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7 Business Perspectives
Module-2
Economic Perspectives of Business

Macro economic variables/ parameters

/Economic indicators of Business
INFLATION

MONEY
SUPPLY

GDP

INTEREST
RATES

EXCHANGE
RATE

National Income 4 versions

1. Gross Domestic Product (GDP)
2. Gross National Product (GNP)
3. Net Domestic Product (NDP)
4. Net National Product (NNP)
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GDP
Measures: GDP according to sector
(agriculture, mining, manufacturing and
service industries)
Significance: provides analysis of total output
at a high level of detail
Presented as: quarterly and annual totals
Focus on: real growth rate
GDP is one of the most basic and important
indicators of the overall heath of an economy
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Nominal GDP
Nominal GDP is the value of the total flow of goods and
services produced in an economy over a specified
period of time (usually a year) at current market
prices. In this calculation all the intermediate goods are
excluded and only the products for final consumption,
capital goods (machinery etc) or changes in stocks are
included. Intermediate goods are excluded because the
value of intermediate goods are implicitly included in
the prices of final products. Final products are meant
for final use or consumption and not used in finals
production or processing.
Nominal GDP: Total economic activity in current prices
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Real GDP
Real GDP is physical quantity of goods and
services produced. Since this physical
aggregate is highly heterogeneous involving
different units of measurement, it is
measuring only by production or quantity
index numbers. i.e. expressed in base-year
prices
Total economic activity in constant
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GDP Deflator
GDP deflator is a price index number which
can be applied to nominal GDP figure to
remove the effect of changes In the price
level.
GDP Deflator, measures the contribution to
GDP on account of increases in prices
GDP Deflator= Nominal GDP/Real GDP
GDP at current prices in the current year /
GDP at constant price in the current year
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Gross Domestic Product (GDP)

Price Tag
of a
countrys
economy

Gross Domestic
Product (GDP) is the
final value of goods
and services produce
in a country.
Symbolically,
GDP=GNP-(X-M)
Where,
X-Exports
M-Imports
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Analysis of Sectors/Sectoral shares

Sectoral share is the contribution of each sector
towards GDP.
Agricultural sector
Industrial sector
Service sector
Infrastructural sector.

Analysis of Sectors/Sectoral shares

SECTOR

2005

2013

Agriculture

18.6%

13.7%

Industry

7.6%

15.2%

Service

53.8%

56.5%

Infrastructure

3.5%

6.5%

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AGRICULTURAL OUTPUT
It is defined as consisting of those products
which are not consumed in further processing
within agriculture but are available for
consumption elsewhere.

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Role of Agricultural sector

Contribution to National Income

Major source of living
Important for industrial development
Important to Foreign trade
Major source of employment
Contribution to economic development.

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ELECTRICITY GENERATION
Production of bulk electric power for
industrial, residential, and rural use.
Public Sector Undertakings.
NTPC
NHPC
NPCI
Cost of Business firm.
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Inflation
Increase in price level Decrease in the value of
money is called inflation
Inflation reduces the value of money in economy
Different types of price indices are used like the
wholesale price index(WPI)
Consumer price index (CPI)
Producers price index (PPI)

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Inflation
YEAR

INTEREST
RATE

RATE OF
INFLATIO
N

2011June

8% -April

8.87%

2012Nov

8.5%oct

7.24%

MEASURES
OF RBI

MEASURES OF
GOVERNMENT

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Inflation Rate in India

MPBIM-BUSINESS PERSPECTIVES,
VIJAYALAKSHMI.S

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Causes of Inflation
Demand Pull Inflation
Increase in money supply
Increase in disposable
income
Increase in consumer
spending
Cheap monetary policy
Deficit financing
Expansion of service sector
Black money
Increase in exports

Cost Pull inflation

Shortage of factors of
production
Industrial dispute
Natural calamities
Artificial scarcities
Increase in exports
Law of diminishing returns
International factors

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Measures to control Inflation

Monetary Control:
Credit control
Demonetization of currency
Issue of new currency

Fiscal Measures
Reduction in unnecessary expenditure
Increase in Taxes
Increase in savings
Surplus budget

Other Measures
To increase production
Price control
Rationing

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Deflation
Decrease in price level Increase in the value
of money is called Deflation

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Supply of Money
The supply of money means the total amount
of money in circulation in an economy.

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Money

--Coins
-Currency deposits

Near Money

Time deposits and savings banks

deposits of commercial banks
Bills of exchange
Treasury bills
Savings bonds and certificate
Deposits of housing societies

-Demand Deposits

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Money supply
Measures: notes, coins and various bank
deposits
Significance: indicator of level of transactions
and perhaps, inflation or GDP. Crucial
parameter to ensure price stability and
economic growth

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 The Reserve Bank of India defines the monetary

aggregates as:
M1: Narrow Money: Currency with the public +
Deposit money of the public (Demand deposits with
the banking system + 'Other' deposits with the RBI).
M2: Transaction Money: M1 + Savings deposits with
Post office savings banks.
M3: Broad Money: M1+ Time deposits with the
banking system = Net bank credit to the Government +
Bank credit to the commercial sector + Net foreign
exchange assets of the banking sector + Government's
currency liabilities to the public - Net non-monetary
liabilities of the banking sector (Other than Time
Deposits).
M4: M3 + All deposits with post office savings banks
(excluding National Savings Certificates).
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Balance sheet of central bank

Liabilities

Assets

Monetary Liabilities

Monetary assets

1. Currency
2. Reserves (no account of reserve
ratio )
3. Other reserves

1.Credit
-Government
-Banks
-Commercial Institutions

Non Monetary Liabilities

Share capital
General Reserves

Non Monetary Assets

2.Reserves
-Forex
-Gold
3. Physical assets
-land
-Buildings

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 CRR: Cash reserve Ratio- under the monetary

credit policy of 2001-02 of the RBI,
commercial banks are required to maintain 6%
of their deposits with RBI
SLR: statutory Liquidity Ratio : SLR prescribes
certain percentage of deposits which the
banks have to maintain in the form of cash
and permitted assets and securities and
investments
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 Repo rate : this is the rate at which liquidity is injected

in to the system by the central bank. Banks borrow
money from the central bank against government
securities with an understanding to take them back
from the central bank at a pre-determined rate which
is defined as repo rate
Reverse Repo Rate: this is the rate at which liquidity is
absorbed from the system by the central bank. In this
case the central bank borrows the excess funds from
various banks at a pre-determined interest rate which
is defined as the reverse repo rate
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Foreign Trade
The size of the foreign trade is important
indicator of the macro economic environment,
particularly in relation to international
business
Foreign trade balance is the key indicator of
the contributions of the trade towards
national income foreign exchange reserves

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 Foreign Trade=Exports + Imports

Foreign Trade Balance=Exports Imports
If Positive, called Trade surplus
If negative, is called Trade Deficit
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Highlights on Foreign Trade

Trade deficit during Q1 of 2012-13 stood
lower at US$ 40.1 billion as compared with
US$ 46.2 billion during Q1 of 2011-12.

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Forex Reserves
Foreign Exchange reserves consisting of foreign
currency assets, gold holding of the central bank and
special drawing rights are key indicators of macro
environment
Foreign exchange reserve of a country Indicate a
countrys ability to:
Pay for Imports
Discharge its external debt liabilities
Raise fresh borrowings in international markets
Intervene in foreign exchange market to stabilize its
rate of exchange
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Special Drawing Rights An international type of monetary reserve

currency, created by the International Monetary
Fund (IMF) in 1969, which operates as a
supplement to the existing reserves of member
countries. Created in response to concerns about
the limitations of gold and dollars as the sole
means of settling international accounts, SDRs
are designed to augment international liquidity
by supplementing the standard reserve
currencies.

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 SDR: Special Drawing Rights- are the

international reserve asset created by IMF
which are also widely used as international
unit of account in international official
transaction. These are convertible in to
leading currencies of the world and are
universally accepted

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Exchange Rate
The rate at which domestic currency gets
exchanged for foreign currency is called
exchange rate.

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Economic infrastructure
1.Transportation
Road Transportation
Rail Transportation
Sea Transportation
Air Transportation
2.Communication
Telephone
Mobile Phone
3.Energy
4.Electricity
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Social Indicators
Economic growth without human
development is of very little use
Social development includes Education,
Training, Health care, Sanitation, Family
welfare, Water supply, social security, etc.
UN brings out HDI for various countries

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