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Saturday, October 15, 2011

Nobel Prize Winners in Economics

Introduced in 1967 but first prize was given in 1969. The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel has been awarded 43 times to 69 Laureates between 1969 and 2011.
Why are the individuals awarded a Prize in Economic Sciences called Laureates?
The word "Laureate" refers to being signified by the laurel wreath.
In Greek mythology, the god Apollo is represented wearing a laurel wreath on his head. A laurel wreath is a circular crown made of branches and leaves of the bay laurel (In latin: Laurus nobilis). In ancient Greek laurel wreaths were awarded to victors as a sign of honour - both in athletic competitions and in poetic meets.

1969Ragnar Frish
Joan Tinbergen
Dynamic Econometric Model of Growth
1970Paul SamuelsonContribution in Economic Analysis
1971Simon KuznetsModern Economic Growth Analysis
1972Kenneth Arrow
John Hicko
General Equilibrium and Welfare Economics
1973W.W. LeontiefInput-Outpur Model
1974Gunnar Myrdal
F. Von Hayek
Contribution in Growth Economics
1975Tjalling Koopmans
Leonid Kontarovich
Optimum Resource Allocation
1976Milton FriedmanMonetary History and Consumption Analysis
1977James Meade
Bertel Ohlin
Internation Trade and Capital Flow
1978Herbert SimonDecision Process in Organisations
1979T. Shultz Arthur LewisEconomic Growth in Backward Nations
1980Corienz KleinModel Related to Eonomic Fluctuation
1981James TobinAnalysis of World Financial Market
1982George StiglerPublic Regulation
1983Gerald DebrewModification in General Equilibrium Analysis
1984Richard StoneNational Income Accounting System
1985Franco ModiglianiFinancial Market and Saving Analysis
1986James BoochananEconomic and Political Decision Making
1987Robert T. SolowEconomic Growth Model
1988Moris AlliesOptimum Utilisation of Resources
1989H. TrigwayUse of Probability Theory in Economics
1990Harry Marco Vitz
William Sharp M. Miller
Portfolio Choice Principle, Capital Asset Pricing Model and Principle of Corporate Finance
1991Ronald CoaseTransaction Costs and Property Rights
1992Gerry BackerMicro Economic Analysis of Human Behaviour
1993Robert Fogal
Douglas North
Quantitative Methods in Economic History
1994Joah Harsanyee
John Nash, R. Selton
Theory of non-operative games
1995Robert LucasDevelopment of Rational Expectations Theory
1996James Mirillis
William Vickrey
Incentive Structures Analysis
1997Robert C. Merton
M. S. Scollas
Derivative and Stock Operations
1998Amartya SenWelfare Economics
1999Robert MundellAnalysis of Monetary and Financial Policy in Exchange Rate System
2000James Heckman
Daniel Macfaddan
For developing solution to solve decision making problem
2001George A. Akerlof
A. Michael Spence
Joseph E. Stiglitz
Developing theories about financial markets that can be applied to both developing and advanced countries
2002Daniel Kahnemann Vernon
L. Smith
Human Judgment and Decision Making under Uncertainity
2003Robert Engle
Clive Granger
Methods analysing economic time series with time-varying volatility and common trend
2004Finn Kydland
Edward Prescott
Banks and explaining business cycles
2005Thomas C. Schelling
Robert J. Aumann
Game Theory Analysis
2006Admund PhelpsInternational Trade-off between inflation and unemployment
Eric Maskin,
Roger Myerson
Mechanism Design Theory
2008Paul KrugmanNew Trade Analysis Theory
2009Elinor Ostrom
Oliver E. Williamson
Analysis of economic governance, especially the boundaries of the firm
2010Peter A. Diamond
Dale T. Mortensen
Christopher A. Pissarides
Analysis of markets with search frictions
2011Thomas J. Sargent
Christopher A. Sims
Empirical research on cause and effect in the macroeconomy

Saturday, October 8, 2011

International Bank for Reconstruction and Development (IBRD)

IBRD and its associate institutions a group are known as the World Bank. The Second World War damaged economies of the most of the countries particularly of those who were directly involved in the war. The global war had completely dislocated the multilateral trade and dislocated multilateral trade and had caused massive destruction of life and property. In 1945, it was realised to concentrate on reconstructing these war affected economies in a planned way. IBRD was established in December 1945 with the IMF on the basis of recommendation of Bretton Wood Conference. This is the reason why IMF and IBRD are called 'Bretton Wood Twins'. IBRD started functioning in June 1946. World Bank and IMF are complementary institutions.
India is a member of four constituents of the World Bank Group i.e. IBRD, IDA, IFC, and MIGA (Multilateral Investment Guarantee Agency) but not of its fifth institute ICSID (International Centre for the Settlement of Investment Disputes).
Objective of World Bank
According to the Clause I of the agreement made at he time of establishment of World Bank, it was assigned the following objectives:
  1. To Provide long-run capital to member countries for economic reconstruction and development. World Bank provides capital mainly for following purposes -
    (i) To rehabilitate war ruined economies (this objective is fully achieved)
    (ii) To finance productive efforts according to peace time requirement.
    (iii) To develop resources and production facilities in underdeveloped countries.
  2. To induce long-run capital investment for assuring BOP equilibrium and balanced development of international trade. (This objective was adopted to increase increase the productivity of member countries and to improve economic condition and standard of living among them).
  3. To promote capital investment in member countries in following ways:
    (i) To provide guarantee on private loans and capital investment.
    (ii) If private capital is not available even after providing guarantee, then IBRD provides loans for productive activities in considered conditions.
  4. To provide guarantee for loans granted to small and large units and other projects of member countries.
  5. To ensure the implementation of development projects so as to bring about a smooth transference from a war-time to peace economy.
IMF Vs. World Bank
IMF and World Bank are Bretton Wood Twins. Both the institutions were established to promote international economic cooperation but a basic difference is found in the nature of economic assistance given by these two institutions. World Bank provides long term loans for balanced economic development, while IMF provides short-term loans to member countries for eliminating BOP disequilibrium. Both these institutions are complementary to each other. The eminent world economist George Schultz had suggested in American Economic Association Conference in January 1995, for the merger of IMF and World Bank.
Membership of the World Bank and Voting Right
Generally every member country of the IMF automatically becomes member of World Bank. Similarly, any country which quit IMF automatically expelled from the World Bank's membership. But under a certain provision a country leaving the membership of IMF can continue its membership with World Bank. If 75% member of the bank gives their vote in its favour.
Any member country can be debarred from the membership of World Bank on following grounds:

  1. Any member country can quit the bank simply by written notice to bank, but such country has to repay the granted loans on terms and conditions decided at the time of sanctioning the loan.
  2. Any country working against the guidelines of bank can be debarred from membership by the board of governors.
Like IMF, World Bank has also two types of members: 'founder members' and 'general members' the world bank has 30 founder members who attained membership by December 31, 1945. India is also among these founder members. The countries joining the World Bank after December 13, 1945 come under the category of general members. At present total membership of the World Bank is 182. The voting right of member country is determined on the basis of member country's share in the total capital of the bank. Each member has 240 votes plus one additional vote for each 1,00,000 shares of the capital stock held.
Capital Resources of World Bank
The initial authorized capital of World Bank was $ 10,000 million, which was divided in 1 lakh share of $ 1 lakh each. The authorized capital of the bank has been increased from time to time with the approval of member countries. On June 30, 1996 the authorized capital of the bank was $ 188 billion out of which $ 180.6  billion (96% of total authorized capital) was issued to member country in the form of shares. Member countries repay the share amount to the world bank in following ways:
  1. Two percent of allotted shares are repaid in Gold, USD or SDR. 
  2. Every member country is free to repay 18% of its capital share in its own currency.
  3. The remaining 80% share is deposited by member country only on demand by the World Bank.
Bank is managed by an elected President. On July 1, 2007, Robert B. Zoellick became the 11th President of the World Bank. The headquarter of World Bank is at Washington DC.
IDA (established on Spetemeber 24, 1960) and IFC (established in July, 1956) are the tow main associate institutions of IBRD. These institutions work under the supervision of World Bank. MIGA is also an associate institution in the World Bank group.
Banks Lending Operations
IBRD gives loan to members in anyone or more of the following ways:

  1. By granting or participating in direct loans but its own funds.
  2. By granting loans out of the fund raised in the market of a member or otherwise borrowed by the bans and 
  3. By guaranteeing the whole or part loans made by private investors through the investment channels.
Before a lone is made or guaranteed the bank ensure that the -
  1. Project fro which the loan is asked has been carefully examined by the competenet committee as regards the merits of the proposal.
  2. Borrower has reasonable prospect for the repayment of loans.
  3. The loan is meant for productive purposes and 
  4. Tthe loan is meant for reconstruction and development.
Functions of the World Bank
Presently, The World Bank is playing the main role of providing loans for development works to member countries, specially to under-developed countries. The World Bank provides long-term loans for various development projects of 5 to 20 years duration. The loaning system of the bank can be explained with the help of following points:
  1. Bank can grant loans to a member country upto 20% of its share in paid up capital.
  2. Bank also provides loan to private investors belonging to member countries on its own guarantee, but for this loan private investors have to seek prior permission from those countries where the amount will be collected. For such loans the consent of that country is also required whose currency is given in loans. For granting such guarantee, the Bank charges 1% to 2% as service charge.
  3. The quantum of loans, interest rate and term and conditions are determined by the Bank itself.
  4. Generally, Bank grants loan for a particular project duly submitted by the member country.
  5. The debtor nation has to repay either in reserve currencies or in the currency in which the loan was sanctioned.
Besides, granting loans for reconstruction and development, World Bank also provides various technical services to the member countries. For this purpose, the Bank has established 'The Economic Development Institute' and a Staff College in Washington.
Appraisal of the World Bank Activities
Bank has sanctioned 75% of its total loans to developing countries of Africa, Asia and Latin America while only 25% was given to developed nations of Europe. IFC, IDA and MIGA were established as the associate institutions of the World Bank in extending financial assistance to member countries. Besides, the Bank also tried its best to coordinate the functioning of nations granting loans to underdeveloped countries. In 1958, the Bank played an important role in establishing 'India Aid Club' for providing specific economic assistance to India. It has now been renamed as 'India Development Forum'. Such types of clubs and forums has also been established for other developing countries. The Bank has also established its mission in various developing countries for providing technical assistance for development project in these countries. The Bank also takes the guidance of experts of various international institutions like FAO, WHO, UNIDO, UNESCO for providing assistance for various projects related to agriculture, education and water supply.

Tuesday, October 4, 2011

Profit as Business Objective

Meaning of Profit- Profit means different things to different people. "The word profit has different meaning to businessmen, accountants, tax collectors, workers and economists and it is often used in loose polemical sense that buries its real significance"[Joel Dean, Managerial Economics, Asia Publishing House, 1960 p3]. In General sense 'profit' is regarded as income accruing to the equity holders, in the same sense as wages accrue to the labour; rent accrues to the owner of rentable assets; and interest accrues to the money lenders. To a layman, profit means all income that flow to the investors. To an accountant 'profit' means the excess of revenue over all paid-out costs including both manufacturing and overhead expenses. It is more or less the same as 'net profit'. For all practical purposes profit or business income means profit in accountancy sense plus non-allowable* expenses. Economist's concept of profit is of 'Pure Profit' called 'economic profit' or 'just profit'. Pure profit is a return over and above the opportunity cost, i.e., the income which a businessman might expect from the second best alternative use of his resources.
Accounting Profit Vs. Economic Profit
The two important concept of profit that figure in business decisions are 'Economic Profit' and 'Accounting Profit'. It will be useful to understand the difference between the two concepts of profit. As already mentioned, in accounting sense the profit is surplus of revenue over and above all paid-out costs, including both manufacturing and overhead expenses. Accounting profit may be calculated as follows:
Accounting profit = TR - (W+R+I+M)
where W = wages and salaries, R = rent, I = interest, and M = cost of materials.
Obviously, while calculating accounting profit, only explicit or book costs, i.e., the cost recorded in the books of accounts, are considered.
The concept of 'economic profit' differs from that of 'accounting profit'. Economic Profit takes into accounts also the implicit or imputed costs. The implicit cost is opportunity cost. Opportunity cost is defined as the payment that would be 'necessary to draw forth the factors of production from their most remunerative alternative employment.' Alternatively, opportunity cost is the income foregone which a businessman could accept from the second bast alternative use of his resources. For example, if an entrepreneur uses his capital in his own business, he foregoes interest which he might earn by purchasing debentures of other companies or by depositing his money with joint stock companies for a period. Furthermore, If an entrepreneur uses his labour in his own business, he foregoes his income (salary) which he might by working as a manager in another firm. Similarly, by using productive assets (land and building) in his own business, he sacrifices his market rent. These foregone incomes - interest, salary and rent - are called opportunity cost or transfer cost. Accounting profit does not take into account the opportunity cost.
It should also be noted that the economic or pure profit makes provision also for (a) insurable risks, (b) depreciation, and (c) necessary minimum payment to share holders to prevent them from withdrawing their capital. Pure profit may thus defined as 'a residual left after all contractual costs have been met, including the transfer cost of management, insurable risks, depreciation, and payment to share holders sufficient to maintain investment at its current level.' Thus,
Pure Profit = Total Revenue - (Explicit Cost + Implicit Costs)
Pure profit so defined may not be necessarily positive for a single firm in a single year - it may be even negative, since it may not be possible to do decide beforehand the best way of using resources. Besides, in economics pure profit is considered to be a short-term phenomenon - it does not exist in the long run, especially under perfectly competitive conditions.
*for example Indian Income Tax Act makes only partial allowance for expenses on 'entertainment and advertisement'.

Sunday, October 2, 2011

South Asian Free Trade Area (SAFTA)

The most significant aspect of the 12th SAARC Summit (Jan 4-6, 2004) at Islamabad, the capital city of Pakistan, was the signing of a historic Agreement on Free Trade. The leaders of India, Pakistan, Bangladesh, Bhutan, Maldives, Nepal, and Sri Lanka have agreed upon to create a "South Asian Free Trade Area".
SAFTA has come into force since January 1, 2006 replacing South Asian Preferential Trade Agreement (SAPTA) which was operative among SAARC countries since December 7, 1995. SAPTA was the success of 9th SAARC conference held in New Delhi in 1995 where this new concessional trade system SAPTA was approved. SAPTA was the factor which really opened all positive possibilities to to establish SAFTA.
SAFTA presupposes abolition of all kind of trade and tariff restrictions. Ultimately it will pave the way for the creation of common market with common currency.
Seven SAARC member countries agreed upon to reduce tariff between 0-5% by 2016. The SAFTA agreement allows any states to pull out of any treaty at any time.

  • Formation of sensitive lists.
  • Outlining the products whose tariffs will not be reduced.
  • Rules of origin.
  • Revenue loss compensation mechanism for LDCs. (Bangladesh, Bhutan, Maldives and Nepal) by comparatively developed nations (India, Pakistan, and Sri Lanka).
  • An arbitration council or dispute settlement body.
  • India and Pakistan will reduce their tariffs 0-5% level within 7 years, while Sri Lanka gets 8 years, and LDCs like Nepal, Bangladesh, Bhutan and Maldives in 10 years.
  • Each of the countries will create two sensitive lists, one of more developed countries and other for less developed countries. 
  • A SAFTA Ministerial council with membership of commerce/trade ministers.
  • A committee of Exports for the administration and implementation of treaty.
  • Removal of barriers to the intra-SAARC investment, harmonisation of custom facilities transit facilities for intra-SAARC trade and simplification of procedure for visa.

Asian Development Bank (ADB)

ADB was established in Dec. 1966 on the recommendation of ECAFE (Economic Commission for Asia and Far East). The aim of this Bank is to accelerate economic and social development in Asia and Pacific region. The  Bank started its functioning on January 1, 1967. The head office of the Bank is located at Manila, Philippines. It is worth mentioning here the Chairmanship of ADB is always allotted to a Japanese while its three Deputy Chairman belong to USA, Europe and Asia. At present, 63 nations are partner members of ADB.
The principle functions of ADB are:
  1. To make loans and equity investments for the economic and social advancement of its developing member countries.
  2. To provide technical assistance for the preparation and execution of development projects and programs and advisory services.
  3. To respond to the request for assistance in coordinating development policies and plans in developing member countries.
Asian Development Bank constituted 'Asian Development Fund'  in 1974, which provides loans to Asian countries on concessional interest rates. India started borrowing from ADB's Ordinary Capital Resources (OCR) in 1986. 
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