18.10.

2011

Economic Stabilization

Sources of Instability and Unsustainability

Inflation and deflation Global economic recession or economic sanctions Continued disequilibrium in the supply and demand of foreign exchange coupled with excess volatility of the real exchange rate Continued large overall balance of payments surplus coupled with rising foreign exchange reserves (the Japanese model) Energy and the environment Technological dependence Inter-regional and inter-personal disparity of the income distribution Non-economic sources--war, pestilence, natural disasters,terrorist activities

Economic Growth PerspectiveInstability is Inevitable

Phase I: 1950-51 to 1979-80

Two sub-phases (50 to 65; 66 to 79)

Phase II: 1980-81 to 1993-94

Start: Policy regime change End (a) Crises year(1990-91). (b) Reform initiation 1991-92 (c) Adjustment/recovery (1992-03 to 1993-04)

Phase III: 1994-95 to 2011

1994-95: Statistical significant growth break Rising trend growth

Where India Stands?

Region GDP % of World GDP
20% 21% 6% 11% 5% .09%

GDP Per Real Capita GDP Growth

$47,000 $33,000 $34,200 $6,000 $2,800 $800 1.3% 1.0% -.4% 9.8% 6.6% 8.5%

United States European Union Japan China India Ethiopia

Source: CIA World Factbook

$14T $15T $4.3T $7.8T $3.2T $66.3B

The Cost of Economic Instability

1. Economic costs
GDP Gap: difference between the actual GDP and potential GDP that could exist if all resources were employed ( = opportunity cost). Misery Index: the sum of monthly inflation and unemployment rates. Uncertainty: of the future can cause even more problems

2. Social costs Wasted Resources: people not allowed to be useful members of society. Political Instability: economic instability greatly affects voter tendencies. Crime and Family Values: many are forced to crime in order to get by.

Macroeconomic Equilibrium

Macroeconomic Equilibrium
Aggregate Supply: the total value of goods and services that all firms would produce in Aggregate Demand : a specific period of time the total quantity of at various price levels goods and services demanded at different price levels.

Stabilization Policies
Demand-Side Policies:
Demand-Side believes that the government needs to provide stability. It can take a direct role by spending, or an indirect role by lowering taxes, etc.

Supply-Side Policies
Supply-Side Policies: are designed to stimulate output and lower unemployment by increasing production rather than demand.

Monetary Policies: Monetarists: favour long-term monetary growth at levels low enough to control inflation. Money supply needs to constantly grow at a slow and steady rate too much growth/too quickly will lead to inflation and other problems that will hurt in the longrun.

The key is decreasing governments role in the economy deregulation: less taxes, laws, and rule that may limit production.

...

Monetary Policy
to assist for full-employment, non-inflationary output

Quantitative Tools
Bank Rate

Qualitative Tools
Moralsuation

Interventions
Administered Price Special Incentives

Open Market Operations

Issue of Directives

CRR/SLR

Voluntary Restraints

..........to manipulate economic growth

Public Expenditure Social Security Law and Order Emergency Services Health Education Defence Foreign Aid Environment Agriculture Industry Transport Regions Culture, Media and Sport

Fiscal Policy

Taxation Public Borrowing

Direct Indirect

The Golden Rule!

Transparency Stability Responsibility Fairness Efficiency