Macro Economics Project
Executive Summary
Balance of Payment
BoP, also known as balance of international payments, deals with an economy’s transactions with the rest of the world, for a specified time period. It involves goods, services and income, financial claims and liabilities and transfers such as gifts and foreign aid.
Balance of Payment involves two kinds of accounts –
Trade balance, or for India’s case, Trade Deficit, is a major component of Current Account Deficit. It the output in the economy can be characterised as Y, below equations can be derived as follows:
Y = C + I + G + NX
NX=Y– (C+ I + G )
NX = (Y– C– G ) – I
= S – I
Where,
C: Consumption; I: Investment; G: Government Spending; NX: Net Exports; S: Saving. As we can see from the above derivation, NX can also be expressed as the difference between saving and Investment.
Based on the above premise of rising current account deficit in the country, in this report we offer insights into the causes of CAD, identifying them as implicit or obvious causes, while also exploring some practical, situational and structural causes that account for worsening the current account balance in India. We map our analysis using IS model for open economy, use the data for trade balance, oil and gold prices for around past twenty years, from 1990-2013, to do a regression analysis that helps us comment on the correlation that might exist between the two statistics. We also explore J curve effect by analysing trends in currency exchange rate and trade balance for year 2013. Having established the causes of CAD, we explore the concept of twin deficit and its importance in the current account deficit discussion.
We then go on to listi...
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4. http://www.imf.org/external/pubs/ft/fandd/basics/current.htm
5. www.tradingeconomics.com
6. ww.indiastat.com
7. Why Is the U. S. Current Account Deficit so Large? Evidence from Vector Autoregressions, Daniel David Bachman, Southern Economic Journal, Vol. 59, No. 2 (Oct., 1992) (pp. 232-240)
8. Nicholas Apergis & Konstantinos Katrakilidis & Nicholas Tabakis, 2000. "Current account deficit sustainability: The case of Greece," Applied Economics Letters, Taylor and Francis Journals, vol. 7(9), pages 599-603.
9. India’s Experience with Capital Flows: The Elusive Quest for a Sustainable Current Account Deficit, Ajay Shah, IlaPatnaik, NBER Working Paper No. 11387, May 2005
10. http://timesofindia.indiatimes.com/business/india-business/Indias-current-account-deficit-falls-to-5-2-billion-in-July-September-quarter/articleshow/26746231.cms?
The movie IOUSA is a documentary that draws attentions to the impact and magnitude of federal debt to the United States of America. It explores the history of the US federal debt since the independence day and the major events and the action that were taken. The movie discusses four major type of fiscal deficits demonstrating the irresponsibility and danger in each one of these types. These four sections are: the budget deficit, saving deficit, trade deficit and finally leadership deficit.
Though the world economy as a whole has grown in recent years, a factor that is not taken into account is that the number “of the poor in the world has increased by 100 million” (Roy 3). In other words, the gap between rich and poor is widening. For India, this has startling implications. Though it is a nation that is developing in many ways, it also is a nation blessed with over one billion citizens, a population tally that continues to grow at a rapid rate. This population increase will greatly tax resources, which can create a setback in the development process. The tragedy, of course, is that the world is full of resources and wealth. In fact, Roy quotes a statistic showing that corporations, and not even just countries, represent 51 of the 100 largest economies in the world (Roy 3). For a country struggling to develop, such information is disheartening. However, there is also a more nefarious consequence of the growing disparity between rich and poor, and power and money being concentrated in the hands of multinational corporations: war is propagated in the name of resource acquisition, and corruption can reign as multinationals seek confederates in developing countries that will help companies drive through their plans, resulting in not only environmental destruction but also the subversion of democracy (Roy 3).
The fact that majority of the capital funds was in the form of portfolio capital instead of foreign direct investment (FDI) had also worsen the situation. The ratio of portfolio capital to FDI had increased substantially from 1:1.3 in 1990 to 1:6.5 in 1993. Given the volatile nature, portfolio capital tends to respond with greater speed to changes in the environment.
The US has been in and out of debt countless times throughout history, going as far back as the Civil War. However, debt did not become a truly relevant problem until much later, in the 1980s (Budget Deficits). Up to that point, large budget deficits were generally only allowed during wartime, but this pattern ended after the Great Depression. Roosevelt’s New Deal meant that the government spent much more than it previously did, even after the economy improved (Budget De...
Economist John Maynard Keynes is credited with giving deficit spending academic legitimacy when he published “The General Theory” in 1936, even though many of his ideas were rebranded. (Deficit Spending, 2008) The advantages of deficit spending are that is helps
U.S Federal Deficit and Debts:Understanding the history and context. (2011, November 1). Utah Foundation. Retrieved January 25, 2014, from http://www.utahfoundation.org/img/pdfs/rr7
Michelis, L. (2011). The Greek Debt Crisis: Suggested Solutions and Reforms. The Rimini Centre Economic Analysis (RECEA), Italy.
The U.S. trade deficit has risen more or less steadily since 1992. In the second quarter of 2004, the trade deficit relative to GDP surpassed the 5 percent mark for the first time. Many economists already considered trade deficits above 4 percent of GDP dangerously high. The fear is that continued growth in this external imbalance of the U.S. economy will ultimately spook overseas investors. http://www.americanprogress.org/issues/2004/09/b193700.html
The Greek economy has seen a large collapse following the recent worldwide recession. The European Union has expressed concerns for the impact that Greece’s economic collapse will negatively affect other member nations. Greece and the European Union are working to reduce the Greek deficit and to contain the economic crisis to Greece.
In November of 2004, the United States ran a fifty-four billion dollar trade deficit, translating to over 600 billion for the entire year. This deficit is a result of the disparity between the amount of goods that the US imports and the amount it exports. To equalize this deficit in its current account, the American government sells assets from its capital account, often to foreign investors. This phenomenon is seen as a serious threat to the success and continued growth of the nation’s economy, tied in with popular concerns that the United States is losing its competitive and dominant edge in global economics. The traditional economic theory employed to solve this problem calls for a return to mercantile protectionism, through use of tariffs and subsidies to drive up the price of imports and lower the price of exports. Running contrary to this is a second option: increasing domestic savings and lowering government spending. These theories both aim to decrease American dependence upon foreign imports and investment, and ultimately equalize the enormous trade deficit that currently exists.
Subramanian, Arvind. India’s Economy is stumbling? The New York Times. August 31, 2013: A19. Print.
The exports in 2009 were negative 9.6 percent GDP and increased quickly in 2010 to 7.2 percent GDP. The imports in 2009 were also negative and higher than the exports with 13.9 percent and increased to 10.4 percent GDP (Briales, 2010). This shows that the imports and exports of the economy increased quickly and kept the consumption of the people up as they still wanted items sent from other places and their items were wanted in other countries
In the following report we have first tried to clear the concept of the multiplier then carried on with explaining various theoretical aspect of tax multiplier, government spending multiplier and planned investment multiplier. Then we have tried to compare the change in expenditure and change in GDP in Indian economy by providing data which was extracted through a secondary source.
The US Department of Treasury , "The Daily History of the Debt Results ." Last modified
We must avoid the temptation if at any given time our individual national economy is more prosperous than those of our other partner states, to be so arrogant as to forget that our economic situation may be suddenly reversed and that therefore we will soon need close links with our partner states in matters concerning both the intra-regional and extra-regional spheres. West Indian history abounds with instances of countries suffering sudden reversals of their economic fortunes.