Is higher per capita income the only measure of economic development/Measurement of Economic Development

GDP is the final value of the final goods and services produced within the geographic boundaries of a country during a specified period of time, normally a year.

It counts the goods and services produced within the country and hence does not consider the products that the country imports from another country.

GDP Growth Rate

·         GDP growth rate is an important indicator of the economic performance of a country. It is the percentage increase in GDP from year to year.

·         It tells us exactly whether the economy is growing quicker or slower than the preceding year. Most countries use real GDP to remove the effect of inflation.

·         If the economy produces less than the preceding year, it contracts and the growth rate is negative. This signals a recession. If it stays negative long enough, the recession turns into a depression.

Significance of GDP

·         GDP is a broad measure of a country’s economic activity, used to estimate the size of an economy and growth rate. Because GDP provides a direct indication of the health and growth of the economy, businesses can use GDP as a guide to their business strategy. Investors also watch GDP since it provides a framework for investment decision-making.

·         The “corporate profits” and “inventory” data in the GDP report are a great resource for equity investors, as both categories show total growth during the period. Corporate profits data also displays pre-tax profits, operating cash flows and breakdowns for all major sectors of the economy.

Methods of Gross Domestic Product (GDP) Calculation

Gross Domestic Product (GDP) can be measured by 3 methods:

1. Income Approach:

• The income approach starts with the income earned from the production of goods and services. Under income approach we calculate the income earned by all the factors of production in an economy.
• Factors of production are the inputs which goes into producing final product or service. Thus, the factors of production for a business are – Land, Labor, Capital and Management within the domestic boundaries of a country. 
• In this approach, we calculate income from each of these Factor of production which includes the wages got by labor, the rent earned by land, the return on capital in the form of interest, as well as business profits earned by management. Sum of All these incomes constitutes national income and is a way to calculate GDP.

• Formula : Net National Income = Wages + Rent + Interest + Profits

2. Expenditure Approach :

• Second approach is converse of Income approach as rather than Income, it begins with money spent on goods & services. This measures the total expenditure incurred by all entities on goods and services within the domestic boundaries of a country.
• Mathematically, GDP (as per expenditure method) = C + I + G + (EX-IM)

Where,

1. C: Consumption Expenditure, i.e. when consumers spend money to buy various goods and services. For example – food, gas bill, car etc.
2. I: Investment Expenditure, i.e. When businesses spend money as they invest in their business activities. For example, buying land, machinery etc.
3. G: Government Expenditure, i.e. when government spends money on various development activities and
4. (EX-IM): Exports minus Imports, that is, Net Exports. I.e. we include the exports to other countries in calculation of GDP and subtract the imports from other countries to our country.

• The calculation of GDP from the above methods gives us the nominal GDP of the country. We will consider the difference between the Nominal and Real GDP in the coming article.
• Mostly GDP is calculated with both approaches and calculations are done in such a way that the values from both approaches should come almost equivalent.

3. Output (Production) Approach:

• This measures the monetary or market value of all the goods and services produced within the borders of the country.
• In order to avoid a distorted measure of GDP due to price level changes, GDP at constant prices or Real GDP is computed.
• GDP (as per output method) = Real GDP (GDP at constant prices) – Taxes + Subsidies.

• To make it gross, we need to do two adjustments – Add depreciation of capital & Add Net Foreign Factor Income. NFFI is (income earned by the rest of the world in the country – income earned by the country from the rest of the world)
• GDP (Factor Cost) = Wages + Rent + Interest + Profits+ Depreciation + Net Foreign Factor Income
• This basically is the sum of final income of all factors of production contributing to a business in a country before tax.
• Now if we add taxes and deduct subsidies, then it become GDP at Market cost.
• GDP (Market Cost) = GDP (Factor Cost)+ (Indirect Taxes – Subsidies)
•  

Is higher per capita income the only measure of economic development?

Generally, economic development is a process of change over a long period of time.

Though there are several criteria or principles to measure the economic development, yet none provides a satisfactory and universally acceptable index of economic development.

Hence, it is a complex problem to answer about the measuring of economic development.

R.G. Lipsey maintains that there are many possible measures of a country’s degree of development, income per head, the percentage of resources unexploited, capital per head, saving per head and amount of social capital. But more commonly used criteria of economic development are increase in national income, per capita real income, comparative concept, standard of living and economic welfare of the community etc.

1. National Income as an Index of Development:

There is a group of certain economists which maintains the growth of national income should be considered most suitable index of economic development. They are Simon Kuznets, Meier and Baldwin, Hicks D. Samuelson, Pigon and Kuznets who favored this method as a basis for measuring economic development. For this purpose, net national product (NNP) is preferred to gross national product (GNP) as it gives a better idea about the progress of a nation.

According to Prof. Meier and Baldwin, “If an increase in per capita income is taken as the measure of economic development, we would be in the awkward position of having to say that a country had not developed if its real national income, had risen but population had also risen at the same rate.”

Similarly, Prof. Me de maintains that, “Total income is a more appropriate concept to measure welfare than income per capita.” Therefore, in measurable economic development, the most appropriate measure will be to include final goods and services produced but we must allow for the wastage of machinery and other capital goods during the process of production.

Arguments in Favor of National Income:

There are certain arguments for stressing real national income as a measurement of economic development.

They are:

(i) A larger real national income is normally a pre-requisite for an increase in real per capita income and hence, a rising national income can be taken as a token of economic development.

(ii) If per capita income is used for measuring economic development, the population problem may be concealed, since population has already been divided out. In this context, Prof. Simon Kuznets writes, “The choice of per capita, per unit or any similar measure to gauge the rate of economic growth carried with it danger of neglecting the denominator of the ratio.”

(iii) If an increase in per capita income is taken as the measure of economic development, we are likely to be put in an awkward situation of saying that a country has not developed if its real national income has increased but its population has also increased at the same rate.

Arguments against National Income:

Despite the favourable arguments, national income as a measure of economic development suffers from certain shortcomings:

(i) It cannot definitely be said that economic welfare has increased if the national and even the per capita income may be rising unless the distribution of income is equitable.

(ii) Expansion of national and per capita income cannot be identified with enrichment because the composition of the total output is also important. For example, an expansion of total output could be accompanied by a depletion of natural resources or it could compose of only armaments or could consist of merely a greater output of capital goods.

(iii) It must not only consider what is produced but also how it is produced. It is possible that when real national output grows, the real costs i.e., ‘pain and sacrifice’ of the society may also grow.

(iv) It is difficult to determine proper deflators to eliminate the effects of price changes in an underdeveloped countries.

(v) It is also complicated when average income is rising but unemployment exists due to the rapid growth of population, thus, such a situation is not consistent with the development.

2. Per Capita Real Income:

Some economists believe that economic growth is meaningless if it does not improve the standard of living of the common masses. Thus, they say that the meaning of economic development is to increase aggregate output. Such a view holds that economic development be defined as a process by which the real per capita income increases over a long period time. Harvey Leibenstein, Rostow, Baran, Buchanan and many others favor the use of per capita output as an index of economic development.

The UNO experts in their report on ‘Measures of Economic Development of Under-developed Countries’ have also accepted this measurement of development. Charles P. Kindleberger also suggested the same method with proper precautions in computing the national income data.

Arguments in favor of per Capita Real Income:

The aim of economic development is to raise the living standard of the people and through this to raise consumption level. This can be, estimated through per capita income rather than national income. If national income of a country goes up but the per capita income is not increasing, that will not raise the living standard of the people. That way, per capita income is a better measure of economic development than the national income.

Increase in per capita income can be better index of an increase in the welfare of the people. In advanced countries, national income has increased much faster than the growth rate of population. It means the per capita real income has been constantly increasing and this has led to the increase in welfare of the people. That way, per capita income can be considered a better index of the welfare of the people.

Arguments against Per Capita Real Income:

The real per capita income, a measure of economic development has been severely criticized by Jacob Viner, Kuznet etc.

(a) According to Meier and Baldwin, “If an increase in per capita income were taken as the measure of development, we would be in the awkward position of having to say that a country had not developed if its real national income had risen, but population has also risen at the same time.”

If in a country an increase in national income is offset by the increase in population, then we would be bound to say that no economic development has taken place. Similarly, if national income in a country has not gone up but population has reduced due to epidemic or war, in that case we would be bound to conclude that economic development is taking place.

(b) When we divide national income by population, the problem of population in that case is ignored. It confines the scope of the study.

The increase in per capita income is a good measure of economic development. In the advanced countries, per capita income has been on continuous increases because the growth rate of national income is greater than the growth rate of population. This has raised the economic lot of the people. In underdeveloped countries, there is very less capacity to produce per head. So, as the capacity to produce goes up these economies proceed towards economic development.

c) In this measure, distributive aspect has been ignored. If national income goes up but there is unequal distribution of income among different sections of the society, in that case rise in national income will be meaningless.

(d) In the underdeveloped countries where per capita income is regarded as a measure of economic development, with the increase in per capita income of these countries, there is also increase in unemployment, poverty and income inequalities. This cannot be regarded as development.

(e) Economic growth is multi-dimensional concept which involves not only increase in money income but also improvement in social activities like education, public health, greater leisure etc. Such improvements cannot be measured by changes in per capita real income.

(f) The data of per capita national income are often inaccurate misleading and unreliable because of imperfections in national income data, and its computation. That way, per capita real income cannot be free from weaknesses. Despite these drawbacks in the measure of real per capita income, many countries have adopted this measure as an indicator of economic development.

3. Economic Welfare as an Index of Economic Development:

Keeping in view the drawbacks of real national income and real per capita measures of economic development, some economists like Coline Clark, Kindleberger, D. Bright Singh, Hersick etc. suggested economic welfare as the measure of economic development.

The term economic welfare can be understood in two ways:

(a) When there is equal distribution of national income among all the sections of the society. It raises economic welfare.

(b) When the purchasing power of money goes up, even then there is an increase in the level of economic welfare. The purchasing power of money can go up when with the increase in national income there is also increase in the prices of goods. That means economic welfare can increase if price stability is ensured.

Thus economic welfare can boost with equal distribution of income and price stability. Higher the level of economic welfare, higher will be extent of economic development and vice-versa.

Arguments against Welfare Index:

In order to assess economic welfare, it is essential to know the nature of national income and the social cost of production. We face lot a practical difficulties while estimating these economic factors. It is on account of this reason that many economists do not consider economic welfare as a good measure of economic development. Also the concept of welfare is subjective in nature which cannot be measured. Also welfare is a relative term which differs from person to person.

4. Comparative Concept:

Economic development is a comparative concept and it can easily be understood and measured. In a simple way, from comparative concept, we can ascertain how much the economic development has been attained in a country.

The comparison can be made by two methods over time period:

(а) Comparison within the country.

(b) Comparison with other countries.

(a) Comparison within the Country:

5. Measurement through Occupational Pattern:

The distribution of working population in different occupations is also regarded as a criteria for the measurement of economic development. Some economists regard the changes in the occupational structure as a source for measuring the nature of economic development. According to Colin Clark there is deep relation between the occupational structure and economic development. He has divided the occupational structure in three sectors.

(1) Primary Sector:

It includes agriculture, fisheries, forestry, mining etc.

(2) Secondary Sector:

It consists of manufacturing, trade, construction etc.

(3) Tertiary Sector:

Here we should note that the measurement of economic development through occupational patterns is not considered as satisfactory on following grounds:

(i) It is not possible to clearly classify the occupations in an underdeveloped economy in three distinct categories

(ii) Secondly, in the early stages of development, the activities of tertiary sector like transport, communications, trade etc. are inadequate and insufficient. Consequently the chances of employment in these activities are very restricted.

6. Standard of Living Criterion:

Another method to measure economic development is the standard of living. According to this view, standard of living and not rise in per capita income or national income should be considered an indicator of economic development. The very objective of development is to provide better life to its people through improvement or upliftment of the standard of living. In other words, it refers to increase in average consumption level of the individual. But, this criteria is not practicably true.

Let us suppose, national income and per capita both increase but the government mops up this income with the way of heavy dose of taxation or compulsory deposit scheme or any other method, in such a situation, there is no possibility to raise to average consumption level i.e., standard of living.

Moreover, in poor countries, propensity to consume is already high and stern efforts are made to reduce superfluous consumption in order to encourage savings and capital formation. Again ‘standard of living’ is also subjective which cannot be determined with objective criterion.

Which is the Best Measure of Economic Development?

After studying all the above methods of measurement of economic development we are likely to be confused and the question might arise as to which of the above measures of economic development is the best. Answer depends on the objective of measuring economic development. However, after considering form different point of view it may be concluded that GNP or per capita is the best method of measuring economic development.

In the words of Prof. R.G. Lipsey, “Whatsoever changes there may be in future in the measurement of economic development they cannot fully replace gross national product (GNP).” Economists and U.N. Organisations use GNP per capita as the measurement of economic development.

What Is Gross Domestic Product (GDP)? different methods of computing Gross Domestic Product in Bangladesh?

 ·         GDP is the final value of the final goods and services produced within the geographic boundaries of a country during a specified period of time, normally a year.

·         It counts the goods and services produced within the country and hence does not consider the products that the country imports from another country.

GDP Growth Rate

·         GDP growth rate is an important indicator of the economic performance of a country. It is the percentage increase in GDP from year to year.

·         It tells us exactly whether the economy is growing quicker or slower than the preceeding year. Most countries use real GDP to remove the effect of inflation.

·         If the economy produces less than the preceeding year, it contracts and the growth rate is negative. This signals a recession. If it stays negative long enough, the recession turns into a depression.

Significance of GDP

·         GDP is a broad measure of a country’s economic activity, used to estimate the size of an economy and growth rate. Because GDP provides a direct indication of the health and growth of the economy, businesses can use GDP as a guide to their business strategy. Investors also watch GDP since it provides a framework for investment decision-making.

·         The “corporate profits” and “inventory” data in the GDP report are a great resource for equity investors, as both categories show total growth during the period. Corporate profits data also displays pre-tax profits, operating cash flows and breakdowns for all major sectors of the economy.

Methods of Gross Domestic Product (GDP) Calculation

Gross Domestic Product (GDP) can be measured by 3 methods:

1. Income Approach:

• The income approach starts with the income earned from the production of goods and services. Under income approach we calculate the income earned by all the factors of production in an economy.
• Factors of production are the inputs which goes into producing final product or service. Thus, the factors of production for a business are – Land, Labour, Capital and Management within the domestic boundaries of a country. 
• In this approach, we calculate income from each of these Factor of production which includes the wages got by labor, the rent earned by land, the return on capital in the form of interest, as well as business profits earned by management. Sum of All these incomes constitutes national income and is a way to calculate GDP.

• Formula : Net National Income = Wages + Rent + Interest + Profits

2. Expenditure Approach :

• Second approach is converse of Income approach as rather than Income, it begins with money spent on goods & services. This measures the total expenditure incurred by all entities on goods and services within the domestic boundaries of a country.
• Mathematically, GDP (as per expenditure method) = C + I + G + (EX-IM)

Where,

1. C: Consumption Expenditure, i.e. when consumers spend money to buy various goods and services. For example – food, gas bill, car etc.
2. I: Investment Expenditure, i.e. When businesses spend money as they invest in their business activities. For example, buying land, machinery etc.
3. G: Government Expenditure, i.e. when government spends money on various development activities and
4. (EX-IM): Exports minus Imports, that is, Net Exports. I.e. we include the exports to other countries in calculation of GDP and subtract the imports from other countries to our country.

• The calculation of GDP from the above methods gives us the nominal GDP of the country. We will consider the difference between the Nominal and Real GDP in the coming article.
• Mostly GDP is calculated with both approaches and calculations are done in such a way that the values from both approaches should come almost equivalent.

3. Output (Production) Approach:

• This measures the monetary or market value of all the goods and services produced within the borders of the country.
• In order to avoid a distorted measure of GDP due to price level changes, GDP at constant prices or Real GDP is computed.
• GDP (as per output method) = Real GDP (GDP at constant prices) – Taxes + Subsidies. 

 To make it gross, we need to do two adjustments – Add depreciation of capital & Add Net Foreign Factor Income. NFFI is (income earned by the rest of the world in the country – income earned by the country from the rest of the world)

• GDP (Factor Cost) = Wages + Rent + Interest + Profits+ Depreciation + Net Foreign Factor Income
• This basically is the sum of final income of all factors of production contributing to a business in a country before tax.
• Now if we add taxes and deduct subsidies, then it become GDP at Market cost.
• GDP (Market Cost) = GDP (Factor Cost)+ (Indirect Taxes – Subsidies)

 

Economic Planning

 Economic planning refers to the planning of subsequent economic actions through the development of certain policy measures. These actions are to be followed in the future in consonance with predetermined economic objectives.

As a banking aspirant, the knowledge of this topic is important for both Mains and Interview round. It is pertinent to know the concept of economic planning and its background to make yourself proficient in your work as a banker. Let us now delve deeper and understand what is economic planning, what are the different types of economic planning and a brief introduction to how economic planning in India is carried out!

What is Economic Planning?

Economists have come up with a number of definitions since the time planning entered the domain of economics. However, a lot of them have agreed that the most significant was formulated by H D Dickinson.According to him, economic planning is - “the making of major economic decisions - what and how much is to be producedand to whom it is to be allocated by the conscious decision a determinate authority, on the basis of a comprehensive survey of the economic system as a whole”.

After it was introduced by the erstwhile Soviet Union, many countries started adopting the method of economic planning at different levels to achieve faster growth.

Let us now discuss the types of economic planning that emerged.

Types of Economic Planning

Planning by Direction and Planning by Inducement

An integral part of the socialist society, planning by direction entails the absolute absence of a laissez-faire system. This type of economic planning has one central authority that plans, directs, and executes according to pre-determined economic priorities.

Planning by Inducement, on the other hand, is more of democratic planning. It entails planning by manipulating the market. Although there is no compulsion, a certain degree of persuasion is practised in planning by inducement. In this type of planning, the enterprises have the freedom of production & consumption. However, these freedoms are controlled & regulated by the state through policies and measures.

Financial Planning & Physical Planning

In financial planning, resource allocation is done in terms of money; and it is essential to remove the maladjustments between supply and demand. Hence, it is instrumental in ensuring a balance between supply & demand, and in controlling inflation to bring about economic stability in the country.

In physical planning, resource allocation is done in terms of men, machinery, and materials. An overall assessment of the available resources is done to ensure that bottleneck situations are eliminated during the execution of the plan. It is viewed as a long-term planning process.

Indicative Planning & Imperative Planning

Indicative planning is based on the principle of decentralization for the operation & execution of plans. In this type of planning, the private sector is neither completely controlled nor directed to meet the targets of the plan. But it is expected to fulfill those targets. Towards that end, the government facilitates the private sector but does not direct them in any way.

In imperative planning, on the other hand, all economic activities are controlled by the state. There is complete control of the government over the factors of production. Even the private sector needs to strictly abide by government policies and decisions, which are rigid.

Rolling Plans & Fixed Plans

In a rolling plan, every year three plans are drawn up and acted upon. One of them is an annual plan, which entails the planning for one year;the second is a 5-year plan;while the third is a 15-year plan in which broader goals and objectives are listed, which are in consonance with the previous year planning.

In contrast to the rolling plan, a fixed plan refers to planning for a certain period of time — say 4, 5, or 10 years ahead. It lays down definite goals and objectives that are to be met in the due course of time. Except under an emergency situation, the annual objectives are met (those listed in the fixed plan).

Centralized & Decentralized Planning

Under the centralized planning system, planning is made a restrictive prerogative of the central planning authority. This authority is solely responsible for the formulation of the plan, and fixing its objectives, targets, and priorities. There is no economic freedom; and the entire economic planning is under bureaucratic control.

In contrast, decentralized planning refers to execution of the plan from the grassroots. In this type of planning, the central planning authority formulates the plan in consultation with the different administrative units for the central and state schemes. The state planning authority formulates the plan for district and village levels.

Economic planning has some essential features:

(a) There must be a centralised planning authority for preparing the plans and suggesting the means for their implementation.

(b) Before framing the plan, the planning authority should undertake an accurate survey of the available resources (both existing and potential) and the essential needs of the country.

(c) An economic plan must have some definite aims and objectives.

(d) The plan should lay down a series of targets on the different lines of production such as agricultural, industrial, etc.

(e) It should make a proper allocation of the proposed outlay into the different heads of development.

(f) An economic plan must have a definite time limit, usually 5 years (as in our country).

(g) There must be mutual consistency between the targets of the pro­duction of the different sectors.

Money Supply

The money supply is all the currency and other liquid instruments in a country's economy on the date measured. The money supply roughly includes both cash and deposits that can be used almost as easily as cash.

Governments issue paper currency and coin through some combination of their central banks and treasuries. Bank regulators influence the money supply available to the public through the requirements placed on banks to hold reserves, how to extend credit, and other money matters. 

Understanding Money Supply

Economists analyze the money supply and develop policies revolving around it through controlling interest rates and increasing or decreasing the amount of money flowing in the economy. Public and private sector analysis is performed because of the money supply's possible impacts on price levels, inflation, and the business cycle. In the United States, the Federal Reserve policy is the most important deciding factor in the money supply. The money supply is also known as the money stock.

Effect of Money Supply on the Economy

An increase in the supply of money typically lowers interest rates, which in turn, generates more investment and puts more money in the hands of consumers, thereby stimulating spending. Businesses respond by ordering more raw materials and increasing production. The increased business activity raises the demand for labor. The opposite can occur if the money supply falls or when its growth rate declines.

Change in the money supply has long been considered to be a key factor in driving macroeconomic performance and business cycles. Macroeconomic schools of thought that focus heavily on the role of money supply include Irving Fisher's Quantity Theory of Money, Monetarism, and Austrian Business Cycle Theory.

Historically, measuring the money supply has shown that relationships exist between it and inflation and price levels. However, since 2000, these relationships have become unstable, reducing their reliability as a guide for monetary policy. Although money supply measures are still widely used, they are one of a wide array of economic data that economists and the Federal Reserve collects and reviews

Foreign Direct Investment

 Properly harnessed, long-term foreign investment can bring important benefits to the Bangladesh economy. Bangladesh’s projected needs for investment in infrastructure for an expanding transport network and burgeoning urban centres cannot and need not be met from domestic resources alone. With improved economic management and a highly liberalized investment regime, and with strategic locational shifts in labor-intensive industries, Bangladesh could become an attractive destination for private capital flows over the next decade. This would be in addition to official bilateral and multilateral assistance to finance development projects. The investment climate of a country is very important determinant of the countries attractiveness to foreign investment. For the longer-term, FDI must be encouraged for the technology transfer and spillover effects from improved management and productivity. Low levels of FDI so far have meant that Bangladesh has missed out on positive technology spillover. FDI policy framework: During the Sixth Plan and beyond, foreign direct investment is encouraged in all industrial activities in Bangladesh excluding those on the list of reserved industries excluded on grounds of national security. Gas and electricity, roads, ports and telecommunications are priority areas for foreign capital. 

Incentives to foreign investment. The government has liberalized its industrial and investment policies in recent years by reducing bureaucratic control over private investment and opening up many areas. Some of the major incentives are tax exemptions for power generation, import duty exemptions for export processing, an exemption of import duties for export oriented industries, and tax holidays for different industries. Double taxation can be avoided by foreign investors on the basis of bilateral agreements. Facilities for the full repatriation of invested capital, profit and dividend exist.

Strategic Actions

The Perspective Plan will consider the following strategic actions:

• A concerted and focused effort will have to be made during the Sixth and Seventh Plan to change the investment climate by giving high priority to constraints in infrastructure, regulatory framework, and policy environment.

• The general governance situation will be addressed. Efforts will be made to reduce cost of doing business to improve the country’s image and stimulate foreign investment.

• A special effort will be made to encourage regional investment in emerging and potentially high return sectors (e.g. software development and IT from India, electronics from China).

• A major effort will be made to establish a string of Special Economic Zones (SEZs) along international borders. This is designed to stimulate cross-border investments and trade, in line with the successful examples of China and Vietnam.

• The private sector will be encouraged to enter joint ventures and other forms of collaborative investment with NRBs and foreign partners in areas of high potential.

Gresham's Law

 In currency valuation, Gresham's Law states that if a new coin ("bad money") is assigned the same face value as an older coin containing a higher amount of precious metal ("good money"), then the new coin will be used in circulation while the old coin will be hoarded and will disappear from circulation.

Coins were first made with gold, silver and other precious metals, which gave them their value. Over time, the amount of precious metals used to make the coin decreased because the metals were worth more on their own than when minted into the coin itself. If the value of the metal in the old coins was higher than the coin's face value, people would melt the coins down and sell the metal. Similarly, if a low quality good is passed off as a high quality good, then the market will drive down prices because consumers won't be able to determine the good's real value.

Reserve Ratio'/Cash Reserve Ratio/Cash Reserve Requirement

 A Cash Reserve Ratio, also known as the Reserve Requirement is a regulation set by Central bank (Bangladesh Bank) which dictates the minimum amount (reserves) that a commercial bank (in some cases, any bank) must be held to customer notes and deposits. In simpler terms this is the amount the bank must surrender with/to the Central (governing) Bank.

It is a percentage of bank reserves to deposits and notes. Cash reserve ratio is also known as liquidity ratio or cash asset ratio and is utilized as a tool (sometimes) in monetary policy and as a tool to influence the country’s interest rates, borrowing and economy. For example, if the reserve ratio in the Bangladesh is determined by the central bank to be 11%, this means all banks must have 11% of their depositors' money on reserve in the bank. So, if a bank has deposits of 1 billion, it is required to have 110 million on reserve.

Basel II Accord

The Basel Accords determine how much equity capital - known as regulatory capital - a bank must hold to buffer unexpected losses. Equity is assets minus liabilities. For a traditional bank, assets are loans and liabilities are customer deposits. But even a traditional bank is highly leveraged (i.e., the debt-to-equity or debt-to-capital ratio is much higher than for a corporation). If the assets decline in value, the equity can quickly evaporate. So, in simple terms, the Basel Accord requires banks to have an equity cushion in the event that assets decline, providing depositors with protection.

The regulatory justification for this is about the system: If big banks fail, it spells systematic trouble. If not for this, we would let banks set their own levels of equity -known as economic capital - and let the market do the disciplining. So, Basel attempts to protect the system in much the same way that the Federal Deposit Insurance Corporation (FDIC) protects individual investors.

Quasi rent

 Quasi-rent is like economic rent, but usually larger, because it is the excess of return over short run opportunity cost, which does not include the fixed cost of replacing or duplicating fixed assets such as a piece of capital or an invention. Thus, infra-marginal rent.

For example at the time of creation of Bangladesh, the demand for houses increased owning to increase in population. But the supply could not be increased because of the sacristy of building materials. For the time being, their supply was much limited as that of land. Rent rose. This abnormal increase in the return on capital invested in building is nothing but Quasi-rent.

The term quasi rent is not new to the economists. This is basically an analytical term which is used for the income earned as a result of the opportunity cost after investment. Usually it so happens that the individuals face the loss of cost investment and their payment may be sunk. The amount earned after such a loss is called as the quasi rent. The term of quasi rent is not too old and it was used for the first time by Alfred Marshall. He was the first economist to earn quasi rents. Income one earns on a sunk cost. A quasi-rent occurs when one makes an investment and pays for it, and then earns income from it without needing to make further investment. In order to be considered quasi-rent, the income must exceed the opportunity cost of the investment. Quasi-rent has also been defined as the excess of total revenue earned in the short run over and above the total variable costs.

Thus, Quasi-rent = Total Revenue — Total Variable Cost.

In the long run, all costs are variable and in the long-run competitive equilibrium, total receipts are equal to total costs (including normal profit), there are no excess earnings over and above costs and hence no quasi-rent. However, these abnormal profits will not last long. When the abnormal conditions are over, the number of machines will be increased, then the incomes from machines are bound to decrease.

In short, quasi-rent is applied to the very large incomes which the owners of a factor of production come to enjoy on account of the temporary scarcity of such a factor.

Economic value of quasi rent

Generally the quasi rent also sometimes referred to as the economic rent is defined as the difference between the incomes obtained from a certain factor of production and the cost of the factor which is used in bringing the production in particular use. There are many applications of quasi rent. Either it is used in bringing the factor of quasi rent into economic use or it can also be applied in using the factor for the purposes of opportunity cost.

Investment of quasi rent

In general the quasi rent is defined as the difference between the income earned as a result of the currently used factor and the minimum cost which is required to draw the quasi factor for a particular use. The value of opportunity income is the most important while practicing the quasi rent. Basically the opportunity cost of income is the current income subtracted by the available income being used in next best factor. This factor is used during the particular use in future. Nowadays there are many examples where the capital investments are made out of the quasi rent cost investments. This usage is recorded in almost all of the specialized or unspecialized capital equipment.

In case of the investment of sunk cost, the amount required to draw the result for an economic usage is minimal. On the other hand the true quasi rent is the income which is in excess and it is also required in order to make the remaining factor much productive. Sometimes the quasi rent may also include the sunk cost investment.

Elasticity

 The degree to which a demand or supply curve reacts to a change in price is the curve's elasticity. Elasticity varies among products because some products may be more essential to the consumer. Products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases. Conversely, a price increase of a good or service that is considered less of a necessity will deter more consumers because the opportunity cost of buying the product will become too high.

A good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied. Usually these kinds of products are readily available in the market and a person may not necessarily need them in his or her daily life. On the other hand, an inelastic good or service is one in which changes in price witness only modest changes in the quantity demanded or supplied, if any at all. These goods tend to be things that are more of a necessity to the consumer in his or her daily life.

To determine the elasticity of the supply or demand curves, we can use this simple equation:

Elasticity = (% change in quantity / % change in price)

If elasticity is greater than or equal to one, the curve is considered to be elastic. If it is less than one, the curve is said to be inelastic. 

As we mentioned previously, the demand curve is a negative slope, and if there is a large decrease in the quantity demanded with a small increase in price, the demand curve looks flatter, or more horizontal. This flatter curve means that the good or service in question is elastic.

Meanwhile, inelastic demand is represented with a much more upright curve as quantity changes little with a large movement in price.

Elasticity of supply works similarly. If a change in price results in a big change in the amount supplied, the supply curve appears flatter and is considered elastic. Elasticity in this case would be greater than or equal to one.

On the other hand, if a big change in price only results in a minor change in the quantity supplied, the supply curve is steeper and its elasticity would be less than one.

Definition of Public Good

 A product that one individual can consume without reducing its availability to another individual and from which no one is excluded. Economists refer to public goods as "non-rivalrous" and "non-excludable". National defense, sewer systems, public parks and basic television and radio broadcasts could all be considered public goods.

One problem with public goods is the free-rider problem. This problem says that a rational person will not contribute to the provision of a public good because he does not need to contribute in order to benefit.

For example, if Sam doesn't pay his taxes, he still benefits from the government's provision of national defense by free riding on the tax payments of his fellow citizens.

Shifts vs. Movement

 1.       For economics, the "movements" and "shifts" in relation to the supply and demand curves represent very different market phenomena:

1. Movements

A movement refers to a change along a curve. On the demand curve, a movement denotes a change in both price and quantity demanded from one point to another on the curve. The movement implies that the demand relationship remains consistent. Therefore, a movement along the demand curve will occur when the price of the good changes and the quantity demanded changes in accordance to the original demand relationship. In other words, a movement occurs when a change in the quantity demanded is caused only by a change in price, and vice versa.

2.      

Like a movement along the demand curve, a movement along the supply curve means that the supply relationship remains consistent. Therefore, a movement along the supply curve will occur when the price of the good changes and the quantity supplied changes in accordance to the original supply relationship. In other words, a movement occurs when a change in quantity supplied is caused only by a change in price, and vice versa.

3.       2. Shifts

A shift in a demand or supply curve occurs when a good's quantity demanded or supplied changes even though price remains the same. For instance, if the price for a bottle of beer was $2 and the quantity of beer demanded increased from Q1 to Q2, then there would be a shift in the demand for beer. Shifts in the demand curve imply that the original demand relationship has changed, meaning that quantity demand is affected by a factor other than price. A shift in the demand relationship would occur if, for instance, beer suddenly became the only type of alcohol available for consumption.

4.      

Conversely, if the price for a bottle of beer was $2 and the quantity supplied decreased from Q1 to Q2, then there would be a shift in the supply of beer. Like a shift in the demand curve, a shift in the supply curve implies that the original supply curve has changed, meaning that the quantity supplied is effected by a factor other than price. A shift in the supply curve would occur if, for instance, a natural disaster caused a mass shortage of hops; beer manufacturers would be forced to supply less beer for the same price.