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Macroeconomic Policies in Developed and Developing Countries: Inflation and Growth

Indian Inflationis it a Threat to Growth and Development?

Chart 1: Inflation and Economic Growth in India

The chart above shows the annual rate of consumer prices inflation and real GDP growth for the Indian

economy. The table below provides summary data for key indicators:

Table 1: Indian Macro Indicators 2009 2010 2011 2012 2013 2014*

Real GDP (% change) 8.2 10.5 6.5 3.3 3.4 5.1

Consumer prices inflation (per cent) 12.4 10.5 8.4 10.4 11.1 9.0

Government fiscal balance (% of GDP) -9.4 -6.9 -8.1 -7.3 -6.9 -6.5

Current account balance (% of GDP) -2.7 -2.7 -4.2 -4.8 -4.1 -3.5

Source: OECD World Economic Outlook, data for 2014 is a forecast

(i) Analyse some of the causes of persistently high inflation in the Indian economy (20 marks)

(ii) Evaluate the extent to which high inflation is a significant threat to Indias continued growth and

development (30 marks)

Annual % change in real national output, Annual % change in consumer prices

India - Economic Growth and Inflation

Consumer price inflation (%) Real GDP (% change at constant 2004 prices)

06 07 08 09 10 11 12 13

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Percen

t

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

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JapanCan Abenomics lift the Japanese economy out of deflation and slow growth?

Table 2: Key Macroeconomic Indicators for the Japanese Economy

2009 2010 2011 2012 2013 2014

Real GDP (% change) -5.5 4.7 -0.6 1.9 1.8 1.5

Consumer spending (% change) -0.7 2.8 0.4 2.3 1.8 1.0

Gross fixed capital formation (% change) -10.6 -0.2 1.1 4.4 3.5 1.4

Exports of goods and services (% change) -24.2 24.4 -0.4 -0.1 1.9 7.8

Imports of goods and services (% change) -15.7 11.1 5.9 5.5 2.4 4.1

Output gap (% of potential GDP) -4.8 -0.9 -2.1 -0.9 0.1 0.8

Unemployment rate (% of the labour force) 5.0 5.0 4.6 4.3 4.0 3.9

Government fiscal balance (% of GDP) -8.8 -8.3 -8.9 -9.5 -10.0 -8.5

Short-term interest rate - per cent per annum 0.5 0.2 0.2 0.2 0.2 0.1

Consumer price - headline inflation per cent -1.3 -0.7 -0.3 0.0 0.2 2.3

Current account balance (% of GDP) 2.9 3.7 2.0 1.1 0.9 1.2

Source: OECD World Economic Outlook, 2014 data is a forecast

Chart 2: Japanese Real GDP and the Exchange Rate Index

(i) Analyse some of the cause of the persistent deflationary pressures experienced by the Japanese

economy in recent years (20 marks)

(ii) To what extent is the policy of Abenomics an appropriate strategy to drive improvedmacroeconomic performance in Japan? (30 marks)

Top Pane: Real GDP, Bottom Pane: Exchange Rate Index, 2005=100, monthly average

Japan - Real GDP and Exchange Rate Index

Japan, real GDP by expenditure, index, 2005 = 100 Japan, Exchange rate index 2005=100Source: IMF

06 07 08 09 10 11 12 13

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Index

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95

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101102

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Index

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Suggested reading

IndiaInflation, Growth and Development

Indias battle against inflation (FT, Jan 2014)www.ft.com/cms/s/0/f0256d5c-8506-11e3-a793-

00144feab7de.html

India central bank considers inflation targeting (FT, Jan 2014)www.ft.com/cms/s/0/cc77f4d6-8328-11e3-

86c9-00144feab7de.html

Food prices; a bricks and mortar problem for Indian economy (Reuters, Dec 2013):

www.reuters.com/article/2013/12/26/us-india-economy-inflation-idUSBRE9BP0HG20131226

In India, economic slowdown and inflation cause middle class to defer dreams (Washington Post, Nov 2013)

Click here

Is India becoming an inflation nation? (BBC, Oct 2013):www.bbc.co.uk/news/world-asia-india-24753675

What is wrong with Indias economy? (BBC, July 2013):www.bbc.co.uk/news/world-asia-india-23282350

High Inflation Deepens India's Stagflation Fears (WSJ, Dec 2013):

http://online.wsj.com/news/articles/SB10001424052702303949504579261780231175394

Abenomics and the Japanese Economy

Abenomics is the name given to a suite of measures introduced by Japanese prime minister Shinzo Abe after

his December 2012 re-election to the post he last held in 2007. His aim was to revive the sluggish economy

with "three arrows": a massive fiscal stimulus, more aggressive monetary easing from the Bank of Japan, and

structural reforms to boost Japan's competitiveness.(Source: FT Lexicon)

Why Abenomics holds lessons for West (Linda Yueh, Dec 2013):www.bbc.co.uk/news/business-25369031

Abenomics may take 10 years to work (BBC, Oct 2013):http://www.bbc.co.uk/news/business-24440893

Japan banks on success of Abenomics (Stiglitz, Apr 2013):

http://www.theguardian.com/business/2013/apr/08/japan-shinzo-abe-yen-economics

Abenomics: The objectives and the risks (BBC, July 2013):http://www.bbc.co.uk/news/business-23339712

What is Abenomics? (Business Insider, July 2013):www.businessinsider.com/what-is-abenomics-2013-3

FT articles on Abenomics -http://search.ft.com/search?queryText=abenomics

Abenomics one year on Sloman Economics site:http://pearsonblog.campaignserver.co.uk/?p=11625

http://www.ft.com/cms/s/0/f0256d5c-8506-11e3-a793-00144feab7de.htmlhttp://www.ft.com/cms/s/0/f0256d5c-8506-11e3-a793-00144feab7de.htmlhttp://www.ft.com/cms/s/0/f0256d5c-8506-11e3-a793-00144feab7de.htmlhttp://www.ft.com/cms/s/0/f0256d5c-8506-11e3-a793-00144feab7de.htmlhttp://www.ft.com/cms/s/0/cc77f4d6-8328-11e3-86c9-00144feab7de.htmlhttp://www.ft.com/cms/s/0/cc77f4d6-8328-11e3-86c9-00144feab7de.htmlhttp://www.ft.com/cms/s/0/cc77f4d6-8328-11e3-86c9-00144feab7de.htmlhttp://www.ft.com/cms/s/0/cc77f4d6-8328-11e3-86c9-00144feab7de.htmlhttp://www.reuters.com/article/2013/12/26/us-india-economy-inflation-idUSBRE9BP0HG20131226http://www.reuters.com/article/2013/12/26/us-india-economy-inflation-idUSBRE9BP0HG20131226http://www.washingtonpost.com/world/economic-slowdown-inflation-cause-indias-middle-class-to-defer-dreams/2013/11/05/ace864ba-4189-11e3-b028-de922d7a3f47_story.htmlhttp://www.washingtonpost.com/world/economic-slowdown-inflation-cause-indias-middle-class-to-defer-dreams/2013/11/05/ace864ba-4189-11e3-b028-de922d7a3f47_story.htmlhttp://www.bbc.co.uk/news/world-asia-india-24753675http://www.bbc.co.uk/news/world-asia-india-24753675http://www.bbc.co.uk/news/world-asia-india-24753675http://www.bbc.co.uk/news/world-asia-india-23282350http://www.bbc.co.uk/news/world-asia-india-23282350http://www.bbc.co.uk/news/world-asia-india-23282350http://online.wsj.com/news/articles/SB10001424052702303949504579261780231175394http://online.wsj.com/news/articles/SB10001424052702303949504579261780231175394http://www.bbc.co.uk/news/business-25369031http://www.bbc.co.uk/news/business-25369031http://www.bbc.co.uk/news/business-25369031http://www.bbc.co.uk/news/business-24440893http://www.bbc.co.uk/news/business-24440893http://www.bbc.co.uk/news/business-24440893http://www.theguardian.com/business/2013/apr/08/japan-shinzo-abe-yen-economicshttp://www.theguardian.com/business/2013/apr/08/japan-shinzo-abe-yen-economicshttp://www.bbc.co.uk/news/business-23339712http://www.bbc.co.uk/news/business-23339712http://www.bbc.co.uk/news/business-23339712http://www.businessinsider.com/what-is-abenomics-2013-3http://www.businessinsider.com/what-is-abenomics-2013-3http://www.businessinsider.com/what-is-abenomics-2013-3http://search.ft.com/search?queryText=abenomicshttp://search.ft.com/search?queryText=abenomicshttp://search.ft.com/search?queryText=abenomicshttp://pearsonblog.campaignserver.co.uk/?p=11625http://pearsonblog.campaignserver.co.uk/?p=11625http://pearsonblog.campaignserver.co.uk/?p=11625http://pearsonblog.campaignserver.co.uk/?p=11625http://search.ft.com/search?queryText=abenomicshttp://www.businessinsider.com/what-is-abenomics-2013-3http://www.bbc.co.uk/news/business-23339712http://www.theguardian.com/business/2013/apr/08/japan-shinzo-abe-yen-economicshttp://www.bbc.co.uk/news/business-24440893http://www.bbc.co.uk/news/business-25369031http://online.wsj.com/news/articles/SB10001424052702303949504579261780231175394http://www.bbc.co.uk/news/world-asia-india-23282350http://www.bbc.co.uk/news/world-asia-india-24753675http://www.washingtonpost.com/world/economic-slowdown-inflation-cause-indias-middle-class-to-defer-dreams/2013/11/05/ace864ba-4189-11e3-b028-de922d7a3f47_story.htmlhttp://www.reuters.com/article/2013/12/26/us-india-economy-inflation-idUSBRE9BP0HG20131226http://www.ft.com/cms/s/0/cc77f4d6-8328-11e3-86c9-00144feab7de.htmlhttp://www.ft.com/cms/s/0/cc77f4d6-8328-11e3-86c9-00144feab7de.htmlhttp://www.ft.com/cms/s/0/f0256d5c-8506-11e3-a793-00144feab7de.htmlhttp://www.ft.com/cms/s/0/f0256d5c-8506-11e3-a793-00144feab7de.html