WTO, which came into being from January 1, 1995, with its headquarters in Geneva, Switzerland.
Page: 73, Location: 1112-1115
What distinguishes WTO from GATT is that it is an organization while the latter was a mere agreement. In fact, WTO has instituted a Dispute Settlement Body (DSB) that addresses the grievances of member countries against those member countries which fail to follow their liberalization commitments.
Page: 73, Location: 1119-1121
To this end, the general purpose of all the agreements is to remove quantitative restrictions such as import bans or quota; to ease customs duty protection for domestic industry; to reduce subsidies on production and/or exports; and
Page: 74, Location: 1126-1127
For example, under ATC, all the quota restrictions that member countries had placed on import of textiles and clothing under the earlier Multi-Fibre Agreement (MFA) were set to terminate within ten years from the formation of WTO. As a result of this, today, the textiles and clothing sector is completely free of all quota restrictions on imports. Before the formation of WTO, Indian exports were constrained by import quotas imposed by the developed world.
Page: 74, Location: 1129-1132
The TRIPS Agreement, too, has had an impact on trading norms. This agreement has helped member nations harmonize their domestic laws on intellectual property rights
Page: 75, Location: 1141-1143
The average bound rates for agricultural imports are still above 113 percent in India. In fact, the maximum
Page: 80, Location: 1216-1216
the ‘bound rates’ of customs duties—the maximum rates of customs duties which a country may charge on imported goods—are very high. The bound rates are naturally higher than the actual customs duties charged by a country. The average bound rates for agricultural imports are still above 113 percent in India. In fact, the maximum bound rate for animal products, dairy products, and fruits and vegetables is 150 percent. Therefore, in the Doha Round, one of the expectations of the developed countries is that the developing countries give better market access to them.
Page: 80, Location: 1214-1218
In contrast, developing countries had practically no commitments to reduce subsidies since their expenditure on subsidies was low.
Page: 81, Location: 1231-1232
To sum up, the long-term objective of WTO is to ensure that international trade is conducted smoothly and predictably through negotiations among the member countries.
Page: 82, Location: 1246-1247
While WTO does not encourage this, it allows FTAs as long as its members do not increase trade restrictions against the non-FTA countries.
Page: 82, Location: 1250-1251
WTO allows imposition of Anti-Dumping duties. Dumping has a special meaning in WTO agreements. If an exporter sells a good in a foreign market for a CIF (cost, insurance, freight) price which is lower than its normal value in the exporter’s domestic market, it is considered as ‘dumping’. Essentially, the normal value refers to the fact that the domestic price (in exporter’s market) is not lower than the cost of production.
Page: 84, Location: 1274-1277
Anti-dumpting duty: Duty charged by a government on a product that is imported from a foreign firm and that is being sold at a price below the normal value in the exporter’s domestic market. The duty would be equal to the difference between the exporter’s price in the importing country and the normal value of the product in the exporter’s domestic market.
Page: 85, Location: 1294-1297
Free Trade Area (FTA): As per GATT Article XXIV-8(b), an FTA is a group of two or more countries in which customs duties and other restrictive regulations of commerce are eliminated on substantial trade between these countries for the products originating in these countries.
Page: 86, Location: 1307-1309
Intra-industry trade: Trade among nations in similar but differentiated products.
Page: 86, Location: 1311-1312
New Trade Theories (NTTs): Trade theories that rely on a preference for variety on the part of consumers and the existence of economies of scale that lead to intra-industry trade.
Page: 86, Location: 1316-1317
‘Inflation is the one form of taxation that can be imposed without legislation.’ —MILTON FRIEDMAN
Page: 87, Location: 1331-1332
This is how the inflation rate is calculated by the government: the weighted average of the increase in prices of different commodity groups in the consumption basket.
Page: 89, Location: 1359-1360
An easy formula used to construct such index numbers was given by the German economist Étienne Laspeyres.
Page: 90, Location: 1368-1368
Hence, inflation is said to occur when most of the prices start rising due to the relative shortage of those goods. Inflation is triggered either by a general increase in the demand for goods and services relative to their supply, or by a general fall in the supply of goods and services relative to their demand.
Page: 90, Location: 1373-1375
Laspeyres Price Index: An Easy Formula to Calculate Price Level
Page: 90, Location: 1377-1377
For an easier understanding of this formula it can be written in a less mathematical fashion as:
Page: 92, Location: 1397-1398
where PIT represents the price index number in the year T; Σ represents summing over two goods—food and clothing; PT and P0 represent the prices of goods in the year T and the year 0; and Q0 represents the quantities of goods consumed in the year 0.
Page: 91, Location: 1381-1384
Shortage of food and agricultural raw material in relation to the demand leads to a rise in the cost of production and prices in most sectors of the economy. Volumes traded in the market suffer due to high prices. Inventories mount up, sending a signal to firms to produce less. The result is high prices accompanied by lowered output and employment, in other words, stagflation.
Page: 92, Location: 1408-1411
For example, with regular frequency, the government offers support prices to farmers for rice, wheat, sugar cane, cotton, and many other cash crops. Of course, these support prices are higher than the free market price. Such price supports increase the cost of production in industries which use agricultural produce as raw material. Overall, therefore, administered prices may result in inflation.
Page: 93, Location: 1412-1414
Demand–Pull Inflation
Page: 93, Location: 1415-1415
When the demand for goods or services exceeds the existing output levels in the economy, the result is inflation. The cause of an increase in demand could be increased exports, a rise in household and firm spending, increased government purchases, and/or central bank operations.
Page: 93, Location: 1416-1418
Brighter business prospects imply a higher profitability for firms, and this gets reflected in the higher prices of equity/shares in the stock market. And as the wealth of households goes up in the form of high-value shares or equity stocks, they start spending more on goods and services.
Page: 93, Location: 1425-1427
Thus, a demand–pull from the external sector and an optimistic reading of the future by firms and households can increase the demand for goods and services relative to the existing output levels, thereby causing inflation in the economy.
Page: 94, Location: 1427-1429
In a milder version, the government did monetize its debt in the past, contributing to some inflation in the 1980s. However, this window of ad hoc monetization has been closed by law to the Indian government and RBI since 1994.
Page: 95, Location: 1453-1455
German Hyperinflation: Too Much Money Chasing Too Few Goods!
Page: 95, Location: 1456-1456
This phenomenon of hyperinflation—an extreme form of demand–pull inflation—is captured by an economic postulate called the Quantity Theory of Money.
Page: 96, Location: 1463-1465
Now, it is easy to see that if and are constants, an increase in money supply M will only lead to an increase in price level P. This is exactly what happened in Germany in the early 1920s. A substantive increase in the money supply to pay for war reparations and wages without production led to a substantive increase in the price level alone, for the output in the economy was held almost constant in relation to the gigantic increases in money supply.
Page: 96, Location: 1471-1475
Businesses, on the other hand, may not lose as their revenues increase with increasing prices. Thus, inflation results in a redistribution of income that is unfavourable to fixed-income earners. The same can be said of debtors and creditors.
Page: 98, Location: 1488-1490
When individuals sell shares at a high price, they make capital gains which are taxable. Part of the rise in share prices may simply be due to the inflationary factor and part may be pure capital gains accruing to the relative high price of the share. Thus, one may need to adjust the total capital gains by removing the inflationary factor.
Page: 98, Location: 1498-1500
However, inflation in moderation may do some good as well. It is argued that a little inflation offers an incentive to firms to produce more. To produce more, additional labour is required, leading to greater employment, and there will be more available for society’s consumption.
Page: 100, Location: 1526-1528
For example, if the inflation rate is, say, 3.5 percent, the nominal wages may be kept constant; or, if they have to be raised, they can be raised less than the full extent of the inflation.
Page: 101, Location: 1538-1539
Moreover, we have also learnt that assigning weights to different groups of commodities is critical since different sets of consumers may lay out different proportions of their spending on different groups of commodities.
Page: 101, Location: 1544-1545
Therefore, a number of price indices are used to calculate inflation. In fact, you may notice that media and the government keep quoting different inflation rates—namely, inflation-based on consumer price indices, wholesale price indices, and the core and headline inflation.
Page: 101, Location: 1545-1547
Headline inflation is the inflation which is calculated on the basis of the Wholesale Price Index (WPI), which represents the index of the average price of all commodities at the wholesale level.
Page: 102, Location: 1563-1564
It excludes prices of services but includes prices of raw materials, semifinished products, and even imported commodities that are traded at the wholesale level. Therefore, WPI reflects the inflation that is posed to the industrial sector of the economy.
Page: 102, Location: 1564-1566
calculation of the price index and the inflation rate. In India, core inflation is calculated
Page: 103, Location: 1577-1578
In India, core inflation is calculated by excluding food and fuel prices from WPI.
Page: 103, Location: 1578-1578
On the supply side, one of the few measures that a government can take to control inflation is easing the supply constraint by removing import restrictions.
Page: 104, Location: 1593-1595
on different occasions, the Indian government has brought customs duties down to zero on import of rice, wheat, pulses, crude edible oils, butter, ghee, raw sugar, and onions. This is done in the hope that additional import supplies at cheaper prices would eliminate domestic shortage and reduce prices.
Page: 105, Location: 1596-1598
Another solution to the inflation issue is presenting competition to Agricultural Produce and Marketing Committee (APMC) markets in towns and cities. Allowing private players—including multi-brand retailers who bring in FDI—to deal in retail and wholesale markets will reduce trader margins.
Page: 105, Location: 1609-1611
During an inflationary period, we often read or hear the statement, ‘The economy is overheating.’ In plain English, this term may be used to signify that something is being overworked or overused.
Page: 106, Location: 1618-1619
Thus, if an economy enjoys a very positive consumer and business outlook, the demand for goods and services outstrips the capacity constraints or the normal use of the economic resources leading to overheating, that is, an inflationary situation due to excess demand.
Page: 106, Location: 1625-1627
During inflationary situations, a government would do well to avoid initiating new projects and to hold back on any imminent spending that is in the offing. Else, the additional demand that would get generated due to such policies would add fuel to the fire of inflation.
Page: 107, Location: 1633-1635
Conversely, therefore, a reduction in money supply reduces inflation. RBI can reduce the money supply in the economy through different ways.
Page: 107, Location: 1640-1641
RBI may alter CRR and SLR, but not frequently. One of the main objectives of these ratios is to avoid a run on banks and to keep at least a part of the depositors’ money in secured government bonds
Page: 108, Location: 1646-1648
RBI has two other instruments to control the money supply at its disposal—Open Market Operations (OMOs) and altering the repo rate.
Page: 108, Location: 1648-1648
OMO refers to the buying and selling of government securities by RBI in the market. When RBI sells government securities in the market, banks and financial institutions buy them and money flows from the private sector to RBI, resulting in lowering the deposit amounts in commercial banks. This reduces the cash in banks which is needed to create multiple deposits and to extend loans. Hence, through the multiplier effect, the ability of banks to give loans comes down.
Page: 108, Location: 1648-1652
The repo rate refers to the ‘re-purchase order’ rate that is available to commercial banks under RBI’s Liquidity Adjustment Facility (LAF
Page: 108, Location: 1653-1654
Through LAF, commercial banks can secure short-term funds by selling government securities to RBI for on-lending to customers, meeting with their daily/overnight requirements of CRR, SLR or meet any other financial obligations.
Page: 108, Location: 1656-1658
Laspeyres Price Index: A price index representing a weighted average of the prices of different goods or group of goods, where the weights are decided on the basis of the share of the good or the group of goods in the total expenditure in the base year.
Page: 112, Location: 1711-1713
Open Market Operations (OMO): The selling (or buying) of government securities by the central bank of a country to (and from) commercial banks, financial institutions, and/or others in the financial market.
Page: 112, Location: 1713-1715
‘Everything in the world may be endured except continued prosperity.’ —JOHANN VON GOETHE
Page: 113, Location: 1727-1729
The biggest trough in the GDP growth rates appears in the fiscal year 1979–80—the year of the oil shock when the world experienced a shortage of crude oil due to the Iranian revolution and successive price hikes by OPEC. GDP fell by a whopping 5.24 percent during that year.
Page: 114, Location: 1743-1745
In economics, the downturn of an economy—expressed by a negative GDP growth rate—is known as recession.
Page: 115, Location: 1755-1756
textbook definition defines recession as a phenomenon where the GDP falls (that is, the GDP growth rate is negative) at least for two consecutive quarters.
Page: 115, Location: 1756-1757
Thus, a lack of sufficient demand for goods and services is the main reason for a recession setting in.
Page: 115, Location: 1760-1761
paucity
Page: 116, Location: 1769-1769
Keynes had summed up the above scenarios by saying that positive activities of businesses depend on spontaneous optimism and an urge to action which he called ‘animal spirits’. He used this colourful term to describe one of the essential ingredients for economic prosperity—confidence.
Page: 117, Location: 1788-1790
If the environment is such that animal spirits are dimmed, the enterprise may fade. It is the uncertain environment that weakens the state of confidence to which practical men always pay the closest and most anxious attention.
Page: 117, Location: 1793-1795
person is considered involuntarily unemployed if he/she is looking for work at the going wage but does not find one. By analogy, someone who is voluntarily not working at the given market wage is not part of the labour force. Similarly, individuals, who are students, or perform only domestic duties, are too young or too old, or live on alms, are not part of the workforce.
Page: 118, Location: 1809-1812
A person is considered involuntarily unemployed if he/she is looking for work at the going wage but does not find one. By analogy, someone who is voluntarily not working at the given market wage is not part of the labour force. Similarly, individuals, who are students, or perform only domestic duties, are too young or too old, or live on alms, are not part of the workforce.
Page: 118, Location: 1809-1812
Similarly, students who have recently graduated would not necessarily find jobs immediately. This kind of unemployment is referred to as ‘frictional’ unemployment.
Page: 119, Location: 1816-1817
an unemployed civil engineer may retrain himself/herself by doing some computer courses and seek employment in the software industry. This out-of-work retraining period is described as ‘structural’ unemployment.
Page: 119, Location: 1820-1821
A rule of thumb in the Western world is that 4 to 5 percent unemployment is natural and consistent with full-employment of resources.
Page: 119, Location: 1823-1824
On the other hand, it may also happen that animal spirits get dimmed and confidence levels are lowered because of a variety of socio-economic and political causes. This represents the downswing of the business cycle—the bust phenomenon.
Page: 120, Location: 1832-1834
This kind of unemployment—that goes well beyond the natural rate of unemployment, and is associated with a business downturn—is called ‘cyclical’ unemployment. Thus, if (job) quits are pro-cyclical, (job) firing is countercyclical occurring on the downturn of the business cycle.
Page: 120, Location: 1837-1839
Keynes is famously quoted as saying, ‘In the long run we are all dead.’
Page: 122, Location: 1856-1857
That is, if unemployment is high, then it is critical we do something about it in the short run itself.
Page: 122, Location: 1857-1857
In such a situation, the government follows what is called an expansionary fiscal policy. This involves increasing government spending and/or cutting taxes. Essentially, the government tries to give a fillip to the demand for goods and services which has come down due to recession.
Page: 122, Location: 1861-1863
élan.
Page: 122, Location: 1867-1867
christen
Page: 126, Location: 1926-1926
While we did not formally christen the policy then, RBI’s stance for controlling the demand–pull inflation that typically occurs when the economy is overheated during a boom period
Page: 126, Location: 1926-1927
While we did not formally christen the policy then, RBI’s stance for controlling the demand–pull inflation that typically occurs when the economy is overheated during a boom period is called the ‘contractionary monetary policy’.
Page: 126, Location: 1926-1928
There is another way to look at OMO operations. When RBI decides to purchase government securities from the market, the demand for government securities goes up. This raises the price of government securities.
Page: 127, Location: 1941-1943
Thus, an OMO-purchase of government securities by RBI leads to a fall in the market interest rate.
Page: 127, Location: 1947-1948
The sum total of the above developments was that, on the one hand, cost–push inflation raised its head, and on the other, a deficient demand in the economy slowed down the GDP growth rate.
Page: 131, Location: 1998-1999
The stylized fiscal and monetary policies offer a trade-off between the two. Either they extinguish inflation at the cost of growth or have growth at the cost of inflation.
Page: 131, Location: 2005-2006
Animal Spirits: Spontaneous optimism and urge to action among businesses, which is conditioned by the socioeconomic and political environment. The term was used by John Maynard Keynes, the father of modern macroeconomics in his 1936 treatise, The General Theory of Employment, Interest and Money.
Page: 134, Location: 2049-2051
Frictional Unemployment: Unemployment that occurs when people happen to be between jobs or have just graduated from school.
Page: 135, Location: 2059-2060
Structural Unemployment: Unemployment caused by structural changes among various sub-sectors of the economy, leading to a mismatch between the vacancies and the skills in the labour force, until workers can be retrained or relocated.
Page: 135, Location: 2070-2072
CHAPTER 7 UNAIMED OPULENCE
Page: 136, Location: 2079-2079
‘Unaimed opulence, in general, is a roundabout, undependable, and wasteful way of improving the living standards of the poor.’ —JEAN DRÈZE AND AMARTYA SEN
Page: 136, Location: 2080-2082
enmeshed
Page: 137, Location: 2092-2092
percolate
Page: 138, Location: 2104-2104
sporadic
Page: 139, Location: 2121-2121
As Jean Drèze and Amartya Sen opined, unaimed opulence may be the result of such growth. Growth-mediated welfare may not trickle down—it might only make the rich richer and the poor, poorer.
Page: 139, Location: 2128-2130
However, the dollar–rupee exchange rate does not reflect the true purchasing power of the two currencies. This is because the exchange rate is determined only on the basis of the demand and supply of the two currencies that are required for import and export and for financial transactions. Moreover, besides these requirements, there are millions of other goods and services that are traded within each country but not between the two countries. Hence, the dollar–rupee exchange rate may not represent the true value of the purchasing power of the currencies within their respective domestic markets. Therefore, the World Bank looks at what is called purchasing power parity (PPP) incomes.
Page: 140, Location: 2145-2150
As a nation, India has not fully exploited her potential in terms of generating a higher standard of living for an average Indian in terms of the volume, value, variety, and quality of goods and services.
Page: 142, Location: 2169-2171
Farmers were required to produce a given minimum quota for the government, and they could sell out-of-quota produce in private markets and make a good income out of it. This system was successful in increasing the farm output and the farmers’ income, and is known as the Household Responsibility System.
Page: 145, Location: 2217-2219
The late Vinoba Bhave, a devout Gandhian, began his Bhoodan (land donation) movement by criss-crossing the hinterlands of India, appealing to the conscience of the landed community to donate land voluntarily.
Page: 146, Location: 2232-2234
In England, the passing of the Poor Law Amendment Act of 1834 emphasized the importance of ‘workhouses’ as a means of giving food relief to the poor. The philosophical basis for the act was guided by the utilitarian ideas of Jeremy Bentham (1748–1832), known for his axiom, ‘it is the greatest happiness of the greatest number that is the measure of right and wrong.’
Page: 150, Location: 2291-2294
in India by linking it to primary education when thethen Madras Corporation developed a school lunch programme in 1925, the first ever to do so. In the post-Independence era, the state of Gujarat started a school lunch programme in 1984. However, it was only in 1995 that the NP–NSPE was launched at the national level. Popularly known as the Midday Meal Scheme, the objective of this programme was to give a boost to the universalization of primary education and to impact the nutritional intake of students in primary classes.
Page: 150, Location: 2299-2303
lacunae
Page: 151, Location: 2310-2310
profligate
Page: 155, Location: 2364-2364
GNI is a close cousin of GDP. It is arrived at by subtracting the net taxes paid (tax minus subsidy) and adding the net factor incomes of Indian citizens from abroad to GDP at market prices. Thus, GNI represents the income accruing to Indian citizens valued at factor cost.
Page: 156, Location: 2380-2382
PPP Exchange Rate: The exchange rate based on the purchasing power parity (PPP). It measures the amount of local currency required to purchase a certain basket of goods that $1 would purchase in the US.
Page: 156, Location: 2392-2393
CHAPTER 8 ECOLOGUE
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‘I don’t see novels ending with any real sense of closure.’ —MICHAEL ONDAATJE
Page: 157, Location: 2399-2401
imbibe
Page: 158, Location: 2409-2409
conjugal
Page: 158, Location: 2410-2410
We also know that high fiscal deficits crowd out private investments, and that wasteful public expenditure causes inflation. Therefore, it is very critical that budget allocations on MGNREGS, the Midday Meal Scheme, SSA, Chiranjeevi, and a host of other policies, be spent judiciously to ensure creation of permanent, quality rural assets, universalization of education, and improved health care
Page: 159, Location: 2435-2438