Lord John Maynard Keynes wrote the General Theory of Employment, Interest and Money as a solution to the problem of periodic unemployment faced by developed industrial nations of the West during the great depression of the thirties. Keynesian theory singles out deficiency of effective demand as the major cause of unemployment and low level of income in industrial economy operations under a laissez faire system. Deficiency of effective demand is a prominent feature of economies undergoing depression and in order to improve the level of effective demand in an economy. Keynes suggested policy measures like cheap money policy, government’s compensatory investment spending, deficit financing and other fiscal methods. In essence, therefore, Keynesian economics turn out to be economics of depression applicable to developed countries. Its applicability in underdeveloped countries is very limited. To quote Joan Robinson: “ Keynes’s theory has little to say directly, to the underdeveloped countries, for Continue reading
Managerial Economics
Managerial Economics generally refers to the integration of economic theory with business practice. It deals with the use of economic concepts and principles of business decision making. Managerial Economics is thus constituted of that part of economic knowledge or economic theories which is used as a tool of analyzing business problems for rational business decisions. Managerial economics can be viewed by most modern economists as a practical application of economics theory in using effectively the firms scarce resources.
Profit Forecasting in Managerial Economics
Profit planning cannot be done without proper profit forecasting. Profit forecasting means projection of future earnings after considering all the factors affecting the size of business profits, such as firm’s pricing policies, costing policies, depreciation policy, and so on. A thorough study including a proper estimation of both economic as well as non-economic variables may be necessary for a firm to project its sales volume, costs and subsequently the profits in future. Approaches to Profit Forecasting in Managerial Economics According to Joel Dean, a famous economist, there are three approaches to profit forecasting, which are as follows: Spot Projection: Spot projection includes projecting the profit and loss statement of a business firm for a specified future period. Projecting of profit land loss statement means forecasting each important element separately. Forecasts are made about sales volume, prices and costs of producing the expected sales. The prediction of profits of a firm Continue reading
Foreign Institutional Investors (FII’s) and Indian Economy
Introduction to Foreign Institutional Investors (FII’s) Since 1990-91, the Government of India embarked on liberalization and economic reforms with a view of bringing about rapid and substantial economic growth and move towards globalization of the economy. As a part of the reforms process, the Government under its New Industrial Policy revamped its foreign investment policy recognizing the growing importance of foreign direct investment as an instrument of technology transfer, augmentation of foreign exchange reserves and globalization of the Indian economy. Simultaneously, the Government, for the first time, permitted portfolio investments from abroad by foreign institutional investors in the Indian capital market. The entry of FIIs seems to be a follow up of the recommendation of the Narsimhan Committee Report on Financial System. While recommending their entry, the Committee, however did not elaborate on the objectives of the suggested policy. The committee only suggested that the capital market should be gradually Continue reading
The Stages of Inflation
Inflation passes through three stages. In the first stage the rise in price is slow and gradual. In this stage it is easier to check the inflationary rise in the price of goods and services. But if inflation is not effectively checked in the first stage then it enters the second stage. In second stage inflation becomes a serious headache for the government. The prices of goods and services start rising much more rapidly then before. It not possible to eliminate inflation completely but if the government takes effective steps, it may be possible to prevent a further rise in price level. In the third stage, prices of goods and services now start rising almost every minute and it becomes impossible for the government to check them. These can be illustrated by an example , in first stage price rise in a proportion is less than the supply of money. Continue reading
Factors Determining Spot Exchange Rates in Forex Markets
It is the interplay of the forces of demand and supply that determines the exchange rate between two currencies in a floating rate regime. The exchange rate between, say, the rupee and US dollar depends upon the demand for US dollars and the supply of US dollars in the Indian foreign exchange market. The demand for foreign currency comes from individuals and firms who have to make payments to foreigners in foreign currency mostly on account of the import of goods and services and purchase of securities. The supply of foreign exchange results from the receipt of foreign currency normally on account of export or sale of financial securities to foreigners. Important Factors Determining Spot Exchange Rates 1. Balance of Payments: Balance of Payments represents the demand for and supply of foreign exchange which ultimately determine the value of the currency. Exports, both visible and invisible, represent the supply side Continue reading
Foreign Exchange Risk or FOREX Risk
Foreign Exchange dealing is a business that one get involved in, primarily to obtain protection against adverse rate movements on their core international business. Foreign Exchange dealing is essentially a risk-reward business where profit potential is substantial but it is extremely risky too. Foreign exchange business has the certain peculiarities that make it a very risky business. These would include: Forex deals are across country borders and therefore, often foreign currency prices are subject to controls and restrictions imposed by foreign authorities. Needless to say, these controls and restrictions are invariably dictated by their own domestic factors and economy. Forex deals involve two currencies and therefore, rates are influenced by domestic as well as international factors. The Forex market is a 24-hour global market and overseas developments can affect rates significantly. The Forex market has great depth and numerous players shifting vast sums of money. Forex rates therefore, can move Continue reading