What shape the world will be in: An Interesting observation

An interesting observation by a corporate economist on the path that recession is expected to take- Growth would dip followed by recovery, the after effects of the recent monetary easing, implying a familiar ‘U’ shape.
However other anticipated patterns resemble other letters of the alphabet- Optimists apprehend the recovery path to look like ‘V’ implying a quick return of confidence and credit; on the other hand it could be a ‘W’ shaped double dip. Pessimists fear the pattern of the future to resemble an ‘L’, implying a big dip and then a ride along the bottom. A gloomy frame of mind would rather think of a back slash: ‘\’ , displaying a relentless decline. Other options could be a downward spiral, shaped like ‘S’ or ‘Z’.
The bottom line is that the next year is different from an up-down business pattern which we saw in the last three decade, and that the range of alternative options as provided by alphabet economics shape the range of policy prescriptions that the policy makers may opt, for driving the economy out of recession.

Source: http://www.economist.com/

Richa Shukla
Globsyn Business School

Does economics support the smoking bans?

……looking through the lens of an econometrician
Econometric studies undertaken by smoke free advocates, on the effect of smoking bans on restaurant industry in several locations in California and Massachusetts shows that smoking bans have not harmed the restaurant industry. Some have even shown an increase in overall restaurant business. Their findings are however based on restaurant sales-tax receipts or other aggregate data.

Does this mean smoking bans are really a “win-win situation for restaurant owners”? Also is it justifiable for the authorities to tell property owners that they can’t allow smoking on their premises?

Not necessarily as the studies supporting smoking bans are based on aggregated restaurant sales data; that is, they look at the “restaurant industry” in the smoke-free communities. Also from the economic perspective, it largely ignores the concept of private property rights acting as an essential prerequisite and a fundamental linchpin of wealth creation in a market economy.

However the following are sufficient reasons for smoke free advocates to remain undeterred on their stand-
1) Environmental tobacco smoke “is responsible for approximately 3,000 lung cancer deaths each year in nonsmoking adults”
2) It harms the “respiratory health of hundreds of thousands of children”

Source: http://www.fee.org/publications/the-freeman/article.asp?aid=5120

Richa Shukla

Globsyn Business School

Indian growth not immune to International slow down

The Indian march towards becoming a economic super-power just hit a road block in recent times. In light of the tight credit condition and the governments struggle to control the record high inflation accounted for the Indian economy to grow at slowest rate in three years. Annual growth slowed to 7.9 per cent in the first fiscal quarter of 2008 ended on June 30, significantly lower than the 8.8 per cent rate reported in March.

The growth momentum slowed down as a result of multiple factors including tighter monetary policy, adverse global environment, higher interest rates, slow bank credit growth and ever raising crude and commodity prices.

This is in contrast to China’s economic growth. It has remained strong and shows signs of resilience in the face of the global economic slowdown. China's economic growth in the second quarter grew 10.1 per cent, down from 10.6 per cent.

In the opinion of several analysts the RBI is expected to maintain a tight policy stance with an aim to curb inflation to single digits. However, economists expect it to grow further in the later part of the year.

However the growth in the services sector, showed great resilience and remained strong at around 10 per cent. The sector which was hampered the most is the manufacturing sector as it suffered the sharpest fall and grew only 5.8 per cent compared to 10.9 per cent in the same period in 2007.

Contributed By:

Mr. Param Shah
(Assistant Registrar)
Globsyn Business School - Ahmedabad

Effect of non US currencies on India’s Foreign Exchange reserves

India’s foreign exchange reserves fell by $6.498 billion to $288.811 billion from $295.309 billion. It is primarily due to fall in foreign currency assets (expressed in US dollar terms) which includes the effect of appreciation or depreciation of non US currencies such as Euro, Sterling and Yen held in reserves.
It calls for a proactive thinking given the protracted evidence of economic woes afflicting Europe and America which are spreading eastwards.

Source: The Statesman

Richa Shukla

Globsyn Business School

Theorizing Consumer Behaviour

1) When does the demand curve potentially slope upward?
– This happens when a consumer buys more of a good when its price rises-Case of Giffen goods
a. Economists use the term Giffen good to describe a good that violates the law of demand.
b. Giffen goods are goods for which an increase in the price raises the quantity demanded.
c. The income effect dominates the substitution effect.
d. They have demand curves that slope upwards.
2) How wages affect labour supply?
If the substitution effect is greater than the income effect for the worker, he or she works more.
If income effect is greater than the substitution effect, he or she works less.
3) How do interest rates affect household saving?
a. If the substitution effect of a higher interest rate is greater than the income effect, households save more.
b. If the income effect of a higher interest rate is greater than the substitution effect, households save less.

Richa Shukla
Globsyn Business School

Income Effect and Substitution Effect

• A price change has two effects on consumption.
– Income effect
– Substitution effect
• The Income Effect
– The income effect is the change in consumption that results when a price change moves the consumer to a higher or lower indifference curve.
• The Substitution Effect
– The substitution effect is the change in consumption that results when a price change moves the consumer along an indifference curve to a point with a different marginal rate of substitution

Richa Shukla
Globsyn Business School

Data say enough to silence any economic doomsayer

The world should not be worried about India’s medium to long term prospects as the nation’s economic fundamentals are sound and robust-

• India not a large borrower: $15 billion borrowing for a country with a $1 trillion GDP is not much
• Strong savings rate of 34.8%
• Investment rate of 35.9%
• Incremental Capital output ratio of 4% (better than China, 4.3%)
• Growth in export of 20%
• Strong growth in foreign exchange reserves at over $308 billion
• As per the projections, by 2022, India could be the world’s largest pool of trained manpower and leaders in industry and commerce, accounting for 10% of the world trade.

Source: The Chartered Accountant (Journal of the ICAI)

Richa Shukla

Globsyn Business School

Scarcity & Allocation

Teacher enters a class of 10 students with 10 chocolates (product is not scarce).
Teacher: How many chocolates does each one of you want?
It is found that 8 students prefer to have one chocolate each; and 2 students desire to have 2 chocolates each.
Thus total demand is 12 chocolates, whereas total supply is 10 chocolates (we see that chocolates have become a scarce product now because of excess demand as defined by student preference)
Teacher thinks….. “I have to devise an allocation mechanism for distributing chocolates. Let the mechanism be based on the concept of willingness to buy and ability to pay.”
Teacher: Whoever is willing to get chocolates have to appear for an examination, and that they are free to quit if chocolates are not strongly desired.
With this announcement two students quit as they were not willing to sit for an examination. Subsequently we are left with 10 chocolates and 8 students.

Key Takeaways:

• Individual preferences/desires make the availability of a product “limited in supply”
• For allocation of scarce product there ought to be an allocation mechanism such that who ever is willing to pay the market price for the product gets it (in the above case price is “to appear for an examination”) or there will not exist any systematized and regulated process of product distribution
• Allocation mechanism must be such that there is “continual adjustment of prices” (In the above case, if no one had left after “examination announcement” then the teacher would have to think for some add on strategies, i.e. some benchmarking in marks etc., till the point is achieved where total demand equals total supply)

Richa Shukla
Globsyn Business School

Child Labour- Global Problem

According to Unicef about 211 million children aged from five to 14 are at work around the world. The ILO estimates that between five and six million children are forced labourers (40-50% of the total). Some of them are born into bondage; some are sold by their parents or abducted working in agriculture, industry, domestic work.
There exists a dire need to join hands to abolish child slavery.
Source: BBC News
Richa Shukla
(Globsyn Business School)

What economics can?

• It creates awareness of your power to think like an economist
• You start behaving rationally…hey its not that you were irrational, but yes the subject can sharpen your rational edge
• You start analyzing the way you behave and the way others behave in a social environment
• Develops in you an art to visualize each area of life differently and analytically
• Gradually you try to simulate the outside world in the economic brain of yours for capturing its essence and developing new frameworks with new perspectives.

Richa Shukla

(Globsyn Business School)

“Economy is good only when the employment standard is good”

Can we go with the above dictum? What if employment standard is good but the economy is not resilient to internal and external shocks. Thus arises the question of sustainability. How can an economy sustain itself in the phase of good employment standard vis a vis shocks.

Richa Shukla
(Globsyn Business School)

From the neuroscience experiments: An add-in to the theory of Consumer Behaviour

Recent research has shown that when making decisions with immediate consequences, economic actors typically display a high degree of impatience. Consumers choose immediate pleasures instead of waiting a few days for much larger rewards. Consumers want "instant gratification."
However, people do not behave impatiently when they make decisions for the future. Few people plan to break their diets next week. Instead, people tend to splurge today and vow to exercise/diet/save tomorrow. From today's viewpoint, people prefer to act impatiently right now but to act patiently later.
Economists need to study its consequence on the savings behaviour and implications for optimal saving institutions.

Richa Shukla

(Globsyn Business School)

Blending fiscal policy & Monetary Policy Credibility:

Experience confirms that the best way to pursue price stability is through a credible monetary policy. This implies the public declaration of the objective and the implementation of policy measures whenever developments show a departure from it and not to renege on its earlier promises.
However can monetary policy alone sustain the objective of price stability? Presently the monetary authorities are increasing the CRR and manipulating interest rate to pull down prices but prices are tending towards double-digit rate.
Such policy practice can affect the investment scenario, as decision makers might find it difficult to get investment funds as cost of borrowing increases culminating into an offset in the supply front. This might accentuate demand supply imbalance spiralling prices upward.
Given the root cause of current price spiral to be both demand side and supply side factors; the need of the time demands a judicious blend of fiscal and monetary policy.

Richa Shukla

(Globsyn Business School)

Order: Spontaneous versus Hierarchical

Decision making occurs at two-levels, where one acts independent and autonomous of one another (as through the institution of market) and where one acts through directions from above and outside (as within a business organisation or state). Spontaneous order refers to the age old dictum and logic of Adam Smith’s invisible hand (this is the domain of market) while hierarchical order refers to command which could materialize at the level of state or business organisation (this is the domain of planning and policy, whether centralized or decentralized). In an economy, decision making (the study of microeconomics) occurs at both levels and students should have a crystal clear idea of the place and importance of both as also their relationship.

Contributed by:
Dr. Anjan Chakrabarti
Head, Department of Economics
University of Calcutta

....and thus we say "human wants are unlimited"

The four basic human wants move in tandem with human needs.
As each level starting at the base is achieved, the next higher level becomes more important.

Richa Shukla
(Globsyn Business School)

Are you loss averse? It may be an innate rather than learned attribute

New research out of Yale University argues that monkeys and humans exhibit similar economic biases, and that economic decision-making have much deeper roots than many economists suspect.

The study involved presenting the capuchin monkeys with "two payoff-identical gambles: one in which a good outcome was framed as a bonus, and the other in which bad outcomes were emphasized as losses. Like humans, the monkeys displayed a strong preference for the first option, and like humans, the monkeys seemed to weigh the losses more heavily than comparable gains."
"Given the capuchins' inexperience with trade and gambles, these results suggest that loss-aversion behaviour extends beyond humans, and may be innate rather than learned."

With this interesting finding there exists definitely a challenge to see "whether systematic economic biases such as risk-aversion are learned behaviors – and thus easily ameliorated through market incentives – or biologically based, arising in novel situations."

(Source: http://news.mongabay.com/)

Richa Shukla

(Globsyn Business School)

Concept of Opportunity Cost

Reading for an hour means giving up fishing

(Source: http://www.nvcc.edu)

Opportunity cost is the sacrifices made (in terms of pleasure sacrificed from doing next best alternative action) by taking up the first best choice.

Richa Shukla

(Globsyn Business School)

Weak Dollar vs Strong Dollar

The weak U.S. dollar is helping to push oil and gasoline prices higher, making imported goods more expensive for Americans and overseas vacations more costly. At the same time, it's helped U.S. exporters.

If the dollar gains against other currencies, it is said to be strengthening. Its buying power increases relative to the other currencies. If its exchange rate declines, it is said to be weakening.

A strong dollar lowers the price to U.S. consumers of foreign products and services. That helps to keep inflation in check. U.S. consumers also benefit when they travel to foreign countries. It's usually a sign of a strong economy that is firing on all cylinders.

Weak dollar is basically the mirror image of strong dollar. U.S. manufacturers and other exporters benefit as American products become relatively cheaper. More foreign tourists can afford to visit the United States.

• Exports are growing thanks to the weak dollar, which makes U.S.-made goods more affordable.
• Industries with a strong international presence are benefiting the most.
• Primary-product producers are seeing increased profits, since commodities are priced on the global market.

The dollar’s fall over the past several years is just cause for celebration by many domestic producers. Since its peak in 2002, the trade-weighted dollar has fallen by 25%, making U.S. goods much more competitive in an international market, while filling U.S. malls with Europeans on shopping sprees. The dollar has likely now finished its downward revaluation, and should stabilize going forward. This will allow the U.S. to enjoy the benefits of an affordable currency, while removing some of the risk in corporations’ long-term plans.
However if the dollar continues to sink, it could bring more inflation and even trigger a sell-off by foreigners of U.S. investments, making it harder to pay down the national debt and increasing risks of recession.
Source: MiamiHerald.com

Richa Shukla

(Globsyn Business School)

Prices Rising - due to reckless printing of money

Since 1947, India’s real GDP has gone up only 15 times, but currency in circulation has disastrously multiplied by 462 times, pushing up the price level 51 times and destroying 98% of the value of the rupee. In over 100 years currency increased gradually to only Rs. 12,382 crore by 1980 but has now reached the astronomical figure of Rs. 6,02,706 crore. During the British period the price level went up only 3 times in 82 years, from 1857 to 1939. Even Singapore’s price level has gone up just 3 times in 47 years since 1961, while its real GDP has jumped up 35 times.

Contributed By:

Prof. Amit Dey

(Globsyn Business School)

Source: The Economic Times

Principles of economics

• People have tradeoffs
• The cost of something is what you give up to get it
• Rational people think at the margin
• People respond to incentive
• Trade can make everyone better off
• Markets are usually a good way to organize economic activity
• Governments sometimes improve market outcomes
• A country’s standard of living depends on its ability to produce goods and services
• Prices rise when the government prints too much money
• Society faces short-run tradeoff between inflation and unemployment.

Richa Shukla

Globsyn Business School

Welcome!

To a land of dismal science
To a land of self interested individuals
To a land of assumptions
To a land of curves and tangencies
To a land of built up models

This is how most management students Welcome! the subject. To them economics is a unique landscape composed of the above 5.

Alas! Essence of the subject withers and students remain deprive of their dynamic thinking power.

If you have read the above statement in between lines you have hit the point. Yes… it is the subject “Economics” which builds and embeds the mind with a unique thinking power and analytical ability.

Richa Shukla

(globsyn business school)