World Economy - 2014

 

The prices of food items have increased manifold during the last three years. In 2008 the prices of wheat and rice had doubled. Rising price of food items affect the poor and the lower middle class the most, because they spend a major portion of their income on purchase of food items. But apparently there is no shortage of food items. Better storage facilities of food grains are required, mainly in the developing countries to preserve what has been produced. Wastage cannot be afforded. Developing nations, with borrowings and investments from developed nations, have moved forward a bit. But they also have not been able to divert the fruits of development in the right direction. Rising Oil prices have affected the balance of payments.

Low interest rates, deficit budgets, and government borrowings have dampened the growth of the world economy. As a result of moderate growth, unemployment has cropped up. Accumulation of wealth and liquidity in the hands of a few has affected the economies adversely. Developing nations have tried to control inflation by keeping the interest rate high. High interest rate discourages investment and growth of gross domestic product. In spite of their best efforts to keep the economy away from the pressure of inflationary price rise, through monetary and fiscal policies, effective demand has not gone down as desired. Without proper investment decisions, employment has been affected adversely.

A huge capital resource is remaining sunk in fixed assets. Conversion into liquid assets is not so easy. Markets, on one side, are getting flooded with consumer durables. Over-emphasis on opportunities in some areas has resulted in an unbalanced growth of the world economy. Some areas have progressed, while some have fallen back. Governments need to put a judicious check on expenditure, subsidies and benefits to mellow down the price rise. But that again gives rise to unemployment. It has to be ensured that subsidies and benefits reach those sections of the population for which it is meant.

Per unit cost of energy is increasing. This adds to the production cost. So the price rise is not only because of high effective demand. It is also a case of cost-push inflation. Need to find alternative sources of energy are necessary. A suitable alternative for coal needs to be found out. The energy resource needs to be used more effectively and judiciously. Nuclear energy is not appearing to be a very safe long-term option. Those who are at the helm of managing the energy resources have to handle the situation with more caution and care, keeping in mind long-term effects of their decisions and actions.

It is required to boost the economies with fresh investments, but the moment that is done, prices will rise further. More areas have to be brought under food grain cultivation to increase food production. New technologies have to be implemented to get more yields from the same land. Importing food grains puts pressure on the economy, as it is always costlier. Transportation cost also adds to the cost. Local yields have to be raised. Cutting down the cost is an absolute necessity.

Attention should be shifted to less saturated areas where small and medium scale industries can and need to be developed. Capital resources should be diverted to areas and sectors where it is needed the most. This will increase the output. More supply of goods and services will then bring down the price level. This will create fresh employment as well, which will gear up the economies with a more equitable distribution of income. A change in consumption pattern and lifestyle is required. Collective well-being should get a big priority. Too much of optimism, with respect to revenue earning, is required to be curtailed. Speculative activities, based on the rising price level, should be controlled, keeping in mind that ultimately it will be a self-defeating policy. Governments need to chalk out their fiscal and monetary policies very judiciously. Distribution system needs to be smooth enough to bring parity in price level. Governments will have to manage their debts, if any, efficiently.

Most of the economies need to swing back to a near non-inflationary situation. A total evaluation and overhauling of the world economic structure needs to be done with sufficient co-operation among countries.

Money - An Economic Overview

Evolution of Money: The fundamental aim of man is to satisfy his economic wants. In earlier days man produced whatever was needed by him. But in course of time, economic wants started to increase. So to satisfy all his economic wants, man started to exchange the goods. In earlier days the system that was followed for exchange is known as the Barter System. Under this system there was direct exchange of goods for goods. But man started to face many difficulties under this system. So to overcome these difficulties man introduced money.

First precious metals were used as money. Then, in course of time, a small quantity of a metal, with a with a stamp or mark put on it to indicate value, was introduced to serve the purpose of money. This process is called coinage. Now a days paper money, duly sanctioned by law, with appropriate signs and symbols, is used used universally as the medium of exchange. For small transactions, however, coins are still used.

Legal Tender Money: Legal tender money means money, the tender or payment of which constitutes, by law, the sufficient discharge of a debt.

The fundamental difference between money and other commodities is that money is generally acceptable in payment for goods, services, debts and compensations, while other commodities are not. People want other commodities for the commodity's sake - to consume, enjoy or otherwise utilize them, but money is wanted not for its own sake but because it has purchasing power over other goods.

The real significance of money is that it is a claim, which can be used by its owner to buy everything. As because general acceptability is the fundamental characteristic of money, we can define money as anything which is generally accepted by people in exchange for commodities or services, or in payment of debts or compensations.

Mr. Paul Samuelson: "Money is an artificial social convention."

Definition: Money is something, which serves as a medium of exchange. It is accepted unquestionably by everyone in exchange for goods and services. Different economists have defined money in different ways. According to Mr. Francis Walker "money is what money does."

We can define money as anything, which is accepted by the people

1. as medium of exchange,
2. as a measurement of value,
3. as a store of value,
4. as a standard of deferred value, and
5. as a transfer of value.

From this above definition follows the functions of money.

1. Medium of Exchange: Money promotes or facilitates exchange of goods and services. Our whole economic system depends entirely upon money, without which all modern forms of consumption, production, distribution and exchange will cease to exist.

2. Measurement of Value: Money assigns a value or price to any commodity or service. Every commodity or service can be weighed in terms of money. So it serves as a measuring instrument for value.

3. Store of Value: Money is the best form in which one can store his wealth. It has a universal usefulness at any given time, which makes it the best form as a store of value.

4. Standard of Deferred Value: Money serves as standard for deferred payments, that is payments, which are to be made in future.

5. Transfer of Value: Since any economic commodity or service can be weighed in terms of money, for any kind of value transfer it acts as the best medium.

Demand for money or reasons for holding money: J, M. Keynes forwarded three primary reasons or motives for holding money.

1. Transactions motive: Every man requires a certain amount of money to meet his daily expenditure. From this, the transaction demand for money arises.
2. Precautionary motive: People normally hold more money than what is required for his transactions purpose. He keeps some extra money in hand to meet the unforeseen circumstances, or any kind of emergency situation. This gives birth to the precautionary demand for money.
3. Speculative motive: Money, when invested, brings income in the form of interest. If someone decides to hold money he will be foregoing the interest that it would have yielded, if invested. Thus holding money means preferring liquidity, as money is the most liquid form of asset. When there is an expectation that interest will rise in the future, people purchase securities to earn higher interest income in the future. Interest is the reward for parting with liquidity. Thus individuals or institutions, who have sufficient money left after satisfying the first two demands, may also need some money for speculative purpose.

In the short run, transactions demand and precautionary demand are more or less fixed. Only under a situation of rising prices and consequent inflation, these two demands may increase in the short run. Otherwise in the short run, it is the speculatory demand for money, which determines the overall demand for money.

Supply of Money: The supply of money basically means the quantity of money in circulation. In simple terms, the total amount of cash held by individuals and institutions in the form of notes and coins, together with the total value of deposits held in bank accounts of commercial banks, together with bills and bank notes constitute the supply of money. Some writers prefer to use the term money in a narrow sense to mean only legal tender money. Others include deposits, but only such deposits as are withdrawable by cheques, thus excluding non-chequeable deposits. The measures that are taken to control the total supply of money in an economy are compositely called the Monetary Policy.

Value of money: Meaning: Value of money means the purchasing power of money. It means that goods and services can be purchased with money. When more goods and services can be purchased with money, the value of money is said to be more, and vice versa.

Determination of the value of money: There are two theories given by the economists for the determination of the value of money. The two theories are

1) Quantity Theory of Money
2) Income Theory of Money