economic stabilization

8/2/2019 Economic Stabilization

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EconomicStabilization

18.10.2011


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Sources of Instability and Unsustainability

Inflation and deflationGlobal economic recession or economic sanctionsContinued disequilibrium in the supply and demand of foreignexchange coupled with excess volatility of the real exchangerateContinued large overall balance of payments surplus coupledwith rising foreign exchange reserves (the Japanese model)Energy and the environmentTechnological dependenceInter-regional and inter-personal disparity of the incomedistributionNon-economic sources--war, pestilence, naturaldisasters,terrorist activities


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Economic Growth Perspective-Instability 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 changeEnd (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


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Where India Stands?

Region GDP % of WorldGDP

GDP PerCapita

RealGDPGrowth

United States $14T 20% $47,000 1.3%

European Union $15T 21% $33,000 1.0%

Japan $4.3T 6% $34,200 -.4%

China $7.8T 11% $6,000 9.8%

India $3.2T 5% $2,800 6.6%

Ethiopia $66.3B .09% $800 8.5%

Source: CIA World Factbook


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The Cost of Economic Instability

1. Economic costs

GDP Gap : differencebetween the actual GDP and

potential GDP that could existif all resources were employed( = opportunity cost ).

Misery Index : the sum of monthly inflation and

unemployment rates.Uncertainty : of the futurecan cause even more problems

2. Social costs Wasted Resources : peoplenot allowed to be useful

members of society.Political Instability :economic instability greatly affects voter tendencies.

Crime and Family Values :many are forced to crime inorder to get by.


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Macroeconomic Equilibrium


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Macroeconomic Equilibrium

Aggregate Supply:

the total value of goods

and services that allfirms would produce ina specific period of timeat various price levels

Aggregate Demand : the total quantity of

goods and services

demanded at differentprice levels.


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Stabilization Policies

Demand-SidePolicies:

Demand-Sidebelieves that thegovernmentneeds to providestability.

It can take adirect role byspending, or anindirect role bylowering taxes,etc .

Supply-SidePolicies

Supply -SidePolicies: aredesigned tostimulate output andlower unemploymentby increasingproduction ratherthan demand.

The key is decreasinggovernments role inthe economy

deregulation: lesstaxes, laws, and rulethat may limitproduction.

Monetary Policies:

Monetarists: favour long-term monetary

growth at levels lowenough to controlinflation.

Money supply needsto constantly grow at

a slow and steadyrate too muchgrowth/too quickly willlead to inflation andother problems thatwill hurt in the long-run.


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Monetary Policy

... to assist for full-employment, non-inflationary output

QuantitativeTools

Bank Rate

Open MarketOperations

CRR/SLR

QualitativeTools

Moralsuation

Issue of

Directives

VoluntaryRestraints

Interventions

AdministeredPrice

SpecialIncentives


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Fiscal Policy

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

Public Expenditure

Social SecurityLaw and OrderEmergency ServicesHealthEducationDefenceForeign AidEnvironment

AgricultureIndustryTransportRegionsCulture, Media andSport

PublicBorrowing

Taxation

DirectIndirect


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The Golden Rule!

TransparencyStability

ResponsibilityFairness

Efficiency

economic stabilization

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