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Summary

Economics Class 31

## THE CLASS STARTED WITH A BRIEF OVERVIEW OF THE PREVIOUS TOPICS (05:01 PM)

## INEQUALITY (05:08 PM)

- According to the UN, inequality is defined as the state of not being equal, especially in status, rights, and opportunities.
- Economic inequalities measure differences in income, expenditure, and wealth.
- Social inequalities measure differences among people based on region, religion, gender, caste, etc.
- **Quintile ratio** = Income or Expenditure of Top 20%/Income or Expenditure of Bottom 20%.
- **Palma Ratio**=Income or Expenditure of Top 10%/Income or Expenditure of Bottom 40%.
- **Lorenz Curve:**
- It is a graphical method of depicting inequality, the cumulative percentage of the population is plotted against the cumulative percentage of income/expenditure/wealth.
- **Gini Coefficient:**
- It is an arithmetic measure of inequality based on the Lorenz curve.
- Gini coefficient = Area between 45-degree line and Lorenz curve divided by Area below 45-degree line.
- **Inequality in terms of Wealth by Oxfam International:**
- "Commitment to reducing inequality Index" given by Oxfam International.
- It measures commitments or inclination of government towards reducing inequality i.e. priority given by the government to reduce inequality is based on three pillars:
- a) Public services pillar, for example: access to health, education, etc.
- b) Progressive taxes.
- c) Worker's rights (pension, job security, etc.)
- **Causes of Inequality:**
- Shift towards a market economy after 1991.
- Policy failures/policy paralysis with respect to primary sectors like agriculture.
- Lack of institutional credit.
- Poverty and unemployment.
- Inefficient implementation of the government schemes.
- Marketization of basic services like health, education, etc.
- Private ownership of property.
- Failures/ lacunas in the implementation of land reforms.
- **Government measures to reduce the inequality:**
- Land reforms carried out by various governments like Kerala.
- PSU-led growth.
- Nationalisation of banks.
- Financial Inclusion carried out through various initiatives led to inclusive growth.
- Boost to MSME sector through various acts and initiatives.
- 5th and 6th FYPs were focused on reducing inequality.
- **Relative inequality:**
- It is a difference in income and expenditure in society.
- It measures inequality, as per UNDP percentage of the population earning less than 50% of median income.

## FINANCIAL MARKET (06:13 PM)

- **Difference between Money market and Capital market:**
- |  |  |
  | --- | --- |
  | **Money Market** | **Capital Market** |
  | Short term less than 365 days | Long term. |
  | Discounted security (Zero Coupon, Non-Coupon) | Dated Securities. |
- **Money Market:**
- It caters to short-term borrowing requirements such as working capital.
- The money market mainly deals with financial instruments whose maturity is up to one year.
- Common money market instruments are treasury bills, cash management bills, call money, certificates of deposit, commercial papers, commercial bills, etc.
- **Treasury Bills:**
- These are discounted securities(non-coupon/zero coupon) issued by RBI on behalf of the central government.
- **There are three types of T-bills:**
- a) 91 Days
- b) 182 Days
- c) 364 Days
- They are called discounted securities because they are issued at a discounted rate and purchased at the original face value.
- **Cash Management Bills:**
- It was introduced in 2010 and it also has a discounted security similar to T-bills with a tenure period of less than 91 days.

## BOND MARKET (07:13 PM)

- Sensex is an index of the Bombay Stock Exchange prepared by considering 30 top companies.
- In general, when bond prices increase bond yield decreases.
- Bond yield is nothing but the coupon rate/ the current price of the bond.
- **Normal/Regular Yield curve:**
- In a normal yield curve, which is upward-sloping, longer-maturity bonds typically have higher yields compared to shorter-maturity bonds
- Investing in higher-maturity bonds leads to higher returns.
- **Steep Yield Curve:**
- sudden increase or jump in the yield in long-term bonds, the yields on long-term bonds are rising faster than yields on short-term bonds.
- **Flat curve:**
- Irrespective of the maturity, it gives the same return.
- **Inverted Yield Curve:**
- When the yield of a long-term maturity bond is less or falling, it can be a very strong indicator of recession which is about to come.
- **Why an inverted bond yield is an indicator:**
- The fall in long-term bond yield indicates increased investment into long-term bonds, inflating the bond prices thereby leading to a fall in bond yield. i.e. investors are removing money from short-term instruments and investing in long-term instruments (hedging risk)
- **Impact on India:**
- In the US short-term interest rates are going to increase leading to an appreciation of the dollar, making Indian rupee weak.
- It may have an adverse impact on macro economic indicators, like inflation (rupee value fall= Imports costly i.e. Oil, food Costly)
- Due to the recession India may fail to maximize its exports, in spite of falling rupee value leading to increased trade deficit in India.

## COMMERCIAL PAPER (07:58 PM)

- Introduced in 1990, it is a short-term money market instrument issued as an unsecured promissory note and is privately placed.
- It is issued in multiple of five lakhs.
- Companies and financial institutions can issue commercial paper to meet their fund requirement.

## THE TOPIC FOR THE NEXT CLASS: MONEY MARKET (To be Continued)