Showing posts with label MONEY-BANKING & FINANCE. Show all posts
Showing posts with label MONEY-BANKING & FINANCE. Show all posts
Monday, 8 October 2012
What is inflation also explain the causes and remedies (control) of inflation?
According to Silverman. Inflation is define as, “inflation is the term given to the expansion of money supply, in excess
of the amount justified by the state of the trade resulting in a general rise
in prices”.
Coul born has beautifully define the term as “too much money chasing too few goods”.
According to the Crowther says, “Inflation is a state of
economy in which the value of money is following.
Examples prices are rising.
There are two kinds of inflation:
1.
Demand pull inflation.
2.
Cost push inflation.
Here we goes to describe the above kinds of inflation in
detail.
1.
Demand pull inflation:
Some
economists believes that inflation is caused by increase in aggregate demand
for goods. They say that demand may rise due to many causes including increased
money supply for example; people may reduce savings and spend more. As
aggregate demand rises for goods and services, firms try to increase
production. To this they need more workers, more machines and more raw
materials. If these resources are not available because they are already full
employed, the firms will not be able to increase output. In this case, rising
demand causes inflation.
2.
Cost push inflation:
Some
economists think that inflation occurs due to rising costs. When the firms pass
on their increased costs to consumers in the form of higher prices inflation
starts. Important sources of rise in cost include workers demand for higher
wages, increase in taxes.
Causes of inflation:
a.
Population explosion:
Our
population is rising at a very fast that is 3%. On other hand the rate of
growth of GNP is not very high that is 5.4%. Thus increase in national output
is insufficient to solve the problem of scarcity of goods. Since independence,
our population has increase four times.
b.
Political instability:
A
country’s economy depends upon political stability. Political instability
discourages investment and encourages speculation. Under such circumstances,
the industrialist and businessman feel unsecure and cannot make good plans. The
government also cannot adopt affective measures to control rise in prices.
c.
Imported inflation:
A very
important cause of inflation in Pakistan is the existence of inflation in their
countries. Since 1970’s most countries are experiencing inflation. The result
in the Pakistan has to import machinery, raw material and other goods at higher
prices.
d.
Nationalization:
Due to
nationalization of industrial in 1992, people were discouraged to make
investment in industrial. Moreover in Pakistan the nationalization industrial
did not perform will. They becomes centers of in sufficient production, high
prices and poor quality goods were result.
e.
Wages increases:
The increase in wages of workers has
also contributed to inflation. Increase in wages result in higher cost of
production of goods. So their price rises.
f.
Climatic factors:
Pakistan
economies heavily depend upon agriculture but due to weather condition many
crops fall short of target, thus pushing up prices. For example cotton
production remain stagnant and below target during previous years. Wheat
production has also not kept pace with rising demand.
g.
Oil crises:
The
oil prices in 1973 created by a large quantity of inflation throughout the
world. Import of oil is a high Burdon on our foreign exchange resources. At
present 25 persons of our exports are used to pay for oil. From time to time,
oil exporting countries increase price of oil, which raises transport cost.
h.
Artificial scarcity of goods:
Frequent
artificial scarcity of essential items is created (cement, ghee, oil, sugar,
etc) and huge profits are charged. Similarly through smuggling, large quantity
of essential goods is sent to Afghanistan and India.
Remedies of inflation:
It is the main objective of every government to take proper measures to control inflation.
The main measures which are used to control inflation are:
1.
Monitory
policy.
2.
Fiscal
policy.
3.
Direct
measures and other measures.
1.
Monitory policy:
Monitory
policy is a policy that influences, the economy through changes in money supply
and available credit. Monitory policy is adopted by central bank of country.
The various monitory measures which are used to control inflation are grouped
under heads.
a. Qualitative control.
b. Quantitative control.
There are:
1.
Open markeet operations
2.
Variation in bank rates
3.
Credit rationing
4.
Varing reserve requirements.
2.
Fiscal policy:
Fiscal policy is the deliberate
change in either government pending or taxes to simulate or slow down the
economy. It is the budgetary policy of government relating to taxes, public
expenses, public borrowing and deficit financing.
Fiscal policy is based upon demand
management examples, raising or lowering the level of aggregate demand by
controlling various. Expenses, government expenses, consumption expenses.
3.
Direct measures:
It means the step of government like
rationing of goods and freezing of prices and wages. The government can also
increase voluntary savings of people by giving them various incentives.
Other measure:
a.
Increase in output:
The
most effective method to control inflation is to increase the supply of goods.
For this purchase, industrial and agricultural out put should be increased.
However, Pakistan performance in this regard in unsatisfactory.
b.
Control of smuggling:
All
steps should be adopted to check these evils through publicity as well as
punishment. Large quantity of wheat, ghee, and other essential commodities
being smuggled to Afghanistan should be control.
c.
Industrial peace:
Industrial
peace should be control to maintain the supply of goods and avoid the danger of
scarcity. The disturbance such as what happened at Karachi during the post
years? Should be control.
d.
Control of money supply:
Volume
of credit and money supply should be control. This can be done if tight
monitory policy is followed. Decrease in money supply means less purchasing
power with the people.
e.
No deficit financing:
Deficit
financing should be disco tribute. The development expenses should be meat
through taxation, savings. Excessive issue of currency should not be used to
meet budget deficit.
f.
Population control:
Measure
should be adopted to decrees the rate of population growth. The campaign of
population planning has already started showing some success.
g.
Simple living:
Luxurious
life style should be discouraged and simple living should be adopted. The
political leaders should themselves adopt simple living and provide an example
for others.
What are the main functions of money? And defined money?
According to an earlier German economist (knap) “anything
which is declared by the state as money is money”.
According to (roger miller) “Anything which is generally
accepted in payment for the goods and services or the repayment of debts is
money”.
According to walker, “money is what money does”.
Functions of money:
There are two major functions of money.
a.
Primary
functions.
b.
Secondary
function.
Primary functions:
1.
Money as medium of exchange:
The
purchasing and selling are done through the money. In the other words money is
used as a medium of exchange, which remove the problem of double co-incidence of
wants in barter system. The use of money as a medium of exchange promoting the
efficiency in the economy.
i.
It has reduced much of time spent in exchanging goods and services.
ii.
It has also promoted efficiency by allowing people to specialize in any
area in which they have comparative advantage and receive money payments for
labour.
2.
Money as unit of account:
The another important function of the
money is that it provides a unit of account. The monitory unit of account helps
to measure the value of goods and services. For example we measures weight in
kg. Distances are measured in km, similarly the value of goods and services are
measured in money.
So money is a yardstick which allowed
an individual to measure the comparative value of goods and services.
3.
Money as a standard of defferd payments:
In
today economy buying and selling of goods are made on the basis of credit. So
money is a medium of exchange. Which are used to settle the debts maturing in
future. Debts are stated and paid in terms of unit of account.
4.
Money as a store of value:
Money also
functions as a store of value. The money, which you have today, is a side to
purchase a thing later on. So they wait for until he has to desire to spent it.
Money held’s in the form of cash is considered highly liquid assets.
Secondary functions:
Money has the potential to influence the economy. It
influences the price level, interest rates, utilization of resources etc.
1.
Aid to specialization, production and trade:
The
use of money helped in removing the difficulties in the barter system. The
markeet mechanism, production of commodities. Expansion and diversions of trade
etc. Have been facilitated by the use of money.
2.
Influence on income and consumption:
Money has
a direct influence on the income and consumption of the country. When the
production is increased due to increase on demand, so automatically the incomes
will also increase. In the other words we can say that due to increase in
income, the consumption of goods and services increase as compare to past.
3.
Money as instrument of making loan:
The
people deposit their saving into the bank. The bank advances loan to the
industrialist and farmers or investors. So the saving of the people is
transferred to the investment.
4.
Influence on the economic policy:
Money
has a direct impact on the economic into the bank. The bank advances loan to
the industrialist and formers or investors. So the saving of the people are
transferred to the investment.
5.
Basic of bank credit:
Bank provides
loans from their cash reserves, so the volume of money will effect due to
increase or decrease of the money supply.
6.
Liquidity of property:
Money gives
a liquid form to the property. A property can be easily converted into liquid
form due to money.
Define barter system? What are the inconveniences of barter system?
Barter system:
Barter is a system in which the direct exchange of goods and
services for goods and services. The barter was possible due to the limited
wants of the human being even today barter system is still used in
international trade.
Inconviences:
1.
Double co-incidence of wants:
The Barter System needs the matching
of wants of the two parties’ co-incidence. A person has to fund another person
who is ready to accept the goods of the first person in the exchange of his own
goods. It is necessary to fund two persons whose exchangeable goods suit the needs
of each other.
2.
Lack of common measure:
In barter economy there is no common
standard by which the value of the goods to be exchanged can be measured. Thus each
transaction which takes place would require to determination of the ratio of
exchange between to be exchange.
3.
Lack of sub-divisions:
The another drawback of barter system
is the lack of sub-division. It means that if there is double co-incidence of
wants between two parties but the exchange will not take place even then. These
are particularly in these commodities which are not sub-divided.
4.
Lack of store of value:
The
another problem in the barter system is the lake of storage in a perishable
goods. They losses their value as the time passes.
5.
Difficulty in transfer of wealth:
The
transferring of wealth from one place to another place is very difficult in the
barter system. The immovable properly cannot be shifted from one place to
another place. Similarly, the transfer of movable assets cannot be easily transferred
from one place to another place.
6.
Difficulties in tax collection:
The another
problem in barter system is collection of taxes in the form of goods from the
tax payers. If a good are collected as a tax than it will lose. Its value as
the time passes on and secondly the problem of storage is also arise.
Sunday, 7 October 2012
What is exchange control? Various methods of exchange control.
ALL THE DATA HAVE BEEN TRANSFER TO www.khyberacademy.blogspot.com
Saturday, 6 October 2012
Describe in brief the method of making international payments?
ALL THE DATA HAS BEEN TRANSFER TO WWW.khyberacademy.blogspot.com
Creditor and owner’s position with regard to risk, income and control in the business?
The owners make permanent investment of fund in the business.
The creditors on the other hands, advance loan in the business for short,
medium, and long term in the form of money, property. First of all, we will
discuss about the position of owner as regard risk, income and control in the
business.
Owner position with
regard to Risk, Income, Control
Owner position with regard to Risk:
The position of owner in the business is very risky. In the
sole proprietorship, the individual owns the business and assume all risk and
receive 100% profit. In case of loss the liability of owner is unlimited .the
same position of partnership in partnership business. As the owner in sole
proprietorship as well as in the partnership have unlimited liability. They,
therefore assume too much financial risk. If at any time the business debts
exceed business assets, they not only loose entire investment in the business. In
case of joint stock Company the liability of owners are limited to the extent
of value shares only. So there is a loss the owner losses a part or full value
of his original investment.
Owner position with regard to Income:
The sole proprietorship allows the owner to receive the
amount which is left after meeting all the business expenses.
In case of partnership, the profit and loss are divided according
to the capital contribution or as per agreement of the partnership.
In case of joint stock Company the investors receive the
dividends which are declared by the board of directors.
Owner position with regard to Control:
In the sole proprietor ship the individual operate the
business himself for his own personal interest. We may transfer some control to
an employee for performing a particular duty.
In partnership the function of business are divided by mutual
agreement among the partners. One partner of the firm may take the responsibility
of production ,the another may be take in charging of meeting of product, the
third of maintaining the books of accounts.
In case the join stock company the shareholders are the
owners. A large numbers of share holders are interest in dividend and rise in
the value of share. The share holder transfers the control to the elected board
of directors, which plans and implements the policies in the business.
Creditor position with
regard to Risk, Income, Control
Creditor position with regard to Risk:
In a sole proprietorship. If the firm is dissolved, the
individual has to bear the losses in full. All the assets of individual are available
to satisfy the claim of the creditor of the business. In case of partnership,
if the creditor is not able to recover the debts from the assets of business,
than he can choose to sue all the partners in business to recover his debt from
their personal properties. In case of joint stock Company the creditor have a
prior clam on the assets of the business. In the creditors among themselves,
there is a ranking of claims.
Creditor position with regard to Income:
As regards income of the creditors, it doesn’t fluctuate with
the earring of the business. The rate of interest to the creditors is limited
per agreement to the amount loaned to the business. The rate of interest to the
creditor as compared to the rate on the owner’s capital is usually low. However
the income of the creditor is more certain than that of the owners.
Creditor position with regard to Control:
As a matter of legal right, the creditors can’t claim any
share in the management of the business in all three forms of business
organization.
What are the various sources of business funds?
The sources of the business funds can be classified into
three group:
1. Short term finance.
2. Long term finance.
3. Medium term finance.
1.
Short term finance:
When
the owner has not enough money to meet current expenses like payment to
creditors salaries. Rent and measure etc. He can borrow the amount from others.
The revenue may be receipt after some time. But the expenses are paid on daily
basis. Therefore, the sources of short term finance are used meet the business
obligation.
Sources:
i.
commercial bank:
The banks
provide O/D facility for few months. It is used to pay the current liabilities.
The commercial bank also provides “cash credit” and loan for the business.
ii.
Finance corporations:
The
finance corporations help the business by rendering short term funds. There are
small scale organizations as compared to the commercial banks.
iii.
Trading bills:
The
export and import trading bills can negotiated and discounted to provide funds
in advance o actual due date of the settlement by some business people.
iv.
Customer advances:
The
customer can supply short term funds. The customer can makes full payment or
particle for goods before receiving the delivery of goods.
2.
Long term finance:
Long
term finance is usually for permanent basis. The owners provide funds on
payment basis and the creditors through long term funds.
Sources:
i.
Capital:
The
amount contributed by the owner is used in the business. The large amount is
provided in the shape of capital. Additional amount can also be provided by the
owner.
ii.
Retained profit:
The
profit retain in the business can built up funds of the business. The retain
profit income can be used in business or may be to earn further.
iii.
Issue of right shares:
A
public company can increase its capital by issue of right shares. The right
shares are offered to the share holders in proportionate to their present
holding often at a price which is a less than the current price in the stock
exchange.
iv.
Debentures:
The
debentures are long term loan against of the assets of the company. The rate of
interest is fixed. The time period of repayment of debenture is also fixed.
v.
Ploughing back of profit:
Ploughing
back of profit means the use of profit of the business for its development.
Ploughing back of profit is a useful source of getting extra capital for
building and expansion of the business. In ploughing back of profit, there is
no problem of taking loans and no burden of interest on the business.
3.
Medium term finance:
Medium
term finance is defined as money raised for a period from one to five years. It
is required for the repair and modernization of the machinery.
Sources:
i.
Commercial banks:
Commercial
banks are now the important source of providing medium term loans. Loans are generally
given against some securities of assets, the loan is credited to account of
borrowers. He can withdraw the whole amount on installment basis.
ii.
Debentures:
A
company may raise a part of medium term capital by issuing debentures. It is an
instrument issue by the company acknowledgement debt under its common seal. The
terms and conditions of loan are written on the documents.
iii.
Loans from specification institutions:
Medium term
finance are also provided to the business concerned of specialized credit
institutions like (PLCLC, IDBP, ADBP) etc.
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