Market failure refers to a market that fails to provide efficient outcomes for the society. In other words, market works efficiently only when there exist perfect competition or when exclusion principle could be applied in the free market. Exclusion principle requires that, those who do not pay for as goods should be excluded from its consumption and those who derive any benefit from goods should bear its cost. In free market economy the main responsibility of the government is to prevent the market from failure. Market failure can be summarized in two ways: Market failures due to incentive or incentive failure Market failures due to structure or structure failure 1. Market failure due to incentive or incentive failure The market failure due to the presence of externalities is known as incentive failure. The free market mechanism does not function effectively when exclusion principle is not applicable. Exclusion principle requires that, Continue reading
International Economics
Sovereign Wealth Funds (SWFs) – Meaning, Types, Benefits and Risks
Sovereign Wealth Funds (SWFs), investment vehicles of Governments are increasingly seen in action through acquisition of either natural resources like oil and gas fields or equity holdings in MNCs. While the reasons for establishing a SWF may vary from commercial to strategic ones, SWFs’ influence on the countries and corporate is substantial. Since they mostly stay invested for a long-term they do not pose threat of pulling out in the short term and creating huge volatility in the financial markets. Since their investment corpus run to billions, by staying invested for a long time, they have a stabilizing effect on the capital market even during crashes and short term fluctuations. However, regulations and guidelines of the SWF also needs to be put in place in order to avoid it from exercising any soft control or strategic moves that may affect the sovereignty of the country allowing investments. Sovereign Wealth Funds Continue reading
Country Similarity Theory of International Trade
Country similarity theory was developed by a Swedish economist named Steffan Linder. Country similarity refers to what? Is it similarity of location or culture or political/ economic interests or technological capability (that is acquired advantage) or natural advantage or lack of it? Traditional trade theories speak of difference in demand or supply conditions or both as a necessary condition for trade between countries. That is, the traditional trade theories are built upon differences. But the country similarity theory is built of identical features of nations in trade. 8 out of top 10 trading partners of the USA are developed economies. Globally 11 out of 12 largest players in world trade are developed nations. Developed countries trade more with developed countries: Products of a developed country match demand and user conditions of another developed country only. Hence the similarity in development pace decides trade between countries. The reasoning is that a Continue reading
Keynesian Theory of Trade Cycles
John Maynard Keynes, one of the most influential economists of the 20th century, never worked out a pure theory of trade cycles, though he made significant contributions to the trade cycle theory. Keynes states, “The trade cycle can be described and analyzed in terms of the fluctuations of the marginal efficiency of capital relatively to the rate of interest.” According to Keynes, the level of income and employment in a capitalist economy depends upon effective demand, comprising of total consumption and investment expenditure. Changes in total expenditure will imply changes in effective demand and will lead to changes in income and employment in the country. Therefore, in the Keynesian system fluctuations in total expenditure are responsible for fluctuations in business activity. Now, according to Keynes, consumption expenditure is relatively stable, and consequently it is the fluctuations in the volume of investment that are responsible for changes in the level of Continue reading
Fiscal Policy – Definition, Objectives and Techniques
The term fiscal has been derived from the greek word fisc, meaning a basket to symbolize the public purse. Fiscal policy thus means the policy related to the treasury of the government. Fiscal policy is a part of general economic policy of the government which is primarily concerned with the budget receipts and expenditures of the government. All welfare projects are completed under this policy .It also suggests measures to control economic fluctuations which may become violent and create great upheavals in the socio-economic structure of the economy. It also outlines the influence of resource utilization on the level of aggregate demand through affecting the level of aggregate consumption and investment expenditure. Definitions of Fiscal Policy According to U. Hicks “Fiscal policy is concerned with the manner in which all the different elements of public finance, while still primarily concerned with carrying out their own duties, may collectively be geared Continue reading
Harrod-Domar Models of Economic Growth
The Harrod-Domar models of economic growth are based on the experience of advanced economies. They are primarily addressed to an advanced capitalist economy and attempt to analyze the requirements of steady growth in such economy. Both Harrod and Domar are interested in discovering the rate of income growth necessary for smooth and uninterrupted working of the economy. Though their models differ in details, yet they arrive at similar conclusions. Harrod and Domar assign a key role to investment in the process of economic growth. But they lay emphasis on the dual character of investment. Fist, it creates income, and secondly, it augments the productive capacity of the economy by increasing its capital stock. The former may be regarded as the ‘demand effect’ and the later the ‘supply effect’ of investment. Hence so long as net investment is taking place, real income and output will continue to expand. However, for maintaining Continue reading