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Economic Survey: Kaushik Basu's Cover Job

For the cover of the Economic Survey 2010-11, Basu has chosen the easily identifiable IS-LM function. Developed by English economist John Hicks and American economist Alvin Hansen, this function provides a framework for analyzing the factors determining the level of aggregate demand.

Puja Mehra   New Delhi     Last Updated: February 25, 2011  | 20:20 IST

Last year, immediately after he'd presented his first Economic Survey, professor of Economics at Cornell and the Chief Economic Advisor to India's Finance Minister Kaushik Basu spent more time explaining the illustration he'd chosen for its cover rather than its contents.

A couple of days later, Basu had told me, "I wasn't expecting such a reaction to it. I just chose it for aesthetical reasons. People are taking it far too seriously and that's why I am not saying what it is." But then, perhaps since he knows I studied at the Delhi School of Economics, where he taught in the earlier part of his career, he chose to tell me that it is a function by Belgian economist, Jacques Dreze - father of Jean Dreze.

For the cover of the Economic Survey 2010-11, Basu has chosen the easily identifiable IS-LM function. Developed by English economist John Hicks (1904-1989) and American economist Alvin Hansen , (1887-1975) this function provides a framework for analyzing the factors determining the level of aggregate demand.

The IS-LM model (or the Hicks-Hansen model) is a key macroeconomic framework as it incorporate all the major aspects of an economy: Investment-savings (IS) and the liquidity-money supply (LM). That is, it combines equilibria in the financial market with that in the goods and services market, producing an overall equilibrium level for demand. Thus, this model can be useful to policy-makers in determining how fiscal and monetary tools can be leveraged to alter national income.

Basu's choice is relevant to the ongoing debate in the economy about the scope of the role of monetary policy can play in boosting growth and at the same time fight inflation. The Survey has projected a GDP growth of 8.6 per cent for 2010-11. It is upbeat on most aspects of the economy and its management, treats the deep dips in growth of factory output as suggested by the latest data available (November and December 2010) as road bumps rather than indication of any long term problem.

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