About economic analysis

8/7/2019 About economic analysis

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About economic analysis Economic analysis is a process whereby strengths and weaknesses of an economy areanalyzed. Economic analysis is important in order to understand exact condition of aneconomy. It can cover a number of important economic issues that keep cropping upwithin a particular economy, which is being analyzed.

Macroeconomics and economic analysis Macroeconomic issues are important aspects of economic analysis process. However,economic analysis can also be done at a microeconomic level. Macroeconomic analysishelps in understanding fundamentals of an economy. Since such a form of analysisoperates on a wide scale, it helps one to analyze strengths and weaknesses of particular economies.

Macroeconomic analysis takes into account growth achieved by a particular economy or rather a particular sector of that economy. It tries to find out reasons behind a particular economic phenomena like growth or reversal of economy.

Inflation and economic analysis Many countries of world are plagued by a rising rate of inflation. Economic analysishelps in providing an explanation of why inflation has taken place. It also suggests waysin which rate of inflation could be brought down, so that economicdevelopment could continue.

Economic analysis and governmental policies Governmental policies and plans, pertaining to economy, have always been an importantpart of economic analysis. Since policies and plans adopted by a particular government isresponsible for shaping an economy, they are always closely scrutinized by variousprocesses of economic analysis.

Economic ratings and economic analysis Economic rating is another important part of economic analysis, as it provides anaccurate picture of how an economy was faring when those ratings were being calculated

Economic analysis and comparison of economic policies It is a good way to analyze an economy by comparing its policies with those followed byother economies. This is all more applicable in case of economies that are of similar types, for example developing economies.

Inflation in India In financial year 2007-08, average inflation in India was around 4.66 percent. This ratewas lower than average inflation of financial year 2006-07. In 2007-08, fiscal high pricesof food items were primary cause behind high rates of inflation. That high rate of inflation had to be controlled by banning a number of necessary commodities as well asvarious financial steps. High prices of oil were responsible for proportionately high rateof inflation in 2008-09.



GDP OF INIDIA

The Indian economy is the 12th largest in USD exchange rate terms. India is the secondfastest growing economy in the world. India’s GDP has touched US$1.25 trillion. Thecrossing of Indian GDP over a trillion dollar mark in 2007 puts India in the elite group of

12 countries with trillion dollar economy. The tremendous growth rate has coincided withbetter macroeconomic stability. India has made remarkable progress in informationtechnology, high end services and knowledge process services.

However cause for concern would be this rapid growth has not been an inclusive innature, in the sense it has not been accompanied by a just and equitable distribution of wealth among all sections of the population. This economic growth has been locationspecific and sector specific. For e.g. it has not percolated to sectors were labor isintensive (agriculture) and in states were poverty is acute (Bihar, Orissa, Madhya Pradeshand Uttar Pradesh).

Though India has the second highest growth rate in the world, its rank in terms of humandevelopment index (which is broadly used has a measure of life expectancy, adult literacyand standard of living) has gone down to 128 among 177 countries in 2007 compared to126 in 2006.

Indian GDP –Trend Of Growth Rate

1960-1980 : 3.5%1980-1990 : 5.4%1990-2000 : 4.4%2000-2009 : 6.4%

Contribution of Various Sectors in GDP

The contributions of various sectors in the Indian GDP for 1990-1991 are as follows:

Agriculture: - 32%Industry: - 27%Service Sector: - 41%


Agriculture: - 20%Industry: - 26%Service Sector: - 54%


Agriculture: - 17%Industry: - 29%



Service Sector: - 54%

It is great news that today the service sector is contributing more than half of the IndianGDP. It takes India one step closer to the developed economies of the world. Earlier itwas agriculture which mainly contributed to the Indian GDP.

The Indian government is still looking up to improve the GDP of the country and soseveral steps have been taken to boost the economy. Policies of FDI, SEZs and NRIinvestment have been framed to give a push to the economy and hence the GDP.

Inflation in India

Inflation is caused due to several

economic factors:

• When the government of a country print money in excess, prices increase to keepup with the increase in currency, leading to inflation.

• Increase in production and labor costs, have a direct impact on the price of thefinal product, resulting in inflation.

• When countries borrow money, they have to cope with the interest burden. Thisinterest burden results in inflation.

• High taxes on consumer products, can also lead to inflation.• Demands pull inflation, wherein the economy demands more goods and services

than what is produced.• Cost push inflation or supply shock inflation, wherein non availability of a

commodity would lead to increase in prices.

Problems

The problems due to inflation would be:

• When the balance between supply and demand goes out of control, consumerscould change their buying habits, forcing manufacturers to cut down production.

• The mortgage crisis of 2007 in USA could best illustrate the ill effects of inflation. Housing prices increases substantially from 2002 onwards, resulting in adramatic decrease in demand.

• Inflation can create major problems in the economy. Price increase can worsenthe poverty affecting low income household,

• Inflation creates economic uncertainty and is a dampener to the investmentclimate slowing growth and finally it reduce savings and thereby consumption.

• The producers would not be able to control the cost of raw material and labor andhence the price of the final product. This could result in less profit or in someextreme case no profit, forcing them out of business.



• Manufacturers would not have an incentive to invest in new equipment and newtechnology.

• Uncertainty would force people to withdraw money from the bank and convert itinto product with long lasting value like gold, artifacts.

Inflation in India EconomyIndia after independence has had a more stable record with respect to inflation than mostother developing countries. Since 1950, the inflation in Indian economy has been insingle digits for most of the years

Between 1950-1960

The inflation on an average was at 2.00%

Between 1960-1970

The inflation on an average was at 7.2%

Between 1970-1980The inflation on an average was at 8.5%.

Inflation At Present

Inflation in India a menace a few years ago is at a 30 year low. The inflation ended at alow of 0.61% in the week ended May 9, 2009 this after reaching a 16 year high of 12.91% in August 2008, bringing in a sigh of relief to policymakers.

monetary policy



Monetary policy is one of the tools that a national Government uses to influenceits economy. Using its monetary authority to control the supply and availablity of money, a government attempts to influence the overall level of economic activity in line with its political objectives. Usually this goal is"macroeconomic stability" - low unemployment, low inflation, economic growth, and a balance of external payments. Monetary policy is usually administered by a Government appointed "Central Bank", the Bank of Canada and the Federal Reserve Bank in the United States.

Central banks have not always existed. In early economies, governments would supply currency by minting preciousmetals with their stamp. No matter what the creditworthiness of the government, the worth of the currency dependedon the value of its underlying precious metal. A coin was worth its gold or silver content, as it could always be melteddown to this. A country's worth and economic clout was largely to its holdings of gold and silver in the national treasuryMonarchs, despots and even democrats tried to skirt this inviolate law by filing down their coinage or mixing in other

substances to make more coins out of the same amount of gold or silver. They were inevitably found out by the tradersmoney lenders and others who depended on the worth of that currency. This the reason that movies show pirates andthieves biting Spanish dubloons to ascertain the value of their booty and loot.

The advent of paper money during the industrial revolution meant that it wasn't too difficult for a country to alter itsamount of money in circulation. Instead of gold, all that was needed to produce more banknotes was paper, ink and aprinting press. Because of the skepticism of all concerned, paper money was backed by a "promise to pay" upondemand. A holder of a "pound sterling" note of the United Kingdom could actually demand his pound of silver! Whengold became the de facto backing of the world's currency a "gold standard" was developed where nations kept sufficiengold to back their "promises to pay" in their national treasuries. The problem with this standard was that a nation'seconomic health depended on its holdings of gold. When the treasury was bare, the currency was worthless.

In the 1800s, even commercial banks in Canada and the United States issued their own banknotes, backed by theirpromises to pay in gold. Since they could lend more than they had to hold in reserves to meet their depositersdemands, they actually could create money. This inevitably led to "runs" on banks when they could not meet theirdepositers demands and were bankrupt. The same happened to smaller countries. Even the United States Treasury hadto be rescued by JP Morgan several times during this period. In the late 1800s and early 1900s, countries legislatedtheir exclusive monopoly to issue currency and banknotes. This was in response to "financial panics" and bankinsolvencies. This meant that all currency was issued and controlled by the national governments, although they stillmaintained gold reserves to support their currencies. Commercial banks still could create money by lending more thantheir depositors had placed with the bank, but they no longer had the right to issue banknotes.

Modern Monetary Policy

Modern central banking dates back to the aftermath of great depression of the 1930s. Governments, led by theeconomic thinking of the great John Maynard Keynes, realized that collapsing money supply and credit availabilitygreatly contributed to the savagery of this depression. This realization that money supply affected economic activity led

to active government attempts to influence money supply through "monetary policy". At this time, nations createdcentral banks to establish "monetary authority". This meant that rather than accepting whatever happened to moneysupply, they would actively try to influence the amount of money available. This would influence credit creation and theoverall level of economic activity.

Modern monetary policy does not involve gold to a great extent. In 1968, the United States rescinded its promise to pain gold and effectively removed itself from the "gold standard". Since then, it has been the job of the Federal Reserve tcontrol the amount of money and credit in the U.S. economy. I doing this, it wants to maintain the purchasing power othe U.S. dollar and its comparative worth to other currencies. This might sound easy, but it is a complex task in aninformation age where huge amounts of money travels in electronic signals in microseconds around the world.

The Effectiveness of Monetary Policy



Balance Of Payments - BOP

What Does Balance Of Payments - BOP Mean?A record of all transactions made between one particular country and all other countries duringa specified period of time. BOP compares the dollar difference of the amount of exports andimports, including all financial exports and imports. A negative balance of payments means thatmore money is flowing out of the country than coming in, and vice versa.

Investopedia explains Balance Of Payments - BOP Balance of payments may be used as an indicator of economic and political stability. For example, if a country has a consistently positive BOP, this could mean that there is significantforeign investment within that country. It may also mean that the country does not export much of its currency.

This is just another economic indicator of a country's relative value and, along with all other indicators, should be used with caution. The BOP includes the trade balance, foreign investmentsand investments by foreigners.

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About economic analysis