eeb final word

8/9/2019 EEB Final Word

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ECONOMICS Economics is a Science of

choice in the face of unlimited ends& scarce resources that havealternative resources.

Macroeconomics is that branch ofeconomics, which studies theaggregate behavior of economicsystem like total national income.

The market economies neverperform at the same level. They

are marked with boom & recessionlevels in alternate cycles.

Macroeconomics aims atachieving economic stability bycontrolling these ups & downsin the market economies.


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Balance of Payments &Exchange rate parameterswhich are consideredimportant in judging theeconomic health of anynation.

Balance of paymentsNations make payments for

goods & services importedwhile receive payments for

goods & services exported.The net payments received &

payments made is known asBalance of Payment.

Exchange rateThe rate at which a nations

currency is exchanged for


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currencies of other nation iscalled exchange rate, alsoinfluences the Balance ofPayments.

For any economy to be stable,

the balance of paymentsshould neither be in surplusnor in deficit & the exchangerate should not be fluctuating

briskly.

Constituent Groups of an

economy:They can be grouped under four

heads:


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The householdsThe firmsThe GovernmentThe Rest of the world

GROSS DOMESTIC

PRODUCT (GDP) The gross domestic product(GDP) orgross domesticincome (GDI) is a basic

measure of a country's overalleconomic output. It is themarket value of all final goodsand services made within theborders of a country in a year.

GDP measures the marketvalue of the output of a nation


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& not just the quantity of goods& services produced.

An accurate measurement of aggregateoutput requires that a particular goodor service must be counted only once.

It means that they are Final goods,also known as Consumer goods.Final goods are those which thecustomers purchase for final use & notfor further processing, or

manufacturing. Goods & services that are purchased

by an intermediary for furtherprocessing, manufacturing or resale arecalled Intermediate goods.

Example: Tyres sold toautomobile manufacturers are


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intermediate goods. This valuewould not be considered whilecalculating GDP, as the countof intermediate transactionseparately would lead todouble counting & hence

blowing up the value of GDP.Example

GDP is only concerned with new or

current production. Old output is notcounted in current GDP as it wasalready counted back at the time it was

produced. GNP (Gross National Product): A

measurement of the total market valueof all the final goods & services

produced in an economy, with the


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resources of a nation regardless ofwhether these resources are located in

that nation or abroad, in one year.

o Calculating GDPGDP is calculated in two ways: The expenditure approach Adding

up the amount spent on all finalgoods during a given period.

The income approach Adding upthe income i.e rents, interest & profits

received by all factors of productionin producing final goods. These two methods yields same value

as every payment (expenditure) by abuyer is at the same time a receipt

(income) for the seller.The Expenditure Approach


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There are four maincategories of expenditure

Personal consumptionexpenditures (C)

Gross Private domesticinvestment (I)

Government purchases (G) Net exports (X) The expenditure approach

calculates GDP as

GDP = C + I + G + X

1. Personal consumptionexpenditures (C)

A large part of GDPThree main categories are:


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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 domesticinvestment (I)

Investment refers to the purchaseof new capital such as housing,plants & equipment & inventory

Investment can be made both byprivate as well as public sector.

3. Government purchases (G)


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Purchases of newly producedgoods & services by central,

state & local governments. Includes all wages & salaries of all

government workers.

4. Net exports (X) Net exports are total exportsminus total imports.

Net exports can be positive ornegative.

The Income Approach The four components are National income (N) Depreciation (D)


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Indirect taxes minus subsidies(T)

Net factor payments to therest of the world (F)

GDP is calculated asGDP = N + D + T + F

1. National income (N) National income is the

aggregate factor income that

arises from the currentproduction of goods &services by the nationseconomy.

It is the sum of five items: Compensation of employees

Largest of five items. Includes


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Salaries & wages paid tohousehold by firms & by

government. Proprietor's income Income

from unincorporated businesses. Corporate profits Income of

corporate businesses.

Net interest Interest paid bybusiness.

Rental income Income receivedby the property owners in the formof rent.

2. Depreciation Capital assets wear out or

become obsolete over time.The measure of this decreasein value of capital assets iscalled depreciation.


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3. Indirect taxes minus subsidies(T)

In calculating final sales, indirecttaxes such as sales tax, custom

duties and license fees areincluded. These taxes are counted on

expenditure side, they must also becounted on income side also.

Subsidies are payments made bythe government. These subsidies are subtracted

from the national income to getGDP.

For example, Farmers receivesubsidies from government.


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Subsidy payments are incometo farm proprietors, thus part ofnational income, but they didnot come from the sale ofagricultural goods, so not apart of GDP.

To balance the expenditureside with the income,subsidies need to besubtracted.

4. Net factor payments to therest of the world (F)

Net factor payments to the rest

of the world is (the paymentsof factor income to the rest ofthe world) - (the receipts of


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factor income from the rest ofthe world)

National income is income offactors of production owned bya nation.

GDP, is the output produced

by the factors of productionlocated within the nation.

National income includes

some income that should notbe counted in GDP (incomethat a nations citizen earnabroad), while it may not

include some income thatshould be counted in GDP(foreigners income in nation).


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ECONOMIC ENVIRONMENT

The economic environmentis an amalgamation of variouseconomic factors, such as totalemployment, productivity,income, wealth and inflation

These factors influence thespending patterns ofindividuals and firms.

The existing economicenvironment of business ishighly complex & it is notalways easy to comprehend it.

It is this reason why differentpersons interpret it differently& the firms operating in the


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same economic environmentoften take different decisions.

Eg., In Inflationary situation,some companies may sell theirentire output, while others maywithhold a part of their supply

with expectation that a furtherincrease would bring themlarger 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: Highemployment represents a positive


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picture of the economy.

Productivity: This is the outputgenerated from a given amount ofinputs. High levels of productivitysupport the economic environment.

Factors Affecting the EconomicEnvironment

The economic environment of a nation aswell as the world is impacted by:

Inflation and deflation: Inflationary anddeflationary pressures alter thepurchasing power of money. This has adirect 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 moneytowards businesses.


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3. Exchange rates: This impactsthe price of imports, the profitsmade by exporters and investorsand employment levels (alsothrough the impact on thetourism industry).

The economic environment isalso influenced by variouspolitical, social andtechnological factors. These

include a change in governmentand the development of newtechnology and business tools.

FINANCIAL MARKET

Financial market is amechanism that allows peopleto buy and sell (trade) financial


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securities (such as stocks andbonds), commodities (such asprecious metals), and otherfungible items (crude oil,wheat, orange juice) of valueat low transaction costs.

Money Market The money market is the global

financial market for borrowing andlending of short-term funds (less than

one year). As per RBI definitions A market for

short terms financial assets that areclose substitute for money, facilitatesthe exchange of money in primaryand secondary market.

It doesnt actually deal in cash ormoney but deals with substitute of


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cash like promissory notes &government papers which can

converted into cash without any lossat low transaction cost.

It includes all individual, institution.

Features of Money Market

Transaction have to be conductedwithout the help of brokers.

It is not a single homogeneousmarket.

The component of Money Marketare the commercial banks &NBFC (Non-banking financialcompanies).

In Money Market transaction cannot take place like stockexchange, only through oral


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communication, relevantdocument and writtencommunication transaction can bedone.

Objective of Money MarketTo provide a reasonable

access to users of short-termfunds to meet theirrequirement quickly,adequately at reasonable cost.

Structure of Indian MoneyMarket

Money market existed in Indiaduring the pre-independence

period, but was far moreundeveloped. Indian money market is broadly

divided into following sectors, viz.,


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The unorganized

The organized

Co-operative The rates of interest between the

sectors also differs.

Unorganized Sector

The most prominent are Indigenous banksMoney lenders

Chits NidhisORGANISED STRUCTURE Reserve bank of India

DFHI (Discount and financehouse of India)

Commercial banks


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Development bank IDBI,ICICI,NABARD, LIC, UTI etc.

CO-OPERATIVE SECTOR State cooperativea. Central cooperative banksb. Primary Agri credit societiesc. Primary urban banks State Land development

banks Central land development

banks Primary land development

banks

Capital Market


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A capital market is a marketfor securities (debt or equity),where business enterprises(companies) and governmentscan raise long-term funds.

It is defined as a market inwhich money is provided forperiods longer than a year.

o The market where investment

funds like bonds, equities andmortgages are traded is known asthe capital market.

o The primal role of the capital

market is to channelizeinvestments from investors who


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have surplus funds to the oneswho are running a deficit.

o The capital market offers bothlong term and overnight funds.

o The financial instruments that have

short or medium term maturityperiods are dealt in the moneymarket, whereas the financialinstruments that have long maturityperiods are dealt in the capital

market.o The different types of financial

instruments that are traded in thecapital markets are equityinstruments, credit marketinstruments, insuranceinstruments, foreign exchange


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instruments, hybrid instrumentsand derivative instruments.

Structure Of Capital Marketo Capital Market can be divided

into two constituents: The Financial Institutions

The Securities Market

The Financial Institutionse.g., ICICI, IDBI, LIC, UTI,

etc. provide long term &medium term loan facilities.

The Securities Market: isdivided into

The gilt-edged market (or themarket for governmentsecurities)


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The Corporate securitiesmarket

The gilt-edged market (or themarket for governmentsecurities)

Risk free market, as thegovernment cannot defaulton its payment obligations

RBI plays a dominant role inthe government securities

b. The Corporate securities

market Securities issued by the firms

(i.e shares, bonds)


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It consists of new issuesmarket (primary market) &the stock exchange(secondary market) Indian Capital Market

The Indian Equity Markets and the

Indian Debt markets together formthe Indian Capital markets

The Indian Equity Marketdepends mainly on global fundsflowing into equities and theperformance of various companies.

The Indian Equity Market is almostwholly dominated by two majorstock exchanges -National Stock

Exchange of India Ltd. (NSE) andThe Bombay Stock Exchange(BSE).


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Debt market refers to thefinancial market whereinvestors buy and sell debtsecurities, mostly in the formof bonds.

Indian debt market is one of

the largest in Asia. The most distinguishing

feature of the debt instrumentsof Indian debt market is that

the return is fixed.

This means, returns arealmost risk-free. This fixed

return on the bond is oftentermed as the coupon rate orthe interest rate.


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Therefore, the buyer (of bond)is giving the seller a loan at afixed interest rate, whichequals to the coupon rate.

Indian debt market can beclassified into two categories:

Government Securities Market

(G-Sec Market): It consists of

central and state governmentsecurities. It is also the mostdominant category in the Indiadebt market.

Bond Market: It consists ofFinancial Institutions bonds,Corporate bonds.


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INDIAN ECONOMY The economy of India is the fourth

largest by purchasing power parity(PPP).

In the 1990s, the country began toexperience rapid economic growth,as markets opened for internationalcompetition and investment.

In the 21st century, India is anemerging economic power withvast human and natural resources,

and a huge knowledge base. Economists predict that by 2020,India will be among the leadingeconomies of the world.

Economy transformed fromprimarily agriculture, forestry,fishing, and textile


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manufacturing in 1947 tomajor heavy industry,transportation, andtelecommunications industriesby late 1970s.

Salient features of IndianEconomy

Indian Currency andExchange Rate

Gross Domestic Product(GDP)

Indian Foreign Trade:Principal export trade with

European Union, United States,and Japan. Main commodities areagricultural and allied products,


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gems and jewelry, and ready-made garments. Iron ore,minerals, and leather and leatherproducts also important.

Principal import trade with

European Union, United States,and Japan. Major imports oilproducts from Middle East. Othermajor imports like chemicals,

dyes, plastics, pharmaceuticals,precious stones, iron and steel,fertilizers and pulp paper andpaper products.


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Energy:India importer ofpetroleum and natural gas, but hasabundant coal, hydroelectricpower (especially in parts ofNorth India), and growing nuclearpower industry.

Minerals:Basic minerals: iron,bauxite, copper, lead, zinc, mica,uranium ore, rare earths.

Agriculture:Around 45 percent (136million hectares) of total landcultivated, 27 percent double cropped,effectively giving India 173 millionhectares of cultivated land. Rice,

wheat, pulses, and oilseeds dominateproduction; commercial crops--sugar


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(India world's largest producer),cotton, jute also important.

Green Revolution technologicaladvances and improved high-yielding variety seeds, and

increased fertilizer production andirrigation between mid-1960s andearly 1980s. Dairy farming,fishing, and forestry important

parts of agricultural sector.

Science and Technology:Major government investment

(80 percent of total) in controlof science and technologysector. Substantial


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investments in research anddevelopment in defense,nuclear science, space, andagriculture.BALANCE OF PAYMENTS

Balance of payment (BoP) is a

statistical statement thatsummarizes, for a specificperiod, transactions betweenresidents of a country and the

rest of the world. BoP comprises current

account and capital account.

In Current account, balance oftrade, net factor income from


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abroad and net foreign aidtransfers are included.

In Capital account, deposits &financial investments in Indiaby foreigners or by an Indian inabroad, foreign exchange

reserves are included.

There are many signals that theBoP account of a country gives out.

For example, large current accounttransactions indicate towardsstrength of an economy.

This was the case with India asreduction in trade restrictions and

duties led to increase in bothexports and imports after 1991.


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Also large capital accounttransactions may indicate well-

developed capital markets of aneconomy.

Healthy BoP positions or surplus

in capital and current accountkeeps confidence in the economyand among investors.

However, healthy BoP positions

may be different for differentcountries.

For example, surplus in current

account is often more importantfor developed countries thansurplus in capital account as most


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of them have sufficient capital tofund their investments.

On the other hand, developingcountries like India may placemore importance on capitalaccount as reserves and funding

for investment is crucial for them.

How does BoP influenceeconomic policy?

A healthy BoP position can signaldomestic currency appreciation,hence encouraging businesses toengage in future contracts

accordingly.Indias current account share was

almost 60% in 1991-92, but


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reduced to around 44% in 2007-08. Also, mismatch has beenmuch greater in capital account inrecent years, which gave rise toIndias foreign exchange reserves.

Over the years, these trends haveforced policy makers to makepolicies keeping in mind foreignflows (capital) and effects of

policies on them.However, policies at the same

time could be held responsible forsuch flows.

Indias BoP


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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 threequarters of 2008.

After the reforms in 1991, Indiasposition of merchandise trade (exportsand imports of goods) kept ondeteriorating, but its position oninvisibles (services, current transfersetc) improved during the period.

However, one of the major factors forincreasing current account deficit inthe last few years has been a rising oilimport bill.

In 2007-08 it had a capitalaccount surplus of $108,031million.


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In the same year it increased itsforeign exchange reserves by$92,164 million, which providedstability to the economy.

Foreign investments haveincreased since 1991, peaking in2007-08 to $44,806 million.

BUSINESS CYCLE A business cycle is the period

of growth and decline in aneconomy.

It can be defined as Wavelikefluctuations of businessactivity characterized by

recurring phases ofexpansion & contraction in


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periods varying from three tofour years.

The National Bureau of EconomicResearch (NBER) analyzeseconomic indicators to determine

the phases of the business cycle.The Business Cycle Dating

Committee uses quarterly GDPgrowth rates as the primaryindicator of economic activity.

However, it also uses monthlyfigures, such as employment,personal income, industrialproduction and retail sales.

CHARACTERISTICS OFBUSINESS CYCLE

1. Recurring Fluctuations:


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Characterized by fluctuations whichoccur periodically in a free rhythm.

Implies that the recurrence ofexpansion & contraction has nofixed period.

2. Period of business cycle islonger than a year:

A period is 3 4 yrs

In some cases, cycles are shorteror longer than those of normal.

In any case, period of a cycle is not

shorter than one year.

3. Presence of the alternatingforces of expansion &contraction:

Business cycle is characterized byalternating forces leading toprosperity & depression.


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These forces are in-built in thesystem.

4. Phenomenon of the crisis: Implies that the peak & trough are

asymmetrical.

Prosperity phase comes to endabruptly whereas recovery phase isgradual & slow.

Phases Of Business Cycle There are four stages in the

business cycle:

Recession - When the economystarts slowing down.

Depression or Trough - Whenthe economy hits bottom.

Recovery - When the economystarts growing again.


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Prosperity or Peak - When theeconomy is in a state of "irrational

exuberance."

From trough to peak, there is

expansion period & from peakto trough the contractionphase.

1.Recession:It is a relatively shorter period.

Forces of expansion getsweakened & forces ofcontraction get strengthened.


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Characterized by liquidation instock market, strain in bankingsystem, liquidation of bankloans, abandoning of newprojects.

During recession, the production ofconsumer goods doesnt declineimmediately, even when theincomes of people fall.

The demand for consumptiongoods falls with a lag.

On the other hand, fall in theproduction of Capital goods isdramatic.

Signs of recessions are notimmediately noticed. The most


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noticeable signal is the weakeningof the stock market.

During recession, banks &other financial institutions donot reach the stage of

bankruptcy, this developswhen depression sets in.

2. Depression:

Recession ultimately mergesinto depression which is thephase of relatively loweconomic activity.

When economy moves fromrecession to depression, thereis a notable fall in production


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of goods & services & inemployment.

This decline in production isnot uniform.

Manufacturing, mining &

construction output reduction aresignificant.

Industries producing machine,tools, plants, equipment & steel arehighly effected.

In these industries employmentfalls rapidly.

During depression when incomesof household falls drastically, there

is a subsequent reduction in theexpenditure on durable goods.


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Production & employment in non-durable goods sector has a little

effect.During depression, in earlier stage,

the price falls, despite the reductionin output of goods & services.

As the contraction proceeds,purchasing power of peoplesteadily fall.

Characterized by a notable fall inproduction, increased

unemployment & a rapid fall in thegeneral price level.

3.Recovery:

Therecovery is gradual.Starts when the prices stopsfalling.


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Generates Income &employment which createsadditional demand.

Pressure for increasing theproduction is created.

Revival of stock activities.Upward movement of price of

securities indicate the recoveryof profits.

New products & newtechnologies are introduced.

When this expansionproceeds, wages & salariesincreases, there is an effectivedemand for other newprojects.


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The phase of recovery tendsto move into the phase ofprosperity.

4.Prosperity

Begins under the stimulus of

certain forces.These forces create expectations

of rising profits, thus inducing theentrepreneurs to increase thescope of activities.

In this phase, the wages andsalaries increase rapidly, thus, thedemand for consumption of goodsalso increases.

The supply of goods, in later stage,increases with a lag which leads torise in prices.


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A marked feature is expansion in

bank deposits & the supply ofcurrency.

Prices do not rise uniformly in thisphase.

The rising profits boost up thestock prices of securities.

During the prosperity phase,expansion itself brings the series offorces which ultimately led to the

beginning of recession.The most important is the gradual

increase in the costs relative ofprices.

In early stages, there is a risinggap between the costs & prices.


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When there is a gradual increase incosts relative to price, the profit

margin narrows down.The reason being the increasing

demand of materials, labor, whichcannot be met from reserves.

Another reason for the rise in costsin the later phase is utilization ofsub-standard equipment, likeinferior workmen & less efficientmanagement.

The later stage of prosperity phaseled to the beginning of recession &thus the cycle repeats.

CAPITALIST ECONOMY

An economic system is basedupon the principle of "supply anddemand." People produce goods


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that others want, in order to sell orexchange for a profit - the goalbeing to accumulate wealth.

A capitalist economy alsoknown as the free marketeconomy can be defined as an

economic activity, where themeans of production are privatelyowned.

It can also be defined as: An economicsystem in which the means of

production and distribution are

privately or corporately owned anddevelopment is proportionate to theaccumulation and reinvestment of

profits gained in a free market.


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Most of the economies over the worldhave enriched their economic system

by implementing capitalist norm in therecent years.

In such form of economy there is noGovernment interference.

The basic characteristics of suchtypes of economic system are asfollows:

More private participation in the

field of economic activities Free environment to compete in

the economy

Individuals and firms act for profitmotive

High freedom for choice to theconsumers

Government acts as a police state.


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Capitalism is comprised of

individuals, enterprises,markets, income andgovernment.

Individuals Individuals engage in a

capitalist economy asconsumers, labourers, andinvestors.

As consumers, individuals

influence production patternsthrough their purchasedecisions, as producers will


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change production to producewhat is most profitable (mostoften what consumers want tobuy).

As labourers, individuals may

decide which jobs to preparefor and in which markets tolook for work.

As investors they decide how

much of their income to saveand how to invest theirsavings.

These savings, which become

investments, provide much ofthe money that businessesneed to grow.


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Businesses

Business firms decide what toproduce and where thisproduction should occur.

They purchase inputs(materials, labour, and capital).

Businesses try to influenceconsumer purchase decisionsthrough marketing andadvertisement as well as thecreation of new and improvedproducts.

To be successful, firms mustsell a quantity of their product


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at a certain price to yield aprofit.

In a capitalist nation,businesses decide when andhow much they want to investin infrastructure, capital and

other resources necessary inproduction.

The market

The market is a term used byeconomists to describe acentral exchange throughwhich people are able to buy

and sell goods and services.In a capitalist economy, the

prices of goods and services


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are controlled mainly throughsupply and demand andcompetition.

Supply is the amount of agood or service produced by a

firm and available for sale.Demand is the amount that

people are willing to buy at aspecific price.

Prices tend to rise whendemand exceeds supply andfall when supply exceedsdemand.

Competition arises when manyproducers are trying to sell the


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same or similar kinds of products tothe same buyers.

Competition is important incapitalist economies because itleads to innovation and morereasonable prices as firms thatcharge lower prices or improve thequality of their production can takebuyers away from its competitors.

Without competition monopoly maydevelop.

Income

Income, in a capitalist economydepends primarily on what skillsare in demand and what skills arecurrently being supplied.

People who have skills that are inscarce supply are worth a lot more


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in the market and can attract higherincomes.

Competition among employers forworkers and among workers forjobs, help determine wage rates.

Firms need to pay high enoughwages to attract the appropriateworkers; however, when jobs arescarce, workers may accept lower

wages.Labour unions and thegovernment also influence wagesin capitalist nations.

Unions act to represent labourersin negotiations with employers.


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The government

In capitalist nations, thegovernment does not prohibitprivate property, or preventindividuals from working wherethey please.

The government also does notprevent firms from determiningwhat wages they will pay andwhat prices they will charge for

their products.

The government also carriesout a number of economic

functions.Government agencies regulate

the standards of service in


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many industries, such asairlines and broadcasting.

In addition, the governmentregulates the flow of capitaland uses things such as theinterest rate to control factors

such as inflation andunemployment.

INTERNATION

ALINSTITUTIONS


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IMF International MonetaryFund

IBRD International Bank forReconstruction &Development

Also Known as World BankITO International Trade

OrganizationThe International Monetary

Fundo The International Monetary

Fund (IMF) is the international

organization formed with astated objective of stabilizing


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international exchange ratesand facilitating development.

o The IMF was formallyorganized on December 27,1945, when the first 29countries signed its Articles of

Agreement.o Its headquarters are in

Washington, D.C., UnitedStates.

o The IMF describes itself as "anorganization of 186 countries,working to foster global

monetary cooperation, securefinancial stability, facilitateinternational trade, promote


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high employment andsustainable economic growth,and reduce poverty".

o Today, the number of IMFmember countries has more

than quadrupled from the 44states involved in itsestablishment.

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,


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Mexico, Spain, Brazil, SouthKorea, Venezuela

IMF is controlled by a BoardOf Governors who meet oncein a year to take major policy

decisions.Member states elect the

Executive Board members.The voting power of each

country depends on its annualcontribution.

Objectives of IMF

To promote international monetarycooperation through a permanent


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institution which provides themachinery for consultation &

collaboration on internationalmonetary problems.

To facilitate the expansion &balanced growth of internationaltrade & to contribute thereby tothe promotion & maintenance ofhigh level of employment.

To promote exchange stability.

To give confidence to members by

making the Funds resourcesavailable to them.

Membership qualificationso Any country may apply for

membership to the IMF.


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o The application will beconsidered first by the IMF'sExecutive Board.

o After its consideration, theExecutive Board will submit areport to the Board of

Governors of the IMF.

The Board of Governors after

adopting it, the applicant stateneeds to sign the IMF'sArticles of Agreement andfulfill the obligations of IMF

membership.Any member country can also

withdraw from the Fund.


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World Bank

World Bank is a term used todescribe an international financialinstitution that provides loans todeveloping countries.

The World Bank has a stated goal

of reducing poverty.The World Bank comprises of two

institutions: the International Bankfor Reconstruction andDevelopment (IBRD) and theInternational DevelopmentAssociation (IDA)

The World Bank headquarters arein Washington, D.C.


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The World Bank sees the fivekey factors necessary foreconomic growth as:

Build capacity:Strengthening governmentsand educating governmentofficials.

Infrastructure creation:Implementation of legal and

judicial systems for the

encouragement of business,the protection of individual andproperty rights and thehonoring of contracts.

Development of FinancialSystems: The establishment


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governmental organization(NGO) officers etc.

The Bank obtains funding for itsoperations primarily through theIBRDs sale of AAA-rated bonds in

the worlds financial markets.The IBRDs income is generated

from its lending activities.

The IDA obtains the majority of itsfunds from forty donor countries

who replenish the banks fundsevery three years, and from loanrepayments, which then becomeavailable for re-lending.

The President of the Bank isresponsible for chairing the


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meetings of the Boards ofDirectors and for overallmanagement of the Bank.

The Executive Directors,representing the Bank'smember countries, make up

the Board of Directors, usuallymeeting twice a week tooversee activities such as theapproval of loans and

financing decisions.Members

Some of the World Bankmember countries are

Afghanistan, Bangladesh,Canada, Australia, UnitedStates, Japan, Germany,


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France, United Kingdom,India, China, Italy, SaudiArabia, Russia, Netherlands,Belgium, Switzerland, Mexico,Spain, Brazil, South Korea,Venezuela

The International Bank forReconstruction and Development

(IBRD) has 186 member countries,while the InternationalDevelopment Association (IDA)has 168 members.

Each member state of IBRD should

be also a member of theInternational Monetary Fund (IMF)and only members of IBRD are


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allowed to join other institutionswithin the Bank (such as IDA).

BALANCE OF TRADEThe balance of trade is the

difference between themonetary value of exports and

imports in an economy over acertain period of time.

Trade surplus: A positivebalance of trade. It consists of

exporting more than isimported.

Trade deficit: A negativebalance of trade. It consists of

importing more than exporting.


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The balance of trade formspart of the current account.

The Balance of Trade isidentical to the differencebetween a country's outputand its domestic demand - thedifference between whatgoods a country produces andhow many goods it buys fromabroad.

India Balance of Trade India reported a balance of

trade deficit equivalent to10147.0 Millions in December

of 2009. India is leading exporter of

jewelry, textiles, chemicals,


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leather manufactures andservices.

India is poor in oil resourcesand is heavily dependent oncoal and foreign oil imports forits energy needs.

Other imported products are:machinery, gems, fertilizersand chemicals.

Main trading partners areEuropean Union, The UnitedStates, China and UAE.

FLUCTUATIONS IN 90s

The trade deficit was close to$6000 million in 1990-91.


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It came down substantially tillthe years 1993-94.

Again rose subsequently toaround $6500 million in 1997-98

It shot up to $9170 million and$12,848 million in 1998-99 and1999-2000.

Then fell to the $6000-6600range in 2000-01 and 2001-02.

VARIATIONS IN DEFICITThe deficit during the 1990s can be

broken up into four periods ofvarying duration.

First, during the years 1991-92 to1995-96, both exports and importsgrew at more or less similar rates,


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so that the deficit remained low inmost years and fluctuated within

the $1 billion to $5 billion range.Second, between 1995-96 and

1998-99, while imports continuedto grow, exports stagnated,resulting in a widening of the tradedeficit to $9.1 billion by the end ofthat period.

Third, in 1999-00, while

exports recovered, importssurged because of a rise in oilprices, resulting in thewidening of the trade deficit to

$12.8 billion. Finally, in 2000-01 and 2001-

02, while exports rose initially


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and then remained at thatlevel, imports stagnated andthe trade deficit returned to thelevels it had touched in themid-1990s.

WHY THIS BEHAVIOUR?

o The movements in oil imports,which are influenced by oilprices, have substantiallyinfluenced the size and

direction of Indias overallimport bill.

o During the period 1990-91 to2000-01, in all years excepting

one (1998-99), Indias non-oiltrade has either been in


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balance or reflected a surplusof exports over imports.

o The removal of restrictions andreductions in tariffs, was alsoexpected to result in a flow in

non-oil imports.o Movements have been quite

varied in the principalcategories of imports (oil, non-

oil bulk, export-related andother imports).

o While oil imports have fluctuatedquite significantly, as is to beexpected, and rose to relativelyhigh levels in 1996-97 and 1999-00


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to 2000-01, export related importshave 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 amountduring 1995-97 and stagnated

once again thereafter.

o Another striking feature is theincrease in "other imports"

between 1991-92 and 1998-99, after which they havestagnated.

o The share of that category,

which stood at 40 per cent in1990-91, rose to 47 per cent in1995-96 and 52 per cent in


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worsening of the trade deficitto an unsustainable extent.

ROLE OF CAPITALGOODS IMPORTS

One reason why the otherimports category did not risefurther was the fact that capitalgoods imports which rose from$4.2 billion in 1991-92 to $10.3billion in 1995-96, stagnatedthereafter, fluctuating between$9 and $10 billion till 1998-99.

This was the period when aftera short-term boom between

1993-94 and 1995-96, Indianindustry registered a


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deceleration in its rate ofexpansion.

This deceleration would haveaffected capital goods importsthrough its impact on

investment.After 1998-99, when industry

began its slide into near-recessionary conditions,

capital goods imports fellbelow $9 million in 1999-00touching $6.6 billion in 2000-01.

Since capital goods constitutean important component of


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other imports, though its sharefell from 60.4 per cent in 1995-96 to 40.4 per cent in 2000-01,this trend would havesubstantially influencedmovements in the other

imports category.

Thus, there appear to be onlytwo circumstances that can

lead to a substantial rise inthe import bill.

A recovery and sustainedgrowth in industrial

production. A sharp rise in oil prices.


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If either of these occurs, thetrade deficit is bound towiden, unless India is able tomake the breakthrough inworld markets.

eeb final word

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