Understanding Fluctuation: A Demand and Supply Side Perspectives Nilanjan Banik, PhD Associate Professor Center for Advanced Financial Studies Institute.

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Presentation transcript:

Understanding Fluctuation: A Demand and Supply Side Perspectives Nilanjan Banik, PhD Associate Professor Center for Advanced Financial Studies Institute for Financial Management and Research

Full Employment Level of Output Versus Actual Output Peak Recession Full Employment Level of Output Actual Level of Output GDP Time

Growth Versus Development Growth is a uni-variate concept and measured as growth rate of per capita real GDP. Development is a multivariate concept; essentially taking into account per capita GDP; mortality rate and literacy rate.

GDP per capita, going by PPP (US $) Countries India Switzerland Thailand United States Singapore Norway Source: WDI Online Database

Development Indicators Indicators GDP growth rate1.1 ' 8.2 ' 9.3 ! Life Expectancy (In years) : Male Female Infant Mortality Rate (per thousand birth) Poverty Ratio (%) * Source: Economic Survey ; National Institute of Rural Development. ' At prices; ! In base year prices; * Figures for the year

Components Agriculture and allied activities (2.6%) ! Industry (10.4%) Services (11%) Sectoral Shares of GDP Source: Reserve Bank of India and CSO ! Percentage growth during that particular fiscal

Capital Formation and Employment Share Investment (as a % of GDP) Agriculture and Allied Activities Manufacturing Services Employment Ratios (as a % of total employment) Agriculture and Allied Activities Manufacturing Services Source: Reserve Bank of India (2006); CSO (2006); NSSO (2006).

Growth and Volatility to to to GDP Growth (Mean) Coff. of Variation Agriculture and Allied Service Growth (Mean) Coff. of Variation Industry Growth (Mean) Coff. of Variation Services Growth (Mean) Coff. of Variation Source: National Account Statistics

Factor productivity During , output per worker in the services sector grew at a rate of 7 percent Output per worker in the manufacturing sector grew at a rate 4.5 percent Output per worker in the agricultural sector grew at a rate of 2.4 percent Source: Bosworth, Collins and Virmani (2006).

Profits and Sensex Source: Joshua Felman, International Monetary Fund

Some Facts “Among wage and salary earners the top 20 per cent of the population in urban India earns 56 per cent of the income while the bottom 20 per cent earns barely 3.4 per cent of the income” – pp.42 “Indeed the top 20 per cent earns more than all other put together” – pp.43 Source: India Today, September 18-24, 2007; NSSO –

Data and Methodology Decompose agricultural, manufacturing and services, components of GDP into trend component and cyclical component. It is a bi-variate model; with rainfall and individual GDP components - agriculture, manufacturing or services, all at the State level. Trend component generally represents supply side whereas cyclical component generally represents demand side components. Blanchard - Quah decomposition techniques is used for identifying demand and supply side shocks.

Results Supply side disturbances contribute most to fluctuation in agricultural output and least to fluctuation in services sector output. Demand side disturbances mostly affect manufacturing output. Services output again are least affected. Fluctuations are measured at a lag length of four quarters.