Taking Economics to Next Level

In my last post we had discussed about the meaning of the economics. This post will take it up to its next level, where we make the readers introduce to the two broad divisions of economics. Microeconomics and Macroeconomics.

ICICI Banks net profit for current quarter increased by 40% , Production runs at Tata motors plant to get reduced in the coming year , Indian steel industry aims to boost investment in new plants in the current year. All these statements mentioned either talks about one company or one Industry in relation to company or industry product prices, cost, production or investment.  Broadly Microeconomics is the study of individual behaviour of company, industries or consumers in terms of their interaction with each other in market. Micro conics is concerned with how decrease in price of Maggie or LG television discount sales will affect the buying behaviour of consumer and how competitors will react to this decrease in price of Maggie or LG television sets .

India Gross domestic product forecasted to be 8% for the next financial year. To tame the on-going inflation RBI has hiked the interest rate from 50 basis points, Aggregate production level has shown consistent decrease in the third quarter of 2010. All the above statements have one thing in common i.e aggregate level of prices , aggregate interest rates , aggregate production, which represents the economy as a whole rather than a consumer , company or industry. A study of aggregates is called as Macroeconomics. For eg. Comparison of  GDP of GDP of emerging economies like China and India is macroeconomics.

In recent years the dimension between microeconomics and macroeconomics have reduced to great extent . For e.g taking the example of GDP comparison of China and India , before we can the compare the GDP of two countries, the prerequisites to  these is understanding of firms , consumers , workers and investors of these countries. Macroeconomist are nowadays concerned with microeconomic foundation of aggregate macroeconomic phenomenon. Therefore a manger who needs to decide on the price of the new small car manufactured by his company needs into take consideration the study of his company , automobile industry , consumer behaviour , competitor pricing as well as aggregate income and income of the population of the country as a whole. Therefore both microeconomics and macroeconomics become essential to set up the pricing strategy of the company

Economics

Introduction to Economics

In order make this initiative successful let us begin this journey by introducing what is economics.

Before economics help make this start let me assure you that, the blog will not define economics in bookish language but will try to give you an insight that how this economics is useful in our daily life.

Idea behind this learning is that after reading, reader is able to relate to this vision from a point of view of a household, a manager working in a company, a bank manager, CEO of an MNC or may be a Finance Minister of India.

Economics  is usually associated with words like

E – Equal ,

C – Choice  ,

 O –opportunity ,

 N – next best ,

O – optimum  ,

 M – monetary ,

I – insufficient

C – cost

S – Scarce

These are some words which everyone of us use in our daily life and that is what economics associated with OIKONOMOS ( in greek it means who manages a household). As a household we face many decision such as , how much and what to buy , what to cook and not to cook, how to utilize all ingredients efficiently .

Similarly a manager in a FMCG company working at an operational level has many such decisions to make , like how many bottles of shampoos to be produced , whether 200 ml or 500 ml , whether to produce more hair fall protection shampoos or dandruff protection shampoos .

A financial Manager might be trying hard to decide in the beginning of the month whether to put his client funds in stock market or debt market.

A marketing manager while deciding the allocation of salesmen in different territories is in a fix how many salesmen in a territory to get highest sales revenue.

A  CEO of a hospital who needs to decide whether to build neonatal care facility or not.

Government needs to decide whether to invest more in agriculture or industry or services.

In all the above examples thing come out to be common is , making a choice between two or more alternatives. Why one has to make alternatives? The answer is Scarcity.

In order to implement all the above examples, one requires the use of various resources in term of material for cooking, raw materials to manufacture shampoos, funds or money to invest and government needs to check the availability of land and labour. All these resources used for different activities are limited in supply. Due to this scarcity of resources the decision maker resort to only left one method of making choices which in best terms utilizes all these resources.

Therefore economics is a study how society, household , government , a manager manages its scarce resources in making decisions.

Key Words : Resources , scarcity , choices

New : About Economics

Hello to all

About Economics would like to thank all readers , to give it a good response to information shared by the blog.

The blog will again be coming up with lot of information for you all.

Blog will be upgraded with new terms and terminologies to share the applications of Global Economy and Financial world.

About Economics will now be starting to build a glossary of all possible words and week by week the blog will update you with new terms with simple language.

Apart from that blog will revive its latest economic news and other sections.

New thing which blog introducing is readers choice : Readers can ask questions related to economics , finance any aspect the blog will answer to all queries.

Looking Forward for your response

You can mail your queries at : bhumika4@gmail.com

Enjoy Reading

Protect from Protectionism

Virus of global meltdown has made world to dance over its tunes. In amidst of all this, western countries are resorting to an antivirus called “protectionism” to fight this financial meltdown.

Before going into gist of this post, Lets have brief look on Protectionism:
According to Wikipedia : Protectionism is the economic policy of dampening trade between states through methods such as tariffs on imported goods , restrictive quotas and various other government restrictions aimed at discouraging imports and prevent foreign take over of local markets and companies. In short it is the opposite of free trade and globalization.

History
Being the” super power”, all good and bad things related to world economy are initiated by USA. In one of my earlier post “fight of words: R vs. D” I had mentioned about Hawley –Smoot Tariff, which came into forth during times of great depression of 1930’s. As business were slowing down in order to protect its own industries American government created “Hawley –Smoot Tariff in 1930’s , which meant to charge high import tariffs on imports , this led to deterioration in global trade leading to economic retaliation.

Present situation
Free movement of goods and services across nations was one common link on which all economists since World War II had agreed upon. Current crisis have hiited so hard that western nations: the leaders of globalization and free trade, are spreading a new wave of isolationism.
With Barrack Obama admistration coming with a stimulus package of $ 800 billion which contains a clause “Buy America” has led to agitation among other economies. This “buy American clause which has taken heap all over imposes restrictions on use of non- American material in all public work programmes that will be funded by stimulus package. Similar sort of protectionist policies are also be followed in Britain with government infusing funds in banks to keep them solvent and insisting that funds to be used nationally.

This sort of protectionism will have adverse impact on world trade. For short term countries mite benefit from such measures but in long run this would impede their global competitiveness. Protectionism will increase cost of production and will result in inefficient allocation of resources. End result of such a policy would be only benefit incompetent industries which can’t compete at international level, whereas efficient industries will loose the most out of them.
For instance it mite be the case that, that steel, cement manufacturers may benefit from the “buy American” clause but technology sector which consists of biggies like Microsoft, Intel, Apple, General Electric and so on will take a back seat if in retaliation countries like China, India and other emerging markets who have trade relation with America impose tariffs on goods produced by these companies.

In comparison to 1930’s protectionist policy, present day policy is more discerning. Though in current slowdown fewer tariffs have been raised, but modern protectionism comes with tighter licensing requirements, import bans and anti dumping measures. Rich countries have played clever by introducing discriminatory procurement provisions in their fiscal stimulus bills and offered subsidies to ailing national industries.

International trade has covered a long journey from 1930’s period to current day crisis. And we all believe that world has less to fear from protectionism in present times. Over the period a strong safeguard system in terms of international agreement has been built which maintain tariffs in limit. The global supply chains which have integrated national economies together tightly have made it difficult for government to raise tariffs without harming producers in their own country. However these safeguard systems may fail when there is intense use of anti dumping, use of domestic subsidies and other kinds of swarming protection. Most of the countries are in position to raise tariffs as their applied rates are below maximum allowed by WTO commitments. They may tend to do so on risk of disrupting the global supply chains.

U- Turn of Globalization

It’s a well known fact that slowdown in trade is result of ongoing global recession. Even in earlier slowdowns trade has fallen on account of slowdown in demand , but current downfall in trade is arbitrary i.e. that though trade has fallen in volume , the striking feature is that it has depressed on account of falling prices and stronger dollar.

Most economists argue that tremendous growth in global supply chains is responsible for such fast dropdown in global trade. It means that countries not specialize in final products but in products used in process of production. For e.g. in earlier times truck made in America which had used American steel and parts would enter trade data only it was exported. But now if that truck uses Indian, and processed in other country then slowdown in demand in America would effects its counterparts also.

Therefore in this sense Buy America clause mite turn out to be bust for American economy. For instance if take a look at auto sector. The American government is working hard to provide big stimulus to save its auto industry. However most of these manufacturers have global businesses and to protecting an automobile company in one country would affect its operations in others as well. For e.g. if us government did not provide any rescue package for general motors its worldwide operations, including business that it outsources in India, would be affected.

Therefore the it mite be the case that in era of global supply chains in international trade , this rescue plan of America mite turn out to be another problem for them.