Indian Economy: Basic Applied Concepts
( This material was prepared by our colleague Ms. Shilpi Jha for students of BJMC-II.
Dr. C P Singh)
Economic growth
Economic growth is a term used to indicate the increase of total GDP. It is often measured as the rate of change of gross domestic product (GDP). Economic growth refers only to the quantity of goods and services produced; it says nothing about the way in which they are produced. Economic development, a related term, refers to change in the way goods and services are produced; positive economic development involves the introduction of more efficient or "productive" technologies or forms of social organisation.
Economic growth is that branch of one,which deals with the study of rate of change of gross domestic product,referring to the quantity of goods and services produced.Economic growth can either be positive or negative. Negative growth can also be referred to by saying that the economy is shrinking. Negative growth is associated with economic recession and economic depression.
Gross national product (GNP) is sometimes used as an alternative measure to gross domestic product. In order to compare multiple countries, the statistics may be quoted in a single currency, based on either prevailing exchange rates or purchasing power parity. Then, in order to compare countries of different population sizes, the per capita figure is quoted. To compensate for changes in the value of money (inflation or deflation) the GDP or GNP is usually given in "real" or inflation adjusted, terms rather than the actual money figure compiled in a given year, which is called the nominal or current figure.GDP per capita is not the same thing as earnings per worker since GDP measures only monetary transactions for all final goods and services in a country without regard to who receives that money.
Development economics
The latter half of the 20th century, with its global economy of a few very wealthy nations and many very poor nations, led to the study of how the transition from subsistence and resource-based economies to production and consumption based-economies occurred. This led to the field of development economics, including the work of Nobel laureates Amartya Sen and Joseph Stiglitz. However this model of economic development does not meet the demands of subaltern populations and has been severely criticized by later theorists. PROTAP
Economic development is the increase in the standard of living of a nation's population with sustained growth from a simple, low-income economy to a modern, high-income economy.Its scope includes the process and policies by which a nation improves the economic, political, and social well-being of its people.Gonçalo L Fonsesca at the New School for Social Research defines economic development as "the analysis of the economic development of nations.The University of Iowa's Center for International Finance and Development states that:
"'Economic development' or 'development' is a term that economists, politicians, and others have used frequently in the 20th century. The concept, however, has been in existence in the West for centuries. Modernization, Westernization, and especially Industrialization are other terms people have used when discussing economic development. Although no one is sure when the concept originated, most people agree that development is closely bound up with the evolution of capitalism and the demise of feudalism.
The study of economic development by social scientists encompasses theories of the causes of industrial-economic modernization, plus organizational and related aspects of enterprise development in modern societies. It embraces sociological research on business organization and enterprise development from a historical and comparative perspective; specific processes of the evolution (growth, modernization) of markets and management-employee relations; and culturally related cross-national similarities and differences in patterns of industrial organization in contemporary Western societies. On the subject of the nature and causes of the considerable variations that exist in levels of industrial-economic growth and performance internationally, it seeks answers to such questions as: "Why are levels of direct foreign investment and labour productivity significantly higher in some countries than in others?"[6]
Mansell and Wehn state that development has been understood since the second World War to involve economic growth, increases in per capita income, and attainment of a standard of living equivalent to that of industrialized countries. Economy Development can also be considered as a static theory that documents the state of economy at a certain time. According to Schumpeter (2003)the changes in this equilibrium state to document in economic theory can only be caused by intervening factors coming from the outside.
Economic growth versus economic development
Economic development refers to social and technological progress. It implies a change in the way goods and services are produced, not merely an increase in production achieved using the old methods of production on a wider scale. Economic growth implies only an increase in quantitative output; it may or may not involve development. Economic growth is often measured by rate of change of gross domestic product (eg., percent GDP increase per year.)[10] Gross domestic product is the aggregate value-added by the economic activity within a country's borders. Economic development typically involves improvements in a variety of indicators such as literacy rates, life expectancy, and poverty rates. GDP does not take into account important aspects such as leisure time, environmental quality, freedom, or social justice; alternative measures of economic wellbeing have been proposed. A country's economic development is related to its human development, which encompasses, among other things, health and education.
Intensive versus extensive growth
A closely related idea is the difference between extensive and intensive economic growth. Extensive growth is growth achieved by using more resources (land, labour and capital). Intensive growth is growth achieved by using a given amount of resources more efficiently (productively). Intensive growth requires development.
Does growth create development?
Dependency theorists argue that poor countries have sometimes experienced economic growth with little or no economic development; for instance, in cases where they have functioned mainly as resource-providers to wealthy industrialised countries. There is an opposing argument, however, that growth causes development because some of the increase in income gets spent on human development such as education and health.
According to Ranis (2000)[11], we view economic growth to human development as a two-way relationship. Moreover, Ranis suggested that the first chain consist of economic growth benefiting human development with GNP. Namely, GNP increases human development by expenditure from families, government and organizations such as NGOs. With the increase in economic growth, families and individuals will likely increase expenditures with the increased in incomes, which leads to increase in human development. Further, with the increased in expenditures, health, education tend to increases in the country and later will contribute to economic growth.
In addition to increasing private incomes, economic growth also generate additional resources that can be used to improve social services (such as healthcare, safe drinking water etc...). By generating additional resources for social services, unequal income distribution will be limited as such social services are distributed equally across each community; benefiting each individual. Thus, increasing living standards for the public.[12]
To summarize, as noted in Anand’s article (1993)[13], we can view the relationship between human development and economic development in three different explanations. First, increase in average income leading to improved in health and nutrition (known as Capability Expansion through Economic Growth). Second, it is believed that social outcomes can only be improved by reducing income poverty (known as Capability Expansion through Poverty Reduction). Thirdly, (known as Capability Expansion through Social Services), defines the improvement of social outcomes with essential services such as education, health care, and clean drinking water.
How to measure economic development?
Economic development can be measured in many ways but first of all it is important to point out that an economy can grow without developing. Development is a qualitative measure of an improvement in the quality of life.
It can be measured by GNP and GDP per capita, by measuring birth rates and literacy rates, by measuring life expectancy, urbanisation, energy consumption, population growth and distribution of income.
Questions: Outline the differences between economic growth and economic development. Discuss how economic development may be measured. Outline how globalisation may impact upon a nation’s development. (Where appropriate make reference to a relevant case study.)
Answer: Although economic growth and development are similar in meaning, they have some essential differences. Economic growth refers to the increasing ability of a nation to produce more goods and services. Economic development basically implies that individuals of that nation will be better off and takes into account changes in economic and social structures that will reduce or eliminate poverty. Economic development can be measured in a number of different ways including the Human Development Index, a Gender Empowerment Measure, a Human Poverty Index and a Human Freedom Index. All of these measures were developed by the United Nations Development Program. The World Bank also has its own indicator called the World Bank Development Indicator. Globalisation can have both negative affects on a nation. It can impact on the levels of economic growth a country may experience, impact on levels of unemployment or it may impact on a country’s quality of life.
Economic growth is the expansion of a country’s productive capacity. This leads to a rise in total national output. Growth can occur in two different ways; the increased use of land, labour, capital and entrepreneurial resources by using better technology or management techniques and increased productivity of existing resource use through rising labour and capital productivity. While theoretically having an increasing national output means greater material welfare and a rise in living standards, it does not equate to having higher levels of well being for individuals in that nation. Economic growth can, in fact, have negative impacts on a nation including environmental degradation and the loss of traditional cultural values. It also may mean there is greater inequality between different classes in society, that is, the gap between the rich and the poor may grow. It is for these reasons that economic development measurements are also used.
Economic growth as a measure fails to account for other important social and economic factors such as the size of the black market, domestic work which is not given a financial value, the level of damage to the environment and inequalities in income distribution. Various indicators have been developed to compensate for the limitations of economic growth measurements. Rather than just measuring the economic living standards in a country, development indicators measure the welfare of individuals in that country. The main development indicator used is the Human Development Index (HDI). It was devised by the United Nations Development Program (UNDP) to measure the economic achievements of a nation in combining economic growth as well as social welfare. The HDI takes into account three major factors:
• Life expectancy at birth: High levels of longevity are critical for a country’s economic and social well being.
• Levels of educational attainment: The HDI measures adult literacy and the ratio of people in primary, secondary and tertiary education.
• Gross Domestic Product per capita: seen as being a measurement of the ability of people to access goods and services.
The HDI is essentially a score between 0 and 1. A score of 0 would mean no human development has taken place and a score of 1 is the maximum amount of human development. In 2000, the Human Development Report places Canada as the top ranked nation with a HDI of 0.935. Australia was ranked fourth, with a HDI of 0.929 behind Norway and the United States. The lowest ranked nation was Sierra Leone with a HDI of 0.252. When comparing the HDI of certain countries, the GNP per capita should also be considered. A nation with a much higher-ranking HDI than GNP per capita has had a relatively high level of economic development given their level of economic growth. Examples of this are Tajikistan (+43) and Cuba (+40). In contrast, some nations may have a higher GNP per capita ranking than their HDI ranking. This indicates that there is a very high level of inequality, that is high income levels are only enjoyed by a small proportion of the population. A country with this problem is South Africa with a GNP per capita ranking 54 places higher than their HDI ranking.
The UNDP has also developed a number of other indicators. It has developed a specific Gender Development Index which compares the HDI between male and female populations, a Gender Empowerment Measure, which shows gender inequality in economic and political opportunities and a Human Poverty Index (HPI) which measures similar outcomes to the HDI, but examines the extent of disadvantage faced by people who are being deprived of human development. The HPI is adjusted for developing and developed countries.
In 1991, the UNDP developed a one off indicator called the Human Freedom Index (HFI). This included such things as the right to travel in ones own country, the right to teach ideas and receive information, the right to have an ethnic language, the freedom from forced or child labour, the freedom from compulsory work permits, the freedom from censorship, the freedom for political, legal, social and economic equality for women, social and economic equality for ethnic minorities and the existence of independent trade unions. The UNDP discontinued this measurement as it was based on subjective facts and would not be a consistent measurement from year to year.
The World Bank Developed its own indicator called the World Bank Development Indicator (WBDI). This was made to supplement the Human Development Index. The WBDI mainly measures the quality of life, the success of measures to alleviate poverty, the current account balance, malnutrition, traffic congestion, tax rates, life expectancy, population size, educational standards such as literacy and infant mortality.
Another smaller economic development indicator is one developed by economists, James Tobin and William Nordhaus called the Measurement of Economic Welfare. This index takes into account real GNP per capita plus the value of a family’s work. It also takes into account the balance of hours spent in leisure and work, pollution levels and the rate of environmental damage.
Globalisation can impact a nation in a variety of ways. A positive effect of globalisation for many nations is that it allows for them to achieve higher levels of economic growth. With higher levels of trade, world output will increase which inturn should mean higher levels of economic growth followed by increased standards of living. This has been particularly true for rapidly developing economies such as Thailand, Malaysia, Korea and Singapore. They have seen phenomenal growth figures throughout the nineties, although many were sent back to recession in 1997 after the Asia crisis. However, nations which had been struggling with achieving sustainable growth and standards of living, may have been further negatively affected by globalisation. With countries such as Africa opening up their markets, they have been inundated with imports, but at the same time unable to sell their exports. This equates to lower levels of growth for these countries and lower standards of living.
Globalisation has also affected unemployment rates. It has created millions of jobs throughout the world. Twenty-seven million jobs worldwide are now related to exportation. Even with these jobs being created, unemployment is still a major problem for most countries. With increased competition from transnational corporations, domestic employers must remain competitive and to do this they seek improved efficiency. This may mean reducing the amount of staff they have. Also, globalisation has meant that new technologies have been developed to improve efficiency. When new technology is implemented it generally means some jobs are made redundant. Another reason domestic unemployment may rise because of globalisation is that free trade has made many sectors of the domestic market uncompetitive with the global market. An example of this is the European Union, which have subsidised their beef exports. This has meant cattle farmers in Kenya have been unable to compete and have been removed from the market.
Rates of inflation can also be affected with increased globalisation. A country with a high rate of inflation will be less competitive globally because their products will be priced higher than others, so they are less competitive. Governments around the world use monetary policy to control the rate of inflation for this reason. If a country is unable to maintain low levels of inflation then its export sector is at high risk of collapsing.
Globalisation also impacts the quality of life for nations. It seems that the poor keep getting poorer. When countries open themselves up to international competition governments must apply economic rationalist principles. They may cut government spending in essential areas such as health, welfare and education thus reducing the quality of life in this nation. Also, countries with minimal government regulation often attract large transnational companies. This could result in the exploitation of the workers and the environment in countries where quality of life may already be low.
Poland is a country, which has opened itself up to the global economy. It became a free market in 1990 and since has made strong progress. Although in the very early nineties Poland experienced a sharp decline in GDP, it has since resumed steady growth. In 1999 its GDP growth was 4.1%. The private sector now accounts for over 55% of the total GDP. In early 1990, Poland was experiencing hyper-inflation with levels of up to 1200%. In 1999 the inflation rate was lowered to 7.3%, which although is still high by developed world standards, is slowly dropping. Also in the early nineties, Poland had huge unemployment rates with most sectors at around 30%. This has now been lowered to 13%, which again is high by developed nations’ standards but is a lot less than the rates experienced early in the decade.
Essentially, the difference between economic growth and economic development is that one is a quantitative measure (growth) and the other is a qualitative measure (development). Economic development can be measured using a variety of indicators, mostly developed by the United Nations Development Program (UNDP), though another widely used indicator was developed by the World Bank. Globalisation can have many affects on nations, depending on their government policies and also on their economic status.
Developing country
Developing country is a term generally used to describe a nation with a low level of material well being. There is no single internationally-recognized definition of developed country, and the levels of development may vary widely within so-called developing countries, with some developing countries having high average standards of living.[1][2]
Some international organizations like the World Bank use strictly numerical classifications. The World Bank considers all low- and middle- income countries as "developing". In its most recent classification, economies are divided using 2008 Gross National Income per capita. In 2008, countries with GNI per capita below US$11,905 were considered developing.[3] Other institutions use less specific definitions.
Countries with more advanced economies than other developing nations, but which have not yet fully demonstrated the signs of a developed country, are grouped under the term newly industrialized countries
Taxes: definition, direct and indirect taxes
To tax (from the Latin taxo; "I estimate", which in turn is from tangō; "I touch") is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law.
Taxes are also imposed by many subnational entities. Taxes consist of direct tax or indirect tax, and may be paid in money or as its labour equivalent (often but not always unpaid). A tax may be defined as a "pecuniary burden laid upon individuals or property to support the government […] a payment exacted by legislative authority."[1] A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government […] whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name."[1]
In modern taxation systems, taxes are levied in money, but in-kind and corvée taxation are characteristic of traditional or pre-capitalist states and their functional equivalents. The method of taxation and the government expenditure of taxes raised is often highly debated in politics and economics. Tax collection is performed by a government agency such as Canada Revenue Agency, the Internal Revenue Service (IRS) in the United States, or Her Majesty's Revenue and Customs (HMRC) in the UK. When taxes are not fully paid, civil penalties (such as fines or forfeiture) or criminal penalties (such as incarceration)[2] may be imposed on the non-paying entity or individual.
Purpose of taxation: Taxation has four main purposes or effects: Revenue, Redistribution, Repricing, and Representation.
The main purpose is revenue: taxes raise money to spend on roads, schools and hospitals, and on more indirect government functions like market regulation or legal systems. This is the most widely known function. A second is redistribution. Normally, this means transferring wealth from the richer sections of society to poorer sections. A third purpose of taxation is repricing. Taxes are levied to address externalities: tobacco is taxed, for example, to discourage smoking, and many people advocate policies such as implementing a carbon tax. A fourth, consequential effect of taxation in its historical setting has been representation.[3] The American revolutionary slogan "no taxation without representation" implied this: rulers tax citizens, and citizens demand accountability from their rulers as the other part of this bargain. Several studies have shown that direct taxation (such as income taxes) generates the greatest degree of accountability and better governance, while indirect taxation tends to have smaller effects.[
Direct and indirect taxes
Taxes are sometimes referred to as direct tax or indirect tax. The meaning of these terms can vary in different contexts, which can sometimes lead to confusion. In economics, direct taxes refer to those taxes that are collected from the people or organizations on whom they are ostensibly imposed. For example, income taxes are collected from the person who earns the income. By contrast, indirect taxes are collected from someone other than the person ostensibly responsible for paying the taxes. In law, the terms may have different meanings. In U.S. constitutional law, for instance, direct taxes refer to poll taxes and property taxes, which are based on simple existence or ownership. Indirect taxes are imposed on rights, privileges, and activities. Thus, a tax on the sale of property would be considered an indirect tax, whereas the tax on simply owning the property itself would be a direct tax. The distinction can be subtle between direct and indirect taxation, but can be important under the law.
Economic sectors
An economic sector is a certain type of business activity within an economy. Economics is part of the social structure of a society and is concerned with how people produce and consume goods and services. What types of goods and services are produced and consumed in a society depend on geography and social customs. The three major economic sectors are: primary, secondary and tertiary.
The primary economic sector includes obtaining and refining raw materials such as wood, steel and coal. Primary economic sector workers include loggers, steelworkers and coalminers. All types of natural resources industries such as fishing, farming, forestry and mining are a part of the primary economic sector.
The secondary economic sector deals with the processing of raw materials into finished goods. Builders and potters are examples of secondary economic sector workers. Lumber from trees is made into homes and clay from the earth is made into pottery. Brewing, engineering and all types of processing plants are part of the secondary economic sector.
The tertiary economic sector has to do with services to businesses and consumers. Dry cleaners, real estate agents and loan officers fall into the category of tertiary economic sector workers. Transportation, banking, tourism and retail stores are all part of the tertiary economic sector. The movement of goods and services through the primary, secondary and tertiary sectors is referred to as the "chain of production." For example, trees are sourced to make paper, then the pulp is processed to create the paper and then the finished product is sold in stores. Some people consider government and education to be solely part of the tertiary sector, while others add the quaternary economic sector and the quinary economic sector to the three main sectors.
Public sector
The part of the economy concerned with providing basic government services. The composition of the public sector varies by country, but in most countries the public sector includes such services as the police, military, public roads, public transit, primary education and healthcare for the poor. The public sector might provide services that non-payer cannot be excluded from (such as street lighting), services which benefit all of society rather than just the individual who uses the service (such as public education), and services that encourage equal opportunity.
In India, public sector undertaking (PSU) is a term used for a government-owned corporation (company in the public sector). The term is used to refer to companies in which the government (either the Union Government or state or territorial governments, or both) owned a majority (51 percent or more) of the company equity.
A government-owned corporation, state-owned enterprise, or government business enterprise is a legal entity created by a government to undertake commercial activities on behalf of an owner government, and are usually considered to be an element or part of the state. There is no standard definition of a government-owned corporation (GOC) or state-owned enterprise (SOE), although the two terms can be used interchangeably. The defining characteristics are that they have a distinct legal form and they are established to operate in commercial affairs. While they may also have public policy objectives, GOCs should be differentiated from other forms of government agencies or state entities established to pursue purely non-financial objectives that have no need or goal of satisfying the shareholders with return on their investment through price increase or dividends.
GOCs can be fully owned or partially owned by Government. As a definitional issue, it is difficult to determine categorically what level of state ownership would qualify an entity to be considered as "state-owned", since governments can also own regular stock, without implying any special interference. As an example, the Chinese Investment Corporation agreed in 2007 to acquire a 9.9% interest in the global investment bank Morgan Stanley, but it is unlikely that this would qualify the latter as a government-owned corporation. Government-owned or state-run enterprises are often the result of corporatization, a process in which government agencies and departments are re-organized as semi-autonomous corporate entities, sometimes with partial shares listed on stock exchanges.
The term government-linked company (GLC) is sometimes used to refer to corporate entities that may be private or public (listed on a stock exchange) where an existing government owns a stake using a holding company. There are two main definitions of GLCs are dependent on the proportion of the corporate entity a government owns. One definition purports that a company is classified as a GLC if a government owns an effective controlling interest (>50%), while the second definition suggests that any corporate entity that has a government as a shareholder is a GLC.
A quasi-governmental organization, corporation, business, or agency (parastatal) is an entity that is treated by national laws and regulations to be under the guidance of the government, but also separate and autonomous from the government. While the entity may receive some revenue from charging customers for its services, these organizations are often partially or majorly funded by the government. They are usually considered highly important to smooth running of society, and are sometimes propped up with cash infusions in times of crisis to help surmount situations that would bankrupt a normal privately-owned business. They may also possess law-enforcement authority, usually related to their functions.
Private sector
The part of the economy that is owned and controlled by private individuals and business organizations such as private and public limited companies. In a free enterprise economy, the private sector is responsible for allocating most of the resources within the economy. This contrasts with the public sector, where economic resources are owned and controlled by the state.
Monetary policy
Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy.[1] Monetary theory provides insight into how to craft optimal monetary policy.
Monetary policy is referred to as either being an expansionary policy, or a contractionary policy, where an expansionary policy increases the total supply of money in the economy, and a contractionary policy decreases the total money supply. Expansionary policy is traditionally used to combat unemployment in a recession by lowering interest rates, while contractionary policy involves raising interest rates in order to combat inflation. Monetary policy is contrasted with fiscal policy, which refers to government borrowing,
Monetary policy tools
Monetary base: Monetary policy can be implemented by changing the size of the monetary base. This directly changes the total amount of money circulating in the economy. A central bank can use open market operations to change the monetary base. The central bank would buy/sell bonds in exchange for hard currency. When the central bank disburses/collects this hard currency payment, it alters the amount of currency in the economy, thus altering the monetary base.
Reserve requirements: The monetary authority exerts regulatory control over banks. Monetary policy can be implemented by changing the proportion of total assets that banks must hold in reserve with the central bank. Banks only maintain a small portion of their assets as cash available for immediate withdrawal; the rest is invested in illiquid assets like mortgages and loans. By changing the proportion of total assets to be held as liquid cash, the Federal Reserve changes the availability of loanable funds. This acts as a change in the money supply. Central banks typically do not change the reserve requirements often because it creates very volatile changes in the money supply due to the lending multiplier.
Discount window lending: Many central banks or finance ministries have the authority to lend funds to financial institutions within their country. By calling in existing loans or extending new loans, the monetary authority can directly change the size of the money supply.
Interest rates: The contraction of the monetary supply can be achieved indirectly by increasing the nominal interest rates. Monetary authorities in different nations have differing levels of control of economy-wide interest rates. In the United States, the Federal Reserve can set the discount rate, as well as achieve the desired Federal funds rate by open market operations. This rate has significant effect on other market interest rates, but there is no perfect relationship. In the United States open market operations are a relatively small part of the total volume in the bond market. One cannot set independent targets for both the monetary base and the interest rate because they are both modified by a single tool — open market operations; one must choose which one to control.
In other nations, the monetary authority may be able to mandate specific interest rates on loans, savings accounts or other financial assets. By raising the interest rate(s) under its control, a monetary authority can contract the money supply, because higher interest rates encourage savings and discourage borrowing. Both of these effects reduce the size of the money supply.
Fiscal Policy
Measures employed by governments to stabilize the economy, specifically by adjusting the levels and allocations of taxes and government expenditures. When the economy is sluggish, the government may cut taxes, leaving taxpayers with extra cash to spend and thereby increasing levels of consumption. An increase in public-works spending may likewise pump cash into the economy, having an expansionary effect. Conversely, a decrease in government spending or an increase in taxes tends to cause the economy to contract. Fiscal policy is often used in tandem with monetary policy. Until the 1930s, fiscal policy aimed at maintaining a balanced budget; since then it has been used "counter-cyclically," as recommended by John Maynard Keynes, to offset the cycle of expansion and contraction in the economy. Fiscal policy is more effective at stimulating a flagging economy than at cooling an inflationary one, partly because spending cuts and tax increases are unpopular and partly because of the work of economic stabilizers. See also business cycle.
Thus fiscal policy is the use of government spending and revenue collection to influence the economy. It can be contrasted with the other main type of economic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the supply of money. The two main instruments of fiscal policy are government spending and taxation. Changes in the level and composition of taxation and government spending can impact on the following variables in the economy:
• Aggregate demand and the level of economic activity;
• The pattern of resource allocation;
• The distribution of income.
Fiscal policy refers to the overall effect of the budget outcome on economic activity. The three possible stances of fiscal policy are neutral, expansionary, and contractionary:
• A neutral stance of fiscal policy implies a balanced budget where G = T (Government spending = Tax revenue). Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.
• An expansionary stance of fiscal policy involves a net increase in government spending (G > T) through rises in government spending, a fall in taxation revenue, or a combination of the two. This will lead to a larger budget deficit or a smaller budget surplus than the government previously had, or a deficit if the government previously had a balanced budget. Expansionary fiscal policy is usually associated with a budget deficit.
• A contractionary fiscal policy (G < T) occurs when net government spending is reduced either through higher taxation revenue, reduced government spending, or a combination of the two. This would lead to a lower budget deficit or a larger surplus than the government previously had, or a surplus if the government previously had a balanced budget. Contractionary fiscal policy is usually associated with a surplus.
The idea of using fiscal policy to combat recessions was introduced by John Maynard Keynes in the 1930s, partly as a response to the Great Depression.
Economic effects of fiscal policy
Governments use fiscal policy to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives of price stability, full employment, and economic growth. Keynesian economics suggests that adjusting government spending and tax rates are the best ways to stimulate aggregate demand. This can be used in times of recession or low economic activity as an essential tool for building the framework for strong economic growth and working toward full employment. The government can implement these deficit-spending policies to stimulate trade due to its size and prestige. In theory, these deficits would be paid for by an expanded economy during the boom that would follow; this was the reasoning behind the New Deal.
Governments can use budget surplus to do two things: to slow the pace of strong economic growth, and to stabilize prices when inflation is too high. Keynesian theory posits that removing funds from the economy will reduce levels of aggregate demand and contract the economy, thus stabilizing prices.
Some classical and neoclassical economists argue that fiscal policy can have no stimulus effect; this is known as the Treasury View[citation needed], which Keynesian economics rejects. The Treasury View refers to the theoretical positions of classical economists in the British Treasury, who opposed Keynes' call in the 1930s for fiscal stimulus. The same general argument has been repeated by neoclassical economists up to the present. From their point of view, when government runs a budget deficit, funds will need to come from public borrowing (the issue of government bonds), overseas borrowing, or the printing of new money. When governments fund a deficit with the release of government bonds, interest rates can increase across the market. This is because government borrowing creates higher demand for credit in the financial markets, causing a lower aggregate demand (AD), contrary to the objective of a budget deficit. This concept is called crowding out; it is a "sister" of monetary policy.
Other possible problems with fiscal stimulus include the time lag between the implementation of the policy and detectable effects in the economy, and inflationary effects driven by increased demand. In theory, fiscal stimulus does not cause inflation when it uses resources that would have otherwise been idle. For instance, if a fiscal stimulus employs a worker who otherwise would have been unemployed, there is no inflationary effect; however, if the stimulus employs a worker who otherwise would have had a job, the stimulus is increasing demand while labor supply remains fixed, leading to inflation.
Disinvestment
Disinvestment, sometimes referred to as divestment, refers to reduction of some kind of asset for either financial or ethical objectives or sale of an existing business by a firm. A divestment is the opposite of an investment. Firms may have several motives for divestitures. First, a firm may divest (sell) businesses that are not part of its core operations so that it can focus on what it does best. For example, Eastman Kodak, Ford Motor Company, and many other firms have sold various businesses that were not closely related to their core businesses.
A second motive for divestitures is to obtain funds. Divestitures generate funds for the firm because it is selling one of its businesses in exchange for cash. For example, CSX Corporation made divestitures to focus on its core railroad business and also to obtain funds so that it could pay off some of its existing debt.
A third motive for divesting is that a firm's "break-up" value is sometimes believed to be greater than the value of the firm as a whole. In other words, the sum of a firm's individual asset liquidation values exceeds the market value of the firm's combined assets. This encourages firms to sell off what would be worth more when liquidated than when retained.
A fourth motive to divest a part of a firm may be to create stability. Phillips for example divested its chip division called NXP because the chip market was so volatile and unpredictable that NXP was responsible for the majority of Phillips' stock fluctuations while it represented only a very small part of Phillips NV.
A fifth motive for firms to divest a part of the company is that a division is underperforming or even failing.
Disinvestment in India
In May 2004, Government adopted the National Common Minimum Programme (NCMP), which outlines the policy of the Government with respect to the public sector. The relevant extracts of NCMP are given hereinunder:
“ The UPA Government is committed to a strong and effective public sector whose social objectives are met by its commercial functioning. But for this, there is need for selectivity and a strategic focus. The UPA is pledged to devolve full managerial and commercial autonomy to successful, profit-making companies operating in a competitive environment. Generally profit-making companies will not be privatized.
All privatizations or DISINVESTMENT OF GOVERNMENT SHARES IN THE PUBLIC SECTOR COMPANIES will be considered on a transparent and consultative case-by-case basis. The UPA will retain existing “navratna” companies in the public sector while these companies raise resources from the capital market. While every effort will be made to modernize and restructure sick public sector companies and revive sick industry, chronically loss-making companies will either be sold-off, or closed, after all workers have got their legitimate dues and compensation. The UPA will induct private industry to turn around companies that have potential for revival.
The UPA Government believes that privatization should increase competition, not decrease it. It will not support the emergence of any monopoly that only restrict competition. It also believes that there must be a direct link between privatization and social needs – like, for example, the use of privatization revenues for designated social sector schemes. Public sector companies and nationalized banks will be encouraged to enter the capital market to raise resources and offer new investment avenues to retail investors
Subsidies
A subsidy (also known as a subvention) is a form of financial assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry (e.g., as a result of continuous unprofitable operations) or an increase in the prices of its products or simply to encourage it to hire more labor (as in the case of a wage subsidy). Examples are subsidies to encourage the sale of exports; subsidies on some foodstuffs to keep down the cost of living, especially in urban areas; and subsidies to encourage the expansion of farm production and achieve self-reliance in food production.[1]
Subsidies can be regarded as a form of protectionism or trade barrier by making domestic goods and services artificially competitive against imports. Subsidies may distort markets, and can impose large economic costs.[2] Financial assistance in the form of a subsidy may come from one's government, but the term subsidy may also refer to assistance granted by others, such as individuals or non-governmental institutions, although these would be more commonly described as charity.
Types of subsidies
There are many different ways to classify subsidies, such as the reason behind them, the recipients of the subsidy, the source of the funds (government, consumer, general tax revenues, etc). In economics, one of the primary ways to classify subsidies is the means of distributing the subsidy.
In economics, the term subsidy may or may not have a negative connotation: that is, the use of the term may not be prescriptive but descriptive. In economics, a subsidy may nonetheless be characterized as inefficient relative to no subsidies; inefficient relative to other means of producing the same results; "second-best", implying an inefficient but feasible solution (contrasted with an efficient but not feasible ideal), among other possible terminology. In other cases, a subsidy may be an efficient means of correcting a market failure.
For example, economic analysis may suggest that direct subsidies (cash benefits) would be more efficient than indirect subsidies (such as trade barriers); this does not necessarily imply that direct subsidies are good, but that they may be more efficient or effective than other mechanisms to achieve the same (or better) results.
Insofar as they are inefficient, however, subsidies would generally be considered by economists to be bad, as economics is the study of efficient use of limited resources. Ultimately, however, the choice to enact a subsidy is a political choice. Note that subsidies are linked to the concept of economic transfers from one group to another.
Economics has also explicitly identified a number of areas where subsidies are entirely justified by economics, particularly in the area of provision of public goods.
Budget
Definition: A budget is a spending plan along with proposals to finance the plan and is used to allocate resources to achieve a set of objectives. This financial tool coordinates anticipated expenditures in an effort to maximize resources. A budget is time-specific, and it must be flexible to respond to financial and programmatic changes. A budget, in effect, serves as a financial road map for country, state or an organization.
Dr. C P Singh)
Economic growth
Economic growth is a term used to indicate the increase of total GDP. It is often measured as the rate of change of gross domestic product (GDP). Economic growth refers only to the quantity of goods and services produced; it says nothing about the way in which they are produced. Economic development, a related term, refers to change in the way goods and services are produced; positive economic development involves the introduction of more efficient or "productive" technologies or forms of social organisation.
Economic growth is that branch of one,which deals with the study of rate of change of gross domestic product,referring to the quantity of goods and services produced.Economic growth can either be positive or negative. Negative growth can also be referred to by saying that the economy is shrinking. Negative growth is associated with economic recession and economic depression.
Gross national product (GNP) is sometimes used as an alternative measure to gross domestic product. In order to compare multiple countries, the statistics may be quoted in a single currency, based on either prevailing exchange rates or purchasing power parity. Then, in order to compare countries of different population sizes, the per capita figure is quoted. To compensate for changes in the value of money (inflation or deflation) the GDP or GNP is usually given in "real" or inflation adjusted, terms rather than the actual money figure compiled in a given year, which is called the nominal or current figure.GDP per capita is not the same thing as earnings per worker since GDP measures only monetary transactions for all final goods and services in a country without regard to who receives that money.
Development economics
The latter half of the 20th century, with its global economy of a few very wealthy nations and many very poor nations, led to the study of how the transition from subsistence and resource-based economies to production and consumption based-economies occurred. This led to the field of development economics, including the work of Nobel laureates Amartya Sen and Joseph Stiglitz. However this model of economic development does not meet the demands of subaltern populations and has been severely criticized by later theorists. PROTAP
Economic development is the increase in the standard of living of a nation's population with sustained growth from a simple, low-income economy to a modern, high-income economy.Its scope includes the process and policies by which a nation improves the economic, political, and social well-being of its people.Gonçalo L Fonsesca at the New School for Social Research defines economic development as "the analysis of the economic development of nations.The University of Iowa's Center for International Finance and Development states that:
"'Economic development' or 'development' is a term that economists, politicians, and others have used frequently in the 20th century. The concept, however, has been in existence in the West for centuries. Modernization, Westernization, and especially Industrialization are other terms people have used when discussing economic development. Although no one is sure when the concept originated, most people agree that development is closely bound up with the evolution of capitalism and the demise of feudalism.
The study of economic development by social scientists encompasses theories of the causes of industrial-economic modernization, plus organizational and related aspects of enterprise development in modern societies. It embraces sociological research on business organization and enterprise development from a historical and comparative perspective; specific processes of the evolution (growth, modernization) of markets and management-employee relations; and culturally related cross-national similarities and differences in patterns of industrial organization in contemporary Western societies. On the subject of the nature and causes of the considerable variations that exist in levels of industrial-economic growth and performance internationally, it seeks answers to such questions as: "Why are levels of direct foreign investment and labour productivity significantly higher in some countries than in others?"[6]
Mansell and Wehn state that development has been understood since the second World War to involve economic growth, increases in per capita income, and attainment of a standard of living equivalent to that of industrialized countries. Economy Development can also be considered as a static theory that documents the state of economy at a certain time. According to Schumpeter (2003)the changes in this equilibrium state to document in economic theory can only be caused by intervening factors coming from the outside.
Economic growth versus economic development
Economic development refers to social and technological progress. It implies a change in the way goods and services are produced, not merely an increase in production achieved using the old methods of production on a wider scale. Economic growth implies only an increase in quantitative output; it may or may not involve development. Economic growth is often measured by rate of change of gross domestic product (eg., percent GDP increase per year.)[10] Gross domestic product is the aggregate value-added by the economic activity within a country's borders. Economic development typically involves improvements in a variety of indicators such as literacy rates, life expectancy, and poverty rates. GDP does not take into account important aspects such as leisure time, environmental quality, freedom, or social justice; alternative measures of economic wellbeing have been proposed. A country's economic development is related to its human development, which encompasses, among other things, health and education.
Intensive versus extensive growth
A closely related idea is the difference between extensive and intensive economic growth. Extensive growth is growth achieved by using more resources (land, labour and capital). Intensive growth is growth achieved by using a given amount of resources more efficiently (productively). Intensive growth requires development.
Does growth create development?
Dependency theorists argue that poor countries have sometimes experienced economic growth with little or no economic development; for instance, in cases where they have functioned mainly as resource-providers to wealthy industrialised countries. There is an opposing argument, however, that growth causes development because some of the increase in income gets spent on human development such as education and health.
According to Ranis (2000)[11], we view economic growth to human development as a two-way relationship. Moreover, Ranis suggested that the first chain consist of economic growth benefiting human development with GNP. Namely, GNP increases human development by expenditure from families, government and organizations such as NGOs. With the increase in economic growth, families and individuals will likely increase expenditures with the increased in incomes, which leads to increase in human development. Further, with the increased in expenditures, health, education tend to increases in the country and later will contribute to economic growth.
In addition to increasing private incomes, economic growth also generate additional resources that can be used to improve social services (such as healthcare, safe drinking water etc...). By generating additional resources for social services, unequal income distribution will be limited as such social services are distributed equally across each community; benefiting each individual. Thus, increasing living standards for the public.[12]
To summarize, as noted in Anand’s article (1993)[13], we can view the relationship between human development and economic development in three different explanations. First, increase in average income leading to improved in health and nutrition (known as Capability Expansion through Economic Growth). Second, it is believed that social outcomes can only be improved by reducing income poverty (known as Capability Expansion through Poverty Reduction). Thirdly, (known as Capability Expansion through Social Services), defines the improvement of social outcomes with essential services such as education, health care, and clean drinking water.
How to measure economic development?
Economic development can be measured in many ways but first of all it is important to point out that an economy can grow without developing. Development is a qualitative measure of an improvement in the quality of life.
It can be measured by GNP and GDP per capita, by measuring birth rates and literacy rates, by measuring life expectancy, urbanisation, energy consumption, population growth and distribution of income.
Questions: Outline the differences between economic growth and economic development. Discuss how economic development may be measured. Outline how globalisation may impact upon a nation’s development. (Where appropriate make reference to a relevant case study.)
Answer: Although economic growth and development are similar in meaning, they have some essential differences. Economic growth refers to the increasing ability of a nation to produce more goods and services. Economic development basically implies that individuals of that nation will be better off and takes into account changes in economic and social structures that will reduce or eliminate poverty. Economic development can be measured in a number of different ways including the Human Development Index, a Gender Empowerment Measure, a Human Poverty Index and a Human Freedom Index. All of these measures were developed by the United Nations Development Program. The World Bank also has its own indicator called the World Bank Development Indicator. Globalisation can have both negative affects on a nation. It can impact on the levels of economic growth a country may experience, impact on levels of unemployment or it may impact on a country’s quality of life.
Economic growth is the expansion of a country’s productive capacity. This leads to a rise in total national output. Growth can occur in two different ways; the increased use of land, labour, capital and entrepreneurial resources by using better technology or management techniques and increased productivity of existing resource use through rising labour and capital productivity. While theoretically having an increasing national output means greater material welfare and a rise in living standards, it does not equate to having higher levels of well being for individuals in that nation. Economic growth can, in fact, have negative impacts on a nation including environmental degradation and the loss of traditional cultural values. It also may mean there is greater inequality between different classes in society, that is, the gap between the rich and the poor may grow. It is for these reasons that economic development measurements are also used.
Economic growth as a measure fails to account for other important social and economic factors such as the size of the black market, domestic work which is not given a financial value, the level of damage to the environment and inequalities in income distribution. Various indicators have been developed to compensate for the limitations of economic growth measurements. Rather than just measuring the economic living standards in a country, development indicators measure the welfare of individuals in that country. The main development indicator used is the Human Development Index (HDI). It was devised by the United Nations Development Program (UNDP) to measure the economic achievements of a nation in combining economic growth as well as social welfare. The HDI takes into account three major factors:
• Life expectancy at birth: High levels of longevity are critical for a country’s economic and social well being.
• Levels of educational attainment: The HDI measures adult literacy and the ratio of people in primary, secondary and tertiary education.
• Gross Domestic Product per capita: seen as being a measurement of the ability of people to access goods and services.
The HDI is essentially a score between 0 and 1. A score of 0 would mean no human development has taken place and a score of 1 is the maximum amount of human development. In 2000, the Human Development Report places Canada as the top ranked nation with a HDI of 0.935. Australia was ranked fourth, with a HDI of 0.929 behind Norway and the United States. The lowest ranked nation was Sierra Leone with a HDI of 0.252. When comparing the HDI of certain countries, the GNP per capita should also be considered. A nation with a much higher-ranking HDI than GNP per capita has had a relatively high level of economic development given their level of economic growth. Examples of this are Tajikistan (+43) and Cuba (+40). In contrast, some nations may have a higher GNP per capita ranking than their HDI ranking. This indicates that there is a very high level of inequality, that is high income levels are only enjoyed by a small proportion of the population. A country with this problem is South Africa with a GNP per capita ranking 54 places higher than their HDI ranking.
The UNDP has also developed a number of other indicators. It has developed a specific Gender Development Index which compares the HDI between male and female populations, a Gender Empowerment Measure, which shows gender inequality in economic and political opportunities and a Human Poverty Index (HPI) which measures similar outcomes to the HDI, but examines the extent of disadvantage faced by people who are being deprived of human development. The HPI is adjusted for developing and developed countries.
In 1991, the UNDP developed a one off indicator called the Human Freedom Index (HFI). This included such things as the right to travel in ones own country, the right to teach ideas and receive information, the right to have an ethnic language, the freedom from forced or child labour, the freedom from compulsory work permits, the freedom from censorship, the freedom for political, legal, social and economic equality for women, social and economic equality for ethnic minorities and the existence of independent trade unions. The UNDP discontinued this measurement as it was based on subjective facts and would not be a consistent measurement from year to year.
The World Bank Developed its own indicator called the World Bank Development Indicator (WBDI). This was made to supplement the Human Development Index. The WBDI mainly measures the quality of life, the success of measures to alleviate poverty, the current account balance, malnutrition, traffic congestion, tax rates, life expectancy, population size, educational standards such as literacy and infant mortality.
Another smaller economic development indicator is one developed by economists, James Tobin and William Nordhaus called the Measurement of Economic Welfare. This index takes into account real GNP per capita plus the value of a family’s work. It also takes into account the balance of hours spent in leisure and work, pollution levels and the rate of environmental damage.
Globalisation can impact a nation in a variety of ways. A positive effect of globalisation for many nations is that it allows for them to achieve higher levels of economic growth. With higher levels of trade, world output will increase which inturn should mean higher levels of economic growth followed by increased standards of living. This has been particularly true for rapidly developing economies such as Thailand, Malaysia, Korea and Singapore. They have seen phenomenal growth figures throughout the nineties, although many were sent back to recession in 1997 after the Asia crisis. However, nations which had been struggling with achieving sustainable growth and standards of living, may have been further negatively affected by globalisation. With countries such as Africa opening up their markets, they have been inundated with imports, but at the same time unable to sell their exports. This equates to lower levels of growth for these countries and lower standards of living.
Globalisation has also affected unemployment rates. It has created millions of jobs throughout the world. Twenty-seven million jobs worldwide are now related to exportation. Even with these jobs being created, unemployment is still a major problem for most countries. With increased competition from transnational corporations, domestic employers must remain competitive and to do this they seek improved efficiency. This may mean reducing the amount of staff they have. Also, globalisation has meant that new technologies have been developed to improve efficiency. When new technology is implemented it generally means some jobs are made redundant. Another reason domestic unemployment may rise because of globalisation is that free trade has made many sectors of the domestic market uncompetitive with the global market. An example of this is the European Union, which have subsidised their beef exports. This has meant cattle farmers in Kenya have been unable to compete and have been removed from the market.
Rates of inflation can also be affected with increased globalisation. A country with a high rate of inflation will be less competitive globally because their products will be priced higher than others, so they are less competitive. Governments around the world use monetary policy to control the rate of inflation for this reason. If a country is unable to maintain low levels of inflation then its export sector is at high risk of collapsing.
Globalisation also impacts the quality of life for nations. It seems that the poor keep getting poorer. When countries open themselves up to international competition governments must apply economic rationalist principles. They may cut government spending in essential areas such as health, welfare and education thus reducing the quality of life in this nation. Also, countries with minimal government regulation often attract large transnational companies. This could result in the exploitation of the workers and the environment in countries where quality of life may already be low.
Poland is a country, which has opened itself up to the global economy. It became a free market in 1990 and since has made strong progress. Although in the very early nineties Poland experienced a sharp decline in GDP, it has since resumed steady growth. In 1999 its GDP growth was 4.1%. The private sector now accounts for over 55% of the total GDP. In early 1990, Poland was experiencing hyper-inflation with levels of up to 1200%. In 1999 the inflation rate was lowered to 7.3%, which although is still high by developed world standards, is slowly dropping. Also in the early nineties, Poland had huge unemployment rates with most sectors at around 30%. This has now been lowered to 13%, which again is high by developed nations’ standards but is a lot less than the rates experienced early in the decade.
Essentially, the difference between economic growth and economic development is that one is a quantitative measure (growth) and the other is a qualitative measure (development). Economic development can be measured using a variety of indicators, mostly developed by the United Nations Development Program (UNDP), though another widely used indicator was developed by the World Bank. Globalisation can have many affects on nations, depending on their government policies and also on their economic status.
Developing country
Developing country is a term generally used to describe a nation with a low level of material well being. There is no single internationally-recognized definition of developed country, and the levels of development may vary widely within so-called developing countries, with some developing countries having high average standards of living.[1][2]
Some international organizations like the World Bank use strictly numerical classifications. The World Bank considers all low- and middle- income countries as "developing". In its most recent classification, economies are divided using 2008 Gross National Income per capita. In 2008, countries with GNI per capita below US$11,905 were considered developing.[3] Other institutions use less specific definitions.
Countries with more advanced economies than other developing nations, but which have not yet fully demonstrated the signs of a developed country, are grouped under the term newly industrialized countries
Taxes: definition, direct and indirect taxes
To tax (from the Latin taxo; "I estimate", which in turn is from tangō; "I touch") is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law.
Taxes are also imposed by many subnational entities. Taxes consist of direct tax or indirect tax, and may be paid in money or as its labour equivalent (often but not always unpaid). A tax may be defined as a "pecuniary burden laid upon individuals or property to support the government […] a payment exacted by legislative authority."[1] A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government […] whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name."[1]
In modern taxation systems, taxes are levied in money, but in-kind and corvée taxation are characteristic of traditional or pre-capitalist states and their functional equivalents. The method of taxation and the government expenditure of taxes raised is often highly debated in politics and economics. Tax collection is performed by a government agency such as Canada Revenue Agency, the Internal Revenue Service (IRS) in the United States, or Her Majesty's Revenue and Customs (HMRC) in the UK. When taxes are not fully paid, civil penalties (such as fines or forfeiture) or criminal penalties (such as incarceration)[2] may be imposed on the non-paying entity or individual.
Purpose of taxation: Taxation has four main purposes or effects: Revenue, Redistribution, Repricing, and Representation.
The main purpose is revenue: taxes raise money to spend on roads, schools and hospitals, and on more indirect government functions like market regulation or legal systems. This is the most widely known function. A second is redistribution. Normally, this means transferring wealth from the richer sections of society to poorer sections. A third purpose of taxation is repricing. Taxes are levied to address externalities: tobacco is taxed, for example, to discourage smoking, and many people advocate policies such as implementing a carbon tax. A fourth, consequential effect of taxation in its historical setting has been representation.[3] The American revolutionary slogan "no taxation without representation" implied this: rulers tax citizens, and citizens demand accountability from their rulers as the other part of this bargain. Several studies have shown that direct taxation (such as income taxes) generates the greatest degree of accountability and better governance, while indirect taxation tends to have smaller effects.[
Direct and indirect taxes
Taxes are sometimes referred to as direct tax or indirect tax. The meaning of these terms can vary in different contexts, which can sometimes lead to confusion. In economics, direct taxes refer to those taxes that are collected from the people or organizations on whom they are ostensibly imposed. For example, income taxes are collected from the person who earns the income. By contrast, indirect taxes are collected from someone other than the person ostensibly responsible for paying the taxes. In law, the terms may have different meanings. In U.S. constitutional law, for instance, direct taxes refer to poll taxes and property taxes, which are based on simple existence or ownership. Indirect taxes are imposed on rights, privileges, and activities. Thus, a tax on the sale of property would be considered an indirect tax, whereas the tax on simply owning the property itself would be a direct tax. The distinction can be subtle between direct and indirect taxation, but can be important under the law.
Economic sectors
An economic sector is a certain type of business activity within an economy. Economics is part of the social structure of a society and is concerned with how people produce and consume goods and services. What types of goods and services are produced and consumed in a society depend on geography and social customs. The three major economic sectors are: primary, secondary and tertiary.
The primary economic sector includes obtaining and refining raw materials such as wood, steel and coal. Primary economic sector workers include loggers, steelworkers and coalminers. All types of natural resources industries such as fishing, farming, forestry and mining are a part of the primary economic sector.
The secondary economic sector deals with the processing of raw materials into finished goods. Builders and potters are examples of secondary economic sector workers. Lumber from trees is made into homes and clay from the earth is made into pottery. Brewing, engineering and all types of processing plants are part of the secondary economic sector.
The tertiary economic sector has to do with services to businesses and consumers. Dry cleaners, real estate agents and loan officers fall into the category of tertiary economic sector workers. Transportation, banking, tourism and retail stores are all part of the tertiary economic sector. The movement of goods and services through the primary, secondary and tertiary sectors is referred to as the "chain of production." For example, trees are sourced to make paper, then the pulp is processed to create the paper and then the finished product is sold in stores. Some people consider government and education to be solely part of the tertiary sector, while others add the quaternary economic sector and the quinary economic sector to the three main sectors.
Public sector
The part of the economy concerned with providing basic government services. The composition of the public sector varies by country, but in most countries the public sector includes such services as the police, military, public roads, public transit, primary education and healthcare for the poor. The public sector might provide services that non-payer cannot be excluded from (such as street lighting), services which benefit all of society rather than just the individual who uses the service (such as public education), and services that encourage equal opportunity.
In India, public sector undertaking (PSU) is a term used for a government-owned corporation (company in the public sector). The term is used to refer to companies in which the government (either the Union Government or state or territorial governments, or both) owned a majority (51 percent or more) of the company equity.
A government-owned corporation, state-owned enterprise, or government business enterprise is a legal entity created by a government to undertake commercial activities on behalf of an owner government, and are usually considered to be an element or part of the state. There is no standard definition of a government-owned corporation (GOC) or state-owned enterprise (SOE), although the two terms can be used interchangeably. The defining characteristics are that they have a distinct legal form and they are established to operate in commercial affairs. While they may also have public policy objectives, GOCs should be differentiated from other forms of government agencies or state entities established to pursue purely non-financial objectives that have no need or goal of satisfying the shareholders with return on their investment through price increase or dividends.
GOCs can be fully owned or partially owned by Government. As a definitional issue, it is difficult to determine categorically what level of state ownership would qualify an entity to be considered as "state-owned", since governments can also own regular stock, without implying any special interference. As an example, the Chinese Investment Corporation agreed in 2007 to acquire a 9.9% interest in the global investment bank Morgan Stanley, but it is unlikely that this would qualify the latter as a government-owned corporation. Government-owned or state-run enterprises are often the result of corporatization, a process in which government agencies and departments are re-organized as semi-autonomous corporate entities, sometimes with partial shares listed on stock exchanges.
The term government-linked company (GLC) is sometimes used to refer to corporate entities that may be private or public (listed on a stock exchange) where an existing government owns a stake using a holding company. There are two main definitions of GLCs are dependent on the proportion of the corporate entity a government owns. One definition purports that a company is classified as a GLC if a government owns an effective controlling interest (>50%), while the second definition suggests that any corporate entity that has a government as a shareholder is a GLC.
A quasi-governmental organization, corporation, business, or agency (parastatal) is an entity that is treated by national laws and regulations to be under the guidance of the government, but also separate and autonomous from the government. While the entity may receive some revenue from charging customers for its services, these organizations are often partially or majorly funded by the government. They are usually considered highly important to smooth running of society, and are sometimes propped up with cash infusions in times of crisis to help surmount situations that would bankrupt a normal privately-owned business. They may also possess law-enforcement authority, usually related to their functions.
Private sector
The part of the economy that is owned and controlled by private individuals and business organizations such as private and public limited companies. In a free enterprise economy, the private sector is responsible for allocating most of the resources within the economy. This contrasts with the public sector, where economic resources are owned and controlled by the state.
Monetary policy
Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy.[1] Monetary theory provides insight into how to craft optimal monetary policy.
Monetary policy is referred to as either being an expansionary policy, or a contractionary policy, where an expansionary policy increases the total supply of money in the economy, and a contractionary policy decreases the total money supply. Expansionary policy is traditionally used to combat unemployment in a recession by lowering interest rates, while contractionary policy involves raising interest rates in order to combat inflation. Monetary policy is contrasted with fiscal policy, which refers to government borrowing,
Monetary policy tools
Monetary base: Monetary policy can be implemented by changing the size of the monetary base. This directly changes the total amount of money circulating in the economy. A central bank can use open market operations to change the monetary base. The central bank would buy/sell bonds in exchange for hard currency. When the central bank disburses/collects this hard currency payment, it alters the amount of currency in the economy, thus altering the monetary base.
Reserve requirements: The monetary authority exerts regulatory control over banks. Monetary policy can be implemented by changing the proportion of total assets that banks must hold in reserve with the central bank. Banks only maintain a small portion of their assets as cash available for immediate withdrawal; the rest is invested in illiquid assets like mortgages and loans. By changing the proportion of total assets to be held as liquid cash, the Federal Reserve changes the availability of loanable funds. This acts as a change in the money supply. Central banks typically do not change the reserve requirements often because it creates very volatile changes in the money supply due to the lending multiplier.
Discount window lending: Many central banks or finance ministries have the authority to lend funds to financial institutions within their country. By calling in existing loans or extending new loans, the monetary authority can directly change the size of the money supply.
Interest rates: The contraction of the monetary supply can be achieved indirectly by increasing the nominal interest rates. Monetary authorities in different nations have differing levels of control of economy-wide interest rates. In the United States, the Federal Reserve can set the discount rate, as well as achieve the desired Federal funds rate by open market operations. This rate has significant effect on other market interest rates, but there is no perfect relationship. In the United States open market operations are a relatively small part of the total volume in the bond market. One cannot set independent targets for both the monetary base and the interest rate because they are both modified by a single tool — open market operations; one must choose which one to control.
In other nations, the monetary authority may be able to mandate specific interest rates on loans, savings accounts or other financial assets. By raising the interest rate(s) under its control, a monetary authority can contract the money supply, because higher interest rates encourage savings and discourage borrowing. Both of these effects reduce the size of the money supply.
Fiscal Policy
Measures employed by governments to stabilize the economy, specifically by adjusting the levels and allocations of taxes and government expenditures. When the economy is sluggish, the government may cut taxes, leaving taxpayers with extra cash to spend and thereby increasing levels of consumption. An increase in public-works spending may likewise pump cash into the economy, having an expansionary effect. Conversely, a decrease in government spending or an increase in taxes tends to cause the economy to contract. Fiscal policy is often used in tandem with monetary policy. Until the 1930s, fiscal policy aimed at maintaining a balanced budget; since then it has been used "counter-cyclically," as recommended by John Maynard Keynes, to offset the cycle of expansion and contraction in the economy. Fiscal policy is more effective at stimulating a flagging economy than at cooling an inflationary one, partly because spending cuts and tax increases are unpopular and partly because of the work of economic stabilizers. See also business cycle.
Thus fiscal policy is the use of government spending and revenue collection to influence the economy. It can be contrasted with the other main type of economic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the supply of money. The two main instruments of fiscal policy are government spending and taxation. Changes in the level and composition of taxation and government spending can impact on the following variables in the economy:
• Aggregate demand and the level of economic activity;
• The pattern of resource allocation;
• The distribution of income.
Fiscal policy refers to the overall effect of the budget outcome on economic activity. The three possible stances of fiscal policy are neutral, expansionary, and contractionary:
• A neutral stance of fiscal policy implies a balanced budget where G = T (Government spending = Tax revenue). Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.
• An expansionary stance of fiscal policy involves a net increase in government spending (G > T) through rises in government spending, a fall in taxation revenue, or a combination of the two. This will lead to a larger budget deficit or a smaller budget surplus than the government previously had, or a deficit if the government previously had a balanced budget. Expansionary fiscal policy is usually associated with a budget deficit.
• A contractionary fiscal policy (G < T) occurs when net government spending is reduced either through higher taxation revenue, reduced government spending, or a combination of the two. This would lead to a lower budget deficit or a larger surplus than the government previously had, or a surplus if the government previously had a balanced budget. Contractionary fiscal policy is usually associated with a surplus.
The idea of using fiscal policy to combat recessions was introduced by John Maynard Keynes in the 1930s, partly as a response to the Great Depression.
Economic effects of fiscal policy
Governments use fiscal policy to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives of price stability, full employment, and economic growth. Keynesian economics suggests that adjusting government spending and tax rates are the best ways to stimulate aggregate demand. This can be used in times of recession or low economic activity as an essential tool for building the framework for strong economic growth and working toward full employment. The government can implement these deficit-spending policies to stimulate trade due to its size and prestige. In theory, these deficits would be paid for by an expanded economy during the boom that would follow; this was the reasoning behind the New Deal.
Governments can use budget surplus to do two things: to slow the pace of strong economic growth, and to stabilize prices when inflation is too high. Keynesian theory posits that removing funds from the economy will reduce levels of aggregate demand and contract the economy, thus stabilizing prices.
Some classical and neoclassical economists argue that fiscal policy can have no stimulus effect; this is known as the Treasury View[citation needed], which Keynesian economics rejects. The Treasury View refers to the theoretical positions of classical economists in the British Treasury, who opposed Keynes' call in the 1930s for fiscal stimulus. The same general argument has been repeated by neoclassical economists up to the present. From their point of view, when government runs a budget deficit, funds will need to come from public borrowing (the issue of government bonds), overseas borrowing, or the printing of new money. When governments fund a deficit with the release of government bonds, interest rates can increase across the market. This is because government borrowing creates higher demand for credit in the financial markets, causing a lower aggregate demand (AD), contrary to the objective of a budget deficit. This concept is called crowding out; it is a "sister" of monetary policy.
Other possible problems with fiscal stimulus include the time lag between the implementation of the policy and detectable effects in the economy, and inflationary effects driven by increased demand. In theory, fiscal stimulus does not cause inflation when it uses resources that would have otherwise been idle. For instance, if a fiscal stimulus employs a worker who otherwise would have been unemployed, there is no inflationary effect; however, if the stimulus employs a worker who otherwise would have had a job, the stimulus is increasing demand while labor supply remains fixed, leading to inflation.
Disinvestment
Disinvestment, sometimes referred to as divestment, refers to reduction of some kind of asset for either financial or ethical objectives or sale of an existing business by a firm. A divestment is the opposite of an investment. Firms may have several motives for divestitures. First, a firm may divest (sell) businesses that are not part of its core operations so that it can focus on what it does best. For example, Eastman Kodak, Ford Motor Company, and many other firms have sold various businesses that were not closely related to their core businesses.
A second motive for divestitures is to obtain funds. Divestitures generate funds for the firm because it is selling one of its businesses in exchange for cash. For example, CSX Corporation made divestitures to focus on its core railroad business and also to obtain funds so that it could pay off some of its existing debt.
A third motive for divesting is that a firm's "break-up" value is sometimes believed to be greater than the value of the firm as a whole. In other words, the sum of a firm's individual asset liquidation values exceeds the market value of the firm's combined assets. This encourages firms to sell off what would be worth more when liquidated than when retained.
A fourth motive to divest a part of a firm may be to create stability. Phillips for example divested its chip division called NXP because the chip market was so volatile and unpredictable that NXP was responsible for the majority of Phillips' stock fluctuations while it represented only a very small part of Phillips NV.
A fifth motive for firms to divest a part of the company is that a division is underperforming or even failing.
Disinvestment in India
In May 2004, Government adopted the National Common Minimum Programme (NCMP), which outlines the policy of the Government with respect to the public sector. The relevant extracts of NCMP are given hereinunder:
“ The UPA Government is committed to a strong and effective public sector whose social objectives are met by its commercial functioning. But for this, there is need for selectivity and a strategic focus. The UPA is pledged to devolve full managerial and commercial autonomy to successful, profit-making companies operating in a competitive environment. Generally profit-making companies will not be privatized.
All privatizations or DISINVESTMENT OF GOVERNMENT SHARES IN THE PUBLIC SECTOR COMPANIES will be considered on a transparent and consultative case-by-case basis. The UPA will retain existing “navratna” companies in the public sector while these companies raise resources from the capital market. While every effort will be made to modernize and restructure sick public sector companies and revive sick industry, chronically loss-making companies will either be sold-off, or closed, after all workers have got their legitimate dues and compensation. The UPA will induct private industry to turn around companies that have potential for revival.
The UPA Government believes that privatization should increase competition, not decrease it. It will not support the emergence of any monopoly that only restrict competition. It also believes that there must be a direct link between privatization and social needs – like, for example, the use of privatization revenues for designated social sector schemes. Public sector companies and nationalized banks will be encouraged to enter the capital market to raise resources and offer new investment avenues to retail investors
Subsidies
A subsidy (also known as a subvention) is a form of financial assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry (e.g., as a result of continuous unprofitable operations) or an increase in the prices of its products or simply to encourage it to hire more labor (as in the case of a wage subsidy). Examples are subsidies to encourage the sale of exports; subsidies on some foodstuffs to keep down the cost of living, especially in urban areas; and subsidies to encourage the expansion of farm production and achieve self-reliance in food production.[1]
Subsidies can be regarded as a form of protectionism or trade barrier by making domestic goods and services artificially competitive against imports. Subsidies may distort markets, and can impose large economic costs.[2] Financial assistance in the form of a subsidy may come from one's government, but the term subsidy may also refer to assistance granted by others, such as individuals or non-governmental institutions, although these would be more commonly described as charity.
Types of subsidies
There are many different ways to classify subsidies, such as the reason behind them, the recipients of the subsidy, the source of the funds (government, consumer, general tax revenues, etc). In economics, one of the primary ways to classify subsidies is the means of distributing the subsidy.
In economics, the term subsidy may or may not have a negative connotation: that is, the use of the term may not be prescriptive but descriptive. In economics, a subsidy may nonetheless be characterized as inefficient relative to no subsidies; inefficient relative to other means of producing the same results; "second-best", implying an inefficient but feasible solution (contrasted with an efficient but not feasible ideal), among other possible terminology. In other cases, a subsidy may be an efficient means of correcting a market failure.
For example, economic analysis may suggest that direct subsidies (cash benefits) would be more efficient than indirect subsidies (such as trade barriers); this does not necessarily imply that direct subsidies are good, but that they may be more efficient or effective than other mechanisms to achieve the same (or better) results.
Insofar as they are inefficient, however, subsidies would generally be considered by economists to be bad, as economics is the study of efficient use of limited resources. Ultimately, however, the choice to enact a subsidy is a political choice. Note that subsidies are linked to the concept of economic transfers from one group to another.
Economics has also explicitly identified a number of areas where subsidies are entirely justified by economics, particularly in the area of provision of public goods.
Budget
Definition: A budget is a spending plan along with proposals to finance the plan and is used to allocate resources to achieve a set of objectives. This financial tool coordinates anticipated expenditures in an effort to maximize resources. A budget is time-specific, and it must be flexible to respond to financial and programmatic changes. A budget, in effect, serves as a financial road map for country, state or an organization.
posted by U&Me | 12:56 AM
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