One of the important central banking functions of the Reserve Bank of India (RBI) is the maintenance of the external value of the rupee. As such it has been given the custody of foreign exchange reserves and sole agency for the administration of exchange controls in India. All receipts and payments in and out of India require general or special permission of the RBI. The dealings in foreign exchange and foreign securities in India, payments to person resident outside India and export and import of currency notes, bullion or precious stones etc., are subject to general or special permission of RBI or are prohibited. The RBI with the help of authorized dealers, and moneychangers carries on the administration of controls. The types of transactions, which are controlled by the RBI and the government are in general those which have international financial implications and include inter alia the following important items. Continue reading
Economics Concepts
Keynesian Theory and Underdeveloped Countries
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
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
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
Selling Cost in Monopolistic Competition
Selling costs refer to those expenses which are incurred for popularizing the differentiated product and increasing the demand for it. Selling cost is a special feature of monopolistic competition. Under perfect competition due to homogeneous product and under monopoly because of absence of substitute, the selling costs become unnecessary. The most important instrument by which a firm can convince its buyers about the differentiating nature of its product is advertising. Such expenditure which is incurred by a firm under monopolistic competition to persuade customers to prefer its product to that of its rivals is known as ‘selling costs’. According to famous American economist, Edward Chamberlin, Selling Costs are Costs incurred in order to alter the position or shape of demand curve for a product. Such selling costs may be incurred in any form such as advertising, sales promotion, samples to potential customers etc. Whatever Continue reading
Measures to Control Inflation
Inflation should be controlled in the beginning stage, otherwise it will take the shape of hyper-inflation which will completely run the country. The different methods used to control inflation are known as anti-inflationary measures. These measures attempt mainly at reducing aggregate demand for goods and services on the basic assumption that inflationary rise in prices is due to an excess of demand over a given supply of goods and services. Read more: Economic Policies to Control Inflation Anti-inflationary measures are of four types: Monetary policy Fiscal policy Price control and rationing Other methods 1. Monetary Policy It is the policy of the central bank of the country, which is the supreme monetary and banking authority in a country. The central bank may use such methods as the bank rate, open market operations, the reserve ratio and selective controls in order to control the credit creation operation of commercial banks and Continue reading