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
International Economics
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
International Taxation
For the worldwide/global operation of firms, taxation plays a vital role. International taxation has become the core of various financing decisions which includes international investment decisions, international working capital decisions, fund raising decisions and the decisions related to dividend and other payments. The tax decision is also relevant in domestic firms also. The managing of taxation is an extremely difficult issue for the international corporations. The various reasons are given as follows: The firms are supposed to work in several tax jurisdiction or authorities where the tax rates are diverse and also the administration of the tax system is not uniform. The ultimate load of tax in the framework of international firms is determined by means of a more complex interaction of varying descriptions of the tax base. The difference in tax treatment in different nations will direct to distortions in worldwide trade and investment. The companies which are situated Continue reading
Price Discrimination in Managerial Economics
In today’s economies where product and service competition is dense, to sell products and services to consumers in the way as expected by the company has become harder but at the same time necessary compared to the past. It has become unavoidable for the firms to use various pricing strategies alongside with the classical selling strategies to reach this goal. In today’s economic conditions in which the markets being far from full competitive state resulted the firms functioning in this market to become more or less a price-maker. For this reason, one of the ways for the firms that aim to increase the total income thus the total profit can use is, to implement different pricing for consumers with different specialties instead of applying the same pricing for all the consumer groups. Because the consumers having different income levels, taste and choice cause them to have a desire to pay Continue reading
Concept of ‘Fear of Floating’
In the modern era, many countries claim to be running a floating exchange rate. However, many of these countries actively limit fluctuation in the external value of their national monies. This behaviour has been dubbed “fear of floating”, several reasons exist for it. Firstly, there is the ‘original sin’ problem. Many emerging economies are unable to borrow overseas in their domestic currency. This leads to an accumulation of foreign debt liabilities that are unhedged. If there is a sharp depreciation in these nations’ exchange rate, the domestic currency value of their external debt will be altered and thus their economies net worth will also change. Secondly, policymakers in emerging markets suffer from a chronic lack of credibility. The economies may therefore experience large and frequent shocks to exchange rate expectations or to interest rate risk premiums. To gain confidence and credibility, the authorities who set the interest rate will therefore Continue reading