eeb final word
TRANSCRIPT
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ECONOMICS Economics is a Science of
choice in the face of unlimited ends& scarce resources that havealternative resources.
Macroeconomics is that branch ofeconomics, which studies theaggregate behavior of economicsystem like total national income.
The market economies neverperform at the same level. They
are marked with boom & recessionlevels in alternate cycles.
Macroeconomics aims atachieving economic stability bycontrolling these ups & downsin the market economies.
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Balance of Payments &Exchange rate parameterswhich are consideredimportant in judging theeconomic health of anynation.
Balance of paymentsNations make payments for
goods & services importedwhile receive payments for
goods & services exported.The net payments received &
payments made is known asBalance of Payment.
Exchange rateThe rate at which a nations
currency is exchanged for
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currencies of other nation iscalled exchange rate, alsoinfluences the Balance ofPayments.
For any economy to be stable,
the balance of paymentsshould neither be in surplusnor in deficit & the exchangerate should not be fluctuating
briskly.
Constituent Groups of an
economy:They can be grouped under four
heads:
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The householdsThe firmsThe GovernmentThe Rest of the world
GROSS DOMESTIC
PRODUCT (GDP) The gross domestic product(GDP) orgross domesticincome (GDI) is a basic
measure of a country's overalleconomic output. It is themarket value of all final goodsand services made within theborders of a country in a year.
GDP measures the marketvalue of the output of a nation
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& not just the quantity of goods& services produced.
An accurate measurement of aggregateoutput requires that a particular goodor service must be counted only once.
It means that they are Final goods,also known as Consumer goods.Final goods are those which thecustomers purchase for final use & notfor further processing, or
manufacturing. Goods & services that are purchased
by an intermediary for furtherprocessing, manufacturing or resale arecalled Intermediate goods.
Example: Tyres sold toautomobile manufacturers are
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intermediate goods. This valuewould not be considered whilecalculating GDP, as the countof intermediate transactionseparately would lead todouble counting & hence
blowing up the value of GDP.Example
GDP is only concerned with new or
current production. Old output is notcounted in current GDP as it wasalready counted back at the time it was
produced. GNP (Gross National Product): A
measurement of the total market valueof all the final goods & services
produced in an economy, with the
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resources of a nation regardless ofwhether these resources are located in
that nation or abroad, in one year.
o Calculating GDPGDP is calculated in two ways: The expenditure approach Adding
up the amount spent on all finalgoods during a given period.
The income approach Adding upthe income i.e rents, interest & profits
received by all factors of productionin producing final goods. These two methods yields same value
as every payment (expenditure) by abuyer is at the same time a receipt
(income) for the seller.The Expenditure Approach
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There are four maincategories of expenditure
Personal consumptionexpenditures (C)
Gross Private domesticinvestment (I)
Government purchases (G) Net exports (X) The expenditure approach
calculates GDP as
GDP = C + I + G + X
1. Personal consumptionexpenditures (C)
A large part of GDPThree main categories are:
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Durable goods (like automobiles,furniture, household appliance that
last relatively longer time) Non- durable goods (like food,
clothing, that are used fairly quickly)
Services (like payments for services,expenditures for doctors, lawyers,educational institutions)
2. Gross Private domesticinvestment (I)
Investment refers to the purchaseof new capital such as housing,plants & equipment & inventory
Investment can be made both byprivate as well as public sector.
3. Government purchases (G)
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Purchases of newly producedgoods & services by central,
state & local governments. Includes all wages & salaries of all
government workers.
4. Net exports (X) Net exports are total exportsminus total imports.
Net exports can be positive ornegative.
The Income Approach The four components are National income (N) Depreciation (D)
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Indirect taxes minus subsidies(T)
Net factor payments to therest of the world (F)
GDP is calculated asGDP = N + D + T + F
1. National income (N) National income is the
aggregate factor income that
arises from the currentproduction of goods &services by the nationseconomy.
It is the sum of five items: Compensation of employees
Largest of five items. Includes
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Salaries & wages paid tohousehold by firms & by
government. Proprietor's income Income
from unincorporated businesses. Corporate profits Income of
corporate businesses.
Net interest Interest paid bybusiness.
Rental income Income receivedby the property owners in the formof rent.
2. Depreciation Capital assets wear out or
become obsolete over time.The measure of this decreasein value of capital assets iscalled depreciation.
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3. Indirect taxes minus subsidies(T)
In calculating final sales, indirecttaxes such as sales tax, custom
duties and license fees areincluded. These taxes are counted on
expenditure side, they must also becounted on income side also.
Subsidies are payments made bythe government. These subsidies are subtracted
from the national income to getGDP.
For example, Farmers receivesubsidies from government.
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Subsidy payments are incometo farm proprietors, thus part ofnational income, but they didnot come from the sale ofagricultural goods, so not apart of GDP.
To balance the expenditureside with the income,subsidies need to besubtracted.
4. Net factor payments to therest of the world (F)
Net factor payments to the rest
of the world is (the paymentsof factor income to the rest ofthe world) - (the receipts of
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factor income from the rest ofthe world)
National income is income offactors of production owned bya nation.
GDP, is the output produced
by the factors of productionlocated within the nation.
National income includes
some income that should notbe counted in GDP (incomethat a nations citizen earnabroad), while it may not
include some income thatshould be counted in GDP(foreigners income in nation).
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ECONOMIC ENVIRONMENT
The economic environmentis an amalgamation of variouseconomic factors, such as totalemployment, productivity,income, wealth and inflation
These factors influence thespending patterns ofindividuals and firms.
The existing economicenvironment of business ishighly complex & it is notalways easy to comprehend it.
It is this reason why differentpersons interpret it differently& the firms operating in the
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same economic environmentoften take different decisions.
Eg., In Inflationary situation,some companies may sell theirentire output, while others maywithhold a part of their supply
with expectation that a furtherincrease would bring themlarger profits.
The economic environment
comprises of: Income and wealth: Income in an
economy is measured by GDP, GNP.High values of these factors show a
progressive economic environment.
Employment levels: Highemployment represents a positive
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picture of the economy.
Productivity: This is the outputgenerated from a given amount ofinputs. High levels of productivitysupport the economic environment.
Factors Affecting the EconomicEnvironment
The economic environment of a nation aswell as the world is impacted by:
Inflation and deflation: Inflationary anddeflationary pressures alter thepurchasing power of money. This has adirect impact on consumer spending,business investment, employment rates,government programs and tax policies.
Interest rates: Interest rates determine the
cost of borrowing and the flow of moneytowards businesses.
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3. Exchange rates: This impactsthe price of imports, the profitsmade by exporters and investorsand employment levels (alsothrough the impact on thetourism industry).
The economic environment isalso influenced by variouspolitical, social andtechnological factors. These
include a change in governmentand the development of newtechnology and business tools.
FINANCIAL MARKET
Financial market is amechanism that allows peopleto buy and sell (trade) financial
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securities (such as stocks andbonds), commodities (such asprecious metals), and otherfungible items (crude oil,wheat, orange juice) of valueat low transaction costs.
Money Market The money market is the global
financial market for borrowing andlending of short-term funds (less than
one year). As per RBI definitions A market for
short terms financial assets that areclose substitute for money, facilitatesthe exchange of money in primaryand secondary market.
It doesnt actually deal in cash ormoney but deals with substitute of
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cash like promissory notes &government papers which can
converted into cash without any lossat low transaction cost.
It includes all individual, institution.
Features of Money Market
Transaction have to be conductedwithout the help of brokers.
It is not a single homogeneousmarket.
The component of Money Marketare the commercial banks &NBFC (Non-banking financialcompanies).
In Money Market transaction cannot take place like stockexchange, only through oral
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communication, relevantdocument and writtencommunication transaction can bedone.
Objective of Money MarketTo provide a reasonable
access to users of short-termfunds to meet theirrequirement quickly,adequately at reasonable cost.
Structure of Indian MoneyMarket
Money market existed in Indiaduring the pre-independence
period, but was far moreundeveloped. Indian money market is broadly
divided into following sectors, viz.,
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The unorganized
The organized
Co-operative The rates of interest between the
sectors also differs.
Unorganized Sector
The most prominent are Indigenous banksMoney lenders
Chits NidhisORGANISED STRUCTURE Reserve bank of India
DFHI (Discount and financehouse of India)
Commercial banks
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Development bank IDBI,ICICI,NABARD, LIC, UTI etc.
CO-OPERATIVE SECTOR State cooperativea. Central cooperative banksb. Primary Agri credit societiesc. Primary urban banks State Land development
banks Central land development
banks Primary land development
banks
Capital Market
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A capital market is a marketfor securities (debt or equity),where business enterprises(companies) and governmentscan raise long-term funds.
It is defined as a market inwhich money is provided forperiods longer than a year.
o The market where investment
funds like bonds, equities andmortgages are traded is known asthe capital market.
o The primal role of the capital
market is to channelizeinvestments from investors who
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have surplus funds to the oneswho are running a deficit.
o The capital market offers bothlong term and overnight funds.
o The financial instruments that have
short or medium term maturityperiods are dealt in the moneymarket, whereas the financialinstruments that have long maturityperiods are dealt in the capital
market.o The different types of financial
instruments that are traded in thecapital markets are equityinstruments, credit marketinstruments, insuranceinstruments, foreign exchange
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instruments, hybrid instrumentsand derivative instruments.
Structure Of Capital Marketo Capital Market can be divided
into two constituents: The Financial Institutions
The Securities Market
The Financial Institutionse.g., ICICI, IDBI, LIC, UTI,
etc. provide long term &medium term loan facilities.
The Securities Market: isdivided into
The gilt-edged market (or themarket for governmentsecurities)
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The Corporate securitiesmarket
The gilt-edged market (or themarket for governmentsecurities)
Risk free market, as thegovernment cannot defaulton its payment obligations
RBI plays a dominant role inthe government securities
b. The Corporate securities
market Securities issued by the firms
(i.e shares, bonds)
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It consists of new issuesmarket (primary market) &the stock exchange(secondary market) Indian Capital Market
The Indian Equity Markets and the
Indian Debt markets together formthe Indian Capital markets
The Indian Equity Marketdepends mainly on global fundsflowing into equities and theperformance of various companies.
The Indian Equity Market is almostwholly dominated by two majorstock exchanges -National Stock
Exchange of India Ltd. (NSE) andThe Bombay Stock Exchange(BSE).
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Debt market refers to thefinancial market whereinvestors buy and sell debtsecurities, mostly in the formof bonds.
Indian debt market is one of
the largest in Asia. The most distinguishing
feature of the debt instrumentsof Indian debt market is that
the return is fixed.
This means, returns arealmost risk-free. This fixed
return on the bond is oftentermed as the coupon rate orthe interest rate.
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Therefore, the buyer (of bond)is giving the seller a loan at afixed interest rate, whichequals to the coupon rate.
Indian debt market can beclassified into two categories:
Government Securities Market
(G-Sec Market): It consists of
central and state governmentsecurities. It is also the mostdominant category in the Indiadebt market.
Bond Market: It consists ofFinancial Institutions bonds,Corporate bonds.
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INDIAN ECONOMY The economy of India is the fourth
largest by purchasing power parity(PPP).
In the 1990s, the country began toexperience rapid economic growth,as markets opened for internationalcompetition and investment.
In the 21st century, India is anemerging economic power withvast human and natural resources,
and a huge knowledge base. Economists predict that by 2020,India will be among the leadingeconomies of the world.
Economy transformed fromprimarily agriculture, forestry,fishing, and textile
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manufacturing in 1947 tomajor heavy industry,transportation, andtelecommunications industriesby late 1970s.
Salient features of IndianEconomy
Indian Currency andExchange Rate
Gross Domestic Product(GDP)
Indian Foreign Trade:Principal export trade with
European Union, United States,and Japan. Main commodities areagricultural and allied products,
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gems and jewelry, and ready-made garments. Iron ore,minerals, and leather and leatherproducts also important.
Principal import trade with
European Union, United States,and Japan. Major imports oilproducts from Middle East. Othermajor imports like chemicals,
dyes, plastics, pharmaceuticals,precious stones, iron and steel,fertilizers and pulp paper andpaper products.
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Energy:India importer ofpetroleum and natural gas, but hasabundant coal, hydroelectricpower (especially in parts ofNorth India), and growing nuclearpower industry.
Minerals:Basic minerals: iron,bauxite, copper, lead, zinc, mica,uranium ore, rare earths.
Agriculture:Around 45 percent (136million hectares) of total landcultivated, 27 percent double cropped,effectively giving India 173 millionhectares of cultivated land. Rice,
wheat, pulses, and oilseeds dominateproduction; commercial crops--sugar
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(India world's largest producer),cotton, jute also important.
Green Revolution technologicaladvances and improved high-yielding variety seeds, and
increased fertilizer production andirrigation between mid-1960s andearly 1980s. Dairy farming,fishing, and forestry important
parts of agricultural sector.
Science and Technology:Major government investment
(80 percent of total) in controlof science and technologysector. Substantial
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investments in research anddevelopment in defense,nuclear science, space, andagriculture.BALANCE OF PAYMENTS
Balance of payment (BoP) is a
statistical statement thatsummarizes, for a specificperiod, transactions betweenresidents of a country and the
rest of the world. BoP comprises current
account and capital account.
In Current account, balance oftrade, net factor income from
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abroad and net foreign aidtransfers are included.
In Capital account, deposits &financial investments in Indiaby foreigners or by an Indian inabroad, foreign exchange
reserves are included.
There are many signals that theBoP account of a country gives out.
For example, large current accounttransactions indicate towardsstrength of an economy.
This was the case with India asreduction in trade restrictions and
duties led to increase in bothexports and imports after 1991.
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Also large capital accounttransactions may indicate well-
developed capital markets of aneconomy.
Healthy BoP positions or surplus
in capital and current accountkeeps confidence in the economyand among investors.
However, healthy BoP positions
may be different for differentcountries.
For example, surplus in current
account is often more importantfor developed countries thansurplus in capital account as most
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of them have sufficient capital tofund their investments.
On the other hand, developingcountries like India may placemore importance on capitalaccount as reserves and funding
for investment is crucial for them.
How does BoP influenceeconomic policy?
A healthy BoP position can signaldomestic currency appreciation,hence encouraging businesses toengage in future contracts
accordingly.Indias current account share was
almost 60% in 1991-92, but
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reduced to around 44% in 2007-08. Also, mismatch has beenmuch greater in capital account inrecent years, which gave rise toIndias foreign exchange reserves.
Over the years, these trends haveforced policy makers to makepolicies keeping in mind foreignflows (capital) and effects of
policies on them.However, policies at the same
time could be held responsible forsuch flows.
Indias BoP
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In 1991-92, current account deficit was$1,178 million, which rose to $17,403
million in 2007-08, and accounted for$36,469 million for the last threequarters of 2008.
After the reforms in 1991, Indiasposition of merchandise trade (exportsand imports of goods) kept ondeteriorating, but its position oninvisibles (services, current transfersetc) improved during the period.
However, one of the major factors forincreasing current account deficit inthe last few years has been a rising oilimport bill.
In 2007-08 it had a capitalaccount surplus of $108,031million.
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In the same year it increased itsforeign exchange reserves by$92,164 million, which providedstability to the economy.
Foreign investments haveincreased since 1991, peaking in2007-08 to $44,806 million.
BUSINESS CYCLE A business cycle is the period
of growth and decline in aneconomy.
It can be defined as Wavelikefluctuations of businessactivity characterized by
recurring phases ofexpansion & contraction in
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periods varying from three tofour years.
The National Bureau of EconomicResearch (NBER) analyzeseconomic indicators to determine
the phases of the business cycle.The Business Cycle Dating
Committee uses quarterly GDPgrowth rates as the primaryindicator of economic activity.
However, it also uses monthlyfigures, such as employment,personal income, industrialproduction and retail sales.
CHARACTERISTICS OFBUSINESS CYCLE
1. Recurring Fluctuations:
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Characterized by fluctuations whichoccur periodically in a free rhythm.
Implies that the recurrence ofexpansion & contraction has nofixed period.
2. Period of business cycle islonger than a year:
A period is 3 4 yrs
In some cases, cycles are shorteror longer than those of normal.
In any case, period of a cycle is not
shorter than one year.
3. Presence of the alternatingforces of expansion &contraction:
Business cycle is characterized byalternating forces leading toprosperity & depression.
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These forces are in-built in thesystem.
4. Phenomenon of the crisis: Implies that the peak & trough are
asymmetrical.
Prosperity phase comes to endabruptly whereas recovery phase isgradual & slow.
Phases Of Business Cycle There are four stages in the
business cycle:
Recession - When the economystarts slowing down.
Depression or Trough - Whenthe economy hits bottom.
Recovery - When the economystarts growing again.
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Prosperity or Peak - When theeconomy is in a state of "irrational
exuberance."
From trough to peak, there is
expansion period & from peakto trough the contractionphase.
1.Recession:It is a relatively shorter period.
Forces of expansion getsweakened & forces ofcontraction get strengthened.
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Characterized by liquidation instock market, strain in bankingsystem, liquidation of bankloans, abandoning of newprojects.
During recession, the production ofconsumer goods doesnt declineimmediately, even when theincomes of people fall.
The demand for consumptiongoods falls with a lag.
On the other hand, fall in theproduction of Capital goods isdramatic.
Signs of recessions are notimmediately noticed. The most
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noticeable signal is the weakeningof the stock market.
During recession, banks &other financial institutions donot reach the stage of
bankruptcy, this developswhen depression sets in.
2. Depression:
Recession ultimately mergesinto depression which is thephase of relatively loweconomic activity.
When economy moves fromrecession to depression, thereis a notable fall in production
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of goods & services & inemployment.
This decline in production isnot uniform.
Manufacturing, mining &
construction output reduction aresignificant.
Industries producing machine,tools, plants, equipment & steel arehighly effected.
In these industries employmentfalls rapidly.
During depression when incomesof household falls drastically, there
is a subsequent reduction in theexpenditure on durable goods.
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Production & employment in non-durable goods sector has a little
effect.During depression, in earlier stage,
the price falls, despite the reductionin output of goods & services.
As the contraction proceeds,purchasing power of peoplesteadily fall.
Characterized by a notable fall inproduction, increased
unemployment & a rapid fall in thegeneral price level.
3.Recovery:
Therecovery is gradual.Starts when the prices stopsfalling.
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Generates Income &employment which createsadditional demand.
Pressure for increasing theproduction is created.
Revival of stock activities.Upward movement of price of
securities indicate the recoveryof profits.
New products & newtechnologies are introduced.
When this expansionproceeds, wages & salariesincreases, there is an effectivedemand for other newprojects.
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The phase of recovery tendsto move into the phase ofprosperity.
4.Prosperity
Begins under the stimulus of
certain forces.These forces create expectations
of rising profits, thus inducing theentrepreneurs to increase thescope of activities.
In this phase, the wages andsalaries increase rapidly, thus, thedemand for consumption of goodsalso increases.
The supply of goods, in later stage,increases with a lag which leads torise in prices.
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A marked feature is expansion in
bank deposits & the supply ofcurrency.
Prices do not rise uniformly in thisphase.
The rising profits boost up thestock prices of securities.
During the prosperity phase,expansion itself brings the series offorces which ultimately led to the
beginning of recession.The most important is the gradual
increase in the costs relative ofprices.
In early stages, there is a risinggap between the costs & prices.
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When there is a gradual increase incosts relative to price, the profit
margin narrows down.The reason being the increasing
demand of materials, labor, whichcannot be met from reserves.
Another reason for the rise in costsin the later phase is utilization ofsub-standard equipment, likeinferior workmen & less efficientmanagement.
The later stage of prosperity phaseled to the beginning of recession &thus the cycle repeats.
CAPITALIST ECONOMY
An economic system is basedupon the principle of "supply anddemand." People produce goods
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that others want, in order to sell orexchange for a profit - the goalbeing to accumulate wealth.
A capitalist economy alsoknown as the free marketeconomy can be defined as an
economic activity, where themeans of production are privatelyowned.
It can also be defined as: An economicsystem in which the means of
production and distribution are
privately or corporately owned anddevelopment is proportionate to theaccumulation and reinvestment of
profits gained in a free market.
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Most of the economies over the worldhave enriched their economic system
by implementing capitalist norm in therecent years.
In such form of economy there is noGovernment interference.
The basic characteristics of suchtypes of economic system are asfollows:
More private participation in the
field of economic activities Free environment to compete in
the economy
Individuals and firms act for profitmotive
High freedom for choice to theconsumers
Government acts as a police state.
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Capitalism is comprised of
individuals, enterprises,markets, income andgovernment.
Individuals Individuals engage in a
capitalist economy asconsumers, labourers, andinvestors.
As consumers, individuals
influence production patternsthrough their purchasedecisions, as producers will
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change production to producewhat is most profitable (mostoften what consumers want tobuy).
As labourers, individuals may
decide which jobs to preparefor and in which markets tolook for work.
As investors they decide how
much of their income to saveand how to invest theirsavings.
These savings, which become
investments, provide much ofthe money that businessesneed to grow.
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Businesses
Business firms decide what toproduce and where thisproduction should occur.
They purchase inputs(materials, labour, and capital).
Businesses try to influenceconsumer purchase decisionsthrough marketing andadvertisement as well as thecreation of new and improvedproducts.
To be successful, firms mustsell a quantity of their product
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at a certain price to yield aprofit.
In a capitalist nation,businesses decide when andhow much they want to investin infrastructure, capital and
other resources necessary inproduction.
The market
The market is a term used byeconomists to describe acentral exchange throughwhich people are able to buy
and sell goods and services.In a capitalist economy, the
prices of goods and services
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are controlled mainly throughsupply and demand andcompetition.
Supply is the amount of agood or service produced by a
firm and available for sale.Demand is the amount that
people are willing to buy at aspecific price.
Prices tend to rise whendemand exceeds supply andfall when supply exceedsdemand.
Competition arises when manyproducers are trying to sell the
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same or similar kinds of products tothe same buyers.
Competition is important incapitalist economies because itleads to innovation and morereasonable prices as firms thatcharge lower prices or improve thequality of their production can takebuyers away from its competitors.
Without competition monopoly maydevelop.
Income
Income, in a capitalist economydepends primarily on what skillsare in demand and what skills arecurrently being supplied.
People who have skills that are inscarce supply are worth a lot more
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in the market and can attract higherincomes.
Competition among employers forworkers and among workers forjobs, help determine wage rates.
Firms need to pay high enoughwages to attract the appropriateworkers; however, when jobs arescarce, workers may accept lower
wages.Labour unions and thegovernment also influence wagesin capitalist nations.
Unions act to represent labourersin negotiations with employers.
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The government
In capitalist nations, thegovernment does not prohibitprivate property, or preventindividuals from working wherethey please.
The government also does notprevent firms from determiningwhat wages they will pay andwhat prices they will charge for
their products.
The government also carriesout a number of economic
functions.Government agencies regulate
the standards of service in
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many industries, such asairlines and broadcasting.
In addition, the governmentregulates the flow of capitaland uses things such as theinterest rate to control factors
such as inflation andunemployment.
INTERNATION
ALINSTITUTIONS
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IMF International MonetaryFund
IBRD International Bank forReconstruction &Development
Also Known as World BankITO International Trade
OrganizationThe International Monetary
Fundo The International Monetary
Fund (IMF) is the international
organization formed with astated objective of stabilizing
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international exchange ratesand facilitating development.
o The IMF was formallyorganized on December 27,1945, when the first 29countries signed its Articles of
Agreement.o Its headquarters are in
Washington, D.C., UnitedStates.
o The IMF describes itself as "anorganization of 186 countries,working to foster global
monetary cooperation, securefinancial stability, facilitateinternational trade, promote
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high employment andsustainable economic growth,and reduce poverty".
o Today, the number of IMFmember countries has more
than quadrupled from the 44states involved in itsestablishment.
o Some of the IMF member
countries are United States,Japan, Germany, France,United Kingdom, India, China,Italy, Saudi Arabia, Canada,
Russia, Netherlands, Belgium,India, Switzerland, Australia,
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Mexico, Spain, Brazil, SouthKorea, Venezuela
IMF is controlled by a BoardOf Governors who meet oncein a year to take major policy
decisions.Member states elect the
Executive Board members.The voting power of each
country depends on its annualcontribution.
Objectives of IMF
To promote international monetarycooperation through a permanent
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institution which provides themachinery for consultation &
collaboration on internationalmonetary problems.
To facilitate the expansion &balanced growth of internationaltrade & to contribute thereby tothe promotion & maintenance ofhigh level of employment.
To promote exchange stability.
To give confidence to members by
making the Funds resourcesavailable to them.
Membership qualificationso Any country may apply for
membership to the IMF.
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o The application will beconsidered first by the IMF'sExecutive Board.
o After its consideration, theExecutive Board will submit areport to the Board of
Governors of the IMF.
The Board of Governors after
adopting it, the applicant stateneeds to sign the IMF'sArticles of Agreement andfulfill the obligations of IMF
membership.Any member country can also
withdraw from the Fund.
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World Bank
World Bank is a term used todescribe an international financialinstitution that provides loans todeveloping countries.
The World Bank has a stated goal
of reducing poverty.The World Bank comprises of two
institutions: the International Bankfor Reconstruction andDevelopment (IBRD) and theInternational DevelopmentAssociation (IDA)
The World Bank headquarters arein Washington, D.C.
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The World Bank sees the fivekey factors necessary foreconomic growth as:
Build capacity:Strengthening governmentsand educating governmentofficials.
Infrastructure creation:Implementation of legal and
judicial systems for the
encouragement of business,the protection of individual andproperty rights and thehonoring of contracts.
Development of FinancialSystems: The establishment
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governmental organization(NGO) officers etc.
The Bank obtains funding for itsoperations primarily through theIBRDs sale of AAA-rated bonds in
the worlds financial markets.The IBRDs income is generated
from its lending activities.
The IDA obtains the majority of itsfunds from forty donor countries
who replenish the banks fundsevery three years, and from loanrepayments, which then becomeavailable for re-lending.
The President of the Bank isresponsible for chairing the
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meetings of the Boards ofDirectors and for overallmanagement of the Bank.
The Executive Directors,representing the Bank'smember countries, make up
the Board of Directors, usuallymeeting twice a week tooversee activities such as theapproval of loans and
financing decisions.Members
Some of the World Bankmember countries are
Afghanistan, Bangladesh,Canada, Australia, UnitedStates, Japan, Germany,
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France, United Kingdom,India, China, Italy, SaudiArabia, Russia, Netherlands,Belgium, Switzerland, Mexico,Spain, Brazil, South Korea,Venezuela
The International Bank forReconstruction and Development
(IBRD) has 186 member countries,while the InternationalDevelopment Association (IDA)has 168 members.
Each member state of IBRD should
be also a member of theInternational Monetary Fund (IMF)and only members of IBRD are
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allowed to join other institutionswithin the Bank (such as IDA).
BALANCE OF TRADEThe balance of trade is the
difference between themonetary value of exports and
imports in an economy over acertain period of time.
Trade surplus: A positivebalance of trade. It consists of
exporting more than isimported.
Trade deficit: A negativebalance of trade. It consists of
importing more than exporting.
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The balance of trade formspart of the current account.
The Balance of Trade isidentical to the differencebetween a country's outputand its domestic demand - thedifference between whatgoods a country produces andhow many goods it buys fromabroad.
India Balance of Trade India reported a balance of
trade deficit equivalent to10147.0 Millions in December
of 2009. India is leading exporter of
jewelry, textiles, chemicals,
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leather manufactures andservices.
India is poor in oil resourcesand is heavily dependent oncoal and foreign oil imports forits energy needs.
Other imported products are:machinery, gems, fertilizersand chemicals.
Main trading partners areEuropean Union, The UnitedStates, China and UAE.
FLUCTUATIONS IN 90s
The trade deficit was close to$6000 million in 1990-91.
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It came down substantially tillthe years 1993-94.
Again rose subsequently toaround $6500 million in 1997-98
It shot up to $9170 million and$12,848 million in 1998-99 and1999-2000.
Then fell to the $6000-6600range in 2000-01 and 2001-02.
VARIATIONS IN DEFICITThe deficit during the 1990s can be
broken up into four periods ofvarying duration.
First, during the years 1991-92 to1995-96, both exports and importsgrew at more or less similar rates,
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so that the deficit remained low inmost years and fluctuated within
the $1 billion to $5 billion range.Second, between 1995-96 and
1998-99, while imports continuedto grow, exports stagnated,resulting in a widening of the tradedeficit to $9.1 billion by the end ofthat period.
Third, in 1999-00, while
exports recovered, importssurged because of a rise in oilprices, resulting in thewidening of the trade deficit to
$12.8 billion. Finally, in 2000-01 and 2001-
02, while exports rose initially
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and then remained at thatlevel, imports stagnated andthe trade deficit returned to thelevels it had touched in themid-1990s.
WHY THIS BEHAVIOUR?
o The movements in oil imports,which are influenced by oilprices, have substantiallyinfluenced the size and
direction of Indias overallimport bill.
o During the period 1990-91 to2000-01, in all years excepting
one (1998-99), Indias non-oiltrade has either been in
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balance or reflected a surplusof exports over imports.
o The removal of restrictions andreductions in tariffs, was alsoexpected to result in a flow in
non-oil imports.o Movements have been quite
varied in the principalcategories of imports (oil, non-
oil bulk, export-related andother imports).
o While oil imports have fluctuatedquite significantly, as is to beexpected, and rose to relativelyhigh levels in 1996-97 and 1999-00
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to 2000-01, export related importshave shown a low but consistent
rate of increase since 1994-95.o Non-oil bulk imports, on the other
hand, have stagnated till the mid-1990s, risen by a small amountduring 1995-97 and stagnated
once again thereafter.
o Another striking feature is theincrease in "other imports"
between 1991-92 and 1998-99, after which they havestagnated.
o The share of that category,
which stood at 40 per cent in1990-91, rose to 47 per cent in1995-96 and 52 per cent in
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worsening of the trade deficitto an unsustainable extent.
ROLE OF CAPITALGOODS IMPORTS
One reason why the otherimports category did not risefurther was the fact that capitalgoods imports which rose from$4.2 billion in 1991-92 to $10.3billion in 1995-96, stagnatedthereafter, fluctuating between$9 and $10 billion till 1998-99.
This was the period when aftera short-term boom between
1993-94 and 1995-96, Indianindustry registered a
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deceleration in its rate ofexpansion.
This deceleration would haveaffected capital goods importsthrough its impact on
investment.After 1998-99, when industry
began its slide into near-recessionary conditions,
capital goods imports fellbelow $9 million in 1999-00touching $6.6 billion in 2000-01.
Since capital goods constitutean important component of
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other imports, though its sharefell from 60.4 per cent in 1995-96 to 40.4 per cent in 2000-01,this trend would havesubstantially influencedmovements in the other
imports category.
Thus, there appear to be onlytwo circumstances that can
lead to a substantial rise inthe import bill.
A recovery and sustainedgrowth in industrial
production. A sharp rise in oil prices.
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If either of these occurs, thetrade deficit is bound towiden, unless India is able tomake the breakthrough inworld markets.