The Current India

Another setback which is ought to happen if there is fiscal cut on the government side. I've been saying this for a long time now to all my students that there is no need for a monetary policy. A corporate tax cut, thinking that the giant firms would invest more, is either a strategy by the government to exploit the economy which is basically a foolishness or rather and more obvious the government doesn't want to increase it's expenditure because of a GST return failure. A lower return from GST and building pressures from states and a BoP deficit has boggled the mind of the "chai-waala", and his non - economic advisors. Kindly go back four words before the full-stop and read again. Yes, that's Correct, I said Non-economic advisors.
You've done a tax cut, thinking firms would help the economy. Well here comes what we economists think and how the government and it's illiterate politicians think. You don't have to teach me, every citizen of our country knows that a majority of the politicians of India are illiterates and even have been convicted for illegal agendas. So, since they never studied economics, I would throw a free class for them.
Prof. Karl Marx said, the firms or the capitalistic firms, aim only to earn profits. Their sole motive being profit only. How? Via exploitation. The exploitation of labour. I would like to add something more to this, keeping in mind the current scenario of our nation.Thre is not just exploitation of labour, there is an exploitation of our rights, of our constitution, of each and every individual, of our future childrens, of our minds, our physical structurs, our cognitive abilities and what not!
You being an illiterate as far as economics is concerned, the current government , thinks they are better than Prof. Raghram Rajan, Prof. Amartya Sen and Prof. Abhijit Banerjee. Wait, Mr. Look at yourself in the mirror, you'll get to know what you are and what they are! You guys did a basic mistake. You, instead of taking money from firms (that is a tax rise), you gave it to them in the form of tax cut, they will keep more money with themselves and not spend more. This makes me recall the Keynesian model stating people don't spend more than their income. For example, if you are earning Rs. 1 lakh, you'll likely spend less than that, implying a MPC<1 (Marginal Propensity to Consume). Let's get this inside your head! Say, a big firm's turnover is 1000 crores, and the owner's income is 100 crores. Apart from his basic subsistence, how much will he consume in a year? Think and estimate, say Rs. 70 crore. Rs. 30 crore he'll save. Right?. Now your did a tax cut, thinking they would spend more, but that's a wrong concept. A tax cut would leave them with more profits and more savings and they would not spend more than Rs 70 crore. Why will they do that? They are already enjoying their lavish life. What you did, is increase their profits and the money in the economy went down further. If you would have increased the tax instead, your tax revenue would have increased, and the poor who don't have the money to spend would have got the money via jobs etc. And these demands would have gone up, this adding up with the demands of the rich capitalistic firms, thereby increasing the aggregate demand in the economy. A diagrammatic explanation for your fat head!

According to the above diagram, having more revenue would increase the 'G' (Govt. Expenditure) implying a rightward shift of IS curve (mind your LM remain intact - no monetary policy into play). At the initial r*, Y increases to Y' and an increase in r to r1 would imply a bit of crowding out through reduction in investment via firms, but then overall Y increases from Y* to Y1. But, unfortunately, this never happened! What happened is a reduction in AD, a leftwards shift of IS curve as shown below :

Thus, leading to a fall in r and Y both.
Now, as i started this article with the expectation of a fiscal cut simple because of a poor GST return, the government might reduce it's spending. Now, again, if G decreases (govt. Expenditure decreases), again AD declines, thus IS shifts more to it's left as shown below :

If you see closely, Y was falling before, now it declined further from Y* to Y1 to Y2. Hence, no growth, reduction in National Income, GDP, employment, unemployment in the economy increases, thus making this more as a structure issue.
I rest my case!

Thank You,
An honest citizen,
Taha Hayat

The Creation of Bubble and Some Nudges

The amalgamation of stagnation (a period of low level of output and economic growth) and inflation (a rise in the general price level) leads to Stagflation. The worst situation, currently, one of the greatest developing Indian economy is facing. It is veil from sight and the humans are unaware of it. We are at a point in time, when suddenly everything seems to downswing in reality, but we still don't agree and hold onto hope.

The growth rates coming out now looks stark, both at the state - level as well as the country - level. The humans have been differentiated by Econs (economists) as per Prof. Thaler and Prof. Sunstein. The problem, according to me, doesn't lie with the workings of the government, but instead in the workings and thinking of humans. As per an article I read in 'Morning Star', Samantha and David Cameron, had a sign in their home which read, " Calm down dear, it's only a recession". I know, both the above mentioned characters do not belong to our country, but their reaction is equivalent to ours. (Just in case you don't know who they are, please Google it). Continuing with this article, for these 'humans', they think economic crisis is a joke, and time heals everything. But, according to me, time is just a variable, which is inevitable. And the healing process comes in with 'humans' and the government needs to nudge the humans in proper way, without any exploitation.

The problem : Privatisation and the Capitalistic society. According to the papers written by Prof. Karl Marx and Friedrich Engel such as 'the holy family', these two great economists and philosophers argued that the profits which the capitalist firms are enjoying are not profits, they are called "exploitation", the exploitation of labors. This exploitation has been very much misunderstood by the young economic graduates these days in the sense that there is also the exploitation of nature as well, by these capitalistic firms. This results in both increasing poverty and inequality in income and wealth and the environmental exploitation which threatens us all. This boils down to the studies by environmental economics and behavioural economics papers.

Let's take a simple problem at hand and mention the nudge which should be done. The uber and ola Start-ups. The capitalistic firms have just one main objective of profit maximising, the secondary objective being customer satisfaction. These startups have very much exploited the natural process and there is exploitation at every stage of life. During winters, these automobile companies, still put on their air - conditioners, and the customers enjoy it. Here, what comes in is some Nudges and the government intervention in a positive way. The citizens above the poverty line are losing their sense of mind and are driven to a more luxurious and conspicuous lifestyle rather than a rational choice theory. One sort of nudge in this case would be to switch off the A.Cs during the times when the weather around us is cool and the government should take proper steps against those flouting the law : A fine, for example.

The citizens have become more irresponsible and are made to thought that the government is there for them and whatever happens, the government of India would come to their rescue. The diversion of the people's minds have been done in a much more planned way than our imagination.

For example, the upliftment of the Article 370 has led the government and big businessmen like Ambani, to exploit the whole of kashmir. Now, people will think, that the investments would create employment opportunities for the people of kashmir. Right? No, wrong! Think... That would be exploitation of their freedom, and in return for that you're giving them petty jobs. This would directly mean that the poors remain poor, while the Ambani's become more rich by exploiting and thus the inequality in the economy increases. They're happy with their lives. Money is not everything, it cannot buy happiness. The wealth - oriented definition by Prof. Adam Smith, simply goes down the gutter because one needs to understand that there are people who are earning less, but are happy, and we have no right to exploit their happiness. You cannot follow the wealth definition of Adam Smith.

If there happens to be an exploitation of kashmir as a whole, then I petty that this environmental problem which the world is facing will get worse and this is only because of exploitation by the capitalistic firms and their evil objective of profits.

Apart from this, the mind of the citizens have been restructured and the path of correct thinking has been in-versed into the concept of "one - nation", one - religion ": more like a divide and rule policy of the British government. Even then, we took it into our emotions and fought among ourself and the third party was benefited. And even now, the history is repeating. For example, with the slogan of 'Jai-Shri Ram' and mob-lynching coming into being, I've two questions popping up inside my head while writing this article. One, why isn't the government saying anything about this, if it wants the betterment of the Muslims and the social welfare maximisation. Second, what benefit will we get by forcing the Muslims to chant the slogan of "Jai Shri Ram". If we say it, their perspective about Allah won't change and if they don't chant, then we shoot the Muslims right on the forehead and you think you've accomplished a great deal. But, sorry, you've lost humanity. These stunts even 'Ram-ji' wouldn't have done it, which the Irrational people (mind it the people and not the Hindus as a whole) are doing. These are nothing but a selfish political stunts to get into our head and exploit our world of happiness. I would like to quote something from a book I'm writing : "We're tending towards corruption, rather than tending towards Correction". Just give it a thought! Adios... 

THE QUANTITY THEORY OF MONEY (QTM)

The theory was first build up by people like Copernicus and Jean Bodin in as early as 1566. This theory according to me is more like an econophysics model which received its popularity from Irving Fisher in 1911 and other economists like J.S Mill. There were a lot of argument on the reality of the existence of the QTM, and many theory related to the QTM came in. However, the basic conclusion of each theory even though they deviated and restated the original Quantity Theory of Money equation, remained unchanged, i.e. they all explained that price level is directly related to the money supply. Let's discuss everything one-by-one. Even though not everything is there to study for your exam, but you can always prefer to know and get knowledge.

1. The Quantity Theory Of Money - In accordance with Irving Fisher.

Also known as the Cash Transaction approach, In its simplest form, it states that the general price level (P) in an economy is directly dependent on the money supply (M), P = f(M)

If M doubles, P will also double. If M falls by half, then P will also decline by the same amount. This is the logic behind the quantity theory of money. In his theory of demand for money, Fisher attached emphasis on the use of money as a medium of exchange (this is important, if you remember I have taught you how Keynes was different from Classical economists, in the way that the classical economists only thought of money as a medium of exchange, from which came a vague definition as “Money is what money does”. But Keynes said that money also has a function of store of value, where you can always save money for future use). Demand for money is a function of income. The rate of interest has no effect on the demand for money. Fisher emphasized on the supply of money, assuming demand for money is constant. 

Fisher has explained his theory in terms of his equation of exchange: According to Fisher, the equation for QTM is given as follows:

P x T = M x V

Where P = price level, or 1/P = the value of money;
M = the total money supply in the economy;
V = the velocity of Money;
T = the total amount of goods and services exchanged for money or the transactions taken place.

The total volume of transactions multiplied by the price level (PT)
represents the demand for money.
This equation equates the demand for money (PT) to supply of money
(MV).

The truth of this proposition is evident from the fact that if M is doubled, while V, and T remain constant, P is also doubled.

Assumptions of the Theory:

1. V is assumed to be constant and is independent of changes in M.
2. T also remains constant and is independent of other factors such as M, and V.
3. It is assumed that the demand for money is proportional to the value of transactions.
4. The supply of money is exogenously given from outside the system and is a constant.
5. The theory is applicable in the long run.

This whole thing was argued by Prof. Karl Marx, where he explained that whatever is being determined should be in terms of labor theory of value, where it should be determined by the socially necessary labor time needed to produce the commodity and that the QTM is a function of quantity of commodities, the price of the commodities and the velocity. After all, it is labor who determines how much production will happen. He didn't reject Fisher's theory, but just changed the function and said that the volume of money depends on labor basically.

Likewise, Keynes came in and argued that the amount of money was determined by the purchasing power or aggregate demand.

2. The Cambridge Version of the QTM - given by Alfred Marshall, Pigou, Robertson and Keynes.

Also known as the Cash Balance approach. We shall only discuss the original Cambridge version of the QTM and would avoid the functions given by each economist in specific.

M x V = P x Y

The whole concept is the same. I have mentioned it previously as well. The only difference is that everyone who has argued has just taken a different route to explain the same thing which was first explained by prof. Irving Fisher: As Money supply increases, Price level also goes up, other things remaining intact.

Thus, the % change in M x % change in Velocity = % change in P x % change in Y

Assuming velocity and income constant, we see that the change in the constant doesn't matter and the value becomes zero. Therefore, implying the direct relation between change in M and change in P. Thus, as Money supply in the economy increases, the price level also increases.

Let's take an example to explain how the model looks like.

Suppose, M = 1000, V = 4, P = 2, and Y = 2000

Then, according to the formula,  M x V = P x Y

                                                 ⟹ 1000 x 4 = 2 x 2000
                                                 ⟹ 4000 = 4000
Now, if M rises by 50%, i.e. it increases by 1000 + 50% of 1000 = 1500, then P will also increase by 50%, i.e. from 2 to 3, i.e. now P = 3 and M = 1500, then again, 

       M x V = P x Y
⟹  1500 x 4 = 3 x 2000 
⟹  6000 = 6000

This is what happens in reality. If the govt. of India increases the money supply which has happened earlier as well, then prices in the economy rise up fast. 

Thus, as M ↑ , V constant, (M x V)↑ ⇒ P↑, Y remaining constant. 

MONEY SUPPLY (FOR B.COM 3rd Year, B.Sc/B.A 1st year)

Money supply

Definition of money: Money is defined as the stock of assets that can be readily used to make transactions. In other words, money is simply the total stock of currency in the hands of the public of any economy.

Functions of money:

1.       Medium of exchange: Money is used to buy goods and services (G&S) that individuals want. It can therefore, be used as a medium of all kinds of transactions in the economy. In any economy, the ease with which money can e converted to purchase other things is known as liquidity of money.

2.       Store of Value: money is also used to transfer purchasing power from present generation to the future or from present period to the future. Although, such store of value as a function of money is not perfect due to the possibility of inflation, which reduces purchasing power of money overtime. Yet, individuals can trade money by saving it now and spending it in the future.

3.       Unit of Accounts: In the credit market, all the lending and borrowing is recorded in terms of money. Also in any market in the economy, money is quoted as the price for the commodity or service and hence it acts as a yard- stick with which all, the economic transactions are measured.

Types of money

Money that has no intrinsic value of its own but is established as money by the governments’ order or decree is known as fiat money.

On the other hand, when some commodity is utilized as money because of its intrinsic value, then it is called commodity money. The most widespread example of commodity money is gold coins, where gold as a currency is used as money and those economies using such gold coins are said to be on gold standard.

Measures of economy

Mₒ - it comprises the total currency in the hands of the public in any economy. It is also known as the “Base Money.”

M₁ - it comprises currency in the hands of public, i.e., Mₒ, as well as demand deposits, travellers’ cheque and other chequeable deposits.

M₂ - it includes M₁ + Saving Deposits + Small time deposits + Money market mutual fund balances

M₃ - M₂ + long-term deposits + euro dollars + institutions – money market mutual funds only.

Central Bank

ASSETS	LIABILITIES
1.       Government borrowings (Domestic Credit/DC)	1.    Currency (C)
2.       Commercial bank borrowings (Discount Window Operation/DW)	2.    Reserves (R/SLR)
3.       OMOs (Government Bonds/B)
4.       Foreign Exchange Reserves (F)

Assets – Side explanation:

1.       The RBI (Central Bank) advances credit to the government as the financier of the government. In case of deficit financing, the additional government expenditure is financed by borrowing from the Central Bank.

2.       The Central Bank also provides credit to the commercial banks through the discount window mechanism when the commercial banks have shortage of funds.

3.       The Central Bank also controls the Capital market of the economy and it is the absorber of government bonds. When the Central Bank on behalf of the government operates through open market purchase of government bonds, the stock of government bonds with the Central bank goes up, this adds to the Asset value of the Central Bank.

4.       The Central Bank is also the custodian of foreign exchange reserves in the open economy. It is found that if the domestic currency appreciates then there is a fall in the foreign exchange value while if the domestic currency depreciates there is an increase in the foreign exchange reserve value.

Liabilities – Side explanation

1.       Currency – the Central Bank of any economy has the monopoly right over the issue of currency, which is then circulated among the citizens.

2.       Reserves – the Central Bank also keeps reserves in the form of Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR), which belongs to the Commercial Bank for emergency requirement in order to solve (mitigate) the problem of bank-run.

Now, the total value of assets and liabilities of the Central Bank comprises the base money or outside money or simply High Powered Money. Therefore, the high-powered money comprises the monetary base of the economy.

Therefore, from Assets side,

DC + DW + B + F = H (high powered money)  → Supply Side Equation

                                               

Similarly, from liability side,

C + R = H  →  Demand Side Equation

                                          

Commercial Bank

ASSETS	LIABILITIES
Loan (L)	Deposits (D)
Reserves (R)

Derivation of Money Multiplier

1.       Currency- Deposit Ratio- it is defined as the ratio of the amount of currency held as liquid cash in the hands of public to the amount of deposits that is saved in the banks. It is normally denoted by:-

                               β = C÷D

2.       Required Reserve Ratio, Excess Reserve Ratio and reserve Ratio- the reserve ratio gives the fraction of the deposits with the commercial banks that are withheld by them as reserves. It is normally denoted by:-

                               α = R÷D

Since R is a fraction of D for a proper banking system, hence α<1.

The total reserve of any commercial bank comprises of required reserves and excess reserves. The required reserve ratio (RRR) denotes the amount of deposits that has to be kept by the commercial bank as compulsory reserves with the Central bank. This reserve is pre-determined by the Central bank and imposed on all the Commercial Banks as a constant. However, such excess reserves are not compulsorily imposed by the Central Bank and hence its magnitude depends on the policies of individual commercial banks themselves.

Therefore, the fraction of the deposit with the commercial banks that are kept, as excess reserves are known as Excess Reserve Ratio (ERR).

                                      α      =   R÷D    =  (RR+ER)÷D

                                                               =          RR÷D    +      ER÷D

                                                               =           RRR      +       ERR

                                                               =               α₁       +         α₂ ;  where

_α1 =  RRR     (constant)

α_{2 =}   ERR   (variable)

RR – Required Reserve

ER – Excess Reserve

The ER of any commercial bank depends on market interest rate (r), discount window rate of the central bank (r_d) and future uncertainties (σ). Normally, as the ‘r’ goes up the commercial banks want to give out more loans in order to earn more profit and hold less excess reserve. 

Thus, Excess Reserve is inversely related to ‘r’, implying, ERR ∝ 1/r. Similarly, if the central bank charges a high interest rate to the commercial bank as the lender of the last resort, then commercial banks would not opt for the loan from the central bank in lieu to repay a higher amount as debt afterwards, hence they would keep more excess reserve so that they stay safe from such situation. Therefore, the higher is the r_d, the more the commercial banks keep money as excess reserves. This means that Excess Reserve is directly related to ‘r_d’, implying, ERR ∝ r_d.

In addition, w.r.t market uncertainties, we notice that the more are the market uncertainties, the riskier it will be for commercial banks to give out loans and therefore, it holds more ER. Hence, ER is directly related to market uncertainty. Thus, ERR ∝ σ.

Hence, overall, α₂= f(r, r_d, σ).

From the liability side, if you recall,

                         H= C+ R        →        (1)

The money supply in the economy is given by:-

                         M= C + D      →        (2)

      (2) ÷ (1), gives us,

   =>   M÷H = (C+D) / (C+R)

Let us divide R.H.S by D,

   =>  M/H   =   ( C/D + D/D ) /  ( C/D + R/D )  

                              

   =>  M/H   =   ( β + 1 ) /  ( β + RR/D + ER/D ) 

   Now, cross multiplying H, and putting the notations, we get, 

  M = H [ (β + 1) / (β + α₁ + α₂) ]   →  (3)

Now let, m =  (β + 1) / (β + α₁ + α₂)   →     money multiplier

=>  M = mH     →     money multiplier equation

Again, We know, α<1 

=> α + β  < 1 + β 

=> 1 < (1 + β) / (α + β)

=> 1 <  m

Where, α = α₁ + α₂

 ஃ  m>1

Thus, the above result implies that if ‘H’ increases by 1 unit, then the Money supply (M) increases by more than 1 unit, why? Because the money multiplier is greater than 1, so the effect will be greater.

PROBLEM SUM (EXAMPLE):

Given:

(i)  α1 (bar)= RR/D = 0.12, α2 = ER/D = 0, β = C/D = 0.3 , find the money multiplier and money supply amount, if High-powered money (H) is 40 billion.
(ii)  If α1(bar) = 0.2 , then what is the money multiplier value, and what is the change in money supply.

Ans.) (i)  α = α1 (bar) + α2 = 0.12 + 0 = 0.12

 ஃ  m ( money multiplier ) =  (1 + β) / (α + β)  =  (1 + 0.3)/ (0.12 + 0.3) = 1.3/0.42 = 3.095

ஃ  Money Supply = m H = 3.095 x 40 = Rs. 123.8 billion.

         (ii)  Now, if the value of α1 (bar) becomes 0.2, then α = 0.2 + 0 = 0.2

ஃ  m =  (1 + β) / (α + β)  =  (1 + 0.3)/ (0.2 + 0.3) = 1.3/0.5 = 2.6

ஃ  Money Supply = m H = 2.6 x 40 = Rs. 104 billion.

ஃ  The change of Money Supply = 123.8 - 104 = Rs. 19.8 billion.

Thus, the money supply in the economy goes down by 19.8 billion rupees.

HS (HIGHER SECONDARY) IMPORTANT QUESTIONS.

Long questions (5marks each)

Please read your books and get your concepts clear. Once you do that thoroughly, then solve these questions, it'll help you out brushing up before your exam.

Q1. Explain the relationship between TP, AP and MP.

Q2. In which stage will a producer operate?

Q3. Explain the concept of internal economies and external diseconomies.

Q4. Derive the firm's supply curve under perfect competition. Explain using the diagram.

Q5. Explain the AD-AS analysis using a schedule or a diagram.

Q6. Derive the LAC from SACs.

Q7. What are the assumptions of the marginal productivity theory of distribution?

Q8. How the interest rate is determined from the liquidity preference?

Q9. Determine the wage rate using the marginal productivity theorem.

Q10. How rent element can exist in the earnings of any factor of production?

Q11. Explain the criticism of the Recardian theory of Rent.

Q12. Distinguish between Ricardian theory and Modern theory.

Q13. Explain the Expenditure and Income method of measuring National Income.

Q14. Explain the problem of double counting.

Q15. Explain what are the leakages and injections in the 3-sector Circular flow model.

Q16. Explain the functions of Central bank.

Q17. Distinguish between Current account and Capital account.

Q18. Explain the concept of credit creation and credit control.

Q19. Find the S.D. from the following information:
        (a) 20,19,20,19,19,20
        (b) 10,9,10,9,9,10

Q20. Explain Lorenz Curve with the help of diagram.

Q21. How the exchange rate is determined under flexible exchange rate system?

Q22. What are the Causes of Poverty?

Q23. What are the causes of income inequality?

Q24. What are the different types of unemployment in India? Explain them.