business perspectives - module i (1)

7/30/2019 Business Perspectives - Module I (1)

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BUSINESS

It is a typical economic activity with the object of

earning income :

Income may be in the form of Profit, accumulation

of wealth or purchasing power

Collectively business means the total business

activities in the country in the industry and

commerce

The activity may be profit or loss in carrying out

production or distribution or providing service


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DIFFERENTKINDOFBUSINESS

ORGANIZATIONS

Proprietary concerns :

Here the business operation is started and

operated by an individual

He is also called as a sole trader or proprietor He starts, organizes manages and bears the risk

and controls the business himself .

The capital contributed may be his own or borrowed

He bears the losses and enjoys all the profits


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Advantages of sole trading :

1. Single ownership run by individual enjoy all profitshimself and also incurs losses if any

2. Easy to form legal formalities are minimum

3. Business decisions can be taken quickly takeadvantage of business s Opportunities for gains

4. Can provide personalized service - to achievepersonal rapport with customers

5. He enjoys the benefit of hard work in the form ofprofits motivate for hard work

6. He can maintain secrecy of business7. Cost of operation is less as he himself is managing it

8. This system encourages self employment


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LIMITATIONSOFSOLETRADING

1. Limited capital only is available own orborrowed cannot expand

2. Single person managerial or organizing ability islimited

3. Suffer from the deficiency in the form of unlimitedliability

4. Risk assumption would be huge wrongdecisions can create lot of damage

5. It is not suitable for big business6. He has to take care of many things cannot pay

equal attention to all aspects some importantaspects suffer can land him in problems


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PARTNERSHIPFIRM

It is a business enterprise formed by two or more

persons called partners

Collectively they are called as a partnership firm

There would be pooling of capital ,skill , organizingtalent and managerial ability.

The capital is contributed by the partners

They also share the business risks

In short : it is a business enterprise which is formedby the association of two or more persons who

carry on a business jointly with the intention of

sharing profits and losses is called partnership


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ADVANTAGESOF PARTNERSHIP

1. More capital can be mobilized two or more personscontribute for capital

2. Formation of the firm is relatively easier

3. They can maintain secrecy

4. Ideas and opinions can be heard and right decisionscan be taken

5. Risk is shared as it is shared by two or more persons

6. Partners come from diverse fields can form expertviews in decision making

7. It is more stable and more continuity in existencecompared to sole trading

8. Dynamic management is possible


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JOINTSTOCKCOMPANIES

Term registered company means a companyincorporated under the companies act 1956-orother cos acts

Definition: a voluntary association of personsassociation of individuals formed for some commonpurpose has capital divisible into parts called asshares

It is an artificial person created by process of lawit has perpetual succession & common seal

It is regarded as a person by law human beinglike Ram or Shyam

It is an artificial person has no body or soul notvisible except to the eye of law

It can sue and be sued


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Decide whether pvt or public , start new or takeoverold, - by promoters

7 or more persors if public co 2 or more cos incase of pvt co associated persons subscribe the

names It may be company ltd by shares 2. co ltd by

guarantee, 3. unlimited co

Documents to be filed:

Ascertain from registrar whether Name is available


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ADVANTAGESOFALIMITEDCOMPANY

1. Huge amount of capital can be mobilized2. Expansion of business is easier can capitalize

reserves3. Can continue for a long period of time4. It can enjoy the economies of scale5. Services of specializes personnel can be availed

6. It encourages savings, motivation

createsemployment and capital formation7. limited liability :limited to the nominal value 8. No. of members: Public co :unlimited 9. Transferability of shares without consent of other

members10. Separate Legal entity for cos: In partnership if partners

die

firm dissolves11. Control: can be obtained by buying shares

partnership shares cant be transferred12. Management of cos can be easily transferred to

employees etc.. But cant be in partnership13. Members and company can sue each other


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LIMITATIONOF JOINTSTOCKCOMPANIES

1. Formation involves lot of legal formalities and alsoexpensive

2. Trade secrecy cannot be maintained

3. Decisions are taken on the basis of majority minorityshare holders are affected by it

4. The directors should act honestly otherwise seriousdamages may result

5. Transfer of shares facilitates speculation businesspublic are unduly influenced by speculative activities

6. Democratic management is only in theory many

share holders do not even attend meetings onlyinfluential share holders exercise powers and manageco

7. Procedural formalities are more urgent actionscannot be taken


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COMPANYV/S PARTNERSHIP

1. Mode of creation: come after regn under cos act vsregn not compulsory

2. Legal status: legal personality v/s partners not distinctfrom firm

3. Liability of members: limited v/s unlimited

4. Management: members cannot manage v/s partnersshould mange5. Transferability: freely transferable v/s consent of all

partners necessary6. Agency: members are not agents of co v/s partners are

agents of firm

7. Objectives : limited to M/A v/s unlimited8. Insolvency: members are not insolvent if co is

insolventv/s if firm insolvent all partners are insolvent9. No of members not limited v/s limited


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HINDU UNDIVIDED FAMILY -HUF

It is carried on by Hindu undivided family

It is managed by senior male member called Karta

Other male members of the family are called Co-

parceners The firm can be the joint property or an ancestral

Property

The liability of the Karta is unlimited


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CO- OPERATIVESOCIETY

It is formed to fulfil the objectives of a section of the

society

It is managed by applying the rule of democracy

It is intended to serve both its members andenvironment or community as a whole

Co-operative societies carry on business for mutual

benefit and work with service motive


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MERITSOF CO-OPERATIVES

1. It provides self help for lower and middle class

people

2. It removes the evils of capitalism

3. Economic problems faced by poorer populationsare solved through co-operatives

4. Formation of co-operative society is easier

members with common interest come together

5. Democratically elected members manage it6. It is not with profit objective but for promoting

public welfare


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LIMITATIONOFCO-OPERATIVES

Management is with controversies educated and richtake advantage of ignorant people

They are subjected to Govt control and interference - itsfreedom is curbed

Timely decisions cannot be taken

There will be domination on of the majority interests It is serving the political purpose of politicians

Corruption is rampant

It cannot raise huge capital as the members themselvesare not rich

Management is not in the hands of experts hencemanagement is always a problem

Due to limitations of capital and organizational abilitycannot undertake business in large scale


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TRUSTS :

Here the person who holds the legal tittle to theproperty manage it for the benefit of some one else

It is established by transferring the assets to anindividual /s , who will manage these assets for the

designated beneficiaries Such individuals who manage are called trustees

Normally trust is formalized through a trust deednot compulsory

The trust deed should be executed on a stamppaper and registered

Only responsible trustees should be appointed tomanage the trust property prudently


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NONGOVERNMENTORGANIZATION - NGO

They are registered bodies which provide services likeeducation, health, social reforms

The members provide free service to the beneficiaries

Funds are raised through public grants from govt or

international bodies also They supplement efforts of govt in development

They have good contact with people to convey theirproblems to govt

They quickly respond to the needs of the poor

They strive to build self-reliant communities

They work to eliminate poverty

They help to mobilize funds for the development of thecommunity


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TYPESOFGOVTAGENCIES

1. departmental undertakings :

These undertakings are managed by separate

departments of Govt attached to a Ministry

Eg. Railways, defense, broadcasting, P & T etc., It will be under the control of the ministry in charge,

Capital is contributed by the govt - expenditure is

out of the annual appropriations from budget

Any income earned is paid into the treasury of thegovt


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Public Corporation :

These govt undertakings are established under the

statute passed by the parliament or legislature

It is an autonomous body - its powers and rightsand functioning are laid down in the statute

It enjoys independence in respect of capital

structure and day to day management

There will not be much interference from govt butthey are accountable

Eg. RBI, SBI, LIC etc.,


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GOVT COMPANIES

Here more than 51% of the share capital is held by

the central govt or state govt or jointly by both.

Such companies enjoy the status of corporate body

under companies act

It also enjoys legal status under the law

It also enjoys a greater operational flexibility


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TRADEASSOCIATIONS

It is a voluntary association of business units

It operates in a certain field for promotion of their

common economic interests

It is a non-profit organization - it does not enter intoany business transaction

The main objective of the association is to protect

the common interest

Trade associations may or may not have sharecapital


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BUSINESS SYSTEM

It is a combination of policies, personnel, equipment and

computer facilities to co-ordinate activities of business

It establishes rules and procedures of the business

organization

Business environment :

It refers to all external forces which have a bearing on

the functioning of the business

Some of the Environment includes factors such as

socio-economic , technological, suppliers, competitorsand government, political system etc.,

These factors may give opportunities and pose threats

to the firm


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OBJECTIVESOFBUSINESS : ECONOMIC

OBJECTIVES :

Earning adequate profit - reward for taking risk it ismeasuring rod of success needed for stability andprosperity - source of finance

Creation of Customers : it can succeed only if it hascustomrs for its goods - produce as per want of

consumer Innovation : adopt to changing conditions viz new

techniques, new process, new designs etc.,

Socio economic objectives :

To supply goods and services of std., quality wanted by

the societyAvoid anti-social practices like hoarding, black marketing

etc.,

Provide employment opportunity to the people

Pay fair wages and benefits to the employees


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SOCIALOBJECTIVES OFBUSINESS

Payment of timely and regular payment of taxes

Promote social welfare activities

Take steps /avoid polluting the environment

Promote balanced regional development

Human objectives :

Promote humane treatment to employees

Should provide fair deal to employees

Provide job satisfaction to employees

Encourage employees in decision making

National Objectives :

Produce as per national priorities

Promote exports and import substitutes

Help small scale industries

Give necessary training to make them skilled

Achive and create socialistic pattern of society


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SCOPEOFBUSINESS

1. Production : produce goods for selling

2. Purchase : purchase goods for production or for sale

3. Storing : to bridge the time lag between productionand sale

4. Transportation : move the goods from suppliers toproduction site - and move the finished goods toconsumers

5. Advertising : provide information about goods topromote sales

6. Banking : provide funds to finance business7. Insurance : to reduce the risks associated with

business

8. Appoint agents : to promote business activity


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FACTORSAFFECTINGSELECTIONOF

BUSINESSORGANIZATION

Size of the business unit : depends upon the level ofproduction eg. Small level proprietary is enough forlarge scale joint stock co is needed

Capital employment : if capital needed is smallproprietary concern is enough if huge capital is

needed there is need to set up Joint stock co Integration : if owner wants to manage and control all

activities he can manage himself - in large undertakingsneed to create distinction between ownership andmanagement

Stability : need to create stability to be successful

Flexible : the business organization should be flexible tochanging scenario

Tax liability : the tax liability is different andconcessional for certain line of activity select suchactivity as far as possible


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NATUREANDSCOPEOFENVIRONMENTAL

SCANNING

Environmental scanning involves internal and externalenvironments

Scanning is important in the following ways :

Enables management to forecast the trends that affectfortunes of business

Gives information regarding products needed,positioning in market (competition), marketsegmentation, types of services to be provided,businesses to be acquired or sold

Once the opportunities and threats are identified firm

can formulate the strategies to achieve target It can help the device the value chain

Firm can assess the need for physical and personnelcompetencies needed

Make a through SWOT analysis of the company


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BUSINESS ENVIRONMENT

According to Kieth Davis : Business environment is theaggregate of all conditions, events that influences and surroundsand affect it.

A business firm gets resources from the environment andsupplies its goods and services to the environment

There are internal and external forces

The environmental forces provide opportunities and threats to thebusiness community

Business and environment are interrelated

Business can expand if the environment is favorable

Eg. Produce more if govt gives subsidy

Business faces challenges and problems if the environment isnot favorable

eg. Recession cut down the rate of production , if competition ismore they can go for massive advertisement

It is dynamic ever changing economic political, culturaltechnological factors


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TWOTYPESOFENVIRONMENT : INTERNAL &

EXTERNAL FACTORS

Internal Environment : they exist within business firm -generally controllable

eg. Marketing mix, physical facilities, personnel , R & Dcapabilities , financial policies , capital structure etc., etc

External environment : These factors exist outside the business firm

They are beyond the control of a companysuccess ofthe firm depends upon the adaptability of the firm to thefirm to the environment

The factors are : government policies, demographicfactors, legal factors etc.,

Elements of external environment are :

1. Micro environment 2. Macro environment


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MICROENVIRONMENT

1 suppliers: uncertainty of supply is a constraint - maintain highinventories increase cost

2. Customers: choice of the customers may change - it has itsrelevance to profitability

3. Competitors : - in case of severe competition take upvigorous advertisement

Marketing intermediaries : effectiveness of marketing agents whobring sales of a product

Macro environment : Uncontrollable factors

1. Economic environment : policy of the government - eg.Restrictive import policy or policy to protect home industries

2. Political environment : the kind of political system has animpact on the business : eg. There is a different kind of policies incommunist countries

3/ Legal environment : govt bring in laws regarding wages,employment opportunities, health at work, emission of air, etc


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MACRO EXTERNALENVIRONMENT - CONTD

Social environment : some of the examples are buying andconsumption habits of people , customs and traditions ,education etc.,

Demographic environment : size, growth rate, agecomposition , gender of the population etc., - demand for

goods get affected by these factors Natural environment : certain climatic conditions are useful for

certain industries eg. More demand for jeeps in hilly areasthan cars

Technological environment : a firm which cannot cope with the

technological changes may not be able to survive eg.Advent of TV , VCP, VCR have affected cinema theatres

International environment : this affects exports and imports :

eg. In case of recession in foreign markets adoption ofprotection policies by foreign nations may create problems


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BUSINESSETHICS :

Ethos - Greek word - means character

It is a set of standards and code or value system

Business ethics refers to the application of ethics tobusiness

It is the study of good and evil , right and wrong actionsof businessman

It is the moral standards which are expected to befollowed by the people who manage the business

business is a part of the society - it has to contribute to

the welfare of the society To excel and develop business needs the patronage of

the society - eg. Customers, suppliers etc.,

Even a wealthy strong co cannot exist in the long run if itis run on unethical means


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SOMEOFTHEBUSINESSETHICSARE :

Giving fair and equitable treatment to employees

Charge fair prices from the customers

Provideing correct information in advertisement

Use fair weights and measures of commodities

Pay taxes to the govt and other bodies

Earn reasonable profit

Be a good corporate citizen


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IMPORTANCEOFETHICSINBUSINESS

Ethical attitude towards employees Manager shouldknow that his decision affects lives of thousands ofemployees

Good and skilled labor can be attracted to theorganization - as it is employee friendly

Customers get a good feeling that they are getting valuefor their money

Firm with Ethical standards make better decisionswhich are in the interest of the public

Ethics and profit ethics go together a company withethics is sure to be successful in the long run

Law cannot protect society but ethics can protect eg.Measures taken for workers health and pollution controleven before law is passed


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FACTORSWHICHGOVERNBUSINESSETHICS

Value derived from institutions like family, religion, school,government - prescribe what is good or bad - Right behavior isrewarded and vice versa

Some times organizations goals do not match with individualethical goals such cases individual has to show leadership andintegrity

Superiors : leaders should serve as models and mentors andnot otherwise

some times employees succumbs to pressure from superiors andbecome un ethical

eg. Secretary may say Boss is out even though he is in asinstructed by boss

Peers and colleagues create significant influence - a personjustify his wrong action telling that others are doing so

Professional codes : these days the organizations andgoverning institutions prescribe code of conduct eg. Institute ofChartered accountants of India, ICWA, or AIMA


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FACTORSINFLUENCING ETHICS

Corporate culture :

it should have ethical culture in the areas of

leadership, reward systems, fairness , care for

employees and community

Environment :

The actions of the organization has to be

environmental friendly understand nature - take

note of droughts, heat waves, forest fire polluted air,

etc.,


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ETHICALISSUESIN INDIANBUSINESS

After 1990 harshad mehta scam created moreof awreness in india

There are issues regarding corruption, insidertrading, misappropriation of accounts, misleading

advertisements, exploitation of child labour ,exploitation of women in work place, safty in workplace etc.,

These are some of the areas where govtregulations and watch dog bodies are needed to

monitor business activitis Ethical business can be classified under these

basic groups : equity, rights, honesty, corporategovernance, corporate power


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BASICGROUPS

1. Equity : it means fairness apart from legal andhuman rights - like equal wages to women

employees, exploitation of child labour etc.,

2. Rights : it refers to the Just claim of a person

The claim may be legal or behaviroral

Employee rights: in work place not to exlploit

women and children in work place, long hours of

work, unhealthy working conditions etc.,

Employer rights : like action against inefficient

employyees, take action after due process,

evaluate performance, demand efficiency, no work

no pay etc.,


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3. Honesty : business man should not cheat, seal, lie,bribe,

Some of the examples : insider trading, helping acompetitor, inappropriate gifts, wrong claims inadvertisement, etc.,

4. Corporate governance : it is to encourage the use ofresources and at the same time be accountable of theseresources

The aim is to protect the interests of individuals, corpns,and society

It is the relationship between the directors,shareholders, society etc

5. corporate power : take care of the issues like, saftyof work place, product safty, merger or downsizeingetc.,


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VALUES

Values are global beliefs that guide actions and

judgments

Values represent basic convictions of what is good

and what is bad desirable and undesirable in

ones conduct

Values form the bed rock of culture

It defines the societys norms which are justifiable

It includes freedom, democracy, truth, justice,

honesty loyalty, collective responsibility


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SOURCESOFVALUESYSTEMINDIVIDUAL

VALUESAREAFFECTEDBY:

1. family background : parents imbibe moral valuesin children by reward and punishment system

2. society factors; schooling and teachers has amajor role to play in molding the value system

3. personal factors : persons intelligence, ability,educational determine his values

4. cultural values : it is passed on from generationto generation - eg. A person is friendly, hostiledepends upon the culture he belongs

5. religious factors : religion gives a of values toimbibe


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6. life experiences : learn from own and others

experiences individuals form logical decisions on

this

Role demands : it is associated with the particular

position in organization :

Eg. If the informal code demands that the manager

has to be social with employees he has to

cultivate that habit to come up in ladder , even if he

does not wish so


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CORPORATEGOVERNANCE

According to Milton Friedman:

corporate governance is to conduct the business in

accordance with the owner or shareholders desires,

- to make as much money as possible while

conforming to the basic rules of the society , lawand customs

Corporate governance is the set of mechanisms

used to manage the relationship among

stakeholders , to control directions andperformance of organisation


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CHARACTERISTICSOFCORPORATE

GOVERNANCE

1. Discipline : it is a commitment by a companys

senior management to adhere to behavior that is

universally recognized and accepted as proper

Have commitment to adhere to procedures,

processes of the organization

2. Transparency: actions should be such that the

outsider is able to make meaningful analysis of

companys actions

3. Accountability : management should beaccountable of their actions and decisions

4. Responsibility : the management should act

responsibly to the organisation and stake holders


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5. Fairness : rights of various groups have to be

respected - eg. Minority share holders interest

should be protected

6. social responsibility : should place high priority to

ethical standards - should be a good corporatecitizen it should be non-discriminatory and non-

exploitative

7. This can bring lot of reputation to the company


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SCOPEOFTHECORPORATEGOVERNANCE

Preparation of companys financial statements Internal control independence of auditors

Compensation arrangements of top management

Way of nominating the individuals to board

Resources made available to the directors

Code of conduct for corporate governance : aspects to be keptin mind :

Universally acceptable ethical values

Board function in an impartial manner

Transparency in functioning

Encourage discipline

Ensuring confidentiality

Incentive for efficient and effective functioning

Loyalty to the organization

Providing motivation

Etc., etc.,


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End of Module 1


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KEYINDICATORSOFECONOMIC

PERSPECTIVES

Gross Domestic Product _ GDP:

It is the basic measure of a countrys economic

performance

It is the market value of all final goods andservices made within the borders of the countryin a year

Within the borders include : political front airs ,

territorial waters and ships and aircrafts operated

by residents of the country , fishing vessels and oil& natural gas rigs , embassies and military

establishments of the country situated abroad


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CHARACTERISTICSOF GDP

Gross indicates domestic product inclusive of

depreciation

It includes only value of final goods and services

Value of second hand goods is excluded only new

goods are taken into account

GDP is confined to only domestic territory of a

country

It does not include :

A. transfer payments

B. capital gains and income earned through illegal

activities


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TYPESOF GDP

Nominal GDP :

it is the value of total flow of goods and services produced inan economy over a specified period of time at current marketprices

The GDP is Distorted by inflation if there is no adjustment

This unadjusted GDP is known as nominal GDP

Real GDP :

it is physical quantity of goods and services produced

In an inflationary environment , the nominal DGP is greaterthan the real GDP

GDP Deflators :

Cost of purchasing the items included in GDP during theperiod , relative to the cost of purchasing the same itemsduring the base year is termed as DGP Deflator


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APPROACHESTOMEASURE GDP

1. Expenditure approach :

Consumption goods and services + gross investments+Govt Purchases + (exports imports )

2. Income approach : it is arrived by adding up thefactor incomes to the factors of production in the society- this include:

Employee compensation + corporate profits+proprietor's income +rental income + net interest

3. value added approach:

Ie . The value of sale of goods minus purchase ofintermediate goods to produce the goods sold

Note: GDP s of different countries may be compared byconverting their value in notional currency


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ADVANTAGESOF GDP

1. it is an indicator of standard of living of the

people in a country comparable between

countries

2. comparison of productivity and economic health

can be done between countries

3. it is a easier parameter to measure - other

parameters like output per worker etc is not so

effective


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DISADVANTAGE OF GDP

1. wealth distribution : it does not take into account

the disparity of income between the rich and poor

2. Non-market transactions are excluded house

hold production or unpaid services are not

considered for calculation

3. illegal activities or tax avoiding activities are

unreported so GDP is underestimated

4. quality of goods cheap goods are bought more

and more by people high durability goods arepurchased less here higher GDP is resulting from

inefficiency and waste


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SECTORALSHARES

Sectoral shares refer to the contribution of each sector to theGDP of the nation

The three sectors in any economy are :

Agricultural sector, : it is process of producing food, feed, fiberand other goods by the systematic raising of plants and animals

It contributes 18.5% to the GDP

industrial sector : it is concerned with the production of goods

It contributes 26.4% to the GDP

service sector : it is the non-material equivalent of goods

It contributes 55.1% to the GDP- more than half of ur GDP

It is due to liberalization after 90s more exports in services

sector took place Service is the economic activity that does not result in ownership

- main difference /distinction from that of physical goods


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AGRICULTURAL OUTPUT :

Agricultural out put has been defined as consisting of thoseproducts which are not consumed in further processing withinagriculture but are available for consumption

Its share to GDP is an indication of economic development

But all is not well with agricultural sector

Agriculture is impt for eco development

It provides food for population and raw material for industries lapses in food production cause serious question about food

security dependence on imports for food - drain on foreignexchange resources

Shortage of food may result in mal-nutrition , hunger poverty and a poor image of the economy

internationally Agriculture has contributed 16.6%on GDP in 2007

despite of deploying 70% of the population in agriculture Emphasis is given in our 5 year plans to improve agriculture


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CAUSESOFLOWPRODUCTIVITYIN

AGRICULTURE :

Greater pressure of population on land : 70% of our populationDepend on agriculture - industry cannot absorb raisingpopulation

Small and fragmented land holding : Average holding in India isvery low - i.e. 2.6Hectaes it is also fragmented land holding isuneconomical

Defective land tenure zamindari system agl. Laborer has the fear of loosing job always

Conservatism in farmers : they are illiterate, ignorant andsuperstitious - they dont change to improved method of farming

Inadequate irrigation facilities: farmers are gambling withmonsoon uncertain rainfall

Lack of finance and marketing facilities : dependence on moneylenders , exploitation by middlemen and Brokers

Lack of agriculture Inputs : like seeds and fertilizers

Poor techniques of production : old plough and spade andanimals are used not modern equipments


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MEASURESTOIMPROVEAGRICULTURAL

PRODUCTIVITY

Improve volume of cultivable land : presently outof 84 crore acres , only 32 acres are used

Develop irrigation facilities : by govt

Improvement in land tenure system : - ownership

rights should be given to farmers to improve Increase credit facilities cheap credit through

banks and co-operatives

Fixation of economic holding - consolidation ofland holding should take place

Encourage co-operative farming

Provide proper price to the agricultural produce


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INFLATION

It refers to a situation when there is a general rise inprices and a corresponding fall in the value of money

It causes a decline in the purchasing power or value of

money

Prices keep on rising due to excess supply or due toexcess supply of money and lower production of

exchangeable goods

Crowther : defines it as state in which the value of

money is falling and prices are rising

Every increase in price cannot be treated as inflation

There should be a persistent upward rise in the general

price level at a substantial rate for a prolonged period of

time


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FACTORSCAUSINGANINCREASEINDEMAND

1. Increase in public expenditure : eg. Eg. During a time of war or in developmental planning there

will be increase in demand for goods and services in aneconomy - this results in increase in prices of goods andservices

2. Increase in private expenditure - eg. When business

conditions are good entrepreneurs invest more funds in newbusinesses causing increase in demand

3. Increase in exports : higher demand for product fromabroad increase exports less available for domesticconsumption increase price

Reduction in Taxes : leads to increase in purchasing power

due to availability of money in the hands of people Repayment of public debt by govt : this increases money in

the hands of public leading to increase in demand for goods

Rapid growth of population : increase the demand for goods


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EFFECTSOF HIGH INFLATION

People with fixed income suffer as the prices arehigher but their income is same as before

Trade union demand higher wages - this can again fuelinflation more of strikes and unrest

If inflation is higher the exports become more expensiveto other countries creates deficit

Encourage speculation : create uncertainty amongproducers create speculative tendency

Reduction in savings : reduced savings adversely

affects capital formation hinders production Hoarding and black marketing rises expecting prices

to go up

Continuous raise in prices creates sellers marketmakes producers


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EFFECTSOFINFLATIONCONTD

Debtors and creditors : it is gain to debtors and lossto creditors value of money at the time of lending

is more and at the time of repayment is it is lower

Investors in fixed income Securities lose due to fall

in value of money

Farmers are benefited as the value for their

produce goes up

When the prices rise in home country than in

foreign country the value of the home currencyfalls


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INFLATIONANDDEFLATION

During inflationary cycle business men startinvesting with optimism

During deflation industries experience slackness in

demand for industrial goods, banks face crisis in

recovery , prices fall, incomes and wages go down

During inflation productive resources are in full

employment

In deflation unemployment gradually spreads to all

sectors


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CALCULATIONOFTHEINFLATIONRATE

Inflation rate =

= P1- PO x100

PO

P1 is price index for current year

Po is the price index for the previous year


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PRICEINDICIESIN INDIA

Whole sale price Index (WPI) :

It is the most frequently estimated measurement of price

in India

It is computed at aggregate level of major and sub

groups of individual commodities on weekly basis This index is used for measuring inflation in India

Consumer Price Index : it is available for only 4categories of consumers ie. Industrial workers, urban

employees, agricultural laborers and rural laborers The coverage is not as wide as WPI

Used only for wages and dearness allowance

calculations


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DEMANDPUSHINFLATION

It is a situation where the aggregate demand for goods andservices exceeds the available supply of output

COST PUSH INFLATION ; :

it occurs due to supply side factors like

increase in wage rates Increase on price of raw materials

STAGFLATION : it is a situation where the inflation and

stagnation of economic activity exists side by side

There will be recessionary tendency in certain industries

Arises due to continuous inflation leading to fall in demand


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MONEYSUPPLY

Money supply referes to the total supply of moneyin circulation in a given gountrys economy at agiven time

RBI has classified supply of money in four

components as follows: M1 = Currency with public + Demand deposit with

Banks + othr deposits with RBI

M2 = M1 + Post office savings Bank deposits

M3 = M1 + time deposits with Banks

M4 = M3 + total post office deposits

Money supply includes: currency with Public ,deposits with banks, Deposits with RBI, Depositswith post office


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FACTORSAFFECTINGMONEYSUPPLYIN INDIA

Deficit financing in budget : if expn is more thanincome - Govet takes loan from banks

CRR : if CRR is more Banks can only create lesscredit

Rate of Interest : if rate of int is more banks getmore deposits the banks can lend it

Sale and purchase of securities by RBI if RBIsells securities money supply contracts - vice vrsa

If RBI purchases more FX or public converts moreof FX to rupee - supply of money increases

Banking habits if people keep more depositsbanks can grant more loans


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FOREIGN TRADE

No country is self sufficient - need for internationaltrade

Export and import of goods and services is calledForeign trade

NEED FOR FOREIGN TRADE :

large scale production ;: there is scope t cater to foreignmarkets

Degree of self sufficiency : every country cannotproduce every thing there is need for FX Trade

Geographic factors : different countries are endowedwith different natural resources eg. Petrol , diesel etc.,

Occupational distribution : People in different countriesspecialize in different areas


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FOREX RESERVES

Fx reserves prtain to the stock of foreign currency,gold holdings of the central Bank it includes SDR

( Special drawing rights from IMF)

A country holds a basket of foreign currencies and

the total of these in one denomination usually dollargives the forex reserves level

Forex reserves indicate its ability to :

Pay for imports

Discharge its external debt liabilities

Raise fresh borrowings in international market

Intervention to stabilize rate of exchange


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EXCHANGE RATES

Exchange rates between two currencies is the ratesat which they are exchanged or sold against each

other

Eg. If The exchange rate for Indian rupee is Rs. 52,

this means that 1 American dollar can beexchanged for Rs. 52.

The foreign exchange market is one of the largest

markets in the world

Foreign exchange rate is the price of one currencyquoted in terms of another currency


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FIXEDANDFLEXIBLEEXCHANGERATS

Fixed exchange rate system : Countries following the fixed exchange rate system agree to keep

their currencies at a fixed , pegged rate and the change in theirvalue only at fairly infrequent intervals -

Changes only when the economic situation forces them to do so

Advantages /merits :

1. easy to attract foreign capital - as foreigners are not interestedto invest in an unstable currency

2. it eliminates speculation in FX market

3. unstable exchange rates may encourage flight of capital

4. helps developing countries which have persistent balance ofpayment deficits prevent continuous depn in value

5. if exchange stability is not assured , exporters and importerswill not be knowing how much they will receive/pay

6 it results in economic stabilization


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DEMERITSOFFIXEDEXCHANGERATESYSTEM


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CONTD. BUSINESSPERSPECTIVESCONTD

Demerits of fixed exchange rate : The countries which are liberalized and globalised prefers flexible

exchange system

It increases the BOP of most of the countries

It will not work where fx policies and economic policies are not properlyco-ordinated

FLEXIBLE EXCHANGE RATE SYSTEM : Under this system exchange rates are freely determined in an open

market

The rates are determined by market forces like demand and supply offoreign exchange

Merits :

1. It is simple to operate - adjustments in rate are a continuous process

2. It reinforces the effectiveness of monetary policy

3. It permits free trade and convertible currencies on continuous basis

4. It gives more independence to govt on domestic policies

DEMERITS OF FLEXIBLE EXCHANGE RATE


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DEMERITSOFFLEXIBLEEXCHANGERATE

SYSTEM

1. It is impossible for the exporters and importers onthe price they will receive or pay for foreign

exchange

2. It gives inflationary bias to an economy eg.

When the currecy depreciates , we have to paymore for imports (costlier )- this increases inflation

3. Speculation adversely influence fluctuations in

supply and demand for foreign exchange


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ECONOMICINFRASTRUCTURE

Development of infrastructure is important to theeconomic development of a nation

Until recently providing infrastructure was the prime

responsibility of public monopolies

Now government is encouraging private participation This is giving rise t better risk sharing, accountability,

monitoring and manage infrastructure

Economic infrastructure includes :

1. Energy, 2. Water,

3. Transport

4. communication


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ENERGY

It plays a crucial role in eco development of a nation It is created through conventional and non-conventional

sources

Conventional sources are : firewood, agricultural waste,animal dung, coal, oil natural gas, electricity, uranium

etc.,

Non conventional sources include : solar, wind, tidalwaves,

It important to increase generation and conserve it

It is important to design buildings to have naturalventilation, natural cooling

It is also important to educate the masses to conserveenergy


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2. WATER

Water is a very valuable infrastructure There is a need to apply eco-friendly concept to water

infrastructure development

Measures in this regard can include:

1. reducing water demand by increasing public

awareness2. Integrate water resource management

3. Bring in water recycling

4. Minimize water loss

Need to make rain water harvesting measures - which

is cheapest source of water GOI has formed many authorities like central water

commission, central ground water board, etc.forefficient water resources management


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TRANSPORTINFRASTRUCTURE

This Infrastructure creates most valuable place utility for theproducts

There is a need to promote eco-efficient transport sector -protect environment also

Transport system in India includes railways, roads, shipping, civil

aviation . Indian railways is the second largest in the world

Rail ways are run on ideological grounds and not on commercialterms

National highways development programme is taken up in a bigway in India

India has an extensive coastline to provide cheaptransportation But India is loosing an estimated 10 billionbecause of lack of efficient shipping services

Competition in the airline industry is also heating up - howeverhigh cost of operation has become a serious problem withairlines industry


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COMMUNICATION

Telecom sector has witnessed a revolutionary change Many private operators have entered this sector

Telephone is no more a luxury item - it is used even bylower income groups

There are many Internet providers in the country

Many innovations have taken place in business due tothis infrastructure - ie internet

Business has also grown leaps and bounds due tointernet - E commerce, E governance , YouTube , facebook and many social networks have become order ofthe day

Government is planning to improve the net-work to ruralareas in a big way so that the IT industry can spread torural areas and improve the working conditions there


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SOCIALINDICATORS :

Social indicators define the social problems , social trends toguide social planning

Examples are :

1. No. of health problems related to environmental pollutants

2. No. of students enrolled to study environment

3. No of people using community space like parks, greenwaysetc.,

4. No. of people working on environmental issues

Indias high economic growth will be unacceptable if 35% of itspeople continue to merely subsist on less than a dollar a dayand children are denied basic education

It should take steps to educate masses

Provide health for all

The number of Indians with higher education is a mere7%compared to 50% in Britain and 47% in G8 countries

Without education and healthcare there is no chance ofproductivity going up

INDIAN GOVTS ROLE IN IMPROVING SOCIAL


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INDIANGOVT SROLEINIMPROVINGSOCIAL

INDICATORS

Set up extensive social welfare system

eg. Supplementary nutrition for expectant mothers

and children below 7 years , immunization and

health programmes, vacation camps for low income

groups There are also support for blind, deaf, mentally

retarded etc.,

Women education and working women hostels

setup Rehabilitate prostitutes, and convicts ,- begging at

public plaaces is forbidden by law , -drought and

earthquake rehabilitation steps are taken up

GOVT STEPS TO IMPROVE SOCIAL INDICATORS


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GOVTSTEPSTOIMPROVESOCIALINDICATORS

- CONTD

Old age and disability benefits are covered byprovident fund and pension schemes, employes

insurance schemes in vogue - many labour laws

are brought in to improve the living conditions

Prohibit discrimination in workplace - equal pay forsame job no discrimination for women etc. are

brought in


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CONCEPTSOFFOREIGNEXCHANGERATE

Cross rate : It is the exchange rate between thecurrencies of 2 countries that are not quoted againsteach other - but are quoted against a common currency

The cross rates of currencies that are not quotedagainst each other can be quoted in terms of dollar

2. spot exchange rate : it is the rate at which a currencycan be bought or sold for immediate delivery which iswithin 2 business days after the date of trade

3. bid and ask spread: it is the difference between thebid and ask rate of currency

4 Forward exchange rate : it is the rate that is currently

paid for delivery of currency in future date In Forward market currencies are traded for future

delivery


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EXAMPLE - COVERINGEXCHANGERISKA domestic co has taken a loan which is repayable in

foreign currency 6 months later

The rates of fx may undergo a change

Hence there is an exchange rate risk

If the local currency suffers against the foreign currency -

the business has to write off a loss To cover against this risk the business enters into a

forward contract - i.e., it agrees today to buy the foreigncurrency 6 months later at the price prevailing today at aprefixed premium

Perceptions of buyer and seller differ they get into win-win situation


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FUNCTIONSOFFOREIGNEXCHANGE MARKET

It facilitates quick and easy conversion of currencies

Eg. If an indian exporter sells to and American importer

- the exporter bills in Indian rupees . Then the American

importer must convert his currency into indian currency

or rupees - FX market facilitates easy conversion 2 Provision of credit or international credit

Eg. In case of trade it provides Bankers acceptance and

LC for international trade

3. forex market provides facility for minimising foreign

exchange risk

Eg. It provides hedging facilities to absorb FX risk


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PARTICIPANTSINTHEFOREXMARKET

1. Traders/ brokers : are mostly commercial banks who buyand sell FX. - transactions include spot or forwardtransactions .

Traders normally deal in Fx based on the customers orders

2. speculators : Speculator is one who takes a open position

The speculator may have foreign currency on hand called aLong position - bull

Or he may have promised to deliver FX in a future date -called a short position - bear

Hedgers : are those who limit their potential losses by lockingin a guaranteed foreign exchange positions

Arbitrageurs: engage in simultaneously buying and sellingcurrency in two or more markets and thus make profit

Governments : to maintain the price of their currencies theforex markets govt buy or sell Foreign currencies in forexmarket