BUSINESS

It is a typical economic activity with the object of earning income : Income may be in the form of Profit, accumulation of wealth or purchasing power Collectively business means the total business activities in the country in the industry and commerce The activity may be profit or loss in carrying out production or distribution or providing service

DIFFERENT KIND OF BUSINESS

ORGANIZATIONS Proprietary concerns : Here the business operation is started and operated by an individual He is also called as a sole trader or proprietor He starts, organizes manages and bears the risk and controls the business himself . The capital contributed may be his own or borrowed He bears the losses and enjoys all the profits

 1. 2. 3.

4.
5. 6. 7. 8.

Advantages of sole trading : Single ownership run by individual enjoy all profits himself and also incurs losses if any Easy to form legal formalities are minimum Business decisions can be taken quickly take advantage of business s Opportunities for gains Can provide personalized service - to achieve personal rapport with customers He enjoys the benefit of hard work in the form of profits motivate for hard work He can maintain secrecy of business Cost of operation is less as he himself is managing it This system encourages self employment

LIMITATIONS OF SOLE TRADING

1.

2.

3.

4.

5.

6.

Limited capital only is available own or borrowed cannot expand Single person managerial or organizing ability is limited Suffer from the deficiency in the form of unlimited liability Risk assumption would be huge wrong decisions can create lot of damage It is not suitable for big business He has to take care of many things cannot pay equal attention to all aspects some important aspects suffer can land him in problems

PARTNERSHIP FIRM
It is a business enterprise formed by two or more persons called partners Collectively they are called as a partnership firm There would be pooling of capital ,skill , organizing talent and managerial ability. The capital is contributed by the partners They also share the business risks In short : it is a business enterprise which is formed by the association of two or more persons who carry on a business jointly with the intention of sharing profits and losses is called partnership

ADVANTAGES OF PARTNERSHIP
1.

2. 3. 4.

5. 6.

7.

8.

More capital can be mobilized two or more persons contribute for capital Formation of the firm is relatively easier They can maintain secrecy Ideas and opinions can be heard and right decisions can be taken Risk is shared as it is shared by two or more persons Partners come from diverse fields can form expert views in decision making It is more stable and more continuity in existence compared to sole trading Dynamic management is possible

LIMITATIONS OF PARTNERSHIP
Source of finance is limited - even all partners cannot bring capital for huge projects Liability of partners are unlimited - personal properties of partners are attachable Partners cannot share their shares without consent of other partners Organizing ability and managerial talent is limited compared to a limited company Decisions have to be taken collectively time consuming may cause delay Even if one partner commits mistake other partners are penalized for no fault of theirs

JOINT STOCK COMPANIES

Term registered company means a company incorporated under the companies act 1956-or other cos acts Definition: a voluntary association of persons association of individuals formed for some common purpose has capital divisible into parts called as shares It is an artificial person created by process of law it has perpetual succession & common seal It is regarded as a person by law human being like Ram or Shyam It is an artificial person has no body or soul not visible except to the eye of law It can sue and be sued

Decide whether pvt or public , start new or takeover old, - by promoters 7 or more persors if public co 2 or more cos in case of pvt co associated persons subscribe the names It may be company ltd by shares 2. co ltd by guarantee, 3. unlimited co Documents to be filed: Ascertain from registrar whether Name is available

ADVANTAGES OF A LIMITED COMPANY

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

Huge amount of capital can be mobilized Expansion of business is easier can capitalize reserves Can continue for a long period of time It can enjoy the economies of scale Services of specializes personnel can be availed It encourages savings, motivation creates employment and capital formation limited liability :limited to the nominal value No. of members: Public co :unlimited Transferability of shares without consent of other members Separate Legal entity for cos: In partnership if partners die firm dissolves Control: can be obtained by buying shares partnership shares cant be transferred Management of cos can be easily transferred to employees etc.. But cant be in partnership Members and company can sue each other

LIMITATION OF JOINT STOCK COMPANIES

1. 2. 3. 4. 5. 6.

7.

Formation involves lot of legal formalities and also expensive Trade secrecy cannot be maintained Decisions are taken on the basis of majority minority share holders are affected by it The directors should act honestly otherwise serious damages may result Transfer of shares facilitates speculation business public are unduly influenced by speculative activities Democratic management is only in theory many share holders do not even attend meetings only influential share holders exercise powers and manage co Procedural formalities are more urgent actions cannot be taken

COMPANY V/S PARTNERSHIP

1.

2.
3. 4.

5.
6. 7.

8.
9.

Mode of creation: come after regn under cos act vs regn not compulsory Legal status: legal personality v/s partners not distinct from firm Liability of members: limited v/s unlimited Management: members cannot manage v/s partners should mange Transferability: freely transferable v/s consent of all partners necessary Agency: members are not agents of co v/s partners are agents of firm Objectives : limited to M/A v/s unlimited Insolvency: members are not insolvent if co is insolventv/s if firm insolvent all partners are insolvent No of members not limited v/s limited

HINDU UNDIVIDED FAMILY -HUF

It is carried on by Hindu undivided family It is managed by senior male member called Karta Other male members of the family are called Coparceners The firm can be the joint property or an ancestral Property The liability of the Karta is unlimited

CO- OPERATIVE SOCIETY

It is formed to fulfil the objectives of a section of the society It is managed by applying the rule of democracy It is intended to serve both its members and environment or community as a whole Co-operative societies carry on business for mutual benefit and work with service motive

MERITS OF CO-OPERATIVES
1.

2. 3.

4.

5.

6.

It provides self help for lower and middle class people It removes the evils of capitalism Economic problems faced by poorer populations are solved through co-operatives Formation of co-operative society is easier members with common interest come together Democratically elected members manage it It is not with profit objective but for promoting public welfare

LIMITATION OF CO-OPERATIVES

Management is with controversies educated and rich take advantage of ignorant people They are subjected to Govt control and interference - its freedom is curbed Timely decisions cannot be taken There will be domination on of the majority interests It is serving the political purpose of politicians Corruption is rampant It cannot raise huge capital as the members themselves are not rich Management is not in the hands of experts hence management is always a problem Due to limitations of capital and organizational ability cannot undertake business in large scale

GOVERNMENT UNDERTAKINGS
These are enterprises which are owned by the state or central government These undertakings have come into existence to fulfill the promotional role of Govt It is helpful for implementation of socio- economic policies These enterprises are owned, controlled and managed by the state or its agencies

TRUSTS :
Here the person who holds the legal tittle to the property manage it for the benefit of some one else It is established by transferring the assets to an individual /s , who will manage these assets for the designated beneficiaries Such individuals who manage are called trustees Normally trust is formalized through a trust deed not compulsory The trust deed should be executed on a stamp paper and registered Only responsible trustees should be appointed to manage the trust property prudently

NON GOVERNMENT ORGANIZATION - NGO

They are registered bodies which provide services like education, health, social reforms The members provide free service to the beneficiaries Funds are raised through public grants from govt or international bodies also They supplement efforts of govt in development They have good contact with people to convey their problems to govt They quickly respond to the needs of the poor They strive to build self-reliant communities They work to eliminate poverty They help to mobilize funds for the development of the community

TYPES OF GOVT AGENCIES

1. departmental undertakings : These undertakings are managed by separate departments of Govt attached to a Ministry Eg. Railways, defense, broadcasting, P & T etc., It will be under the control of the ministry in charge, Capital is contributed by the govt - expenditure is out of the annual appropriations from budget Any income earned is paid into the treasury of the govt

Public Corporation : These govt undertakings are established under the statute passed by the parliament or legislature It is an autonomous body - its powers and rights and functioning are laid down in the statute It enjoys independence in respect of capital structure and day to day management There will not be much interference from govt but they are accountable Eg. RBI, SBI, LIC etc.,

GOVT COMPANIES
Here more than 51% of the share capital is held by the central govt or state govt or jointly by both. Such companies enjoy the status of corporate body under companies act It also enjoys legal status under the law It also enjoys a greater operational flexibility

TRADE ASSOCIATIONS
It is a voluntary association of business units It operates in a certain field for promotion of their common economic interests It is a non-profit organization - it does not enter into any business transaction The main objective of the association is to protect the common interest Trade associations may or may not have share capital

-=-=-=-=-=-=-===-==-==-===--=-

BUSINESS SYSTEM
It is a combination of policies, personnel, equipment and computer facilities to co-ordinate activities of business It establishes rules and procedures of the business organization Business environment : It refers to all external forces which have a bearing on the functioning of the business Some of the Environment includes factors such as socio-economic , technological, suppliers, competitors and government, political system etc., These factors may give opportunities and pose threats to the firm

OBJECTIVES OF BUSINESS OBJECTIVES :

: ECONOMIC

Earning adequate profit - reward for taking risk it is measuring rod of success needed for stability and prosperity - source of finance Creation of Customers : it can succeed only if it has customrs for its goods - produce as per want of consumer Innovation : adopt to changing conditions viz new techniques, new process, new designs etc., Socio economic objectives : To supply goods and services of std., quality wanted by the society Avoid anti-social practices like hoarding, black marketing etc., Provide employment opportunity to the people Pay fair wages and benefits to the employees

SOCIAL OBJECTIVES

OF BUSINESS

Payment of timely and regular payment of taxes Promote social welfare activities Take steps /avoid polluting the environment Promote balanced regional development Human objectives : Promote humane treatment to employees Should provide fair deal to employees Provide job satisfaction to employees Encourage employees in decision making National Objectives : Produce as per national priorities Promote exports and import substitutes Help small scale industries Give necessary training to make them skilled Achive and create socialistic pattern of society

SCOPE OF BUSINESS
1. 2. 3.

4.

5.

6. 7.

8.

Production : produce goods for selling Purchase : purchase goods for production or for sale Storing : to bridge the time lag between production and sale Transportation : move the goods from suppliers to production site - and move the finished goods to consumers Advertising : provide information about goods to promote sales Banking : provide funds to finance business Insurance : to reduce the risks associated with business Appoint agents : to promote business activity

FACTORS AFFECTING SELECTION OF

BUSINESS ORGANIZATION

Size of the business unit : depends upon the level of production eg. Small level proprietary is enough for large scale joint stock co is needed Capital employment : if capital needed is small proprietary concern is enough if huge capital is needed there is need to set up Joint stock co Integration : if owner wants to manage and control all activities he can manage himself - in large undertakings need to create distinction between ownership and management Stability : need to create stability to be successful Flexible : the business organization should be flexible to changing scenario Tax liability : the tax liability is different and concessional for certain line of activity select such activity as far as possible

NATURE AND SCOPE OF ENVIRONMENTAL

SCANNING

Environmental scanning involves internal and external environments Scanning is important in the following ways : Enables management to forecast the trends that affect fortunes of business Gives information regarding products needed, positioning in market (competition), market segmentation, types of services to be provided, businesses to be acquired or sold Once the opportunities and threats are identified firm can formulate the strategies to achieve target It can help the device the value chain Firm can assess the need for physical and personnel competencies needed Make a through SWOT analysis of the company

BUSINESS ENVIRONMENT

According to Kieth Davis : Business environment is the aggregate of all conditions, events that influences and surrounds and affect it. A business firm gets resources from the environment and supplies its goods and services to the environment There are internal and external forces The environmental forces provide opportunities and threats to the business community Business and environment are interrelated Business can expand if the environment is favorable Eg. Produce more if govt gives subsidy Business faces challenges and problems if the environment is not favorable eg. Recession cut down the rate of production , if competition is more they can go for massive advertisement It is dynamic ever changing economic political, cultural technological factors

TWO TYPES OF ENVIRONMENT : INTERNAL & EXTERNAL FACTORS

Internal Environment : they exist within business firm generally controllable eg. Marketing mix, physical facilities, personnel , R & D capabilities , financial policies , capital structure etc., etc External environment : These factors exist outside the business firm They are beyond the control of a company success of the firm depends upon the adaptability of the firm to the firm to the environment The factors are : government policies, demographic factors, legal factors etc., Elements of external environment are : 1. Micro environment 2. Macro environment

MICRO ENVIRONMENT

1 suppliers: uncertainty of supply is a constraint - maintain high inventories increase cost 2. Customers: choice of the customers may change - it has its relevance to profitability 3. Competitors : - in case of severe competition take up vigorous advertisement Marketing intermediaries : effectiveness of marketing agents who bring sales of a product Macro environment : Uncontrollable factors 1. Economic environment : policy of the government - eg. Restrictive import policy or policy to protect home industries 2. Political environment : the kind of political system has an impact on the business : eg. There is a different kind of policies in communist countries 3/ Legal environment : govt bring in laws regarding wages, employment opportunities, health at work, emission of air, etc

MACRO

EXTERNAL ENVIRONMENT

- CONTD

Social environment : some of the examples are buying and consumption habits of people , customs and traditions , education etc., Demographic environment : size, growth rate, age composition , gender of the population etc., - demand for goods get affected by these factors Natural environment : certain climatic conditions are useful for certain industries eg. More demand for jeeps in hilly areas than cars Technological environment : a firm which cannot cope with the technological changes may not be able to survive eg. Advent of TV , VCP, VCR have affected cinema theatres International environment : this affects exports and imports : eg. In case of recession in foreign markets adoption of protection policies by foreign nations may create problems

BUSINESS ETHICS :

Ethos - Greek word - means character It is a set of standards and code or value system Business ethics refers to the application of ethics to business It is the study of good and evil , right and wrong actions of businessman It is the moral standards which are expected to be followed by the people who manage the business business is a part of the society - it has to contribute to the welfare of the society To excel and develop business needs the patronage of the society - eg. Customers, suppliers etc., Even a wealthy strong co cannot exist in the long run if it is run on unethical means

SOME OF THE BUSINESS ETHICS ARE :

Giving fair and equitable treatment to employees Charge fair prices from the customers Provideing correct information in advertisement

Use fair weights and measures of commodities Pay taxes to the govt and other bodies Earn reasonable profit Be a good corporate citizen

IMPORTANCE OF ETHICS IN BUSINESS

Ethical attitude towards employees Manager should know that his decision affects lives of thousands of employees Good and skilled labor can be attracted to the organization - as it is employee friendly Customers get a good feeling that they are getting value for their money Firm with Ethical standards make better decisions which are in the interest of the public Ethics and profit ethics go together a company with ethics is sure to be successful in the long run Law cannot protect society but ethics can protect eg. Measures taken for workers health and pollution control even before law is passed

FACTORS WHICH GOVERN BUSINESS ETHICS

Value derived from institutions like family, religion, school, government - prescribe what is good or bad - Right behavior is rewarded and vice versa Some times organizations goals do not match with individual ethical goals such cases individual has to show leadership and integrity Superiors : leaders should serve as models and mentors and not otherwise some times employees succumbs to pressure from superiors and become un ethical eg. Secretary may say Boss is out even though he is in as instructed by boss Peers and colleagues create significant influence - a person justify his wrong action telling that others are doing so Professional codes : these days the organizations and governing institutions prescribe code of conduct eg. Institute of Chartered accountants of India, ICWA, or AIMA

FACTORS INFLUENCING

ETHICS

Corporate culture : it should have ethical culture in the areas of leadership, reward systems, fairness , care for employees and community Environment : The actions of the organization has to be environmental friendly understand nature - take note of droughts, heat waves, forest fire polluted air, etc.,

ETHICAL ISSUES IN INDIAN BUSINESS

After 1990 harshad mehta scam created more of awreness in india There are issues regarding corruption, insider trading, misappropriation of accounts, misleading advertisements, exploitation of child labour , exploitation of women in work place, safty in work place etc., These are some of the areas where govt regulations and watch dog bodies are needed to monitor business activitis Ethical business can be classified under these basic groups : equity, rights, honesty, corporate governance, corporate power

BASIC GROUPS
1. Equity : it means fairness apart from legal and human rights - like equal wages to women employees, exploitation of child labour etc., 2. Rights : it refers to the Just claim of a person The claim may be legal or behaviroral Employee rights: in work place not to exlploit women and children in work place, long hours of work, unhealthy working conditions etc., Employer rights : like action against inefficient employyees, take action after due process, evaluate performance, demand efficiency, no work no pay etc.,

3. Honesty : business man should not cheat, seal, lie, bribe, Some of the examples : insider trading, helping a competitor, inappropriate gifts, wrong claims in advertisement, etc., 4. Corporate governance : it is to encourage the use of resources and at the same time be accountable of these resources The aim is to protect the interests of individuals, corpns, and society It is the relationship between the directors, shareholders, society etc 5. corporate power : take care of the issues like, safty of work place, product safty, merger or downsizeing etc.,

VALUES
Values are global beliefs that guide actions and judgments Values represent basic convictions of what is good and what is bad desirable and undesirable in ones conduct Values form the bed rock of culture It defines the societys norms which are justifiable It includes freedom, democracy, truth, justice, honesty loyalty, collective responsibility

SOURCES OF VALUE SYSTEM INDIVIDUAL VALUES ARE AFFECTED BY:

1. family background : parents imbibe moral values in children by reward and punishment system 2. society factors; schooling and teachers has a major role to play in molding the value system 3. personal factors : persons intelligence, ability, educational determine his values 4. cultural values : it is passed on from generation to generation - eg. A person is friendly, hostile depends upon the culture he belongs 5. religious factors : religion gives a of values to imbibe

6. life experiences : learn from own and others experiences individuals form logical decisions on this Role demands : it is associated with the particular position in organization : Eg. If the informal code demands that the manager has to be social with employees he has to cultivate that habit to come up in ladder , even if he does not wish so

CORPORATE GOVERNANCE
According to Milton Friedman: corporate governance is to conduct the business in accordance with the owner or shareholders desires, - to make as much money as possible while conforming to the basic rules of the society , law and customs Corporate governance is the set of mechanisms used to manage the relationship among stakeholders , to control directions and performance of organisation

CHARACTERISTICS OF CORPORATE
GOVERNANCE 1. Discipline : it is a commitment by a companys senior management to adhere to behavior that is universally recognized and accepted as proper Have commitment to adhere to procedures, processes of the organization 2. Transparency: actions should be such that the outsider is able to make meaningful analysis of companys actions 3. Accountability : management should be accountable of their actions and decisions 4. Responsibility : the management should act responsibly to the organisation and stake holders

5. Fairness : rights of various groups have to be respected - eg. Minority share holders interest should be protected 6. social responsibility : should place high priority to ethical standards - should be a good corporate citizen it should be non-discriminatory and nonexploitative 7. This can bring lot of reputation to the company

SCOPE OF THE CORPORATE GOVERNANCE

Preparation of companys financial statements Internal control independence of auditors Compensation arrangements of top management Way of nominating the individuals to board Resources made available to the directors Code of conduct for corporate governance : aspects to be kept in mind : Universally acceptable ethical values Board function in an impartial manner Transparency in functioning Encourage discipline Ensuring confidentiality Incentive for efficient and effective functioning Loyalty to the organization Providing motivation Etc., etc.,

End

of Module 1

KEY INDICATORS OF ECONOMIC

PERSPECTIVES Gross Domestic Product _ GDP: It is the basic measure of a countrys economic performance It is the market value of all final goods and services made within the borders of the country in a year Within the borders include : political front airs , territorial waters and ships and aircrafts operated by residents of the country , fishing vessels and oil & natural gas rigs , embassies and military establishments of the country situated abroad

CHARACTERISTICS OF GDP
Gross indicates domestic product inclusive of depreciation It includes only value of final goods and services Value of second hand goods is excluded only new goods are taken into account GDP is confined to only domestic territory of a country It does not include : A. transfer payments B. capital gains and income earned through illegal activities

TYPES OF GDP

Nominal GDP : it is the value of total flow of goods and services produced in an economy over a specified period of time at current market prices The GDP is Distorted by inflation if there is no adjustment This unadjusted GDP is known as nominal GDP Real GDP : it is physical quantity of goods and services produced In an inflationary environment , the nominal DGP is greater than the real GDP GDP Deflators : Cost of purchasing the items included in GDP during the period , relative to the cost of purchasing the same items during the base year is termed as DGP Deflator

APPROACHES TO MEASURE GDP

1. Expenditure approach : Consumption goods and services + gross investments +Govt Purchases + (exports imports ) 2. Income approach : it is arrived by adding up the factor incomes to the factors of production in the society - this include: Employee compensation + corporate profits +proprietor's income +rental income + net interest 3. value added approach: Ie . The value of sale of goods minus purchase of intermediate goods to produce the goods sold Note: GDP s of different countries may be compared by converting their value in notional currency

ADVANTAGES OF GDP
1. it is an indicator of standard of living of the people in a country comparable between countries 2. comparison of productivity and economic health can be done between countries 3. it is a easier parameter to measure - other parameters like output per worker etc is not so effective

DISADVANTAGE

OF

GDP

1. wealth distribution : it does not take into account the disparity of income between the rich and poor 2. Non-market transactions are excluded house hold production or unpaid services are not considered for calculation 3. illegal activities or tax avoiding activities are unreported so GDP is underestimated 4. quality of goods cheap goods are bought more and more by people high durability goods are purchased less here higher GDP is resulting from inefficiency and waste

SECTORAL SHARES

Sectoral shares refer to the contribution of each sector to the GDP of the nation The three sectors in any economy are : Agricultural sector, : it is process of producing food, feed, fiber and other goods by the systematic raising of plants and animals It contributes 18.5% to the GDP industrial sector : it is concerned with the production of goods It contributes 26.4% to the GDP service sector : it is the non-material equivalent of goods It contributes 55.1% to the GDP- more than half of ur GDP It is due to liberalization after 90s more exports in services sector took place Service is the economic activity that does not result in ownership - main difference /distinction from that of physical goods

AGRICULTURAL OUTPUT :

Agricultural out put has been defined as consisting of those products which are not consumed in further processing within agriculture but are available for consumption Its share to GDP is an indication of economic development But all is not well with agricultural sector Agriculture is impt for eco development It provides food for population and raw material for industries lapses in food production cause serious question about food security dependence on imports for food - drain on foreign exchange resources Shortage of food may result in mal-nutrition , hunger poverty and a poor image of the economy internationally Agriculture has contributed 16.6%on GDP in 2007 despite of deploying 70% of the population in agriculture Emphasis is given in our 5 year plans to improve agriculture

CAUSES OF LOW PRODUCTIVITY IN AGRICULTURE :

Greater pressure of population on land : 70% of our population Depend on agriculture - industry cannot absorb raising population Small and fragmented land holding : Average holding in India is very low - i.e. 2.6Hectaes it is also fragmented land holding is uneconomical Defective land tenure zamindari system agl. Laborer has the fear of loosing job always Conservatism in farmers : they are illiterate, ignorant and superstitious - they dont change to improved method of farming Inadequate irrigation facilities: farmers are gambling with monsoon uncertain rainfall Lack of finance and marketing facilities : dependence on money lenders , exploitation by middlemen and Brokers Lack of agriculture Inputs : like seeds and fertilizers Poor techniques of production : old plough and spade and animals are used not modern equipments

MEASURES TO IMPROVE AGRICULTURAL

PRODUCTIVITY Improve volume of cultivable land : presently out of 84 crore acres , only 32 acres are used Develop irrigation facilities : by govt Improvement in land tenure system : - ownership rights should be given to farmers to improve Increase credit facilities cheap credit through banks and co-operatives Fixation of economic holding - consolidation of land holding should take place Encourage co-operative farming Provide proper price to the agricultural produce

ELECTRICITY GENERATION
It refers to generation of large scale production of electric power for industrial, residential and rural use Sources of power generation in India : from falling water, coal, natural gas , oil and nuclear fields to electric energy , bio gas production , solar power , wind power , and thermal power Present generation of power is 1,44,564 MW - it is expected to be 2,00,000 MW by next year

INFLATION

It refers to a situation when there is a general rise in prices and a corresponding fall in the value of money It causes a decline in the purchasing power or value of money Prices keep on rising due to excess supply or due to excess supply of money and lower production of exchangeable goods Crowther : defines it as state in which the value of money is falling and prices are rising Every increase in price cannot be treated as inflation There should be a persistent upward rise in the general price level at a substantial rate for a prolonged period of time

FACTORS CAUSING AN INCREASE IN DEMAND

1. Increase in public expenditure : eg. Eg. During a time of war or in developmental planning there will be increase in demand for goods and services in an economy - this results in increase in prices of goods and services 2. Increase in private expenditure - eg. When business conditions are good entrepreneurs invest more funds in new businesses causing increase in demand 3. Increase in exports : higher demand for product from abroad increase exports less available for domestic consumption increase price Reduction in Taxes : leads to increase in purchasing power due to availability of money in the hands of people Repayment of public debt by govt : this increases money in the hands of public leading to increase in demand for goods Rapid growth of population : increase the demand for goods

EFFECTS OF HIGH INFLATION

People with fixed income suffer as the prices are higher but their income is same as before Trade union demand higher wages - this can again fuel inflation more of strikes and unrest If inflation is higher the exports become more expensive to other countries creates deficit Encourage speculation : create uncertainty among producers create speculative tendency Reduction in savings : reduced savings adversely affects capital formation hinders production Hoarding and black marketing rises expecting prices to go up Continuous raise in prices creates sellers market makes producers

EFFECTS OF INFLATION CONTD

Debtors and creditors : it is gain to debtors and loss to creditors value of money at the time of lending is more and at the time of repayment is it is lower Investors in fixed income Securities lose due to fall in value of money Farmers are benefited as the value for their produce goes up When the prices rise in home country than in foreign country the value of the home currency falls

INFLATION AND DEFLATION

During inflationary cycle business men start investing with optimism During deflation industries experience slackness in demand for industrial goods, banks face crisis in recovery , prices fall, incomes and wages go down During inflation productive resources are in full employment In deflation unemployment gradually spreads to all sectors

CALCULATION OF THE INFLATION RATE

Inflation rate = = P1- PO x100 PO

P1 is price index for current year Po is the price index for the previous year

PRICE INDICIES IN INDIA

Whole sale price Index (WPI) : It is the most frequently estimated measurement of price in India It is computed at aggregate level of major and sub groups of individual commodities on weekly basis This index is used for measuring inflation in India Consumer Price Index : it is available for only 4 categories of consumers ie. Industrial workers, urban employees, agricultural laborers and rural laborers The coverage is not as wide as WPI Used only for wages and dearness allowance calculations

DEMAND PUSH INFLATION

It is a situation where the aggregate demand for goods and services exceeds the available supply of output COST PUSH INFLATION ; : it occurs due to supply side factors like increase in wage rates Increase on price of raw materials STAGFLATION : it is a situation where the inflation and stagnation of economic activity exists side by side There will be recessionary tendency in certain industries Arises due to continuous inflation leading to fall in demand

MONEY SUPPLY
Money supply referes to the total supply of money in circulation in a given gountrys economy at a given time RBI has classified supply of money in four components as follows: M1 = Currency with public + Demand deposit with Banks + othr deposits with RBI M2 = M1 + Post office savings Bank deposits M3 = M1 + time deposits with Banks M4 = M3 + total post office deposits Money supply includes: currency with Public , deposits with banks, Deposits with RBI, Deposits with post office

FACTORS AFFECTING MONEY SUPPLY IN INDIA

Deficit financing in budget : if expn is more than income - Govet takes loan from banks CRR : if CRR is more Banks can only create less credit Rate of Interest : if rate of int is more banks get more deposits the banks can lend it Sale and purchase of securities by RBI if RBI sells securities money supply contracts - vice vrsa If RBI purchases more FX or public converts more of FX to rupee - supply of money increases Banking habits if people keep more deposits banks can grant more loans

FOREIGN TRADE

No country is self sufficient - need for international trade Export and import of goods and services is called Foreign trade NEED FOR FOREIGN TRADE : large scale production ;: there is scope t cater to foreign markets Degree of self sufficiency : every country cannot produce every thing there is need for FX Trade Geographic factors : different countries are endowed with different natural resources eg. Petrol , diesel etc., Occupational distribution : People in different countries specialize in different areas

FOREX RESERVES
Fx reserves prtain to the stock of foreign currency, gold holdings of the central Bank it includes SDR ( Special drawing rights from IMF) A country holds a basket of foreign currencies and the total of these in one denomination usually dollar gives the forex reserves level Forex reserves indicate its ability to : Pay for imports Discharge its external debt liabilities Raise fresh borrowings in international market Intervention to stabilize rate of exchange

EXCHANGE RATES
Exchange rates between two currencies is the rates at which they are exchanged or sold against each other Eg. If The exchange rate for Indian rupee is Rs. 52, this means that 1 American dollar can be exchanged for Rs. 52. The foreign exchange market is one of the largest markets in the world Foreign exchange rate is the price of one currency quoted in terms of another currency

FIXED AND FLEXIBLE EXCHANGE RATS

Fixed exchange rate system : Countries following the fixed exchange rate system agree to keep their currencies at a fixed , pegged rate and the change in their value only at fairly infrequent intervals Changes only when the economic situation forces them to do so Advantages /merits : 1. easy to attract foreign capital - as foreigners are not interested to invest in an unstable currency 2. it eliminates speculation in FX market 3. unstable exchange rates may encourage flight of capital 4. helps developing countries which have persistent balance of payment deficits prevent continuous depn in value 5. if exchange stability is not assured , exporters and importers will not be knowing how much they will receive/pay 6 it results in economic stabilization

DEMERITS OF FIXED EXCHANGE RATE SYSTEM

CONTD. BUSINESS PERSPECTIVES CONTD

Demerits of fixed exchange rate : The countries which are liberalized and globalised prefers flexible exchange system It increases the BOP of most of the countries It will not work where fx policies and economic policies are not properly co-ordinated FLEXIBLE EXCHANGE RATE SYSTEM : Under this system exchange rates are freely determined in an open market The rates are determined by market forces like demand and supply of foreign exchange Merits : 1. It is simple to operate - adjustments in rate are a continuous process 2. It reinforces the effectiveness of monetary policy 3. It permits free trade and convertible currencies on continuous basis 4. It gives more independence to govt on domestic policies

DEMERITS OF FLEXIBLE EXCHANGE RATE

SYSTEM It is impossible for the exporters and importers on the price they will receive or pay for foreign exchange 2. It gives inflationary bias to an economy eg. When the currecy depreciates , we have to pay more for imports (costlier )- this increases inflation 3. Speculation adversely influence fluctuations in supply and demand for foreign exchange
1.

ECONOMIC INFRASTRUCTURE

Development of infrastructure is important to the economic development of a nation Until recently providing infrastructure was the prime responsibility of public monopolies Now government is encouraging private participation This is giving rise t better risk sharing, accountability, monitoring and manage infrastructure Economic infrastructure includes : 1. Energy, 2. Water, 3. Transport 4. communication

ENERGY

It plays a crucial role in eco development of a nation It is created through conventional and non-conventional sources Conventional sources are : firewood, agricultural waste, animal dung, coal, oil natural gas, electricity, uranium etc., Non conventional sources include : solar, wind, tidal waves, It important to increase generation and conserve it It is important to design buildings to have natural ventilation, natural cooling It is also important to educate the masses to conserve energy

2. WATER
1.

2.
3. 4.

Water is a very valuable infrastructure There is a need to apply eco-friendly concept to water infrastructure development Measures in this regard can include: reducing water demand by increasing public awareness Integrate water resource management Bring in water recycling Minimize water loss Need to make rain water harvesting measures - which is cheapest source of water GOI has formed many authorities like central water commission, central ground water board, etc.for efficient water resources management

TRANSPORT INFRASTRUCTURE

This Infrastructure creates most valuable place utility for the products There is a need to promote eco-efficient transport sector protect environment also Transport system in India includes railways, roads, shipping, civil aviation . Indian railways is the second largest in the world Rail ways are run on ideological grounds and not on commercial terms National highways development programme is taken up in a big way in India India has an extensive coastline to provide cheap transportation But India is loosing an estimated 10 billion because of lack of efficient shipping services Competition in the airline industry is also heating up - however high cost of operation has become a serious problem with airlines industry

COMMUNICATION

Telecom sector has witnessed a revolutionary change Many private operators have entered this sector Telephone is no more a luxury item - it is used even by lower income groups There are many Internet providers in the country Many innovations have taken place in business due to this infrastructure - ie internet Business has also grown leaps and bounds due to internet - E commerce, E governance , YouTube , face book and many social networks have become order of the day Government is planning to improve the net-work to rural areas in a big way so that the IT industry can spread to rural areas and improve the working conditions there

SOCIAL INDICATORS :

1. 2. 3.

4.

Social indicators define the social problems , social trends to guide social planning Examples are : No. of health problems related to environmental pollutants No. of students enrolled to study environment No of people using community space like parks, greenways etc., No. of people working on environmental issues Indias high economic growth will be unacceptable if 35% of its people continue to merely subsist on less than a dollar a day and children are denied basic education It should take steps to educate masses Provide health for all The number of Indians with higher education is a mere 7%compared to 50% in Britain and 47% in G8 countries Without education and healthcare there is no chance of productivity going up

INDIAN GOVTS ROLE IN IMPROVING SOCIAL

INDICATORS Set up extensive social welfare system eg. Supplementary nutrition for expectant mothers and children below 7 years , immunization and health programmes, vacation camps for low income groups There are also support for blind, deaf, mentally retarded etc., Women education and working women hostels setup Rehabilitate prostitutes, and convicts ,- begging at public plaaces is forbidden by law , -drought and earthquake rehabilitation steps are taken up

GOVT STEPS TO IMPROVE SOCIAL INDICATORS - CONTD

Old age and disability benefits are covered by provident fund and pension schemes, employes insurance schemes in vogue - many labour laws are brought in to improve the living conditions Prohibit discrimination in workplace - equal pay for same job no discrimination for women etc. are brought in

CONCEPTS OF FOREIGN EXCHANGE RATE

Cross rate : It is the exchange rate between the currencies of 2 countries that are not quoted against each other - but are quoted against a common currency The cross rates of currencies that are not quoted against each other can be quoted in terms of dollar 2. spot exchange rate : it is the rate at which a currency can be bought or sold for immediate delivery which is within 2 business days after the date of trade 3. bid and ask spread: it is the difference between the bid and ask rate of currency 4 Forward exchange rate : it is the rate that is currently paid for delivery of currency in future date In Forward market currencies are traded for future delivery

EXAMPLE - COVERING EXCHANGE RISK

A domestic co has taken a loan which is repayable in foreign currency 6 months later The rates of fx may undergo a change Hence there is an exchange rate risk If the local currency suffers against the foreign currency the business has to write off a loss To cover against this risk the business enters into a forward contract - i.e., it agrees today to buy the foreign currency 6 months later at the price prevailing today at a prefixed premium Perceptions of buyer and seller differ they get into winwin situation

FUNCTIONS OF FOREIGN EXCHANGE MARKET

It facilitates quick and easy conversion of currencies Eg. If an indian exporter sells to and American importer - the exporter bills in Indian rupees . Then the American importer must convert his currency into indian currency or rupees - FX market facilitates easy conversion 2 Provision of credit or international credit Eg. In case of trade it provides Bankers acceptance and LC for international trade 3. forex market provides facility for minimising foreign exchange risk Eg. It provides hedging facilities to absorb FX risk

PARTICIPANTS IN THE FOREX MARKET

1. Traders/ brokers : are mostly commercial banks who buy and sell FX. - transactions include spot or forward transactions . Traders normally deal in Fx based on the customers orders 2. speculators : Speculator is one who takes a open position The speculator may have foreign currency on hand called a Long position - bull Or he may have promised to deliver FX in a future date called a short position - bear Hedgers : are those who limit their potential losses by locking in a guaranteed foreign exchange positions Arbitrageurs: engage in simultaneously buying and selling currency in two or more markets and thus make profit Governments : to maintain the price of their currencies the forex markets govt buy or sell Foreign currencies in forex market