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The government uses both fiscal and monetary policy to stimulate the economy (get it growing) and also to slow the rate of growth down when it gets overheated. With fiscal policy the government influences the economy by changing how the government collects and spends money. The most common tools that the government enacts to effect fiscal policy include: • Increased Spending on new government programs and initiatives (such as job creation programs). This has the effect of increasing demand for labor and can result in lower unemployment levels • Automatic Fiscal Programs are programs that take effect immediately to help correct the slide in the economy. Probably the single best example of this is unemployment insurance which a person can file for as soon as they lose their job. • Tax Cuts are another tool that government uses to stimulate demand for goods and services when the economy takes a turn for the worse. The effect of a tax break is to put more money back in the pockets of businesses and consumers which they can spend and put back to work in the economy. Monetary Policy, on the other hand, involves the manipulation of the available money supply within the economy. In the United States, the role of manipulating the money supply falls to the Fed or the central bank in the US. Not only does the Fed have overall responsibility for the country's monetary policy, but it also has responsibility for issuing currency and overseeing bank operations. An increasing money supply puts more money in the hands of consumers which they turn around and spend - a decreasing money supply does just the opposite. In order to increase or decrease the money supply, the Fed has four principal levers which it pulls to try and effect change. The first thing that the Fed can do is to alter the reserve ratio which is the percentage of assets that commercial banks have to keep on deposit at one of the Federal Reserve Banks - the higher the reserve ratio, the less money that banks can lend out to the general public. Another way the Fed can control the money supply is by adjusting the federal funds rate (fed funds rate). The federal funds rate is a short-term borrowing rate that banks have established amongst themselves for short-term borrowing. Another way the Fed can adjust the money supply is by raising or lowering the discount rate which is the rate at which commercial banks can borrow money from the Fed. The higher the rate (or interest charged on the loan), the less inclined commercial banks are to borrow and a smaller amount of money will be available in the market. And lastly, the Fed can buy and sell government bonds. The buying of bonds translates into income for the US government, which can in turn put more money into the economy.
Fiscal Policy vs Monetary Policy Fiscal policy and monetary policies are instruments utilized by governments to give impetus to the economy of a nation and sometimes they are used to curb the excess growth. The fiscal policy is the underlying principle through which the government controls the economy with the collection and expenditure of money. This is revealed in the government’s fiscal policy of a particular period. The government engages in manipulating the available fund within the economy. This is described in the monetary policy of the government. It deals with the issuing of currency and administration of banks for smooth operations. A good flow of money enables customers to have more cash at hand and in turn encourages spending. The fiscal policy relates with the programs and plans of the government and creates an increasing demand for workers resulting in lowering of unemployment position. The automatic fiscal plans correct the sliding down of economy, like the unemployment insurance to give relief to persons who lose jobs. Tax cuts are brought in to give back more money to business and consumers which they can spend in turn to strengthen the economy.
The fiscal policy revolves around the economic position of the nation and the related strategy to impose taxes to make maximum use of fund. This is not a one time affair but goes on changing every year to suit the position of the economy and its needs during the specific period. The monetary policy differs with the fiscal policy on the ground that it is exclusively for banks and the circulation of money in an efficient way. This is also changed every year on the demand and supply of the money and makes effect on the rate of interest on loans. This monetary policy acts as the key regulator through the key bank of the nation as the Federal Reserve System in US. Fiscal policy is fundamentally an attempt of the nation to give direction to the economy through manipulation of tax structures. Whereas, the monetary policy is the procedure by which the nation or its key bank influences the supply of fund, rates of interest and so on. The main objectives of both the procedures are attainment of growth of economy and its stability. In the monetary policy, the central bank attempts to bring in four principles to either increase or reduce money supply to make a change in the structure. The primary principle is to change the cash reserve ratio of commercial banks. This restraint compels banks to maintain a deposit at the central bank. The increase in the ratio means dearth of funds at the hands of commercial banks, which makes loans to consumers difficult. Accordingly interest rates on short-term borrowings are settled. The central banks also employ the process of buying or selling of government bonds to control the supply of money in the market. These are basic differences between fiscal policy and monetary policy of a country. Summary 1. Fiscal policy gives the direction of economy of a nation. Monetary policy controls the supply of money in the nation. 2. Fiscal policy relates to the economic position of a nation. Monetary policy focuses on the strategy of banks. 3. Fiscal policy administers the taxation structure of the nation. Monetary Policy helps to stabilize the economy of the country. 4. Fiscal policy speaks of the government’s economic program. Monetary policy sets the program of key banks of the nation.
Checking vs Savings
A financial institution normally offers their customers access to various accounts. There are generally two accounts that the customer can choose from; a checking account or a saving account. Although each bank widely varies its banking terms, the requisites of how you can access each account remain universal.
A checking account is normally the banking account that you use in your daily routine. It is the account from where you pay bills, withdraw money and make purchases. A saving account is where you place any monies that you wish to set aside or accumulate for a ‘rainy day.’ Money placed in a saving account will, over time, accumulate a payment of interest. Banks will normally provide each saving account an interest level. For example if you had saved $100 in a savings account with a 3% interest rate, in a 12 month period you would secure an extra $3.00 in your saving account. Â Because of the constant movement of money in a checking account, banks pay little or no interest on monies held in these accounts. If you wish to save large amounts of money it is best to place it in a savings account; that way you can earn money while the bank is securely looking after it. Checking accounts will also offer their customers an ‘overdraft’ facility on their account. If you are in good standing with your bank, they will offer you the facility of using more money than you actually have. The over drawn money is usually requested to be repaid at the end of the month. Savings accounts do not offer this clause. From a savings account, you may only withdraw what monies you have invested.
Checking accounts allow you prompt access to your funds. Â Savings accounts, on the other hand, have strict rules regarding withdrawal. Some savings accounts will require you to complete a notice period before withdrawal can be made, and some savings accounts will only let you withdraw from your account so many times in a given period. Â The benefit of holding a checking account is the flexibility that you can achieve within your account. This type of account will be issued with a debit card, allowing you access to funds when the banks are closed, and allowing you to pay for items without dealing in cash. Thanks to today’s technological advances, checking accounts are now available online. In an instant you can securely log on and complete remotely complete instructions. Unfortunately, many savings accounts do not offer such a facility for their customers. No card facilities are offered with these types of accounts; you will still have to physically visit the bank to make a withdrawal from your account. Summary
1. Checking accounts are used for everyday financial needs, like withdrawing money and making purchases. 2. Savings accounts restrict your withdrawal and do not offer instant access to your account. 3. Checking accounts can be accessed online. 4. Savings accounts are used to securely keep large sums of money that you have been saving. 5. The financial institution will pay you an interest rate for keeping your money in its account
This is one of the best approaches to stabilize and ensure the growth of the nation’s economy. As the names of ‘micro’ and ‘macro’ imply. Overall. and the position of foreign trades. unemployment. and how the price affects the growth of these markets. These two economies are mutually dependent.e. savings. and are necessary for the rise in the economy. consumption. where the government will focus of the collecting of revenue to empower the economy. Monetary Policy: This policy controls the monetary authority. The focus of macroeconomics is basically on a country’s income. international trade. between factors such as output. microeconomics has become one of the most important strategies in business and economics. investment. An important aspect of this economy. as they know how to steady the economy. and international finances. Governments make policy changes to avoid different types of economic distress. Summary: Microeconomics and macroeconomics are important studies within economics. In other words. They are the two most important fields in economics. This can create a solid impact on the economic growth. First and foremost. i. Therefore. microeconomics facilitates decisions of smaller business sectors. and together. at times. In our present time. macroeconomics maintains two strategies: Fiscal Policy: The most important aspect of fiscal policy is taxation and government spending. it may be hard to separate the functions of the two. central bank. microeconomics concentrates on the ‘ups’ and ‘downs’ of the markets for services and goods. both of these terms mentioned are sub-categories of economics itself. Microeconomics focuses on the market’s supply and demand factors. and relationships. and macroeconomics focuses on entire economies and industries. they develop the strategy for the overall growth of an organization. Its main importance is to analyze the economy forces. when the markets do not provide effectual results. that are essential to sustain the overall growth and standard of the economy. and methods of determining the supply and demand of the market. in order to sustain the growth of the economy. but with a much broader approach. macroeconomics studies similar concepts. economic growth and changes in the national income. consumer behavior. national income. On the other hand. GDP and price indices. While the two studies are different. or government of a country. macroeconomics is a vast field that concentrates on two areas. Macroeconomists are often found to make different types of models. although.Microeconomics vs Macroeconomics There are differences between microeconomics and macroeconomics. . is also to examine market failure. with the study of unemployment rates. that determine the economy’s price levels. inflation. and focuses on the availability and supply of money and interest rates.
increasing economic growth and changes in the national income. which is based on ownership. 3. 4. services and goods produced. and Gross National Income are the factors that determine the national income. The GDP also determines the local income of a nation. GDP and price indices. normally one year. these three methods are used to determine National Income. Gross Domestic Product. many factors. future growth and standard of living. and determines the economic price levels. in order to understand how the economic system is administered. the GDP can be calculated. The income method takes into account the overall income from various means of production. and government/private spending are used. The National Income determines the overall economic health of the country. measures the overall economic output of a country. GDP vs National Income “GDP” or Gross Domestic Product and National Income are financial terms that are related to the finance of a country.Macroeconomics focuses on unemployment rates. Generally.Microeconomics focuses on the market’s supply and demand factors. they are interdependent. and work in harmony with each other. The product or output method is a method that evaluates the overall value of services generated by the country.Macroeconomics is a vast field.with microeconomics focusing on the smaller business sectors. The main differences are: 1. National Income is the total value of all services and goods that are produced within a country and the income that comes from abroad for a particular period. exports. Gross Domestic Product is defined as the value of the goods and services generated within a country. Then there is the expenditure method where the sum of all expenditures incurred is taken into account In the calculation of GDP. In a very simple formula. and sustained. and macroeconomics focusing on the larger income of the nation. such as. Gross National product. which concentrates on two major areas. The GDP. trends in economic growth. of larger industries and entire economies.Microeconomics facilitates decision making for smaller business sectors. The . Microeconomics and macroeconomics are the fundamental tools to be learnt. contributions of various production sectors. 2.
positive vs normative economics Each of us must have an understanding on how the economy works. and Gross National Income are the factors that determine the national income. It is important therefore to know what economics is and learn about its different features and dimensions. ï¿½ Economic theory – provides a research outlet of economics with the use of theoretical reasoning and mathematical solutions. Summary: 1. exports. ï¿½ Applied economics – application of economic theory ï¿½ Rational economics – formulation of a framework the understanding of economic behavior.Gross Domestic Product is defined as the value of the goods and services generated within a country. contribution of various production sectors. ï¿½ Behavioral economics ï¿½ uses social and emotional factors in understanding the decisions of individuals and business entities in the performance of their economic functions.Gross Domestic Product. ï¿½ Macroeconomics – examines issues that can affect the entire economy like unemployment. We should be able to know how our behavior and spending habits affect the economy. these three methods are used to determine National Income. future growth and standard of living. services and goods produced. trends in economic growth. distribution. buyers. and “NX” is net exports minus total imports. There are several dimensions of economics. 3. monetary and fiscal policy. 5. and government/private spending are used. 2.National Income is the total value of all services and goods that are generated within a country and the income that comes from abroad for a particular period. such as. The National Income determines the overall economic health of the country. Its purpose is to explain how economies work and the interaction between its various agents. 4. which is based on ownership. The GDP also determines the local income of a nation. Economics is a social science that deals with the production. Gross National Product. . inflation. “I” is the amount of business capital. It will allow us to see if our policy makers are making the right economic decisions for us. measures the overall economic output of a country. and consumption of goods and services. Generally.general formula for determining GDP is C + G + I + NX where “C” is the National Consumer Spending. producers.The GDP.In the calculation of GDP. namely: ï¿½ Microeconomics ï¿½ examines the behavior of the consumers. many factors. “G” is the total government spending. and sellers. normally one year.
Positive economics is also called descriptive economics while normative economics is called policy economics. Positive economic statements can be tested using scientific methods while normative economics cannot be tested. 4. It is also known as Descriptive economics and is based on facts which can be subjected to scientific analysis in order for them to be accepted. Normative economic statements cannot be tested and proved right or wrong through direct experience or observation because they are based on an individualï¿½s opinion. They make distinctions between good and bad policies and the right and wrong courses of action by using their judgments. It deals with the relationship between cause and effect and can be tested. Positive economic statements are always based on what is actually going on in the economy and they can either be accepted or rejected depending on the facts presented Normative economics is the study of how the economy should be. It determines the ideal economy by discussion of ideas and judgments. and scientific formula in determining how an economy should be. Summary 1. 2. In normative economics. they complement each other because one must first know about economic facts before he can pass judgment or opinion on whether an economic policy is good or bad. 3. Positive economics deals with what is while normative economics deals with what should be. people state their opinions and judgments without considering the facts. It is also known as Policy economics wherein normative statements like opinions and judgments are used. Although these two are distinct from each other. It is based on factual information and uses statistical data. Positive economics deals with facts while normative economics deals with opinions on what a desirable economy should be. CPI vs GDP Deflator .ï¿½ Positive Economics Positive economics is the study of what and why an economy operates as it does.
Over long periods of time. even the outdated ones that are not really purchased by the consumers anymore. Summary: 1. The prices of other items used in production are not considered as well as the prices of investment goods. the GDP deflator compares the price level in the current year to level in the base year There are so many price indices out there and GDP is unlike some of them that are based on a predetermined basket of goods and services. which is short for Consumer Price Index. The GDP deflator measures a changing basket of commodities while CPI always indicates the price of a fixed representative basket. the machines and the industrial equipments that are used to make them are not considered. . CPI.CPI and GDP deflator generally seem to be the same thing but they have some few key differences. Like the GDP deflator. Consumption goods are the main priority of the CPI measure. The GDP deflator is calculated quarterly and it weights may change per calculation. In the GDP deflator. Nevertheless. CPI tends to consider insignificant goods. GDP Deflator takes into account goods that are produced domestically. both provide similar numbers. services included. Only consumer items are taken into account. If expressed mathematically. indicates the prices of a representative basket of commodities procured by the consumers. but they can diverge in shorter periods. The ratio of the two values is the GDP deflator. GDP deflator is not identical with the CPI but provides an alternative to each other as a measure of inflation. It does not bother with imported goods and it reflects the prices of all the commodities. As you can see. GDP has two types the: Nominal GDP and the Real GDP. it also compares prices of the current period to a base period. the so-called basket in a year is weighted by the market value of all the consumption of each good therefore it is allowed to change with people’s investment and expenditure patterns since people do respond to varying prices. GDP Deflator = (Nominal GDP/Real GDP) x 100 Essentially. Both are used to determine price inflation and reflect the current economic state of a particular nation. they are still considered for pricing in the fixed basket. It uses a fixed basket of goods and services and is a widely used measure of the cost of living faced by consumers of a nation. GDP is an abbreviation of Gross Domestic Product which is the overall value of all final goods and services made within the borders of a country in specified period.
The first number is classed as your ‘gross income’. the more you have to pay. Your pay slip will contain a set of two figures. but your company has made no money during the financial year. the lower your income becomes and the less the government can tax you for. An easy calculation is as follows.2. The more you earn. GDP deflator frequently changes weights while CPI is revised very infrequently. The government looks at the amount we earn. Now comes the tricky bit because we live in a democratic society we are expected to pay a certain level of tax to the state. Â It is the amount your employer has agreed to pay you for either a week or months worth of work before the government charges you any taxes. You can often find yourself with an extremely depleted final figure after all the taxations are deducted Now comes the tricky bit because we live in a democratic society we are expected to pay a certain level of tax to the state. the more you have to pay. The level of your gross income determines what level of tax you have to pay. The government looks at the amount we earn. Business Net Income is even more confusing for the business owner. This calculation becomes a slightly more complex if you run a business or large corporation. Both personal and business finances can be greatly affected if you lack this relevant knowledge. If your calculation generates a negative figure. 3. Of course the benefits of this are that the more you deduct. Different countries have different levels of deductions and the government has the right to deduct your gross income accordingly. Â To be fully in control of your finances you need to understand the tangible differences between the two. your wages are determined by numerous factors. Cost per unit of sales ‘“ total cost of goods sold = Gross profit. Many people face utter confusion when asked to state the difference between gross and net income. Different countries have different levels of deductions and the government has the right to deduct your gross income accordingly. CPI will consider imported goods because they are still considered as consumer goods while GDP deflator will only contain prices of domestic goods Gross vs Net Income. The list that you can claim for is endless. In order to calculate your gross income from the business. but also any operating expenses that have occurred while running your business. you first need to take away the cost of the goods. The level of your gross income determines what level of tax you have to pay. it is unfortunate. Summary . Net income is calculated by subtracting not only the cost of goods. As an employee. You can often find yourself with an extremely depleted final figure after all the taxations are deducted. The more you earn.
But. [The image shows the GDP growth per capita of each country.1. gross income is the salary that your employer pays you before deductions. 2. is extremely high when it comes to countries like Saudi Arabia. government spending. As seen in the image China has the highest GDP growth in the world] . business and forecasting of economic trends. exports with imports subtracted from the total. the formula to calculate GDP is addition of consumption. gross income is established by the following calculation: Cost per unit of sales ‘“ total cost of goods = Gross Profit. It includes three variants which are: • • Nominal GDP: is the production of services and goods that are valued at the current price prevalent in the market. Many different taxes are deducted from your earnings 5. GNP captures an image of how the nationals of a particular country are faring financially. For an individual. GNP refers to the GDP added to the total amount of capital gain from all investments made abroad with the amount of income that has been earned by foreign nationals in that country subtracted from the total. GNP ignores the production area but focuses totally on the nationals of a particular country and businesses and industries owned by them irrespective of where they are located. Both terms are used in the sectors of finance. This is the reason the difference between the two is very trivial when it comes to America. you are left with what is known as your net income. On the other hand. Both individual employees and businesses pay tax in relation to their gross salary or profit. GDP is also taken into account on the basis of the current prices in the period being studied. 3. In countries where there is very high foreign investment. For a company. 4. Further. Once the tax has been deducted from your gross earnings. But while. GDP captures an image of the domestic economic strength of a country. Meanwhile. investment. GNP vs GDP GNP or gross national product and GDP or gross domestic product are both measures of economic development. then you refer to it as that country’s GDP. When you calculate the estimated value that defines the worth of any country’s services provided and production carried out over a whole year. Real GDP: is the production of goods and services that are valued at constant prices and are not affected by market fluctuations. the GDP is always much higher than the GNP. This calculation helps economists to figure out if production in a country has improved or not without any reference to how the purchasing power of the country’s currency has changed.
the Gaming and VFX industry. the term GDP stands for Gross Domestic Product. it does not necessarily mean that there is also a growth in the services and goods provided. that occurs throughout the year. ‘NX’ ‘“ This refers to the net exports of a country. Inflation refers to the rise in prices of goods on a yearly basis. Summary: The main differences between Nominal GDP and Real GDP are: . ‘C’ ‘“ Refers to all types of consumer spending or private consumption that occurs within a country’s economy. including exports and imports. Real GDP indicates costs according to various base years. and it is defined as the cost of all the services and goods that are available in a country. It is essential to calculate GDP on an annual basis for all types of major sectors. The Real GDP calculation for the year is the same as the amount determined for Nominal GDP. ‘I’ ‘“ Refers to the capital expenditure of businesses. Statistical analysis has shown a wider outlook in the growth of the economic conditions. Basic growth has been seen in the E & M industry. therefore. like government outlays. that is stated in the price level for the base year.0 percent. Real GDP is the estimation of national output. and investments that arise. and is the macroeconomic gauge of the structure of an economy. public consumption. but accounts for inflation as well. and the growth has been even more evident in the recent years. as current dollars can also be specified as nominal dollars. The E & M industries include the sectors of Television. and the goods produced. This shows the growth of the Nominal GDP as a percentage. Animation. Therefore. whereas. and the inflation rate. and the Internet Advertising industry. and which has been accustomed to allow for inflation. but growth is predicted to resume shortly. ‘G’ ‘“ This refers to the amounts of government spending. although. This would indicate the Nominal GDP.Nominal GDP vs Real GDP First of all. The size of a population can affect the Real GDP. This is due to the general decrease in market activity. exports and imports. The formula to calculate Real GDP is: Nominal GDP/GDP Deflator x 100. Growth Domestic Product is the rate of services and final goods. a constant change in business strategies and plans is required. which refers to the year in which the services and goods are produced. Real GDP focuses on price changes. Film. Inflation indicates the income status of an economy. Gross Domestic Product is measured in current dollars. Nominal GDP indicates the present-time prices of the types of services available. It is found that industries in many countries have grown at a fast pace due to domestic GDP. the present financial crisis has lead to a deceleration in this industry by 8. if there is a growth in the GDP. The basic formula for calculation is: GDP = C + G + I + NX. Print and Media. Radio Advertising.
is that the Gross National Income is based on location. which comprises of the Gross Domestic Product along with the income obtained from other countries (dividends. are economic terms that deal with National income. whereas the GNI is the value produced by all the citizens. The GNI and GDP are often considered to be the opposite sides of the same coin. Gross Domestic Product helps to show the strength of a country’s local income.Real GDP is the costs of the services rendered. Gross Domestic Product helps to show the strength of a country’s local income. Gross National Income helps to show the economic strength of the citizens of a country. GNI is based on location. 4. whereas the Gross national Income is the value produced by all the citizens. It is the market value of all services and goods within the borders of a nation. Gross National Income helps to show the economic strength of the citizens of a country. GDP is said to be the measure of a country’s overall economic output. as the firm is owned by US citizens even though it is located in another country. 2. Summary: 1. Suppose a firm in the United States has an establishment in Canada. One of the main differences between the two. the profits from the products will not be part of the US Gross Domestic Product. it is easier to understand with an example. The GNI is the total value that is produced within a country. On the other hand. On the other hand. It can also be said that GDP is the value produced within a country’s borders. which comprises of the Gross Domestic Product along with the income obtained from other countries (dividends. while Gross Domestic Product is based on ownership. this would count towards the US Gross National Income. 2. and goods produced. 3. as production has not taken place in another area. Well. or Gross National Income. and GDP is based on ownership . Gross Domestic Product is the value produced within a country’s borders. Well. and GDP. The GNI is the total value that is produced within a country. interests). interests).1. and goods produced. GNI vs GDP GNI. that is indicated by various base years. However. or Gross Domestic Product. what actually is Gross National Income and Gross Domestic Product? The GDP is said to be the measure of a country’s overall economic output.Nominal GDP represents the current prices of all types of services. So. one can see that the GNI and GDP differ in all features.
expenses must be paid out of revenue. namely earnings and profit are not merely synonyms. Profit Before Interest and Taxes. EBIT and PBIT are used as a measure of a firm’s profitability that excludes interest and income tax expenses. earnings (also called revenues) pertain to the money a company collects. In accounting and finance. on the other hand. Furthermore.EBIT vs PBIT In accounting and finance. It is also commonly used by investors to compare companies. investors take note PBIT when viewing income statement. a poor investment choice. in actuality. the only difference would be the first letter of their respective acronyms. there’ll therefore be a variation in computing EBIT and PBIT. PBIT is mostly used by creditors to screen companies with minimal depreciation and amortization activities. the more profitable the company is likely to be. While in gross profit. selling and administrative expenses. For most enterprises. revenue is deducted with operating expenses ( OPEX ) excluding interest and taxes. identifying the most profitable company in terms of the efficiency of its operation. it’s not recommended to use EBIT to appraise an individual company’s profitability. revenue is deducted with only one component of the OPEX which is cost of goods sold (COGS ). is the money left after all expenses are paid. commonly comprised of the cost of goods sold. Basing the evaluation solely on EBIT may conceal the fact that a seemingly promising company is. But one must note that what these first letters stand for. However. Come to think of it superficially. EBIT is an acronym for Earnings Before Interest and Taxes while PBIT. . it is important to note that in PBIT. PBIT is also known as operating income. In business terms. There’s in fact a noteworthy difference between them. Simply put. Given these definitions. EBIT evaluates a company’s earning potential and serves as a crucial consideration in changing the capital structure of business. Some confuse it with gross profit. but it is also used as a replacement for EBIT and operating profit. from revenues. Even supposing a profoundly leveraged business may appear profitable using EBIT. Noticeably. To clarify this misconception. The remainder after all incurred manufacturing or delivery costs will be the profit. it may in fact be at the losing end once interest on its significant debt load is taken into consideration. EBIT or operating income is a measure of a firm’s profitability that excludes interest and income tax expenses. since it represents the amount of cash that the companies can earn to pay off creditors. PBIT is equal to Net profit + Interest + Taxes. Taxation can also pull a company’s profitability significantly. Profit. PBIT. EBIT is equal to Operating Revenue ‘“ Operating Expenses (OPEX) + Non-operating Income. likewise measures an enterprise’s profitability by subtracting operating expenses from revenue excluding tax and interest. operating profit or even operating earnings. there’s a significant deal of similarities between the nature of EBIT and PBIT. Operating income is operating revenues minus operating expenses. In most cases. also interchanged with operating income. And it is but necessary to cite these before proceeding with the determining the dissimilarities between EBIT and PBIT. specifically applicable to a firm that has no nonoperating income. The larger the EBIT value. EBIT is derived by subtracting expenses.
and other emoluments. A salary includes the basic amount. these may vary from one company to another. super annuation and medical insurance. is that some components are included in one. house rent allowance and other allowances. gross salary is the amount an employee receives as a salary. 2) EBIT = Operating Revenue ‘“ Operating Expenses (OPEX) + Non-operating Income. dearness allowance. city compensatory allowance. A gross salary will not include the contributions to the PF and gratuity. reimbursement of conveyance/telephone/medical bills. . dearness allowance. whereas. The difference between CTC and gross salary. CTC vs Gross Salary A salary is the periodic payment that an employee receives from an employer in return for the work he provides. non-cash concessions and stock option plans are all included in the CTC. Cost to Company is the amount that an employer will spend on an employee in a particular year. or Cost to Company. the employer’s contribution is not added to the gross salary. Though these are included in the CTC. 3) EBIT is mostly used to evaluate a company’s profitability in comparison to others. before any deductions. house rent allowance. but not in the other. An employee. incentives. it is the amount that the employer has committed to pay an employee on a monthly basis. Cost to Company is the amount that an employer will spend on an employee in a particular year. PBIT is frequently used by creditors to measure a company’s earning and paying capacity. gratuity. While the employer’s contribution is added to the Cost to Company. and other benefits that are given. among other things. reimbursements. The components of a gross salary includes basic pay. certain components are different for individual employees.Summary 1) Earnings Before Interest and Taxes (EBIT) and Profit Before Interest and Taxes (PBIT) both measure of a firm’s profitability that excludes interest and income tax expenses. contributions and tax benefits. will always look towards CTC. when seeking employment. PBIT is equal to Net profit + Interest + Taxes. before any deductions. gross salary is the amount an employee receives as a salary. When talking of Cost to Company. Cost to Company refers to the amount that the employer is willing to spend on an employee. Leave encashment. and gross salary. it involves salary. Summary: 1. and other components are the same for all employees. whereas. The reimbursement includes bonuses. Contributions refer to the amount that the employer contributes to the PF. For gross salaries. In regards to gross salary.
3. given to such players are huge in term of taxes . dearness allowance. Investment Companies. is perceived to be inferior to FDI because it only widens and deepens the stock exchanges and provides a better price discovery process for the scrips. thereby puling down not only our share prices but also wrecking havoc with the Indian rupee because when FIIs sell in a big way and leave India they take back the dollars they had brought in. on the other hand. the fluctuations in the stock market is generally due to the FII Investments . CTC involves salary. now that would be FDI. house rent allowance and other allowances. brings in more and better products and services besides increasing the employment opportunities and revenue for the Government by way of taxes. the employer’s contribution is not added to the gross salary. Pension Funds. that is. However if Lehman has bought shares of Unitech though secondary markets (stock trading market) it would have been an FII. On the other hand. A gross salary will not include the contributions to the PF and gratuity. Besides. and other emoluments. reimbursements. contributions and tax benefits. into the stock market. the components of a gross salary includes basic pay. FII. Salary includes the basic amount. Therefore we could see Lehman investing 15% in say Unitech. FII is a fair-weather friend and can desert the nation which is what is happening in India right now. FII funding is a paramount maker of stock markets and there selling or buying moves the stock in a day. All other differences flow from this primary difference. There investments are in the stock market whereas FDI is generally a long term commitment to a particular company in a sector in terms of equity investment by some foreign entity. The employer’s contribution is added to the Cost to Company. cause the rules are eased the investor can leave the market at Any point of time. Insurance House's is a short term benefit to the country and the rules and regulations to enter the Indian Market are not much. Do you know the difference between FDI and FII? What is foreign investment? . How is relation between FDI and FII? FII generally means portfolio investment by foreign institutions in a market which is not their home country. among other things. The Economy high and low depends on the FDI's Investment where as the Stock mark fluctuations are generally because of FII Foreign direct investment (FDI) flows into the primary market whereas foreign institutional investment (FII) flows into the secondary market. These institutions are generally Mutual Funds. FDI also have to follow a high rules and regulations to enter the market and the subs.2. city compensatory allowance. house rent allowance. FDI is perceived to be more beneficial because it increases production. dearness allowance.FDI have long term commitment and hence we see flight of capital in terms of FII outflows but not generally in FDIs.
and a degree of influence over. net FDI inflows amounted to $8. No such benefit accrues in the case of FII inflows. foreign investment also facilitates flow of technology into the country and helps the industry to become more competitive. While this might be true of individual funds. the effect is to increase capital availability in general. In some areas like gambling or lottery. How does the Indian government classify foreign investment? The Indian government differentiates cross-border capital inflows into various categories like foreign direct investment (FDI). India opened up to investments from abroad gradually over the past two decades. The panel feels FDI inflows would increase to $19. FDI brings not just capital but also better management and governance practices and. The know-how thus transferred along with FDI is often more crucial than the capital per se. with the aim of increasing its capacity/productivity or changing its management control. According to the Prime Minister’s Economic Advisory Committee. although the search by FIIs for credible investment options has tended to improve accounting and governance practices among listed Indian companies. creating volatility in the stock market and exchange rates. in this case too. A simple and commonly-used definition says financial investment by which a person or an entity acquires a lasting interest in.Any investment flowing from one country into another is foreign investment. no addition to production capacity takes place as a direct result of the FDI inflow. Inflow of investment from other countries is encouraged since it complements domestic investments in capital-scarce economies of developing countries. cumulatively. especially since the landmark economic liberalisation of 1991. addition to production capacity does not result from the action of the foreign investor – the domestic seller has to invest the proceeds of the sale in a manner that augments capacity or productivity for the foreign capital inflow to boost domestic production. no foreign investment is allowed. Just like in the case of FII inflows.5 billion in 07-08. Translating an FII inflow into additional production depends on production decisions by someone other than the foreign investor — some local investor has to draw upon the additional capital made available via FII inflows to augment production. the management of a business enterprise in a foreign country is foreign investment. In the case of FII investment that flows into the secondary market.5 billion in 2006-07 and is estimated to have gone up to $15. . various types of technical definitions –– including those from IMF and OECD –– are used to define foreign investment. rather than availability of capital to a particular enterprise. FDI up to 100% is allowed in sectors like textiles or automobiles while the government has put in place foreign investment ceilings in the case of sectors like telecom (74%). often. Direct investment to create or augment capacity ensures that the capital inflow translates into additional production. non-resident Indian (NRI) and person of Indian origin (PIO) investment. Why does the government differentiate between various forms of foreign investment? FDI is preferred over FII investments since it is considered to be the most beneficial form of foreign investment for the economy as a whole. FDI tends to be much more stable than FII inflows.7 billion during the current financial year. Globally. FII inflows have only provided net inflows of capital. Apart from helping in creating additional economic activity and generating employment. Moreover. There is a widespread notion that FII inflows are hot money — that it comes and goes. Direct investment targets a specific enterprise. technology transfer. In the case of FDI that flows in for the purpose of acquiring an existing asset. foreign institutional investment (FII).
FDI vs FII Both FDI and FII is related to investment in a foreign country. is allowed to the extent of 49%. But in Foreign Direct Investment. it is also possible for an FII to declare itself a 100% debt FII in which case it can make its entire investment in debt instruments. On the contrary. FIIs include asset management companies. FII or Foreign Institutional Investor is an investment made by an investor in the markets of a foreign nation. endowment foundations. In simple words. In an FDI. However. investment trusts as nominee companies. All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company. there are peculiar cases like airlines where foreign investment. the government also introduces new regulations from time to time to ensure that FII investments are in order. However. the companies only need to get registered in the stock exchange to make investments. In addition. charitable trusts and charitable societies. . FDI or Foreign Direct Investment is an investment that a parent company makes in a foreign country. but FDI from foreign airlines is not allowed.According to the government’s definition. For example. In FII. including FII investment. pension funds. FII can enter the stock market easily and also withdraw from it easily. This difference is what makes nations to choose FDI’s more than then FIIs. FIIs are required to allocate their investment between equity and debt instruments in the ratio of 70:30. But FDI is quite different from it as they invest in a foreign nation. It aims to increase the enterprises capacity or productivity or change its management control. No individual FII/sub-account can acquire more than 10% of the paid up capital of an Indian company.45 of the same date. They can also invest in listed and unlisted securities outside stock exchanges if the price at which stake is sold has been approved by RBI. It helps in increasing capital availability in general rather than enhancing the capital of a specific enterprise. FDI is more preferred to the FII as they are considered to be the most beneficial kind of foreign investment for the whole economy. mutual funds. investment through participatory notes (PNs) was curbed by Sebi recently. 2001 and FEMA Notification No. The Foreign Institutional Investor is also known as hot money as the investors have the liberty to sell it and take it back. the capital inflow is translated into additional production. The government allows greater freedom to FDI in various sectors as compared to FII investments. What are the restrictions that FIIs face in India? FIIs can buy/sell securities on Indian stock exchanges. this is not possible. But FDI cannot enter and exit that easily. The FII investment flows only into the secondary market. Foreign Direct Investment only targets a specific enterprise. university funds. incorporated/institutional portfolio managers or their power of attorney holders. unless the Indian Company raises the 24% ceiling to the sectoral cap or statutory ceiling as applicable by passing a board resolution and a special resolution to that effect by its general body in terms of RBI press release of September 20. but they have to get registered with stock market regulator Sebi.
you grow to understand that air pollution from North America affects air quality in Asia. Foreign Direct Investment targets a specific enterprise. When you think of the world as a system over space. to which overriding priority should be given. The FII increasing capital availability in general. Summary 1.The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor. Though the Foreign Institutional Investor helps in promoting good governance and improving accounting. and a system that connects time. 3. it does not come out with any other benefits of the FDI. FII is an investment made by an investor in the markets of a foreign nation. While the FDI flows into the primary market. and that pesticides sprayed in Argentina could harm fish stocks off the coast of Australia. But FDI cannot enter and exit that easily. FDI not only brings in capital but also helps in good governance practises and better management skills and even technology transfer. On the contrary. The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor What is Sustainable Development? Environmental. 4. . and the idea of limitations imposed by the state of technology and social organization on the environment's ability to meet present and future needs. the FDI’s are long term. FII can enter the stock market easily and also withdraw from it easily. in particular the essential needs of the world's poor. the FII flows into secondary market. FDI is an investment that a parent company makes in a foreign country. also known as the Brundtland Report: "Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. but the most frequently quoted definition is from Our Common Future. It contains within it two key concepts: • • the concept of needs. economic and social well-being for today and tomorrow Sustainable development has been defined in many ways. 2." All definitions of sustainable development require that we see the world as a system—a system that connects space. While FIIs are short-term investments.
Making environmentally conscious decisions about your business operations can be good for the bottom line. but what if the air in your part of the world is unclean? And it's good to have freedom of religious expression. One of the basic assumptions underlying the definition of sustainable development is that environmental considerations have to be entrenched in economic decision-making. Paying attention to sustainable development is especially sensible when so many of our potential customers and clients are actively seeking greener products and services. and try to ensure that our communities are healthy. we know that society. pleasant places to live. organic products can be sold for a higher price in the market. and consumers are willing to pay that price. a shift to more sustainability must take place at the local level. 1987 Does your business fit this definition of sustainable development? Sustainable development is a worthy goal for small businesses everywhere. in the places where we live.And when you think of the world as a system over time. It's good to be physically healthy. but what if you can't feed your family? The concept of sustainable development is rooted in this sort of systems thinking. but what if you are poor and don't have access to education? It's good to have a secure income. While our government has made a strong commitment to practicing sustainable development and implementing policies to support it. full sustainable development is impossible. It's that basic optimism that motivates IISD's staff. As members of our various communities. But we can address them. and shop" (The Sustainability Report). you start to realize that the decisions our grandparents made about how to farm the land continue to affect agricultural practice today. It helps us understand ourselves and our world. for instance. associates and board to innovate for a healthy and meaningful future for this planet and its inhabitants Sustainable Development "Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It just makes sense to pay attention to the environmental impact of our economic practices." . almost 80 per cent of the population is urban. We also understand that quality of life is a system. Therefore. if small businesses don't get on board. . too. the environment. The problems we face are complex and serious—and we can't address them in the same way we created them. Many food producers have switched to organic production methods. "In Canada. and the economy are interconnected. and the economic policies we endorse today will have an impact on urban poverty when our children are adults.Brundtland Commission. Witness the growth of industries such as "organic" food. work.
But what about where you work? Are you also operating your business in an environmentally conscious fashion? For small businesses to be actively involved in sustainable development. an ecologically sustainable economy must be capable of supporting viable populations of native species.If you're like me. geothermal. Ultimately. reuse. These are all important values. too. sustainable economies cannot be based on the use of nonrenewable resources. the stocks of non-renewable resources. The following page will give you the information you need to put the definition of sustainable development into action. and acceptable levels of other environmental qualities that are not conventionally valued as resources for direct use by humans . systems of resource use must not significantly degrade any aspects of environmental quality. and solar. but their importance is rarely measured in terms of dollars. water. but that flow must be maintainable over the long term. sustainable economies must be supported by the use of renewable resources such as biological productivity. However. and recycle in your home. including those not assigned value in the marketplace. To be truly sustainable. as well as inorganic components such as water and the atmosphere. viable areas of natural ecosystems. such as metals. as are many ecological services such as the cleansing of air. and without causing environmental damage that challenges the survival of other species and natural ecosystems. The notion of sustainable development recognizes that individual humans and their larger economic systems can only be sustained through the exploitation of natural resources. and petroleum. Central to the notion of sustainable development is the requirement that renewable resources are utilized in ways that do not diminish their capacity for renewal. Consequently. they need to adopt environmentally sound business principles and translate these into action. A system of sustainable development must be capable of yielding a flow of resources for use by humans. can only be diminished by use. The goal of sustainable development is to provide resources for the use of present populations without compromising the availability of those resources for future generations. wind. You reduce. you're an environmentally conscious person. so that they will always be present to sustain future generations of humans. By definition. and you've taught your children to do these things. coal. even renewable resources may be subjected to overexploitation and other types of environmental degradation. Biodiversity is one example of a so-called non-valuated resource. In addition. and land of pollutants by ecosystems. and the maintenance of agricultural soil capability. Built into this concept is an awareness of the animal and plant life of the surrounding environment. Sustainable Development Sustainable development is the management of renewable resources for the good of the entire human and natural community. and biomass energy sources. the provision of oxygen by vegetation.
Production Possibility Curve The choices that society must take are often presented in terms of production possibility curve. This concept is called the principle of increasing marginal opportunity cost. 100 80 60 40 20 0 15 14 12 9 5 0 Row. Where output . You can get more of something only by giving up something else. The production possibility curve is related to the concept of opportunity cost that you were introduced earlier. The phenomenon occurs because some resources are better suited for the production of butter than for the production of guns. The production possibility curve demonstrates that: 1. There is a limit to what you can achieve. resources. A production possibility curve is created from a production possibility table by mapping the table in the twodimensional graph. 0 4 7 9 11 12 % of resources devoted to Pounds of production of butter. butter. and technology. Every choice you make has an opportunity cost. 2. This information has been plotted on the graph. % of resources devoted to production of guns 0 20 40 60 80 100 Number of guns.a table that lists a choice's opportunity costs by summarizing what alternative outputs you can achieve with your inputs. The information in the production possibility table can be presented graphically in a diagram called a production possibility curve.a result of an activity. That is the opportunity cost of choosing guns over butter increases as we increase the production of guns. and we use the better ones first. A B C D E F . The table contains the information on the trade -off between the production of the guns and butter. The downward slope of the opportunity cost curve represents the opportunity cost concept you get more of one benefit only if you get less of another benefit. trading butter for guns. A production possibility curve is a curve measuring the maximum combination of outputs that can be obtained from a given number of inputs. given the existing institutions. input . As we move along the production possibility curve from A to F. It is a graphical representation of the opportunity cost concept. Opportunity cost can be seen numerically with a production possibility table .is what you put into a production process to achieve an output. we get fewer and fewer for each pound of butter given up.
while point Y represents the goals that the economy cannot attain with its present levels of resources. Production Possibility Frontier (PPF) Under the field of macroeconomics. B and C . Point X represents an inefficient use of resources.all appearing on the curve . points A. the production possibility frontier (PPF) represents the point at which an economy is most efficiently producing its goods and services and. to achieve efficiency. The production possibility frontier shows there are limits to production. Imagine an economy that can produce only wine and cotton. allocating its resources in the best way possible. must decide what combination of goods and services can be produced. According to the PPF. so an economy. B.represent the most efficient use of resources by the economy. Let's turn to the chart below. resources are being managed inefficiently and the production of society will dwindle. . If the economy is not producing the quantities indicated by the PPF. therefore.A.
C. B. wine output will be significantly reduced while the increase in cotton will be quite small. by moving production from point A to B. it will produce less wine than it is producing at point A. that the country is not producing enough cotton or wine given the potential of its resources. Point X means that the country's resources are not being used efficiently or. and C all represent the most efficient allocation of resources for the economy. if the economy moves from point B to C. Point Y. represents an output level that is currently unreachable by this economy. Keep in mind that A. A new curve. As the chart shows. Alternatively. the nation must decide how to achieve the PPF and which combination to use. Output would increase. when the PPF shifts . the economy must decrease wine production by a small amount in comparison to the increase in cotton output. it would have to divert resources from making wine and. When the PPF shifts outwards. would represent the new efficient allocation of resources. on which Y would appear. in order for this economy to produce more wine. If more wine is in demand. it must give up some of the resources it uses to produce cotton (point A). consequently. as we mentioned above. D. and the PPF would be pushed outwards. If the economy starts producing more cotton (represented by points B and C). As we can see. the time required to pick cotton and grapes would be reduced. more specifically. the cost of increasing its output is proportional to the cost of decreasing cotton production. if there was a change in technology while the level of land. However. However. we know there is growth in an economy. labor and capital remained the same.
a country can concentrate on the production of one thing that it can do best. Giving up these opportunities to go to the movies may be a cost that is too high for this person. . what is valued more than something else will vary among people and countries when decisions are made about how to allocate resources. C. B. This is important to the PPF because a country will decide how to best allocate its resources according to its opportunity cost. is determined by his or her needs. Similarly.inwards it indicates that the economy is shrinking as a result of a decline in its most efficient allocation of resources and optimal production capability. forgo ice cream in order to have an extra helping of mashed potatoes. Country B would need to give up more cotton than Country A to produce the same amount of cars. But you can always change your mind in the future because there may be some instances when the mashed potatoes are just not as attractive as the ice cream. if production of product A increases then production of product B will have to decrease accordingly. County A has a comparative advantage over Country B in the production of cars. If he or she were to buy the most expensive service. let's look at a hypothetical world that has only two countries (Country A and Country B) and two products (cars and cotton). The opportunity cost of producing both cars and cotton is high for Country A. Let's look at another example to demonstrate how opportunity cost ensures that an individual will buy the least expensive of two similar goods when given the choice. By using specialization. for Country B. the previous wine/cotton example shows that if the country chooses to produce more wine than cotton. it would need to divide up its resources. the slope of the PPF will always be negative. Opportunity Cost Opportunity cost is the value of what is foregone in order to have something else. Thus. Comparative Advantage and Absolute Advantage Specialization and Comparative Advantage An economy can focus on producing all of the goods and services it needs to function. which has an abundance of steel. And because scarcity forces an economy to forgo one choice for another. You may. has an abundance of fertile land but very little steel. rather than dividing up its resources. Therefore. An economy can be producing on the PPF curve only in theory. leading him or her to choose the less expensive service. Because it requires a lot of effort to produce cotton by irrigating the land. time and resources (income). Each country can make cars and/or cotton. economies constantly struggle to reach an optimal production capacity. For example. A shrinking economy could be a result of a decrease in supplies or a deficiency in technology. assume that an individual has a choice between two telephone services. therefore. In reality. Country A would have to sacrifice producing cars. which will have to give up a lot of capital in order to produce both. For you. For example. would need to give up more cars than Country B would to produce the same amount of cotton. for instance. that individual may have to reduce the number of times he or she goes to the movies each month. wants. Now suppose that Country A has very little fertile land and an abundance of steel for car production. This value is unique for each individual. Therefore. Country B. the opportunity cost of producing both products is high because the effort required to produce cars is greater than that of producing cotton. the mashed potatoes have a greater value than dessert. If Country A were to try to produce both cars and cotton. on the other hand. but this may lead to an inefficient allocation of resources and hinder future growth. Remember that opportunity cost is different for each individual and nation. Trade. Each country can produce one of the products more efficiently (at a lower cost) than the other. The opportunity cost of an individual's decisions. Country A. the opportunity cost is equivalent to the cost of giving up the required cotton production.
I could even spend the day looking for a better job right? I give up all of these things if I choose . each country will be exchanging the best product it can make for another good or service that is the best that the other country can produce. in theory. both countries will be able to enjoy both products at a lower opportunity cost. For example. Opportunity cost is the cost we pay when we give up something to get something else. There can be many alternatives that we give up to get something else. Let?s look at our examples from above. will no longer be lacking anything that they need. If they trade the goods that they produce for other goods in which they don't have a comparative advantage. Or. OPPORTUNITY COST Should I go to work today? Should I go to college after high school? Should the government spend money on a new weapon system? These are decisions that are made everyday. if Country C specializes in the production of corn. what is the cost of our decisions? What is the cost of going to work. If you have a job. For example. Better quality resources can give a country an absolute advantage as can a higher level of education and overall technological advancement. Country A may have a technological advantage that. enables the country to manufacture more of both cars and cotton than Country B. Determining how countries exchange goods produced by a comparative advantage ("the best for the best") is the backbone of international trade theory. It is not possible. I could sleep in. A country that can produce more of both goods is said to have an absolute advantage. Furthermore. but the opportunity cost of a decision is the most desirable alternative we give up to get what we want. or the cost of not buying that weapon? In economics it is called opportunity cost. or not to go to college? Finally what is the cost of buying that weapon system. If it is a nice day I could take my dog to the park and play all day. This method of exchange is considered an optimal allocation of resources. even though countries both have the same amount of inputs. with the same amount of inputs (arable land. what do you give up to go to work? There are many possibilities. for a country to have a comparative advantage in everything that it produces. whereby economies. however.and Country B has a comparative advantage over Country A in the production of cotton. labor). it can trade its corn for cars from Country A and cotton from Country B. so it will always be able to benefit from trade. or the decision not to go to work? What is the cost of college. Specialization and trade also works when several different countries are involved. Absolute Advantage Sometimes a country or an individual can produce more than another country. specialization and comparative advantage also apply to the way in which individuals interact within an economy. however. Now let's say that both countries (A and B) specialize in producing the goods with which they have a comparative advantage. steel. Like opportunity cost.
What I get from working is a greater benefit than the cost of giving up these things. People with college experience contribute time and money to charitable causes at a higher rate than those with less education. We could be working and earning money instead of going to college. How do we know that college is such a good thing? How much college do we need? Let?s look at some numbers from a 2002 study on education from the Institute of Government and Public Affairs: ?There are distinct benefits of a college education.547 people to get health care (Centers for Medicare and Medicaid Data Compendium) or. Overall.7 million for the ballistic missile defense system (Center on Arms Control and Nuclear Proliferation). showed the following benefits: • • • • Higher Earnings . We are all told to go to college so you can get a good education and that will translate into a good job. opportunity cost is the most desirable thing given up not the aggregate of the things we gave up. we will spend four or more years going to classes.000 in future earnings. Finally we will be giving up free time for study time that could be used to do other things. Increased levels of education are associated with the increased likelihood of voting or registering to vote.384 scholarships for university students (National Center for Education Statistics). That same money could pay for 27. Also. Labor force participation rates and employment rates for people aged 25 and over increase with increased levels of education. and will help your child become a better-rounded individual. Let?s look at the college example. as a fraction of overall federal spending. and an opportunity to meet many different people. $150. So what are the costs? There are monetary costs for sure. health care. In addition. college can provide many other benefits that are less tangible. the entire college experience will provide your child with a lifetime of benefits?. by the Institute of Government and Public Affairs for the Illinois Board of Higher Education.Earning a bachelor?s degree provides the average student with over $590. These represent real choices that the government must make with our Tax dollars.25 million in future earnings. A study conducted in April of 2002. the ability to think critically. The opportunity costs in this case depend upon what you value more military spending. Benefits include increased self-awareness. 37. Similarly a professional degree provides a present value to the student of almost $1. As we can see there are many benefits to a college education. But. or college scholarships.to go to work. . What about spending money on a missile defense system? In the fiscal year 2006 budget the taxpayers of Colorado will spend.
and teachers. Resources are Land. Goods and services are the things that we buy like mp3 players or hair cuts.this is the effort that an individual person puts into making a good or service. we can get a better idea of what choices they have for production. Labor. we will use a Production Possibilities Curve. This includes crops that are grown on a land. They all provide their labor for a wage. and Capital Land. but they cannot produce all of both. .this is anything that is used to produce other goods and services. and it is the building that the cars are made in. minerals that are mined from land and rent that is paid to an owner of land for its use. Labor. Production Possibilities Curve shows the choices a country can make with respect to its available resources. All of these are the resource known as capital. This for this effort the person is paid a wage.this refers to all natural resources used to produce goods and services. If we look at a simple model of an economy for the country of Appleoplios it shows that they can produce two goods apples and shoes. or spend their money on. When the resources of Appleoplios are used to their full potential they can produce 100 million apples (point A) a year or they can produce 4 million pairs of shoes (point B). A good is a physical thing you can hold a service is some thing that gets used up right after it is purchased. If you make cars you need machines to make the metal that is used in the cars. Capital. medical personal. It is also the truck that drives the cars to the dealer who sells them.To get a graphical representation of how an economy makes decisions on what to produce. Labor includes factory workers.
Why would thy do this? If Appleoplios wants to save some resource for future use then they would produce at a point inside their PPF. What is the opportunity cost in terms of shoes? How many shoes did they give up in order to make 80 million apples? They gave up 2 million shoes. what is the opportunity cost of producing 3. What about some other possible points for consideration? Can they. This is their most efficient point. So using all the available resources the country of Appleoplios has a variety of production choices. In this case we gave up 50 million apples so we could move some resources in to the production of shoes. Maybe they want to save water or another resource to use at a later date.The line that connects points A and B is called a production possibilities frontier (PPF).5 million shoes? What did we give up to produce the shoes? We gave up 50 million apples. If they choose to produce at point C they are making a combination of let’s say shoes 3. This is a point of under utilization of resources. Opportunity cost is always expressed in terms of what we gave up in order to get something else. What about point D on the curve? At point D Appleoplios can produce 80 million apples and 2 million shoes. With that in mind. They are not operating at peak efficiency. When the produce on the production possibilities curve they are using all of their resources to there maximum potential. It represents all of the possible combinations of production possibilities available to Appleoplios.5 million shoes and 50 million apples. . for example produce at point E? Yes they can. If the economy decides that it needs apples and shoes it can choose to produce at any point along the production possibilities curve.
Like all economies they want to produce more then the year before.What about point F? Can Appleoplios produce at point F? Not at this time. but how do they do it? They need to fine more resources or use technology to increase their production possibilities. . They do not have enough resources to produce at this point. They want to move their production possibilities curve out to point F and further the next year. Would the country like to produce at point F? Sure they would.
.This is a new PPF that is achieved with the introduction of new resources or a new technology that can help the production process. ACB is the budget line. showing combinations of goods X and Y that can be bought for given total spending. C is a consumer equilibrium.there will be a parallel shift in the budget line due to an increse or decrease in income!points insyd the budget line are inefficient since income is saved and outside the line they become infeasible. If each good is available in any quantity at a fixed price per unit.the budget lie graph is a downward sloping line whose gradient shows the ratio between the prices of two goods X and Y. budget line A graph showing what combinations of quantities of two goods can be afforded by a consumer with a fixed total amount to spend. on the highest indifference curve consistent with the budget constraint budget line budget line in economics can be defined as a line which shows the various combinations of two products that can be bought in a fixed or given income. the budget line is a straight line with a slope proportional to the relative price of the two goods.