MA ECONOMICS

MA ECONOMICS


NOTES AVAILABLE IN REASONABLE PRICE

NOTES AVAILABLE IN REASONABLE PRICE

Macroeconomics and Microeconomics: Chit Chat

  CHIT-CHAT TIME           Commerce Heaven (In this conversation after getting 1000 Rupees Khalid is going with his friend Tariq to purcha...

Monday, May 28, 2012

Budget 2012-13


Budget 2012-13 by Dr Ashfaque H Khan The present government will be presenting its fifth and the last budget on June 1, 2012. Given the persistence of political tension throughout the tenure, deterioration of security environment, unfolding of multiple epoch making events and intensification of the war on terror, presenting the fifth budget is in itself nothing short of a big achievement for the government. Budget 2012-13 is being prepared in an inhospitable economic environment, both domestically and externally. The domestic economic environment is largely a creation of the government itself. In fact, there is general consensus within and outside the country that the economy of Pakistan has never been in a state such as this until now. Pakistan has faced serious economic difficulties in the past, but has managed to sail through because of a strong and committed leadership and competent economic team. There is widespread scepticism as to the strength and effectiveness of both the leadership and the economic team which has rendered the people of Pakistan nervous about their own futures. It is well known that the budget is not only an account of resources and expenditure of the government but that it also reflects the policy of the government to address the challenges facing the economy. Declining investment and slowing economic growth, shrinking capacity of the economy to create jobs, rising poverty, persisting double digit inflation, mounting debt burden, depreciating exchange rate, emerging debt payment crisis, higher budget deficit, crippling effects of power sector mismanagement, and waning confidence of the private sector on the country’s economic management are some of the critical challenges currently confronting Pakistan. Budget 2012-13 must address these challenges. Expecting a serious, meaningful and reform-oriented budget in the tail end of the government’s tenure is too much. Fiscal indiscipline continues to this day, and as such the country has paid and is still paying a heavy price. Investment rate (investment-to-GDP ratio) has declined to 12.5 percent in 2011-12, which is the lowest in sixty years as against 22.5 percent in 2006-07. A 10 percentage point reduction in investment in such a short period has caused irreparable damage to the economy. Foreign private investment on the other hand has simply collapsed from as high as $8.4 billion in 2006-07 to $ 0.5 billion in the current fiscal year. More worrisome is the fact that domestic saving has declined to 5.8 percent of the GDP in 2011-12, which is perhaps the lowest in the country’s history (15.6 percent in 2006-07). Can a developing country like Pakistan achieve a higher economic growth with such dismally low saving and investment rates? It is not unsurprising to see Pakistan’s economic growth slowing to an average of three percent per annum over the last five years. All major components of economic growth have also exhibited a dismal performance. For example, despite criminal increase in support prices of various agricultural commodities, agriculture growth averaged 2.2 percent per annum, almost equal to the country’s population growth. Large scale manufacturing grew by 0.7 percent, on average, and services sector registered a growth of 3.8 percent per annum during the same period. Such low economic growth is bound to create less jobs thereby increasing unemployment and poverty. Persistence of large fiscal deficit is one of the principal reasons for the above mentioned ailments. Fiscal deficit has thus far averaged 6.5 percent of the GDP. However, the current fiscal year may see budget deficit touching 8 percent of the GDP (including the so-called one-off elements of 1.9 percent of the GDP). Such a development on the fiscal front has damaged monetary policy credibility and as such has emerged as one of the principal reasons for the persistence of double digit inflation. Large budget deficit will also add to public debt, which may reach Rs13 trillion in June 2012. It may be noted that the total stock of public debt stood at Rs6.0 trillion in June 2008, which has, since then, more than doubled in just five years. Higher public debt is bound to increase interest payment, which is likely to cross Rs1.0 trillion, thereby leaving little resources to be spent on education, health and physical infrastructure. Pakistan is sure to face serious payment difficulties on its external debt obligation in the next two years. Unless we receive huge capital inflows during this period, Pakistan will not be able to service its external debt payment. Making a budget for the next year under such financial constraints will be a gigantic task for the government. The crippling effects of power sector mismanagement and the waning confidence of the private sector on the country’s economic management have contributed immensely to declining investment and growth. Can budget 2012-13 address such issues? Budget 2012-13 will be a non-serious and politically motivated budget, directed only at ‘winning’ the election. None of the issues discussed above will be addressed in this budget. Had the government been serious in improving the health of the economy, it could have taken difficult decisions in the past four budgets. At the moment, I am more worried about the fallout of such a non-serious budget. If things go as indicated by the stance of the government, I am certain that the budget 2012-13 will not touch upon agricultural income coming under the direct tax net, implementing of the RGST, reform in petroleum sector taxation, provincial governments improving their fiscal efforts, resolution of rotten PSEs and circular debt and strengthening of tax administration. It is safe to predict that in sidestepping these thorny issues, the forthcoming budget is likely to be as out of tune with economic realities as earlier budgets. The cost as always will be borne by those not at the helm of the country but by the already economically crippled common man whose hopes for a better future lie all but shattered.

Thursday, May 10, 2012

Liquidity trap


A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in general price levels.
In its original conception, a liquidity trap refers to the phenomenon when increased money supply fails to lower interest rates. Usually central banks try to lower interest rates by buying bonds with newly created cash. In a liquidity trap, bonds pay little to no interest, which makes them nearly equivalent to cash. Under the narrow version of Keynesian theory in which this arises, it is specified that monetary policy affects the economy only through its effect on interest rates. Thus, if an economy enters a liquidity trap, further increases in the money stock will fail to further lower interest rates and, therefore, fail to stimulate. In the wake of the Keynesian revolution in the 1930s and 1940s, various neoclassical economists sought to minimize the concept of a liquidity trap by specifying conditions in which expansive monetary policy would affect the economy even if interest rates failed to decline.

Don Patinkin and Lloyd Metzler specified the existence of a "Pigou effect," named after English economist Arthur Cecil Pigou, in which the stock of real money balances is an element of the aggregate demand function for goods, so that the money stock would directly affect the "investment saving" curve in an IS/LM analysis, and monetary policy would thus be able to stimulate the economy even during the existence of a liquidity trap. While many economists had serious doubts about the existence or significance of this Pigou Effect, by the 1960s academic economists gave little credence to the concept of a liquidity trap. The neoclassical economists asserted that, even in a liquidity trap, expansive monetary policy could still stimulate the economy via the direct effects of increased money stocks on aggregate demand. This was essentially the hope of the Bank of Japan in the 1990s, when it embarked upon quantitative easing. Similarly it was the hope of the central banks of the United States and Europe in 2008–2009, with their foray into quantitative easing. These policy initiatives tried to stimulate the economy through methods other than the reduction of short-term interest rates. When the Japanese economy fell into a period of prolonged stagnation despite near-zero interest rates, the concept of a liquidity trap returned to prominence.[1] However, while Keynes's formulation of a liquidity trap refers to the existence of a horizontal demand curve for money at some positive level of interest rates, the liquidity trap invoked in the 1990s referred merely to the presence of zero interest rates (ZIRP), the assertion being that since interest rates could not fall below zero, monetary policy would prove impotent in those conditions, just as it was asserted to be in a proper exposition of a liquidity trap. While this later conception differed from that asserted by Keynes, both views have in common first the assertion that monetary policy affects the economy only via interest rates, and second the conclusion that monetary policy cannot stimulate an economy in a liquidity trap.

Declines in monetary velocity offset injections of short term liquidity. Much the same furor has emerged in the United States and Europe in 2008–2010, as short-term policy rates for the various central banks have moved close to zero. Paul Krugman argued repeatedly in 2008-11 that much of the developed world, including the United States, Europe, and Japan, was in a liquidity trap.[2] He noted that tripling of the U.S. monetary base between 2008 and 2011 failed to produce any significant effect on U.S. domestic price indices or dollar-denominated commodity prices.[3][4] Criticisms Austrian School economists generally argue that a lack of investment during periods of low interest rates are the result of malinvestment and time preference instead of liquidity preference.[5][6] Most Austrian economists have rejected Keynes' theory of liquidity preference altogether. In his book America's Great Depression, Murray Rothbard argued that interest rates are determined by time preference. Says Rothbard, "Increased hoarding can either come from funds formerly consumed, from funds formerly invested, or from a mixture of both that leaves the old consumption-investment proportion unchanged. Unless time preferences change, the last alternative will be the one adopted. Thus, the rate of interest depends solely on time preference, and not at all on "liquidity preference." In fact, if the increased hoards come mainly out of consumption, an increased demand for money will cause interest rates to fall—because time preferences have fallen."[7]

Wednesday, May 9, 2012

GUESS PAPERS OF MA-EXTERNAL ECONOMICS PREVIOUS AND FINAL ARE AVAILABLE.


GUESS PAPERS OF MA-EXTERNAL ECONOMICS PREVIOUS AND FINAL ARE AVAILABLE. ALSO AVAILABLE: PAST PAPERS FROM 1998 ONWARDS. NOTES OF MICRO ECONOMICS. IMPORTANT THEORY OF STATISTICS. CONTACT: KHALID AZIZ 0322-3385752 R-1173, 3RD FLOOR, AL.NOOR SOCIETY, BLOCK 19, F.B.AREA, KARACHI 38.

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