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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)