Global Economy

Economy – Word Economy comes from a Greek word for “one who manages a household.”

A household and an Economy faces many decisions like –
Who will work?
What goods and how many of them should be produced?
What resources should be used in production?
At what price should the goods be sold?

Economics is divided in two parts – Micro Economics and Macro Economics

Micro Economics focuses on individual parts of economy.
Example – How households and firms make decisions and how they interact in specific markets.

Macro Economics looks at the economy as a whole.
Example – How markets, as a whole, interact at the national level.

Society and Scarce Resources:

In every society there are many resources (labor, natural resources, etc) which are scarce (i.e. in limited supply). Management of society’s resources is important just because resources are scarce.

Economics is the study of how the society manages its scarce resources.

Standard of living – It can be measured in different ways, by comparing the total market value of a nation’s production (GDP) and by measuring the personal income.

GDP (Gross domestic product) -The measure of an economy adopted by the United States in 1991; the total market values of goods and services produced by workers and capital within a nation's borders during a given period (usually 1 year).

Let’s talk about Inflation and Unemployment – Inflation is an increase in overall level of prices in the economy.

Unemployment - The state of being unemployed or not having a job. Unemployment is a serious social evil – rate of unemployment is an indicator of health of an economy.

Usually Inflation and Unemployment are inversely proportional, if Inflation increases Unemployment decreases and vice versa. (Is applicable within a country)
But if we are dependable on other countries this is not applicable.

Example – When software company’s which are outsourced mainly by USA were doing good, I mean to say when USA had an Inflation we all had good jobs and salaries, when USA went into recession (decrease in economy) we lost our jobs and had less salaries and appraisals. This happened because their Supply, Demand and Price factors were badly managed. So to save losses USA started targeting operating costs (salaries, wages and costs incurred for operations). This is the only part from Short term assets which they can touch. Usually short term assets are the assets which company holds for less than an year and fixed assets are something which is for more than an year and it is usually property, land etc..

Companies have to maintain balance sheets, cash flow statements and Income statements to show to its investors. One can make out the financial condition of a company looking at these things. Or you can also say you can make out how well a country is performing if we know the financial condition by seeing at budget. I will talk later about it which is more of macro economics.

Balance Sheet is divided in two parts - left and right.

Left part contains and Assets and right part contains the liabilities and Share holders Capital.

Assets are further divided in Fixed Assets and Long term Assets.
Liabilities are further divided into short term liabilities and long term liabilities.

And one thing we all should know is the left part of balance sheet should tally with the right part of the balance sheet.

So guys what I wanted to convey you guys is that Assets is the thing where everyone plays with, especially the short term assets – operating costs to show profits.

Hope you guys got the message. So please don’t blame your company bosses as the salary is reduced or there is a job cut. If you are in there position you are answerable to the investors (shareholders) who have invested in your company. Even I will not invest my money in a company which is not performing well.

So coming back to Inflation and Unemployment – Yes there are always ways to tackle these. Problem is when there is no money in market government will come into picture. And I believe so far our finance ministry is really doing good as we have not hit into recession yet when most of the major countries are hit by recession.

What government will do – they will act as investors and invest money from government expenditure which they gain from the taxes we pay, as the supply and demand are not met. There is a potential output every economy has, if there is full utilization of potential output there is no inflation. There is no utilization as of now in most of countries as there is no money to utilize it as their respective government has not done well enough to tackle bad situations. We are the buyers and suppliers, we produce things and consume it – so money is rotating here. But there comes a situation when the whole economy is screwed up as a result of inappropriate government policies and less control over the supply demand and pricing. So government tries to bring out the economy out of crisis.

Take example of USA, their economy screwed up because of the less control over the banks, banks in USA provided loans at higher interest rates and keeping mortgage of high values. And these banks gave the mortgage of people as investment to the foreign investors considering it as the short term investments. And later when the economy fell down and went into recession these banks could not encash the mortgage for non payers as the value of mortgage has also gone down below the loan amounts and they also have to suffer heavy losses from the foreign investors as they have to repay back the foreign investors.

Now USA government has started investing from the government expenditure by buying the shares in the companies and reducing the income tax and value added taxes, so that people can afford things and start buying and when the things are back in normal they will start increasing the taxes which they will have to do to maintain the equilibrium between the supply and demand. There needs to be equilibrium of price between the supply and demand, one cannot charge more than price ceiling as this will create an upset in the economy. Usually supply and demand are inversely proportional. Supply increases demand goes down and vice versa. These both things should be maintained as this will lead to shortage and surplus. Both are not good for both consumers and sellers. When there is a shortage prices go up and it leads to black market. When there is a surplus as a seller you face losses for extra produced goods.

Example – Oil prices were too high so demand went down and there was a surplus as no one was buying oil due to high costs and the oil companies started facing losses as there were no buyers. So they have to reduce the prices, but still they faced loss as the cost of production was more than cost of selling, so now they have come up with other strategy they have reduced the supply itself (production), they supply the actual demand so they can maintain profits. Same thing works with our companies as well; they too reduce the supply (production) sometimes to gain profits.

Another example is when our Indian government regulates the oil prices and put a price ceiling we can see that petrol pump owners stop the supply to avoid the losses. So guys don’t scratch your heads when our government regulates price of fuel and you see a big line outside petrol pumps. These things are as simple as it can be.

Now going back to Macro Economics, Government has to maintain a perfect balance between the Potential Output of economy and Actual Output of economy by regulating the consumption and investments by playing with the income tax, value added taxes, money supply and government expenditures which results in control of the inflation, unemployment and foreign exchange rates. This is what happens in a budget.

In general a country should have zero percent to 3 percent unemployment and an inflation of 6 % as zero percent inflation means people are overworked by overtimes.

Hope you guys enjoyed this small passage on economy; hope that it has also answered many of your questions. Your suggestions and questions are most welcomed.
Wish you all and your dear ones a very happy and prosperous new year.

Gasoline and diesel usage and pricing

These days I see a lot of forward mails on fuel price comparissions , people are cursing Indian government for levying huge taxes on fuel and gasoline products. Below is the mail for reference.

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Dear Friends!
Petrol in Pakistan Rs17 per litr
Malaysia Rs 18 per litr
In India it's Rs.59 per litr
Why is there a difference within India itself? World Market CRUDE Oil is not
the reason for this. It's all Gain for private owners? As we are the
general public, or Common Man as R.K.Laxman wud hv said, we have to
raise our voice, let's raise thru Emails.
Forward this to all Indians who care.
IT HAS BEEN CALCULATED THAT IF EVERYONE DID NOT PURCHASE A DROP OF
PETROL FOR ONE DAY AND ALL AT THE SAME TIME, THE OIL COMPANIES WOULD
CHOKE ON THEIR STOCKPILES.
AT THE SAME TIME IT WOULD HIT THE ENTIRE INDUSTRY WITH A NET LOSS
OVER 4.6 BILLION DOLLARS WHICH AFFECTS THE BOTTOM LINES OF THE OIL
COMPANIES.
THEREFORE "June 14 th" HAS BEEN FORMALLY DECLARED
"STICK IT UP THEIR BEHIND " DAY AND THE PEOPLE OF THIS NATION SHOULD
NOT BUY A SINGLE DROP OF PETROL THAT DAY.
THE ONLY WAY THIS CAN BE DONE IS IF YOU FORWARD THIS E-MAIL TO AS
MANY PEOPLE AS YOU CAN AND AS QUICKLY AS YOU CAN TO GET THE WORD
OUT. WAITING ON THE GOVERNMENT TO STEP IN AND CONTROL THE PRICES IS
NOT GOING TO HAPPEN. WHAT HAPPENED TO THE REDUCTION AND CONTROL
IN PRICES THAT THE ARAB NATIONS PROMISED TWO WEEKS AGO?
REMEMBER ONE THING, NOT ONLY IS THE PRICE OF PETROL GOING UP BUT
AT THE SAME TIME AIRLINES ARE FORCED TO RAISE THEIR PRICES,
TRUCKING COMPANIES ARE FORCED TO RAISE THEIR PRICES WHICH AFFECTS
PRICES ON EVERYTHING THAT IS SHIPPED. THINGS LIKE FOOD, CLOTHING,
BUILDING SUPPLIES MEDICAL SUPPLIES ETC. WHO PAYS IN THE END? WE
DO!
WE CAN MAKE A DIFFERENCE.IF THEY DON'T GET THE MESSAGE AFTER ONE
DAY, WE WILL DO IT AGAIN AND AGAIN. SO DO YOUR PART AND SPREAD THE
WORD. FORWARD THIS EMAIL TO EVERYONE YOU KNOW. MARK YOUR
CALENDARS AND MAKE June 14 th
A DAY THAT THE CITIZENS SAY
"ENOUGH IS ENOUGH"
We forward so many junk email to many of our friends, now let us do
it for some useful cause to cut down the price of the petrol .. ...

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This is my humble request to all those who are spreading this e-mails. Please don't believe such mails blindly. Kindly go through the German Technical Cooperation (GTZ) report on the worldwide gasoline prices. Have faith in our government. Also I would like to mention that the gasoline prices in India is very less as compared to Asian countries. Reason behind this is to help common man - by not letting him affected for his basic needs.

reference - http://en.wikipedia.org/wiki/Gasoline_usage_and_pricing

How a credit card works

How a credit card works when you shop….??
[A small situation to make us understand the funda…]

Priya: I want to buy a Sony digital camera costing Rs.20,000, but I don't have any cash right now.

Alok: Why don't you use your ICICI Bank credit card? Never heard them say? We are there ??

Priya: I am quite skeptic about using these cards. I pay using the card; get a bill after 30 days and pay after another 20 days. This is a maximum of 50 days interest free loan. Why does any bank do it?

If I borrow Rs.20,000 on personal loan at 11%.
Interest to be paid for 50 days = Rs. 20,000 * 11% * (50/365) = Rs. 301.40.

Here the bank is giving me a loan without interest when I use the credit card. Something is wrong somewhere!


Alok: Well? let me tell you how it works when you use your card to pay for the camera.
· You present your ICICI Bank credit card? a Master Card.
· Sony World swipes your card on a machine provided by Citibank. Let's call Citibank? The acquirer bank and the process of Sony World swiping the card on that machine? Requesting authorization.
· Citibank communicates with the card issuer? ICICI Bank through Mastercard Network to check if the card is valid and has the required credit limit.
· ICICI Bank reviews and approves / declines which is communicated back to Sony World.
· You sign a receipt called Sales Draft given by Citibank. This is the obligation on your part to pay the money to ICICI Bank. Data on this receipt can be captured electronically and transmitted.


At the end of day or at the end of some period Sony World chooses:

o Sony World submits the receipt you signed to Citibank who pays Sony World the money. Sony World pays Citibank a fee called Merchant Discount. Let us say this is 6% of the sale value = 6% * 20,000 = Rs. 1200

o Citibank sends the receipt electronically to a MasterCard data center which in turn sends it to ICICI Bank.

o ICICI Bank transfers the money to a settlement bank which in turn transfers the funds to Citibank.

o Citibank pays ICICI Bank an Interchange Fee of 4% of the sale value = 4% * 20,000 = Rs. 800

o 20 to 50 days later ICICI Bank gets the money from you ? and you don't pay the interest!!


Priya: Interesting! So Sony World pays more than the interest that I should have paid for the loan that I take. I, as a cardholder have the following benefits

1. Convenience of not having to carry cash.
2. Credit availability? Free of interest.


However what benefits does Sony World get for paying so much money? Isn't it more profitable for them to take cash? They can save as much as Rs.1200.

Alok: Certainly. Some retail outlets offer you discounts if you pay by cash, don't they?

However when you don't count the money that you are spending, you tend to buy more! Cards encourage this? Called impulse purchase.

If you did not have access to credit, you would not have bought the camera this month ? or may be not any time soon either. By accepting cards, the merchant is actually extending you credit at the risk of the card issuer. He pays money to the banks to carry that risk.

Priya: So ICICI Bank uses this money to pay back to us when they announce 5% cash back. They insist that the Sales draft that I sign at the retailer should also be from ICICI Bank. This means they are saving on the Interchange Fee and also pay me a part of the Merchant Discount that they get.

Alok: Exactly! If you have noticed, ICICI Bank gives you the cash back in the next credit card statement. They keep the Cash back Money for a maximum of 60 days before passing on a part to you. This accrues them interest too.

Say if ICICI Bank earns an interest of 6% per annum for the cash they carry ? they get Rs.1000 * 6% * (60/365) = Rs. 10

That is not huge, but money nevertheless. And when you consider that almost everyone in this city shops with a credit card these days, it is a big sum.

Priya: And that also explains why banks tie up with petrol pumps like ICICI Bank has tied up with HPCL and I could re-fuel there without having to pay the fuel surcharge of 2.5%. The card issuer and the acquiring bank is the same and that saves interchange fees.

Priya: Sooper! Then lets go for shopping ?? Let's not miss this Christmas and New year Shopping Festival!


[All the numbers used to explain concepts in this article must be treated only as an example. Merchant Discounts may vary from bank to bank. Interchange Fee is regulated by VISA and MasterCard]
[ Also these days one can avail the balance transfer facility provided by Banks, where you can pay the credit card bills by another credit card and thus gaining more time for repay ]