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Showing posts with the label macroeconomics

Decision Making as Output and Bounded Rationality

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  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra
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Macroeconomic Scenario in India: A Note

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  The year 2020 is about to end and perhaps looking back it would be a year that would be best forgotten for all the things. The Chinese virus induced pandemic does not seem to subside with new mutations being reported and countries going into lockdowns ahead of Christmas. This is despite the vaccines are getting administered albeit the baby steps in combating this disease. While experts do believe the end game for the pandemic has begun, one has to await for some more time before any concrete results are likely to be visible. As one looks forward to 2021, at this stage it seems the economic recovery is still some way off across the world. There would be a new President in the United States and it must remain to be seen how President Joseph Biden would deal with China, the country primarily responsible for the current global crisis, social, economic and health.   The macroeconomic projections for India have been less worse than anticipated. The second quarter of the financial year
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Macroeconomics and Firm Decision Making

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  As observed in many past posts, economics has close linkages with real life. As practising managers or entrepreneurs economics helps in undertaking structured analysis and decision making. There are pointers towards increasing returns of decision making using structured tools like economics. Therefore, economics to a business practitioner would be indispensable. It is not that economics offers something new or novel. Many economic theories have been practiced consciously or sub-consciously over centuries by businessmen and others. What economists have done from Adam Smith onwards is to theorize the empirical observations. The empirical observations when aggregated would point to certain patterns which emerge as theory. For long, there were no distinction between macro or micro economics, something came into existence through the thoughts of John Maynard Keynes and his successors. Macroeconomics evolved in a different fashion in contrast to microeconomics. The former sounded glamorous
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Indian Economic Growth 2020-21: Some Thoughts

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  The GDP data of the first quarter 2020-21 is out. India has experienced YOY decline of 23.4% in the Q1. It is hardly surprising. The period of the first quarter of the pandemic year 2020-21. It was a period where there was a lockdown through the country for most part of the period. In fact, the lockdown began to be eased only in the middle of May which of course triggered the migration back home of the thousands of migrant workers from Maharashtra, Gujarat etc. Therefore, even though the economy began taking baby steps once again, the paucity of labour added to the shortage. Hence there was a widespread expectation of rapid collapse in the economic growth rate. Therefore, prima facie, the quarter was an outlier. In fact, the quarter has seen decline in economic growth across the world. The US recorded a YOY decline of 30%+ while Singapore recorded a decline in excess of 40%.   There is no surprise anywhere about the direction of the global economy. As the world reels from the pan
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The Dominance of the Dollar

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As the lockdown imposed to curb the spread of the Chinese flu sinks the global economy into a recession, perhaps unseen in recent times, the issue of dollar dominance and possible shortage once again is taking a centre stage. Dollar for long has dominated the international financial scene, post World War II in particular. Some experts believe, the financial crisis of 2008 highlighted the adverse consequences of dollar dominance. Yet they feel rather than a strategy to reduce the dollar dominance and its spread to rest of the world, the dominance has in fact been reinforced. The assets and liabilities denominated in dollars across the world continues to increase. This to some analysts puts pressure on the US Federal Reserve as it goes about its monetary policy.   The fears are nothing new or unusual. Post World War II, many countries feared the outbreak of World War III. The US was the only country that had escaped relatively unscathed in the War and thus dollar was the only currenc
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Will the Indian Lockdown Create Inflationary Tendencies?

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Some studies indicate a possibility of high inflation even in the excess of 10% within the next year. The expected inflation as per the surveys seem to point towards a jump of 3-4%. Interestingly, there is a divide among the economists over the after-effects of the Wuhan pandemic. The world having locked down for more than a month has without doubt created economic disruption both through Aggregate Demand (AD) and Aggregate Supply (AS) There has been an induced halt to aggregate demand with a similar restriction on aggregate supply. Furthermore, even with the lifting of lockdown, the propensity to self-protect might make prospective consumers wary of shopping thus lower AD. At the same time, the reluctance of the workers given the risks associated with the job tasks might make them skip from work thus adding to constraints in AS. Therefore an analysis would be worth pursuing over the likely inflationary impact or otherwise of the economic shutdown caused by the Wuhan flu. There
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A Note on Circular Flow of Income and National Income Accounts

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Macroeconomics differs from microeconomics in the mode of analysis. While the latter uses the bottom up approach using a profit maximising firm or utility maximising individual as the starting point, the former uses the geographic construct of an economy as a starting point. To borrow from the forest, one can analyse the forest from the point of the various animals, birds, reptiles, insects, plants, shrubs, creepers, trees, herbs, caves, water bodies, soil among many other entities found in the forest. One can analyse them individually, their functions in a group, their interactions, etc. This is bottom up approach, thus the micro way of analysis. The other way is to have helicopter view or bird’s eye view of the forest. One can observe the total area the forest occupies as percentage of landmass, the oxygen content released by the forest, the carbon dioxide and other green gases absorbed by the forest, the amount of water by volume in the forest, the nature of flora and fauna in th
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Caselets in Macroeconomics

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Caselet I- Rupee depreciation and textile industry The recent rupee depreciation has enabled the Indian textile industry to hold yarn prices and also increase yarn exports.   Though Indian industry demonstrates stronger backward linkages, low labour costs have enabled countries like Bangladesh, Pakistan and Vietnam to overtake India in terms of capturing textile export markets.   With Chinese Yuan appreciating, Indian exports have become more competitive. Indian textile export share is marginal ( 5% as compared to China’s 30%). Many analysts advocate leveraging the current scenario to capture the global market at the expense of China.   As a CEO of leading textile manufacturer, you are planning to go in for capacity expansion. Capacity expansion necessitates funding and thus you approach a consortium of banks. Prepare the detailed projections convincing the bankers how the global economic trends portray well for Indian textile exporters. (Note: Use financial statements sh
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