Month: January 2014

What is Economic Growth ?

Economic Growth Takes Place when There is Increase in the national Income of a Country Or Increase in Country’s Productive Capacity To understand the concept of Economic Growth, we use many tools like that of the  Production possibility Curve. Let us first describe this simple concept : Production Possibility Curve The PPC represents a Boundary in  the sense that it shows the current availability of resources and technical knowledge, a country cannot produce beyond its potential capacity. So the PPC is therefore a Short Run Diagram; in the long run the PPC can be increased. So it is shifted forwards or rightwards. It is generally considered that country’s PPC curve Shifts forward but there are certain possibilities that it may go leftwards. For Example: Countries that are going through warfare, Lets take Afghanistan whose Aggregate Demand decrease to a very high level during the war period and even after the war. We can also take another example of Revolution as in the country of Iran during the Khomeini revolution which flew a lot of foreign investment and a decrease Aggregate Demand during his regime. Such factors of war, natural disaster or war basically affects the factors of Consumption, Investment and Government Expenditure that as a consequence affects the Aggregate Demand which slows down the economy. Graphically describing the PPC The Above Graph shows all the possible combinations of two...

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Financial Crisis of 2008 and 2009

In 2008 the United States went through a Financial crisis. Many of these events were said to be the reflections of 1930’s great depression that brought fear to many individuals considering it’s a severe downturn in economic transactions and rapid rise in unemployment. Rise in Housing Market and Lower Interest Rate Now the scenario of Financial Crisis begin a few years earlier with a substantial rise in housing market. This rise was due to many factors one of which was the low interest rates. Theoretically lower interest rates are usually for recovery of Economy, but by making it less expensive to get a mortgage and buy a home, they also contributed to a rise in housing prices. Subprime Borrowers and Securitization In the mortgage market, the Subprime Borrowers are those with a higher risk of default on the basis of their income and credit history. Due to the Developments in the mortgage market, the subprime borrowers were easily able to get mortgages and buy homes.One other development was Securitization “ A process which practices the pooling of various types of contractual debt like residential mortgages, commercial mortgages, auto loans etc and than this pooled debt as securities to investors. Now securities backed by mortgage receivables are called Mortgage Backed Securities. “ Some Government policies encouraged this high risk lending to make the goal of home ownership more attainable for...

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Price Index

Price Index A Price Index is a measure of the average level of prices. So when we see a news on the TV that “Inflation is rising”, they are really reporting the movement of a Price Index. A price index is a weighted average of the price of a basket of goods and services. Which means that when price indexes is calculated , policy makers weight individual prices by the economic importance of each good. In other words , its just like when you buy a household product which has a higher priority than the rest of the other products so does the price index do by taking weighted average by the importance of that product. Now the most important price indexes are : Consumer Price Index (CPI) Producer Price Index (PPI) GDP Deflator Since we have already discussed GDP deflator in our earlier posts. Let us now describe the Consumer Price Index, Consumer Price Index (CPI) The most common and widely used measure of the overall price level is the consumer price index. The consumer Price Index is the measure of the average price paid by the buyers for market basket of consumer goods and Services. Remember Consumer Goods and Services. For example in United States, the government record the prices of around 80,000 goods and services for more than 200 categories. Than the prices are arranged in...

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Business Cycle

One important factor of business fluctuations is changes to aggregate Demand. Like I said before, any changes made to consumption, investment or government expenditure will change aggregate demand which as obvious will have fluctuations in Business cycle. Though we are having a combine topic of business cycle and aggregate demand. Let me first explain the basic elements of what Business cycle or fluctuations are: Definition of Business Cycle With reference to the book of Samuelson “Business Cycle are economy-wide fluctuations in total national output, income and employment , usually lasting for a period of 2 to 10 years, marked by widespread expansion or contraction in most sectors of the economy.” Phases of Business Cycle There are two main phases of Business cycle: Recession Expansion And two turning points Peaks Trough Recession is downturn time period from 2 to 12 months. Economically speaking, a decline in income, employment and total output . If Recession last longer than that, it is called Depression. In the business Cycle graph above we can see that the contraction part is basically the situation which goes through the time period of Recession. Expansion is the progressive part of business cycle which can be interpreted as an improvement in the Income, Output and Employment. Peak and trough is the turning point in the cycle. Peak leads to contraction or recession and trough leads back to the...

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Shift Factors/Determinants of Aggregate Demand

Shift Factors of Aggregate Demand We have defined the aggregate demand in our last posts .Let us now discuss the factor that shifts the aggregate demand. In the most simplest way , any factor either external or internal that effects “Consumption, Investment or Government Expenditure” will shift the aggregate demand upward or downward. Now there are many shift factors that could possibly effect C,I or G. But one of the most important factors are the policy instruments of : · Fiscal policy · Monetary policy Fiscal And Monetary Policy The word fiscal come from the root word “FISC” which refers to the “Treasury” of a government. Fiscal Policy is one of the policy instruments of Macroeconomics that deal with  government spending and taxing policies.  Monetary policy refers to the maintenance and behavior of money supply , credit and central bank policies. We will further be discussing these two policy instruments  in detail in the upcoming posts. But the logic behind these being a shift factor of Aggregate demand is quiet simple. If Taxes are raised in Fiscal policy . This effect will lead to a decrease in consumption. Which as a result will Shift the Aggregate Demand curve downwards. Graphically:     Now lets have a look at the Effect of Govt Expenditure. An increase in Govt Expenditure will as a consequence lead to an increase in the investment...

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Aggregate Demand And Its Downward Slope

Macroeconomics has a lot of diverse concepts. One of these is the Aggregate Demand. If you have gone through microeconomics, you must have came across the very first concept of the simplified Demand for  a single product. For a single product we get to see its price and quantity demanded. Or the amount which a person is willing and able to buy. But than we are only talking about a single product.  A single product demand is as follows:Now we see the willingness and ability to buy a single product But what about the demand for the overall products ? That’s where we talk about the Aggregate Demand . Though the logic behind the aggregate demand is much more complex than the simple demand. The aggregate demand (AD) is the relationship between the quantity of output demanded and the aggregate price level. In other words, the aggregate demand curve tells us the quantity of goods and services people want to buy at any given level of prices. Graphically Downward Sloping Aggregate Demand Curve Here comes the a little confusing part. We will go a bit further in defining the Aggregate Demand this time. The Aggregate Demand shows the relationship between the price level P, and the quantity of goods and service demanded Y,. Ad its is drawn for a given value of Money Supply M. When the Aggregate Demand...

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Independent Off-Price Retailer

An independent off-price retailer is one that engages in selling of goods at a less than standard whole sale prices. The retailers’ work independently and often runs the business as an entrepreneur or as part of a larger organization. Their main area of expertise lies in selling at lower prices than other retailers. An independent retailer starts off the business from the ground up. The off price retailers buy goods at reduced whole sale prices. Unlike to other department store, they don’t ask for promotional allowances, return privileges and extended payment terms. This may cause some difficulty in obtaining merchandise. From the time of business planning to the opening, the independent off-price retailer does it all. The off –price retailers buys the manufacturer’s overstocked goods at low prices. They also acquire goods from bankrupt stores, irregular products and unsold end- of- season production. However, their first preference is the first quality current products since the purchasers for off price retailers are usually those who acquire goods that is often available, easily get on deal, changes in products styles and switching off brands more time and again. The trend of independent off price retailers has grown over the years.  One of the good examples is of factory outlets. A factory outlet is owned by a manufacturer i.e. it carries only one line of merchandise of its own. Every season, from...

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Brand Personality Aaker’s

For a decade, the brand personality has been a subject of discussion for the researchers of all time. Researchers find this topic very important to study as they perceived it helps to differentiate the personalities of different brands. The first question that comes into mind is what’s a brand personality? Aaker defines the brand personality as “the set of human characteristics associated with a given brand”. Any human’s personality is affected by the factors associated with human beings such as friends, family and relatives. Similarly a brand personality can be affected by a no of factors i.e. to both related and unrelated products. A brand personality can be conceptualized based on the fact that usually the observers attribute different personality characteristics of people every time they interact. Jennifer Aaker had developed a framework to determine the brand personality by classifying into five core dimensions, each divided as a set of facet. A brand personality is a crucial important driver to analyze self expressive benefits, the brand customer relationships and the communication of useful benefits. Aaker has operated the brand personality as the human attributes of a brand. By exploring the brand personality on the basis of 114 traits across 37 brands that covers across all product categories. Whenever a brand strategist has to explore the potential of enhancing a brand personality then they have to face through this basic...

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Franchise Organization

A franchise organization is one which already exists as a successful product or service and the franchiser makes a contractual relationship with the franchisee to operate under the franchiser’s trade name and guidance in return for an initial royalty fee. Franchising involves a continuing relationship by providing the franchisee the licensed privilege to operate the business and at the same time gives assistance in organizing, training, trading, promoting and managing in exchange for monetary concerns. For a well known brand that enters into business as a franchise organization has many advantages as compared to an entrepreneur who just began a business. The most evident point to explain this situation is the availability of a well proved system of operation and training is given as how to implement it. The new franchisees can ignore many mistakes that an entrepreneur could make because the franchise organization has already perfected the daily operation through trial and error bases. A reputable franchise organization firstly works on marketing research before selling out a new outlet. This makes the franchisee more hopeful and confident that the demand of the product or service is high in the market. The organization gives a clear view about the competition that exist and how to differentiate themselves from the rival businesses. As a result, the franchisee enjoys the advantage of having a huge strength in number. They will acquire...

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What is Intensive distribution

There are three types of distribution that can be used to make all products accessible for the consumers’ i.e. Intensive distribution, selective distribution and exclusive distribution. Whenever a generic product is faced with a problem of differentiation and retention, the intensive distribution is used as a marketing strategy for such products where it is made available to customers from all sorts of sources possible with the help of various distribution channels. The customer is encountered with all the products which are available in shopping malls, discount stores, general stores etc. The brand retention will persist as the customer doesn’t have to look for a product as it’s already been made available in the market to serve the customer’s needs. The products that are sold out intensively are usually low priced or impulse purchase products. In the intensive distribution strategy, the seller’s unit costs for stocking the products are low and the ease for consumers is also seen as a critical part. The idea behind this strategy is that by making all the products readily available in the market is to boost more sales. The customers are not targeted based on their specific demographic segment necessarily. The intensive distribution becomes appropriate for products like chewing gum, bread, candy bars, soft drinks, salt, soaps etc where the key factor behind the purchasing decision is convenience. The best way to implement an...

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