Basically, inflation is supposed to occur after reaching the stage of full employment, for till that stage is reached an increase in effective demand and price level will,be followed by an increase in output, income and employment. It is after the stage of full employment when all men are employed that a rise in the price level will not be accompanied by an increase in production and employment. Theoretically, therefore, it is not possible to imagine an inflationary situation existing side by side with full employment. It is in this context that the question of inflation in a developing country, which has both widespread unemployment and underemployment is raised. Bottlenecks of Inflation It is interesting to observe that Keynes himself visualized the possibility of an inflationary situation even before full employment was reached. Such a situation can arise even in advanced countries, if there are difficulties in perfect elasticity of Continue reading
International Economics
Pigovian Tax – Meaning and Definition
Neo-classicals uphold perfect competition as the ideal state of the market. But in truth, the economy is fraught with market failures. Therefore, we need government interference to correct many of these market failures. Pigovian Tax (also spelled Pigouvian tax) imposed by the government is one such course of intervention. It helps to curb negative externalities (e.g. pollution) and reduce the burden on the society caused by the externalities (social costs of production and consumption). Moreover, it attacks over-consumption, bringing it closer to the socially optimal level of production and/or consumption. What is Pigovian Tax? Pigovian tax is a kind of tax, which is levied to correct a negative cost that is created by the actions of any business firm, but that is not considered in a firm’s private costs or profits. Also known as ‘sin tax’, it is a tax placed on an action with a negative externality, to correct Continue reading
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
Disequilibrium in Balance of Payments
We have noted above that the balance of payments is always in balances from accounting point of view. Besides, in the accounting procedure, a deficit in the current account is offset by a surplus in capital account resulting from either borrowing from abroad or running down the gold and foreign exchange reserves. Similarly, a surplus in the current account is offset by a corresponding deficit in capital account resulting from loans and bills to debtor country or by decline of its gold and foreign exchange reserves. However, disequilibrium in the balance of payments does arise because total receipts during the reference period need not be necessarily equal to the total payments. When total receipts do not match with total payment of the accounting period, this is a position of disequilibrium in the balance of payments. The final balance of payments position is obtained in the manner described below. For assessing Continue reading
The Current Account Component in Balance of Payments (BoP)
The Current Account Component The Current Account records a nation’s total exports of goods, services and transfers, and its total imports of them. The current account is subdivided into two components (1) balance of trade (BoT), and (2) balance of invisibles (BOIs). Structure of Current Account in India’s BOP Statement A. CURRENT ACCOUNT I. Merchandise (BOT): Trade Balance (A-B) A. Exports, f.o.b. B. Imports, c.i.f. II. Invisibles (BOI): (a + b + c) a. Services i. Travel ii. Transportation iii. Insurance iv. Govt. not elsewhere classified v. Miscellaneous b. Transfers i. Official ii. Private c. Income i. Investment Income ii. Compensation to employees Total Current Account = I + II 1. Balance of Trade (BoT) Balance of payments refers the difference between merchandise exports and merchandise imports of a country. BOT is also known as “general merchandise”, which covers transactions of movable goods with changes of ownership between residents and Continue reading
The SCP Paradigm – Structure drives Conduct which drives Performance
The SCP paradigm assumes that the market structure determines the conduct of the organization. This conduct, in turn, is the determinant of market performance. Examples of market performance include efficiency, profitability and growth. The Structure Conduct Performance Framework seeks to establish that certain structures of the industry can lead to certain kinds of conduct or behavior which then leads to various types of economic performance. The SCP paradigm was developed through evaluation of empirical studies involving American industries. Theoretical models were not used to support the paradigm. The conclusion that was drawn from empirical studies was that market structure determined performance. This is caused by the belief that the laws of competition should not be based on behavioral models but rather on structural remedies. According to J.S. Bain who developed the paradigm in the 1950s, most industries became concentrated than necessary. In concentrated industries, there are high barriers to entry. Continue reading