1876 to 1929 (Classical theory)
Then great depression happened.
US AND UK changes
US - Tax increase by Herbet Hoover
UK- No change,state wouldn’t intervene
Then Keynes came into picture
1.Get govt to spend on public works program which is relatively cheaper 2.Put money into the hands of the people,increase in the consumption The problem is that of lack of aggregate demand.He gave a fiscal policy kind of solution..Why?
Aggregate demand was tackled.. Either through fiscal or monetary policy. Rate of interest – change in investment – change in demand
It is not just rate of interest, marginal efficiency of capital.(Keynes said that)
AD- CONSUMPTION,INVESTMENT,GOVERNMENT DEMAND
At height of prosperity,while consumption and investment (30 to 35%) Invest ment percentages came down...consumption didn’t (check empirical data) Check psychological factor of consumption.....
Unemployment vs output rationality
Based on the definition of unemployment
Fiscal theories based on Keynes theory
Upto 1970s everything was good. Then oil shock came up. “Philips curve relationship”
Then came up Monetarism.
They said Inflation is primarily a monetary effect. Monetary policies should be in place They said,they need a stable growth of money supply. Volatility gets changed.. In the short run Do not have fluctuations in money supply.
In long run,the nominal variable.
Fiscal policy doesn’t play a role.
The most recent thought is the Rational expectation thoughts. Anything which is systematic wont work. Unsystematic changes work. Supply side economics – LAFFERS CURVE
If you have very high tax rates,it will affect incentive to produce,supply etc.Low tax rates gives more incentives.India has seen some version of the supply side economics implemented on it. Like tax base widening etc.
Investment and Incremental Capital Output Ratio (ICOR) in Indian context is 4:1 Savings rate =Investment rate = 36%
ICOR = 4%
ICOR = I/Q
Q= I/ICOR = 36/4 = 12%
Difference between savings and investments = external savings
36.8+1.3 = 38.1
Domestics plus international savings
Circular flow model which has 5 different actors/players. Interaction between them..savings = leakages eco on track.
Output – (Land,Labour,capital) = residual (profit)
If i don’t do a lot of expenditure, we use it for leakages, savings,taxes and imports Leakages = Injections
When leakages > injections – contractions
When leakages < injections – expansions
-comparison with rest of the word
3 methods of national income
Product method/value added method
Income method – add wages,add rent,add interest,add profit Expenditure method –
C(house)+i(firms)+g(govt)+x-m (rest of world)
Financial assets investment not added to gdp
FII – BALANCE OF PAYMENTS accounts
NATIONAL INCOME ACCOUNTS – IN GDP
Income method (gdp at factor cost)
Expenditure method (gdp at market prices)
Durables,non durables,services – consumptions
Pensions,subsidies,scholarships are transfer payments but not in Lieu of current production...
Government expenses = government purchase plus transfer payments Govt purchases is taken in this mthod..but not transfer payments
Remittances are transfer payments (Saudi guy sending money to India)
Crowding out concept,consumption proportion etc are very important concepts. If consumption is stable, we need to look at the sectors
Gdp analysis – from macro to micro analysis can be done... (consumption goes down,which sector,which segment is driving it etc)
Used goods are not counted in gdp,financial transactions is not recorded in gdp. Concepts of national income
Receipts and payments( be careful)
Factor income is wages plus rent plus interest plus profit
We are not allowed to invest in property abroad as well as capital, net factor income tends to be negative. Depreciation is used...
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