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What

is

the

difference

between

fiscal

and

monetary

policy?

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

Its main importance is to analyze the economy forces. but with a much broader approach. or government of a country. when the markets do not provide effectual results. Microeconomics focuses on the market’s supply and demand factors.e. These two economies are mutually dependent. and relationships.Microeconomics vs Macroeconomics There are differences between microeconomics and macroeconomics. economic growth and changes in the national income. in order to sustain the growth of the economy. macroeconomics maintains two strategies: Fiscal Policy: The most important aspect of fiscal policy is taxation and government spending. They are the two most important fields in economics. and together. with the study of unemployment rates. Overall. investment. This is one of the best approaches to stabilize and ensure the growth of the nation’s economy. microeconomics has become one of the most important strategies in business and economics. . microeconomics concentrates on the ‘ups’ and ‘downs’ of the markets for services and goods. Therefore. Governments make policy changes to avoid different types of economic distress. it may be hard to separate the functions of the two. microeconomics facilitates decisions of smaller business sectors. between factors such as output. While the two studies are different. and methods of determining the supply and demand of the market. On the other hand. macroeconomics studies similar concepts. both of these terms mentioned are sub-categories of economics itself. and macroeconomics focuses on entire economies and industries. and the position of foreign trades. savings. inflation. The focus of macroeconomics is basically on a country’s income. at times. unemployment. as they know how to steady the economy. central bank. Monetary Policy: This policy controls the monetary authority. GDP and price indices. i. An important aspect of this economy. Summary: Microeconomics and macroeconomics are important studies within economics. that are essential to sustain the overall growth and standard of the economy. consumer behavior. where the government will focus of the collecting of revenue to empower the economy. they develop the strategy for the overall growth of an organization. that determine the economy’s price levels. although. and are necessary for the rise in the economy. national income. macroeconomics is a vast field that concentrates on two areas. In our present time. Macroeconomists are often found to make different types of models. As the names of ‘micro’ and ‘macro’ imply. In other words. and focuses on the availability and supply of money and interest rates. and international finances. This can create a solid impact on the economic growth. consumption. international trade. is also to examine market failure. and how the price affects the growth of these markets. First and foremost.

normally one year. GDP and price indices. The product or output method is a method that evaluates the overall value of services generated by the country.Macroeconomics is a vast field. 3. Gross Domestic Product. The GDP also determines the local income of a nation. and work in harmony with each other. and determines the economic price levels. Generally. The . many factors. The GDP. 4. Microeconomics and macroeconomics are the fundamental tools to be learnt. and government/private spending are used. The National Income determines the overall economic health of the country. services and goods produced. these three methods are used to determine National Income. the GDP can be calculated.Microeconomics facilitates decision making for smaller business sectors. Then there is the expenditure method where the sum of all expenditures incurred is taken into account In the calculation of GDP.Microeconomics focuses on the market’s supply and demand factors. increasing economic growth and changes in the national income. contributions of various production sectors. which concentrates on two major areas. GDP vs National Income “GDP” or Gross Domestic Product and National Income are financial terms that are related to the finance of a country. which is based on ownership. future growth and standard of living.Macroeconomics focuses on unemployment rates. Gross Domestic Product is defined as the value of the goods and services generated within a country. In a very simple formula. Gross National product. 2. in order to understand how the economic system is administered. of larger industries and entire economies. and sustained. measures the overall economic output of a country. exports. they are interdependent. 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. trends in economic growth. The income method takes into account the overall income from various means of production. and macroeconomics focusing on the larger income of the nation. such as.with microeconomics focusing on the smaller business sectors. The main differences are: 1. and Gross National Income are the factors that determine the national income.

and Gross National Income are the factors that determine the national income.general formula for determining GDP is C + G + I + NX where “C” is the National Consumer Spending. . � Macroeconomics – examines issues that can affect the entire economy like unemployment. services and goods produced. 4. It is important therefore to know what economics is and learn about its different features and dimensions. The National Income determines the overall economic health of the country. and sellers.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. and government/private spending are used. contribution of various production sectors. exports. buyers. � Applied economics – application of economic theory � Rational economics – formulation of a framework the understanding of economic behavior. � Behavioral economics � uses social and emotional factors in understanding the decisions of individuals and business entities in the performance of their economic functions. which is based on ownership. these three methods are used to determine National Income. � Economic theory – provides a research outlet of economics with the use of theoretical reasoning and mathematical solutions. We should be able to know how our behavior and spending habits affect the economy. 3. “I” is the amount of business capital.Gross Domestic Product is defined as the value of the goods and services generated within a country. 5. Summary: 1.Gross Domestic Product. producers. positive vs normative economics Each of us must have an understanding on how the economy works. Economics is a social science that deals with the production. normally one year. distribution. measures the overall economic output of a country. Its purpose is to explain how economies work and the interaction between its various agents. Gross National Product. monetary and fiscal policy.The GDP. namely: � Microeconomics � examines the behavior of the consumers. many factors. It will allow us to see if our policy makers are making the right economic decisions for us.In the calculation of GDP. Generally. The GDP also determines the local income of a nation. such as. and consumption of goods and services. “G” is the total government spending. inflation. 2. future growth and standard of living. and “NX” is net exports minus total imports. trends in economic growth. There are several dimensions of economics.

CPI vs GDP Deflator . Positive economics deals with what is while normative economics deals with what should be. 2. 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. It deals with the relationship between cause and effect and can be tested. Although these two are distinct from each other. 4. It is based on factual information and uses statistical data. people state their opinions and judgments without considering the facts. 3. They make distinctions between good and bad policies and the right and wrong courses of action by using their judgments. Positive economic statements can be tested using scientific methods while normative economics cannot be tested.� Positive Economics Positive economics is the study of what and why an economy operates as it does. It determines the ideal economy by discussion of ideas and judgments. Positive economics deals with facts while normative economics deals with opinions on what a desirable economy should be. Positive economics is also called descriptive economics while normative economics is called policy economics. and scientific formula in determining how an economy should be. 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. Normative economic statements cannot be tested and proved right or wrong through direct experience or observation because they are based on an individual�s opinion. It is also known as Policy economics wherein normative statements like opinions and judgments are used. 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. Summary 1. In normative economics.

The GDP deflator is calculated quarterly and it weights may change per calculation. GDP deflator is not identical with the CPI but provides an alternative to each other as a measure of inflation. As you can see.CPI and GDP deflator generally seem to be the same thing but they have some few key differences. The GDP deflator measures a changing basket of commodities while CPI always indicates the price of a fixed representative basket. but they can diverge in shorter periods. the machines and the industrial equipments that are used to make them are not considered. CPI tends to consider insignificant goods. Nevertheless. Over long periods of time. services included. The prices of other items used in production are not considered as well as the prices of investment goods. Summary: 1. 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. Only consumer items are taken into account. they are still considered for pricing in the fixed basket. It does not bother with imported goods and it reflects the prices of all the commodities. both provide similar numbers. Both are used to determine price inflation and reflect the current economic state of a particular nation. which is short for Consumer Price Index. Consumption goods are the main priority of the CPI measure. Like the GDP deflator. GDP Deflator = (Nominal GDP/Real GDP) x 100 Essentially. GDP has two types the: Nominal GDP and the Real GDP. 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. indicates the prices of a representative basket of commodities procured by the consumers. GDP Deflator takes into account goods that are produced domestically. In the GDP deflator. If expressed mathematically. even the outdated ones that are not really purchased by the consumers anymore. 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. 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. . CPI. The ratio of the two values is the GDP deflator. it also compares prices of the current period to a base period.

 To be fully in control of your finances you need to understand the tangible differences between the two. Net income is calculated by subtracting not only the cost of goods. Different countries have different levels of deductions and the government has the right to deduct your gross income accordingly. The level of your gross income determines what level of tax you have to pay. the more you have to pay. GDP deflator frequently changes weights while CPI is revised very infrequently. Your pay slip will contain a set of two figures. In order to calculate your gross income from the business. The list that you can claim for is endless. The first number is classed as your ‘gross income’. Summary . 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. your wages are determined by numerous factors. 3.  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. The level of your gross income determines what level of tax you have to pay. but your company has made no money during the financial year.2. The government looks at the amount we earn. 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. 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. An easy calculation is as follows. Cost per unit of sales ‘“ total cost of goods sold = Gross profit. This calculation becomes a slightly more complex if you run a business or large corporation. Of course the benefits of this are that the more you deduct. Business Net Income is even more confusing for the business owner. As an employee. but also any operating expenses that have occurred while running your business. the lower your income becomes and the less the government can tax you for. If your calculation generates a negative figure. Both personal and business finances can be greatly affected if you lack this relevant knowledge. The more you earn. The more you earn. you first need to take away the cost of the goods. You can often find yourself with an extremely depleted final figure after all the taxations are deducted. it is unfortunate. Different countries have different levels of deductions and the government has the right to deduct your gross income accordingly. Many people face utter confusion when asked to state the difference between gross and net income. the more you have to pay. The government looks at the amount we earn.

the GDP is always much higher than the GNP. government spending. gross income is the salary that your employer pays you before deductions. Once the tax has been deducted from your gross earnings.1. is extremely high when it comes to countries like Saudi Arabia. Real GDP: is the production of goods and services that are valued at constant prices and are not affected by market fluctuations. Meanwhile. Both terms are used in the sectors of finance. investment. This is the reason the difference between the two is very trivial when it comes to America. When you calculate the estimated value that defines the worth of any country’s services provided and production carried out over a whole year. But. GDP is also taken into account on the basis of the current prices in the period being studied. On the other hand. 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. For an individual. Many different taxes are deducted from your earnings 5. gross income is established by the following calculation: Cost per unit of sales ‘“ total cost of goods = Gross Profit. But while. 3. In countries where there is very high foreign investment. then you refer to it as that country’s GDP. 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. Both individual employees and businesses pay tax in relation to their gross salary or profit. exports with imports subtracted from the total. GDP captures an image of the domestic economic strength of a country. 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. GNP captures an image of how the nationals of a particular country are faring financially. As seen in the image China has the highest GDP growth in the world] . 4. you are left with what is known as your net income. 2. [The image shows the GDP growth per capita of each country. the formula to calculate GDP is addition of consumption. For a company. business and forecasting of economic trends. Further. 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. GNP vs GDP GNP or gross national product and GDP or gross domestic product are both measures of economic development.

Real GDP focuses on price changes. Inflation indicates the income status of an economy. Growth Domestic Product is the rate of services and final goods. whereas. the present financial crisis has lead to a deceleration in this industry by 8. The basic formula for calculation is: GDP = C + G + I + NX. Real GDP is the estimation of national output. This is due to the general decrease in market activity. Animation. It is found that industries in many countries have grown at a fast pace due to domestic GDP. like government outlays. Gross Domestic Product is measured in current dollars. it does not necessarily mean that there is also a growth in the services and goods provided. The E & M industries include the sectors of Television. the term GDP stands for Gross Domestic Product. but accounts for inflation as well. as current dollars can also be specified as nominal dollars. It is essential to calculate GDP on an annual basis for all types of major sectors. but growth is predicted to resume shortly. that occurs throughout the year. Inflation refers to the rise in prices of goods on a yearly basis. Nominal GDP indicates the present-time prices of the types of services available.Nominal GDP vs Real GDP First of all. The formula to calculate Real GDP is: Nominal GDP/GDP Deflator x 100. including exports and imports. The size of a population can affect the Real GDP. the Gaming and VFX industry. therefore. and the inflation rate. ‘I’ ‘“ Refers to the capital expenditure of businesses. ‘G’ ‘“ This refers to the amounts of government spending. although.0 percent. if there is a growth in the GDP. The Real GDP calculation for the year is the same as the amount determined for Nominal GDP. and the goods produced. and is the macroeconomic gauge of the structure of an economy. a constant change in business strategies and plans is required. exports and imports. which refers to the year in which the services and goods are produced. ‘C’ ‘“ Refers to all types of consumer spending or private consumption that occurs within a country’s economy. Summary: The main differences between Nominal GDP and Real GDP are: . and investments that arise. public consumption. and the growth has been even more evident in the recent years. Real GDP indicates costs according to various base years. Radio Advertising. and which has been accustomed to allow for inflation. ‘NX’ ‘“ This refers to the net exports of a country. Print and Media. Film. that is stated in the price level for the base year. Statistical analysis has shown a wider outlook in the growth of the economic conditions. Therefore. and the Internet Advertising industry. This would indicate the Nominal GDP. Basic growth has been seen in the E & M industry. and it is defined as the cost of all the services and goods that are available in a country. This shows the growth of the Nominal GDP as a percentage.

it is easier to understand with an example. Summary: 1. Gross Domestic Product helps to show the strength of a country’s local income. 4. Well. or Gross Domestic Product. The GNI is the total value that is produced within a country. interests). while Gross Domestic Product is based on ownership. which comprises of the Gross Domestic Product along with the income obtained from other countries (dividends. It is the market value of all services and goods within the borders of a nation. as production has not taken place in another area. 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. Suppose a firm in the United States has an establishment in Canada. that is indicated by various base years. However.1. It can also be said that GDP is the value produced within a country’s borders. is that the Gross National Income is based on location. Well.Real GDP is the costs of the services rendered. interests). this would count towards the US Gross National Income.Nominal GDP represents the current prices of all types of services. one can see that the GNI and GDP differ in all features. GNI vs GDP GNI. whereas the GNI is the value produced by all the citizens. Gross Domestic Product helps to show the strength of a country’s local income. Gross Domestic Product is the value produced within a country’s borders. and GDP is based on ownership . On the other hand. and GDP. The GNI and GDP are often considered to be the opposite sides of the same coin. 3. GDP is said to be the measure of a country’s overall economic output. One of the main differences between the two. and goods produced. are economic terms that deal with National income. and goods produced. The GNI is the total value that is produced within a country. 2. the profits from the products will not be part of the US Gross Domestic Product. Gross National Income helps to show the economic strength of the citizens of a country. whereas the Gross national Income is the value produced by all the citizens. Gross National Income helps to show the economic strength of the citizens of a country. On the other hand. GNI is based on location. 2. So. as the firm is owned by US citizens even though it is located in another country. or Gross National Income. which comprises of the Gross Domestic Product along with the income obtained from other countries (dividends.

However. EBIT is an acronym for Earnings Before Interest and Taxes while PBIT. EBIT or operating income is a measure of a firm’s profitability that excludes interest and income tax expenses. from revenues. is the money left after all expenses are paid. but it is also used as a replacement for EBIT and operating profit. Noticeably. PBIT. The larger the EBIT value. EBIT is derived by subtracting expenses. operating profit or even operating earnings. commonly comprised of the cost of goods sold. Profit Before Interest and Taxes. But one must note that what these first letters stand for. it’s not recommended to use EBIT to appraise an individual company’s profitability. the more profitable the company is likely to be. In most cases. in actuality. Furthermore. likewise measures an enterprise’s profitability by subtracting operating expenses from revenue excluding tax and interest. . the only difference would be the first letter of their respective acronyms. In business terms. EBIT is equal to Operating Revenue ‘“ Operating Expenses (OPEX) + Non-operating Income. also interchanged with operating income. there’s a significant deal of similarities between the nature of EBIT and PBIT. earnings (also called revenues) pertain to the money a company collects. EBIT and PBIT are used as a measure of a firm’s profitability that excludes interest and income tax expenses. It is also commonly used by investors to compare companies. it may in fact be at the losing end once interest on its significant debt load is taken into consideration.EBIT vs PBIT In accounting and finance. While in gross profit. EBIT evaluates a company’s earning potential and serves as a crucial consideration in changing the capital structure of business. Profit. namely earnings and profit are not merely synonyms. on the other hand. Operating income is operating revenues minus operating expenses. Some confuse it with gross profit. there’ll therefore be a variation in computing EBIT and PBIT. a poor investment choice. selling and administrative expenses. PBIT is equal to Net profit + Interest + Taxes. identifying the most profitable company in terms of the efficiency of its operation. revenue is deducted with only one component of the OPEX which is cost of goods sold (COGS ). revenue is deducted with operating expenses ( OPEX ) excluding interest and taxes. it is important to note that in PBIT. The remainder after all incurred manufacturing or delivery costs will be the profit. PBIT is mostly used by creditors to screen companies with minimal depreciation and amortization activities. since it represents the amount of cash that the companies can earn to pay off creditors. investors take note PBIT when viewing income statement. Simply put. specifically applicable to a firm that has no nonoperating income. And it is but necessary to cite these before proceeding with the determining the dissimilarities between EBIT and PBIT. Come to think of it superficially. Even supposing a profoundly leveraged business may appear profitable using EBIT. For most enterprises. Taxation can also pull a company’s profitability significantly. PBIT is also known as operating income. expenses must be paid out of revenue. To clarify this misconception. Basing the evaluation solely on EBIT may conceal the fact that a seemingly promising company is. There’s in fact a noteworthy difference between them. In accounting and finance. Given these definitions.

Though these are included in the CTC. Cost to Company refers to the amount that the employer is willing to spend on an employee. will always look towards CTC. 2) EBIT = Operating Revenue ‘“ Operating Expenses (OPEX) + Non-operating Income. Contributions refer to the amount that the employer contributes to the PF. PBIT is frequently used by creditors to measure a company’s earning and paying capacity. among other things. dearness allowance. house rent allowance and other allowances. incentives. but not in the other. it is the amount that the employer has committed to pay an employee on a monthly basis. and gross salary. PBIT is equal to Net profit + Interest + Taxes. reimbursements. city compensatory allowance. An employee. A gross salary will not include the contributions to the PF and gratuity. A salary includes the basic amount. house rent allowance.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. Cost to Company is the amount that an employer will spend on an employee in a particular year. gross salary is the amount an employee receives as a salary. When talking of Cost to Company. super annuation and medical insurance. it involves salary. the employer’s contribution is not added to the gross salary. While the employer’s contribution is added to the Cost to Company. and other benefits that are given. Leave encashment. CTC vs Gross Salary A salary is the periodic payment that an employee receives from an employer in return for the work he provides. when seeking employment. The components of a gross salary includes basic pay. Summary: 1. non-cash concessions and stock option plans are all included in the CTC. whereas. contributions and tax benefits. 3) EBIT is mostly used to evaluate a company’s profitability in comparison to others. For gross salaries. before any deductions. Cost to Company is the amount that an employer will spend on an employee in a particular year. The reimbursement includes bonuses. certain components are different for individual employees. gross salary is the amount an employee receives as a salary. or Cost to Company. . and other emoluments. In regards to gross salary. gratuity. and other components are the same for all employees. The difference between CTC and gross salary. dearness allowance. these may vary from one company to another. reimbursement of conveyance/telephone/medical bills. whereas. before any deductions. is that some components are included in one.

How is relation between FDI and FII? FII generally means portfolio investment by foreign institutions in a market which is not their home country. FDI also have to follow a high rules and regulations to enter the market and the subs.2. Insurance House's is a short term benefit to the country and the rules and regulations to enter the Indian Market are not much. cause the rules are eased the investor can leave the market at Any point of time. Therefore we could see Lehman investing 15% in say Unitech. the fluctuations in the stock market is generally due to the FII Investments . 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. and other emoluments. On the other hand. The employer’s contribution is added to the Cost to Company. house rent allowance and other allowances. given to such players are huge in term of taxes . These institutions are generally Mutual Funds. into the stock market. the employer’s contribution is not added to the gross salary. the components of a gross salary includes basic pay. city compensatory allowance.FDI have long term commitment and hence we see flight of capital in terms of FII outflows but not generally in FDIs. contributions and tax benefits. All other differences flow from this primary difference. Pension Funds. Salary includes the basic amount. now that would be FDI. A gross salary will not include the contributions to the PF and gratuity. dearness allowance. reimbursements. house rent allowance. 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. 3. dearness allowance. CTC involves salary. Besides. 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. brings in more and better products and services besides increasing the employment opportunities and revenue for the Government by way of taxes. Do you know the difference between FDI and FII? What is foreign investment? . on the other hand. FDI is perceived to be more beneficial because it increases production. 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. 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. among other things. Investment Companies. FII. However if Lehman has bought shares of Unitech though secondary markets (stock trading market) it would have been an FII. that is.

foreign investment also facilitates flow of technology into the country and helps the industry to become more competitive. 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. Globally. and a degree of influence over. No such benefit accrues in the case of FII inflows.5 billion in 2006-07 and is estimated to have gone up to $15. FDI brings not just capital but also better management and governance practices and. FDI tends to be much more stable than FII inflows. no foreign investment is allowed.5 billion in 07-08. 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. A simple and commonly-used definition says financial investment by which a person or an entity acquires a lasting interest in. Direct investment to create or augment capacity ensures that the capital inflow translates into additional production. in this case too. rather than availability of capital to a particular enterprise. India opened up to investments from abroad gradually over the past two decades. often. Direct investment targets a specific enterprise. FII inflows have only provided net inflows of capital. creating volatility in the stock market and exchange rates. 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. various types of technical definitions –– including those from IMF and OECD –– are used to define foreign investment. the management of a business enterprise in a foreign country is foreign investment. The panel feels FDI inflows would increase to $19. 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. cumulatively. Moreover. although the search by FIIs for credible investment options has tended to improve accounting and governance practices among listed Indian companies. While this might be true of individual funds. technology transfer. In the case of FII investment that flows into the secondary market. According to the Prime Minister’s Economic Advisory Committee. .7 billion during the current financial year. net FDI inflows amounted to $8. the effect is to increase capital availability in general. foreign institutional investment (FII). non-resident Indian (NRI) and person of Indian origin (PIO) investment. 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%). with the aim of increasing its capacity/productivity or changing its management control. Just like in the case of FII inflows. The know-how thus transferred along with FDI is often more crucial than the capital per se. There is a widespread notion that FII inflows are hot money — that it comes and goes.Any investment flowing from one country into another is foreign investment. How does the Indian government classify foreign investment? The Indian government differentiates cross-border capital inflows into various categories like foreign direct investment (FDI). Apart from helping in creating additional economic activity and generating employment. especially since the landmark economic liberalisation of 1991. In the case of FDI that flows in for the purpose of acquiring an existing asset. In some areas like gambling or lottery.

45 of the same date. In addition. However. All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company. However. including FII investment. The Foreign Institutional Investor is also known as hot money as the investors have the liberty to sell it and take it back. the companies only need to get registered in the stock exchange to make investments. 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. The government allows greater freedom to FDI in various sectors as compared to FII investments. 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. endowment foundations. It helps in increasing capital availability in general rather than enhancing the capital of a specific enterprise. FII can enter the stock market easily and also withdraw from it easily. pension funds. university funds. The FII investment flows only into the secondary market. No individual FII/sub-account can acquire more than 10% of the paid up capital of an Indian company. FDI or Foreign Direct Investment is an investment that a parent company makes in a foreign country. there are peculiar cases like airlines where foreign investment. In simple words. FIIs include asset management companies. What are the restrictions that FIIs face in India? FIIs can buy/sell securities on Indian stock exchanges. this is not possible. . FDI vs FII Both FDI and FII is related to investment in a foreign country. But FDI is quite different from it as they invest in a foreign nation. In an FDI. charitable trusts and charitable societies. 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. investment through participatory notes (PNs) was curbed by Sebi recently. 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. incorporated/institutional portfolio managers or their power of attorney holders. the capital inflow is translated into additional production. Foreign Direct Investment only targets a specific enterprise. But FDI cannot enter and exit that easily. This difference is what makes nations to choose FDI’s more than then FIIs. is allowed to the extent of 49%. In FII. 2001 and FEMA Notification No. but they have to get registered with stock market regulator Sebi.According to the government’s definition. investment trusts as nominee companies. It aims to increase the enterprises capacity or productivity or change its management control. FII or Foreign Institutional Investor is an investment made by an investor in the markets of a foreign nation. But in Foreign Direct Investment. On the contrary. but FDI from foreign airlines is not allowed. FIIs are required to allocate their investment between equity and debt instruments in the ratio of 70:30. For example. the government also introduces new regulations from time to time to ensure that FII investments are in order.

but the most frequently quoted definition is from Our Common Future. While FIIs are short-term investments. the FDI’s are long term. When you think of the world as a system over space.The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor. FII is an investment made by an investor in the markets of a foreign nation. It contains within it two key concepts: • • the concept of needs." All definitions of sustainable development require that we see the world as a system—a system that connects space. and that pesticides sprayed in Argentina could harm fish stocks off the coast of Australia. 3. Summary 1. to which overriding priority should be given. Foreign Direct Investment targets a specific enterprise. The FII increasing capital availability in general. While the FDI flows into the primary market. Though the Foreign Institutional Investor helps in promoting good governance and improving accounting. FDI is an investment that a parent company makes in a foreign country. FII can enter the stock market easily and also withdraw from it easily. it does not come out with any other benefits of the FDI. economic and social well-being for today and tomorrow Sustainable development has been defined in many ways. 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. But FDI cannot enter and exit that easily. in particular the essential needs of the world's poor. the FII flows into secondary market. also known as the Brundtland Report:[1] "Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor What is Sustainable Development? Environmental. you grow to understand that air pollution from North America affects air quality in Asia. . 4. 2. On the contrary. FDI not only brings in capital but also helps in good governance practises and better management skills and even technology transfer. and a system that connects time.

1987 Does your business fit this definition of sustainable development? Sustainable development is a worthy goal for small businesses everywhere. and consumers are willing to pay that price. too. and shop" (The Sustainability Report). work. It just makes sense to pay attention to the environmental impact of our economic practices. the environment.And when you think of the world as a system over time. We also understand that quality of life is a system. The problems we face are complex and serious—and we can't address them in the same way we created them. "In Canada. But we can address them. and the economy are interconnected. we know that society. It's that basic optimism that motivates IISD's staff. almost 80 per cent of the population is urban. organic products can be sold for a higher price in the market. Making environmentally conscious decisions about your business operations can be good for the bottom line. Witness the growth of industries such as "organic" food. 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. It's good to be physically healthy." . 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. a shift to more sustainability must take place at the local level. Paying attention to sustainable development is especially sensible when so many of our potential customers and clients are actively seeking greener products and services. . in the places where we live. if small businesses don't get on board. One of the basic assumptions underlying the definition of sustainable development is that environmental considerations have to be entrenched in economic decision-making. you start to realize that the decisions our grandparents made about how to farm the land continue to affect agricultural practice today. and try to ensure that our communities are healthy. and the economic policies we endorse today will have an impact on urban poverty when our children are adults.Brundtland Commission. pleasant places to live. Therefore. It helps us understand ourselves and our world. As members of our various communities. While our government has made a strong commitment to practicing sustainable development and implementing policies to support it. for instance. full sustainable development is impossible. but what if the air in your part of the world is unclean? And it's good to have freedom of religious expression. Many food producers have switched to organic production methods.

and solar. reuse. To be truly sustainable. and without causing environmental damage that challenges the survival of other species and natural ecosystems. wind. Consequently. the stocks of non-renewable resources. You reduce. systems of resource use must not significantly degrade any aspects of environmental quality. but their importance is rarely measured in terms of dollars. and recycle in your home. an ecologically sustainable economy must be capable of supporting viable populations of native species. and biomass energy sources. including those not assigned value in the marketplace. These are all important values. and petroleum. and acceptable levels of other environmental qualities that are not conventionally valued as resources for direct use by humans . 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. water. sustainable economies cannot be based on the use of nonrenewable resources. The notion of sustainable development recognizes that individual humans and their larger economic systems can only be sustained through the exploitation of natural resources. they need to adopt environmentally sound business principles and translate these into action. even renewable resources may be subjected to overexploitation and other types of environmental degradation. Ultimately. such as metals. By definition. A system of sustainable development must be capable of yielding a flow of resources for use by humans. the provision of oxygen by vegetation. However. and you've taught your children to do these things. 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. and land of pollutants by ecosystems. Biodiversity is one example of a so-called non-valuated resource. sustainable economies must be supported by the use of renewable resources such as biological productivity. too.If you're like me. Built into this concept is an awareness of the animal and plant life of the surrounding environment. The following page will give you the information you need to put the definition of sustainable development into action. Sustainable Development Sustainable development is the management of renewable resources for the good of the entire human and natural community. geothermal. viable areas of natural ecosystems. you're an environmentally conscious person. and the maintenance of agricultural soil capability. but that flow must be maintainable over the long term. coal. so that they will always be present to sustain future generations of humans. as are many ecological services such as the cleansing of air. 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. In addition. as well as inorganic components such as water and the atmosphere.

we get fewer and fewer for each pound of butter given up. Opportunity cost can be seen numerically with a production possibility table . There is a limit to what you can achieve. This information has been plotted on the graph. given the existing institutions. The table contains the information on the trade -off between the production of the guns and butter.Production Possibility Curve The choices that society must take are often presented in terms of production possibility curve. 100 80 60 40 20 0 15 14 12 9 5 0 Row. resources. 2. The production possibility curve demonstrates that: 1. 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. It is a graphical representation of the opportunity cost concept. Where output . You can get more of something only by giving up something else.a table that lists a choice's opportunity costs by summarizing what alternative outputs you can achieve with your inputs. A production possibility curve is a curve measuring the maximum combination of outputs that can be obtained from a given number of inputs. That is the opportunity cost of choosing guns over butter increases as we increase the production of guns. Every choice you make has an opportunity cost. The phenomenon occurs because some resources are better suited for the production of butter than for the production of guns. input . butter. As we move along the production possibility curve from A to F. 0 4 7 9 11 12 % of resources devoted to Pounds of production of butter. and we use the better ones first. A production possibility curve is created from a production possibility table by mapping the table in the twodimensional graph. The production possibility curve is related to the concept of opportunity cost that you were introduced earlier. % of resources devoted to production of guns 0 20 40 60 80 100 Number of guns. The information in the production possibility table can be presented graphically in a diagram called a production possibility curve. This concept is called the principle of increasing marginal opportunity cost. trading butter for guns.is what you put into a production process to achieve an output. A B C D E F .a result of an activity. and technology.

. the production possibility frontier (PPF) represents the point at which an economy is most efficiently producing its goods and services and. to achieve efficiency. B. resources are being managed inefficiently and the production of society will dwindle. Point X represents an inefficient use of resources. B and C . The production possibility frontier shows there are limits to production.A. Production Possibility Frontier (PPF) Under the field of macroeconomics. Let's turn to the chart below. must decide what combination of goods and services can be produced. If the economy is not producing the quantities indicated by the PPF. so an economy. while point Y represents the goals that the economy cannot attain with its present levels of resources.all appearing on the curve . points A. According to the PPF. therefore. allocating its resources in the best way possible.represent the most efficient use of resources by the economy. Imagine an economy that can produce only wine and cotton.

it must give up some of the resources it uses to produce cotton (point A). that the country is not producing enough cotton or wine given the potential of its resources. D. Point X means that the country's resources are not being used efficiently or. if there was a change in technology while the level of land. However. consequently. A new curve. more specifically. Output would increase. the time required to pick cotton and grapes would be reduced. However. when the PPF shifts . in order for this economy to produce more wine. the nation must decide how to achieve the PPF and which combination to use. on which Y would appear.C. and C all represent the most efficient allocation of resources for the economy. If more wine is in demand. When the PPF shifts outwards. it will produce less wine than it is producing at point A. by moving production from point A to B. As we can see. B. Point Y. as we mentioned above. would represent the new efficient allocation of resources. and the PPF would be pushed outwards. wine output will be significantly reduced while the increase in cotton will be quite small. If the economy starts producing more cotton (represented by points B and C). we know there is growth in an economy. if the economy moves from point B to C. Alternatively. it would have to divert resources from making wine and. labor and capital remained the same. represents an output level that is currently unreachable by this economy. the cost of increasing its output is proportional to the cost of decreasing cotton production. Keep in mind that A. As the chart shows. the economy must decrease wine production by a small amount in comparison to the increase in cotton output.

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. Therefore. assume that an individual has a choice between two telephone services. forgo ice cream in order to have an extra helping of mashed potatoes. Thus. which has an abundance of steel. leading him or her to choose the less expensive service. Each country can make cars and/or cotton. if production of product A increases then production of product B will have to decrease accordingly. for Country B. 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 products is high because the effort required to produce cars is greater than that of producing cotton. In reality. wants. Because it requires a lot of effort to produce cotton by irrigating the land. 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. has an abundance of fertile land but very little steel. This is important to the PPF because a country will decide how to best allocate its resources according to its opportunity cost. Remember that opportunity cost is different for each individual and nation. . For example. for instance. it would need to divide up its resources. A shrinking economy could be a result of a decrease in supplies or a deficiency in technology. Country B. Country A would have to sacrifice producing cars. which will have to give up a lot of capital in order to produce both. Country B would need to give up more cotton than Country A to produce the same amount of cars. By using specialization. Opportunity Cost Opportunity cost is the value of what is foregone in order to have something else. The opportunity cost of an individual's decisions. Giving up these opportunities to go to the movies may be a cost that is too high for this person. County A has a comparative advantage over Country B in the production of cars. time and resources (income). therefore. the opportunity cost is equivalent to the cost of giving up the required cotton production. 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. Similarly. economies constantly struggle to reach an optimal production capacity. If Country A were to try to produce both cars and cotton. Therefore. Each country can produce one of the products more efficiently (at a lower cost) than the other. C. B. that individual may have to reduce the number of times he or she goes to the movies each month. For you. the slope of the PPF will always be negative. This value is unique for each individual. Now suppose that Country A has very little fertile land and an abundance of steel for car production.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. what is valued more than something else will vary among people and countries when decisions are made about how to allocate resources. would need to give up more cars than Country B would to produce the same amount of cotton. is determined by his or her needs. but this may lead to an inefficient allocation of resources and hinder future growth. Trade. on the other hand. The opportunity cost of producing both cars and cotton is high for Country A. Country A. the mashed potatoes have a greater value than dessert. If he or she were to buy the most expensive service. And because scarcity forces an economy to forgo one choice for another. the previous wine/cotton example shows that if the country chooses to produce more wine than cotton. An economy can be producing on the PPF curve only in theory. a country can concentrate on the production of one thing that it can do best. You may. For example. rather than dividing up its resources.

and Country B has a comparative advantage over Country A in the production of cotton. or the cost of not buying that weapon? In economics it is called opportunity cost. with the same amount of inputs (arable land. There can be many alternatives that we give up to get something else. so it will always be able to benefit from trade. labor). If it is a nice day I could take my dog to the park and play all day. I could even spend the day looking for a better job right? I give up all of these things if I choose . If you have a job. but the opportunity cost of a decision is the most desirable alternative we give up to get what we want. if Country C specializes in the production of corn. It is not possible. Absolute Advantage Sometimes a country or an individual can produce more than another country. 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. For example. Opportunity cost is the cost we pay when we give up something to get something else. steel. what do you give up to go to work? There are many possibilities. Better quality resources can give a country an absolute advantage as can a higher level of education and overall technological advancement. even though countries both have the same amount of inputs. will no longer be lacking anything that they need. or not to go to college? Finally what is the cost of buying that weapon system. For example. for a country to have a comparative advantage in everything that it produces. however. Now let's say that both countries (A and B) specialize in producing the goods with which they have a comparative advantage. whereby economies. specialization and comparative advantage also apply to the way in which individuals interact within an economy. what is the cost of our decisions? What is the cost of going to work. or the decision not to go to work? What is the cost of college. I could sleep in. A country that can produce more of both goods is said to have an absolute advantage. Country A may have a technological advantage that. Determining how countries exchange goods produced by a comparative advantage ("the best for the best") is the backbone of international trade theory. enables the country to manufacture more of both cars and cotton than Country B. however. Like opportunity cost. Let?s look at our examples from above. in theory. Furthermore. If they trade the goods that they produce for other goods in which they don't have a comparative advantage. both countries will be able to enjoy both products at a lower opportunity cost. 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. This method of exchange is considered an optimal allocation of resources. Specialization and trade also works when several different countries are involved. it can trade its corn for cars from Country A and cotton from Country B. Or.

Increased levels of education are associated with the increased likelihood of voting or registering to vote. We could be working and earning money instead of going to college. Similarly a professional degree provides a present value to the student of almost $1. .25 million in future earnings. opportunity cost is the most desirable thing given up not the aggregate of the things we gave up. by the Institute of Government and Public Affairs for the Illinois Board of Higher Education. Overall. 37. What about spending money on a missile defense system? In the fiscal year 2006 budget the taxpayers of Colorado will spend.547 people to get health care (Centers for Medicare and Medicaid Data Compendium) or. $150. People with college experience contribute time and money to charitable causes at a higher rate than those with less education. In addition. college can provide many other benefits that are less tangible. The opportunity costs in this case depend upon what you value more military spending. We are all told to go to college so you can get a good education and that will translate into a good job. and an opportunity to meet many different people. What I get from working is a greater benefit than the cost of giving up these things. Labor force participation rates and employment rates for people aged 25 and over increase with increased levels of education. 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. showed the following benefits: • • • • Higher Earnings . A study conducted in April of 2002. Benefits include increased self-awareness. the ability to think critically. These represent real choices that the government must make with our Tax dollars.Earning a bachelor?s degree provides the average student with over $590. and will help your child become a better-rounded individual. or college scholarships. Also. the entire college experience will provide your child with a lifetime of benefits?. we will spend four or more years going to classes. Finally we will be giving up free time for study time that could be used to do other things.to go to work. As we can see there are many benefits to a college education. health care. But.384 scholarships for university students (National Center for Education Statistics).7 million for the ballistic missile defense system (Center on Arms Control and Nuclear Proliferation). Let?s look at the college example. That same money could pay for 27. So what are the costs? There are monetary costs for sure. as a fraction of overall federal spending.000 in future earnings.

Labor. It is also the truck that drives the cars to the dealer who sells them. but they cannot produce all of both. 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. medical personal.this is anything that is used to produce other goods and services. Production Possibilities Curve shows the choices a country can make with respect to its available resources. They all provide their labor for a wage. Labor includes factory workers. or spend their money on. . we will use a Production Possibilities Curve. Capital. and Capital Land. This for this effort the person is paid a wage. If you make cars you need machines to make the metal that is used in the cars. A good is a physical thing you can hold a service is some thing that gets used up right after it is purchased.this is the effort that an individual person puts into making a good or service. 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). and it is the building that the cars are made in. Goods and services are the things that we buy like mp3 players or hair cuts. we can get a better idea of what choices they have for production. minerals that are mined from land and rent that is paid to an owner of land for its use. All of these are the resource known as capital. and teachers.this refers to all natural resources used to produce goods and services. Labor.To get a graphical representation of how an economy makes decisions on what to produce. Resources are Land. This includes crops that are grown on a land.

Maybe they want to save water or another resource to use at a later date. for example produce at point E? Yes they can. They are not operating at peak efficiency.5 million shoes and 50 million apples. It represents all of the possible combinations of production possibilities available to Appleoplios. In this case we gave up 50 million apples so we could move some resources in to the production of shoes. What about some other possible points for consideration? Can they. If they choose to produce at point C they are making a combination of let’s say shoes 3. So using all the available resources the country of Appleoplios has a variety of production choices. When the produce on the production possibilities curve they are using all of their resources to there maximum potential. This is a point of under utilization of resources. If the economy decides that it needs apples and shoes it can choose to produce at any point along the production possibilities curve. Opportunity cost is always expressed in terms of what we gave up in order to get something else. This is their most efficient point. With that in mind. what is the opportunity cost of producing 3.5 million shoes? What did we give up to produce the shoes? We gave up 50 million apples. What about point D on the curve? At point D Appleoplios can produce 80 million apples and 2 million shoes. . 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.The line that connects points A and B is called a production possibilities frontier (PPF).

They want to move their production possibilities curve out to point F and further the next year. . They do not have enough resources to produce at this point.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. Would the country like to produce at point F? Sure they would. Like all economies they want to produce more then the year before.

ACB is the budget line. showing combinations of goods X and Y that can be bought for given total spending.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. 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 lie graph is a downward sloping line whose gradient shows the ratio between the prices of two goods X and Y. If each good is available in any quantity at a fixed price per unit. C is a consumer equilibrium. .This is a new PPF that is achieved with the introduction of new resources or a new technology that can help the production process. 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. the budget line is a straight line with a slope proportional to the relative price of the two goods.