Business Update
Prof. Prasanth Pillai
India: Quick Facts
Population
1.21 billion (2011 census)
Ranked 2nd
GDP
Nominal
$
1.95 trillion
PPP
$
4.68 trillion
Prasanth Pillai
India: Quick facts
GDP - composition by sector (2011 est.)
Agriculture: 17.2% Industry: 26.4%
Services: 56.4%
Labour force by occupation
Agriculture: 53%
Industry: 19% Services: 28%
Prasanth Pillai
THREE SECTORS OF THE ECONOMY
PRIMARY SECTOR
Produces raw materials (mostly)
Obtained directly from nature
Method
Extracted form the ground
Mining
Quarrying
e.g., stone, slate, minerals Collected E.g., fishing, forestry, farming
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SECONDARY SECTOR
Converts raw materials to finished goods
Nature of Output
Capital goods: for other producers
Help
make other goods (welding equipment) services (delivery van) used up when consumed, e.g., bread
Provide
Consumer goods: to final consumer
Consumables: Consumer
durables: last longer, e.g., TVs
Building and construction industries
Utilities: co.s that supply water, gas, electricity.
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Services
TERTIARY SECTOR
intangible, often used up at the time of consumption
Nature of output for businesses
e.g.,
helping in production, distribution of goods, advertising
for consumers
hairdressing,
restaurant meals, education, health care
for both
financial
services: e.g., banking, insurance
Prasanth Pillai
GROSS DOMESTIC PRODUCT
Gross Domestic Product
GDP
the market value of all final goods and services produced in a country in a given time period.
Market value Final goods and services Produced within a country In a given time period
four key aspects
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Gross Domestic Product
Market Value
goods and services are valued at their market prices
To add apples and oranges, computers and popcorn, we add the market values so we have a total value of output in dollars A final good (or service) is an item bought by its final user during a specified time period.
Final Goods and Services
A final good contrasts with an intermediate good, which is an item that is produced by one firm, bought by another firm, and used as a component of a final good or service.
Excluding intermediate goods and services avoids double counting
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Gross Domestic Product
Produced Within a Country
GDP measures production within a country ie. domestic production.
GDP measures production during a specific time period, normally a year or a quarter of a year.
In a Given Time Period
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GDP: Circular Flow of Expenditure and Income
GDP measures the value of production
equals total expenditure on final goods
equals total income.
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GDP: Circular Flow Diagram
GDP measures the value of production
equals total expenditure on final goods equals total income
The circular flow diagram shows the transactions among households,
firms, governments, and the rest of the world
Households Governments
Factor Markets
Goods Markets
Rest of the World Firms
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GDP: Households and Firms
Households and Firms
Households sell and firms buy the services of labour, capital, land and entrepreneurship in factor markets. For these factor services, firms pay income to households
wages for labour services for the use of capital for the use of land for entrepreneurship
interest rent
profit
Total Income ( Y ), is the total payment made by the firm to various factors of production
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GDP: Circular Flow Diagram
Households Y Governments
Factor Markets
Goods Markets
Y Firms
Rest of the World
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GDP: Goods Market
Consumption Expenditure
Firms sell and households buy consumer goods and services in the goods market
Consumption expenditure (C)
the
total payment for consumer goods and services
Investment Expenditure
Firms
buy and sell new capital equipment in the goods market and put unsold output into inventory purchase of new plant, equipment, and buildings and the additions to inventories form part of investment expenditure
Investment Expenditure ( I )
The
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GDP: Circular Flow Diagram
Households Y
C G
Governments
Factor Markets I
Goods Markets X-M
Rest of the World
Firms
X-M
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Gross Domestic Product
Government Expenditure ( G )
buy goods and services from firms and their expenditure on goods and services is called government expenditure.
Note:
Governments finance their expenditure with taxes and pay financial transfers to households, such as unemployment benefits, and pay subsidies to firms. These financial transfers are not part of the circular flow of expenditure and income.
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GDP: Circular Flow Diagram
Households Y
C G
Governments
Factor Markets I
Goods Markets
Rest of the World
Firms
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Prasanth Pillai
Gross Domestic Product
Rest of the World
Exports
Firms
in a country sell goods and services to the rest of the
world
Imports
Firms
buy goods and services from the rest of the world
Net Exports ( X M )
The value of exports (X ) minus the value of imports (M) is called net exports If net exports are positive, the net flow of goods and services is from countrys firms to the rest of the world.
If net exports are negative, the net flow of goods and services is from the rest of the world to countrys firms.
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GDP: Circular Flow Diagram
Households Y
C G
Governments
Factor Markets I
Goods Markets X-M
Rest of the World
Firms
X-M
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GDP: Circular Flow Diagram
blue and red flows are the circular flows of income and expenditure The sum of blue flows equal red flows ie.
Y = C + I + G + X-M
Households Y C G
Governments
Factor Markets I
Goods Markets X-M
Y Firms
Rest of the World
X-M
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GDP
The circular flow shows two ways of measuring GDP
GDP Equals Expenditure Equals Income
GDP = C + I + G + X M
Total expenditure on final goods and services equals GDP
Aggregate income equals the total amount paid for the use
of factors of production: wages, interest, rent, and profit.
Firms pay out all their receipts from the sale of final goods,
so income equals expenditure,
Y = C + I + G + (X M).
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Gross Domestic Product
Why Is Domestic Product Gross?
Gross means before deducting the depreciation of capital. The opposite of gross is net. Net means after deducting the depreciation of capital
Depreciation
the decrease in the value of a firms capital that results from wear and tear and obsolescence. the total amount spent on purchases of new capital and on replacing depreciated capital.
the increase in the value of the firms capital. Net investment = Gross investment - Depreciation.
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Gross investment
Net investment
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GDP: Nominal Real Potential
Nominal GDP
the value of goods and services produced during a given year valued at the prices that prevailed in that same year. Nominal GDP is just a more precise name for GDP.
Real GDP
the value of final goods and services produced in a given year when valued at the prices of a reference base year
Potential GDP
The value of real GDP when all the economys labor, capital, land, and entrepreneurial ability are fully employed is called potential GDP.
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Limitations of GDP
Some of the factors that influence the standard of living
and that are not part of GDP are
Household production Underground economic activity Health and life expectancy Leisure time
Environmental quality
Political freedom and social justice
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Prasanth Pillai
GREAT DEPRESSION
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1929-1939
Stock market
crash
Didnt realize
the effect it would have
No money to
replenish what was borrowed
Many found being broke humiliating.
The Roaring 20s
The new concept of
credit
People were buying:
Automobiles Appliances Clothes
Fun times reigned
Dancing Flappers
Drinking
Why was this bad?
Credit system
People didnt really have the money they were spending
WWI
The U.S. was a major credit loaner to other nations in need Many of these nations could not pay us back
The Stock Market
People bought stocks
on margins
If
a stock is $100 you can pay $10 now and the rest later when the stock rose
Stocks fall Now the person has less than $100 and no money to pay back
And then.
With people panicking
about their money investors tried to sell their stocks
This
leads to a huge decline in stocks Stocks were worthless now
People who bought on margins now could
not pay Investors were average people that were now broke
Herbert Hoover was president at the
start
Philosophy: Well make it! What He Did: Nothing The poor were looking for help and
no ideas on how to correct or help were coming
Farmers were already feeling the effects
Prices of crops went down Many farms foreclosed
People could not afford luxuries
Factories shut down Businesses went out
Banks could not pay out money People could not pay their taxes
Schools shut down due to lack of funds
Many families became homeless and had to live in shanties
Many waited in unemployment lines hoping for a job.
People in cities would wait in line for bread to bring to their family.
Some families were forced to relocate because they had no money.
Hooverville
Some families were forced to live in
shanty towns
A grouping of shacks and tents
in vacant lots
They were referred to as
Hooverville because of President Hoovers lack of help during the
depression.
A drought in the South lead to dust storms that destroyed crops.
The Dust Bowl
The South Was Buried
Crops turned to dust=No food
to be sent out
Homes buried Fields blown away
South in state of emergency
Dust Bowl the #1 weather
crisis of the 20th century
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Two Families During the Depression
A Farm Foreclosure
Videos
Please visit shark/common folder/BU
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BUSINESS CYCLE
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What does the GDP tell us?
If the GDP is larger than last year the economy is
expanding (getting bigger)
If the GDP is smaller, the economy is shrinking (getting
smaller)
Business Cycle
The Business Cycle allows people to understand the direction the economy (GDP) is going (growing or shrinking) and plan accordingly.
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Phases of Business Cycle
Expansion (Growing) Peak (Top) Contraction (Shrinking) Trough (Bottom)
Peak
Peak
Trough
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Expansion
During a period of expansion:
Wages increase
Low unemployment
People are optimistic and spending money High demand for goods
Businesses start
Easy to get a bank loan Businesses make profits and stock prices increase
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Peak
When the economic cycle peaks:
The economy stops growing (reached the top)
GDP reaches maximum Businesses cant produce any more or hire more people Cycle begins to contract
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Contraction
During a period of contraction:
Businesses cut back production and layoff people
Unemployment increases Number of jobs decline
People are pessimistic (negative) and stop spending money
Banks stop lending money
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Trough
When the economic cycle reaches a trough:
Economy bottoms-out (reaches lowest point)
High unemployment and low spending Stock prices drop
But, when we hit bottom, no where to go but up! UNLESS.
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Recession / Depression
A prolonged contraction is called a recession (contraction
for over 6 months)
A recession of more than one year is called a depression
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Business Cycle: Key drivers
Business Investment
When the economy is expanding, sales and profit keep rising, so companies invest in new plants and equipment, creating new jobs and more expansion. In contraction, the opposite is true
Interest Rates and Credit
Low interest rates, companies make new investments, adding jobs. When interest rates climb, investment dries up and results in less job growth
Consumer Expectations
Forecasts of an expanding economy fuels more spending, while fear of a recession decreases consumer spending
External Shocks
External Shocks, such as disruptions of the oil supply, wars, or natural disasters greatly influence the output of the economy
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Prasanth Pillai
THANK YOU
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