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Fiscal and monetary policies are macroeconomic tools in the hands of the government and central bank of a country to exercise control of the economy. Fiscal and monetary policies are formulated for controlling inflation, creating employment and increasing the growth prospects of an economy.  Fiscal policy is mainly concerned with government revenue and expenditure, and monetary policy deals with the circulation of money. While government departments usually have direct involvement in the formation of fiscal policy, monetary policy is formulated by the central bank of the country. Taxes on various goods are determined by the fiscal policy. Monetary policy determines the rate of interest charged by the banks.   What is fiscal policy? Fiscal policy deals with the revenue collection and expenditure by the government. A country's government plans how it will generate revenue for running the country. Taxes are the major source of government revenue. However, higher tax does not necessarily mean higher revenue. When people need to pay higher taxes, their disposable income reduces. This may lead to reduced consumption and savings. Reduction in consumption may affect government tax collection. A lower demand situation faced by the industry may also reduce the taxes paid by the corporates. The government needs to maintain a balanced approach in levying taxes on various goods and services sold in the economy. Taxes can be of two types; direct and indirect. Direct tax is based on the income of the people. The higher the income of an individual or the profit of a company, the more the taxes. Indirect taxes are taxes levied by the government on various goods and services sold in the country. As the taxes are collected not directly but through sales of goods, hence they are termed indirect taxes. The government determines tax rates. Fiscal policy also determines the expenditure of the government. The government needs to spend money on the salary of government employees, for the maintenance of government properties, roads etc. At the same time, the government can spend money on building infrastructure and productive capacity in the country. The latter may help more in achieving growth and developing the economy.   Fiscal policy, growth and development Economic growth can be achieved by increasing production, increased demand and consumption. Government expenditure often creates new jobs, new infrastructure and develops the economy. When government expenditure creates new jobs, people get more money to spend. This expands the economy and brings prosperity. Keynesian theory of macroeconomics suggests that even deficit financing can help an economy: when the government spends money beyond its means that can lead to more employment and the development of infrastructure, bringing an economy out of recession. Tax cut allows people to have more money in hand and consumption increases. An increase in consumption can make the factories expand their capacity and produce more. This may help in generating more investments.  In the case of tax concession to businesses, there are more investments and expansion of the businesses. Additional taxes usually contract the economy by reducing the demand for goods.   Fiscal policy and inequality Direct taxes are often called progressive and indirect taxes as regressive. The former taxes people as per their level of income. However, indirect taxes like value-added tax are levied equally on the rich and poor. Government has the opportunity of taxing the rich more and redistributing the money to the poor. The expenditure on creating universal health care or education system may help in creating opportunities for all sections of people in the economy and eventually reduce inequality. Government can also provide a universal minimum income to all citizens.   What is monetary policy? Monetary policy is the macroeconomic policy that deals with the circulation of money in an economy. Monetary policy determines the bank's interest rate. If the interest rate is high, people save more and reduce consumption. This reduces the money supply in the economy. Increased interest rates also make loans expensive and people do not prefer taking loans for buying consumer goods like cars or houses. Monetary policy also influences the currency exchange rate. When the interest rate in a country increases, foreign money in the economy increases, as investors prefer to earn higher interest. If the central banks stock more foreign currency, local currency may depreciate. When the central banks sell foreign currency in the market, it improves the value of the local currency.   Monetary policy and inflation Monetary policy is often used to stabilize prices and reduce inflation. Due to increases in interest rates, home loans, car loans, etc. become expensive. Consumers spend less and save more reducing the money supply in the economy. This enables checking the inflation. Inflation occurs when more money chases few goods (head to How Does Economics Explain Inflation? for more). Now as the money supply is cut down, inflation eases. However, an increase in interest rates may deter investors from taking fresh loans for investing in the economy. Reduction in the investment may reduce production and employment over a period of time which may create a situation where again inflationary situation arises due to a reduction in the supply of goods. Monetary policy can control inflation when it is due to excess money supply. However, it cannot solve the supply-side constraints.   Monetary policy and growth A monetary policy that wants the economy to be growth-driven works towards a low-interest rate regime. Lowering interest rates enable businesses to go for fresh investments, expand productive capacity and grow the economy. Lower interest rate encourages consumers to buy new cars, new homes and other consumer goods. These increase the demand in the economy. Higher demand and supply levels expand the economy. Economic growth can be achieved with monetary policy. However, increasing activities and increase in income may also have an inflationary effect on the economy.   Economic policies and influence of the state State economic policies try to ensure stability in the economy. It tries to reduce volatility. Volatility affects business as well as negatively impacts day to day life of the people. The state has monetary and fiscal policy tools to influence the economy. The effective implementation of monetary policy can cut inflation. It can bring in growth. Fiscal policies can expand the priority sectors of the government. It can also influence the consumption of certain products by a tax cut. Fiscal policy can create employment and bring prosperity to the economy. State influence on the economic front is exercised through fiscal and monetary policy measures. It is imperative that these policies are balanced to reduce uncertainty and volatility in the macroeconomic environment. Learn about macroeconomic policymaking and other rudiments of macroeconomics with Macroeconomic Essentials. Out now. Our book Macroeconomics Essentials You Always Wanted To Know brings you a multifaceted and holistic introduction to the realm of microeconomics. To know more about macroeconomic policies, policymaking tools, and how they impact our lives, head now to Amazon or Ingram to pre-book your personal guide to all the macroeconomic fundamentals.   Also read: Follow These Tips to Get Started (And Succeed) As An Online Entrepreneur What is Entrepreneurship and how do you set up a successful business? What is a Market in Economics?

Selling and buying goods and services often are not restricted within the boundaries of a country. Countries trade across borders.  Why do countries trade internationally? Countries trade because not all the resources are available in all parts of the globe. Good quality kiwis may be available in New Zealand and not in India. Therefore, if Indian men, women and children want to enjoy kiwi, they need to import it. Again, not all countries are equally competent in manufacturing each and every good. China can produce garments at a much less price than France can. Hence, French people can save money when they import clothes from China.   Benefits of International Trade  International trade can make the world more prosperous. The exchange of goods enables countries to maintain better relationships. It is said that trade is the best mechanism to prevent war. Countries having strong trade relationships are unlikely to enter into a war. Globalization opens up economies worldwide. It helps in reducing the cost of production. Most of the modern economies are now part of a global value chain. A car finally assembled in the USA may have various components manufactured across the globe. Globalization can bring homogeneity in the lifestyle as well across the globe.   World Trade Organization (WTO) and Most Favoured Nation (MFN) World Trade Organization was established in the year 1995 with the purpose of providing a better level playing field to countries across the world for international trade. It endeavors to ensure fair trade between countries. It intervenes to reduce friction between countries engaged in international trade. WTO members must offer all their fellow members the status of the most favored nation(s) under which countries cannot discriminate between member countries. If the USA levies a certain rate of tariff on Chinese goods, it is not expected to allow any preference for the same good produced in India or Bangladesh. However, the principle of MFN is often violated. Countries do discriminate between members with differential tariff and non-tariff barriers.   Anti Dumping  Another challenging situation is the dumping of goods. For capturing the market, countries are seen to sell goods at a lower price compared to the cost of manufacturing (Head to What is a Market in Economics? for more). Countries are ready to incur losses in the short term to gain market share in a country in the long term. To prevent this, countries are allowed to levy anti-dumping duty under WTO’s rule-based trade mechanism.   Trade Balance  Trade comprises exports and imports. A country may export its production of goods and services to other countries. The country also imports goods and services from other countries as per its need. A country often exports goods to a country more compared to the imports from the country. Similarly, the country will have more imports of goods from another country compared to exports to this country. When a country has more exports of merchandise goods to a country compared to imports, it is running a trade surplus. Again, when import from a country exceeds exports to the country, it is a situation of trade deficit. While calculating the trade balance, we consider only trade of goods and do not take into account invisibles or services. Some economies may have more imports than exports—for example, big economies like the USA and India. These countries run trade deficits. China mostly runs a trade surplus in aggregate. Often the deficit in the trade of goods is compensated by a surplus in services trade. Trade deficits may have several implications on economic conditions in various countries. An economy with a high level of trade surplus may have export-led growth. There can be job creation in the export-oriented sectors. It is natural for a country to have a surplus or deficit with some of its partners. A deficit indicates that domestic production is not enough for the consumption requirements in the country.   Balance of Payment  Balance of payment is a record of all possible transactions between residents of a country with the rest of the world. The possible transactions can be in goods, services, assets, payment of salaries, interest, etc. The transactions are for a specified time period, usually the financial year. The BOP has primarily two main accounts; the current account and the capital account. International Monetary Fund (IMF) has introduced a third component—namely financial account—as part of BOP. Similar to other forms of accounting, in the case of BOP as well, each transaction is recorded with a plus or minus sign. When a transaction earns foreign currency for the country, it is termed as credit and recorded with a plus sign. When a transaction leads to spending foreign currency, it is a debit; the corresponding record has a negative sign. Usually, exports are considered as credit and imports are considered as debit. For a nation, exports earn foreign currency hence it is credit. In the case of imports, foreign currency is spent from the country; hence, the corresponding entry is a debit entry. Balance of payment is vital for a country’s economic prosperity. It affects the forex reserve in the country. It is also a determinant of the exchange rate of the currency of the country. Macroeconomics Essentials You Always Wanted To Know is brimming with information on foreign exchanges, trades, international organizations—like International Monetary Fund and World Trade Organization—and everything else you might need to get your macroeconomic fundamentals in check. The book is available for pre-order now. Related Blogs -  5 Qualities of a Successful Entrepreneur How Does Economics Explain Inflation? Microeconomics is Essential For You!    

The pangs of inflation have been felt all around the world. In the US, the inflation rate was 7.7% in October 2022 and in India, it was 6.77%. The UK recorded its highest inflation rate at 11.1% in 41 years in 2022. After the Covid-19 pandemic, inflation has increased as a result of all the services re-opening but businesses not having the resources to provide the goods and services. But, let’s try to understand what is inflation.     What is inflation? A price rise is considered inflation. It increases the cost of living in a country. By definition, inflation is the rise in prices during a given time period.     What are the factors behind inflation or price rises? There are various reasons for price rises. Microeconomic theories like the law of demand, the law of supply, consumer preferences, cost of production, competition, and market condition are responsible for price rises. The book, Microeconomics Essentials You Always Wanted to Know deals with various microeconomic theories like demand, supply, consumer choice, the revenue of firms, cost of production, market, competition, etc. which are vital to understanding inflation in a country. The understanding of underlying reasons for inflation can help businesses and entrepreneurs take the right pricing decisions in an inflationary condition.     A piece of news dated January 12th, 2022 covered in www.usa.today.com comes with the tagline ‘Food prices up, shelves empty’. It blames the pandemic-related workers’ absence and warns about high inflation. The News report says the price of new cars went up during the last year by 11.8 %, and groceries were dearer by 6.3 %. Chicken and fish prices jumped by 10.4 and 8.4 % respectively.     How do we explain these changes in price? When we analyze the above situation, the price rise was due to the absence of workers in the production process. So, workers’ absence led to a short supply. In economics, we deal with the theory of supply and demand. If the demand increases, the price goes up. If the price goes up, demand falls. In case of an increase in supply, the price falls. Again, in case of an increase in price, suppliers are motivated to produce more and supply more. The price is dependent on the supply and demand of goods. There is a shift in consumer demand due to consumer preference and income level. It also shows how the production cost determines the supply of various materials. The production cost is determined by the prevailing wages, raw material cost, cost of electricity, and many other productions related factors”     Conceptually, purchasing power is the ability of the customer to pay for the goods. Now when the price goes up, consumers' purchasing power goes down. This may have a negative impact on the lifestyle of the consumers. This is the primary reason why Central Banks and Governments try to control inflation in a country. You can read more about purchasing power in the book, Financial Management Essentials You Always Wanted To Know.     Steps taken to control inflation Usually, the central bank in a country tries to taper the money flow in the economy to control inflation. When there is less money in the hands of the people, the demand for goods comes down, making the prices stable. However, this is not applicable when the inflation is due to supply-side constraints i.e. less production due to the unavailability of laborers or issues with the supply of raw materials. Sometimes, due to natural calamities, drought, etc. farm production may drop leading to price rises in food items.     Governments sometimes try to increase imports and curb exports to control inflation but economists do not find this sustainable.     About the Author - Prof. Amlan Ray is currently Senior Director & Dean at SRISIIM, New Delhi, a management and research Institution recognized by theMinistry of Science & Technology andMinistry of Education, Government of India. He has 27 years of experience working inCorporates, Consulting, Training, and Academia.                  

Market is a commonly used term in our day-to-day lives. However, in Economics, market has a deeper meaning. We often classify economies as market-driven economies. In this blog post, we explore the meaning of market and its types         What is a Market? A market is a place where buyers and sellers meet for transactions. For example, a  retail mall is a marketplace where lots of buyers meet sellers of various brands on a given day. A market need not necessarily be a physical place but can also be a virtual platform. In stock markets, both buyers and sellers are behind their computer screens, meeting on a virtual platform. Amazon provides a virtual marketplace for its online buyers.       What are the seven forms of market?       In economics, there are various forms of markets: Monopoly Duopoly Oligopoly Monopsony Monopolistic Competition Pure competition Perfect competition       What is Monopoly? Monopoly has a single seller. A monopoly is a situation in which the seller can decide the price at which he will sell his commodities. As there is a single seller, the market price and individual seller’s price is the same. The question remains whether buyers accept the price set by the monopoly seller or not. It is decided based on the buyer’s purchasing power and availability of substitutes.     Example of Monopoly The railways have a monopoly but still, they cannot set the price of train tickets at their discretion.       What is Duopoly? A duopoly is a situation in which there are only two major players in the market. It is the simplest form of oligopoly with two sellers.     Examples of Duopoly Worldwide, there are two main players selling soft drinks: Coke and Pepsi.  The size of the market catered by Coke and Pepsi with multiple brands is so large that they establish a duopoly with control over the market prices.       What is Oligopoly? Oligopoly is a market condition in which there are a number of sellers but the market is not too large. There are more than 2 sellers but the maximum number is not specified. Approximately, the maximum number can be assumed to be about 25. Here due to competition, the firms cannot set the prices at their discretion.   Example of Oligopoly A modern example of Oligopoly is the OTT market. Netflix, Amazon, Hotstar, Hulu etc are the main competitors in the market.       What is Monopsony? While Monopoly stands for a single seller; monopsony means a single buyer. It is the mirror image of a monopoly where there is a single buyer. Monopsony is more prevalent in the factor market.     Example of Monopsony Suppose, a city has a single mine; so all mining laborers have only one place to sell their labor. This is a form of monopsony. There is a close similarity in the operations of monopsony and monopoly.       What is Monopolistic Competition? In monopolistic competition, a large number of sellers produce differentiated products. In differentiated products, the important product features vary.   Example of Monopolistic Competition There are a large number of sellers of mobile phones across the world. The features of the phones vary from brand to brand. The camera, screen size, processor, and operating system all determine their demand and price. Though it is the same product, utility varies depending on the features. Quality is an important determinant for product differentiation. Buyers’ segments vary depending on the product quality. Brands like iPhone can create a monopoly-like advantage within the market with their product features and quality.       What is Perfect Competition? Perfect competition is an idealized form of market with a large number of buyers and sellers, offering homogenous products. As there are a large number of sellers and the product is homogenous without the scope of differentiation in value offered, the firms are price takers. They are bound to sell at the price determined by the market. In perfect competition, the factors of production have perfect mobility, there is free entry and exit for firms, no government interference, perfect knowledge of the market, and independent decision-making without forming any cartel.   Example of Perfect Competition The closest example of perfect competition is the market for cereals, pulses, or vegetables in which a large number of sellers offer similar products to a larger number of buyers.       What is Pure Competition? Perfect competition without the characteristics of perfect mobility of factors of production is termed Pure Competition. This is termed ‘pure’ as there is no element of monopoly in this.   However, often economists agree that in reality there is nothing called perfect or pure competition. Requirements for a passport and visa are not conducive for the mobility of labor. Perfect knowledge does not exist in a market due to trade secrets maintained by competitors. Government intervenes in the market more than often. Therefore, perfect competition still is a myth!     Markets is one of the various topics covered in the newly launched book Microeconomics Essentials You Always Wanted To Know; to know about markets in detail, check out the book here. The book also covers core concepts of microeconomics like demand, supply, factors of production, marginal utilities, and much more.      

Economics is a part of our everyday lives. From deciding which toothpaste to buy, which mode of transport to take, how much money to spend on leisure, and where to invest our money, we apply the concepts of economics, often unknowingly. Economics is nothing but a social science dealing with the production, distribution, and consumption of goods and services. But it can become difficult to understand all aspects of economics under one umbrella. Therefore, the subject is divided into two branches - Microeconomics and Macroeconomics.   Below is the excerpt from the conversation we had with Prof. Amlan Ray - author of our soon-to-release book Microeconomics Essentials You Always Wanted To Know.   Prof. Amlan Ray is currently Senior Director & Dean at SRISIIM, New Delhi, a management and research Institution recognized by the Ministry of Science & Technology and Ministry of Education, Government of India. He has 27 years of experience in corporates, consulting, training, and academia. Read on to find out more about the subject.         How does Economics help?  Economics is essential for the world of business and finance. It helps to formulate national and global policies. Economics also determines what we choose to buy in our daily life. Resources are scarce and we cannot buy anything and everything with limited income. Hence comes the need for resource planning or budgeting. In the future, if a situation evolves in which we have abundant items across the supermarkets and enough money for every person in the society to buy those, will we have the subject of economics? Human wants are infinite and probably never a situation will arise when all our needs will be fulfilled.  Economics will remain at the center place of policymaking as economics helps in increasing societal welfare by optimizing resources.         How do you differentiate between microeconomics and macroeconomics? In present days, economics is categorized into two subfields – Microeconomics and Macroeconomics. Norwegian economist Ragnar Frisch first used the terms microeconomics and macroeconomics in 1933.   Adam Smith is considered to be the father of Microeconomics. Microeconomics studies economic phenomena at the individual level. It shows how individuals make their purchase decisions. It also shows how consumer decisions affect demand and supply. The interaction between buyers and sellers and related decisions of purchase and production are dealt with in microeconomics. It shows how the prices of goods and services are determined in the market with the interaction of buyers and sellers. It also deals with the cost, production, revenue, and profit of individual firms that are constituents of an industry.   Macroeconomics deals with the economy as a whole at the country or global level. It is concerned about the aggregate demand, supply, savings, income, and expenditure at the national or global level. It provides inputs for policy making at the national level. The concerns of employment, production, and productivity are addressed by macroeconomics. It also suggests taxation and monetary policies.     In the book, Microeconomics Essentials, I have discussed all the necessary concepts of Microeconomics.         What does the book have to offer? Microeconomics Essentials You Always Wanted To Know makes the readers understand the practicalities of the subject. Examples taken from various industries in this book demonstrate the applications of the subject in real life.  The book uses simple language to unravel the jargon of microeconomics. The topics in this book are streamlined to help readers grasp the concepts easily. The purpose of the book is to make people without an economics background comfortable with the subject.         Who can use this book? Business professionals can use this book to understand decision-making in companies and various industries. Entrepreneurs will be benefited from learning the basics of microeconomics to understand policy matters. Undergraduate students can use this as a textbook that covers their syllabus. Students at master’s level in programs like MBA who don’t have an economics background will benefit from this book as it will be useful for them to understand the basics of economics.         By the end of the book, how will the readers be benefitted? The book introduces the readers to core economics concepts like demand and supply and takes them through theories of consumer choice, markets, factors of production and international trade. At the end of the book, the readers will be able to understand the following concepts of microeconomics: Concept of scarcity and choice Law of demand and supply Price elasticity of demand and supply Consumer behavior with both cardinal and ordinal utility theory Theory of cost and production Various forms of market ranging from monopoly to perfect competition Concepts of revenue, cost, and profit Overview of factors of production Basics of trade including free trade and trade barriers         Studying the concepts of microeconomics will enable us to understand our own reactions and behavior towards fluctuations in factors that we can’t control. Lastly, it helps us to make economic decisions in our day-to-day lives efficiently and cleverly.   Microeconomics Essentials You Always Wanted To Know is currently available for review on Netgalley.   Stay tuned for the launch date!