 ECONOMICS

• Economics is a “Science of
choice in the face of unlimited ends
& scarce resources that have
alternative resources”.
• Macroeconomics is that branch of
economics, which studies the
aggregate behavior of economic
system like total national income.
• The market economies never
perform at the same level. They
are marked with boom & recession
levels in alternate cycles.

• Macroeconomics aims at
achieving economic stability by
controlling these ups & downs
in the market economies.
• Balance of Payments &
Exchange rate – parameters
which are considered
important in judging the
economic health of any
nation.
• Balance of payments
Nations make payments for
goods & services imported
while receive payments for
goods & services exported.
The net payments received &
payments made is known as
“Balance of Payment”.
• Exchange rate
The rate at which a nation’s
currency is exchanged for
 currencies of other nation is
called “exchange rate”, also
influences the Balance of
Payments.

• For any economy to be stable,

the balance of payments
should neither be in surplus
nor in deficit & the exchange
rate should not be fluctuating
briskly.

• Constituent Groups of an
economy:
They can be grouped under four
heads:
The households
The firms
The Government
The Rest of the world
GROSS DOMESTIC
PRODUCT (GDP)
• The gross domestic product
(GDP) or gross domestic
income (GDI) is a basic
measure of a country's overall
economic output. It is the
market value of all final goods
and services made within the
borders of a country in a year.
• GDP measures the market
value of the output of a nation
 & not just the quantity of goods
& services produced.

• An accurate measurement of aggregate

output requires that a particular good
or service must be counted only once.
• It means that they are “Final goods”,
also known as “Consumer goods”.
Final goods are those which the
customers purchase for final use & not
for further processing, or
manufacturing.
• Goods & services that are purchased
by an intermediary for further
processing, manufacturing or resale are
called “Intermediate goods”.

• Example: Tyres sold to

automobile manufacturers are
 intermediate goods. This value
would not be considered while
calculating GDP, as the count
of intermediate transaction
separately would lead to
double counting & hence
blowing up the value of GDP.
 Example

• GDP is only concerned with new or

current production. Old output is not
counted in current GDP as it was
already counted back at the time it was
produced.
• GNP (Gross National Product): A
measurement of the total market value
of all the final goods & services
produced in an economy, with the
 resources of a nation regardless of
whether these resources are located in
that nation or abroad, in one year.

o Calculating GDP
GDP is calculated in two ways:
• The expenditure approach – Adding
up the amount spent on all final
goods during a given period.
• The income approach – Adding up
the income i.e rents, interest & profits
received by all factors of production
in producing final goods.
• These two methods yields same value
as every payment (expenditure) by a
buyer is at the same time a receipt
(income) for the seller.
 The Expenditure Approach
• There are four main
categories of expenditure –
• Personal consumption
expenditures (C)
• Gross Private domestic
investment (I)
• Government purchases (G)
• Net exports (X)
• The expenditure approach
calculates GDP as
GDP = C + I + G + X

1. Personal consumption
expenditures (C)
A large part of GDP
Three main categories are:
 Durable goods (like automobiles,
furniture, household appliance that
last relatively longer time)
 Non- durable goods (like food,
clothing, that are used fairly quickly)
 Services (like payments for services,
expenditures for doctors, lawyers,
educational institutions)

2. Gross Private domestic

investment (I)
• Investment refers to the purchase
of new capital such as housing,
plants & equipment & inventory
• Investment can be made both by
private as well as public sector.

3. Government purchases (G)

• Purchases of newly produced
goods & services by central,
state & local governments.
• Includes all wages & salaries of all
government workers.

4. Net exports (X)

• Net exports are total exports
minus total imports.
• Net exports can be positive or
negative.

 The Income Approach

• The four components are
 National income (N)
 Depreciation (D)
 Indirect taxes minus subsidies
(T)
 Net factor payments to the
rest of the world (F)
• GDP is calculated as
GDP = N + D + T + F

1. National income (N)

• National income is the
aggregate factor income that
arises from the current
production of goods &
services by the nation’s
economy.
• It is the sum of five items:
• Compensation of employees –
Largest of five items. Includes
 Salaries & wages paid to
household by firms & by
government.
• Proprietor's income – Income
from unincorporated businesses.
• Corporate profits – Income of
corporate businesses.
• Net interest – Interest paid by
business.
• Rental income – Income received
by the property owners in the form
of rent.

2. Depreciation
• Capital assets wear out or
become obsolete over time.
The measure of this decrease
in value of capital assets is
called depreciation.
3. Indirect taxes minus subsidies
(T)
• In calculating final sales, indirect
taxes such as sales tax, custom
duties and license fees are
included.
• These taxes are counted on
expenditure side, they must also be
counted on income side also.
• Subsidies are payments made by
the government.
• These subsidies are subtracted
from the national income to get
GDP.

• For example, Farmers receive

subsidies from government.
 Subsidy payments are income
to farm proprietors, thus part of
national income, but they did
not come from the sale of
agricultural goods, so not a
part of GDP.
• To balance the expenditure
side with the income,
subsidies need to be
subtracted.

4. Net factor payments to the

rest of the world (F)
• Net factor payments to the rest
of the world is (the payments
of factor income to the rest of
the world) - (the receipts of
 factor income from the rest of
the world)
• National income is income of
factors of production owned by
a nation.
• GDP, is the output produced
by the factors of production
located within the nation.

• National income includes

some income that should not
be counted in GDP (income
that a nation’s citizen earn
abroad), while it may not
include some income that
should be counted in GDP
(foreigner’s income in nation).
 ECONOMIC ENVIRONMENT
 The economic environment
is an amalgamation of various
economic factors, such as total
employment, productivity,
income, wealth and inflation
 These factors influence the
spending patterns of
individuals and firms.
 The existing economic
environment of business is
highly complex & it is not
always easy to comprehend it.

 It is this reason why different

persons interpret it differently
& the firms operating in the
 same economic environment
often take different decisions.
 Eg., In Inflationary situation,
some companies may sell their
entire output, while others may
withhold a part of their supply
with expectation that a further
increase would bring them
larger profits.
The economic environment
comprises of:
• Income and wealth: Income in an
economy is measured by GDP, GNP.
High values of these factors show a
progressive economic environment.
• Employment levels: High
employment represents a positive
 picture of the economy.
• Productivity: This is the output
generated from a given amount of
inputs. High levels of productivity
support the economic environment.

Factors Affecting the Economic

Environment
• The economic environment of a nation as
well as the world is impacted by:
• Inflation and deflation: Inflationary and
deflationary pressures alter the
purchasing power of money. This has a
direct impact on consumer spending,
business investment, employment rates,
government programs and tax policies.
• Interest rates: Interest rates determine the
cost of borrowing and the flow of money
towards businesses.
3. Exchange rates: This impacts
the price of imports, the profits
made by exporters and investors
and employment levels (also
through the impact on the
tourism industry).
• The economic environment is
also influenced by various
political, social and
technological factors. These
include a change in government
and the development of new
technology and business tools.
 FINANCIAL MARKET
• Financial market is a
mechanism that allows people
to buy and sell (trade) financial
 securities (such as stocks and
bonds), commodities (such as
precious metals), and other
fungible items (crude oil,
wheat, orange juice) of value
at low transaction costs.
 Money Market
 The money market is the global
financial market for borrowing and
lending of short-term funds (less than
one year).
 As per RBI definitions “A market for
short terms financial assets that are
close substitute for money, facilitates
the exchange of money in primary
and secondary market”.
 It doesn’t actually deal in cash or
money but deals with substitute of
 cash like promissory notes &
government papers which can
converted into cash without any loss
at low transaction cost.
 It includes all individual, institution.
 Features of Money Market
Transaction have to be conducted
without the help of brokers.
It is not a single homogeneous
market.
The component of Money Market
are the commercial banks &
NBFC (Non-banking financial
companies).
In Money Market transaction can
not take place like stock
exchange, only through oral
 communication, relevant
document and written
communication transaction can be
done.
 Objective of Money Market
 To provide a reasonable
access to users of short-term
funds to meet their
requirement quickly,
adequately at reasonable cost.
 Structure of Indian Money
Market
• Money market existed in India
during the pre-independence
period, but was far more
undeveloped.
• Indian money market is broadly
divided into following sectors, viz.,
 The unorganized
 The organized
 Co-operative
• The rates of interest between the
sectors also differs.
 Unorganized Sector

• The most prominent are

 Indigenous banks
 Money lenders
 Chits
 Nidhis
 ORGANISED STRUCTURE
 Reserve bank of India
 DFHI (Discount and finance
house of India)
 Commercial banks
 Development bank IDBI,ICICI,
NABARD, LIC, UTI etc.

 CO-OPERATIVE SECTOR
 State cooperative
a. Central cooperative banks
b. Primary Agri credit societies
c. Primary urban banks
 State Land development
banks
 Central land development
banks
 Primary land development
banks
 Capital Market
 A capital market is a market
for securities (debt or equity),
where business enterprises
(companies) and governments
can raise long-term funds.
 It is defined as a market in
which money is provided for
periods longer than a year.

o The market where investment

funds like bonds, equities and
mortgages are traded is known as
the capital market.
o The primal role of the capital
market is to channelize
investments from investors who
 have surplus funds to the ones
who are running a deficit.
o The capital market offers both
long term and overnight funds.

o The financial instruments that have

short or medium term maturity
periods are dealt in the money
market, whereas the financial
instruments that have long maturity
periods are dealt in the capital
market.
o The different types of financial
instruments that are traded in the
capital markets are equity
instruments, credit market
instruments, insurance
instruments, foreign exchange
 instruments, hybrid instruments
and derivative instruments.
 Structure Of Capital Market
o Capital Market can be divided
into two constituents:
 The Financial Institutions
 The Securities Market

 The Financial Institutions

e.g., ICICI, IDBI, LIC, UTI,
etc. provide long term &
medium term loan facilities.
 The Securities Market: is
divided into
 The gilt-edged market (or the
market for government
securities)
 The Corporate securities
market

 The gilt-edged market (or the

market for government
securities)
 Risk free market, as the
government cannot default
on its payment obligations
 RBI plays a dominant role in
the government securities

b. The Corporate securities

market
 Securities issued by the firms
(i.e shares, bonds)
 It consists of new issues
market (primary market) &
the stock exchange
(secondary market)
 Indian Capital Market
• The Indian Equity Markets and the
Indian Debt markets together form
the Indian Capital markets
• The Indian Equity Market
depends mainly on global funds
flowing into equities and the
performance of various companies.
• The Indian Equity Market is almost
wholly dominated by two major
stock exchanges -National Stock
Exchange of India Ltd. (NSE) and
The Bombay Stock Exchange
(BSE).
• Debt market refers to the
financial market where
investors buy and sell debt
securities, mostly in the form
of bonds.
• Indian debt market is one of
the largest in Asia.
• The most distinguishing
feature of the debt instruments
of Indian debt market is that
the return is fixed.

• This means, returns are

almost risk-free. This fixed
return on the bond is often
termed as the ‘coupon rate’ or
the ‘interest rate’.
• Therefore, the buyer (of bond)
is giving the seller a loan at a
fixed interest rate, which
equals to the coupon rate.

• Indian debt market can be

classified into two categories:
 Government Securities Market
(G-Sec Market): It consists of
central and state government
securities. It is also the most
dominant category in the India
debt market.
 Bond Market: It consists of
Financial Institutions bonds,
Corporate bonds.
  INDIAN ECONOMY
• The economy of India is the fourth
largest by purchasing power parity
(PPP).
• In the 1990s, the country began to
experience rapid economic growth,
as markets opened for international
competition and investment.
• In the 21st century, India is an
emerging economic power with
vast human and natural resources,
and a huge knowledge base.
• Economists predict that by 2020,
India will be among the leading
economies of the world.

• Economy transformed from

primarily agriculture, forestry,
fishing, and textile
 manufacturing in 1947 to
major heavy industry,
transportation, and
telecommunications industries
by late 1970s.

 Salient features of Indian

Economy
 Indian Currency and
Exchange Rate
 Gross Domestic Product
(GDP)
 Indian Foreign Trade:
Principal export trade with
European Union, United States,
and Japan. Main commodities are
agricultural and allied products,
 gems and jewelry, and ready-
made garments. Iron ore,
minerals, and leather and leather
products also important.

• Principal import trade with

European Union, United States,
and Japan. Major imports oil
products from Middle East. Other
major imports like chemicals,
dyes, plastics, pharmaceuticals,
precious stones, iron and steel,
fertilizers and pulp paper and
paper products.
 Balance of Payments:
Negative trade balance in late
1980s and early 1990s.
 Foreign Aid: Most aid provided
by Aid-to-India Consortium,
consisting of World Bank Group
and Austria, Belgium, Britain,
Canada, Denmark, Germany,
France, Italy, Japan, Netherlands,
Norway, Sweden, and United
States. Japan, largest aid granter
and lender.

 Industry: Basic industries:

textiles, steel and aluminum,
fertilizers and petrochemicals, and
electronics and motor vehicles.
 Energy: India importer of
petroleum and natural gas, but has
abundant coal, hydroelectric
power (especially in parts of
North India), and growing nuclear
power industry.

 Minerals: Basic minerals: iron,

bauxite, copper, lead, zinc, mica,
uranium ore, rare earths.
 Agriculture: Around 45 percent (136
million hectares) of total land
cultivated, 27 percent double cropped,
effectively giving India 173 million
hectares of cultivated land. Rice,
wheat, pulses, and oilseeds dominate
production; commercial crops--sugar
 (India world's largest producer),
cotton, jute also important.

• Green Revolution technological

advances and improved high-
yielding variety seeds, and
increased fertilizer production and
irrigation between mid-1960s and
early 1980s. Dairy farming,
fishing, and forestry important
parts of agricultural sector.

 Science and Technology:

Major government investment
(80 percent of total) in control
of science and technology
sector. Substantial
 investments in research and
development in defense,
nuclear science, space, and
agriculture.
 BALANCE OF PAYMENTS
• Balance of payment (BoP) is a
statistical statement that
summarizes, for a specific
period, transactions between
residents of a country and the
rest of the world.
• BoP comprises current
account and capital account.

• In Current account, balance of

trade, net factor income from
 abroad and net foreign aid
transfers are included.
• In Capital account, deposits &
financial investments in India
by foreigners or by an Indian in
abroad, foreign exchange
reserves are included.

There are many signals that the

BoP account of a country gives out.
For example, large current account
transactions indicate towards
strength of an economy.
This was the case with India as
reduction in trade restrictions and
duties led to increase in both
exports and imports after 1991.
Also large capital account
transactions may indicate well-
developed capital markets of an
economy.

Healthy BoP positions or surplus

in capital and current account
keeps confidence in the economy
and among investors.
However, healthy BoP positions
may be different for different
countries.

For example, surplus in current

account is often more important
for developed countries than
surplus in capital account as most
 of them have sufficient capital to
fund their investments.
On the other hand, developing
countries like India may place
more importance on capital
account as reserves and funding
for investment is crucial for them.

How does BoP influence

economic policy?
A healthy BoP position can signal
domestic currency appreciation,
hence encouraging businesses to
engage in future contracts
accordingly.
India’s current account share was
almost 60% in 1991-92, but
 reduced to around 44% in 2007-
08. Also, mismatch has been
much greater in capital account in
recent years, which gave rise to
India’s foreign exchange reserves.

Over the years, these trends have

forced policy makers to make
policies keeping in mind foreign
flows (capital) and effects of
policies on them.
However, policies at the same
time could be held responsible for
such flows.

 India’s BoP
 In 1991-92, current account deficit was
$1,178 million, which rose to $17,403
million in 2007-08, and accounted for
$36,469 million for the last three
quarters of 2008.
 After the reforms in 1991, India’s
position of merchandise trade (exports
and imports of goods) kept on
deteriorating, but its position on
invisibles (services, current transfers
etc) improved during the period.
 However, one of the major factors for
increasing current account deficit in
the last few years has been a rising oil
import bill.

In 2007-08 it had a capital

account surplus of $108,031
million.
In the same year it increased its
foreign exchange reserves by
$92,164 million, which provided
stability to the economy.
Foreign investments have
increased since 1991, peaking in
2007-08 to $44,806 million.
 BUSINESS CYCLE
 A business cycle is the period
of growth and decline in an
economy.
 It can be defined as “Wavelike
fluctuations of business
activity characterized by
recurring phases of
expansion & contraction in
 periods varying from three to
four years”.

 The National Bureau of Economic

Research (NBER) analyzes
economic indicators to determine
the phases of the business cycle.
 The Business Cycle Dating
Committee uses quarterly GDP
growth rates as the primary
indicator of economic activity.
However, it also uses monthly
figures, such as employment,
personal income, industrial
production and retail sales.

CHARACTERISTICS OF
BUSINESS CYCLE
1. Recurring Fluctuations:
 Characterized by fluctuations which
occur periodically in a free rhythm.
 Implies that the recurrence of
expansion & contraction has no
fixed period.
2. Period of business cycle is
longer than a year:
 A period is 3 – 4 yrs
 In some cases, cycles are shorter
or longer than those of normal.
 In any case, period of a cycle is not
shorter than one year.

3. Presence of the alternating

forces of expansion &
contraction:
 Business cycle is characterized by
alternating forces leading to
prosperity & depression.
 These forces are in-built in the
system.
4. Phenomenon of the crisis:
 Implies that the peak & trough are
asymmetrical.
 Prosperity phase comes to end
abruptly whereas recovery phase is
gradual & slow.
 Phases Of Business Cycle
 There are four stages in the
business cycle:
 Recession - When the economy
starts slowing down.
 Depression or Trough - When
the economy hits bottom.
 Recovery - When the economy
starts growing again.
 Prosperity or Peak - When the
economy is in a state of "irrational
exuberance."

From trough to peak, there is

expansion period & from peak
to trough the contraction
phase.

1. Recession:
It is a relatively shorter period.
Forces of expansion gets
weakened & forces of
contraction get strengthened.
Characterized by liquidation in
stock market, strain in banking
system, liquidation of bank
loans, abandoning of new
projects.

 During recession, the production of

consumer goods doesn’t decline
immediately, even when the
incomes of people fall.
 The demand for consumption
goods falls with a lag.
 On the other hand, fall in the
production of Capital goods is
dramatic.
 Signs of recessions are not
immediately noticed. The most
 noticeable signal is the weakening
of the stock market.

During recession, banks &

other financial institutions do
not reach the stage of
bankruptcy, this develops
when depression sets in.

2. Depression:
Recession ultimately merges
into depression which is the
phase of relatively low
economic activity.
When economy moves from
recession to depression, there
is a notable fall in production
 of goods & services & in
employment.
This decline in production is
not uniform.

 Manufacturing, mining &

construction output reduction are
significant.
 Industries producing machine,
tools, plants, equipment & steel are
highly effected.
 In these industries employment
falls rapidly.
 During depression when incomes
of household falls drastically, there
is a subsequent reduction in the
expenditure on durable goods.
 Production & employment in non-
durable goods sector has a little
effect.
 During depression, in earlier stage,
the price falls, despite the reduction
in output of goods & services.
 As the contraction proceeds,
purchasing power of people
steadily fall.
 Characterized by a notable fall in
production, increased
unemployment & a rapid fall in the
general price level.

3. Recovery:
The recovery is gradual.
Starts when the prices stops
falling.
Generates Income &
employment which creates
additional demand.
Pressure for increasing the
production is created.

Revival of stock activities.

Upward movement of price of
securities indicate the recovery
of profits.
New products & new
technologies are introduced.
When this expansion
proceeds, wages & salaries
increases, there is an effective
demand for other new
projects.
The phase of recovery tends
to move into the phase of
prosperity.

4. Prosperity
 Begins under the stimulus of
certain forces.
 These forces create expectations
of rising profits, thus inducing the
entrepreneurs to increase the
scope of activities.
 In this phase, the wages and
salaries increase rapidly, thus, the
demand for consumption of goods
also increases.
 The supply of goods, in later stage,
increases with a lag which leads to
rise in prices.
 A marked feature is expansion in
bank deposits & the supply of
currency.
 Prices do not rise uniformly in this
phase.
 The rising profits boost up the
stock prices of securities.
 During the prosperity phase,
expansion itself brings the series of
forces which ultimately led to the
beginning of recession.
 The most important is the gradual
increase in the costs relative of
prices.

 In early stages, there is a rising

gap between the costs & prices.
 When there is a gradual increase in
costs relative to price, the profit
margin narrows down.
 The reason being the increasing
demand of materials, labor, which
cannot be met from reserves.
 Another reason for the rise in costs
in the later phase is utilization of
sub-standard equipment, like
inferior workmen & less efficient
management.
 The later stage of prosperity phase
led to the beginning of recession &
thus the cycle repeats.
 CAPITALIST ECONOMY
 An economic system is based
upon the principle of "supply and
demand." People produce goods
 that others want, in order to sell or
exchange for a profit - the goal
being to accumulate wealth.
 A capitalist economy also
known as the free market
economy can be defined as an
economic activity, where the
means of production are privately
owned.

It can also be defined as: An economic

system in which the means of
production and distribution are
privately or corporately owned and
development is proportionate to the
accumulation and reinvestment of
profits gained in a free market.
Most of the economies over the world
have enriched their economic system
by implementing capitalist norm in the
recent years.
In such form of economy there is no
Government interference.

 The basic characteristics of such

types of economic system are as
follows:
 More private participation in the
field of economic activities
 Free environment to compete in
the economy
 Individuals and firms act for profit
motive
 High freedom for choice to the
consumers
 Government acts as a police state.
 Capitalism is comprised of
individuals, enterprises,
markets, income and
government.

 Individuals
• Individuals engage in a
capitalist economy as
consumers, labourers, and
investors.
As consumers, individuals
influence production patterns
through their purchase
decisions, as producers will
 change production to produce
what is most profitable (most
often what consumers want to
buy).

As labourers, individuals may

decide which jobs to prepare
for and in which markets to
look for work.
As investors they decide how
much of their income to save
and how to invest their
savings.
These savings, which become
investments, provide much of
the money that businesses
need to grow.
 Businesses
Business firms decide what to
produce and where this
production should occur.
They purchase inputs
(materials, labour, and capital).
Businesses try to influence
consumer purchase decisions
through marketing and
advertisement as well as the
creation of new and improved
products.

To be successful, firms must

sell a quantity of their product
 at a certain price to yield a
profit.
In a capitalist nation,
businesses decide when and
how much they want to invest
in infrastructure, capital and
other resources necessary in
production.

 The market
The market is a term used by
economists to describe a
central exchange through
which people are able to buy
and sell goods and services.
In a capitalist economy, the
prices of goods and services
 are controlled mainly through
supply and demand and
competition.

Supply is the amount of a

good or service produced by a
firm and available for sale.
Demand is the amount that
people are willing to buy at a
specific price.
Prices tend to rise when
demand exceeds supply and
fall when supply exceeds
demand.

 Competition arises when many

producers are trying to sell the
 same or similar kinds of products to
the same buyers.
 Competition is important in
capitalist economies because it
leads to innovation and more
reasonable prices as firms that
charge lower prices or improve the
quality of their production can take
buyers away from its competitors.
 Without competition monopoly may
develop.

 Income
 Income, in a capitalist economy
depends primarily on what skills
are in demand and what skills are
currently being supplied.
 People who have skills that are in
scarce supply are worth a lot more
 in the market and can attract higher
incomes.
 Competition among employers for
workers and among workers for
jobs, help determine wage rates.

Firms need to pay high enough

wages to attract the appropriate
workers; however, when jobs are
scarce, workers may accept lower
wages.
Labour unions and the
government also influence wages
in capitalist nations.
Unions act to represent labourers
in negotiations with employers.
 The government
In capitalist nations, the
government does not prohibit
private property, or prevent
individuals from working where
they please.
The government also does not
prevent firms from determining
what wages they will pay and
what prices they will charge for
their products.

The government also carries

out a number of economic
functions.
Government agencies regulate
the standards of service in
 many industries, such as
airlines and broadcasting.
In addition, the government
regulates the flow of capital
and uses things such as the
interest rate to control factors
such as inflation and
unemployment.

INTERNATION
AL
INSTITUTIONS
IMF – International Monetary
Fund
IBRD – International Bank for
Reconstruction &
Development
Also Known as World Bank
ITO – International Trade
Organization
 The International Monetary
Fund
o The International Monetary
Fund (IMF) is the international
organization formed with a
stated objective of stabilizing
 international exchange rates
and facilitating development.
o The IMF was formally
organized on December 27,
1945, when the first 29
countries signed its Articles of
Agreement.
o Its headquarters are in
Washington, D.C., United
States.

o The IMF describes itself as "an

organization of 186 countries,
working to foster global
monetary cooperation, secure
financial stability, facilitate
international trade, promote
 high employment and
sustainable economic growth,
and reduce poverty".

o Today, the number of IMF

member countries has more
than quadrupled from the 44
states involved in its
establishment.
o Some of the IMF member
countries are United States,
Japan, Germany, France,
United Kingdom, India, China,
Italy, Saudi Arabia, Canada,
Russia, Netherlands, Belgium,
India, Switzerland, Australia,
 Mexico, Spain, Brazil, South
Korea, Venezuela……

IMF is controlled by a Board

Of Governors who meet once
in a year to take major policy
decisions.
Member states elect the
Executive Board members.
The voting power of each
country depends on its annual
contribution.

Objectives of IMF

 To promote international monetary

cooperation through a permanent
 institution which provides the
machinery for consultation &
collaboration on international
monetary problems.
 To facilitate the expansion &
balanced growth of international
trade & to contribute thereby to
the promotion & maintenance of
high level of employment.
 To promote exchange stability.
 To give confidence to members by
making the Fund’s resources
available to them.
 Membership qualifications
o Any country may apply for
membership to the IMF.
o The application will be
considered first by the IMF's
Executive Board.
o After its consideration, the
Executive Board will submit a
report to the Board of
Governors of the IMF.

 The Board of Governors after

adopting it, the applicant state
needs to sign the IMF's
Articles of Agreement and
fulfill the obligations of IMF
membership.
 Any member country can also
withdraw from the Fund.
  World Bank
 World Bank is a term used to
describe an international financial
institution that provides loans to
developing countries.
 The World Bank has a stated goal
of reducing poverty.
 The World Bank comprises of two
institutions: the International Bank
for Reconstruction and
Development (IBRD) and the
International Development
Association (IDA)
 The World Bank headquarters are
in Washington, D.C.
 The World Bank sees the five
key factors necessary for
economic growth as:
 Build capacity:
Strengthening governments
and educating government
officials.
 Infrastructure creation:
Implementation of legal and
judicial systems for the
encouragement of business,
the protection of individual and
property rights and the
honoring of contracts.

 Development of Financial
Systems: The establishment
 of strong systems capable of
supporting from micro credit
to the financing of larger
corporate ventures.
 Combating corruption:
Support for countries' efforts
at eradicating corruption.

 Research, Consultancy and

Training: The World Bank
provides platform for
research on development
issues, consultancy and
conduct training programs for
those who are interested
from academia, students,
government and non-
 governmental organization
(NGO) officers etc.

 The Bank obtains funding for its

operations primarily through the
IBRD’s sale of AAA-rated bonds in
the world’s financial markets.
 The IBRD’s income is generated
from its lending activities.
 The IDA obtains the majority of its
funds from forty donor countries
who replenish the bank’s funds
every three years, and from loan
repayments, which then become
available for re-lending.

 The President of the Bank is

responsible for chairing the
 meetings of the Boards of
Directors and for overall
management of the Bank.
 The Executive Directors,
representing the Bank's
member countries, make up
the Board of Directors, usually
meeting twice a week to
oversee activities such as the
approval of loans and
financing decisions.
 Members
 Some of the World Bank
member countries are
Afghanistan, Bangladesh,
Canada, Australia, United
States, Japan, Germany,
 France, United Kingdom,
India, China, Italy, Saudi
Arabia, Russia, Netherlands,
Belgium, Switzerland, Mexico,
Spain, Brazil, South Korea,
Venezuela……

 The International Bank for

Reconstruction and Development
(IBRD) has 186 member countries,
while the International
Development Association (IDA)
has 168 members.
 Each member state of IBRD should
be also a member of the
International Monetary Fund (IMF)
and only members of IBRD are
 allowed to join other institutions
within the Bank (such as IDA).
 BALANCE OF TRADE
The balance of trade is the
difference between the
monetary value of exports and
imports in an economy over a
certain period of time.
Trade surplus: A positive
balance of trade. It consists of
exporting more than is
imported.
Trade deficit: A negative
balance of trade. It consists of
importing more than exporting.
The balance of trade forms
part of the current account.
The Balance of Trade is
identical to the difference
between a country's output
and its domestic demand - the
difference between what
goods a country produces and
how many goods it buys from
abroad.
 India Balance of Trade
 India reported a balance of
trade deficit equivalent to
10147.0 Millions in December
of 2009.
 India is leading exporter of
jewelry, textiles, chemicals,
 leather manufactures and
services.
 India is poor in oil resources
and is heavily dependent on
coal and foreign oil imports for
its energy needs.

 Other imported products are:

machinery, gems, fertilizers
and chemicals.
 Main trading partners are
European Union, The United
States, China and UAE.
 FLUCTUATIONS IN 90’s
 The trade deficit was close to
$6000 million in 1990-91.
 It came down substantially till
the years 1993-94.
 Again rose subsequently to
around $6500 million in 1997-
98
 It shot up to $9170 million and
$12,848 million in 1998-99 and
1999-2000.
 Then fell to the $6000-6600
range in 2000-01 and 2001-02.
 VARIATIONS IN DEFICIT
 The deficit during the 1990s can be
broken up into four periods of
varying duration.
First, during the years 1991-92 to
1995-96, both exports and imports
grew at more or less similar rates,
 so that the deficit remained low in
most years and fluctuated within
the $1 billion to $5 billion range.
Second, between 1995-96 and
1998-99, while imports continued
to grow, exports stagnated,
resulting in a widening of the trade
deficit to $9.1 billion by the end of
that period.

 Third, in 1999-00, while

exports recovered, imports
surged because of a rise in oil
prices, resulting in the
widening of the trade deficit to
$12.8 billion.
 Finally, in 2000-01 and 2001-
02, while exports rose initially
 and then remained at that
level, imports stagnated and
the trade deficit returned to the
levels it had touched in the
mid-1990s.
 WHY THIS BEHAVIOUR?
o The movements in oil imports,
which are influenced by oil
prices, have substantially
influenced the size and
direction of India’s overall
import bill.
o During the period 1990-91 to
2000-01, in all years excepting
one (1998-99), India’s non-oil
trade has either been in
 balance or reflected a surplus
of exports over imports.

o The removal of restrictions and

reductions in tariffs, was also
expected to result in a flow in
non-oil imports.
o Movements have been quite
varied in the principal
categories of imports (oil, non-
oil bulk, export-related and
other imports).

o While oil imports have fluctuated

quite significantly, as is to be
expected, and rose to relatively
high levels in 1996-97 and 1999-00
 to 2000-01, export related imports
have shown a low but consistent
rate of increase since 1994-95.
o Non-oil bulk imports, on the other
hand, have stagnated till the mid-
1990s, risen by a small amount
during 1995-97 and stagnated
once again thereafter.

o Another striking feature is the

increase in "other imports"
between 1991-92 and 1998-
99, after which they have
stagnated.
o The share of that category,
which stood at 40 per cent in
1990-91, rose to 47 per cent in
1995-96 and 52 per cent in
 1998-99, before falling to 43
per cent in 2000-01.

o If we look at the shares of

different categories of imports
in the total, it is clear that while
the share of oil imports has
fluctuated significantly, rising
sharply in periods when the
trade deficit has widened, the
share of export related imports
has varied within a small range
and stagnated over time, and
that of non-oil bulk imports has
declined.
o The rise in the share of other
imports did not result in a
 worsening of the trade deficit
to an unsustainable extent.
ROLE OF CAPITAL
GOODS IMPORTS
One reason why the other
imports category did not rise
further was the fact that capital
goods imports which rose from
$4.2 billion in 1991-92 to $10.3
billion in 1995-96, stagnated
thereafter, fluctuating between
$9 and $10 billion till 1998-99.
This was the period when after
a short-term boom between
1993-94 and 1995-96, Indian
industry registered a
 deceleration in its rate of
expansion.

This deceleration would have

affected capital goods imports
through its impact on
investment.
After 1998-99, when industry
began its slide into near-
recessionary conditions,
capital goods imports fell
below $9 million in 1999-00
touching $6.6 billion in 2000-
01.

Since capital goods constitute

an important component of
 other imports, though its share
fell from 60.4 per cent in 1995-
96 to 40.4 per cent in 2000-01,
this trend would have
substantially influenced
movements in the ‘other
imports’ category.

 Thus, there appear to be only

two circumstances that can
lead to a substantial rise in
the import bill.
 A recovery and sustained
growth in industrial
production.
 A sharp rise in oil prices.
 If either of these occurs, the
trade deficit is bound to
widen, unless India is able to
make the breakthrough in
world markets.