Reports on the economic performance of business units are quite different. Management reports are prepared monthly or quarterly, whereas economic performance reports are prepared at irregular intervals usually once every several years. For reasons stated earlier, management reports tend to use historical information actual costs incurred, whereas economic reports use quite different information. In this section we discuss the purpose and nature of the economic information. Economic reports are a diagnostic instrument. They indicate whether the current strategies of the business unit are satisfactory and, if not, whether a decision should be made to do something about the business unit- expand it, shrink it, change its direction, or sell it. The economic analysis of an individual business unit may reveal that current plans for new products, new plant and equipment, or other new strategies, when considered as a whole, will not produce a satisfactory future profit, even though, separately each Continue reading
Economics Concepts
International Trade Theories – Absolute, Comparative and Competitive Advantage
Absolute advantage theory was first presented by Adam Smith in his book “The Wealth of Nations” in 1776. Smith provided the first concept of a nation’s wealth. Adam Smith is a grandfather of economics because he introduced two important concepts that many of the new trade theories are based on these two main concepts, which are specialization and free exchange. However, many arguments were made and many economists thought there was a problem with the theory of absolute advantage after David Ricardo published the theory of “comparative cost” (aka “comparative advantage”) in the early 19th century. Even though Smith and his followers introduced many important points for the thoughts of economic, it is too complicated with this simple version of trade theory in today’s global economy. In 1990, Michael Porter introduced the diamond model of new competitiveness theory. These three trade theories are important in order to make a country Continue reading
Modified Liberalized Exchange Rate Management System (Modified LERMS)
The process of liberalization continued further and it was decided to make the Rupee fully floating with effect from March 1, 1993. The new arrangement is called Modified Liberalized Exchange Rate Management System or Modified LERMS. Its salient features are as under: Effective March 1, 1993, all foreign exchange transactions, receipts and payments, both under current and capital accounts of balance of payments are being put through by authorized dealers at market determined exchange rates. Foreign exchange receipts and payments, however, continued to be governed by Exchange Control Regulations. Foreign exchange receipts are to be surrendered to the authorized dealers except in cases where the residents have been permitted by RBI to retain them either with the banks in India or abroad. Authorized dealers are free to retain the entire foreign exchange surrendered to them for being sold for permissible transactions and are not required to surrender to the Reserve Continue reading
Poverty Trap
Poverty trap is a situation where an unemployed person receiving social security benefits not encouraged to seek work because his or her after €tax earnings potential in work is less than the benefits currently obtained by not working. The poverty trap occurs due to benefits such as income support, housing benefit, single parent allowance and family tax credit. Given that social security benefits represent the ‘bottom line’ (that is, the provision of some socially and politically ‘acceptable’ minimum standard of living), the problem is how to reconcile this with the ‘work ethic’. For example, consider the case of a low-skilled person in the UK. He is unable to get a high-paid job because he doesn’t have the right skills, training or experience. He has two options. First one is to get a low-paid job or second option is to claim unemployment benefits. If he gets a low paid job he Continue reading
Price Elasticity Of Demand – Concept and Types
The price elasticity of demand measures the degree of responsiveness of quantity demanded for a certain commodity to the change in its price. In other words, the price elasticity of demand is defined as the ‘ratio of percentage change in the quantity demanded to the percentage change in price. It can be expressed as follows: Price elasticity of demand (ep) = Percentage change in quantity of demand / Percentage change in price Where, ep = Coefficient of price elasticity of demand. The price elasticity of demand is always negative due to the inverse relationship between the price and quantity demanded. But for the sake of simplicity in understanding the magnitude of response of quantity demanded to the change in the price we ignore the negative sign and take into account only the numerical value of the price elasticity of demand. Types of Price Elasticity of Demand There are five types of Continue reading