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Unit 14: Calculation of National Income

Notes
Figure 14.4: Circular Flow of Income in a Four Sector Model

Source: www.maeconomics.web.com

Caselet India — Seeking a Second Generation of Reform

en years ago the Indian government embarked upon reform, liberalizing the
economy to open it to global markets. Today, this liberalization effort is showing
Tmixed results.
Despite strong GDP growth (averaging 5 to 6 percent annually), a reasonably low current
account deficit (less than 2 percent of GDP), and ample foreign reserves (over $30 billion),
an analysis of India's economy shows indications of distortions in three areas: the real
economy, the financial sector, and macroeconomic policy. India is considering a "second
generation" of reforms to further liberalize the economy and correct these market
distortions, but if distortions remain unchecked, a financial crisis could emerge.
In the real economy, steady value destruction has been evident over the past eight years.
This value destruction has been sustained since 80 percent of available capital is directed
at non profitable sectors, a trend that is unlikely to change in the near future due to
Contd...

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