Actuarial Economic Models-II

Amity School of Insurance, Banking and Actuarial Science
Amity School of Insurance,

Banking and Actuarial Science
.
B. Sc. (Actuarial Science) 5th Semester
ACCT322-Actuarial Economic Models-II

Manish Sharma
1
Economics
Economics is a social science that

studies how individuals, governments,
firms and nations make choices on
allocating scarce resources to satisfy
their unlimited wants in such a manner
that consumers can maximise their
satisfaction, producers can maximise
their profits and the society can
maximise its social welfare.
2
Course Contents/Syllabus:
Actuarial Economics-II
Syllabus.doc
3
Difference between Micro

and Macro Economics
BASIS FOR
MICROECONOMICS MACROECONOMICS
COMPARISON
The branch of economics that The branch of economics that studies
studies the behavior of an the behavior of the whole economy,
Meaning
individual consumer, firm, family (both national and international) is
is known as Microeconomics. known as Macroeconomics.
Covers various issues like
demand, supply, product pricing, Covers various issues like, national
Scope factor pricing, production, income, general price level, distribution,
consumption, economic welfare, employment, money etc.
etc.
Helpful in determining the prices Maintains stability in the general price

of a product along with the prices level and resolves the major problems of
Importance of factors of production (land, the economy like inflation, deflation,
labor, capital, entrepreneur etc.) reflation, unemployment and poverty as
within the economy. a whole.
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Micro vs. Macro Economics

1. Microeconomics studies the particular market segment of the economy,
whereas Macroeconomics studies the whole economy, that covers several
market segments.
2. Microeconomics deals with an individual product, firm, household,
industry, wages, prices, etc., while Macroeconomics deals with
aggregates like national income, national output, price level, etc.
3. Microeconomics covers issues like how the price of a particular
commodity will affect its quantity demanded and quantity supplied and
vice versa while Macroeconomics covers major issues of an economy like
unemployment, monetary/ fiscal policies, poverty, international trade, etc.
4. Microeconomics determine the price of a particular commodity along with
the prices of complementary and the substitute goods, whereas the
Macroeconomics is helpful in maintaining the general price level.
5. While analyzing any economy, microeconomics takes a bottom-up
approach, whereas the macroeconomics takes a top-down approach into
consideration.
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Business Environment
Internal Environment External Environment
Value System
Mission and
Objectives
Organizational Micro Environment Macro Environment
Structure
Corporate Culture Customers Political
Quality of Human Suppliers Economic
Resources Marketing Social
Labor Unions Intermediaries Technological
Physical resources Competitors Legal
and Technological Public Environmental
capabilities
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National Income
It is the money value of all the goods and

services produced by the residents of the
country.
Two measures:
GDP (Gross Domestic Product)
GNP (Gross National Product)
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Domestic vs. National

"Domestic" means the boundary is
geographical: we are counting all goods
and services produced within the country's
borders, regardless of by whom.
"National" means the boundary is defined

by citizenship (nationality). We count all
goods and services produced by the
nationals of the country (or businesses
owned by them) regardless of where that
production physically takes place. 8
Approaches to National
Income Measurement
Product/ Value Added Method
Income/Factor income Method
Expenditure Method
9
GDP & GNP

GNP at market prices = C+I+G+X-M
C = Private Consumption Expenditure (of all
Households)
I = Investment Expenditure (of all firms)
G = Government Consumption Expenditure (of
the local government)
(Where X-M = Exports Imports)
GNP = GDP + Net Factor Income Earned from
Abroad(NFIA)
Net Factor Income from abroad = Income
earned from abroad Income sent to abroad 10
National Income: Some

Accounting relationships
Gross-Depreciation becomes Net
National-NFIA becomes Domestic
Market price-net indirect taxes becomes

factor cost
11
Performance of Country
To understand how a country is doing over
a period of time, it is necessary to
compare national income figures for
different years. Aggregates are based on
constant 2005 U.S. dollars.
Annual percentage growth rate of GDP at market prices
2010 2011 2012 2013 2014 2015 2016 2017 2018
10.26 6.63 5.4 6.3 7.5 8.01 7.1 7.2 7.5
Source: World Bank

Available at http://www.worldbank.org/en/publication/global-economic-prospects#data 12
Per capita Income
GDP per capita is gross domestic product

divided by midyear population.
GDP per capita (US $)
2010 2011 2012 2013 2014 2015 2016
1345.77 1461.67 1,446.98 1,452.19 1,573.11 1613.19 1709.38
Source: World Bank

http://data.worldbank.org/indicator/NY.GDP.PCAP.CD?end=2016&locations=IN&start=1960&view=chart
13
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Key Concepts of Macro

Economics
Economic growth takes place when both total
output and total income are increasing. (GDP growth: 6.8%)
2015-16
GNP is the measure of economic activity. Gross
National Product (GNP) is the value of all final
goods and services produced in the economy in a
given time period.
Nominal GNP measures the value of output at the
prices prevailing in the period, during which output
is produced,
While Real GNP measures the output produced in
any one period at the prices of some base year. 15
2011-12
Circular flow of Income

Firms
Factor
Incomes:
Two Sector Rent
+Wages
Goods and Model +Interest
Services
+Profits
Payments
for Goods FOP: Land, Labor,
and Capital and Organization
Services
Households
Product or
Factor Market
Commodity Market 16
Circular flow of Income

Injections
Firms
Four Sector
Factor Model
Payments Banks Govt. Abroad
Consumption of Goods
and Services
Net
Taxes(T)
Households Net
Savings(S) Import
Expenditure(M)
Withdrawals
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Investment Multiplier
The concept of Investment Multiplier is an
important contribution of Prof. J.M. Keynes.
Keynes believed that an initial increment in
investment increases the final income by many
times.
Multiplier expresses the relationship between
an initial increment in investment and the
resulting increase in aggregate income.
K= Y/I
Y = C + S, MPC=C / Y, MPS=S / Y
MPC+MPS=1 18
Formula of Multiplier (K)

Y = C + S
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Module II
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Money
A medium that can be exchanged for
goods and services and is used as a
measure of their values in the market.
Functions:
1. Medium of exchange
2. Measure of value
3. Standard of deferred payment
4. Store of value
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Liquidity Preference
Function
Liquidity preference refers to the demand for
money, considered as liquidity. The concept was
first developed by John Maynard Keynes to explain
determination of the interest rate by the supply and
demand for money.
Keynes defines the rate of interest as the reward
for parting with liquidity for a specified period of
time.
According to him, the rate of interest is determined
by the demand for and supply of money.
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Demand of Money
1. Transaction motive
2. Precautionary motive: A desire to hold cash in
order to be able to deal effectively with
unexpected events that require cash outlay.
3. Speculative motive: John Maynard Keynes, in
laying out speculative reasons for holding
money, stressed the choice between money
and bonds. If agents expect the future nominal
interest rate (the return on bonds) to be lower
than the current rate they will then reduce their
holdings of money and increase their holdings
23
of bonds.
Transaction motive
The transactions motive for demanding money
arises from the fact that most transactions involve
an exchange of money.
Because it is necessary to have money available
for transactions, money will be demanded.
The total number of transactions made in an
economy tends to increase over time as income
rises.
Hence, as income or GDP rises, the transactions
demand for money also rises.
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Precautionary motive
People often demand money as
a precaution against an uncertain future.
Unexpected expenses, such as medical or
car repair bills, often require immediate
payment.
The need to have money available in such
situations is referred to as
the precautionary motive for demanding
money.
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Speculative motive
The speculative motive relates to the desire to
hold ones resources in liquid form to take
advantage of future changes in the rate of
interest or bond prices.
Bond prices and the rate of interest are inversely
related to each other. If bond prices are
expected to rise, i.e., the rate of interest is
expected to fall, people will buy bonds to sell
when the price later actually rises.
If, however, bond prices are expected to fall, i.e.,
the rate of interest is expected to rise, people will
sell bonds to avoid losses.
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Supply of Money
The supply curve for money is vertical,

because it does not depend on interest
rates. (as in the case of demand as
speculative motive)
It depends entirely on decisions made by
the central bank.
Reserve Bank of India controls the
money supply in the market.
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Stock of Money in the Economy/

Narrow Money
Components of Money Supply
M1 = Currency & Coins with people + Demand
deposits of Banks(Current & Savings
Accounts) + Other deposits of RBI
M2 = M1 + Demand deposits of the post offices
Broad Money
M3 = M1 + Time/Term deposits of the

Banks(Recurring Deposits and Fixed Deposits)
M4 = M3 + Total deposits of the post
offices(both Demand and Term/Time Deposits)
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Module III
29
Business Cycle
Business Cycle is the upward and downward
movement of economic activity that occurs
around the growth trend.
The top of the Cycle is called the peak.
A very high peak, representing a big jump in
output, is called a boom.
When the economy starts to fall from the peak,
there is a downturn in business activity.
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Business Cycle
If that downturn persists for more than two
consecutive quarters of the year, that downturn
becomes recession.
A large recession is called a depression, which is
much longer and more severe than a recession.
The bottom of recession or depression is called a
trough.
When economy comes out of the trough,
economists say it an upturn.
If an upturn lasts two consecutive quarters of the
year, it is called expansion.
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Business Cycle
Output
Trough
Year / Quarter
32
Inflation
Inflation is defined as a sustained increase in the
general level of prices for goods and services.
It is measured as an annual percentage increase.
When the general price level rises, each unit of
currency buys fewer goods and services. Thus,
inflation results in loss of value of money.
As inflation rises, every rupee you own buys a
smaller percentage of a good or service.
The value of a rupee does not stay constant (it
decreases) when there is inflation.
33
Deflation
Deflation is the reduction of the general

level of prices in an economy. It is an
opposite phenomenon of Inflation.
Deflation occurs when the inflation rate

falls below 0% (a negative inflation rate
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Disinflation & Reflation

Deflation is distinct from disinflation, a slow-down in
the inflation rate, i.e. when inflation declines to a
lower rate but is still positive.
Disinflation is a decrease in the rate of inflation a
slowdown in the rate of increase of the general
price level of goods and services in a nation's gross
domestic product over time.
It is the opposite of reflation.
A fiscal or monetary policy, designed to expand a
country's output and curb the effects of deflation.
Reflation policies can include reducing taxes,
changing the money supply and lowering interest
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rates.
Types of Inflation
Cost-push inflation is supposed to be a
type of inflation caused by rising prices in
goods or services with no suitable
alternatives.
An example of this inflation is the oil crisis
of the 1970s.
Demand-pull inflation is a rise in the
price of goods and services created by
aggregate demand in excess of aggregate
supply.
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Types of Inflation
1. Creeping Inflation
Creeping or mild inflation is when prices rise
3% a year or less.
Creeping inflation is beneficial to economic
growth because this mild inflation sets
expectations that prices will continue to rise.
As a result, it sparks increased demand as
consumers decide to buy now before prices rise
in the future.
By increasing demand, mild inflation drives
economic expansion.
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Types of Inflation
2. Walking Inflation
This type of strong, or pernicious, inflation is
between 3-10% a year.
It is harmful to the economy because it heats up
economic growth too fast.
People start to buy more than they need, just to
avoid tomorrow's much higher prices.
This drives demand even further, so that
suppliers can't keep up.
As a result, common goods and services are
priced out of the reach of most people.
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Types of Inflation
3. Galloping Inflation
When inflation rises to ten percent or greater, it
wreaks absolute havoc on the economy.
Money loses value so fast that business and
employee income can't keep up with costs and
prices.
Foreign investors avoid the country, depriving it
of needed capital.
The economy becomes unstable, and
government leaders lose credibility. Galloping
inflation must be prevented.
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Types of Inflation
4. Hyperinflation
Hyperinflation is when the prices skyrocket more
than 50% a month.
It is fortunately very rare. In fact, most examples
of hyperinflation have occurred when the
government printed money recklessly to pay for
war.
Examples of hyperinflation include Germany in
the 1920s, Zimbabwe in the 2000s, and during
the American Civil War.
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Types of Inflation
5. Stagflation
Stagflation is just like its name says: when
economic growth is stagnant, but there still
is price inflation.
It happened in the 1970s when the U.S.
went off the gold standard.
Once the dollar's value was no longer tied
to gold, the number of dollars in circulation
skyrocketed. This increase in the money
supply was one of the causes of inflation.
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Economic Policies
Economic policy is the term used to describe
government actions that are intended to
influence the economy of a city, state or nation.
Some examples of these actions include setting
tax rates, setting interest rates, and government
expenditures.
Most factors of economic policy can be divided
into either fiscal policy, which deals with
government actions regarding taxation and
spending, or monetary policy, which deals with
central banking actions regarding the money
supply and interest rates.
42
Fiscal Policy
Fiscal policy deals with the taxation and
expenditure decisions of the government.
Monetary policy, deals with the supply of money in
the economy and the rate of interest.
These are the main policy approaches used by
economic managers to steer the broad aspects of the
economy.
In most modern economies, the government
deals with fiscal policy while the central bank is
responsible for monetary policy.
The two main instruments of fiscal policy are changes
in the level and composition of taxation and
government spending in various sectors. 43
Use of Fiscal Policy

When inflation is too strong, the economy
may need a slowdown. In such a situation, a
government can use fiscal policy to increase
taxes to suck money out of the economy.
Fiscal policy could also dictate a decrease in
government spending and thereby decrease
the money in circulation.
In case of disinflationary situation, tax
rates may be reduced or government
spending may be increased for increasing
the money supply in the market 44
Monetary Policy
Monetary policy is the process by which
the monetary authority of a country
controls the supply of money, often
targeting an inflation rate or interest rate to
ensure price stability and general trust
in the currency.
Further goals of a monetary policy are
usually to contribute to economic growth
and stability, to lower unemployment,
and to maintain predictable exchange
rates with other currencies. 45
Instruments of Monetary
Policy
1. Cash Reserve Ratio (CRR): The share of net
demand and time liabilities (deposits) that banks
must maintain as cash balance with the Reserve
Bank.
2. Statutory Liquidity Ratio (SLR): The share of
net demand and time liabilities (deposits) that
banks must maintain in safe and liquid assets,
such as, government securities, cash and gold.
Changes in SLR often influence the availability of
resources in the banking system for lending to the
private sector. 46
Policy
3. Liquidity Adjustment Facility (LAF): Consists of overnight
and term repo/reverse repo auctions. Repo is the rate at which
RBI lends money to the commercial Banks. Reverse repo is
the rate at which commercial banks lends money to the RBI.
Progressively, the Reserve Bank has increased the proportion
of liquidity injected in the LAF through term-repos.
4. Term Repos: Since October 2013, the Reserve Bank has
introduced term repos (of different tenors, such as, 7/14/28
days), to inject liquidity over a period that is longer than
overnight. The aim of term repo is to help develop inter-bank
money market, which in turn can set market based
benchmarks for pricing of loans and deposits, and through that
improve transmission of monetary policy. 47
Policy
5. Marginal Standing Facility (MSF) is a new scheme
announced by the Reserve Bank of India (RBI) in its
Monetary Policy (2011-12) and refers to the penal rate
at which banks can borrow money from the central bank
over and above what is available to them through the
Liquidity Adjustment Facility (LAF) window.
MSF, being a penal rate, is always fixed above the
repo rate. The MSF would be the last resort for banks
once they exhaust all borrowing options including the
liquidity adjustment facility by pledging through
government securities, which has lower rate of interest
in comparison with the MSF. 48
Policy
6. Open Market Operations (OMOs): These include
both, outright purchase or sale of government
securities (for injection/absorption of liquidity)
7. Bank Rate: It is the rate at which the Reserve
Bank is ready to buy or rediscount bills of exchange
or other commercial papers. This rate has been
aligned to the MSF rate and, therefore, changes
automatically as and when the MSF rate changes
alongside policy repo rate changes.
8. Moral suasion is an advise, oral or written, by the
central bank to the commercial banks to expand or
49
restrict credit.
Monetary Policy
Policy Repo Rate 6.00%
Reverse Repo Rate 5.75%
CRR 4%
SLR 20.00%
Marginal Standing
6.25%
Facility Rate
Bank Rate 6.25%
As on August 2017
Source: RBI
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Module IV
51
Financial Markets
Mechanism that allows people to buy

and sell financial securities (such as
stocks and bonds) and items of value
at low transaction cost.
Markets work by placing many interested

buyers and sellers in one place, thus
making easier for them to find each other.
52
Types of Financial Markets
53
Capital Market
Slice of the financial markets that deal with
medium/long term financial instruments (eg.
Bonds, equities)
It deals with funds having long maturity (more
than a year) or an indefinite maturity.
Transactions take place formally over stock
exchanges with the help of brokers unlike money
markets wherein transactions take place without the
help of brokers.
Basic Role: To transfer funds from those who have
surplus and make available funds to those who are
running a deficit.
They deal in both debt and equity. 54
Capital Market Cont.

It can be further classified into Primary and
Secondary Markets.
Primary Market: Newly issued stocks/bonds are

traded.
Secondary Market (Stock Markets): Trade of

existing stocks/bonds takes place.
55
Primary Market
If some entrepreneur wants to start up a new
business, he would not be able to arrange the
huge fund requirements from his friends and
relatives.
the promoter has the option of raising money
from the public across the country by selling
(issuing) shares of the company.
small savings of, say, even Rs. 5,000 can
contribute in setting up, say, a Rs. 5,000 crore
Cement or Steel plant.
This mechanism by which corporates raise
money from public is called the primary
56
markets.
Secondary Markets.
As a shareholder, if you need your money back,
you can sell these shares to other or new investors.
Such trades do not reduce or alter the companys
capital.
Stock exchanges bring such sellers and buyers
together and facilitate trading.
Therefore, companies raising money from public
are required to list their shares on the stock
exchange.
This mechanism of buying and selling shares
through stock exchange is known as the
secondary markets.
57
Benefits to Investors:
The Capital market helps the investors, i.e., those
who have funds to invest in long-term financial
instruments, in following ways:
It brings together the buyers and sellers of
securities and thereby makes possible the
marketability of investments,
By advertising security prices, the Stock Exchange
helps the investors to keep track of their
investments and channelize them into most profitable
lines
It protects the interests of the investors by
compensating them from the Stock Exchange
Compensating Fund in case of any fraud/default.
58
Products in Capital Market

Products available in Capital Market
Mutual Hybrid
Equity Debt Derivatives
Funds Instruments
Corporate Govt. Debt

Preference Shares
Debt -Govt.
-Debentures Securities
Cumulative
-Bonds (G- Secs)
Preference Shares
Cumulative
Convertible
Preference Shares
59
Debt (loan instruments)

Corporate Debt: Debentures are instrument issued by
companies to raise debt capital.
As an investor, you lend your money to the company, in
return for its promise to pay you interest at a fixed rate
(usually payable half yearly on specific dates) and to
repay the loan amount on a specified maturity date say
after 5/7/10 years (redemption).
Normally specific asset(s) of the company are held
(secured) in favour of debenture holders.
This can be liquidated, if the company is unable to pay
the interest or principal amount.
Unlike loans, you can buy or sell these instruments
in the market.
60

Corporate Debt:
Bonds are broadly similar to debentures. They are issued by
companies, financial institutions, municipalities or government
companies and are normally not secured by any assets of the
company (unsecured).
Types of bonds
Regular Income Bonds provide a stable source of income at
regular, predetermined intervals
Tax-Saving Bonds offer tax exemption up to a specified amount of
investment, depending on the scheme and the Government
notification.
Examples are:
Infrastructure Bonds under Section 88 of the Income Tax Act, 1961
NABARD/ NHAI/REC Bonds under Section 54EC of the Income Tax Act,
1961
RBI Tax Relief Bonds 61

Government debt:
Government securities (G-Secs) are instruments
issued by Government of India to raise money.
G Secs pays interest at fixed rate on specific dates
on half-yearly basis.
It is available in wide range of maturity, from short dated
(one year) to long dated (up to thirty years).
Since it is sovereign borrowing, it is free from risk of
default (credit risk).
You can subscribe to these bonds through RBI or
buy it in stock exchange.
62
Hybrid instruments (combination of

ownership and loan instruments)
Preferred Stock / Preference shares entitle you to receive
dividend at a fixed rate.
Importantly, this dividend had to be paid to you before dividend can
be paid to equity shareholders. In the event of liquidation of the
company, your claim to the companys surplus will be higher than
that of the equity holders, but however, below the claims of the
companys creditors, bondholders / debenture holders.
Cumulative Preference Shares: A type of preference shares on
which dividend accumulates if remains unpaid. All arrears of
preference dividend have to be paid out before paying dividend on
equity shares.
Cumulative Convertible Preference Shares: A type of preference
shares where the dividend payable on the same accumulates, if not
paid. After a specified date, these shares will be converted into
equity capital of the company.
63
Foreign Exchange
Foreign currency means any currency other
than Indian currency
Foreign exchange means foreign currency and
includes -
(i) all deposits, credits and balances payable in
any foreign currency, and any drafts, traveller's
cheques, letters of credit and bills of exchange,
expressed or drawn in Indian currency but
payable in any foreign currency;
(ii) any instrument payable, at the option of the
drawee or holder thereof or any other party
thereto, either in Indian currency or in foreign
currency or partly in one and partly in the other. 64
Foreign Exchange Market

Foreign Exchange Market facilitates the
exchange of one currency for another, or the
conversion of one currency into another
currency.
Foreign exchange markets, where money in
one currency is exchanged for another.
The global foreign exchange market is by far
the largest financial market, with average daily
volumes in the trillions of dollars.
The Reserve Bank issues licences to banks and
other institutions to act as Authorised Dealers in
the foreign exchange market. 65
Participants
Players in the Indian Forex market include
(a) Authorised Dealers (Ads), mostly
banks who are authorised to deal in
foreign exchange,
(b) foreign exchange brokers who act as
intermediaries, and
(c) customers individuals, corporates
66
FERA and FEMA

The Foreign Exchange Management Act, 1999
(FEMA) is an Act of the Parliament of India "to
consolidate and amend the law relating to foreign
exchange with the objective of facilitating external
trade and payments and for promoting the orderly
development and maintenance of foreign exchange
market in India".
It was passed in the winter session of Parliament in
1999, replacing the Foreign Exchange Regulation
Act (FERA) which had become incompatible with the
pro-liberalisation policies of the Government of India.
This act makes offences related to foreign exchange
civil offenses.
67
FERA vs. FEMA

FERA consisted of 81 sections, and was
more complex. FEMA is much simple, and
consist of only 49 sections.
Terms like Capital Account Transaction,
current Account Transaction, person, service
etc. were not defined in FERA, which have
been defined in detail in FEMA.
Definition of "Authorized Person" in FERA
was a narrow one. It has been widened to
include banks, money changes, off shore
banking Units etc. 68
International Trade
International trade is the exchange of capital,
goods, and services across international
borders or territories, which could involve the
activities of the government and individual.
A product that is sold to the global market is an
export, and a product that is bought from the global
market is an import.
Increasing international trade is crucial to the
continuance of globalization.
Without international trade, nations would be limited
to the goods and services produced within their
own borders.
69
International Trade
MERCHANDISE COMMERCIAL
2013 TRADE SERVICES TRADE
Exports (million US$) 313 235 150 926

Share in world total
exports 1.66 3.25
Imports (million US$) 466 042 124 621

Share in world total
imports 2.47 2.84
70
World Trade Organization (WTO)

The World Trade Organization (WTO) is the only
international organization dealing with the global rules
of trade between nations.
Its main function is to ensure that trade flows as
smoothly, predictably and freely as possible.
The WTO officially commenced on 1 January 1995
under the Marrakesh Agreement, signed by 123
nations on 15 April 1994, replacing the General
Agreement on Tariffs and Trade (GATT), which
commenced in 1948.
Currently has 161 members.
India has been a WTO member since 1 January 1995
and a member of GATT since 8 July 1948. 71
WTO
It is a forum for governments to negotiate trade agreements.
It is a place for them to settle trade disputes. It operates a
system of trade rules.
It helps developing countries build their trade capacity.
Essentially, the WTO is a place where member governments
try to sort out the trade problems they face with each other.
Where countries have faced trade barriers and wanted them
lowered, the negotiations under WTO have helped to open
markets for trade.
But the WTO is not just about opening markets, and in some
circumstances its rules support maintaining trade barriers
for example, to protect consumers or prevent the spread of
disease.
72
Objectives of WTO
1. To improve the standard of living of people in the
member countries.
2. To ensure full employment and broad increase
in effective demand.
3. To enlarge production and trade of goods.
4. To increase the trade of services.
5. To ensure optimum utilization of world
resources.
6. To protect the environment.
7. To accept the concept of sustainable
development. 73
Functions of WTO
1. To implement rules and provisions related to trade
policy review mechanism.
2. To provide a platform to member countries to decide
future strategies related to trade and tariff.
3. To provide facilities for implementation,
administration and operation of multilateral and bilateral
agreements of the world trade.
4. To administer the rules and processes related to
dispute settlement.
5. To ensure the optimum use of world resources.
6. To assist international organizations such as, IMF
and IBRD for establishing coherence in Universal
Economic Policy determination. 74
The Balance of Payments

Balance of Payments (BoP) statistics
systematically summaries the economic
transactions of an economy with the rest of the
World (i.e. transactions between resident & non
resident entities) during a given period.
It comprises of current and capital & financial
accounts.
The different accounts within the BoP are
distinguished according to the nature of the
economic values provided and received, under
the double-entry system of accounting in the
BoP.
75
A.Current Account B.Capital Account
I.Merchandise 1.Foreign Investment(a+b)
II.Invisibles [a+b+c] a) Direct
a) Services b) Portfolio BALANCE
2.Loans [a+b+c] OF
i) Travel
a) External Assistance
ii) Transportation i) By India PAYMENTS
iii) Insurance ii) To India BOP.xls
iv) Government, not in- b) Commercial Borrwings
cluded elsewhere (MT & LT)
v) Miscellaneous i) By India
b) Transfer ii) To India C) Errors & Omissions
i) Official c) Short Term Credit D) Overall Balance [A+B+C]
to India E) Monetary Movements[i+ii]
ii) Private i) I.M.F.
3.Banking Capital [a+b]
c) Income a) Commercial Banks
ii) Foreign Exchange Reserves
(Increase-/Decrease+)
i) Investment income i) Assests
ii) Compensation to ii) Liabilities
employees of which Non-Resident Deposits
Total Current Account [I+II] b) Others
4.Rupee Debt Service
5.Other Capital
Total Capital Account [1 to 5]
Current Account
The current account includes flows of
goods, services, primary income, and
secondary income between residents and
non-residents and thus constitutes an
important segment of BoP.
Current account balance shows the
difference between the sum of exports of
goods and services as well as income
receivable, on the one hand, and the sum
of imports and income payable on the
other 77
Capital Account
The capital account comprises credit and
debit transactions under non-produced
nonfinancial assets and capital transfers
between residents and non-residents.
Thus, acquisitions and disposals of non-
produced non-financial assets, such as
land sold to embassies and sales of
leases and licences, as well as transfers
which are capital in nature, are recorded
under this account.
78
Financial Account
The financial account reflects net acquisition and
disposal of financial assets and liabilities during
a period.
The sum total of net transactions under the
current and capital account represents net
lending (surplus) or net borrowing (deficit) by the
economy from the rest of the world, which is
reflected in the financial account as net outflow
or inflow of capital.
Thus, the financial account shows how the net
lending to or borrowing from the rest of the world
has occurred.
79

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Amity School of Insurance, Banking and Actuarial Science

Amity School of Insurance,

B. Sc. (Actuarial Science) 5th Semester

ACCT322-Actuarial Economic Models-II

Economics is a social science that

Difference between Micro

Helpful in determining the prices Maintains stability in the general price

Micro vs. Macro Economics

Internal Environment External Environment

It is the money value of all the goods and

Domestic vs. National

"National" means the boundary is defined

Income/Factor income Method

GDP & GNP

National Income: Some

National-NFIA becomes Domestic

Market price-net indirect taxes becomes

Annual percentage growth rate of GDP at market prices

2010 2011 2012 2013 2014 2015 2016 2017 2018

10.26 6.63 5.4 6.3 7.5 8.01 7.1 7.2 7.5

Source: World Bank

Per capita Income

GDP per capita is gross domestic product

GDP per capita (US $)

2010 2011 2012 2013 2014 2015 2016

1345.77 1461.67 1,446.98 1,452.19 1,573.11 1613.19 1709.38

Source: World Bank

Key Concepts of Macro

Circular flow of Income

Circular flow of Income

Formula of Multiplier (K)

The supply curve for money is vertical,

Stock of Money in the Economy/

M3 = M1 + Time/Term deposits of the

Deflation is the reduction of the general

Deflation occurs when the inflation rate

Disinflation & Reflation

Use of Fiscal Policy

Mechanism that allows people to buy

Markets work by placing many interested

Types of Financial Markets

Capital Market Cont.

Primary Market: Newly issued stocks/bonds are

Secondary Market (Stock Markets): Trade of

Products in Capital Market

Corporate Govt. Debt

Debt (loan instruments)

Debt (loan instruments)

Debt (loan instruments)

Hybrid instruments (combination of

Foreign Exchange Market

FERA and FEMA

FERA vs. FEMA

Exports (million US$) 313 235 150 926

Imports (million US$) 466 042 124 621

World Trade Organization (WTO)

The Balance of Payments

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