the Features of business cycle

A business cycle is a swing in total national output, income, and employment, usually lasting for a period of 20 to 10 years, marked by widespread expansion or contraction in most sectors of the economy.

Typically economists divide business cycle into two main phases, recession and expansion. Peaks and troughs mark the turning points of the cycles. The downturn of a business cycle is called a recession, which is often defined as a period of in which real gross domestic product declines for at least two consecutive quarters. The recession begins at a peak and ends at a trough. According to the organization, which dates the beginning and end of business cycles, the National Bureau of Economic Research, the last U.S recession began after the economy peaked in the summer of 1990. This was followed by a brief recession, which ended in March 1991, after which United States enjoyed one of the longest expansions in its history.

Note that the pattern of cycles is irregular. No two business cycles are quite the same. No exact formula, such as might apply to the revolutions of the planets or of a pendulum, can be used to predict the duration and timing of business cycles.

causes of Poverty

10 main causes of Poverty in India

Rapidly Rising Population:

The population during the last 45 years has increased at the rate of 2.2% per annum. On average 17 million people are added every year to its population which raises the demand for consumption goods considerably.

2. Low Productivity in Agriculture:

The level of productivity in agriculture is low due to subdivided and fragmented holdings, lack of capital, use of traditional methods of cultivation, illiteracy etc. This is the main cause of poverty in the country.

3. Under Utilized Resources:

The existence of under employment and disguised unemployment of human resources and under utilization of resources has resulted in low production in agricultural sector. This brought a down fall in their standard of living.

4. Low Rate of Economic Development:

The rate of economic development in India has been below the required level. Therefore, there persists a gap between level of availability and requirements of goods and services. The net result is poverty.

6. Price Rise:

The continuous and steep price rise has added to the miseries of poor. It has benefited a few people in the society and the persons in lower income group find it difficult to get their minimum needs.

7. Unemployment:

The continuously expanding army of unemployed is another cause of poverty. The job seeker is increasing in number at a higher rate than the expansion in employment opportunities.

8. Shortage of Capital and Able Entrepreneurship:

Capital and able entrepreneurship have important role in accelerating the growth. But these are in short supply making it difficult to increase production significantly.

9. Social Factors:

The social set up is still backward and is not conducive to faster development. Laws of inheritance, caste system, traditions and customs are putting hindrances in the way of faster development and have aggravate" the problem of poverty.

10. Political Factors:

The Britishers started lopsided development in India and reduced Indian economy to a colonial state. They exploited the natural resources to suit their interests and weaken the industrial base of Indian economy.

In independent India, the development plans have been guided by political interests. Hence, the planning a failure to tackle the problems of poverty and unemployment.

concept of poverty

Poverty

Poverty is the state of one who lacks a certain amount of material possessions or money. Absolute poverty or destitution refers to the deprivation of basic human needs, which commonly includes food, water, sanitation, clothing, shelter, health care and education. Relative poverty is defined contextually as economic inequality in the location or society in which people live.

For much of history, poverty was considered largely unavoidable as traditional modes of production were insufficient to give an entire population a comfortable standard of living. After the industrial revolution, mass production in factories made wealth increasingly more inexpensive and accessible. Of more importance is the modernization of agriculture, such as fertilizers, to provide enough yield to feed the population. The supply of basic needs can be restricted by constraints on government services such as corruption, tax avoidance, debt and loan conditionalities and by the brain drain of health care and educational professionals. Strategies of increasing income to make basic needs more affordable typically include welfare, economic freedoms, and providing financial services.

Although poverty is one of the most familiar and enduring conditions known to humanity, it is an extremely complicated concept to understand. Some researchers view it as a reaction to the stress of being poor, whereas others perceive it as a process of adapting to the condition of poverty. Historical definitions are numerous, but can be classified as relating to either lack of financial income or lower social status. Numerous factors contribute to the concept of poverty, including political, economic, social, and cultural forces. The one that has consistently had the greatest effect on the evolving concept is the passage of time, which encompasses all these forces in a very intricate manner. This author explored the evolution of the concept of poverty to identify relevant themes for consideration in the public health nursing domain.

Central Budget

Definition of 'Budget'
An estimation of the revenue and expenses over a specified future period of time. A budget can be made for a person, family, group of people, business, government, country, multinational organization or just about anything else that makes and spends money. A budget is a micro economic concept that shows the trade off made when one good is exchanged for another.

The Central Budget of India, referred to as the Annual Financial Statement in Article 112 of the Constitution of India, is the annual budget of the Republic of India, presented each year on the last working day of February by the Finance Minister of India in Parliament. The budget, which is presented by means of the Financial Bill and the Appropriation bill has to be passed by the House before it can come into effect on April 1, the start of India's financial year.

                                                                                        

Fiscal Policy : Concept, Objectives, Instruments

Fiscal policy is how the government manages its budget. It collects revenue via taxation that it then spends on various programs. Elected officials guide fiscal policy, redirecting funds from one sector of the population to another. The purpose of fiscal policy is to create healthy economic growth and increase the public good for the long-term benefit of all. As you can imagine, legislators and their constituents have different ideas of the best way to do that. As a result, fiscal policy is usually hotly debated, whether at the federal, state, county or municipal level.

Objectives of Fiscal Policy –

1. To achieve desirable price level:
The stability of general prices is necessary for economic stability. The maintenance of a desirable price level has good effects on production, employment and national income. Fiscal policy should be used to remove; fluctuations in price level so that ideal level is maintained.


2. To Achieve desirable consumption level:
A desirable consumption level is important for political, social and economic consideration. Consumption can be affected by expenditure and tax policies of the government. Fiscal policy should be used to increase welfare of the economy through consumption level.


3. To Achieve desirable employment level:
The efficient employment level is most important in determining the living standard of the people. It is necessary for political stability and for maximization of production. Fiscal policy should achieve this level.


4. To achieve desirable income distribution:
The distribution of income determines the type of economic activities the amount of savings. In this way, it is related to prices, consumption and employment. Income distribution should be equal to the most possible degree. Fiscal policy can achieve equality in distribution of income.


5. Increase in capital formation:
In under-developed countries deficiency of capital is the main reason for under-development. Large amounts are required for industry and economic development. Fiscal policy can divert resources and increase capital.


6. Degree of inflation:

In under-developed countries, a degree of inflation is required for economic development. After a limit, inflationary be used to get rid of this situation.


Instruments of Fiscal Policy

The first tool is taxation, whether of income, capital gains from investments, property, sales or just about anything else. Taxes provide the major revenue source that funds government. The downside of taxes is that whatever or whoever is taxed has less income to spend themselves. That makes taxes very unpopular. Find out exactly how the U.S. Federal budget is funded in Federal Income and Taxes.


The second tool is spending. The government provides subsidies, transfer payments, contracts to perform all kinds of public works, and of course salaries to government employees -- to name just a few. The reason government spending is a tool is that whatever or whoever receives the funds has more money to spend, thus driving demand and economic growth.

Public Finance and Private Finance

Public Finance and Private Finance

Meanings:

public finance is a branch of economics that deals with the expenses and revenues from government to government in the economy.

The long-term financing is revenue and expenditure. If you have a link to the private sector, private financing is needed. On the other hand, if it related to the public sector, ie, the public finances.

Private Finance:
Deal to income and expenditure by the private sector.

Public Finance:
This revenue and expenditure of the Government Sector (public sector)

Public finance Vs Private finance
1. Time period: The public finances in a period of several years together, while private financing to do with the financial daily, weekly, monthly, etc.


2. Assets Vs expenditure: In public finance, income from fees as follows. In addition, the cost of private financing in line with sales.


3. Arrears financing: Budget deficit, government. can create new tickets issued. In addition, the private sector has no authority to issue new tickets.


4. Nature of budget: In the public sector's budget deficit is important. In the private sector, the budget surplus is large.


5. Compulsory loans: The government can borrow to bind to other financial institutions to their cost, while the private sector can not be met.


6. Secrecy: State budget is not a secret, but Govt. published their budgets for television, radio, etc. On the other hand, the household, to keep the secret.


7. Nature of projects: In public finance, the government must complete the long-term projects. In addition, the private sector has a short project is completed.


8. Nature of changes: Public Finance shows significant changes, while the private sector has to do with minor modifications.


9. Accounting document: The state budget is a written document that the budget sector is a written document.


10. Analysis system: Govt. Revenue and expenditure is regularly monitored by an audit system. On the other hand, there is no system of private financing.


11. Adopted assistance: In the public finances, the Government may rely on foreign aid, but private financing, there is no way of outside help.


12. Absolute or aberrant antecedent of income: Public Finance, source of income is indirect, while the tax is a source of private funding, that address income.


13. Above-mentioned sanction: Public Finance, Government. have the prior approval of his cabinet, etc. National Assembly, Senate, while in private funding, without prior permission is required from any authority.


14. Future planning: In public finance, there are no long-term planning, while private funding is nothing planned.


15. Use of banking resources: In public finance, the main goal for the welfare of the population, used as in private funding, the resources for maximum personal satisfaction.


16. Almanac of finance: The private sector may or may not keep records of your finances, the govt. maintains a permanent record of your finances.

Conclusion:
We conclude that the financing of public and private sector for revenue and expenditure. In any case, we distinguish between public and private financing on the basis of certain criteria.

tax

Tax

A tax (from the Latin taxo; "rate") is a financial charge or other levy imposed upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many administrative divisions. Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent.

According to Black's Law Dictionary, a tax is a "pecuniary burden laid upon individuals or property owners to support the government [...] a payment exacted by legislative authority." It "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government [...] whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name."

Characteristic :

• Taxes are imposed by the government only.
• A tax is compulsory contribution of the tax payer.
• Payment of a tax is the personal obligation of the tax payer.
• The aim of taxation is the welfare of the community as a whole.
• A tax is a legal collection.
• An element of force is there.

Classification

Direct and Indirect Taxes

Taxes have been broadly categorised into direct taxes and indirect taxes. Dalton made a distinction between direct and indirect taxes as "that a Direct Tax is really paid by a person on whom it is legally imposed while an indirect tax is imposed on one person, but paid partly or wholly by another owing to a consequential charges in the terms of some contract or bargaining between them".

A direct taxes involve a direct money burden and in the case of indirect taxes, the man who pays the tax to the government is different from the person who bears it ultimately.

Merits of Direct Tax:

1. Economy
2. Certainty
3. Equity
4. Reduction in inequalities
5. elasticity
6. Civil consciousness

Demerits of Direct Tax:

1. Unpopular
2. Inconvenience
3. Possibility of injustice
4. Possibility of evasion
5. Exemption of low income group

Merits of Indirect Tax:

1. Convenient
2. Difficult to evade
3. Elastic
4. Equitable
5. Can be progressive
6. Productive
7. Wild Coverage
8. Social Welfare

Demerits of Indirect Tax:

1. Regressive
2. Administrative cost
3. Reduction in savings
4. Uncertainty
5. No civil consciousness

Generally speaking, the burden of indirect taxes tends to fall more heavily on the poorer sections of the community and that of the direct taxes mainly on the richer sections of the community. They both are not competitive but are complementary. That is why Gladstone, the great Victorian statesman, remarked that the direct and indirect taxes should be viewed  as equally attractive sisters, neither of whom should be pursued too ardently.

Proportional and Progressive Taxation

Taxes may be divided into proportional and progressive basing on the burden of taxation.

1. Proportional Taxation:
   P.E. Taylor says, "A schedule of proportional tax rates is one in which the rates of taxation remains constant as the tax base changes". The amount of tax payable is calculated by multiplying the tax base with the fixed rate. Thus, in proportional tax system the multiplier, i.e., the rate remains constant with the change in multiplicant (Income).
   
   Case for/Merits:
   1) Proportional  tax does not affect the relative position of the tax payer.
   2) Proportional tax is simple to estimate and calculate and the imposition is uniform.
   3) The willingness to work more and save more of the tax payer is not adversely affected by the proportional taxation.
   4) The principle of equality of justice is being followed in proportional taxation.
   5) 'Equality of sacrifice' as between the rich and the poor can be achieved by it.
   
   Mc Culloch, a well known supporter of proportional taxes says, "When you abandon the plain principle (of proportion) you are at sea without rudder and compass and there is no amount of injustice you may not commit."
   
   Case against/Demerits:
   1) A system of proportional taxation would not lead to equitable and just distribution of the burden of taxation as it falls more heavily on the small incomes than on the high incomes because the marginal utility of money diminishes more rapidly as the income increases.
   2) A system of proportional taxation means the tax rates for the rich and the poor are the same. Hence, the State cannot obtain from the richer sections of the community as much as they can give.
   3) The proportional tax system, however, cannot be elastic as the financial needs of a government may change from time to time and it is often required to have more funds.
   
2. Progressive Taxation:
   P.E.Taylor says,"A schedule of progressive tax rate is one in which the rate of taxation increase as the tax base increases". In the case of progressive tax, the multiplier (i.e., the rate) increases as the multiplicant (income) increases.
   
   Case for/Merits:
   1)  Proper distribution of money: Since progressive taxation allows income-based taxes, a person with low income will pay much less than a person with a high income. This is an effective way for proper distribution of wealth.
   2) Protects the lower income group: Progressive taxation system allows the lower income group to pay less in taxes. Since most of the working population falls in this category, progressive taxation is favored by most.
   3) Protection during recession times: Progressive taxation system also protects people during recession times because if their income drops, they fall into lower income bracket.
   4) Stable income stream: Progressive taxation also allows the government to have a stable income stream even in times of depression.
   
   Case against/Demerits:1) Opposes equality: Many believe that progressive taxation opposes the Constitution which promotes equal rights for citizens. By taxing the higher income group at a higher rate, progressive taxation defies the Constitution.
   2) Prevents taking high paying jobs: Progressive taxation system may also prevent individuals from taking a high paying job because most of their income would be taken away as taxes. It also discourages individuals to work harder to gain higher incomes.
   3) Encourages emigration: High progressive taxation system can encourage high earning workers to move overseas to escape the tax system.
   4) Encourages hiding of assets: High progressive taxation system can also encourage high income earners to opt for off-shore banking by which they can hide their assets and save taxes.

Non-bank financial institution : meaning, role, difference between NBFI and banks

Non-bank financial institution

A non-bank financial institution (NBFI) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFIs facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market brokering. Examples of these include insurance firms,pawn shops, cashier's check issuers, check cashing locations, payday lending, currency exchanges, and micro loan organizations. Alan Greenspan has identified the role of NBFIs in strengthening an economy, as they provide "multiple alternatives to transform an economy's savings into capital investment [which] act as backup facilities should the primary form of intermediation fail."

Role in Financial System 

NBFIs supplement banks by providing the infrastructure to allocate surplus resources to individuals and companies with deficits. Additionally, NBFIs also introduces competition in the provision of financial services. While banks may offer a set of financial services as a packaged deal, NBFIs unbundle and tailor these service to meet the needs of specific clients. Additionally, individual NBFIs may specialize in one particular sector and develop an informational advantage. Through the process of unbundling, targeting, and specializing, NBFIs enhances competition within the financial services industry.

Growth 

Some research suggests a high correlation between a financial development and economic growth. Generally, a market-based financial system has better-developed NBFIs than a bank-based system, which is conducive for economic growth.

Stability 

A multi-faceted financial system that includes non-bank financial institutions can protect economies from financial shocks and enable speedy recovery when these shocks happen. NBFIs provide “multiple alternatives to transform an economy's savings into capital investment, [which] serve as backup facilities should the primary form of intermediation fail". However, in the absence of effective financial regulations, non-bank financial institutions can actually exacerbate the fragility of the financial system.

Difference between bank and non-banking financial institution

A Bank is an organization that accepts customer cash deposits and then provides financial services like bank accounts, loans, share trading account, mutual funds, etc. 

A NBFC (Non Banking Financial Company) is an organization that does not accept customer cash deposits but provides all financial services except bank accounts.

a) A bank interacts directly with customers ; while an NBFI interacts with banks and governments

(b) A bank indulges in a number of activities relating to finance with a range of customers; while an NBFI is mainly concerned with the term loan needs of large enterprises

(c) A bank deals with both internal and international customers; while an NBFI is mainly concerned with the finances of foreign companies

(d) A bank's man interest is to help in business transactions and savings/ investment activities; while an NBFI's main interest is in the stabilization of the currency

Central bank : functions, credit control

Central bank

A central bank, reserve bank, or monetary authority is a public institution that manages a state's currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the amount of money in the nation, and usually also prints the national currency, which usually serves as the nation's legal tender.Examples include the European Central Bank (ECB) and the Federal Reserve of the United States.

The primary function of a central bank is to manage the nation's money supply (monetary policy), through active duties such as managing interest rates, setting the reserve requirement, and acting as a lender of last resort to the banking sector during times of bank insolvency or financial crisis. Central banks usually also have supervisory powers, intended to prevent bank runs and to reduce the risk that commercial banks and other financial institutions engage in reckless or fraudulent behavior. Central banks in most developed nations are institutionally designed to be independent from political interference.

Activities and responsibilities 

Functions of a central bank may include:

• implementing monetary policies.
• determining Interest rates
• controlling the nation's entire money supply
• the Government's banker and the bankers' bank ("lender of last resort")
• managing the country's foreign exchange and gold reserves and the Government's stock register
• regulating and supervising the banking industry
• setting the official interest rate – used to manage both inflation and the country's exchange rate – and ensuring that this rate takes effect via a variety of policy mechanisms

Credit Control

Credit Control is an important tool used by Reserve Bank of India, a major weapon of the monetary policy used to control the demand and supply of money (liquidity) in the economy. Central Bank administers control over the credit that the commercial banks grant. Such a method is used by RBI to bring “Economic Development with Stability”. It means that banks will not only control inflationary trends in the economy but also boost economic growth which would ultimately lead to increase in real national income with stability. In view of its functions such as issuing notes and custodian of cash reserves, credit not being controlled by RBI would lead to Social and Economic instability in the country.

Need for Credit Control 

 The basic and important needs of Credit Control in the economy are-

• To encourage the overall growth of the “priority sector” i.e. those sectors of the economy which is recognized by the government as “prioritized” depending upon their economic condition or government interest. These sectors broadly totals to around 15 in number.

• To keep a check over the channelization of credit so that credit is not delivered for undesirable purposes.

• To achieve the objective of controlling “Inflation” as well as “Deflation”.

• To boost the economy by facilitating the flow of adequate volume of bank credit to different sectors.

• To develop the economy.

Objectives of Credit Control 

• Attain stability in exchange rate and money market of the country.
• Meeting the financial requirement during slump in the economy and in the normal times as well.
• Control business cycle and meet business needs.

Commercial bank : functions,

Commercial bank

A commercial bank (or business bank) is a type of bank that provides services, such as accepting deposits, giving business loans and basic investment products.

Commercial bank can also refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to individual members of the public (retail banking).

The role/functions of commercial banks

Commercial banks engage in the following activities:

• processing of payments by way of telegraphic transfer, EFTPOS, internet banking, or other means
• issuing bank drafts and bank cheques
• accepting money on term deposit
• lending money by overdraft, installment loan, or other means
• providing documentary and standby letter of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet exposures
• safekeeping of documents & other items in safe deposit boxes
• sales, distribution or brokerage, with or without advice, of: insurance, unit trusts and similar financial products as a “financial supermarket”
• cash management and treasury
• merchant banking and private equity financing
• traditionally, large commercial banks also underwrite bonds, and make markets in currency, interest rates, and credit-related securities, but today large commercial banks usually have an investment bank arm that is involved in the mentioned activities.

Difference between money markets and capital markets

Difference between money markets and capital markets

The money markets are used for the raising of short term finance, sometimes for loans that are expected to be paid back as early as overnight. Whereas the capital markets are used for the raising of long term finance, such as the purchase of shares, or for loans that are not expected to be fully paid back for at least a year.
Funds borrowed from the money markets are typically used for general operating expenses, to cover brief periods of illiquidity.
For example a company may have inbound payments from customers that have not yet cleared, but may wish to immediately pay out cash for its payroll. When a company borrows from the primary capital markets, often the purpose is to invest in additional physical capital goods, which will be used to help increase its income. It can take many months or years before the investment generates sufficient return to pay back its cost, and hence the finance is long term.
Together, money markets and capital markets form the financial markets as the term is narrowly understood. The capital market is concerned with long term finance. In the widest sense, it consist of a series of channels through which the saving of the community are made available for industrial and commercial enterprises and public authorities

money market and Capital market

Money market

As money became a commodity, the money market became a component of the financial markets for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less. Trading in the money markets is done over the counter and is wholesale. Various instruments exist, such as Treasury bills, commercial paper, bankers' acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-lived mortgage-, and asset-backed securities. It provides liquidity funding for the global financial system. Money markets and capital markets are parts of financial markets. The instruments bear differing maturities, currencies, credit risks, and structure. Therefore they may be used to distribute the exposure.The money market developed because there are parties that had surplus funds, while others needed cash. Today it comprises cash instruments as well.

The money market functions are:

• Transfer of large sums of money
• Transfer from parties with surplus funds to parties with a deficit
• Allow governments to raise funds
• Help to implement monetary policy
• Determine short-term interest rates

Capital market

Capital markets are financial markets for the buying and selling of long-term debt- or equity-backed securities. These markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments.[1] Financial regulators, such as the UK's Bank of England (BoE) or the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their jurisdictions to protect investors against fraud, among other duties.

Monetary policy

Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.[1][2] The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. It is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in order to avoid the resulting distortions and deterioration of asset values.

 In India, the central monetary authority is the Reserve Bank of India (RBI). is so designed as to maintain the price stability in the economy. Other objectives of the monetary policy of India, as stated by RBI, are:

Price Stability

Price Stability implies promoting economic development with considerable emphasis on price stability. The centre of focus is to facilitate the environment which is favorable to the architecture that enables the developmental projects to run swiftly while also maintaining reasonable price stability.

Controlled Expansion Of Bank Credit

One of the important functions of RBI is the controlled expansion of bank credit and money supply with special attention to seasonal requirement for credit without affecting the output.

Promotion of Fixed Investment

The aim here is to increase the productivity of investment by restraining non essential fixed investment.

Restriction of Inventories

Overfilling of stocks and products becoming outdated due to excess of stock often results is sickness of the unit. To avoid this problem the central monetary authority carries out this essential function of restricting the inventories. The main objective of this policy is to avoid over-stocking and idle money in the organization

Promotion of Exports and Food Procurement Operations

Monetary policy pays special attention in order to boost exports and facilitate the trade. It is an independent objective of monetary policy.

Desired Distribution of Credit

Monetary authority has control over the decisions regarding the allocation of credit to priority sector and small borrowers. This policy decides over the specified percentage of credit that is to be allocated to priority sector and small borrowers.

Equitable Distribution of Credit

The policy of Reserve Bank aims equitable distribution to all sectors of the economy and all social and economic class of people

To Promote Efficiency

It is another essential aspect where the central banks pay a lot of attention. It tries to increase the efficiency in the financial system and tries to incorporate structural changes such as deregulating interest rates, ease operational constraints in the credit delivery system, to introduce new money market instruments etc.

Reducing the Rigidity

RBI tries to bring about the flexibilities in the operations which provide a considerable autonomy. It encourages more competitive environment and diversification. It maintains its control over financial system whenever and wherever necessary to maintain the discipline and prudence in operations of the financial system.

inflation and deflation

What is Inflation or What is the meaning of Inflation? 
In economics inflation means, a rise in general level of prices of goods and services in a economy over a period of time.   When the general price level rises, each unit of currency buys fewer goods and services.  Thus, inflation results in loss of value of money.   Another popular way of looking at inflation is "too much money chasing too few goods".   The last definition attributes the cause of inflation to monetary growth relative to the output / availability of goods and services in the economy.

In case the price of say only one commodity rise sharply but prices of other commodities fall, it will not be termed as inflation.  Similarly, in case due to rumors if the price of a commodity rise during the day itself, it will not be termed as inflation.

What are different types of inflation?
Broadly speaking inflation is divided into two categories i.e.

(a) DEMAND - PULL INFLATION:   In this type of inflation prices increase results  from an excess of demand over supply for the economy as a whole. Demand inflation occurs when supply cannot expand any more to meet demand; that is, when critical production factors are being fully utilized, also called Demand inflation.

(b) COST - PUSH INFLATION:   This type of inflation occurs when general price levels rise owing to rising input costs. In general, there are three factors that could contribute to Cost-Push inflation: rising wages, increases in corporate taxes, and imported inflation. [imported raw or partly-finished goods may become  expensive due to rise in international costs or as a result of  depreciation of local currency ]


What is Deflation ?
Deflation is the opposite of inflation.   Deflation refers to  situation, where there is decline in general price levels.   Thus, deflation occurs when the inflation rate falls below 0% (or it is negative inflation rate).   Deflation increases the real value of money and allows one to buy more goods with the same amount of money over time.   Deflation can occur owing to reduction in the supply of money or credit.   Deflation can also occur due to  direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy.

classification of money

Money can be classified on the basis of relationship between the value of money and value of money as a commodity. Value of money means the face value of money.

For example, the face value of five rupees coin is five rupees. Value of money as a commodity means the value of the commodity of which money is made of. For example, the commodity value of money of a five rupee coin is the cost of material (metal) used of which the coin is made.

If face value and commodity value of coin are the same, it is called standard coin. On the other hand, if face value is greater than the commodity value of coin, it is called token coin. These days, coins are token coins.

Categories of Money:

1. Commodity (full-bodied) money:

Commodity money is that whose face value is equal to its commodity value. This type of money was in existence when gold standard was prevalent. In other words, face value of the coin was equal to its intrinsic (commodity) value. But now this kind of money is not to be found anywhere in the world.

2. Representative (full-bodied) money:

Though in spirit it is like the commodity (full-bodied) money but in form it is different. This kind of money is usually made of paper but equal to the face value of the money gold is kept in reserve. This money saves the users from the inconvenience of carrying money in heavy-weight in case of large quantity because paper money can be conveniently carried.

3. Credit Money:

It is that money whose value of money (face-value) is greater than the commod­ity value (intrinsic value) of money. Token coins and promissory notes are part of credit money. Besides these, there are other forms of credit money also. Various forms of credit money are the following:

(a) Token coins:

Token coins are those whose face value is more than their intrinsic value. In India, coins of the money value of Rs. 5, Rs. 2, Rs. 1, 50 P, 25 P, 20 P, 10 P and 5 P are token coins.

(b) Representative Token Money:

This is usually of the form of paper, which is in effect a circu­lating ware house receipt for token coins or an equivalent amount of bullion thus is backing it. Not only this, the coin or bullion backing the representative token money is worth less as a commodity than as money.

(c) Promissory Notes issued by Central Banks:

This is a major component of currency. It in­cludes currency notes of all denominations issued by Reserve Bank (excluding on rupee note). The system governing note-issue in India is the Minimum Reserve System. Minimum Reserve System stipu­lates that a minimum amount is kept in reserve in the form of gold and foreign exchange. This means our currency is inconvertible.

(d) Bank Deposit:

Demand deposits (current and saving deposits) are the bank deposits which can be withdrawn on demand. One can withdraw bank deposits at any time through cheques. However, bank does not keep 100% reserves to meet the withdrawal of demand deposits and hence these deposits are credit money.

supply and demand

Money Supply

In economics, the money supply or money stock, is the total amount of monetary assets available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits (depositors' easily accessed assets on the books of financial institutions).

Money supply data are recorded and published, usually by the government or the central bank of the country. Public and private sector analysts have long monitored changes in money supply because of its effects on the price level, inflation, the exchange rate and the business cycle.

Demand for money

The demand for money is the desired holding of financial assets in the form of money: that is, cash or bank deposits. It can refer to the demand for money narrowly defined as M1(non-interest-bearing holdings), or for money in the broader sense of M2 or M3.

Money in the sense of M1 is dominated as a store of value by interest-bearing assets. However, money is necessary to carry out transactions; in other words, it provides liquidity. This creates a trade-off between the liquidity advantage of holding money and the interest advantage of holding other assets. The demand for money is a result of this trade-off regarding the form in which a person's wealth should be held. In macroeconomics motivations for holding one's wealth in the form of money can roughly be divided into the transaction motive and the asset motive. These can be further subdivided into more microeconomically founded motivations for holding money.