The 

balance of payments (BOP) is the method countries use to monitor all international
monetary transactions at a specific period. Usually, the BOP is calculated every quarter
and every calendar year.All trades conducted by both the private and public sectors are
accounted for in the BOP to determine how much money is going in and out of a country.
If a country has received money, this is known as a credit, and if a country has paid or
given money, the transaction is counted as a debit.Theoretically, the BOP should be zero,
meaning that assets (credits) and liabilities (debits) should balance, but in practice, this is
rarely the case. Thus, the BOP can tell the observer if a country has a deficit or
a surplus  and from which part of the economy the discrepancies are stemming.
BUSINESS CYCLE 1. ExpansionThe first stage in the business cycle is expansion. In this
stage, there is an increase in positive economic indicators such as employment, income,
output, wages, profits, demand, and supply of goods and services. Debtors are generally
paying their debts on time, the velocity of the money supply is high, and investment is high.
This process continues as long as economic conditions are favorable for expansion.2.
PeakThe economy then reaches a saturation point, or peak, which is the second stage of
the business cycle. The maximum limit of growth is attained. The economic indicators do
not grow further and are at their highest. Prices are at their peak. This stage marks the
reversal point in the trend of economic growth. Consumers tend to restructure their budgets
at this point.3. RecessionThe recession is the stage that follows the peak phase. The
demand for goods and services starts declining rapidly and steadily in this phase.
Producers do not notice the decrease in demand instantly and go on producing, which
creates a situation of excess supply in the market. Prices tend to fall. All positive economic
indicators such as income, output, wages, etc., consequently start to fall.4.
DepressionThere is a commensurate rise in unemployment. The growth in the economy
continues to decline, and as this falls below the steady growth line, the stage is called a
depression.5. TroughIn the depression stage, the economy’s growth rate becomes
negative. There is further decline until the prices of factors, as well as the demand and
supply of goods and services, contract to reach their lowest point. The economy eventually
reaches the trough. It is the negative saturation point for an economy. There is extensive
depletion of national income and expenditure.6. RecoveryAfter the trough, the economy
moves to the stage of recovery. In this phase, there is a turnaround in the economy, and it
begins to recover from the negative growth rate. Demand starts to pick up due to low prices
and, consequently, supply begins to increase. The population develops a positive attitude
towards investment and employment and production starts increasing.
Difference Between Inflation And Hyperinflation
Inflation Hyperinflation
National income accounting refers to the set of methods and principles that are used by
the government for measuring production and income, or in other words economic activity
of a country in a given time period.The various measures of determining national income
are GDP (Gross Domestic Product), GNP (Gross National Product), and NNP (Net National
Product) along with other measures such as personal income and disposable
income.National income accounting refers to the set of methods and principles that are
used by the government for measuring production and income, or in other words economic
activity of a country in a given time period.The various measures of determining national
income are GDP (Gross Domestic Product), GNP (Gross National Product), and NNP (Net
National Product) along with other measures such as personal income and disposable
income.The importance of national income accounting is that it is helpful in facilitating
techniques and procedures for measurement of output and income at the aggregate level. It
is a process of preparing national income accounts that is based on the principles of double
entry system of business accounting.National income accounting helps in summarising the
economic performance of a country by measuring the national income aggregates for the
year.The government policies are framed on the basis of the data obtained from national
income accounting.
National income accounting equation is an equation that shows the relationship between
income and expense of an economy and other categories. It is represented by the following
equation:
Y = C + I + G + (X – M)Where Y = National income, C = Personal consumption expenditure,
I = Private investment, G = Government spending, X = Net exports, M = Imports
An indifference curve is a graphical representation of a combined products that gives
similar kind of satisfaction to a consumer thereby making them indifferent.Every point on the
indifference curve shows that an individual or a consumer is indifferent between the two
products as it gives him the same kind of utility.
The indifference curve analysis work on a simple graph having two-dimensional. Each
individual axis indicates a single type of economic goods. If the graph is on the curve or
line, then it means that the consumer has no preference for any goods, because all the
good has the same level of satisfaction or utility to the consumer. For instance, a child might
be indifferent while having a toy, two comic book, four toy trucks and a single comic book.
The Indifference Map refers to a set of Indifference Curves that reflects an understanding
and gives an entire view of a consumer’s choices. The below diagram shows an
indifference map with three indifference curves.

Characterized by a price rise that is Price rise leads to inflation of greater than
well under control. 50%

Largely witnessed during more Extra ordinary times like wars, economic
steady times. collapse leads to hyperinflation.

Monetary tools are used to push

Very difficult to control.
inflation lower or higher.

Part of economic data these days. Unheard of in recent times.
Returns to scale in economics is a term that defines the relationship between the input
changes in proportion with the output during production using the same type of technology.
It reflects the change or variation in productivity. A producer commonly uses inputs such as
labor and capital to produce goods and services. Therefore, it is the best method to
measure the efficiency of production. The lesser the amount of input a producer uses to
produce more output, the better its efficiency, and vice versa.In the manufacturing sector, it
is a commonplace to have the highest output level with minimum raw material inputs like
labor and capital. However, all factors of production are variable in the long run. So, by
changing the production factor’s quantity, producers can change the production scale and
make it optimal. For example, to increase the production output, firms must change the
input levels proportionally and utilize them to the best capacity. During such a scenario, it is
necessary to find the relationship between changes in input with the changes in output
during production.While applying the law of returns to any factory, one has to consider
these assumptions:Producers should consider using only capital and labor as input factors
of production.Producers should add both labor and capital together in a fixed ratio.The
prices of these factors remain constant.Producers use the same technology in the long
term.
What Is the Consumption Function?
The term consumption function refers to an economic formula that represents the
functional relationship between total consumption and gross national income (GNI). The
consumption function was introduced by British economist John Maynard Keynes, who
argued the function could be used to track and predict total aggregate consumption
expenditures. It is a valuable tool that can be used by economists and other leaders to
understand the economic cycle and help them make key decisions about investments as
well as monetary and fiscal policy.
Calculating the Consumption FunctionThe consumption function is represented
as:C = A + MDwhere:C=consumer spendingA=autonomous consumptionM=marginal prop
ensity to consumeD=real disposable income
Fiscal policy is based on the theories of British economist John Maynard Keynes, which
hold that increasing or decreasing revenue (taxes) and expenditure (spending) levels
influence inflation, employment and the flow of money through the economic system. Fiscal
policy is often used in combination with monetary policy, which, in the United States, is set
by the Federal Reserve to influence the direction of the economy.Fiscal policy is paramount
to successful economic management since taxes, spending, inflation and employment all
factor into gross domestic product (GDP). This figure details the value of goods and
services produced by a nation within a year. [Learn how to calculate the cost of goods
sold (COGS) for your business.]To understand how fiscal policy can affect the economy,
consider a fiscal expansion that leads to rising demand, which in turn increases production.
If this demand increase occurs in a high-employment economy, prices will vary. However, in
a low-employment economy, this demand will lead to more employment and production but
not necessarily price variation. The change in GDP depends on which of these situations
applies.How fiscal policy affects businessesPublic and private companies experience
direct effects of an economy’s fiscal policy – whether in the form of spending or taxation.
Fiscal policy can have the following effects on your small business.1. Investment
opportunitiesBusinesses will see more investment opportunities related to government
spending. This commonly occurs during an expansionary fiscal policy, when more money is
flowing into the economy from the government and from other sources since taxation is also
low. When a balance between price and demand is met, then companies can expect to
thrive and grow.2. Slower growthA contractionary fiscal policy may kick in to prevent
inflation when that balance is broken and demand – and prices – fall. Businesses typically
rein in their growth due to rising taxes and take measures to stay in the black with less
money flowing through the economy.3. Taxation changesDepending on your company’s
location, your business will face several levels of taxation: including local, state and federal.
Consider how your state and local government taxes your company and how it interweaves
with federal fiscal policy.
Methods of Demand Forecasting There is no easy or simple formula to forecast the demand.
Proper judgment along with the scientific formula is needed to correctly predict the future demand
for a product or service. Some methods of demand forecasting are discussed below:1] Survey
of Buyer’s ChoiceWhen the demand needs to be forecasted in the short run, say a year, then
the most feasible method is to ask the customers directly that what are they intending to buy in
the forthcoming time period. Thus, under this method, potential customers are directly
interviewed.2] Collective Opinion MethodUnder this method, the salesperson of a firm
predicts the estimated future sales in their region. The individual estimates are aggregated to
calculate the total estimated future sales. These estimates are reviewed in the light of factors like
future changes in the selling price, product designs, changes in competition, advertisement
campaigns, the purchasing power of the consumers, employment opportunities, population,
etc.3] Barometric Method This method is based on the past demands of the product and tries
to project the past into the future. The economic indicators are used to predict the future trends of
the business. Based on future trends, the demand for the product is forecasted. An index of
economic indicators is formed. There are three types of economic indicators, viz. leading
indicators, lagging indicators, and coincidental indicators.4] Market Experiment Method
Another one of the methods of demand forecasting is the market experiment method. Under this
method, the demand is forecasted by conducting market studies and experiments on consumer
behavior under actual but controlled, market conditions.5] Expert Opinion MethodUsually,
market experts have explicit knowledge about the factors affecting demand. Their opinion can
help in demand forecasting. The Delphi technique, developed by Olaf Helmer is one such
method.6] Statistical MethodsThe statistical method is one of the important methods of
demand forecasting. Statistical methods are scientific, reliable and free from biases. The major
statistical methods used for demand forecasting are:
Types of Market Structures

1. Perfect Competition Perfect competition occurs when there is a large number of small
companies competing against each other. They sell similar products (homogeneous), lack
price influence over the commodities, and are free to enter or exit the market.Consumers in
this type of market have full knowledge of the goods being sold. They are aware of the
prices charged on them and the product branding. In the real world, the pure form of this
type of market structure rarely exists. However, it is useful when comparing companies with
similar features.2. Monopolistic Competition Monopolistic competition refers to an
imperfectly competitive market with the traits of both the monopoly and competitive market.
Sellers compete among themselves and can differentiate their goods in terms of quality and
branding to look different. In this type of competition, sellers consider the price charged by
their competitors and ignore the impact of their own prices on their
competition.3. OligopolyAn oligopoly market consists of a small number of large
companies that sell differentiated or identical products. Since there are few players in the
market, their competitive strategies are dependent on each other.For example, if one of the
actors decides to reduce the price of its products, the action will trigger other actors to lower
their prices, too. On the other hand, a price increase may influence others not to take any
action in the anticipation consumers will opt for their products. Therefore, strategic planning
by these types of players is a must.4. MonopolyIn a monopoly market, a single company
represents the whole industry. It has no competitor, and it is the sole seller of products in
the entire market. This type of market is characterized by factors such as the sole claim to
ownership of resources, patent and copyright, licenses issued by the government, or high
initial setup costs.All the above characteristics associated with monopoly restrict other
companies from entering the market. The company, therefore, remains a single seller
because it has the power to control the market and set prices for its goods.

What Is Inflation?
Inflation is a rise in prices, which can be translated as the decline of purchasing
power  over time. The rate at which purchasing power drops can be reflected in the
average price increase of a basket of selected goods  and services over some period of
time. The rise in prices, which is often expressed as a percentage, means that a unit of
currency effectively buys less than it did in prior periods. Inflation can be contrasted
with deflation , which occurs when prices decline and purchasing power increases.
Demand-Pull EffectDemand-pull inflation  occurs when an increase in the supply of
money and credit stimulates the overall demand for goods and services to increase more
rapidly than the economy's production capacity. This increases demand and leads to price
rises.Cost-Push EffectCost-push inflation is a result of the increase in prices working
through the production process inputs. When additions to the supply of money and credit
are channeled into a commodity or other asset markets, costs for all kinds of intermediate
goods rise. This is especially evident when there's a negative economic shock to the
supply of key commodities.Built-in InflationBuilt-in inflation is related to adaptive
expectations or the idea that people expect current inflation rates to continue in the future.
As the price of goods and services rises, people may expect a continuous rise in the
future at a similar rate. As such, workers may demand more costs or wages to maintain
their standard of living. Their increased wages result in a higher cost of goods and
services, and this wage-price spiral  continues as one factor induces the other and vice-
versa.
Characteristics of Monopolistic MarketsIn a competitive market, numerous companies
are present in the market and supply identical products. Its demand curve is flat, whereas,
in a monopolistic market, the demand curve is downward sloping. Companies that are
operating in a competitive market can sell any desired quantity at the market price.
The following are the characteristics of a monopolistic market:1. Single supplier A
monopolistic market is regulated by a single supplier. Hence, the market demand for a
product or service is the demand for the product or service provided by the firm.2. Barriers
to entry and exit Government licenses, patents, and copyrights, resource ownership,
decreasing total average costs, and significant startup costs are some of the barriers to
entry in a monopolistic market.When one supplier controls the production and supply of a
certain product or service, other companies are unable to enter the monopolistic market. If
the government believes that the product or service provided by the monopoly is necessary
for the welfare of the public, the company may not be allowed to exit the market.Generally,
public utility companies – such as electricity companies and telephone companies – may be
prevented from exiting the respective market.3. Profit maximizer In a monopolistic market,
the company maximizes profits. It can set prices higher than they would’ve been in a
competitive market and earn higher profits. Due to the absence of competition, the prices
set by the monopoly will be the market price.4. Unique productIn a monopolistic market,
the product or service provided by the company is unique. There are no close substitutes
available in the market.5. Price discrimination A company that is operating in a
monopolistic market can change the price and quantity of the product or service. Price
discrimination occurs when the company sells the same product to different buyers at
different prices.Considering that the market is elastic, the company will sell a higher quantity
of the product if the price is low and will sell a lesser quantity if the price is high.
Consumer equilibrium refers to a situation, in which a consumer derives maximum
satisfaction, with no intention to change it and subject to given prices and his given income.
The point of maximum satisfaction is achieved by studying indifference map and budget line
together.
On an indifference map, higher indifference curve represents a higher level of satisfaction
than any lower indifference curve. So, a consumer always tries to remain at the highest
possible indifference curve, subject to his budget constraint.
Conditions of Consumer’s Equilibrium:
The consumer’s equilibrium under the indifference curve theory must meet the following two
conditions:
(i) MRSXY = Ratio of prices or PX/PY 
Let the two goods be X and Y. The first condition for consumer’s equilibrium is that
MRSXY = PX/PY
a. If MRSXY > PX/PY, it means that the consumer is willing to pay more for X than the price
prevailing in the market. As a result, the consumer buys more of X. As a result, MRS falls till
it becomes equal to the ratio of prices and the equilibrium is established.
b. If MRSXY < PX/PY, it means that the consumer is willing to pay less for X than the price
prevailing in the market. It induces the consumer to buys less of X and more of Y. As a
result, MRS rises till it becomes equal to the ratio of prices and the equilibrium is
established.
(ii) MRS continuously falls:
The second condition for consumer’s equilibrium is that MRS must be diminishing at the
point of equilibrium, i.e. the indifference curve must be convex to the origin at the point of
equilibrium. Unless MRS continuously falls, the equilibrium cannot be established.
Thus, both the conditions need to be fulfilled for a consumer to be in equilibrium
Factors effecting demand and supply?
Price of the Product There is an inverse (negative) relationship between the price of a
product and the amount of that product consumers are willing and able to buy. Consumers
want to buy more of a product at a low price and less of a product at a high price. This
inverse relationship between price and the amount consumers are willing and able to buy is
often referred to as The Law of Demand. THE CONSUMER’S INCOME The effect that
income has on the amount of a product that consumers are willing and able to buy depends
on the type of good we're talking about. For most goods, there is a positive (direct)
relationship between a consumer's income and the amount of the good that one is willing
and able to buy. In other words, for these goods when income rises the demand for the
product will increase; when income falls, the demand for the product will decrease. We call
these types of goods normal goods.The Price of Related GoodsAs with income, the effect
that this has on the amount that one is willing and able to buy depends on the type of good
we're talking about. Think about two goods that are typically consumed together. For
example, bagels and cream cheese. We call these types of goods compliments. If the price
of a bagel goes up, the Law of Demand tells us that we will be willing/able to buy fewer
bagels. But if we want fewer bagels, we will also want to use less cream cheese (since we
typically use them together). Therefore, an increase in the price of bagels means we want to
purchase less cream cheese. We can summarize this by saying that when two goods are
complements, there is an inverse relationship between the price of one good and the
demand for the other good.The Tastes and Preferences of ConsumersThis is a less
tangible item that still can have a big impact on demand. There are all kinds of things that
can change one's tastes or preferences that cause people to want to buy more or less of a
product. For example, if a celebrity endorses a new product, this may increase the demand
for a product. On the other hand, if a new health study comes out saying something is bad
for your health, this may decrease the demand for the product. Another example is that a
person may have a higher demand for an umbrella on a rainy day than on a sunny day.The
Consumer's ExpectationsIt doesn't just matter what is currently going on - one's
expectations for the future can also affect how much of a product one is willing and able to
buy. For example, if you hear that Apple will soon introduce a new iPod that has more
memory and longer battery life, you (and other consumers) may decide to wait to buy an
iPod until the new product comes out. When people decide to wait, they are decreasing the
current demand for iPods because of what they expect to happen in the future.
FLOW OF THE MONEY
The basic purpose of the circular flow model is to understand how money moves within an
economy. It breaks the economy down into two primary players: households and
corporations. It separates the markets that these participants operate in as markets for
goods and services and the markets for the factors of production . Other sectors can be
added for more robust cash flow tracking.
The circular flow model is used to measure a nation's income, as the circular flow model
measures both cash coming into and exiting a nation's economy. It is also used to gauge
the interconnectivity between sectors as a fully robust and strong economy will have
interaction between components. For instance, the relationship between a
government's taxation  policies and a household's consumption spending will have a direct
impact on a business's ability to sell goods.
The circular flow model is aptly named because funds tend to continuously flow between
sectors. As highlighted in the diagram below, money often flows from one sector to
another, awarding benefits along the way. No single sector should hoard or collect all
resources; instead, a fully-functioning circular model will continuously move funds so each
sector can operate appropriately. Note that this example below is a single type of model
and does not represent all circular flow models
Three Important Methods for Measuring National Income There are three techniques to
compute national income:
Income Method, Product/ Value Added Method, Expenditure Method
Income Method National income is calculated using this method as a flow of factor
incomes. Labor, capital, land, and entrepreneurship are the four main components of
production. Labour is compensated with wages and salaries, money is compensated with
interest, the land is compensated with rent, and entrepreneurship is compensated with
profit.NI can be calculated as follows:
Employee compensation + Operating surplus (w + R + P + I) + Net income + Net
factor income from overseas = Net national income.
 
Where,Wage stands for wage and salaries, R stands for rental income., P stands for profit. I
stand for mixed-income.
 Product/ Value Added MethodNational income is calculated using this method as a flow
of goods and services. During a year, we determine the monetary value of all final goods
and services generated in an economy. The term "final goods" refers to goods that are
consumed immediately rather than being employed in a subsequent manufacturing
process.
Intermediate goods are goods that are used in the manufacturing process. Because the
value of intermediate products is already included in the value of final goods, we do not
count the value of intermediate goods in national income; otherwise, the value of goods
would be double-counted.
NI can be calculated as follows:
 G.N.P. - COST OF CAPITAL – DEPRECIATION – INDIRECT TAXES = NATIONAL
INCOME
Expenditure Method National income is calculated using this method as a flow of
expenditure. The gross domestic product (GDP) is the total of all private consumption
expenditures. Government consumption expenditure, gross capital formation (public and
private), and net exports are all factors to consider (Export-Import).
NationalIncome+NationalProduct+NationalExpenditure=NationalIncome+National
Product+National Expenditure=National Expenditure.