ECONOMY by VIVEK SINGH

2021-06-01 06:23:37 Open / Comment

2021-05-31 17:48:30 The answer to the above question is (c). The explanation is:

If the lockdown continues and Govt. will give fiscal stimulus which means govt may reduce tax or give subsidies or cash to the people or businessmen then it will increase aggregate (total) demand in the economy. But if this demand is not met by producing/supplying the goods and services by unlocking the economy/businesses then it will definitely result in inflation.

If the aggregate (total) demand in the economy increases by 10% and supply (of goods and services) also increases by 10% then there will not be an increase in effective demand and the inflation will not increase. But if the aggregate demand increases by 10% and supply just increases by 6% then there will be effective demand of 4% in the economy and this results in inflation. That demand which is not met by supply results in effective demand. Effective demand increase in the economy necessarily increases inflation.

In the above question as the lockdown is continuing and govt giving stimulus so, aggregate demand as well as effective demand both will increase resulting in inflation. Open / Comment

2021-05-31 07:37:11 Question of the day
Govt. is saying that it will provide fiscal stimulus once the lockdown/supply restrictions are removed completely. What could be the impact if the fiscal stimulus is given without easing lockdown/supply restrictions?

(i) Aggregate demand will necessarily increase
(ii) Effective demand will necessarily increase
(iii) Inflation will necessarily increase
(iv) No impact on inflation Open / Comment

2021-05-29 15:51:19 The above is article from Indian Express. An article for general reading, but some facts you need to have a look.

1) The domestic demand of edible oil is around 24 Million Tonnes (MT) while we produce only 11 MT, resulting in imports of around 13 MT. So, more than 50% of our requirements are being met through imports. The major imports are palm oil (Indonesia, Malaysia), Soyabeen oil (Argentina, Brazil), and Sunflower oil (Ukraine, Argentina).

2) The prices of edible oil (groundnut, mustard, vanaspati, soya, sunflower and palm) have increased 50% in the last one year. And the increase is mostly due to the international factors. Even if we do not import mustard oil but since the edible oils are "close substitutes", and an increase in price of one or two major categories will result in an increase in prices in all the categories as people start shifting consumption to other categories due to cheaper prices).

3) One main reason of increase in prices is the shift in usage of edible oils from food to fuel. Other reasons are more buying by China, labour issues in Malaysia, Impact of laNina on palm and soya producing areas and other weather changes and imposition of export duty on crude palm oil in Indonesia and Malaysia

4) What we can do immediately to reduce the prices. The answer is to reduce the import duty which has increased because of imposition of cess after the budget.

5) Imports can be categorized under different categories like "free" and "restricted". In case of "free" you do not require any approval for imports other wise a permission is required.

6) The last para is quite confusing and I think they have mixed few things and its confusing and you can leave it. Open / Comment

2021-05-29 15:33:42 Open / Comment

2021-05-29 08:11:40 The above is news from Indian Express. Let us understand few points. Read it carefully.

1) The currency swap agreement between two countries (say A and B) happens at Central Bank Level. Country A gives its currency to country B and country B will give its own currency to country A. And the countries will keep on paying the interest on the currency which they have taken from the other country. And after a fixed period the swap is again reversed which means country A will get the principal amount from B and country B will get the principal amount of its currency from A. This is a kind of Standard agreement.

But now there can be certain deviations in such agreements depending on mutual agreement like:

(a) Country A takes the currency of B but B does not require/take the currency of A. See it will not impact BECAUSE country A will keep on paying the interest on the currency and amount which it has taken from B and after a fixed period country A will return the principal amount also to B. So, in this case B did not take anything from A BUT it does not matter because A has kept on paying interest on the money taken and then paid the principal. So, this is a kind of credit/loan facility for country A because B did not take any currency from A. That is why in this case it is called an (open ended) credit/loan facility. Why open ended because two countries can sign such agreements for a certain period but they will use only when required.

(b) This swap agreement can also be in the form of third currency. Now in the above news, Sri Lanka wants dollars but not Bangladeshi currency and Bangladesh do not require at all any Sri Lankan currency. So, in this swap agreement a third currency has been offered. So, Bangladesh will offer dollars (from its dollar reserves just for help) to Sri lanka and Sri lanka will keep on paying interest in dollars and after a fixed period Sri Lanka will return the (principal amount) dollars. So, ideally Sri Lanka should pay interest in dollars because it has taken dollar currency from Bangladesh but upon request of Sri Lanka, Bangladesh may allow Sri Lanka to pay interest in Sri Lankan currency. So there can be variations/exceptions and accordingly calculations can be done. Since Sri Lanka will keep on paying interest on the amount taken from Bangladesh and will return the principal amount (in dollars) too after the fixed period, SO it does not matter even if Bangladesh did not take any currency from Sri Lanka or not. AND if Sri Lanka is not able to pay the dollars (principal) amount they both the countries can adjust this in trade (imports from Sri Lanka into Bangladesh).

2) If Sri Lanka will borrow the same amount of dollars from the market, it will have to pay much higher interest rate. If Sri lank sells its own currency and purchase dollars in the forex market then its currency may start depreciating a lot. So, in such situations, currency swap agreements become helpful because these are OUT OF MARKET transactions at country level.

3) So, currency swap agreements are quite helpful in case a country's forex reserve is declining and it has obligations which can be settled only in dollars/forex like repayment of external loan or imports of some essential. Open / Comment

2021-05-29 07:50:08 Open / Comment

2021-05-28 06:55:34

Open / Comment

2021-05-27 07:09:46 Open / Comment