Major Economic Organizational Issues
Major Economic Organizational Issues
Ankur Verma
* Business Cycle
The economy tends to move in a series of ups and downs, called Business Cycle, rather than in a steady pattern. The greatest world-wide economic depression of 1930s. Business cycles are an issue for the organizations. During recessions many business go bust, and even for those that survive, profits fall. In contrast during boom, demand for most products rises, profits rise, and most business find it easy to expand.
* Inflation
Decrease in the value of money with an increase in price levels is called Inflation .Inflation matters to organization because it creates distortions in the price mechanism, most notable by eroding the real value of anything accounted for in money terms. Some organization will make arbitrary gains as a result of inflation, and others will lose. A pick-up in inflation is usually the signal for tightening of monetary policy that raises interest rates and brings about a slowdown in the economy. Such downturns in the economy have an adverse effect on most organization.
* Unemployment
In times of low unemployment, organizations will find it difficult to hire scarce workers, especially those with requisite skills. In periods of high unemployment, organizations will often find their employees more interested in bargaining for some measures of job security rather than increased wages.
* Government Budget Deficits
It is a Budget Deficits when the Government spending is more than it is raising from taxation. Organizations worry about budget deficits for two main reasons. First, government borrowing competes with organization's borrowing in capital markets and may raise interest rates for organizations. Second, government in deficits may be forced to raise taxes and thereby reduce profits and consumer demands
* Interest Rates.
Monetary policy involves changes in interest rates, or the money supply, to influence the economy. High interest rates are a symptom of a tight monetary policy. When interest rates are high, organizations find it more costly to borrow, and this makes them more reluctant to invest in expanding their business. Also organizations are usually hit by a fall in sales as consumers with mortgage or bank loans reduce their spending in response to high interest rates. Hence high interests rates tend to reduce demand in the economy. Low interests rates tend to stimulate demand for the opposite reason.
* Exchange Rates
Exchange rates can affect the relative prices, and thereby the competitiveness, of domestic and foreign producers. A significant appreciation of the domestic currency can make domestic goods expensive relative to foreign goods. Organizations doing business abroad must be concerned with exchange rates. If they buy or sell on contracts denominated in foreign currency, they must worry about the sterling value of those amounts at the time when the contract it settled.
* What , How and For Whom
Any Economic organization -whether it is in industrial nation, a centrally planned economy or an isolated tribal nation- confronts and resolves three fundamental economic problems. What commodities should be produced, how these goods should be produced, and for whom they should be produced.
Economic System
Introduction : An economic system is a particular set of social institutions which deals with the production, distribution and consumption of goods and services in a particular society. The economic system is composed of people, institutions and their relationships to resources, such as the convention of property. It addresses the problems of economics, like the allocation and scarcity of resources in a given economy. Economic systems is the category of economics that includes the study of different systems.
The scarcity problem, for example, requires answers to basic questions, such as: what to produce, how to produce it, and who gets what is produced. An economic system is a way of answering these basic questions. Different economic systems answer them differently.
The basic and general economic systems are:
* Market economy (the basis for several "hands off" systems, such as capitalism).
* Mixed economy (a compromise economic system that incorporates some aspects of the market approach as well as some aspects of the planned approach).
* Planned economy (the basis for several "hands on" systems, such as socialism).
* Traditional economy (a generic term for the oldest and traditional economic systems)
* Participatory economics (a recent proposal for a new economic system)
Planned/Command Economy : Involves a greater role for society and/or the government to determine what gets produced, how it gets produced, and who gets the produced goods and services, with the stated aim of ensuring social justice and a more equitable distribution of wealth (see welfare state). If there were shortages, prices would be raised; if there were surpluses, prices would be lowered.[3] Raising the prices would encourage businesses to increase production, driven by their desire to increase their profits, and in doing so eliminate the shortage. Lowering the prices would encourage businesses to curtail production in order ...
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Planned/Command Economy : Involves a greater role for society and/or the government to determine what gets produced, how it gets produced, and who gets the produced goods and services, with the stated aim of ensuring social justice and a more equitable distribution of wealth (see welfare state). If there were shortages, prices would be raised; if there were surpluses, prices would be lowered.[3] Raising the prices would encourage businesses to increase production, driven by their desire to increase their profits, and in doing so eliminate the shortage. Lowering the prices would encourage businesses to curtail production in order to prevent losses, which would eliminate the surplus.
Market Economy : This economic systems give more power to private individuals (and perhaps corporations) to make those decisions like setting the price and to determine what to produce etc., rather than leaving them up to society as a whole, and often limit government involvement in the economy.
Mixed Economy: A mixed economy is an economy that has a mix of characteristics essential to disparate economic systems. It is usually defined as an economy that contains both private-owned and state-owned enterprises or that combines elements of capitalism and socialism, or a mix of market economy and command economy characteristics. Some characteristics of a mixed economy:
* People can own their own businesses, but political leaders make policies concerning these.
* The government controls the mail system.
* The government controls most of the road networks.
* The government has a virtual monopoly on the provision of policing.
* The government tells manufacturers what to make if something is in need during war time.
* The Government bans certain drugs.
* The government has created a minimum wage law.
* The government provides social welfare payments to some citizens.
* A sizable part of pre-college education is government-provided.
Indian Economy
The Indian economy is diverse and embraces a huge area including, agriculture, mining, textile industry, manufacturing and a vast array of other services. There is an enormous shift from what the economy used to be in the distant past. Indian economy is the third largest in the world, as measured by "purchasing power parity"(PPP). Still now two thirds of the population thrives on agriculture directly or indirectly. Indian economy is somewhat socialistic in its approach though nowadays there is a change that has taken place and we see India on the run with other capitalist countries.
Post Independence History:
There was a basic stress on a few things like protectionism, import substitution, industrialization, a large public sector, business regulation, state intervention in labor and financial markets and central planning.
The economy of the country shifted from predominantly agricultural, forestry, fishing and textile manufacturing in 1947 to major heavy industry, telecommunications and transformation industries by late 1970s.
In the 1950s the Indian government undertook a chain of plans for the economic development. These plans functioned profitably for a while but then again in the long run they showed lese development. Since 1950s trade deficit problems arose leading up to a problematic situation in the 1960s like inflation. 3.1 percent was the average rate of growth a year in constant prices from FY 1951-FY 1979. Economic doldrums were a result of structural inadequacies, wars with China in 1962, with Pakistan in 1965 and 71, currency devaluation in 1966, first world oil crisis and few natural calamities.
Recent Times:
Reforms in the economy were being made, which included the pro-business measures of 1980, initiated by Rajiv Gandhi, relieved restrictions on `capacity expansion for incumbents`, removal of price controls and reduced corporate taxes. 1991 marked the economic liberalization initiated by the then Indian Prime Minister P. V. Narasimha Rao and his finance minister Manmohan Singh which was in response to a balance-in-payments crisis. Other changes like the abolition of the License Raj, public monopolies, allowance of automatic approval of foreign direct investments in many sectors.
990 onwards we see the emergence of India as one of the wealthiest economies of the world with a constant growth of economy with only very few major knock backs. More private sector initiatives were taken up during 1980s and 1990s. Liberalization gave way for a new start reducing the burden of the public sector and globalization helped MNCs to function in India. Late 1990s and early 2000 marked the beginning of an achievement in the telecom field where universal license allows CDMA license holders to provide GSM services and the opposite.
At present India has a modern stock exchange instead of an outdated one. There has been a rise in the IT sector lately, the setting ups of the Indian Institutes actually led to the influx of highly qualified manpower resources harnessing the economy of the country. There seems to be no sign of balance of payments crisis in India from a superficial level. Having a reserve of $130 billion, there is huge optimism in India. Finally it has got some ground in the world economy and the growth is on the move.
State planning and the mixed economy: Indian economy works on the basis of 5 year Plans which enables an effective and equal distribution of national resources for a balanced economic development.
Mixed economy is a merger of the socialist and capitalist economy. India's mixed economy has switched roles embracing capitalist economy to greater extent over the past decade. In India the public sector covers the railways and postal services. Nationalization of banks have also taken place, recently phases of privatization are on the run.
Public expenditure: Public expenditure in India basically constitutes capital and revenue expenditure. These are included in central plan expenditure, central assistance and non-development expenditure.
Central plan expenditure is for the allocation of resources in development schemes given in plans of the central government and public sector undertakings. Central assistance is the aids provided for plans of state governments and union territories. Capital defense expenditure, loans for public enterprises, states and union territories and foreign governments fall under non-development capital expenditure. Whereas non-development revenue expenditure consists of revenue defense expenditure, subsidies, postal deficit, administrative expenditure, pensions, debt relief to farmers etc.
Public receipts: Tax system has undergone serious changes or reforms over the years. The Union government levies income tax, sales tax, custom and excise duties, the State government levies sales tax on intra-state sale of goods, entertainment, alcohol, transfer of property etc., and local government extract taxes from property, public utility services, etc. therefore more than a quarter of the union government's tax revenues is commonly used with the state governments. Central government receives non-tax revenues from fiscal services, public sector dividends etc, whereas state government's non-tax revenues come from grants, interest receipts, and other economic and social services.
Financial institution: The Reserve Bank of India, Bombay Stock Exchange and the National Stock Exchange is located in Mumbai which is the commercial capital of India. To offer tax benefits and better infrastructure for setting up business, Special Economic Zones and software parks has been set up by India.
Civil services, railways and the central bank sectors were already inherited from the British during the time of independence.
India's monitory regulator, authority and supervisor of the financial organization is the Reserve Bank of India, which is the country's central bank. The RBI issues currency and is also the manager of exchange control.
The BSE Sensex is a 'value-weighted' index formed of 30 companies, which are representative of various sectors on the Exchange. The BSE is referred to as the 'barometer' of the Indian stock markets.
The National Stock Exchange is the world's third largest stock exchange in terms of transactions, and the mammoth and most advanced stock markets in India. The stock markets and other security markets of India are regulated by The Securities and Exchange Board of India.
Sectors:
agriculture: India was predominantly an agricultural economy until in the past years it somewhat transformed according to world economies. India occupies the second position in the world in terms of farm output. 18.6% of the GDP in 2005 was contributed by agriculture and related sectors like fishing, forestry and logging and provided employment for 60% of the total workforce. Since 1950, per unit are of production has increased due to the five year plans and improvements in irrigation, modern agricultural practices, technological advancements, subsidies and agricultural loans since the 'green revolution'.
Apart from the developments there have been setbacks as usual due to different problems of obsolete farming practices, size of the land holdings, inequities in land distribution and others.
Industry: With time there has been enormous reforms made in the industrial sector. There has been privatization of certain public sector industries which led to the expansion in the production of consumer goods. The industrial sector involves the transport, provision of a service, such as in pest control or entertainment, distribution and sale of goods from producer to a consumer as may happen in wholesaling and retailing etc. India ranks 14th in the world in factory output, accounting for 27.6% of the GDP and employing 17% of the total working force.
The threat of cheaper Chinese imports to the private sector run by old families firms with political connections to flourish helped to rejuvenate the management by concentrating on the design of new products, curtailing costs, technology and low labor costs.
Services: The service industry in India provides employment to 23% of the workforce. It has a massive share in the GDP, amounting to 53.8% in 2005 up from 15% in 1950. India takes the 15th position in services output. Information technology, business process outsourcing etc fall among the briskly growing sectors adding up to one third of the total output of services in the year 2000. The service sector in India is provided with a very good infrastructure and reduced communication cost, making it pretty powerful in this sector.
Banking and Finance: The banking system in India is broadly organized and unorganised. Among the organised sector it incorporates public, private, foreign owned banks, and the unorganised sectors comprise of individual/family owned bankers or money lenders, and also non-banking financial companies (NBFCs). There has been an increase in the number of bank branches, including rural areas.
Reserve Bank of India is the agency for al policy matters, and is very important in terms of strengthening Indian economy.
Liberalisation gave way for reforms in the banking system. These reforms were made in the nationalised banks as well as in the insurance sectors, private and foreign concerns.
Major public sector banks in India are Allahabad Bank, State Bank of India, Andhra bank, Bank of India etc. Private sector banks include UTI bank, Bank of Punjab, and HDFC bank etc. Standard Chartered Bank, ABN AMRO bank and such others are the multinationals in India.
Foreign direct investment in India:
Foreign direct investment of FDI in India is permissible through financial collaborations, joint ventures, preferential allotments, capital markets and so on. Where as atomic energy, arms and ammunition, railways, mining industry of certain minerals are some of the areas where the FDI is not given any liberty.
In the years 1998-99, announcements of measures for the betterment and proper functioning of FDI have been made. FDI have been permitted up to 49 % of the total equity by the government. FDI now includes "Credit Card Business" and "Money Changing Business" permissible under Non-Banking Financial Services.
FDI policy is reviewed from time to time with measures being taken for further liberalization. Proposals for foreign investments are considered by The Foreign Investment Promotion Board (FIPB).
The US Economic System
US is a market-oriented economy, where private individuals and business firms make most of the decisions, and the federal and state governments buy needed goods and services predominantly in the private marketplace. US business firms enjoy considerably greater flexibility than their counterparts in Western Europe and Japan in decisions to expand capital plant, lay off surplus workers, and develop new products. At the same time, they face higher barriers to entry in their rivals' home markets than the barriers to entry of foreign firms in US markets.
The American belief in "free enterprise" has not barred a major role for government, however. People in the US rely on government to address matters the private economy overlooks, from education to protecting the environment. And despite their advocacy of market principles, they have used government at times to nurture new industries, and at times even to protect American companies from competition. This is visible from the highly subsidized agriculture in the US. This has been a contentious issue among the trade gurus in the developing countries and they have been demanding that US slash these subsidies.
US firms are at or near the vanguard in technological advances, especially in computers and in medical, aerospace, and military equipment, although their advantage has narrowed since the end of World War II. The onrush of technology largely explains the gradual development of a "two-tier labor market" in which those at the bottom lack the education and the professional/technical skills of those at the top and, more and more, fail to get comparable pay raises, health insurance coverage, and other benefits.
Structure of the US Economy
Services have the highest contribution to the US GDP, followed by Industry. Being an industrialized nation agriculture accounts for a very marginal share in the total national income.
Among the other human development indicators, while there is a very small number living below the poverty line, all the people in America enjoy access to an improved water source. Literacy rate over the age 15 is 100% and so is the gross primary enrolment rate, with an equitable distribution between the two sexes of the population.
Despite the generally prosperous American economy as a whole, concerns about inequality continue. The black population is the most vulnerable group as global competition has threatened workers in many traditional manufacturing industries, and their wages have stagnated. During the 1980s, the federal government edged away from tax policies that sought to favour lower-income families at the expense of wealthier ones, and it also cut spending on a number of domestic social programs intended to help the disadvantaged. Meanwhile, wealthier families reaped most of the gains from the booming stock market. In the late 1990s, there were some signs these patterns were reversing, as wage gains accelerated -- especially among poorer workers. But it is still too early to determine whether this trend would continue in the 21st century.
Chinese Economy System
Beginning in the late 1978, China Economy has been moving to a more market
oriented economy.
China decollectivized agriculture, yielding tremendous gains in production. The share of agricultural output in total GDP rose from 30% in 1980 to 33% three years later. However, after that the share of agriculture has fallen fairly steadily, and by 2002 it accounted for only 15.4% of GDP. Thus , even with these improvements, agriculture accounts for only 20% of the nation's gross national product.
The structural changes gave increased authority of local officials and plant managers in the industry, permitted a wide variety of small-scale enterprises in service and light manufacturing. Due to its increasing openness to foreign trade and investment, in 1999, China Economy became the second largest economy of the world after the USA, in terms of GDP.
At present, more than half of the population depends on agriculture for living. However agriculture's contribution to GDP has remained low.
Large share of industrial production in GDP, characterized the Chinese economy, much before the start of economic reforms there.
In 1978, industry accounted for 50% of officially measured GDP. This was particularly striking because so much of the workforce remained on the land. The relative share of the services sector has since remained steady ( 33% in 2003), and the continued shrinkage in the relative contribution of agriculture has been reflected in a larger share for the industrial sector, which in 2003 accounted for around 52.3% of GDP.
China ranks first in world production of red meat. producer of rice and wheat, among cash crops, china ranks first in cotton and tobacco and is an important producer of oilseeds, silk, tea, ramie, jute, hemp, sugarcane, and sugar beets. Due to improved technology, the fishing industry has grown considerably since the late 1970s.
ROLE OF STATE vs MARKET
Until 1978, industrial output was dominated by large state-owned enterprises (SOEs). Gradually, the share of state-owned and state-holding enterprises in gross industrial output value had shrunk; in 2002 it was around 41%. However, state-owned companies, controlled by economic ministries in Beijing (Capital of China), represented only 16% of industrial output. State-holding enterprises may control large numbers of state firms, and are not 100% state-owned.
The changes in economic policy, including decentralization of control and the creation of "special economic zones" to attract foreign investment, led to considerable industrial growth, especially in light industries that produce consumer goods