Unit 3,4,5

Unit-4 Basic Economic Problem

Definition

A theory that scarcity exists in the sense that only finite and insufficient resources are available to satisfy the needs and desires of all human beings. The fundamental economic problem then faced by human society and business operators is how to allocate scarce resources to the provision of various goods and services within the economy.

What is Poverty?

Condition where people's basic needs for food, clothing, and shelter are not being met. Poverty is generally of two types: 

(1) Absolute poverty is synonymous with destitution and occurs when people cannot obtain adequate resources (measured in terms of calories or nutrition) to support a minimum level of physical health. Absolute poverty means about the same everywhere, and can be eradicated as demonstrated by some countries.

(2) Relative poverty occurs when people do not enjoy a certain minimum level of living standards as determined by a government (and enjoyed by the bulk of the population) that vary from country to country, sometimes within the same country. Relative poverty occurs everywhere, is said to be increasing, and may never be eradicated.

What is cause?

Action, inaction, or occurrence that brings about a change, effect, reaction, or result, or provides grounds for initiating a legal proceeding.

Causes/ Measures to Reduce Poverty

Reasons for Rural Poverty

Some of the basic reasons of rural poverty in India are:

• Unequal distribution of income.
• High population growth.
• Illiteracy.
• Large families.
• Caste system.

Problems Of Rural Poverty

• Presence of malnutrition, illiteracy, diseases and long term health problems.
• Unhygienic living conditions, lack of proper housing, high infant mortality rate, injustice to women and social ill-treatment of certain sections of society.

Steps Taken by Government to Reduce Rural Poverty
The government of India has been trying its best to remove poverty. Some of the measures which the government has taken to remove rural poverty are:

• Small farmer’s development Programme.
• Drought area development Programme.
• Minimum needs Programme.
• National rural employment Programme.
• Assurance on employment.
• Causes for Urban Poverty.

Causes for Urban Poverty

The causes of urban poverty in India are:

• Improper training
• Slow job growth.
• Failure of PDS system

Problems Of Urban Poverty

• Restricted access to employment opportunities and income.
• Lack of proper housing facilities
• Unhygienic environments
• No social security schemes
• Lack of opportunity to quality health and educational services.

The steps taken by government to remove urban poverty are:

• Nehru Rozgar Yojna.
• Prime Minister Rozgar Yojna.
• Urban Basic services for the poor Programme.
• National social Assistance Programme.

But these processes can be helpful only if the policies go to those people for whom it is meant. The clash between the central government and the state government often results in the lack of implementation of these policies. So it is very important that the governments do not play power politics when it comes to a serious issue such as poverty.

Step-down method:- The process of balancing a budget by reducing the number of expenses in several ways. At the high point, the goal is to reduce expenditures on demanded items. At the lowest point, the goal is to reduce expenditures on the least-desired items.

Stop consuming too much! A study says that a billion of people is overweight while another billion is dying of hunger. Maybe you think that you throwing away food doesn't really do anything to the children in Africa... but if people just stop buying too much just because they can, then the world will be a more balanced place.

What is unemployment?

Total number of able men and women of working age seeking paid work. Unemployment statistics vary according to how unemployment is defined and who is deemed to be part of the workforce. Traditional methods for collecting unemployment data are based, typically, on sampling or the number of unemployment benefit requests. International labor organization (ILO) computes unemployment on the basis of number of people who have looked for employment in the last four weeks and are available to start work within two weeks, plus those who are waiting to start working in a job already obtained.

 Types of Unemployment

The creation of "full employment" is a common economic policy goal. However, full employment does not imply zero unemployment. A dynamic economy will always have some unemployment; this is not necessarily harmful. Types of unemployment are often broken down as follows:

·Structural Unemployment - Changes occur in market economies such that demand increases for some jobs skills while other job skills become outmoded and are no longer in demand. For example, the invention of the automobile increased demand for automobile mechanics and decreased demand for farriers (people who shoe horses).

·Frictional Unemployment - This type of unemployment occurs because of workers who are voluntarily between jobs. Some are looking for better jobs. Due to a lack of perfect information, it takes times to search for the better job. Others may be moving to a different geographical location for personal reasons and time must be spent searching for a new position.

Cyclical Unemployment - This occurs due to downturns in overall business activity.

As previously noted, full employment does not equate to zero unemployment. Some unemployment is normal in a market economy and is actually expected as part of an efficient labor market. Full employment is defined as the level of employment that occurs when unemployment is normal, taking into account structural and frictional factors.

The natural rate of unemployment is that amount of unemployment that occurs naturally due to imperfect information and job shopping. It is the rate of unemployment that is expected when an economy is operating at full capacity. At this time in the U.S., the natural rate of unemployment is considered to be about 5%.

Essay Topic: Unemployment in India: Causes, Effects and Solutions

Unemployment refers to the the state of being unemployed or not having a job i.e. joblessness. A person is said to be unemployed if he or she is looking for work or is willing to work at the prevailing wage but is unable to find the job.

Our country is set to be progressing by leaps and bounds in the matter of economy but this progress is low sided that the net results is the sharp increase in the number of unemployed. Population of our country India is increasing day by day. It is the second highest populous country in the world. Today ,we have over 1.15 billion people in our country and so is the increasing unemployment rate. Today, we have both educated and uneducated unemployed people. We have skilled and unskilled unemployed youths both in the urban and the rural areas. Even degree holders are unemployed. The main cause of unemployment is the growing population. Other factors are Recessions, Inflation ,corruption, disability, and nepotism.

Causes of Unemployment are as follows:

Increasing Population i.e. High population growth.

Recessions.

Inflation.

Corruption.

Disability to do the job.

Nepotism.

Demand of highly skilled labour.

Attitude towards employers.

Undulations in the business cycles or agricultural sector comprising of the factors such as low production, natural calamities such as drought, famine or any natural disaster.

Unsatisfied incomes or salaries of the employees.

Willingness to work: Young people are not ready to take jobs which are considered to be socially degrading or lowly.

Deterioration in Industry and business.

Effects of Unemployment:

Low economic growth.

Unemployment can lead to emotional and mental stress.

A person can also get demoralized, he can do wrong things like he can indulge in the habits like alcohol and drug abuse or even may commit suicide.

Higher income income inequalities and disparities leading to nothing but poverty.

 Remedies And Solutions to unemployment:

The main remedy lies in the Rapid Industrialization.

The need of faster economic growth to generate more jobs.

The need of improvements in the education and training provided to the youths with a greater focus on vocational skills and self employment.

The Government support to struggling industries is necessary to try to save jobs.

Cuts in real wages is also a way to help in reducing the problem of unemployment.

Promoting education especially female education and motivating people to have small families.

The problem of unemployment is a really a very dangerous and ticklish problem. Unemployment check is very necessary and needed to be removed for the betterness of one and all.

INFLATION

Meaning/Definition

A sustained, rapid increase in prices, as measured by some broad index (such as Consumer Price Index) over months or years, and mirrored in the correspondingly decreasing purchasing power of the currency. It has its worst effect on the fixed-wage earners, and is a disincentive to save.

There is no one single, universally accepted cause of inflation, and the modern economic theory describes three

Types of inflation:

(1) Cost-push inflation is due to wage increases that cause businesses to raise prices to cover higher labor costs, which leads to demand for still higher wages (the wage-price spiral).

 (2) Demand-pull inflation results from increasing consumer demand financed by easier availability of credit.

(3) Monetary Inflation caused by the expansion in money supply (due to printing of more money by a government to cover its deficits). See also deflation and hyperinflation.

CAUSES OF INFLATION

There are two main causes of inflation:
• Demand-pull (when there is excess demand), and
• Cost-push (when costs rise)
Demand-pull inflation
This occurs when there is excess aggregate demand in the economy (overall) or in a specific market or industry. Businesses respond to high demand by raising prices to increase their profit margins. Demand-pull inflation is associated with the boom phase of the business cycle
The main causes of demand pull inflation are
• A weaker exchange rate which increases the price of imports and reduces the foreign price of UK exports
• A reduction in direct or indirect taxation - consumers have more disposable income causing more demand
• Rapid growth of the money supply as a consequence of increased bank and building society borrowing
• Rising consumer confidence and an increase in the rate of growth of house prices
• Faster rates of economic growth in other countries – providing a boost to UK exports overseas
Cost-push inflation
This occurs when costs of production or operation are increasing. The key causes include:
• External shocks (e.g. commodity price fluctuations)
• A depreciation in the £ exchange rate (weaker pound = more expensive imports)
• Acceleration in wages
What happens when faced with cost-push inflation?
• Firms raise prices to protect their profit margins – better able to do this when market demand is price inelastic
• “Wages often follow prices”
• A rise in inflation can lead to rising inflationary expectations

  

MEASURES TO CONTROL INFLATION

Inflation is the rise in price levels in an economy over a given time period. This means that a given amount of currency will buy a lower number of goods as time passes as it loses its value. For this reason controlling inflation is one of the main economic objectives of a government. There are many ways to control inflation; however most of them work by either increasing aggregate supply or decreasing aggregate demand. Both actions result in the equilibrium moving down. The measures that are required to control the inflation depend on what is thought to be causing it. A government's monetary policy can decrease aggregate demand by increasing interest rates. This will discourage borrowing and increase savings, both of which constrict consumption, thereby decreasing aggregate demand. Fiscal policies can also be used to control inflation. If a government wants to decrease it then it will increase taxation and decrease government spending. This will result in consumers and firms having less to spend, therefore coupled with the lower government spending this will cause leakages to increase and injections to decrease, reducing aggregate demand. Subsidizing the costs of firms will decrease production cost allowing them to lower their prices, also reducing inflation. Supply side policies such as education and training will increase the quality and quantity of labour available for firms, which will result in an outward shift of the aggregate supply curve. This will move the equilibrium down, decreasing price levels and therefore also decreasing inflation. Other ways to decrease inflation is to reduce tariffs on imports, as this will lead to lower prices and therefore lower cost-push inflation. Inflation targeting can lower the chances of both types of inflation by decreasing the expectations of inflation. In conclusion short term measures to control inflation seek to decrease aggregate demand, whereas long term solutions want to increase aggregate supply.

Unit-3 Markets

Markets Meaning Definition

•   a regular gathering of people for the purchase and sale of provisions, livestock, and other commodities.

• The concept of a market is any structure that allows buyers and sellers to exchange any type of goods, services and information. The exchange of goods or services, with or without money, is a transaction.
  Income
  
  

  National Income Meaning:- A variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including gross domestic product (GDP), gross national product (GNP), net national income (NNI), and adjusted national income (NNI* adjusted for natural resource depletion).
  
  

  
  
  
  

  Stock and Flow Concept:- A stock variable is measured at one specific time, and represents a quantity existing at that point in time (say, December 31, 2004), which may have accumulated in the past. A flow variable is measured over an interval of time. Therefore a flow would be measured per unit of time (say a year).

  
  

   
  Meaning of Personal Income:- In economics, personal income refers to an individual's total earnings from wages, investment enterprises, and other ventures. It is the sum of all the incomes actually received by all the individuals or household during a given period.
   
  Meaning of Disposable Income:- Income remaining after deduction of taxes and social security charges, available to be spent or saved as one wishes.

  National Income at Current Prices:

  National Income at current prices refers to its estimates at prices prevailing in the economy at the time of making such estimates. Prices change every year. In general, they rise year after year with rare exceptions.
  National Income for a particular year relates to the prices prevailing in that year. Such an estimate of national income is known as national income at current prices. Here, the term national income may refer to any of the eight national income aggregates.
  It should be borne in mind, however, that the use of national income, in particular, has reference to Net National Income, or more popularly, Net National Product, each at factor cost.

  National Income at Constant Prices:

  National Income at constant prices refers to national income expressed in terms of prices of a fixed year of reference. It requires conversion of national income at current prices in terms of the prices of the year of reference, called the base year.
  To illustrate the point, suppose national income at current prices for an economy is Rs 10,000 crores. And the price index of the current year with respect to 1991 as the base year is 250. Also suppose that the national income estimate for the said economy in 1991 was Rs 4,000 crores.
  One would, at the outset, think that the national income in the current year has more than doubled of what it was in the base year. A little reasoning shows that the inference is quite misleading. For such comparisons, we need to convert the two estimates in terms of same prices.
  It is more convenient to convert the current year’s estimate in terms of the base year’s prices. The method is known as deflation of national income. The current year’s estimate of national income in terms of the base year’s prices can be obtained from the simple unitary method or from the following formula:
  Thus national income at current prices, when deflated, reduces to a value equal to base year’s national income in this illustration. What appeared to be a sizeable growth (250%) turns out no growth (0%), in reality, as soon as the current estimate is adjusted for inflation.
  Clearly, purchasing power of current national income is no better than that of the base year.
  The purpose of deflating national income is twofold:
  1. It helps to study the annual growth rate of the national income in historical perspective. This is essential for evaluation of performance of various growth oriented economic policies employed.
  2. It helps to compare the purchasing power of the current year’s national income with that of any year of reference.
  The process of national income deflation can be cut short if national income deflators for different years were given.
  What is GNP?
  Gross National Product is a measure of a country's economic performance, or what its citizens produced (i.e. goods and services) and whether they produced these items within its borders.
  Example:
  GNP includes income earned by citizens and companies abroad, but does not include income earned by foreigners within the country.
  The figures used to assess GNP include the manufacturing of tangible goods (cars, furniture and agricultural products) and the provision of services (education, healthcare, and business services). GNP does not include the services used to produce manufactured goods because their value is included in the price of the finished product.  However, GNP does include depreciation and indirect business taxes like sales tax.
  The formula for GNP is:
  Consumption + Government Expenditures + Investments + Exports + Foreign Production by U.S. Companies – Domestic Production by Foreign Companies = Gross National Product
  
  
  What is GDP?
  
  
  DEFINITION:- of 'Gross Domestic Product - GDP' The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis.
  Example:
  The Department of Commerce releases GDP data for the U.S. economy on a quarterly basis at 8:30 am EST on the last business day of the next quarter.
  The equation used to calculate GDP is as follows:
  GDP = Consumption + Government Expenditures + Investment + Exports - Imports
  The components used to calculate GDP include:
  Consumption:
  -- Durable goods (items expected to last more than three years)
  -- Nondurable goods (food and clothing)
  -- Services
  Government Expenditures:
  -- Defense
  -- Roads
  -- Schools
  Investment Spending:
  -- Nonresidential (spending on plants and equipment), Residential (single-family and multi-family homes)
  -- Business inventories
  Net Exports:
  -- Exports are added to GDP
  -- Imports are deducted from GDP
  
  The GDP report also includes information regarding inflation:
  -- The implicit price deflator measures changes in prices and spending patterns.
  -- The fixed-weight price deflator measures price changes for a fixed basket of over 5,000 goods and services.
  GDP is calculated both in current dollars and in constant dollars. Current Dollar GDP involves calculating economic activity in present-day dollars. This, however, makes time period comparisons difficult due to the effects of inflation. By comparison, Constant Dollar GDP factors out the impact of inflation and allows for easy comparisons by converting the value of the dollar in other time periods to present-day dollars.
  What is GDP?
  Net national product (NNP) refers to gross national product (GNP), i.e. the total market value of all final goods and services produced by the factors of production of a country or other polity during a given time period, minus depreciation.
  How it works/Example:
  The formula for NNP is:
  NNP = Market Value of Finished Goods + Market Value of Finished Services - Depreciation
  Alternatively, NNP can be calculated as:
  NNP = Gross National Product - DepreciationLet's assume Country XYZ's companies, citizens and entities produce $1 trillion worth of goods and $3 trillion worth of services this year. The assets used to produce those goods and services depreciated by $500 billion. Using the formula above, Country XYZ's NNP is:
  NNP = $1 trillion + $3 trillion - $0.5 trillion = $3.5 trillion

Types of Markets

Introduction:

In market economies, there are a variety of different market systems that exist, depending on the industry and the companies within that industry. It is important for small business owners to understand what type of market system they are operating in when making pricing and production decisions, or when determining whether to enter or leave a particular industry.

Perfect Competition

Perfect competition is a market system characterized by many different buyers and sellers. In the classic theoretical definition of perfect competition, there are an infinite number of buyers and sellers. With so many market players, it is impossible for any one participant to alter the prevailing price in the market. If they attempt to do so, buyers and sellers have infinite alternatives to pursue.

Monopoly

A monopoly is the exact opposite form of market system as perfect competition. In a pure monopoly, there is only one producer of a particular good or service, and generally no reasonable substitute. In such a market system, the monopolist is able to charge whatever price they wish due to the absence of competition, but their overall revenue will be limited by the ability or willingness of customers to pay their price.

Oligopoly

An oligopoly is similar in many ways to a monopoly. The primary difference is that rather than having only one producer of a good or service, there are a handful of producers, or at least a handful of producers that make up a dominant majority of the production in the market system. While oligopolists do not have the same pricing power as monopolists, it is possible, without diligent government regulation, that oligopolists will collude with one another to set prices in the same way a monopolist would.

Monopolistic Competition

Monopolistic competition is a type of market system combining elements of a monopoly and perfect competition. Like a perfectly competitive market system, there are numerous competitors in the market. The difference is that each competitor is sufficiently differentiated from the others that some can charge greater prices than a perfectly competitive firm. An example of monopolistic competition is the market for music. While there are many artists, each artist is different and is not perfectly substitutible with another artist.

Monopsony

Market systems are not only differentiated according to the number of suppliers in the market. They may also be differentiated according to the number of buyers. Whereas a perfectly competitive market theoretically has an infinite number of buyers and sellers, a monopsony has only one buyer for a particular good or service, giving that buyer significant power in determining the price of the products produced.

Characteristics of a Good Market

Introduction

Not all markets are created equal. Some are bigger, better and more lucrative than others. Knowing how to evaluate a market is like knowing where to go fishing for a great catch.

Use these 11 characteristics to evaluate any market with ease so that you can take your business where there are the highest chances of success. A rising tide floats all boats; a great market lifts everyone up.

To evaluate your market, get a pen and piece of paper and go out and research the following 11 characteristics. Rate how well that market scores, on a scale of 1 to 10, on each of these characteristics, and then see if the total score makes you happy.

1. Size. The bigger the market size, the better.

2. Urgency. The more urgently people need the products in that market, the better. For example, pet rocks have no urgency, but medication does.

3. Speed to market. The faster you can go from getting the initial idea to beginning to make sales, the better.

4. High pricing potential. The higher you can charge per product, the better.

5. Low cost of acquiring new customers. The easier and cheaper it is to get new customers, the better.

6. Low cost and ease of delivering. The cheaper and easier it is to deliver your product, the better.

7. Uniqueness. The more unique your product is (or how you deliver it, or how you package it), the better.

8. Low upfront investment. The less resources you need to test the market, build the business and get started, the better.

9. Back-end and up-sell potential. The more related products you can sell to your existing clients, the better. You don’t want to go into business whereby you can only sell one product one time to each customer and then that’s it. There is now growth potential there. You need to be able to repeatedly sell the same customer.

10. Evergreen potential. The easier it is to continue selling and selling once in business, the better. For example, a product that can be sold for ever, like toilet paper or cooking oil, is better than one that is sold just once, like pet rocks.

11. Addressability. The easier it is to reach and communicate with your market, the better. For example, does your market congregate in “pools” like mailing lists or radio stations or places you can get access to?

Unit-5

Money Meaning:-Anything of value that serves as a (1) generally accepted medium of financial exchange, (2) legal tender for repayment of debt, (3) standard of value, (4) unit of accounting measure, and (5) means to save or store purchasing power. See also cash.

Functions Of Money:-One of the three main services provided by a national currency to those organizations and individuals participating in a country's economic system. The commonly accepted primary functions of money are as

The Three Basic Functions of Money

Now, let's take a look at how economists view the basic functions of money. Money serves four basic functions: it is a unit of account, it's a store of value, it is a medium of exchange and finally, it is a standard of deferred payment. Let's take a look at each one of these functions with the help of Margie the cake baker and Bob the lawn guy.

1.Money Is a Unit of Account

Money is a unit of account because everything in the economy is quoted in terms of it. For example, when Margie sells cakes in her bakery, she offers the cakes for sale at a certain price. That price is quoted in terms of money. Let's say she has a chocolate cake selling for ten dollars - that's a really good one, by the way. When Bob sells his lawn service, the price of his service is quoted in dollars, also. Let's say he charges $20 per yard. If you think about it, Bob's lawn service is really worth two of Margie's chocolate cakes, and Margie's $10 cake is worth a half of Bob's lawn service. Since Bob is not the only customer Margie has, and Margie isn't Bob's only customer, they need a unit of account that works for everyone in the economy. In this way, money functions as a unit of account, which is the foundation of every transaction taking place around us.

2.Money Is a Medium of Exchange

Money is a medium of exchange because it can be used it to buy goods and services in an attempt to satisfy unlimited needs and wants. For Bob, he wants chocolate cake (who doesn't?) and lots of it. Bob is a business owner in the town of Ceelo. Every time he buys a cake from Margie's bakery, he exchanges the money he earned from his job for a cake. Money serves as an important medium of exchange in the economy, empowering people to purchase goods and services in an attempt to satisfy their unlimited needs and wants.

3.Money Is a Store of Value

Money is a store of value because Bob can exchange his lawn services for money one day and then use it to purchase goods and services at a later date. When he earns a paycheck, he cashes it at the bank, for example. Bob can hold the cash in his wallet for a few minutes, a few days or even a few months or years before he decides to exchange it for one of Margie's outrageously, decadently delicious, chocolate cakes. Unfortunately, inflation prevents most of the money in existence today from serving as a pure store of value, because the money loses a significant portion of its purchasing power over time. However, if there were no inflation, then money would serve as a near-perfect store of value.

What is Money?

Go with me to the town of Ceelo, where Margie the cake baker is busy baking cupcakes in her own kitchen today, while Mike the mechanic works on her minivan in the driveway.

In the town of Ceelo, we often hear people using terms like money and wealth interchangeably. When people talk about Margie the cake baker and what a nice house she has, they often say, 'Margie has a lot of money.' However, there's an important distinction between money and wealth. Although wealth could mean stocks, bonds, real estate, or gold, money is something far simpler. In economics, money is anything that is widely accepted in exchange for goods and services.

A World Without Money

What would the world be like without money? An economy can operate without money. In fact, most economies have operated without it at some point in history. But you wouldn't want to try this for long, as it would become quite frustrating. Here's how that would play out.

Suppose there are only two people in the entire economy - Mike the mechanic and Margie the cake baker. Instead of using money, they could trade products or services. Mike could trade an oil change - that he sells for $20 normally - for two of Margie's chocolate cakes - which she sells for $10 normally. This seems pretty simple in an economy with only two people. However, the more people you have and the more types of goods you have, the more complicated your economy gets and the more costly it becomes to satisfy everyone's needs and wants. A world without money becomes problematic.

For example, if you produce wheat, but you want cows, then you'll have to find somebody who raises cattle who also wants wheat. When two parties to an exchange value the good they would receive as much as the good they would give away, economists call this a coincidence of wants. Suppose you're a mason who lays bricks, and you need some oil. Not sunflower oil or extra virgin olive oil - I'm talking about light, sweet, crude oil - black gold, Texas Tea. Where can a mason find an oil refiner who happens to need a brick wall? This may cost you a great deal of time and effort, and as you try to locate the right person to exchange goods and services with, this could be a long time.

The Benefits of Money

As you can see, money offers consumers and businesses some very basic and practical benefits. Money was invented as an alternative to bartering. The major benefit of money is that it increases the efficiency of an economy by reducing transactions costs. When people can use money instead of bartering, this leads to morespecialization and better division of labor within the economy.

In an economy with money, Margie and Mike can specialize in what they do best instead of what they can use to exchange with other people. Margie can bake cakes instead of being a farmer, and Mike can repair cars, which he's really good at, instead of raising cattle.

Why does this really matter? Because an economy with more specialization and division of labor trades more often, produces more, and enjoys greater economic output.

What is                       Definition of Money

Money serves three purposes. It is a medium of exchange, a store of value and a unit of account. It is used to pay debts, purchase goods and services and is accepted by the government for taxes. Legal Tender laws are enacted to require people to use the government's money in payment of lawful debts among private citizens.

Four Types of Money

1. Commodity money
2. Receipt money
3. Fractional money
4. Fiat money

Commodity Money

Commodity money started as barter. The exchange of cattle and sheep advanced to one of gold and silver because metals are not perishable, their purity and weight can be measured easily and they can be traded for any good or service. Unlike diamonds, metals can be melted down and reformed into smaller quantities for smaller purchases without losing value.

In 2100 BC, gold cubes were used in China. In 600 BC, the Lydians used precious metal coins in Asia Minor. In 400 BC the Greeks began minting coins. From about 300 AD to 1100 AD, the Byzantine empire (Eastern Holy Roman Empire) used a coin called the Solidus. One could not file or chip the coins or issue a false coin under the penalty of chopping off your hand. As a result, the Byzantines never bankrupted, never went into debt and never devalued the currency over a span of 800 years. The Byzantine Empire had a perfect monetary system: the best in history.

The Western Roman Empire, on the other hand, used every imaginable means to devalue their currency and plunder the people. As a result, it collapsed in 476 AD long before the Byzantines who eventually succumbed in 1453 AD for reasons having nothing to do with the stability of their currency.

Nota Bene: It should be noted here that the amount of gold in the world does not affect its ability to serve as money. As the world economy grows, only the quantity that will be used to measure any given transaction will change. After a time, it might take a very small amount of gold to buy something, but gold can be effectively traded in small quantities. In addition, transactions may also be accomplished with other metals such as silver, nickel or copper. We come to the startling truth that it does not matter how big the supply of real money (gold) is: Any supply will do. The free market will simply adjust by changing the value of gold. More money does not supply more capital, is not more productive and does not result in economic growth. Our "elastic" monetary system, is just a clever way for bankers to make money and Congress to take your money and spend it without your knowing about it.

Receipt Money

During the days of the Roman Empire, goldsmiths maintained vaults where they stored their gold. It followed logically that they might also store gold for other people for a fee. Thus, the first banks were born. The goldsmiths gave their depositors receipts for gold deposited and because the receipts could be redeemed by a bearer at any time, they had intrinsic value and were traded as money. Goldsmiths also loaned money from their reserves and collected interest just as is done today.

Fractional Money

Of course, goldsmiths quickly realized they only needed a small portion of their stockpiles on hand for redeeming customer receipts for "their" gold. So it logically followed that to collect more interest, they could loan more money than they had on hand by using receipts backed by nothing except the goldsmith's knowledge that all their depositors would not come to collect their gold on any given day. Thus was born fractional receipt money, the precursor to our present day banking system. As long as these illegal and fraudulent loans were repaid, no one was the wiser. But if the loans failed (flood, drought), the goldsmith was caught short. This began a "run on the bank" and only the first in the door were made whole. The rest lost their money and "hung" the goldsmith. Without the crime of loaning more money in receipts than the goldsmith had on hand in real gold, there would never be a run on the bank to redeem the receipts. Of course, at the time this was considered a serious crime because it was recognized clearly as fraud. The money did not exist and everyone understood it.

Fiat Money

Fiat money is money that has value only because a government says it has value. It is not backed by anything. Fiat money has two characteristics. a) It does not represent anything of intrinsic value. b) It is decreed to be legal tender (laws that require everyone to use it in settlement of private debts). These two characteristics always go hand-in-hand because fiat money is worthless and it would be rejected by the public without the government's threat of fines or imprisonment for failure to accept it as money. A review of the history of money and banking shows that manipulation of fiat money by governments has failed every time it has been tried.

Today's Money

Fractional money partially backed by gold or silver is a hybrid between receipt money (honest money) and fiat money that has nothing to back it. When the fraction in fractional receipt money reaches zero, the fractional receipt money is then truly fiat money. Because we are on a Fiat Money system in the US today, all money (the M1 money supply) is created by debt, not by work. If all debts were paid, there would be no money.

Moneytary Policy

Definition:- Economic strategy chosen by a government in deciding expansion or contraction in the country's money-supply. Applied usually through the central bank, a monetary policy employs three major tools: (1) buying or selling national debt, (2) changing credit restrictions, and (3) changing the interest rates by changing reserve requirements. Monetary policy plays the dominant role in control of the aggregate-demand and, by extension, of inflation in an economy. Also called monetary regime. See also monetarism.

Objectives or Goals of Monetary Policy:

The following are the principal objectives of monetary policy:

1.Full Employment:- Full employment has been ranked among the foremost objectives of monetary policy. It is an important goal not only because unemployment leads to wastage of potential output, but also because of the loss of social standing and self-respect.

2. Price Stability::- One of the policy objectives of monetary policy is to stabilize the price level. Both economists and laymen favour this policy because fluctuations in prices bring uncertainty and instability to the economy.

3. Economic Growth::- One of the most important objectives of monetary policy in recent years has been the rapid economic growth of an economy. Economic growth is defined as “the process whereby the real per capita income of a country increases over a long period of time.”

4. Balance of Payments::- Another objective of monetary policy since the 1950s has been to maintain equilibrium in the balance of payments.

  Instruments of Monetary Policy:

The instruments of monetary policy are of two types: first, quantitative, general or indirect; and second, qualitative, selective or direct. They affect the level of aggregate demand through the supply of money, cost of money and availability of credit. Of the two types of instruments, the first category includes bank rate variations, open market operations and changing reserve requirements. They are meant to regulate the overall level of credit in the economy through commercial banks. The selective credit controls aim at controlling specific types of credit. They include changing margin requirements and regulation of consumer credit. We discuss them as under:

Bank Rate Policy:

The bank rate is the minimum lending rate of the central bank at which it rediscounts first class bills of exchange and government securities held by the commercial banks. When the central bank finds that inflationary pressures have started emerging within the economy, it raises the bank rate. Borrowing from the central bank becomes costly and commercial banks borrow less from it.

The commercial banks, in turn, raise their lending rates to the business community and borrowers borrow less from the commercial banks. There is contraction of credit and prices are checked from rising further. On the contrary, when prices are depressed, the central bank lowers the bank rate.

It is cheap to borrow from the central bank on the part of commercial banks. The latter also lower their lending rates. Businessmen are encouraged to borrow more. Investment is encouraged. Output, employment, income and demand start rising and the downward movement of prices is checked.

Open Market Operations:

Open market operations refer to sale and purchase of securities in the money market by the central bank. When prices are rising and there is need to control them, the central bank sells securities. The reserves of commercial banks are reduced and they are not in a position to lend more to the business community.

Further investment is discouraged and the rise in prices is checked. Contrariwise, when recessionary forces start in the economy, the central bank buys securities. The reserves of commercial banks are raised. They lend more. Investment, output, employment, income and demand rise and fall in price is checked.

Changes in Reserve Ratios:

This weapon was suggested by Keynes in his Treatise on Money and the USA was the first to adopt it as a monetary device. Every bank is required by law to keep a certain percentage of its total deposits in the form of a reserve fund in its vaults and also a certain percentage with the central bank.

When prices are rising, the central bank raises the reserve ratio. Banks are required to keep more with the central bank. Their reserves are reduced and they lend less. The volume of investment, output and employment are adversely affected. In the opposite case, when the reserve ratio is lowered, the reserves of commercial banks are raised. They lend more and the economic activity is favorably affected.

Selective Credit Controls:

Selective credit controls are used to influence specific types of credit for particular purposes. They usually take the form of changing margin requirements to control speculative activities within the economy. When there is brisk speculative activity in the economy or in particular sectors in certain commodities and prices start rising, the central bank raises the margin requirement on them.

The result is that the borrowers are given less money in loans against specified securities. For instance, raising the margin requirement to 60% means that the pledger of securities of the value of Rs 10,000 will be given 40% of their value, i.e. Rs 4,000 as loan. In case of recession in a particular sector, the central bank encourages borrowing by lowering margin requirements.

Conclusion:

For an effective anti-cyclical monetary policy, bank rate, open market operations, reserve ratio and selective control measures are required to be adopted simultaneously. But it has been accepted by all monetary theorists that (i) the success of monetary policy is nil in a depression when business confidence is at its lowest ebb; and (ii) it is successful against inflation. The monetarists contend that as against fiscal policy, monetary policy possesses greater flexibility and it can be implemented rapidly.

Fiscal Policy Meaning, Objectives& Tools

What is Fiscal Policy?

Ø  Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. It is the sister strategy to monetary policy through which a central bank influences a nation's money supply.

Objective of Fiscal Policy

Introduction:- Government spending and the policies guiding the public expenditure of the government do influence macroeconomic conditions. These policies affect tax rates, interest rates and government spending, in an effort to control the economy. Fiscal policy is the means by which a government adjusts its levels of spending in order to monitor and influence a nation’s economy. Fiscal policy and monetary policy go hand in hand with each other. Both are interdependent on each other.

Before the Great Depression in the United States, the government’s approach to the economy was laissez faire. However, following the Second World War, it was determined that the government had to take a proactive role in the economy to regulate unemployment, business cycles, inflation and the cost of money. By using a mixture of both monetary and fiscal policies (depending on the political orientations and the philosophies of those in power at a particular time, one policy may dominate over another), governments are able to control economic phenomena.

Fiscal policy serves as an important tool to influence the aggregate demand. The instruments of fiscal policy are government spending and taxation. Depending upon existing situation of the economy, government can employ either expansionary or contractionary fiscal policy. Expansionary fiscal policy increases the aggregate demand whereas contractionary or deflationary fiscal policy reduces the aggregate demand. Changes in the level, timing and composition of government spending and taxation have an important effect on the economy.

Fiscal policy is the policy of government related to its own expenditure and taxes in order to influence the aggregate demand (AD).It is one of the very important demand –side policies. Demand –side policies focus on changing the AD or shifting the AD curve in the aggregate demand and aggregate supply (AD-AS) model in order to achieve the goals of price stability, full employment, and economic growth.

There are four components of AD: consumer spending(C), investment spending (I), government spending (G), and net exports(X-M), where X=exports and M=imports. Fiscal policy influences all of these four components of AD. Government can influence ‘C’ by imposing taxes on consumers, i.e., personal income taxes. It can influence ‘I’ by imposing taxes on business profits. Similarly, government can easily change its own spending. It influences ‘X-M’ by means of subsidies provided to the domestic producers, import tax, and so on.

OBJECTIVES

The major objectives of fiscal policy are as follows:

• Full employment: It is very important objective of fiscal policy. Unemployment reduces the level of production, and hence the level of economic growth. It also creates many problems to the unemployed people in their day-to-day life. So, countries try to remove unemployment and attain full employment. Full employment refers to that situation, where there is no involuntary unemployment in the economy. To attain this objective, government tends to:
•  Increase its spending
• Lower the personal income taxes
•  Lower the business taxes, or
• Employ a combination of increasing government spending and decreasing taxes

However, in practice, it is difficult to achieve full employment. As the factor markets are not perfect, factor units may lose their jobs and may not get the new jobs immediately.

• Price stability: Both sharp rise and sharp fall in general price level are not desirable. It is because sharp rise in prices makes many goods and services unaffordable to the consumers whereas sharp fall in prices discourages the producers to produce goods and services. So, price stability is desirable. However, it should be noted that the principle that general price level should be reasonably stable is generally accepted, the determination of exact trends which are most satisfactory from the stand point of welfare of society is difficult. There are following three alternative points of view regarding the price stability.
• Economic growth: It is also an important objective of fiscal policy. By means of higher rate of economic growth, the problem of unemployment can also be solved. However, it may create some problems in the maintenance of price stability. The developed countries, like USA, UK, Japan, etc. give attention to the relationship of actual growth rate to the potential growth rate permitted by the consumption – saving ratio, technological considerations and other factors. The less developed countries give emphasis to the increase in the potential growth rate as well as the relationship of the actual and potential growth rate. 
• Resource allocation: Resource allocation refers to assigning the available resources of the economy to the specific uses chosen among many possible and competing alternatives. It gives answer to what to produce and how to produce-questions of the economy. Fiscal policy should ensure the optimum allocation of the resources. It should divert the resources from unproductive sectors to the productive sectors of the economy. It is the long-run objective of the government. The emphasis of the government upon the full employment, price stability and economic growth should not overshadow the resource allocation goal.
• Increase in Savings: This policy is also used to increase the rate of savings in the country. In the developing countries rich class spends a lot of money on luxuries. The government can impose taxes on them and can provide the basic necessities of life to the poor class on low rate. In this way by providing incentives, savings can be increased.
• Equal Distribution of Wealth: Fiscal policy is very useful for the achievement of equal distribution of wealth. When the wealth is equally distributed among the various classes then their purchasing power increases which ensures the high level of employment and production.
• Control Inflation: Fiscal policy is very useful weapon for controlling the rate of inflation. When the expenditure on non productive projects is reduced or the rate of taxes are increased then the purchasing power of the people reduces.
• Reduce the Regional Disparity: In the less-developing countries, the regional disparity is found. Some areas are more developed while the others are less developed. Government provides the infrastructure facilities in less developed areas. The tax holiday incentive is also provided in these areas which is very useful in increasing the per capita income.
• Check Rapid Increase in Consumption: Fiscal policy is also used to check the rapid increase in the consumption will be high then the rate of saving will be low and consequently rate of investment will be low. So one country cannot improve its economic condition without increasing the investment.

Fiscal Policy Tools and the Economy

Imagine that Sam is sick. He's at home right now, and the doctor's been called. All of a sudden, the doorbell rings, and standing at the front door is a doctor carrying a medical kit. Now, the doctor comes in the patient's bedroom, opens up the kit and finds three tools inside. I'll bet you're curious about what's in the kit, huh? The doctor chooses one or two of the tools in his toolkit and uses them on the patient.

Now imagine the patient is the whole economy. The economy has entered a slowdown that has now turned into a full-blown recession. Unemployment is high, and people are fearful of their financial future. The government uses its own fiscal policy toolkit, like a doctor, to administer fiscal policy tools - like government spending, taxes and transfer payments - to help strengthen aggregate demand when it's weak. On the other hand, when the economy is overheating by growing beyond its capacity, fiscal policy does the opposite and slows down economic growth to address the problem of inflation.

Now, the word 'fiscal' means 'budget' and refers to the government's budget. Fiscal policy, therefore, is the use of government spending, taxation and transfer payments to influence aggregate demand and, therefore, real GDP. If you imagine the government as the doctor carrying the medical kit, these three things are in the toolkit: government spending, taxes and transfer payments. Let's briefly look at some examples of each one of these fiscal policy tools.

Government Spending

Government spending includes the purchase of goods and services - for example, a fleet of new cars for government employees or missiles for national defense. Government spending is a fiscal policy tool because it has the power to raise or lower real GDP. By adjusting government spending, the government can influence economic output.

In addition to the primary effect of government spending on the economy, this spending multiplies through the economy as it affects businesses who sell the goods and services bought by the government. Consumers then go on to spend the paychecks they earn from those businesses, stimulating real GDP even more.

For example, when Larry's Limos receives a large order for more government vehicles, his sales increase, and he hires more employees who earn a paycheck from the company. Once they cash their paycheck, they spend this money on goods and services, and the effect of a single increase in government spending now leads to a much greater result - an effect that economists call the multiplier effect.

Taxes

Alright, let's talk about taxes. Taxes are a fiscal policy tool because changes in taxes affect the average consumer's income, and changes in consumption lead to changes in real GDP. So, by adjusting taxes, the government can influence economic output. Taxes can be changed in several ways. Firstly, marginal tax rates can be raised or lowered. Secondly, they can be eliminated entirely, or the tax rules can be modified.

Transfer Payments

Alright. We've talked about government spending, then we talked about taxes - now let's talk about transfer payments. Transfer payments include things like Social Security, welfare or unemployment checks. These checks go out all over the country on a monthly basis and serve as the income for tens of millions of consumers. Transfer payments are fiscal policy tools in the same way that taxes are because changes in transfer payments lead to changes in consumer income, and when consumers spend more of their income, this influences economic output.

So, these are the three main tools that the government administers to the economy to help it in the short-term. But they can be used in two different ways. Let's find out how.

Expansionary vs. Contractionary Fiscal Policy

Each tool can be used in two opposite ways - to help expand economic output or, on the other hand, to help contract economic output, based on the diagnosis made by fiscal authorities. When the government uses fiscal policy to stimulate aggregate demand during a recession, economists call this expansionary fiscal policy.

Just imagine a small gnome wearing a government t-shirt holding a large balloon in his hand - a balloon with the words 'Real GDP' written on the side, by the way - a balloon that has become somewhat deflated. Now picture the gnome blowing up the balloon. As it expands, you can now easily read the words 'Real GDP.' This is expansionary fiscal policy because fiscal policy tools are used to expand the economy.